Uganda was among the first sub-Saharan African countries to embrace market reforms in the late 1980s and graduated as a mature reformer in 2006 with sound economic fundamentals and much improved governance. Real GDP growth accelerated from an average of 6.5 per cent year-on-year in the 1990s to over 7 per cent during the 10 years leading up to 2009-10. Not surprisingly, Uganda qualifies as one of the few durable African success stories.  Yet its continued prosperity hinges on shifting the economy to a higher productivity level and integrating all its regions into the development process. The coming ‘oil era’ should have a powerful impact on the wider economy, but also poses future challenges.

The economy has undergone structural transformation in the past two decades. According to World Bank figures, as a share of total national output, services and industry increased from 32 per cent and 11 per cent in 1990 to 55.7 per cent and 27 per cent respectively, by 2009. Over the same period, agriculture as a share of GDP fell sharply to 17 per cent (from a high of 57 per cent).

Clearly an efficient transportation network is needed to improve links between producers and markets, while improving the mobility of the work force. And, more importantly, industry needs more electricity. Present output is only 550 megawatts (MW) in spite of the 5,300MW potential. The 2010-11 budget has allocated US$570 million for roads and the transport sector in general.

Uganda has proved resilient during the global downturn, underpinned by fiscal-monetary stimuli in the form of higher public spending and low interest rates, adequate international reserves, lower external debt and a well-regulated banking system. Real GDP growth has been robust by global standards  – 7.2 per cent in 2009 – thanks to higher intraregional trade and recovery of private investment flows. Growth, however, declined to 5.2 per cent in 2010, caused by drought and reduced capital inflows. On the positive side, however, fiscal deficits and public debt remain manageable. And Uganda has maintained a prudent borrowing strategy – the risk of debt distress is negligible.

‘Prudent macroeconomic policies have enabled Uganda to maintain  stability despite a series of external shocks. Notwithstanding a recent deceleration, output growth has been strong and is expected to rebound quickly. Inflation has moderated and the country’s external position has remained solid, buoyed by robust exports and foreign investment flows. Limited central bank intervention has helped smooth excessive exchange rate volatility and the financial sector has remained sound,’ the International Monetary Fund (IMF) has said.

Sustained output expansion has facilitated tangible progress towards the Millennium Development Goals (MDGs). With the proportion of people living in abject poverty at 25 per cent in 2009/10, Uganda has surpassed the 2015 MDG of halving the 56 per cent poverty rate recorded in 1992-93. It could also achieve other targets on universal primary education, gender parity and combating malaria and other chronic diseases.

Capital inflows The latest figures from the Paris-based Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee put net official aid to Uganda at US$1,788 million, representing 11.6 per cent of gross national income. The top five donors were the US (US$360 million), the International Development Association (US$289 million), the EU (US$193 million), the African Development Fund (US$110 million) and Britain (US$92 million). Uganda’s growth for several years has exceeded the regional average, but due to rapid population growth (3.2 per cent – one of the world’s highest), real GDP growth per capita has averaged 4 per cent in the 2000s.

fDi Intelligence, the research and analytics division of the Financial Times, named Uganda as one of the fastest growing destinations for foreign direct investment (FDI). In 2009, Uganda attracted the highest FDI of the East African Community (EAC), based on UN Conference on Trade and Development data. Net inflows totalled US$799 million – compared with Tanzania’s (US$679 million) and Kenya’s (US$141 million).

Many sectors are fully accessible to foreign equity ownership, including primary and secondary industries. According to the IMF, the top sources of 2009 investment were Britain (US$731 million), Canada (US$417 million), Mauritius (US$226 million), Australia (US$218 million) and the US (US$208 million). Future EAC regional initiatives to develop transport networks, including plans for a Uganda-Kenya railway project will help expand intraregional trade and direct investment.

An emerging oil exporter Uganda is the only EAC country with sizeable proven oil resources. The Lake Albert Rift basin alone is thought to contain two million barrels – roughly the same production potential as Yemen. Reserves are expected to last for around 25 years and offer a unique opportunity to transform Uganda’s economic landscape (if utilised wisely). ‘Stronger public financial management systems are crucial to the efficient spending of oil revenues,’ the IMF has advised. Meanwhile, the World Bank has also stressed that Uganda needs to invest in priority sectors with the highest returns and ensure greater transparency in the management of oil revenues in order to reap the rewards of the oil boom.

Preliminary estimates suggest that the petroleum sector could account for 8 per cent of Uganda’s GDP and provide over one-third of total government revenues. The World Bank predicts that crude production will hit 350,000 barrels per day by 2018, with the country earning at least US$2 billion in oil exports every year. Colossal investments of US$10 billion are needed to produce, transport, refine and export the oil – which requires building a 1,300km pipeline to Mombasa port in Kenya. The mega projects in upstream and downstream sectors – the exploration, discovery and refining of crude oil – would benefit the real economy. ‘The investment is going to be huge. You are talking about multiple billions of dollars of investments,’ says Aidan Heavey, CEO of Tullow Oil.

Long-term agenda The National Development Plan (NDP) for the 2011-15 fiscal period, the first of six five-year plans launched in April 2010, seeks to transform Uganda over 30 years from a largely peasant economy into one focused on middle-income. The NDP’s main theme is ‘Growth, Employment and Socio-Economic Transformation for Prosperity.’ It marks a broadening of Uganda’s development strategy from poverty reduction, towards tackling infrastructure gaps – key constraints to raising output potential.

The NDP identifies five priority areas: increasing infrastructure development (mainly energy and transport); facilitating private sector access to productive inputs and boosting the productivity/commercialisation of agriculture; strengthening human resource capacity through health, education and skills training; promoting scientific innovations; and enhancing good governance and value for money in public services by increasing the efficiency of state institutions.

The NDP’s key targets include doubling national output to USh72.1 trillion and increasing the share of manufacturing to 30 per cent of GDP within the next five years. To develop the capacity to produce 3,800MW of electricity – a prerequisite for achieving industrialisation in the coming years – Uganda must add 750MW per year in the medium-term. In view of likely drops in official aid packages, financing will rely more on domestic revenue and additional external sources, including private finance initiatives (PFIs) or public-private partnerships (PPPs).

The programme calls for better use of natural resources to ensure that all regions benefit from future growth. Sixteen ‘flagship projects’ are proposed to improve national competitiveness on a par with middle-income countries. These include power generation, water, transport, information and communications technologies, oil refining and mining, agriculture and public services. Uganda needs to improve its absorption capacity for planning/executing mega-capital projects, and increase transparency, with an emphasis on cutting waste and red tape. In recent years, the government has strengthened procurement and public financial management (PFM) laws, systems and regulations – but further effort is required to strengthen compliance, according to observers.

‘Black gold’ offers a unique opportunity for raising national prosperity through higher infrastructure investments and job creation in non-oil sectors. President Yoweri Museveni has reiterated that Uganda’s oil wealth could be used to fund projects in energy, transportation, scientific research and education. The country also has a comparative edge in agriculture. If fully exploited, it could boost output, exports, and jobs and help combat existing poverty.

Looking ahead, the main challenges are to accelerate infrastructure development and deepen structural reforms in order to enhance productive capacity and alleviate constraints on private sector-led growth in the post-oil era, alongside Uganda’s participation in the planned East African Monetary Union (EAMU).

Obiageli Ezekwesili, the World Bank’s Vice-President for the Africa Region, neatly sums up Uganda’s potential. ‘It’s possible for Uganda to transform itself into a middle income country in the next 15 years by focusing on improving the business environment and service delivery,’ she says, ‘as well as creating an enabling framework for value for money.’