Kenya’s economic stimulus package 2 will fall far short

Ideas & Debate

Kenya’s economic stimulus package 2 will fall far short

National Hygiene Programme
Youth hired under the National Hygiene Programme waiting to be deployed to various parts of Nairobi. The project seeks to provide jobs to thousands of youths in counties hardest-hit by coronavirus. PHOTO | JEFF ANGOTE 

On May 23, President Uhuru Kenyatta announced a Sh53.7 billion Economic Stimulus Package (ESP 2). This came a few weeks after he announced a raft of tax and expenditure measures to cushion the economy from the impact of the Covid-19 pandemic, his first ESP as president.

The focus of ESP 2 was infrastructure, employment, education and health amongst other areas. However, it is my opinion that ESP 2 will be ineffective as it does not address consumer demand and investment spending.

I draw reference to the simplest definition of an Economic Stimulus Package according to Investopedia – “A package of economic measures put together by a government to stimulate a struggling economy.” According to Keynesian theory (advanced by John Maynard Keynes), Government should focus on implementing monetary policy and fiscal means including increased expenditure and tax cuts aimed at increasing private sector consumption and investment spending.

ESP 1 that included tax cuts and increased Government expenditure with the support of monetary authorities that cut the Central Bank Rate (CBR) and Cash Reserve Ratios (CRR) was a step in the right direction as it was directed at increasing both consumer demand and investment spending.

While many say that the Covid-19 pandemic has created an economic crisis, I would say that it has not created but merely exposed the ineffectiveness of Government’s expenditure. In effect, this ESP will have minimal impact on overall economic growth in the medium and long-term.


It is true that the pandemic has resulted in a number of businesses closing and thousands of jobs lost, this is not solely its creation. Government has failed to create a conducive environment for businesses to prosper including a punitive tax regime and has failed to create adequate employment or entrepreneurship opportunities for Kenyans. The pandemic has just made a bad situation worse.

Ironically, this is the third “Economic Stimulus Package” (ESP) announced by Mr Kenyatta, with the first and most effective traced back to his tenure as Finance Minister in Mwai Kibaki’s Government in his 2009/2010 budget speech.

Positive signs of economic recovery in the first decade of the 21st Century were erased by ethnic violence at end of 2007 and the beginning of 2008 which followed the disputed outcome of the 2007 general election.

Kenya like most countries in the developing world were still feeling the effects of the global economic recession that started in 2008.

In his 2009/10 budget speech, the word “stimulus” was used no less than eight times either for emphasis or the importance accorded to jump-starting the faltering economy. A few things caught my eye as I went through the 2009/10 budget speech statement:

“We plan to implement a fiscal stimulus package that focuses on sectors that will generate maximum benefit. As such, we have had to strike a balance between supporting growth and maintaining medium-term debt sustainability. Budgets are about priorities given the reality that financial resources are limited.”

This summarises the primary purpose of a stimulus package, maximum benefit to its target while maintaining debt sustainability.

I do not believe that this round of ESP will be as effective as the one in 2009 or even the one in March 2020 for several reasons the first being it does not address the significant decline in household expenditure and investment spending. Expenditure on infrastructure, education, health, agriculture, environment and water should not be part of a stimulus package but areas of continuous expenditure as they form the basic foundation of economic growth. Instead, the Government should be addressing the issues of long-term employment or entrepreneurship opportunities.

Total ESP funding amounts to Sh85.7 billion including Sh53.7 billion listed as the total cost of post Covid-19 ESP Programme. Sh 32 billion as other additional expenditure as well as Sh100million as donor financed project.

The National Treasury estimates that Sh28.9 billion will be made available by restructuring the 2020/21 fiscal budget. The difference of Sh43.6 billion will be funded through donor support (Sh5.2 billion), the sports fund Sh5 billion, the road annuity fund (Sh7 billion) and the Nairobi Metropolitan Fund (Sh26.4 billion). This leaves a deficit of Sh12.3 billion which it states will be funded by surpluses from state corporations. This funding structure raises questions on the unpreparedness of the Government to deal with unforeseen circumstances that require emergency funding.

The National treasury showed a realisation of the Government’s financial position in its 2009 ESP.

“Therefore, faced with the current economic challenges and bearing in mind that raising taxes is not a prudent option under the current circumstances, we as a government, chose to partly accommodate the temporary financing shortfalls with savings arising from rationalisation of government expenditures to remove waste and non-priority expenditure. For the balance of the financing shortfall, we have adopted a programme of responsible borrowing.”

This does not appear to be the case at present with the Government appearing to be oblivious of its current financial position defined by a growing budget deficit sparked off by rising expenditure and fast falling revenues.

D’Souza is head of research at Sterling Capital.

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