19 June 2007

Kenya: Central Bank is a Catalyst And Driver of the Economy

Nairobi — Vision 2030 seeks to transform Kenya into a globally competitive middle-income country in 25 years.

To realise the vision, the economy requires a sustained annual growth of 10 per cent in the period. This will require contribution of each sector, including finance. The role of CBK thus becomes critical. Central banks all over the world play fundamental roles in economic development.

Their roles have evolved over the years due to the changing economic environment and changes in policies. Different emphasis has been adopted in the process of this evolution.

Consequently, central banks contribute to achievement and maintenance of macroeconomic and financial stability, particularly price stability, which is necessary for the economy to thrive.

The Central Bank of Kenya has not been an exception. Its roles have changed with the dominant economic thinking of the time. But three roles have stood out over the years and remain key - monetary policy formulation and implementation, ensuring financial system stability and ensuring development of efficient payment and settlement systems.

Low and stable inflation is good for growth

The Bank also plays the role of a banker and fiscal agent for the Government. Furthermore, it is an advisor to the Government and to other players in the economy. The Central Bank is, therefore, at the pinnacle of economic management since no other Government agency is mandated to play these roles.

Monetary policy is formulated to fight inflation and macroeconomic instability.

It is important to reiterate that the most significant contribution that monetary policy can make to ensure economic prosperity is to maintain low and stable inflation. The adverse effects of inflation, and especially on the poor, are well known. Low and stable inflation is good for growth as it facilitates long-term investment decisions and planning horizons.

While policies for stimulating economic growth and restructuring the economy remain the general thrust for economic managers, they have to be complemented by CBK's efforts to maintain macroeconomic stability.

The role of markets is important to determine prices. The CBK observes the prices. The exchange rate, a good example, is determined by demand and supply in the foreign exchange market. This approach is more sustainable and less distortionary. The Central Bank should only intervene when there is evidence of shocks or excessive speculation.

Price formation is recognition we should let the markets work. This is important for the Central Bank. A good example is also the domestic price index that is a summary of several markets and from where we derive inflation.

The CBK should ensure that a sound and stable financial sector is a key prerequisite for development.

The CBK has an important role to play in the promotion and development of sustainable financial institutions. Kenya has a large proportion of unbanked population, which requires financial services to engage in economically productive enterprises, not pyramid schemes.

The CBK recognises that improving access to credit for all segments of the population is critical in economic development. This is why microfinance is important. With increased access to credit, the poor are enabled to break out of the poverty trap. The Central Bank should ensure credit access and lower costs of credit.

Safe and efficient payments infrastructure is essential for enhancing competitiveness in the economy. An efficient payment system reduces transaction costs. An inefficient payment system may hamper business. Furthermore, the envisaged increased sophistication of the financial sector and the accompanying multiplicity of new products need to be clearly understood.

The Central Bank continues to provide the market and the public with accurate, timely and relevant information to facilitate informed decision-making.

There are also challenges. CBK must invest heavily in capacity. The bank must be the source of knowledge and advice on monetary policy, economic management, bank supervision and development of the financial sector.

For this to work effectively, the Central Bank will seek partnership not only with institutions it regulates, but also organisations and renowned policy researchers to deliver the best possible outcomes. We encourage institutions to build more capacity to meet the growing demand in the economy and to partner with CBK to provide a showcase for capacity building and practical experience.

The Central Bank plays the role of a catalyst and driver of economic development by ensuring price and macro-economic stability through appropriate monetary policy. It has an important role in supervising the financial sector to ensure that it functions well.

It ensures that payment and settlement systems are efficient. The Central Bank is a fiscal agent, a banker and advisor to the Government. These are important roles in economic renaissance.

The writer is the Governor of the Central Bank.

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