Financial markets refer to an interaction where securities trading occurs, involving stock markets, bond markets, forex markets, precious metals, and derivatives. Over the years, Uganda has steadily improved its financial market portfolio, both domestically and internationally. Uganda’s financial market standing was revealed by a continental financial markets index conducted by Absa Group Limited in association with the Official Monetary and Financial Institutions Forum (OMFIF). For the second year running, Uganda has been ranked fourth on the continent in a survey that covered 28 countries.
The annual index report is based on index parameters of market depth, market transparency, tax and regulatory access, access to foreign exchange, capacity of local investment, macroeconomic environment and transparency, legal standards, and enforceability. In the survey, it was realized that Uganda experienced a fall in foreign exchange reserves, a low performance in local investment, and low market depth in the equities and bond markets, but still performed better than bigger economies like Kenya, Tanzania, and Ethiopia. It was only outdone by South Africa, Mauritius, and Nigeria in the continental ranking.
In the benchmarked six categories, the scores were: macroeconomic environment and transparency (86/100), legal standards and enforceability (85/100), market transparency, tax and regulatory environment (79/100), access to foreign exchange (67/100), market depth (46/100), and capacity of local investors (14/100). It is clear that there are glaring challenges in the performance of market depth and the capacity of local investors. Market depth is the size and liquidity of domestic equity and bond markets with a range of listed assets. This underscores a below-average stock market with little activity in the domestic bond market. The document captured a fall in stock market capitalization as a percentage of GDP between June 2022 and June 2023. This is attributed to challenges in the global economic environment replete with inflation, rising interest rates in developed economies, and geopolitical contradictions that affected capital markets globally.
The capacity of local investors analyzes the potential for institutional investment to drive capital market growth based on the size of the pension fund markets, both in per capita terms and in relative listed securities. On both parameters, Uganda performed dismally, as pension fund assets per capita fell below zero. Uganda failed to improve its credit score rating like the East Africa community members did because of higher international corporate ratings. However, it topped the pack in macroeconomic environment and transparency. This is due to open fiscal and monetary policy decisions that involve timely data releases on macroeconomic variables.
The fall in inflation from double-digits in 2022 to below 5 percent is a consequence of reduced food and fuel prices and restrictive monetary policies, leading to a 6.5 percent annual GDP growth rate in 2022–2027. The report highlights the shortage in foreign exchange reserves. The country experienced a fall in forex reserves from 4.2 months of import cover in 2021 to about 3’7 months of import cover in 2022. This was attributed to the cost of money in advanced economies and the adverse effects of the Russia-Ukraine conflict, which affected capital inflows.
The report acknowledges the efforts put into investor education intended to improve financial literacy. Financial literacy facilitates financial inclusion and reductions in the informal sector. The informal sector distorts capital flow in the economy. Investor education opens up investment opportunities through capital mobilization, linking possible business partners for joint ventures, and pooling resources to create more viable and resilient investment portfolios. Capital markets operations have not taken root yet. The passing of the Financial Institutions Regulations 2023 bill in April enables the investor to settle a loss in one financial instrument with another that has gains. What this means is that the synchronized debt of an investor in one security can be offset with the security that has gains, which will also make payments to creditors more assured in case of default.
The report delves into ways and means of solving the issues pertaining to lack of market depth, depletion of foreign exchange reserves, and shrinking pension fund assets and size. It was observed that financial sector depth does not happen by accident. It is a direct function of both monetary and fiscal policies. It was further pointed out that the equity market cannot grow without a strong bond market as its foundation. An integrated economy with a domestic savings policy program would go a long way in boosting the size and types of lifetime savings programs.
The report looks at the diminishing foreign exchange reserves. It acknowledges that, for the size of our economy and natural resource endowment, our forex reserves are small. We are only saved by Ugandan diaspora remittances, which can be tripled with a clear policy framework. Production of world-class goods and services can wreck millions of foreign reserves. Tourism could be another source of forex exchange by merely making the country clean with standard amenities and security guarantees.
The report casts a positive light on the future of financial markets in Uganda, calling for a robust policy framework to include all financial institutions in a financial inclusion program.
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