Uganda Economic Update 8th Edition, january 2017 Step by step Let’s solve the finance puzzle to accelerate growth and shared prosperity a Uganda Economic Update 8th Edition, January 2017 Step by step Let’s solve the finance puzzle to accelerate growth and shared prosperity This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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The material includes a fact sheet, documentary video and a number of blogs relating to issues in the report. © 2017 International Bank for Reconstruction and Development / International Development Association or The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 www.worldbankgroup.org CONTENTS ABBREVIATIONS AND ACRONYMS iv | FOREWORD v | ACKNOWLEDGEMENTS v PA R T O N E PA R T T WO THE STATE OF THE ECONOMY DEEPER FINANCE CAN UNLOCK GROWTH ACCELERATORS 3.0 Uganda’s Financial System has made strong 2 1.0 Recent Economic Developments 26 advances, but not inclusively 3 1.1 New shocks exacerbating post-election uncertainty 3.1 Who in Uganda is Offering Financial Services? to weaken economic activity 26 5 1.2 Low inflation and sustained monetary policy easing 29 3.2 How do Ugandans use financial Services? but no stimulus on credit 3.3 What Constrains Financial Credit Inclusion in 35 Uganda? 8 1.3 A weakening external position deflated activity in sectors with external links 41 4.0 Exploring Options for Closing the Gaps in Financial 11 1.4 The large investment program keeps fiscal deficit Credit Inclusion high, yet spending pressures are rising 15 2.0 Economic Outlook STATISTICAL ANNEXES 15 2.1 New shocks dampen expectations for accelerated growth 48 Table A1: Key Macroeconomic Indicators 18 2.2 Downward risks abound 49 Table A2: Growth and Structure of the Economy 19 2.3 What will drive Uganda’s growth acceleration? 50 Table A3: Central Government Fiscal Framework (% of GDP) 51 Table A4. Monetary indicators 52 Table A4. Monetary indicators B OX E S 21 Box 1: Non-performing assets rose significantly across the banking system 22 Box 2: Central Bank resolves problematic Crane Bank 37 Box 3: Understanding determinants of interest rate spreads in Uganda 43 Box 4: Interest Rate Caps: Experiences from around the world ii FIGURES Figure 1: Declining GDP growth places Uganda below many of its peers in the region---------------------------------------------------------------------------3 Figure 2: Sectoral Annual GDP Growth Rates--------------------------------------------------------------------------------------------------------------------------------4 Figure 3: Sectoral Annual GDP Growth Rates are Volatile but Generally Low Recently --------------------------------------------------------------------------5 Figure 4: Inflation has remained low and stable, in spite of volatile food prices------------------------------------------------------------------------------------6 Figure 5: Lending rates not declining as quickly as other interest rates-----------------------------------------------------------------------------------------------7 Figure 6: Private sector credit has decelerated since October 2015----------------------------------------------------------------------------------------------------7 Figure 7: Deceleration in credit across all sectors--------------------------------------------------------------------------------------------------------------------------8 Figure 8: Improvement in External Current Account in recent years is expected to be reversed----------------------------------------------------------------9 Figure 9: Exports Grew Marginally as Some Markets Closed -----------------------------------------------------------------------------------------------------------10 Figure 10: A Gradual Depreciation of Shilling is Consistent with Weak External Position-----------------------------------------------------------------------10 Figure 11: The Domestic Revenues collected during the first quarter were below target -----------------------------------------------------------------------12 Figure 12: Evolution of debt historically and in the future---------------------------------------------------------------------------------------------------------------18 Figure 13: Real Growth Capital Formation in Uganda far lower than comparators over FY 2012/13- FY 2014/15------------------------------------------20 Figure 14: Financial Sector Institutions as of November, 2016---------------------------------------------------------------------------------------------------------26 Figure 15: Account Penetration in EAC Countries--------------------------------------------------------------------------------------------------------------------------29 Figure 16: Deposit and Loan Accounts at Commercial Banks per 1,000 Adults, 2015-----------------------------------------------------------------------------31 Figure 17: Mechanism Used for Savings in 2013---------------------------------------------------------------------------------------------------------------------------31 Figure 18: Credit and Borrowing Strands by Gender and Location (2013)-------------------------------------------------------------------------------------------32 Figure 19: Domestic Credit to Private Sector by Banks (% of GDP)----------------------------------------------------------------------------------------------------34 Figure 20: Uganda’s lending rates nominally stand higher than many other countries--------------------------------------------------------------------------36 TA B L E S Table 1: Recurrent expenditure increasing gradually under weight of interest and non-wage expense-----------------------------------------------------13 Table 3: Source of Credit for Households in Uganda 2012/13----------------------------------------------------------------------------------------------------------45 Table 2: Summary Assumptions for the Medium Term Outlook, Baseline Scenario------------------------------------------------------------------------------17 Table 4: Source of Credit for Households in Uganda 2012/13----------------------------------------------------------------------------------------------------------33 Table 5: Indicators of Access to Credit in Uganda and Comparator Regions----------------------------------------------------------------------------------------34 Table 6 : Policy Actions to increase financial inclusion-------------------------------------------------------------------------------------------------------------------45 iii ABBREVIATIONS AND ACRONYMS BoU Bank of Uganda NDP National Development Plan BOP Balance of Payments NEER Nominal Effective Exchange Rate CBR Central Bank Rate NGO Non-Government Organization CI Credit Institutions NPL Non-performing Loan CPIA Country Policy and institutions Assessment NSSF National Social Security Fund DPF Deposit Protection Fund NTBs Non-Tariff Barriers DRC Democratic Republic of Congo NTMs Non-Tariff Measures DSA Debt Sustainability Analysis ODA Official Development Assistance EAC East African Community OECD Organization for Economic Cooperation and EU European Union Development FAS Financial Access Survey PIMS Public Investment Management System FDI Foreign Direct Investment PSPF Public Service Pension Fund FIA Financial Institutions Act PSI Policy Support Instrument FSSC Financial Sector Surveillance Committee PSPS Public Service Pension Scheme GDP Gross Domestic Product REER Real Effective Exchange Rate GOU Government of Uganda RFF Rural Financial Services Strategy HIPC Highly Indebted Poor Countries ROE Return on Equity ICT Information and Communications Technology ROSCAs Rotating Credit and Savings Associations IFC International Finance Corporation SACCO Savings and Credit Cooperative Organization IFPRI International Food Policy Research Institute SMEs Small and Medium-sized Enterprises IMF International Monetary Fund SSA Sub-Saharan Africa LIBOR London Interbank Offered Rate UEU Uganda Economic update MDI Micro-finance Depository Institution UGX Uganda Shillings MDRI Multilateral Debt Relief Initiative UMRA Uganda Microfinance Regulatory Authority MFI Micro-Finance Institution URA Uganda Revenue Authority MoFPED Ministry of Finance, Planning and Economic URBRA Uganda Retirement Benefits Regulatory Authority Development UCSCU Uganda Co-operative Savings and Credit Union MoPS Ministry of Public Service VSLAs Village Savings and Loan Associations MSMEs Micro, Small and Medium Enterprises VAT Value Added Tax MTIC Ministry of Trade, Industry and Nominal WB World Bank Cooperatives WDI World Development Indicators iv FOREWORD Uganda’s long run of rapid growth has struggled to maintain its pace in recent years. The economy has faced a number of shocks, including bad weather; disruption to her export markets in South Sudan as a result of civil unrest; election related macro instability during the post 2011 election period and high uncertainty around the 2016 election; upheavals in the domestic financial system; as well as those related to the global up and downs in growth and commodity prices. Under these circumstances, the economic policies that authorities have pursued have been successful in preserving past gains, particularly keeping inflation in low single digit levels and reducing poverty. Uganda has also made significant strides in preparations for production of its long- awaited crude oil. Unfortunately, the ambitious public investment program meant to stimulate the economy and remove the country’s long standing deficiencies in physical infrastructure, has not catalyzed acceleration of private investments. As a result, Uganda’s economy has been growing at an average of 4.5 percent per year since 2012, generating only modest per capita growth as it rallied against a fast growing population, and falling below projections by at least a percentage point each year. The near term growth projection of about six percent is also lower than levels sufficient for Uganda to attain middle income status by 2020, and is subject to volatility, some of which has already materialized. It is important that fiscal policy not become an additional source of shocks. This means effective delivery of the debt-financed infrastructure program and boosting domestic revenues from among the lowest in Sub- Saharan Africa. To boost the private sector side, Uganda needs to pay more attention to strengthening its financial systems to support faster investments and households management of risks. There has been an intensified interest in the financial systems across the East African Community due to a number of banking system distress episodes, debates around interest rate capping and innovations such as mobile money enabled by information and communication technology. Uganda cannot be alone in addressing these and other issues critical to ensuring its financial system raises the bar in supporting the country’s growth and prosperity agenda. Against this backdrop, I am pleased to introduce the Eighth Edition of the Uganda Economic Update series. In addition to the macroeconomic assessment in the first part of the report, this edition explores the options that exist for the country to get a much larger part of its population financially included and a much bigger proportion of its economic activities funded within the domestic financial system. As with previous editions, I hope that this Eighth Uganda Economic Update will stimulate, and contribute to, the debate among stakeholders on this important agenda. Diarietou Gaye Country Director, Eritrea, Kenya, Rwanda, and Uganda Africa Region v ACKNOWLEDGEMENTS The Eighth Edition of the Uganda Economic Update was prepared by a team led by Rachel Kaggwa Sebudde and including Valeriya Goffe, Dorothy Daka, Mehnaz Safavian and staff of Makerere University School of Economics. The team is grateful to Kevin Carey and Mehnaz Safavian for the guidance provided on the structure and messaging of the document. Barbara Nalugo and Barbara Katusabe provided logistical support, while Sheila Kulubya managed the communications and dissemination strategy. The Uganda country team provided useful feedback during the preparation of the report. Abebe Adugna (Practice Manager, Macroeconomic and Fiscal Management), James Seward (Practice Manager, Finance and Markets), Thomas O’Brien (Country Program Coordinator) and Christina Malmberg Calvo (Country Manager) provided overall guidance on the project. The report benefitted from insights of peer reviewers: Fulbert Tchana Tchana (Senior Economist), Nadeem M. Karmali (Senior Financial Sector Economist), and Julian Casal (Senior Financial Sector Economist) Close collaboration with external stakeholders was intended to ensure the relevance of the messages to policy makers and practitioners. These external collaborators included Bank of Uganda, The National Financial Stability Authority, and the Ministry of Finance, Planning and Economic Development. Irfan Kortschak provided professional editing services. vi KEY MESSAGEs The negative GDP growth rate recorded in the first quarter of materializing. It is important to ensure that the fiscal impact of FY 2016/17 is indicative of the recent difficulties that Uganda these shocks does not transmit into macro policy slippages, has faced in achieving the rates of growth required to enable with past experiences showing how damaging such slippages the country to fulfil its aspirations. In the period from the 1990s can be to growth. In order to return to the levels of economic to 2010, Uganda achieved average annual rates of economic growth recorded in the immediate post-reform era, it is vitally growth of around seven percent, far higher than many peers. necessary to address binding constraints and to transform The sustained growth was the result of macroeconomic the economy to facilitate the achievement of higher levels of stability, post-conflict rebound, and market and institutional productivity through diversification into a more resilient range reforms which transformed Uganda from a failed state to one of economic activities. of the fastest growing economies in the world. As with previous editions of this update, the eighth Uganda However, the average annual growth in the five-year period to Economic Update provides an analysis of the current state FY 2015/16 has decelerated to 4.5 percent. In sharp contrast to of the economy, while also focusing on a particular subject the earlier period, this is significantly lower than the average of significance. In this update, the focus is on the state of rate recorded by low income countries in the same period. The the financial system, with an analysis of the means by which decline since 2011 is partly related to the increasingly volatile this system can be leveraged to accelerate growth and external environment and partly to domestic policy slippages. development through higher levels of financial inclusion. A Policy frameworks held up well during the 2016 election well-functioning financial sector enables financial institutions cycle, but serious strains related to the impact of the drought to provide affordable credit and other financial services to on agriculture and of the civil strife in South Sudan are now a greater proportion of the population. This encourages the Morgan Mbabazi, 2016 Banking hall in a commercial bank ready to serve customers vii emergence of new businesses and facilitates the growth of Part 1: The state of the economy existing businesses. At the household level, it enables to smooth the patterns of consumption, to invest in human During the first half of FY 2016/17, Uganda experienced capital development, and to accumulate physical and other subdued economic activity in response to a number of assets. Together or individually, all of these outcomes play a shocks, the most significant of these being the impact significant role in the achievement of higher levels of economic of adverse weather conditions on agriculture and civil growth and shared prosperity. unrest in South Sudan. With the average annualized inflation In general, low income countries face intrinsic challenges in rate standing at the relatively low level of 4.7 percent during moving beyond shallow financial systems and in overcoming the first half of the year, the Bank of Uganda continued to informational asymmetries. In addition, growth slowdowns ease monetary policy to stimulate growth. However, liquidity tend to deteriorate the quality of credit and to expose financial conditions remained tight, with commercial banks imposing sector governance issues. As interest in addressing these increasingly stringent conditions on loans. During the first issues is growing within the East African community, Uganda quarter of the year, overall economic activity declined by 0.2 should take the opportunity to examine the current state of percent, contrasting the positive growth rate of 0.6 percent its financial sector with a view to implement reforms that will recorded in the previous quarter and a reversal of the recovery establish a strong basis for future growth. that had begun to become apparent after the completion of the election cycle in February 2016. Due to the prolonged Uganda’s level of financial inclusion has increased significantly drought conditions, agriculture declined by 1.1 percent in recent years. At present, approximately eight million during this quarter. Services, which in the past have been the Ugandan adults have access to an account at a financial main driver of growth, also stagnated. With manufacturing institution, with these accounts allowing them to conduct a and trading activities declining strongly due to disruptions range of transactions. However, at present, a much smaller to the main market in South Sudan, the growth of industry proportion of individuals and firms are able to access credit was mainly driven by the expansion of construction activities, from the formal financial system, with credit provided by the which was largely driven by government projects. system accounting for less than an eighth of Uganda’s GDP. The Government continued to focus on the delivery of Those unable to access credit are forced to rely on informal its huge investment program, with this program being sources of finance or their own, their families’, or their the most significant cause of the increase in the headline friends’, often very limited resources. As a result, a significant budget deficit. However, implementation of the investment proportion of the population is unable to increase its level program was affected by quality issues that resulted in a of productivity, and too many Ugandans continue to rely on deceleration to the rate of execution of key projects. By the end subsistence activities, particularly in the agricultural sector. of December, the value of revenues collected during the first half of the year was significantly lower than the targeted level. The main constraint on access to and the efficient use of It is expected that the shortfall in revenues could increase to financial services to support growth and increased productivity a value of around 0.4 percent of GDP by the end of the year. is the high cost. In addition, the sector suffers as a result of With the under-execution of the development budget, overall low levels of public confidence in formal financial institutions, expenditures may not reach the budgeted level of 22.5 percent largely due to historical experiences related to a series of of GDP. Despite this, Uganda’s fiscal deficit is expected to reach crises and upheavals in the financial system. As a result, a the level of around 6 percent of GDP, with this deficit being large proportion of the population prefers to keep its savings predominantly met through external financing. in the form of cash stored at home or of livestock, gold or other similar assets. The Government has recently developed The combined impact of domestic and external factors a National Financial Inclusion Strategy, which, if implemented has led to a further weakening of Uganda’s external well could be a significant step towards ensuring that a far position during FY 2016/17, reversing the improvement greater proportion of Ugandan people, households and firms that had been recorded in recent past. A deceleration to have access to and use a broad range of affordable, high- in the growth of imports of goods and services as Uganda quality financial services, which in turn will promote growth benefitted from the low international oil prices supported a and prosperity. viii reduction in the country’s current account deficit from a value such a failure having the potential to prevent reductions of 7.6 percent of GDP to 5.7 percent between FY 2013/14 and to the fiscal deficit, to make it harder for Uganda to FY 2015/16. With the decline in exports resulting from the comfortably pay off its increasing debt and to reduce situation in South Sudan and with the increase in the import the hoped-for efficiency and productivity gains to the bill, the external current account deficit has deteriorated. This economy. Moreover, the volatility of regional markets, deficit is now expected to reach a value of 7.1 percent of GDP particularly as a result of the unrest in South Sudan and if the during FY 2016/17. The poor performance of the export sector upcoming elections in Kenya are accompanied by disruption, is partly a result of Uganda’s failure to diversify exports into and the uncertainties in the global economy, all have negative higher productivity goods that are less sensitive to commodity implications for exports, remittances and FDI. In this context, price movements. Inflows through the capital account have the high cost of and limited access to credit and financial also been slow. Foreign Direct Investment (FDI) to Uganda services has become a key binding constraint on Uganda’s has declined steadily since FY 2013/14, when the total value economy, preventing the efficient allocation and reallocation of these investments was in excess of a billion dollars, almost of resources and thereby reducing the potential to increase twice the figure of US$ 512 million recorded in FY 2015/16. productivity across all sectors of the economy. Uganda’s currency remained relatively stable for almost 10 months in the period up to October 2016. However, with the increasingly weak external position, it has Part 2: Deeper finance can unlock since begun to deteriorate. The stability of the shilling was growth accelerators largely the result of the implementation of a tight monetary Successful emerging countries that have achieved rapid, policy during the election period. With the easing of monetary equitable economic growth have been characterized policy starting to have impact on liquidity in the markets, the by their ability to develop deep financial systems that currency softened, depreciating in value by about 6 percent in effectively mobilize savings and intermediate resources the final three months of 2016. to productive activities. Access to financial services enable The performance of the economy during the second half individuals, households, and businesses to efficiently balance of FY 2016/17 is expected to improve as the impact of the income and expenses over time, to manage shocks, and to drought recedes, banking system distress is contained, invest in the development of their human and physical capital. and execution of public projects improves. Overall, the Most critically, efficient intermediation encourages savers, Ugandan economy is projected to grow at the rate of between eases access to credit for borrowers and lowers the costs of 4.0 to 5.0 percent during FY 2016/17, increasing only marginally credit, which in turn reduces the overall transaction costs for to 5.2 percent in FY 2017/18, and to 6.0 percent in FY 2018/19. enterprises, making them more competitive. Therefore, a well- This growth is expected to be primarily driven by public functioning financial system encourages the emergence of new investments, with private investment still constrained by a lack businesses, supports the growth of existing businesses, and of business confidence, uncertainty about markets as social ensures business sustainability. Similarly, a well-functioning unrest persists in South Sudan, and the high cost of credit. In financial system will encourage households to save and 2016, the financial sector was challenged by the significant to engage in income generating activities in the form of increase in non-performing loans (NPLs), which in turn reduced investments, hence smoothing consumption and accelerating the tendency of banks to increase the availability of credit or to poverty reduction. reduce interest rates, despite the easier monetary policies. As Uganda’s financial system has emerged in the context in Kenya, the Central Bank was forced to intervene to address of a broader set of market-oriented policy reforms that undercapitalization, in the case of Crane Bank. However, involved liberalization of the financial sector in the the banking system as a whole remains well capitalized and 1990s. These reforms were aimed at improving efficiency provisioned for NPLs. and to enable the emergence of institutions to provide a The main risks to the economic outlook relate to the broader range of financial services, to a broader proportion possible failure of the Government to complete on-time of the population. Institutions providing financial services its massive infrastructure development program, with include banks, credit institutions (CIs), microfinance ix depository institutions (MDIs), savings and credit cooperative The high cost of finance has been a major constraint organizations (SACCOs), insurance companies, and pension to finance in Uganda. According to the Economic Forum schemes. In terms of inclusion, the development of non- Global Competitiveness Report (2016-2017), in terms of the bank deposit-taking financial institutions, such as credit affordability of financial services index, Uganda ranks in 120th institutions and microfinance deposit-taking institutions has place out of 138 countries, with a steady decline in its position been significant, because these institutions generally have a over recent years. In addition, more still remains to be done wider geographical scope and are more orientated to serving to foster public confidence in formal financial institutions, low-income clients. However, the most impact on access to largely due to limited financial literacy and also the historical financial services has been through mobile money. developments characterized by a series of crises and upheavals in the financial system. As a result, a large proportion of the At present, slightly more than half (52 percent) of population prefers to keep its savings in the form of cash Uganda’s adult population has access to an account stored at home or of livestock, gold or other similar assets. at a formal financial institution that enables them to While an overall growth in savings has been observed over the engage in at least a limited range of transactions. This is years, the 2013 Finscope survey shows that 65 percent of the a significant increase from the figure of 28 percent recorded in population is still unserved in terms of savings and credit (in 2009, with most of the improvement coming from an increase contrast to only 15 percent of the population being excluded in the use of mobile money services. Thus, a large proportion from any financial services). of households, SMEs, and agricultural producers still have only limited access to credit, savings, payment, and insurance Improving access to finance in Uganda cannot be achieved products from the formal financial system. through any one single measure. Rather, it requires a multi-faceted approach to address the many challenges Almost half of those people who hold accounts with that constrain access to financial services, especially formal financial institutions do so with a bank, with 28 the high cost and low public confidence in the financial percent of the adult population holding such an account. institutions. The most significant constraint on financial While this is a significant increase from the figure of 21 inclusion is cost, with Uganda ranking in 120th place out of 138 percent recorded in 2011, it shows that a large proportion of countries in the area of the affordability of financial services, the population is still left out of the banking system, leaving according to the Economic Forum Global Competitiveness Uganda behind many regional and global peers. With more Report (2016-2017). In addition, inclusion is constrained by lack than 7 million active users in 2016, the financial service most of financial literacy (resulting in “self-exclusion”), the low level commonly used by Ugandans was mobile money, with the of public confidence in formal financial institutions; and by increase resulting from the widespread embrace of new the undeveloped state of long-term savings products such as technologies by consumers, who have been attracted by the pensions and insurance. The stronger regulation of the pension potential of this service to effect financial transactions easily. system which has been initiated by the Uganda Retirement Despite the increase in the level of access to financial Benefits Regulatory Authority needs to be supported by a services, only a very small proportion of Ugandan stronger laws and regulations. Once completed, the reformed businesses and households have access to a bank loan pension sector should support competition in the financial and/or a line of credit. The overall domestic credit to GDP sector. ratio in Uganda has stood at the average level of 15 percent of In order to improve the mobilization of savings, GDP over the past decade, far lower than the figures recorded consumers must have greater confidence in the safety by regional neighbors such as South Africa and Kenya, and and integrity of financial institutions and easier access to lower still when compared to comparators in other regions, the services these institutions provide. Periods of instability including countries in Europe, Central Asia, East Asia and the in the banking system, including the recent instability Pacific. A number of surveys have identified the limited access created by the difficulties faced by Crane Bank, undermine to credit as the most significant constraint to doing business confidence in financial institutions. Consumer confidence can in Uganda. In addition to the supply of affordable credit, be increased if an increasingly large proportion of users of demand-side also plays an equally role, as lack of “bankable” financial services experience good and reliable services over projects, especially in key sectors like agriculture, prevents sustained periods of time. An enabling environment could lenders from further increasing private sector credit. be achieved through the development of stronger regulatory x structure, particularly in the case of the non-bank financial strengthen the legal and regulatory framework governing sector, which is currently largely unregulated; strengthening secured transactions and creditor rights, and establish consumer awareness of existing safety measures against a centralized movable collateral registry, in order to losses; and improving consumer protection practices among strengthen the credit infrastructure. all financial institutions. iv. Strengthen the legal, regulatory, institutional and Reducing the cost of credit requires a comprehensive, supervisory framework of Uganda’s financial sector to be long-term effort to increase levels of competition and able to support a deeper financial system. to improve the credit infrastructure. However, significant v. Promote sound debt management policies and short-term gains can be made through measures to address macroeconomic policies to avoid Government borrowing information asymmetries; to strengthen the financial crowding out credit to private sector. infrastructure; to build capacities in the sector; and to maintain macro-economic stability. While some governments vi. Stimulate the demand side by registering land, conducting have attempted to impose interest rate caps as a remedy, financial literacy programs, improving consumer such measures do not address the underlying causes of the protection practices and fostering trust of the population high levels of interest rates, and hence have often proved in the financial system to achieve better deposit to be counter-productive to increasing the level of financial mobilization and extension of the maturity of the deposit inclusion to ensure that a greater proportion of its population base. can benefit from and contribute to sustainable, long-term economic growth. Fortunately, the Government has embarked on an ambitious strategy to dramatically increase the level The issues constraining increased levels of financial of financial inclusion by ensuring that a far greater inclusion in Uganda are multifaceted. Thus, increasing proportion of Ugandans have access to a broad range of these levels requires a multifaceted approach. The high-quality, affordable financial services. It is hoped that overarching objective must be to comprehensively this increased financial inclusion will facilitate higher levels of strengthen the financial system, particularly as inclusion productivity and enable both households and businesses to involves institutions other than the standard deposit taking mitigate against the impact of shocks. The National Financial institutions, financial service users comprising of individuals, Inclusion Strategy (NFIS) has been developed through a multi- households and firms, and durations of finance ranging from stakeholder consultative process, with the support of both the short to long term finance. Building public confidence in the private and public sectors. The initiative has been driven by financial system to raise more financial savings; adopting the Ministry of Finance, Planning and Economic Development more cost effective modes of providing credit; and ensuring (MoFPED) and the BoU. good governance through more comprehensive and up-to- date regulatory and supervision frameworks, are the most Around the world, many countries have realized that access important areas to ensure the financial sector supports the to financial services can generate increased economic much needed growth acceleration. As a priority, authorities activity and reduce income inequalities by enabling lower should focus on the following: income households and the self-employed to become more productive and resilient. More than 50 countries around the i. Allow entrance of new strong banks that can challenge world have committed to increasing the level of financial inclusion current market leaders, while consolidating banks in or to implementing national financial inclusion strategies as the lower tier by further increasing minimum capital part of their broader national development plans. If Uganda is to requirements, to stimulate competition within the achieve its aspirations of increased growth and shared prosperity, banking system it should maintain and expand its commitment to increasing the level of financial inclusion to ensure that a greater proportion of ii. Stimulate the development and strengthen the capacity and its population can benefit from and contribute to sustainable, oversight of non-bank financial intermediaries, to mobilize long-term economic growth. more savings and increase completion in the system. iii. Expand coverage of individuals and businesses by credit bureaus and increase the spectrum of data contributors, xi Part 1 The State of the economy • During the first quarter of FY 2016/17, the economy contracted by 0.2 percent as it adjusted to the impacts of drought, the ongoing unrest in South Sudan and to a slowdown in credit from the banking system. • With inflation pressures abating, the Bank of Uganda continued to implement easier monetary policies. However, the impact on the real economy was weak due to structural issues in the financial sector and to the increase in the level of risk aversion of banks. • The fiscal deficit is projected to reach 6 percent of GDP in FY 2016/17 as the collection of revenues fail to meet targets, while at the same time the rate of execution of key hydroelectric projects improved and recurrent cost pressures increased. In the medium term, the high headline deficit should adjust to a more controlled level once the externally financed infrastructure is complete. • The slow rate of export growth combined with the large import bill resulted in deterioration of the external current account deficit, which is now expected to exceed 7 percent of GDP in FY 2016/17. • The economy will grow at a rate of around 4 to 5 percent this year, a rate similar to the average achieved over the past five years. The economy will accelerate only gradually, to 6 percent by 2019. • Uganda’s economic growth is expected to be mainly driven by public investments, with private investments struggling to overcome the effect of shocks and uncertainty regarding the pace of the Government’s huge infrastructure program. • The volatility of regional markets, due in particular to the protracted violence in South Sudan and global economic uncertainty, could result in a decline in exports, remittances and FDI. In order to achieve higher levels of resilience, the Government needs to ensure that its investment program is soundly financed and generates real productivity improvements. • Resilience to shocks is also impeded by the inefficiency of the domestic financial system, with this inefficiency acting as a key binding constraint on risk management and increased productivity across all sectors of the economy. xii Morgan Mbabazi, 2016 A burst of activity in Nakasero Market in Kampala 1 1.0 Recent economic developments Economic activity at the beginning of FY2016/17 was much more subdued than had been anticipated, with the sluggish performance that has characterized the economy since the second quarter in the previous year persisting. The easing of monetary policy following the completion of the 2016 electoral cycle had only a limited effect, due to bad weather conditions; the outbreak of violence in South Sudan; upheavals in the domestic financial sector resulting from an increase in the NPL ratio; and correspondingly more stringent loan conditions. Together with increased global uncertainties and decreased demand, these factors resulted in a decline in exports, remittances and FDI, thus constraining private investment. Overall, economic activity declined, with this trend being most pronounced in the agricultural and manufacturing sectors. Over the past five years, the performance of the Ugandan The slowdown in the rate of economic growth economy has been more subdued than previous trends, notwithstanding, the positive economic growth has with lower-than-expected growth outcomes. The average continued to contribute to reduction of poverty, albeit at rate of growth for this period has stood at 4.5 percent, almost a slower pace. It is estimated that the share of households half of the average figure of 8.7 percent recorded in the five- living below the international extreme poverty line of US $ 1.9 year period up until FY 2010/11 (see Figure 1). Despite the fact a day declined to 33.9 percent by end of FY 2014/15. While that the most recent period has been characterized by a high this sustains the downward trend in poverty that Uganda has level of public investment intended to remove constraints achieved over the past two and a half decades, the rate of on growth, private investment has not accelerated to the decline during this period is much slower than 2.7 percentage degree that might have been expected, particularly given points per year that was recorded in the period 2006 to 20131. the oil prospecting activities in Uganda. A range of external According to estimates from the Uganda Bureau of shocks, including those related to the global economic and Statistics, during FY 2015/16, the Ugandan economy grew financial crisis, high commodity prices, the post-2011 election at 4.8 percent, almost a full percentage point lower than macro-instability, and the recurrent drought conditions across had been projected. The value of investments grew at the rate the country, have contributed to the economic slowdown. of 8.0 percent, a far higher rate than the average of 1.0 percent In addition, as discussed in earlier editions of the Uganda recorded over the previous two years. While this rate was Economic Update series, constraints related to inadequate lower than the 10 percent that had been projected, it reversed infrastructure, inflexible land markets, and inefficient financial the negative rate recorded during FY 2014/15. The increased intermediation have had an increasingly negative impact rate of investment compensated for the slump in both public on economic performance. Moreover, rather than raising and private consumption and the declining contribution of capital investments that have a strong growth acceleration net exports. The decline in net exports was the result of a element, private investment has been mainly in real estate combination of factors, including lower regional and global development, where real returns have been very poor; with demand for Uganda’s products and the high level of demand the resultant oversupply now driving down occupancy rates as for imports to support construction. For the sixth consecutive well as the property prices. During the period 2013-2015, the year, Uganda’s overall rate of growth was lower than the rates average rate of economic growth in Uganda was slightly higher recorded by Tanzania, Kenya and Rwanda. than the Sub-Saharan average, but did not match that of the three fast growing neighbors, Tanzania, Kenya and Rwanda The services sector has continued to make the most that had created an island of high growth amidst subdued significant contribution to overall GDP growth. This sector economic performance across the world (see Figure 1) expanded by 6.5 percent, with the ICT and financial and 1. World Bank. 2016. The Uganda Poverty assessment Report. Farms, Cities and Good Fortune: Assessing Poverty Reduction in Uganda from 2006 to 2013. Washington DC. World Bank 2016 2 insurance services sub-sectors being the most significant South Sudan; protracted global weakness; and the low volume contributors. In the industrial sector, only the construction of credit available to this sub-sector, despite an easing of sub-sector recorded an impressive growth, with this sub-sector monetary policy. The agricultural sector accelerated to 3.2 expanding by 6.8 percent, compared to 1.9 percent recorded percent per annum, on account of a strong recovery in cash in the previous year. The manufacturing sub-sector continued crops and some improvement in weather. to perform poorly, largely due to the loss of key markets in Figure 1: Declining GDP growth places Uganda below many of its peers in the region Source: World Bank, International Monetary Fund, and Uganda Bureau of Statistics Note: There is a break in the series in 2008/09 when GDP was rebased and reweighed in cognizance of changing structure of the economy. The low rate of inflation and the easier monetary policy of the tight monetary policies implemented prior to this implemented over the year might have had a more and of the uncertainties related to the election continued to stimulating impact on the economy if new shocks in the constrain private investment. On the fiscal side, while funds post-election period did not constrain private investments were released as budgeted, a number of implementation and the momentum towards increased public investment challenges hampered the actual execution of a number of had been sustained. In FY 2015/16, the average rate of critical projects. While the uncertainties related to the election inflation stood at 3.0 percent, with the adequate food supply were anticipated, the combined impact of these uncertainties and the reduced impact of external shocks throughout most and other shocks was much more significant than had been of the year contributing to this low rate. However, the impact anticipated. 1.1 New shocks exacerbating post-election uncertainty to weaken economic activity The subdued performance recorded since the second half as these efforts to stimulate the economy began to have a of the previous year persisted into FY 2016/17. With the positive impact, a number of new shocks undermined their completion of the 2016 electoral cycle, it was expected that impact: inconsistent and short rains during typical planting domestic policies would create a more conducive economic seasons, increased volatility in the external environment; and environment, with policymakers balancing the need to reduce sporadic outbreaks of civil unrest in South Sudan, including the cost of borrowing; the need to avoid exacerbating upward attacks on traders and disruptions to the trading routes inflationary pressures; and the need to build the confidence between Uganda and South Sudan. In addition, as of August of investors in the post-election period. Thus, monetary 2016, the World Bank froze new lending to Uganda to focus policy was eased as inflationary pressures declined and attention on the implementation of existing projects, which domestic public sector borrowing was reduced to increase development could have affected investor confidence. the availability of credit to the private sector. However, just 3 The most recent domestic shock relates to upheavals in economic uncertainties continued to undermine private sector the financial system that have resulted in a deceleration confidence. to the provision of credit to the private sector. This Uganda’s public investment program has continued to be deceleration is largely the result of the sector-wide increase affected by significant implementation challenges. Progress in non-performing loans and the Central Bank takeover of the towards the completion of major projects, particularly the management and subsequent resolution of the Crane Bank, Karuma and Isimba hydroelectric projects, was somewhat one of Uganda’s four largest private banks by 2016. At the slower than had been anticipated. In FY 2015/16, the average same time, adverse weather incidents related to the el nino rate of execution for these projects stood at only 53 percent. and la nina phenomena severely affected agricultural output, This low rate of progress was largely the result of issues related with the sector expected to continue to perform poorly for the to the involvement of a new major financer, Exim Bank, with remainder of the year. In terms of external factors, the effect delays resulting from resettlement procedures and insurance of the poor performance of the global economy has been and disbursement arrangements. In addition, a number of exacerbated by the outcomes of the Brexit referendum and quality issues affected these projects, with the most significant the United States presidential elections, both of which have of these issues being the development of cracks in the dam resulted in increased uncertainty. walls. The need to establish commissions of investigation to These shocks have had a combined negative impact on address these issues may have resulted in a deceleration to private investment. First, in spite of the easing of monetary the pace of execution. By the end of the first quarter, total policies, there have been ongoing indications of financial development expenditure was estimated to have reached a distress in the economy, with a number of businesses urgently value of only Shs 1,558 billion, almost Shs 200 billion lower requesting government assistance and others declaring than the level projected at the beginning of the year. This bankruptcy. With a reduction in the volume of trade and a shortfall is expected to more than triple by December 2016, at decrease in money flows between Uganda and South Sudan the end of the first half of the financial year. Thus, in total, the as a result of the ongoing civil unrest in the latter, the impact of annual rate of growth of public investment may be less than 8 the Government’s delayed payments to the suppliers of goods percent in FY 2015/16. The World Bank’s decision to suspend and services became more apparent. In July, the Government new loans to Uganda has focused public attention on the issue announced a plan to implement a package of measures, of the slow delivery of investment projects.3 including the payment of all domestic arrears as a means to While economic activity increased following the alleviate the pressure on distressed local businesses.2 However, completion of elections and into the fourth quarter of the Government’s persistent difficulties with the delivery of FY 2015/16, there has been a subsequent deceleration. public investments and the persistent global political and Bank of Uganda compiles indicators such as the business Figure 2: Sectoral Annual GDP Growth Rates Source: Bank of Uganda 2 The Auditor General’s report for June 2015 estimated arrears totaling Shs 1.3 trillion (about 5% of the FY 2016/2017 budget). The report expressed concern that despite the Government’s commitment control system, the total amount of arrears has been increasing; and called upon the Government to clear them 3. Effective August 22, 2016, the World Bank Group took a decision to suspend new lending to Uganda, while reviewing the country’s portfolio performance and social impacts in consultation with the Government of Uganda. 4 tendency indicator and composite index of economic activity, started government projects. By contrast, the manufacturing to provide advance indications of trends in economic activity. sector declined by 4.7 percent during this period, reversing The business tendency indicator improved significantly in the recovery that had been recorded during the second half the period from February to June 2016. However, in the four of FY2015/16. The agro-processing sub sector recorded the month period up until September 2016, there was a gradual largest decline, mainly driven by the shocks to the supply deterioration, with the indicator declining to 55.5. Similarly, the of raw materials from the agricultural sector. Similarly, the rate of increase in the composite index of economic activity rate of growth of the trade sector decelerated to 0.7 percent, also declined during the first quarter of the year (see Figure 2). significantly lower than the 1.5 percent recorded in the first quarter of FY 2015/16. The agricultural sector performed poorly The developments described above had their most as a result of harsh and unpredictable weather conditions significant impact on the manufacturing and trade related to the el nino and la nina phenomena. During the services sectors. By contrast, the poor performance first quarter of FY 2016/17, the sector declined by 1.1 percent, of the agricultural sector was largely due to adverse continuing the downward trend observed in the previous weather conditions. According to UBOS quarterly data, half-year. Cash crops recorded the most severe decline, at 5.5 the construction sector grew by 9.2 percent during the percent. The sustained decline in food production has had first quarter of FY 2016/17, significantly higher than the 4.7 a significant impact on the welfare of the poor. By October percent recorded in the same period of the previous year, 2016, a significant proportion of the population in number of and also reversing the decline recorded during the last districts were facing hunger and starvation, with around 80 quarter of FY 2015/16. This good performance was mainly districts calling for food relief assistance from the Government. driven by the increase in construction activity on recently Figure 3: Sectoral Annual GDP Growth Rates are Volatile but Generally Low Recently Source: Uganda Bureau of statistics Overall, economic activity in Uganda declined by 0.2 not be able to achieve a growth rate higher than 4.5 percent percent, a stark contrast to the positive growth rate of 0.6 in FY 2016/17. While this rate is roughly the same as has been percent realized in previous quarter and a reversal of the recorded in recent years, it is still significantly lower than recovery that had started after the February 2016 elections. the average rate of it 6.5 percent recorded over the past two With this subdued performance expected to have continued decades and by regional peers. into the second quarter of the year, the Ugandan economy may 1.2 Low inflation and sustained monetary policy easing but no stimulus on credit Uganda has continued to record low inflation close to the to June 2016, food prices declined as agricultural supply targeted level of 5 percent. This is significantly lower than continued to benefit from earlier good weather. After July, this the average rate of 22 percent recorded in the nine-month trend was reversed, largely due to the deterioration in weather period following the 2011 elections. In the period from March conditions. However, the increase in food prices was modest, 5 being fully offset by a decline in the prices of electricity, fuel, decline in global oil prices were lower than the potential, on and utilities and in the overall non-food inflation rate, due account of exposure to the decline in other commodity prices mainly to the falling cost of imported oil. Another factor was and depreciation in the value of the currency. During the first the relatively stable value of the Ugandan shilling. The value of quarter of FY 2016/17, average annualized inflation stood at 4.7 the shilling stabilized as market sentiments regarding domestic percent, with pass-through from poor weather conditions in policies improved. However, actual gains from the dramatic agriculture still limited. Figure 4: Inflation has remained low and stable, in spite of volatile food prices Source: Uganda Bureau of Statistics With expectations that inflationary pressures will remain While interest rates on both treasury bills and deposits low, the Central Bank has continued to implement looser in commercial banks have been responsive to monetary monetary policies in order to stimulate economic growth. policy signals, commercial banks have revised their The Central Bank foresees a further reduction in the output lending rates only slowly, maintaining high interest gap, depending on the level of adherence to the fiscal margins. With commercial banks becoming aware that the budget; food price inflation developments; and the external CBR had reached peak levels in February 2016 (the month of environment. The CBR was further reduced to 12 percent in the elections), banks began to reduce their fixed deposit rates, December 2016, following a lowering to 15 percent at the end leading the policy curve by about two months. In subsequent of FY 2015/16. months, the rates for fixed deposit and treasury bills were also reduced. Indeed, for the six-month period ending in September 2016, both treasury bills and fixed deposit rates declined by 5 percentage points in each case, compared to growth is mainly driven by public the decline of three percentage points in the CBR. However, investments, as private investments commercial lending rates declined to a far lesser extent, with struggle to overcome tight liquidity a significant time lag (see Figure 5). By October 2016, these conditions and the host of shocks rates had declined to only 23.9 percent, compared to the rate including weather, South Sudan conflict of 24.7 percent recorded in December 2015. This asymmetrical behavior is reflected by commercial banks’ persistently high and global uncertainty interest margins, as has been discussed in previous editions of this Update, and is further investigated in the second part of this report. 6 Figure 5: Lending rates not declining as quickly as other interest Figure 6: Private sector credit has decelerated since October 2015 rates Source: Bank of Uganda Source: Bank of Uganda Despite the looser monetary policies, liquidity conditions4 distress and required a government bail-out to a value of have remained tight, and the rate of growth of private around US$ 386 million. This financial distress was partly sector credit has declined persistently over the past attributed to the high cost of financing from commercial year. The year-on-year growth rate for private sector credit banks and partly to the high level of government arrears, with declined to -1.6 percent by September 2016 (see Figure the total value of these arrears standing at around US$ 446 6). The commercial banks declined to adjust lending rates million. Additional contributing factors to complaints from the downwards, partly to enhance their risk management practices corporate sector were the congested, costly public services and to tighten lending standards, especially in the case of that have rendered the business environment uncompetitive. loans of foreign currency. This behavior was necessitated by the deterioration in the quality of loans and the increased In the 12-month period to September 2016, the rate recognition of foreign exchange risks. As a result, commercial of growth of credit to all sectors declined, despite the banks have drastically reduced foreign currency denominated gradual unwinding of tight monetary policy. Across the lending, with the stock of these loans 10.1 percent lower than different sectors, loans to building and construction, trade, the levels recorded a year ago (as of the end September 2016). manufacturing, and the personal and household sectors With the revaluation of these loans to eliminate the effect of continue to account for the bulk of private sector credit, depreciations in the value of the currency, the decline is even comprising more than 70 percent of the total stock. In the more significant. This has had major implications to liquidity, building and construction sector, which currently accounts for given that credit denominated in foreign currency still accounts the largest proportion of private sector credit (22.5 percent of for more than 40 percent of the total loans. total), the volume of loans declined by 2.4 percent from the Also contributing to cash flow strains, the Government has level recorded in September 2015. In the trade sector, these accumulated a significant volume of arrears for goods and loans declined by 6.9 percent over the same period. In this services supplied by the private sector. This, in addition to sector, the impact of the exchange rate volatility jeopardized the high cost of credit and the feared exchange rate exposure, business activities by raising the cost of importation, and has made it difficult for some firms to honor their bank loans subsequently the price of imported goods on the domestic on schedule. In fact, during the first quarter of FY 2016/17, market and operational costs. These key components are it was reported that a number of firms were under financial mostly denominated in dollars, while business revenues 4. Liquidity conditions can be defined as the ability of firms, individuals or households to access money for day to day transactions 7 are denominated in shillings. The decline in the volume of affected the large borrowers as banks reduced their exposure loans to the manufacturing sector was even more dramatic, due to resultant non-performing loans. However, there was at 13.7 percent, deepening the declines recorded in the also a significant drop in the volume of loans to the business five months prior to this period (see Figure 7). Instability in services sector, which largely consists of SMEs, which are South Sudan severely affected both trade and manufacturing deemed to be relatively high risk customers. Only in the case of activities, given that South Sudan was a key business outlet the personal and household sector has there been a sustained for a wide range of trade activities and a key market for goods positive growth rate, reaching 9.5 percent. manufactured in Uganda. These developments mainly Figure 7: Deceleration in credit across all sectors Source: Bank of Uganda 1.3 A weakening external position deflated activity in sectors with external links In recent years, the most significant causes of distress an impact on the production of agricultural commodities for to Uganda’s external resource flows has been the South export, particularly maize and beans. Sudan crisis and remaining uncertainties about oil. By In the context of these developments, Uganda’s current 2013, South Sudan had become the largest destination for account has remained very weak. The current account Ugandan exports. However, this market has since become sustained a deficit of an average value of 7.1 percent of GDP extremely unpredictable as a result of the outbreak of serious in the period from FY 2011/12 to FY 2015/16. In the period unrest in that country and of the resulting intermittent from FY 2013/14 to FY 2015/16, Uganda’s current account blocking of trade routes to Uganda. In addition, the external balance improved slightly, declining from a deficit of 7.6 environment continues to be very unfavorable to Uganda, with percent of GDP to 5.7 percent. This was mainly the result of a the global economy remaining weak, constraining demand for deceleration in the growth of imports of goods and services as Uganda’s exports and the flow of foreign direct investments, Uganda benefitted from the low international oil prices and the especially into the oil sector. While global prospects began to declining FDI reduced the country’s project-related imports. improve during the current financial year, with a consequent In addition, while tourism receipts declined on account of increase in commodity prices, this was followed by significant election-related uncertainties, the value of secondary income, uncertainties related to the Brexit referendum and the US the bulk of which is private transfers, increased steadily from presidential elections. In addition, the severe drought has had US $ 1,204 billion during FY 2013/14 to US$ 1,543 billion by 8 FY 2015/16. For FY 2016/17, there are indications that the and transfers declining as a result of global uncertainties. current account deficit could increase to a value above seven Therefore, the value of imports is expected to increase from percent of GDP, with South Sudan markets remaining risky 18 percent of GDP in FY 2015/16 to 20.4 percent in FY 2016/17, or completely closed; global oil prices continuing to increase while a deceleration in the growth of exports will see these and therefore exerting upward pressure on the import bill; the inflows paying for only 55 percent of the import bill. Already, Government investment program accelerating; the tourism during the first quarter of FY 2016/17, the trade and services receipts reducing in response to new developments including deficits worsened to US$ 395 million and US$ 255 million the Kasese clashes in western Uganda and avian flu outbreak; respectively, largely because of these factors. Figure 8: Improvement in External Current Account in recent years is expected to be reversed The poor performance of exports is largely the result of the in South Sudan around July 2016 was followed by a steep failure to diversify exports into higher productivity goods decline in the volume of exports, with the value declining by that are less sensitive to commodity price movements. at least 72 percent, from US$25 million to US$7 million in the In the period from FY 2011/12 to 2015/16, the average value period from June to July 2016. of exports stood at 10.9 percent of GDP. This was far lower than the average value of 12.4 percent of GDP recorded in the previous five-year period. Traditional export commodities such as coffee and tea still constitute around 30 percent of the total Uganda has consistently value of exported goods. Due to weak global demand, these increased its headline fiscal exports have not performed well. Rather, growth was driven by an increase in the value of non-traditional exports, including deficit over the past three years, metal and plastic products, bottled water, and rice. Markets with this deficit expected to for these non-traditional exports are mostly located within reach a value in excess of 6.0 the region. During FY 2015/16, the value of exports to regional percent of GDP markets grew by only 3.1 percent, mainly attributable to the reduced demand from South Sudan. The resurgence of unrest 9 Figure 9: Exports Grew Marginally as Some Markets Closed 15 13 Exports as % of GDP 11 9 7 5 3 1 Source: Bank of Uganda With FDI declining over the past three years, the financial The value of the shilling remained relatively stable account has also remained weak. In FY 2013/14, the total throughout most of FY 2015/16, largely due to the tight value of FDI inflows stood at around a billion dollars. In FY monetary policy stance that remained in place throughout 2015/16, the value of these inflows had almost halved to US$ most of the year. The currency depreciated by 5.3 percent Kenyato 512 million, equivalent of GDP. only 2 percentRwanda (LHS) According (LHS) over FY 2015/16, with much of this loss in value occurring to the FDI survey conducted EU (LHS) FDI continues by the BoU,South Sudan (RHS) to during the first half of the year, particularly in the period from primarily take the form of investments in the natural resource June to September 2015. After some months of appreciation 55 as oil exploration and tourism. It remains 30 sectors, such and a few blips in the daily rate in the period around the a challenge50for Uganda to stimulate efficiency-seeking 45 25 February 2016 elections, the value of the shilling remained investments outside the natural resources sectors and to 40 quite stable, recording only a marginal depreciation of 0.5 US$ '000,000 generate broader linkages within the economy, including 20 35 percent over the six months leading to September 2016. through the30 promotion of intra-regional FDI. The value 15 The stable exchange rate suggests that the adjustment to of disbursements 25 on concessional external loans to the Government the weakening external sector was conducted through the 20 increased only modestly from US$ 322 million 10 to US$ 43615million, but reversed the decline recorded in implementation of a tight monetary policy stance and a FY2011/12. 10 Therefore, it was the non-concessional borrowing, 5 reduction in forex reserves, which declined from 4.9 months Mar-16 Jan-16 Sep-15 Feb-16 Jun-15 Jun-16 Oct-15 May-16 Dec-15 Jul-15 Jul-16 Nov-15 Apr-16 Aug-15 which increased from US$ 81 million to US $ 371 million, and of import cover to 4.6 months in the period from FY 2014/15 hence closed the funding gap over this period. to 2015/16. With much of the loss in value resulting from the Figure 10: A Gradual Depreciation of Shilling is Consistent with Weak External Position Source: Bank of Uganda 10 strengthening of the US dollar against other currencies, the 2016, the value of shilling was 7 percent below the level depreciation of the nominal effective exchange rate was much recorded 12 months earlier. Uncertainties related to both lower, standing at 1.4 percent, then appreciating by 1.8 percent local and external events, including the freezing of new loans during this year. by the World Bank and the impact of the results of the Brexit referendum and the US presidential election being the most However, the currency has recently become increasingly significant causes of this uncertainty. This is notwithstanding volatile as a result of the ongoing weakness in the external the fact that the Government has contracted balance of sector. The value of the shilling depreciated by 0.4 percent payments support credit from PTA Bank to provide the BoU in the period from June to September 2016, with further with sufficient resources to prevent spikes in the foreign depreciation from November 2016 pushing the exchange rate exchange market when the need arises. to levels in excess of Shs 3600 per dollar. By end December 1.4 The large investment program keeps fiscal deficit high, yet spending pressures are rising Uganda has consistently increased its headline fiscal Morgan Mbabazi, 2016 deficit over the past three years, with this deficit expected The Bujagali Power Dam to reach a value in excess of 6.0 percent of GDP during this year. This is consistent with the implementation over the past several years of an investment-driven fiscal policy intended to stimulate economic growth. The FY 2016/17 National Budget envisaged that the total value of expenditure would increase from the level of 22.1 percent of GDP recorded in FY 2015/16 to 22.4 percent, with the construction of key infrastructure projects intended to address constraints on private investments and to enhance the productive capacity of the economy continuing. Consistent with this objective, the value of resources allocated to the transportation sector was raised to 19 percent of the total budget, from 15 percent in FY 2015/16. The allocations to the energy sectors also remained sizeable, at 12 percent of the total budget, even though it was lower than the figure of 15 percent recorded during the previous year. Meanwhile, in a bid to enhance human capital, skills development and health outcomes, 12 percent of the budget was allocated to the education sector and 7 percent to the health sector. The allocations to the education and health sectors increased by 44 percent and 26 percent respectively relative to allocations in FY 2015/16. A significant proportion of the expenditure in the educational sector has been allocated to facilitating the transition of graduates from formal education into productive economic activities through strengthening the capacity of Business Technical and Vocational Education Training (BTVET) in skills development. Health expenditure has been directed towards strengthening interventions aimed at enhancing the availability of healthcare Uganda has consistently increased its headline fiscal deficit workers at health centers and reducing maternal and infant over the past three years, with this deficit expected to reach a value in excess of 6.0 percent of GDP mortality. Increased regional security and terrorism concerns necessitated significant increases in the allocations to the 11 security sector, with these allocations increasing to 8 percent expected level of international trade taxes. Specifically, VAT of the total budget. Allocations to agriculture were increased on imports fell short of the target by 15 percent; import duty to 4 percent of the total budget in an attempt to increase by eight percent; excise duty on imports by 34 percent; and productivity growth in the sector. Public administration and withholding tax collections by 41 percent. Together, the total interest payments had been budgeted to reduce their share value of the gap between the revenues collected and the in the budget. With domestic revenues forecast to increase to targets amounted to Shs 157 billion. The value of collected 14.4 percent of GDP, the fiscal deficit was expected to reach revenues was also lower than in the corresponding period of to reach 6.4 percent of GDP in FY 2016/17, with more than 80 FY 2015/16. The collection of direct domestic taxes was also percent of the fiscal deficit funded through external borrowing, lower than the targeted level during this quarter, as a result the bulk of which was to be derived from commercial sources of shortfalls in corporate taxes (34 percent), presumptive (non-concessional loans). taxes (97 percent) and withholding taxes (19 percent). Overall, domestic revenue mobilization is projected to reach 14 percent However, both the lower than expected domestic of GDP, which is 0.4 percentage points lower than the original revenues and the decline in the value of aid inflows have target. Uganda’s revenue collection performance continues to complicated the implementation of the FY 2016/17 budget. significantly lag those of its peers in the EAC.5 While external As a result of decelerating growth and disruptions to trade, the grants may reach the targeted levels of 1.8 percent of GDP Uganda Revenue Authority did not collect the level of revenues by the end of the year, they too have so far not performed as targeted at the beginning of the year, with the resulting well as expected, with disbursements of only Shs 142 billion, shortfalls requiring the Government either to source alternative a value equivalent to only 0.1 percent of the expected annual financing or to reduce expenditures. In the first quarter of FY value of Shs 1.718 billion. The amounted disbursed is also 2016/17, the value of collected tax revenues amounted to much lower than the figure of Shs 483 billion recorded in the Shs 2.86 trillion, representing a shortfall of about 3.2 percent same period in the previous year. relative to the targeted level, largely due to the lower than Figure 11: The value of domestic revenue collected during the first quarter was below target Source: Uganda Revenue Authority So far, the revenue shortfalls have been absorbed conducted through public training institutions such as Uganda exclusively through under-execution of the development Management Institute, rather than being conducted in hired budget. However, recurrent expenditures also remain under out space at hotels. However, in the post-election period, when pressure. During the first half of FY 2016/17, 50.2 percent of there are pressures to honor election pledges, the Government the approved recurrent budget had been released, almost found it difficult not to increase recurrent expenditure, equally spread across the sectors. This is in line with the efforts particularly since most of this expenditure consists of the to continue to contain non-wage recurrent expenditures. For wage bill for teachers and civil servants, and for public instance, public training and workshops are now required to be administration. Moreover, during the first half of the year, 5. In FY 2015/16 domestic revenue as a share of GDP stood at 23 percent in Kenya, 17.6 percent in Tanzania, 14.3 percent in Rwanda and 14.8 percent in Burundi. 12 Uganda has faced a number of shocks, with some implications is still being affected by delays. The construction of the to fiscal operations. The drought increased the need for Karuma and Isimba hydroelectric projects, both funded expenditure on food relief.6 During this part of the year, by Exim Bank of China, seems to be accelerating, as both lecturers of Makerere University also conducted strike action implementing agency and contractors move up the learning due to non-payments of their allowances, a development curve.7 For other externally funded projects, including those in which led to the indefinite closure of the university and the the road sector, the World Bank’s cancellation of one project establishment of a commission to investigate the issue. In and the suspension of the transport component in two others addition, there was agitation from some health professionals due to lack of attention to social safeguards has slowed due to the non-payment of salaries and allowances; demands down activity in that sector and resulted in delays to the by school teachers for better pay; and an outbreak of hostilities disbursement of funds by external financiers. This has resulted in the Kasese region in western Uganda, leaving more than in a slowdown in the rate of execution in a sector where the 100 dead and heightening security concerns in the area. These average disbursement rate did not exceed 60 percent in FY events are likely to result in supplementary expenditures. 2015/16. The domestically funded projects did not perform much better in terms of execution. For example, the agriculture In terms of development expenditure, whereas releases sector absorbed only 52 percent of the funds released, for the first half of the year were in excess of 50 percent of mainly on account of the poor performance of the National the budgeted total, the actual execution of key projects Table 1: Recurrent expenditure increasing gradually under weight of interest and non-wage expense FY2016/17 FY2016/17 In percent of GDP FY2013/14 FY2014/15 FY2015/16 App. Budget Proj. Revenues and grants: 12.6 14.2 14.9 16.2 15.9 Domestic revenues 11.6 13.0 13.5 14.4 14.0 o/w Tax revenues 11.1 12.3 12.8 13.6 13.3 External Grants 1.0 1.2 1.4 1.8 1.8           Total expenditure 16.6 18.5 19.7 22.5 21.9 Recurrent 9.5 9.9 10.8 10.4 10.4 Development 7.1 6.7 6.9 9.8 9.6 Domestic Development 4.4 4.2 4.1 4.7 4.5 Externally Financed Projects 2.7 2.5 2.8 5.1 5.1 Net Lending & Investment 0.0 1.6 1.8 1.9 1.6 o/w Hydro-power Project 0.0 1.3 1.8 1.9 1.6 Other (e.g. Clearance of domestic arrears) -0.5 0.3 0.2 0.4 0.3 Overall balance --3.5 -4.4 --5.2 -6.2 -6.0           External Financing 1.3 1.2 2.9 5.4 5.3 Domestic Financing 2.2 3.2 2.2 0.9 0.7 o/w Petroleum Fund withdrawals 0.2 2.1 -0.1 -0.1 -0.1 Memorandum items:         Nominal GDP (Shs billions) 70,458 77,845 84,907 92,878 93,939 Source: Ministry of Finance, Planning and Economic Development, IMF, and World Bank 6. By mid-November2016, Government had received alerts for food support from 80 out of the 112 districts and estimated that up to seven million people were in urgent need of food, a situation that was expected to extend to March 2017. The most affected areas are in the cattle corridor zone. Nonetheless, it was anticipated that if the September-December planning season failed too, then the situation was to become a catastrophe for a larger part of the population. 7. Since the Karuma project started in FY 2013/14, the rate of disbursement has been gradually increasing (from 1% in FY 2013/14, to 41% in FY 2014/15 and to 53% in FY 2015/16), as the different parties involved in the process appreciate the requirements, while also the issues related to insurance, compensation, and management fees have also been resolved. 13 Agriculture Advisory Development Secretariat (NAADS), which increase in recurrent expenditure and the lower than targeted absorbed only 33 percent of its Q1 FY 2016/17 release. With revenues, the fiscal deficit is still projected to reach six percent this underperformance during the first half of the year, it is of GDP. This would be 0.2 percentage points lower than expected that total development expenditure will reach a value targeted in the approved budget, but still one of the largest equivalent to only 9 percent of GDP, almost a percentage point fiscal deficits in Uganda for more than a decade. Consistent lower than the budgeted level. with the plans set out in the budget, more than 85 percent of this deficit is to be funded by drawing on external resources, Despite these factors, the fiscal deficit will still increase with the authorities endeavoring to minimize domestic relative to the previous year as a result of the many borrowing. During the three years prior to FY 2015/16, the competing demands on the budget and the sluggish high level of domestic financing had increased the level of revenues available to the Government. Total expenditure is vulnerability of public debt, given its short-term nature, and expected to reach 21.9 percent of GDP, only half a percentage increased the risk of crowding out the private sector, with point lower than projected in the budget. However, due to the increases in interest rates increasing the cost of credit. Morgan Mbabazi, 2016 The value of the shilling remained relatively stable throughout most of FY 2015/16, largely due to the tight monetary policy stance that remained in place throughout most of the year. Organizing finances at a village savings association 14 2.0 Economic Outlook Uganda’s economy is expected to grow at less than 5 percent during FY 2016/17, accelerating gradually to about 6 percent in the subsequent two years. These relatively low rates are due to a number of shocks, including much lower trade with South Sudan, the low credit from the financial system, bad weather, and an uncertain global economy. With these shocks particularly affecting private investment, it is expected that public investments intended to address infrastructure constraints and prepare Uganda for oil production will continue to be the main driver of growth. The main risks include those related to fiscal management in the face of huge spending pressures and to the possibility that the investment program will not result in higher levels of growth if it is not properly implemented, potentially leading to unsustainable levels of debt. If the financial system fails to provide sufficient credit to support increased private investment, Uganda may remain trapped in a long-term low growth cycle. 2.1 New shocks dampen expectations for accelerated growth The World Bank forecasts that the Ugandan economy will Morgan Mbabazi, 2016 Stock market dealers watch the price trends grow at the rate not higher than 5 percent in FY 2016/17, at the Uganda Stock Exchange with this growth rate remaining roughly unchanged in FY 2017/18. With the economy adjusting to a number of shocks; with the financial system remaining jittery on account of the high level of non-performing assets and the resolution of issues related to the Crane Bank; with sporadic clashes in South Sudan; with anticipated effects of the news of a breakout of avian flu in Uganda on tourism, production and export of poultry products; and with an uncertain global economy, it is unlikely that there will be a dramatic acceleration in the rate of growth in the second half of the year.8 The looser monetary conditions and reduced domestic borrowing by the Government to finance large public investments will create a more conducive environment for the private sector, with an increased availability of credit as a result of the reduction in the crowding out of private investment that has occurred in recent years. However, as discussed in Section 1.2, commercial banks have recently tightened their lending standards; authorities have made capital requirements more stringent; and banks are becoming increasingly reluctant to grant loans given the recent deterioration in the quality of their loans portfolio. These factors will constrain growth, despite the persistent gains With the economy adjusting to a number of shocks; with the from low global energy prices and from the strengthening of financial system remaining jittery; with sporadic clashes in the construction boom. In addition, the construction boom South Sudan, and an uncertain global economy, it is unlikely that there will be a dramatic acceleration in the rate of may decelerate if resources are re-allocated from a number of growth in the second half of the year on-going infrastructural projects towards recurrent expenses aimed at mitigating the evolving humanitarian crisis attributed 8. The IMF too concluded the 6th PSI review on November 2016, revising its growth forecast for FY 2016/17 to 5.0 percent 15 to the severe drought. Therefore, the overall rate of growth for The pattern of growth can be expected to remain the the year is expected to remain at roughly the same level as in same as in the past decade, with the predominant source FY 2015/16. It is still expected that this growth outcome will of growth being increased economic activity in the continue to reduce poverty by an estimated 0.7 percentage construction and services sectors, with the manufacturing points per year over 2016-2018, although this could mainly be sector also continuing to expand, albeit from a very small recorded in the central and western regions, widening regional base. Though still only contributing to a small proportion of spatial disparities. GDP, the mining and quarrying sector could be a significant source of further growth in coming years, as the sector’s proven It will be necessary to implement monetary policy in a potential starts to attract increased attention from investors. manner that maintains the delicate balance between Growth in the output of the agricultural sector will continue stimulating the economy and continuing to control to be subdued due to supply-side constraints, a development inflation. In the next few months, the monetary authorities which further reduces prospects for faster poverty reduction. may be inclined to tighten monetary policy to curtail inflationary pressures resulting from food price increases The very uncertain global outlook will continue to have a and the depreciation in the value of the currency. Moreover, negative impact on exports, especially to the USA and the if international oil prices continue to increase, the domestic EU. It will also have an impact on foreign direct inflows and prices for many imported goods may also rise, hence on private transfers. These effects will exacerbate the already contributing to inflation. Once policy rates start to increase, adverse effects of the protracted political crisis in South Sudan, commercial banks will have a justification to tighten credit which until recently was Uganda’s fastest growing export further. In this context, it can be expected that the level of market. These developments, in combination with an increase private investment will remain low, or at least will increase only in imports for infrastructure projects, will result in a further gradually. In terms of the public sector, if efforts to improve widening of the external current account deficit to a value in the implementation of World Bank projects are sufficiently the range of 8-10 percent of GDP in FY 2017/18 and FY 2018/19. successful to justify lifting the freeze on new lending, it may The capital balance should remain roughly unchanged, unless have spill-over effects that will enable public investments to the expected decline in official aid transfers following the remain the key driver of investments for the next few years. freeze of new loans by the World Bank is offset by a higher level of FDI, particularly in extractive activities. In the short run, the With an acceleration of implementation of major public planned increase to public investments will most likely curtail investment projects, the economy should grow at a slightly a build-up of international reserves beyond the current levels higher rate in FY 2017/18, reaching the level of around 5.2 of about 4.0 to 4.5 months of import cover. percent. The economy will also derive some benefits from low energy prices, particularly if investors take advantage of Fiscal policy will continue to be used as the principal the associated low cost of imported inputs. Economic activity, instrument to stimulate economic activity. During FY particularly in oil-related activities, could also intensify, given 2017/18, total expenditure can be expected to remain high, the progress that has been made with the arrangements for at around 21 percent of GDP. However, at this level, it will this industry. In this respect, the Government has already still be lower than the figure of 21.9 percent of GDP recorded issued the long-awaited exploration agreements, which in FY 2016/17. It should be noted that this level is still high could accelerate FDI inflows, infrastructure development, by regional standards. The major driver of this increase in employment and the development of local industries. If this expenditure is the acceleration of construction works on the occurs, it is expected that the stimulus effects of an increase Karuma and Isimba hydroelectric plants. Once completed, in the economic activities in the construction sector, driven these projects are expected to double Uganda’s power by Uganda’s significant investments in public infrastructure generation capacity. According to the FY 2017/18 National projects, will offset the effects of a weak external sector on the Budget Strategy, accelerating infrastructure development to Ugandan economy. These effects could be expected to carry hasten the realization of investment returns is an important on through to FY 2018/19, when economic growth is expected means to improve productivity in the primary sectors. Total to increase to about 6 percent. expenditure is expected to decline to about 19 percent of GDP following the completion of key one-off investment projects. 16 With only limited improvement to revenue mobilization, through external borrowing. This followed the realization that increased public expenditure is expected to be funded the increased issuance of domestic securities to finance the through borrowing. While revenues are expected to increase budget risked crowding out private investments. As a result, by an average annual rate of 0.5 percentage points, these up to 88 percent of the fiscal deficit will be financed through rates are too low to cover increased expenditure. As a result, external loans, with the value of these loans almost doubling to the deficit will increase to reach 6.0 percent of GDP, before 5.3 percent of GDP during FY 2016/17, before declining slightly declining to 4.9 percent in the subsequent year. Uganda’s to 4 percent of GDP during FY 2017/18. authorities had planned to finance the increasing deficit Table 2: Summary Assumptions for the Medium Term Outlook, Baseline Scenario           2013 2014 2015 2016e 2017 f 2018 f Real GDP growth, at constant market prices ,d 3.6 5.2 5.1 4.8 4.5 5.2   Private Consumption   -0.5 3.6 12.6 4.6 8.7 8.8   Government Consumption   2.1 0.1 12.4 5.6 3.3 2.5   Gross Fixed Capital Investment 9.7 2.5 -0.5 8.0 7.0 10.0   Exports, Goods and Services   6.7 0.2 -3.5 6.9 4.0 9.0 Imports, Goods and Ser-     0.0 -5.8 16.5 8.2 16.2 16.0 vices Real GDP growth, at constant factor prices,d 3.4 3.9 4.8 4.5 4.5 5.2   Agriculture   1.8 3.0 2.3 3.2 3.3 4.0   Industry   4.3 3.9 7.8 3.0 5.0 9.0   Services   3.9 4.3 4.8 5.7 6.6 5.1 Prices: Inflation               Inflation (GDP       6.1 3.4 5.1 4.0 5.1 4.8 Deflator) Inflation (CPI period aver-     5.0 5.2 3.0 6.6 5.4 5.0 age) Current Account Balance (% of GDP) -6.3 -7.6 -7.2 -5.9 -7.1 -8.2 Financial and Capital Account (% of GDP) 6.1 7.4 8.1 7.2 8.3 9.6 Net Foreign Direct Investment (%   5.9 6.1 3.2 2.1 4.6 4.7 of GDP) Fiscal Balance (% of GDP)   -3.2 -3.5 -4.4 -5.2 -6.0 -5.3 Debt (% of GDP)   25.9 28.3 31.8 34.5 38.6 41.5 Primary Balance (% of GDP)   -2.1 -2.6 -2.7 -2.8 -3.6 -2.3 Poverty rate ($2.5/day 2005 PPP terms) a,b,c 34.6 34.3 33.9 33.5 33.0 32.4 Poverty rate ($5/day 2005 PPP terms) a,b,c 65.0 64.7 64.3 64.1 63.6 63.0 Sources: World Bank Staff projections Notes: f = forecast (a) Calculations based on 2009-UNHS and 2012-UNHS.  (b) Projection using annualized elasticity at the regional level with pass-through = 1 based on GDP per capita constant PPP. (c) Actual data: 20162. Projections are from 2013 to 2018 (d) Actual GDP series revised in line with revised numbers from UBOS, after rebasing of the Consumer Price Index. 17 2.2 Downward risks abound The economic outlook faces a number of risks, the most investments is highly dependent on volatile external financing, immediate and critical of which relate to domestic given that for now, the utilization of domestic resources is developments and the way fiscal management can limited by the shallow capital market. If the large investment accommodate them in the context of the low revenue base program does not result in improved growth or if projects are and to increased spending pressures, both of which could delayed significantly, as has been the case with several energy have implications for financing the investment program projects, this could also result in rapid increases to the debt-to- and the level of debt. Private investments could stagnate or GDP ratio, most likely to a level in excess of the threshold of 56 even decline if Uganda’s fragile regional markets are distorted percent of GDP, the present value debt threshold for medium further in the event the tensions in the Democratic Republic CPIA performers. According to an update to the Joint World of Congo deteriorates into civil unrest following the failure by Bank/IMF Debt sustainability analysis conducted in November the Congolese Government to conduct presidential elections, or that the upcoming elections in Kenya are followed with a 2016, Uganda continues to be at a low risk of debt distress with disruption of trade with Uganda as was the case around the the present value of public debt-to-GDP ratio projected to peak 2007 elections. On the other hand, the financing of public at about 36 percent in FY2021.9 Figure 12: Evolution of debt historically and in the future Sources: Joint Debt Sustainability Assessment by IDA and IMF, December 2016 9. Under the Country Policy and Institutional Assessment (CPIA), Uganda is classified as a medium policy performer, with a CPIA score of 3.73 (3-year average, 2013–15). All data refer to fiscal years running from July to June (e.g., FY2016 covers July 2015 to June 2016, abbreviated as 2016 in the figures and tables). External debt is defined as foreign-currency denominated debt for purposes of the DSA. 18 Uganda’s debt sustainability remains vulnerable to a While this may assist in the development of the capital market, number of variables, a fact that has led to downgrading it risks crowding out private sector investment, as higher of the country’s long term debt risk by some credit rating interest rates increase the cost of borrowing. In recent times, firms. These variables include: (i) the rate at which the shilling with the increasing development of longer term markets, depreciates, which affects the cost of servicing external debt; the market has preferred Treasury bonds to Treasury bills. (ii) the rate of GDP growth, fiscal revenue, and exports, which Increased government borrowing has increased the cost of affects the ability to service debt; and (iii) the strength of the domestic borrowing, with the share of interest on the domestic institutions, which affects the thresholds for assessing debt debt in total interest payments on all debt increasing from 81 sustainability. In particular, the continued failure to collect percent and 87 percent in the period from FY 2014/15 to FY adequate levels of revenue in the context of a rapid fiscal 2015/16. expansion has contributed to an increase in the risk of debt Uganda remains vulnerable to a number of exogenous distress. In November 2016, under its recent assessment of shocks, including shocks related to fluctuations in the Uganda’s credit rating, Moody’s downgraded the long-term prices of its main exports and imports, regional security, issuer rating of the Government of Uganda from B1 to B2 but and volatile climatic conditions. Volatile commodity prices changed the outlook to stable from negative. This was based and financial distress in industrialized countries can have on what Moody’s believed to be the sustained erosion of fiscal adverse effects on Uganda’s external position, exacerbating strength and rapid increase in the debt burden to 33 percent of domestic inflation and complicating the financing of its GDP, with increases projected to continue towards 45 percent budget. Uganda’s trade prospects are also influenced by the of GDP by 2020. Indicators of reduced debt affordability security situation in its fragile region, notably South Sudan include a rise in the debt to revenue ratio, which is expected to and DRC. Uganda remains vulnerable to risks associated exceed 250 percent, while interest payments are expected to with volatile climatic conditions and food prices, particularly consume 16 percent of revenues by 2018. The latter far exceeds given the limited implementation of mitigation measures the median level for B-rated countries, which stands at eight involving irrigation systems. With agriculture remaining the percent. Nonetheless, the stable outlook reflects the fact that primary source of livelihood for more than 69 percent of Uganda’s credit fundamentals will stay at roughly the same the population, supply disruptions resulting from change level as peers in the B2 category. in weather patterns could have significant negative effects In addition, the share of domestic debt has increased from on consumption and livelihoods and could complicate the 8 percent of GDP in FY 2009/10 to 14 percent in FY 2015/16, management of inflation. and is expected to increase to 16 percent in FY 2016/17. 2.3 What will drive Uganda’s growth acceleration? Uganda’s past periods of high growth benefitted from In the period from FY 2012/13 two FY 2014/15, Uganda’s gross strong capital accumulation, driven by high levels of capital formation increased at an average of 1.7 percent private investment. The total value of private investments per annum. This was far lower than increases recorded by increased to an average of 18 percent of GDP during the first neighboring countries, including Rwanda (8.3 percent) and decade of 2000s, compared to the average annual figure of 11 Tanzania (6.2 percent), and less than half the average for percent recorded in the 1990s. However, private investment sub-Saharan African countries, which stood at 4.7 percent per growth has been subdued and volatile since 2009. In the public annum. This is in spite of the fact that this was a high public sector, the total average annual value of investments has stood investment period, with a large proportion of investments at about 6 percent of GDP, allowing capital accumulation to being financed by a significant inflow of foreign savings increase to 24.5 percent of GDP by FY2012/13, compared to through grants and transfers. the levels of less than 6 percent of GDP recorded in the 1980s. 19 For Uganda to sustain faster growth rates, it would need to But how can faster factor accumulation be achieved with accelerate and sustain high levels of investments that can a shallow financial system struggling to intermediate support accumulation of both human and physical capital. resources to investment at affordable cost and resulting There is no doubt that increased public capital spending and in limited inclusion of a large proportion of the population the improved effectiveness of public services could support in the financial system? On one hand, Uganda’s low level of savings has also undermined its capacity to invest. capital accumulation. However, this may be a transitory effect, International experience shows that no country has achieved with sustainable capital accumulation arising only from private sustainable growth without reasonably high levels of domestic investment, as has been demonstrated by experiences of the savings. On the other, there are enormous challenges to overwhelming majority of high growth countries. Therefore, intermediation of resources to all types of economic activity, the rapid increase in public investments envisaged in the with the bulk of this task, being done by the commercial banks. medium term will have to be supplemented with, and then As a result, domestic credit to the private sector is estimated substituted by, a significantly increased growth in private to amount to less than 15 percent of GDP, leaving individual investment. savings and informal sources to finance the rest of economic activity generated by the private sector. Figure 13: Real Growth Capital Formation in Uganda far lower than comparators over FY 2012/13- FY 2014/15 Source: World Development Indicators Overall, Uganda suffers from a mismatch between the to those who most need it. The stresses experienced by the respective level of access of different sectors to finance economy in the last two years, as a result of factors including and each sector’s respective role in the economy. The election uncertainty, exchange rate depreciation, drought public sector has considerable access to domestic and external and the crisis in South Sudan, have exposed weaknesses in finance, but its continued struggles with the execution of the financial system, manifested by rising NPLs, tightening investment projects have limited the developmental impact credit, sluggish implementation of investment projects, of finance on the economy, both in terms of stimulus from and difficulties for the poor to manage consumption risks. investment and productivity gains from the increases to public Uganda urgently needs to develop a deeper financial sector capital. The large corporate sector can access the formal to facilitate the achievement of higher rates of growth and banking system, but only at a premium on the real interest rate the more effective functioning of its social institutions. In the available to the Government, which is already high. Small firms following chapter, this Update describes current status of the and households rely heavily on alternative financial services financial sector, with a focus on its contribution to economic such as cooperatives and mobile payments – but due to lack growth, stability, and inclusion, and outlines the key first steps of confidence and severely asymmetric access to information, necessary to strengthen the financial market infrastructure. this type of access is prone to credit rationing and not available 20 In spite of the progress being made in financial intermediation, new threats to sustained access to credit and growth and stability of the financial system will need to be closely monitored and addressed quickly and effectively. While at the aggregate level, the banking system remains sufficiently capitalized, liquid and profitable, the quality of loans has recently declined severely, with the NPL ratio steadily increasing. With the exception of one bank, all banks met the core capital requirements as of June 2016. By this time, the value of core capital held by the banks was above 8 percent of the risk-weighted assets (RWA). If, they maintain the same level of capital, banks would still meet the requirement after it is raised to 10 percent of RWA and a capital conservation buffer is applied. However, NPLs increased from approximately 4 percent in June 2015 to more than 8 percent in the current year. This deterioration of loan quality underscores the need to closely monitor credit risk within Uganda’s commercial banking system (see Box 1). Indeed, the stress tests conducted as part of the 2011 Financial Sector Assessment Program (FSAP)10 had warned of the need to closely monitor developments in this area. Box 1: Non-performing assets rose significantly across the banking system Up until 2013, the banking system recorded a strong performance, attributable to the high quality of banks’ loan portfolios. In the context of a high level of non-performing loans (NPLs) in the 1990s, the banking system had since adopted a cautious approach to lending and hence managed to maintain a very low level of non-performing assets over the last decade. In the period from December 2007 to December 2011, the ratio of NPLs to total loans stood at an average level of 2.95 percent. However, in the recent past, the quality of loans has deteriorated and associated credit risk within Uganda’s banking system increased. Specifically, the ratio of NPLs to total gross loans increased from 2.2 percent in December 2011 to 6 percent in December 2013. While this ratio had improved between 2014 and 2015, it rose again during 2016 to reach 8 percent by June 2016. In recent times, the high credit risk exposure is attributed to the after-effects of high credit growth and the economic slowdown in 2015 and 2016, which continued to negatively impact the quality of the sector’s loan portfolio. In addition, a large portion of the NPLs has been related to loans denominated in US dollars, implying that the risk of high level of default resulting from exchange rate fluctuations materialized this year. The increasing volume of NPLs in 2015 and 2016, was particularly evident in the manufacturing sector. This has been mainly because of the reduced volume of trade with South Sudan, which had been the largest destination for Ugandan manufactured goods. By June 2015, the proportion of NPLs in this sector had reached 17.5 percent. Overall, the level of NPLs increased from 6 percent by June 2013 to 8 percent by June 2016. Trade and commerce account for the largest share of NPLs, with a share of 39 percent, followed by the building and construction sectors, with a share of 29.5 percent. The share of NPLs in the case of the manufacturing sector has increased, reaching the level of 17 percent by June 2016. 10. International Monetary Fund and World Bank, 2012, “Uganda: Financial Sector Assessment Program Update” (June 2012) June 2012 21 One cause of the high ratio of non-performing assets was the high level of exposure to foreign currency loans in the context of the volatile value of the shilling especially between April and November 2015, with this effect being particularly significant in the case of the real estate sector. For traders, currency volatility jeopardized the business environment by increasing both the cost of importation and operational costs. Even where such goods and services are purchased locally, the effect of imported inflation spilled over into domestic prices and into the cost of rented business space, with most rentals denominated in foreign currency. Other sources of vulnerability include sporadic episodes of instability in South Sudan, a key business outlet for a wide range of economic activities in Uganda. This has had the effect of disrupting income streams for many businesses, thereby constraining their ability to meet their debt obligations. Across the different banks, NPAs are not distributed evenly, suggesting that bank-specific management factors may have been partially responsible for the overall rise in NPLs. As stated earlier, the BoU took over the management of Crane Bank in October 2016 because this bank was determined to lack sufficient capital and to pose a risk to the stability of Uganda’s financial system. Prior to the takeover, its non-performing assets had risen to constitute more than 20 percent of its loan portfolio, which left it significantly undercapitalized. Several other banks have also experienced a surge in NPLs in recent months. As at June 30, 2016, five other banks had a ratio of NPLs in excess 10 percent. However, it is notable that some banks continue to maintain a low ratio of NPLs, in the range of 2-3 percent, and many banks are more than adequately provisioned. The increase in credit risk for a significant part of the any bank, standing at 23 percent at the time of its takeover, banking system had to be contained to avoid a self- undermining its capital base (Box 2). Indeed, this bank had perpetuating vicious cycle of loss of confidence and the highest ratio of NPLs of any bank, standing at 23 percent at financing interruption. By June 2016, up to 10 out of the 25 the time of its takeover. Even with containment of the distress banks (40 percent of the banking system) had NPLs in excess in the banking sector, the combined effects of these factors on of 10 percent of total loans on their books, but the NPLs for the quality of credit and the tightening of financing conditions the remaining 60 percent of the banking system are more by commercial banks has resulted in the emergence of a self- comfortable. Crane Bank had the highest ratio of NPLs of perpetuating cycle. Box 2: Central Bank resolves problematic Crane Bank On October 20, 2016, Bank of Uganda (BoU) announced that it had taken over the management of Crane Bank and suspended its Board of Directors, upon a determination that Crane Bank Limited was a significantly undercapitalized institution as defined by law, posed a systemic risk to the stability of the financial system and that the continuation of Crane Bank’s activities in its existing form was detrimental to the interests of its depositors because this bank was deemed to lack sufficient capital and to posed a risk to the stability of Uganda’s financial system. By taking over Crane Bank, BoU was fulfilling one of its key mandates, which is to ensure the stability of the financial system and the safety of the depositors. Indeed, in the past, BoU has implemented a number of actions to achieve these objectives. For instance, over the past half-decade, it closed the National Bank of Commerce in 2012, and Global Trust Bank Uganda Limited in 2014, while it carefully managed the resolution of issues related to the management Imperial Bank Uganda Limited after its majority shareholder in Kenya had been put under receivership. All these interventions achieved the purpose of ensuring the stability of the financial system, even when major institutions had had problems. Crane Bank, Uganda’s fourth largest bank in terms of assets and fifth in terms of deposits at the time BOU’s intervention, had been on the BoU watch list since 2015. Crane Bank was part of a financial conglomerate with almost 500,000 accounts and 46 branches across Uganda. It was therefore one of the most systemically important institutions in Uganda’s banking system. A key cause of Crane Bank’s distress was the poor quality of its loans, as the ratio of NPLs to loans had risen to 23 percent of its loan portfolio. Moreover, in the weeks preceding its takeover, rumors regarding its weakness and a possible closure by BoU, prompted depositors to withdraw their deposits due to speculation regarding the bank’s future. This run on the bank resulted in a significant erosion in the value of its deposits. As the same time, the shareholders failed to raise enough capital to quickly recapitalize the bank to curtail further deterioration. BoU issued reassurances that it intended to resolve the issues related to Crane Bank in a manner which preserves its core functions and services to customers. Crane Bank remained open to customers and BoU did not institute limits on how much customers can deposit or withdraw, as it tried to operate the bank as smoothly as possible while an in-depth audit was being carried out. Upon completion of the audit, BOU confirmed that Crane Bank liabilities exceeded its assets and that it was insolvent. On January 27, 2017, BOU progressed the nature of the takeover of Crane Bank from statutory management to receivership and transferred all Crane Bank’s liabilities (including deposits) and assets, to DFCU Bank Limited Uganda. The BoU further issued reassurance that it will continue to protect the depositors’ interests and to maintain stability of the financial sector. Source: BoU 22 Morgan Mbabazi, 2016 Insurance providers display their services at the 2016 Insurance Expo Crane Bank, Uganda’s fourth largest bank in terms of assets and fifth in terms of deposits, had been on the BoU watch list since 2015 23 Part 2 DEEPER FINANCE CAN UNLOCK GROWTH ACCELERATORS • Slightly more than half (52 percent) of Uganda’s adult population has access to an account at a formal financial institution, compared to 28 percent recorded in 2009. • At present, 28 percent of Ugandans hold bank accounts, a significant increase from the figure of 21 percent recorded in 2011, but still lagging behind that recorded by regional and global peers. • With more than 7 million active users in 2016, the financial service most commonly used by Ugandans was mobile money, with the increase resulting from the widespread embrace of new technologies by consumers, who have been attracted by the potential of this service to effect financial transactions easily. • Despite the increase in the level of access to financial services, only a very small proportion of Ugandan businesses and households have access to a bank loan and/or a line of credit. Consequently, domestic credit has financed only 13 percent of GDP over the past decade. • The most significant constraint on financial inclusion is cost, with Uganda ranking in 120th place out of 138 countries in the area of the affordability of financial services, according to the Economic Forum Global Competitiveness Report (2016-2017). • Inclusion is constrained by the low level of public confidence in financial institutions; by the undeveloped state of long- term savings products such as pensions and insurance; and by the undeveloped state of credit and mobile service infrastructure. • Reducing the cost of credit requires a comprehensive, long-term effort to increase levels of competition and to improve the credit infrastructure. In the short-term, effort must be focused to addressing information asymmetries, strengthening the financial infrastructure, building capacities in the sector. • To raise savings mobilization, there is need to build confidence by ensuring financial institutions are safe and efficient, raising awareness through consumer education, and strengthening regulations. • For Uganda’s financial system to raise more savings and to lower the cost of finance, it must encourage more competition between banks and with other non-bank financial institutions including insurance and pensions. 24 Morgan Mbabazi, 2016 Members of Kamwe Kamwe Savings and Loans Society balance their books at their monthly meeting 25 3.0 Uganda’s Financial System has made strong advances, but not inclusively Successful emerging countries that have achieved rapid, supports the growth of existing businesses, and ensures equitable economic growth have been characterized by their business sustainability. Similarly, a well-functioning financial ability to develop deep financial systems that effectively system will encourage households to save and to engage in mobilize savings and intermediate resources to productive income generating activities in the form of investments, hence activities. Access to financial services enable individuals, smoothing consumption and accelerating poverty reduction. households, and businesses to efficiently balance income and The financial system also provides a strong basis for the expenses over time, to manage shocks, and to invest in the settlement of payments, which is fundamental to the functioning development of their human and physical capital. Most critically, of the economy. The critical questions are: To what extent has efficient intermediation encourages savers, eases access to Uganda been able to develop a financial system that fulfils these credit for borrowers and lowers the costs of credit, which in functions? How can it address the constraints that continue to turn reduces the overall transaction costs for enterprises, affect this development? This section of the Ugandan Economic making them more competitive. Therefore, a well-functioning Update attempts to address these questions. financial system encourages the emergence of new businesses, 3.1 Who in Uganda is offering financial services? Uganda’s financial system has emerged in the context of a of which accept deposits, with those doing so under the broader set of market-oriented policy reforms that involved broad supervision of the Bank of Uganda (BoU). Institutions liberalization of the financial sector in the 1990s. It has providing financial services include banks, credit institutions also been significantly influenced by rapid developments in (CIs), microfinance depository institutions (MDIs), savings information and communications technologies (ICTs) over the and credit cooperative organizations (SACCOs), insurance past decade. Before the commencement of the reforms in 1988, companies, and pension schemes. Commercial banks, CIs, Uganda’s financial system was highly regulated, consisting of and MDIs belong to the first three tiers of the financial system only a few banks, with interest rates and credit limits tightly and are regulated by the BoU. The fourth tier of financial controlled by the Government, and with these banks serving institutions includes SACCOs, NGOs, for-profit MFIs, and informal only a small proportion of the population. The reforms that institutions such as ROSCAs, VSLAs and burial societies. They have been implemented since then were intended to improve are not regulated and supervised by the BoU11, but are either efficiency and to enable the emergence of more varied regulated through other means or through self-regulation. A institutions to provide a greater range of financial services to a range of non-bank financial institutions also offer financial broader proportion of the population. services, with these institutions including insurance companies, pension funds, securities industry, mortgage institutions and At present, Uganda’s financial sector consists of a range development banks. of different types of financial institutions, a proportion Figure 14: Financial Sector Institutions as of November, 2016 Source: Bank of Uganda, Insurance Regulatory Authority figures and estimates for Tier IV institutions 26 There are now 25 banks in Uganda, a dramatic increase Morgan Mbabazi, 2016 since the reform started, which has also been accompanied by de-concentration of the banking system. Nonetheless, price competition remains limited. The evolution of the Herfindahl Index of Uganda’s banking sector shows a decline in concentration from 2004 to 2013. In 2004, the value of the index was almost 1,700 but it experienced a significant decline over the years, down to 939.7 in June 201312 , indicating gradual decline in concentration within the sector. Entrance of new players into the market has played a significant role in that: since the expiration of a moratorium on new bank licenses in 2007, the number of commercial banks in Uganda increased from 14 to 25 in 2014. Nevertheless, there is still significant potential for further decline in concentration. Competition has driven down returns on equity which are now less than half the levels in the first half of the 2000s. However competition has generally not taken the form of price competition; instead banks have competed for customers by opening new branches – the number of branches is now six times the level in the early 2000s – which suggests that the banks do not believe that customer demand for financial services is very price sensitive. In aggregate, the banking system in Uganda is well- capitalized with an average Tier 1 capital adequacy ratio of 19 percent in June 2016, well above the regulatory minimum level of 8 percent. The average level of Return on Assets (ROA) stood at 2.2 percent in June 2016, a rate that was below the level of 2.8 recorded a year earlier. Return on Equity (ROE) declined significantly over the two points, from 17.7 percent in June 2015 to 13.8 percent in June 2016. While the banking system is characterized by generally well-performing loan portfolios, the proportion of NPLs has increased recently (see discussion in Section 2.3 of this report). In terms of inclusion, the development of other deposit- taking financial institutions, such as credit institutions and microfinance deposit-taking institutions, has been significant, because these institutions generally have a wider geographical scope and are more orientated to serving low-income clients. As might be expected, the CI and MDI sectors are relatively very small, holding less than four percent of the banking system’s total value of loans and two percent of deposits in 2014. These institutions are prudentially Airtel service centre registers customers for mobile money In slightly more Uganda, financial Uganda’s than sector half (52%) consists ofofa the ofpopulation adult range different is 11. One exception is large SACCOs which will fall under supervision BoU following financially included (meaning access to a transaction account), which the passage of the Tier IV Microfinance Institutions and Moneylenders Act types of financial institutions, a proportion of which accept (2016). The threshold is voluntary savings in excess of Shs 1.5 billion and is a big improvement since 2009, when less than one deposits, with those doing so under the broad supervision third (28%) of of capital above Shs 0.5 billion. Bankpopulation the adult the of Uganda was included (BoU) 12. BoU Financial Stability Report (2013) 27 regulated by the BoU, and could therefore play a more expansive availability of microfinance services throughout the country, role in providing financial services. they are also characterized by similar weaknesses. Tier IV institutions, including VSLAs, SACCOs, and NGO In order to protect the savings of the depositors, to limit micro-finance institutions, are particularly active providers predatory lending practices, and to build confidence in of financial services in the rural areas. According to the the system and thereby to promote financial inclusion, Finscope survey (2013), 51 percent of the population still hold Parliament recently enacted the Tier 4 Microfinance their savings in cash; 29 percent use Rotating Savings and Credit Institutions Act and Moneylenders, 2016. The legislation Associations (ROSCAs); 18 percent use Village Savings and Loans places large and medium-sized SACCOs and all non-deposit Associations (VSLA); 9 percent use banks and MDIs; 7 percent taking MFIs under the supervision of the newly-established use MFIs and SACCOs; and 3 percent use mobile accounts. Uganda Microfinance Regulatory Authority (UMRA). It also In the same survey, 53 percent of respondents reported that requires the periodic monitoring of smaller SACCOs by the access to financial services through VCLAs had improved in the Department of Cooperatives. Although UMRA has been period from 2009 to 2013, while the proportion of respondents established as an independent agency, it will come under reporting access to financial services through SACCOs stood at Ministry of Finance, Planning and Economic Development 27 percent. For access through MDIs and Cis, the proportion of (MoFPED), with its board consisting of representatives of respondents indicating that access had improved was much the MoFPED, the Ministry of Trade, Industry and Nominal smaller, at only 8 percent. Cooperatives (MTIC) and BOU, in addition to private and civil society stakeholders. To support the implementation of this SACCOs play an important role in Uganda’s financial act, the Government has been required to formulate a strategic system. There are more than 1900 registered SACCOs, serving framework that included a process for the establishment of a combined total of around 1 million clients. The Uganda UMRA, for the provision of capacity building support for Tier IV Cooperative Savings and Credit Union (UCSCU), a national financial institutions, and for the establishment and regulation apex organization for SACCOs, estimates that for the 1,707 of agencies and associations that support these institutions. SACCOs for which data was available in 2013, the combined total membership of these institutions 913,572 members; The number of non-bank financial intermediaries has members; the combined total value of their deposits stood at also been expanding, with these intermediaries including US$ 39 million; the combined total value of their share capital pension funds, insurance companies and securities markets. stood at US$ 33.7 million; and the combined total value of their Despite this growth, their overall contribution to the financial loan portfolio stood at US$ 70 million. This category of financial sector remains limited. The largest pension scheme, the services received a boost with the implementation of the Rural National Social Security Fund (NSSF), recorded an increase to Financial Services Strategy (RFSS), with its stated commitment the value of its asset base to Shs 5.6 trillion by December 2015. to the establishment of SACCOs in every sub-county in the Together with other smaller retirement benefits schemes, the country. total value of the assets held by pension sector is equivalent to around 12 percent of GDP. The total value of assets held by The rural financial sector has faced a tradeoff between insurance operators reached Shs 1.14 trillion by the same point. the pace of expansion and soundness. To facilitate the achievement of rural access, the government-owned Micro The introduction of mobile money to Uganda in 2009 has Finance Support Centre13 supported the establishment of 600 facilitated a number of significant changes to the financial new SACCOs and provided support to 735 existing SACCOs to system. Technological advances have enabled mobile network improve their services and expand their outreach. Unfortunately, operators to offer financial services through mobile telephones, while well intended, to some extent this public intervention with significant implications for outreach and inclusion. By undermined the stability of the SACCOs. The intervention December 2015, Uganda had a total of six mobile money service had the effect of converting many SACCOs into distributors of providers, these being MTN, Airtel, Uganda Telecom, Africell, subsidized loans, while the industry lacked regulation, oversight M-Cash and EzeeMoney. and supervision. Similarly, while NGOs and microfinance companies may have played a valuable role in expanding the 13. Microfinance Support Centre is the state-owned entity established as part of the rural finance services program (RFSP) in 2006 to provide wholesale finance to SACCOs and MFIs as part of the government’s rural outreach strategy. 28 3.2 How do Ugandans use financial Services? In recent years, Uganda has achieved significant gains in percent recorded in 2009. Similarly, Global Findex shows that the the extent of financial inclusion and the degree to which use of an account in Uganda increased from 20 percent in 2011 various groups (e.g., the poor, rural population, women) to 44 percent in 2014- growth matched only by Tanzania within are included in the formal financial systems, according to the EAC countries (Figure 15). This represents an impressive systematic indica¬tors derived from several datasets that increase, which was driven by the extensive use of mobile allow for international comparison. Finscope Surveys show money by consumers, who have been attracted by the potential that 54 percent of Uganda’s adult population now has access of this service to effect financial transactions easily. to an account at a formal financial institution, compared to 28 Figure 15: Account Penetration in EAC Countries Source: Global Findex Survey, 2014, World Bank In terms of the number of mobile money transactions, proportion to GDP, the number of registered accounts, and other Uganda has become a world leader with respect to the statistics, Uganda is among the world leaders. The high rate proportion of value of these transactions to GDP and of usage of mobile money is the result of a number of factors, the number of registered accounts. The proportion of including the relatively low rate of usage of the formal banking Ugandans using mobile money is greater than for any other system, consumers’ willingness to adopt new technologies, and financial services, with more than 7 million active users in the pressing need for payment systems by consumers. The main 2016 (even though this number may include multiple line constraints to further expanding the use of mobile money in users that could have resulted into double counting). The rate Uganda is that 55 percent of adults do not own a mobile phone, of usage is significantly higher than in many other countries, with a larger proportion having a poor command of English or even when these countries have also been characterized by being illiterate, with only 40 percent of users being able to use widespread acceptance (see Table 3). In terms of the number of SMS with a good level of proficiency. mobile money transactions, the value of these transactions in 29 Table 3 : Top Countries by Mobile Money Use (2015) Economy Mobile Mobile Mobile Mobile money Mobile Mobile money Mobile Mobile money money money money accounts: money agent transactions: money transactions: accounts: accounts: accounts: registered per outlets: number transactions: value ( %of active active per registered 1,000 adults registered number per GDP) 1,000 adults 1,000 adults Bangladesh 12,792,905 113 34,098,760 300 628,671 1,156,600,880 10,182 10 Botswana 713,382 464 1,190,952 774 1,736 11,481,936 7,463 2 Cambodia 147,593 14 443,156 42 3,629 61,729,982 5,794 68 Indonesia 34,314,795 184 535,580 3 0 Kenya 31,642,400 1,183 31,642,400 1,183 143,946 1,114,176,700 41,650 45 Lesotho 210,914 155 1,064,028 780 3,479 Madagascar 544,402 39 2,498,600 177 10,826 28,728,048 2,034 7 Nigeria 10,771,193 106 21,086 43,933,362 430 0 Pakistan 6,241,579 51 15,322,171 125 301,823 374,541,000 3,050 7 Philippines 6,437,217 94 9,351,971 136 23,781 327,224,000 4,775 3 Rwanda 2,522,096 369 7,663,199 1,120 40,467 168,612,455 24,638 19 Tanzania 19,006,176 649 53,843,917 1,838 270,974 1,387,854,759 47,363 53 Tonga 53,523 797 37,049 552 129 51,760 771 3 Uganda 21,102,851 1,042 109,458 693,558,390 34,230 44 Zambia 250,108 29 4,917,204 561 19,249 2,838,650 324 0 Zimbabwe 4,752,287 522 8,430,888 925 38,745 228,202,695 25,044 33 Source: IMF FAS Survey The expansion in the range of services, the adoption of new Morgan Mbabazi, 2016 technologies, and the increased outreach have all contributed to greatly improved access, especially for deposit accounts, but many gaps remain. Compared to the figures recorded in 2011, the number of Ugandans holding bank accounts has increased dramatically. Nonetheless the rate of usage is still low compared to the rates recorded by regional and global peers. Global Findex results show that the proportion of adults holding at least one bank account increased from 21 percent in 2011 to 28 percent in 2014. While this is a significant increase, it is still relatively low compared to the levels recorded by comparator countries. This is further confirmed by the IMF Financial Access Survey (FAS) (2015), which in addition shows that there was a large gap in the proportion of the population holding a deposit account and that holding a loans account at commercial banks. By 2015, for deposit accounts, the figure stood at 230 accounts per 1,000 adults, but at only 25 accounts per 1,000 adults for loans. While it is usual for there to be a greater proportion of the population holding deposit accounts than loans accounts, a number of regional and international comparators have recorded greater proportion of loans accounts relative to deposit Ruhiira SACCO serves customers accounts (see Figure 16). Moreover, the 2016 Intermedia Survey for Uganda shows that a larger part of the population is yet to transition A high proportion of Uganda’s adult population engages in savings but are significantly more from basic mobile money transfers to more advanced mobile likely to use informal mechanisms than formal financial services and a wide spectrum of financial services available mechanisms to do so at banks and other financial institutions. 30 Figure 16: Deposit and Loan Accounts at Commercial Banks per 1,000 Adults, 2015 n h da es ad Su gl h an ut So B Source: IMF Financial Access Survey (FAS) (2015 While a high proportion of Uganda’s adult population of formal institutions to intermediate and provide credit to engages in financial savings, they are significantly more MSMEs in order to promote their growth and productivity. Most likely to use informal mechanisms than formal mechanisms commonly, adults keep their financial savings at home, followed to do so. In total, it has been estimated that while 68 percent by their use of village savings and loan associations (VSLAs) and of the adult population engages in savings, only 16 percent rotating savings and credit associations (ROSCAs) (see Figure conduct savings through formal channels such as banks, 17). By contrast, Ugandan firms are very likely to hold money deposit-taking microfinance institutions, or deposit-taking in a checking or savings account, with more than 86 percent of SACCOs. This limited use of formal financial institutions affects surveyed firms stating that they held accounts of this sort. not only the safety of consumers’ funds, but also the ability Figure 17: Mechanism Used for Savings in 2013 Source: FinScope Survey 2013 31 The use of pensions as a saving vehicle is also limited, (20 percent) and to manage emergencies (15 percent). Most with only 2.1 percent of the population and less than five individuals stated that the main reason they did not participate percent of the workforce participating in or being covered in loans was their fear of being in debt. by a pension scheme. The most important pension schemes Finscope 2013 also shows that there is a significant are the National Social Security Fund (NSSF) and the Public difference between household preferences in urban and Sector Pension Fund (PSPF). In addition, there are around rural areas in terms of their preferences for credit providers. 60 occupational retirement benefit schemes. FinScope 2013 While the overall rate of usage of formal credit from both indicates that only two percent of adults participated in formal bank and non-bank providers is very low (13 percent in 2013), insurance schemes, down from the level of three percent households in rural areas uses non-bank formal providers recorded in 2009. However, 43 percent of adults utilized informal to a relatively greater extent, while the opposite is true for insurance schemes, mainly for burial services. The most those in urban areas. Within rural areas, the Uganda Poverty significant barriers to participation in formal insurance schemes Assessment14 showed that financial institutions are almost are a lack of knowledge and information regarding their benefits completely absent in northern Uganda. Overall, 65 percent of the and high costs. population does not have access to formal credit, with the use Ugandans display a high degree of caution when it comes to of informal mechanisms actually increasing in the period from borrowing. According to Finscope 2013, 35 percent of adults 2009 to 2013. Women are relatively disadvantaged in terms of had active loans at the time of the survey, a decrease from access to formal credit, with 68 percent of women unserved in the level of 44 percent recorded in 2009. The most commonly 2013, compared to 62 percent of men (see Figure 18). cited reasons for accessing credit included to pay for education Figure 18: Credit and Borrowing Strands by Gender and Location (2013) 2009 2013 Uganda 6 7 18 5 65 Uganda 5 2 32 7 55 Urban 9 5 15 5 65 2013 Rural 5 7 19 4 65 2009 Urban 6 3 28 7 57 Rural 4 1 33 7 54 7 7 19 6 62 2013 Male Female 5 6 18 3 68 2009 Male 5 1 31 8 55 Female 4 2 32 6 55 Formal Bank Formal Other Informal Family/Friends Excluded Source: FinScope Survey 2013 14. World Bank 2016, The Uganda Poverty Assessment Report: Firms, Cities and Good Fortune – Assessing Poverty Reduction in Uganda from 2006 to 2013 32 Data from household surveys also suggests that there are this proportion falling to only 10 percent for households in rural significant variations in the source of finance and the purpose areas. Across time, the largest evolution in sources of funding for to which it is put between urban and rural areas in Uganda. households has involved the rate of usage of SACCOs, which now For example, up to 25 percent of households in urban areas provide 52 percent of financing to households in rural areas and obtain financing from formal financial institutions such as banks, 47 percent to households in urban areas. Family and friends are credit institutions, and micro-deposit taking institutions, with still a significant source of financing for enterprises. Table 4: Source of Credit for Households in Uganda 2012/13 Source of Credit for Share Purpose of Loan Share Source of Enterprise Share Households in 2012/13 (2012/13) Start-Up (Informal Sector Survey 2012/13) Relatives and friends 32% Expansion of Enterprise 29% Own Saving 92% Formal Financial Institutions e.g. 14% bank, Credit institution, MDFI SACCOs NGO / Cooperative society 47% Education & Health 27% Loan from Family / Friends 4% Community / group 13% Agricultural Inputs 24% Loan from Money Lender 1% Government agency 12% Consumption 17% Loan from Bank or Financial 1% Institution Firm/employer/money lender 6% Housing 3% Other 1% Banks 2% Source: Uganda National Household Surveys A very small proportion of Ugandan firms and Morgan Mbabazi, 2016 businesses have a bank loan and/or line of credit, with those obtaining these facilities paying high costs and having to comply with stringent collateral requirements. Over the ten years to 2015, Uganda’s credit to GDP ratio stood at an average of only 15.1 percent.15 This ratio is very low compared to the ratio recorded by regional neighbors such as South Africa and Kenya, and even lower than that recorded in other regions, such as Europe, Central Asia, East Asia and the Pacific. The low level of access is explained by both supply and demand side challenges. While financial institutions have not been successful in A hatchery at developing credit products meeting the needs of Ugachick Uganda Ltd enterprises, the lack of financial literacy among enterprises, failure to keep financial records and to A very small proportion of Ugandan firms and businesses design viable projects have also greatly contributed have a bank loan and/or line of credit to the low volume of credit to the private sector. 15. International Monetary Fund, International Financial Statistics and data files, and World Bank and OECD GDP estimates 33 Figure 19: Domestic Credit to Private Sector by Banks (% of GDP) 140 EAST ASIA & PACIFIC 120 100 EUROPE & CENTRAL ASIA 80 SOUTH AFRICA 60 40 KENYA SUB-SAHARAN AFRICA 20 UGANDA 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Sources: Enterprise Survey (2013), International Monetary Fund, International Financial Statistics and data files, and World Bank and OECD GDP estimates According to the Enterprise Survey in Uganda (2013), limited in Uganda are required to provide a lower value of collateral access to credit is reported as being the most significant for a loan than the world average, but the proportion of loans constraint to doing business in Uganda. Only 9.8 percent of requiring collateral is higher. As a result, very few firms in firms in Uganda have a bank loan and/or line of credit from a Uganda use bank loans to finance investments (3.3 percent in bank, compared to the average figure of 23.8 percent recorded Uganda compared to 10 percent in sub-Saharan Africa and 16 in sub-Saharan Africa and 36.5 percent worldwide. Borrowers percent worldwide (see Table 5). Table 5: Indicators of Access to Credit in Uganda and Comparator Regions Indicator Uganda SSA All Countries Percent of firms with a checking or savings account 86.7 88.1 88.2 Percent of firms with a bank loan/line of credit 9.8 23.8 36.5 Proportion of loans requiring collateral (%) 86.4 79.7 77.3 Value of collateral needed for a loan (% of the loan amount) 159.4 175.2 182.2 Percent of firms not needing a loan 41.9 34.1 40.9 Percent of firms whose recent loan application was rejected 7.7 15.3 14.5 Proportion of investments financed internally (%) 79.5 78.3 69.2 Proportion of investments financed by banks (%) 3.3 9.9 16.3 Proportion of investments financed by supplier credit (%) 3.2 3.9 5.1 Proportion of investments financed by equity or stock sales (%) 13.0 3.7 5.0 Percent of firms using banks to finance working capital 21.7 23.5 31.0 Proportion of working capital financed by banks (%) 7.0 9.9 12.6 Proportion of working capital financed by supplier credit (%) 3.5 7.2 10.8 Percent of firms identifying access to finance as a major constraint 20.2 43.0 30.8 34 In terms of a breakdown by sectors, the smallest proportion impacts than credit. (Stewart, Van Rooyen et al. 2012). It may be of credit is provided to the agricultural sector, despite because investment in non-agricultural businesses is often made its significant contribution to Uganda’s economy. The out of savings. Thus, improving access to savings accounts has agricultural sector receives less than 10 percent of the total of all a great potential to increase non-agricultural income. Mobile credit provided through Uganda’s financial system, 90 percent of money is a promising way to promote financial inclusion in which is provided by commercial banks. About 57 percent of this Uganda, especially as half of the users of mobile money services credit is provided to finance processing and marketing activities. are unbanked. With the bulk of this credit going to large-scale farmers, small- Financial sector inclusion is also associated with rural-urban scale farmers, who collectively constitute more than 90 percent migration, a critical part of structural transformation of the of the agricultural system, have very limited access. economy. At the household level, rural households that include Despite pervasive difficulties in accessing credit, simply at least one member who has migrated to an urban area are increasing access to a savings account has potentially 13 percentage points more likely to have a formal loan than beneficial effects on household income of the poor. households that do not (28 percent compared to 17 percent), According to the Uganda Poverty Assessment 2016, the gap in and 15 percentage points more likely to have a savings account terms of access to savings accounts between the bottom 40 with a formal institution (29 percent compared to 15 percent). percent and the rest remains significant. In 2011, 12 percent of Having a formal loan and a formal savings account increases all households had at least one member with savings account the likelihood of becoming a migrant-sending household by with formal financial institution, while it was only 4 percent 3 and 6 percentage points respectively. The results suggest for the bottom 40 percent of households. Empirical analysis that facilitating households’ access to these savings and credit suggests that having a savings account with formal institutions products could help them overcome liquidity constraints to increase non-agricultural income, and the impact is stronger migration, making households less dependent on agriculture than credits. This result is consistent with empirical findings and fragile rural livelihoods. from many countries that savings has relatively positive welfare 3.3 What constrains Financial Credit Inclusion in Uganda? Uganda must save more, however, more serious problems the underdeveloped state of non-bank financial system making lie in the fact that not enough of this saving is provided it difficult for firms and household to access long term finance, as lending to private sector borrowers that can expand and keeping competition with banks services very low. The production and generate employment. A range of both most critical among these constraints involve issues related supply- and demand-side factors constrain the accessibility of to the cost of the services, limited infrastructure, and the low financial credit in Uganda. These factors range from individual confidence levels. preferences to hold savings in form of non-financial assets, to 3.3.1 High cost of financial services In Uganda, the cost of finance is relatively high compared to even in comparison to relatively high regional levels. In real other countries in the region and around the world. Average terms, Uganda’s lending rates are even higher relative to those lending rates have been in excess of 20 percent since mid-2011, of its neighbors. Although it is difficult to assess the degree to currently standing at 23.5 percent, compared to deposit rates, which a particular level of lending rates is justifiable, surveys which are hovering around 4.1 percent.16 In 2015, Uganda’s of clients, including households and enterprises, find that the average lending rate was almost 15 percentage points higher high cost of finance and the stringent collateral requirements than that recorded in Vietnam and 12 percentage points higher are a significant barrier to enterprise growth and operation, than in Zambia (see Figure 20). Thus, Uganda’s rates are high, particularly in the case of small and medium enterprises. 16. Bank of Uganda, June 2016. 35 Figure 20: Uganda’s lending rates nominally stand higher than many other countries Source: IMF International Financial Statistics and World Development Indicators (2015) The proximate cause of high lending rates in Uganda is a is unreliable and difficult to obtain. The high rates also reflect high-cost operating environment, compounded by various the high-risk premium. Therefore, the level at which financial forms of market segmentation. According to the Economic institutions set lending rates depends on a host of factors, Forum Global Competitiveness Report (2016-2017), in terms with the most significant of these factors relating to the cost of of the affordability of financial services index, Uganda ranks mobilizing deposits. Commercial banks in emerging markets in 120th place out of 138 countries, with a steady decline in its source most of their funds from consumer deposits, often having position over recent years. The high interest rates seem to be to compete with government securities. The decomposition of largely the result of a lack of competition and high overheads, the difference between the interest paid on deposits and the rate lack of qualified professionals, high costs of expansion, at which they lend these savings, called the interest rate spread, especially in rural areas, and the high costs associated with can help quantify the magnitude of these factors (see Box 3). conducting due diligence in an environment where information Morgan Mbabazi, 2016 Mobile money joints ease access to financial services even in urban areas In terms of the affordability of financial services index, Uganda ranks in 120th place out of 138 countries, with a steady decline in its position over recent years. The proximate cause of high lending rates in Uganda is a high-cost operating environment, compounded by various forms of market segmentation 36 Box 3: Understanding determinants of interest rate spreads in Uganda According to bank-level financial statement data, lending rates and spreads increased to a moderate extent in the period from 2009 to 2016. The average effective interest rate spreads17 increased from more than 16 percent in 2009 to around 17 percent by mid-2016. However, these spreads declined in the period from 2009 to 2012. Effective lending rates (interest income on loans divided by net loans) for most banks increased modestly in the period from 2009 to mid-2016. On the other hand, effective deposit rates (interest expense on deposits divided by deposits) declined slightly during this period. So, the widening in effective spreads is due to a slight increase in lending rates and a small decrease in deposit rates. The level of spreads in Uganda is higher than that of any other country in East Africa over the last five years. The high operating costs and profits attribute significantly to the spreads in Uganda. The decomposition shows that on average, operating costs and profits accounted for 80 percent or more of the overall banking system spread in Uganda in the period from 2009 to 2016. A similar tendency is observed in peer countries, where profits and operating costs also contribute to a large proportion of the spreads. Box Figure 3a: Interest Rate Spread Decomposition in Uganda and EAC Spreads in Uganda (2009 - 2016)18 Components as a share of the spread (2014)19 Source: BoU Source: Bankscope, Bureau van Dijk Reserve requirements and loan loss provisioning contribute to a relatively small proportion of the spreads, but they are essential for financial sector stability. Reserves and loan loss provisioning increase bank resilience to shocks from sudden deposit withdrawals and loan defaults. The level of provisioning can depend on bank-specific and macroeconomic factors. For instance, banks with high-risk loan profiles may provision more than banks with lower risk loan profiles, while lower GDP growth tends to be associated with higher provisioning. In addition, the loan loss provisioning component of the spread increases as asset quality deteriorates, signaling a rise in default risk. The most significant component of operating costs is staff remuneration costs, with the scarcity of skilled staff contributing to these high costs. On average, staff salaries represented 42 percent of total operating costs across all banks in the period from 2009 to mid-2016. High salaries for financial sector professionals in Uganda are an important contributing factor to high lending rates. The high cost of skilled staff can be primarily explained by the scarcity of qualified professionals. High operating costs in Uganda can also be explained by relatively low levels of efficiency in the banking sector. In 2014, Uganda’s ratio was one of the highest in the EAC and it was also much higher than the median ratios of low and upper middle income countries. In addition, a bank’s business model and customer outreach have an important effect on operating costs. For banks that target MSMEs and low-income consumers, the costs of conducting due diligence on borrowers can be relatively high, particularly in an environment characterized by difficult access to reliable information on retail borrowers. In addition, banks with a large branch network incur higher operating costs and the requirements for opening branches in Uganda make it very expensive to expand into rural areas. For the most part, the costs of rent, electricity, staff etc. outweigh the financial benefits for banks, 17. Effective or ex-post spread defined as the difference between the effective (ex-post) lending and deposit rates calculated using financial statement data. 18. All data points use financial data from end of December with the exception of 2016, which uses financial data from the end of June 2016. 19. Source data is from Bankscope to ensure comparability across countries. So, the calculations for Uganda maybe show different shares than decomposition calcula- tions generated using Bank of Uganda data. Note data from Burundi was not available. 37 as the numbers of customers served and the volume of transactions is often low in rural areas. Lastly, structural challenges in developing countries elevate the costs of doing business. In general, banks in developing countries cite high operating costs as one of the main reasons for the high lending rates. Gaps in physical infrastructure, unreliable electricity supply, and expensive IT and telecommunication services, all of which are commonplace in these economies, contribute to high operating costs and, in turn, to high lending rates and spreads. Overall, there is a high rate of variation between the lending rates and spreads of different banks in Uganda. For instance, in June 2016, lending rates ranged from about 32 percent to about 9 percent, while spreads ranged from more than 25 percent to as low as 7 percent. These differences are generally the result of diverse range of bank business models and strategies. The decomposition of spreads also varies across the different banks. Operating costs contribute to the largest portion of spreads in about half of the banks. These banks are generally smaller, less efficient, with weak balance sheets, and with a small market share. More efficient banks have lower operating costs, although they tend to set their interest rates in line with less efficient banks to increase their profitability. As a result, profits contribute to the largest portion of spreads in the other half of banks. These banks are mostly larger, well-established institutions with significant market power. Provisions contributed to a relatively small proportion of spreads for most of the banks over the period of analysis. This is surprising, considering the differences in the different banks’ target market segments and the deterioration in asset quality experienced by some banks. Bank investments in government securities also have an effect on interest rate spreads. African banks tend to invest in government securities to a greater extent than do other developing countries in other regions. While this is partly due to the limited opportunities to invest in the real economy, the returns on these “risk-free” investments tend to be relatively high in Africa. Therefore, bank investments in securities can be highly profitable compared to lending operations, which inherently incur a higher level of expense and which carry more risks. In Uganda, bank holdings of government securities in Uganda are comparable to other EAC countries, remaining on average relatively stable in spite of rising yields (see Box Figure 3b). The share of government securities held by Ugandan banks is higher than the share held by any other EAC country with the exception of Kenya. In the period from 2009 to mid-2016, the average share has remained steady, fluctuating around the level of 21 percent of total assets. Box Figure 3b: Bank Holdings of Government Securities and Treasury-bill yields Share of Government Securities to Total Assets Average Short term T-Bill Rates and Lending risk (in percent) premiums (in percent) Source: BoU, Bankscope, Bureau van Dijk Source: BoU The level of development of financial infrastructure is another significant driver of high lending rates and spreads. In countries with well-developed financial infrastructure, information asymmetries and risk premiums are relatively low, which leads to lower spreads. Lenders have ready, reliable access to information by which to assess their borrowers and their pledged collateral, which significantly lowers the costs of conducting due diligence. On the other hand, in countries with an underdeveloped financial infrastructure, the costs of conducting due diligence are much higher and credit risks are poorly assessed, which means that borrowers are relatively more likely to pay the same rates as bad borrowers. As a result, lending rates and interest rate spreads in these countries tend to be higher to compensate lenders for the much higher level of risk and operating costs. 38 3.3.2 Limited financial infrastructure and requisite collateral The limited level of development of financial infrastructure has been estimated that land disputes in Uganda reduce annual and access channels, especially in rural areas, limits the agricultural production by 5–11 percent. degree of financial inclusion and partly explains low savings Additionally, the inability to use movable property as rates. The highly-dispersed population limits the effective collateral restricts access to formal loans, especially market size, as the provision of financial services outside urban for SMEs and farmers. At present, there is no unified legal centers is not cost-effective if traditional banking business framework for secured transactions which extends to creation, models are utilized. Financial institutions report that the costs publicity and enforcement of functional equivalents to security of establishing and opening physical bank branch offices in rural interests in movable assets in Uganda. Uganda scores a 6 out of areas of Uganda are often prohibitive. Agent banking, which 12 in terms of the legal rights index for the World Bank’s Doing could alleviate this constraint, was only recently permitted Business (2017) Indicators. Financial institutions require high under current legislation. The physical requirements for opening levels of collateral, given the issues related to the lack of land a branch are high and infrastructure is inadequate. Since the tenure security and to the lack of a framework for enforcing volume of transactions in rural areas is generally small, opening against movable property. Enterprise surveys shows that on branches in rural areas is often economically unviable. As a average, Uganda’s banks require collateral to a value of up to 160 result, while performance in terms of geographical outreach percent of the value of the loan, with 87 percent of loans to firms indicators has been increasing, it has been doing so at a very requiring collateral, significantly higher than the average level for slow pace. The IMF’s Financial Access Survey of 2014 shows sub-Saharan Africa, which stands at 79 percent. that Uganda had 2.9 branches per 100,000 adults, a significantly lower ratio than that recorded by neighboring countries, with These challenges are even more pronounced within the the exception of Tanzania, where the ratio stood at 2.56. By agriculture sector, for which the structure of economic comparison, Burundi recorded a ratio of 3.13; Kenya a ratio of activity contributes to constraining access to credit. 5.56; and Rwanda of 5.98. Agriculture is made up mainly of smallholder farmers with low and irregular average incomes, making their risks difficult A robust credit infrastructure enables the better use of to assess, while the costs of reaching them are high. Without borrowers’ property and reputational capital to overcome agriculture specific insurance, the risks of drought and flooding asymmetric information and lowers the cost of providing are quite significant, contributing to lack of bankable projects. finance. Unfortunately, in this area, Uganda falls short. The Without a supportive legal and regulatory framework for leasing, limited availability of high-quality collateral, particularly in the it is not easy to use that instrument to tap long term capital, form of properly registered land, contributes to the limited especially for machinery and agricultural equipment. access to bank loans and to their high cost. As was discussed in the sixth edition of the Uganda Economic Update,20 only 20 percent of Uganda’s land is registered, most of which is mailo land, which cannot be used as collateral because banks There are many mechanisms in place to increase finance cannot liquidate it, as the rights of the landowners overlap to the agricultural sector, but their development impact with those of legally recognized tenants, who enjoy inheritable is difficult to assess. Evaluating these different mechanisms and transferrable rights as landlords. The low rate of land to identify strengths and weaknesses and opportunities registration in Uganda compares unfavorably with the rate for refinements would be as important as identifying new recorded in Rwanda (60 percent) and even more unfavorably interventions. The new interventions could include offering with that recorded in Western European countries (95 percent). targeted training to financial institutions on specific topics, However, it compares favorably with the average sub-Saharan introducing agriculture insurance, promoting the financing of African country. Measures to accelerate land registration and smallholders indirectly through aggregators to minimize costs to develop the capacity of institutions responsible for resolving and share counterparty risk, carrying out programs to address land disputes needs to be prioritized given the extent to which the significant technical and managerial skills gap of agricultural land tenure insecurity constrains economic growth in Uganda. It entrepreneurs, and others. 20. World Bank, 2015, Searching for the “Grail”: Can Uganda’s Land Support its Prosperity Drive? Uganda Economic Update (6th Edition) September 2015. 39 Uganda has made significant progress towards the In Uganda, the limited ability of different systems utilized by development of its credit reporting system in recent years, the financial sector to interact seamlessly (interoperability) accompanied by enactment of a number of regulations and the still limited outreach of mobile financial services and the implementation of other measures to support its means that expanding access to consumers at the bottom effectiveness.22 This is a significant development, as a well- of the pyramid will be more challenging. At present, MDIs functioning credit reporting system is an essential measure to and deposit-taking SACCOs still do not have access to the reduce information asymmetry and to enable lenders to make payment system. This prevents these organizations from informed choices. A World Bank report on Credit Information offering modern, affordable payment solutions to a greater Sharing Reforms on Banking Financing (2014) finds that proportion of consumers. In addition, the lack of a mechanism following the establishment of a credit bureau system, the level to clear and settle payments between the financial conventional of access to finance increases; interest rates decline; average financial sector’s electronic clearing system and mobile network periods of maturity lengthens; and the share of working capital operators limits cross sector functionality. financed by banks increases. Deposit accounts, pensions, and insurance services are In spite of the establishment of the credit bureau system, the perhaps the most significant potential tool to enable majority of consumers are still not included in that system, consumers to accumulate and protect their assets, but the with this lack of inclusion limiting their level of access to uptake of these products is limited. However, as of 2013, a financial services. This is because data in the credit bureau greater proportion of adults utilized informal financial services is predominantly based on information provided by banks, than utilized the formal banking system (31 percent versus 16 with most Tier IV institutions not involved in the provision of percent). In addition, FinScope 2013 found that men were more data. In the future, in order to increase the benefits of the credit than twice as likely to save at formal institutions as were women, reporting system for both lenders and borrowers, it will be indicating a significant difference in patterns of behavior necessary to increase both the number of data providers and the between the genders. Women utilize informal financial services proportion of the population covered. According to the World in Uganda to a greater extent than do men. While there are Bank’s Doing Business (2017) report, Uganda’s credit bureaus benefits to using informal services, the associated risks can be only cover 6.6 percent of the population, compared to the figure high, with consumers having little protection in the face of bad of 67 percent recorded in OECD countries. Uganda does not lending practices or loss of savings. have a credit registry. 3.3.3 Past lapses in sector governance still undermining confidence in system As the discussion above suggests, Uganda’s financial system In addition, the proportion of the population holding has failed to effectively mobilize and intermediate finance. savings accounts at formal institutions is limited by the The low interest rates on deposits in the banking system are generally low level of confidence that consumers have in accompanied by high fees on deposit accounts and other such institutions, particularly due to moral hazard at the banking transactions. This creates disincentives to savers, who base of the pyramid. This lack of confidence is largely due still prefer to hold their savings in the form of physical assets to the large number of closures and cases of fraud involving such as land and livestock. It has also been observed that financial institutions, particularly SACCOs, during their period of competition for deposits has intensified following the removal rapid growth over the past decade. Since 2006, the Government of the moratorium on the entry of new banks in 2007 and the has attempted to harness the potential of these institutions to transfer of deposit accounts held by donor agencies from facilitate the achievement of higher levels of financial inclusion, commercial banks to the central bank in early 2005. However, providing significant support to strengthen and expand these measures seem to have benefited only a small segment of their outreach. Unfortunately, this public intervention has the market, particularly those that can hold fixed deposits, thus undermined the stability of the SACCOs, many of which began having only a limited impact on attracting new savers. to act as distributors of subsidized loans. At the same time, 21. With the goal of establishing an appropriate legal and regulatory environment for credit reporting in Uganda, the CRB Regulations were developed and gazetted in 2005. The purpose of these Regulations is to regulate the licensing and operation of CRBs licensed under the FIA (2004) and the obligations of MDIs with regard to CRBs under section 46 of the MDIA (2003). 40 the overall sector remained weak due to a lack of regulation, formed over any negative occurrence within the system, even oversight and supervision. While NGOs and microfinance in the case of the formal financial channels. The most recent companies have contributed significantly to increasing the level of such negative developments culminated in the takeover of of access to microfinance services in the country, they are also Crane Bank by BoU, but a number of other, similar events and characterized by similar issues that affect the SACCOs. While even closures in the 1990s also had an impact on consumer BoU has devoted significant effort to safeguard the stability of confidence in banks. This has resulted in a more general lack of the financial system and fostering trust of the population, these confidence in financial institutions, with a spillover effect on the efforts have to be intensified to overcome public perception level of deposit mobilization of other financial intermediaries. 4.0 Exploring options for closing the gaps in Financial Credit Inclusion The issues constraining increased levels of financial of finance ranging from short to long term finance. Building inclusion in Uganda are multifaceted. Thus, increasing these public confidence in the financial system to raise more financial levels requires a multifaceted approach. The overarching savings; adopting more cost effective modes of providing credit; objective must be to comprehensively strengthen the financial and ensuring good governance through more comprehensive system, particularly as inclusion involves institutions other than and up-to-date regulatory and supervision frameworks, are the the standard deposit taking institutions, financial service users most important areas to ensure the financial sector supports the comprising of individuals, households and firms, and durations much needed growth acceleration. These are elaborated below. i) Mobilizing more savings In order to mobilize a higher level of savings at financial financial system. To increase coverage of insurance, especially institutions and to get a higher proportion of individuals, in the case of lower income households, policy actions could households or firms to demand for credit from them, aim to expand the current awareness campaign to better consumers must have greater confidence in the safety and communicate the benefits of insurance products; strengthen integrity of these institutions. They must also have ease of the regulatory enforcement of compulsory insurance products; access to points of service, which could be facilitated through and use banking agents as distribution channels for insurance agent banking22 or through an expansion of mobile money products. services. The general level of confidence in informal financial As was also emphasized in the fourth edition of the Uganda institutions will increase when a large proportion of consumers economic update23 , the main function of the pension sector experience good, efficient and reliable service over time. must be to encourage long term savings. Measures must be Expanding both the scope of coverage and the usage of mobile put in place to ensure that pension savings are invested well financial services could involve technological solutions and new to provide a good return to savers whilst minimizing potential innovations to increase financial access and usage across the risks. In this respect, the proposed Pensions Liberalization spectrum. Beyond the deposit taking institutions, increasing Bill to strengthen the capacity of pension funds to meet their the general propensity to engage in long-term savings is key to liabilities, to improve the administration of the sector, and to protecting consumers against financial vulnerabilities and to provide a policy and legal framework to increase participation providing safety nets. Additionally, strengthening pensions and in retirement savings schemes, is a move in the right direction. insurance markets could catalyze growth by matching long-term Once enacted, it can allow for the expansion of the coverage of investors to borrowers and creditors. pension schemes to include self-employed workers and those in This underscores the need to comprehensively strengthen the the informal sector. 22. Recent amendments in the Financial Institutions Act have removed prohibitions to use of agent banking. 23. World Bank, 2014, “Reducing Old Age and Economic Vulnerabilities: Why Uganda Should Improve its Pension System” Uganda Economic Update, 4th Edition; June 2014. 41 ii) Making Finance more Affordable Reducing the cost of finance in a sustainable manner assess these borrowers, policy actions could focus on requires a sustained effort to overcome a number of strengthening the credit reporting system and the secured structural challenges. Addressing these challenges requires transactions and insolvency frameworks. As a means to long-term investments and major structural reforms to increasing the coverage of credit bureaus and to enable them fundamentally lower the cost of doing business in Uganda, with to play a more meaningful function, they need to have access these reforms involving a restructuring of the economy and to a wider range of sources of credit information and to include the banking system. However, there are measures to address a greater range of users to develop more complete and deeper the factors contributing to high lending rates and spreads that credit profiles. could help in the short to medium term. These measures include The generally high interest rates imposed by financial addressing existing information asymmetries; strengthening institutions are the result of a number of factors, including financial infrastructure; institutionalizing the development of factors outside the control of those financial institutions. financial sector skills; and developing payment systems. To Therefore, it is not productive to drive these rates downwards be effective, these measures need to be combined with efforts merely by capping interest rates by fiat. To effect change in on other fronts, including efforts to maintain macroeconomic the short term, some governments have implemented interest stability, reduce the cost of doing business and to improve the rate controls and regulations. While interest rate controls business environment more generally. signal a high level of government commitment to reducing the Strengthening credit infrastructure is particularly critical for cost of finance, such measures do not address the underlying MSMEs, as lenders usually possess very scare information cause of the high interest rate and therefore often have on them and are highly risk-averse when lending to this counterproductive effects (see Box 4). segment. To help banks and borrowers better and quicker Morgan Mbabazi, 2016 Nakato waiting for customers at Nakasero market Strengthening credit infrastructure is particularly critical for MSMEs, as lenders usually possess very scare information on them and are highly risk-averse when lending to this segment 42 Box 4: Interest Rate Caps: Experiences from around the world Around the world, there are numerous examples of governments and regulatory agencies imposing controls on interest rates on loans. These controls have been justified for a number of reasons, from supporting specific sectors in the economy in cases where there is a market failure in the financial sector, to protecting borrowers from exploitation and increasing the level of access to finance. At present, roughly 20 countries in sub-Saharan Africa have interest rate caps on loans. Most recently, Kenya enacted regulations on lending rates, with these regulations coming into effect in September 2016, effectively reintroducing caps that had previously been eliminated in July 1991. Available empirical evidence shows that interest rate caps have had varying degrees of effectiveness. Helms and Reille (2004) and FAI (2010) show that interest rate caps reduce price transparency and do not prevent the exploitation of borrowers. Maimbo (2014) analyses the available empirical research to conclude that the interest rate control has been predominately ineffective. However, in the case of the United States, a few studies have demonstrated positive outcomes. There is ample evidence that interest rate caps can indeed have unintended negative consequences. These may include the withdrawal of financial services from the poor or from specific segments of the market, an increase in illegal lending, a decrease in the licensing of new lending institutions, an increase in the total cost of loans through additional fees and commissions, and a decrease in product diversity. Documented experiences with interest rate controls in SSA include: • South Africa: Some financial institutions evaded caps by charging credit life insurance and other services, which reduced the transparency of the total cost of credit. • WAEMU: The imposition of interest rate caps on microfinance loans caused microfinance institutions to withdraw their services from poor and more remote areas and to increase average loan sizes to increase the level of efficiency and returns, because the interest rate ceiling made serving poor in remote areas unfeasible. • Zambia: Interest caps, introduced in 2013, were removed with immediate effect at the end of 2015. Studies showed that these caps limited access to finance, particularly for SMEs. Micro-finance institutions considered that the rate caps did not enable them to reach the breakeven point, causing a number of entities to exit the sector. In addition, as Treasury bill rates increased, these caps on commercial bank lending became increasingly binding. Sources: Helms, Brigit, and Xavier Reille. 2004. “Interest Rate Ceilings and Microfinance: The Story So Far.” CGAP Occasional Paper 9, Consultative Group to Assist the Poor, Washington, DC. Maimbo, Samuel. 2014, “Interest Rate Caps around the World: Still popular; but a blunt instrument.” World Bank Mimeo. Financial Access Initiative (FAI, 2010); “Interest Rate Policy”; Policy Framing Note 4 World Bank, AFR Financial Monitor, various editions. For the longer term, several of the required policy lower tier; and to strengthen non-bank institutions, including measures to reduce cost also relate to measures to financial intermediaries such as SACCOs and MDIs. Additionally promote savings in general, but key among which is a strengthening pensions and insurance markets could increase continued effort to increase completion. It is essential to competition and catalyze growth by matching long-term promote a higher level of competition between banks in the investors to borrowers and creditors. upper tiers; to facilitate the consolidation of banks in the iii) Promoting good governance through stronger regulatory capacity and oversight While over recent years, the BoU has built and expanded institutional and supervisory framework of Uganda’s financial its regulatory and oversight capacities significantly, sector. In particular, it advocated and facilitated amendments a stronger and more encompassing regulation and to the Financial Institutions Act (FIA) 2004 in January 2016. supervision role would be necessary for the stability and These amendments set out a path for the implementation of deeper financial inclusion. BoU has already conducted agent banking, Islamic banking, bancassurance, the revision of a number of measures to strengthen the legal, regulatory, capital requirements, and the creation of a standalone Deposit 43 Protection Fund (DPF). Effective December 2016, commercial DPF as a standalone entity with clarity about roles and the cost banks are also required to hold more capital, with this increase of any interventions. However, as with any deposit insurance in capital requirements meant to strengthen the banking framework, governance issues in the banking sector have to sector. BoU is also implementing measures to strengthen be closely monitored to ensure that systemic risks have not the identification of systemic risks. However, given the recent increased due to moral hazard. increase in non-performing assets across the banking sector, Policymakers should also focus on measures to strengthen there is an urgent need for strengthening oversight of financial the regulation and oversight of the Tier IV financial institutions. In addition, there are gaps particularly with respect institutions. These institutions are not covered by the 2003 to the adequacy of the existing deposit protection system meant MDI Act, but rather are regulated by a range of authorities to mitigate the impact of bank failures that result in contagious under a number of different laws. A significant step forward has bank runs, and in the regulatory oversight of Tier IV institutions. been the enactment of the Tier 4 Microfinance Institutions and Earlier reforms to the depositor protection system have Moneylenders Act, 2016, by Parliament. It is now essential to permitted a good practice separation of regulation and establish and operationalize UMRA and to build the capacities of supervision from deposit insurance. Before the amendments Tier IV financial institutions and of the agencies and associations to the FIA (2004), the responsibility for banks and MDIs deposit that support them. protection arrangements was mandated to the BoU. A key Lastly, increasing savings and access to affordable element of amendments was a major restructuring of the financing requires addressing challenges outside of the deposit protection framework. Two existing funds under the banking sector. Developing the Government debt market in a management of BoU were merged and the DPF was established manner that supports financial inclusion and the expansion of as an entity, with contributing institutions including commercial financial services, as this market can have a significant impact banks, credit institutions and MDIs. The DPF is governed by a on the pricing behavior of banks. In addition, formulating and board consisting of seven members, including representatives implementing a sound debt management policy, with a regular of the Ministry of Finance, the BoU, and a number of other issuance policy that reduces the volatility of the returns on public and contributing financial institutions. The coverage risk-free assets to transform the interest rate structure. Overall, level is now determined directly by the Minister of Finance, implementing sound macroeconomic policies to reduce the level rather than the BoU, as previously. The Board is responsible of volatility and risk premiums, with a high level of predictability for decisions related to the payment of protected deposits. In in terms of macroeconomic performance being a significant addition, the amendments enable the DPF to be appointed as factor. Frequent spikes in inflation and depreciation make it more a receiver or liquidator of a financial institution by the BoU. The likely that banks will hedge against unpredictability through the appointment of members to the DPF’s managing board is now imposition of higher rates and spreads. almost complete. This is a step towards the establishment of the iv) Prioritizing among the many priorities to deepen the financial system In view of the many policy actions, authorities ought to ii) Stimulate the development and strengthen the capacity and prioritize to start with those that are feasible and will make a oversight of non-bank financial intermediaries, to mobilize significant impact. As the above section indicate, the required more savings and increase completion in the system. actions are numerous, ranging from measures to ensure that the iii) Expand coverage of individuals and businesses by credit consumers of the services are aware of the benefits and costs bureaus and increase the spectrum of data contributors, to installing infrastructure that can reduce costs (see Table 6). In strengthen the legal and regulatory framework governing terms of priority, with the aim of generating the largest impact secured transactions and creditor rights, and establish on the financial sector, the authorities should focus on the a centralized movable collateral registry, in order to following: strengthen the credit infrastructure. i) Allow entrance of new strong banks that can challenge iv) Strengthen the legal, regulatory, institutional and current market leaders, while consolidating banks in supervisory framework of Uganda’s financial sector to be the lower tier by further increasing minimum capital able to support a deeper financial system. requirements, to stimulate competition within the banking system 44 v) Promote sound debt management policies and both the private and public sectors, under the stewardship macroeconomic policies to avoid Government borrowing of the MoFPED and the BoU. Increased access to financial crowding out credit to private sector. services is intended to enable the self-employed to become more productive and resilient, to generate increased economic vi) Stimulate the demand side by conducting financial literacy activity, and to facilitate the achievement of higher levels of programs, improve consumer protection practices and foster trust of the population in the financial system to equality and inclusion. To achieve these goals, more than 50 achieve better deposit mobilization and extension of the countries around the world have committed to increasing the maturity of the deposit base. level of financial inclusion as part of their broader national development plans. The measures described above would play a significant role in strengthening the Government’s strategy to ensure The next update will explore more closely options for that a far greater proportion of Ugandans have access to a increasing availability of longer term finance. If Uganda broad range of high-quality, affordable financial services. is to achieve its aspirations of increased growth and shared Increased financial inclusion will facilitate higher levels of prosperity, it should maintain and expand its commitment productivity and enable both households and businesses to increasing access to financial solutions both for short and to mitigate against the impact of shocks. A framework to long term uses. That way, the country will ensure that a greater achieve this already exists in the form of the National Financial proportion of its population can benefit from and contribute to Inclusion Strategy (NFIS), which was developed through a sustainable, long-term economic growth. multi-stakeholder consultative process, with the support of Table 6 : Policy Actions to increase financial inclusion A. Mobilizing savings Building consumer confidence in formal and non-bank deposit taking institutions. • Accelerate the implementation of amendments to the FIA Act to improve the deposit insurance system • Conduct financial literacy programs • Building the capacities of CIs, MDIs and SACCOs through a number of measures, including institutionalizing the development of financial sector skills through the establishment of an industry-wide curricula for professional banking, MFI, and SACCO practices; • Promoting a more robust prudential system of regulation and supervision of SACCOs by operationalizing UMRA through a number of measures, including issuing related regulations for licensing, regulation, consumer protection and prudential norms; • Strengthening and increasing consumer awareness of existing deposit protection mechanisms; • Developing effective complaints units within BoU, UMRA, and the IRA to enable consumers to report issues related to their rights within the formal sector; • Improving consumer protection practices in MFIs, mobile financial service providers, banks, SACCOs, and insurers; • Creating a more conducive environment to enable consumers to access deposits, effect savings, and take up other services, such as insurance, especially in remote and hard-to-reach areas through measures to develop, maintain and regulate an agent banking infrastructure; • Utilizing innovative technologies to further develop linkages between informal and small financial institutions, such as VSLAs, and the formal sector, to achieve higher levels of financial inclusion for a greater number of women and rural households. 45 Increase coverage of insurance, especially in the case of lower income households • Expand the current awareness campaign to better communicate the benefits of insurance products; • Strengthen the regulatory enforcement of compulsory insurance products; • Use banking agents as distribution channels for insurance products. Ensure that pension savings provide a good return to savers whilst minimizing potential risks • The enactment of the Pensions Liberalization Bill to strengthen the capacity of pension funds to meet their liabilities, to improve the administration of the sector, and to provide a policy and legal framework to increase participation in retirement savings schemes; • The expansion of the coverage of pension schemes to include self-employed workers and those in the informal sector. Enable mobile service providers to offer more innovative, efficient, safer, and cheaper mobile accounts • Conducting a pricing review of mobile financial services and supporting the Uganda Communications Commission to review the need for structural changes or other actions to promote competition in the market; • Developing linkages and connections between mobile financial service providers and established financial system. B. Reducing the cost of finance Promoting a higher level of competition in the upper tier of the banking sector and consolidating banks in the lower tier. • the entrance of strong banks which can challenge current market leaders, • consolidation of banks in the lower tier by further increasing minimum capital requirements, and • Stimulating the development and strengthening capacity and oversight of other types of financial intermediaries, including MDIs and Tier IV institutions. • Promoting the development of other types of financial intermediaries, including savings and credit cooperatives. Strengthening financial infrastructure, particularly the credit reporting system and the secured transactions framework. • Increase depth and breadth of credit information by expanding coverage of individuals and businesses and increasing the spectrum of data contributors; • Strengthen the legal and regulatory framework governing secured transactions, creditor rights and establish a centralized movable collateral registry. Encouraging the sharing of information between banks and other credit providers. • Establish and maintain an efficient collateral registry and effective creditor rights framework. • Modernize the payment systems. Addressing the high costs associated with expansion and establishment of new branches, especially in the rural areas • Leveraging technological innovations and other mechanisms to deliver innovative banking services. This could include measures to promote agent banking, now that regulatory amendments to remove the prohibitions on this form of banking services. Strengthening and institutionalizing the development of financial sector skills. • Establishing commonly accepted, industry-wide curricula for the training of professional banking staff and implementing a mandatory certification program to ensure a minimum standard of professional skills. • Strengthening and institutionalizing available training at financial institutions; at the BoU; and at other financial sector regulators. Stimulating demand for financial services in rural areas • Conduct financial literacy programs, • Improve consumer protection practices C. Improving regulatory oversight of financial • Accelerate the implementation of amendments to the FIA Act to improve the deposit insurance system • Conduct financial literacy programs • Improve consumer protection practices • Tier IV regulation 46 Morgan Mbabazi, 2016 Organized farming can only survive on registered land Statistical Annexes 47 Table A1: Key Macroeconomic Indicators 48 Est. Proj. Indicator Indicator Indicator Indicator Indicator Indicator Indicator Indicator Indicator Indicator Population Millions 31.0 31.9 35.1 37.6 38.7 39.9 41.1 42.3 GDP USD millions 20181.4 20262.5 23237.0 24993.0 27761.0 27531.0 24661.0 26549.0 Per capita GDP USD 651 635 662 665 717 690 600 628 GDP growth % 5.2 9.7 4.4 3.3 4.5 5.1 4.8 5.0 Gross Domestic Savings as % of GDP 19.7 19.5 17..7 21.7 19.9 21.9 24.3 23.1 Gross Investments as % of GDP 12.5 12.3 28.2 29.5 29.0 31.5 24.3 27.9 Inflation (period average) % 9.4 6.5 23.4 5.8 6.9 2.7 7.7 5.2 Exchange Rate (end-year) UGX/USD 2283.3 2623.2 2472.0 2593.0 2600.0 3302.0 3778.0 3278.0 External Sector Exports, f.o.b. Million USD 2,317.0 2,298.0 2,660.0 2,912.0 2,706.0 2,738.0 2705.0 2865 Imports - f.o.b. Million USD -4,117.0 -4,680.0 -5,241.0 -5,035.0 -5,074.0 -4,988.0 -4575.0 -5,048 Current Account Balance Million USD -1631.0 -1984.0 -2219.0 -1582.0 -2105.0 -1971.0 -1452.0 -1884.0 Balance of Payments (overall balance) Million USD 235.0 -597.0 759.0 337.0 378.0 -353.0 95.0 22.0 Gross Foreign Reserves Million USD 2384.7 2044.0 2643.8 2912.3 3394.0 2895.0 2962.0 2980.0 External Debt Million USD 2343.4 2904.9 3067.3 3742.9 4339.5 5103.1 7299.5 7541.6 Foreign Direct Investment Million USD 693.0 719.0 1244.0 940.0 1096.0 870.0 512.0 567.0 Monetary Sector Average Deposit Rate % 2.0 2.1 3.2 3.0 3.1 3.3 3.2 3.3 Average Lending Rate % 20.7 19.8 24.6 24.8 22.1 25.2 23.7 24.4 Growth in Money Supply (M3) % 23.6 25.7 26.1 6.6 17.4 15.9 7.7 5.8 Government Finance Total Domestic Revenue as % of GDP 10.5 13.6 11.2 11.3 11.6 13.0 13.5 14.0 Tax Revenue as % of GDP 10.3 10.9 10.3 11.0 11.4 12.6 12.8 13.3 Non Tax Revenue as % of GDP 0.3 0.2 0.2 0.3 0.2 0.3 0.6 0.6 Grants as % of GDP 2.1 1.9 1.9 1.4 1.0 1.2 1.4 1.8 Total Expenditure and net lending as % of GDP 16.7 19.1 15.6 16.2 16.6 18.5 19.7 21.9 Recurrent Expenditure as % of GDP 10.5 12.7 9.1 9.0 9.5 9.9 10.8 10.4 Development Expenditure as % of GDP 6.1 6.1 6.1 6.5 7.0 6.7 7.0 9.7 Fiscal Balance (overall) as % of GDP -4.0 -3.6 -2.5 -3.5 -4.0 -4.3 -5.2 -6.0 Source: Ministry of Finance, Planning and Economic Development, IMF and World Bank Table A2: Growth and Structure of the Economy Economic Economic Economic Economic Economic Economic Economic Economic Activity Activity Activity Activity Activity Activity Activity Activity Real GDP Growth Rates (%) 5.2 9.7 4.4 2.7 5.2 5.1 4.8 Agriculture 3.2 2.9 1.1 1.8 3.0 3.0 2.6 Industry 7.8 11.4 3.0 4.4 3.9 7.9 3.1 o/w manufacturing 4.5 7.8 2.7 -2.5 2.2 11.0 0.4 o/w construction 12.5 15.0 3.9 10.8 5.3 2.7 5.8 Services 5.9 12.4 3.9 4.1 4.3 5.3 6.8 GDP Shares (% of constant GDP) Agriculture 26.2 24.6 23.8 23.5 23.2 22.6 22.2 Industry 18.1 18.4 18.2 18.4 18.3 18.7 18.4 o/w manufacturing 8.5 8.4 8.2 7.8 7.6 8.0 7.7 o/w construction 5.8 6.0 6.0 6.5 6.5 6.4 6.4 Services 48.5 49.7 49.9 50.3 50.2 50.2 51.3 FISM and net taxes 7.2 7.3 8.1 7.9 8.1 8.1 0.0 GDP Shares by expenditure type (% of nominal GDP) Final Consumption Expenditure 83.2 84.2 86.6 82.2 83.0 86.7 92.9 Households 73.8 74.6 73.9 74.4 74.8 77.8 82.7 Government 9.4 9.6 12.7 7.9 8.2 8.9 10.2 Gross Capital Formation 26.9 26.8 28.5 27.5 26.4 23.9 26.5 Gross fixed capital formation 26.6 26.5 28.1 27.1 25.9 23.5 26.1 Charges in inventories 0.4 0.3 0.3 0.4 0.4 0.4 0.4 Trade balance -8.9 -11.8 -11.1 -8.5 -8.5 -8.2 -7.6 Gross domestic saving (% of GDP) 12.5 12.3 17.7 21.7 19.9 21.9 24.3 Public 2.9 3.3 2.4 3.1 1.4 1.5 2.3 Private 9.6 9.0 15.3 18.6 18.5 20.4 22.0 Source: Uganda Bureau of Statistics 49 50 Table A3: Central Government Fiscal Framework (% of GDP) Outturn Outturn Outturn Outturn Outturn Outturn Outturn Outturn Budget Proj 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2016/17 REVENUES AND GRANTS 13.5 12.7 15.5 13.1 12.8 12.6 14.2 14.9 16.2 15.9 Revenues 11.0 10.5 13.6 11.2 11.3 11.6 13.0 13.5 14.4 14.0 URA 10.6 10.3 10.9 10.3 11.0 11.4 12.6 12.8 13.6 13.3 Non-URA 0.4 0.3 0.2 0.2 0.3 0.2 0.3 0.6 0.7 0.6 Oil Revenues 0.0 0.0 2.5 0.7 0.0 0.0 0.2 0.1 0.1 0.1 Grants 2.6 2.1 1.9 1.9 1.4 1.0 1.2 1.4 1.8 1.8 Budget Support 1.5 1.1 1.1 1.0 0.3 0.3 0.3 0.4 0.3 0.3 Project Support 1.0 1.0 0.8 0.9 1.1 0.7 0.9 1.0 1.5 1.5 EXPENDITURE AND LENDING 15.0 16.7 19.1 15.6 16.2 16.6 18.5 19.7 22.5 21.9 Current Expenditures 9.5 10.5 12.7 9.1 9.0 9.5 9.9 10.8 10.4 10.4 Wages and Salaries 3.4 3.2 3.5 3.1 3.3 3.4 3.5 3.5 3.6 3.6 Interest Payments 1.0 0.9 0.9 1.0 1.4 1.4 1.6 2.0 2.2 2.3 Other Recurr. Expenditures 5.1 6.4 8.2 5.0 4.3 4.8 4.8 5.2 4.7 4.4 Development Expenditures 4.8 6.1 6.1 6.1 6.5 7.0 6.7 7.0 9.8 9.7 Net Lending/Repayments -0.2 -0.1 -0.1 -0.1 0.6 0.0 1.6 1.8 1.9 1.6 Domestic Arrears Repaym. 0.8 0.2 0.4 0.5 0.1 0.0 0.3 0.1 0.1 0.2 OVERALL DEFICIT Overall Fiscal Bal. (excl. Grants) -4.0 -6.1 -5.5 -4.4 -4.9 -5.0 -5.5 -6.2 0.0 -8.1 Overall Fiscal Bal. (incl. Grants) -1.5 -4.0 -3.6 -2.5 -3.5 -4.0 -4.3 -5.2 -6.2 -6.0 FINANCING 1.5 4.0 3.6 2.5 3.5 4.0 4.3 5.2 6.2 6.0 External Financing (Net) 1.6 1.9 1.5 1.9 2.2 1.3 1.2 2.9 5.4 5.3 Domestic Financing (Net) 0.0 1.7 2.3 0.0 1.1 2.3 3.2 2.2 0.9 0.7 MEMORANDA ITEMS Nominal GDP (Shs billions) 34504 40946 47078 59420 64758 70458 77845 84907 92878 93939 Source: Ministry of Finance, Planning and Economic Development, IMF and World Bank Table A4. Monetary indicators Est Proj. 2008/9 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 Monetary Aggregates M3 as % of GDP 18.3 20.5 22.4 19.0 18.6 20.1 21.1 20.7 19.8 M2 as % of GDP 14.3 15.9 17.1 13.0 14.0 14.9 14.3 14.3 13.7 M3 growth rate (%) 25.0 33.2 25.7 7.2 6.6 17.4 15.9 7.1 5.8 M2 growth rate (%) 26.3 32.1 23.9 -4.2 15.7 14.1 8.8 8.9 5.8 Domestic Credit Total domestic credit (% of GDP) 9.2 11.9 16.0 11.8 12.5 14.2 16.5 16.9 18.4 Private sector credit (% of GDP) 10.4 11.4 14.3 12.7 12.4 12.9 14.1 13.5 13.2 Total domestic credit growth (%) 64.1 54.7 54.1 -6.5 13.4 21.9 32.3 10.8 8.9 Private sector credit growth (%) 31.3 29.8 44.1 11.6 6.0 14.1 20.3 4.2 8.3 Interest Rates Structure Average TB rate (period average, %) 8.4 5.3 7.6 17.2 10.3 9.3 12.0 16.1 14.1 Average lending rate (%) 20.9 20.7 19.8 24.6 24.8 22.1 21.6 23.8 22.7 Average deposit rate (%) 2.1 2.0 2.1 3.2 3.0 3.1 3.3 3.2 3.3 Source: Bank of Uganda 51 52 Table A4. Monetary indicators 2016/17 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Est. Proj. Current Account (incl transfers) -8.1 -9.8 -9.5 -6.3 -7.6 -7.2 -5.9 -7.1 Exports of goods 11.5 11.3 11.4 11.7 9.7 9.9 11.0 10.8 o/w coffee 1.3 1.8 1.9 1.7 1.5 1.5 1.4 1.5 Imports of goods -20.4 -23.1 -22.6 -20.1 -18.3 -18.1 -18.6 -19.0 o/w oil imports -2.5 -3.4 -4.1 -4.1 -3.9 -3.4 -2.6 -2.8 Services (net) -2.1 -3.4 -1.7 -1.6 -1.2 -2.5 -2.7 -2.2 Trade balance -8.9 -11.8 -11.1 -8.5 -8.5 -8.2 -7.6 -8.2 Income (net) -1.7 -1.7 -2.0 -2.1 -2.2 -1.6 -1.7 -1.7 Current transfers (net) 4.6 7.1 5.3 5.9 4.3 5.1 6.3 5.1 Capital and Financial Account 8.8 5.3 10.1 6.1 6.5 4.2 4.2 7.2 Capital account 1.0 0.8 0.8 0.1 0.3 0.4 0.5 0.5 Financial account 7.9 4.5 9.3 5.9 6.1 3.9 3.7 6.7 o/w direct investment 3.4 3.5 5.4 3.8 3.9 3.2 2.1 2.1 o/w portfolio investment 0.2 0.0 -1.1 -0.2 0.0 -0.6 -0.7 0.1 Overall Balance 1.2 -2.9 3.3 2.1 1.1 1.5 2.9 5.2 Gross International Reserves (million USD) 2384.7 2044.0 2643.8 2912.3 3394.0 2895.0 2962.0 2980.0 Gross international reserves in months of imports 4.4 3.2 4.3 4.5 5.1 4.3 3.6 4.2 Source: Bank of Uganda For more information, please visit: www.worldbank.org/uganda Join the discussion on: http://www.facebook.com/worldbankafrica http://www.twitter.com/worldbankafrica http://www.youtube.com/worldbank 56