Uganda’s economy at crossroads: How did we get here?

On 14th February 2017, it was a packed media briefing at the Bank of Uganda (BoU) headquarters. Prof. Emmanuel Tumusiime-Mutebile, the governor BoU was about to announce the Central Bank Rate (CBR) for that month. However, there was an array of foreign press because there had been some speculation that the governor was going to indeed confirm that the economy was in free-fall. In the same month February 2017, one of the tabloids had stated in a headline that the “economy had collapsed” and attributed this to one of the executive directors, Dr. Adam Mugume. What Mugume had actually stated at a Stanbic Bank Uganda forum on Uganda’s economy was that the “economic growth party of the last 25 years was now over.”

Mutebile subsequently pointed out that Uganda’s economy was going to grow at a much slower pace in the financial year 2016/17. This was the financial year where economic recovery was being projected but it appeared the situation would worsen than it was in it in 2015/16. According to the Uganda Bureau of Statistics (Ubos), the first three months of 2016/17 indicated that there was almost zero growth (contraction) of the economy. Additionally, the BoU’s own assessment of the second quarter of 2016/17 indicated similar signs as the third quarter of the FY 2016/17.

“While this slowdown was due to temporary factors, economic growth remained weak for the remaining part of FY 2016/17 reflecting a combination of domestic and external factors. GDP growth projection for FY 2016/17 had been revised downwards to 4.5% from 5% that had at the last Monetary Policy Committee meeting,” Mutebile told reporters.

At the time, the Central Bank governor attributed the poor economic performance to the temporary dry spell out that had lasted for more than 10 months from 2016 into half of 2017. However, it should be noted that since 2012, the economy has not grown at a level above 6%. That brought in Dr. Mugume’s point that the party is perhaps over. The drought that has caused a shortage of food and pushed food prices upwards is only part of the problem. However, what appears to be suggested is that there are other deficiencies in the economy.

In January 2017, Dfcu acquired some of the assets and liabilities of Crane Bank. This marked the near end of Crane Bank, a bank that had prided itself on being the lender to small businesses in the country. Crane Bank’s failure, according to BoU is in part because of the none performing loans that the bank had accrued. The estimates indicated that almost Ugx300bn of the loans had gone bad. The NPLs were a reflection of an economy that was not in good shape. Of particular concern was the large exposures to the real-estate sector.

“At the sectoral level, there were problems in the commercial real estate sector, where heavy investment in recent years has led to oversupply in the market with the result that occupancy rates had fallen and many owners had not been able to generate sufficient income to service their loans,” Mutebile pointed out back in November 2016.

On the sidelines, the collapse of Crane Bank was subject to a forensic audit by BoU that was expected to expose some of the deals the bank had made. In August 2019, Bank of Uganda lost the case to Sudhir. The entire banking sector as of December 2016 had an NPL exposure of 10.5% – a historic high -, which was estimated to close Ugx1.2trillion. The question, however, is how did Uganda get to this?

In 2013 Nakumatt Supermarkets started its aggressive expansion in Uganda By end of 2015, cracks started to emerge when Nakumatt was operating empty shelves. The problem; Nakumatt went into an expansion drive using short-term facilities.  A rating agency had issued note warning that Nakumatt’s expansion in Uganda was too ambitious and overstated.

“Nonetheless, each country within the region continued to face endemic challenges, which posed downside risks to growth over the short term,” Global Credit Rating Co. noted in 2015.

That explains the state of the economy. There is a phrase that is often used by economists in the country at the moment; Low aggregate demand in the economy. In other words, as businesses expand, the expansion is not matched by the demand from the people. Prior to 2011, growth in borrowing by businesses was estimated at about 20%. That money had to be paid back through cash flows generated from the businesses. That didn’t happen and banks came calling for their money. Steel Rolling Mills (SRM) one of the largest steel companies in the country at the time was under receivership after Standard Chartered Bank recalled a Ugx50bn loan. SRM’s argument was that they were producing steel products but demand was less. Less aggregate demand has meant that shopping arcades remain half full. The low purchasing power in the economy is principally also because the benefits of the previous growth have not trickled down enough to grow demand.

What is Uganda’s competitive advantage?

At least 70% of Ugandans are employed in the agricultural sector. Of this, more than three quarters are engaged in subsistence agriculture that doesn’t grow income. This is the explanation by the World Bank that you cannot have a sector that employs most Ugandans and it contributes only 23% to GDP. That is the paradigm of Uganda’s skewed economy.

This has often been said in an area where Uganda has a competitive advantage if agriculture is modernized. In essence, from the time of farming to value addition, there has to be changed. Coffee is still one of Uganda’s largest exports but the value added to the coffee is still on the low side. Uganda also produces tea but it is considered to be a medium grade, meaning that it has to be blended with other teas from Kenya in order to have high-quality tea for consumption. For value addition to happen in Uganda, Ugandan tea factories have to be blending some of that tea in the country.

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