Last week, Nakaseke District. It is a lecture I have regularly given to the UPDF officers at their different schools since 2010.
In this lecture, I attempt to bring our heroes in the military uniform to speed as far as our economy is concerned. In brief, we look at some of the facts about Uganda’s economy that every Ugandan should know, and their economic implications. For example, what are the implications of having a very small economy? An economy with a total GDP (gross domestic product — the value of the total output of goods and services produced in the country) of only about U.S. $25 billion (or Ushs. 67 trillion), and per capita GDP of about $628 (or Ushs1.7 million) a year.
Someone may ask, is $25 billion so small to make Uganda a small economy? Oh yes. To understand how badly off we are, one may compare this with personal incomes of some rich individuals. Don’t even think about the Bill Gates or Warren Buffets of this world. Think about young entrepreneurs like Facebook founder Mark Zuckerberg. The 30-year-old young man is worth about $33 billion. He can, therefore, buy the entire Uganda, with all our cows, coffee, beans, minerals, etc. and retain enough change to buy Rwanda. We are really very poor, small economies.
What is even more worrying is that our per capita income has failed to grow despite the continued growth of GDP. In 1970, Uganda’s per capita income was U.S. $133. Malaysia also had a low income per person, about $392. Today, Malaysians enjoy incomes as high as $10,500 while Ugandans continue to struggle to make ends meet using very low incomes.
Why the paradox? Why has Uganda’s GDP per capita failed to grow as much as it is doing in Malaysia and other countries, despite the somewhat impressive growth in total GDP? In 1970, Uganda’s total GDP was about U.S. $1.2 billion. As we have seen above, it has since grown to $25 billion. However, when it comes to people’s incomes, they have by and large been stagnant. Why?
Foreign dominated economy
A number of factors contribute to this anomaly. First, Uganda’s growth is not inclusive. Inequality in income and wealth is high. The Gini-coefficient (the index used to measure inequality) stands at 0.39. This is quite high Gini index, implying that the growth in GDP goes to the very few individuals who already have a lot, leaving the masses with low, stagnant incomes.
Secondly, the high population growth rate of Uganda is making it difficult for Ugandans to raise their incomes. The recent census confirmed that our population is growing at above 3%, with fertility rate of 6 (i.e. every woman in Uganda, on average, produces 6 children). This means that growth of per capita income is competing with the high population growth rate. And the former is losing the race.
Thirdly, a very large proportion of Uganda’s GDP is produced by foreigners. Just look around Kampala city and count the number of serious businesses that are owned by Ugandans. Not many. Most big businesses, especially in the fastest growing sectors such as telecommunications, banking, large scale manufacturing, wholesale and retail trade (large super markets and stores), etc., are owned by foreigners. Where are Ugandans concentrated? In small, informal businesses — boda boda, vending the products that foreigners produce, hair salons, running bars, etc. Thus, the GDP is going to the foreigners who repatriate it to their home countries.
Another factor contributing to low growth of Uganda’s per capita incomes the high marginal propensity to import (MPM). I have always questioned our trade policy which allows imports of all kinds, ranging from toothpicks to popcorns, bathing sponge (ekyangwe), and all sorts of items that we can easily produce here. I often hear people wondering how we have failed to produce a pin! A pin may be sophisticated, but what about toothpicks?
In Uganda, we cannot sharpen a tree to pick our teeth! Someone has to pose as a “businessman”, board a plane, and go to China to import boxes of these sharpened pieces of wood. We spend 33% of our incomes importing such items, and we wonder why our incomes are stagnant yet those of the Chinese and Malaysians are growing miraculously.
Regional security challenges
Lastly, our incomes are stagnant partly because of our low levels of capital accumulation. This is on the account of very high marginal propensity to consume (MPC), currently standing at about 87%. This means that on average, Ugandans spend 87% of every additional shilling they earn. We save and invest only about 13% of our incomes. Thus we cannot make our incomes grow when we haven’t saved and invested a substantial proportion.
Another aspect I often discuss for our soldiers, and my students of Ugandan Economy at Makerere University Business School, is the current state of economy of Uganda. Bank of Uganda projects that the economy will this year grow at between 5 and 5.5 percent. This growth, according to authorities, will be supported by high public investment in infrastructure, and also by the expected recovery of domestic demand.
However, there are risks that might impede growth of the economy, including the weak global economy. Europe has failed to recover as had been projected. This implies that our exports might be affected and remittances from Ugandans living and working in those countries might dwindle.
Secondly, this year we expect low foreign direct investment (FDI) inflow. This is on the account of the foregoing factor, and the political uncertainty that has been created by the apparent power struggles within the ruling National Resistance Movement (NRM) party. Regional security challenges are also contributing to our economic hardships. South Sudan, one of our largest markets in the region, has failed to stabilize. There is also a looming conflict between Egypt and Ethiopia and Uganda over the Nile waters. There is also a lot of unfinished business in the Democratic Republic of Congo (DRC). All these are likely to negatively impact the economy in 2015.
Political bickering within NRM
Our trade deficits are widening, now standing at about 15% of GDP ($2.5 billion). Our import trade has enlarged far more than the export trade, now standing at $7.8 and $5.3 billion respectively. How do we finance the trade deficit? By using current transfers, particularly grants and remittances, and through investment inflows. However, owing to the economic hardships that Europe is undergoing, grants and remittances are reducing yet exports are also not doing well (due to global & regional challenges seen above).
This is partly the reason the shilling is depreciating at a scary rate. Average mid-market exchange rate in April 2014 was Ushs. 2,530 per US Dollar. By the time I am writing this, (Jan. 15, 2015) it was Ushs. 2,898! Why has the shilling experienced rapid depreciation in the last couple of months? Bank of Uganda issued a statement last week attributing the current depreciation to speculation. It was a diplomatic way of decrying the negative expectations created by the political infightings within the NRM.
I have on several occasions warned that political uncertainty ahead of 2016 might return the economy to the post 2011 crisis. Because of the political bickering between you, Mr. President, and your former friend and political ally, former Prime Minister Amama Mbabazi, investors are reluctant to bring their dollars. This has left the economy with very few dollars yet demand for them to import is rising. The situation is likely to remain the same, or even get worse, as we approach 2016.
However, although speculative tendencies may be blamed for the current spate of rapid depreciation, Bank of Uganda should come out clearly tell Ugandans what has made the shilling weak over the year. In 1990, it required a Ugandan to pay only Ushs. 70 to purchase one U.S. dollar. Today we are paying nearly Ushs. 2900. Why?
Our weak balance of payments (the trade deficit seen above) is the main reason for this long run depreciation. We are importing a lot and thus increase the demand for the dollar, yet our exports have not grown to earn the dollars. Thus the price of the dollar has to keep rising.
Other factors include, the low levels of productivity among Ugandans which makes it difficult to produce high value products for export, the effect of global market volatility, and of course the increased demand for the dollar by Ugandans going to China, Dubai, and India to do business (import all sorts of products).
Next week, we shall see why our domestic prices don’t respond quickly to global trends. I have heard many Ugandans wondering why when oil prices dropped on the world market, pump prices in Uganda remained high. We shall explain the reasons behind this anomaly.