Uganda economy gets positive reviews even as firms struggle to stay afloat

Traders at a market in Uganda's capital Kampala in 2016. Uganda’s economy got positive reviews from the Central Bank and some economists in 2019. PHOTO | FILE | NATION MEDIA GROUP 

In Summary

• Despite the strong credit growth, fairly high borrowing rates and banks’ unwillingness to lend large sums of money have left many businesses unable to tap into increased bank lending activity

By BERNARD BUSUULWA
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Despite Uganda’s economy getting positive reviews from the Central Bank and some economists in 2019, the limited impact of loose monetary actions on business activity, significant tax collection challenges and huge monies owed to local suppliers by government institutions dominated public conversations.

The Bank of Uganda (BoU) projected a growth rate of 5.5 to six per cent for the 2019/2020 financial year based on steady monetary easing by the bank. However, observers warn that widespread signs of distress in many sectors point to a lower growth rate.

Consistent soft monetary policy actions have left the Central Bank Rate (CBR) at a record low of nine per cent since October while average lending rates and overall credit growth patterns have picked up since May amid massive liquidity levels experienced in the interbank market — a trading and borrowing window used by commercial banks to fulfil temporary financial needs.

CREDIT FLOWS

Lending rates charged on shilling-denominated loans averaged 20.2 per cent between June and August compared with 19.7 per cent recorded between March and May, according to BoU data. In comparison, average lending rates charged on dollar-denominated loans fell slightly from 7.4 per cent to 6.7 per cent during the same period.

Overall private sector credit flows increased by 13.9 per cent between June and August compared with 14.8 per cent growth registered between March and May. Total private sector credit expanded by eight per cent in December 2018, the data shows.

Despite the strong credit growth, fairly high borrowing rates and banks’ unwillingness to lend large sums of money have left many businesses unable to tap into increased bank lending activity, creating a mismatch between credit growth patterns and overall business activity.

However, economists appear reluctant to explain this scenario after several months of reduced interest rates, declining loan default rates and diminished inflation levels.

“The agricultural sector is still the largest employer in the economy but contributes much less to total output and that means growth remains less inclusive. The services sector is still the biggest contributor to the GDP at 49 per cent compared with the industrial sector at 26 per cent,” said Mira Clara, the International Monetary Fund resident representative in Uganda.

Total revenue collections for the first quarter of 2019/2020 fell by Ush505 billion ($135.9 million), reflecting the hard times of the past 12 months. This deficit is close to the Ush606 billion ($163 million) gap registered in 2017/2018, according to Uganda Revenue Authority (URA) statistics.

The shortfall was mainly attributed to deficits recorded by value added tax, withholding tax and excise duty revenue streams. Reducing tax revenue collections could lead to severe budget cuts, increased government borrowing and delays in execution of some infrastructure projects.

“The annual tax collection target was raised to Ush19 trillion ($5 billion) against our economic expectations. The economy is so weak and will struggle a lot to grow by six per cent this financial year. Credit is still very expensive and banks are more interested in putting money into treasury Bills and bonds. As a result, URA has resorted to issuing additional tax assessments to taxpayers and slapping them with agency notices the next day,” said Muhammad Sempijja, a tax partner at audit and accountancy firm Ernest and Young Uganda.

SCALING DOWN

Mr Sempijja added that companies have been forced to scale down their operations, with some cutting jobs and reducing their budgets. He added that some government suppliers have not been paid for five years.

“The government allocated only Ush200 billion ($53.8 million) in this financial year for payment of domestic arrears against the more than Ush2.5 trillion ($673 million) it owes,” he said.

The total value of domestic arrears — money owed by the government to private companies contracted to supply various goods and services — increased to Ush2.7 trillion ($741.8 million) at the end of 2015/2016 according to IMF research.

Though updated figures on Uganda’s domestic arrears were not available by press time, the overall value of domestic arrears currently accounts for nine per cent of GDP, government sources indicated.

In 2018/2019, the government allocated Ush300 billion ($80.8 million) for payment of domestic arrears.

“I agree that domestic arrears do affect tax revenue performance. But tackling this problem is not easy. Part of the problem is linked to certain accounting officers in some dockets who regularly accumulate arrears,” said Keith Muhakanizi, Permanent Secretary in the Ministry of Finance, Planning and Economic Development and Secretary to the Treasury.

“While URA is unlikely to meet its collection targets, higher revenue targets unlock opportunities for increasing the taxman’s budget. Worse, taxpayers are also struggling to obtain VAT refunds from URA.

“Some firms have opted for cost cutting and innovation in order to survive this year. For example, the telecos have rolled out enticing voice and data bundles to keep customers on their networks for longer,” said Plaxeda Namirimu, a tax director at PWC Uganda.

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CREDIT FLOWS

Overall private sector credit flows increased by 13.9 per cent between June and August compared with 14.8 per cent growth registered between March and May. Total private sector credit expanded by eight per cent in December 2018, the data shows.

Despite the strong credit growth, fairly high borrowing rates and banks’ unwillingness to lend large sums of money have left many businesses unable to tap into increased bank lending activity, creating a mismatch between credit growth patterns and overall business activity.