LET’S PREPARE FOR THE LOOMING RECESSION

OPINION ARTICLE
BY ELIUD OWALO

The adverse effects of the Covid-19 pandemic will definitely lead to a period of economic recession in the country. Kenya will witness a period of significant decline in the level of economic activity spread across all sectors of the economy, characterized 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 period of time will be drastically diminished. We should therefore anticipate a period of contraction in the economy. Should this situation persist for a longer period, then 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 gross domestic product (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 (public expenditure) and tax rates (taxation) to influence the level of economic activity in the country. Conversely, the Government can utilize 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; maximize 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 Corona virus is a fundamental risk to the full realization 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 program. 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 stabilization of the economy against the backdrop of an anticipated economic downturn.

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 the 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 is 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 rationalization 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 revitalization strategy.

Suprisingly,our BPS is till 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, on a cursory look at economic performance indicators, my view is that the Government is far from realizing its targets on all the Four Pillars, with Manufacturing and Affordable Housing as 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 the Universal Healthcare, Food Security and Manufacturing pillars. 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 enough and adopt a ‘Big Three’ Agenda moving forward to enable the country focus efforts on addressing effects of the COVID-19 pandemic.

Eliud Owalo is a Management Consultant specializing in Strategy’ formulation, implementation and control.