13 January 2013

Uganda: Tough 2012 for Economy

Kampala — Uganda's economy, witnessed a hard 2012 as the banks had high lending rates, with inflation at its peak.

However, despite the reductions in the lending rates and inflation, the rate of private sector borrowing did not grow as a result of the commercial banks staying their prime lending rates.

Commercial banks are still adamant to reduce their lending rates despite a 10% point reduction in the Central Bank Rate (CBR).

The commercial banks argue that they are maintaining high lending rates because they have to dispose off loans acquired at high interest rates.

The increase in lending rates by commercial banks, coupled with the government's tightening of its expenditure has severely hit a number of sectors including the real estate sector.

A number of real estate developers as well as people who had obtained loans to purchase land and property hoping to reap from the property boom are still counting on losses. Many of them have had their property seized by banks.

Inflation

Some sections of the public felt that the reduction in inflation was not reflected in the actual prices of commodities in the market.

Ms. Maria Kiwanuka, the Minister of Finance Planning and Economic Development told a gathering at a Uganda Manufacturers' Association (UMA) luncheon last year that inflation showed that prices in 2012 were not as volatile as those in 2011.

The Monetary Policy stance exercised by Bank of Uganda to curb the runaway inflation and also bring down the high interest rates that had caused a lot of disenchantment in the private sector was largely successful as it managed to bring down inflation to single digits by the close of the year.

The lending rates also reduced and according to the Central Bank, by the end of the 2012, private sector lending was deemed to be growing.

During the reading of Uganda's 2012-2013 budget in June, Finance Minister, Maria Kiwanuka said that Growth in the services sector had slowed to 3.1%, with trade, finance, education and health services sectors registering negative annual growth rates.

Growth in industrial production slowed to 1.1% during the FY 2011/12. The hardest hit industrial sub-sector was formal manufacturing, where growth reduced by 4.4%. This was mainly attributed to the unreliable electricity supply. The agricultural sector has performed much better, recording annual growth of 3.0%.

The Minister also added that 75% of the FY2012/13 budget will be financed by locally sourced revenue while 25% of the budget will be financed by development partners of the country.

According to trading economics.com, the GDP in Uganda expanded by 2.80% in the third quarter of 2012 compared to the same quarter of the previous year.

The third quarter of 2012 saw inflation drop to single digits and lending rates had gone down as a result of reduction in the Central Bank Rate (CBR). The third quarter of 2011 was the time when inflation had skyrocketed to a 19 year high of 30.4% and interest rates had also gone up, private sector lending was at its lowest and manufacturing had almost stalled.

Aid cuts

However, before the curtains came down on 2012, when everything seemed to be going according to plan, donors announced they were suspending aid to Uganda following the alleged mismanagement of funds at the Office of the Prime Minister.

The announcement that donors were cutting aid to Uganda further threatened to dent the country's recovery hopes with Bank of Uganda Governor Prof. Emmanuel Mutebile stating that the cuts would reduce Uganda's growth prospects by 0.7%.

Mutebile said in early December that, "It is still too early to establish the effects (of the aid cuts) on the economy. If all the donors who are being reported to have cut aid do so, we think it will reduce the potential growth rate by about 0.7%."

He also added that since the last monetary Policy Statement in November 2012, the prospects for real economic growth in 2012/13 had weakened.

"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 private sector borrowing, the need to cut government expenditure in response to donor aid cuts and the difficult global outlook," he said.

The scandal in the office of the Prime Minister has seen a host of European nations including Britain, Denmark, Norway, Germany and Ireland suspend aid to the East African nation.

As a result of the aid cuts, government will be forced to reduce spending and shift it to priority sectors and according to economic pundits, this will have a huge impact on the economy.

"Government being the biggest spender in the economy, reducing its expenditure will definitely have a trickledown effect on the common man," Mr. Joseph Okolong, an independent consultant observes.

BOU's Adam Mugume, also shares the same notion, "If projects that were to be financed by the donors are not execute then of course the workers will not be hired and that in itself will be an effect to the families of those workers."

Overall, 2012 was an exceptionally tough year for both large and small businesses in Uganda. With the domestic and global economy still mired in some uncertainty, analysts have predicted that businessmen should expect lower prospects in 2013.

Mr. Charles Ocici, the Executive Director, Enterprise Uganda told the East African Business Week that the beginning of 2012 was inflationary in nature but that he expects better prospects in 2013.

If the coming Kenya elections take the 2007 direction, Uganda will be plunged into supply shocks.

Stocking up on essential items like fuel may be necessary.

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