Apr 12, 2020

Introduction:                                                   

The effects of the COVID-19 pandemic continues to increase with the number of cases rising and the number of deaths escalating. According to the World Health Organization (WHO), as of Friday, 10^thApril 2020, the figures stood at 1,521,252 infections and 92,798 deaths. Closer home, Kenya’s numbers continue to grow with 184 confirmed cases and 7 deaths as at 10^thApril 2020.  Below is a summary of what we have written so far on the COVID-19 pandemic: 

1. Impact of Corona Virus on the Kenyan Economy: We analyzed the resultant effect on the Kenyan economy given the negative impact that the pandemic is having on international trade, the financial and commodity markets, and the global macroeconomic environment; and,
2. The Potential Effects of COVID – 19 on Money Market Funds: Here we highlighted the current macro-economic environment in the country, where we analyzed the effects in the fixed-income market and how things stand, having reported the first infection on 13^thMarch 2020.

In this note, we focus on the options available to the Kenyan Government when it comes to managing the adverse economic effects brought about by the pandemic. Under this, we shall cover:

1. Kenya’s Economic Policy Response to the COVID-19 Pandemic,
2. Policies That Have Been Implemented in Other Economies to Limit Possible Economic Fallouts Arising from the Pandemic,
3. Additional Policy Options to be considered by the Kenyan Government, and,
4. Conclusion
   

Section I: Kenya’s Economic Policy Response to the COVID-19 Pandemic

COVID-19 is first and foremost a public health problem, with the economic aspect being a secondary but important factor; consequently, the focus should be policies that will enhance public health even before implementing fiscal and monetary policy to inject the requisite liquidity and support into the markets. The priority should first be to ensure that it is safe for people to go out to work and to spend. However, in this note we are focused on the economic aspect.

The pandemic has so far had a negative financial impact and is expected to worsen as highlighted below:

1. Economic Growth Impact: Global growth is expected to decline with organizations such as the United Nations Department of Social and Economic Affairs (UN-DESA) forecasting a contraction of 0.9% in the global economy. In Kenya, GDP growth for 2020 is expected to decline significantly with the Central Bank of Kenya having already revised down their projections from an earlier estimate of 6.4% to 3.4%. Other firms such as McKinsey have also revised down their growth projections to 1.9%, from their earlier estimate of 5.2%. Having factored in the effects of the locust invasion, as well as the ongoing pandemic, we have also revised our growth projections downwards to a range of 1.4% - 1.8% for 2020, from our 5.7% projection as at the start of the year;
2. Currency Volatility: The Kenyan Shilling has been depreciating due to the uncertainty created by Coronavirus with the YTD depreciation against the US Dollar currently at 4.6% as at 9^thApril 2020, in comparison to the 0.5% appreciation in 2019;
3. Inflation: Inflation has remained within the Central Bank’s targets of between 2.5% and 7.5%, with the March inflation coming in at 6.1% driven by increases in food prices. There are expectations of inflationary pressure emanating from the effects of the Coronavirus, driven by supply-side shortages owing to lockdowns across the globe which have disrupted supply chains, further heightening cost-push inflation;
4. Interest Rates: There has been a recorded increase in yields towards the long-end of the yield curve in Q1’2020, mainly attributable to pent up demand for the short-term securities as investors maintained the duration play owing to the current uncertainties in the financial markets. Kenyan Eurobond yields have also recorded a rise, a trend replicated in other Sub-Saharan African Eurobonds. On average Kenyan Eurobonds recorded 2.6% points rise in Q1’2020. This is as a result of increased premium being demanded by investors for holding any government securities given the current economic growth uncertainty, and,
5. Financial markets: The local financial market has also taken a hit from the uncertainty and industry disruptions brought about by the virus, a trend replicated in global financial markets. The Nairobi All Share Index during the first quarter of the year recorded a 20.7% decline as investors exit the market. Consequently, the market is now trading at historical lows, at a price to earnings ratio (P/E) of 8.5x, 35.9% below the historical average of 13.2x.

The government of Kenya and the Central Bank have respectively announced fiscal and monetary measures to support the citizens and the Kenyan economy at large. Below we highlight some of the measures put in place so far to prevent the spread as well as cushion the economic disruptions arising from the pandemic:

	Action
Fiscal Policy   (Total amount of Fiscal action is currently estimated at Kshs 145 bn / 1.5% of GDP)	Directing the Kenya Revenue Authority (KRA) to settle the payment of all verified VAT refund claims equivalent to Kshs 10.0 bn within 3-weeks,
	Directing all Government ministries and departments to clear payments of pending bills of at least Kshs 13.0 bn, within 3-weeks,
	Voluntary salary reduction for senior ranks in the National Executive as per the below: The President and Deputy President – 80% Cabinet Secretaries – 30% Chief Administrative Secretaries – 30% Principal Secretaries – 20%
	The National Treasury will implement reliefs and increase disposable income to households through: 100% Tax Relief for individuals earning a gross monthly income of up to Kshs 24,000.0, A reduction of the VAT rate to 14% from 16%, effective 1st April 2020, Reduction of Pay-As-You-Earn to 25% from 30%, Reduction of Corporation Tax from 30% to 25%, and, Reduction of Turnover Tax to 1% from 3% for all Micro, Small and Medium Enterprises (MSMEs), Appropriation of an additional Kshs 10.0 bn to vulnerable members of society such as the elderly and orphans, Temporary suspension of the listing with Credit Reference Bureaus (CRB) of any person or MSME whose loan account falls overdue effective 1st April,
Monetary Policy	Lowering of the Central Bank Rate (CBR) by 100 bps to 7.25% from 8.25%,
	Lowering the Cash Reserve Requirement (CRR) to 4.25% from 5.25% which will provide additional liquidity to commercial banks to directly support borrowers during this period, and,
	The release of Kshs 7.3 bn to the National Treasury, money gained from the demonetization exercise done in 2019.

In our view, the moves by the government are positive and quite pro-active but there is more to be done. In addition, the said policies would create some other challenges in terms of increasing the already constrained fiscal deficit. According to the FY’2019/20 Budget Policy Statement, the country’s fiscal deficit was estimated at 6.3%. This means that the government does not have the fiscal space to afford a borrow-and-spend fiscal stimulus. We are also pessimistic about the government’s ability to meet its revenue targets, putting into consideration the fact that the government raised its total revenue target by 14.2% to Kshs 2.1 tn for FY’2019/20, which it cannot meet in the current market conditions, and will thus exert pressure on the domestic borrowing front to plug in the deficit.

The National Treasury is working to establish a fund, COVID-19 Emergency Response Fund, whose purpose will be: (i) to fund the purchase of essential supplies to public hospitals and related institutions, health professionals and frontline workers as need arises, (ii) to fund programs and initiatives towards cushioning and provision of emergency relief to the most vulnerable, older and poor persons in urban informal settings, (iii) to support and stimulate MSMEs rendered vulnerable by the pandemic, (iv) to enhance the capacity of the relevant institutions in handling COVID-19 surveillance, and (v) to fund any emerging issue arising from the pandemic.

In the next section, we look at policies that have been implemented by other countries to see what we can borrow.

Section II: Policies That Have Been Implemented in Other Economies to Limit Possible Economic Fallouts Arising from the Pandemic

Some of the key measures implemented include (we have included in bold font the changes since our last update in our Topical here, and underlined what we think could have an impact if borrowed and adapted for Kenya:

Country	Economic Measures Taken by the Government
UK	The Chancellor set aside an additional GBP 330.0 bn (Kshs 55.1 trillion), equivalent to 15% of U.K.s’ GDP, to bail out thousands of businesses hit by the coronavirus pandemic. Further to this: GBP 20 billion (Kshs 2.6 trillion) worth of tax cuts and grants for businesses this financial year A new lending facility for larger firms agreed with the Bank of England A three-month mortgage payment holiday for borrowers affected by the virus Shops and restaurants will not have to pay business rates this year Insurers will pay out to companies covered for pandemics Paying employers who keep their staff on payroll The Chancellor set aside US Dollar 39.0 bn (Kshs 4.1 trillion) to boost the economy through the Coronavirus pandemic The government suspended business rates for small firms, offered discounts for larger firms and extended sick pay
USA	The Federal Reserve announced a special facility, Commercial Paper Funding Facility (CPFF), to purchase corporate paper from issuers that are having a difficult time finding buyers in the open market amounting to USD 1.0 trillion (Kshs 105.0 trillion) The Senate and The White House reached an agreement on a US Dollar 2.0 trillion (Kshs 209.0 trillion), equivalent to 9.3% of US’s GDP, stimulus deal to offset the economic damage from the virus. The relief package includes direct payouts to citizens and a boost towards unemployment benefits The Federal Reserve also announced new measures it is putting in place to support the economy which included: Federal Open Market Committee (FOMC) purchase treasury securities and agency mortgage-backed securities to support smooth market functioning and transmission of monetary policy to the economy, Supporting the flow of credit to employers, consumers and businesses by establishing new programs that will provide up to US Dollar 300.0 bn (Kshs 31.4 trillion) in new financing, Establishment of two facilities to support credit to large employers namely, the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF), for the new bond and loan issuance and to provide liquidity for outstanding corporate bonds, respectively, The establishment of the Term Asset-Backed Securities Loan Facility (TALF), which is meant to support the flow of credit to consumers and businesses, Expanding the Money Market Mutual Fund Liquidity Facility (MMLF) to include a wide range of securities to facilitate the flow of credit to municipalities, Passing of the Families First Coronavirus Response Act on a US Dollar 8.3 bn (Kshs 867.3 billion) emergency Coronavirus budget, which guarantees free coronavirus testing, paid emergency leave, improvement of Unemployment Insurance, strengthens food security initiatives, and increases federal medical funding to states
Italy	The government has adopted an emergency decree worth Euro 25.0 billion (Kshs 2.9 trillion), equivalent to 1.4% of Italy’s GDP, to support the country’s already struggling economy. This will include Euro 3.5 billion (Kshs 408.5 billion) to help the health service and Euro 10 bn (Kshs 1.1 trillion) to support families and workers, Temporary suspension of mortgage payments The government is offering tax extensions to cash strapped businesses Tax credits to be granted for companies which suffer a 25.0% drop in revenues
Germany	The government is set to pass a supplementary budget of Euro 156.0 billion (Kshs 18.2 trillion), equivalent to 4.4% of Germany’s GDP, to plug the economic effects brought about by the coronavirus The government has made it easier for companies to claim subsidies to support workers on reduced working hours to counter the effects of the pandemic

Section III: Additional Policy Options to be considered by the Kenyan Government

The government has the largest role to play in helping navigate the economy through this pandemic. This can be done by putting in place supportive rules and regulations that shall help protect and turn around the economy. We see five main additional actions that the government can explore:

1. An Enhanced Economic Stimulus Package,
2. A Lifeline Fund For Individuals/ Workers Most Affected,
3. Credit Facilities to Keep Businesses Going,
4. External and Partners Finance, and,
5. Debt Relief to Go into Economic Containment.

We then analyze below, in detail the five additional actions that the government can explore:

1. An Enhanced Economic Stimulus

Looking back at the Economic Stimulus Package (ESP) initiated by the government after the 2007/2008 post-election violence, which was put in place to pull the country out of an economic slump where the country’s GDP growth of 6.9% in 2007 had declined to 1.5% in 2008. The ESP was set up to “create demand” in the affected sectors through government spending. The package was split into two phases where the allocated budget for Phase I was Kshs 22.0 bn and Kshs 27.0 bn for Phase II, amounting to Kshs 49.0 bn, equivalent to 1.3% of GDP. This was directed towards the construction of schools, horticultural markets, juakali sheds and public health centers throughout the country.

A similar move will go a long way in helping the economy recover from the effects of the COVID-19 pandemic. Having looked at what other countries have done, as we stated in the previous section, we have seen stimulus packages equal to an average of 7.5% of GDP as highlighted below:

Country	GDP 2019	Stimulus Package	% of GDP
UK	2,743.6	412.5	15.0%
USA	21,439.5	2,000.0	9.3%
Italy	1,988.6	27.5	1.4%
Germany	3,863.3	171.4	4.4%
Kenya	98.6	1.4	1.4%
Average			7.5%

Source: IMF, amounts in US Dollars (Billions)

To this effect, the government can:

1. Re-allocate funds from government ministries, departments and agencies such that they absorb the full impact of the revenue collection shortfalls by cutting back on non-essential recurrent budget expenditures in areas such as travel, training and entertainment,
2. Reallocate funds from its FY’2019/2020 budget directed towards various development projects. For example, the Cabinet Secretary for the National Treasury had proposed, allocating Kshs 180.9 bn for on-going roads construction projects as well as the rehabilitation and maintenance of roads,
3. Allocate funds towards the containment of the pandemic in the FY’2020/21 Budget. For example, in the 2020 Budget Policy Statement, Kshs 388.9 bn had been allocated to the Energy, Infrastructure and ICT sector. Part of these funds can be directed towards the proposed ESP, and,
4. The government can also consider giving economic stimulus through the central bank where attractive loan facilities can be set up to help mitigate the effects brought about by the pandemic. This can be done in conjunction with commercial banks in the country who will then provide cheap credit to businesses and individuals.

We believe that the focus should be to curb the immediate need, which is to contain the COVID-19 pandemic by setting up an ESP geared towards revamping the economy. As such, we recommend that the package amount to Kshs 100.6 bn, equivalent to 1% of GDP, given that the country currently cannot afford a large stimulus package similar to what we have seen other countries do.

2. A Lifeline Fund for Individuals/ Workers Most Affected:

Low-income households, consisting of families living below the poverty line, are among the most affected groups in the country mainly due to the imposed curfews and decline in business activities. According to the Kenya National Bureau of Statistics, low-income households represents 27.4% of the country’s population. This also includes laid-off workers and self-employed persons in the informal sector (e.g. barbers and hairdressers), who due to their hand-to-mouth lifestyle, will be left at a disadvantage. This relates most to families in Nairobi’s crowded and informal settlements where social distancing and working from home is not practical.

The table below shows the countries that have set aside funds to go towards affected individuals and workers and their amounts as a percentage of GDP:

Country	GDP 2019	Amount set aside	% of GDP
USA	21,439.5	500.0	2.3%
Italy	1,988.6	11.0	0.6%
Average			1.4%

Source IMF, amounts in US Dollars (Billions)

Based on the table above, we believe that the country can set aside approximately Kshs 55.6 bn (equivalent to 0.6% of Kenya’s GDP) towards a “Lifeline Fund”. We have assumed the 0.6%, which a conservative approach having considered the government’s fiscal constraints.

One of the ways this has been done e.g. in the United states, is through the distribution of funds to affected households through direct payouts to their households, through checks based on the number of people in a house hold and the level of income. This might be impractical in the Kenyan context but we believe households can be cushioned through other ways such as: (i) zero-rating tax on essential supplies such as foodstuffs, for example: maize flour, cooking fat and rice, and, medical supplies such as masks, gloves, and sanitizers, and, (ii) reducing the taxes and levies charged on utilities such as electricity and water which are considered necessities, which would help citizens, especially those who might not benefit from the proposed income tax reliefs due to the nature of their wage earnings.

3. Credit Facilities to Keep Businesses Going:

In the current state of affairs, the government’s mitigation strategies with regards to the ongoing pandemic have led to reduced incomes. The directive to work from home, closure of restaurants and clubs, and the curfew, which has resulted, to reduced working hours has forced some businesses to lay off workers or require them to take unpaid leave for an unspecified period. This has adversely affected businesses and the economy at large. To curb this, credit facilities and payroll support can be given to the affected sectors and businesses in an effort to reduce the closure of businesses and loss of jobs during this period. Considering what the United Kingdome and the United States have done, highlighted in section ii, the Kenyan government can:

1. Set up an Asset Backed Loan Facility for businesses in the affected sectors such as the tourism sector which is the most affected, putting into consideration the ongoing restrictions,
2. Set up a Credit Facility for Large employers to go towards payroll support with the aim of reducing the expected job loses,
3. Waive business rates for small firms and give discounts to larger ones for a period of 3 months to help cushion the effects of the virus.

The US set aside USD 500.0 bn towards these initiatives, equivalent to 2.3% of the country’s GDP. The Kenyan government can set aside about Kshs 100.6 bn, which is equivalent to 1.0% of Kenya’s GDP, having considered the current state of affairs with regards to government finances. Keeping these businesses alive will ultimately aid in a faster recovery once the situation is under control. As another option, the government can:

1. Give Fiscal incentives such as waivers on levies charged to businesses in the adversely affected industries such as the catering levy (hospitality industry). For instance, as highlighted in the letter to CS Ministry of Treasury and Planning by Law Society of Kenya, under the Tourism Act, persons engaged in the provision of tourism services are required to charge a tourism levy at a rate of 2.0% of the gross sales. Further, hotels and restaurants are also required to charge a catering levy at a rate of 2.0% of the gross sales. Furthermore, Section 106 of the Tourism Act allows the CS for National Treasury to grant certain fiscal incentives to promote the development of sustainable tourism, including waivers and rebates to persons engaged in the provision of tourism services, hotels, and restaurants, and,
2. Providing time extensions of up to 90-days to businesses with regards to the submission of returns and tax payments can help alleviate cash-flow challenges being faced in the economy. This is because April is the first quarter for most taxpayers and the due date for the first instalment of corporate tax and balances of corporate tax liabilities for the previous financial year.

4. External & Partners Finance

Given the fact that the country has been running a fiscal deficit of about 7.0% over the past six years, the country needs to work with development partners to be able to get the much-needed cash to cushion against the pandemic. So far, we have seen the World Bank give the Kenyan Government USD 60.0 mn (Kshs 6.1 bn) to help mobilize response capacity, strengthen multi-sector platforms and help in monitoring and evaluate the prevention and preparedness against the Coronavirus. Some of the other options available include:

1. UNICEF: Partnering with International organizations such as UNICEF to get additional funding to support the affected groups such as orphans and street children,
2. IMF: Negotiations are underway with the IMF for a USD 350.0 mn financial rescue package to be directed towards budgetary support.
3. Private Sector: Partnering with companies in the private sector to come up with initiatives to support the affected groups such as Commercial Banks. This can be done by encouraging banks to provide more affordable loans to households.

5. Debt Relief to Go into Economic Containment

Initiating a conversation on a possible debt moratoria or even forgiveness with its foreign debtors both on the bilateral and multilateral debt servicing as well as on the foreign commercial debt servicing. Given the current market conditions, with the volatility of the Kenyan shilling also in play, debt repayments would be more expensive and as such elevating the risk of a higher fiscal deficit. The debt relief will allow the government redirect funds to go towards the containment of the pandemic. To put this into context, if the government manages to push this year’s loan repayments to China’s Exim bank, which includes the SGR loan, they will free up approximately Kshs 71.4 bn, for the current fiscal period. In the 2020 Budget Policy Statement, Kshs 630.1bn had been allocated towards debt repayment in the FY’2020/21 budget (both principal and interest). By initiating some of these talks with our debtors, we believe come funds can be reallocated and be directed towards containing the pandemic.

Protection of incomes for both corporates and individuals is key. Given that the country is not like the developed markets such as the US where people can access social security if they are unemployed, the challenge then becomes how to ensure that livelihoods are not compromised.

Section IV: Conclusion

The country should try balance between providing the most required relief to businesses and individuals and ensuring that they do not impact tax collections much as that would mean a huge fiscal deficit and then it opens other challenges. So far, the government has announced tax relief through the reduction of tax rates for both individual and corporate incomes. In line with some recommendations from the Parliamentary Budget Office released during the week in their Special Bulleting COVID-19, the government can balance taxation measures with expenditure reduction to reduce pressure on our already constrained budget.

In addition to the ongoing public health initiatives, the government can also explore the following additional 5 options: 

1. Initiating an enhanced Economic Stimulus Package to help spur the economy and hasten its recovery following the effects of the novel coronavirus. This will be directed to the affected sectors such as tourism and horticulture,
2. Social transfers to vulnerable persons, laid-off workers and self-employed persons in the informal sector for 3 months. This can be done through a “Lifeline Fund” where these payouts will cushion the affected households and ultimately help enforce the set curfews and movement restrictions in an effort to curb the spread of the novel coronavirus,
3. Setting up a credit facility to lend to businesses that have kept their staff on payroll to help reduce job losses attributable to the current economic situation,
4. Reaching out to external partners to help mobilize response capacity putting into consideration the country’s current fiscal position. International organizations such as the IMF & World Bank can provide financial aid to be directed towards containing the spread and adverse effects of COVID-19, and,
5. Initiate conversations with our foreign debtors regarding the existing repayment arrangements of the country’s debt and propose a debt relief, having considered the current market conditions. Restructuring the existing bilateral, multilateral and foreign commercial debt will help ensure the livelihoods of the citizenry is not compromised.

Finally, looking back at a period where the country was faced with sort of similar challenge, case in point: the 2007/08 Post-election Violence, the government put together an ESP that seemed to work. It is however important to note that during that period, according to data from the National Treasury, the Government’s fiscal deficit stood at 1.4% of GDP as at Q1’2007, compared to the 7.7% fiscal deficit for the FY’2018/19 financial year. This means that the government had more fiscal room to fund a stimulus package, coupled with readily available funding in both the local and financial markets, which is not the case today. It is to this effect we believe, the Government has proposed amendments to the Income Tax Act (ITA) 2020, where they have raised tax on some items with the aim of trying to balance the taxation measures hoping to maintain government revenue during this period of uncertainty.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.