Tuesday July 15 2014

Is Uganda’s economy in a recession? Technically no but practically yes

By Fred Muhumuza

Technically, a recession is defined as a situation when the economy declines during two successive quarters – continuously for six months. Over the last decade, Uganda has experienced declines in growth in some quarters but not two in succession. However, that is as far as it goes. Over the same decade, average growth has been on the decline just like a bicycle continues to climb the hill but at a decreasing speed until it comes to a halt and has to be pushed. Practically, we cannot determine a recession over six months when growth is a long-term trend variable. By the time the economy contracts for two successive quarters, it has already been in a recession for a while. You do not want to begin peddling when the bicycle is already in reverse.
The National Bureau of Economic Research defines recession as a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in declining real GDP, real income, employment, industrial production, and trade. Indicators such as increased loan write-offs, reduced corporate profits and taxes, slowdown in real estate activity, and a struggling consumer community – all of which are visible in Uganda - should not be ignored when determining a recession.
However, Uganda should not wait for the Jury decision on the recession to begin addressing the urgent downward trend of the economy that is now deep into a second decade. To begin with the current strategy that building infrastructure will spur growth in this decade is an illusion. Too much chemotherapy to deal with the cancer of inadequate infrastructure is simply killing the economic patient. The Ugandan economic patient is already losing weight – very fast!
A medium to long-term strategy of dealing with the infrastructure gap, which does not overemphasise first class tarmac roads everywhere, should be adopted. We cannot target to tarmac nearly 4,000 kilometres at almost a million dollars each in just less than a decade. We also plan to build a standard gauge railway, refinery, power dams and continue with costly social, administrative, political and security programmes.
Too much fiscal injection in a short time and for long-term objectives has a tendency of ‘raising the temperature at the back of the fridge’ while freezing the rest of the economy. This happens through gross distortions of prices, including high interest rates, and creation of bubbles in sectors like real estate and land. The hardware of infrastructure is as important as the software associated with favourable macroeconomic variables, which have contributed greatly to past growth. In 2010/11, GDP was about Shs40 trillion. Since then government alone has injected another Shs40 trillion and GDP has only grown by just over half of that – the bulk of the growth coming from the struggling private sector. Should government borrow and crown out the private sector?
Selling debt at high interest rates – double digits – means investors foresee a risk of government default due to the recession. When the interest is high it means investors do not want the debt, so the country must pay more to attract them. Unless there is conspiracy in the market to defraud government and make it acquire expensive debt when it can get it more cheaply. We can only ignore these facts at our own peril.
The answer lies not in increased operations and financial management engineering but rather strategic economic management. In times like these, it is better to have an army of sheep that is commanded by a lion and not the other way round. Our lions are devouring the sheep instead of commanding them. In comparing Uganda, Animal Farm and the Russian revolution gone bad, ours could as well be the Russian roulette – a case of economic suicide in search of quick riches.

Dr Muhumuza is a senior manager, Financial Services Inclusion Programme, KPMG Uganda. [email protected]