Government cannot influence price levels whose changes are driven by external shocks that are outside

By John Kusolo

“Government cannot influence price levels whose changes are driven by external shocks that are outside its control. We will therefore not be applying measures which can lead to long-term and painful distortions in the economy”, says Finance Minister Matia Kasaija while delivering Uganda’s budget speech for Financial Year 2022/2023 whose theme is : Full Monetisation of Uganda’s Economy through Commercial Agriculture, Industrialisation, Expanding and Broadening Services, Digital Transformation and Market Access.

RECENT ECONOMIC PERFORMANCE AND OUTLOOK

Economic Growth

The size of Uganda’s economy is projected to expand to Shs. 162.1 Trillion for the financial year ending 30th June 2022. This is equivalent to US Dollars 45.7 Billion. Economic activity has been more buoyant at the growth rate of 4.6 percent per annum this financial year up from 3.5 percent of last year. This shows that the economy is on a path to full recovery from the COVID-19 disruptions.

This buoyant recovery and resilience of the economy has been induced by the deliberate and prudent economic policies - Uganda’s GDP per capita has increased to US Dollars 1,046 in current prices, which is equivalent to Uganda Shs. 3.7 million per person per year. The services sector is expected to grow by 3.8 percent up from 2.8 percent growth last financial year. This is on account of continued recovery in wholesale and retail trade, education and tourism services; coupled with growth in real estate activities and ICT. The services sector is projected to contribute 41.5 percent to GDP.

The industry sector is expected to grow by 5.4 percent up from 3.5 percent growth last financial year, largely on account of recovery in manufacturing and construction activities. The industry sector is projected to contribute 26.8 percent to our GDP.

The agriculture sector is expected to grow by 4.3 percent, largely as a result of growth in food and cash crop production, livestock as well as recovery in fishing. This is the same rate at which the agriculture sector grew last year. The sector contributed 24.1 percent to total economic output.

Prices

In the second half of Financial Year 2021/22, however, there has been a significant increase in prices for some of the essential commodities and services. These include laundry bar soap, petrol and diesel, cooking oil, some food crop items such as wheat, sugar, potatoes, and onions. Education services, and building materials such as cement and steel have also experienced price increases. As a result, the overall inflation has increased considerably from 2.7 percent in January 2022 to 6.3 percent in May 2022, causing considerable discomfort among the public.

According to Matia Kasaijja the recent increase in the prices of essential commodities is a result of events that have occurred outside Uganda. These are:

i) The effect of COVID-19 restrictions across the world, which disrupted supply-chains, which has consequently caused a shortage of intermediate raw materials used to produce some essential commodities;

ii) In the recent past, the global economy has faced high shipping costs arising from limited availability of containers, and higher fuel prices; all together leading to supply shortages globally;

iii) The full opening of economies globally following relative containment during the COVID-19 pandemic lockdowns has led to a rapid rise in aggregate demand for a number of fast-moving-goods beginning with oil, yet production levels have been constrained by Covid-19 restrictions; and

iv) The situation has been worsened by the Russia-Ukraine conflict, which has further disrupted supply of oil, cereals such as wheat, maize, and sunflower oil, as well as essential metals like aluminum and nickel. The two countries are major producers and exporters of these commodities. Appropriate measures to curb the rising prices in the short, medium and long term will be implemented. These measures include:

i) Supporting farmers to grow more fast-maturing food and oil seeds to ensure sufficient domestic supply;

ii) Maintaining a market-based determination of prices to support a continuous supply of the goods and services. This is intended to ensure that demand does not outstrip supply;

iii) Expediting improvement of alternative fuel import routes across Lake Victoria to avoid possible unnecessary supply disruptions;

iv) Using appropriate fiscal and monetary policies to mitigate the impact of price shocks;

v) Construct additional fuel storage infrastructure in the medium term, and stock them adequately; and

vi) Expediting commercial oil production and development of the oil refinery. Government cannot influence price levels whose changes are driven by external shocks that are outside its control. We will therefore not be applying measures which can lead to long-term and painful distortions in the economy. For example persistent shortages of goods, hoarding, and black markets.

Exchange Rate Developments

Over the past year, the Uganda Shilling initially strengthened against the US Dollar, appreciating by 2.3 percent between April 2021 and April 2022. This appreciation was on account of higher dollar inflows from our exports, foreign direct investment, and foreigners buying Government treasury bills and bonds.

20. However, the Shilling has experienced significant depreciation pressures since March 2022 on account of concerns arising from the Ukraine-Russia conflict and related sanctions as well as the rising interest rates in advanced economies. The Shilling depreciated by 1.7 percent month-on-month on average in the three months to June 2022 and by 6.7 percent against the US Dollar between June 2021 and June 2022. The Bank of Uganda is taking appropriate measures to avoid volatile fluctuations but not preventing the exchange rate movements.

Interest Rates

Commercial bank lending rates for Shilling denominated loans marginally declined to 18.8 percent in the 10-month period to April 2022, down from 19.1 percent in the same period in the previous year. Reduction in lending rates occurred in the Transport and Communication, Building, Mortgages,Construction and Real Estate, and Personal and Household Loans sectors.

External Sector Performance

Total export receipts of goods and services amounted to US Dollars 5.74 billion in the 12 months to April 2022, down from 6.2 billion in the previous 12 months. Merchandise exports reduced by US Dollars 858 million in the same period. However, coffee receipts increased by US Dollars 279.5 million to US Dollars 811 million in the same period.

Private sector imports of goods have increased significantly to US Dollars 6.4 billion in the year to April 2022 from US Dollars 5.0 billion in the previous 12 months. This increase is attributed largely to investments in the oil and gas sector. For the same reason, foreign direct investment has rebounded strongly to US Dollars 1.36 billion in the year to April 2022 from US Dollars 892 million in the same period a year before. Uganda’s international reserves at the end of April 2022 increased to US$ 4.54 billion, equivalent to about 4.6 months of imports. This was an increase from US Dollars 3.57 billion as at April 2021.

Fiscal Performance

The revenue collection target in financial year 2021/22 Budget was Shs. 22.425 trillion. Total revenue collection is now projected at Shs. 21.486 trillion. This represents a shortfall of Shs. 939 billion. Despite this revenue shortfall, domestic revenue collection this financial year has improved compared to last year. This has been on account of improved tax administration and increased economic activity following the full re- opening of the economy in January 2022.

Total Government expenditure excluding domestic debt refinancing, external debt amortisation and appropriation-in-aid is projected to amount to Shs. 35.027 trillion this ending financial year. This expenditure is equivalent to 21.6 percent of GDP. This is Shs. 697 billion higher than the expenditure planned at the time of budgeting, mainly due to the need to finance the health requirements associated with the impact of Covid-19 pandemic, and to address internal and regional security threats. The fiscal deficit this Financial Year 2021/22 is estimated at 7.3 percent of GDP which is lower than the 9 percent fiscal deficit registered in Financial Year 2020/21. Our target is to reduce the fiscal deficit to 3 percent in the medium term.

COVID-19 Mitigation Measures

Government implemented several measures to mitigate the impact of the pandemic on households and businesses. These measures were aimed primarily at keeping Ugandans alive and also to restore business activity. To date, the outcomes of these measures are as follows: Health and Social Support Response Government implemented robust actions to contain the COVID-19 pandemic and its effects on households. These actions included:

i) Enforcement of COVID-19 SOPs and guidelines, and free mass vaccination. A total of 16 million people, equivalent to 72 percent of the targeted 22 million persons have received at least one dose;

ii) Provision of Shs. 53.5 Billion as cash relief grants to adversely affected people, including boda-boda riders, salon workers, food vendors, private school teachers, ghetto residents, and street vendors;

iii) Strengthening health care systems, including regional and national referral hospitals by equipping 143 Intensive Care Units (ICUs), upgrading of 255 Health Centre IIs to Health Centre IIIs, and the recruitment of 400 health workers; and

iv) Funding scientific research and development, including COVID vaccines development and innovative therapeutics such as COVIDEX.

During the pandemic, learning continued with the provision of home-learning materials across the country. Following the full reopening of schools, an additional 2,900 primary and secondary school teachers have been recruited and deployed to help the learners to catch up on lost time. Restoring Business Activity To support recovery of the economy Government has provided credit relief to borrowers as well as funding to micro, small and medium enterprises (MSMEs) and corporate/large businesses. The following progress has been registered:

i) Bank of Uganda extended credit relief to enable borrowers unable to service their loans during the pandemic to restructure them. Loans totaling Shs 7.2 trillion, representing 40 percent of total loans, were restructured over the period;

ii) Domestic arrears to private sector suppliers of goods and services to Government totaling Shs. 526 billion were cleared. In addition, Court Awards amounting to Ushs 57 billion were settled;

iii) The Microfinance Support Center (MSC) was funded to support micro- businesses through the Emyooga Fund (Shs. 100 billion) and support to SACCOs (Shs. 27 billion). Consequently, 6,600 SACCOs and 205,000 savings groups have been established across the country. These are operating a total of 4.1 million accounts. As a result, savings worth Shs. 63 billion as at the end of April 2022 among the lowest earners of this country have been realized;

iv) For small businesses that do not fall under Emyooga and at the same time do not qualify for the UDB funding, the Shs. 200 billion Small Business Recovery Fund has been established in partnership with Bank of Uganda supervised financial institutions to offer credit at a subsidised interest rate of 10% percent per year;

v) To support the recovery of medium and large-scale businesses, Uganda Development Bank (UDB) was capitalized to the tune of Shs. 636 billion and which was fully disbursed by May 2022 at an interest rate of 12 percent per annum. In addition, UDB plans to disburse a further Shs. 351 billion by December this year;

vi) For private sector enterprises engaged in strategic industrial development of the country, such as agro-processing, manufacturing, and minerals beneficiation, the Uganda Development Corporation (UDC) received Shs. 160.7 billion this financial year to make equity joint venture investments; vii) Government has also disbursed the Shs. 20 billion to Teachers’ SACCO to support them to recover from the pandemic;

viii) In the Financial Year 2021/2022, the Agricultural Credit Facility disbursed a total of Shs. 67.42 billion to 1,057 borrowers as at June 2022. Cumulatively, the fund has financed a total of 3,120 farmers across the country to a tune of Shs. 737.30 billion;

ix) Following amendment of the National Social Security Fund (NSSF) Act to allow mid-term access for qualifying members, a total of Shs. 420 billion has so far been paid out to about 21,500 beneficiaries; and

x) For women entrepreneurs, I have received a US Dollar 217 million grant from the World Bank to provide funding in the coming financial year to middle level businesses managed by women to support their growth and create jobs.

As a result of the above measures, we have begun to see positive trends in business activity. For example, during the 10 months from July 2021 to April 2022, there was a 38 percent increase in tax payers with 686,000 new taxpayers being added to the taxpayer register.

In addition, investors’ sentiments about doing business in Uganda have remained positive in recent months as illustrated by the following indicators between July 2021 and May 2022.

i) The Business Tendency Index (BTI) which has increased by 20.8 percent. The BTI measures the level of optimism that executives have about current and expected outlook for production, order levels, employment, prices and access to credit;

ii) The Purchasing Managers’ Index (PMI) which has increased by 48.8 percent. The PMI is an indicator of business activity both in the manufacturing and services sectors; and

iii) The Composite Index of Economic Activity (CIEA) which has increased by 4.3 percent. The CIEA represents the monthly underlying forces in the national economy.