Why end-year cash in circulation grew slowest in nine years

GRAPHIC | STANSLAUS MANTHI | NMG   

By TIMOTHY ODINGA More by this Author

The amount of cash circulating in the economy in December grew 2.6 percent, the

slowest in nine years amid a slowdown in business activities in the wake of drought and sky-high inflation.

Data from the Central Bank of Kenya (CBK) show that cash outside banks in December increased by Sh6.6 billion to close the year at Sh258.8 billion, reflecting a 2.6 percent growth in the festive month.

At 2.6 percent, this is the slowest growth in cash circulation since 2013 amid the push by the new administration to turn around the economy.

The muted growth in cash in consumers’ pockets comes amid the worst drought in 40 years, hurting the agro-based sector that accounts for more than a fifth of Kenya’s GDP and is the country’s top employer.

This reduced the earnings of workers in the sector, ultimately hurting the income of other firms via reduced demand. Poor weather combined with the effects of Russia’s war in Ukraine pushed inflation to multi-year highs, forcing workers to reduce their shopping baskets and cut back on non-essential items such as beer and airtime.

The reduced consumer spending lowers the earning power of firms that could be forced to cut payments on their value chains, which include suppliers and workers.

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GRAPHIC | STANSLAUS MANTHI | NMG

“Disruptions as a result of the General Election, inflation and firms not fully recovering from Covid-19 while firms and government spending reduced led to a slower growth in cash circulation,” said Job Wanjohi, the head of research and policy at Kenya Association of Manufacturers (KAM).

Average annual inflation stood at 7.64 percent last year compared to 6.11 percent in 2021.

Cash in circulation, which measures the liquidity of firms and households for money available for spending, hit a record high of Sh267.7 billion in July last year when Kenya was at the peak of the electioneering period.

After the August 9 General Election, the amount of cash outside the bank fell for three consecutive months before recording a marginal rise in November when it stood at Sh252.2 billion.

The amount of cash in consumers’ pockets tends to rise by higher margins in December following the Christmas and New Year festivities.

It grew 6.2 percent in December 2021, 3.92 percent a year earlier and 6.59 percent in 2016.

→ tnyabera@ke.nationmedia.com