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How Covid-19 has affected economic fundamentals

The price of a tray of eggs has plummeted from Shs 12,000 in January 2020 to Shs 7,000

The price of a tray of eggs has plummeted from Shs 12,000 in January 2020 to Shs 7,000

A lot of water has flown under the bridge in regard to the impact of Covid-19 on the Ugandan economy.

The debate has centred on the negative impact of Covid-19 pandemic on economic activity, revenue streams and subsequent lockdowns and travel restrictions which have all combined to deprive the people of eking out their normal livelihoods.

In order to understand the actual impact of Covid-19, there is a need to understand what we call economic fundamentals.

In economic nomenclature, there are four (4) economic fundamentals namely; i) interest rates, ii) trade balance, iii) inflation and iv) gross domestic product (GDP).

These fundamentals are critical for people’s well-being, because they determine not only the capacity of a people to engage in economic activity, but they define the actual store of real-time value of money. Let’s look at how Covid-19 has affected each economic fundamental.

Interest rates

One major problem faced by everyone in Uganda, big or small, black or brown and short or tall is how one is going to meet loan repayment.

Uganda’s interest rate regime is one of the highest. The current rates are in the range of 20 per cent yet, countries like South Africa, it is 10.25 per cent, Tanzania; 12.0 per cent, Kenya; 12.3 per cent, United Kingdom; 1.1 per cent, USA; 0.25 per cent while China is at 3.8 per cent!

Covid-19 pandemic has unleashed a blow to borrowers whose businesses most of them SMEs, have suffered the full-brunt. The high interest rates have been exacerbated by the closure of business enterprises, most of whose proprietors have ‘eaten’ up the operating capital.

It is good that Bank of Uganda agreed on a moratorium on loan repayment, but still, the real issue is that interest rate is already abnormally high, which contributes to high mortality of SMEs and less competitiveness of our economic enterprises.

It is going to be an uphill task for borrowers to meet loan obligations both during and after the Covid-19 period.

Trade balance

This means the amount of money we earn through exports (export receipts) as compared to the money we spend on buying goods from other countries (import invoices). This is where Covid-19 has hit us the most. The money Uganda earns from tourism is $1.5bn per financial year, while the money we earn from Ugandans in the diaspora is $1.4bn annually.

We sell goods worth $4.1bn and import goods worth $7.8bn, implying a trade balance of $37bn. Covid-19 pandemic has worsened this situation because all our sources of inflows have been negatively affected.

Tourism has suffered the worst catastrophe under Covid-19, because of the closure of borders, ban of air travel, closure of hotels and restaurants. It is only our hope that the coronavirus will subside quickly and tourism will rebound. Uganda has been outstanding in managing the Covid-19 pandemic and it is envisaged that the tourism sector will suffer in the immediate, but in the short and medium-term, the sector should catch up.

This is because Uganda has been highly acclaimed due to the excellent way we have controlled Covid-19 and this will be a high attraction.

Secondly, there is need to harness domestic tourism.  For exports, we have learnt our lesson: there has been a twin supply-demand shock and it is clear that Covid-19 unleashed a depressed global demand, while also cutting short the supply of raw materials and intermediate goods.

The implication is that we must embark on import substitution, boost local production and cure “the cancer of importation.”

Inflation

One problem that we have not encountered is the rise in prices of goods. This has been driven by two major factors namely: the depressed consumer demand unleashed by Covid-19 pandemic. The closure of borders, business enterprises and travel restrictions under lockdowns have left few people with disposable income to purchase goods and services.

For Uganda, the agricultural sector has “mothered” all of us even in this difficult Covid-19 periodic. Most people have enjoyed relatively low prices of foodstuffs because the people in rural areas work hard to produce food crops. 

However, there has been a problem of plummeting of prices of products such as milk and eggs. While this has been advantageous to consumers, the drastic fall in prices of agricultural products means low returns to farmers.

For example, the price of a tray of eggs has plummeted from Shs 12,000 in January 2020 to Shs 7,000. Similarly, the price of milk has fallen from Shs 1,200 to Shs 300 in May 2020.

Growth

Growth of an economy is measured in terms of gross domestic product (GDP). Covid-19 has posed tremendous growth challenges.

One critical question is; has Covid-19 plunged Uganda into a recession? The answer is both Yes and No. No, because technically, a recession means that a country’s GDP has suffered two successive quarters of negative growth.

The Ugandan GDP has been growing at 6.2 per cent but is now projected at 3.0 per cent. However, when harsh economic environment dictates that people must survive on one meal a day, having lost their jobs through lay-offs, you do not depend on technical definitions to determine economic realities. The writing is clear on the wall.

The lessons learnt are that Uganda will be better if it adopts import substitution strategy and cure the “cancer” of importation. It is also abundantly clear that the agricultural sector is a fundamental sector that has “shock-absorbed” Uganda, and Covid-19 pandemic has demonstrated that the agriculture sector needs special attention.

We all applaud the Uganda government and the ministry of Health for the great work in controlling the spread of Covid-19 and in properly treating the victims of Covid-19. I only advise that lets now focus on economic stimulus that can make the economy rebound as quickly as possible.

reevconsult@infocom.co.ug 

The writer is an international consultant on economic transformation in the African region

Comments

0 #1 kirya 2020-06-01 05:58
Cona virus stsretd 35 years ago when m7 took over power with his bushmen.

They liberated themselves from poverty and now they own all types of properties in Uganda. URA bank of Uganda are used as personal funds for the family of thieves!

The loans and financial AID are distributed between the family members and the left over is given to the political prostitutes.

Time has come to reclaim our country. They cannot determine our destiny.
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