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Why the country could use another stimulus package

By XN Iraki | November 3rd 2020 at 09:00:00 GMT +0300

Youths work at a road construction site in Nairobi under the Kazi Mtaani initiative. The programme was one of the beneficiaries of the Sh53.7 billion economic stimulus package.  [Collins Kweyu, Standard]

It is worrying that the number of Covid-19 cases has started rising again after reports that the curve had started flattening around July. 

Maybe we are victims of our own success. Kenya aggressively prepared for Covid-19 even long before the first case was reported.

The preparedness paid off, with lower than predicted deaths and infections. The numbers left Western scientists and naysayers agape.  

The price of this aggressiveness was a slowdown in economic growth, which could slump to one per cent this year going by the International Monetary Fund’s (IMF) prediction.

The growth could be lower if the second wave of Covid-19 is not controlled. 

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To stop the economy from hitting rock bottom, the government came up with an economic stimulus package worth about Sh57.3 billion in May.  

It involved Kazi Mtaani, cash transfers to the elderly and vulnerable members of society, tax cuts and waivers, reduction in interest rates and reduction in bank cash ratios and payment of pending bills. 

But the lingering question is if the stimulus package was adequate. The best way to find out is to compare it with other countries.

To make it comparable, you would have to divide the amount of money given out by the government by the Gross Domestic Product (GDP) (see table). 

Comparing a cross-section of a number of countries, you find that Kenya’s stimulus package was among the lowest at 0.76 per cent, only comparable to Mexico (0.7 per cent).  

But it seems to have worked, going by the fact that unlike other countries, Kenya’s economic growth could be positive, though much below the expected rate of about six per cent if Covid-19 had not happened. 

Most countries, particularly developed ones, will experience negative growth.

The bright spot is China, which could be the new locomotive of the world economy.   

Some argue things could have been worse without the stimulus. We need time to prove that.  

It is also possible that much of the stimulus money was saved, muting its effect.

Data from banks seems to suggest that. Covid-19-induced uncertainty is likely to lead to more savings. Remember the stockpiling of essential commodities after Covid-19 came ashore?   

How do we separate the stimulus package from the resilience of the Kenyan economy where 83 per cent of the population works in the informal sector?

This informality means that the economic cycles are not as large as expected. For once, being underdeveloped proved an asset during the pandemic. 

The big question now is if we need another stimulus package. A lazy answer is no because the economy has opened up and is likely to rebound driven by our resilience.

The long answer is yes. Looking at the rising Covid-19 numbers, some mitigating measures should be instituted to flatten the curve again. That could slow down the economy.  

Clearly, force will not work this time in reducing the spread of the virus. We may have to use a carrot.

What shall we give those who willingly reduce their movement from one county to another or close down their businesses to aid the slowdown in the spread of Covid-19? This calls for another stimulus package.  

The size of our stimulus package compared with other nations means there is room for another push to mitigate the pains of an expected slowdown if new Covid-19 control measures are put in place. Noted what’s happening in Europe? 

A key bump to another stimulus package is the Sh9 trillion debt ceiling, which we are slowly approaching. Needless to say, money for the stimulus package is likely to be borrowed. Remember the earlier stimulus package reduced tax revenues. 

The other big question is how the new measures to contain Covid-19 will play into the politics of the Building Bridges Initiative (BBI) and a possible referendum.

Will our leaders focus on Covid-19 resurgence or BBI? Will they ride on fear of Covid-19 to push their agenda through a referendum? 

The excitement and political tensions created by BBI seem to suggest that Covid-19 is now on the back burner. Some boldly suggest the focus on BBI is a good distraction from Covid-19. 

The third big question is how to convince the sceptical public that the second wave of infections is as serious as the first one if not worse. The success in curbing the first wave may have been misinterpreted as scaremongering. 

We definitely need another stimulus package if the political atmosphere allows.

Even without the second wave, our economy is not yet out of the woods. This package should be more successful because we should have learnt from the first one.

We need another stimulus package because a cure, vaccine or herd immunity are still way off.

- The writer is an associate professor at the University of Nairobi

Covid 19 Time Series

 


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