The cost of doing business in Uganda

by Business Times writer
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Uganda’s business landscape is marked by a blend of optimism and challenges.

While many entrepreneurs and investors have decried the skyrocketing cost of doing business, the government shows a positive trend.

Several factors such as inflation, interest rates, taxes and levies, currency fluctuations, energy costs, infrastructure, access to finance among others contribute to the cost of doing business.

According to the April 2024 monthly economic performance report by the Ministry of Finance, investors are more optimistic about the business environment especially in the manufacturing, and wholesale trade sectors.

“This is shown by the Business Tendency Index, which remained above the 50-mark threshold increasing to 55.57 in April 2024 from 55.54 the previous month,” the report reads in part.

Despite the Finance Ministry’s report showing investors’ optimism about Uganda’s business environment, the country’s inflation rate has been on the rise, driven by increases in food prices, fuel, and transportation costs which lead to higher production costs, reduced purchasing power, and decreased consumer demand.

According to the May 2024 report by the Uganda Bureau of Statistics (UBOS), annual inflation for 12 months to May 2024 increased to 3.6% compared to 3.2% registered in April 2024.

“Annual energy fuel and utilities inflation increased to 9.5% in the year ending May 2024 compared to 7.9% registered in the year ended April 2024. This was mainly due to an increase in solid fuels inflation to 18.8% in May 2024 compared to 14.3% registered in April 2024,” UBOS report reads.

It adds: “Liquid energy fuels inflation increased by 4.8% in the year ending May 2024 compared to 3.9% in the year ended April 2024.”

Specifically, petrol prices increased by 8.1% in May 2024 compared to 6.9% in April 2024, and diesel prices increased by 1.1% compared to 0.1% registered in April 2024.

In April 2024, the Monetary Policy Committee (MPC) of Bank of Uganda increased the Central Bank Rate (CBR) from 10% to 10.25%.

Central Banks raise the Central Bank Rate to among others, tackle inflation by raising borrowing costs, which then decreases consumer spending and investment, thereby tempering economic activity. This approach is typically employed to uphold price stability and manage inflationary pressures.

The Bank of Uganda’s decision to raise CBR aimed to combat inflation but made borrowing more expensive for businesses.

Businesses are caught between the need for capital and the high cost of borrowing, making it difficult to expand or even maintain operations.

Rising the lending rate also highlights the instability of the Ugandan shilling, which has not stabilized against the U.S. dollar for several months.

The Central Bank Deputy Governor, Michael Atingi-Ego said the shilling remains vulnerable due to outflows of short- term foreign investor funds from the domestic market in search of attractive yields in other markets and strong domestic demand by corporates.

“The weakening of the shilling significantly impacts domestic prices, which could push inflation higher,” he said.

Additionally, the Ugandan shilling’s volatility against major currencies, particularly the US dollar, affects import costs and makes it challenging for businesses to budget and plan. A weak shilling means higher import costs, leading to increased prices for consumers. This unpredictability makes it difficult for businesses to hedge against exchange rate risks, further increasing their costs.

Furthermore, frequent tax hikes and the introduction of new levies have increased the tax burden on businesses.

Recently, the Government introduced five new tax bills to Parliament with the aim of generating enough resources to finance the national budget in the upcoming fiscal year.

The tax bills include; the Excise Duty (Amendment) Bill, 2024, the Stamp Duty (Amendment) Bill, 2024, the Tax Procedures Code (Amendment) Bill, 2024, the Value Added Tax (Amendment) Bill, 2024 and the Income Tax (Amendment) Bill, 2024.

Some of the proposed taxes target fundamental consumer goods such as petroleum products, construction materials, and bottled drinking water.

Government proposed a 100-shilling additional levy on each liter of fuel, increasing the duty on fuel items such as petrol to 1,550 shillings per liter, diesel and other fuels to 1,230 shillings per liter, and kerosene to 500 shillings per liter, as outlined in the Excise Duty Amendment Bill 2024.

Furthermore, the government has proposed to impose a 5% withholding tax on gains earned from the sale of; land in cities and municipalities, sale of rental property and sale of shares in a private company.

Others include; an imposition of excise duty tax rate of Shs500 per 50 Kgs of Cement, adhesives, grout, white cement or lime, and a 10% or Shs75 per litre whichever is higher, on mineral water, bottled water and other water purposely for drinking.

Taxes are essential for government revenue, but excessive taxation can stifle economic growth. Businesses are calling for a review of the tax regime to create a more conducive environment.

Another critical aspect influencing the cost of doing business in Uganda is energy. The country has made strides in expanding its electricity grid and incorporating renewable energy sources. Despite these efforts, electricity costs remain high, and power outages are common, disrupting production and increasing operational expenses. For many businesses, the need to invest in backup generators adds to the financial burden, affecting overall profitability. 

Infrastructure development is another pivotal factor. Uganda has invested in improving its road networks, which facilitates better connectivity and reduces transportation costs. However, there are still significant gaps, particularly in rural areas, where poor road conditions lead to higher logistical expenses and delays. Rail and air transport options are limited, further complicating the movement of goods and services. 

A balanced understanding of these elements is crucial for businesses looking to navigate the Ugandan market and for policymakers aiming to create a more supportive business environment. 

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