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Lockdown: Govt should provide emergency loans for businesses

Dr Ramathan Ggoobi

Dr Ramathan Ggoobi

The ongoing countrywide lockdown to stem the spread of Covid-19 is having a polarizing effect on the economy. Whereas several medical experts have welcomed the lockdown, many in the business community, especially the low-income earners, fear for the worst.

However, Dr RAMATHAN GGOOBI, an economist and policy analyst, told David Lumu in an interview that it is possible to strike a balance if government provides emergency credit support to ensure survival of businesses.

Generally, how do you view the debate on lockdown as a strategy to deal with the Covid-19 pandemic?

Experience around the world suggests that lockdowns effectively suppress the spread of Covid-19. They, however, pose considerable economic costs that, in turn, threaten lives and livelihoods.

For example, a recent rigorous analysis by the World Bank shows that although last year’s lockdown was effective at flattening the epidemiological curve, and thus very few Ugandans died of Covid-19, it produced a net increase in mortality in Uganda and other low-income countries.

The estimates indicate we lost up to four children per every Covid-19 fatality averted. That, in simple terms, means for every adult (mainly elderly) saved, four children died. They died mainly due to economic contractions and distraction of the healthcare system from primary health and maternal care to Covid-19.

So, given the kind of trade-offs that must be made, policymakers need to be very careful when they are taking decisions to lockdown. They need to consider the frequency, intensity and length of the lockdowns. They need not to panic. Covid-19 is as contagious and disastrous economically as it is medically.

We shouldn’t make people consider a tough choice between Covid-19 and hunger; what they should die from. That calls for an elaborate plan that adequately or at least reasonably supports people to stay at home, and at the same time one that protects the healthcare system to continue functioning to avert non-Covid mortalities.

How do you see Uganda’s economic recovery shaping up given the strong second wave of the Covid-19 pandemic?

Early last year, I warned our policy-makers to watch out since historical experience shows pandemics are typically not discrete. They occur in multiple waves. As you go through one wave, you must start to think about the frequency, intensity and length of lockdowns you are likely to face as other waves hit.

I wish they listened. Instead, they designed a budget that was largely focused on normal U-shaped recovery and the original medium-term goals. Needless to say, just like last year, next year’s budget has already been rendered inapt before its implementation starts. This, in a way, is good news. Budgets are not cast in stone.

In a country with a sizeable population living a subsistence life, how will the lockdown affect them?

The people in subsistence are likely to increase further mainly because more Ugandans have migrated from urban to rural areas to run away from the lockdown. But these are likely to be mostly those who were in subsistence economy anyway; either as wage earners or business operators in the urban informal economy.

So, we are likely to see increase in the population in subsistence farming. Additionally, due to large numbers likely to lose their formal jobs as some firms scale down or fold, we might also see a rise in the segment of population in wage or business-based subsistence.

What are the policy options for Uganda to support the economy at this juncture?

First, government must mobilise more fiscal resources to finance at a time when we have seen an unprecedented fiscal expansion already to respond to the pandemic. There are two sources of resources government can deploy to recover the economy – taxes and borrowing.

Already there are concerns about debt overhang post-Covid. Our debt stock increased to $18 billion as at end December, 2020, from $13 billion in December, 2019. The debt-to-GDP has already hit the ceiling of 50% in nominal terms.

Should government contract more debt?

We know that high debt levels are a problem for growth, interest rates and future inflation.

Should it raise taxes on businesses and households that have been hit hard by the pandemic?

This is the dilemma policy-makers face going forward. My view is that although Uganda’s debt-to-GDP ratio has increased rapidly recently, there is still room for responsible borrowing. As long as the interest rate burden remains low, and there’s confidence among potential creditors, then we are relatively safe.

The government only needs to have a plan for paying off the debt that is anchored on strong supply-side growth for the tax base to grow, plus fiscal prudence.

So, as long as we can find extremely long-dated debt to lock in low-interest rates, and reduce the rate at which we are going into rollover of very short-dated debt, then we can get more concessional debt to support economic recovery.

Priority should be given to small and medium enterprises (SMEs) in sectors that can generate both inclusive growth and jobs. The particular sector to support should be scientifically and capriciously selected. The planned SME Recovery Fund should be established to provide affordable emergency credit support to ensure survival of businesses that employ other people.

Secondly, this financial year government should allow SMEs to file tax returns on a quarterly rather than monthly basis. This will give the room to reuse the funds as working capital rather than seeking costly bank loans. The money already invested in Uganda Development Bank (UDB) should also be enhanced and retargeted. The Uganda Development Corporation (UDC) will also need more money to bail out strategic businesses that are likely to face more cashflow challenges by co-investing with them.

There is also need to prepare workforces for post-Covid ‘new normal’ by equipping the youth with more and better employment skills, as well as internship and work experience assistance.

Then, government should reduce the cost of internet and invest more in ICT and training to promote digitization of the economy. The post-Covid world is going to be digital-oriented. The revenue expected from internet tax may be forfeited. The multiplier effect will be higher than the lost revenue.

Do you foresee a need for large-scale government bailouts at the end of the pandemic?

Yes. Now that government has its investment arm (UDC), let it be optimally used to bailout strategic businesses that are likely to face more cashflow challenges by co-investing with them.

Instead of giving taxpayers’ money to private businesses as grants, UDC should buy stake in large struggling businesses that may not be creditworthy to acquire loans from UDB or commercial banks. The businesses will buy back the shares when their financial positions improve.

Of recent, Uganda has been advocating import substitution by encouraging local manufacturing. Can such a policy really work in such times of uncertainty?

To pull off this strategy, there are two ‘transfer’ challenges Uganda is likely to face: First, raising fiscal capacity to execute the import substitution strategy. This is a challenge of transfer from private to public sector.

With low savings, a shallow financial sector, relatively high interest rates, and a big consumptive and freeloading government, it is going to be hard to mobilise fiscal resources to finance an inward-looking strategy without raising the already high interest rates and inflationary pressures.

Second, transfer from the rest of the world. Uganda is already bordering over-reliance on foreign direct investment (FDI) whose presence is dominant in the productive real economy, particularly manufacturing. With Covid and its devastating impact on global national economies, it is left to be seen whether more capital will come to Uganda.

Are we a safe enough destination for the now scarce and rare capital? How will Uganda compensate for the likely loss of remittances, tourism revenues, and other capital inflow sources?

In addition, won’t Covid escalate further trade wars and further weaken the already debilitated EAC as nations pursue mercantilism and inward-looking policies?

These are questions policymakers should grapple with at a time of unprecedented levels of uncertainty and without much wiggle room.

Comments

0 #1 kabayekka 2021-06-23 17:50
If this government cannot provide any financial help to the farming communities that seem to be provide a meal for all the communities that are suffering from a national lockdown, how dare these rich people who are running profitable business to start to demand government assistance in loans.

One understands that much of the present loan or external debt portfolio Uganda is indebted with is due to the capital and financial demands of the Establishment of the Uganda Private business sectors?

This is the sector right now that is holding on to the Uganda foreign exchange mechanism so that the shilling remains strong even when it is presently very weak on the international currency market!

The Uganda private sector is sitting on so much Ugandan shilling currency in the hope that when the lockdown ends it will be business as usual as if nothing bad has ever happened to the rich people of this country!
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0 #2 kabayekka 2021-06-23 18:02
If the rich hospitals of this country are making lots of money from this pandemic and storing it all up into the banks, to whom is Ramathan Ggoobi demanding financial support for?

Even the government itself has been begging the rich not to make so much money out of this pandemic so that they can as well show some sort of sympathy to the condemned who are waiting to die of COVID19 in this poor country!
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0 #3 kabayekka 2021-06-24 14:24
Now that this government is waking up to the fact that there should be a welfare system in this country as any other country on the African continent, some help has been suggested in terms of cash currency other than beans and maize mill.

A welfare system is not given to the rich and managers of business. It serves the poor and unemployed who are financially struggling to find work and make a living.

This is a system that is functioning well in many countries and if it starts now in Uganda, it must go on to make this country an African Socialist and Democratic nation.
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0 #4 kabayekka 2021-06-24 22:42
These so called African revolutionaries after trying so hard on their agenda to make Uganda a class society of capitalism, where the rich govern, this is the time to give up their dream and resign!

The African societies for many generations on this continent have always been in that culture of socialism. More so like in that international ideology of the Christian Jesus.
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