Economy could deflate by Sh1 trillion, analysts warn

Lewis Njoka @LewisNjoka

The economy will shrink by between Sh317 billion and Sh1 trillion this year due to the coronavirus pandemic, a report has said.

According to a McKinsey report, Kenya’s gross domestic product (GDP) growth could decline by between three and 10 percentage points depending on how the pandemic is handled.

In the best case scenario, the country’s GDP growth will reduce by about Sh317 billion ($3 billion) and Sh1 trillion ($10 billion) in the worst case scenario.

Private consumption

The report says the GDP growth decline will be mainly due to a reduction in household, private and government consumption expenditure as well as supply chain disruptions.

The pandemic’s impact on tourism and the dynamics in the global oil industry are also expected to have a major impact on the country’s GDP growth. 

If the outbreak is well contained and economic slowdown stemmed in good time, McKinsey projects that the country’s GDP growth will reduce from the earlier projection of 5.2 to 1.9 per cent.

Much earlier, the management consulting firm had projected that Kenya’s GDP would grow by six per cent but revised it downwards to 5.2 to take into account the ongoing locust infestation.

If the situation is poorly handled and the virus spreads wide in Africa resulting in prolonged economic downturn, Kenya will register a negative GDP growth estimated at -5 per cent. 

The report anticipates four different scenarios ranging from one where the outbreak in Africa is contained and economic slowdown contained, to one where the outbreak is widespread resulting in prolonged economic downturn. 

Predictive model

In all the four scenarios, however, the country will experience reduced economic growth. 

Luckily, the predictive model shows that Kenya could avoid a recession (negative growth) this year on condition that the Covid-19 outbreak is contained. 

 “In two out of four scenarios, Kenya could potentially avoid a recession. These scenarios imply a GDP reduction of $3 billion (Sh317 billion) to $10 billion (Sh1 trillion) in 2020,” says the report.

In both best case and worst case scenarios, manufacturing and tourism sectors will be the worst hit.

Manufacturing will be hit hard due to decreased consumption and supply chain disruptions while tourism could a experience a 60 to 90 per cent decline due to restrictions placed on movement globally.

Several other organisations have in the recent past revised their economic growth projections for Kenya downwards to take into account the effect of the Covid-19 pandemic.

NCBA Bank, for instance, projects that the country’s economic growth will reduce to 2.3 per cent in 2020, should the Covid-19 pandemic persist through the second quarter of this year, a sharp decline from the 5.7 per cent GDP growth it gave in January.

Central Bank of Kenya (CBK) too has admitted that its earlier economic growth projection was no longer feasible due to the Covid-19 pandemic. 

“While we do not know how the long this pandemic will last, the World economy is already in a recession, meaning that even our GDP growth projection of 6.2 per cent no longer holds.

This is why the monetary policy committee is acting to minimise the damage this economy will suffer,” said CBK Governor, Patrick Njoroge in a recent interview.

Asset management firm, Cytonn, says it expects the country’s GDP growth to range from 4.3 per cent to 5.2 per cent for the year 2020 depending on the severity of the outbreak.