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Factsheet February 13, 2020

14th Uganda Economic Update: Strengthening Social Protection

What is the Uganda Economic Update?

The Uganda Economic Update (UEU) is a bi-annual assessment of the state of the country’s economy. It analyzes the performance of the economy, key challenges and opportunities, and provides an economic forecast for the year ahead. The UEU is divided into two parts: the macro-economic analysis which provides insight into the day-to-day management of the economy, and the special topic which usually examines a key driver of the economy in more detail, and its contribution to growth, reduction of poverty and boosting opportunity. The last UEU examined the social and economic benefits of increasing public spending on education to achieve higher levels of human capital, reduce poverty and boost economic growth.

What is the current state of the economy?

The economy continues to grow driven by strong levels of domestic consumption and sustained levels of public and private investment. Net Foreign Direct Investment inflows shot up to 5.1% of gross domestic product (GDP) in FY18/19 from 3% of GDP the previous year. The construction sector continues to grow at double-digit levels. There has been a jump in manufacturing growth supported by recent expansions in the sector, including investments in new factories. Agriculture was boosted by another decent harvest and a strong rebound in fisheries. Nevertheless, growth is falling short of the where it needs to be if the country is to meet its target of attaining lower middle-income soon. To meet that target the economy needs to grow by at least 8% over the next decade.

Tax revenues (at 12.6% of GDP) exceeded the budget target of 12.4% for FY18/19 but remain significantly lower than government’s medium-term target of 16% of GDP and regional peers like Kenya (17.9%) and Rwanda (16.3%). A small number of citizens still pay the most taxes, so widening the tax base is a big priority. Limiting exemptions to investors would boost collection in the long term. Uganda’s public debt is currently sustainable, but vulnerabilities are increasing and delays in the oil sector’s Final Investment Decision (FID) are also a major concern.  

What is the outlook for the economy?

While the growth outlook for Uganda is favorable, risks are tilted to the downside. As the 2021 elections draw closer, heightened political activity and uncertainty could lead to a rise in spending, and a fall in investment and economic activity. Reliance on rain-fed agriculture and systemic challenges in the sector remain risks to GDP growth, the poor’s income, and export earnings. Regional and global factors could also undermine the outlook. Reduced foreign demand, which would weaken exports and present risks to external stability, could come in the form of regional instability or as a result of trade uncertainties between the US and China, which might further slow global growth.

What is the significance of focusing on social protection?

One in five Ugandans still live in extreme poverty and more than a third live on less than $1.90 a day. That is 21.4% of the population. Many households in Uganda remain vulnerable, mostly to income fluctuations, food insecurity, and climate-related shocks. They do not have the means to cope with shocks that they may experience. Droughts, irregular rains, serious illnesses, or accidents to the main income earners erode gains made in reducing poverty, but also sink households into further poverty.  Social protection programs that support investment in human capital and help mitigate shocks can contribute to reducing vulnerability of populations and support economic growth. The two main existing public programs in Uganda - the Senior Citizens Grant (SCG) and the Northern Uganda Social Action Fund (NUSAF) - have very low coverage reaching 0.7% of the population. It means many people in need of social safety nets are left out, leaving them to sink further into poverty or to expose them to other vulnerabilities. Financing for the two programs accounts for just 0.16% of the GDP which is lower than what Kenya and Rwanda spend – i.e 0.4% and 0.3% respectively on direct income support. Most of the funding for these programs comes from donor sources and this is not sustainable.

How would investing in social protection lead to inclusive growth?

Simulations show, for example, that programs covering the poorest 50% of households with infants under two years old, would cost an estimated 0.23% of GDP, whereas similar programs covering the poorest 50% of all households with children under five years old would cost 0.50% of GDP. To better mitigate shocks, the design of social protection programs should consider the nature, frequency and geographical location of large-scale shocks faced by Ugandan households. Expanding Disaster Risk Financing (DRF) models, based on regional (Kenya) and local (NUSAF 3 pilot DRF component) examples, is recommended.

In this Update we recommend providing direct income support to vulnerable households with children, to help them invest more in human capital formation and development. In addition, existing risk financing pilots are scaled up to reach more people, address different disasters and ensure better regional coverage to better prepare for drought and other shocks. The scaling up of agricultural insurance is important particularly as drought is a major risk to farming households. For others involved in the informal sector, tailor-made products that benefit from fiscal incentives could help them save more and boost their opportunity, and ultimately movement into the formal sector.

How is the World Bank positioned to support government of Uganda on social protection programs?

The World Bank finances the Northern Uganda Social Action Fund (NUSAF3) which is in its third phase. It is a five-year program which has been running since March 2016 and follows earlier phases of NUSAF2 and NUSAF1. The program is providing direct income support and building the resilience of the poor and vulnerable communities of Northern and North-Eastern Uganda. Decades of conflict and displacement left the communities lagging far behind the rest of the country in social and economic development. Overall NUSAF as of September 2019, has provided support to over 359,788 households house-holds which translates to over 1,798,940 beneficiaries so far, of whom 57% are female beneficiaries. In terms of focus, the innovative Disaster Risk Financing facility (DRF) piloted in Karamoja has reached over 66,616 house-holds.  The improved household income support programme (IHISP) reached over 74,296 house-holds. The Labour Intensive Public Works (LIPW) component supported over 217,643 households, while the Sustainable Livelihood Pilot (SLP) reached over 1,234 households. The Project has implemented 8,139 Projects of which 54% fall under the Agriculture sector. Under NUSAF3, the beneficiaries have reported a satisfaction rate of 95% with the project. The mid-term evaluation report indicated an increase in household productive assets from 34.7% to 47.5% among DRF beneficiaries. DRF also led to a reduction in food relief to Karamoja, with the government saving UGX 9.4 billion in 2017. NUSAF3 beneficiaries have earned over 78.8 billion shillings from their enterprises and from their labor (under IHISP and LIPW). They have also accumulated group savings of more than 30.8 billion shillings and planted over 8.5 million trees.