The Kenyan Economy on the trail of COVID-19

In December, the World Health Organization (WHO) announced cases of pneumonia of unknown cases were detected. It was later announced as a corona virus outbreak. The virus continues to evolve with research ongoing to understand its dynamics. In terms of growth economically, it has impacted in disruption of global supply chains, mostly the tourism sector and other sectors of the economy have been adversely affected economically.

In financial markets the Nairobi Security Exchange (NSE) has been halted after its share index fell by more than 5%, wiping out investor’s portfolios due to panic selling. Foreign traders disposed of their equity holdings to purchase gold and fixed income securities. The banking and financial sector will also see a significant drop in revenues with SMEs being particularly vulnerable to the crisis and unable to service loans or conduct meaningful transactions. It is likely that there will be a significant increase in non-performing loans. The economic impact is certain to be very significant, there will be hundreds of businesses (mainly SMEs) that will close down and never revive because of this crisis and it will take a while and much more Government fiscal intervention to bring the economy back to life.

The aviation industry estimates that airlines globally are set to loose in passenger revenues. If corona pandemic is pro-acted, the Kenya Airways (KQ) estimates in loosing at least Kshs. 800 million per month, noting that the situation could change more dramatically in the coming days as more restrictions are implemented in global travel. These measures include salary deductions, sending non-critical staff on annual leave immediately, and cancelling of their flights putting 50% of aircraft on long term storage.

Business in the ports of Mombasa has been significantly affected. Ships scheduled to dock have been cancelled following the outbreak. This has largely affected the cargo throughout in the port. It has resulted in businesses losses that have acutely felt in the supply chain, with the Standard Gauge Railway (SGR) registering a decline of 60%. The decline in cargo is a big blow to Kenya as it is expected to collect more revenue from SGR and pay the Kshs. 10 billion monthly loans to China Export and Import Bank.

Bulk of Kenya’s exports to other countries is adversely affected by corona. This will affect export earnings negatively due to weak demand. The low supply of imports from China and South Korea in terms of electronics, clothes and furniture many of which are imported from China are likely to decrease.

Covid-19 has affected the country’s exports of horticulture and agricultural goods. The horticulture and floriculture exports play a key role in earning foreign exchange, and along with the full decline of tourism and the hospitality sector, Kenya’s reserves of foreign currency are expected to be depleted at a faster rate putting some pressure on the Kenyan Shilling. The country’s fresh produce export market has dropped following the lock-down in some European markets. The floriculture industry is being particularly hard hit with large farms laying off workers and struggling to service their loans despite a general off-season for farms running at 30-40% of capacity. Coffee and tea exports are on the decline as well due to weak demand and low commodity prices in target markets.

Essential goods manufacturers recorded rises in revenues over the month of March. The largest manufacturer of pharmaceuticals in the country had its highest ever revenue in March as the Government, households and businesses in the value chain are buying both in caution and reaction. Food and beverage manufacturers will also continue to have strong revenues until household consumption begins to fade with stretched out incomes.

The real impact of Covid-19 on manufacturing economic performance will be seen at the start of the next quarter when household and business spending is likely to drop by about 50%. The reduced incomes and money in circulation will definitely stretch demand and will reverberate to the rest of the manufacturing sector.

On the business front, the Covid-19 pandemic has clearly illustrated the need of the country to explore alternatives and diversifying the supply chains to reduce dependency on the region. The crisis will end, but we must be ready with the right interventions to kick-start the economy.

Author:Susan Mbula Muli – Lover of Social Economics