COVID-19 and price stability in Eastern Africa: How effective were the governments’ policy response measures?

Figures & data

Figure 1. Number of confirmed COVID-19 cases (March 2020—April 2021).

Source: John Hopkins University- Center for Systems Science and Engineering (JHUCSSE, 2021) COVID-19 Data (2020–2021). Notes: The graph shows both upward and downward swings in the confirmed number of COVID-19 cases across the 4 countries. The highest cases were reported in November 2020, December 2020, January 2021, and February 2021 for Kenya, Uganda, Rwanda, and South Sudan respectively.

Table 1. Major country-specific fiscal/monetary government intervention measures

Country	Policy response/measures
Kenya	The Government through the National Treasury reduced: the turnover tax from 3% to 1%; the Value Added Tax (VAT) from 16% to 14%; the highest Pay as You Earn (PAYE) band from 30% to 25% & the corporate tax rate from 30% to 25%. A 100% Tax Relief for low-income earners individuals who earned up to Kenya Shillings (KES). 24,000 per month. The Central Bank of Kenya (CBK) reduced the Central Bank Rate (CBR) from 8.25 % to 7.00%; lowered the banks’ Cash Reserve Ratio by 100bps from 5.25% to 4.25%; temporarily suspended the listing with Credit Reference Bureaus (CRBs) for persons who defaulted in their loan obligations with effect from 1 April 2020 and directed commercial banks to provide flexible requirements for the performing loans as of March 2020. Settlement of verified pending bills worth KES. 13 Billion by ministries & county governments and the disbursement of accumulated VAT refunds of KES. 10 Billion. Appropriation of KES. 10 Billion through cash transfers to the elders, orphans, and other vulnerable members of the society. Reduction of the salaries of the: President & Deputy President by 80%, cabinet secretaries & chief administrative secretaries by 30%, and principal secretaries by 20% voluntarily. Most of these measures were set to take effect till the end of the year (December 2020).
Uganda	Reduction of the CBR from 9.00% to 8.00%. Extension of the returns from PAYE, VAT, Excise Duty, Withholding Tax, and taxes under the Lotteries and Gaming Act to 30^th April from the earlier deadline of 15 April 2020 as well as the extension of the time within which to file tax returns (from the 31 March 2020 deadline to 31 May 2020). Waiver of penalty and interest upon voluntary disclosure by taxpayers for March and April 2020. Deferment of tax payments for taxpayers that were due in March and April 2020 under installment arrangement to May 2020. Removal of bank-to-wallet charges charged on cash-out for the lower transacting tiers for 30 days. Providing liquidity assistance to commercial banks in financial distress by the Bank of Uganda (BoU) for a period of up to 1 year. Providing liquidity to banks through the REPOS issuance for longer periods of up to 60 days with rolling over options. Financial institutions to restructure credit facilities for businesses/individual customers affected by the pandemic with effect from April 2020. Purchasing of Treasury Bonds held by deposit-taking microfinance institutions.
Rwanda	Suspending down payments on the tax outstanding for cordial settlement. Softening of enforcement for tax arrears collection. Deadline extension for filing and paying Corporate Income Tax (CIT). Fast-tracking of VAT refunds to Small and Medium-Sized Enterprises (SMEs). CIT and Personal Income Tax (PIT) payments to be grounded on the current annual transactions. PIT exemptions for school teachers (private sector), and hotel employees who earned less than RWF 150,000 per month. Extension of the lending facility worth RWF 50 billion to liquidity-constrained banks for six months with effect from 1 April 2020 by the National Bank of Rwanda (NBR). NBR lowered the RRR by 100 basis points (that is, from 5% to 4%) effective from 1 April 2020. Easing of the repayment conditions on loans for the affected borrowers and waiving of electronic money transaction charges for 3 months till 22 June 2020. Purchasing of Treasury Bonds through the rediscount window for 6 months with effect from 1 April 2020.
South Sudan	Allocating a COVID-19 fund of USD 8.0 million, of which USD 5.0 million was apportioned to the Ministry of Health to help fight the pandemic. A total of USD 7.6 million grants from the World Bank were also redirected to UNICEF, and the International Committee of the Red Cross (ICRC), to be used in purchasing PPEs. The Bank of South Sudan (BSS) lowered the CBR from 15% to 13% and the RRR from 20% to 18% (on 24 April 2020). On 7 July 2020, the BSS lowered the CBR to 10% and reduced the RRR to 10%. The BSS also encouraged commercial banks to restructure loans to businesses/individuals.

Source: (Deloitte, 2020; International Monetary Fund (IMF), 2021)

Table 2. General panel statistics

Variable	Obs.	Mean	Std. Dev.	Minimum	Maximum
Consumer Price Index (CPI)	56	4134.545	7078.385	107	18,863.10
Covid cases	56	4022.161	6758.105	0	28,426
Trade balance	56	419.161	266.276	128.60	1083.11
Exchange rate	56	1236.33	1474.286	103.74	3791.46
Broad money (M2)	56	9640.909	11,805.39	591.14	30,663.40
Lending rate	56	15.627	2.676	11.75	20.93
Central Bank Rate (CBR)	56	7.960	3.313	4.50	15

Source: Compiled from Stata

Notes: Across all the selected EAC countries, the trade balance was negative implying a trade deficit. The figures represented here denote a trade deficit of USD million.

Table 3. Stationarity test results

Variable	Testing level	W-t-bar Statistic	W-t-bar P-value	Order of Integration
$lnConsumerPriceIndex$	Level 1^st D	−0.8019 –3.3582	0.2113 0.0004	I (1)
$lnCovidcases$	Level	−3.1403	0.0008	I (0)
$lnTradebalance$	Level 1^st D	−1.3874 –4.8827	0.0827 0.0000	I (1)
$lnExchangerate$	Level	−2.7948	0.0026	I (0)
$lnBroadmoney$	Level	−1.9120	0.0279	I (0)
$Lendingrate$	Level 1^st D	−0.6353 –3.7679	0.2626 0.0001	I (1)
$CentralBankRate$	Level 1^st D	−1.0737 –9.1983	0.1415 0.0000	I (1)

Source: Author’s computation from Stata

Notes: D denotes difference. We employed the 5% level of significance in testing for stationarity.

Table 4. Pooled mean group (PMG) regression results-full model

	(1)	(2)	(3)	(4)	(5)
VARIABLES D.lnCPI	EC	Kenya	Rwanda	South Sudan	Uganda
ECT		−1.038***	−0.215*	0.336***	−0.0204
		(0.114)	(0.127)	(0.103)	(0.0228)
D.lnCovid cases		0.00619***	−0.00522***	−0.0148***	−0.00157
		(0.000647)	(0.00202)	(0.00381)	(0.00153)
D.lnTrade balance		−0.0380***	0.0106	−0.0444***	0.00153
		(0.0112)	(0.0151)	(0.0143)	(0.00482)
D.lnExchange rate		−0.0243	−0.265	2.363***	0.168
		(0.104)	(0.315)	(0.207)	(0.185)
D.lnBroad Money		−0.196***	0.225***	−0.0218	0.133**
		(0.0591)	(0.0788)	(0.0637)	(0.0538)
D.Lending rate		0.168	−0.108	2.129***	0.000500
		(0.225)	(0.0986)	(0.211)	(0.0223)
D.CBR		−2.090***	−0.378***	0.350***	−0.0241
		(0.344)	(0.113)	(0.0669)	(0.0357)
lnCovid cases	0.00551***
	(0.00107)
lnTrade balance	0.174***
	(0.0219)
lnExchange rate	0.177
	(0.136)
lnBroad Money	0.680***
	(0.0876)
Lending rate	0.238
	(0.444)
CBR	2.745***
	(0.457)
Constant		−10.67***	−2.086	1.519***	−0.198
		(2.539)	(1.286)	(0.392)	(0.223)
Observations	52	52	52	52	52

Standard errors in parentheses

*** p < 0.01, ** p < 0.05, * p < 0.1

Notes: The long-run estimates are represented in the second column and lack the difference operator “D” while the third, fourth, fifth, and sixth columns present the short-run PMG estimates with the difference operator. ECT is the Error Correction Term and denotes model convergence in the long run. Further, on the assumption of long-run homogeneity, we do not perform the cointegration test since we can simply infer it from the statistical significance of the long-run coefficients and the Error Correction Term (ECT). This can be seen from the results presented in Table 4.

Table A1. Different statistics per panel

Variable	Mean	Std. Dev.	Min	Max	Obs.
Consumer Price Index Overall Between Within	4134.545	7078.385 8035.57 891.762	107 110.511 768.652	18,863.10 16,187.89 6809.752	N = 56 n = 4 T = 14
Covid cases Overall Between Within	4022.161	6758.105 4881.649 5241.579	0 731.357 –7197.054	28,426 11,278.21 21,169.95	N = 56 n = 4 T = 14
Trade balance Overall Between Within	419.161	266.276 279.869 105.307	128.60 171.789 174.543	1083.11 821.228 736.519	N = 56 n = 4 T = 14
Exchange rate Overall Between Within	1236.33	1474.286 1686.607 35.317	103.74 107.825 1089.644	3791.46 3699.476 1328.314	N = 56 n = 4 T = 14
Broad Money Overall Between Within	9640.909	11,805.39 13,503.14 360.467	591.14 853.634 8554.181	30,663.40 29,642.83 10,661.48	N = 56 n = 4 T = 14
Lending rate Overall Between Within	15.627	2.676 2.920 0.806	11.75 11.976 12.434	20.93 19.083 17.474	N = 56 n = 4 T = 14
CBR Overall Between Within	7.960	3.313 3.581 1.088	4.50 4.536 4.960	15 13 9.960	N = 56 n = 4 T = 14

Source: Author’s compilation from Stata

Table A2. Pairwise correlation matrix

	$\mathit{C}\mathit{o}\mathit{v}\mathit{i}\mathit{d}$$\mathit{c}\mathit{a}\mathit{s}\mathit{e}\mathit{s}$	$\mathit{T}\mathit{r}\mathit{a}\mathit{d}\mathit{e}$$\mathit{b}\mathit{a}\mathit{l}\mathit{a}\mathit{n}\mathit{c}\mathit{e}$	$\mathit{E}\mathit{x}\mathit{c}\mathit{h}\mathit{a}\mathit{n}\mathit{g}\mathit{e}$$\mathit{r}\mathit{a}\mathit{t}\mathit{e}$	$\mathit{B}\mathit{r}\mathit{o}\mathit{a}\mathit{d}$$\mathit{m}\mathit{o}\mathit{n}\mathit{e}\mathit{y}$	$\mathit{l}\mathit{e}\mathit{n}\mathit{d}\mathit{i}\mathit{n}\mathit{g}$$\mathit{r}\mathit{a}\mathit{t}\mathit{e}$	$\mathit{C}\mathit{e}\mathit{n}\mathit{t}\mathit{r}\mathit{a}\mathit{l}\mathit{B}\mathit{a}\mathit{n}\mathit{k}$$\mathit{R}\mathit{a}\mathit{t}\mathit{e}$
$Covid$$cases$	1.0000
$Trade$$balance$	0.6610	1.0000
$Exchange$$rate$	−0.2125	−0.3435	1.0000
$Broad$$money$	0.6387	0.8796	−0.2977	1.0000
$lending$$rate$	−0.4553	−0.6413	0.8235	−0.7001	1.0000
$CentralBank$$Rate$	−0.1658	−0.0166	−0.2564	−0.2304	−0.0945	1.0000

Source: Stata computation.

Note: We logarithmically transform the variables in our estimated model to control for the potentially high correlation values.

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