How will the Coronavirus impact Kenya’s economy and which sectors could be impacted?
The Coronavirus poses a threat to the world’s economy. A reduction in the movement of people and goods will lead to lower foreign investment and transactions. Global travel bans and social distancing measures, which are essential to fight the pandemic, are sharply reducing demand in many key sectors such as tourism, hospitality, transportation and entertainment.
Standard Bank of South Africa for instance expects this pandemic to shave off 0.3-0.4 percentage points off growth in Kenya. It is expected that the impact on Kenya’s economy could be broad-based.
The sector most directly impacted at present is tourism and hospitality, which accounts for roughly 10% of the country’s GDP. Foreign tourists have cancelled bookings, while the Kenyan government recently banned all flights from jurisdictions that have cases of the COVID-19.
Tourism receipts from Kenya were around USD 1.5bn last year. As a percentage of total exports of goods and services, tourism represents 13.1%.
The sector that has also been affected is floriculture: nearly a third of all cut flowers imported into Europe come from Kenya. European demand for flowers has recently plummeted due to increasing levels of quarantine and social distancing.
Firms in the industrial and manufacturing sectors are also facing headwinds associated with global supply chain disruptions.
More generally domestic demand for goods and services (especially non-essential discretionary spending) may be impacted.
Finally, diaspora remittances which account for 2.9% of the Kenyan GDP could decline as a result of slower growth worldwide and therefore impact economic growth in Kenya.
What can businesses do to weather an economic downturn?
Many businesses may not have enough liquidity to weather dramatic shortfalls in demand. They need to be prepared for such an eventuality.
1. Thoroughly review your business to assess the risk and impact of COVID-19 on operations and cash flow.
2. Review budgets and eliminate non-essential expenses.
3. Optimise inventory levels in line with reduced demand for certain goods.
4. Scout for alternate suppliers to reduce dependency.
5. Consider alternate sales and distribution channels including digital.
6. Review the ability of the business to comply with its contractual (employment, tenancy and other commercial agreements) and financial obligations (loans, bank facilities).
7. In cases where the company’s contractual obligations may not be serviced as per the agreed terms, engage the counterpart (landlord, lender, partner,etc.) as soon as possible to reach an amicable resolution. Remember that many other businesses will face similar challenges and have similar requests so engage early and amicably to maximise your chances of reaching a fruitful agreement.
8. Ensure availability and access to capital to withstand shocks and meet financial obligations. Maintain a savings cushion (preferably in a tier-1 institution) that is readily available if required.
9. Scale back or defer aggressive expansion plans or speculative ventures.
What are the implications of the recent Government directive for both employers and employees?
Employers are advised to provide the right working conditions and flexibility to employees to ensure their safety, health and welfare in line with the Occupational Health and Safety Act and the recent Government directive.
1. Workplace and working conditions: The Occupational Safety and Health Advisory on Corona Virus (COVID-19) dated 14th March 2020 by the Directorate of Occupational Safety & Health Services (DOSH Advisory 2020 - https://labour.go.ke/wp-content/uploads/2020/03/CORONA-VIRUS-Answers-Fac...) requires the employer to promote and practice hygiene measures such as to provide clean and well-maintained hand washing facilities and offer alcohol-based sanitizers. When regular facilities are not available, ensure that there is regular cleaning of objects that are frequently touched, make sure ventilation systems are working properly and limit all forms of employee gatherings.
2. Remote working: The Government has requested employers to encourage employees to work remotely to mitigate the spread of the COVID-19 in the workplace. Furthermore, when practical, companies should aim to conduct business meetings with the use of technology. Employers should also consider allowing non-essential staff to remain away from the workplace for the time being. Employees working from home or remotely are entitled to pay during this period.
3. Self-isolation and sick-leave: in view of the fact that WHO has declared the COVID- 19 as a pandemic and self-isolation is critical, as a preventive measure pursuant to the Government directives, an employer should consider dealing with this period as paid compassionate leave. Employers should also relax sick leave rules to allow employees to follow the quarantine rules, if they have travelled or have symptoms of the Coronavirus without penalising them. Should the absence period extend and sick leave days become exhausted, employers and employees can negotiate a variation of the employment contracts in accordance with Section 10 (5) of the Employment Act, to either provide for a reduction of salary or continued payment of salary during the sick leave period.
4. Redundancy, termination or salary change: any action by the employer in this regard needs to be guided by the Employment Act and the employee’s employment contract. Employers cannot vary the terms of an employee’s contract without prior approval of the employee. Refer to next question for further details.
5. What about force majeure? Can an employer invoke this to terminate employment? In legal terminology, the law of frustration would be applicable. The concept of frustration of a contract refers to the situation whereby a contract ceases to bind the parties if, through no fault of either of them, unforeseen circumstances beyond the control of the parties arise in which a contractual obligation becomes impossible to perform. This applies to a contract of employment. Frustration discharges the parties from further liability under the contract. For its successful application, frustration should not be due to the act of the party seeking to rely on it. The global pandemic COVID-19 together with subsequent directives from the Government of Kenya would amount to a frustrating event in respect of employment contracts. For the doctrine of frustration to be successful, it is required that the event have some character of permanence. It is arguable that an employer would be discharged from paying salaries in circumstances where, for a prolonged period of time, the employer has not been in a position to carry out any income generating activities.
6. Would the employer then be required to make severance payments in these circumstances? It is arguable that as a result of frustration of employment contracts due to no fault of either the employers and employees (in this case COVID 19), there would be no requirement to make any severance payments. To mitigate against the effects of a prolonged shut down, it is imperative that employers and employees vary the terms of the contracts to provide for reduced pay. In addition, employers can in consultation with employees agree to unpaid leave where there is a prolonged period of closure of the business. This would be a viable option for those in the hospitality and airline business.
What is the Government doing to assist businesses and individuals weather the downturn?
Governments around the world have announced bold monetary and fiscal measures to stimulate the economy, ease liquidity and provide a cushion to businesses. The Kenyan Government has not yet provided clarity on fiscal stimulus measures and given the current fiscal and budgetary situation, it may not be in a position to announce effective steps. The private sector has however engaged Treasury to propose certain tax incentives and increase flexibility around statutory requirements.
Meanwhile, the Central Bank of Kenya, in partnership with the private sector, has taken the following steps:
1. Mobile money: Until 30th June 2020, all charges for mobile money transactions up to Kshs 1,000 will be waived. Transaction limits have been increased to Kshs 150,000. The daily limit for mobile money transactions has now increased to Kshs 300,000 and no monthly limit for mobile money transactions will apply.
2. Commercial Banks: Banks have agreed to provide relief to borrowers on their personal loans based on their individual circumstances arising from the pandemic, and will review requests from borrowers for extension of their loans for a period of up to one year.
SMEs and corporate borrowers can contact their banks for assessment and restructuring of their loans based on their respective circumstances arising from the pandemic. Banks will meet costs arising from the extension and restructuring of the loans. Examples of restructuring options include loan tenor extension, moratorium on principal and/or interest, stepped up repayment profile. Please however note that the onus will be on the client/borrower to demonstrate how his or her situation has been affected by the pandemic. For instance, a farmer exporting premium roses to Europe will be well placed to explain how the pandemic has disrupted his business. On the other hand, a farmer selling fruit and vegetables to local grocers may find it harder.
Should we expect any disruptions in Government services?
For now, the Government of Kenya has announced that the following offices and services will be suspended:
1. The Business Registration Service (BRS) temporarily suspended the services provided at Sheria House with effect from 16 March 2020. The online services platform will continue to be accessible.
2. The Ministry of Lands and Physical Planning declared that all lands offices and registries will be closed for 28 days effective 17 March 2020.
3. The Chief Justice and the National Council on the Administration of Justice announced various measures relating to Kenyan courts for two (2) weeks effective 16 March 2020.
In spite of these disruptions, individuals and businesses still need to ensure they comply with their regulatory, legal and contractual obligations. Failure to comply could result in sanctions and penalties.
What next? When will we have more certainty and clarity on the outlook?
The spread of the Coronavirus in Kenya remains contained for now. Assuming the Government directives are adhered to by members of the public, we should be hopeful for a clearer outlook within 1-2 months. Historically, pandemics such as the Spanish flu lasted 2-3 months.
Having said that, it is unlikely that economic activity will rebound fast; many countries will be reluctant to reopen their borders and allow travel to resume until we have a global resolution to the pandemic. As such, businesses and individuals should be prepared for a difficult economic environment for the next 3-6 months.
How can I obtain more information or advice on employment or business matters?
The Jamat is encouraged to contact the Economic Planning Board on +254(0)735 681 105 or on email: at [email protected] for any further queries or confidential advice on any of the above. The institutions are closely monitoring the situation and will keep the Jamat informed of any further developments in a timely manner.