Kenya’s inflation roller coaster prompts fresh look at long-ignored money supply

By Steve UMIDHA

Kenya  is facing a money circulation problem and nobody is quite sure where the money is hoarded and why.

Cash circulating or the amount of money sloshing outside the banking system has been in short supply since the start of the year, and while some are calling it the great money shortage of 2023, curious insiders are now convinced that there is more to the issue than meets the eye.

Read: Kenya’s inflation jumps to 9.2 percent

Few people are reading political spite in the ruinous dogfight among political elites. The impact of that ugly fight has now ropped in business wheeler-dealers and it is shaking the country’s fragile economy.

“Sophisticated cartels in the financial world have taken over and this is going to last as long as it takes,” reveals economist, Dr. Samuel Nyandemo – terming it a “culmination of campaign intimidations.”

The outspoken University (UoN) don says the staggering amounts of hoarded wealth and money by Kenya’s wealthiest billionaires – who are increasingly squirreling away their cash, could pose a serious threat to the economy at large and exacerbate the already high echelons of income inequality and cruel living standards among Kenyans.

“The new formations of cartel alignments by this administration are all out to counter the existing ones and you can clearly see from the latest shake-up at the Kenya Revenue Authority which has seen Commissioner–General Githii Mburu shown the door. It is a state seizure – a cartel fight, whose impact will only hurt Mwananchi,” offered Nyandemo in a phone interview.

Adding that the ongoing problem is an internally – engineered crisis that has nothing to do with external market forces such as the Ukraine war which has led to supply chain glitches.

It is, however, not the first time that the country’s disturbing pattern of low cash circulation has come up.

During the electioneering year 2017, low liquidity issues clouded President William Ruto’s predecessor, Uhuru Kenyatta, disrupting consumers’ buying habits for months before stability resumed several weeks following Kenyatta’s second term in office – a re-election whose outcome was originally annulled because of “irregularities.”

On August 8, 2017, Kenya’s Supreme Court nullified Kenyatta’s re-election and ordered a fresh presidential poll after the then-Chief Justice David Maraga – now a key figure in Ruto’s administration as the head task force on the improvement of the welfare of police and prison officers said the electoral body IEBC committed various illegalities affecting the integrity of the polls.

The opposition leader, Raila Odinga disputed those results and has since maintained that his victory was also stolen from him in the 2022 August Presidential election. William Ruto was declared the poll’s victor.

Another economist, Peter Macharia says the ensuing influence on the ongoing cash flow constraints if not managed well and in time, will continue to see an investor or capital flight – most of whom (investors) are holding back their investment decisions.

Capital flight includes an exodus of capital from a nation, usually during political or economic instability, currency devaluation, or capital controls.

“Right now the economy is not vibrant, it is a wait-and-see situation at the moment by business people…if this persists we will begin to see an investor flight similar to what we saw just before the 2022 elections and in every electioneering period,” offered Macharia, who says the impacts of delayed rains could also see a prolonged drought period.

Devaluing Shilling value

Having a shortage of money, according to Macharia, naturally affects the prices of goods and services, income levels, and the availability of alternative payment methods which tend to guide the domestic demand for cash, while political and economic uncertainties generally shape foreign demand.

The Kenyan shilling continues its losing streak with commercial banks quoting the shilling at 128.37 per U.S. dollar as of today, undermined by persistent dollar demand across all sectors of the economy although demand was strongest from energy and manufacturing firms.

The shilling has hit a series of new all-time lows this year – about 2.3 percent since the New Year commenced and that streak looks likely to carry on, on the aforesaid dynamics.

“I cannot rule out the possibility of a continued fall in the value of the Shilling against the US Dollar if the status quo remains the same and key sectors like horticulture will be the most affected by this spat,” argues Macharia who also runs a digital lending firm, Jijenge Credit.

As much as one-half of the value of the local circulating money is estimated to be stashed in foreign countries or offshore accounts by the billionaires accused of roasting the economy that is yet to fully recover from the ravaging impacts of Covid-19.

Money circulation in an economy or what many economists term the velocity of money, means the supply of money in the economy is low, according to Sachen Gudka – the former Chairperson of the Kenya Association of Manufacturers (KAM).

Ordinarily, this happens when the population is unsure of the economic future, uncertain about their jobs or their once regular income, which has now become irregular and cannot be relied upon to support their most pressing needs.

“Another factor is the volume of trade. The more we trade, the more transactions we make, and therefore the circulation of money increases. But if the volume of trade is low, the transactions decrease, business networks shrink, and income streams dry up.

Small businesses, especially, would find it extremely difficult to survive in times such as these. This is currently the case for many businesses in the country,” notes Gudka in his analysis.

Consumer and business activity have weakened as a result of domestic headwinds such as continued drought conditions and fiscal consolidation, as well as slowing global growth.

Kenyans are still grappling with sky inflation in the middle of a sluggish economy with reduced cash flow circulation that has forced many workers to cut demand for non-essential items.

Political tension

Similarly, most analysts see the Azimio la Umoja-One Kenya leader Raila Odinga’s calls for mass action, as another reason money in circulation has ‘dried up.’

Asked whether Odinga’s move was being backed by the said billionaires judging by the open spat between President Ruto and former President Uhuru Kenyatta, with the latter allied to the billionaires’ club, economist Nyandemo said.

“But this goes without saying. It is obvious.”

The ultimatum to President William Ruto’s administration, Mr. Odinga declared a mass action countrywide in the next 14 days to protest against the high cost of living at the Jeevanjee Gardens in Nairobi on Wednesday, February 22.

“The ongoing process of reconstituting IEBC must stop immediately. A bipartisan task force must be put in place to restructure IEBC in a manner that ends its monolithic operations. If these demands are not heeded within 14 days, we shall lead Kenyans to massive mass action across the country to take their power back and restore sanity,” said Odinga.

That threat, according to Nyandemo, should not be taken lightly, one he believes could have a damaging reputation for Ruto’s wobbly administration.

“This is Raila we are talking about, he has done it before, and he can do it again…these are not just political threats and they shouldn’t be taken lightly.”

The Inflation metrics

The annual inflation rate in Kenya accelerated to 9.2 percent in February of 2023, from 9.0 percent  in January, above market forecasts of 8.8% and the central bank’s preferred range of 2.5% to 7.5 percent.

The overall year-on-year inflation rate as measured by the Consumer Price Index (CPI) was 9.0 percent, in January 2023, according to data from the Kenya National Bureau of Statistics (KNBS).

Other challenges affecting Kenya’s economy include corruption and weak governance. Weakened consumer spending (leading to rising unemployment and poverty) lower public investment and fiscal austerity.

More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services. When this happens across a large number of businesses and sectors, this leads to an increase in inflation.

Inflation is a sustained rise in overall price levels. Moderate inflation is associated with economic growth, while high inflation can signal an overheated economy. If economic growth accelerates very rapidly, demand grows even faster and producers raise prices continually.

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