Uganda’s private sector activity improves on strong demand

Uganda’s private sector activity improves on strong demand, but experts are worried that improvement in economic activities is likely to stir imports, putting pressure on the exchange rate and so is operational costs

Kampala, Uganda | JULIUS BUSINGE | Stanbic Bank’s latest report– Purchase Managers Index (PMI) for June 2017 – issued on July05 indicates that operating conditions for businesses in Uganda improved during the month on the back of renewed local demand that led to an increase in output, new orders, employment and purchase of new stocks.

The PMI is based on data compiled from monthly replies to questionnaires sent by the bank to company executives in approximately 400 private companies.

The bank says the companies are carefully selected to accurately represent the true structure of the Ugandan economy, including agriculture, industry, construction, services and wholesale and retail sectors.

The bank’s PMI bases its calculations on the performance of five areas by businesses and rated at 100% each; new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%).

The June report is among the three recent reports published in a row in close consultation with the Uganda Bureau of Statistics, a representative agency of government.

For June, the Head of Global Markets at the bank, Anne Juuko said the PMI posted a respectable 52.8% up from 51.0% in May indicating a further “improvement in private sector business conditions for the fifth time in as many months”. In April the PMI was recorded at 53.5%.

The 50% rate signal an improvement in business conditions of the previous month while readings below shows deterioration or reduction.

Commenting on the report, Juuko said the upward trajectory of two of the private sector monitored categories namely industry and services performed so well as  they more than offset the worsening of the overall operating conditions in the remaining sectors.

“Ugandan private sector firms continued to raise their payroll numbers, with job creation seen in construction and services,” she said.

On employment generally, the report indicates that growth in the construction and service sectors outweighed reductions in payroll numbers in the agriculture and wholesale and retail sectors. However, staffing levels were unchanged in the industry category.

Output prices rose across all sub-sectors; firms attributed this to the passing on of higher input costs to customers.

Overall the input costs rose across all five of the categories of economic activity and was attributed to a combination of higher purchasing prices, staff costs and other operational costs such as utility bills.

On staff costs, more than three times as many respondents (15%) noted a rise in staff costs compared to those seeing a fall (5%). The report says that firms raised wages to motivate employees and to provide compensation for higher living costs. There were fairly good performance in the areas of new export orders, suppliers delivery times and generally output levels.

The Bank’s Regional Economist for East Africa, Jibran Qureishi, said the improved situation is supported by the easing of the monetary policy stance recorded for the better part of last year or so.

“We suspect as inflationary pressures have subsided somewhat over the past couple of months; the MPC may still cut its key benchmark rate at its next meeting in August,” Qureishi said.

On June 19, Bank of Uganda announced a cut in the Central Bank Rate to 10% for the coming three months down from 11%, in a bid to push commercial bank rates down and spur private sector borrowing.

BoU’s recent reductions in the CBR have brought down average lending rates to 22% for most parts of this year down from around 25% before.

However, Qureishi warns that as economic activity improves in the second half of this year, imports may rise and put pressure on the exchange rate which could subsequently raise costs to firms.

The Uganda shilling traded at slightly over Shs3500 per US dollar for most parts of last year and this year but analysts say this rate is very high despite it being stable.

In an interview with The Independent, Martin Okumu, the director for communication at Uganda National Chamber of Commerce and Industry (UNCCI) said that making business easy in Uganda would rotate around bringing down interest rates and improving quality of labour.

Okumu said Uganda’s economy being open and liberalised means that lenders have a right to charge whatever interest rate they want and lend to those they think would payback.

Fortunately for some foreign owned firms with connections in countries such as Japan, China, Turkey, Okumu said, they are able to source for funds from their home countries at very little or no interest rate to venture in business in Uganda.

“…to them [countries] this is okay because it is an extension of their economies to Uganda,” he said.

Okumu said government needs to realistically support private sector players in the budgeting process annually.

Stanbic’s PMI comes at a time the country is yearning for better growth in economic activity after recording a 3.9% growth in FY 2016/2017 down from 4.8% recorded in FY2015/2016. Government expects economic growth rate of 5.5% this financial year supported by improved agricultural activities and expansion of private sector credit among other factors.

Table showing the PMI for April-June, 2017

Source: Stanbic Bank

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