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					                                  STERN WARNINGS FOR UGANDA

WES Newsdesk-London                                                        16 June 2012

Uganda is east Africa's third-largest economy, with growth rates over 6% over the last two years.
This year the picture may not be the same. Official statistics indicate growth is expected to tumble in
“the fiscal year ending this month to 3.2% from 6.7% in the previous year”. Ahmadou Moustapha
Ndiaye, World Bank country manager in Uganda stated that “the slide in growth was undermining
the country's recovery from the 2008-09 global economic turmoil”. Warnings from the World Bank
are that “Uganda must move up the value chain in agricultural production, create more jobs outside
farming and tame double-digit inflation to get its economy back on a vigorous growth path”. Indeed
most industry in Uganda is related to agriculture, however mechanisation is inadequate and much of
the output is sold in semi-processed form, severely limiting earnings from the sector. Ndiaye stated
that "Uganda must transform from low to higher productivity activities. On the production side,
agriculture, which is the bedrock for Uganda's industrialisation must transform and become more
productive."

AFRICA’S CUP OF COFFEE

Uganda is Africa’s biggest coffee exporter; however shipments of the beans are expected to drop
33% this month that’s according to the Uganda Coffee Development Authority. The inconsistent
coffee breaks or disruptions are due to the effects of climate change, which hit Uganda’s coffee
production. Experts say this could continue affecting the crop if good agricultural practices are not
put in place. Ndiaye said average farm yields in Uganda were below 40% of those achieved at
Uganda's research stations and the country needed to step up industrialisation in agri-processing to
"achieve convergence" with middle income countries. Moreover, the performance of the farm
sector, whose contribution to growth has decreased still, employs over 70% of the population.
Ndiaye added, “Uganda also needs to create jobs outside of agriculture. Job creation is imperative
because Uganda has one of the fastest growing workforces on the planet”. The government has
also been slated for underfunding the agriculture sector. More bleak news is that the country's
banking industry has been wary of increasing credit to agriculture, citing its risk profile.

THE DEBT BURDEN

The GOOD NEWS for Uganda is, according to experts is that the transport, telecommunications and
financial services sectors are expected to remain dynamic due to the link with the East African
undersea Internet cable. There is also an increase in economic activity in the mining and
construction sector due to on-going investments in energy infrastructure, and the oil exploration
activities in western Uganda. Hence Foreign Direct Investment will continue to grow and
international aid will remain crucial. However, the BAD NEWS is the current account balance will
remain in deficit amid the continuing high volume of imports of capital goods and fuel. Uganda is
one of the main African beneficiaries of public development aid. It was the first country to be
eligible for the Heavily Indebted Poor Countries (HIPC) initiative and had virtually all of its foreign
debts scrapped by the IMF, World Bank, and major donors. However it still has foreign debt 80% of
which is held by multilateral institutions. This is expected to remain at sustainable levels.
THE RISK FACTOR

The major risk deterring foreign investors is Uganda’s infrastructural deficiencies, particularly
concerning energy, which constrain the development of manufacturing. The government is keen on
expanding Uganda's manufacturing industry to add value to most commodity exports, however
those efforts remain largely thwarted by insufficient power and poor infrastructure. In 2011, the
government made a substantial increase in its spending on infrastructure under the National
Development Plan (2010-2015). The investments will be focused on transportation (Northern
Transport Corridor) and energy, with the start of construction of a refinery and an oil distribution
network with the actual extraction of oil expected at 150,000 barrels per day. Another factor is
political and security instability with recurring tensions in northern regions continuing due to
instability in South Sudan and the Democratic of Republic of Congo (DRC). South-eastern Uganda
has also continued to suffer from the consequences of the Rwandan conflict. Despite the joint
intervention of Uganda, DRC, and the government of South Sudan against the Lord's Resistance
Army (LRA), insecurity still persists in northern Uganda. "Investors like stable and predictable
environments that allow for effective planning. To regain investor confidence, therefore, there
should be stability, inflation at single digit level." Another contributory risk factor is Uganda’s
informal economy that evades the tax system.

INVESTOR REWARDS

But does the risk exceed the rewards? Trade wise, Uganda is in an enviable position as compared to
some African states. It’s attracts dominant nations as trade partners such as the United States,
China, Russia, Switzerland and Norway. The rewards for investors are the country’s diversified
economy such as agriculture, fishing and minerals. Tourism has potential, receiving an economic
boost from the government. There is also the international institution backing for infrastructure
projects in transport, education and energy. In 2006, Uganda struck it big with commercial
hydrocarbon deposits in its Albertine rift basin along the border with the DRC; the government
estimates reserves at 2.5 billion barrels. However, the current trend and the greatest reward for
investors is oil with expectations that Uganda could become the 5th biggest oil producer of sub-
Saharan Africa. February this year, the Ugandan government signed production agreements with
the London-based company, Tullow oil. The deals pave the way for a £6bn investment in a refinery
and crude oil export pipeline. Subsequently, Tullow will sell two-thirds of its interest in the Lake
Albert Rift Basin to a Chinese company, CNOOC and the French firm, Total. Oil is certainly a reward
factor; however the oil trinket is a potential risk if there is no transparency or accountability. NGO’s
and international institutions such as the World Bank have called for Uganda to join the Extractive
Industries Transparency Initiative (EITI), a coalition of governments, companies and civil society
groups that aims to improve transparency and accountability. This will send a clear message to
investors and international financial institutions that the government is committed to greater
transparency.

				
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posted:10/8/2012
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