Virus calls for extraordinary monetary rescue initiatives

There is a famous statement that goes like this: elegant models of how economies work are often wrong. Markets are not self-correcting, but need constant intervention and management to ensure high consumer demand, investment and employment. I will leave you to guess where the quote came from.

However, it is now evident that the world is reeling from the impact of coronavirus. What started as a public health crisis has now mutated into an economic crisis, with much of the world forced to craft fiscal and monetary responses to counter the effects. Indeed it is an extraordinary crisis that calls for extraordinary counter measures.

And due to the global interconnectedness, Kenya has not been left behind. A couple of days back, the President announced a raft of tax measures to cushion the population from the pandemic.

Among them was establishment of the Covid-19 Emergency Response Fund which, according to the National Treasury, is meant to provide for a framework to mobilise resources for emergency response towards containing the spread, effect and impact of the pandemic.

Subsequently, the Treasury hurriedly issued a raft of guidelines to operationalise the fund. In the regulations, the Treasury has left wide open its funding sources, which include appropriations by the National Assembly, voluntary contributions from public officers and private persons, grants, donations, subscriptions, bequests or other gifts and any other sources approved by the Treasury.

However, the fund appears to lack two ingredients; first is the estimated quantum required to rescue demand and supply and secondly, its delivery.

The biggest impact of the coronavirus is the laying off of employees as businesses (small, medium or large) comply with restrictions placed by governments, an action which translates to lost earnings.

And due to the circularity nature of money, lost earnings translate into a reduction in spending, which creates a negative multiplier effect in an economy. Consequently, a core part of the fund’s objectives should be an attempt to restore lost earnings.

I have looked at the most recent sectoral earnings statistics by the Kenya National Bureau of Statistics and by picking out the sectors that are directly affected by the pandemic in terms of layoffs, lost earnings are close to Sh150 billion (or 1.7 per cent of GDP).

Unfortunately, Kenya’s public finances are disorderly and there is no space to appropriate such an amount from the fiscus. But there is monetary space.

And it goes like this: Section 46 of the Central Bank of Kenya (CBK) Act allows the apex bank to make direct advances to the government for the purpose of offsetting fluctuations between receipts from the budgeted revenue and payments of the government on condition that it is secured by negotiable securities with a maturity of not later than 12 months. Upon maturity, any outstanding amounts shall be converted into a loan on such terms and conditions determined by the bank.

Further, the Act directs that total advances to the government shall not exceed five per cent of last audited revenues. With this in mind, the Treasury should issue a bond of such a quantum, or more, being a negotiable security, in favour of the CBK in exchange for full subscription and the proceeds go into the Covid-19 Emergency Response Fund.

It will not amount to printing since the ‘repayability’ aspect creates an obligation. The next step should be for Parliament to reconvene and amend the Act to (i) extend the tenure to beyond 12 months; and (ii) increase the cap to beyond five per cent of audited revenues.

Extraordinary situations call for extraordinary responses. We know that in the long-run, the situation will correct itself but the cost to the millions of livelihoods can be avoided.

@GeorgeBodo