More poor people than the employed : Uganda's development paradox

Uganda National Household Survey (UNHS) 2016/17 released on September 27^th, 2017 has interesting and perplexing statistics that reveal the weight of the development challenges Uganda faces. The survey was conducted and issued with a one year lag. Drawing from historical trend (1999/00, 2002/03, 2005/06, 2009/10, 2012/13), the next household survey should have been in 2015/16.  As expected, slowing economic growth has negative ramifications for poverty reduction and unemployment. With lower growth, the pace of poverty reduction has also slowed and 27% of the population (10.1 million) were categorised as poor in 2016/17 compared to 19.7% in 2012/13 (6.6 million). Additionally, while Uganda remains at less than half the 1990 poverty rate (56%), in absolute numbers there are approximately 700,000 more poor people in 2016/17  when compared to 1990 poor people. This means the rate of poverty reduction has been lower than the lower of population growth.

Interestingly while poverty has increased (3 in 10 Ugandans) are poor, the level of inequality has decreased suggesting that the non-poor particularly the small middle income class endured faster reduction in their incomes than the poor. And yes the middle income class is small – for example an average NSSF member (now estimated at 1.4 million) earns a gross salary of UGX 850,000. This is consistent with survey finding that persons with education of a degree or more earned a monthly median income of UGX 780,000. The survey further reveals that the average monthly wage of an employee was UGX 168,000. A median rural wage employee who earns UGX 120,000 monthly is essentially poor – less than the USD 1.25 per day estimated at UGX 135,000. Juxtaposing the average wage increment since 2012/13 with inflation, suggests that real wages reduced.

The struggles of the non-poor are in part exacerbated by the level of dependency. One way to look at it is that nearly 1 in 4 Ugandans are employed implying the 3 depend on the 1 employed. This weight of dependency is discounted in the conventional definition of age dependency which is defined as the ratio of the dependent population (0 to 13 and 65+ years) to the proportion of economically productive population (15 to 64 years).The working age population (15 to 64 years) is now at 51% (19 million), meaning the age dependency ratio of 97 and declining from 107 in 2012/13. 

Additionally, 21.2% of population (4 million) of working age population are not working and therefore the working population, defined as persons who produce goods or provide services for use by others or for own use, is estimated at 15.1 million. On the other hand, the labour force which includes the employed and unemployed persons is estimated at 10 million, out of which the total population in employment was estimated at 9.07 million. This means 918,000 Ugandans were unemployed – translating into a 9.2% unemployment rate. This also discounts the unemployment magnitude since only 60% of the working are employed. The remaining 40% (difference between the working and labour force) are simply doing voluntary work.   This added to the unemployment of 918,000 would defacto mean approx. 7 million are not employed.  21% of the population are considered youth (between 18 and 30 years) and the respective youth unemployment stands at 13%.

If government was to offer poverty transfer payments or safety nets, it would need to spend UGX 79,300 per month (minimum consumption per adult equivalent) on each of the 10.1m poor people. This translates into UGX 800 billion per month and UGX 9.6 trillion per annum (about 40% of the budget or 70% of domestic revenue). This would be seemingly unaffordable. To address the poverty and employment challenges, targeting the basic factors of production remains critical. Land is the primary factor of production and requires institutional reforms to backstop the needed structural reforms. The recent poverty surge is attributed to climatic and drought conditions that affected the agriculture sector over this period. There were more frequent droughts - 2009/10, 2011/12 and 2016/17.   The survey indicates that agriculture remains the largest employer of the labour force and arguably has the highest potential to reduce poverty; hence addressing the entire value chain linked with agro processing industrialisation is omni-warranted. Revamping growth to its historical averages is not only essential for middle income status attainment but necessary for poverty reduction and employment creation. The Uganda Growth Forum held on the 14th and 15th September 2017 at Speke Resort Munyonyo underscored areas necessary for growth recovery including espousing public investment management. 

Banking sector highly leveraged but this comes with pronounced risks

Recently, Bank of Uganda (BoU) published the seventh issue of the Annual Supervision Report corresponding to the year ending December 2016.  BoU reiterates that the banking industry remains sound, well capitalised, liquid and profitable. This indeed is instrumental in restoring confidence to the sector following the takeover of Crane bank in October 2016 and the subsequent disposal of some of its assets and liabilities to DFCU bank in January 2017. In the same report, it is underscored that the handling of Crane Bank by BoU was without any contagion despite the regulatory weaknesses, fraud in the bank and the associated misreporting by then a Domestic Systematically Important Bank.
On profitability of the sector, the report indicates a reduction in profits after tax from UGX 541 billion in 2015 to UGX 302 billion in 2016 – the lowest in five years.   However, this is inconsistent with the published information by the 24 commercial banks that reveals that the net profits increased to UGX 677 billion. The difference (UGX 375 billion) is arguably attributed to Crane Bank losses which accounted for nearly 50% of the industry non-performing loans (NPLs) in December 2016. The asset deterioration depicted by the rise in NPLs (10.5% of total loans) and bad loans (UGX 574 billion) in December 2016 imply that the sector risks remain pronounced. The stress tests reveal that if each bank's largest three borrowers were to fully default, 13 banks would become undercapitalised with the cumulative shortfall of UGX 512 billion. Together with NPLs and bad loans, they compare unfavourable to the commendable Deposit Protection Fund (DPF) of UGX 405 billion end of December 2016. The DPF capitalisation is through premiums paid by the respective banks - of which 95% is invested in government securities. Additionally, DPF only accounts for 2.5% of the total deposits.
 The deposits imperatively offer leverage for the banking sector as they account for 70% of the total assets (an equivalent of 81% of the total liabilities). However, the deposits are mainly of short term nature – implying arguably the banks do not offer long term lending. The ratio of total deposits to loans remains above 1, and grew to 1.4 largely representing the sluggish growth (6.1%) in credit in 2016. Loan approvals were at less than 60%, implying for every 10 loan applications – only 6 were granted. While credit to personnel and households increased to UGX 1.9 trillion ( 16% of the total loan book, some banks are re-adjusting their portfolio either in safer assets, areas of comparative advantage ( for example Housing Finance Bank for mortgages) and others like equity have indicated they will stop personnel lending. Credit to real estate and trade sectors has remained stagnant over the last couple of years.
Banks instead increased their investment in government securities reaching UGX 5.1 trillion in 2016 from UGX 4.1 trillion in 2015 – representing a 25.6% increase. This may be suggestive of the crowding out of the private sector whose growth in the last 5 years has been lower than the historical average. Also total private sector credit at UGX 11.5 trillion represents 13% of GDP which is low compared to Sub Saharan Africa average of over 20% - which illustrates low credit penetration and that private sector is not optimally leveraged yet the banks are seemingly so. This also corroborated by the cumulative number of financial cards reaching 1.38 million in December 2016. Low credit penetration is attributed inter alia information asymmetry on the borrowers, small middle income class, the slowing economic activity plus the associated downside effect on employment and the reducing household income in real terms. Household income data remains desperately needed and to be frequently updated for proper and effective economic planning. The last household data available is from 2012/13 and economy has since encountered numerous shocks and changes.
In conclusion, with total shareholders' equity at UGX 3.7 trillion (16% of the total bank assets) implies that banks are highly leveraged by deposits. Despite the high interest rate spread (difference between loan and deposit rates), banking profitability remains unpropitious particularly for the bottom 15 banks (five were loss making in 2016). The high deposit share of bank assets reiterates the need for heightened supervision to mitigate the recurrence of Crane Bank and restore full confidence in the sector. The alternative is client panic and bank runs and this could adversely strangle the economy.

Real estate sector sound but has pronounced medium term risks especially for urban areas

Three years ago, a colleague as old Uganda's life expectancy (63 years) approached me for causal advice on his rental units business that were fetching him revenue of about UGX 30 million per month and an annual gross income of UGX 360 million assuming full occupancy. However, according to him the full occupancy levels were averagely 10 months per year. I then advised him to sell his property and at a price 10 times his annual rent revenue. He eventually sold at UGX 3 billion. I further advised that he invests in government securities (bonds and bills) as the rates were bound to increase since government domestic borrowing was on the rife. In fact nearly UGX 5 trillion worth of government securities have been issued in the last 3 years and nearly UGX 1 trillion to be issued in FY 2017/18. Also owing to upward periodic surge in inflation, the Central Bank reacts by increasing the Central Bank Rate thus fostering an upward increase in other short term interest rates including the treasury bills and bond rates. Long story short, his annual his net annual return has averaged between UGX 360-400mn.
Looking at the rental units buyer's perspective, it will take them about 20 years to have a break even. With an assumed annual income of UGX 300m-360million, it will take new owner about  10 years to recover the current face value of UGX 3bn which then will be will be of much less value. Contrary to the long term recoverability of real estate, over 60% of the cumulative private investments are in buildings and structures. One of the obvious reasons is that the return on real estate (inflation) will remain favourable. Contrary to the law of demand, when real estate prices increase, the demand tends to also increase in anticipation that prices will rise in near future. The vibrancy of real estate activities has been backstopped by the notable increase in share of private sector credit allocated to Building, Mortgage, Construction and Real Estate from 17% in 2009 to 22% in 2016, surpassing trade as the largest share of the private sector credit. Notably, the foreign currency loans to construction sector continued to rise at a faster rate, accounting for 28% all total foreign currency loans.
However, the recent trends are indicative of slowing economic activity. Over the last 6 years, economic growth the leading indicator of economic vibrancy has been short of its historical average rate by 2-3%. Growth is expected to reach to be 3.9% in FY 2016/17 (the second lowest growth rate since the early 1990s). Slow growth trends mean subdued demand and have implications on some segments of the economy particularly the real estate sector.  The real estate activities have remained stagnant at 5.2% of GDP over the 2009-2015 period. This implies that its growth has been commensurate the slowing growth rate of the economy over the corresponding period. Relatedly, the construction sector growth has slowed from over 11% in 2009 to just 4% in 2015 despite the increased government infrastructure expenditure.
In 2016, the size of non-performing loans on the commercial banks books enlarged rapidly reaching 10% of gross loans - with largest share (21%) recorded in the building and construction sector. The risks were more pronounced for foreign exchange denominated loans largely underpinned by the   depreciation of the shilling against the USD that has averaged 8% p.a since 2010.
In principle, when the real estate prices grow faster than economic growth, it becomes hard to sustain the bubble. The Bank of Uganda compiled real estate indicators (Land Price Index and Rental Property Index) though obsolete indicate that the prices have increased and rapidly except for Kampala Central where they reduced.  The bubble has seemingly burst for commercial properties, as the commercial property index for the greater Kampala show that the prices have reduced by 25% points between December 2012 and September 2015.
In conclusion, the real estate remains largely informal, unregulated, over priced in urban centres and marred with information asymmetry which factors underscore structural challenges and long term risks to sector. Regulatory reforms especially in land subsector are expeditiously warranted. Remember

Key facts about the Ugandan budget for FY 2017/18

Overweeningly, there is a fallacy about the UGX 29 trillion budget for Financial Year 2017/18. Only UGX 22 trillion will be spent on the 18 sectors (including statutory entities, central government, and local government and interest payments). What most call debt repayment of about UGX 5-6 trillion is simply debt roll-over. Simply re-contracting the debt instead of paying it off. This is because the 2015 Public Financial Management Act requires all debt both domestic and external to be approved by Parliament. Debt roll over is considered as new debt and thus the inclusion in the FY 2017/18 budget. For the third year in a row, FY 2017/18 will include provisions for refinancing of maturing domestic debt (also known as Treasury redemptions) to a tune of UGX 5 trillion or 22 % of the proposed budget compared to 19 % in FY 2016/17.
With an estimated population of UGX 40 million, each Uganda is worth UGX 550K in the next financial year budget. Gender mainstreaming huh? The top 4 sectors with largest budgetary allocation FY 2017/18 are led by women. That is Works and Transport, Education, Energy and Heath.
The approved budget for FY 2017/18 represents 7.6% increment from the FY 2016/17 approved Budget and the increment of 7.6% from previous approved budget is lower than the sum of FY 2016/17 inflation outturn (5.5%) and population growth (3%), implying a lower budget in terms of real per capita expenditure.
Overall, the budget deficit (expenditure in excess of domestic revenue) will account for 5.6% of the GDP in FY 2017/18 and which GDP is expected to cross the UGX 100 trillion mark for the first time. Cumulative fiscal deficits tantamount into public debt. Uganda's public debt outstanding is USD 9.8 billion (about 38.6% of GDP) and with the forecast budget/ fiscal deficit, the public debt will cross the 40% of GDP in FY 2017/18.
The fiscal deficit will be financed by both domestic (18%) and external borrowing (82%). Domestic borrowing is expected to be kept slightly at less than 1% of GDP. The rest will be external loans, of which 63% will be from non-concessional terms (shorter term and fairly close to market times). 33% of the non-concessional external loans will go towards Karuma and Isimba Hydro Power dams.
Already government is the largest borrower from the domestic market and domestic debt to domestic revenue ratio will remain nearly at 1. While domestic debt accounts for about 30% of the outstanding public debt, in terms of debt servicing expected in FY 2017/18 – it will account for 76% of interest payments due. Interest payments at 12.2% of the approved FY 2017/18 is the second largest share of the budget and the largest share of the budget funded by domestic revenue.

While the Infrastructure sectors of Works and Transport and Energy and Mineral Development account for 31.4% of the approved budget FY 2017/18, they remain heavily funded by external sources. The works and transport sector will be funded 49% from external sources and mainly loans (non-concessional) while energy sector -83% of the approved FY 2017/18 will be funded from external sources (largely loans).
The social development sectors of education, health and water and environment accounts for 23% of the approved budget FY 2017/18 compared to a high of 37% in FY 2002/03. These accounts for 23% of the approved budget FY 2017/18 compared to 24% in FY 2016/17, representing a 6% reduction in nominal allocations to these sectors compared to 31% reduction in the first budget framework for FY 2017/18. The reductions are mainly to the water and sanitation sector. Broadly per capita social development expenditure is reducing.
The agricultural sector which exhibited a recessionary trend (negative growth for two consecutive quarters) largely due to drought accounts for 3.8% of the budget FY 2017/18 of compared to 4% in FY 2016/17. However, in nominal terms, the allocations increase by nearly one percentage point.
Only 12% of local governments' budget will go to development activities. And 11% of the local government allocation will go for development budget.
Lastly only 0.2% of GDP allocation has been provided in FY 2017/18 for domestic arrears clearance yet the outstanding arrears as verified by Auditor general end of June 2016 were at 3% of GDP.

Is Uganda airline feasible?

My deductive and quick thoughts ( To be updated)
Politically yes we need it but economically we don't atleast yet.
The arguments against national airline are compelling:
1. We have a history of its failure
2. Regional aviational investments are struggling.
3. It comes at a cost of the tax payer - because in the short run even efficiently managed, it wouldn't break even. Again we have to borrow and our numbers getting super elevated. Contracted debt is over 50% of GDP. The debt risks are getting elevated particularly because we borrow in Dollars/other foreign currencies, but earn taxes in a weaker currency UGX. Recent trend of 10% depreciation per annum not a good trend.
4. Efficient management is not our classical define. Name a single efficient run and commercially viable Gov't entity in Uganda. Their eventual listing on Uganda stock exchange would be one indicator. Even service sector is not our niche.
5. Traffic volume - we have low numbers. If we had 3-4 entebbe airport numbers may be. Cargo frieght also limited numbers. Trade is increasingly skewed to EAC and COMESA and thus Standard Guage Railway and other transports modes expected to suffice here.
6. Other economic benefits,like Jobs created particularly in top level will be few. May be in long term, they would increase bug still marginal.
7. Where are regional thinking caps when it comes to airline? We already saturation in the region.
8. Airlines like refineries are expensive and complex.
9. We have an overload of large investments all front loaded and the risks of leakages/mistakes(costly) imminent.
10. So if airline is viable, still the timing would have to be rethought. 1st we need ri structurally reform be4 a huge investment. We remain struggling with even the aviation schools. GoU is indebted to CAA and arrears were growing last time i checked. Also would make sense to delay and develop financial sector so that we are able to raise some domestic financing off the market.Oil sector and airline linkages? -something i am yet to find out but even largest producers dont own national airlines.
Again very quick and deductive thoughts. GoU's own statements indicate airline is economically viable.

Financial sector shallowness a representation of the quality and size of private sector

Taking a look at global debt for households, firms and governments, it is glaringly in excess of 300% of World GDP. This implies that debt is an imperative factor in leveraging economic activity across the globe particularly where economic return is foreseeable. However, in the global debt composition, there are a few bad oranges in the basket. Turning back to Uganda, government is the largest borrower from the domestic market, with an outstanding stock of UGX 12.7 trillion in February 2017 compared total private sector credit of UGX 12.1 trillion. Over the last four years, commercial banks have increased their investment in government securities at an annual rate of 19% compared to growth in commercial bank credit of 13% (and slowing. As of June 2016, commercial banks held 43% of the total government securities.

Source: BoU Financial Stability Report FY 2015/16
The rest were held by NSSF (33%), offshore investors (10%) and others (14%). This trend suggests shrinking space for private sector borrowing due to heightened government borrowing, yet government employment accounts for about 6% labour force.
Private sector credit for Uganda as a share to GDP, a measure of financial depth at 15%, is low comparable with low-income countries - far below the Sub Saharan Africa average of 24% and over 40% for other regions (North Africa, East Asia, Middle East and Latin America and the Caribbean). The limited credit penetration reflects the quality and size of the private sector. That is why the banks that account for over 75% of the financial sector still hold substantial excess reserves (beyond the required levels by Bank of Uganda).The other telling sign is in the notable weakness in the banking sector. The loss making banks in 2015 were 5 including Crane bank (defunct now) and taken over DFCU. The level of non-performing loans (NPLs) reached 10% of gross loans in December 2016, twice the ratio in December 2015. Uganda has the second highest NPL ratio in East Africa after Burundi. The leading NPLs are in building and construction sector, the agriculture sector and trade services. While the agriculture sector accounts for 10% of the outstanding private sector credit, together with building and construction, they continue to account for largest composition of NPLs. This performance coincides with the tight economic conditions and slowing economic growth particularly in agricultural sector. The agricultural output growth has averaged less than 3% per annum since 2010, lower than population growth rate. On a quarterly basis, the sector output exhibited recessionary trend in 2015/16 - that is two consecutive negative quarterly growth. Also a slowdown in investment growth impacts negatively on building and construction, since 70% of the total investments in Uganda go buildings and structures. With such composition of investments, capital productivity is likely to slow further in long run.
On the supply side, financial sector assets as share of GDP also remain low at less than 50% of GDP, which is half the share in the aforementioned regions. Another important source of capital for the private sector is through equity markets either through listing or issuance of corporate bonds. Uganda's equity market remains small, illiquid and shallow with only 16 companies registered on the equity segment and 5 corporate bonds listed on debt segment of the Uganda Securities Exchange (USE). There hasn't been any activity on the primary market (initial public offers) since 2012, when UMEME was converted into a public company. The secondary market activity on USE remains subdued and registering annual total turnover less than 3% of GDP.
The Ugandan private sector is arguably small and prefers to stay informal. According to the last business census by Uganda Bureau of Statistics, more than 90 percent of businesses had less than 4 employees. Those entities are arguably not also covered by the insurance sector, which also remains rather small with a market penetration of less than 1% of GDP.
The Ugandan private sector is arguably small and prefer to stay informal. According to the last business census by Uganda Bureau of Statistics, more than 90 percent of businesses had less than 4 employees. Those entities are arguably not also covered by the insurance sector, which also remains rather small with a market penetration of less than 1% of GDP.
Overall, Uganda’s financial system is characterised by small and concentrated private bank-dominated financial systems, a large informal financial sector, shallow capital markets, high borrowing costs and underdeveloped long term savings, development banks and other financial institutions. Without pragmatically improving the general business environment and growing a substantial middle income class, the level of financial leverage for private will remain low. No more pussyfooting on structural and long term reforms.

Uganda's middle income- small it is

Over the last decenary, Uganda's growth has seen a surge in supply side particularly in the manufacturing and service sectors. The question,however, remains whether this supply side surge has created its own demand or rather meaningful middle income through enhanced employment. It is against that backdrop that I transpose the middle income discussion into numbers.
First, a country to attain lower middle income status, it requires a GDP per capita income (GDP divided by population) of USD 1,026. This translates into daily income per Ugandan of USD 2.8 (or UGX 10,000). However, Uganda's GDP per capita is only USD 710 – a daily income per Ugandan of USD 2 (UGX 7,000). Notably, the Uganda poverty status report of 2014 suggests that 64% of Ugandan's live below that USD 2 per day. Assuming the current population to be at 38 million, this translates into 24.3 million Ugandans earning less than UGX 7,000 daily or UGX 210,000 monthly. In addition, the vulnerability class is defined at twice the poverty line (i.e. people living between USD 1-2 per day) were vulnerable to falling back poverty. The recent economic developments reflected by slowdown in economic growth, downsizing and closures of some businesses and rising inflation may suggest increased vulnerability.
Looking at national census statistics, 49% of Ugandans are in the working age population (15- 64 years). This means working age population of 18.6m Ugandans. Thus the 19.4 million who are outside the working population age depend on the 18.6m leading to a dependency ratio of more than 100%.That is not the full story, 30% of the working population (5.6 million) are not employed. The unemployed 5.6m added to 19.4m implies 25 million Ugandans thrive on the economic power of the working within the working age population (i.e. 13 million) thus a dependency of 192%. In addition, 58% of the not working (3.2 million Ugandans) is due reasons other than participation in education and represent the non-utilized labour potential.
For the working population, 64% of working age population are employed in subsistence agriculture (arguably a non-monetary sector) - that is 11.9 million Ugandans. So this leaves only 1.1 million (of the 13 million) Ugandans in the monetary sector.  
Against that backdrop and a notable recent mitigated expansion of consumer services it begs a question as to whether population is a good indicator of consumer demand. By and large, this proxy is flawed. The economic prowess of this population is what matters. This now raises the next question, if 1.1million employees are estimated to be involved in money economic activities beyond subsistence, then how big is the middle income of Uganda.
A number of indicators could be used to corroborate the fact that Uganda has less than 1 million in the middle income. Understandably URA database has 964,000 registered PAYE clients, of which only 500,000 are in the tax bracket of 30% PAYE - earning more than UGX 410,000 per month.
Numerically, the privately owned cars on our roads – that is UAA 001A to UBA 999B gives approximately 676,000. With some individuals owning more than one car, it could mean those who own cars are about 500,000. Remember, public transport is not necessarily developed to incentivise middle class to use public means as opposed to buying cars.
Again, NSSF active members would another good indicator. The Fund currently has more than 1.6 million members, of whom about 600,000 actively contribute every month. An average NSSF member earns gross pay of  UGX 780,000. Deductively, usually middle income class is also an indebted class. So the statistics on the number of clients with access to credit from the banking system would be another telling figure. How many clients contribute to the current outstanding stock of Private Sector Credit of UGX 11.7 trillion? My guess is as good as yours, around the same numbers for NSSF active members. Also, on the business side, the Uganda Registry Service Bureau has a register of 500,000 businesses (active, dying and dead businesses).
To properly understand the middle income class, there is a desperate need for frequent information on the household income. With one million Ugandan's born every year and arguably less than 1 million in the middle income class today, underscores that Uganda's future middle income feasible in mid 2020s – may not be middle income for all. Addressing the supply side of labour and eventually the aggregate demand remains essential and should be at the root of budgetary framework. A meaningful lower middle class is classified at USD 10-20

The 12 indicators that suggest Uganda's Public Debt risks are elevated

In recent times, Bank of Uganda has been cautious about the growth in public debt - with some officials suggesting that the trend is leveraged by hope for oil revenues after 2020. The December 2016 IMF Debt Sustainability Analysis (DSA) indicates that Uganda is still assessed as to be of low debt distress but the vulnerabilities have intensified. The risks are related to the amplified non-concessional borrowing, weakness in absorption of project loans and low export performance. The debt service indicator was assessed to be above the set threshold under the standardised stress tests while the present value of the debt to exports ratio depicted a breach of the threshold between 2019 and 2021 under the extreme stress scenario of an export shock. The widening fiscal deficit is attributed to mainly low revenue performance and infrastructure oriented expenditure.
Against that backdrop, i highlight 12 indicators that suggest Uganda's debt trajectory requires an in-depth analysis.

1. Disbursed and undisbursed as at end June stood at 52% of GDP. Disbursed is now at 34.5% of GDP. On that front, fiscal deficit will remain at an average of 6% of GDP per annum, suggesting the 50% nominal threshold is in touching distance. According to latest Moody credit rating for Uganda, debt-to-revenue ratio of 236%, one of the highest amongst its eers
2. Annual growth in debt stock of 30% is unlikely to be contained in 2019 as planned on 2 fronts ( election year and 1st oil in 2020).
3. IMF notes risks have increased, the low export and volatile performance being on key risks associated also with a weakening shilling.
4. Domestic debt growth is growing exponentially and as end of October 2016, domestic debt to domestic revenue is now above 100%. This compares stocks(debt) against flows(revenue) but suggest that domestic revenue are low relative to our outstanding obligations. Also domestic debt to private sector credit above 100% contrary to public debt strategy.

Source: Bank of Uganda
5. Interest payments on debt have risen to 12.2% of budget FY 2017/18, overtaking education sector as third largest sector. They will account for 16% of domestic revenue in that year, another threshold of debt strategy violated.

6. For the 3 year running, GoU is not able to pay off maturing domestic debt but just to roll it over. In FY 2017/18, they will rollover 6.8 trillion, in FY 2016/17 ( was UGX 4.9 trillion) and UGX 4.7 trillion in 2015/16. The average time to maturity of current stock(12.3trillion) is 1.8 years. What is end game here?

7. Domestic borrowing is essentially for recurrent nature activities implying minimal investment return. In last 4 years, domestic borrowing outtrun has superceeded the approved limits in budget. Borrowing at 12% and above is going to be hard to offset. In fact combined with external debt (factoring in exchange rate risk), prudently assume the average interest on our public debt is 7% and yet return in terms of economic growth is 5%, thus hard to sustain.

8. With undisbursed debt nearly 18% of GDP, that indicates slow absorption of key projects. The committment fees paid on undisbursed loans have been rising. Double edged sword huh?

9. Tax revenue remains low at 13.4% and low compared to regional counterparts. The problem here in part is collecting little income tax. Again size of middle income comes into play. And my famous indicator of about 620,000 privately owned cars suggests a small share of 16m labour force are in middle income. This increases dependence and this suggests non oil tax revenue are likely to remain low. see my earlier views also on middle income and prospects of meeting debt obligations

10. Should the 2015 exchange rate volatility(shilling depreciation) replicate, external debt will rise sizeably. Some examples included Zambia debt rising to unsustainable levels. Note that UGX has depreciated about 8% per annum against the dollar over last 5 years and this trend equally exacerbates the numbers. Just 100 shilling depreciation of the UGX against the dollar, potentially increases our external debt of 5.5 billion dollars by UGX 550 billion (4% of the current domestic revenue).

11. The arrears are regarded as domestic debt but not usually included in debt accounting. The current numbers of arrears range between 2.3 trillion and 2.7 trillion according to GoU sources(about 12% of planned budget FY 2017/18). However same budget plans UGX 110bn to clear arrears( a drop in a ocean). Table below shows the arrears reported by Auditor General in the report for FY 2015/16

12. All these factors tend to undermine the other macro indicators.By the way in 2015/16 - it is reported that the advances from BoU were not repaid back fully in the same FY as required by law. Also domestic arrears were cited as one of the main causes of non performing loans. The second issue was high interest rates in 2015, in part these driven large issuance of domestic securities. Lets also remember that there were bloated planned issuance of securities. Private sector was low and priced some risk on GoU. All these also should constrain growth prospects.

The Uganda Economic Outlook 2017: Economic prospects in 2017 to remain mitgated

In economics two expectation theories; adaptive and the rational dominate the deduction of future trajectories. The former essentially relies on the past to predict the future while the latter relies on the past but rationally factors in the prevailing policy framework. It is the latter backdrop that advised this article.

 Both 2015 and 2016 have been economically challenging for developing countries, particularly Sub-Saharan Africa (Uganda inclusive), owing to domestic currency challenges, the fall in commodity prices, and a sluggish global economy.  The global challenges are also encapsulated in the slower growth in China, the Euro zone as well the Brexit and Trump uncertainty.  At the backdrop of Sub-Saharan Africa (SSA) registering the lowest growth in 15 years for 2015, its average growth is expected to slow sharply to 1½ % in 2016 (lowest in 20 years)-according to the 2016 October IMF Regional Economic Outlook. This slowdown is also reflective of slow economic performance of the 2 largest economies Nigeria, and South Africa. The two account for 50% of SSA output (GDP).

Real sector performance is expected to remain sound but below full potential prospects. Uganda’s economic growth eased to 4.8% in FY 2015/16, lower than the downward revised target of 5% and the 5% growth in 2014/15. Over the last 5 years, growth has slowed; averaging 4.3% per annum compared to an average of 7% in 1993-2010. Growth over the next year is expected to be supported by increased public investment expenditure and easing monetary policy stance. In the October 2016 monetary policy statement, the Central Bank Rate was reduced to 13% compared to 17% in March 2016. The high frequency indicators of economic activity (Business Tendency Index and Composite Index of Economic activity) remained positive the second half of 2016, showing the confidence investors have about doing business in the country as well as well as a continued recovery in the level of economic activity.

However, the downside risks prevail which suggests that aggregate demand and economic growth will remain subdued in the range of 4-5% over the next year: Global growth forecasts for 2016 have been revised downwards and particularly Uganda’s major trading export partners (Europe, China, and S. Sudan) remain with output gaps (difference between full potential and actual output). China’s growth is slowing, Europe is grappling with Brexit uncertainty, and S Sudan – Uganda’s largest informal export partner is locked down in political conflict and uncertainty.  However, Kenya – Uganda’s top destination for its exports is poised to still grow modestly at 5-6%.  Overall, external demand for Uganda exports will be mitigated over the next year.

Private sector credit growth, a leading indicator of the financial sector’s contribution to economic activity, has slowed- registering a 1% reduction between September 2015 and September 2016. Private sector credit growth is expected to remain slow, owing to fact that banks will be focused on repairing their balance sheets. From the published bank financial statements for 2015, the Non-Performing Loans (NPLs) are on the increase, with two of the top five banks registering significant increases. As a result each registered a drop of over UGX 50 billion in profitability.  5 of the 25 banks made losses with the bad loans outstripping the losses incurred. The first half of 2016s saw a rapid rise in non-performing loans on the bank books, with NPLs to total gross loans reaching 8.31% in FY 2015/16 compared to 3.97% in FY 2014/15. This in part manifested in the recent takeover of Crane Bank by Bank of Uganda (BoU) for failure to meet the requisite capital requirements. Crane Bank (t Forth largest bank in Uganda by asset value) was regarded as a Domestic Systematically Important Bank (DSIB) along with other two other banks- implying strong linkage with other commercial banks, and likely effect on the banking sector.  

In addition, the private sector continues to compete with Government of Uganda (GoU) for credit, as also exhibited by recent growth of domestic public sector surpassing the levels of private sector credit. The increased domestic borrowing by Government of Uganda has not only increased beyond some benchmarks set out in the in the 2013 Public Debt Management Framework, but has also in part limited the scope of private sector to borrow (also known as crowding out). By end June 2016, total domestic securities (domestic debt) stood at UGX 11.7 trillion while the total private sector credit stood UGX 11.4 trillion. At the end of June 2015, they stood respectively at UGX 9.97 trillion and UGX 10.97 trillion. Government domestic borrowing in first quarter of FY 2016/17 at UGX 678.6 billion already exceeded the limit of set out in the annual approved budget of UGX 602 billion. This trend suggests that the private sector borrowing space will remain tight and crowded out by Government borrowing.

Theoretically, inflation constrains growth prospects. Uganda’s overall inflation averaged 9.5% per annum between 2011 and 2015, which essentially means 6 shillings in 2011 is worth 10 shillings today. This also indicates that purchasing power over the corresponding period has dwindled.  While the October 2016 inflation of 4.2% is below the medium term target of 5%, the average annual (year to year) inflation January to October 2016 is 5.5%. However, prevailing risks  suggest a likely increase inflation to 8-10% in next 6-12 months. The drought in many parts of the country this year will lead to food crop prices increasing in the next months.

The depreciation of Ugandan shilling also tends to heighten inflation pressures, particularly through imports, Electricity, Fuels and Utilities (EFUs). The exchange rate is predominantly used as the measure of external competitiveness, and in the Ugandan context- the shilling has been depreciating over last 30 years.  The pace of depreciation of the shilling has been more pronounced over the last couple of years, and the largest depreciation (22%) experienced in 2015. The external weakness continue to prevail, particularly with current account deficit of 9% of GDP, slowing Foreign Direct Investment (FDI) and dwindling foreign exchange reserves of USD 3 billion (4.4 months of import value) in October 2015, compared to 6 months of import value in 2008. According to United Nations Conference on Trade and Development (UNCTAD) database, FDI to Uganda has reduced from USD 1.205 billion in 2012 to USD 1.057 billion in 2015. Also the oil prospects remain mitigated in the short run. The shilling depreciation pressure has increased in recent months reaching UGX 3500 against the US dollar.  Owing the shilling depreciation at an average of 8.3% per annum over last 6 years, it is prudent to assume a similar trend, suggesting that shilling against the USD will be in the range of 3600- 3800 in 2017.  

Overall, Uganda over the last 8 years has seen some of the economic buffers in form of strong economic growth, high levels of foreign currency reserves, modest and low inflation as well as stable currency, dwindle.  Also the economy as a result of twin deficit (trade and budgetary deficits), together annually accounting for over 15% of GDP have increased the external liabilities in excess of USD 14 Billion dollars (54% of GDP). This implies that economy faces long term structural constraints and economy will remain susceptible to external shocks, manifesting into rising inflation, and weakening shilling. The heightened inflation expectations coupled with a weak currency indicate that the monetary policy stance is likely to be tight in 2017, which is an increase in CBR in 2017). Control of inflation comes with sacrifice of some growth prospects.  As a policy response, GoU ought to maintain effective coordination of monetary policy and fiscal policy. Imperative is to regulate to the appetite to borrow domestically as well as improving the efficiency in public spending of appropriated budget. The business as usual days are behind us, real economic solutions with limited political interference will be key in the medium term.