The Covid-19 pandemic presented Uganda with a new challenge, namely an inflationary spike, as a result of the postponement of economic activities.
This situation has particularly impacted Small and Medium Enterprises (SMEs) as they strive to balance costs and profits.
SMEs are facing multiple challenges, including the rising cost of inputs such as raw materials, transportation, and energy, which directly contribute to increased production costs.
Moreover, the decrease in consumer purchasing power, caused by the escalating prices of goods and services, has resulted in reduced sales for SMEs.
The decision of SMEs to increase prices depends on various factors, including market conditions and the price elasticity of their products.
Each business will evaluate these factors to determine the most suitable course of action.
Brain Mutebi, a retailer at Busega said the prices of goods are steadily going down .
He said SMEs have had to keep a healthy cash flow while considering whether to increase costs.
"Generally prices are decreasing but there are some goods such as cooking oil whose prices are still high. We have not yet benefited much from the current changes but we are hopeful," he said.
Mutebi emphasised the need for government assistance and guidance on navigating through difficult times.
However, accessing funding to overcome these challenges has proven to be a difficult process for SMEs.
A study conducted by Twaweza's Sauti Za Wanainchi in 2021, revealed that the cost of living was jeopardizing the livelihoods of many individuals.
Despite stagnant incomes, a significant portion of the population experienced severe food shortages and went without a meal a day due to poverty.
This cost-of-living crisis has resulted in the decline of "real" disposable incomes due to high inflation.
The prices of staple foods in the market have risen sharply, approaching levels seen in 2017 when the East Africa region faced widespread distress, as highlighted in the report.
For example, the beef price at Masanafu Roofla has risen by Shs3,000. Residents are currently paying Shs15,000 per kilogram of beef, compared to Shs12,000 before the lockdown.
Similarly, the cost of a box of tomatoes has increased by Shs40,000. Previously, the box of tomatoes was priced at Shs140,000, but now it is being sold for Shs180,000. Other staple food items at Busega market include Posho, rice, beans, sugar, and matooke. The price ranges are as follows:
- Posho: Between Shs3,200 and Shs3,400
- Rice: Between Shs4,000 and Shs7,000
- Beans: Depending on the type, prices range from Shs3,200 to Shs5,500
- Sugar: Prices range from Shs5,000 to Shs6,000
- Matooke (a bunch): Prices vary from Shs14,000 to Shs30,000.
Calls have been made to governments to establish streamlined procedures for SMEs to access funding during challenging economic conditions. The current crisis in the cost of living has placed the livelihoods of many Ugandans at risk.
Although there have been recent improvements in the value of the shilling and a slight decrease in inflation, SMEs are still affected.
Rehemah Nakiwala, a market vendor, expressed optimism that the situation will soon normalise, but noted that prices for certain goods, such as sugar, cooking oil, and rice, remain high.
"The situation has improved compared to previous time (during Covid-19). My business is slowly picking up and I can get something to feed my family, "she said.
Given that commodity prices are still elevated, the marginal changes resulting from the shilling's gains and inflation drop have yet to make a significant impact on SMEs.
In a paper titled "Why Ugandans should prepare for higher commodity prices in 2023," Dr. Brian Sserunjogi, a research fellow at the Economic Policy Research Centre (EPRC) at Makerere, highlighted the challenges brought about by rising commodity prices as the global economy reopens after the Covid-19 pandemic.
According to data from the Uganda Bureau of Statistics on June 30th, the annual headline inflation decreased from 6.2% in May 2023 to 4.9%. Similarly, the annual core inflation dropped from 5.6% to 4.8%, mainly driven by reduced inflation in maize, rice, and flour
Despite the projected ease in global commodity prices in 2023 due to a slowdown in global growth, Sserunjogi cautioned that this positive outlook might not be realised due to prolonged dry weather and climate conditions, which have played a significant role in sustaining price increases since 2022 and are likely to continue doing so in 2023.
Thaddeus Musoke, the chairperson of the Kampala City Traders Association (KACITA), expressed concerns about the future of Small and Medium-Sized Enterprises (SMEs) given the current situation, describing it as "tricky."
"The future of SMEs is still not clear because access to funds is still hard. We thought that Covid-19 recovery funds would push the SMEs but there are many challenge,” he noted.
He highlighted the challenges faced by SMEs in accessing funds, noting that the conditions to access Covid-19 recovery funds are complicated, often requiring security that many SMEs lack.
Musoke also mentioned that the perception of heavy taxation by the government hinders SMEs from formalising their businesses.
The fear is that once formalised, the government will claim a significant portion of their profits.
Additionally, he identified bureaucracy as another obstacle to business formalisation, particularly in sectors such as education, where the process involves significant costs and complexities.
As a result, many schools end up operating illegally.
Enock Nyorekwa Twinoburyo, an economic consultant, highlighted that inflation might not be the primary challenge faced by small and medium enterprises (SMEs) at the moment.
He emphasised the issue of SMEs not accessing credit, citing the hindrance of formalisation. He mentioned that most SMEs operate informally, making them ineligible for bank loans.
Twinoburyo noted that while formalised SMEs are scarce, it doesn't imply that inflation and related costs don't affect them. According to KACITA, 51% of businesses in Uganda are informal.
Some SMEs perceive formalisation as a potential increase in taxes, which is not entirely accurate, according to experts.
The formalisation process involves bureaucratic procedures and can be expensive, discouraging SMEs from pursuing it.
However, implementing incentives such as tax exemptions could reduce production costs and help alleviate inflationary pressures.
Twinoburyo further explained that higher commodity prices can impact SMEs due to cost-push inflation, which primarily affects producers. As a result, SMEs end up absorbing the increased costs.
He argued that not all SMEs are manufacturers but rather operate in the mid-stream, meaning that if the producer marks up prices to cover expenses, SMEs will also pass on those costs.
Experts pointed out that SMEs, which have not fully recovered from the impact of Covid-19, are particularly vulnerable to downsizing effects such as inflation and interest rate hikes.
These factors can further constrain their prospects. Twinoburyo highlighted several emerging issues, including global uncertainty and increased financing costs.
“On the local scene the financing costs have been going up primarily because of the Central Bank response to cut inflation. That means there are tight financing conditions for the SMEs,” said Twinoburyo.
Blessing Immaculate Owomugisha, the Secretary General at Uganda Chamber of Commerce and Industry, believes that inflation will remain high until it stabilizes, which means that the prices of certain commodities are likely to stay elevated.
According to Owomugisha, even if inflation is declining, it doesn't necessarily mean that prices should be immediately lowered, as the cost of production may not have changed.
She suggests that the situation could be improved if SMEs are exempted from certain taxes, such as withholding taxes and income taxes, and provided with incentives.
This, she believes, could help reduce production costs.
On the other hand, John Walugembe, the Executive Director of the Federation of Small and Medium Sized Enterprises (FSMES), is optimistic about the future of SMEs.
He points out that external factors driving inflation are becoming more moderate and advises SMEs to seize the opportunity to revitalize their businesses.
"SMEs should now take the advantage to reboot their businesses, to find new customers, re-position themselves, to market more,” Walugembe said.“
While inflation is a challenge, Walugembe acknowledges that SMEs face other issues as well.
In an interview with the Nile Post, Patrick Ocailap, the Deputy Secretary to the Treasury, expressed that unless there are significant structural changes in the global economy, prices cannot be expected to decrease overnight.
Ocailap emphasized the need to promote farmers' activities and establish strong market linkages to stabilize prices in the long term.
"That is a long activity that will bring inflation down for good,” Ocailap said
Ocailap said the decreasing inflation rates to the efforts of government entities such as the Bank of Uganda and the Ministry of Finance.
He encouraged SMEs to remain patient and resilient, as the future holds promise, particularly in agro-processing, agro-trade, and agro-production.
He confidently stated, "The future of SMEs in Uganda is very bright. Let them not lose hope, especially in agro-processing, agro-trade, or agro-production. That is where the magic bullet is."
The story was produced by the Nile Post with support from Uganda Editors' Guild
