Uganda Economic Review (29Oct09)

8/8/2019 Uganda Economic Review (29Oct09)

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Uganda Economic Review

INVESTMENT PROSPECTS AND OUTLOOK

Ugandaseconomytodecelerate

in200910,butstillexpectedto

grow6.0in2010

Ugandas economy has shown resilience in the face of the global recession and

according to the IMF will register a growth rate of 7.0% in 20091 (2008:9.0%).

Nevertheless, export earnings and foreign capital inflows showed a downward

trend.Asluggishrecovery intheglobaleconomy in2010 isexpectedto leadtoa

wider tradedeficit,potentialdepreciationoftheUgandashilling(UGX)and lower

tax revenue collections. According to the October 2009 IMF World EconomicOutlook,Ugandaneconomicgrowthisexpectedtoslowdownto7.0%in2009,and

6.0%in2010,lowerthanthatofrecentyears,butstillsubstantiallyhigherthanthat

ofmanyothercountries.Economicgrowthisexpectedtorecovertoalongerterm

averageof7.0%by2012.

Historicand

expected

economic

growthaboveworldand

regionalaverages

Real GDP growth (% pa)

3.6

1.6

6.15.0

7.5

6

4

2

0

2

4

6

8

10

12

0507091113

0507091113

0507091113

0507091113

0507091113

World Advanced

economiesEmerging

&

developingAfrica Uganda

Source:IMFWorldEconomicOutlookOctober2009

Exportgrowthdeceleratedon

thebackofweakglobaldemand

Exports growth decelerated to 20% in FY09 due to falling coffee prices and a

decline in global demand. While coffee export earnings decreased by 4%, non

coffee exportswitnessedan increase of22% in value terms. Arecovery incoffee

pricewillleadtoimprovedexportearnings.

ExpansionofEACcustomsunion

willdrivegrowth

TheinclusionofRwandaandBurundiintheEastAfricanCommunity(EAC)customs

unionwillhaveapositive impactonthegrowthof intraregionaltrade.Uganda is

alsonegotiatingagreementswithotherregionaltradeblocsaswellasanEconomic

Partnership

Agreement

with

the

EU

that

should

boost

Ugandas

agricultural

exports.

FDIinflowsin200910remain

uncertain

Ugandahas created a regulatory environment which encouragesFDI. As a result,

FDI increased from less than 4.0% of GDP in FY05 to above 5.0% from FY0608.

Uganda received FDI worth USD 737m in FY09, a decline of 5.4% compared with

FY08. Telecommunications, and oil and gas sectors received the largest share of

FDI. However, inflows in FY10 are uncertain due to the poor global economic

environment.

1AccordingtotheBankofUganda,thelocaleconomygrewby7.0%infiscalyeartoJune2009(FY09).

3|A f r i c a n A l l i a n c e P a n A f r i c a n S e c u r i t i e s R e s e a r c h 2 9 O c t o b e r 2 0 0 9


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Debtto

GDP

ratio

may

increase

marginallyinFY10Multilateral

debt

reduction

initiatives

have

enabled

Uganda

to

reduce

its

debt

from

63.8% of GDP in FY03 to 12.2% in FY09. However, this is expected to increase

marginally in FY10 as government attempts to stimulate the domestic economy

andprovidesupportforthemostaffectedeconomicsectors.

In recent years the government has financed development using the domestic

capital market. As a result, the domestic debt ratio has increased sixfold during

200007. Government has established benchmarks to keep this in check and

preserveitsStandard&PoorsB+creditrating.

Servicessectorcontinuestodrive

growth

Theservicessector,whichaccountsfor46%ofGDP,continuedtopropel economic

growth; growth in this sector was driven by financial services, transport and

communications. Thesectorhasbeengrowing the fastest forover fiveyearsand

willcontinue

to

drive

growth

in

the

medium

term.

In

FY09

services

registered

areal

growth rate of 9.4%, compared to 3.8% and 2.6% growth registered by the

industrialandagriculturalsectors,respectively.

Inflationisexpectedtofallin

200910astheeconomy

stabilisesandfuelpricesfall

The headline inflation rate almost doubled from 7.3% in FY08 to 14.1% in FY09.

However,thetrendisexpectedtoreverseinFY10asfuelpricesfallinlinewiththe

declineinglobaloilprices.

Interestratesremainedrelativelystabledespiteaspikeininflation;infacttheBank

of Uganda is urging commercial banks to reduce the lending rates to the private

sectortofacilitateborrowingforgrowthandexpansion.

Governmentinitiatives

to

improvebusinessclimateThe

Ugandan

government

has

taken

various

initiatives

to

improve

the

business

climate, including increasing investment in infrastructure and human resource

development, increased focus on agricultural productivity and agroprocessing,

formingregulatorybodies,enactingcommerciallaws(suchastheCounterfeitlaw,

Company law, Mortgage law, ICT sector legislation, etc). These initiatives, along

with political stability, will create an environment conducive for business activity

andeconomicgrowth.

Governmentisexpectedto

continueitsfocuson

infrastructure development

Inadequateinfrastructureiscurrentlythebiggestimpedimenttoeconomicgrowth

in Uganda. Infrastructure development is a priority for the government, with

several road and hydropower plant projects already underway. Expansion plans

forthenationalrailandtelecommunications networkarealsobeingdeveloped.

The government aims to use its National Development Plan (NDP) to develop

infrastructure andagriculturetoincreaseexportsanddrivefuturegrowth.

MFIswillprovideeasieraccessto

creditforallsectionsofthe

society

The government is increasing its support to microfinance institutions to increase

theirlendingcapacity.Largemicrofinancedeposittakinginstitutionshaveenjoyed

considerable success, which is now attracting commercial banks to enter this

market.

Foreigninvestorscontinueto

facechallenges

Some of the major challenges faced by foreign investors include inadequate

physical and institutional infrastructure, a poorly educated workforce, political

interference,anontransparentregulatorysystem,andhighlevelsofcorruption.

However,

the

government

is

taking

steps

to

improve

administration

and

ensure

efficient implementation of development plans. To increase accountability, every

government department is now expected to prepare comprehensive work plans



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whose progress is reviewed and verified in quarterly presidential public sector

roundtable

meetings.

Anti

corruption

courts

have

also

been

set

up.

Ugandaisaleaderinsocial

developmentinitiatives

UgandaisoneoftheleadingnationsinAfricaactivelyfocussingonsocialprogress.

Besides efforts to reduce poverty, it is placing emphasis on improving education

(constructionofschools,improvinginfrastructure)andthehealthcare(construction

of local health centres, providing drugs especially for HIV/AIDS and malaria).

AccordingtotheWorldHealthOrganisation,Ugandahasbeenthemostsuccessful

nationinAfricainlimitingthespreadofHIV/AIDS.

Politicalinstabilitycouldgrowas

the2011electionsapproach

PresidentsMusevenisrulesince1986hasbroughtpoliticalstabilityandeconomic

reform.However,politicalcompetitionhasincreasedsincetheonsetofmultiparty

democracyin2006.Musevenihasfailedtogroomasuccessorandhasshownthat

hemaybeunwillingtostepdownwithoutsignificantpressure.Meanwhile,ethnic

basedgrievances

have

reared

their

head,

raising

the

threat

of

divisive

ethnocentric

politicalconflict.



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COUNTRY SNAPSHOT

Demographics and political Economy

CapitalKampala Population31.7m(2008) Landarea241,038km2 FormofgovernmentPresidential democratic

republic

Naturalresourcescoffee,fishandfishproducts,tea,horticulturalproducts,oil(discoveredin2006)

CurrencyUgandashilling(UGX), USD1=UGX1,880 NominalGDP2008USD14.5bn,2009E

USD16.0bn

NominalGDPpercapita2008USD472 Inflationrate14.5%(Sep2009) StockmarketUgandaSecuritiesExchange(USE),

marketcapitalisation

USD

614m

Human development Competitiveness

HumanDevelopmentIndex2008Ranked154

th/177,score0.505

Povertylevel28.6%peoplebelowpovertylinein2006(52.0%in1990).

WorldBanksEaseofDoingBusinessreport2009RankedseventhinsubSaharanAfrica.

WorldEconomicForumGlobalCompetitivenessIndex2009Ranked26outof31Africancountries

polled,128outof133countriespolledglobally.

Country map

Source:AfricanDevelopmentBank



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COUNTRY OVERVIEW

GEOGRAPHY

Geographybothablessinganda

curse

Enviablenaturalresources.

A countrys geographic position can have a significant effect on its ability to

develop. In the case of Uganda, the country is both blessed and cursed by

geography. Blessings include fertile soil, a climate conducive to agriculture (to a

lesserextentinthedrynorth),itspositionononeoftheworldslargestfreshwater

lakes, enviable mineral wealth (including zinc, gold, diamonds, and the recently

discovered oil deposits), water courses that allow for hydroelectric power

generation,anditsproximitytoeastAfricasbiggesteconomy,Kenya.

These factors, however, are only blessings if the country is able to take full

advantage

of

them.

Unfortunately,

Uganda

has

not

been

able,

as

yet,

to

develop

itsagricultural sector to its full potential, although government has decided to

prioritise agricultural development. Ugandas use of Lake Victoria has been

extensive, but unsustainable, resulting in fish stocks falling significantly. Its use of

hydropower is increasing asnew power plantscome online. With regard to oil, it

remainsanopenquestionastowhetherUgandawillbeabletoeffectivelymanage

its newly found reserves. But early signs are that Uganda is determined to learn

fromthemistakesofotheroilproducingAfricancountries (Nigeria,Angola,Libya)

andhasenlistedthehelpoftheNorwegiangovernment,whichhasagreedtofund

theestablishmentofinstitutionstomanageUgandasoilindustry.

butlandlocked OnelessagreeableaspectofUgandasgeographicpositionisthatbeinglandlocked

makes itsexportsmorecostlyanddependentonKenyaforaccesstothesea.This

wasasignificant

problem

recently

when

the

political

crisis

in

Kenya

(in

the

early

2008) caused transport routes to the port of Mombasa to be blocked. Although

being landlocked is not something Uganda can overcome, the country is taking

steps to mitigate its effects through plans to improve rail links to Mombasa.

Moreover,theEastAfricanCommunity(EAC)freetradeblocwillmeanthatcustoms

dutiesonUgandanexportswillbereducedastheypassthroughKenyaenrouteto

theirfinaldestination.

andsurroundedbyvolatile

neighbours

Another significant geographic disadvantage is that Uganda borders on conflict

ridden countries such as the Democratic Republic of Congo, Sudan, and Rwanda.

Theregionsporousbordershaveresulted inrebelgroupseasilycrossing between

countries.Onthepositiveside,rebelactivityhasbeencontainedtomildincidences

atborder

sections

in

recent

times.

DEMOGRAPHICS

WillUgandareapthe

demographicdividend

Uganda has one of the highest population growth rates in the world at 3.3% in

2009. In 2002Ugandaspopulationwas 24.2m in2008 it wasestimatedat 31.7m

and is expected to reach 46.3m by 2020. Whats more, 50% of the current

populationisundertheageof15(2009est.).

If Uganda is able to curb its population growth rate then it could reap significant

benefits from what has been termed the demographic dividend. This dividend

refers toasituationwherethebulkofthepopulation isataneconomicallyactive

age; thus the population as a whole is more productive and less dependent on

either

the

government

or

relatives (ratio

of

dependents

to

economically

active

people declines). The benefits of the demographic dividend are multiple (from

highersavingsrates,toimprovedhumancapital),butonlyaccruetothosecountries



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thatareabletoeffectivelytakeadvantageofthewindowofopportunity.

Population size (m)

0

10

20

30

40

50

1 95 0 1 96 0 1 97 0 1 98 0 1 99 0 2 00 0 2 01 0 2 02 0

Source:DeptofEconomicandSocialAffairs,UnitedNations

Growth rate (% per annum)

0.0

1.0

2.0

3.0

4.0

1950 1960 1970 1980 1990 2000 2010 2020

.orbeburdenedbyarestless,

bloatedurbanisedpopulation?

The reaping of the demographic dividend is far from certain. Should the

governmentbeunabletodoso,Ugandacould in factbehinderedby itsgrowing,

youngpopulation.

Inthenextsixteenyearsitisprojectedthatthepercentageofthepopulationliving

inurbanareaswillincreasefrom15%to40%.Ifemploymentandinfrastructureare

unabletokeep apacewithurbanisation,Ugandasmaincities(especiallyKampala)

couldseeballooningslums,asisthecaseinKenya.Suchasituationcouldalsobreed

socialandpoliticalinstability.

TheUgandangovernmenthasbeenslowtorealisetheimportanceofhavingaclear

plan to manage rapid urbanisation. However, it has taken the first steps by

establishing the Department of Urban Administration and the Ministry of Local

Government,whichwillbechargedwithmanagingissuesarisingfromtheinfluxof

peopletothecities.Furthermore,thegovernmenthasaskedallrelevantministries

todevelopanationalurbanpolicy.

Ethnicdiversitymaychallenge

socialcohesion

Ugandasgrowing andrapidlyurbanisingpopulation ismade up of over20 ethnic

groups;the largestbeingtheBaganda(18%),Basoga(11%),BanyakoleandBakiga

(8%each).Thecolonialperioddisproportionately benefitedthecentreandsouthof

the country, and hence the groups that inhabited it (the Baganda). This

subsequently led to ethnic rivalries and discord in the early postcolonial period,

untilMuseveni

took

power

in

the

1980s.

Although

less

of

aworry

than

in

the

recent

past, ethnicity may become a divisive issue in future as political competition

increasesunderthenewmultipartypoliticalsystem.

Humancapitaltobeimprovedby

freeuniversaleducation

Atpresenttheadult literacyrateinUgandais66.8%,comparedto73.8% inKenya

and 69.4% in Tanzania. However, the governments Universal Primary Education

initiative,broughtintoeffectin1997,andtheofferingoffreesecondaryschooling,

startedin2007,shouldintimeimprovetheaverageskillslevelsinthecountry.The

quality of education, however, is still hampered by a shortage of teachers and

materials.



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INFRASTRUCTURE

Roadand

rail

improvement

key

fordevelopment

The

landlocked

Uganda

relies

heavily

on

rail

and

road

networks

to

transport

its

goods. However, both systems fell into disrepair between 1962 and 1986.

Investment inrail increasedafter 1995as thegovernment institutedrejuvenation

projects,butfurtherinvestmentisneeded.

Ugandacurrentlyhasaround27,000kmofroads,yetonly1,800kmaretarredand

4,800km of the remainder are suitable for allweather purposes. The Uganda

NationalRoadAuthority(UNRA)istheagencyresponsibleforthedevelopmentand

maintenanceof national road corridors. Oneof themajorprojectsundertakenby

theUNRA is therehabilitation ofthe1,700kmNorthernTransportCorridorwitha

grantreceivedfromEuropeanDevelopmentFund.TheWorldBankhasalsonoted

the importance of improving Ugandas transport infrastructure, both as a priority

forUgandas

development

and

as

adriver

in

regional

integration.

This

year

the

bank

promisedtohelpfundtherequired improvements(focussingonthenorthernand

easterncorridors),butdidnotgivedetailsonwhenorhowmuchwouldbeoffered.

Air transport iseven lessdeveloped;Ugandahasonlyone international airportat

Entebbeand13upcountryaerodromes.

Mobilepenetrationislowbutis

growingquickly

Ugandas low mobile telephone penetration rate of 27% offers a significant

investmentopportunity inthecommunicationsector.Thegovernmentplanstolay

over1,500kmofopticalfibrecableby2010toconnectUgandatotheEastAfrican

submarine cable and also connect major towns including Luwero, Nakasongola,

Masindi,Hoima,Kyenjojo,FortPortalandGulu.

Substantialelectricitycapacity

expansionisunderway

Ugandahasoneofthelowestelectrificationratesintheworld,withagridaccessto

5% of the population in urban areas and approximately 2% in rural areas. Total

installed capacity is 527MW, of which almost 60% is generated by hydroelectric

power, the largest hydropower stations being Nalubale and Kiira. To address this

shortfall, construction of hydroelectric power stations at Bujagali (250MW) and

Karuma(750MW)isunderway.



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POLITICAL OVERVIEW

GOVERNMENT STRUCTURE

Thecurrentconstitutionallows

forapowerfulpresidentialoffice

Uganda isapresidentialrepublicwherethepresidentistheheadofstate,headof

governmentandalsotheheadofthedefenceforces.Electionsareheldforboththe

president and the legislature. The president appoints a vice president, prime

ministerandotherministers.

To be elected to the position, a candidate must secure at least 50% of the total

votescast.Ifnoindividualwinstherequirednumberofvotes,arunoffelection is

held. The president is elected for a fiveyear term and can serve in office for an

unlimitednumberofterms.

NRMandFDCdominate

elections

The Uganda National Assembly is a single legislative body with 305 members, of

which 214 are elected by direct popular vote, 81 by legally established Special

Interest Group nominations and 10 members are ex officio. All these members,

including the president, serve fiveyear terms. 56 of the representatives of the

SpecialInterestGrouparewomen,whorepresenteachdistrict.

TheNationalResistanceMovement(NRM)andForumforDemocraticChange(FDC)

are the key political parties which dominated the 2006 elections, securing 242 of

the319seatsintheNationalAssembly.

Ugandahasadoptedthree

constitutionssince1962

Ugandahasadoptedthreeconstitutionssinceindependence.The1962constitution

led to elimination of the federal and quasi federal structure and transferred the

powerto

the

centre,

to

be

exercised

by

the

president.

After

the

1967

constitution,

thepresidentwasconsideredthechiefexecutiveandeachpoliticalpartywasgiven

the right to nominate a contender for president. The 1967 constitution also

outlawedthetraditionalkingdoms.Thecurrentconstitutionwasadopted in1995,

andamendedin2005and2006toscrappresidentialtermlimitsandcreateamulti

partydemocracy,respectively.

POLITICS IN PERSPECTIVE

Theearlypostcolonialperiodof

Ugandanpoliticssawinstability

andviolence,firstfromObote.

Uganda became independent in October 1962 and faced a volatile political

environmentuntil 1986. In1962 the Uganda PeoplesCongress (UPC)andKabaka

Yekka(KY)formedacoalitiontotakepowerafterthefirstelections.In1966Milton

Obote (thenprimeminister from theUPC)with thehelpof IdiAmindeposed the

president,Kabaka

Mutesi

II(king

of

the

Baganda),

in

amilitary

coup

and

seized

the

presidency.KabakaMutesiIIwasforcedtofleetoLondonasObotetookaimatthe

tribal kingdoms, using the 1967 constitution to dissolve them and form a unitary

governmentwithpowerconcentratedinthepresidentsoffice.

andthenfromAmin,. When Idi Amin took power in a coup in 1971 the move was welcomed by the

Ugandanpeople, who felt theyhadbeen liberated fromObotesrepressive reign.

However, Amins ascent ushered in a dark period that claimed the lives of an

estimated300,000peopleduring197179.Aminsruleendedwithan intervention

by Tanzania and the Uganda National Liberation Front (UNLF). But the regime

changedidnotmanagetobringstability.Anumberofshortlivedregimescameand

wentwithObotetakingpoweragainin1980,onlytobeoverthrownbyTitoOkello

in1985.

Okello

was

also

unable

to

bring

order

to

Uganda,

and

was

subsequently

overthrownbyYoweriMusevenisNationalResistanceArmyin1986.



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.until

relative

stability

was

establishedwithMusevenis

ascenttopower

Musevenis

rule

has

brought

stability

to

Uganda

for

the

first

time

in

the

postindependence period. He blamed the instability that preceded him on political

parties,whichhefelttendedtodividesocietyalongethnic lines.Thus,intheearly

years of his rule Museveni outlawed political parties and instead tried to instil

democratic participation at the grassroots level through Local Councils (initially

referredtoasRevolutionaryCouncils).Mountingexternalandinternalpressureled

toconstitutionalreforms thatprecededareferendumin2000onwhetherUganda

shouldadoptmultipartydemocracyorcontinuewiththeNRMMovementsystem.

In that referendum Musevenis system was legitimated, and the 2001 elections

proceeded like the 1996 elections, where candidates stood for election on their

own merits without party machinery supporting them. Museveni won the 2001

electionwith69%ofthevote,downfromthe74%hehadreceivedin1996.

Recentchanges

have

seen

a

moveawayfromthenoparty

systemtowards.

Musevenismain

opponent

in

the

2001

election,

Kizza

Besigye

(28%

of

the

votes),

contestedtheelectionresultsintheSupremeCourt.Thecourtruledthatalthough

therewereirregularitiesintheelectoralprocess,itwouldnotoverturntheresults.

Besigye,facedwithchargesoftreasonandfearingreprisalforopposingMuseveni,

wentintoexilesoonafter.

.multipartydemocracy.But

intimidationandirregularities

remainafactorinelections

In2005anotherreferendumwasheldtoascertainwhetherUgandanswouldprefer

a multiparty system. This time, Ugandans came out in favour of multiparty

democracy, signalling a new era in Ugandan politics and setting the stage for the

2006elections.Termlimitsforthepresidentwerescrappedbyparliamentin2005,

allowingMusevenitorunforreelection.Besigyereturnedfromexiletocontestthe

elections for his new party, the Forum for Democratic Change (FDC). However, in

the

run

up

to

the

elections

he

and

22

other

members

of

the

FDC

were

arrested

oncharges of treason and conspiracy with the Peoples Redemption Army militant

group.TheConstitutional Courtruledagainstthearrest,andBesigyeandtheother

FDC members were allowed to go free and campaign for the elections. The

electionssawMusevenisholdonpowerdecreasefurtherashereceived59%ofthe

vote(afull10%lowerthanin2001).BesigyesFDCpickedup37.36%.

CURRENT GOVERNMENT

Ugandahaswitnessed

significanteconomicprogress

underthecurrentgovernment

UnderMusevenis22yearrule,thecountryhasseensignificanteconomicgrowth,

liberalisation and privatization, and an improvement in the human development

indicators. Decentralisation is also being promoted to empower popularly elected

localgovernmentstotakechargeofdevelopmentplans.

Thehumanrightssituationhas

improvedconsiderably

Ugandaboastsarelativelyfreemediaandseveralactivecivilsocietyorganisations,

though lawandorderproblems, includingpoorpolicing,remain.Thejudiciaryalso

hasdisplayedindependence,butitdoesfacepoliticalpressureandintimidation (as

with the Besigye case over the 2001 elections, above, when twojudges recused

themselves from the trial for fearof falling foulof the regime). The humanrights

situationinnorthernUganda,thetraditionalhomeoftheLordsResistanceArmy, is

generallyworsethanintherestofthecountry.

However, resettlement and rehabilitation programmes undertaken by the

governmentandaidorganisationshaveeasedthestrainedlivingstandardsinmany

areasinthenorthernpartofthecountrythatwereaffectedbytheLRAsactivities.

Corruptionis

akey

challenge

Despite

macroeconomic

and

political

stability,

structural

transformation

remains

akey challenge for the economy. The government bureaucracy is inefficient and

there is widespread corruption. Transparency Internationals Corruption

Perceptions Index 2008 ranked Uganda at 126th place out of 180 countries. To



12/42


address this problem, the AntiCorruption Court was setup in 2008 and an Audit

Unitfor

government

spending

is

being

created

in

the

Auditor

Generals

office.

RECENT DEVELOPMENTS

TheLRAremainsatlarge

abroad.

TheLordsResistanceArmy(LRA),headedbythenotoriousJosephKony,remainsat

largedespiteaconcertedeffortbetweenthearmiesoftheDRC,Sudan,andUganda

toquashthemilitialatelastyearafterpeacetalksbrokedownagain.Theirefforts

didnotmanagetostopthegroup,whorepliedbymassacringaround500peoplein

northern DRC over the Christmas period last year. Much LRA activity is now

confinedtoborderingcountries,butstillaffectsUgandanpoliticsbycomplicatingits

relationshipwithitsneighbours.

whiletribalissuesraisetheir

headat

home

On11and12ofSeptember2009,violencebrokeoutinKampalaasmembersofthe

Baganda

tribe

confronted

police,

who

were

assigned

to

stop

the

Baganda

king(kabaka)RonaldMutebifromvisitingthenorthofthecity.TheEconomistreported

on17Septemberthat24peoplewerekilledinandaroundthecityduetotheriots.

TheBagandaandthegovernmenthavehad,forthemostpart,acordialrelationship

inthepast.However,itseemsthatrelationsarestraining.

AnotherfactorstrainingrelationsbetweenthegovernmentandtheBagandaisthe

issue of land. The erstwhile kingdom claims 64,500 km2 of fertile lands in central

Uganda, aclaimthatMuseveniandthe landministerhavedismissedoutofhand.

Suchgrievancescouldgalvaniseanoppositionmovementcallingforsomeformof

federalismintheupcomingelections.

The

Baganda

are

not

the

only

group

with

land

issues,

the

Bunyoro

have

also

calledforthereturnoflandexpropriatedfromthemundercolonialrule,significantly, land

that has been found to have oildeposits. It would seem that Musevenis fears of

multipartypoliticalcompetitionworkingasadivisive forceamongstethnicgroups

could be realised. Just as in Kenya, ethnic politics has the potential to cause

widespreadpoliticalinstability.SuchissueshavecausedtheEconomistIntelligence

Uniton16September2009tolowerUgandaspoliticalriskratingfromBtoCCC.

Politicalpartieshavestartedto

frametheirstrategiesforthe

2011elections

Thenextelectionsarescheduledtotakeplacein2011.Thegovernmentistryingto

strike a balance between taking populist measures to ensure its victory and hard

socioeconomic decisions that continue to support economic growth. Analysts

contend that the government will attempt to pass the controversial Land

AmendmentsBillandanactofparliamentonmanagementofoilresourcesin2009

inorder

to

create

abuffer

to

contain

any

negative

fallout

before

the

elections.

whichareexpectedtobea

repeatofthe2006contest

With the selection of both Museveni (NRM) and Besigye (FDC) as presidential

candidates, the2011electionsareexpected tobearepeatof the2001and2006

elections. However, we can also expect squabbles from within the NRM as

ambitiouspoliticiansbecomefrustratedwithMuseveniscontinueddominance.



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ECONOMIC OVERVIEW

OVERVIEW

Ugandahasseenfourepisodes

initseconomichistorysince

independence.Aperiodof

growth(196070)

Since independence, Ugandas economic development has tracked political

developments.ArecentOECDreport(Kuteesaetal.)has identifiedfoureconomic

episodesduringthisperiod.Thefirst,196070,sawUgandaemergingasoneofthe

most vibrant economies in subSaharan Africa, with a real GDP growth rate

averaging4.8%drivenbyagrowingmanufacturingsector.

aperiodofeconomiccollapse

(197081)

FromthestartofAminsrulein1971thesituationchangeddrastically.Civilunrest

andeconomicmismanagementsawskilledUgandansemigrateenmasse(especially

theAsiancommunitywhowereexpelledbyAminsregime),whiletheoilshocksof

the

1970s

only

added

to

economic

and

political

woes.

The

result

of

themismanagementwashighinflationandbalanceofpaymentsdeficits.

aperiodofmildimprovement

andgrowth(198186)

By 1981 it was obvious that things needed to change. Structural adjustment

measures were put in place toencourage growth, including revaluing the shilling,

removing price controls, increasing interest rates, and implementing fiscal and

monetary reforms (OECD, 2006). The benefits were felt immediately and growth

returnedtotheeconomy,exceptfortheagriculturalandindustrialsectors(dueto

poorly managed price incentives and foreign exchange and infrastructure

constraints).

andaperiodofsustained

growthandcompetenteconomic

management(1986

present)

SincetheonsetoftheMuseveniperiod,1986tothepresent,theUgandaneconomy

hasimprovedmarkedly,withtheassistanceandguidanceofthemultilateral donor

institutions.

GDP

growth

rates

have

averaged

over

7%

during

the

period

and

inflationrateshavebeencontained,onaverage,withinthesingledigitrange.

Uganda has not been totally sheltered from the current global recession, but

growth, though down, has continued. Economic activity slowed down from 9% in

FY08to7%inFY09.

Nominal GDP (USDbn)

6.2 6.67.2

9.2 10.0

11.9

14.515.9

0

5

10

15

20

FY02 FY04 FY06 FY08

Source:BankofUganda

Real GDP growth rate (% per annum)

8.6

6.6 6.8 6.3

10.8

8.49.1

7.0

0

2

4

6

8

10

12

FY02 FY04 FY06 FY08

Source:BankofUganda

Despite an improvement in macroeconomic policies, Uganda remains a poor and

underdeveloped country. Its economy is small relative to other EAC member

countriesasitaccountsfor27%oftheregionalpopulationbutcontributeslessthan

20%toEACGDP.WithanestimatedpercapitaincomeofUSD472in2009,Uganda

iscategorised

by

the

World

Bank

as

alow

income

country.



14/42


PLANS FOR DEVELOPMENTInclusivedevelopmentisthe

mainaimofeconomicpolicy

The aim of economic policy, the Macroeconomic Plan and Programmes for Social

and Economic Development, FY1014, is inclusive development. Thus far, the

country has almost singularly focused on macroeconomic stability and economic

growth.Economicpolicycurrentlytakesamultiprongedapproachandfocuseson

thefollowingpriorities:

Prioritiesincludeagriculture,

infrastructure, human

developmentandreconstruction

ofNorthernUganda

Agriculture. Focus on improving agricultural production and productivitythrough better irrigation facilities, mechanisation and consolidation of

National Agricultural Advisory Services (NAADS) for provision of inputs and

technical support to farmers. Improvement of agricultural regulation to

facilitatepricesettingandaccesstointernationalmarketswillbecritical.

Transport infrastructure. Emphasis on construction, upgrading andmaintenance of critical road networks. Rehabilitation of the railway link to

Mombasatoaffordcheaperaccesstothesearouteisalsoapriority.

Energy infrastructure. Completion and timely commissioning of large powerprojectslikeBujagaliandKarumatoensureavailabilityofadequatepowerto

supportthegrowingdemandfromindustrialactivities.

Education and health. Increasing the budgetary allocation and provision offundsforcapitationandconstructionofnewclassrooms,improvingthehealth

infrastructure, and provision of drugs for lifethreatening diseases like

HIV/AIDSandmalaria.

Reconstruction

of

northern

Uganda.

The

Peace

Recovery

and

Development

Plan (PRDP)aims toupgrade infrastructure innorthernUganda.The focus is

onroads,sanitation,healthandwater.

Ugandahasmadegoodprogress

withMDGgoals

The government signed the Millennium Declaration in 2000, which set out the

following eight Millennium Development Goals to be achieved by 2015. Uganda

appearslikelytoeradicateextreme poverty;promotegenderequalityandempower

women; combat HIV/AIDS, malaria and other diseases; ensure environmental

sustainability;anddevelopaglobalpartnershipfordevelopment.

Ugandamayalsobeabletoachieveuniversalprimaryeducation,withgreatereffort

to encourage children to complete primary education. With improved policies,

strengthenedinstitutions,andadditionalfundingthecountrymaybeabletomeet

its

target

for

hunger

too.

However,

progress

to

reduce

child

mortality

and

to

improvematernalhealthisuncertain.

PEAPhasresultedinlowering

povertyfrom44%inFY97to31%

inFY09

ThePovertyEradicationActionPlan(PEAP)hasbeenUgandasflagshipprogramme

for economic and human development and was implemented since 1997. The

initiative aims to secure certain socioeconomic goals by 2017 and was revised

everythreeyearstotakeaccountofemergingissuesanddevelopments.Themain

goaloftheprogrammewastoreducetheamountofpeopleunabletomeettheir

basicneedsfrom44%intheinceptionyear,1997,tounder10%by2017.

TheNationalDevelopmentPlan

tosucceedPEAP

ThelastversionofthePEAPexpiredin2008andhassubsequentlybeenreplacedby

the National Development Plan. The NDP has a fiveyear development planning

horizon,asopposed tothethreeyearhorizonofPEAP.TheobjectivesoftheNDP

are

much

the

same

as

those

of

the

MDGs

and

Macroeconomic

Plan

and

ProgrammesforSocialandEconomicDevelopment.



15/42


ECONOMIC ACTIVITY

COMPOSITION OF REAL GDP

Servicessectorcontributesclose

tohalfoftheGDP

The services sector is the largest contributor to economic activity. The average

contributionofservicestorealGDPbetweenFY0109was49%.Industrialsectorhas

continued to contribute about 25% to the GDP, while the share of agriculture has

declinedfrom23%inFY00to15%inFY09.Theindustrialsectorisdominatedbythe

construction (15% of GDP in FY09) and manufacturing (7%) subsectors.

Industrialisation has not kept pace with economic growth over the years due to a

lack of adequate infrastructure and institutional support and inappropriate policy

measures.

The

government

recognises

that

the

natural

comparative

advantage

and

socio

economicstructureoftheeconomyfavoursagriculture,andhencehasincreasedthe

expenditureonagricultureby63%inFY09.Theshareofagricultureasapercentage

ofrealGDPhasdeclinedfrommorethan23%inFY00to15%inFY09

GDP composition by industry FY09 (% of total)

15.1 14.613.8

6.77.9

7.06.1

4.6

2.6 3.5

18.1

0.0

5.0

10.0

15.0

20.0

Agriculture

Construction

Wholesale&retailtrade

Manufacturing

Transport&

communications

Realestateactivities

Education

Hotels&restaurants

Financialservices

Publicadministration

Other

Source:BankofUganda

Aslowdown

in

construction

sectorandtradepulleddown

economicgrowthinFY09

RealGDP

growth

slowed

to

7%

in

FY09

on

account

of

the

poor

performance

by

the

industrial sector (particularly construction), which is dependent on government

funds and remittances. Although government allocation improved in FY09, the

increase was largely offset by a significantdecline in remittances and donor funds

(32%y/yreduction).TradeactivitiesalsodippedinFY09duetoweakeningdemand

inthewakeoftheglobaleconomicslowdown.



16/42


Growth rate (% per annum, FY0509)

8.39.2 9.8

1.3

0

4

8

12

16

FY05

FY06

FY07

FY08

FY09

FY05

FY06

FY07

FY08

FY09

FY05

FY06

FY07

FY08

FY09

FY05

FY06

FY07

FY08

FY09

RealGDP Services Industry Agriculture,forestry

&fishing

Source:BankofUganda

Financialservices,transportand

communicationsectorsgrewthe

fastestinFY09

DuringFY09,thegrowthperformanceofkeysectorswasmixed.Whilethefinancial

services, transportation and communication sectors grew at more than 20% y/y,

therewasasignificantdipinthegrowthofconstruction,whichgrewatjust2%y/y.

Thegrowthrateintheagriculturesectorhasseenasteadydeclinefrom8%inFY01

to0%inFY07.However,FY09hasseenareversalinthistrendwitha3%growth.

EXPENDITURE ON REAL GDP

Consumptionistheengineofthe

Ugandaneconomy

Gross fixed capital formation grew strongly in FY0309 at an average rate of over

12.4%p.a.Duringthesameperiodhouseholdconsumptiongrewat7.6%.However,

therewere

considerable

fluctuations

over

the

years

and

within

the

sub

components

ofconsumptionspending.InFY09,governmentconsumptiongrewat9.6%, pushing

final consumption growth to 10.4%. In FY06, by contrast,household consumption

grewat12.4%andreplacedgovernmentconsumptionasthegrowthdriver offinal

consumption.

Components of Real GDP (% growth)

8.63.5

12.7

16.5

50

40

30

20

10

0

10

20

30

FY05

FY06

FY07

FY08

FY09

FY05

FY06

FY07

FY08

FY09

FY05

FY06

FY07

FY08

FY09

FY05

FY06

FY07

FY08

FY09

Household

consumption

expenditure

Government

consumption

expenditure

Fixedcapitalformation Netexports

Source:BankofUganda

Increasinggapbetweenimports

andexportsdrainstheeconomy

The external sector has hindered the economy during FY0509.Net exports (total

exports less total imports) fell each year except FY08. In FY09, net exports

experiencedaparticularly

sharp

fall

of

45.1%.



17/42


GROSS FIXED CAPITAL FORMATION

Forthe

last

five

years,

gross

fixed

capital

formation

(GFCF)

has

been

above

20%

of

nominalGDPwithprivateinvestmentcontributingmorethan80%ofthetotal.This

can be attributed to the liberalisation of the economy. At the same time, it also

highlightsinsufficient publicinvestmentintheinfrastructureofthecountry.

GFCF (UGXbn)

3,564 3,810

4,9675,583

6,476

0

2,000

4,000

6,000

8,000

FY05 FY06 FY07 FY08 FY09

Public

Private

Source:BankofUganda

GFCF (% of Nominal GDP)

22.2

21.0

23.4

22.6

21.7

18

20

22

24

26


Source:BankofUganda

SAVINGSThesavingsrateexpectedto

reach17.7%inFY09

Thegrosssavingsrate,asapercentageofGDP,hasbeenrisingsteadilysinceFY01.

ThesavingsrateforFY07was14.8%andestimatedat14.5%forFY08.Itisexpected

to

have

risen further

to

17.7%

in

FY09.

The

increase

in

savings

rate

is

primarily

duetothedevelopmentofmicrofinanceinstitutionsviaSavings,CreditandCooperative

Organisations(SACCOS).

LABOUR MARKETLabourforceisgrowingat3.3% Ugandas relatively young population has grown by about 3.3% per annum in the

last five years. In FY08, the workforce rose by 3.5% to reach 13.9m. As per the

National Labour Market Indicator in FY06, about 14% of the population was

employedinurbancentres.

Majorityofthelabourforceis

unskilled

Only23%oftheworkforcehasreceivedsecondaryeducationandabove.Only 0.5%

of the workforce is engaged in entrepreneurial activities, employing 16% of the

workforce.

Lack

of

formal

education,

skills

and

opportunity

has

forced

82%

of

the

workforcetobeeitherselfemployedorworkasunpaidfamilylabour.

The official unemployment rate, using the strict definition which counts people

actively lookingforemployment, inFY06was2%,while12%oftheworkforcewas

underemployed.Theurbanunemploymentrate ishigherat7%,comparedtorural

unemploymentrateof1%.



18/42


SELECTED ECONOMIC SECTORS

AGRICULTURE

Agricultureisthekeyforeign

exchangeearnerinspiteof

challenges

Agricultureremainsthemainstayoftheeconomyandemploysmorethan70%of

the population. Italso accounts for 45%of the totalexportearnings, consistently

generating more foreign exchange than any other sector. However, the high

populationgrowthrate,decliningaveragefarmsize,inadequateinfrastructure, and

lackofmarketinformation,remainthekeychallenges.

Uganda relies heavily on subsistence agriculture, with 70% of the area under

cultivation being used for subsistence production. Increased investment in

agriculture and initiatives to increase productivity will be essential for reviving

agriculture

and

reducing

poverty.

The majority of agricultural production is concentrated on lowvalue crops. The

primary agricultural products include food crops, fishing, forestry, livestock and

horticulturalproduce.

Agriculture - share in real GDP (%)

23 23 22 21 2018

1716 15

0.0

5.0

10.0

15.0

20.0

25.0

30.0


Source:BankofUganda

Agriculture real growth (% per annum)

7.97.1

2.11.6

2.0

0.5 0.1

1.4

2.5

0.0

2.0

4.0

6.0

8.0

10.0


Source:BankofUganda

Initiativesinthissectordidnot

havethedesiredimpact

Severalagricultural programmeshavebeen launched,buttheyhavenotdelivered

satisfactoryresults.Manypolicieslackcoherenceandattimesruncontrarytoother

developmentprogrammes.

Currently, the country is undertaking a full agricultural census using global

positioning

systems

to

design

policies

that

meet

the

actual

needs

of

farming

communities. To stimulate the sector, certain provisions have been made in the

FY10 budget, including the allocation of UGX 36bn to the National Agricultural

AdvisoryServices(NAADS)toraisetheincomelevelofsubsistencefarmers.

COFFEE INDUSTRY

Coffeeisoneofthemost

importantcropsforUgandas

economy

Coffee is one of the preeminent crops grown in Uganda and contributes about

2030%oftheforeignearnings.ThetwomajorcoffeecropsproducedinUgandaare

RobustaandArabica.

Coffeeexportswitnessedrobust

growthinFY08

In FY08, 3.2m 60kg bags of coffee were exported, reflecting a 19% y/y increase.

RobustaandArabicacoffeeaccountedfor2.7mbagsand0.5mbags,respectively.

ComparedtoFY07,theexportvalueofcoffeegrewby51%y/ytoUSD388mandin

FY08theaveragerealisedpricegrewby18%y/ytoUSD2.20perkg.



19/42


Coffeeoffersimmensepotential,

butchallenges

remain

The coffee sector has immense investment opportunities, but it faces certain

constraints

which

restrict

the

free

flow

of

capital.

These

include

a

lack

ofcoordination between public bodies, such as UCDA and NAADS/NARS, and an

incomplete regulatory framework, which ignored key areas like research. Also,

volatile global coffee prices further discourage investors. Government has

undertakencertaininitiatives,suchassecurityofinvestmentguaranteedunderthe

Ugandanconstitution,tocountertheseconstraints.

TheEUisthelargestmarketfor

Ugandascoffeeexports

Uganda enjoys extensive market access to the EU due to trade agreements that

ensure exports are dutyand quotafree. The EU is the largest export destination,

accountingforover75%oftotalcoffeeexports,followedbySudanwithashareof

16%. The top Ugandan coffee exporters are Kawacom, Kyagalanyi Coffee, and

Ugacof. The top coffee buyers include ECOM Agro Industrialists, Sucafina and

Volcafe.

Procurement of coffee (000 tonnes)

170.1158.1

133.1

175.3

211.8

0

50

100

150

200

250

2004 2005 2006 2007 2008

Arabica Robusta

Source:UgandaCoffeeDevelopmentAuthority,UgandaTeaAuthority

FISH AND FISH PRODUCTS INDUSTRY

Fishinghascontinuedtodecline

overthelast3years

ThepresenceoflargelakessuchasLakeVictoria,LakeAlbertandLakeKyogamake

Ugandanaturally abundant in fishand fishproducts.For the past three years the

sectorhasbeenexperiencingnegativegrowth; inFY08thesectordeclinedby10%

duetooverexploitationoffishstocksandillegalfishing.

Thesectorisalsograpplingwithchallengessuchaslackofhygieneinhandlingfish,

lackofadequatecontrolcapacitieswiththefisheriesresourcesmanagement,poor

fishing

equipments

and

inadequate

standards

in

beach

management

practices.

Government has taken remedial steps to help the sector overcome its

inadequacies. Some of the highpriority objectives set by the government to

developthesectortargetvalueadditionandproductrangediversification, increase

inexportvalue,manpowerand infrastructural development.Oneofthe initiatives

istheNationalAgriculturalResearchSystemAct,whichallowsprivateresearchers

or research agencies to engage in aqua research using public funding without

havingaformalmandate.

However, measures taken by the government to stem overfishing have shown

limited results. Consequently, the Uganda Fish Processors and Exporters

Association (UFPEA) started selfpolicing by privatelyhired inspectors and

increasingthe

minimum

catch

size

of

Nile

Perch

specified

under

Uganda

law.

Illegal

fishingisstillrampantandresultedinalossof40%ofthetotalsupplyinFY08.



20/42


Fish catch (000 tonnes)

247.5

434.8416.8

367.2 374.3

200

250

300

350

400

450

2003 2004 2005 2006 2007

Source:FisheriesDepartment,MinistryofAgriculture,AnimalIndustryandFisheries

TEA INDUSTRY

Volumeofteaexportsincreased

inFY08,lowpricesledtoa

declineinexportearnings

FavourableclimateandsoilconditionsmakeUgandathebestqualityteaproducer

in the world.As aresult tea forms a major export crop in thecountry. The three

biggestteaexportersofUgandaare JamesFinlay(formerlyRuwenzoriHighlands),

RuwenzoriCommoditiesandToro&MtyangTeaCompany.

Procurement of tea (000 tonnes)

35.737.7

34.3

44.942.8

0

10

20

30

40

50

2004 2005 2006 2007 2008

Source:UgandaTeaAuthority

In FY09, the volume of tea exports grew by 8.6% due to rehabilitation of tea

plantationsandtheencouragementofoutgrowth,but itsvalueasapercentageof

totalexportsdecreasedfrom1.8%inFY08to1.6%inFY09duetolowworldprices.

A

major

drawback

faced

by

tea

exporters

is

the

double

tax

they

have

to

pay

inKenya, which is a major export destination. The sector faces a shortage of

processingfacilities,whileexistingfacilitiesneedmodernisation.

To boost tea processing capacity, the Danish International Development Agency

(DANIDA) sanctioned an interestfree loan of USD 8m in FY08 to Ugandas

smallholderteagrowerstobuymachineryandequipment.Further,thegovernment

has announced investment of UGX 2.8bn (USD 1.5m) to build a twoline tea

processingplant.Toimproveprivatesectorparticipation,government estateshave

beenprivatisedandprivatesectorinvestmentisencouragedviajointventures.

HORTICULTURE SECTOR

Lackof

certification

poses

a

challengetothegrowthof

horticultureexports

Uganda

exports

niche

horticultural

products

including

flowers,

vanilla,

pepper,

fruits and ginger. The sector contributes 36% to the total export earnings and

servestheEUmarket oneoftheworldslargestmarketsandwheretheunitprices



21/42


areseveraltimeshigherthaninthedomesticmarket.

Atpresent,thesectorfacesnumerous institutional andtechnicalconstraints,such

as lackofaccessto information, inadequatefinance,anddependenceonweather

conditions. Such constraints faced by cultivators make it harder for them to get

EurepGAP certification. With an increase in the demand for certified produce,

Uganda is feared to lose out in the world market. While there are supply side

constraints, the investment case for the horticultural sector is based on a strong

andgrowingdemandintheEUmarket.

SERVICES SECTOR

Servicesoutgrowsagricultureto

dominateGDPoutput

Services sector surpassed agriculture and has since FY95 emerged as the largest

contributor toGDP. InFY09, itscontribution tonominalGDPwas46%.Thesector

grewat

9%

in

FY09,

aslowdown

from

a10%

growth

in

FY08.

Tradedominatesservicessector,

buttransportandfinancial

sectorsleadothersubsectors

The wholesale and retail trade has been dominating the sector due to the

favourable conditions in the exports market, followed by transport and

communication, real estate, education and hotels and restaurants subsectors.

During FY0809 transport and communication and financial services, growing at

over20%,werethefastestgrowingsubsectors.

HOTEL AND RESTAURANTS SECTOR

Enhancedcapabilitiestohost

internationalevents

In2008,therewereover3,200hotelsandrestaurants,ofwhich77hadaturnover

of over UGX 10m. A major impetus to the sector came when Uganda hosted the

Commonwealth Heads of Government Meeting (CHOGM) in 2007. During the

preparationperiod

(2005

07)

hotel

developers

received

tax

incentives

and

the

hotel

roomcapacityincreasedfrom2,000to6,000.ThishasimprovedUgandasabilityto

hostinternationaleventsandvisitorstomainurbancentres.

Thepoorqualityandinadequatesupplyofhotelfacilitiesremainaconcernasthey

hinderUgandasabilitytocatertotheever increasingtourist inflowatmanyof its

tourist circuits. Continued growth in demand and the extension of financial

incentivesbygovernmenttoencourageentryofmoreplayerscanofferalucrative

investmentopportunityinthesector.

Total arrivals (000)

738662

770883

1,163

0

300

600

900

1,200

1,500

2004 2005 2006 2007 2008

OtherArrivals

TouristArrivals

Source:UgandaBureauofStatistics

TRANSPORT SECTOR

Truepotentialofthetransport

sectornotyetachieved

Ugandasroadtransporthasadisproportionate shareof90%inthepassengerand

freight transport, and is crucial for international movement. The transport and



22/42


communication sector witnessed an average growth of 17% between FY0509,

mainlyon

account

of

growth

in

the

communications

sector.

The

sectors

share

of

GDPhasincreasedcontinuouslyinthelastfiveyearsandwas7%inFY09.

Inadequate physical infrastructure is one of the major impediments for economic

growth. Therefore, the government has increased budget allocation for

development of the transportation and communication sector and is vigorously

promotingprivateparticipation.

National road network length (km, June 2008)

2,5962,838

2,486

1,613 1,432

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Central

Region

Eastern

Region

Northern

Region

Southern

Region

Western

Region

PavedRoads

UnpavedRoads

Source:UgandaNationalRoadAuthority

Inputconstraintscanbecomea

majorimpedimenttogrowth

For FY10, the government has allocated UGX 1.1trn for the Road Development

Programme, while for FY11,UGX80bn and UGX268bn is sanctioned for theroad

fund and road maintenance, respectively. Despite large allocations set aside for

roaddevelopment,

the

sector

continues

to

face

raw

material

supply

constraints

and

a lack of skilled labour to execute the projects. This can impact the quality of

executionandcompletionoftheprojectsontime.

Privateparticipationtoenhance

airinfrastructurefacilities

Withonlyasingle internationalairportatEntebbeand13upcountryaerodromes,

Ugandasairtransportsectorisunderdeveloped.Privateparticipationisencouraged

inalmostallareas,suchasgroundhandlingservices,constructionandmanagement

ofairporthotels,inflightcatering,andinhousedutyfreeshops.

In July 2009 the government started the construction of a new terminal at Arua

airfield. The terminal is expected to cost UGX 1.53bn and start operations in

February 2010. A Middle Eastern company, Dodsal Group, has been assigned the

ob of developing a world class cargo centre at the Entebbe Airport with an

estimatedcost

of

USD

24m.

Freight movement using railways iscostefficient,but thedilapidatedstateof the

railway infrastructure has resulted in a 50% fall in the amount of freight carried.

RepairoftheKampalaMalabarailwaysectionthatconnectsUgandatoMombasa

port in Kenya, is underway. Moreover, the EU has earmarked EUR10m for the

rehabilitation oftheNileRailwayBridge.

COMMUNICATIONS SECTOR

Privateparticipationhasledto

increasedcompetition

As a result of successful liberalisation, Uganda has three established mobile

operators (MTN, Zain and Uganda Telecom). With recent entry of Warid Telecom

(Feb08),Orange(Mar09),andITelecom(Sep09),thetotalnumberofoperatorshas

increasedto

six.

Increased

competition

has

resulted

in

the

reduction

of

call

charges

andhasincreasedtheservicescoverage.



23/42


Lowpenetrationrateoffers

significantgrowth

opportunities

Ugandas growing population of around 32m and low mobile penetration rate of

27%offers

significant

growth

opportunities

in

the

communications

sector.

Telecom subscriber base (m)

5.3 5.96.6

7.6

8.7

+10%+12%

+16%

+14%

0

2

4

6

8

10

12

De c07 Mar08 Jun08 Sep08 Dec08

FixedL in e Mo bi le

Source:UgandaCommunicationCommission,Dec2008

Mobile penetration (%)

18.7 20.022.0

26.029.0

0

10

20

30

40

Dec 07 Mar08 Jun08 Sep08 Dec08

Source:UgandaCommunicationCommission,Dec2008

In December 2008, of the 8.7m subscriber base a miniscule 2% represented the

fixed lineconnections.Whiletherewasalmostnogrowth infixed linesubscribers,

the mobile phone subscriber base expanded by 66% in 2008 and recorded a

continuousriseintheshareofinternationaltalktime.

Infrastructuraldevelopmentsto

provideanimpetustothesector

Toconnecttheentirecountrythegovernmentplanstolayover1,500kmofoptical

fibrecableby2010.ThecablewillconnectmajortownsandwilllinkUgandatothe

EastAfricansubmarinecable.

CONSTRUCTION SECTOR

Theconstructionsectorhasbeenacrucialdriverofeconomicgrowthwhileaccess

toforeigncapitalandtheavailabilityofrawmaterialhavefacilitatedfurthergrowth.

Construction activity is primarily supported by government budgetary outlays,

external agencies funding for the development of road infrastructure and by

remittancesfortheconstructionofresidentialandcommercialbuildings.

Output of construction sector at current prices (UGXbn)

2,020 2,119

2,786

3,3413,661

+4.9%

+31.5%

+19.9%+9.6%

0

1,000

2,000

3,000

4,000

5,000



Globalrecessionhashadadirect

impactonthesector

In FY09 the sector registered real growth of only 2% as compared to 11% in the

previousyear.Thepoorperformancecanbeunderstoodinthewakeoftheongoing

globalrecession.FY09sawadeclineinremittancesfromUgandanslivingabroad,a

fallin

the

risk

appetite

of

private

investors,

and

areduction

in

availability

of

funds

from external fundingagencies.At the same time,artificially inflateddomesticoil



24/42


pricesandincreasingcostofcementhavepusheduptheinputcosts.

Commercialbankshaveemerged

asasourceoffunding

Theshareoftheconstructionsectorinbanklendinghasincreasedovertheyears.In

2008itssharewasover10%.Moreover,commercialbanksarepartneringwithreal

estatedeveloperstoofferefficientmortgagefacilitiestomiddleclassconsumers.

MANUFACTURING SECTOR

The manufacturing sector in Uganda is dominated by production of low cost and

fastmovingconsumergoods.Duetoincreasesinpercapitaincome,thedemandfor

manufactured goods is rising. Most of the produce is consumed locally, and the

preferenceforimportedgoodsishigh.

Formalsectorisexperiencing

increased

investment

Themanufacturingsectorexperiencedagrowthrateof7%inFY09comparedto8%

in

FY08.

The

formal

manufacturing

sector

grew

by

8%

in

FY09.

The

growth

is

mainlyon account of expansion of the food processing subsector. Subsectors such as

textiles, clothing and footwear, chemicals, paint, soap and foam products also

experiencedgrowth.Atabout30%,manufacturingisthesecond largestsubsector

oftheindustrialsector.

According to the Uganda Investment Authority (UIA), the value of manufacturing

projectsapprovedhasgrownfromUSD44.6min2004toUSD641.2min2008.The

valueofloansextendedtothemanufacturingsectorhasincreased,thoughitsshare

in the total commercial bank lending has shown a downward trend from 16% in

FY06to12%inFY08.

Financialincentivesto

encouragethe

formal

sector

In2008,theformalmanufacturingsectoremployed32,125people;themajorityof

whomwere

semi

skilled.

More

than

60%

of

the

employees

work

in

food

processing

units.Toencourage exportoriented manufacturing investments in the sector, the

FY10budgetintroduced severalincentives,includingremovaloftheimportdutyon

machinery and plant imports and a tenyear tax holiday for investments made in

exportorientedproductionandagroprocessinginvestment.

Informalsectoractsasa

learninggroundfortheunskilled

labour

Aquarteroftotalmanufacturingsectoroutputisgeneratedintheinformalsector.

It provides urban employment to a growing unskilled labour force and rural

migrants.

Output of manufacturing sector at current prices (UGXbn)

+14.8%+16.9%

+19.0%

+24.6%

1,1251,291

1,509

1,796

2,238

0

500

1,000

1,500

2,000

2,500

3,000


Informal

Formal

Source:UgandaBureauofStatistics.

Depreciationoftheshillingand

highfuel

prices

represent

challengesforthesector

In FY10, the sector is expected to be adversely impacted by the global recession.

The

depreciation

of

UGX

against

USD

has

increased

the

cost

of

importing

capitalgoods and raw materials. Ugandan exports, however, have become more cost

competitive, yet due to a decrease in the global demand the export revenue for



25/42


manufacturingsectorhasdeclined.

ThissituationisexacerbatedbyhighfuelpricesinUganda,whichareregulatedand

continuetoremainhighdespiteafallininternationalcrudeoilprices.Anincreasein

thecostofborrowingisalsoaproblemasbankshaveraisedtheirlendingratesby

23%during1Q09.

ELECTRICITY SECTOR

Ugandahasverylow

electrificationrates,butnew

powerprojectsareunderwayto

correctthis

Ugandahasatotalinstalledcapacityof527MW,ofwhichalmost60%isgenerated

byhydroelectricpower,thelargesthydropowerstationsbeingNalubaleandKiira.

Ugandahasoneofthelowestelectrificationratesintheworld,withagridaccessto

5% of the population in urban areas and approximately 2% in rural areas. To

address this shortfall, construction of hydroelectric power stations at Bujagali

(250MW) and Karuma (750MW) is underway. Moreover, diesel generators have

beenaddedatMutundwe,Namanve,andNalubaalesubstationsandseveralprivate

Independent Power Producers (IPP) have been licensed by the government to

generateelectricity.

Thesectorhasexperiencedpositivegrowthratesof5%and4% inFY08andFY09,

respectively,althoughitscontributiontoGDPhasremainedbelow2%.

After initiation of the electricity sector reforms in the late 1990s this sector has

becomeanattractivegroundforinvestors,butitfacesconstraintsthathavecaused

itnot toattract funds.These include institutional factors (costlyandcumbersome

litigationprocess),financialfactors(inaccessibility ofeasycredit)andpoliticalrisks

(corruptionand

theft).

The

government

has

taken

certain

steps

to

overcome

these

constraints,includingVATexemptionfordevelopersandaneasyandefficientlegal

framework.

Installed electricity capacity (MW), 2008

InstalledCapacity(MW)

Total 527

Hydropowerplant 315

Nalubalehydropowerplant 180

Kiirahydropowerplant 120

Thermalpowerplant 200

Lugogothermalpowerplant 50

Kiirathermalpowerplant 50

Namanvethermalpowerplant 50

Mutundwethermalpowerplant 50

Bagasseelectricity 12Source:UgandaElectricityTransmissionCompanyLimited



26/42


FISCAL POLICY

OVERVIEW

Ugandastartedwithalmostno

economicbasein1986

Ugandaemergedfromcivilwarin1986withadecimatedphysicalandinstitutional

infrastructure, thwarted international trade relations, agriculture at subsistence

level,andanalmostdestroyedmanufacturingsector.Thus,thecountryhadasmall

tax base and daunting expenditure requirements for military spending and social

development. This resulted in a large fiscal deficit (excluding grants), which was

financedbystateownedbanks.

Fiscaldeficithasremainedlowin

FY09duetounderspendingby

government

agencies

Tax reforms introduced in the mid1990s by the Uganda Revenue Authority to

broadenthetaxbase improvetheefficiencyoftaxcollection,andacrackdownon

the

embezzlement

of

export

and

customs

duties

improved

revenue

collection.Moreover,politicalstabilitytranslatedintoextensiveexternalaidandconcessional

borrowings.FromFY95toFY08thefiscaldeficit(excludinggrants)hasremainedin

the 512% range, while the fiscal deficit (including grants) has mainly been in the

1.04.5%range,exceptforthe7%inFY00.

Fiscal balances (including grants) (% of GDP)

2.2

4.4

3.9

1.5

0.7

2.2

0.7

2.0

3.4

5.0

4.0

3.0

2.0

1.0

0.0


Source:BankofUganda

InFY09,the fiscaldeficitwas lessthanexpectedandstood3.4%ofGDP.Revenue

shortfall was less than projected partly as government introduced measures for

efficientallocationoffundsagenciescouldnotutilisefundsallocatedtothemdue

to poor implementation capacity. According to theWorld Bank, Uganda doesnotfaceanyriskwithregardtofiscalsustainability (riskthatthegovernmentwillnotbe

ableto

meet

its

obligations),

rather

the

risk

is

of

allocating

amuch

larger

fraction

of

totalexpenditureonrecurrentitemscomparedtodevelopmentofinfrastructure.

REVENUE

Ugandasdependenceonforeign

grantshasdecreased

Theshareofgrantshasreducedfrom38%inFY05to17%inFY08.Thistrendsawa

marked reversal in FY09 as the share of grantsjumped to almost 67% due to an

increase in grants for project support from UGX 700bn in FY08 to UGX 7.8trn in

FY09. After participating in the Multilateral Debt Relief Initiative (MDRI) in FY06,

Uganda isnoteligibletoreceivegrantsfromtheWorldBank;consequentlygrants

forbudgetsupportgrewonlyby4%fromFY08toFY09.



27/42


Foreign grants (% of total revenue)

37.5

26.9 28.5

16.7

66.7

0

10

20

30

40

50

60

70

80


Source:BankofUganda

Indirect taxes contribute80% to

totaltaxrevenue

TheaimofthetaxpolicyofUganda istobalancethegrowth inrevenuecollection

with economic growth. At present, almost 80% of the tax revenue comes from

indirect taxes, particularly trade taxes (export duties, customs and sales tax on

imports).Totalexcisetaxcollectionfrompetroleumandotherimportsisalmostas

largeasdirectincometaxpayablebyindividuals(PAYE)andcorporations.

Composition of fiscal revenue - FY09 (% of total revenue)

7%

11%

11%

11%

18%

20%

22%Companytaxes

Importduty

PAYE

Otherreceipts

VAT

Grants

Exciseduty

Source:BankofUganda

In recent years, revenues from import duty have grown at 38% per annum. As a

result, itsshare in total taxrevenues hasgrown from 7% inFY05 to13% inFY09.

This increased share is at the expense ofcorporate and other taxes (from 23% in

FY05to

16%

in

FY09).

According

to

the

World

Bank,

Uganda

is

expected

to

increase

collection from direct taxes on account of a larger tax base and better

administration. At thesametime, theshareoftradetaxesmayreduceasUganda

furtherliberalisesitstraderegime.

EXPENDITURE

MTEFimprovedfiscalplanning After setting up the Uganda Revenue Authority (URA), the introduction of the

MediumTermExpenditureFramework(MTEF)inFY98wasanimportantstructural

changeinthefiscallandscapeofthecountry.Itmarkedasignificantshiftawayfrom

theadhocbudgetplanninginprioryears.

Inthelastfewyears,expenditure

hashovered

around

20%

of

GDP

The introduction of MTEF overlapped with increased spending to reduce poverty.

This

resulted

inhigher

expenditure,

which

peaked

tat

26%

of

GDP

in

FY02.

Since

then,itremainedinthe1921%range.



28/42


Composition of government expenditure (UGXbn)

1,9872,234

2,442

2,881

3,250

1,232 1,314

1,6911,380

2,458

0

1,000

2,000

3,000

4,000


RecurrentExpenditure

DevelopmentExpenditure


One of the weaknesses of the fiscal policy is that more than 60% of the total

spending isonrecurrentexpenditure; in FY08 itwas ashighas 68%.However, to

boost the infrastructure sector, the government increased capital expenditure by

34%inFY09,raisingitsshareintotalexpenditureto43%.

CURRENT EXPENDITURE

Higherspendingtoimprovethe

socialservicessector

General public expenditure consumes the largest share of recurrent expenditure.

From FY05 to FY09, the share of social services, which includes education, health

and community and social services, steadily increased, growing at an average

annualrateofabout18%.

Current expenditure by function (UGXbn)

1,9872,234

2,442

2,8813,250

0

1,000

2,000

3,000

4,000


Health

Education

Economic&Commservices

Publicorder&safety

Defence

Generalpublic

Others


Mostoftheotherrecurrent

expenditureisemployeecosts

Asignificantportionofotherrecurrentexpendituregoestopayemployeesinthe

form of pensions and allowances. It also includes transfers to agencies which use

most of the funds to pay salaries. Moreover, the share of wages in recurrent

expenditure has been increasing. Therefore, a considerable fraction of recurrent

expenditureisspentonemployeecosts.

CAPITAL EXPENDITURE

Shareofeconomicserviceshas

increasedto40%inFY09

Economicservices(agricultural extension,irrigation,etc.)enjoythelargestsharein

totalcapitalexpenditure.Itssharepeakedat44%inFY07andstoodat35%inFY09.

The

expenditure

allocated

to

the

road

sector

is

projectbased

and

varies

significantlyfromyeartoyear.



29/42


Composition of recurrent expenditure (UGXbn)

1,9872,234

2,442

2,881

3,250

0

1,000

2,000

3,000

4,000


Otherrecurrentexpenditure

Interestpayments

Wagesandsalaries


Key capital expenditure areas (% of total)

0

20

40

60

80

100


Education&health

Agriculture

Roads

Economicservices

Generalpublic

Others


FINANCING DEBT

Uganda isable tomeet itsdebt

obligations

Over time Uganda accumulated external debt to finance its expenditure, which

outstripped its revenues by a large amount. As a result of a worsening fiscal

position, the country received debt relief under various initiatives, such as Highly

Indebted Poor Country (HIPC) and Multilateral Debt Relief Initiative (MDRI)

programmes. After several rounds of debt forgiveness, the country is now in a

betterpositiontomeetitsdebtobligations.

Availabilityofconcessionalloans

isnecessaryforeconomicgrowth

Despitethemanageabledebtburden,Ugandasexpenditurerequirementscontinue

tobe largerthat itssourcesofdomesticrevenue.Therefore,continuedavailability

of

concessional

loans

remains

a

pre

requisite

to

keep

it

on

a

high

growth

trajectory.

Outstanding government external debt (USDbn)

3.43.8

4.24.5 4.4 4.5

1.51.7

1.9

0.0

1.0

2.0

3.0

4.0

5.0

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09




30/42


EXTERNAL RELATIONS

BoPturnednegativeinFY09,

drivenbyadeclineincoffee

exportsandFDI

Uganda is a moderately open economy, with aggregate merchandise exports and

imports accounting for 43% of GDP in FY08. The overall balance of payments in

FY08stoodatUSD238manddeterioratedtoadeficitofUSD179minFY09dueto

worsening current account (declining coffee export revenues) and capital and

financial account (resulting from a decrease in foreign direct and portfolio

investment).

Balance of payments (% of GDP)

0.01.7

0.1

6.75.4

2.4 2.4 1.6

1.1

10

5

0

5

10


Capital&financialaccount

Currentaccount

Overallbalance

Source:BankofUganda

Valueofimportshasgrown

fasterthanvalueofexports

The trade deficit has steadilyworsened over theyears,barringFY04andFY07,as

thegrowthinvolumeandvalueofimportshasexceededexportgrowth.Totaltwo

waymerchandise

trade

has

increased

by

almost

four

times

between

FY01

and

FY09.

Alargepartofthisisdrivenbyprivatesectorimportsandcoffeeexports.

Balance of trade (USDm)

698

926995

913 936

1,500

1,200

900

600

300

0


Source:BankofUganda

Growth rate (% per annum)

0

30

60

90


Exportsgrowth

Importsgrowth

Source:BankofUganda

Exportsearningsfluctuatewith

changeincoffeeprices

In FY08, Ugandan exports had a growth of 73% and were at an all time high of

USD2.6bn.InFY09,theexportearnings increasedbyatamuch lowerrateof20%

duetoafallincoffeepricesandoveralldeclineinglobaldemand.

Ugandas main export commodities are coffee, fish and fish products, as well as

manufacturedproducts.Coffeecontributesover10%tothetotalvalueofexports.

The shareof fish and fishproducts to export earnings has been steadily falling; it

reached9%

in

FY09

from

14%

in

FY05.

The

share

of

manufactured

goods

has

risen

to30%inFY09.



31/42


COMESA(42%)andEU(27%)arethemainmarketsforUgandanexports.

COMESAandtheEUaremain

exportdestinationsExports contribution by destination (% of total)

0

20

40

60

80

100

2004 2005 2006 2007 2008

RestofWorld

ME&Asia

Americas

Europe

OtherAfrica

COMESA


Importbillisdrivenby

movementinoilprices

The private sector accounts for 95% of total imports. Oil is the main imported

commodity,comprising15%ofthetotal.Accordingly,achangeintheimportbillis

linked to world oil prices. Other important imports include chemical products,

machinery and equipment, metal and metal products. In FY08, Ugandan imports

grewbyover40%,reachingatotalofUSD3.5bn,largelyduetoincreasedworldoil

prices. In FY09, the import bill is estimated to have declined by about 11% to

USD3.1bn.

Imports contribution by origin (% of total)

0

20

40

60

80

100

2004 2005 2006 2007 2008

RestofWorld

ME&Asia

Americas

Europe

OtherAfrica

COMESA


Currentaccountdeficitdeclined

by27%

y/y

in

FY09

ThecurrentaccountdeficitinFY09isatUSD1.2bn,adeclineof27%fromFY08.At

about7.7%

of

GDP,

the

current

account

deficit

has

increased

due

to

a worsening

servicesandincomeaccountandhigherprivatesectorimports.Thecurrentaccount

transfer surplus has been increasing over the years. In FY09 there was marginal

declineof1%dueafallingovernmentinflows.



32/42


33/42


electricityandconstructionsectorscatchinguponthegrowthchart.

FDI flows in Uganda


FDIInflows(USDm) 337.6 512.0 694.1 778.4 736.5

%Change 36% 52% 36% 12% 5%

FDI(%ofGDP) 4% 5% 6% 5% 5%

FDI(%ofGFCF) 16% 25% 25% 24% 21%

Source:BankofUganda

The Uganda Investment Authority (UIA), set up in 2001, encourages foreign

businesses to invest in the country by acting as a one stop facilitation point for

investors and advising government with regard to the best practice policies on

investment.To

alarge

extent

it

has

been

successful

in

achieving

its

objectives.

In

2008theUIAlicensed349projectswithatotalvalueofUSD2.4bn,whichledtothe

creationofabout42,950jobsinthecountry.

Foreigninvestorsface

infrastructuralconstraintsand

weakregulatoryframework

Some of the major challenges faced by foreign investors include inadequate

physicalandinstitutional infrastructure, aninadequatelyskilledworkforce,political

interference, a nontransparent regulatory system, and high levels of corruption.

However,thegovernmentistakingstepstoreduceadministrative inefficiencies and

increasingthebudgetaryallocationtoinfrastructure.

Remittancesareamainsource

offoreignexchange

Remittances are an important source of foreign exchange in Uganda and have

increasedyearonyearfromFY04toFY09,exceptadeclineinFY07.Theyamounted

toUSD

546m

in

FY08

compared

to

USD

325m

in

FY07,

which

represents

astrong

growth of 168%. In FY09, private transfers increased on the back of increased

workers remittances amounting to USD 746m. The ratio of remittances to GDP

stood inchedup from4% inFY08 to5% inFY09.Remittancesare largelyused for

consumption,butwith theexpansion in theeconomicbaseremittanceshavealso

beenusedforinvestmentintherealestatesector,agricultureandtourism.

UGXdepreciatedbyalmost31%

inFY09

The Ugandan shilling (UGX) depreciated by 30.8% in FY09, from an average of

UGX/USD 1,634 in July 2008 to UGX/USD 2,137 in June 2009. There was high

demand for foreign exchange by firms, particularly the oil and manufacturing

companies. The future UGX/USD exchange rate will be driven by export receipts,

foreignaid,privateremittancesandinterestpaymentsongovernmentborrowing.

Exchange Rate (USD/UGX)

1,992

1,500

1,700

1,900

2,100

2,300

Source:www.oanda.com



34/42


MONETARY SECTOR

OVERVIEW

Structuralchangeshavebeen

thehighlightinthelastdecade

In the last fifteen years considerable structural changes have taken place in

Ugandas economy, especially in the financial sector. Other than liberalising the

economy, Uganda has transitioned to a marketdetermined exchange rate and

interestrateregime.Thiswasfollowedbyachievingcurrentaccountconvertibilityin

1993andtheliberalisationofthecapitalaccountin1997.Theprincipalfocusofthe

BankofUganda(BoU)hasbeenpricestabilityandtocontaininflationat5%.

MONEY SUPPLY

Largeinflowofdonorfunds,

exportearnings

and

remittances

contributetoliquidity

Uganda has been receiving donor funding for social and economic development.

Theselarge

inflows,

along

with

export

earnings

and

remittances,

have

consistently

provided high levels of liquidity and put pressure on the real exchange rate. The

excessliquidityhasbeencarefullycontrolledusingopenmarketoperations.

To keep inflation under check BoU increased base money (commercial bank

depositswiththecentralbankandcurrencyissued)by21% inFY09against30% in

FY08.Moneysupplyalsoroseby25%onaccountoftheincreaseinforeignassetsof

thebankingsystemandthemonetaryauthorityinFY09.

Base money supply growth (% pa)

0

10

20

30

40

FY0 0 FY0 2 FY0 4 FY0 6 FY0 8

Source:BankofUganda

M2 money supply growth (% pa)

0

10

20

30

40

FY0 0 FY0 2 FY0 4 FY0 6 FY0 8

Source:BankofUganda

M3 money supply growth (% pa)

0

10

20

3

Uganda Economic Review (29Oct09)

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