Uganda: 2020/2021 Was Tough for Economy

The financial year 2020/2021 was largely challenging due to the COVID-19 pandemic hit that negatively affected all sectors of the economy, according to the Bank of Uganda annual report for 2021 released on Oct.19.

"Although Uganda gradually eased the lockdown measures during the first half of the financial year, the antecedent global and domestic supply chain disruptions led to a severe contraction in economic activity and a sudden decline in consumer demand," reads the report in part.

It adds that the contact-intensive sectors continued to be affected by social distancing measures and heightened uncertainty.

In terms of sector performance, manufacturing and service sectors registered growth rates of only 2.1 percent and 2.5 percent, respectively, well below the historical average while the agricultural sector grew by 3.5 percent, which was below the 4.8 percent growth rate registered in the previous year.

Consequently, real gross domestic product growth in FY2020/21 increased only marginally to 3.3 percent from 3.0 percent registered in FY2019/20.

Meanwhile, inflation remained benign on account of exchange rate stability and the existence of spare capacity in the economy. Annual headline and core inflation averaged 2.5 percent and 3.5 percent, a slight increase from 2.3 percent respectively registered in the previous fiscal year.

The report says, the benign inflation environment permitted the pursuance of accommodative monetary policy stance to support economic activity.

Indeed, the Central Bank Rate was maintained at 7 percent during the first 11 months of the financial year and reduced further to 6.5 percent, the lowest level ever, in June 2021.

Notwithstanding the accommodative monetary policy stance, private sector credit (PSC) growth remained subdued largely on account of risk aversion by lenders and weak credit demand, owing to the relatively murky economic environment conditioned by the COVID-19 pandemic.

Growth in PSC declined to 8.1 percent in FY2020/21 from 11.7 percent in FY2019/20.

Most of the deceleration was on account of shilling denominated lending, which grew by 9.9percent, lower than the 15.6percent growth rate registered in FY2019/20.

The growth in private sector credit also remained uneven across major sectors of the economy, with the mining and quarrying and trade sectors registering negative growth rates in the FY 2020/21.

The balance of payments recorded a surplus of US$440million in FY2020/21, largely underpinned by significant budget support inflows. Although the current account deficit widened to a record high of US$4,139million in FY2020/21, it was more than offset by the financial account inflows, leading to a reserve build-up during the year.

The deterioration of the current account deficit was driven by the widening trade deficit, partly driven by public investments, which boosted imports, while exports remained relatively subdued.

In addition, tourism receipts declined on account of the global measures to contain the pandemic.

Foreign direct investment inflows, however remained subdued on account of the global economic uncertainty. It declined to US$847million from US$967 million in the FY2019/20.

FDI is however projected to recover on account of the positive developments in the oil sector and in line with the projected recovery of the economy.

Portfolio inflows, which are more vulnerable to refinancing risks were however strong, registering a net inflow of US$116million in the FY2020/21 compared to a net outflow of US$321million in FY2019/20, as offshore investors increased their holdings of domestic debt securities.

The stock of foreign exchange reserves as of end-June 2021 amounted to USD 4,214 million, which is equivalent to 5.5 months of import cover.

Sound banking sector

The report however says, the banking sector remained sound, with bank liquidity and capital buffers well above the minimum regulatory requirements.

The asset quality of the commercial banking system also improved, largely supported by the credit relief measures put in place by BoU to mitigate the adverse economic impact of the pandemic on borrowers and the financial sector.

As of June, 2021 the ratio of non-performing loans to total gross loans stood at 4.8 percent compared to 6.0 percent in June 2020.

The Bank of Uganda continued to embrace the opportunities of the changing financial ecosystem in order to enhance financial inclusion and economic transformation.

Beyond Uganda

Following the contraction in global output in 2020 due to the COVID-19 pandemic and the associated measures to contain its spread, global economic activity started to pick up in the second half of 2020 and the recovery has gained momentum over the first half of 2021.

The World Bank in its June 2021 Global Economic Prospects Report projected a pick-up in global output by 5.6 percent in 2021, an upward revision from the January 2021 projections.

Nonetheless, the recovery is uneven among countries with advanced economies, particularly the United States, the recovery is stronger, largely supported by successful vaccination campaigns and significant policy stimulus. Indeed, the advanced economies are the main driver of the recovery in global growth.

Emerging markets and developing economies, including China, which controlled the spread of the pandemic earlier than most economies are projected to grow by 6 percent in 2021, from a contraction of 1.7 percent in 2020.

However, excluding China, emerging markets are projected to grow by a modest 4.4 percent in 2021, from the contraction of 4.3 percent in 2020.

Although improvement in external demand and international commodity prices are expected to support growth for emerging markets (excluding China) in 2021, new COVID-19 waves amidst slow vaccination rates and inadequate policy support are anticipated to hold back the pace of the recovery.

Sub-Saharan Africa economies are projected to grow by 2.8 percent in 2021, the same level of growth projected in January 2021, but up from the contraction of 2.4 percent in 2020.

The pace of growth in 2021 is moderated by low fiscal space to provide fiscal stimulus coupled with challenges in vaccine procurements.

The report warns: "The outlook is, however, uncertain, with elevated downside risks arising mainly from the emergence of new COVID-19 variants and waves... in addition, the current pick up in global commodity prices and inflation, if sustained, may trigger earlier than anticipated tightening of global financial conditions, if central banks tighten monetary policy stance, with more adverse effects on highly indebted emerging markets."

Museveni's new year promise

In a televised address on Oct.28, President Yoweri Museveni said the country has imported sufficient dozes of covid vaccines to administer on the population to allow full reopening of the economy in January next year.

As the country awaits this to happen, Bank of Uganda governor, Emmanuel Tumusiime Mutebile has promised to do everything within his powers to keep it alive.

"Bank of Uganda will continue to do everything within its mandate to champion a stable and predictable economic environment and financial stability in order to enhance social and economic welfare of the people of Uganda," Mutebile said in the annual report.

He said, during the pandemic era, BoU maintained an accommodative monetary policy stance to support economic activity amidst a benign inflation outlook, which he hopes to continue doing until full reopening is realized.

He said, the economic growth for Uganda is estimated at 3.3 percent for FY2020/2021 rising to 3.5-4.5percent in FY2021/2022 and return to 6-7percent by 2024/2025.

Similarly, the inflation trajectory is likely to be shaped by uncertainties impinging on the upside and the downside but will remain within the medium-term target of 5 percent.

Mutebile says, mitigating measures such as accommodative monetary policy, credit relief measures to be extended on a case-by-case basis after expiration in September 2021, and budgetary support to micro small medium enterprises amongst others are expected to minimize the negative impacts of COVID-19.

In his October monetary policy report Mutebile said, with the ebbing of the COVID second wave, a phased relaxation of pandemic related restrictions and improving vaccine coverage, economic activity is gradually normalizing.

He said, the high frequency indicators of economic activity for August and September 2021 suggest that the economy is pulling out of the COVID-19 second wave impact.

However, he said, some contact dependent sectors that faced the brunt of the pandemic continue to face difficult conditions and that the virus continues to pose uncertainty in the near-term economic outlook.

He said, economic growth will depend on the release of pent-up demand, a boost to investment activity from the government's focus on infrastructure and support to sectors that have been more adversely affected by the pandemic and accommodative monetary conditions.

In addition, an acceleration in private consumption, strong growth in external demand, a gradual return of tourism and foreign and private domestic investment in the oil sector are the other supporting factors.

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