IMPACT OF COVID-19 ON MICRO , SMALL & MEDIUM ENTERPRISES IN UGANDA AND POLICY RESPONSES LEAD AUTHOR OF THE REPORT 1 John Kakungulu Walugembe is the Executive Director of the Federation of Small and Medium Enterprises-Uganda (FSME), the umbrella body for all SMEs in Uganda. The organization boasts of a membership of over 112,000 small and medium sized businesses, all over Uganda. He possesses a Master of Business Administration (MBA)-Finance and Economics from the University of Oxford (Saïd Business School), a Master of Public Administration (MPA)- Development Economics and Public Policy from Harvard University (John F. Kennedy School of Government) and a First Class Honors bachelor’s degree in Science, from Makerere University. ABOUT FSMEU The Federation of Small and Medium Enterprises-Uganda (FSME) was established as an umbrella body for Micro, Small and Medium Enterprises in Uganda to play a pivotal role in creating a robust and conducive business environment for small and medium businesses in Uganda. It is a not-for-profit membership association for Micro, Small and Medium Enterprises in Uganda, registered as a company limited by guarantee. It was pioneered by a group of entrepreneurs in 1990 and formally incorporated as a company limited by guarantee in 2017. Since its founding, it has grown from strength to strength. Presently, it has an excess of 112,500 members nationwide. What makes our association unique, is our independence from Government, special interest groups and big business. We only speak for the MSME owners/Managers; whose interests we represent. That is why our Board of Directors is made up of MSME owners/managers from all over the country. The Federation works with both the public and private sectors to ensure that there is a conducive and fair environment for running Small and Medium sized businesses in Uganda, through amplifying their voice on different issues. We do this through lobbying on their behalf. In addition, we provide them with opportunities for networking, offer them business advisory services and training. In this way, we unlock their potential and ensure that they contribute to employment creation, innovation and economic growth. To be and remain the largest apex organisation promoting and protecting the interests of small and medium sized business owners in Uganda. VISION To equip SMEs for success and growth through ensuring that there is a conducive environment for business and access to quality business development services. MISSION CORE AREAS Business Advocacy, Entrepreneurship, Start up advisory services, Business Incubation, Business Networking, SME Online Market Portal’ Trade Missions, Trade fairs and Exhibitions. 2 This study was prepared by the Federation of Small and Medium-Sized Enterprises-Uganda’s research unit, under the leadership of Mr. John Kakungulu Walugembe, the Executive Director. The survey design and data analysis was carried out by the following team members: Phillip Nsenge, Saad Kalule, Doreen Nuwamanya, Racheal Ninsiima Kagoro, John Mutebe, Nobert Oola and Emma Abibi. The authors of this report would like to express their gratitude to the over 4,500 Micro, Small and Medium Enterprise owners and managers who agreed to take part in this survey. ACKNOWLEDGEMENTS 3 MSMEs have been disproportionately affected by the COVID-19 pandemic due to: their being labor intensive, their possession of very thin liquidity reserves and their lack of assets to use as collateral to access quick credit. The quarantine and lockdown measures imposed by the Government of Uganda on 18th March 2020, and the 18th of June 2021 led to a decrease in demand, supply chain disruptions, raw material shortages, transporta- tion challenges and cash flow disruptions. As the backbone of Uganda’s economy, the plight of MSMEs should concern all stakeholders. As the umbrella body representing the MSME sector in Uganda, the Federation of Small and Medium-Sized Enterprises considers it important to assess the impact that this pandemic is having on our members. Although in past year, various studies were conducted to assess the impact of the pandemic on the MSMEs sector in Uganda, none of these has specifically focused on the members of the Federation of Small and Medium-Sized Enterprises. The Federation of Small and Medium-Sized Enterprises-Uganda has been at the forefront of working with the Government of Uganda to design and implement a stimulus package for the MSME sector. The stimulus package was aimed at resolving the liquidity challenges that MSMEs faced as a result of the pandemic and related measures. The package includ- ed: tax deferrals, payment of domestic arrears, lowering the Central Bank Rate (CBR), loan restructuring and recapitalizing the Uganda Development Bank, among others. However, the sad reality is that many MSMEs have failed to benefit from the stimulus package due to various reasons. Going forward, FSMEU hopes that this report will provide stakeholders, particularly policy makers, insight on the situation and could, perhaps, help develop programmes that can enhance the resilience of MSMEs to this pandemic. Daniel Musiitwa Ssubi CHAIRPERSON FOREWORD The COVID-19 pandemic is negatively impacting both the supply side (production of goods and services) and the demand sides of the economy (consumption and investment). According to the Ministry of Finance, Planning and Economic Development of Uganda, close to 2 million Ugandans may slip back into poverty, as a result of the severity and unknown duration of the coronavirus pandemic. Our findings paint a very grim picture. First, 34% of all MSMEs interviewed, particularly in the tourism and hospitality sectors reported closing their businesses, due to the lockdown and quarantine measures imposed to curb the spread of the virus. Additionally, 78% of all MSMEs surveyed reported experiencing cash flow challenges, as a result of a drop in demand for their products and services. On average, women owned businesses reported experiencing more cash flow challenges, than male owned businesses. 53% of the surveyed MSMEs, especially in the manufacturing sector, reported experiencing supply chain disruptions and difficulties in accessing inputs. 4 TABLE OF CONTENTS 1. OVERVIEW OF THE MSME SECTOR IN UGANDA 5 Definition of Micro, Small and Medium-Sized Enterprises (MSMEs) 5 Location of MSMEs 5 Size of MSMEs 6 Gender of MSMEs 6 Nationality of MSME owners 7 Sectors of MSME business activity 7 Age of MSMEs 8 2. INTRODUCTION 9 3. METHODOLOGY 11 4. PROFILES OF THE RESPONDENT MSMEs 17 5. IMPACT OF COVID-19 ON MSMES 15 5.1 IMPACT ON SALES AND REVENUE 15 Impact of the COVID-19 pandemic on sales and revenue 15 Impact of the pandemic on sales of MSMEs by geographical location 16 Impact of the pandemic on sales of MSMEs by Gender 16 Impact of the pandemic on sales of MSMEs by Sector 17 5.2 IMPACT ON OPERATIONS AND BUSINESS CONTINUITY 18 Production capacity and logistics 19 Reasons for Reduction in operations or business closure 19 Status of business premises 20 Change in rental agreements with landlords after the lockdown 20 Risk of Business Failure 21 Expected length of business survival 21 Expected length of business survival by sector 23 Additional operating expenses 23 5.3. IMPACT ON LIQUIDITY 27 Financial performance of MSMEs 27 MSMEs experiencing cash flow constraints 30 Sufficient liquidity to continue operations in the next six months 30 Most effective financial support to mitigate the liquidity crisis 31 Financing needed to revive operations in the next six months 31 5.4. IMPACT ON EMPLOYMENT 33 Employee levels 33 Salaries and wages 33 Earnings of women and youth 37 6. SPECIFIC FINDINGS ON THE IMPACT OF THE SECOND LOCKDOWN ON THE MSME SECTOR 39 Ability to make ends meet 39 Use of savings to make ends meet 39 Sale of business assets 40 Fear of defaulting on tax obligations 40 7. BUSINESS RESPONSES TO COVID-19 41 Digitalization 41 Remote working 41 Laying off employees 41 Diversifying into domestic or regional supply chains 41 Business closure 41 8. POLICY RESPONSES TO THE PANDEMIC 43 The Government of Uganda’s Stimulus Package for MSMEs 43 Monetary policy and credit Relief Measures 43 Deferral Measures (tax and social security payments) 43 Financial Support for MSMEs 44 Reactions of MSMEs to the government’s stimulus measures 45 MSMEs that have benefitted from Government’s stimulus measures 45 Awareness of government relief measures 45 Which stimulus support measure was accessed by most MSMEs? 46 9. OPPORTUNITIES 47 Digitalization 48 Access to new markets 48 Green and sustainable recovery 48 Repositioning youth and women owned MSMEs 48 10. RECOMMENDATIONS 49 Access to low-cost credit and financial support 49 Build MSMEs’ resilience capability 49 Prioritize MSMEs as suppliers 49 Reform the business environment 50 Promote the digital transformation of MSMEs 50 Embrace sustainability 50 11. CONCLUSION 51 Figure 1 Location of MSMEs in Uganda 5 Figure 2 Size of MSMEs in Uganda 6 Figure 3 Gender of MSME Owners 6 Figure 4 Nationality of MSME Owners 7 Figure 5 Sectors of MSME Activity 7 Figure 6 Age of MSMEs 18 Figure 7 Study Framework 11 Figure 8 Firm size of respondent MSMEs 12 Figure 9 Years in Business of Respondent MSMEs 12 Figure 10 Gender of MSME Respondents 13 Figure 11 Geographical distribution of respondent MSMEs 13 Figure 12 Sector Distribution of Respondent MSMEs 14 Figure 13 Impact of COVID-19 pandemic on Sales and Revenue of MSMEs 15 Figure 14 Impact on Sales by Geographical Location 16 Figure 15 Impact of pandemic on Sales of MSMEs by Gender 16 Figure 16 Impact of the pandemic on sales of MSMEs by Sector 17 Figure 17 Impact of the Pandemic on Production Capacity and Logistics 19 Figure 18: Reasons for Closing or Reducing Operations 19 Figure 19: Ownership Status of business premises 20 Figure 20: Changes in rental conditions after the lockdowns 20 Figure 21: Perceived Risk of Business Failure 21 Figure 22: Expected Length of Business Survival without support 21 Figure 23: Expected Length of Business Survival by Sector 23 Figure 24: Additional operational expenses due to lockdown measures 23 Figure 25: MSMEs reporting supply chain challenges 24 Figure 26: Size of MSMEs and impact of supply chain disruptions 26 Figure 27: Financial Performance of MSMEs in 60 day period preceding the survey 27 Figure 28: Financial Performance of MSMEs per Sector 27 Figure 29: Financial Performance of MSMEs Per Gender of Owner 28 Figure 30: MSMEs Experiencing Cash flow Constraints 30 Figure 31: Sufficiency of Liquidity to continue operations 30 Figure 32: Most effective financial support to mitigate the financial crisis 31 Figure 33: Financing required to revive operations 31 Figure 34 Changes in employee levels due to the impact of the pandemic 33 Figure 35: Change in Employee Levels per Sector 33 Figure 36: Changes in salaries and wages due to the pandemic by size 34 Figure 37: Changes in salaries and wages by sector 36 Figure 38: % of Women and Men laid off by MSMEs due to COVID-19 37 Figure 39: % of youth laid off by MSMEs due to COVID-19 38 Figure 40: Ability of MSMEs to make ends meet during the second lockdown 39 Figure 41: % of MSMEs who sold business assets during the second lockdown 40 Figure 42: % of MSMEs who fear defaulting on tax obligations 40 Figure 43: Responses by MSMEs to the COVID-19 pandemic and the lockdowns 41 Figure 44: % of MSMES who benefitted from the stimulus measures 45 Figure 45: % of MSMEs who are aware of Government's stimulus measures 46 Figure 46: Relief measures accessed by MSMES 46 TABLE OF FIGURES 30% Source: Census of Business Establishments, Uganda Bureau of Statistics, 2010/11 OVERVIEW OF THE MSME SECTOR IN UGANDA According to the Uganda Bureau of Sta tisti cs: MSM Es c ou nt for 95% of the t o tal enterprise pop u la ti on U ganda MSM Es empl o y ar o und 2 5 milli o n people of U ganda’s w or k fo rce MSM Es c o ntribute 85% of U ganda’s GDP Micro Small Medium NO. OF EMPLOYEES TURN-OVER ASSET BASE < 1 < 4 & < 5 < 50 & < 50 < 100 & < = 1m < 12 million & < 12m < 100 million & < =100 < 360 million & < 1 < = 12 million & < 12m < 100 million & < 100 < 360 million & 1.1 Definition of Micro, Small and Medium-Sized Enterprises Total number of MSMEs Estimated to be 1,500,000 1.3 LOCATION OF MSMES 35% of all MSMEs are located in Central region, 23.4% are in Western Uganda, 18.2% are in Kampala, 13.9% are in Eastern Uganda and 9.4% are in Northern Uganda. Within the various regions, the composition of the MSME sector varies. MSMEs in Kampala are predomi- nantly in trading, while those in Central region are predominantly in Agriculture. MSMEs in the Eastern region are predominantly in food processing, transport and storage, while those in the North are concentrated in the Health and Education sectors. 5 35% 23.40% 18.20% 13.90% 9.40% 0% 5% 10% 15% 20% 25% 30% 35% 40% Central region Western Kampala Eastern Northern 1. 1.2 Figure 1 Location of MSMEs in Uganda 1.4 SIZE OF MSMES Uganda’s MSME landscape is dominated by Micro businesses, which have less than five employees (71%). 18% were small businesses (5-10 employees) and 11% are Medium-Sized businesses (ten or more employees). 1.5 GENDER OF MSMES The majority of business owners ( 76% ) are Female 71% 18% 11% Microbusinesses Small businesses Medium businesses 76% 24% Male Female Source: Financial Sector Deepening Uganda. (2015). National Small Business Survey of Uganda 2015. 6 Figure 2 Size of MSMEs in Uganda Figure 3 Gender of MSME Owners 1.6 NATIONALITY OF MSME OWNERS Most owners of MSMEs are Ugandans (98%). 1% are Asians, 0.2% are Kenyans, 0.1% Rwandans, 01% Ethiopians and 0.6% -other nationalities. 1.7 SECTORS OF MSME BUSINESS ACTIVITY Most MSMEs ( 16% ) are involved in Agriculture, 10.8% are in food and beverages, 10.6% are in retail trade, 7.20% are in the creative, arts and entertainment sector, 5.20% in the textiles and apparels etc. Source: Financial Sector Deepening Uganda. (2015). National Small Business Survey of Uganda 2015. 0% 20% 40% 60% 80% 100% 120% Ugandans Asians Kenyans Rwandans Ethiopians Others 15.50% 10.80%10.60% 7.20% 5.20% 5.20% 3.30% 2.60% 2.50% 2.30% 2.20% 1.80% 1.70% Agriculture Food & Beverage Retail trade Crea � ve, arts & entertainement Tex �l es and apparel Financial services Computer programming & consultancy Health Rental servics Personal services Video, Sound and TV Accomoda � on Courier services Repair of equipment Construc � on Insurance 7 Figure 4 Nationality of MSME Owners Figure 5 Sectors of MSME Activity 1.8 AGE OF MSMES 69% of all MSMEs are less than 10 years old. 31% 38% 15% 16% 1-5 years 6-10 years 11-15 years Above 16 years 8 Figure 6 Age of MSMEs In December 2019, the first cases of the Coronavirus were reported in Wuhan City, Hubei Province in China . Thereafter, this virus spread rapidly across the globe. As of 6 August 2021, there have been 200,840,180 confirmed cases of COVID-19 including 4,265,903 deaths reported to the World Health Organization . By August 2021, Uganda had recorded 95, 723 cumulative cases and 2783 deaths . this virus spread rapidly across the globe. As of 31 December 2020, more than 102 million confirmed cases had been reported worldwide, as well as over 2.2 million deaths. This COVID is therefore among the deadliest diseases to have emerged in recent history. In order to curb the spread of the virus through “flattening the curve” and preventing the “overwhelming of health care systems”, governments all over the world instituted very strict lockdown and quarantine measures. On 18th March 2020,and 18th June 2021, respectively, the Government of Uganda instituted stringent lockdowns banning cars, public gatherings, shutting down shopping centers, places of worship, schools,entertainment centers and instituting a night curfew . Although the Government started to relax most of these measures in June 2020, most of these measures later, most schools and places of worship remain partially closed, while gyms and bars, remain closed. Mask wearing is compulsory in all public spaces, while public transport operators are only allowed to carry half of their usual capacity. There are several ways the coronavirus pandemic and containment measures are affecting the Ugandan economy. The Ministry of Finance, Planning and Economic Development estimates that the Uganda GDP growth rate could decline by between 7-10% in the Financial Year 2020/21, 2-3 million formal and informal jobs are at risk especially in retail, wholesale, manufacturing, education, health and tourism sectors. MSMES have been particularly affected by the pandemic, on both the demand and supply sides. On the supply side, many MSMEs are experiencing a reduction in the supply of labor due to transport disruptions, unwell employees and the need for parents to take care of their children due to school closures. According to a study by the United Nations Capital Development Fund, 74% of the respondent companies indicated that 30% of their employees were unable to come to work due to the lockdown. Moreover 62% of these companies confirmed that they were considering or had started cutting jobs . The lockdown, in particular, led to a huge drop in capacity utilization in the manufacturing sector. Many small scale manufacturers also experienced difficulties in accessing inputs and intermediate goods, as a result of global supply chain disruptions. On the demand side, the loss of income by many consumers due to redundancy and sackings and the heightened sense of certainty are negatively impacting their willingness and ability to spend. A study by the Economic Policy Research Centre confirms that 50% of the businesses interviewed had experienced a reduction in demand of 50% . Risk aversion due to the fear of contracting COVID-19 and the closure of schools and health centers has particularly contributed to the demand for agricultural products. The impact of COVID-19 on MSMEs greatly concerned the Government of Uganda due to the important role that they play in employment creation and overall economic growth. The Government of Uganda therefore designed a Stimulus Package to alleviate the negative impact of the pandemic on the sector. This Stimulus Package was motivated by the desire to: to maintain the economic welfare of households and prevent individuals from becoming unemployed, to help MSMEs to survive the crisis and not collapse due to liquidity constraints and to maintain the stability of the financial system. INTRODUCTION 9 2. The stimulus measures included: Providing credit to micro and small enterprises through SACCOs and Microfinance Institutions, establishing a Microfinance Recovery Fund targeting Small and Medium-Sized enterprises, expediting the payment of domestic arrears, deferring Pay as You Earn (PAYE) for SMEs and Corporations, waiving interest on tax arears and expediting payment of outstanding VAT refunds. Although these measures have alleviated the pain of MSMEs, to a certain extent, more needs to be done to sustain these businesses. The negative impact of the pandemic notwithstanding, COVID-19 has presented a range of opportunities, particularly, in the area of digitalization which could lessen the cost of doing business and improve business operations. 10 Morens, David M et al. “The Origin of COVID-19 and Why It Matters.” The American journal of tropical medicine and hygiene vol. 103,3 (2020): 955-959. doi:10.4269/ajtmh.20-0849 The Telegraph. (2020, August 26). How Uganda's tough approach to Covid-19 is hurting its citizens. Ayebare, J. (2020). Uganda's Recovery Program. Ministry of Finance, Planning and Economic Development. United Nations Capital Development Fund. (2020). Impact of COVID-19 on Ugandan MSMEs. This study was conducted using an exploratory methodology by reviewing existing literature, including research reports and policy documents. In addition, we collected primary data from 4,500 MSMEs in 130 districts of Uganda. The data was collected through the administering of both an online and physical questionnaire. The research team relied on a purposeful sampling technique in order to target MSMEs in those sectors and districts, who were more likely be most affected by the pandemic. Primary data collection was aimed at investigating the following key issues: The assessment framework for this study is as follows: Participation in the survey was voluntary and no financial compensation was offered on completion of the survey. Each respondent was requested to sign the informed consent letter to voluntarily participate or withdraw from the study, at any stage. Before formally launching the survey, the questionnaire items were pretested among a small sample of MSMEs to evaluate the clarity and relevance of the questionnaire items to identify and eliminate any misunderstandings. METHODOLOGY • The impact of the pandemic on: sales, operations, employment and Liquidity, among others • MSME response measures during and after the pandemic • Expectations about the future and the required financial and non-financial support • The perception of existing government stimulus package and other policy interventions • Impact of the pandemic on gender roles, mental health and other social metrics. Short-term impact Medium-term impact •Impact of COVID-19 on MSMEs •MSME response strategies • Effectiveness of existing relief measures Long-term impact • Business opportunities • MSME recovery and resilience 1 2 3 11 3. Figure 7 Study Framework 91% of all the respondent MSMEs were micro businesses with less than 5 employees.. About 70% of all the respondents were still in their first ten (10) years since establishment. This finding indicates that many businesses may have collapsed before their 10th birthday. PROFILES OF THE RESPONDENT MSMEs 4.1 FIRM SIZE 4.2 YEARS IN BUSINESS 91% 7% 2% Micro enterprises (1-5 employees) Small enterprises (5-50 employees) Medium enterprises (50-100 employees) 38% 32% 30% 1-5 yrs 6-10 yrs 10 yrs and above 12 4. Figure 8 Firm size of respondent MSMEs Figure 9 Years in Business of Respondent MSMEs 4.4 GENDER DISTRIBUTION 4.5 GEOGRAPHICAL DISTRIBUTION 32% 68% Male Female 68% of all the respondent MSMEs are women-owned or run, compared to 32% male male owned or run enterprises. More than 50% of the respondent MSMEs are located in Kampala and Central region. This was followed by 19% in Western region, 13% in Eastern region and 12% in Northern region. 41% 15% 19% 13% 12% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Northern Eastern Western Central Kampala 13 Figure 10 Gender of MSME Respondents Figure 11 Geographical distribution of respondent MSMEs 31% of the profiled MSMEs were engaged in trading and other low level services. This was followed by 20% in Agriculture, 8% in textiles, 8% in financial & professional services, 7% in manufacturing, 3% in ICT, 3% in Utilities, 2% in Personal care and 2% in construction, among others. 4.6 SECTOR DISTRIBUTION 31% 20% 3% 7% 2% 8% 3% 2% 6% 8% SECTORS Trading & low level services Agriculture ICT Manufacturing Personal care Tex �l es U � li � es Construc � on Hotels, bars and restaurants Financial & professional services 14 Figure 12 Sector Distribution of Respondent MSMEs This chapter discusses the impact of the COVID-19 pandemic on the operations of MSMEs in Uganda. Specifically, it discusses the impact of the pandemic on sales, operations, liquidity and employment. 82% of formal MSMEs reported experiencing reduced sales of more than 50% compared to 73% of informal businesses. As earlier indicated, this may be due to the fact that these formal businesses make more sales than their informal counterparts. Moreover, informal businesses are much more likely to break lockdown and curfew rules to make a sale, as compared to formal businesses. Interestingly, 5.1.1 Impact of the covid-19 pandemic on sales and revenue The COVID-19 pandemic has had an adverse impact on the operations of the surveyed MSMEs. The majority of both formal and informal MSMEs confirmed that they had experienced a reduction in their sales due to the COVID-19 pandemic. However formal businesses which tend to have a higher turnover than informal businesses reported being more negatively impacted, as a result of reduced sales. The majority of businesses surveyed reported that their sales had declined by more than 50% in the 6 months following the lockdown on 18th March 2020. 22% of informal businesses reported ceasing operations due to no sales, compared to 12% of formal businesses. Moreover, formal businesses appear to be more resilient that their informal counterparts, as 6% reported a decrease in sales of less than 50% The link between the formality of an enterprise and its resilience to COVID-19 is an interesting one and it should be further researched. IMPACT OF COVID-19 ON MSMES 5.1 IMPACT ON SALES AND REVENUE 22% 12% 73% 82% 5% 6% I N F O R M A L F O R M A L Sales have completely stopped Sales/Revenue have decreased by more than 50% Sales have decreased by less than 50% 15 Figure 13 Impact of COVID-19 pandemic on Sales and Revenue of MSMEs 5. Interestingly on 22% in Western Uganda, 18% in Eastern Uganda and 16% in Northern Uganda reported closing their businesses as a result of the pandemic. This might be attributable to the strict enforcement of lockdown and curfew rules in Kampala and surrounding areas. Moreover, the negative impacts of COVID-19 in Uganda, have been primarily urban.. MSMEs in Kampala and Central region appear to have been worst affected by the pandemic. 45% and 38% of MSMEs in Kampala and Central region, respectively, reported closing business as a direct consequence of the pandemic. 5.1.2 Impact of the pandemic on sales of MSMEs by geographical location 5.1.3 Impact of the pandemic on sales of MSMEs by Gender 45% 38% 22% 18% 16% 39% 40% 39% 33% 37% 16% 22% 39% 51% 53% K A M P A L A C E N T R A L W E S T E R N E A S T E R N N O R T H E R N Sales have completely stopped Sales have decreased by more than 50% Sales have reduced by less than 50% 39% 45% 37% 49% 24% 6% M A L E F E M A L E Sales have completely stopped Sales have decreased by more than 50% Sales have decreased by less than 50% 16 Figure 14 Impact on Sales by Geographical Location Figure 15 Impact of pandemic on Sales of MSMEs by Gender