Can Uganda survive the global recession?

Feb 25, 2009

The continental Europe is hit by a devastating financial crisis that has sent many a company on a downward spiral. A recession can be defined as a period of reduced economic activity and can be reflected in the countries’ real GDP, personal incomes, pri

By Prof Augustus Nuwagaba

The continental Europe is hit by a devastating financial crisis that has sent many a company on a downward spiral. A recession can be defined as a period of reduced economic activity and can be reflected in the countries’ real GDP, personal incomes, private firms and small-scale business enterprises.

The IMF defines global recessions as periods where global growth is less than 3%. By this criterion, there has been a number of recessions across the world in different countries since 1985, that is, in 1990-1993, 1998 and 2001-2002 and then, the current crisis.

This current recession was precipitated by the failure of the housing sector in the US that led to colossal losses for assets backed by mortgage payments and spurred by the freeze of credit markets. This left many financial institutions limping with little or no credit to give to their clients and many consequently trapped in debt. Consequently, theUS has witnessed the worst job loss in history since World War II.

According to the US Department of Labour, unemployment rate is at 7.2%, with 2,590,000 jobs lost in 2008 comparable to 2,750,000 in 1945. These job losses were distributed across many sub-sectors.

The case in point is the manufacturing shade off of 149,000, leisure and hospitality industry 22,000, mining industry 1,000 positions, retailers slashed payrolls by 66,600 workers last month, professional and business services reduced by 113,000, financial services reduced by 14,000, and construction employment by 101,000.(CNNMoney.com)

During the last month, most renowned companies lost almost 80,000 jobs in a day. Companies like Philips, Pfizer, Corus, Caterpillar, Home Depot, ING, Sprint Nextel and Steel Company in the UK, have also experienced the shock waves and each dumped a sizeable number of jobs.

According to The Economist (February 5) car companies have also had a share of the recession. Car makers all over the world like Volvo and Saab (Ford and General Motors), Chrysler, Fiat, and Jaguar, Land Rover, among others, are suffocating under the credit crunch. This seems to be just the first round and many other companies shall follow suit if the bailout plan does not materialise soon.

It should be noted that the African continent cannot be spared. It is not insulated enough to survive the shocks of this financial crisis. However, since Africa is not well integrated in the global system, it cushioned a little which may soften the blow. A number of issues emerge from this shortly to depict how “soft” the blow will be.

It should be noted that since many European countries are in recession, the demand for African oil and minerals that are mainly Africa’s exports has fallen drastically.

What is further falling is the demand for non-traditional exports like fresh flowers. African petroleum exporting economies like Libya and Nigeria have already reacted by cutting oil output to reverse the sprawl in prices caused by the global recession.

This implies that African economies that are mainly producers of raw materials shall be affected severely. In Nigeria, the Ogun state government has put an embargo on employment into the civil service and cut 12% in the salary and allowances of political office holders to prepare the state for challenges of this economic meltdown.

It is therefore, no longer a myth that the spill-overs of this recession in developed and industrialised countries has so far had dire effects on Africa’s economies. There is an observable slow down in some economies, reduction in capital inflows due to reduction in remittances and foreign investment.

In Uganda, the economy, for example, has been earning a lot of foreign exchange in the form of remittances from Ugandans working abroad.

These remittances had an evidence level of sh2.338 trillion ($1.4b) in the year 2007/08. This made remittances the major source of foreign exchange for the Uganda.

It boosted private investment, capital and macroeconomic stability instrument in Uganda in addition to catering for the needs of individual families of those people working abroad. It is observable that Ugandans working abroad are the force behind the property boom in Uganda, especially in the housing sector.

The closure of Gateway Television, a UK-based broadcasting Company that had operations in numerous African countries is a manifestation of the spillover effects. But if the recession grips so tight, all these will contract and immigrant workers in the hard-hit countries will no longer have money to remit back to their countries. As companies shade more employees, it is probable that many will lose their livelihoods.

According to AMREF (February 10), in Kenya the continuation of this recession shall be a “death sentence” to many vulnerable people with only one out five able to afford two meals a day, 2.5million with HIV under her administration and receiving free ARVS followed by one of the worst droughts in the region, many people do not know how they are going to survive through the recession in case there are no more donations or funding for a number of programmes targeting such people.

If there is a rise in protectionism say, “Buy American” and barring other countries to sell goods in their markets, this will consequently lead to the slow-down of economic activity in industries, reduction in foreign exchange earnings and massive unemployment, among other things.

It is important to note that with increased biting of this recession, African countries, including Uganda, shall experience reduction in budget support and aid cuts and this will be a blow to service delivery, especially where there is less government expenditure.

It is, therefore, pertinent that, African countries need to strengthen their financial systems to prevent the collapse of the economy.

It is also important that the central banks refocus more on regulation and supervision of all the local and international financial institutions so as to avoid sliding into the crisis, or if it happens, to lessen the severity.

The writer is the managing consultant of REEV Consult International

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