COVID-19: THE KENYA GOVERNMENT’S ECONOMIC STIMULUS

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His Excellency President Uhuru Kenyatta yesterday announced a stimulus package designed to help the country through the current COVID-19 crisis. His announcements included tax, economic, monetary adjustments and limited social measures to curb the spread of the virus.  While the measures are welcome, they seem to be directed more towards the aftermath of the pandemic rather than dealing with current situation people find themselves in.  We have outlined the various measures announced and provided our perspective on them.

In addition to the President’s announcements, The East African Community Health Ministers met on 25th March 2020 and we set out their key action points below.

Tax measures

The following tax measures have been announced:

  • People earning a gross monthly income KES 24,000 will not be subject to tax on their income. This will result in a saving of approximately KES 1,500 per month.
  • The top rate of income tax is reduced from the current 30% to 25%.
  • The corporation tax rate for resident companies is reduced similarly. No reduction has been proposed for non-residents.
  • The turnover tax rate which applies to taxpayers who have a turnover under KES 5 million is reduced from the current 3% to 1%.
  • The VAT rate to be reduced from 16% to 14% - putting Kenya well below other East African Community member states.

Note that with the exception of the VAT reduction, which the President specifically announced would take effect on 1 April 2020, he suggested that the income tax changes will take immediate effect.  The announcement seems to imply that the income tax rate changes will take effect in March 2020.  However, these changes will require approval by Parliament which one assumes will happen immediately.  Changes to legislation also require public participation, but in the circumstances this may be waived.  With regard to the VAT rate change, the Cabinet Secretary responsible for the National Treasury is allowed to change the rate by up to 25% by gazette notice.  This change is valid until rejected by Parliament.

The reduction in tax rates is something that many have been clamouring for even before the current crisis as a means to give the economy a boost.  While the reductions are welcome, the question must be how useful they will be in giving relief to those directly impacted by the pandemic.  Clearly a reduction of tax rates should result in additional disposable income, for both individuals and business, but where people have already been laid off, there will be no benefit.  It is also not clear how the KES 24,000 tax free element will be incorporated into the current tax bands.  What was perhaps needed was some form of handout to the less fortunate in our society but with the government’s current financial status, this may have been difficult.

The proposed reduction in the standard rate of VAT will also apply to commercial letting which will assist business with their cash flows.  Residential letting is already exempt from VAT and the change in standard rate will have no impact.  Surprisingly, no measures were announced to assist residential letting.  Perhaps consideration could have been given to reducing the rate of residential rental withholding tax from the current 10%.

Economic measures

The President announced the following measures:

  • An appropriation of an additional KES 10 billion to the elderly, orphans and other vulnerable members of society through cash transfers by the Ministry of Labour and Social Protection.
  • A temporary suspension of adverse listings in the Credit Reference Bureaus for Micro, Small and Medium Enterprises (MSMES) and corporate entities where loans fall overdue or in arrears effective 1st April 2020.
  • Government ministries and departments have been directed to pay at least KES 13 billion of the supplier debt within three weeks of 25 March 2020 of the supplier debt. A similar directive has been announced for the private sector.
  • VAT refunds amounting to KES 10 billion to be expedited by the Kenya Revenue Authority for all verified claims.
  • KES 1 billion to be appropriated from the Universal Health Coverage kitty to recruit additional personnel in health services.
  • A reduction by 80% of the salaries of the President and his Deputy; 30% for Cabinet Secretaries and Chief Administrative Secretaries and 20% for Principal Secretaries. Other arms and tiers of government have been asked to follow suit.
  • State and Public Officers with existing medical conditions and / or over the age of 50 (as announced although the speech released suggested 58 as the age) to take leave or work from home unless they work in the security sector and other essential services.

These measures are welcome and may have better short-term impact as we try to deal with COVID-19.  The modalities of some of the measures need to be determined and no doubt further guidance will be issued. 

Payments to suppliers of amounts owed by the government and VAT refunds are extremely welcome and will assist in cash flow issues that are bound to arise in the current climate.  It is important to appreciate that the government has been promising to release these payments for a while now.  The supplier debt is significantly higher than the KES 13 billion but at this stage any amount that is released will provide relief.  The President indicated that the private sector would also be required to pay sums owed to suppliers within a three week period, although this may require specific legislation to enforce. 

Perhaps Kenya’s biggest issue today is the high cost of government which has resulted in significant recurrent expenditure.  The salary cuts announced will help to reduce expenditure but the questions that must be asked are whether this will be enough and indeed having heard something similar in the past, whether they will actually be effected?  His announcement did not address reductions in other parts of the government – parliament, the senate, counties and the judiciary.  This has been left to them to decide although there should be no reason why they should not similarly reduce their pay – after all Kenya has probably the highest paid civil servants in the world!

A key issue currently facing business is an overly aggressive revenue authority and while in his first address on COVID-19, the President did suggest there would be an easing on enforcement, nothing was said about that yesterday.  This would give business the short term relief they desperately need.

Monetary measures

These measures were announced by the Central Bank (CBK) following the Monetary Policy Committee meeting this week:

  • Lowering of the Central Bank Rate (CBR) by 1% to 7.25%
  • Lowering of the Cash Reserve Ratio (CRR) by 1% to 4.25%.
  • CBK to provide flexibility for loan classification and provisioning for loans that were performing on 2nd March but need to be restructured because of COVID-19.

It is expected that these measures will increase the supply of credit to the private sector and therefore improve their cash flows.  However, this will only be of benefit where the private sector continue to engage in their business.  We have, unfortunately, already seen a number of businesses in the tourism sector close down since the crisis started.

Social measures to curb the spread of the virus

  • A nationwide curfew has been put in place from 7 pm to 5 am for all citizens other than those specifically authorised otherwise or being those in the medical field.
  • The Kenya Ferry Services are now to be controlled by the Police, Coast Guard and National Government Officers.

For the purpose of the curfew, essential services have been classified as:

  • Medical Professionals & Health Workers
  • National Security, Administration and Co-ordination Officers
  • Public Health and Sanitation officers in the County Governments
  • Licensed Pharmacies and Drug Stores
  • Licensed Broadcasters and Media Houses
  • Kenya Power & Lightening Company Limited
  • Food Dealers, Distributors, Wholesalers & Transporters of Farm Produce
  • Licensed Supermarkets, Mini-Markets and Hypermarkets
  • Licensed Distributors and Retailers of Petroleum and Oil Products and Lubricants
  • Licensed Telecommunication Operators and Service Providers
  • Licensed Banks, Financial Institutions and Payment Financial Services
  • Fire Brigade and other Emergency Response Services
  • Licensed security firms

The curfew that has been imposed falls short of a full lock-down of the country which a number of other countries have  put in place to curb the spread of the virus.  It would seem that the intention is to allow people to continue with their daily lives even if it does not help in applying the social distancing behaviour that is also strongly advised.  It is possible that the reason the government has adopted this measure is the high number of people who live a hand-to-mouth daily existence.  There is a fine balance between this and preventing the spread of COVID-19.

We anticipate that the Government will introduce more measures to deal with the health crisis on the assumption that Kenya is going to be hit like so many countries in the coming weeks.  Indeed, a lot more needs to be done to address the health crisis first and alleviate the needs of those who are most affected – being informal and unskilled workers.  We will update you further.

EAST AFRICAN COMMUNITY MINISTERS OF HEALTH MEETING

The East African Community held a meeting of member states Ministers of Health on 25th March 2019.  The key resolutions passed were:

  • Member states to continue to implement mandatory quarantine measures for 14 days, for all travellers to the region;
  • EAC face to face meeting remain suspended and members are urged to meet virtually;
  • Member states to facilitate the free movement of goods and services and to that effect:
    • trucks ferrying goods are to have a maximum of 3 crew members;
    • if the crew are screened and they are found to be at high risk or are positive for COVID-19, then the truck is decontaminated before it reaches the destination and crew members must self- quarantine for a period of 14 days as per guidelines of each member state;
    • truck members are urged to stop only at designated points to reduce spread of the virus;
    • crew of cargo planes and vessels will be quarantined in a government designated hotel for the period of their stay;
  • Member states are directed to support local companies to ensure the local production and availability of key consumables or products used in COVID-19 response including hand sanitizers, medical products, soap among others
  • Member states are to establish a system to monitor crew health and enable contact tracing;
  • Coordinate efforts between member states to help fight the spread of the crisis;
  • EAHRC directed to conduct research on COVID-19 and technologies, advances in care and treatment, vaccines, behaviours of the virus, diagnostics etc. to inform policy and practice of the region;
  • EAC member states and their embassies and high commissions to coordinate citizens who have been affected by closure of borders to enable them to move to their final EAC destination; and
  • All EAC states to provide additional contingency and emergency funds to fight the impact of COVID-19.