How economy can benefit in quest to boost cash circulation

As Kenyan leaders attempt to bring an end to the country’s political challenges through the Building Bridges consultative initiative, their attention is also greatly needed to fix an economy that is in sixes and sevens.

The job loss environment that became prevalent last year has now triggered a new crisis in the housing market. The latest statistics show that one in three houses on sale in the market is a distressed sale, either on auction or on private treaty between the creditor and the borrower.

At no time in Kenya’s economic history has there been a greater transfer of homes out of the hands of private citizens.

At the heart of the problem is a drop in cash circulation to its lowest point since 2015, greatly reducing the aggregate demand for goods and services. The traditional cure for such a problem would have been found in lowering the benchmark interest rates by the central bank.

However, this does not appear to be working and policy makers must now consider more direct ways of injecting cash into the system through innovative techniques such as Quantitative Easing.

Many might wonder how we got to a situation where cash in circulation dropped to record lows. In truth, the cracks started to appear in 2015 when debt repayments for foreign loans started becoming a significant expenditure line item.

A key trigger for this was the 2014 rebasement of the economy which saw Kenya reclassified as a middle-income country and which meant Kenya could no longer qualify for concessional loans which are typically preserved for low income countries.

Furthermore, debt service repayments were structured to have a priority on the revenues of government thereby redirecting much needed cash away from other key government obligations.

The private sector started to feel the heat only a year later in 2016 when the interest rate cap was implemented ushering in a three- year period of slowdown of credit to the private sector, inflicting great damage to businesses.

By the time 2017 was coming around, the election jitters greatly slowed down investment activity across the country compounding the damage created by tight financing conditions.

As the economy limped forward into 2019, the final blow was delivered through the demonetisation exercise that took out nearly Sh60 billion out of circulation. Such a drastic drop crippled many businesses and made 2019 by far the most challenging year in recent memory.

Given the limitations described above, the government is only left with the option of directly injecting liquidity into the economy. This is best achieved through quantitative easing, which essentially refers to the introduction of new money into the economy by the central bank.

Quantitative easing can be implemented in different ways in different countries. While in the United States $1.3 trillion was used to buy financial assets from banks and governments, the Kenyan approach can be different whereby new money can be used to target specific projects that can dramatically reduce the high levels of youth unemployment. While the challenges facing our economy are grave, the solutions are very much within our realm of action.

The writer is chief economist, Mentoria Economics.