Uganda economy to grow less than expected due to drought — minister

Uganda’s economy is not in recession and has remained resilient despite several unfavourable conditions, finance minister Matia Kasaija told Parliament today as he delivered a statement on the state of the economy. However, Kasaija said it will not grow as anticipated due to ongoing drought conditions in parts of the country.

The minister said that growth has been impacted by the difficult global environment, the civil war in South Sudan, lower global commodity prices, a slowdown in implementing public infrastructure investment, uncertainty surrounding the recent elections, and the World Bank’s suspension of lending to Uganda.

But the economy has managed to withstand the effects of those developments, Kasaija said. “Macroeconomic stability has been maintained, with reasonable rates of growth, low inflation, and adequate international reserves.”

Kasaija also noted that there is need for “coherent domestic policies in order to manage market expectations and avoid erosion of confidence in the economy.” The minister referred to a recent IMF review which he said concluded that “the economy is not in a crisis but there exists risks” that have to be managed well for a change in fortunes.

Read More: IMF urges curb on government spending, praises BoU policy

The minister said the fragile global economy has implications for Uganda’s growth prospects, the performance of its exports and by extension, the exchange rate. The “mode and timing of Brexit and the results of the just concluded US elections will add to uncertainty and will have implications for the recovery in global economic growth,” Kasaija said.

Public investment in infrastructure and an anticipated recovery in private sector credit will drive growth in the current financial year and the medium term, the minister’s statement said. But he cautioned that the drought in parts of the country might lead to slower growth than projected. The economy was forecast to grow at 5% in 2016-17 compared to 4.8% last financial year.

The slower-than-anticipated growth of major trading partner economies and delayed implementation of infrastructure projects could also lead to slower growth, he said.

The poor performance of exports – a result of weaker global demand, lower global commodity prices, and the situation in South Sudan – is responsible for a “fragile” current account, the minister said. In the first two months of 2016-17, the current account deficit was estimated at $217.8 million. Kasaija said it is expected to remain fragile in the next months due to increased private sector imports for the festive season.

The minister blamed the recent depreciation of the Uganda shilling against the dollar on the pick-up in corporate demand for the dollar which he said was higher than available supply. At the close of trading today, the shilling was at 3,560.58/3,570.58 according to Bank of Uganda figures, it’s lowest level in over a year.

On the World Bank’s decision to withhold new lending to Uganda, Kasaija said government is working closely with the international lender to address the concerns that led to the decision.

The minister said the banking sector as a whole is “adequately capitalised to withstand shocks.” Total capital to risk-weighted assets was at 22.5% at the end of September compared to 20.1% at the end of September 2015. The ratio of non-performing loans to total loans had also fallen to 7.7% in September from 8.3% in June 2016; it was at 3.8% in September 2015.

Kasaija said he will provide a comprehensive report on Crane Bank’s standing to parliament once Bank of Uganda finishes auditing the lender’s books. The bank’s management was taken over by the central bank in October after determining that it was significantly undercapitalised. The minister said the bank is operating normally.

To turn round the economy and support growth, the government will “enhance” project implementation for infrastructure projects and improve efficiency in budget implementation, Kasaija said.

According to the minister, the government is also working on clearing arrears to private sector firms so they can meet their obligations to banks. The delay in paying government suppliers has been blamed for the increase in loan defaults this year.

Further, Kasaija said government will reduce its borrowing from domestic markets as it crowds out the private sector and leads to higher interest rates. Government rationale is that it is cheaper to borrow from domestic than foreign markets.

The opposition will respond to the statement after Parliament’s Committee on National Economy has analysed it, Opposition chief whip, Ssemujju Ibrahim Nganda said.

The speaker, Rebecca Kadaga asked the National Economy committee to critically look at the minister’s statement and report back to parliament this Thursday.