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Overhaul national budget to reflect Covid19 economic realities

By Ndung'u Wainaina | August 6th 2020 at 12:00:00 GMT +0300

The National Treasury prepared a budget that was completely unhinged and which 'lives' in a parallel universe to that of our Covid-19 devastated world.

While the Kenyan economy has been fully opened, this was not done in a properly managed way. The country should have adopted a county situational analysis strategy with timed review mechanism rather than 'one size fits all'. The country is already seeing a wave of increasing infections. This makes it absolutely necessary to overhaul the FY2020/2021 budget to reflect and align it with the reality of Covid-19 and the worst social and economic crisis that we face. This is not the time for huge capital expenditure on mega projects.

While the government’s immediate priority should have been to ‘buy’ a lower rate of unemployment as quickly as possible, the economic and non-economic co-benefits of stimulus programmes, both in the short-term and long-term, should also have been considered when deciding what stimulus projects to support. With a pandemic like Covid-19, the risk with waiting to see how badly the economy slows is that by the time the data is clear, the window to act effectively would have passed. The size of the budget fiscal stimulus-response needs to be proportionate to the damage that would otherwise be done.

Treasury and State House did not plan, budget and ensure the maximum use of available resources to protect the socio-economic rights of the Kenyan population being brutalised by the Covid-19 pandemic. It is evident that Treasury disingenuously ignored the fiscal options for responding to the effects of the pandemic and the concomitant restrictions. It is not just the size of the fiscal stimulus that would determine the short and long-term Covid-19 economic effects. The shape of the deficit also matters.

The FY 2020/2021 budget ought to have been informed by Covid-19 response, collapse in economic activity and economic contraction, budget deficit and the huge decline in tax revenue collection and huge debt servicing burden.

Covid 19 Time Series

 

It was erroneous for the National Treasury to treat the Covid-19 crisis normally as though to expect the economy that comes out of hibernation to look like the one that had been put to sleep.

Unequal economy

If the government is serious about building a less unequal economy, it must use the budget to change the distribution of the incomes arising out of economic activity by increasing expenditure targeted at low-income groups. This can be done by either increasing total expenditure or by reprioritising expenditure to low-income groups so that they can benefit more.

An adjusted coronavirus-centred budget that reprioritises expenditure is required urgently to fully address the worsening health crisis, support livelihoods, advance rights, sustain businesses, and protect the country from imminent economic and social collapse.

The economic crisis brought on by the coronavirus pandemic requires fast, large, effective and well-targeted fiscal stimulus. The government needs a budget approach that is temporary and targeted as well as structural and sustained. Here are my suggestions.

1. Give additional resources to counties to enable them to respond effectively to the escalating pandemic. The counties need more funding to increase testing and screening capacity in high-density areas, increase bed capacity, provide proper PPE and improve tracing and isolation facilities.

2. Revenue sharing should be revised to ensure adequate funding of county governments’ so that they can provide safe and consistent supply of water to residents, give food to the hungry and pay rent for those who are unable to and provide face masks to all people.

3. To avoid further retrenchments and income loss, the government should extend more support to businesses including by setting aside funds to help small and medium-sized enterprises to stay afloat and keep their employees.

4. The government should support businesses to set up a Temporary Employer/Employee Relief Scheme (TERS) to offer funds to businesses or directly pay employee wages. It should make the relief more accessible and automatic for certain businesses to extend relief to households.

5. A low-interest government-guaranteed rescue fund should be set up where loans are not appropriate to help businesses survive this period. In some instances, the government should consider making large direct investments in some companies in exchange for equity in those firms. The most efficient way for the government to make such equity injections would be to create a dedicated fund. In addition to saving jobs and ensuring production, such stimulus would provide long term benefits to taxpayers in the form of future dividends from future profits.

Health and education

6. Targeted support for the most severely affected sectors and household stimulus payments would benefit the wider economy. Increasing social grants is an important way of ensuring that poor and low-income Kenyans survive current economic hardships.

7. Target activities with high direct employment. Crucial sectors such as health and education have higher direct employment effects per spending. By contrast construction involves relatively small direct employment but significant off-site indirect employment. The priority should be to the more employment-intensive areas like refurbishing existing public sector infrastructure such as schools. The more labour intensive industry is the more jobs will be created per billion spent

8. Give additional funding to the education sector. Children’s well-being has been affected by Covid-19. The painful consequences of the government’s failure to provide schools with adequate infrastructure and basic services such as clean water will see almost a third of children not returning to school. Urgent spending on schools’ infrastructure will benefit an entire school community.

Mr Ndung'u is the Executive Director, International Center for Policy and Conflict


National Treasury Covid-19 National budget
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