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Njuguna Ndung'u, Kenya's top banker, does not mince words discussing its economy. BusinessToday reports

Listening to Njuguna Ndung'u, Governor of the Central Bank of Kenya, speak about his country's economy was a pleasant surprise. Unlike the central bank chiefs of some large nations whose jargon can only be deciphered by economic experts on what the future holds, Ndung'u was candid and forthcoming about the state of the Kenyan economy. He believes in telling as it is. One reason for his straightforwardness could be his academic background. Ndung’u holds a PhD in economics from the University of Gothenburg, Sweden, and master’s and bachelor’s degrees in economics from the University of Nairobi. He has lectured in advanced economic theory and econometrics at the University of Nairobi. His research work has been published in several international journals on issues ranging from economic growth, poverty reduction, inflation, interest rate and exchange rate to financial management and public sector growth. He is also an authority on external debt, financial liberalisation, employment and labour market issues.

Trouble in paradise
The East African nation has been mired in political crisis since December last year. Despite a compromise reached between the two main rival political parties, investor confidence in the economy remains low and it continues to be a drag on the economy in the first quarter of 2008 after having posted a stellar growth rate of nearly seven per cent in 2007. However, Ndung'u is optimistic about the rest of the year. "The economy will reco-ver and gradually find its path over the course of the year and reverse a slowdown. Kenya will come back and reclaim its place as an island of tranquillity in Africa and register a growth pattern witnessed in the last five years," predicts Ndung'u. Apart from the aberration in the first quarter of 2008, the country has been registering economic growth since 2003 when the reforms were put in place. The GDP grew at 2.9 per cent in 2003, 5.7 per cent in 2005 and 6.7 per cent in 2007.

Kenya's central bank head was on a tour of the region to drum up support for investment into the country's banking and financial sector, particularly its fledgling Islamic banking sector. His trip brought him to Oman, UAE and Bahrain. "We are keen to make Kenya the region's banking hub. Nairobi's strategic location makes it an ideal place for Islamic banks to easily access the Muslim-populated Eastern and Central African regions."

East Africa has a large Muslim population, which until now did not have access to Islamic banking products in their countries. Kenya's first Islamic bank – Gulf African Bank – was launched in February by investors from the Middle East with a capital base of US$27mn, which includes BankMuscat International, UAE-based investment firm GulfCap, Dubai-based private equity firm Istithmar World, PTA Bank and other Kenyan investors. Gulf African Bank offers corporate banking, housing finance, car finance, retail banking products as well as other services that conform to the tenets of Islam. The bank soon intends to expand into Tanzania and Uganda. Ndung'u says the Central Bank of Kenya has approved licence for a second Islamic bank that will commence operations soon. According to him, Kenyan banks lack innovative and diverse Shariah-compliant products and the entry of foreign banks will expand this segment.

"I see strong growth in the Kenyan banking sector, particularly Islamic banking. There is a huge market niche in Islamic banking that needs to be filled and it provides great opportunity for the Gulf banks to fill that gap. Gulf banks are very mature compared to their Kenyan counterparts. The entry of Gulf Islamic banks into Kenya will see new innovative products. We are getting a lot of inquiries from Gulf banks, which are keen to open branches in Kenya."

Investment opportunities
The traditional banking sector also offers a plethora of opportunities for growth. Consider this. Kenya, with a population of about 35mn, only had 3.3mn deposit accounts in 2006, which increased to 4.7mn in 2007. The country has 45 banks, including a few non-banking financial institutions. The profits of the sector increased by 30 per cent in 2006 from 27bn Kenyan shillings (US$400mn) to 35bn Kenyan shillings (US$500mn) in 2007. "The figures tell you that there is still ample scope. We also expect some consolidation in this sector. The stated objective of Vision 2030 is to have stronger and larger scale banks and a drive to be a regional hub for banking services," informs Ndung'u. Opportunities for investment include mergers and acquisitions of existing banks, equity investment, investment in debt securities such as bonds and commercial paper financing and also a combination of insurance and capital market services.

There are three pillars to the Vision 2030 objectives – economic, social and political development. It aims to achieve a GDP growth of ten per cent by 2012 supported by maintenance of macroeconomic stability, increased savings and investments, including targeted investments on flagship projects, accelerated infrastructure developments and structural reforms. The sectors that will propel this growth include agriculture, trade, tourism, manufacturing, business process outsourcing and financial services.

The way forward
Coming back to the ground realities in Kenya and whether the prevailing situation will have any long-term impact on the country's economic future, Ndung'u says, "The central bank is still analysing the economic cost of the political crisis taking into account a weakening economic outlook and increasing downside risks to growth. Meanwhile, there are issues and policy interventions that can be discussed to provide the way forward." The Central Bank of Kenya has three issues at hand that need to be tackled immediately – inflation, exchange rate fluctuation and unemployment. Data released by Kenya National Bureau of Statistics show that overall inflation increased from 12 per cent in December 2007 to 18.2 per cent in January 2008. Ndung'u says the spike in inflation was a consequence of supply constraints rather than demand pressure.

The increase in food prices was a result of disturbances in some food-surplus parts of the country and longer term effect of failed rains in most parts of the country. Although he would not comment on the targeted band tolerance for inflation, steps are being taken to prevent it from spiralling out of control. On the exchange rate, Ndung'u says the Kenyan shilling was under pressure towards the end of last year. "We have a floating rate mechanism and the shilling was fluctuating between 74 and 62 against the dollar, driven largely by portfolio inflows. There will be some volatility on account of the Safaricom IPO, which is being eagerly awaited by overseas investors."

The political crisis had a major impact on the country's tourism sector. With travel advisories from key tourism markets warning their citizens against visiting the country, the tourism sector, which employs several tens of thousands, was hit the hardest. Exports, a key foreign exchange revenue earner, were also affected badly. Some reports put the loss from the resulting chaos at approximately US$3.6bn.

"The labour market is likely to suffer for a long time. When factors of production are displaced physically, they tend to take a long time to resume normal operations due to uncertainty. However, the government, in a bid to increase employment, is planning to build two high-end, multi-attraction tourism cities to bolster the sector's earnings potential and generate much-needed employment. Vast untapped potential also exists in manufacturing and business process outsourcing among other areas."

Ndung'u says in taking policy action "we need to be careful not to compound the problems instead of solving them." Considering the manner in which he has been approaching the problems, which is tackling them head on and not mulling over key decisions, Kenya, despite its current political upheavals, seems to be in safe economic hands for the moment.