The Macroeconomic Effects of Covid-19 on Uganda’s Economy

The Covid-19 pandemic is not only the most serious global health crisis since the 1918 Great Influenza (Spanish flu), but is set to become one of the most economically costly pandemics in recent history. Experience with past epidemics provides some insights into the various channels through which economic costs could arise, in the short as well as longer term. At the same time, Covid-19 differs from previous episodes in several important ways. Notably, the globally synchronized lockdowns and trauma of financial markets reinforce one another into an unprecedented economic sudden stop. For these reasons, the Covid-19 global recession is unique.

The World Health Organization (WHO) first declared COVID-19 a world health emergency in January 2020. Since the virus was first diagnosed in Wuhan, China, it has been detected in over 190 countries. In early March, the focal point of infections shifted from China to Europe, especially Italy, but by April 2020, the focus shifted to the United States, where the number of infections was accelerating. More than 80 countries have closed their borders to arrivals from countries with infections, ordered businesses to close, instructed their populations to self-quarantine, and closed schools to an estimated 1.5 billion children. Uganda registered her first case of COVID 19 on Saturday 21st March, 2020 and had 227 confirmed cases by the time this report was issued. This report will analyze the macroeconomic impact of COVID 19 on Uganda’s economy using the available quantitative estimates but focusing on four Macroeconomic variables; Economic growth, Balance of Payments, Unemployment and Inflation.

Economic growth
The IMF estimated that the global economy could decline by 3.0% in 2020, before growing by 5.8% in 2021; global trade is projected to fall in 2020 by 11.0% and oil prices are projected to fall by 42%.This is consistent with the World Bank’s prediction of slow growth for sub-Saharan Africa (SSA) to 3.7 per cent this year, its weakest pace since 2009, mainly due to the drop in commodity prices.

The IMF and WB reports show that Uganda is, like any other country that trades in commodities, likely to suffer economic contraction below five per cent to about four per cent. This slowdown in the global economy will affect Uganda’s economy in the following ways:

• The reduced commodity export prices for Uganda for its traditional exports like coffee, cotton, and flowers as result of the economic crisis in Europe and China, though temporary, has greatly affected Uganda’s foreign exchange inflows and caused instability in the exchange rate market

• Supply chain disruptions due to curtailing of global value chains with forced quarantines and lockdowns implemented by more than 80 countries. A disruption in global supply chains is going to have an impact on small and medium enterprises in Uganda. This sector constitutes 13% of Uganda’s economy yet nearly 20% of all the goods traded in this sector are imported from China.

• COVID 19 will negatively affect the service sector more than any other sector in Uganda. This sector contributes approximately 51% to Uganda’s GDP (the highest contributor of all the sectors). Its sub-sector of tourism will be the hardest hit by corona virus yet it is Uganda’s number one source of foreign exchange constituting 7.7 percent of the country’s GDP and employing close to 700,000 people. This will have an indirect impact on the travel and hospitality industry in Uganda.

• There will be a potential decline in FDI and remittances from outside countries. According to data from the Uganda Investment Authority (UIA), 45% of all the planned FDI into Uganda was to come from china yet coronavirus has affected China’s potential investment dealings in capital infrastructure and manufacturing. Also, as a result of disruption in the business and economic activities in many countries where the majority of Ugandans live and work, remittances face a potential decline.

• Pandemics also persistently depress aggregate demand. COVID 19 is likely to be followed by multiple decades of low natural interest rates due higher precautionary savings and depressed investment opportunities.

• There is an anticipated decline in tax collections for financial year 2020/2021 which will widen fiscal deficits. According to URA, 42% of all the tax collected is from international trade. This tax is mainly in the form of VAT and import duty on imports and exercise duty on importation of petroleum products. This situation will be escalated by the reduced economic activity in retail and trade, services, hotels, tourism and manufacturing sectors which will translate in both reduced VAT remittances and corporation tax payments.

The reduced commodity export prices for Uganda for its traditional exports like coffee, cotton, and flowers as result of the economic crisis in Europe, though temporary, has greatly affected Uganda’s foreign exchange inflows and caused instability in the exchange rate market.

Accompanied with high domestic demand for dollars by foreigners in the market as
they repatriate their earnings back home and also by domestic importers, this has caused high deprecation pressures on the domestic currency. prices will be rising due to expensive imports. With the continued demand for dollars in the market and reduced export revenues, inflation is likely to continue rising.

This will force the central bank to maintain the increases in interest rates until the inflation is moderated to target single-digit levels. Higher interest rates on credit resulting from the central bank intervention has a negative impact on investment, and overall demand for goods and services in the economy, thus a reduction in economic growth.

Balance of Payments.
Uganda has a systemic trade deficit as a result of the country’s dependence on fuel imports. Uganda is a net exporter of agricultural products such as coffee and cotton. Uganda’s main trading partner is Kenya with 15 percent of imports and 10 percent of exports. Others include: UAE and South Africa. Uganda recorded a trade deficit of 280 USD Million in March of 2020.

Uganda’s B.O.P is set to deteriorate given the fact that needs. This explains why in order to address the urgent balance-of-payments and
external and fiscal accounts are expected to shrink, creating substantial urgent external and fiscal financing needs. This is why in order to address the urgent balance of payment and fiscal needs, the IMF approved US$491.5 million emergency assistance for Uganda
under the Rapid Credit Facility.


The table below shows Uganda’s recent B.O.P estimates which can be deteriolated by COVID 

A recent African Union (AU) study reveals that about 20 million jobs are at risk on
the continent as a result of the impact of the coronavirus pandemic. Unemployment
rising from a pandemic can have long lasting adverse effects on the economy.

On the supply side, the most important cost will be the reduction of the labor force. A
onetime reduction in the labor force as employers unprecedently lay off workers
would raise the ratio of capital to labor and lower the rate of return to capital slowing
the rate of capital accumulation and GDP growth.

The cost-benefit analysis in health policies certainly goes beyond accounting for
economic gains and losses. But even from a narrow economic perspective, the
adequate course of action is far from settled. On the one hand, the high output losses
from global efforts to contain the Covid-19 pandemic are unprecedented. On the
other hand, it is unclear if the counterfactual scenario would be less costly, an
uncontrolled pandemic such as the 1918 Great Influenza resulted in substantial and
persistent damages. A better understanding of the transmission channels of the Covid-19 shock to the economy, the interaction between economic decisions and the epidemic, and the policy trade-offs is therefore needed.