An investigation into the effects of seigniorage in financing public projects in Kenya

Abstract

The development of public projects in Kenya is one of the flagship areas for the country to advance into a developing economy. This has been entrenched by the country in its latest development master plan, well referred to as Kenya, Vision 2030. This strategy paper has earmarked a growth rate of 10% in a number of years for key sectors such as tourism, agriculture, trade and manufacturing. However, achievement of such grand plans becomes impeded if there are not enough funds to spur this developmental growth. This study therefore has taken a look at Seigniorage and investigated its effects in financing government projects. The objectives of the study was to determine the cost of issuing banknotes and coins, to determine the income derived from the issue of banknotes and coins and to evaluate the extent that income derived from the issue of banknotes and coins can have an effect in financing public projects in Kenya. The study adopted the descriptive design method and a questionnaire administered to 14 respondents on a census basis. The study was also longitudinal and therefore it ana lysed data from the financial statements of the Central Bank of Kenya over a five year period so as to determine the currency in circulation growth and eventually derive the Seigniorage income that could result from this issue. The study was conducted in Nairobi, Kenya primarily at the Central Bank of Kenya. The study was facilitated by use of both primary and secondary data which were collected, collated and ana lysed statistically using mean, mode and range. The dependent variable for this study was financing of public projects and the independent variables were costs of issuing currency, derived income from issue of currency and the recognition of this income. The intervening variables were state of the economy, political stability and adopted accounting policies. The research revealed that currency in circulation has been on an upward trend and the total costs associated to these currencies much lower than the face values ascribed. With the positive trajectory in circulation growth and the much lower investment costs for getting these products to circulation, the uptake of another revenue source seems to be in the offing. Whereas incorporation of Seigniorage revenue as an important revenue stream could be considered for the Central Bank of Kenya, primary adoption should not be the focus as it may deter focus to revenue generation and not price stability. With the right focus, the possibility that Seigniorage income will more often than not be positive and in the billions annually, the overall effect to development of infrastructure in Kenya will be phenomenal. Financing of public projects in Kenya can be dependent on revenues from Seigniorage adoption and implementation.