EconomyOPINION

Low Velocity of Money Main Reason Most Kenyans are Broke Economics of Pending Bills in a Healthy Economy

circulation of money in kenya www.businesstoday.co.ke
Devolved systems are expected to enhance linkages of small micro-enterprises and expedite payments for services and goods delivered. [ Photo / al.nd.edu ]

You might have had a serious engagement with your supplier, your clients at your rentals or even your friend who you loaned some money a few months ago. They all lament that ‘hakunapesa’ or simply no money. So where did the money go?

The Kenyan economic environment has not had a good growth trajectory in the recent past. In fact, the economy has plummeted with real GDP growing by an estimated 5.9% in 2019, down from 6.5% in 2018. Analysts attribute this mainly to unfavourable weather and reduced government investment. 

Where’s the money?

In February, I had a cursory discussion with a number of actors in the microeconomic sector in Wajir and Graissa counties. These are businesses with an employee base of over 30 staff, small microenterprises mainly of sole ownership and a number of informal economy operators ranging from mama mboga, bodaboda operators, taxi services and those engaged in menial jobs such as car wash, truck loaders and garbage collection services.

The informal economy employs over 80% of the local population, according to the trends of employment between 2009-2015 by the institute of economic affairs IEA.

During this period, a common phrase on the lips of many and as we begin a new decade especially when asked about business growth, investment plans or short-term plans is that, ‘there is no money’. Some of the respondents indicated a near-collapse of the economic environment referring to their condition as “tunakaa tu”, loosely translated as “idling around’.

Mercy Mwende operates a vegetable stall in Wajir main market, Sokomjinga. Mwende set up her stall in 2002 and has since operated in the main market. She has literally waded through unscathed the difficult economic environment especially during the rainy seasons when her supplies are affected. She narrated that devolution had opened up the region and that she has had a good streak of sales in the period 2013 to late 2017.

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During this period, Mwende says she had to ferry her supplies from larger markets in the central region and has set up some secondary stalls in Griftu, Bute and Habaswein. For her, a sudden fall in sales and the collapse of secondary markets in the sub-counties cannot be explained. However, she believes many of her customers have money held up as ‘pending bills’. She seems abreast of the presidential directive for counties to clear pending bills.

Hassan, not his real name has operated a hardware shop since 2010. His fortunes soared to higher levels and, bolstered by this, he had set up a second branch in 2014. Orders for building materials from individuals and contractors were so high that he had to commit all his savings to order supplies. However, his astronomical growth suddenly started plummeting in 2017.

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At first, orders became rather a trickle and individual orders seemingly vanished. He shudders as he remembers contractors who would send crispy clean Cheques suddenly avoiding his shop. By then, his bad debts accrued to well over Ksh65 Million. The resultant situation compelled him to claw back on his expansion path and reclaim part of his fixed assets. He now operates a small shop and had to resort to out of court settlement for the millions owed to him by contractors.

The ‘lack of money’ indicates the situation narrated by Mwende and Hassan who are players in a different sector of the sub-national economy. What do we mean by ‘lack of money”?

Velocity of Money

The lack of money refers to the slow rate of circulation of money in the economy or low liquidity. Money circulation in an economy is impacted by several factors. For example, the supply of money in the economy or what many economists term as the velocity of money.

A low velocity of money means the supply of money is low. This stifles any investment plans, reduces spending by economic units and generally affects plans to resuscitate the economy. The effect of this is that a tendency to hold on to the money occurs and spending decreases. This is apparently the situation with many Kenyans holding idle cash in banks.

The opportunity cost of holding idle cash is that it neither earns interest nor any profit. [ Photo / Business Today ]

Imagine an economic scenario. Mr X holds about Ksh25 million in his bank account. By the local standards, Mr X is a celebrity and a millionaire but from a macroeconomic lens, he is just holding‘idle cash’. The opportunity cost of holding idle cash is that it neither earns interest nor any profit. If Mr X invests his idle cash, he will earn profits and contribute to money circulation by paying salaries to employees, taxes to the government and also spend or plough back profits into his business.

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In the case where he pays salaries, employees will spend on their families thus increasing money circulation in the economy. Where Mr X pays taxes, the government being the single largest spending entity, will invest in projects such as roads, water, health among others. A local contractor will do the road, pay salaries and again contributes to the circulation of money in the economy.

Other exogenous factors that also determine the circulation of money include the international economic environment, and pandemics like COVID-19. You will remember incidences where there was a ‘run on the banks’ where people withdrew their savings.

Is this the scenario among our micro-economies at the counties?

The introduction of devolution in 2013 came with high expectations in the business sector. Counties were seen as the next big deal. Analysts predicted an economic boom especially for small and medium enterprises doing business with counties. 

Economics of counties   

Counties are frontiers of economic growth and wealth creation.  To realize such growth, the subnational business environment is very important in spurring economic growth, not only of the counties but also of the nation as a whole.  The presidential directive on clearing pending bills by county establishments indicates the importance of the subnational economy for the macroeconomic environments.

The devolved systems are expected to enhance linkages of small microenterprises and expedite payments for services and goods delivered, thus improving circulation of money

During the first phase of the devolved system of government, the business community raised concerns of a multiplicity of charges and double taxation that negatively impacted on business growth. A county’s regulatory environment including licensing procedures such as business permits, amounts of levies, charges and feeds and other regulatory requirements impact on business operational cost. The complexity of the process and higher amounts of regulatory fees stifle growth as it leads to higher cost of doing business.

The government is the first loser when a business collapses or goes bankrupt. More taxes are collectable when businesses thrive.

This sad state of affairs coupled with high pending bills negated the government’s efforts at promoting local enterprise under the banner Buy Kenya, Build Kenya. Fortunately, President Kenyatta issued a directive in June 2019 to ministries and government agencies to clear all eligible pending bills amounting to Ksh450 billion. This was a welcome lifeline for thousands of small businesses. Counties owed contractors suppliers Ksh100 billion, almost equivalent to 10% of the national budget. 

So what is the effect of pending bills on the economy?

The government is the first loser when a business collapses or goes bankrupt. More taxes are collectable when businesses thrive, tax is collected during almost every transaction. When people are in debt they reduce their spending and begin to hold back, stagnating cash flow which explains the current decrease in revenue. The solution is not to increase taxes or harass citizens and businessmen more, but rather release money into the hands of citizens.

Saving employment

Clearing pending bills will improve the speed of circulation of money resulting in more revenue. Indeed, the government’s initiative to clear pending bills is expected to stimulate the fledgling economy.

First, the move saves thousands of jobs. With the SME industry arguably the biggest employer in the country, the livelihood of millions of Kenyans was at risk. The directive injected a new lease of life into many SMEs facing collapse.  

Second, the directive serves to reassert fiscal discipline and accountability as a constitutional principle of public financial management in Kenya. Article 201 of the Constitution provides that public money shall be used in a prudent manner with clear fiscal reporting. The huge stock of pending bills was partly attributable to malpractices such as corruption and failure by some counties to strictly adhere to budget.

Timely payments improve the credit profile of SMEs doing business with counties thus enhancing their competitiveness.

Opaque county financial arrangements also created avenues for officials to demand bribes from suppliers seeking payments. With counties now required to file regular updates on pending bill payments with Treasury, it is easy to track the status of such payments. 

Third, the directive is good for investor confidence. Certainty is a valuable element in business planning and sustainability. No prudent business will commit money in risky ventures without a clear exit horizon. Besides, timely payments improve the credit profile of SMEs doing business with counties thus enhancing their competitiveness. It also ensures their sustainability in the long term.

Paying old debts

The sub-national microeconomic environment is volatile and has the tendency to show ‘a cautious ‘spending behaviour where cash is held up by non-paying clients like county establishments. The unfolding situation causes a ripple effect that is even felt by the mama mboga and all those economic units at the grassroots by determining circulation of money.

The effect is no one has the cash to spend hence the ‘no money’ cry on the streets. Kenya needs a clear and enforceable law that prohibits county governments from paying new debts before old ones are cleared or entering into new contracts before the old ones are paid for.

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MOHAMED ABDULLAHI
Mohamed Abdullahi is a public policy economist, a researcher, a certified secretary and a governance consultant. He is a member of the Institute of Economic Affairs (IEA) and the Institute of Certified Secretaries (ICS). He comments regional economic and governance issues.

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