R 221110Z JAN 09
FM AMEMBASSY KAMPALA
TO SECSTATE WASHDC 1062
INFO DEPT OF TREASURY WASHINGTON DC
DEPT OF COMMERCE WASHINGTON DC
RWANDA COLLECTIVE
IGAD COLLECTIVE

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. 
 
- - - - - - - - - - - - - - - 
General Real Economy Impact 
- - - - - - - - - - - - - - - 
 
¶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. 
 
- - - - - - - - - - - - - - - 
Impact on Trade and Investment 
- - - - - - - - - - - - - - - 
 
¶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. 
 
- - - - - - - - - - - - - 
Financial Sector Impacts 
- - - - - - - - - - - - - 
 
¶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. 
 
- - - - - - - - - - - - - - - - - - - - - - - - 
Impacts on Government Revenues and Expenditures 
- - - - - - - - - - - - - - - - - - - - - - - - 
 
¶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. 
 
- - - - - - - - - - - - - - - - - - - - - - - - 
Other Donor and Multilateral Institutions, Plans 
- - - - - - - - - - - - - - - - - - - - - - - - 
 
¶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