Uganda’s Economic Recovery: Strengths & Concerns

by Business Times writer
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The quarterly Gross Domestic Product (GDP) released by the Uganda Bureau of Statistics (UBOS) for the first quarter of the financial year 2023/24 indicates that Uganda’s economy grew by 5.3% year on year, down from a revised 5.4% in the previous quarter while growth in the financial year 2022/23 remained unchanged, at 5.2% despite revisions.

Year-on-year gross value added for the agricultural, industry, and service sectors grew by 3.6%, 11.9%, and 10% in the first quarter of financial year 2023/24 compared to respective revised growth rates of 5.1%, 11.7%, and 9.4% in the first quarter of the previous year.

The slowdown in growth is partly attributed to unfavourable weather conditions and the lagged impact of the tightening of monetary policy which saw Bank of Uganda increase the Central Bank Rate to 10.25% from 10% at the beginning of April. This highlighted the instability of the Ugandan shilling, which has not stabilized against the U.S. dollar for several months.

Despite the challenging economic environment, Uganda’s economy is projected to still grow at 6% in financial year 2023/2024.

However, economic growth in the outer years is projected in the range of 5.5% – 6.5% compared to an earlier projection of 6.5% – 7%, reflecting the likely impact of tighter monetary policy, which is required to stabilize inflation around the medium term.

A tighter monetary policy stance will increase interest rates, which might constrain private-sector credit growth.

While Uganda’s economic recovery continues to be resilient, Bank Of Uganda admits that some dark clouds still remain, including: the tight economic conditions.

“The tight monetary policy stance to abate inflationary pressures amidst financing constraints could constrain private-sector credit, investment, and overall economic growth,” reads the March 2024 state of the economy report by Bank of Uganda.

The Central Bank also warns of private sector crowding out from the credit market due to increased borrowing by Government:

“Increased government borrowing might increase interest rates, making it harder for businesses and individuals to get loans, potentially hindering spending and investment.”

On Thursday last week, the Government submitted a proposal to Parliament for approval to borrow USD 117.26 million from Standard Chartered Bank to finance the upgrade of Kitgum – Kidepo road, further proving Government’s never ceasing appetite for borrowing.

Furthermore, the Central Bank warns of the exchange rate depreciation pressures which might negatively affect imports, making them more expensive, discouraging trade, and affecting economic growth.

Other dark clouds hovering over Uganda’s economy is the global economic slowdown. Weaker demand in other countries could hurt Ugandan exports, reducing earnings and affecting the balance of payments as already witnessed in the decline of the country’s foreign exchange reserves.

Uganda’s foreign exchange reserves suffered a significant decline of approximately 12% from USD 4.1 billion to USD 3.5 billion between June 2023 and January 2024.

Bank of Uganda attributed this decline to external debt repayments and its inability to acquire foreign currency due to depreciation of the Uganda shilling.

“The reserves have declined from US$ 4.1 billion at the end of June 2023 to about US$3.5 billion largely due to external debt payments and the inability of the BoU to purchase foreign currency from the market given the exchange rate depreciation.”

Uganda’s rising public debt, with more than half obtained from external sources, has been consuming a growing share of its revenue, thus affecting allocations for sectors like education and healthcare.

According to the Auditor General’s Report for the financial year 2022/23, the total public debt as at June 30, 2023 amounted to a staggering 96.168 trillion shillings. This amount comprises Domestic Debt Stock of 43.696 trillion (45.4%) and External Debt Stock of 52.472 trillion shillings (54.6%).

The Central Bank cautioned that the future outlook for the Balance of Payments position remains delicate, primarily due to factors such as the consistently increasing costs of servicing external debt, which could impede the achievement of the foreign reserve target.

Additionally, the Central Bank noted that the delayed disbursement of expected budget support loans, elevated government spending on imports exceeding projections, and unfavorable or restrictive conditions in both global and domestic financial markets could disrupt the program aimed at building reserves.

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