The amount of foreign money circulating in Kenya from unexplained sources fell drastically in the three months to June, reflecting the extent to which the military operation in Somalia has disrupted the networks that were suspected to be responsible for the flow.
Unexplained foreign money in Kenyaâ€™s banking system fell to Sh6.5 billion in June from a high of Sh170 billion at the beginning of last year, the lowest in five years.
The development appears to vindicate some analystsâ€™ position last year that rampant piracy in the Indian Ocean and its proceeds were responsible for the unexplained flows. The trend also contradicts the Central Bank of Kenyaâ€™s vehement denial of the same.
â€œIt is conceivable that there are fewer Somalia-related flows coming through to Kenya, but one cannot be sure at this point in time,â€ said Razia Khan, the StanChart head of research for Africa.
The inflows have previously been linked to the property market bubble in many Kenyan towns and excessive demand for imported goods.
Kenya National Bureau of Statistics (KNBS) report for the quarter ending June shows that unexplained forex flows dropped to the lowest level as Kenya Defence Forces incursion into Somalia deepened, disrupting the networks that moved illicit cash and goods.
The figure is expected to drop even further in the second half of 2012 following the recent capture by African Union forces of Kismayu, the Al-Shabaab terroristsâ€™ last stronghold in Southern Somalia.
Piracy in the Indian Ocean grew to crisis levels last year, leading to the hijacking of more than 100 ships for which the terrorists were paid millions of dollars in ransoms.
Kenya has also been swamped by billions of shillings worth of goods imported through the Al Shabaab controlled Somalia coastline. The rise in unexplained foreign money (referred to in accounting lingo as errors and omissions) entering Kenya as piracy peaked in the Indian Ocean is what led to the suspicion that some or most of the ransom money was being spent or kept in Kenya.
The unexplained cash stood at a staggering Sh128 billion ($1.5 billion) by mid last year and rose to about Sh170 billion ($2 billion) at the beginning of the year.
Besides piracy, analysts have also pointed at the failure by banks to properly categorise the forex receipts and their sources.
â€œBetter categorisation by banks may be a part of itÂ (reason for lower â€˜unexplainedâ€™ inflows) though, Iâ€™ve not seen signs that something is being done differently,â€ said Ms Khan.
On Tuesday, CBK maintained that it did not know the source of the cash, insisting that KNBS should explain the flows as the author of the data.
â€œConsidering that KNBS is the author of the data you have made reference to, they should be better placed to respond. Therefore, please re-direct your questions to KNBS,â€ CBKâ€™s communications office said in response to questions on the data.
CBK governor Njuguna Ndungâ€™u also referred the Business Daily to KNBS saying he was not in a position to know the source of the forex.
â€œThe tabulation of the GDP numbers is not part of the Central Bankâ€™s mandate but that of the KNBS. Ours is just to come up with policy issues,â€ said Prof Ndungâ€™u even as KNBS insisted that the CBK and Kenya Revenue Authority are the primary sources of its data.
â€œMost of the data comes from the Central Bank. They should have the original records of the source of the cash. All we do is collect it,â€ said Zachary Mwangi, KNBS director general.
The CBK is the custodian of supervisory information from banks and non-bank financial institutions.
Foreign exchange flows are among the most monitored aspects of the financial system. Monitoring the forex inflows is of great interest to CBKâ€™s effort to control financial crimes such as money laundering and fraud.
The presence of huge amounts of suspect cash in the Kenyan system is also being seen as an indication that the regulator does not strictly require banks to record sources of forex they collect from clients.
The recent slump Indian Ocean piracy has also had another positive impact on the Kenyan economy. The cost of imported goods has gradually dropped in tandem with freight as insurance companies lower premiums charged with reduced risk of attacks.
Analysts also expect the Kenya shilling to remain stable despite the drop in support from the unexplained flows as long as the monetary authorities stay on the aggressive path in their management of liquidity.
That is also to say the imbalance between imports and export is being corrected through liquidity management, meaning that the CBKâ€™s recent market activity will persist in the near term.
Indian Ocean piracy was seen as contributing to higher forex flows into Kenya leading to higher liquidity in the market last year, driving inflation.