Is Uganda's business climate affecting its regional competitiveness?

BUSINESS

By Brian Sserunjogi 

Uganda's economic development policy agenda envisions an inclusive and export-oriented private sector-led economy. To achieve this objective, the economy needs to formalise extensively, increase manufacturing and reduce trade deficits.

However, attaining this progress necessitates enterprises in the country to be competitive within regional and international markets. In turn, this depends on a favourable business climate. 

According to the global competitiveness report 2017/18, Uganda's business competitiveness has not been impressive in the last five years. While Rwanda and Kenya have managed to keep their global competitiveness ranking below the 50th and 90th positions respectively since 2012/13, Uganda has persistently ranked above the 100th position. Indeed, more recently Uganda's global competitiveness ranking deteriorated from 113th position in FY 2016/17 to 114th position out of 138 economies in FY 2017/18. 

And while the country's annual share of private sector investments in total investment averaged 86% between FY 2012/13 to 2016/17, the share of total investment as a percentage of GDP, which peaked at 28 percent in FY 2012/13, has since declined to 23 percent of GDP in FY 2016/17. Moreover, private investment as a share of GDP has been declining over the past five years.

The above state of affairs is partly attributed to the challenges of doing business as well as the trends in evolution of business constraints in Uganda. According to Uganda's Business Climate Index (BCI), constructed by Economic Policy Research Centre (EPRC), business managers have consistently reported unreliable and expensive power; stiff competition from cheap substandard and counterfeit foreign products; high interest bank credit; weather variability and high cost of production inputs as the key business challenges hindering business competitiveness in Uganda during the last five years (2012 to 2017). 

More importantly, unreliable and high power tariffs was highly ranked as a key business constraint, indicating that despite significant public investment into energy generation, huge gaps remain in power transmission and distribution across Uganda. Moreover, competition from substandard foreign products has remained unabated indicating weaknesses in key institutions (Uganda Bureau of Standards and Ministry of Trade, Industries and Co-operatives) mandated to curb infiltration of these products. 

It is also interesting to note that despite the high corruption perception in Uganda, business managers did not rank corruption as a key business constraint in Uganda. It is likely that corruption is profitable in a business environment characterized by intense bureaucratic red tape such as Uganda's. Therefore, paying bribes may be helping firms circumvent cumbersome government regulations and procedures. This may explain why businesses are less likely to report it as a business obstacle.

The BCI further solicited responses on the evolution of business challenges by requesting business managers to indicate how business constraints such as cost of electricity and macroeconomic challenges have evolved during previous years. The results indicated that between 2015 and 2016, substandard products, unfavourable tax policies and unreliable electricity supply became more of a problem.

While climatic conditions, customs /export regulation, access to finance, government regulation and transport infrastructure eased. In 2017, business managers indicated that substandard goods, unfavourable tax policies, insufficient demand, and increased power tariffs continued to persist as serious constraints to business growth in Uganda.

In light of the above, government needs to increase investments in power transmission and distribution to ensure that every business establishment that requires power accesses it cheaply.

Moreover, the persistent increase in power tariffs need to be curtailed by reducing distributor energy losses through power thefts and expediting completion of hydropower dams at Karuma and Isimba to boost the country power generation and reduce end user tariffs. 

To curb the proliferation of substandard and counterfeit goods, government needs to close financial and human resources gaps at the Uganda Bureau of Standards to increase enforcement of quality and standards. Moreover, there is a needs to fast track passing of the Anti-counterfeit Bill, 2015 to reduce the negative effects of substandard good both to the business community but also for public health concerns. Lastly, government needs to invest in irrigation infrastructure to reduce the negative effect of vagaries of weather on Uganda's business climate.