The International Monetary Fund (IMF) —the body that gives loans when countries are in financial difficulties—has said that Kenya is artificially manipulating the shilling.
In a statement quoted on Bloomberg, IMF said that the local unit is 17.5% over-valued, meaning that a 100 shilling note is not worth the paper it is printed on and should buy items that are only worth Sh83.5.
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This statement by IMF comes at a time when there has been speculation among Kenyan economists on the apparent stability of the Kenyan shilling even after a gruelling electioneering period.
Assuming IMF is right, the shilling being overvalued by 17.5 percent means an extra 17.5 KES on exchange rate. Multiply that by $25bn of foreign debt & National Debt goes up ~ 440bn in KES terms or an extra 6% on debt/gdp ratio. Looks like CBK has an eye on the debt metrics.
— Mohamed Wehliye (@WehliyeMohamed) October 24, 2018
Traditionally, the shilling losses value after every general election and inflation tends to soar.
Unlike the previous election years, these basic economic fundamentals have remained unwaveringly stable. More shocking is the fact that the stability comes at a time when the economy is not doing well.
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Consequently, the IMF has reclassified the shilling from “floating” to “other managed arrangement” to reflect the currency’s limited movement due to periodic central bank interventions.
This announcement might result in foreign exchange volatility as the market absorbs the implications of an overvalued currency. So far, the Shilling has been unwaveringly stable at Sh101-Sh102 to the dollar. Importers stand to lose the most while those paid in dollars and exporters stand to gain in the event the value of the shilling plummets.
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But perhaps of more worry should be the amounts that will be required to service public debt that is owed in foreign currency. Currently, half of the GDP is debt.
In addition to the many instruments at the hands of Treasury to control the value of the shilling, one apparent layman deduction of this revelation is that Treasury has been secretly ‘printing’ money.
A volatile foreign exchange market will immediately throw Kenya’s economy into a whirlwind.
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