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How COVID-19 has impacted micro, small, and medium businesses in Uganda

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Thankfully, the incidence of COVID-19 in Uganda is very low in comparison to other countries- the country has so far recorded 260 cases, with 63 recoveries, and no COVID-19 related deaths as of this writing. Indeed, early on, Uganda adopted a number of containment measures to curb the spread of the virus, including the closure of schools, restrictions on internal and international travel, use of hand sanitizer, improved handwashing stations, social distancing, and even lockdown, among others. While these measures may have contributed to the successful reining in of the virus, those same restrictions have hit business operations hard.

A recent rapid survey of businesses by the Economic Policy Research Centre (EPRC) in Uganda reveals that three-quarters of the surveyed businesses have laid off employees due to the risks presented by COVID-19 and subsequent containment measures. Indeed, the results suggest that lockdown measures have reduced business activity by more than half. In terms of sectors, we find that businesses in agriculture have experienced the largest constraints in access to both inputs and markets for outputs due to control measures such as transport restrictions, quarantine, social distancing, and bans on weekly markets.

In short, we find that micro and small businesses experienced a larger decline in businesses activity compared to medium and large firms—an unsurprising finding since most of the country’s micro and small businesses halted operations due to their inability to implement preventative health measures such as provision of on-site lodging for employees, and sanitizers and handwashing equipment for customers. These preventive measures have resulted in an increase in operating expenses for businesses that continued to stay open. Consequently, a majority of micro and small businesses, particularly in the service sector, predict they will have to close within one to three months if the pandemic persists and current restrictions are maintained (Table 1). On the other hand, the majority of the medium and large firms do not foresee closure. Sectoral analysis reveals slightly higher resilience among agriculture and manufacturing firms compared to service sector firms.

Recommended actions

From the survey, we see that micro, small, and medium enterprises in Uganda are getting the squeeze in the face of COVID-19 and associated business restrictions. From the analysis, we recommend that the authorities offer liquidity interventions to support firms in addressing immediate liquidity challenges, reduce layoffs, and avoid firm closures and bankruptcies. In order to free up more cash for businesses, the government may also consider the following: (i) tax rate reduction, (ii) reducing taxable income, (iii) offering tax credits, and (iv) offering tax refunds. In addition, the government should pay all the outstanding arrears against supplies made to government

Commercial banks should consider proactively providing emergency loans to MSMEs with flexibility in repayments. The government could recapitalize commercial banks and micro-financial institutions by extending cash loans or by loosening the liquidity reserve requirements to provide financial institutions with the extra liquidity required to provide flexible emergency loans. The above efforts could be complemented by extension and diversification of partial credit guarantee schemes for loans provided by private banks. Alternatively, the government could offer concessional loans through the Uganda Development Bank. In this vein, the government of Uganda has already sought and received a $500 million loan from the International Monetary Fund. The government is also seeking debt repayment rescheduling, which would free up to $2 billion for such purposes.

Use of technology for access to credit should also be escalated during this crisis. For example, mobile money and other e-platforms can simplify loan application processes and reduce turnaround times of MSME loans.

Finally, the Credit Reporting Bureau should be on the lookout for unintended defaults. In this case, all financial institutions should continue to share credit information with regulators. Finally, the government should consider amending the legal framework on bankruptcy with temporary measures to prevent liquidation.