- Pauline Njoroge:
After the president’s announcement on the Ksh.1000 note yesterday, we saw some arguing that the move won’t be successful because most of the cash being hoarded is in form of dollars, and those keeping in form of Ksh will convert it to dollars within the 120 days given.
Well, today I decided to talk to someone who could provide expert analysis on the matter, and this was my take home:
The cash outside banks is 230 Billion and this is what the president wants to bring back to the formal economy or in the banking sector. As of June 2018, there were 210 million one thousand shilling notes in circulation valued at KShs 210 billion. This means majority of the notes both in and outside banks is of Ksh. 1,000 denomination and only 20 Billion is in other currency.
Foreign Exchange Reserves in Kenya increased to 11737.70 Million USD Million in February from 11387.20 Million USD in January of 2019. Thus to convert the Ksh 230,000,000,000 outside banks to dollars would require $2,300,000,000 or almost 20% of the total forex reserves. This CBK can’t allow because the dollar would appreciate to around Ksh 125 per dollar and given the dollars required to repay debt and exports, the economy would simply collapse given that Kenya is a net importer. Therefore government would not avail the dollars.
The dollars in the economy are very controlled so as to keep a stable exchange rate of between 95-105. And as stated above, because of the foreign debt repayment, the CBK cannot allow appreciation of the dollar, as every Ksh. 1 rise in exchange rate increases our debt by a huge margin.
So what is likely to happen is that we will see completion of more houses and purchase of assets at exaggerated prices i.e.cars, lands etc in the next four months. We can also expect inflation up to mid next year as effects of demonetization typically take 6-12 months.
All in all, this was a very necessary move. The money being hoarded needs to be injected back to the formal economy.
Interesting analysis from another group
“Where did the money go?
We’ll find out soon enough
Kenya has announced that after October 1st, the old Ksh. 1,000 note will be invalid, worthless and illegal tender. It will be worth less than the paper it is printed on.
This has a number of implications and consequences for all Kenyans but let’s try and examine the reason we were given for this calculated move: the war against corruption.
Corruption has reached run-away levels in Kenya. We no longer discuss the amounts looted in millions but in billions. The majority of this money is actually stolen in cash and this is because it is much harder to track money which is in actual cash. Bank transfers and cheques always leave a paper trail which links everyone involved and makes it possible for them to be prosecuted (in Kenya the judiciary is such a let down on this font) so actual cash is ferried to homes and bungalows of thieves and hidden.
We must recall all the raids EACC officials have conducted on suspects’ homes only to find millions in cash stashed in pillow cases and under mattresses. Or the testimony given in parliament by countless witless accomplices who state that they were directed to collect bags stuffed with millions of shillings. This money never goes into a bank account because any deposit above 1 million shillings is immediately reported by Central bank. Any sudden increase in your deposits that cannot be explained is flagged and reported for investigation. So you can’t just deposit your money in bits over time, it will be even more suspicious.
So say you have been stashing corruption money in your house for a few years. You now have close to a billion shillings hidden and it’s mostly in 1,000 shilling notes (this is because it is the most widely used denomination in mega-schemes and corruption). You can’t put it in a bank because DCI will be at your doorstep faster than you can say kimeibiwo. You can’t put it abroad because the US, UK and Switzerland among other countries have signed agreements with Kenya to flag these deposits, freeze the accounts and where possible return the money to the government. It would be a fools errand.
You can’t spend it all in a hurry either. Last week the court of appeal ruled that all unexplained wealth must be seized by the government through the appropriate agencies. You don’t even have to be charged in court for the seizure to take place, just being unable to explain where the money came from is enough for DCI to march into your house, grab the money and deposit it in Treasury (and not in your name). So buying 5 fancy vehicles and houses will just attract undue attention to yourself.
In normal times, you may lay low until the next election and then go on a campaign frenzy throwing money around in support of your favorite candidate. Once the election is done you may recover your spent money through a plum assignment on some parastatal or dubious tenders and the cycle starts all over again. But now that plan has been thrown out of the window. You need to vanish that money before October 1st.
Unlike other countries, majority of Kenya’s wealth is actually held in cash. That means the corruption money in your house cannot be cleaned by buying gold and hiding that away instead. Besides which, with the recent gold scam going on, would you dare try buying gold in Kenya now? This means you need to spend that money in other ways; party, go to restaurants and eat the most expensive items, buy everyone a round of drinks at your local bar, tip your taxi guy generously…spend, spend, spend.
This means we will see an economic boom between now and the end of September. Millions will be invested in rush projects without second thoughts. Money will be spent in all the right places in a bid to get rid of it fast.
Then overnight, the 1,000 note will be demonetized and whatever money you still have hidden will be useless. The section of Kenya’s economy that has thrived on corruption money will crumble (hotels, restaurants, bars, luxury vehicles and real estate). Being found with this money in significant amounts will land you in hot soup. You either burn it or throw it away.
In all honesty, we should have seen this coming. Rather than head-butting the bull in a head on collision, what the President has done is corralled the bull into a small room and allowed it to do the damage to itself. The CBK cap on bank transactions over 1 million shillings, followed by international deals to curb off-shore stashing of corruption billions. This was swiftly followed by the appointment of a competent DCI and DPP who are above reproach. The final piece of the puzzle was provided by the court of Appeal judges who last week handed Kenyans a lifeline, all unexplained money and wealth may be seized even if the suspect is not taken to court. And now, the denomination of choice for corruption hoarding and illegal activities is being phased out.
What a time to be alive, this will definitely be interesting to see. To quote President Uhuru Kenyatta, we shall come to appreciate hard work versus overnight riches.”