Where did the billions go? CBK falls short of demonetisation target

The mystery of missing billions from the Kenyan economy has been exposed by the ongoing currency replacement exercise that ends tomorrow.

In one of the best-laid plans to rid the country of dirty cash, the Central Bank of Kenya (CBK) worked behind the scenes, keeping most government officials, banks and all the other players in the financial sector in the dark.

HOARDING BILLIONS

It secretly printed the new bank notes and quietly gazetted laws to give them the legal backbone before swinging a surprise blow on money launderers and fraudsters. It chose a public holiday, Madaraka Day on June 1 this year, to launch its attack, catching by surprise those who would have rushed to court had they got wind of what was coming in advance.

But this was a move loaded with political significance as some influential individuals were suspected to be hoarding billions of shillings in cash outside the banking system.

Satisfied, the financial sector regulator then retreated to launch a national publicity blitz, the last part of the plan ahead of tomorrow’s deadline to return the old Sh1,000 notes that will be worthless from October 1. And, like a lion waiting on its prey before it pounces, the authorities started the important wait for those with illicit money, tax evaders, politicians, terrorist financiers and money launderers to walk into any of its traps.

They have so far not turned up with the billions, at least not through the open doors, according to multiple sources who spoke to the Sunday Nation in confidence.

COUNTERFEITERS

Either those targeted had anticipated the June 1 action long before it came and converted the billions into foreign currency long before CBK came calling, or they opted to lose their loot, taking the air out of the demonetisation balloon.

In recalling the 217 million pieces of the old Sh1,000 notes in a massive and expensive process that cost the taxpayer over Sh15 billion, the CBK had also taken the war to the doors of counterfeiters.

But most importantly, the four-month currency demonetisation process was meant to force those keeping billions of shillings outside the banking system – in private safes and deposit boxes, bunkers, under mattresses and abroad – back into circulation. By close of business tomorrow, CBK hoped to suck back Sh217 billion, which represents 80 per cent of all the money in circulation, in a process that would redistribute it back in the economy.

The Kenya Revenue Authority (KRA) has been waiting in the shadows for an opportunity to pounce on anyone with unexplained wealth or who has not been paying his fair share of wealth, while other agencies that deal with money laundering, among them the Financial Reporting Centre and the Asset Recovery Agency, have been on high alert. 

DIRTY TRICKS

But as the deadline nears, it is emerging that the biggest success for the CBK will be replacing the old Sh1,000 notes with the new ones, and will end up with a hole in its books estimated to run into billions of shillings if nothing out of the ordinary happens tomorrow.

According to figures reviewed by the Sunday Nation, by September 1, only 24 people had walked into any of the 42 banks with more than Sh2 million in the old notes to convert to new ones. In fact, 99 per cent of those who converted the notes had Sh1 million or less.

This means either no one had more than the Sh1 million in cash, or those who did decided to beat the system by breaking their loot into smaller amounts to escape the scrutiny of the CBK. 

There was no rush and hardly did any bank witness the scenes seen elsewhere in the world, particularly in India, where panicked citizens arrived in banking halls with sackloads of money.

“There are not too many people with too much money,” Dr Patrick Njoroge, the CBK Governor, told reporters in a briefing at the regulator’s offices this week as he gave an update on his latest monetary policy decision. There were also revelations of suspected dirty tricks being applied, including huge amounts used to buy wheat in Narok.

SHOCK ECONOMY

The elephant in the room, however, is how to reconcile the books of the CBK with actual money that is in circulation without printing new money to fill the shortfall, estimated to be as much as Sh30 billion.

Mr Tony Watima, an economist, argues that if, for instance, Sh20 billion (an hypothetical figure) will not have been returned by the end of tomorrow, it means that Sh20 billion worth of money will have been taken out of circulation.

This may shock the economy since less money will be chasing available goods and services produced at the demand level that had factored in that missing Sh20 billion.

“For CBK to get money back from circulation, it earns it by buying government securities from commercial banks and institutions. In this case, it has mopped up at no cost and the Sh20 billion will be reported in CBK’s accounts as cash reserve only to be released by selling government securities,” Mr Watima said.

One of the biggest problems with too little money in the economy is that consumers end up being denied their spending power, and this hurts the economy. For the several companies that have been sacking staff to small businesses struggling to remain afloat, a common thread has been too little money in circulation.

SH100 BILLION

If there is one question that has irritated the soft-spoken CBK governor in the last four months, it is how much Kenyans have returned in the old notes. Yet, ordinarily, it should not be a difficult question, given that it is the CBK that prints the money, controls circulation and receives reports on a daily basis from all the 42 banks in the country.

Dr Njoroge declined to give the total value of money so far returned until next week. However, by August, about Sh100 billion had been exchanged, which was nearly half of the Sh217 billion that was to be replaced.

In value terms, the CBK said 58 per cent of all the money exchanged by September 1 was less than Sh500,000, while 75 per cent was less than Sh1 million.

The Kenya Bankers Association (KBA), the industry lobby which has supported the process all through, says the CBK does not necessarily have to print and issue new notes in the market to deal with the deficit, but it will have a better understanding of just how much money is out there, which will inform its future decisions.

“The process will give a clearer picture of exactly how much money is in circulation, and it means the Central Bank will now have to clean its books,” Mr Habil Olaka, the chief executive officer of KBA, said in an interview.

On its part, the Kenya Forex Bureaus Association (KFRA) said it has been largely business as usual for its members as the earlier anticipated spike in currency action as money launders rushed to beat the deadline did not materialise.

THE NUMBERS

“I think this is because of the stringent measures put in place. Assuming by the end of the process they have not returned, then the stolen money will become valueless and they will not benefit from it,” said Mr Mohammed Nur Ali, the KFRA chief executive officer.

But the Consumer Federation of Kenya (Cofek), which has been critical of the process, says those who had been targeted for looting public coffers have been trading in dollars and have stacks of the greenback kept away, shielding them from any losses and making the whole process an exercise in futility.

“The CBK is nursing wounds after overspending on the exercise and has gotten no value. We advised that for there to be any success, the CBK should have sprung a surprise and given people a short window to return the money. Four months was too much,” Mr Stephen Mutoro, the secretary-general of Cofek, said. “Besides, it is an open secret that looters started using dollars long time ago and this did not catch them by surprise.”

But CBK brushed aside these concerns, promising to give the numbers and its verdict on the exercise next week.

INFLATION

The other target of beating counterfeits appears to have suffered minor injuries after counterfeiters shifted to the new currency. Fakes of the new generation notes in denominations of Sh100, Sh500 and Sh1,000 are circulating in, especially, Nairobi and Kiambu counties.

Demonetisation has not always yielded the desired results. India scrapped 500 and 1,000-rupee bank notes in 2016 to flash out tax evaders.

However, this did not get the desired effects as 99 per cent of the money still got back into the system.

Nigeria also introduced a new currency and banned the old notes in 1984 under the Muhammadu Buhari administration. But this caused chaos and was blamed for the inflation that followed and crashed the economy.

EXCESS LIQUIDITY

Ghana attempted a similar move in 1982 when it ditched its 50 cedis note to deal with rampant tax evasion and empty excess liquidity. It had the downside of fuelling a currency black market.

North Korea tried this in 2010 but ended up leaving citizens with no food and shelter after Kim-Jong II knocked off two zeros from the face value of the old currency in order to kick out the black market.

There have been at least five success stories where the exercise worked for the economy and resulted in the intended outcomes.

These include Pakistan (2016), the UK (2002), Australia (1996), and the EU (2002). Zimbabwe attempted the same move in 2015 and succeeded after adopting the US dollar as its official currency.