Trade-offs for Uganda’s ‘Middle-Income’ status

After years of trying to attain the Middle Income status, Uganda, according to President Yoweri Museveni, has finally made it into the coveted bracket irrespective of tough economic times. 

In his 2022 State of the Nation Address, Mr Museveni, noted that despite locust invasion, the rising waters of the lakes, the floating islands, the landslides, the terrorist bombs, the Covid-19 pandemic and now the rising commodity prices largely caused by the Russian invasion of Ukraine, the country still managed to find its way into the middle income status.

Currently, he says the economy is standing at $45.7 billion (Shs176 trillion) by the exchange rate method and at $131.6 billion (Shs507 trillion) by the Purchasing Power Parity (PPP) method. This, according to Mr Museveni means the GDP per capita is $1,046 (about Shs4 milion) which is slightly beyond the entrance points for the lower middle-income status of $1,036 (about Shs3.9 milion).
Following some years of eluding the country, President Museveni disclosed: “We have passed that figure. Congratulations!”

The President was also quick to add: “However, to be declared a middle-income country, you should sustain this for two to three consecutive years. I am confident that we shall over perform in achieving that.”
After the President’s declaration, the World Bank was quick to state otherwise, noting in its report that Uganda remains a low-income country even after President Museveni and Finance Minister Matia Kasaija said the economy had risen to middle income status. The World Bank plays a prefect’s role by the virtue of being the custodian of the categorisation.

Effects
Despite obvious advantages that comes with a middle income status among them large, resourceful middle class with a strong purchasing power - which as a result lends some prestige to the government, graduating from Least Developed Countries (LDC) status erodes some trade preferences such as the duty-free, quota-free market access which, unless economies are better placed to compete with fellow parties, can reinforce the middle-income trap.

According to the technical wing of the Ministry of Trade, once Uganda attains the middle income status, it will lose the negotiated market access it enjoyed under the LDC category. One such market access is the African Growth and Opportunity Act (AGOA) - a piece of legislation that was approved by the U.S. Congress in May 2000. This legislation is expected to assist economies of sub-Saharan Africa such as Uganda to improve economic relations between the United States and the region.

Going by international rules
As a middle income country, Uganda will be expected to play by the same rules in international trade as developed countries but the intricacies involved render it a whole new ball game.
There are also opportunities that are preserved within the World Trade Organisation (WTO) framework that is only meant for the benefit of LDCs.
For example, most Least Developed Countries (LDCs) like Uganda presently enjoy some generous market access in important export markets in Europe and North America. This arrangement is as a result that the ability of LDCs among them Uganda to take advantage of trade preferences is limited because of supply side constraints and restrictive requirements for rules of origin.

In addition, the products in which Uganda and other LDCs specialise in face some of the highest levels of protection in the lucrative markets in developed countries. To improve the exporting condition for these countries, many countries have granted non-reciprocal market access in their markets.
They include initiatives such as the Everything But Arms (EBA) by the European Union. This provides duty and quota free market access for all products originating from LDCs, but arms. Canada, Japan, and the United States have since been providing the same offers as well.

Transition
Prosper Magazine understands that even as the country declares itself a middle income there are efforts at the WTO to make a case for countries such as Uganda that have graduated from LDC status to be granted another 12 year-transitional period while enjoying the privileges that are granted to LDCs in international trade.

Experts’ analysis    
In his State of the Nation address for 2022, Mr Museveni noted that if Uganda could sustain her GDP at $1,046 for the next three years, she would graduate to the lower middle-income status ceteris paribus – if all factors remains constant. 
However, a clear assessment of the subject indicates a confusion of the would-be transition to a middle income status with Least Developing Country (LDC) graduation. The two are different.
The LDC is an official UN country classification sanctioned by the United Nations (UN) General Assembly. The Committee for Development Policy (CDP) of the UN Economic and Social Council confers LDC status on countries based on the three inclusion and graduation criteria including Gross National Income (GNI) per capita, Human Assets Index  and Economic and Environmental Vulnerability Index (measuring indicators such as merchandise export concentration; instability of agricultural production; instability of exports of goods and services among others).
If a country is scoring low on those three parameters, it maintains an LDC status. In terms of demographics, a population cap of 75 million has been in place since 1991 for a country to be considered an LDC.

On the other hand, the middle income status is conferred onto a country by the World Bank based on Gross National Income (GNI) per capita criteria that is low-income (24 are in Africa-Uganda inclusive), lower-middle income (22 in Africa), upper middle income (seven in Africa), or high-income (only one in Africa [Seychelles]).
The Istanbul Programme of Action on LDCs guides that for a country to graduate out of the LDC category, it must meet at least two out of the three parameters, and must be met at two consecutive triennial reviews to graduate after three more years.
A country may also graduate based on the income criterion alone if it exceeds the income threshold twice and satisfies an assessment that the revenue is sustainable. 

However, one should understand the difference between the two variables and their implications to Uganda. While the World Bank’s income-based classification is geared towards assessing the credit worthiness of a country, the purpose of the UN’s LDC classification is to eliminate a country’s structural deficits.

Lower-middle income versus LDC
While a country may have high income owing to, for instance, its natural resources, it may still be considered an LDC due to weak social progress or vulnerabilities to external shocks.

For example, whereas the World Bank classifies countries such as Angola, Benin, DRC, Comoros, Lesotho and Tanzania as lower-middle income countries, the UN still categorises them as LDCs. Therefore, the UN LDC graduation follows a strict process, which if followed, would deliver on balancing between incomes and welfare of the population, which are key ingredients for a sustainable, self-reliant economy.

However, it looks like government  is focusing more on attaining middle-income status than LDC graduation.

Without addressing the two critical parameters (Human Assets and Environmental Vulnerability Indices) would risk Uganda falling into the middle income trap,  a situation whereby a middle-income country is failing to transition to a high-income economy due to rising costs and declining competitiveness.
For example, if Uganda were to achieve the lower middle income status in the next three years, she would be in the same classification with economies such as Indonesia, Egypt, Nigeria, Kenya and India.   

Regional comparison
To compare Kenya, whose budget for the FY2022/23 is at $28.62 billion (Shs110.2 trillion) compared to Uganda’s $12.83 billion (Shs49 trillion) in the same year is either biased or flawed or both.  The same goes for share of manufactured exports in 2020 where Kenya’s were at 30 per cent compared to Uganda’s 14 per cent.
While the government should be credited for putting in place measures to promote Agro-industrialisation, minerals beneficiation, infrastructure development (roads, irrigation, airports) more remains to be done to ensure that the base of the economy is strong enough to withstand the shocks associated with LDC graduation.