Recovery from Covid-19 hinges on supporting SMEs

May 7, 2020 in Business, Opinion by Editor

SMEs constitute more than 80 pc of Uganda’s private sector and account for between 70 pc to 90 pc of non-farm employment and value-added services.

African countries are taking preventive measures to reduce the negative impact of the coronavirus pandemic on their economies, but recovery will hinge on the fortunes of the small and medium enterprises (SMEs) writes Letitia Ouko.

According to analysts, Africa’s GDP is likely to drop from 2% to 1.2% and effects are already being felt – demand for Africa’s raw materials and commodities in China has declined and Africa’s access to industrial components and manufactured goods has been hampered.

John Walugembe, the Executive Director of the Federation of Small and Medium Enterprises is quoted as saying that Ugandan SMEs have already been disproportionately affected by the pandemic due to a disruption in their supply chains, shocks to demand as people choose to stay home, cash flow problems among others. On one hand, entrepreneurs are naturally resilient people. On the other hand, SMEs have fewer fall-backs and coping mechanisms that are available to larger organizations.

SMEs constitute more than 80 pc of Uganda’s private sector and account for between 70 pc to 90 pc of non-farm employment and value-added services. With the coronavirus pandemic disrupting their activities, the economy is undoubtedly going to take a hit.

While addressing the media recently, Amelia Kyambadde, the Minister of Trade, Industry and Cooperatives revealed that over 4,200 companies had closed down due to the ongoing lockdown aimed at curbing the spread of COVID-19. Thousands of Uganda’s SMEs, regarded as the country’s engine of growth, are struggling to survive. The COVID-19 pandemic has greatly reduced demand for their products and services, which has resulted in significant dips in their sales, and consequently, in cash flow problems.

Due to diminished cash flows, many businesses are struggling to pay their employees and meet other financial obligations. Moreover, the heightened uncertainty is leading to a reduction in access to credit, as financial institutions are less sure of the businesses’ ability to pay back loans.

The closure of businesses will lead to an unprecedented unemployment surge; the failure of many borrowers to meet loan obligations; tax defaults which translates to the failure for Uganda Revenue Authority to meet targets; and a general fall in consumer demand. The struggling lower-income population has reached the tipping point where they are unable to pay rent; meet utility bill payments and are calling for relief supplies of basic necessities from the government.

Based on global trends, and the impact that the virus has had on businesses in Uganda, it is important that these enterprises identify what options they have on how best to survive the virus’ onslaught on their businesses.

First and foremost, they need to manage their workforce. People form the integral part of the business, and this is a time to focus on them. Ensure that employees adhere to health and safety guidelines while exercising a duty of care to themselves. Businesses are advised to monitor governments and WHO recommendations, implement remote working schedules for roles that can be completed online.

It is paramount that businesses have sufficient liquidity to weather the storm. To ensure this, they need to redesign their cash flows and plan on how to survive these difficult times. Businesses should model various scenarios and how they can overcome them. They should conduct stress testing and build contingency plans. We may not have a clear indication of what may happen tomorrow, so businesses need to forecast how much their business can endure, how long they can survive, what contingency plan will best suit them through the next three to six months.

Businesses should also develop a plan to manage contractual obligations. They must review how the business will be able to manage contracts with customers and suppliers, consider what would happen in the event of default, Force Majeure, consider the possibility of remote payments, as well as explore possibilities for renegotiation of terms of engagement.

The business should also manage financial arrangements, review the terms between borrowers and lenders, review the financial ratio of the potential loss of revenue, review the events of defaults, and consider renegotiating new financing or restructuring of moratoriums. In addition, businesses should consider insolvency risks, their financial position relative to their contractual counter-parties, taking any necessary steps that they may need to manage their cash flows, and meet contractual obligations.

With the new normal that is social distancing, SME’s should align IT systems to support the evolving scenarios. Businesses need to reverse their mindset – work does not necessarily have to be done at designated work stations. How well can your infrastructure support remote working? Are you able to receive payments, make payments? Ensure you have technological upgrades to ensure communication is flowing.

Businesses should also source for alternative supplies. Mrs. Kyambadde has advised the private sector to consider value addition to locally available raw materials, such as animal skins and fruits, to substitute imports from Europe and China.

She advised them to think outside the box because persistence of the pandemic may constrain sourcing of machinery and final consumables for traders, which will hinder buying and selling. This presents an opportunity for locally produced consumables.

Finally, businesses need to redesign their 2020 business strategy. Most business strategies were formulated under normal circumstances.

However, with the change in variables, assumptions, and projections, this must change. Businesses must formulate a strategy that accommodates the current crisis and unforeseen future crises.

Many businesses around the world, Uganda included, are obviously feeling the negative impact of the coronavirus, however, doing nothing is not an option. Businesses will have to rethink strategy and make difficult decisions if they are indeed to weather the storm and survive COVID-19.

Letitia Ouko is Communications Manager at AZA