Is IMF position on ‘static’ shilling mistaken?

However, before concluding that exchange-rate “stability” is automatically wrong or costly, it is worth taking a clear-eyed, evidence-based look at the facts on the ground.

In short, there is nothing intrinsically wrong with a stable currency.

On the contrary, a stable foreign-exchange environment can be a sign of well-functioning markets and effective central bank policy. It helps traders, importers and exporters plan, reduces hedging costs, and limits the inflationary pass-through from imported prices. The suggestion that stability alone is a problem risks fixing what is not broken.

It is important to start with the IMF’s public statements. An IMF staff team visited Nairobi in late September or early October 2025 to assess Kenya’s macroeconomic position and discuss a possible Fund-supported programme.

The Fund emphasised the need for macroeconomic stability, debt sustainability and market-based exchange rate flexibility as routine elements of its advice.

At some public forums and press accounts, IMF staff and some media characterised the shilling’s behaviour as “too stable,” implying that the exchange rate may not be responding sufficiently to market signals and could be complicating monetary policy transmission.

Nevertheless, there are important nuances that were either omitted or not sufficiently emphasised in this account. First, the IMF’s standard policy advice that exchange rates should be primarily market-determined is a general principle, not a one-size-fits-all edict.

Secondly, the mere observation that an exchange rate is stable is not, by itself, proof of harmful intervention or of lost competitiveness.

To find the underlying cause of it, one has to examine the reserves, market liquidity, the composition of capital and current account flows, and whether monetary policy is achieving its objectives. On the face of these metrics, you begin to see where that stability is coming from.

A few critical facts should guide any assessment.

The Central Bank of Kenya (CBK) publications show usable reserves comfortably above four months of import cover.

For example, the CBK weekly and monthly bulletins report reserves and comment that usable reserves were around $12.1 billion, which is over five months of import cover in October 2025. Adequate reserves are a key buffer that allows the central bank to ensure orderly markets and to cushion shocks.

Recent government arrangements to secure oil on 180-day credit terms from suppliers materially reduce immediate dollar demand for fuel imports, which historically has exerted pressure on the shilling.

Such supply-side arrangements relieve short-term import financing stress and therefore contribute to exchange-rate stability without implying artificial suppression of price discovery.

Market quotes in 2025 repeatedly show the shilling trading in a narrow band around Sh129–130 per dollar at times, with small day-to-day movement.

A narrow trading band is not evidence of suppression by itself — it reflects the supply/demand balance in the interbank market in that period.

Taken together, these facts suggest a mixture of adequate reserves, robust forex inflows (remittances and services revenues), credit arrangements for critical imports, and transparent CBK market operations plausibly explain the shilling’s stability. A stable exchange rate regime can be beneficial to the economy as a whole, presenting a win-win position.

Importers, exporters, and transporters can budget, price and hedge with more confidence when exchange-rate movements are moderate and predictable.

Frequent, large swings in the exchange rate are costly: they increase the need for expensive hedges, push up working capital requirements, and discourage long-term contracts. A stable shilling, therefore, reduces frictional costs for trade.

If the IMF’s message is that markets should be allowed to signal problems when they arise, that is a standard and fair point. If the IMF’s public statements imply that any period of low exchange-rate volatility is necessarily a problem, then that is an overreach that requires correction.

The public and market participants are best served when international institutions and local policymakers continue to publish the data that lets everyone judge for themselves.

Kenya imports a substantial share of its energy and intermediate goods.

Large currency depreciations translate into immediate increases in imported fuel and commodity costs that feed into domestic inflation. Stability supports the central bank’s inflation-targeting framework by limiting imported inflation shocks and making monetary policy more effective.

Financial institutions and corporates face lower costs for hedging and for cross-border settlement when currency volatility is low. That increases the economy’s operational efficiency and reduces marginal costs for firms that rely on imported inputs.

Investors, both domestic and foreign, prefer predictable operating environments. Exchange-rate stability reduces one source of macroeconomic uncertainty and improves the business climate.

These benefits are not abstract but tangible, measurable impacts on the cost of doing business and on macroeconomic stability.
Several plausible, benign explanations can account for the shilling’s limited movement.

Worker remittances, tourism revenues and services exports have strengthened Kenya’s external receipts in recent periods. When such inflows are sustained, they increase the supply of foreign exchange and dampen volatility.

The CBK’s published methodology for the exchange rates, which is a weighted average of registered trades, and frequent published bulletins improve price discovery.

The CBK may also conduct operations aimed at smoothing spikes that is an accepted practice in many emerging markets while leaving the market’s price-setting role intact.

The oil credit facilities and extended supplier credit terms reduce the immediate dollar demand for imports and therefore reduce pressure on the exchange rate. This is pragmatic import financing management.

Large usable reserves make it easier for the CBK to support orderly conditions during temporary shocks without making a long-term commitment to an official exchange-rate peg. The CBK’s weekly bulletins explicitly note that reserves remain adequate as alluded earlier in this article.

It is worth acknowledging where the IMF’s caution may have legitimate grounding.

If domestic policy is unsustainable, stability can be temporary and end in a disruptive depreciation later. The IMF’s caution is often framed as a preventive concern about long-term competitiveness.

Very tight management of the exchange rate can make it harder for monetary policy to control inflation or for the exchange rate to perform its shock-absorbing role.

These are sensible, technical points. However, the detail is in the data and the execution. Are reserves adequate? Is the stability supported by balanced flows and policy coherence? Is monetary policy achieving its inflation target? On those questions, the data point to a more favourable picture for Kenya.

For a country like Kenya, which is working to preserve macro stability while addressing debt sustainability, a constructive path would be to continue and deepen public reporting on Forex liquidity, usable reserves (and how they are calculated), composition of inflows (remittances, tourism, export receipts), and any exceptional operations the CBK conducts to smooth volatility.

The IMF and CBK should publish a joint technical note if the Fund’s staff have concerns about the transmission mechanism. This note should set out indicators, thresholds and recommended adjustments.

Kenya must continue to combine prudent fiscal consolidation with monetary discipline and structural reforms to enhance exports, widen the tax base and strengthen debt management. This will reduce the chance that “stability” proves temporary.

From the evidence available in CBK releases and market reporting, the recent steadiness of the shilling appears to reflect a combination of adequate reserves, robust inflows, transparent market pricing practices and structural financing arrangements for key imports.

Those are not signs of policy failure. They are, instead, plausible reasons why the exchange rate can be relatively stable without impairing competitiveness or monetary policy.

This is not to say that Kenya cannot be complacent. Prudent fiscal management, ongoing transparency, and a clear dialogue with the IMF on indicators and thresholds are essential in ensuring that Kenya stays on course and sustains its forex markets stability.

Abraham Muthogo Kamau, Economist and the CEO of Miradi Capital. Email: [email protected]