Government spending boosts cash flow
Cash circulating outside banks hit an all-time high of Sh273.4 billion in July in the wake of rushed government spending at the end of the financial year in June, easing the cash flow pain for contractors, suppliers and their employees. Data from the Central Bank of Kenya (CBK) show the cash outside banks rose from Sh257.9 billion in June to the highest level under President William Ruto’s administration and surpassed the previous peak of Sh267.7 billion set in July last year.
The rise in cash outside banks coincided with the end of the government’s fiscal year on June 30 which is usually accompanied by large-ticket disbursements from the exchequer to meet targets for recurrent and development spending. The government normally releases the money to ministries, departments, and agencies who will then remit the monies to suppliers and contractors who subsequently make payments to employees, including project supervisors, managers, and casual labourers, completing the chain of money circulation in the economy.
Cash-strapped economy benefits from increased liquidity
The increased cash in circulation found a cash-strapped economy where national government pending bills had, for instance, risen to a record-high of Sh567.5 billion at the end of June from Sh537.2 billion at the end of March. The state of the economy in July was equally precarious, with the data from Stanbic Bank’s Purchasing Managers Index showing a sharp downturn in business activity, underlined by the fall of new orders and the deterioration of customer demand amidst a sharp rise in living costs.
Cash outside banks refers to the amount of money in the form of paper notes or coins within the economy and which is used to conduct transactions between consumers and businesses. It is presumed to be the currency in hand, which is used throughout the economy to buy goods and services. This would imply that during July, more cash was available in the economy for the purchase of goods and services from businesses and peer-to-peer transfers.
Cash circulation trends over time
The cyclicality seen over the years speaks to the fact that there are usually outsize disbursements by the government made in July, although wrongly attributed to June. As the government releases funds to the real sector this leads to spikes in currency in circulation from the monetary sector perspective,” noted Churchill Ogutu, an economist at IC Asset Managers.
The following table shows the cash circulation (in billions of shillings) for each month from January 2022 to July 2023:
| Month | Cash circulation |
|---|---|
| Jan-22 | 240.1 |
| Feb-22 | 241.3 |
| Mar-22 | 243.6 |
| Apr-22 | 245.9 |
| May-22 | 248.2 |
| Jun-22 | 257.9 |
| Jul-22 | 267.7 |
| Aug-22 | 261.4 |
| Sep-22 | 259.1 |
| Oct-22 | 260.3 |
| Nov-22 | 262.6 |
| Dec-22 | 264.9 |
| Jan-23 | 266.1 |
| Feb-23 | 267.3 |
| Mar-23 | 269.6 |
| Apr-23 | 271.9 |
| May-23 | 274.2 |
| Jun-23 | 283.9 |
| Jul-23 | 273.4 |
Implications and outlook for cash circulation
The high level of cash outside banks has both positive and negative implications for the economy. On one hand, it indicates increased economic activity and consumer confidence as people spend more on goods and services. On the other hand, it also suggests a low level of financial inclusion and formalization as people prefer to keep their money outside the banking system.
The outlook for cash circulation depends on several factors, such as government spending patterns, inflation rates, interest rates, exchange rates, and public health measures related to Covid-19 pandemic. The CBK has been monitoring these factors closely and adjusting its monetary policy accordingly to ensure price stability and economic growth.
