Thursday, September 22, 2011

Of Inflation, monetary policies and the IMF

An online discussion with business journalists on twitter this morning regarding the IMF’s role in the Kenyan economy resulted into a heated discourse with the Star’s James Mbugua saying “Why is the IMF more concerned with Inflation than growth? They’ve messed us up”. He went on to say “Everything that Central bank has been doing has IMF written all over it.”

For those not in Kenya- the shilling has weakened to a 17 year low against the almighty dollar- due to a combined number of reasons, mostly blamed on erratic international crude prices and a strengthening dollar, and the issue of speculation has not also be ruled out.

Now a weak shilling has a ripple effect- there are those that benefit, especially exporters, in our case, horticulture, coffee and the tourism industry, fall under the winners. But the losers are more. Being an oil import dependent economy- the price per liter of fuel has been on the increase in recent months. This has had a domino effect on manufacturers who rely on fuel for transportation and energy when electricity fails. And talking of electricity- the fuel costs generally push up the bills that arrive in your post office box every month.

Now with that in mind; there are monetary policies which basically have 3 instruments that Central bank can use to bring about price stability in the economy. When there’s a high dollar demand, the shilling weakens; The CBK can buy securities in exchange for money stock ( To increase liquidity in the market)-or vise versa, hence creating an equilibrium. There are other more complex instruments, such as the interbank over-night lending rates. It’s a short term financing tool with punitive interest rates, leaving the central bank as a lender of last resort. This article by the Business daily explains this as well as updates us on the latest on this.
So how does the IMF come in?

Because it is in times like these that the expertise and much needed dollar injection can offer some stability to the shilling while the economic expertise can advice Kenya on successful ways of handling the crisis. Many feel that the IMF hasn’t acted in the interests of ordinary Kenyans as an ailing population.

The Fund- as it is known in other quarters has been blamed for concentrating more on the issue of inflation, which some say is just a symptom, other than the actual problem. At a press briefing with Antoinette Sayeh the IMF Chief for Africa, at the IMF Annual meetings in Washington, I asked her about the IMF’s focus areas in relation to inflation and growth-and her concern was that Inflation is not a problem in isolation and must be addressed as a matter of urgency. She says that the Central bank must be wary of fiscal and monetary policies that are overly loose (meaning the government has a larger role in promoting economic well being) and should focus on tight monitory conditions. Economists who support a tight fiscal policy say that a government acts best when it acts least; ideally this promotes low taxes and spending and ideally limit government involvement to the setting of prevailing interest rates.

So are we too deep in? Is CBK already being overly loose? Can the free fall of the shilling be left to the mercies of the markets? Will IMF’s injection of dollars through an Extended Credit facility stem the capital outflow and introduce stability to a shilling that has hit a 17 year low?


  1. From the late 1960s to mid 1980s monetary policy in Kenya was generally
    passive and focused mainly on the protection of the country’s foreign
    exchange reserves and supporting the import substitution policy.
    What the IMF Chief for Africa stated over the CBK was sad given that from the mid 1980s to June 2008, Kenya has been implementing
    monetary policy within IMF supported programs through the use of
    facilities such as Structural Adjustment Facility (SAF) in 1986, Enhanced
    Structural Adjustment Facility (ESAF) and Poverty Reduction and Growth
    Facility (PRGF) from 1997 to June 2008.
    In all of these programs the underlying monetary policy formulation and
    management rely on the IMF’s policy formulation tools particularly the
    financial programming framework. Monetary policy operations seek to
    ensure that monetary expansion is in line with the inflation objective and
    adequate to support transactions with the potential economic growth.
    So are we too deep in? Given the precedence that CBK and the IMF already set, yeah, we might be...
    Is CBK already overly loose? I just hope they know what they are doing which so far is really wanting...
    Can the free fall shilling be left to the mercies of the markets? Yeah, but not in isolation of any other factor that affects its appreciation.
    Will IMF’s injection of dollars through an Extended Credit facility stem the capital outflow and introduce stability to a shilling that has hit a 17 year low? This takes me back to the different programmes that the Kenya government has undertaken with the IMF in the past, having taken the ECF way, it further goes to ascertain of the fact that Kenya's trade policy has failed leading to Current Account deficits marring the country.

  2. Thanks Kipchumba,

    That’s a great breakdown that spells the relationship that our economy has had with the IMF. Clearly quite deep, and when other journalists say ‘ The CBK actions over interbank rates etc had the IMF written all over it, I suppose they are quite right.
    I’d like to know though- to encourage growth and rebuild the safety nets that shielded or insulated Kenya during the first economic crisis in 2008, is there anything that can be done without external financing?
    My worry is, however much we need dollar injection the same may sink us farther by postponing the problem of larger sovereign debt to another time. Are there any local solutions, either involving the private sector or so in spurring local growth? Can our domestic markets be stimulated without external funding? Or are we too broke already?

  3. The IMF's ECF program does provide for extension after the allocated 3 years are some extent, it's tantamount to postponement of the gist of the matter.
    But does Kenya have recourses?...I cannot help but think of the Four Asian Tigers; Hong Kong, Singapore, South Korea and Taiwan, and their 'miraculous' 30-year economic growth of around 6% per year. They did feel the pinch from the financial crises and recessions which of course highlights some policy shortcomings but these were sharply overdone. However, in comparison with typical developing countries, government policies in this states have been fiscally responsible, pro-market and hence, reasonable. A full explanation of these
    countries’ growth would attribute more to
    the contribution of technology. It is improvements in tech-
    nology that explain why there was so much capital accumulation.