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Central Bank of Kenya Building on Haileselasie Avenue, Nairobi. Wilberforce Okwiri, Standard
Fund managers and analysts have questioned the strong Kenya Shilling, with some claiming that the local currency was over-valued, putting themselves at crossroads with the regulator--Central Bank of Kenya (CBK).

They added that a resilient shilling was hurting the country’s export earnings even as it rendered Nairobi Securities Exchange less attractive to foreign investors.

Yesterday, Amana Capital, a fund manager, said in a report that the shilling is over-valued by at least 30 per cent, adding to a radical finding by the International Monetary Fund (IMF) on the country’s exchange rate last year.

The company noted that while the value of the shilling in the local market had depreciated by 50 per cent in ten years, its value on the global market had only declined by 20 per cent.

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Reginald Kadzutu, the chief investment officer at Amana Capital, argued that this inconsistency in valuation means the shilling is overvalued by 30 per cent on a purchasing power parity (PPP) basis.

PPP is a metric used to compare living standards in different countries by looking at how much it would cost to purchase a sample basket of goods using different currencies.

In other words, the shilling was not as strong in the global market as it appeared.

According to the report, Kenya’s Economic Puzzle - Putting the Pieces Together, while such factors as consumer price index, the balance of payments and money supply in the economy have been moving significantly, the exchange rate which is determined by these factors has not.

“At some point, the exchange rate was moving in tandem with the factors, but while these factors continued moving up the shilling stopped,” said Mr Kadzutu.

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Lekishon Leonard, a research analyst at Sterling Capital, also said the strength of the shilling was having an adverse impact on the NSE as an attractive investment option for foreigners.

“A considerable number of foreign investors believe that the shilling is trading well above its fair value thus making investing in local stocks comparatively expensive,” he said.

Amana’s findings echo those of IMF which in December 2018 accused the CBK for propping up the shilling with the Washington-based institution noting that the local currency was over-valued by 17.5 percentage points.

CBK, which is responsible for maintaining a stable exchange rate, denies that it has been managing the shilling.

It says the value of the local currency has been shored up by fundamentals including increased inflows of foreign currencies through export earnings, tourist receipts and diaspora remittances.

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Gerishon Ikiara, an Economics lecturer at the University of Nairobi, said Kenya respected the floating rate regime since the country liberalised its exchange rate in the early 1990s.

“The shilling responds to fundamentals when there are more dollar inflows the shilling strengthens,” he said.

The shilling, which traded at average 100.90 against the dollar yesterday, has also been strengthened by the increased inflow of borrowed foreign currency, according to the World Bank.

Fund managers analysts International Monetary Fund Central Bank of Kenya Inflation
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