Economy suffers major revenue losses

Thursday May 21 2020
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Affected. Traders while away time outside closed arcades on Luwum Street in Kampala on Tuesday. PHOTO BY ABUBAKER LUBOWA

Economic growth fell sharply in April on the back of a slowdown caused by the coronavirus disease (Covid-19) pandemic, according to a just-released monthly report from the Ministry of Finance, Planning and Economic Development.
Growth for the financial year ending June is now expected to be 3.9 per cent, down from a pre-pandemic projection of six per cent.
Uganda has been in a state of lockdown from the third week of March in an effort to stem the spread of the viral disease and the report offers the first full-month measure of the impact of the reduced economic activity.
“Beyond the inevitable impact of the global supply chain disruptions on the domestic economy, these measures - key among which includes closure of all international borders to persons except cargo and a partial lockdown – continued to dampen economic activities, with the effects of the lockdown mostly felt in the services sector, informal trade sector, domestic transport, and retailers among others,” notes the April 2020 Performance of the Economy report.
Government collected Shs937.64 billion in taxes in the month, which was Shs648.2 billion less than projected. A slow down in implementation of projects also saw the government collect only Shs28.2b in grants, reflecting a shortfall of Shs141.6b.
Although government’s expenditure also fell by around 20 per cent in the month, it still spent about two shillings for each shilling it collected in April, ending the month with an overall fiscal deficit of Shs1 trillion, about Shs300 billion more than projected.
Tax revenues are expected to have a shortfall of about a trillion shillings by end June when the financial year closes due to lower economic growth, and the Shilling is expected to come under pressure against foreign currencies, due to reduced inflows of foreign exchange.
With about a trillion shillings revenue deficit projected by the close of the financial year next month, the report notes that as a result of the revenue shortage, lower domestic revenues and the additional expenditure requirements to support the health sector and the vulnerable population, will further dent public finances leading to an expansion in the budget deficit.
Household incomes are also projected to suffer according to the report and the findings will strengthen calls by the private sector for the government to present a more robust stimulus package to breathe life into the economy.

Rising prices
Prices of goods generally rose between March and April. Prices for processed foods like maize flour and rice all increased while the price of maize flour also soared due to increased demand as the government bought and distributed food aid to vulnerable urban populations.
In addition, the EFU inflation tracker, which measures the price of energy, fuel and utilities also increased from 7.7 per cent in March to 8.3 per cent in April due to a rise in the prices of solid fuels, specifically charcoal.
On the other hand, prices for food crops fell to negative two per cent from 2.5 per cent recorded in March 202 mainly due to a drop in prices for fruits and staples like bananas. Prices for vegetables also reduced to 6.5 per cent in April, down from eight per cent in the previous month.

From a broader trading outlook, the merchandise trade deficit narrowed further in March to $ 177m from $ 192m in February, as imports fell faster than exports. The value of imported goods fell by 10 per cent to $492m from $548.2m in February while goods exported fell to $ 315m in March from $356m in February.
The report notes, on a positive note, that the Central Bank Rate was reduced to eight per cent in April from nine per cent in March to support economic activity.
Lending rates for the Shilling and foreign currency denominated loans eased in March to 17.8 per cent and 6.6 per cent down, from 19.1 per cent and 6.7 per cent respectively in February – but this was partly due to a fall in demand for loans.
Pessimistic outlook
Disruptions to global supply chains have reduced imports that provide opportunities for increased domestic production. Government officials led by President Museveni have called for faster import substitution by producing more products locally, including hand-sanitisers, facemasks and pharmaceutical products.
On Wednesday Daily Monitor reported that at least 10 local companies had lined up to produce more than 30 million facemasks that the government plans to distribute free-of-charge to all Ugandans aged six years and older.
However, experts cited in the report remain pessimistic or at best cautiously optimistic.
This is supported by evidence from the Purchasing Managers’ Index (PMI), which registered the lowest-ever level in April of 21.6. The PMI provides information about current and future business conditions to company decision makers, analysts, and investors.
In addition, the Business Tendency Index (BTI) dropped to 49.9 in April from 51.2 in March, as investors’ sentiments about business conditions for the next three months became more pessimistic. BTI measures business confidence in major sectors of the economy.
Furthermore, the Covid-19 lockdown is expected to worsen Uganda’s balance of trade and payments position with the rest of the world, as inflows from foreign direct investments, tourism, remittances, and exports sharply decline.

The performance of the economy report for April 2020 also reveals that the deterioration in the external position will in turn exert pressures on the Shilling in the domestic foreign exchange market.
In April the Shilling depreciated by 0.3 per cent against the dollar with an average mid rate of Shs3,785.7 to the dollar, from Shs3,772.9 in March due to higher demand for the foreign unit.

Survey on the business climate
A ccording to the Business Barometer, which is the Private Sector Foundation Uganda (PSFU) tool to capture the current perception of business climate in Uganda, Covid-19 Pandemic was highlighted as the top key challenge that has affected all the sectors with 80 per cent of companies saying their performance had been affected.

The other challenges following are delayed payments, low local purchasing power, cost of credit, delays in policy implementations, current tax regime, Shilling depreciation and poor labour productivity.

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From the perception survey results, 31 per cent of the members mentioned that the business situation for March to April 2020 was good to operate in than before while 69 per cent said the business situation was worse than before.

However, when asked to predict the business performance for the next six months, 50 per cent of the respondents said the business situation for the next six months will be better, while another 50 per cent expected the business situation to worsen if the situation remains the same.

Some 90 per cent, of the companies stated that they were uncertain about employment if the current situation will not improve in the next six months while 10 per cent of the companies were really certain about employment.

Also some 42 per cent of small companies will decrease their employment, 67 per cent of the medium companies will also decrease, from the large category, 57 per cent of them will decrease their employment

According to another survey conducted by the Economic Policy Research Centre (EPRC), an independent policy think tank although the number of confirmed Covid-19 cases in Uganda remains very low compared to many other countries, measures adopted to contain the spread of the pandemic are taking immeasurable toll on business operations.
The EPRC business climate survey further discloses that continued enforcement of the Covid-19 containment measures is increasingly slowing down the economy.

This is because the most hit economic segment of the economy includes Micro, Small Medium and Enterprises whose impact does not only spreads across all the economic sectors in the country but also accounts for more than 2.5 million jobs, making it the largest employer in the country, according to the Ministry of Trade, Industry and Cooperative statistics.

According to the report, Covid-19 and subsequent lockdown has reduced business activity by more than 50 percentage points, implying businesses are performing below potential across the board.

Further, sectoral analysis shows that businesses in agriculture experienced the largest decline in business activity with 76 per cent of the firms reporting severe decline and 12 per cent reporting moderate decline.

This could be largely attributed to Covid-19 containment measures such as transport restrictions, quarantine, social distancing and ban on weekly markets, which have hindered farmers’ access to input and output markets, thus undermining their productive capacities.

Micro and small businesses reported experiencing a larger decline in businesses activity compared to medium and large firms. This is not surprising since most of the micro and small businesses halted operation due to inability to implement Standard Operating Procedures such as the provision of on-site accommodation for employees.

In addition, employees of SMEs use public transport—which was banned on March 25, making the situation more difficult.

Further, the report, basing on a survey of firms using the EPRC’s business climate index methodology, while examining the effect of the risk presented by Covid-19 on Uganda’s businesses, indicated that small and medium businesses have experienced the largest effects of the risk associated with Covid-19 compared to large scale businesses.

The decline in small and medium businesses is due to inability to cope with containment measures instituted by government.

Specifically, nine out of 10 businesses report experiencing an increase in operating expenses due to preventive measures instituted by government to curb the spread of the virus.

Mr Patrick Ocailap, the Deputy Secretary to the Treasury’s view
Administratively the measure being taken is to slowly start to opening up the lockdown. This will allow private sector to start limping on, although difficult but provide some kind of relief. We are aware that sixty days is a long time out of business.

Also, we are looking at several tax proposals but they will require Cabinet clearance then Parliament stamp of approval, and this may lead to adjustment of budget that has already been approved by Parliament.

As you know the budget was drawn before Covid-19 crisis. And tax assessment takes time. We could make any pronouncement in March and April because that was too soon. We were being extremely cautious so as to avoid panic.

Now we have a good picture of the situation and by next week the picture of the kind of economic package we are talking about will even be much clearer. We needed to be informed by data and now we have a clearer picture to inform the economic package that we shall advise cabinet and then proceed to parliament if endorsed. All this will happen shortly.

But importantly there is no need to panic. Everything is being well thought of.

iladu@ug.nationmedia.com

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