The 14-day extension of the lockdown due to COVID-19 has been received with mixed reactions by different sections of society. Whereas the first wealth is health, the inability to earn by some Ugandans has made them reconsider, in part, the merit in being healthy if you are not working.
The uncertainty about how to handle COVID-19 is slowly fading because of the growing knowledge (lessons) from country and cross-country experiences. For instance, the containment measures, though unprecedented, have been effective and will continue to be effective when followed. However, these measures are likely to reinforce the expected economic downturn, thus, posing a dilemma for policymakers.
There are concerns that the containment measures would result in a contraction of the global economy by about 3 percent. For Uganda, the Bank of Uganda projects that the economy will grow at 3 – 4 percent in 2019/20, a revision from the earlier projection of 6 percent. Further still, in the short run, the observed macroeconomic effects on the economy are general reductions in domestic consumption, domestic and foreign investments, government spending, government revenues, exports and imports. The long run effects will depend on government’s response to the short run fluctuations in macroeconomic variables and on the speed of recovery of the global economy.
The government has already employed some fiscal and monetary policy measures to contain the pandemic and to limit the damage of the containment measures on the economy. The key fiscal policy measure has been increasing the health ministry’s expenditures while the key monetary policy measures are reducing the central bank rate and providing other credit relief measures. With the 14-day extension and hopes of the recovery of the Ugandan economy, the role of active fiscal policy is still justified.
Whereas the priority for fiscal policy is to prevent the spread of COVID-19 and provide treatment to the affected persons, there is increasing pressure for the government to provide relief to households and the business sector, especially the most affected. While some households have received food relief and some businesses have been authorised to resume work, the demand for goods and services is likely to remain low.
Therefore, allowing some businesses to resume work reduces the fiscal pressure for the government to provide relief. In addition, the goodwill of many Ugandans and non-Ugandans to support government efforts toward disease (COVID-19) control and disaster relief has also reduced pressure on the fiscal resources tremendously. Nonetheless, this does not absolve the government of its duty towards the citizens during this time.
To respond effectively and sustainably to the pandemic, the proposed courses of fiscal action on the spending and revenue side would be ideal. Starting with the spending side, first, the government should continue spending on the prevention and treatment measures. However, the spending should not be exaggerated because individuals and businesses are still providing support and, with timely accountability, more individuals and firms might continue contributing to the National Task Force on COVID-19.
Second, the government should continue to provide relief to the households and businesses that are most affected by containment measures. Third, the government needs to reinforce the exchange rate due to the likely effects of currency depreciation or the anticipated reduction in the inflow of foreign currency from grants, exports, remittances and investments from abroad.
Fourth, prioritise the payment of the suppliers of essential goods and services during this period to avert any sharp spike in the government expenditure arrears. Fifth, negotiate for debt relief with the multilateral and bilateral lenders so that the revenues are diverted from meeting debt obligations (like interest and principal repayment) to the essential sectors such as health and security. However, because of uncertainty concerning the duration of the lockdown and the impact of the containment measures on the economy, the government should be flexible enough and not commit to unnecessary and fixed increases in its spending.
On the revenue side, it would be reasonable for the government to temporality reduce the taxes charged on some individuals or firms to a reasonable level – fair enough not to increase the plight of the individuals and firms. Whereas temporarily eliminating taxes (on individuals and firms) during this period might seem ideal, it could result in a sharp increase in the country’s debt if we have to borrow to spend on the current priorities. However, when fiscal space is constrained, borrowing at concessional terms can be considered to match the low revenues. Nonetheless, the government needs to be more flexible on the revenue side by adjusting its response to the fluctuations in economic activity.
Therefore, the optimal fiscal policy response of the government to the COVID-19 pandemic is likely to depend on the effects of the pandemic on the domestic and the global economy. In addition, the response ought to be flexible enough to respond to changes in the macroeconomic indicators.