4 June 2012

Uganda: Is the Nation in Recession?


Kampala — If your tenant has delayed to pay rent or if you are a food vendor and your customer delays to pay up, just cool down. You are not alone.

This is what many people and businesses are going through and you certainly have to be affected.

Uganda's growth prospects are currently hinged on the recent discovery of oil but it seems real growth will only start when the oil begins to flow.

There have no doubt been a number of investments all looking to benefit from the black gold that have been set up but that has not wiped out the fact that the economy is growing 'below potential', in the words of the Governor Bank of Uganda.

Prof. Emmanuel Mutebile's comments stem from the fact that the economy is currently growing at about 5% as opposed to the average of 7.2% forecast by the five-year National Development Plan (NDP) that was launched in 2010.

Recent shocks in the Ugandan economy have therefore left a few skeptics wondering whether the economy is in a recession or whether it is just a temporary blip before it bounces back.

Several arguments have come up with some people blaming the tightening of the monetary policy by the Central Bank.

A recession is a business cycle contraction that results in a general slowdown in economic activity.

Macroeconomic indicators such as GDP, employment, investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble.

Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and reducing taxation.

In Uganda today, all the above definitions of a recession are seemingly cropping up. Inflation is falling, household incomes are reducing, there is a general slowdown in economic activity, the unemployment rate is seemingly going up and business profits are tremendously reducing.

Mr. Richard Kamajugo, the Commissioner Customs at the Uganda Revenue Authority (URA) while announcing the monthly revenue performance for April said that the deficit experienced in the month was a result of the slowdown in economic activity in the month brought mainly by the tight monetary policy.

"April was generally a slow month as we experienced lower than expected levels of cargo and fuel. Volumes of fuel for instance declined by 15% compared to the same period last year," Kamajugo said, adding "The volumes of dry cargo also declined while the warehoused volumes increased substantially."

He said one of the major reasons for the low levels of business experienced in April was the tight monetary policy stance adopted by the Central Bank to curb inflation.

"Larger analysis is being done but the feedback we are getting is that it was really tight. Purchases were low in the market, partly attributed to the tight monetary policy stance to try to manage inflation," he said.

An analyst who preferred anonymity said when there is little spending, there is little production which all result in low revenue collection.

Bank of Uganda's tightening of the monetary policy has been applauded for managing to reduce inflation from a high of 30.4% in October last year to 20.8% in April 2012. However, it has also been blamed for hiking interest rates and increasing the cost of financing.

Speaking to the East African Business Week in an interview recently, Mr. Everest Kayondo, the Chairperson of Kampala City Traders' Association (KACITA), said the high interest rates had made it very expensive to finance business.

"The business environment is extremely hostile because our interest rates are some of the highest in the world. The CBR has not been reduced and this has prohibited expansion because the cost of financing is very high", he says.

He adds that the time is now for government to step in and reduce the interest rates to avoid a total slowdown in economic activity.

Asked whether he thought Uganda's economy was in a recession, Kayongo said the economy was moving in that direction and if nothing was done to change the situation, it would worsen.

"Yes we are moving towards a recession because we are experiencing stagflation, a combination of stagnation in growth and inflation. We actually told the government functionaries that the prices had remained high and yet there was no growth," he said.

However, the Central Bank Governor, Prof Emmanuel Mutebile recently said they were anticipating growth because the measures they had put in place (Monetary policy) was only impacting negatively on some sectors while others were growing.

However, an economist who preferred anonymity said the Central Bank was under pressure to contain inflation by contracting the demand.

"Government has instructed Bank of Uganda to curb inflation at any cost and so until inflation is brought down, we don't expect much of a change in the CBR," he said.

However, Kayongo says the growth BoU governor mentioned was in the wrong sectors, those that don't employ many Ugandans.

"Growth is actually in the wrong sectors. Banking, telecommunication, insurance are the sectors that anticipate growth and yet when you critically analyze, you find that these are mainly multinational companies that will repatriate their profits back home to their share holders," Kayongo said, adding, "Because they are foreign owned, they will only improve the GDP and the National Domestic Product (The amount of money the country will have to spend to maintain the GDP) will remain high."

His words were reechoed by Mr. Charles Ocici, the Executive Director of Enterprise Uganda who also believes the economy is actually experiencing a recession.

He said an ordinary person will experience recession when the following sign occur; purchasing power of the general population going down, rate of new jobs creation stagnates or reverses-companies laying off staff, the Foreign Direct Investment begin to fall and when the private sector's capacity to absorb commercial loans and repay them from operations and not from selling collateral dips.

He said other tell tale signs of a recession are when the rate of foreign currency generation falls below what it used to be and when the tax collections begin to nose dive in a very uncharacteristic manner.

He said, "In my view all these symptoms of a decelerating economy are manifesting in our own environment. So while we may not see a recession that will lead to the US type where there was negative growth completely, here we are likely to see a significant drop in forecasted growth levels. But clearly, it is a recession."

A senior Uganda Bureau of Statistics (UBOS) official, who preferred anonymity, said the economy was doing badly in the past months.

"It's now improving though it's still bad," he said.

However, Ms. Rachel Sebudde, a Senior Economist at the World Bank's Uganda office says that the Uganda's growth that has over the past three years been below historical trends due to a combination of domestic factors and exogenous shocks that weighed down economic activity do not imply that the economy is in a recession.

She said, "On the back of subdued export performance, high inflation and subsequent tightening of monetary policy to restore macroeconomic stability, GDP growth is expected to slow further to about 4% in the FY2011/12, from a short-lived recovery in FY 2010/11."

She says a recession is normally used in reference to sustained negative growth (in the developed countries where information about the economy is available, this would be negative growth for four consecutive quarters).

"Therefore even though the indicators suggest that things are not well and growth is slowing down (which is true), the economy is not yet in recession" says Sebudde.

She adds that going forward, there are risks that need to be managed well to ensure the economy reverts to historical growth trends, key among these is a possible slowdown in the global economy that could catalyze a fall in trade with Europe.

She said "This would have adverse effects to aggregate demand within the EAC countries, an overall decline in commodity prices, a fall in capital flows, including remittances, and as uncertainties in the global financial markets heightens. Yet, unlike in 2008, when the country had a buffer to back up the declines in external flows it is unlikely to be in position to carry out counter-cyclical fiscal policies should the global downturn worsen. This situation could be worse if donor support also wanes."

"It is difficult to comment," said Mr. Albert Odongo, the Managing Director of Kenya Commercial Bank (KCB) Uganda, when asked whether the economy is in a recession.

"Things are tough right now but there is light at the end of the tunnel. We have to stay positive and anticipate that with inflation reducing and the CBR rate also reducing things may change," stressed Odongo while talking to East African Business Week.

An economist and manager at a big hotel in Kampala, who preferred anonymity says business is very slow.

"We over depended on donors who are having problems in their own countries nd so don't have money," he said. "Inflation is very high whereas spending power is so low yet there are some sectors that don't change. Can you imagine a primary school pupil paying school fees in millions?.

He added that in the early part of the year, spending on power was very high because of unreliable supply yet the market was consuming little resulting in high overheads.

"Most people now spend on basics and this means some sectors don't get an income." The economist said.

Mr Pius Mugerwa, the proprietor of Omega Construction in Kampala, noted that there is delayed payment which slows down work.

"Government cut budget and this affects work progress," he said.

Another hotelier said his hotel has been seriously affected by the budget cuts. "Even the private customers have reduced and yet one has to maintain services to remain relevant,' the hotelier who preferred anonymity, said.

So sensitivity is the issue of recession that many sources East African Business Week talked to feared to be mentioned for fear of losing government contracts.

However, during the release of the poverty status report by the Ministry of Finance, it was noted that about 7.5 million Ugandans are absolutely poor with 13.5 million on the brink of jumping back into absolute poverty.

The report was made in 2010, meaning that if in these two years the 13.5 million or half of the 13.5 million have dropped back to poverty due to job loss, inability to find meaningful employment, reduction in borrowing due to the high interest rates, loss of property as a result of choking bank loans and others, about 21 million Ugandans out of the projected 34 million people could be absolutely poor.

The slow down has been felt down the lowest ladders. Mr Moses Katembuzi who owns rentals in Kawempe a Kampala suburb says he has had three rooms unoccupied for three months simply because prospective tenants don't have money.

"Usually it takes between one or two weeks for a room to be filled but now I have lost three months' rent yet I am servicing a bank loan," he said. "Even the other tenants I have take long to pay and yet I have to meet obligations like utilities. I now accept installments."

The situation was not better in the foods sector where Ms Mariam Nabankema, a vendor at Bwaise Market has registered losses throughout May.

"I normally sell two sacks of fresh cassava every day but since May started I have been selling one sacking the hope that my customers can pick up. I have even been forced to give out food on credit in the hope that customers will pay though the repayment is very low," she said.

Mr Amon Tibekikanwa has had to delay rent by two months because his landlord a media house in the city had not yet paid salary for two months.

For most Ugandans, hope is placed in the budget due in the next few days that some rescue will at last come.

The slow down has seriously affected the media with major houses reporting low or reduced business. Those lucky to get adverts have been told to wait for sometime to be paid.

In an effort to remain competitive some pay Tv stations have slashed their charges. They are lead by Star Times which slashed decoder fees from Ushs100,000 ($40) to Ushs60,000 ($24). Multichoice followed last Friday when it announced xczxcvcvcvcvcvcvvcvcv

As if all those measures are not enough the media reported on Friday that May pay for civil servants will be delayed to verify the payroll. A statement posted at Ministry headquarters said salaries will be paid between June 4 and June 8.

Considering that the government is the largest single formal employer, salaries have a ripple effect and any delay is reflected down the ladder.

So landlords and vendors may have to wait a little longer before they are cleared.

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