Expanding banks, fiscal space key test for CBK boss

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President Uhuru Kenyatta addresses the Press in Nairobi on March 27. His office was among the biggest spenders on luxury products last year. PHOTO | FILE 

By GEORGE BODO

President Uhuru Kenyatta’s nomination of Patrick Ngugi Njoroge for appointment as the new Central Bank of Kenya governor ends a three-month wait for a substantive head of the apex bank.

His appointment is still subject to Parliament’s approval. However, the Jubilee Alliance’s dominance of Parliament reduces the vetting process to a mere formality.

Before he even reports to the office, Dr Ngugi will find a full in-tray and, when he settles down in his new role, he will need to shuffle his to-do list in the following order of priorities: top of the list is fiscal dominance.

Expenditure

The Treasury’s medium-term fiscal framework has put total expenditure for the fiscal year 2015/16 at nearly Sh2 trillion. This level of expenditure, from a funding point of view will have profound implications on monetary policy over the next 12 months.

Revenue projections remain quite ambitious and given the previous collection trends, it is almost arguable that the tax base may be overstated (as has been advanced previously by other bodies of knowledge).

It therefore increases the possibility of government deepening its borrowing activities to plug the fiscal deficit. So far in the current 2014/15 fiscal year, the Treasury had borrowed nearly Sh860 billion, in gross terms, as at May 2015 (including Eurobond proceeds). 

This level of borrowing, if replayed, maybe at odds with monetary policy and can crowd out private sector. The new governor will have to counter any potential dominance of fiscal position, given that expansionary fiscal policies tend to be inflationary.

Second, he has to escalate banking supervision. His predecessor, Prof Njuguna Ndung’u successfully oversaw the operationalisation of the tail-end of Basel II (specifically the expansion of risk-weightings to include market and operational risks and the creation of capital buffers for the same).

The market now needs to fully exhaust Basel II and start transitioning into Basel III.

More specifically, CBK should now consider adopting Basel guidelines on systemically important financial institutions (SIFIs) by declaring certain institutions to be systemically important.

Kenyan banks are now transitioning into vital regional players, as is evidenced by Equity Bank’s recent foray into the Democratic Republic of Congo.

Declaring certain institutions to be systemically important will then allow the apex bank to segment regulation to the extent that systemically important banks (SIBs) will now be asked to escalate their loss absorbency capabilities (compared to non-SIBs).

Additionally, SIBs will be subject to such things as quarterly stress testing on capital and liquidity, greater frequency and intensity of on-site and off-site supervision and development of specific recovery plans to be submitted to the CBK.

And also as part of continuous monitoring of such institutions, joint supervisions (through the supervisory colleges) should be escalated.