The Corona Virus will have a lasting impact on the economy in both the short and long run. Whether the impact is positive or negative will be based on the actions that we take now. Our actions will make or break the economy and the impact will be felt in the foreseeable future. The outbreak happened in Wuhan, China and will definitely impact trade in the world. China is an economic giant, exporting products to the entire world. The travel restrictions will, therefore, impact the entire world.
Kenya imports from China stand at US$3.66 Billion in 2018, according to the United Nations COMTRADE database on international trade. These imports range from machinery, electronics, household goods, aluminium, beauty products, iron and steel amongst other products. These range from raw materials for use to finished products for sale to the final consumer that touch in the manufacturing industry. If these products are not moved because of the resulting quarantine measures, then the companies that depend on the raw products from China and such countries will grind to a halt. They cannot manufacture without the much-needed raw materials. There would be lost time in both machine hours and human resources. The companies will have no goods to sell and these may lead to the closure of factories and retrenchment or redundancy of staff who, are involved in the manufacturing process. It also means that these companies are not able to pay taxes to the government. This will result to reduced taxes and hence the government may not manage to cater for the operational needs of its people.
Kenya relies on finished products from china including beauty products, animal vegetable and fats, clocks and watches, electronics amongst other products. These products are evidently in the Kenya market and create cheaper options for consumers who cannot afford more expensive products. There will be unavailability of these products in the market or stock-outs of these products. This will push prices of similar or substitute products to cost more due to the unavailability of products. Tusky’s and Naivas supermarkets have already issued price warnings indicating that products will cost more now than in the past. This will result to increase in the cost of living which means that there will be inflation. The inflation in February 2020 was at 6.37% up from 5.78% on January 2020. There is already an increase in inflation which signals tough economic times ahead. The inflation rate in February 2020 of 6.37% was the highest since April 2019, this is driven by prices of food amidst the widespread shortage.
The traders who deal in products from China will feel the impact. We have traders dealing in electronics, textiles, beauty products amongst other items that are sourced from China. Since these products are not available for sale, these traders will not manage to trade. The finance sector namely banks, Micro Finance Institutions and SACCOs will feel the impact from non-performing loans from retailers who are not able to service their loans since they are not able to import goods for sale. In a study done by FinAccess in April 2019, the report notes that high default loan types are goods and services from shopkeeper at 45.4%, mobile loans at 18.1% and loans from family at 12.7%. The report noted those three as the highest default sources. As monies from business transactions become scarce, the default rates will increase. The shopkeeper will be poorer, the mobile loan defaults will increase and the monies we owe our family members will increase.
The hospitality sector is usually the first to feel the impact of travel restrictions. Data released by a survey conducted by Statista in June 2019 for the period 2013 to 2018 from indicated that there would be a bed occupancy rate of 50.8% in 2020, 51.1% in 2021. The study indicated that in 2018, the occupancy rate was at 53.2% and had projected and decrease to 49% in 2019. With the cancellation of flights and conferences to Kenya, these rates may not be achieved. Hotels in Kenya are currently experiencing very low occupancy rates. The tourism sector in Kenya contributes about 10% of the GDP. The risk is that they will be negatively impacted with the effects of the cancellation of flights which bring in the much-needed foreign currency and the cancellation of conferences. This will result into loss of jobs and increase in unemployment further straining the economy and the working population.
The government has projected to collect Kshs2.91 trillion in taxes during this financial year to enable it finance its operations and projects. This may be difficult to achieve due to the eminent economic slow down anticipated in the country. But the government can decide to turn the tide. One of the Big 4 agenda is to enhance manufacturing. The government has initiated a number of key projects that are geared towards supporting value addition and raising the manufacturing sector’s share of GDP to 15 per cent by 2022. This creates an opportunity for the government and the citizenry to think critically and support value addition. This will reduce reliance of imports that can be manufactured in Kenya. The government should support SMEs to value addition. The support towards increasing the manufacturing capacity of government-owned Kenya Industrial Research and Development Institute (KIRDI) where SMEs take their products for manufacturing. We have SMEs waiting for as much as five months for their turn to manufacture. This slows done value addition and motivation for these entrepreneurs. They are not able to make substantive business due to such arrangements. The government of Kenya signed and ratified the Africa Free Trade Area (AfCFTA) in 2018. This agreement provides market of 1.2billion people in the African Continent. This is another huge opportunity to trade within the continent to exploit. We need to build on this manufacturing through the cottage industry.
The government should introduce a requirement of percentage of listing of Kenyan manufactured products in the local supermarkets. SMEs owners in Kenya are selling their wares in car boots, handbags and hawking them as they are not able to list them in supermarkets. It is the time that the government supported the slogan of Build Kenya, Buy Kenya. The first consumers of Kenyan products should be Kenyans themselves through the channels we have including both locally and foreign-owned supermarkets. This way there is a guaranteed market for Kenyan Entrepreneurs. This will in turn increase their chances of access finance both debt and equity since there is an already existing addressable market. This is the time we need to address the matters that affect SMEs and have a candid conversation with the policymakers. It is a golden opportunity which may never present itself again. It is time to act or remain a net importer for years to come.
CPA Caroline Gathii, IRMCert, is an International Certified Risk Expert with FirstIdea Consulting Limited.