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Towards the end of 2011 Standard & Poor's Ratings Services affirmed its 'B+' long-term and 'B' short-term foreign- and local-currency sovereign ratings on the Republic of Uganda. The firm predicted a stable outlook for the country. The transfer and convertibility (T&C) assessment was revised to 'BB-'.
In June of 2011, Hon. Hon. Maria Kiwanuka, Uganda's Minister of Finance, Planning and Economic Development read the annual budget. This was done in tandem with an established tradition of reading the budgets simultaneously in the East African Community.
The theme of the 2011/12 annual budget was ‘Promoting Economic Growth, Job Creation and Improving Service Delivery'. This budget was read in a backdrop of high inflation, fuelled by increase in food and fuel prices. The drought that affected parts of the country and the increase in demand for food in neighbouring countries such as Kenya and the Republic of South Sudan. This already grim picture was further muddied by the unfolding Euro zone financial crisis. It is noteworthy that outside the East African Community, the European Union is Uganda's biggest trading partner.
Inflationary pressures have also been driven by both increased global commodity prices and the depreciation of the Uganda Shilling, which affected domestic prices. Inflation in China, India and Kenya, the main sources of Uganda's imports, has risen persistently, leading to higher imported inflation. For example the average price of crude oil in April 2011 reached US $ 128 per barrel, an increase from US Dollars 66 in December 2009. This increase in international fuel prices passes through to the domestic market because of a depreciated Uganda Shilling.
A review of the 2011/12 national budget illustrates that despite the slow recovery in the global economy and increasing domestic prices, economic activity remained robust during the past year. The total National Output of goods and services, commonly referred to as Gross Domestic Product (GDP) rebounded, grew at 6.3 per cent during the year, compared to 5.5 percent in Financial Year 2009/10. The rebound in economic activity is largely attributed to the recovery in construction and increased trade activities. In addition, there has been strong performance in the telecommunications, financial services, mining and quarrying sub-sectors. These are central areas of economic projections in 2012.
It is important to state from the outset that concrete economic projection is no mean feat. This is largely attributable to the globalization phenomenon. This trend makes regional and international economies highly intertwined. This increased interdependence of economies and economic activities, means that any negative growth in one corner of the globe has a knock on effect on another distant corner.
Therefore whereas the fundamentals of Uganda's economy may be sound and on firm footing, the overall performance may be impacted upon negatively by seemingly unrelated activities in Europe and North America or even East Africa! The economic projections for 2012 thus will be based on a number of critical issues; these are national, regional and international. It is essential to analyze each one in its own merit.
The 2012 Economic Projections will to a large extent be determined by the implementation of the national budget with specific reference to infrastructure. There are however other key areas that the Government of Uganda has continued to place great emphasis upon. These include; Infrastructure Development in Roads and Energy, Promotion of Science, Technology and Innovation for Value Addition, Private Sector Development and Employment Creation, Enhancing Agricultural Production and Productivity, and Human Development. It is also important to note that the fiscal policy pursued by the Government will play a central role in controlling inflationary pressures.
GDP per capita stood at about $539 in 2011. In the shorter term, Uganda's GDP growth rate may be constrained by the current monetary environment but is well placed to reach about 5%-6% in the medium term. This is on the back of strong growth across several sectors, infrastructure investments, and new oil production prospects. Moreover, macroeconomic stability is underpinned by a Policy Support Instrument (PSI) with the IMF and strong relations with donors
Uganda's primary macroeconomic objective in the medium term is to promote rapid, broad based and sustainable growth, consistent with transforming the country to middle income status. This is possible given opportunities available including the recovery in the world demand for exports, the high demand for food in the region and globally, favorable conditions for private sector investment, continued peace and stability. The macroeconomic objectives in the medium term therefore seek to attain the recovery in economic growth to at least 7 per cent per annum on average; reverting to an inflation target of 5 per cent; a stable, competitive exchange rate; and prioritizing investments which enhance the productive capacity in the economy and employment creation. During the third quarter of 2011 the inflation rate rose to close to 30 percent. However towards the end of 2011 the inflation rate began to reduce gradually. This is as a result of the tightening of the money supply in the market by Bank of Uganda. It has consequently led to an increase in interest rates by commercial banks. The projections are that with prudent macroeconomic management inflation should be tamed in 2012.
The manufacturing sector in Uganda has constantly pointed to the state of infrastructure as one area that reduces the competitiveness of Uganda's manufactured products. It is evident that the Government is responding to the complaints and road works are being undertaken nationally. Towards the close of 2011 the Mbarara, Kabale/Katuna road rehabilitation was commissioned. Other roads that have been concluded include the Kampala Gulu Highway, while the Gulu, Atiak/ Nimule work is ongoing. A number of key projects have been completed this financial year and strides have been taken to improve the condition of the national road network. This trend will certainly continue into 2012 and the impact on the economy will be generally positive.
This has been a key challenge to economic activity in the country generally. Owing to increased costs of crude oil, the cost of thermal generation has increased considerably. It was projected that the 250 MW Bujagali Hydropower Project would be commissioned towards the end of 2011, this however now seems more likely in early 2012, when the first 50 MW will be availed to consumers. Other smaller power schemes have been commissioned. More and more investors are flocking to the energy sector in Uganda. While the feasibility study for the 600 MW Karuma Hydro power project was completed in 2011, and the Government is ready to commence its construction. The strengthening of the shilling should gradually witness the reduction in the cost of fuel, leading to a more manageable thermal generation, while the additional 50 MW. Power relief for the manufacturing and even domestic sector in 2012 will impact positively on the general economy. This year will go down in the history of energy infrastructure as the year of mini hydro power stations.
Though Uganda has for long been a net exporter of food, one key area that requires attention is that of value addition. Attention to value addition, will improve Uganda's competitiveness and business climate, as well as promote economic growth and create employment. Already initiatives have been put in place, it remains to be seen if these initiatives can be followed through. The work undertaken by research institutes such as the National Agricultural Research Organization (NARO) is being felt at the grassroots, through increased yields. Through organizations such as the Uganda Industrial Research Institute (UIRI) and others, increased focus is being made on value addition. It is essential that in 2012, the uptake pathways for the research and value addition undertaken by Uganda's researchers move more towards the private sector. A few years ago, collaboration between NARO scientists and Nile Breweries led to the production of Epuripuri also known as Sorghum Beer. This has created a greater demand for sorghum from farmers and a ready market from Nile Breweries Limited. Such initiatives will spur household incomes and increase the purchasing power of communities at the grassroots level. 2012 should see more initiatives involving the private sector, scientists and communities in areas such as vegetable oil among others where Uganda has a competitive edge.
This is buttressed by a vibrant Information Technology sector with key players such as Makerere University Kampala being on the forefront of taking advantage of this revolution. A total of 1430 km of optical fibre cable was completed under the second phase of the National Backbone and e-Government Infrastructure project during the 2011/12 financial year. This compliments private sector efforts to develop high speed interconnectivity between the country and global internet and telecommunication networks. High caliber manpower is being trained at Makerere University and investors in the sector in 2012 will have every reason to be confident of returns in the sector. The projections for the growth of IT in 2012 are thus bright.
The process of East Africa's economic integration is in high gear. There are key challenges on the political front; earlier estimates of having a single currency by 2012 appear in doubt. This is because of the unraveling of the Euro currency in the Euro zone. Most analysts are agreed that without clear political direction and ceding of a measure of economic sovereignty by the five partner states, the proposed single East African currency would be afflicted by the same woes that face its existing much older counterpart the Euro. 2012 may thus not witness the birth of the proposed East African currency but may instead lead to wider consultations on key issues of monetary policy and joint strategies on curbing inflation and cost of living generally. Perhaps there will be a shift from the usual symbolism of reading the budgets on the same day, to a more coordinated effort towards lowering costs of credit for the private sector across the region. The projection for the single East African currency is that of deferral with greater emphasis on coordinated financial housekeeping in 2012
However, deeper economic integration with systematic application of taxes will see Uganda's manufactured products in the supermarkets and shops in the neighbouring countries. This structured way of doing business has already witnessed a major shift in regional trading patterns. For example in the financial 2009/10 South Sudan was Uganda's top export destination. However by 2010/11 there was a shift from South Sudan to Kenya. Kenya and Rwanda were Uganda's top two export destinations, with South Sudan in fourth place. This indicates a number of challenges facing Ugandan exporters in the South Sudan market. It also shows a clear preference by exporters for markets that are predictable and consistent. Barring any major trade dispute, such as the end of year slapping of taxes on Uganda's exports by Tanzania, 2012 is projected to be a year when inter regional trade will blossom. This will be a plus for Uganda's economy in 2012.
In the year 2007/08 there was serious political strife in Kenya. This strife was as a result of disputed election results. This chaos affected not only Kenya but her neighbours in the region. Kenya's port of Mombasa servers not only Kenya, but also landlocked countries such as Uganda, Rwanda, the DR. Congo and South Sudan. The chaos thus affected business and impacted negatively on projected revenues from the imports and exports of these countries. 2012 is an election year in Kenya, it is hoped that the events of 2007/08 do not recur since their impact would be adverse. The good news is that all parties in Kenya are agreed that electoral violence is unacceptable. The projections for 2012 in light of instability in Kenya are that the chances of chaos recurring are slim, since the catastrophic events of 2007/08 provides a reference point for all parties concerned. This diminished possibility of violence is a plus for Uganda's economy in 2012.
Regional infrastructure plays an important role in ensuring free movement of people and goods throughout the region. The phenomenon of climate change is affecting road construction negatively. The recent end of year devastating floods in Dar es Salaam and other parts of Tanzania are a case in point. The central corridor serves Rwanda, Burundi and Uganda as well any negative impact on infrastructure will lead to reduced traffic in the region. Furthermore the Port of Mombasa may be stretched to capacity, this already difficult situation is compounded by non tariff barriers such as unnecessary road blocks and weighbridges. The increase in cargo volumes can only be handled by improved railways though presently besides well crafted policy documents there is no effort on the ground to change this for the better. The projections for 2012 in regional infrastructure are increased pressure on the ports of Mombasa and Dar es salaam. The good news is that the airline industry in the region and Uganda is set for greater growth in 2012.
As stated at the outset, the world is increasingly becoming a global village. Uganda may have all her policies outlined above in place. The regional mix may favor further growth of Uganda's economy, however if the EU and USA markets are in abeyance the impact will be felt right in Kampala. The indications are that the Euro is showing signs of tentative recovery while the US economy is gradually on the mend.
Nationally, there are threats such as the high interest rates that have the potential of choking access to credit. The level of industrial unrest may also have an impact on the overall economy. It's still early days though and should the situation take the improvement path as early signs indicate, then with the national and regional priorities in place, the Ugandan economy is set to grow at the projected over 7 percent in 2012.
Written by Collison Lore, ReConnect Africa, Uganda
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