4 June 2009
(Page 2 of 4)
Investment
Uganda's investment climate continues to be attractive and profitable. Total fixed investment grew by 9.2% during fiscal year 2008/9, higher than the growth of 6.5% recorded last financial year.
The share of investment to GDP is now 26%, of which private investment is 20.4%. Private construction is estimated at 15.9% of GDP and this would have been higher if remittances from Ugandans working abroad had remained at last year's level. Private investment in machinery and equipment increased to 4.5% of GDP compared to 3.4% of GDP in financial year 2007/08. This means that private investors are focusing on increasing productivity of their investments, which is also good for creating jobs as profits continue to grow.
Foreign direct investment remains strong, reflecting continued sound economic fundamentals and, therefore, strong investor confidence in the economy. Foreign direct investment is estimated at $736m during this financial year. This comes on top of $778m worth of foreign investment achieved last financial year. I have been informed that because countries in Europe are in recession, private companies in those countries are exploring investing in Uganda where they can make profits. Equity capital is estimated at $597m this financial year, while reinvested capital from company profits increased by nearly 10% in the same period. The reinvestment of company profits in Uganda is a good sign of investor confidence in the economy.
Export performance
Despite the concerns at the beginning of the global recession that our exports were going to decline because of reduced demand in developed countries, this has not materialized. I am happy to report to the nation that our exports of goods continue to grow, now estimated at $2.8b for financial year 2008/09 compared to $2.6b in the financial year 2007/08. Most of the increase was on account of regional informal cross-border trade which is estimated at $1.242b in this financial year compared to $ 1.068b in financial year 2007/08, an annual increase of 16.3%.
Uganda's export of manufactured industrial products to the region, especially Southern Sudan and DRC, which account for 70 percent of informal cross border trade, is estimated at $831m in financial year 2008/09. There was a slight decline of $36m mainly because of fish. While the demand for fish and the price have shot up, the stocks in our lakes had declined but the Government is addressing this by strengthening regulation. Exports of maize and beans have increased by 55% and 34% respectively in this financial year.
The volume of coffee export shipments increased by 5.2% from 181.68 metric tonnes last year to an estimated 191.16 metric tonnes this financial year. However, the coffee receipts were lower because of the fall in coffee prices in the international market. Tea export receipts are also estimated to have increased by 11.3% in the same period while export volume increased by 7.1%.
Cotton export receipts registered impressive performance with an increase of nearly 40% during fiscal year 2008/09 while export volumes increased by over 89% in the same period from about 12,000 metric tonnes in financial year 2007/08 to 22,500 metric tonnes in financial year 2008/09. This strong rebound of the cotton sector is attributed to improved acreage and improved seeds. All this growth in the economy is taking place in spite of the mistake of delaying Bujagali dam some years ago. How much more would have the economy grown if those mistakes had not been made?
Inflation
The NRM Government has established a track record of maintaining low inflation since 1992/3. Inflation has averaged 5.0 percent per annum for the last two decades. More recently, primarily as a result of strong demand from neighbouring countries, food prices escalated. Up to April 2009, the annual increase in the general price level was 13.4%.
The price of food, including processed food, increased by 26.1% in the 12 months to April 2009 and while that of beverages increased by 12.6% in the same period. Food crops and related products which include fresh food produce, milk and flour, recorded a general price increase of slightly over 30% while prices of food staples escalated by 66.3% per annum in the 12 months to April 2009.
The annual inflation level which excludes food, fuel, utilities and electricity - because these face volatile price movements - (commonly referred to as core inflation) was 11.3% by end April 2009. Although oil prices dropped substantially in October to below $70 and subsequently below $40 per barrel, the fall in prices was not immediately passed on to Ugandans until January 2009. There have also been persistent problems with the oil pipeline between Mombasa and Nairobi and the problem of pirates off the coast of Somalia hijacking ships at sea which has pushed up the cost of transporting oil through the Gulf into the Indian Ocean. These factors resulted in high oil pump prices which translated into persistently high transport costs.
However, the situation has dramatically improved in recent months. Since December 2008, prices of some non-food items started coming down while the rate of increase decelerated in some others. The pump prices of fuel have dropped (negative growth) by 6.4% for the year ending April 2009 compared to an increase of over 21 percent recorded in the corresponding period in the previous year. As a result, transport fares increased only by 4.5% during the same period - which is less than the average inflation rate - compared to an increase of 23% in the previous year (April 2007 to April 2008). Communication charges also registered zero growth in the same period, but recovered from a 1.5% decline a year before.
During the period January to April 2009, the monthly general price level of rent, fuel and utilities, as a group, dropped by negative 1.5% only on average, while that of transport and communications fell by 0.3% in the same period. The outlook on inflation is positive. With this trend, it is projected that inflation will revert to single digit within the course of next financial year.
Exchange rate
Owing to sustained demand for foreign currency from both corporate and offshore players and high domestic import demand, the shilling weakened or depreciated by 29% between April 2008 and April 2009. Other factors include: the general strengthening of the US dollar against major currencies in the international markets since January 2009, reduced remittances and other current transfers through NGOs.
It is important to note that while the shilling has weakened or depreciated between October 2008 and May 2009, the real effective exchange rate - in other words, the relative trade weighted value of the shilling vis-à-vis currencies of trading partners - which measures the competitiveness of the export sector, strengthened or appreciated in the same period. On an annual basis, the real exchange rate appreciated (strengthened) by 2.6% between March 2008 and March 2009.
It is important to put what is happening on the exchange rate in proper perspective. Although the current events in the global economy sparked off the recent exchange rate movements, it is important to note that the shilling sustained general appreciation between June 2003, when the exchange rate reached nearly sh2,000 per one US Dollar and August 2008. This appreciation made some exports uncompetitive as export producers barely recovered their input costs. The recent depreciation, therefore, has the positive effect of making our export sector more competitive.
Therefore, the exchange rate will continue to be determined by supply and demand in the foreign exchange market and there will be no Government shift in the exchange rate policy. Government will not intervene in the foreign exchange market to support the exchange rate at an administratively pre-determined level. The Bank of Uganda will continue to routinely and modestly intervene in the market only to deal with fluctuations which may cause sharp volatility in the exchange rate. This policy stance is to ensure that we preserve our foreign reserves currently at $2.4b, which is equivalent to five months of imports. Our reserves will not be used to subsidize imports, as Government's strategy for reducing prices is to support increased production in the domestic economy through measures that I will later explain.
Constraints to growth
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