In the first ten months of the current year, there has been a notable increase in the value of dollar deposits in Kenyan commercial banks. This surge, amounting to Sh528.56 billion, is primarily attributed to the Kenyan shilling’s ongoing depreciation against the US dollar. This currency fluctuation has resulted in substantial capital gains for those holding dollar-denominated assets.
According to recent data from the Central Bank of Kenya (CBK), the amount of dollar deposits soared by 57%, from Sh921.05 billion at last year’s end to Sh1.449 trillion by the end of October. This growth rate is one of the highest recorded in a decade, with the last significant rise observed in 2011.
This increase in dollar reserves occurred alongside a 22% devaluation of the Kenyan shilling against the dollar, closing October at 150.56 units per dollar. The year-to-date depreciation currently stands at 24.3%. Consequently, dollar holders have seen substantial appreciation in the value of their holdings. For example, a dollar holding worth Sh1 million at the start of the year would have appreciated to Sh1.22 million by the end of October, representing a Sh220,000 increase, exclusive of any bank interest on these deposits.
While some of the increase can be attributed to actual growth in dollar savings, the shilling’s depreciation has been a significant factor in accelerating the increase in dollar deposits’ value. In the first half of the year, dollar holdings grew by 12% in actual dollar terms but showed a 29% increase in shilling terms by the end of June when accounting for the weak shilling.
This growth in dollar deposits occurs amidst challenges faced by businesses, especially importers, in accessing dollars. The market exchange rate has also seen misalignment with the CBK’s rate.
The shilling’s weakness is mainly due to the US Federal Reserve’s interest rate hikes aimed at combating inflation. These hikes have led to increased demand for the dollar in the global market, affecting the value of local currencies like the Kenyan shilling.
This situation, while benefiting dollar holders and exporters, has increased the costs of servicing foreign currency loans and importing goods. The CBK, in its recent monetary policy statement, noted that the public sector’s external debt service costs have risen, impacting the government’s fiscal consolidation efforts.
As of early July, Kenya’s external debt denominated in US dollars stood at 67.2%, with other currencies like the euro, yen, yuan, and sterling pound comprising the remainder.
In response, the CBK recently raised the base lending rate from 10.5% to 12.5%, the highest in 11 years, to address inflation and support the shilling.
Despite these challenges, recent trends in December show a slower depreciation rate of the shilling compared to October and November, offering some hope for stabilization of the local currency.