There is a constraint on liquidity in the Kenyan economy. Thus, Kenyan commercial banks have requested Ksh 100 billion ($668 million) in liquidity support due to tea bonus payments. This means that the Kenyan central bank is about to increase the money supply, which will increase the amount of cash available in the Kenyan economy. This cash injection will come as a stimulus package to stimulate the economy after the country’s money supply shrunk by 10% over the last six months.
There are, indeed, a number of factors that contributed to the cash constraint in Kenya. First, the prolonged drought. Kenya has been experiencing a prolonged drought that has significantly impacted agricultural production, a key sector of the economy. This has led to reduced incomes for farmers and a decrease in the supply of food, driving up prices and putting a strain on household budgets.
Second, Inflation in Kenya has been on the rise in recent months, reaching a high of 10.5% in September 2023. This has eroded the purchasing power of consumers and made it more difficult for them to save money.
Third, the slowdown in global growth did not spare the Kenyan economy. This is because Kenya is a major exporter of goods and services, and a slowdown in global demand has led to a decline in export earnings.
Fourth, the Kenyan central bank has been applying tight monetary policy to combat inflation. This has led to an increase in interest rates, which has made it more expensive for businesses and individuals to borrow money, thus reducing the amount of cash available in the economy.
Fifth, the Kenyan government has accumulated a high level of debt, increasing the public debt and government deficit.
The combination of these factors has led to a decline in the money supply in Kenya. This has made it more difficult for businesses and individuals to access cash and has contributed to the cash constraint.
The Central Bank of Kenya's stimulus package is aimed at addressing the cash constraint by increasing the availability of liquidity in the banking system. The package is also aimed at supporting lending to businesses and individuals. The very problem with stimulating the economy through central banking is that it could lead to higher inflation. The package is designed to increase the amount of money in circulation, which could put upward pressure on prices.
Beyond the inflationary problem that this cash injection would create, it could also engineer moral hazard. Indeed, stimulus packages can create moral hazards. This is because they can make people less likely to work or save money, as they know that the government will provide them with assistance if they need it. Furthermore, stimulus packages can lead to higher levels of government debt. This is because they typically involve the government borrowing money to finance the spending.
Overall, the Kenyan Central Bank's stimulus package is a risky move. While it will provide benefits to the Kenyan economy in the short-term, it will have negative consequences on the Kenyan people in the long term.