Kenya’s central bank governor, Kamau Thugge, stated that the country’s currency, which is currently trading at historically low levels, has been overvalued for several years. This declaration came as the Kenyan shilling’s value dropped to more than 150 to the US dollar this week, signifying a decrease of nearly 24 percent over the past year, as opposed to approximately 100 in October 2018.
During a session with a parliamentary committee on Tuesday, Thugge noted, “I think for several years now we have had an overvalued exchange rate.” He pointed out that financial institutions like the International Monetary Fund and the World Bank had estimated the shilling to be overvalued by 20 to 25 percent five or six years ago.
Thugge admitted that efforts were made to maintain a relatively strong exchange rate artificially, but at the cost of a decline in international reserves. He assumed office as the Central Bank of Kenya governor in June this year.
Kenya’s foreign exchange reserves have now reduced to an amount equivalent to about 3.7 months of import cover. Thugge emphasized that it was still adequate to address any emergencies, but there has been a decrease in reserve levels due to the defense of a potentially overvalued exchange rate.
The sharp depreciation of the shilling has exacerbated the economic difficulties experienced by Kenyan citizens, who have been grappling with a cost-of-living crisis and the imposition of various new or increased taxes.
The rising prices, particularly for essential items such as food and fuel, sparked a series of sometimes lethal protests against President William Ruto’s government earlier this year. Accusations have been made against President Ruto for failing to fulfill promises made during the 2022 election campaign regarding the welfare of Kenya’s underprivileged.
In defense of these measures, the government has contended that the removal of subsidies on items like fuel and the implementation of increased taxes are necessary steps to enhance public finances and alleviate the national debt burden, which currently exceeds 10.1 trillion shillings ($67 billion).
| Key Points | |
| Central Bank Chief’s Assessment | Kenya’s central bank governor, Kamau Thugge, declared that the country’s currency has been overvalued for several years. |
| Shilling Depreciation | The Kenyan shilling’s value recently dropped to over 150 to the US dollar, marking a nearly 24 percent decline in a year. |
| International Institutions’ View | Financial institutions, including the IMF and the World Bank, had previously estimated the shilling to be overvalued by 20 to 25 percent. |
| Reserve Depletion | Efforts to maintain an artificially strong exchange rate have led to a reduction in Kenya’s foreign exchange reserves. |
| Economic Hardship | The shilling’s sharp depreciation has added to the economic difficulties faced by Kenyan citizens, including a cost-of-living crisis and increased taxes. |
| Public Protests | Rising prices, particularly for essential goods, have triggered protests against the government, with accusations that campaign promises were unfulfilled. |
| Government’s Defence | The government argues that the removal of subsidies and increased taxes are necessary to improve public finances and reduce the national debt. |