Kenya Economic Update: COVID-19 Will Hit Kenya’s GDP In 4 Major Ways

Kenya’s economy is feeling the hit of the fast-spreading COVID-19 that has resulted in numerous businesses closing down with millions of people being left without meaningful jobs.

Even before being affected by the COVID-19 pandemic shock, Kenya’s economy had decelerated according to the findings by the World Bank Group in the 21st Edition of Kenya Economic Update.

The economy expanded by 5.4 percent in the first three quarters of 2019, down from 6.0 percent over the same period in 2018.

The slower growth was associated with underperformance in agriculture (due to poor rains) and private investment, which weakened due to crowding out from widening fiscal deficits and, relatedly, limited private sector credit growth (7.1 percent year-on-year in December 2019).

As a result, the World Bank’s GDP growth estimate for 2019 as a whole is about 5.6 percent, buoyed by strong performance in the services sector that helped overcome a slowdown in agricultural output. This represents a 0.2 percentage point downward revision compared to the October 2019 Kenya Economic Update estimate.

The COVID-19 global pandemic will have a large negative impact on Kenya’s real GDP growth in 2020, something that will force analysts who had projected growth to revise their projections.

Economic activity is weighed down by a combination of supply and demand shocks originating from both the external and domestic fronts. On the external side, supply and demand shocks are being transmitted through several channels:

Global supply chains are being disrupted, reducing the availability of intermediate and capital goods, as a result of shutdowns in the source countries, and transport disruptions. Kenya’s monthly imports, notably from China, contracted sharply in the months of January-March 2020. A large share of retail goods in Kenya are shipped in from China and shortages of these goods could raise consumer prices.

Kenya’s goods exports (horticulture, tea and coffee) are coming under pressure. Flower exports have already been hit hard, including due to the disruption to what would normally be peak Mother’s Day demand in Europe.

Reduced tourism earnings. The number of tourist arrivals in 2019 increased by 1.2 percent to 2.1 million, but with COVID-19, that trend is unlikely to continue. Indeed, Kenya’s tourist arrivals as of March 2020 shows signs of slowing and looks set to continue to decline during the peak season in July-August 2020.

A slowdown in remittance inflows: Although they remained broadly steady as of January-March 2020, remittances could come under pressure due to adverse effects on the economies where the Kenyan diaspora is working. Kenya recorded remittances of $2.9bn in 2019 (2.9 percent of GDP), with the bulk of remittances coming from the UK (34 percent) and the US (30 percent).

Will the Kenyan economy sail through this pandemic?