Impact of COVID-19 to the Economy of Kenya

Since the first case of COVID-19 was reported in Kenya on March 13, 2020, the country just like other countries in the world, has been experiencing massive destruction of the economy in terms of GDP decline and job losses (Odhiambo et al. 2020). While the country had started experiencing the economic impacts prior to COVID-19, the emergence of virus has accelerated Kenya’s economic troubles.

How has COVID-19 has affected the Kenyan Economy?

COVID-19 has negatively impacted the Kenyan economy as seen in the performance of the financial markets, disruption of global supply chains, volatility of the Kenyan currency, reduction in diaspora remittances, and reversal of prior monetary and fiscal policies.

Performance of Financial Markets

Since the first reported case, a majority of foreign investors who had made huge investments in Kenyan securities at the Nairobi Stock Exchange, started disposing off their securities fearing a market collapse, leading to a huge slump on the securities prices traded at the Exchange (Karungu, et al. 2020). The NSE-20 Share Index has been steadily losing its value declining by 300 basis points between 15th March 2020 and 15th May 2020, a trend that is mirrored in the performance of the Kenyan economy.

Moreover, as shown in the table below the Year to Date (YTD) performance of some of the large-cap stocks or Blue-Chip companies on the exchange as at 15th May 2020 have been on a dramatic decline.

It is important to note that the Blue Chips typically record huge losses in their YTD performance during times of local crisis as investors sell-off their stocks and shift to less risky havens as opposed to holding other risky securities traded in the Nairobi Securities Market (NSE) see (Odhiambo et al, 2020a).

Company Current Price (Kshs) YTD Performance
Bamburi Cement Ltd 51.22 (36.6%)
Safaricom PLC 23.90 (21.6%)
Equity Group Holdings PLC 40.85 (23.4%)
KCB Group PLC 41.58 (22.8%)
East African Breweries Ltd 184.95 (7.1%)
British American Tobacco Kenya PLC 400.55 (18.6%)
Diamond Trust Bank Kenya Ltd 92.99 (15.0%)
The Co-operative Bank of Kenya Ltd 12.90 (18.0%)
Note: Data from Nairobi Securities Exchange market by 15.05.2020

 

Disruptions in the global Supply Chains

The transmission of the Coronavirus has severely disrupted worldwide supply chains making Kenya, that has relied on imports, to be a vulnerable place. For instance, imports from China are about 22 percent of total imports of Kenya.

With the current curfew and partial lockdown measures, a majority of the manufacturing and production sectors in the Country that also rely on the imports as inputs, have been massively disrupted. This has had a huge impact on the economic growth of Kenya forcing laying off of many workers.

Volatility on the Kenyan Currency

The outbreak of this pandemic has exerted pressure on the Kenyan shilling due to the curfew and lockdown within the international supply chains leading to a scarcity of foreign currency. For example, shortage of shortage of exports has made the Kenyan shilling vulnerable losing 5% of its value since the start of March (Erkekoglu, et al. 2020).

With reduced value of the Kenyan shilling, all Kenyan exports will become cheaper leading to further devaluation of the currency which is detrimental to Kenyan economy especially on tourism (Wanjala, 2020).

Diaspora Remittances

Diaspora remittances have dropped due to the deterioration in global economic activities. This will lead to a reduction in disposal income of the recipients thus negatively affecting economic growth(Ozili et al. 2020). This coupled with increased prices of household items abroad might result in a further reduction in the amount of foreign currency expatriated into the Kenyan economy.

As per 2019, diaspora remittances to Kenya stood at USD 2.9 billion that has formed the main contributor to Kenyan Foreign Exchange reserves that Central Bank of Kenyan uses when stabilizing the Kenyan currency. With the drop in the forex reserves, the Kenyan currency volatility is likely to reach all-time high due to COVID-19, that ultimately have a negative impact on the Kenyan economy.

Monetary and Fiscal Policy

The Monetary and Fiscal Policy Committee of the Central Bank had met on 23rd March 2020 with the aim of reviewing the results of its prior policy decisions when dealing with the latest economic developments. They reduced the Central Bank Reference rate by 50 basis points to allow banks to lend more money into the economy leading to a higher level of circulation of cash into the economy. However, a reduction in the economic activities in the country leading to people lacking money will definitely lead to poor purchasing power thus slowing down the Kenyan economy.

Going by the existing economic activities in Kenyan due to coronavirus, the GDP growth of Kenya is likely to range between 1.3% and 2.2% for the year ending of 2020.

This will depend on the severity of the outbreak especially at its peak, which is expected in August or September as well as how Kenyan behave with an aim of preventing the coronavirus spread in Kenya to prevent more stringent restrictions that could further negatively impact the economy.

References

Erkekoglu, H., Garang, A. P. M., & Deng, A. S. (2020a). Modeling and Forecasting USD/UGX Volatility through GARCH Family Models: Evidence from Gaussian, T and GED Distributions. International Journal of Economics and Financial Issues, 10 (2), 268-281.

Odhiambo, J., Weke, P., & Wendo, J. (2020b). Modeling of Returns of Nairobi Securities Exchange 20 Share Index Using Log-Normal Distribution.

Karungu, R., Memba, F., & Muturi, W. (2020). Influence of financial contagion on stock performance of firms listed in the Nairobi securities exchange. Accounting, 6 (1), 1-16.

Odhiambo, J., Weke, P., & Ngare, P. (2020). Modeling Kenyan Economic Impact of Corona Virus in Kenya Using Discrete-Time Markov Chains. Journal of Finance and Economics, 8 (2), 80-85.

Ozili, P. K., & Arun, T. (2020). Spillover of COVID-19: impact on the Global Economy. Available at SSRN 3562570.

Wanjala, K. (2020). The Economic Impact Assessment of the Novel Coronavirus on Tourism and Trade in Kenya: Lessons from Preceding Epidemics. Finance & Economics Review, 2(1), 1-10.


Author

FA Joab O. Odhiambo, Bsc. (Actuarial Science), Msc. (Actuarial Science) is a part-time lecturer in the School of Mathematics and a PhD candidate (Actuarial Science) University of Nairobi. He is also a Certified Financial Analyst. Email: joabodhiambo@students.uonbi.ac.ke


Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the policy or position of the University of Nairobi.

 

Shared By FA Joab O. Odhiambo Since the first case of COVID-19 was reported in Kenya on March 13, 2020, the

Source: Impact of COVID-19 to the Economy of Kenya – Research, Innovation and Enterprise Blog

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