Cash outside banks hits an all-time high of Sh273.4bn

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. 

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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.

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

At the end of the 2022/23 fiscal year, the Treasury disbursed nearly Sh460 billion in June to meet funding for recurrent and development expenditures alongside disbursements to counties under the equitable share of revenue.

“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.

Other monetary components equally marked an expansion in the same period to also set new records in July.

For example, M1 — the sum of cash outside banks and banks short-term deposits and other CBK deposits — grew to Sh2.126 trillion from 2.098 trillion in June.

M1 is the money supply that is composed of currency, demand deposits, and other liquid deposits—which include savings deposits.

Meanwhile, M2, which sums up M1 and long-term deposits in banks ended the period at Sh3.886 trillion from Sh3.852 trillion previously.

M2 is a measure of the money supply that includes cash, checking deposits, and other types of deposits that are readily convertible to cash such as certificates of deposits.

Additionally, broad money in circulation or M3, which sums M2 and long-term deposits in non-banking financial institutions and deposits by the non-banking institutions held by banks, expanded to a record Sh5.133 trillion in July from Sh5.037 trillion.

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M3 includes currency, deposits with an agreed maturity of up to two years, deposits redeemable at notice of up to three months, repurchase agreements, money market fund shares/units, and debt securities of up to two years.

The creation of money in the economy largely lies with commercial banks via credit generation.

The general expansion in money in circulation coincided with the continued flow of credit to the national government, businesses, and households, with private sector credit growth, for instance, holding up at 10.3 percent. Net credit to the government meanwhile grew at a faster rate of 16.1 percent in the same month.

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