I may have misunderstood, but basically CRR is part of the monetary tools that CBK uses to control money supply in the medium term. Other tools it uses is repo and reverse repo for the short term, and CD's (which are deposits by banks that earn interest - not sure whether they still exist). On fiscal side, Treasury borrows from the public through CBK via T-bills and bonds, to cover for their capital and recurrent expenditure, and repaid through taxes.

Paying all deposits to banks as opposed to taking bonds would be detrimental to the economy, as GoK would be competing with the prvt sector for funds. Secondly, 4% would imply short term facility, if we're to go by the yield curve, otherwise banks will still ask for the 10% to keep 10 yr deposits, considering GoK needs long term borrowings to manage cashflow, which is usually rolled over on maturity.

All in all, there is a very thin, and hazy line between CBK & GoK (Treasury), as CBK hasnt been given full independence as in other countries.

@tonicasert. Check out this interesting article in the Business Daily today. Excerpt.

Treasury has accumulated billions of shillings in the past few weeks, causing jitters among banks and forcing the Central Bank to intervene frequently with injection of liquidity into financial markets.

Treasury’s lack of capacity to spend cash comes at a time when the CBK is keen to keep inflation in check and interest rates low but analysts say the delicate balancing act may not be sustainable.

Read more:

http://www.businessdaily.../-/oc8wj9z/-/index.html

Taleb: Piling On More Debt Won't End Global Crisis. Read more:

http://www.moneynews.com...ebt/2010/05/10/id/358549

wow, great stuff. CRR is not really permanent? Yes..humm I used a poor choice of words, I guess what I meant is that the injection is not a loan (not contracted to be repaid). If you raised the CRR back to 5.0% from the current 4.5% then the 0.5% would immediately be required to be kept as a mandatory reserve, the move would ideally be long term. The reason is more likely a long term is that it's supposed to trickle down through the system (to achieve the desired effect). But we can see clearly why lowering CRR is easier than raising it.

Why does the interbank lending mart exist? Commercial Banks take and create deposits. They take deposits from depositors and create deposits when they make loans. The language sounds wrong, but it's the case and I believe it's the fundamental reason behind the interbank loan market. The core functions of any bank (stated above) therefore involve the movement of deposits all over the system resulting in liquid banks here and illiquid banks elsewhere. So when there's a crunch, rates go up but when there's a flush they go down.

When govt has a public auction (Bond/Bill) they cause liquidity problems becoz cash leaves banks heading to CBK vaults. This has an impact on interbank rates by raising them. However, CBK can also influence these rates, when there's a crunch they buy bonds (reverse repo), when there's a flush the sell bonds (repo). Treasury can also influence these rates, when there's a crunch they increase govt spending, during a flush they freeze spending. Therefore it is clear what is causing the need for injections (see post 25).

The questions on the table are (1) why keep issuing bonds if there’s an accumulation of govt funds at CBK? If govt has over Ksh75 billion (post 22) at CBK why not stop issuing bonds until that figures drops to say Ksh20 billion (2) if ministries are incapable of spending money efficiently then why have such huge expenditure planned, thus huge deficit financing? Or only issue debt near June when ministries are expected to spend it. (3) If the goal is to lower interbank rates, wouldn’t it make sense to flood the banks with cash (i.e., increase govt spending)?

All CBK is doing is increasing the domestic debt (way over budget) and crowding out the private sector. Look at the Q1 results from Equity, KCB to NIC Bank, to COOP today (except CFC & DTBK), lending to govt was higher than ordinary lending in each case. So how can govt purport to want to promote consumer lending when CBK is supporting banks during auctions, while creating competition between borrowers and them. This whole debacle leads me to think that the reason behind not spending govt cash is because is actually a tool to tame the inflation banks would create through lending.

A whopping Sh30 billion earmarked for development in the current financial year and released to ministries remains idle in bank accounts, hampering delivery of critical services to wananchi.

The riddle of unspent billions, coming hardly a month before the next budget, has provided the latest indications of how ministries have been unable to roll out projects which were listed in this year’s budget.

“Whenever concern is raised, people often think that it is Treasury that has refused to release the money. But the fact is that some ministries sit on billions of shillings that Treasury has already approved electronically for expenditure,” the PS said on Tuesday.

Officers to blame

On Tuesday, Mr Kinyua said that the Treasury, which is responsible for releasing the money to the ministries, was concerned about the trend of cash remaining untouched in Central Bank of Kenya accounts.

Mr Kinyua said that permanent secretaries and accounting officers, charged with executing projects, were the culprits.

Read more:

http://www.nation.co.ke/...32/-/hf6pvl/-/index.html

UK maths just don't add up-dude needs to go easy on muratina. How many t-bills have we had to finance gaps in the Budget? I can quickly recall two of them that alone add to Ksh30bn.

So how come we then end up with this massive underspend? Doesn't the right hand know what the freaking left hand is doing?