Kenya's GDP to grow below 2.5% if COVID-19 persists, says Treasury

Kenya’s economic growth rate is expected to drop further to 2.5% from an earlier projection of 3.0%. This is if extreme shocks associated with COVID-19 pandemic persist and global demand remains weak.

These grim figures were disclosed to the Senate recently by AMB Ukur Yatani, National Treasury and Planning Cabinet Secretary.

This revision of Kenya’s economic growth is from the initial 6.1% in 2020. Treasury projects Kenya’s economic growth to rebound in 2021 to grow at 6.0% and reach 6.4% by 2020.

In a meeting with the Senate Committee of COVID-19 to provide some highlights on the macroeconomic effects of the pandemic on the Kenyan economy and related matters, CS Yatani said measures necessary to contain the virus have triggered a social-economic downturn and there is still great uncertainty about its severity and length.

He said closure of borders by world economies has hit Kenya’s economic growth by impacting on trade, tourism, agriculture, manufacturing and other related sectors. Both imports and exports, as well as tourism arrivals, have fallen dramatically.

The Agriculture sector has further been affected by the low global demand for agricultural exports especially horticulture, tea and coffee among others. Collection of Domestic taxes has shrunk due to declining incomes and depressed consumption as the Government enhances COVID-19 containment measures with restrictions in and out of Nairobi, Mombasa, Kwale, Mandera and Kilifi Counties.

Inflation remains within target of between 2.5 to 7.5 percent. The rate was was 6.1% in March 2020 up from 4.4 percent in March 2019 due to higher food prices.

Yatani told the Senate that the Kenya Shilling exchange rate to the dollar has recently experienced some volatility largely due to uncertainties with regard to the impact of COVID-19 and a significant strengthening of the US dollar in the global markets. The Shilling weakened against the US$ to exchange at an average of KSh 103.7 in March 2020 from an average of KSh 100.3 in March 2019. In April 23, 2020, the local unit exchange rate to the dollar weakened to KSh 107.10.

He said the US$ 8,573.5 million (5.4 months of import cover) reserve continues to provide adequate cover and a buffer against the emerging shocks in the domestic foreign exchange market.

He warned about reduced forex remittances and resultant pressure on reserves held by Central Bank of Kenya (CBK), on the exchange rate. As a result of the lower international oil prices, the oil import bill is expected to be low and will counterbalance the impact of reduced exports particularly horticulture, tea, coffee, transport, tourism services as well as impact of other imports.

At the moment, FDI to Kenya is low with the closure of borders, cautious capital markets and uncertainty among investors as they await for the evolution of the pandemic. Treasury is reporting reduced revenue collections by the tax authority due to impact of COVID-19 on-budget execution.

As at March 2020, Ordinary revenue collection amounted to KSh1,215.8 billion (11.7% of GDP) against a target of KSh1,348.1 billion, a shortfall of KSh. 132.3 billion from target. Excise taxes recorded a shortfall of Ksh.35.2, Income tax (KSh. 39.2 billion), import duty (KSh 17.8 billion) and VAT(Ksh.34.8 billion).

CS Yatani told Senate Ad Hoc COVID-19 committee that while the overall fiscal deficit as at March 2020 was KSh 449.6 Billion, this was 4.3 per cent of GDP meaning that Kenya still has additional headroom for additional borrowing. He disclosed that Kenya has already received assistance from various international lenders to fight COVID-19, including KSh 5.0 billion from the World Bank.

Figures indicate that Kenya’s current debt level is estimated at KSh 6.2 trillion (58% of GDP), below the IMF and World Bank threshold of 74% of GDP. He said that while Kenya has taken steps to reduce its debt levels, the corona virus pandemic may delay the realization of Treasury’s fiscal plan.