KAMPALA: In a robust display of economic resilience, Uganda’s economy has been bolstered by significant inflows from Non-Governmental Organizations (NGOs) and projected increases in Foreign Direct Investment (FDI). According to the State of the Economy report for June 2024, these factors have played a crucial role in stabilizing the Ugandan shilling against the US dollar, despite global financial pressures.
“Foreign Direct Investment, projected to exceed 5 percent of GDP over the next two years, is expected to be the primary source of financing for the current account deficit,” the report notes. FDI typically involves foreign firms or individuals investing in Ugandan businesses, either by establishing new operations or acquiring and merging with existing ones. This inflow is critical, especially given the limited financing expected from external loans to the government in FY2024/25 due to tight global financial conditions.
“Foreign Direct Investment will play a pivotal role in financing our current account deficit, ensuring economic stability and growth,” the report highlights. In the longer term, as global financial conditions normalize, loans to the government are expected to pick up, providing additional support.
Despite the challenging global financial landscape, the Ugandan shilling has shown relative strength, supported by improved export revenues, particularly from coffee, and increased inflows from NGOs, according to the report. These NGO inflows, comprising grants, loans, and donations, have a multiplier effect on the economy, stimulating local businesses and creating additional economic activity. For example, financial assistance from NGOs can be directed towards crucial sectors like education, healthcare, agriculture, and social services, contributing significantly to overall economic development.
The manufacturing sector has also seen substantial demand for foreign exchange, aligning with the government’s industrialization agenda aimed at increasing export earnings through value addition and supporting the Import Substitution Strategy. The Absa Africa Financial Markets Index (AFMI) reflects the development and deepening of Uganda’s foreign exchange market, maintaining Uganda’s ranking in fourth position among 28 African countries.
Uganda’s economy demonstrated robust growth, expanding by 6 percent in FY2023/24, up from an average of 4.1 percent in the preceding years, according to the report. This growth was driven by improvements in household spending, public investment, and net exports, with services and industry sectors leading the rebound. The economic growth is projected to continue, with expectations of 6.0 to 6.5 percent in FY2024/25 and above 7 percent in subsequent years, driven by investments in the extractive industry and government productivity-boosting programs.
However, the economic outlook is not without risks. The report warns of potential setbacks from escalating geopolitical conflicts, supply chain disruptions, higher freight costs, reduced export demand, and unfavorable weather conditions affecting agricultural production.
Inflation has been contained at 3.6 percent in May 2024, thanks to tight monetary policy actions, favorable domestic food supplies, and negative imported inflation due to lower global commodity prices. A stable shilling also contributed to this containment. Inflation is expected to rise slightly, averaging between 5.0 and 5.4 percent over the next 12 months, but is anticipated to converge to the medium-term target of 5.0 percent by the second half of 2025.
The Monetary Policy Committee (MPC) meeting in June 2024 assessed that the current monetary conditions are sufficiently tight to contain inflation around the medium-term target. Consequently, the Central Bank Rate (CBR) was maintained at 10.25 percent, with the rediscount and bank rates remaining at 13.25 percent and 14.25 percent, respectively.
As Uganda continues to navigate the complex global economic landscape, the strategic inflows from NGOs and the anticipated surge in FDI are set to play a crucial role in maintaining economic stability and fostering sustained growth.