4 January 2017

Uganda: Experts Predict Tough Times Ahead for Economy in 2017

Photo: Daily Monitor
Beer bottles go through a production line. President Museveni has put emphasis on industrialisation in Uganda for it to move to a middle income economy.

Experts think that the reduction in the Central Bank Rate (CBR) by the Central Bank to 12 per cent from its high level of 17 per cent will be a big factor in shaping up the economy in the New Year.

Private Sector Foundation Uganda's (PSFU) executive director, Mr Gideon Badagawa, in his lenses on what will shape the economy in 2017, says: "The new year should start with commitment from government and the private sector to usher this economy into middle income status by 2020."

He says this will require a lot of seriousness from either side to support wealth creation and employability.

Central Bank Rate

Experts think that the reduction in the Central Bank Rate (CBR) by the Central Bank to 12 per cent from its high level of 17 per cent will be a big factor in shaping up the economy in the New Year.

Mr Badagawa's hope is that commercial banks will follow suit and reduce lending rates to stimulate investments.

Indeed, some commercial banks have reciprocated by cutting their lending rates by a slight margin of 1 percentage point.

"It is our hope that government reduces on domestic borrowing to avoid crowding out private investments," Mr Badagawa said.

The private sector also hopes that the regional market will stabilise to the advantage of Uganda's exporters.

Mr Badagawa noted that PSFU is working with government to implement the Local Content Policy to assure local manufacturers of the local market and reduce forex outflows.

"This should help reduce on our trade imbalance. This shall, in part, be fulfilled by having government share their Medium Term Expenditure Framework (MTEF) plans with the private sector," Mr Badagawa explained.

Frugality in government is also required to help reduce Uganda's indebtedness.

In an earlier interview with this newspaper, Deputy Governor, Bank of Uganda, Dr Louis Kasekende, said Uganda's public debt, though still sustainable, has risen in recent years, on account of borrowing to finance infrastructure projects that are necessary to improve the economy's productive capacity and competitiveness over the medium-long term.

"..Net present value of debt is about 31 per cent of GDP while total nominal public debt is about 34 per cent of GDP. In volume terms, external debt is currently estimated at about $ 5 billion (about Shs17 trillion) and domestic debt (treasury bills and bonds) at Shs11.612 trillion by end of June 2016," Mr Kasekende noted.

Mr Ramathan Ggoobi, an economics lecturer at Makerere University Business School, was asked about his predictions for the New Year, using the "Leading Economic Index" (LEI)-which ranges between 0 (worst prospects) and 1 (best prospects).

He said currently, Uganda's LEI is estimated at 0.47 which implies bad prospects going forward.

"It's projected that our LEI will stagnate at 0.48 between 2017 and 2020. So, is this good for a country working towards attaining a middle income status by 2020?" Mr Ggoobi wondered.

He said Uganda's current economic status is mainly because the stock of goods (inventories) held by firms has piled up over time, an indication that the economy has not just weakened but has been dwindling since 5 or 6 years ago.

"For example, the average level of inventories for 2016 is estimated at Shs171 billion. All this is mainly due to the tight monetary policy the BoU pursued in much of the period 2015/16," he shared.

Agriculture

Dr Ezra Suruma, an economist and presidential adviser on Finance, shares that majority of Uganda's population which depends on agriculture for their livelihood, measures success from a good harvest. That is why good weather and improved irrigation methods will determine their fate.

"We must make irrigation and fertiliser accessible to the majority of farmers. Of course continued peace and security is a prerequisite for all economic prosperity," Dr Suruma shared.

The promise to purchase local products through the 'Buy Uganda Build Uganda' policy has also brought a ray of hope to the private sector. The challenge is how it should be implemented.

Finance minister Matia Kasaija while meeting Ugandans living and working in the Diaspora on December 21, said government is developing a policy statement that will require all government departments to stop importing goods which are manufactured locally.

"This will promote industrialisation and create jobs for the youth in the country," Mr Kasaija said.

Generally, the stability being experienced in the economy and the investor confidence compared to the period before elections is encouraging.

Dr Maggie Kigozi, president, Business and Professional Women Kampala, agreed that 2016 was not easy but expressed optimism in the New Year.

"I am optimistic that Uganda's economy will grow in 2017 despite the absence of rain which supports our agriculture," Ms Kigozi said.

Dr Adam Mugume, the director of research, Bank of Uganda, says what will shape the economy in 2017 is premised on how efficiently government executes public investments.

He says the private sector is still restrained by global economic development and rather subdued domestic demand.

"So, the way government enhances productivity through investments and other expenditures while maintaining low and sustainable public debt, the way it improves the business environment and handles governance issues will determine how robust economic growth will be," Mr Mugume observes.

Dr Fred Muhumuza, an economist and researcher at Financial Sector Deepening Uganda, on his take as we begin 2017, says there will be a slight improvement in the weather, following the end of the La-Nina or dry weather phenomenon. Nevertheless, food production and prices will only improve after the first quarter.

"The weak production across the economy and weak profitability given the low demand conditions, created negative ripples across firms and their main creditors - the banks," Mr Muhumuza shares.

He, however, adds that the weaknesses in the mainstream government that lead to little or no value from public spending, coupled with delayed or bad decisions continue to undermine the economy, which is expected to grow at about 5 per cent.

"The reduction in private consumption may offer some relief in terms of reduced imports and inflation but will also have far-reaching negative repercussions on investment, employment and future production," Mr Muhumuza warns.

He projects that there will be limited inflows from potential investors, poor export revenues and depreciation of the Shilling, which lost value by 6 per cent from Shs3,362.5 in December 2015 to Shs3,560.6 in November 2016.

Tough times ahead

Mr Muhumuza says the economy will continue struggling in 2017 largely on account of weak and bad policies rather than resources.

However, the policy dilemma (especially preference of operational level budget aspects at expense of strategic development planning) will translate into a resource problem as government - the biggest single actor in the economy - tries to 'throw' money at almost every problem.

Unemployment will continue to increase as government pursues non-effective initiatives of funding youth and other special groups with no economic rationale.

Similarly, the mismatch of spending short-term capital on long-term infrastructure, the embedded corruption, poor quality of services and debt service costs of nearly Shs2.5 trillion, will undermine the long-term trajectory to middle income status. "As the year-by-year countdown to 2020 continues, the economy is likely to remain far away from the middle income status. We should recall that the first set target for middle income status was 2017," Mr Muhumuza concludes.

Way forward

Mr Ggoobi thinks BoU's decision to relax its policy to 12 per cent in the last quarter of 2016, from its high of 17 per cent, could encourage banks to reduce lending rates and increase private sector credit. It will also help to buy back a few units of the Shilling.

"Secondly, with Kenya going into elections next year, this might also help our economy to get a few dollars from portfolio investors," he adds.

The risks, however, lie in the possibility of resurgence of political unrest in the DRC, the unresolved situations in South Sudan and Burundi and the increasingly unpredictable weather which continues to dilute the government's efforts in the agricultural sector via the Operation Wealth Creation.

Developments

EAC: The regional economy

Mr Aly Khan Satchu, a Nairobi-based equity markets analyst with focus on East Africa, said the region has been a bright star, especially in comparison with the rest of Sub Saharan Africa (SSA) which has been a darkening sky.

"The EAC is the fastest growing trade bloc in SSA and is expected to remain in the lead in 2017. But the EAC story has not been homogenous with serious challenges being seen in Burundi [less than 1 per cent of EAC GDP] and on the periphery," he notes.

He adds that with South Sudan back at ground zero, it has an outsized negative spill-over effect, especially in Uganda [a big trading partner for South Sudan].

1%

percentage contribution of burundi to east african community gdp

2017's outlook for Shilling

The Uganda Shilling is likely to weaken among other frontier market currencies going into the New Year following a decision by the US Federal Reserve Bank to raise its key lending rate.
The decision to raise the rate by 25 basis points was expected by the financial markets and is likely to strengthen the dollar globally which will result in reversal of flows from emerging markets back into the US.
The US Fed has indicated that there will be three rate hikes in 2017, with the Trump administration eyeing a stimulus package that will include tax cuts and increased government spending.
Mr Stephen Kaboyo, the managing partner at Alpha Capital-forex firm, shares: “This scenario is likely to affect the cost of servicing the country’s external debt making it more expensive in the short run.”

25

The decision to raise the rate by this amount of basis points was expected by the financial markets and is likely to strengthen the dollar globally

Govt efforts in 2017

Government employees will have to drink less coffee, attend fewer workshops and travel less as government tightens its noose on expenditures on consumables and allowances.
In the 2017/2018 Budget, government will cut ministry and department budgets by 50 per cent. The funds will be diverted into the construction of oil roads and railway in the Albertine region to facilitate its expected production in 2020.
The savings from the budget cuts will be channeled into agriculture, especially in establishing irrigation to curb drought as climate change takes a toll on the country.
The areas which have been affected in this development include all allowances which have been cut to Shs30.9 billion, from Shs61.8 billion.
Ministries and government employees will have to incur costs to buy tea which falls under the welfare category whose budget has been reduced to Shs1.6 billion from Shs3.2 billion.

Shs30.9b

MONEY ALLOCATED FOR all allowances IN THE 2017/18 BUDGET

12% Experts think a reduction in the Central Bank Rate by the Central Bank to this percentage from its high level of 17 per cent will be a big factor in shaping up the economy in the New Year

Experts’ views

“We must make irrigation and fertiliser accessible to the majority of farmers. Of course continued peace and security is a prerequisite for all economic prosperity,”
Dr Ezra Suruma, economist and Presidential Adviser on Finance

“I am still optimistic that Uganda’s economy will grow in 2017 despite the absence of rain which supports our agriculture,”
Dr Maggie Kigozi, President, Business and Professional Women Kampala

“The new year should start with commitment from government and the private sector to usher this economy into middle income status by 2020,”
Mr Gideon Badagawa, the executive director Private Sector Foundation Uganda.

 

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