Kampala – Prof Emmanuel Tumusiime-Mutebile, the governor, Bank of Uganda (BoU), often comes off as a man of few words. His responses to the media are often brief with limited detail and loaded with economics jargon.
However, on the afternoon of December 14, 2016, he gave a response to a journalist’s question that was perhaps more revealing and stating the actual state of the economy. The reporter was questioning the state of the economy considering the wobbles brought about by slowed lending from commercial banks, struggling businesses and drought conditions affecting the country.
In response, Mr Mutebile gave the economy a clean bill of health and noted that “just because you might not feel it in your pockets, the economy is growing.” This obviously created murmurs on the 7th floor boardroom of the BoU headquarters in Kampala.
He had a point. The economy has indeed been growing. The projection – revised downwards – indicates that the economy will grow at 4.5 per cent in 2016/17, lower than the 5 per cent projection. This growth is considered low due to the middle-class ambitions of the country by 2020. The criticism of economic growth figures has always been that they often don’t reflect a trickle-down effect for the population.
Since the 1990’s, Uganda had been averaging growth rates of about 7 per cent, at least until 2012 when that figure dropped to 3.2 per cent. In essence, in the 1990’s to 2011, the economy was considered to be producing goods and services at a much faster rate than it is now.
A walk around Kampala and having discussions with people from all walks of life, there is a common phrase they often use: “There is no money in the economy” or for business persons “people are not spending because they have no money.” These are just phrases indicating money may not exactly be as spread out among the population as it should be in order for people to spend.
“The economic party we had over the last 25 years is over,” Dr Adam Mugume, the director research at BoU, told delegates attending a Stanbic Bank Uganda economic dialogue recently.
In other words, if people were not feeling the impact of growth in the last 25 years when figures were better, it is now even worse.
In the last 25 years, the main driver of the impressive growth figures came from the services sector. That is the growth in financial, telecom and construction sectors. On average, the services (financial and telecoms) were averaging almost 9 per cent growth. Up to 2010/11, the construction sector was also averaging about 12.2 per cent. The two continue to be the most dominant contributors to growth although at much slower rates. In 2013, the World Bank warned Uganda that growth was coming from sectors that don’t employ the majority of Ugandans.
“While Uganda’s economy has grown significantly over recent years and will continue to do so into the future, presently a significant proportion of the country’s population is not benefiting optimally from this growth. Rather, the vast majority of Uganda’s labour force remains employed in low productivity activities. This is because the most productive, rapidly expanding economic sectors are often more capital-intensive than labour-intensive and employ only a small proportion of the workforce,” the World Bank warned at the time.
That doesn’t appear to be changing – at least not yet. The 2014 National and Population Census by the Uganda Bureau of Statistics shows that the agricultural sector has the highest number of business enterprises standing at 43 per cent, followed by manufacturing at 16 per cent. Only 3 per cent of business enterprises are providing services.
The agricultural sector continues to be the largest employer in the economy with a participation rate of about 70 per cent. However, 64 per cent of those are engaged in unproductive agriculture that doesn’t add any disposable income in people’s pockets. This is probably why you do not feel Uganda’s economic growth in your pockets. To make matters worse, manufacturing and agriculture are also growing at much lower rates on annual basis, meaning that not enough money is trickling down to these high employment segments of the economy.
“Due to the prolonged drought conditions, agriculture declined by 1.1 per cent during this quarter. Services, which in the past have been the main driver of growth, also stagnated. With manufacturing and trading activities declining strongly due to disruptions to the main market in South Sudan, the growth of industry was mainly driven by the expansion of construction activities, which was largely driven by government projects,” reads, in part, the World Bank Uganda Economic Update released in January this year.
Even making matters worse for the economy is the rather slow addition of new jobs that can absorb the 4 per cent annual labour force. The estimates indicate that the country has to create at least 10 million jobs by 2020. Those jobs, according to Ms Racheal K. Sebudde, a chief economist at the World Bank Uganda Country Office, have to be high productivity jobs that can result in higher economic growth and equitable distribution of that growth. The year 2020 also happens to be the time government has set to have reached middle-income status.
On top of being “exclusive growth” instead of “inclusive growth”, the task ahead is much greater because the lower growth rates won’t deliver the country to that middle-income status.
“For Uganda to achieve middle-income status by 2010, Gross Domestic Product (GDP) must grow by 10 per cent,” she says, adding: “To reach middle-income status by 2020, Uganda’s per capita income must grow about 9 per cent which equals to 12 per cent of total GDP.”
One of those indicators, whether there is a trickle-down effect in economic growth figures, is called per capita income. This is often defined as the average income per person for every year. Uganda’s figure on this is very worrying. At 4.8 per cent growth in 2015/16, the estimates indicate that per capita income only grew by 1 per cent.
“Uganda’s population is growing at a rate of about 3.5 per cent but the average income per person is growing at 1 per cent. That means some people are being left behind in the growth the country is posting,” Ms Sebudde points out.
To reach that middle-income status, per capita income has to surge from 1 per cent to 9 per cent in order to ensure that some people are not left behind.
It should be noted that per capita income for a middle-income country is estimated at $1026 (Shs3.7). Uganda would have to jump from the $623 (Shs2.2m) per capita income if it is to reach the desired middle-income status.
Dr Fred Muhumuza, an economist and specialist working with Financial Sector Deepening Uganda, points out that the challenge for businesses right now is that the estimated levels of income to generate the demand necessary for enterprise growth is just not there.
“In an economy where there is very low aggregate demand, every business is going to have a risk and then the bank will also recognise the ability of you to pay-back is very low. There is a deficiency in aggregate demand and we must get back to fixing this. For Uganda to attain immediate demand, the private sector investment and demand must expand,” he explains.
He adds: “You cannot jump the immediate river but you are already planning that when I grow up I will be a doctor. First, finish your primary school exams.”
For instance the rapid supermarket expansion by Nakumatt in Uganda was driven by the belief that there will be demand in the outlets that would generate enough money to cater for the loan obligations of the company.
Mr Muhumuza points out that for some businesses defaulting on loans, it is sometimes a question of demand not being there to generate the cash-flows to provide working capital and finance costs.
In order to address the challenges of the economy, promote jobs and increase productivity, the government appetite for infrastructure investment continues to surge. This, it is hoped, will be one of the main drivers of growth going forward. However, concerns are that some of the infrastructure is not generating returns good enough to boost growth, especially agricultural productivity.