2 January 2014

Uganda: 2014's Economic Prospects

To give a sound projection of the economy in 2014, a reflection on how the key economic indicators played last year would be necessary. Reducing commercial bank lending rates [currently averaging around 22% from about 30% in the last about two years ago], a stable exchange rate [trading at close Shs 2,600 per USD] and inflation [currently at 6.8 as of November 2013 from 30% at the end of 2011], will influence private and public investment decisions in all sectors of the economy this year.

Analysts unanimously believe that the easing of these indicators in 2013 after Bank of Uganda's implementation of inflation targeting regime will play a major role in shaping growth in 2014 and beyond.

Beyond Uganda, analysts say, African countries have been quietly impressive over a decade and this, they say, will continue in 2014 and as the continent will not be overly dependent on natural resource prices and markets.

Investors are expected to invest more in technology-driven sectors, including advanced agriculture, transportation, medicine and other sectors like finance, telecommunications, real estate, education, health, oil, retail businesses among others.ka

Players in the economy are also expected to further improve productivity by ensuring that there is quality of service so as to win the global market.

Analysts believe that economic growth for Uganda and other economies will depend on their ability to innovate, create, and reinvent the way they do business.

Stephen Kaboyo, a senior economist and managing director at Alpha Capital Partners, is especially optimistic. He says looking at the past year (2013), Uganda's economic growth was largely driven by public investments especially in energy sector as well as modest growth in exports as contributions of household consumption remained minimal but this will change in 2014.

"In the global economy green shoots are starting to emerge while domestically there are positive indicators that real economic activity is beginning to pick up in line with the accommodative monetary policy stance implemented by the Central Bank," he said.

Going into 2014, Kaboyo said, domestic investment is projected to increase, inflation is expected to drop further and the exchange rate is expected to remain stable.

He added that credit flow is expected to gain momentum as banks get back to lending underpinned by the continued accommodative monetary policy stance.

However, he warns, on the downside that the unfavorable current account balance will continue to be a major risk to the currency.

Available data indicate that the current account deficit deteriorated to US$728.6 million during the three months ended October 2013 from a US$578.6 million deficit in the previous three months period. The surplus on the Capital and Financial account continues to finance the deficit on the current account, which increased to US$702.8 million in the three months ended October 2013.

Kaboyo says Uganda's fortunes in 2014 will also depend on the political stability in the neighborhood countries of Kenya, DR Congo and South Sudan, which have recently been threatened by civil strife and terror attacks.

Liquidity boom:

Other analysts believe that the liquidity squeeze could also ease as politicians, come 2014, are likely to begin spending cash on preparing their political ground ahead of the 2016 polls. However, this will give Bank of Uganda a bit of headache as it will have to control money in circulation so that it doesn't cause high inflationary pressures like the situation was in 2011.

"But on a whole 2014 looks brighter," Kaboyo said. Stephen Kaboyo

Ana Lucía Coronel, the IMF mission chief and senior resident representative for Uganda, was also positive about Uganda's economic growth and recovery saying it will continue to gain momentum mainly driven by public investment, supported by appropriate policies.

Coronel said with the recovery of private sector activity and significant public investment in the construction of two large hydropower plants and road projects, growth is expected to rise to over 6.2% in 2013/2014.

She added that BoU's monetary policy stance is likely to keep core inflation within the expected 5% medium-term target.

Coronel credits actions taken to improve public financial management practices, including the first phase of implementation of a treasury single account and the upgrading of key accounting systems. These measures will boost growth of Uganda's economy, she says, but only if fiscal discipline is maintained.

Progress on strengthening tax revenue collection has been slow, according to Coronel and further improvements are required to avoid the accumulation of payment arrears and reduce the frequency of supplementary budgets by different spending agencies.

In its monetary policy report for December, Bank of Uganda predicts GDP growth in 2013/14 to be 6.2% up from 5.8% in 2012/13, and, the Bank says, growth is projected to pick up more speed in FY14/15 to 6.5% partly on account of increased private consumption and investment as indicated by the recovery in private sector credit.

Indeed, latest figures indicate that lending by commercial banks is picking up from the sluggishness of the last 18 months. For instance, Shs162.3 billion was borrowed from commercial banks in October last year compared to Shs148.2 billion borrowed at the same time in 2012. That is a 9.5% jump in borrowing.

The annual growth in private sector credit was recorded at 8.95% in Oct. 2013, higher than 8.8% in September and 7.31% in Oct. 2012. This trend is expected to continue in 2014.

The bank said there is going to be continued investments in infrastructure (particularly roads and energy) and improved agricultural production and productivity.

On another positive note, these projections come amid a situation when the global inflationary pressures remain largely contained due to low global commodity prices among other factors despite the fact that in October 2013, inflation developments were still mixed between advanced and emerging economies.

BoU says the outlook for global inflation, which plays a major role in the computation of the local consumer price index (CPI), is to remain suppressed in 2014, as oil prices remain subdued supported by increased non-OPEC supply.

The Bank says however, the risks to the outlook appear to be broadly balanced and warns that, should core inflation rise, as is indeed forecast in 2014, then BOU should gradually increase its key lending rate, the central bank rate. This is likely, as usual, to cause a hike in commercial bank lending rates, which might negatively impact on economic growth prospects for the country.

Jared Osuro, a senior economist, also holds a positive outlook on Uganda's economic prospects, which he says is good for the business sector. He says, whenever economic indicators become favorable, ideally that makes it easy for the private sector to do business, grow positively and contribute to positive economic growth in turn.

He adds that once the government keeps the investment momentum in different sectors of the economy particularly infrastructure and energy, that will also boost growth. Osuro says however, that global factors will have to remain favorable so that trade between these countries and Uganda remain on a positive growth curve.

If that doesn't happen, then we are likely to see 'unwanted growth.'

However, Louis Kasekende, the deputy governor of Bank of Uganda told a news conference at the end of last year that his team will continue to assess the global and domestic economic and financial developments and their implications on the overall outlook for inflation and growth of the Ugandan economy, and take appropriate actions to maintain future average annual core inflation around the medium target of 5%.


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