24 Jun 2020

COVID–19: LAMENTING NOT AN OPTION

Basic economics asserts that scarcity is an all-pervasive economic problem which is solved by three decision-making agents of an economy. Households/individuals, firms/businesses and government, actively engaged in production, consumption, and exchange of goods and services. The interactions between the agents is that of interdependency and act in a mutually reinforcing circular manner. Production leads to consumption and consumption of necessitates production.

The cyclic non-interrupted flow of the economy presupposes normality where households are playing their role as consumers to satisfy their requirements in exchange for their resources with producers. The decision to manufacture goods and services made by a firm is informed by the existing demand from the consumers with their interactions regulated and/or facilitated by the Government to generate optimal outcomes.

The current Covid-19 situation has disrupted normalcy bringing the economy to a screeching halt and impairing consumers’ capacity to earn. In addition, effective demand has also been affected and the capacity to produce in response to declining demand for goods and services also disrupted. Whereas it is still early to tell how bad the economic damage will be, preliminary indicators show that the damage will be large. Notwithstanding the proactive measures undertaken by the Government including quarantine, social distancing, and closure of learning institutions, shut down of non-essential businesses, and asking people to work from home among others.

His Excellency the President and indeed the entire Government deserve applause for the stewardship in fighting this pandemic. The commendable progress in the recoveries owing to the tireless efforts, dedication, and commitment of our medical teams requires mention.

Initially, the government response of providing food to the vulnerable urban population and engagement of service providers like Banks and insurance companies eased the pressure. The recent economic stimulus measures too announced by the President are all meant to reverse the disrupted trend.

With all the measures and interventions in place, the economic effects should be still expected. Putting in place an Economic Recovery Task Force similar to the current Covid-19 Taskforce, to be charged with guiding the economy towards recovery is worthwhile considering mindful that recovery needs to be guided.

The effects of Covid-19 on our economy are far-reaching. The disruption of the global supply chains as a result of the closure of factories in countries especially China with whom Uganda trades, has an immediate impact on the trade and retail sector which PwC estimates to contribute about 13percent of Uganda’s economy.

In addition, China being a major source of funds for investment in infrastructure projects, the Uganda Investment Authority had estimated about 45percent of all planned Foreign Direct Investment into Uganda in 2018/19. The reduction in the inflows will also be exacerbated by the decline in remittances by the Ugandan citizens in the diaspora. The World Bank and Bank of Uganda reports had estimated them at US $1.4 billion in 2017 and US$ 1.312 billion in 2018. Similarly, the consumption of our exports elsewhere has equally reduced. All these put together, in addition to the emergency expenditure (as opposed to development expenditure) on containing the effects of the pandemic will impact tax revenues.

Domestically, the restrictions on all inbound and outbound international flights has impacted trade but more seriously, the tourism industry and associated services like hotels, tours and travel agencies, and airlines. This had been estimated to employ about 1million people and contribute 8 percent of GDP. The demand and supply shocks have made the Government revise the estimated growth rate for 2019/20 from 6% to 5.2-5.7% and the impact will be bigger in 2020/21. In the short to medium term, savings and Investment will reduce and unemployment soars becoming more pronounced in the ‘vulnerable economy’ such as tourism, transport, real estate, among others.

Banks are likely to register an increase in non-performing assets with a decline in their loan portfolio in the medium term despite the measures that have been put in place relating to loan restructuring. Likewise, insurers too are likely to register lapses of policies despite the measures that the Insurance Regulatory Authority of Uganda has put in place to ease premium payments and the responsiveness of the Insurance Companies.

The manufacturing industry is producing at under capacity with many struggling to access raw materials that were hitherto sourced from the Covid-19 disrupted economies. Wholesale and retail businesses remained closed for over 60 days but even with easing the lockdown on some of them, the demand is extremely low yet the fixed costs remain.

The transport sector and the complements to it are also struggling with jobs directly and indirectly involved, food vendors, taxi touts, washing bays, among others, are at stake as they struggle to provide basic support to their household members.

Whereas this paints a picture of hopelessness it is not all lost. The government has taken lead in ensuring that the pandemic is contained. The next steps will, therefore, require a proactive and bold approach to adaption and recovery. Sitting down and lamenting is no option. With constrained earnings, cutting back on expenditure may bring temporary relief as the government works out more permanent solutions. Households ought to also budget for only essentials and eliminate waste. For those intending to invest, a cautious approach and advice may save any looming losses.

For the investors, whereas cost containment may be the natural response, do not rush to lay off workers, your greatest assets. Consider the adoption of flexible working arrangements and home-based Information Technology - enabled operations.

Hard times call for change. Reducing overreliance on imports should be deliberate as well as having an appropriate insurance policy to protect your assets, businesses, and life is critical.

With cautious thinking about the possible risks imposed by inevitable occurrences, we are likely to see a more pro-active and disaster-prepared society ready to face tough situations with minimal shocks. We shall not have lost it all, we shall have learnt at least a lesson. Keep safe, together we can wipe COVID-19 out of Uganda.

 Alhaj Kaddunabbi Ibrahim Lubega

Chief Executive Officer of the Insurance Regulatory Authority of Uganda