Diaspora remittances to Kenya to drop due to coronavirus

Edwin Dande, CEO of Cytonn Investments. The firm says with Europe feeling the effects of coronavirus, the decline in economic activities globally will result into a massive reduction in disposable incomes. PHOTO | FILE |  NATION MEDIA GROUP

Diaspora remittances to Kenya to drop due to coronavirus

Diaspora remittances to Kenya is expected to fall to its lowest as the consequences of lockdown in Europe due coronavirus. Diaspora remittances stood at Sh280 billion last year.

Recently the remittances have become the largest contributor to forex reserves, which the Central Bank of Kenya (CBK) uses to stabilise the currency.

UNCERTAINTY

With the rising uncertainty on global markets, the CBK has indicated that it was seeking to purchase Sh40.5 billion from banks in the next four months to bolster its dollar reserves which stood at Sh8.4 billion as at March 13.

According to an investment firm Cytonn Investments, with Europe feeling the effects of coronavirus pandemic, the decline in economic activities globally will result into a massive reduction in disposable incomes

“This coupled with increased prices of household items abroad might see a reduction in money expatriated into Kenya,” said Cytonn report.

Immediately the first case of coronavirus was reported, the stock markets declined with stocks such as Safaricom and Kenya Commercial Bank declining by 5.4 per cent and 7 per cent respectively in a day.

Trading in the Nairobi Security Exchange 20 was halted on March 13, after the NSE 20 dropped more than 5 per cent as per the provisions of rule 9.4.1 (ii) of the NSE Equity Trading Rules.

EUROBOND YIELDS

On the bond front, Eurobond yields increased significantly, an indication that investors are now attaching higher risk premium on the country due to the anticipation of slower economic growth attributable to locust invasion.

According to Cytonn, coronavirus has disrupted supply chain with the manufacturing sector suffering heavily as imports from China account for approximately 21 per cent of Kenya’s total imports.

“The low supply of imports from China as well as South Korea especially in terms of electronics could see process rise to exorbitant levels,” said the Cytonn report.

The Kenya Association of Manufacturers has warned that the outbreak could cause a shortage of intermediate goods used to manufacture products that are exported.

NEGATIVE IMPACT

According to a report by the Kenya Private Sector Alliance (KEPSA), 61 per cent of businesses surveyed reported that the coronavirus has had a direct negative impact on their businesses.

KEPSA warns that if the situation gets worse most companies will ask employees to work from home thus negatively affecting business in the service sector. There is also likelihood of stock outs and delayed deliveries due to lockdown, reduced demand of export products and capital flow and increased cost of goods.

Travel restrictions and difficulty in obtaining credit from financial institutions as well as reduced ability to meet loan interest payments and slowed investments appetite from foreign and local investors could have a long lasting impact on the economy.

Already tourism sector which contributed about 1.3percent to Kenya’s Gross Domestic Product (GDP) in the third quarter of last year is facing hard times due to lockdown in major economies such as Italy where tourists originate from.

Agricultural sector is also hard hit with a drop in export volumes, freezing of orders on fruits and vegetables to China and a hike in the prices of imported inputs used for food processing.

MEGA PROJECTS

Construction sector will also be affected as mega projects will be postponed and thus impacting on revenues in the industry.

Professional services have recorded delays in payment from clients in China, which in return has caused delay in project implementation resulting into negative impact on revenue.

Cytonn is concerned that coronavirus could reduce Kenya’s GDP growth to a range of 4.3 percent to 5.2 per cent this year.

Cytonn wants government to grant tax breaks to companies seeking to increase their capacity to produce import substitute goods by zero rating Value Added Tax (VAT) for three months.

It also calls for release of VAT refunds to assist businesses manage cash flow, banks to give concessionary loans at low rates , provide a Business Stabilisation Fund to cushion the impact of coronavirus to Small and Medium Enterprises.

Other measures include reduction of corporate tax for industries that have highly been affected such as aviation or waiving corporate tax as well as reduction in payroll tax for three months for low income workers and strengthen local supply chain for traders to be able to access import substitute goods.