Covid-19: Where is the economic stimulus package?

Right now, markets and supply chains have been interrupted. Central Bank predicts that this might cut Uganda’s Gross Domestic Product growth from the projected 6 per cent to about 3 per cent to 4 per cent – the lowest economic growth in more than five years – in this financial year.

Currently, very little is known about what life after Covid-19 will be like. But it is not too early to start planning for the post Covid-19 era by unveiling an economic stimulus package in form of some tax breaks and waivers to SMEs.

The Kenyan way
To suppress the spread of coronavirus, the government on March 30 declared a two- week lockdown just as the population was trying to adjust to life under the partial lockdown.

Trade, investment, growth, and employment have all been affected and the crisis is set to have an impact on the economy and revenue collection targets.

To resuscitate businesses and the Kenyan economy, President Uhuru Kenyatta announced stimulus measures including some tax relief for businesses. He declared reduction of Pay As You Earn from 30 per cent to 25 per cent. Reduction of turnover tax from 3 per cent to 1 per cent.
Corporation tax reduction from 30 per cent to 25 per cent.

It is further reported that he suspended all Credit Reference Bureau listing for all loan defaulters. This is in addition to VAT reduction from 16 per cent to 14 per cent, let alone directing that all government suppliers be paid pending bills in 21 days.

In addition, all VAT refunds to be paid in 21 days or offset against Withholding tax among other measures to lessen the impact of Covid-19 on businesses and the economy.

Presidential feelings
According to President Museveni, the economy is currently not causing him sleepless nights.

In his address to the nation last week on Wednesday, he said: “…The issue is not business or how a business has suffered! The issue we are dealing with is a matter of life and death—Covid-19. We are talking about stopping mass deaths.”

For President Museveni, unless this fight (against Covid-19) is defeated, everything else is relegated to the periphery.

He is cognisant of the fact that some key sectors of the economy among them tourism is suffering. But despite that, he believes this is a lesson for the country to reduce reliance on imports and dedicate more time to manufacturing.

Cabinet maneuvers versus revenue pressures
This newspaper understands that the Ministry of Finance, has put together fiscal policy (use of government revenue to influence the economy) as a measure to boost businesses and resuscitate the economy that is expected to dip to worrying levels as a result of the impact of Covid-19.

By last week, the raft of fiscal measures were still in Cabinet, pending scrutiny and approval. Once approved, the measures will be unveiled by the Finance Minister Matia Kasaija before the Parliament.

When contacted, the Deputy Permanent Secretary as well as the Deputy Secretary to the Treasury, Mr Patrick Ocailap, said an immediate fiscal policy would be unveiled.

When pressed to give a highlights of what is contained in Mr Kasaija’s plan, he said: “We are buying food locally for distribution to vulnerable people. This is a direct twin effect of support to domestic aggregate demand for agricultural products while addressing dire needs of those living hand to mouth.”

Mr Kasaija while responding to government’s plan to distribute food in Kampala and Wakiso in the wake of the shutdown, said: “We are now not collecting taxes for reasons we all know (shut down as a result of suppressing Covid-19 spread). As MPs, you should be thinking of how the government can collect revenue or where to get money from.”

Already, he said: “We are borrowing $200 million (Shs763.3 billion) as budget support from International Monetary Fund. We are committing Shs284billion to fight Covid-19.”

Paying off domestic arrears
Mr Kasaija also told Parliament that about Shs400 billion will be availed to pay off some domestic arrears. This, he said, will rejuvenate local SMEs and keep them in business as the government continues to battle COVID-19 pandemic.

In total domestic arrears, money government owes local suppliers’ amounts to Shs1.2 trillion after verification.

Experts weigh in
According to the executive director of the East African School of Taxation, Mr Godfrey Akena, government can emulate the Kenyan stimulus package.

As for the executive director of Private Sector Foundation Uganda (PSFU), the country’s private sector apex body, Mr Gideon Badagawa, the reality is that most of the business in the country and globally have drastically gone down.

He said: “Employers are sending workers home implying reduced productivity. Now because this is what brings in much of our tax revenue, the targeted revenues must be revised downwards.”

He continued: “Pay As You Earn (PAYE), Income tax, VAT etcetera will no longer come in. Let’s agree to swallow a bitter pill now and be better in future. This is the time to leverage fiscal and monetary policies for business and investment.”

Mr Corti Paul Lakuma, a research fellow with Economic Policy Research Centre, believes stimulus package like in Kenya is ideal for Uganda. But he cautioned that it all depends on the environment you are operating in.

Informal economy
“It is easier to move between tax rates in Kenya than would be the case in Uganda. Kenya has a large formal sector,” Mr Lakuma said.

He also wondered whether it would not be difficult to reverse once offered, before concluding that tax reliefs, rebates and subsidy are a tough question in an informal economy such as Uganda.

EY Tax Partner/Country Leader Mr Muhammed Ssempijja thinks that suppressing the pandemic is more urgent now than anything else.

“Priority now should be to stop the virus and once that is done then economic stimulus can be on the table. For now, the priority should be some kind of regular support to the poorest people who earn hand to mouth so that they can stay home to stop the spread of the virus.

“The challenge is whether government can afford to get these resources and how to identify the poor. This can be done through the Local Council system who should register their phone numbers and get weekly or monthly payment on their phones.”

Manufacturers adjust
According to Mr Daniel Birungi, the chief executive officer of Uganda Manufacturers Association, the sector players are adjusting to life under lockdown.

Because of the changes in working hours, Mr Birungi said many manufacturers have had to re-adjust their schedule in factories and comply with curfew hours, beginning at 7am till 6:30pm, affecting most of the night shift hours.

The shutdown also means the day shift is shorter to allow workers walk back home to beat the curfew.

Some manufacturers have set up mattresses, sanitary facilities and provide ample food and medical facilities in case of anything, and all these are extra costs.

“On the other hand, few factories had to close, because it was costly to work at the given time,” Mr Birungi has said.

He continued: “We have many members operating on loans, and in this low production period, many of them are operating below 50 per cent.”

Mr Birungi is also of the view that the CBR is lowered by 3 per cent to address the issue of default, resulting into job losses.

Restructuring of the loans and mortgages should also exceed the earlier requirement of three times to four times, and we are already engaging Uganda Bankers Association on this issues.

“We need more time to pay our loans,” he said.

Business leaders
Kampala City Traders Association (Kacita) Chairman Mr Everest Kayondo, when contacted said the rest of the business community save for those dealing in food/edibles are shutting down.

Trade contributes about 70 per cent of Uganda’s total tax contribution and this is going to hit the country very hard.

“All this started with the closure of China where many Ugandan traders source their goods. In the months of January, February and March, no imports were ordered and we are not sure of April and May. With the complete closure, the impact on the economy is going to be big and we shouldn’t be surprised with a 1.5 per cent GDP reduction.

Ideally, of URA’s Shs20 trillion target, 70 per cent revenue comes from trade, the sector contributes about Shs14 trillion. This means on a daily basis, trade contributes about Shs28 billion in customs taxes. With the 14-day-lockdown, government is bound to lose much more.