Election lowers FDI inflow into Uganda by Shs687b
Posted Tuesday, February 23 2016 at 02:00
Uganda’s economy was plunged in anxiety in the week leading to the general election. The Shilling was not spared either as it came under pressure mid-week when demand picked up ahead of elections on account of short covering by most market players amidst very low inflow, writes Martin Luther Oketch.
Slow market activity in the run up to elections is partly to blame for low foreign inflow into the country.
Foreign Direct Investment (FDI) inflow into Uganda in 2015 declined by $200 million (about Shs687 billion) as a result of difficult global environment which hit the world in 2015 inform of economic slowdown and the just concluded general elections.
The FDI, has for nearly four decades, become an important avenue for economic growth and development in developing countries given the potential role they can play in accelerating growth and economic transformation. Developing countries, including Uganda, are strongly interested in attracting FDIs.
The executive director research Bank of Uganda, Dr Adam Mugume last week said in the previous year (2014), FDI inflow into Uganda was estimated at $1.2 billion (about Shs4.122 trillion).
“In 2015, FDI to Uganda is estimated to have dropped to $1 billion (about Shs3.435 trillion) due to weakness in the global economy in 2015,” he said.
The drop in FDIs
Dr Mugume said in the first 10 months of 2015, foreign direct inflows were estimated at about $830 million (about Shs285 billion), lower than the $1 billion (Shs3.4 trillion) received in the same period of 2014.
The economy attracts more FDI from the telecommunication and extractive industries because they are considered profitable.
Most of these foreign inflows, according to Dr Mugume, are from Europe, India, South Africa and Kenya.
In its sixth edition of the Uganda Economic Update series of September last year, the World Bank said since the national elections (including presidential and parliamentary) of 2011, the Ugandan economy has recovered to a significant extent, but has not been able to come close to realising the high levels of growth that it had recorded over recent decades.
In the FY 2014/15, the Ugandan economy grew at the rate of 5 per cent per annum, with this growth driven by acceleration in public and private investments in various sectors of the economy.
In the economic update, the World Bank explained that Uganda’s economic outlook continues to be characterised by a high level of uncertainty in the context of the elections in 2016.
Global oil price drop hurts FDIs
Senior economist at the World Bank Country Office Rachael Sebudde Kagawa said bulk of the FDI inflow in Uganda in the recent years has been oil related and the slowdown in the global prices has had an impact on FDI inflows into the country.
Sebudde said: “The election uncertainties have seen most investors post ponding their investment in the country while those who are already here take more dividends out.
The World Bank said in its 2016 Global Economic Prospect (GEP) report released on January 6 that global economy grew by 2.4 per cent in 2015.
“Global economic growth was less than expected in 2015, when falling commodity prices, flagging trade and capital flows, and episodes of financial volatility sapped economic activity,” the World Bank said.
Analysis by the World Bank in the GEP, shows that a further deceleration of activity in key emerging and developing economies overshadowed a modest recovery in major high-income countries in 2015. This deceleration was accompanied by further declines in commodity prices, subdued global trade, bouts of financial market volatility, and weakening capital flows.
The World Bank GEP reveals that in developing countries, growth in 2015 is estimated at a post-crisis low of 4.3 per cent, down from 4.9 per cent in 2014 and 0.4 percentage point lower than projected in June.
“In a development unprecedented since the 1980s, most of the largest emerging economies in each region have been slowing simultaneously for three consecutive years. The economic rebalancing in China is continuing and accompanied by slowing growth. Brazil and Russia have been going through severe adjustments in the face of external and domestic challenges. On average, activity in emerging and developing commodity exporters stagnated in 2015, as they continued to be hard hit by declining commodity prices,” the World Bank explained.
The growth in the global economy continues to remain weak.
“The bigger picture why there is slowdown in FDI in Uganda is the global economic slowdown which has weakened capital flows from developed emerging market economies to developing countries. FDI from China has significantly reduced because of the Chinese economic slowdown; the purchasing power in China is currently weak compared to some years ago,” Sebudde said.
However, Sebudde clarified that the slowdown does not mean the FDI have stopped coming into Uganda.
FDI have become a significant feature in the social economic development of Uganda’s economy.
The International Monetary Fund (IMF) explains that the significance for developing countries is that FDI has become an important source of private external finance for developing countries pointing out that it is different from other major types of external private capital flows in that it is motivated largely by the investors’ long-term prospects for making profits in production activities that they directly control.
The IMF states that while FDI represents investment in production facilities, its significance for developing countries is much greater. Not only can FDI add to investible resources and capital formation, but, perhaps more important, it is also a means of transferring production technology, skills, innovative capacity, organisational and managerial practices between locations, as well as of accessing international marketing networks.
“The first to benefit are enterprises that are part of transnational systems (consisting of parent firms and affiliates) or that are directly linked to such systems through non-equity arrangements, but these assets can also be transferred to domestic firms and the wider economies of host countries if the environment is conducive.” says the IMF.
The IMF adds: “The greater the supply and distribution links between foreign affiliates and domestic firms, and the stronger the capabilities of domestic firms to capture spillovers (that is, indirect effects) from the presence of and competition from foreign firms, the more likely it is that the attributes of FDI that enhance productivity and competitiveness will spread.”
Dollar supply drops. While FDI inflow is falling, the situation is being worsened by the increase in remittances out of the country by foreign workers in Uganda from $703m (Shs23.7 billion) in 2014 to $850m (Shs28.8 billion) in 2015. By remitting more savings and capital than before, they are reducing the dollar supply in the local foreign exchange market and raising its exchange rate as more Shillings chase fewer dollars.