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From smart budgets to smart returns

World Bank shows the way for Uganda to get more from every shilling it invests

The World Bank (WB) on June 6 unveiled its 7th Economic Update on Uganda at a ceremony in Kampala. The update, which is a bi-annual assessment of the state of the country’s economy, analyses the performance of the economy, notes key challenges and the opportunities, and provides an economic forecast for the year ahead, writes Gideon Atwiine.

This time, for the Financial Year 2016/17, the update focused on the urgent need for the government to shift from preparing “smart budgets” to ensuring “smart returns” from them. This, the WB argues, will unleash the power of public investment management as a significant way to boost Uganda’s economy.

The report emphasised key issues and what needs to be implemented to ensure best results.

Keith

Generally, the report indicates that over the past five years, the Ugandan economy recorded some positive growth, despite a number of challenges resulting from both domestic and external factors. In financial year 2014/15, the rate of growth was 5% per year. This growth rate sustained the momentum achieved after the economic growth rate had increased to 5.2% in financial year 2013/14 from 3.6% recorded in financial year 2012/13, according to the Uganda Bureau of Statistic (UBOS)’s revised GDP series.

This recovery was mainly driven by the growth in consumption, since there was a deceleration in the rate of growth of gross investments over this period. To a certain extent the economy stabilised with the rate of inflation declining from 23.5% in financial year 2011/12 to 3% in financial year 2014/15, even though increasing food prices and currency depreciation began to exert  an influence towards the end of the year.

It was also challenging environment for policymakers to manage the impact of unpredictable global environment, with Uganda’s external current account deficit increasing from a value of around 7.8% of GDP in financial year 2012/13 to 9.6% in financial year 2014/15.

In addition, Uganda’s economy operated in the context of significant regional political challenges, mainly due to the unrest of neighboring South Sudan and Democratic Republic of Congo and isolated terrorist incidents in Kenya. All of these factors had an impact on Uganda’s spending needs, exports, and remittances.

The economic outlook for Uganda is broadly favorable, according the WB. With uncertainties rising from the February 2016 election dissipated, the low energy prices, and the stimulus effect from large public investments intended to address infrastructure constraints and prepare Uganda for oil production, there should be a boost in investments and an increase in the rate of growth that is much higher than those recorded in the past five years.

Despite the adverse impact of a weak external sector, with the impact of low oil prices on investment in the oil sector being particularly significant, the rate of growth of the Ugandan economy is projected to accelerate to 5.9% in financial year 2016/17 and to remain on an upward trajectory into the medium term.

However, there are risks to these growth prospects, including risks related to the protracted weak global economy, volatile weather, regional insecurity, and poor implementation of the huge investment program. In particular this latter risk could reduce the ability of the planned investments to facilitate the achievement of the intended growth acceleration.

The report further focused on public investment management; moving beyond spending to creating productive assets. In this, the report looks at whether Uganda’s fiscal policy can deliver its ambitions.

Uganda’s fiscal policy has generally been ambitious and expansionary over the past decade in support of the National Development Plan and Vision 2040. These aim at transforming the country to middle income status. The fiscal deficit almost reached over 6% of GDP by financial year 2015/16, with over 40% of the resources allocated to infrastructure sectors.

Uganda’s economy operated in the context of significant regional political challenges, mainly due to the unrest of neighboring South Sudan and Democratic Republic of Congo and isolated terrorist incidents in Kenya. All of these factors had an impact on Uganda’s spending needs, exports, and remittances.

The expansionary fiscal policy stance is expected to be sustained to the medium term as the government continues its plan of addressing the key binding constraints to growth and building production capacities to exploit oil.

Meanwhile, up to 36% of budgeted resources have not been released to the implementing agencies in the past. As a result consumption has remained the key driver of growth in economic activity, and there are indications of a decline in the efficiency in utilization of public capital. These challenges have constrained the efficacy of fiscal policy in attaining the stated national objectives.

Another focus was knowing why Uganda is not generating good returns on its investments. This addresses the binding constraints to growth in Uganda in building production capacities to exploit oil and requires managing investments effectively.

Currently, the ability of government fiscal policy to achieve its planned objective is to some extent constrained by inefficiencies in public investment management. Uganda is currently ranked in 46th position out 71 counties in terms of quality of institutions for public investment management. Among the issues affecting the effectiveness of public investments are implementation challenges, the result in delays, cost overruns, and perpetuity. Based on lessons from other countries, the systems in Uganda could particularly be improved in the area of project appraisal and ex-post evolution to establish minimum conditions to support efficiency.

Another great issue that was addressed in the report is the efforts that can be put in place for Uganda to maximize value from its public investments. To convert its large investment program into productive assets, Uganda needs to improve its public investment management system.

The government has already initiated key reforms in this area, but given the complexity, particularly related to governance and political economy issues, this requires sustained efforts and commitments. The government could, therefore, adopt a systematic approach to streamline and strengthen institutions for managing public investments, including building capacity of ministries, departments and agencies, promoting a common understanding of what is required to do through the process, and how it should be done, through clear guidance and standard criteria on key process, and closing gaps in the legal and regulatory framework to clarify and strengthen mandates and incentives.

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