Former Central Bank of Kenya (CBK) Governor Prof. Njuguna Ndung’u has opened up about a major policy disagreement with the International Monetary Fund (IMF), recounting how Kenya resisted external pressure to tighten monetary policy during a period when the economy was recording both rapid growth and elevated inflation.
Speaking in a Central Bank of Kenya (CBK) video interview, Ndung’u recalled telling IMF officials, “I am not a spanner boy,” driven by his determination to pursue monetary policies that reflected Kenya’s unique economic conditions rather than adopting standard prescriptions.
According to Ndung’u, Kenya experienced what he described as a rare “twin occurrence” during his tenure at the Central Bank, with economic growth exceeding 7 percent while inflation remained elevated at between 13 percent and 14 percent.
Under conventional monetary policy theory, persistently high inflation is typically met with tighter monetary conditions through higher interest rates and reduced liquidity. The IMF therefore recommended aggressive monetary tightening, based on the assumption that reducing money supply would ease inflationary pressures.
However, Ndung’u argued that Kenya’s economic structure did not fit neatly into the traditional monetarist framework. Rather than relying solely on textbook economic models, he maintained that policymakers needed to understand the underlying drivers of inflation and how Kenya’s financial system was evolving.
Ndung’u Rejected One-Size-Fits-All Monetary Prescriptions
The former CBK Governor Njuguna Ndung’u said the IMF’s policy recommendations were based on assumptions that did not accurately reflect Kenya’s economy.
One key assumption was that the velocity of money, which is the rate at which money circulates through the economy, remained largely constant. Ndung’u argued that this was no longer the case as technological innovation was rapidly transforming financial transactions across the country.
Instead of implementing monetary tightening simply because inflation was elevated, he questioned whether the inflation was primarily driven by excess liquidity or by broader structural and supply-side factors. In his view, sharply restricting credit would have slowed investment and economic expansion while doing little to address the real sources of inflation.
Another central pillar of Ndung’u’s argument was the transformative impact of M-Pesa and the rapid expansion of mobile money. The introduction of M-Pesa in 2007 fundamentally redefined Kenya’s financial landscape by altering how money circulated through the economy.
According to Ndung’u, the innovation broke the conventional macroeconomic relationship between money supply and economic activity by changing the velocity of money, which is the rate at which a unit of currency changes hands to purchase goods and services. This directly challenged the IMF’s assumption that the velocity of money remained largely constant, creating a monetary transmission mechanism that differed significantly from traditional economic models.
While M-Pesa dramatically accelerated the speed of digital transactions, it also reshaped the circulation of physical currency. Research has shown that digital money moved rapidly within the M-Pesa ecosystem, with person-to-person transfers averaging between 11 and 14.6 transactions per month. Payments that previously took days through physical cash transfers or transport networks could now be completed within seconds, significantly increasing transaction efficiency across the economy.
Ndung’u also challenged the IMF’s reliance on the 91-day Treasury Bill rate as a key indicator of inflation expectations. He argued that this benchmark did not accurately capture domestic price pressures or reflect the changing dynamics of Kenya’s economy.
Instead, he advocated for monetary policy decisions that incorporated local economic data and stronger analysis of inflation drivers rather than depending heavily on internationally applied benchmarks. According to Ndung’u, policy needed to respond to Kenya’s own economic realities instead of assuming that models developed for other economies would produce the same outcomes domestically.
The Disagreement Helped Shape Kenya’s Central Bank Rate Framework
Rather than yielding to external pressure, Ndung’u said the disagreement prompted the Central Bank to strengthen its own monetary policy framework. He explained that the Bank developed localized forecasting tools by aligning inflation data more closely with domestic economic growth and other Kenyan macroeconomic indicators.
This shift eventually contributed to the establishment of the Central Bank Rate (CBR) as Kenya’s principal monetary policy benchmark. The framework gave the CBK greater flexibility to respond to domestic economic conditions while strengthening the transmission of monetary policy through the banking system.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.