‘Remove tax exemptions to collect more’

The East African government expanded their fiscal deficit in 2020 to help them fight the impact of Covid-19 pandemic and that stayed high all through 2021. Now the biggest challenge for them is to bring down these fiscal deficit to control their debt level, which if not properly managed could spill over to currency depreciation.

Fiscal consolidation must be a priority for the East African government; looking at bringing down the fiscal 3.5 per cent before the oil revenue starts has to be worked right and that is bringing down the fiscal deficit from 6.5 percent to 3.5 should between now and before the oil revenue starts.  This is the issue of revenue collection which remains a big problem in African countries.

African governments must become efficient in revenue collection, abolish tax exemption and then widen the tax base. For Uganda, this has to happen to see increased revenue collection. While the delay in making progress with fiscal consolidation is understandable, government should push ahead with fiscal consolidation before the start of oil production.

Oil production has the potential to change the political pressure on the government, especially with general elections looming in early 2026.

Another reason why fiscal consolidation is potentially important in Uganda is that the current account deficit has historically been wide. In fact, under the current IMF projections, it will widen out further in the coming years as the start of construction on the oil project pushes up the import bill before exports start rising with the start of oil production.

So the challenge for the government is to reduce its domestic borrowing demands, while the Bank of Uganda (BoU) should iron out the impact of these lumpy financial flows on the foreign exchange market. The BoU currently has significant levels of foreign exchange reserves and can intervene in the foreign exchange market when it wants to, essentially to smooth out excessive volatility. But historically it has been unwilling to intervene in the market for longer periods, especially if it feels that fundamental macroeconomic factors are driving movements in the currency.

What is your analysis about economic recovery in the East African region/Uganda in particular?

When you look at the national lockdowns in East African due to Covid-19, there was slowdown or negative growth  and small positive growth. After lifting up the lockdown, we are seeing rebound in economic growth especially in Kenya and Rwanda at 5 percent. But Uganda’s second lockdown of June 2021 took much longer than we expected. The June 2021 lockdown was more of a prolonged period so Uganda lagged behind Kenya and Rwanda in economic recovery. However, Uganda has now fully opened the services sector and the night activities are normally operating. This is going to support Uganda’s economic recovery in the range of 5.5 percent to 6 percent similar to the growth of Kenya and Rwanda which is 6 percent. Overall, the East African economies have showed much resilience to Covid-19, the recovery in East Africa has been probably much quicker, and the East Africa is going to be much faster than in other regions in Africa. 

What is Citi bank’s focus on Uganda’s exchange rate (the state of the Uganda Shilling)?

Uganda has always had a stable exchange rate. The Uganda shilling was very stable in 2010/11 it after this when a rise in the current account deficit and fiscal deficit, which caused it to depreciate. Whether the BoU thinks that the Uganda shilling is now deviating from economic fundamentals is less clear to us at this point. As we understand the situation, the BoU feels there may be a very modest overvaluation of the Shilling, maybe in the order of 3 to 5 percent. 

The critical point for us is while we can argue over the exact level of overvaluation, it would be unwise for the BoU to allow significant further appreciation from this point as this would potentially be moving the currency against economic fundamentals. A long-term view of the Uganda shilling shows that after the stability during the country’s long economic boom, there was a period of significant weakness.  This was largely a consequence of the widening of the twin fiscal and current deficits. Since 2018, a new period of stability has emerged, but the underlying macroeconomic drivers have become a little more complicated, with a rising current account deficit but also a significant fiscal deficit, by Ugandan standards.

As Citi our official forecast for the Uganda Shilling in 2022 is at Shs3,655 per US dollar and in 2023 at Shs3,715 per US dollar. For the aggregated forecast which includes the JP Morgan, Citi and others the Uganda shilling will trade at Shilling 3,780 in 2023. 

 What is your insight on the inflation rate in Uganda and in Africa at large?

Uganda’s inflation has been stable for the last three years; for instance, in 2021 Uganda’s inflation stood at 2.2 percent so the inflation has been below the policy target. Uganda’s inflation is being forecast at 4.9 percent but it is still below the policy target of 5 percent. When you look at Ivorian war and Senegal inflation is at 6 percent and plus.

However, the impact of external events should not be overstated when thinking about inflation dynamics in an economy like Uganda’s. This is because while wheat products – essentially bread and pasta - are consumed in Uganda, notably by urban populations, it is still not the dominant staple carbohydrate consumed by the average person. This remains a combination of ugali and matooke, the supply of which is met predominantly from domestic production.

Petrol prices in Uganda have been rising significantly prior to the conflict. This reflected both rising international oil prices in 2021, but also problems in moving petrol products across the border from Kenya as a result of Covid travel restrictions. The average price of unleaded petrol around Kampala is already Shs5,000 per US dollar, relatively high by African standards and probably not too far from cost recovery levels.

What do you have to say about the Central Bank Rate (CBR) visa vie private sector credit growth for this year from the Citi Bank perspective?

Rising inflation, both nationally and globally, would lead to an expectation that the MPC could adjust the Central Bank Rate (CBR) upwards.The BoU currently estimates that this would only be in the second half of 2023, (although we still think all estimates of an output gap should be treated with caution in Africa given the high unemployment and under employment levels).This indicates that BoU is unlikely to hike the CBR this year. Our current thinking is that only if inflation pressures were to become more entrenched in the second half of 2022 and the economy continues to recover at the current expected pace, the MPC consider potential rises in the CBR, so in 2023 at the earliest.