# Introduction

Frequent exposure to different shocks is common for households in developing countries. The shocks introduce substantial volatility in households’ income or consumption<sup>1</sup> and can lead to changes in poverty status. This makes the poverty indicator less accurate in measuring risk to poverty since it is based on the observed level of wellbeing. In contrast, assessing the likelihood of households falling into poverty or their vulnerability to poverty can be a more useful measure to assess the dynamic nature of poverty. Understanding the nature of vulnerability, which may be related to high consumption fluctuations, permanently low consumption, household or common shocks is also important for the design of effective poverty alleviation policies (Chaudhuri, 2003; Naudé, Santos-Paulino & McGillivray 2009).

In recent years, a significant share of the population of Uganda has experienced different idiosyncratic (household specific) and covariate (common for households in the community) shocks. According to the Uganda National Panel Survey 2019/20, 32 percent of the population experienced at least one shock during the last 12 months. The rural population was more likely to experience shocks than their urban counterparts (37 percent versus 19 percent, respectively). The population from the bottom quintile of consumption per adult equivalent was most likely to experience a shock at 42 percent.

Uganda is one of the most vulnerable and least adapted countries to climate change based on the Notre Dame Global Adaptation Initiative (ND-GAIN). Most of the land used for crops is rainfed and the agricultural sector consists of small subsistence farms averaging less than two hectares. This makes households in rural areas particularly vulnerable to weather changes. The increase in poverty observed in 2016/17 was to a largest extent due to severe drought and pests (World Bank, 2018). According to the UNPS, the most frequent shock in 2019/20 was also a drought, which affected 13 percent of the population at the national level and 21 percent in the Northern region. The inflow of refugees and the COVID-19 pandemic also stand out as prominent covariant shocks to have recently hit Uganda. One way in which experiencing shocks manifests itself is through a high volatility of economic growth. This is reflected in Uganda, whereby gross domestic product (GDP) per capita has dropped to less than one percent multiple times during last 20 years.

Addressing the challenges associated with high vulnerability to poverty requires a developed and adaptive social protection system which effectively targets the vulnerable population and provides adequate benefits to insure against the shock. The national development plans in Uganda (NDP) prioritize social protection as one of the key strategies for transforming Uganda from an agrarian to a modern society. However, the current levels of expenditure on social protection and the coverage are low. For example, according to the Atlas of Social Protection Indicators of Resilience and Equity (ASPIRE), programs providing cash transfers accounted for 0.16 percent of GDP in 2016. This was lower than what was spent in Tanzania (0.24 percent of GDP) and Rwanda (1.16 percent of GDP). The coverage of social protection programs is quite low, with the two largest direct income support programs in Uganda covering only three percent of the population (World Bank, 2020). This was lower than the average of nine percent in East Africa. Maintaining adequacy of the direct income programs is also an issue. Thus, the nominal value of the Senior Citizens Grant has not been adjusted since 2010.

To date there have been several empirical studies measuring vulnerability of population in Uganda to poverty. Lawson, Mckay and Okidi (2006) used panel data for the years 1992–1999 to show poverty transitions and analyzed their characteristics by using quantitative and qualitative analysis. Similar work was done by Ssewanyana and Kasirye (2012) who used panel data to show that compared to the 1992-

> 1 Given that poverty is measured predominantly by consumption, we use the term consumption throughout the text.

2