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CBK locks horns with IMF over shilling’s valuation

Central Bank of Kenya Governor Patrick Njoroge
Central Bank of Kenya Governor Patrick Njoroge on September 19, 2017 at the CBK building in Nairobi. PHOTO | SALATON NJAU  

Central Bank of Kenya (CBK) Governor Patrick Njoroge has accused the International Monetary Fund (IMF) of using the Kenyan shilling as an experimentation tool in a recent valuation that said the local currency is highly overvalued.

Dr Njoroge, who spent 20 years working at the IMF until 2015, maintained that there was no fundamental miscalculation in valuing the Kenyan shilling as suggested and that the CBK allows market forces of supply and demand to determine the currency’s value.

He said the IMF had relied on a new methodology that has been in place since 2015 to judge Kenya despite knowing that the tool has glaring weaknesses and is well suited to advanced economies.

“They used a new methodology that was only put in place in 2015. The External Balance Assessment (EBA)-Light methodology was designed for the advanced economies and now it is sort of being brought down to non-advanced economies,” said the governor.

'Weaknesses in methodology'

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Dr Njoroge said that in finding that the Kenyan shilling was overvalued by 17.5 per cent the IMF had disregarded all the glaring weaknesses in the methodology and instead used it in a black box environment, and presented data that popped out just as it is with no disclaimers.

“How many other countries have used this methodology? In a sense, we are the ones being used as guinea pigs in terms of the EBA-light methodology. That is something we don’t agree with,” he said.

The attack signals a further cooling relationship between Nairobi and the IMF, which in September terminated Kenya’s access to a Sh152 billion ($1.5 billion) precautionary facility.

Mbui Wagacha, an economist and adviser in the Office of the President, had taken a similar position on Kenya’s dealings with the IMF, insisting that so as long as the fund tied the renewal of the facility to stringent conditions such as the removal of bank interest rates cap, Nairobi was not going to bow down and sign.

Challenge narrative

Yesterday Dr Njoroge challenged the media to question the IMF's and analysts’ view on matters such as the shilling.

“We quarrel with IMF, we may not agree with everything. Whatever they put out there, challenge it. What is it they are trying to do?” he posed.

The governor’s attack came just weeks after the IMF published a document showing that Kenya’s exchange rate was misaligned by a particular magnitude, adding that it could change the Kenyan shilling’s classification from ‘floating’ to ‘other managed arrangement.’

Dr Njoroge promised to upload on the CBK website the analysis that informs the valuation of the shilling, insisting that his team’s calculation supports the view that there is no fundamental misalignment in the exchange rate.

Kenya, he said, is wedded to a flexible exchange rate regime and only intervenes to minimise levels of volatility - a policy he says is “well understood” by every practitioner and central banks across the world.

“We don’t have a view about the level or direction of the shilling. We let the market flexibly drive the pricing,” Dr Njoroge said, adding that the CBK uses several standard approaches such as Purchasing Power Parity (PPP) approach, elasticity’s approach, behavioural equilibrium exchange rate approach and macro balance approach to value the shilling.

He said there can never be one best single approach in shilling’s valuation as was done with EBA-light methodology and insisted that in the CBK’s assessment, any misalignment is below five per cent.

CBK's 'low transparency'

The IMF had also criticised the CBK over the level of transparency in the procedures used to value the shilling, saying it remains too low.

But Dr Njoroge said the CBK will only entertain transparency within limits that cannot damage the market. The level of disclosure being asked of Kenya, he said, is demeaning relative to other institutions such as the Bank of England.

“It is easier to just bash us because we are CBK and throw us in this black box, or whatever it is. But we are holding onto a particular policy given our risks,” he said.

As a policy, he explained that CBK does not comment on details of the foreign exchange intervention until it judges that the information is no longer market-sensitive.

“We can’t recklessly reveal information just so as to say we are more transparent. It doesn’t make sense,” the CBK governor said.

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