Kenya’s curse of monetary expansion during elections

The Central Bank of Kenya(CBK) as the beating heart of the economy takes a beating in the fray, its foundational role overseeing financial sector safeguards challenged while it retains the key role of fiscal agency for government.

When beholden to incumbents at elections, CBK corners itself. Mysterious access to unbacked money and its dispersal portrays the cracks in intellectual and mandated regulatory independence to steer the economy, direct monetary policy, and price stability. If 2027 replicates Moi’s 1992, with its money printing and the Goldenberg fraud, expect the economy to sink- again. With only a 36.65percent vote, Moi wrestled the flawed December 26, 1992, election with hands dripping in blood and a shattered economy.

Pressures for irregular money typically begin with spikes in government spending as desperate incumbents finance corruption and flawed public finances. Tender magnates ride roughshod over the economy. Today, as 10 firms pocket 60percent state tenders, power brokers hold sway. Money stashed in gunny bags, billions in cash, sidesteps a system named Kenya Electronic Payment and Settlement System (KEPSS) serving as the country’s Real-Time Gross Settlement (RTGS) for high-value and time-critical financial transactions

All this while Safaricom (with government asset holdings now stripped in a questionable sale) still rides the waves as Kenya’s global example of cashless transactions. If the gunny bags of Ol Kalau, Mbere North etc, were unbacked monetary expansion marking CBK’s capitulation, we have failed the lessons of 1992-1993, their destructive fiasco.

As Moi siphoned off unbudgeted money expansion, the repercussions destroyed monumental assets and wealth of hardworking Kenyans and taxpayers. The costs? Inflation at 46percent in 1993; an economy at near collapse; GDP growth at near zero; mass unemployment; ethnic clashes, etc. Months after winning, Moi struggled to pull Kenya from the brink.

Donors were not playing ball; they froze $350 million in aid by November 1991 demanding both multi-party democratic elections and aggressive free-market structural adjustments – including "retention accounts" freeing exporters to retain foreign-currency earnings instead of remitting them to the CBK; freeing the prices of corn and wheat, etc.

Moi after the money printing to fund Ol Kalau/Mbere North-like briberies blamed the skyrocketing inflation, deep recession, and social hardships, on the Bretton Woods institutions, ‘cruel, dictatorial and unrealistic.’ As he suspended liberalisation, global lenders pushed back a fiercely at a meeting in London to stem monetary expansion, end corruption, cut a bloated public service, trim parastatals, and boost the private sector.

The New York Times of March 26, 1993, portrays Moi stewing in economic apocalypse, having bitten more than he could chew. Sidelining his political backers from the fiscal feeding trough, their retreat let him throw the skunk at taxpayers and a new CBK Governor famous for renaming the CBK problem: hyperinflation, amenable to ‘mopping up excess liquidity.’ CBK aggressively drove an unprecedented new model very much alive today, to the detriment of the Kenya economy: high interest rates and high-yielding Treasury bills pumped into circulation, to be redeemed by taxpayers. The Governor even staged historic comedy by burning CBK documents at Karura Forest.

Who gained from the mop-up? Principally banks, lending cheap customer deposits to government for high returns, paid for by taxpayers. Portfolio investors benefited from the dismantling of restrictive foreign exchange controls and a liberalized forex market that ended fixed exchange rates.

The CBK oversaw an escalation of interest rates as a tool to incentivise commercial banks and investors (including foreign portfolio investors) to hold government securities rather than lend for Kenya’s productive economic activities.

I have argued elsewhere that this mistaken trap defies financial intermediation. A Primary Dealers system (as in the US or even neighboring Uganda) would tap market-driven domestic debt. Results? A history of ignoring bank lending to Kenya’s fundamentals for economic output, even a lack of customer care in banking, has put blinkers into banking as a casino for securities. Two examples suffice, one as recent as the last six-month bank reports to CBK.

Today, banks’ balance sheets amass historically low-cost deposits on liabilities; the assets side prioritize risk-averse government securities and sidesteps lending to the real economy. Access to capital is decimated. The low-cost deposits include public sector accounts, Pension Funds, Insurance companies etc.

The model diminishes access to capital and growth as in Fig.1, showing the problem in global context. Kenya’s private sector credit crunch (at 31.6percent) is so severe it is inferior to the Sub-Saharan average (33.1percent). And the credit availed is never allocated by sector priorities to unlock growth and employment.

Who are the losers? The economy with only 12percent of Kenya’s labor force in formal jobs. Even highly skilled Kenyans stay unemployed. Worse, from low-cost deposits, banks set an acute margin (called the interest rate spread) to anchor sky-high profits lending to government securities. Restricted private sector access to capital is attributed to non-performing loans -NPLs. Finally, government redeems debt service from current and future taxpayers without default.

"Evidence of rip-off"

Debt Service is indeed a first claim on the Consolidated Fund, which now surpasses spending on development, education, etc.). In this sense, government pays interest on its own money by offering high interest on the securities banks purchased with deposits of public money sourced from their deposit liabilities).

It contributes to the super profits model. Starved of loans, Kenya’s economy limps on with low investment and mass unemployment. Strangely, the model parallels the fate of post-colonial coffee and tea growers. They earn peanuts from raw exports as their exports make millionaires abroad. Evidence of the rip-off? Pick Q1 2024. Kenya’s bank returns on equity (ROE) averaged 21.9percent: this was more than double the US bank ROEs averaging 10.3percent.

Second, study the official bank reports to CBK for the six months ending June 2026. Cheap customer deposits just got even cheaper (falling 8.4percent to 6.8percent). Banks increased the interest spread from 6.9percent to 7.5percent. It is very odd for customer deposits to earn banks a spread greater than the cost of customer deposits.

The top 11 lenders earned 16percent more (from Sh124bn a year ago to Sh144.9bn). Loan defaults (with the NPLs hypocrisy still intact) fell by 8.9percent for the top nine banks. Surprisingly, CBK retained its CBR at 8.75percent since February 2026. Banks’ lending rate was 14.4 percent as of June 2026. Banking needs reforms.

Dr. Wagacha is former Senior Economic Adviser, the Presidency, Acting Chairman of CBK Board and Chair of the Sovereign Wealth Fund Committee (2014).