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Weak buying power took toll on firms

Saturday February 15 2014
cement

Workers offload cement at a Rift Valley Railways goods shed in Kampala. Weak consumer purchasing power took toll on some large Ugandan firms in the second half of last year. Photo/Morgan Mbabazi

Weak consumer purchasing power took toll on some large Ugandan firms in the second half of last year.

Data from the Uganda Revenue Authority (URA) shows that 325 out of the country’s 700 large taxpayers — firms that contribute around 80 per cent of tax collections — posted losses in the half year ending December 2013.

Across the region, firms recorded mixed results, forcing their chief executives to approach 2014 with caution despite predictions of stronger economic performance.

READ: Investors upbeat on 2014 profits

In Uganda, the weak purchasing power affected corporation tax,  a major source of revenue for the taxman. This led to an overall deficit of Ush246.93 billion ($99.8 million) for the first half of 2013/14.

As a result of depressed earnings among top taxpayers, corporation tax paid by financial sector players for the first half of 2013/14 dropped to Ush45.16 billion ($18.2 million) compared with Ush89.20 billion ($36 million) registered in the previous year. 

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Corporation tax collected from the manufacturing sector fell from Ush67.25 billion ($27.2 million) to Ush57.84 billion ($23.4 million) during the same period, URA data shows.

Meanwhile, in Kenya and Tanzania, banks posted impressive results last year. According to data from Central Bank of Kenya, for example, commercial banks posted a Ksh111.5 billion ($1.3 billion) profit in the 11 months to November 2013, surpassing the full-year performance for 2012.

Reports published in a local newspaper show that the harsh 2013 business environment, which worsened in the run-up to the general election in March, did not deter banks from recording profits. Banks made a total pre-tax profit of Ksh107.7 billion ($1.25 billion) in 2012.

Analysts said the industry’s impressive performance was linked to the huge interest spreads they continue to enjoy in the market.

READ: Higher interest spreads attract more Kenyan banks to Uganda

In Tanzania, top banks recorded strong profit growth in the third quarter of last year. 

The best performers were National Microfinance Bank (NMB), CRDB, Bank M Tanzania and DCB Commercial Bank, which posted an increase in profits, riding on reduced costs, increased uptake of loans and higher interest rates during the period.

NMB’s after-tax profit grow to $20.4 million in third quarter of 2013, up from $17.5 million recorded in the same period in 2012. Bank M registered a profit growth of $2.6 million, an increase of 30.7 per cent, over the previous year’s $1.8 million.

Declining incomes in Uganda’s largest enterprises highlight the impact of weak consumer spending and limited access to credit. Analysts said firms producing non-essential goods like cosmetics suffered the most.

Low consumer demand in East Africa, partly driven by limited government spending and the high cost of living, the poor sales for many businesses in recent months, with even the festive period not being spared.

READ: Kenyan shopping habits spell doom for small-scale traders

One major problem is that lending rates still remain expensive for many small and medium businesses, which has discouraged many business owners from seeking loans to increase output.

Data obtained from the Bank of Uganda shows lending rates averaged 22 per cent between October and December 2013 compared with 24 per cent recorded by the end of 2012.

Net loan extensions declined to Ush62.6 billion ($25.3 million) in December 2013 compared with Ush118.2 billion ($47.8 million) recorded during November 2013.

In Kenya, lending rates remain high, limiting the growth of many small and medium enterprises. A recent World Bank report cited high interest rates charged on loans as one of the problems crippling the growth of small and medium enterprises.

READ: High cost of credit slowing growth of Kenya’s SMEs, says World Bank

Muhammed Sempijja, country leader and tax partner at Ernst & Young Uganda said Uganda’s economy has not recovered enough to support strong growth in tax revenues.

“Lending rates even at 19 per cent remain high for most businesses and this has made it difficult for them to invest more in their operations,” said Mr Sempijja.

Though East Africa’s growth is expected to average six per cent this year, CEOs remain cautious, since business performance of individual companies depends on a wide ran of factors, among them stability of the world economy, cost of production and demand for goods and services.

Additional reporting by Jeff Otieno.

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