US warns Kenya over shilling manipulation

US warns Kenya over shilling manipulation
Published date:
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.

 

Share this article

View related news articles

Kenyan manufacturers eye US market in growth plan

Manufactures in Kenya are banking on the pending trade deal with the US to grow the sectors’ contribution to the GDP and create jobs. The sector targets a 20 per cent contribution to economy by  2030. This will be driven by an increase in production of high quality products that will help expand supply and grow exports, the Kenya Association of Manufactures (KAM) has said. “AGOA has provided a significant market for Kenya’s...

07 November 2022

US DOA leads trade delegation to Kenya as country embraces GM crops

Representatives from 32 United States agribusiness firms arrived in Kenya on October 30 as part of an American government delegation scouting for trade opportunities. The US food firms are looking for new and expanded markets in Kenya for their crops. Kenya currently faces food insecurity and also wants to seal a trade deal with Americas. Nairobi has been pressured by Washington to allow access to its genetically modified (GM) food and...

06 November 2022

Kenya President Ruto’s warm relationship with US likely to expedite trade deal

Kenya and the US will be taking another shot at the dragging trade talks with hopes of reaching a deal before the year 2025. This is when the African Growth and Opportunity Act (AGOA) lapses. AGOA eliminates import tariffs on goods from eligible African nations, with its coming to an end putting countries under pressure to secure a pact that will see them continue to enjoy preferential trade terms. President William Ruto’s warm...

04 November 2022

Kenya president Ruto: Country ready for more trade deals with the US

President Ruto has said Kenya is ready for more trade deals with the US under the African Growth and Opportunity Act (AGOA) program, which gives Kenya and 40 other sub-Saharan African countries duty-free access to the US market for over 6,000 products. Ruto, who hosted a US delegation at State House, Nairobi, on Monday, said the country has plenty more to offer the United States as a trade partner. "Kenya largely exports apparel products to...

31 October 2022

US food firms to visit Kenya scouting for trade opportunities

Representatives from 32 US agribusiness firms are set to jet into Kenya on Sunday as part of an American government delegation scouting for trade opportunities. The US food firms are looking for new and expanded markets in Kenya for their crops. Kenya currently faces food insecurity and also wants to seal a trade deal with Americas. Nairobi has been pressured by Washington to allow access to its genetically modified (GM) food and crop...

29 October 2022

Kenya's new president: US has overtaken the UK as Kenya's premier trading partner

President Ruto has said the United States has overtaken the United Kingdom to become Kenya's premier trading partner. Ruto, who spoke during the Mashujaa Day celebrations at Uhuru Gardens on Thursday, said Kenya will continue strategic engagements with key development partners like the US and the UK, which has been the country’s premier trading partner for a long time. "We also remain devoted to our strategic engagements with key...

20 October 2022

If duties were eliminated, 'strong potential for US red meat in Kenya'

The U.S. Meat Export Federation recently submitted comments (  see document alongside) to the Office of the U.S. Trade Representative on the U.S.-Kenya Strategic Trade and Investment Partnership. Cheyenne McEndaffer, USMEF senior director of export services, says that USMEF highlighted several non-tariff barriers and potential trade obstacles, including concerns about Kenya's burdensome import license system,...

30 September 2022

Kenya businesses 'want continued duty-free access'

The Biden administration has been clear that none of its trade negotiations cover tariffs. That includes talks with the U.K., the EU and the Indo-Pacific region, as well as the Strategic Trade and Investment Partnership talks with Kenya. In Kenya’s case, the country already has duty-free access to the United States for most of its goods under the African Growth and Opportunity Act. But the Biden administration has not said yet...

26 September 2022

Concerns expressed that Kenya deal with US could hurt regional trade

The pursuit of a new trade pact between Washington and Kenya is eliciting old fears on whether it could hurt adherence to obligations under the East African Community, and hence continental ambitions for more commerce. The US has confirmed it is willing to restart negotiations on a future trade pact with Nairobi once a substantive government is formed by President William Ruto. And although Washington says any trade agreements in Africa will...

24 September 2022

US concerns with doing business with Kenya

The United States of America has expressed interest in resuming trade with the East African nation of Kenya. The resumption of trade between both nations is a welcomed development according to both parties, assuming the interest of both players is protected.  Tension surmounting between these two nations results from the potential tax that could be imposed on their businesses should they commence trade with each other.  The US has...

24 September 2022

US overtakes Uganda to become the largest market for Kenyan goods

The United States has overtaken Uganda to become the largest market for Kenyan goods, according to a report by Business Daily. Citing official data, the publication reported that Kenya’s exports to the US grew by 47 percent to Sh38.8 billion in the first half of the year, ending Uganda’s 10-year dominance as the leading export destination for Kenya-made goods. In the period under review, Ugandan consumers bought Sh36.2 billion worth of...

22 September 2022