Executive Summary
The Business Health Index (BHI) for Uganda provides an assessment of the business health at the time of survey and the outlook. This study BHI is based on responses from 408 enterprises, stratified by sector and company sizes. The data covers the key sectors, and UDB-supported enterprises as well as non-UDB clients.
The BHI for Q3 2023 stood at 39.71 below the threshold of 50, showing low perceived business performance compared to Q2 2023. The key drivers included high cost of production, and limited access to raw materials. Additionally, the Business Health Index for Q4 2023 was 58.10 indicating a positive outlook. In Q3 2023, businesses perceived to have performed poorer compared to the preceding quarter (Q2) across sectors, including agriculture, manufacturing, and tourism. All the BHI components such as raw materials availability, production, sales, profitability, and enterprise-driven job growth, fell below the critical threshold of 50. Manufacturing and agro-processing experienced low performance due to increased production costs and higher raw material expenses.
UDB-supported enterprises had a BHI of 44.07 in Q3, above the overall BHI but below the critical threshold of 50, attributed to challenges in raw materials and production. Like with the general BHI, the Q4 BHI for UDB funded projects was 63.20 suggesting positive prospects, driven by expectations of improved raw material availability, production, sales, profitability, and enterprise-driven job growth. Concerns persist over raw material scarcity and production costs. UDB-funded businesses demonstrated stronger BHI than non-UDB-funded enterprises suggesting that the UDB financial and non-financial interventions might be enhancing business resilience and performance. Challenges faced by businesses include high credit costs, elevated electricity charges, high cost of raw materials, insufficient demand, expensive labor, and surging transportation expenses.
Additionally, measures to address the high cost of production including limited access to and high cost of raw materials ought to be implemented to increase capacity utilisation, production, and productivity of businesses. These measures include electricity tariff reduction, and investments in local production capabilities, to enhance supply chain efficiency.
In conclusion, while Q3 2023 experienced low performance in Uganda’s business health, optimism prevails for Q4. The Business Health Index (BHI) serves as a crucial tool for decision-makers, offering insights into turning points in business health conditions, aiding strategic planning, and informed decision-making for financing interventions in the enterprise sector.
Introduction
The Business Health Index (BHI) assesses current business health and anticipations among business enterprises in Uganda. It reflects the sentiments of business owners and managers regarding present and future business health conditions.
Improved current business health signifies heightened investment, financial performance, and impactful development in job creation Growth, GDP contribution, tax revenue, and foreign exchange earnings.
However, a deteriorating business health outlook suggests uncertainty among individuals regarding the prospects of their firm’s business health within the operating business environment.
Crucially, the Business Health Index (BHI) provides early signals to decision-makers, both in government and the private sector, regarding turning points in business health conditions. Its advantage extends to aiding decision-makers in assessing and planning actions related to their business health, while also supporting informed decision-making for financing interventions aimed at business enterprises.
Methodology
The Uganda Business Health Index (BHI) is derived from survey data generated from SMEs and large-scale enterprise managers/owners in Uganda. The study analyzed responses from 408 enterprises, including 107 UDB customers and 301 non-UDB customers, conducted in October 2023. The sample was stratified by sector and company size. The survey covered various sectors such as agriculture, manufacturing, agro-processing, tourism and hospitality, human capital development (education and health), wholesale trade, and other services including creative, transport, and financial sectors.
The survey was part of the bank’s quarterly surveys which elicit responses on the prevailing business health conditions and expectations about the future business health conditions. This Business Health Index (BHI) report examined the business managers’/owners’ views of business health conditions for quarter 3, 2023 (July-September 2023) compared to quarter 2, 2023 (April to June 2023). Additionally, it looked at the business expectations about the following quarter’s performance (Q4, October to December 2023) compared to the preceding quarter (July to September 2023).
The Business Health Index (BHI) is computed from key indicators: raw materials availability, production, sales, profitability, and enterprise-driven job growth. Respondents rate their perceptions on a Likert scale: “higher,” “same,” “lower,” or “improve,” “same,” and “worsen” for each indicator.
Figure 1: The five components of the Business Health Index (BHI).
Source: authors construct based on the key components of the Business Health Conditions
Sub-indices are computed from responses on sub-variables within each Business Health Component, using weights: 0 for negative current performance and outlook, 0.5 for neutral of unchanged stance, and 1 for positive current performance and outlook. Calculating the percentage distribution of responses and multiplying by weights yields sub-indices. These sub-indices are then averaged to form component indices, which, in turn, are averaged to calculate the overall Business Health Index (BHI).
The formula for BHI Calculation:
a) Sub-indices
The sub-indices representing key sub-variables within each business health component are calculated using the following formula:
d= 100*(wu(Ntu/Nt)+ ws(Nts /Nt) + wd(Ntd/Nt));……………………………..(1)
where Ntu; Nts; and Ntd denote, respectively, the number of survey participants who report that the relevant business health variable has increased, stayed unchanged, or declined from period t -1 to period t.
d signifies sub-indices for key sub-variables.
wu =1, ws=0.5, and wd =0 are the weights assigned.
For current business health conditions, t-1 corresponds to the previous quarter, and t represents the current quarter.
For future business health conditions, t-1 corresponds to the current quarter, and t represents the next quarter.
The formula yields sub-indices (d) for sub-variables under each business health component, such as Volume of raw materials and cost of raw materials under the Raw Materials Availability component; Capacity utilization, Total Production Volume, and cost of production under the Production by Enterprises component; Sales Volume, Average selling price, and Sales Revenue under Sales by Enterprises component. Notably, Profitability by Enterprises and Enterprise-Driven Job Growth components have no sub-variables.
b) Business Health Component indices
C = Σd/n……………………………………………………………………………………………….(2)
Where:
C represents the Business Health Component index for key business health indicators, including Raw Materials Availability, Production by Enterprises, Sales by Enterprises, Profitability by Enterprises, and Enterprise-Driven Job Growth.
Σd is the summation of sub-indices for key sub-variables.
n is the number of sub-indices for key sub-variables.
c) Overall Business Health and Outlook Indices
O= ΣC/m………………………………………………………………. (3)
Where,
O represents the Overall Business Health Index.
ΣC is the summation of component indices.
m is the number of component indices.
d) Interpretation of results
The current Business Health condition depicts the current perceived performance relative to the preceding quarter (three months). An index exceeding 50, signifies a relatively better performance perceived by the business owners/managers compared to the preceding quarter. In addition, a value of 50 indicates a perceived similar performance across periods/quarters. A value below 50 reflects a perceived declinein performance of the current quarter compared to the previous quarter.
The expected Business health performance analysis is considered for the subsequent quarter, projecting future outcomes. An index above 50 shows positive expectations or optimism for the upcoming quarter, 50 means a neutral outlook with no change, and a value below 50 indicates negative expectations or pessimism for the next quarter compared to the previous one.
Results
Overall Business Health Index (BHI)
While the business health experienced a low point, the outlook remains optimistic.
Figure 2 indicates that there was a relatively lower business performance in quarter three (Q3) of 2023 compared to the preceding quarter (Q2) with the Business Health Index (BHI) of 39.71. The businesses experienced a perceived relatively poor performance across all component indices—Raw Material Availability (36.17), Production by Enterprises (33.12), Sales by Enterprises (45.23), Profitability by Enterprises (34.78), and Enterprise-Driven Job Growth (49.26)—all below the critical threshold of 50, indicating unfavourable performance during the quarter.
The perceived poor business health during Q3 2023 was influenced by business concerns, particularly regarding the financial situation and credit accessibility in the economy (impact of a tight monetary policy stance). The average Central Bank Rate (CBR) remained high at 9.7%, contributing to a weighted average lending rate for Shilling-denominated credit of 18.4% in Q3 2023, despite a slight decrease from 19.3% in Q2 2023[i].
Figure 2 also highlights optimism in business health for the upcoming quarter (October-December 2023) relative to Q3, as reflected by the Business Health Index (BHI) at 58.10. This positive outlook is driven by optimistic component indices—Production by Enterprises (55.06), Sales by Enterprises (66.16), Profitability by Enterprises (63.30), and Enterprise-Driven Job Growth (59.26)—all surpassing the critical threshold of 50.
However, concerns arise regarding raw materials availability, evident in a notably low Raw Materials Availability index of 46.72, below the critical threshold. This scarcity may elevate production expenses, as indicated by the Cost of Production index at 27.54. Nevertheless, favorable weather conditions may contribute to increased raw materials for agro-processing, attenuating the effect of reported raw material availability.
Figure 2: Business Health Index (BHI): Q3 2023 Performance and Outlook for Q4 2023[ii].
Source: Computation by the author based on Business Health and Outlook Survey (BHS) data (October 2023).
Drivers of Businesses’ Health in Uganda
The business health was weaker in Q3 2023
The relatively low availability of raw materials, with a component index of 36.17, adversely impacted the Q3 2023 performance. This is evident in the sub-indices, volume of raw materials (41.84) and cost of raw materials (30.50).
The production index was low in Q3 at 33.12, and was likely caused by the low capacity utilization (35.93), total production volume (40.44), and cost of production (22.99), which were all below 50. In addition, the drop in sales by enterprises indexed at 45.23 which is below 50, was potentially driven by a perceived decline in the sales volume (41.57), and sales revenue (40.64). Also, the enterprise profitability, indexed at 34.78, was low because it is driven by both production and costs which were all not favourable in Q3 of 2023(See Figure 3).
Figure 3: Business Health Index (BHI) for Q3 2023: Overall index, Components Indices and Sub-Indices.
Source: Computation by the author based on Business Health and Outlook Survey data, October 2023
The Business Health Outlook remains Optimistic.
Figure 4 highlights a positive shift (optimism) in business health from Q3 2023 (July-September 2023) to Q4 2023 (October-December 2023), evident in component indices surpassing the critical threshold of 50: Production by Enterprises (55.06), Sales by Enterprises (66.16), Profitability by Enterprises (63.30), and Enterprise-Driven Job Growth (59.26).
Expected improvement in Q4 2023 Production by Enterprises (index 55.06) is attributed to positive performance drivers, with sub-indices capacity Utilization (67.78) and total production volume (69.85) exceeding the threshold of 50, except for cost of Production (27.54) falling below.
The anticipated rise in Q4 2023 Sales by Enterprises (index 66.16) is due to positive sub-indices: Sales Volume (67.86), Average Selling Price (62.57), and Sales Revenue (68.05), all above the critical threshold. Expected Profitability by Enterprises (index 63.30) is partly linked to an anticipated improvement in Sales Revenue (index 68.05), while the Cost of Production outlook (index 27.54) may pose challenges.
The anticipated rise in Q4 2023 Enterprise-Driven Job Growth (index 59.26) is rooted in high Profitability Outlook (index 63.30), reflecting strong business confidence. This positive sentiment hints at potential job growth in Uganda’s enterprise sector for the upcoming quarter (Q4, 2023).
Figure 4: Business Health Outlook Index (BHI) for Q4 2023: Overall Index, Components Indices and Sub-Indices
Source: Computation by the author based on Business Health and Outlook Survey data, October 2023
Analysis of Business Health Index (BHI) by Sector
In Q3 2023, business performance was perceived to be relatively lower than Q2 across key sectors—Agriculture, manufacturing, agro-processing, tourism, hospitality, education, and wholesale trade—reflecting business health indices below 50, except for health and other services (creative, transport, and financial sectors) with indices at 52.82 and 50.65, respectively. The perceived decline stemmed from limited Raw Materials Availability, Production by Enterprises, Sales by Enterprises, and profitability levels, as reflected by the indices below the threshold of 50.
Manufacturing and agro-processing sectors saw business health deterioration across the two quarters due to rising production costs (indices 23.36 and 21.67) and increased cost of raw materials (indices 27.48 and 41.67), all below 50.
There was optimism about Q4 2023 performance, reflected in business health outlook indices above 50: Agriculture (66.80), manufacturing (54.75), agro-processing (63.34), tourism and hospitality (61.04), education (58.15), health (71.69), wholesale (57.52), and other services (65.37). The health sector’s remarkable 71.69 outlook index was driven by expected profitability (75.00). Agriculture boasted a 66.80 outlook index, driven by favourable weather conditions and confidence in increased production. Indeed, the agriculture sales and revenue had BHI’s of 71.32 and 78.68, respectively.
Anticipated challenges remained for the manufacturing sector in Q4 2023, with the expected high cost of production represented by a 27.10 index, falling below the threshold of 50.
Figure 2: Business Health Index for Q3 2023 and Outlook for Q4 2023 by Sector
Source: Computation by the author based on Business Health and Outlook Survey data, October 2023
Analysis of Business Health Index (BHI) for UDB-Funded Enterprises
In Q3 2023, Uganda Development Bank (UDB)-supported enterprises experienced a perceived decline in business health, reflected in a Business Health Index (BHI) of 44.07 below the critical threshold of 50. This perceived decline was attributed to challenges in raw materials availability and production by enterprises, with component indices of 40.12 and 36.31 respectively, both below the 50 threshold. The raw materials challenge stemmed from a high cost of raw materials index at 31.40, while production challenges were linked to a high cost of production index at 23.81. Profits (43.53) and enterprise-driven job growth (49.55) indices also fell below 50, indicating a decline in Q3 2023 compared to Q2 2023.
Like overall business outlook, UDB-supported enterprises anticipated improved business health in Q4 2023, with a Business Health Index (BHI) of 63.2, indicating positive prospects. The optimism was rooted in component indices including, overall raw material availability (50.30), production (62.12), sales (70.37), profitability (67.89), and enterprise-driven job growth (65.32). Concerns lingered about raw material scarcity in manufacturing due to soaring costs, as reflected in the raw materials cost index (31.4) below the 50 threshold. Similarly, there were concerns about production costs affecting manufacturing levels, indicated by the production cost index of 23.81.
Figure 3: Business Health Index for Q3 2023 and Outlook for Q4 2023 for UDB-Funded Enterprises
Source: Computation by the author based on Business Health and Outlook Survey data, October 2023.
Comparative Analysis of Business Health Index (BHI) between UDB Funded and Non-UDB Funded Enterprises
Figure 4: Business Health Index (BHI) for UDB Client & Non-UDB Clients
| UDB Funded Enterprises | Non-UDB funded Enterprises | |||
| Business Health Index for Q3 2023 | Business Health Outlook Index for Q4 2023 | Business Health Index for Q3 2023 | Business Health Outlook Index for Q4 2023 | |
| Overall Index | 44.07 | 63.20 | 37.95 | 56.01 |
| Raw Materials Availability | 40.12 | 50.30 | 34.44 | 45.15 |
| The volume of raw materials | 48.84 | 74.42 | 38.78 | 63.78 |
| Cost of raw materials | 31.40 | 26.19 | 30.10 | 26.53 |
| Production by Enterprises | 36.31 | 62.12 | 31.75 | 51.93 |
| Capacity utilisation | 40.00 | 73.75 | 34.21 | 65.26 |
| Total Production Volume | 45.12 | 79.27 | 38.42 | 65.79 |
| Cost of production | 23.81 | 33.33 | 22.63 | 24.74 |
| Sales by Enterprises | 50.80 | 70.37 | 43.01 | 64.49 |
| Sales Volume | 50.99 | 70.79 | 37.75 | 66.67 |
| Average selling price | 52.36 | 65.09 | 53.92 | 61.57 |
| Sales Revenue | 49.05 | 75.24 | 37.36 | 65.24 |
| Profitability by Enterprises | 43.58 | 67.89 | 31.38 | 61.52 |
| Enterprise-Driven Job Growth | 49.55 | 65.32 | 49.15 | 56.97 |
Source: Computation by the author based on Business Health and Outlook Survey data, October 2023.
Main Challenges Affecting the Business Health in Uganda
The main pressing constraints to business health for Q3 2023 included high credit costs, elevated electricity charges, high cost of raw materials, insufficient demand, costly labor, and surging transportation expenses.
High credit costs persisted as a burden to Ugandan businesses, with commercial Banks’ lending rates remaining elevated averaging 18.4% in Q3 2023, contributing to a negative influence on the cost of production, indicated by an index of 22.99 below the 50 threshold.
Power tariffs remained a constraint, increasing production costs in the manufacturing sector. For instance, UMEME’s report indicated average tariffs for different consumer categories, ranging from UGX611.8 per kWh for commercial consumers to UGX 296.2 per kWh for extra-large industrial consumers. These tariffs continued to burden business owners, escalating production costs.
Insufficient demand emerged as a significant constraint, partly linked to reduced purchasing power among consumers. Notably, the decreased hotel occupancy rates due to high rate of international tourists’ cancellations was largely attributed to safety concerns following incidents like the Allied Democratic Forces (ADF) rebel murder case in Queen Elizabeth National Park[iii].
Rising cost of living in Q3 2023 prompted increased labor demands for higher wages, increasing production costs across sectors. Concurrently, soaring transport costs, driven by escalating oil prices, with petrol averaging UGX 5,485 per litre and diesel at UGX5,153 per litre, contributed to a rise in annual inflation for Energy, Fuel, and Utilities (EFU) from -3.1% in June 2023 to -1.2% in September 2023, intensifying production expenses, particularly in manufacturing, due to increased transport costs.
Conclusion and Policy Implications
The business health index (BHI) for Q3 2023 was 39.71 and lower than the threshold of 50 suggesting businesses perceived low performance for Q3 2023 compared to Q2 2023. The key drivers of this perceived low performance included high cost of production, limited access to raw materials, and financial conditions (tight monetary policies). However, businesses exhibited optimism over performance in Q4 2023. Indeed, the BHI for Q4 2023 was 58.10 and above the 50 threshold, driven partly by anticipated improved financial conditions.
The findings also showed that UDB-supported enterprises had a stronger Business Health Index (BHI) compared to non-UDB clients, highlighting the potential positive impact of UDB through financial and non-financial services.
Challenges identified include high financing costs, electricity tariffs and hence cost which forms a significant part of costs for manufacturing-related businesses, insufficient demand, high labor and transport costs.
We recommend initiatives to lower electricity tariffs to address the constraint of high power costs, potentially through reassessing tariff structures, introducing subsidies for specific industries, or incentivizing energy-efficient practices.
Furthermore, there is a need to implement measures to address the high cost of raw materials in Uganda. Increasing local production and productivity capabilities is key to increasing raw material supply, and hence capacity utilisation of businesses enterprises. Since Uganda is agro-based, there is a need to enhance investment in agri-food systems to upgrade agri-value chains and hence improve raw materials.
[i] https://www.bou.or.ug/bouwebsite/Statistics/
[ii] Relative Business Health for the current quarter (Q3 2023) relative to previous quarter (Q2 2023) and
Relative business health for next quarter (Q4 2023) compared to the current quarter (Q3 2023)
[1] https://www.bou.or.ug/bouwebsite/Statistics/
[1] Relative Business Health for the current quarter (Q3 2023) relative to previous quarter (Q2 2023) and
Relative business health for next quarter (Q4 2023) compared to the current quarter (Q3 2023)
For more information about this Business Health Index (BHI) report, contact the Directorate of Economic Research and Knowledge Management (ERKM) – Uganda Development Bank.
| Bob Twinomugisha Senior Economist – Macroeconomics and Trade Email: btwinomugisha@udbl.co.ug Dr. Francis Mwesigye Chief Economist Email: fmwesigye@udbl.co.ug |