The value of foreign currency deposits held by Kenyans in local commercial banks hit a 17-month low in December last year when it stood at Sh1.26 trillion, levels last seen in July 2023 when the holdings stood at Sh1.25 trillion, new data shows.
The disclosures from the Kenya National Bureau of Statistics indicate that the deposits, expressed in local currency terms, recorded a Sh52.8 billion month-on-month dip last December from the Sh1.31 trillion held at the close of November.
The 4.03 percent drop in the mostly US dollar deposits came during a period when the local shilling remained largely stable, exchanging at an average of Sh129.30 against the greenback after having recovered from the free fall witnessed in 2023.
Ken Gichinga, the chief economist at business analytics consulting firm Mentoria Economics, said that the long-standing stability of the Kenyan currency has extinguished the motivation to continue holding foreign reserves.
“The exchange rate has been remarkably stable since February last year and this has caused the incentive to hold foreign reserves to significantly diminish. There is also the speculation that the US Federal Reserve could further lower interest rates which could, in turn, further strengthen the Kenyan currency,” Mr Gichinga told this publication.
During the 17 months, the deposits stood at their highest in January last year when they hit Sh1.603 trillion before dropping to Sh1.504 trillion the following month and further down to Sh1.315 trillion in March.
The exchange rate in January had hit a peak of Sh161 against the dollar, coming on the back of sky-high local and global inflation as well as inhibitive lending rates.
Earlier in 2023, speculation on the weakening of the shilling had led to a large build-up of hard currency in banks as both corporates and households moved to seek a hedge against the weakening domestic unit at the time.
Foreign currency deposits, expressed in local currency terms, for instance, rose from Sh946.5 billion to Sh1.5 trillion between January and December 2023.
The weakening of the local currency by more than 20 percent in 2023 had led to not just higher demand for hard currency, but also a rise in dollar deposits in local monetary terms.
Risks surrounding the June 2024 Eurobond maturity served to drive investor jitters, taking the performance of the shilling to its worst levels in nearly three decades as some speculated a devaluation of the unit in the event of default, helping lift the demand for dollars.
