Why this will be Kenya’s worst year

In the coming months, you may not be able to afford your current lifestyle. Projections for the rest of the year on the Kenyan economy paint a gloomy future in which a vast majority of Kenyans will be penniless and unable to afford the basics of life.

The destruction caused by the novel coronavirus on the economy will for the first time since independence result in a negative growth for the economy or recession, killing whatever hopes of a revival that the country’s already fledgling economy harboured.

Already, several companies in the hospitality and aviation sectors have sacked thousands of workers, with the surviving ones staring at painful pay cuts. Other companies have simply shut down.

Negative growth

For the remaining months of the year, costs of food, fuel, school fees and rent may prove too hard of a burden for many, in what is turning out to be the country’s worst year. To put this in context, prior to 2020, the country’s worst year came in 1992, when the economy contracted by 0.8 per cent.

Financial consultancy firm McKinsey & Company, which has made this projection, also predicts that this negative growth of five per cent will see the value of the country’s wealth drop by Sh1 trillion. This is against an estimated growth of 5.6 per cent last year.

And President Uhuru Kenyatta’s administration will have to summon extraordinary energy to put the country back on track.

Amidst the gloom though, the Central Bank is putting a more positive spin on its estimates, projecting a growth of 3.4 per cent this year, while the National Treasury expects it to hit three per cent.

But for McKinsey, the best-case scenario would be 1.9 per cent.

Still, earlier projections had forecast growth of between six and 6.3 per cent for 2020. But that was before the coronavirus pandemic hit the world. The situation is compounded by a broke National Treasury with little recourse of extricating itself from this quagmire having run out of taxes and borrowing options.

Debt repayments in dollars are coming in thick and fast.

Eight years ago, in 2011/12, for every Sh1,000 ($12) received in export earnings, former President Mwai Kibaki’s government used only Sh18 ($0.2) to pay interest on foreign debt.

This has changed. In the financial year ending June 2018, for every Sh1,000 ($10) that the country earned from its exports of tea, coffee, horticulture and others, Sh173 ($1.7) went into paying interest on foreign debts. And this does not even include principal payments.

Every extra dollar that Uhuru’s government has paid out to foreign creditors in 2019 has meant fewer dollars to buy critical resources such as drugs, petrol, fertiliser or foodstuff.?

Yet, all eyes are on the government to lift businesses from the precipice of bankruptcy and arrest job losses. Most analysts want the government to implement a war-time policy that would see it do all the heavy-lifting, including bailing out bankrupt companies, controlling prices, insuring jobs or even distributing foods directly to the vulnerable.

It is a crisis that analysts say will bring to the fore the financial indiscipline that saw President Kenyatta’s administration blow up billions in white elephant projects even as government officials competed to outdo each other on who would pocket the most from public coffers.

Now, the government is under pressure to not only halt an impending health crisis by boosting its healthcare system but also to reduce the economic shock that might result from Covid-19, a disease caused by the novel coronavirus.  

Critics have noted that the Kenyan government has virtually no means of extricating itself from this difficult situation. It can neither increase its taxes nor ramp up foreign debt to bolster its firepower.

Tax revenues are expected to underperform as nearly every economic activity comes to a standstill. The pandemic has jilted the global financial market, with the capital being rushed from emerging markets.

It will thus be almost impossible for Kenya to borrow from the international market. Normally, Kenya does not only borrow from the international market for budget support but also to repay other external loans that fall due. 

Tax measures

Last Tuesday, Treasury Cabinet Secretary Ukur Yatani said Treasury will do everything necessary in continuing government efforts to stop the coronavirus spread.

Yatani said the proposed tax measures due in Parliament, as well as austerity directives, will be implemented with or without the greenlight of agencies or other arms of government. 

Treasury was last week prepared to table the proposals made in the Tax Laws Amendment Bill 2020, but Parliament postponed the scheduled its sittings to a later date.

“The corona situation is an extraordinary circumstance that requires the understanding of every single leader and every institution,” he said. “For us, we equate it to a war situation, we would not expect anybody or any institution to operate outside the expectation of the country.”

It is a war that has already had its casualties. Aviation and travel, flower, hospitality are just some of the sectors that have been decimated.

Others such as hotels, gyms, restaurants, barbershops, sports and entertainment have been the collateral damage as the government institutes measures aimed at containing the pandemic’s spread.

One of the surest ways out of the economic quagmire occasioned by coronavirus, experts have reckoned, is increased government spending. Yet, the government is nearly broke and has for a while been running on flat tires.

As of the end of February, the Treasury had a paltry Sh2.8 billion in its coffers.

In an interview with Sunday Standard, Yatani admitted that Kenya’s economy had little reserves to help it absorb shocks such as the current one. This has forced it to trim its budget and redirect resources towards the fight against coronavirus. “The Kenyan economy is not that big. We do not have enough reserves to cushion ourselves,” he said.

As a result, the government has been scrapping for cash and resources from everywhere.

Besides seeking outside help from development partners such as the World Bank and International Monetary Fund (IMF), the Treasury has received about Sh7.4 billion from the Central Bank of Kenya. The funds had been rendered useless at the end of the exercise to withdraw old Sh1,000 notes.

The World Bank and IMF will also give Kenya another Sh122 billion, complementing money that will be flowing into the Covid-19 emergency fund from philanthropists and other donors.

The IMF and World Bank have already thrown in a word on behalf of some 76 developing countries, including Kenya, for the rich countries to offer them debt relief.

African countries, under the auspices of the African Union, are pushing for debt forgiveness from the multilateral and bilateral lenders.

But it might be different this time around. Several countries, including Kenya, have been gobbling up dollar-denominated sovereign bonds - Eurobonds.

Restructuring of these debts will not be part of the IMF/World Bank negotiations. Instead, Kenya and many other countries will have to negotiate separately with their bondholders for relief. 

Already, most of the dollar-denominated loans which form almost half of Kenya’s stock of debt, have increased by over Sh150 billion, as the shilling loses ground against the dollar. The shilling is now trading at Sh106.5 against the greenback compared to Sh100 in February.

Kenya’s bad borrowing habits that have seen it ramp up expensive external loans have come back to haunt it.

When asked if the government has a projection of how much it would cost to contain the pandemic spread as well as stimulate economic recovery in the near term, the Treasury CS was non-committal.

“Our budget for Covid-19 is very substantial. We have five committees looking at the impact… and we are now trying to see how best we are going to realign our current budget to fund critical services,” he said.

Following the 2007/08 global financial crisis and the post-election violence, the government introduced the Economic Stimulus Programme (ESP) to help the economy get back on its feet. In that financial year, the government spent an additional Sh21.6 billion, three per cent of its Sh700 billion expenditure basket.

In the following year and as the effects of the global market crash continued to be felt, the Treasury spent another Sh22 billion, an equivalent of Sh105 million per constituency under the ESP.

The restrained economic activities following movement restrictions mean even lower revenue collection for the taxman. Last week, the Parliamentary Budget Office said the taxman will lose more than Sh122 billion in revenue from various tax waivers proposed on VAT and Income Tax.

Aside from this, traditional revenue streams have dried up.

Last year, Kenya generated Sh163 billion from tourism, with total number arrivals standing at two million.

This year, this revenue stream will be virtually be non-existent, as international travel remains grounded for the foreseeable future and conditions in Europe and North America, Kenya’s crucial tourism source market, remain uncertain.

Diaspora remittances, another key contributor and currently standing at Sh200 billion, have started falling.