Uganda reins in growing current account deficit

Saturday May 11 2013

By MARTIN L OKETCH Special Correspondent

Uganda’s current account deficit improved between October last year and the end of March this year, helping keep afloat the country’s currency, which was volatile from depreciating sharply over the six-month period.

New data shows the account, which tracks the difference between imports and exports, improved by 26 per cent in the third quarter of last year buoyed by a decline in non-oil private sector imports and increases in exports and workers remittances.

Bank of Uganda (BoU) in its latest quarterly economic report for the period ended December last year said the current account balance improved to a deficit of $484.8 million, from $658 million recorded in the second quarter of 2012.

“This represents an improvement on both quarterly and annual basis of 26 per cent and 14 per cent respectively. The quarterly improvement in the current account was mainly driven by the trade balance,” said Uganda’s banking regulator in the quarterly statement.

Preliminary data from BoU shows that in the last quarter of last year, the deficit had improved to $367.95 million then improved again in the first quarter of 2013 to $312.85 million.

At the beginning of October last year, Uganda’s currency was exchanging at an average of Ush2,545.23 to the dollar, depreciated to an average of Ush2,685.95 at the end of December then appreciated to an average of Ush2,594.77 at the end of March this year.

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East African Community countries import more than they export, meaning that more of their resources flow out of the country that results in pressure on their exchange rates.

An improvement in the current account deficit keeps more resources in the country and contributes to a stable currency. In the event of a weak currency, central banks in countries that import more than they export sometimes turn to offering high interest rates to attract foreign inflows, which keep the currency stable in the short term. 

BoU said exports grew by 5 per cent to $759.3 million and the value of workers remittances was double the figures recorded in the second quarter of 2012.

“The increase in current transfers was driven by an above average performance in workers’ remittances, which stood at $228.5 million in Q3 2012, approximately double the $122 million recorded in workers’ remittances over the preceding quarter. This overcompensated for the negative contribution from grant disbursements to the current account,” said the banking regulator in the statement.

Adam Mugume, director for research BoU, said foreign direct investments into the country have been flowing to the tune of $150 million per month and net portfolio inflows were $20 million per month.

He said peaceful elections and transition of government is expected to result in increased imports and negatively affect portfolio inflows as investors look to obtain higher returns in the Kenyan market.

“These factors coupled with decreased donor disbursements are likely to stress the BOP in the short term,” said Dr Mugume.

Exports from the East African Community countries are almost similar with agricultural products such as tea, coffee, flowers, vegetables and other horticultural products making up the bulk of sales to foreign countries.

Small portion of exports

Minerals such as gold and diamond account for a small portion of exports except for Tanzania, but the region is gearing for oil and gas exploration. 

Imports into the region are fuel products and machinery used for infrastructure development.

During times of drought, the region also imports food from Western countries despite being endowed with large tracts of land that can be used to make the economies self-sufficient.

Lawrence Bategeka, senior research fellow at Economic Policy Research Centre, said Uganda’s government needs to address the supply side of the economy by investing more in agriculture to increase volumes of exports into the international market.

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