The world is in turmoil today with Covid-19 attacking nearly everywhere and the death toll continues to rise. Aside from the human toll — which by all accounts is expected to be substantial — the economic havoc that the virus is bringing with it is extremely scary.
Most countries are in lockdown with learning institutions, entertainment places and offices closed as we try to stop the spread of the virus. Airlines have stopped flying to certain destinations and if matters continue as they currently are, we could witness a complete shutdown of the airways. The economic impact of all this, while difficult to measure now, is likely to be larger than anything the world has seen in the past.
Before the pandemic, the larger East African region was certainly bucking the global trend with average economic growth above six percent compared to a shade under three percent globally. Closer to home in Kenya, 2019 closed at nearly six percent growth depending on whose figures one used. Nonetheless, all the institutions that provide these numbers, including our own government, suggested at least 5.5 percent growth. Impressive by any standards and something to be proud of. But is it?
The thing about measuring economic growth is that the numbers don’t really show the trickle-down effect to a country’s citizens. Even the Central Bank Governor, Patrick Njoroge, reportedly said “you can’t eat GDP” and at the end of the day that is what the people need. In our part of the world, the impressive growth numbers have meant little to Wanjiku, who continues to live from one meal to the next.
Our growth is coming largely from the infrastructure spend, a lot of which does not stay in the country and does not, therefore, help Kenyans in the short-term. That we need the infrastructure development is not in doubt because without infrastructure the domestic economy cannot really grow. When one adds to the mix high government expenditure, wastage and corruption, one can see that we are selling ourselves short.
The Covid-19 virus may give us the chance to rethink our approach. Our reliance on imports and the impact it has on the economy, particularly from China (often referred to as “the factory of the world”) has been plainly evident since the virus first raised its ugly head. China, the original epicentre, shut down and the world suddenly found itself with shortages. In Kenya, imports from China in the first two months of the year fell by $580 million — a staggering number that clearly sets out our reliance on imports. Perhaps the time has come to wholly adopt at least the manufacturing pillar of President Kenyatta’s Big Four Agenda.
“Make Kenya, Buy Kenya” is what we should be saying but to achieve this the government needs to provide that conducive low cost and red-tape-free environment that we need. We will not be able to compete with imports from markets that have the economies of scale to produce cheaply and efficiently unless the government makes a concerted effort to achieve this. The Kenyan government needs to bear this in mind.
The aggressive approach by the Kenya Revenue Authority is in some ways laudable. If by doing this they are going after the tax cheats — ‘keep going’ would be my view. Unfortunately, in the midst of this aggression are businesses that do not cheat but find themselves facing hard economic conditions, which is another sure sign that our economy isn’t performing to its full potential. Attaching bank accounts simply closes businesses and makes people redundant. Doing this will result in lower collections not higher. A more balanced and thought-through approach is needed — less of the sledge hammer and more of the nail! The Value Added Tax Automated System is one such sledge hammer which needs more thought.
The pandemic gives us an opportunity in a perverse sort of way. In the short-term we should be offering relief to both individuals and business who find themselves under considerable pressure with shut downs. Short-term tax reductions, including delayed payment plans will help. Let government pay its supplier debt and ensure VAT refunds are made. Clear the bottlenecks at the ports so that intermediate products and capital equipment needed for manufacturing can come in quickly. Above all abolish all the unnecessary red-tape we have to go through. And of course tackle the corruption mess.
More than ever now, our government needs to take bold action and perhaps even invoke emergency legislation to allow for extension of statutory deadlines, possible tax breaks, etc.
The Covid-19 pandemic is likely to get worse before it gets better and while government must focus primarily on that for now, including offering short term relief, it must not forget the long term needs. Let us take this horrible virus as a time to introspect and make a healthier (in more than one sense) Kenya going forward.
The writer is Director, Bowmans Coulson Harney LLP.