Rising Covid numbers, elections threaten economic recovery

On May 17, Finance minister Matia Kasaija wrote to the World Bank Country Manager, Mr Tony Thompson, seeking for financing credit of $300m (Shs1 trillion).

These funds were meant to close the expected financing gaps and prevent the country from slipping into a macroeconomic crisis with corresponding loss in livelihoods and acceleration in poverty borne by the growing threat of the Covid-19 pandemic.

Mr Kasaija in the letter detailed government’s commitment to reforms, including the integrated financial management system, the treasury single account, and other institutional and regulatory reforms to curb the systemic corruption, and streamline public procurement and processes for public investment management.

He indicated that with Uganda’s main trading partners, including Europe, China and Kenya, all adversely impacted by the Covid-19 pandemic, the country will be at the receiving end of the negative spillover effects.

“The sudden stop in travel activity has adversely impacted the booming tourism industry in Uganda, which employs around 600,000 workers, contributes to sizeable foreign exchange inflows, and stimulates domestic consumption. Mobility restrictions and attendant global recession have impacted other sectors of the economy, including manufacturing, horticulture, floriculture, and services,” the letter reads in part.

Loan approval
The World Bank board approved the credit line at the end of June and the money has since been wired to government to cover various interventions relating to Covid-recovery, the process compounded by rising Covid-19 cases especially in Kampala metropolitan which now accounts for 42 percent of all active cases, which could compel government to [re]impose radical measures.

Already there is talk of a second lockdown, which is not surprising given what is happening elsewhere around the globe.

In his address last Thursday to the ruling NRM National Executive Committee, a tough talking Museveni briefly weighed in on the matter and promised to tackle the issue extensively in his televised address on Covid-19 this week.

Yet still, according to a confidential brief by donors, a copy seen by this newspaper, the country’s macroeconomic outlook faces significant downside risks, not least from Covid-19 but rather the upcoming 2021 elections which “could heighten uncertainty and slow down investments” (both domestic and foreign direct investment) and economic activity as well as lead to higher fiscal deficits.

The turbulence in the neighbouring South Sudan and eastern DR Congo—Uganda’s second and fourth top export destinations – could disrupt supply chains and reduce exports, which could adversely impact growth and the external outlook.

The country’s medium-term outlook has worsened considerably due to the impact of Covid-19, the brief details, with real Gross Domestic Product (GDP) expected to recover in Financial Year (FY) 2020/2021 to about 3.7 per cent, which is still a 2.5 percentage point decline compared to the pre-Covid baseline.

However, this projected growth in FY2021 could as well be as low as 2.9 per cent, despite an expansionary fiscal policy, as the global economy takes longer to recover, remittances slow further impacting adversely domestic demand, and the country faces a more widespread pandemic.

Mr Museveni was endorsed last week as the ruling NRM party flag bearer for the 2021 polls. In power for 34 years, the incumbent does not leave anything to chance, usually using all means available to placate the electorate.

The Secretary to the Treasury, Mr Keith Muhakanizi, told Daily Monitor the road to recovery will be bumpy over the next months “depending on how fast we get a [coronavirus] vaccine” and the electioneering is a worrying factor as a transmission line for Covid-19.

Bumpy road ahead
“We would be lying to ourselves not to say we won’t have a bumpy road. How quickly can tourism rebound: how fast can remittances, foreign direct investments recover?” Mr Muhakanizi said.

“Even domestically, we see a lot of people reluctant to spend…the people selling luxury goods must be feeling this; in such times people are engaged in consuming only basic commodities,” he added.

More than once, alarms have raised that if the pandemic lasts longer globally or spreads more widely internally, it would deter the rebound of the import-export trade, stretch the moribund health sector, and deal a blow to the country’s external balances.

The International Monetary Fund (IMF) in April described the “great lockdown” imposed by nearly all world countries to contain spread of the Coronavirus as the “worst economic downturn since the great depression” of the 1930s.

“The magnitude and speed of collapse in activity that has followed is unlike anything experienced in our lifetimes,” the IMF warned. “This is a crisis like no other, and there is substantial uncertainty about its impact on people’s lives and livelihoods,” it added.

Similarly, the World Bank forecast early in June that the global economy is going to “shrink by 5.2 per cent,” representing “the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870.

Mr Muhakanizi does not rule out Uganda too sliding into a recession mainly as a result of negative spillover effects but he indicated that the economy had started showing signs of picking up with the easing of the lockdown two months ago “although some sections [of the economy] were affected badly.”

According to the Treasury’s performance of the economy report for last month, there was improvement in economic activity compared to June and May as a result of government easing the lockdown measures, especially on transport and the reopening of several businesses.

Additionally, the report detailed that international trade improved slightly as reflected by an increase in the value of exports and imports: export earnings increased for the second month in row to $337m (Shs1.2 trillion) in June up from $290m (Shs1.064 trillion) in May while the value of imports increased to $543m (Shs1.9 trillion) in June up from $435.6m (Shs1.5 trillion).

Bank of Uganda maintained the lending rate at 7 per cent in July and continued to provide liquidity support to the banking sector but that did not translate into low lending rates offered by commercial banks: in fact prime lending rates averaged between 18 and 19 per cent.

The Uganda Shilling continued to strengthen against US dollar, registering an appreciation of 0.9 per cent on account of increased inflows amidst subdued demand.
The stock of private sector credit grew by 4.1 per cent to Shs16.9 billion, up from Shs16.3 billion. Uganda also managed to trade a surplus with the Middle East at $124.2m (Shs454 billion) and marginally—$0.5m—with the European Union, while deficits were registered with all other trading blocs in June.

“The question of how the economy faired; in calendar year 2020 if we get even 0.5 per cent growth we would be lucky…but we are seeing a lot of shooting signs faster than we anticipated,” Mr Muhakanizi said.

“The problem with Covid is; if the situation doesn’t worsen from the disease point, the economy will grow faster but the way I see people behaving I don’t need a scientist to tell me where we are headed. Now, if these political class do not behave Covid is going to hit the roof….so I think elections are going to affect us but as a transmission mechanism for Covid,” he added.

Mr Muhakanizi revealed that they expect a sizeable part, especially the urban population to slip back into poverty—the Uganda Bureau of Statistics (UBOS) is currently working on the compilations—and at least Shs3 trillion could be written off.

For this FY 2020/21 government set a revenue collection target of Shs20.8 trillion to reinforce the Shs45 trillion budget. The Uganda Revenue Authority, according to the treasury report, had registered a surplus in tax collections for the first month of the FY (July) of Shs1.2 trillion out of the targeted Shs1.02 trillion, but this was mainly as a result of spillovers from the previous financial year that ended in June.

Double whammy
Going by the treasury’s performance report, a glimmer of hope is starting to trickle in, the Covid state of affair notwithstanding.

But Bank of Uganda Governor Emmanuel Mutebile, while announcing the monthly policy statement for August a fortnight ago, indicated that economic growth is expected to remain below the potential growth range until the FY 2022/2023.

“Economic outlook is extremely uncertain largely because of unpredictable intensity and duration of the pandemic. The downside risks include possibility of wide spread and possibly a more severe second wave recurring into a complete lockdown as well as a forecasted locust invasion. Uganda remains vulnerable to financial volatility,” he said.

As a result of the measures imposed to contain the spread of Coronavirus between March and May, Mr Mutebile revealed that the economy had contracted by 3.2 per cent, with some Shs3.9 trillion wiped off the market.

“Covid-19 affected both the demand and supply side; while supply will recover in line with easing containment measures, demand will only improve gradually with improvement in foreign demand and confidence levels as well as continued support from fiscal and monetary policies,” he revealed.

GDP growth projections
In its 15th economic update released last month, the World Bank detailed that on a calendar year basis, real GDP growth in 2020 is projected between 0.4 and 1.7 per cent, compared to 5.6 per cent in 2019, which in real per capita terms growth has turned negative.

“The decline in Uganda’s real GDP growth and corresponding loss of jobs could be even larger if the country were to face a more widespread pandemic, which would require more extended periods of mobility restrictions and/or overwhelm the capacity of the health system,” the economic update reads in part.

And with the pandemic widening, the World Bank further warned that with the current account deficit and slowing financing inflows, the external gap will amount to $1b (Shs3.6 trillion) in the FY2020/21 (or about 2.4 per cent of GDP).

“The combined fall in merchandise exports, tourism earnings and remittances are expected to outweigh the decline in imports. The crisis is also set to severely impact external financing inflows, with net FDI inflows projected to decline by 30 percent in FY20 compared to last year’s outcome and recovering only at the margin in FY21,” it added.

Mr Simon Mwebaze, the general manager of UAP Financial Services, explained to this newspaper that the economic contraction has already been felt, although somewhat levelled with the easing of the lockdown measures but “some critical sectors such as tourism and all supporting functions; education and all supporting functions are still in the red, and likely to continue in the red for some foreseeable time.”

He also agreed that the economy is picking up in areas such as construction, finance, and banking. “There is a bit of recovery; it’s not a v-shaped recovery as we would have hoped but by the time vaccine will be found, there will be some wiggle room.”

Mr Mwebaze indicated that while some African economies have already slid into a recession, Uganda’s comparative advantage is that “anchor sectors of the economy are still more or less operating” notwithstanding the high chances of contracting the negative spillovers.

What analyst says
“To say we will see a broadband spillover may not be the case. If you look at the challenges the country has seen over the last five years, from instabilities in neighbouring countries to the border closure, and still always came out stronger.

That said, as a way forward to save the economy we need to ensure we are competitive in terms of output, assisting businesses by either restructuring their loan portfolios or bringing down the cost of the credit in line with the CBR. We need to bring a private sector mind in the solutions,” he said.

In this financial year’s budget under the theme “Stimulating the Economy to Safeguard Livelihoods, Jobs, Businesses and Industrial Recovery” read out in June, government acknowledged the gravity of the lockdown, especially on private businesses and detailed strategies to help them steer clear of the storm, including accessing credit from the Uganda Development Bank (UDB) and micro finance institutions.

However, local media has been awash with complaints about the prohibitive requirements, including, among others, a facility application letter (on official company letter head), copy of the detailed business plan and feasibility study, board resolution to borrow with details of shareholders and directors with their bio data, and a credit reference bureau report of the company and all its shareholders/directors, to be considered for a credit from UDB.

In the same vein, an April report by the government Microfinance Support Centre detailed that it was overwhelmed by loan requests from SMEs.

According to Dr Paul Lakuna, a research fellow at the Economic Policy Research Centre at Makerere University, BoU’s revelation of contraction in the economy broadly means a reduction in GDP or real GDP, especially in the three largest sectors—agriculture, manufacturing—and broken down further, including sub-sectors such as trading, but the focus should be getting everyone on board.

“Relative to last year, things are worse but compared to the last quarter, things are better,” Dr Lakuna said. “The revised budget took into consideration a lot of things in form of bailouts, tax deferments, etc, but there are issues of equity that we still have to deal with; take, for instance, private schools, who is watching over them.”

With the Covid-19 cases spiking every day, and basing on World Health Organisation projections that Sub-Saharan case load was likely to peak by September, easing out of this economic fragility for Uganda, like many developing countries, will likely be an uphill battle.

KEY ISSUES
In its 15th economic update released last month, the World Bank detailed that on a calendar year basis, real GDP growth in 2020 is projected between 0.4 and 1.7 per cent, compared to 5.6 per cent in 2019, which in real per capita terms growth has turned negative.

Bank of Uganda maintained the lending rate at 7 per cent in July and continued to provide liquidity support to the banking sector but that did not translate into low lending rates offered by commercial banks; in fact prime lending rates averaged between 18 and 19 per cent.