Mitigating COVID-19 Effects on East African Economies
COVID-19 In East Africa
By Atwongyeire Joseph reporting from Uganda
The East African Community is currently facing an unparalleled magnitude and pace of twin health and economic crises that are heightening the risk of compromising development at the country and regional level. The global COVID-19 pandemic, associated with huge loss of human life and morbidity, have brought the East African countries to their knees across all sectors, at a pace never witnessed before; posing a serious risk of upending and reversing recent development progress. The twin health and economic crisis has led to, and is now manifested in: lock downs, business closures and slowdown, travel restrictions and border closures. The initial primary health crisis called for quicker health solutions but yet uncertainty over vaccine development and deployment remains as does confusion on control measures in the medium term.
In East Africa the outbreak is in all 13 countries with 21,391 confirmed cases and continues to evolve since the first case was reported on 13th March, 2020 in Kenya (WHO, 2020b). The case fatality rate (CFR) in East Africa, since that date, stands at 2.9% compared to 2.7% for Africa overall. However, East Africa is the second least region after Central Africa severely affected by COVID-19 (CDC, 2020).
Figure 1: Number of COVID-19 Cases and Case Fatality Rate (CFR) in East Africa
Source: Africa Center for Disease Control (CDC) and World Health Organization (WHO) Dashboard
The number of confirmed cases is still increasing, even significantly, across the region, and based on the top nine countries with the highest number of cases, the flat end of the curve is yet to be attained (see Figure 1). The rising number of COVID-19 cases in the region is of unprecedented concern for human health, increasing poverty and food insecurity amid concurrent conflict, macroeconomic failure, climate change shocks, and even desert locust infestations (FEWSNET, 2020). The effects of government responses to control COVID-19’s spread, including social distancing, travel restrictions and border closures, have driven a slowdown in economic and trade activity that has led to a sharp widespread decline in household income and a sharp increase in food insecurity and mental health concerns. The medium- and long-term effects resulting from the measures taken to slow down and contain the spread of the disease remain to be understood, though they are likely to be dire as well, as current experience demonstrates. In an extreme case, the pandemic could increase the number of food insecure people by 23% from the 23 million people currently severely food insecure across six East African countries (Ethiopia, Kenya, Somalia, South Sudan, Sudan and Uganda), plunging them into severe food poverty (FEWSNET, 2020).
Evidence available further indicates that some of the impacts in the East African region also have far reaching macro level as well as sectoral level ramifications touching on industries such as aviation, tourism, agriculture and manufacturing. For instance, in Kenya, GDP forecast growth in 2020 now stands at 1%, down from 5.7% due to the gravity of the pandemic; with the economy witnessing a decline in tourism (almost eliminated), export revenues, and a disruption in supply value chains (Deloitte, 2020). In Ethiopia, the economy is expected to grapple with high unemployment and inflation rates, and 2020 GDP growth has been revised to 3.2% from 6.2%. Similarly, the outlook in Tanzania and Uganda show a similar trend with GDP growth declining by 3.3% and 1.8%, respectively (Deloitte, 2020). Tanzania is experiencing a decline in demand for its mineral exports along with global supply chain interruptions. The Ugandan economy is also faced with the disruption of supply chains and weakened global demand for its export goods (PwC, 2020). Price spikes related to the impact of COVID-19 have also occurred in some markets for major food items in Ethiopia, South Sudan, Rwanda, Burundi and Uganda (FEWSNET, 2020). With exemptions from movement restrictions to ensure continuity in the domestic and regional trade of food and essential non-food commodities, enhanced cargo screening procedures as well as temporary market closures, speculative trading and panic buying have contributed to supply chain disruptions and price hikes. Insights on the expected impacts in each country call for affirmative policies and actions aimed at addressing a recovery trilemma of averting a health crisis, recovery of the economies, and protecting the vulnerable while mitigating the growing inequalities.
In an attempt to curb the spread of COVID-19, various preventive measures have been put in place. Most governments have urged and/or legislated the public to: place reliance on reliable and up-to-date information about the pandemic; wash hands frequently; avoid contact with others; maintain social distancing; ensure respiratory hygiene; wear masks; ensure isolation after infection or when in suspicion of infection; and curfews. According to Deloitte (2020), IMF (2020) and CSBAG (2020), different governments have introduced protective and recovery fiscal and monetary interventions to safeguard their economies that include:
Fiscal policy measures
- Reduction of turnover tax from 3% to 1%.
- 100% Tax Relief for “low income” earners – individuals earning up to KES 24,000 per month.
- Increase in the maximum tenor of repurchase agreements from 28 to 91 days.
- Temporary suspension of listing with credit reference bureaus persons who default on their loan obligations with effect from 01 April 2020.
- Reduction of VAT from 16% to 14%.
- Reduction of the highest PAYE band from 30% to 25%.
- Appropriation of KES 10bn through cash transfers to the elderly, orphans and other vulnerable members of society; disbursement of accumulated VAT refunds of KES 10bn.
- Reduction of Corporate rate tax from 30% to 25%.
- Settlement of KES 13bn of verified pending bills within the next three weeks.
- Voluntary reduction of the salaries of the President and the Deputy President by 80%, that of cabinet by up to 30%, that of chief administrative secretaries by 30% and that of principal secretaries by 20%.
Monetary policy measures
Central Bank of Kenya is committed to:
- Reduction of the Central Bank Rate from 7.25% to 7.00%.
- Lowering banks’ cash reserve ratio by 100 bps to 4.25%.
- Lowering banks’ cash reserve ratio by 100 bps from 5.25% to 4.25%.
- Increasing the maximum tenor of repurchase agreements from 28 to 91 days:
- ● Giving flexibility to banks regarding loan classification and provisioning for loans that were performing on March 2, 2020, but were restructured due to the pandemic.
- Encouraging banks to extend flexibility to borrowers’ loan terms based on pandemic-related circumstances and encouraging the waiving or reducing of charges on mobile money transactions to disincentivize the use of cash.
Fiscal initiatives include:
- National Bank of Ethiopia to avail ETB 15bn for private banks to enable them to provide debt relief, loan rescheduling and additional loans to their businesses.
- National Bank of Ethiopia to increase the amount of money individuals can transfer through mobile banking, to limit in-person cash handling.
- Removal of the minimum price set by the National Bank of Ethiopia on the horticulture sector for flower exports.
- Banks to avail foreign currency for importers primarily importing goods and input materials for the prevention of COVID-19.
- Tax exemption for the import of materials and equipment to be used in the prevention and containment of the COVID-19.
- A ETB 5bn (USD 154m) package to bolster healthcare spending.
- A government approved loan of USD 54.9m from the Africa Centre for Disease Control and Prevention to help fight the virus.
- The Ministry of Revenue to expedite VAT returns to support companies with cash flow.
The Government of Tanzania has put in place interventions to aid in mitigating the spread of the COVID-19 virus in the country while also limiting the potential negative impact the outbreak might have on the economy. Members of the public have been advised to avoid non-essential travel to COVID-19 affected countries, while the government has banned the issuance of travel permits to all civil servants to countries that have been reported to have Coronavirus cases.
Fiscal measures include:
- The government releasing US$302 million for health spending. The funds come from cancelling and postponing some budgeted spending such as foreign travel and training; national ceremonies; and procurement of vehicles.
- Support to the private sector to expedite the payment of verified expenditure arrears with priority given to affected small and medium enterprises (SMEs), paying US$376m as of March 2020.
- Granting VAT and customs exemptions to additional medical items requested by the Ministry of Health.
Monetary measures include:
- The Bank of Tanzania (BoT) reduced collateral haircuts requirements on government securities; from 10% to 5% for Treasury bills and from 40% to 20% for Treasury bonds effective on May 12, 2020.
- The BoT reduced the discount rate from 7% to 5% on May 12, 2020.
- The BoT lowered the Statutory Minimum Reserves requirements from 7% to 6% effective on June 8, 2020.
- The BoT will provide regulatory flexibility to banks and other financial institutions that will carry out loan restructuring operations on a case-by-case basis.
- The daily transactions limit for mobile money operators was raised from about US$1,300 to US$2,170 and the daily balance limit was raised from US$2,170 to US$4,340.
Fiscal Policy measures
- Suspension of Tax Audit: Effective 18th March, post-clearance and comprehensive tax audits were put on hold for a period of 30 days, exception is made to desk audits which remain as planned.
- Extension of Financial Statements Certification: The revenue authority has provided a relief to taxpayers required to submit certified financial statements on 31 March 2020 by granting an extension to file the certified accounts by 31 May 2020.
- For taxpayers seeking amicable settlements of their tax obligations arising from audits, the Tax Authority has waived the down payment requirement of 25% of the outstanding tax liability that ought to be paid before the case is accepted by the Rwanda Revenue Authority.
- The IMF approved the disbursement of US$109.4 million to be drawn under the Rapid Credit Facility.
- Rwanda’s emergency response plan includes scaled up health spending. Support to vulnerable households has started in the form of regular in-kind transfers of basic food stuffs (door-to-door provision of rice, beans and flour every three days).
- Support to firms is envisaged in the form of subsidized loans from commercial banks and is expected to target SMEs and hard-hit sectors such as the hospitality industry.
- Salaries of top civil servants for the month of April will be redirected to welfare programs.
- The Government has introduced relief measures including the suspension of down payments on outstanding tax for amicable settlement and has softened of enforcement of collecting tax arrears.
Monetary Policy measures
- National Bank of Rwanda (BNR) announced measures:
- To extend lending facilities to banks (FRW 50 B fund) for distressed banks at CBR rate, tenure extended to 3,6 and 12 months.
- To encourage use of digital channels and contactless mobile payments: for the next 3 months.
- Operators and Banks agreed to:
- Zero charges on all transfers between bank accounts and mobile wallets.
- Zero charges on all mobile money transfers.
- Zero merchant fees on payments for all contactless Point of Sale (mobile and virtual POS) transactions.
- Limits for individual transfers using money wallets increased from FRW 500,000 to FRW 1,500,000 for Tier 1, and FRW 1,000,000 to FRW 4,000,000 for Tier II customers.
- An extended lending facility worth RWF 50 billion (0.5 percent of GDP) available to liquidity-constrained banks for the next six months. Under this facility, banks can borrow at the policy rate and benefit from longer maturity periods.
- Treasury bond purchases through the rediscount window for the next six months.
- Lowering of the reserve requirement ratio by 100 basis points, from 5% to 4%, effective from April 1. Loan repayment conditions were also eased for impacted borrowers, and charges on electronic money transactions waived for the next three months.
- The central bank is also working closely with the Minister of Economy and Planning to provide support to microfinance institutions.
Policy response measures
- Burundi has taken very limited precautionary measures on managing the pandemic and life has since continued as normal as the Burundi Government is going ahead with its presidential election scheduled for May 20.
- The Government has instructed citizens to follow some basic rules of social distancing and handwashing, but there are no restrictions on public gatherings or public events. Hand sanitizers and water for handwashing have been installed in public places.
- The Government has asked hospitals to make beds available for potential cases (20 for each national hospital and 5 for each local one), with only one laboratory in the nation capable of COVID-19 testing and with minimal capacity.
- The authorities have prepared a national contingency plan to address the pandemic. It was last updated on March 27, 2020 with actions covering the following six-month period. Its cost is US$ 27.8 million (0.9% of GDP). Identified financing so far comes from the World Bank and only covers about 18% of the plan’s cost.
- In addition, authorities have taken measures to lessen the socio-economic impact of the pandemic, including:
- the rehabilitation of roads to limit transportation bottlenecks (US$ 15.8 million or 0.5% of GDP);
- the boosting of strategic oil reserves (US$ 6.3 million or 0.2% of GDP);
- increasing the strategic stock of food supplies (US$ 3.7 million or 0.1% of GDP),
- subsidies and transfers to support the most vulnerable (US$ 26.3 million or 0.9% of GDP). Financing of these measures has not yet been identified.
- Other measures have been taken to support specific hotels and industries. Taxes owed will be forgiven for hotels and industries that will not be able to pay. Subsidies are planned to help pay salaries in these sectors and avoid massive layoffs. Salaries for suspended services such as those provided at the Melchior Ndadaye International Airport will continue to be paid with government support.
Fiscal Policy measures
- Extension of time within which to file tax returns – the 31 March 2020 filing deadline for taxpayers whose accounting date is in September had been extended by 2 months to 31 May 2020.
- All customs border stations and customs warehouses shall remain open and functional to facilitate movement and clearance of cargo subject to the Customs laws and guidelines.
- Waiver of penalty and interest upon voluntary disclosure – a taxpayer who makes any voluntary disclosure during the months of March and April 2020 and pays the principal tax, shall have their penalty and interest waived in accordance with the law.
- Deferment of tax payments due in March and April 2020 under instalment arrangement MOUs to May 2020 for taxpayers whose businesses have been affected by government directives on COVID-19 and are unable to meet their obligations during the period.
- Returns of PAYE, VAT, Local Excise Duty, Withholding Tax and taxes under the Lotteries and Gaming Act for March due by 15 April 2020 were extended to 30 April 2020.
- Encouraging taxpayers to use its online services but remain available to offer services that cannot be accessed online.
- In support of the Government of Uganda’s interventions to combat the effect of COVID-19, the National Social Security Fund (NSSF) has put in place measures to ease the cash flow burden of affected employers/businesses in the private sector.
- NSSF indicated that effective from 31st March 2020, it will allow Ugandan businesses facing economic distress to reschedule their NSSF contributions for three (3) months without accumulating penalty. A business that does not apply for this amnesty will be expected to continue honoring its statutory obligation to remit NSSF contributions by the 15th day of every month.
- Distribution of food in Kampala and Wakiso to vulnerable people. This is hoped to support domestic aggregate demand for agricultural products while addressing dire needs of those living hand to mouth.
- Utilization of part of the Contingency Fund in the FY2019/20 budget to finance approximately 1/5 of the Ministry of Health Preparedness and Response Plan from January to June 2020 (about USD1.3 million from a total of USD7 million).
- Seeking of a supplementary budget of US$80 million to support critical sectors such as health and security at the frontline of the pandemic.
- Uganda Revenue Agency has also instituted Business Continuity Measures of a tax administration nature to support taxpayers in meeting their obligations for example grant of extension on tax paying deadlines.
- Government borrowing over Shs760 billion as budget support from the International Monetary Fund, and committing Shs284 billion to fight Covid-19.
- The Government reprioritized Quarter 4 releases for FY 2019/20 financial to critical activities of mitigating COVID-19; salaries and gratuity and water services were safeguarded.
Monetary policy measures
- Supervised Financial Institutions (SFIs) to defer the payments of all discretionary distributions such as dividends and bonus payments for at least 90 days effective March 2020.
- Exceptional permission granted to SFIs to restructure loans of corporate and individual customers that have been affected by the pandemic, on a case by case basis effective April 2020.
- Provision of liquidity to commercial banks for a longer period through issuance of reverse Repurchase Agreements (REPOs) of up to 60 days at the CBR, with opportunity to roll over.
- Waiving limitations on restructuring credit facilities at financial institutions that may be at risk of going into distress.
- Provision of exceptional liquidity assistance to commercial banks that are in liquidity distress for a period of up to one-year.
- Purchase of Treasury Bonds held by Microfinance Deposit taking Institutions (MDIs) and Credit Institutions (CIs) in order to ease their liquidity distress due to the COVID-19 pandemic.
- Elimination of bank-to-wallet charges and cash-out fees for lower transaction tiers for 30 days.
- Ensuring that contingency plans by financial institutions guarantee the safety of customers and staff.
- Intervening in the foreign exchange market to smooth out excess volatility arising from the global financial markets.
- Putting in a place a mechanism to minimize the likelihood of sound businesses going into insolvency due to lack of credit.
- Continuing to engage Mobile Network Operators (MNOs) and commercial banks to:
- further reduce fees on mobile money transactions and other digital payment charges in order to limit the use of cash and bank branch visits.
- Increase in the daily transaction and wallet size limits for mobile money transactions.
This information is continually being updated. It shows that the central governments and banks of countries in the East Africa region are being diligent and involved in helping control and reduce the spread of COVID-19 and lessen the impact of both the disease and its economic and other social impacts.
CDC. [African Centre for Disease Control] (2020). Coronavirus Disease 2019 (COVID-19): https://africacdc.org/covid-19/.
CSBAG. (2020). EAC COVID-19 Economic Policy Response Tracker. https://www.dgf.ug/sites/default/files/rescrc/covid%20vol.%202%20newsletter%20csbag.pdf.
Deloitte. (2020). The Impact of COVID-19 on East African Economies. Summary of Government Intervention Measures and Deloitte Insights. https://www2.deloitte.com/content/dam/deloitte/ke/documents/finance/economic_impact_covid-19_pandemic_on_eastafrican_economies.pdf.
FEWSNET. (2020). Acutely Food Insecure Population Rises Due to COVID-19 and Concurrent Shocks. https://reliefweb.int/report/south-sudan/east-africa-key-message-update-acutely-food-insecure-population-rises-due-covid.
IMF. (2020). Policy Responses to COVID-19. International Monetary Fund Policy Traker. https://www.imf.org/en/topics/imf-and-covid19/policy-responses-to-covid-19#t.
PwC. (2020). Impact of the Corona Virus on the Uganda Economy. https://www.pwc.com/ug/en/press-room/impact-of-the-corona-virus-on-the-uganda-economy.html.
WHO [World Health Organization]. (2020). COVID-19 WHO African Region: External Situation Report 11/2020. World Health Organization – Regional Office for Africa. https://reliefweb.int/report/south-africa/covid-19-situation-update-who-african-region-external-situation-report-3-18.