Businesses in Kenya, which last year relied on foreign-currency-denominated loans to sustain their operations, have now cut back on such loans following the appreciation of the shilling and the relative stability over the last few months.
Central Bank of Kenyan (CBK) reports showed that the value of foreign currency-denominated bank loans, mostly the US dollar, fell by 13.3 percent in the month to June, coming on the back of another drop of 14.2 percent in April.
Loans dominated in local currency saw marginal growth over the same period, albeit at a slower pace compared to previous periods, indicating that Kenyans are generally moving away from dollar-denominated debt.
CBK Governor Kamau Thugge attributed the decline in foreign currency-denominated debt to the continued appreciation of the shilling.
“The sharp decline [in foreign currency-denominated loans] reflects the appreciation of the exchange rate,” Dr Thugge said during a press briefing following the Monetary Policy Committee sitting on Wednesday.
Foreign currency-dominated loans currently account for over a quarter or 26 percent of credit extended by commercial banks to the private sector and heavily depend on the performance of the shilling against major currencies.
The growth in such loans peaked in April last year, when the shilling was at a record-high exchange rate of about Sh132 per US dollar, having depreciated by about 8 percent from the beginning of the year. The shilling traded at an average 129 yesterday.
It was around that time that the country experienced one of its worst dollar shortage crises, forcing some manufacturers to bill their clients in dollars instead of the local currency, but also pushing many businesses into dollar borrowing.
Throughout the year, the value of dollar-denominated currencies continued on a growth trajectory, oscillating between 10 percent and 25 percent, as the shilling continued depreciating.
In December, foreign currency-denominated loans grew by 10.9 percent as the shilling continued to weaken.
“The continued weakening of the exchange rate is contributing to a significant increase in the Kenya shilling value of foreign currency-denominated debt,” CBK said in a statement in December.
