Kenyan shilling overvalued by 4pc, says CBK policy insider

Money Markets

A teller counts money. The World Bank says that in 2013 alone the shilling appreciated by 5.7 per cent, eroding Kenya’s competitiveness. PHOTO | FILE 

By GEOFFREY IRUNGU, girungu@ke.nationmedia.com

In Summary

• Francis Mwega says the shilling’s overvaluation is marginal, a view that is in contrast with the World Bank’s opinion that the exchange rate has become overvalued by 33 per cent in the past 10 years causing big variation between exports and imports.
• The shilling has been trading for several months at between Sh87.50 and Sh88 to the dollar.
• In the latest update on the Kenya economy, the World Bank said in 2013 alone the shilling appreciated by 5.7 per cent, eroding the country’s competitiveness.

A member of the Central Bank of Kenya's Monetary Policy Committee (MPC) says the shilling is overvalued by 4.3 per cent, but discounts suggestion this is the main reason for low exports compared to imports.

 

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• Kenyan shilling not too overvalued, says CBK insider

Francis Mwega in a research paper notes that the shilling’s overvaluation is marginal, a view that is in contrast with the World Bank’s opinion that the exchange rate has become overvalued by 33 per cent in the past 10 years causing big variation between exports and imports.

The analysis says the depreciation of the shilling is not the solution to economic problems and advocates reforms geared toward increasing productivity in the economy.

The paper, titled Exchange Rate Misalignment, says increasing the amount of exports would depend on other initiatives such as raising productivity, which relates to inputs including policy.

The shilling has been trading for several months at between Sh87.50 and Sh88 to the dollar.

“The analysis in the paper shows that the real effective exchange rate has not significantly deviated from the estimated equilibrium rate… the results tentatively show that the real exchange rate is only slightly misaligned, with an overvaluation of about 4.3 per cent,” said Prof Mwega.

In the latest update on the Kenya economy, the World Bank said in 2013 alone the shilling appreciated by 5.7 per cent, eroding the country’s competitiveness.

“The trade-weighted exchange rate points to a loss of competitiveness by Kenya. The strong shilling combined with lower inflation in Kenya’s trading partner economies continues to erode Kenya’s competitiveness. In 2013 the effective exchange rate appreciated 5.7 percent,” said the World Bank Kenya Economic Update June 2014.

In another analysis of the 10-year period between 2003 and 2012, the World Bank concluded it was a period of local currency appreciation.

“Appreciation in the real exchange rate is an important contributor to the export stagnation. The shilling has appreciated by 33 per cent, or 3 per cent per annum, in real terms since 2003,” said the Bank.

READ: Strong shilling hurting economy, says World Bank

However, the Bretton Woods institution said “the loss of competitiveness this appreciation reflects can be mitigated by improving the business climate”.

CBK governor Njuguna recently told the Business Daily that the exchange rate only deviated from its proper level by up to five per cent.

A dealer with a commercial bank said he felt there was neither a potential for depreciation or appreciation of the local currency since it was properly valued.

“We normally deal with forces of supply and demand, so from where I sit I feel it is properly valued. I cannot say that it should depreciate to Sh89,” said the dealer, who preferred to be anonymous in order to speak candidly about the regulator.