Member countries of the East African Community are preparing to simultaneously table the 2018-2019 Budgets in their respective parliaments. In Uganda, finance minister Matia Kasaija will present a 30.9 trillion Uganda shilling (USD$8 billion) budget. Sarah Logan examines the economic context of Uganda’s annual budget and the associated challenges.
What is the context in which this year’s budget is being tabled?
The Ugandan government is facing pressure to deliver on many fronts. Economic growth slowed in recent years, averaging 4.5% in the five years to 2016. That’s down from an average of 7.8% in the previous five year period. Curtailed growth was due to lower commodity prices. Uganda’s main commodity exports of coffee, cotton and copper all experienced diminished world prices.
Other contributing factors were an increased incidence of drought and the conflict in neighbouring South Sudan, Uganda’s main export trade partner. Relatively high population growth, averaging 3.4% in the five years to 2016, eroded much of the gains from economic growth in recent years, resulting in declining GDP per capita and increased poverty.
Constraints to growth and productivity remain notable, particularly in agriculture and manufacturing. These sectors are hampered by infrastructure gaps, high interest rates that have made borrowing expensive, and difficulties accessing high quality inputs. These constraints have had a marked impact on micro, small, and medium enterprises, which constitute 93.5% of Ugandan firms. Such limitations pose obstacles to achieving production at scale, which is needed for firm growth.
In recent budgets, the government has significantly raised investment in public infrastructure (notably in transport, works, and energy) to address these constraints. It’s also tried to cater for relatively rapid urbanisation. But long project timescales, poor project selection and execution, and absorptive capacity constraints mean that maximum gains from these investments have not been realised.
These investments have also necessitated greater government spending in recent years, financed by increased borrowing from both domestic and external sources. As a result government debt has grown to 38.6% of GDP, up from 19.2% in 2009. But debt remains within the confines of what is considered sustainable.
What are the most challenging factors heading into this budget?
Working out the right balance between investing in infrastructure and social sectors is a key challenge. While more spending on infrastructure development is vital, it has necessitated budget cuts to arguably already underfunded social sectors, including health and education. But the right balance cannot be judged on budget allocations alone: these figures don’t take into account off-budget financing, which is common in social sectors.
International targets (where they exist) are also of limited value in guiding allocations as spending needs vary across countries and over time.
Another key challenge is how to fund the budget. The National Budget Framework Paper envisions both external and domestic borrowing, as well as the use of domestic tax and non-tax revenues. Government’s domestic borrowing has contributed to raising interest rates, making borrowing more expensive.
Consequently, a growing portion of government spending now goes on servicing its debt obligations, estimated at 12.3% of total revenues for 2018/19. In time, this figure should be lowered, thus opening up funds for spending on development priorities.
Domestic tax and non-tax revenues are generally a preferred source of budget funding as they do not incur debt. The contribution from these sources is expected to rise to 53% through anticipated improvements to tax administration and compliance. This is a positive sign.
What policy highlights would you want to see and why?
Continued investment in energy and infrastructure should be pursued, but it is necessary to improve the efficiency of these public investments. For example, up to 60% of the works and transport budget was reportedly not spent.
The government has recognised in its National Budget Framework Paper that issues around under-execution of development projects need to be addressed and it is working on ways to better allocate funds based on absorptive capacity. The government is also cognisant of the need to provide funds to cover operations and maintenance costs in coming years to slow infrastructure deterioration.
The government has acknowledged the need to raise the country’s tax to GDP ratio, which at 13.5% is relatively low. The Uganda Revenue Authority is exploring several avenues to improve tax administration and compliance.
More could be done to expand the tax base and minimise distortions through, for example, greater focus on value added tax – one of the more progressive tax instruments – rather than import tariffs. Imports are vital as inputs for manufacturing, and restrictions on imports reduce firms’ productivity and competitiveness.
Rwanda’s experience with raising value added tax through mandatory usage of electronic billing machines is valuable in this regard.
How are Uganda’s growth prospects looking?
In coming years, GDP growth is set to accelerate as recent and ongoing public investments begin to yield returns.
JOHANNESBURG - South African markets are pricing in the possibility of an interest rate hike this year as the rand falls, even though economists say this is unlikely as inflation expectations have not breached the upper end of the central bank’s target range.
South Africa’s rand has slumped nearly 9 percent against the dollar year to date, hurt by global risk-off sentiment and poor domestic economic data. It fell to a 7-month low last week.
Capital Economics senior emerging markets economist John Ashbourne said the currency fall has raised speculation that South African policymakers would follow some emerging market countries that have started raising interest rates.
Some have moved as a pick-up in their economy or other factors push up inflation, while others are being forced to act to steady their currencies.
South Africa’s forward rate agreements are implying a 25 basis-point hike in interest rates by the end of the year.
But a Reuters poll found last week that economists expect the South African Reserve Bank to keep its repo rate unchanged at 6.5 percent until 2020.
“We think that markets are getting ahead of themselves by pricing in rate hikes in South Africa... We do not think that this is likely,” Ashbourne said in a note.
“Policymakers have explicitly said that they will not react to currency moves until they see a lasting effect on domestic inflation. And the pass-through between currency moves and inflation is weaker in South Africa than in many other EMs.”
The central bank said in May it would maintain its vigilance to ensure inflation remained within the 3 to 6 percent target range, and would adjust the policy stance should the need arise.
The bank currently forecast CPI to average 5.1 percent in fourth quarter 2018, and 5.2 percent in the last quarters of 2019 and 2020. The next interest rates decision and inflation forecasts are due on July 19.
South Africa’s consumer price inflation slowed to 4.4 percent year-on-year in May as the rise in food prices eased.
“A weaker currency makes (the central bank) more fearful but it depends on how it impacts inflation twelve months out,” Citi economist Gina Schoeman said.
“We don’t think we will see rate hikes in 2018. It doesn’t mean there is no risk of it, and the market is correct to price for that.”
Schoeman said rate hikes over the past five years happened when the inflation forecast for twelve months out had breached 6 percent and stayed above that for two or three quarters.
“So it has to not only breach 6 percent, it has to also breach it for a sustainable amount of time. If it is not doing that, then we don’t have a risk of interest rate hikes,” she said.
Mexico’s central bank raised its benchmark interest on Thursday in a bid to counteract the effects of a peso slump and keep a downward inflation trend on track.
Argentina, Turkey, India and Indonesia are among the other countries hiking rates.
Vienna - Russia on Saturday joined partner countries in backing an OPEC-led pledge to boost oil production in response to growing global demand, Angolan Oil Minister Diamantino Azevedo said.
"We have agreed," Azevedo told reporters after a meeting with OPEC ministers and 10 non-OPEC partner countries in Vienna.
The green light was widely expected after energy ministers from the 14-member Organization of Petroleum Exporting Countries already agreed on Friday to raise output by one million barrels a day from July.
The proposal is the result of a face-saving compromise hammered out after days of diplomacy in Vienna dominated by tensions between Iran and archfoe Saudi Arabia over amending an 18-month-old supply-cut deal that has lifted oil prices to multi-year highs.
Saudi Arabia, supported by Russia, was strongly in favour of pumping more oil to ease fears of a supply crunch and quiet grumbles about the higher prices in major consumer countries like the United States, China and India.
In the end, a vaguely-worded statement that made no mention of the one-million figure allowed all sides to save face.
Ministers also acknowledged that production problems in several countries meant the real number of extra barrels coming to the market would be several hundred thousand less.
Markets were disappointed with the modest output hike, sending crude prices soaring on Friday.
Brent crude added $2.50 to finish at $75.55 a barrel, while the US benchmark West Texas Intermediate gained $3.04 at $68.58 per barrel.
As one of the world's top producers, Russia's cooperation in the supply-cut deal is seen as crucial.
Moscow had long argued for a hike, feeling the pressure from domestic oil companies eager to produce more so they can cash in on the higher prices.
Russia's Energy Minister Alexander Novak had said ahead of Saturday's meeting that it was "timely" for OPEC and its 10 partner countries, known as OPEC+, to raise production.
The OPEC+ supply-cut pact struck in late 2016 and set to run until the end of the year, called on participants to trim output by 1.8 million barrels a day.
But production constraints and geopolitical factors have seen several nations exceed their restriction quotas, keeping some 2.8 million barrels off the market, according to OPEC.
By agreeing to collectively raise output by a million barrels, members are simply committing to comply fully with the deal struck in late 2016 - allowing them to increase supply without undoing the original deal.
"I agreed to have 100% of compliance, not more," Iran's Zanganeh said as he left OPEC headquarters on Friday.
Saudi Arabia's Energy Minister Khalid al-Falih said the agreement would "contribute significantly to meet the extra demand that we see coming in the second half".
But the joint communique did not spell out how the additional barrels would be divvied up, a key issue given Iran's insistence that cartel members should not be allowed to offset involuntary production losses in other member countries.
Much of the current production shortfall has come from Venezuela, where an economic crisis has savaged petroleum production.
In Libya, fighting between rival factions has damaged key oil infrastructure.
This week's OPEC talks in Vienna have been the most politically charged in years.
US President Donald Trump, hoping for lower pump prices ahead of November's mid-term elections, has been among the loudest critics of OPEC's supply cut pact, piling pressure on key ally Riyadh to boost output.
Trump weighed in again after Friday's OPEC decision was announced, tweeting: "Hope OPEC will increase output substantially. Need to keep prices down!"
Iran's Zanganeh earlier this week accused Trump of trying to politicise OPEC and said it was US sanctions on Iran and Venezuela that had helped push up prices.
Investors looking for a haven amid the rout in emerging markets over the past two months would have found one in Nigeria’s domestic debt.
Naira bonds issued by the government have returned 8.4 percent in dollar terms this year, the most in the Bloomberg Barclays Global EM Local Currency Index, which includes 25 countries from Argentina to Turkey. And it’s the only local-currency debt not to have made losses this quarter.
Nigeria's local bonds have outperformed peers since March
Note: Average total return for government local debt in dollar terms
Franklin Templeton Investments and BlackRock Inc. are among global money managers that are bullish on Nigerian securities, enticed by average yields of 13.4 percent, which, while down from almost 17 percent in August, are still among the highest in the world.
They’re also confident the OPEC member will be able to keep the naira stable, thanks in part to oil prices having climbed around 60 percent in the past year. The naira’s barely budged since a devaluation last year, and held its own as other emerging currencies began to tumble in April. The Abuja-based central bank is keen to keep it that way, at least until February’s elections.
In Africa's battle for the skies, an east African carrier is stepping up its game in an effort to dominate the market. The state-owned Ethiopian Airlines, Africa's largest carrier by number of passengers, according to FlightGlobal, has taken stakes in a raft of carriers across Africa and opened routes to new destinations, like Manchester, UK.
The expansion is part of the airline's 2025 Vision to become the leading aviation group in Africa, and increase the share of the market occupied by African airlines.
"Twenty percent of the market is carried by African airlines and 80% of the market is carried by non-African airlines," said Tewolde Gebremariam, CEO of Ethiopian Airlines. "The market share has been declining for the last 20 years."
Ethiopian Airlines is looking to fend off competition from South African Airways, the largest carrier by number of flights, according to FlightGlobal, EgyptAir, Royal Air Maroc and Kenya Airways.
Tewolde told CNN that Ethiopian Airlines are expanding into West Africa with Togolese airline ASKY Airlines. They're also doing business with Air Cote d'Ivoire, Congo Airways and have taken management of CEIBA International in Equatorial Guinea.
The airline has ambitious plans; Ethiopia is working with the Zambian government to relaunch their national carrier with a 45% stake, it also plans to establish a wholly-owned airline in Mozambique and has signed a contract to start an airline in Guinea. Ethiopian has also taken stakes in a Chadian airline.
"Typically, they're taking a minority stake or around 50%. They tend to go into these joint ventures with local partners," said Oliver Clark, senior reporter at FlightGlobal.
Ethiopian Airlines is launching new routes from Addis Ababa to Jakarta, Chicago and Geneva in the coming months. The airline is looking to make the Ethiopian capital a transport hub, connecting other African countries without long-haul capacity with continents around the world.
"It's trying to feed traffic from other African countries through Addis to then give them the connectivity to travel on to other continents, US, Europe and Asia in particular," Clark said.
In 2015, Africa accounted for only 3% of air passenger traffic, according to the International Civil Aviation Organization. The growth of African airlines worldwide will seek to expand the number of travelers.
The United States’ Energy Information Administration (EIA) forecasts that Brent crude oil prices will average $71 per barrel in 2018 and $68 a barrel in 2019. Meanwhile, Nigeria’s Bonny Light crude oil has maintain an international price of $73.44 per barrel, higher than the Organisation of the Petroleum Exporting Countries (OPEC) basket price of $73.35 per barrel.
The price of Nigeria’s Bonny Light is higher than the Nigeria’s $51 per barrel benchmark for 2018 budget.EIA in its Monthly Oil Market report for May, expects oil prices to decline in the coming months because global oil inventories are expected to rise slightly during the second half of 2018 and in 2019.The updated 2019 forecast price is $2 a barrel is higher than in the May forecast, which sold for an average price of $77 a barrel, an increase of $5 per barrel from April and the highest monthly average price since November 2014.
Even though the 2019 oil price forecast is higher than it was in the May monthly report, EIA expects oil prices to decline in the coming months because global oil inventories are expected to rise slightly during the second half of 2018 and in 2019.According to EIA, expected inventory growth results from forecast oil supply growth outpacing forecast oil demand growth in 2019.
EIA currently forecasts global petroleum and other liquids inventories will increase by 210,000 barrels per day (b/d) next year, a factor that, all else being equal, typically puts downward pressure on oil prices.Most of the growth in global oil production in the coming months is expected to come from the United States.
EIA projects that U.S. crude oil production will average 10.8 million barrels per day for full-year 2018, up from 9.4 million barrels per day (bpd) in 2017, and will average 11.8 million bpd in 2019.
The agency noted that if the 2018 and 2019 forecast annual averages materialize, they would be the highest levels of production on record, surpassing the previous record set in 1970.EIA expects that OPEC crude oil production will average 32.0 million b/d in 2018, a decrease of about 0.4 million bpd from the 2017 level.
The Minister of State for Petroleum Resources, Dr Ibe Kachikwu, expressed optimism that the price of crude oil would rise to a level that is neither too high nor too low.The Minister said though crude oil appears to have fallen into bad times because of prevailing low price and the campaign against the use of fossil fuels for environmental reasons, the product would soon rise up to take its place as the prime global energy source.
Waxing poetic message on the current crude oil prices recently, Kachikwu stated: “My name is oil, those who are kind to me call me black gold. Those who hate me call me crude.“I worry for my future; everyone now talks down on me. Even farmers who trembled at the sight of my name are now strategizing against me.“And all my beneficiaries, me have they abandoned, all because producers have lost their tracks. But I will rise again, and when I do, I will take no prisoners.
“I will new technologies control; I will my supremacy confirm; I will my respect regain.“And my pricing, not too low, not too high; but I will not allow prices to humiliate me. All of you in OPEC, APPA, GCEF and all such bodies who have shown me no respect recently, soon, you’ll eat your words.”
Inflation eased to 4.4% for May compared to 4.5% in April, despite the implementation of a VAT hike implemented in April.
This is according to Statistics South Africa (StatsSA), which on Wednesday released the consumer price index figures for May. The index increased 0.2% month-on-month.
The market consensus was for CPI to accelerate to 4.6%, and in a market update on Wednesday RMB economist Isaah Mhlanga had projected an increase to 4.8% having considered the VAT pass-through.
Mhlanga also expected the fuel price and weak rand to impact inflation. “The oil price and a weak rand have had a huge impact (on inflation), but the second-round effects will only be visible in the months to come and they are difficult to quantify and separate from the first-round effects,” said Mhlanga.
He expects the current account deficit data due on Thursday to be a “shock to the currency”, RMB projects it to be 5% of GDP.
By 10:23 the rand was trading 0.44% firmer from the previous close at R13.68/$.
Contributors to May's inflation include food and non-alcoholic beverages which increased 3.4% year-on-year. Inflation for restaurants and hotels increased by 5% year-on-year.
Transport contributed to the month-on-month inflation, the index increased 1.2%.
In May the CPI for goods increased by 3.5% year-on-year, unchanged from April. The CPI for services increased by 5.3% year-on-year, also unchanged from April
The mines minister of the Democratic Republic of Congo has disclosed the country’s prime minister has sign into law the regulations to immediately implement a new mining code without any concessions to industry demands that key provisions be amended.
The move could set off a legal battle between the government and major mining companies operating in Congo, including Glencore and Randgold, which threatened legal action against the government last week if their concerns about tax hikes and the elimination of exemptions were not addressed.
“The code will be applied as it was promulgated!” Mines Minister Martin Kabwelulu told Reuters in a text message.
A spokeswoman for Randgold, who has been handling media queries on behalf of seven of the largest foreign companies operating in Congo, did not immediately respond to a request for comment.
Kabwelulu said the regulations would first be adopted at a cabinet meeting on Friday and then signed by Prime Minister Bruno Tshibala in the evening, adding that “the application of the code will be immediate!”
The new code scraps 10-year protections for existing projects against changes to the fiscal regime, imposes a windfall profits tax and increases royalties. Congo is Africa’s top copper producer and the world’s leading miner of cobalt.
Norwegian-based oil exploration and production firm, Aker Energy AS, believes its successful entry into Ghana’s upstream petroleum business is a timeous opportunity to transfer Norway’s decades of technical expertise and vast experience in the oil and gas industry to the country and the sub-region as a whole.
The transfer will be achieved through conscious mentoring and subcontracting to local staff and firms, the Chief Executive Officer (CEO) of Aker Energy, Mr Jan Arve Haugan, told journalists in Accra.
In his first interaction with journalists in Accra after Aker Energy successfully replaced Hess Ghana Limited as the operator and 50 per cent owner of the Deep-Water Tano Cape Three Points (DWTCTP) block, Mr Haugan said the company’s contribution to the country and its domestic stakeholders “will be beyond the local content” requirements captured under the Local Content and Local Participation Policy.
“We want to contribute to the local economy beyond the requirements of the local content. We know that the oil and gas sector has some sort of minimum requirements on local content and that is a good picture of good governance.
“But sometimes, that is also a system that does not really build the industry in the country. So we have communicated very clearly that the Aker family, which I am the representative here today, has an obligation from the owners of the company to contribute to competence beyond local content,” he stated.
Aker Energy, the energy wing of Norwegian billionaire, Mr Kjell Inge Rokke, entered Ghana’s nascent upstream petroleum subsector in February this year through a US$100 million share purchase agreement with Hess Ghana for its stake in the DWTCTP block.
A financial closure of the transaction was reached last month, paving the way for Aker Energy to pay US$25 million to Hess Ghana. The remaining US$75 million is to be paid after the plan of development (PoD) has been approved by the government, according to the requirements of the transaction.
Following the sale, Aker Energy will now lead Lukoil (38 per cent), the Ghana National Petroleum Corporation (10 per cent) and Fuel Trade (two per cent) to develop and produce oil in the block, which has proven reserves of about 550 million barrels of oil equivalent with additional potential of 400 million barrels.
Mr Haugan said Aker Energy was working hard to ensure that the PoD was submitted to the government in July to pave the way for its approval by December this year.
“We have clearly communicated that the critical activities need to be triggered by the end of the year. So currently, we are preparing the application for the development and that has to be submitted for approval to be given before the end of the year,” he noted.
He added that the approval would be followed by an ‘order to proceed’ in 2019, enabling the various actors to start development works.
“In 2020, it will be the year of assembling, where we will start to manufacture in various locations, then we put the pieces together and divide our pieces into three major blocks – the subsea production system (SPS), the subsea umbilicals, risers and flowlines (SURF) and then the floating, production, storage and offloading (FPSO) vessel,” the CEO mentioned.
He explained that although the company had “framed agreements to be copied from Aker BP,” our sister company in Norway, for the SPS and the SURF, that of the FPSO was different, given that it would be a purpose-built vessel.
“For the FPSO, we took the work that was done by Hess and we started. All the technical considerations have been completed and closed, and then we started the commercial process,” he said.
He explained that the bid for the FPSO was opened in early April, with the evaluation currently ongoing; with the hope that it would be completed by the end of the year.