A dollar shortage in the country pushed foreign currency loans to a new record high last year as firms scrambled to access the greenback.
Data from the International Monetary Fund (IMF) shows that foreign currency loans underwritten by deposit-taking institutions in Kenya reached a high of Sh1.2 trillion in the quarter ended June last year from Sh1 trillion in a similar window in 2022.
Foreign currency loans grew by 19.8 percent between April and June 2023 and 78.4 percent in five years since March 2018 when total loans stood at just Sh687.3 billion.
Firms, especially manufacturers, opted for dollar-denominated loans following dollar shortages which commenced at the start of 2022, to mitigate difficulties in accessing hard currency from the market.
In July 2022, for instance, alcoholic beverages manufacturer East African Breweries Limited Plc (EABL) revealed it had taken a Sh1.5 billion dollar-denominated bank overdraft as an offset to limited foreign exchange supply.
“We don’t borrow in foreign currency as a matter of principle. However, with the limited liquidity of dollars, we have managed this by getting an overdraft in dollars and we pay it down as liquidity becomes available,” EABL Chief Finance Officer Risper Ohaga said at the time.
Last year, oil marketer Vivo Energy Kenya revealed it had taken up dollar loans as a hedge against forex shortages as it also found it difficult to obtain hard currency to fulfill external orders.
“Due to the liquidity constraints in Kenya during the year, Vivo Energy Kenya Limited had to enter into material foreign exchange borrowings and swaps that remain outstanding at year-end,” the oil marketer indicated in its annual report.
Additional data from the IMF shows manufacturing held the highest share of foreign currency loans by sector ahead of trade, transport, and communication.
In January, the IMF warned of hard currency borrowings by non-export-oriented sectors such as households and real estate, noting difficulties in accessing hard currency loans had resulted in a rise in non-performing loans in the foreign currency borrowings portfolio.
“Banks report that with the ongoing dollar shortage, FX borrowers who are unable to source for US dollars in the local market have been offering repayment in shilling, effectively defaulting on the loans, and contributing to the recent rise in non-performing loans,” IMF said in a report.
The prominence of foreign currency-denominated loans has masked growth in private sector credit over recent months as the weaker domestic exchange rate translates to a weightier loan book in local currency terms.
For instance, according to the Central Bank of Kenya, overall credit growth to the private sector grew by 13.9 percent in December 2023 from 13.2 percent in November 2023.
However, the overall credit growth adjusted for exchange rate depreciation was only up to 8.3 percent from eight percent over the same period.
“Part of the reason is purely because of the exchange rate depreciation,” CBK Governor Kamau Thugge said last week.