The International Monetary Fund (IMF) revealed that the Kenya shilling is moderately overvalued.
“Kenya’s real effective exchange rate appreciated in real terms by four per cent during 2015, and its level is estimated to be moderately overvalued,” said the IMF in its note about the Kenyan economy that confirmed Kenya is eligible for a precautionary facility of Sh153 billion that can only be drawn if the country experiences currency shocks.
The valuation is based on the real effective exchange rate (Reer) that also takes into account the currency’s value relative to that of its trading partners as well as inflation levels. Reer affects the value of goods and services between trading partners.
At the time that the IMF concluded that the Kenyan currency was overvalued it was exchanging at 102.23 units to the dollar, meaning it would still not be a real depreciation if the unit lost more value against the greenback.
The views of the multilateral lender echo the sentiments expressed by Francis Mwega, a member of the Monetary Policy Committee (MPC) of the Central Bank of Kenya (CBK), just over a year ago. Prof Mwega concluded in his research that the shilling was overvalued by 4.3 four per cent although his data stretched only to 12 months. Former CBK governor and MPC chair Njuguna Ndung’u also concluded in late 2014 that the shilling was probably overvalued by no more than five per cent. Meanwhile, the World Bank has maintained that the local currency has been strengthening in real terms by at least three per cent per year for just over a decade.
In its recent report on the Kenyan economy, investment bankers at Citi Global Markets said that the Kenyan currency is relatively stable to the point of enabling the private sector to borrow heavily abroad. Interest payments are lower when the local unit is strong and the prevailing global interest rates are lower than those available locally.
“The Kenyan shilling has been one of the most stable in sub-Saharan Africa (SSA) in recent years. Therefore, given relatively high local borrowing interest rates and low global interest rates it should perhaps not be surprising that Kenyan firms have sought to increase their stock of offshore, foreign currency debt in recent years,” said Citi Global Markets.
Head of fixed-income market at Kestrel Capital Alexander Muiruri said the currency has been relatively stable to the point that Kenya has been attracting investors fleeing commodity-dominated economies such as Zambia, Nigeria and South Africa. Business has been sluggish in the commodities markets in other countries.
Commodity exporters in Africa have seen their currencies depreciates by upwards of 50 per cent in some cases. Others such as Nigeria are facing huge budget deficits as a result of depressed oil prices
