Manipulation of the shilling against the dollar could threaten the ongoing trade talks between Kenya and the US.
As part of the pre-conditions in the ongoing negotiations for a free trade agreement (FTA) between the two countries, the US has warned Kenya against manipulating the shilling and wants it to allow market forces to influence the exchange rates.
“Ensure that Kenya avoids manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage,” says the US in a raft of conditions.
Kenya and the US formally commenced discussions in July and hope to strike a trade agreement that will serve as a model for future trade pacts with other African nations.
Kenya is seeking to wrap up the pact before the expiry of the Africa Growth and Opportunity Act (AGOA) in 2025. AGOA gives Kenya and several other sub-Saharan African countries duty-free access to the US for over 6,000 products.
The International Monetary Fund (IMF) in 2018 accused Kenya of overvaluing the shilling by 17.5 percent but Central Bank of Kenya (CBK) governor Patrick Njoroge refuted these claims.
“Our own calculations support the view that there is no fundamental misalignment reflected in our exchange rate and we have also retaliated that the Kenya shilling reflects the currency’s true value,” said Njoroge.
“We let the market flexibly drive the price of foreign currency. The only thing we do is to intervene in order to minimize volatility.”
He said IMF used a methodology called EBA Lite, which is designed for advanced economies to arrive at its conclusion.
“We are the ones who are being used as a guinea pig in terms of EBA Lite methodology. That is something that obviously we do not agree with,” he said.
Besides manipulation of the exchange rate, the US has issued other conditions to Kenya including support for Israel’s political and commercial interests.