Cash in circulation at 6-year low after Sh1,000 note ban

The Central Bank of Kenya building in Nairobi. FILE PHOTO | NMG 

By OTIATO GUGUYU
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Summary

• CBK data shows Sh60bn cannot be traced with big chunk lost June-September.
• The record low cash in circulation comes in a period when the economy has faced a cash crunch that has been reflected in job cuts and stagnant wages for employees and a slowdown in businesses.
• The biggest drop in cash circulating outside banks came in the four months to September, when money outside the institutions fell by Sh65 billion.

The amount of cash in Kenyans’ pockets dropped to a six-year low in September with the biggest drop emerging in the period when the Central Bank of Kenya (CBK) retired old Sh1,000 banknotes.

CBK data shows that the cash circulating outside banks dropped to Sh157.7 billion in September — the lowest since April 2014. September was the deadline for all Kenyans to convert their old Sh1,000 notes to the new currency that was unveiled on June 1.

The record low cash in circulation comes in a period when the economy has faced a cash crunch that has been reflected in job cuts and stagnant wages for employees and a slowdown in businesses. The biggest drop in cash circulating outside banks came in the four months to September, when money outside the institutions fell by Sh65 billion.

Money in demand deposit accounts — cash kept in banks but which is available on demand — remained unchanged at Sh1.19 trillion in May and September, suggesting that there was no shift in currency from peoples’ pockets to short-term savings.

Analysts are puzzled by the drop given that CBK had announced in October that notes worth Sh7.4 billion were not exchanged, rendering the cash invalid, amid suspicions that the billions of shillings in unexplained wealth were tied to illicit activities.

George Bodo, a director at Callstreet Investor Relations — a consultancy and research firm — said that CBK’s announcement on money supply after the withdrawal of the old Sh1,000 notes had raised questions. He argued that CBK announced the withdrawal of older Sh1,000 notes worth Sh217 billion on June 1 and revealed that it had pumped Sh149.6 billion of the new currency in the four months to the end of September, leaving a balance of Sh67 billion. “Do we want to say that there were some Sh59.9 billion of the old notes that were delivered without a corresponding entry?” Posed Mr Bodo in a commentary published by the Business Daily. He arrived at the figure after deducting the Sh7.4 billion that the CBK described as illicit cash. “The only explanation to this puzzle could be that maybe the apex bank (CBK) reissued the balance in other lower denominations, in which case they need to come clear”. CBK failed to respond to e-mail questions from the Business Daily on the factors behind the Sh65 billion drop in cash circulating outside banks between May and September.

On June 1, the regulator set September 30 as the deadline for everyone to convert their old Sh1,000 notes into new ones through the process known as demonetisation. Those exchanging large amounts were required to explain how they acquired the cash. The move was designed to stop the flow of proceeds of crime, like corruption and counterfeiting of bank notes. The process of invalidating the old notes saw commercial banks flag some 3,172 transactions as suspicious and reported them to the authorities during the conversion exercise over the four months.

“Demonetisation could have reduced money outside the banks. What of failure by government to pay suppliers? That could have removed lots of money from our pockets or banks where we keep it,” said Prof XN Iraki, an economist at the University of Nairobi.

Business owners have accused both the national and county governments of delaying payments to suppliers worth more than Sh150 billion. Firms complain that the government takes years, rather than the normal three months, to settle bills for goods and services supplied to it, mainly due to below-target revenue collection and pressing expenditure needs like repaying public debt that now routinely gobble up half of the tax collections.

This has hurt businesses that trade with the government. As a result, some have cut back operations, shed jobs or have had to face auctioneers after failing to service their loans.

Companies are struggling with reduced sales and profits in a soft economy that has persisted since 2017 when Kenya went through a bruising General Election followed by a repeat presidential election.

Key firms have put on hold hiring of new staff in an economy that has also witnessed a string of job losses in recent months affecting nearly all sectors, a development that has worsened Kenya’s economic situation and cut the flow of cash. This is reflected by the high number of firms listed at the Nairobi Securities Exchange (NSE) issuing profit warnings.

High-net worth investors and companies with billions in shillings in fixed accounts have opted not to invest in expanding businesses or starting new ventures, which ultimately have the effect of putting money in people’s pockets and boosting circulation of cash outside banks as well as short-term deposits.

CBK data shows that long-term and fixed deposits associated with the wealthy and cash-rich corporates rose slightly from Sh1.34 trillion in May to Sh1.4 trillion in September. Foreign currency deposits also rose from Sh577.9 billion to Sh607.4 billion, an indication that the wealthy are protecting their value and hedging against the local currency.