7 November 2017

Uganda: Good News On Economy

Photo: The Monitor
Bank of Uganda governor Emmanuel Tumusiime-Mutebile

Kampala — There is some good news for Uganda's economy finally. The Central Bank's latest annual report shows a sharper GDP growth in 2016/17 than had earlier been estimated.

The FY2016/2017 growth figures released on Oct. 24 by Governor Emmanuel Tumusiime Mutebile quote revised estimates of economic activity by the Uganda Bureau of Statistics (UBOS).

They show that, quarter on quarter, GDP growth averaged 1.1% in the four quarters of 2016/17, which is equivalent to annualised growth of 4.4%; which is 0.5 percentage points higher than the earlier growth estimates of 3.9%. But that is still 0.3 percentage points lower than the outturn for FY2015/16 of 4.7% and lower than 6% average government projection for the last five years.

"Growth in Q2 and Q3 - 2016/17 was particularly robust at 1.4 and 1.8% respectively which suggests a sharp GDP growth," the report reads in part. It says this growth is consistent with the Composite Index of Economic Activity (CIEA), which estimates growth of 1.9% in the quarter to May 2017. The CIEA estimates the annual growth to August 2017 at 4.8% an indication of a pick in the level of economic activity.

Earlier, on Oct. 3, Mutebile had given a hint of the good news to reporters in Kampala. The BoU boss said core inflation is forecast to remain around the medium-term target of 5% and economic activity is slowly gaining momentum. He said this warranted a cautious easing of monetary policy to boost private sector credit growth and strengthen the economic growth momentum. He accordingly cut the central bank rate to 9.5% from 10%; the lowest mark ever, for the next three months.

Looking ahead, Mutebile said GDP growth for FY2017/18 is projected to pick up to 5.0-5.5%. He said supportive signals included the current accommodative monetary policy, recovery in external demand and Foreign Direct Investment (FDI), increased activity in the agricultural sector due to improved weather conditions, and the fiscal stimulus outlined in the national budget for FY 2017/18.

In a detailed Monetary Policy Report, Mutebile appears to blame fiscal issues for holding back economic performance.

He said structural constraints such as the high cost of doing business in Uganda is partly to blame for a harsh economic environment "which cannot be addressed by monetary policy alone".

He said Uganda's lending rates are highest and profitability indicators in Uganda are the lowest amongst its key competitors in the East African Community (EAC) region.

Return on assets (ROA) in Uganda remains the lowest in the region averaging at 11.3% in Uganda in FY2016/17 compared to 26.4% recorded in Kenya and 19.8% in Tanzania.

The other indicator to watch out is the country's debt stock which stood at Shs33.8trillion as at the end of June 2017. This represents about 36% of the country's total GDP, a favourable position according to economists who put the acceptable threshold of debt-to-GDP at 50%. But others say that is no panacea.

Experts react

Some experts like Ddumba Ssentamu, an economist and former vice chancellor of Makerere University say political questions need to be resolved fast for investors to gain more confidence in the economy.

"Parliament has to sit down and sort out the issue as fast as possible; if they don't do that, it means the economy will suffer," Ssentamu told The Independent.

He praised the government increased investment in infrastructure projects.

"It will lower the cost of doing business and make businesses more profitable going forward," he said. He said, however, the government needs to improve project efficiency by closely monitoring progress and meeting deadlines.

He said the government needs new areas of widening the tax base to improve revenue to support productive public expenditure.

Despite the optimism on the horizon, some pessimism persists amongst analysts. Many are anxious over what extent the current political tension over the age-limit could hurt the economy.

When The Independent put this question to Finance Minister, Matia Kasaija on Oct. 26, he was blunt. Kasaija said the political chaos is hurting the economy in a "substantial" way and that government would evaluate the situation and inform the country at an appropriate time.

"This fracas is making investors not to bring their money here; tourists fear to come here; if it were you, would you invest here in the current situation," he said.

As he spoke, chaos appears to have enveloped the whole country as several Members of Parliament and other politicians consulted voters on whether or Article 102 (b) of the constitution should be scrapped to lift the presidential age limit and allow President Yoweri Museveni to run again in 2021.

One Edson Nasasira, a 22-year old man had on Oct. 18 been shot dead by Police that was dispersing irate Rukungiri residents at an opposition rally. Many other people, including MPs, were injured and hospitalised in different places across parts of the country in similar circumstances.

Repeated strikes by sections of public servants demanding higher pay fueled possibly by political expenditures also contributed to a sense of flux. Shs13 billion given to MPs for consultations over the amendment added to resentment among those suffering due to the slow economy.

Regionally, the situation in neighboring Kenya - Uganda's largest trading partner in the region - remained politically unstable over disputed presidential elections. Spontaneous riots erupted in parts of the country as protesters kept police busy.

South Sudan, which is another big trading partner with Uganda, remains relatively peaceful following recent political turmoil. But demand for imports from Uganda remains depressed as anxiety and uncertainty persists.

In its Oct. 12 update on Uganda, the World Bank says, Uganda's economy could be impacted by a flaring up of conflict in South Sudan and any renewed refugee inflows that would add to the estimated one million South Sudanese already in the country.

The WB added that further delays in the completion of public investment projects would prevent the productivity that could be gained from enhanced infrastructure, while acceleration in domestic arrears would have an adverse impact on private investment and worsen the credit challenge.

Private sector leaders are worried.

"The age limit matter is hurting the economy," Gideon Badagawa, the executive director at the Private Sector Foundation Uganda (PSFU) said at a forum. He explained that numbers of tourist and potential investors had dropped rapidly.

"The earlier they resolve this matter the better otherwise our young and weak economy will be in shambles and this will cause even deeper political problems" he said.

But Martin Okumu, the head of communication at Uganda National Chamber of Commerce and Industry (UNCCI) says the age limit debate is a temporary situation and will end soon. Businesses will operate normally and investors will come, he said.

"Each and everything we do is linked to politics," Okumu told The Independent, "Politics will always be interacting positively or negatively with economic activities at any one time in any country that is why we talk of political economy. It is a marriage between the two."

Okumu says economic activities like export-import trade, exchange rate developments, and public investments, say in infrastructure, say a lot about how politics and economics affect each other.

"For people to take part in economic activity, they would read the political situation first and act later," he says.

For now, these market sentiments remain topical in discussions about the direction Uganda's economy could take in the short and medium term. Quick resolution of the political question could yield positive economic outcomes it appears. The inverse could drag the economy back into slow or no growth.

Recent quarter economic performance (illustrations) - Source: Bank of Uganda

In the quarter to August 2017, the current account deficit (sum of the balance of trade of goods and services exports less imports)narrowed to US$166 million from US$306million in the quarter to May 2017 as a result of improving of the sservices account balance by US$90 million due to increase in travel receipts in addition to other income related to inflows from personal transfers amounting to US$80million.

The merchandise trade deficit widened by 7.8% to US$389million on account of a 4.8% decrease in export receipts; imports decreased by 1.0% US$1,202million due to lower project and non-project government imports.

Interest ratescontinued to decline in the quarter - August 2017 in line with the eased monetary policy stance. However, time deposit rates averaged 9.3% in July and August 2017 compared to 9.4% in May and June 2017. The weighted averagelending rate averaged 21.6% in July and August 2017, compared to 21.1% in May and June 2017. Private sector credit remains subdued. Average annual growth in the quarter to August 2017 was 5.8% relative to 6.1% in quarter to May 2017. Demand for credit remains robust while supply remains subdued because lenders are risk averse.

The Uganda shilling remained relatively stable, averaging Shs3,599.6 against the US dollar over the last four months to August with realexchange rate depreciating by 5.5% in August 2017 compared to a depreciation of 4.1% in July 2017. This depreciation was driven by relative exchange rate and price movements with country's major trading partners.

The stock of reserves at the end of September 27, 2017 was US$3.55billion, equivalent to 5.5 months of import cover.

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