Thursday, January 05, 2006

Greenspan: What lessons for Mulei & CBK?

In just under 3 weeks, America's top-most banker will be leaving office with what some are calling a mixed legacy in the bag (refer to for details). 
What lessons could our very own Mulei and the CBK draw from his talismanic past as the Fed boss?

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Anonymous Kimanimungai said...


The issues which Mulei must sort out first before monetary policy in Kenya can be of any impact include:

First, political patronage is one of the issue that the government must address if it wanted to make monetary policy as strong as it is in the US. The manner of the appointment the two execitives are totally different. The way the central bank used to hire its staff was questionable more so during cheserem and Kotut's tenures given the fact that CBK should be only a professionals' outfit. Interference by politians is another area (Remeber the 1993 excess supply of money supply due to printing of money to finance the first multi-party elections (Politics)? Inflation went to almost 70 percent in that year)

Secondly, the independence of monetary policy is one of the conerstone of monetary policy that to date is lacking in Kenya. Fiscal pressures are another concern of monetary policy conduct. The government's appetite for domestic finances putting pressure on the broader money supply (M3X) and the overall liquidity (M3XT). Money supply therefore continues to rise even when the CBK's policy is one that is meant to reduce money supply (Contractionary). For definitions, of M3X and M3XT, refer to the site below.

The third concern is political greed of the legislators. Remember the introduction of the Induplums Rule to regulate the accumulation of Non-Performing loans and the famous Donde Bill which all never saw the light of day because the Kenya Bankers Ass bribed MPs with guddies at the coast to throw them out.

Fourth, monetary policy the world over is run under certain policy rules. There is suppose to be a current money demand function that helps the monetary authority to forcast money supply since the assumption is that money demand (Md) always equals to money supply (Ms). So the coefficient of money demand should equal to that of Ms. It is from this equation that the CBK should derive the money multipliers and the elasticities of the demand for money to better forcast Ms. I challenge the CBK to make public the money demand equation, elasticities of money demand and the money multipliers they are using to focus money supply in Kenya currently! I am sure it is not there (Inside information). In the absence of this framework (otherwise called the monetary targeting framework), the CBK has the option of targeting the exchange rates, but because exchange rates are flexible, their options on this are limited, the other option is the inflation targeting option. Apparently the CBK targets inflation at below 5 percent. This is a policy inconsistency. It is difficult to target both inflation and money supply at the same time, because one affects the other. Inflation affects the level of money supply in the economy and money supply affects the infaltion (As was in 1993). But how can they know this if the reseach department of CBK is full of guys who dont research. A few of them may be good though, but majority got those positions from the "Do you Know Anybody" theatres.

Fourth, there is too much overreliance on the IMF/Worldbank teams. The IMF and World Bank bases their monetary and fiscal policies on a financial programming model which relies on monetary, balance of payments, and fiscal accounting identities. The financial programming assumes a one for one relationship from the identity between the policy variable and the outcome variable and assumes the other variables in the identity to be exogenous with respect to the policy variable. These assumptions are never realistic. Research has identified the following shortcomings with the financial programming model:

it does not consider the endogeneity of all the variables in each macroeconomic identity
its simple behavioural assumptions are unstable
there are large statistical discrepancies in all the identities
The major shortcomings that Mulei could have instituted could have been to bring independence to the institution (The 1996 CBK Amendments are not sufficient). The other could have been to instill professionalism in the critical departments including research depts.

The CBK is one big mess that is not possible to be sorted in one year.

1/06/2006 12:36:00 pm  
Anonymous Koitalel said...

Monetary Policy (MP) ~ managing money supply to achieve specific goals- classical goals being-
- To achieve economic growth
- To achieve full employment
- To control inflation
Traditional tools used to achieve above goals are-
- Management of interest rates via-
. Central Bank’s control of national currency liquidity, example selling and buying government financial instruments (read: securities bonds and so forth)

- Management of national currency (<== allow me to branch off and address this issue without digging any further into MP woes)

As KimaniMungai has ably pointed out, and addressed the political economy of MP quite well, let me quote the part I want to expand on “ Remember the 1993 excess supply of money supply due to printing of money to finance the first multi-party elections (Politics)? Inflation went to almost 70 percent in that year)... personally, I think the printing continued close to 2002 ...

This is where I fault the NARC government- Tinga Tinga, Kibaki, prof Nyong'o and all…and in particular Kibaki having been involved in Kenya’s finance/economy since independence.

Why did they fail to take MP action to route corruption in the currency which would have recovered substantial amount of looted currency? Anyone with reasons kindly share …

My expectations were that with an element of surprise, they would have printed new currency and provided relatively very short time for holders of old currency to covert to the new, and after that time the old currency would have been declared illegal.

Now, the anti-corruption in conjunction with CB would have just monitored large conversions and quizzed how such funds were gotten, and this is where they would have had a huge leverage in discovering and remedying currency corruption.

As it stands, the looters picked everyones’ pocket by printing currency, and by the look of things, they got away with it …

Let me stop here.

1/06/2006 12:37:00 pm  
Blogger Kenyananalyst said...

Kimani & Koitalel -

All very interesting, practical ideas.

Those familiar with the Kenyan political and economic experience will always remind you that we almost rarely have a conducive policy and legislative agenda for anything important and where we have such, we - conveniently - find some personal or political reasons to inhibit the practicability of such (e.g we get to clog the system with corruption...then again find some way to explain that away).

Question: Is there a realistic possibility that the the Third Council of Ministers, current MPs and the CBK machinery can and will rise to the occasion?

Why the inertia?

I doubt they are not already aware of our concerns here and elsewhere.

1/06/2006 12:38:00 pm  
Anonymous MwanaKenya said...

Jesse, the politics of the day will remain our undoing unless a miracle happens. While we expect the three arms of government ( Executive-CB, Legislature-parliament and judiciary) to pull in the same direction, we have had a nasty experience. The central bank of all is expected to be driven by professionalism but have overtime been invested by political patronage and professionalism takes the back seat. When sense seems to prevail there and somebody comes up with some sound policies, parliament, where bills to support such policies are supposed to be passed, is a disappointment. Until and unless there is the political will to support sound policies, our salvation remains a pipe dream. Can we have a parliament that can rise to the occasion? What does it take? If brains, our current parliament happens to enjoy a sea of them. Is it power that has driven all nuts or selfishness?

1/06/2006 01:13:00 pm  
Anonymous Mook said...

Interesting points raised and I couldn't be left behind without my contribution on this burning issue that seems to evade many including myself.


"The independence of monetary policy is one of the conerstone of monetary policy that to date is lacking in Kenya."

I agree with you totally but I will look at this in a different perspective. The CB chief being a Government agent on monitary policy can disagree or agree with the employer. If he finds that the employers method of economy growth is contradictory to the layed down priorities then he/she has two options: quit or restrain from implementing crazzy polies which might take the country into great recess.

There are two partners involved in achieving the required economic growth: the CBK and politicians whereby the CBK is the chief advisor to the latter.

When this regime came into power all seemed to go as planned and the indicators were pointing in the right direction major economic growth.

But the little growth was cut short by government extravagancer. With my little knowledge this is the time when the government ought to have saved raise the reserve or invested in activities which could help them in achieving their other goals for instance;

To achieve full employment
To reduce inflation to acceptable lavel

1/06/2006 04:35:00 pm  
Anonymous Koitalel said...

On the Political Economy side, I think there is too much vested interest that Monetary Policy (MP) becomes akin to peeling an onion with very little wiggle room and a lot of tears ... with the die heavily loaded against us some of the constraints are quite overwhelming and that's why for example some of the Latin American countries are paying off WB/IMF and parting ways ... see Confessions of an Economic Hitman by John Perkins who recently observed ... The protests this week in Bolivia come as Latin America is seeing significant success among popular progressive movements. From Hugo Chavez of Venezuela, Lula da Silva of Brazil to the changes of government in Uruguay and now Ecuador, there is a continent-wide trend that has Washington concerned. The US has long exploited countries throughout Central and Latin America for the natural resources, labor and land. Over the decades, this exploitation has been backed up by force and through devastating policies dictated to puppet regimes. John Perkins says he helped the U.S. cheat poor countries in Latin America and around the globe out of trillions of dollars by lending them more money than they could possibly repay and then taking over their economies. From 1971 to 1981, John Perkins worked for the international consulting firm of Chas T. Main. He described himself as an "economic hit man." He’s written a memoir called Confessions of an Economic Hitman
... This book worth glancing at ... some interesting reading but a bit marginal and frought with generalizations imo.

Kenya MP has both domestic and international forces to contend with which imo are overwhelming for CB/MP folks to make any independent policy...I would rate them powerless.

1/07/2006 09:29:00 am  
Blogger Kenyananalyst said...

Koitalel -


Your contribution brings to mind parts of a point I had earlier contributed to a separate post by Jikz:

"As for the political elite and the police force / intelligence community, one can also never discount the possibility that crucial sections of our public life / policy have been sold out to some insidious, international agenda (let the reader understand).

I know there are those who will dismiss this as merely another conspiracy theory / unfounded and misplaced emotionalism, but has anyone - for instance - ever wondered how and why the P2 (part Mafioso, part Freemasonry) so wrecked Italian government and public life a few decades ago?"

By the way, for those among you interested in some preliminary readings of the confessions cited by Koitalel, the October 2005 edition of the NewAfrican (Issue no. 444) may be something to lay your hands on at the nearest library / your subscriptions.

Page 46-51 is the acre of space devoted to the NY best-seller.

1/07/2006 09:39:00 am  
Anonymous Koitalel said...

Now that we know that all Gov. Mulei /CBK can do is throw his arms in the air, and once he gets tired, bring them down … back to Jesse’s original question – “What lessons could our very own Mulei and the CBK draw from his [prof. Greenspans] talismanic past as the Fed boss?

1. We know prof. Greenspan worked under diverse Republican and Democratic administrations (examples…the late Prez. Reagan, Clinton …and others) with relatively reasonable success.
2. We also know he had tremendous pressure internationally … EU (interest rates adjustments), China (trade, currency pegging), holders of US instruments, stability of the $ internationally, debt, irrational exuberance at the heydays of the bubble, notwithstanding a number of international crisis that were threatening US economy, and not to mention those that wanted to ride US currency coattails by pegging their currencies to US $ like Indonesia and most recently China…
3. We know IMF/WB was never on Greenspan’s case, but was rather a tool at his feet…

We have concluded that CBK Governor Mule can hardly be successful within the current economic/political structure. Which leads to the question, what kind of economic/political structure did Greenspan work under to make him successful and are we likely to adopt such structures…

IMO CBK needs to be independent and accountable and have a well-defined charter … for mwananchi like me; my prayer is for – growth, employment, price stability…

Greenspan and the Board members are nominated by the President and confirmed by Senate, they are tenured for 14 years.

Perhaps we should expand on CBK amendment, institute structures such as hiring and tenure – example gazette these positions, have the President nominate top three candidates openly, present list of candidates to Parliamentary select committee which also can have professionals from private sector, academics… who will go over the prospective candidates’ CV/ do all the necessary research/discoveries, then present a final candidate to Parliament for confirmation by a simple majority… personally, I would be comfortable with any person selected via such a process …

I think Mulei under current political/economic structure is reduced to servicing the whims of the power centers and for him to be successful as Greenspan has been, he needs a workable political/economic structure.

PS, these are mere discussions and in no way any criticism of Gov. Mulei

1/09/2006 10:28:00 am  
Anonymous Kimanimungai said...


Good points but I cannot apologise for criticising a public officer on the basis of his official duties. I cannot apologise because I pay him handsomely with my taxes to provide professional services to me and the other Kenyans.

If the performance of the CBK is wanting, it cannot be made better by keeping quiet. If we tell them they are not delivering to our expectations is just to wake them up.

My stake on the CBK and the governor is that, they must put a professional entity in place with a very strong research base. Policy responses must be done only on the basis of well researched options. Look at the research publications of the Federal Reserve Staff and compare with our CBK!

1/09/2006 10:28:00 am  
Anonymous Koitalel said...

@KimaniMungai, I was watching NFL playoff... Washington Redskins just spanked Tampa Bay Buccaneers in a match that was near a defensive masterpiece...

Yap! we need well trained/ qualified professionals, research and modeling for such key positions ...

On another topic @Jessi_Masai, you observed " one can also never discount the possibility that crucial sections of our public life / policy have been sold out to some insidious, international agenda (let the reader understand). “ Very true! If we do not stand up for our own interests, nobody will, I often hear many of us complain of slanted news overseas and often wonder, should we be expecting foreigners to articulate our interests …

At this moment – NOW, there are two major opportunities going on for Kenya- 1) that they can balance the budget from internal resources 2) the vast amount of remittances that Wananchi abroad inject into the economy.

I was at one time looking at the latter and noted, they can also provide the necessary capitalization for domestic firms via the capital market … I looked at the KenGen IPO and thought, Wananchi abroad can capitalize it to the tune of nearly 2b shillings easily ... if KenGen sold wananchi in diaspora 25% of the IPO and gave them two director positions, this would be a great start towards capitalizing genuine local firms …and given the NSE comparatively high returns, it would be a win/win situation…and a windfall for Kenya economy…

Stated objectives of the gov. divestiture of KenGen included raising revenue for the budget, ensuring wide ownership among Kenyans and contributing to the development of the country's capital markets… meaning that the KenGen shares will be widely distributed to Kenyans …

So, lets assume that Kenya was successful in widely distributing KenGen shares … there are so many ways of pre-empting that move- example, say we know KenGen will earn 1.7b ks or ~10% each year, so you give them a loan for ~20b sh to expand power generation via some xyz project, thereby preempting stated objectives above and at the same time intercepting nearly all the earnings ...such practices are commonplace...

At any rate, I heard something to the effect that KenGen was being given a huge loan from some place like EU (unconfirmed)… and I said to myself, if they can entertain such an option while in the midst of one of the most successful IPOs, then, ...

Another example, why would an entity like Kenya Pipeline – one of the most profitable company with enormous potential, have been into so much debt, that Dr. Ochuodho lost his job trying to reorganize the debt…

As a third and final example, did you happen to see pictures of German ambassador to Kenya skipping over open sewage in Kibera …doing PR for Kenya / Sudan railways a ~2,000billion Kenya Shillings project( yes, ~two trillion), not sure why /how it was awarded to Germany, they neither have been at the forefront of liberating Southern Sudan, nor are they in a position to protect it once its built, and I fail to see any large successful projects they have done in the region… I suppose Americans would have been a better choice for various reasons – better market linkages, more likely to attract more companies into Sudan, can protect it … even China, IMO would have been a better choice, I’m sure they could have built it much more economically …

At any rate, my point was what transpires during such contracts negotiations, we did not hear much about how this contract was awarded or how its intended to transform the regions economy…((with this kind of a project in the back pocket, it might be prudent for the German ambassador to keep his tail close to in between his legs instead of making outrageous political statements as he has done in the past …personally, I don’t care what side he supports … he should just stay away from partisan politics))

So your statement is not too far fetched, these are games that go on day in day out… we just have to step to the plate and project our interests, unfortunately, we have mostly sold out for minute individual gains ...

Enuff of my opinions …

1/09/2006 10:29:00 am  
Blogger Kenyananalyst said...

Koitalel -

Have you taken cognisance of Nairobi's new Mugabe-style "Look-East" policy and its ramifications on her budget balancing (not to mention the wider economy), if any at all?

For Kimani: I agree, unbridled deference to seniority / authority often stifles constructive criticism in the Kenyan / African context, becoming our bane in the process.

It gets a little un-nerving / disconcerting when one has to handle some issues / persons with kids' gloves.

1/09/2006 01:15:00 pm  
Anonymous Anonymous said...

Mwangu Irungu said
You cannot compare Allan Greenspan and Andy Mulei. The environmnet they care in are totaaly diffrent.
To give you a clear contarst btween the two is like the difference between using the football terms Man Utd and Sony Sugar.
While Greenspan worked independent of the executive where political interference was minimal, in Kenya, CBK chief are on the opposite. Many CBK chiefs in Kenya, hav had it rough and played to the tunes of the politcal heavy weights especialy in the last regime.
Mulei can only hope that what happened to his predecessors will not happen to him, he can only wait and read the books Greenspan hope sto write.
Greenspan spoke and every financial market listened, his speech was discussed word for word to get full interpretation even in the congress. When he sneezed even the oval and offc off course State House in Nairobi got a cold.

2/01/2006 11:24:00 am  
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