The Ugandan economy
Recent economic development
After the misrule by Idi Amin and Milton Obote, Uganda was considered a failed state. The country was plagued by continuous conflicts and the economy was in a terrible condition. In 1986 however, the new government introduced several structural reforms and since then, Uganda has been one of Africa’s fastest growing economies with a GDP growth rate averaging 6.9 % between 1986 and 2010. The high growth has contributed to a significant reduction in the share of people living below the poverty line. In fact, Uganda has experienced the fastest poverty reduction of all Sub-Saharan African countries. Since 2010, growth has slowed down, mainly as a result of the general economic instability in the world and the conflicts in Congo DRC and South Sudan, two countries that are important as export markets since they are bordering Uganda.
Despite 30 years of high GDP growth, Uganda remains one of the poorest countries in the world. One of the main reasons is that the fertility rate remains too high – the average Ugandan women has around six children and many start giving birth at a very young age. The fertility rate is considerably higher in the poorest share of the population which makes it difficult for them to catch up. The high population growth together with an increase in the proportion of women joining the labor force have also resulted in Uganda having one of the world’s highest workforce growth rates. The World Bank estimates that the number of potential workers triple by 2060 reaching 60 million. The growth in the number of formal jobs is significantly slower which gives rise to very high unemployment rates, especially among youth. In addition, the scarcity of formal jobs make most Ugandans remain in the agricultural or the informal sector where productivity and wages are low.
Despite 30 years of high GDP growth, Uganda remains one of the poorest countries in the world.
There is also a matching problem in the Ugandan labor market. Even though the average years of schooling in the population has increased significantly, the poor quality of the education system and lack of practical skills training makes it hard for businesses to find skilled workers.
Growth in the Ugandan economy is also hampered by poor infrastructure. The most significant challenges are the lack of cheap and reliable power supply – electricity is expensive and there are power outbreaks almost on a daily basis, and insufficient transport infrastructure. Corruption and non-productive government spending is high and as a result many infrastructure investments are delayed and public institutions are underdeveloped.
Lack of finance is an additional problem. Despite a relatively low inflation, interest rates remain high with the rates charged by commercial bank averaging around 22 percent. In addition, very few Ugandans formally own land, something that is often needed as a collateral. Especially for the many informal businesses and small scale farmers, getting a loan from a formal bank is impossible.
Uganda is rich in natural resources and most of them are currently not used to their full potential. For example, the river Nile has its source in Uganda and the many rapids of the river makes it a perfect location for producing hydro power. So far, it is estimated that only ten percent of the potential 2700 MW is used. There are also newly discovered petroleum wells in Lake Albert that if exploited with responsibility could provide incomes for many Ugandans.
Thanks to Uganda’s beneficial climate, the agriculture sector holds huge potentials. Currently, large areas of land are cultivated by small scale farmers that use inefficient methods. A higher productivity in the agricultural sector and more farmers expanding into value-addition could increase exports and reduce poverty in the large rural areas.
The tourism sector also has expansion potential. Uganda is full of scenic nature that to a large extent is unexploited, and it is home to a large game stock including half of the world’s remaining population of mountain gorillas. Still, the number of tourists in Uganda is very small compared to neighboring Kenya and Tanzania. As a result, tourist experiences are more authentic and there is a great potential in expanding for example adventure or eco-tourism.
Coffee is one of the major agricultural products.
A more efficient agriculture sector will enable a more rapid urbanization rate and that is typically associated with higher growth rates. The many young Ugandans are also getting more and more educated. Even though education quality sometimes is questioned, the average Ugandan youth is innovative and has a very high level of English compared to other countries with similar wage levels. Combined with the fact that Uganda is a stable and peaceful country with a relatively liberated economy, the future megacities of Uganda (Kampala is for instance estimated to have a population of more than 10 million within the next 20 years) have the potential to be attractive locations for foreign companies looking into entering the east African market.
How microfinance can help
Few people would guess that the most entrepreneurial country in the world is Uganda, but it actually is according to a survey by approved index from 2014. The results from this study show that a remarkable 28.1 percent of Ugandans own or co-own a business that have paid out wages for between three and 42 months. This is more than double compared to the share of entrepreneurs in the second most entrepreneurial country (that is Thailand) and more than six times as high as in the US.
Uganda is the most entrepreneurial country in the world. 28 percent of own or co-own a business.
While visiting Uganda, one will experience how the streets of cities and villages are vibrant. In basically every corner there is some kind of business activity, be it a mini-market, a food stall or a hair salon. To date, there are unfortunately few Steve Jobs or Bill Gates among the Ugandan entrepreneurs. Instead, most of them are small scale businesses that employ one or two people. What is striking when wandering through the streets of any Ugandan city is also that many of the businesses are identical. Hence, many of the entrepreneurs are not really entrepreneurial according to the common interpretation of the word.
Even though many Ugandans are innovative and business minded, many entrepreneurs are entrepreneurs just because there are no other alternatives. The unemployment rate among youths is estimated to somewhere between 63 and 83 percent and also for the many university graduates, finding a paid job is almost impossible. Starting up your own informal business thus remains the only alternative for earning an income.
The productivity in the informal sector is very low resulting in little and unreliable income for the owners. The profits made are too small for the business owners to be able to save for the investments necessary to expand their business and to get a formal bank loan is not possible. Few business owners also have the skills necessary to analyze their businesses and find ways of improving it. According to a World Bank report from 2010, the lack of financing and poor business skills is also the main constraint for increasing productivity in the informal sector.
Businesses line up along the main road.
Thus, microfinance is exactly what the Ugandan economy needs. Especially in combination with training in business skills and financial management, access to financial services has the potential of transforming the informal market to become more efficient and consolidated.
Microfinance can be done in many different ways and target different types of businesses. At Lenders Without Borders, we believe that targeting business owners that have a real interest in improving and expanding their business, and also the capability of doing so, have the biggest overall impact. Providing these business owners with capital and training will enable them to grow their businesses and provide several formal employment opportunities. Of course, expanding some businesses will come at the cost of some of their competitors losing customers and eventually have to close down. However, these former business owners can be employed in the increasing job market. To be frank, not everybody is an entrepreneur. Still, everybody can benefit from joining one.
Learn more about the Ugandan economy and the main challenges in these reports from the World Bank:
The World Bank (2015). Uganda economic update 5th edition – The Growth Challenge: Can Ugandan Cities get to Work? The World Bank group, Report No: 94622-UG.
The World Bank (2015). Uganda systematic country diagnostics: Boosting Inclusive Growth and Accelerating Poverty Reduction. The World Bank group, Report No: 97145-UG.
The World Bank (2015). Uganda economic update 2th edition – Jobs: Key to prosperity. The World Bank group, Report No: 80952-UG.
Find them and many other interesting documents here: https://openknowledge.worldbank.org/
Uganda Country Profile
Population: 37.8 million
Median age: 15.9 years (77% under 30 years of age, 2015 years estimate)
Area: 241,551 square km
Geography: landlocked East-African country bordering with DRC, Kenya, Rwanda, South Sudan and Tanzania
Ethnicities: Baganda 16.9%, Banyakole 9.5%, Basoga 8.4%, Bakiga 6.9%, Iteso 6.4%, Langi 6.1%, Acholi 4.7%, Bagisu 4.6%, Lugbara 4.2%, Bunyoro 2.7%, other 29.6% (2002 census)
Religions: Roman Catholic 41.9%, Protestant 42% (Anglican 35.9%, Pentecostal 4.6%, Seventh Day Adventist 1.5%), Muslim 12.1%, other 3.1%, none 0.9% (2002 census)
Government: Presidential republic (Yoweri Museveni, President since 1986)
Official languages: English, Swahili (official) and Luganda, plus various Bantu languages
Main agricultural products: coffee, tea, cotton, tobacco, cassava (tapioca), potatoes, corn, millet, pulses, cut flowers; beef, goat meat, milk, poultry
Main industries: sugar, brewing, tobacco, cotton textiles, cement, and steel production
Poverty headcount ratio at $1.90 a day (2011 PPP): 33.2% (2012)
Human Development Index: 0.483 (Rank 163 2015)
Life expectancy at birth: 57.8 years (2013 est.)
Mean years of schooling: 5.4 years (2014 est.)
Percentage that complete primary school: 54.2 % (2013)
Maternal mortality: 360 deaths per 100,000 live births (2013)
Infant mortality: 43.8 deaths per 1,000 live births (2013)
Under-five mortality: 66.1 deaths per 1,000 live births (2013)
Fertility rate: 5.9 children per woman (2015 est.)
Adult literacy: 73.2% (2013 est)
GDP (PPP, current International $): $ 66,9 billion (2014 est.)
GDP per capita (PPP, current International $): $1,771 (2014 est.)
GDP growth: 4.8 % (2014 est.)
GDP per capita growth: 1.5 % (2014 est.)
GDP by sectors: agriculture 23.1%, industry 26.9%, services 50% (2013 est.)
Inflation rate: Consumer prices 4.3% (2014 est.)
Child labour: 36.7% of children aged 7-14 years (2014 est.)
Youth unemployment: (age 15-24): 63-83%
Urban population: 15.8% and growing 5.4% per year (2014 est.)
Informal economy: 40.3% of GNP (2007 est.)
Data is collected from the World Bank.