Private sector contracts for the first time in over three years in Covid-19 fallout

Key survey of private sector executives shows a fall in new business, company shutdowns, and issues with supply of materials in March

The first indicator showing the economic impact of the Covid-19 coronavirus outbreak is out, and it shows that private sector activity in Uganda shrunk for the first time in over three years.

The Stanbic Bank Uganda Purchasing Managers’ Index fell to an all-time low in March, reflecting a fall in new business, company shutdowns and issues with the supply of materials during the month, international research firm IHS Markit said on Friday.

The PMI, a monthly survey of purchasing executives in 400 private sector companies, fell to 45.3 in March from 56.2 in February, the lowest level since January 2017 when it came in at 47.7. Readings above 50 mean that a majority of surveyed enterprises reported an increase in activity, while readings below indicate a contraction.

Chart showing growth of private sector activity in Uganda, 2016 to 2020

“Central to the decline in business conditions were reductions in both output and new orders,” a statement released by IHS Markit said. “In both cases, the falls were the first in 38 months.

“Panellists reported that new orders suffered due to COVID-19 and an associated lack of customers. Lower tourist numbers were mentioned, and new export orders were also found to have fallen during the month. Declining new orders and company shutdowns contributed to a reduction in output.”

The global coronavirus pandemic also caused issues in supply chains, leading to difficulties in securing materials, particularly from China. As a result, company purchases and inventories declined, while suppliers’ delivery times lengthened following border closures. Purchase costs also increased because of shortages of some products, leading companies to raise charges.

Kenneth Kitungulu, the head of global markets at Stanbic Bank Uganda, said some of the bank’s manufacturing clients said they had to buy inputs from alternative countries — China is the usual source — before most countries implemented wide-ranging restrictions. Telecom firms and pharmaceutical companies reported an increase in data and call traffic and drugs, respectively.

However, staff costs decreased reflecting a reduction in employment, the first since June 2016.

Jibran Qureishi, economist at Stanbic Bank’s East African unit said: “The first sub-50 reading since 2017 was perhaps not a surprise, given the ongoing concerns associated with Covid-19. The impact is likely to be broad-based across the economy. Sectors such as tourism and manufacturing are already feeling the pain as global supply chains are disrupted and cross-border travel is restricted.

“But of course, diaspora remittances could also decline as global growth slows. Furthermore, given the sharp fall in international oil prices, it’s quite likely that the final investment decision on oil will also be postponed into next year. Admittedly, the impact of Covid-19 and the possible delay in the FID, will materially weigh on economic growth this year.”

The PMI is a leading indicator that measures private sector conditions to show whether activity is improving or declining compared to the previous month. It is compiled by IHS Markit — and sponsored by Stanbic Bank Uganda — from survey responses providing information on new orders, output, new staffing, suppliers delivery times, and inventory levels.

The survey asks managers in 400 private sector companies in agriculture, construction, industry, services, and wholesale and retail about business conditions. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP. IHS Markit says last month’s data were collected between 12 and 30 March.