Experts poke holes in Amana Capital report

In Summary

•The report has hinted that the Kenyan shilling is overvalued by 30 per cent hence not showing its true picture in the market.

Amana Capital chief investment officer Reginald Kadzutu.
Amana Capital chief investment officer Reginald Kadzutu.

Financial experts have disputed a report by Amana Capital which states   the shilling is overvalued, arguing that a single parameter cannot be used to determine currency performance.

The report has hinted that the Kenyan shilling is overvalued by 30 per cent hence not showing its true picture in the market.

Kenya Bankers Association chief executive Habil Olaka was the first to dismiss the method used in the study to evaluate the value of the shilling, saying that Consumer Price Index (CPI) cannot be the only determinant.

"Several factors determine strength of any given currency. You have to look at those determinates in whole, to get the true picture. The shilling’s stability is supported by economic fundamentals,’’ Olaka said.

PricewaterhouseCoopers country senior partner Peter Ngahu supported Olaka’s argument, asking researchers to stop torturing numbers to bleed desired narratives.

The argument that rises in CPI triggers currency devaluation is farfetched. Our forex reserves are stable, Diaspora remittance touching highest levels and exports improving. Numbers don’t lie. Let us stop torturing figures,’’ Ngahu said.

According to Amana Capital, devaluation of the purchasing power has direct impact on the currency value, an aspect the Kenyan shilling is not portraying, adding that the shilling is being managed to fake stability.

He explained that the consumer price index which was at Sh97 in 2009 has since risen to Sh192; meaning that Kenyans are spending Sh192 to buy what could be bought at Sh100 ten years ago, translating to 50 per cent devaluation of purchasing power.

''The shilling's exchange rate which was at 72 against the dollar in 2009 is now at Sh100. This represents 20 per cent devaluation, meaning the shilling is overvalued by 30 per cent, '' Kadzutu said.

Another driver of currency according to the report is demand and supply. Kenya currently earns around Sh 500 billion in exports but has a staggering foreign debt of Sh2.5 trillion and imports of close to a similar amount.


‘This points to constant increasing demand for dollars to pay for imports and for debt servicing. The question that beckons is how comes dollar demand does not add downward pressure on the shilling? Kadzutu posed.

The danger of an overvalued exchange rate will be to make the country’s exports expensive compared to competitors and hence reduce exports. Further, it will also lead to cheaper imports reducing local demand in return impacting the high level of unemployment which remains a chronic problem and a suppressed economic growth.

The current account deficit will persist until the shilling goes to the level it is supposed to be.

The report supports IMF's views on the shilling which were disputed by the Central Bank of Kenya.

Last year, the international lender accused Kenya of propping up its shilling, saying that it is overvalued at by over 17 per cent.

Even so, CBK governor Patrick Njoroge refuted those claims, stating that IMF unfairly valued the shilling.