By Morris Aron

Kenya has banked on the rain for the third time in two years. If short rains are sufficient, going by the weatherman's word, the economy'swoes appear sorted.

This is according to a number of economists and analysts who talked to Financial Journal about where economy is headed following last week's Monetary Policy Committee (MPC) prescriptions. "Kenya's economy has strong links to the weather. Poor rains spike food and energy prices. In many respects, monetary policymaking needs a degree of meteorological expertise as well," said Aly-Khan Satchu, an independent economic analyst.

Money supply

This verdict comes as a reprieve to the Central Bank of Kenya (CBK) and MPC â€" the body that advises Central Bank on the money supply and the economy â€"has been under criticism over its past actions in as far as taming inflation, controlling foreign exchange volatility and driving economic growth are concerned.

During its meeting last week, MPC raised the Central Bank Rate (CBR) to seven per cent from 6.25 per cent, the highest increase since the rate was introduced in 2006. The move means that it will be more expensive for banks to borrow from CBK, a development that is bound to see commercial banks shy away from using the facility and in the process reduce money supply in the economy and tame inflation brought about by increased money supply.

Inflation rise

The decision also means that financial institutions that borrow from CBK will be staring at higher interest rates, meaning that any consumer who borrows from such institutions will bear higher interest rates. Many would say that rain is possibly the wild card that might just prove to be the thing the economy badly needed. Though statistics from the Kenya National Bureau of Statistics indicate that inflation has risen in the last couple of months, every time it rains, the trend appears to cool off.

In August, inflation rose to just above 16 per cent â€" the tenth month of consecutive rise. The increase was largely due to the high cost of fuel and other factors and less on agriculture derived products. According to the Kenya Meteorological department (KMD), many parts of the country are likely to experience enhanced rains between October and December.

Economic adjustments

"Rainfall distribution is expected to be generally good over most areas except in the northeastern and northwestern regions," Joseph Mukabana, the director of KMD said. "This will enhance agricultural activities in most of the areas."

Kenya's economy is mainly rain-fed with agriculture contributing about a quarter of Kenya's Gross Domestic Product (GDP). Poor rains, therefore, mean that a quarter of the GDP is hampered leading to economic adjustments and a disruption of food security and electricity output, which in turn triggers spikes in inflation and threatens economic growth in the short and long run. Sufficient rainfall replenishes reservoirs that the country needs for power generation and crop production.

Recent actions

"The weather has much impact on the foreign exchange rate and inflation," said Satchu. "We have imported a big burst of inflation through the weak currency and because of the surge in fuel and food costs."

However, despite the upbeat mood on sufficient short rains, there is one catchâ€"sugar.

The MPC report, signed by CBK Governor Njuguna Ndung'u, noted: "The latest foodstuff to give us a price shock just when we thought we were coming to a solution with respect to food is sugar."

"Sugar has a significant weight in the Consumer Price Index basket when assessed against the weight of maize." While admitting that some of its recent actions in a bid to tame inflation and foreign exchange volatilities in the market may have been taken out of context, MPC also indicated that it would explain what its actions are meant to signal to the market.

To ease their liquidity concerns, MPC also allowed commercial banks to use a 30-day average to meet their minimum cash reserve requirement (the percentage of their money that they are supposed to retain in the bank). On taming erratic volatility of the foreign exchange, the MPC endorsed a recent decision by Finance minister Uhuru Kenyatta to seek more dollars from the International Monetary Fund to raise the import cover and stabilise dollar demand.

There was also a proposal that will mean foreign currency inflows rise as the country plans to float a sovereign bond and a Diaspora Infrastructure bond. MPC noted that the Kenya Shilling will continue to come under pressure due to concerns over the American economy and European debt crisis. But while the monetary policy directives have been given, analysts say that if the short rains fail then adjustments have to be made.