Cash in circulation hits four-month high as election spending surgeTuesday June 21 2022
Cash circulating outside the banking system hit a four-month high of Sh252 billion in April as Kenya entered the election season where uncontrolled political spending affects money supply.
The latest data published by the Central Bank of Kenya (CBK) shows that the metric, which is a blunt measure of the economic activity in a country, grew by Sh3.69 billion from Sh248 billion a month earlier.
The rising value of cash outside the banking system is an indicator of economic recovery as Kenyans are determined to pull out of the Covid-19 slowdown.
It could also be fuelled by election-related spending after the Independent Electoral and Boundaries Commission (IEBC) revoked its attempt at capping campaign contributions and spending in the 2022 General Election.
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The Parliamentary Budget Office in the Budget Options for 2022/2023 and the Medium Term, urged the Central Bank of Kenya (CBK) to ensure election spending does not fuel inflation.
“Indeed, there is anecdotal evidence that as we edge close to the elections there is increased money supply in the economy,” the Parliamentary Budget Office said.
“The Central Bank of Kenya should therefore enhance its surveillance mechanism to ensure monetary stability with the view to containing possible inflationary pressure resulting from enhanced campaign spending,” PBO said.
Broad money supply (M3), a key indicator for overall liquidity conditions, has been growing at a stable rate above 8 percent. CBK projects it to grow to 11 percent by end of June 2022.
Analysts say the growth could also be organic given that the money supply has generally been growing over the past couple of months as the economy recovers.
Kenya’s economy staged a marked recovery last year driven by the recovery in the services sector and expansion in industrial output.
GDP rebounded to grow at 7.5 percent in 2021, the fastest pace in 11 years and is expected to stabilise at 6 percent this year.
Churchill Ogutu, an economist at IC Group, says there was a similar increase in demand deposits — cash available for withdrawal in banks — which rose by Sh47 billion to hit Sh1.52 trillion indicating a gradual increase in money in the economy.
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The rise in demand deposits indicates many people were looking to have their cash within easy reach for spending rather than lock them in a savings account for a return.
“I have tried to look at the previous five months before elections and typically M3 is around 8 to 10 percent. I also looked at last year's April and previous months you can see a clear trend that this might be organic growth and not necessarily linked to elections,” Mr Ogutu said.
The expected role of monetary policy as Kenya heads to the next year and the general elections is to maintain stable inflation, stable interest rates and a competitive exchange rate.
Increased supply of money when chasing fewer available goods can fuel the already high inflationary environment.
Inflation hit a seven-month high of 6.47 percent in April from 5.56 percent in February even as new taxes are expected to bring a fresh round of price increases in the Finance Bill.
The price of goods such as crude oil, food, machinery and cars have also increased in the wake of the shilling weakening 2.6 percent since the start of the year, compared to a 3.64 percent depreciation in 2021.
Inflationary pressure has become a political headache for the government that has recently been forced to offer fuel subsidies to defuse social tension.
CBK raised its policy lending rate by half a percentage point to stem rising inflation and stabilise the shilling.
The increase in the central bank rate (CBR) to 7.5 percent is meant to make money expansive to borrow, reducing cash in the economy and moderating demand.
The budget office said keeping inflation in check will require careful monitoring of the money supply, especially the currency circulating outside banks during the election season.
Kenya conducts very expensive elections with politicians splurging billions on expenditures such as advertising, printing merchandise, transportation, event operations and management.
The cost of managing elections in Kenya is one of the highest in the world at $25 (Sh2,900) per voter.
Add political spending on high-end vehicles and renting helicopters every hour to reach remote towns and rural areas much faster.
A Westminster Foundation for Democracy Limited (WFD) and the Netherlands Institute for Multiparty Democracy study by Prof. Karuti Kanyinga and Tom Mboya estimated election spending runs into billions.
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The study found it costs Sh35.5 million on average to run for a Senate seat, and Sh22.8 million to contest for the county Woman Rep seat in the National Assembly.
Running for the constituency MP seat, on the other hand, costs just Sh18.2 million; Sh4.6 million less than what it costs to contest the Woman Rep seat, with the same benefits, in the same house. Running to be an MCA costs, on average, Sh3.1 million.
The IEBC attempted to cap presidential campaign spending in the next General Election at Sh4.4 billion.
Candidates for governor, women representative and senator seats will be limited to spending between Sh21.9 million and Sh117.3 million, depending on the size and population of the devolved units.
IEBC was however forced to retreat after the National Assembly annulled the draft campaign financing regulations and the contributions and spending limits for political parties and candidates.
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