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Finance experts debate impact of global crisis

By Patrick Kagenda

On November 28 the National Planning Authority organized a one day National public dialogue on the impact of the global financial crisis on Uganda. Dr. Abebe Aemro Selassie the IMF senior resident representative to Uganda was the presenter and Dr Emmanuel Tumusime Mutebile Uganda’s Central Bank governor and Prof. Paul Colette Wandee of the World Bank the discussants. The Independent’s Patrick Kagenda brings the excerpts.

Dr. Abebe, IMF: “Uganda will be affected through four channels”

A lot of things are happening out there whose creation is still very unclear. We are projecting economic growth for the US in 2009 will be 1%. How this global crisis is going to affect Uganda and other African countries, I think, probably through commodity prices. Certainly there has been some lag between commodity prices and economic activity in sub-Saharan Africa.

Commodity prices have been declining very badly in recent weeks. We all know this, and have seen what has happened to oil prices. In the short term it’s not a bad thing for the Ugandan economy but in the long run it is because Uganda wants to be an oil exporter. Coffee prices have slumped quite sharply in the last couple of weeks affecting farmers.

Perhaps the economic crisis has been felt most in the external financing side. Financial flows to average countries have become very scarce. From an African perspective, last year we saw for the first time two countries Ghana and Gabon issuing bonds in international markets raising significant amounts of money. This year two other countries Kenya and Tanzania were planning to do the same. Both have been forced to shelve those plans. So the outlook for financing is very dire. It’s not just our African countries being affected but other emerging market countries. Together with government not being able to access financial markets, the cost of borrowing for private companies has also increased very sharply.

There is a tendency to think that these borrowing costs do not have an impact on Uganda, but if we think about recent large investments by companies like Hima cement owned by conglomerate Lafarge, which I think raises money internationally, MTN whose parent company borrows money abroad to invest here, when the borrowing costs shoot up the financing costs even here in Uganda shoot up. It’s not about the borrowing cost being high and new money not coming in, but the portfolio investment that have been made into emerging market countries and the outflows heading back to the G7 economies in particular.

The flow of liquidity from this country has had a very severe impact on the exchange rate. The recent volatility in the exchange rate which has been quite significant by recent standards in the up and down movement did not have anything to do with changes in the liquidity condition. Usually in financial markets that are not so well developed, the liquidity in aggregate easily relates to policies being implemented fully. But in this case the deviation from monetary policy was low deviation in terms of being able to hit the target. Notwithstanding, there has been a big impact on the exchange rate and interest rate. This tells you that the movement of the exchange rate has more to do with sentiments rather than the policy stand. Notwithstanding prudent policy, Uganda has been hit by the prices. What we are seeing is a sharp slow down in economic activity globally and in Uganda’s trading partners, commodity prices beginning to decline, foreign capital is becoming scarce and market sentiment both here and abroad has soured.

When we met with our counterparts in Uganda our sense at IMF was that there would be four channels through which the crisis would affect Uganda.

Firstly there will be economic slowdown that is reducing demand for Uganda’s exports, there is the credit squeeze going on globally, and our expectation is there will be lower financing both lower FDI but also credit for private sector companies and government to borrow is going to diminish.

The third point is going to be potential capital flight with implications for the exchange rate and the fourth is potential financial sector exposure. However the fourth is not here as there are no toxic assets in Uganda.

As a small open economy Uganda has been affected by the crisis and we forget this is the second crisis to impact on Uganda this year. The first local crisis of the year was of very high food and fuel prices of March – April and everybody felt the impact of that crisis very quickly. In spite of all this, IMF commitment to Uganda remains undiminished. The global crisis will help bring down inflation and private banks are to lend more to the private sector as it becomes difficult for the private sector to borrow from abroad.

Prof. Paul Colette Wandee, World Bank: “Private investments will be under pressure”

Uganda being an all out market economy, there is to be an impact on the financing plan. But given that it is a small open economy, it is very vulnerable as a result of severe changes in the international environment and there is a degree of uncertainty on making projections on the lag.

Uganda is only in the mid range so it is in a better position than most countries. The focus should be on addressing the main concerns of the economy for improved growth. Ugandan house holds have benefited a lot from remittances over the years which has boosted household incomes and reduced poverty, that avenue has now become a huge vulnerability in this period. The global crisis effects could have multiple effects on Africa as private investment will be under heavy pressure.

Emmanuel Mutebile, BoU: “I said the rate of growth would be 5%. I was slightly wrong.”

A discussant should not stand up and say I agree with everything that has been said and then sit down. This puts me in a very difficult position. But really I must say so. I want to take the opportunity, having said that, to use the paper to bring out a few things. In everything that has been presented by Dr. Selassie there is nothing to change my original response to the question from the press about the impact of the crisis on Uganda. I repeat that the immediate impact of the financial turmoil in the western world is almost zero with the single exception of the impact of the exchange rate. The depreciation of the shilling as a result of a changed sentiment by people who had invested essentially in government treasury bills and government bonds removing liquidity of Uganda as a result of the problems in the West. Our banks are not linked to the toxic waste, the sub prime mortgage crisis that was essentially at the heart of this problem.

But we have contained even the exchange depreciation as a result of that panic. Of course with the lag there will be an impact, and I ventured to suggest at that time that the lag would be approximately 9-12 months and this will be through the channels he has ably demonstrated; essentially through declining exports, decline in remittance, decline in aid; decline in FDI. But even then the impact on the Ugandan economy even the medium term impact on the Ugandan economy is not likely to be more than 2% points of growth.

The Ugandan economy will still grow by 7% which as he has explained is more or less the trend. I must emphasise that this conclusion has been independently arrived at by the Bank of Uganda and the IMF. Initially I had said the rate of growth would be 5%. I was slightly wrong. The conclusion is we should not panic as if the roof is going to fall down.


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