Business and Finance

Economy on steady recovery path

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By Samuel Sanya

THE past six months are 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 during the school holidays. We just need government protection from the cheap imports.”

The country has started to recover from the food supply shocks that momentarily threw inflation into an upward spiral, making loans more expensive as the Central Bank battled to calm the raging economic storm.

Even worse, the exchange rate depreciated rapidly hitting the sh2,900-mark last September as the imports became much more expensive as exports suffered the brunt of the struggling Euro Zone economies, further amplifying the domestic troubles.

However, as the great scientist Isaac Newton said “what goes up must come down,” the economic storm is starting to calm as inflation falls, and the exchange rate stabilises and growth rates start to climb.

Recent Uganda Bureau of Statistics (UBOS) quarterly gross domestic product figures indicate that the economy grew by 2.4% between January and March from an earlier decline of 2.6% between October and December 2011 when inflation peaked.

“Trend cycle in the quarterly GDP grew by 1.9% in the third quater 2011/12 compared to a decline of 2.1% for Q2 2011/12.

“The agriculture sector value added grew by 0.4%, industry grew by 7.3%,” JB Male Mukasa, the UBOS executive director, said in a statement. He pointed out that value added for cash crops grew by 2.3%, livestock by 1.2%, forestry by 1.1% and fishing by 2.7%, the industrial sector by 9.2% despite declines in the value added in the mining and quarrying activities of 12.7%.

During the same time, Bank of Uganda (BOU) increased its benchmark Central Bank Rate (CBR) to 23%, resulting in a decline in value added by the services sector by 0.2% though other productive sectors remained resilient resulting in an overall growth in economy.

The tight monetary stance being observed by the Central Bank has seen the shilling stabilise in the sh2,400 – 2,500 for the past month as inflation slowly falls toward the Central Bank 5% target in the medium term.

John Mayende, a UBOS principal statistician, pointed out that the fall in headline inflation to 14.3% coupled with the recent easing in monetary policy which has increased private sector credit 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 July from a prior dip of -5% in June.

Core inflation, the portion of headline inflation that the Central Bank is targeting, has steadily fallen to 15.4% from 19.6%, albeit higher than the headline inflation of 14.3%, which has drastically fallen from the highs of 30.6% in October 2011.

“Inflation will fall to single digits over time, and should allow the Bank of Uganda to cut interest rates by at least 100 basis points this week,” said Razia

Khan, the head of Africa research at Standard Chartered. “All of this should underscore recovery prospects in the economy,” she said.

Analysts expect the CBR to be cut to 18% from 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 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 BOU monetary policy in the short-to-medium term are to maintain the downward path of core inflation towards its medium term target of 5%, while at the same time, encourage private sector credit from the banking system,” Dr. Louis Kasekende, the BOU deputy governor, said.

He explained that increased private sector credit would in turn support stronger growth 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 the sh439b mark in February from a prior month of sh286b before falling to sh415b and sh357b in subsequent months even as loan applications continue to rise each month.

Despite a torrid financial year, the economy remained resilient with the Uganda Revenue Authority (URA) beating the odds to override the sh6,169.28b collections target by a sh39b surplus, spurred on by advanced collection technologies.

Cuthbert Baguma, the director of the Uganda Tourism Board, pointed out that the country’s fortunes are set to grow as positive global ratings increase visitor numbers.

“The numerous accolades that the country has won have improved the international visibility of Uganda and visitor numbers have already passed the one million mark,” he added.

Revenues to the tourism sector hit the $800m (about sh2trillion)-mark last year, boosting the entire economy, reducing the need for donor aid as the country moves to achieve self-sustainability.

Uganda’s imports outstripped exports by 30% or $1.21b (about sh3trillion) according to the Finance Minister, Maria Kiwanuka.

Inclusive growth

While presenting a paper on Market Failures in the Financial System at the 20th Jospeh Mubiru memorial lecture, Professor Joseph Stiglitz, warned of the need to align private rewards in the private sector to social returns when the economy falls in the hands a few, rich but corrupt fellows 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 emphasised.

He added that the Government needs to consider capitalising development banks and small-and-medium enterprises to achieve inclusive growth and economic development in the long run.

Prof. Mahmood Mamdani reiterates the need for policies that provide for the society to directly participate in the economy, saying “the challenge is not how the State can regulate the market, but how society can regulate both the State and the market.”

Kiwanuka adjusted the income tax schedule in her second budget speech, imposing an additional 10% tax on incomes above sh120m each year or sh10m each month as the country moves to reduce income inequalities.

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