The Ugandan economy recorded weaker growth of 5.1% in 2010 because of receding aggregate demand, mainly in private consumption, and weak external demand for traditional exports, in particular coffee. In spite of the declines, regional demand for Uganda’s exports remained high. Export earnings fell from 2.9 billion US dollars (USD) in the financial year 2008/09 to USD 2.8 billion in 2009/10. Although lower than 2008/09 levels (USD 883 million), remittance receipts in 2009/10 (USD 820 million) surpassed traditional foreign exchange earners coffee and tourism. Earnings from coffee and tourism in 2009/10 were USD 262 million and USD 400 million respectively. Sustained public investment in infrastructure and the global recovery are expected to spur growth in the short to medium term. The near-term prospects for the oil and gas sector remain uncertain because of disputes between the government and oil exploration firms. The real gross domestic product (GDP) growth rate is projected to increase to 5.6% in 2011 and 6.9% in 2012 because of increasing regional demand and the improved global outlook.

Growth in 2010 was primarily driven by the telecommunications, financial services and construction sectors, while the services and agriculture, forestry, fishing and hunting sectors, which account for 54.4% and 24.8% of GDP respectively, showed weaker growth. Growth in telecommunications was bolstered by expansion in mobile telephony while financial sector growth was boosted by the licensing of an additional commercial bank and expansion in the size and outreach of the existing financial institutions. The rebound in fishing and food production was offset by falling growth for the cash crops of coffee and cotton, leading to stagnation in the agriculture sector. In the recent past the declining GDP share of the agriculture sector has been the result of low productivity, limited value addition and lack of commercialisation. On the demand side, growth was driven by private consumption and investment growth, albeit at rates lower than in 2009. Private consumption and private investment projections are for weaker growth in 2011 but recovery in 2012.

Inflation declined markedly from 13.4% in 2009 to 7.3% in 2010 as a consequence of falling food prices resulting from favourable weather conditions and subsequent improved food production. Projections are for further reductions in 2011 and 2012. The monetary policy stance over the medium term remains focused on seeking to restrict inflation at the target of 5%. The fiscal policy stance will remain expansionary in view of the government’s sustained public investment in infrastructure, including roads and energy. Tax receipts are expected to recover in tandem with the improving economic prospects and tax administration efficiency gains, although these gains will not be sufficient to cover the shortfall in grants. Thus the overall fiscal deficit (including grants) as a percentage of GDP is expected to increase in 2011.

The external position weakened as a result of a decline in export earnings from the traditional export crops, in particular coffee. International reserves, currently covering slightly under five months of imports, are expected to remain healthy, in part because of the weekly purchase of foreign exchange by the central bank.

The social sector also saw marked improvements with a reduction in the poverty rate from 31% in 2005/06 to 23% in 2009/10 although income inequality worsened. Progress was also recorded in education thanks to the universal primary and secondary education programmes. However, stagnation and reversals were reported for the health-related indicators.

Weak infrastructure, inadequate financial services to the private sector, and weaknesses in public sector management and administration are the major constraints to growth. The recently launched National Development Plan (NDP) is expected to prioritise reforms aimed at addressing these constraints.

Uganda’s major Emerging Partners (EPs) in 2009 were China; Hong Kong, China; India; Singapore and United Arab Emirates (UAE). The UAE; China; and Hong Kong, China accounted for 29% of total foreign direct investment (FDI) in 2009, with 54% of these investments in equity capital. In addition, the bulk of this FDI is concentrated in three sectors: finance, insurance and business services; manufacturing; and wholesale, retail, catering, accommodation and tourism. Emerging partners in Asia and the Middle East1 accounted for 13% of Uganda’s export earnings and 57% of imports.

Table 2: GDP by sector (in percentage)

Source:Uganda Bureau of Statistics.

Figures for 2010 are estimates; for 2011 and later are projections.

Table 3: Demand composition

Source:Data from Uganda Bureau of Statistics and Bank of Uganda; estimates (e) and projections (p) based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.

Macroeconomic policies in Uganda aim to achieve strong real GDP growth of at least 7%, inflation below 5%, a competitive exchange rate and adequate foreign reserves. These goals are shared by the International Monetary Fund (IMF) as outlined in the Policy Support Instrument (PSI) to which Uganda has subscribed since December 2006. The seventh review of the PSI and subsequent approval of a new PSI in May 2010 concluded that Uganda has been successful in maintaining macroeconomic stability. Prudent macroeconomic policies helped Uganda weather the effects of the financial crisis better than was initially expected, helped restore single-digit inflation, and sustained Uganda’s gross international reserves. The new PSI-supported programme will continue to support infrastructure development while ensuring macroeconomic stability.  However, the first review under the new PSI conducted in December 2010 was not completed because of a breach of three quantitative targets, including the ceiling on net credit to government, ceiling on increase in the base money liabilities of the central bank and the stock of domestic budgetary arrears. However, the government is committed to redressing these shortfalls to avert a possible PSI cancellation and consequent sending of adverse signals to development partners and investors

Table 4: Public finances (percentage of GDP)

a. Only major items are reported.

Figures for 2010 are estimates; for 2011 and later are projections.

The Bank of Uganda (BoU) is responsible for monetary policy, since the country is not a member of a monetary union. The BoU’s primary objective is to control inflation, with a secondary objective of maintaining stability in domestic financial markets and foreign exchange markets. In 2010 the conduct of monetary policy aimed to keep inflation around the 5% target through foreign exchange sales from aid inflows to reduce interest rates and bolster private sector credit growth. The actual inflation rate amounted to 7.3%, thus exceeding the target. The BoU continues to sell treasury bills and bonds to carry out its sterilisation functions and repurchase agreements to smooth intra-auction liquidity. It also made adjustments in the re-discount rate and the bank rate to facilitate lending operations.

Base money grew by about 19% in 2010, as the BoU implemented a gradual easing of monetary policy with a view to reducing interest rates. Falling food prices, structural rigidities and under-execution of the capital budget resulted in a marked decline in the headline inflation rate. The large injections of liquidity by the BoU contributed to a sharp fall in interest rates on government securities, with the average yields-to-maturity on the two-year and three-year bonds falling from 12.3% and 13.9% respectively in 2009 to 8.8% and 11.2% in 2010. However, lending rates did not come down as banks moved to a more conservative risk stance. As a result, private credit growth slowed markedly and only trended up marginally by the end of 2010.

Uganda has operated a flexible exchange rate since the early 1990s. While remaining committed to a flexible exchange rate, the BoU intervened sporadically in the foreign exchange market to limit volatility. The BoU stepped up its foreign exchange purchases in 2009 in response to the sudden appreciation of the shilling (UGX). It also shifted the pattern of its monetary interventions from November 2009, reducing its regular daily sales of foreign exchange while maintaining the stock of domestic securities broadly unchanged. This contributed to depreciation of the shilling by around 17% between January and October 2010.

In the short- to medium- term, monetary policy is expected to anchor inflationary expectations while the flexible exchange rate regime will help maintain competitiveness and a judicious level of international reserves to cushion against exogenous shocks.

Export receipts as a percentage of GDP are estimated to have declined from 16.7% in 2009 to 15.6% in 2010 because of falling earnings from coffee and non-coffee exports. Export earnings from coffee, also the primary cash crop, fell from USD 283.3 million in 2009 to USD 281.4 million in 2010. Gains from increasing coffee prices were offset by poor weather and outbreak of pests in key producing areas. Coffee export prices increased by 15% in 2008, fell by about 7% in 2009, and are projected to rise again by 14% in 2010 and 12% in 2011.

The GDP share of imports increased only marginally between 2009 and 2010, partly because of the depreciation of the shilling, weak private sector demand and lower oil prices. Projections for the import share of GDP are for increases in 2011 and 2012. Consequently, the current account balance worsened in 2010 with sustained deterioration projected for 2011 and 2012 because of the possibility of large increases in non-oil imports as the country speeds up investments in oil production.

The East African Community (EAC) common market protocol came into force on 1 July 2010 establishing a framework for free movement of goods, persons and services within the EAC region. However, relevant legislation and the institutional framework to facilitate the implementation of the common market protocol are not yet in place. Negotiations to eliminate barriers to regional trade are continuing under the auspices of the EAC-Common Market for Eastern and Southern Africa (COMESA)-Southern African Development Community (SADC) tripartite arrangement and are expected to bolster inter-regional trade in East and Southern Africa.

Capital inflows, consisting mostly of foreign direct investment (FDI) and official loans, more than financed the current account deficit, creating a surplus in the balance of payments and raising international reserves to about five months’ imports of goods and services by the end of 2010. FDI is estimated to have increased from USD 787 million (4.8% of GDP) in 2008 to USD 799 million (4.8% of GDP) in 2009, an increase of 1.5%, and with a positive outlook for 2010 and 2011 because of the global economic recovery. Workers’ remittances dropped by USD 63 million to USD 820 million in 2009/10 following strong growth in 2008/09. However, remittances are projected to increase to USD 980 million in 2010/11.

Sound macroeconomic policies and cautious public borrowing following debt relief (Heavily Indebted Poor Countries [HIPC] in 1999/2000 and Multilateral Debt Relief Initiative [MDRI] in 2005/06 and 2006/07) have allowed Uganda to maintain a sustainable debt position, with all debt indicators declining to levels well below their policy-dependent thresholds. Total debt stock as a percentage of GDP declined from a high of 63.6% in 2003 to an estimated 14% in 2009 and 13.3% in June 2010. New external borrowing has been limited to financing for energy, roads and agricultural development, and was contracted on highly concessionary terms, mostly from the International Development Association (IDA) and the African Development Bank (AfDB). Public and publicly guaranteed external debt has remained low as a percentage of GDP (13.3% in 2009/10), and is mostly owed to multilateral partners. Domestic debt, issued exclusively for the conduct of monetary policy, amounted to less than 10% of GDP. Sustained macroeconomic management and prudent fiscal management together with modest public sector deficits are expected further to strengthen Uganda’s debt position over the medium term. The substantial infrastructure investments planned over the NDP period (2010/11-2014/2015) are expected to benefit from concessionary funding and are thus not expected to have a negative impact on Uganda’s debt position.

Table 5: Current account (percentage of GDP)

Source:Data from Uganda Bureau of Statistics and Bank of Uganda; estimates (e) and projections (p) based on authors’ calculations.

Figures for 2010 are estimates; for 2011 and later are projections.

Figure 2: Stock of total external debt (percentage of GDP) and debt service (percentage of exports of goods and services)

Uganda’s major Emerging Partners (EPs) in 2009 were the United Arab Emirates (UAE), China, Hong Kong, Singapore and India. The UAE; China; and Hong Kong, China accounted for 29% of total foreign direct investment (FDI) in 2009, with 54% of these investments in equity capital. In addition, the bulk of this FDI is concentrated in three sectors: finance, insurance and business services; manufacturing; and wholesale, retail, catering, accommodation and tourism.

China has also been actively engaged in funding infrastructure projects in the country including roads and office blocks, and has recently shown interest in Uganda’s oil industry. China’s state-owned CNOOC Ltd. has already agreed a joint venture with the UK’s Tullow Oil PLC and France’s Total SA to develop Uganda’s downstream oil industry in at least three oil blocks in the Lake Albertine Rift basin. This joint venture is projected to invest at least USD 10 billion in the country’s oil industry. The main interests of the EPs in Uganda appear to lie in natural resources and access to markets, especially in the light of the East African Community common market.

The UAE; Singapore; Hong Kong, China; and China are among the emerging destinations for Uganda’s exports, largely made up of fish and fish products, coffee, cotton, and cobalt, accounting for about 5% of Uganda’s export earnings in 2009, while 39% of Uganda’s imports, ranging from equipment and machinery to fabrics and petroleum products, come from India, the UAE, China, and Saudi Arabia.

Data from the Bank of Uganda indicate that official development assistance (ODA) from non-African and non-OECD countries comes exclusively from China, with USD 205 million in loans and grants disbursed since 2007, the bulk of this ODA going to infrastructure.

EPs differ from their traditional counterparts in several ways, in particular the approach to development co-operation. For instance, while the traditional partners are interested in addressing development challenges in their totality including political governance, human rights and other freedoms, as well as economic governance and management, EPs typically are mostly interested in rates of return on their investments, expanding markets and/or seeking new sources of raw material. Consequently, EPs are complementary to rather than substitutes for the traditional partners. 

Another important key difference between the EPs and the traditional partners, in particular the multilateral partners, lies in the conditions attached to development assistance. For instance, while ODA from the multilateral partners usually requires counterpart funds from government, EPs typically finance the entire investment as a turnkey project. In addition, while standard procurement rules and procedures are often followed in the case of investments and ODA from the traditional partners, this is not a requirement for the EPs. In particular, almost all supplies and labour are usually sourced from the EP.

The tenure of engagement between EPs and government usually depends upon either the profitability of the investment or the lifespan of the natural resource of interest. In the case of the former, the EP’s commitment is short to medium term: in the latter longer term.

The Ministry of Finance, which is constitutionally mandated to co-ordinate development assistance, conducts all negotiations of loan and grant agreements with both EPs and traditional partners. The Uganda Investment Authority (UIA), a semi-autonomous agency established by the Investment Code Act (1991), operates in partnership with both the private sector and government to spearhead economic growth and development. The UIA’s major role is to facilitate and promote private sector investment in Uganda by contributing to and advocating for a competitive doing-business environment.

The NDP is the major framework that governs the engagement between EPs and government. The NDP contains the national development priorities and mechanisms to put into effect these priorities, and the EPs’ ODA and FDI is aligned to these national commitments. Traditional partners also use the NDP as a basis for their engagement with government and accordingly ODA and FDI from EPs and traditional partners are complementary. However, EPs have exploited the absence of a robust investment regulatory framework to invest in business ventures such as retail trade and catering activities which would ordinarily be preserved for local citizens. This has stifled local entrepreneurship, thereby impeding the development of a local middle class.       

Although the World Investment Report (2010) indicates that Uganda has been a leading destination for FDI in the EAC region since 2007, it is reasonable to suppose that EPs that locate their FDI in Uganda also target the bigger EAC market. However, governments in the region appear to compete for FDI, as, for example, evidenced by the uncoordinated tax concessions and other ad hoc incentives, as opposed to the marketing of the EAC as a single FDI destination.

Uganda has invested in industrial parks, fully equipped with the requisite infrastructure, as an initiative to reduce the cost of doing business. In addition, ad hoc tax exemptions and other tax incentives have been offered to EPs to enhance Uganda’s attractiveness as an investment destination. However, since such incentives are not ratified, their sustainability cannot be guaranteed. Uganda has also entered into 15 bilateral investment treaties, 11 double taxation treaties and nine international investment agreements with several countries with a view to supporting and strengthening domestic investment and attracting more FDI. The share of ODA from EPs in the national budget increased over the short term from about 8.8% in 2007 to 12.3% in 2009. However, since this debt is acquired on highly concessionary terms, it is not expected to have a negative impact on Uganda’s debt position.

The key benefits from EPs comprise creation of employment, augmenting the country’s export earnings, diversification of productive capacity, and technology transfer. Furthermore, in the case of ODA, EPs provide an additional source of development financing, which has been very instrumental in unblocking infrastructure bottlenecks.

A total of eight presidential candidates were nominated in November 2010 to contest Uganda’s top political office for the period 2011-15. The ruling National Resistance Movement party nominated the incumbent, Yoweri Museveni, to stand for his fourth term in office, while the opposition political parties fielded several candidates including an interparty coalition candidate.

The electoral process leading up to the 18 February 2011 presidential, parliamentary and local elections although largely peaceful, was marred by claims of poor preparation by the Electoral Commission, delays in the ratification of election guidelines, and the use of public funds by the incumbent. In particular, the Electoral Commission used voters’ registers instead of voters’ cards because of delays in the completion of biometric national ID cards. Opposition politicians interpreted this as a ploy to rig the elections and even threatened to seek a court injunction against them.

Museveniwas declared winner of the 2011 presidential election with 68% of the votes cast and parliamentary election with a total of 279 MPs compared to the 56 opposition legislators and 37 independents. His closest challenger, Dr. Kiiza Besigye polled 26% of the votes cast. However, opposition politicians have disagreed with the election observers’ endorsement of the February 2011 poll and called on Ugandans to take to the streets in protest against Museveni’s leadership. 

The controversial Institution and Cultural Leader’s Bill was passed into law in 2011. The legislation seeks, among other things, to stop traditional and cultural leaders from engaging in partisan politics and lays down entitlements and penalties in case of abuse. Sections of the population, including the Buganda Kingdom, condemned the new legislation and have vowed to contest it in court.

Uganda is among the few countries in sub-Saharan Africa that will meet the Millennium Development Goal (MDG) 1 target of halving poverty by 2015. The proportion of the population living below the absolute poverty line declined from 56% in 1992/93 to 31% in 2005/06 and to 23.3% in 2009/10. The pace of poverty reduction has slowed, however, as a result of the increasingly unequal distribution of income in the country: the Gini coefficient, a measure of income inequality, increased from 0.3 in 1992 to 0.41 in 2005/06 and to 0.42 in 2009/10.

Uganda’s population was estimated at 31.8 million in 2010, with 50% of the population below 15 years of age and a dependency ratio of 117 which is among the highest in the world. At the current annual population growth rate of 3.2%, the population is projected to reach 91.3 million by 2050. This presents several significant challenges in terms of provision of social services. For example, the latest Uganda Demographic and Health Survey (UDHS) shows that although the proportion of underweight children under five years of age fell from 23% to 16% between 1991 and 2006, 68.5% of the population were still unable to obtain enough food to meet the recommended calorie intake in 2006.

The introduction of universal primary education in 1997 led to a 204% increase in gross enrolment, from 2.7 million children in 1996 to 8.2 million in 2009. The Net Enrolment Ratio, a key MDG indicator that measures the proportion of children of school-going age who are actually in school, increased from 86% in 2000 to 93% in 2009, close to the 100% required to meet the MDG. In addition, the gender gap in primary education has disappeared, with the proportion of girls in total enrolment rising from 93% in 2000 to 100% in 2009. However, the primary completion rate at 53% in 2009 remains low. The pupil-teacher ratio remains very high, at 57 to 1 in 2007, although this is a slight improvement from 59.4 to 1 in 2000. The number of pupils per classroom is also high at 72, but considerably better than the 84 in 2004.

Infant mortality has declined from 81 deaths per 1 000 live births in 1995 to 76 in 2006, but still far above the MDG target of 31 deaths per 1 000 live births.  Similarly, the under-five mortality rate has declined, but not by enough to put Uganda on track to meet the target by 2015. The maternal mortality rate is also high, although it fell from 505 per 100 000 live births in 2000 to 435 in 2006. To meet the MDG target, Uganda will need to reduce the maternal mortality rate to 131 deaths per 100 000 live births by 2015. HIV/AIDS prevalence fell from 18% in 1992 to 6.4% in 2008 but continued vigilance is needed to combat the pandemic.  Communicable diseases contribute over 50% of disability adjusted life years (DALYs) lost. This dismal performance of the health sector reflects limited access to existing facilities most of which are dilapidated.

Significant progress has been made with regard to increasing access to safe water and sanitation but access to potable water remains low, especially in rural areas. It is estimated that only 65% of the rural population and 66% of the urban population have access to safe water, while access to sanitation is estimated at 68% and 73% for the rural and urban areas, respectively.In sum, Uganda is on track to achieve at least three of the eight MDGs, namely halving poverty, HIV/AIDS, and achieving universal primary school enrolment. Strong progress has also been made in addressing gender inequality in education. However, strategic interventions are urgently required to sustain progress and to meet the other MDGs especially those relating to reducing child mortality and improving maternal mortality.

Although Uganda has ratified several international conventions and commitments, including the Convention on the Elimination of All Forms of Discrimination against Women and the Beijing Platform of Action, and there are several provisions in the country’s constitution which guarantee equality between women and men, only minimal progress in eliminating gender disparity has been made. For instance, the share of women in wage employment in the non-agricultural sector dropped from 39% in 2003 to 28% in 2006. However, the number of seats held by women in the national parliament increased from 18% in 2000 to 30% in 2006.

Climate variability and change has serious implications for the Ugandan economy and the welfare of the population since these are intricately linked to the natural environment. In particular, as current average temperatures in Uganda are expected to increase by up to 1.5o C by the 2020s and as rainfall patterns change, some urgent measures are needed to mitigate the effects of the expected socio-economic impacts of climate change on food security, health, and the economic development of the country. The 2007 National Adaptation Programmes of Action indicate that drought is the most dominant consequence of climate change in Uganda, the others being floods and landslides. Extreme weather increases the susceptibility of populations to harsh living conditions and outbreaks of waterborne diseases such as diarrhoea and cholera. Prolonged dry spells, on the other hand, have resulted in respiratory disease, and rising temperatures are changing the geographical distribution of malaria and other disease vectors.