Findings by the International Monetary Fund that the Kenyan shilling is overvalued has elicited varied reactions from the market.
The Central Bank of Kenya (CBK) yesterday played down IMF’s assertion, terming it “suggestive”, even as it expressed worries on how the market would react to the same. “The Central Bank of Kenya notes the recently published IMF Article IV report on Kenya and its suggestion of the relative weakness of the external position vis-à-vis the fundamentals,” said the regulator in a statement.
The lender of last resort said its own calculations had shown that the shilling was neither overvalued nor undervalued.
“As has been previously communicated, the CBK’s own calculations support the view that there is no fundamental misalignment reflected in our exchange rate, and reiterates that the Kenya shilling reflects the currency’s true, fundamental value,” said CBK.
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IMF’s assessment of the country’s current account deficit - which occurs when the value of the goods and services it imports exceeds the value of the goods and services it exports - showed that it might be above the norm, pointing to an overvaluation of the shilling. “Given the continued appreciation of the real exchange rate, the external position is assessed to be weaker than fundamentals,” said IMF, putting the overvaluation at 17.5 per cent.
Some financial experts weighed in on the matter, with some saying CBK’s obsession with propping up the shilling was not to stabilise prices but to suppress the rise in the value of the country’s external debt, which is denominated in US dollars.
“Assuming IMF is right, the shilling being overvalued by 17.5 per cent means an extra 17.5 Kenyan shilling on the exchange rate. Multiply that by $25 billion of foreign debt and national debt goes up by Sh440 billion terms or an extra six per cent on debt/GDP ratio. It looks like CBK has an eye on the debt metrics,” said Mohamed Wehliye, an advisor at Saudi Arabian Monetary Authority.
Every shilling borrowed for dollar loans such as the Eurobond in 2014 at around 87 units a dollar, will be paid back at 101.2 units a dollar currently, or higher if it depreciates further.