The International Monetary Fund (IMF) has called out central banks in Africa for selling forex reserves to manage currencies, terming it counterproductive.
In his keynote address during the 45th Assembly of Governors Association of African Central Banks in Zambia over the weekend, IMF African Department director Abebe Selassie said those exchange rate policies are not flexible.
"Central banks have for the most part responded to the pressures they faced by selling reserves and not as much by allowing exchange rate depreciation. These will not ease inflation nor stabilise currencies,'' he said.
According to him, this kind of exchange rate policy has come at a considerable cost.
"In particular, there has been quite a pronounced decline in foreign exchange reserve in the region—problematic of course given the level of reserves in most countries were on the low side,'' he said.
Abebe lamented shades of the rather messy monetary and exchange rate policy arrangements that prevailed in many countries in the 1980s have resurfaced, causing more harm than good.
"In the face of the brutal exogenous shocks that countries have faced, many of you have been caught between a rock and a hard place and had to make invidious tradeoffs. The question is whether these tradeoffs are optimal.''
As a result, parallel foreign exchange markets have re-emerged and, in the cases, where they already existed these premia have widened dramatically.
He called on regional countries to work on their exports, saying that it is the best way to ensure a steady flow of forex.
The IMF's regional executive said the share of global exports has remained meagre, despite relatively strong growth performance and improvement in many other development indicators.
His tough talk at the governor's meeting is coming at a time several countries including Kenya have seen their currencies widely depreciate against major international legal tenders.
Yesterday, the shilling slipped to 143 units against the US dollar, a new low, having depreciated 20 per cent in the past 12 months.
This is despite the Central Bank of Kenya rolling out a raft of monetary policies including hiking the base lending rate to 10.5 per cent in the past Monetary Policy Committee meeting in July.
The apex bank is expected to meet today, with bankers appealing to the committee to retain the rate as the country observes its impact on inflation.
In March, CBK introduced a new foreign exchange code that came with threats of punitive fines and license suspension for offenders after allegations of traders hoarding dollars.
The foreign exchange code, among others, prohibits banks from engaging in trading practices, quoting prices, or making transactions with the intention of manipulating price movements or disrupting the functioning of the market.
Despite this, the country's forex reserves have threatened to slip below both local and East African benchmarks of at least 4 0r 4.5 months of import cover.
According to the latest CBK weekly bulletin, the usable foreign exchange reserves dropped to $7.3 billion or exactly four months of import cover.
"This meets the CBK’s statutory requirement to endeavor to maintain at least 4 months of import cover,'' the apex bank said.
The reserve, which had started to build up on increased exports and high diaspora remittances has been dropping for the past four weeks, with experts suspecting that CBK is selling to iron out volatilities in the exchange rate market.
The regulator did not give reasons for the ongoing drop in FX reserve.
IMF has in the past accused Kenya of managing its currency to distort its actual value.
In 2019, the international lender said that Kenya had overvalued its currency by 30 per cent, a move that saw CBK release a counter analysis indicating that the shilling was actually undervalued.
He explained that the consumer price index which was at Sh97 in 2009 has since risen to Sh192, meaning that Kenyans are spending Sh192 to buy what could be bought at Sh100 ten years ago, translating to a 50 per cent devaluation of purchasing power.
A comprehensive study by the banking sector regulator dubbed ‘Assessment of Exchange Rate Misalignment in Kenya’ showed the average undervaluation of the shilling between 2010 to 2017 outweighed the average overvaluation across three methodologies.
"The study finds that the Shilling was in fact, largely undervalued during most of the study period,’’ the report said.
All eyes are now on the regulator to see the next cause of action even as the shilling continues to tumble.
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