Year of cautious optimism amidst gloomy outlook

. Coming off a year where the economy was plagued by high interest rates on loans, high inflation and a depreciating shilling, economists predict that 2012 might be another year overshadowed by macroeconomic uncertainty.

The stormy conditions on the local and international economic scene will call for courage from economic forecasters that choose to offer a positive outlook for 2012. While delivering a speech on the state of the economy late last year, the country’s Finance Minister, Maria Kiwanuka declared that this year would be tougher than last year. “Let us be realistic but not lose perspective. The coming year will not be the easiest in Uganda’s modern history, but we will get through it,” said Ms Kiwanuka on November 1, 2011.

More economists and analysts are anticipating a challenging economic year. One of the most influential and authoritative voices on the country’s economy, Governor Emmanuel Tumusiime Mutebile has acknowledged the hardships but he has at least offered some cautious optimism that signals a return to recovery and stability in the course of 2012.

Delivering this year’s inaugural Monetary Policy Statement, the Central Bank governor said inflation is expected to decline gradually in 2012. Further projection suggests that it is expected to fall back into the single digit bracket in the last quarter of the year. And it might help to treat the forecasts for what they are.

Projections aside, the performance of the country’s economy will hinge on a number of factors, some of which are local while others are exogenous. Following are some of the key local indicators and sectors that are likely to affect the country’s general economic performance.

GDP outlook
The Executive Director Research at Bank of Uganda, Dr. Adam Mugume says that economic growth is expected to slow to about five per cent in 2011/12 as demand restrain is anticipated to reduce real growth in the output of the industrial and services sectors. On quarterly basis it is being anticipated that Uganda’s real GDP growth rate is expected to be in the bracket of one per cent to three per cent.

Inflation out
Giving a recap on Uganda’s macroeconomic development Dr Mugume says annual headline inflation accelerated rapidly from five per cent in January 2011 to 30.5 per cent in October 2011 before declining to 29.0 percent in November 2011.

Due to the tight monetary policy in place, inflation in December 2011 reduced to 27 from 29 per cent in November while the core inflation rate stood at 29 from 31 per cent recorded in November. Dr Mugume says this high inflation is likely to continue exerting pressure on household disposable income and will remain a major challenge to the macroeconomic stability objective.

“Consistent with the domestic and global developments and the elevated upside risks to inflation, BoU has implemented a tight monetary policy stance, Dr Mugume said. “If things continue the way they are the moment, the central bank projects inflation could settle around 12 per cent before finally hitting single digits in the last quarter of 2012.”

However, Senior Fellow Research at Economic Policy Research Centre, Dr Lawrence Bategeka expresses doubt that inflation levels will fall to single digit in the last quarter of 2012. “Production of agricultural produce is still low amidst increased demand for food, this coupled with the exogenous factors while continue to create high inflationary pressure in Uganda economy. Unless a miracle happens, we shall not have single digit inflation in 2012,” he forecasted.

Remittances
Governor Tumusiime Mutebile projects that remittance to Uganda are expected to slow down to $760 million down from the $770 million reached last year due to Eurozone crisis and the difficult condition in US where most of the remittances that come to Uganda come from.
The World Bank in its newly updated World Bank brief on global migration and remittances released late last year in Geneva said that remittance flows to developing countries are expected to total $351 billion in 2011, and worldwide remittances, including those to high-income countries, will reach $483 billion in 2011.
The World Bank points out while the economic slowdown is dampening employment prospects for migrant workers in some high-income countries, global remittances, nevertheless, are expected to stay on a growth path and, by 2014, are forecast to reach $593 billion.

Outlook on interest rates
The central bank says lending rates are expected to continue rising because monetary policy will remain tight for a couple of months in 2012 if not for most of 2012 depending on how fast inflation will decelerate.
Dr Bategeka’s take on interest rate trend is that it will continue to stay high because of the Central Bank Rate which still in at 23 per cent, while the Bank Rate continues to be at 28 per cent and the Rediscount Rate will also stay at 28 per cent in the first quarter of 2012.

Taxation forecast
Half way the financial year, Uganda Revenue Authority is not quite there yet. But with about five months to the end of the financial year, the tax collectors are upbeat to hit the revenue targets of over 6.129 trillion shillings. This will be achieved through implementation of taxpayer expansion programmes with emphasis on rental income tax, stamp duty and motor vehicle transfers coupled with the implementation of the national audit plan with an increase in audit coverage (825- 1500) to monitor and enforce payments of arrears among others innovations.

Manufacturing outlook
According to Uganda Manufacturers policy experts, the performance contribution of Uganda’s manufacturing sector to the economy in 2012 cannot be properly projected at the moment but will be strongly based on the stability in supply or availability of fairly priced energy that is central to the production and supply of goods and services to the consumers in Uganda.

However, following the recent increase in energy tariffs it is quite obvious that the manufacturing sector’s contribution to the economy in 2012 will be limited. Still due to the high cost of credit from banks, the manufacturing sector will be negatively affected as few industries are likely to venture into product diversification and or increased production for export markets among others. Manufacturers would like to see massive investments in energy projects by the government and the private sector in order to attain reliable and affordable energy.

Exports outlook
Export projections are a bit difficult at this point given that statistics for 2011 are not yet to be collated. Basing on the figures for 2010 of $1.6bn, the Uganda Export Promotion board said 2012 export figures could reach $1.85 - 1.96. Worth noting is that these figures can be impacted in exchange rate fluctuations, interest rates and fuel prices.