UGANDA -- GLOBAL FINANCIAL CRISIS: RESPONSE TO REQUEST

UNCLAS KAMPALA 000090


STATE FOR EEB/IFD/OMA, EEB/EPPD, AF/E, AND AF/EPS
STATE PASS USTR PATRICK DEAN COLEMAN AND USAID/EA
USAID ALSO FOR FA/COO/AFR PAUL CRAWFORD
TREASURY FOR REBECCA N. KLEIN
COMMERCE FOR BECKY ERKUL

E.O. 12958: N/A
TAGS: EAID ECON EFIN UG
SUBJECT: UGANDA -- GLOBAL FINANCIAL CRISIS: RESPONSE TO REQUEST

REF: A) 2008 SECSTATE 134905 B) 2008 KAMPALA 1383



1. SUMMARY: The following are question-by-question responses to the
request for information outlined in reftel. As a result of the
global financial crisis, the Government of Uganda (GOU) has adjusted
down its estimated economic growth rate by roughly two percentage
points for the 2008/2009 fiscal year. Officials stated GOU
statistics are not yet available on the impact on exports,
remittances or increased unemployment, but stated they expect the
economy to grow by between 7% and 7.5%, down from the 9% expected
earlier. The real impacts will be seen in the second and third
quarters of 2009, they state. As reported in ref B, the domestic
economy is vulnerable to reduced flows of donor assistance,
remittances, and foreign direct investment. It will also be hit by
lower prices and demand for critical exports such as coffee, along
with higher interest rates. On the upside, Uganda's financial
sector is generally well insulated from the international financial
crisis because domestic banks have little exposure to international
markets and the GOU has kept debt ratios low. END SUMMARY.

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General Real Economy Impact
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2. Do you see evidence that economic activity in key sectors is
slowing down as a result of the crisis?

-- Econoff interviewed Dr. David Kihangire, Acting Executive
Director of Research at the Bank of Uganda and Mike Olupot-Tukei,
Assistant Commissioner of the Macroeconomic Policy Department at the
Ministry of Finance, Planning and Economic Development. Both
officials say the crisis has not yet had any measurable impacts on
key sectors. They expect an impact on the construction industry,
which benefits from roughly $1 billion in remittances per year, but
have not seen any effects thus far. Key agricultural products are
also likely to see reduced demand, including coffee, fish, cut
flowers, and cotton.


3. Do you see evidence of rising formal sector unemployment or
reduced household incomes? Are government social safety net
programs up to the job of addressing any increase in poverty or food
insecurity caused by the financial crisis?

-- Formal sector unemployment has not increased, according to
Olupot-Tukei. While a rise in formal sector unemployment is
possible, 80% of Ugandans employ themselves through the agriculture
and fishing industries. Most Ugandans mitigate the effects of
unemployment through reliance on subsistence agriculture and the
informal economic sector. Overall unemployment remains low, at
about 3%, but most Ugandans avoid unemployment by turning to
subsistence agriculture in the event they cannot find employment.
The GOU has been pressed to create formal sector employment at the
rate of population growth, which stands at 3.2%. Social safety net
programs are generally inadequate.


4. Is the government amenable to taking necessary actions to respond
to the crisis? Is the crisis creating political challenges or
unrest that is making it more difficult for authorities to take
needed policy measures?

-- GOU officials at both the Finance Ministry and Bank of Uganda
(BOU, or Central Bank) said the Government has not made any
adjustments to policy at this time, but is closely observing the
effects of the crisis. Officials appear amenable to spending funds
from Uganda's Central Bank reserves, which currently stand at $2.7
billion, or 5.2 months of export cover, to compensate for certain
shortfalls in government revenue or donor funding.

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Impact on Trade and Investment
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5. Have you seen evidence of a slowdown in foreign demand for the
host country's principal export commodities? Have imports of
critical inputs to production (e.g., fuel and other raw materials,
fertilizer, etc.) slowed down?

-- Ugandan officials have seen no impacts thus far on trade. It
must be stated that Uganda's statistics are typically released with
a several month delay. Officials expect key exports, including
coffee, fish and cut flowers, to suffer, but officials state they
will only see these impacts in late 2009 and that impacts depend on
the severity of the global recession.

-- A drop in commodity prices has increased tension among some
farmers. The GOU recently intervened in negotiations between the

Ugandan Cotton Development Organization and farmers to force the
group to purchase the crop at a higher price. According to Citibank
Uganda, the decline in commodities prices is having an impact on the
domestic steel industry, as leading steel companies are now holding
inventory purchased at higher prices and will have to sell at a
loss. Demand for cement has fallen "marginally," according to
Citibank. The Ugandan Coffee Manufacturers Association told the
press that the drop in coffee prices from $2,400 per ton to $1,700
in November was also a cause for concern.


6. Are major exporters and importers able to obtain letters of
credit and other trade finance? Has the cost of trade-related
services (e.g., credit, insurance, shipping) increased?

-- Bank executives reported that exporters and importers are able to
obtain credit, though interest rates have risen. The base rate for
12-month Ugandan-shilling loan for prime borrowers stands at 18%.
The rate for Ugandan government 12-month treasury bills currently
stands at 18.5%, up from just 14% in July 2008. The costs of
trade-related services have increased, but mainly because the price
in diesel and gasoline fuel in Uganda has risen. Fuel price
increases are a result of supply constraints stemming from a new
Kenyan law limiting the size of fuel trucks traveling on the roads
and maintenance on the pipeline to Uganda from Kenya. The vast
majority of Uganda's fuel imports come through Kenya.


7. Is your host country's economy heavily dependent on remittances
from its nationals working abroad? If so, do recent data or
anecdotal information suggest any significant changes?

-- Uganda receives roughly $1 billion per year in remittances from
Ugandan workers abroad, about three times the value of Uganda's
coffee exports, the country's largest revenue earner outside of
donor assistance. The Central Bank confirms that remittances have
fallen, though it could not provide a figure. According to the
Eastern Africa Association, a business advocacy group based in
Nairobi, some foreign exchange bureaus have reported a 30% drop in
remittance transfers.


8. Are you aware of major planned foreign direct investment (FDI)
projects that have been delayed or cancelled due to the financial
crisis?

-- Oil exploration firms in western Uganda have invested some $500
million in oil exploration in Uganda. These companies confirmed
that the tightening of credit markets would force them to delay some
planned exploration this year, though they hesitated to quantify the
length of potential delays.

-- Norpak, a Norwegian power firm, announced in late 2008 that
negotiations on its investment in the 150-megawatt Karuma Falls
hydroelectric dam had broken down with the GOU. Karuma Falls is
second largest power plant planned in the GOU's power development
plan, after the Bujagali dam, which is due for completion in January

2011. Though Norpak's withdrawal was not a direct result of the
financial crisis, the current global financial crisis could
complicate the GOU's ability to find an alternative investor.

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Financial Sector Impacts
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9. Is there evidence that firms are finding it more difficult or
more expensive to borrow? Do you see impacts of reduced credit
availability in the real economy, such as deferred capital
investments or firms shutting down?

-- Citibank Managing Director Shirish Bhide told Econoff that
liquidity exists for short-term (12-month) borrowers. Domestic
banks, largely unexposed to global markets, will remain capitalized.
However, investors needing term loans of longer than one year are
finding higher rates and less liquidity in the market. Bhide said
that the local market urgently needed export credit agencies such as
the U.S. Export-Import bank to increase their operations in Uganda.



10. Are bankers concerned that nonperforming loans are rising as a
proportion of their overall loan portfolios?

-- The Ministry of Finance reported that the rate of non-performing
loans for Ugandan commercial banks for 2008 stood at 6.5%, compared
to 4.5% the previous year. The increase in non-performing loans as
not directly linked to the credit crisis, however, the Ministry
stated.


11. Do you feel confident that bank regulation in your country is
strong enough to deal with the challenges of a potentially weakened
financial system?

-- Ugandan bank regulation is among the strongest in sub-Saharan
Africa, domestic banks are well capitalized, and confidence in the
formal banking sector is high. Currently, Ugandan banks rely almost
completely upon local assets for their local lending practices and
are known to be extremely conservative. The mortgage market is
still in its infancy, as is the Ugandan Stock Exchange. Central
Bank officials told Econoff that Ugandan banks had almost no
exposure to "toxic" assets abroad, such as real estate securities
that could destabilize the sector.

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Impacts on Government Revenues and Expenditures
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12. Are you aware of any recent plans by the government to curtail
investment or other important government spending?

-- As mentioned above, the GOU's planned construction of Karuma
Falls hydroelectric dam currently remains in doubt because a key
investor withdrew. The GOU had allocated $70 million in the
2008/2009 fiscal year for the construction, but it remains unclear
from where the remainder of the necessary financing will come.

-- Construction of the 250 MW Bujagali Dam, already under
construction, will move forward. The World Bank has provided a
guarantee for the project and included a $20 million contingency
fund for interest rate fluctuations which can be employed, according
to Kampala-based World Bank officials.


13. Are overall public sector revenues in the country highly
dependent on import tariffs, taxes on commodities, or other taxes
whose yields may decline as a result of the economic crisis?

Public revenues are expected to decline for a broad number of
reasons. GOU revenues from a wide range of tariffs will fall due
to lower growth.


14. Is there any indication that other funding sources for the
government's budget (other donor flows, commercial loans, sovereign
bonds) may fail to materialize due to the crisis?

Central Bank officials announced on January 14 that due to the
global financial crisis the GOU would not issue its first Eurobond
to fund infrastructure projects.

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Other Donor and Multilateral Institutions, Plans
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15. Have the in-country representatives of the IMF, World Bank, and
other significant bilateral or multilateral donors entered into
discussion with the host country government or non-governmental
organizations regarding additional or accelerated assistance in
response.

No.


16. What issues have multilateral or other donors identified in
connection with this crisis as significant problems or weaknesses to
be addressed in your country? If they have proposed new assistance,
have the details been announced or reported in other channels?

-- IMF Representative Abebe Selassie noted that financing will be
extremely expensive for road and power developments and will put
increasing pressure on future budgets. The GOU had committed itself
to spending some $200 million per fiscal year from the reserves on
roads and power infrastructure. Falling exports, however, will
result in lower foreign currency earnings, putting pressure on
Uganda's reserves over time. Poor revenue performance would also
reduce the GOU's ability to fund a range of projects through the
budget and would dampen economic growth, he said. Still, Selassie
praised the GOU for not spending a significant amount of the
reserves to support the Ugandan shilling, which has weakened by some
25% in the last six months. "Good credit to them (GOU) for them
taking it on the chin," he said.


BROWNING