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Uganda Economic

Outlook 2017
February 2017

Table of Contents

Foreword 2

Political and economic headwinds affected growth in 2016 4

Despite the optimism, there are major risks to the economy 5

Ugandas economy is underperforming compared to its peers in the EAC 6

Poor revenue collection will affect the 2016/17 budget execution 7

Ugandas public debt burden is now a major concern 8

The banking sector is very strong despite the high NPLs 9

New Year prospects are a lot better but the risks remain 10

Conclusion and Contacts 11

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We are pleased to share with you our first accelerated investment in public
edition of the Uganda Economic Outlook infrastructure projects which will boost
bulletin. manufacturing, as well as services,
notably tourism; a rebound in private
This bulletin comes at a very crucial time sector credit and consumption.
for the Uganda economy when growth is
slowing down, private sector credit is on New investments in the oil and gas
a decline, consumer demand is low, sector, an increase in productivity of both
implementation and execution of critical the agriculture and industry sectors, as
public infrastructure projects is very well as the expected recovery in the
sluggish, and the public sector debt global and regional economies should
burden on the economy is at the highest it also help to grow the economy over the
has ever been. medium term.

The bulletin contains a brief overview of We will be issuing this bulletin on a

the performance of the economy last year quarterly basis, highlighting key
2016, and an analysis of the current developments and trends in the economy
For further information please contact economic environment and the outlook as well as sharing our perspectives,
Francis Kamulegeya for 2017. insights and views on wider economic
+256 (0) 772 749 982 issues as well as specific industry sector
francis.kamulegeya@ug.pwc.com Our analysis and commentary on the analysis.
economy as contained in this bulletin is
based mainly on the most recent Bank of
Uganda reports, National Budget
Framework Paper 2016/17, the latest IMF
Uganda country report and data from
other international organisations such as
the World Bank.

The Government is projecting the

economy to grow by 5% this year. This
growth will be driven mainly by

Uganda Economic Outlook Feb 2017 3

Political and economic headwinds
affected growth in 2016

2016 was an economically difficult year for demand, which affected exports. The
The economy faced Uganda. The economy faced numerous governments slow execution of public
numerous challenges challenges due to the continued uncertainty investment projects, and the ongoing conflict
due to the continued surrounding the recovery in global economic in South Sudan also continues to affect
uncertainty surrounding growth, weak commodity prices and geo- demand for manufactured output.
the recovery in global political events in our key trading partners.
economic growth, weak According to the recent business climate index
commodity prices and As a result, of these numerous challenges, our survey by the Economic Policy Research
geopolitical events in our export earnings, FDI flows and remittances to Centre (EPRC), business confidence declined
key trading partners. Uganda all went down. These developments, from 93.5 to 79.2, a drop of 20%2. This is the
together with a slowdown in the execution of worst decline in business climate index since
public investment projects and weaker than 2012.
expected private sector demand, had a major
effect on the economy1. The negative sentiments expressed by
businesses were mainly as a result of the carry
Consumer demand in the economy continues over effects of the 2016 electoral cycle, the
to be subdued even in this New Year - 2017. adverse effects of exchange rate depreciation,
This is mainly due to the continued lag effect the high interest rates and the resumption of
of the 2016 general elections, the relatively war in South Sudan, which is a major export
tight monetary policy which was necessary in destination for Uganda.
containing the inflationary pressures that
ensued in the first half of 2015 and the Economic outlook
continuation of the difficult international According to the Bank of Ugandas latest
economic environment, manifested in soft report on the State of the Economy, the
commodity prices and subdued global economy is projected to grow by around 5% in
this financial year 2016/17. The projected
growth will be supported mainly by the
anticipated recovery in private sector credit
which should spur consumer spending and
effective demand, as well as the continued
public investment in infrastructure

The report however acknowledges the fact

that the ongoing government investments in
public infrastructure such as power and
energy, road construction, etc are not
expected to provide an immediate stimulus to
aggregate demand immediately due to their
high import content. The multiplier impact of
Source: National Budget Framework Paper 2017/18
these investments will have greater impact on
Source: EPRC - Uganda Business Climate Index Report
economic growth in the medium-to-long-term.

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Despite the optimism, there are major
risks to the economy

There are also major downside risks to the slowdown in fixed capital formation
There is also a risk that planned projected economic growth. These risks during this financial year.
heavy public investment projects mainly include the expected slowdown in
may not deliver the expected our major trading partners economies Other risks include adverse weather
outcomes of an increase in especially in the EU and China, the conditions that may affect our
construction activity and raising current uncertainty surrounding post- agricultural production and food supply.
productivity of the real economy Brexit, and the ongoing conflict in South In addition to this, subdued global growth
due to its slow implementation and Sudan, which is our biggest export and uncertainty are constraining
low local content. market. international demand for Ugandas
Other internal risks include delays in the
implementation of public infrastructure The projected economic growth could
projects such as the Standard Gauge also be affected by a further decline in
Railway (SGR) linking Uganda to its East commodity prices, constrained external
African neighbours, and the key support, declines in remittances and
infrastructure projects critical for the Foreign Direct Investment (FDI) inflows.
commencement of oil production.
Adverse trends in the global financial
Continued delays in the implementation market which could also result in higher
of these key projects will result in a interest rates which would increase the
costs for external financing to the
Key Economic Indicators3 economy.

There is also a risk that planned heavy

2014/15 (a) 2015/16 (a) 2016/17 (f) 2017/18 (f)
public investment projects may not deliver
Real GDP growth (% change) 5.1% 4.8% 5.0% 5.5% the expected outcomes of an increase in
construction activity and raising
Annual headline inflation (average) 3.0% 6.6% 5.4% 4.8%
productivity of the real economy due to its
Fiscal balance (% of GDP) -3.0% -5.0% -3.0% -4.0% slow implementation and low local
Public debt (% of GDP) 34.4% 36.5% 38.5% 40.5%
All in all, a positive outlook faced with
Current account (% of GDP) -9.4% -8.7% -8.7% -8.9%
very many internal and external risks.
External debt (% of GDP) 41.3% 45.0% 48.0% 50.0%

Notes: (a) actual; (f) forecast

Source: Ministry of Finance, UBOS

Uganda Economic Outlook Feb 2017 5

Ugandas economy is
underperforming compared to its
peers in the EAC

Over the last five years, real GDP growth GDP Growth among selected countries in East Africa5
in Uganda has averaged 4.5%, a rate
significantly lower than that of its
regional peers in the East African
The key sectors that contributed to this
growth were the services sector, 9.00
particularly information and
communication services, agriculture and 7.00
the construction sectors.
The manufacturing sector experienced a
decline mainly as a result of the slowdown 3.00
in the growth of private sector credit to 2013 2014 2015 2016e 2017f

the sector due to increase in the cost of Kenya Uganda Rwanda Tanzania Ethiopia
borrowing. This negatively affected
private consumption and effective

Demand for manufactured output was

also greatly affected by the conflict in
South Sudan, which is Ugandas main
export market.

According to the latest forecast from the

Economic Intelligence Unit, Tanzania,
Kenya and Rwanda will be among the 20
fastest growing economies in 2017.

The Tanzanian economy is expected to

grow by 7.2%, Kenya by 6.4%, Rwanda by

Source: Economic Intelligence Unit Worlds 20
fastest growing countries in 2017
Source: World Bank

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Poor revenue collection will affect the
2016/17 budget execution
According to the latest figures from the If the domestic revenues collections
Ministry of Finance, total domestic continue to underperform, the
revenue collections in the first four government will be forced to borrow
months of FY 2016/17 (July to October) more from the domestic market.
were short of target by Shs 196.6 billion.
The increase in government borrowing
During the same period, the World Bank may result in a substantial increase in
issued a statement indicating that it has yields on government securities, which
withheld new lending to Uganda may result in an increase in borrowing
effective 22 August 2016 due to poor rates, which may constrain the private
portfolio management. The shortfall in sector credit growth even further.
domestic revenue collection, together
with the cancellation and suspension of The other alternative would be for the
new loans from the World Bank, is government to cut expenditure for the
having a major impact on the funding of rest of the financial year.
the government budget.
Already, government expenditures have
As a result of this, the government has been revised downwards by Shs. 848
had to borrow more from the domestic billion on account of the projected under
market to finance the budget. During the performance in revenue collections.
period July to October 2016, domestic
Any additional expenditure cuts may do
financing requirement has been
more harm to the economy by further
increased by 50% from the originally
constraining domestic demand given the
budgeted Shs 612 billion to Shs. 912
already declining private sector credit
billion to cover the underperformance in
revenue collections6.

Source: Ministry of Finance Planning and Economic Development

Uganda Economic Outlook Feb 2017 7

Ugandas public debt burden is now a
major concern

The Ugandas public debt burden has risen by

12.7% in the past four years from 25.9% of
GDP in FY 2012/13, to 38.6% of GDP in FY

The debt burden is projected to continue rising

to 45% of GDP by 2020. Debt as a percentage
of revenues has risen by 54% since 2012 and is
expected to exceed 250% by 20187. The
countrys ever increasing debt burden has
resulted in a deterioration of the debt
affordability situation.

Despite governments commitments to

broaden its financing base, Ugandas capital
expenditures are still too reliant on external
finance. Currently debt servicing constitutes
11% of the total government expenditure, one The preliminary Debt Sustainability Analysis
of the highest debt burdens in sub-Saharan (DSA) shows that Uganda is likely to face Currently debt servicing
Africa. moderately high risk in the near future. constitutes 11% of
the total government
This is expected to increase to 16% of the total There is also a risk of a further increase in the expenditure, one of the
government expenditure by 2018. Ugandas already high interest costs in the budget, highest debt burdens in
debt burden has risen faster than the which currently account for more than 11% of sub-Saharan Africa.
governments own resources, resulting in a Government expenditure.
debt-to-revenue ratio of 236%, one of the
highest amongst B-rated countries. This has The high level of Government expenditure on
prompted Moodys recent down grade of interest payments, particularly domestic
Ugandas long-term bond rating by one notch interest payments budgeted for next year, is a
to B2 from B1. consequence of the high borrowing
requirements, necessitated by the need to
The countrys relatively weak exports, its low scale up infrastructure spending.
domestic revenues, depreciation pressure on
the Shilling as well as the short maturity In addition, there are also perceptions in the
nature of the domestic debt poses the greatest business community that Uganda may not be
risks to Ugandas debt prospects8. able to service its rising debt levels.

Source: Bank of Uganda State of the Economy Report: December 2016
Source: IMF 5th PSI Review Report of November 2015 on Uganda Debt Sustainability Analysis

8 PwC
The banking sector is very strong
despite the high NPLs

A recent Bank of Uganda survey of the

banking industry found that there were
four most important reasons why
borrowers were defaulting on their loan

These reasons were behind more than

60% of the NPLs across the entire
banking sector. Number one was - failure
of Government to pay its contractors and
suppliers; number two - cost overruns
faced by borrowers due to insufficient
cash flows; number three - the effect of
the political instability in South Sudan,
and finally, the diversion of funds by
borrowers away from their intended use.

The survey also established that there

was a lot of speculative borrowing to
finance property development in
anticipation of high demand for housing
in the event of a take-off of the oil sector.

Many of these properties are either

incomplete or empty. In addition, bank
overhead costs which contributed about
7% of the lending spreads in 2015, have
Overall, the banking system is very This high increase in NPLs has resulted in since increased to 13%, mainly as a result
strong, with bank liquidity and capital a risk aversion by banks, which has led to of the ever increasing high cost of doing
buffers well above the minimum a decline in the growth of the private business in Uganda.
requirement. sector credit. Indeed, credit to the private
sector grew by an average of 7.5% in the The survey concluded that overall, the
The banking sector as a whole is year to October 2016 down from 18.9% banking sector remains very sound.
adequately capitalized to withstand any in the period to October 2015. However the sector faces a number of
shocks. Despite this, the non-performing risks, the main one being the declining
loans (NPLs) to gross loans have nearly The slowdown in credit growth was credit quality in some business sectors.
doubled over a period of the last 12 reflected across all sectors of the
months rising from 3.8% in September economy with the exception of personal Also, any further increases in NPLs could
2015 to 7.7% in September 2016. and household loans. heighten the risk aversion of commercial
banks, constraining the growth in private
sector credit. This would have a negative
impact on the economy.

Uganda Economic Outlook Feb 2017 9

New Year prospects are a lot better but
the risks remain

Ugandas economic outlook remains positive bolster slowing credit growth and boost the
now that the electoral cycle has ended and With inflation under economy. Recovery in private sector credit due
private sector activity can start picking up. control, and within the to the easing of monetary policy should result
banks target band, the in a rebound in private sector credit which
According to the recently published National Bank of Uganda is likely should help to improve consumer demand and
Budget Framework Paper (NBFP) 2016/17, the to continue with the private sector investment.
economy is projected to grow by 5% in real current trend of cutting
terms in FY2016/17 before accelerating to the Central Bank Rate Private consumption which is by far the
5.5% and 6%, respectively in FY2017/18 and (CBR) policy during the largest component of GDP by expenditure,
FY2018/19. course of this year in an will continue to be the primary engine of
attempt to bolster slowing economic growth over the next few years.
Growth will be driven mainly by strong credit growth and boost
performances in the industry and services the economy. Following the issuance of the oil production
sectors, and also by public infrastructure licenses, we also expect an increase in the
investment and other investments in priority economic activities directly and indirectly
sectors. related to the oil sector.

In the medium term, the Government expects All our above positive sentiments and
the key drivers of growth to include mainly optimism are based on the assumption that
agriculture, tourism, manufacturing and Government will maintain macroeconomic
construction. stability, improve its ability to execute projects
on budget and on time and most importantly
We expect the Government to continue with fight corruption.
its ambitious infrastructure investment plan
which is aimed at addressing some of the
countrys major structural bottlenecks.

These public infrastructure investments will

also be a major driver of economic growth
over the next few years as a number of publicly
and privately financed projects come to
fruition. This means that the Governments
extensive infrastructure development
program should boost local economic activity
even if the global economy remains sluggish.

With inflation under control, and within the

banks target band, the Bank of Uganda is
likely to continue with the current trend of
cutting the Central Bank Rate (CBR) policy
during the course of this year in an attempt to

10 PwC

In conclusion, we are cautiously

optimistic that economic growth will
pick up in 2017, from the sluggish pace
we saw in 2016.

This growth will be driven mainly by

accelerated public infrastructure projects
which will boost manufacturing, as well
as services, notably tourism; a rebound in
private sector credit and consumption,
new investments in the oil and gas sector,
increase in productivity of both the
agriculture and industry sectors, and a
recovery in the global and regional
economies which will in turn support
Ugandas export growth over the medium

For further information, please contact

All our above positive sentiments
and optimism are based on the Francis Kamulegeya Uthman Mayanja
assumption that Government will Country Senior Partner Partner
maintain macroeconomic stability, +256 (0) 312 354 400 +256 (0) 312 354 400
francis.kamulegeya@ug.pwc.com uthman.mayanja@ug.pwc.com
improve its ability to execute
projects on budget and on time and
most importantly fight corruption. Cedric Mpobusingye Dowson Kalemba
Partner Partner
+256 (0) 312 354 400 +256 (0) 312 354 400
cedric.mpobusingye@ug.pwc.com dowson.kalemba@ug.pwc.com

Uganda Economic Outlook Feb 2017 11

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