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Uganda loses Shs130b in 2 months over coronavirus
The deserted departures lounge at Entebbe Airport yesterday. Manufacturers and traders who rely on supplies, especially from China and Europe, are facing challenges and are likely to shut down due to the coronavirus pandemic.PHOTO BY RACHEL MABALA
Uganda has lost more than Shs130 billion between February and March because offshore investors, who have been investing in Uganda securities stopped, Bank of Uganda (BoU) has said.
Officials from Bank of Uganda say a number of investors exited Uganda’s economy, making investments in government securities decline.
They also say the global value chains are being disrupted by factory shutdowns and delayed resumption of operations. Domestic manufacturers and traders, who rely on supplies from China and Europe, are facing challenges and are likely to shut down if the coronavirus pandemic persists.
Mr Adam Mugume, the director for Research at BoU, told Daily Monitor that offshore investors have exited government securities market to seek safe investment havens.
“For instance, between February 21 and March 13, offshore holding of government securities declined by Shs130 billion. This, plus negative sentiments, resulted in the shilling depreciation against the US dollar from Shs3,676.9 in February to Shs3,820 as of March 20, a depreciation rate of 3.9 per cent,” he said.
This means that Ugandan currency value will continue to decline against the dollar if the coronavirus continues. Mr Mugume also said tourism, a major source of foreign exchange earnings, is shrinking as a result of declining demand and expanding travel restrictions.
According to him, imports will definitely decline. He said currently about 71 per cent of imports come from countries severely affected by coronavirus and are under lockdown.
“It might be impossible to get alternative sources in a short time. This suggests a severe supply disruption. Given that about 77.8 per cent of imports are raw materials and capital goods. This will gravely affect domestic production process,” he said.
Mr Mugume said domestic capital, human as well as financial resources, are becoming underutilised as workers in factories and tourism are being laid off or furloughed.
“Commodity prices are declining sharply. Whereas a decline in oil prices is beneficial to Uganda as an oil importer, the harm caused by decline in agricultural commodity prices, for instance coffee, outweighs the benefits of oil price decline,” he said.
“A combination of the exchange rate deprecation and supply disruption will ultimately result in higher inflation in the coming months. The uncertainty that it is creating is also likely to affect domestic spending. Household spending is expected to grow at a slower pace amid moderate income growth. Private sector investment activity is projected to grow moderately but public infrastructure investments are to remain solid underpinned by ongoing projects,” he added.
He also said ultimately credit conditions will tighten, economic growth will be weaker, and the diversion of government resources to fight the outbreak will reduce funds available for key development priorities.
“In particular, private sector borrowing costs could rise, and financial conditions tighten, as commercial banks suspect consumers and firms may be unable to repay their loans on a timely basis. Higher borrowing costs will expose financial vulnerabilities leading to a heightened risk that debt cannot be rolled over. A reduction of credit will amplify the downturn arising from the supply and demand shocks,” Mr Mugume said.
Central bank response plan
Mr Mugume said Uganda’s economy, being small and open, is sensitive and therefore the central bank stands ready to react to disorderly financial market movements.
He said the BoU will ensure that financial institutions continue to operate effectively.
“We shall provide exceptional liquidity assistance for a period of up to one year to financial institutions supervised by BoU that may require it and waive limitations on restructuring of credit facilities at financial institutions; engage Mobile Network Operators and commercial banks to further reduce fees on mobile money transactions and other digital payment charges in order to limit the use of cash and bank branch visits, increase daily transaction and wallet size limits for mobile money transactions,” he said.
Intervention
Bank of Uganda says they have already intervened in the foreign exchange market to smoothen volatility while letting the shilling adjust to external pressure.
Mr Adam Mugume, the director for Research at BoU,said easing monetary policy could boost confidence and assist with the recovery of demand once the outbreak eases and travel restrictions are removed. “Therefore, as the Covid-19 effects begin to fade, BoU should be in position to ease monetary policy and provide liquidity in the event that the financial system is constrained.
Second, the BoU could consider encouraging commercial banks, on a temporary and time-bound basis, extensions of loan maturities, especially for the sectors that will be hit hardest. These measures would lift confidence,” Mr Mugume said.
