The Independent (Kampala)

7 January 2013

Uganda: 2013 Prognosis

Experts are cautiously optimistic that the New Year could revive the country's economic prospects.

For business sector players in trading, manufacturing, construction, transport, real estate and tourism among other sectors, 2012 is a year they want to forget quickly having been at the receiving end of a brutal economic times characterized by high inflation, low productivity, exchange rate volatility and high fuel prices. Year-on-year inflation rate jumped to a high of 30.4% towards the end of 2011, before rebounding towards the end of 2012.

The high inflation affected aggregate demand for most goods and services and thus slowed down the growth of most businesses as the Central bank intervened with its inflation targeting measures. The appreciation of the foreign currencies especially the US dollar led to the increase in the cost of imports which further hiked the cost of doing business.

Oil prices kept fluctuating precariously throughout 2012, with a litre of petrol touching Shs 4, 000 at one point. Diesel prices went up too, hence causing a rise in the cost of transportation of most traded goods and services. It therefore came as no surprise when Kampala traders went on strike protesting the record interest rates and the rapid depreciation of the shilling against foreign currencies especially the US dollar.

But with all that in play, policy makers remained firm that the economic situation would stabilise under a tight monetary stance. Indeed, the Bank of Uganda continued to implement the use of interest rates - setting the Central bank rate monthly to influence the changes in interest rates - under inflation targeting lite, which, according to most analysts including the Central bank worked since it pulled back "stubborn" inflation to single digits at the end of the year.

But this was achieved at a cost. The high cost of acquiring bank loans constrained economic growth, since most investors suspended activities fearing to finance the expensive loan products from banks. Banks too reportedly suspended lending fearing that most borrowers would default on loans. As a result, economic growth slowed to 3.2% in 2011/2012 down from 6.7% in 2009/2010.

2012 economic ghosts

The question now is whether the country's economic fortunes would be revived in 2013 or will it carry on the baggage of 2012 into the New Year. Policy makers and analysts were optimistic that the economy would unfold in 2013 but suggested that this would come in the latter months of the year after the existing constraints in the economy are addressed or have subsided. While releasing the monetary policy statement for December, BoU's governor Emmanuel Tumusiime Mutebile said: "The BoU's monetary policy will continue to focus on stimulating aggregate demand in order to boost real economic growth without jeopardizing the medium term inflation target of 5% for core inflation.

The BOU's forecast for core inflation is that it will stabilize at around 5.0% over the next 12 months. He said the prospects for economic growth in 2012/13 have weakened. It said the main constraints to economic growth in the short term are the weakness on the demand side of the economy, a lack of growth in the private sector borrowing, the need to cut government expenditure in response to donor aid cuts and the difficult economic global outlook.

In its 159-page global focus report for 2013; Standard Chartered Bank appeared to suggest that Uganda's GDP should recover in 2013, but the ghosts of 2012 will continue to haunt the government and dampen the medium-term outlook.

"Growth is likely to remain below 7% trend," the bank said, adding that news of the suspension of all UK aid to Uganda on concerns over the misuse of aid money would impact on investor sentiment.

On the country's oil sector, the group said the large scale oil production looks likely to be differed to 2017 at the very earliest, with the ongoing debate over whether Uganda should build a large refinery for domestic consumption of fuel or a pipeline for access to export markets continues to delay the oil production schedule. Either option, the report added, would be costly with the latter unlikely to be finished until 2018. "With imports roughly twice the level of exports, the current account deficit will persist and rely increasingly on FDI to help finance it," it added.

On raising funds by the government, the bank said the potential Eurobond issuance to diversify Uganda's sources of funding is possible in 2013, although with domestic and controversial legislation increasingly in focus, its reception by foreign investors is uncertain.

The bank expects the Central bank to continue with its modest easing in 2013 by at least 50bps, taking the Central bank rate to 11% by end of year-2013.

It added that fiscal policy would remain focused on boosting domestic revenue collection, especially as donor assistance is threatened. The issue of low revenue to GDP ratio did not escape criticism from the experts. While Uganda has made modest progress in tax collection to-GDP ratio remains below the regional peers. Talking on the exchange rate, the bank said the Ugandan shilling is expected to be vulnerable to a reversal of portfolio outflows.

The size of the current account deficit is also a concern to policy makers in Uganda who favor a gradual depreciation of the shilling in order to encourage some correction of the current account deficit as well as avert future overshooting. With new foreign investment inflows slowing and with nominal yields likely to be less attractive in 2013 than in the previous year, and little prospect of forex appreciation, investors are likely to choose not to roll over the existing debt before it matures, according to the report.

Looking back at 2012, Herbert Zake, the head of corporate affairs at Standard Chartered Bank, Uganda, said: "The times were extremely hard for everyone." He was however confident that BoU would continue to play its part in 2013. "Bank of Uganda should be strongly commended for sticking to their policy and steering the country from the high interest rate to where it is now," he said. He however, said the high interest rates slowed borrowing, which is one of the core businesses of financial institutions.

Telecoms unsure

David Holliday, the UTL managing director, told The Independent that after their 2012 ordeal they are looking forward to increasing their customer base in the New Year. UTL is owned by the government of Libya and suffered the consequences of a UN freeze on assets owned former President Muammar Gaddafi's government. The company consequently lost some of its best employees and subscribers as debts continued to mount. "We will continue to cut costs in all ways possible in line with the economic situation," said Holliday.

MTN's Ronald Zakumumpa said the volatile economy kept them on their toes in 2012. Indeed in its group's quarterly report for the period ended September, 2012, performance in the Ugandan market was impacted by increased competition, which led to only a marginal increase in the number of subscribers.

However, the company's average revenue per user in Uganda is reported to have increased by 4.6% in that period. With the launch of Sure Telecom, the 7th telecom operator in Uganda, as the year closed, the telecom market is set to be even more competitive in 2013 and the older players should expect a good run for their money. Generally, economic experts urge business sector players to remain on alert if they are to survive in 2013.

"As the cost of doing business increases, one should think of better ways to cut costs," Charles Ocici, the executive director at Enterprise Uganda, says. "You have to suspend some projects and invest in them when the economic situation is favorable. Above all, you need to engage with your customers, give them proper advice on what to buy and what they shouldn't buy. You need to be very careful when taking bank loans."

Richard Byarugaba, the National Social Security Fund (NSSF) managing director, said they ended 2012 on a good note with a new corporate identity as they gear up for the liberalization of the pension sector in the coming months. "In 2013 we will work to increase further our asset base/capital currently standing at Shs 3 trillion," he said, adding, "I believe the economy is improving and it will favor business in 2013."

Naturally, it is not easy to predict with certainty what a New Year will bring. But analysts are in agreement that the key factors that will directly influence the economy in 2013 are the effects of the donor aid cuts, inflationary pressures, exchange rate movements, the global oil prices and the stability of global economic factors and as well as the results of the forthcoming Kenyan presidential elections, which will be held in the first months of 2013.

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