Although real Gross Domestic Product (GDP) growth remained strong at 6.4 per cent during the first half of FY18/19, per capita growth is insufficient to propel Uganda to lower middle-income status, says the 13th edition of the Uganda Economic Update launched on Thursday at Makerere University by the World Bank.
According to the document, growth has largely been driven by strong investment and consumption performance, favorable weather conditions and strengthened credit. The Information and Communications (IC) sector sustained double-digit growth levels, financial services continued to recover, and agriculture was boosted by another decent harvest, it notes.
“Given the very high population growth rate of over 3 per cent per year, GDP growth will need to accelerate. Moreover, heavy reliance on rain-fed agriculture makes GDP and exports more volatile, with disproportionate costs for the poor. Therefore, an increase in agricultural productivity and absorption of excess rural labour into better and more productive employment is critical for making growth more inclusive,” it says.
Revenue collections
The report says revenue performance has been strong in the first half of FY18/19 and can be further enhanced if government remains committed to implementing the new domestic revenue mobilization (DRM) strategy. It notes that tax revenues have been on an upward trajectory, increasing to 14.5 per cent of GDP in the first half of FY18/19. Strong coordination and effective implementation of government’s five-year DRM strategy will be necessary for further revenue growth, it says. It calls for the establishment of a framework for managing tax exemptions, which it says continue to be a drain on public finances.
Ensuring robust and diverse revenue base
The report further says ensuring a robust and diverse revenue base is critical before any significant oil revenues start accumulating. “This will help contain the rise in public debt, ensure a stronger social compact in the use of revenues and provision of services, and would later allow oil revenues to be invested for strategic, long-term needs,” it says.
Capital expenditure fall short of expectations
According to the report, Uganda’s capital spending continues to fall short of expectations, diminishing the expected return from public investments and committing resources away from other pressing needs. Actual first half FY18/19 capital spending amounted to about 6.1 per cent of GDP, which is well below the levels of spending in the first halves of FY’s 14/15 and 15/16, of above 7 per cent of GDP, and only about a quarter of the FY18/19 development budget, it says. Compared to peers, capital spending in Uganda stood at 5.9 per cent of GDP in FY17/18, which was substantially lower than Rwanda (10.3 per cent of GDP) and Kenya (7 per cent of GDP), it says.
“Combined with deficiencies in the ‘quality at entry’ of projects, cost escalations, and poor quality of some projects, this under-spending is constraining Uganda’s ambitions for rapid growth and socio-economic transformation. Therefore, concerted efforts are required to select projects more carefully,” it argues. For instance, it says power generation investments have not been well sequenced with investments into transmission and distribution systems) and to improve public investment management (PIM).
Public debt expected to hit 44 percent of GDP
The projected widening of the fiscal deficit in FY18/19 and use of non-concessional financing will keep public debt on a steep upward trajectory. Public debt is expected to hit 44 percent of GDP in FY18/19. The growth in budget deficits and the increasing use of non-concessional financing are creating pronounced vulnerabilities. “Non-concessional borrowing results in larger principal and interest payments and makes debt more vulnerable to external shocks. Larger interest payments also consume fiscal space for spending on poverty reduction and public goods,” it says.
2021 elections could lead to drop in investment
The report notes that while the growth outlook for Uganda is positive, risks are tilted to the downside. The economy is expected to grow by 6 per cent in FY18/19 and FY19/20, driven by intensified public and private investments, especially to support developments in the energy and oil sectors. However, as the 2021 elections draw closer, heightened political activity and uncertainty could lead to a drop in investment and economic activity.
It says reliance on rain-fed and subsistence agriculture continues to expose the economy to risks from adverse weather. “Prioritizing spending more effectively, improving spending execution rates, and increasing revenue mobilization would maintain Uganda’s macroeconomic stability and reduce debt vulnerabilities,” it says.
Tensions with Rwanda and volatility in the Democratic Republic of Congo (DRC), South Sudan, and other export markets present risks to external stability and export performance, it says.
