Controversy of overvalued shilling: Why Central Banks intervene globally

An International Monetary Fund (IMF) report has ignited the debate on the true value of the Kenyan shilling.

This after another study by Amana Capital, an investment firm, recently alleged that the shilling is overvalued by 30percent.

IMF on the other hand had alluded to an 18 percent overvaluation.

The pronouncement was based on the limited movement of the local unit relative to the US dollar over time to suggest the management of the shilling by government through the Central Bank of Kenya.

The value of the shilling has subsequently been put under the microscope by a number of analyst and research firms.

Amana Capital, for example, challenged the unit’s exchange value to the dollar on an account of its depleted purchasing power.


CBK Governor Patrick Njoroge however maintains the case for the absence of a misalignment in the unit’s exchange rate regime.

According to Njoroge, who previously worked at the IMF, the lender of last resort does not seek to control the value of the shilling but rather makes intervention to stem volatility.

Further to the disclosure, Central Bank has hit out at IMF’s revised EBA-Lite model of currency regime determination.

It terms it as one construed for developed economies rather than one suitable for emerging economies like Kenya.

CBK analyses a variety of aspects to the determination of the shilling’s value including the Purchasing Power Parity (PPP), elasticity, the behavioural equilibrium exchange rate and the micro-balance approach.

It terms the accusations of overvaluing of the shilling as a ‘shallow inspection’ of the unit.

Kenya Bankers Association (KBA) Chief Executive Officer Habil Olaka conquers with the reserve bank to call for a surgical examination of the shilling’s true value.

“It’s a very strong statement to say the shilling is being managed. Such a statement should be anchored on vigorous analytical work to bring prove to the accusation. There is a need to go further,” he said.


Central Banks around the world have in themselves the necessary tools to manage any potential shocks to their home currencies.

From raising interest rates to impact the flow of investor funds, increasing capital and reserve requirements for member banks the CBK can also buy reserve currencies, issue new currency and act as an emergency lender to distressed commercial banks and other key institutions including government.

It is the intervention of individual Central Banks that one determines each of the country’s currency regime.

While a free floating currency regime based on the play-out of demand and money supply makes for the most transparent model, Central Banks do make soft adjustments based on the movement of key fundamentals including economic growth and inflation.

On the flipside, some Central Banks take a hard-line stances on the valuation of their local currency units, in essence, managing their currency regime to suit macro-economic expectations.

The majority of world currencies now fall under the free-floating regime following the collapse of the gold standard in 1973, but for the close monitoring by Central Banks to manage shocks.

The Canadian dollar for instance makes one of the limited clean floating currencies with the last intervention by its Central Bank coming in 1998.

A close scrutiny of the Central Banks’ interventions therefore makes for the best approach to determining a managed currency regime in a case of the full disclosure of the intercession.

“With a soft peg currency with no specific exchange rate level, it becomes difficult to ascertain whether it is overvalued or not. In addition to the Kenya case, the CBK does not make public its intervention activities in terms of quantum as it periodically ‘smooths out volatility’.

“Therefore, we admit with no solid data, we are unable to authoritatively comment on KES overvaluation,” Genghis Capital Macro-Economic Research Analyst Churchill Ogutu highlighted the tough call on the shilling’s valuation.


While a free-floating regime makes for best practise, managing the currency valuation presents opportunity to create stability while containing perverse effects from effects such as the occurrence of speculative attacks.

Such interventions do not however guarantee of success as Great Britain learnt during the sustained attack on the pound in 1992, triggered by financier George Soros.

The United Kingdom for instance spent billions in defending its local unit only to see the pound’s value sink by 14.3 percent resulting in losses equitable to Ksh.433.6 billion (3.3 billion pounds)

While there is no evidence of an overbearing role of the CBK in the shilling’s pricing, the government may have some motivation to prop up the shilling in light of its current foreign debt exposure.

Such a move does however carry with it some level of risk.

“The consequences of an overvalued currency is that it makes the country’s exports expensive compared to competitors and hence reduce exports.

Further, it will also lead to cheaper imports reducing local demand in return impacting the high level of unemployment which remains a chronic problem and consequently suppress economic growth,” Cytonn Investments Senior Investments Analyst Caleb Mugendi told Citizen Digital.

Kenya has in itself a heightened level of debt distress characterised largely by increasing debt redemption obligations.

The country is for instance expected to foot over Ksh.1 trillion in debt servicing costs in the 2019/20 financial year, a figure representing more than half the total revenue collection expectations.

The obligations will likely mean a return to the international credit market for additional funds even as the country’s credit profile comes under scrutiny in the absence of an IMF stand-by credit facility with the last available one having expired in September of 2018.

The absence of this cover is likely to see Kenya receive credit at a premium as investors become wearier of the country’s debt profile.

Kenya’s macro-economic fundamentals however remain aligned to ongoing fiscal consolidation efforts.

Inflation for instance remains anchored within the 2.5-7.5 percent while the current account deficit has continued to narrow closing in at 4.5 percent at the end of March 2019 on an account of increased horticultural exports, improved transport receipts and strong diaspora remittances.

The country has also seen a slowdown in public debt accumulation with total debt growth easing in recent years.

CBK usable forex reserves have however been on the retreat easing to Ksh.809.5billion (USD 8.07 billion) as at May 9, an equivalent 5.2 months import cover, a sum however well above the 4.5 months cover statutory requirement.

The shilling has meanwhile maintained its long-term stability hovering well within 100 units to the dollar having traded at an average Ksh.101.19 on Thursday.

While the CBK and Treasury remains in pursuit of a new credit arrangement with the IMF as the government’s lines up a third Eurobond estimated at an approximate Ksh.250billion, the country has not in recent years to the 2011-2013 stretch drawn from the emergency IMF kitty.


Central Bank of Kenya (CBK) Kenya Shilling IMF

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