Many Kenyans broke as cash circulation drops by Sh10b

Kenya’s money supply fell at a significant rate in the year to December, signalling a battered economy and financial markets.

The cash circulating within and outside the banking system fell last year by 0.2 per cent or Sh9.9 billion, from a year earlier amid the raging economic crisis marked by a worsened cost of living and a gloomy outlook.

The latest data published by the National Treasury shows that the metric also known as M3 money supply — the broadest measure of liquidity in the monetary system - fell to Sh5.48 trillion from Sh5.49 trillion a year earlier. 

“Broad money supply, M3, contracted by 0.2 per cent in the year to December 2024 compared to a growth of 21.2 per cent in the year to December 2023,” said Treasury.

“The slowdown in growth of M3 was due to a decline in the growth of Net Domestic Assets (NDA), particularly the domestic credit.”

Treasury added the primary source of the growth in M3 was the resilience in the Net Foreign Assets (NFA) of the banking system, mainly reflected in the stability of banking systems’ Foreign Assets. Tue foreign assets are held in various currencies including US dollars, Euros and other global currencies. 

“The NFA of the banking system in the year to December 2024 grew by 6.1 per cent compared to a growth of 179.5 per cent in the year to December 2023,” said Treasury in its Quarterly Economic and Budgetary Review.

The dropping value of cash circulating in the economy, which is a blunt measure of the economic activity in a country, is an indicator of economic slowdown as Kenyans and corporations confront the ongoing economic crisis amid a global capital flight to perceived safer havens. Governments use M3 money supply figures to direct monetary policy, thereby controlling inflation, consumption, growth, and liquidity over medium- and long-term periods.

M3 money supply denotes liquid money in people’s pockets plus demand deposits such as in current accounts, which one can walk into a bank and withdraw.

It also includes money in time deposits like fixed-term deposits and other savings accounts which one has to give notice to access and also that which is in foreign accounts owned by Kenyan families, individuals and companies.

M3 is arrived at by incorporating a measurement of the nation’s money supply that estimates all the cash individuals have in hand or short-term bank deposits or M2 and the M1 money supply which comprises currency, demand and other liquid deposits as well as resident foreign currency deposits.

Individual Kenyans and companies are confronting the effects of an economic slowdown amid a battered economy marked by job losses and a worsening cost of living crisis in recent months across nearly all sectors as companies intensify austerity measures to protect profits.

Experts have warned that the drying up of credit in the market as banks tighten their vaults due to default fears could tip the battered economy into a temporary recession.

According to analysts, high interest rates and a credit crunch can make a perfect storm for a recession.

Until now a sharp rise in interest rates had threatened to choke economic growth as it lifted borrowing costs and encouraged cutting costs by companies and individuals or saving over spending, investing, and hiring.

If lending dries up, that could weigh down on the value of stocks, real estate and other assets besides crimping overall demand - a recipe for a painful recession. The Kenya Kwanza government now reckons that tackling the current credit crunch that has constricted access to financing for businesses and individuals is central to boosting liquidity in the market.

Treasury Cabinet Secretary John Mbadi recently noted that reduced borrowing by the private sector has led to a significant tightening of the credit market. “Interest rates have started coming down,” he explained, indicating a potential easing of the financial strain on households and businesses.