Corona pandemic: What measures will salvage economy?

Early this week, Parliament in stark contrast of the prevailing economic conditions doled out Shs10 billion to lawmakers from the Supplementary Budget.

The money is meant to maintain ambulances contributed by MPs, to provide fuel and pay allowances for the drivers of the ambulances.

This has elicited public resentment as thousands have signed a petition demanding that the funds are relocated to health centres and medical personnel.

According to the Bank of Uganda Monetary Policy Statement for April 2020, the Covid-19 impact on the Ugandan economy is projected to slow down drastically in the second half of Financial Year (FY) 2019/2020, with Gross Domestic Product (GDP) growth for the FY projected at 3 to 4 per cent.

Mr Corti Paul Lokuma, a macro-economic expert at the Economic Policy Research Centre (EPRC), opines: “We could lose more than 50 per cent in the output we are producing in a year.

Putting it in context, Uganda has a high informal sector estimated at 50 per cent characterised by many SMEs and 70 per cent of the population is below 30 years old, many energetic people are at home not working or their future is put at risk by covid.”

This slowdown will be amplified by the lockdown measures spanning a period of 35 days.

“The biggest challenge the lockdown has created is the breakdown in the supply chain,” argues Mr Abubakar Mayanja, an economist.

“Many people used to travel on the road and they would buy from these roadside markets and some of these buses and taxis are part of the supply chain, the biggest problem is that production can go to waste, the urban economy can suffer, that is the thinking and intervention I was expecting to hear from officials,” he says.

It is estimated that the biggest impact will be on the services sector such as tourism, hotels, lodges, salons, entertainment, sports, recreation, and the informal sector. It will also batter mainly internal trade due to closure of markets in adherence to presidential directives to suppress the further spread of the virus.

Mr Julius Mukunda, the executive director of Civil Society Budget Advocacy Group (CSBAG), told Daily Monitor that whereas the tourism sector will face a torrid spell, Uganda is largely a boda-boda economy and small enterprise businesses like salons will grossly be affected.

“One of the things we should do for example is how to stimulate the economy, our financial institutions need to function properly, no country functions with a sick financial sector.
Bank of Uganda (BoU) has lowered the Central Bank rate and restructured loans, BoU has provided liquidity and issued invitations to tender for treasury bills but this is not enough,” Mr Mukunda argues, adding that there must be a re-alignment in the next financial year budget to lift the economy from a slump.

Draft report
CSBAG has authored a draft report titled: “Refocusing the budget to mitigate effects of Covid-19 and support food security, job and wealth creation.”

It offers a well-researched analysis to eliminate wasteful expenditure and a blueprint on enforcing austerity measures to revive the economy and save the country Shs2.3 trillion, an equivalent of 9.9 per cent of the total budget.

Mr Mayanja told Daily Monitor that the first after-shocks of the pandemic will be felt as Europe and America slows-down into a recession.

“If starbucks is closed, then our [Ugandan] coffee will not have a market,” he says.
Mr Mayanja also revealed that disruptions in supply chains from China, a major trade partner, will affect manufacturing and this will reduce revenues.

“GDP numbers almost 73 per cent is consumption, this reduction will have an impact on Value Added Tax collection and limited revenue from import duties as a result of a breakdown in supply chains,” he says, adding: “The key manufacturing areas is sugar, tobacco, cement. We need clinker [for cement] that we have to bring in, we have the steel industry which has a big portion of its raw materials that need to be imported like steel billets, so there are major risks that may create the first depression in our lifetime economy.”

Mr Lokuma says the pandemic will result into loss of employment. “We should expect up to 20 per cent of loss of jobs, survival of firms will be at risk, even before Covid, a lot of firms were not surviving, with liquidity constraints, we expect the mortality rates to go up.”

The limited economic activity resulting from Covid-19 is likely to impact on the country’s domestic revenue mobilisation efforts and hence affect government spending.

Policy experts will need to re-align government budgets to lift an economy from distress.
Mr Mayanja says some of these policy shifts should target the rural economy, which has got 71 per cent of the labour-force and 25 per cent of GDP. “Those near the poverty line can fall back yet it has taken decades to get them out.”

Uganda’s projected revenue for the Financial Year 2020/2021 is Shs21.5 trillion, which will not be realised as the economy slows down and this could result into external borrowing as public debt soars.

Uganda’s debt stock grew from Shs46.36 trillion at the end of June 2019 to Shs48.91 trillion at the end of December 2019.

Of this, the external debt was Shs31.53 trillion representing 64 per cent while domestic debt was Shs17.38 trillion representing 36 per cent. This represents an increase in nominal debt to GDP from 36.1 per cent in June 2019 to 36.97 per cent in December 2019.

There are fears that over reliance on domestic borrowing crowds out private sector investments by hiking the cost of borrowing since government consumes a huge chunk of loanable funds from commercial banks.

Uganda’s expenditure growth has consistently outpaced growth in revenue collection, creating a widening financing gap and putting Uganda at risk of debt distress. Increasing debt also ties up resources in interest payments – domestic interest payments are now the third largest item in the annual proposed budget of the FY 2020/2021 at Shs4 trillion, which is equivalent to 11.3 per cent.

But with the price of the barrel of oil on the international market plummeting, there are fears that Uganda, which had hedged its bet on oil production, could default in paying the loans and attract less foreign direct investments.

It is not clear yet whether China will give the country a grace period to repay the loans.

The debt-trap perspective
Experts call this the debt-trap diplomacy where Beijing offers infrastructure loans and if weak economies cannot generate cash to pay their interest, their assets are taken.

Mr Lokuma says Uganda is one of the few countries, where there is optimism for growth after the devastating effects of the pandemic.

“There is a prediction to grow by 6 per cent in 2021 which is a fast recovery, this will not be seen in other jurisdictions. This [growth] will be aided by a moratorium on debt payment and debt rescheduling,” he says.

But Mr Mayanja says the country should be cautious. “I don’t think 3 to 4 per cent growth is realistic [this financial year]. It is not immediately possible to ramp-up production in terms of import substitution in areas where trade has been disrupted because of issues of intellectual property, you’ve got to build the skills.”

According to the total proposed National Budget for the FY 2020/2021, it stands at Shs44.6 trillion of which 40 per cent is proposed for development expenditures and 60 per cent for recurrent expenditure.

But the pandemic has affected domestic resource mobilisation in addition to other inherent challenges.

In times of crisis, Mr Mayanja postulates that there are three key factors to account for in the economy; human capital, financial capital and inventories.

“We have to get out of the conventional modelling and go into a social accounting matrix, fortunately Uganda built one. For instance how many people were working in hotels and don’t have work? An inventory of capital assets, when you allocate the budget you have to go in areas that directly attack the problem. For example, I know that healthcare, retail and food industry are critical,” he says.

URA projections
For instance, during the half-year period of July to December 2019, Uganda Revenue Authority (URA) was projected to collect Shs9.739 trillion, however, URA collected net revenue of Shs9,042.01 trillion thus falling short by Shs697.38 billion.

With trade and commerce coming to a shuddering halt, shortfalls in the year (FY 2020/2021) are expected to fall more sharply and this will leave the budget kitty further depleted.

Uganda’s domestic resource mobilisation challenges include insidious tax incentives and exemptions: URA anticipates to forego about Shs500b tax revenue in the FY 2019/2020.

Illicit financial flows from corporations through money laundering and financial misreporting results in an additional loss of a staggering Shs2 trillion.

There is also the under-assessment of mineral royalties. For instance, the Energy ministry collected Shs10.5b in respect of mining royalties, however, a review of reports from the Customs and Excise Department of URA indicated that government should have collected Shs70b in royalties, using the applicable rate of 5 per cent from gold, tantalum and tungsten.

The tax body also experienced leakages due to poor working relations with other government bodies.

For instance, the 2019 Auditor General report indicated that a total of Shs54b was not collected due to non-coordination between URA and the Gaming Board.

The tax body did not collect another Shs393.8b due to failure by URA to access the Integrated Financial Information Management System. It was also registered that a number of expatriates do not pay PAYE due to failure by the Directorate of Immigration to share work permits issued with URA; a number of driving permits are issued without paying the requisite taxes; and a number of instruments are registered by the Ministry of Lands without paying the requisite stamp duty.

As has been most Uganda’s budgets in recent years, the proposed highest expenditure is works and transport at Shs5.8 trillion followed by security at Shs4.5 trillion, followed by interest rate payment at Shs4.01 trillion, Education at Shs3.5 trillion and Health at Shs2.8 trillion.

“When you look at the Budget of the FY 2020/2021, it has nothing to do with Covid-19, it is still business as usual and that is the biggest worry, because if you provide Shs68b to travel abroad, we are wondering where you are travelling. For heaven’s sake this thing [pandemic] will end when the economy is on its knees,” argues Mr Mukunda.

He says: “A number of things need to be done, we need to have serious austerity measures, and this is the time to reduce luxuries from our budget.”

Mitigating wasteful expenditure
CSBAG’s study suggests some of the expenditures deemed as wasteful include welfare and entertainment, special meals and drinks, and ministerial donations amounting to Shs83.5b from selected sectors.

There is also duplicity in expenditures in all sectors on ICT, and ICT Equipment amounting to Shs225.3b.

Another duplicated budget items such as ‘agricultural supplies’, which is catered for under various votes could result in a saving of Shs213.1b.

The study suggests that Shs715.2b could be retained if government halts items such as staff training, maintenance , recruitment expenses (except for the Health ministry), computer supplies and Information Technology, transport equipment, machinery and equipment, among others.

Government can save another Shs68.3b on the superfluous expenditure on travel abroad, which barely has any cost benefit to the country.

Travel inland amounting to Shs281.377b could also be trimmed by 30 per cent to Shs84.413b.
The study recommends capitalisation of Uganda Development Bank to the tune of Shs300b.

It is estimated that this will provide cheap credit to the more than 18 million Ugandans who are eligible to participate in the financial sector market.

Participation of Uganda Development Bank in the credit market will increase the amount of loanable funds within the market and this has a trickle-down effect on commercial banks lowering their lending rates.

The draft research also proposes that the Micro Finance Support Centre Services should be supported to the tune of Shs100b.

This, according to the study, will boost the financial base of the Micro Finance Support Centre through a transmission mechanism; improve access to credit to more than 70 per cent of the informal sector players as well as a few formal sector players Agriculture is another area of priority to revive the economy.

This can be anchored on supplying seeds, suckers and fertilisers, the recruitment of extension workers, establishment of buffer stores, establishing an import substitution fund and value addition processing centres.

But without a robust team of medical personnel and properly equipped hospitals in place, there are fears that other interventions to resuscitate a battered economy could be in vain.

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

The MoFPED estimates that Covid-19 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.

Economy hit
Tough times ahead. Last month, economists predicted hard times for Uganda as the country stares at consequences of coronavirus outbreak now ravaging several countries across the world.
Uganda Investment Authority (UIA), the government agency mandated to sell the country as the preferred destination for foreign investors, said they have been hit hard since the outbreak of the virus. Mr Lawrence Byensi, the acting director general of UIA, said the number of foreign investors applying to come to Uganda had reduced.
Uganda External Recruitment Agencies Association spokesperson Ronnie Mukundane, said the situation was dire. “We are stuck with people because countries we export to have closed borders. We also have people whose contracts have run out,” he said. Mr Mukundane said external recruitment agencies have lost billions of money.