The Central Bank of Kenya (CBK) has emphasized that a weaker shilling against the American dollar is advantageous for the country's economy, highlighting the potential benefits of such a currency devaluation.
The CBK argues that a lower valuation of the local currency can enhance Kenya's global export competitiveness and lead to the availability of more affordable products and services.
According to the CBK, a weakened currency can stimulate domestic investments that contribute to job creation while also discouraging the excessive consumption of luxury imports.
These measures are deemed essential for enhancing the current account balance and fostering economic growth.
"In 2011, there was a large current account deficit of about 11 percent of GDP, and the exchange rate had to depreciate significantly to correct this imbalance in the economy," the CBK explained, underlining the historical importance of currency adjustments in maintaining economic stability.
In recent years, the Kenyan shilling has steadily depreciated against major global currencies, most notably the US Dollar, which has placed pressure on imports. Currently, the exchange rate stands at an unprecedented average of Sh150.55 for $1 US dollar.
CBK's Kamau Thugge recently acknowledged that Kenya had maintained an 'artificially strong' shilling for the past six years due to overvaluation.
He stated that the current exchange rates have now effectively neutralized this overvaluation.
The CBK clarified its stance, stating, "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 liberalized capital account."
This framework allows the exchange rate to adjust in response to economic factors such as trade, production, and investment in the economy.
The CBK emphasized that its role is to provide a conducive policy environment without targeting a specific exchange rate level or direction.
Conversely, a strong shilling can hinder the competitiveness of the Kenyan currency and, consequently, exports.
Additionally, a high-interest rate, which discourages domestic investment, can negatively impact economic growth and employment.
According to the CBK, such a high interest rate is typically associated with short-term inflows of foreign exchange, which strengthens the shilling, introducing exchange rate instability risks.
The CBK concluded by stating, "Strengthening the Shilling by short-term foreign exchange inflows increases the risk of exchange rate instability since these can be easily reversed."
The bank's commitment remains towards maintaining a balanced and flexible approach to currency valuation to support Kenya's long-term economic goals.