Economic advice in times of crisis: Recollections from the former economic advisor to Kenya

Updated: Mar 19

Prof Njuguna Ndung'u, Former Central Bank Governor of Kenya


CEoG initiated a program of writing support to African economic policymakers who have played senior advisory roles at the heart of governments in sub-Saharan Africa. The goal is to gather recollections of key economic events during their tenure as economic advisors. CEoG helps contributing policymakers transcribe and edit their recollections into at least one chapter that will form part of a ‘Handbook for Chief Economic Advisors to Government’.

These chapters will be organized around key economic events and the roles of that the senior economic advisors played in navigating their countries through the events. The chapters will document successes and mistakes, elaborating the practical challenges associated with bridging economic evidence to effective policy making. They will provide a vivid account of what it takes to be an effective advisor to political leaders. At their discretion, contributing authors will be encouraged to share practical lessons and tips for how to organize advisory functions.



Part 1: Policy responses to the Global Financial Crisis of 2007-9


Q: Did you have a sense of how the global crisis might hit Kenya?


This was a crisis at the centre, and African countries are at the periphery. That was the immediate thinking and perception. I remember when the real crisis was unfolding, we were at the annual meeting of the IMF and the World Bank. We had a meeting of the G-24 and that is when we were talking about the global financial crisis and how the Fed was trying to resolve it. What lessons came out of it, especially for the African region? The first lesson is regulatory innovation and how to cope with the crisis it at the marketplace as well as market development. The second lesson is the regulatory capacity and capability that is required to guide the innovations and the market appropriately. The third and related is the capability of the regulator and other institutions to protect the market in times of shocks and the appropriate information flow.


My own position has been that the government must have strong institutions that will protect and regulate the market. But more importantly, they must be strong institutions to nudge the market to the desired path. In a sense, that was the first reaction to the crisis. The second reaction is, where will the financial crisis hurt the economy most? The African Development Bank developed a committee that would help to understand the channels through which the unfolding global financial crisis would affect the African economies. The President of the AfDB, Donald Kaberuka, created the Committee of 10. I represented the Central Bank Governors of the East African region in this Committee. The Committee of 10 was supposed to share information across African economies and develop coping strategies and domestic policy responses with regional comparability.


Now with the Covid-19 crisis, countries are working individually with limited coordination. This is essentially because everyone is protecting themselves and self-preservation is the first line of defense, both at the individual household and national levels. The lessons from the global financial crisis are that a coordinated response is important. It does seem that coordination will perhaps start when vaccines are available, and countries must coordinate to distribute and share them as a global public good.


Back to the global financial crisis, it had a direct effect on foreign direct investment, FDI. Investors were constrained by a lack of certainty in the policy space, fear of policy reversals, characteristic of many African economies in times of crisis. But paradoxically, FDI mostly emanates from the centre to the periphery and the crisis was at the centre. In Kenya at the time, the issue was how to deal with the development agenda, and the infrastructure gap. Public infrastructure is complimentary to private investments in that it lowers the transactions costs and thus enhances the profitability of private investments. The question was how to finance this public infrastructure gap and ignite economic vibrancy when the global financial system was in a crisis? At the Central Bank of Kenya we had already started a market for public debt, and we were an agent of the Ministry of Finance to sell government bonds. This had become an important market that we could develop further for public infrastructure financing.


The development budget contains public investment projects (PIP), each with its own budget. We envisaged that we could package the PIP for an Infrastructure Bond (IB) and raise those funds in collaboration with the banking sector, the brokerage firms, the Pension Funds, and the insurance market. In return the Treasury would give us an update of these projects and then we would share with the market. That was the start for the preparations of the infrastructure bond. President Mwai Kibaki made it clear and he told me “please make sure that it succeeds”. And when our President tells you that it is an honor, but also it is an order.


The success of the first IB and oversubscription in 2009 was amazing and celebrated as the beginning of an innovative domestic resource mobilization phase in African economies. It soon became a new investment instrument in the Kenyan market and attracted the diaspora as well. We may have avoided a drastic reduction in the development budget, which would have robbed Kenya’s economy of its capacity for future growth and private investments.


Q: What were the obstacles in taking infrastructure bonds from initiation to implementation?


We wanted to make sure that funds from the IB would go to the government. But such funds would be fungible. Then how do we tie the government to the targeted projects to be financed by IB? The IB was not attractive to the National Treasury because it tied their hands. The Treasury did not want to be monitored especially on the PIP projects financed by IB, so the enthusiasm of IB was declining very fast.


The impact of the global financial crisis at the initial stages was to make the market more risk averse, focused on short term, rather than long term fixed and sector-specific investments. At the Central Bank, we held meetings with commercial banks and developed solutions to declining credit to the private sector. In a sense the banks were parking their funds in government commercial paper as they searched for more information that would adjust perceived risk, the market had adopted a waiting option.


Because the global financial crisis was not being resolved as fast as the market had anticipated, we needed to develop a strong mechanism to create hope and dislodge the market from this waiting option. But it was not going to be easy.


That is why the development of the IB was two-pronged: One, the government would get resources for development expenditure. Second, the banks, the private sector and even the pension funds would find themselves investing in IBs, a 12-year government commercial paper. This provided hope that the government’s development budget and PIP projects would be implemented. Long term capacity for growth was being established and investment in bonds was pushing market vibrancy.



This post is part of our new blog series on recollections of Chief Economic Advisors.


Click here to read Prof Benno Ndulu's recollections of the 2007-9 financial crisis in Tanzania

Click here to read Sen Narrainen's recollections of the 2007-09 financial crisis in Mauritius.

Click here to read Dr. Sen Narrainen's thoughts on how to be a successful advisor

Click here to read Prof Ndulu's thoughts on how to be a successful economic advisor

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