There’s no telling when economy will beat virus
By XN Iraki
| Sep 8th 2020 | 4 min read
In the fullness of time, it will be possible to analyse the wisdom behind some of the key policy decisions the government made after Covid-19 came ashore.
In my opinion, the government for once showed its grasp of reality. By not closing the economy and instead going for a curfew, we forestalled a possible economic meltdown.
I would suggest an even bolder move of fully opening up the economy while minimising the risk of the spread of the virus by changing the patterns of how Kenyans interact.
The wisdom behind not closing the economy came from our limited knowledge about Covid-19 and the large informal sector. We still do not know enough about the virus beyond the fear and deaths it has visited on us.
One paradox is that Covid-19 has not spread as fast as was predicted in Africa. Some cite a largely youthful population, hot weather and better immunity resulting from our encounter with too many diseases and viruses, or vaccination from other diseases. It could also be that more people have been adhering to measures, such as social distancing, the wearing of masks in public and praying hard.
What is certain is that the virus has devastated the global economy with record unemployment rates and sluggish growth as businesses close or shift to survival mode.
In some countries, Covid-19 curves have flattened. In Kenya, we are not certain but hope it has. That apart, we must focus on post-Covid recovery. How long will it take? What will it take? What will the role of the private and public sectors be?
We could start by asking if the two stimulus packages have worked as expected. Is the tax relief working? Have Kenyans saved the money or consumed it? How many jobs did the stimulus packages save? Was it enough? A PhD thesis could unravel all this.
One unintended consequence of Covid-19 has been deeper involvement of the government in the economy, best espoused by borrowing, quantitative easing, printing money and interventions in capital markets. Imagine the government buying shares.
Time will tell if governments are up to the task of saving economies from the ravages of Covid-19, just as they do during wars. In some countries like China and the Scandinavia states, governments are used to playing a big and positive role in the economy.
In other countries, it’s more mixed, with the private sector playing an equally important role. It’s interesting to see how the private sector will react. The sector dislikes the government but loves State bailouts.
The government uses traditional tools, fiscal and monetary policies to change the trajectory of the economy. Tax cuts and big government projects can stimulate the economy; we are all Keynesians. The government can borrow for that and let the future generations pay for it.
The low interest rates make it easier for governments to borrow. What if inflation or interest rates spike in future?
The tricky part is the monetary policy. The interests were low before Covid-19. What happens when interest rates hit zero or negative? Ideally, we would rush to the bank to borrow money. But that has not been forthcoming because of uncertainty. We are not sure how the pandemic will play out until we get a vaccine or cure. Some governments are even giving money to private firms to prepare for mass vaccinations in case the trials are successful.
There is no doubt that the Kenyan government is doing its part in bringing post-Covid-19 recovery by giving soft loans or grants to businesses to stay afloat. We need more data on who has benefited from the stimulus money. Will the government allocate capital efficiently? Kenyans will hold it to account in case of market failure. But where would we turn to if the government fails in managing the economy? Should we really celebrate deeper government involvement in the economy?
What about you and me? Can we be relied on to turn the economy around? We are saving more and postponing investment decisions. The solution to making us more economically active lies with the government; create more certainty so that we can consume and invest.
This is why the debate on 2022 polls and misuse of Covid-19 money could not have come at a worse time.
The good news is that a majority of Kenyans have gone back to their economic activities; we are getting used to Covid-19. Others suggest we realised we are on our own, and the economic reality could not allow us to stay indoors any longer.
Opening schools and lifting the nighttime curfew will mark the final return to economic normalcy. But hangovers will remain. The government can hasten the return to normalcy and recovery thereof by creating more certainty. Let us reduce the decibels of political noise. We should publicise the use of money set aside for Covid-19 the same way we publicise data on Covid-19 cases.
Our recovery will also depend on trading partners. If our markets for goods and services recover, they will drag us along.
Think of the European Union or China. One theory is that China will serve as the new locomotive of the world economy; it was not as badly afflicted by Covid-19 despite the virus originating from there. What of our sources of tourists and raw materials? New innovations by the time Covid-19 runs its course will also play a role in economic recovery.
It will take, in my opinion, about two years for the economy to recover. This would mean the end of 2022.
- The writer is an associate professor at the University of Nairobi
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