CBK chief calls for speedy set up of commodities exchange

CBK governor Njuguna Ndung’u has called for speedier setting up of a commodities exchange to stabilise prices by guaranteeing constant supply of food all-year round.

In an interview with UK-based research firm Oxford Business Group, Prof Ndung’u says frequent food and fuel shortages had made it difficult for the regulator to stabilise prices as the country is faced with recurrent supply shocks.

“The tools to fight inflation tend to be demand-side tools and can thus ignite short-run recession in the country until the supply shocks are resolved,” said Prof Ndung’u in the yet-to-be published report.

“One of the critical long-term buffers for food supply is to create a commodity exchange similar to what Ethiopia has done,” said the governor.

Kenya has been making strides towards establishing a commodities exchange expected to stabilise supply of food, which fluctuates according to planting seasons.

The National Cereals and Produce Board depots (NCPB) will be used as warehouses for storing farmers’ harvest to minimise wastage.
The Capital Markets Authority is also in the final stages of drafting rules for the commodities exchange.

In the wide-ranging interview, Prof Ndung’u also said Kenya’s planned $1.5 billion sovereign bond will provide cash to fuel economic growth and increase foreign exchange reserves.

He said the money raised would go into rolling out large-scale infrastructure projects that are expected to fuel economic growth.

“The Eurobond is not about getting a sovereign bond to search for oil — that is the role of the private sector … Expanding and decongesting cities will pull economic growth and open production potential, but to do so there must be a large infusion of public investments that are complementary to private investment in that they lower transaction costs and enhance profitability of private investments,” said the governor.

Prof Ndung’u said the foreign exchange reserves would build buffers to protect against currency fluctuations and periodic supply side shocks.

He noted that supply and demand shocks would always drive the nominal exchange rate, but that the lack of a target for the nominal exchange rate meant that monetary policy was essentially the immediate response.

“The wider solution is having buffers. A country like Kenya can only build those buffers by buying foreign exchange reserves in the market. The other buffers are strategic reserves for food and fuel, the main supply side price shocks,” he said.

Prof Ndung’u said inflation was likely to be maintained at five per cent as long as supply shocks such as drought do not hit the country.