19 April 2014

Uganda's Economic Pulse

Despite projected growth Uganda is still grappling with a growing population that has resulted in sprawling slums. INDEPENDENt/JIMMY SIYA New World Bank report highlights key challenges facing fight against poverty

Economic growth in 2014 will be stronger in East Africa, thanks to robust foreign direct investment flows into offshore natural gas resources in Tanzania, and the onset of oil production in Kenya and Uganda says the latest World Bank report, 'Africa's Pulse.'

The report appears to be in agreement with an earlier report, the Microfinance Market Outlook 2014, published by the International Monetary Fund early this year, which noted that Ghana, Kenya and Uganda are each expected to grow by 6%, while commodity exporters Nigeria and Tanzania are likely to expand by more than 7%. According to the report, which analyses issues shaping the continent's economic prospects, growth in the sub-region rose to 4.7% in 2013 and is expected to move to 5.2% in 2014, thanks to an increase in investment in natural resources and infrastructure, and strong household spending from Diaspora remittances.

However, although the region's economic outlook remains robust generally, it will also exhibit high levels of vulnerability due to lower commodity prices and a slowdown in capital flows. While speaking to journalists by video-conference from Washington on April 7, Francisco Ferreira, chief economist World Bank Africa, said the sub-region was now in its 19th year of a growth cycle in which the economy has been growing at an average of 4.5%.

Ferreira said the trends that have tended to push growth will likely continue in 2014.

Rachel Sebudde, the World Bank Uganda office economist, worries about the country's high population growth, which is still growing at 3.3% per annum and has put pressure on the outcomes of the economic growth. That notwithstanding, however, growth has led to poverty reduction in Uganda, allowing the country at the aggregate level, to surpass the MDG on poverty target (which was to half its poverty rate from 56% in 1992).

The latest information from the Uganda Bureau of Statistics (UBOS) suggests that the poverty rate has fallen to 22%.

However, the reduction in poverty has not been spread equally across all locations - while in the Central, only 5.2 % of the population are poor, about 49% of those in the North are still poor.

In addition, a large number of people are still living next to the poverty line, meaning that while numerically they are considered to be non-poor they may not feel very different from their counterparts just below the poverty line, Sebudde told The Independent on April 14.

"If we were to raise the poverty index - say for example double its current level, then about 43% of the population would still be poor," she said.

Sebudde explains that part of this is mainly because the bulk of the population remains engaged in low productivity jobs, both within agriculture and off agriculture.

These activities have allowed people just to get barely above the poverty line, but left them vulnerable to any shocks, making them insecure and not feeling the growth.

She adds that while income poverty may have reduced, this has not been fully translated into other forms of welfare, including the access to basic services such as education and health, which in tandem have hampered outcomes such as morbidity rates, infant and maternal mortality, among others.

"Service delivery would have to increase alongside the increase in incomes, for a larger part of the population to feel included in the growth and development process."

But Dr Fred Muhumuza, the economic advisor at the Finance ministry, said, "GDP as you know is about the whole and one other indicator, which gives a clue on whether it will reflect on the ground, which is the inequality co-efficient.

"In Uganda, that has been deteriorating implying that whatever is being added is not being distributed fairly but rather finding its way into a few hands. This is happening in many countries across the globe too with the USA being one of the worst," he told The Independent on April 11.

Muhumuza said since the mineral sector involves a few people, growth is not likely to go to all.

"The only way such growth is shared is if governments are development-oriented and corruption free and ready to spread out the benefits. I am yet to see such a country in the region," he said.

But Ferreira said part of the reason growth is not 'seen' by the majority of the population in sub-Saharan Africa is partly because it does not necessarily take place where the poor people are because those 'rich' sectors don't employ many poor people.

If for instance, a 6% increase investment in the agriculture sector was made, it would go a long way in translating these growth figures into meaningful living conditions.

More pro-poor investments:

Besides investing more in Sub-Saharan Africa's human capital, the World Bank says the governments will therefore have to commit more resources where the majority of the populations are concentrated; in small towns and the agricultural sector. There is also need to consider rent redistribution to the poor as is already happening in resource-rich countries like South Africa, Ethiopia and Tanzania where mothers are being given monthly cash transfers as long as their children are in school. This would be a good way of linking development to people's improved living conditions.

The World Bank says capital flows to Sub-Saharan Africa continued to rise, reaching an estimated 5.3% of regional GDP in 2013, which was way above the developing country average of 3.9%.

Net foreign direct investment (FDI) inflows to the region grew 16% to a near record of $43b in 2013, boosted by new oil and gas discoveries in many countries including Angola, Mozambique and Tanzania. With lower international food and fuel prices, and prudent monetary policy, inflation slowed in the region, growing at an annual rate of 6.3% in 2013, compared with 10.7% a year ago.

Remittances to the region grew 6.2% to $32b in 2013, exceeding the record of $30b reached two years earlier. These inflows, combined with lower food prices, boosted household real incomes and spending.

Tourism also grew notably in 2013, helping to support the balance of payments of many countries in the region.

According to the UN World Tourism Organization, international tourist arrivals in Sub-Saharan Africa grew by 5.2% in 2013, reaching a record 36m, up from 34m in 2012, contributing to government revenue, private incomes, and jobs.

However, despite the figures giving a positive outlook on growth prospects, the said growth is not reflected anywhere on the ground as people living in poverty continue to increase in these countries.

Indeed in most countries, inflation has been declining while poverty levels too have been going down.

Africa's untapped potential:

Although at over $50b and an average annual expansion rate of 12% has been recorded, the region's services exports trail all other developing regions. This, the World Bank says, is an untapped potential that deserves attention from the region.

Traditional services such as transportation and travel have declined from 73% of total services exports in 2005 to less than 64% in 2012, while modern services exports in the region have increased their share by nearly 10% points from just over 26% of total services exports to about 36% over the same period.

Africa's Pulse says globalization of services is a potentially important source of growth for developing countries and technology and outsourcing are enabling traditional services to overcome their old constraints such as physical and geographical proximity.

Modern services, such as software development, call centres, and outsourced business processes, can be traded like value-added, manufactured products, enabling developing countries that focus on services, innovation, and technology to leverage services as an important driver of growth.

Makhtar Diop, the World Bank Group's vice president for Africa, said high quality university programmes in Africa, particularly in areas such as the applied sciences, technology, and engineering, could dramatically increase the region's competitiveness, productivity and growth.

"Strategic reforms are needed to expand young people's access to science-based education at both the country and the regional level, and to ensure that they graduate with cutting edge knowledge that is relevant and meets the needs of private sector employers." Diop added that a number of African countries are now routinely among the world's fastest-growing countries as a result of sound macroeconomic reforms in recent years and the fact that the rest of the world has steadily updated its reality of the continent as a high opportunity region for trade, investment, business, science and technology, and tourism. "Poor physical infrastructure will, however, continue to limit the region's growth potential. Significantly more infrastructure spending is needed in most countries in the region if they are to achieve a lasting transformation of their economies."

The report says the region's infrastructure deficit is most acute in energy and roads and that across Africa, unreliable and expensive electricity supply and poor road conditions continue to impose high costs on business and intraregional trade.

In a special analysis of the region's growth and trade patterns in Africa, Africa's Pulse says export diversification remains a tough challenge for many African countries, especially oil producers.

"Although Sub-Saharan Africa's exports remain concentrated in a few strategic commodities, the region's countries have made substantial progress in diversifying their trading partners," said Ferreira.

"Over the last decade, exports to emerging markets such as the BRICs--Brazil, Russia, India and China--have grown robustly, primarily due to the prolonged boom in commodities demand." The BRICs received only 9% of Sub-Saharan Africa's exports in 2000 but accounted for 34% of total exports a decade later, surpassing the region's exports to the EU.

In 2012, the region's exports to the BRICs reached $145b with China alone accounting for about a quarter (23.3%) of the region's total merchandise exports. However, the World Bank says this shift in trading partners also underscores the region's vulnerability to any slowdown in the BRICs, particularly China.

Indeed, the report notes that while GDP growth in the region is expected to remain stronger than in many other developing countries worldwide, a number of important risks remain including weaker commodity prices.

It says a weaker demand for metals and other key commodities, combined with increased supply, could lead to a sharper decline in commodity prices. In particular, if Chinese demand, which accounts for about 45% of total copper demand and a large share of global iron ore demand, remains weaker than in recent years and supply continues to grow robustly, copper and iron ore prices could decline more sharply, with significant negative consequences for the metal-producing countries, especially Zambia.

On the political front, the report also warns that political uncertainty (domestic risks associated with social and political unrest), emerging security problems, and upcoming national elections, remain a major threat to the economic prospects of a number of countries in the region and these might slow the rate of the much needed economic reforms.

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