Uganda’s Economy in a State of Melt Down

Uganda’s economy has recently grown at a slower pace, reducing its impact on incomes and poverty reduction. Average annual growth was 4.5% in the five years to 2016, compared to the 7% achieved during the 1990s and early 2000s. The slowdown was mainly driven by adverse weather, escalate bad relations with Rwanda that affected movement of people especially at Gatuna border closure, private sector credit constraints, and the poor execution of public projects.

Effects bad relations with Rwanda that affected movement of people

Bad relations with Rwanda affected movement of businessmen commuting via Gatuna border which has paralyzed business transactions in Uganda, with majority of businesses in Kisoro and Kabale lying idle. According to businessmen in Kabale, the Gatuna border issues have affected their business in a number of ways and many of them are angry at NRM Government that has contributed to the impasse.  Indeed Uganda was the net importer of Rwandan goods valued at $200 M.  Compiled data indicate that Tax collections in Uganda are below expectations and fiscal pressures are rising. Meanwhile, delays and poor management of the public investment program by the Government of Uganda are likely to prevent the productivity gains expected from enhanced infrastructure, while acceleration in domestic arrears may have an adverse impact on private investment and further limit the extension of credit.

Furthermore, Uganda’s belligerent activities against Rwanda that contributes to frosty relationship between the two countries   could negatively affect the growth of Uganda’s exports. Lower exports, taxes and overall growth, will have implications for debt sustainability and the current account.

Development Challenges

According to the Uganda Poverty Assessment, in 2013 more than a third of the population lived below the extreme poverty line of $1.90 per day. Moreover, vulnerability to falling back into poverty is very high for every three Ugandans who get out of poverty; two fall back in, demonstrating the fragile gains.

Estimates from the Uganda National Household Survey 2016/2017 suggest that the proportion of the population living below the national poverty line rose from 20% in FY2013 to about 21% in FY2017. All Uganda’s regions registered an increase in the number of poor persons with the notable exception of the Northern region, which is the poorest, and where poverty decreased from 44% to 33%.

With one-third of children under five stunted, Uganda is among the 20 countries worldwide with the highest prevalence of under nutrition. Stunting is nearly twice as high in rural compared to urban areas (36 percent compared to 19%). At 3%, Uganda’s annual population growth rate is among the highest in the world (albeit fertility rate is reducing). Uganda’s population of 35 million is expected to reach 100 million by 2050, while the annual urban growth rate of 5.2% is among the highest in the world and is expected to grow from 6.4 million (2014) to 22 million by 2040.

Uganda’s refugee population has almost tripled since July 2016 and is currently around 1.35 million, as Ugandan government and officials have turned the refugee influx as a sort of business.  As a matter of fact, various UN refugee agencies and development agencies have suspended their refugee Aid to Uganda for allegations of rampant corruption in the office the Prime Minister that is formally in charge of Refugees.

Financial Crisis looming; Uganda Withdraws Cash from Oil Fund before Producing any oil

According to reports from Uganda’s Ministry of Finance, Uganda is spending more than a third of its nascent Petroleum Fund before it produces any oil as it struggles to narrow its budget gap while increasing infrastructure investments.

A sum of 200 billion shillings ($54 million) was removed from the fund to help finance spending plans for the year through June, leaving 288.7 billion shillings in the account, the Finance Ministry said in a report on its website. A 125.3 billion-shilling withdrawal was made the previous year.

Uganda is implementing a 32.7 trillion-shilling budget for 2018-19, partly to fund development of power plants and roads. That contributed to a fiscal deficit of 6.6 percent of gross domestic product this year, leaving the government with the need to raise funds from elsewhere to plug the gap.

The move by Uganda to withdraw cash from oil fund a head of time reflects a realization that the start of commercial oil production is still distant and that it makes little sense to have a negative carry on the money in the Petroleum Fund in the meantime. The draw-down could be seen as a precursor of exploring other financial options, such as non-concessional foreign borrowing.

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