The World Bank on Tuesday released its eighth Uganda Economic Update in which it outlined its view of the state of the country’s economy, more than six months after it cut off funding over slow execution of projects. Here are 10 key messages to take away from the report:
1. Economy is slowing, fast
Uganda’s economy grew by an average of 7% between 1990 and 2010, outgunning many of its rivals in the region and in sub-Saharan Africa. That pace is gone, however, and the economy has only grown by an average of 4.5% since 2012, held back by political instability in the country and the region, low agricultural output and weaker global commodity prices.
2. Betting on energy and transport infrastructure
The government is investing heavily in energy and transport infrastructure, including new roads, a new standard gauge railway and at least two hydropower dams on the River Nile but this bet is yet to pay off, and delays in construction and cost overruns pose a risk for fiscal deficit and public debt.
3. Central Bank controls in election season
The Central Bank kept a tight leash on money supply around election time in 2016 and managed to keep inflation at around 4.7% in the first half of the 2016/17 financial year but the result was an economy that struggled to grow, with growth falling 0.2% in Q1 2016/17, compared to a 0.6% growth year-on-year. Agriculture declined 1.1% while the service sector remained flat.
4. Exports lagging behind imports
The country is simply not exporting enough and what it exports is still unprocessed and low value, mostly cotton and coffee. Instability in South Sudan, a key export market, hasn’t helped and imports are expected to rise to 20.4% of GDP in 2016/17 up from 18% in 2015/16. It means that Uganda’s exports will only be able to pay for 55% of imports.
5. Running on empty, fuelled by debt
The fall in crude oil prices helped reduce the current account deficit from 7.6% in 2013/14 to 5.7% in 2015/16 but lower export earnings and a rush to borrow for infrastructure projects have seen it climb rapidly to 7.1% of GDP. Lower tax revenues and delays in completing infrastructure projects have also put pressure on the fiscal deficit.
6. Investor confidence dips
Foreign direct investment has fallen from more than $1billion in 2013/14 to $512million in 2015/16 on the back of global uncertainty as well as delays to unlock investment in key sectors, particularly oil and gas. It was felt in the economy in Q1 2016/17; while construction grew year-on-year from 4.7% to 9.2%, manufacturing slowed by 4.7% and, trade declined from a growth of 1.5% to 0.7% while agriculture grew by negative 1.1%.
7. Mobile cash is king
One in two Ugandan adults, roughly eight million people, now have access to the formal financial system. However, only three in 10 adults have bank accounts and most of the rest – about seven million – access financial services through mobile money. If cash is king mobile money is King Kong!
8. Bankers hang onto their umbrellas
The Central Bank is loosening its monetary policy to drive growth but commercial banks continue to play it safe. On the one hand, banks do not pass on lower interest rates to borrowing customers quickly enough: in the six months to September 2016 interest rates on treasury bills and fixed deposits fell by 5%, compared to a 3% drop in the Central Bank Rate yet lending rates between December 2015 and October 2016 only fell marginally from 24.7% to 23.9%.
In addition, banks are more reluctant to lend in the face of increases in non-performing loans. In the year to September 2016 lending to all sectors in the economy dropped, with lending to manufacturing dropping by a production line-stopping 13.7%.
9. Shilling still in the woods
The tight monetary policy during the elections helped the Shilling hold steady after 24 months of losing value against the dollar and other international currencies but the Ugandan unit remains vulnerable; as the Central Bank loosened the monetary policy to spark growth, the Shilling lost 6% in the last three months of 2016.
10. Growth might be too slow to make middle-income target
Overall, the Ugandan economy offers a mixed picture. The number of households living on less than $2 a day continues to drop, to 34% by the end of 2014/15 but it is not dropping as fast as it did between 2006 and 2013, when it dropped by about 2.7% per year. Also, the World Bank expects the economy to grow at 4.5% this financial year, rising to 5.2% in 2017/18 and to 6% in 2018/19 but this rate, held back by low business confidence, political instability and the high cost of credit, is slower than Uganda needs to meet its middle-income targets.