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Kenya Fiscal April 2020

Kenya: Authorities unveil stimulus measures; financing needs heighten

The government announced a series of relief measures worth around 2.0% of GDP at the end of March, aiming to mitigate the economic fallout from the Covid-19 pandemic. Lockdowns abroad, particularly in Europe—Kenya’s largest export market—will depress tourism receipts, exports and remittance inflows, while social-distancing and curfews on the domestic front will hamper private consumption. The response measures will only be able to partially cushion the heavy blow to the economy this year and will also widen the fiscal deficit and pressure revenues.

Authorities allocated an estimated KES 40 billion (around USD 370 million) for increased health spending, food relief and monetary support to vulnerable segments of the population. Furthermore, the government announced tax breaks totaling up to 1.5 % of GDP, including full relief for workers earning below KES 24,000 (around USD 225) monthly; a reduction in the corporate income tax rate from 30% to 25% and in the turnover tax for small firms from 3% to 1%; and a VAT cut from 16% to 14%.

On 2 April, the World Bank approved USD 50 million as an immediate emergency response, while the Kenyan government is also set to secure additional funding totaling USD 1.1 billion from the IMF and the World Bank (USD 350 million and USD 750 million, respectively) for budget support. Kenya is also already in discussion with the IMF about a new stand-by credit facility program. Meanwhile, in mid-April, President Kenyatta reportedly stated the authorities have initiated talks with foreign lenders to suspend debt payments in order to free up resources to combat the fallout from the pandemic.

Commenting on the government’s response measures, Dylan Smith, an economist at Goldman Sachs, noted:

“The Kenyan government’s support package is focused primarily on easing the tax burden on businesses and households. Tax liabilities, however, are not the first-order problem for service-sector businesses watching revenues collapse, cut-flower farms without an international market, or retrenched employees facing loss of income. Tax relief will help on the margin, and will likely accelerate the recovery phase of the crisis. But in the very near term, businesses and households will need ready access to credit on favourable terms, placing the primary burden on the financial and monetary system. The Central Bank of Kenya has cut rates and leaned on banks to restructure liabilities, but more measures to ease liquidity will likely be required.”

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