According to data from the Central Bank, Kenya’s money supply is growing at the slowest levels in seven years, threatening economic growth and development and also affecting the performance of capital markets.
The rate of growth of money supply fell to about 6.4 per cent by the end of September, a level last seen in April 2009 when the economy was still recovering from the aftershocks of post-election upheaval—probably bearing out a current complaint by traders about low business.
The statistics on money supply mirror concerns by the CBK that private sector credit is slowing down, which is a threat to economic growth. There has been concerns that the rate of credit growth has been growing at decreasing rate
Monetary Policy Committee (MPC) cited this as a major reason for cutting the base lending rate by 50 basis points to 10 per cent on September 20, with lower inflation providing space to do so and quoted the same as the reason for retaining the base rate at 10 percent during last MPC meeting.
In the 2009 lows, the CBK cut both the policy central bank rate (CBR) and the cash reserve ratio (CRR)—the latter being the portion of deposits kept at central bank—to rescue the economy.
Growth in money supply stood at 6.4 per cent in July 2016, 110 basis points lower than the lows witnessed in 2009. Inflation has also been relatively low averaging 6.2 per cent between January and August 2016, but the current drought and marginal depreciation of Ksh has seen the rate of inflation rise to 10.42 percent.
Money supply refers to cash in banks and individuals’ hands, as well as instruments that are easily convertible into cash such as Treasury bills and bonds.
The retention of the CBR, commonly referred to as loosening the monetary policy, is meant to spur circulation of cash in the economy through banks, which encourages spending and therefore economic growth
It, however, carries the risk of pushing up the inflation, causing instability of the exchange rate and lately, cutting bank loan rate since the CBR is the benchmark.
The lower money supply was partly because people were borrowing less, both out of caution by banks when lending and private sector pessimism over the prospects of the economy with an election fast approaching. Any form of market price control, whether in the form of an interest rate cap of otherwise, will be subsequently followed by a shortage.
The commercial banks have retreated to their safe zones and are only lending to clients with low risk such as major corporations or the government. SMEs and personal loans applicants without collateral are being ignored and this has brought credit-crunch criteria and subsequent leading to massive layoffs.
Historically, the market’s performance has mimicked trends in growth of money supply and the slash in the benchmark rate is expected to mitigate the market’s downtrend especially ahead of the upcoming August elections.