GROWTH

IMF repeats overvalue claims as shilling hit a 10-month high

The current strength is a win for domestic consumers but a loss for exporters.

In Summary
  • The local currency at Sh106.80 against the greenback at 2PM, levels last seen in June last
  • While Kenya celebrates the gain, IMF has for the second time in less than three years insisted that the currency is being propped to hide its fair value. 
Kenya Coins
Kenya Coins
Image: Eric Thuo

The Kenyan shilling strengthened to  a 10-month high on Wednesday, but the International Monetary Fund (IMF ) in a separate report believes it is overvalued.

The Google currency trader tracked the local currency at Sh106.80 against the US dollar at 2PM, levels last seen in June last year  after months of depreciation on Covid-19 effects.

The shilling has gained much strength since Friday, a factor attributed to rising forex reserves that gives the Central Bank of Kenya a leeway to use some to cushion the local currency against volatilities in the international market. 

The Central Bank of Kenya Weekly bulletin shows that forex reserves improved to $7.425 billion or 4.56 months of import cover as of April 8, compared to $7.34 billion or 4.51 months of import cover. 

Financial experts however believe that the rise is temporary and is likely to drop significantly as the country spends most of its reserves to repay due international debts come June.

''The strength of the shilling will depend on a number of factors, but the loan repayment will be key. The use of forex reserves will leave the local currency naked and open for the fall,'' Barry Chacha, a financial risk analyst told the Star on phone.

He added that while G20 countries may extend the debt suspension for multilateral loans, commercial ones will have to be paid. 

His views are shared by  James Obara, a currency trading expert who says the current strength is a win for domestic consumers but a loss for exporters. 

He insists that unless the country goes for more loans to repay due ones, the available forex reserve will be eroded exposing Kenya to volatilities. 

While Kenya celebrates the gain, IMF has for the second time in less than three years insisted that the currency is being propped to hide its fair value. 

According to the International Monetary Fund(IMF), Kenya’s real effective exchange rate (REER) has been on an appreciating trend in recent years but suggests that the Kenya Shilling is overvalued by 9.1 per cent.

“Despite a stable nominal effective exchange rate (NEER), relatively higher inflation rate than in trading partners had in recent years contributed to medium-term real appreciation, and Kenya’s REER had appreciated more than its regional peers,” said IMF

The international lender ,however, noted that in 2020 the appreciating trend reversed, and the annual average REER depreciated slightly by 1.5 percent compared to 2019.

“Since March 2020 the REER has gradually depreciated as the exchange rate absorbed some of the impact of the Covid-19 shock, which has reduced sources of foreign exchange for Kenya,'' IMF said in its report last month. 

In  November  2018, the international lender  said Kenya's real exchange rate was overvalued by 17.5 percent, citing the current account deficit, which it said was not in step with other economic fundamentals.

The IMF's remarks irked CBK, forcing it to conduct a detailed study that revealed that the local currency  has been undervalued in the past decade, and could be way stronger against the dollar than currently reported.

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.