Economy expands in 2018

Economists still question its impact on people’s pockets

Kampala, Uganda | JULIUS BUSINGE | Uganda’s economy expanded faster than expected in the past 10 months compared with the previous year supported by accommodative monetary policy, rebound in private sector credit and continuous investment in infrastructure.

Data from Bank of Uganda, Ministry of Finance, Planning and Economic Development and the Uganda Bureau of Statistics shows that the economy grew between 7-8% higher than the projected 6% growth. This is higher than the annual 4.5% and 2.5% recorded in 2017 and 2016, respectively, demonstrating improved confidence in the economy.

Last month, the central bank retained the central bank rate at 10%, the lowest since 2011; a decision that has triggered a sharp drop in lending rates from as high as 22.6% at the beginning of the year to 20.3% at the moment.

Private sector credit increased by 10.5% as at the end of June this year compared with 5.6% in the previous year. At the same time, the government has in the past year invested billions of shillings in various infrastructure including Karuma and Isimba hydro-power dams as well as airports and roads. Additionally, both core and headline inflation was contained at an average of 3-5% – almost the same rate as that of 2017.

On the other hand, the exchange rate has been high throughout the year but somewhat stable at 3,700 per US dollar – slightly higher than the 3,600 mark for last year.

The current growth in the economy signals increased job creation as well as increased production of goods and services. However, city economists including Isaac Nkote, a senior economics lecturer at Makerere University Business School (MUBS) told The Independent that the reported growth is good and that he cannot disagree with the official figures released by government.

He, however, said he would like to see how this good performance has had an impact on individual consumers’ incomes and other key players like industrialists and agriculturalists that drive the economy. He said the continued huge investments in public infrastructure projects need to be evaluated to ascertain its real impact on the economy.

“Yes roads and power dams are being constructed but how many jobs have been created, how much tax has been collected as a result and are the exports growing,” he said. Meanwhile, the BoU statistics shows that the total government revenue (including grants) in July and August 2018 amounted to Shs2.5trillion, which was Shs46.1 billion lower than the projected amount in the approved budget due to an under performance in grants revenue, specifically project support grants. While grant receipts during the period amounted to Shs98 billion, domestic revenue amounted to Shs2.5trillion, which was Shs132.5 billion higher than the programmed amount.

The current account balance (CAB) remained fragile in the quarter to August 2018, according to BoU registering a 10% increase in the deficit to US$565.3 million, from a deficit of US$513.6million in the quarter ended May 2018.

The increasing current account deficit was largely driven by the expansion in the services deficit and the trade deficit. In terms of public debt, the stock was Shs.41.8trillion in August (42% of GDP). But with the exception of debt stock, BoU executives say all the public debt risk indicators were within the recommended international and regional benchmarks.

The executives said the risks to the debt remains high worsened with high capital outflows as a result of high interest rates in advanced economies and the tightening of global financial conditions.

Good rating

But the Standard and Poor’s (S&P), an international rating agency, says in its latest rating that the Ugandan government stayed broadly on track with its policy support instrument and coordination program with the International Monetary Fund as well as with its wider relations with official creditors.

The rating agency states that public-sector-led hydropower projects whose funding continued in 2018 will boost the power supply in the next few years, helping growth prospects.

The rating states that the government made notable progress in reducing the percentage of the population below the poverty line though their incomes remains highly volatile, subject to climatic changes and fluctuations in export price.

This, according to the rating, is based on the fact majority of the workforce is employed in the agriculture sector The rating agency says that due to what they consider to be a narrow export base, they do not expect consistently high export growth over the medium term. And that while commodity prices (tea and coffee) have improved in 2018 they have observed that only limited growth in non-traditional exports was recorded.

Due to Uganda’s investment program, S&P expects imports related to capital projects to continue driving imports and material current account deficits (CAD) in the range of 5%-6% of GDP. “In our forecasts for 2018-2021, the current account deficit will widen to about 6% of GDP, due to higher oil prices and a pickup in public investments, resulting in higher imports,” it says.