Abstract

This section sketches a broad picture of the effects of economic stabilization on resource mobilization, allocation, and growth during the years 1987–94. Given Uganda's poverty and weak social indicators, attention is also given to the social dimensions of growth and the impact of the adjustment effort on such economic indicators as employment and income distribution.

This section sketches a broad picture of the effects of economic stabilization on resource mobilization, allocation, and growth during the years 1987–94. Given Uganda's poverty and weak social indicators, attention is also given to the social dimensions of growth and the impact of the adjustment effort on such economic indicators as employment and income distribution.

The agricultural sector—by far the dominant sector in the Ugandan economy—accounted for more than half of total real GDP over the period, although its share declined modestly, from around 56 percent of GDP in 1987/88 to some 51 percent in 1993/94 (Chart 3). Over the same period, the share of manufacturing output rose sharply, albeit from a low initial base of just over 3 percent, to around 6 percent. Other major sectors in the economy remained relatively stable in their contribution to GDP during 1987–94, with moderate increases recorded in the construction and trade sectors. Given the significance of agriculture, Uganda's overall growth performance is closely related to weather-related supply factors, as well as to the incentive and regulatory environment. As a considerable portion—estimated at 29 percent of GDP in 1993/94—of Uganda's agricultural sector is of a subsistence nature and is outside the monetized economy, it follows that a substantial part of real GDP may not be responsive to normal price incentives and typical monetary variables affecting savings and investment, and thus to capital accumulation in the economy. It is nevertheless possible to assess the impact of the adjustment process on growth and capital accumulation in the Ugandan economy and, in particular, to address the important question of what is required to raise the growth potential of the economy over the medium term in order to improve important social variables. A key objective of this paper is to demonstrate that while growth has been impressive, even greater growth may be necessary to raise the quality of life in Uganda, given the low base from which it is starting, the rate of increase of the population, and the array of pressing social needs.

Chart 3.
Chart 3.

Sectoral Shares in GDP

(1991 prices)

Sources: Department of Statistics. Uganda and IMF staff estimates.

Growth

Uganda's growth performance over the adjustment period reflects the strong recovery of the agricultural sector (Table 2). Between 1987 and 1994, the agricultural sector expanded by an average of 4.3 percent per annum. The armed conflicts and the disintegration of public infrastructure and services in previous years had had devastating effects on the mostly smallholder farming population. Agricultural output has only recently reached the levels achieved in the late 1970s. Given the large share of food crop production in agriculture—about 71 percent—the resurgence of the domestic market has been a significant determining factor in the high growth rate of agriculture. However, the increase in food production has stemmed mainly from an expansion in area cultivated rather than from higher yields. The increase in the cultivated area for food resulted mainly from the re-establishment of peace in the western, southern, and central parts of the country, as well as improvements in the transportation infrastructure between food-producing areas and Kampala. Although welcome, growth in food crop output from increased acreage, rather than yields, places a natural constraint on the future development of Ugandan agriculture and heightens the need to implement major initiatives in agricultural research and extension with a view to improving the technology used by small farmers.

Table 2.

Annual Growth Rates of GDP by Sector (at Constant 1991 Prices)

(In percent)

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Sources: Statistics Department. Ministry of Finance and Economic Planning; and IMF staff estimates.

Impact of Market-Oriented Policies

The growth of the food crop subsector within agriculture has been facilitated by the adoption of free market policies, including the decontrol of food prices and trade. All farmgate agricultural prices in Uganda are now market determined, although indicative prices are announced for the traditional export crops such as coffee and cotton in order to strengthen the bargaining position of producers. With the exception of coffee, for which a daily floor price is set, export prices are now fully liberalized. The liberalization of agricultural commodity prices and the abolition of various marketing boards have had the effect of increasing revenues to farmers as well as lowering marketing costs, thus significantly raising the profitability of agricultural production. The result has been a probable improvement in the rural-urban terms of trade in the country. Additionally, the progressive liberalization of the exchange system and the abolition of the surrender requirement on export proceeds from traditional crops have resulted in much higher returns to producers, processors, and exporters. The reliance of the food crop subsector on the domestic market continues to create a natural constraint. Demand is likely to rise only in relation to population growth rates and, to a lesser extent, increases in income, given the relative inelasticity of food crop demand to changes in income. Hence, higher growth rates in food crop production will have to focus on the diversification of export markets and the development of agro-industries.

Agricultural Exports and GDP Growth

Uganda's traditional agricultural exports have been a key determinant of its growth performance. The impact of exports on growth is not only significant in the generation of incomes and demand for domestic output, but given Uganda's recent foreign exchange constraint, it helped determine import levels, which also underpin economic growth. Until recently, declining export prices had been a major factor affecting the production levels of the main export, coffee (Chart 4). Coffee exports in 1993/94 totaled about 2.2 million bags (60-kg. bags), considerably below the peak of 3.5 million bags achieved in 1972/73. The recovery in volume, albeit slow, has been helped by a new system for pricing and taxing coffee adopted in 1991, which allows the producer price, as well as processor and exporter margins, to be determined by market forces. In 1992, in response to the very low levels of world prices, the tax on coffee exports was abolished, and the Government removed the Coffee Marketing Board's monopoly on buying and marketing. Subsequently, the Board was converted into a commercial operation in competition with private exporters.

Chart 4.
Chart 4.

Coffee Export Volume and Unit Values

(Volumes in thousands; values in U.S. dollars)

Sources: Department of Statistics, Ministry of Finance and Economic Planning; and IMF staff estimates.

Cotton and tea are two other agricultural export crops that are critical to Uganda's growth potential. In 1970, Uganda exported 78,000 tons of cotton and earned approximately $49 million. By 1988, output had fallen to only 2,100 tons, with earnings of $3 million. Cotton's dependence on a centralized and fairly capital-intensive ginning and marketing process has made it even more vulnerable than coffee to political and economic uncertainty. Since cotton is an annual crop and has a higher marginal cost of production than food and other cash crops, any reduction in returns can lead to a fairly rapid decline in production, as farmers switch into other crops. Over the past several years, all of the ginneries—which are owned by cooperatives—became heavily indebted and incapable of operating profitably. More recently, the greatly improved overall incentive framework and the liberalized environment, together with steps taken by the Government, have improved the outlook for the industry. The Lint Marketing Board's monopoly on the export of lint has been removed, and a Cotton Development Statute was enacted in January 1994, which abolished the union monopoly over cotton exports, eliminated licensing and other regulatory barriers, and established the Cotton Development Organization to regulate cotton seed production. In addition, the cooperatives are being given incentives in the form of debt relief to either sell off or lease their ginneries to private operators. Although the cotton industry is far from a recovery, the decline was arrested during the adjustment period and production volumes picked up to about 5,000 tons in 1993/94.

With respect to tea, output had fallen from about 15,000 tons in 1970 to about 2,000 tons in 1987. Although limited, reforms in the industry have included allowing firms to export directly and introducing privatization efforts. The result has been some recovery in output, to 10,000 tons in 1993/94.

Contribution of Other Sectors to GDP Growth

Although relatively small in their overall contribution to GDP, the manufacturing and construction sectors performed quite strongly during the past seven years, helping to maintain reasonable growth rates in the economy even when the agricultural sector suffered from unfavorable weather. Between 1987/88 and 1993/94, for example, the average growth rate of the manufacturing sector was about 10 percent, and in some years—for example, 1991/92, when GDP growth was low—the sector grew by over 18 percent. Over the seven-year period, the construction sector expanded by an annual average of more than 9 percent. The encouraging performance of the nonagricultural sectors in the economy has been greatly facilitated by the reduction in macroeconomic distortions, the liberalization of investment and trade licensing requirements, the increased access to foreign exchange, and the improvements in tax and tariff administration. Additionally, in 1991, an Investment Code was implemented and the Uganda Investment Authority (UIA) instituted as a “one-stop shop” to promote investment. Finally, the Government has been forthright in effectively resolving the expropriated property issue. Over 2,500 properties have been returned to the former owners, and the Government has embarked on the final phase, which includes a combination of repossession, sale, compensation, and reversion of properties to landlords in accordance with the law.

Investment and Saving Performance

Investment

The relatively high growth rates achieved in the Ugandan economy over the adjustment period were led by an increase in the rate of investment activity. In 1986/87, the ratio of domestic investment to GDP was estimated at only 9 percent (Table 3 and Chart 5). This was less than half of the average for the African region as a whole and almost a third of investment ratios experienced in developing countries in Asia, Latin America, and the Caribbean. During the period of adjustment, the investment-GDP ratio increased steadily through 1991/92 and reached an estimated 16.4 percent in 1993/94. While this represents considerable progress, Uganda's investment-GDP ratio is still below the average of 19.6 percent achieved by African countries in the period 1987–93 and the nearly 31 percent achieved by high-growth developing countries in Asia.

Table 3.

Saving and Investment Ratios in Developing Countries

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Source: World Economic Outlook. October 1994.

Fiscal years 1983/84–1986/87.

Fiscal years 1987/88–1992/93.

Chart 5.
Chart 5.

Domestic Savings and Investment Ratios

Sources: Department of Statistics, Ministry of Finance and Economic Planning; and IMF staff estimates.

These comparisons would imply that the investment-GDP ratio can and should be raised significantly. Another concern is the fact that the investment ratio in Uganda has more or less stagnated in the past two years, suggesting that the rise over the adjustment period may have reached a steady state owing to bottlenecks, implementation capacity, efficiency issues related to the financial sector, or the end of the reconstruction activities following the civil war.

A further disaggregation of estimates on capital formation shows that whereas public fixed investment as a ratio of GDP almost tripled, from 2.6 percent in 1986/87 to 7.6 percent in 1993/94, the private fixed investment ratio increased less sharply, from 6.6 percent to 8.8 percent over the same period. This suggests strongly that the overall GDP performance has been influenced more by public investment, in such areas as infrastructural improvements in particular, than by a resurgence in private sector investment activity. Given the implementation capacity constraints on public investment programs in recent years, future increases in gross domestic investment will most likely have to come from the private sector, unless significant bottlenecks affecting the efficiency of public investment programs can be resolved. To address this issue, Uganda, in cooperation with the World Bank, has attempted to rationalize public capital expenditures by classifying projects into “core” and “noncore,” based on priority considerations, implementation capacity, and recurrent costs. The objective is to raise the efficiency and productivity of public investments before any further expansions in the capital budget are attempted. If successful, the contribution of public capital formation to overall domestic investment could be significant in the medium term.

Although the private sector's investment response to the now-stable macroeconomic environment has been gradual, Uganda has laid a sound basis for enhanced investment activity. As mentioned above, an incentive structure has been created in the Investment Code, and the UIA has been set up to facilitate investment. Both are currently being reviewed to ensure that their operations remain consistent with the original objectives. Divestiture programs—discussed in Section V—will undoubtedly encourage more private investment, as well as free resources for the private sector. The various exchange and trade liberalization measures adopted over the past seven years (discussed in more detail in Section IV) provide powerful incentives to direct foreign investment. The mobilization of domestic savings, however, remains a major constraint on future domestic investment trends. Savings mobilization is affected both by the fiscal position of the central Government (and the nonfinancial public sector at large) and by efficient financial intermediation.

Saving

At the end of the civil war in 1987, Uganda's gross domestic savings as a percentage of GDP stood at an estimated -12.6 percent; for Africa as a whole, the average at that time was about 19 percent (Table 3). Uganda's situation has improved dramatically since 1987, and, as a result of its macroeconomic stabilization efforts, the domestic savings ratio reached 2.2 percent as of 1993/94. In particular, the reduction of inflation rates and appropriate financial policies ensured positive real interest rates, and the overall investment and saving climate has improved markedly. However, the domestic saving effort has not been helped by the public sector, and in 1993/94 central government savings as a percentage of GDP stood at an estimated -1.6 percent, not significantly different from its level at the start of the adjustment period in 1987/88. This outcome—which has occurred despite the fiscal adjustment efforts and public sector reforms pursued throughout the adjustment period—reflects the difficult internal and external environment under which Uganda undertook its reforms and, in particular, the difficulties in boosting government revenues, improving tax administration, and containing the demands on reconstruction expenditures. Reforms in the fiscal area are only now beginning to pay off and the central government is expected to show positive savings in the upcoming period. As a consequence of the low domestic saving effort, Uganda has had to rely to a large extent on foreign savings to help finance domestic investment and growth. Between 1986/87 and 1993/94, private and official transfers averaged 6.7 percent and 5.2 percent of GDP, respectively. Thus, in raising its investment rates toward the average for Africa, Uganda has become dependent on bilateral and multilateral borrowing.

Financial Intermediation and Saving/Investment Dynamics

The limitations of the financial sector in mobilizing and efficiently allocating domestic savings to the most profitable investment opportunities in Uganda represent a major issue, which is considered in greater detail in Section VI (“Monetary Policy and Financial Sector Reform”). Throughout the adjustment period, monetary policy has been fairly successful in influencing inflation and interest rates. Reform of the financial system to enhance financial intermediation, however, has been one of the main areas of weakness in the adjustment period. The result is that the Ugandan economy is still significantly unmonetized, with a large ratio of currency in circulation to deposits. Rural financial markets remain effectively undeveloped and, because of the high cost of intermediation, interest rate spreads are high. Moreover, term lending continues to be difficult and inadequate to finance investments in agriculture.

If Uganda is to reach a higher growth path, it must raise both domestic savings and investment. This cannot be overemphasized. But the efficiency of the intermediation process is just as important in order to ensure that savings are channeled to the most productive and profitable enterprise projects. This is particularly true of public investment projects. It is also arguable whether domestic investment rates rise in response to higher savings or whether savings increase when there are investment opportunities. The dynamics of the relationship between private and public investment will also be important in Uganda's attempt to increase growth. In many high-growth Asian countries, it has been observed that high private sector growth rates have traditionally followed substantial public sector investment in infrastructural development and human resources, especially in primary and secondary education. This is logical since it reduces the cost of private investments, thus raising the profitability of projects. In the run-up to a higher path of sustainable growth, Uganda will need to take into consideration the experiences of successful high-growth developing countries.

Social Dimensions of Growth

Uganda's rapid economic progress in recent years typifies the dilemma of many successful adjusting developing countries starting from a low base with poor social conditions. Macroeconomic discipline, and notably fiscal discipline, has been indispensable in ensuring stability and enhancing the growth environment, but there are tremendous pressures to improve social conditions and realize the benefits of successful adjustment. One manifestation of this is the pressure to increase civil service salaries, an issue discussed within the context of fiscal adjustment and civil service reform in Section V. Data limitations make it very difficult to analyze the social impact of the adjustment process. Like many developing countries in Africa, Uganda lacks a series of household data. Even basic data such as unemployment statistics are unavailable. Thus, the analysis presented here is of necessity rather tentative. It is intended to show the general direction of change and the likely broad impact of the policy adjustments that have taken place.

Rural Incomes

At the outset of the adjustment period in 1987, some of Uganda's social indicators were among the worst in Africa. With a per capita annual income of about $200, Uganda was one of the poorest countries in sub-Saharan Africa. The recovery of agricultural production during the adjustment period contributed not only to an impressive overall GDP growth but also to increases in rural incomes.2 It is estimated that about 89 percent of the Ugandan population is rural and engages primarily in agricultural production. Much of this economic activity is subsistent in nature, with an estimated 85 percent of the farming population operating on less than two hectares of land. Accordingly, it is likely that the benefits of agricultural growth are evenly distributed among the rural population.

Real per capita GDP in Uganda is estimated to have increased from U Sh 107,087 (or about $200 at the prevailing exchange rate) in 1986/87 to about U Sh 128,636 in 1993/94, an increase of 20 percent.3 If one assumes that real per capita agricultural GDP can be used as a proxy for rural real per capita GDP, then rural per capita incomes are estimated to have increased from about U Sh 66,827 (or about $125) to about U Sh 73, S60 between 1986/87 and 1993/94, an increase of about 10.5 percent. In this calculation, rural incomes may be overstated to the extent that urban farming is important, but they may also be understated to the extent that nonagricultural activities are important in rural areas. The two are assumed to be offsetting. One may also conjecture that some redistribution of income occurred in this period, given the liberalization of agricultural prices and trade, the changes in the exchange rate, and the elimination of marketing monopolies. However, there is some evidence that while the domestic terms of trade in cash crops may have improved—especially in the latter period of the adjustment reforms—the domestic terms of trade in food crops, which dominate agriculture, may have declined. This may have been due to the revival in agricultural output and the surplus generated. The overall effect is uncertain, however, since there is no detailed information on farmers' expenditures per capita. Also, any decline in the food crop terms of trade may overstate farmers' loss of income because of the lower cost of production that resulted from the improved security conditions in postwar Uganda.

Another issue worth considering in the assessment of the welfare dimensions of Uganda's growth and adjustment efforts is the achievement of price stability. Over 90 percent of GDP is estimated to go toward consumption expenditures in Uganda. High rates of inflation represent a significant tax on these expenditures, redistributing income to producers and the Government. The benefits of this inflation tax are questionable, since the expenditures generated by the Government tend to be narrowly distributed, while the adverse effects of inflation are more general. Furthermore, inflation tends to worsen the welfare of the poor disproportionately, given their higher consumption rate and their lack of access to financial assets.

Employment

Although comprehensive statistics on employment creation are unavailable, the recovery in economic growth over the seven-year period is likely to have reduced the unemployment rate. As mentioned above, the strong growth in the economy has been led by the agricultural sector, which employs the largest number of Ugandans. Key urban sectors such as manufacturing and construction have also enjoyed high growth rates, which have probably had a favorable impact on the unemployment rate. Trade and other service sectors have enjoyed spin-off benefits as well. As discussed in Section IV, Uganda has had some success in diversifying its agricultural export base. Exports of nontraditional commodities such as maize, fish products, and horticultural crops have increased in recent times, generating employment for both rural and urban workers, although inadequate statistics make it difficult to gauge the significance of employment gains. The revival of cotton output is likely to be more significant in generating rural employment, as cotton is a smallholder crop, and continued progress in reforming this sector offers prospects for improving rural incomes.

Employment gains in Uganda in the past seven years have been limited by the downsizing of the civil service, army demobilization, and the rate of population growth. The growth of private sector activity may have absorbed some of these displaced workers, but Uganda clearly needs to implement its population policy vigorously to slow not only the overall population growth but also the rate at which young adults enter the labor force. It is difficult, however, to gauge the impact that demographic changes such as rural-urban migration may have on urban unemployment in particular. This is an important area to be investigated further. It could be argued, though, that the improvement in rural incomes might well have reduced the urge to migrate to urban centers. In the medium term, with fiscal consolidation and a more efficient public investment implementation program, employment creation is likely to be significant.

Social Expenditures

Although key social indicators in Uganda remain poor, significant efforts have been made to restructure public expenditures so as to increase the emphasis on the provision of economic and social services, which boost human capital. Expenditures in such areas as primary health, primary education services, and agricultural research and extension have been given greater priority in the Government's budget (see discussion of fiscal adjustment in Section V). Between 1989/90 and 1991/92, there was a real increase of 49 percent in locally funded expenditures on primary education, and real expenditures on primary health grew even more markedly. However, these higher social expenditures have yet to bear fruit fully. Adult illiteracy is estimated to have declined from about 57 percent in 1986 to about 46 percent in 1992, but the primary school enrollment rate remains near its 1986 level of about 71 percent. The evolution of Uganda's health indicators is even more illustrative of the odds facing the authorities, as the effects of the devastating AIDS epidemic have overshadowed the gains in improving the delivery of health care services. Life expectancy in 1992 is estimated to be only about 44 years, which is below the 1987 estimate of 48.3 years. The infant mortality rate in 1992 is estimated at 122 per 1,000, higher than the 115.5 in 1987. It is clear that in order to raise Uganda's growth prospects and the welfare-inducing aspects thereof, the Government will need to continue steadily increasing its allocations for health and education services, within the constraints imposed by revenue availability and the wider macroeconomic implications. In addition to raising savings and investment ratios, significant investment in human capital is indispensable to rapid and sustained economic growth, as evidenced by the high-growth Asian developing countries.

Some of the adjustment programs instituted in Uganda over the past several years have been associated with certain social costs. This is particularly true for the civil service reforms and the army demobilization program. Unlike many countries undergoing adjustment, Uganda has never had a large need for elaborate social safety nets. The adjustment programs did not call for wage freezes or cuts. In fact, there has been an emphasis on substantially raising civil service salaries in real terms, to livable levels. The programs did not call for the elimination of subsidies, since there were few to start with, and the elimination of price controls did not create significant social costs, since they were limited and in many cases nonbinding.

2

For a detailed analysis of the impact of the adjustment process on the poor in Uganda, see World Bank (1993).

3

Per capita GDP in foreign currency terms between the two periods is not comparable because of the overvaluation of the exchange rate in the earlier period.

Cited By

Adjustment with Growth, 1987-94
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