The Treasury building in Nairobi. The Treasury’s policy dominance is already discomforting the Central Bank of Kenya governor. PHOTO | FILE
What you need to know:
Is the governor’s stance justified? Yes, because the issue of fiscal dominance has featured prominently in the current debate on causes of exchange rate volatilities.
If recent events are anything to go by, I’m foreseeing a strained working relationship between fiscal and monetary policymakers. The Treasury’s policy dominance is already discomforting Central Bank of Kenya governor Patrick Njoroge.
First, in his submissions to Parliament’s Finance, Planning and Trade committee, he differed with Treasury on the Sh5bn ($50 million) new minimum core capital proposals for commercial banks.
And as was reported by the Business Daily, the governor said passing the Treasury’s proposals would lead to ‘‘rushed consolidations and make big banks more dominant’’.
He instead proposed a risk-based regulatory approach where ‘‘the bank that takes more risk should have more capital.’’
He has a point and is basically alluding to the introduction of the Basel III model. I also think that CBK should move towards identifying systemically important banks (SIBs).
The identified SIBs — because they present significant systemic risks, largely due to their large balance sheets, regional presence and interconnectedness — should then be asked to put in place higher loss absorbency capabilities by way of fortifying their balance sheets through higher capital adequacy and liquidity coverage ratios.
Further, they will be subject to robust stress-testing and more frequent on-site supervision.
Additionally, I don’t think forced consolidation, as proposed by the Treasury, will solve any of the negative balance sheet dynamics that banks have to deal with on a daily basis.
Key among them being lack of long-term deposit liabilities (and the subsequent acute funding mismatch) and lack of sticky foreign currency liabilities. So Dr Njoroge’s proposal of a risk-based approach makes sense.
Second, the governor has also openly expressed his displeasure over the continuing fiscal indiscipline. Basically, the Treasury is running wide fiscal deficits, whose funding can only be through borrowing.
In the just ended fiscal 2014/15, the central government spent all tax revenue collections on recurrent expenditure, which means that if such a trend continues development projects will have to be financed through borrowing.
Governor’s stance
Due to his openly radical stance on this matter, Dr Njoroge is likely to run into trouble with his ‘‘boss’’ (the Treasury CS) who, in my opinion, holds the view that funding constraints shouldn’t stand in the way of a development project.
Is the governor’s stance justified? Yes, because the issue of fiscal dominance has featured prominently in the current debate on causes of exchange rate volatilities. One school of thought advances the theory that CBK, in its efforts to stem further depreciation of the shilling against the dollar, is fighting the Treasury’s battles.
Which I think is true. Judging from his recent two submissions to Parliament, Dr Njoroge comes out as anti-fiscal dominance and not likely to continue condoning the Treasury’s policy dominance.
Additionally, he’s unlikely to be a fence-sitter and will instead aggressively pursue re-alignments between fiscal and monetary policies.
In the course of this pursuit, he’ll probably lock horns with the Treasury secretary which could transition into policy feuds between the two key institutions.
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