World Bank cautions Uganda on negative economic growth rate

The negative GDP growth rate recorded in the first quarter of FY 2016/17 is indicative of the recent difficulties that Uganda has faced in achieving the rates of growth required to enable the country to fulfill its aspirations, according to latest World Bank Economic Update report on Uganda.

The 2017 report entitled 'Step by step : let's solve the finance puzzle to accelerate growth and shared prosperity in Uganda'  said that In the period from the 1990s to 2010, Uganda achieved average annual rates of economic growth of around seven percent, far higher than many peers.

The report said Uganda's economy is not performing according to expectations. Growth declined by 0.2 percent in the first quarter of 2016/17.

The economy had been anticipated to rebound strongly on the back of planned public spending on infrastructure, and increase in private sector credit to raise productivity.

However, the continued weak domestic economic environment, worsened by the low commodity and fuel prices in international markets, the crisis in South Sudan, and severe drought have continued to strain investment and exports, and hence slowed down growth.

According to the update, Uganda's economy will need to continue adjusting to these shocks and strengthen the financial system, which remains jittery due to the high level of non-performing assets and the Central Bank's recent takeover and resolution of Crane Bank, previously the third largest bank.

If the economy overcomes these shocks and grows at an average of 2.5 percent per quarter, the overall rate of growth for FY 2016/17 could rise to 4-5 percent.

However, this rate of growth is far below the over 10 percent required for the country to outpace the population growth rate and realise its development aspirations to achieve middle income status by 2020

The sustained growth was the result of macroeconomic stability, post-conflict rebound, and market and institutional reforms which transformed Uganda from a failed state to one of the fastest growing economies in the world.

However, the average annual growth in the five-year period to FY 2015/16 has decelerated to 4.5 percent. In sharp contrast to the earlier period, this is significantly lower than the average rate recorded by low income countries in the same period.

The decline since 2011 is partly related to the increasingly volatile external environment and partly to domestic policy slippages.

"Policy frameworks held up well during the 2016 election cycle, but serious strains related to the impact of the drought on agriculture and of the civil strife in South Sudan are now materializing. It is important to ensure that the fiscal impact of these shocks does not transmit into macro policy slippages, with past experiences showing how damaging such slippages can be to growth," read part of the report.

The report recommends that in order to return to the levels of economic growth recorded in the immediate post-reform era, it is vitally necessary to address binding constraints and to transform the economy to facilitate the achievement of higher levels of productivity through diversification into a more resilient range of economic activities.