I Policy

IMPACT OF CORONAVIRUS (COVID-19) ON KENYA’S ECONOMY by AGATHA AMASE

By June 2, 2020 No Comments

Background Information

The novel coronavirus (COVID 19) has been the topic of discussion since the turn of the decade, with the first case of the virus being reported on 31st December 2019 in Wuhan, China. Initially, the virus was a major concern for the medical community since there was very little information about how the virus spread, the incubation period, or the severity of the disease. The rest of the world watched closely as China attempted to contain and eradicate the disease, which seemed like it would quickly be contained. With very little known about the virus at the time, it slowly spread to other nations and begun causing panic across the globe. Since then, the coronavirus has not only adversely affected the global community in matters of health but also, in terms of international trade, macroeconomic indicators, and financial markets. It is for this reason that i have chosen to discuss the impact the virus is likely to have on the Kenyan economy, with the first case reported in Kenya on 13th March 2020.

Therefore, I shall be discussing the following:

  1. Brief History on How the Pandemic Started and the Current State of Affairs
  2. How the Pandemic has Affected the Global Economy
  3. The Effects in the Kenyan Economy,
  4. The Way Forward, Outlook and Conclusion.

1.1 Brief History on How the Pandemic Started and the Current State of Affairs

The Coronavirus, better known as COVID-19 in the medical community, is a group of viruses that causes respiratory tract illnesses. The symptoms are severe cough, sneezing, and breathing difficulties. The virus broke out in the Wuhan district in China and slowly spread to other parts of the world. Currently, the disease has spread to over 104 countries with major economies such as Italy, Japan, South Korea, France, Spain, Australia, and the US having all reported multiple cases of the virus within their borders, and deaths related to the virus. The World Health Organization (WHO), on 11th March 2020, declared the outbreak a global pandemic raising the risk assessment of the outbreak to “very high”. A pandemic status is given to a disease epidemic that has spread across a large region across the globe and community spread is inevitable. China, the world’s second-largest economy, is a global manufacturing hub and with the country in lockdown, a majority of developed and developing economies are beginning to experience the negative effects of the virus due to the disruption of the global supply chain.

AGATHA AMASE .

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The fear of contracting the virus is also perceived to be spreading faster than the virus itself, having sparked fear across the globe with most people being driven by emotional contagion and rushing to stock up on items such as hand sanitizers,

gloves and face masks, with online sales for these products having risen between January and February.

Most people are also stocking up on canned and non-perishable goods due to uncertainty about how the virus will affect the supply chain and fears of a lockdown. This emotional contagion has greatly amplified the effects of the pandemic on the global economy, even though a majority of people around the world remain largely unaffected. The medical practitioners put the mortality rate currently at 3.3% compared to other outbreaks such as the SARS virus, which had a mortality rate of approximately 9.6%. Mortality is more severe with those of age 60 and above with pre-existing medical conditions, with the younger population largely recovering

1.2 How the Pandemic has affected the Global Economy

The rapid geographical spread of the coronavirus and the high infection rates have spread fear around the globe disrupting global economic activities. According to the Organization for Economic Cooperation and Development (OECD), the world economy is projected to grow by 2.4%, from an estimated 2.9% in 2019, the slowest pace since 2009, during the 2008/2009 financial crisis.

The virus has affected both developed and developing countries in terms of;

  1. International Trade

The virus has caused a lockdown in countries such as China, India, Rwanda and now very recently Italy to contain the spread of the disease adversely affecting the global supply chain. China has been the world’s largest exporter since 2009 according to the World Bank. The disruption of the global supply chain is likely to cause input shortages causing most manufacturing plants and retailers to suspend operations. The demand for oil has also slowed down since the outbreak of the virus with major manufacturing hubs such as China and the US either shutting down or slowing down causing the oil prices to plummet down. As of 11th March, crude oil prices had. In 2018, China and the US were the largest oil importers and despite being the largest exporter in the world, China is also a major importer of goods and services. Global economies that depend on China as a customer have already begun experiencing the effects of the lockdown due to the slowdown in demand.

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  1. Financial and Commodity Markets

As the virus continues spreading to major economies around the world, most investors in the equities market have become net sellers, wiping out any year to date gains that major indices had made. Most investors have moved to place their money in safer haven assets such as gold, driving their prices upwards. The collapse of the oil prices mentioned earlier has also negatively affected the stock markets with investors rushing to dump stocks in the energy sector. Many

companies focus on diagnosing, treating, and preventing the pandemic have however been recording gains in their stock prices.

  1. Macroeconomic Indicators

As stated earlier, the global economic growth for 2020 is likely to come in at a slower pace due to the spread of the coronavirus. Most Central Banks around the world have taken a dovish monetary policy stance in a bid to boost the economy amid the negative macroeconomic effects emanating from the coronavirus outbreak.

1.3 The Effects so Far in the Kenyan Economy

The first case of Coronavirus infection within Kenya’s borders was reported on the 13th of March 2019.  Despite this, the country had already begun experiencing the adverse economic effects of the pandemic.

  1. Financial Markets: The first major hit the country experienced was the net selling position by investors in the stock markets. Most foreigners who had invested in the Kenyan stock market began selling their stocks as the virus began spreading to different parts of the globe. Many foreign investors, who often purchase blue-chip stocks, have been selling their equity holdings to purchase gold and fixed income securities due to the much uncertainty in the market. Immediately the first case of Coronavirus was reported in the country, the stock markets declined with stocks such as Safaricom and KCB declining every day. Trading in the National Stock Exchange was halted on 13th March 2020.
  1. Disrupted Supply Chains: As mentioned earlier, the spread of the virus has also disrupted the global supply chain and Kenya has not been spared either. Imports from China account for approximately 21.0% of Kenya’s total imports and with the current lockdown, activities within the manufacturing sector are likely to be disrupted. The low supply of imports from China as well as South Korea especially in terms of electronics could

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see prices rise to exorbitant levels. Local supermarkets have already indicated that the prices of electronics, clothes, and furniture many of which are imported from China are likely to rise with media reports indicating that ships from China are yet to dock at the Mombasa port. The virus also affects the country’s exports of horticulture and agricultural goods mainly because of reduced consumer spending as well as shutdowns in major markets. The Kenya Association of Manufacturers has warned that the outbreak could cause a shortage of intermediate goods used to manufacture products that are exported. The decline in business conditions is already being felt.

 

According to a report done by the Kenya Private Sector Alliance (KEPSA), 61.0% of businesses surveyed reported that the Coronavirus has had a direct negative impact on their businesses. According to a report by KEPSA, most businesses expect to be disrupted in these various ways:

  • Most companies foresee a situation where they will have to ask employees to work from home thus negatively affecting businesses in the service sector,
  • Stock-outs and delayed deliveries due to the lockdown,
  • Reduced demand for export products,
  • Increased cost of goods which will consequently increase the overall cost of production,
  • Reduced capital flows, restrictions on travel, and reduced staff time,
  • Difficulty in obtaining credit from financial institutions as well as reduced ability to meet their loan interest payments, and,
  • Slowed investment appetite from foreign and local investors.

I believe the Kenyan Government can borrow a leaf from the governments and possibly;

  • Grant tax breaks to companies seeking to increase their capacity to produce import substitute goods, which could even mean zero-rating VAT for the next 3-months,
  • Release VAT refunds to assist businesses with managing their cash flow,

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  • Encourage banks to give concessionary loans at low rates to facilitate businesses, and as well provide moratoriums on loans that are due,
  • Announce and provide for a Business Stabilization Fund to cushion the impact of the coronavirus, especially for Small & Medium Enterprises (SME’s),
  • Consider reducing corporate tax for industries that have been highly affected by the virus such as the aviation industry, or waiving corporate tax for a 3-month period as well as a reduction in payroll tax for the next 3 months for the low income bracket workers, and,
  • Strengthen the local supply chain for traders to be able to access import substitute goods.

 

 

 

As mentioned in the previous section, I applaud the Kenyan Government for the swift and effective measures taken to control the medical side of the pandemic. Government now needs to look into measures to sustain economic output and implement measures to support businesses.

1.4 The Way Forward, Outlook and Conclusion:

I believe the emotional contagion has and will continue to inhibit rationality even from the investor’s perspective. We believe that the psychological factor has played a major role in driving the current impact of the pandemic globally. For instance, many investors holding equity stocks in their portfolios globally have been quick to sell off their holdings thus incurring losses due to the plummeting prices. The misinformation about the virus has also added to this, as most people are unaware of what exactly the disease entails, the symptoms, prevention measures, and steps to be taken if one suspects they are infected. Medical practitioners are yet to understand much about the disease as well as fueling further the emotional contagion among the general public. The uncertainty has caused and may continue to cause most people to make irrational decisions and spread fear all around.

I believe the Kenyan government in conjunction with the Ministry of Health should take these necessary precautions to prevent a full-blown outbreak:

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  • Clear and effective communication, which has already been done by the Kenyan Government, for the medical side of the pandemic,
  • Swift responses including quarantine and broad travel restrictions are effective for containment, and adequate preparedness by all health agencies given that the first case has already been reported,
  • Promote social distancing as much as possible to reduce community transmission,
  • Increase awareness to the public on the impact of the virus and especially on how spreading can be curbed. As such nationwide sensitization of citizens and businesses on sanitization initiatives and control/prevention measures are key which will also demystify most of the misinformation around the virus effectively control the emotional contagion,
  • Businesses can explore alternative markets from where they can source for necessary supplies or consider sourcing locally, and,
  • Local businesses can also develop virtual workstations and enlightening employees to be prepared to offer virtual services from their home to avoid the high risk of infection.

 

 

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