Finance Sector Deepening(FSD) Kenya studies shows that for Kenya to have a robust and inclusive recovery, the recovery must include individuals in the informal sector.
FSD has called this group of people cuspers – i.e. people on the cusp of escaping poverty but still at risk of falling back into it.
The independent trust says that while women may be especially vulnerable, digitization will increase, but efforts are needed to ensure that the benefits are widely spread.
According to the Trust, COVID-19 has created an environment of high uncertainty, unclear and unfamiliar risks, and an unprecedented global shock that has crippled key economic centers across the world.
FSD Kenya, FSD Africa and BFA Global conducted a three-week agile scenario process to create the different worlds that Kenya faces based on three macroeconomic trajectories for the country.
According to Anzetse Were, an economist at FSD Kenya, there might be a relatively short V-shaped bounce back in which growth resumes in late 2020 with reasonable growth levels by mid- 2021. There could also be a longer and more debilitating U-shaped limp back in which recovery is slower, with 2019 growth rates likely only reached by 2023.
And finally, more fundamental fallback in which there is long-lasting harm to the economic structure, any upticks are not sustained and a new lower level of economic activity endures beyond 2023.
‘Cuspers’ are defined as low and moderate income working Kenyans, largely in in the informal sector, who operate outside the easy reach of formal transfers or funding.
Were reckons that Cuspers are generally more vulnerable to the crisis than wealthier groups because they started with generally low levels of financial health, their incomes have been affected by the pandemic restrictions—drastically so in some cases—and their informality means they are not in easy sight of state welfare or even formal sector finance solutions.
A BFA online survey (April 2020) found that 79- 81% of low and moderate income Kenyans reported income somewhat or significantly reduced as a result of COVID-19. Further, conventional coping strategies to survive shocks such as increasing income through casual work, and receiving remittances from friends and family have been reduced.
Cuspers are the engine room of an inclusive economic recovery, because they are of working age, support dependents and without their livelihood strategies, the poverty gap could grow and inequality increase.
The informal sector has suffered aggressive and often ad hoc anti-business restrictions linked to COVID-19. These restrictions could lead to a reduction in the survival of and competition from informal firms, thereby enhancing formal firms’ market share and power in key sectors. In this scenario, the size of the informal sector would be squeezed, and the growth of formal employment would be unable absorb the much larger number of displaced cuspers.
Cuspers, whose predominant source of livelihood is linked to the leisure/business tourism sector, will be more deeply impacted with lower prospects of recovery than cuspers earning a living in certain agricultural value chains (such as horticulture) or delivery services.
However, given lagging demand, their relative inexperience and networks in the new sector, high competition and market saturation, it is unlikely that the ‘winning’ sectors would be able to absorb all cuspers.
FSD Kenya says a fall back macro scenario could happen if COVID-19 leads to a severe attrition of the informal sector as there is less demand for goods and services in the economy, and many people who sought refuge in the rural areas during the crisis find they do not have the means or opportunity to return to urban activities, further depressing wages and productivity.
Many households have drawn down on their saving, depleted their assets and exhausted their credit, making recovery difficult without a stimulus.
While cuspers may be especially vulnerable at this time, their ability to stay afloat in very difficult circumstances may create a ‘mirage of resilience’ that conceals deep deterioration in economic well-being, financial health and actual ability to truly recover.
The inherent fluidity of cusper life can make them difficult to target using conventional approaches deployed via government and the formal financial sector. This makes it more important to employ creative mechanisms to target a segment that can be ‘invisiblised’ using conventional methods.
Interventions are needed that will support the growth of productivity in the informal sector.
Informal enterprises, which are more often run by women, will also need stimulus to return to work in most scenarios; the crisis could be an opportunity to increase productivity, profitability, job quality and income security. These could be in the form of offering bounce back loans through the supply chain and community financial institutions, decreasing the burden of bureaucracy and corruption, and taking advantage of Kenya’s already-high digital activity to increase trust and reliability in the economy.
Digitisation will accelerate but its effects will be uneven for cuspers. Kenya started the crisis more digitally connected than many peer nations. COVID-19 has provided impetus to accelerate digitisation buoyed by government action to increase limits and waive fees on low value transactions.
While these may quicken shifts to digital payments, or towards digital commerce along value chains, it may deepen digital exclusion. The use of digital payment systems, and on-boarding/ use of digital commerce platforms carry costs linked to electronic devices and internet access.
FSD says its scenerios are not predictions but rather unfolding stories. The organization has a site that is tracking the impacts of COVID-19 on the Kenyan economy.