Uganda battling tough times as economy slows down

At the centre of Uganda’s post-election budget is a confession that it’s time to turn the music off and face the reality that the significant macroeconomic gains of the past years — particularly what has been touted as “steady progress” and “economic recovery”— are under strain from the current tough economic times.
According to the latest International Monitory Fund (IMF) outlook, economic activity in Uganda and in sub-Saharan Africa as a whole, in 2015, fell to its lowest levels in 15 years, and as a result of “multiple shocks”, regional growth is expected to slow down further this year.

The decline is the latest indication of the belt-tightening state of affairs awaiting the Finance minister prepares to present the Budget to the nation early next month. The 2016/17 Budget comes on the heels of what Mr Keith Muhakanizi, the secretary to Treasury, called a constrained fiscal space.
Faced with rapidly decreasing fiscal and foreign reserves and constrained financing, IMF has advised that commodity exporters should respond to the shocks promptly and robustly to prevent a disorderly adjustment. As revenues from the extractive sectors are likely to be reduced, prospective oil producers such as Uganda have been advised to use the lull, to build buffers so as to contain build a sustainable tax base from the rest of the economy.

In its April 2016 Regional Economic Outlook for sub-Saharan Africa released in Kampala on Tuesday, IMF and economists/ technocrats in Bank of Uganda and ministry of Finance, revealed that economic growth in the region is projected to slump to 3 per cent in 2016, down from 3.4 per cent in the “good times” of 2015 and 5 per cent in 2014.
The main reason for the slowdown according to IMF’s regional director, Ms Antoinette Sayeh, and other economists, is the sharp decline in commodity prices, which has placed a number of the region’s larger countries (oil exporters and non-oil exporters) under severe strain.
“Africa needs a substantial policy reset to reap the region’s strong potential,” Ms Sayeh said, adding that this is particularly urgent in commodity exporters and some market access countries, as the policy response to-date has generally been insufficient.”

The slow-down reflects the adverse impact of commodity price slump in some of the larger economies and more recently the drought in eastern and southern African countries, including Ethiopia, Malawi and Zimbabwe. The people in these countries are suffering from severe drought that is putting millions at risk of food insecurity.
The growth performance, however, differs across countries. In particular, most oil importers in the region registered robust growth in excess of 5 per cent in countries such as Cote d’Ivoire, Kenya and Senegal. In most of these countries growth is being supported by ongoing infrastructure investment efforts and strong private sector consumption.

From the latest findings, the decline in oil prices benefited many oil-importing counties, though the drop in prices of other commodities that they export, and currency depreciations, have partly offset the gains. For instance in Uganda, ministry of Finance has announced that economic growth is projected to decelerate in the last quarter of the current financial year (2015/16) as the country pulls through what Opposition politicians called “a costly general election”.
The secretary to Treasury, however, explained that the deceleration of the economy had nothing to do with the 2016 general election and blames the slow-down on the “downside risk” accruing from weakening domestic demand, slow economic recovery by trading partners and major emerging markets as well as declining commodity prices.

Uganda’s economy is projected to grow by 5 per cent this financial year, down from an earlier projection of 5.8 per cent. Nonetheless, Mr Muhakanizi said, that “real economic growth” is projected to recover to 5.5 per cent in 2016/17 financial year and later average at 6.3 per cent per annum over the medium term.
The region’s medium-term prospects, according to Ms Sayeh, remain generally favourable but many countries like Uganda urgently need to reset their policies to reinvigorate growth and realise this potential. The dependence on natural resource exports has made nearly half of sub-Saharan African countries vulnerable to the ongoing decline in commodity prices.

To this end, IMF advises that countries in sub-Saharan Africa should adjust fiscal policies, and for Uganda and others outside monetary unions, exchange rate flexibility, as part of a wider policy package, as part of the first line of defence.
In the medium term, IMF insists that economic policies targeted at diversification and financial sector development could also strengthen resilience and boost growth.
The Deputy Governor Bank of Uganda, Mr Louis Kasekende, State minister for Finance (General Duties), Fred Omach; the secretary to Treasury Keith Muhakanizi and other government officials accepted the findings. They also said it’s time for a policy reset as governments battle the decline in mid of increasing public spending.

“Let’s discuss these issues with the politicians because they matter. We shouldn’t assume these issues are understood by politicians who have just promised heaven on earth. Revenues have gone up but the fiscal space has gone down. They think there is more money yet the situation is different,” Mr Muhakanizi said, adding: “We are going to have adjustments in fiscal policy.”
Highlighting the key strategic policies needed for sub-Saharan Africa to sustain growth momentum, Dr Kasekende said policy buffers have to be rebuilt and maintained to create more fiscal and macroeconomic space to enable governments to implement “countercyclical” macroeconomic policies in the face of negative macroeconomic shocks.
Former Finance ministers Ezra Suruma and Maria Kiwanuka were of the view that to strike the right balance in the face of declining growth, the need for fiscal adjustments notwithstanding, focus should be placed on job creation to mitigate the prevailing crisis of youth unemployment.

Realising that the IMF outlook had largely focused on the volatility of commodity prices, Dr Suruma weighed in: “I always had a problem with IMF, now I have a problem with BoU as well—my problem is that unemployment is not mentioned yet when I studied economics long time ago unemployment was a big problem and I am sure it’s still a big problem. The silence means it’s not important until it hits us. The destabilising effect on the economy will be much bigger that commodity prices.”
Ms Kiwanuka suggested that in the next report, IMF should focus on productive sectors such as agriculture, infrastructure and others that are critical in job creation.

“Could we think of working backwards, putting focus on employment, job creation, local content and agri-business? We need to do a cost-benefit analysis focusing on job creation in order to confront the challenges ahead,” she said.
As unemployment persists and the media continues to report on corruption, the constricted tax base, depreciation of the Shilling, inflationary pressures, unfunded priorities in the budgets, poverty and falling stock prices in the region, many people may react to the economic climate with a flood of strong emotions and a sense of uncertainty.
“Unemployment is real because we are exporting jobs to Europe. This is why as government, we are focusing on industrialisation, value addition and skilling Uganda to ensure that the youth are employable,” Mr Omach said.

On the difficult economic times, without delving into the specifics, Mr Omach promised that the government would examine the policy agenda. He blamed spill-over effects on the stronger dollar, decline in capital inflows and weak commodity prices.
Although Dr Kasekende, using the analogy of a party in the good economic times, recommended that in devising tough tactics for tough economic times similar to what Uganda and other countries in sub-Saharan Africa are faced with, “we must accept that the party is over and turn the music off”.
“Structural adjustments might have the effect of stopping the music and the dance but we must accept that the boom has come to an end, someone has to switch off the music we have been enjoying,” Dr Kasekende said, adding, “When imports exceed exports, someone must finance the difference. When liabilities go up, you end up eating into the foreign reserves and this will affect the economy.”

Dr Kasekende, who was one of the panellists, representing his boss, the Governor, Mr Emmanuel Tumusiime-Mutebile who also attended the meeting, was answering a question from Uganda Revenue Authority’s commissioner general Doris Akol, wondering how in a difficult economic environment, the government and those in authority will be able to ensure that on the ground, the squeeze of high interest rates and other policies do not affect people’s ability to trade and pay taxes which are needed to boost fiscal space.
On the high level of external borrowing as a solution to the fiscal challenges, Dr Kasekende explained, “The narrowing of macroeconomic and fiscal space is partly the result of governments adopting more ambitious public spending programmes to address infrastructure needs, mainly financed with external capital,” Dr Kasekende said.

“There are sound economic reasons for scaling up public investment, but we have to recognise that it’s funded through higher borrowing, it will unavoidably constrain the policy options for macroeconomic stabilisation, leaving the region’s economies more vulnerable to negative exogenous shocks,” he added.
Over the medium term, in addition to rebuilding policy space and buffers as commodity prices gradually recover, Ms Sayeh said sub-Saharan African commodity-exporting countries should more actively increase the quality and efficiency of public investment, continue efforts to mobilise domestic revenues, and pursue economic diversification to enhance resilience to commodity price shocks, including by improving the business climate.

For about 25 sub-Saharan African countries (including exporters of food and raw materials), 20 of them experienced cumulative declines in their commodity terms of trade between 2000 and 2014, mainly because of increased oil import bills.
However, despite the adverse commodity terms-of-trade developments facing these countries, many sustained solid growth over that period, averaging 4 per cent.
Going forward, IMF reports says, there is need for countries in sub-Saharan Africa to rebuild scarce buffers and mitigate vulnerabilities if external conditions worsen further.

Uganda’s exports
Uganda’s exports are generally classified into two categories; traditional and non-traditional. The traditional exports are the products that have, for long, formed the country’s export base such as coffee, cotton, tea and tobacco.
But several other products have emerged and these form the mass of what is known as the non-traditional exports. This category includes flowers, fish, manufactures (such as iron & steel products, cement and confectionaries), minerals and professional services.