Becoming the Champion: Uganda’s Development Challenge

IMF News, January 27, 2017

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Sub-Saharan Africa’s growth in 2016 was the lowest in 20 years at about 1.5 percent, and is projected to reach only 2.7 percent in 2017.
Recent shocks and risks:
- Slower emerging market demand and continued weakness in many advanced economies.
- Sharp falls in commodity prices.
- Tighter access to market financing.
- Rising protectionist sentiment and slowed global trade since 2012.
Divergence within Africa:
- East Africa has been a brighter spot due to more effective policy frameworks and more diversified economies.
- Uganda’s growth has hovered at about 5 percent a year—“better than many, but not enough.”
- With increased infrastructure investment and the oil sector moving forward, growth could accelerate to 6 or 6½ percent in the coming years.
Private investment is falling across many African countries, stifling new sources of growth.

Overarching challenge: translate past successes (threefold increase in per capita GDP over the past generation; reduction of extreme poverty to one-third of the population; achievement of the UN Millennium Development Goal of halving poverty by 2015) into faster, more inclusive growth.

a. Investment in Infrastructure

Infrastructure bottlenecks (electricity, transportation) are a permanent brake on growth and limit firms’ market access and willingness to invest.
Government strategy: scale up infrastructure investment while maintaining debt sustainability.
Efficiency and institutions:
- Investment must be efficient; strong institutions are required to prevent mismanagement and ensure value for money.
- World Bank estimate: if Uganda’s investments were better managed, annual growth could be 2.5 percentage points higher.
Financing:
- Borrowing alone is unworkable because debt would become too high.
- More tax revenue needs to be mobilized.
- Progress: tax revenue has increased in the past few years, but Uganda is still only halfway to the East African Community’s goal of raising tax revenue equal to 25 percent of GDP.
- IMF estimate: strengthening VAT administration and removing some exemptions on the VAT and corporate income tax could raise revenue by 3 percent of GDP or more.

b. Governance and Institutions

Good governance and strong institutions are cornerstones of economic growth and have been central to Africa’s success over the past 20 years.
Oil sector risks and safeguards:
- To avoid the “curse” of many oil exporters, Uganda needs a strong transparency and accountability framework.
- Existing plans: channel all oil revenue to the Petroleum Fund, and from there to budget support and the Petroleum Investment Reserve.
- IMF stands ready to assist in preparation for oil production.

c. Regional Economic Integration

Opportunities exist within the East African Community (EAC) market of more than 150 million consumers.
Progress and constraints:
- The Single Customs Territory has been established; the Common Market is advancing.
- Infrastructure, customs, taxes, and investment reforms remain necessary to realize full potential.
Financial sector dynamics:
- Emergence of Pan-African and regional cross-border banks presents opportunities and new challenges for bank regulation and supervision that require unprecedented cooperation.

d. Inclusive Growth

Inclusive growth is critical: continuing poverty reduction yields clear benefits.
IMF research highlights:
- More inclusive societies tend to grow faster and more sustainably.
- If inequality in Sub-Saharan Africa could be reduced to the levels of Southeast Asia, growth could be consistently higher.
- New research (released concurrent with the speech) focuses on the relationship between inequality and reforms in fiscal policy, financial sector policy, and agriculture.
Policy priorities for inclusion:
- Good jobs for young people.
- Strong emphasis on education and health care.
- Assistance to the poor, including a social safety net.
- Greater gender equality and expanded financial inclusion.
Progress and gaps:
- Considerable progress in financial inclusion, including mobile banking.
- Uganda still lags other East African countries in adult bank account ownership; Ugandan women have much less access to banking than men.

Current cooperation centers on the Policy Support Instrument, which provides a framework for many discussed issues.
Capacity development and technical assistance:
- IMF supports efforts to improve tax administration, public financial management, and financial sector stability.
- The IMF offers continued assistance on transparency, accountability, and preparation for oil revenue management.

Key challenges to address:
- Scale up and efficiently manage infrastructure investment.
- Strengthen governance and institutions, especially for the oil sector.
- Deepen regional economic integration and address cross-border financial supervision.
- Prioritize inclusive growth through jobs, education, health, social safety nets, gender equality, and financial inclusion.
Expected outcomes if priorities are met:
- Stronger growth that creates good jobs for young people.
- A foundation for continued success and sustained hope, leveraging Uganda’s entrepreneurial energy and start-up ecosystem.

Speech by Christine Lagarde, IMF Managing Director, Kampala, Uganda, January 27, 2017