The value of dollar deposits in commercial banks increased by Sh528.56 billion in the first 10 months of the year majorly on the continued slump of the shilling against the dollar, rewarding customers with double-digit capital gains on their hard currency stock.
Central Bank of Kenya (CBK) data shows dollar deposits rose by 57 percent from Sh921.05 billion at the end of last year to hit Sh1.449 trillion at the close of October, marking one of the fastest jumps in 10 months since 2011.
The rise in the dollar holdings came in the period the shilling shed 22 percent of its value against the dollar to close October exchanging at 150.56 units to the dollar. The slump has continued, taking the year-to-date devaluation to 24.3 percent.
The weakening of the shilling in the first 10 months of the year means that a customer who was holding a dollar equivalent of Sh1 million saw their money close October at Sh1.22 million or an appreciation of Sh220,000 even before factoring even interest paid by banks on such deposits.
While part of the jump in value is due to a growth in the actual stock of dollars, the depreciation of the shilling against hard currencies had the biggest contribution in growing the stock at a faster pace.
Dollar depositors had in the first six months of the year seen their holdings rise by just 12 percent to $8.67 billion from $7.78 billion on increased savings.
However, when the weak shilling is factored in, their holdings swelled by 29 percent to close June at an equivalent of Sh1.185 trillion, showing that the devaluation of the currency has contributed more to the increased stock of dollar holdings compared with additional savings and interest.
The rise in dollar deposits has come in an environment where various businesses, especially those involved in the importation of raw materials and finished goods, have had challenges accessing dollars. The market exchange rate has also been misaligned with that of the CBK.
The shilling has mainly suffered from a stronger dollar as the US Federal Reserve hikes interest rates to fight inflation. The rate hikes have had the impact of sparking dollar outflows to safe havens, mostly in the developed economies, increasing demand for the greenback and depressing the value of the local currency.
While a weak shilling has given returns to those holding dollars and helped exporters earn more, it has meant increased costs of servicing foreign currency-denominated loans and made imports much more expensive.
"The public sector external debt service costs have risen, thereby offsetting some of the gains made towards the government's strong fiscal consolidation," said CBK in the recent monetary policy committee statement.
The Treasury data shows the proportion of Kenya's external debt denominated in US dollar was at 67.2 percent at the start of July while 21.3 percent, 3.9 percent, 5.1 percent and 2.3 percent were in euro, yen, yuan and sterling pound, respectively.
The CBK last week increased the base lending rate from 10.5 percent to 12.5 percent—the highest level in 11 years— citing the need to fight inflation and also save the shilling from further slide against the dollar.
Of the overall inflation of 6.8 percent in November, CBK said the exchange rate depreciation contributed about three percentage points, pointing to the second-round effects manifesting in the form of higher import prices.
The State is worried that continuing weakening of the shilling and the rising interest rates amid sustained spending pressures could wreck its plan of achieving a 5.4 percent budget deficit in the current financial year and trim this to 4.4 percent of GDP in 2024/25 and further to 3.6 percent in 2026/27.
Central Bank of Kenya (CBK) data shows that the shilling has shed on average three cents to the dollar since the beginning of December, compared to an average loss of 12 cents a day in November, and 13 cents in October, offering some hope that the local currency is beginning to get some stability.
