2017/18 Budget: Are we at policy change point?
The 2017/18 Budget is here. In his opinion, Patrick Mweheire, talks about issues that need to be addressed in order to achieve robust growth.
With the 2017/18 National Budget set to be delivered tomorrow, many Ugandans are apprehensive about the state of the economy and curious about what policy levers, government, will pull to uplift the real economy and get the country growing again.
While it is natural to focus on the highlights of our respective sectors, the Budget sets the tone. It is all encompassing as our government pays a massive role in affecting the business environment we operate in.
Between 1990 and 2013, Uganda’s Gross Domestic Product (GDP) grew at a compounded annual growth rate of 8.0 per cent, since then we have averaged 4.5 per cent, 1.5 per cent higher than our stunning annual population growth rate of 3.0 per cent.
Real incomes are declining and wallets are shrinking worsened by a high dependency ratio. While many positive gains have been made among several fronts, we need to address our recent reduced growth rates.
What could have led to this? The truth is that it is a combination of self-enforcing factors that will require robust and an astute set of policies to address them.
Investment
On the investment side, government has prioritised the right sectors to spend on. We need cheaper electricity and passable road networks for a largely agrarian economy to industrialise, become more productive and reduce poverty.
However, our rough estimates indicate that less than 10 per cent of the $2.5 billion spent on two existing hydro power plants under construction in Uganda has been localised.
I appreciate that these are long term projects that will generate returns over an extended period of time but you cannot isolate the strain they put on the government coffers with no real and immediate trickle-down effect.
We need to connect the dots a layer down and ensure the investment spend has some domestic impact. I recognise Uganda does not have a world class turbine manufacturing facility locally but we do have world class cement manufacturers, we have world class steel products, and so on.
In light of our growth aspirations, 10 per cent local content is unacceptable and we should aim for a number closer to 30 per cent. Imagine the positive impact an additional local spend of $1 billion would have on our local business eco-system.
We are about to embark on a huge spending spree in the oil and gas sector, an excess of $15 billion will be invested in developing the sector over the next five years. We will need thoughtful investment and guidance from government to ensure that a broad section of Uganda’s local corporates and SME’s benefit from this significant spend. We estimate that Uganda’s GDP will double between 2020 and 2025 due to the impact of the sector. We do, however, need this growth to be more inclusive and it will not happen without appropriate planning between the public and private sector.
The challenges in the agriculture sector, which employs 70 per cent of Ugandans, need to be addressed. Certain aspects of the sector have been managed without proper end-to-end coordination.
Close to 50 per cent of all the arable land in the entire East Africa region is in Uganda and we are yet to harness this opportunity. We approach each problem in silos and seem to solve one issue at the expense of another. We need to improve credit access to the sector at a micro level, boost productivity by utilising more mechanised methods of farming and reintroduce the cooperatives that allowed for scale and urgently address the land tenure system which has allowed for massive land fragmentation.
All these interventions will go a long way in boosting productivity and allowing us to harness this natural competitive advantage. We need to unlock financing and make affordable private sector credit accessible. In 2016, we saw private sector credit growth grind down to less than 6% year-on-year growth, half of the double digit growth that we had gotten accustomed too in the recent past. We must urgently address the structural challenges that are keeping the cost of credit relatively high.
The government needs to strike the right balance between the quantum and cost of domestic borrowing in order to address the ‘crowding effects’ concerns. The one-year Treasury bill was as high as 19 per cent a year ago setting the tone for high borrowing rates across the country.
We need to deepen the financial markets by liberalising the pension sector, up skilling financial markets players and mobilising more domestic savings. With savings at less than 20 per cent of GDP, Uganda lags the continent in savings mobilisation and therefore over relies on short-term debt financing even when it is not appropriate. The government must also eliminate domestic arrears which have now exceeded Shs2.7 trillion or 10 per cent of the Budget, these arrears create a real strain on businesses and have a knock-on credit quality effect on private sector loans. A medium term government financing plan that takes all these issues into account and balances affordability and growth is urgently required.
Lastly, we must address bureaucracy and allow the private sector to function a lot more effectively. Unlocking our growth potential will need “all hands on deck” and excessive red tape undermines the bond between the government and business and ultimately compromises private sector growth. To that end, we remain optimistic that with the upcoming budget, we shall see more interventions that streamline the regulatory framework, increase efficiencies and reduce our cost of doing business. Uganda ranked 115th in the World Bank ease of doing business 2017 survey; I know that we can do a lot better.
We have a great silver lining in our nascent oil and gas sector that is a much needed catalyst for growth but without connecting the dots, we are likely to miss another great opportunity to truly achieve inclusive and sustainable growth.
Mr Patrick Mweheire is the chief executive officer Stanbic Bank Uganda
