The impact of Pandemics on Poverty and Financial Inclusion
By Rashmi Pillai, Executive Director.
By now, the novel Coronavirus disease (COVID-19) – is a household term. Hand sanitizer is out of stock, businesses are closing or cutting staff, and even boda-boda riders near the FSD Uganda office report possible plans to stop working and go back to the village because they aren’t earning enough to remit back to their families. The pandemic is another reminder of our global interconnectedness. It is a reminder of how an issue that is completely external can dramatically influence economies, both through on the ground effects like killing tourism, and through macro level effects like disrupting trade and weakening the currency.
Uganda confirmed its first case of COVID-19 on Saturday, March 21. At the time of writing this blog, eight new cases were confirmed by the Ministry of Health. The Government of Uganda, together with private sector actors, continue to demonstrate great leadership by putting in place and adopting progressive measures aimed at protecting Ugandans and limiting the impact of the pandemic. But its economic impact is here. In a speech on March 19, the Honorable Minister of Finance, Planning and Economic Development noted that Uganda has already revised its GDP growth rates downwards from 6% to anywhere between 5.2% to 5.7%. Let’s take tourism as an example. Tourism is one of Uganda’s biggest exports (7% of GDP). It employs anywhere between 200,000-500,000 people per year and is going to be significantly affected, with hard currency flows that tourists bring each year slashed downwards for at least the next 4-6 months.
Tourism involves holiday planning with travel agents and tour guides, visa revenues for the government, domestic transportation bookings with taxis and tour vehicles, accommodation and food at resorts, guesthouses, entertainment options, shopping, experiences at national parks or even local sightseeing. Tour guides and hotel workers spend their wages in local shops. Declines in just tourism will have a direct impact on the revenues of all actors across this value chain, heavily compromising their resilience levels and upward mobility. Additionally, this will further exacerbate the government’s domestic revenue mobilization gap.
Economies are interconnected networks, and even as the hardest hit industries cry out for help, government, donors and other stakeholders should take a wholistic approach to helping. Rural areas will also be harder hit than is yet visible. Let’s take the dairy and coffee sectors as examples. While Uganda has a big domestic market for dairy and dairy products, it is also a big export commodity. Dairy farmers are already feeling the brunt of lowered rates per liter due to excess supply casued by disruptions experienced by exporters. Coffee is Uganda’s second biggest export, after gold. China, whose coffee consumption is growing 20% per annum, was being actively courted as an export destination by coffee consortiums. This is now suspended.
A similar if nt higher impact is being witnessed in labor-intensive sectors like manufacturing and carpentry, since Uganda imports large quantities of raw materials from China. Between disruptions to supply, and low new orders as buyers decrease due to uncertainty, these sectors are now reducing the number of shifts for workers, suspending certain lines of production or considering temporarily shutting down.
If the world cannot contain and curtail the rise of COVID-19 in the next couple 4-6 months, the impact on the global and Ugandan economy will be huge. The Ministry of Finance estimates that an additional 2.6 million Ugandans will go into poverty in case of a heavy rise of COVID-19 cases in Uganda.
So, what can the financial sector (including regulators and the government) do to help people overcome this crisis but more importantly deal with the aftermath of this external shock?
The Ugandan government, The Ministry of Finance, and The Bank of Uganda through their action plans have shown true leadership in making the hard choice and getting ahead of the curve. The private sector is also playing its role, with the Uganda Bankers’ Association eliminating bank to wallet charges and eliminating cash-out fees for lower transaction tiers for 30-days.
On the payments side, mobile wallet providers like MTN are waiving on-network transaction fees for lower tier bands while Airtel has waived on-network fees for all tiers for the 30-day period. An even stronger response would be for these partners to increase the tiers for no-fee transactions, encouraging people to go cashless and reducing the risk of virus spread through the most touched surface by all – cash.
The financial sector actor with an opportunity to rise to this unprecedented challenge is the Insurance industry. Many insurance companies don’t cover pandemics and epidemics. However, in Kenya, the Insurance Regulatory Authority was successfully able to negotiate with the insurance industry in covering patients of COVID-19 (link here), while Indian insurers are honoring life insurance policies of patients who have died of COVID-19. Uganda can follow suit or even better, lead by example. Health insurance can help with hospital bills, medicines or even cash to replace lost income. If insurers can find a way to honor pandemic related bills and consequences it will go a long way in building awareness of why insurance is important, as well as trust in a sector which is otherwise viewed with skepticism.
What about the aftermath – how can the financial sector support faster recovery of people, households and non-financial industries? This will require a concerted effort between government, all financial sector and development actors. For example: how can government, banks and investors help credit only institutions, non-deposit taking MFIs, or pay-go-solar, leasing and other types of sectors when regular customers can’t repay on time? If companies force repayments or collateral seizure when livelihoods are lost or reduced this could push clients further into poverty. On the other hand, adjusting repayment tenors will have liquidity and cashflow implications for credit providers. Similarly, 70% of Ugandan households directly or indirectly depend on agriculture. Depressed demand for goods due to the economic shock of COVID-19, could impact agricultural produce prices, lowering farmer incomes and impacting their liquidity to buy inputs for the next farming cycle.
At FSD Uganda, we are closely monitoring the impact of COVID-19 on the economy. We are in regular touch with our partners in the financial sector, the refugee space, and the beneficiaries they are working tirelessly to serve day in and day out. We know the hard part is just beginning. The road to recovery will require even greater collaboration, unconventional thinking, and most importantly urgency from the entire industry to start planning today to lessen the pain of tomorrow. We cannot afford to wait until the dust, or virus, clears.
Thank you for this analysis,personally am looking into the cashless space including crypto currencies to see how quickly people may/may not adopt it since it seems like a safer option in regards to getting infected with the virus plus currently theres alot of money in supply since people have dumped assets and other countries are printing more money and people have chose to hold onto liquidity so am wondering what is to come of value if currencies are losing value.
Thanks, Abel for your comment. Yes, countries will look to stimulate the economy, not to mention cushion businesses and people. Printing money is being actively considered and while that might result in inflation, prudent monetary policy initiatives become critical in these exceptional times.
Good and helpful commentary, Rashmi. Thank you. I particularly like your point that the pandemic provides the insurance industry with an opportunity to show not just its importance to people’s lives, but that it can relate to customers and is demonstrably keen to build trust in insurers and their products. Let’s hope the industry responds to your call. Stay safe and best wishes to all in FSDU.
Thank you Rashmi Pillai – based in Uganda, Indian-origin? You go some ways to bring some estimates here, not seen much – impact of the C19 via tourism and some consideration of the same wrt exports (coffee and milk). You do not mention remittances and FDI. The four together comprise 25% or so of our GDP – gone, so Min Finance’s “revised GDP growth rate downwards from 6% to anywhere between 5.2% to 5.7%” is just off, even if they put a negative sign to 5.2-5.7%. The urban sectors garner 75% of our GDP, produced by some 4.5 million work force. Those jobs are gone, at $2-4 wages per day. Add operating surplus of the owners – informal as well as formal – gone. 75% of the urban GDP (75% of total) gone – but we have to calculate per day to arrive at the lost GDP in these 2 months: $50 million per day “lost” = $ 3 billion = 10% of Uganda’s GDP – gone in 2 two months. Ten percent of our GDP. If the lockdown persists the losses will keep going per day. It’s a calamity and all the more “unfair” as it is those 4 external factors that really caused the downturn of the economy, in other words even if we open up now-now, the four externals will continue to affect us as their upturn will depend on how our partners’ economies rebound. So when you say: “It is a reminder of how an issue that is completely external can dramatically influence economies” you meant the C19, but you did bear down on tourism and exports. The C19 as well as the GDP declines came from abroad. Poverty incline came from abroad. My estimate is the 4.5m urban labour force – twice the “official” estimate and that means an increase in poverty of >20% (now; once the crisis is over that poverty should improve gradually). Stanbic’s PMI shows a major downturn for April to confirm the downturn that has already happened. You were writing when the number of cases was 8 (?). Now 101, 0 deaths, 50 recoveries. Success story on that side, but there are excess deaths – newborn babies, delivering mothers, malaria even – to weigh against. Death by C19 vs Death by Death is being debated. I had an article on all of the above in Daily Monitor of 16th April.
Thanks for your contributions ,I look forward for the cashless economy the fact the that cash movement has great led to the spread of diseases not only covid but even other diseases