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Financial Institution Risk Assessment in Uganda: Country Faces Uncertainty Amidst Growth Rebound

Kampala, Uganda - A Complex Risk Landscape

As Uganda’s economy bounces back from a pandemic-induced recession, financial institutions operating in the country are facing a complex risk landscape. According to a Coface assessment, Uganda’s business environment has been rated “C”, citing uncertainties surrounding corporate payment behavior and high default probability.

Economic Growth Drivers

The country’s economic growth is expected to be driven by domestic demand and hydrocarbons, with household consumption improving as remittances recover and health restrictions ease. However, low rainfall forecasts and locust outbreaks pose a threat to agriculture-dependent households, which could impact inflation.

Strengths and Weaknesses

Despite these challenges, Uganda’s natural resources, diversification efforts in the agri-food sector, international support for infrastructure projects, and concessional debt terms are seen as strengths. The country is also a major coffee exporter on the continent, alongside Ethiopia.

However, endemic poverty, inadequate infrastructure, and lack of security in border areas with neighboring countries remain significant weaknesses. The poor progress in governance, particularly in combating corruption, has also raised concerns.

Fiscal Challenges

The budget deficit is expected to narrow this year as growth accelerates, but interest payments on debt will continue to weigh on public finances. The country has secured IMF support under a three-year ECF program and relies heavily on concessional sources of financing from multilateral creditors.

The current account deficit is expected to widen due to increased imports of capital goods for hydrocarbon projects and slow recovery in tourism receipts. Financing the deficit will rely on international donor support, foreign direct investment in oil projects, and repatriation of profits by foreign firms.

In the midst of these economic challenges, social frustration and security concerns remain high. President Yoweri Museveni’s government won a disputed election last year, sparking political tensions and human rights abuses. The activity of Islamic State-affiliated insurgents has also raised concerns about national security.

Conclusion

Financial institutions operating in Uganda must navigate this complex risk landscape to ensure the stability of their operations and investments. A thorough assessment of the country’s economic, political, and social risks is essential for making informed decisions in this uncertain environment.

Key Takeaways

Uganda’s business environment is rated “C” due to uncertainties surrounding corporate payment behavior and high default probability.
Economic growth is expected to be driven by domestic demand and hydrocarbons.
Natural resources, diversification efforts, and international support are seen as strengths.
Endemic poverty, inadequate infrastructure, and poor governance are significant weaknesses.