Overview:
While Uganda’s FDI inflows increased by US$ 55.3 million to US$ 813.7 million in the three months to July 2024, mainly on investment in the oil sector, BoU says other financial flows weakened substantially and weighed on forex reserves in the period under review.
The Bank of Uganda (BoU) has warned that Uganda’s financial stability will remain sluggish due to the ever-declining Foreign Direct Investment (FDI).
While Uganda’s FDI inflows increased by US$ 55.3 million to US$ 813.7 million in the three months to July 2024, mainly on investment in the oil sector, BoU says other financial flows weakened substantially and weighed on forex reserves in the period under review.
“While net foreign direct investment (FDI) inflows have been strong since 2021, mainly reflecting oil-related investments, net portfolio and other investment inflows have been weak and volatile, as experienced elsewhere in the region, reflecting less favourable global financial conditions,” the Central Bank said in its State of the Economy Report for September 2024.
Net other investment inflows have seen a significant decline in recent years from a peak of US$ 500 million in FY2019/20 to around US$ 200 million in FY2023/24 as external project and budget support inflows fell, the report warns.
Despite strong oil-related FDI, Uganda faces challenges with volatile financial inflows and reduced external support, impacting overall financial stability.
Similarly, in the three months to July 2024, the portfolio investment account deteriorated with net outflows of US$194.0 million, an increase from a net outflow of US$75.6 million in the quarter to April 2024.
This was largely attributed to offshore investment outflows on domestic debt securities. The other investment account also recorded net outflows of US$352.7 million in the quarter to July 2024, a turnaround from net inflows of US$120.9 million registered in the quarter to April 2024, as banks increased their placements of deposits abroad and a decrease in both budget and project support loans.
“These trends highlight Uganda’s challenges with capital outflows and reduced external financial support, which could impact economic stability,” the report says.
These developments in the financial account are primarily reflected in a combination of factors, including offshore exits, high debt service payments and constrained donor support inflows. On the upside, however, FDI inflows remained robust to support the surpluses registered during the reporting quarters.