By Emem Ekanem
The governor of Kenya’s central bank, Kamau Thugge, has stated that the shilling, the country’s currency, has been overestimated for quite some time. Recently, the shilling reached a record low, trading at one hundred and fifty (150) shillings to the dollar, marking a 24% decrease compared to the previous years. It can be recalled that back in October 2018, one dollar ($1) was equivalent to a hundred (100) shillings.
On Tuesday, the 24th of October, Kamau Thugge, the governor of the Central Bank of Kenya, expressed this view to a parliamentary committee, stating, “I think for several years now we have had an overvalued exchange rate.” Around five years back, the International Monetary Fund and the World Bank assessed the shilling to be overvalued by approximately 20% to 25%, as stated by Mr. Thugge.
“We have tried to maintain a fairly strong exchange rate artificially, at the cost of losing international reserves,” explained Kamau Thugge, the recently appointed governor of Kenya’s Central Bank who took office in June. According to Mr. Thugge, the nation’s foreign exchange reserves only cover imports for less than four months. He further expressed that, “it is still sufficient to deal with any emergencies.”
The current historically low exchange rate can be attributed, in large part, to the increased strength of the United States Dollar (USD), driven partly by the high yields on the United States (US) Treasury bonds. This drop in value leads to higher costs for imports and contributes to Kenya’s significant debt, which amounted to over 10,100 Billion shillings (equivalent to 64.4 billion euros) as at the end of June, accounting for roughly two-thirds (2/3) of the gross domestic product, according to data from the Treasury.
Thugge noted that despite the reopening of the interbank dollar market in April and the removal of a Central Bank of Kenya regulation limiting daily deviation from the indicative rate, the Kenyan currency (shilling) has still experienced a decline. He mentioned that this has allowed the exchange rate to adjust naturally based on the forces of demand and supply.
The governor of the Central Bank of Kenya, Kamau Thugge, stated that they have contacted ten (10) major banks to provide clarification on the extensive spreads, despite the recent reforms in the interbank market. Thugge emphasized that he anticipates receiving their justification for avoiding potential measures, and based on their responses, he will decide the appropriate course of action.
Thugge further mentioned that the Central Bank of Kenya has implemented various measures to help strengthen the shilling, such as reevaluating restrictions on tenor swaps and other financial tools denominated in local currency.
Since his election in August 2022, the president of the East African country, President William Ruto, has implemented a range of tax increases and introduced new levies with the aim of boosting government income and improving the country’s fiscal flexibility. However, these measures being implemented are significantly affecting the people’s purchasing capacity, leading to confusion and dissatisfaction among the populace. This is despite his earlier pledge during the presidential campaign to alleviate the economic challenges faced by the most economically vulnerable (the poorest) in Kenya.
The steep decline in the value of the shilling has worsened the financial strain on the people of Kenya, who have been grappling with high costs of living and the introduction of various new or heightened taxes. Frustration over escalating prices, especially for essentials like food and fuel, sparked a series of occasionally violent demonstrations against Kenyan President, William Ruto’s administration earlier this year.
The coronavirus (COVID-19) pandemic, along with the repercussions of the conflict in Ukraine and a severe drought in the Horn of Africa, significantly impacted Kenya’s robust economy, the locomotive of East Africa. Economic growth rates dropped to 4.8% in the past year, a notable decline from the 7.6% recorded in 2021. Projections for 2023 indicate a further dip compared to the previous year, 2022.
The government has argued that the removal or discontinuing of subsidies on items like fuel and the implementation of higher taxes are necessary steps to enhance public finances and ease the national debt burden of more than 10.1 trillion shillings, which is approximately sixty-seven billion dollars ($67 Billion).
