By Patrick Kagenda
Bank of Uganda says economy stable but BoP figures tell a different story
Uganda’s macro-economic environment remains “broadly stable” amid global economic gloom, according to the March economic and financial indicators from the Central Bank.
But close scrutiny of the figures released last week reveals an attempt to gloss over adverse balance of payments, poor export sector performance, and rising cost of borrowing for the private sector.
The BoU figures claimed to show that by sticking by its tight monetary policy stance, it had restrained inflation, lending rates, and broad money supply.
Significantly, it showed, domestic credit had surged by 4.1% even as the bank rate, the rediscount rate, and margins declined to complete the blue skies picture.
Basing on the statement, the inflation-targeting Central Bank sounds satisfied that March saw a 1.1% contraction in broad money supply because the surge in domestic credit was cooled down by a bigger decline the banking system’s Net Foreign Assets.
But not everyone is happy.
The main problem for the economy appears to be the persistent poor export sector performance. The economy appears to be reeling from the impact of the slowdown in the global economy.
Up to US$ 93.1 million extra entered the economy in February 2008 than flew out but the latest BoU figures show that up to US$ 68.3 million more went out than came in the February.
This overall balance of payments deficit is blamed on the economy persistently importing more than it exports.
Even the capital and financial accounts that reflect how much capital investments and finances are flowing into the economy continued to grow but at a slower pace. In February 2008 the surplus was US$ 88.7% but had declined to US$49.2%.
Overall, export proceeds in February 2009 reduced relative to the same month a year ago. Total exports amounted to US$218 million compared to US$257 million in 2008.
In a sign of the times, this dismal performance in February is 6.9% better than what was recorded in January 2009.
Coffee exports suffered again as volumes declined by 8.1% to 256,579 bags of 60kgs each.
The drop in money terms was bigger at 34.1% to US$23.9%.
The feared drastic drop in commodity prices due to the credit crunch in the West has, however, not materialised although the coffee price declined by 7 cents per kilo to US$1.5.
Among the non-coffee exports, tobacco was the best performer, raking in US$ 7.58 million in February. Tobacco is showed the highest month on month rise. It brought in US$ 6.3 million in February 2008.
Fish was another good export performer bringing in US$ 7.08 million from non-regional sales and US$ 4.11 million in regional sales. Compared to the same period last year, fish exports have declined. They brought in US$ 10.42 million and US$ 5.12 million respectively last year.
Cotton was the highest riser, bringing in US$ 4.87 in February 2009 compared to US$2.02 in February last year.
Overall, the February 2009 exports were down 15.2% compared to February 2008.
Unfortunately, over the same period Uganda continued to import more hence the current account deficit.
Total imports rose to US$ 330.4 million in February compared to US$ 293.1 million in February 2008.
The only respite appears to have come to the economy by way of reduced international oil prices. That alone cut the private sector import bill for February from US$ 52.9 million in February 2008 to US$ 33.7 million this year.
The real of good news for households whose income has been continually eroded by rising prices since early 2008, is that prices continue to rise but at a lower than was feared.
The BoU statement used a vague description of the rate at which food prices continue to rise.
“Food inflation remains lofty,” it said in a statement. But it was more specific on the cause of the rise in food prices: “High transport costs and robust regional demand for food items from Uganda.”
It also explained why food crops inflation edged up to 30.4 % from 30.0% in February. However the month on month food crop inflation dropped to 1.1% from 1.6% in February.
Headline inflation declined again from 14.8% to 14%. This is the general rate at which prices including those of food change and is a good indicator of the impact on standard of living.
This is significant because consumers can continue to enjoy the same basket of goods at relatively the same price.
The monthly headline inflation was down to 0.3% as compared to 1.1% in February.
The government too should be happy because Annual Core inflation, which excludes the more volatile shifts in food prices, has decreased to 12.1% from 13.1% and remained below headline inflation.
Month on month, core inflation decreased to 0.2% from 0.7% in February 2009.
The energy, Fuel and utilities inflation was also down to 0.35 from 1.4% in February 2009. This was largely driven by reduced prices of petrol and firewood.
The foreign exchange market experienced some volatility with shilling depreciating by 4.4% to trade at an average Shs 2050 against the dollar on the back of strong corporate demand for the dollar.
Up to US$ 624 million worth of gross forex was bought and US$ 634 million sold in March compared to US$ 465 bought and US$475 sold the previous month.
The shilling was, however, much stronger than in February when it traded at an average Shs 2,150 to the dollar.
This stronger position is a result of BoU’s daily sale of foreign exchange on the Inter-bank Foreign Exchange Market (IFEM) to the tune of US$ 6.6 million. It also intervened once in the forex market to prop up the shilling.
A depreciated shilling is generally good for exports but a quick or huge depreciation could cause inflationary pressure in the economy.
In a further sign of a slowing economy, the banking system’s claims on the private sector increased by a mere 0.5% to Shs 3,499 billion although bank lending to parastatals swung up by over 150% to 58.1 billion.
Part of the reason could be the increase in the monthly weighted average lending rate on commercial bank loans in shilling denominations to 20.7% in February from 18.9% in January. This means that loans were being acquired at a higher cost possibly because the commercial banks, wary of the toxic debts that sparked the global financial crisis, are becoming more stringent.
Only the average lending rate on the foreign currency denominated loans issued by commercial banks reduced slights from 10.6% in January to 9.4% in February.
But even here, the commercial banks foreign assets and the Central Bank’s foreign reserves declined over the period leading to a 4.3% decline in Net Foreign Assets.
According to the BoU statement, the stable macroeconomic conditions did not necessitate the issue or re- opening of any Treasury bond securities in March.
The tight monetary policy stance also saw outstanding Treasury bills stock increase by 11%. Two calendar Treasury bill auctions with offers of Shs 70 billion each were held in March. Both were over-subscribed.
The interest rate sector witnessed major reductions in the TB rediscount rate of up to 10.6% from 14.5% for the 364-day; 9.5% from 14.5% for the 182-day; and 6.4% from 9.6% for the 91-day in February.
In the end, BoU’s claim that “macro-economic conditions remained broadly stable” appears correct although it’s unclear what is being done to improve the balance of payments position and support the private sector to steer past a volatile global economy.