The risk of extending the COVID-19 lockdown could delay rebound in economic activity
Kampala, Uganda | JULIUS BUSINGE | Uganda’s private sector activity slowed in June, the second time in a row, with businesses forecasting a dejected outlook for the few months ahead as a result of the ongoing second COVID-19 lockdown.
The latest monthly Stanbic Purchasing Managers’ Index (PMI) dropped to 34.9 in June, down from 56.5 in May attributed to government’s COVID-19 lockdown measures that were announced during the month to tame the sky-rocketing numbers of COVID-19 positive cases. In April, PMI stood at the 57.8.
The index reading signalled a deterioration in business conditions for the first time in five months, and was below the series average of 52.8.
Sponsored by Stanbic Bank and produced by IHS Markit, the monthly survey involves a questionnaire to some 400 purchasing managers and has been conducted since June 2016.
It covers the sectors of agriculture, industry, construction, wholesale & retail and services. The headline PMI figure provides an early indication of operating conditions in Uganda.
It is a composite index, calculated as a weighted average of five individual sub-components composed of New Orders (30%); Output (25%); Employment (20%); Suppliers’ Delivery Times (15%) and Stocks of Purchases (10%).
Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show deterioration.
According to the June index, the imposition of a 42-day lockdown to try and slow the spread of the COVID-19 pandemic impacted negatively on business conditions across the private sector.
Falls were seen in output, new orders and employment, while companies lowered their selling prices to try and attract business.
Falling customer numbers meant a lack of new orders, while business activity also declined. Reductions in output and new orders were seen across each of the five sectors covered by the survey.
Ronald Muyanja, the head of trading at Stanbic Bank Uganda said, with workloads down amid the lockdown, companies scaled back their employment and purchasing activity, in both cases for the first time in five months. He said reduction in employment meant that staff costs also fell.
“Restrictions on travel meanwhile resulted in longer suppliers’ delivery times, lower input buying and delays in the delivery of materials fed through to a reduction in inventories,” he said.
Meanwhile, companies lowered their selling prices as part of efforts to attract customers. This was despite a further increase in purchase costs, which largely reflected higher raw material prices amid product shortages.
Construction and industry each saw purchase costs increase, while falls were recorded in the agriculture, services, wholesale & retail sectors.
“There were hopes that business activity will rebound once the lockdown measures are lifted, supporting optimism in the 12-month outlook for output,” Muyanja said.
Ferishka Bharuth, Economist – Africa Regions at Stanbic Bank said, despite an increase in purchase costs, which largely captured higher raw material prices due to global shortages, companies lowered their selling prices to attract customers.
Bharuth said that the impact of the lockdown on the headline PMI is likely to be transitory, and fade as lockdown measures are eased.
“There is the risk that some lockdown restrictions may be extended, which could delay the rebound in economic activity amidst the recent spike in Covid-19 cases,” he added.
The same views in the index were echoed at a recent virtual Standard Bank Research Annual Investor Conference where policymakers from the Bank of Uganda and Ministry of Finance attended.
During the conference, participants noted that the anticipated GDP growth of 4.3% year-on-year in FY2021/22, from 3.3% in FY2020/21 may not be achieved because of the current reimposed public health restrictions.
Data from Bank of Uganda indicates that, the services sector has remained constrained despite the moderate pick-up in economic activity between January and June 2021. Tourism receipts slowed to US$250m in FY2020/21 from US$1.5bn before the pandemic.
The government however forecasts tourism earnings to recover to US$1.2bn in FY2021/22 amidst doubts due to COVID-19 lockdowns.
The domestic trade and manufacturing sectors are expected to underperform like the situation was in 2020.
Meanwhile, the fiscal deficit is projected to decline to 6.3% of GDP in FY2021/22, from 9.9% of GDP in FY2020/21. However, health expenditure will now likely increase and tax collections decrease, perhaps resulting in a higher fiscal deficit for FY2021/22.
June PMI facts
- COVID-19 lockdown causes a decline in business conditions
- Output down amid lower new orders
- Lack of work leads to drop in employment
- Restrictions on travel resulted in longer delivery times
- Charges lowered to stimulate demand