NAIROBI, Kenya, Mar 3 – Economist Ashish Chadda has expressed concerns that the Kenya shilling is currently stronger than its intrinsic and fundamental value, inhibiting both business growth and foreign direct investment (FDI) inflows.
According to Chadda, the current exchange rate is not reflecting the true economic dynamics, and this is particularly harmful to sectors like exports and property investment from the diaspora.
Chadda, in a statement, highlighted two key reasons behind his argument: the inflation rate differential between the US dollar and the shilling and the growing current account deficit.
He believes that these factors are contributing to the strengthening of the shilling, despite it being out of alignment with the country’s economic fundamentals.
“The KES was stabilized primarily through a combination of a high interest rate regime and the early retirement of the 2024 Eurobond, which helped to mitigate credit risk fears,” Chadda explained.
However, as the Central Bank of Kenya (CBK) gradually reduces interest rates, pressure is mounting on the shilling, which is being managed through interventions such as the disposal of dollars.
His statement comes in the back of a scale down in the country’s foreign exchange reserves, which have since fallen to $9.06 billion, a decline of $301 million in less than a month. This is from a peak of $9.37 billion on February 13.
Chadda pointed out that without CBK’s intervention, the local unit would have depreciated further.
Further complicating matters is Kenya’s designation by the Financial Action Task Force (FATF) as a high-risk country for money laundering.
Chadda suggests that this could also be contributing to the artificial strength of the shillings.
The economist argues that a devaluation of the Kenya shilling is necessary to bring it to its “optimal” level of around Sh200 against the greenback.
He believes such a move would have multiple positive effects on the economy, including a lower interest rate regime, helping local businesses thrive.
Similarly, Chadda argues that a weaker shilling would stimulate exports, making Kenyan products more competitive abroad.
Likewise, it could reduce the demand for imports, encouraging local industries to compete with foreign goods as well as making it more attractive for the diaspora to convert their dollars into shillings for local investments.
However, Chadda also calls for broader economic reforms to support the country’s growth.
The economist pointed to the high taxes, particularly on fuel and employee wages, which are eroding purchasing power and negatively impacting businesses.
Additionally, Chadda highlights the unsustainable levels of government expenditure and borrowing, which he says are crowding out private sector lending and further straining the economy.
