Friday May 8, 2020 – Kenya’s Gross Domestic Product (GDP) is projected to decelerate substantially in 2020 due to the negative impact of the COVID19 (coronavirus) pandemic.
The 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.
However, some of the actions taken by the Kenyan Government to mitigate the effects of COVID19 can be described as “childish and silly”.
One of these actions the Kenyan Government has done is to reduce Value Added Tax (VAT) from 16 percent to 14 percent.
Brilliant economists like David Ndii have termed the move as “balderdash” and are asking why lower VAT and most of the businesses are closed?
Economist Mohamed Welihye, who is an Advisor to the Saudi Arabian Monetary Authority (SAMA), also dismissed the VAT reduction and instead offered a 13 point strategy on how Kenya’s Government can revive the economy amid the coronavirus pandemic.
Here are 13 points on how Uhuru can resuscitate the economy easily according to Economist Welihye
1. Covid-19 is a health crisis that has also serious economic consequences. Many countries are dealing with the health problems but are at the same time trying to minimize the impact on the economy now & once the health issues are dealt with.
2. In the last 2 months or so, I have been involved in designing Fiscal impulse, Deferral & Liquidity/Gurantee programs meant to respond to the Covid-19 crisis. In the process, I have looked at the various programs adopted by different countries (of different sizes & capacity).
3. In my opinion, the best programs to support the economy are those that are designed in such a way that there is risk-sharing by governments through guarantee schemes & enlisting the banks to lend, using central & commercial bank funding for lending.
4. Unless we put in place a well designed & effective private sector stimulus program, the economy will likely not recover & that will have serious ramifications for the country- debt, jobs, security, etc. Remember, our economy needed to jump starting even before Covid-19.
5. Let the GoK put together a KES 100 billion loans to SMEs gurantee program to provide low-cost funds at an attractive interest rate relative to the cost of funding for comparable maturities) for the SMEs. This will be money worth spent as an investment in SMEs now = taxes tomorrow
6. The National Treasury can partner with EIB/WB to provide lenders with a guarantee of 90% on each loan to give lenders further confidence in continuing to provide access to affordable finance to SMEs. The lender’s participation in the credit risk sharing shall be 10%.
7. The funding? KES 50 billion from the reserves released by CBK back to the banks & KES 50 billion from participating lenders. This way, the lenders will be getting a 50% discount on funding (the other 50% is money they had no access to) but assuming only 10% of the credit risk.
8. Because almost all the credit risk has been taken away from the banks, interest rate for these loans should be at max 5%. Remember the reserves will be like new money at 0% to the banks & as such cost of funds for these loans should be low.
9. Limit loan size to max 50m per customer so that as many SMEs (and as small) as possible can take advantage. Loan tenure of max 5 years and a grace period of 6 months for interest & principal requirements.
10. Facility should be available to viable businesses & should target specific sectors that are critical to the economy and where a lot of the employment is. Hospitality, Horticulture, Trade & Service, Public transport, Food & the food chain, etc.
11. To manage the risk of moral hazard, directors of these companies can be asked to also sign personal guarantees. Other risk management measures to prevent abuse of this cheap access to funds should be put in place.
12. It is in the interest of the banking sector that they support measures to save businesses and stimulate the economy. Otherwise, the credit risk that is building up in the system and the probable many years of recession will eventually also kill their own businesses.
13. Ni hayo tu from Wangathika Thuu of King’eero Institute. KI urges you to stay safe, wash hands, sanitize & follow government instructions. The Butchers of Kamuti ini are itching for the economy to fully re open!.
The Kenyan DAILY POST