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Economic strategy options available under Covid-19

Central Bank of Kenya
Central Bank of Kenya. FILE PHOTO | NMG 
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Economic contraction, downturn and mark-time continue to be registered in Kenya with little uptake of appropriate policies. With policy denial, challenges in capacity worsen under Covid-19. Fast and furious, it pushes Kenya over a cliff no amount of PR or bling-bling can camouflage. Two primary lessons: the public to follow government instructions; the government to engage high-gear competences vital in public finances and the health sector. By March 2020, the UN estimates Covid-19 had cost Africa $29 billion.

Already stressed under a fiscal crisis and lack of coordination last October, Kenya perseveres with hardships. Institutional changes the Parastatal Reforms Implementation Committee proposed in 2013 that could have saved the day as buffers to Covid-19 responses (in the Biashara Bank — as a single agency for supporting SMEs — and the Sovereign Wealth Fund) lie in limbo. Covid-19 poses a quadruple challenge on whole-economy, health, jobs, and livelihoods.

Consider Kenya’s policy responses in the 2008-2009 global financial crisis. It plunged GDP growth to 0.2 percent. The government engaged pro-growth policies that favoured private sector-led recovery by reducing domestic borrowing, lowering interest rates and tapping earlier revenue mobilisation.

This rolled back the budget deficit to below four percent of GDP. The macro-policy mix expanded on both the fiscal and monetary sides, replicating Barack Obama’s macro-policy in the US — bailouts and public spending support backed by the Fed (central bank) bond-buying programme. The taxpayer’s money used was later unwound back to public coffers at a profit as the economy recovered. This pulled the US from tipping into a recession.

In Kenya, GDP growth surged from 0.2 percent to 3.3 percent, and 8.4 percent over 2009-2010. The 8.4 percent was Kenya’s highest rate since 9.5 percent GDP growth in 1977, and the highest ever since. Targets in the manner of Vision 2030 seemed on course. The 2008-09 policy mix showed how whip-smart policies re-ignite recovery. Now, Covid-19 lowers access to external and domestic resources and narrows the options.

Multilateral lenders apply varied instruments. The African Development Bank (AfDB), for example, has sold a $3 billion ‘Covid-19” Social Bond at a coupon rate of 0.75 percent and netted orders exceeding $4.6 billion.

Western economies revived earlier macro-policy options, now sliced into innovative strands: direct micro-level supports for enterprises, for example income supports to employees and for the self-employed; and overriding fiscal/monetary policy mix.

As of March 2020, the macro-policy mix options vary. Monetary policy tools abound: the EU has engaged a massive bond-buying programme coded the Pandemic Emergency Purchase Programme — EUR750 billion — promising ‘full potential of our tools”; the US cobbled up a $2 trillion economic relief plan with employee payments dependent on pre-Covid-19 incomes; unemployment benefits; student loan relief; small business loan waivers.

All US airlines are going under if not bailed out; they could be. Fiscal stimulus packages in the UK (GBP 330bn), France (Euro 300bn) and Spain (Euro 200bn) focus recovery from economic and social disruptions. Other variants (the UK, for example) offer emergency legislation to prevent private and social renters from being evicted from their homes and wage replacements up to 80 percent. Fiscal support tops about 15 percent of GDP.

The above ‘bulk’ strategy is a head-spinner for Kenya even with scaling up of competences. We’ve eroded policy options since 2014, even coordination. We lack not just the fiscal space for the borrow-and-spend model of the 2008-2009 crisis, but with Covid-19, fiscal revenues are in a free fall. On monetary policy, the Central Bank of Kenya (CBK) responses are innovative: mobile fees readjusted, loan maturities lengthened, CBR lowered to 7.25 percent from 8.25 percent, and Cash Reserve Ratio CRR lowered to 4.25 percent from 5.25 percent.

Problem: monetary policy uncoordinated with fiscal policy NEVER convinces markets or transmits required impulses. Years of intense domestic borrowing (not to say external) leaves banks in a comfort zone lending to the government and starving credit to the private sector.

Hence, the CBK and CBR have little traction. Expect sluggish private sector lending despite cap lifting and MPC efforts. Meagre flows to SMEs and the informal segment pervade the very sector (80-90 percent) most active in recovery, job creation and affecting the highest share of workforce and livelihoods.

Yet the heavy lifting must be fiscal policy as Covid-19 gets murky. Here, the national and county governments must take the lead to cut and reallocate expenditures, save resources and support small businesses, employees and consumers from below; not succumb to corporate or elite pressures for tax cuts and bailouts, such as airlines.

The priority is the set-up and operationalisation of a safety net. Recent tax cuts will not reach the most economic-recovery-inducing people in Kenya.

And they risk bias in rewarding formal sector enterprises that wriggle out of paying taxes due. Increased public debt is a no, no. The national government should tap soft external resources available, for example IMF, seek debt service moratorium and debt forgiveness.

Scrap corruption and wastage, tap them for domestic resources. Government savings of taxpayer’s money on travel, conferences and other activities should release resources to allay the disruptions of Covid-19. Counties should mobilise own-revenues and end mischiefs endemic on accountability and public services. Why domestic resources augmented with soft external resources? What scale?

With Western countries unleashing about 15 percent of GDP, a counterpart fiscal stimulus in Kenya would be Sh.1.5 trn based on GDP at $100 billion (Sh10 trillion). This amounts to about 50 percent of the national Budget of 2020/21 (tweaked latest at Sh2.91 trillion).

Take a more realistic figure of one-tenth of that level (at Sh 150bn stimulus). Could we marshall it or requisite capacity? Shouldn’t some stimulus go to investment-centred spending to cushion adverse shocks going forward?

Then, empirical evidence favours support from below. Fiscal support works better for economic recovery when concentrated on lower incomes or labour laid off (who spend) than on the rich or corporates who save the support (may not re-invest, save jobs or re-employ; this delays economic recovery).

The SMEs and informal sector drive Kenya’s employment growth. And even if the subsidies/bailouts to higher-income earners and corporates were possible, and we took equity for taxpayers as financial counterparts for a transitional period, this corporate support would in Kenya be unrecoverable to the public coffers.

It would thus be inequitable to taxpayers. To design economic policies for COVID-19, bid for competences.

Dr Wagacha is a former senior economic advisor, Executive Office of the President (2013-2018) and former Acting chairman, Board of Central Bank of Kenya.

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