According to the governor of Kenya’s central bank, the shilling, which is currently trading at a historically low rate, has been overvalued for a number of years.
At 150 shillings to the dollar on Monday, the exchange rate was a new record low, down 24% from the previous year. One dollar was equal to 100 shillings in October 2018.
“I think for several years now we have had an overvalued exchange rate,” the governor of the Central Bank of Kenya, Kamau Thugge, told a parliamentary committee on Tuesday.
According to Mr. Thugge, the World Bank and the IMF estimated that the shilling was 20% to 25% overvalued around five years ago.
“We have tried to maintain a fairly strong exchange rate artificially”, said the governor of Kenya’s central bank, who took office in June, but “at the cost of losing international reserves”.
Mr. Thugge claims that the nation’s foreign exchange reserves are insufficient to cover imports for more than four months.
“This is still sufficient to deal with any emergencies,” he added.
The US currency’s strengthening, which is partially caused by the high yields on US Treasury bonds, is mostly to blame for this historically low exchange rate.
According to Treasury estimates, Kenya’s debt load at the end of June was over 10,100 billion shillings (64.4 billion euros), or about two-thirds of the country’s GDP. This depreciation increases the cost of imports and adds to the country’s debt.
President William Ruto, who was elected in August 2022, has enacted a number of tax increases and additional levies in an effort to boost government revenue and give the nation more flexibility.
However, despite his campaign pledge to alleviate the financial hardships of Kenya’s poorest citizens, these actions are severely reducing purchasing power and creating confusion and unhappiness among the populace.
Following the shockwaves of the war in Ukraine and a catastrophic drought in the Horn of Africa, COVID-19 severely shook the Kenyan economy, which is the engine of East Africa. In contrast to 2021, when economic growth was 7.6%, it slowed to 4.8% last year, and growth projections for 2023 are lower than those for 2022.
