Ndung’u faces headache as shilling remains in free fall

National Treasury is in the eye of a storm as Kenyans debate the cost of living and the shilling’s relentless slide which is increasing the cost of commodities in a country that banks heavily on imports.

The free fall of the shilling could not have come at a worse time for the current Cabinet Secretary Njuguna Ndung’u whose history as one-time Governor of the Central Bank of Kenya (CBK) coincided with a huge devaluation of the shilling 11 years ago.

The move prompted a parliamentary committee to ask him to step aside for investigations into how he allowed the local currency to plunge to a historic low of Sh107 to the dollar, that was in October 2012. In January 2011 he cut interest rates in the face of accelerating inflation raising concerns about his willingness to take tough policy action ahead of an election that was due by March 2013.

However, despite being on the chopping board at the time, Ronny Chokaa, an economist at Investment Bankers Genghis Capital Ltd believes the CS has his strengths. He has, for instance, shown a drive to reorganise the tax regime to prioritise taxing wealth, consumption, income and trade respectively.

“I commend this for it follows the ‘Ability-to-pay’ principle of taxation,” Chokaa said, adding that the CS, who occupied the National Treasury’s corner office in September last year has a strong drive for sustainable public-debt management.

Multilateral lenders

“Notably, Ndung’u is ardently keen after sourcing inexpensive concessional financing from multilateral lenders - this is theoretically the best option we have, yet it is becoming increasingly difficult to source cheap financing across international markets, given our deteriorating credit rating,” he said.

And with his every move being monitored now, could it be second time lucky for him, by virtue of holding an office that wields immense political powers to influence decisions, as opposed to the less glamorous one at the CBK when he anchored his influence on the less administrative role.

At that point in 2011, Ndung’u was considered among the least effective policymakers in Africa by a Reuters survey of 10 sub-Saharan analysts, for failing to spot and act against rising price pressures and then presiding over the shilling’s collapse.

The report was critical of the regulator for keeping its discount window rate, charged to banks borrowing from the regulator as a last resort, below the interbank and Treasury bill rates, thereby encouraging commercial banks to borrow from the window as the shilling devalued.

Ndung’u was made to raise the key lending rate by a whooping 400 basis points and launching a round of hikes that strengthened the currency to below Sh90 to the green buck.

The regulator also changed borrowing rules from the discount window as well as how the rate was calculated, mopped up the shilling funding and curbed commercial banks’ foreign exchange exposure.

While all that is in the past now, unfortunately, Ndung’u stepped into the Treasury’s corner office in September last year with the shilling exchanging at around Sh117.95 to the dollar.

Despite high expectations and the hindsight of the previous stormy experience with the shilling and which he eventually weathered, Kenyans are reeling from volatility-to-volatility, with households and businesses alike complaining of the high cost of living, and that of doing business.

Raging debate

By yesterday, the Kenyan currency had hit a historic low of Sh139 to the dollar while inflation stood at 9.2 per cent.

President William Ruto stepped into the raging debate by announcing a raft of measures that will stabilise the shilling. It is likely that Ndung’u has been acting behind the scenes, as Ruto’s assertion was made a day after a meeting of Cabinet meeting- the government’s highest decision making organ.

“For the people who work numbers, I am giving you free advice that those of you who are hoarding dollars, you might shortly go into losses,” he warned .

Ruto said one of his administration’s strategies will be to reinstate the interbank exchange market to re-establish a system where banks and financial institutions can trade currencies freely with each other to enable banks access foreign currencies easily and at friendlier rates, thereby reducing transaction costs