Uganda’s economy has rebounded strongly, with all three sectors (agriculture, industry, and services) weathering recent successive shocks to push growth in gross domestic product (GDP) to 5.3% during FY23 compared to 4.7% the year before. Private consumption increased, while public investment was scaled back as fiscal space narrowed and private investment retracted in response to a tight monetary stance through the fiscal year. With higher capital imports, due primarily to investments related to the country’s crude oil development project, the current account deficit widened to 8.7% of GDP in FY23 up from 7.9% in FY2022.
After peaking at 10.7% in October 2022, inflation steadily declined and had fallen below Bank of Uganda (BOU)’s target of 5% by June 2023, thanks to lower international commodity prices, fiscal consolidation, and tight monetary policy. The annual headline and core inflation stood at 3.5% and 3.3%, respectively. In tandem with a firm trend of low inflation and lessened inflation expectations, BOU lowered its policy rate to 9.5% for August 2023 from the 10% level it had maintained for 10 consecutive months.
Uganda’s economic growth is expected to accelerate to above 6% per year in the medium term as BOU eases monetary policy and the government relies mainly on revenue collection and spending efficiencies to cut the deficit. The recovery in tourism – combined with the government’s export diversification and agro-industrialization effort – plus investments to support export of crude oil will boost growth further. Nonetheless, the disruptions in global financial conditions and increasingly volatile weather remain major downward risks.
Accelerated growth may reduce poverty (measured at the $2.15/day international poverty line) from 41.7% in 2023 to 40.7% by 2025. But because households have limited adaptive capacity, the pace of poverty reduction will ultimately depend on how food access and affordability evolve, and on the incidence of weather and any environmental shocks.
Development Challenges
Increased shocks and less momentum behind policy reform create challenges for sustaining economic growth and reducing poverty in Uganda. Real GDP per capita grew by only 1.0% per year between 2011 and 2022 in a context of rapid population growth, drought, and other external shocks, a less supportive external environment, and weakening policy and institutional framework (including centralization of policymaking). The pace of poverty reduction decelerated, as most households rely heavily on agriculture and are vulnerable to climate change and weather shocks.
Ahead of a possible transition into an oil producer in 2025, the Ugandan economy needs to structurally transform and shift labor into more productive employment to reinvigorate economic activity and reduce poverty. The private sector must drive this transformation and diversification. Uganda’s growth model of debt-financed public spending—which has emphasized physical infrastructure—has crowded out private sector investment and is not sustainable. A more appropriate role for the state is to build human capital, facilitate private investment and job creation, and pursue measures to reduce inequality and strengthen resilience. The prospects for the shift to private sector-led growth depend on macroeconomic stability, more efficient and effective public spending, increased government support for the most vulnerable, and the uptake of digital and other innovative technologies.
Human Capital
Uganda’s Human Capital Index is low. Children born in Uganda today are likely to be 38% as productive when they grow up as they could be if they enjoyed complete education and full health. Children who start schooling at the age of four years are only expected to complete 6.8 years of school by their 18th birthday, compared to the Sub-Saharan average of 8.3. However, a child’s actual years of learning are 4.3, with 2.5 years considered “wasted” due to the poor quality of education.
Last Updated: Sep 27, 2023
