6 January 2017

Uganda's Attempt to Economic Recovery in 2017

Photo: Stephen Wandera/Daily Monitor
The vendors sell their merchandise in an open street market in Kampala.

The economic distress that became more apparent through 2016 can be traced to as far back as 2011 when inflationary pressures ravaged the country after a controversial election. Although the bleeding stopped as wounds were hurriedly stitched through a number of interventions, the scars that remained have started reopening.

Finance Minister Matia Kasaija acknowledged only last October that the economy "is struggling", but for long, the majority Ugandans have been surviving under harsh economic conditions.

But Mr Richard Byarugaba, the National Social Security Fund (NSSF) managing director, speaking at the Uganda Parliamentary Press plenary on November 3, 2016, said: "The economy has been limping for a very long time."

Appearing before Parliament over the same on November 15, last year, Mr Kasaija said the economy had "remained resilient despite several unfavourable conditions" and summarised the situation as "deceleration in the execution of public infrastructure investment" amid a "difficult global environment."

However, the minister insisted that the economy would survive the slide into recession, but admitted that a review by the International Monetary Fund (IMF) noted that there existed "risks" to the economy hinged on the pace of recovery of the global economy.

What is the problem?

A common saying goes that if you ask three economists the same question, you will get three different answers. This is true with Uganda right now.

Asked what exactly is ailing the economy, the deputy Secretary to the Treasury, Mr Patrick Ocailap, said: "The economy grew slower than was projected." Does that sound to you like an answer?

The economy, he said, had been projected to grow at 5.2 percent in 2015/16, but the results returned by Uganda Bureau of Statistics (Ubos) showed it would grow dismally at 4.2 percent, which could rise to 4.8 percent. This is down from the 5 per cent growth registered in 2014/15.

This revision in GDP was attributed to economy volatilities such as the high interest rates, depreciation of the Uganda Shilling and skyward inflationary pressures, which stood in way of foreign direct investment flows, savings and investments. The situation was compounded by the high uncertainty that engulfed the country in the run up to the 2016 election.

According to World Bank, "the electoral cycle held back economic activity, as would be expected. Over the first half of the year, economic indicators have been downbeat - suggesting much lower aggregate demand than anticipated."

After elections, Mr Ocailap said there came the fresh crisis (in July) in South Sudan, one of Uganda's biggest export markets. It is estimated that Uganda previously raked out a weekly Shs28b ($8m) from business in the now troubled country.

The third "crucial factor" he cited were the ongoing reforms (fiscal and others) instituted to contain the high frequency leakages (corruption) in the sectors for which the government was borrowing heavily and recently incensed the World Bank to withhold new lending of up to Shs5 trillion ($1.5b) in new lending until further notice. As a result of fiscal budgetary reforms, the Treasury said it saved in the range of Shs150 billion, "monies which would have otherwise been swindled."

"So people are crying because of our tightening on their liquidity," he said. "The effect of this has been slowly building since 2012/2013 but in the one or two years should have been neutralised."

Version two

In an article published recently, Prof Augustus Nuwagaba of Makerere University, while partly buying into the above official narrative, said the biggest problem of the economy is the way it is structured. The country's GDP is estimated at $25b (Shs89 trillion). But where does this GDP come from?

"It is from the service sector, largely telecommunications (44.3 percent), but ironically, the service sector employs less than 1 per cent of the population. The agricultural sector, which employs 76 per cent of the population ironically contributes only 23 percent. This means that the sector, which is clearly the most economically endowed and therefore capable of creating jobs and broad-based growth, is surprisingly incapable of doing so."

He said it is a contradiction that while the economy continues to grow, it leaves the majority in the low income category, making them unable to provide a sizeable market to anchor further growth. For example, one can argue that the UK, or USA economy has agriculture contributing less than 2 percent of the GDP. But it is important to note that the population engaged in agriculture in those countries is less than 1 per cent, justifying their contribution to the economy.

If anything is to be fixed, Prof Nuwagaba argues, the starting point is the need "to restructure the economy, provide long-term financing in the agricultural sector through increased investments, improved seeds, fertilisers, irrigation and production infrastructure, marketing, research, land access, agricultural mechanisation and value addition" all of which cannot be done by the private sector. "The scientific laws dictate that water flows by gravity along a slope, but if you want it to ascend a hill, you pump it."

The other challenges Prof Nuwagaba identifies are limited access to cheap financing, limited ability of Ugandans to save - with the saving to GDP ratio standing at a paltry 13 per cent and only 8.3 per cent of the population engaged in the banking sector while 68 per cent remains in the non-monetary sector, producing for consumption and not the market.

These issues, of course, have been pointed out by a number of other economists and social critics. The government is also accused of competing for credit with private borrowers through extensive domestic borrowing, among other things.

Why does it feel worse?

The explanations aside, it is clear that ordinary people have remained so unhappy with their own economic prospects after all the economy is inextricably tied to people; it is them who make money, spend it and or are taxed by the government.

In fact, there is no simple way to gauge an economy’s health. But if you had to choose just one statistic, like technocrats at Finance or Bank of Uganda do, it would be real GDP, which measures the total income produced within an economy, adjusted for the overall level of prices.

Statistics are okay, but when an economy is indeed in a mess, to an average person they mean less, explained Mr Ramathan Ggoobi, a policy analyst and economics lecturer at the Makerere University Business School (Mubs). “But in this case if you looked closely at statistics for the real indicators of the last five years you will realise the economy has been doing well.”

The macro- economic indicators as cited by Finance and BoU, he said, are good “but don’t offer a real picture; that is why sometimes we turn to micro-economic indicators (like household incomes, inequality, savings, personal incomes, unemployment) and if you turn to these you will get a completely different picture”—that were are not doing very fine.

Added to the fact that the global economy is facing a turbulence, Ugandans abroad cannot remit more money like they used to, and China is no longer buying in bulk as it used to nor dishing out the soft loans in large numbers, and with the South Sudan market yet to stabilize, Mr Ggoobi, said that means more problems for Uganda. “It is generally a combination of factors that have led to the economic slowdown.”

Due to a variety of external or external shocks, the economy grew by meagre 4.7 per cent in 2014 but shot up to 5.3 per cent and was expected to reach 5.1 per cent in 2016 and subsequently to 5.8 per cent in 2017, largely driven by industry, services and public infrastructure investment.
The challenge with this arrested development, Ms Sheila Kulubya, the communications officer at the World Bank in an email to our inquiries, noted that “this rate of growth is much lower than what Uganda achieved in the earlier years of reform, or what is required for a genuine transformation to middle income level. This calls for a much more determined effort to raise productivity and accelerate the rate of growth.”

So how can it be fixed?
Economists are sometimes like physicians; they will examine a patient, identify a problem but offer no obvious diagnosis.

Mr Charles Byaruhanga, a macroeconomic specialist at the Ministry of Finance, says: “As soon as the dynamics stabilise the economy will pick up. A recession is when you get two negative quarters of consecutive growth, ours has not reached that level; it is only a deceleration but will accelerate soon.” BoU also said last December that the economy had started picking up, and was expected to grow by five per cent in 2017.

However, several analysts, have urged the government to start taking agriculture seriously, not just because it is one on which the economy is traditionally anchored but also employs the majority population. Ubos’ national population and housing census data for 2016, shows that nearly two thirds (64 per cent) of the working population was engaged in subsistence agriculture.

Mr Ggoobi says that what kills the economy is when the people lack a permanent flow of income. “The tell-tale signs of the economy being distressed have not started today; but gave us a rude awakening to realise that any fixing should start with agriculture. By government waking up progressively; namely increasing the budget to the agricultural sector from the current Shs800 billion to Shs1 trillion in the next FY, I think they can fix it in the long run.”

But how is the money being allocated to agriculture being used? Much of it, Shs350b, will this financial year go to Operation Wealth Creation – an initiative in which soldiers led by Gen Salim Saleh distribute seeds, seedlings and animals to farmers.

It has now emerged that almost 60 per cent of the seedlings supplied last year dried up due to lack of rain. This calls attention to the provision of water for agriculture to solve the problem of reliance on nature, something which has almost entirely been ignored.

Another issue relates to agriculture financing, and Dr Ibrahim Kasirye, a principal research fellow at Makerere University’s Economic Policy Research Centre (EPRC), has a suggestion.

He says: “Banks usually don’t lend to farmers for agriculture due to the huge risks involved so this should be a responsibility for government to shoulder.”

It would appear then, going by this observation, that the government could consider providing loan financing to small farmers. The challenge, again, is that earlier efforts of this nature, like the Entandikwa scheme, failed because those who borrowed did not pay back the money.

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