Uganda gross domestic product (GDP) — the broadest measure of economic activity in a country — grew faster than initially predicted in the 2018-2019 fiscal year, but the growth is still not fast enough for the government’s lower middle-income status and poverty reduction ambitions.
The World Bank said on Thursday that rebased estimates released last year by the Uganda Bureau of Statistics show that real GDP increased at an annual rate of 6.5% in 2018-2019, higher than its previous estimate of 6.2%.
That expansion maintains the rebound in economic activity recorded over the last two years, according to the Bank. It was “driven by strong levels of domestic consumption and sustained levels of public and private investment.”
Net foreign direct investment inflows rose to 5.1% of GDP in 2018-19 from 3% the previous year, the World Bank said in its 14th Uganda Economic Update report. “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.”
However, the bank said that the economy is not expanding fast enough to meet the government’s lower middle-income status and poverty reduction ambitions. To reach middle-income status by 2030, Uganda’s economy needs to expand by an average of over 8% on an annual basis over the next decade, the report said.
“This is an extremely tall order given underlying factors such as low productivity and a failure to shift to higher productivity activities that are resilient to shocks and can generate and sustain high growth rates,” it said.
The bank added that Uganda is not creating enough jobs to absorb young people leaving school. Government figures show that only 75,000 new wage jobs are being created annually, far below the 600,000 the economy needs to add every year.
“Therefore, significant economy-wide productivity improvements, particularly in the agri-food sector, are needed to accelerate growth and to absorb excess rural labor into better and more productive employment,” the bank said.
Social protection to build resilience to shocks
To mitigate shocks and support more inclusive growth, the government should expand social protection programs to areas with the highest levels of vulnerability and risk, advised the World Bank.
“Recent favourable weather and stronger agricultural growth has contributed to the recovery of household incomes and lowered the estimated poverty levels down to those observed in the 2012-2013 fiscal year,” said the report. “However, environmental shocks and climatic risks can quickly reverse this trend.”
In addition, the bank said that economic growth over the past decade has been increasingly less inclusive, and its impact on poverty reduction has also declined. Each unit increase in GDP in the period has resulted in a lower decline of the poverty rate compared to 2000 and 2009, according to the report.
To remedy this, stronger focus should be placed on “inclusive and equalising policies” that will improve productivity and raise the quality of growth.
“This would include support to those who may be left behind and building resilience to shocks that undermine economic growth when they occur and during the time it takes for households to recover,” the bank said.
The report suggested interventions such as modernising agriculture and investing in irrigation systems, as well as “the expansion of existing social protection programs or the introduction of new ones can help mitigate risks, increase resilience and reduce the negative effects of adverse shocks on vulnerable households”.
Why agriculture? The sector employs about 64% of Ugandans and 72% of young Ugandans, according to the report, and accounted for about 45% of exports in 2018-2019. Because of this, it is vital to increasing household income and consumption — which in turn stimulate growth in other sectors.
A large fall in agriculture commodity prices or poor rains have always led to a reduction in income from the sale of crops and consumption, slowing down poverty reduction as a result.
“The drought and pest infestations in 2016 and 2017 largely explained the increase in poverty incidence between the 2012-2013 and 2016-2017 fiscal years from 19.7 to 21.4% (under the national poverty line), as households engaged in agriculture accounted for most of the increase,” the report said.
The bank added that environmental shocks and risks resulting from the effects of global warming have also become an important check on productivity growth. Individuals and households affected by those risks are ” less willing to invest in inputs and skills that help improve productivity,” necessitating social protection programs, among other interventions.