Kenyans withdrew 34.2 billion shillings from their dollar accounts in two months as confidence in the local currency increased.

Data from the Central Bank of Kenya (CBK) shows that by the end of May, foreign currency deposits had fallen to 745 billion shillings from a high of 779.8 billion shillings in March, a sign of confidence growing in the shilling which had been battered by the negative effects of the pandemic.

Wealthy individuals and businesses had previously converted most of their wealth into dollars to hedge against the weakening shilling, scared of a tough business environment with a volatile exchange rate.

They parked the money in the banks until the financial storm was over. Between April and May, foreign currency deposits in Kenyan banks fell by 17.3 billion shillings, according to data from the CBK.

Deposits had previously fallen by 16.9 billion shillings as customers began to dip into their dollar accounts following a period of exchange rate stability.

Sarah Wanga, head of research at AIB Capital, said people tend to flee to less risky assets during a crisis such as the Covid-19 pandemic. “They would ideally reduce their holdings of dollar shillings, expecting the dollar to appreciate as during this period hard currencies tend to gain,” she said.

The country’s hard currency pot received a big boost after the International Monetary Fund (IMF) and the World Bank disbursed loans to Kenya.

Foreign currencies are essential for balance of payments needs, such as the payment of foreign loans and the import of essential inputs such as oil.

Kenya also issued a $ 1 billion (108 billion shillings) Eurobond, which raised the country’s official foreign exchange reserves to $ 9,590 million (Sh1.34 trillion) on July 8. It was the highest level of foreign exchange reserves since July last year, enough to cover the country’s imports for 5.86 months.

“This meets the CBK’s legal requirement to strive to maintain at least four months of import coverage, and the East African Community (EAC) region’s convergence criteria of 4 , 5 months of import coverage, “CBK said.

Churchill Ogutu, head of research at Gengis Capital, said the reduction in foreign currency deposits (FCYs) was informed by expectations of the inflows of external debt financing at the time.

This, he said, was cemented by the fact that deposits began to decline in April with the initial disbursement of IMF funds.

“So my view is that locals who had FCY deposits reduced their holdings in anticipation of the shilling appreciation on foreign debt financing inflows,” Ogutu said.

Having sufficient reserves is good for the shilling. This means that the local currency is not under pressure where there is so much that it runs after less hard currencies.

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