August dollar deposits up Sh13bn on weak shilling

The value of dollar deposits in Kenya bank accounts rebounded by a five-month high of Sh13 billion in August, reversing a dip in July as savers fled from the weakening shilling.

Data by the Central Bank of Kenya (CBK) shows that the dollar deposits stood at an equivalent of Sh771 billion at the end of August, up from Sh757 billion in July.

The deposits have been on a general decline trend since March when they stood at an all-time high of Sh779.7 billion — except for June when it bucked the drift to rise by Sh15 billion to Sh760.34 billion before dipping again to Sh757.73 billion at the end of July.

Besides the flight from a weakened shilling, analysts have also attributed the increase in dollar savings to the slow economic recovery as the government continues to ease measures set to contain the pandemic.

“Depositors are accumulating these hard currencies as a hedge against the depreciation of the shilling, which has been under pressure since June,” said Genghis Capital analyst Melodie Ndanu.

High demand for hard currencies by importers is outweighing foreign inflows generated by diaspora remittances, exports, and key sectors such as tourism, resulting in fall in the value of the local currency.

The local currency has been under pressure, having so far shed its value by four percent from its best performance of 106.5 against the dollar in May to trade at the current 111.2 units being a 10-month low.

Foreign currency savings have risen by Sh106.9 billion in the 12 months to August this year, the steady rise is also being linked to the rising political temperatures as the country gears up for the 2022 general elections. “It may be a case of investors hedging against the shilling due to fears of further depreciation and also election risk in the coming year,” Davis Gathinji, an analyst at Sterling Capital, said.

A shaky macroeconomic environment has also been linked to the underperformance of the shilling. For instance, public debt has risen to unsustainable levels recorded at Sh7.7 trillion in June.

The cost of living rose consecutively for five months and hit a 19-month high of 6.9 percent in September, just 0.6 percent shy of the Central Bank of Kenya’s desired upper limit of 7.5 percent, but eased slightly to 6.45 percent last month. This, among others, is being blamed for eroding investor confidence in the local currency.

Despite the rising inflationary pressures and worrying debt levels, the Treasury remained optimistic of a recovery this year, estimating a narrowing in the fiscal deficit to 7.5 percent of GDP from last year’s 8.7 percent.

More than 187,300 jobs were lost in 2020 when the economy shrank by 0.3 percent blamed on lower consumption and the pandemic containment measures. The Kenya National Bureau of Statistics in its latest quarterly jobs report noted that the unemployment rate fell to 6.6 percent at the end of March this year from a record of 10.4 percent in June last year at the height of the Covid-19 pandemic.

In its last Monetary Policy Committee meeting, the CBK remained optimistic of an economic recovery but cautioned it would depend on the distribution and uptake of vaccines.

Savings in fixed accounts, which increased by Sh12 billion in August hit a record Sh1.64 trillion, a clear indication that the wealthy were protecting their value and hedging rather than seeking new areas in which to invest their fortunes amid the economic fallout from the pandemic.

In August, cash circulating outside the banking system fell by Sh7.2 billion to Sh235.6 billion. The sharp biggest fall on a month-on-month since the demonetisation in 2019.