Kenya’s banking sector is experiencing a significant boost as dollar deposits in commercial banks rose by Sh61 billion during July, reaching a remarkable Sh1.246 trillion ($8.47 billion). This surge, reported in the National Treasury’s Draft 2023 Budget Review and Outlook Paper, reflects the ongoing trend of dollar deposit growth driven by a weakening Kenyan shilling.
Compared to the same period the previous year, these deposits have grown by a substantial 37.8 percent, indicating a doubling of the growth rate seen in July 2022.
Economists attribute this rapid expansion to the steady depreciation of the Kenyan shilling against the US dollar, with the local currency weakening by 18 percent over the past year. This depreciation has led to an increase in the value of dollar holdings when converted to shillings, despite the quantity of deposits remaining relatively stable.
July’s Sh61 billion increase in the value of dollar deposits followed a noteworthy Sh93 billion surge in June. So far in 2023, these deposits have grown by an impressive Sh325.3 billion, equivalent to $2.2 billion.
A key observation is that approximately 70 percent of Kenya’s dollar deposits belong to corporate entities, with the remainder held by households. This suggests that the majority of these funds are not held for speculative purposes.
Bulk buyers have been proactively accumulating dollar reserves as a response to a US currency shortage experienced in the first quarter of the year. This shortage arose due to complications in the interbank forex market, which had been relatively inactive in recent years. These strategic moves also serve as a hedge against potential forex losses, considering the ongoing depreciation of the shilling.
Encouragingly, the current account deficit has narrowed, measuring the gap between Kenya’s forex inflows and outflows. In June 2023, the current account balance decreased by 20.6 percent to $4.63 billion (4.4 percent of GDP), down from $5.83 billion (5.1 percent of GDP) in June 2022.
This positive shift is attributed to several factors, including reduced imports, increased exports of goods and services, and a surge in diaspora remittances.
Kenya’s diaspora community demonstrated its strength as remittances reached a record monthly high of $378.1 million (Sh55.6 billion) in July, subsequently settling at $354.3 million (Sh52.1 billion) in August.
Cumulatively, inflows for the 12 months leading up to August 2023 amounted to an impressive $4.12 billion, marking a 3.2 percent increase compared to the $3.99 billion recorded during a similar period in 2022.
This surge in dollar deposits, coupled with a narrowing current account deficit, underscores the resilience of Kenya’s financial sector amid currency fluctuations and evolving economic dynamics. Analysts are closely monitoring these developments as Kenya positions itself in the global financial landscape.
Photo Source: Google
By: Montel Kamau
Serrari Financial Analyst
21st September, 2023
