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Broke government with limited options in fight against coronavirus

NAIROBI
By Domnic Omondi | March 24th 2020

An official from the Public Health Department disinfects a stall at Gikomba Market in Nairobi over the weekend in an effort to contain the spread of the coronavirus in the capital. [Stafford Ondego, Standard]

President Uhuru Kenyatta’s financial armoury is fast running out of weapons to combat the coronavirus pandemic.

He has few options in the face of growing calls for the government to give businesses some form of tax relief, or cobble together a stimulus package to avert an economic meltdown.

Data from the Treasury shows that by end of February, the country had only Sh2.8 billion in its accounts, too little to help it effectively combat the effects of the coronavirus pandemic.

And with the Treasury’s finances in poor shape, some analysts say it is nearly impossible for the State to give tax relief – unless it drastically cuts its spending.

This would translate to its slashing salaries for workers like police officers, doctors and teachers, or freezing its development plans. Yet, the government needs this money to keep flowing to boost consumption and stimulate the economy.

Costs of business 

However, not cutting taxes – a key source of government revenue – might see businesses collapse under the weight of the high costs of doing business.

The Treasury has the option of increasing borrowing, but even before the current global health crisis, it was trying to run away from this as it had reached its limit.

Previously, at around this time, the government would have taken or be in the process of taking a commercial loan – either a sovereign bond, such as the Eurobond, or a syndicated loan from banks.

But more borrowing would compromise its current financial position given that debt as a fraction of gross domestic product has already surpassed 60 per cent.

Moreover, borrowing from the local market would crowd out the private sector, which needs the money to stay afloat.

President Kenyatta has so far relied on the Central Bank of Kenya (CBK) to help the country navigate what could turn out to be a crippling economic crisis.

Last Friday, CBK released Sh7.4 billion to support the government’s efforts to deal with the effects of the pandemic that threatens to wipe out livelihoods and cripple the economy.

“That money goes to help our health facilities and our health workers,” said the president.

And yesterday, the CBK cut its benchmark lending rate by 100 basis points to 7.25 per cent to cushion the economy in the face of the coronavirus outbreak.

It also reduced the cash reserve ratio for commercial banks to 4.25 per cent from 5.25 per cent, releasing an extra Sh35.2 billion for lending to borrowers.

However, as investment bank Genghis Capital noted in one of its analyses, there has to be co-ordination between government spending and CBK’s monetary policy in the fight against the economic effects of the pandemic. And the fiscal side – government spending and taxation – has to be fully on board.

“Recent experience in developed markets shows the shortfalls of an unco-ordinated policy response; more specifically, use of monetary policy solely as first responders to the economic hit,” noted Churchill Ogutu, a financial analyst at Genghis Capital.

Mr Ogutu cited CBK Governor Patrick Njoroge’s sentiments of the risks that could emerge, and which would be addressed through comprehensive co-ordination.

“In addition, as the business environment becomes more challenging, we expect a dip in tax revenues, and in turn government spending.”

‘Prisoner’s dilemma’

That is why Wahoro Ndoho, the CEO of Euclid Capital and a former director at the Public Debt Management Office at the Treasury, says the government is in a prisoner’s dilemma.

It needs to raise taxes to spend on a stimulus package, yet the business environment is not right for it to increase taxes.

Nonetheless, Mr Ndoho does not think businesses should be given tax breaks as they would likely use it to recoup their losses. He reckons that at this time of crisis, businesses are risk-averse.

“Any entrepreneur at this time is running at a loss. His business has also become a bigger risk than a benefit to him. So, giving a business person a stimulus package at a time of crisis has a lot of slippages because entrepreneurs are rational beings,” he said.

“And if he has made losses, the first thing he will do with this stimulus is to keep it; to recoup his losses first.”

And when it comes to borrowing, either from the domestic or foreign markets, the Treasury is facing various hurdles.

On the one hand, it could use this money to boost the economy – by perhaps increasing transfers to the elderly and other vulnerable groups, or for on-lending to smes.

On the other, however, the government is already out of borrowing space. Ndoho wants it to consider restructuring expensive loans and overhauling procurement rules so it can borrow money through an emergency bond and spend it.

But as the country’s foreign exchange reserves continue to be depleted as it grapples with more foreign outflows than inflows, and with the shilling trading at 106.5 against the dollar on Friday, efforts to arrest the currency slide have not borne any fruits.

Currency jitters threatens to push the country to the brink of a balance of payments crisis. For the first time, the country might have trouble repaying its external loans as they fall due owing to a weak shilling.

An insurance cover from the International Monetary Fund (IMF), which would have acted as an additional buffer in case of an external shock such as the present one, is not yet in place after the last one of $989.8 million (Sh105 billion) expired in September 2018.

 

Negotiations for a three-year stand-by facility are still ongoing after the Treasury and CBK officials dragged their feet on the arrangement, insisting that the country’s reserves were sufficient to help the country weather any exogenous shock.

Dr Njoroge told reporters that Kenya has been on record saying it was not desperate for a stand-by facility.

“It’s not that we are on the ropes, (that) the economy is on the ropes and we need the IMF to come and sort us out,” he explained in a press briefing last year.

And things are expected to get worse as the virus continues to pound various sectors, with a decline in economic activities hampering tax collections.

– SEE RELATED STORY IN THE ‘FINANCIAL STANDARD’

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