Poverty and Distributional Effects of COVID-19 on Households in Kenya

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...