Money men double speak: Thugge, Ndung’u ‘contradict each other’ on fall of shilling, higher taxes

Central Bank of Kenya Governor Kamau Thugge and Treasury Cabinet Secretary Njuguna Ndung’u find themselves battling against criticism of flip-flopping on the fall of the shilling against the dollar and new taxes—twin issues that continue to burden Kenyans.

Dr Thugge this week told MPs that the Kenyan shilling has been on a freefall because it had been overvalued for several years.

But when Dr Thugge met with MPs in June during his vetting for the plum post, he attributed the shilling’s depreciation to global inflation and hoarding of dollars by Kenyans, causing a scarcity.

And Prof Ndung’u—during his vetting for the Cabinet position a year ago—equated raising of taxes during hard economic times to killing the goose laying the golden eggs but has since defended recent tax increases, including the doubling of value-added tax (VAT) on petroleum products to 16 per cent.

Prof Ndung’u also argues that the Kenyan shilling continues to fall because of past policy mistakes that raised its value beyond where it actually belonged, even though during his vetting, he attributed the fall to scarcity of dollars and tightening of monetary policies in the west.

The shifting of goalposts by the two men charged with overseeing the economy from a regulatory point has exposed their doublespeak on issues that have hugely affected every household, with the combined impact of increased taxes and the falling of the shilling raising commodity prices.

Dr Thugge on Tuesday told the National Assembly’s Finance committee that the shilling has been overvalued, citing a previous International Monetary Fund (IMF) review that indicated the shilling had been overvalued by up to 25 per cent, to support his argument.

“On the issue of exchange rate, for several years now, we’ve had an overvalued exchange rate. In fact, if you go back five, six years ago, there was a raging debate as to whether the shilling exchange rate was overvalued and at that time, the Bretton Woods institutions—the IMF and the World Bank—felt that the exchange rate was overvalued by anywhere between 20 and 25 per cent,” the CBK governor explained.

Dr Thugge said the government had been left trying “to maintain a fairly artificially strong exchange rate but also at the cost of loss of international reserves,” which have fallen to 3.7 months of import cover.

“It’s still sufficient to address any emergencies, but there has been that decline in the level of reserves, trying to defend, perhaps, an overvalued exchange rate. That overvaluation became obvious last year when the developed and advanced economies had a very expansional monetary policy. Their inflation rates last year went beyond what they had seen in decades. It took very strong actions in terms of raising interest rates,” he said.

When Kenya could not match the steep increase in base lending rates to the US levels, the governor went on, dollars started leaving the Kenyan economy, thus affecting exchange rates. “Because there was already an overvaluation, our currency depreciated a bit higher than the currencies within the region,” he added.

However, this was not the explanation Dr Thugge provided members of the same committee when he appeared before them for vetting in June. Then, he seemed to believe that the Western countries, mainly the US, had printed too much money, causing inflation, only to raise interest rates when prices went up.

“The immediate reason for this depreciation of the shilling is the fact that there has been a general increase in inflation globally, either because of the war in Ukraine; because the US and other advanced countries, maybe, their loosening of monetary policy in the past- called quantitative easing, maybe they overdid it and therefore there was too much money chasing too few goods and that has fuelled inflation even in the US,” Dr Thugge told the committee then.

Asked about the apparent contraction, the CBK governor told the Saturday Nation yesterday: “The reference to an overvalued shilling relates to a review conducted by the IMF in the past few years (reported in our newspaper). This context, combined with global macroeconomic shocks, geopolitical factors, and the need for advanced economies to raise interest rates to fight historically high inflation, all conspired to put pressure on most currencies. This depreciation has affected most countries and is not confined to Kenya alone.”

In June, Dr Thugge had also told MPs that hoarding of dollars by Kenyans in their personal accounts had contributed to the shortage and the shilling shedding more value, promising to engage the Treasury on the consideration of “issuing dollar-denominated bond, which would increase dollar liquidity, strengthen the shilling.”

For his part, Prof Ndung’u told MPs during his vetting in October last year that depreciation of the shilling was being caused by supply-side shocks that had reduced dollar availability, starting with the Covid-19 pandemic that hit global supply chains, the Russia-Ukraine war, climate disasters and an overall inflation in the west, which caused a rise in interest rates. This, he explained, caused many people to hold dollars as speculation got rife.

“When the crisis started biting, especially the whole world, it’s only the US Fed that started tightening their monetary policy and even the Euro started being affected because they were not following suit. When everybody followed suit, there was a whole tightening even in Kenya here and so the signalling is that there would be scarcity of dollars. And so everybody moves in a different direction because they are anticipating that there will be tightening. Once the crisis has been resolved, then there is inflow of foreign exchange because we have an open capital account and a floating exchange rate, their precision will always take place and we are going to see dollar flows,” Prof Ndung’u said.

Yesterday, however, the CS held the view that by the shilling shedding value at the pace it had since last year, “we are paying for past policy mistakes.”

Prof Ndung’u went ahead to join Dr Thugge and the chairperson of the President’s Council of Economic Advisors, Dr David Ndii, in their campaign that overvaluation of the Kenyan shilling over the past years has caused the steep depreciation.

The shilling has lost more than 21 per cent of its value against the US dollar since January, from exchanging at Sh123.42/$1 when the year started, to Sh150.36/$1 by yesterday.

“The CBK governor made a statement on the exchange rate and the effect of current depreciation. David Ndii also reminded us of what he said five years ago. I was in Parliament not long ago and I said that we are paying for past policy mistakes. It is in the Hansard.

“Exchange is a nationwide relative price. So talking about it is not taking a position. So you cannot ask what the National Treasury position is. The policy is that we have a floating exchange rate policy and an open capital account. That allows the CBK to develop and implement an independent monetary policy,” the CS told the Nation.

“The problem that has been raised is that since 2016, the nominal exchange rate was managed, not allowed to float. In this same period, the government was investing heavily in infrastructure projects, thus pushing the prices of non-tradable goods up; in other words, the real exchange rate was getting misaligned. Ideally, the nominal exchange rate would move to solve the problem. It is an automatic stabiliser. But it was managed, so it could not move. Now it is moving to correct those policy mistakes,” Prof Ndung’u added.

While appearing before Parliament to unveil the 2023/24 budget in June, the CS explained that the government introduced the Government-to-Government (G-2-G) oil importation programme in April to ease pressure on the shilling, as there was stiff competition for the dollars when importing petroleum products.

At the time, the government’s object of blame for the depreciating currency was high demand for dollars for importation of petroleum products, which was estimated at $500 million monthly, and Prof Ndung’u told the country that the programme would ease pressure on the shilling.

“To date, the monthly importation of petroleum products is approximately 740,000 metric tons, of which 60 per cent is consumed in the domestic market, while 40 per cent is for the transit market in the region. This product is currently paid for using the United States dollar, which puts a strain on foreign exchange availability and pressure on nominal exchange rate and ensuing exchange rate volatility in the market on a monthly basis,” the CS said on June 15.

However, while the government then promised that the programme would address the local currency depreciation, with the President promising that the exchange rate would fall from over Sh120/$1 as was then to about Sh115/$1 within two months, this has not worked and it has since denounced the objective.

“Contrary to the noise about the slide, despite the petroleum G-to-G deal, we did not set out to stabilise the shilling. We set out to stabilise the foreign exchange market, i.e. availability of foreign exchange, restore the interbank market and clean float. We have achieved the first, and good progress on 2 and 3. Without the G-to-G, we’d be where Ghana is,” tweeted Dr Ndii on Wednesday.

The shifting of goalposts to favour the current argument has not only been on performance of the shilling, as Prof Ndung’u has also changed his views regarding the raising of taxes during difficult economic times.

“When you are in such a dire situation, when poverty is biting and the cost of living is rising, that is not the time to increase taxes or re-target taxes. That is the time to look at the areas where you can provide interventions…The whole issue is to try and protect that goose that lays the golden egg. That is the main point and is the policy of taxation that I came up with when I talked about ‘please do not raise tax rates to the point where it becomes an inducement for you to evade taxes. You are killing the goose that laid the golden egg, unless you want to say bye-bye to the golden egg,’” Prof Ndung’u said during his vetting.

Instead, he said he would challenge the Kenya Revenue Authority to tax “where there is a boom” to the extent that the taxes would not distort the market or cause people and businesses to evade taxes. The CS yesterday, however, continued to defend, as necessary, the raise of VAT on petroleum products from eight to 16 per cent, whose impact has been escalation in fuel prices and subsequently transport and commodity prices.

The government has also gone after informal businesses and small-scale farmers with strategies to tax them, and starting to look at business cash flows through digital payment systems, which has caused an exodus from digital payments by Small and Medium-sized Enterprises.

“On taxation, we have not raised taxes as such. I did explain at length the problem of taxing fuel at eight per cent and those in the industry claiming refunds with 16 per cent. The tax credit from this sector has been a pain to the exchequer and that is the correction that was being made. Facts are facts. Don’t mix them with non-facts,” Prof Ndung’u told the Nation.

The impact of tax increment has been felt by Kenyans from all walks of life, as fuel prices crossed Sh200 per litre for the first time, and now closing in on Sh220, especially petrol.

“Tax reforms under way must depend on analysis of each tax instrument and its impact on domestic prices, consumption and structure of demand for the target goods, resource allocation, production and investment decisions. I have not seen or read such an analysis for Kenya. We are starting from scratch so that we can inform tax policy reforms,” the CS added.

Other tax measures introduced in the current financial year include an increment in excise duty on mobile money transactions, a raise of Pay As You Earn (PAYE) tax for workers earning above Sh500,000 monthly and the bringing of businesses with at least Sh25 million annual revenues into the corporate tax bracket, to pay 30 per cent corporation tax.

It is not the first time a sharp depreciation of the shilling has caused ripples across the economy. In 2012, Prof Ndung’u, then serving as CBK governor, survived being thrown out of office following a parliamentary committee investigation into the decline of the Kenyan shilling at that time, after MPs voted 46 to 37 in his favour.

MPs voted to expunge an adverse recommendation against the CBK governor, arguing the issue needed not to be personalised. The committee had found that Kenya suffered capital flight during the period when the Kenya shilling was depreciating, as uncertainties about the unpredictable exchange rate fuelled negative expectations about the economy and key macroeconomic variables.

“The committee finds the governor’s conduct and behaviour incompatible with the holder of the office of Governor of the CBK and therefore recommend: the governor take responsibility for allowing the sharp decline of the shilling and step aside to pave the way for thorough investigations,” the committee report read.

It also asked former President Mwai Kibaki to constitute a tribunal to investigate Prof Ndung’u’s “conduct, incapability and incompetence to perform the functions of the office”.

The hostile recommendations against Prof Ndung’u were defeated by a vote of 46-37.