Uganda's Economy On a Slow Recovery Path

Bujagali power dam.

Kampala — Uganda's optimism in the first quarter of the Financial Year 2017/18 has been replaced with fear of a slow growing economy.

The Central Bank's latest quarterly report dubbed 'State of the Economy' shows that Gross Domestic Product (GDP) was slower in the first quarter compared with the last quarter of the last financial year.

Citing the estimates of the economic activities by the Uganda Bureau of Statistics (UBOS), Governor, Emmanuel T. Mutebile, said the economy grew by 1.3 per cent in the first quarter of the FY 2017/18, which though is lower than 2.5 per cent in the fourth quarter of 2016/17.

"This is consistent with estimates of the BOU's early warning indicator - the composite index of economic activity (CIEA), which indicates a rebound of economic activity, driven by strong growth in industrial activity," the report reads in part.

This comes at a time the government has also increased on the rate of borrowing, mostly from China, to fund infrastructure projects including roads, power plants, fibre cable networks and an airport expansion.

According to the report, public debt stood at Shs 37.9trillion as at the end of December compared with Shs34.4trillion in June 2017, representing a 9.4% growth. The external and domestic debt amounted to Shs 25.1 trillion and Shs 12.8 trillion respectively, which is an increase of 12.2 per cent and 4.2 per cent, respectively, during the same period under review.

The Central Bank boss said economic growth is projected in the range of 5 - 5.5 per cent in FY 2017/18, and is forecast to average about 6.3 per cent in the medium to long term, supported by accommodative monetary policy, improvement in public investment management, global economy performance.

Mutebile however, said there are some downside risks to the projected economic growth numbers, one of which is crowding out of private financing and investment by the large government borrowing aggravated by the weak structural conditions - low returns on public capital and poor execution of investments.

Declining interest rates

Meanwhile, the other highlight in the report was the movement of interest rates for government paper. The average yields on the 91-day, 182-day and 364day Treasury bills (T-bills), for instance, declined to 8.6, 8.6 and 9.1 per cent, respectively in the quarter ended January 2018, relative to 9.6, 9.7, and 10.3 per cent in the quarter to October 2017 and 14.1, 14.9 and 15.4 per cent in the quarter to January 2017.

Similarly, yields on the longer term bonds also declined, with the average yields on the 2-year, 3-year and 5-year Treasury bonds (T-bonds) declining to 10.9, 11.3 and 12.6 per cent, respectively in the quarter ended January 2018, from 12.2, 12.7 and 13.6 per cent in the preceding quarter. Average yields on the 10-year and 15-year T-bonds also declined to 14.2 and 14.4 per cent from 14.6 and 15.1 per cent, respectively over the same period.

The reduction in yield across the maturity spectrum signals a reduction in earnings to prospective investors as monetary policy eases.

On Feb. 13, BoU cut the Central Bank Rate by 0.5 percentage points to 9% as a measure for boosting private sector credit (PSC) uptake and economic activities.

This was in response to a decline in headline inflation and core inflation from 3.3% and 3% last December to 3% and 2.6% in January 2018, respectively.

So far, the current CBR is the lowest since 2011 when Inflation Targeting Lite (ITL) was introduced to tame inflation that had jumped to 30%, the highest since 1993. The highest point, the CBR has been was 23% at the end of 2011.

The PSC, however, remains subdued even as the average lending rate on shilling denominated loans eased to 20.2 per cent, from 21.4 per cent in the preceding quarter and 22.9 per cent in the corresponding quarter of the previous year.

The risk of Non-Performing Loans (NPLs) to PSC growth slowly moderated following the decline in the ratio of NPLs to 5.6 per cent in December 2017, from 7.2 per cent in the preceding quarter ended September 2017.

Commenting on the new report, Ramathan Ggoobi, a senior economics lecturer at Makerere University Business School (MUBS) told The Independent in an interview that while the declining interest rate is good for the growth of the private sector, the government's increased borrowing from the public make the entire move counterproductive.

"There is need for government and BoU to coordinate such that when the interest rates are lowered, the government does not also go to borrow from the public to finance its various activities," he said.

Ggoobi, however, noted that the revenue deficit is the major reason for government's increased borrowing from the public to meet its current expenditure.

Available data indicates that for the first six months of FY2017/18, the government revenue (including grants) amounted to Shs 7.35trillion, which was Shs. 1.14trillion lower than the amount programed in the approved budget.

But Martin Okumu, the executive director of Sapentia Professional Consultants and the immediate former director for communication at Uganda National Chamber of Commerce and Industry (UNCCI) said the issue of interest rates is not the reason for low PSC uptake.

"The biggest challenge is to get the loans, produce and sell to who? People don't have money," he said. "In any case, the interest rates being charged are still very high by any standards."

He said the political conflicts in South Sudan and the eastern Democratic Republic of Congo has reduced on the cash flow into the economy.

Beyond Uganda

Overall, according to the report, in the Sub-Saharan Africa, growth is estimated to have increased to 2.7 per cent in 2017, up from 1.4 per cent in 2016 and is projected to improve further to 3.3 per cent and 3.5 per cent in 2018 and 2019 respectively.

The increase in outward growth is mainly on account of recovery in economies such as Nigeria, supported by, among other factors, stronger commodity prices.

The relatively lower projected growth rates for SSA, compared to their historical levels, is attributed to structural and political challenges in member economies, particularly South Africa where heightened political uncertainty weighs on confidence and investment.

While global economic activity is projected to strengthen in 2018 and 2019, risks to the outlook are broadly balanced in the near term, but skewed to the downside over the medium term.

The risks stem mainly from more rapid and sizeable tightening of the currently easy global financial conditions, a shift to inward-looking tariff and trade policies and noneconomic factors such as terrorism, geopolitical tensions, domestic political discord and extreme weather events.

Going forward

Mutebile says PSC is expected to strengthen on the back of the expected increase in credit supply as banks align their pricing behaviour to the eased monetary policy stance, which should lower the cost of lending to enterprises and prime borrowers.

He said the demand for credit is also likely to be driven by stability of the exchange rate and improvement in the macro-economic conditions.

"On the other hand however, banks expect to tighten non-price terms and conditions including, the size of the loan, collateral requirements and maturity of the loan as they implement stricter provisioning standards required under the International Financial Reporting Standard 9 and guard against inadequate security," he said.

The new accounting standard which came into effect in January this year, requires banks and any other financial institutions to make appropriate provisions in anticipation of future potential losses, rather than the former practice, International Accounting Standard 39 (IAS 39) of providing provisions only when losses are incurred.

On a sad note, in the short run, Mutebile said the current account deficit is expected to worsen on account of a higher private sector import bill as firms resume normal levels of production following the end of the festive season.

Quick figures

The economy grew by 1.3 per cent in Q1 of FY 2017/18, which is lower than 2.5 per cent in the fourth quarter of 2016/17

Public debt increased from Shs34.4trillion as of June to Shs37.9trillion as at the end of Dec. 2017

Economic growth is projected in the range of 5 - 5.5 per cent in FY 2017/18, and is forecast to average about 6.3 per cent in the medium to long term

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