The Covid-19 Pandemic has hit the world-Uganda inclusive. How have SMEs been affected?
SMEs constitute more than 80 per cent of Uganda’s private sector, account for between 70 to 90 per cent of non-farm employment and value added. They shall, therefore, be disproportionately affected by this Covid-19 pandemic. Specifically, they will experience: Quarantines, travel restrictions, market lock downs, the ban on public transport and social-distancing measures are leading to a fall in consumer spending.
Businesses that rely on physical spaces and interpersonal interactions, such as restaurants, supermarkets, markets, hotels, tour operators, bars, gyms are experiencing a severe drop in sales. Reduced sales are likely to result in a cash flow crunch in these businesses.
Many small businesses import inputs or products for sale, from China. These will suffer shortages. The ban on public transport will also disrupt domestic supply chains.
Due to diminished cash flows, many businesses are struggling to pay their employees and meet their other financial obligations. Moreover, the heightened uncertainty is leading to a reduction in access to credit, as financial institutions are less sure of the businesses’ ability to pay back loans.
Staff are staying home due to fear of catching the virus or lack of public transportation. SMEs are, therefore, struggling to operate at full capacity, due to these staff constraints.
In the longer-term, this pandemic may lead to an economic slowdown or recession.
How can SMEs live and beyond COVID-19?
SMEs need to appreciate that remote working is the way to go. They need to embrace it and find innovative ways of supervising staff that may not necessarily be in the same physical location.
It may be a pandemic, but it comes with opportunities which SMEs need to look out for. For instance, increased demand for home delivery of food and other necessities, increased demand for sanitisers and face masks, increased demand for digital transacting and manufacturing.
Secondly, investing in the hygiene, safety and wellbeing of your staff is one aspect SMEs should appreciate that the post COVID-19 world will demand that they adhere to strict hygiene and work safety standards. They need to, therefore, start preparing early.
Going forward, SMEs need to have an up-to-date and robust risk management strategy that helps to anticipate and mitigate these risks.
As the pandemic confines people to their homes, what kind of incentives do SMEs need to weather this storm?
SMEs need tax relief to have extra cash to meet their daily business operational expenses, since their cash flows are suffering. Individual income tax relief offered to consumers will also boost their purchasing power and ability to demand for goods/services from SMEs.
SMEs need the government to implement measures to increase their access to liquidity since their sales have reduced and consequently their cash flow. To solve this problem, SMEs need to have access to no interest or low interest loans to meet their short-term financial obligations.
The government owes a lot of money to domestic SMEs. A good step would be for these arrears to be paid in a phased manner, starting with businesses in those sectors most affected by the crisis.
If you were a minister of Finance, what would you do differently in cushioning SMEs to survive the pandemic and ensure business continuity?
Wow! I would propose a comprehensive stimulus package that includes: both monetary and fiscal measures in order to ensure that the economy does not go into recession and that businesses-especially SMES are supported to remain afloat.
This package would include the following monetary policy interventions:
Slashing interest rates: This would make it easier for banks and other financiers to lend to SMEs. One other aspect I would do is to urge the Central Bank to engage in quantitative easing through purchasing back government securities (bonds and treasury bills). This would leave more money circulating in the economy.
Then, lower capital reserve requirements for commercial Banks. This would free up more money for lending to SMEs. The package would also include the following fiscal policy measures:
Establish an economic injury loan guarantee scheme for small and medium sized businesses in impacted sectors like: tourism, entertainment, consumer goods among others, to provide them with zero-interest loans to meet their financial obligations and operating expenses. This guarantee scheme would not be a grant. Instead, it guarantees the loans taken out by SMEs affected by this pandemic from commercial banks. This guarantee would substantially reduce the risk profile of these SMEs and unlock needed funding to them.
To ensure that people do not lose their jobs, I would establish a job support scheme for tax compliant SMEs, which would pay for at least 15 per cent of their wage bill for four weeks’ period.
When it comes to taxes, I would lower the VAT rate from 18 per cent to 16 per cent, offer individual income tax relief to boost consumer spending, waive PAYE for six months and excuse eligible SMES from paying their 10 per cent NSSF contribution for three months. These measures would free up needed cash for SMEs to meet their financial obligations.
Establishing a special fund to pay off at least 45 per cent of all domestic arrears owed to SMEs in the sectors most affected by the Covid-19 pandemic would be the other policy measure I would put in place. Businesses in tourism, entertainment would be prioritised.
Direct cash transfers to informal workers and vulnerable groups who live from hand to mouth would benefit from cash transfers to ensure that their livelihoods are not disrupted.
What are the three challenges SMEs in Uganda face while doing their business?
Small and Medium Sized Challenges face a range of challenges, when operating in Uganda.
One of them is an unconducive legal and regulatory environment. SMEs operate in a policy environment that glorifies foreign investors and considers SMEs to be, at best, a nuisance. They receive minimal support to start and grow their ventures, yet they are expected to start contributing to the national resource envelope before they break even.
Moreover, the process of complying is complex and expensive. In many instances, automating such processes makes them more difficult to navigate for entrepreneurs, who are illiterate.
Secondly as finance is to a business, blood is to a human body. If businesses, find it difficult to obtain affordable finance, then their operations will be constrained. Unfortunately, the cost of finance is still a challenge that impedes the operations of many SMEs.
Finding ready markets both locally and regionally is still a challenge. Many regional governments still use Non-Tariff Barriers to keep put competitor products, while favouring their home producers. Secondly, the limited implementation of the Buy Uganda Build Uganda policy limits the access of our SMEs to local markets.
What lessons should SMEs learnt from the coronavirus pandemic?
SMEs ought to learn that the world is an uncertain place and that anything can happen at any time. As such, they need to always plan for such contingencies. In addition, they need to appreciate that the world is interconnected now. A virus that starts in China can easily spread and impact their business in Uganda. So, they need to take greater interest in the world.