8 February 2018

Uganda: NRM Economy - If Majority Are Praising It, Why Are Experts Worried About the Future?

Kampala — One highlight of President Yoweri Museveni's 32-year stay in power has been the massive efforts at resuscitating the economy. When Museveni and his group came into power in 1986, they faced a collapsed economy and therefore had it as one of the key issues in the National Resistance Movement (NRM) 10 point program.

Inflation at the time had touched the highs of 300%. Today it has settled below 10% for about the past five years apart from the 30% that was recorded at the end of 2011, the highest since 1993. GDP has been quoted to be growing at an average of 6.5% per year.

Before 1986, internal conflicts, dictatorship, and economic disintegration had characterised the years from 1971 when Idi Amin took over power, to the eighties that culminated in a violent civil war during the second Milton Obote reign and the Okello Lutwa regime.

Some experts however feel Uganda has attained growth without development. They argue that Uganda has seen growth in numbers in many areas - GDP, education institutions, private companies, health facilities, roads, power dams, schools and enrollment - but the quality needed to spur development is lacking.

Why this view persists can be traced to the difficulties faced at different stages in the 32 years as Museveni and the NRM sought solutions to fix the economy.

Economy's transformation journey 1986-1990

The period from 1986-1990 was Museveni's pre-reform period during which the NRM pondered over the direction of economic policy it would take.

Museveni looked at three major factors to guarantee the prosperity of Ugandans - having a critical mass of buyers and consumers of the goods and services produced by families and communities; infrastructure to support the production and exchange of those goods and services (electricity, roads, the railways, ICT) and security of person and property.

By 1986, the government had 146 state-owned enterprises with 138 majority holding and eight minority state holdings. Most of the 146 state-owned enterprises existed only in the register and most performed poorly as a result of the country's violent political history and a collapsed economy.

They suffered from low capacity utilisation, large operating losses or low profitability and being illiquid and indebted.

Before privatisation and with the exception of 1988, the financial performance of joint venture companies returned an operating loss of Shs72m ($36,000) between 1986 and 1988. Most were insolvent, illiquid and operating below 50% capacity.

IMF and World bank 1990-95

The period 1990-1995 was the most fundamental where economic reforms were taken setting Uganda to the liberal economy with the influence of the International Monetary Fund (IMF) and the World Bank (WB).

Three issues stood out; the legalisation of the parallel foreign exchange rate market in 1990; liberalisation of coffee marketing in 1991 and the merger of the Ministry of Finance and the Ministry of Planning and Economic Development in March 1992 and the achievement of macroeconomic stability.

In 1995-2002 is when the fundamental reforms that had been initiated in the early 1990s were taken forward through developments such as decentralisation, the Poverty Eradication Action Plan and the medium term expenditure framework. The focus on policy was on poverty reduction and expanded provision of public services.

From 2002 onwards, government continued to consolidate and adjust to political and personnel changes. The emphasis on economic policy has since shifted from poverty eradication to economic growth with a somewhat more interventionist role for government. Uganda's GDP growth averaged 6.5% per annum in the 1990s and 2000s. This was minimal but better than the 2.6% recorded between 1965--1985. Real GDP per capita has improved to USD 615 up from US$230 in the 1970s.

Industrialisation agenda

Industrialisation has also contributed tremendously to Uganda's great economic transformation. This sector has grown from 8.6% in 1996 to over 28% today.

The 2014 data from Uganda Bureau of Statistics (UBOS) indicates that Uganda had over 416,864 companies that were formerly in services sector comprised of the areas of hospitality (tourism), consultancy, banking, education, health, transport, ICT, beautification (salons) and more.

These were employing 872,260 people. The formal manufacturing sector alone had 32,410 companies, employing 153,495 people.

Over the same period, however, the percentage contribution of agriculture to the GDP has declined to 26% from 44% in 1996 even as volumes of output have gone up. The sector, which employs over 70% of Ugandans, has largely been left in the hands of the private sector with its annual budget funding recorded below 5% over the past years.

Meanwhile, industrialisation has partly been pointed out as one factor driving Uganda's GDP in monetary terms, from 1986 to 2015, the economy's GDP has grown from US$246 million in 1986 to US$26billion today.

Tax revenues have increased from less than a trillion in the early days of NRM to now close to Shs 15 trillion. This is good news in line with national budget funding and moving the economy.

Latest threats to economy

Lately, some shocks are threatening the future of the economy if not tamed.

For instance, drought and political instability within the region have recently affected output and market exploitation opportunities, hence reversing growth of the economy to an average of below 5% as opposed to higher rates recorded in early 2000s (7-8% per year ) and government projections of over 6%.

High inflation has been another threat. But the Bank of Uganda introduced Inflation Targeting Lite (LTE) in 2011 as part of its broader monetary policy instrument to tame it because it had jumped to 30% at the end of 2011 (the highest since 1993). Top bank officials say the policy tool, the Central Bank Rate (CBR) - which it sets every after three months to signal direction of interest rates - has succeeded given that inflation for the last five years has been kept within the target of 5%.

However, critics say the hiking of the CBR to 23%, in its early days of 2011, discouraged investments because it brought about high interest rates (which jumped to around 28% from the lows of 23% on average then). Although the BoU has reduced the CBR to now 9.5%, the lowest ever, still interest rates remain high - averaging 20% - which is muting growth of private sector credit.

This means there is a dilemma to deal with. Private sector credit is not growing partly because government is borrowing locally to finance service delivery activities, some of which aim to ease the cost of doing business for the private sector. But the same private sector say government's internal borrowing is bad news because they are being crowded out, hence affecting bigger economy opportunities. As that dilemma hangs around, attempts by the private sector to lure banks to further reduce interest rates are yielding insignificant results because banks say the cost of doing business in the country dictate that current rates remain if they are to keep their businesses as a going concern.

The good news though is that government has reported in its official documents that it would cut domestic borrowing from Shs954.2 billion in the current FY to Shs 611bn in FY 2019/20 and to Shs 409 bn by FY 2022/23.

Urbanization effect

Urbanisation has also turned out to be an area of concern in the last 32 years. Government data indicates that the rate of urbanisation is 4.5% per year and up to 13% of Uganda's population now lives in urban areas. The Government estimates that by the year 2030, up to 20 million people will be living in urban areas.

This is not good news entirely because the poor are running away from poverty in rural areas and finding the same poverty in urban areas. Recent reports from UBOS indicate that poverty levels in the country have increased from 19% five years ago to around 28% today. Drought and some external market shocks have been cited as causes.

But some people say this could serve as a wakeup call to government that must deal with this matter through its spending priorities in the budget and general trade facilitation activities.

Once done, going forward, it would keep its (government's) Vision 2040 dream of transforming the economy from a peasant to a modern and prosperous country in 30 years alive.

But why are experts concerned

Ddumba Ssentamu, a professor of economics and former vice chancellor of Makerere University has a summary of Uganda's economy under the NRM.

"Uganda can be best described as a country that has attained growth without development," he told The Independent on Jan.20.

He said that many things are growing in number; GDP, education institutions, private companies, health facilities, roads, power dams, schools and enrollment but quality is the problem.

"What we have is quantity but not quality; and that is where the problem is," Ssentamu said.

Going forward, he suggests, for the economy to gather more momentum of growth, create opportunities in terms of jobs and more, "the country needs serious planners" to wisely allocate resources in the budget and ensure it is properly spent to attain value for money. He also said Uganda Revenue Authority needs to up its collections by building more capacity in her system to deal with informal businesses that are currently outside the taxpaying bracket.

Policy reversals needed

Isaac Shinyekwa, a research fellow at the Economic Policy Research Centre (EPRC) at Makerere University told The Independent the NRM government should be credited for transforming the economy from where it was in 1986 to where it is now.

He said in reference to growing per capita income, tamed inflation, increased road network, electricity generation and access, schools, health facilities.

However, he says that government needs to do policy reversals and rethink its liberalization stance and be part of business by owning more parastatals.

"I think we over opened our market; it has cost us a lot given that investors are allowed to take out 100% of their money," he said.

He says that government must put more money in productive sectors - agriculture, industry/manufacturing to support the economy.

He also suggests that government should further reduce the cost of doing business through extension of cheap credit to the private sector through Uganda Development Bank; cut its domestic borrowing and resort to external borrowing which is even cheaper.

Surprisingly, even those who desperately supported SAPs to apply in Uganda now have mixed feelings about them.

In his book titled; Advancing the Ugandan Economy- a personal account - Ezra Suruma, the former minister of finance says while history is likely to judge the NRM leadership harshly for allowing the IMF/WB to interfere with the country's sovereignty by taking up Structural Adjustment Programmes (SAPs).

It is important to note that after 10 years of brutal exploitation and rampant theft by Amin's regime, Uganda's national treasury was empty, virtually all economic infrastructure had been destroyed and the people were facing extreme hardships.

Suruma says the NRM recognised the need for emergency funds to restore basic government services and get the economy moving.

However, Suruma warns; "... many African countries that took up the IMF/WB policies needed and still need to focus their attention on creating governance structures capable of encouraging and promoting the peaceful coexistence of each country's diverse population groups, without which lasting economic transformation is unlikely to occur."


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