A report by the Parliamentary Budget Office(PBO) has warned that Kenya does not have the resources needed to deal with a fully blown COVID-19 outbreak.
A large chunk of Revenues is allocated to recurrent spending, allocation to county governments and interest payments. This leaves very little room for maneuver. And with expected revenue under-performance, the country does not have much by way of available resources to cater to emergencies of this magnitude.
Approximately 61% of businesses had already reported feeling the effect of COVID 19 on their businesses with some reporting financial losses.
This special bulletin from parliamentary budget office(PBO) now warns that these grim statistics are likely to worse as efforts are put in place to stem spread of infections by the coronavirus.
The PBO mentions that supply disruptions will push up prices. With the declining purchasing power of consumers, many businesses may have to scale down operations. Reduced income for businesses will reduce employment leading to declining
income for consumers and lowering aggregate demand.
A vulnerability index developed by the Overseas Development Institute ranks Kenya as among the top ten most vulnerable economies to COVID 19 due to its close trade links with China and its poorly equipped healthcare system to deal with the pandemic.
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The parliamentary unit observes that wholesale and retail, accommodation and restaurant, as well as transport and storage, will be arguably the most affected by the pandemic. The service sector contributed three per cent to 5.6 per cent GDP growth in 2019.
Air transportation is arguably the worst hit. Even before the ban on all international flights, the suspension of flights to China had resulted in an estimated revenue loss of KSh. 800 million per month. With a ban on all international flights, this loss margins could be worse.
The ban on international travel, work from home directive and closure of bars and restaurants except for takeaway services has significantly reduced activity in this sector and with many of the workers being daily wage earners, many have been laid off or have taken unpaid leave.
PBO observes that a slowed economic activity, declining incomes and uncertainty over the future will invariably reduce consumer spending thereby hurting demand uncertainty over future income.
With the COVID-19 crisis turning global, many manufacturing industries may have to suspend operations altogether. Business uncertainty and reduced working hours means that many companies including those that could potentially continue production, have had to significantly scale down operations pending the outcome of the current crisis.
According to the Famine Early Warning Systems Network, food availability increased in early 2020 and with a forecast of above average rainfall in the March to May long rains season, food and pasture production should improve further.
A rapidly depreciating Kenya Shilling will make it more expensive for import-dependent industries, triggering cost-push inflation.
Although declining diaspora remittances pose a risk to the exchange rate, suspension of operations by many importers may balance out the effects thereby stabilizing the exchange rate.
PBO says lack of an IMF standby loan facility to help cushion the Kenyan Shilling from economic shocks is also a significant risk to the exchange rate outlook.
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