Pandemic exposed the vulnerability of Kenya’s economy

By Patrick Muinde

Vegetable vendors sort out cabbages at Migori market yesterday. Most of the traders import the cabbages and one goes for Sh50. [Caleb Kingwara, Standard]

Around this time one year ago, Kenya just days from confirming its first case of

coronavirus. Soon after, many sectors of the economy would be shuttered, millions lost their livelihoods and others forced to work in totally unfamiliar grounds.

While the pandemic continues to ravage many economies, we seem to have escaped the huge costs witnessed in many other parts of the world. Whether it is the Government’s effort or divine intervention or sheer luck, it is a subject for another day.

Economic consequences of pandemic

The majority of the macroeconomic indicators available to economists have lagged effects. Up to-date, we cannot reliably tell the full impact of the pandemic on the economy. However, official quarterly GDP data provide signals of a battered economy and significant negative effects on livelihoods.

As per the third quarter report to September 30, 2020, GDP contracted by 1.1 per cent from a contraction of 5.5 per cent in the second quarter. This was in comparison to a 5.8 per cent expansion for a similar period in 2019. NSE share index dropped by 27.6 per cent and the shilling depreciated by an average of about 7 per cent against the major currencies.

The labour force report for a similar quarter, to September 2020, demonstrated consistent evidence of a subdued economic activity. The unemployment rate eased to 7.2 per cent from 10.4 per cent in the second quarter. The unemployment rate was 5.3 per cent for a similar period in 2019. Unemployment stood at 3.256 million. Labour underutilization was 2.277 million in the quarter compared to 2.632 million and 1.597 million in the same quarter in 2019, respectively.

The strongest signal to the severity of the pandemic on the economy is the meteoric rise in public debt. For the eight months, February - November 2020, Kenya borrowed a whopping Sh1.096 trillion (Sh7.254 – 6.158 trillion). This is about Sh320.035 billion more than the amount borrowed between December 2018 to December 2019 (Sh6.049 -5.273 trillion).

The spike in the public debt implies either a huge drop in revenues to support budgetary expenditure or opportunistic behaviour to engage in a borrowing jamboree in the name of the pandemic. This is on the backdrop of the infamous revelation that Sh2 billion public funds are stolen each day. Then there was also the Covid-19 millionaires' theatre of the absurdity.

The question is; how much of this ever found its way into the local economic system in the face of the debt burden and obligations netted on the future generations?

Efficacy of policy interventions

All is said and done, there never was any tangible economic stimulus outside the tax-breaks for both individuals and corporates. Clearing pending bills was simply restoring the liquidity hole among the business community. Majority of the Covid-19-related emergency expenditures were outside the local economic system given the heavy reliance on imports for Personal Protective Equipment (PPE).

The pandemic, however, exposed the vulnerability of our local economy: it exposed the fallacy of over-dependence on the informal sector. For the political class, it is easier to hide failed economic policies and poor performance by arguing a case of the informal sector. For instance, what evidence is there to verify the 767,900 jobs (92 per cent) created by the informal sector out of the total 843,000 new jobs reported by the government in 2019?

The complexity of the informal sector impedes the transmission of targeted policy interventions into the economic system. It is also technically impossible to fairly account for its contribution to the GDP and government revenues. It is also hard to evaluate labour productivity in the sector.

Thus, while ordinary households may appear to get by from their informal hustles, the Government is unlikely to find it easy financing its ambitious expenditures programmes. The net impact of the pandemic will soon reflect on government revenues and expose the debt trap.

Path to recovery

The policy response to economic meltdowns leans to either the Keynesians or Monetarist theories. While Keynesian’s economists argue for stimulation of consumption through increased government expenditures and net exports, monetary economists argue for the increased money supply, if necessary by printing. The monetary approach is not an option given our precarious fiscal space and small formal sector to transmit any money injections into the economy. Therefore, to know if the right policy interventions have been undertaken, we examine their impacts on domestic consumption, government expenditure and net exports.

On this we’ve serious policy gaffes. One, the rushed tax reversals reduces disposable incomes available to households to stimulate local consumption. The turnover tax diminishes any hopes of resuscitating Micro, Small and Medium Enterprises (MSMEs) shuttered by the pandemic. Digital taxes stifle the new economic frontiers of digital retailing fueling recovery in other economies.

Two, the Budget Policy Statement (BPS) for the 2021/2022 fiscal year offers no tangible rescue plan to the economy. While it acknowledges a contraction of the global economy by 3.5 per cent and subdued growth of 0.6 per cent of the local economy in 2020, the document only vaguely refers to ‘some post-Covid-19 economic recovery strategy’.

The BPS completely ignores the negative impact of the pandemic and presupposes a rosy recovery to a 6.0 per cent GDP growth rate. Recurrent expenditure is estimated to increase by Sh200 billion, to stand at Sh2 trillion up from Sh1.8 trillion of the revised 2020/21 budget. Development expenditure is set to decline by about Sh32 billion to Sh609.1 billion down from Sh641.9 billion in the revised 2020/2021 budget estimates.

Consistently failed

Revenue targets are estimated at Sh2.034 trillion and an overall financing deficit of Sh966.6 billion. This is despite the government having consistently failed to meet its revenue targets over the past 10 years. Comparatively, while government expenditure is projected to grow by 3.7 times by 2021/22 compared to 2012/2013 (Sh3.01 trillion/881.9 billion), actual government revenues have increased only 2.6 times as at 2019 (Sh1.737 trillion/667.5 billion).

The overall financing deficit has grown 5.8 times over the 10 year period (Sh966.6/167.4 billion). This would explain the Sh5.461 trillion debt hole created over the past eight years alone (Sh7.254 -1.793 trillion), between December 2012 and November 2020. The numbers are grimmer with the estimated Sh3.4 trillion off-balance sheet debt obligations held by State Corporations and the newly-found Public Private Partnerships (PPPs) voyages.

Finally, the politicos seem to believe and/or imagine the economic challenges of the day are triggered by legal problems as opposed to systemic policy failures. The simple truth is that laws never put bacon on the table for ordinary folks but good and effective economic policies. Trading activities, tax revenues and new jobs won’t suddenly start growing on trees simply because of amending the constitution.

Unfortunately, I foresee no legacy on the BBI in the midst of a pandemic and an economic crisis. At the end, when the Jubilee era is over, it is only the economy that will tilt the scales, Covid-19 notwithstanding. A president’s job scorecard boils down to household welfare and livelihoods for ordinary folks…the rest can go to the dogs!