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Economy to slow down this year - BOU

If the economic pinch stung last year, the pain will be more this year as the Bank of Uganda says growth will be lower than last year's, writes  ALON MWESIGWA.  

Ugandans will continue experiencing a financial squeeze as the economy continues to struggle to regain its footing, the Bank of Uganda has said. Governor Emmanuel Tumusiime-Mutebile told reporters last week that the earlier projected 4.5 per cent growth for this year will not be achieved.

“Given the weak economic performance in the first two quarters of the current financial year, the projected GDP growth of 4.5 per cent in 2016/17 is unlikely to be achieved,” Mutebile said. This means the economy has performed worse than the last financial year where it grew by 4.8 per cent.

This poor performance has been driven mainly by the prolonged drought, which has affected agriculture, where three quarters of Ugandans earn a living. The agriculture sector contracted by at least two per cent between September 2016 and March 2017, according to BOU.

The country depends heavily on agriculture, relying on rainwater. President Museveni’s current crusade of promoting drip irrigation is not expected to transform the agriculture sector from the predominant subsistence farming to commercial, which needs a reliable water source.

BOU deputy governor Dr Louis Kasekende said the economic recovery would have been faster if there were swift changes in the way people are farming to use improved methods.

Outside agriculture, the signs of a poor economy are seen in all corners. Key retailer Nakumatt has shut its Katwe branch on poor sales while other stores remain with near empty shelves.

There is another indicator: a drop in the importation of raw materials and capital goods. Capital goods, such as machines which are needed in production, account for 70 per cent of Uganda’s imports.

Dr Adam Mugume, the BOU executive director Research, said “that is an indicator of a weak business environment.”

Banks have reduced their lending to customers due to a slowdown in the economy

The low imports, however, saw trade deficit, measured by the goods imported vis-à-vis exported, reduced by 13 per cent. Exports performed a little better,  with coffee receipts going up, owing to improved international prices. Gold from the region re-exported via Uganda also grew.

The value of exports less imports, plus the money Uganda earned from abroad, plus donor funds, sometimes known as the current account, improved. This is reflected in the drop of the current account deficit, which reduced by 32 per cent between November 2016 and February 2017. Personal “transfer inflows associated with the festive season and the start of the new school term” were big contributors to this drop.

EXPENSIVE MONEY

The central bank says loans uptake remains tepid, where lending rates have declined by only 1.2 per cent since March 2016 compared to a 5.5 per cent cut since August 2016.

Last week, Mutebile reduced the central bank rate (CBR), a key determinant of the cost of money in the economy, by 0.5 per cent to 11 per cent, although it is yet to have desired impact.

“Although the number of loan approvals is not much lower than the number of applications, the value of applications approved is way below the value applied for, suggesting that slow growth in credit has been mainly due to the supply side,” said BOU in its monetary policy report.

The reduction in the CBR took some industry players by surprise. Razia Khan, the chief economist, Africa, at Standard Chartered bank, said: “We had expected the policy rate to remain on hold in April, with cuts at the June and October monetary policy committee meetings, given food price pressures in the near term. However, with the BoU cutting its FY 2017 growth projection to 4.5 per cent, it is clear that growth concerns are overriding.”

Patrick Mweheire, Stanbic bank boss, told reporters recently that they had intentionally kept the loans and advances low in 2016 as they watch the economy recover.

When people are not borrowing, it means there are low business volumes. Loans to the building and construction sector slowed while loan extensions to the manufacturing sector remained weak. Only salaried people borrowed more.

BOU expects credit demand to increase in the quarter to June 2017 as it becomes certain that economic activity will rebound. Kasekende said the impact of government infrastructure projects was yet to be felt on growth as “they take three to five years to have an impact.”

“But we should believe they are growth-enhancing, and not growth-constraining,” he said.

The Kenyan presidential elections slated for August, conflicts in South Sudan and uncertainty in the Democratic Republic of Congo, all of which are key trading partners for Uganda, are the main risks going forward. South Sudan and DRC remain Uganda’s export market while Kenya, a key import route.

BOU is optimistic, though, that inflows through the financial sector may increase due to project support loans for energy-related projects and an increase in foreign direct investment inflows.

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