The trillions being spent to cushion global economies

Monday May 18 2020

President Kenyatta at State House, Nairobi, signing into law the Tax Laws (Amendment) Bill, 2020. PHOTO | PSCU


Faced with a disturbing reality of collapsing economies and stressed financial systems because of the Covid-19 pandemic, governments world-over have been forced to intervene, setting aside trillions of shillings to keep entire industries and companies afloat.

In just four months, the pandemic has disrupted local, regional and international commerce in mind-boggling ways, as big and small businesses shut their doors in compliance with measures to rein in the pandemic.

With economies grinding along at snail’s pace, millions of jobs have melted into thin air. The International Labour Organisation (ILO) estimates that in the informal economy around the world, 1.6 billion workers, representing half of the global workforce, are facing immediate danger of having their livelihoods destroyed permanently.


More than 436 million enterprises, the ILO adds, are at high risk of serious disruption, 232 million among them in wholesale and retail, 111 million in manufacturing, 51 million in accommodation and food services, and 42 million in real estate and other sectors.

With lockdowns and curfews still firmly on in some countries, including Kenya, the rock bottom of this dire situation seems yet to be hit.

The ILO has, therefore, called for urgent measures across the world to protect jobs and cushion companies as well as enterprises.

“The ILO calls for urgent, targeted and flexible measures to support workers and businesses, particularly smaller enterprises, those in the informal economy and others who are vulnerable,” said Guy Ryder, ILO Director-General.

In response to the situation and to mitigate economies from the impacts of the coronavirus pandemic, governments around the world, including Kenya, have come up with various stimulus packages aimed at cushioning businesses and injecting cash into economies.

The packages range from issuing grants and cheap interest loans to businesses, easing taxation measures to funding companies to enable them pay employees even as they stay closed.


So far, the US has announced the biggest stimulus package to redeem its crashing economy, with a $2 trillion (more than Sh200 trillion) package. Dubbed the Cares (Coronavirus Aid, Relief, and Economic Security) Act, the package has seen the federal government pump cash into the financial system to rescue jobs and businesses.

The money was given out late March after President Donald Trump signed the Bill into law, releasing the amount equivalent to half of the US’s last year’s spending.

The package has enabled thousands of businesses to stay afloat while millions of workers receive something to live on. The government basically pays wages to some workers still retained by struggling companies and sustains workers who have lost jobs.

The logic of US government stimulus is to cushion from bankruptcy the big corporations it usually relies on for revenue in normal times, and support the medium and small ones walk through the Covid-19 pandemic.

The Cares Act temporarily transfers financial responsibility from private businesses to the government, and stipulates that companies receiving assistance maintain employment levels of at least 90 per cent up to September this year.

In East Africa, Kenya leads in measures to cushion businesses amid the pandemic havoc. The Central Bank of Kenya (CBK) last month released Sh15.4 billion to support tourism, real estate, trade and agriculture sectors, which have been heavily hit by the Covid-19 pandemic, from the funds obtained after reduction in cash reserve ratio.

The banking sector regulator cut the benchmark rate from 8.25 to 7.25 per cent in March, a move that lowered the amount of minimum deposits banks must have, boosting the flow of cash in the economy. It also reduced the cash reserve ratio for commercial banks to 4.25 per cent from 5.25 per cent — a move that has seen the release of Sh35.2 billion for lending to customers hit by pandemic.

Through the Monetary Policy Committee (MPC), CBK also asked banks to restructure loans, offering relief to distressed borrowers (individuals and enterprises), mostly from tourism, transport and trade sectors, who have approached banks for restructuring of more than Sh700 billion loans.

In March, CBK also gave the government Sh7.5 billion worth of bank notes retained during the demonetisation of Sh1,000 currency last year, to help in combating the pandemic.

The financial market regulator also reached out to banks and telecommunication companies and agreed to enhance mobile money to promote cashless payments.

“We’ve never had a challenge of this magnitude economically. The shock has hit all drivers in the economy, and for the first time in a long while, we have a perfect storm where we have been hit on supply, demand and financing systems. If not careful, financial plumbing maybe dislocated,” CBK Governor Patrick Njoroge said.

Micro, Small and Medium Sized businesses (MSMEs), Dr Njoroge noted, need to be supported.

He added that MPC is working on a scheme that would pump about Sh100 billion into the economy to support small businesses through the pandemic, a process expected to be completed this month.
“MSMEs need to be urgently supported. This includes putting in place a credit guarantee scheme to reduce moral hazard, with rates that are affordable to them. There is work going on that we expect to come to fruition in the near future,” Dr Njoroge said.


On March 25, President Kenyatta announced a 100 per cent tax relief for persons earning gross monthly salaries of up to Sh24,000, as a way of cushion them from feeling the heat of the Covid-19 pandemic.

The President also announced a reduction of income tax rate (Pay As You Earn) and resident income tax from 30 to 25 per cent, as well as turnover tax from three to one per cent for all SMEs.
This was despite a reduction of Value Added Tax (VAT) from 16 to 14 per cent, beginning April 1.

Already, at least 133,657 Kenyans have lost their jobs in the formal sector, according to a government report released last month, and many companies have either put employees on reduced pay or sent them on unpaid leave. More businesses are still struggling with expenses such as rent, even when most of them have closed doors.

Other East African countries, however, have yet to commit as much resources to support businesses, rather focusing on releasing cash and food aid to support vulnerable families, such as the extreme poor, elderly and the disabled.

In Tanzania, operations are still going on almost normally since President John Magufuli has maintained that his citizens can continue to work and attend churches and mosques while observing measures advised by medical personnel.

In Africa, South Africa President Cyril Ramaphosa announced a R500 billion (Sh2.8 trillion) stimulus package to mitigate impacts of the pandemic and lockdown placed in the country since March.

Of the amount, R100 billion was set for protection and creation of jobs, R40 billion for income support for workers whose employers are unable to pay them, and R200 billion as loan guarantee scheme to help businesses pay salaries, rent and suppliers. All companies with an annual turnover of up to R300 million were allowed to participate.

In Egypt, President Abdel Fattah el-Sisi allocated EGP100 billion (Sh673 billion) to support the tourism industry by sustaining operation of hotels, supporting the stock exchange market by purchasing shares, and disbursing cash to some 2.4 million families.

Last month, the Egyptian government also announced an increase in public spending by $634 million to support the economy, through paying contractors’ and suppliers’ debts, as a way to keep the production system running.


But the stimulus packages rolled out by Kenya and most African countries pale in comparison to what developed countries such as the US, UK and Italy have allocated to protect their economies and livelihoods from total collapse.

In the US, companies with between 500 and 10,000 employees are also allowed to borrow at an interest rate of 2 per cent per year and allowed not to repay the loans within six months.

For companies with 500 or fewer employees, banks can also lend them money to cover two months of payrolls and other operating expenses, with the government promising to pay, as long as they do not lay off workers or rehire the ones who had already been fired. The US government promised to inject $60 billion into the airline industry (one of the most hit by the Covid-19) $350 billion for loans and loan guarantees for small businesses, $440 billion for companies considered critical to national security.

The package is despite the Federal Reserve plans to buy unlimited amount of government debt, through sale of treasury bills and bonds, as the US government initiated moves to save its economy late March, after 30 per cent of its stock market crushed and bond markets became dysfunctional.

The US is most affected by Covid-19, with more than 1.2 million positive cases, more than 70,000 deaths with over 20 million Americans losing jobs as per last week figures.

In Japan, the cabinet last month approved a supplementary appropriation bill, unveiling a JPY108 trillion (about Sh100 trillion) economic stimulus package to mitigate Covid-19 impacts.

Through the package, the government plans to expand employment adjustment subsidies by supporting employers maintain jobs. Companies started receiving support to pay leave allowance to workers beginning April 1 to June 30, where the government pays employers a percentage of the leave allowance. Companies are supported to pay staff even if they have partially closed down.

The bill also subsidised interest rates while eliminating collateral requirements for loans on businesses impacted by the pandemic. This is on top of introduction of a one-year tax moratorium for some taxes.


In the UK, the Bank of England announced a Sh22.8 trillion bond purchases after it held an emergency meeting in March. The bank has bought Sh8 trillion assets since March 19.

UK Chancellor Rishi Sunak unveiled a Sh37.7 trillion (15 per cent of UK’s GDP) loan scheme to support businesses survive the pandemic. This was in addition to a raft of other measures instituted earlier such as tax cuts, grants and issuing of mortgage holidays.

“The Coronavirus will have a significant impact on our economy, but it will be temporary,” Mr Sunak told Parliament. UK Prime Minister Boris Johnson rallied his country to act like in wartime.
“We must act like any wartime government and do whatever it takes to support our economy,” the Prime Minister asserted.

Mr Johnson’s government has injected 3,000 billion euros in cash into small businesses, and guaranteed them to borrow cheap loans to pay rent, suppliers and staff.

A separate lending facility has also been set up by the Bank of England for large firms, while insurance payout was launched for leisure and entertainment joints that were closed after the social gatherings ban. This is besides all retail, leisure and hospitality companies being exempted from business rates for a year.

In Italy, to limit the damage to economy and mitigate the impact of Covid-19, the government, in early March, unveiled a Sh412.6 billion equivalent package. Economy minister Roberto Gualtieri said the government was introducing tax credits for companies that reported a drop in revenues up to 25 per cent.

Last month, the Italian government approved another Sh2.9 trillion equivalent package to cushion the economy as the European country continued to suffer heavy economic and health blows.

In Malaysia, the government announced a RM250 billion stimulus package (Sh6.15 trillion) or 17 per cent of GDP to mitigate unemployment and support businesses, particularly SMEs, weather the Covid-19 storm. Measures to ease cashflow pressures for businesses such as tax instalment and additional allocations to a special relief facility for SMEs were introduced.