Last week the WHO declared the outbreak of the corona virus as a pandemic. There are now more than 165,000 confirmed cases of Covid-19 globally with about 6,500 deaths. So far 147 countries have reported cases of the virus since it emerged in China in December 2019. What was initially seen as a largely China centric problem is now a global crisis beyond the obvious public health crisis, the coronavirus is having a major impact on the global economy. By the time of writing this article, there had been no confirmed cases of Covid-19 infections in Uganda. However, we are already feeling its negative impact on our economy, and way of life.
As the world grapples with the coronavirus, public health of course must be the first level of concern, with focus being on preventative and containment measures as well as equipping and preparing the global health care systems’ capacity to confront the pandemic. However, the negative impact of the virus on the global economy is increasing every day. The restrictions we are seeing on the movement of people, goods and services, and containment measures such as factory closures in China, is creating a lot of uncertainty on the global economy.
Closure of China “the world’s factory” is hurting the global economy
China is the second biggest economy in the world. It makes up a third of all manufacturing globally, and it is the world’s largest exporter of goods. Currently, about 20 percent of all global trade in manufacturing intermediate products originates in China. Twenty years ago this was only 4 percent.
Given its status as the “factory of the world” any disruption of China’s manufacturing output and supply of intermediate inputs was always going to have a negative effect on the productive capacity of the global economy. The closure of factories in China is being felt around the world, reflecting the key and rising role China has in global supply chains, travel and commodity markets.
Businesses all over the world including here in Uganda are suffering from lost revenue and disrupted supply chains due to China’s factory shutdowns. China’s rising importance in the global economy is not only related to its status as the leading global manufacturer and exporter of consumer products, but it is also the main supplier of intermediate inputs for many manufacturers elsewhere in the world.
The slowdown in the global economy has led to a huge decline in oil demand
Economic slowdowns generally lead to lower demand for oil, and this is exactly what we are witnessing at the moment. China is the world’s largest consumer of oil. With coronavirus hitting China’s manufacturing and aviation sectors badly, this has resulted in a huge drop in global oil demand. In situations like this, oil producers usually respond to declines in demand by cutting supply to boost the oil prices. In fact, early this month, members of the Organization of the Petroleum Exporting Countries (OPEC) and a few other major oil producers met to discuss an additional cut in global oil production of 1.5 million barrels per day through the end of June in response to the outbreak.
Unfortunately, they failed to agree on this. When the agreement collapsed, Saudi Arabia cut prices and lifted output, apparently to harm Russia for refusing to agree to production cuts. Following the Saudi decision, Brent Crude fell more than 20 percent , the sharpest one-day drop since the 1991 gulf war. The increased uncertainty in the global price of oil has led to financial market volatility last seen during the global financial crisis. In theory, lower oil prices should help oil-importing countries, like Uganda. However, the depressed activity in the country as well as the pressure on the Uganda shilling may limit that benefit.
How does all this impact Uganda’s economy?
Uganda’s economic performance is influenced by developments in the global economic environment. Therefore, a slowdown in the global economy as a result of coronavirus will have a negative impact on Uganda’s economy. This impact will be many ways.
Factory closures in China have resulted in supply chain disruptions
China is Uganda’s major trading partner, and the effects of coronavirus are already being felt in Uganda. With China having shut down its manufacturing centers and closed its ports, there has been a resultant decrease in demand for Uganda’s commodities. Importers in China are cancelling orders from Uganda due to port closures and as a result of reduction in consumption in China. This has resulted in a reduction in the demand for the country’s exports which are mainly agricultural commodities and natural resources. For example, the three-day China International Coffee Specialty Expo that was scheduled to take place this week has been postponed indefinitely. China is a major market for Uganda coffee and Uganda was to be the “portrait country” at this Expo. This was going to give our country a great opportunity for increased awareness, visibility and market penetration in the China and Asia Pacific specialty coffee market.
The impact of coronavirus will also be felt in Uganda’s manufacturing sector. Factory closures in China have resulted in supply chain disruptions for manufacturers in Uganda, with delays, raw material shortages, increased costs and reduced orders. With the widespread nature of the virus, it is difficult to envisage how supply chains could be adjusted rapidly to meet demands.
A disruption in global supply chains as a result of factory closures in China is going to have a negative impact to small and medium enterprises in Uganda. These are the enterprises that trade mainly with China and are in the trade and retail sector (abasubuuzi). This sector constitutes 13% of Uganda’s economy. Nearly 20% of all the goods traded in this sector are imported from China. The main imports from China are textiles and apparels, electronics, building and construction material, pharmaceuticals, heavy machinery, raw materials, iron and steel, as well as household consumer goods.
There will be a decline in FDI and remittances from diaspora
China is the second largest recipient of foreign direct investment (FDI) in the world. There will be a significant decline in FDI inflows into China as a result of the coronavirus. A decline in FDI into China together with lost revenue, lower profits which will translate into lower earnings will also affect China’s ability to continue making huge investments elsewhere in the world. For example, in the last financial year, China topped the list of planned investments in Uganda. According to the data from the Uganda Investment Authority (UIA) 45 percent of all the planned FDI into Uganda was to come from China. The investments were mainly in capital infrastructure projects and manufacturing. This means that we should expect a slowdown in FDI as a result of the coronavirus.
There will also be a be a decline in the foreign currency inflows and remittances from diaspora as a result of the disruption in the business and economic activities in many of the countries where the majority of Uganda diaspora live and work.
The tourism sector and its related industries will suffer most
The tourism sector will be the hardest hit by coronavirus as the as Government issues travel warning to people travelling to, and out of Uganda, under its policy “social distancing” in order to prevent and contain infections. As of now, tourism is the number source of foreign exchange in Uganda. It constitutes 7.7 percent of the country’s GDP and employs close to 700,000 people. We all now know that the less people interact with each other, the less the virus spreads. This is the “social distancing” policy that WHO is advising all countries, including Uganda to follow.
This is having a negative effect on the travel and hospitality industry in Uganda. The most affected sectors are hotels, travel and tour agencies, bars, restaurants as well as international conferences and summits. For example, Uganda was supposed to host the 3rd UN G77 and China Summit next month, but this has been postponed, due to the coronavirus. This summit was going to be a major boost to our country’s international image and tourism sector. It was expected to be attended by over 6,000 international delegates from 135 countries. Delegates were expected to discuss trade between countries, investment and humanitarian aid related issues.
Tax collections will also be affected
Currently, about 42% of all the tax collected in Uganda is from international trade. This tax is mainly in the form of VAT and import duty on imports, and excise duty on the importation of petroleum products. A slowdown in international trade as a result of the coronavirus is likely to have a massive negative impact to tax collections this year. The situation will be made worse by the reduced economic activity in the retail and trade, services, hotels, tourism and manufacturing sectors which will translate in both reduced VAT remittances and corporation tax payments to the URA.
So what does a business man or woman faced with this situation do?
Doing nothing is not an option. You will need to be creative and innovative to mitigate the coronavirus’ economic disruptions on your business.
If you are in manufacturing and you are now faced with a risk of running out of your imported raw materials, consider scaling back production as you wait for the situation to stabilize. This may involve temporarily closing down some of your production lines and saving on operating and running costs, as you wait for your raw material orders to come through when China re opens fully. It is important to ensure that you communicate with, and notify all your key stakeholders especially customers, suppliers, creditors, staff as well as your bankers about whatever key business decision you make as the decision will also have an impact on them. It is very important that you update your customers about delays in their orders, and wherever necessary and possible adjust customer allocations to optimize profits on near term revenue and meet contractual terms.
If you are in the trade and retail sector, review your current stock levels and assess how long they are likely to last. Carry out a robust and regular review of your cash flow. Assess what impact a reduction in sales will have on your ability to pay suppliers, creditors, your staff as well as repayment of your bank loans. If you foresee any cash flow challenges, consider renegotiation of payment terms with suppliers and creditors, and even your landlord. Most importantly, talk to your bank early enough if you foresee any challenges with keeping up with your regular loans. This is a time to look very critically at all your business costs and scale back on non-critical costs and expenses to preserve cash flow.
Do not lay off staff instead consider flexible working arrangements at reduced pay. Have an open and honest discussion with your staff. They also see what is happening to the business and they will understand.
Review your business contingency plan if you have one, if you do not have one, this is the time to develop one. Get professional help with this. Check your business risks insurance policy. Does it cover these losses? If it does, talk to your insurance broker for assistance on making a claim for loss compensation from your insurer. If you do not have a business risk insurance policy, again this is the time to consider getting one.
Do not sit back and lament and hope it will go away. Take action. This is not one of those “Government Etuyambe” situations, you will need to be proactive to protect your business. You may even want to start exploring alternative sources for your goods and merchandise now that China is still closed. Countries such as Turkey, Indonesia, Thailand and Vietnam may be worth looking at. In fact, over the last two years, the value of goods imported into Uganda from these countries have doubled, which confirms that these countries are now credible alternative sources of imports to China.
Government must be commended for the way it is currently responding to the coronavirus pandemic. It has kept the citizens updated on the current state in the country and providing advice to the public on what they need to do to stay safe. However, more needs to be done. In order to keep the citizens safe from this pandemic, there is need for coherent, coordinated, and credible policy responses in all the Government’s ministries, authorities and directorates, to ensure that the virus does not result into a public health and economic tragedy in our country.
There should be continuous and consistent advocacy and sensitization for all government ministries and agencies as well as international NGOs and development partners, faith based institutions and communities at large. There should also be a large-scale distribution of information, in all the local languages, to the general public with guidelines on how to stay safe, what signs and symptoms to look out for and how to respond in case of suspected infections.
There is need for very clear protocols to community leaders, health workers and the general public with regards to case detections, contact tracing as well as surveillance guidelines. The public should be provided with advice and guidelines on how to contact the medical surveillance teams and rapid responders at both national and local municipal levels.
Coronavirus has been declared by the WHO as a pandemic. Which means it is now a global emergency. Scientists have explained that they do not yet have a clear understanding of the virus’s behavior, transmission rate, and the full extent of contagion. This means there is still a lot to learn about the virus. The good news is that scientists all over the world have been working day and night to find both a cure and a vaccine for the virus. As you patiently wait for the cure and vaccine for this Pandemic do whatever is in your powers to protect your business, your livelihood and your family from this Pandemic.
Partner, PwC Uganda
Tel: + 256 (0 312 354 400