The Central Bank of Kenya (CBK) clarified, in a comprehensive response to public debate about the performance of the Kenya shilling, that exchange rate movements should not be simplistically labeled as “good” or “bad,” but rather as a reflection of the underlying economic fundamentals.
In a detailed statement addressing enduring market concerns, the CBK clarified its stance on exchange rate policy, explaining that Kenya operates under a floating exchange rate regime with a liberalized capital account.
This means the shilling’s value adjusts naturally in response to economic factors including trade, production, and investment patterns in the economy.
“The CBK provides the policy environment and does not target a particular level or direction of change of the exchange rate,” the statement emphasized, noting that the bank’s intervention is limited to stemming excessive volatility from external shocks or addressing short-term foreign exchange liquidity shortages.
To put this policy in perspective, the CBK revealed that Kenya’s financial market handles between USD 350 to 500 million in daily transactions, amounting to USD 12-15 billion monthly. With the central bank maintaining foreign exchange reserves of slightly over USD 4 billion (equivalent to four months of import cover), any attempt to artificially maintain a specific exchange rate level would be unsustainable, as these reserves “would not last even a week.”
Balance of Effects
The central bank’s response is revisited at a time when market concerns and speculation about currency stability have intensified. While acknowledging that a weaker shilling increases import costs, the Central Bank of Kenya has in the past highlighted several potential benefits of currency depreciation, including:
- Enhanced export competitiveness in world markets
- Improved balance of trade position
- Promotion of domestic investments
- Discouragement of luxury import consumption
However, the bank also cautions that for an economy like Kenya’s, with significant oil import requirements, a prolonged currency weakening could eventually trigger inflationary pressures through energy prices.
Conversely, the CBK warns against the dangers of an overly strong currency, noting that it can:
- Reduce export competitiveness
- Discourage domestic competitive industries
- Lead to increased unemployment if manufacturers face pressure from cheaper imports
- Result in reduced tax revenue for the government
Market Reality
Current market dynamics continue to reflect the structural challenges highlighted in earlier analyses, with persistent pressure on the shilling primarily driven by a significant imbalance in the country’s balance of payments. As a net importer, Kenya’s demand for dollars for essential imports including raw materials, machinery, medicines, and food items remains a key factor influencing exchange rate movements.
The shilling has shown a significant recovery in 2024, appreciating by approximately 21% year-to-date as of November, which marks a notable turnaround from its earlier status as one of the worst-performing currencies at the start of the year. However, the CBK’s maintained position that any exchange rate misalignment typically stays within a 5% range provides important context for understanding these market fluctuations.
The central bank maintains that its primary mandate remains overall price stability, with exchange rate considerations forming just one component of its bi-monthly Monetary Policy Committee (MPC) deliberations on maintaining macroeconomic stability.
Also Read: Path to Riches 2024—Entrepreneurship Overtaking Politics in Kenya