Uganda: 2019 Economy Performs Below Expectations

Kampala, Uganda — Uganda's economy performed below expectations especially towards the end of the year, according to the latest Bank of Uganda Monitory Policy Report.

In addition, an analysis of the different monetary policy reports, looking at the trend of GDP, private sector credit, inflation, commercial bank interest rates, balance of payment position and the central bank rate shows that all was not well in 2019 compared with the last year.

This is further supported by the Bank of Uganda Governor, Emmanuel Tumusiime Mutebile, who revealed on Dec.09 that indeed the Composite Index of Economic activity pointed to a moderation of economic activity since the beginning of this year.

He said the moderation of domestic economic growth was driven by both slowing global activity and domestic factors.

For instance, in the first 10 months of 2019 with the exception of gold and re-exports, tourism and other merchandise exports are estimated to have grown at a slower rate, reflecting the moderating external demand.

However, the public sector financing rose amidst limited fiscal space, and raising the prospect of further pressure on the domestic borrowing costs.

Overall, economic growth is projected to be in the range of 5.5-6.0 percent in 2019. In 2018, the economy was reported to have grown at an average of 6.1-6.2%.

This development comes at the time the government has been working tirelessly to boost growth in key sectors of agriculture, tourism, manufacturing but little appears to have been achieved.

For instance, in tourism, government had planned to attract more than one million tourists this year on top of the 1.5 million people received in 2018, but available figures from the Central Bank and Uganda Tourism Board indicate that after ten months, only about 1.2 million tourists had visited Uganda.

Uganda's tourism earnings had grown to $1.4 billion in 2017 and $1.6billion making the sector the biggest forex exchange earner above coffee earnings and diaspora remittances. There was hope that this could only get better in subsequent years.

But with the scare of Ebola cases reported in Kasese and the international media reports on the violence in the Democratic Republic of Congo, cases of political violence, murder and urban crime have made some tourists to reconsider visiting the country.

In August, the government re-launched operations of the national carrier - Uganda Airlines - as one way to boost tourism. The airline now flies to more than seven destinations in Africa. Its impact on tourism and the entire economy is yet to be attained.

Balance of Payments

In the 12 months to October 2019, the Current Account Deficit (CAD) widened by 45.1%, to $3,290.2million due to higher private sector imports. The import bill grew by 14.3% (or US$850.2 million), exports grew by 9.6%. However excluding gold, imports grew by 1.9%, consumption goods by 4.9% while capital/intermediate imports grew by 0.8%. Exports contracted by 12.7%, financial account inflows increased by 72.3% (or US$1,119.1 million).

Increased Foreign Direct Investment (FDI) inflows, coupled with significant draw down of deposit assets abroad by banks and the private sector, relative to the year to October 2018, where significant build up in deposits abroad was recorded. FDI grew by 45.4% from US$1200.4 million to US$1745.9million.

Inflation trends

Despite the increase in core inflation in November 2019, it remained low and within the medium term target (2-3 years) of 5%. Inflation remains subdued in part due to a relatively stronger exchange rate, moderate domestic demand, and lower food prices. The factors holding back inflation appear to have gained a foothold, reinforced by lower global inflation, falling global commodity prices, and weakening global growth. The annual headline and core inflation was reported at 3% and 2.9% in for the month of November as opposed to 3.0% (headline) and 4.6% (core) in the month of February 2019.

In between the year (April - October) annual headline and core inflation averaged between 3.7% and 3.4% respectively, going by the monetary policy reports published by BoU. Changes in inflation figures were mainly influenced by food prices and related factors like weather.

Commercial bank lending rates have on average remained relatively stable which is reflective of the accommodative monetary policy stance, albeit slight increases that were noted in the periods of April and July 2019.

In the three months to August 2019, commercial bank interest rates increased slightly to an average of 20.2%, compared to 19.7% in the quarter to May 2019. The increase in the lending rates was mainly recorded in the sectors of agriculture, manufacturing, and trade. But throughout the year, the rates averaged at 20.15%.

Private sector credit

Growth in private sector credit (PSC) continued to strengthen, despite a slowdown in the quarter to August 2019, largely supported by an accommodative monetary policy stance and improvements in asset quality. Average year-on-year growth in PSC declined to 13.9% in the three months to August 2019 relative to 14.8% in the previous period.

The slowdown was mainly due to higher loan recoveries on account of improved loan recovery measures undertaken. In terms of annual performance for all the months up to November, the MPRs analysis shows that PSC growth averaged at 12.75%.

Uganda shilling performance

The Uganda shilling maintained an appreciation trend strengthening by 1.5% quarter-on-quarter and 3.3% year-on-year in September 2019 to a mid-rate of Shs3, 675.50 per US dollar. Shilling strengthening was driven largely by strong inflows from offshore investors, exports, and NGO inward transfers.

On average, the shilling traded against the dollar for all months of 2019 up to November at Shs3, 730, going by BoU's quarterly data.

The other key highlight during the year was increasing debt levels. BoU figures for the August MPR, shows that the country's provisional total public debt stock as at the end of August 2019 stood at Shs 47,348.2 billion, corresponding to an increase of 0.1% compared to a decline of 1.6% the previous year.

The increase in the stock of total public debt between June 2019 and August 2019 was mainly due to a 2.9% increase in the public domestic debt. However, the public external debt maintained a dominant share of 64.8% of the total public debt.

According to expert analysis by the World Bank top officials, reliance on rain-fed agriculture, however, remains a downside risk to growth, the poor's income, as well as export earnings. Tax collections are below expectations and fiscal pressures are rising.

Meanwhile, delays and poor management of the public investment program could prevent the productivity gains expected from enhanced infrastructure, while an acceleration in domestic arrears may have an adverse impact on private investment and further limit the extension of credit.

The country's economy, in general analysis was largely influenced by an accommodative monetary policy stance driven by Bank of Uganda technocrats, growth in the private sector credit, fiscal stimulus, strong domestic demand, improvement in the agriculture sector as a result of favourable weather conditions and growth in public infrastructure developments.

The central bank continued to manage monetary policy using the policy interest rate - the Central Bank Rate - as a tool to determine interest rates in the market. The trend of the CBR was 10% (February), 10% (April), 10% (June), 9% (August), 10% (October) and 9% (December).

The CBR movement remained largely flat because of marginal changes in core inflation that influences its movement.

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