Kudos to B.O.U but with aid cuts, all eyes are on the private sector for 2013

Midway the 2012/13 financial year, the festive season has been a clear reflection of the kind of year 2012 has been for the Ugandan economy with a Christmas characterised by vendors, open shops and unusual activity on the outskirts of Kampala and in Mbarara.
The country’s civil servants complaining of not having received pay for the past two months and wondering what their week long holiday would be like all thanks to the undying corruption in government ministries. Even with reduced inflation, commodity prices remain high on account of high demand during the festive period. Banks are continuing to lend at high rates as one of the strategies to maintain their profitability amidst limited growth in bank deposits. Telecom companies continue to struggle for the mobile money and data clientele as key revenue drivers with some even increasing their tariffs for both voice and messaging services to increase their profitability. All these point to a slowed economy and are only symptoms of the underlying issues in the country’s prevailing economic terrain.

The country has had its foreign aid to the tune of USD 300.0 million suspended because of misappropriation. Ireland suspended about USD 20.0 million meant for schools, funding basic infrastructure like water. Sweden has also tasked Uganda with paying USD 6.7 million meant for roads, schools, health clinics under PRDP. Denmark has also demanded the reimbursement of misappropriated monies. Germany also suspended aid worth EUROS 3.0 million, needless to mention that the UK, Uganda’s biggest donor also suspended aid following the OPM scandal. This is bound to affect infrastructural projects planned for the financial year considering the government is meant to refund the money. It also means some of the projects will have to be abandoned and completion of some will be dependent on funds being moved from other ministries or roles.

One must understand that most of Uganda’s grant financing is now from bilateral partners as opposed to multilateral agencies thanks to improved macroeconomic management. The country’s external debt is 90.0 per cent funded by multilateral donors on concessional terms with 10.0 per cent from bilateral donors. Mismanagement of donor funds could have far reaching implications on the country’s cost of debt because of poor governance which casts doubt on the country’s ability to use money for intended projects and ability to recoup the money borrowed and pay interest. As a matter of fact, the country’s credit rating has also been downgraded by Standard & Poor because of the negative economic outlook given the suspension of funds that account for about 25.0 per cent of the national budget. The suspension of aid is expected to negatively affect the exchange rates considering aid constitutes a major source of Uganda’s foreign exchange sources.

Kudos to the central bank that has overseen the Herculean task of taming inflation in the country and had it reduced from 30.5 per cent in the last quarter of 2011 to 4.9 per cent in November 2012. This was no mean feat that involved the use of a very high Central Bank Rate that also peaked at 23.0 per cent in the last quarter but has since reduced by nearly half and stands at 12.0 per cent as we speak. The Treasury Bills also played a huge role in mopping up excess liquidity in the economy but the rates have also come down with reduced inflation. The challenge however remains with the commercial banks that have not proportionately revised their lending rates and are still lending at over 20.0 per cent and using the large spreads of up to 10 percentage points as a fundamental driver of their profits. This comes as no surprise given that effects of the tight monetary policy still linger and the inflation has remarkably eaten away people’s savings. It also explains why many banks are resorting to promotions to attract more bank deposits which are also fundamental for any banks profitability. These signs reflect on the fact that the private sector is not doing that well. With a government that has reduced spending power thanks to withheld aid, commercial banks remain integral in the economy’s performance because of their role in supporting the private sector. Banks however face very stiff competition from the convenience provided by the Telcos through mobile money services. Numerous people are becoming more inclined to using the “mobile wallet” as opposed to going to the banks. The mobile money transfers and payments are increasing in value with the platforms moving billions of USD. Innovation is increasingly becoming a threat to the old brick and mortar banking system.

The Telcos however seem to have a lot of competition in their sector as well. Competition has shifted from the voice segment that seems saturated to the mobile money platforms and data segments. Service providers have also moved away from managing their own masts to renting them, a strategy that should ease up cash flows and enable them to focus on their mainstream services. The services have however become more expensive, my take is that if you are not growing clientele as fast then a hike in prices of services should be able to boost revenue. The fundamental question that remains is how much more these Telcos can hike the prices.

Exchange rates have remained a thorn in the flesh of the business community through the course of the year despite the central bank’s efforts to stabilise the local unit. Putting economics aside, one of the key causes of the UGX’s depreciation was the fiscal indiscipline by government. It included purchasing of six fighter jets that explains the Ministry of Defence having the largest supplementary budget in 2011/12 which ate into the country’s import cover leaving the country’s currency in free fall  with effects lingering on way into 2012.  It also included supplementary budgets to State House, parliament etc. at the expense of education, roads and public service and other sectors

Revisions to Recurrent Spending compared to original 2011/12 Budget

(Largest adjustments to appropriation-by agency, per cent of GDP)

ECON 2012

 

The high demand for fuel and importing of high value commodities like construction materials and machinery while exporting mainly lower value unprocessed agricultural products in form of coffee, cotton, horticultural products  as well as fish and fish products has not helped the currency especially with the unstable European economy. As of 2011, exports were worth USD 2.6 billion which was only 16.3 per cent of GDP while imports were almost worth double the export value at USD 4.8 billion which was 30.0 per cent of GDP. This definitely has huge implications on the country’s exchange rate due to high demand for foreign currency to procure imports hence the depreciation of the currency.  Demand for foreign currencies for speculation purposes by financial institutions also contributed to the unfavourable forex rates especially for the first half of the year. Looking ahead, the withheld foreign aid will negatively affect the country’s foreign exchange reserves and rates could become increasingly unfavourable when business resumes as usual in the New Year.

Now that we are midway the financial year 2012/13, the target growth rate is looking less achievable if the aid is not restored with the central bank putting it at 4.2 per cent.  This is a 0.8 per cent reduction from the initial 5.0 per cent GDP growth projection. The reduction in government’s spending capacity is however likely to affect sectors like construction especially in the second half of the financial year since projects to do with roads, schools etc. are bound to be put on hold  mainly because donor financing is released in bits. Bearing that in mind, the private sector has a big role in the remaining part of the financial year most especially the service sector that contributes over 50.0 per cent to the country’s GDP. Banks however remain very instrumental if this is to be achieved especially when it comes to the rates at which they avail financing to the other private sector players.

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