What next for Uganda’s economy after fully reopening?

On January 24, 2022, Uganda lifted all Covid-19 related restrictions, effectively reopening the economy after nearly two years of lockdown.

For many businesses that operate 24-7 such as bars and lodges, this is time to make up on lost time and try to make some money.

But many challenges abound. According to statistics, Uganda’s economy has underperformed since 2020 when Coronavirus pandemic lockdown hit the country.

The monthly performance of the economy reports released by the finance ministry indicate that due to the effects of COVID-19, the government has been registering shortfalls every month.

For instance, combining monthly revenue shortfalls of July of Shs144.3b, Shs170b registered in August, Shs197.9b recorded in September, and Shs151.1b registered in October, the total revenue shortfall for the first four months of the current financial year is to the tune of Shs 663.38b.

Bank of Uganda says the economy needs three years to recover as economic growth is projected to return to 6%- 7% in financial year 2024/25.

Nevertheless, there is optimism as Uganda’s economy grew faster in 2021 compared to 2020, as most sectors were more open.

Growth was evident through the increased lending to 19% for the quarter ending October 2021 from an average 17.61% in the quarter ending July 2021, following the expiry of the Credit Relief Measures.

So what should be done to revive the economy?

Experts say the government should work towards stimulating the private sector to pick up.

Uganda’s private sector is dominated by Micro, Small, and Medium Enterprises (MSMEs) comprising of approximately 1,100,000 enterprises and employing approximately 2.5 million people equivalent to 90% of total non-farm private-sector workers.

Mr. David Walakira, a policy analyst, says: “Stimulus spending is something that needs to continue as a policy because it helps to pull up consumption.”

Speaking during the 5th Economic Growth Forum at Kampala Serena Hotel on Thursday, January 13, 2022, economic experts said Uganda needs to achieve and sustain much higher growth to attain middle income status.

Jonathan Leape, an Associate Professor of Economics at the London School of Economics and Political Science, speaking via a video link, said Uganda should take advantage of the free trade areas, maximize its industrial parks and link SMEs to the external market.

“Job creation is critical for economic growth. Uganda’s unemployment rate is one of the highest in Africa. One of the ways to create employment is by growing the economy,” he explained.

Nicholas Stern, a British economist, banker and academic, emphasized that without addressing concerns over climate change, it will be difficult for Uganda to sustain growth in years to come.

“Unless we address the issue of climate change, in some years to come, it will be difficult for people to spend time outside because of the extreme weather conditions,” he warned.

Dr Michael Atingi-Ego, the Deputy Governor Bank of Uganda, calls for reduction in spending on non-priority areas, postponement of capital intensive and import dependent projects to help improve external balance as well as revenue enhancing measures to protect against future shocks.

Dr Albert Musisi, the Commissioner for Macroeconomic Policy at the Ministry of Finance, Planning and Economic Development, says focus areas are making Uganda’s growth more inclusive (transition from subsistence to market economy, informal to formal employment) and improving effectiveness of government in terms of policy implementation.

Others he says include; building resilience to future shocks (internal & external), diversification of export basket and markets, dealing with climate change, using trade to drive recovery and accelerated growth.

Paul Lakuma, the head of the Macro-Economic Unit at the Economic Policy Research Centre (EPRC) says the Covid-19 pandemic caused a drop in revenues, economic shutdown and new expenditure pressures which now calls for re-prioritization of national resources.

According to Lakuma, a medium plan in reallocating the budget to agriculture, health, education, trade and industry, social development, ICT, works and energy will enhance economic growth.

Such sectors, according Lakuma, largely increase household income and reduce unemployment.

Lakuma emphasizes that Uganda needs to respond to issues that have affected its budgeting due to effects of Covid-19.

Lakuma cites low absorption of externally funded development budgets in sectors of agriculture and health, compared to full absorption of the domestic counterpart budgets in the same sectors.

He adds that donor budgets did not perform well in terms of absorption, due to strict procurement, monitoring and evaluation conditions as well as demands to compensate project affected persons using the domestic budget, which in turn stalled a number of projects.

“In light of that, I ask for renegotiation with donors that some of these funds which are not performing can be reallocated during the budget to address the key priority areas,” says Lakuma.

He also says duplication of budget outputs reduces flexibility and accountability and increases the cost of monitoring the projects undertaken under the different sectors.

“This calls for consolidation of similar budget outputs which should be done in consultation with key stakeholders,” Lakuma says.

Mr. Elly Karuhanga, the Private Sector Foundation Uganda (PSFU) chairperson, says government should restructure the Uganda Development Bank (UDB) to manage the new development bank dynamics and capitalize the bank to enable it effectively support the financing requirements of the Ugandan business community.

“Support the tourism sector with a line of financing through UDB, improve the administration of the Agriculture Credit Fund, recapitalize and procure more cargo aircraft for Uganda Air Cargo to ensure foreign market expansion. It is important that 50% of the board positions are occupied by the private sector,” he says.

Francis Kisirinya, the Deputy Executive Director at the Private Sector Foundation Uganda says inflation remains one of the concerns for the private sector, especially with the surge in prices for petroleum products.

“A rise in petroleum prices might lead to increase in the cost of doing business and higher prices,” he said.

Data from the Uganda Bureau of Statistics indicates that annual inflation rate rose further from 2.6% in November to 2.9% in December 2021.

The Permanent Secretary and Secretary to Treasury, Mr. Ramathan Ggoobi, lists government’s economic recovery and growth strategies.

“During the next Financial Year 2022/23 and over the medium term, our economic policy will seek to achieve the following three broad objectives: Mitigation of the Covid-19 impact on business activity and livelihoods through wide spread vaccination to fully reopen the economy and financial support to business,” he says.  

Mr. Goobi adds: “Speeding up socioeconomic transformation through re-prioritization of the national budget to redirect resources towards wealth and job creation, industrialization, export promotion and other areas with high return on investment and sustaining national security and macroeconomic stability as key foundations for recovery, growth and transformation.” 

To reduce public debt, Ggoobi says they will go for more concessional loans.

“We are going to borrow largely concessional or longer-dated commercial loans in order to reduce the refinancing risk,” he says.

A concessional loan is one made on more favorable terms than the borrower could obtain in the market place. The concessional terms may be one or more of the following: a lower interest rate below (the most common) deferred repayments. income-contingent repayments.

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