Effects of The Pandemic on Household Savings

Effects of The Pandemic on Household Savings

At Spurt! We are always looking to amplify solutions to critical and specific challenges in Sub Saharan Africa. This week, we reviewed Kenyan’s with over $1000 in the bank by Charles Mwaniki from Business Daily. According to the Central Bank of Kenya, the number of accounts holding $1000 and above increased by 8.7% to 1.69 million, representing the highest number of high-quality accounts the country has experienced in the past three years. It was expected that with the layoffs, job cuts and closure of businesses, the number of accounts holding more than $1000 would decrease, however, analysts attribute the increase to reduced spending by salaried workers.

The imposition of lockdown measures and restriction in movement also meant that reduced economic activity led to subdued demand for certain goods and services that could no longer be accessed. While the increased household savings is an interesting surprise, it is critical to note that this only represents 0.035% of Kenya’s population. According to data from the World Bank, the gross domestic savings rate of Kenya, which represents savings of household sector, private corporate sector and public sector, stands at 4.5%. This means that the increased savings during the pandemic year represent a very small section of Kenya’s population.

Sub-Saharan Africa has a lower savings rate compared to other regions in the world. According to estimates by the World Bank, gross domestic savings in the region averaged about 21% of GDP compared with 40% registered in the Middle East and North Africa and 35% in East Asia and the Pacific.

In some countries, the rates are even on the decline with attribution to different factors. South Africa accounts for almost 40 per cent of sub-Saharan Africa’s total GDP, yet the savings rate has declined from around 25% in the 80s to a meagre 15% in 2019. Savings woes in South Africa, similar to anywhere else in the continent, is attributed to high unemployment; over-indebtedness; economic uncertainty, and lack of sound knowledge around saving products among many other reasons.

study done on the implications of COVID-19 on household income and food security in Kenya and Uganda found that the loss of income heavily affected people working in informal sector jobs, whose wages are usually earned on a hand-to-mouth basis. The stringent lockdown measures across both countries meant that more families were food insecure with limited amounts to spend on sustenance.

With food insecure households increasing by 38% in Kenya and 44% in Uganda, households have been in survival mode trying to figure out how to get their next meal. The subdued consumer expenditure and an uptick in bank savings indicate that wealthy individuals and firms are opting to save rather than seek new areas in which to invest. This cycle is likely to have dire consequences on small businesses which take a larger share of economic activity in most African countries.

study done by Brookings exploring the effect of COVID-19 on small businesses in Uganda showed that micro and small businesses have experienced a larger decline in business activity compared to medium and larger firms. These findings are expected as micro and small businesses are more vulnerable to cash flow issues and have limited resilience capabilities compared to large firms. Micro and small businesses also face an uphill task in accessing credit during periods with reduced economic activity because they don’t have a wealth of assets or projected business activity that would enable them to meet the credit requirements, which most times favour medium and large enterprises

In order to free up more cash in the economy and boost economic activity, governments need to follow through with an extended period of tax rate reduction, reducing taxable income, offering tax credits, and offering tax refunds. The case in Kenya has unfortunately been different with the reprieve extended to businesses and individuals taken away in December 2020. With the country still facing curfews and limited movements, the situation is likely to get worse.

The government should be more proactive in implementing reprieves based on prevailing economic circumstances to safeguard the livelihoods of a large portion of the population facing difficulties as the global pandemic continues to show no signs of dissipating. Incentives should also be introduced by the government to financial institutions that are proactive in lending to micro and small businesses.

These efforts can go a long way in building more capabilities for businesses and improving economic activity. The informal sector in sub-Saharan Africa which is dominated by micro and small businesses accounts for 70% of employment on average, according to AfDB. Extending more robust and proactive interventions in supporting this sector of the economy will only yield great results not only for the economy but for individual households that make their day to day livelihood from micro and small businesses.