UGANDAN ECONOMY

FIN 3226

BCOM III

LECTURE NOTES
(Student’s Reader One)

INTRODUCTION TO UGANDA’S ECONOMY

 Evolution & Nature of Uganda’s economy

 Performance of Uganda’s economy.
 Theoretical perspectives on economic growth and development

FACULTY OF ECONOMICS, ENERGY AND MANAGEMENT SCIENCE

DEPARTMENT OF ECONOMICS

MAKERERE UNIVERSITY BUSINESS SCHOOL

October, 2021

Facilitator: Darious Mugabe Email: [email protected]

Disclaimer: Note that these notes are guides but NOT a substitute for attending lectures. Clearly,
the notes in this reader are far from being complete and CANNOT substitute reading full text books
or the recommended texts. If you miss lectures or group discussions, or you don’t read the
recommended texts, you will find it difficult to obtain a good grade.

1.0 Introduction

This reader is intended to help you comprehend the first topic in Ugandan Economy. It covers
the evolving nature of the Ugandan economy, the theoretical perspectives on economic
growth and development, performance of the economy, the structure of economy and its
performance.

What is an economy?

It is simply a circular flow of income and expenditures. An economy consists of various

markets, which are essentially a gathering of economic agents—households and firms
(illustrations needed). Economic markets are mechanisms used to allocate scarce resources in
an economy and government as an economic agent plays a critical role of ensuring that market
rules of the game are not flouted. In so doing, government’s aim is to maximize the welfare of
other economic agents.

The Evolving Nature of Ugandan Economy

Ugandan economy is an agrarian economy. Peasant agricultural production has been the
predominant economic activity for Uganda since pre-colonial times. During the colonial rule
over Uganda, Asians became involved in commerce: retail and wholesale trade, cotton
ginning, coffee and sugar processing, while Africans (indigenous Ugandans) were largely
excluded from wholesale trade as, according to colonial policy, licenses could only be issued
to traders who owned permanent buildings of stone or concrete. By 1959, ‘Africans handled
less than 10% of national trade’ (Kasozi, 1999).

This colonial policy provoked intense resentment; indigenous Ugandans felt alienated and for
a long time regarded Asians as foreigners and exploiters. Idi Amin was later in 1972 to
capitalize on this discontent, at a huge cost to the economy, as described in section 1.2 below.

Given this history, it’s not surprising that peasant agriculture has remained the mainstay for
Ugandans. Agricultural productivity has also remained low, and this means persistence of
poverty especially in rural areas where near 80% of Ugandans live, mainly, as small-holder
subsistence farmers.

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The Economy at Independence

Uganda enjoyed a strong and stable economy in the years approaching independence. At
independence in 1962, the economy was small but one of the most promising in sub-Saharan
Africa. At independence, the total GDP for Uganda was just above USD 68 million (about
Shs. 177 billion in today’s shilling). The GDP grew to about USD 108 million by 1966. The
post-independence decade of 1962-1971 was a period of considerable economic prosperity
characterized by:
 Average annual real GDP growth rate of 6% per annum,
 Real GDP per capita growth rate of 3% per annum,
 Economic growth averaged 4.5% a year,
 Sound fiscal and monetary policies leading to stable macroeconomy which accelerated
growth of the economy,
 Stable prices -- inflation never exceeded single digit. So the cost of living was low. For
example, although a university graduate in the 1960s started at a salary of Shs. 1,500 a
month, he/she commanded a better living standard than his/her grandchild today. Then,
the exchange rate was Shs.7 per $; meaning that a graduate earned about USD 214. If that
amount is adjusted for inflation, it comes to about $1,500 in 2014 terms. That would mean
that a fresh university graduate in 1960 earned about Shs. 3.9 million in 2014 money.
 The balance of payments was in surplus. This was on the account of strong export
performance.
 Stable exchange rate and foreign exchange readily available,
 GDP per capita was about $512 (in 1980 prices) -- the fifth highest in Eastern and Southern
Africa, after South Africa, Zimbabwe, Mauritius and Zambia.
 National saving rate was among the highest in the region, 13.4% of GDP,
 Exports of goods and services accounted for 25% of GDP and these were able to finance
a large proportion of the country’s import requirements
Table 1: Selected Economic Performance Indicators 1960-70 (indexes: 1960=100)

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Source: Background to the Budget (1965/66); Statistical Abstracts (1965 & 1966); Quarterly Economic
and Statistical Bulletin; & World Bank (1982)

Note: We shall illustrate this dataset in class for more visual evidence.

By 1970, Uganda was one of the emerging economies in the world, in the same league with
countries such as Singapore, Malaysia, Thailand, and other countries that have since taken
off. Actually, in 1971, Uganda was considered among those African countries with a chance
of achieving a GDP growth rate of 7% for the rest of the century (Bwire, 2012).

1.1.1 The “Good Old Days”

The 1960’s are widely regarded as the good old days among Ugandans mainly because the
general standards of living were relatively good and perhaps better than those lived by most
Ugandans today. This was on the account of the low cost of living and the high value the
Ugandan shilling commanded then.

The prices of goods and services were low and stable. For example, a parent was required to
pay only Shs. 15 per term for his/her child to go to an urban primary school like Bat Valley
Primary School, while secondary schools charged Shs. 20 per term.

A kilo of sugar cost 45 cents and did a litre of milk. A bottle of soda cost 65 cents, while a beer
cost 1 shilling and 20 cents. A cup of black tea in a trendy Kampala restaurant cost 25 cents,
while tea with milk cost 50 cents.

As far as transport was concerned, the railway fare from Kampala to Mombasa was only Shs.
20, while that from Kampala to Arua was Shs. 10. A bus ticket within Kampala City cost a
passenger between 25 and 30 cents. A bicycle cost Shs. 250, while a brand new car (Honda
Civic) cost Shs. 30,000.

The entry fee into night clubs in the 1960s was Shs.2, with the more upscale and expensive
clubs (the Guvnors/Silk of the time) charging only Shs.3.

This implies that a fresh university graduate who earned Shs. 1,500 (an equivalent of Shs. 3.9
million in 2014) a month lived a very comfortable life. This is the reason economists
emphasise macroeconomic stability (particularly the stability of prices and exchange rates).

1.2 Where Did These Rosy Statistics Go?

The economy started to deteriorate under the rule of President Idi Amin from 1971 to 1979.
On assuming power, Amin’s military regime embarked on policies that would seriously affect
the Ugandan economy and the wellbeing of the people for decades. His period was
characterised by:

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1) The 1972 economic war – in August 1972 Amin expelled Asians (over 70,000 of them)
many of whom were active in agribusiness, manufacturing, and commerce. Amin accused
the Asians of the following offences:
a) Abuse of foreign exchange regulations: That Asians used to export goods and services and
kept the foreign exchange proceeds abroad. This also included undervaluing of exports
and overvaluing of imports;
b) Hoarding and smuggling of essential commodities like sugar, oil, and hoes creating artificial
shortages in order to keep the prices unreasonably high;c)
c) Undercutting African traders and unfair competition: That Asians were importers,
wholesalers and retailers all in one, and ensured that business remained entirely in Asian
hands by practicing price discrimination against Ugandan traders. They did this by
supplying their fellow Asians with goods at low prices than those they charged indigenous
Ugandans;
d) Employing family members in their businesses: That Asians used not to trust Ugandans and
if they employed any Ugandan they hid business secrets from them and did not give them
authority;
e) Tax evasion: That Asians kept two different books of accounts; one for Income tax
department and another, which showed the true and correct account of the business, in
Gujarati or Hindu which Ugandan tax administrators did not understand. Through this
trick they paid less tax than they ought to;
f) Practicing and spreading corruption. That Asians believed that they could not get any service
in the government department or parastatal without bribing their way; and lastly
g) Disloyalty to the country: Amin accused Asians of being ungrateful to Uganda. That the
country had availed them with opportunities for both local and foreign training in
medicine, engineering, law and other professions but on completion of the programs many
of them had either worked briefly for government or opted directly for private sector.
Therefore, due to these accusations Amin, under decree 17/1972, revoked the residence
permits of Asians of Indian, Pakistan and Bangladesh origin, and gave them 90 days (3
months) to leave the country (Kibikyo, 2008).

Although a long history of economic inequalities between the African majority and the Asians
has caused resentment, the expulsion did little to improve income distribution or the welfare
of the ‘common man’ in Uganda (Bigsten & Kayizzi-Mugerwa, 1999). Instead, it put an end
to Uganda’s post-independence prosperity. It set Uganda on a deterioration path. There were
three main effects of the Asian expulsion:

i. Skilled managers were replaced by largely unskilled people, often drawn from the
military and with little education;
ii. The appropriation of their properties earned the country a long-lived reputation for
lawlessness and property confiscation;

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 iii. The manner in which former Asian businesses were acquired created insecurity of
tenure, leading to asset stripping e.g. Kakira sugar factory lost 119 tractors. Note:
o Before Amin’s unfortunate action, the three East African governments (Kenya,
Tanzania & Uganda) had in January 1967 proposed to expel Asians from East Africa
who had refused to assume the EAC citizenship aimed at reducing repatriation.
o In 1969, in a bid to enable indigenous Ugandans to have a say in the economic affairs
of their country (which at the time was dominated by Asians & British immigrants)
and “for the realisation of the real meaning of Independence”, Obote had announced
a “Move to the Left” under the Common Man’s Charter. He wanted to make Uganda a
socialist country like Tanzania.
2) Gross mismanagement of the Ugandan economy by Amin’s henchmen and hangers-on
(popularly known as mafuta-mingi). Many of these lacked entrepreneurial skills and
creditworthiness, and were inexperienced at doing business. Most of the mafuta-mingi
were muslims (Amin’s religion) although several other prominent beneficiaries (e.g.
Gordon Wavamunno [Mercedes Benz Franchise], James Mulwana [Uganda Batteries &
Uganda Blankets], Mrs. Mbiire [Pop-In, a bread-making factory] – a few beneficiaries who
became successful) were non-Muslims. The mafuta-mingi ran down the factories and
shops.
3) Introduction of economic distortions such as price controls (which led to emergency of
black markets (magendo) & hoarding of basic groceries and other essential commodities);
high import tariffs (led to smuggling); excessive printing of money to finance fiscal deficits
(led to high inflation -- 216% in 1979), fixed exchange rate regime (led to shortage of
foreign exchange) etc.

4) Fiscal indiscipline -- spending too much on unproductive sectors of the economy such as
the military, government, etc. and neglecting the productive sectors such as agriculture,
industry, services, physical infrastructures etc. Amin was the first Ugandan leader to start
an arms race & big public spending. This led to high budget deficit, increasing at an annual
rate of 23%, and was financed by simply printing money.
5) Collapse of the formal sector which led to drastic reductions in government tax base to
only 6% of GDP in 1979 from 15% of GDP in 1970. Private business virtually collapsed
due to shortages of inputs, high inflation, and insecurity;

6) Drastic fall in foreign direct investment (FDI) due to the economic war and insecurity
which undermined investor confidence in Uganda, and

7) Escalating foreign and domestic debt (see table 2 below), and alienation of Uganda from
bilateral and multilateral donor agencies, such as the World Bank and IMF. Aid inflows
from the World Bank and Western countries generally ceased.

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By 1980 the Ugandan economy had reached an unprecedented state of decay. Production had
collapsed, there were rampant shortages of essential commodities such as soap, sugar,
paraffin, clothes, blankets, drugs, food, etc., prices had gone through the roof (216% inflation
rate), and physical infrastructure had been destroyed.

Overall the GDP had fallen between 1971 and 1980 by 40% (Musinguzi et al, 2000). The
period 1971-80 has been described by political and economic pundits as having been “a
political tragedy and an economic disaster for Uganda.”
Table 2: Selected Economic Performance Indicators 1971-80 (indexes: 1960=100)

Source: Background to the Budget (various years, 1971/72 – 1981/82); Budget Speech (various years):
World Bank: World Development Data.; World Bank (1982).

In summary, the main causes of poor economic performance during the 1970s were:
 Economic war & subsequent distortions,
 Political turmoil,
 Social disorder,
 A highly over valued exchange rate,
 Export taxation, and
 Quantitative restrictions on imports.
1.3 Obote II’s Economic Recovery Programme (ERP), 1981 – 1985

In 1981, the country began a programme of economic recovery under the second government
of Milton Obote. The programme aimed at:

i. Raising the real GDP growth by 5% per annum,

ii. Reducing inflation to annual rate of 25% in order to re-establish macroeconomic
stability
iii. Reviving production and securing operational and long-term finances from external
sources

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 iv. Improving macroeconomic management polices to encourage the mobilisation of
domestic resources
The following were some of the reforms which Obote II introduced under the 1981–84
ERP:
 Floating of the Uganda shilling on the foreign exchange markets to strengthen the
BOP,
 Dismantling of a wide range of price controls,
 Increasing producer prices for export crops,
 Introduction of a dual exchange rate starting in August 1982 i.e. Window I (the less
depreciated official exchange rate determined by BOU for essential imports especially
oil and raw materials, and for debt service. It was it was set at $1 = UGX100 on 23rd
August 1982, before increasing it to UGX 290 per dollar by the end of 1982), and
Window II (the more depreciated rate determined through a foreign exchange auction
& black market [Kibanda]. It was set at 1$ = UGX240 at the beginning, and increased
to UGX 479 per dollar at the end of 1982). Window Two rate was determined by a
weekly auction of foreign exchange by the Bank of Uganda.
 Restoration of investor confidence by persuading foreign companies to return to their
former businesses which Amin had expropriated,
 Rationalization of tax structures and control of government expenditure, and
 Brought back the IMF and the World Bank -- the two donor agencies extended
considerable foreign assistance to the economy. ODA flows rose from zero to an
average of 1.5% of GDP between 1981 and 1985 (Bwire, 2012).
Achievements of the 1981-84 ERP
i. Between 1981 and 1984 GDP, on average, grew by 6% per annum. Per capita income
also grew at average rate of 0.22% in the same period, contrasted with the sub-Saharan
region performance, which declined at a rate of 1.28%
ii. By 1983 inflation had been stabilised and controlled (i.e. from 164% per annum in
1981 to 21% in 1983)
iii. There was reduction in the overall budget deficit,
iv. Domestic credit to government was cut down,
v. The value of the shilling was stabilised
vi. The productive capacity of the economy was recovered. Export volumes increased
despite the constraint of a coffee quota.
vii. Economic growth restarted partly with the increased external financing assistance,
especially for rehabilitation efforts following years of neglect of infrastructure in the
1970s.

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Table 3: Selected Economic Performance Indicators 1981-86 (indexes: 1960=100)
Indicators 1981 1982 1983 1984 1985 1986
GDP growth rate (%) 4 5.7 7.4 -8.5 2 0.3
GDP Per capita index 65 67 70 62 61 60
Investments/GDP (%) 5 9 7 7 8 8
Savings/GDP (%) 0 0 2 6 7 5
Exports/GDP (%) - 9 8 9 9 9
Inflation (%) 74 40 22 36 95 96
External debt (M$) 717 882.1 1014.9 1077.4 1238.8 1422.1
Population (Millions) 13.4 13.8 14.1 14.5 14.8 15.2
Source: Background to the Budget (various years, 1982/83 – 1987/88); Bank of Uganda: Annual Report
1985; IMF, International Financial Statistics; World Bank (1988), Towards Stabilisation and
Economic Recovery; Statistical Bulletin No. GDP/2: Gross Domestic Product of Uganda 1981-1989;
World Bank: World Development data.

However, the recovery was short-lived. The reasons for failure of the 1981-84 ERP include:
 Renewed outbreak of civil strife which hindered pursuance of proper economic
management i.e. escalation of the Luwero bush war (the NRM/NRA Liberation War of
1981-1986)
 Government commitment to the programme was weak, denying the reforms the desired
credibility. A number of performance benchmarks in the monetary programme were
violated, which culminated in the suspension of the programme with the IMF. The IMF
ended its support following a disagreement over budget policy with Obote II government.
 Overly expansionist fiscal and monetary policies which led to resurgence of inflation, and
drastic fall in GDP growth to 8.5% by 1984. For example, money supply increased by 127
in 1984 alone.
 Little progress was made towards improving the tax structure and administration
By the time Obote II government was toppled in July 1985, Ugandans were living agonizing
lives similar to, and in some parts of the country worse than those under Amin. During the
brief regime of Tito Okello Lutwa in 1985, the economy slipped almost out of control as civil
war extended across the country. Some observers summarised Okello’s six months regime as,
“Months of aimlessness, months of destruction and months of shame for Uganda.”

1.4 The NRM’s Economic Recovery Programme, 1987

Taking over a country and an economy in ruins in January 1986, the NRA/NRM
Government, with the help of the World Bank and the IMF, came up with a number of
reforms to restore economic sanity. By the end of 1986 inflation had reached 358.4% and the
GDP growth of 0.3% was driven by the subsistence sector.

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This hyperinflation was mainly due to total lack of financial control in government ministries
and parastatals leading to huge budget deficits, financed by printing money (Musinguzi et al,
2000).

Initial mistakes
 Closed model and revaluation (of the ‘buying power of the shilling’) turned out to be
a mistake as this fueled more macroeconomic instability and worsened external
viability.
 Price controls resulted into the intensification of macroeconomic imbalances. These
controls created all the distortions that Amin had brought to Uganda --- shortages,
black markets (Kikuubo boys), etc. The controls were also extended to the forex
markets, where the official rate in 1986 was fixed at Ushs 14 per U.S. dollar and Ush
50 per U.S. dollar for essential and non-essential transactions respectively (Atingi-Ego
& Subudde, 2003). These controls brought back all the bad effects that had been
experienced in 1970s.
These mistakes taught “the new leaders from the bush” some hard lessons and by 1987 it had
become evident that a new programme was needed.

World Bank/IMF funded ERP

In May 1987 the NRM government, supported by IMF and the World Bank, introduced an
Economic Recovery Programme (ERP) aimed at:
i. Achieving positive economic growth of at least 5% per annum by boosting production,
ii. Restoration of price stability by dampening inflation
iii. Halting and reversing the deterioration of balance of payments by boosting export
earnings, and
iv. Strengthening the institutional framework.
This ERP marked the beginning of the emergence of the Ugandan Economy we are studying
today.

1.4.1 The Broad Policy Objectives of the ERP were:

a) Stabilisation of the economy, through the restoration of fiscal and monetary discipline,
notwithstanding the increasing demand for considerable outlays to rehabilitate the
devastated infrastructure in the post conflict economy;
b) Liberalisation of consumer and producer prices. The underlying theory here is that
competitive markets and their efficiency in allocation of resources is promoted by
appropriate pricing. Consequently, regulation of markets and their pricing was to be
eliminated. Monopoly position of marketing boards was also eliminated. Liberal
marketing policies increased competition, hence better prices paid to the farmers.
c) Liberalisation & deregulation of interest rates within a restructured and more efficient
financial system capable of mobilising domestic resources and increasing investments;

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 d) Progressive movement towards a market determined exchange rate within a system
free of exchange restrictions and distortions;
e) Strengthening of the Balance of Payments (BOP) and the normalization of relations
with external creditors;
f) Liberalisation of trade and compliance with other regional and international trade
obligations; and
g) The privatization and rationalization of state enterprises.
Major Reforms under the 1987 ERP
i. Currency reform measures -- two zeros were knocked off the shilling (i.e. 1 new
Shilling = 100 old Shillings) and a currency conversion tax at a rate of 30% was also
imposed. These measures were intended to reduce excessive liquidity in the
economy in order to restore the value of the Ugandan Shilling. This was
accompanied by 77% devaluation (i.e. from 14 to 60 shillings per dollar) to address
imbalances in the external sector. Inflation reduced from 360.7% in May 1987 to
about 200% in June (Barungi, 1997).
ii. Abolition of export taxes in 1992/93 to promote Uganda’s exports. Government
had introduced export taxes in 1987/88, mainly from coffee, to broaden the tax base.
Managing the increased coffee-export inflow in 1994-95 was a test of economic management
in the new liberalised environment. The money had a real potential for destabilising the
economy by appreciating the currency. The government decided to re-introduce a coffee tax as
the quickest means of mopping up extra liquidity in the market. (Kayizzi Mugerwa)
iii. Merger of Ministry of Finance (MoF) with Ministry of Planning and Economic
Development (MoPED) in 1992 to coordinate macroeconomic management and
ensure fiscal discipline (control of public expenditure),
iv. Granting of semi-independence to the Bank of Uganda (BoU) through 3
legislations -- the 1993 BoU Statute which gave it full authority for monetary policy;
the 1993 Financial Institutions Statute which gave it power to regulate and supervise
commercial banks and other financial institutions, and the 1995 Constitution
(Article 162 (2) granted it independence). “In performing its functions, the Bank of
Uganda shall conform to this Constitution but shall not be subject to the direction or control of
any person or authority,” the article states. Through reforms, the BOU was
transformed from a “printing press” to a credible central bank with the prime
objective of price stability.
v. Fiscal operations and tax reforms, including: setting up of Uganda Revenue
Authority (URA) in 1991 to improve revenue administration, abolition of export
taxes beginning in 1992/93, introduction of value-added-tax (VAT) at 17% for most
goods in 1996, etc.
vi. Development of private sector to get government from doing business. In 1991
Uganda Investment Authority (UIA) was created to administer the Investment Code

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 to attract, promote and facilitate investment, provide fiscal incentives, and protect
foreign and local investors.
vii. Privatisation of state owned enterprises (SOEs) which unofficially started in 1989
with the sale of some six firms and in 1992, 142 SOEs were officially put on sale
launching the project aimed at getting government out of doing business.
viii. Adoption of a fully-fledged flexible exchange rate regime in 1992. A highly over
valued exchange rate system, adopted in 1970s through 1980s, had been at the
forefront of Uganda’s poor economic performance. In October 1993, the inter-bank
rate was introduced to eliminate the segmented exchange rate system by bringing
about a convergence of the three channels (i.e. the official FX market; the weekly
auction; and the forex bureaux). These reforms in the FX market had appositive and
significant impact on the economic recovery of Uganda.

Table 4: Selected Economic Performance Indicators 1987-97(index 1960 = 100)

Sources: Background to the Budget 1996/97; Uganda: Key Economic Indicators, January 1996; IMF:
International Financial Statistics; World Bank: World Bank Development Data 1996; Statistical
Abstract 1998; Bank of Uganda, Monthly Economic Report Jan-March, 1999.
Major highlights from 1987 to date, courtesy of the ERP
 Prudent macroeconomic policies which reduced inflation from 220% in 1987 to a
singledigit for much of the period 1993 – 2007. However, inflation began rising once again
into double digits from 2007/08 onwards. We shall see why this was the case (in Topic 2).
 Savings fell sharply to 4.2%, from 7.0% in the previous period, primarily resulting from the
high consumption levels recorded.
 Because of resource constraints, limited efforts were made to improve the physical
infrastructure and development financing was constrained Sustained positive GDP
growth rates averaging 6.5%.
 Per capita income (GNI per capita) has grown at an average of 3.6% p.a., and recovered
from the low of US$250 of 1986 to US$660 in 2016. However, it is still far below the average
growth rate of highly performing economies of South East Asia (5.6% over the last two
decades), although Uganda’s growth has outperformed that of SSA by nearly 82% during
this period.

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 The investment–GDP ratio has averaged 15% in this period, recording the highest average
ratio since the 1960s
 The period, especially the 1990s, has been characterised by substantial reliance on external
assistance. This was necessitated by (1) the low domestic savings rate, (2) the narrow
revenue base including inadequate export earnings, and (3) the acute need for resources to
rehabilitate the economy in order to revive the productive capacity and improve
government’s ability to manage the economy.
 Government identified the need to reduce poverty through broad-based growth that
involves the participation of the poor in order to create economic opportunities and reduce
poverty so as to consolidate the post-conflict peace. Poverty reduced to 25% in 2009/10
from 56% in 1992.
 Lower inflation restored investor confidence in Uganda besides allowing a competitive
exchange rate.
 Improvement of human development indicators; education (especially UPE and
liberalization of education sector), primary health care, water and sanitation etc. For
instance, primary school enrolment is 8.7 million pupils, 74% of households have access to
water from improved sources (UNHS 2009/10).
Note:
• Over the last three decades, the economy has moved from recovery to growth based
on short- term planning (Vision 2040).
• In 1990s, Uganda was “a pioneer of macroeconomic stabilization and structural
adjustment in sub- Saharan Africa.” (Reinikka and Collier, 2001). As a result, the
country attracted a lot of aid money. For example, Uganda was the first country to
receive general budget support under the World Bank’s Poverty Reduction Support
Credit (Moncrieffe, 2004).

Some negative impacts of ERP

Although experience of Uganda in the past two decades or so has revealed that market-
oriented policies are more effective and efficient than the administrative controls, there are a
number of issues about these reforms that have been raised by a cross section of people that
need to be debated. These are:
• The growth profile has remained jobless
• Incomes have not kept pace with the GDP growth
• Income inequality is rising
• Low competitiveness of the economy
• Too much market; too little government

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 Theoretical Perspectives on Economic Growth

Economic growth refers to a persistent quantitative increase in goods and services produced
in a country over a period of time. It is increase in Gross Domestic Product (GDP) of a
country. GDP per capita, at constant prices, is used to measure economic growth.

We use the Production Possibility Frontier (PPF) to illustrate economic growth. When it shifts
outward, then there is economic growth in a country. (Illustration needed)

2.1 Basic Growth Theory: Important facts you should know

Formal Definition of GDP
GDP is the market value of all final goods and services newly produced on domestic soil
during a given time period (usually a year).

Why Do Economists Care About GDP?

Because output is highly correlated (at certain times) with things people care about (i.e.
standard of living, wages, jobs, prices, value of currency, etc… or generally HAPPINESS!!!).
Economists assert that high GDP per capita reflects a high standard of living. For example,
the 2015 World Bank rankings1 showed that the richest country in the world in 2015 was
Monaco, with $171,500 (Gross national income per capita 2015, Atlas method) followed by
Liechtenstein ($114,200), Bermuda ($106,140), Norway ($93,820) and Qatar ($85,430).

The poorest country was Burundi, with a mere $260, followed Central African Republic
($350) and Liberia ($380), Niger ($390) and Democratic Republic of the Congo (DRC) with
$410. Uganda was the 17th poorest country on earth with $670. Kenya was the richest country
in the East African region with $1,340, followed by Tanzania ($910), and Rwanda ($700).
This implies that standard of living is much higher in countries such as Monaco, Luxemburg
and Qatar than in Uganda2.

Limitations of GDP
However, economists concur that GDP may at times be misleading. In the words of one critic,
“GDP works like a calculating machine that adds but cannot subtract. It treats everything that happens
in the market as a gain for humanity, while ignoring everything that happens outside the monetised
economy, regardless of the importance to well-being.”3

Some common limitations of GDP as a measure of economic performance include the

following:

1See World Bank (2016)

2According to the World Bank, GDP or GNI per capita measures the average amount of resources available
to persons residing in a given economy, and reflects the average economic well-being of a population. 3
Clifford Cobb, Ted Halstead and Jonathan Rowe (of Redefining Progress, a San Francisco-based economic thinktank)

Ug. Econ, Lecture Notes, BCOM III, AY 2020/2021; MUBS; October, 2020 Page | 14
 i) GDP doesn’t take into account the type of goods produced. Some goods such as
alcohol, cigarettes, do not directly improve on human welfare.
ii) GDP per-capita does not take into account the efforts applied in producing output.
Employees could be over worked for example, working twice the normal 8 hours of
work. GDP per-capita may be high while welfare may not necessarily be high.
iii) The impact of economic activity on the environment is not directly taken into account.
For instance oil drilling may have negative impact on the environment.
iv) GDP per-capita does not take into account many factors that may be important to
quality of life, such as the quality of water, sanitation and security from crime which
distortions the measure of welfare.
v) GDP per-capita statistics do not consider income distribution.
vi) Nominal GDP per capita does not account for inflation which is an important
determinant of welfare.
vii) Inflationary tendencies make comparison in welfare very difficult.

Renowned economists, Joseph Stiglitz, Amartya Sen and others in 2010 wrote a book,
“Mismeasuring Our Lives” in which they analysed the limitations of using GDP per capita as a
measure of economic & social progress. We shall look at their findings in development economics.

In 1970s, Jigme Singye Wangchuck, the King of Bhutan (a small kingdom in South Asia in
the Himalayas) proposed the GNH—Gross National Happiness—as a better index to measure
development instead of using GDP. In GNH, material well-being is important but it is also
important to enjoy sufficient well-being in things like community, culture, governance,
knowledge and wisdom, health, spirituality and psychological welfare, a balanced use of time,
and harmony with the environment.

In Bhutan (a country that in 2015 the World Bank ranked 158th out of 217 countries in the
world with a GNI per capita of $2,370) they use the GNH Index to determine whether the
people are actually happy. For example, the 2015 GNH Index showed that 8.4% of the
Bhutanese were ‘deeply happy’, 35% ‘extensively happy’, and 48% ‘narrowly happy’, while
8.8% were unhappy. The index found that men were happier than women. It also found that
people living in urban areas were happier than rural residents. They further found that more
educated people were happier, and that farmers were less happy than other occupational
groups.

Nominal vs. Real Variables

Nominal GDP is output valued at Current Prices. However, comparing Nominal GDPs over
time can become problematic. One may confuse changes in output (production) with changes
in prices. For example, government may announce a 15% increase in per capita GDP from
2005 to 2014, yet this increase may be a result of a rise in prices by 15% and not a result of an

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increase in the physical output in the economy. In this case, nothing much has improved in
the real economic condition of the Ugandans. Actually the rising prices (inflation) may have
worsened their condition! For that reason, economists prefer Real GDP. This is the output
valued at some constant level of prices (prices in a base year). Real GDP, therefore, is the
nominal GDP adjusted for inflation. It is got by dividing nominal GDP by a price index,
popularly known as the GDP price deflator:

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 =
𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟

What needs to be done to raise real GDP per capita?

Economists believe that for a country to grow it must transform its primary production into
intermediate production. That is, being able to convert primary goods (raw materials) into
intermediate goods. It is the intermediate goods that are later transformed into final goods.
At that stage the country is said to have developed.

To become an intermediate producer, however, a country must first acquire a “blueprint”

from the Research and Development (R&D) sector. A “blueprint” is simply the technology
or knowhow for transforming final goods to differentiated intermediate inputs.

The R&D sector is competitive. Researchers produce “blueprints”. Blueprints are protected
by perpetual patents. Innovators thus absorb all the profits of the intermediate goods sector.
But there is free entry in the R&D sector, which drive net profits in that sector to zero as well.
In other words R&D or innovation is a non-rival good. Yet R&D is expensive. Because of
this fact, therefore, private individuals in poor countries are usually reluctant to invest in R&D
sector. This calls for government/public investment in the R&D sector in the initial stages.

Innovation vs. Imitation (Building on the Shoulders’ of Giants -- or new researchers building on the
shoulders of previous researchers). Due to the non-rivalry of R&D, research knowledge has a
spillover effect. When a mass of producers generate new ideas, the aggregate level of
knowledge in the economy increases proportionally with the production of new ideas.

The Critical Question

How can Uganda with low level of GDP per person catch up with the high levels enjoyed by
the Scandinavians or Americans or the G8 or the other countries we admire?

This will only be possible by achieving growth rates of GDP sustained for long periods of
time. Small differences in growth rates over long periods of time can make huge differences
in final outcomes, than high GDP growth rates registered for a shorter period. According to
the Robert Solow (1956), the only source of sustained growth is productivity growth.

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Once we appreciate the importance of sustained growth, the question becomes natural: What
can we do to make our growth faster?

This is the very question the planners at National Planning Authority (NPA) were grappling
with while putting together the Uganda Vision 2040.

In order to prescribe policies that will promote growth, we need to understand first what the
determinants of economic growth are. That’s exactly where Growth Theory comes into the
picture.

Conventional Determinants of Growth

In conventional theory of development economics, for a country to grow the following are
prerequisites:
1. Capital accumulation: A country must save at least 15% of its GDP and invest it in new
factories, machinery, equipment and other materials that increase the physical capital stock.
It should also invest in socio-economic infrastructure, such as, roads, energy, water and
sanitation, communications, hospitals, schools, etc.

2. Population and labour force growth: This is a factor still under debate. Population growth
increases the labour force and the potential size of domestic markets in the long run. This
stimulates economic growth. However, it is questionable whether rapidly growing
population exerts a positive or negative influence on economic growth, especially given that
a country may not be able to absorb and employ all the increased labour force. The high
population may also be poor and therefore lacking in effective demand for goods and
services produced.

3. Technological progress: Improvement in the process of accomplishing tasks. This is where

innovation plays a critical part. Technology progress can be labour saving or capital saving
or neutral. The bottom line is: for a country to grow there must be advancements in
technology i.e. better utilization of existing and new found resources to raise output. Some
new models of growth justify imitation where a copy modern technologies from innovators.

4. Natural resources: Conventionally, a country which is endowed with natural resources

such as minerals, forests, water, fertile soils, good climate, air etc. is likely to grow faster
than those without e.g. Diamonds played a great part in Botswana’s rapid growth; just oil
has accelerated growth in Qatar, the Emirates etc. However, there are countries without
minerals and other resources which have attained rapid growth while some with abundant
resources remained stagnant -- Japan Vs DRC.

5. Organisation: The entrepreneur ability to organise other resources promotes production

and thus economic growth. This calls for prudent macroeconomic policies, especially fiscal
and monetary policies – low inflation, stable exchange rates and interest rates, prudent

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 government expenditure, good governance and political stability all stimulate economic
growth.

6. Role of institutions:
a. Property rights: This refers to security of ownership of resources, both physical and
intellectual resources. For a country to grow property rights must be guaranteed.
b. Rule of law: For economic growth to come about there should be rule of law as
opposed to dictatorship and political corruption.
c. Impact of taxes: Evidence shows that high taxes are a major impediment to faster
economic growth. So for a country to grow there must be a prudent tax policy that is
raising revenue by progressively taxing its population.
d. Investment in education: There must be human resource development for any
country to grow. There are various benefits that accrue to a country whose population
is welleducated and trainable.

Economist Daron Acemoglu & political scientist James Robinson in 2012 authored a book,
“Why Nations Fail”, in which they attribute success of nations to building “inclusive” political
and economic institutions (i.e. institutions that protect individual rights, secure private
property and encourage entrepreneurship). They argue that poor countries are those under
“extractive” institutions (i.e. institutions that place power in the hands of small elite that
(mis)use it to exploit the masses.)

Is the Ugandan Economy Growing?

Yes. Official statistics from UBOS and World Development Indictors show that the economy
has expanded quite rapidly as the figure below shows:

Figure 1: Uganda’s GDP (in Billion Current USD) 1986 – 2016

Source: WDI database; Author’s calculations

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 The figure above shows Uganda’s total GDP between 1986 and 2016 in billion US dollars. It
shows that the GDP has grown quite rapidly from below US$4 billion in 2000 to over US$27.8
billion in 2014, although declined slightly to US$25.5 billion in 2016. Data shows that average
GDP growth rate between 1986 and 2000 was 6.1 percent per year, increasing to 6.6 percent
for the period 2001 – 2016 (WDI, 2017). Generally, Uganda’s economy has turned in strong
growth since early 1990s.

Main Sources of Growth in Uganda for the Period 1992 to Date

a) Good economic policies (fiscal and monetary) that led to macroeconomic stability and thus
increases in agricultural incomes, foreign direct investment (FDI), remittances by Ugandans
living abroad, and the high growth of the real sector.
b) Increased private sector investment, especially in industry and construction. Uganda’s
growth has mainly been driven by increased investment particularly in industry and services.
Increased private sector investment is on the Uganda’s membership in the Multilateral
Investment Guarantee Agency (MIGA) which increased the attractiveness of the country as
an investment centre. Also the creation of the Uganda Investment Authority (UIA) in 1991
and its new Investment Code facilitated both local and FDI. Investment is mainly in the
sectors of tourism, agro-processing, horticulture, fish processing, construction, mining,
manufacturing, hydro-electric power, merchant and investment banking, telecommunication
and infrastructure development.
c) Large donor support geared towards public sector spending on social services. For example,
Uganda was the first country to receive general budget support under the World Bank’s
Poverty Reduction Support Credit (Moncrieffe, 2004). The aid-GDP share, which was
about 1% in 1980 rose significantly to about 5% in 1986 reaching a peak of about 19% in
1992, and averaged about 11% between 1990 and 2006 (Bwire, 2012). ODA inflows (in
absolute terms), increased from USD 870m in 1996/97 to USD 1.4bn in 2008/09.
d) Favourable external environment. Substantial debt relief and relatively low borrowing costs,
and high commodity prices. Uganda became a beneficiary of the highly indebted poor
countries (HIPC) debt relief in 1998/99.
e) Increased exports and thus better terms of trade, with new exports, particularly fish, cut flowers,
and maize, coming on board. Total exports increased from US$171 million in 1992 to
US$478 million in 1999. Uganda’s exports mainly go to the European Union (EU) and the
Common Market for Eastern and Southern Africa (COMESA).
f) Removal of economic distortions such as price controls (and the resultant black marketing),
fixed foreign exchange regime, high tariffs (and the resultant smuggling), etc.
g) Growth in total factor productivity: the portion of output not explained by the amount of
inputs used in production. This increased output by TFP is thus due to increased efficiency
of capital and labour used in production. This growth in Uganda’s TFP has been as a result
of growth of education, health, infrastructure, imports and other institutional factors.
h) Relatively stable political environment since the 1990s which reduced uncertainty and risk for
investors.

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 Fine GDP has grown; but growing for who?
The main challenge in Uganda is that although GDP has been growing, per capita incomes
among Ugandan households seem not to keep pace with the GDP. By and large, although
per capita income growth rate has been positive, averaging 3.4 percent per year in 25 years
(1990 – 2015), household incomes among Ugandans have remained nearly stagnant since
1970s to date (see the figure below).
Uganda’s per capita incomes (in current US$) compared with other selected countries

Source: World Bank Data; Author’s Calculations

The figure above shows per capita incomes (in current US$) for Uganda, compared with three
other countries. The figure clearly indicates that between 1970 and 2014, GDP capita for
Uganda has been nearly stagnant. Although Uganda’s total GDP has expanded to over US$27
billion, incomes have not changed much since 1970s, yet the incomes of South Korea and
Malaysia— countries that had comparable per capita incomes with Uganda in 1970—have
grown impressively. This literally means that in Uganda, and much of Africa, we are building
rich economies with poor people.

Why the paradox? Why are incomes stagnant despite the rising GDP?
a) Growth is not inclusive. There is rising inequality among Ugandans. This means that the
growth is going to the few who already have a lot. The emerging opportunities are poorly
distributed. Central Uganda & Greater Kampala = 66%, North = 7%, East = 13% & West
= 14% 3 . Although inequality (let it be individual or regional) is often a consequence of

3 MoFPED (2016), “Private Sector Development Strategy 2015/16 – 2019/20.” 5

See UNSTATS: National Accounts Aggregates

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 progress—not everyone or every part of the country gets rich at the same time—large
inequalities affect progress.
b) High population growth rate. Uganda’s population is growing at 3.25% (9th highest; and
the fertility rate is 6 kids per woman, the 5th highest in the world). This implies that
population is competing with the growth of GDP, and clearly the former is winning the race.
If Uganda’s economy and population continue to grow at the rates both have been growing
in the past decade (2005 – 2015), it will take Uganda 20 years (70/3.5 = 20 years) to double
her GNI per capita. Note: Uganda’s GNI per capita is currently growing at 3.5% per year.
Globally, the most livable countries are those either with smaller populations or with large
population driven by longer life expectance as opposed to increasing numbers of children.
The key is to ensure that the country reduces the dependency ratio (the number of children
per family).
c) A large proportion of Uganda’s GDP is produced by foreigners. Most of the large and
thriving businesses in Uganda (and particularly those in the fastest growing sectors—
telecommunications, banking, large scale manufacturing, wholesale and retail trade etc.) are
foreign owned. Ugandans are concentrated mainly in small, informal businesses— vending
the products that foreigners produce, riding boda-bodas, hair salons, bars, etc. Thus, a
significantly larger proportion of the proceeds of the expanding economy go to foreigners
who repatriate them to their home countries.
d) High marginal propensity to import (MPM). Currently, the MPM for Uganda stands at
33%5 – one of the highest in the region (e.g. Zambia = 23%, Tanzania = 29%). This implies
that incomes and jobs are shipped out of Uganda to the countries that produce her imports
– China, South Korea, India, Hong Kong, Malaysia etc. No wonder their incomes are
growing as ours continue to stagnate.
e) Low levels of capital accumulation. The culture of consumerism among Ugandans means
that we cannot save and accumulate capital. Uganda’s MPC (87%) is very high which
deprives many Ugandans of the ability to save, invest and create wealth that would secure
their income flows. China’s MPC is 38%, South Korea’s is 42%.

Why the Jobless Growth of Uganda’s Economy?

In economic theory, economic growth is expected to create jobs and reduce unemployment
(Okun’s Law). In 1962, Arthur Okun, an American economist, postulated that a 1% increase
in the growth rate of GDP would lead to 0.3% reduction in unemployment. Subsequent
research has proven that economic growth is good for employment.

However, empirical and diagnostic studies have found that Uganda’s growth profile has
remained jobless (see Ggoobi, 2017). The economy has been growing rapidly in recent
decades without a commensurate growth in employment.

We have already seen how the economy has expanded in the past three decades. Despite that
rapid expansion of the economy, unemployment has increased. It is estimated that of the

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500,000 young people that enter the labour market every year, only about 10 percent of secure
a formal job (NPA, 2015). The rest either remain jobless or join the informal sector. Over 90%
of Ugandans employed in non-agricultural activities are in informal employment (according
to UBOS statistics). So, why the paradox?
Research has attributed it to the following factors:

1. Chaotic political economy: according to Mugisha and Kitamirike (2017), a

combination of ‘wrong’ orientation of macroeconomic reforms (neo-liberalism) and political
patronage fuelled by a shift to multi-party democratic politics, and the desire of the NRM
regime to consolidate itself in power, caused jobless growth. That the two crowded out
private and public investment.
2. Low productivity growth: Uganda’s agriculture has had the lowest labour
productivity in Uganda, yet it is the sector that hosts three quarters of Uganda’s labour force.
3. High population growth rate: between 1990 and 2014, total employment in Uganda
grew on average by 2.96% per annum, yet the population growth rate in the same period
was 3.6%, and labour force growth rate was 3.1% over the period. Population growth rate
often competes with other important variables such as the growth rate of the household
incomes and the growth rate employment. In Uganda the former is currently winning the
race.
4. Structure of Uganda’s economy: As indicated later in this reader, Uganda’s economy
has experienced sectoral shifts in GDP composition with no sectoral shifts in employment.
Nearly 80% of the population has remained stuck in agriculture, a sector whose contribution
to GDP reduced from 56.6% in 1986 to about 24% in 2016. More research is needed to
explain why this is the case.

Performance of the Economy

Uganda ranks in the bottom 11th percentile in the world on GDP per capita, yet its average
GDP growth rate of 7% between 1990 and 2011 was one of the highest in the world. This
explains the depth of the pit in which the economy had been drowned by its turbulent history.
The economy is still constrained by:

a) Uncompetitive business environment: Overall, Uganda ranks 114th out of 137

countries ranked in the 2017-2018 edition of the Global Competitiveness Report. She ranks
76th for macroeconomic environment and 102nd for business sophistication [11 pillar of
national competitiveness. It is a key factor for innovation and concerns the quality of a
country’s overall business networks as well as the quality of operations and strategy of
individual firms](GCR, 2017-19) . Note: GCR is Global Competitiveness Report, authored by the
Institute for Strategy and Competitiveness. Uganda ranks 165th out of 190 when it comes to ease
of starting a business, requiring one to go through 12 procedures and 24 days.

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b) High levels of corruption and highly bureaucratic procedures: Uganda has one of the
most expensive and lengthy business procedures. Corruption is ranked second among “the
most problematic factors of doing business” by the GCR 2017-18 (after high taxes). Over 51% of
firms surveyed expected to make informal payments to public officials “to get things done”
compared to just 22% for firms in Africa overall. Additionally, in 2015 it required one to go
through 15 procedures (27 days) to start a business in Uganda, compared to an average of 5
across EAC countries (World Bank, 2015). The number of procedures to register property is
10 in Uganda, compared to 7 in the EAC.

Although there has always been corruption and theft of public money in Uganda, evidence
shows that the country has never seen the scale of corruption scandals we have had in the
recent years. It all started with the CHOGM scandal (2007) = $27 million, Global Fund (2008)
= $37 million, GAVI Fund (2008) = $4.6 million, Temangalo (2008) = Shs.11 billion,
National IDs (2010) = Shs.19 billion; Bicycles for LCs (2011) = $1.7 million; Microfinance
Support Centre (2011) = Shs.60 billion; and Basajjabalaba/BOU (2011) = Shs.169 billion.
Other corruption scandals include: the EAC pension scheme (2012) = Shs.169 billion, Office
of the Prime Minister scandal (2012) = Shs.50 billion, and Katosi road (2014) where Shs. 24.7
billion was shared by government officials. The few reported scandals above cost Uganda a
total of Shs. 737 billion ($220 million).
c) Political insecurity & uncertainty: Uganda’s political institutions rank low
worldwide. Public trust in politicians is low, ranking 99th in the world (GCR, 2017-18).
Business costs due to crime and violence are high, ranking 115th while the costs of terrorism
rank 123st out of 137. So political risk is still very high.

d) Macroeconomic instability: Uganda’s macroeconomic indicators are more volatile

than its neighbours i.e. interest rates, exchange rates, employment rate, current account
balance etc. are all higher than the EAC average, except government budget and inflation.
e) High concentration of workforce in agriculture: three quarters of the labour force are
stuck in agriculture, a sector which makes up an insignificant portion of less than 0.3% market
share on the world market.

f) Rising income inequality: Since the 1990s, the income disparities have been growing
with the growing economy. The Gini-coefficient increased from 0.37 in 1996 to 0.42 in 2017.
However, inequality is a global challenge. Thomas Piketty (Capital in 21st Century) attributes
the rising inequality to “the tendency of returns to capital to exceed the rate of economic
growth.” So he recommends high economic growth and a global wealth tax to reduce the
inequality.

g) Low capacity utilization: Due to poor technology and low work ethic (the civil service
culture which is highly entrenched among Ugandans – working strictly between 9am and 5pm
with long breaks in-between). Uganda has low levels of innovation (ranking 74th), which is

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not surprising given its weak education system and low-skilled labour. Uganda’s higher
education and training ranks a lowly 126th in the world.

h) Poor infrastructure: Uganda is landlocked, with long distance to the sea (870 miles),
yet there is no efficient railway transport. This makes it difficult for Ugandan firms to compete
globally. The railway takes 21 days to get the freight from Kampala to Mombasa, and could
take 60 days. Freight charge on road is very high ($120/ton, which 2/3 of the cost of
transporting the same cargo by sea from Mombasa to Europe! Power shortage is another
problem. Power outages cost Ugandan businesses 10% of sales revenue, compared to just 6%
for Kenyan firms and 8% for Rwandan firms (World Bank, 2006). The power is expensive,
having increased from Shs.171 to Shs.667 per kWh between 2004 and 2015. Overall, the
quality of Uganda’s infrastructure (roads, rail, air, electricity, and telephony) ranks 122nd in
the world (among the worst). It requires one to go through 6 procedures and 66 days to getting
electricity, itself expensive and unreliable (World Bank’s Doing Business Report 2018)

i) Limited access to credit: It is the 3rd most problematic factor for doing business in
Uganda. Only 17% of firms in Uganda have lines of credit or loans from financial institutions,
compared to 26% for firms in Africa. Lending rates are higher in Uganda, compared to EAC
peers. Uganda ranks 125th in world on affordability of financial services (GCR 2017-18)

j) Weak social institutions: Low-skilled human resources; due to young population and
weak education system. Thus Uganda lacks management talent and technologically skilled
labour. Top manager in each sector has an average of 10 years work experience, compared to
13 years for Africa (WDI, 2015). There is also low trust in society, mainly because laws, rules,
regulations as well as ethical and moral codes that impose “internal sanctions”, such as guilt,
are weak.
However, despite all these constraints, throughout the 1990s up to 2011, the economy has
turned in a solid performance, characterised by:
a) High and sustainable economic growth averaging 7% per annum,
b) Annual underlying inflation rate fell averaging 5%,
c) Reduction in poverty – overall poverty level as measured by the headcount ratio (the
number of individuals below the poverty line) declined from 56% in 1992/93 to 19.7%
in 2014/2015.
d) Increased foreign direct investment. Gross investment rates rose from 25% of GDP in
2008/09 to 31% of GDP in 2014/15, mainly financed by FDI and external loans. Net
FDI inflows (as % of GDP) averaged 4.5% between 2005 and 2015.

Recent Performance of the Ugandan Economy

Ugandan economic authorities (Ministry of Finance, Planning and Economic Development
and BoU) and institutions like World Bank and IMF use several economic indicators to
analyse the performance of the economy. Such indicators include:

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 a) GDP & GDP per capita growth rates
b) Inflation rate
c) Interest rates & private sector credit
d) Foreign exchange rate
e) External sector performance
f) Fiscal performance (government revenue and expenditure)
Poor performance of the economy in the past years
Although the economy evaded a full-blown recession4, in the past years GDP experienced
four quarters of negative growth5. The trend was in such a way that a quarter of negative
growth occurred, followed by positive growth in the next quarters, and then another quarter
of negative growth (Figure 3).
Figure 3: Negative GDP growth in four quarters (2011/12 – 2016/17)

Source: World Bank (2017)

The growth rate of GDP in Uganda has, in the recent past, been the lowest in the region,
save for those of troubled Burundi and South Sudan. GDP growth reduced to 3.9% in
2016/17 from 4.8% in 2015/16. Agriculture was in recession, while industry and services
also performed badly.

Why the poor performance?

4 A recession is when the GDP growth rate is negative for two consecutive quarters or more. Textbook economists often
stick to this requirement to determine whether an economy is in a recession or not. However, some economists posit
that a recession can quietly begin before the quarterly GDP reports turn negative – when there are several quarters of
slowing but still positive growth.
5 World Bank (2017), Uganda Economic Update, 8th Edition, January 2017. The World Bank Group, Washington DC

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Authorities attributed the recent poor performance of Uganda’s economy to both external and
domestic/regional factors. The factors ranged from global economic developments such as:
1) slow growth in China, 2) fall in commodity prices, 3) tight financing conditions mainly in Europe,
and 4) geopolitical events such as Brexit and U.S politics, to regional and domestic factors, notably
5) South Sudan crisis, 6) banking liquidity crunch, 7) drought conditions, and 8) increased political risk

Signs of recovery in economic performance

Recent statistics indicate that the economy is on a recovery trajectory. Overall, it expanded
by 5.8% in FY 2017/18, 1.9 percentage points higher than the growth of 3.9% registered in
FY 2016/17. Services have been the main driver of the recovery (grew by 7.3%), followed by
agriculture. BoU also eased money supply by reducing the CBR to 9%, which encouraged
banks to reduce lending rates and to extend credit to borrowers.

Risks that are likely to further negatively affect the recovery of the economy
a) Weak public investment management (PIM),
b) Regional and global challenges,
c) Oil uncertainties,
d) Rain-fed-pest-infested agriculture,
e) Disappearing aid
f) Inflation picking up
g) Financial sector crowded with risks

Suggested way forward

1. Domestic revenue mobilisation
2. Improve PIM
3. Improve business environment
4. Prepare for oil

Growth prospects for Uganda

Uganda has the potential to be the second fastest growing economy (after India) over the
decade 2014 – 2024, according to growth projections presented by researchers at the Center
for International Development at Harvard University (CID). Its predicted annual growth rate
to 2024 is 6% just below India that was predicted to grow by 7% per year to 2024. The
projections are based on a decade of research into the relationship between measures of
economic complexity and growth. Economic complexity takes into account the diversity and
sophistication of productive capabilities used to produce a country’s exports. It predicts future
economic growth with much greater accuracy than the World Economic Forum’s Global
Competitiveness Index.

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What Uganda needs to do to achieve this growth potential

1. Re-building the fiscal space: How? (1) broadening the tax-base to yield higher
revenues; (2) improvement of revenue administration (risk management and
segmentation of taxpayers will do the magic, simplification of laws to elicit
compliance); (3) rationalising spending i.e. government wage bill & non-wage
expenditure; and (4) improving efficiency of spending – wastage in public investments,
health, education etc.
2. Second-generation reforms – a set of measures intended to enable the country to
attain, in a sustained way, high-quality growth. Second generation reforms are needed
to re-align relations between state, market, and civil society. Uganda needs policies to:
(1) boost consumer benefits (by reducing prices for services and products such as
electricity, transport, health care, education, and by increasing choice and service
quality); (2) reduce the cost structure of exporting and upstream sectors to improve
competitiveness; (3) address a lack of flexibility and innovation in the supply-side of
the economy; (4) create new job opportunities; and (6) maintain and increase high
levels of regulatory protections in areas such as health and safety, the environment,
and consumer interests.
3. The need for industrialisation and urgent reversal to premature industrialisation.
To build a resilient economy, Uganda must investment heavily in industrialisation,
particularly manufacturing. This will change the structure of the economy (create
quality jobs; generate tax revenue; redistribute incomes). Uganda needs more factory
workers than sandal-making or Chinese product vending ‘entrepreneurs’.
4. The need to close the infrastructure gap
5. Need to launch Uganda’s exports into global trade

Rebasing of GDP
The Uganda Bureau of Statistics (UBOS) recently revised its national accounts estimates. The
new estimates show that the economy was more buoyant than had previously been reported.
The new estimates showed significant variations in GDP growth rate series. As a result there
was an upward adjustment in real GDP growth.

These changes were attributed to:

i. Change of base year from 2002 to 2009/10 prices;
ii. Change in methodology for measuring GDP, to ensure better coverage of the
economy than in the past. The coverage of economic activities in the economy was
made more comprehensive after capturing the informal sector and non-profit
institutions.
These revisions to the previous estimates resulted in overall GDP, at current prices, to increase
by 16.5% a year, on average as seen in the table below.

Ug. Econ, Lecture Notes, BCOM III, AY 2020/2021; MUBS; October, 2020 Page | 27
Table 6: Uganda’s GDP at Market Prices

Source: Uganda Bureau of Statistics

This was the second rebase in recent times following the 2008 rebase from 1997/98 to 2002
prices. Actually an empirical study by Bwire (2012) had found that data from UBOS and
World Bank (World Development Indicators) revealed a 3.6 percentage point average
absolute discrepancy per year in Uganda’s GDP real growth rates between 1970 and 2008.

5.0 Trivia (Key Facts about Ugandan Economy)

Economic Facts
 Total GDP (at current prices) = UGX 95.8tn/$25.9bn (2017)
 GNI Per Capita, Atlas method (at current US$) = 2.2m/$600
 Poverty (national PL) = 21.4%
 Income held by richest 20% = 51%
 Income held by poorest 20% = 5.8%
 Rural poverty (national PL) = 25%
 Urban poverty (national PL) = 9.7%
 Regional distribution of poverty = East 38%; North 32.5%; Central 13%; West 11%;
Wakiso 2.7% and Kampala 2.6%
 Gini Index = 0.42 (highest in Central (0.41); lowest in Eastern (0.34)
 Poverty gap ratio = 5.3%
 Squared poverty gap = 1.9%
 Self-employed (% of total employed) = 82%
 % employed in agriculture = 76 (in manufacturing only 5%)
 % of households that use own savings as the main source of business funding = 78%
(banks 1%; SACCOs 1%; MDIs 0.6%)
 Main mechanism for saving is secret location (33% of HHs), followed by VSLAs 16%;
mobile money 10%; banks 8%; ROSCAs 5%; SACCOs 3%
 75% of Ugandans are knowledgeable about mobile money (59% of Ugandans
registered for MM)
Human Development
 Average distance to a government health unit = 4.6km
 % of Ugandans that sleeps in mosquito net = 41%
 Average distance to the nearest government primary school = 2km
 Literacy rate = 74%

Ug. Econ, Lecture Notes, BCOM III, AY 2020/2021; MUBS; October, 2020 Page | 28
  Net primary school enrolment = 80% (down from 82% in 2013, and 86% in 2003)
 Net secondary school enrolment = 28%
 % with access to telephone services = 71%
 % of population with access to electricity = 18%
 % of population with access to improved water = 80% [urban 92%; rural 75%)
 Life expectancy = 58 years
 Infant mortality rate (under 5 per 1000) = 55
 Average distance to the main source of drinking water = 1km
 % of households that do not use any toilet facility = 10% (Karamoja 70%, North 24%,
East 12%, Central 6%, West 3% and Kampala 0.4%)
 % of households that afford salt = 54%
 % of households that use only one room for sleeping = 44% (Kampala 68%)
 % of houses roofed with iron sheets = 75% (from 68% in 2013)
 % of houses with cemented floor = 37%
Others
 Total population = 39 million, (2017 est)
 Proportion of population in rural areas = 82%
 Working age population = 19 million
 Working population = 15m (79%) – of which 9m (60%) are employed; 6m (40%) are
in subsistence
 Not working population = 4 million (21%) – of which 3.1 million are outside the labour
force
 Population growth rate is 3% per year
 Population below 15 years of age = 52%
 Population below 30 years of age = 78% (27m)
 Median age = 15.9 years (UN, 2015)
 Total number of households = 7.3 million
 Average household size = 5 persons
 Dependency ratio (% of working-age popn) = 103 [note: old age dr = 5) (Kenya=81;
Singapore=36; Korea=66; Malaysia=44)
 Adolescent fertility rate (/1,000 women ages 15-19) = 115
 % of Ugandans that participate in cultural activities = 80%
 Only 6% of Ugandans use internet (52% of these for social media// 12% for business
& 16% for acedemics)
At a glance
 Total size of Uganda = 241,040 sq. km.
 Total land area = 200,520 sq. km or about 50m acres (from 199,810 sq. km in 1960s).
 % of land under agriculture in 1962 = 45%
 % of land under agriculture in 2015 = 72%
Source: World Bank (2018), UBOS (2017) & MoFPED (2016)

Ug. Econ, Lecture Notes, BCOM III, AY 2020/2021; MUBS; October, 2020 Page | 29
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