By standing pat, departing CBK boss Patrick Njoroge leaves his successor Kamau Thugge with obscure choices

By Steve UMIDHA

Former treasury Principal Secretary Dr Kamau Thugge’s nomination as the preferred candidate to replace the outgoing Dr. Patrick Njoroge at the helm of the Central Bank of Kenya (CBK) did not come as a shock to many.

President William Ruto in a signed statement today by the Head of Public Service Commission Felix Koskei, nominated the seasoned economist in an appointment that is subject to seal of approval by the National Assembly.

The new appointee is however facing two competing economic trends that could make his future rate decisions more difficult and highly treacherous.

On one hand, turmoil in the banking sector including the cost containment and competition from fintechs as well as political quandary over the government’s sustained borrowing splurge, could weaken the economy if banks restrict lending and financial markets tumble on fears of a default on the country’s debt burden.

Such concerns – most of which some economists have repulsed, would call for further rate hikes depending on how Dr. Thugge fiddles with the delicate situation.

If endorsed by the Parliament, he stands in line to be the tenth Governor of the Central Bank of Kenya and will initially serve in that role for a period of 4 years. He will be eligible for another four years, making a total of eight years at the apex bank.

On the other hand, the stubborn inflation, while slowing, is persisting at a level far above the central bank’s 2.5 percent target, raising further worries that the next MPC meeting might have to further tighten credit to slow price increases.

It fundamentally means, additional rate hike, if prompted, would follow – a trend that would lead to ever-higher borrowing rates and intensify the risk of a possible economic slump.

The wide range of potential outcomes is what awaits Kamau Thugge whose picking was as a result of a rigorous recruitment process by the Public Service Commission of Kenya – a government employment agency that had shortlisted five other candidates for the position of Governor of the Central Bank of Kenya.

Thugge replaces the outgoing Dr. Patrick Njoroge, who has served for eight years and is scheduled to leave office on June 17, 2023.

Those challenges will ultimately make it more difficult for him to navigate the CBK’s way out of its extraordinarily aggressive policy.

The commission conducted interviews for the six last Tuesday with each allocated a maximum of one hour to plead their case.

Other shortlisted contenders included Dorcas Muthoni Mutonyi, Haron Sirima, Edward Sambili, Nancy Onyango and Adan Abdulla Mohamed with each candidate having the bragging rights of wealth of experience and expertise in the field of economics and finance.

By virtue of his position at the national treasury, Dr Thugge was widely expected to replace Dr. Njoroge with whom they worked together at the World Bank affiliate, the International Monetary Fund (IMF) as an economist, senior economist and deputy division chief – playing a critical role in swaying the design of Kenya’s current fiscal decentralization system.

He has previously worked in the Ministry of Finance as head of Fiscal and Monetary Affairs Department, Economic Secretary and as Senior Economic Advisor.

He has also coordinated the formulation of legislation for implementing devolution, including the Public Finance Management Act, 2012 and the Commission on Revenue Allocation Act, 2011.

Thugge, obviously a political appointee, braces for unprecedented challenges and will be expected to also keep the markets calm to help cushion against the increasing non-performing loans, political interference and uncertain global financial trends like the impacts of the European war on the economy.

Ordinarily, the bank’s board of directors oversees CBK’s functions by formulating key policies including guidelines that govern the Monetary Policy Committee (MPC). It also reviews the committee’s performance periodically – often every three months.

Other issues such as unsustainable macroeconomic policies (including large current account deficits and unsustainable public debt), excessive credit booms, large capital inflows, and balance sheet fragilities, combined with policy paralysis due to a variety of political and economic constraints, will also be of great concern to the next CBK governor.

His first call of action, however, will be to stabilize the weakening local currency – a debate that continues to provoke moods.

The Kenyan Shilling debate 

Is the Kenyan Shilling showing no further signs of weakening or hurtling inescapably towards one? It depends on who you ask, and even the incoming CBK boss sure has his opinion on this.

Since the onslaught of Covid-19 in March 2020, the local currency has flirted with every global economic shock as it continues to search for direction.

BMI Research, for instance – an affiliate of Fitch Solutions that provides macroeconomic, industry and financial market analysis predicted in April that the Kenyan shilling will depreciate by 13.5 percent against the US dollar, closing the year at Sh140.

“We project that the Kenyan shilling will depreciate by 13.5 percent against the US dollar in 2023, closing the year at KES140/USD,” notes the firm in its Q2 macroeconomic update, further noting that the inflation – which slowed last month to 7.9 percent, to remain elevated in 2023, averaging 7.5 percent.

The country’s inflation rate had soared a dreadful 9.2 percent in March and below market estimates of 9 percent, on accelerated rise in prices of food and non-alcoholic beverages which averaged to 13.4 percent from 10.1 percent the previous month.

It also marked the period when the Kenyan Shilling performed poorly against the dollar and other global currencies.

That fall, which has been consistent for several months now, coupled with challenges in accessing dollars, has seen investors flee the Nairobi Securities Exchange, according to Absa Bank Kenya which sees the shilling hitting Sh150 against the USD by the end of the year.

“The trend will keep on for the rest of this year. This year, as much as inflation is expected to ease heading towards the statutory level, we forecast the shilling to continue weakening on the backdrop of steady interest rates which are already on post-Covid highs,” noted the Head of FICC Research and Chief Economist for Absa Bank Kenya, Jeff Gable.

Same fears were also shared by Safaricom Chairman Adil Khawaja last week when responding to queries on share price, to which he gave an indication that there could be additional issues with dividend repatriation for foreign investors that relate to dollar availability.

“There has been some difficulty in taking the dividends out, which then puts a little bit of pressure on some of the funds that are holding these shares,” offered Khawaja.

Several reasons have been floated around on why the value of Shilling has performed so badly this year, including interest rate hikes by the Federal Reserve Bank of the United States, a situation that has resulted in the US dollar rising in value relative to other currencies, including the Kenyan shilling.

Genghis Capital in March said it expects the shilling to trade as low as 161.40 per dollar by year-end on dwindling foreign-exchange reserves, and a deteriorating balance of payments.

But Charlie Robertson, global chief economist at Renaissance Capital in his predictions to African Business, notes that a “worst-case scenario”, which would involve the government defaulting on its debt, “could send the shilling weakening to 20-30 percent below its long-term average rate –168-182/$ by the end of 2023.”

The local currency depreciated by 0.4 percent against the US dollar, closing the week ended on May 7, 2023 at Sh136.4, from Sh135.9 recorded a week earlier. It closed the week at Sh134.58.

On a year-to-date basis, the shilling has depreciated by 10.5 percent against the dollar, adding to the 9.0 percent depreciation recorded in 2022.

Concerns remain high on the future performance of the shilling given the current pressures as well as the dwindling country’s forex reserves and the rising debt level – whose servicing is projected to increase by 34 per cent in the year 2023 from Sh930.35 billion to Sh1.25 trillion.

As such, economic experts like Peter Macharia who also runs a digital lending firm Jijenge Credit ltd, shares the same pain and frustration, but he’s upbeat about a possible flip-up in the currency performance in the coming months.

“Usually, across the globe, a strong dollar makes a bad situation worse for the rest of the economies, especially developing markets like ours. But I would expect things to improve in the coming months based on the fiscal policies being executed by the government through the Finance Bill,” offers Macharia.

That optimism springs from recent sentiments by the Energy Cabinet Secretary Davis Chirchir, who is convinced that the USD KES rate should ease soon to below 130 from its current levels as a result of the Government-to-Government oil deal.

“With the stability and the symmetry on the interbank, we are likely to be converting these ones at 133-134. Progressively, we will possibly be seeing the dollar coming below 130,” noted Chirchir.

What is Dr. Thugge accused of?

In January 2021 the high court of Kenya dropped charges against Thugge in a prosecution case that had directed involved parties to provide testimony against a former Treasury Cabinet Secretary Henry Rotich and others accused of corruption over the awarding of tenders to build two dams, namely Aror and Kimwarer.

Kamau Thugge, at the time and Susan Koech, an official at the tourism ministry, were among a number of officials charged in the case in 2020 including Mr. Rotich.

The case stemmed from an investigation into the misuse of funds in two dam projects planned in western Kenya, overseen by Italian construction company CMC Di Ravenna. Rotich, the other officials and the company have all denied wrongdoing.

Muteti said Chief Magistrate Douglas Ogoti had accepted his request to halt the case against Thugge and Koech.

But in March this year, Kenya and Italy resolved to restart the construction of Arror, Kimwarer and Itare dams in a deal that will also see the government exempted from paying in excess of Sh12 billion to Italian firms for breach of contract.

The deal was agreed on during a meeting between President William Ruto and Italian President Sergio Mattarella, who is on a State visit to Kenya.

As part of the agreement, the government was required to drop charges against Italian companies that had won tenders to construct the dams which were mired in controversy and whose construction was stopped in September 2019 under a cloud of graft allegations.

The erection of the dams in Nakuru and Elgeyo Marakwet counties was suspended by the Jubilee administration after a report questioned their technical and financial feasibility. An Italian company, CMC di Ravenna had won the tender to construct the Arror and Kimwarer dams, both of which were halted over allegations of financial impropriety on the part of government aforesaid names.

Kenya Revenue Authority (KRA) had also moved to the High Court demanding over Sh333 million on account of VAT from CMC Di Ravenna on Itare dam. The Italian firm had also counter sued the government, demanding a refund of over Sh166 million from the taxman.