Double tragedy facing economy: Covid-19 and Elections

Although it is difficult to establish how much money those vying for political positions in the country spend on electioneering, the economy usually takes a beating from extravagant election expenditure.  

Excessive expenditure experienced during electioneering period usually destabilises the economy as evidenced in the previous four general election.

Analysts fear for the worst this time as the political season heats up.

This is because the country’s politics, particularly at the higher end of the political spectrum, has in the last decades become a “do or die” affair, as most political actors inject as much money as they can to win an influential or lucrative political seat.

Available studies including one conducted by the Public Policy Institute (PPI) indicate that the country’s parliamentary and District Council (LC5) elections are increasingly becoming a commercial affair.  

For example to win a parliamentary seat, on average, candidates in the 2016 elections spent Shs484.7 million for both the primary and general elections. On average, successful candidates outspent rivals by a difference of Shs194.5 million.

Interviews with political players involved in elective politics further indicate that to grab a parliamentary seat in the country, one will have to spend in the range of Shs150 million to Shs600 million.

For those gunning for the top presidential slot, the amount more than doubles for some political players, considering the high stakes involved.

Effect

Economists attribute excessive money supply in the economy during elections to inflation that goes haywire upon conclusion of the electoral exercise. This reduces purchasing power of the shilling, pushing domestic prices up, and crowding out private sector investment due to the high interest rates charged on bank loans.

As a result the chances of losing properties staked as guarantee to the banks becomes more real by the day because of rising inflation, compelling the banks to hike lending rates which makes it difficult for borrowers to clear their loan obligations.

The ultimate price for the distorted money supply into the economy during the election period increases the unemployment rate because private sector cannot acquire cheap credit facility. 

Then there is uncertainty that comes with election. 

Not knowing which candidate may win or how the win may translate in terms of effects on policies can be a big stress for businesses which eventually costs the economy. This is because a new president can mean so many things including new tax rules and regulations that could change the way business operates. 

Investors dealing in financial markets get nervous and suspend or reduce investment.

“Markets hate uncertainty,” Ms Susan Khainza, a chartered financial analyst said last week.

She continued: “Throughout the electioneering period, activity on the stock market is expected to remain subdued and investors tend to favour less risky investments like fixed income and sometimes prefer the dollar to the local currency. It is harder to make a decision when faced by uncertainty. Some investors may take advantage of the lower prices caused by subdued demand at the stock exchange and pick up equities which offer favourable valuations.”

In another interview with private sector development specialist, Mr Moses Goli Ogwal, he said uncertainty does not work in isolation.  

He said one of the key things for investments is predictability. And this should include macroeconomic stability as well.

“Sometimes, elections are related with expenditures which drastically cause inflation. In the process of managing inflation, we have seen in the past, interest rates increase because of the actions of the Central Bank such as increasing the CBR and so on,” Mr Ogwal said. 

What Mr Ogwal is talking about happened after the 2011 and 2016 elections although the turbulence in the macroeconomic stability was not as hard as exemplified in the aftermath of the previous general election.

“Such things worry investors. So they will be watching how macroeconomic stability particularly inflation which relates to interest rates balances out,” he noted.

Stimulus or stifling?

According to Dr Fred Muhumuza, a lecturer at Makerere School of Economics, the notion that election money, most of which is being used to lure the electorate, should not be regarded as stimulus because of its potential to stifle the economic growth.

The renowned economists argued that technically, elections do not address the fundamental economic challenges because such monies are not geared towards resolving issues in the productive sector of the economy. 

“It is simply liquidity injections of money into the economy for purposes of political campaigns and not a decent planned investment,”he said.  

He is also cognisant of the fact that election is not just a constitutional requirement but a democratic process where money should be spent. The rhetorical question is: how efficient can the democratic exercise be done without or limited disruptions to the economy.

For example in the recent presidential nomination, some of the national roads were blocked. 

This is in addition to ensuring that the forthcoming election is managed in a manner that it does not result into a huge medical bill as a result of the population contracting Covid-19.

Covid-19 election

Unlike the previous elections, this forthcoming one will be held in the midst of Covid-19 which has taken immeasurable toll on nearly every major sector of the economy.

An economic sector like tourism, the country’s biggest foreign exchange earner, is pretty much in a coma with a minimum life support.

According to a report authored by the Tourism Ministry, the hotel sub-sector has lost a trillion shillings in the period between March and June, thanks to the Covid-19 lockdown that has restricted access to the facilities. The report further noted that by next month the hotel industry would have lost Shs1.8trillion.

 Already economic sectors such as manufacturing, construction, tourism, hotels, trade, transport and generally the services sector, all of which provides massive employment and revenues to the national kitty, are experiencing slowdown.

In his 14th address to the nation regarding the ongoing battle against Covid-19, President Museveni said: “We have lost $1.6 billion (about Shs6 trillion) from tourism and there is nothing we can do about that…”

Regarding remittances from Ugandans living abroad, Mr Museveni noted that the country could lose $1.3 billion (about Shs4.9 trillion).   

As if that is not bad enough, a Ministry of Finance, report reveals that domestic revenue collections registered a deficit of about a Shs3 trillion by close of the previous financial year, partly as a result of Covid-19 pandemic and the resultant containment measures instituted in the last quarter of the revenue collection calendar.  

Risk of Covid-19

The result of the Economic Policy Research Centre (EPRC)’s survey, examining the effect of the risk presented by Covid-19 pandemic on Uganda’s businesses indicates that that small and medium businesses experienced the largest effects of the risk associated due to inability to cope with containment measures, including a lockdown.

With respect to the future outlook, the major concerns highlighted by businesses—in the event that the Covid-19 situation persists for more than six months—relate to reduced product demand and potential inability to meet costs of operations.

Job losses

The report projects that if Covid-19 persists for the next six months, about 3.8 million workers would lose their jobs temporarily while 0.6 million would lose their employment permanently.

Over 75 per cent of employees projected to lose their jobs permanently are from the services sector and mainly from Kampala.

EPRC research fellow Corti Paul Lakuma said despite elections being a necessary evil it cannot be done away with even when it disruptive to the economy.