UNIVERSITY OF NAIROBI

SCHOOL OF OPEN AND DISTANCE LEARNING

PhD PROJECT PLANNING AND MANAGEMENT

LPD 803 - ECONOMIC ANALYSIS IN PROJECT MANAGEMENT

ASENA MORGAN MUSUNGU

REG No. L83/56601/2020

LECTURER: Dr. WACHIRA. M

Assignment Two

Due Date: September 10, 2020

1
Discuss the GDP and GDP per capita using the Three Approaches
1.0 Introduction
1.1 Definition of GDP

Gross domestic product is the market value of all final goods and services produced within the
national borders of a country for a given period of time.

 GDP can be measured using the expenditure approach: Y = C + I + G + (X – M).

 GDP can be determined by summing up national income and adjusting for depreciation,
taxes, and subsidies.
 GDP can be determined in two ways, both of which, in principle, give the same result.

GDP: Gross domestic product (GDP) is the market value of all officially recognized final goods
and services produced within a country in a given period of time.

Gross domestic product (GDP) is the market value of all final goods and services produced
within the national borders of a country for a given period of time. GDP can be determined in
multiple ways. The income approach and the expenditure approach highlighted below should
yield the same final GDP number.

Simple view of expenditures: In an economy, households receive wages that they then use to
purchase final goods and services. Since wages eventually are used in consumption (C), the
expenditure approach to calculating GDP focuses on the end consumption expenditure to avoid
double counting. The income approach, alternatively, would focus on the income made by
households as one of its components to derive GDP.

How is the GDP computed?

i. The Expenditure Approach: This approach involves computing the sum of consumption
expenditures by households (C), Investment by private and Government enterprises (I), and
difference between exports (X) and imports (M). It is mathematically represented as: GDP = C
+ I + (X - M)

The expenditure approach attempts to calculate GDP by evaluating the sum of all final good and
services purchased in an economy. The components of U.S. GDP identified as “Y” in equation

2
form, include Consumption (C), Investment (I), Government Spending (G) and Net Exports (X –
M).

Y = C + I + G + (X − M) is the standard equational (expenditure) representation of GDP.

 “C” (consumption) is normally the largest GDP component in the economy, consisting of
private expenditures (household final consumption expenditure) in the economy. Personal
expenditures fall under one of the following categories: durable goods, non-durable
goods, and services.
 “I” (investment) includes, for instance, business investment in equipment, but does not
include exchanges of existing assets. Spending by households (not government) on new
houses is also included in Investment. “Investment” in GDP does not mean purchases of
financial products. It is important to note that buying financial products is classed as
‘saving,’ as opposed to investment.
 “G” (government spending) is the sum of government expenditures on final goods and
services. It includes salaries of public servants, purchase of weapons for the military, and
any investment expenditure by a government. However, since GDP is a measure of
productivity, transfer payments made by the government are not counted because these
payments do not reflect a purchase by the government, rather a movement of income.
They are captured in “C” when the payments are spent.
 “X” (exports) represents gross exports. GDP captures the amount a country produces,
including goods and services produced for other nations’ consumption, therefore exports
are added.
 “M” (imports) represents gross imports. Imports are subtracted since imported goods will
be included in the terms “G”, “I”, or “C”, and must be deducted to avoid counting foreign
supply as domestic.

ii. The Income Approach: This approach measures the income earned by various factors of
production. It is computed as: GDP = Wages (compensation of employees) +Taxes on
production and imports - subsidies +consumption of fixed capital +Net operation surplus/mixed
income

The income approach looks at the final income in the country, these include the following
categories taken from the “National Income and Expenditure Accounts”: wages, salaries, and
3
supplementary labor income; corporate profits interest and miscellaneous investment income;
farmers’ income; and income from non-farm unincorporated businesses. Two non-income
adjustments are made to the sum of these categories to arrive at GDP:

 Indirect taxes minus subsidies are added to get from factor cost to market prices.
 Depreciation (or Capital Consumption Allowance) is added to get from net domestic
product to gross domestic product.

The income approach equates the total output of a nation to the total factor income received by
residents or citizens of the nation. The main types of factor income are:

 Employee compensation (cost of fringe benefits, including unemployment, health, and

retirement benefits);
 Interest received net of interest paid;
 Rental income (mainly for the use of real estate) net of expenses of landlords;
 Royalties paid for the use of intellectual property and extractable natural resources.

All remaining value added generated by firms is called the residual or profit or business cash
flow.

Formula: GDI (gross domestic income, which should equate to gross domestic product) =
Compensation of employees + Net interest + Rental & royalty income + Business cash flow

iii. The Production or Value Added/Output Approach:

This method considers the value of sales of goods and services less the purchase of intermediate
inputs used to produce the final products. Gross domestic product is derived as the net value of
goods and services produced in an economy in a certain period of time (quarterly and annually in
the case of Kenya).

It is compiled as: GDP= Gross Output at basic prices Minus Intermediate Consumption Plus
Taxes less subsidies on product

The output approach is also called “net product” or “value added” method. This method consists
of three stages:

4
  Estimating the gross value of domestic output;
 Determining the intermediate consumption, i.e., the cost of material, supplies, and
services used to produce final goods or services;
 Deducting intermediate consumption from gross value to obtain the net value of domestic
output.

Net value added = Gross value of output – Value of intermediate consumption.

Gross value of output = Value of the total sales of goods and services + Value of changes in the
inventories.

The sum of net value added in various economic activities is known as GDP at factor cost. GDP
at factor cost plus indirect taxes less subsidies on products is GDP at producer price. GDP at
producer price theoretically should be equal to GDP calculated based on the expenditure
approach. However, discrepancies do arise because there are instances where the price that a
consumer may pay for a good or service is not completely reflected in the amount received by
the producer and the tax and subsidy adjustments mentioned above may not adequately adjust for
the variation in payment and receipt.

Other Approaches to calculating GDP

The income approach evaluates GDP from the perspective of the final income to economic
participants.

 Income approach: GDP based on the income approach is calculated by adding up the
factor incomes to the factors of production in the society.
 Expenditure approach: The total spending on all final goods and services (Consumption
goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports
(X) – Imports (M)) GDP = C + I + G + (X-M).
 Depreciation: The measurement of the decline in value of assets. Not to be confused
with impairment, which is the measurement of the unplanned, extraordinary decline in
value of assets.

Gross domestic product provides a measure of the productivity of an economy specific to the
national borders of a country. It can be measured a few different ways and the most
5
 commonly used metric is the expenditure approach; however, the second most commonly
used measure is the income approach. The income approach unlike the expenditure approach,
which sums the spending on final goods and services across economic agents (consumers,
businesses and the government), evaluates GDP from the perspective of the final income to
economic participants. GDP calculated in this manner is sometimes referenced as “Gross
Domestic Income” (GDI).

GDP over time: GDP is measured over consecutive periods to enable policy makers and
economic agents to evaluate the state of the economy to set expectations and make decisions.

This method measures GDP by adding incomes that firms pay households for factors of
production they hire- wages for labor, interest for capital, rent for land, and profits for
entrepreneurship. The “National Income and Expenditure Accounts” divide incomes into five
categories:

 Wages, salaries, and supplementary labor income

 Corporate profits
 Interest and miscellaneous investment income
 Farmers’ income
 Income from non-farm unincorporated businesses

Two adjustments must be made to get the GDP: Indirect taxes minus subsidies are added to get
from factor cost to market prices. Depreciation (or Capital Consumption Allowance) is added to
get from net domestic product to gross domestic product.

Income Approach Formula

GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less
subsidies on production and imports. Alternatively, this can be expressed as:

GDP = COE + GOS + GMI + TP & M – SP & M

 Compensation of employees (COE) measures the total remuneration to employees for

work done.
 Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses.
6
  Gross mixed income (GMI) is the same measure as GOS, but for unincorporated
businesses. This often includes most small businesses.
 TP & M is taxes on production and imports.
 SP&M is subsidies on production and imports.

The sum of COE, GOS, and GMI is called total factor income; it is the income of all of the
factors of production in society. It measures the value of GDP at factor (basic) prices. The
difference between basic prices and final prices (those used in the expenditure calculation) is the
total taxes and subsidies that the government has levied or paid on that production. So, adding
taxes less subsidies on production and imports converts GDP at factor cost (as noted, a net
domestic product) to GDP.

By definition, the income approach to calculating GDP should be equitable to the expenditure
approach (Y = C + I+ G + (X – M)). In practice, however, measurement errors will make the two
figures slightly off when reported by national statistical agencies.

7
2.0 Introduction Sector Analysis.

Economic Performance in most sectors slowed in the first quarter of 2020 compared to the
corresponding quarter of 2019. Real GDP grew by 4.9 per cent during the review period
compared to 5.5 per cent growth in the first quarter of 2019. Though Kenya was somewhat
spared the brunt of the COVID-19 pandemic in the first quarter of 2020, the economy was
affected by the resultant uncertainty that was already slowing economic activity in some of the
country’s major trading partners. During the quarter under review, there was heightened
agricultural activities that significantly anchored the overall economic performance. Agriculture,
Forestry and Fishing sector grew by 4.9 per cent compared to 4.7 per cent in the corresponding
quarter of 2019. The growth was also supported by robust growths in Transportation and Storage
(6.2%), Financial and Insurance Activities (6.0%), Construction (5.3%), Information and
Communication (9.8%) and Wholesale and Retail trade (6.4%). The decelerated growth recorded
in the quarter under review was aggravated by 9.3 per cent contraction in Accommodation and
Food Service activities that were heavily weighed on by corona virus containment measures
instituted in major sources of tourists. This resulted in a steep decline in the volume of
international visitor arrivals in March 2020.

The macroeconomic environment that prevailed in the first quarter of 2020 was premised on the
need to cushion the economy from the anticipated potential shocks related to the COVID-19
pandemic. During the quarter under review, the Kenyan Shilling depreciated against the US
Dollar and Japanese Yen, but gained ground against Euro and the Pound Sterling. Similarly, the
Shilling appreciated against all the regional currencies, most notably against South African Rand
at 6.4 per cent. The Monetary Policy Committee (MPC) lowered the Central Bank Rate (CBR) to
7.25 per cent in March 2020 from 8.25 per cent in February 2020. The CBR was lower in the
review period compared to the first quarter of 2019 (9.0 per cent). The easing of CBR was
mainly geared towards stimulating economic activity amid the outbreak of the COVID-19
pandemic in Kenya in mid-March 2020. Broad money supply increased from KSh 3,415.3 billion
as at March 2019 to KSh 3,661.0 billion as at March 2020. Reduced economic activity was also
manifest in constrained activity at the Nairobi Securities Exchange (NSE). The (NSE) 20 Share
index dropped to 1,966 points in March 2020 from 2,846 points in March 2019. During the
quarter under review, the current account deficit expanded by 10.2 per cent to KSh 110.9 billion
from KSh 100.6 billion in the corresponding quarter of 2019.

8
2.1 Sectoral Analysis

1. Agriculture, Forestry and Fishing Agriculture sector recorded a growth of 4.9 per cent in
the review quarter compared to 4.7 per cent growth recorded in the corresponding quarter of
2019. Production of key food crops showed mixed performances during the quarter in review as
evidenced by movement in their respective prices. Whereas prices of fruits were generally higher
during the period under review, most vegetable prices were lower compared to the first quarter of
2019, implying that supply was relatively adequate. The sector benefited from favourable rainfall
that saw tea production increase from 106.3 thousand metric tonnes in the first quarter of 2019 to
158.6 thousand metric tonnes during the review period. In addition, performance in the sector
was also supported by increased production of sugarcane as evidenced by a 10.2 per cent
increase in the volume of cane delivered to millers. However, in the horticultural subsector, the
volume of cut flowers exported decreased from 49,163 metric tonnes in the first quarter of 2019
to 42,639 metric tonnes.

2.2. Manufacturing

The sector is estimated to have expanded by 2.9 per cent in the first quarter of 2020 compared to
a growth of 3.5 per cent in a similar quarter of 2019. Growth in the sector was mainly supported
by manufacture of nonfood products that increased by 4.6 per cent compared to a growth of 3.3
per cent in the corresponding period of 2019. Growth in the nonfood subsector was driven by a
rebound in cement production and increased activity in the assembly of motor vehicles. On the
other hand, manufacture of food products recorded a slowed growth of 0.3 per cent during the
reference period from 3.8 per cent in the first quarter of 2019. Growth in the subsector was
buoyed by manufacture of sugar, processing of tea and processing of grain mill products.
However, the level of activity in the subsector was subdued by manufacture of bakery products,
processing of coffee and manufacture of fats and margarine which recorded contractions during
the review period. Credit advanced to the sector grew by 15.3 per cent in the first quarter of 2020
compared to a growth of 12.1 per cent in the same period in 2019.

2.3. Construction

In the period under review, the sector registered a slowed growth of 5.3 per cent compared to a
growth of 6.1 per cent registered in the first quarter of 2019. The decelerated growth was
explained by decline in the value of imported construction materials. Importation of fabricated

9
metal products and cement, construction related materials, declined by 11.7 per cent and 38.3 per
cent, respectively. The sector’s growth, even though was slower than in the first quarter of 2019,
was reflected by increase in consumption of cement, which rose by 11.6 per cent to stand at
1,628,362 metric tonnes. The sector’s growth was further supported by increased credit which
grew by 4.2 per cent in the period under review.

2.4. Electricity and Water

Electricity and water supply recorded a decelerated growth of 6.3 per cent in the review period
compared to a growth of 7.8 per cent in the first quarter of 2019. Total electricity generation
expanded by 2.2 per cent in the first quarter of 2020 compared to a growth of 7.0 per cent in the
corresponding quarter of 2019. Growth in the electricity sector was supported by increased
generation of electricity from hydro and geothermal coupled with a decline in generation of
electricity from thermal sources. Generation of electricity from hydro expanded by 29.8 per cent
during the period under review compared to 22.7 per cent growth in the first quarter of 2019
mainly on account of sufficient rainfall received during the preceding quarter. Similarly,
generation of electricity from geothermal grew by 10.6 per cent in the first quarter of 2020
compared to a contraction of 2.3 per cent in the same quarter of 2019. Electricity generated from
thermal sources decreased to 163.9 million-kilowatt hour in the first quarter of 2020 from 311.6
million-kilowatt hour in the first quarter of 2019. The sector’s growth was somewhat constrained
by generation of electricity from wind which contracted by 37.0 per cent from 437.8 million-
kilowatt hour to 275.7 million-kilowatt hour in the first quarter of 2020.

2.5. Transportation and Storage

Activities in the transport and storage sector were relatively slower, recording 6.2 per cent
growth in the quarter under review compared to a growth of 6.4 per cent in the first quarter of
2019. The decelerated growth was against a marginal increase (0.8%) in volume of port
throughput in the first quarter of 2020 to stand at 8,612,484 tonnes from 8,545,503 tonnes
recorded in the same period in 2019. Consumption of light diesel declined by 0.3 per cent to
551.6 thousand metric tonnes in the quarter under review from 553.3 thousand metric tonnes
recorded in the first quarter of 2019. The number of passengers and cargo movement on the
standard gauge railway declined by 9.8 per cent and 7.7 per cent, respectively, during the quarter
under review to stand at 320,730 passengers and 928,054 tonnes of cargo from 355,554
passengers and 1,005,803 tonnes of cargo registered in the same period in 2019.
10
2.6. Accommodation and Food Service

Accommodation and food service activities contracted by 9.3 per cent in the first quarter of 2020
compared to a growth of 11.0 per cent in the first quarter of 2019. The activity has been
adversely affected by Covid-19 pandemic in many ways as international travels were either
cancelled or suspended, hotels closed or scaled down their operations for indefinite period, and
movement restrictions imposed in nearly all the countries. Measures imposed by countries to
mitigate the spread of Covid-19 resulted to a decline in number of international visitor arrivals
through the two major airports from 364,744 in the first quarter of 2019 to 294,053 in the review
period.

2.7. Financial and Insurance

The sector grew by 6.0 per cent during the quarter under review compared to 6.3 per cent in
2019. Broad money supply (M3) expanded from KSh 3,415.32 billion in March 2019 to KSh
3,661.01 billion in March 2020. Net foreign assets increased to KSh 769.72 billion in March
2020 from KSh 722.0 billion in March 2019.

During the quarter under review, the Central Bank of Kenya (CBK) adopted accommodative
monetary policy stance to cushion against systemic issues in the banking system due to the
Covid-19 pandemic. In March 2020, CBK revised the Central Bank Rate (CBR) downwards to
7.25 per cent, from 8.25 per cent in February 2020, compared to 9.00 per cent in March 2019.
Figure 2 shows the trends in interest rates from January 2019 to March 2020. The savings rate
reduced from 5.05 per cent in March 2019 to 4.15 per cent in March 2020, while the lending rate
dropped to 12.09 per cent from 12.51 per cent in March 2019. The 91-Days treasury bill rate
increased to 7.29 per cent at end of review period from 7.13 per cent in March 2019. The CBK
reduced the Cash Reserve Ratio (CRR) requirement for banks to 4.25 per cent from 5.25 per cent
with aim of injecting additional liquidity to the banking sector.

3.0 Leading Economic Indicators

The Consumer Price Index (CPI) increased marginally from 108.27 points in June 2020 to
108.35 points in July 2020. The overall rate of inflation dropped marginally from 4.59 per cent to
4.36 per cent during the same period. In July 2020, the Kenyan Shilling depreciated against all
major trading currencies. The average yield rate for the 91-day Treasury bills, which is a
benchmark for the general trend of interest rates dropped from 7.14 per cent in June 2020 to 6.24
11
per cent in July 2020, while the inter-bank rate dropped from 3.27 per cent to 2.12 per cent over
the same period. The Nairobi Securities Exchange (NSE) 20 share index decreased from 1,942
points in June 2020 to 1,804 points in July 2020.At the same time the total number of shares
traded also decreased from 553 million shares to 517 million shares during the same period. The
total value of NSE shares traded increased from KSh 12.30 billion in June 2020 to KSh 13.47
billion in July 2020. Broad money supply (M3), a key indicator for monetary policy
formulation, increased from KSh 3,863.63 billion in June 2020 to KSh 3,905.44 billion in July
2020. The value of Gross Foreign Exchange Reserves decreased from KSh 1,521.81 billion in
June 2020 to KSh 1,456.36 billion in July 2020. The value of Net Foreign Exchange Reserves
dropped from KSh 887.43 billion to KSh 839.57 billion during the same period.

3.1 Agriculture

The quantity of coffee auctioned at the Nairobi Coffee Exchange was 1,310.43 MT in July 2020
while the average auction price stood at KSh 357.53 per kilogram over the same period. The
quantity of produced tea decreased from 47,003.93 MT in May 2020 to 46,377.67 MT in June
2020. The price of processed tea dropped from KSh 210.37 per kilogram in May 2020 to KSh
197.62 per kilogram in June 2020. The quantity of cane deliveries increased from 572.37
thousand metric tonnes in June 2020 to 625.61 thousand metric tonnes in July 2020. The
quantity of cut-flower exports in July 2020 was 10,449.18 MT while its value was KSh 6,792.95
million. The volume of vegetable exports decreased slightly from 4,677.39 MT in June 2020 to
4,191.00 MT in June 2020. The value of vegetable exports also decreased from KSh 1,741.33
million to KSh 1,736.87 million during the same period

3.2 International Trade

Volume of trade rose from KSh 169.65 billion in June 2020 to KSh 190.76 billion in July 2020.
The value of total exports increased from KSh 48.05 billion in June 2020 to KSh 52.00 billion in
July 2020 while the value of imports increased from KSh 121.60 billion in June 2020 to KSh
138.76 billion in July 2020. Domestic exports by Broad Economic Category (BEC) indicated
that food and beverages was the main export category in July 2020 accounting for 46.06 per cent
of exports, while non-food industrial supplies accounted for 22.29 per cent of the total exports.

Quantity of coffee exported decreased from 5,414.08 MT in June 2020 to 3,546.25 MT in July
2020 and its value dropped from KSh 2,956.33 million to KSh 1,799.26 million over the same

12
period. The quantity of tea exported increased from 46,399.01 MT in June 2020 to 46,850.57 MT
in July 2020. However, value of exported tea dropped from KSh 10,293.00 million to KSh
10,013.83 million over the same period.

Imports by BEC indicate that non-food industrial supplies were the main import category in July
2020 with a share of 39.35 per cent. Machinery & other capital equipment; Fuel and lubricants;
and transport equipment constituted 19.26, 12.32 and 8.24, per cent of the total value of imports,
respectively. Foods and beverages accounted for 9.77 per cent of the total imports in July 2020.

3.3 Energy

Total local electricity generation increased from 912.90 million KWh in June 2020 to 969.14
million KWh in July 2020. In the international market, the price of the OPEC crude oil basket
increased from US Dollars 37.05 per barrel in June 2020 to US Dollars 43.42 per barrel in July
2020. The national average domestic retail oil prices of motor gasoline premium rose from
KSh 90.34 per litre in June 2020 to KSh 101.37 in July 2020. The price of light diesel oil rose
from KSh 75.88 per litre in June 2020 to retail at KSh 92.81 per litre in July 2020. On the other
hand, the average price for Kerosene rose from KSh 63.79 per litre to retail at KSh 66.41 per litre
during the same period. Charcoal prices averaged KSh 57.37 per Kg in July 2020. The price of a
13-Kg cylinder of gas averaged KSh 2,075.00 in July 2020.

3.4 Manufacturing, Building and Construction

The quantity of cement produced increased from 510,919 MT in June 2020 to 514,233 MT in
July 2020. Consumption of cement dropped from 508,298 MT in June 2020 to 447,902 MT in
July 2020. Sugar production increased from 45,458 Metric tonnes in April 2020 to 46,350 Metric
tonnes in May 2020. Production of assembled vehicles decreased from 830 units in March 2020
to 669 units in April 2020. Milk uptake in the formal sector dropped from 42.51 million litres in
May 2020 to 40.25 million litres in June 2020.

3.5 ICT, Tourism and Transport

The total number of mobile money transactions was 157.76 million in July 2020 while their
value stood at KSh 450.98 billion. The value of imports for telecommunication equipment rose
from KSh 2,651.51 million in June 2020 to KSh 3,115.44 million in July 2020.

13
The total number of visitors arriving through Jomo Kenyatta (JKIA) and Moi International
Airports (MIA) decreased from 1,229 persons in May 2020 to 536 persons in June 2020. The
number of passengers who landed at Jomo Kenyatta International Airport (JKIA) increased from
1,232 persons in May 2020 to 2,240 persons in June 2020, and passengers who embarked
increased from 1,617 persons in May 2020 to 3,905 persons in June 2020. Total monthly
throughput at the port of Mombasa rose from 2,752.41 thousand metric tonnes in June 2020 to
3,012.15 thousand metric tonnes in July 2020.

14
4.0 SECTORS AFFECTED MOSTLY BY THE COVID-19

Kenya’s GDP growth averaged 5.4% in 2019 and had been projected to grow at about 5.7% in
2020 amid robust private consumption, higher credit growth, and rising public and private
investment. Further, as the COVID-19 pandemic hampers revenue base collections, the negative
outlook on Kenya’s financing risks becomes exposed. As such, the large gross borrowing
requirements, which include amortization of external bilateral debt and the need to refinance a
large stock of short-term domestic debt have seen rating agency Moody’s change Kenya’s
sovereign credit outlook to “negative” from a previous outlook of “stable”. In light of the
COVID-19 pandemic, GDP growth is expected to decline to 1.0%.

This is majorly due to:

• Reductions in household and business spending (about 50%) due to liquidity constraints;

• Disruption in supply chain for key inputs in machinery and chemicals (about 30 percent);

• Decline in imports from affected countries (about 3.1% estimated decline in total import value);
• A decline in tourism activity (about 20 percent) due to a standstill in the global aviation
industry;

• A decline in government spending in different sectors due to a USD 658m shortfall in revenue
collection in the remaining 3 months to the 2019/20 fiscal year end.

4.1 Impact on Agricultural Sector

Agriculture solely contributed about 32.4% to Kenya’s GDP in 2019.A locust swarm affecting
domestic agricultural production will likely hit hard agricultural growth in 2020. Further,
weakened growth prospects for key trading partners in North America and Europe due to the
COVID-19 pandemic is also expected to limit demand for Kenya’s exports of coffee and
horticultural products over the short term.

• The Vegetables and fruits markets remain with minimal activities as exporters are shipping
only 25% to 30% of their normal capacity.

• Kenya’s flower exports have so far recorded a more than 50% drop in exports with indications
that production is currently at less than 10% and facing the risk of total collapse.

15
4.2 Impact on Tourism and Hospitality sector

Kenya’s tourism industry registered improved performance in 2019 mainly attributed to growth
in aviation, investor confidence and withdrawal of travel advisories. Tourism earnings increased
by 3.9% from KES 157.4bn in 2018 to KES 163.6bn in 2019 while the number of international
arrivals increased by 1.2% from 2m arrivals in 2018 to 2.1m arrivals in 2019. As such the sector
contributed to about 8.8% of Kenya’s GDP in the same period and over 1.1m jobs to the Kenyan
economy.

• Due to the COVID-19 pandemic, leisure and conference tourism, both external and domestic
face possible collapse owing to travel restrictions which has completely stopped international
tourist arrivals, while social distancing measures have affected domestic tourism and
conferencing. Given the tourism sector’s strong linkages with the wider economy, reduced
tourist arrivals will impede consumption of various goods and services and the incomes of
workers in related sectors. • The Kenyan government has set aside KES 500m to help the tourism
sector recover post the coronavirus pandemic.

4.3 Impact on Manufacturing

Manufacturing is one of the Big Four Agenda for the Kenyan government and therefore critical
for Kenya’s economic growth and development. The manufacturing sector contributed about
7.7% to Kenya’s GDP in 2019.

• The COVID-19 pandemic presents a mixed impact to the sector with certain subsectors likely
to boost production to meet essential goods demand, while others may suffer depressed demand
and production activity.

• Food and health products manufacturing are likely to stay afloat. Food production will be
boosted by persistence of domestic demand for essential food items, while health products
manufacturing will benefit from expected expansion in manufacturing of essential medical and
protective equipment to deal with the unfolding pandemic.

4.4 Impact on construction and real Estate sector

The construction and real estate sectors combined contribute about 12.4% (USD 11.3bn) to
Kenya’s GDP.
16
• The major interruptions on these sectors include shorter working hours, decline in construction
materials due to supply disruptions, and lower demand for housing. The public housing project
will also be impacted as the government pulls together funds to deal with the scourge and
respond to emergency interventions.

• Further ramifications on the construction and real estate sectors include a decline in project
financing as lenders would be uneasy to finance construction projects because of the uncertainty
surrounding the completion of projects.

• Government infrastructural projects are also expected to stall due to a shortfall in revenue
collections by USD 658m and as the government expands spending on the health sector to
combat the virus.

• Financial uncertainty is expected to dampen uptake of houses in the real estate sector in 2020.
Given that real estate buying is often characterized by speculation, most investors are already
counting losses as the COVID-19 pandemic impedes access to credit. Housing being part of
Kenya’s Big Four Agenda, the government is expected to extend critical intervention to the
sector throughout the pandemic.

4.5 Impact on Transport- Aviation

The Kenyan government temporarily suspended all international flights starting 25 March 2020
until further notice as a precaution against the deadly COVID-19 pandemic. Consequently,
Kenya Airways (KQ) has applied for a state bailout to avoid its collapse as aircrafts were
grounded and revenue sources cut-off.

• The suspension of international flights saw the airline send home most of its workers on unpaid
leave as from 1 April, 2020, the management team taking a 75% pay cut and the CEO getting an
80% pay cut. For the past 3 months (January to March 2020), the airline has experienced 3.5m
fewer passengers resulting in a USD 0.73 bn revenue loss, risking 193,300 jobs and USD 1.6 bn
in contribution to Kenya’s economy.

• One job in the airline transport industry supports approximately another 24 jobs in the
economy. As such, a collapse of the airline transport industry would translate to significant
losses in other sectors of the economy.

17
4.6 Impact on Equity Market

Kenya’s first major economic impact due to COVID-19 was on the stocks market. Trading was
halted at the Nairobi Securities Exchange (NSE) after the NSE 20 index dropped more than 5%
with stocks such as Safaricom and KCB declining by 5.4% and 7.0%, respectively on 13 March
2020, the first day a COVID-19 case was reported in the country.

• As of day close 08 May 2020, the bourse had fallen even more steeply with the NSE 20 share
index having dropped by 26.05% on a year to date (YTD) basis, as investors, especially foreign
ones react to the evolving pandemic.

• Most investors have since the onset of the pandemic indulged in a net selling position with a
preferred option of purchasing fixed income securities due to uncertainty in the market.

4.6.1 Government Intervention Measures

To navigate through the crisis, governments need to provide a bridge to get the private sector to
the other side of the pandemic in reasonable shape. Unlike the 2007/2008 financial crisis, the
drawback does not originate from the financial crisis and as such, governments would want to
put a keen eye on fiscal policies as much as central banks have a great role to play in terms of
supporting liquidity.

The Kenyan government has put in place several fiscal, monetary and institutional policies in
combating the COVID-19 pandemic. However, the Government has been running a budget
deficit of around 7% of GDP which raises concerns around how the country can afford to cut tax
earnings without making efforts to cut spending, especially the non-essential kind.

The International Monetary Fund (IMF) has approved a KES 79.3 billion disbursement as part of
the Rapid Credit Facility (RCF) to Kenya to help in fighting the COVID-19 pandemic. At the
start of April 2020, the government also received KES 5.3bn from the World Bank and KES
7.4bn from the Central Bank to help navigate through the COVID-19 storm. The funds can
indeed have a significant impact but this will depend on how the funds are spent and on whether
the government is able to implement additional, more inclusive measures to counter the effects
of COVID-19.

18
REFERENCES

• African Union: Impact of the Coronavirus (COVID-19) on the African Economy

• Central Bank of Kenya - https://www.centralbank.go.ke/releases/weekly-bulletin/

• Cytonn Q1’2020 Markets Review- https://cytonnreport.com/research/cytonn-q12020-markets-

review#global-markets-review

• Deloitte Kenya Tax Alert (COVID-19) Government Measures publication

• ECA Report – COVID-19 in Africa: Protecting lives and Economies

https://www.tralac.org/documents/resources/COVID-19/3293-COVID-19-protecting-african-
lives-andeconomies-uneca-april-2020/file.html

• Economist Intelligence Unit – Kenya Country Report, April 2020

• Fitch Solutions: Quarterly Sub-Saharan Africa Outlook; Macro Implications of and Policy
Responses To COVID-19 • United Nations; World Economic Situation and Prospects 2020

• Fitch Solutions Kenya Country Risk Report (15/04/2020)

• International Monetary Fund (IMF), 2020. World Economic Outlook, April 2020: The Great
Lockdown. Available [Online]. https://www.imf.org/en/Publications/WEO/
Issues/2020/04/14/World-Economic-Outlook-April-2020-The-Great-Lockdown-49306

• International Monetary Fund (IMF), 2019. Sub-Saharan Africa Economic outlook. Available
[Online]. https://www.imf.org/en/Publications/REO/SSA/

• Kenya Bureau of Statistics- https://www.knbs.or.ke/data-releases

• Ministry of Health Kenya - http://www.health.go.ke/COVID-19/

• Parliamentary Budget Office Special Bulletin on the COVID-19 Global Pandemic; impact to
the economy and policy options.

• The Economics of a Pandemic: the case of COVID-19; Paolo Surico and Andrea Galeotti
Professors of Economics at London Business School

• World Health Organisation- https://www.who.int/emergencies/diseases/novel-coronavirus-

2019

19