KAMPALA – The Coronavirus has wrecked economies worldwide, economic stimulus packages have been initiated in different countries, Uganda inclusive. In part II, I discussed immediate measures needed to kick start the Uganda economy. As I have stated earlier, these are personal observations and recommendations. In this part three (3) I discuss short term and medium-term strategies. Government has already secured loans and we have received several pledges to support the economy as below.
a) International Monetary Fund IMF
Today, IMF Executive Board approved US $491.5 million to help Uganda address the economic impact of the COVID19 pandemic.
b) US Mission Uganda
USAIDGH has redirected US $2M in Uganda to help hospitals prepare for incoming COVID19 infections, deploy an epidemiologist to help with contact tracing, expand virtual communications, protect lab workers, and provide emergency support to vulnerable children.
USAID has announced US $2.3M in new health assistance in Uganda to support risk communications, case management, infection prevention and control, supply chain technical assistance and laboratory capabilities through existing health activities.
USAID has dedicated US $6.6 million in assistance to the COVID19 response in Uganda
c) United Nations in Uganda
UN agencies in Uganda issue 316.4 USD emergency appeal for COVID19 response.
d) Denmark in Uganda
With support from Danish MFA, we have extended financial assistance of over US $2.1 million towards the COVID19 response in Uganda through our partner our partners WHO-Uganda and UNFPA-Uganda who will work with the government of Uganda through the Ministry of Health Uganda.
e) Attilio pacific
It is true, to help Uganda address the health emergency caused by the COVID19 pandemic and its socio-economic impacts, we are re-focusing our cooperation and mobilizing additional funding. As step we will soon disburse £30 million of budget support to Uganda’s National Treasury.
Proposed Short and Medium Term Measures.
The country is already in a recession. Already with closure of many institutions, production stopped, the GDP growth this financial year maybe negative with a likely 30% decline. These are difficult times which require quick action to prevent the country from spinning into economic chaos. The hand to mouth people are already on the streets. Five (5) kilos of posho for a family of 5 people cannot last for (5) weeks! So, they are badly off. Go through Kampala to confirm. The government, therefore, must act quickly to stave off the looming economic crisis but without compromising health. The coronavirus kills! A man in Byeyogere (Kampala) is reported to have killed his family because he lacked food! (Bukedde/Agataliko nfufu, May 09, 2020)
Besides the immediate measures, which must be worked out, the government must initiate short term measures to quick start and support the economy and restructure economic activities. Some medium-term measures must also start now. The government must address monetary and fiscal policy, education, health policies among others. It must also address some of the activities that act as bottlenecks or are dysfunctional in the economy. I address some of the issues below;
a) Monetary Policy Measures.
While the government has done well on fiscal and monetary policy there is need to calibrate the policies in light of the Coronavirus pandemic. The Bank of Uganda has already publicized the measures it wants to put in place to improve the economic environment so as to allow businesses to restart and or support operating ones. These are very good measures. Monetary policy measures deal primarily with money supply in the economy. The overall objective is to maintain price stability. The amount of money available in the economy influences credit. Too much money not backed up by production causes inflation. This is among other causes. Inflation eats away investments, so inflation must be kept in check. The central bank ensures this.
The Uganda economy is already in a recession. There is a decline in production, businesses have closed and there will be more business failures or closures after the formal lockdown ends. The country should, therefore, be able to avail credit to various businesses at different levels to enable these organizations to restart or increase their level of production. The planning is now. There is worry among many people of being laid off. Many organizations already laid off people and in others there has been no April salary most likely in May too, and if unlucky there is no sign that they will have an income at all. There is a degree of desperation among people.
What should the government do in the circumstances? The central bank has already indicated the measures they have put in place in terms of availing credit to commercial banks. It has advised commercial banks to reschedule loans. In the past, the Bank of Uganda has attempted moral suasion on interest but it hasn’t succeeded. There is now need for a political element. The political element is availing credit at much lower interest rates! I cherish market forces and I wouldn’t have stated that. But for years, why have we failed to fix the interest rate? Why are interest rates high? Kenya made a political decision sometime back legislating interest rate which I personally criticized. They subsequently abandoned legislating interest rates. In our current circumstances, we have no choice. This is not a normal situation. Interest rates for business should be 10%. Government should now request organizations to forward their re-opening plans and requests for money. This must be done pro-actively on part of government. Who wants the money? Organizations must prepare!
The government has already received support from IMF to fight the impact of the Coronavirus. I believe on concessionary terms.
“WASHINGTON, DC – The Executive Board of the International Monetary Fund (IMF) approved today a disbursement of SDR361 million (about US$491.5 million or 100 percent of quota) for Uganda under the Rapid Credit Facility (RCF). It will help finance the health, social protection and macroeconomic stabilization measures, meet the urgent balance-of-payments and fiscal needs arising from the COVID-19 outbreak and catalyze additional support from the international community.
The Ugandan economy is being severely hit by the COVID-19 pandemic and, in particular, such key sectors as services (tourism), transport, construction, manufacturing and agriculture. The challenging external environment is curtailing remittances and foreign direct investments. The pandemic has also exacerbated the challenges posed by heavy rains in early 2020 and the ongoing locust invasion.
To contain the impact of the pandemic, the authorities have increased health spending, strengthened social protection to the most vulnerable, and enhanced their support to the private sector. The Bank of Uganda has appropriately reduced interest rates and provided liquidity to safeguard financial stability, while maintaining exchange rate flexibility.
The weakening economic conditions emanating from the Covid-19 pandemic have put significant pressures on revenue collection, expenditure, reserves and the exchange rate, creating urgent large external and fiscal financing needs.
The IMF continues to monitor Uganda’s situation closely and stands ready to provide policy advice and further support as needed. The authorities have also committed to put in place targeted transparency and accountability measures to ensure the appropriate use of emergency financing” (www.imf.org/en/News/Articles/2020/05/06 Press Release No. 20/206).
The Challenge of Interest Rates in Uganda
Uganda has failed as of now to find an ideal interest rate that drives business. It is common knowledge that the central banks rate should be a few percentage points above inflation and then the commercial bank rate should be also some percentage points above the Central bank rate. Our inflation ranges between 2 – 5%, our bank rate is about 11% and ranges between 9 and 13% and the commercial banks rate is average 20%! Libor (The London inter-Bank rate) is an average of 1%, this is an international benchmark interest rate. What a difference? There is something wrong here!
There is an underlying weaknesses in the economy especially inefficiency among other things in the economy that causes interest rates to be high or are banks making abnormal profits or is lending too risky? Why is this so? With this kind of interest rate no Ugandan business can be competitive in a global market. Exports have been known to drive growth. We cannot export competitively with this cost of money, therefore, this constrains our growth. I believe the central bank has various studies on this to indicate why the interest rates are up there.
Interest rates in a free market economy should be determined by the forces of demand and supply. Ugandan’s interest rates appear not to be. It seems there is dysfunction. There is a problem which should be addressed. But in the current conditions as we get out of the Coronavirus pandemic we need “Concessionary loans” for business. In such situations it is usually the small business people who suffer a lot, big businesses normally can use their reserves. They are usually in a position to go over short-term crisis unless if of course the value of their shares have fallen steeply but in our case, we have very few companies that are listed and therefore this may not be an issue. It is reported that the IMF loan will also go to capitalizing Uganda Development Bank so as to lend to small businesses. It will enable us maintain our imports! This will stimulate production in developed economies and exchange rate stabilization among other uses. Money has been lent to DEVELOPING countries to support developed countries emerge from the recession.
Cheaper financing will ensure that the economy is stimulated is crucial but from where and for what purpose? With a dampened economy, a little more planned credit and activities should be a magic cure. The maximum 10% interest rate would be ideal in the circumstances though does not guarantee competitiveness of Uganda’s businesses
b) Fiscal Policy Measures
Fiscal policy has to do with taxation and budget. Right now, Uganda’s tax collections are not as per international standards. By International standards governments collect about 18-20% of their GDP annually. Some countries like Finland collect 54.2%, France 47.9%. Uganda has made tremendous progress over the years from about 8% in the 1980’s to currently about 14.5%. Remember about 25% of the Uganda’s GDP is not monetized. This therefore has been good progress but much below other countries. Kenya and Ethiopia are about 16.5%. Because of this Uganda is unable to fund its national budget. Monetization of the country’s production and increasing tax base are crucial.
With decline in GDP for financial year 2019/20 and 2020/21 the country’s tax collections will be low. We still have to borrow money from abroad, to enable us meet our expenditure! We have already received US$491million from IMF and those other amounts as shown above. More important we need another round of austerity measures to keep our expenditure in check.
But first of all, where are the source of our tax? The culture of paying tax in Uganda is still poor. Taxes were introduced on coffee in 1903 to support the British colonial government. To date the number paying income tax is small, mainly those in formal employment, others do not understand it. Ugandan’s will complain over the tax all the time and yet they want and expect much from the government. They forget that the government cannot work unless if we pay taxes.
There are 740,000 registered taxpayers in Uganda and under 3,000 of them contribute 90% of the taxes! There are an estimated 20.5 million adults in Uganda who could be eligible to pay tax under right circumstances. With the small number of formal business and small number of people in paid employment, you don’t expect many tax payers in the country. But this is a consequence of the colonial policy of keeping African out of business relegating them to “farming and backyard industries”. This has to change if Africa is to prosper through payment taxes. The government must take a proactive position of fostering formal businesses within the country and creating tax awareness and the need to pay tax. The government must increase prices of agricultural productions so that people are able to sell their produce. Produce must move from farmers to silos. Higher prices and where necessary some subsidy will monetize production.
The most effective tax is indirect tax. Indirect tax is levied on goods and services. VAT is one such tax. Tax that is paid by individuals which is normally what you call Pay as You Earn or Corporation tax for companies is called Income Tax. These are direct taxes. Companies normally tend to accept tax, but it’s very difficult for individuals outside formal employment to pay tax. Even businessmen themselves hate to pay tax! So, tax imposed on goods and services as indirect tax, is likely to be paid. As part of the measure to boost the economy government should lower tax rate to encourage compliance and expand the taxpayers’ base. Tax policy needs to be evolved to bring more individual and formal firms into the tax bracket. This is through lower tax rate. I made some recommendations in the in the immediate measures. But it must be a deliberate, not casual policy.
While money is collected there is no value for it in expenditure. Government vehicles are expensive. Government project are very expensive. The country loses a lot of money through corruption.
The writer, Prof. Waswa Balunywa, is the Principal of Makerere University Business School