We have looked at the recent treasury auctions, debt, inflation and now let's see if we can recap on some aspects of our GDP calculation. The World Bank website has the following to say about the GDP deflator “Inflation as measured by the annual growth rate of the GDP implicit deflator shows the rate of price change in the economy as a whole. The GDP implicit deflator is the ratio of GDP in current local currency to GDP in constant local currency”.

Therefore we can assume that if inflation goes down (CPI changes lowers) then GDP constant local currency goes up, so the GDP implicit deflator lowers (the above ratio). We can therefore see the real threat from inflation on GDP figures and this is represented in the World Bank figures below (as well as their estimates for 2009).

http://data.worldbank.or...cator/NY.GDP.DEFL.KD.ZG
http://data.worldbank.org/country/kenya

World Bank figures for Kenya's GDP Deflator

2000 - 6.1%
2001 - 1.6%
2002 - 0.9%
2003 - 6.2%
2004 - 7.1%
2005 - 5.2%
2006 - 7.4%
2007 - 4.7%
2008 - 13.1%
2009F - 12.5%
2010F - 7.5%

What is clear from World Bank figures is that inflation wrecked in 2008 and 2009 deflating GDP considerably but changes inflation seem more contained in 2010, any suggestions why? Fred Kaifosh writes more on this issue in his article titled "Why The Consumer Price Index Is Controversial" saying...

"The GDP, as an indicator of economic growth and the strength of an economy, is an important input for investors. The CPI plays a role in the determination of the real GDP; therefore, manipulation of the CPI could imply manipulation of the GDP because the CPI is used to deflate some of the nominal GDP components for the effects of inflation. CPI and GDP have an inverse relationship, so a lower CPI - and its inverse effect on GDP - could suggest to investors that the economy is stronger and healthier than it really is".

http://www.investopedia....7/consumerpriceindex.asp

@scubidu - I agree CBK (GoK) shud pay interest on deposits held with CBK... but you know that it is a political move (& abuse of power) coz CBK wants 'free' money...

CBK crying about 'high rates' should PAY interest on deposits to allow commercial banks to pass on the gains/savings to consumers...

Kenya’s gross domestic debt as at June financial year ends from 2000 to 2010 are:

Year – Billions (% growth)
2000 – 206 (+18.2%)
2001 – 212 (+2.8%)
2002 – 236 (+11.4%)
2003 – 289 (+22.6%)
2004 – 306 (+5.8%)
2005 – 315 (+2.7%)
2006 – 358 (+13.8%)
2007 – 405 (+13.1%)
2008 – 431 (+6.4%)
2009 – 518 (+20.4%)
2010 – 654 (+26.1%)

The focus in international markets has been on debt; the growth of Kenya’s domestic debt in 2010 has been phenomenal. The growth in the month of April has been especially high up 5.9% (36.5 billion) since March. The CBK decision to pursue an expansionary policy has meant they monetize the budget deficit by adjusting the monetary base (reserves). Below are example from the last six weeks that show CBK weekly injections and overnight lending.

Starting week – RRepo Injections (Overnight Window)

March 26 – 8.0 billion (5.476 billion)
April 01 – 10.5 billion (920 million)
April 09 – 7.8 billion (986 million)
April 16 – 12.8 billion (zero)
April 23 – 24.7 billion (584 million)
April 30 – 24.4 billion (222.5 million)
May 07 – 17.6 billion (280 million)

The oversubscription of Treasury auctions has been attributed to banks being too liquid-clearly the above figures show how much CBK is willing accommodate. Today’s reserve money at 177.2 billion is below CBK target, compare this to reserve money levels of 178.9 billion as at 31st March 2010-The funds raised by Treasury are not spent but accumulated. Q1 results from NIC Bank and KCB show huge investments in government securities (don’t have Equity results on me). KCB’s Q1 investment went up 47% (12b) in ‘10, while NIC’s was up 50% (2b) outperforming normal loan growth (we have already questioned credibility of household lending stats in other posts). It’s proved lucrative for banks, they receive support on value dates, NSE bond prices of certain 5 year papers are up 10% today since the end of 2009 while some of those 15 year bonds are up over 25%.

CBK may not have a bond auction in June, I’m guessing most emergencies are taken care of. Demand for T-bill will continue to be high, with funds being diverted to short term paper. Short term rates continue to fall, 91D trading at 4.498% today, cud possibly reach 3% in line with so-called inflation. Food inflation is down considerably, but the new CPI only covers the last 14 months so can’t compare food inflation to any stats b4 Feb 2009. Do we have a debt problem? Well domestic debt is up 31% y-o-y, GDP has to grow by 4.4% for debt to be productive at minimum & interest payments on domestic debt are already up 30%. To examine debt growth for yourself, read the CBK bulletin below:

http://www.centralbank.g...etin/2010/May/070510.pdf

Not inflation adjusted unfortunately. Which inflation series should I apply? The new one or old one? Apples/oranges.

@Scubidu
The bank deposits held with Central Bank are a monetary tool used to manage the economy. I dont know of a Central Bank (I may be wrong), that pays interest on this deposit - i.e. Cash Ratio Reserve.

Case 1: When NARC won the elections sometime back, Mwiraria, who was the Finance Minister, reduced CRR from 10% to 6% i.e. banks were now required to hold the 6% of their deposits with CBK (at no return). The end result> Banks were flooded with cash, and thats when Personal loans and all sorts of loans kicked off, and we ended up with a growing economy.

Case 2: China and India have been leading inthe economic recovery out of the current recession, and their economies are currently showing signs of over heating with inflation. Recently, PBoC and RBI raised interest rates, as well as Cash Ratio Reserve> Banks are now required to keep more funds with CB at no return. End result is less loans dished out, less money in circulation, and a checked inflation.