05/11/2025
Treasury has revealed shilling undervaluation amid IMF concern
The Treasury publicly stated that the shilling is undervalued against the U.S. dollar and, if freely floated amid stronger dollar inflows, could strengthen to about KSh 118 per USD.
Cabinet Secretary John Mbadi said the current rate in the region of KSh 129 to the dollar indicates that the exchange rate is being managed.
Treasury officials argue that the exchange-rate stability is backed by improving macro-fundamentals such as stronger exports, tourism receipts, diaspora remittances, and foreign‐exchange reserves of around US$12.1 billion (approx. KSh 1.56 trillion).
IMF’s concern is:
The IMF staff mission to Kenya reported that the shilling’s lack of movement – i.e., its “too stable” behaviour despite changes in the external environment, may be interfering with monetary policy transmission and inflation targeting.
Specifically, the shilling has remained in a narrow range around KSh 129 to the dollar since early 2024, even though the U.S. dollar weakened globally and Kenya had improving external flows.
The IMF’s principle for member countries is that the exchange rate should act as a shock absorber, adjusting to external conditions rather than being restrained.
Implications & Analysis
If the shilling is indeed undervalued, this means the KSh price of the USD is higher than what market fundamentals alone would dictate if the rate were freely floating. The Treasury figure of KSh 118 suggests an implied 9-10% strengthening from KSh 129.
A weaker shilling (i.e., higher KSh per USD) benefits Kenyan exporters (makes exports cheaper in USD) but hurts importers (makes dollar‐priced imports more expensive) and raises
foreign‐currency debt servicing costs.
Conversely, a stronger KSh (lower KSh per USD) helps reduce inflation imported via fuel, food and other imports, but risks hurting exports and the competitiveness of Kenyan goods abroad.
The IMF’s concern is primarily about exchange‐rate flexibility: if the rate is artificially kept stable or managed, then monetary policy (interest rates etc.) may be less effective in responding to external shocks.
For Kenya, with relatively large external debt denominated in foreign currency, allowing the shilling to depreciate sharply could increase debt servicing burdens. Thus, the government may prefer to maintain some exchange‐rate stability to control debt risk, even if it runs counter to IMF orthodoxy.
The Treasury’s admission that the shilling is undervalued signals a possible policy pivot: acknowledging that the currency might be artificially weak and may have room to appreciate if external inflows hold up. This could have significant implications for exporters, importers, inflation and debt management.
Outlook & what to watch
Keep an eye on Kenya’s export performance, tourism receipts, diaspora remittances and FX reserves. Sustained foreign‐currency inflows might allow the shilling to move closer to its “undervalued” implied value.
Monitor the next rounds of negotiations with the IMF: how Kenya and the IMF agree on the degree of exchange‐rate flexibility and the conditions around a possible new IMF programme.
Watch the stance of the Central Bank of Kenya (CBK) on interventions in the forex market: formal statements as well as actual interventions (reserve releases or dollar purchases) will signal how “free” the float will be.
Inflation dynamics will be key: if the shilling appreciates toward KSh 118, it could reduce inflation pressures from imports; if it remains anchored at KSh 129 or weakens, inflation risks remain.
Foreign‐currency‐denominated debt servicing costs: if the shilling strengthens, this eases the burden; if it weakens, the budget will come under more pressure.
