Kenya paying the price for overvalued shilling, CBK governor says

Wednesday October 25 2023

Central Bank of Kenya Governor Dr Kamau Thugge speaks during a press briefing. PHOTO | BILLY OGADA | NMG


The Central Bank of Kenya (CBK) has said the shilling was overvalued by up to 25 percent in a rare admission that suggests the ongoing free-fall of the currency is far from flattening out.

CBK Governor Kamau Thugge told MPs that the demand for foreign exchange has outweighed supply in most months leading to the depreciation of the shilling that has since officially crossed the Ksh150 mark against the US dollar.

But it is the admission that the currency had been overvalued as the country fought to maintain an “artificially strong exchange” rate that sent shockwaves across the financial markets as the regulator waits for the shilling to find its true value.

“I think for several years now, we have had an overvalued exchange rate, in fact, if you go back six years ago there was a raging debate as to whether the Kenyan shilling exchange rate was overvalued and at that time the Bretton Woods institutions felt that actually the exchange rate was overvalued by anywhere between 20 to 25 percent,” Dr Thugge said.

Read: Kenya shilling falls to historic low against dollar

“The over-valuation became obvious last year. Inflation last year went beyond what had been seen for decades. The US raised interest rates by 500 basis points,” Dr Thugge said.


He told Parliament that in April, most of the foreign exchange inflows were used in the reduction of the short positions held by commercial banks and unfulfilled demand carried over from previous months.

“The CBK did not raise the interest rate considerably and there were capital outflows which affected the exchange rate.”

Since the beginning of the year, the shilling has depreciated by 17.7 percent against the dollar, which is more than double the 8.3 percent it shed against the greenback in the whole of 2022.

“Most African currencies have weakened against the US dollar, partly reflecting global strengthening of the US dollar,” Dr Thugge told the Finance and National Planning Committee of the National Assembly.

“Policy tightening in major economies partly contributed to the global strengthening of the US dollar.”

Dr Thugge appeared before the committee chaired by Molo MP Kuria Kimani to explain the measures the CBK was putting in place to reverse the shilling losses against the US dollar.

Dr Thugge said the Kenyan currency had continued to slide despite the reopening of the interbank dollar market in April and the removal of a CBK rule that capped daily deviation from the indicative rate at 20 cents has helped the exchange rate to find its own level through demand and supply.

Read: Kenya shilling to weaken further

He said the CBK had written to 10 main banks to explain why the spreads were so wide despite the interbank market reforms.

“I have written to 10 banks to explain why their spreads are very wide. I expect to receive their responses as to why action should not be taken. Once I receive their responses, I determine the action to be taken,” he said.

Dr Thugge said the CBK has undertaken a number of measures to help strengthen the shilling, including reviewing the limits on tenor swaps and other local currency funding instruments.

“The tenor of swaps and Kenya shilling borrowing where non-resident banks are involved is limited to a tenor of not less than six months,” he said.

“There is no limit in the tenor of swaps between residents. This includes resident banks within the East African Community.”

Dr Thugge said the CBK has adopted the use of an electronic brokerage system in the foreign exchange market.

He said the minimum amount tradeable in the interbank exchange market has been revised from $500,000 to $250,000.

Dr Thugge said the CBK has issued guidance to Money Remittance Providers (MRPs) to enhance interbank liquidity. Selling of foreign exchange by the MRPs to cooperate customers, he said, is restricted to a minimum of $100,000 per customer per day.

The CBK said it expects large cash inflows from the International Monetary Fund (IMF), the World Bank and regional development financial institutions to help strengthen the shilling.

Dr Thugge told MPs that a team from the IMF will visit Kenya next week and the Treasury hopes to get at least $400 million (Ksh60 billion).

Kenya, he added, also expects $530 million from the IMF and the significant amount of the concessional resources will go towards replacing expensive domestic debt that the Treasury borrowed from banks.

Read: IMF approves Kenya's $447m loan

Dr Thugge said Kenya also expects to receive $750 million (Ksh562.5 billion) from the World Bank that is to be disbursed by March next year.

“We expect inflows from multilateral, bilateral and regional development financial institutions. We have a three-year reform programme with the World Bank. We have engaged the World Bank and IMF to see if there is room for further disbursements,” Dr Thugge said.

“The IMF will be in the country to conduct its sixth review and we expect to see whether they will increase the amount they intend to lend to us.”

Dr Thugge said the CBK recently met with 130 investors in Marrakech, Morocco, to convince them that Kenya will pay the Eurobond which falls due in June next year.

“The improved sentiments around the Eurobond and the debt issues saw the interest rate on Eurobond fall from 20 percent to 14.4 percent just two days after meeting the 130 investors,” the governor said.

“The ongoing engagement with investors, the expected inflows from multilateral, bilateral and regional development financial institutions as well as deliberate measures to improve forex inflows will help us support the shilling from a further decline.”