Uganda’s economic rating improves

Construction works going on at a road section in Arua Town. One of the basic contributors to improved credit rating is infrastructure development. PHOTO BY CLEMENT ALUMA

What you need to know:

Boost. The country has improved its revenue raising capacity


Fitch, a global rating agency, has upgraded Uganda’s sovereign credit rating to ‘B+’ from ‘B’ with a stable outlook.

This is on account of cautious policies supportive of growth and improvements in the country’s fiscal strength, largely due to reduction in aid dependence and improved revenue raising capacity..
Upgrading the country’s ratings means that Uganda’s economic environment is now much better that than it was a year ago.

The London-based agency observed in a press release issued on Friday, that Uganda has a long track record of prudent macroeconomic policies, supporting robust growth, which has averaged 6.6 per cent for more than a decade.

The agency expects growth to remain above 5 per cent in financial year 2015 and financial year 2016, supported by significant infrastructure investment in new power generation capacity.
“Effective monetary policy implementation has helped contain inflation, which fell to 4.3 per cent in 2014 from a decade peak of 18.7 per cent in 2011,” the release said.

The agency also explained that Uganda’s fiscal dynamics have improved, supported by improved revenue collection capacity.

This is in addition to the country’s authorities that have cut tax exemptions and improved tax collection, with a commitment to raise revenue as a percentage of Gross Domestic Product (GDP) by 1 per cent over the next two fiscal years.

Over-performing revenue
The preliminary fiscal data for the first half of financial year 2015 shows that revenue collection over-performed, a trend which Fitch expects to continue.

In this regard, Fitch forecasts revenue as a percentage of GDP to increase to 13.2 per cent of GDP in financial year 2016, from 11.2 per cent in financial year 2012.

“Revenues are lower than for peers and have remained at 11 per cent of GDP (before grants) for the past decade,” Fitch said.

Unlike in the past, government has been reducing its heavy dependence on development aid, currently financing the budget 2014/2015 at a level of 81 per cent using domestic resources.

The agency said Uganda has become steadily less aid dependent, demonstrating the authorities’ ability and willingness to act prudently by curbing current expenditure in line with lower grants.

Grants as a percentage of revenue have fallen to 8 per cent in financial year 2014 from 15 per cent in financial year 2012 and 40 per cent in financial year 2002.

“Although government debt has risen steadily to 30.4 per cent of GDP in financial year 2014 from 20.8 per cent in financial year 2010, due to rising domestic and external borrowing, it remains well below ‘B’ category peers, with the majority (86 per cent) on concessional terms,” Fitch officials said.

“Fitch expects the construction of the Karuma and Isimba hydro-power dams to raise debt above 35 per cent of GDP by financial year 2016, although it is expected to peak significantly below the ‘B’ median of 46.5 per cent,” the agency added.

The upgraded outlook reflects Fitch’s assessment that upside outweighs downside risks to the ratings. The main factors that could, individually, or collectively, trigger positive rating action include:
1. A continued track record of sound economic management as well as investment in infrastructure, supporting robust growth and rising per capita income.
2. A narrowing in the current account deficit, as a result of improved export performance, supporting a further build up in reserves.
3.Strengthening of public finances, focusing on improved tax revenue generation.
4. Regulatory reforms to foster an improved business environment.

what the rating means
Uganda’s B+ reflect the following key rating drivers:
Free market. Uganda’s pursuit of free-market policies, particularly its commitment to a flexible exchange rate and an open capital account, enables its economy to adjust to disruptions more quickly than its peers.

Growth. Rapid growth has helped to lift two-thirds of the population out of extreme poverty over the past decade, but per capita income remains low - less than one-third the ‘B’ median - due in part to high population growth of 3.3%. The rating remains constrained by weak governance and a weak business environment, both below the ‘B’ median.

Financing.External finances are considered a rating strength relative to ‘B’ category peers, notwithstanding the forecast increase in the current account deficit to 8.3% of GDP in FY15, above the ‘B’ median of -6.9%, driven by a sharp increase in capital imports for the two large Hydro Power dams being built.

Imports. Higher capital imports will be partly offset by sharply lower oil prices (oil imports were 21% of the total import bill in FY14).