Money in circulation grows by Ksh.203 billion in four months


Money in circulation grows by Ksh.203 billion in four months

In Summary

  • The growth of broad money between March and June contained in the Central Bank of Kenya (CBK) Monetary and Finance Statistics is largely attributable to an accumulation of government securities by investors.
  • However, the increase in liquidity levels under the COVID-19 cloud is yet to be felt fully by Kenyans with private sector credit growth marking a continuous slide in recent months to 7.6 per cent in June.
  • An increase in money in supply usually points to lower interest rates and generates more investments by putting money in the hands of consumers to stimulate spending.

Money in supply within the Kenyan economy has defied the shocks of the COVID-19 pandemic expanding by Ksh.203 billion or an equivalent 30.7 per cent.

The growth of broad money between March and June contained in the Central Bank of Kenya (CBK) Monetary and Finance Statistics is largely attributable to an accumulation of government securities by investors.

Broad money in supply (M3) now stands at Ksh.3.863 trillion as of June 30 in comparison to Ksh.3.661 trillion at the end of March.

Near money/cash equivalents which represent savings accounts, certificate of deposits, marketable securities and treasury bills grew at a faster rate of 25.9 per cent or an equivalent Ksh.111 billion.

The equivalents are regarded as a key measure of liquidity levels in financial markets.

Cash and notes in circulation defined as narrow money/M1 meanwhile grew by Ksh.72 billion in the period while foreign currency deposits expanded by Ksh.20.2 billion in the four months.

M2 which represents cash in circulation and short term bank deposits meanwhile expanded by Ksh.183 billion in the review period.

An increase in money in supply usually points to lower interest rates and generates more investments by putting money in the hands of consumers to stimulate spending.

However, the increase in liquidity levels under the COVID-19 cloud is yet to be felt fully by Kenyans with private sector credit growth marking a continuous slide in recent months to 7.6 per cent in June.

Commercial banks are expected to begin issuing their half year results from this month revealing the absolute extent of new lending in six months to June.

So far, the government has been the greatest beneficiary to the expansion of cash in circulation as investment in debt soar.

The subscription to Treasury bills for instance stood at 152.6 per cent in the first half of 2020 which bonds attracted interests of 119.6 percent representing investor bids of Ksh.916.7 billion and Ksh.414.7 billion respectively.

Subsequently, yields on the 91, 182 and 354 T-Bills has come down to 6.7, 7.4 and 8.2 per cent respectively from 7.2, 8.2 and 9.8 per cent at the end of 2019 to leave government paying less for domestic debt

At the same time, the financial markets have remained awash with liquidity with interbank rate- the lending rate between banks falling to 2.76 percent in June fro 5.46 percent in December.

CBK has on its part pushed for the growth in money in supply having lowered the commercial bank reserve ratio to 4.25 percent in March to free up Ksh.35.2 billion in new funds to commercial banks.

Of essence now will be the bridging of available funding in the financial markets to the main street/real economy to cushion business as enterprises continue to absorb shocks of the global health emergency which has already claimed casualties among them SMEs, hotels, bars and entertainment joints.

Central Banks and commercial banks play the primary role of money creation through printing money and lending out deposits respectively.

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Story By Kepha Muiruri
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