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Economy

Virus to cut Sh1trn from Kenya GDP

Nurses preparing an isolation room in Kisumu
Nurses preparing an isolation room in Kisumu. FILE PHOTO | NMG 

Kenya’s economy could shrink by five percent in what will represent a $10 billion (Sh1 trillion) loss of the country’s output if the coronavirus pandemic is not contained, management consultants McKinsey & Company has warned in a new report to be released Friday.

The firm reckons that the dip in gross domestic product (GDP) will be the product of disruption to supply chain for key inputs in machinery and chemicals, a hit on the tourism inflows and exports like flowers and reductions in household and business spending, all of which are critical for economic sustenance and growth.

If the McKinsey forecast comes to pass, this will mark the first contraction of Kenya’s economy since 1992 in the aftermath of the Goldenberg scandal during the autocratic era of the then President Daniel arap Moi. The Goldenberg scam led to the loss of at least $1 billion (Sh105 billion) through a dubious compensation scheme for bogus gold and diamond exports.

McKinsey forecasts that economic growth will dip from 5.2 to 1.9 percent — representing a reduction in GDP of $3 billion (Sh315 billion).

Kenya has so far confirmed 110 cases of the Covid-19 disease and its crucial tourism and farm exports businesses have already been hit by the impact of the pandemic that has caused close 50,000 deaths and over 975,000 infections globally.

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“The biggest impacts in terms of loss to GDP are reductions in household and business spending (about 50 percent), disruption to supply chain for key inputs in machinery and chemicals (about 30 percent) and tourism (about 20 percent),” says McKinseyin the report capturing the impact of the pandemic on Africa’s economies.

“An initial analysis of Covid-19’s economic impact, finds that Africa’s GDP growth in 2020 could be cut by 3–8 percentage points. We find that the pandemic and the oil-price shock are likely to tip Africa into an economic contraction in 2020, in the absence of major fiscal stimulus,” say the management consultants.

These means that Kenya will perform worse compared to its Africa’s peers based on McKinsey & Company’s best scenario growth of 1.9 percent.

CBK last month revised its 2020 economic growth forecast to 3.4 percent from an initial estimate of 6.2 percent.

“(The government) also need to consider an extensive stimulus package to reverse the economic damage of the crisis,” says the McKinsey & Company report. Kenya announced tax cuts on March 25 to protect the economy against the coronavirus. Parliament is scheduled to meet next week to debate the proposal presented by the Treasury (see separate story).

The government has signalled its intention to release billions of shillings in unpaid bills and speed up tax refunds to inject additional liquidity into the economy. As part of mitigation measures, CBK also lowered its benchmark lending rate by a 100 basis points and reduced the amount of cash that banks are required to hold as reserves.

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