Examining Uganda’s 2023 Economic Performance & 2024 Outlook

by Christopher Kiiza
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Despite the restrictive credit, monetary and fiscal conditions from both the domestic and external economic environments, which have constrained aggregate demand, the economy remains resilient, says Bank of Uganda.

The Central Bank’s Composite Index of Economic Activity (CIEA), a statistical tool used to measure the overall level of economic performance, showed a slight softening in the quarter leading up to October 2023 which means that there was a decrease in the economic activity in July, August and September of 2023. However, the Index indicated a 6.0% quarter-on-quarter annualized growth which Bank of Uganda says, is a clear indication of robust economic expansion.

“Moreover, on a year-on-year basis, the index grew by 6.6% in the same period,” the Bank of Uganda State of the Economy Report 2023 reads in part.

The sectoral indicators also paint a similar picture of the slowdown of economic activity but remain strong in services and agriculture. The two sectors grew by 4.8% and 3.6% quarter-on-quarter annualized, respectively, in the three months to October 2023.


Uganda’s inflation rate as measured by the Consumer Price Index (CPI) dropped to 3.9% in the 12 months leading up to July 2023, down from the previous 4.9% recorded in the year ending June 2023, marking the lowest inflation rate the country has registered since February 2022 when the country registered an annual inflation of 3.1%.

The main drivers were maize flour inflation that registered 6.9 percent in July 2023 compared to 20.9 percent registered in June 2023, Cassava flour inflation that registered 13.1 percent in July 2023 compared to 34.6 percent registered in June 2023, Rice inflation registered 24.6 percent in July 2023 compared to 31.7 percent registered in June 2023, and Live chicken inflation registered 2.5 percent in July 2023 compared to 28.7 percent registered in June 2023.

In addition, Annual Services inflation declined to 2.5 percent in the year ending July 2023 compared to 3.3 percent registered in the year ended June 2023. This was attributed to Annual Passenger Transport Services inflation that decelerated to negative 7.0 percent in the year ending July 2023 compared to negative 3.9 percent registered in June 2023.

The other driver to the slowdown in the Annual Inflation was the Annual Food Crops and Related Items Inflation that registered 9.3 percent in the year ending July 2023 compared to 12.3 percent registered in the year ended June 2023.

The annual inflation for Energy Fuel and Utilities decreased to -1.6% in July 2023 from -3.1% in June 2023. This decline was primarily driven by a decrease in Liquid Energy Fuels inflation, which recorded -17.5% in July 2023 compared to -11.9% in June 2023. Specifically, Petrol inflation dropped to -21.1% in July 2023 from -14.7% in June 2023, while Diesel inflation slowed to -21.0% in July 2023 from -16.5% in June 2023.

Reflecting dynamics in the international oil prices and effects of seasonal factors on the cost of solid fuels and food crops and related ‘items’ prices, non-core inflation has increased in the last two consecutive months, reaching 5.5% in November 2023 from a recent low of 3.9% in September 2023. As such, the deflation in Energy, Fuels, and Utilities prices was reversed in October 2023, with year-on-year price growth in this component rising to 4.3% in November 2023 from the bottom of minus 3.1% in June 2023 while food crops and related items inflation was hardly changed at 6.4% in November 2023.

“Reflecting weak aggregate demand, non-food and services inflation remains low at 2.8% in November 2023, with the recent slight increases largely driven by an isolated spike in the cost of health services. Similarly, the other goods inflation has continued to exert downward pressure on inflation, reaching 1.4% from double-digit levels observed up to March 2023. Generally, good inflation remains low, with durable goods inflation at below 1 percent, reinforcing the sluggishness of aggregate demand,” reads the December 2023 state of the economy report by Bank of Uganda.

Inflation is expected to remain below the target in the near term but to return to the target in the medium term. The medium-term inflation forecast for December 2023 shows that the inflation outlook remains unchanged compared to the October 2023 round of forecasts. Inflation is projected to remain below 5% in the near term but return to the target in the medium term, relatively unchanged from the October 2023 forecast round. Core inflation is projected to average 2.5 to 3.5% in FY2023/24, up from 2 to 3 % in the October 2023 forecast round. The upward revision for FY 2023/24 reflects a higher path for energy prices in the short term.

The inflation outlook is, however, subject to elevated risks. On the upside, the current geopolitical conflicts could escalate and feed into higher international oil prices, passing through to domestic pump prices and renewing supply chain disruptions. Furthermore, volatility in global financial markets could increase, triggering an increased outflow of capital and exacerbating the depreciation of the shilling. On the downside, global inflation could decline faster, leading to much lower imported inflation. In addition, current rains could result in bumper harvests, pushing down further food crop prices.

Exchange Rates

“The Uganda shilling remains relatively stable against the US dollar despite the recent bouts of depreciation pressures in the quarter to November 2023. Although the unit depreciated by 2% during the review quarter to a mid-rate of 3,782.0 in November 2023, it was 1.2% stronger compared to the level in the three months to November 2022,” the state of the economy report reads.

The losses sustained by the shilling during the quarter were largely due to higher corporate demand, mainly from the oil, telecommunication, and manufacturing firms amid continued outflow of portfolio capital and bearish sentiments over the expected outflows from proceeds of the Airtel Initial Public Offer (IPO).

Other currencies in the East African Community (EAC) continued to depreciate against the US dollar during the period under review at rates much higher than the Uganda shilling and have never recovered from losses sustained since the COVID-19 pandemic hit the economies. For instance, the Rwandan Franc and Kenyan Shilling depreciated against the US dollar by 4.6% and 5.4% in the quarter to November 2023, staying on the depreciation trend observed for a couple of years. The two currencies have lost over 48% and 34% of their values to the US dollar in stark contrast to only 3% loss suffered by the Uganda shilling. The Tanzanian Shilling also yielded to the depreciation pressures losing 4.8% to the dollar in the three months to November 2023, more than double the unit’s loss in the three months to August 2023.

Commercial Banks’ Lending Rates

Lending rates remained elevated due to the tight funding conditions of commercial banks and high credit risk. The weighted average shilling lending rate remained stable at 18.8% in the three months to October 2023 relative to the three months to July 2023, while the weighted average lending rate for foreign exchange-denominated loans remained stable at 9.0% over the same period. Prime lending rates remained relatively unchanged at 20.6% over the same period. However, declines in lending rates were noticeable for a few sectors, such as personal loans, transport, and communications. At the same time, marginal increases were observed in the agriculture, manufacturing, trade, and housing sectors.

Private Sector Credit

Total private sector credit growth grew by 7.8% in the three months to October 2023 from 7.3% in the three months to July 2023, largely driven by valuation changes for foreign exchange-denominated loans on account of depreciation of the shilling. However, purged of the foreign exchange valuation changes and capitalized interest, private sector credit growth declined to 5.6% from 8.9% over the same period. Growth in shilling-denominated loans decreased to 9.6% in the three months to October 2023 from 11.4% observed in the three months to July 2023, while foreign currency-denominated loans’ growth grew by 3.3% from a contraction of 2.1% over the same period.

The approval rate for credit in value terms decreased in the three months to October 2023 to 58.6% from 64.1% in the three months to July 2023. However, the value of loan requests rose to Shs8.7 trillion from 6.0 trillion Shillings while the value of loans approved rose to Shs5.1 trillion from Shs3.9 trillion over the same period.

Bank of Uganda attributed the increase in demand to the building up of inventory to meet the anticipated festive season demand, coupled with the demand from education institutions to meet their working capital and operational needs.

Private sector credit growth remained weak in most sectors and weakened further during the review period in the Trade, Transport and communications, and personal loans sectors. Although still weak, private sector credit growth ticked up in agriculture, manufacturing, housing, and business services.

Balance of Payments

The balance of payments is a systematic record of all economic transactions made between one country and the rest of the world over a specific period, typically a year. It is a comprehensive accounting statement that summarizes a country’s economic interactions with other nations.

The Bank of Uganda’s state of the economy report says that the current account deficit remains high and is showing signs of returning to the worsening trajectory since the quarter to April 2023.

“However, at US$ 950.9 million in the three (3) months to October 2023, it was 15.2% narrower relative to the same period the previous year. The year-over-year improvement in the current account balance was due to the narrowing of deficits in the goods, services, and primary income accounts. The deficit on goods accounts narrowed by 13.9% to US$833.8 million during the period on account of the expansion consistent with the improvement in the terms of trade,” the report reads.

Balance of Payments Outlook

Generally, the balance of payments outlook is dependent on how geopolitical tensions will evolve and how long the cost of capital in global financial markets stays high. In the short term, the current account balance will likely be supported by increased export revenues given the favorable weather conditions. On the downside, potential high-for-longer interest rates could keep global financial conditions tighter, restricting the availability of financing especially to the government at affordable terms.

In the medium term, underlying the balance of payment projections are the planned developments in the oil sector. The current account deficit is expected to gradually narrow as imports contract and exports steadily rise during the oil production phase. The financial account surplus is expected to progressively rise due to a steady increase in project support inflows and robust FDI inflows.

Fiscal Policy

“Reflecting tight global and domestic financial conditions and consistent with the government fiscal consolidation agenda, fiscal operations were less expansionary than programmed in the first four months of FY2023/24. Total government expenditure at Shs11,480.3 billion in the period fell short of the program by Shs1,232.7 billion on account of underperformance of development expenditure and net lending to a tune of Shs696.8 billion and Shs431.8 billion, respectively. Although recurrent expenditure also underperformed the budget, interest payment overshot the budget by Shs55.5 billion reflecting high interest rates amid tight financial conditions,” the state of the economy report by Bank of Uganda reads.

It adds,” Interest payments and external debt principal repayments exert elevated pressure on tax revenues to the extent that for every 100 shillings collected in tax revenues, 32 goes to debt service, diminishing resources available for service delivery.”

“Despite the 11.2% growth in domestic revenue collections relative to the four months to October 2022, total government revenue (including grants) was Shs1,173.5 billion lower than the program in the first four months of FY2023/24. Grants amounted to Shs251.5 billion, registering a shortfall of Shs.726.9 billion while domestic revenue at Shs8,017.5 billion was short of the programme by Shs446.6 billion. Consequently, the fiscal operations were in an overall deficit, including grants of Shs.3,211.3 billion financed mainly from domestic borrowing.”

2024 Outlook

“The economy is projected to continue recovering, with growth accelerating from 5.2% in FY2022/23 to 6.0% in FY2023/24, supported by the continued recovery of activity in the industry, agriculture, construction, and services. Growth will also be supported by continued FDI inflow, especially into the extractive sector, and government investments in growth-enhancing programs such as the PDM and other infrastructures. In the medium term, growth is projected at 7% driven by oil production and export activities,” says Bank of Uganda. 

Nevertheless, the growth outlook remains uncertain, with the balance of risks tilted to the downside. Economic growth might face a slowdown due to several factors: adverse weather conditions impacting agricultural production, financial constraints on budgetary spending caused by high external finance costs, restricted household consumption and private investments due to tight domestic credit conditions, and potential spikes in global commodity prices triggered by escalating geopolitical tensions, particularly in the Middle East and Eastern Europe.

Also, slower global and regional economic activity due to high-for-longer interest rates and lower trade could lead to lower external demand for Uganda’s exports, which could constrain aggregate demand further. On the upside, domestic growth could surpass baseline projection if inflation in advanced economies declines faster than expected prompting the loosening of monetary policies or weather conditions to turn out favorable.

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