CBK steps up its cash injections to stimulate growth
The Central Bank of Kenya. The bank seeks to spur private sector credit, which has fallen behind projections. Photo/FILE
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The amount, which translates into an average of nearly Sh20 billion every month, reflects the State’s ease with the level of inflation, which allowed it to expand supply of money without sparking a sharp increase in the cost of goods and services.
The report however criticises commercial banks for being slow to react to the regulator’s signals for a loose monetary policy.
CBK confirmed the monetary expansion drive, saying it was intended to spur private sector credit, which has been lagging behind projections.
The Central Bank of Kenya (CBK) has injected into the economy a massive Sh239 billion in the past one year to stimulate growth, new World Bank data shows.
The amount, which translates into an average of nearly Sh20 billion every month, reflects the State’s ease with the level of inflation, which allowed it to expand supply of money without sparking a sharp increase in the cost of goods and services.
The report however criticises commercial banks for being slow to react to the regulator’s signals for a loose monetary policy.
“While commercial banks were quick to increase their lending rates as CBK tightened monetary policy, they have not reacted with similar vigour in reducing their lending rates to their customers during the monetary easing,” said the report dated this month titled Kenya Economic Update: Time to Shift Gears.
It indicates the monetary authority stepped up the cash in circulation by 18.5 per cent in April this year, representing the single largest growth year-on-year since March 2011.
CBK confirmed the monetary expansion drive, saying it was intended to spur private sector credit, which has been lagging behind projections.
The new cash pumped into the economy brings the money supply to Sh1.58 trillion, just below a half of the size of the economy that now stands at Sh3.44 trillion.
The cash is in the form of broad money (M2), which comprises not only the various forms of deposits but also instruments that are easily convertible into cash such as treasury bills and bonds. In terms of M1, which is cash in banks and individuals’ hands used in daily transactions, the expansion was an even bigger 20 per cent.
The CBK data shows that credit has failed to grow as expected since last July. Private sector credit expanded by only 11.5 per cent in February this year, against a target of 16.8 per cent. In January, credit expanded by only 12 per cent against a 17 per cent target.
However, with consistent reduction and stabilisation of the inflation rate, the Monetary Policy Committee (MPC) has been moving with speed to ease the policy stance and inject cash into the economy through lower interest rates.
While the Central Bank Rate (CBR), which represents the lowest or base lending rate to commercial banks from the CBK, has come down to 8.5 per cent from a high of 18 per cent in early July 2012, this has not fully translated into lower lending rates prompting the CBK to use the monetary stimulus.
“We have allowed the monetary expansion because we realised that targets for credit expansion were not being met. So we needed to give a push to encourage private sector lending,” said Terry Ryan, a member of the MPC, which normally meets once every two months to set the policy rate.
The next MPC meeting is scheduled for July 9. Lending to the private sector stood at Sh1.306 trillion in February, an 11.5 per cent growth from the same month last year.
However, there has been considerably domestic borrowing for the financial year ending this month, requiring intervention of CBK to remove its market impact.
Data from the National Treasury shows that by the end of this month domestic borrowing will hit Sh166 billion against the initial target of Sh107 billion. This followed a huge shortfall in state revenue collection through taxes, grants and loans.
“We have been trying to get banks to lend to the private sector, but we needed to have enough money supply so that domestic borrowing does not crowd it out,” said Prof Ryan.
The consultant economist said the rise in monetary aggregates was in the context that overall inflation had fallen and stabilised at single digit levels, while the risks to the exchange rate resulting from speculative activity in the capital markets were minimal.
“In any case, we have witnessed many foreign investors taking advantage of the returns from the stock exchange and so this lessens the threats of speculation. This gives us the assurance that there are lower risks to the exchange rate even as we expand money supply,” said Prof Ryan.
The shilling has been fairly stable this year at between 83 units and 87 units to the dollar, presenting lower risks to inflation.
An economist with insider knowledge of the Treasury said there was pressure on the monetary policy managers to provide a monetary stimulus to enable the new government honour its promises to create jobs and raise revenues for various planned projects in the Sh1.64 trillion Budget.
