{"doc_id": "008451d6fde878ac415b85d4d11141bd", "text": "The Conduct of Monetary Policy\nin East Africa In A Changing\nPolicy Environment\nA Memorial Lecture In Honour of Prof Francis Mwega\nBy\nProf. Benno J. Ndulu\n\nOutline\n• Conduct of Monetary Policy in East Africa\n• largely Successful\n• Remarkably similar across countries – regional coherence\n• Recent Striking Changes in the Behaviour of Monetary Aggregates and\nprices in East Africa\n• Sharp slow down of Monetary Growth\n• Sharp Slow Down Of Private Sector Credit Growth;\n• Sharp fall in money market rates - reflected in treasuries\n• What Explains theses Changes?\n• How Have East African Central Banks responded to these changes?\n• What are the key risks to macro stability in the Near and Medium Term?\n\nI. Conduct of Monetary Policy in the EAC\nLargely Successful\nTwo key sets of indicators for measuring such success\n• The first relates to achievement of the core mandates of the central\nbanks - price stability\n• Inflation for domestic prices\n• Exchange rates for price of tradables\n• Secondly, Success is also deduced from ability to ride through major\nshocks to enable the economies continue on a path of sustained growth\nafter brief disruption\n\nInflation trends in selected EAC countries\nSince 2013 Inflation\nHeadlineiInflation\nrates have\nTanzania Kenya Uganda Rwanda\nremained subdued\nBurundi Lower limit Upper limit\nand within EAC\n30\nconvergence band\nsave for Burundi 25\nrecently, mainly due\n20\nto successful\nt\nconduct of n\ne 15\nc\nr\nmonetary policy e\nP\nhelped along by 10\nstability of oil\n5\nprices, and\nimproved food\n0\nsupply 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7\n1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1\n- - - - - - - - - - - - - - - - - - - - - - - - - - - - -\nc r n p c r n p c r n p c r n p c r n p c r n p c r n p c\ne a u e e a u e e a u e e a u e e a u e e a u e e a u e e\nD M J S D M J S D M J S D M J S D M J S D M J S D M J S D\n4\n\nNominal exchange rate index – Reasonably Stable save for\nCorrections For Shocks\n- Reasonably stable\nNominal exchange rate index (2010=100)\npath with correction Tanzania Kenya Uganda Rwanda\n170\nfor shocks\n160\n- Real effective\n150\nExchange rates\n140\nStable\nx\ne 130\nd\n- Larger correction n I\n120\nin countries purs-\n110\nuing more\n100\nflexible exch rate\n90\nregime 0 1 1 1 1 1 1 1 1 1 2 1 2 1 2 1 2 1 3 1 3 1 3 1 3 1 4 1 4 1 4 1 4 1 5 1 5 1 5 1 5 1 6 1 6 1 6 1 6 1 7 1 7 1 7 1 7 1\n- c - r -n - p - c - r -n - p - c - r -n - p - c - r - n - p - c - r - n - p - c - r -n - p - c - r -n - p - c\ne D a M u J e S e D a M u J e S e D a M u J e S e D a M u J e S e D a M u J e S e D a M u J e S e D a M u J e S e D\n5\n\nReal GDP performance in selected EAC countries\nReal GDP Growth in EAC Countries\nPercent\n2008 2009 2010 2011 2012 2013 2014 2015 2016\n• Growth in the region was strong and\nBurundi 4.9 3.8 5.1 4.0 4.4 4.9 4.5 -3.9 0.9\nrobust supported by public investment in\nKenya 0.2 3.3 8.4 6.1 4.6 5.7 5.3 5.6 6.0\ninfrastructure, favourable commodity\nRwanda 11.1 6.3 7.3 7.8 8.8 4.7 7.0 6.9 6.0\nprices, subdued global oil prices and\nTanzania 5.6 5.4 6.4 7.9 5.1 7.3 7.0 7.0 7.0\nfavourable weather condition.\nUganda 10.4 6.9 8.2 5.9 3.2 4.7 4.9 5.5 4.8\nSources: African Economic Outlook, 2017 and National Bureau of Statistics • Growth in the region has remained\nresilient to shocks, quickly recovering after\nEAC QUARTERLY GDP GROWTH each shock – with robust macrostability\nPercent\nCountry 2013 2014 2015 2016 2017\nQ1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3\nUganda 3.4 4.6 3.9 4.1 5.8 7.0 1.4 8.4 5.7 5.6 6.2 5.3 4.1 2.9 1.2 2.0 3.9 6.5 7.5\nRwanda 4.5 7.7 2.7 4.1 7.4 5.9 10.5 6.7 8.0 9.3 8.1 10.0 8.9 7.5 5.4 2.4 1.7 4.0 8.0\nKenya 6.1 7.5 6.4 3.5 5.2 6.0 4.6 5.6 5.8 5.6 6.1 5.5 5.3 6.2 5.7 6.1 4.7 5.0 4.4\nTanzania 6.2 5.9 7.3 9.7 7.8 9.8 5.7 4.4 6.5 6.5 6.8 8.2 6.9 8.5 6.6 5.5 5.7 7.8 6.8\nEAC Average 5.1 6.4 5.1 5.3 6.6 7.2 5.5 6.3 6.5 6.8 6.8 7.3 6.3 6.3 4.7 4.0 4.0 5.8 6.7\nSources: National Bureau of Statistics 6\n\nManaging Shocks for Sustained Macrostability\n• Since 2008 the region managed to ride through three major shocks with\nconsequence on macrostablity\n• Global Financial Crisis (2009) – the biggest shock with impacts transmitted through\na spike in exchange rates (heightened by speculative attacks) and through a global\neconomic recession\n• The Euro Crisis (2011/12) again transmitted mainly through spike in exchange rates\nand its impact on lengthening the period of recovery from GFC recession\n• Commodity Price Collapse (2014/15) with its effect transmitted mainly via pressure\non exchange rates\n• Judging from the short duration of stress from each shock – short lived\ninflationary and exchange rate spikes and quick recovery of growth –\nManagement of shocks was quite successful.\n\nRemarkable Similarity Across Countries in the Path of\nMonetary Aggregates and Price Indicators Across the\nRegion\nIt is not by accident – the region is on a path to Monetary Union and\nthe Central banks via MAC have actively coordinated approaches and\naction\n• Harmonization in the approaches to the conduct of monetary policy has\nstrengthened over time.\n• Coordination of responses to common shocks e.g. Global Financial Crisis\n2009\n• Cross border operations of regional and international banks has\nnecessitated coordination in regulation and handling of common challenges.\n• Exchange of information and data has facilitated this coordination\n\nII. Recent Significant Developments in the Path\nof Monetary Aggregates and Prices\n• Sharp slow down of Growth Rates of all Monetary Aggregates\n• A Virtual Collapse of growth of Credit to the Private Sector – mainly\ndriven by a spike in the risk premium as indicated by spikes in Non-\nperforming loans across the region\n• Sharp decline in yields in the market for treasuries a key benchmark\nfor other financial prices\n• But lending Rates stayed strikingly stable or rose widening the gap\nbetween treasuries and lending rates in most countries\n\nEAC money supply Growth Trends\n• Growth of\nAnnual growth of M3\nmoney\nTanzania Kenya Uganda Rwanda\nsupply\n45\ntracks\nInflation\n40\nreasonably\n35\nwell\n30\n• It has now\nbegun to t 25\nn\ne\nc\npick up in r\ne 20\nP\nsome of the\n15\nEAC\ncountries 10\nafter sharp\n5\ndeceleration\n0\nover the last\n0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7\n1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1\ntwo years - - - - - - - - - - - - - - - - - - - - - - - - - - - - -\nc r n p c r n p c r n p c r n p c r n p c r n p c r n p c\ne a u e e a u e e a u e e a u e e a u e e a u e e a u e e\nD M J S D M J S D M J S D M J S D M J S D M J S D M J S D\n10\n\nGrowth of Credit to the Private sector has\nslowed down sharply\nAnnual growth of credit to the private sector\nTanzania Kenya Uganda Rwanda\n50\n40\n30\nt\nn\ne 20\nc\nr\ne\nP\n10\n0\n-10\n0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7\n1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1\n- - - - - - - - - - - - - - - - - - - - - - - - - - - - -\nc r n p c r n p c r n p c r n p c r n p c r n p c r n p c\ne a u e e a u e e a u e e a u e e a u e e a u e e a u e e\nD M J S D M J S D M J S D M J S D M J S D M J S D M J S D\n\nSharp Rise in NPLS Has Raised Risk Premium\nTanzania NPLs/gross Loans Kenya NPLs/gross Loans Uganda NPLs/gross Loans Rwanda NPLs/gross Loans\n14\n12\n10\n8\nt\nn\ne\nc\nr\ne\nP\n6\n4\n2\n0\n1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7\n1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1\n- - - - - - - - - - - - - - - - - - - - - - - - - -\np c r n p c r n p c r n p c r n p c r n p c r n p c\ne e a u e e a u e e a u e e a u e e a u e e a u e e\nS D M J S D M J S D M J S D M J S D M J S D M J S D\n\nEAC money market interest rates Declined Sharply Reflecting\nFlight to Safety of Government Paper\n91-day T-bill rate 182-day T-bill rate\nTanzania Kenya Uganda Rwanda Tanzania Kenya Uganda Rwanda\n25 30\n25\n20\n20\n15\nt t\nn n\ne e 15\nc c\nr r\ne e\nP P\n10\n10\n5\n5\n0 0\n0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 0 1 1 1 1 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7\n1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1\n- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -\nc r n p c r n p c r n p c r n p c r n p c r n p c r n p c c r n p c r n p c r n p c r n p c r n p c r n p c r n p c\ne a u e e a u e e a u e e a u e e a u e e a u e e a u e e e a u e e a u e e a u e e a u e e a u e e a u e e a u e e\nD M J S D M J S D M J S D M J S D M J S D M J S D M J S D D M J S D M J S D M J S D M J S D M J S D M J S D M J S D\n• Countries in the EAC which are more open to global market, experience\nrelatively large swings in money market interest rates e.g. Uganda\n13\n\nEAC money market and commercial banks interest rates\nTZ 364-day WAY TZ Central Bank rate KE 364-day WAY KE Central Bank rate\nTZ Overall Time Deposit Rate TZ Overall Lending Rate KE Overall Time Deposit Rate KE Overall Lending Rate\nTZ Interbank rate KE Interbank rate\n35 35\n30 30\n25 25\nt n 20 t n 20\ne e\nc c\nr e 15 r e 15\nP P\n10 10\n5 5\n0 0\n0 1 1 1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 7 0 1 1 1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 7\n1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1\n-c -r -g -c -r -g -c -r -g -c -r -g -c -r -g -c -r -g -c -r -g -c -c -r -g -c -r -g -c -r -g -c -r -g -c -r -g -c -r -g -c -r -g -c\ne p u e p u e p u e p u e p u e p u e p u e e p u e p u e p u e p u e p u e p u e p u e\nD A A D A A D A A D A A D A A D A A D A A D D A A D A A D A A D A A D A A D A A D A A D\nUG 364-day WAY UG Central Bank rate RW 364-day WAY RW Central Bank rate\nUG Overall Time Deposit Rate UG Overall Lending Rate RW Overall Time Deposit Rate RW Overall Lending Rate\nUG Interbank rate RW Interbank rate\n30 20\n18\n25\n16\n20 14\nt n t n 12\ne c r e P 15 e c r e P 1 8 0\n10\n6\n5 4\n2\n0 0\n0 1 -c\ne D\n1 1 -r\np A\n1 1 -g\nu A\n1 1 -c\ne D\n2 1 -r\np A\n2 1 -g\nu A\n2 1 -c\ne D\n3 1 -r\np A\n3 1 -g\nu A\n3 1 -c\ne D\n4 1 -r\np A\n4 1 -g\nu A\n4 1 -c\ne D\n5 1 -r\np A\n5 1 -g\nu A\n5 1 -c\ne D\n6 1 -r\np A\n6 1 -g\nu A\n6 1 -c\ne D\n7 1 -r\np A\n7 1 -g\nu A\n7 1 -c\ne D\n0 1 -c\ne D\n1 1 -r\np A\n1 1 -g\nu A\n1 1 -c\ne D\n2 1 -r\np A\n2 1 -g\nu A\n2 1 -c\ne D\n3 1 -r\np A\n3 1 -g\nu A\n3 1 -c\ne D\n4 1 -r\np A\n4 1 -g\nu A\n4 1 -c\ne D\n5 1 -r\np A\n5 1 -g\nu A\n5 1 -c\ne D\n6 1 -r\np A\n6 1 -g\nu A\n6 1 -c\ne D 14\n7 1 -r\np A\n7 1 -g\nu A\n7 1 -c\ne D\n\nBut Lending Rates Have stayed Stubbornly\nHigh\n• Notwithstanding sharp decline in interbank cash market rate and\nTreasuries’ market rates lending rates have stayed stubbornly high.\nIn Tanzania they even rose slightly. In Kenya they moved down but\nnot significantly.\n• To a large extent this is due sharp rise in NPLS raising risk premiums\n• Risk-adjusted rates followed suit or stayed stubbornly above\ndeclining cost of funds or declining market rates\n\nThe Gap between Lending Rates and market\nRates Has Widened\n• Interbank Cash market rates have fallen sharply in line with with\nCentral Bank easy monetary policy – Response from banks has been\nto use this position to lend to Governments or accumulate liquidity\nin the form of excess reserves in the Central Banks\n• With high NPLS banks have\n• slowed down credit to the private sector\n• Lent more to each other driving rates down\n• Increased demand for govt paper, way beyond govt needs (heavy\noversubscriptions driving maket rates down.\n\nIII. Major Changes Impacting the Conduct of\nMonetary Policy\n• More Frequent Supply Side shocks with exogeneous impact on\nInflation\n• Sharp Rise in Transaction Velocity of Circulation with the advent of\nmobile Money\n• Dilution of Fiscal Dominance\n• Changes in the approach to conducting monetary policy – From\nTargeting Quantities to Targeting Prices\n\nTransaction velocity of money in the EA Region\n• The impact of\nTransaction Velocity\nslow growth in\nTanzania Kenya Uganda Rwanda\nmonetary\n40\naggregates was\npartly reduced\n35\nby rising\ntransaction\n30\nvelocity of\nmoney\n25\nassociated with\nongoing financial\n20\ninnovations and\ntechnological\n15\n1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7\ndividend 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1\n- - - - - - - - - - - - - - - - -\nc c c c c c c c c c c c c c c c c\ne e e e e e e e e e e e e e e e e\nD D D D D D D D D D D D D D D D D\n18\n\nThe main Imperatives of Monetary Policy\nImplementation have changed significantly\n• In 2008 when I became Governor of the Bank of Tazania – our main preoccupation was\nmopping up liquidity from the system to reduce Inflationary pressure.\n• Fiscal dominance = Govt busy injecting via spending foreign savings and the Central\nBank mopping up excess liquidity arising from this\n• Currently fiscal Dominance significantly diluted\n• Government greater reliance on domestic revenue means enhanced neutrality in monetary\neffects of govt operations – withdraw liquidity when collecting Revenue and injecting liquidity\nwhen spending it\n• Significant proportion of foreign savings – via grants or loans spent on big projects meant\nleakages via imports of goods and services and fees\n• Loans given in kind – i.e. with no cash transfer for big projects also meant less liquidity\ninjections\n• Central Banks have been pushed to rely more on their own instruments to provide liquidity e.g.\nvia repos, purchase of forex from the market etc – depth and efficacy of financial markets key\nchallenges for effectiveness of transmission mechanisms\n\nFiscal Operations Much less Liquidity Injecting\n• Sharp decline in liquidity injecting financing as donor budget\nsupport sharply decreased, and non-concessional borrowing also\nslowed down with increase in the cost of borrowing\n• Loans given in kind are not-liquidity injecting – many Chinese-\nfunded infrastructure loans are in that form (Rail in Kenya; Gas\npipeline in Tanzania)\n• Dominance of large infrastructure projects in the development\nbudget – where foreign firms dominate in securing contracts=\nmeans large leakages in the multiplier effects\n• As the share of development budget rises these leakages become\nmore pronounced\n\nThose countries that have shifted to price-based conduct\nof monetary Policy Policy Rate tracks Markets better\n• They use policy rates more actively\n• They track short term rates more accurately\n• But not long term rates\n\nEAC Policy rates and short-term money market interest rates\nTZ Central Bank rate TZ Repo rate TZ Interbank rate KE Central Bank rate KE Repo rate KE Interbank rate\n35 35\n30 30\n25 25\ntn 20 tn 20\ne e\nc c\nr r\ne P 15 e P 15\n10 10\n5 5\n0 0\n0 1 1 1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 7 0 1 1 1 2 2 2 3 3 3 4 4 4 5 5 5 6 6 6 7 7 7\n1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\n-r\np\n-g\nu\n-c\ne\nD A A D A A D A A D A A D A A D A A D A A D D A A D A A D A A D A A D A A D A A D A A D\nUG Central Bank rate UG Repo rate UG Interbank rate RW Central Bank rate RW Repo rate RW Interbank rate\n30 14\n12\n25\n10\n20\ntn\ne c r e P 15\ntn\ne c r e P 6\n8\n10\n4\n5 2\n0 0\n0 1 -c\ne D\n1 1 -r\np A\n1 1 -g\nu A\n1 1 -c\ne D\n2 1 -r\np A\n2 1 -g\nu A\n2 1 -c\ne D\n3 1 -r\np A\n3 1 -g\nu A\n3 1 -c\ne D\n4 1 -r\np A\n4 1 -g\nu A\n4 1 -c\ne D\n5 1 -r\np A\n5 1 -g\nu A\n5 1 -c\ne D\n6 1 -r\np A\n6 1 -g\nu A\n6 1 -c\ne D\n7 1 -r\np A\n7 1 -g\nu A\n7 1 -c\ne D\n0 1 -c\ne D\n1 1 -r\np A\n1 1 -g\nu A\n1 1 -c\ne D\n2 1 -r\np A\n2 1 -g\nu A\n2 1 -c\ne D\n3 1 -r\np A\n3 1 -g\nu A\n3 1 -c\ne D\n4 1 -r\np A\n4 1 -g\nu A\n4 1 -c\ne D\n5 1 -r\np A\n5 1 -g\nu A\n5 1 -c\ne D\n6 1 -r\np A\n6 1 -g\nu A\n6 1 -c\ne D\n22 7 1 -r\np A\n7 1 -g\nu A\n7 1 -c\ne D\n\nIV. Major Macrostability Risks Going Forward\n• Independence of Central Banks to pursue price stability and protect\nthe value of the local currency\n• Tendency to fix interest rates, a key price of monetary policy blunts\nefficacy of monetary policy transmission\n• Debt Sustainability / Debt distress\n• Unsustainable levels of borrowing\n• Risks from Currency mismatch in major borrowing for infrastructure big\npush (borrowing for non-tradable services\n• Risks from Maturity mismatch for major infrastructure investment\n• End of Quantitative Easing in US to be followed by Europe\n\nRising Challenges to Central Bank\nIndependence\n• Notwithstanding the fact that independence/autonomy of central\nbank independence is enshrined in Constitutions and Law there are\nfrequent operational challenges to this independence\n• Interest rate controls and directed credit – most frequent pressure\nin the region – more on this in the next slide\n• Rising capital inadequacy and dependence on fiscal subventions will\nundermine autonomy and separation of fiscal and monetary policy\nmandates\n• Almost a decade of very low returns/yields to central bank foreign\ninvestment due to quantitative easing have eroded capital adequacy of\ncentral banks and exposed them to risk of dependence on subventions\n\nDeliberate Policy Interventions to Promote\nCredit by Lowering Rates Unfruitful\n• Tying lending rates to policy rates is at best tenuous. Objectives of policy rates\nare related to price stability – while capping interest rates targets affordability\nof lending rates\n• It is also likely that those who least can afford high interest rates may be\nskewed out of credit market by higher risk assessment rather than simply\ninterest rates – e.g. those who benefited for unsecured credit – e.g. Mkesho,\nMpawa\n• Interest Controls are not new, they were tried across the region in the past, and\nthe ensuing rationing of credit at set rates disproportionately skewed out those\nwho were targeted most for help driving them to loan sharks\n• Interventions that target reduction of risk premium or requirements for\nexpensive collateral – e.g. credit scoring system based on mobile telephony and\nmobile money usage – would be most effective solutions instead.\n\nDebt Sustainability Challenges – Are we\nborrowing too much?\n• Based on DSA carried out for each of the East African member\ncountries External debt and Total public debt are broadly within the\nacceptable int’l thresholds and EAC limit of PV of debt at 50%\n• None is currently already at risk of distress\n• Nevertheless recent build up has been rapid with higher cost and\nshorter maturities as non-concessional borrowing increased faster\nthan debt stock\n• PV of Kenya’s total public debt ratio to GDP has approached the 50%\nmark (although there are disputes for discount rate for domestic\ndebt) and could breach the threshold for sustainable debt\n\nThe Risks from Currency Mismatch\n• The Greater risk is that from currency mismatch (liquidity risk)\n• Loans for large infrastructure projects (transport, power, water\ncommunications) are contracted in foreign currency and have to be\nrepaid in the same\n• But revenue streams from these investments are in local currency and\nservicing to a large extent depends on growth of export sector.\n• Unless these investments accelerate growth of exports, a country may\nface challenges in externalizing debt service even if there is enough\nrevenue from these investments\n• Hope lies in getting oil and gas exports to start flowing early to boost\nforeign exchange earnings\n\nThe Risks of Maturity Mismatch\n• Some debts start getting repaid even before investment is complete\n• This is particularly the case for debt contracted in the capital\nmarkets – usually medium term in maturity\n• This mismatch in timing leads to a “solvency” risk – no revenue\navailable to service the debt\n• Large and lengthy gestation period projects = such as standard\ngauge railway if funded this way could spell out such risk for the\ncountries concerned\n• This is particularly troublesome if debt has to be rolled over at\nhigher cost.\n\nEnd of Quantitative Easing and Rise in interest\nRates\n• USA is already moving full steam to reversal while Europe is winding\ndown QE. Two major impacts are worrisome vis a vis macrostability\n• Reversal of capital flows back to USA and Europe to take advantage\nof higher returns and reduced risks – likely to engender\n• significant pressures on and volatility of exchange rate and\n• tightening of liquidity particularly if foreign currency denominated deposits\ndecline and subdues liquidity injection via inflows of foreign savings\n• Initial large negative effect on central bank income via revaluation\nlosses as price of its foreign assets decline with rise in interest rate -\nengendering inadequacy of capital and thraeat central bank\nindependence.\n\nConcluding Remarks\n• The conduct of monetary policy in the region has been overall\nsuccessful\n• Part of this success can be attributed to letting Central Banks pursue\nits mandates unencumbered\n• Sustaining this success will partly depend on\n• Protecting the independence of central banks to implement its mandate\n• Improve accountability of central banks for its actions – including more\neffective communication of its activity\n• Stronger capacity and flexibility to manage response to shocks\n• Let us sustain regional coordination and coherence of policy and\naction in response to shocks and in this era of cross-border banking.", "source": "CBK", "stratum": "cb_requests", "fetch_date": "2026-04-26", "url": "https://www.centralbank.go.ke/uploads/speeches/383506888_Prof Mwega's Memorial Lecture - rev.pdf"}