OPINION: Tailored mitigation efforts could cushion economy better from Covid-19 pandemic
By Desmond Boi
The coronavirus pandemic has certainly thrown into sharp relief the interconnected clasp of globalization and nationalism and revealed the constraints of the neoliberal globalization that has predominated since the 1980s.
We can now perceive the inefficiencies of the present-day economic infrastructure, as well as the ineptness of many governments across the globe. It is possibly this kind of interconnectedness that we have among the nations of the world today, that the replica efforts put in place to fight Covid-19 is noted and appreciated.
While there is the need to avoid the nationalist rhetoric and policies that have already taken grip especially in the most advanced economies and embrace the international cooperation, our government should not be seen to be pre-eminently externally influenced in its approach to combat the crisis but rather led by the realities of its population.
Notably, we can expect that the world after Covid-19 will have a cluster of countries that are relatively closed off and nationalistic than before while at the same time grappling with the need to retain a sense of global cooperation with regards to averting any future crisis. The pandemic is posing an unprecedented threat to both our public health and the global economy, and as such intricate and amicable national efforts are required to manage the pervasiveness of the imminent crisis.
A quick glance across the globe in respect of the economic mitigations in the wake of the pandemic shows different level of preparedness. In the US for instance, the government last month gave a $2 trillion (Ksh.200 trillion) in cash as assistance for regular Americans, Main Street businesses and hard-hit airlines and manufacturers, among others.
While at the same time there are joblessness filings in the US as a result of the pandemic, a similar scenario cannot be noted in most of Europe where the crisis is even more severe leaving very little economic activity. That is the case because most of the European firms usually have an arrangement with the governments whereby in the case of such a crisis, half of the wage bill is shifted to the government.
These elusive measures from the Sub-Saharan viewpoint cannot be replicated in this time, considering that ideally, if nothing is done to the firms, they’ll become cash-strapped from lack of revenue and no new capital injections prompting massive layoffs and wage cuts.
The knock-on effect will be a push down from upper to lower, lower middle class to poor. Most people lifted out of poverty in the past decade might find themselves in an inevitable downward trajectory economically.
Kenyan firms are already exhibiting a shrinking path, with the NSE All-Share Index (NASI), NSE 20, and NSE 25 declining tremendously, pushing their Year-to-Date performance to losses of 21.2%, 25.9% and 25.2% respectively by end of last week.
These losses are all in breach of the threshold of a bear market, which is a fine print wherein securities prices fall by 20.0% or more. Further, the tightening liquidity in the money markets especially reflected in the ever-increasing interbank rate implies that soon or later, households will be grappling with diminished liquidity.
As the Covid-19 pandemic continues to draw devastating streaks on the sands of time, bracing ourselves for a global recession is very crucial.
Some of the mitigations put in place by the Kenyan government in response to Covid-19 with the view of cushioning the economy and Kenyans is certainly a step in the right direction, admittedly. For instance, the move to reduce the turnover tax rate to 1% from 3% and increasing the threshold for the businesses that qualify is prudent as it will substantially decrease the tax burden on Micro, Small and Medium Enterprises (MSMEs), which compose 98% of the businesses in the country, being a source of employment to 14.9 million Kenyans.
Also, the downward adjustments in the corporate tax implies that the National Treasury has the intentions of ramping up the revenue collections.
Nevertheless, with respect to the reduction of income tax exemptions, the government might have to pay higher interests on green and infrastructure bonds in cover for the tax levy to attract investors, since the one distinctive and attractive component to these bonds was the tax exemptions.
We too anticipate seeing reduced disposable income more so for the low-income earning class and therefore heavily affecting their capacity to save for retirement.
The realities of our relatively loosened economic fabric will have to be a guiding streak in the formulation of policies in this period of growing global economic distress. Considering our debt sustainability, for instance, Kenya’s debt service-to-revenue ratio in estimate hit 33.4% when 2019 came to an end, surpassing the 30% recommended threshold.
Africa’s Pulse, a World Bank report, that was released last week, the public debt for the Sub-Saharan region has risen dramatically in the past decade, putting its debt profile at a riskier position as a result of the lower concessional borrowing and growing creditors and non–Paris Club governments.
In the same vein, the Bank predicts that the region’s growth will enter a negative zone, to grow at 2.1% to 5.1% down from the 2.4% growth record of 2019. In Kenya, analysts in investment banking project growth estimates to range between 1.4% and 1.8% for this year, hinging on the severity of the Covid-19 outbreak and its resultant effects on the economy.
Rightly so, for a non-resource intensive economy like ours, disruptions of supply chains and reduced demand from our trading partners will substantially cripple the economy’s growth.
In the containment efforts to curtail the spread of the Covid-19, a commendable mitigatory has been done by the government. The national curfews and semi-lockdowns have to a great extent indicated to have some positive effect on the spread of the virus.
However, we want as much as possible not to adopt follow-up policies applied by the advanced and some of the middle-income economies since our population is predominantly in the informal employment. As a matter of fact, with the exclusion of agriculture, informal employment tops an average of 76% according the latest World Bank report.
As such, also, the stimulus propagated by our Treasury organs in terms of cuts in rates may prove to be less effectual particularly in the long run in case the pandemic persists chiefly because of the pervasiveness of supply reverberations at the height of the containment measures.
With these being likely to be accelerated by the reduced supply of labour and massive closure of businesses, interventions that will provide liquidity in form of a guarantee in commercial loans to both formal and informal firms will come in handy.
Further, a more elaborate and concerted effort should be put to protect the vulnerable groups in form social grants and distribution of food, supporting the majorly affected businesses through wage subsidies to prevent incidences of mass layoffs, initiate waivers on the basics amenities such as water and electricity levies, ramp up the testing alongside the promotion of other health measures of wearing masks will help us set foot towards the critically needed success.
The writer is a Monitoring and Evaluation Specialist. [email protected]
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