MELTDOWN

Kenya’s economic growth to contract to 1%, World Bank warns

It had previously projected a 6% growth.

In Summary

•Kenya’s economy had decelerated before the COVID-19 pandemic, and the shock is expected to further reduce growth in 2020, across services, industry and agriculture.

•National Treasury on Tuesday projected a 2.5 per cent growth and at worse, 1.8 per cent.

Economy
Economy

Kenya's economy will grow by 1.5 per cent in 2020 according to the  World Bank, painting an even grimmer picture than that given by the National Treasury.

Cabinet Secretary Ukur Yatani, while launching the Economic Survey 2020 placed the growth at between 1.8 percent and 2.5 percent.

This coming at a time when the survey shows that the economy shrunk to 5.4 per cent in 2019 from 6.3 per cent in 2018.

The bank had previously projected a 6 percent growth.

In its latest Kenya Economic Update (KEU) released, the global lender warned that if the Covid-19 related disruptions continue, growth could further contract to 1.0 per cent.

 
 

The virus impact is expected to reduce growth across services, industry, and agriculture, the global lender said.

“Economic growth projection remains highly uncertain and the outcome will hinge on how the pandemic plays out internationally and within Kenya, along with policy actions taken to mitigate the situation,” it said.

Despite government tax and stimulus packages for the private sector, key sub-sectors remain exposed, according to the bank.

Policy measures such as working from home, travel restrictions, the closure of schools, the suspension of public gatherings, and a nightly curfew, have been termed necessary to delay the spread while the country ramps-up investment in its healthcare systems.

Nonetheless, they are also quite costly to the economy by reducing social interaction, production, and demand across all sectors, World Bank said.

“We recognize that Kenya must balance between reducing the spread of the virus and cushioning Kenyans particularly informal workers and youth who make up 70 per cent of the population from the adverse economic effects posed by Covid-19,” said Felipe Jaramillo, World Bank Country Director for Kenya.

“In partnership with other development partners, we are supporting the government of Kenya through financing and technical advice to strengthen its health systems capacity to contain the spread Covid-19,” Jaramillo added.

 
 

The hardship from the crisis would disproportionately befall the poorest and the most vulnerable households in Kenya, World Bank warns.

Many of these depend on farming (for the rural), self-employment, and informal wage (for the urban). 

According to experts at the global lender, protecting earnings and reaching households through cash transfers is considerably more challenging due to a nascent system of social safety nets, lack of proper physical address system, and updated welfare registers.

It is critical, therefore, for the country to scale up available social assistance programs to provide poor households with food, water, and other basic supplies to cope with the crisis, World Bank has advised.

It is also important, to customize Covid-19 spread containment measures to reflect local context and peculiar constraints faced by the government such as limited fiscal space, and much less operational capacity to respond to help households and firms weather the crisis.

“Supporting small businesses and protecting jobs to cope with the negative effects of the Covid-19 crisis is particularly critical at this time,” said Peter Chacha, World Bank Senior Economist and Lead Author of the report. 

“This could be done by ensuring that vulnerable households have cash-on-hand, workers continue to receive salaries - even when temporarily laid-off-and that firms have enough cash flow (to pay workers and suppliers) and avoid bankruptcies,” he added.

Kenya’s medium-term growth is projected to rebound fast (to about 5.6 per cent over the medium term), on assumption that investor confidence will be restored soon after the Covid-19 pandemic is contained.

The greatest uncertainty to this outlook, however, is the extent of the impact of Covid-19 global pandemic on Kenya.

Unanticipated large-scale community transmission of the virus could disrupt domestic economic activity more severely and reduce growth below the baseline.

Residual risks include the potential for drought and a second-round of locust invasion in mid-2020, which could reduce agricultural output and hurt rural incomes.