The impact of pandemics on poverty and financial Inclusion

OPINION

By Rashmi Pillai

By now, the novel coronavirus disease      (COVID-19)- is a household term. Hand sanitiser is out of stock, businesses are closing or cutting staff and even bodaboda riders near the FSD Uganda office report possible plans to stop working and go back to the village because they aren't earning enough to remit to their families. The pandemic is another reminder of our global interconnectedness.

It is a reminder of how an issue that is completely external can dramatically influence economies, both through on-the-ground effects like killing tourism and through macro level effects like disrupting trade and weakening the currency.

At the time of writing, Uganda has yet to announce a single positively identified case of COVID-19, but the impact is already here. In a speech on March 19, Uganda's Minister of Finance, Planning and Economic Development noted that Uganda has already revised its GDP growth rates downwards from 6% to anywhere between 5.2% to 5.7%.

Let's take tourism as an example. Tourism is one of Uganda's biggest exports (7% of GDP). It employs about 200,000-500,000 people per year and is going to be significantly affected, with hard currency flows that tourists bring each year slashed downwards for at least the next 4-6 months.

Tourism involves holiday planning with travel agents and tour guides, visa revenues for the Government, domestic transportation bookings with taxis and tour vehicles, accommodation and food at resorts, guesthouses, entertainment options, shopping, visit experiences at national parks or even local sightseeing.

Tour guides and hotel workers spend their wages in local shops. Declines in just tourism will have a direct impact on the revenues of all actors across this value chain, heavily compromising their resilience levels and upward mobility. Additionally, this will further exacerbate the Government's domestic revenue mobilisation gap.

Economies are interconnected networks, and even as the hardest-hit industries cry out for help, the Government, donors and other stakeholders should take a wholistic approach to helping. Rural areas will also be harder hit than is yet visible. 

Let's take the dairy and coffee sectors as examples. While Uganda has a big domestic market for dairy and dairy products, it is also a big export commodity.

Dairy farmers are already feeling the brunt of lowered rates per litre due to excess supply that is not being exported due to disruptions experienced by exporters. Coffee is Uganda's second biggest export, after gold.

China, whose coffee consumption is growing 20% per annum, was being actively courted as an export destination by coffee consortiums. This has now been suspended.

A similar if not higher impact is being witnessed in labour-intensive sectors like manufacturing, carpentry, since Uganda imports large quantities of raw materials from China.

Between disruptions to supply, and low new orders as buyers decrease due to uncertainty, these sectors are now reducing the number of shifts for workers, suspending certain lines of production or considering temporarily shutting down.

If the world cannot contain and curtail the rise of COVID-19 in the next couple 4-6 months, the impact on the global and Ugandan economy will be huge. The Ministry of Finance estimates that an additional 2.6 million Ugandans will go into poverty in case of a steep rise of COVID-19 cases in Uganda.

So, what can the financial sector (including regulators and the government) do to help people overcome this crisis but more importantly deal with the aftermath of this external shock?

The Ugandan government, the Ministry of Finance, and Bank of Uganda have shown true leadership in making the hard choice and getting ahead of the curve, despite no positive cases yet. The private sector is also playing its role, with the Uganda Bankers' Association eliminating bank-to-wallet charges and eliminating cash-out fees for lower transaction tiers for 30-days.

On the payments side, mobile wallet providers like MTN are waiving on-network transaction fees for lower-tier bands while Airtel has waived on-network fees for all tiers for the 30-day period. An even stronger response would be for these partners to increase the tiers for no-fee transactions — encouraging people to go cashless. Thus, reducing the risk of virus spread through the most commonly touched surface by all — cash.

The financial sector actor with an opportunity to rise to this unprecedented challenge is the Insurance industry. Many insurance companies don't cover pandemics and epidemics. However, in Kenya, the Insurance Regulatory Authority was successfully able to negotiate with the insurance industry in covering patients of COVID-19 (link here), while Indian insurers are honouring life insurance policies of patients who have died of COVID-19. Uganda has the opportunity to follow suit or even better, lead by example. Health insurance can help with hospital bills, medicines or even cash to replace lost income. If insurers can find a way to honour pandemic related bills and consequences it will go a long way in building awareness of why insurance is important, as well as trust in a sector which is otherwise viewed with scepticism.

What about the aftermath—How can the financial sector support faster recovery of people, households and non-financial industries? This will require a concerted effort between government, all financial sector and development actors. For example: how can government, banks and investors help credit only institutions, non-deposit taking MFIs, or pay-go-solar, leasing and other types of sectors when regular customers can't repay on time? If companies force repayments or collateral seizure when livelihoods are lost or reduced this could push clients further into poverty. On the other hand, adjusting repayment tenors will have liquidity and cashflow implications for credit providers. Similarly, 70% of Ugandan households directly or indirectly depend on agriculture. Depressed demand for goods due to the economic shock of COVID-19, could impact agricultural produce prices, lowering farmer incomes and impacting their liquidity to buy inputs for the next farming cycle.

At FSD Uganda, we are closely monitoring the impact of COVID-19 on the economy. We are in regular touch with our partners in the financial sector, the refugee space, and the beneficiaries they are working tirelessly to serve day in and day out. We know the hard part is just beginning.  The road to recovery will require even greater collaboration, unconventional thinking, and most importantly urgency from the entire industry to start planning today to lessen the pain of tomorrow. We cannot wait until the dust, or virus, clears. 

The writer is the executive director of the Financial Sector Deepening Uganda