"Wash Wash" Explained from an economist's perspective

By:Franc_kenyan

Following  Edgar Obare's expose on Wash Wash I thought  it might be good to share the adverse effects of the industry  to the economy and to us wananchi wa kawaida.  

Wash wash increases the country's money supply;  which  includes both cash and other types of deposits that can be used almost as easily as cash. So you would think CBK realeases data on Money supply  because of its effect on real economic and price levels?

Unfortunately it doesn't.  What the CBK  releases is the Country's  GDP on a quarterly  basis. GDP is normaly assessed as a comprehensive indicator of a country’s overall economic health. So let's disect it.

So it comes as no surprise  that the CBK cannot notice when people print money and pump  it into the economy. Note that tbe only way "new" money can come into the economy is through FDI, foreign remittances and money laundering.

Let's divide GDP into two; Real GDP and Nominal GDP. Nominal GDP is  calculated at current market prices and rises with money supply. On the other hand, Real GDP is an inflation-adjusted measured and does not have as clear of a relationship with the money supply.

How does an increase in money suppy impact on the economy?

1. Increase in asset prices ( housing, land, etc) that's coz watu wako na pesa. This is what you see in Kilimani and Lavington. A simple  house unapata service fee ni 10k.

2. Another effect is wastage.

Boat parties, endless parties and luxury cars.

This goes hand in hand with speculative investments, which can result in the rapid escalation of asset prices followed by a contraction (a  bubble). This is what happened in the Real estate industry.

You get people investing blindly into markets they have no experience in. It started with shopping  malls then to real estate.

3. Effect on small businesses 

You open a business with your hard earned money then a month later someone comes a opens a similar business next to you. You invite competition only to find out they similar products at half price. What do you do?? 

You just go out of business.

Wash wash guys have different business economies and can offer their products below production costs. It sounds ridiculous, but they don’t have to make a profit with their products and earn a margin. Their primary goal is to launder to the funds as they print their own money.

Almost forgot the decrease in govt revenue and subsequent increase in taxation.

Most of these dealings are in the informal sector so govt cannot tax the businesses hence less revenue . What happens is that taxes are increased to curb the budget deficit caused by this.

Inflation

The ultimate effect  of wash wash is inflation.

Money itself has no intrinsic value and we only consider it valuable due to its ability to buy things. In Kenya we use fiat money which requires us to have trust and faith in the govt that our money has value

If money gets printed aimlessly and pumped into the markets, according to the laws of demand and supply, the value of the money falls.

More money will be in circulation so the prices of commodities will rise.

Let's  put this into perspective; the 1 USD was worth 80ksh in the late 2000s. Now 1 USD= 108ksh. That increase is due to various factors, inflation  included.

Kenya's inflation rate now stands at 5.76%, which is not bad, nearly the same as most developed countries.

However, we all live in and know Kenya so hatujui what data they use to come up with these figures. 

Just saying!! The price of refiling a 13kg cylinder gas was 1, 900 in April, now it stands at 2,500. Gas is an essential household commodity so it can be used to calc inflation.

Okay, didn't know the CBK tweets here, through  its proxies at least. So from the DMs i've been given the money supply data which is apparently public.

It doesn't take anything from the thread it just raises more questions. 

Let's understand money supply

Money supply = currency + Liquid assets.

In the CBK data you'll  see;

M0 which is usually the Base money or total money printed ( money in circulation  + federal reserves)

M1 is the amount of money held by the public + transaction  deposits 

M1= M0 + Chekable deposits - Reseves

M2= M1 + Savings, NSE, time deposits

M3 =Investment accounts + M2

Let's  also understand that the more money is printed, the less value it will have. 

So, what's the difference between the money printed at De la rue and those printed elsewhere? Or even those laundered from illegal activities.

Well, the money printed at the federal reserve can all be accounted for as M0. The CBK can print as much money as it wants but will regulate how much of it will be released into circulation. So we can have an increase in M0 by over 20% but a regulated increase in M1 and M2.

In this case, the prices of commodities and inflation will not increase sharply. However, if the CBK decides to release the entire cash into circulation then there would be a Zimbabwe an Argentina or worse a Venenzuela.

This is the same thing that can happen if illegal money infiltrates our systems

To all those saying that the effect of Wash wash is negligible should know that the enxtent of their operations is diverse.

How do you think stolen public funds find their way into bank accounts?  Fake arms and Gold deals, inflated project prices?