COVID-19 Economic Containment Policies
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.
Introduction:
Over the past week, the situation surrounding COVID-19 (Coronavirus) pandemic has worsened as numbers of positive cases increase globally. The World Health Organization (WHO), in a press release done on 23rd March 2020, updated that the global outbreak of the virus was picking up pace, having surpassed 350,000 infections and 15,000 deaths. As of Monday, 30th March 2020, the figures stood at 693,224 infections and 33,106 deaths. Closer to home, the cases recorded in the country have increased from the 38 recorded last week to 50 infections and one (1) death. The virus has had a devastating impact on the economic conditions of global economies. As a result, governments across the globe have rushed to put together economic stimulus packages for their countries, to cushion the effects of COVID – 19 on their respective economies and prepare for the expected recession in the global economy. We have covered Coronavirus in our previous two topicals:
- Impact of Corona Virus on the Kenyan Economy. In this topical, we highlighted how the pandemic started, the current state of affairs, noting that despite the virus spreading, emotional contagion also played a significant role in amplifying the effects of the pandemic on the global economy. We also analyzed the effects the pandemic has had on the global economy weighing in on how the virus has negatively impacted international trade, the financial and commodity markets, and the global macroeconomic environment; and,
- 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 13th March 2020. We go further and discuss how this has affected Money Market Funds across the
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:
- The Major Economic Effects COVID - 19 Has Had on The Kenyan Economy,
- Kenya’s Policy Response to the COVID-19 Pandemic,
- Highlighting What Effective Policies Have Been Implemented in Other Economies to Limit Possible Economic Fallouts Arising From the Pandemic,
- Policy Options Available to The Kenyan Government,
Section I: The Major Economic Effects COVID - 19 Has Had on the Kenyan Economy,
In our first topical on the Coronavirus, Impact of Corona Virus on the Kenyan Economy, we looked at the how the virus broke-out in Wuhan, China and how it has spread across the globe up until 11th March 2020 when the World Health Organization (WHO) declared COVID – 19 a global pandemic. Since then, the situation has only worsened with several counties resorting to lock-downs and encouraging self-quarantine to stop the rapid spread of the virus.
Closer home, the COVID-19 pandemic has resulted in the following economic effects in Kenya:
- Economic Growth Impact: During the last MPC meeting, the Central Bank of Kenya (CBK) revised its GDP projections for the country, highlighting that economic growth which is expected to decline from a baseline estimate of 4% to 3.4%, attributable to reduced demand by Kenya’s main trading partners, disruptions of supply chains and domestic production caused by COVID-19 pandemic. Also considering the effects on other economies and the severity of the current situation, we expect the country’s GDP to be affected significantly. As per Cytonn’s estimate, we anticipate a 10% to 25% impact on GDP growth and as such we expect GDP growth to come in anywhere between 4.3% and 5.2% depending on the scale of the economic disruption that Coronavirus will cause in Kenya,
- Impact on the Financial Markets: The financial markets have taken a hit from the uncertainty and industry disruptions brought about by the virus. The Nairobi All Share Index has, on a year-to-date basis, recorded a 23.5% decline as investors exit the market. This has been the same case in the fixed income market where T-bill subscription for the past week declined to 57%, down from the 264.0% subscription recorded two-weeks ago before the first case was reported within Kenya’s borders, and,
- Currency Volatility: The Kenyan Shilling has faced a lot of volatility with the uncertainty surrounding the virus. This has resulted in declines in foreign inflows and other currency inflows which saw the shilling depreciate to Kshs 105.1, a 4.5-year low. Central Bank has opted to sell dollars to mitigate the losses,
Section II: Kenya’s Policy Response to the COVID-19 Pandemic:
As at 27th March 2020, we had confirmed 38 cases of the virus within our borders. Since the first case, the government has tried to be pro-active in addressing this pandemic by encouraging people to observe good hygiene, sanitize and to practice social-distancing during this period of uncertainty to reduce the spread of the virus. Employers were also advised to allow their employees to work from home as schools and colleges were closed about two weeks ago. Earlier in the week, the president addressed the nation where he highlighted some of the additional measures put in place by the government to cushion Kenyans from the economic effects of the virus and similarly, to reduce the spread of the virus.
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:
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Action |
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Fiscal Policy |
· 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, |
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· Directing all Government ministries and departments to clear payments of pending bills of at least Kshs 13.0 bn, within three weeks, |
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· Voluntary salary reduction for senior ranks in the National Executive as per the below: i. The President and Deputy President – 80% ii. Cabinet Secretaries – 30% iii. Chief Administrative Secretaries – 30% iv. Principal Secretaries – 20% |
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· The National Treasury will implement reliefs and increase disposable income to households through: i. 100% Tax Relief for individuals earning a gross monthly income of up to Kshs 24,000.0, ii. A reduction of the VAT rate to 14% from 16%, effective 1st April 2020, iii. Reduction of Pay-As-You-Earn to 25% from 30%, iv. Reduction of Corporation Tax from 30% to 25%, and, v. Reduction of Turnover Tax to 1% from 3% for all Micro, Small and Medium Enterprises (MSMEs), vi. Appropriation of an additional Kshs 10.0 bn to vulnerable members of society such as the elderly and orphans, |
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vii. Temporary suspension of the listing with Credit Reference Bureaus (CRB) of any person or MSME whose loan account falls overdue effective 1st April, |
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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. |
In our view, the moves by the government are positive and quite pro-active but there is more to be done. As highlighted in our fixed-income section, some of these measures put in place by the Government are welcome, but we believe they will not be entirely effective in cushioning a greater multitude of the population with our sentiments guided by:
- The Proposed Tax Relief: To put this into context, before the 100% tax relief, PAYE for an employee earning Kshs 24,000 stood at Kshs 2,955 with a personal relief of Kshs 1,408 thus a net PAYE of Kshs 1,547. Putting into consideration the new PAYE regime, the net tax benefit to such employees would, therefore, be a meagre Kshs 1,547. According to statistics by the Kenya National Bureau of Statistics (KNBS), about 74.0% of all Kenyans working in the formal sector earn a monthly salary of below Kshs. 50,000,
- The Reduction of PAYE to a Maximum of 25.0% from 30.0%: For all citizens earning above Kshs 24,000, the tax rate will also have a minimum effect on the ‘take-home’ pay for most middle-income earners. With the new PAYE tax regime, employees who earn a taxable income of Kshs 50,000 will have a meagre tax relief of slightly below Kshs.150 from the reduction in PAYE,
- The Voluntary Salary Reduction: The proposed pay cut is in the order of Kshs 800.0 mn per year, merely 0.02% out of the National Government wage bill of Kshs 400.0 bn. The pay cut will save less than 0.05% of the wage bill. Therefore, the pay cut was in a bid to strengthen Public Relations rather than mitigate the effects of COVID-19,
- Monetary Policy Measures: Monetary policy works by injecting money into the economy indirectly through the banking system to make businesses and individuals borrow and spend. This policy works in line with the demand and supply dynamics in the market. As the situation stands, most businesses have closed to work from home and as the country-wide lockdown begins, few people are thinking of spending, with the focus being mainly on saving in preparation for the expected tough times It is for this reason that we feel monetary policy might not be the right tool for the job,
- Public Health Response: When we take into consideration the state of matters in developed countries, one of the major challenges they are facing is bed capacity in their hospitals. This can be seen clearly in the different mortality rates across the globe. The Ministry of Health needs to be pro-active and manage the situation given that our facilities can not handle a large number of
With some of the measures coming into effect on 1st April 2020, we expect that the effects of these initiatives will not be immediate and that it might be too late given the effects of the ongoing pandemic are being felt today.
Section III: Effective Policies that have been implemented in Other Economies to Limit Possible Economic Fallouts Arising from the COVID-19 Pandemic,
The COVID-19 crisis has globally transformed into an economic and labour market shock, impacting not only supply (production of goods and services) but also demand (consumption and investment). To combat the effects arising from the pandemic most governments worldwide have instituted measures to curb the spread as well as support their economies.
Some of the key measures implemented include (we have included in bold font the changes since our last update in our Topical here:
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Country |
Economic Measures Taken by the Government |
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UK |
· The Chancellor set aside an additional GBP 330.0 bn (Kshs 42.9 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 · 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 |
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USA |
· The Senate and The White House reach an agreement on a US Dollar 2.0 trillion (Kshs 209.0 trillion) 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: § Support for critical market functioning where the Federal Open Market Committee (FOMC) will 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 |
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Italy |
· The government has adopted an emergency decree worth Euro 25.0 billion (Kshs 2.9 trillion) 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 |
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Germany |
· The government is set to pass a supplementary budget of Euro 156.0 billion (Kshs 18.2 trillion) 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 IV: Policy Options Available To the Kenyan Government
Governments’ role in disaster management is important and they ultimately take the lead when it comes to getting actionable solutions which should be in the best interests of the citizens. As such we believe these are some of the actionable policies that the Government can implement to combat the COVID-19 pandemic as well as mitigate its effects in the economy:
i.Economic Stimulus and Business Disruption Support:
This involves reviewing the current financial status of the country and coming up with initiatives that support the socio-economic needs of its citizens. Given the socioeconomic severity of COVID-19, as evidenced by what is happening globally, with a casing point being the US economy where according to data from the bureau of labor statistics, a record 3.3 million people filed claims for unemployment in the past week, we believe that any economic stimulus from the Government should be focused primarily on providing a safety net to the greater population to support their day to day livelihoods and ensure they are first able to sustain the most basic need such as food and shelter. In as much as a reduction in PAYE or corporate tax is welcomed, due to the massive job losses as well as shutting down of most Micro, Small and Medium Enterprises (MSME’s), if the severity of COVID-19 is to continue, most individuals would eventually file NIL PAYE returns by the end of the financial year, with companies also failing to meet the corporation tax obligations and thus the strategy might not be rational after all. As such, we believe that the Government should focus on the below-highlighted tax incentives that would directly affect to cushion the greater population, as well as enable them to access the basic needs during these tough times:
- Increasing personal and mortgage tax reliefs by 100% to help individuals whose liquidity will be affected during the current year of income. This will enable them to meet their daily expenses and other unplanned expenses
- Zero-rating tax on essential supplies such as foodstuffs (maize flour, cooking fat and rice) and Medical supplies (medication and sanitizers),
- Provide time extensions of up to 90-days to individuals and businesses with regards to the submission of returns and tax payments because April is the first quarter for most taxpayers and the due date for the first installment of corporate tax and balances of corporate tax liabilities for the previous financial year,
- Giving fiscal incentives such as waivers on levies charged to businesses in the adversely affected industries such as the hospitality industry (catering levy). 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 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,
- Budget re-allocation to go towards a kitty to support the individuals On this front, we believe that cutting back on development projects and non-essential recurrent budget expenditure for instance funds set aside for international travel, and public events. In the FY’2019/2020 budget statement, 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, we believe some of these funds can be re-allocated to curb the immediate need which is to contain the COVID-19 pandemic, and,
- To provide temporary targeted relief to security issuers, investment funds and investment advisers affected by COVID-19. The US Securities and Exchange Commission (SEC) announced that it was extending filing periods for certain public company filing obligations under the federal securities laws and that it was also extending regulatory relief previously provided to funds and investment advisers whose operations may be affected by COVID-19. As such Public companies will enjoy a Public Company Relief where they will have a 45- day extension to file certain disclosure reports that would otherwise have fallen due between 1st March and 1st July Investment Funds and Investment Advisors will similarly enjoy a relief where they will be granted additional time with regards to holding in-person
board meetings and meeting certain filing and delivery requirements. We believe the Capital Markets Authority and other regulatory bodies can also consider giving such reliefs to affected organizations where they will have an extension to allow businesses to reorganize themselves in light of the recent happenings.
ii. Cross-cutting initiatives
This involves liaising with other stakeholders such as the private sector and international organizations such as the UN and IMF to come up with initiatives to reduce economic pressures during times of uncertainty. We do acknowledge the financial constraints of the Government having operated at a fiscal deficit of 7.0%-8.0%, coming in at 7.5% in FY2018/2019 according to the year’s budget outturn. On the other hand, the debt levels have escalated over the years currently standing at Kshs 6.0 tn, with the debt mix currently at 49:51, domestic and foreign. Out of the USD 30.7 bn in Public & Publicly Guaranteed External debt, approximately USD 10.0 bn is in foreign commercial debt divided equally between Eurobonds and syndicated bank loans and as such has been heavily dependent on global financial markets which have been heavily disrupted by the COVID-19 pandemic. As such we believe the Government should focus on other cross-cutting initiatives to fund efforts of combating the effects of the pandemic. Recently, the World Bank gave 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 evaluation of prevention and preparedness. We believe some of the other options available include:
- Partnering with International organizations such as UNICEF to get additional funding to support the affected groups such as orphans and street children,
- Initiating a conversation on a possible debt moratoria with its foreign debtors both on the bilateral and multilateral debt servicing as well as the foreign commercial debt 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, and
- Partnering with companies in the private sector to come up with initiatives to support the affected groups (i.e. Commercial Banks) This can be done by encouraging banks to provide more affordable loans to households
Section V: Conclusion
In conclusion, we believe a Government’s role in disaster management is important and they ultimately take the lead when it comes to getting actionable solutions which should be in the best interests of the citizens. We believe there are ways to mitigate the effects brought about by the virus in our economies but the measures put in place need to be well formulated and executed. We believe the Government should borrow from the preexisting policies that have worked in other economies as well as come up with other tailored solutions specific to our economy based on our preexisting economic structure, conditions as well as fiscal restrictions. Before coming up with such policies, we believe that COVID-19 is first a health problem, with the economic aspect being a secondary factor. As such the main focus should be policies that will enhance the livelihood of the citizens. Before implementing fiscal and monetary policy to inject the requisite liquidity in the markets the priority should first be to ensure that it is safe for people to go out to spend. As per what has been observed in other jurisdictions such as China to flatten the infection curve, it is an absolute priority to ensure that there is minimal movement due to the exponential rate of infections as the average infected person spreads the disease to two or three others. To ensure social distancing crusade is observed in an economy where 80.0% of the working population is employed in the informal sector, the Government has to first provide a safety net for such especially those in urban informal settlements.
