How Private Sector plans to Utilize national budget

by Mmeeme Leticia Luweze
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Uganda runs a mixed economy with the private sector playing a dominant role in terms of asset ownership and development potential. As a result, economic growth is linked closely to private sector growth.

In Uganda, the private sector generates 77 percent of formal jobs, contributes 80 percent of gross domestic product (GDP), funds 60 percent of all investments employs approximately 2.5 million people and provides more than 80 percent of domestic government revenues. Therefore, strengthening the private sector is crucial to sustainably achieve the industrialization agenda, among other economic growth priorities.

The private sector (PS) is defined as that part of the national economy that is not under direct state control, is run for profit, and by norm, has both domestic and foreign-owned firms. Uganda’s private sector comprises about 1.1 million enterprises, dominated by micro and small enterprises with few medium and large enterprises. Collectively, about 98.8 percent of the private sector comprises micro, small, and medium enterprises (MSMEs), and less than one percent are large enterprises. The majority of the micro-enterprises employ only one person (55.7%), while within the small enterprise category, (6.5%) employ 5-9 persons. Large enterprises are operating in agro-processing, banking, and light manufacturing. This partly accounts for the slow growth in manufacturing value-added GDP and employment

While presenting the National Budget for the FY 2023/2024, Matia Kasaija (MP), Minister of Finance, Planning and Economic Development noted that the theme for the coming financial year has been maintained as: “Full Monetisation of Uganda’s Economy through Commercial Agriculture, Industrialisation, Expanding and Broadening Services, Digital Transformation and Market Access”

To achieve this, the private sector must play a significant role. Private sector credit increased to Shs 21.54 trillion in April 2024 from Shs 20.47 trillion in April 2023, marking a 5.2 percent increase. Matia Kasaija noted, ‘There has also been a slight increase in the share of credit allocated to productive sectors of the economy. For instance, agriculture credit rose slightly to 11.3 percent by April 2024, up from 11.1 percent in April 2023, while credit to manufacturing remained steady at 13.4 percent.

The Government of Uganda is committed to private-sector development. The 1995 Constitution of the Republic of Uganda, under Article IX on the right to development, states, “In order to facilitate rapid and equitable development, the State shall encourage private initiative and self-reliance.” Consequently, several policies, strategic plans, and programs have been designed to develop a robust and competitive private sector. Vision 2040 commits to two strategic objectives: first, direct government investment in strategic areas to stimulate the economy and facilitate private sector growth; and second, accelerate industrialization through upgrading and diversification to harness local resources, and offshore industries, and develop industrial clusters along the value chain. Similarly, the third National Development Plan (NDP III) prioritizes the private sector’s role in driving growth, wealth, and job creation. Consequently, competitiveness has been central to Uganda’s policy formulation and implementation.

Uganda’s private sector faces high mortality rates, with about 90 percent of private enterprises operating for less than 20 years. Additionally, it is largely informal; about 98 percent of micro-enterprises are informal. Enterprises are also inequitably distributed regionally, with 58.9 percent in the central region—Kampala alone has approximately 18.9 percent, while the Karamoja Sub-region has less than one percent. High mortality limits the private sector’s ability to drive sustainable growth, while informality excludes them from resource markets, government regulation, and support, ultimately inhibiting their growth, expansion, and competitiveness.

Despite the agricultural sector being dominant, evidence shows that non-agricultural enterprises are prevalent (31% of the 8.9 million households), especially at the household level, contributing significantly to household incomes and welfare. At the subregional level, over 40 percent of households in Kampala, Karamoja, and West Nile have at least one household member operating a household enterprise, while Acholi has the least (12%). This distributional inequity undermines the private sector’s efficacy in driving inclusive growth and socioeconomic transformation. Therefore, NSPSD II  (Second National Strategy for Private Sector Development)  needs to address the inequitable segmentation of the sector while implementing strategies to encourage formality and access to credit for sustainability.

Private Sector Development is one of the 20 programs under NDP III, aiming to increase the private sector’s competitiveness to drive sustainable and inclusive growth. Successful implementation of the program is expected to reduce the informal sector, increase non-commercial lending to the private sector, boost the proportion of public contracts awarded to the private sector, and enhance the value of exports. While there are program implementation action plans and working groups to drive PSD, the NSPSD II is intended to provide direction and coordination of actions to ensure the program’s success.

Here are some of the opportunities and challenges that the budget reading presents for the private sector.

Opportunities for the Private Sector

Economic Growth and Sectoral Expansion

Increased GDP Growth: Uganda’s GDP is projected to grow by 6% in FY 2023/24, surpassing regional and global averages. This robust economic growth creates a favourable environment for business expansion and investment.

Sectoral Growth: The services, agriculture, and industry sectors are estimated to grow by 6.6%, 5.1%, and 5.8%, respectively. This sectoral growth offers opportunities for private sector investments across diverse industries, including retail, wholesale trade, tourism, communication, real estate, manufacturing, construction, and mining.

Oil and Gas Sector

Increased Investments: Investments in the oil and gas sector, supported by Foreign Direct Investment (FDI), will drive economic activities and create opportunities for private companies involved in oil exploration, production, and related services.

First Oil Production: With first oil production expected in FY 2025/26, companies can position themselves to benefit from the associated economic activities and value chains.

Agricultural Development

Parish Development Model (PDM): The streamlined implementation of the PDM and favourable weather conditions have supported agricultural growth. Private sector entities can engage in agribusiness, providing inputs, technologies, and services to enhance productivity.

Increased Production: The expansion of food and cash crop production, as well as livestock, presents opportunities for businesses in agro-processing, distribution, and export of agricultural products.

Tourism and Services Sector

Tourism Recovery: The strong recovery in tourism, driven by investments in infrastructure and marketing, offers opportunities for private sector investments in hospitality, tour operations, and related services.

Service Sector Growth: The growth in retail and wholesale trade, communication, and real estate activities creates a favourable environment for businesses in these sectors to expand and innovate.

Infrastructure and Industrial Development

Industrial Parks and Infrastructure: Continued investment in industrial parks, roads, bridges, and ICT infrastructure presents opportunities for construction companies, suppliers, and service providers.

Railway Rehabilitation: The rehabilitation of the Metre Gauge Railway and the commencement of the Standard Gauge Railway will improve transportation efficiency, benefiting logistics and supply chain companies.

Stable Macroeconomic Environment

Low Inflation and Stable Exchange Rate: Low inflation (3.2%) and a relatively stable exchange rate support investment planning and export competitiveness, creating a conducive environment for business operations.

Reduced Interest Rates: The reduction in commercial bank lending interest rates to 17.7% and the stability in domestic debt market interest rates provide more affordable credit options for businesses.

Export Promotion and Trade

Increased Exports: The government’s Export Promotion Strategy has significantly increased exports, creating opportunities for businesses involved in export-oriented manufacturing and value addition.

Regional and International Trade: Growth in exports to EAC, COMESA, Middle East, and Asia opens up markets for Ugandan products, benefiting businesses engaged in international trade.

Government Support and Funding

Access to Affordable Capital: Continued capitalization of the Uganda Development Bank, Parish Development Model, Agricultural Credit Facility, and Small Business Recovery Fund provides affordable capital for wealth creation and business expansion.

Youth and Women Enterprises: Programs supporting youth and women enterprises, such as the Emyooga Fund, Presidential Skilling and Industrial Hubs, and the GROW project, offer financial support and skills development opportunities.

Challenges for the Private Sector

Regional Disparities: Uneven distribution of economic activities and investments, with a concentration in the central region, may limit opportunities for businesses in other regions, exacerbating regional economic disparities.

Commodity Price Fluctuations: Volatility in global commodity prices can impact profit margins, particularly for businesses reliant on imports or exports of raw materials and finished goods.

Inflation Management: While inflation is currently low, maintaining it amidst global economic uncertainties and internal pressures is crucial for economic stability and business planning.

Climate Change

Agricultural Vulnerability: Climate change poses a risk to agricultural production and infrastructure, potentially affecting businesses dependent on stable agricultural outputs.

Adaptation Costs: Implementing climate change adaptation measures may require significant investments, which could be challenging for some businesses.

Geopolitical Tensions

Regional and Global Instability: Geopolitical tensions can disrupt trade, supply chains, and investment flows, posing risks to businesses engaged in international markets.

Market Uncertainty: Political instability in key markets can lead to fluctuations in demand and prices, affecting business planning and profitability.

High Interest Rates

Debt Accessibility: Despite a reduction, commercial bank lending rates at 17.7% are still relatively high, making access to affordable debt challenging for some businesses.

Investment Constraints: High interest rates can constrain business investments and expansion plans, particularly for small and medium-sized enterprises (SMEs).

Global Commodity Price Fluctuations

Price Volatility: Fluctuations in global commodity prices can impact the cost of inputs and the profitability of businesses involved in manufacturing and exports.

Revenue Uncertainty: Price volatility can lead to revenue uncertainty, affecting business stability and growth prospects.

Export and Trade Barriers

Non-Tariff Barriers: Despite growth in exports, businesses may face non-tariff barriers and regulatory challenges in regional and international markets.

Competition: Increasing competition in export markets requires businesses to continuously innovate and improve product quality and competitiveness.

Infrastructure Deficiencies

Logistics and Transport: While investments are ongoing, existing deficiencies in logistics and transportation infrastructure can hinder efficient business operations and increase costs.

Electricity and ICT Access: Ensuring reliable and affordable access to electricity and ICT infrastructure remains critical for business efficiency and innovation.

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