Kenya is one of the fastest growing economies in sub-Saharan Africa with a growth rate of 5.9% in 2019. The African Development Bank Group (AfDB) said the growth rate of 5.9% recorded in 2019 is driven mainly by services on the supply side and household consumption and firm investment on the demand side.
Prior to the outbreak of the coronavirus, Kenya’s economic growth was projected to be around 6% in 2020 according to the AfDB. Inflation is also expected to hover around 5% in 2020. Fiscal deficit was around 7.5% in 2019 and public debt increased to 58% of total GDP. Kenya’s economy was expected to grow further in 2020 as previous success in growth was attributed to increased crude oil production and exports, favourable weather conditions, improvements in foreign direct investment, gains from the African Continental Free Trade Agreement, and government’s commitment to industrialize health, agriculture, housing and the manufacturing sector.
As a lower-middle income country, agriculture is the dominant economic sector accounting for about 52% of total GDP. Majority of Kenyans depend on the agriculture sector for their livelihood and it is estimated that 7 out of every 10 people in Kenya depends on agriculture. More than 50% of the country’s revenues from exports come from the agriculture sector. The manufacturing sector contributes about 14% to overall GDP whilst the financial services sector contributes about 6.8%. With regards to importation, Kenya obtains about 66.8% of imported products from Asia.
Kenya, just like any other economy in the world, has been hit by the coronavirus and measures put in place to mitigate the spread of the virus have brought difficulties to businesses, households as well as the individuals. China is one of its major trading partners and the current outbreak of the corona virus (covid-19) has affected most importers and petty traders who obtain most of their products from the Asian economic giant. This may force some people out of business and may worsen the unemployment issues as well as the of poverty in the country.
The Kenyan economy has deteriorated in the second quarter of 2020 due to the measures put in place to slow the spread of the coronavirus. These measures constrained economic activities and is compounded by lockdowns abroad which is having a dent on remittance inflows and depression tourism revenues. Social distancing measures and inputs shortages has also affected the private sectors businesses as Purchasing Managers’Index (PMI) dropped for the fourth month running from 37.5 from March to 34.8 in April.
Due to the deteriorating fiscal stance, Moody’s affirmed Kenya’s B2 rating but revised its outlook from stable to negative. The Economic focus analysts have also projected a drop in GDP growth to 1.5% this year. The Central Bank of Kenya also revised its growth expectations for 2020 downwards to 2.3%. A reduction in the VAT rate from 16% to 14%, low global oil prices and favourable weather conditions were cited as factors that will keep the rate of inflation between 2.5% to 7.5%.
In a bid to mitigate the severe impact of the virus on the economy, The Monetary Policy Committee (MPC) of Kenya’s Central Bank opted for a further reduction in the policy rate by 25 basis points to 7%, the lowest since September 2011. Market expectations however, projected a larger cut in the policy rate that was announced by the MPC.
A reduction in the policy is needed so as to lower the cost of borrowing from universal banks as a means of stimulating investment. According to economic theory, lower interest rates culminates to increase in investment because people normally borrow to invest. However, the difficulty in such a policy is how commercial banks respond to a reduction in the prime rates by the central bank. Banks normally hesitate to reduce their interest rates even when the central bank reduces the prime rates.
However, the Kenyan central bank indicated that the earlier measures of a reduction in the cash reserve ratio and policy rate cut were effective. This is good news and we will expect economic agents to respond to this quantitative easing so as to stimulate growth in Kenya.
Foreign Loans and Spending
In May, the IMF disbursed USD 739 million to Kenya to help in the fight against the global pandemic. However, in an attempt to lessen the impact of the coronavirus on the economy as well as to cushion economic activity, the Kenyan government is planning to obtain another USD 500 million package after an earlier approved loan of USD 1.0 billion from the World Bank in May to address the economic shock of the coronavirus.
To mitigate the economic fallout from the coronavirus, the government has announced a series of relief packages estimated to be around 2% of GDP. Social distancing and lockdowns will stifle consumption since most of the people are in the informal sector.
The government has earmarked KES 40 billion (USD 370 million) to finance health, food relief and monetary support to the poor and vulnerable in the country. there were also tax breaks amounting to 1.5% of GDP and a total tax relief for workers earning below KES 24,000 (USD225) monthly. There were also reductions in VAT from 165 to 14%, corporate income tax rates from 30% to 25%.
Following the earlier invasion of locust swarms in the year, heavy rains in the country also pose a serious threat to agriculture production and food security. There is the possibility of a second wave of the invasion of the locust swarms which will further worsen the already bad food security issues in the East African nation.
Already, Capital Business on June 11 reported that “as a result of COVID-19, an estimated 30 percent of Kenyans living in Nairobi’s informal settlements are experiencing severe hunger”.
Droughts in 2018/19 has impeded economic growth and pose serious threats to food security. Food security in Kenya is likely to worsen in 2020 due to invasion of some parts of Kenya with locust swarms in the middle of February 2020. The locust invasion does not only pose a threat to the large number of people who are dependent on agriculture, but will also affect other sectors such as manufacturing and the services sectors. Without food, productivity of workers will be low and companies will run into loses.
The invasion also come at a time that Kenya faces serious problems with youth unemployment. Youth unemployment rate in 2019 was 18.34%. The interactive effect of these factors is a further aggravation in the level of poverty and food insecurity in Kenya.
In Kenya, major stocks such as Safaricom and KCB Bank declined by 5.4 per cent and 7 per cent respectively on the first day the first coronavirus case was announced in Kenya. As stock prices continued to plunge on the second day, the Nairobi Stock Exchange (NSE) suspended trading for the NSE 20 index on March 13, 2020 according to its equity trading rules which require trading suspension if there was a drop of more than five per cent. Kenya also witnessed a 55 percent fall in tourist visits following the coronavirus outbreak.
Stimulus for Tourism Sector
Last year, tourism sector earnings were up by 4 percent in 2019 to stand at Sh163 billion compared to the Sh157. 4 billion recorded in 2018. The tourism sector is one of the hardest hit sectors in the Kenyan economy as a result of the outbreak of the coronavirus.
Whilst unveiling the country’s spending plan for financial year 2020/2021, The National Treasury said it has allocated Sh11.3 billion to the tourism sector in what could help the sector bounce back to profitability owing to the coronavirus outbreak in Kenya.
“The government will scale up the efforts to scale up the tourism sector by promoting aggressive post-COVID-19 tourism marketing and providing support for hotel refurbishment through soft loans to be channelled towards the tourism finance corporations. Sh3 billion has been set aside to support the renovation of facilities and the restructuring of business operations by actors in this industry,” said Treasury Cabinet secretary Ukur Yatani
Government has also set aside Sh2 billion to provide grants to 160 communities and support to Kenya wildlife services to engage 5,500 community scouts for a period of one year.
Private sector supports
The I&M Bank Foundation has set aside a total of Sh50 million, to help cushion vulnerable communities from the effects of the COVID-19 pandemic. This will help cushion vulnerable families from the economic effects prompted by this outbreak.
Sh25 million will be used to support the government’s effort in the supply of healthcare products and medical equipment, to mitigate against COVID-19 pandemic impact. The remaining Sh25 million in-kind for food packages and hand sanitization stations.
Support from the European union
The European Union Ambassador for Kenya, Simon Mordue is expected to sign a €5 Million grant, in the presence of the Ministry of Labour and Social Protection, that will enable a consortium of NGOs to provide cash transfers to 80,000 vulnerable Kenyans who have lost their income sources due to COVID-19.
Capital Business said on Thursday June 11 that,
“The EU itself is contributing Ksh 35 billion to Kenya’s response to COVID-19 whilst EU Member States have already provided more than Ksh 3.3 billion (EUR 30 million)– that figure continues to increase. This collective support by Team Europe is a statement of Europe’s friendship and partnership with Kenya in these difficult global times”.
Whilst the pandemic has resulted in loss of lives and livelihoods, it has also enabled the Kenyan government to improve self-sufficient food production, improve the health care system and use legislation to pass an economic relief bill into law. It is now clear that the pandemic has also presented economies with some opportunities that if well seized will improve their economies.