Friday, October 31, 2008

Will the Global Financial Crisis hit Ordinary Ugandans?

Recently, a financial crisis has sent shock waves across the globe especially amongst the rich world from the United States to United Kingdom and the rest of Continental Europe.
The nature of the crisis is extremely incomprehensible even to the experts. It begun with the busting of the housing bubble in the U.S. that led to large losses for assets backed mortgage payments.
The resulting losses have left many financial institutions around the rich world with too much debt and too little cash to provide the credit needed by companies, private enterprises and individual consumers.
Banks are short of cash (liquidity) to pay for their resulting bad debts as well as to lend to each other and their clients.
There is wide spread panic that the global financial system may collapse and it seems to only be getting worse day by day.

Will this crisis spread to reach poor nations like Uganda and hurt ordinary Ugandans?
Yes, most probable. There are seven channels through which this crisis could spread to hit Ugandan economy and hence an ordinary Ugandan:

First, Uganda has been earning a lot of foreign exchange in form of remittances from Ugandans working abroad including the famous “Nkuba Kyeyos”.

These earnings reached a record level of USD $ 1.4 billion in 2007/08 financial year, making remittances the major source of foreign exchange for the government, private investment capital and macroeconomic stability instrument in Uganda.
Remittances also have been sole source of survival for some families, from school fees, to supporting household food and medical expenses.

Steady flow of this cash from Ugandans abroad has also supported the property boom, from land to housing and construction industry in Uganda which is at its peak now.

Much of this money comes from countries that are currently experiencing the financial meltdown i.e. U.S., UK, and continental Europe. Companies struggling to survive in these countries are likely cut jobs to reduce their costs, and others are collapsing and losing business.

In such circumstances it’s the immigrant workers that get affected first, and this will lead to reduced cash inflow in Uganda in form of remittances.

Reduced foreign exchange inflows will hurt government on macroeconomic stability, reduced private investment will lead to slow down in the property boom and families that depended on remittances from their kin abroad for incomes will be hurt, if this crisis turns into a global economic recession.

Second, Uganda’s exports will be hurt. Uganda is a primary commodities exporter i.e. coffee, tea, fish, flowers. Whenever, there is an economic slow down-recession, commodity prices are the first to Plunge. Recent oil prices are an example.

Depressed commodity prices together with reduced global demand because of reduced cash for rich consumer’s pockets will squarely be felt by the ordinary Ugandans who are directly participating in producing these commodities for exports through their reduced incomes.

Thirdly, like in the 1930s when the world entered into an economic recession, rich nations responded by shutting their markets from other nations exports-protectionism will rise. Triggered by industrial activity slow down, loss of jobs and massive unemployment, protectionism against Uganda’s exports could lead to reduced foreign exchange earnings, reduced household incomes depending on these exports.

Fourthly, reduced aid to support government budget, out of Ugshs: 6.1429 trillion budgeted in the current financial year, Ugshs: 1.8786 trillion is external money, probably in form of grants, loans or foreign aid. This is 30 percent budget support.
A recession as a result of financial crisis could trigger disruptions in the aid flows that can severely hurt government development budget and scale down the poverty eradication programmes undermining the progress to achieve the UN millennium development goals (MDGs) by 2015.

Also a probable recession will hurt NGOs budgets working in service delivery and development work. Because these NGOs usually depend on charity foundations in the north which depend on stock markets to raise their finances, agencies like World Food Programme which specialises in delivery of food aid to people in displaced camps could see their budgets shrink and operations hurt severely.

Firth, tourism, with the likely holiday makers in Europe, U.S. cash trapped, hotels and travel agencies may see fall in bookings and cash inflows, and likely will cut their costs by shedding jobs.

With fall in tourist arrivals, there will be fall in foreign exchange earnings and fall in activity of travel agencies and hotels leading to fall in jobs and family incomes.

Sixth, foreign investment in Uganda is also likely to slow down and thus slow down economic activity.

With commodity prices plunging, foreign extractive industry investment faces uncertain future if the recession continues, that will affect the viability and feasibility of certain companies investing in Uganda in short term, which could lead to loss of job creation opportunities with this missed investments.

Seventh, reduced cash inflows of any form will gravitate the problems families and households are already experiencing from high food and energy prices.

Household budgets have expanded of recent because of high food and energy prices, and with liquidity squeeze will make this worse for these families.

Overall, despite the rapid economic growth Uganda has achieved in the last years, it’s still vulnerable to external shocks like the current global financial crisis.

The above are still very serious potential avenues in which this crisis can hurt Ugandan economy and ordinary Ugandans in particular. The government and policy makers in Kampala should stay on the watch rather than dismissing the crisis!

3 comments:

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Dany said...

Thanks to PL for linking this post in Rigotnomics.

I share must of your concerns but a crucial point is missed: exchange rates. For what I read, Uganda has a floating ER system, so a consequence of the crisis should be a, probably large, depreciation of the Ugandan Shilling (at least in Chile depreciation has been around 40%). This is good and bad.

Good because the negative effects of the crisis on remittances should be small (and even positive), same for exports, compensating part of the fall in commodity prices and maybe promoting some export diversification.

The bad side of depreciation is that liabilities in foreign currency, as most of public debt in Uganda might be, increase proportionally to the rise in ER, imposing a big public and private debt burden.

Let's hope that, for once, the North will suffer more than the South!!! power to the South!!!

Dany said...

Thanks to PL for linking this post in Rigotnomics.

I share must of your concerns but a crucial point is missed: exchange rates. For what I read, Uganda has a floating ER system, so a consequence of the crisis should be a, probably large, depreciation of the Ugandan Shilling (at least in Chile depreciation has been around 40%). This is good and bad.

Good because the negative effects of the crisis on remittances should be small (and even positive), same for exports, compensating part of the fall in commodity prices and maybe promoting some export diversification.

The bad side of depreciation is that liabilities in foreign currency, as most of public debt in Uganda might be, increase proportionally to the rise in ER, imposing a big public and private debt burden.

Let's hope that, for once, the North will suffer more than the South!!! power to the South!!!