How the Corona Virus has Affected African Economies Especially Uganda

The corona virus was declared as a pandemic by the WHO after a worldwide outbreak. There are now more than 200,000 confirmed cases of Covid-19 globally with about 21,000 deaths. So far more than 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 corona virus is having a major impact on the global economy. So far there are 33 confirmed cases of Covid-19 infections in Uganda to date.

As the world grapples with the corona virus, 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 global economic uncertainty. 

The closure of China is Hurting the Global Economy

The second biggest economy in the world, China 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.

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 all over the world including in Uganda which is 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.

A huge Decline in Oil Demand due to a Global Economic Slowdown

The corona virus has also lead to an economic slowdown which has also generally lead to lower demand for oil from China which is the world’s largest consumer of oil and other world big powers like the USA and the European Union. The sectors that have bore the brunt of this economic slowdown are the manufacturing and aviation sectors which has resulted in a huge drop in global oil demand. In situations like this, oil producers like (OPEC) usually respond to declines in demand by cutting supply to boost the oil prices. The increased uncertainty in the global price of oil has led to financial market volatility last seen during the global financial crisis which in turn has led to the depressed activity in countries like Uganda as well as the pressure on currencies from poor countries like Uganda.

The Global Economic Slowdown and its Impact on Uganda

Uganda’s economic performance is influenced by developments in the global economic environment. Therefore a slowdown in the global economy as a result of corona virus will have a negative impact on Uganda’s economy in the following ways

Factory closures in China have resulted in Supply Chain Disruptions

A) China is Uganda’s major trading partner and the effects of the corona virus is 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.

B) 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.

C) The impact of corona virus is also being 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 and increased costs and reduced orders.

D) 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. 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, household consumer goods as well as iron and steel.

There will be a decline in FDI and remittances from the Diaspora 

China is the second largest recipient of foreign direct investment (FDI) in the world and there has been a significant decline in FDI inflows into China as a result of the corona virus. A decline in FDI into China together with lost revenue has lowered profits which have translated into lower earnings which have also affected 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 there will be slowdown in FDI.  

There will also be a be a decline in the foreign currency inflows and remittances from the Diaspora as a result of the disruption in the business and economic activities in many of the countries they work in. 

Tourism sector and its related Industries have suffered most from this pandemic virus.

The tourism sector in Uganda is the hardest hit by the corona virus. The Government issued travel warning to people traveling to and out of Uganda under its policy of “social distancing” in order to prevent and contain infections as a result tourism which is the number one source of foreign exchange in Uganda and constitutes 7.7 percent of the country’s GDP and employees close to 700,000 people has been greatly impacted the tourism sector and the travel and hospitality industry in Uganda i.e. The most affected sectors are hotels, tours and travel agencies, bars, restaurants, beaches as well as international conferences and summits.

Tax Collections will also be Affected.

The tax collected in Uganda from international trade currently is about 42%. This tax is mainly in the form of VAT, import duty and excise duty on the importation of petroleum products. A slowdown in international trade as a result of the corona virus is likely to have a massive negative impact on tax collections this year. The situation has been made worse by the reduced economic activity in the retail trade, services, hotels, tourism and manufacturing sectors which will translate in both reduced VAT remittances and corporation tax payments.