What you need to know:
The economy is going through a number of challenges and indeed, experts say, it is worrying because it is at such a time when elections are just around the corner. Mark Keith Muhumuza & Jonathan Adengo sought expert opinion on the current state of the economy and the way forward.
“It is going to be painful,” this is what Amos Nzeyi said when asked to speak out the current state of the economy.
Nzeyi is an industrialist and the chairman of Uganda Manufacturers Association. His worry is basically contained in the ever surging power tariffs, which last week went up by an average of 17.4 per cent.
But beyond the tariffs are the stinging commercial interest rates, which have been forced through the roof by the persistent increments in the Bank of Uganda benchmark lending rates.
The increments present a gloomy indicator for an economy that has already been weakened by a heavily shedding Shilling, rising inflation and contracted growth projections.
Last week, Emmanuel Tumusiime-Mutebile, the Bank of Uganda (BoU) governor increased the Central Bank Rate (CBR) from 16 per cent to 17 per cent, noting that the effects were “yet to feed through completely into prices,” which indicated the worst was yet to come.
In the same week, Electricity Regulatory Authority (ERA) made it more gloomy, announcing tariffs, would in the next three months, rise by an average of 17.4 per cent, the highest increase since the scrapping of electricity subsidies in 2012.
Power is an integral part of production, which explains why manufacturers are opposed to any increment.
In fact, before ceding ground, manufacturers had requested that the decision to increase tariff be delayed – albeit after the collapse of negotiations to return subsidies.
Manufacturers consume most of Uganda’s power and generate at least 70 per cent of revenue for the sector.
“To put it simply, the government doesn’t have money,” said an official in the ministry of Finance who requested anonymity because he is not authorised to speak to the media.
With negotiations failing, Nzeyi said the only option was to take the hit, adding, “It is going to be painful, but there is nothing we can do about it. It will hurt the industry.”
Uganda, just like most sub-Saharan countries, negotiates power purchase agreements with independent producers in dollars.
This means more Shillings will be required to purchase the same amount of power in dollars.
Umeme also has borrowings pegged to the dollar, meaning that it has to lose money if the rates remain stagnant.
In fact, in the first half of 2014, Umeme posted a loss of Shs4.4b, largely due to a surge in foreign exchange losses.
However, Selestino Babungi, the Umeme chief executive officer, believes there is need to look beyond the current effects and invest “in a sustainable electricity sector that is fundamental to economic development of the country”.
This, he says, will be achieved once Karuma and Isimba hydropower plants, together with investment in transmission and distribution infrastructure, is completed.
However, in the meantime the dilemma is prices of finished goods are likely to rise, which may increase inflationary pressures that Mutebile is trying to fight.
The situation brings back memories of 2011 when there was a surge in inflation, spiking interest rates to more than 30 per cent.
The period was characterised by massive loan defaults forcing banks to fall into deep losses.
Fast forward to 2015, commodity prices have been moving upwards and the likelihood of them falling soon is not feasible in the short term.
Commercial bank interest rates have already moved upwards and are likely to rise further from the current average of 28 per cent.
The situation, according to Percy Lubega, the Centenary Bank chief manager business development, is likely to force a growth in non-performing loans, which might lead to loss of millions in bad debts.
But banks might be less worried about rising interest rates because trends show it is in such times that they post more returns.
For instance, profitability of the sector in 2011 rose to Shs490b expanding Shs590b in 2012 but slowed in 2013 to Shs460b because interest rates had started to go down.
And for this, Stephen Kaboyo, the Alpha Capital managing partner, insists bankers need to be reined in because “the high profits posted by banks do not appear to fully justify the high nominal and real interest rates and the large spreads.”
Kaboyo’s advice could be hard to force through, considering that Uganda operates a free market economy, which the Central Bank has persistently cited for its non-intervention in the interest rates market.
Amid all this, the end result will be costly as economic growth will further be tested having already reduced to 5 per cent from the projected 5.8 per cent.
This reduction, according to Musa Muyanja, a research analyst at the Economic Policy and Research Centre could worsen with economic growth likely to fall below 5 per cent because the effects of the depreciating Shilling are yet to be felt.
In the real estate sector, according to Paul Mwirigi, the Knight Frank Head of marketing, the effects could be heavy, given that “…the cost of building per square metre goes up - both for locally and internationally sourced construction materials.”
The sector and the economy at large, was still recovering from the 2011 effects that saw Uganda grow at the slowest pace in more than a decade.
But for Fred Muhumuza, a former advisor in the Finance ministry, the current economic headwinds are just an amplification of what started in 2011 because the increase in the interest rates has had long term implications that were only but deferred to the future.
“...what we are going to see is not a repeat but an amplification. The ripple is still on and that ripple is going to get bigger,” he says.
Whereas expert opinion specifically from the International Monetary Fund has thumbed up the Central Bank for its early response in the face of tightened inflationary pressures, this might be soiled by continued heavy spending on non-essentials by government.
“While monetary policy has by and large been on track as seen through the tightening stance to curb inflationary pressures but the monetary policy alone in terms of the CBR cannot do the entire heavy lifting. The solution, in my view, seems to lie in fiscal consolidation because it’s at the heart of the problem,” Kaboyo said.
Indications are all is not well as recently government issued a bad cheque for civil servants, amid large stashes of money going into election related activities.
Fears are that with government trying to hurry through amendments to the Public Finance Management Act, 2015, there could be mishandling tax payers’ money ahead of an expensive election showdown.
Some of the major amendments will allow government to borrow short-term loans from the Central Bank without the approval of Parliament and a window that will allow for supplementary spending beyond what is in the budget.
All these amendments are being pushed through ahead of the 2016 elections, which analysts say, could have similar aspects like those of 2011.
In 2011, stashes of cash were splashed into the money markets and the after effects were grave, where inflation shot through the roof, rising to over 30 per cent, the worst in over three decades.
Already there have been allegations of government dipping its hands in the cookie jar to draw money for its elective activities.
However, this, according to Adam Mugume, the BoU executive director for research “is an exaggeration”, saying the only money (Shs200b) that will be spent has been allocated to the Electoral Commission, but is cognizant to the fact they are pushing government to cut back on extravagant expenditures.
The hard truth is, however, money, which is spent to fund elections is rarely made public with people only left guessing. In a recent revelation, Central Bank governor, admitted he had issued Promissory Notes that were abused to fund elections.
Arthur Isiko, the Bank of Africa managing director, says, during elections the public is prompted to “speculate on pricing and valuation of assets”, which have negative effects.
In such circumstances, Isiko explains, “gains tend to be illusory as the high election spending, more often than not, results into shifts in consumption habits and nothing more.”
Protecting the economy
Whereas the Central Bank agrees that high interest rates could dampen growth, Mutebile says the repercussions of inflationary pressures could be worse and as thus they need to be nipped at the earliest.
Mutebile has, over time, insisted that they will do whatever is within the law to protect the economy from any financial threat.
The economy has been under pressure because of rising inflation and the depreciating Shilling.