November 28, 2018 / 1:36 PM / in 9 months

UPDATE 2-Kenya's foreign exchange rate reflects true value -cenbank governor

* IMF said real exchange rate 17.5 pct over-valued

* Central bank chief rejects claim that rate is misaligned

* Rate cap hindering the effectiveness of monetary policy (Adds details)

By Duncan Miriri

NAIROBI, Nov 28 (Reuters) - Kenya’s central bank governor on Wednesday dismissed a report by the International Monetary Fund (IMF) that its national currency was overvalued and said the fund had used an inappropriate method to assess the shilling’s worth.

Patrick Njoroge said the foreign exchange rate reflected the shilling’s true value and the central bank does not seek to control it.

The shilling, which is trading at 102.55 per dollar, sank to its lowest since February after the IMF report was published last month.

The IMF said Kenya’s real exchange rate was over-valued by 17.5 percent, citing the current account deficit, which it said was not in step with other economic fundamentals.

Bank governor Patrick Njoroge said, “our own calculations support the view that there is no fundamental misalignment reflected in our exchange rate and we have also retaliated that the Kenya shilling reflects the currency’s true value.”

“We let the market flexibly drive the price of foreign currency. The only thing we do is to intervene in order to minimise volatility.”

Njoroge, who took up his post in 2015 from a senior role at the IMF in Washington, accused the fund of using a new methodology -called EBA Lite- which is designed for advanced economies, to arrive at its conclusion.

“We are the ones who are being used as a guinea pig in terms of EBA Lite methodology. That is something that obviously we do not agree with,” he said. “You need to be careful of all the weaknesses of the methodology.”

IMF officials in Kenya were not immediately available for comment.

The current account deficit narrowed to 5.3 percent of GDP in the year to the end of September, from 6.3 percent a year earlier, the central bank said.

It attributed the improvement in the deficit to strong growth in tourist arrivals, a jump in farm exports like tea and an increase in hard cash sent home by Kenyans living abroad, amid a decrease in imports.

“It (the current account deficit) is closing as expected and we don’t have any concerns,” Njoroge said.

Policymakers were however concerned by the impact of a cap on commercial lending rates, which was stifling the transmission of monetary policy into the real economy, he said.

Policymakers have cut the benchmark lending rate twice this year, in March and July, to 9.0 percent.

Njoroge ruled out the use of other tools like cash ratios to stimulate private sector credit growth, which stood at 4.4 percent in the year to the end of October, below the bank’s target of 7-8 percent.

Other instruments would only be used in extreme circumstances, he said. (Editing by Alexandra Hudson)

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