Economy on steady recovery path

By Samuel Sanya

THE past six months have been the hardest Moses Kitaka’s poultry business has ever experienced. The cost of chicken feeds hit record highs, sales were slow and it was nearly impossible to borrow. However, things have started to look up.   

“Prices of feeds have gone down slightly this year. I’m sure that in the next three weeks when children start to return to school, the prices of maize bran will drop further as maize milling picks up,” he says, beaming with optimism. 

“Demand for chicken has kept growing and will always be there,

“I’m optimistic that demand will pick up even more during the school holidays. We just need government protection from the cheap imports,” Kitaka said.

Prices of commodities have started to drop, but are expected to remain at levels a little higher than they were at the start of the year 2011.

The country has started to recover from the food supply shocks that momentarily threw inflation into an upward spiral as demand outstripped supply causing a shortage.

Even worse, the exchange rate depreciated rapidly hitting the sh2,900 mark in September largely due to expensive imports from the Euro Zone economies, further amplifying the domestic troubles.

In order to counter this, the Central Bank instituted a benchmark Central Bank Rate (CBR) to reduce money in circulation and thereby bring down prices.           

However, as the great scientist Isaac Newton once said “what goes up must come down” inflation is starting to fall, the exchange rate has stabilized and growth rates are picking up.

Recent Uganda Bureau of Statistics (UBOS) quarterly Gross Domestic Product figures indicate that the economy grew by 2.4% between January and March 2012 from an earlier contraction of 2.6% between October and December 2011 when inflation peaked. 

Adam Mugume, the Bank of Uganda (BOU) executive director for research said that the manufacturing sector has the closest link to the banking sector and is always the first to be hit when economic conditions are tight.

JB Male Mukasa, the UBOS executive director said in a statement that trend cycle QGDP figures show that the economy grew by 1.9% in the third quarter of the financial year 2011/12 compared to a decline of negative 2.1% in the second quarter.

He added that value added by the livestock, cash crop, industry, forestry, and fishing subsectors went up despite declines in the mining and quarrying subsectors.  

The central bank increased its rate to 23% resulting in a decline in value added by the services sector by 0.2% though other productive sectors remained resilient.

Cuthbert Baguma, the director of the Uganda Tourism Board (UTB) pointed out that the country’s fortunes are set grow with the recent positive global tourism ratings.

“The country has won numerous accolades that have improved its international visibility. Visitor numbers have already passed the 1m mark this year,” he added.

Revenues to the tourism sector hit the $800m (sh2 trillion) mark last year, boosting the entire economy and reducing the need for donor aid.

The tight monetary stance currently being observed by the central bank has seen the shilling stabilize in the sh2,400 – 2,500 range for the past month and  inflation is gradually easing toward the 5% target in the medium term.  

John Mayende, a UBOS principal statistician pointed out that the fall in headline inflation to the current levels of 14.3% should boost consumers’ purchasing power.

Food supplies to markets have greatly increased in recent months resulting in a -5.9% decline in the average price of food in the month of July 2012 from a prior decline of -5% in the month of June.

“.. inflation will fall to single digits over time, and should allow the Bank of Uganda to cut interest rates by at least 100 bps (basis points) this week," said Razia Khan, head of Africa research at Standard Chartered.

“All of this should underscore recovery prospects in the Ugandan economy,” she said of Uganda’s economy.

Analysts expect the CBR to be cut to 18% from the present 19% further easing pressures on the shoulders of the borrowing public as inflation dips for a ninth consecutive month.

Reductions in the CBR have seen lending rates decline to an industry average of 25% from the highs of 30% in the past six months as the size of loan applications begins to grow steadily once more.

“The strategic objectives of the BOUs monetary policy in the short to medium term are to maintain the down ward path of core inflation…while at the same time encouraging private sector credit from the banking system,” Louis Kasekende, the BOU deputy governor said.

He explained that increased private sector credit would in turn support stronger growth in the real economy as the country moves to achieve growth rates above the 6% level in recent years. 

Loans to the private sector have grown in recent months hitting sh439b mark in February 2012 from a prior month sh286b before falling to sh415b and sh357b in subsequent months even as loan applications continue to rise each month.

Despite a torrid financial year 2011/12, the economy remained resilient with the Uganda Revenue Authority (URA) beating the odds to override the sh6 trillion collections target by a cool sh39b.

Is the economic growth inclusive?

While presenting his paper on Market Failures in the Financial System at the 20th Joseph Mubiru memorial lecture, Professor Joseph E. Stiglitz warned of the need to align rewards in the private sector to social returns in the economy.

He explained that short of this, the economy would be unbalanced with large incomes going to a few rich and corrupt individuals in the business class.

“We need regulations to oversee the financial sector to make sure that private incentives are better aligned with social returns,” he emphasized.

He later added that the government needs to consider capitalizing development banks and Small and Medium Enterprises as this would ensure inclusive economic growth.

At the same event, prof. Mahmood Mandami reiterated the need for society to directly participate in the economy, saying that “the challenge is not how the state can regulate the market, but how society can regulate both the state and the market.”

Maria Kiwanuka, the finance minister recently adjusted the income tax schedule in her second budget speech this year, imposing an additional 10% tax on incomes above sh120m each year or sh10m each month. It is hoped that this will reduce income inequalities.