African govts not in a position to offer economic rescue packages

Tuesday April 14 2020

A worker pulls a consignment of medical

A worker pulls a consignment of medical supplies, donated by Jack Ma and Alibaba Foundations to Kenya, at Jomo Kenyatta International Airport in Nairobi, Kenya on March 24, 2020. PHOTO | XINHUA  

NJIRAINI MUCHIRA
By NJIRAINI MUCHIRA
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A limited fiscal space that has left governments with little room to manoeuvre has made it impossible for African governments to unveil economic stimulus packages to deal with the unfolding impacts of the Covid-19 pandemic.

While governments across the globe have launched massive financial war chests, African countries have been forced to institute tax measures, tap into global development partners’ resources, borrow from rich countries and set up funds that private sector players can contribute to.

Some of the measures taken to deal with the pandemic, particularly tax cuts, are a double edged sword with Kenya for instance expecting to forfeit $1.1 billion in revenues over the next three months after President Uhuru Kenyatta announced tax reliefs to cushion the economy and most vulnerable in society.

Constancy firm McKinsey reckons that although the Covid-19 crisis is stretching the capacity of governments across the world, African governments face even greater challenges that make it impossible to unleash stimulus packages.

This is because the average ratio of public revenues to gross domestic product in African countries stands at just 19 per cent, compared with countries like Brazil that stand at 30 per cent and United Kingdom at 37 per cent.

The fact that debt servicing already absorbs 22 per cent of revenues, means that governments have a limited scope for stimulus packages compared with their peers in other regions.

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“For African governments, any form of stimulus packages will need to be carefully targeted and supported by development partners and philanthropic organisations,” said McKinsey in a report titled “Tackling Covid-19 in Africa” dated April.

In Kenya, the Parliamentary Budget Office (PBO) has said that financially the country is not in a position to offer an elaborate stimulus package primarily because of a limited fiscal space.

This is because approximately 23 per cent of the country’s ordinary revenues in the current financial year are meant to cater for interest payments of public debt that stand in excess of $60 billion while 71 per cent is for recurrent spending including county allocations.

“This leaves very little room for manoeuvre and with expected revenue underperformance, the country does not have much by way of available resources to cater to emergencies of this magnitude,” said PBO in a special Covid-19 bulletin.

Rich countries across the globe have committed to fiscal stimulus packages as an attempt to cushion against the effects of the pandemic, with the United States having the largest package of $2.3 trillion accounting for about 11 per cent of its GDP.

It is followed by Australia with a $189 billion package that accounts for 9.7 per cent of its GDP and Canada’s $75 billion, which is 8.9 per cent of GDP.

In Africa, limited fiscal space has exposed the continent’s high levels of vulnerabilities in dealing with the pandemic, a problem compounded by constrained health systems, highly informal economies, young populations and widespread poverty.

This has forced governments to resort to desperate measures to contain the outbreak including begging for help with individuals like billionaire Jack Ma and the Alibaba Foundations responding with a 1.5 million shipment of laboratory diagnostic test kits and over 100 tonnes of commodities for infection prevention and control.

Finance ministers have also appealed for a $100 billion economic stimulus that includes a waiver of up to $44 billion in interest payments from developed nations.

Only tools

In East Africa, the lack of fiscal space has seen governments use the only tools available to them to cushion their economies from the unprecedented effects of the pandemic.

Top interventions include tapping into global development partners resources, tax measures, cutting of central bank benchmark rates and setting up emergency funds.

The International Monetary Fund (IMF), which has made available about $50 billion through its rapid-disbursing emergency financing facility, has already received requests from about 30 African countries seeking to tap the resources.

The World Bank, on its part, expects to deploy up to $160 billion over the next 15 months to help countries protect the poor and vulnerable, support businesses and bolster economic recovery.

Kenya and the Democratic Republic of Congo are among countries that have already tapped into the World Bank resources, receiving $50 million each under its $14 billion fast track facility.

“This new fast track facility will assist Kenya in its efforts to prevent, detect and respond to the threat posed by Covid-19 and strengthen national systems for public health preparedness,” said Carlos Felipe Jaramillo, World Bank Kenya country director on April 2.

On the same day, Rwanda received $109.4 million from the IMF Rapid Credit Facility to arrest the deteriorating impacts of the pandemic on its economy.

“The Covid-19 pandemic has ground Rwanda’s economy to a halt, creating an urgent balance of payments need,” said Tao Zhang, IMF deputy managing director.

In Uganda, the government said it is seeking $190 million from the World Bank to help cushion its economy from the impact of the pandemic.

According to McKinsey, Africa’s economies could experience a loss of between $90 billion and $200 billion in 2020 due to the pandemic, with GDP growth shrinking to 0.4 per cent from 3.2 per cent in 2019.

For Kenya, the consultancy contends the country is facing a likely economic contraction that could see growth plunge to 1.9 per cent down from 5.2 per cent last year if the pandemic is contained. This will represent a reduction in GDP of $3 billion.

In scenarios in which the outbreak is not contained, Kenya’s GDP growth rate could fall to −5 per cent, representing a loss to GDP of $10 billion.

The PBO bulletin already estimates that Kenya may experience a minimum 25 per cent decline in export revenue with the cut flower industry projected to loss approximately $558.2 million in value by end of the year.

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