Global Financial Markets Implications for the Uganda economy

The threat of a looming global stagflation does not augur well for the Ugandan economy. A slump in
global output is expected to constrain demand for Uganda’s exports of goods and services as a number of advanced economies turn inward, to boost their economies. In addition, China’s zero-tolerance to Covid-19 has caused a reduction in production in the country which could drive up prices of goods. China being a major source of Uganda’s imports, means importing into the country at a higher cost. The combination of reduced exports earnings with the higher cost of imports if the price effect dominates, implies reduction in net exports and thus lower domestic growth. Moreover, as China continues to grow much slower than expected, its authorities could reduce the amount of financial aid available to developing countries including Uganda.

This would constrain growth in these countries as the Chinese loans have been the main boost to
infrastructural growth. As commodity prices remain elevated, the rise in global inflation means higher imported inflation going forward for Uganda. The high crude oil prices are already adversely affecting the Ugandan economy as fuel pump prices have risen to record highs catalyzing additional pressures to the inflation. Furthermore, high crude oil prices have put tremendous pressure on Uganda’s oil position, which has worsened the terms of trade and the trade balance. As oil importers have to pay much more to import the same amount of fuel, the demand of foreign exchange has surged causing depreciation pressures to the Shilling. Furthermore, higher costs of capital and intermediate goods would constrain domestic production as the capital of domestic importers get squeezed which would lead to lower investment demand and output.

On the other hand, the projected pick-up in Foreign Direct Investment (FDI) following the announcement
of the FID in February 2022 may start to materialize as advanced economies look to new sources of crude
oil away from Russia. In the short-term period, this is viable as countries are yet to concretize green energy sources.

Finally, the tighter global financial market conditions have led to an increase in yields of securities from
Advanced Economies. This has led to a portfolio reversal from developing economies including Uganda, as investors search for safer assets. The Shilling thus faced large depreciation pressures. The domestic foreign exchange market is expected to witness volatility as the Advanced markets continue to grapple with record inflation levels and maintain tight monetary policy stances. The tighter financial market conditions is bound to worsen Uganda’s debt position as loans become more expensive to acquire and service.