MACROECONOMICSA Macroeconomic Country Report On UGANDA By: Dhruba Jyoti Chatterjee (11C) Hasan Nayar (16C) Jasmit Singh Chawla (19C) Kapish Kaushal (20C) Shashwat Sinha (41C) Surjodeb Sarkar (44C)
INTRODUCTIONUganda which is also known as ‘Pearl of Africa’ is located in east Africa and shares its border withCongo and Tanzania, South Sudan and Kenya. It follows a presidential democracy political systemwith Yoweri K. Museveni from the ruling coalition National Resistance Movement (NRM) as itscurrent head of state. Apart from the NRM, other parties include Forum for Democratic Change(FDC), Uganda People’s Congress (UPC) and The Democratic Party (DP). Its capital is Kampala and itsofficial languages include English and Swahili. The local currency of Uganda is shilling.Uganda gained independence in 1962 from the British Empire and the first parliamentary electionswere held in 1962. Milton Obote was the first Prime Minister of Uganda and was over thrown by IdiAmin after a military coup in 1971. Idi Amin’s dictatorial rule lasted 8 years during which he carriedour mass killings. Milton Obote retuned to power in 1979 after the Uganda-Tanzania War when IdiAmin was overthrown. General Tito Okello came into power in 1985 and ruled for six months afterwhich he was replaced by Yoweri K. Museveni after the bush war. Museveni has been in power since1986.Uganda has large natural resources and mineral deposits. It also has large untapped reserves ofcrude oil and with the latest discovery of oil in Lake Albert, Uganda is poised for growth. Uganda’seconomy largely depends on the services sector like telecommunication, financial service andconstruction which accounted for 52% of the GDP as of 2010. Other sectors which contribute to theGDP include Industry contributing 26.5% and Agriculture which contributes 22.5%. Uganda’s majorproduce include coffee, tea, cotton and tobacco. Uganda’s economy is growing at 5.1% per year asof 2010. Uganda’s primary exports include Coffee, Fish products, Tobacco and Tea and its majorexport markets are EU Countries, Sudan, UAE, Netherlands and Kenya. Uganda’s major importsinclude machinery and equipment, petroleum products, Food and beverages and chemicals relatedproducts and its main import sources are EU countries, Kenya, UAE, India and China.About 30% of Uganda’s population had HIV in 1980. This figure has fallen to 6% as of date andefforts to eradicate it continue making Uganda one of the rare success stories with respect to AIDS inAfrica. A policy to remove user fee at state health facility has also been implemented since 2001 andhas helped in this cause.
A large portion on Ugandas population is Illiterate with only 3.2% of GDP being spent on education.More than 6 million pupils attend schools as of 2011. Almost 70000 students leave school for highereducation every year but. Only 35% of them are accommodated in higher institutions. Education isvery important for Ugandas sustenance and growth in future.The Lord’s Resistance Army lead by Joseph Kony is the primary rebel group in Uganda. The LRA hasbeen accused of conducting mass human rights violations in Uganda including murder, abduction,forcing children into hostilities and sexual enslavement. Uganda along with aid from the UnitedStates of America continues to fight the LRA.Uganda has strong bilateral ties with the US and EU countries. It also maintains ties with radicalstates like North Korea and Iran. Apart from its international relations, Uganda also relies on IMF andWorld Bank as a source of aid. However, recently Uganda’s relation with EU countries has beenstrained with a part of the aid being withheld due to corruption charges on the Ugandangovernment.Uganda’s economy has good growth potential and the recent viable oil reserve discovery can enableUganda to become an oil exporter in the long run. It will also attract investment and fulfil its ownenergy needs. However, there are numerous challenges which pose a threat to the growth ofUganda’s economy and stability with problem areas like limited productivity in the recent years, overdependence on agriculture, corruption and lack of governance.
UGANDA - Country Profile Country Uganda Country population (m) 32.7 Capital Kampala Official language English GMT +2 Presidential Time zone of capital Political system hours democracy Surface area (sq km) 2,36,040 Head of state Yoweri K. Museveni GDP (%) 5.2 GNP (%) 5.7 Top 3 export goods (% of total Top 3 import goods (% of total exports) imports) Coffee 16.8 Machinery & equipment 30.3 Fish & fish products 8.4 Petroleum products 14.5 Tobacco 4.9 Food, beverages & tobacco 13.3 Top 3 export markets (% of total Top 3 import sources (% of total exports) imports) EU 31.3 EU 20.3 Sudan 14.2 Kenya 15.6 UAE 10.2 UAE 14.8MACROECONOMIC PERFORMANCE IN THE RECENT PASTWith democracy in place, Uganda has taken a step towards economic rehabilitation anddevelopment in the past two decades. There has been a focus on rebuilding the infrastructure,primarily the transportation and communications that were destroyed by war and neglect. Ugandahas benefited significantly from the support it has received from the IMF and the World Bank, withalmost all its foreign debts being forgiven under the Heavily Indebted Poor Countries Initiative(HIPC). Consequently, it has emerged as one of the fastest growing economies in the last five years.(Nominal GDP, 2010: 17.7 Billion USD; GDP (PPP): 42.2 Billion USD). However, the Ugandan Economycontracted sharply in the years 2009 and 2010, following the global recession, which led to a weakexternal demand for traditional exports (particularly coffee) and a drop in aggregate demand. Real GDP Growth (%age) (2006-2011) 12 10.4 10 8.1 8 7.1 5.7 5.6 6 4.9 4 2 0 2006 2007 2008 2009 2010 2011 (E) Source : IMF and Local Authorities Data; Estimations used for 2011 dataWith a median age of 15 years, Uganda boasts of one of the youngest populations in the world. Thecurrent estimated population is close to 35 million. Its population growth rate is 3.5%, way above
the global rate of 1.2%. While the growing population is expected to create a favourabledemographic profile in terms of growth and development, it is becoming increasingly difficult tocreate jobs at the same rate. As per the labour flow figures at Uganda Investment Authority and theUganda Bureau of Statistics, more than 4,00,000 Ugandans enter the labour market every year; onlyabout 1,13,000 are absorbed in formal employment. While the unemployment rate is 3.5%, theyouth unemployment rate is close to 32%. In case of University Graduates, this figure goes upto 36%.The recent discovery of oil reserves has renewed hope amongst the Ugandan youth about theeconomic prospects, though it also raises concerns about possible cases of corruption, consideringthe case of many other African nations. While the Government’s decision to “invest in youngpeople” by making it a fundamental social obligation in Uganda’s Poverty Eradication Action Plan isappreciable, there is still a lot of ground to cover.The Government has maintained an expansionary fiscal policy aiming to achieve strong real GDPgrowth of 7% or more, its impact has been weakened by under-execution of the capital budget.However, the total expenditure is expected to go up as per the National Development Plan. Ugandacontinues to be a largely untaxed economy (especially in the agricultural sector). Moreover, ill-defined exemption norms and loopholes in the current tax legislation have also eroded the tax base.Hence, there has been a decline in the total revenue collection and grants.Table: Public Finances (As % of GDP) 2007 2008 2009 2010 2011(E)Total Revenues 18.5 16.3 15.4 14.9 13.9Taxesand GrantsGrants 12.8 13.2 12.5 12.1 11.5 5.1 3 2.8 2.7 2.3CurrentTotal Expenditure 19.9 15.9 15.3 16.7 16.4Expenditure 12.2 10.7 10 9.6 9.6Capital Expenditure 7.2 5.9 5.5 7.2 6.6Overall Balance -1.4 0.4 0.1 -1.5 -2.5Source: Uganda Bureau of Statistics and Bank of UgandaThe Bank of Uganda is responsible for managing the monetary policy in the country. Its primaryobjective is to control inflation, besides maintaining stability in the domestic financial markets andforeign exchange markets. The monetary policy stance is to restrict inflation to 5%. However, theinflation figures leaped beyond 13% in the year 2009, mainly because of the following reasons: a. Presence of pirates in the Indian Ocean, break-downs in the Mombasa Oil refineries and new transportation/trade regulations pushed the fuel prices up. b. Natural disasters, including floods and landslides, led to an increase in food prices.Favourable weather conditions and improved food production helped reduce the food prices andhence, the inflationary pressure dropped to 7.3% in the year 2010. However, the inflation figuresthis year have gone through the roof; the Annual Headline Inflation Rate for the year ending
November 2011 read 29%, which is actually a shade lower than the figure of 30.4% noted lastmonth. This can be explained in light of the expansionary monetary policy followed by the BOU inthe year 2010 and early 2011. With an eye on the promotion of domestic investment, the BOUreduced the interest rates. The BOU allowed the Central Government to draw its savings andincreasingly borrow from it during 2010 and early 2011. This led to an increased circulation ofcurrency in the market. With the prices of crude oil moving up again and the shortage in the foodproduction, inflation was all but an expected outcome. CPI Inflation (2007-2011) 40 30 29 20 12 13.4 10 6.4 7.3 0 2007 2008 2009 2010 2011 (Nov)Source: African Economic OutlookUganda has operated a flexible exchange rate since the early 1990’s, occasionally intervening in theforeign exchange market to contain volatility. This has been done to maintain an appropriate level ofinternational reserves to cushion against external shocks and maintain competitiveness in the exportmarket. However, being a small open economy, it was impossible to remain unaffected by theadverse affects of the global financial crisis of 2008. The sloppy growth in exports, capital inflowsand foreign direct investment against the rising demand for foreign currency and imports has led toa steady depreciation of the Ugandan shilling since 2009. The value of the Ugandan Shilling stands at2400 units per US Dollar, a slight improvement from the all-time low of 2900 units per US Dollar inSeptember earlier this year. The Ugandan media has reacted strongly to the “impending economiccrisis”, comparing the current scenario to that of Zimbabwe.The export receipts as a %age of GDP has been declining in recent years. The imports are growing ata faster rate than the exports, a trend that is likely to continue. Therefore, the current accountbalance is expected to deteriorate in the near future. Capital inflows in the form of FDI and officialloans have more than financed the current account deficit in the past, creating a surplus in thebalance of payments. This channel has dried as a direct consequence of the global financial crisis of2008. With another crisis developing in the European region, the mood is unlikely to change, thedepreciating shilling being an indication.Table: Current Account (As %age of GDP):Exports of 2007 2008 2009 2010 2011(E)Goods (FOB) 11.1 15.9 16.7 15.6 14.9Imports ofGoods (FOB) 18.4 21.4 24.1 24.7 25.3Trade -7.3 -5.6 -7.4 -9.1 -10.5BalanceSource: Uganda Bureau of Statistics and Bank of Uganda
The industrial sector is growing as a consequence of the infrastructure development activities in thecountry, as can be seen by the growth in products used in construction, such as cement, bricks, paintand metallic products. The unstable and inconsistent supply of electricity continues to hamperindustrial growth, especially in extractive industries such as mining and crude oil. The monthly trendin the volume of goods produced by the manufacturing sector in Uganda is measured in terms ofIndex of Production (IoP). This index is based on 2002 prices and is a result of the compilation of datafrom nearly 200 business establishments. In the current index, the Food Processing Group,Beverages and Tobacco, Chemicals, Paint and Foam Products have been given the highest weights. Industrial Production Growth rate (2006-2010) 8 7 6 5.8 6 5.2 4 2 0.7 0 2006 2007 2008 2009 2010 Source: CIA World Factbook, 2011MACROECONOMIC DIFFICULTIES FACED BY UGANDAThe most severe macro-economic problem faced by Uganda has been the surge in inflation duringthe past 18 months. Headline and core inflation increased sharply from 4.2% and 4.6% respectively,in June 2010 to 15.7 % and 12.2% in June 2011.Recovering from the global crisis, the macroeconomic policy objective in 2010-11 was to accelerateeconomic growth and create employment. To achieve this task, the priorities were focused onexpansion of economic infrastructure and increasing domestic production. Thus the Bank ofUganda’s target was to keep the core inflation below 5%, thereby not constraining the growth of thecountry in a big manner. In response to the weakening economic situation following the global crisis,there was an expansionary monetary policy followed in the first half of the year. This was to help inboosting aggregate demand of the economy.However, it was in the second half of the year, that the food prices saw a rise due to supply shocksto production, most notably the droughts in both Uganda and its East African neighbours. Theprolonged drought affected most of the food producing regions of the country. Food accounts for27.2 percent of the overall Ugandan consumer basket of goods and services. Annual food priceinflation increased to 33.4 percent in June 2011. Inflation of non-food items, which account for theremaining 73.8 percent of the consumer basket, was much more moderate, although it has edged upin recent months to 7.9 percent in June 2011.
60 50 40 30 Food Prices Non Food Prices 20 10 0 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Jan-08 Jan-09 Jan-10 Jul-06 Oct-06 Jan-07 Jul-07 Oct-07 Jul-08 Oct-08 Jul-09 Oct-09 Jul-10 Oct-10 Jan-11 Jul-11 -10Source: Uganda Bureau of StatisticsThe rise in the price of oil has also been one of the reasons for the hike in prices as it has increasedthe domestic costs of production.Citing the supply side pressures in the second half of the year, the central bank was forced to tightenits monetary policy in the second half of the year. This tightened monetary policy was followed bythe central bank engaging in open market operations by selling of government bonds and bills. Thestock of treasury bills and bonds, which are the main instruments of monetary policy increased fromShs.1, 414.4 billion and Shs.1,563.9 billion in June 2010 to Shs.1,696.1 billion and Shs.2,324.4 billion,respectively in June 2011. Thus, the net withdrawal of liquidity from the system in 2010/11 onaccount of Treasury bills and bonds approximately amounted to Shs.108.3 billion and Shs.874.0billion, respectively.The contractionary monetary policy stance, as expected, led to an increase in the yields of treasurybills and bonds. The average monthly yields to maturity for the 91-day, 182-day and 364-dayTreasury bills rose to 12.7 percent, 13.3 percent and 13.8 percent, respectively from 4.4 percent, 5.7percent and 7.4 percent in June 2010.In Uganda’s case, since it has been the external supply disruptions that have led to an increase in theprices, the tightening monetary policy is only going to have limited impact. However, it is importantfor the monetary policy to prevent supply side shocks to food prices being percolated to the nonfood prices. It is important that the monetary policy causes a disinflation of non-food prices, so thatwhen the supplies improve, the inflation comes back to the target level. On the contrary, in case the
non- food prices are not curtailed, the inflationary pressure will become deep rooted and high pricesare likely to persist, despite an improvement in the level of supplies.Apart from the supply side, some blame of rising inflation has to go to the Bank of Uganda itself.High fuel and commodity prices had an impact on inflation worldwide, but it was exacerbated inUganda, courtesy of the Bank of Uganda following an expansionary monetary policy stance for mostpart of 2010. Between January and December 2010, the currency in circulation increased from 1% to32%.Another contributing factor was a supplementary budget of $300m approved by parliament forMusaveni’s political campaign during the elections. However, during the time of election, largenumber of foreign firms scaled back production in fear of large scale violence, resulting in decreasedsupply of goods and market overloaded with cash.The second major macroeconomic problem has been the sharp depreciation in the UgandanSchilling. The Ugandan shilling depreciated by 14.5 percent against the US dollar to an annualaverage exchange rate of Shs.2,323.4/US$ from Shs.2,028.9 percent recorded in 2009/10. The primereason for the depreciation has been a weakening balance of payment account for Uganda. Thebalance of payments recorded a deficit of US$ 581.4 million in 2010/11 from the surplus position ofUS$ 210.9 million registered in 2009/10 mainly on account of the worsening current balance and adecline in the capital and financial account surplus. Index of the Ugandan Currency against the US dollar: June 2007-July 2011(2008=100) 155 145 135 125 Index (Units) 115 105 95 85 75 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Jan-07 Jan-08 Jan-10 Jan-11 Jul-07 Oct-07 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Jul-10 Oct-10 Jul-11 MonthsSource: Bank of UgandaThe current account has deteriorated on account of the sharp rise in the import bill as compared tothe export growth. Uganda’s demand for imports increased strongly with the recovery of economicgrowth from the global crisis. Uganda’s trading partners like the EU, Japan, South Africa, particularlythose countries from which Uganda imports more than exports, the depreciation against all thesecurrencies implied a rise in the import costs. Rising international oil and commodity prices for mostof the last year, led to large sectors of the Ugandan economy increasing their demand for foreigncurrencies, in order to meet their import bill.
Imports increased from $3.5 billion in 2007/08 to $4.6 billion in 2010/11, an increase of $1.1 billion.In contrast, exports only increased from $2.1 billion to $2.3 billion, an increase of $0.2 billion. As aresult the trade deficit widened from $1,437 million in 2007/08 to $2,285 million in 2010/11. Onemore reason for the widening trade deficit was the slow growth in export earnings. Uganda’s majorexport good is coffee and due to droughts in the robust-growing areas during the bean developmentstage, the prices never recovered and rose as it did for certain other commodities. Exports have alsobeen depressed due to the slow growth of the destination countries particularly the EU. Current Account USDbn 2008 2009 2010 2011f 2012f Goods -1.3 -0.8 -1.6 -1.9 -1.8 Exports 2.7 3 2.6 2.9 3.6 Imports 4 3.8 4.2 4.8 5.4 Services -0.5 -0.5 -0.7 -0.7 -0.7 Credit 0.8 1 0.9 0.9 1 Debit 1.3 1.4 1.6 1.6 1.7 Income -0.2 -0.3 -0.3 -0.4 -0.3 Credit 0.1 0 0 0 0.1 Debit 0.4 0.4 0.4 0.4 0.4 Current transfers 1.2 1.1 1 1.1 1.1 Credit 1.6 1.5 1.5 1.5 1.6 Debit 0.3 0.4 0.5 0.4 0.4 Current account -0.8 -0.5 -1.7 -1.9 -1.7 Current account (% of GDP) -4.8 -2.7 -9.6 -10.1 -7.9Source: IMF, International Financial StatisticsUncertainty surrounding the elections also played a role in driving down the schilling as investorsfrantically started to buy up dollars. Capital inflows that bring in US dollars and FDI were seen on adecline.Another reason for the decline of the schilling against the dollar was the negative market sentiment.Along with the rising oil prices, major concerns over fiscal sustainability in the Euro zone and theslowdown of the US economy sent investors into asset allocation shifts, as the investors rushed intosafe havens for protection of their investment. Less inbound tourism also brought about a deficit inservices trade and reduced transfers in connection with foreign budget support also contributed toit. This, in fact is something that could have detrimental consequences for the Ugandan economy.Around 30% of the annual budget of Uganda comes from the foreign donors, and it has played alarge role in the economic development of Uganda over the years. If the global recovery is slow, andthis remittance is reduced, it could be disastrous for Uganda as many of its projects in the pipelineparticularly the National Development plan will be halted. Donor fatigue is now widely becoming aconcern for the Ugandan economy.
REMEDIES TO UGANDA’S MACROECONOMIC PROBLEMSThe first macroeconomic problem of inflation is a problem that has surfaced to extreme degreesonly in the past year. For the past 15 years, the inflation has more or less seen a downward trendand stabilising around the 6.5-7% mark. However, in the past year, it has shot up to nearly 15%. Rise in Prices 260.00 240.00 220.00 200.00 180.00 160.00 140.00 120.00 100.00 Jan Feb Mar Apr May June July Aug Sep CPI 151.20 153.82 160.25 164.96 166.81 166.94 170.84 175.50 187.34 Food Prices 179.53 182.99 204.72 216.57 218.86 213.37 219.89 225.30 244.18Source: Uganda Bureau of StatisticsAs evident by the diagram, the hike has mostly been driven by the increase in the food price levels.This clearly shows that inflation in Uganda has been driven by the supply side. In such a situation,the priority of the government should be to increase the supply situation by increasing theavailability of food grains.Agriculture, which employs more than 70% of Uganda’s population, contributes only 22% to theGDP. Over the past five years, the agricultural growth has seen a declining trend from 13% to 6%.This sector is also one of the under-invested sectors by the foreign donors. It is also one of thesectors that receive low private sector credit. Its share in total private sector credit was 6.50 in June2011 as compared to 14.12 for the manufacturing sector. Thus, the starting point to improve thesupply side situation would be to improve the productivity levels in agriculture.Firstly, the government needs to look into those areas, which are still under-exploited. The case inpoint being processed foods and vegetables. Perishable farm produce are wasted or sold atthrowaway prices during the peak seasons due to poor post harvest storage facilities and lack ofeffective processing techniques, leading to less than optimum level production and low capacityutilisation. This situation is present despite Uganda having the desired raw materials, equipment andlabour available to carry out the task.There are viable agricultural opportunities available in pepper, aloe vera, large scale production offresh water fish, vegetables and fruits etc. The direct investment, though on a continued rise inUganda over the years, can be opened up more to look into this. This is a major requirement ifimproved efficiency and diversification of the sector is desired. For increased production, the government can provide for incentives for labour to increaseproduction. This incentive can be provided in the form of tax cuts, which viewed positively by thelabour force will result in an increased output from them. Small steps have been taken in thisdirection with rolling out of E tax.
An increase in the supply levels in the long run will lead to increased income for the country assupplemented by the diagram.However, measures to increase the supply will only show the results in long-term. In the short run,in order to make sure that the food inflation doesn’t get generalised and induce inflation in othersectors of the economy, some moderation of liquidity may be required. Tightening of monetarypolicy may be required and the same was followed by the Bank of Uganda in the second half of2010-11. A decline in the money supply will cause a leftward shift of the LM curve and subsequentlyof the demand curve. This contractionary monetary policy can be achieved by an increase in CRR orthe repo rates or sale of open bonds in the market, the method that is being employed by the Bankof Uganda.The second major macroeconomic problem faced by Uganda is the sharp fall in its currency. Overthe past year, the Ugandan schilling has slumped 18% against the US dollar, making it the worstperforming currency.To deal with this problem of sharp depreciation, the Bank of Uganda will need to engage in acontractionary monetary policy. However, to meet the inflation target of 5% by 2013, the cuts to themoney supply must be accompanied by strong fiscal measures. Both agriculture and themanufacturing sector need to be strongly supported, so that the local products become morecompetitive and the exports can bring in the much needed foreign currency.The procedure of how a contractionary monetary policy will lead to an appreciation of the currencyand help in curbing inflation is detailed below. However, at present these are also the steps thathave been taken by the Bank of Uganda, some of which aspects were presented earlier in the report.The bank has already injected a significant amount in excess of $50mn to support the fallingschilling.
Uganda, being a small economy, we don’t expect its change in policies, to have a significant impacton the world interest rates. As a result, the LM curve has been taken of a vertical shape parallel tothe y axis. Faced with high inflation and sharp depreciation of the currency, the country shouldengage in a contractionary monetary policy. This contractionary monetary policy can be broughtabout by an increase in the cash reserve ratio or the repo rates or the bank rates. Increase in eitherof these ratios will restrict the supply of funds from the Bank of Uganda to the various central banksavailable. With less money in hand, the commercial banks will be able to lend less, and as a result,there will be a withdrawal of liquidity from the system, causing a leftward shift of the money supplycurve and consequently of that of the LM curve. A leftward shift of the money supply curve will shiftthe interest rate up from R0 to R1. This increase in interest rate will help in fighting the inflationary
situation present in Uganda, so that the food inflation doesn’t spiral off to other sectors of theeconomy. At the same time, an increase or appreciation of the currency will bring in the muchneeded foreign currency into the country. These capital inflows into the country will help in buildingup the foreign reserves of the country, which at present can only finance for four months ofUganda’s import. In the short run, this, we believe is the policy that the Bank of Uganda shouldfollow.However, development in the agriculture and manufacturing sector, as suggested earlier shouldhave to be supplemented along with this, because there in lies the long run solution to Uganda’sproblems.
LIST OF TABLES AND FIGURES1. Bar Graph on Real GDP growth from 2006-20112. Table on Public Finances as a % of GDP from 2006-20113. Line Graph on CPI from 2007-20114. Table on Current A/c as a part of GDP from 2007-20115. Line Graph on Industrial Production Growth Rate from 2006-20106. Line Graph Comparison of Food and Non Food Prices7. Line Graph on the Index of the Ugandan schilling against the US dollar8. Table on break-up of Current A/c from 2008-20129. Line Graph on CPI and food prices for the current yearREFERENCES1. BANK OF UGANDA MONTHLY, QUARTERLY AND ANNUAL REPORTS2. D&B COUNTRY REPORT3. AICO AFRICA ANNUAL REPORT 20114. IMF WORLD ECONOMIC OUTLOOK DATABASE5. WWW.BUSINESSINUGANDA.COM6. ECONSTATS7. DOING BUSINES: THE WORLD BANK8. UGANDA BUREAU OF STATISTICS9. CIA WORLD FACTBOOK10. AFRICAN ECONOMIC OUTLOOK