Foreign currency deposits in local banks have risen past the half a trillion mark for the first time, mainly driven by Kenyans sending money home to take advantage of the tax amnesty programme.
The Kenya National Bureau of Statistics (KNBS) and the Central Bank of Kenya (CBK) say in their latest reports that the foreign currency holdings stood at Sh514 billion at the end of May, having risen 17 per cent or Sh73 billion in 12 months.
“From our discussions with the banking sector players, we attribute the increase in foreign exchange deposits to the tax amnesty programme, with a number of tier three banks recording notable inflows,” said Genghis Capital macroeconomic analyst Churchill Ogutu.
“With the tax amnesty extended till June next year, we expect the foreign exchange deposits to continue the positive momentum.”
Treasury secretary Henry Rotich in 2016 offered a tax pardon to encourage fat cats holding undeclared assets overseas to bring them home by June this year, leading to a last-minute rush in May.
Mr Rotich, however, extended the deadline to June 2019, and relaxed the scrutiny on how the assets were accumulated to encourage compliance.
Bad economic times
Forex experts say that under normal circumstances foreign currency deposits grow when people are looking to secure hard currency ahead of bad economic times, meaning that it would take an extraordinary event like the tax amnesty to push them up at a time when the economy is tipped to perform better than last year.
Those who will fail to comply with the amnesty terms will face a 20 per cent penalty on the tax payable for any undeclared funds on top of the tax payable.
The CBK data on diaspora remittances also reflects the rising flows, that hit a monthly record of Sh25.5 billion ($253.7 million) in May.
Cumulatively for the first five months of the year, the remittances stood at Sh112 billion ($1.11 billion), a 52 per cent increase over the same period in 2017, when cumulative remittances stood at Sh73.6 billion ($732.7 million).
The shilling has been a beneficiary of the influx of foreign currency, appreciating by 2.7 per cent against the dollar this year, bucking the global trend that has seen the major frontier and emerging market currencies shed value against the greenback.
Other African countries’ currencies have shed value against the dollar, including Uganda (-2.6 per cent), Tanzania (-1.7 per cent), Rwanda (-0.8 per cent), South Africa (-6.7 per cent) and Nigeria (-0.5 per cent).
A strengthening of the shilling has also fuelled the build-up of foreign currency, dealers say, with companies and individuals seeking exchange gains in future taking up the greenback.
This is because there are pointers that the shilling could come under pressure in the medium term due to rising oil prices, especially if the current US-Iran geopolitical spat escalates (Iran is a major oil producer and US sanctions would hit global production levels and raise price).
“The current exchange rate, in light of the general trend across similar markets, makes for a compelling case to take a position now in case of future depreciation,” said a dealer at a commercial bank.
The build-up in foreign currency holdings has also come at a time when Kenya’s import bill is rising, which ideally would have seen the volume of foreign currency fall as importers use up reserves to pay for external orders.
Kenya’s trade deficit — the difference between imports and exports — widened by 8.7 per cent to Sh494.3 billion in the first five months of the year from Sh454.86 billion in a similar period in 2017.
That the volume of foreign currency in bank accounts has grown in spite of the higher imports is indicative of robust inflows beyond the traditional export sources, traders say, pointing at the growing share of remittances.
Official reserves held at the central bank have also remained healthy this year, even as the regulator continues to use dollars to service foreign debt and protect the shilling against volatility.
Latest data shows that by the end of last week, the reserves stood at $8.87 billion (Sh891.4 billion), equivalent to 5.92 months of import cover, compared to $7.06 billion (Sh709.5 billion) equivalent to 4.73 months of import cover at the beginning of this year.