An economic response towards recovery: preparing for the aftermath of OF COVID-19

05 Apr, 2020 0 comments
Wangari Muikia Wangari Muikia

COVID-19 has dealt a big blow to the global economy. In order to stem the spread, entire countries are going on lockdown. Data from China tells us just how outputs and incomes will suffer more if a lockdown is initiated. And while it is hard, it is a necessary evil to stem the spread.

Kenya does not have the needed infrastructure to deal with large numbers of patients. But if there is any saving grace, because we were not as hard hit from the start, we are able to learn from other countries and apply what works. Also we have a shorter wait time to a viable vaccine. We also have a younger population, are less urbanized with lower population density, and have a comparatively smaller economy, reducing human interaction. In addition, we are much more adaptable to change and can more easily pivot to newfound industries in the post-COVID-19 world. But in spite of that, the effects from a few months of self-isolation and quarantine are already having a negative effect on GDP.

The last time Kenya had negative growth was 50 years ago in 1970. All indicators point to Kenya going into a recession of similar proportions this year, egged on further by recessions in other countries especially in the event of a lockdown. But if we put in the right policies and strategies, we will give ourselves a much better chance to REBUILD, possibly reinvent, and then SUSTAIN strong growth. This is what we propose the government should do.

To start, we need far reaching policies to support the vulnerable and to stimulate spending during the lockdown and over recovery. For those losing their jobs and those already hovering or under the poverty line, those who have to take care of sick family members or those who become sick themselves, they will need support. Unfortunately, this is a burden that will be most felt by the low- and middle-income families who do not have enough savings to tide them over. They will need social assistance such as cash transfers, and in-kind reliefs such as food vouchers. Many will also need loan holidays, including those with microloans, mortgages and other personal loans.

A supported fiscal stimulus package could be feasible for low- and middle-income families, and if the government could afford KSh 5000 per month per household in those income groups, it could cost over one hundred billion Kenya shillings over three months. These transfers can be distributed through e-vouchers to be used solely for food or hygiene products. A stimulus package could spur consumer spending against businesses that would have also taken advantage of credit made available through recent government actions, and businesses would have confidence that there is demand for their products and maintain their staff contingent. This is a self-fulfilling prophecy that will snowball into a reviving economy. 

In addition, we need fiscal action to keep the flow of credit to business. Even in normal times, business survives on credit. The degree of access to credit is one of the mantras of conducive business environments. It is especially so now. Businesses will be more dependent on borrowing to survive. The Government will need to find savings within the budget, soak up excess liquidity in the market and open up to any funding from development partners like the IMF.  A proportion of these funds should go to provide loans to business. Some businesses can carry along their original paths. Others will need to pivot. We already see examples in the clothing industry pivoting to produce masks, and mechanics producing ventilators, and technology’s emergence as a backbone industry and an essential utility. This way there is a path to continuity that does not need significant changes in investment capital. At the same time we can push the Buy Kenya Build Kenya initiative. While firms can be given better loan conditions, be clear; these are not bailouts. They need to be backed by collateral to be viable. This solution makes sense for businesses that are still running.

For businesses that do not have a way out – like some in the tourism industry – policy and legislation can be crafted to enable the government guarantee loans to them on the condition that they maintain their staff and payroll over the self-isolation or in the event of a lockdown. This way households depending on those businesses for their daily upkeep do not fall into crisis, the businesses themselves are able to weather the storm, and the government can concentrate its efforts on other vulnerabilities in the economy. While there might be some dishonest companies that game the system, the risk from those and the benefits accruing to the rest of the economy are worth bearing.

But what about the elephant in the room? What if there is no internal fiscal space to provide for loans or social assistance? And this is likely the case, not just for Kenya, but for many developing countries. The self-isolation and lockdown strategy will result in declining tax revenues and almost zero trade, remittances and tourism revenues, and most of the money that is there will be redirected to health. And to top it off the financial markets are in jeopardy putting spending at risk. Further exacerbating the costs of fiscal space are our ongoing economic context of low GDP per capita, low health expenditures per capita, fewer doctors and ever fewer hospital beds, lack of access to clean water for most, and weak border controls. With no fiscal space, flattening the curve is going to be excruciating. 

So, to increase fiscal space, we need to borrow internally with a 2-year maturity even if it means monetary easing and central bank support. If possible, we should also borrow externally if we can provide comparably favorable yet well considered terms.  Even with our growing debt load, we need to consider that these are extraordinary times. Already there is already discussion with debtors around restructuring existing debt which should provide relief. Alongside borrowing, we should also take advantage of the IMF and World Bank packages being offered. Then, with oil prices at an all-time low, we need to lock in low oil prices now to realize the savings over recovery. And lastly, we must postpone non-essential expenditures like roads. Those can be picked up later. These measures all need to be done in parallel and need to be done now.

The freed up fiscal space should be used first to prop up the health care system. Then it can finance interventions that focus on people first, and then on firms. Banks should be facilitated, through Central Bank arrangements, to support households and business. Social assistance should ramp up support using existing programmes in place. The informal sector should also be supported as it is by far the larger sector in the economy. And finally, it should be used to incentivize business to keep workers on the payroll.

There is also a role for the private sector in this. Some businesses are doing exceptionally well in this crisis; the IT industry, communications including telephone and social media, delivery services, and television-based entertainment to name a few. They have a role to play in cutting prices of goods and services, as well as supporting smaller local businesses. If ever there was a time for Kenyans for Kenya, this is it; from a business standpoint and also from a household level.

Based on these considerations, how is Kenya doing? As of April 3rd 2020, there has not been any mention of a lockdown. Thus far, this is what has already been achieved, and what remains for consideration. Overall we are doing the right things. Time will tell whether it was enough.

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