This week I was invited by the Rotary Club of Kyadondo to give a talk on what government can do for the urbanites, peri-urbanites, self-employed, employed, private businesses and other SMEs that were being crushed by the vagaries of Covid-19. In other words, they were politely asking me to tell them about what I think government could do for the economy in the post-coronavirus era.
I usually never turn down an opportunity to share what I think, but this one was more complicated. I had to do it via ZOOM™, a video conferencing app. That is itself one of the new changes that we have to adopt to in this era of social distancing. The upside, was that the conference had to start on time and thus by 6.30pm we were up and ready to go. This is what I shared with them.
First, before we attempt to propose any interventions, we must understand the impact on the economy. We need to understand that the pandemic is going to cause disruptions in most aspects of our economy.
These will include the following. First, a decline in imports of about 25 per cent to 30 per cent leading to a corresponding decline in tax revenues for this FY 2019/20, and FY 2020/21 onwards. Other domestic taxes will also decline as local activity also experiences a slowdown.
Second, we should expect to see a decline in export revenue sources for goods and services (commodities, tourism and labour). Third, we should expect to see a decline in profitability of local firms arising from lower demand for the products in all sectors of the economy, including banking services, industry, agriculture, manufacturing, mining etc.
Subdued private sector activity will lead to a low uptake of credit for investment and a decline of imports of raw materials for industries. Fourth, is that there will be a slowdown in growth of our gross domestic product (GDP) - that is the total output of all goods and services coupled with increased pressure on exchange rates as export receipts and foreign direct investment decline.
As one of the poorest countries on planet earth, our choices are, therefore, stark. In any case we have been running on steroids. Asking the government to alleviate the economic pain is, therefore, going to be difficult. To use a crude analogy, it is akin to asking an oversexed and 'tired' old man running on empty to get it up again immediately!
But still there are some interventions that can be made. These need to cover three aspects of the economy - monetary, fiscal and the real sector. In terms of fiscal policy, government will have to consider a number of options to ensure people keep on spending.
These include, payment of domestic arrears, curbing non-essential non-wage expenditures on items like travel abroad and entertainment, renegotiation of foreign debt obligations and remitting of tax arrears by the URA. Domestic arrears payments must be prioritised in such a way that local suppliers take the first bite.
On the monetary side, there is going to be a difficult fight, but Bank of Uganda's (BoU) job is cut out. That is to continue inflation control, while relaxing commercial bank regulations on management of non-performing assets.
The conundrum the Central Bank faces is keeping interest rates down in line with the increased public sector borrowing requirement. Working with ministry of Finance, BoU can issue say a 30-year bond for funding some of the requirements that are going to crop up in the next financial year(s).
In terms of the real sector, ministry of Finance and BoU must move the Agricultural Credit Facility to government owned banks and lend to agro-based businesses at a rate of about eight per cent to encourage food production. Here again, government may have to reduce taxes rates to encourage reinvestment. The key to keeping this economy together is going to be food. More so, considering the harvest of babies we shall be making in nine months' time!
Prof Sejjaaka is country team leader at Mat Abacus Business School.