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Shilling overvalued by 17.5 per cent, says IMF

NEWS
By Otiato Guguyu | October 25th 2018
The shilling has been stable for the better part of this year, exchanging at Sh100 against the US dollar. [File, Standard]

The shilling may be overvalued by up to 17.5 per cent, according to a global lender.

The International Monetary Fund (IMF) in its much-awaited report following a review on Kenya’s economic health released yesterday, said the shilling risked being classified as “managed” rather than operating on the forces of demand and supply.

“Reflecting limited movement of the shilling relative to the US dollar, MCM’s (Monetary and Capital Markets Department) 2018 report on exchange rate arrangement to be published in February 2018 will reclassify Kenya’s shilling from floating to other managed arrangement,” said IMF.

Dollar loans

This would be a resounding indictment on the Central Bank of Kenya (CBK), which has maintained the country has a flexible currency and that it only manages volatility rather than targeting a figure.

For months now, the shilling has exchanged at around 100 units against the dollar, despite shocks of IMF facility withdrawal and raising of the United States Federal rates by 0.25 eight per cent to 2.25 per cent.

The shilling is a sensitive subject for the country’s authority since with every percentage devaluation, the size of external debt grows.

For 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. In the report, IMF looked at the gap between exports and imports referred to as current account deficit, both cyclical and actual, that are currently above normal.

This implies that the shilling's strength may be interfering with the competitiveness of the country’s exports.

The real effective exchange rate (REER) approach also shows a similar size of overvaluation, equivalent to about 18.0 per cent. “Given the continued appreciation of the real exchange rate, the external position is assessed to be weaker than fundamentals,” said IMF.

Kenya seems to have gone to extreme levels to avoid letting IMF specialists put the value of the shilling to scale by failing to disclose crucial data to assess the shilling’s real value.

“Regarding the last approach, the external sustainability approach, it was not possible to use it, as the international investment position data is not yet produced by the authorities,” said IMF.

The Bretton Woods Institution noted that CBK engaged in periodic forex exchange interventions, typically unsterilised, to limit the shilling’s movement.

“Given the CBK’s credibility, well-anchored inflation expectations, and adequate reserve coverage, there is scope for greater exchange rate flexibility,” said IMF.

This comes even as the country jumped to position three from five last year in the second edition of the ABSA Africa Financial Market Index following better rankings for running a free forex market.

Kenya tied with Botswana at 65 per cent, behind market leader South Africa at 93 per cent in the index that measures the maturity of markets, transparency, ease of accessibility, and investor friendliness.  

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