Uganda faces strong headwinds in 2024

by Business Times correspondent
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In the coming 12 months, various reputable sources have projected Uganda’s growth rate at between 4.7% and 6.8%. Taking the best scenario, economic growth will be faster than the sub-Saharan African average of four percent, however much depends on how we cope with the headwinds coming our way or already buffeting us.

Climate change, particularly marked by flash floods and drought, will continue to impose an added cost and drag to economic growth around the world. For predominantly agriculture-based economies such as Uganda, underestimating this threat is unwise yet the resources to mitigate the adverse effects are limited.

Geo-political tensions show no signs of letting up, fueling the uncertainty that continues to affect global markets. Three of the five locomotive economies, China, Germany and Japan are in a slump which is depressing commodity prices.

The Russian/Ukraine war is entering its third year. Meanwhile, the Israeli military campaign in the Gaza Strip has had the knock-on effect of disrupting the major shipping route around the Arabian Peninsula.

Closer to home, the East African Community (EAC) is expanding. But at the slightest hint of neighbourly competition, some member state governments resort to non-tariff barriers, reducing trade flows and over-pricing consumers. 

During the past three years, intra-EAC trade has stagnated at 15% as national vested interests increasingly clash with the Community’s protocols for stronger regional integration.

It has been over six years since all the EAC Heads of State physically gathered together in one room for a Summit. This growing mistrust dampens business confidence, underlined by the threat of all out war breaking out in the smouldering hotspots of the Great Lakes region. If this happens, investors flee and with them, the capital and knowhow that helps generate economic growth.

Although development of the oil and gas sector is presently a major driver of Uganda’s growth, sustaining FDI inflows and helping to shore up the shilling against the US dollar, these headwinds loom large.

In its December monetary policy statement, the Bank of Uganda said, ‘The growth outlook is subject to uncertainties, including slower than expected global and regional growth; a resurgence of supply chain distortions, and if the geo-political tensions escalate, tighter fiscal policy, in part due to unfavourabe global financial markets. This could in turn restrict government development expenditure; tighten credit conditions, constraining household consumption and private sector investments’.

On January 1st, Uganda’s economic prospects were dealt an early blow. The United States government formally delisted the country for eligibility to the African Growth and Opportunity Act (AGOA), allowing duty/quota-free access to the American domestic market.

This was despite a last ditch effort by government officials and business people, at the end of 2023 to prevent the inevitable. Inevitable, because as soon as the Anti-Homosexuality Act (AHA) was declared law in May 2023, the Americans made it clear they were not interested in any discussions except repeal. Suspension from AGOA was the promised stick.

Determined to press the point, the US government issued a business advisory on October 23. It highlighted ‘heightened risks for US businesses, individuals and other persons, including health providers, members of the academic institutions and investors conducting or contemplating conducting business in Uganda’.

The Uganda government is indignant, because this touches on sovereign rights. Nonetheless, as much as Ugandans insist enacting AHA was a matter of national principle and consensus, the Americans are just as adamant gay rights do matter.

This impasse has resulted in Uganda losing an export market worth $12.3 million or nearly UGX50 billion by 2022 figures according to Susan Muhwezi, the Senior Presidential Advisor on AGOA and Trade.

Some may suggest this is not a big loss. No doubt business people who have struggled to get American customers for their products will disagree. They feel gutted and in the same vein, it would be interesting to read the contents of the Certificate of Financial Implications that accompanied the bill that eventually led to AHA. 

Uganda’s main trading partners are Kenya, the European Union, United Arab Emirates, China, India, Tanzania, South Sudan and the Democratic Republic of Congo.

The US does not rank high among Uganda’s leading trading partners. However, through USAID, the Americans are the biggest single financier of the country’s social-welfare programmes, as well as providing assistance to small and medium enterprise (SME) development. USAID has clarified that in spite of AHA, much of these programmes will remain intact although there is to be ‘redirecting’ of funding. In other words, there are no guarantees.

Meanwhile technocrats in the finance ministry have their eyes set on an upcoming meeting also related to AHA, because it directly concerns future external budget support. Lack of any headway will mean government ministries face further cuts in their budgetary allocations, and private sector borrowers being squeezed. Banks prefer the guaranteed returns from lending money to the government.

Between January 16 and 19, government representatives and those from several civil society organizations (CSOs) are to hold consultations in Kampala with World Bank officials. This comes after the multilateral lender announced in August 2023, a freeze on new lending to Uganda following passage of AHA.

As of December 31, 2022, the World Bank’s portfolio of IDA-financed credits and grants to Uganda stood at $5.2 billion, comprising 21 national and two regional projects.

The IDA is the financing arm of the World Bank Group which offers soft loans at concessional rates making it possible for low income countries to implement major long term projects, notably in infrastructure, education and health.

In light of AHA, the World Bank officials want to hear of the proposed mitigation measures, (if any) to ensure inclusion and non-discrimination of vulnerable and disadvantaged individuals and groups on World Bank-financed projects.

A briefing note reads in part, ‘The consultations will focus on proposed mitigation measures being added to all the 19 projects in the existing World Bank portfolio. All projects being consulted upon are at various stages of implementation, and hence the opportunity to change the project design is severely limited. As such, the consultations will focus on the proposed mitigation and support measures being built into each project and propose adjustments to improve their efficacy as appropriate’. Put simply, the World Bank wants to make sure all the boxes are ticked.

Since the World Bank suspension, behind-the-scenes talks have been taking place between Uganda government officials and the lender to seek a compromise. Recent media reports speak of some common ground being found, but lest we forget, the largest shareholder in the World Bank with 16.6% is the US. 

Furthermore, the presidency of the World Bank is the preserve of the Americans, while the position of Managing Director of the International Monetary Fund is reserved for the Europeans.

The EU, Uganda’s leading bilateral donor, has from the outset taken a different tack. This is not surprising. For several years now, the majority of the EU member states have been ganging up against Hungary and occasionally Poland, over the limitation of gay rights. Why pick a new fight with another country, several thousand kilometres away? Nevertheless, the EU has expressed its concerns as a forcefully and politely as possible.

Across Uganda, there are 115 projects being funded by the EU totaling over 896 million euros (nearly $980 million). According to the European Commission Directorate General for Trade, during 2022, Uganda exported about 800 million euros worth of goods, (mostly primarily products). About 30% of these goods enter the EU market through the Everything But Arms (EBA) preferences system, which is similar to AGOA.

In August 2023, responding to calls for EU punitive measures against Uganda, Jutta Urpilainen, the International Partnership Commissioner, said, “At this moment, the EU considers that a suspension of EU financial support to Uganda would deprive the most vulnerable populations, including LGBTIQ persons, from vital support.”

There is another consideration. French company, TotalEnergies, is already several billion dollars into developing the Tilenga oil fields in western Uganda. It would be disastrous for the company if the EU follows the US route over the AHA issue.

Fuel is an essential commodity. As a landlocked country, Uganda has been relying on Kenya to supply it for donkey years. If anything, the Kenyans have grown to believe it is their right and in the interlude, they have made plenty of money. 

Last year, the Uganda government pulled the rug out from under the Kenyans by announcing that Uganda National Oil Company (UNOC) would now take over this business. There was dismay in Nairobi, quickly followed by anger then resistance, but Kampala is determined.

Tempers are flaring; making a mockery of all the good intentions that the EAC supposedly stands for. The dispute has now been elevated into a legal case which is only increasing anxiety across Uganda’s business community.

It explains why the government has now invited the private sector to come in as a stop-gap measure until Kenya recognises UNOC’s new role.  It’s going to be a logistical nightmare and ironically, Kenyan haulers are likely to benefit due to their superior number of tanker trucks.  If cooler heads do not prevail, a prolonged disruption in fuel supplies is the one imminent headwind that can surely sweep Uganda off its feet.

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