Overcoming public and private investment challenges in Uganda

Uganda faces multiple challenges in raising the levels and efficiency of public investment, including low domestic revenue collection, inefficient resource allocation, delays in project implementation, and weak institutional capacity. These bottlenecks not only constrain the funding available for development projects but also hinder the effectiveness of investments. Among other challenges, high borrowing costs, rising debt levels, and reliance on external funding reduce the flexibility of government spending, while governance issues, such as corruption and lack of transparency, further impact the productivity of public investments.

The IGC partnered with the Ministry of Finance, Planning and Economic Development (MoFPED) to host Uganda’s 8^th Economic Growth Forum. Given how critical public finance is for economic growth and the need to adopt innovative financial solutions for public investments, overcoming constraints for mobilising public and private finance for public investment was one of the key issues the invited academic and policy experts discussed.

Efficiency and levels of public investment in Uganda remain low

Nhial Kuch, IGC Senior Country Economist, illustrated that Ugandan investment as a share of GDP has declined (see Figure 1), and public investment efficiency has remained low in recent years. Furthermore, relative to other countries with similar per capita incomes, such as Ethiopia and Tanzania, Uganda's public investment is below average. Despite reforms in public investment management (PIM) in Uganda, Nhial Kuch’s data analysis indicates that the efficiency of public investment in Uganda has decreased over the last decade. This has significant ramifications for Uganda's ten-fold growth agenda and the country’s goal of increasing investment to 40% of GDP.

Figure 1: Public and private investment as a percentage share of GDP

Domestic resources are limited and foreign sources of financing have declined

Growing public investment in Uganda requires access to domestic and foreign financing, both of which have dwindled or stagnated in the recent past. Using the UNU-WIDER Government Revenue Dataset for 2023, Nhial Kuch highlighted that Uganda’s tax-to-GDP ratio of 12.5% falls below the average of 14.96% for the 44 African economies. This is concerning because a tax-to-GDP ratio of at least 15% is the minimum required to provide essential services necessary for sustainable and inclusive growth in low- and middle-income countries. Moreover, net official development aid (ODA) and net multilateral financial flows as a share of GDP have declined sharply since 2020. While the fall in ODA and net multilateral financial flows has been precipitated by the COVID-19 pandemic and geopolitical tensions (such as the war in Ukraine), the decline in foreign direct investment (FDI) can partly be attributed to favourable investment returns in other countries, making FDI more competitive. 

Technology-based solutions can gradually improve tax collection and compliance

Paul Lakuma from the Economic Policy Research Centre (EPRC) demonstrated a possible solution to raising levels and efficiency of public investment in Uganda - bolstering tax revenues through the electronic fiscal receipting and invoicing solution (EFRIS). The EFRIS is a digital platform introduced in 2020 by the Uganda Revenue Authority (URA) to streamline tax administration by tracking and managing all business transactions in real time. EFRIS aims to combat tax evasion, enhance transparency, and increase revenue collection. 

Paul Lakuma finds that EFRIS initially increased sales, purchases, value-added, and VAT payments for participating firms by over 10% in its first year, though its impact diminished over time. EFRIS adoption has been gradual among small firms despite EFRIS's potential to lower compliance costs and enhance tax compliance. His analysis demonstrates that larger firms and those at lower risk of tax non-compliance have seen more substantial benefits, while smaller firms and those at higher risk of non-compliance have shown a weaker response. The reform's effects have also been more pronounced in sectors with large compliance gaps, with upstream sectors experiencing a significant rise in VAT payments. These outcomes indicate that EFRIS's full impact will develop gradually over time, emphasising the need for enhanced tax awareness and enforcement to unlock its complete potential, especially for firms most resistant to compliance.

Public investment management reforms can improve resource allocation and raise the efficiency of public investment 

The 2022 Public Investment Management Assessment (PIMA) by the International Monetary Fund (IMF) has shown that reforms in the public investment management (PIM) system which began in 2016, particularly in institutional design, have led to some improvements in national and sectoral planning, project selection, portfolio management, and project appraisal among others. Despite these efforts, the effectiveness of PIM in Uganda still lags relative to other comparable countries. 

The IMF PIMA report suggested that PIM reforms centred on multiyear budgeting, allocation of funding for operations and maintenance (O&M), and monitoring of public assets can improve the efficiency of public investment in Uganda. In addition to these reforms, establishing a stronger legal framework to enforce standards and guidelines and enhancing technical capacity within the PIM framework can enhance the efficiency of public investment in Uganda. 

Policy directions to overcome financing constraints 

To increase financing for public investment in Uganda, the government needs to engage the private sector through public-private partnerships (PPPs) for essential services. The government may attract more FDI through deeper policy reforms, generous tax incentives, setting up Special Economic Zones (SEZs), and enhancing the country’s digital infrastructure. Developing and deepening capital markets, for example, through reforming and promoting, is crucial for access to domestic financing. This will involve reforming microfinance institutions and promoting digital financial services. Strengthening institutional frameworks and implementing robust anti-corruption measures will build investor confidence and bring in more investment. Regulatory reforms to reduce bureaucracy and improve judicial efficiency are crucial as well.

Leveraging the expertise of international financial institutions such as the World Bank and African Development Bank can provide project financing and technical assistance. In addition, utilising blended finance mechanisms will help combine public and private funding, while grants and technical assistance from international donors can complement private investment. Promoting green finance by attracting investments in sustainability projects and accessing international climate funds will further contribute to financing public investment.