Several macroeconomic indicators are currently underperforming. Are we really on track towards achieving Vision 2040?
The official view by the various public agencies that are mandated to manage the economy is that Uganda’s economy has expanded nearly sevenfold under the National Resistance Movement (NRM) leadership.
More than 28 years ago, the total GDP (gross domestic product — the value of total output produced each year) was about USD3.9 billion (or about Shs.11 trillion in today’s value of the dollar) according to the World Bank statistics. Today, the World Bank estimates that Uganda’s GDP has expanded to about USD 22 billion (or about Shs. 64 trillion). This paints a rosy picture as far as economic progress of Uganda is concerned.
However, economists know that GDP, particularly in its absolute terms, is not a good metric for measuring economic progress of a society, even though it is the conventional measure. A combination of other variables commonly known as macroeconomic indicators need be considered to get a better picture.
The statistical measures, apart from GDP, that reflect the overall health of the economy include the inflation rate, exchange rates, GDP per capita growth rate, unemployment rate, interest rates and credit conditions, current account balance, debt stock, and stock market averages.
When making decisions, economic agents, such as investors, producers (industrialists, farmers etc), consumers, and citizens should be more interested in the stability of these macroeconomic variables than the absolute GDP.
So the question we should ask is; how have these variables performed in the last 28 years? Statistics from Bank of Uganda (BOU) indicate that apart from inflation that has reduced from the hyper levels at which it used to gallop back in 1986, most of the other variables above have not improved to the levels that would convince us that the economy is healthy. Let us look at the performance of each of the macroeconomic variables then and now.
A look at the exchange rate performance between 1987 and today, for example, would leave one wondering whether the economy has really grown or even moving in the right direction.
The “average official mid-rate” (the exchange rate that BOU prefers since it “improves comparability with the weighted average bureaux rate) has increased from Shs.44.6 per U.S. dollar in 1987 to over Shs.2,985 today. Last month, the exchange rate crossed the Shs. 3,000 mark for the first time in the country’s history, trading at Shs. 3,022/31 against the dollar on March 12, 2015.
A natural question comes in: how can the shilling depreciate that rapidly in the last two decades against a background of the reported strong year-on-year GDP growth, averaging 6.7%? Bank of Uganda, the institution that is legally mandated to play a regulatory role in the foreign exchange market, has on various occasions come out to explain the causes of this rapid depreciation of the shilling.
Last month, following the strong depreciation of the shilling, the Bank attributed it to two major causes-the strength of the dollar itself on global markets, and strong demand for the dollars in Uganda to fund imports and dividend payments to foreign shareholders. It also decried the poor export earnings owing to problems in regional markets.
However, these and other related explanations seem to concentrate much on the short term exchange rate volatilities, and thus are unhelpful in explaining the long term depreciation patterns. Why has the shilling kept on depreciation even during the periods when the dollar was at its weakest?
How do other countries’ currencies perform against the dollar? The Kenyan shilling, for example, has remained relatively strong against the dollar. In 1993, Kenya’s official exchange rate against the dollar averaged Kshs.58. It has since depreciated to about Kshs.88 per dollar.
In South Africa, the dollar purchases less than 11 Rands. In Rwanda, they have to give up about only 680 Rwandan Francs to purchase a dollar, having increased from 432 Francs in 1990. Why Shs.3000 in Uganda? Yet the dollar could only purchase Shs.44 in 1987 when the economic recovery programme was launched!
Secondly, let us look at interest rates. Interest rates are key to the health of the economy. They are the price of money that people, businessmen, and investors need to borrow from banks respectively to buy consumables, do business, or invest to create jobs and to produce the goods and services needed in the economy. Thus, the lower the interest rates the better.
However, to perform this role better, and in a healthy way possible, these rates that banks charge on their money or reward to those who deposit money with them should not be fixed by the government. Fixing them would distort the money market and discourage banks from lending.
Interest rates in Uganda were fully liberalised with effect from 1st July 1994. So we shall concentrate on the period between 1994 and today and analyse their performance. Back then, banks were on average charging about 14% on those who borrow, and pay about 4% to those who saved with them. Today, banks charge an average rate of interest of 22% on borrowers and pay only 2.4% to savers. In other words, bank credit has become more expensive and the interest rate spread (the difference between lending rate and savings rate) has increased, thereby discouraging saving.
External sector performance
Turning to the external sector performance, we often use the current account balance of the BOP (Balance of Payments — which summarises the transactions between Uganda and the rest of the world) to analyse the performance of the economy. Data on current account balance is quite scanty.
Bank of Uganda statistics that is available indicate that the current account balance of Uganda has permanently remained negative, implying that import expenditure continues to exceed export earnings year-after-year. The deficit has grown from USD 769 million in 2000 to over USD 2 billion today or in the region of 8.5% of GDP, according to the latest Monetary Policy Statement by Bank of Uganda.
So are we really moving in the right direction when we have failed to improve export performance, yet we continue raising the import expenditure? The total import bill has increased from USD 680 million (or Shs.1.97 trillion) in 1999 to USD 5 billion (or 14.5 trillion) in 2014.
Consequently, we have resorted to borrowing. The external debt stock has increased from USD 1.9 billion (or Shs. 5.5 trillion) in 1987 to over USD 4 billion (Shs.11.6 trillion) today. Although the debt has not yet reached unsustainable levels, the rate at which it is growing continues to expose Uganda external shocks. With the ongoing up-fronting of the anticipated oil revenues to invest in the various ongoing infrastructure projects, the debt stock will rise and might soon hit the roof.
Turning on the unemployment rate, there is no reliable data on employment in Uganda. However, the World Bank put current youth unemployment in Uganda at 83%. This implies that nearly the entire youth cohort in Uganda is frustrated by the apparent lack of employment opportunities.
Empirical studies have found that Uganda’s growth profile has remained jobless. This is mainly because growth is happening in sectors such as telecommunications and financial services that do not create many jobs, partly because they are more capital intensive — using more technology than human labour.
The agricultural sector which employs over 77% of the workforce in Uganda is not growing and it is being rapidly phased out — contributing only 23% to GDP. I have written in these pages before that to create more productive jobs and increase household incomes, we need to industrialize, beginning with the agricultural sector (building small-and medium-scale agro-processing plants around the country). This has not yet been done and there are no concrete indicators and it will be done in the near future.
Therefore, owing to the above analysis of how several macroeconomic indicators are performing, is Ugandan economy really moving in the right direction? Is our economy really transforming or emerging as several official documents allege? Are we on track towards achieving Vision 2040?
In my view these are some of the questions that the economists at the National Planning Authority (NPA) should be asking. If the answer is no; and any honest person will agree that most of the indicators above point to that fact, then the next question that should be asked is why? Why are we not progressing? Since independence, Uganda has shown great potential to transform her economy. However, we seem not to fully live up to these expectations, why?
Is it the geography that is impeding us? Is it culture? Or is it ignorance of our leaders and managers of the economy? Could the institutional hypothesis of some economists, who think that the country’s political institutions are the key determinant of economic development, be the most likely explanation of our situation? More specifically, could this be a result of our failure to build “inclusive” political institutions? May be I am the one asking the wrong questions! Pardon me but I am deeply thinking about this.