What was initially seen as a largely Chinese problem is now a global crisis, which has claimed many lives. The COVID-19 has had a major impact on the global economy including that of Uganda.
The Government through its arms was prompted to put in place measures since 28th March 2020 to curb spread of the virus including but not limited to travel restrictions within the country, partial lockdown among others which have hampered the economic activity within the economy. Measures introduced by the government to counter the spread of the coronavirus have continued to dampen economic activities, with the effects of the lockdown mostly affecting the services and informal trade sector, domestic transport, retailers among others.
Investors are becoming more pessimistic about business conditions for the next three months. At the beginning of the Financial Year 2019/20, the government projected the economy to grow by 6.2 per cent but the latest estimates from the Ministry of Finance, Planning and Economic Development indicate that it slowed down to 3.9 per cent. The lower economic growth will hamper domestic revenue mobilization efforts and limit household income.
How has COVID-19 affected Uganda’s economy?
1. Exchange rate depreciation due to high capital flight.
The shilling is seen to lose value in March and April against the dollar as capital continues to fly out to perceived safer financial markets/assets. This has led to higher demand of the US dollar which has outmatched its supply.
According to Bank of Uganda, investors withdrew at least Shs 165 billion in government securities and deposits placed in commercial banks from the country between February and March 6, 2020. In mid-March, the local currency breached the Shs3,900 mark against the dollar, the lowest level it has traded ever.
Data from the Performance of the Economy Report by the Ministry of Finance, Planning and Economic Development for the month of April 2020 indicates that Uganda Shilling depreciated by 0.3% against the US dollar.
2. Supply chain disruption.
Supply chain disruptions have been evidenced leading to reduced output, sales, aggregate demand, etc leading to production cuts in various industries. As a result, cyclical unemployment has increased due to a slump in demand for labour by businesses.
For example, Verma Company Limited, a leading importer of motorcycles in Uganda, suspended all employment contracts until it is allowed to resume operations effective April 14 with employees retaining only the medical insurance cover.
Elsewhere, in a notice sent out on April 14, The Sheraton Hotel indicated that if the situation did not improve by the end of April, all its employees will be sent on unpaid leave effective May 1 and that all workers on probation are to be terminated.
3. Low revenue for the Ugandan government.
Revenue in the form of taxes like VAT and excise duty has definitely dropped by a mile due to the reduced consumption and reduction in dutiable imports arising from the effects of Covid-19 on trade.
Additionally, the government will not likely receive donations and grants as all of the donor countries have been badly hit by the coronavirus too. The government will, therefore, have to borrow more money from commercial banks to fund its projects. This can easily lead to the private sector crowding out which reduces private investment.
Since the government and private sector will be competing for the scarce funds available for investment, there will be an increase in interest rates.
4. The service sector continues to struggle.
Economic activity has drastically reduced since most of the service sector has been slowed down. With restrictions on activities such as hotels, entertainment, education, recreation, real estate, transportation, retail, and social work. Many people are not earning a living and therefore, can not sustain their lives like they used to which has led to a reduction in livelihoods.
The tourism sector has been hit the hardest by coronavirus as the government closed the airport for travellers. Currently, tourism is the number one source of foreign exchange in Uganda and makes 7.7% of the country’s GDP, and employs close to 700,000 people both directly and indirectly.
For instance, Uganda was supposed to host the 3rd UN G77 and China Summit in April but was postponed due to the coronavirus pandemic. This summit was going to be a major boost to Uganda’s international image and tourism sector. It was expected to be attended by over 6,000 international delegates from 135 countries.
However, there’s likely to be more contraction of economic activity since the economy is mainly maintained by the government. In most Least Developed Countries (LDCs), like Uganda, the government is the major key player.
As companies look at how to sustain themselves after all the restrictions have been lifted, some of the solutions will be wage cuts, changing the business models and retrenchment. With the resulting unemployment, income inequality and poverty will increase and many government projects will stall due to lack of funds.
1. More focus should be directed towards investing in the health sector.
This will be achievable through Research and Development, and infrastructure development. Alternatively, rapid testing kits can also be obtained in bulk so that people do not need to wait for 24 hours to receive their results.
This will help gun down community spread as only the healthy ones are allowed to proceed and move on while the infected individuals are instantly taken to health centres.
2. Increase funding to businesses
The government should increase funding to the Uganda Development Bank (UDB) so that it can promote and finance the development of businesses that produce locally instead of importing substitute products especially those with emphasis on agro-processing. This will reduce Uganda’s reliance on imported goods which tend to cause imported inflation.
3. Adoption of a digital economy.
A cashless economy can help reduce the spread of Covid-19 since money has been proven to be a conduit for the transmission of the deadly virus. This can be enhanced by foregoing taxes on mobile money so as to make it cheap and easy for everyone to adapt, and embrace the digitized economy.
Businesses should also consider creating an online presence for themselves such as e-commerce stores to reach their customers. During this time of lockdown, businesses that offer online orders and delivery services have proved to be more effective.
To be competitive when normal work resumes, many businesses will need to change their business models to support the latest digital trends if they wish to stay afloat.
4. Scaling down on production costs and needs
Business people especially those who depend on imported raw materials need to be more creative and innovative to mitigate the economic disruptions of Covid-19 on their business.
Scaling down production as everyone waits for the situation to stabilize should be one of the options. This can be done through temporarily closing down some of the production lines and saving on operating and running costs, as you wait for the situation to calm down.
Firms need to ensure clear communication with all key stakeholders especially customers, suppliers, creditors, staff as well as bankers about whatever key business decisions have been made, as each will have an impact on them.
More emphasis on the BUBU (Buy Uganda Build Uganda) initiative should be put on ventures dealing in import substitution. Not so long ago, waragi was seen as a menace and a community hazard. But with realization and increased awareness that it is a raw material for making hand sanitizers, many people have engaged in the activity and are earning an income.
Author: Kirembwe Andrew
Andrew is a young, enthusiastic, and self motivated individual who loves sports and enjoys writing and sharing informative content about business, tech, lifestyle and entertainment. He is also an entrepreneur by trade.