Observers project that the economy will get worse before it gets better, as inflation continues to rise and expected pickup in demand continues to keep us waiting.
According to official figures economic growth rose to 4.2 percent in the last financial year, an improvement from 3.4 percent in the previous financial year. This is the lowest it has been since 1999/2000 when the economy grew 3.0 percent. The recent slump in growth was due to the shut down of the economy – locally and internationally, during the Covid-19 pandemic.
"Expectations that the economy would return to pre-pandemic growth levels were thwarted by the war In Ukraine, which has slowed efforts to resuscitate supply chains still reeling from the covid lockdown...
As a result commodity prices – wheat and other grains, which Ukraine is major global supplier, jumped as did global oil prices, which rose to $120 a barrel in February with the start of the Ukraine war but has since fallen back to about $90 at the beginning of November.
As if that is not enough, western economies have been beating off inflation pressures, a hangover from the huge fiscal expansion prompted by the Covid-19 lockdown. In the US inflation peaked at 9.1 percent in June the highest in more than 40 years.
The US and Europe had various program to alleviate the suffering of their people during the pandemic, including in some cases, printing money to pay a monthly allowance. Those economies are now fighting to keep the ensuing inflation under control.
Other western economies have followed the US Federal Reserve, who have raised the key lending rate to four percent in November from below one percent at the beginning of 2022.
In Uganda this has had the knock effect of increasing the dollar rate. The dollar begun the year under sh3,600 almost touching sh4,000 in August, before falling back to about Sh3,750 ta the time of writing this.
By increasing the Federal Reserve rate, has seen a flight of capital back to the US to take advantage of the higher rate. As a result the US dollar has appreciated – attaining parity with the Euro for the first time in 20 years.
We have already felt the effects of the appreciation of the dollar with fuel pump prices crossing over the sh5,000 a liter mark before bursting through sh6,000 a liter mark all in August.
The jump in fuel prices has driven inflation up to 10.7 percent in October, the highest it has been since July 2012, before easing off to close the year at 10.2 percent.
On one hand the need to keep this imported inflation down while on the other keeping lending rates down to allow the economy recover, are almost mutually exclusive efforts.
"To head off the inflation Bank of Uganda has raised the Central Bank Rate (CBR) used to price bank loans to 10 percent from 6.5 percent at the beginning of the year. This has had the knock-on effect of the banks raising their lending rates....
In trying to restrict money in circulation -- the classical way to fight inflation, the central bank has with the same stroke, made borrowing for businesses more expensive putting the brakes on economic recovery.
While Uganda Revenue Authority (URA) reported record collections in the first quarter of the 2022/23 financial year, government has been doing its part not to fan the inflationary fire by cutting back on expenditure, which while it may have helped in slowing down price increases has depressed business activity.
The tax man announced that they had exceeded their target in the first three months of the 2022/23, collecting sh5.4 trillion against a target of sh5.1 trillion. These collections were 5.6 percent higher than the same time in the previous year.
In the first quarter government released sh8trilion less than the sh12trillion earmarked for the first quarter.
It is against this rather bleak background of rising inflation, reduced government spending and higher lending rates that the economy enters 2023.
While the Bank of Uganda thinks the economy will grow by between five and six percent in 2023 they warn that,
“The risks to the growth outlook are tilted to the downside emanating from the emergence of global recession and the associated increase in the global economic uncertainty, escalation of geopolitical conflicts and the negative spill overs from the reform and higher than projected inflation. Other downside risks are a further decline in consumer and business confidence and heightened exchange rate volatility,” the central bank said in its latest “State of the Economy Report” released in September....
Their reason for higher economic growth in 2023 than last year is the step up of private and public investment in the oil & gas sector.
In February 2022 the Financial Investment Decision (FID) was reached which paved the way for the development of the 1400km oil pipeline from western Uganda to the Tanzanian port of Tanga. It is expected that until 2025, when the first oil is seen, about $20b will be invested in developments in the sector.
These new investments may lift the shilling, dampening imported inflation, allowing the central bank to loosen its monetary policy and government to increase spending.
But clearly it is not business as usual, as borrowing rates are rising around the global and it is not unreasonable to expect they will adversely affect investment plans in the Oil & gas sector.
The US Federal reserve said in November after its latest rate hike that it was premature to expect them to slow down on their rate hikes. Several more rate hikes into 2023 would increase depreciation pressures of the shilling and stretch out the central bank’s fight to bring inflation under control further into the year.
The central bank writing in September projected that inflation would peak before Easter in 2023 but this was before inflation hit double digits in October. The new reality means they will have to rethink their projections.
"Favourable, weather may put a damper on inflationary pressures as food production may not be badly affected. But there has to be a proviso on this, if drought conditions continue in Kenya and the horn of Africa our farmers may be forced to fill the gap pushing prices up and fueling further inflation....
Kenya has suffered four consecutive years of below average rainfall affecting harvests and affecting about 18 million people in Kenya, Ethiopia and Somalia according to the World Food Programme (WFP). It is so bad that Kenya’s wildlife authority reported in November that hundreds of elephants, wild beats and zebras had fallen victim to the adverse weather pattern.
For the man on the street this means that further belt tightening will be necessary in the new year. Government’s continued holding back on spending may very well spell doom for some companies, while the BOU’s continued tightening of money supply will mean borrowing rates will continue to climb.
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