Economic challenges that President Museveni must address
Posted Tuesday, March 1 2016 at 02:00
Uganda has enormous potential to develop, particularly in the agricultural sector and the oil yet to be produced. But these prospects are undermined by several problems, causing failure of policies to stimulate growth. Mark Keith Muhumuza & Dorothy Nakaweesi look at the things that President Museveni’s government must address to set the economy on the right path.
As the curtain – at least for now – is drawn on the 2016 general elections, the economic environment still looks subdued. Often, as with elections, the business community takes a wait-and-see approach. With the election over and swearing ceremony still two months away, the economy needs a reboot as indicators are mixed. Commodity prices have been increasing at a much slower pace, food prices have not surged and the Shilling remains stable. That is on the positive side. On the negative, the economy is slowing, interest rates are rising and the government is still borrowing at high rate.
The election result, even as it is being disputed, came as no surprise to the bulk of investors and reports by several firms.
The Standard and Poor’s ratings agency and Standard Chartered had pointed to a win by President Yoweri Museveni, which, in part, explains the stability of the Uganda Shilling, in the first opening week after election results were announced. Unlike the last general election, the economy, this time, appears to be set for a soft landing.
In 2011, after the elections, the economy went into a tail-spin as inflation hit a record high of 30 per cent as a result of the excessive spending during the period. Already, the ruling party, National Resistance Movement (NRM) is being accused of having tapped state resources to finance its campaign. The observer from the EU Election Observation Mission noted that “the monetisation of this election is higher than that of 2011.” He also said it was disturbing to hear that state funds were used to pay voters of one candidate.
Reduced business confidence as FDIs drop
As the Opposition contests this election, the business community is not expected to increase spending. Already, there has been a fall in Foreign Direct Investment (FDI) in the country. According to the Bank of Uganda (BoU), the inflow of FDI fell by nearly Shs700b in part as a result of the general election and global economic developments.
In fact, Andrew Musangi, the board chairman of the Asset Management Firm, GenAfrica Uganda, describes the Ugandan situation as being like a “rabbit in the headlights” for investors. That description is translated as investors being “so frightened or surprised that you cannot move or think.”
The task ahead for President-elect, Museveni will be to bring back the business confidence and deliver on some of the campaign rhetoric promises. President Museveni’s campaign has been premised on the phrase “steady progress.” In other words, maintain the status-quo by improving economic conditions that would propel Uganda into a middle-income country by 2021. The title of the manifesto “Taking Uganda to Modernity through Job Creation and Inclusive Development,” could not be more befitting for the economic focus in the next five years.
The 313-page manifesto is filled with several promises. On the economy specifically, it praises the progress made in what the party terms as maintaining “macroeconomic stability and contained inflation within the single-digit bracket.”
“Building on these achievements, we will work towards increasing the size of the economy and expand our revenue base. To achieve this, we will continue removing bottlenecks that affect doing business for large investments and Micro, Small and Medium Enterprises (MSMEs). In addition, we will aggressively promote Uganda as an investment and tourist destination,” the manifesto reads.
High interest rates
The current high-interest rates, a Shilling higher than it was in the last three years and effects of the global economic conditions are some of the issues on the agenda in the short term.
After one of the most expensive elections, experts say the incoming President should tighten the noose with tougher policies to address the economic challenges that are holding back the economy.
Gideon Badagawa, the executive director Private Sector Foundation Uganda (PSFU)’s reflection for the incoming President is: “Pulling the country together and ensure a peaceful election aftermath to restore investor confidence in the economy is more paramount.”
Badagawa adds that thereafter, the new leader needs to contract the economy and reduce public spending on the welfare of government officials in favour of development expenditure.
“The President will need to take the hard decision to free up resources for public good investment and build efficiency in service delivery,” he noted.
“I think a lot can be done with a leaner but effective administration. We only need to be efficient in all we do as the government,” he added.
Badagawa further thinks the President should ensure that we have an effective civil service that will help the economy compete, cause innovations and create sustainable jobs for the population.
He adds: “The private sector would call on the President to increase support to public agencies that support business to compete and ensure they are caused to account for performance with a carrot-and-stick approach.”
Encourage low-interest rates
Aly-Khan Satchu, a Nairobi-based equity markets analyst with the focus on East Africa, thinks the most important issues are to encourage lower interest and get credit flowing again to boost the economy immediately.
Currently, commercial banks give loans at an interest rate of 27 per cent which has made accessing money very expensive.
In fact, some commercial banks are issuing personal loans at rates as high as 29.5 per cent.
“The lesson is to try and surge the economy immediately. I would also look real hard at the ability to encourage Foreign Direct Investment (FDI) in the post-election period,” Satchu shared.
The major driver of FDI in Uganda in the last few years has been the oil and gas sector. At the moment, there is a slowdown in activity in the sector as companies await production licences.
Additionally, a new round of licensing for oil exploration is yet to be completed. If both production and exploration licences are issued it could boost FDI in the country.
The inflow of the investments would create jobs and put local contractors back to work. Foreign investment also brings much-needed dollars into the economy, which could ease pressure on the Uganda Shilling.
That, however, is only part of the solution. A long-term approach is boosting Uganda’s exports and domestic production.
Stephen Kaboyo, the managing partner at Alpha Capital emphasises the need for promotion of value addition and boosting local production. In fact, value addition is mentioned several times in the NRM manifesto. Agro-processing and minerals beneficiation are top on the plans by NRM to boost value addition.
“In order to improve agricultural mechanisation, value addition, and household incomes, we provided to various districts the following: mobile milking machines, milk coolers, maize mills, honey equipment, juice extractors, coffee haulers,” the manifesto reads.
The task, however, is much greater than it is on paper as value addition has been part of the President’s speeches in the last five years.
Uganda’s budget has been largely expansionary as the country spends big on infrastructure. It is expected to expand further once talks on the Standard Gauge Railway and oil refinery are actualised.
Dr Fred Muhumuza, an economist currently working with the Financial Deepening Programming insists that there should be a slowdown in the expansionary expenditure by the government.
“There is too much spending that is not adding value to the economy but instead, it is putting pressure on the government to borrow yet it is not raising any benefit,” Muhumuza noted.
Tighten budget allocation
Muhumuza said government needs to tighten the Budget allocation notwithstanding any deliverables.
“This can be done by scaling back on some of the projects like road projects whose construction doesn’t have to start immediately,” he said.
This is contrary to the message sent out by the president-elect. Infrastructure has been the core of President Museveni’s campaign message. His insistence has been that it is infrastructure that will boost the productivity of the economy. The government, once sworn, will continue this expenditure trajectory.
However, for such investments to deliver the much-needed production, the cost is expected to be much lower. For instance, power tariffs remain considerably high. It is expected that once the Isimba and Karuma Dams are completed, this would bring down power tariffs. For the business community, that is a wait of up to three years.
For the next government, making promises was the easy part, delivering on them poses much greater realities from within and without.
BOU maintains CBR
Bank of Uganda in February, maintained the Central Bank Rate at 17 per cent to boost economic activity.
The CBR—rate at which commercial banks borrow from the Central Bank— has been maintained with the hope of encouraging commercial banks to provide low interest rate loans to the public.
This, according to the Central Bank Governor Tumusiime Mutebile, will in turn, support increased investment by the private sector in the economy.