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 then weakening domestic unit.
The value of foreign currency deposits held in local banks rose 2.5 percent to Sh1.27 trillion in April, up from Sh1.24 trillion in March, breaking a four-month decline that commenced in December last year, when the holdings hit a 17-month low at Sh1.26 trillion.
This is according to data from the Kenya National Bureau of Statistics (KNBS).
Nairobi-based economist at IC Group Churchill Ogutu opines that the rebound could have been as a result of dollar stockpile, as firms raced to cover cyclical demands, including payouts of corporate dividends to foreign investors. Most Kenyan companies pay their final dividend between May and August.
“The buildup of the foreign deposits in April could be largely due to cyclical annual demands such as payments of dividends, particularly to foreign investors with local bank accounts,” Mr Ogutu told the Business Daily in a phone interview.
“It follows that the accounts received enhanced dollar supplies at the end of the first quarter,” he added.
The KNBS also indicates that the rebound came in a month when the local shilling recorded a slight depreciation against the major world currencies, contributing to the rise in value of the foreign deposits in shilling terms.
KNBS indicates, for instance, that the mean monthly exchange rate for the Kenyan shilling against the US dollar stood at Sh129.51 in April compared to Sh129.33 in March, while the shilling’s exchange rates against the Sterling Pound and the Euro moved from Sh166.77 to Sh170.19 and from Sh139.58 to Sh145.20 respectively during the period.
The local currency also depreciated against the Japanese Yen in April to exchange at Sh89.66 compared to Sh86.74 in March.
Prior to the April rebound, the foreign currency deposits, which are expressed in local currency terms, had been on a sustained dip reflecting the stabilising of the shilling which has been on a recovery trend from the freefall witnessed in 2023.
Economic analysts had earlier opined that the long-standing stability of the local currency had extinguished the motivation to continue holding foreign reserves in banks.
In January last year, as the shilling’s devaluation hit its worst to exchange at Sh161 against the dollar, the foreign deposits hit a high of Sh1.603 trillion before dropping to Sh1.504 trillion the following month and further down to Sh1.315 trillion in March as the local currency began to stabilise.
The weakening of the shilling at the time was mostly driven by fears of Kenya's potential default on a $2 billion eurobond that was to mature in June 2024. An early partial repayment of the bond In February 2024 calmed those fears, sparking the strengthening of the local currency.
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 then weakening domestic unit.
The weakening of the shilling by more than 20 percent in 2023 had led to not just higher demand for hard currency whose value rose substantially in local currency terms.
