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Don't use Kenya currency as ‘guinea pig,’ governor tells IMF

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The shilling is overvalued by less than five per cent against the dollar, Governor Patrick Njoroge said.

Tuesday 04, December 2018

(Bloomberg)--Kenya’s central bank reiterated that it only intervenes in the foreign-exchange market to minimise volatility, criticising an International Monetary Fund assessment that the shilling is highly overvalued, and the unit is no longer floating.

The shilling is overvalued by less than five per cent against the dollar, Governor Patrick Njoroge said. That compared with the IMF’s assessment of 17 per cent. The lender used a new methodology that’s only been in place since 2015 to reach that conclusion, Njoroge said. The formula was created for advanced economies and only now being applied to emerging markets despite its “well-known” weaknesses, he said.

“We are being used as a guinea pig on the External Balance Assessment-Lite methodology,” Njoroge told reporters in the capital, Nairobi. “The methodology was used in a black box environment. Data went in, whatever popped out was what was presented and obviously that was something we would not agree with.”

Kenya uses “standard approaches” such as the Purchasing Power Parity, Elasticities, Real Equilibrium Exchange Rate, because one methodology is not sufficient to give a holistic picture, he said.

“Our own calculations support the view that there is no fundamental misalignment reflected in our exchange rate and the shilling reflects the real and true value,” Njoroge said. “We have a flexible exchange-rate regime and we don’t have a view on the level and direction of movement.”

The shilling was steady at 102.68 against the dollar by 3:30 p.m., down two per cent from a 99.87 peak on 16 July. For most of 2018, the unit has been Africa’s best performing currency and has gained 0.6 per cent this year, according to data compiled by Bloomberg.

That performance has been underpinned by frequent central bank intervention, said Jared Osoro, director for research on financial markets and policy at the Kenya Bankers Association. Foreign-exchange reserve levels dropped to $8.03 billion last week from a record $9.51 billion in April, according to the central bank.

“The prevailing market conditions follow aggressive central bank interventions in the form of market participation,” he said in a statement on the lobby group’s website.

The central bank says economic growth this year could outpace an expected 6.2 per cent after agriculture and remittances expanded at a much faster rate. It is likely to raise the outlook after gross domestic product statistics for the third quarter are published, Njoroge said. East Africa’s biggest economy posted 5.7 per cent and 6.3 per cent expansion in the first two quarters of the year respectively.

Exports increased by 7.7 per cent in the year through September, Njoroge said, while remittance inflows totaled $2.23 billion in the first 10 months, a 42 per cent increase from a year earlier.

“There is a favorable outlook for 2018,” Njoroge said.

TAGS : Patrick Njoroge, foreign-exchange market, International Monetary Fund , External Balance Assessment-Lite methodology, Purchasing Power Parity, Real Equilibrium Exchange Rate, Jared Osoro, Kenya Bankers Association

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