Nathan Sunday; Research Associate, Economic Policy Research Centre
Coronavirus (COVID-19) has continued to spread across the world following the first infections in Wuhan city in Hubei province of China in December 2019. As of 14th may 2020, 4.5 million cases where confirmed, with 297,197 deaths worldwide. Uganda confirmed its first case on 21st March 2020, upon which the country came up with a number of containment measures to curb the spread of the virus, such as the closure of schools, restrictions on internal and international travel, use of hand sanitizer and initial lockdown of 14 days. The lockdown was later extended for 21 days, and then later 14 days with slight easing.
The above measures have affected the economy in various ways, but micro, small and medium enterprises (MSMEs) have been affected most. A recent study by the Economic Policy Research Centre “how has the COVID-19 pandemic impacted Ugandan businesses? Results from a business climate survey” shows that micro and small businesses lost more than one-half of their businesses activity. This is largely attributed to inability to implement Standard Operating Procedures (SOPs) such as the provision of on-site accommodation for employees, which resulted into halting of operations for most of the micro and small businesses. In addition, employees of SMEs use public transport to get to work, which was temporarily suspended on the 25th March 2020. Nevertheless, essential services such as food supplies, health services and security services have been left to operate.
Nonetheless, businesses have suffered a loss of business activity, largely due to severe decline in access to inputs. Majority of MSMEs reported large reduction in access to inputs, while others reported no access at all. This is due to disruptions in supply chains, owing to factory closures in China and other main suppliers, of intermediate inputs. Most of intermediate input deficient MSMEs where from the manufacturing sector.
Consequently, the domestic price of inputs, for small and medium businesses increased by close to 38 percentage points. However, there is a positive aspect in the deficit of intermediates presented by the COVID-19 related risk. It follows that the deficit is a clear opportunity for Uganda to develop a critical domestic value and supply chains so that businesses, particularly MSMEs, can have a stable source for their inputs, while saving on the scarce foreign exchange.
Regarding demand, a high percentage of MSMEs experienced severe decline in demand. This is particularly so with MSMEs in the agriculture sector. Several factors that could explain the fall in demand: First, it could be a consequence of fear of contracting COVID-19 resulting in reduced visits to food markets. Second, the fall in demand is also consistent with rise in consumer demand for dry rations. Third, the restrictions on private and public transport has reduced purchases by the urban middle class. Lastly, the closure of institutions such as schools and hotels has highly contributed to decline in demand of food items.
Due to loss of demand, businesses have experienced a severe decline in revenues. Consequently, more than 19 percent of MSMEs have reduce the size of their employees by more than 50 percent. Loss of revenue has undermined the ability of more than 70 percent of MSMEs to repay outstanding loans. Looking forward, businesses are pessimistic, with more than 50 percent MSMEs predicting layoff in the event that the pandemic persists for the next six months. More so, most of the micro and small businesses would exit business in 1 to 3 months in the event the current situation persist.
As a way of supporting MSMEs to recover, there is therefore need for a fiscal stimulus package to address immediate liquidity challenges, reduce layoffs, and avoid firm closures and bankruptcies. However, the support should be kept as simple as possible during the lock down, and gradually evolve during the post lockdown phase by taking into account new circumstances. Furthermore, in order to address immediate cash flow challenges, government could consider one or a combination of the following; tax rate reduction, reducing taxable income, offering tax credits, and offering tax refunds.
Additionally, government could consider buying equity of the distressed firms. In the same accord, commercial banks should consider to proactively provide emergency loans to MSMEs with flexibility in repayments, including on existing loans, which could be complemented by extension and diversification of partial credit guarantee schemes for loans provided by private banks or provision of concession loan by government through Uganda Development Bank.
Finally, there is urgent need to amend the legal framework on bankruptcy with temporary measures to prevent liquidation, such as increasing the debt threshold required for a creditor to initiate bankruptcy proceedings against a debtor, and suspending the director’s duty to file or suspending the personal liability of directors for a fixed time for insolvent trading and many other options.