IMF Flags Transparency Gaps in Kenya’s FX Policy

The International Monetary Fund has urged Kenya to clarify its exchange-rate framework as Nairobi negotiates a new medium-term funding arrangement designed to roll over about US $2.3 billion of external obligations falling due in 2026. The Fund’s technical note, circulated during Article IV consultations, cites “inconsistent liquidity provision and communication opacity” as factors that have muddied the shilling’s true equilibrium value.

The Kenyan shilling has depreciated roughly 3 percent year-to-date—milder than last year’s 14 percent slide—but dealers say the inter-bank market remains thin and administratively guided. Daily trading volumes rarely exceed US $100 million, compared with pre-2020 averages near US $250 million, leaving importers reliant on informal allocation. The IMF is pressing for a transparent price-discovery mechanism and consistent auction disclosures to restore investor confidence.

The central bank defends its managed-float model, arguing that interventions are limited to smoothing disorderly conditions rather than pegging the currency. Yet limited communication and divergent on-screen quotes suggest an implicit corridor that constrains natural two-way flow. The issue has become politically charged as parliament debates new FX-management provisions within the Public Finance (Amendment) Bill, which would codify intervention triggers tied to inflation, reserves and capital-flow metrics.

Macro fundamentals remain mixed. Reserves stood at about US $7.4 billion in September, equivalent to 4.1 months of import cover—adequate but trending lower. Inflation eased to 4.6 percent, supporting the central bank’s recent 25 bps rate cut to 9.25 percent. However, the primary deficit remains wide at roughly 4 percent of GDP, and external-debt servicing absorbs more than a quarter of revenue. With dollar demand firm and eurobond spreads above 700 basis points, transparency is now a policy asset rather than an optional virtue.

Kenya’s challenge is to normalise liquidity without sparking speculative runs. Traders argue that an FX auction window or inter-dealer swap facility would deepen turnover and improve price discovery. IMF staff reportedly favour a gradual transition, accompanied by clear reserve-target communication and a market-based reference rate verified through independent data providers such as Refinitiv or Bloomberg.

A credible regime would reduce reliance on costly swaps and restore parity with peers such as Uganda, whose shilling strengthened 4 percent this year under orthodox management. Ultimately, confidence—not administrative defence—will determine how much external support Kenya can secure on favourable terms.