What should be done to make the economy survive the COVID-19 pandemic

Monday April 6 2020

 

By Damali Ssali

The Coronavirus pandemic (COVID-19) has become a fully-fledged global economic crisis with governments now issuing Level 4 – Do Not Travel advisories, instituting curfews, partial and full lockdowns.

These lockdowns that started from Wuhan, China - the epicentre of coronavirus outbreak - are fast turning in to the safest way of life with Italy, Spain, India, South Africa, Uganda, Kenya, and Rwanda among countries administering shutdown doses.

The lockdowns mean that factories and private companies cease most economic activities. Therefore, disposal incomes for both people and companies is reduced in sectors of the economy including the health, manufacturing, retail, trade, transport, tourism, entertainment, education and many others.

Conservative estimates indicate that the global economic aftermath of COVID-19 pandemic could last at a minimum of one year. The Organisation for Economic Co-operation and Development (OECD) estimates annual global GDP growth is expected to drop to 2.4% in 2020, from an already weak 2.9% in 2019. World exports are forecast to decline by more than 5% to US$1.28 trillion in 2020.

Further, the United Nations Conference on Trade and Development (UNCTAD) reports that the number of container cargo ships from China, reduced by 30 percent, in January 2020 alone from 540 ships to 370 ships per day.

A March 10, 2020 Baker-McKenzie report highlights that many African countries face a “twin supply-demand shock,” due to a decrease in imports of manufacturing inputs and supplies from China and reduced demand from exports in key sectors in various export markets. Reports from the Uganda Ministry of Trade, Industry and Cooperatives indicate that China is our leading import market, accounting for at-least 16 per cent or US$5.5 billion of Uganda’s total imports bill.

The continued persistence of the corona crisis will certainly curtail the sourcing of raw materials and capital goods, such as machinery, for Uganda’s domestic manufacturing sector.
The European Union (EU) market, which is also in various stages of lockdown, is a strategic market for Uganda’s exports and imports.

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Uganda exported US$515 million worth of goods, over the past three years, whilst it imports totalled to US$ 561 million over the same period. The main exports to the EU market have been coffee, fish, flowers and hides and skins. Uganda mainly imports medical equipment, pharmaceutical products, petroleum and oils from the EU.

Generally, Africa is a net importer of medical equipment and pharmaceuticals, which are mainly supplied by Europe and India.
Studies from United Nations Economic Commission for Africa (UNECA) indicate that Africa imports over 94 percent, or on average US$ 16 billion per annum, of its medical and pharmaceutical products. The current government lockdown in Europe and India are likely to increase the risk of drug shortages on the continent and specifically in Uganda.

Even more worrying for Africa is the fact that only 15 African countries are net exporters of food, with Uganda being one of them. If the COVID-19 pandemic results in to an economic crisis lasting for over a year, there will be serious food shortages in over 39 countries on the continent and this may unfortunately fuel civil unrest.
Huge blow to cross border trade.

In 2019 alone, Uganda's formal exports to the Common Market for Eastern and Southern Africa (COMESA) amounted to US$ 1.23 billion. Whilst total exports to East African Community (EAC) amounted to US$ 1.15 billion, out of which US$ 537 million went to Kenya, US$ 409 million to South Sudan, US$ 95 million to Tanzania, US$ 54 million to Rwanda, and US$ 51 million to Burundi. Exports to the Democratic Republic of Congo were US$ 567 million.

The restriction of movement of people across borders, due to new health protocols that must be adhered to is also going to greatly impact Uganda’s trade volumes with neighbouring countries.

As a result, the Ministry of Finance, Planning and Economic Development (MoFPED) reported that Uganda’s growth projection for the financial year ending June 2020 had been revised downwards from 6% to 5%. Also, imports are expected to decline by 44% over the next four months to June 2020.

In respect to the banking sector, the ministry reports that non-performing loans may increase by 50% due to the COVID-19 pandemic.
Given that domestic taxes contribute over 70% of government revenue, this means that the funds that will be available to government for public service are going to be significantly reduced.

The reduction in global travel, due to travel bans, will significantly affect the tourism industry. A report from International Air Transport Association (IATA) indicates that 75% of the world airlines have cash to cover 3 months of the fixed expenses and risk becoming insolvent thereafter.

According to UNECA, in the 2008 global financial crisis, Africa’s tourism experienced losses of up to US$ 7.2 billion, which mostly impacted Egypt, Ethiopia, Kenya and Mauritius. The COVID-19 pandemic is likely to have a similar or even higher impact.

Crude oil prices have seen a dramatic reduction of 32% from US$ 51 to US$34 per barrel in anticipation of the global slowdown of economic activity.

This poses a significant risk to the development of Uganda’s oil sector, and most urgently, the final investment decision for the oil pipeline as foreign direct investment is channelled to safe assets such as gold.

The MoFPED estimates that this on-going COVID-19 pandemic will lead to an increase in the number of Ugandans pushed below the poverty line by 780,000 in the best-case scenario or 2.5million, in the worst-case scenario.
Way Forward.

Faced with unprecedented hard times, talk is ripe that we should condense our 2020 resolutions into just one. That is: Survival. From a trade and business perspective, here is how we can stay alive.

There is urgent need for coordination of cross-border trade between Uganda and its neighbouring countries.
The East African Community had issued a joint communique on movement of people and goods with key guidelines that should always be adhered to by all countries. Bi-lateral modalities on the movement of goods and people in light of the COVID-19 crisis should also be worked out with DR Congo.

The private sector should engage the government to come up with mitigation measures against non-performing loans to save companies from insolvency. This will ensure that risk of unemployment in Uganda is limited as the private sector accounts for over 70% of total employment.

The government working with telecoms, banks and other financial service players should accelerate the implementation of a cashless economy.

The government should conduct a risk assessment on the critical medical equipment and pharmaceuticals that are imported mostly from Europe and India. This should be in-terms of current stock levels and Uganda’s capacity to produce the same in case of supply constraints over the next 6 months.

Finally, the government should introduce measures to ensure that the supply of basic food, across the whole country, is guaranteed. A hungry population is an ungovernable population.
Damali Ssali is a Trade Development Expert at TradeMark East Africa.
damali.ssali@trademarkea.com

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