Economists advise on crawling out of crisis

Tuesday April 21 2020
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Major economies have locked down which may last for several months, which has diminished economic activity. A prolonged period of dislocation in financial markets could trigger distress among financial institutions, which, in turn, could lead to a credit crunch for nonfinancial borrowers. File Photo

The International Monetary Fund projects that Uganda’s Gross Domestic Product (GDP) will fall from 5.2 per cent in 2019 to 3.5 per cent in 2020 while Bank of Uganda postulates a worse scenario of GDP falling to 2.3 per cent.

Both figures may be revised downwards if sectors such as manufacturing, trade, and services (tourism, hotel, and restaurants) that were hit hardest, do not recover in the short term.

Major economies have locked down which may last for several months. All this has reduced economic activity. A prolonged period of dislocation in financial markets could trigger distress among financial institutions, which, in turn, could lead to a credit crunch for nonfinancial borrowers.

Going forward, economists share their views on how Uganda can crawl out of this crisis:-
Dr. Madina Guloba, Senior research fellow, Economic Policy Research Centre
Nevertheless, the lockdown has revealed that Uganda needs to focus on industrialisation.
The government needs to deepen agro-industrial linkages as a catalyst for the wider industrialisation agenda.
“This is because investment in agriculture ensures that supply chains to the industry are sustained. This strategy will reduce dependency on imports and save on the much-needed foreign exchange,” she explains.

As a result, Uganda will crawl out of the economic depression fast enough in recovery mode to catch up. But the recovery might not be up to the pre-crisis times.

“This is because jobs/employment will be granted progressively for those who have been laid off as business picks up,” Guloba adds.

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Secondly, commodity prices will also remain high in the short term especially for the non-consumables (construction materials, electricity, and other amenities) as they try to cover-up the losses.

Tax revenue collections will be at its lowest as both private and public ventures/ investments will be slow in take-off.

“Trade balance can be good if the government strategically places its self to undertake serious agro-industrialisation in import replacement and increase export volumes of agricultural value-added products to Europe and regional markets that have been hard hit by Covid-19.”

She added that, if the ‘Buy Uganda Build Uganda’ (BUBU) policy and the campaign is intensified with leading key priority commodities identified, then the possibility of crawling out of the looming depression is possible.

However, the public should be rallied to buy domestically and only import what can’t be produced locally. In addition, the government should be looking for markets for Ugandan products abroad.

Dr. Susan Kavuma, Economist and lecturer at the Makerere University School of Economics
The economic recession is likely to be more severe for developing countries than in developed countries.

“This is because of the high levels of informality in the product and factor markets which expose producers, consumers and workers to high levels of vulnerability,” Kavuma said.
Government should design appropriate fiscal and monetary tools that can be used to revive the economy.

The aim of the policy direction should be to increase aggregate demand and supply.
Bank of Uganda has reduced the Central Bank Rate (CBR) by 1 percentage point to 8 per cent which is a good policy direction.

“Past experience has shown that interest rates on commercial loans are not responsive to the CBR. Therefore, BoU should engage commercial banks to reduce the interest rates, not only on new loans but also current loans,” she added.

This will improve the cash flow of firms to allow them to make more investments.
On the fiscal side, the government should restrain from increasing tax rates during the recession but rather implement austerity measures to enforce spending cuts.

The focus should be to reduce wasteful expenditure that includes: allowances for attending meetings whether within the country or abroad, expenses for foreign travel and entertainment among others.

The saved funds from these activities can be redistributed to finance essential activities in the social service sectors such as health and education and the economy targeting the agriculture sector which will boost domestic demand given the multiplier effect of these sectors.

Another expenditure area where the government can free up funds to inject in the economy is renegotiating the repayment terms for the national debt. The freed-up resources can be deposited in a capital fund which will be accessed by SMEs that constitute over 90 per cent of Uganda’s private sector. SMEs should access the funds in the form of grants, preferably matching grants which increase the commitment of firms.

Government must embrace import substitution strategies and give more attention to the ‘Buy Uganda build Uganda’ (BUBU) strategy.

Dr. Fred Muhumuza, Economist and lecturer at the Makerere University School of Economics
While the coronavirus attacks humans by reducing the oxygen levels in the blood eventually causing a collapse of vital organs and death, it also shuts down vital economic organs – basically industries, businesses in the service sector and agricultural farms.

The economy is already following global trends of reduced growth that is not expected to exceed 4 per cent. China, which is believed to be the Workshop of the world, has registered a 6.8 per cent decline in January – March 2020 compared to a 6.5 per cent increase in the same period last year.

How then should Uganda respond to secure and later revive its economy after the pandemic?
“The revival of the economy must follow a trend of ensuring the limited available money continues to flow to the vital economic organs – mainly households and basic services in health, security, and agriculture – and thereafter revive the functionality of the entire economy,” Muhumuza shares.

Mr Muhumuza’s first message for the recovery is as is the case in medical practice, the economic logic should be built on the circular flow of income.

“Business firms in the industrial and service sectors employ and pay people who live in households, and who in turn use these same earnings (money income) to buy the goods and services from the same firms,” he explains.

However, Muhumuza ponders: At what point of the circle does one restart the flow that has been disrupted by Covid-19?
The ideological thinking in Uganda has been to incline towards industry and service sectors as the main drivers of growth.

The biggest benefit Uganda can pick from the economic disruption by Covid-19 is to allow that disruption to follow the ideological thinking, hence the political and technical designs economic resuscitation and recovery.

The most versatile units of the economy during this era of the pandemic has been the agricultural households including the subsistence farmers.

Mr Muhumuza, however, says this should not be the reason to keep them locked in a low equilibrium economic status but to rather position them as part of the recovery process.

“This will be in addition to sustaining current investments in health, security, and basic public administration,” he added.

Sequentially, the agriculture sector, its crudeness and rudimentary nature notwithstanding remains a central piece for preserving and later restarting the economy.

First, agriculture will ensure food and nutrition, which are crucial elements of reversing and mitigating the Covid-19 effects on the health of both humans and the economy.

Second, in the circular flow, agricultural households are the only entities that double both in production and consumption at the micro level.

“Strengthening agricultural production and productivity, will not only increase the food supply for everybody but also inject critical incomes to enhance the circulation that is central to restarting industries and service sector through increased demand and worker productivity,” Mr Muhumuza analysed.

He says the above strategy will rebuild the internal the resilience of the economy by reviving internal demand and productivity, thereby setting the foundation for import substitution industries.

It should be noted that even after the lockdown has been lifted, industries and many service providers will only revive production-based on the availability of demand.

Mr Muhumuza says while increased government spending can make a contribution as is being adopted in the more developed nations (fiscal stimulus), they should be adopted with caution as the resultant increases in the budget deficits and debt will have disastrous effects over the medium to long term.

“Focus should be on the enhancement of services that comes with payment of salaries and creation of demand for part of the private sector, payment of arrears, and avoidance of excessive domestic borrowing that is bound to derail the recovery process cutting off money flows to the private sector.

To conclude, Mr Muhumuza says government must avoid political temptations of considering short-term solutions to what is already set to be a global long-term problem.

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