In a recent survey of sub-Saharan central bankers by Reuters analysts, Central Bank of Kenya (CBK) Governor Njuguna Ndung’u figures right at the bottom. Is Kenya’s chief economist all that bad, or was Reuters off the mark?
Unlike the Central Banker Report Card feature published annually by Global Finance since 1994, and which grades Central Bank Governors of 36 key countries (and the ECB) on an ‘A’ to ‘F’ scale for success in areas such as inflation control, economic growth goals, financial stability and interest rate management, the Reuters survey is based on subjective polling of sometimes biased market analysts.
Little is known of the criteria used and whether such surveys have been conducted in the past. It would have been nice to know what Prof Ndungu’s ratings, for example , were in each year of his first term in office when inflation and interest rates were in single digits and the currency was stable despite heavy government expenditure.
Irrespective of who does it, rating central bankers is not a brilliant idea as the conditions of each country differ and the central banker can only be rated on his own and cannot be compared with his peers.
It is difficult for anyone to compare the performance of central bank governors across jurisdictions. Their performance on inflation, currency stability or other parameters is possibly the result of local factors unrelated to what the central banker did. Prof Ndung’u has consistently kept local economic conditions in mind while determining monetary policy. The monetary policy response in Kenya since the post-election violence and since the global crisis has been calibrated to Kenya’s specific macroeconomic conditions and policy stance has been guided by considerations such as the need to consolidate recovery after the post-election violence, the fact that inflation was initially driven entirely by supply side factors and the need to support government borrowing to promote badly needed economic growth.
It is thus impossible to compare the monetary policy performance of the CBK’s governor to that of say, South Africa’s Reserve Bank governor, when the conditions and the needs of the two economies they manage are different
Reuters in its survey for example notes the fact that South Africa’s Gill Marcus emerged as the best central banker in their survey despite taking no major policy decisions in the whole of 2011. How can one then compare the performance of Gill who was flying her country’s economy on an auto pilot mode during 2011 with that of Ndung’u who was flying Kenya’s economic plane manually and in bad economic weather conditions caused by drought, famine, supply side failures, a bloated coalition government budget and a ballooning current account deficit?
The performance of a central bank governor cannot be based on monetary policy actions alone, especially those made at a snap short during his or her term. The CBK governor’s mandate also includes financial stability, promoting growth and acting as the government’s agent in debt management. When we rank a governor, how much weight do we then put on monetary policy, on financial inclusion, on financial stability, on economic growth or on financial reform?
Prof Ndungu’s responsibility in developing Kenya’s financial sector is as equally important as financial and price stability. A key part of the central bank’s role in the development of the finance industry is to ensure that the country’s poorest have access to adequate financial services in order to support balanced economic growth. It was correctly noted by Reuters that Prof Ndung’u had more success in expanding access to basic banking services, an important platform for broader economic growth, than any other central bank governor in Africa. This is what one of the more informed analysts had to say of Ndung’u:
“No other central bank governor in Africa has done as much for financial inclusion and in terms of innovation, falling rates of financial exclusion, the reach of microfinance banks and mobile banking, Kenya is streets ahead, even compared with South Africa.” How much of this was considered in ranking the governor then?
What about financial stability? Most of the governors ranked above Prof Ndung’u oversee far much less stable financial systems than Kenya’s banking industry. Didn’t the failures of financial regulation and supervision —rather than of monetary policy—lay at the heart of the global financial crisis that has now transformed itself into a sovereign crisis which is threatening the political stability of many nations?
How then does one brand the governor as being the worst in the region purely on the basis of some short term food driven inflation? Does a governor of a central bank become “ineffective” simply because the local currency has taken a hit that may be it deserves to take? The Indian Rupee is currently the worst performing in the world, having lost more than 25 per cent of its value this year and inflation has refused to come down despite the Reserve Bank of India(RBI) raising interest rates 11 times this year alone (something Prof Ndung’u has been accused of failing to do). Yet India is a country run by economists. The Prime Minister, the Finance Minister and the Reserve Bank Governor are all top notch economists. So does that make these guys bozos on the basis of this single factor?
The CBK has one of the most difficult jobs to perform. On the one hand, Kenya is an economy with a lot of potential to grow. On the other, many Kenyans live a hand-to- mouth existence. Any inflationary rise in the price of staples would bring much discontent and suffering yet at the same time, strong credit growth — which is inflationary by nature — is necessary to bring Kenya’s masses out of poverty. Navigating those two extremes is what the CBK has to do.
It is an extremely difficult task and sometimes accidents do happen when managing this balance. Prof Ndung’u, just like all other governors did and will at some stage, make policy mistakes. He will also be criticised for making certain policy decisions one way or another. What is not good to see however, is unfair criticisms from those who should know. It was unusual for example for Micah Cheserem, a former Governor of the CBK, to come out strongly and criticise a sitting Governor.
This hardly happens in other countries as central bankers usually have a lot of respect and empathy for one another given that they know the difficulty of the job at hand.
This hardly happens in other countries as central bankers usually have a lot of respect and empathy for one another given that they know the difficulty of the job at hand.
Mr Cheserem must remember that both Kenya’s economic ambitions and the global economic environment have changed since the days when he was on that hot seat. The benefits of hindsight are enormous — but also potentially misleading. If CBK had known ahead of time that it will experience supply side failures, severe drought and the effects of the eurozone crisis and the Arab Spring, the governor would no doubt have taken different policy decisions. But such considerations are not a meaningful guide to future policy. By their nature, economic shocks cannot be foreseen. And the worst of all came from the committee currently investigating the sharp depreciation of the shilling who are busy telling Kenyans that the recent depreciation of the shilling was engineered by the central bank itself and was meant to defraud Kenyans. That is absurd, to say the least.
27 December 2011
A Business Daily Africa Article under Politics and Policy by
Mr Mohamed Wehliye, Vice-President, Risk Management Division, Riyad Bank, Saudi Arabia
