Economy in Bullish Mood?

President Yoweri Museveni tours Roofings factory at Namanve. Manufacturing is recording higher amounts of loans according to BoU. FILE PHOTOBOU says pick up in private sector credit points to an economic revival but economic observers are not as optimistic

Hajji Katimbo, the chairperson of Kikuubo traders, is confused about the information Bank of Uganda officials give out about the performance of the economy.

“Banks will charge higher rates compared to what Bank of Uganda tells you,” he told The Independent on Sept. 9. “What is on ground is different.” Katimbo said many of his traders have recently lost property to banks because they have failed to meet their loan obligations in time. “Sometimes their terms and conditions are hard to meet,” Katimbo added.

What traders are saying appears to paint a negative picture about the economy that indicators show to be rebounding from the shocks of the last quarter of 2011 and some parts of 2012, according to Bank of Uganda’s monetary policy report for August.

The report indicates a positive picture of all major economic indicators about the economy if compared to the second half of 2011 and first half of 2012.

The report says the average annual growth in private sector credit in the quarter to June, 2014 was 12.7% up from 7.8% in the quarter to March, 2014, mainly driven by increase in households and personal loans, and loans to agriculture and building and construction sectors.

Average commercial bank lending rates for shilling denominated loans have relatively stabilized at 21.7% in the second quarter to June 2014 compared to the highs of about 28% at the beginning of 2012.

The reduction is attributed to the reduction in the monetary policy tool the central bank rate (CBR), which has remained at 11% for months compared to 23% recorded at the end of 2011 and some months of 2012.

In fact, Adam Mugume, the executive director for research at the BoU, said at a recent press conference that total loans given out by banks to borrowers had increased to about Shs 9 trillion for the period up to June, 2014 compared to less than Shs 7 trillion recorded at the beginning of 2012. He attributed the increase to the “improved business environment.”

Another indicator – inflation – has declined to 2.8% (year-on-year) for the year ending August 2014 compared to the highs of 30% at the end of 2011, largely attributed to the reduction in food prices.

Core inflation, the target for BoU, has declined to 3.1% for the year ending August 2014 compared to around 30% recorded at the beginning of 2012.

GDP growth has also somewhat improved to 5.7% for 20132014 compared to 3.2% recorded for 20112012.

The exchange rate, which had spiked to Shs 2,900 per US dollar at the end of 2011 and early 2012, has been somewhat stable at around Shs 2,61516 as of Aug. 8. This rate is slightly below the long-run steady state rate of Shs 2, 700-2,800 to the dollar.

Unfavourable numbers:

Unfortunately, BoU reports indicate that Uganda’s trade balance continues to deteriorate on account of stagnant exports and high import requirements.

The trade deficit fell by 11.4% from $2,123 million in 201213. In 201314, the trade deficit rose to $2,365.5 million from $ 2,123 million in 201213.

Speaking to the media earlier last month, BOU Governor Emmanuel Tumusiime Mutebile said the latest economic indicators suggest that the domestic economy continues to register favorable performance. Mutebile said economic growth is projected to be in the range 5.5 – 6.5% in FY 201415 compared to the 5.7% registered in 20132014. Going forward, Mutebile said, he expects economic growth momentum to be sustained, anchored by domestic demand with additional support from the improved external environment.

The key uncertainties for the domestic economy continue to be centred on the timing and extent of the pickup in domestic investment and the prospects for export demand, he said. “It is possible that consumption and investment could be ger than expected,” he said, before warning that there are external risks as the global economic outlook remains subject to considerable degree of uncertainty.

Mutebile said prospects for global economic activity in 2014 are weaker than earlier anticipated but are expected to gather momentum in 2015 whereas financial and commodity markets also remain vulnerable to instability as geopolitical risks remain elevated.

BoU projects core inflation to remain in the range of 4 – 5% in the third quarter of 2014, increasing to 5.5 – 6.5% over the next 12 months. Given the assessment, Mutebile said, the BoU’s judgment is that the current monetary policy stance is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the medium term target of 5%.

Mixed reactions:

Everest Kayondo, the chairperson of Kampala City Traders Association, said what BoU refers to as the reduced interest rate is the ‘nominal’ interest rate – the average commercial bank lending rate – which stands at at 21%, “but actual lending rate is far higher than that”.

“Their (BoU) rate is quite misleading,” Kayondo told The Independent on Sept. 9, adding that there are other costs like 2% commitment fee of the total credit, loan monitoring fee among others and those hike the cost of credit even further. “So it is not true that we are borrowing at affordable rates,” he said.

Lawrence Bategeka, an economist and former research fellow at the Economic Policy Research Centre at Makerere, appeared to agree with Kayondo. He said the drop in inflation is largely due to a decline in food prices due to the recentongoing harvests.

“You cannot base monetary policy on that,” he said, “seasons come and go.” On interest rates, he said there is a need to examine the willingness of banks to extend credit to borrowers. “You may say the rates have dropped but ask yourself who is borrowing?” “It is possible that only corporates are borrowing and not the ordinary businessmen and households which comprise the majority of Ugandans.”

Biggest borrower sectors:

BoU reports indicate that four sectors consumed approx. 75% of the total loans given out by banks for the period from January to June 2014 building mortgage and real estate taking the largest share, 22.7%, trade [21.6%], personal loans and household loans [17.2%] and manufacturing [13.2%].

Bategeka however said the business environment “is improving” compared to the last half of 2011 and first months of 2012 when all economic indicators had worsened. Going forward, Bategeka suggested that the government and the private sector and everyone should focus on increasing crop production to prevent inflation from rising.

“We are seeing growth in services sector but not in agriculture our mother sector,” he said, it is a responsibility for each of us to make sure we turnaround this.

Fred Muhumuza, the senior manager for financial services inclusion Programme at KPMG Uganda, and a former senior aiser to the minister of finance, said none of the indicators (interest rates, inflation, exchange rates, private sector credit etc.) really reflect the status of the underlying health of the economy in Uganda today.

Like Bategeka, Muhumuza said inflation is largely a case of food prices that are determined by seasons, which we do not control. “Our agriculture production is still weather-driven as we have not invested in managing the weather,” he said, “It is just a few more months of these rains before something goes wrong once again.”

On reduced food prices, Muhumuza said, it is a good sign but not reliable for anyone to hang their hopes on.

On interest rates he said, they may be lower than some of the worst cases of 2011 but that still leaves them higher at 21% compared to what is needed to promote sustainable and profitable private sector investment. “It is a case of comparing the worse with the worst with nothing good or better or even best,” he said, in the same line, he added, it would be good to know who is borrowing and what they are doing with the money.

“Quite often it is just rescheduling of credit that companies have failed to pay and then asking for more to save old investments and not necessarily making new investments,” he said. He added there is need for a demand indicator to judge the health of the economy as that is the trigger of all opportunities that eventually feed into borrowing as people plan to take aantage of emerging businesses.

Asked to comment on the exchange rate, Muhumuza said, the exchange rate is lower largely because of dollars attracted by high interest rates related to government borrowing in the domestic market to finance the budget.

He said foreigners borrow at low rates in Europe and convert dollars to Shillings to buy government bonds. These ‘artificial’ dollars, he said, keep the exchange rate low, but also reduce URA collections that are planned at a higher exchange rate.

Overall, he said none of these developments is sufficient to conclude about the health of the economy.

“The picture remains gloomy and going forward to 2015 and 2016 is going to be tough and uglier,” he said without elaborating. But while releasing the bank’s performance for the first six months of 2014, Phillip Odera, the CEO of Uganda’s largest commercial bank, Stanbic Bank, said business was “coming back to normality” after his bank recorded a 19.2% increase in net profits to Shs 68 billion in the first six months of the year from Shs 57 billion in the same period in 2013.

Other analysts including Stephen Kaboyo from Alpha Capital Partners and Arthur Isiko from African Alliance said players in the economy had gained confidence that the economy was rebounding, which was also a good thing. Worries however persist about the rising 2016 general elections fever, which could send the shilling tumbling again as it did in 2012.

Source : The Independent

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