Why SMEs are essential to Uganda’s post-pandemic economic recovery

Edirisa Sembatya and Lewis Akenji

What you need to know:

  • In planning for the type of economy that should emerge from the pandemic, government would find efficiency gains in supporting businesses and communities that would make the society more resilient.

The Covid-19 pandemic has jolted national governments the world over to provide emergency support to vulnerable parts of society and the economy. For Uganda specifically, this has exacerbated challenges already posed by heavy rains earlier this year and an ongoing locust invasion. Through the Covid-19 Task Force, the government has collaborated with private sector and development partners to deliver support such as food rations to most affected households and medical equipment to health workers. The Central Bank has further lowered the CBR rate and financial institutions have encouraged borrowers to defer loan repayments. Such support is much needed. But financial aid should be directed at key economic players - such as Micro Small and Medium size Enterprises (MSMEs) - that can ensure a sustainable post-pandemic recovery.

Unfortunately, businesses least able to access the aid are often those that are most in need of it. It may seem counter-intuitive, but the key to a successful bailout package, especially when resources are limited, does not lie in the usual practice of giving more money to large corporations. Rather it would require targeted and tailored support for eco-inclusive MSMEs – these are businesses that do not only focus on profits but also on providing employment, social and health benefits to communities in which they operate, as well as addressing several of the ecological challenges now being reemphasized by the pandemic. It is for the above reason that SEED supports eco-inclusive SMEs.
In Uganda, MSMEs make up approximately 90 percent of the private sector and are directly linked to over 80 percent of manufactured output, according to the Uganda Investment Authority. Without counting the informal sector, MSMEs employ more than 2.5 million people in Uganda, equivalent to 90 percent of total non-farm sector workers. This should call for immediate attention when thinking of what to prioritize in the current crisis.

Too essential to fail
SEED has recently observed that many eco-inclusive MSMEs that have gone through our capacity development programs are pivoting their business models to stay relevant. However, challenges with working capital and the high cost of doing business show a need for a safety net or relief to MSMEs. Tusafishe, a winner of the SEED Award, supplies water filtration systems to schools and other vulnerable communities, helping to reduce water-borne disease infections in these communities. Tusafishe now finds itself unable to continue most of its operations. If it is unable to sustain a minimum level of operations, then the consequences would also befall communities that it serves. More people in schools and hospitals would suffer and continue to divert the little income they have to treatment of diseases that are otherwise prevented because of Tusafishe’s services.

Consider also SEED winner Wana Energy Solution, an eco-inclusive business located 14km outside Kampala. It provides rural communities with Liquefied Petroleum Gas as an alternative cooking solution to using biomass, selling low-cost refills to rural households and commercial enterprises using PayGo. This tackles the negative health and environmental impacts of 99 percent of Ugandan households who rely on charcoal, wood, or other forms of biomass for cooking, especially in rural areas.
Recent government measures to curb the spread of covid-19 have hit businesses like Tusafishe and Wana Energy Solutions hard. A recent business impact survey conducted by the Uganda Revenue Authority and the United Nations Capital Development Fund shows that only about 15 percent of surveyed companies can sustain more than three months of operation on their current cash flow. MSMEs, essential to archiving the Sustainable Development Goals, are at risk more than even before.

Already the government estimates that declining growth and loss of jobs could push 780,000 Ugandans into poverty. In a worse-case scenario, according to the Minister of Finance, Planning and Economic Development, economic growth could decline to as low as 4.6 percent, pushing an additional 2.6 million Ugandans into poverty and threatening the gains made over the last several years.
The danger is to let MSMEs, especially the eco-inclusive ones, fall through the cracks of government stimulus packages and post covid-19 recovery plans. MSMEs are not a well self-organized group; as such, they lack the lobby power or PR machines that big businesses have. They are also less likely to get much-needed loans from banks, because of the small size of their individual businesses, no collateral, or just lack of awareness of such possibilities.

Engaging SMEs in a resilient economic recovery
Support provided to businesses during this recovery should be treated as an investment in future prosperity, making it concomitant with how it contributes towards a people-centric and resilient post-pandemic recovery. We recommend three types of actions for eco-inclusive SMEs. The most immediate is remedial action, to reduce the financial burden on MSMEs in the hardest hit sectors.. Examples are direct financial aid with a special fund dedicated to MSMEs, suspension or renegotiation of payments such as for loans, or providing government guarantees for quick and low-interest loans. A special insurance scheme can be set up for MSMEs and their employees against the pandemic shocks, or accelerate and expand the scope of existing mechanisms such as Uganda’s Agricultural Insurance Scheme.

The second type of action is capacity development in order for eco-inclusive MSMES to be better equipped at management, accessing finance, business acquisition and generally building more resilience into their models. SEED has been providing such programs for over 10 years, working with partners and national governments to provide direct enterprise support, as well as to better government policy and private sector instruments that affect MSME sustainability.

The third type of action, needed in the medium term, is to design policies and instruments that optimize the operational environment for eco-inclusive SMEs to thrive. Government should view support of MSMEs as part of its social protection program, given how strongly linked the performance of eco-inclusive MSMEs is to addressing unemployment among the less educated and marginalized populations, poverty reduction, and food security. Such actions would bolster the role of MSMEs while also helping to formalize Uganda’s sizeable informal sector. Furthermore, contributions of eco-inclusive SMEs to environmental protection and pollution prevention are aligned with international frameworks on sustainable development and climate change. Eco-inclusive SMES should thus be duly integrated in policy discourse towards national development priorities and recognised as making contributions towards government efforts to fulfil its international commitments.

In planning for the type of economy that should emerge from the pandemic, government would find efficiency gains in supporting businesses and communities that would make the society more resilient. In this respect, eco-inclusive MSMEs offer the best chance of linking entrepreneurship to inclusive and ecologically sustainable development.

Lewis Akenji is the executive director SEED
Edirisa Sembatya is managing director Finding XY