If you have been on social media the past week or so you have probably seen this video asking why the government just can’t print more money to pay off its huge debts.
Obviously the video was made on a light note. However, it is important for us to examine the underlying questions being raised. Why is Kenya broke? And why can’t we print money to pay off the huge debts. According to the Central Bank of Kenya Report on public debt Kenya owes Ksh 7.7 Trillion as per June 2021, meaning every Kenyan owes approximately Ksh 138,631.
Effects of printing more money to the economy
First the money circulating in the Kenyan Economy must be equal to our country’s output. Printing more money that is greater than our Gross Domestic Product means more money in circulation. This would cause hyperinflation leading to increase of general prices of goods and services in Kenya. The shilling would lose more value in exchange of dollars and other foreign currencies due to the increased supply of money in the economy that does not meet demand of money. Basically the supply of money must equal money velocity (money transactions) in a productive economy. The Central Bank of Kenya can only print more money when the demand of money in the economy exceeds the supply of money. In simple terms when Kenya’s Gross Domestic Products grows to balance the money supply and money velocity.
How Monetary Policy controls money supply
Central Bank of Kenya issues bonds to raise money for developments or pay borrowed debts. The Central bank implements monetary decisions to control supply of money in the economy. It is mandated by the government to influence economic growth and prices of goods and services using monetary tools. For inflation rate to be low the general prices must be stable.
Central Bank of Kenya controls money in circulation using tools like:
- •Open Market Operations – This is the most widely used monetary tool in Kenya. When the Central Bank of Kenya decides to increase money in circulation in the economy, it buys long term securities from investors like commercial banks, institutions and individual investors. When the Central Bank of Kenya decides to reduce money supply it sells government bonds to investors and raise money to operate the government and pay off debts. Economists discourage this kind of domestic borrowing by government as it increases interest rates by commercial banks making it difficult for businesses to access lending for business growth. This has a ripple effect to the economy as it leads to slow economic growth.
- •Reserve Requirements – Central Bank of Kenya currently requires commercial banks to keep a Cash Reserve Ratio of 5.25 per cent of their total deposits at the CBK Reserve. Central Bank may increase the money supply by lowering the reserve requirements for commercial banks therefore lower interest rates that allows lending of more money to businesses and consumers.
- •Discount Rate – Central bank of Kenya is the lender of last resort for commercial banks. To control money supply it increases or lowers the lending rates to banks. As the lender of last resort, Central Bank reduces discount rate to increase money supply by giving banks a greater incentive to borrow money and grow their reserves to lend businesses. To decrease money supply in the economy, Central bank increases the discount rate.
Have you heard about Qualitative Easing?
There are unique circumstances under which the Central Bank of Kenya could print more money. You may have heard of Economists or policy makers talk about quantitative easing. The Central Bank of Kenya can print more money and buy long term securities in the Open Market to increase more money in supply. When the CBK purchase bonds, interest rates reduce driving lending to businesses and consumers. This generally increases money circulating in the economy. Even though this is unconventional monetary policy countries implement it when there is a financial crisis to spur economic growth.
How Fiscal Policy controls money supply
Fiscal Policy is one of the commonly used tool to manage Kenya’s economy because it affects output (Gross Domestic Product) produced directly by controlling aggregate demand and supply for money. This is an important tool for the stabilization of the economy.
The government can increase the money circulating in the economy through government spending and taxation. The Big 4 Agenda; manufacturing, food security, affordable health care and affordable house are some of the government by jubilee administration to increase government spending, employ Kenyans directly or indirectly and put more money in the pockets of Kenyans to reduce poverty and influence economic growth.
During budget making process the National Treasury proposes taxation measures to raise funds and the Finance Bill is read and approved by Parliament of Kenya. When the government increases taxes and levies it collects money circulating in the economy to finance developments and spending. This action reduces money supply. There have been public outcry by Kenyans that the high taxes especially the fuel levies have increased the cost of living. If the situation is not well monitored it could lead to increase in prices and high inflation rate which will have negative effects to economy.
Can Kenya print more money to pay her debts
There are people of the school of thought that Central Bank of Kenya should print more money to pay debts instead of over taxing the already overburdened tax payers and businesses. Important to note is that Chinese debts and or any other debts are issued in dollars because it is stable and globally accepted for international trade. Borrowed debts externally to finance Kenya’s deficit budget can only be paid back in dollars not shillings. Where does this leave us as a country?
This means Central Bank has to buy dollars in circulation through foreign exchange rates or raise the dollars through international trade. We can also get dollars from foreign reserves in Kenya through foreign remittances, export trade and tourism.
Related:
Kenya Remits KSh 82.7 Billion to China, Resuming its Debt Repayment
Kenya’s External Debt Climbs to $37 Billion in First Six Months of 2021
