Kenya Shilling Has for Long Been Overvalued, CBK Governor Kamau Thugge Says

According to the Central Bank of Kenya (CBK), the demand for foreign exchange in Kenya has consistently exceeded the supply, resulting in the depreciation of the Kenya Shilling.

This depreciation has led to the currency crossing the Sh150 mark against the US dollar. Kamau Thugge, Governor of the Central Bank of Kenya, has disclosed that foreign exchange inflows were used to tackle short positions held by commercial banks and fulfil pending demands from earlier months. Both the International Monetary Fund and the World Bank have maintained for years that the Kenyan shilling was overvalued by approximately 20 to 25 per cent. The fall in value has been constant and unrelenting, culminating in a convergence between the US dollar's official and retail selling rates.

Since the beginning of the year, shilling has depreciated by 17.7 per cent against the dollar, which is more than double the 8.3 per cent depreciation seen in the entire year of 2022. The CBK's indicative rate on Monday showed a buying price of Sh149.84 and a selling rate of Sh150.04, resulting in an average of 149.94. Forex bureaus, on the other hand, quoted dollar selling prices ranging from Sh156. Appearing before the committee led by Molo MP Kuria Kimani, Dr Thugge discussed the steps the CBK is taking to address the devaluation of the Shilling against the US dollar.

Despite the reopening of the interbank dollar market in April and the removal of a CBK regulation that limited daily deviation from the indicative rate to 20 cents, the Kenyan currency continues to decline. This decline is being addressed by allowing the exchange rate to find its own level through supply and demand, and the CBK has contacted ten major banks to inquire about the wide spreads. To strengthen the shilling, the CBK has implemented various measures. These include a review of Limits on Tenor Swaps and Other Local Currency Funding Instruments.

Additionally, the CBK has adopted the use of the Electronic Brokerage System in the foreign exchange market. The minimum tradable amount in the interbank exchange market has also been reduced from $500,000 to $250,000. The CBK has also issued guidance to Money Remittance Providers (MRPs) to enhance interbank liquidity. The Central Bank of Kenya (CBK) has projected a daily minimum of $100,000 per customer. The CBK anticipates a boost to the Kenyan shilling through substantial cash inflows from international sources such as the International Monetary Fund (IMF), the World Bank, and regional development financial institutions.

According to Dr. Thugge, the Treasury expects a visit from an IMF team next week, with hopes of securing a minimum of $400 million (Sh60 billion). Additionally, Kenya looks forward to receiving $530 million from the IMF, a portion of which will be used to replace costly domestic debt borrowed from local banks. Furthermore, the World Bank is expected to disburse $750 million (Sh562.5 billion) by March of next year.