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COVID-19 PANDEMIC

Urgent economic responses needed to fight coronavirus

Financial regulators should carefully monitor the ongoing impact of Covid-19 on broader financial stability

In Summary

• The most vulnerable companies are those that rely heavily or solely on factories in China.

• The coronavirus puts the spotlight on policymakers to counter the risks of the virus in a quick, constructive, and effective way. 

Wajir Governor Mohamed Abdi (in white apron) with health workers at the isolation centre at the county referral hospital on Sunday, April 12, 2020
COVID-19: Wajir Governor Mohamed Abdi (in white apron) with health workers at the isolation centre at the county referral hospital on Sunday, April 12, 2020
Image: STEPHEN ASTARIKO

Covid-19 outbreak is affecting supply chains and disrupting manufacturing operations around the world.

But the worst is yet to come as the peak of the impact of Covid-19 on global supply chains will occur in end-March.This will force thousands of companies to throttle down or temporarily shut assembly and manufacturing plants in China and other markets.

The most vulnerable companies are those that rely heavily or solely on factories in China.The coronavirus puts the spotlight on policymakers to counter the risks of the virus in a quick, constructive, and effective way. Global growth is already slow, and financial markets have very low interest rates, which mean that central banks have little ammunition with which to mitigate any potential economic fallout. This puts greater pressure on governments to use the power of their purse to counter the economic fallout from the coronavirus.

The Kenya government can do a lot to counter the risks associated with the spread of the virus by engaging in fiscal policies that will provide relief to affected populations and mitigate disruptions to companies. Policymakers should undertake a number of steps to address any economic fallout from the virus. The burden of meeting this challenge falls squarely on the government.

To its credit, the Central Bank should  cut interest rates, but monetary policy will likely have a very limited effect since interest rates are already low and have been so for some time. To put the Kenya economy on steady footing, the government should engage in fiscal stimulus and embrace key principles for economic policy action in response to the coronavirus.

The government needs to identify crucial medical supplies to deal with the outbreak and make sure that production will meet demand. Production and stockpiling of face masks and protective gear for medical workers, and saline bags to treat patients, must be organised with government financial support.

Policymakers should consider providing relief to hospitals and healthcare providers. It is unrealistic to think that these workers won’t face financial strain during this period. Moreover, pandemics affect everyone, and many of the patients in need of acute care may be uninsured.

The government and regulators should also monitor financial markets closely and prepare for possible market stress; credit events; or sudden drops in credit supply or in liquidity in markets such as overnight repurchase agreements (repos) and intervene where it is sensible to do so.

Moreover, financial regulators should carefully monitor the ongoing impact of Covid-19 on broader financial stability. If, for example, banks in hard hit areas are unable to meet commercially viable business loans because they are capital constrained, a programme to temporarily purchase preferred stock in these banks would allow them to meet local needs and keep businesses operating. It will be important to reduce the impact that this outbreak with have on the financial stability and prosperity of households, particularly those who are already vulnerable.  Now is precisely the time for deficit spending.

Ndirangu Ngunjiri, managing partner, Watermark Consultants