Monetary Policy Tools of Kenya

Topics: Monetary policy, Central bank, Inflation Pages: 6 (1907 words) Published: September 7, 2013
MONETARY POLICY TOOLS OF KENYA AND ITS EFFECTIVENESS IN THE RECENT YEARS

* INTRODUCTION
Kenya, officially the Republic of Kenya, is a sovereign state in East Africa. Although Kenya is one of the biggest economy in Africa, Kenya is still developing with a Human Development Index (HDI) of 0.519 putting the country at a position of 145 out of 186 – one of the lowest in the world and about 38% of Kenyans live in absolute poverty. The most important agriculture sector is one of the least developed and inefficient, employing 75 percent workforce and less compared to 3 percent of that food secure developed countries. Kenya’s economy grew by 7% in 2007, but this changed immediately after the disputed presidential election in December 2007, which followed with a chaos in the whole country. The economy has posted tremendous growth in the service sector, boosted rapid expansion in the telecommunication and tremendous financial activity over the last few decades and now contributes 62% of GDP. Kenya has traditionally been a liberal economy with minimal government inference (price control). As of May 2001, economic prospects are positive, with an expected 4-5% growth in GDP largely due to the expansion of telecommunications, transport, construction and a recovery in agriculture. The World Bank estimated growth of 4.3% in 2012. Kenya is east and central Africa’s hub for financial serviced. The Nairobi Securities Exchange (NSE) is ranked 4th in Africa in terms of market capitalization. The Kenya banking system is supervised by the Central Bank of Kenya (CBK). Till July 2004, the system consisted of 43 commercial banks (down from 48 in 2001) several non-bank financial institutions, including mortgage companies, four savings and loan associations, and several score foreign-exchange bureaus.

* The conduct of Monetary policy in Kenya after liberalization

INSTITUTIONAL AND OPERATIONAL
Following the economy wide economic reforms aimed at allowing market forces more latitude in decision-making in early 1990’s, the conduct of monetary policy at the CBK was substantially modified to reflect the objectives of a modern central bank. While the CBK’s monetary policy strategy continued to be that of targeting monetary aggregates, there was a shift away from direct to indirect instruments of monetary control with clearly defined objectives and greater operational autonomy. A new institutional framework for conducting monetary policy was formalizes with the amendment of CBK Act in 1996. The principal objective of the CBK was stipulated as formulation and implementation of monetary policy directed to achieving and maintaining stability in the general level of prices and a greater autonomy of the CBK in the conduct of monetary policy. With respect to accountability and communication, the law stipulates that the CBK, at intervals of not more than six months, submit to the Minister of Finance a monetary policy statement specifying the policies and means by which the Bank intends to achieve the policy targets reasons for adopting such policies and means

Review the progress of the implementation of monetary policy during the period preceeding the policy statement. Initially, for a greater part of 1990s, the conduct of monetary policy focused on the behavior of the broad monetary aggregate, M2, defined as currency in circulation and term and non-term domestic currency deposits with banks as well as non-bank financial institutions (NBFIs), the stability of the relation between M2 and nominal GDP came into question with increased openness of the economy. By 1998, the bank had shifted to a much broader monetary aggregates, M3, defines as M2 plus foreign currency deposits (FCD) held by residents as its intermediate target. The reserve money continued to be the operating target. In terms of instruments of monetary policy, the CBK initially managed monetary conditions in Kenya to obtain suitable growth in the money...
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