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How many Covid-19 stimulus packages does a country need?

THE STANDARD INSIDER
By XN Iraki | May 31st 2020

President Uhuru Kenyatta might as well be called the stimulus president. He has popularised the use of the word, perhaps a reflection of his dalliance with economics and his American experience.

Kenyatta came up with his first stimulus package as the minister of finance in 2009 to revive the economy after the post-election violence period the previous year and a global economic slowdown around the same time. It was as if, by providence, he was rehearsing for a bigger crisis.

The crisis is here, an economic crisis this time not brought by our political differences but a coronavirus, tiny and invisible - unlike our political competitors.

His next economic stimulus package was at the end of March 2020 when low-pay workers got tax relief, while turnover, corporate and value added tax (VAT) went down. Further, vulnerable members of the society were promised cash transfers.

Observers noted that those working in the formal sector benefited most from the first Covid-19 stimulus package. But did the package work?

That was too early in the pandemic to estimate the full impact of the stimulus package on the economy. Fear and panic hovered over the country. New information as jobs were lost and businesses closed may have necessitated another economic stimulus package.

We need further research to investigate the impact of that package on the economy. Our worry then was that lots of firms would not spend the savings from tax cuts. Like individuals, they probably saved the money from tax relief.

It’s rational; under the cloud of uncertainty brought by Covid-19, one would be tempted to save the money which, unfortunately, mutes the economic stimulation that comes from spending money. Such spending creates demand and jobs thereof.

Economists, courtesy of Covid-19 are going through their golden age in research. They have free experiments to test policies.

The second package announced on May 23 is more informal sector oriented. Sending money directly to the vulnerable members of the society was a step in the right direction and should not end with Covid-19. Let us give credit where it’s due; the government had started cash transfers to the elderly long before Covid-19 came ashore.

Hiring diploma and certificate holders in the health sector shows the target is Kenyans at the lower echelons of the society. Employing manual workers to fix our roads under the ‘Kazi Mitaani’ instead of big companies is another bottom of the pyramid approach. It targets the unemployed youth, never mind their dislike for manual work. The same applies to hiring of local teachers and ICT interns.

VAT refunds and outstanding bill payments were in the first Covid-19 stimulus package. Paying debts significantly improves liquidity in the economy and has lately been our economic soft underbelly. A credit guarantee scheme for small and micro-enterprises (SMEs) is long overdue; after all, such firms form the backbone of our economy.

Getting support

In tourism and agriculture, key players such as hotels and flower exporters are getting support and hopefully through trickle-down effect men and women at the bottom of the pyramid will benefit. The two sectors are labour-intensive and create jobs. Think of flower pickers and restaurant workers whose jobs can’t be automated.

Environment improvement through planting trees, flood control and water harvesting is not left out. The rural areas are not left out through this stimulus package.

Finally, manufacturing gets a boost from purchase of locally manufactured (or assembled) cars and credit guarantees of SMEs in this sector.

The stimulus packages leave no doubt that the ghosts of economist John Maynard Keynes still haunt us. Keynes advocated for the use of monetary and fiscal policies to mitigate the effects of depressions and recessions. Remember tax rates and interest rates going down, and now public works?

The copious use of the world ‘local’ in the second stimulus package demonstrates the focus on the grassroots and ‘deglobalisation’ effect of Covid-19.

But we ask loudly, will the second stimulus package stimulate the economy?

The package is about 2.5 per cent of our Sh2 trillion budget. Compare that with USA whose budget in 2019 was $4.45 trillion (Sh476 trillion) - her four Covid-19 stimulus packages total $2.4 trillion, which is about 54 per cent of the budget. USA might not be the best benchmark, but the comparison shows we could ramp up our stimulus.

One silent question is where the money for the stimulus package will come from. You may not want to hear this - from debt. Taxes have already been cut and economic slowdown means less revenue from taxes. 

Donors may chip in while there could also be some cuts in non-essential spending to free some money. Covid-19 could not have come at a worse time for our economy with citizens complaining about debt and corruption.

If you listened carefully, the president hinted that the economy could start opening up. Did that mean the stimulation will now shift to us, we do our part in getting back to work and start driving the reluctant wheel of progress?

Curfews and travel restrictions have stifled economic activities. The big question is if the rising cases of Covid-19 will postpone the reopening of the economy. Kenyans are waiting with their pent-up energy and raring to go.

The rising Covid-19 cases may also be an indicator that the economy has reopened unofficially. Who will bear the cost of more infections as the economy is opened up? Will the economic benefits outweigh costs of the disease?

The silent consensus seems to be Yes. The feeling in Kenya and other countries seems to be: let us open the economy then deal with the consequences, with schools opening a sticking point. 

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

Covid 19 Time Series

 

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