Issues that will make or break economy in 2015

Kampala. High public investment in infrastructure, pick up in private sector credit growth, increased Foreign Direct Investment and recovery in agricultural production are the factors that will help Uganda see a bright economy in 2015 with a higher growth rate of 5.5 per cent from 4.5 per cent in the previous year.
The Central Bank believes with these factors in place, the outlook for Uganda’s economic growth is 5.5 per cent, which is not bad for the country given the prevailing difficult environment mainly in the global environment and some risks in the domestic economy.
“Growth in 2015 will be supported by public investment in infrastructure, private domestic consumption and investment demand (recovery in private sector credit growth), increased FDI; and rebound in agricultural production,” said executive director of research Bank of Uganda, Dr Adam Mugume, in an interview with Prosper last week.
Government spending in various infrastructure projects is still high calculated in trillions of shillings, while growth in private sector credit is now at 15.3 per cent on annual basis.
The recent rebased GDP by Uganda Bureau of Statistics indicates the share of agriculture contribution to the GDP was 25 per cent in the financial year 2013/14.
In specific, Dr Mugume says Foreign Direct Investment (FDI) has remained buoyant amounting to $1.4 billion (Shs4 trillion) in 2014/15 compared with $1.2 billion (Shs3.4 trillion) in 2013/14. It is expected to rise further to $1.7 billion (Shs4.8 trillion) in 2015/16.
In the first 10 months of 2014, FDI is estimated at about $977 million (Shs2.8 trillion) compared with about $725 million (Shs2.1 trillion) in the same period of 2013.
The high trend in FDI inflows into Uganda continues to support the GDP growth rate because they are a significant source of capital investment in the country.

Risks
However, Dr Mugume says there are substantial risks to growth emanating from both the domestic and external scene.
“Increased investment in infrastructure may require substantial domestic financing, which may further constrain private sector credit. In addition, exports might continue to underperform while imports could grow faster than exports, which means that net exports will provide a negative contribution to GDP growth,” he said.
Dr Mugume added: “Moreover, the worsening economic conditions abroad could have the strongest adverse effects on exports and gross fixed capital formation hence depressing economic growth. Overall, in the medium to longer-term horizon, on account of the gradual revival in global demand, the domestic economy is projected to post a stronger growth.”
Ms Razia Khan, the head of Africa Macro Standard Chartered Bank, said: “We expect a positive GDP outlook over the coming year, supported by a steep rise in public investment in the run-up to 2016, when elections are scheduled to be held.”
Ms Khan said hydropower projects within Uganda – notably the Karuma and Isimba projects – will increase power capacity, and Uganda will also benefit from a number of East African regional projects, such as the building of a standard-gauge railway.

Spending projected to increase
Ms Khan said spending is likely to increase ahead of the 2016 elections, but Uganda will need to make faster progress on revenue mobilisation.
Ms Khan further stated that in response to shortfalls in direct budget support from donors, Uganda had previously delayed the implementation of capital projects (in FY14).
“Financial Year 2015 (ends June 2015); many of these projects will be accelerated. However, weak domestic revenue mobilisation ratios are still an issue,” she said.
Uganda’s average inflation for 2014 closed at 4.3 per cent down from 5.5 per cent it closed in 2013.
Ms Khan said: “Despite current low rates of headline inflation, we expect Bank of Uganda to keep its Central Bank Rate on hold at 11 per cent until quarter three of 2015. Recent pressure on the Uganda Shilling has made the authorities more wary of any easing.”
However, Ms Khan said upside inflation risks includes the likelihood that domestic demand is stronger than anticipated.
“We expect government spending plans to be a key influence on BoU monetary policy decisions going forward,” Ms Khan said.

Inflation forecast to rise
Ms Khan said: “We expect a gradual rise in headline inflation, from less than 2 per cent in October 2014 to 8 per cent by September 2015, largely as a result of the less favourable base. We forecast two 50 basis point hikes in the CBR to 11.5 per cent in September and 12 per cent in November 2015.”
“The CBR is likely to be raised to 13 per cent in quarter one of 2016, around the time of Ugandan elections. Should the Uganda Shilling come under even more pressure ahead of this, then a faster pace of tightening is likely,” she added.

Global oil prices fall further
On January 7, 2015, the global oil prices dropped below $50 per barrel, favouring the net oil importers like Uganda, Ms Khan explained that weaker oil prices will have a mixed impact on Uganda, pointing out that in the very near term, Uganda should benefit from a lower import bill.
“The pass-through into inflation of a weaker Uganda shilling will also be muted as a result of weaker oil prices. However, with Uganda developing its own oil reserves (estimated reserves have been upgraded to 6.5 billion barrels), the country is also likely to experience the negative effects of a weaker oil price environment,” she said.
The executive director of Private Sector Foundation Uganda, Mr Gideon Badagawa, told Prosper magazine that the country is headed to better times because inflation levels are low and there has been a pick- up in private sector activities.
“The means that there are investments going in most sectors of the economy compared to a year ago. Infrastructure is improving feeder roads linking the rural areas where agricultural commodities are produced to urban markets is becoming better in some areas,” he said.

Increase agriculture exports

Hinting on exports and imports; Mr Badagawa said Uganda should increase the volume of agricultural exports to save the country from outflow of foreign exchange as a result of higher volumes of imports than exports.
The global economy is still experiencing low growth; this has also been worsened by the fall in oil prices in the last two months.
The International Monetary Fund in October last year lowered its global economic growth forecast to 3.8 per cent from 4 per cent it had projected in July 2014 citing weakness in the large Euro-zone economies and major emerging market economies.
On December 4, 2014, the European Central Bank (ECB) cut its 2014/ 2015 growth forecast for the euro-zone to 0.8 per cent from the 0.9 per cent it was predicting three months ago.
The new ECB economic forecast for Euro-zone shows that the downgrades were sharper for 2015 and 2016. Growth forecast next year for Euro-zone is expected to be 1 per cent, down from the earlier forecast of 1.6 per cent, while the 2016 forecast was cut to 1.5 per cent from 1.9 per cent.
By Martin Luther Oketch

Other factors
Job creation. Senior manager at KPMG, Mr Fred Muhumza, says few jobs will be created in 2015.
Price stability. Muhumza says Uganda is likely to continue using interest rates as as end of inflation control rather than a stimulus of private investment in 2015.
Welfare improvements. Livelihoods, drought and erosion of real incomes through inflation, will see many households retreat to consolidate whatever little they have carried from 2014.

Numbers to watch

5.5%
Projected growth rate in Uganda’s economy in 2015.

8%
Proposed inflation rate in Uganda by September 2015.

12%
Forecast percentage rise in the Central Bank Rate in November 2015.

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