Weaker global growth could pile pressure on Shilling

Tuesday August 13 2019

A forex trading chart in Kampala. FILE PHOTO

A forex trading chart in Kampala. FILE PHOTO 

By Martin Luther Oketch

While the World Economic Situation and Prospects 2019 offers timely warnings about a range of macroeconomic challenges facing policymakers around the world, the International Monetary Fund (IMF) has maintained its positive assessment of Uganda’s economy.
IMF’s optimism about Uganda comes after it has downgraded the World economic growth to 3.2 per cent from 3.5 per cent and 3.4 per cent from 3.5 per cent for Sub-Saharan Africa.
In an interview with Prosper Magazine, the IMF resident representative in Uganda, Ms Mira Clara, said: “While this does not materially alter our positive assessment of growth for the Ugandan economy, it does point out that downside risks are very present. Weaker global growth could affect Uganda and its current account deficit through reduced tourism, trade, FDI and portfolio inflows,” she said.

Impact of trade tensions
Ms Clara further said the intensification of trade tensions could also impact growth and pile pressure on the shilling. Policies such as maintaining the exchange rate flexibility and accelerating reforms to improve competitiveness are good responses to mitigate the risks.”
One of the key factors causing the global slowdown is the two world large economies of the United States (US) and China.
Urgent and concrete policy action is needed to reduce risks to the global economy and secure the foundations for stable and sustainable economic growth.
Globally, the IMF advises that monetary policy should remain accommodative especially where inflation is softening below target. But it needs to be accompanied by sound trade policies that would lift the outlook and reduce downside risks. With persistently low-interest rates, macroprudential tools should be deployed to ensure that financial risks do not build up.
“Fiscal policy should balance growth, equity and sustainability concerns, including protecting society’s most vulnerable. Countries with fiscal space should invest in physical and social infrastructure to raise potential growth. In the event of a severe downturn, a synchronised move toward more accommodative fiscal policies should complement monetary easing, subject to country-specific circumstances,” the IMF advised.
IMF also suggests that the need for greater global cooperation is urgent. In addition to resolving trade and technology tensions, countries need to work together to address major issues such as climate change, international taxation, corruption, cyber-security, the opportunities and challenges of newly emerging digital payment technologies.
Many of the developing economies that are falling behind depend heavily on commodities, both in terms of export revenue and financing of fiscal expenditure. The combination of the high volatility of export and fiscal revenues often translates into large swings in economic activity and lower rates of growth over the longer term.
In an interview with Prosper Magazine, a research fellow of the macroeconomic department at Economic Policy Research Centre (EPRC) Mr Corti Paul Lakuma, said the US economy is slowing down after six years of constant high growth of 2 to 3 per cent on average.
“That can tell you that we are going into the business cycle; you can always have good years. The slowdown in the US economy has an impact in the world economy and it usually has spillover effects on the developing countries,” he said.
Mr Lakuma said currently, China is experiencing the lowest economic growth in 20 years after registering double-digit economic growth.
“Economic growth for China is now at 6.2 per cent, the slowdown in the Chinese economy may result in less demand for imports from Least Developing Countries like Uganda. China imports a lot of raw commodities from developing countries for its industries where Uganda has a comparative advantage,” he said.
China’s high economic growth in the past 20 years has been mainly supported by manufactured items which it exports to both developed and developing countries.
Mr Lakuma explained that China’s economic slowdown caused by economic restructuring as it tries to move away from the manufacturing economy to a knowledge economy coupled with the slowdown in the global economic growth could have some effects on Uganda’s economy. It could slowdown Foreign Direct Investment and lower commodity prices if the trend persists for a long time.
The World Economic Outlook (WEO) updates are published in January and July between the main WEO publications released usually in April and October annually. The WEO updates provide a subset of revised estimates for key indicators.
In an interview with Prosper Magazine, Dr Fred Muhumuza, a lecturer at Makerere University School of Economics, said the International Monetary Fund advice is based on assumptions.
Dr Muhumuza said there will be turbulence in the global economy and regional economies of African countries because of geopolitical tension, which causes disruption and slowdown in economic growth.
“When you look at what is happening in the global economy; a lot is basically downward growth, which in a way affects developing countries,” he said.
Going forward, Dr Muhumuza said that much as Uganda’s growth rate is based more on the regional economic growth, “There could be a slight reduction in growth because of turbulences.”
Dr Muhumuza said the IMF World Economic Outlook is average, implying that the real growth rate can either be high or lower than what is being projected.
Activity in major advanced economies—particularly in the Euro Area—as well as in some large emerging markets and developing economies has been weaker than expected.