NAIROBI, Kenya, Oct 31 – A weaker shilling against the American dollar is good for the economy, the Central Bank of Kenya (CBK) has said.
A lower valuation of the local currency has the capacity to increase the country’s export competitiveness globally by offering affordable products and services.
Likewise, a weak currency promotes domestic investments that create employment while discouraging the final consumption of luxury imports.
“All these are necessary to improve the current account balance and support economic growth,” CBK said in a statement.
“For instance, in 2011 there was a large current account deficit of about 11 percent of GDP, the exchange rate had to depreciate significantly to correct this imbalance in the economy,” it added.
Over the last few years, the Kenyan shilling has been on a downward trajectory against major global currencies like the US Dollar, among others, putting pressure on imports.
Today, one USD is trading for an average of Sh150.55, which is an all-time low against the greenback.
Only last week did CBK boss Kamau Thugge say that Kenya has maintained an ‘artificially strong’ shilling for the past six years due to overvaluation, a factor he says has now been neutralized by the current exchange rates.
“The proper context of this discussion must be premised on the understanding of the CBK’s mandate of overall price stability within the framework of a floating exchange rate regime and a liberalised capital account,” CBK added.
“This policy setting means that the exchange rate adjusts – it weakens or strengthens – in line with economic factors including trade, production and investment in the economy,” it added.
“The CBK therefore provides the policy environment and does not target a particular level or direction of change of the exchange rate.”
On the other hand, a strong shilling reduces the competitiveness of the Kenyan currency, hindering exports around the world.
“Furthermore, a high interest rate which discourages domestic investment, which in turn impacts negatively on economic growth and employment, is generally associated with short-term inflows of foreign exchange which strengthens the Shilling,” CBK stated.
“Strengthening the Shilling by short-term foreign exchange inflows increases the risk of exchange rate instability since these can be easily reversed.”
