{UAH} Uganda - Economic Worries Ahead

Uganda - Economic Worries Ahead

 

The cost of corruption in Uganda is high and the Auditor general in his latest report identified about 700bn to have been lost in FY 2011/12. This is 5-7% of the approved budget which is in line with the World Bank estimations of about 5-10% lost in corruption lost annual. With 10% of the approved budget getting lost annually, Uganda is losing a full budget year in 10 years.

Corruption is not the only constraint to doing to business in Uganda. In the Ease of Doing Business 2013, Uganda,  120 out of 180 countries with the areas under scoring being access to good infrastructure especially energy, ease of starting a business, protecting investors, registering properties, enforcement of contracts and trading across borders. Uganda's infrastructure is among the worst in the world (Republic of Uganda 2010; World Bank 2007).

The National Development Plan identifies weak infrastructure as one of the key binding constraints in Uganda. Roads, power and railways are all below those of Uganda's neighbors, with grave implications for the economy. It is a welcome move however that the current budget priorities key infrastructure projects in energy, works and transport sectors.

On top of the agricultural sector getting only 4% of the current budget proposal, we continue to see limited linkages with the banking sector Private sector Credit is largely skewed to construction, trade and salaried loans. The building and construction sector constituted the largest share of total credit, dominating at 23.3 percent. The share of the trade and commerce sector to total lending, which in the previous year constituted the largest share at 21.5 percent, increased slightly to 21.7 percent.  Personal and household loans constitute 21.1%, manufacturing at 8.9% and agriculture at 6.4%.

Low agricultural productivity arguably is linked to current account deficit which remains at over 10% of GDP. This implies we demand more forex to import than forex we get from exports thus leaving exchange rate vulnerable to volatility. The current account is not likely to ease in coming few years due to oil investment imports. Despite the diversification of its export base, Uganda remains heavily dependent on primary commodities. Diversification of the export base is of paramount importance. The factors that continue to constrain export diversification include the primary and low-value-added nature of Uganda's exports, poor product quality, and poor regulation standards, which inhibit competition in marketing and export of primary commodities. The current account deficit could also dent the further accumulation of reserves the reserves are the main source of revenue for the central bank revenue but due to low rates on international markets, the central bank incurred operational losses in the last financial year.

Lastly, needless to mention is the bulging level of youth unemployment estimated at 32.2%. The education environment has seen about 400,000 graduates churned out every year from colleges and universities: the employment sector can only absorb about 20,000 per annum. The growing youth unemployment could fundamentally pose political and socio-economic challenges. 

Uganda will also face a number of other internal and external risks like  reduced reliance on foreign aid,   the nascent oil sector challenges, supply or structural shocks to prices/inflation, global fluctuations on oil prices as well as economic conditions in Europe, China and America.  To mitigate the ultimate effects, the monetary policy and fiscal policy have read from the same page. The oversight institutions have to be at their best helping in bridging the large implementation gap.

Uganda has a number of opportunities that it can capitalize on including the discovery of oil, growing private sector as well as the Potential to play a coordinating role and harmonize policies for the EAC, COMESA and non-EAC Great Lakes regional market, given its strategic location in the middle of EAC.

By Enock Nyorekwa Twinoburyo

Economist.

The African Executive