Dollar deposits hit record Ksh.834B

Foreign currency deposits reached a new all-time record Ksh.834 billion in April as Kenyans increased their holding of foreign exchange as a buffer against a weakening Shilling.

New data from the Central Bank of Kenya (CBK) shows the foreigh currency deposits which are mostly denominated in dollars beat their previous record of Ksh.811 billion in March.

The foreign currency deposits posted a 9.4 per cent annualized rate of growth in April reversing a deceleration in the accumulation of the hard currency which had slumped to 3.2 per cent and four per cent in February and March respectively.

Nevertheless, the rate of foreign currency accumulation was higher year over year in August and September last year at an equal 16.1 per cent.

The preference to hold deposits in foreign currency, especially dollars is pegged on a strengthened green buck which has been anchored primarily on the omgoing Federal Reserve interest rate hike cycle.

Higher interest rates in the US has made it more appealing to hold dollar denominated assets as mirrored in foreign investor portfolio outflows in emerging and frontier markets such as Kenya including stocks.

The preference to hold dollars has had the equal and opposite effect of weakening other world currencies including the Kenya Shilling which was quoted at Ksh.117.67 against the US dollar at the start of trading on Monday.

So far in 2022, the Kenyan shilling has lost ground on the US dollar by an estimated 4.2 per cent.

Domestically, a stronger dollar flanked by a rising import bill amidst high global commodity prices has created a dollar shortage as the demand for the green buck outstrips available supply.

The development has seen local banks call for a further tightening in monetary policy by the Central Bank of Kenya (CBK) to incentivise the holding of shilling denominated assets and prop the Shilling.

“The cure is to make holding Kenya shilling assets more valuable than the dollar. Interest rates in the US are rising, raising risks in emerging markets as witnessed in the ongoing capital reversal. We must make it more valuable to hold the Kenya shilling,” Kenya Bankers Association (KBA) Chairman John Gachora said on Thursday.

In acknowledgement of the high cost pressure, the CBK tightened its monetary policy last month by lifting its benchmark interest rate to 7.5 per cent from seven per cent.

World over, other Central Banks have been tightening monetary policy to deal with runaway inflation including the Bank of England (BOE) and the European Central Bank (ECB).

This action is further expected to anchor the holding of foreign currency and likely lift the FX deposits in the country from the current high Ksh.834 billion.