Assessing the Economic Impact of COVID-19

The COVID-19 pandemic has taken a toll on human life and brought major disruption to economic activity across the world. The impact of this unprecedented crisis on human life and the global economy reflects the speed and magnitude of the contagion, greater global integration, and the major role that China plays in global supply chains, travel, and commodity markets.


Despite a late arrival, the COVID-19 virus has spread rapidly across Sub-Saharan Africa in recent weeks. As of April 7, 5,425 cases of COVID-19 have been confirmed in 45 of the 48 countries in Sub-Saharan Africa. The insufficient testing capacity in many countries in the region suggests that these figures most likely understate the true number of infections.

In response to the rise of corona virus cases in Kenya to three, on 15 March the government of Kenya closed all schools and directed that all public and private sector workers work from home, wherever possible. Travel restrictions were later imposed to prevent non-residents from entry. Kenyan nationals and residents were required to self-quarantine for a minimum of fourteen days.

On 22 March, following the confirmation of an additional eight cases, bringing the total to 16 nationally, the Kenyan government introduced additional measures and directives to reduce the spread of coronavirus in the country. These measures include a suspension of all international flights effective at midnight on 25 March, with the exception of cargo flights (all persons entering the country will be compelled to undergo quarantine at a government facility). The government further stipulated that any persons, including senior government officials, found to be in violation of quarantine measures would be forcefully quarantine at their own expense. All bars are to be closed until further notice as of 22 March, with restaurants allowed to remain open for takeaway services only. All public service vehicles (i.e., matatus and buses) must adhere to passenger distancing guidelines previously stipulated on 20 March. Further, all churches, mosques, and other gatherings (e.g., funerals), are restricted to no more than 15 persons, and weddings are banned. Public gatherings of more than 15 people outdoors are also barred.

On 25 March, President Uhuru Kenyatta, following the reporting of an additional three cases, announced a nation-wide curfew on unauthorized movement from 7 PM to 5 AM beginning on Friday, 27 March. The government also unveiled measures to buffer Kenyans against financial hardships arising movement restrictions associated with the coronavirus crisis, including:

  • 100% tax relief to Kenyans earning KSh 24,000 (US$228) and below.
  • Pay as you earn (PAYE) reduction from a maximum of 30% to 25%.
  • Reduction of turnover tax rate from 3% to 1% for all micro, small and medium enterprises.
  • Reduction of resident income tax to 25%.
  • Making available KSh 10 billion (US$95 million) to vulnerable groups including the elderly and orphans, among others.
  • Temporary suspension of the listing of loan defaulters for of any person, micro, small and medium enterprise and corporate entities whose loan account is in arrears effective 1 April 2020.
  • Reduction of VAT from 16% to 14% effective 1 April 2020.

The government also moved to increase allocation of funds for health care, along with other fiscal adjustments to the economy:

  • KSh 1 billion (US$9.5 million) from the Universal Health Coverage kitty to be channeled to the employment of new health workers to help combat the spread of COVID-19.
  • The President and Deputy President to take 80% pay-cut, all Cabinet Secretaries to take 30% pay-cuts, Chief Administrative Secretaries (30%) and Principal Secretaries (20%).
  • All State and public officers aged 50 and above; and have preexisting medical conditions, to take leave from work, or be allowed to work from home. This directive excludes those public officers working in the security department.
  • Central Bank of Kenya to lower the Central Bank Rate from 8.25% to 7.25%.
  • Reduce the Cash Reserve Ratio from 5.25% to 4.25% to increase liquidity of KSh 35 billion to commercial banks, which, in turn, will be in positions to provide loan services to “distressed Kenyans”.
  • Nationwide curfew and partial lockdown of Nairobi Metro Politan


The ongoing COVID-19 socio-economic crisis is forcing business leaders worldwide to take quick actions to respond to the pandemic and its effects on their businesses. Thousands of companies have crafted crisis management plans, with many of them transitioning to a fully virtual workplace.



The National Treasury of Kenya released the Tax Amendment Bill 2020 necessitated by the presidential directive dated 25 March 2020, with regards to measures announced by the President to cushion the economy and Kenyans from the adverse effects of the Coronavirus pandemic. Some of the major amendments include;

  1. A reduction of the turnover tax rate from the current 3.0% to 1.0% for all Micro, Small and Medium Enterprises (MSMEs), and a further proposal to increase the threshold of the MSMEs qualifying for turnover tax from Kshs 5.0 mn to Kshs 50.0 mn,
  2. Reduction of the corporate tax deductions available to corporate bodies, the removal of the recently introduced 30.0% additional tax deductions on electricity costs available to manufacturers and a reduction on the tax incentives available to companies listed on the Nairobi Securities Exchange,
  3. Reduction of income tax exemptions, including, overtime, bonuses, the capital gains exception on the disposal of a private residence, transfer of private land by an individual which is not more than Kshs 3.0 mn and agricultural property less than 50-acres, income from a registered home ownership savings plan, income from the National Social Security Firm, Monthly or lump sum pension granted to a person over 65 years of age, and investment income of a pooled fund which will reduce the benefits attributable to retirees. The amendment bill also proposed that Paragraph 51 of the First Schedule of Income Tax Act that exempts interest income accruing from all listed bonds, notes or other similar securities used to raise funds for infrastructure and other social services from taxation, be deleted. This will mean that interest earned from Infrastructure and green bonds, a fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects will now be subject to 10.0% withholding tax, just like the other normal bonds,
  4. On withholding tax, tax on dividends payable to non-residents increased to 15.0% from 10.0%,
  5. On employment taxes, the resident personal relief was increased from the current Kshs 1,408 per month to Kshs 2,400 per month effectively increasing the average take home to Kshs 992 per month. Tax bands have been expanded and the marginal tax rate reduced from 30.0% to 25.0%, and,
  6. On Value Added Tax, there is a proposal to change the VAT status of various services and goods from exempt or zero-rated to standard rated. To change the VAT status of others such as bread and milk from zero-rated to exempt. The bill also proposes to abolish the exclusion of excise duty, fees and other charges from the taxable value of petroleum products, a change that will increase the taxable value of petroleum products resulting into an increase in the final price charged to the consumer.

"Success today requires the agility and drive to constantly rethink, reinvigorate, react, and reinvent.” – Bill Gates


Implications for COVID-19

The World Bank projects that economic growth in Sub-Saharan Africa will decline from 2.4 percent in 2019 to -2.1 to -5.1 percent in 2020, the first recession in the region in 25 years. It will cost the region between US$37 billion and US$79 billion in terms of output losses for 2020. The downward growth revision in 2020 reflects macroeconomic risks arising from the sharp decline in output growth among the region’s key trading partners, including China and the euro area, the fall in commodity prices, reduced tourism activity in several countries, as well as the effects of measures to contain the COVID-19 global pandemic.


Customizing the policy response to reflect the structural features of the Kenyan economy and the peculiar constraints that policy makers face, including much less fiscal space and much less operational capacity to respond. The government has reacted quickly and decisively to curb the potential influx and spread of the COVID-19 virus very much in line with emerging international experience. As the situation evolves, there are more questions about the suitability and likely effectiveness of some of these policies, such as strict confinement. The large size of the informal sector (89 percent of total employment); the precariousness of most jobs; the limited coverage of pensions and unemployment insurance schemes; and the predominance of micro, small, and medium-size enterprises in business activity (98 percent) all need to be factored in, as they may make aggressive containment measures less effective. Protecting vulnerable groups, ramping up testing, and promoting the wearing of masks may be better options. Equally important is the need to differentiate the monetary policy response due to the weak monetary transmission in countries with underdeveloped financial markets. Because of the reduced monetary policy effectiveness, the policy response will be mostly fiscal.

  1. The reduction in the turnover rate and increasing the threshold for businesses that qualify will reduce the tax burden on MSMEs, which constitute 98.0% of all businesses in the country, employing 14.9 mn Kenyans.
  2. The reduction in corporate tax deductions indicates that the National Treasury intends to increase collection of tax revenues. The reduction of tax incentives for the companies listed in the Nairobi Securities exchange may reduce the allure of listing on the NSE as the costs incurred during a listing, such as legal fees, can be significant,
  3. On reduction of income tax exemptions, the state may have to pay higher interest on infrastructure and green bonds to compensate for the tax levy in order to attract investors, as the tax exemption was the single most distinctive and attractive feature of these bonds. Taxation of overtime, bonuses and retirement benefits will lead to a reduction of disposable income especially for the low-income earners and impacting their ability to save for retirement,
  4. The increase in withholding tax on dividends payable to non-residents may reduce Kenya’s attraction of Foreign Direct Investments (FDI) given the era of Africa Continental Free Trade, as foreigners will seek to set base in countries with more favorable Corporation tax regimes making Kenya less attractive for foreign investors,
  5. The change in employment taxes, once implemented will mean that persons earning under Kshs 24,000 will pay zero tax, those earning Kshs 35,000 will now pay a PAYE of Kshs 1,650 a Kshs 2,093 reduction from the previous Kshs 3,743 PAYE. This will go a long way in increasing their purchasing power, and,
  6. The change in VAT status may result in an increase in the cost of goods and services to the taxpayers. This includes the most basic such as milk and bread as the change in status from zero-rated to exempt will result in the inability of manufacturers to claim input VAT incurred in their operations with the potential of forcing them to pass the additional costs to consumers through price increases.
  7. The new VAT and Capital gains taxes introduced by the bill are to offset the series of measures like the various tax cuts, VAT refunds and faster repayment of pending bills to suppliers that were put in place by the president as a measure to cushion the economy against the effects of the Coronavirus.

However, economic commentators and the international institutions, like The World Bank, have noted the need for the African region, including Kenya, to implement policies different from those adopted in advanced countries and (some) middle-income countries due to the structure of their economies, as a high proportion of the population is in informal employment. Excluding Agriculture, informal employment accounts for 76.8% of total employment and small and medium-sized enterprises (SMEs), account for up to 90.0% of all businesses and represent 38.0% of the region’s GDP. The World Bank also noted that Monetary Policy stimulus by way of rate cuts may not be effective in the region mainly due to the prevalence of supply effects at the height of the containment measures, which has resulted in reduced labour supply and the closure of businesses, especially in contact-intensive sectors, coupled with the weak monetary transmission in many countries with underdeveloped domestic financial markets and as such there was need for a different type of Central Bank intervention that provides liquidity support through direct credit lines or guaranteed commercial loans to formal and informal businesses.

Therefore, it is recommended that Kenya should implement a differentiated monetary and fiscal policy response customized to specifically reflect the structural features of the economy and the particular constraints that policy-makers face including much less fiscal space and less operational capacity to respond. Given the large size of the informal sector, with 89.0% unemployment, the predominance of the MSME in the business activity, at 90.0%, aggressive containment measures such as total lock-downs will be less effective and could result in a collapse in economic activity that will increase poverty and endanger lives and livelihoods. Going forward, protecting vulnerable groups with social grants and food distribution, wage subsidies to prevent massive layoffs, waivers for basic services such as electricity, water tariffs, and mobile money transaction fees, ramping up testing, and promoting the wearing of masks may be better options with more resources being directed towards protecting and equipping the healthcare system will be critical for success.


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