Date
1. Introduction
The Covid-19 or coronavirus was first reported in late December 2019. Since then, Covid-19 has become a global pandemic with 827,417 confirmed cases and 40,777 deaths across 206 countries, areas and territories. The spread of the virus has led to unprecedented actions by countries globally including border closures, quarantines, curfews, and so on, not seen since the second world war in a bid to slow down the global contagion that is already underway in Europe, Americas, and now Africa. In Africa, there are 4,073 confirmed cases of which 287 were new as of 1st April 2020, and 91 confirmed deaths of which 14 were as of 1st April 2020. In Kenya, as of 1st April 2020 there were 81 confirmed cases of Covid-19. (Source: Ministry of Health, Kenya, 1st April 2020).
In an integrated and globalised world, the measures to curb the spread of Covid-19 will undoubtedly have an impact on the global economic system as well as long lasting social consequences across different countries. Developing countries in Africa are approximately 3 or 4 months behind the global contagion curve and therefore urgent concerted efforts need to be undertaken to mitigate the contagion taking a foothold on the continent. It is uncertain the extent to which the fragile health infrastructure could cope with Covid-19 pandemic. On the economic front, the continent is integrated into the global trading system and being a net importer, Covid-19 is likely to cause a deep recession in many countries including the larger economies like Kenya. This, coupled with growing indebtedness of many African countries is going to test the limits of policy to prevent countries falling over the edge into a recession and debt crisis. On the social front, fragile healthcare systems, vulnerable social protection systems, and large informal workers is likely to see countries like Kenya witness rise in unemployment, rising poverty, growing inequality, as well as higher fatality rate relative to confirmed cases as the pandemic continues to spread across the world.
2. Potential Impact of the Covid-19 Pandemic in Kenya
The global and national measures being put in place to slow the spread of the Covid-19 virus will have significant impact on the Kenyan economy. This impact is expected to be felt across all sectors of the economy and society.
Economic impacts
Growth – The Kenyan economy has been stuttering for the past decade averaging between 5% and 6% growth rate. Its continued reliance on the export of primary commodities and inability to move up the value chain across all major economic and productive sectors make the economy extremely vulnerable to the spill-over effects of the Covid-19 virus. The export share of GDP has been on the decline for the past decade and strategies to develop export oriented strategies are yet to be fully integrated in any meaningful way. The Covid-19 pandemic shock could adversely affect Kenya’s foreign reserves in the medium term. Being a net importer of raw materials, the Covid-19 virus is going to disrupt in a significant way the business operations in the Kenyan economy. MSMEs are likely to bear the brunt of this disruption from the slow-down of global supply chains and will see their business operations either grinding to a halt or go out of business all together. It is likely the Kenyan economy will experience a reduced growth rate. The National Treasury, in its 2020 Budget Policy Statement, noted a lower than expected growth in 2019 at 5.6% against a target of 6.2%. The onset of the Covid-19 virus and specifically now with reported cases in Kenya, this growth rate is likely to be revised further downwards to about 2% to 3%.
Revenues – The result of this lower than expected growth in 2019 will have a direct impact on the revenues raised in order to fund its next fiscal period. Revenue targets in Kenya have been missed for the past decade and according to the National Treasury ordinary revenue targets for the current fiscal year have been revised downwards by Kshs 33.4 billion to Ksh. 1.78 trillion. Despite this downward revision on revenues, the National Treasury has planned for an increase in recurrent expenditure and reduction of development expenditure. These measures are noted on account of increase in interest payments, wages & salaries as well as pensions payments. (Source: Budget Policy Statement 2020). The onset of the Covid-19 virus and resulting revision downwards of growth forecasts will undoubtedly lead to lower than expected revenues from all sources. Tax revenues in particular will be affected especially owing to businesses having to reduce their operations, their supply chains disrupted, and depressed consumption due to the restriction on movement of people to contain the spread of the Covid-19 virus. The anticipated lower tax revenue collection in the immediate to medium term is going to place even further pressure on tax policy and revenue as government implements measures to shore up citizens and businesses in order to mitigate the impact of Covid-19.
Debt – Kenya’s national debt has been a growing concern given the government’s increased appetite for commercial and non-concessional loans that attract higher interest rates. A parallel concern is how this accrued debt especially from instruments such as the ‘Eurobonds’ is being used. In some cases funds raised from these bonds are being used to pay off existing debts instead of investments in the country’s national development agenda. Kenya finds itself borrowing to pay debt and not investment. The most recent figures indicate the country is headed towards a debt precipice. Public debt stands at over Ksh 5 trillion (US$50 billion) or 60.15% of Kenya GDP, a 4.97 percentage point rise from 2017, when it was 55.18% of GDP. According to the most recent debt sustainability assessment, the government has breached key debt service to revenue ratios, with concerns on the increased proportion of commercial loans with high interest rates. To put this into perspective, the debt per capita or debt per Kenyan is has risen to US$1,029 in 2018 per inhabitant from US$865 in 2017. A further concern is the move by the government to underwrite debts of county governments; and provide debt guarantees to underperforming state institutions. These types of decisions are likely to add to the already bulging debt portfolio placing even more pressure on the underfunded government purse. The onset of Covid-19 in Kenya is likely to worsen the country’s debt position due to a depreciation of the Kenya shilling which will increase the value of the national debt. Overall debt might also worsen from the borrowing the government will need to take to finance the stimulus packages planned to smooth over businesses and citizens during this period. With an anticipated contraction of the economy resulting in reduced revenues, both the public and private (individual) debt situation is likely to worsen in the short and medium term.
Social impacts
Unemployment – rising unemployment in Kenya remains a major challenge for the government despite the modest economic growth of between 5% and 6% over the past decade. It is estimated that in the decade from 2015 to 2025 that 9 million individuals will enter the labour market in Kenya and at current rate of jobs being created this will mean the unemployment rate increasing from 9.3% to about 10% in 2020. The number of jobs created in 2018 was 840,600 down on the 2017 figure of 909,800 against 7 million unemployed (Source: Kenya National Bureau of Statistics). As Covid-19 takes a foothold in Kenya and the government measures to minimise the spread will be accompanied by businesses closing and workers being sent home, there is a high risk of sending a significant number into unemployment. The knock-on effects of how businesses react to the ongoing measures to minimise the spread of the virus will have an impact on unemployment numbers beyond the tipping of the virus curve and the recovery phase post Covid-19. The ensuing lower predicted growth rates means there will be a lag in businesses readjusting back to full operations. Therefore in the short and medium term, Kenya can expect a rise in unemployment. Furthermore, the number of jobs being created in the short and medium term will decline further than those of the 2018 figure of 840,600. The rise of unemployment in country will bring with it both economic and social pressures to contend with.
Poverty and Inequality – like most crises whether national or global, there is always a risk of there being an increase in poverty and an exacerbation of inequality. The Covid-19 pandemic will lead to an increase and poverty and inequality in Kenya and reverse the positive steps taken by the government that saw the number of Kenyans living below $1.90 a day has declined from 46.8% in 2005/06 to 36.1% in 2015/16 (World Bank 17th edition of the Kenya Economic Update). Despite the reduction of those living in poverty, inequality in Kenya remains rife across all facets of life. According to Oxfam International, 0.1% of the Kenyan population (8,300 people) own more wealth than the bottom 99.9% (more than 44 million people). There are about 1 million who have unequal access to opportunities, such as healthcare and education. Gender inequality remains a major issue in Kenya with girls and women disproportionately impacted in ‘normal times’ and this worsening during crisis time like the Covid-19 pandemic. The impact of Covid-19 on poverty is still too early to estimate, but with key economic and social indicators already stuttering, it is likely that we will see a short to medium term spike in poverty and a larger number falling below the $1.90 a day poverty line. There is likely to also be some intertemporal movement between income groups as incomes will be affected in the short to medium term. The resulting poverty spikes likely to be observed in Kenya will be accompanied with a rising in inequality. In particular, it can be expected those in the informal sector will be hit the hardest and more specifically women. As the pressures of getting health facilities ready to deal with Covid-19 contagion, it is possible we there will be a diversion of resources from normal day to day health provision and this will impact access to basic healthcare. With the closure of schools and children being sent home, the impact on the education attainment of those from lower income households are likely to impacted disproportionately and spilling over to the medium term in terms of accessing higher education and employment opportunities. The full depth of the poverty and inequality impacts of Covid-19 will depend on the speed with which government interventions stem the contagion and get the economy moving again as soon as it is safely possible to do so.
Debt – Over the past decade and a half access to credit and other financial instruments has enabled citizens to access finances for investments and purchases in fixed assets such as land, residential holdings, as well as non-fixed assets such bonds and equities. The accumulation and compilation of private debt amongst citizens has spawn out of easy to access unsecured loans (little or no collateral), salaried based loans, mobile phone loan facilities, SACCOS, and chamaas. Furthermore, the growth of the mortgage and buy to rent market in the past decade is another source of debt accumulation by citizens. These instruments have the potential to increase the exposure of citizens to economic shocks and direct shocks to income meant to service these different debt instruments. With the onset of Covid-19 in Kenya and the anticipated deep-rooted effects on the economy, jobs especially suggests that we are potentially headed towards a private debt crisis that will impact bank loan exposure, retail development and completion, and repayment of ordinary loans.
3. Covid-19 Responses to smooth over the economy and citizens
In designing responses to the Covid-19 pandemic, it is important to note this is a medical emergency with both economic and social impacts. Therefore, to effectively minimise the economic and social consequences it will be critical for the government of Kenya to take drastic steps to stem the spread of Covid-19. It will simultaneously need to the consider a combination of economic and social protection measures to ensure depth and duration of this shock are shortened as much as possible.
Addressing the Medical Emergency
Testing is the most critical component in determining the depth of contagion in the country, and will inform further measures to be taken with regards to isolation and treatment. The measures the government of Kenya has taken in response to the onset of Covid-19 within its borders are signifcant and positive. The move to close schools, restrict movement, and promote cleanliness and personal hygiene have been well timed when compared with other countries globally. While there are still gaps in actually dealing with the peak epidemic in terms of medical facilities like health centres, ventilation machine, and intensive care units across the country, being behind the global contagion provides the government with a time buffer to cover these gaps. In dealing with this medical emergency, the government will need to move fast to also identify high-risk individuals and the vulnerable and ensure the health infrastructure can cope with peak epidemic when it arrives. Equipping hospitals and medical staff with the right attire including personal protective equipment (PPE) as they are at the frontline of fighting this disease. It is important to note that low confirmed numbers do not equal low contagion, it is imperative that testing is sped up and carried out with urgency if the country is to short the period to reaching peak contagion and turn the curve. The experience in other part of the world suggests that testing as being critical in the containment of the spread. The government of Kenya should invest in get testing kits into the country and test as many people as possible as quickly as possible.
Buffering the Economy
As this medical emergency takes centre stage in Kenya, it will soon begin to mutate itself into an economic crisis the country has probably never witnessed. As the rest of the world, with whom Kenya trades with and relies for both imports, exports, and foreign exchange, gradually grinds to a halt, the spillover effects will start being felt. Kenya’s reliance on imports for key industries and supply chain means we will witness a dramatic fall in the output from this sector and the knock-on effect will be reverberate throughout the economic system right down to citizens who are likely to find themselves out of work as business operations become no longer viable. A similar experience is likely to be witnessed in the export sector where agricultural and horticulture demand slows, businesses in this sector will begin to feel the effects of this global contraction. Foreign exchange from remittances and tourism are likely to drop dramatically as diaspora deal with the effects of lockdowns and being furloughed by their employers; and with international travel practically grounded, tourist visits will collapse. The tourism industry will suffer a double whammy of missing out on both international and domestic tourists given the restriction on movement.
The ensuing economic crisis is very different from the financial crisis of 2007-08 where only certain sectors where directly impacted. The crisis Kenya and the rest of the world is staring at is a near total stalling of all economic activity, contraction of global demand for majority of goods and services, business closures, job losses and increase in unemployment, increased indebtedness, and certainly deep recession that will take a long time to recover from.
Interventions to keep businesses afloat during this period will needs a combination of both fiscal and monetary policy interventions. The overall objective of the policy measures will be to ensure cash flow in the economy continues as uninterrupted as possible. The measures by the central bank to cut its base rate is a welcome first step as this will provide some liquidity to commercial banks to support businesses especially. It will also enable the National Treasury consider some recovery fund and instrument options that can be used to ease the financial stress the economy is going to experience in the short to medium term. The current rate cut will need to go further than the 7.25% announced in March 2020. Further rate cuts will likely be needed to further the cushion the economy as the government takes more actions to buffer businesses. Furthermore, the announcements made by the government to reduce certain taxes are the first wave of policy responses we are likely to see. The reduction in VAT and corporate tax rate while welcome will impact on the country’s revenue projections targets. Moreover, even with the reduction of personal income tax rates, the likely redundancies will definitely aggrevate the situation. In particular, the suspension of CRB listings backdated to 1st March 2020 will be a welcome relief to business owners who are at most risk during this crisis. The financial sector is also enacting relief measures to support SMEs in restructuring their loans as well as meeting the costs related to the extension and restructuring of loans. To facilitate increased use of mobile digital platforms, banks will waive all charges for balance inquiry. In addition, to minimise the use of cash, the cost of mobile money transactions has been waived up to Ksh 1,000.
These measures are welcome but will need to go further as Covid-19 stretches its footprint across the country. In addition to further base rate cuts, the government will need to consider developing financing instruments that can be made available to businesses. For MSMEs, the government might want to consider more radical reliefs for example suspending VAT, deferring the turn over tax, and suspending other rate and permit fees that require monthly renewals. Such proposals will provide much needed cashflow for the MSME sector in Kenya and facilitate continuation of operations. For domestic manufacturers and industry, government could pass emergency legislation to get the sector players to repurpose their production line towards producing much needed health care equipment. For example, the apparel and textile sector could be asked to produce PPEs for healthcare workers; other industries and manufacturing firms could also join the efforts to combat Covid-19. Other proposals might be considering national stadia into temporary hospital and treatment centres as a way of easing the burden on the country’s stretched hospital infrastructure. Hotels and other similar facilities could be repurposed as quarantine centres across the country to support the medical efforts and ease the stress on the health system in the short to medium term. Such interventions and initiatives will keep some several businesses across different supply chains operating and enhance even further the preparedness of country to deal with the worst that is yet to come.
Borrowing will be at the centre of any interventions the government needs to take in ensuring the economy is not crippled to its knees. With the red flags already flying high in the National Treasury’s face over national debt, the government will need to assume a pragmatic approach with its creditors. Consolidating and restructuring the country’s debt repayments will go a long way to freeing up resources to be used to cushion the economy. Negotiating a suspension or either a payment of the principal or interest amounts to creditors would go some way in easing the fiscal pressure the National Treasury is going to come under in the next few weeks and months in designing policy interventions. Similarly, the government will need to negotiate even less conditionalities on credit lines from institutions such as the IMF and the World Bank if it is to create the fiscal and monetary policy space to see itself through this crisis. The more proactive the government interventions are before the peak of the Covid-19 pandemic in Kenya, the softer the economic blow this crisis will have. The road to recovery will be long and because Kenya is about 3-4 months behind the pandemic curve, there will be an additional lag in recovery as other regions begin to flatten their curve.
Shielding Citizens
Besides businesses and the economy, the worst affected from both the medical emergency and the economic crisis will be citizens. Many citizens are facing the prospect of lost income because they have been made redundant, or reduced income because of the slow down in economic activity, or because their businesses have run into financial difficulties. The government while addressing the economic impact of Covid-19 needs to critically assess the impact on citizens and how to shield them from this crisis especially the most vulnerable in society. The aim of the interventions should be about ensuring the government can provide a reliable safety net for all citizens. The measures announced including reducing VAT from 16% to 14% does not help much. The low-income earners and informal sector workers are likely to bear the sharp end of reduced or lost incomes and VAT still being applied on goods will actually make them worse off despite the VAT reduction. The government might consider either suspending VAT or scrapping all together VAT on basic and essential goods. This will put more money in the pockets of citizens and will have a net benefit for those who will experience income shocks in the short to medium term. A welcome proposal by the government for the credit reference bureau (CRB) not to enlist people from 1st of March will be a welcome relief for many especially given the number of citizens who will find it difficult to keep up payments on loans. The government may want to go further and consider whether banks, SACCOs and other lending services can suspend repayments of loans and mortgages for a reasonable period thereby availing cash in the pockets of citizens. The same will need to be considered for landlords and the rental economy. Landlords will need protection as will tenants with regards evictions or auctioneers.
The government will need to bolster up its social protection programme and infrastructure. The 100% tax relief for those earning up to Ksh 24,000 is welcome but does not go far enough to cushion citizens. It is not clear if this is for gross or net income per month. To adequately cover many of those in employment and keep cash in the pockets of citizens, the goverment may want to consider increasing this threshold to a net monthly salary of Ksh 50,000. This will cover a wider net of those in employment and ensure more of the population have more disposable income that coupled with reduced cost of goods from VAT suspension/scrapping will act as an indirect welfare gain for may Kenyans. The increased allocation of Ksh 10 billion to the cash transfer programme is good first step but as the depth of Covid-19 is unmasked over time, this amount will need to be increased significantly both in terms of finances but also coverage of citizens. The social fallout from this medical and economic crisis will outweigh the economic impact and will take the country several steps backwards if inadequate preparations take place in terms of getting citizens to have cash in their pockets. The policy space the government is manoeuvring needs to pay close attention to the social impact of Covid-19.
The supply chain of food, fuel, and medical treatment needs to be shored up as the country awaits the peak of the Covid-19 contagion in Kenya. Keeping the population fed and healthy in order to minimise the risks of other diseases and illnesses taking a foothold in the country. The government needs to ensure the country’s food and fuel reserves both in warehouses and with retail supermarkets will be sufficient in the wake of full lockdown and peak contagion scenario. With global supply chains at a practical standstill it is possible the country or parts of the country might begin to experience food and fuel shortages leading broader social and health issues amongst citizens. Linked to the supply chain is the pricing mechanism the government needs to keep a close watch on to ensure that retail and wholesalers do not take advantage of this crisis and hike the price of essentials and fast -moving goods. There should be safeguards such as price freezes for example to protect citizens.
What lies ahead?
As the Covid-19 disrupts life as we know it globally and nationally, it will test to the core the ability of the state to defend its citizens from experiencing the most holistic crisis we have ever faced as country. Kenya has lived through curfews, food shortages, economic difficulties but all at different stages and periods. With growth prospects reduced, lower than expected tax revenues, and Kenya’s debt to GDP levels is already in the doldrums, it may be important to explore how proposed measures aimed at cushioning the economy may be implemented. Covid-19 is a package of crises that promises disruption and guarantees a regression on social gains from the past decade. The cost of fixing these crises will require unorthodox policy decisions and approaches, and a radical role for the state in guaranteeing the protection of citizens and buffering of businesses. When the dust from Covid-19 begins to settle (whenever that will be), what will emerge is that Kenya will be facing a panDEBTmic.
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Jason Rosario Braganza – Economist
Email: jason.rosario.braganza@gmail.com
Twitter: @JasonBraganza1