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Guest Post; Kenya Economic Outlook 2019

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By Vipul Shah, Chairman & Founder, Grant Thornton Kenya

Kenya has
continuously stood out as the place to invest in in Sub Saharan Africa in spite
of the challenges that it faces. Investors continue to be bullish about the economy
because of Kenya’s importance to the regional economy and its focus on
investments around the Big 4 Agenda. As we look forward to the reading of the
Kenya Budget 2019/2020, our attention is drawn to the outlook on the Kenyan
economy.

The macroeconomic environment

Kenya’s
economy was forecast to grow at 5.9 per cent earlier this year. This has been
brought down to 5.8 per cent due to the failed long rains. Kenya is an
agricultural economy which is mainly rain-fed meaning any changes in rainfall
patterns are definitely going to have an impact on the economy.

Kenya
still has an interest rate-cap on commercial bank lending rates in place which
will dampen its ability to renew the Standby Credit Facility from the
International Monetary Fund (IMF) later this year. This is a short-term balance
of payment financing facility. Its significance will be felt, if the government
seeks financing from additional taxes within the year.

The
private sector’s contribution to GDP growth is likely to be depressed with commercial
banks withholding credit (as a result of the interest rate cap) in favor of
less risky government securities. This is having a direct impact on exports
which are not where they need to be while the import bill keeps rising. This is
likely to continue in the near term until the interest rate cap is removed and
appropriate measures for banks to be more proactive in avoiding predatory
lending.

Kenya’s Big 4 Agenda is still on course with various projects targeted at manufacturing, housing, healthcare and agriculture in various stages of implementation. GDP growth is expected to come from the Big 4 Agenda projects with public infrastructure projects contributing the highest percentage of growth. Budgetary allocation for road construction is expected at Kshs 87.5 bn (domestically financed) and Kshs 34.2 bn (foreign financed).

The Kenyan
Shilling is expected to remain stable going forward with a projected high of
KSh 101 and a low of KSh 104 to the US Dollar. Inflationary pressure will be
felt from the rising cost of living which is driven by increases in the cost of
food and basic commodities – a high of 7.5%. Interest rates are expected to
rise marginally owing to pressure from the need to meet fiscal targets through
domestic borrowing.

The public policy environment

Kenya’s
involvement in China’s Belt & Road Initiative has been received with
uncertainty over how Kenya will repay the loans involved in the infrastructure
projects it is pursuing. So far, the project has had a positive impact on the
Kenyan economy with developments happening in trade, manufacturing and growth
in domestic tourism.

Further, Public
debt will continue to grow as the government of Kenya seeks to finance the Big
4 Agenda. Ksh 460.2 billion has been budgeted for the Big 4 Agenda. However,
Kenya’s public debt is still within sustainable levels. For Kenya, the Present
Value (PV) of debt to GDP ratio as at June 2018 stood at 49%, well below the
74% global benchmark for lower middle-income countries (LMICs)[2]. Also, China does look at
the country’s ability to pay before giving out loans. It is in their best
interest to advance loans to countries that have the ability to pay.

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The first
phase of the Standard Gauge Railway (SGR) project has eased the flow of goods
and people between the Port of Mombasa and Nairobi. Though teething problems
are there with regards to the movement of containers, the SGR will prove itself
to be the most efficient means for commercial transport with time.

Kenya’s
relationship with China is deepening with more private enterprises setting up
locally. We continue to see more Chinese construction companies setting up in
Kenya with a view to participate in the endless opportunities presented by a
focus on infrastructure and real estate. These firms are employing Kenyans at
all levels and continue to play a role in bringing down unemployment.

The fact
that they are also involved in private infrastructure projects has seen the
growth of investment-grade infrastructure projects. Investors want to see
consistency in quality and developments that could be sitting in any of the
world’s major capitals right here in Kenya. These projects have brought a lot
of foreign capital into the country seeking a return in this market.

Taxation

In the past year,
we have had several amendments to tax legislation in a bid to offer a push to
the Government’s “Big Four Agenda”. The Kenya Revenue Authority (KRA) has seen
its collection target exponentially increase over the last decade. This has
required them to change tact and year on year they keep adopting new and
advanced revenue collection measures. Audits have come back in full swing and
controls to enforce compliance are at their most technologically advanced
level.

Over the years,
enforcement has been used as a primary tool for driving the tax compliance
agenda home in most of the tax administrations across the world. This probably
explains why the tax collectors have never been the favorite public officers
among the people in their jurisdictions. The KRA has tried to change tact in
the recent past by using facilitation rather than enforcement.

Kenya reviewed
its revenue target downwards for this fiscal year by 5% to KES 1.61 trillion.
This is the second year in a row that Kenya is cutting its collection targets.
This, tied together with the fact that the revenue authority has missed its
target over the past five years, is indicative that the collection targets have
been continuously overambitious.

The reduced
collection targets have sparked fears that the country may not be able to curb
its reliance on debt. The KRA has doubled up on the use of technology in
ensuring compliance and this is already bearing fruits. With the introduction
of presumptive tax, the collector will be able to net in many taxpayers in the
informal sector and also those who’ve been filing nil returns.

It is also
anticipated that the long awaited overhaul of the Income Tax Act, that has been
in force for over four decades, will come to fruition this year. The new Bill
is envisioned to simplify the computation and administration of income tax,
hopefully increasing the collections for KRA.

The change in
tact from enforcement to facilitation to ensure taxpayers are aware of their
obligations, while ensuring compliance is made as easy as possible, will go a
long way in securing KRA’s increasing targets.*

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Taxpayers to bailout KQ as it sinks into a further $130m loss, and still grounded

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JAMES ANYANZWA

By JAMES ANYANZWA
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Kenyan taxpayers are set to feel the full weight of owning a bigger stake of the national carrier, as the airline reported a $130 million (Ksh13 billion) full-year loss at a time when it is seeking a government bailout to sail through the Covid-19 pandemic.

Kenya Airways last year underwent a series of capital and debt restructuring that elevated taxpayers to the biggest shareholders of the financially troubled carrier.

The Treasury last year extended a $50 million bailout to the airline, and is currently evaluating another $70 million funding request to help the carrier cope with revenue loss during the coronavirus pandemic, which has disrupted air travel across the globe.

“As you know we have been grounded for nearly three months now and during that time we have maintained all 38 aircrafts whether flying or not flying, we have to pay our leases, we have to pay the insurance costs, and we have a number of costs that don’t go away whether you are flying or not flying. In addition, we still have to pay salaries and so we have asked for money from the government and we are still waiting to hear about that,” said the Kenya Airways chairman Michael Joseph at a press briefing this week.

The airline has run short of cash to finance its operations including maintenance of aircrafts, payment of leases and employee salaries.

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KQ is 48.9 per cent owned by the government and a group of 10 local banks that hold 38.1 per cent of its shares.

Other shareholders include KLM Royal Dutch Airline (7.8 per cent), employees (2.4 per cent) and other shareholders at 2.8 per cent.

But the airline is set to be delisted from the Nairobi Securities Exchange (NSE), after parliament last year approved its takeover by the State.

The carrier, which is grappling with a negative working capital of Ksh42.15 billion, saw its net loss for 2019 widen to Ksh12.97 billion ($129.7 million) from Ksh7.58 billion($75.8 million) in 2018.

Its management says it has halted route network expansion and embarked on a review of the existing ones with a view to further abandoning and reducing frequencies on what it considers to be non-profitable flights.

The latest are part of raft of the new measures that the troubled national carrier is considering to stay afloat in the wake of the Covid-19 pandemic that has grounded 90 per cent of its operations in the past three months.

Other measures include diversification into the cargo business, digitisation of its operations and the consolidation of the aviation sector assets as the airline looks for long term survival techniques.

The management blamed the losses on fleet ownership costs, increased costs on new routes and frequencies and increased financing costs related to interest on loan repayments, foreign exchange movements and adoption of the new accounting standard — (IFRS16).

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The devaluation of the airline’s assets also reduced the firm’s revenues by Ksh6.73 billion ($67.3 million).

Its total revenues increased by 12 percent to Ksh128.31 billion ($1.28 billion) from Ksh114.18 billion ($1.14 million) helped by cargo load and passengers fares on new routes — Geneva, Rome and Malindi — while operating costs increased by the same margin to Ksh129.17 billion ($1.29 million) from Ksh114.86 billion ($1.14 million).

Chief executive Allan Kilavuka said the future of the aviation industry remains uncertain in the wake of the Covid-19 pandemic that has seen governments put in place measures to control the spread of the virus including suspension of international flights to enforce social distancing regulations.

“We are not going to invest in any new route going forward of course. We are going to look at the routes that we have invested in and see whether we want to continue with that investment because any route has an investment,” Mr Kilavuka told an investor briefing in Nairobi last week.

“In some cases we will stop flying to some destinations, in other cases we will reduce frequencies and in other cases we will suspend operations. There are different things we are looking at so that we can respond to the market in the new context.”

The airline estimates that passenger demand in Kenya alone will drop by about 3.5 million this year, while global traffic is forecast to decline by 4.7 percent, causing the first overall decline in demand since the Global Financial crisis of 2008-2009, according to the International Air Transport Association (IATA).

The IATA also forecasts that the global aviation industry will lose $29 billion worth of passenger revenues this year, of which $40 million will be linked to African airlines.

“The times ahead of us are very uncertain but like I said, if you look at the immediate future the year 2020 is obvious not going to be business as usual, the aviation sector will take time to recover,” said Kilavuka.

“There have been very many hypotheses, some are predicting a three-year recovery period, some are predicting a one-year recovery period but the general consensus is that there will be a drop in passenger numbers by at least 50 per cent. My own estimate is slightly more than that. In Kenya in particular we see that the demand for passenger travel we estimate that it is going to drop by about 3.5 million passengers. So it means is that we need to adapt to this new context.”

KQ increased its losses for the year 2018 to Ksh7.5 billion ($75 million) from Ksh6.4 billion ($64 million) in 2017.

Its net loss for the six months’ period to June 30 2019 more than doubled to Ksh8.5 billion ($85 million) from Ksh4 billion ($40 million) in the same period the previous year (2018).

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Over 770,000 youths lose their jobs in three months

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Over 770,000 youths lose their jobs in three months

Jobseekers
A file photo of jobseekers in Nairobi. FILE PHOTO | NMG 

Some 771, 439 youths lost their jobs in the three months to March and before the imposition of coronavirus disease restrictions that have led to further layoffs and pay cuts.

Data from the Kenya National Bureau of Statistics (KNBS) shows that number of Kenyans between the ages of 20 and 34, who are in employment or running a business, dropped 9.89 percent to 7.02 million.

Young people are the hardest hit by joblessness compared to their counterparts aged above 35 years in an economic setting that is plagued by a hiring freeze on the back of sluggish corporate earnings.

This is a major blow to jobseekers, especially the close to one million young people who graduate from various educational institutions every year.

The Quarterly Labour Force Report reflected a grim period for workers and businesses before Kenya reported its first case of Covid-19 on March 12, which ushered in restrictions on travel, mass gathering and a dusk-to-dawn curfew.

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The restrictions were imposed on March 25, meaning that KNBS jobs data covers the latter days of the month and points to a worsening of the employment market in the second quarter when business reeled most from effects of the coronavirus.

However, the decline in employment opportunities for the youth was counterbalanced by the growth of jobs for those aged above 35 years, which rose to 962,471 to 9.55 million in quarter one.

KNBS director-general Zachary Mwangi reckons that the rise in opportunities for those above 35 years is tied to the fact that a majority of them run businesses, which is captured as employment.

“They (older population) normally have an economic activity they are undertaking. Most of them, for instance, have own businesses,” Mr Mwangi told the Business Daily in an interview, adding that unemployment reduces with age. This is the second employment report that will be released quarterly, a departure from the past when KNBS only published annual job reports.

The survey indicates that a total of 3,870,478 — or 35.52 percent of the nearly 10.90 million young Kenyans — were jobless as at end of March 2020, slightly worse than 34.28 percent or 3,359,505 million three months earlier.

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However, the State defines the unemployed as people who do not have a job and have actively been looking for employment in recent weeks.

Under this definition, the government puts the number of unemployed Kenyans at 914,704, or 4.9 percent in the three months to March with the youth accounting for 596,614. “The unemployment rate, measured based on the strict definition, was 4.9 percent for first quarter 2020, same as that of the previous quarter. This was 1.3 percentage points lower compared to that of the same quarter last year,” the KNBS analysts wrote in the report.

“The youth aged 20-24 had the highest proportion of the unemployed at 12.5 percent. On the other hand, those aged 55-59 had the least unemployment rate of 0.3 percent.”

About 478,513 Kenyans between the ages of 15 and 19 years lost their jobs between January and March this year.

The number of formal jobs generated by the economy fell to a seven-year low in 2019.

The economy generated only 78,400 new formal jobs last year, but informal jobs, which rose from 744,000 in 2018 to 767,900 last year.

Figures for this year will likely be hit by the effects of the Coronavirus disease.

Companies started reporting falling sales ahead of Kenya imposing restrictions to curb the spread of coronavirus.

Kenya, which has reported 2,021 positive cases of Covid-19 and 69 deaths, has suspended commercial flights in and out of the country, banned public gatherings and imposed a dusk-to-dawn curfew since March.

It has also halted movement in and out of five counties most affected by the virus, including Nairobi and Mombasa.

This has seen businesses cut down their activities in response to the fall in consumer demand, triggering layoffs, unpaid leave and salary cuts.

The Markit Stanbic Bank Kenya Purchasing Managers’ Index (PMI)–which tracks business performance monthly– tumbled to 34.8 in April from 37.5 in March. Readings below 50.0 indicate a contraction.

“It’s safe to say that, at least with anecdotal evidence available so far, the epicentre of the COVID-19 impact on economic activity will be in the second quarter of this year,” said Jibran Qureishi, economist for East Africa at Stanbic Bank.

“Firms shed jobs at the fastest pace in the survey history, with wages also reduced amid efforts to lower total costs.”

The World Bank expects Kenya’s economic growth to drop to 1.5 percent this year, and contract one percent in the worst-case scenario under the impact of the coronavirus outbreak, down from a 5.4 percent growth last year.

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Uhuru seeks speedy reopening of schools and worship places

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Uhuru seeks speedy reopening of schools and worship places

Uhuru Kenyatta
President Uhuru Kenyatta greets Deputy President Dr. William Ruto shortly before the 57th Madaraka Day Celebrations at State House, Nairobi. PHOTO | POOL 

President Uhuru Kenyatta Monday directed top State officials to fast-track consultations with key stakeholders for gradual reopening of schools and places of worship as more African countries seek partial lifting of coronavirus disease restrictions.

The Head of State said that the guidelines will include protocols like social distancing and hygiene for learners and worshippers’ safety amid the rise in coronavirus cases.

Kenya closed all learning institutions on March 15 while mosques, churches and temples have been closed for two months.

Other establishments like hotels and restaurants have started reopening under strict safety measures as the government seeks to revive Kenya’s stuttering economy following restrictions to movement including a dusk-to-dawn curfew imposed in late March.

“That conscious of Kenya as a God-fearing nation, I direct the Ministry of Interior and the Ministry of Health to continue and hasten their engagement with religious leaders, with the objective of developing protocols that will be adopted to guide a more participatory way for worship while guaranteeing the safety of worshippers,” said Mr Kenyatta in a televised address to the nation.

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“In that regard, and conscious of the emerging trend of infections I direct as follows, that the Ministry of Education fast-tracks and finalises the ongoing consultations with the stakeholders that will provide an appropriate calendar for gradual resumption of education in the country,” Mr Kenyatta said.

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The Health ministry projects that infections will peak in August and September, the same period a taskforce appointed by Education Secretary George Magoha says schools will be free to open. The Sarah Ruto-led team made the recommendation, but Prof Magoha reportedly said there is no problem waiting until January.

The ministry says it will proceed with preparations for a smooth resumption of learning once normalcy resumes.

Mr Kenyatta did not comment on the restrictions to movements, especially the dusk-to-dawn curfew and halting of in and out of five counties most affected by the virus, including Nairobi, Mombasa, Kwale, and Mandera.

The extended containment orders will lapse on June 5. Kenya has reported 2,021 positive cases of Covid-19 and 69 deaths. Prof Magoha last month told Parliament that learners would study for longer hours and only close for one week during the August holiday in an effort to compensate for time lost due to the Covid-19 restrictions.

Tanzania Monday become the first East African nation to reopen learning institutions after President John Magufuli allowed universities to resume studies. Secondary and primary schools, however, remain closed with Dr Magufuli saying that they will analyse the infection trend before re-opening secondary and primary schools.

Globally, governments’ have faced stiff opposition in their bids to reopen schools on fears of a surge in infections.

South Korea last week closed hundreds of schools that had been reopened following a spike in coronavirus infections.

South Africa has started partial lifting of a coronavirus lockdown, letting people out for work, worship or shopping, and allowing mines and factories to run at full capacity.

Although schools were ordered to open Monday for the last years of primary and secondary, unions urged teachers and other staff to stay away, saying they were not equipped to keep employees and pupils safe.

The education ministry backed down on Sunday, saying pupils would now return the week after next. Teachers will report this week for training and to receive protective equipment.

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