Introduction

The Central Bank of Kenya (CBK) recently disclosed that the printing of new currency notes would cost the nation Sh14.2 billion. This revelation was made by the CBK Governor, Kamau Thugge, during a session with the Finance Committee of the National Assembly, chaired by Molo MP Kuria Kimani. Governor Thugge emphasized that the tender for printing the new currency notes was approved by the Cabinet and had the concurrence of the Attorney General. The cost of this new printing initiative is notably $3 million lower than the previous contract serviced by De La Rue, a British currency printing firm that has long been associated with Kenya’s currency production.

This article delves deeper into the reasons behind this significant expenditure, the strategic importance of the new currency, and the broader economic and political implications for Kenya.

The Economics Behind Currency Printing

Currency printing is an essential function of any central bank, ensuring that the physical money supply matches the needs of the economy. Governor Thugge highlighted that currency notes wear out over time due to regular handling, which necessitates periodic reprinting to avoid shortages. He explained that the new notes would be of higher quality, designed to remain in circulation longer than the older ones, which would be gradually withdrawn as they wear out.

The decision to print new currency notes is also influenced by various factors such as changes in economic conditions, inflation rates, and the need to curb counterfeit currency. For instance, in recent years, Kenya has faced challenges with counterfeit notes, leading to a push for higher security features in new currency designs. The CBK’s move to replenish currency stocks and introduce new notes is, therefore, a proactive step to maintain economic stability and public trust in the monetary system.

Cost Implications and Comparisons

The Sh14.2 billion cost of printing new currency notes has raised eyebrows, particularly in light of the significant expenditure during a time when Kenya is grappling with fiscal challenges. However, this cost is relatively lower compared to previous contracts, with Governor Thugge noting a $3 million reduction compared to the contract serviced by De La Rue.

The contract with De La Rue had been a point of contention in the past, with debates surrounding the cost-effectiveness and transparency of the tendering process. De La Rue has been the primary supplier of Kenya’s currency for decades, but the government’s decision to seek a more competitive bidding process this time around appears to have yielded financial savings.

Global Context: How Does Kenya Compare?

When compared globally, the cost of printing currency in Kenya is within a similar range to other nations, although it is difficult to make direct comparisons due to differing economic scales, security features, and the volume of notes required. For example, in the United States, the Federal Reserve spends approximately $800 million annually on printing new notes, with costs varying depending on the denomination and security features. This puts Kenya’s expenditure into perspective, highlighting that while the Sh14.2 billion cost is substantial, it is not excessively out of line with global standards for currency production.

The Role of Currency in Economic Stability

The CBK’s responsibility extends beyond merely ensuring that currency is available. The central bank must also ensure that the currency remains trustworthy and efficient in its role as a medium of exchange, a store of value, and a unit of account. By investing in high-quality currency notes with advanced security features, the CBK is not just replenishing old stocks but also reinforcing the integrity of Kenya’s monetary system.

Moreover, the decision to continue printing physical currency in a rapidly digitalizing world underscores the ongoing importance of cash in Kenya’s economy. Despite the rise of digital payment systems like M-Pesa, cash remains a critical part of everyday transactions, especially in rural areas where digital infrastructure may be less developed. Therefore, the CBK’s investment in new currency notes ensures that all segments of the population have reliable access to money, supporting overall economic inclusivity.

Political and Social Considerations

The introduction of new currency notes also carries significant political and social implications. In many countries, currency changes have been used as tools for political messaging or economic reforms. For example, India’s demonetization in 2016 was a controversial move aimed at tackling black money and counterfeit currency but led to widespread disruption.

In Kenya, the introduction of new currency notes could be seen as a continuation of efforts to modernize the country’s financial system, particularly following the 2019 currency demonetization, which aimed to combat corruption and illicit financial flows. The replacement of old notes with new designs featuring advanced security features aligns with ongoing government efforts to enhance transparency and integrity in the financial sector.

Challenges and Criticisms

Despite the apparent benefits, the decision to spend Sh14.2 billion on new currency notes has not been without its critics. Some economists and political analysts argue that the funds could have been better spent addressing more immediate economic challenges, such as reducing the national debt or investing in critical infrastructure projects. There is also concern about the transparency of the tendering process, with calls for greater scrutiny to ensure that the contract was awarded based on merit and not influenced by external pressures.

Additionally, the logistics of introducing new currency notes can pose significant challenges. The CBK will need to ensure that the new notes are distributed effectively across the country and that the old notes are withdrawn in a manner that does not disrupt economic activity. This will require close coordination with commercial banks, financial institutions, and law enforcement agencies to prevent counterfeiting and ensure a smooth transition.

The Way Forward: Balancing Costs and Benefits

As Kenya continues to navigate its economic landscape, the decision to invest in new currency notes is a reminder of the complex balancing act faced by central banks. On one hand, there is the need to ensure a stable and reliable money supply that supports economic activity and public confidence. On the other hand, there is the challenge of managing costs and ensuring that public funds are used efficiently.

The CBK’s decision to reduce the cost of currency printing by $3 million compared to previous contracts is a step in the right direction, demonstrating a commitment to fiscal responsibility. However, the broader question of how to best allocate resources in a time of economic uncertainty remains.

As Kenya prepares to introduce its new currency notes, it will be crucial for the CBK to maintain transparency and engage in public communication to build trust and understanding among citizens. The success of this initiative will depend not only on the quality and security of the new notes but also on the public’s confidence in the central bank’s ability to manage the country’s monetary system effectively.

Conclusion

The Sh14.2 billion investment in new currency notes by the Central Bank of Kenya is a significant undertaking with far-reaching implications for the country’s economy. While the cost is substantial, it is justified by the need to maintain a reliable money supply, enhance the security of currency, and support economic stability. However, the CBK must navigate the challenges of transparency, cost management, and public communication to ensure the success of this initiative.

As Kenya moves forward with the introduction of its new currency notes, the CBK’s actions will be closely watched by both domestic and international observers. The outcome of this initiative will serve as a benchmark for future monetary policy decisions and will shape the public’s perception of the central bank’s role in safeguarding Kenya’s economic future.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

22nd August, 2024