KAMPALA: Business conditions in Uganda saw a significant decline in the first quarter of 2024, with future outlooks remaining pessimistic. The Uganda Business Climate Index (BCI) for January-March 2024, authored by Emmanuel Erem, Hildah Namuleme, and Wamani Joab, revealed a sharp 11-point drop in business sentiment, falling from 109 to 98. The decline was attributed to several factors, including reduced capacity utilization, rising input costs, declining profitability, and an overall deterioration in the business environment.
The report highlighted that the economy operated below full potential during the quarter, a shift from the previous quarter (October-December 2023) when business sentiments were more positive. “Unlike the previous quarter, the economy operated at less than full potential since the index for the quarter under review is below 100,” the report published recently on the EPRC website, stated.
Inflation and Rising Costs
A key factor contributing to the decline in business conditions was the increase in annual headline inflation, driven by higher costs in services, food crops, and liquid fuels. “Inflation rose by 0.8% during the quarter, moving from 2.6% in the previous quarter to 3.4% by February 2024. The increase in prices negatively impacted consumer demand, reducing purchasing power and further straining businesses reliant on domestic consumption,” the report stated.
Sector Performance and Improvements
Despite the overall decline in business sentiment, the BCI showed improvements across three key sectors: agriculture, manufacturing, and services. The service sector saw the most significant improvement, with business sentiments “rising by 17 points, from 83 to 100.” Agriculture and manufacturing also experienced modest gains, with the agriculture index rising by 5 points (from 77 to 82) and manufacturing increasing by 4 points (from 96 to 100).
The improved performance in the service sector was driven by higher turnover, increased business activity, and greater profitability. Improved capacity utilization and lower production costs contributed to the gains in the manufacturing sector. In the agricultural sector, the improvements were linked to better “labor availability, reduced labor costs, and favorable weather conditions, which led to higher harvests during the second planting season (July-December 2023).” Despite these improvements, the agricultural sector remains below its full potential.
Key Business Challenges
The report also identified the top five constraints to doing business during the quarter. These included unfavorable tax policies, macroeconomic instability, corruption and bribery, and limited access to finance. These challenges persisted from the previous quarter, indicating that systemic issues continue to burden Ugandan businesses. Additionally, the severity of constraints such as crime, poor transport infrastructure, and insufficient demand worsened during the quarter. However, issues like competition, inadequate skilled employees, and electricity availability posed less of a problem compared to earlier periods.
Future Outlook: April-June 2024
Projections for the second quarter of 2024 indicate a continued decline in business sentiment, with the BCI forecasted to drop to 97, below the full potential mark of 100. The outlook for all sectors—services, manufacturing, and agriculture—remains pessimistic, with expected indices of 95, 87, and 78, respectively, down from 100 in the previous quarter.
The anticipated underperformance is linked to various factors, including global economic uncertainty, the depreciation of the Ugandan shilling, and tighter domestic financial conditions, which are expected to dampen demand. Additionally, short-term inflation projections by the Bank of Uganda suggest that inflation may exceed the 5% target, driven by geopolitical tensions in the Middle East, potential disruptions in the supply chain, rising energy prices, and adverse weather conditions.
Impact of Uganda’s Suspension from AGOA
In addition to domestic challenges, Uganda’s suspension from the African Growth and Opportunity Act (AGOA) continues to affect business operations. Following the enactment of the Anti-Homosexuality Act in May 2023, Uganda was suspended from AGOA, along with three other African countries, in December 2023. AGOA provides eligible Sub-Saharan African countries with duty-free access to U.S. markets, and Uganda’s suspension threatens key exports to the U.S., such as textiles, apparel, and agricultural products.
The report revealed that 48% of businesses have been directly impacted by the suspension, facing reduced export volumes and higher tariffs. This has made Ugandan products more expensive and less competitive in U.S. markets, leading to a potential loss of market share and export revenue. The ripple effects are evident, with businesses facing declining profitability and reduced investment opportunities.
Conclusion
Uganda’s business environment faces mounting challenges as inflationary pressures, unfavorable macroeconomic conditions, and external shocks like the AGOA suspension continue to strain economic activity. While certain sectors have shown resilience, the overall outlook for the coming quarter remains pessimistic, with further declines in business sentiment expected across agriculture, manufacturing, and services. The government and policymakers must address persistent constraints such as corruption, access to finance, and infrastructure issues to improve the business climate and foster economic growth in the coming months.
