Wealthy Kenyans and firms had piled up a record Sh922 billion in dollars by last November as they sought to preserve the value of their bank deposits amid a depreciating shilling.
This is after they accumulated an extra Sh119.24 billion in the 11 months to November 2022, in a trend that continues to put pressure on the local currency.
The Central Bank of Kenya (CBK) data shows that the deposits in foreign currency increased from Sh803.66 billion at the start of the year, representing a 14.8 percent jump.
This was the largest increase compared to the Sh58.02 billion jump in a similar period in 2021.
The deposits surge parallel with a decline in hard currency deposits held by commercial banks and the country’s official reserves, at a time the market faced issues of dollar availability in the market.
Experts say the rise of foreign deposits is, majorly, tied to the depreciation of the shilling on the back of a softened accumulation of dollar holdings by locals and companies.
“The increase has been magnified by the falling of the shilling in the last one year other than the growth in deposits which was modest over the time,” said Churchill Ogutu, an economist at IC Asset Managers.
The foreign currency deposits held by residents increased by 6.8 percent to $7.63 billion in the quarter that ended September from $7.144 billion in a similar period in September 2021, representing a $486 million increase.
This was, however, a decline from a high of $7.924 billion in July 2022.
The CBK data show shilling was exchanging at an average of 122.45 units to the dollar at the end of November, having depreciated by 8.2 percent from 113.14 at the start of the year, pushed by increased demand of forex by importers than the supply.
However, it appreciated against the sterling pound and the euro by 3.4 percent and 0.8 percent, respectively over the 11 months.
The weakening, which began during the pandemic has heightened Russia and Ukraine conflicts making investors and companies seek the dollar seen as a safer asset.
Businesses from diverse sectors last year also complained of difficulty in accessing the dollar in quantities they wanted, forcing them to wait for days to weeks to accumulate the funds they require to make payments to their overseas partners, hitting their business plans.
This means firms and individuals with dollar-based accounts were hedging against further weakening by stocking up dollars or holding on tightly to their greenback reserves under speculation of continued weakening, leading to fewer withdrawals from dollar-based accounts.
Over the same period, foreign exchange reserves held by commercial banks declined by 20.4 percent or $907 million to $3.55 billion in September from $4.457 billion.
Official reserves held by the CBK also decreased by 19.1 percent or $1.844 billion to $7.788 billion over the period.
The increase in residents’ foreign currency deposits and the decline in the country’s official and bank stockpile indicate the struggle to access dollars witnessed last year.
It also shows some companies and individuals preferred to sit on the dollars on speculation of continued weakening of the shilling.
Manufacturers complained earlier in the year that the shortage of dollars forced them to buy the greenback at a premium to the official CBK’s average exchange rate.
Getting adequate dollars proved difficult for some traders due to banks not being willing to sell to each other, making it hard for smaller players to fulfil their orders from clients.
Over the period, the net foreign assets of banks and non-banking financial institutions were in a negative position in November at Sh25.57 billion, from a net foreign assets deficit of Sh11.04 billion in January 2022, highlighting the dollar shortage.
It has been widening from a positive position of Sh316 million in March 2021.
Net foreign assets refer to the net total of foreign assets owned by a country’s monetary authorities and banks, minus the foreign liabilities of those entities.
The shortage is also the product of increased dollar demand driven by increased shipments of raw materials and equipment in the wake of the recovering economy and local companies disbursing dividends to foreign investors.
This was also worsened by foreign investor outflows from the securities markets due to rising interest rates in the developed markets and dollar currency appreciation.
The dollar unavailability saw banks borrow from the accounts dollar–denominated accounts leading to the widening spread in the pricing of the foreign currency by a margin of more than Sh12 in order to cover for price risk.
The banking regulator also directed lenders to impose a daily cap on dollar purchases as firms struggled to obtain adequate forex to meet their obligations.
Servicing costs for dollar-denominated loans have gone up for the government due to the further weakening of the shilling, which has raised the cost of buying the greenback locally to pay external lenders and putting pressure on the government reserves.
Foreign currency debt has increased by Sh185.3 billion to Sh4.36 trillion in October from Sh4.17 trillion recorded in December despite a decline in the amount of dollar-debt from $36.90 billion to $35.93 billion due to repayment.
The weakening of the Kenyan currency also means gains for expatriates and locals, and exporters of agricultural products such as tea, coffee and horticulture who are largely paid in dollars as they will end up earning more.