Economy moves to autopilot as tough measures kick in

The economy entered its toughest week yet Monday as the strict measures to control the Covid-19 pandemic kick in.

With bars closed, travelling and shopping restricted, hotels and restaurants left to only do takeaways and home deliveries, and international flights suspended, the dark cloud that has come with the novel coronavirus has finally reached our shores.

As the country moves closer to a complete lockdown, eyes are now focused on the National Treasury to urgently unveil a stimulus package to soften the blow on the economy. Just where salaries will come from in the next two months will be the biggest headache for many employers.

At the global level, countries mostly in Europe and the US have announced billions of shillings in rescue packages aimed at helping struggling companies to keep their staff on the payroll. Some have also come up with measures to help companies pay salaries.

TAXES
It’s not yet clear what the government is planning, but players in the business sector want halving of taxes, suspension of interest rates on bank loans and a solid stimulus package that directly puts money in the pockets of Kenyans.

On Sunday, the government announced more painful measures and warned offenders that they will be punished for any violations as the number of confirmed cases rose to 15. But it is the measures announced that are set to push the economy to run on one engine.

From Monday, 14-seater public service vehicles were directed to allow eight passengers while buses and the commuter rail services were restricted to carry a maximum 60 per cent of their capacity.
The most drastic measure is the suspension of international flights from tomorrow. This has effectively tucked Kenya away from the rest of the globe, in a race to stop more cases from being imported into the country.

Health Cabinet Secretary Mutahi Kagwe last week started the country on the path to a lockdown after he announced some of the boldest measures to be taken by any East African nation.
These measures will make commuting to work more expensive. Unless the government compensates the operators for the lost revenues, they will inevitably pass this cost to the commuters in what could see transport costs double.

But it is those who own bars, hotels and other entertainment spots that the measures will hurt where it matters most.

SHUT DOWN

With the shut down of bars, hundreds of thousands have officially been rendered jobless. Tourism has been shut down and the service industry incapacitated.

Already, Kenya Airways has asked its staff to take pay cuts of up to 75 per cent. Some hotels, among them Sankara, have also asked their staff to take compulsory leave.
More companies are expected to announce similar measures in the coming days as the reality of low sales sinks in.

Alcohol manufacturers pleaded with county governments to be considerate when implementing measures to limit the spread of the deadly virus to avoid actions that would result in a bigger economic impact than anticipated.

The Alcohol Beverages Association of Kenya (Abak) has written to the Council of Governors chairman Wycliffe Oparanya requesting the devolved units to uphold fair administrative action when implementing directives.

Abak chairman Gordon Mutugi said that while the industry supports the limits on public gatherings, the decision by 16 county governments to ban the operations of bars and entertainment spots was unwarranted. About 9,615 outlets have been affected by the actions taken by county governments in the 16 counties.

“Events related to the pandemic are unfolding at an unprecedented speed, with heavy economic losses experienced across various sectors of the economy,” Mr Mutugi said.

“The alcoholic beverage sector currently supports more than two million livelihoods, who directly depend on the alcoholic beverage value chain. Closure of bars disrupts value chains, deepening the negative impact of the pandemic to the economy,” he said.

LOAN PAYMENTS

The Abak chairman asked the devolved units to consider the fact that the businesses are still obligated to meet their obligations in terms of licensing, loan repayments, salaries, rent and leases, as well as their families.

“Bars employ over 250,000 people, who in most cases earn a daily wage. Closing them will render them jobless, jeopardising their support for over two million livelihoods, which will directly lead to social unrest. Ultimately, this could potentially result in social anarchy, including looting, muggings, violent robberies, as has already been witnessed in other parts of the world,” Mr Mutugi warned.
But this is now water under the bridge.

Shopping at supermarkets is set to be another painful process from Tuesday as retailers implement the government’s directives on Friday. Though you could shop anytime of the day or night, be prepared to meet a security officer manning the queue to ensure compliance.

The queue management system is also likely to result in delays as hundreds of shoppers will have to wait for their turn when a select number of people are allowed in.
Employers have also been asked to allow their staff to take annual leave at this time. In addition, those who must come to work must now keep the 1.5 metre social distance between them. This will be a litmus test for companies who work in small spaces or have small offices.

Mr Kagwe said the next two weeks are extremely critical for Kenya and called on all citizens to be disciplined and follow the government’s directives or witness an escalation of measures.

Open-air markets were spared and left to continue operating until further advised, provided that they observe the hygiene and social distance directive. Shutting down markets will be disastrous since it will mean Kenyans stay at home without fresh food.

VIGILANT

While hinting at more drastic measures in coming days, the CS urged Kenyans to be vigilant and take the disease seriously to avoid ‘further punishment’.

“We must plan for the worst case scenarios and we have the plans on how to take care of every situation. Individuals must also prepare for the worst,” Mr Kagwe said, adding that individual responsibility will count for “how we fail or succeed on this virus”.

Players in the real estate sector say the measures will see a general slowdown in activities in the sector over the next few months.

“What this means is that there will be a slowdown in construction activities and therefore project completion deadlines could be affected. Visits to construction sites will also be limited on movement restrictions,” Mizizi Africa finance and operations director George Mburu said.

He added that the sector expects mild effects on instalment payments as customers focus on preventive measures, such as the purchase of food and stocking up on hygiene products.

“We expect this situation to be corrected partly by commercial banks’ resolve to restructure loans, extending repayment periods for credit facilities and waiving of transaction charges,” he added.

WEAK SHILLING
The measures come at a time when the Kenyan shilling is taking a beating from the global pandemic, after most banks moved their asking rates to between Sh107 and Sh109 last week, sliding past the worst record of October 2011.

The currency is set to be exposed further in coming days after Kenya starts relying on imports from other nations that are more expensive than those from China.

When you get expensive imports and you have dwindling dollar receipts from key sources such as tourism, remittances, and earnings from flower, tea and coffee exports, the shilling is literally left with nowhere to hide.

“The dollar has been gaining strength globally due to the pandemic and this is the reason why the shilling is weakening,” said Mr Tony Watima, an economist.
He added that this would result in the costs of debt servicing.
“Our public debt portfolio has also increased because more than half is in foreign loans out of which about 70 per cent is in dollars. The cost of importation will also go up because importers have to buy the dollar,” Mr Watima offered.

Currency dealers said the demand for the greenback was also triggered by the Central Bank of Kenya (CBK), which has been actively buying dollars worth Sh40 billion from the Kenyan market to build its war chest when the worst comes.

FOREX MARKET

This unnerved an already shaky forex market that is still trying to deal with the uncertainty over the economic fallout from the coronavirus pandemic. On average, the mean exchange rate for the dollar was Sh105 on Thursday, having mover from Sh102 in quick succession.

This is the second week the shilling is losing ground against the dollar after Kenya confirmed its first case of Covid-19.

The weakening of the shilling promises to increase the cost of imports given that importers will now need more shillings to buy the same quantities of goods than before.

The CBK announced that it would be buying Sh40 billion ($400 million) between March and June this year, or Sh1 billion per month, seen as an extra buffer zone to protect the country against shocks should things escalate too fast.

A weak shilling is bad for the economy since it is a net importer. Kenya pays for most of its imports, among them oil and machines, using the dollar. Most of the debts are also dollar denominated and this means that Kenya will be paying more than initially budgeted for because of forex exchange losses.