Depositors withdraw Sh34b from dollar accounts as Shilling firms
Kenyans withdrew Sh34.2 billion from their dollar accounts in two months as confidence in the local currency went up.
Data from the Central Bank of Kenya (CBK) shows that by end of May, foreign currency deposits had dropped to Sh745 billion from a high of Sh779.8 billion in March, a signal of growing confidence in the shilling which had been battered by the negative effects of the pandemic.
Wealthy individuals and businesses had earlier converted most of their wealth into dollars to hedge against the weakening of the shilling, spooked by a tough business environment with a volatile exchange rate.
They parked the money in banks waiting for the financial storm to end. Between April and May, foreign currency deposits in Kenyan banks reduced by Sh17.3 billion, data from CBK shows.
The deposits had earlier dropped by Sh16.9 billion as customers began to dip into their dollar accounts following a spell of stability of the exchange rate.
Sarah Wanga, head of research at AIB Capital, said people tend to flee to less risky assets during a crisis such as the Covid-19 pandemic. “They would ideally reduce their holdings of shillings to dollars expecting the dollar to appreciate because during this time hard currencies tend to gain,” she said.
The country’s pot of hard currencies received a major boost after the International Monetary Fund (IMF) and the World Bank disbursed some loans to Kenya.
The foreign exchange if critical for balance of payment needs such as payment of external loans and importation of critical inputs such as oil.
Kenya also issued a $1 billion (Sh108 billion) Eurobond, which increased the country’s official reserves of foreign currency to $9,590 million (Sh1.34 trillion) by July 8. This was the highest level of foreign currency reserves since July last year, enough to cover the country’s imports for 5.86 months.
“This meets the CBK’s statutory requirement to endeavour to maintain at least four months of import cover, and the East Africa Community (EAC) region’s convergence criteria of 4.5 months of import cover,” the CBK said.
Churchill Ogutu, the head of research at Genghis Capital said the reduction of foreign currency (FCY) deposits was informed by expectations of the-then external debt financing inflows.
This, he said, was cemented by the fact that the deposits started to decline in April with the initial disbursement of IMF funds.
“Thus, my view is that the locals who had deposits in FCY reduced their holdings in anticipation of the Shilling’s appreciation on external debt financing inflows,” Ogutu said.
Having adequate reserves is good for the Shilling. It means the local currency is not under pressure where there is so much of it is chasing fewer hard currencies.