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We should prepare for the looming recession

OPINION
By Eliud Owalo | May 12th 2020

The Affordable Housing Programme project in Ngara, Nairobi. The government should put the housing agenda on the back burner for now. [File, Standard]

The adverse effects of the Covid-19 pandemic will definitely lead to a period of economic recession. Kenya will witness a significant decline in the level of economic activity across all sectors, characterised by a decline in the gross domestic product (GDP) for a period of about two consecutive quarters.

The implication is that the market value of all goods and services produced within the country during this time will diminish drastically. We should, therefore, anticipate a period of contraction in the economy. Should this situation persist for a longer period, the economy will regrettably move into a worse state of depression.

Ordinarily, the economic cycle in the country fluctuates between periods of expansion (growth) and contraction (recession). During recession, the GDP declines, interest rates rise, unemployment levels rise, income and consumer spending levels diminish while investment levels stagnate due to a reduction in the level of disposable incomes and savings.

It is anticipated that during the period of recession, the government will intervene in the economy through either fiscal or monetary policies to manage and reverse the downward course and effects of the economic cycle.

The government could deploy a fiscal policy by adjusting its spending levels and tax rates to influence the level of economic activity. Conversely, the government can utilise monetary policy through which the Central Bank influences the amount of money in supply or circulation in the economy. Monetary policy ordinarily either increases liquidity levels in the economy to create economic growth or reduces liquidity levels through a credit squeeze to prevent inflation.

My humble submission is that during the period of recession, the government should deploy an expansionary fiscal policy that entails reduction in taxation levels and increase in the level of public expenditure to boost production; maximise sustainable employment; maintain price stability; and moderate long-term interest rates, all of which are important factors for the health of the economy.

Alternatively, the government can also employ an expansionary monetary policy where the Central Bank lowers interest rates to increase access to credit, boost liquidity levels in the economy and enhance spending and investment levels. Just like any other policy document, our Budget Policy Statement (BPS) is formulated taking into account the obtaining environment. The coronavirus is a fundamental risk to full realisation of the policies spelt out in the BPS. The global, regional and local environment upon which the BPS assumptions were based has drastically changed due to the pandemic. Kenya’s projected growth rate will therefore reduce, and we should correspondingly review the priorities outlined in the BPS to take into account necessary mitigating measures required for an economic stimulus programme.

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This, therefore, calls for adjustments in the ceiling provided for various sectors and government ministries, departments and agencies to channel more resources to sectors that drive production, trade and commerce. Given that revenue generation will be affected, we must adjust the revenue and expenditure projections factored in the BPS and institute remedial action. For a start, various levels of government should revise their budgets to cut down on non-essential spending and redirect expenditure to stabilisation of the economy against the backdrop of an anticipated economic downturn.

Striking a balance

Equally, we should anticipate a combination of supply, demand and financial markets shocks. It is necessary to strike a delicate balance in addressing these shocks. First, the manufacturing and services sectors must immediately be supported to ensure that, as much as possible, production and supply of goods and services does not grind to a halt in the wake of the measures put in place to address the pandemic. Measures such as social distancing, partial lockdowns and bans on international travel have had adverse effects on the supply side of the economy.

On the demand side, the population is already feeling effects of reduced disposable incomes. We must adopt bold and innovative ways of addressing this by striking a balance between the revenue to be collected by the government and the disposable incomes of the people. Measures such as reduction in levels of income tax and VAT which have already been introduced are commendable. On the markets, we should urgently implement desirable measures to calm the stock market and manage debt.

It is notable that the BPS had already proposed expenditure rationalisation and revenue enhancement measures to manage the fiscal deficit. This should now be expanded and deepened further in the wake of the Covid-19 pandemic. The timing of these proposals is also critical for the economy and should form an integral part of the economic revitalisation strategy.

Surprisingly, our BPS is still anchored on the government’s ‘Big Four’ agenda focusing on affordable housing, universal healthcare, food security and manufacturing. One anomaly however is that the BPS has not provided an implementation review of the agenda. However, after looking at the economic performance indicators, my view is that the government is far from realising its targets on all the four pillars, with manufacturing and affordable housing being the biggest laggards.

This is where we should now be bold and propose a radical review of the agenda. Our main focus now must be on universal healthcare, food security and manufacturing. The former two will help in cushioning the population while the latter will help in mitigating the supply shocks to the economy.

The housing agenda may be desirable but not a priority in the prevailing circumstances. My humble submission, therefore, is that the government should be bold and adopt a ‘Big Three’ agenda moving forward to enable the country focus efforts on addressing effects of the Covid-19 pandemic.

- Mr Owalo is a management consultant specialising in strategy formulation, implementation and control

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