Bank of Uganda (BOU) predicts a tough period ahead for Uganda’s economy, a predicament mostly linked to among other factors low revenue collections by the Uganda Revenue Authority (URA).
According to the Bank’s statement for the month of December, the Bank notes that the implementation of the budget for FY 2016/17 faced challenges in the initial phase of budget execution.
During the first four months of FY 2016/17, URA revenue collections amounted to Shs3, 641.3 billion, representing a shortfall of Shs165.6 billion when compared to the target of Shs3, 806.9 billion.
Similarly, relative to the URA target as per the approved budget, domestic revenue registered a shortfall of Shs165.6 billion.
As a result, domestic financing requirement has been increased by Shs300 billion to Shs912 billion to cover the projected underperformance in revenue collections. This was further worsened by the World Bank withholding new lending to Uganda effective August 22, 2016 due to poor management. This, in addition to the cancellation and suspension of two loans is having ripple effects on the economy, BOU notes.
“If Government revenues continue to underperform, and there is recourse to the domestic market to salvage the revenue deficit, then PSC (Private Sector Credit) may be constrained further. There is also a risk that increased domestic financing will lead to a substantial increase in yields on Government securities, which may not only keep lending rates elevated, but also lead to an increase in interest costs,” reads the statement.
It also observes that Uganda’s public debt burden has risen to 38.6 per cent in 2016/17 from 25.9 per cent in 2012/13 and is projected to continue rising towards 45% of GDP by 2020.
“Debt as a percentage of revenues has risen by 54pp since 2012 and is expected to exceed 250 per cent by 2018. This has prompted Moody’s recent down grade of Uganda’s long-term bond rating by one notch to B2 from B1, but changed the outlook from ‘negative’ to ‘stable’. Moody’s said Uganda’s debt burden has “risen faster than the government’s own resources, resulting in a debt-to-revenue ratio of 236 per cent, one of the highest amongst B-rated sovereigns.”
The stock of reserves at the end of October 2016 was estimated at US$2.859.8 million.
In relation to that, lower commodity prices and a less-supportive global environment have also sharply decelerated economic activity in recent past.
Over the last five years, real GDP growth has averaged 4.5 per cent compared to an average of about 7.5 percent between 2000 and 2011. Growth in Private sector credit (PSC) has slowed markedly since October 2015. The slowdown in credit growth was reflected across sectors with the exception of lending to electricity & water and personal & household loans.
BOU attributes the slowdown in growth in PSC to bad loans, which has heightened risk aversion in banks.
“The demand for credit has remained relatively robust. On the other hand, the supply of credit has however remained subdued, an indication that the subdued growth in PSC could be driven by tightening credit standards. The nominal growth in PSC was affected by exchange rate changes.”
Shilling denominated loans grew by 7.9 per cent in the 12 months to October 2016 compared to 12.7 per cent in the previous 12 months period.
BOU further adds that despite the unfavourable international economic environment, the domestic economy has remained resilient.
“Macroeconomic stability has been maintained, with reasonable rates of growth, low inflation, and adequate international reserves. Nonetheless, the inherent risks in the global economy call for coherent domestic policies in order to manage market expectations and avoid erosion of confidence in the economy.”