Uganda’s economy on a slow recovery path

Commenting on the new report, Ramathan Ggoobi, a senior economics lecturer at Makerere University Business School (MUBS) told The Independent in an interview that while the declining interest rate is good for the growth of the private sector, the government’s increased borrowing from the public make the entire move counterproductive.

“There is need for government and BoU to coordinate such that when the interest rates are lowered, the government does not also go to borrow from the public to finance its various activities,” he said.

Ggoobi, however, noted that the revenue deficit is the major reason for government’s increased borrowing from the public to meet its current expenditure.

Available data indicates that for the first six months of FY2017/18, the government revenue (including grants) amounted to Shs 7.35trillion, which was Shs. 1.14trillion lower than the amount programed in the approved budget.

But Martin Okumu, the executive director of Sapentia Professional Consultants and the immediate former director for communication at Uganda National Chamber of Commerce and Industry (UNCCI) said the issue of interest rates is not the reason for low PSC uptake.

“The biggest challenge is to get the loans, produce and sell to who? People don’t have money,” he said. “In any case, the interest rates being charged are still very high by any standards.”

He said the political conflicts in South Sudan and the eastern Democratic Republic of Congo has reduced on the cash flow into the economy.

Beyond Uganda

Overall, according to the report, in the Sub-Saharan Africa, growth is estimated to have increased to 2.7 per cent in 2017, up from 1.4 per cent in 2016 and is projected to improve further to 3.3 per cent and 3.5 per cent in 2018 and 2019 respectively.

The increase in outward growth is mainly on account of recovery in economies such as Nigeria, supported by, among other factors, stronger commodity prices.

The relatively lower projected growth rates for SSA, compared to their historical levels, is attributed to structural and political challenges in member economies, particularly South Africa where heightened political uncertainty weighs on confidence and investment.

While global economic activity is projected to strengthen in 2018 and 2019, risks to the outlook are broadly balanced in the near term, but skewed to the downside over the medium term.

The risks stem mainly from more rapid and sizeable tightening of the currently easy global financial conditions, a shift to inward-looking tariff and trade policies and noneconomic factors such as terrorism, geopolitical tensions, domestic political discord and extreme weather events.

Going forward

Mutebile says PSCis expected to strengthen on the back of the expected increase in credit supply as banks align their pricing behaviour to the eased monetary policy stance, which should lower the cost of lending to enterprises and prime borrowers.

He said the demand for credit is also likely to be driven by stability of the exchange rate and improvement in the macro-economic conditions.

“On the other hand however, banks expect to tighten non-price terms and conditions including, the size of the loan, collateral requirements and maturity of the loan as they implement stricter provisioning standards required under the International Financial Reporting Standard 9 and guard against inadequate security,” he said.

The new accounting standard which came into effect in January this year, requires banks and any other financial institutions  to make appropriate provisions in anticipation of future potential losses, rather than the former practice, International Accounting Standard 39 (IAS 39) of providing provisions only when losses are incurred.

On a sad note, in the short run, Mutebile said the current account deficit is expected to worsen on account of a higher private sector import bill as firms resume normal levels of production following the end of the festive season.

 Quick figures

• The economy grew by 1.3 per cent in Q1 of FY 2017/18, which is lower than 2.5 per cent in the fourth quarter of 2016/17
• Public debt increased from Shs34.4trillion as of June to Shs37.9trillion as at the end of Dec. 2017
• Economic growth is projected in the range of 5 – 5.5 per cent in FY 2017/18, and is forecast to average about 6.3 per cent in the medium to long term