By Dr. Enock Nyorekwa Twinoburyo
Across the globe, nearly everybody — from urban to rural populations, the aged and the young alike are talking about the novel Coronavirus (aka COVID-19), owing in part to World Health Organization declaring it a pandemic.
As I write this article, I have been advised to work (in Kigali) from home until 31st March 2020.
On 16th March 2020, the Center for Disease Control (CDC) recorded 182,000 confirmed cases, less than 0.002% of the World Population and the deaths were only 7,200.
Despite the low associated mortality and declared recoveries 80,000, without action, the spread has been exponential and growing.
This has led to social distancing move by many countries, quarantining cities (e.g. in Italy and China), closure of borders, work from home advisory and closure of schools and churches (e.g. in Rwanda and Kenya). This illustratively suggests that the economic flows, demand and supply factors will be adversely affected.
The recent estimates show that impact of COVID -19 on China (second largest economy in the World) alone in the first two months is more than the effect of global crisis in the first two months.
Similarly, the largest economy in the World – USA has already felt the heat and consequently has reduced the Fed rate to near zero in a bid to restore confidence in the economy. Global demand especially for commodities has already dipped at a pronounced rate as was during the peak epoch of the global crisis.
Sizeable production or supply disruptions have also already happened particularly in China (the OPEC of industrial intermediate goods) and other nations with lock down and quarantines.
In some instances, workers are induced to take unpaid leave or at least structural unemployment is on the rise.
Stock markets in large economies across the globe and some African stock markets (Kenya, South Africa and Nigeria) already encountered double digit volatility spikes, and financial conditions are increasingly tight exhibited by increasing interest rate spread.
In a nutshell, there is growing consensus among economists that a health crisis is an economic one. With COVID-19 in all G7 countries, that account for over 50% of global GDP and manufacturing, a sneeze in the economies implies catching a cold for the small ones.
Uganda is not immune to these global consequences of the Virus. At the time of writing this article, Uganda had not yet reported a case of COVID-19. However, one Ugandan flying from London to Rwanda tested positive and is under quarantine in Rwanda.
The no case notwithstanding, the impact on Uganda’s economy is inevitable as both demand and supply factors are already distorted as is the mobility of factors of production.
Uganda like the global wave, should already entrench a fiscal stimulus response to contain the spread of the Virus inside its borders. Already COVID-19 has spread to 26 of African countries.
The timing is not good for Uganda owing to the shortfalls in revenue and narrow fiscal space this financial year.
The shortfalls are likely to prevail owing to potential decline in imports from China – accounted for 15% of the total imports more than what the entire COMESA exported to Uganda in 2019.
On average, 1000 monthly visas are issued to Ugandans by the Chinese Embassy but these have already dipped immensely. Correlation analysis, shows that a 1% decline in China’s growth translates into 0.5% decline in Uganda’s growth.
Additionally, the trade contagion is through other large trading partners for Uganda like India, Kenya, the UAE that have already encountered COVID-19 spread. The fear factor has equally brought to a standstill some economic links like the Fly Emirates suspending its flights to Entebbe.
The Health of Uganda’s external position has already been impacted, exhibited by recent weaknesses of the Uganda Shilling against the US Dollar despite the decline in oil prices.
The latter expected to be favourable to UGX. This also then suggests that other financial and economic external flows have dwindled in particular to the tourism sector and also the fear factor resonating in the export sector as well. The latter not helped by ongoing trade wars between Uganda and Rwanda, reflected respectively in the ban of Uganda milk products in Kenya and border closure for Ugandan goods to the Rwanda market.
Tourism and foreign direct investment are expected to dwindle as was witnessed in the last cases of the global financial crisis in 2008 and September 11 Attacks.
The World Tourism Organization forecasts international tourism arrivals to decline by 1% – 3% in 2020.
The rising travel restrictions are expected to constrain the respective FDI and Tourism flows into Uganda. The resultant downsides on household and business income flows will be mirrored in the banking sector position, with non-performing loans expected to peak while private sector credit growth slows.
Overall, with global GDP expected to decline between 1 % to 1.5 % this year, correlatively Uganda’s growth is expected to shrink by 0.4% to 0.6%. This implicatively suggests that the short term policy framework must adapt quickly and accomodatively.
Some Central Banks in Africa (for example Mauritius and Egypt Central Banks) have already lowered policy rates in a bid to mitigate the contagion effects from the globe effect of COVID-19. Going forward, caution must be exercised owing to inflationary pressures emerging from import shortages and recent exchange rate movements.
Targeted and fiscal stimuli is inevitable, drawing also from the emergency funds by IMF and World Bank as well as others. Prudency will be key in light of the distortions that predominate during election cycles—with the upcoming 2021 elections already taking an effect on the National Budget. Time to accelerate domestic production is now.
The Writer is Senior Economist, The Sustainable Development Goals Center for Africa in Kigali