Njoroge tells off IMF over shilling value

A currency dealer counts Kenya shillings at a money exchange counter in Nairobi October 23, 2008. The Kenya shilling breached the important 80.00 level on Thursday reaching a near four-year low, despite assurances by the central bank, due to demand for dollars. At 0800 GMT, commercial banks traded the unit at 80.10/20 against the dollar compared with 79.40/50 at the close of trade on Wednesday. [REUTERS/Antony Njuguna]

The Central Bank of Kenya has denied claims by the International Monetary Fund that the Kenyan shilling is overvalued.

CBK Governor Patrick Njoroge yesterday termed IMF’s assertions that the shilling was overpriced by up to 18 per cent in a report released in October as “erroneous”.

Dr Njoroge said all tested models had shown that the margin of error could only stretch to five per cent.

“There is no single model that does the job and we have used several approaches. What we have seen is there is less than five per cent to the extent of any misalignment,” he said at a press briefing by the CBK’s decision-making organ, the Monetary Policy Committee (MPC), in Nairobi.

IMF’s claims came in the wake of a fallout with the Kenyan Government after disagreements on the extension of a $1.5 billion (Sh150 billion) forex insurance programme.

Following the lender’s decision to withdraw the precautionary facility that was tied to Treasury’s fulfilling of a promise to cut the budget deficit through, among other measures, a reduction in public spending, the Government declined to release the IMF’s assessment on the state of the economy. This saw IMF unilaterally release the report, further worsening the bad blood between the two.

In the report, IMF castigated Treasury’s debt management, which it said had exposed the country to currency and interest rate risk.

It also claimed that the shilling was overvalued.

But yesterday, the CBK governor accused the Bretton Woods institution of using unconventional models to price the shilling, resulting in the huge variation.

Njoroge questioned why IMF applied the External Balance Assessment (EBA) which, according to him, was generally used for developed economies.

He said the model that was developed in 2013 and launched in 2015 had not been applied in an economy like Kenya. In fact, EBA, which takes into account a much broader set of factors— including policies, cyclical conditions, and global capital market conditions that may influence the current account and real exchange rate — has only been applied to South Africa on the continent.

“How many peer countries have they used the model on? We are being used as guinea pigs with this model,” said Njoroge, adding that the model’s limitations were well documented. The governor also took issue with IMF’s demand of more transparency on how the apex bank makes currency interventions.

IMF had said that the Kenyan shilling risks being classified as “managed” rather than operating on demand and supply.

“Reflecting limited movement of the shilling relative to the US dollar, MCM’s (Monetary and Capital Markets’) 2018 report on exchange rate arrangement to be published in February 2018 will reclassify Kenya’s shilling from ‘floating’ to ‘other managed arrangement’,” said IMF. Njoroge said CBK would only release data if it was no longer market-sensitive, adding that this was a global practice.

Favourite players

“We do not comment on currency interventions until we judge that it is no longer market-sensitive. Check anywhere, the Bank of England, check how much information they reveal,” he said.

The governor added that the interventions were not done with “favourite players in the dark”, but rather during open market operations with banks, which knew whenever CBK intervened.

He also added that Kenya was an open economy with no controls over current or capital accounts.

The Central Bank, the governor said, operated a flexible forex market that did not target any particular rate but allowed the market to price it.