TRALAC - Trade Law Centre

US warns Kenya over shilling manipulation

Tuesday, 29 September 2020

The US has warned Kenya against manipulation of the shilling against the dollar during the ongoing talks for a bilateral trade pact.

The US is seeking an undertaking that Kenya will let market forces influence the rate of exchange of the shilling to the dollar as part of the trade agreement.

This pre-condition in the free trade deal (FTA) echoes past claims by the International Monetary Fund (IMF) that Kenya’s currency was overvalued, which drew protests from the central bank governor, Patrick Njoroge.

“Ensure that Kenya avoids manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage,” says the US in a raft of conditions set in the ongoing FTA negotiations between Nairobi and Washington.

Kenya and the US on July 8 formally launched negotiations for a bilateral trade pact that the two countries hope could serve as a model for additional agreements across the African continent.

Kenya is keen to do a deal before the expiry of the Africa Growth and Opportunity Act (AGOA), which allows sub-Saharan African countries to export thousands of products to the US without tariffs or quotas until 2025.

Two-way goods trade between the US and Kenya totalled Sh118 billion in 2019, up 4.9 percent from 2018.

But the US has expressed fears that support offered to the shilling could make the local currency appear stronger, and make its goods uncompetitive when compared to Kenya’s.

US law sets out three criteria for identifying manipulation among its trading partners: a material global current account surplus, a significant bilateral trade surplus with the US, and persistent one-way intervention in foreign exchange markets.

After determining a country is a manipulator, the US Treasury is required to demand special talks aimed at correcting an undervalued currency, with penalties such as exclusion from US government procurement contracts.

“The US has been vocal against currency manipulation from its trade partners and the current tiff with China traces its origins to it,” said Churchill Ogutu, Senior Research Analyst at Genghis Capital.

“This ideally means that Kenya should not weaken its local currency to boost exports. Nonetheless, this is a storm in a tea cup scenario with Kenya being largely a net-importer nation.”

The US Treasury designated Taiwan and South Korea as currency manipulators in 1988, the year that Congress enacted the currency review law. China was the last country to get the designation in 1994.

The IMF in 2018 November said Kenya’s real exchange rate was overvalued by 17.5 percent, citing the current account deficit, which it said was not in step with other economic fundamentals.

The shilling was then trading at Sh102.55 per dollar, but has since dropped to historic lows of Sh108.55, triggering a rise in the cost of imports of raw and finished goods such as petroleum products, wheat, vegetable oil and motor vehicles.

 

kenya shilling

 

The local currency has come under pressure in recent months as demand for dollars surged and supply of dollars squeezed by a lack of tourists and a reduction in exports of other commodities.

The shilling has depreciated 5.7 percent from March 12 – the day the country recorded its first case of the coronavirus — when it traded at 102.3 units to the greenback.

It has also been dragged down by demand for hard currencies from importers resuming business after the State started to ease coronavirus containment measures in July.

Dr Njoroge, the Central Bank of Kenya governor, has previously defended Kenya from the currency manipulation tag, insisting the foreign exchange rate reflected the shilling’s true value and that the central bank does not seek to control it.

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

Dr 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 -- 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.

The US also wants Kenya to support Israel’s political and commercial interests, or forget the free trade deal with the world’s biggest economy.

 

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