By James Karuhanga

Senior Researcher Uganda, GLCSS

Uganda’s robust economy is facing challenges despite its striking growth record. GLCSS observes that varying and unfavorable climatic conditions, high costs of power, transport and finance among other things are the factors that are producing mixed economic results in Uganda.

Exports have partly signaled a downward trend on the economy. On a cumulative basis, coffee exports for the period October 2005 – July 2006 amounted to 1,667,900 bags worth US$ 142.0 million. This represented a decline of 22.2 percent in volume but an increase of 4.7 percent in value compared to the 2,143,155 bags worth US$ 135.6 million exported during the same period of the previous coffee year.

‘’The overall decline in volume compared to last year was attributed to a small crop in 2005/06 arising from the dry spell experienced during the year,’’ explains the July 2006 Bank of Uganda (BoU) report. GLCSS considers climate change as one of the most serious threats to sustainable development and points out the need for economic diversification so as to be able to recover from significant unfavorable changes in any one sector.

Overall, the value of Uganda’s non-coffee exports increased by US$ 9.8 million from US$ 61.6 million at end of May 2006 to US$ 71.4 million at end of June 2006. However, there was a decline in the value of tobacco and gold exports from US$ 5.5 million and US$ 10.7 million to US$ 2.8 million US$ 9.1 million respectively over the same period.

Uganda’s flower exports also declined from US$ 3.07 million in May to US$ 2.74 million in June. Efforts are being made however, to rejuvenate this prospective industry. It is believed Uganda’s flowers are not doing well partly because they don’t have the right head size, length and stem thickness due to the unfavorable temperatures around Lake Victoria where most farms are located.

More investors are going into the flower growing business and exploring new areas with encouraging results. Pearl Flowers, a new flower farm in Ntungamo district will this month (October 2006) send its first consignment to Holland. Indeed, the farm’s highly demanded varieties will boost Uganda’s competitiveness on the international market. With the apparent success of pearl flowers in Ntungamo, more farms will be set up in areas with equatorial sunshine and cool temperatures to boost the industry.

Earnings from fish and its products decreased from US$ 17.8 million at the end of May 2006 to US$ 14.5 million at the end of June 2006. Decreased fish exports significantly affect the livelihoods of many Ugandans who depend on fish export earnings.

On the contrary, however, tea and cotton exports, registered increases both from US$ 0.1 million at the end of May 2006 to US$ 3.9 million and US$ 2.6 million respectively.  Hydro-electric power, hides and skins, beans, oil re-exports and cobalt also registered an increase from May to June 2006. Unfortunately, this trend is counteracted by the country’s growing dependence on imports which heightens the trade deficit. Uganda has drastically reduced its electricity exports given its current energy crisis and this too has worsened the country’s terms of trade.

 “Total imports grew from US$ 170.9 million in May 2006 to US$ 192.4 million in June 2006,’’ BoU’s July 2006 report explains. Government imports increased from US$ 10.5 million to US$ 11.8 million. Project-specific imports and non-project-specific import of materials increased from US$ 2.10 million and US$ 8.42 million in May to US$ 10.93 million and US$ 0.85 million in June 2006 respectively.

Private sector imports also increased from US$ 160.4 million to US$ 180.6 million. Oil imports by the private sector grew marginally from US$ 28.5 million to US$ 30.7 million. Here, oil imports and non-oil imports increased from US$ 28.45 million and US$ 131.95 million in May to US$ 30.68 million and US$ 149.90 million respectively.
On the other hand, inflation has been relatively controlled and this is a good sign. According to Uganda’s Central Bank, the annual headline inflation rate declined from 7.2 per cent in June to 5.8 percent in July and the Central Bank attributed this mainly to lower prices of foodstuffs.
‘’Food inflation fell to 7.4 percent in the year ended July 2006 from 10.7 percent for the year ended June 2006 due to mainly increased food supply,” the Central Bank reports
Furthermore, the annual underlying inflation rate decreased from 5.2 percent to 5.0 percent on account of the decline in the goods inflation. On a monthly basis, this rate fell from 0.8 percent in June 2006 to 0.5 percent in July 2006 mainly due to a decline in services inflation that fell to 0.4 percent from 1.3 percent in June.

The annual food crop inflation rate declined from 14.1 percent in June to 8.8 percent in July. According to BoU, this is mainly driven by lower food crop prices and a good harvest of staple foods, vegetables and cereals. Although the BoU’s monetary policy stance aims at ensuring that inflation remains low and stable, GLCSS believes this is not a simple task. Unstable world oil prices coupled with the present energy crisis make the situation rather difficult for the economy.

This is demonstrated by Uganda’s inflation rate rising from 6.1 percent in July to 7.5 percent in August. This is attributed to recent increases in food prices of foodstuffs like Matooke, milk, vegetables and charcoal, which reverses the annual decrease in food stuff inflation.

However, it appears this may not be a long term trend. The annual headline inflation rate for September has reportedly dropped to 6.2 percent from 7.5 percent in August even though monthly headline inflation went up.

‘’The monthly headline inflation went up by 0.8 percent due to an increase in the prices of foodstuffs,’’ reported The New Vision of 3 October. Accordingly, the Uganda bureau of statistics has attributed the rise in prices of some foodstuffs to seasonal and distributional factors resulting into a lower supply.

Prices of other commodities like charcoal, local brew, household items, soap and toiletries, transport fares and medical charges are also reported to have increased.

The Ugandan shilling’s fluctuating value against the US Dollar also has a bearing on the resilient economy. Around 25 September, the shilling continued to trade strongly against the Dollar. The local currency is said to have closed the week at Shs1, 843/45 buying and Shs1, 855/56 selling better than it had closed business in the week before.

Some dealers attributed the stability to the increased export inflows and the reduction in dollar demand through out the week. However, the dealers predicted that the shilling would depreciate in the short run.  This is because demand for dollars is likely to increase in the forthcoming festive season and would result in a depreciation of the shilling.

Compounding Uganda’s economic woes, power firms applied to the Electricity Regulatory Authority for permission to increase power tariffs due to higher thermal costs. Uganda’s energy crisis will continue due to insufficient hydroelectricity generation at its main dams (Kiira and Nalubaale) in Jinja.

According to an expert report by the ministry of energy officials, electricity tariffs could raise by about 1,100 percent. As of May 2006, hydropower output from the two dams at Jinja has reduced from 270 megawatts to around 135 megawatts forcing the government to turn to costly emergency thermal power.

To help alleviate Uganda’s energy crisis, a US-based power firm, South Asia Energy Management Systems Inc. (SAEMS) wants to construct and operate three small hydro-power plants in western Uganda. The three plants expected to be developed concurrently will have a 40MW capacity but will have a minimal impact given that Uganda’s energy demand is increasing fast.
“We are technically and financially capable and very motivated to proceed in a most expeditious fashion,” Jody Lenihan, SAEMS’ president and chief financial officer said. Lenihan, in a proposal to the Electricity Regulatory Authority, said the three sites would be developed concurrently in the shortest time possible.
 The World Bank also pledged to continue supporting an export drive through efforts to eliminate trade barriers which hinder the country’s export potential. The WB effort will assist in creating more jobs, restore sustainable income growth and eventually economic growth.

William Church is director of the Great Lakes Centre for Strategic Studies, a London-based think tank with offices in Central and East Africa. You may contact William Church at GLCSS trains African journalists, offers an on-site internship to foreign African studies students, and manages an exchange program with journalists from the United Kingdom, the United States and Europe.

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