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Personal Finance

Key models for business recovery after virus

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A closed outlet. PHOTO | SHUTTERSTOCK 

The Covid-19 pandemic has not only disrupted our social lives but also the economic landscape of Kenya’s and global economies. For the first time in a long time, we are witnessing an economic slowdown triggered by a government- induced economic shutdown to try and curb the pandemic’s spread and deaths. What this means is that unlike economic slowdowns that we have witnessed before such as the 2008/2009 recession, the Covid-19 induced slowdown may require a different economic recovery thinking and modelling because it is not only affecting the demand side as people lose jobs and incomes but has also hit the supply side of the economy as firms slow down their production capabilities due to lockdown and social distancing.

Past economic slowdowns have followed four or five common shapes including V, U, W, L . These are the same shapes being used to predict the recovery strategies and models that local and global economies should be prepared for as our economies move towards easing of lockdowns and cessations on their journey to reopening the economies.

Firstly, a V shaped economic model predicts a situation where we have an economic decline in output (GDP), employment and other economic parameters due to lockdown and social distancing but this will change to an upward surge of the economic parameters immediately the lockdown steps are eased and the economy starts to reopen.

This model seems to have been predicted to occur by Kenya’s budget policymakers with the view that revenue collection in the next financial year will hit Sh1.62 trillion in comparison to Sh1.58 trillion collected in the 2018/2019 financial year and a declining revenue collection in the final quarter of this financial year due to Covid-19 challenges.

This may be impossible because the pandemic seems to have hit hard sectors of the economy that are crucial in revenue collection such as tourism, hospitality, export and import and remittances from abroad and their recovery may not be an event but a gradual process that will take some time. In addition, the health system needs to be well prepared in conducting mass testing, isolations and treatment and the government stimulus interventions well-structured to cushion both large and micro small and medium enterprises(MSMEs) from Covid-19 shocks if our economy is to recover immediately.

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Secondly, a sluggish V shaped recovery model takes the shape of a nike or a tick where it is predicted that there will be a sharp decline in the GDP and other parameters as it is happening today that is followed by a gradual recovery after the lockdown mesures are relaxed and economic reopening gradually starts. A majority of the economies in the global arena are vouching for this model of recovery as it predicts that things are not going to turn around automatically but it may take some time for key sectors to fully recover.

Thirdly, a U shaped recovery model imagines a situation where the economic production capability will decline drastically as we are witnessing today followed by a stagnation of the economy as the recovery process takes shape on the key sector of the economy for a given period of time. This is followed by a bullish recovery back to the normal level of the economic production after some time.

It is important to note that the stagnation may take some months or financial calendar years before full production capabilities are reached. Though this may not be a very popular recovery model globally, it may be a recovery route taken by many economies depending on the time it takes to fully control the spread of the pandemic.

In addition, this model also assumes that many of the shutdown businesses will reopen after the Covid-19 in order to guarantee some jobs to the people who were left jobless by the pandemic.

Those who vouch for this recovery model argue that the reopening will be gradual, people go back to their normal living behaviour patterns gradually and social distancing situation will continue until a vaccine is developed.

The remedy of this recovery model is government stimulus cushioning many MSMEs from shutting down completely and others being declared bankrupt.

Fourth, a W shaped economic recovery model envisage that as it is happening today, a drastic decline of the economic production capabilities will be followed by a bullish recovery but that due to some other factors, this will be followed by a second wave of decline forced by a second wave of economic shutdowns and lockdown forced by renewed rise in infections after early reopening of the economy.

This may only happen where economic reopening is done before the health system is well-prepared to deal with a rise in infections.

In Kenya’s situation , the reopening of social places, churches and schools may lead to an increase in infection levels that may lead to prolonged cessations and lockdowns of some counties if we remain unprepared in the devolved units.

Lastly, an L shaped economic model envisages a situation where economic production will sharply decline followed by a prolonged stagnation that may not get back to the normal economic level as seen before. This model is the worst scenario which may not be very popular and it is highly unlikely to occur unless our Covid-19 preparedness goes completely wrong.

Although there are many more economic recovery model shapes used to explain our economic recoveries, it is important to note that the model adopted will mostly depend on our health system‘s preparedness to help in the control of the spread of the pandemic and the duration of time the global community will take to come up with a solution to the problem.

Secondly , government interventions in form of stimulus packages play a great role in determining the recovery model adopted and therefore policymakers must get it right by keeping most businesses afloat. Our hope is to do the right thing so that our economies can go back to normal as soon as possible.

The writer is an entrepreneurship and innovation lecturer at Kirinyaga University.

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