Bags full of money [Courtesy] Money stashed by Kenyans in hard currency accounts touched a record high of Sh798.7 billion in November last year, as jittery investors rushed to hedge their funds from being eroded by a weakening shilling.
This was an increase of Sh84.6 billion, or 12 per cent, compared to Sh714.1 billion that was in foreign deposit accounts in the same month in 2020, data from the Central Bank of Kenya (CBK) shows.
Cash in foreign currency accounts has been increasing ever since the country recorded its first case of Covid-19 in March 2020 , with the Kenyan shilling taking a beating as more dollars left the country.
Because of its stability, the dollar, like gold, is preferred by investors particularly the rich, in times of volatility such as in a pandemic.
The shilling has been on a downward spiral, weakening from a mean of 102.5 in March 2020 to 113.41 by end of trading yesterday. November’s was the highest level of foreign currency deposits since February 2021, when the amount held in dollar accounts touched a high of Sh780 billion.
Analysts reckon that this might just be a hedging mechanism against currency depreciation, with the greenback gaining significant ground against other currencies.
“My initial thinking would be that at least you want to hedge so that if, for instance, you need to make a payment, you have the necessary currency to effect it without having to be affected by fluctuations,” said Einstein Kihanda of ICEA Lion in an earlier interview.
Foreign currency deposits are likely to rise further following the continued weakening of the shilling.
Analysts have also said there is a parallel forex market where the interbank rate – the rate at which banks buy from each other – is much higher than the one being reflected on their websites.
Since the outbreak of Covid-19 , which devastated financial markets in frontier countries such as Kenya, wealthy investors have converted their cash into dollars as a hedge against exchange rate volatility.
On March 12, 2020 a day before the country recorded its first case of the viral disease, the local currency was trading at Sh102.47 units against the dollar.However, since then, the shilling has been in free-fall due to a combination of factors, including poor export and tourism earnings.To shield themselves against exchange rate volatility, banks have also been taking a lot of long-term dollar-denominated loans from development partners.Equity Bank recently said it had not […]