Covid-19 — a global public healthcare crisis — has metamorphosed into a bitter economic cocktail: massive government budget holes, sky-high unemployment, the economy frozen, idle workers receiving payments from the government.
For a number of economies, as commerce remains frozen, it is no longer business-as-usual; something which has prompted extra-ordinary responses. Governments on both sides of the Atlantic have been forced to scramble emergency measures to keep supply and demand from collapsing. In Africa, a number of countries, from Algeria, Egypt, Angola to South Africa, have scrambled economic responses to limit the human and economic impact of the Covid-19 pandemic. And Kenya has not been left out.
A week ago, President Uhuru Kenyatta unveiled an eight-point economic stimulus plan totalling some Sh53.7 billion (or some $502 million). Of note is that: (i) about Sh13 billion will towards settling value-added tax (VAT) refunds and other pending bills; and (ii) another Sh15 billion will be used on infrastructure repairs, specifically to hire local labour to repair road infrastructure that has been adversely affected by the ongoing rains; and roll-out another version of kazi-kwa-vijana (jobs to the youth) programme. The kazi-kwa-vijana is a programme that largely fulfills John Keynes’ prophesy: in bad economic times, a government might as well bury banknotes in jars underground, then employ thousands of (young) people to dig them up.
That said, the stimulus programme unveiled by the President lacks torque and does not make any statement. For starters, VAT refunds and settlement of pending bills does not amount to stimulus for the simple reason that it does not trigger net new spending (as it is largely an incurred cost). Beyond that, what’s the efficacy of spending Sh53.7 billion to stimulate a Sh9.7 trillion ($90 billion) economy? For context, the spending equates to a paltry 0.6 percent of Kenya’s gross domestic product (GDP). In April 2020, South Africa unveiled a 500 billion rand (about $29 billion) stimulus programme to keep supply and demand alive and as well as protect its most vulnerable population. About 200 billion rand (or four percent of its GDP) went towards a loan guarantee scheme for pandemic-hit businesses. In Kenya’s case, only about Sh6 billion (about $56 million) has been allocated towards loans and guarantee schemes to pandemic-hit businesses. Aside from the efficacy question, the transmission mechanism of these funds also remains a doubt. For a government that is held hostage by economic bandits and cronist merchants, high funds leakage rates could render such a stimulus plan ineffective.
The government ought to unveil a robust delivery, transmission and monitoring mechanism for such programme. That notwithstanding, the government needs to spend big (or go home). In fact, in my updated estimations, the government needs to spend as much as Sh300 billion (about $2.8 billion); the equivalent of about three percent of GDP. However, already reeling from a weak fiscal trajectory (and a lack of fiscal space), the government will need to do with some money printing to fund such spending quantum. And it goes like this: Section 46 of the Central Bank of Kenya (CBK) Act allows the 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.
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 can issue a bond of Sh300 billion, or even more, being a negotiable security, in favour of the CBK in exchange for full subscription.
In essence, the CBK shall be the sole subscriber to the bond, whether in single or tranched issue. Expectedly, the proceeds will be used to fund a more ambitious economic stimulus program; and upto a third of the programme should go towards credit guarantee scheme for businesses, especially SMEs, that have shut down due to the pandemic. Another huge chunk should go into expanding current cash transfer program to vulnerable households. This is what is commonly referred to as debt monetisation in economics. To execute this, Parliament needs to amend the CBK Act to (i) extend the tenure of such a negotiable security to beyond 12 months; and (ii) increase the cap of advanceable funds to the government to beyond the current five percent (of audited revenues).
Ghana has gone this route. In mid-May 2020, the country’s central bank, the Bank of Ghana, announced that it had triggered emergency financing provisions and began purchases of government bonds. However, being such a large spending, the inflationary impacts on purchasing power can be counter-productive. So there has to be a plan to sterilise the money. And there is only one option: taxation. I’m talking of future generations because printing money in this manner basically means using tomorrow’s resources to finance consumption today. Extraordinary situations call for extraordinary responses. We all know that in the long-run, the post-Covid situation will correct itself but the short-term cost to the millions of livelihoods can be avoided.