In the last two weeks, at least 6 central banks, including the United States Federal Reserve, have lowered interest rates in a coordinated response to the economic impact of the coronavirus pandemic.
The bigger picture of this move is that there’s a unanimous understanding that slowing down the spread of the virus is economically crippling. It requires that people stay home, don’t earn and by extension don’t spend. Unfortunately, bills and obligations haven’t gotten the memo to stay home.
In the face of drastically reduced inflows for individuals and businesses, and outflows remaining constant, a coronavirus driven-economic crisis is inevitable.
In Kenya, unfortunately, the impact will be even worse since our economy has been ailing even before the pandemic. The Kenyan economy is bound to be impacted in three major ways, namely: significant reduction in GDP, reduction of trade flows and increased unemployment rates.
In order to steer the economy out of the imminent turbulence, President Uhuru Kenyatta might have to put his legacy projects, the Big 4 agenda and the Building Bridges Initiative on hold and focus on designing and implementing an economic stimulus package.
The question facing him, therefore, is what such a package would look like. Many economic experts would agree that a duality of interventions is absolutely necessary, that is, fiscal policy and monetary policy interventions. I will attempt to explore some of the elements such a package should contain.
Even though the government has so far ruled out the possibility of widespread tax cuts, I suspect this position might have to change. Uhuru would have to cut income taxes in order to increase disposable income and stimulate spending.
For maximum effects, these cuts would have to be targeted at middle- and (especially) low-income earners. This group of the population is more likely to spend most of the tax savings compared to their wealthier counterparts who are more likely to save it.
Granted, there are few avenues through which such cuts would be delivered without hurting revenue collection too much, but the government will have to innovate, for example, by leveraging on low global oil prices as a possible avenue.
Secondly, infrastructure spending will be an important element of a stimulus package. The goal here is to increase aggregate demand. So the focus will be on projects that will put unemployed people to work.
Whilst Keynesians will argue that any project in this regard would be worthwhile, including digging holes in the ground, small and deliberate infrastructure projects provide an opportunity to address more long term economic challenges, thus increasing their impact.
For example, a widespread project to fix all inner-city roads in Nairobi County would reduce traffic jams and their resultant economic losses, on top of creating employment and business for smaller domestic contractors.
Specific attention would have to be paid to projects that increase the productivity and efficiency of the agricultural sector in order to forestall the possibility of soaring food prices in the medium term.
Overall, the impact of infrastructure spending as a stimulus intervention will depend on the choice of projects, the efficiency of their roll-out, avoiding waste especially in administration and ensuring no graft and corruption in the process.
In my opinion, monetary policy interventions would be more effective if targeted to the MSME sector of the economy. This sector accounts for the bulk of our employment numbers and is most vulnerable to the economic impacts of this pandemic.
The priority here should be to ensure, through a raft of applicable measures and incentives, that the sector has access to affordable credit.
This credit would be useful, if not absolutely necessary, in ensuring that small businesses keep their doors open, pay for operations and most importantly maintain the jobs they provide in the medium term.
The second monetary intervention I would propose would be a deliberate, carefully managed depreciation of the shilling in order to boost imports.
Needless to say, my list of elements is far from exhaustive but still sounds like a tall order for a cash strapped economy. However, the cost of doing nothing would be much, much higher.
So I dare say that Uhuru’s legacy is now almost totally dependent on two things; how he manages the coronavirus pandemic and how he steers the economy through its economic impact.
Uhuru right man for the job
Whilst the reviews of Uhuru’s management of the economy have not been particularly glowing, I reckon that the gods might have designed his presidency specifically for this moment.
Uhuru was at the helm of Treasury in 2009/10 and, therefore, led the rollout and implementation of Kibaki’s Economic Stimulus Plan that was developed to steer our economy through the impacts of the global financial crisis as well as the 2008 post-election violence.
His proximity to the design, implementation and review of the plan places him at a vantage knowledge and experience position to carry out a similar plan after this pandemic is dealt with.
Let us hope and pray that he will rise to the occasion