In
various economic reports this year, one imminent risk to macro-economic
stability is the 2016 election. This is in part encapsulated in the July
Monetary Policy Statement (MPS), where Bank of Uganda has increased its Central
bank rate for the third time this year by even a higher rate of 1.5% to 14.5%,
compared to previous increases of 1% in June and another 1% in April. Before
that, the central bank rate was kept at 11% since June 2014. This illustrates
the heightened election related risks as Uganda draws near the election cycle.
The
Monetary Policy Statement highlights that the rapid exchange rate depreciation
in the last one month is driven by sentiments and speculation as opposed to
market fundamentals. Two perfect candidates driving expectations are the recent
intensification of election related events and the approval of the perceived
expansionary budget for financial year 2015/16 of UGX 24 trillion down from UGX
15 trillion in the previous financial year. It should however be noted that the
budget expected to be spent in 2015/16 is UGX 18.5 trillion and the rest
largely relates to
Domestic Debt Repayment which will be financed through a rollover but as
required by the new 2015 Public Finance Management Act, it had to be
appropriated in the budget and approved by Parliament. Even then the budget
remains expansionary and 47% of the overall budget is recurrent in nature.
Overall the MPS re-emphasizes the heightened risks to
inflation, growth and financial conditions. This is consistent with the present
year economic developments. With the CBR at 14.5%, it implies that the bank
rate (rate at which commercial banks borrow from central bank) is 18%, implying
that base lending rates will increase further to range of 25% and above given most agencies value credit risk risk
between 4-5%. As of 14 July 2015, the overnight interbank borrowing was at 22%.
These lending rates by and large are eventually distortive; they will slow
private sector credit, crowd out private investments and could potentially
heighten the prospects of non-performing loans. In the extreme case, there will
be a recurrence of a 2011 situation where some banks stopped lending in Uganda
shillings at the cost of the shrinking of the overall economic activity. In
2011/12, economic growth dropped to lowest in two decades owing to the
contractionary monetary policy – the CBR was increased from
11% (July 2011) to 23% (Nov 2011 to Jan 2012) in response to the tehn evolving
economic conditions.
An exploratory review of previous election cycles
indicates that they have been economically costly to Uganda. In the election
years, three possible shocks are experienced: the laxity to collect taxes, the
pressure to increase overall expenditure and the amplified need to increase
recurrent nature expenditure. The most recent elections in 2011 were marred
with exceptional spending on fighter jets. This led to a retrospective approval
of supplementary budgets to a tune of 33% of the approved budget. The 2005/06
budget year also had a supplementary budget of nearly 10% of the approved
budget and these supplementary budgets are largely recurrent in nature. In
addition, perceived corruption and, on the overall, money supply tends to
increase during these times.
Also traceable
in 2011 was rapid depreciation of the shilling encountered in part on account
of dwindling foreign direct investments, and
the election related speculation related to increased monetary
expansion. As aforementioned, the Uganda shilling trend has worsened this year,
reaching three record lows against the dollar; at UGX 3000 shillings in March,
UGX 3300 in June and UGX 3600 in July.
This has come at a cost of foreign exchange reserves, as was noted in
previous election cycles, in particular 2011. Uganda's reserves have reduced
from 6 months of import value enjoyed in the mid to late 2000s to an average of
4 months of imports in recent couple of years.
Inflation
tends increase during these cycles, and as noted in the monetary statement, inflation
is expected to increase to 8-10% over the next year, a rate higher than
national target of 5%. In 2011, inflation reached the highest at 30% in 20
years. Theoretically higher inflation tends to increase the misery index
(inflation plus unemployment rate), which constrains growth and increases
poverty levels.
The
associated economic effects are often accompanied by corrective contractionary
policies, often times the monetary policy side trying to mop out the excess
liquidity largely created by the fiscal side.
The lagged effects tend to last longer, as demonstrated by subdued
private sector credit growth and below potential growth rates since 2011. The
recent UBOS statistics show that Uganda grew at 5% of GDP in 2014/15 compared
to 4.6% in 2013/14. These rates are in
fact below our regional counterparts and way below the last 2 decades average
of 6-7%.
In
conclusion, election cycles in Uganda have tended to come at the cost of
macro-economic stability. And, therefore, the performance of our economy in the
next few years has all to do with national politics as it does with exogenous
factors like the strengthening dollar.