Razia Khan

The year 2021 is likely to be a pivotal year for the economy, with the Final Investment Decision (FID) on oil expected by June. Prior to the FID, elections brought forward by one month to mid-January are likely to determine investor sentiment and the pace of Uganda’s post-#Covid-19 recovery. Political risk is seen as elevated.

Protests following the arrest of opposition leader Bobi Wine in 2020 (accused of flouting #Covid-19 restrictions on the size of political rallies) drew a heavy-handed response from police, with scores killed. A post-election calming of sentiment would likely lend itself to a faster growth recovery.

Ongoing political volatility poses further downside risks to our 4.0 per cent GDP forecast for 2021 (revised from 5.0 per cent prior). We also lower our 2020 GDP forecast to -0.3 per cent (from 3.0 per cent) to reflect the deep contraction in Q2-2020, when a lockdown was imposed. Oil-related developments will guide medium-term prospects.

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A positive FID would also see construction on an oil pipeline to Tanzania begin, potentially lifting 2022 GDP growth to 6.0% (5.2 per cent prior).

The COVID crisis will leave Uganda with an elevated debt ratio; public debt is forecast to reach 48 per cent of GDP in FY21 (ends 30 June), from c.40.8 per cent at end-FY20.

While Q1-FY21 revenue beat revised targets, a supplementary budget to cover Covid-19 related spending will cause the full-year deficit to widen. In line with the authorities’ guidance, we revise our FY20 deficit forecast to 7.7 per cent of GDP (from 7.5 per cent) and expect it to widen further to 10.4 per cent (9.0 per cent) in FY21, which covers the election period.

Authorities will seek additional multilateral financing to fund the deficit, alongside increasing the domestic borrowing requirement to Shs4.3 trillion (from Shs3.6 trillion) in FY21. Given closer engagement with the IMF, the FY22 budget (presented in June), will likely focus more on revenue mobilisation. However, we now see a more gradual narrowing of the deficit to 6.8 per cent in FY22 (6.0 per cent prior).

We expect the Bank of Uganda (BoU) to tighten its policy rate gradually post-election, having cut the central bank rate to a record-low 7.0 per cent amid the #Covid-19 crisis.

Although core inflation is likely to remain elevated as economic activity normalises, the Bank of Uganda is likely to look through current strength given the absence of demand-related pressures. We lower our headline inflation forecasts to 3.9 per cent for 2020 (from 4.2 per cent) and 5.7 per cent in 2021 (6.0 per cent). We expect policy tightening to resume around April 2021, but ongoing economic weakness would pose risks to the timing. We now expect only 200bps of tightening in 2021, to 9.0 per cent (250bps prior).

By Razia Khan (Chief Economist for Africa and Middle East, Standard Chartered Bank)