The pandemic exposed the vulnerability of the Kenyan economy

Vegetable vendors sort cabbage at the Migori market yesterday. Most of the dealers import the cabbages and you go for Sh50. [Caleb Kingwara, Standard]

Around this time a year ago, Kenya was just days away from confirmation of its first case of coronavirus. Soon many industries would shut down, millions would lose their livelihoods, and others would be forced to work for reasons completely unknown.

While the pandemic has continued to hit many economies, we appear to have escaped the enormous costs in many other parts of the world. Whether it is government effort, or divine intervention, or sheer luck, it is an issue for another day.

Economic consequences of a pandemic

Most of the macroeconomic indicators available to economists have lagged effects. At this time, we cannot reliably assess the impact of the pandemic on the economy. However, official quarterly GDP data provide signals of a troubled economy and significant negative effects on livelihoods.

According to the report for the third quarter through September 30, 2020, GDP fell 1.1 percent after falling 5.5 percent in the second quarter. That was compared to a 5.8 percent expansion for a similar period in 2019. The NSE stock index fell 27.6 percent and the shilling depreciated an average of about 7 percent against major currencies.

The labor force report for a similar quarter through September 2020 showed consistent evidence of subdued economic activity. The unemployment rate fell from 10.4 percent in the second quarter to 7.2 percent. The unemployment rate was 5.3 percent for a similar period in 2019. Unemployment was 3.256 million. Workforce underutilization was 2.277 million for the quarter compared to 2.632 million and 1.597 million for the same quarter last year.

The strongest signal for the severity of the economic pandemic is the rapid rise in national debt. For the eight months February – November 2020, Kenya has borrowed a whopping 1.096 trillion Shillings (7.254-6.158 trillion Shillings). This is around Sh 320.035 billion more than the amount borrowed between December 2018 and December 2019 (Sh 6.049 to 5.273 trillion).

The rise in government debt implies either a huge drop in revenue to support household spending or opportunistic behavior to run a credit jamboree in the name of the pandemic. This is against the backdrop of the infamous revelation that Shill 2 billion public funds are stolen every day. Then there was the absurd theater of the Covid-19 millionaires.

The question is; How much of it has ever found its way into the local economic system, given the burden of debt and the obligations of future generations?

Effectiveness of political interventions

All said and done, there has never been a specific economic incentive outside of tax breaks for individuals and businesses. Deleting outstanding invoices merely restored the liquidity gap in the business world. Most of the Covid-19-related emergency spending was outside the local economic system as imports were heavily dependent on personal protective equipment (PPE).

However, the pandemic has exposed the vulnerability of our local economy: it has exposed the fallacy of over-reliance on the informal sector. It is easier for the political class to hide failed economic policies and poor performance when arguing an informal sector case. For example, what evidence is there to review the 767,900 informal sector jobs (92 percent) out of a total of 843,000 new jobs reported by the government in 2019?

The complexity of the informal sector hinders the transmission of targeted political interventions into the economic system. It is also technically impossible to fairly explain its contribution to GDP and government revenues. It is also difficult to assess labor productivity in this sector.

While ordinary households seem to get by on their informal goings-on, the government is unlikely to find it easy to fund its ambitious spending programs. The net impact of the pandemic will soon hit government revenues and expose the debt trap.

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Road to recovery

The political response to economic collapse is based on either Keynesian or monetarist theories. While Keynesians economists advocate stimulating consumption through higher government spending and net exports, money economists advocate an increased money supply, if necessary through printing. Given our precarious financial space and small formal sector, the monetary approach is not an option for transferring cash injections into the economy. To know if the right policies have been put in place, we examine their impact on domestic consumption, government spending and net exports.

We have serious political problems in this regard. First, the hasty tax reversals are reducing the disposable income available to households to stimulate local consumption. The sales tax diminishes all hopes of a revival of micro, small and medium-sized enterprises (MSMEs) that were shut down by the pandemic. Digital taxes are stifling the new economic frontiers of digital retail and fueling recovery in other economies.

Second, the Budget Policy Declaration (BPS) does not offer a specific rescue plan for the economy for the 2021/2022 financial year. While recognizing a 3.5 percent contraction in the global economy and subdued growth of 0.6 percent in the local economy in 2020, the document only vaguely refers to “a strategy for economic recovery after Covid-19”.

The BPS is completely ignoring the negative effects of the pandemic and anticipating a rosy recovery to a GDP growth rate of 6.0 percent. Recurring expenses are expected to increase by Sh 200 billion to Sh 1.8 trillion from Sh 1.8 trillion in the revised 2020/21 budget. Development spending is expected to decline by around Sh 32 billion to Sh 609.1 billion, after Sh 641.9 billion in the revised budget estimates for 2020/2021.

Consistently failed

Sales targets are estimated at Sh 2.034 trillion and a total funding deficit of Sh.966.6 billion. This is despite the fact that the government has consistently failed to meet its sales targets for the past 10 years. While government spending is expected to increase 3.7 times by 2021/22 compared to 2012/2013 (3.01 trillion Shillings / 881.9 billion Shillings), actual government revenues by 2019 are only 2.6- increased times (1.737 trillion Shillings / 667.5 billion Shillings)).

The total funding deficit increased by 5.8 times over the ten-year period (966.6 / 167.4 billion Shillings). This would explain the Sh5.461 trillion debt hole created in the last eight years between December 2012 and November 2020 alone (Sh.7.254-1.793 trillion). The numbers are worse with estimated off-balance sheet debt obligations of Sh3.4 trillion held by state-owned corporations and the newly formed Public Private Partnerships (PPPs) Travel.

After all, politicians seem to believe and / or imagine that the day’s economic challenges are triggered by legal problems as opposed to systemic political failures. The simple truth is that laws never put bacon on the table for common people, but rather good and effective economic policy. Trade activity, tax revenues and new jobs will not suddenly grow trees just because the constitution has been changed.

Unfortunately, I don’t see any legacy from the BBI amid a pandemic and economic crisis. In the end, when the anniversary era is over, only the economy will tip the scales regardless of Covid-19. A president’s job scorecard boils down to household welfare and the livelihood of the common people … the rest can go to the dogs!

Dr. Muinde is a development economist

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