Covid-19: Hits and misses of State stimulus package
By XN Iraki | March 31st 2020
The Kenyan government has finally given an economic response to the coronavirus (Covid-19) pandemic.
The government instituted a stimulus package in the 2009/2010 financial year when Uhuru Kenyatta was the Finance minister.
Its main objective was to resuscitate the economy after the 2007/2008 post-election violence. In addition, a rise in oil prices, drought, and the ripple effect of the 2008/2009 global economic crisis also made such an economic stimulus package necessary. It was worth about Sh22 billion.
The money went to the construction of schools, fresh produce markets, jua kali sheds and health centres in all the constituencies. The package was very Keynesian in that it focused on government spending.
Fate has it that it is Uhuru instituting another stimulus package as president but under very different circumstances - a medical emergency. With the objectivity of a scientist or a Supreme Court judge, let’s do an analysis of the package.
It first focused on low-income earners, those earning less than Sh24,000. They will pay no taxes. The pay as you earn (PAYE) was reduced from 30 per cent to 25 per cent. This will release about Sh20 billion to the economy from Sh393 billion collected in the 2018/19 financial year.
According to Kenya Revenue Authority data, VAT will release another Sh8.2 billion from Sh409.6 billion collected during the same period.
VAT and PAYE contributed about 54.4 per cent of tax revenues in this period.
It is hoped all this money, available from April 1, will stimulate the economy by creating demand. It is my hope that with a lower VAT rate, more revenue will be raised if we have not reached the turning point of Laffer’s curve.
The stimulus package’s main objective is “to protect jobs for our people and to provide some certainty for both employees and their employers,” according to the President.
My biggest fear is that any extra money getting into our pockets in a period of uncertainty like this will most likely be saved, muting the stimulus.
That might be the reason President Trump was talking of opening up the economy by Easter to build confidence. Can we try the same?
Other facets of the package include the reduction of Resident Income Tax (Corporation Tax) from 30 per cent to 25 per cent. How will corporations use this money? Retained earnings, dividends or give their workers a raise?
The reduction of the turnover tax rate from the current three per cent to one per cent for all Micro, Small and Medium Enterprises (MSMEs) might have almost no effect. It was to be implemented from January this year. The appropriation of an additional Sh10 billion to the elderly, orphans and other vulnerable members of our society could be the brightest idea in the plan. It will be felt immediately. With good data, such money given as a monthly stipend could be disbursed to the unemployed in future. The temporary suspension of the listing with Credit Reference Bureaus (CRB) of individuals, MSMES and corporate entities whose loan accounts fall overdue or are in arrears, effective April 1 is an interesting one. I recall it was one of the issues raised at the BBI forum in Meru. Will that encourage us not to pay loans?
Payment of Sh13 billion shillings of the verified pending bills and Sh10 billion VAT refund within three weeks and allowing for offsetting of withholding VAT in order to improve cash flows for businesses are low hanging fruits.
Employing additional healthcare workers by getting Sh1 billion from the Universal Health Coverage kitty is a step in the right direction, just as we recruit soldiers during a war. We have a war on Covid-19.
The voluntary reduction of salaries for government officials with specific percentages should not be a public relations exercise. Can it be permanent if it’s from the depth of their hearts?
Working from home for vulnerable members of the public service will reduce crowding and enhance social distancing. What of the informal sector workers?
On the monetary side, Central Bank of Kenya (CBK) has lowered interest rates and reduced the cash ratio to inject additional liquidity into the economy. CBK is following examples of other Central Banks worldwide. The prospects of restructuring loans will provide a much-needed relief to borrowers.
These steps are very different from the 2009/2010 stimulus package. There are no big government projects to keep citizens busy. Hopefully, this is to avoid crowding, the antithesis of social distancing. That might be Phase II of the State’s plan once we have overcome Covid-19.
The curfew from 7pm to 5am was a surprise. I am for a 24-hour economy so as to distribute the population over the 24 hours and enhance social distancing. The stimulus package is great for those formally employed. What of the informal sector? It is assumed that VAT reduction will lead to cheaper goods for everyone. Will businesses respond to that reduction?
The writer is an associate professor at the University of Nairobi.
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