Wealthy Kenyans and businesses’ stockpile of dollars crossed the Ksh1 trillion ($7.24 billion) mark for the first time in March amidst a biting shortage that has roiled the foreign exchange market.
Central Bank of Kenya (CBK) data show that foreign currency bank deposits hit a historic high of Ksh1.06 trillion ($7.67 billion) as individuals and big companies sought a safe haven for their wealth.
This is an increase of Ksh70.5 billion ($510 million) from the Ksh987.7 billion ($7.15 billion) that Kenyans had stashed in dollar accounts in February, amounting to savings of Ksh2.2 billion ($15.92 million) daily in the period.
The increase comes despite a number of pronouncements by President William Ruto to urge Kenyans to release their dollar stockpile amid a weakening shilling. According to CBK data, the shilling exchanged at a mean of 137.95 against the dollar.
The freefall of the shilling is despite the existence of a government-backed deal to import fuel on credit from the Gulf nations which was meant to reduce the demand and arrest the depreciation.
Investors however have continued to open foreign currency-dominated accounts in the hope of making gains from the sharp fall in the shillings against major currencies like the dollar and the pound. This is even as the IMF noted that the forex interbank market, which for long had been dysfunctional, has improved.
“The functioning of the foreign exchange is gradually improving,” said Haimanot Teferra who led the IMF mission to Kenya during the fifth review of the 38-month programme that the country has with the Washington-based institution.
Part of IMF’s conditions for the Ksh484.9 billion ($3.52 billion) programme is for Kenya not to tinker with the exchange rate but instead let it act as a shock absorber.
Bulk buyers also sought a buffer of dollars following a shortage of the US currency, which was blamed on panic buys and the interbank forex market that had become dormant in recent years.
The shortage had forced industrialists to start seeking dollars daily and from several lenders for their monthly hard currency needs as the scarcity put a strain on supplier relations and the ability to negotiate favourable prices in spot markets.
Much of the jump in forex bank deposits rode on savings, with little influence from the strengthening of the greenback against the shilling.
Critics blame CBK governor
Critics, including analysts, have blamed the outgoing CBK Governor Dr Patrick Njoroge for the failure of the forex interbank market. Dr Njoroge has been blamed for restrictions which the CBK boss reckons were aimed at curbing speculation in the foreign exchange market.
A banker, who can’t be quoted as he is not allowed to speak to the media, blamed Dr Njoroge’s capricious interpretation of the banking regulation for creating the current forex crisis.
“Customers holding the dollar believe they deserve an even better deal as they exchange the Shilling, but no bank wants to dare conclude such transactions that may see the Shilling lose value in large quantum for fear of provoking the governor’s ire,” said the banker.
The governor, the bank official said, would routinely reverse completed willing-buyer-willing-seller transactions and further punish them with cash penalties in the millions for “speculating against the Shilling.”
Dr Njoroge’s term will end on June 18 and he most likely be replaced by Dr Kamau Thugge who awaits vetting by the National Assembly.
The Kenyan shilling’s sharp depreciation against the dollar led to a loss of faith in its strength, with some Kenyans resorting to stashing dollars to maintain their purchasing power.
But it is also possible that listed companies have been stockpiling dollars ahead of dividend payments, according to Churchill Ogutu, a financial analyst.
The stockpiling of dollars has attracted the attention of the State House, with President William Ruto warning those holding onto the greenback of losses.
“I’m happy that the players in that sector, including our banks, are coming forward and are working with the CBK so that we can again take charge of our market and that it is not distorted by brokers,” Ruto said on March 12.
“For the people who work numbers, I’m giving you free advice that those who are holding dollars you shortly might go into losses. This market is going to be different in a couple of weeks,” he added.