Uganda’s economy is not in recession but its growth is wanting

Enock Nyorekwa Twinoburyo

What you need to know:

  • Even if Uganda were to eventually reach the threshold at which it would be classified as lower middle income, nothing would have fundamentally changed.
  • The structure of Uganda’s economy is not that of a proper middle income country.

In June 2016, the budget speech indicated that Uganda’s economy was to grow at 5.5 per cent in Financial Year (FY) 2017/18 from 4.6 per cent growth outturn in FY 2016/17, which itself was lower than the 5 per cent forecast in June 2015. In the Bank of Uganda (BoU) monetary policy statement for February 2017, they underscored that growth had been revised downwards to 4.5 per cent in FY 2016/17 due to slower economic activity in the first half of the FY. This was also reflected in the shortfall in domestic revenue of Shs392 billion by end of December.

Fast forward the April 2017 BoU monetary policy statement revealed that the revised growth forecast for FY 2016/17 of 4.5 per cent was unlikely to be met due to prevailing supply constraints. However, since core inflation (which excludes food, electricity, fuel and utilities prices) remained low at 4.8 per cent in March 2017, it is indicative of subdued demand since supply is reportedly constrained. Remember inflation is a case of when demand outstrips supply. Since 2010, the actual annual economic growth has been lower than the projected annual growth. The negative output gaps (when actual growth is less than potential growth) has been at least 2 per cent over the corresponding period. Full potential growth which is highest level sustainable over medium term is estimated at 6-7 per cent.
However, 6-7 per cent annual growth for an economy of $25 billion and estimated population of 38 million with a population growth of 3 per cent is surely not enough to deliver the 2020 target of middle income status. At that growth rate vis-a-vis the population growth, middle income status would only be possible in 2027. Even if Uganda were to eventually reach the threshold at which it would be classified as lower middle income, nothing would have fundamentally changed. The structure of Uganda’s economy is not that of a proper middle income country. Middle income economies are dominated by modern firms, employing lots of people and using modern equipment, not by household enterprises of subsistence farmers and petty traders as in Uganda. It will take time to transform Uganda’s economy into modest middle income.

One explanation of slowing growth is the dismal agricultural sector performance. Over the last five years, annual agricultural output growth has been averagely lower than population growth rate. This negative growth per capita in the sector implies Uganda ironically will struggle to feed its population in future which validates the Malthusian theory that when population growth outstrips growth of subsistence resources, population dividends will not be realised and a population curse would be imminent. In the last year, the agriculture sector has been in a recession – exhibited by more than two consecutive declines in quarterly sector output growth. In addition, since agricultural sector in Uganda is labour intensive, the recent performance is illustrative of declining labour productivity. Evidentially, the annual rate of labour growth in the sector surpasses the rate of sectoral output growth.

Secondly, private sector credit growth has been subdued over the years, in part explained by increased government borrowing from the domestic market. Government domestic debt has already surpassed total private sector credit – implying that ratio of government domestic debt to private sector is over 100 per cent compared to 75 per cent set out in the 2013 Public Debt Management Framework. Domestic borrowing is on the rife, in FY 2016/17, government was to borrow Shs612 billion from domestic market but this was already surpassed in the first quarter. While it has been expected that public investment expenditure would boost growth, weak execution has been realised. In fact only 78 per cent of the first national development plan was realised. This backdrop suggests that capital productivity (measured by capital output ratio) has been declining, that is more public and private investments and lower growth on the other end. Further, 70 per cent of both public and private investments are currently in brick and mortar (buildings and structures) which have low levels of employability and mitigated multiplier impact in the future.

Slowing growth has implications for poverty and inequality. The growth and poverty nexus between 2006 and 2013 suggested that a one per cent economic growth translated into 0.3 per cent reduction in poverty. In a nutshell, a multitude of structural constraints to doing business require redress. These are wide ranging but certainly the primary factors of production of land and people require heightened focus. Strengthening public investment management remains very imperative.

Mr Twinoburyo is a PhD economics Fellow at University of South Africa.