CBK counters IMF, says shilling undervalued

The Kenyan shilling has been undervalued in the past decade, and could be way stronger against the dollar than currently reported, according to the Central Bank of Kenya.

A comprehensive study by the banking sector regulator dubbed ‘Assessment of Exchange Rate Misalignment in Kenya’ shows the average undervaluation of the shilling between 2010 to 2017 outweighed average overvaluation across three methodologies.

‘’The study finds that the Shilling was in fact, largely undervalued during most of the study period,’’ says the report.

A breakdown of the misalignment estimates indicates that the average overvaluation over the period was generally similar across Purchasing Power Parity (PPP), Behavioral Equilibrium Exchange Rate (BEER) and Elasticities approaches at 2.6 per cent, 2.5 per cent and 2.5 per cent respectively.

This was however lower compared to average undervaluation over the sample period based on the three methodologies, which slightly varied (five per cent for PPP, 4.1 per cent for BEER and 2.8 per cent for trade elasticities).

The study further result shows that despite some variation in the magnitude of misalignment over time, this has declined and remained low in the period after 2013.

Real exchange rate misalignment, which refers to a sustained significant deviation of the real exchange rate from its long-run path consistent with economic fundamentals, can have implications on a country’s economic performance.

‘’The misalignment averaged 3.4 per cent in the study period but declined from an average of 4.1 per cent in the period 2010-2013 to 2.6 per cent in 2014 - 2017. This indicates that the country’s real exchange rate has remained largely consistent with economic fundamentals,’’ CBK report said.

The study by CBK tends to dispute earlier ones by the International Monetary Fund (IMF) and Amana Capital that indicated that the local currency was overvalued by 17.5 per cent and 30 per cent respectively.

IMF accused CBK of managing the shilling by propping it up using forex reserves, concealing the true value against other currencies, especially the US dollar. 

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

Amana Capital chief investment officer Reginald Kadzutu in May said Kenya was operating a managed shilling than a free float currency, running a risk of making its exports more expensive.

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.

Even so, CBK governor Patrick Njoroge refuted those claims saying the currency’s stability was supported by stable microeconomic fundamentals and that the value is of free float nature.