Steering the Kenyan Economy during the COVID-19 Pandemic.
May 4, 2020
COVID – 19 has ravaged the global economy, put healthcare systems under enormous strain and obliterated global supply chains and international demand. The disease has not only declared war on our bodies, but also upon our civilization.
Dr. Patrick Njoroge, chairman of the Monetary Policy Committee (MPC) and also the governor of Central Bank of Kenya, chaired a meeting on Wednesday, 29th April 2020 to assess the economic impact of COVID – 19 and the effectiveness and outcomes of the policy countermeasures put into place to mitigate the economic and financial disruptions.
On the global stage, all economic outlooks currently remain highly uncertain as 2020 progresses. All the latest global growth projections indicate a sharp contraction in the global growth rate. Across the world, the lockdown measures have placed severe restrictions to movement and activities of people and non-essential workers and businesses. This has resulted in a sharp increase in the levels of unemployment reduced production and constrained supply chains. Global financial markets are currently experiencing increasing levels of volatility which has directly impacted the asset and commodity prices. The only observable benefit is the global decrease in pollution allowing for ecosystems to begin to restore themselves to former glory.
March 2019 saw the MPC take 2 major steps in relieving the pressures brought on by the pandemic, the lowering of the Central Bank Rate (CBR) and the Cash Reserve Ratio (CRR). As a result of the CRR being lowered in March, 43.5% of the funds released to the banking system have been utilized, the main sectors benefitting being, tourism, agriculture, trade and real estate. Loans amounting to Kshs. 81.7 billion have been restructured following the March 18th announcement of emergency measures. Tourism, Hospitality, Real Estate, Construction and Trade, were the main beneficiaries.
These fiscal measures were incremental and largely targeted to the most vulnerable groups leading to an increase in the amount spent on the healthcare sector to contain the pandemic. In the year 2019, Kenya’s economy grew by 5.4% supported mainly by service-oriented sectors. Initial indicators for 2020 show that growth was resilient during the first quarter of 2020 before the pandemic. Latest growth projections indicate only a 2.35 growth by the end of 2020, less than half of last year’s growth.
A special survey undertaken by the MPC targeting hotels and commercial banks showed that virtually all hotel bookings for the second quarter of 2020 have been cancelled. This has arisen due to increased anxieties occasioned by the pandemic, travel restrictions and a low level of international confidence in our healthcare systems. In addition, this has led to increased layoffs, furloughs and hotel closures.
Following a revision of the balance of payments data, the current account deficit was at 5.8% of GDP in 2018 and 2019. Following the outbreak, it is expected to remain at 5.8% with lower crude oil imports offsetting the projected remittances. Problematically, horticultural exports are expected to diminish following the reduction in the global demand for Kenya’s horticultural products particularly flowers in key market destinations.
Good news from the banking sector, which remains resilient and stable with the number of Non-Performing Loans dropping from 12.7% in February to 12.5% in March. There is still urgent need for more interventions to support the MSME sector. Proposed measures include the introduction of a Credit Guarantee Scheme to lower the risk taken on by bank lending and increase credit uptake. The private sector grew by 8.9% in the last 12 months since March 2019 and was mainly observed in the following sectors:
• Building and construction
• Consumer Durables
This was attributed to the lowering of the lending rate by banks in response to the lowering of the CBR, improvement of liquidity and market conditions after the reduction of the CRR to support access to credit and loan repayments by customers hardest hit by the pandemic. Those who are currently facing loan repayment problems as a direct result of the pandemic are strongly advised to visit their loan provider and discuss their restructuring options.
Inflation is expected to remain stagnant in the near term despite the disruptions occasioned by the pandemic, supported by favorable weather conditions, lower international oil prices and the reduction of VAT.
The MPC have noted that the policies have continued to have the intended effect, but in light of the continuing global crisis, the MPC has decide to further lower the Central Bank Rate from 7.25% to 7.00% in order to bastion its accommodative monetary policy position. The MPC will continue to monitor the situation and any new announcements will be made after they reconvene next month.
With the World bank projecting Kenya’s growth rate to be at 1.5% in the year 2020, much is expected to be done to mitigate the COVID-19 effects. Businesses are advised to reserve cash to cushion their in these times, and be lean in terms of spending. On a brighter side, Kenya is said to be one of the countries that will rebound faster at a rate of 5.6% once the epidermic is contained.