Fiscal deficit is expected to come in at eight per cent this year. Current account deficit is to widen to 4.5 percent of GDP.
Estimated revenue loss in FY2019/20 is approximately Sh39.2 billion (or 0.38 percent of GDP).
It is worth noting that, according to Kenya National Bureau of Statistics (KNBS), 2019 Gross Domestic Product (GDP) growth stood at 5.4 percent.
Last week was an interesting one; North Korea’s Kim Jong Un resurfaced, Madagascar found a "cure" for coronavirus and Safaricom finally brought home its crown jewel (M-Pesa) from Vodafone but minus Sh3.4 billion.
Moreover, markets were strangely ambivalent – both Nairobi All Share Index (NASI) and Nairobi Securities Exchange (NSE) 25 gained 5.9 percent while NSE 20 was flat at (0.4 percent).
For the month of April, inflation numbers dropped marginally to 5.6 percent compared to 5.5 percent in March, Monetary Policy Meeting (MPC) lowered the Central Bank Rate (CBR) by 25 basis points to seven percent and the T-bill auction market suffered weak subscription levels – 91-day, 182-day and 364-day settled at 86.8 percent, 28.4 percent and 111.7 percent, respectively.
So what do we make of all this? It seems the current crisis is leaving a unique footprint. Just three months ago, Kenya's 2020 annual GDP growth outlook was set at six per cent (IMF), six percent (World Bank) and 6.2 percent (CBK) but these projections have now been revised down to one percent, 1.5 percent and 2.3 percent, respectively.
For its worse-case scenario, the World Bank further paints a grim picture of a potentially deeper downside scenario of a contraction to one percent, if Covid-19 related disruptions in economic activity last longer. According to its latest report “Kenya Economic Update”, significant impacts on the services, manufacturing and the agricultural sectors are predicted.
Fiscal deficit is expected to come in at eight per cent this year. Current account deficit is to widen to 4.5 percent of GDP. Estimated revenue loss in FY2019/20 is approximately Sh39.2 billion (or 0.38 percent of GDP). It is worth noting that, according to Kenya National Bureau of Statistics (KNBS), 2019 Gross Domestic Product (GDP) growth stood at 5.4 percent. In summary, the economic outlook looks dreary.
This is the reason why the measures by the government are positive, namely, the reduction of the corporate tax rate to 25 percent from 30 percent, reduction of value-added tax (VAT) to 14 percent from 16 percent and a reduction in turnover rate from three per cent to one per cent. They mean more cash for corporates. But because the private sector is not a homogenous monolith - it is everything from Safaricom all the way down to your Jua kali merchant, the government can do more in the form of credit guarantees.
Why? Three reasons. One: Small and Medium Size businesses (SMEs) employ more than 80 percent of the working population in the country. They all constitute 98 percent of all businesses, create 30 percent of the jobs annually as well as contribute three per cent of the GDP, according to central bank.
Two, since the outlook for a strong credit growth remains dim, most SMEs are likely to suffer from credit access. Already, interbank rate has picked up in mid-April 2020 to six percent from about 4.2 percent in mid-March reflecting narrowing liquidity among banks. Seeing their credit scores are bound to shoot higher in the season, some government-backed guarantee would go a long way.
Three, research shows that, a one percentage point increase in access to credit is associated with an increase in real GDP growth by about 0.07-0.15 percentage points.
Of course, the above alone will not be enough. Other private sector-led measures such as moratoriums for business loans would also be necessary. In all, such liquidity support should provide the necessary cushion for SMEs – the pulse of our economy.
Mr Mwanyasi is Managing Director, Canaan Capital Limited.
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