Uganda’s GDP to go further negative in 2021 as Covid-19 hits hard economy

By George Mangula

The latest World Bank’s Uganda Economic Updates projects that the country’s real GDP growth of between 3–3.3 percent in FY20 (from 6.5 percent pre-COVID) and 2.9–3.7 percent in FY21, as COVID-19 related shocks, as locust invasion and floods hit the country. On a calendar year basis, real GDP growth in 2020 is projected between 0.4 and 1.7 percent, compared to 5.6 percent in 2019.

“Therefore, in real per capita terms growth has turned negative. The main external transmission channels of COVID-19 are through lower exports, tourism, remittances, as well as a sizable deceleration in Foreign Direct Investment (FDI) inflows and government project financing, creating a significant fiscal and external imbalance. This is amplified by a domestic demand contraction due to stringent mobility restrictions and a corresponding fall in incomes.”

According to the report,  the decline in Uganda’s real GDP growth and corresponding loss of jobs could be even larger if the country were to face a more widespread pandemic, which would require more extended periods of mobility restrictions or overwhelm the capacity of the health system.

The Update was virtually released in Kampala yesterday in the afternoon under the theme, “Digital solutionsin a time of crisis”.

The Update notes that for poor and vulnerable households in Uganda, the impact of COVID-19 is expected to be especially severe. Given that many jobs will be lost, and livelihoods affected for several months, poverty is expected to increase even though real GDP growth is projected to be positive. Ugandan households also have limited coping mechanisms such as laack of  savings and social protectionto deal with shocks.

The effects will be observed in both rural and urban areas, although through different transmission channels. In urban areas, the prohibition of social gatherings, closure of non-essential institutions and ban on public and private transport are significantly reducing the incomes of those engaged in the services, manufacturing and construction sectors. “Rural households will be impacted by an overall drop in aggregate demand, together with a slowdown in trade, which will lower demand for food and agricultural products.”

It says that with the pandemic widening the current account deficit and slowing financing inflows, the external gap will amount to US$1 billion in FY20 and FY21. The combined fall in merchandise exports, tourism earnings and remittances are expected to outweigh the decline in imports. The crisis is also set to severely impact external financing inflows, with net FDI inflows projected to decline by 30 percent in FY20 compared to last year’s outcome and recovering only at the margin in FY21. “The external gap will be met by the IMF’s Rapid Credit Facility and World Bank’s emergency lending operation, both totaling US$0.79 billion, and a drawdown of reserve buffers.”

“The fiscal deficit is projected to rise to 7.6 percent of GDP in FY20 (relative to a pre-COVID level of 5.8 percent of GDP) and range between 7 and 8.9 percent of GDP in FY21 (from 5.5 percent pre-COVID). The worsening deficit is due to a sharp decline in revenues, driven by the reduction in economic activity, tax payment postponements to support business liquidity and shrinking trade. At the same time, current spending is rising to manage the COVID-19 crisis, contain the locust invasion and support the economic recovery. The fiscal financing gap in FY21 is estimated at 3 percent of GDP, and hinges on available concessional and nonconcessional financing and external capital spending execution. Hence, if government does not find needed financing and if it proceeds with re-prioritizing development expenditures, the fiscal deficit may only reach about 7 percent of GDP next fiscal year.”

Uganda faces heightened liquidity vulnerabilities

According to the report, despite the high fiscal deficits and expansion in public debt, Uganda remains at low risk of debt distress based on the April 2020 joint World Bank-IMF debt sustainability analysis. However, with total debt service (interest and principal due) expected to average around 55 percent of government revenues over the next three years, Uganda faces heightened liquidity vulnerabilities. This underscores the importance of raising tax revenues and aggressively reducing tax exemptions after the elections in early 2021 to ensure fiscal sustainability.

The report says the medium-term outlook for Uganda has worsened considerably due to the impact of COVID-19, and risks are tilted heavily to the downside. If the impacts of COVID-19 last longer globally, or spread more widely in Uganda, they could deter a reasonably rapid recovery in Uganda’s exports, adversely impact tourism and remittances, and depress domestic economic recovery. “This could lead to a more severe social and economic impact and amplify external and fiscal imbalances. Locusts, army worm infestation, weather shocks, and heightened uncertainty around the 2021 elections further exacerbate these risks.”

Policy actions needed to protect the vulnerable

To protect the most vulnerable, ensure transparency and accountability in the response to COVID-19, and sustain macroeconomic stability, the report calls for policy actions in three key areas: Time-bound expansion of existing and new social safety nets; Reprioritizing budget spending in FY21 and Transparency and accountability of government’s response to COVID-19.

Role of the digital technologies

The report says digital technologies  allow the government to deliver services digitally in key sectors such as health and education. “They connect farmers with markets, facilitate consumer access to a broader range of goods and services, and drive innovations in manufacturing. Digital technologies also enable growth, productivity and employment.2 Particularly relevant for Uganda is the job creation potential of the digital economy.”

For instance, the report argues that the digital economy has already powered the rise of financial inclusion in Uganda and has had important livelihood benefits for poor rural households. It says greater financial account ownership in Uganda can be attributed to the growth and penetration of mobile money, which rose to 51 percent in 2017, from 35 percent in 2014. Additionally, it says, digital transformation has driven financial technology, with fintechs3 offering a number of payment solutions, digital credit applications, and even some innovative insurance products.

The Economic Update notes that While Uganda has made strides in digital transformation with increased access to digital connectivity and digitally enabled services, it continues to lag behind peers. “ country has approximately 27 million mobile subscriptions, which is a penetration rate of 69.2 percent of the population, far below the average of 84 percent for Africa.”

“ Even though the internet market is growing steadily, it is still underdeveloped. Only about 8 percent of the population are mobile broadband subscribers (approximately 186,000 subscribers), a smaller proportion compared to peer countries. Demand-side factors inhibiting greater uptake include affordability, limited uptake of broadband services, skills gaps, limited access to reliable energy, and a lack of digital content in local languages.”

On the supply side, development of the requisite infrastructure and connectivity services is often impeded by regulatory, policy and market bottlenecks in addition to unattractive investment returns for commercial projects in some rural areas, says the report.

It further says  there is a gender and geographical gap in access to digital technologies; Traditional businesses are increasingly leveraging digital technologies for market development and as a new source of revenue, yet technology adoption is still low.

“Gaps in basic and advanced digital skills are a challenge for the digital transformation of Uganda. Nearly 90  percent of households in Uganda do not have internet access with a majority citing lack of confidence, knowledge or skills as a key reason. There is no national Digital Skills framework or ICT in Education policy or strategy around which to organize efforts to begin to address the skills gap.”

It however, says The national ID system launched in 2014 is a critical asset for improving digital service delivery in key sectors such as agriculture, health and social protection.

Digital solutions can play a key role in addressing the economic growth and health challenges posed by COVID-19. Digital solutions can support delivery of essential services for firms ( utility and tax payments, access to markets via digital platforms and e-commerce, and digital SME finance), consumers  mobile money, remittances and e-commerce) and the most vulnerable (e.g. expanded and new short-term social safety nets).

In order to leverage digital solutions in response to COVID-19 and advance Uganda’s digital transformation, the report says policy actions are needed to ;leverage digital technologies to mitigate the health impact of COVID-19 and support the recovery; strengthen the regulatory environment to allow for the continued expansion of the digital economy.

Also cited is the  review taxation of the digital economy; develop coherent strategy of support for the digital entrepreneurship ecosystem, including skills development and building firms’ capabilities.

It adds: “Catalyze regional and global integration of Uganda’s digital economy. Uganda’s digitally enabled firms need a bigger consumer market base to scale and reach critical mass. A more deeply integrated digital market would also drive increased investment, competition and performance of digital infrastructure while helping reduce consumer prices and extending the reach of digital services to underserved communities.”