Uganda’s economy displayed robust growth during the last financial year, surpassing previous expectations. This development bodes well for the Bank of Uganda, as it grapples with rising commodity prices and various economic challenges.
According to the latest annual report released by the Bank of Uganda this month, the country’s Gross Domestic Product (GDP) expanded by 5.3% in the Financial Year 2022/23, surpassing the revised growth rate of 4.6% for the Financial Year 2021/22. Notably, this growth exceeded the central bank’s initial estimate by 0.7 percentage points.
The primary drivers of this economic growth were the services and industry sectors. The services sector recorded a significant growth of 6.2%, an increase of 2.1 percentage points compared to the previous fiscal year. This surge was attributed to growth in trade, real estate, education, and repair activities. Meanwhile, the industrial sector expanded by 3.9%, driven by manufacturing and construction activities, contributing significantly to overall industry growth.
However, signs of a slowdown in economic growth are emerging. This is attributed to reduced domestic demand, primarily influenced by high interest rates.
High-frequency indicators of macroeconomic activity, including the Purchasing Managers Index (PMI), indicate a softening in growth momentum in the three months leading up to June 2023. In June, the PMI declined to 56.4 from 57.4, although it remained above the 50-mark, indicating continued growth.
Looking ahead, the prospects for domestic economic growth are less favorable due to adverse global economic conditions, tighter domestic monetary and financial conditions, and decreasing consumer and business confidence.
The local currency has recently come under pressure, particularly against the US dollar, due to global factors such as heightened uncertainty resulting from international conflicts, supply chain disruptions that have elevated commodity prices, and portfolio investors exiting the domestic debt market due to tight global financial conditions as advanced economies raised interest rates to combat surging inflation.
To combat inflation, the Bank of Uganda increased the central bank rate from 7.5% to 10% in three stages from July to October 2022 and maintained it at 10% until June 2023. This led commercial banks to raise their lending rates to customers to over 20%.
Despite challenges related to inflation and geopolitical tensions, the banking sector remained resilient. This resilience can be partly attributed to increased minimum paid-up capital requirements for financial institutions, which took effect in December 2022. The new requirements raised the minimum paid-up capital for commercial banks and credit institutions, ensuring stability and growth in the sector.
As a result, the total assets of banks in Uganda increased by 8.4% to Shs 48.3 trillion for the year ending June 30, 2023, driven by government securities holdings that rose by 12.2%. However, credit growth slowed down.
Banks also became more cautious about extending loans to the private sector due to concerns about slowing economic growth. Consequently, commercial banks’ gross loans only increased by 4.7% to Shs 19.4 trillion, which was lower than the 12.2% growth in the previous year.
Private sector credit, on the other hand, exhibited an annual average growth rate of 10% in the last financial year, up from 9.5% in the previous year. Both shilling and dollar-denominated loans grew by 12% and 4.7%, respectively. However, this growth remained below the pre-COVID historic level of 12%.
The growth in private sector credit was not uniform across all sectors. Sectors like agriculture, transport and communication, electricity and water, building, mortgage, construction, and real estate slowed down. In contrast, sectors such as manufacturing, trade, business services, as well as personal and household loans recorded substantial growth.
Non-Performing Loans (NPLs) as a percentage of gross loans increased from 5.32% in June 2022 to 5.76% in June this year, but it had decreased from a peak of 5.89% in April this year. This improvement was attributed to better liquidity conditions and increased economic activity.
Complaints against supervised financial institutions decreased, with 433,258 complaints compared to 917,938 raised in the previous financial year. The highest number of complaints were related to mobile money and mobile banking, accounting for 40% of the total, followed by loan processing at 12.8%, agent banking at 9.8%, and debit cards at 6.9%. The rise in mobile money complaints is partially due to increased usage driven by financial inclusion campaigns.
As the Bank of Uganda increased currency issuance to meet economic demands, currency issuance costs also rose by 16% to Shs 199.3 billion during the same period. Looking ahead, the Bank of Uganda projects the economy to grow in the range of 5-6% in the Financial Year 2023/24, driven by ongoing economic recovery and developments in the oil and gas sector in preparation for production.
