Increased uptake of M-Pesa, Kenya’s dominant money transfer service, has fuelled inflation as the service grew large enough to influence implementation of monetary policy, an African Development Bank (AfDB) research claims.
AfDB holds that financial innovations such as M-Pesa have increased the pace of monetary transactions while increasing cash in circulation, looping more people into the financial sector and leading to demand for goods and services outstripping supply.
Inflation was on an upward trend last year, peaking at 19.7 per cent in November before cooling off following monetary tightening by the Central Bank of Kenya. The industry regulator, who refuted the study’s claims Tuesday, attributed the rise in the price of goods and services to too much cash chasing a few goods. This informed its decision to cut cash supply through interest rate increases.
“Evidence shows that the transactions velocity of M-Pesa may be three to four times higher than the transactions velocity of other components of money.
“The increase in the velocity of money induced by these activities may have in turn propagated self-fulfilling inflation expectations and complicated monetary policy implementation,” said AfDB in a brief on inflation dynamics in selected East African Countries. Since its launch in 2007, M-Pesa is estimated to move over Sh2 billion daily while the number of subscribers has risen to 14.9 million.
In its half-year report Safaricom, the operator of M-Pesa, reported that over Sh314 billion had been moved between April and September.
Some economists concur with the report holding that M-Pesa made transactions easier after gaining market confidence of “traditional savers” who held cash at home. “M-Pesa has increased the cash in circulation, impacting on inflation as it results in demand out-pacing supply in the market,” said Dr Samuel Nyandemo, an economics lecturer at the University of Nairobi.
The AfDB report also says that M-Pesa could affect monetary policy. “Velocity of money has increased and if it increases money supply beyond what CBK has factored in then it would lead to inflationary pressures,” said Dr Mbui Wagacha, a macro-economics consultant.
Standard Investment Bank reported last month that the money transfer platform was performing exceptionally well.
CBK says the mobile money transfer service does not add to money supply growth but only increases the frequency with which the same amount of cash is availed in the market.
“M-Pesa cannot add to money supply growth, it can only affect velocity and innovation. This is a mistake I have seen and clarified internationally,” said CBK governor Njuguna Ndung’u Tuesday. However, other economists agree with the findings.
“M-Pesa has increased the cash in circulation impacting on inflation as it results in demand outpacing supply,” said Dr Samuel Nyandemo, an economics lecturer at the University of Nairobi. CBK has however benefited from M-Pesa because it can now monitor money that used to be kept “under the mattress”. It holds that the rise in inflation is a result of rapid growth in credit as well as external factors such as high fuel and food prices which the country had to import owing to poor rainfall.
To rein in inflation, CBK raised its policy rate from 6.25 per cent in August to 18 per cent in December. The move saw inflation drop marginally to 18.3 per cent in January.
AfDB holds that the effect of this monetary tightening on inflation might only appear after a lag given the threat still posed by rising food and energy prices.