Emmanuel Tumusiime-Mutebile: Uganda's potential as an economy for
the next five years
Presentation by Mr Emmanuel Tumusiime-Mutebile, Governor of the Bank of Uganda, at the
Mineral Wealth Conference, Kampala, 1 October 2012.
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1. Introduction
The next five years are likely to be a period of transition for the Ugandan economy; a
transition which will encompass three dimensions. First, there will be a transition to an
economy in which non renewable natural resources - oil and minerals - could make a
substantial contribution to export earnings and Government budget revenues. Secondly, the
Ugandan economy will become progressively more integrated into the regional economy,
with the implementation of the common market and customs union in the East African
Community (EAC). The third dimension of the transition will be a transition from an economy
which is predominantly factor driven, based on its endowments of natural resources and
unskilled labour, to one in which economic growth is driven more by improvements in factor
efficiency; i.e. by growth in productivity. These three prospective economic transitions are
related in important ways, which I shall elaborate on later.
Whether Uganda can gain maximum benefit from these opportunities depends to a large
extent on the economic policies which we pursue over the medium to long term and the
quality of our economic management and governance. It is not axiomatic that Uganda will
benefit from our oil and mineral resources that Uganda will be able to exploit the
opportunities presented by East African economic integration and that Uganda will generate
sustained and dynamic productivity growth. These benefits will only occur if the policy
choices we make are the right ones. This is the main message of my presentation this
morning.
2. Opportunities for an economic transition in Uganda
For the last two decades Uganda has recorded robust economic growth, averaging about
7 percent per annum in real terms. As a result, the size of our economy, again in real terms,
has quadrupled since the early 1990s, although real per capita incomes have only doubled in
this period because population growth rates have exceeded three percent per annum.
Sustaining rapid economic growth consistently over two decades is an impressive
achievement, not matched by most other developing countries. However, this growth has not
yet brought about a major structural transformation of the economy. The majority of the
workforce, around 70 percent, is still employed in smallholder agriculture where productivity
per worker is very low; average value added per worker in agriculture is only $200 per year.
In large parts of the economy, which are still dominated by traditional, informal activities,
productivity is stagnant.
The Global Competitiveness Index, which is produced by the World Economic Forum, the
African Development Bank and the World Bank, distinguishes three stages of economic
development which are related to competitiveness. In the first stage, which characterises
most low income countries, economies compete on the basis of their endowments; unskilled
labour and natural resources. The second stage is an efficiency driven stage of development,
in which economies compete by continuously raising their productivity. Improvements in
factor productivity are the main driver of economic growth in this second stage of
development.
It is on the threshold of the second stage of development that the Ugandan economy now
stands. In industries such as food processing, construction materials, telecommunications
and financial services, modern, high productivity industries have been set up and are
expanding, although they still employ only a relatively small share of the workforce. If we can
make the transition to an efficiency driven economy successfully, Uganda can accelerate the
structural transformation of its economy and move towards middle income status.
The commercial exploitation of hydrocarbon and mineral deposits offers both opportunities
and challenges for Uganda. The opportunities arise because oil and minerals will generate
substantial increments to public revenue and to foreign exchange earnings; resources which
could be used to invest in the physical and human capital needed to strengthen
competitiveness and thus help to create the foundation for productivity driven economic
growth. The World Bank's Doing Business Indicators report that an inadequate supply of
infrastructure is cited by firms as the third most problematic factor for doing business in
Uganda (the most problematic factor is corruption and the second most is access to finance).
Strengthening the transport and power infrastructure could reduce significantly the costs of
doing business in Uganda and thereby help to promote private investment in modern, high
productivity, industries. Better infrastructure is also necessary to enable Uganda to export
minerals or to process them in the country. Productivity growth also requires investment in
human capital. Uganda has made great progress in making access to primary education
virtually universal across the country, but we now need to build on this and expand access to
secondary education and to provide the workforce with the vocational skills needed for
modern industries.
Unfortunately, oil and minerals can also impede development, as demonstrated by the
experience of many developing countries which are rich in resources. Natural resource
revenues are often very volatile because of the inherent volatility of global prices and
sometimes because production volumes may also be erratic, and this volatility can be
transmitted to the macroeconomy, creating a cycle of resource led booms and slumps. The
export of natural resources and the spending of the revenues thus generated in the domestic
economy can also cause real exchange rate appreciation, which damages the
competitiveness of the non resource traded goods sectors of the economy, such as
agriculture and manufacturing; this is a phenomenon called "Dutch disease". Avoiding the
pitfalls of natural resource dependency - the so called "resource curse" - is only possible
with sound economic policies and good economic governance, a subject I will return to
shortly.
The EAC is now implementing the second stage of its regional economic integration project;
the common market which will allow for trade in services within the EAC, including the right
of establishment of firms in the service sectors, and the free movement of capital and labour.
The EAC customs union has already yielded major benefits for Uganda. Uganda's exports to
our EAC partner states have risen from only $68 million in 2001/02 to $676 million in
2011/12. Intra-EAC exports now comprise 25 percent of Uganda's total exports, compared to
14 percent 10 years ago.
Regional economic integration can help to accelerate Uganda's transition to an efficiency
driven economy in several ways. First, it will expand the size of the market for domestic
firms, allowing them to realise economies of scale and become more efficient. In terms of
value, the combined GDP of the EAC partner states is the equivalent of nearly $90 billion,
which is four times the size of the Ugandan economy alone. Secondly, it will strengthen
competitive pressures in the national market, by exposing domestic firms to greater
competition from firms from other EAC partner states. Competition provides the best
incentive for firms to increase their productivity.
Thirdly, regional integration will provide a stepping stone for industries which are not yet
competitive globally to begin exporting, and thus stimulate the improvements in productivity
which will eventually enable them to compete on global markets. This is likely to be
especially important for the domestic food sector, which could produce substantial surpluses
for export. In turn, the opportunity to sell on regional export markets will give farmers in
Uganda incentives to focus on production for the market and to produce higher value
products. Finally, cooperation at the regional level is necessary to develop the infrastructure
to support growth in the region's economies; for example road and rail links from landlocked
countries to the coast. This will be particularly important for the development of the mining
industry.
What policies are essential to bring about the economic transitions?
Macroeconomic policy
The foundation of Uganda's economic growth over the past two decades has been the
priority accorded to macroeconomic stability, and in particular the control of inflation. This will
be equally important in the future, to support the transitions which I have discussed above,
not least because the transition to an efficiency driven economy depends on attracting higher
rates of private investment in modern industries. A stable macroeconomy is a prerequisite for
private investment on a large scale.
The two key components of sound macroeconomic management are a monetary policy
which has as its primary policy objective the maintenance of low inflation, implemented by a
central bank which has the operational independence to set interest rates to achieve this
objective. The BOU has modernised its monetary policy, introducing an Inflation Targeting
Lite monetary policy framework, which employs a policy interest rate - the Central Bank Rate
(CBR) - to influence demand in the economy. The new framework has already proved to be
effective in bringing inflation down. Inflation was driven up sharply last year by supply price
shocks, but the BOU's strategy of raising the CBR has brought about rapid disinflation. The
latest inflation data, released last week, show that core inflation has fallen to 4.8 percent. The
BOU intends to hold core inflation as close as possible to its policy target of 5 percent over
the medium term, using the policy interest rate to counter any shocks which threaten to drive
inflation above the target in a persistent manner.
Fiscal policy will become even more important as a tool for maintaining macroeconomic
stability once production of oil and minerals begins on a commercial scale. A large part of the
rents accruing from natural resources take the form of Government budget revenues and
hence flow into the domestic economy through the Government budget. How the
Government spends these revenues will have a crucial impact on macroeconomic stability
and on the extent to which Dutch disease affects the economy. A sound fiscal policy must be
formulated in a forward looking medium to long term framework. It must ensure that
revenues derived from natural resources are not spent in an unsustainable manner, leading
to a short lived consumption and construction boom, followed by a bust once the resources
run out. It must ensure that any expansion of domestic demand arising from the use of
natural resource revenues is carefully matched to the available supply capacities, for
example in the construction industry, to avoid driving up prices. Fiscal policy must also
ensure that public spending is delinked from the volatility in resource revenues, to avoid
imparting cyclical volatility to the economy. This requires formulating fiscal policy using a
medium term fiscal anchor, such as a non oil fiscal balance target.
Public financial management
Uganda's ability to benefit from the public revenues generated by oil and minerals will
depend on the quality of public financial management. It is imperative that public revenues
are spent in an efficient manner, which requires both very careful selection of public projects
and effective project implementation. Uganda must be especially vigilant to avoid allocating
public funds to white elephant projects, which cannot generate positive social rates of return.
Ensuring that only high quality projects are selected for the Government budget will only be
possible if the technical skills of public officials involved in project appraisal are improved and
if the project selection process is very thorough, transparent and open to public scrutiny. The
current capacities in the public sector for implementing public investment projects are weak;
the backlog of projects for which funding has already been secured but implementation has
been delayed is evidence of serious absorption capacity constraints. Consequently, before
Uganda attempts to scale up public spending on public infrastructure, it is essential that the
capacities in the public sector for managing all aspects of public investment projects are
strengthened.
Improve the climate for private investment
Raising the rate of private investment in modern, labour intensive industries is a prerequisite
for a transition to an efficiency driven economy. In some respects, Uganda has a conducive
business environment for the private sector. We have a record of macroeconomic stability
and provide liberalised factor and product markets. In the Global Competitiveness Index,
Uganda scores relatively well on the indicators for the macroeconomic environment, labour
market efficiency and financial market development.
Nevertheless, Uganda's private investment rate, which stood at an average of 18 percent of
GDP over the last five years, does not compare favourably with the fastest growing
developing economies, such as those in Asia, where private investment rates of over
30 percent of GDP are the norm. The World Bank's Doing Business Indictors reveal some of
the reasons why Uganda does not attract higher rates of private investment. I have already
mentioned that firms cited the inadequate supply of infrastructure as one of the most
problematic factors affecting their business, and the policy implications of this. However, the
problem most frequently cited by firms in the Doing Business Indicator Surveys is corruption.
Corruption raises the costs and the risks of doing business. Curbing corruption is, therefore,
essential to improve the business climate in Uganda and attract higher levels of private
investment.
Accelerating the demographic transition
Uganda has one of the highest total fertility rates in the world, at 6.7 births per women, and is
yet to undergo a demographic transition. As a consequence, Uganda also has a very high
dependency ratio, with 110 dependents for every person of working age. The high
dependency ratio is a major obstacle to improving productivity, because it impedes domestic
savings and reduces the real resources per head which are available for human capital
formation, such as per pupil education expenditures. The developing countries which have
been most successful in sustaining rapid economic growth and structural transformation of
their economies have achieved this in the context of a demographic transition to low fertility
rates and dependency ratios which has enabled very high rates of investment to be financed
and the quality of human capital formation to be improved substantially. To replicate this
success, Uganda must implement policies to bring down the total fertility rate, by
strengthening female education, improving maternal and child health care, providing wider
access to contraceptives and through public campaigns to promote smaller families.
Conclusions
Uganda faces exciting challenges in the years ahead. The economy has delivered, over the
last 20 years, consistent and robust real economic growth which has led to a doubling of per
capita incomes. We now have the opportunity to build on this platform and accelerate
structural transformation. The focus of our efforts should be to strengthen the incentives for
raising productivity, so that continuous increases in efficiency become the driving force of
growth and development. Competitive markets and a stable macroeconomy provide the
foundations for such a transition. The resources earned from the production of oil and
minerals can make a vital contribution to enhancing productivity in the economy, but only if
they are managed and invested in a very sound manner. The exploitation of natural
resources raises the premium on economic management and economic governance.