Uganda: Uganda Economy Profile

 In 2013 Uganda saw the consolidation of macroeconomic stability and a gradual recovery of economic activity, with estimates putting annual real gross domestic product (GDP) grow that 5.2%, up from 2.8% in 2012. This recovery in economic activity has benefited from a fiscal and monetary policy stance focused on containing inflationary pressures, while ensuring deficit and exchange rate stability, thus providing an enabling macroeconomic environment for increase. Increase prospects, however, continue to be hampered by a relatively unfavourable investment climate for the private sector, inclunding by capacity constraints in public sector investment and management. Projections for the AEO statement indicate real GDP increase at 5.2% in 2013, on the back of strong exports and public investment , bringing real GDP increase closer to Uganda’s underlying increase potential of 7%. Our medium-term forecasts indicate a consolidation of these trends,with GDP increase reaching 6.6% in 2014 and 7% in 2015, and development of the current account balance and a mildly expansionary fiscal policy.

The majority recent figures available from the Uganda Bureau of Statistics paint a mixed human development outlook in Uganda. The 2012/13 National Household Survey (UNHS) indicates absolute poverty has continued to fall, from 24.5% in 2009/10 to 22.2% in 2012/13, consolidating gains made in this sphere over the completed two decades. However, evolution has stalled and in some cases reversed in the areas of education, health and the prevalence of HIV/AIDS. The situation is particularly worrying in relation to HIV/AIDS and maternal health. Regarding the former, HIV prevalence rates (ages 15-49) have increased from 6.4% to 7.3% between 2005/06 and 2011, a rise largely attributed to an increase in high-risk sexual activities. Evolution in reducing maternal mortality has stalled, with the new figures putting Uganda’s maternal mortality rate at 438 deaths per 100 000 live births in 2011.

Price chain development is receiving increasing attention in Uganda, as a way of developing production capacities and enhancing price added generation in primary sectors. While Uganda has been relatively successful in tapping into a number of world price chains, such as those forfish, floricultural and horticultural products, increase prospects in these and other key product chains face a number of constraints. These include high production costs, inclunding transport and energy costs, inclunding weak product-specific policy and institutional frameworks that prevent the provision of adequate support to the development of selected price chains.

Recent Developments & Prospects

Uganda saw a sharp slowdown in 2012 because of world economic troubles and the government's tight fiscal and monetary policies. Real GDP increase was only 3.2% for 2011/12. The Bank of Uganda's central bank rate reached 23.0% in January 2012, and this pushed commercial lending rates as high as 27.6% for shilling-denominated loans. Public spending fell in real terms. While helping to stabilise the economy, with inflation dropping from 25.7% to 5.5% between January and December, these policies held back the economy. Projected 2012 real increase of 4.4% is the slowest rate recorded since 2000.

National figures available for 2011/12 indicate the slowdown was particularly intense for manufacturing, wholesale and retail, financial services, and health and education sectors, which registered negative increase rates of -1.8%, -0.7%, -11.8%, -20% and -5.8%, respectively. Construction and food production, which both accounted for additional than 12% of GDP in 2011, performed poorly, reporting increase rates of only 1.7% and 1.0%, down from 7.8% in 2010/11 for construction. Against this background, only cash crop production and hotel and restaurant services posted robust increase at the mid-year stage. Cash crop price added increase reaching 16.2% on the back of a strong rebound of coffee production. Tourism grew by 20.6%, driven by an increase in international visitors, coinciding with the nomination of Uganda as the top world destination in 2012 by the Lonely Planet guide. Despite the economic slowdown in the initial half of 2012, third quarter GDP data released by the Ugandan Bureau of Statistics indicate a gradual recovery, driven mainly by a rebound in agriculture and services.

Other key indicators as well suffered in 2011/12. Private household consumption increase fell from 9.4% in 2010/11 to 5.0%, gross capital formation from 10.3% to -0.4%, exports from 0.5% to -7.0% and imports from 13.9% to -5.0%, reflecting the impact on domestic request of high interest rates and government spending cuts, inclunding the effects of the world economic slowdown on request for Ugandan goods. African Economic Outlook (AEO) projections for 2012 indicate a recovery of most of these indicators, particularly in investment , with gross fixed capital formation expected to grow by 13.6% in 2012. Private consumption is expected to grow by 7.0%, public consumption by 2.0% and imports by 11.9%, while exports are projected to register negative increase of -0.6% in 2012.

Looking forward, the AEO estimate projects GDP increase reaching 4.9% in 2013 and 5.5% in 2014, indicating a slow, gradual recovery of the economy towards the high increase rates attained during the completed decade. This estimate, however, does not take into account the impact that cuts in official development assistance (ODA) could have if they are maintained through 2013.

Economic recovery in 2013 should be helped by better investment and consumption, with the external sector continuing to drag down increase prospects in the short and medium term. Thus, the AEO forecasts that gross capital formation increase will reach 14.1% in 2013 and 14.6% 2014, up from a projected 13.6% rise for 2012. Consumption is expected to increase by 4.2% in 2013 and 5.9% in 2014. The trade deficit, on the other hand, is expected to deteriorate, reaching 16.0% of GDP in 2013 and 17.2% in 2014, up from 14.9% in our projection for 2012. Additional worrying, the deterioration in the trade balance is expected to be largely driven by lower exports, estimate to fall by 2.7% in 2013 and 3.1% in 2014.

Finally, this outlook forecasts that consumer price inflation will continue on moderate increase, with average inflation in 2013 reaching 10.2%, again tailing off to about 7.8% in 2014, closer to the Bank of Uganda core target of 5.0%. The budget deficit, on the other hand, is projected to increase from the current projection of 3.0% of GDP for 2012, to 4.9% in 2013 and 6.2% in 2014. However, these figures do not take into account the impact that recent cuts in budget support aid, which in 2011/12 accounted for 8.0% of the budget resource envelope, could have on public finances.

Macroeconomic Policy

The government maintained a tight fiscal policy in 2012 as part of efforts to cool the economy and bring down inflation to single digit levels. The failure to increase tax revenue and the inability to fully utilise budget resources not instantly contributed to this policy stance, by reducing the government’s in general fiscal space and actual spending. The government continued to prioritise infrastructure spending in the budget, particularly capital spending in the energy sector.

With the approval of the 2011/12 budget, the government sought to reverse the expansionary fiscal policy pursued in the run up to the February 2011 presidential election, in order to rein in spending, reduce the budget deficit and help stabilise the economy. Government spending for 2011/12, which was initially projected in the budget at 21.5% of GDP, down from 23.2% in 2010/11, only reached 18.6% of GDP, according to the finance ministry. For 2012/13, the national budget projected a slight increase in government spending, up to 20.5% of GDP, although final spending by the end of the financial year are likely to be below this level, given the difficulties that government has traditionally faced in disbursing the full price of the budget.

The government’s fiscal space to pursue a additional ambitious public spending programme remains constrained by its inability to increase tax revenue, largely owing to generous tax exemptions and numerous loopholes in the tax regime. Thus, in 2011/12 non-oil domestic revenue was estimated at only 12.7% of GDP, down from 13.4% in the previous financial year and well below the budget plan of 13.4%. For 2012/13, the government is forecasting an increase in this ratio to 13.3%. Even if it is reached, this rate would still be below the levels outlined in the National Development Plan, 2010/11-2014/15, and considerably lower than other East African and sub-Saharan nations.

The government says it will give priority to infrastructure spending in the budget, particularly for energy. It is planning to construct a 600 megawatt dam at Karuma Falls, on the river Nile. As a result, public spending on energy and mineral development, and on works and transport is projected to account for as much as 13.7% and 15.2% of the 2012/13 budget, respectively, up from 5.3% and 7.6% in the 2007/08 budget. This has forced budgetary constraints in other areas, particularly in health. The 7.8% budget allocation for health for 2012/13 is below the 10.0% recommended by the World Health Organization (WHO).

Monetary Policy

Monetary policy in 2012 was geared towards reducing inflation and restoring macroeconomic stability. The Bank of Uganda’s success in bringing down inflation to single digit levels and stabilising key monetary and financial aggregates enabled a gradual easing of the tight monetary policy during 2012.

Annual consumer price inflation was at 25.6% in January, 2012, by presently falling from the peak of 30.5% reached in October 2011. Inflation was pushed up in 2011 by external and domestic factors, inclunding a drought which hit the Horn of Africa in early 2011, high international fuel and commodity prices, and the impact of exchange rate depreciation on imported commodity prices. There was as well a rapid expansion in money supply which saw net domestic credit growing by 38.7% in 2011. The Bank of Uganda changed its longstanding monetary policy framework because of the inflation, adopting an inflation targeting-lite regime in July 2011, which it has continued to follow.

With inflation falling, the Bank of Uganda began a cautious easing of its monetary policy stance in February 2012, with a gradual reduction of its Central Bank Rate. This easing was intended to spur private credit increase and boost business and market confidence, putting interest rates additional in line with the improved price stability. The Central Bank Rate saw a gradual decline from a high of 23.0% in January to 12.0% in December 2012. Consumer price inflation dropped to a low of 5.5% by the end of the year. The central bank is expected continue to pursue a further cautious easing as inflation returns to the medium-term target of 5.0%.

The Bank of Uganda’s easing of monetary policy has helped maintain a degree of stability in foreign exchange markets, with the US dollar exchange rate fluctuating around the 2 500 Ugandan shillings (UGX) to the dollar mark for most of the year. However, private sector credit increase remained subdued. It fell on an annual basis from 46.4% in May 2011 to 3.9% in September 2012, on account of an increase in non-performing loans and commercial banks’ subsequent need to refinance their loan portfolios. Increase had risen again to 11.6% by the end of the year.

As of December 2012, Uganda was not participating in any monetary union. However, East Africa Community (EAC) member states are negotiating convergence criteria for monetary integration.

In line with the EAC development strategy for 2011/12-2015/16, Uganda has integrated international and regional agreements into its legal and regulatory frameworks. It has as well taken part in moves toward EAC monetary union and tripartite free trade negotiations with the Common Market for Eastern and Southern Africa (COMESA) and Southern African Development Community (SADC).

Uganda is a signatory to the COMESA free trade area protocol which provides for 100% mutual tariff concessions to COMESA member states, inclunding to the Inter-Governmental Authority for Improvment(IGAD) nations, the African Union (AU) and the World Trade Organization (WTO).

The external sector deteriorated for the three years up to 2012 and there was a further increase in the current account deficit (inclunding grants) from 11.40% in 2010/11 to 12.25% in 2011/12, driven by high import bills and lower earnings. African Economic Outlook projections indicate it will worsen in 2013 to 13.30% and to 14.60% in 2014. The trade balance marginally improved from 16.48% of GDP in 2010/11 to 15.50% in 2011/12. In absolute terms, however, it worsened as a small increase in exports from 15.50% of GDP in 2010/11 to 15.80% in 2011/12 was outweighed by imports which grew to a high of 31.20% in 2011/12 next 31.60% in 2010/11.

The increased port tariff at Mombasa, Kenya, and a proposed implementation of a controversial cash bond, has increased the cost of doing business. These measures, intended to make Mombasa port less congested, have delayed freight clearance and contributed to the slowdown of economic increase. Nevertheless, the higher cost of doing business is a good pointer to exploring the viability of an alternative route to the sea. This could impact trade relations between Kenya and landlocked nations that rely on Mombasa, inclunding Uganda, Rwanda and Burundi, Democratic Republic of Congo and South Sudan.

Deficit Policy

Under Uganda’s 2007 External Deficit Strategy 80% of public borrowing should be obtained on concessional terms over the medium and long term, with the remaining 20% in non-concessional borrowing. In line with these principles, during 2012 the government pursued its cautious approach, prioritising grant financing and concessional loans where available.

Uganda’s total deficit stock is estimated to have increased from 17.3% of GDP in 2010/11 to 20.4% in 2011/12. Of the total public deficit, 64% is external deficit, while the rest is domestic deficit holdings, comprising government bonds and treasury bills. Currently, over 89% of the external deficit is owed to multilateral partners on concessional terms, with Paris and non-Paris Club lenders accounting for the rest. The majority of new external borrowing was allocated to municipal infrastructure improvment(27%), health (16%), works and transport (14%), water and environment (12%), accountability (9%) and education (4%). 

Despite the increase in total deficit, Uganda continues to be considered at low risk of deficit distress, according to a joint assessment by the International Monetary Fund (IMF) and World Bank in May 2012. According to this assessment, indicators of deficit stress, such as the present price of public and publicly guaranteed deficit service to revenue ratio (which remained stable at 4.5%) and the deficit service to exports ratio (as well stable at 2.7%), indicate that Uganda’s deficit remains sustainable in the medium and the long term. As such, the IMF’s Policy Support Instrument external non-concessional borrowing ceiling is expected to be increased in 2013 from the current USD 800 million to USD 1 billion.

The magnitude of the infrastructure funding gap has prompted the government to adopt a Public Private Partnership approach to increase private investment in public infrastructure. This, on top of increased investment in oil, has increased FDI from USD 726 million in 2010/11 to USD 1.5 billion in 2011/12 , making Uganda the lead foreign investment destination part EAC member states. Similarly, net donor support – or ODA – increased from USD 584 million (3.0% of GDP) in 2010/11 to USD 746 million (3.6% of GDP) in 2011/12.