What China’s slowdown means for Uganda
What you need to know:
Not again. With an already fragile economy, it will be disastrous for the slowdown in China to have a direct impact on Uganda’s growth prospects.
The depressing news all over media channels is China hurting and the global economy seems to be trapped in the mix.
Global stock markets continue to be volatile and jittery, partly due to the slowdown in the growth of the Chinese economy.
But in Uganda, the impact is only, at least for now, visible on media channels as the world’s second largest economy slows to 6.8 per cent, down from the projected 7.4 per cent, according to International Monetary Fund (IMF).
The slowdown is causing panic in the international markets, with the IMF predicting a gloomy global economic outlook due to depreciation of global currencies against the dollar.
But what does the slowdown portend for Uganda?
The appetite for Uganda’s imports largely feeds on two countries: China and India.
Uganda imported goods worth $340m (Shs1.2 trillion), in the first quarter of 2015 compared to $263m (Shs966b) in the same period last year.
The imports range from textile to hair wigs, highlighting how Uganda heavily relies on China as a source of supplies.
In the last 15 years, imports from China have grown from $31.4m (Shs115b) in 2000 to more than $549m (Shs2 trillion) in 2014.
The imports have shown no sign of slowing down, with 2014 being the only year, the value of imports fell.
But the current slowdown will have little impact on the China’s imports as the economy is being stimulated to export more goods.
In fact, when the yuan depreciated against the dollar, the projection was this would feed into import prices.
“A weaker Chinese Yuan may make some of imports to Uganda cheaper, helping to offset the effects of a stronger dollar against the Shilling,” according to Razia Khan, the chief economist for Africa at Standard Chartered Bank.
But the benefits, she says “will only be felt to the extent that trade between China and Uganda is denominated in yuan”.
Two banks, Standard Chartered and Stanbic allow payments from Ugandan importers to suppliers in China using the Yuan.
However, the payments are not significant enough to yield a complete shift from the dollar to the yuan.
Therefore, it will take some time, before Uganda can feel the real impact of a depreciating yuan on the overall pricing of commodities in the country, since most of Uganda’s trade with China is dollar-dominated.
Impact on Uganda’s exports to China
But the export market is expected to feel the impact even though the country’s exports to China are much lower.
Uganda exports to China have steadily grown over the years, rising from an average of $6m (Shs6b) in 2005 to $67m (Shs246b) by close of 2014.
However, exports to China only represent a 2.5 per cent share of total exports.
Uganda’s exports have been reducing, falling to $36m (Shs132b) in the last six months compared to $42m (Shs154b) last year.
According to Musa Mayanja, a research fellow at the Economic Policy and Research Center, the reduction could portent reduced exports to China that have exhibited signs of improving in the last decade.
However, he says it is too early to project the potential drop as “Uganda exports very little to China”.
Uganda mainly exports agro-based products and coffee to China.
Therefore the “sugar daddy” status is likely to stay intact given that China has in the last few years become the darling of Uganda’s infrastructural projects such as the construction of Karuma and Isimba hydro power projects.
The two dams are funded to a tune of more than 80 per cent by loans provided by the Chinese government.
The Standard Gauge Railway project, which will be Uganda’s single most expensive project, is also funded by a loan from China.
Other road projects such Entebbe Express Highway, expansion of the Entebbe International Airport including other upcoming projects are all being funded by loans from China.
Other upcoming projects such as the oil export pipeline, which has a total loan value of about $3b (Shs11 trillion) is expected to be funded by China.
Most of these infrastructure projects are conducted by Chinese companies that have cash reserves thus a slowdown might not have any direct impact, according to Mayanja.
However, a slowdown could be experienced in foreign direct investment (FDI), especially from China.
In the recent past China’s appetite for minerals has been dropping, which could have an impact here even though Uganda is not a big player in the commodities market.
This, Mayanja says, “will affect Uganda that has been seeking investment in mineral exploration and extraction”.
Fragile economic state
Already, Uganda is facing challenges beyond China, which has forced a depreciation of the Shilling more than 32 per cent.
All this is coming ahead of an expensive election year in 2016, which analysts predict could worsen the situation.
Already interest rates are way above the roof and have moved to levels last seen in 2011 when inflation rose to about 30 per cent.
High interest and the depreciation of the Shilling have resulted into a spike in the cost of production with prices of non-food items exhibiting signs of rising.