Cash supply grows at slowest rate since post-poll violence

Money Markets

A man takes out some bank notes from a wallet. The growth of money supply fell to about 6.4 per cent by end of July, Stratlink data shows. PHOTO | FILE 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• Data shows currency in circulation growing less than 2009 that forced the policy central bank rate (CBR) and the cash reserve ratio (CRR) cuts.
• The statistics on money supply mirror concerns by the Central Bank of Kenya (CBK) that private sector credit is slowing down, which is a threat to economic growth.

The amount of money circulating in Kenya’s economy is growing at the slowest levels in seven years, threatening commerce and affecting the performance of capital markets.

Data compiled by research and risk firm Stratlink Africa shows the rate of growth of money supply fell to about 6.4 per cent by the end of July, 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 Central Bank of Kenya (CBK) that private sector credit is slowing down, which is a threat to economic growth.

The CBK’s 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.

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.

“Slowed growth in money supply has created room for monetary expansion while keeping inflation pressures at bay. 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, compared to 6.4 per cent and 7.2 per cent in the same period in 2015 and 2014, respectively,” said Stratlink in its October 2016 Africa markets update.

In economic terms, 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 lowering 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.

READ: CBK's rate cut tips the scales in favour of cheaper loans

It, however, carries the risk of pushing up the cost of living (inflation), causing instability of the exchange rate and lately, cutting bank loan rate since the CBR is the benchmark.

ABC Capital corporate finance manager Johnson Nderi said 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.

“People are borrowing less. Banks have also become more cautious over the rising non-performing loans, and the market has also had to take account of the effects of the collapse of three banks recently,” said Mr Nderi.

The stock market, Stratlink pointed out, has tended to track a similar path to that of money supply, with the main index rising when money supply rises and falling when the supply does.

The past year has seen the Nairobi Securities Exchange (NSE) drop into a bear run that has seen the main index sink to a five-year low, whereby the NSE 20 share index is 20 per cent worse off in the year to date.

Over this time, the MPC has been pursuing a tightening monetary policy, which left the market to be majorly driven by foreign investors as locals stayed away.

Stratlink, however, forecast some hope of a revival if the MPC does another rate cut in the near future, which could be on the cards as next year elections approach.

“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 election season,” said Stratlink.