Ratio Magazine :: The Inside Track to East Africa’s Economies - Uganda: IMF Optimistic on Uganda’s Ability to Withstand Global Crisis

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Uganda: IMF Optimistic on Uganda’s Ability to Withstand Global Crisis

Tuesday, 04 November 2008

The IMF’s latest Uganda review confirm Uganda’s strong growth performance and predicts that the fallout of the global financial crisis can be contained. Andrea Bohnstedt looks at some of the risk factors to the forecast.

The IMF review mission to Uganda at the end of October 2008 noted strong performance in the 207/08 fiscal year when GDP growth reached 9.7% (at market prices). This performance was driven by the construction and services sector, and also bolstered by a 50% growth in exports. Rapidly expanding credit to the private sector equally points to a vibrant economy. Against this positive background, the IMF points out two major shocks to the Ugandan economy: high and rising consumer prices following the surge in both food and oil prices, and the global financial crisis and the result economic downturn. Although to what extent is still unknown, the latter will affect Uganda both in terms of demand for its exports and less FDI, even if Uganda’s banking sector is unlikely to suffer. The IMF subsequently lowered Uganda’s GDP growth forecast for the current financial year (June to June) to a nevertheless very respectable 7.5%. The IMF mission also found that the fiscal framework was still appropriate.

Comment

Uganda no longer has a funded programme with the IMF, but has signed up for regular monitoring visits under a Policy Support Instrument (PSI). The latest assessment of Uganda’s economy and its macroeconomic management was overall very positive, and certainly Uganda’s vibrant financial sector with several new entrants from Kenya and western Africa indicate a thriving economy. A revision of the system of national accounts resulted in a higher GDP growth rate than initially estimated.

Economic growth in the last financial year had benefited from the Commonwealth Heads of Government Meeting (CHOGM) investments. This spending bonanza had been afflicted by the usual governance issues, including ineligible tax exemptions, incomplete contracts, land giveaways etc. Some of the budget for much-needed road repairs and extensions outside the capital had been diverted for ‘CHOGM’ roads, many of which remain incomplete and are likely to fall into disrepair quickly. The problem of entrenched corruption in much of Uganda’s government spending had only been given a cursory mention of ‘the need to ensure value for money in public spending’ by the IMF team.

In addition, there are some risk factors to Uganda’s growth prospects:

The oil price has practically halved over the recent months, and it is not clear yet how this will affect Uganda’s oil exploration efforts. Following Tullow Oil’s first positive results, there had been a lot of excitement in the sector, several other blocks have been concessioned, and the international interest overall was relatively strong. Depending on the development of the oil price, will the government’s plans to build a mini refinery and power station at the exploration site have to be revised?

Uganda also benefited from the strong demand from neighbouring post-conflict regions like Southern Sudan and eastern DR Congo, and its own northern region that is slowly recovering from two decades of internal displacements and the threat from the Lord’s Resistance Army (LRA). But these may not be ‘post conflict’ for much longer: There has long been speculation that the peace agreement between northern and southern Sudan will not hold, and southern Sudan has long been rearming and training to prepare for a renewed outbreak of hostilities. The arms-bearing MV Faina hijacked by pirates off the Somali coast only provides the latest evidence for this. Similarly, the new outbreak of fighting in eastern DRC may have an impact on Uganda. In addition, Uganda had previously been militarily involved in Uganda and still has proxy interests there, so the danger of a renewed involvement remains.

Agriculture received no mention, but is worth considering: The sector still employs 70% to 80% of Uganda’s population, but the growth rate, at 1% in 2007/08, had been distinctly below the rate of population growth at 3.6%. Rural development is an explicit objective of Uganda’s government, but it appears that it has not yet found the right strategy to bring this about. Productivity improvements are urgently needed to address rural and overall poverty, as many of the fast-growing industries are concentrated in the capital.

Longer term political risk remains as President Yoweri Museveni shows little inclination to hand over to a democratically elected successor and is expected to contest the 2011 presidential elections for his fourth (or depending how you count, sixth) term again. Given his falling support, that presidential campaign will see an increase in both corruption and repression towards the media and opposition figures, and will ultimately also affect business.

The full IMF notice can be found here: http://www.imf.org/external/np/sec/pr/2008/pr08266.htm

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