Wednesday March 1 2017

Be optimistic but prepare for worst economy in 2017

A man walks past forex b

A man walks past forex bureau rate boards. PHOTO BY DOMINIC BUKENYA 

By Francis Kamulegeya

Last year, 2016 was a very difficult year for businesses in Uganda.
The economy faced numerous challenges. Some of these challenges included the slowdown in economic activity during the 2016 general elections, the high interest rates that negatively affected private sector credit growth, spillover effects from the conflict in South Sudan, one of Uganda’s most important export markets, and so on.
Because of these numerous challenges, our export earning, foreign direct investment inflows and remittances to Uganda all slowed down.
These developments, together with a slowdown in the execution of public investment projects and a weaker than expected private sector demand, all contributed to the slowdown in the growth of the economy.

Growth revised
As a result of this slowdown, the Government has revised its growth of the economy downwards, and is now projecting the economy to grow by 5 per cent this year.
This growth will be driven mainly by accelerated investment in public infrastructure projects which are expected to boost manufacturing, as well as services, notably tourism.
The projected growth will also be supported by the anticipated recovery in private sector credit which should spur consumer spending and effective demand.
New investments in the oil and gas sector, an increase in productivity of both the agriculture and industry sectors, as well as the expected recovery in the global and regional economies should also help to drive economic growth this year.

Subdued demand
Despite the optimism, the economy still faces a number of risks.
For example, consumer demand continues to be subdued even as we enter into the second month of this New Year. This is mainly due to the continued lag effect of the 2016 general elections, and the high borrowing costs which are affecting consumer spending.
The expected slowdown in our major trading partners’ economies especially in the EU and China, the current uncertainty surrounding post-Brexit, and the ongoing conflict in South Sudan, which is a major export market, will all affect growth of the economy.

More risks
Other internal risks that might affect growth include delays in the implementation of public infrastructure projects such as the Karuma and Isimba hydro power projects, the standard gauge railway, and the various key infrastructure projects critical for the commencement of oil production.
Continued delays in the implementation of these key projects will result in a slowdown in fixed capital formation during this financial year, thereby affecting growth.
There is also a risk that these public infrastructure investments may not deliver the expected outcomes of an increased activity in the manufacturing and construction sectors due to their high import content and low local content.
Finally, Uganda’s economy is heavily dependent on agriculture with more than 60 per cent of our export revenue coming from this sector. This makes the country very vulnerable to any downturn in international commodity prices and to adverse weather conditions.
This means that any adverse weather conditions this year will not only affect our agriculture production and food supply but will also significantly weaken our export revenues.
All these risks mean that 2017 may be as challenging as last year.
The people who are in charge of our economy are very optimistic that the future is bright, and there is definitely light at the end of the tunnel. I believe them.
We should, therefore, be equally optimistic and hope for the best while at the same time prepare ourselves for the worst, as 2017 might be another long journey in a dark tunnel towards the bright future and light at the end of the tunnel.

A foreign exchange chart showing equivalence of the Uganda Shilling to other world currencies. The Shilling has been slowly depreciating throughout the past year, a sign of a volatile economy.

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