COVID-19 Impacts and Short-Term Economic Recovery In Kenya

Abstract

This technical report focuses on the short-term implications on the wider Kenyan economy of the COVID-19 lockdown by taking into account several impact channels (labour productivity, export demand and tourism, remittances, internal demand and internal trade costs). It considers the uncertainty of lockdown durations both domestically and abroad and incorporates the government fiscal and spending measures implemented through the Tax Laws (Amendment) Act, 2020, the COVID Spending Plan and the Economic Stimulus Plan. In annualized terms, the modelling results of this study show that the April-June lockdown in Kenya would have an impact of 5.6% in GDP in 2020 relative to the pre-COVID baseline leading to close to zero economic growth for the year. The main drivers of the reduction in economic activity are the drops in labour productivity, in export commodities and in tourism. The GDP decrease is accompanied by a depreciation of the Kenya Shilling (KSh), a reduction of domestic investment and an increase in government deficit by 17.2 billion KSh. Employment reduces by 11.8% and real income decreases by 7.9% and 6.8% for rural and urban households respectively. The lower income determines a decrease in domestic demand and lowers market prices for the majority of commodities. The impacts of the pandemic would be amplified if a new COVID-19 wave were to emerge in the second part of 2020. The GDP would see a contraction of approximately 0.8% of GDP relative to 2019 in case this hypothetical wave would only occur outside Kenya, and a GDP contraction of 3.8% in case a new set of lockdown measures would need to be imposed in Kenya as well. Employment levels would see a significant reduction of 19.1% while the government deficit would further expand. Addressing the impacts of the April-June lockdown, the announced government spending measures and the reduction of rates for VAT, income, turnover and corporate taxes facilitated by an increase in foreign borrowing determine a short-term recovery at a macroeconomic level, with negative GDP impacts reduced from 5.6% to 4.8% of GDP, implying an approximately 0.9% growth rate for 2020. These measures have an even more pronounced effect for the recovery of household income and the food sectors. Government revenues nevertheless see a decline and, with an increase in public spending, the government deficit expands by a further 25.1 billion KSh. The extent to which this deficit will need to be covered through internal borrowing will influence private investment through crowding-out effects and will constrain medium-term recovery. The main findings of the report show the negative macroeconomic effects of the pandemic on the Kenyan economy and how the government short-term recovery package can support households in reducing these negative impacts. The report also shows that these measures will put under severe stress the government resources, in particular in case of double waves. This calls for a global reaction in front of the negative impacts of the pandemic to support more fragile countries. Future research on this topic will focus on medium-term impacts of economic measures to fight the spread of the pandemic and on distributional impacts of these measures.