CBK says valuation of shilling in line with market forces

The Central Bank of Kenya has defended valuation of the shilling, a week after it was ranked the third worst performing African currency to the dollar in July.

The shilling has been on a slow decline, trading at Sh87.50 on Tuesday, down from Sh84 to the dollar three months ago.

“Movements in the exchange rate serve to correct any imbalances in the market. The movement of the exchange rate cannot therefore be classified as good or bad if it is adjusting to economic factors,” said CBK in a statement.

The regulator has been quick to calm market nerves on the currency depreciation in order to avoid a panic like that witnessed an year ago when the shilling plummeted to Sh107 to the dollar.

This is the second note issued by CBK in two weeks explaining the current weakening is not a concern. It has however warned that a protracted loss could cause inflationary pressures.

A weakening shilling makes imports more expensive thereby fuelling inflation in the economy, while a strong local currency makes Kenyan exports uncompetitive thereby hurting the agricultural and manufacturing sectors.

Kenya is a net importer, relying on external supplies for raw materials, machinery, medicines and some food items.

“A weak exchange is not necessarily bad for example in terms of attracting tourists,” said Duncan Kinuthia, a dealer with Commercial Bank of Africa.

Weakening of the currency has been attributed to higher demand of the dollar by importers amidst a drop in earnings from traditional foreign currency earner tea and exit of the Kenyan money market by foreigners following a drop in interest rates.

CBK said its only participates in the market to avoid huge swings of the shilling or to cover a short-term shortage of foreign exchange liquidity in the market.

CBK has constantly held that the country’s unfavourable trade position reflected by an import bill surpassing exports poses a risk to the currency and has urged the government to consider policies that reverse the position.

It has blamed commentators on the shilling performance of creating an impression that the shilling must always be gaining accusing them of having interests in the direction of the currency.

Some countries, mainly China and Japan, have been accused of manipulating their currency in order to favour their trade.

China has been accused of weakening the Yuan in order to make their exports competitive. CBK said an analysis by the MPC on the shilling showed the exchange rate is never misaligned beyond a range of five per cent.