Economic growth recovery is here: What’s driving it?

Economists and private sector actors are very optimistic that Uganda’s economic growth will recover progressively as the country bounces back from the severe disruption of the Covid-19 pandemic that caused the shutdown of several sectors, with some restricted for much longer.

 Although the pandemic related shutdown crippled productivity and curtailed the household incomes of millions of Ugandans; a ray of hope has emerged following the full opening of the economy, a development which is enabling a rebound in activities in various economic sectors.

 The recovery in the economy from slower growth rates to higher growth rate is being boosted by putting financial resources in the sectors that matter, strengthening the Parish Development Model and empowering the private sector with the aim of increasing production levels in the country in 2022 and beyond.

 Economists anticipate that with the ongoing effects of monetary and fiscal policy support, pent-up demand from consumers for face-to-face services, and the strength in labour markets and asset prices, economic growth is poised to be strong for the in 2022 and beyond.

 The Deputy governor Bank of Uganda, Mr Michael Atingi-Ego says domestic demand is making a strong comeback as Covid-19 related restrictions are eased, adding to gains from robust external demand.

 “Education and hospitality will pick up and boost the contribution of services to economic growth both directly and indirectly given their significant backward and forward linkages to other sectors”, Mr Atingi-Ego said.

 Growth in external demand for Uganda’s exports such as coffee is anticipated to contribute to the growth recovery on the back of a resurgence of the global commodity market.

 Mr Atingi-Ego also says BoU’s accommodative monetary policy stance with the central bank rate held at 6.5 percent for several months now, will continue to aid economic recovery.

Mr Atingi-Ego indicated that the completion of the Final Investment Decision (FID) was expected to bring over $15 billion to develop the national oil and gas sector with a considerable multiplier effect in the economy.

 “At this point, economic growth is projected between 3.8 percent and 4.5 percent in 2021/22, accelerating to 5 - 6 percent in 2022/23, and further to 7 percent  in 2024/2025,” he says.

 However, while Uganda’s economic recovery is bright, Mr Atingi-Ego says there are risks which range from global to domestic level such as the variant of Covid-19, weather conditions among other risks. 

As the major contributor to economic growth and employment creation, the private sector has a central place in renewed efforts to reduce poverty and achieve the Sustainable Development Goals (SDGs). Developing country governments have a strong interest in fostering a business environment that enables the private sector to flourish and fulfil its role as the main engine of growth.

Growth requires macroeconomic stability maintained by low budget deficits, low inflation and a stable and transparent currency regime that yields competitive exchange rates.

The Permanent Secretary in the Ministry of Finance, Planning and Economic Development/ Secretary to Treasury, Mr Ramathan Ggoobi said in the Financial Year 2022/23 and over the medium term,  government is increasing the value chain in agriculture production, commercialisation of products, market access and the use of data.

Mr Ggoobi said the government is so focused on socioeconomic transformation through re-prioritisation of the national budget to redirect resources towards wealth and job creation, industrialisation, and export promotion.

Currently, 39 percent of the population are still out of the monetary economy. Cabinet in March 2021 approved the Parish Development Model (PDM) with seven pillars as the main vehicle for reducing poverty, employment and wealth creation and delivering the NRM Manifesto 2021-2026 commitments, of moving households from subsistence to a monetised economy.

The Parish Development Model (PDM) is expected to be a turnaround programme to cause full monetisation of the economy.

The Parish Development Model (PDM) is a strategy or approach for organising and delivering Public and Private Sector interventions for wealth creation and employment generation at the Parish level as the lowest economic planning unit.

 It is a multi-sectoral strategy to create socio- economic transformation by moving the 39 percent households (that is 3.5 million households or 16. I million Ugandans) out of the subsistence economy into the money economy, using the Parish /Ward as the epi-centre for Development.

PDM is an NDP Ill implementation of the whole-of-Government approach in bringing together the State and Non-State Actors to achieve inclusive socio- economic transformation, in a coordinated, collaborative and participatory manner. It is also, as a strategy to achieve the NRM Manifesto 2021-2026.

In the Parish Development Model, the pillar of production, processing and marketing is one driving force to Uganda’s economic development.

The Parish Development Model is aimed at organising households into structures for empowering them to participate in production, processing, storage and marketing to support value-chain development and food security interventions, for improved incomes of the households.

Mr Ggoobi stresses that pillar three of PMD is financial inclusion. This pillar focuses on reducing financial exclusion by addressing barriers to access to financial services by the households; and deepening and broadening formal savings, investment and insurance usage. The overall objective of financial inclusion Pillar is to, “sustainably increase access to and use of appropriate financial services by subsistence households”.

Mr Ggoobi said the Parish Development Model is taking resources where people are living, adding that the Parish Development Model is deepening decentralisation in place because the government has largely been absent in the rural areas.   

In the past years, it was the government responsible for distributing the seeds to the farmers in this regard, Mr Ggooobi says the economy is in the hands of the private sector.

“We are going to stop distributing seeds, the private sector are the ones who are going to distribute the seeds to the farmers and the private sector are the ones who are going to be marketing the produce,” he says. 

He says the government is going to put Shs1 trillion in the Parish Development Model, which will see both local and financial institutions having a role to play.

Mr Ggoobi says government’s strategy for economic growth recovery for FY 2022/23 and the medium-term lays out planned interventions for Uganda’s economic transformation, consistent with Government’s Macroeconomic objectives spelt out in the Charter for Fiscal Responsibility and the Strategic Objectives of the third National Development Plan (NDPIII) whose overall goal is “Increasing household incomes and improving the quality of life of Ugandans.”

Mr Ggoobi further argues that the overall fiscal strategy is to promote inclusive growth to increase household incomes without compromising fiscal and debt sustainability.

“Debt will never get out of hand because we are sober; in every ministry of government people are scratching their heads to manage their budgets,” he says.

He says, as of June 2021, Uganda’s debt to GDP ratio was 47 percent, it is projected to rise to 51.6 percent, 52.4 percent  in 2022, 2023 respectively before declining to around 50 percent in 2024/25.

Fiscal responsibility

In three to four years, Uganda will be an energy producing country, managing their own oil resources. Mr Ggoobi says the country is very optimistic about the oil but “treating the oil  as a windfall. ”

“Only 0.8 percent of oil revenue will be used for expenditure and another 0.8 percent of the GDP of the Non-oil GDP will be used for infrastructure development. We earmarked the rest of oil revenue, for livelihood and industrialisation,” he says.    

In general, Mr Ggoobi says the government will adopt a new strategy of borrowing to fund development/infrastructure projects, and that tax revenue will fund the other areas in the budget in the coming financial years.

The head Africa, Economic Research at Standard Bank, Mr Jibran Qureishi says unlike the infrastructure development model, the government’s move to Parish Development Model is likely to lead to financial inclusion and contribute positively to social economic transformation.

“The government’s move to reallocate resources to key development areas like agriculture is good news and will supplement other private and development sector initiatives to deliver tangible positive impact,” he says.

The quarterly debt statistical bulletin and public debt portfolio analysis September 2021 by the Ministry of Finance, Planning and Economic Development released on February 10 2022 indicates that domestic debt total issuance increased from Shs2.850 trillion in June 2021 to Shs3.418 trillion in September 2021.

Out of the total issuance of Shs3.418 trillion during the period ending September 2021, Shs1.493 trillion was for fiscal financing and Shs1.824 trillion was issued for redemptions.

Total domestic debt service which comprises Discount, Coupon and Redemptions increased from Shs2.012 trillion as at June 2021 to Shs2.801 trillion in September 2021. The Ministry of Finance, says the increment in debt service can be attributed to high maturities especially arising from reopening of Treasury Bonds.

High Treasury bond maturities arose from the bench mark programme aimed at reducing the fragmentation of the T-bond market. The existence of fewer bonds but with large volumes makes the Treasury bonds more liquid and increases trading activity. This in the long run is aimed at reducing the cost of government borrowing.

Generally, there was an upward shift in the yield curve from the period of June 2021 to September 2021.

Mr Jibran says the high yields in Uganda treasury bonds will continue to attract offshore investors in the government securities in the 10 year and 15 treasury bond even though there is likelihood of tight finance conditions that would result in shift in capital inflows from emerging and developing countries to US due to expected rise in interest rates in the United States and in Europe.  

While there is a lot of optimism about Uganda’s economic recovery in 2022 and beyond, Mr Jibran expressed fears that the persistent passing of the supplementary budget will continue to have shocks on the performance of Uganda’s fiscal policy programmes.

The strong relationship between industrialisation and economic development is pegged on the fact that the manufacturing sector is the driver of productivity growth. This, in turn, is the lifeblood of technological development in both developed and developing countries.

Economies of scale (reduced cost per unit that arise from increased production) are more easily achieved in the manufacturing sector than in the services sector. This is because manufacturing activities lend themselves more easily to mechanisation and chemical processing.

Mr Richard Mubiru, a director at the Uganda Manufacturers Association, says the government should work towards reducing the cost of doing business in the country which remains high.

Mr Mubiru says the agro industries offer Uganda a life line in industrialisation because there are many agricultural products in the country, which can provide the agro industries with the raw materials needed to drive industrialisation.

“However, we must migrate from export of grains to milling fortification products to increase our earnings from exports, there is also a need for de-risking the exports by the government providing guarantees in cases of trouble in the neighbouring countries’ markets. The other thing we must work on is the standard of products that we export,” he said. 

With regional blocs in place, to which Uganda belongs and is signatory to but not really benefiting from the regional arrangement due to hardship, Mr Mubiru said there is need for enhancing exports, and ensuring that economic integration works.

Pension funds are pools of savings accumulated during the working life of individuals. At any given point in time, they are the sum of the flow of the employer and employee contributions, investment income, and eventual benefits paid.

 On November 24, the Parliament passed the National Social Security Fund (Amendment) Bill, 2021 which among others provide midterm access of 20 percent to the contributors and remove restrictions on access for voluntary savings.    

 The deputy managing director at National Social Security Fund (NSSF), Patrick Ayota says, they plan to start implementing mid-term access (in line with the new National Social Security Fund Law) in March this year.

He says a total of 100,000 members qualify to access their savings under this arrangement amounting to approx Shs900 billion.

 “Once that money is injected into the economy, aggregate demand might be higher and impact on price stability,” Ayota says.

However, given the low level of savings of the NSSF members, Mr Ayota advised that it is not wise for them to withdraw all the money constituting 20 percent at once. They should be withdrawing it in bits because it can help them better than withdrawing it in a lampsam at once,” he advised.

As of last year, most of the NSSF exposure is in fixed income, the NSSF’s current investment in fixed income stands at 78 percent, equities 15 per cent and real estate’s 7 percent.

On whether Midterm payment will affect the NSSF investments, Mr Ayota says it will not and they continue investing in longer term government securities.