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Uganda's Balance of Trade Positive, But Low NGO, Gold Receipts Hurt

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Uganda had previously recorded a deficit in trade in both merchandise and services, and this narrowed by 34 per cent over the period as import expenditure fell more sharply than the export earnings, though both registered declines.
29 Dec 2021 18:34
closeup of gold nuggets
Uganda’s export and import trade sector recorded declines in both volumes and value in the last six months of the year ending October 2021 as economic activity slowed down compared to the previous six months.

Uganda had previously recorded a deficit in trade in both merchandise and services, and this narrowed by 34 per cent over the period as import expenditure fell more sharply than the export earnings, though both registered declines. The expenditure on all import categories; investment imports, consumption imports and government imports, decreased as domestic demand was generally subdued.

According to the Bank of Uganda, the exports were affected by a complete halt in gold exports at the end of June as processors and exporters protested the new export taxes imposed by the government on semi and unprocessed gold.

Prior to the halt, gold wars contributing at least 1.2 billion dollars or about 45 percent of total exports, having overtaken coffee as the country’s top foreign exchange earner. By July the country’s general merchandise deficit had grown from 196 million dollars and to 248.8 million in August.

In the subsequent months, the current account deficit, which includes trade in both merchandise and services, improved, registering an increase of 34 per cent to  764.7 million US Dollars by October, from the quarter ending July 2021.  

The trade deficit alone narrowed by 28.5 per cent to 688.8 million US Dollars, as both exports and imports declined, reflecting subdued economic activity, according to the State of the Economy Report for December.  The total export receipts fell by 378.8 million US Dollars, compared to the decline in the import bill of 653 million US Dollars, hence a narrowing of the deficit.  

In all, the Balance of Payments, which includes trade in goods and services, as well as other income movements like grants and remittance, shows a surplus during the two quarters ended October, plus November 2021.

This was due to a decrease in payments for international transportation services as importation dropped and lower interest payments on public external debt. On the other hand, as export earnings declined, there were lower inflows to NGOs and a slowdown in portfolio investment net inflows (investments in companies).

The effect of this was outbalanced by an increase of 60 million dollars in foreign direct investment, among others.  The inflows were also boosted by the International Monetary Fund’s Special Drawing Rights to Uganda which was worth 346 million dollars, which contributed to the surplus in the country’s balance of payments in the quarter to October 2021.

This also resulted in a  242.6 million US Dollars Balance of Payments surplus, which position is slightly higher than the surplus of 224 million recorded in the quarter to July 2021. As a result, the stock of reserves at the end of October 2021 was 4,326.5 million dollars, which is equal to 4.5 months of imports cover.

According to the analysis by the Bank of Uganda, the current account deficit (trade and service export and import trade) is expected to deteriorate on account of import growth in the early months of next year. This is attributed to the oil-related investments and possible trade wars with the regional trade partners like Kenya.

It is hoped that the recent talks between the two countries over trade barriers will bear fruit. But the Short-term outlook is also dependent on the extent of Omicron’s impact on economic activity, and how impact of the vaccination campaign.

In the medium term, the goods and services trade deficit is likely to further deteriorate as petroleum exploration and production activities resume, particularly the construction of the pipeline. These activities will lead to higher import expenditure. However, the expected increase in receipts in other sectors is expected to tame the impact of these import expenditures.  

“The widening deficit will be partially offset by increased travel services receipts in response to developments in the tourism sector. The trajectory of recovery of the tourism sector is contingent on the evolution of the Covid-19 pandemic and the pace of vaccination,” says the State of the Nation Report.   

The country should also benefit from the increased vaccination and control of the pandemic in other countries, especially for tourism and worker’s remittances.  

“Private transfers or remittance inflows will likely increase as economic activity picks up in advanced economies. Similarly, NGO inflows are likely to rise as donors provide grants to address the impact of Covid-19.”  

This should also be helped if the government and gold sector players resolve the tax disputes soon and the exports resume.

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