BoU predicts strong economy in three years

But government needs to focus beyond fighting locusts and coronavirus

Kampala,Uganda | JULIUS BUSINGE | Uganda’s economy is expected to remain strong supported by an accommodative monetary policy and the resultant growth in the private sector credit, latest data from Bank of Uganda shows.

The data contained in the February Monetary Policy Statement (MPS) shows that the economy is projected to grow in the range of 5.5%-6.0% this financial year and 6.3% in the next 2 to 3 years, with the BoU Governor, Emmanuel Tumusiime-Mutebile, attributing it to among others; favourable monetary policy, increase in private sector credit and government’s investment in infrastructure such as roads and power dams.

This projected growth, however, remains below BoU’s estimate of potential output growth of 6.5%.

However, Ugandans should not entirely trust Mutebile’s projections because, the latter said that there are downside risks emanating from both the global and domestic environment.

Besides the rosy picture, there is a downward risk especially with the recent outbreak of Coronavirus (COVID-19).

“There is considerable uncertainty regarding the duration and severity of the coronavirus outbreak,” Mutebile said adding, “If it persists for an extended period, the effect on global economic activity is likely to be larger than currently projected.”

So far, more than 2,592 people have died following an outbreak in the central Chinese city of Wuhan and more than 77,150 cases reported. Deaths have also been confirmed in Hong Kong, Philippines, Japan, France, Taiwan, South Korea, Italy and Iran.

Meanwhile, Mutebile said that despite the recent positive developments in the US-China trade negotiations, an escalation in the dispute remains a key downside risk to the global growth outlook.

This, however, has been worsened with the recent escalation of geopolitical tensions in the Middle East following the US killing of Iran’s Maj. Gen. Qassim Suleiman.

On the domestic front, constraints to agricultural production including uncertain weather patterns and the current invasion by desert locusts could take toll on the projected growth.

Experts weigh in 

Economic experts agree with Mutebile. Enock Twinoburyo, a senior economist told The Independent that the 5-6% growth is a modest projection.

He added that a more optimistic projection is 6% if the downside risks fails to materialize.

He added that the impact of the coronavirus will depend on efforts by China to contain the virus.

“My understanding is that the effect would be limited in the short run because the projections of the coronavirus containment are more optimistic,” he said. “The drivers of growth are more domestic than external,” he added.

He said the impact of the coronavirus will be pronounced in China’s growth because Uganda’s relationship with China is more through its exports to Uganda which do not necessarily trigger economic growth [in Uganda].

He however said that in the event that the coronavirus persists in China, there is a likelihood that local production in Uganda will be negatively affected given that several technologies or equipment and other inputs for key sectors are sourced from China.

Twinoburyo further observes that weather has been favorable and the agriculture sector has been recovering. Manufacturing and services sector, on the other hand, are picking up and increasingly contributing more to the economy.

Beyond locusts and coronavirus, Twinoburyo spoke about 2020 being an election year ahead of 2021 general election which is currently topical amongst all sections of the population.

Twinoburyo said election spending may not have a significant impact on the economy in a year but will be experienced after the election like the situation was in 2011.

Excessive election spending in 2011 caused inflation to jump to 30%, the highest since 1993.

For now, Twinoburyo said, the recovery in PSC is a good buffer and that FDI is also expected to grow.

In a separate interview last month (January), Corti Paul Lakuma, a research fellow at the macroeconomic department at the Economic Policy Research Centre at Makerere University told The Independent that economic growth projections of 5-6% is not bad.

He said the country need to focus on the long term solutions to stir rapid economic growth.

“Shifting from weather dependent economy to one where you control the situation is not easy,” he said, adding that investment in infrastructure, irrigation, use of fertilizer and other agriculture inputs need to be embraced.

He also said the government needs to fight and maintain a stable exchange rate so that import prices do not escalate.