In an elaborate State of Nation Address (30 pages of single spacing, font 18), the President of Uganda started off his speech by underlining that Uganda collected tax revenue Shs. 2.23 trillion (about 12% of GDP) in financial year (FY) 2015/16. The point, he re- emphasized was over dependence on foreign particularly grants and Uganda has made sizeable progress since then. At the time, Uganda’s public debt had reached unsustainable levels and the surmountable decline in Uganda’s debt happened in 2006 when 100 % of the external debt by World Bank, IMF and African Development Bank was forgiven under the Multilateral Debt Relief Initiative (MDRI), reducing Uganda’s debt stock to USD 1.3 billion from the USD 4.5 million. The fiscal deficit (difference between expenditure and revenue) was about 6.5% of GDP – funded 90% funded by grants and 10% loans. The same size of fiscal deficit is expected in 2018/19 – only that this time it is predominately funded by loans (domestic and external). A third of the current national budget is funded by external resources and as such public debt (disbursed and outstanding) to GDP will be in excess of 45% in FY 2018/19. One notable fact is that Tax to GDP has grown marginally over the last thirteen years.
According to IMF 2018 statistics, Uganda fall in 30% of African countries with revenue to GDP of less than 15%, a level considered in empirical work of Gaspar, Jarmaliro and Wingender (2016) as the minimum to deliver basic functions of the state. It also believed that revenue generation is the basic function of the state and the predominating hypothesis suggests low tax effort is a reflection of poor state capacity and efficacy. This may have needed emphasis in the speech.
The President also alluded to the middle income dream and that Uganda growth recovery to 7% in 2019, a growth rate last seen in 2010. I must also underline that some of the statistics in the speech and inconsistent with other national statistics. For example in the Speech, the GDP per capita cast at USD 776. At population of 38.9 million (UBOS statistic), Uganda’s GDP would be USD 30.2 billion (population times the Per capita). The equivalent in UGX of UGX 113 trillion – would represent a 24 percentage point increase from the UBOS publish GDP for June 2017.
The simple fact is that economic growth for this FY even in nominal terms will be much lower. Even if the economy recovered to 7% growth per annum, simple compounding shows that the attainment of lower middle income threshold of USD 1035 is only feasible after the next elections in 2023.
The President was emphatic about growth prospects, reiterating this message with the projections by the Center for International Development at Harvard University (CID) that indicated Uganda will be second highest growing economy in World by 2025. While, I have over the last months failed to get hold of the full study – I make periphery comments on the study. To start with, according to the IMF Regional Economic Outlook, Uganda was only the 14th fastest growing economy amongst the 45 Sub Saharan African countries in 2017. Within the East African community, it only grew than Burundi which exhibited zero growth and South Sudan that was in recession.
This precedence notwithstanding, the study the growth projection of 7-8% for Uganda is consistent with the 1990-2010 average annual growth rate. It is also not overly on the high factoring in the fact that Uganda in mid 2020s will have added oil related growth. History shows oil adds 2-7% growth in the short term. The IMF also projects Ugandans growth to recover to the levels of 7% in medium term. On the downside, the growth forecasts used in the Harvard study use latest data from 2015, and Uganda has since seen only a GDP growth of less than 5% per annum. And some of the underlying causes relate to institutional effectiveness and structural factors.
Since 2015, Uganda has seen a downgrade in World Bank Country Policy Institutional Assessment from strong performer to moderate. Also some of world Governance Indicators and public investment management indicators indicate weaknesses. This then means the optimism embedded in the economic complexity index may have since weakened.
Additionally while Uganda has diversified its export base, it remains predominated by low value products.
The manufacturing growth emphasis is indeed apt but should be handled to the latter.