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How has COVID-19 affected our economic fundamentals

By Prof Augustus Nuwagaba

Added 8th June 2020 08:48 PM

In order to understand the actual impact of COVID-19, there is need to understand what we call economic fundamentals. In economic nomenclature, there are four economic fundamentals namely; i) interest rates, ii) trade balance, iii) inflation and iv) Gross Domestic Product (GDP).

How has COVID-19 affected our economic fundamentals

Prof. Augustus Nuwagaba

In order to understand the actual impact of COVID-19, there is need to understand what we call economic fundamentals. In economic nomenclature, there are four economic fundamentals namely; i) interest rates, ii) trade balance, iii) inflation and iv) Gross Domestic Product (GDP).

OPINION

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 a chance to eke out a living from their normal livelihoods.

In order to understand the actual impact of COVID-19, there is need to understand what we call economic fundamentals. In economic nomenclature, there are four 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 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% yet, countries like South Africa, it is 10.25%, Tanzania; 12.0%, Kenya; 12.3%, United Kingdom; 1.1%, US; 0.25%, while China is at 3.8%.

COVID-19 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 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 $1.5b per Financial Year, while the money we earn from Ugandans in the diaspora is $1.4 annually. We sell goods worth $4.1b and import goods worth $7.8, implying a trade balance of $-3.7. 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 sh12,000 in January to sh7,000. Similarly, the price of milk has fallen from sh1,200 to sh300 in May.

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%, but is now projected at 3.0%.

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 cures 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 Government and the health ministry for the great work in controlling the spread of COVID-19 and in properly treating the victims of COVID-19. I only advise that let us now focus on economic stimulus that can make the economy rebound as quickly as possible. 

The writer is an International Consultant on Economic Transformation in the African Region. reevconsult@infocom.co.ug

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