The President of Uganda, H.E. Yoweri Museveni disclosed the first set of state lockdown restriction lifts to the country on 4th May 2020. In the presence of a capital and aggregate domestic-demand constrained economy, this article offers a macroeconomic problem-solution analysis of the prevailing state lockdown and entails an array of possible economic stimulus strategies that could be undertaken in the post-COVID 19 periods.
The prevailing lockdown has constrained the structural free-market economic mechanism by summoning acute market failures and inefficient capital and market agents’ mobility. This has reinforced unfavorable economic distortions of supply chain rigidities, low money velocity, a high liquidity preference, capital outflows, and limited access to credit, therefore propagating the standstill in trade and commerce.
The tenure of this toxic business environment is still uncertain until when the virus is globally contained and the undivided economy returns to some form of “normal”. A call for prudent and resilient business-structural planning is now vital, especially for the long term.
In this article, the exacerbating economic-recessive elements are categorized and substantively analyzed in divisions of;
a) Consumer behavior and the income substitution effect.
In 2017, Uganda was ranked the 17th among the countries with the highest level of income inequality in Africa. In the same year, the Gini coefficient stood at 0.45 which implies a broad gap between the poor and rich. The gap is currently widening due to a spike in poverty levels during the prevailing lockdown distressing period. The substantive arguments in this article are in line with this reality and acknowledgment.
The consumer scale of preference at the individual/household level has evolved due to paradigm shifts in welfare. Private sector enterprises should acknowledge this drastic change to abate the risk of dubious investment decisions, especially on credit-sourced capital.
Across the middle and lower class, the consumer niche and clientele have drastically evolved to focus on more essential goods and services; food items and health services because of a broad slump in purchasing power.
The underlying extensive economic disruption caused by the COVID-19 pandemic is the colossal slump in aggregate demand in Uganda and the global economy.
Due to the standstill in many private sector income-generating activities and a sharp decrease in consumer purchasing power, economic disruptions arising from this fall in aggregate domestic-demand have constrained investment and consumption smoothing.
b) Price fluctuations, inflation, and economic response policy
In the consumer-facing sectors, businesses that aren’t e-platform oriented are likely to face lifespan threatening conditions. Consumer travel limitations will inevitably continue after the state lockdown with the drastic public transport evolution propagated by health policy guidelines at least until the development of a vaccine.
Core inflationary pressures are likely to be subdued by the equilibrium calibration of the market forces and the low-price preference consumer behavior during and after the state lockdown. This is because of the fall in purchasing power thus a reduction in the consumptive-basket of goods and services per household/ individual.
Volatile headline inflationary pressures will soar in the real economy in cases of acute agricultural supply-constraints due to seasonality, gestation, environmental disasters, and relatively high aggregate demand from a more capital and consumptive adequate international market.
The primary objective of the Bank of Uganda’s monetary policy is to subdue annual core inflation to a medium-term target of 5 %. The Annual Core Inflation registered at 3.4 % for the period ending April 2020. The April monetary policy issued key responses including; the central bank rate reduction to 8%, exceptional liquidity assistance to supervised financial institutions, and loan payment mortarium for up to 12 months, effective April 1st, 2020.
The exogenous nature of the COVID-19 global economic shock propagates a surge in investment risk factors to Credit institutions. Formal credit institutions translate this reality into an exponential increase in credit-default risk therefore an acute increase in interest rates on loans.
The mystification faced by Bank of Uganda lies in the development-efforts of a resilient response strategy to suppress supervised financial institutions’ interest rates during and after the prevailing COVID-19 pandemic. This is geared to sustain the country’s private-credit reliant GDP growth.
Credit institutions provide capital-credit for investment to individuals and firms which is the fastest method of capital accumulation. Due to the poor capital-savings culture in the private sector, credit finance is inseparable from Uganda’s GDP growth correlation. Private sector credit has exponentially grown from shs.7,401.6 billion in 2011 to shs. 16,814 billion in March 2020. Private time and savings deposits rather grew at a dispirited rate, from shs.3,285.6 billion in 2011 to shs.8,063.8 billion in February 2020 and a fall to shs.8,016.4 billion in March 2020 according to Bank of Uganda statistics.
The government had an ambitious target of transforming Uganda into a middle- income status country by 2020. The Middle-Income status states have a citizen’s average income between $1,000 to $12,000
This target’s success concerning its timeframe was futile even before the global pandemic shock due to the earlier irrational public policy designs especially in the fiscal space, high credit interest rates, and the widening income-inequality gap that deterred pro-poor growth.
c) Agriculture sectoral linkage
Due to the extensive agricultural-producing informal sector and sensitive price fluctuations in especially food items, monetary policy doesn’t objectively respond to headline inflation to abate fallacious response policy designs. The Bank of Uganda uses headline inflation analysis as a signal of aggregate price offsets because of its fore and backward linkages to core inflation.
In the local market, agricultural products and services are likely to continue registering exponential inflation rates because of the survival-essential aspect of agricultural produce, the opportunistic profit motive in the price mechanism, and fuel cost-push inflationary pressures in the post-lockdown period.
According to the Uganda Bureau of Statistics (UBOS), maize flour Inflation increased to 37.0 % for the period ending April 2020 compared to 32.2 % recorded for the year ended March 2020. Rice inflation increased to 7.4 % for the period ending April 2020 compared to 0.3 percent recorded for the period ended March 2020. Agriculture employs the majority of the labor force in Uganda. In 2017, Agriculture employed 71.9% of the workforce, but the sector is dominated by the subsistence rural-agricultural model.
Uganda’s large rural population which stood at 76.23 % in 2018 faces a significant risk towards food security and public health in the mid-term due to the prevailing floods, unfavorable economic conditions, and the seasonality aspect of agricultural produce. The recent unprecedented heavy rainfall has created unfavorable conditions of soil erosion, landslides, and flooding in residential lake-basin and mountainous areas. These livelihood and welfare depriving conditions pose a threat to food security and public health in the short and mid-term period.
In January 2020, Ugandan maize flour exports were discarded by Kenya over claims of cancer-causing aflatoxins within the produce. The state lockdown has propagated a spike in demand for maize flour and the haste of production in the local market. This consumptive unfavorable produce could potentially be on sale all over national food markets and the extensive food package distribution being undertaken by the Office of the Prime Minister and COVID-19 task force. This poses a threat to Public health in the long term.
With the acute income inequality in the economy, the commercial agricultural opportunities may be broadly enjoyed by capital adequacy and business- development-skills enriched individuals/firms.
d) Local Government
On 28th April 2020, the Parliament of Uganda approved the creation of 15 cities in the different municipal regions around Uganda. This was an act of rent-seeking by the parliamentary members but the timing of this vote in the wake of the COVID- 19 economic shock was rather irrational.
The decentralized fiscal capacity is meager and likely to shrink further with the forecasted unfavorable business environment during and after the state lockdown. The creation of new cities invokes a huge public expenditure to the central government to sustain local government financing that survives on intergovernmental transfers especially grants.
The increase in local government taxes due to the creation of new cities will inevitably discourage entrepreneurship, foster greater fiscal deficits, deadweight losses, local government revenue leakages in the presence of a vast informal sector hence retarding efficient national fiscal policy planning. The fiscal deficit was programmed to be 6.6% of GDP however the projected outturn is 7.5% which is way too high above the Charter of Fiscal Responsibility target of 3% by the end of FY 2019/20.
The city approval criteria should be based on eligibility requirements’ satisfaction in tarmacked road coverage, urban development plan milestones, and decentralized fiscal capacity.
Economic Stimulus Strategies
Economic agents should endeavor to maximize comparative advantage by producing goods and services they produce best at a lower opportunity cost than other trade partners to facilitate a more Pareto-optimal economic operation in the post- lockdown Uganda hence stimulating economic growth.
In the wake of the pandemic, the success of Bank of Uganda’s expansionary monetary policy relies on a coordinated operation with a resilient expansionary fiscal policy especially towards Small and medium enterprises (SMEs). The COVID- 19 economic disruptions from the demand side are steerable with a formidable fiscal and monetary policy mix.
All ongoing development projects should be reviewed in relation to their timeframes using comprehensive research. This Project review should be informed by reliable statistical data which will transform the uncertain-period economic disruptions into a degree of predictability thus supporting long-term public-policy planning.
The Bank of Uganda should integrate headline inflation into the monetary response framework because of the inseparable agricultural (food items) reinforced linkages with other sectors in the economy during the uncertain tenure of the global pandemic. The Annual Core Inflation stood at 3.4% for the period ending April 2020 compared to the 2.5 % registered for the period ended March 2020. This exponential increment was due to Annual Other-Goods Inflation that is registered at 5.0 % for the year ending April 2020. Due to supply chain rigidities and general price-sensitive offsets from the agricultural sector and energy, extensive inflation analysis should be considered in monetary policy formulation.
Concerning the forecasted capital inadequacy and volatile interest rates, a substantial slice of the recently passed national budget for FY 2020/21 should have been appropriated to Uganda Development Bank (UDB). This appropriation would avail micro-loans to specifically small and medium enterprises (SMEs) that contribute a significant percentage to revenue and GDP growth in Uganda. In 2019, SMEs contributed over 25% of Uganda’s total GDP and employed about 45% of the labor force. In FY 2018/19, SMEs contributed Shs.3.54 trillion to the Shs.9.74 trillion domestic revenue collection in the respective financial year. Such a strategy would aggregately support consumption, business-lifespans, investment, and job security in the economy. With an expansionary fiscal policy especially towards SMEs, the economy would be jump-started sooner than later.
Risk and capital inadequacy factors would have shrunk throughout the economy thus supporting the risk-averse credit institutions. With the availability of rationally lower interest rates on the micro-loans, this economic stimulus strategy would significantly shield the banking sector and enhance GDP growth in Uganda in the post lockdown period.
As commercial agriculture may seem the most lucrative venture, the scale of risk and uncertainty is broad without significant capital accumulation and comprehensive research before investment. The adoption of feasibility and viability studies converts the uncertain and exogenous variables into a degree of certainty hence transformation into endogenously controlled variables.
Concerning agriculture sectoral linkages with public health, Uganda National Bureau of Standards (UNBS) should scale up efforts to assess the quality of food items especially maize flour in the local market. This will reduce the risk of cancer-causing aflatoxin consumption of poorly processed maize flour. In the Long run, investment in public health has welfare-enhancing advantages and is a means of saving to the government and private sector.
Enterprises in the adversely affected consumer-facing sector should adopt the use of e-platforms, especially in the social media space as a means of product and service marketing. The executive action of gradually lifting lockdown restrictions that started on 4th May 2020 signals the private sector to structurally plan for full business “commencement” in the post lockdown era however uncertain this exact period may be. Businesses/firms should adopt effective cost-management and avoid unnecessary expenditures in order to maximize their productivity during and after the state lockdown.
Mugwanya Trevor Timothy (Contributor) Development & Political Economist, Freelance writer www.linkedin.com/in/MugwanyaTrevorTimothy email@example.com