Capital Markets

Shilling decline boosts value of dollar holdings

shilling

A trader counts coins at his kiosk in Nyeri. PHOTO | JOSEPH KANYI | NMG

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Summary

  • Latest Central bank of Kenya data shows dollar deposits have surged 7.1 per cent from a low of Sh745.4 billion in May.
  • The movement has coincided with the depreciation of the shilling which has been on a slide since mid-May when it stood at Sh106.40.
  • The shilling is currently exchanging at 113.4 on the combination of weak inflows and strong dollar demand across sectors.

Rich Kenyans stacked up Sh798.7 billion in dollar accounts in November as depositors turn back to the dollar for higher returns and depreciation of the country’s currency shores up the value of greenback holdings.

Latest Central bank of Kenya data shows dollar deposits have surged 7.1 per cent from a low of Sh745.4 billion in May.

The movement has coincided with the depreciation of the shilling which has been on a slide since mid-May when it stood at Sh106.40.

The shilling is currently exchanging at 113.4 on the combination of weak inflows and strong dollar demand across sectors.

The shilling has declined to an all-time low against the dollar as importers increase demand for the greenback with the economy recovering from the impact of the pandemic.

The decline of the shilling has been a mixed bag. It is helping to inflate the wealth of rich Kenyans with dollar deposits, recipients of diaspora remittances and exporters while hurting importers and widening the national debt.

The value of Kenya’s diaspora remittances rose by 20 percent to $2.71 billion (Sh307 billion) in the nine months to September compared to $2.27 billion (Sh257 billion) in the corresponding period of last year.

Exporters such as tea and coffee producers are also winners in the shilling’s depreciation, which has the effect of making their products more competitive in the international markets besides boosting their revenue in local currency terms.

However, the cost of imported goods like cars, electronics and second-hand clothes as well as that of electricity has increased with the depreciation of the shilling.

Kenya imports a wide variety of goods, including petroleum products, wheat, second-hand clothes, motor vehicles, vegetable oils and industrial machinery, whose costs are rising as the shilling weakens against the dollar.

The Treasury will also feel the heat of the weakening shilling as Kenya’s debt costs are also rising, including those denominated in dollars.

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