Money market liquidity increases on government payments

Central Bank of Kenya (CBK). FILE PHOTO | NMG

By CHARLES MWANIKI
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Summary

• The interbank rate, which is an indicator of liquidity levels in the banking sector, has gone down by 1.4 percentage points to 2.34 percent since the beginning of this month, indicating reduced demand for funds through this window.
• The interbank window is used by banks to borrow from each other on an emergency basis, usually to make sure they meet their daily cash ratios.
• Last week, the Central Bank of Kenya (CBK) attributed the rising liquidity in the market to government payments.

Liquidity levels in the money market have gone up in the past week supported by government payments, which bodes well for the ongoing Treasury bond sale that closes on Tuesday.

The interbank rate, which is an indicator of liquidity levels in the banking sector, has gone down by 1.4 percentage points to 2.34 percent since the beginning of this month, indicating reduced demand for funds through this window.

The interbank window is used by banks to borrow from each other on an emergency basis, usually to make sure they meet their daily cash ratios.

Last week, the Central Bank of Kenya (CBK) attributed the rising liquidity in the market to government payments.

The volume of cash flowing through the banking system as a result of government payments is likely to go up even further now that President Uhuru Kenyatta has signed the 2020/2021 County Revenue Allocation Bill into law, which has paved the way for the National Treasury to release billions of shillings to counties.

These funds had been held up by the dispute in the Senate over the formula to be used in allocating county funds in the next five years.

Once disbursed by the Treasury in coming days, part of this money will go towards payments of pending bills to contractors and suppliers, normally done through the banking system.

Other than easing cash supply worries for banks, a liquid market also helps the Treasury in its efforts to raise funds through the domestic debt market.

This month, the government is seeking Sh50 billion through a reopening of 20-year and 25-year bonds first sold in 2011 and 2018 respectively, with the sale concluding on October 13.