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Posted on March 30, 2020

Weathering the COVID-19 storm: How will Kenyans cope?

The COVID-19 pandemic is testing the resilience of governments, health systems, large companies, small businesses and families worldwide. The challenge facing policymakers is unenviable. Given how contagious the SARS-CoV-2 virus is (on average every infected person infects 2 to 3 additional people, and each of those people 2 to 3 more, so that only ten layers of transmission results in nearly 10,000 cases of infection without any countermeasures) it is now clear that if countries do not test, isolate cases and trace contacts very early on, in order to slow down widespread community transmission and limit the load on hospitals in the short run[1] countries must adopt aggressive social distancing measures that require near complete compliance by citizens, if not, strict enforcement by authorities.

However, these life-saving measures erase economic transactions that would have occurred in normal times:  think matatu rides, hotel stays, dining out, flights, trips to the hairdresser and so on. In Kenya, household consumption spending makes up 82 percent of GDP[2]. By how much and for how long that spending falls, will depend on how far the virus spreads and how much fear it engenders. If communication about the virus is poor or if people perceive that they will not be able to get treated if they experience acute respiratory symptoms or if they can’t properly assess the risk of going out because of low testing rates, it is likely that fear and reduced economic activity will linger. For this reason, affordable and widespread testing to obtain better estimates of the true extent of the virus (at least until a vaccine is available) – is not only an important health policy tool, but also an economic one.

Even without the most severe top-down policy actions such as a city or nationwide quarantine enforced by the police or military, Kenya is already feeling the economic consequences of the pandemic given collapsing demand in export markets (including tourism), supply chain disruptions and potentially reduced diaspora remittances as Kenyans abroad themselves face economic hardship.

Lower income countries like Kenya face additional challenges. High density informal urban settlements with low prevalence of access to clean water, sewerage and handwashing facilities are hotspots for transmission. Smaller numbers of health care workers and hospital beds per capita means that fewer acute COVID-19 cases will be able to be treated if the virus spreads rapidly, affecting high risk population segments.  Larger shares of the population earning at levels close to or below the international poverty line or working in the informal sector without formal safety nets (such as unemployment or health insurance) and worker protections (such as paid sick leave) means that job losses and income reductions will hit families harder. Over 1 in 3 Kenyans live on less than $1.90 per day and two thirds of Kenyan adults earn the majority of their income from either casual work (24 percent), farming (25 percent) or non-farm self-employment (18 percent), livelihoods with few, if any, protections (FinAccess 2019).

Critically, as social distancing measures are introduced, they will need to be implemented in a way that ensures individuals can continue to access food in markets. In addition, this pandemic is a crisis that for many farmers is layered on top of adverse environmental conditions such as a recent locust plague and unpredictable rainfall that already affect crop production. For families or individuals that have transitioned away from agriculture, returning to farming as demand for low-skill services falls in cities and towns may not be so easy.

At a moment that requires worldwide solidarity, it is worth appreciating just how financially vulnerable individuals and families are. Globally, approximately 57 percent of adults at or above the age 18 (approximately 2.9 billion) reported that it would be possible to raise emergency money for an expense equivalent to 1/20th of their country’s GNI per capita in 30 days (2017 Global Findex). In Kenya, 52 per cent of the adult population (approximately 10.5 million individuals) reported it would be possible to raise this emergency money, which for Kenyans, was about USD 72 (at current exchange rates) or KSh 8,039 in 2017. Since the average monthly household consumption per capita in Kenya is around Ksh 5,000 (2016 KIHBS), this emergency money is equivalent to about 1.6 months of the average consumption expenditure per person. In normal circumstances, this implies that in the event incomes dropped by the equivalent to this emergency money and individuals needed to plug that gap, half of Kenya’s adults would not be able to do so – facing hunger, while the other half would be able to do so for a month and a half, on average.

Figure 1.

But these aren’t normal circumstances. Even among adults with financial resilience per the World Bank’s definition, there is an underlying vulnerability that becomes clear when you look at how people who say they could raise emergency money in a month, would actually do so. Among countries with the lowest average household incomes, resilient individuals rely in roughly equal shares on working more, selling assets and their social network for emergency money (Figure 2). Among the lower and upper middle-income range, the relative importance of the social network in funding emergencies rises, but then falls once personal savings takes hold as the predominant source of emergency money in higher income countries. In a majority of countries worldwide working more or tapping your social network for emergency money are the primary coping strategies in the event of a shock.

Figure 2.

In Kenya, among financially resilient adults, 26 percent reported they would raise emergency money from personal savings, 9 percent from borrowing, 24 percent from their social network, 32 percent from working more and 9 percent from selling assets (Figure 2). But some of these strategies – including borrowing formally or from social networks and/or working more- may not be viable in the face of a systemic shock like COVID19 which will affect the labor market, the ability of networks to support one another financially, and the ability of financial institutions to provide credit.

Another way to appreciate the economic vulnerability of Kenya’s population, is to simulate the impact on the national poverty rate of a shock that affects the national distribution of household consumption. Figure 3 shows the impact on the national poverty rate of a range of household consumption shocks (from -5% to -25%) for three scenarios. The “uniform” scenario assumes every household would have to reduce consumption by the same percentage – c as a result of the shock. The “poorest hit hardest” scenario, assumes an overall shock of size c would impact the poorest 40% of the population 1.5 times c,  the middle 40% of the population would experience a reduction in consumption of c and the top 20% would be able to smooth consumption completely so they continue to consume at pre-shock levels. The third scenario “the middle 40% hit hardest” mirrors the second scenario except that in this case, it is the middle 40% of the population that is hit disproportionately hard (1.5 times c), while the poorest 40% of the population experience the overall reduction in consumption of c.  The weighted average shock at the national level is c in each of the three scenarios.

Figure 3.

In a scenario where the shock caused reductions in consumption uniformly across all households, the national poverty rate would rise linearly by about 2 percentage points for each 1 percent reduction in consumption. A 15 percent reduction in consumption in this simple scenario would erase a decade of progress of poverty reduction (the national rate would rise to 46 percent, its level in 2006). In a scenario where the poorest 40% were hit hardest  (for example if farming households had trouble selling agricultural output due to market closures or other distribution challenges) the national poverty rate would rise more rapidly for consumption shocks in the range of 0 to 10 percent and then rise at more or less the same rate as the uniform scenario[3]. In a scenario where the middle 40% were hit hardest (a likely scenario as these households are more likely to be engaged in informal retail, trade or low-skill wage work in the services sector), the national poverty rate would rise less rapidly for shocks in the range of 0 to 10 percent, but then balloon quickly for consumption shocks greater than 10%. In this scenario, a consumption shock of 15 percent would increase the national poverty rate by 16 percentage points (from 35.3 to 51.3 percent of the population). This scenario reflects the fact that a large share of Kenya’s non-poor consume at levels between 10 and 20 percent higher than the national poverty rate (of Ksh 3,252 in rural areas and Ksh 5,995 per person per month in urban areas).

But Kenya has key strengths that it can draw on to attenuate the economic impact of this pandemic and avoid worst case scenarios. Among them, an innovative financial sector, engaged regulators, a culture of entrepreneurship and cash transfer programs that can be expanded using existing infrastructure. Over 8 in 10 adults own an account, a degree of financial inclusion that is more typical of countries whose households earn about ten times more per person per month (Figure 4). Mobile money and mobile-linked bank accounts give people the ability to remotely (and safely) make payments and send money, and at least keeps the possibility open for certain types of commercial activity to continue.  In fact, the first emergency measure announced by the Central Bank of Kenya (CBK) in response to the pandemic included waiving fees on mobile money transactions up to Ksh 1,000 and raising transaction and store-of-value limits. Pesalink – a mobile bank transfer service – subsequently waived fees on all transactions for a period of 90 days. Further, these digital channels can be used to deliver government or private relief such as direct cash transfers. 

Figure 4.

While at this point it is difficult to predict how the pandemic in Kenya will play out, it is a certainty that Kenyans will develop bottom-up solutions to challenges that arise, and the government should support rather than suppress these solutions. (www.covid19econdatakenya.com).

But as it is likely COVID19 has been spreading undetected, Kenya is at the brink of entering a new phase of transmission. To cope with the growth of new cases, substantial new funds will be required to ramp up testing and bolster the health system so that it can cope with an influx of COVID-19 patients. And in order to abate a rise of poverty and hunger, the government will need to provide liability relief and liquidity to lower income households and small enterprises. Without this support it is likely that any strict social distancing measures adopted to keep the virus at bay will fail, as people won’t have any other option but to defy those measures (see for example the consequences of India’s messy implementation of its 21 day national lockdown). The government is currently negotiating a package of emergency budget support of up to Ksh 115 billion (USD 1.2 billion) from the World Bank and IMF. A portion of that budget support would be well spent by significantly expanding cash transfers through Kenya’s payments infrastructure to the millions of Kenyans who lack the financial resilience to weather this storm.

[1] In the long run, effective vaccines and treatment therapies will be additional tools that countries can deploy to control SARS-CoV-2.

[2] The average for the Sub-Saharan Africa region is 68 percent.

[3] But the depth of poverty would increase.

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