BoU predicts strong economy in three years

Enter World Bank, IMF

In their latest economic update, the World Bank says Uganda’s economy continues to grow driven by strong levels of domestic consumption and sustained levels of public and private investment.

Net Foreign Direct Investment inflows shot up to 5.1% of gross domestic product (GDP) in FY18/19 from 3% of GDP the previous year. The construction sector continues to grow at double-digit levels. There has been a jump in manufacturing growth supported by recent expansions in the sector, including investments in new factories.

Nevertheless, the Bank says that growth is falling short of the where it needs to be if the country is to meet its target of attaining lower middle-income soon. To meet that target, the bank suggests that, the economy needs to grow by at least 8% over the next decade.

It also says that widening the tax base should be a big priority to support investments in the economy. Also, limiting exemptions to investors would boost collection in the long term.

Uganda’s public debt – which is slightly over 40% to the GDP – is currently sustainable, but vulnerabilities are increasing and delays in the oil sector’s Final Investment Decision (FID) are also a major concern, the WB says.

Going forward, the WB thinks in line with economic experts that The Independent spoke to. It says that while the growth outlook for Uganda is favorable, risks are tilted to the downside. As the 2021 elections draw closer, heightened political activity and uncertainty could lead to a rise in spending, and a fall in investment and economic activity.

It adds that reliance on rain-fed agriculture and systemic challenges in the sector remain risks to GDP growth, the poor’s income, and export earnings. Regional and global factors could also undermine the outlook.

Reduced foreign demand, which would weaken exports and present risks to external stability, could come in the form of regional instability or as a result of trade uncertainties between the US and China, which might further slow global growth.

Beyond what the World Bank says, the International Monetary Fund adds that the long-term sustainability of the development strategy for Uganda will depend on strong investment in people.

“Given limited budget resources, the government must find a balance between infrastructure needs and supporting social sectors, such as health and education,” it says.

It adds that Uganda has relied on external borrowing to finance its large-scale infrastructure projects, which contributed to rising debt, putting more strain on the budget as more resources need to be allocated for interest payments.

“Nevertheless, the country remains at low risk of debt distress,” the IMF says.

Key facts and figures

The average interest rates charged by commercial banks in the local currency declined by 1.5 percentage points to 19% in the quarter to December 2019 compared with the previous quarter, according to the BoU February Monetary Policy Report.

This decline was mainly due to lower rates charged on loans to the dominant sectors – trade, personal and household, transport and communication and manufacturing.

Similarly, lending rates on US dollar denominated loans declined from 7% to 6.5% during the same period under review.

Growth in private sector credit slackened in the fourth quarter to 2019 relative to the third quarter of 2019 with average (year-on-year) growth quoted at 12.1% in the quarter to December 2019 relative to 13.3% in quarter to September 2019.

On an annual basis, the Uganda shilling loans grew by 15.6%, contributing 10.4 percentage points to total PSC growth compared to 11.3 percentage points in the quarter to September 2019.

Foreign exchange loans grew by 5.1%, contributing 1.7 percentage points to total PSC growth compared to 2.0 percentage points in the quarter to September 2019.

A sector level, data shows that lending has declined mainly in the manufacturing sector which, officials say, might constrain economic activity going forward.

However, average annual credit growth to the building, mortgage, construction and real estate sector was 11.5% in the quarter to December 2019 lower than 13.1% in the quarter to September 2019. In manufacturing, credit declined to 12.3% from 17.1% while agriculture lending credit reduced to 19.7% from 23%.

Average annual credit growth to the trade sector was 13.4%, higher than 11.9% for personal and household loans sector.

Meanwhile, the country experienced slowdown in exports attributed to low international commodity prices and the effect of Uganda-Rwanda border disputes.  Export revenue from Rwanda dropped from 7% ($212million) to 2% ($42million), year-on-year.

The other indicator is the Uganda shilling. It was relatively stable with a bias towards an appreciation due, in part, to the increased inflows during the festive season.

In the quarter to January 2020, the shilling appreciated by 0.1% to an average mid-rate of Shs3, 680 per US dollar.  On year-on-year basis, in January 2020, the shilling appreciated by 0.6%. The slight appreciation was on account of supply from offshores, Non-governmental organizations and export receipts amidst subdued demand.

Inflation on the other hand remains subdued with headline inflation declining to 3.4% from 3.6% in December 2019 while core inflation – the target for monetary policy – remained stable at 3.0%.

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