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Bumpy business terrain hurts multinationals

Firms need to go big on innovations, corporate governance and cost management, experts say

Kampala, Uganda | THE INDEPENDENT | The exit of multinational companies in Uganda including South Africa’s largest grocery retailer Shoprite Holdings exposes the challenges that businesses in the country are grappling with to remain afloat.

Several Kenyan retail chains including, Uchumi, Tuskys, Nakumatt and other firms which had been in operation for decades, have exited the Ugandan market over the past decade.

Shoprite is one of the multi-national companies that has been reviewing its long-term options across Africa over the past year as lower commodity prices, high inflation and currency devaluations hit household incomes and weighed on earnings.

Shoprite has already offloaded its six stores dotted around Kampala and Entebbe to the new entrant, Majid Al Futtaim, the holder of the French licensee, Carrefour.

Currently, Majid Al Futtaim operates two stores in Kampala. Other companies including; Game stores and Africell telecom are also on their exit door owed to stiff competition and unfavorable business environment.

Economists including Fred Muhumuza, said the current effects of Covid-19 pandemic should not be blamed on the woes facing multinationals as some companies were exiting even before the pandemic hit.

He said, businesses now need to go big on innovations, practice good corporate governance principles and manage costs to improve returns on investments and keep in the market.  However, other experts have attributed these closures to a weak economy.

John Walugembe, the executive director of Federation of Small and Medium Sized Enterprises Uganda said, government now needs to further improve the business environment through tax policies, enhancing human resource capabilities and fighting corruption.

“It is dangerous to attract investors and you do not keep them,” he told The Independent, “It is a vote of no confidence in the economy when you see these popular brands leaving.”

Bank of Uganda signal

Last month, Bank of Uganda’s decision to keep the central bank rate unchanged at 6.5% in the next three months sent a signal to the market that Covid-19 containment measures are still a challenge to the country’s economic recovery.

BoU Governor Emmanuel T. Mutebile, said his decision on the CBR was based on the outlook for changes in prices, lending rates and other core indicators of the economy.

“The outlook for inflation is, however, uncertain and is subject to both downside and upside risks…nevertheless, we view these risks as broadly balanced,” he said.

“This decision is consistent with meeting the inflation target of 5% sustainably in the medium term while supporting the economic recovery,” he said.

Mutebile’s monetary policy report for August, however, says that lending rates, another core factor for economic recovery, are on a downward trajectory since February 2021 in line with the easing of monetary policy stance.

The weighted average lending rates declined from 19.6% in May to 17.0% in June this year driven by lending to prime borrowers in the telecom and oil sectors.

Relatedly, credit to the private sector growth remains subdued quarter-on-quarter driven largely by low demand due to the slow pace of economic recovery.

Total private sector credit grew by 6.8% in the quarter to June compared to 9.8% in the quarter to March 2021.

Meanwhile, the exchange rate remained relatively stable, depreciating by 0.3% month-on-month in July 2021 compared to an appreciation of 0.3% in June 2021.

However, it appreciated by 4.1% year-on-year compared to 5.3% appreciation year-on -year in June 2021.

Mutebule said, due to the pandemic containment measures, a sector like tourism is unlikely to return to normal levels any time soon which could somewhat weaken the local currency.

But the composite indicator of economic activity (CIEA), a high frequency proxy of real GDP growth grew by 1.7% in the quarter to June 2021, up from 0.8% in the quarter to March 2021.

Year-on-year, GDP growth declined in 2020/21 from the highs of 5.7% a year before to 3.0%, largely due to the COVID-19 hit.

Muhumuza said, the economic situation has been worsened by regional trade impasse between Uganda and Kenya for some products and the boarder closure to Rwanda – another important market for Ugandan made goods.

Uganda’s trade deficit worsened by 28% to US$3,083million in the first quarter of FY2021/2022 compared to the same period a year earlier.

According to the central bank executives, both business and consumer perceptions over the next three months declined largely driven by uncertainties surrounding the resurgence in COVID-19 infections, low vaccination rollout and lockdown measures in June and July 2021.

“The growth outlook is highly uncertain and is highly conditional on the availability of vaccines, the potential emergence of vaccine-resistant virus strains and a balance between containment measures and economic recovery,” Mutebile said.

He added that economic activity is expected to grow in the range of 3.5-4.0% in FY2021/22; a downward revision relative to the June 2021 projection. This will partly be dependent on inflationary pressures.

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