Kenya Central Bank Governor On Economy

Kenyan central bank Governor Njuguna Ndung’u said he’s confident inflation will slow in coming months after being pushed higher by surging demand for food from tens of thousands of Somali refugees fleeing famine.

“We should see a significant decline in food prices by October,” Ndung’u, 52, said in an interview yesterday in his Nairobi office. The cost of corn, Kenya’s staple food, has begun declining after the humanitarian crisis in the Horn of Africa rekindled concern over food shortages and worsened the inflation outlook, Ndung’u said. The drought in the region is the worst in 60 years, according to the United Nations.Kenya’s inflation accelerated for a ninth month in July, to 15.5 percent, driven by a 24 percent surge in food prices. The jump in price growth has led to a 13 percent decline in the shilling this year and a warning on Aug. 12 from Fitch Ratings that a failure to lower inflation and stabilize the exchange rate would bring downward pressure to bear on its credit rating.“A turnaround in inflation is expected in the next few months,” according to notes provided by Ndung’u during the interview.The central bank aims to keep inflation within its 3 to 7 percent target range. Growth in East Africa’s biggest economy is expected to slow to 5.3 percent this year from 5.6 percent in 2010. That compares with a government target of boosting annual growth to 10 percent and sustaining it through 2030.

Somali Refugees

Food prices in Kenya have risen as refugees fled Somalia to the Dadaab refugee complex in northeastern Kenya, the world’s biggest such facility with more than 400,000 people. The UN has declared a famine in five regions of Somalia and predicted it may spread across the country’s southern region and persist until at least December.

“Food prices are coming down,” he said. “But even when they are coming down, we have seen more hungry faces crossing the border from Somalia and Kenya to compete for the already constrained supply.”The Central Bank of Kenya in March predicted inflation would decelerate to 7.5 percent by year-end. Ndung’u wouldn’t comment on what the bank’s current inflation forecast is. Food costs in the domestic market may start declining as early as September or more likely in October, he said.

Food Prices

Global food prices are close to the peak of 2008 and are contributing to the humanitarian emergency in the Horn of Africa, the Washington-based World Bank said on Aug. 15. The World Bank’s food-price index surged 33 percent in July as the price of corn, sugar and wheat jumped.Kenya’s food and fuel-price inflation may stay “elevated” for the rest of the year, heightening wage demands, said Celeste Fauconnier, Africa analyst at Rand Merchant Bank in Johannesburg, who forecasts the overall rate may range between 13 percent and 15 percent through to October.“Supply side factors are going to remain prevalent and we also expect demand pressures to increase with minimum wage demands,” Fauconnier said in a phone interview today. “Inflation is a significant concern.”Cyclical waves of inflation in Kenya are often triggered by drought, and intensified by bad roads that make it difficult to transport food from farms to the hungry, as well as the failure to build up stockpiles during bumper harvests, Ndung’u said.

Rate Increases

Kenya’s central bank has increased the key lending rate twice this year to head off inflation generated by rising global oil prices and food costs. It left the benchmark rate unchanged at its last meeting in July, saying that further rate increases would do little to tame supply-side pressures.The central bank tightened its policy again this week by imposing a penalty on commercial banks borrowing from its overnight discount window. That may reduce liquidity and lead to a stronger shilling, Africa’s second-worst performing currency this year, after neighboring Uganda.“The depreciation has supported tea and coffee earnings, but raised the shilling cost of fuels and other inputs as well as famine-related food imports,” Ndung’u said. “The depreciation in theexchange rate could also ease balance-of-payment pressures from rising imports.”The shilling is expected to stabilize as tourism earnings and remittances climb and Kenyaninterest rates attract short- term investment, Ndung’u said. Kenya’s three-month borrowing costs rose to a nine-year high of 9.258 percent on Aug. 18.

Weaker Shilling

The shilling weakened 0.1 percent to 93.15 against the dollar as of 12:03 in Nairobi today, compared with a close of 93.05 yesterday. On Aug. 9, the currency weakened to 95.10, its lowest level since March 1994 when foreign-exchange controls were removed.“The importers are complaining about the exchange rate,” Ndung’u said. “The exporters are so happy.”Kenyan imports jumped 32 percent in June to 104.3 billion shillings ($1.1 billion) from a year earlier, while exports grew 30 percent to 41.4 billion shillings, according to the Kenya National Bureau of Statistics.Under the rules introduced on Aug. 15, the central bank applies a three-percentage point penalty to either the previous day’s interbank rate or the benchmark lending rate, whichever is higher.The bank had previously applied its so-called Central Bank Rate, currently at 6.25 percent. The overnight discount window rate rose for the fourth straight day to 17.89 percent yesterday, according to data on the central bank’s website.

Fitch Ratings as a B+ rating on Kenya’s long-term foreign- currency debt, four levels below investment grade, with a stable outlook.

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