The late 1970’s and the early 1980’s saw Uganda suffer from several constraints in terms of overall growth of the economy and macroeconomic stability. In particular, the heavy indebtedness, negative growth, double –digit inflation, terms of trade shocks, rising current account and budget deficits and declining reserves were key outcomes of the poor economic policies and the exogenous shocks the country faced. However, the situation was reversed starting in the late 1980’s with the country experiencing steady improvement in macroeconomic performance with a rebound in growth through the 1990’s and steady declines in inflation from the earlier levels. The fiscal deficits were reduced and the donor funding and debt forgiveness helped to increase international reserves. This note reviews the economic performance during the last 20 years.
2. Macroeconomic and structural policies
The principal objective of the government over the last 20 years was sustaining high and broad based growth. The emphasis was placed on poverty reduction through facilitation of poor people’s participation and benefit from increased economic activity. The strategy followed involved maintaining macroeconomic stability through appropriate tight fiscal and monetary policy; liberalization of the economy to promote private sector led growth and improved external sector performance and implementation of structural and institutional reforms to reduce the constraints to growth.
Fiscal reforms: These centered on improvements to tax administration to boost revenues and introduction of expenditure controls especially to reduce the accumulation of new arrears. On the later a system of monitoring commitments made by line ministries to ensure consistence with budgetary provisions and cash releases was instituted. However, government objective of improving health, education and infrastructure also meant that government had to increase the outlays in these areas. Consequently, the large part of the fiscal consolidation measures centered on tax actions taken that included the creation of the URA, introduction of discretionary tax measures and replacement of sales and commercial transactions levy tax with Value Added Tax. The URA was later restructured to improve tax administration with specific improvements to the audit section and the URA statute revised. Other measures involved broadening the tax base and improving the collection rate.
Financial sector reforms: A number of legal and regulatory reforms were pursued including revisions to the Bank of Uganda Act, enactment of the Financial Institutions Act and the MDI Act. BOU was recapitalized and several weak banks restructured. The country’s largest Bank (UCB) was privatized and to avoid stretching the Bank of Uganda’s Supervision capacity, a moratorium on bank licensing was instituted. Improvements in banking supervision to help banks ensure better risk management were pursued and BOU’s capacity to better regulate non-banks was improved especially following the enactment of the MDI Act. More recently the moratorium on new bank licensing was removed allowing the entry of several new banks to encourage competition as well as to foster the reduction in the intermediation spread. Interest rates determination was decontrolled and left to the market participants. However, the spread between the lending rates remained high partly due to low response to the BOU’s signaling rates and non-performing loans. The BOU also broadened and deepened the government securities market through introduction of more long term dated instruments and development of the secondary market.
Liberalization and external sector policies: Government eliminated marketing boards, price controls, and export taxes and exchange restrictions. The current and capital account controls were removed paving way for the expansion and diversification of the export base and encouraging non-debt creating capital inflows. This was also partly encouraged by the lowering of import tariffs and the streamlining of the duty draw back system on exports. The exchange rate became market determined with BOU maintaining presence in the market by way of intervening whenever necessary to smooth volatility while mindful of the international reserves and inflation objective. A new foreign exchange statute was enacted and new reporting requirements were introduced to improve balance of payments compilation.
Structural reforms: These focused on improvements to the quality and coverage of infrastructure services by increasing competition and private sector participation and improving the legal and regulatory framework for power, telecommunications, water, railway, posts and aviation. Individual regulatory agencies were created under each line ministry to implement related reforms to ensure that the intended overall objectives of improved coverage and quality are achieved. On infrastructure government with the support of donors spent substantial amounts on the rehabilitation of the road network in the initial 10 year period (1991 to 2000) and has during the last five years commenced expansion of existing major corridors and upgrading of other important roads across the country. A roads Authority (Uganda National Roads Authority) responsible for developing and maintaining national roadwork’s was also set-up. Electricity is being addressed through construction of a large hydro power plant at Bujagali and encouragement of private sector supply to the main grid. Temporary thermal was also set-up to fill the void that was created by reduction of supply at the main hydro power plant and increased demand. Besides road and electricity infrastructure, government also developed schools and health facilities country-wide. Further, legislative and judicial reforms supportive of private sector investment and economic activity were implemented. Social expenditures with a view to building human capital, primarily through improved access to education and health services; and pursuing good governance as building blocks for reducing poverty through economic growth and human and physical resource development were also persued.
3. Macroeconomic Performance in the last 20 years
Real GDP grew at an annual average of 7% between 1991 and 2000, and accelerated to an average of 7.6% after 2000 as the sector composition changed. Overall, the economy underwent transformation from a predominantly agricultural based economy towards a service sector based economy. The share of value addition in agriculture to output fell from an average of 45% between 1991 and 2000 to an average of 25%, while value addition in services increased from the average of 38% to an average of 50% over the same period. Value addition in industry also grew from a share of 16% to 25% of GDP. Within the services sector, growth was mainly in construction and communication. The changing composition was partly due to increase in investment (gross fixed capital formation increased at an annual average of 7% between 1991 and 2000, and rose to average of 11% between 2001 and 2009). As a share of GDP, gross fixed capital formation increased from an annual average of 17% of GDP between 1991 and 2000 to an annual average of 21% of GDP between 2001 and 1009. The increase in investment after drastic declines prior to the 1990’s was on account of rehabilitation of infrastructure and increase in productive capacity.
Inflation which was in double digits at the start of the 1990’s (about 30%) continued to fall and was maintained at an average of 5% over the 13 year period between 1995 and 2007. However, inflation hit double digits in 2008 and 2009 on the back of rising oil prices and other commodity prices as well as adverse weather conditions. Much of the decrease in inflation can be explained by fiscal and monetary developments. The fiscal deficit (excluding grants) averaged at about 5% of GDP in the late 1990’s, from a history of high levels. However, there was a three year period (2001 to 2003) when the deficits rose significantly to an average of 11% before reverting to the previous low levels of about 5% of GDP. In the three years that the deficit excluding grants hit double digit levels, government expenditures increased to an average of 22% of GDP from previous levels of about 15% of GDP. Revenues on the other hand have consistently risen doubling in the early 1990’s to an average of 10% of GDP and rising further to an average of 13% of GDP towards the end of the 2000’s.
At the monetary level, M2 grew rapidly at the start of the 1990’ (52%, 66%, and 57% in 1991, 1992 and 1993) before gradually declining to an average annual growth of 17% between 1995 and 2000. The average growth was 19% between 2001 and 2009 but was characterized by surges in 2002, 2007 and 2008 to 25%, 22% and 31% annual growth rates respectively. As a share of GDP, there was an increase from the average of 11.4% between 1991 and 2000 to the average share of 18% between 2001 and 2008. Despite the growth in the monetary aggregates, BOU’s stance remained largely non-accommodative as most of the growth in the monetary aggregates was up until 2007 due to increases in the international reserves. International reserves increased rapidly from 1 month of import cover of goods and services in 1991 to 6 months by the middle of the period (2000) and was maintained at that level through 2009. On the other hand, domestic credit to the private sector increased as a share of GDP from the average of 4.5% between 1991 and 2000 to an average of 10% between 2001 and 2008. Despite the increase in domestic credit to the private sector, lending rates remained largely unchanged at about 20% for the period between 1995 and 2009. However, some increase was initially registered in the savings rate to about 11% in 1997 and 1998 but fell following the bank closures and improved risk management of banks to about 9% to offset some of the increased running costs.
The external sector performance was characterized by mixed fortunes during the period 1991 to 2009. In the current account, the annual growth in exports of goods and services rose rapidly starting in the mid 1990’s averaging 20% on the back of the successful export diversification policies following the implementation of the liberalization and benefits of the bumper coffee harvests and favorable international prices. The gradual fall in international prices that followed resulted in the halving of the growth rates for exports of goods and services in the period between 2001 and 2007 to about 10% per annum before rising again on the back of increased regional demand for Ugandan products as peace was restored in South Sudan and Democratic Republic of Congo. In the capital account, Uganda was a major beneficiary of HIPC debt relief which significantly reduced outflows for debt repayment and also resulted in scaling up of donor resources for poverty programs during the 1990’s and first half of 2000. The additional debt forgiveness through the MDRI provided further savings of foreign exchange that would otherwise have been spent on servicing debt. In the private sector, foreign direct investment equally grew rapidly, from a share of GDP of 0% at the start of the 1990’s to 2% between 1995 and 2000 and doubled to 4% between 2001 and 2009. These developments in the balance of payments supported the slow and steady depreciation in the exchange rate in nominal terms over the last two decades averaging 5% per annum, and the stability in the real effective exchange rate which averaged an annual change over the entire period of 0%.
The outcome of the macroeconomic and structural policies can be seen in the steady decline in the head count poverty indicator from 39% in 2002/03 to 31% in 2005/06 to 24.5% in 2009/10. The key improvements have been noted in education and living arrangements although the incidence of poverty is still high in rural areas and inequality has worsened.
Going forward, there is need to raise growth back to its potential following the recent slowdown to ensure that the MDG’s are met. Efforts to address lingering infrastructure bottlenecks and speeding up of oil production offer potential for boosting growth over the medium to long term. In particular, improvements in infrastructure could support the transformation of the agricultural sector offering prospects for not only reducing poverty levels but also lowering income inequalities between rural and urban populations. The outlook for inflation is favorable but caution is needed to ensure that the transient increase in fiscal spending during the election period coupled with mixed revenue performance and the exchange rate depreciation does not feed through into prices. The accommodative monetary stance that was taken in the wake of the global financial crisis to buttress aggregate demand will need to be discontinued in view of the inflation momentum that has been observed in the most recent months.
Previous delays in budget execution appear to have been moderated over the recent months. The improvements will however need to be backed by improvements in the quality of expenditures focusing on fine-tuning of project appraisal and implementation. In particular, enforcement of government’s control measures and ensuring of compliance by spending units will be critical for ensuring value for money from implemented projects. Additional gains in revenue effort will also be required to match government desires in expanding expenditures to address the remaining infrastructure needs and expanding public service. Moreover, the expected revenues from oil when production commences may lower the potential expansion of non-oil revenues which calls for urgent boosting of revenue effort in the near term. In addition, the possibility to operationalise public private partnership ventures for some infrastructure investment will need to be considered.
The external sector will need much support to reverse recent widening of the current account due to sluggish global demand for Uganda’s exports and the boosting of aggregate demand in the economy through recent expansionary fiscal policy at a time when private sector demand has been rising. The deterioration in the current account which is mirrored in the rapid depreciation of the shilling also calls for expanding the country’s export sector to tap into the countries agricultural potential to serve regional demand and the tourism sector which still has some unexploited/underexploited opportunities. There will be need to harness benefits from the regional integration efforts under the EAC. Existing opportunities in the service sector particularly in the education and health sectors will need to be used to maximize benefits from the integration efforts.
Thank you LK
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