Wednesday January 10 2018

Businesspeople brace for tough economic conditions in 2018

Traders attend to customers in Kikuubo, a

Traders attend to customers in Kikuubo, a business centre in Kampala. Many customers are struggling with low purchasing power, meaning some traders are taking longer than expected to sell their merchandise. PHOTO BY JONATHAN ADENGO 

By Christine Kasemiire

Now that the festive season has ended, people are back to looking for money. But business people predict tougher times ahead of this year.
For Ms Aziza Watila, a dealer in shoes at DTL building in downtown Kampala, after Members of Parliament (MP) amended Article 102, she lost hope and gave up on the system.
She claims that her MP did not consult them on what to vote on the Bill and merely made a decision for them. This, she believes is a beginning of an end for traders who thought their voices were being listened to and their needs catered for.
“Things are going to become even harder because government makes its own decisions and does not care about us. We are distressed because last year we thought taxes would be cut but instead they keep increasing,” she decries.

Some traders believe that unless Uganda sees a change in government, it will be difficult for optimism to reign upon the pearl of Africa.
Mr Hakim Kalumba who sells electronics in Kizito Towers, believes 2018 is going to be a replica of 2017 or even worse especially for traders. The middle-aged man says the government earns most from taxing traders and since they have no alternative source of revenue, the taxman will continue ‘exploiting’ them.
As an importer, he says 2015 was much better but by 2017, taxes had increased by 40 per cent. There is no government initiative that has highlighted their challenges and proposed solutions according to Mr Kalumba. This means 2018 will be more challenging than last year.

“Even with talks of oil, we still have no hope in the Ugandan economy because it will only benefit the few people in government and not the lower people. Growing our businesses will be hard because much as loans are accessible if you have the requirements, you could take on a huge risk since business is not as profitable as before,” he ponders.
Dancing to the same rhythm, street vendor Resty Kulabako trusts that conditions are going to worsen for them. The street stationed woman says even after repercussions that befell Kampala City Council Authority (KCCA) last year, the force from them is still overwhelming, bringing her to the conclusion that in 2018, even more action against street vendors will unfold. To make matters worse, prices keep increasing, slashing her profits further.

The chairman Kampala Capital City Traders Association (Kacita), Mr Everest Kayondo, says the future of the country depends on government’s behaviour.
He says if government borrowing moves to commercial banks in Uganda, the economy will be better as public debt will not increase contrary to borrowing from abroad where interest rates will be higher in consideration of the foreign currency rates.

If it pays debtors, the economy will be better since most of government debt is with the private sector, a situation which increases disposable income in circulation which impacts largely on trade.
If petitions of the Bills put forth before Parliament are passed quickly, the business environment will be better than it is. Some of these Bill will address landlord and tenant relations especially those charged in foreign currency who cry over unnecessary hikes in rent prices and the one prohibiting foreign investors venturing into retail business.
“Once these bills are passed by Parliament, traders will have a better business environment which will mean a boom in the economy,” he says.

Economist’s perspective
In an interview with Daily Monitor, economist Fred Muhumuza only reiterates the traders’ concerns.
He predicts that the business environment in Uganda is going to tighten as 2018 moves forward.
Citing low disposable income in circulation, he believes an impact of low demand is foreseeable. He says people are poorer, a situation which reduces their purchasing power. This means items in stores will take longer to be sold, reducing business turnover. As business turnover is reduced, the traders’ ability to pay taxes equally weakens.
Basing on the low demand for fast-moving goods, he is inclined to believe that inflation will remain in single digit (less than 10).
However, agriculture he says will boom in 2018, projecting a good harvest by half year as demand is equally overwhelming, citing entrance of regional markets such as Kenya, prompting a surge in prices especially after harvest season.
The economist expects the Shilling to continue struggling at Shs3,600 and utmost Shs3,700 since the country’s foreign exchange in flows are minimal to the amount of activity in importing.

Banks will have a hard time
“Banks this year will have to shift to the International Financial Reporting Standards (IFRS) 9 which requires banks to be more frugal in lending especially to high-risk clients which will cut down on credit given out,” he reveals.
Mr Muhumuza says banks will have to be cagey on giving loans which will further reduce access to credit.
He says banks will have to navigate a tough terrain since the cost of doing business will increase amidst low earnings in interest income since borrowing will be less.

Contrary to this is Centenary Bank managing director Fabian Kasi’s prediction that much as the IFRS9 will call for more stringent and rigorous analysis of loan applications, the private sector credit uptake will grow.
He says because of the stability in inflation and lowered interest rates, loan uptake will be better than 2017, but slower than expected.
Ms Safina Wabuna, the executive director Post Bank Uganda, says adequate training for the new standards has been done and controls will have to be strengthened to curtail credit loss and loan impairment.

Mr Daniel Birungi, the executive director of Uganda Manufacturers’ Association, is optimistic that 2018 will bear positive reforms for the sector.
Seeking to engage government to lower the electricity tariff to $5 cents per kilowatt hour (KWh), he believes it will be an initiative to empower manufacturers to produce more this year.

He says with good will from government, some discussions have culminated into good ideas that have been considered for implementation.
Among the discussions slated for this year is lobbying for passing the Local Content law, exporting insurance and guaranteeing a scheme in the Great Lakes region that will curtail losses made by trading with neighbours.
In addition, recapitalisation of Uganda Development Bank is expected to reduce the cost of capital and increasing duration of credit for manufacturers, coupled with developing an alternative route for Namanve Industrial Park which should reduce congestion for goods in transit.
With these in mind, Mr Birungi foresees a good year, set apart from last year.

How Uganda’s economy fared in 2017

Most of the sectors decried 2017 with most people saying it was bad and challenging. The banking sector saw the collapse of longtime bank champion Crane bank which was soon after taken over by dfcu bank. The bank had a surge in profits from Shs23.3m as at June 2016 to Shs114m as at June 2017. The surge in profits was explained by the proliferation in customer deposits including those from Crane bank.
The Central Bank Rate was high all through 2017 ranging between 12 and 10 per cent and only reduced towards the end of the year to 9.5 per cent in November.

Traders had it rough with the banning of second hand clothes while street vendors were off the streets of Kampala. The fear permeated the vendors so much, leading to the death of Oliver Basemera, as she fled from the Kampala Capital City Authority law enforcement officers.
Nakumatt Supermarket, one of the biggest supermarket chain closed after failing to pay its suppliers and rent. The closure led to loss of many jobs.

Taxation also brought tears to the traders who urged government to cut these costs. The Top 100 Mid-sized Companies survey 2017 reported that 74 per cent were drained by taxes imposed on them which leads to increased prices. Mr Charles Ocici, the executive director Enterprise Uganda, asked Uganda Revenue Authority to keep guard at customs for smuggled in cheap Chinese products that compete with taxed Ugandan products and stagnate traders stock since people go in for the cheap products.

Manufacturers and investors
All Chinese retail traders that entered the country purporting to be investors were expelled. A committee in Parliament resolved to push out all Chinese to only take part in large scale investments and leave wholesale and retail trade to Ugandans.
To protect Ugandan manufacturers, government also implemented the local content law that sought to have Ugandan products ahead of any other country in procurement of raw materials and service provision. The local content law named ‘Buy Uganda Build Uganda’ was later challenged due to unclear provisions in the law. The definition of a Ugandan company was challenged on grounds of it meant the company should be owned by a Ugandan or a country founded in Uganda.

As we await its passing, the executive director Private Sector Foundation Uganda Mr Gideon Badagawa revealed that in the Bill, accountants of companies will be held responsible if they give away a contract to a foreign company in the presence of capable Ugandan companies.

What is IFRS 9?
The international financial reporting standard set by the International Accounting Standards Board (IASB). It was effected on January 1, 2018 replacing IAS 39. According to PricewaterhouseCoopers, the replacement was due to criticism that IAS 39 was complex and different from how entities handle their businesses and risks. The standards apply to create common grounds of financial reporting in countries and institutions.
IFRS 9 requires an entity to classify and measure financial assets and liabilities and hedge accounting.
IFRS 9 introduces an expected credit loss impairment model that differs significantly from the current incurred loss model under IAS 39 and is expected to result in the earlier recognition of credit losses going forward.

The estimate will also consider the time value of money. The stringent evaluation of these requirements will require loan applicants to have their books fully audited which is not the case for many in the private sector in Uganda.
According to Mr Fred Muhumuza, the new standards will make banks stricter on credit lent out to people, reducing the banks’ interest income.

Developments in economy

Price stability

In terms of price stability, the executive director of research Bank of Uganda, Dr Adam Dr Mugume, says inflation in 2018 is projected to stabilise at around 5 per cent given the outlook for good crop harvest and stable exchange rate.
“Since inflation is well anchored around the medium-term target and economic growth though recovering but is still below the potential, there would be no justification for increase in interest rates, except if fiscal policy became overly expansionary resulting in heavy domestic borrowing,” he said.

Shilling outlook
Experts predict that in 2018, the Uganda Shilling is likely to remain vulnerable in the short term on account of domestic macro-economic imbalances.
“As the global strength of the dollar continues to put frontier market currencies at the risk of weakening,” Mr Stephen Kaboyo, a partner at Alpha Capital, said.
He thinks there will be a transmission of US high interest rates to the domestic fixed income markets as the US market becomes attractive for international investors.
He said: “A weaker Shilling by implication raises the cost of living considering the fact that Uganda is a net importer. However, a weaker Shilling plays in favour of exports by boosting export revenues.”

Low demand
A number of economic factors inhibited economic expansion for much of 2017 and these were; weak consumer demand, weak currency, inflationary pressures driven by high food prices on account of adverse weather conditions, weak exports coupled by elevated geopolitical risks.
Dr Fred Muhumuza, an economist and Makerere University lecturer, says the low demand in the economy and lack of success in big government projects will moderate imports and help the shilling to depreciate less