Only flexible exchange rate will pull Kenya out of currency shock, IMF says

Economy

Only flexible exchange rate will pull Kenya out of currency shock, IMF says


Signage at the headquarters of the International Monetary Fund (IMF) in Washington, DC. PICTURES | AFP

The International Monetary Fund (IMF) says a flexible exchange rate will help Kenya insulate its economy from the external shocks facing its local currency, at a time when it is trading at record highs, stifling supply chains .

The weakening of the Kenyan shilling raised fears that the depreciation could further affect consumer prices.

The shilling hit a new record high against the dollar after weakening to 117.04 on Friday, signaling a continued rise in prices for imported goods like fuel and cooking oil.

If the shilling falls further, the risk is that distressed consumers – already hit hard by steep food and fuel price hikes – will become reluctant ahead of the key 2022 election.

“Kenya’s economy has shown remarkable resilience in very difficult circumstances,” an IMF spokesman said Friday in response to business daily requests.

READ ALSO: The shilling crosses 117 against the dollar

“In this context, a flexible exchange rate is an important shock absorber.”

The Central Bank of Kenya (CBK) maintains that it is committed to a flexible exchange rate regime and will not deviate from this policy despite the weakening of the shilling.

“We are fully committed to a flexible exchange rate regime. We know the benefits of it and we are not deviating from it,” CBK Governor Patrick Njoroge said earlier.

The Central Bank Governor then said that Kenya is committed to maintaining a floating exchange rate, adding that the bank only intervened to smooth excess volatility.

The current ongoing weakening has hit manufacturers who have sounded the alarm over dollar shortages and cited a struggle to settle payments to monitor suppliers on time.

Dr Njoroge recently downplayed the level of depreciation and disputed claims about dollar supply constraints.

The IMF said on Friday it would continue to provide financial support to Kenya through its regularly reviewed Extended Financing Facility and Extended Credit Facility programs agreed with Kenya previously.

Kenya has not applied for a short-term liquidity line created in 2020 to help member countries with strong fundamentals weather the novel coronavirus pandemic, the IMF added.

“The IMF is supporting Kenya under the ongoing EFF/ECF arrangements. At the next review, which is expected to be completed this summer, Kenya would have access to about $244 million (28.5 billion shillings),” the IMF said.

“No access requests have been made under the SLL and the SLL is not designed to operate concurrently with other IMF-supported programs.”

The Kenya Association of Manufacturers (KAM) said in April that its members had faced strained relations with suppliers due to dollar liquidity in the market, at a time when competition for raw materials has increased. intensified globally due to rising demand amid continued supply chain constraints.

READ ALSO: Dollar Shortage Triggers Parallel Exchange Rates

The Kenyan currency has suffered from the strengthening of the US dollar which has appreciated by 6.8% since the beginning of the year, following recent rate hikes which have made the greenback a safe haven for investors amid a difficult environment. Global uncertainties following Russia’s invasion of Ukraine, analysts said. .

The central bank’s monetary policy committee adopted a tightening stance in May, raising its key interest rate for the first time in nearly seven years to anchor inflation expectations amid concerns over commodity prices raw increase.

The monetary policy committee raised the rate by 50 basis points to 7.5%.

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