Ms Lagarde, who held bilateral talks with President Museveni at State House in Entebbe, said there was need for Uganda to scale up its infrastructure in order to boost production that would translate into better economic growth for the country. But the pursuit of infrastructural development is also piling up the country’s debt burden, raising concerns around its sustainability
Investor confidence of doing business in the Ugandan economy today has remained low one year after the general election, an economist has said.
Ms Sarah Arapta Wojega, the managing director Citibank, said domestically, the election was largely perceived to be peaceful but business confidence took a huge beating in 2016.
“Business confidence saw one it its lowest points in the recent past. Our GDP growth declined to 4.9 per cent against the target of 4.5 per cent. Under pressure from banks, some business lobby teamed up and approached government for a bailout. The banking sector saw an unprecedented non-performing loans rate of 8.3 per cent, the highest in banking sector industry in the recent past,” she said.
She added: “All these events had a huge effect on our economic growth and had effect on the decline of the economic growth.”
Ms Arapta was speaking to Citibank clients who gathered to listen to Dr David Cowan, a Citi Research Africa Economist at Citigroup Global Markets Limited.
“While loss of business confidence was understandable in the run-up to and immediately after the February 2016 elections, the fact that it has remained under pressure throughout much of last year is perhaps more difficult to explain,” Dr Cowan said.
Also addressing top company executives at Kampala Serena Hotel yesterday, he said the low confidence is due to many reasons both political and economic factors.
He said the concerns over government fiscal policy particularly the high recurrent expenditure and increased domestic borrowing have spilled over into the Uganda Shilling causing it to weaken further.
During her visit to Uganda, International Monetary Fund managing director Christine Lagarde, warned Uganda on debt accumulation.
Ms Lagarde, who held bilateral talks with President Museveni at State House in Entebbe, said there was need for Uganda to scale up its infrastructure in order to boost production that would translate into better economic growth for the country. But the pursuit of infrastructural development is also piling up the country’s debt burden, raising concerns around its sustainability.
“There has to be a good balance between concessional and non-concessional loans. The second point is that macroeconomic stability is a key that is looked at by the investors and by the lenders; be it from private sector or bilateral institutions or countries,” Ms Lagarde said.
In November, Uganda’s credit rating was downgraded by credit rating agency Moody’s, in part, because of concerns on debt affordability that had been a persistent vulnerability for Uganda.
Mr Cowan, who is in the country at the invitation of Citibank Uganda, also said the slow pace of arrears clearance and the ongoing internal reconciliation exercise of government arrears has slowed down the private sector led growth with many of these companies failing to pay back bank loans thereby crippling the financial sector.
In June last year, a group of companies came together to seek for a government bailout to the tune of Shs1.3 trillion owed to banks. The companies claimed some of their debts were owed by government.
Indeed the failure to manage the loans affected some banks with Crane Bank being sold off to dfcu Bank by the industry regulator.
According to Bank of Uganda (BoU), one of the reasons Crane Bank became undercapitalised in a space of a year was because of the failure by borrowers to honour their debt obligations.
In 2015, Crane Bank had a non-performing loans portfolio of Shs142 billion. They made provisions of Shs50 billion for bad and doubtful debts. The high loans eroded the minimum capital causing the central bank to take over the bank.
In 2014, the Shilling depreciated by 10.8 per cent due to the weak commodity exports and global strengthening of the US dollar.
The global strengthening of the US dollar coupled with wide current deficit saw the Uganda Shilling depreciating by 17.5 per cent in 2015. This reflected that the Shilling was weaker compared to the previous year. At 17.5 per cent, the Shilling was worst hit by other currencies in the region.
In 2016, the local unit depreciated by by 5.5 per cent.
Mr Cowan said the factor which largely explains this trend is capital flows, or the funding of the current account deficit.
“In Kenya, this is much more private sector driven, whereas in Uganda and Tanzania official flows are more important and they have become somewhat erratic. And the fact that large flows in the market can have a much more de-stabilising impact in Uganda and Tanzania than in Kenya.
Despite the unstable Shilling, Mr Cowan said investors should remain confident that it was driven by more short term factors than medium to long term ones. And as such there is room for business confidence and the economy to will continue to slowly pick up in 2017.
The real GDP growth is forecast to pick up from around 5 per cent in 2016 to 5.5 per cent according to Citi Research report 2017.