A Ugandan farmer sells his produce

For Uganda’s economy, the year 2008 will be remembered more for the jittery first three weeks of January – the weeks that have in more ways than one shaped the path which the economy has taken throughout the year – than the slight calm the public has witnessed towards the end.

Fuel crisis 

In January, fuel prices shot to levels Ugandans had never seen before after a disputed electoral vote in Kenya sparked off the country’s most violent riots in over 40 years, cutting off the supply lines to Uganda. Kenya’s hinterland remains the gateway for most of the goods heading to Uganda. With the fuel supply lines cut off due to the riots, a litre of petrol in Kampala at one point soared to Shs10,000 (about $5.2) from Shs2,200 ($1.1) in a space of two days. That jump has up to this day led to a spike in the prices of commodities like food, transport fares, and thus a higher rate of inflation - a pinch for the over stretched wallets of many Ugandans and a sizeable cut on the return on investment.  

Although the increase in fuel prices grabbed the biggest share of the public’s attention, it is the manner in which the economy is run that raises eyebrows. Despite the fact that the situation in Kenya is calm, fuel prices in Uganda have remained stubbornly above the price at which they traded before the violence erupted. 

The current price of petrol, at Shs2,850 ($1.5) is an indication of how fuel dealers thrive under a loosely regulated market, setting prices against the market conditions, and offers no indications that 2009 will be any different. It is bizarre, for example, that petrol prices in Uganda should trade at Shs2,850 ($1.5) a litre, when a barrel of oil (159 litres) at the international markets is selling at less than $50 – the lowest in close to a decade. 

Officials at Bank of Uganda (charged with maintaining price stability in the economy) have attributed the increase to a weak dollar and the inflation experienced the world over.  

Simon D’Ujanga, the minister of state for energy, was quoted in the press saying that government will only intervene when the price of petrol hits Shs3,000 ($1.58). Petrol prices have already hit the Shs3,000 mark. The public awaits Government’s reaction. 

Fuel dealers have also added another spin to the reasons. Many dealers say that the rickety infrastructural network between Mombasa and Kampala is a huge cost that has been passed on to the consumers. While the dollar has strengthened in the recent past, the infrastructure between Mombasa and Kampala has always had issues, making it an unreasonable excuse to push up pump prices.  

On a national level, the fuel crisis of January helped to expose the sloppiness with which the country’s fuel reserves are managed. The crisis offered the first and best indication that the fuel reserve tanks in Jinja – a secret that government officials, unshaken by shame, have for long jealously guarded for purposes of “national security”- are actually dry. Whether the officials have learnt anything from the crisis and are willing to correct it in the year to come is as good as anyone’s guess. 

Safaricom IPO 

The sale of Safaricom shares to the public in April was the first test of the investment attitude of East Africans, which would determine the manner in which the integration of all the five stock markets into a single vibrant market would be set in motion. At the time of its initial public offer, Safaricom, a Kenyan company, was East Africa’s most profitable firm. 

About 5,000 Ugandans, some of whom had taken up bank loans, purchased shares with the intention of making a kill on the company’s debut at the Nairobi Stock Exchange. The problem was that that was the same business plan of many other investors in the region.

With Safaricom’s subscribers shooting five times more than what the company had targeted, retail investors received less than a quarter of their orders. The investors were left grappling with huge refunds – refunds that took weeks to come and succumbed to the effects of the depreciating Kenya shilling. 

Left with the only choice of making money at the listing on the NSE, investors were shocked to note that the share price did not appreciate to levels they had anticipated, going up from the IPO price of Ksh5 to about Ksh8. The share price has gone on a downward spiral since then, trading at Ksh3.5. 

In the end, the Safaricom IPO became a disastrous campaign for many Ugandans, dampening their appetite for stocks. Some players in the financial market say that part of the reason no company in Uganda floated shares to the public in 2008 is because of the effects of the Safaricom IPO. 

While Safaricom has left a rough patch on Uganda’s capital market industry – making it even harder for institutions like the Capital Markets Authority and the Uganda Securities Exchange to lure retail investors come next year – it served as the best lesson that share prices do not always go up. 

The Credit crisis 

The biggest financial story of 2008 has been the credit crisis, a harsh lesson of how greed and loose regulation almost sent the World’s largest economy to the fringes of total collapse, and with it the entire global system. The credit crisis in the United States of America, whose first signs was noticed in August 2007, gathered momentum early this year and exploded around June, has touched Uganda’s economy in ways that even the best brains in the country had ignored. 

Tumusiime Mutebile, the central bank governor, had predicted that the effects of the credit crisis on the Ugandan economy “would be felt after about six months (Jan 2009)”

Also Simon Rutega, the chief executive officer at the Uganda Securities Exchange, said that the turmoil in the global financial market will not affect the USE because “the two are not interlinked.” 

Those assessments, it later turned out, were off the mark after the Uganda shilling became the first biggest victim of the crisis. Investors fleeing the Uganda financial market helped to strengthen the dollar, leaving behind a weaker Uganda shilling. A weak shilling affects the earnings from exports. 

Two weeks ago, Remi Olowude, the chairman of the National Insurance Corporation, said that the company’s IPO had been pushed to next year for a number of reasons, “especially the global credit crisis which would more than likely have adverse effects on the offer.” Forecasts from the International Monetary Fund offer a gloomy 2009 over the credit crisis.

Acquisitions and mergers 

A change of guard is taking place in Uganda’s banking industry, after two financial institutions were swallowed up and another selling half its stake to foreigners during 2008. In June 2008, Kenya’s Equity Bank – the largest bank in the country’s retail segment – bought Uganda Microfinance Limited, in a deal that is bound to intensify competition in the market. 

Global Trust Bank, a locally incorporated company owned by Nigeria’s Industrial and General Insurance, also snapped up Commercial Microfinance of Uganda, setting the stage for more acquisitions come 2009. 

Capital Finance Corporation, another credit institution, sold 40% of its stake to ABC Bank of Kenya, in what is seen as firmer grip by foreigners of Uganda’s banking industry. A much tougher battle for customers awaits the banks in 2009. 

By Jeff Mbanga

Jeff Mbanga jeff@observer.ug writes for the Weekly Observer