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It’s Our Responsibility to Cushion the Country Against Covid-19

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There is no doubt that the COVID-19 pandemic has shaken the human family to the core. The pandemic has now spread to almost all countries. The number of infections and death is expected to rise exponentially in the countries that are just entering the curve.

With large portions of the world already on lockdown, global focus has largely shifted from economics to saving lives. Evidently this pandemic has occasioned unprecedented suffering to humankind and a massive downward spiral of the world economy.

Various economic think-tanks, global entities and Central Banks have signaled an unprecedented slow-down of the global economy and warned that this spiral could be long and hard. In short, we are already in one of the most horrendous and least foreseen world recessions. Unlike the causes for most past recessions the Corona pandemic, which is the underlying causative factor for this one, has not only advanced rapidly but it has done so in a multi-layered manner, advancing from country to country within short time lags and affecting various facades of life, be they economic, social, religious or even cultural.

Perhaps the bigger challenge is that no one can quite predict how long the pandemic and therefore the economic downturn will be with us. This will depend purely on reversal initiatives by different countries and the unfolding epidemiology of the disease. But the one fact that everyone seems to agree on is that the effects of COVID19 shall, to say the least, be gravely devastating for the human race.

There is no doubt that the first half of this year will be disastrous for the global economy as supported by various statistics. The International Monetary Fund (IMF) has revised its forecast for global economic growth for 2020 to -3% down from the 3.3% announced in January this year. The IMF also projects the cumulative loss of the real global GDP to be over $9trilion which is greater than the economies of Germany and Japan combined and larger than Africa’s GDP. What makes the current situation unique is that for the first time in a long time we are facing a double tragedy where both production and consumption are greatly suppressed.

Nations such as the US, major South East Asian Countries and basically all European countries are expected to post the lowest levels of growth in the last 10 years. For instance, China which has consistently grown at above 6% could spiral down to as low as 3%. It is instructive that about 18% of China’s GDP is supported by exports and although the country seems to be getting out of the pandemic, with the world supply chains in shambles and with many of its external markets just sliding into lockdowns it will be a tough call for China to bounce back within the first half of the year 2020.

In other fronts, oil prices have crashed to their lowest levels in 20 years, stock markets are on a tailspin, currencies are depressed and several airlines and shipping companies are already in the red and could go under in the next few months if they are not handed lifelines.

Countries in the developing world, especially in Africa, are perhaps the most vulnerable as most African countries have weak public health infrastructure and economic shock absorbers. The United Nations Economic Commission for Africa (UNECA) has already revised the Sub-Saharan Africa GDP growth downwards to 1.8% from 3.2% which it had projected earlier in the year when it released its World Economic Situation and Prospects report for the year 2020.

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This could go to the negative territory if countries are not able to contain the pandemic by the end of quarter one of 2020. Back home, the Central Bank of Kenya (CBK) has just revised its annual economic prospects for the country for 2020 from 6.2% to 3.4%. This could actually end up being a best case scenario given the unfolding external effects of the pandemic that are largely outside internal control. Actually, a few other agencies have already posted far lower projections.

So what is our likely direction in the next few months? As I mentioned earlier the focus right now is, and rightfully so, on saving lives and not necessarily on economic numbers. However it would be foolhardy for us to entirely relegate economics and livelihoods to the back banner since COVID19 or no COVID19 people still must eat and pay bills and the economy must recover.

Shifting demand

The world is now largely interconnected and mirroring what is happening globally Kenya’s economy is likely to slow down significantly in the coming days. For instance, international markets for our tea and flowers are already down and owing to travel restrictions Kenya’s tourism numbers have reduced to near zero.

Moving forward, domestic demand is likely to largely shift to basic needs as households hold back on unnecessary expenditure to cushion themselves. Many organizations have already sent more than half of their staffs either on leave or to work from home, factors that are likely to significantly reduce overall productivity given our setting. As international markets remain locked up exports will suffer in the short to medium term. However, this might be the right time for us to prop up export agriculture as food is already becoming a huge need for the locked up countries.

Although import numbers are likely to remain steady in the month of April owing to delayed servicing of local and regional demand by China for February and March (orders were placed in February and early March but China couldn’t supply), imported stock is likely to hit the market at a point when consumption might have been largely eroded. The likely net effect could be a demand-driven reduction of imports from China to the region towards mid-year. Obviously, if we can flatten the curve in the next few weeks there is still a small window to allay this possibility.

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The overall structure of the market is also likely to shift significantly at all levels mostly in the short term. Many organizations have been forced to move work online and this could herald a complete shift in how we do business post COVID19 pandemic. Based on how well firms perform online many of them are likely to keep a lot of their operations there even after this period. This dynamic will certainly have huge implications on labor, taxation, regulation and governance and discussions must start happening around it.

Government spending will inevitably largely shift from capital projects to interventions geared towards management of the pandemic and cushioning of small businesses and low-income citizens. This is important because any other approach could further fuel the pandemic and risk social order. Large companies that rely on government spending are likely to slow down on expenditure and even cut-down on labor.

It will certainly become difficult for many business and individual borrowers to service debt and banks should brace themselves for this and possibly prepare to enter into loan deferment and forbearance arrangements at scales not recently witnessed. Generally, private finance will remain somewhat frozen in the short term as the business community engages a ‘wait and see’ attitude.

Restricted movement

But perhaps our collective catch22 shall be to maintain a fair balance between managing the pandemic and therefore preserving lives, through restricted movement and other initiatives and allowing economic activity to thrive in order to preserve livelihoods and social order.

It is noteworthy that Kenya’s economy is largely supported by agriculture, ICT, financial services, manufacturing, real estate, transport and tourism. Although the contribution by agriculture to the tax net remains below 3%, this is an important contributor to GDP (about 34%) with the sector’s most important contribution being food security.

This sector is critical and must be protected during this difficult time. With restricted movement most operations and transactions have moved to ICT platforms and I expect this sector to be some kind of an economic savior not just in Kenya but globally during this period. There is however no doubt that financial services, manufacturing, transport and tourism will receive a beating and may need to be cushioned in due course.

Firms have a golden opportunity to distinguish themselves by doing everything in their power to keep their staff in employment.

Various measures continue to be rolled out at the National and County levels to cushion the economy. At the National level the National Treasury and the Kenya Revenue Authority (KRA) are already implementing the Presidential directive to lower various taxes. These include 100% tax relief for persons earning Ksh. 24,000 and below, reduction of PAYE from 30% to 25%, reduction of Turnover Tax from 3% to 1% and reduction of VAT from 16% to 14%.  These measures are expected to cushion low income earners by protecting income and lowering prices of basic products.

However, Kenyans must appreciate that taxation during tough economic times is always a catch 22 situation for any Government. This is because a fair balance between cushioning tax payers and funding recovery interventions must be attained. The KRA together with other Multi-Agency entities is also supporting the fight against the pandemic by, for instance, making available confiscated ethanol to manufacture the much needed free sanitizers. At KRA we have also significantly enhanced our online services to serve citizens better during this time. This means that one need not come to Times Tower for most services as these can be transacted online.

It is noteworthy that even as the Ministry of Health and other government agencies work hard to flatten the curve, Treasury and its arms including KRA and CBK as well as other agencies are working round the clock to manage the economic side of things. For instance, even with the prevailing tough conditions the staff family at KRA continue to do everything in their power to support the Country to fund the COVID19 pandemic reversal initiatives.

As Government does everything in its power to manage the current situation there is need for all other entities including the private sector, religious organizations and Non-Governmental organizations to step up their support to fight this pandemic. Perhaps our biggest challenge shall be to cushion employees during this time. Firms have a golden opportunity to distinguish themselves by doing everything in their power to keep their staff in employment. This perhaps is the most compassionate and heroic act that any employer can do at this difficult moment.

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DR FRED MUGAMBI MWIRIGIhttp://www.businesstoday.co.ke
Dr Fred MugambiMwirigi is a Commissioner at Kenya Revenue Authority (KRA) and the Head of the Kenya School of Revenue Administration (KESRA).
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