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Understanding the impact of Coronavirus

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Added 23rd May 2020 04:05 PM

The struggling lower-income population has reached a tipping point where they are unable to pay rent; meet utility bills and are calling for relief supplies from the government.

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Prof Augustus Nuwagaba

The struggling lower-income population has reached a tipping point where they are unable to pay rent; meet utility bills and are calling for relief supplies from the government.

By Prof Augustus Nuwagaba (PhD)

Since December 2019, the Global Economy has been on tenterhooks, resulting from the outbreak of Covid-19, the fatally viral infection caused by coronavirus. As we all know, this infection started in Wuhan, a remote city in China.

A number of conspiracy theories have been advanced to explain the outbreak, but this is not the time to engage in such speculations.

As I pen this article, the global death toll from Corona Virus has reached 50,395!!! And over 1,000,000 infected cases with epicenters in Italy in Europe and New York in the United States of America. Interestingly, China is experiencing a dramatic recovery!

The health sector in all countries including Uganda has therefore been stretched beyond their capabilities and must be commended for selflessness as they treat the overwhelming number of patients. The pertinent questions for every head of state, government, and economists are;1)Has coronavirus plunged our countries into a recession? 2) Who are the most economically affected people? 3) Which sectors of the economy have been hit hardest? 4) What is the most viable response from the government? 5) How did different governments respond to similar global crises such as the world global financial crisis? 6) What immediate safety nets can the government put in place to mitigate such devastating impacts of the Coronavirus? 7) What lessons have we learnt though in a hard way from coronavirus pandemic?

1) Has COVID-19 pandemic plunged Ugandan Economy in recession?

The answer is technical No, but practically a big Yes. For a recession to be declared, an economy must have contracted for two successive quarters, which has not happened of recent, at least from available data. Therefore, a myopic person can take refuge in these technical narratives, but the reality is self-revealing: there has been the closure of businesses; unemployment surge; failure for many borrowers to meet loan obligations; tax defaults; failure for tax body to meet targets and a general fall in consumer demand.

The struggling lower-income population has reached a tipping point where they are unable to pay rent; meet utility bills and are calling for relief supplies from the government. When you reach such a threshold, you do not wait for technical definitions to define economic realities.
 

  1. Who are the most economically affected people?

The coronavirus has hit everyone but it has devastated informal sector operatives, wage earners, and those in the tourism sector. The latter are hit hardest because coronavirus is foreign linked. In Uganda, it has been proved that most infected persons had travelled from Dubai, United Kingdom, and other countries. Tourism will suffer for some time from low external demand, largely due to the depressed global economy which will affect hotel industry and similar services. On the other hand, the informal sector economy (boda bodas, small retail business) will agonize due to abrupt closures but this is temporary. Once the coronavirus pandemic is subdued, this sector will pick immediately. The suffering within this sector is therefore short-lived
 

  1. Which sectors have been hit hardest and what are the macroeconomic implications? 

As already explained in the foregoing, the tourism sector has been hit hardest because this sector depends entirely on extend demand, yet the coronavirus epicenter is in countries that constitute the very source of financial flows including US$ 1.8 Billion from Ugandan Diaspora (BOU, 2019). The contraction in inflows will lead to volatility in the domestic foreign exchange market, hence negatively affecting our current account and Balance of Payments. The other sector to be hard hit will be the financial/ banking sector, largely resulting from a reduced appetite for loans due to collapsing business enterprises. There will be loan repayment defaults with a subsequent surge in Non-Performing Loans (NPL). This will further contract the economy due to decline in aggregate demand, dearth of economic activity, and contraction of private sector credit all resulting into general poor economic health.
 

  1. What is the most viable response from the government?

The response needs different targeted policies because the corona pandemic has significant economic fallout, reflecting shocks to supply and demand. There is need to support the economy through the pandemic, keeping a web of economic and financial relationship between the workers and employers; suppliers and consumers. The aim is to prevent a health crisis turning into an economic and financial debacle, which can permanently harm people and firms through jobs losses and bankruptcies. The following fiscal actions from the supply side are pertinent;

  • The first priority is to keep people healthy and as safe as possible. This means spending more on health supplies and equipment in hospitals and other health facilities

  • Ensure food supplies to the most vulnerable

  • Quantitative easing to business enterprises aimed at preventing total collapse of business activity.

  • Intervening in Loan renegotiations  to support borrowers to manage their loan obligations

  • Supporting tenants to renegotiate with their landlords for rescheduling on rental charges.

  • Direct cash payments to vulnerable people especially the elderly.

On the demand side, there is need for appropriate monetary policy.  The first is for reduction of interest rates. The Bank of Uganda has correctly responded by reducing the Central Bank Rate (CBR) by 0.5% although previous experience has shown that the CBR is not a sufficient monetary policy transmission mechanism in this regard. Therefore, there is need to invoke other monetary policy transmission tools aimed at stimulating demand and economic activity in the short and medium-term. This is even what the FED in the United States has already done, reducing the interest rate by 50 basis points. There is need to defer tax payments and expedite tax rebates to business enterprises where possible. Others are; defer utility bill payments.
 

  1. How did different foreign governments respond to similar cases such as the global financial crisis?

The global financial crisis was different from the corona pandemic because the latter, though has significantly affected the financial system, came outside the financial system itself. In this case, it will be relatively easier to deal with. What the government needs to do is to provide adequate quantitative easing to help cushion business enterprises from total collapse and bankruptcy. This is crucial because all other interventions depend on the capacity to the government to finance the initiatives under the stimulus package but also it is from vibrant business enterprises that the government will be able to get revenue.

The Obama administration in the United States (2008) provided the mother of all stimuli to American business enterprises and this prompt response alone averted the entire global financial crisis which otherwise could have plunged the American economy into a depression. The banks and insurance companies were rescued and America was back on the rail.

  1. Are there safety nets Uganda can put in place to mitigate the impact of such crises?

  • There is a need for strategic food reserves. This is crucial in contingency situation such as the current need for foodstuffs by people who have been rendered jobless due to closure of business and general lockdown.

  • Need for improved foreign exchange reserves position. Currently, our foreign exchange reserve position is equivalent to 4 ½ months of import value. This is reasonable in normal circumstances but in a situation like of coronavirus pandemic, it can be a drop in the ocean.

  • In the medium and long term, there is urgent need for enhancing export sector performance and support for any activity aimed at improving financial flows including establishing diaspora bonds.

  1.  Are there lessons that we can learn from coronavirus pandemic?

  • That an economy cannot sustainably depend on external demand and supply. This is because both are adversely affected by the depressed global economy. Tourism can abruptly halt while foreign manufactured goods can be in short supply or out of reach due to astronomic rise in prices.

  • Adoption of digitalization such as internet banking, mobile money transactions, and automation in industry production are all opportunities that enhance productivity, efficiency, and profitability.

  • Education institutions should exploit the prevailing digital applications as bulwark for Business Continuity Planning (BCP). This entails online teaching and financial transactions in order to keep business operations.

  • It is better to develop our internal capacity to manage pandemics, have ICUs and improve quality of health care in the country. Also public health behaviour such as hand washing should continue even after the coronavirus.

  • Biosecurity has also been vindicated as one critical area that needs attention and mainstreaming 

Whether conspiracy or not, the coronavirus pandemic is here, we need to support the government to eliminate the spread of the infection.

The writer is an International Consultant on Economic Transformation in the African region: Can be reached at reevconsult@infocom.co.ug

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