The phrase “there is no money” has become very popular in Kenya over the past few years. In this context, the lack of money means too little money is flowing or low velocity of money. The resentment about the kack of money in the economy is not limited to a given few, but it’s a widespread concern about the state of our economy.
Money in circulation is the total amount available within the economy for use in economic activities, which plays a significant role in influencing economic interactions and growth. The amount of cash in circulation is influenced by several factors, including the interest rate on loans, changes in GDP, and people’s speculative motives for holding money.
Why there is no money
In Kenya, the problem of low liquidity is attributed to multiple factors and occurrences. One of the factors is the Government’s issuance of its securities at a high rate – in April 2024, the average interest rates for 91-day, 182-day, and 364-day Treasury bills were 16%, 16.85%, and 16.890%, respectively. The extremely high yield on government securities has created an incentive for people to hold bonds, either directly or through money market funds (MMFs), as the Government turns to domestic borrowing.
Another factor that has contributed to this phenomenon is the continued rise in the Government’s pending bills. According to a report by the National Treasury, the total outstanding National Government pending bills as of 30th June this year stood at Ksh516.3 billion. The mounting pending bills, even at the county level, lead to a low volume of trade as the private sector suffers from reduced transactions and profitability.
The third factor, perhaps the most overlooked one that has adverse effects on currency circulation in Kenya, is the high prevalence of gambling. Kenya is Africa’s largest gambler, causing billions of unrealized losses annually. About 11.2% of Kenyans are actively engaged in gambling, according to the latest 2024 Finaccess Household Survey. Sporting betting and online gaming are some of the country’s most prevalent forms of gambling. The gambling sector makes billions in profits without any meaningful contribution to the economy. In 2023, betting operators paiD an exercise tax of Kshs 6.6 billion. This figure demonstrates the substantial amount of cash that betting operators withdraw from the economy.
The list of factors contributing to low liquidity would be incomplete without corruption. Rampant public corruption in the country can distort the allocation of resources. The common forms of corruption in Kenya are bribery, misuse of public funds, and embezzlement of public funds. Businesses involved in bribery find themselves spending more money to deal with bureaucracy. The end result is high production costs, which makes some firms achieve lesser profits. The inefficiencies and low profitability generated by corruption force some firms to close shop or cut their workforce, leading to low velocity of money. Moreover, embezzlement and misuse of public funds limit the Government’s ability to settle pending bills.
What can be done?
Addressing the problem of low liquidity in the economy requires several effective and concrete interventions.
First, the Government should cut the interest rates on treasury bills and bonds by reducing reliance on domestic borrowing – the rate should be below 7%. Lower interest rates on government securities will not only reduce the Government’s expenditure on debt service costs but also drive down the money market fund rates. Such a policy will encourage people to invest in the real economy – agriculture, manufacturing, real estate, and service sectors. This will cause new businesses to emerge, increasing economic transactions and employment opportunities for Kenyans.
Second, the Government should have strict budget allocations to clear all pending pending bills owed to contractors. Also, counties need to allocate funds for the payment of all pending bills.
Third, the Government must act quickly to ban all gambling activities in the country. This move would close a gap through which the economy loses a significant amount of money. We should emulate some top-performing economies like Singapore, China, and Israel, which have long since banned gambling. t
Lastly, the country must intensify its fight against corruption through legislative and non-legislative interventions. Ensuring transparency in the public procurement process is critical to minimize the risk of corruption. AI-assisted anticorruption systems can prove helpful in the detection and prevention of embezzlement, and misuse of public funds. Eliminating corruption ensures the proper allocation of public resources to key sectors.
Conclusion
Multiple interventions are needed to address the liquidity problem in Kenya. Having sufficient money in circulation sets the foundation for a vibrant economy in the future. The move will increase the productivity of businesses, increasing their profitability and capacity to create job opportunities for citizens.
Related: Kenya should tap into AI to fight corruption and cut misuse of public funds
