62.3 percent of Ugandan business are considering or have already started cutting jobs as a result of Covid-19, a trend that could render up to 100,000 Ugandans jobless in the formal sector and up to 4.4 million in the informal sector.
This is according to an April 2020 national socio-economic study by the United Nations Capital Development Fund (UNCDF) in cooperation with Makerere University (the College of Business and Management Science) with support from Uganda Revenue Authority (URA). The study, known as the Uganda Business Impact Survey 2020- Impact of COVID-19 on formal sector small and medium enterprises, was undertaken amongst 1,012 firms registered in the URA database, in the month of April.
The largest numbers of respondents belonged to wholesale and retail trade (11.3 percent), construction, mining and quarrying (10 percent). 93.3% of the studied firms employed between 1-50 persons while 4.4% of the firms employed between 51-100 persons. Majority of firms (82.1%) had annual revenues of below UGX200 million.
Most of the respondents came from the Central Region and Kampala (72.4 percent), the Eastern Region (9.5 percent), the Western Region (9.7 percent and the Northern Region (including Karamoja) 6.6 percent.
“The process of downsizing is likely to affect 21% of the current workforce. Even if the formal business sector is not particularly large in Uganda and includes about 750,000 employees, it produces about 50 percent of the national GDP. This trend would mean a loss of job for over 100,000 employees who are as a rule very qualified and experienced as well as a further decline in purchasing power, which is essential for maintaining the national economy and its huge informal sector accounting for 84.9 percent of jobs outside of agriculture. A recent UNCDF modelling estimates a total loss of informal jobs as a result of COVID-19 at 4.4 million,” notes the study report.
“Layoffs have started and are likely to continue. The downward pressure of declining production due to a combined effect of a reduced workforce and slowing demand forces companies to look for ways to reduce their operating expenses including labour,” further observes the report, noting that several of the studied firms anticipated cash crunches in the near future as a result of the lockdown.
The biggest layoffs are implemented or planned by companies with 11-50 employees (72.5 percent are planning or implementing layoffs) followed by companies with 51-100 employees (65 percent). The industries that are bracing for the biggest layoffs include accommodation and catering, mining and quarrying, manufacturing, culture, sport and entertainment, and wholesale and retail trade.
“The loss of jobs will be particularly felt in the North and Southwest of the country,” noted the study.
Regions least affected by job cuts include Kampala, Eastern and Central regions.
This is the first study that attempts to put a number on the actual challenges that the Ugandan economy will face and the number of jobs to be lost. The study tallies with the April 2020 Stanbic Purchasing Managers Index (PMI) that registered 21.6 in April, down from 45.3 in March. The April reading is the lowest reading since the survey began in June 2016. This was also the second consecutive month it is falling- in March it fell below the 50.0 no-change mark to 45.3, down from 56.2 in February. This was the first deterioration in business conditions in the private sector since January 2017.
The Business Confidence by Bank of Uganda for April- also fell below the 50 mark to 49.88- the lowest ever since the index was created in July 2012. In both the Stanbic and Bank of Uganda indices, business leaders were pessimistic about hiring.
Poor demand and liquidity challenges
“Ugandan companies are fragile and have a relatively low cash flow coverage. Only about 15 percent of surveyed companies can sustain more than three months of operation on their current cash flow. Others must take adjustment measures to keep their profitability at a level that would allow their continued operation. 85 percent of all businesses are going to be in financial distress after three months of lockdown measures. It means that many companies may not be able to resume their business without access to liquidity,” further says the report.
The study also found out that 91 percent of the studied businesses expected their 2020 revenues to be less than that of 2019 with 80.4 percent of companies reporting their revenues would drop by more than 10%. Only 6.2 percent of firms anticipates an increase in their revenues. The companies that expected a drop in their revenues of more than 10 percent were largely in the culture, sports and entertainment; accommodation and catering; transport, storage and postal industry; wholesale and retail trade and manufacturing sectors.
Companies in ICT, financial services and utilities expected their revenues to grow with financial services (18.2 percent) being the most optimistic.
Diageo to Exit East African Breweries as Asahi Takes ControlIn monetary terms, the manufacturing sector is expected to record the highest revenue loss- UGX1.62 trillion, followed by construction (UGX823 billion), wholesale & retail (UGX809 billion) and financial industry (UGX426.6 billion). The ICT sector expected to lose UGX425.2 billion.
Impact on export-oriented companies
Export-oriented industries reported more vulnerability as they prepared for more declines in export volumes. The prevailing expectation among the export-oriented companies is that their export volumes will go down (62.8 percent of the responding companies). 49.2 percent believed that their exports would decline by more than 20 percent. Only 6 percent expected their exports to increase.
By sector, the hardest hit was the private educational institutions which cater for foreign students (91 percent). Almost 70 percent of companies in information transmission, software, and information technology services also expect a drop in their export volumes. The other affected sectors include agriculture, forestry, animal husbandry, fisheries (64.5 percent); health and social work (65.2 percent); construction (65.0 percent); wholesale and retail trade (64.3 percent); and transport, storage, and postal industry (63.6 percent).
BoU statistics show that export earnings in March 2020 fell by 18.3% from USD386 million to USD315.5 million.
Effectiveness of Government relief measures
Most of the interviewed companies, said that the relief measures introduced by government thus far were effective. The two most appreciated business relief measures are an extension of loans terms and reduction of financing costs for SMEs (66.8 percent of all responding companies) as well as an extension of tax payment deadlines to the Uganda Revenue Authority (URA).
However most of the interviewed business wanted the lockdown to end and businesses allowed to operate, “as soon as possible” and subjected to strict compliance to health measures and regulations including disinfection and social distancing.
“The longer businesses stay inoperative, the greater the economic impact and the more difficult it becomes for them to resume their operations. The smaller companies which are the backbone of any economy are particularly concerned. Bigger companies are easy to refinance to start operation, but once small companies are out of business, they may never recover for various reasons,” noted the report.
Study respondents also noted that Uganda needed a proper relief and economic stimulus package that would define all government measures in support of businesses through an act of parliament.
“The relief package would set any reduction in utility fees and rental costs, extension of taxation datelines or duration of tax holidays, wage entitlements of the staff (full pay or reduced) as well as any possible government support in this respect, access to affordable capital, etc. Businesses are convinced that without such a package to kick-start the economy, many businesses may not be able to recover,” noted the study.
“Businesses need to be part of the discussions around such a relief and economic stimulus package. They propose a National Dialogue or Consultations bringing together the business community from different types of businesses and different sectors to forge the way forward in a collaborative, participatory and transparent manner. The National Dialogue should involve relevant Ministries, Departments and Agencies (MDAs) taxation institutions, financial institutions, and should identify mutually acceptable solutions to the problems of Ugandan businesses.
Solutions should not be about short-term fixes but should look towards business sustainability beyond the pandemic. The government should look at this as an opportunity to prepare, for example, for the African Continental Free Trade Area (AfCFTA). Rescue packages should be linked to upgrading businesses, e.g. to add local value, to decrease reliance on imported inputs, to get standards certification so that the next time a shock hits, the businesses can ride the wave. Finally, this should be an opportunity for the government to negotiate for loans/programmes that will keep trade flowing through transport corridors even when pandemics or other shocks hit,” concluded the study.
