Economy not recovering soon, says Bank of Uganda

Who are the winners and losers?

ANALYSIS | THE INDEPENDENT | The second wave of COVID-19 appears to have hit the economy severely and dimmed prospects for a quick recovery, according to the latest Bank of Uganda monetary Policy Statement for August 2021.

The statement is the first major economic outlook publication by the central bank since President Yoweri Museveni on July 30 eased lockdown restrictions he imposed in early June for 42 days.

The easing of restrictions on public transport, cross-district border travel, and business operations created a positive vibe.

But the BoU monetary Policy Statement for August 2021 reveals the extent to which the second wave of COVID-19 and its associated containment measures have interrupted earlier economic recovery momentum following the first wave.

The BoU now projects that economic growth is unlikely to recover quickly and will range between 3.5 to 4% in Financial Year (FY) 2021/22.

Based on that, BoU projects that the 6-7% growth rates averaged in the past by the Uganda economy will perhaps be possible again only in FY2024/25.

“Economic activity is expected to remain well below the pre-pandemic path for an extended time,” it says.

It says, even after the remaining movement restrictions are eased, the “lingering impact of the pandemic on private sector finances is expected to weigh on output over the next two years.”

According to BoU, respite can only come if vaccination picks later in the year.  It adds that any economic rebound will depend on acceleration in private consumption due to pent-up local demand, strong growth in external demand, gradual return of tourism, the Final Investment Decision (FID) in the oil sector, and broad-based improvements in business confidence.

But pull back factors sowing uncertainty include failure to contain the pandemic through vaccination and observance of SOPs, emergence of vaccine resistance to COVID-19 variants, and re-introduction of restriction on gatherings and mobility.

There are also factors outside of the Ugandan economy, including risks associated with rising global commodity prices, especially of oil as economies fully open up.

Winners and losers

The spread of COVID-19 and its economic impacts gained momentum in March 2020 when the country’s first case was reported. By March 30, the government of Uganda had declared a nation-wide lockdown in addition to other critical measures to minimise its spread. The impacts of the  virus  itself  together  with  government  initiatives  to  control  its  spread  have  been  felt  in  the political, social, and economic spheres of life of the country.

Public gatherings in places of worship, bars, weddings, and concerts were suspended together with public and private transport except for so-called essential workers.

Earlier reports had hinted that the COVID-19 effect on the economy is likely to be transitory rather than structural and projected a quick return to positive growth.

One such report was published on Aug. 03 by the Brookings Institution; a nonprofit public policy organisation based in Washington, DC that conducts in-depth research on such issues. Titled ‘The impact of COVID-19 on industries without smokestacks in Uganda,’ it was written by researchers, Madina M. Guloba, Medard Kakuru, and Sarah N. Ssewanyana from Makerere University Kampala’s Economic Policy Research Centre (EPRC).

Unlike the BoU statement that covered the June to July period, the Brookings study covered the early period from March to July.

According to the World Bank, the impact of any pandemic on economic well-being operates through two distinct channels:  directly or indirectly from effects of the pandemic and through the behavioral effects resulting from the fear of contagion.

The government started easing restrictions around June 2020.  Public transport resumed and by September 2020, airports and land borders had re-opened. On Oct. 1, 2020, international flights resumed.

This growth has been negatively affected as a result of COVID-19. Production, taxation, financial flows, employment, money markets, and poverty rates have all been affected.

While  the  growth  rate  prior  to  the  pandemic  in  the  third  quarter  of 2018/19 was at 7.0 percent, in the third quarter of 2019/20, it had declined to 0.3 percent.  Then, while  the  fourth  quarter  of 2018/19  growth  rate  was  at  4.6 percent,  it had declined to -5.7 percent during the same period in 2019/20.

The negative growth corresponds to a decline in GDP value added at constant prices experienced from Shs28.5 trillion (Approx. $7.7 billion) in Q4 2018/19 to Shs27.2 trillion ($7.3 billion) in Q4 2019/20 representing a 4.6% decline.

Nonetheless, the study points out, sectors such as agriculture and transportation (trade in particular, both domestic and cross-border) were more resilient as they continued to grow. In the first quarter of 2020/21, there was even a slight recovery attributed to an ease in lockdown measures, which enabled resumption of the real sector which involves actual purchase and flow of goods and services consumed by people using actual money to pay and other activities in the economy.

“Simply put, there have been losers and winners as the pandemic took its toll on the economy,” the study says.

But like the BoU statement, the Brookings study noted that COVID-19 led to a decline in Uganda’s GDP due to closure of business entities (both formal and informal) and a subsequent and significant decline in employment. Only firms leveraging digital platforms worked, but these instances were rare.

While the agriculture sector  in  Uganda  was  not  heavily  hit,  agro-processing,  an Industries Without Smokestacks (IWOSS) sector that is heavily  dependent  on agriculture  production  for supply,  suffered due to limited transportation of goods from production areas. But most sectors resumed business when the total lockdown was lifted.

According to the study, a key informant in  the  agro-processing  sector  reported  that  the  effect  of  the  pandemic on the sector is transitory because  most  businesses/industries  have  not  shifted  from  their  line  of  businesses  when  they resumed  operations.

According to the key informant quoted, the recovery in agriculture is too high for the COVID-19 effect to have been a structural issue.

The report says even the Ministry of Finance, Planning and Economic Development and Bank of Uganda were reporting that the economy is recovering steadily.

“The speed of  the  recovery  hints  that  COVID-19  effects  on  overall  employment  are  likely  more  transitory,” the report said.

It pointed out that, in terms of sectors, the economy has seen transitions of labour from some sectors to others. Teachers locked out of classrooms turned to charcoal burning, riding bodaboda motorcycle taxis, or serving as night watchmen. Some went into small highly informal businesses like selling chapatti on impromptu street stalls.

The COVID-19 pandemic also induced a structural change in employment. A substantial number of firms/organisations downsized to reduce operating expenses while others closed entirely. Such changes  imply  a  further  contraction  of  formal  jobs,  giving  way  to  more  informal  employment  or, worse, still increased unemployment.