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Eyes on the economy: How the first quarter of 2019 faired

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Added 17th April 2019 10:52 AM

Growth in quarter 1 has been characterized by falling export earnings, rising inflation and a slowdown in private sector credit growth.

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Growth in quarter 1 has been characterized by falling export earnings, rising inflation and a slowdown in private sector credit growth.

By Musa Mayanja Lwanga  
Despite forecasts predicting robust growth for Uganda’s economy in 2019, performance in the first quarter has been mixed.
Growth in quarter 1 has been characterized by falling export earnings, rising inflation and a slowdown in private sector credit growth.
Expectations about the health of the economy and the business environment remain positive and optimistic, despite risks to the outlook tilting towards the upside due to unfavorable weather conditions, trade disruptions and other international developments.  
Monetary policy, inflation and interest rates 
Inflation has been on the rise with the annual headline inflation increasing from 2.7 percent in January to 3 percent in March 2019 having ended the year at 2.2 percent. This trend has largely been driven by core inflation, prompting the Central Bank to maintain its policy rate, the Central Bank rate (CBR) at 10 percent. 
Inflationary risks continue to rise due to delays in rains and the heat wave that hit some parts of the country.
The prevailing weather conditions are likely to affect agriculture production and overall food prices. Inflation is also likely to be influenced by exchange rate movements due reduced export earnings resulting from trade disruptions particularly from border tensions with Rwanda as well as declining financial inflows from donors.
However, the rise in inflation is expected to stay within range of the Central Bank’s target of 5 percent. As such, the accommodative monetary policy is expected to continue in the near future. 
Government borrowing and private sector credit 
Private sector credit saw a 0.6 percent decline from 14,223.7 billion shillings in December 2018 to 14,135 billion shillings in February 2019.
Sectoral analysis shows that, whereas agriculture, trade, transport and communication, Electricity and Water, Community, Social & Other Services saw a decline, there was growth in credit extended to Mining and Quarrying, Manufacturing, Building, Mortgage, Construction and Real Estate, Business Services as well as Personal Loans and Household Loans.
The overall drop in private sector credit was driven by cyclical reductions in demand following the festive season and a slight rise in lending rates (from 20.2 percent in December to 21.4 percent and 21.1 percent in January and February 2019 respectively. 
On the other hand, credit to government rose by 14.9 percent from 2,862.1 billion shilling in December 2018 to 3,288.0 billion shillings in February 2019 despite an observed decline in treasury bill rates and a rise in lending rates.
The 91-day Treasury Bill Yield and the 364-day Treasury Bill Yield averaged 10.3 and 12.4 percent respectively in the first quarter of 2019 compared to 11.1 and 13.3 percent recorded in last quarter of 2018.
However, these rates are expected to rise due to expected increases in government borrowing to fund supplementary budgets as we come close the end of the financial year and the budgeting cycle.
The increase in government borrowing could further affect lending interest rates as well as the growth of private sector credit. 

Figure 1: Credit to Private Sector and Government (Shs. Billion) 

Source: Bank of Uganda, 2019 
Real Sector Indicators 
Real sector indicators show increased optimism and positive expectations regarding the health of the economy.
The Business Tendency Index and the Composite Index of Economic Activity collected by BoU have been on an upward trend throughout the quarter under review. The monthly Business Tendency Index increased from 59.5 in January 2019 to 59.8 in March 2019. However, there is pessimism regarding access to credit and the financial situation of businesses. 
External Sector Performance 
Total exports of goods declined by 0.7 percent from US $ 304.2 million in December 2018 to US $ 300.4 in February 2019 while exports of services declined by a wider margin of -26.1 percent from US $ 161.9 to US $ 128.4 million over the same period.
Disruptions in regional trade particularly with Rwanda and the changes in global demand as well international commodity prices, are likely to further impact on Uganda’s export earnings.
Meanwhile, the import bill declined faster than the fall in export receipts pushing the trade deficit down from US $ 267.2 million in December 2018 to US$ 203.8 million in February 2019. Imports of services reduced by 2.7 percent US $ 224.5 million to US $ 218.6 million over the same period. 
Inflows from Donor Loans and Grants have also been on the decline from US $ million 164.3 in December 2018 to US $ 60.8 million and US $ 88.5 million in January and February 2019 respectively.
The reductions in financial inflows are likely to impact on the exchange rate and consequently other macroeconomic variables in the medium term unless marched by decreased financial outflows.  
What can be done 
If the country is to continue on a path of robust growth, policies and actions that mitigate against the rising risks to the economic outlook have to be employed. Government and other stakeholders need to improve complementary services that support the sector that employs most Ugandans-agriculture.
This could be attained through increasing the coverage of the agriculture insurance scheme, as well as investment in the water for production in agriculture. Regional disputes that disrupt trade need to be resolved quickly to ensure growth in exports.
In additional, government needs to adopt policies that crowd in the domestic private sector (ensure participation on nationals and local companies) especially when it comes to the procurement of large infrastructural projects.
Furthermore, improvement in domestic revenue mobilization, a reduction in domestic government borrowing, fighting corruption and improving project implementation will improve the effect of public spending on the economy. 
The writer is the Head of Research and Market Development, Uganda Bankers’ Association 

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