Uganda's economy is on track

By Duncan Abigaba

Lately, the public has been awash with myths and self-invented theories about the economy, the depreciation of the shilling, possible increase in the prices of goods and services etc. Some people even believe we could end up in the Greece situation.

However, we need to look at the major performance indicators of the economy. These include; economic growth rate, Gross Domestic Product (GDP), inflation, interest rates, Balance of Payments (BOP), foreign reserves, revenue performance, fiscal deficit, fiscal policy and public debt.

Uganda’s economy has been growing at various rates of 3.4%, 6.0%, 4.7% and 5.3% in financial years 2011/2012, 2012/2013, 2013/2014 and 2014/2015 respectively.

The economy is projected to grow at 5.8% in the 2015/2016 financial year and is projected to grow at 6.5% for the next five years. The economy is valued at sh75.183 trillion ($25b) and it is the third largest in East Africa and the 17th largest in Africa.

In the ending financial year 2014/2015, inflation was kept at 2.7% from a record high of 11% in 2011/2012. Even despite the weakening shilling, fuel pump prices have been kept at record low of sh3,400 from sh3,850 for petrol and sh2,850 from sh3,250 for diesel.

The shilling has weakened majorly due to two factors; the strengthening of the US dollar against other international currencies we trade with and importing more than we export. This is due to on-going works on Karuma and Isimba hydro power stations and other road works like the Entebbe Express Highway.  

Interest rates have remained a bit high at 20.1%. This is majorly due to two factors; limited supply of long term capital in the economy and the lack of trust among the borrowers characterised by high default rates and non-performing loans.

Our balance of payments currently stands at negative as at March 2015. Our exports are valued at $2,701.6m whereas the imports are $5,048.9m.
This means our deficit has been standing at $2,347.3m. This is majorly due to the ongoing infrastructural investments in the oil sector, road works and hydro power stations of Karuma and Isimba. Therefore, the increase in demand for foreign exchange to meet the import bill weakens the Uganda shilling.

However, in the ending financial year, this was mitigated by Foreign Direct Investment inflows of $1,200m and workers’ remittances worth $915m, reducing it to $232.3m. However, this was not enough to close the deficit, resulting into a reduction in external reserves amounting to $266.5m. Nevertheless, our reserves remain healthy at $2,974m, equivalent to four months of future imports of goods and services.

Our tax collections are projected at sh11.333 trillion 2015/2016 up from sh9.799 trillion in 2014/2015. Domestic financing through treasury bills and bonds will fall from sh1.775 trillion in 2014/2015 to sh1.386 trillion in 2015/2016. This is because the Government is redeeming its treasury bills and bonds worth 6.4 trillion. The increase in the tax revenue is majorly due to improved tax policy measures implemented this year, improved tax base and expansion of the tax base.

Our domestic revenue to GDP ratio is estimated at 13%. Total expenditure is estimated at 18.6% of the GDP, lower than 22% within the EAC countries. Domestic resources will finance 76.4% the 2015/2016 budget. Whereas the balance will be financed through concessional loans, grants and donations.

Our public debt is projected to reach $7.6b by end of 2015/2016. 60% of the debt is external while 40% is domestic. The increase in the public debt reflects the increased borrowing to finance infrastructure investment.

Although our public debt has increased faster compared to the past trends, it is sustainable in relation to the size of the economy. Measuring public debt in relation to the size of the economy is standard practice to know whether our debt is sustainable or not.

Using this method, our debt to GDP ratio is estimated at 30.4%, which is far below the Public Debt Management Framework 2013 threshold and the East African Community Monetary Union convergence criteria requirement of 50%. Therefore, our public debt remains sustainable and our economy isn’t under debt distress.

This has been confirmed by independent parties who undertake credit rating for Uganda, and the Debt Sustainability Analysis (DSA) conducted by IMF and World Bank.

Therefore, the Uganda shilling hasn’t singly weakened against the dollar. All our major trading currencies including the Euro and the British Pound have fallen against the dollar. What we must focus on is to produce for export; this can mitigate the situation by bringing in foreign exchange to boost our shilling. But the economy is on track.

 

The writer is a deputy Presidential assistant in charge of research and information