Post date: Thu, Jul 10, 2025
Category: Economic Policy
By: Leo Kipkogei Kemboi,

The National Treasury and Economic Planning sent a notice to the Central Bank of Kenya on June 30, 2025, regarding the Price Stability Target and the government’s economic policy as part of the government’s objectives.  That notice is problematic because it violates the Constitution and reinforces fiscal dominance, which means that fiscal policy objectives come first over monetary policy objectives. The authority relied on is legislation passed before 2010, and the National Treasury continues to rely on it.

In this analysis, I frame the four broad issues.

1. The National Treasury Notice violates the Constitutional arrangement under Article 231 and violates Institutional arrangements.
2. The National Treasury Notice reinforces fiscal dominance, a counterproductive policy stance.
3. The National Treasury Notice relies on section 4 (subsections 4, 5, 6) of the Central Bank Act, provisions passed before 2010. However, the Constitution of Kenya 2010, passed and promulgated in 2010, prohibits any direction to the central bank regarding monetary policy.
4. The Mandates of the Central Bank of Kenya and the National Treasury differ because fiscal policy goals can vary from monetary policy goals and may conflict with each other.

The National Treasury’s notice to the Central Bank of Kenya on June 30, 2025, reveals a deeper constitutional and governance fault line that Kenya still needs to address. It is the lingering legacy of pre-2010 legal frameworks that clash with the principles of institutional independence outlined in the 2010 Constitution. By referencing outdated provisions of the Central Bank Act to direct or influence monetary policy, the National Treasury violates Article 231, which guarantees CBK’s autonomy, and reintroduces a pattern of fiscal dominance that weakens sound economic governance.

This incident exposes a broader constitutional issue: failing to align older statutory laws and bureaucratic practices with the governance structure established in 2010. Without prompt legal and institutional reforms, such conflicts will endure, weakening Kenya’s commitment to rule-based macroeconomic management and damaging the credibility of key public institutions.

Notably, this form of institutional arrangement has been ongoing for the last three decades, and the recent notice was just routine. The recent directive should concern every person who watches Kenya’s macroeconomic policy.

Citizens should be concerned for the following reasons.

1. Violation of the Constitution and Institutional Autonomy

The National Treasury’s notice violates the constitutional framework established under Article 231 of the Constitution of Kenya, 2010. This article explicitly guarantees the independence of the Central Bank. It prohibits any person or authority, including the National Treasury, from exercising control over the CBK or interfering with its functions. By issuing directives that attempt to steer monetary policy outcomes, the National Treasury oversteps its constitutional mandate and encroaches on the autonomy of the CBK. Such actions undermine the institutional arrangements carefully designed to preserve checks and balances between key economic authorities.

2. Reinforcement of Fiscal Dominance

The notice exemplifies fiscal dominance, in which fiscal authorities influence or dictate monetary policy decisions. Fiscal dominance is detrimental because it erodes central bank credibility, weakens monetary policy effectiveness, and fosters macroeconomic instability. When the CBK is pressured to align its policies with short-term fiscal goals, such as financing deficits or accommodating politically motivated spending, it risks compromising its core mandate: ensuring price and financial stability. This scenario leads to inflationary pressures, reduced investor confidence, and a distorted credit market, ultimately harming the broader economy.

3. Reliance on Outdated Legal Provisions

The National Treasury’s notice appears to lean on provisions under Section 4(4), (5), and (6) of the Central Bank of Kenya Act, clauses enacted before the 2010 Constitution came into force. However, that antecedence does not matter because any legal framework that conflicts with the constitutional order is subordinate to the Constitution. The 2010 Constitution supersedes pre-existing statutes and insulates the CBK from external directives. Continued reliance on outdated legal provisions reflects a legal misreading and undermines the rule of law that governs Kenya’s post-2010 governance architecture.

4. Conflicting Mandates: Fiscal vs. Monetary Policy

The Central Bank of Kenya and the National Treasury have fundamentally different mandates, and their goals can and may clash. Fiscal policy, managed by the National Treasury, concentrates on government spending, taxation, and income redistribution, often driven by political or short-term economic objectives. In contrast, monetary policy, carried out by the CBK, aims to maintain price stability, control the money supply, and ensure financial system stability. These objectives demand long-term, non-political planning. In practice, the divergence between fiscal and monetary policy objectives becomes particularly evident in various scenarios:

• Supply Shocks: n the event of a sudden oil price surge, the Treasury might cut taxes or increase subsidies to ease the burden on households, while the CBK could be forced to raise interest rates to contain inflation.
• Debt Crisis: During fiscal consolidation, the government may raise taxes or cut spending, while the central bank may adopt expansionary measures to support growth, creating opposing policy pressures.
• Election Cycles: The Treasury may implement fiscal measures, such as tax breaks or increased spending, which could stoke inflation. The CBK, meanwhile, may be compelled to tighten policy to preserve price stability.
• Post-Recession Recovery: While the Treasury may focus on prolonged stimulus to boost employment and investment, the CBK may start tightening to manage future inflation risks, leading to a mismatch in timing and objectives.
• IMF or External Conditionalities: Fiscal policy may be constrained by austerity requirements, while the CBK still seeks to stimulate domestic demand, causing further misalignment.

Such conflicts are not merely theoretical; they undermine policy coherence and reduce the effectiveness of both fiscal and monetary interventions. When monetary policy is subordinated to fiscal priorities, poor inflation control, investor skepticism, and a loss of credibility in macroeconomic governance often result.

Conclusion

The National Treasury’s attempt to influence the Central Bank’s price stability objectives is unconstitutional and economically unsound. It violates Article 231 of the Constitution, disregards Kenya’s carefully structured institutional arrangements, and promotes fiscal dominance, a path fraught with macroeconomic risks. Respecting the CBK’s independence is not just a legal necessity; it is vital for ensuring that Kenya maintains stable prices, credible institutions, and resilient economic management. Each institution must operate within its constitutional and legal confines for effective governance, pursuing its distinct mandate while coordinating through principled, transparent, and non-coercive engagement.

 

Photo credit: Credit: Frank H. – stock.adobe.com

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