Poverty and Distributional Effects of COVID-19 on Households in Kenya
Date
2020-11-29
Authors
Nafula, Nancy
Kyalo, Dennis
Munga, Boaz
Ngugi, Rose
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research consortium
Abstract
With new infections on the rise, it is a race against time for governments to re-look
at some policy interventions necessary to provide appropriate coping and recovery
mechanisms to respond to the crisis. Informed by the most recent Kenya Integrated
Household Budget Survey (KIHBS) 2015/16 data and assumptions on the possible
effects of the pandemic on the income of individuals, this paper provides estimates of
the poverty impact and simulations of the fiscal costs of mitigating the effects in Kenya.
The analysis is informed by microsimulations and Foster, Greer and Thorbecke indices
to analyze the effects of the pandemic on poverty. This study estimates that national
absolute poverty in Kenya may have declined by 7.2 percentage points from 36.1% in
2015/16 to 28.9% in 2019 (pre-COVID). However, as a result of the pandemic, absolute
poverty has increased to 41.9% in 2020, effectively wiping out progress made since
2015/16. This is because households have lost incomes from both labour and nonlabour sources amounting to 11.7% of Gross Domestic Product (GDP) or equivalent of
Ksh 49.1 billion relative to estimated pre-COVID economic situation. Nationally, about
37.7% of the population (18.0 million people) experienced a loss of their labour and
non-labour incomes. The key drivers of the decline in incomes are loss in employment
and reduction in earnings majorly due to reduction in labour productivity and trade
returns due to the April-June lockdowns. The major income effect to rural areas is from
reduced remittances and gifts. To keep poverty headcount ratio at 28.9%, it would
cost the Government of Kenya 6.3% of monthly GDP (Ksh 26.4 billion per month) at a
uniform universal cash transfer of Ksh 773 targeting all poor households while a cash
transfer targeting older persons at Ksh 2,000 per person would cost 0.9% of monthly
GDP (Ksh 3.8 billion per month) to keep poverty levels at relatively lower levels of
40%. Other Government interventions that have worked to reduce poverty include
reduction of SMEs turnover tax from 3% to 1% (40.1%) and exemptions/reductions
in PAYE (39.5%) cost 1.3% and 2.1% of monthly GDP, respectively. In addition to the
social protection approach and tax reliefs, easing restrictions while observing the
containment measures, including encouraging flexible working policy, would allow
households to earn an income.