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Uganda’s Economy Recovering from COVID-19 Impact Amid Uncertainties

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UGANDA - Investors King

The Ugandan economy is emerging from the devastating impact of the COVID-19 (coronavirus) health pandemic, but prospects for growth are undermined by increasing pressure on its natural resources, according to the latest World Bank economic analysis for the country.

The 17th Uganda Economic Update (UEU), From Crisis to Green Resilient Growth: Investing in Sustainable Land Management and Climate-Smart Agriculture, says that the COVID-19 shock caused a sharp contraction of the economy to its slowest pace in three decades. Household incomes fell when firms closed and jobs were lost, particularly in the urban informal sector. The country’s Gross Domestic Product contracted by 1.1 percent in 2020, and is estimated to have recovered to 3.3 percent during the 2021 fiscal year.

“Following the job losses and closure of small businesses, many people returned to agriculture and other natural resources dependent activities to manage and survive the crisis,” said Tony Thompson, World Bank Country Manager for Uganda. “This further strains natural resources, which were already under pressure from rapid population growth, urbanization, a refugee influx and the country’s drive for industrialization.”

From the severe contraction in economic activity and its subsequent impacts on livelihoods during 2020, the report notes that signs of recovery have strengthened, underpinned by improved business and trading conditions as COVID-19 restrictions ease. Domestic investments picked up during the last quarter of 2020 in line with global invest recovery. Manufacturing and construction recovered during the quarter ending March 2021 while the cash crop sector has sustained agricultural sector growth.

The economic growth outlook is 4.6 percent in the 2022, and acceleration to 6.4 percent in the 2023 fiscal year, as domestic demand conditions improve, and global recovery continues as COVID-19 vaccines are rolled out.

The UEU says that Uganda’s immediate priority remains to save lives by intensifying measures to limit the spread of the coronavirus disease. Yet, the report says sustaining recovery will require the government to manage emerging risks including from widening fiscal deficits, escalating costs for small businesses, and climate shocks and loss of its natural capital.

“As the crisis abates, fiscal consolidation and prioritization of spending towards human capital development and greener investments will be the lynchpin into a greener, resilient and inclusive recovery,” said Rachel SebuddeWorld Bank Senior Economist and lead author of the report.

The significant shift of Ugandans to agriculture in response to the crisis has heightened the urgency for the country to enhance sustainable use of natural resources. According to the report, land degradation, deforestation and climate risks contribute to the country’s economic vulnerabilities and poverty. Annual decline in forest cover, by 2.6 percent, is one of the highest rates of forest loss globally and climate risks, including slow onset change and extreme events exacerbate this natural capital degradation.

The combined cost to the economy of land degradation and unsustainable soil erosion, is estimated at 17 percent of gross domestic product (GDP). Environmental degradation can cause a loss of 27 percent of agricultural GDP, says the report.

The World Bank suggests the macro-economic recovery and stimulus packages to be combined with structural measures that will sustainably increase productivity and build resilience to enhance livelihoods, the economy and general well-being.

“Farmers and producers need greater access to appropriate financial incentives and instruments to overcome the cost barrier adoption of sustainable land management and climate smart agriculture,” said Pushina Ng’andwe, World Bank Senior Agriculture Economist and report co-author.

The Bank also recommends that the government to promote sustainable land management practices to protect, conserve and ensure better use of land, soil, water, and biodiversity resources, while restoring degraded resources and their ecosystem functions. Encouraging climate-smart agricultural practices will enhance resilience, the UEU says, as well as reduce greenhouse gases emissions, and boost national food security.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Economy

Goldman Sachs Urges Bold Rate Hike as Naira Weakens and Inflation Soars

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Central Bank of Nigeria (CBN)

As Nigeria grapples with soaring inflation and a faltering naira, Goldman Sachs is calling for a substantial increase in interest rates to stabilize the economy and restore investor confidence.

The global investment bank’s recommendation comes ahead of the Central Bank of Nigeria’s (CBN) key monetary policy decision, set to be announced on Tuesday.

Goldman Sachs economists, including Andrew Matheny, argue that incremental rate adjustments will not be sufficient to address the country’s deepening economic challenges.

“Another 50 or 100 basis points is certainly not going to move the needle in the eyes of an investor,” Matheny stated. “Nigeria needs a bold, decisive move to curb inflation and regain investor trust.”

The CBN, under the leadership of Governor Olayemi Cardoso, is anticipated to raise interest rates by 75 basis points to 27% in its upcoming meeting.

This would mark a continuation of the aggressive tightening campaign that began in May 2022, which has seen rates increase by 14.75 percentage points.

Despite this, inflation has remained stubbornly high, highlighting the need for more substantial measures.

The current economic landscape is marked by severe challenges. The naira’s depreciation has led to higher import costs, fueling inflation and eroding consumer purchasing power.

The CBN has attempted to ease the currency’s scarcity by selling dollars to local foreign exchange bureaus, but these efforts have yet to stabilize the naira significantly.

“Developments since the last meeting have definitely been hawkish,” noted Matheny. “The naira has weakened further, exacerbating inflationary pressures. The CBN’s policy needs to reflect this reality more aggressively.”

In response to the persistent inflation and naira weakness, analysts are urging the central bank to implement a more coherent strategy to manage the currency and inflation.

James Marshall of Promeritum Investment Management LLP suggested that the CBN should actively participate in the foreign exchange market to mitigate the naira’s volatility and restore market confidence.

“The central bank needs to be a more consistent and active participant in the forex market,” Marshall said. “A clear strategy to address the naira’s weakness is crucial for stabilizing the economy.”

The CBN’s decision will come as the country faces a critical period. With inflation expected to slow due to favorable comparisons with the previous year and new measures to reduce food costs, including a temporary import duty waiver on wheat and corn, there is hope that the economic situation may improve.

However, analysts anticipate that the CBN will need to implement one final rate hike to solidify inflation’s slowdown and restore positive real rates.

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Currency Drop Spurs Discount Dilemma in Cairo’s Markets

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Egyptian pound

Under Cairo’s scorching sun, the bustling streets reveal an unexpected twist in dramatic price drops on big-ticket items like cars and appliances.

Following March’s significant currency devaluation, prices for these goods have plunged, leaving consumers hesitant to make purchases amid hopes for even better deals.

Mohamed Yassin, a furniture store vendor, said “People just inquire about prices. They’re afraid to buy in case prices drop further.” This cautious consumer behavior is posing challenges for Egypt’s consumer-driven economy.

In March, Egyptian authorities devalued the pound by nearly 40% to stabilize an economy teetering on the edge. While such moves often lead to inflation spikes, Egypt’s case has been unusual.

Unlike other nations like Nigeria or Argentina, where costs soared post-devaluation, Egypt is witnessing falling prices for high-value items.

Previously inflated prices were driven by a black market in foreign currency, where importers secured dollars at exorbitant rates, passing costs onto consumers.

Now, with the pound stabilizing and foreign currency more accessible, retailers are struggling to sell inventory at pre-devaluation prices.

Despite price reductions, the overall consumer market remains sluggish. The automotive sector has seen a near 75% drop in sales compared to pre-crisis levels.

Major brands like Hyundai and Volkswagen have slashed prices by about a quarter, yet buyers remain cautious.

The economic strain is not limited to luxury items. Everyday expenses continue to rise, albeit more slowly, with anticipated hikes in electricity and fuel prices adding to the pressure.

Experts highlight a period of adjustment as both consumers and traders navigate the volatile exchange-rate environment. Mohamed Abu Basha, head of research at EFG Hermes, explains, “The market is taking time to absorb recent fluctuations.”

Meanwhile, businesses face declining sales, impacting their ability to manage operating costs. Yassin’s store has offered discounts of up to 50% yet remains quiet. “We’ve tried everything, but everyone is waiting,” he laments.

The devaluation has spurred a shift in economic dynamics. Inflation has eased, but the pace varies across sectors. Clothing and transportation costs are up, while food prices fluctuate.

With the phasing out of fuel subsidies and potential electricity price increases, Egyptians are bracing for further financial strain. The recent 300% rise in subsidized bread prices adds another layer of concern.

The situation underscores the balancing act between maintaining consumer confidence and attracting foreign investment.

Economists suggest potential stimulus measures, such as lowering interest rates or increasing public spending, to boost demand.

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MPC Meeting on July 22-23 to Tackle Inflation as Rates Set to Rise Again

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Interbank rate

The Monetary Policy Committee (MPC) is set to convene on July 22-23, 2024, amid soaring inflation and economic challenges in Nigeria.

Led by Olayemi Cardoso, the committee has already increased interest rates three times this year, raising them by 750 basis points to 26.25 percent.

Nigeria’s annual inflation rate climbed to 34.19 percent in June, driven by rising food prices. Despite these pressures, the Central Bank of Nigeria (CBN) projects that inflation will moderate to around 21.40 percent by year-end.

Market analysts expect a further rate hike as the committee seeks to rein in inflation. Nabila Mohammed from Chapel Hill Denham anticipates a 50–75 basis point increase.

Similarly, Coronation Research forecasts a potential rise of 50 to 100 basis points, given the recent uptick in inflation.

The food inflation rate reached 40.87 percent in June, exacerbated by security issues in key agricultural regions.

Essential commodities such as millet, garri, and yams have seen significant price hikes, impacting household budgets and savings.

As the MPC meets, the National Bureau of Statistics is set to release data on selected food prices for June, providing further insights into the inflationary trends affecting Nigerians.

The upcoming MPC meeting will be crucial in determining the trajectory of Nigeria’s monetary policy as the government grapples with economic instability.

The focus remains on balancing inflation control with economic growth to ensure stability in Africa’s largest economy.

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