What is the Uganda Economic Update?
The Uganda Economic Update is a bi-annual assessment of the state of the country’s economy. It analyses the performance of the economy, key challenges and opportunities, and provides an economic forecast for the year ahead. The update is divided into two parts: the macro-economic analysis which provides insight into the day-to-day management of the economy; and the special area, which usually examines a key driver of the economy in more detail, on how it can contribute to a much faster growth rate, eradicate poverty and boost shared prosperity.
The last update focused on land and how it can be used more productively to facilitate economic growth, eradicate poverty and boost shared prosperity. Although land is an asset, in Uganda most of it is unproductive and not being harnessed to its full potential. Only about 8% of Uganda’s land is registered, meaning that the majority cannot be used to invest in more productive agriculture and non-agricultural activities, cannot be used as collateral to access credit, and cannot be used to create equity. This makes land one of the main bottlenecks to doing business in Uganda, to commercialization of agriculture, to building livable and productive cities, and to building infrastructure. Several recommendations were provided in that update, and can be accessed as part of the report. The seventh Economic Update focuses on Public Investment Management (PIM).
What is the current state of the economy?
In the past nine months, the economy has witnessed some instability and volatility arising from a number of factors: the staging of a national election, a slowing and volatile global economy, and the subsequent declining commodity prices resulting from slower growth in two large economies, China and Brazil. With these developments, the shilling lost value steeply, reaching an annual depreciation rate of 40% by September 2015-unprecented since the liberalization of the foreign exchange market. Inflation also edged up to 8.5%, with firm expectation among economic players that it would increase due to the heavy depreciation of the currency, on top of other factors. The Central Bank responded by pursuing a tighter monetary policy stance, that succeeded in withdrawing money from circulation, signaling a tighter monetary policy. As a result, the price of treasury bills went up, constraining the government borrowing and spending on its planned investments while the cost of borrowing from banks increased for the private sector.
Overall, the economy is estimated to have growth by in the range of 4.5 to 5% during the current financial year 2015/16. This growth rate is much lower than 5.4% that was anticipated in the previous update. Significantly, this is almost more than a percentage point lower than the government’s original projection. The takeoff of Karuma and Isimba dams helped sustain economic activity in spite of the weak economic environment and the below-par performance of some of the government’s other planned investments. The biggest explanation for the slower economic growth was the impact of macro volatility on the private sector activity. Uganda continues to trail other East Africa countries, in particular, Rwanda and Tanzania are forecast to have grown at 7%, while Kenya is at 6% during this year.
Lower oil and commodity prices on the international markets played a role, too. Lower oil prices slowed down investment in Uganda’s nascent oil and gas sector while lower prices for key commodities like coffee, tea, tobacco and cotton reduced export revenues, which in turn reduced consumption spending and limited public investment. Similar price dips in 2014 caused economic shockwaves globally but Uganda weathered the storm as it exported the bulk of its commodities to South Sudan then. The outbreak of civil conflict in South Sudan led to a decline in exports, increasing Uganda’s vulnerability to global price volatility.
What is the outlook for the economy?
Despite these challenges, Uganda’s economic outlook remains positive now that the electoral cycle has ended and private sector activity can start picking up. Moreover, the government’s extensive infrastructure development program should boost local economic activity even if the global economy remains sluggish.
All factors remaining constant, the economy is expected to recover and grow by 5.8% in 2016/17, thereafter rising to above 6% in the medium term. Revenue collections are projected to rise to about Shs 13 trillion, which is about 14% of GDP during the year ending June 2017, up from about Shs 12 trillion for the financial year ending June 2016. The Central Bank is also loosening the monetary policy, reducing the cost of its loans to commercial banks from 17% to 16%, which could see more private sector lending to stimulate the economy further.
This outlook faces a number of risks, key among is if the planned heavy public investment program does not deliver the expected outcomes of an increased construction activity and raising productivity of the economy thereafter. Other notable risks include a larger global economic disturbance that has been projected, regional instability, as well unanticipated weather and climate related changes, all of which are partly because many of the lack of appropriate infrastructure assets.
What is the significance of focusing the report on public investment management?
In recent years, the government has increased its capital investments significantly. In the last four years capital investments have increased by 126% and nearly doubled from 4.3% to 7.6% of GDP. Going forward, such investments are expected to increase in tandem with aspirations of transformation stated in the National Development Plan and the National Vision2040. For instance, up to US$9 billion worth of investment is expected in Uganda's oil sector over the next two to three years. The increased activity in construction and other secondary-tier sectors is expected to stimulate productivity across the entire economic value chain to drive growth.
The interest in public investment management relates to the need to minimize the short term risks to growth outline above, but also relates to longer term aspects of growth and how a country can use public policy to influence economic and social outcomes. This is because public investments facilitate the delivery of key public goods, such as infrastructure and social services; and it connects citizens and firms to economic opportunities, all of which are central in ending poverty and boosting shared prosperity in Uganda.
This update focuses on this area to provide a menu of options to policy makers and other stakeholders on how public investments can be better managed and leveraged to drive growth. This analysis is informed by an assessment of Uganda’s systems and processes of public investment management that was undertaken by the Ministry of Finance, Planning and Economic Development, and the World Bank Group last year.
How can the government turn smart budgets into smart returns when it comes to public investment?
Undertaking investment requires sound fiscal and monetary policies that are capable of laying the groundwork to maximize growth. In this regard, the fiscal policy stance depicts a desire by the government to address the key binding constraints to growth and job creation. Total revenue collection remains low and affects government spending on education and health. However, this challenge may be overcome as the dividends from investments are realized and used to support much faster growth and development, including human capital development.
In recent years, Uganda’s fiscal policy has not been so lucky yet as the good budget frameworks that aimed to mainly remove key binding constraints to economic growth were under-executed, due to the way public investments are managed. Endemic delays in implementation, cost overruns and corruption mean that sometimes projects come in at twice the original cost. For example, a road project worth US$100m could end up being delivered at US$200m. This means that although the planning and budgeting process is doing a fair job in identifying the right projects that should transform the country and allocating resources to them, they are not efficiently implemented to deliver the expected benefits.
Many countries have experienced inefficiencies in the way public investments have been managed, as well as in the speed at which these investments produce returns. On the other hand, there are others that are reaping higher returns than Uganda because they have transformed they manage their public investment management more efficiently. This has involved paying attention to the entire project cycle, from when a project idea begins to the management of the completed asset.
Some of the key eight stages of a PIM system, including: planning, appraisal, independent review or evaluation, selection for financing, implementation, adjustment unforeseen changes in environments and process, maintenance, and evaluation, already exist in Uganda, albeit weak and uncoordinated. The biggest challenge however is the weak appraisal and implementation. Experience shows that projects that are poorly designed often fail to produce strong and favorable results owing to poor costing, procurement delays, and capacity gaps, among others. This is where Uganda needs to put emphasis.
What are the key public investment management reforms that Uganda need to undertake?
Uganda has in fact taken some positive steps in strengthening its PIM system. Building on positive efforts to strengthening the way public finances are managed, the Ministry of Finance, Planning and Economic Development has initiated institutional reforms aimed at strengthening the independent review process in the project cycle. In this respect it established a new department responsible for project appraisal and public partnership. Once fully operational, this department will formulate standards and criteria for project appraisals. This will ensure that any project that is submitted for public financing meets the minimum standards for a good project.
Beyond this, the government will need to sustain the momentum of reforms across three main levels:
- Institutional strengthening. This will require doing things differently, rather than business as usual. Critical is avoidance of duplication of projects, more rigorous appraisal, strengthening capacity through training to undertake appraisals and manage projects more effectively. This could be done in collaboration with an academic institution like a public university. Given that institutional reforms take time to be effected, the Update recommends a phased approach. In the short term, emphasis could be on building and strengthening the capacity of existing institutions, with a close focus on building capacity within a core group of technicians across the government to improve project preparation and appraisal to improve quality of projects.
- Standardization. Harmonization of standards and guidelines is critical for quality control, greater tracking, and monitoring of results. A shared understanding is needed across institutions of what needs to be done and how it ought to be done. Developing manuals on various aspects of public investment management will be important, but more so will be to ensure that such standards and guidelines are followed and binding across all ministries.
- Legal and regulatory framework. Public Investment Management needs to be underpinned by a robust legal and regulatory framework. This can help streamline mandates, but also strengthen incentives for the system to work.
What is the relationship between public and private investment?
Traditionally, the role of public investments in an economy would be to provide public services; key among which include infrastructure such as roads and energy, and a good regulatory environment; all of which reduce the cost of doing business. In more recent times, governments have worked out modalities that allow it to leverage capacities from the private sector, but also manage the risks involved in building these investments. Such arrangements, also called public-private partnerships offer a platform for the private sector to be fully embedded into public investment programs, rather than wait for benefits after the assets have been constructed. The challenge is to ensure that the risks involved in such transactions are appropriately allocated and managed by both the private and public sector.
How is the World Bank positioned to support Government of Uganda on PIM?
The Word Bank has been working with government on these areas to ensure that projects are managed more frugally to maximize their value. With some clarity on the areas where priority interventions should be focus, this collaboration can continue so that together we can increase the value of our investments, but more contribute to the development of Uganda.
For further information on the Uganda Economic Update contact:
Rachel K Sebudde
World Bank Uganda
Tel: (256) 414 302201