How coronavirus turned Uganda’s economy upside down
Kampala, Uganda | JULIUS BUSINGE | 2020 has been a bad year for the economy. Growth opportunities have been hampered by the spread of COVID-19 and nationwide lockdown measures which led to closure of businesses and general decline in demand for goods. Jobs were lost.
Locust invasion and floods in various parts of the country were among the other factors that negatively impacted growth of the economy during the year.
The Bank of Uganda kept the policy interest rate – the central bank rate – at an average of 7% during the year, the lowest ever in the country’s history. However, the commercial banks’ lending rates remained high averaging 18% to 20% in all months of the year. The exchange rate, remained stable trading on average at 3, 700 per US dollar possibly as a result of subdued imports.
So far, available policy documents show that the gross domestic product in 2020 is projected to be between 1.5-3% compared to 5.6% reported in 2019 as exports, tourism, remittances, foreign direct investment and portfolio inflows shrunk during the second half of the year due to international trade disruptions and restrictions of movement of people.
This has created significant fiscal and external imbalance, and a deceleration in growth in services, primarily in real estate activities and information and communications technology.
Global powerful bodies such as the World Bank and International Monetary Fund have indicated that the medium-term outlook for the country is not favourable and that the decline in Uganda’s real GDP growth and corresponding loss of jobs could be even increase if the country is to face a more widespread pandemic and further locust invasions, as this could deter a rapid economic recovery.
Election uncertainties
The heightened uncertainty around the upcoming February 2021 elections further exacerbate these risks, according to the World Bank.
The Bank says that regional instability, pandemic preparedness and broader global trade uncertainty could undermine exports and affect growth and have implications for debt sustainability and the current account.
The Bank adds that COVID19 has worsened the effects of poverty and that up to three million people could fall into poverty particularly in urban areas, above the estimated 8.7 million in three years ago.
Worse still, current social protection programs are inadequate, reaching just 3% of the population and increasing overall vulnerability to shocks.
In response to the COVID-19 crisis, the government indicated in the FY2020/2021 [Shs45.5trillion] budget, it would focus on reviving small and medium scale business that are suffering due to the coronavirus pandemic.
It also sought to improve livelihoods in response to the effects of the pandemic on households.
For businesses to survive, government allocated Shs94billion as credit through SACCOs and microfinance to benefit small and medium scale businesses. The finance minister, Matia Kasaija said, this credit is significant since this sector accounts for 85% of private sector employment.
An additional Shs104billion was provided to Uganda Development Bank to enable businesses especially manufacturers and large scale private firms to borrow at low interest rates. Government also pledged to urgently pay arrears it owes the private sector.
Government also provided for tax exemption on agricultural equipment and supplies. For instance, VAT on supply of processed milk was removed to enhance price competition for Ugandan produced milk.
Meanwhile, the BoU in April this year granted permission to all banking institutions to provide credit relief through the restructuring of loans of both corporate and individual customers who were or would be affected by the COVID-19 pandemic.
The objective was to ensure financial stability and alleviate the impact of the COVID-19 pandemic on the financial sector and economic growth. As at December, the banking institutions have restructured loans with clients worth Shs6.7trillion, according to the BoU.
Public debt
Major short falls in revenue collection pushed the government into high levels of borrowing to cover its fiscal deficit for both FY2019/20 and FY2020/21.
Experts say, if this trend continues, it will contribute to a further increase in the total public debt, which has grown from 22.4% in 2010 to a projected 41% of GDP by the end of FY2019/20.
As a result, Uganda’s debt servicing commitments will continue increasing as rising external public loan financing requires high commitment fees, and non-concessional domestic borrowing attracts huge interests.
Interest payments alone took up 9% of total resource envelop for financial year 2020/2021, thus more money is being allocated to interest payment and away from service delivery or development spending that could benefit people living in poverty.
Inflation
Inflation outlook has been revised downwards, according to Bank of Uganda. It is projected in the range of 5-6.5percent in 2020 before converging to its medium-term target of 5%. The risks to the inflation outlook remain tilted to the upside, according to BoU.
However, this trend will depend on food prices due to unpredictable weather conditions; a more depreciated exchange rate, stronger recovery of the global economy-vaccine.
There are however downside risks to the outlook including lower fiscal spending.
BoU’s monetary policy report indicates that private sector credit growth declined somewhat mainly on account of increased risk aversion, deterioration in asset quality and a contraction in growth due to the COVID-19 pandemic.
Average PSC was reported in the range of 7.6%-8.9%. Relatedly, non-performing loans as a percentage of total assets averaged 5.4% during the year, almost the same rate reported for 2019. Loans extended in local currency were reported to grow by an average of 9.8%.
Slower credit growth was reported in all sectors except personal loans and household loans. The lowest growth was in trade and manufacturing. Growth in credit to the services sector (consumer facing services, tourism and others) that has adversely been affected by COVID-19 response started showing signs of recovery towards the end of the year, according to BoU reports.
On the other hand, exports (excluding gold) declined to $2,546.2million from $2,823.8 million on average due to COVID-19 related disruptions in economic activity, with international cross border trade exports hit hardest following the closure of borders in March 2020. These
Going forward
BoU says risks to the economic outlook in the near term have eased as a result of signs of a rebound in both foreign and domestic demand.
However, it also warns that there is still considerable future uncertainty surrounding economic growth and developments. It also adds that there is a need for monetary policy to remain accommodative until the economy sustainably normalises since inflation is projected to be well contained over the medium-term.
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