Central Bank Governor Kamau Thugge has said that Kenya has maintained an “artificially strong” shilling for the past six years due to overvaluation.
Speaking before the National Assembly’s Finance and National Planning Committee, Thugge said international monetary institutions raised alarm over the inflated exchange rate of the Kenyan shilling more than six years ago.
“On the issue of the exchange rate, I think we’ve had an overvalued exchange rate for a number of years now, in fact if you go back six years ago there was a raging debate as to whether the exchange rate of the Kenyan shilling was overvalued and at that time the Bretton Woods institutions, the IMF, the World Bank felt that the exchange rate was actually overvalued by between 20% and 25%,” he said.
He added that the country has been trying to maintain the “artificially strong” exchange rate at the cost of losing international reserves.
“At one point we had reserves of 5 months of import cover, now we have 3.7 months of import cover, that’s still enough to deal with any emergencies, but there has been this decline in the level of reserves trying to defend perhaps an overvalued exchange rate,” he said.
According to Thugge the overvaluation became apparent last year when the world’s advanced economies went through a period of expansionary monetary policy.
“Their inflation rates last year went beyond what they had seen for decades and so they took very strong action in terms of raising interest rates…for example the US raised interest rates by 500 basis points in a very short period of time and very aggressively, but our central bank did not raise interest rates commensurately and so there were capital outflows…and that affected the exchange rate and because there was already an overvaluation, perhaps our currency depreciated a bit more than, for example, the currencies in the region,” he said.
Since the beginning of the year, the shilling has depreciated by 17.7 per cent against the dollar, more than double the 8.3 per cent depreciation against the US currency in 2022 as a whole.
Yesterday, the official exchange rate of the shilling to the dollar broke through the Sh150 mark.
The CBK indicative rate published on Monday morning showed the dollar buying rate at 149.84 shillings and the selling rate at 150.04 shillings units, or an average of 149.94 units.
By the afternoon, the spot or average rate had risen to Sh150.03.
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