How adequate, accessible and sustainable are govt's COVID-19 stimulus packages?

Oct 18, 2020

Most of these stimulus packages may not adequately address the financing needs of MSMEs

Micro, Small, and Medium Enterprises (MSMEs) are the backbone of Uganda's economy as they represent 90% of the entire private sector and contribute about 18% to the country's GDP. MSMEs also account for the bulk of employment in Uganda.

According to the 2015 MSME policy, 2.5 million people are employed by these enterprises. The policy further pronounces the contribution of MSMEs to technological innovation and new products. Thus, MSMEs are regarded as highly significant and having enough potential to change the economy of Uganda for the better.

Despite their contribution to the economy, MSMEs still face legal, institutional, and attitudinal challenges, which impede their growth and survival. Recent evidence indicates that the most significant binding constraint to MSME growth is the limited access to affordable short-term and long-term financing.

Most importantly, this particular challenge has been exacerbated by the economic crisis triggered by the outbreak of the COVID-19 pandemic. Due to the COVID-19 induced uncertainty and its associated containment measures, most borrowers are afraid to borrow.

In addition, the lenders are hesitant to lend to MSMEs because of their riskiness has increased. According to a study by the Economic Policy Research Centre (EPRC), COVID-19 has aggravated the credit and liquidity constraints among MSMEs relative to large businesses with 69% of businesses reporting a decline in access to credit. Worse still, 65% of the MSMEs having outstanding debts indicated that their ability to service debts declined because of the risk associated with COVID-19.

To ensure MSMEs recovery from the pandemic, the government came up with stimulus packages such as the credit facility advanced to the Uganda Development Bank (UDB) to enhance MSMEs investments in import replacement and export promotion and also stimulate businesses operating in the tourism sector. Other interventions include funds advanced to Savings and Credit Cooperations (SACCOs) through the microfinance support centre, cheap capital for special groups mainly comprising of youth and women through the "Emyooga" programme, among others.

Nonetheless, COVID-19 being an existential crisis poses challenging questions in this regard: whether these packages can adequately meet the financing needs given that the exact number of existing and upcoming MSMEs is not known; whether the target beneficiaries are aware of these packages and if they meet the eligibility criteria and the required documentation to apply for them (accessibility); whether the few enterprises that have accessed these packages will not fall back after servicing them or even whether they will be able to service the loans in the first place (sustainability). Additionally, most of the beneficiary enterprises do not have the required financial knowledge to handle these packages to enable them to pay back within the credit period/term.

For instance, as already indicated, the biggest percentage of the private sector is made up of MSMEs, however, details about these enterprises, including who they are, how many they are, their location, ownership, nature of the operation, and the actual financing gap are unknown.

This, therefore justifies the queries on the adequacy of these packages, if such details are not available.

According to UDB's call for applications for loans directed at businesses engaged in the production of essential goods and services for import replacement and export promotion, applicants are required to be registered and must possess collateral security depending on project specifics and risk, with a current valuation of the assets. Also, among the documents required for loan applications are business plans, credit reference bureau and audit reports, and proof of compliance with the National Social Security Fund (NSSF) which most MSMEs in Uganda do not possess.

The application procedure further requires the loan applicants to present a bank statement for the past one year, yet most of these enterprises hardly have business accounts. Moreover, the majority of the MSMEs are unaware of some of these packages, let alone the inability of MSME owners to understand the requirements and application procedures since they are expressed only in English. This automatically pushes the largest percentage of them out of the bracket of eligible beneficiaries for these packages, making them inaccessible.

Furthermore, the sustainability component of these packages is not very clear. Apart from the collateral security (which most MSME owners do not even have) that is listed as part of the requirements for accessing the loans, sustainability plans in the event that the borrower fails to service the loan due to some unforeseen factors is not clearly stated. Just like in other similar government programs, the issue of sustainability has not been given a lot of attention, which partly explains the failure of such initiatives to achieve the intended objectives.

In conclusion, most of these stimulus packages may not adequately address the financing needs of MSMEs which have been worsened by the pandemic. In fact, these packages may not actually reach the target beneficiaries as indicated in the calls for loan application. Instead, larger firms, most of which are foreign-owned may benefit more from the stimulus packages since they are more likely to meet the eligibility criteria plus the required documentation.

Therefore, an up-to-date database with details about MSMEs in Uganda and their financial requirements needs to be developed in order to address the issues to do with the adequacy of government programs aimed at supporting their recovery, survival, and growth in the face of COVID-19. The application procedure and requirements need to be loosened and customised to local circumstances if these packages are to benefit the intended beneficiaries. Furthermore, sensitisation about the available packages and the application requirements should be done in the language best understood by various MSME owners. In addition, clear sustainability arrangements need to be put in place given that over 60 percent of MSMEs in Uganda are aged 1 to 5 years yet some of these packages are long-term, running up to 15 years.

The writer is a research associate at the Economic Policy Research Centre

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