TotalEnergies worker at well pad in Western Uganda

Uganda’s economic resilience amidst global shocks

Blog Macroeconomics

In the wake of the COVID-19 pandemic, the global recession, declining external financial support, rising interest rates, and high government debt, countries in sub-Saharan Africa like Uganda face significant internal and external economic growth constraints. There’s a need to identify scope for structural changes, including fiscal policy adjustment, harmonisation of fiscal and monetary strategies, exploration of climate change initiatives, and a renewed focus on trade policies for economic resilience.

In a world intricately connected by globalisation, even countries distant from major events can feel their impact deeply. Uganda has not been immune to international tremors. The COVID-19 pandemic disrupted its trade, while geopolitical tensions like the Russia-Ukrainian war, introduced volatility in energy and commodity markets. This, combined with a rising global tide of protectionism and tightening monetary policies, threatens Uganda's export prospects and foreign investments.

Uganda’s vulnerability to external and internal shocks is one of its binding constraints to growth. These global events don't just affect macroeconomic landscapes; they have tangible repercussions for everyday Ugandans. As the world grapples with disruptions and changing economic policies, Uganda sees consequent ripples in the form of imported inflation and altered monetary policies.

IGC Uganda partnered with the Ministry of Finance, Planning, and Economic Development to host the 7th Economic Growth Forum (EGF) in Kampala. Albert Musisi from the Ministry of Finance, Planning and Economic Development in Uganda, Christopher Adam from University of Oxford, and Elizabeth Kasekende from the Bank of Uganda share insights on both the domestic and international factors influencing Uganda's economic growth trajectory, from global recessions to structural and policy-induced challenges within the country.

Global economic landscape defined by recession and reduced global demand

Internationally, a lingering recession has overshadowed the global economic landscape, proving exceptionally challenging to recover from. Intensified by reduced global demand and supply side inefficiencies, this downturn has led to the resurgence of inflation and a significant tightening of monetary policy. Geopolitical events, especially Russia's invasion of Ukraine, further complicated the situation by driving up food and energy prices.

Contrary to expectations of increased external financial support to assist SSA (sub-Saharan Africa) in its post-COVID-19 recovery and adjustments, the region has in fact experienced a divergent trend as illustrated in Figure 1. This has further exacerbated already substantial government debt burden, all while external financial assistance continues to decline.

Figure 1: Sub-saharan Africa net official development assistance (ODA) receipts as % of GDP

Figure 1

Notes: This figure shows net ODA receipts as a percentage of GDP in sub-Saharan Africa from 2000 to 2020. There have been short-term fluctuations in from year to year with an overall long-term decline over the two decades. Hitting a peak just over 3% in 2006 net ODA receipts declined to just below of 1.5% in 2014, with a sharp decline between 2006 and 2007. Source: OECD-DAC data (latest data to 2021) and presented by Chris Adam during the 7th EGF.

Climate change, stagnant productivity, and limited access to affordable financing

Uganda is contending with the dual challenge of both structural and policy-induced obstacles to growth. The persistent impact of climate change characterised by recurrent droughts, poses a significant threat to the country. This is exacerbated by Uganda’s limited fiscal space, leaving little room for fiscal reserve buffers to address and mitigate climate shocks. Compounding this is Uganda's stagnant productivity which hampers growth prospects, with a vast segment of the population still engaged in subsistence agriculture and low-yield services.

Access to affordable financing is a significant challenge for both domestic investors and the public sector. Local lending rates are comparatively high in SSA, limiting the growth and innovation prospects of businesses. Moreover, the public sector relies heavily on market-based funding, which comes with elevated interest costs due to perceived risks. These high debt servicing expenses, in turn, impede the allocation of funds to critical development sectors like infrastructure, ultimately weakening Uganda's overall growth potential.Top of Form

Inefficiencies within the public sector also continue to act as a bottleneck to economic progress. Particularly, the lack of coordination among government entities delays necessary interventions and diminishes productivity across both public and private sectors.

A forward-thinking approach to monetary policy by the Bank of Uganda (BOU)

The Bank of Uganda (BOU) has steered its monetary policy with a forward-thinking, medium-term orientation designed to proactively address threats to price stability, aiming to stabilise inflation around the 5% mark. This approach not only accounts for the inevitability of economic shocks but also prevents the introduction of undue volatility from monetary policy overreacting to short-term developments and fluctuations. Despite BOU's proactive strategy, lending interest rates remain discouragingly high. These elevated rates can be attributed to structural barriers such as the overall cost of doing business, market size, institutional gaps, and inherent risks.

Challenges, strategic shifts, and policy recommendations for Uganda’s economic future

Given the already high government debt as shown in Figure 2 and the declining external finance, Uganda must make structural changes. To preserve key social and investment expenditure this must come from more revenue mobilisation and fiscal adjustment.

Figure 2: Government debt to GDP

Figure 2

Notes: The figure shows the government debt-to-GDP ratio for Uganda from 2013 to 2022. It shows that the government debt-to-GDP ratio increased from 27.6% in 2013 to 48.6% in 2022; with a particularly pronounced increase in 2020 and 2021. Source: – Bank of Uganda

To bolster Uganda's external balance position, it's crucial to adopt a strategic approach that capitalises on the opportunities arising from climate change adaptation and transition financing, all while proactively addressing the pressing issues related to climate change. In terms of trade, Uganda should prioritise exploring opportunities for intra-regional and intra-continental trade. Simultaneously, there is an urgent need to boost productivity in established sectors like agriculture while also harnessing emerging growth avenues like value-added production and reinforcing diversification in exports. This multifaceted approach will contribute to a more resilient, robust, and sustainable external balance for Uganda, effectively addressing the binding constraint of low productivity.

The proposed enhanced coordination between the fiscal and monetary authorities by the Bank of Uganda comes in one solution to the binding constraint of inadequate coordination between government bodies. It underscores the importance of clearly defined roles and responsibilities for both monetary and fiscal policymakers, while also highlighting the need for cooperation and understanding between the two to achieve economic stability and avoid conflicting actions that could harm the economy. The goal is to maintain price stability and support the overall health of the economy.

Figure 3: Growth projections (2021-2030)

Figure 3

Notes: This figure illustrates growth projections for countries around the world from 2021 to 2030. It shows that Uganda is projected to be one of the fastest-growing economies in the world over the decade with a projected growth of 7.5%. This is higher than that of its regional neighbours Kenya (4.33%), Tanzania (5.87%), and the Democratic Republic of the Congo (2.2%); as well as some larger economies, such as China (5.82%), Vietnam (5.56%), and Indonesia (5.64%). Source: Harvard’s Growth Lab.

Uganda's potential to emerge as one of the fastest-growing economies in this decade hinges on its capacity to adeptly navigate challenges and capitalise on emerging opportunities. Amid global uncertainties and their unforeseeable repercussions, coupled with Uganda's prevailing public debt challenges and diminishing external financial support, the need for structural adjustments becomes imperative. These necessary adaptations encompass fiscal policy adjustments, the harmonisation of fiscal and monetary strategies, the exploration of climate change initiatives, and a renewed focus and emphasis on trade policies. These strategic shifts are poised to undoubtedly play a pivotal role in shaping Uganda's promising economic future.