Impact Of COVID -19 on Kenya Economy

IMPACT OF COVID -19 ON KENYA ECONOMY 1 Impact Of COVID -19 on Kenya Economy by Your Name Course/ Code Professor 's Name University City, State Date IMPACT OF COVID -19 ON KENYA ECONOMY 2 Summary of news article 1. "inflation figures show consumer prices rose less than economists feared," reported by business reporters Michael Janda and Rachel Pupazzoni https://www.abc.net .au/news/2021 -04 - 28/inflation -cpi -march -quarter -abs/100100276 According to the report, home construction and renovation expenses have been increasing due to the high demand for house construction and shortage of materials. In a nutshell, the economic issue being discussed in the article is how the high demand and low supply of construction materials have had a significant effect on the prices of items (Janda and Pupazzoni, 2021) . The consumer prices are lower than anticipated and reduce the reserve bank's p ressure to increase the interest rates beforehand year 2024. However, the commercial lenders are already sensing a shift in the economy and rising long -term fixed -in mortgage rates. Most economists were expecting that construction would contribute to infl ation, with gushing demand fired by low -interest rates and government subsidies, in addition to the building materials and shortage of labor, attributing to a high rise in prices for new buildings and renovations (Janda and Pupazzoni, 2021) . The low supply of available building materials has increased the demand for the items, leading to increased costs. Besides, the rent increase has not been seeming in CPI. The certified figures failed to capture a very recent surge in rents across different parts of Aust ralia. Choosing this article helped me understand more about the relationship between demand and supply, as we learned in the course. IMPACT OF COVID -19 ON KENYA ECONOMY 3 Summary of news article 2. "resistance to raising the minimum wage reflects obsolete economic thinking ," written by Jim Stanford on April 13, 2021 . https://theconversation.com/resistance -to-raising -the -minimum - wage -reflects -obsolete -economic -thinking -158622 The economic issues being discussed in the article are the equilibrium in the labor market, offsetting inflation, and the solution to unemployment. In Australia, only a few employees work with the lowest wage. The decision to increase the lowest wage for Australian workers is made annually, with a pay rise for at least a third of employees ( Tsikas, 2019). Since COVID -19 struck the country, there has been an increase in the rate of unemployment. However, most of the workers are insistent on getting an absolute freeze. Besides, the government has sided with them but warned that there could be a damp employment rate, affecting post - pandemic recovery. The argument is centered on the updated economic ideologies. The proof obtained during research done in the past years proposes that increasing wages to the regular course would increase aggregate demand and build consumer confidence, which helps maintain average inflation and increase government revenues. According to research conducted over the past tw o decades, it has been found that a higher lowest wage rate does not necessarily mean an increase in the level of unemployment; some may increase employment. IMPACT OF COVID -19 ON KENYA ECONOMY 4 Consultancy report Executive summary Like many countries in the world, Kenya was also affected by the spread of COVID -19 and has since affected its economy, contracting the country's GDP and impacting the livelihood of Kenyans. This has caused a go -slow in the growth of the economy, causing a recession. The containment measures put in place to comba t the spread caused an increase in unemployment levels, thus causing a reduction in the income levels of Kenyans. Declines in consumption levels and investment caused a subsequent decrease in aggregate demand, reducing the GDP by 5.7%. Although the economy is recovering, the unemployment level is still higher than the pre - pandemic rate, and economic growth is still a concern. Introduction The report shows several economic impacts that the COVID -19 has caused to Kenya's economy. It focuses on the changes in the GDP of Kenya, the production costs, changes in consumption levels, and subsequent decrease and increases in the aggregate demand while considering the implications of the pandemic on the country's economy. The report identifies the output and price l evels, business activities, measures put in by the government to reduce the economic effects of the pandemic, and long -term growth. This snapshot of Kenya's economy will provide valuable information to investors and businesses traversing the ambiguity of t he country's current economic conditions. Effects of COVID -19 on the economy of Kenya. IMPACT OF COVID -19 ON KENYA ECONOMY 5 Decrease in aggregate demand. According to macroeconomics, any factor affecting consumption, investment, government spending causes a variation in the total demand. When a country's economy is at complete payoff, the source of goods and chattels and would not be responsive to an increase in aggregate demand. The aggregate supply curve would be perfectly inelastic. As a result, an increase in the aggregate demand owing to expansionary fiscal or monetary policies would be inflationary (Kithiia,Wanyonyi,Maina, Jefwa, and Gamoyo, 2020). On the other hand, when the economy is not full employment, it would be responsive to increased aggregate demand. Therefore, changes in the le vels of employment and output levels would cause inflation. During the past years before the pandemic struck, Kenya has relished resilient economic growth, allowing the country to get the rank of the mid -income republic in the year 2016. Kenya was regarde d as among the rapidly developing economies in Sub -Saharan Africa (Kithiia et al., 2020). However , since the pandemic, the country's GDP decreased from a projected 5.4% rate in 2019 to -0.1% in 2020, while the levels of unemployment rose. It was estimated that the GDP would increase in 2021 up to 7.6% in response to the post -pandemic economic recovery. The financial and societal disturbances instigated by the disease have windswept evolvement in poverty eradication in the country, causing more than three million people to succumb to poverty (Kithiia et al., 2020) . The measures to help navigate the pande mic have rendered challenges in the private sector and decrease household consumption, which reduced household savings and investments , affecting the aggregate demand and causing the demand arc to move leftward from AD 1 to AD 2. New equilibrium with lower output and price is achieved. However, due to the constrained low production capacity of the country, lower output leads to higher unemployment. IMPACT OF COVID -19 ON KENYA ECONOMY 6 Figure1.1 On the other hand, the private sectors face low demand due to the decreased demand for inputs and the rate of consumption. This has been due to the disrupted supply chains restraining intermediate goods and services' obtainability and labor. This has dulle d the visions for novelty and investment. In response to the adverse effects of the pandemic, the government has arranged to execute economic and monetarist policies to help and protect the vulnerable Kenyans increase their incomes. This action will help in increasing the aggregate demand through an increase in the consumption rate. The sharp decrease in income tax caused by the flagging of monetary activities in the country has caused debt vulnerabilities to ris e. P AS E1 E2 Q(Output) AD 1 AD 2 Q1 Q2 P1 P2 IMPACT OF COVID -19 ON KENYA ECONOMY 7 Increase in a high level of unemployment Loss of job employment as a result of the pandemic ha s affected people 's livelihoods. The world Bank records that one among three Kenyan employees are employed by organizations facing temporary or permanent closure, thus affecting government revenues and h ousehold incomes. Unemployment levels have increased, causing gain for the households to decrease. The decrease in income for the households has caused low consumption, hence low savings. According to Keynesian, consumption is nearly dependent on income, w hile investment is dependent on the rate of interest (Ngwacho, 2020, P.133) . A h igh degree of unemployment in the country caused by job losses due to the countermeasures to combat COVID -19 has caused a decrease in total demand, which affects the aggregate demand curve to move leftwards (consider figure 1.1 above). The unemployment levels have increased compared to the pre -pandemic rate. Most businesses have closed down, with the government revenues decreasing in all sectors. AD= C+I+G+ (X -M), When the tota l demand curve moves to the left, output decreases , and prices reduce. High levels of unemployment still hold. The government, on the other side, employs expansionary fiscal and monetary policies to offset the imbalance in the equilibrium. For instance, the government of Kenya increased the expenditure, th us increasing investment (Ngwacho, 2020, P.133) . An increase in investment caused a subsequent increase in income of households, therefore, increasing productivity and social welfare. The government supports emphasis on the need for safe access to foodstuf f. However, Kenya's economy remains uncertain despite the baseline assumptions that the economy is anticipated to rebound rapidly in 2021, increasing the country's GDP by 6.9%. Besides, prolonged social distancing and lockdown have affected the projected economic recovery activity (Ngwacho, 2020, P.133) . An increase in government expenditure on goods and IMPACT OF COVID -19 ON KENYA ECONOMY 8 chattels causes a shift of the AD curve to the right, increasing household income, increasing consumption, and aggregate demand. Although the pandemic has caused many adverse economic fluctuations, there have been technological improvements and innovations in Kenya. Since schools' closure enhances social distancing and helps combat the spread of COVID -19, schools have embraced online learning methods that w ere never used in the past years (Wangari, Gichuki, Abuor, Wambui, Okeyo, Oyatsi, Odikara, and Kulohoma, 2021 . This has been realized through horizontal scale -up of co llaborative shield programs, which have ensured continuous support of vulnerable families while maintaining human assets via prolonged entree to expertise, in addition to accessing alphanumeric expertise and advanced access to information to mitigate asset liquidation. Long -Term Outlook of Pandemic Looking at the long -term economic development s for the economy of Kenya, the government has ensured to input measures to help eradicate the economic effects caused by the pandemic. Economic growth is determined by a buildup of capital stock, an increase in labor inputs , and technological improvements. The long -run growth usually is readdressed and improved when several changes in the short run have been affected (Ngwacho, 2020 , P.131) . For instance, the government increased its investment in the infrastructure and the health sector to stimulate economic growth , hence growing its GDP . More job opportunities were created, therefor e increasing the household income, which increases the aggregate demand. The lockdown and curfew imposed to combat COVID -19 led to the country 's prod uction capacity reduced. Working hours were reduced . T hus production capacity dec reased, affecting the demand and supply of goods and services. High demand and low supply of goods led to IMPACT OF COVID -19 ON KENYA ECONOMY 9 increas ing in prices hence inflation in the country. To offset inflat ion, the government uses inflationary monetary and fiscal policies to ensure a steady economic growth rate (Ngwacho, 2020 , P.131) . The government reduced tax rates on goods from 16% to 8% , causing an increase in consumption of goods, shifting the AD curve to the right, as shown in figure 1.2 below. A corresponding increase in output and price is observed. Besides, a reduction in tax rates led to a rise in investments, hence increasing output. The production capa city increase for a country can be used to examine the welfare of people. Figure1.2 P SR -AS E3 E2 Q(Output) AD 3 AD 2 Q3 Q2 P3 P2 IMPACT OF COVID -19 ON KENYA ECONOMY 10 References List Tsikas, M., 2019. Resistance to raising the minimum wage reflects obsolete economic thinking . [online] The Conversation. Available at: [Accessed 30 April 2021]. Kithiia, J., Wanyonyi, I., Maina, J., Jefwa, T. and Gamoyo, M., 2020. The socio -economic impacts of Cov id-19 restrictions: Data from the coastal city of Mombasa, Kenya. Data , in brief , 33 , p.106317. Ngwacho, A.G., 2020. COVID -19 pandemic impact on Kenyan education sector: Learner challenges and mitigations. Journal of Research Innovation and Implications in Education , 4(2), pp.128 -139. Janda, M. and Pupazzoni, R., 2021. Weak inflation takes pressure off RBA to raise interest rates, but the banks are doing it for them . [online] Abc.net.au. Available at: [Accessed 30 April 2021]. Wangari, E.N., Gichuki, P., Abuor, A.A., Wambui, J., Okeyo, S.O., Oyatsi, H.T., Odikara, S. and Kulohoma, B.W., 2021. Kenya's response to the COVID -19 pandemic: a balance between minimi zing morbidity and adverse economic impact. AAS Open Research , 4. Wanjala, K., 2020. The Economic Impact Assessment of the Novel Coronavirus on Tourism and Trade in Kenya: Lessons from Preceding Epidemics. Finance & Economics Review , 2(1), pp.1 - 10. IMPACT OF COVID -19 ON KENYA ECONOMY 11