Fiscal Sustainability through deeper reforms to Public Investment Management Uganda Economic Update, 19th Edition © 2021 International Bank for Reconstruction and Development/International Development Association or The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessary reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. The World Bank encourages dissemination of its knowledge, so this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; FAX: 202-522-2422; e-mail: pubrights@worldbank.org. Photo credits: Morris Mugisha Design/Layout: Artfield Graphics Printed in Uganda by Artfield Graphics Additional material relating to this report can be found on the World Bank Uganda website (www.worldbank.org/uganda). Contents FOREWORD............................................................................................................................................................. iii ABBREVIATIONS...................................................................................................................................................... iv ACKNOWLEDGEMENTS............................................................................................................................................ vi EXECUTIVE SUMMARY............................................................................................................................................vii PART 1 STATE OF THE ECONOMY............................................................................................................................... 1 1. RECENT ECONOMIC DEVELOPMENTS.....................................................................................................................2 1.1 New shocks derailing the global economic recovery2...................................................................................................2 1.2 Sub-Saharan Africa lagging8 ...........................................................................................................................................4 1.3 Uganda’s economy rebounded strongly from the slump in the first quarter of FY22..............................................5 1.4 New shocks exacerbating households’ vulnerability to poverty16........................................................................... 13 1.5 Bank of Uganda shifts to monetary tightening as inflationary pressures mount................................................... 15 1.6 Current account strengthened as import growth slowed............................................................................................18 1.7 Fiscal consolidation constrained by revenue shortfalls amidst high recurrent spending ..................................... 21 2. ECONOMIC OUTLOOK, RISKS AND POLICY ACTIONS...............................................................................................26 2.1 Recovery being threatened by increased uncertainties ..............................................................................................26 2.2 . Risks remain tilted to the downside............................................................................................................................. 31 2.3. Key policy actions to support recovery........................................................................................................................32 PART 2 CREATING SPACE FOR FISCAL CONSOLIDATION THROUGH BETTER PUBLIC INVESTMENT MANAGEMENT........34 3.1 Tracing options for fiscal consolidation ........................................................................................................................36 3.2 Notable reforms to public investment management but challenges remain ........................................................39 3.3 Identifying gaps in the public investment management system ............................................................................40 3.4 Some options for further improvements in Uganda’s PIM system .........................................................................49 LIST OF TABLES Table 1: Uganda - Real GDP Outcomes....................................................................................................................................11 Table 2: Balance of Payments................................................................................................................................................20 Table 3: Fiscal developments FY19-FY22..............................................................................................................................23 Table 4: Baseline economic outlook (annual percent change unless indicated otherwise)........................................27 Table 4: Options for strengthening the cycle of public investment management in Uganda......................................50 LIST OF BOXES BOX 1: The Impact of the War in Ukraine on Uganda and Policy Responses....................................................................8 BOX 2: How Efforts to Raise Revenue Halted Gold Exports................................................................................................ 19 BOX 3: Placing Uganda in World Bank’s Income Classification.........................................................................................30 BOX 4: The 8-Must-Have Functions of a Good PIM System...............................................................................................42 i LIST OF FIGURES Figure 1: COVID-19 new daily reported cases...............................................................................................................................3 Figure 3: Slower global growth into 2022 and 2023..................................................................................................................3 Figure 2: Fully vaccinated in selected regions (% population, March 2022).........................................................................3 Figure 4: Commodity prices and global inflation........................................................................................................................3 Figure 5: Growth in SSA and selected East African countries..................................................................................................4 Figure 6: Cumulative number of COVID-19 cases in Uganda and evolution of Stringency Index........................................ 6 Figure 7 COVID-19 vaccine roll out (share of population fully vaccinated) in Uganda.......................................................... 6 Figure 8: Uganda’s real GDP growth (quarterly sector contributions % y/y)....................................................................... 6 Figure 9: Uganda PMI (>50 = improvement since previous month)...................................................................................... 10 Figure 10: Working status of respondents across rounds, % of all respondents................................................................. 13 Figure 11: Work stoppages by residence and economic sector, % of respondents worked in previous rounds............. 13 Figure 12: Evolution of severe and moderate composite Food Insecurity Experience......................................................... 14 Figure 13: Incidence of social assistance programs across rounds, % of households........................................................ 14 Figure 14: Share of children engaged in any learning/education activities before the second lockdown ..................... 15 Figure 15: Inflation developments 2019-2022 (% per year)..................................................................................................... 16 Figure 16: International Brent crude oil price versus liquid energy prices in Uganda........................................................ 16 Figure 17: Policy and market rates (percent per annum)......................................................................................................... 17 Figure 18: Private sector credit growth (y/y percentage change).......................................................................................... 17 Figure 19: Uganda: Key export and transfer inflows (percent of GDP). . ................................................................................. 18 Figure 20: Uganda: Financing of current account (US$million).............................................................................................. 18 Figure 21: Fiscal deficit (RHS axis) and total tax revenues and expenditures (% GDP........................................................ 21 Figure 22: Financing the fiscal deficit (% GDP............................................................................................................................ 21 Figure 23: Supplementary expenditures as share of GDP (RHS axis) and as increase above budget (%).....................24 Figure 24: Combined allocation of supplementary budget in FY20 and FY21 (as share of GDP)......................................24 Figure 25: Real GDP per capita......................................................................................................................................................27 Figure 26: Fiscal adjustment to align to CFR (% of GDP)..........................................................................................................29 Figure 27: Debt reduction to align to CFR (%) ...........................................................................................................................29 Figure 28: Real GDP growth rate, %.............................................................................................................................................32 Figure 29. Trend of total revenues and expenditure (% GDP).................................................................................................37 Figure 30: General government expenditure in selected regional countries, average 2016–21 (% GDP)........................37 Figure 31: Share of Public Expenditure by Category (%)..........................................................................................................37 Figure 32: Capital expenditure in selected regional countries, average 2016-21 (% GDP).................................................37 Figure 33: Fiscal rigidity: Uganda’s share of non-discretionary spending in comparison with other regions (%) ......38 Figure 34: The public investment management cycle.............................................................................................................. 41 Figure 35: DC appraisal process in FY20 and FY21 ....................................................................................................................45 Figure 36: New projects in the public investment program and the DC process ...............................................................45 ii Foreword New shocks hit the Ugandan economy in 2022, just as it was recovering as the COVID-19 pandemic waned and related mobility restrictions were fully removed. Commodity price surges and disruptions to trade and supply chains because of the war in Ukraine worsened a global economy that was dragging under the weight of new waves of COVID-19 in some regions and unwinding of stimulus policies. The outlook for Uganda is now one of slower GDP growth with increased vulnerabilities, including in household incomes and food security. The authorities face the challenge to maintain a delicate balance between policies required to support and sustain a growth acceleration and ensuring stability otherwise the start-stop recovery as shocks evolve, will make it impossible for Uganda to build back better. It is against this backdrop that I am pleased to introduce the 19th edition of the Uganda Economic Update, which features a special topic of ‘creating fiscal space for fiscal consolidation through deeper reforms in public investment.’ Fiscal consolidation is needed to rein in high deficits, reduce debt, and ensure stability of the Ugandan economy. Strengthening the management of Uganda’s public investment program is essential for this fiscal consolidation to support long-term, inclusive economic growth. Global experience suggests that the scope for increased efficiency to support economic growth is large. An average country obtains 30 percent less economic output from a given amount of spending on physical infrastructure than does the most efficient country. Up to two thirds of this efficiency gap can be closed through improved institutions, systems, and processes guiding decisions on how to prepare, implement, operate, and maintain public investment projects. To tap into this dividend, many countries are taking more serious steps to improve how they manage their public investments. In cognizance of variation in country characteristics and environments, the World Bank’s engagement in public investment management (PIM) is based in a framework that has drawn good practice management principles applicable to the respective capacity contexts. These principles, termed as the “must-have” features of a PIM system— help to ensure that key risks are appropriately reduced through decision steps and controls that are within most governments’ capacity to implement. Building on the good practices that it has already instituted in the pre-investment phase within this PIMs framework, the Government of Uganda has the opportunity to address persistent problems of low execution of capital budgets, shortened project lifespans, delays in implementation, which waste taxpayers’ money through cost and time overruns. The government also needs to strengthen the gate-keeping function, improve project budgeting, and build project implementation capacities. Better public investment management can support both government’s short- and medium-term fiscal consolidation agenda and longer-term structural transformation of the economy. Keith Hansen Country Director Kenya, Rwanda, Somalia, and Uganda Africa Region iii Abbreviations bbl barrel BMAU Budget Monitoring and Accountability Unit BoP balance of payments BoU Bank of Uganda BTI Business Tendency Indicator CBR Central Bank Rate CFR Charter of Fiscal Responsibility COVID-19 coronavirus disease 2019 CPI consumer price index CRM credit relief measures CSI construction sector index DC Development Committee DFS digital financial services DRC Democratic Republic of Congo DRMS Domestic Revenue Mobilization Strategy DSA Debt Sustainability Analysis DSSI Debt Service Suspension Initiative ECF Extended Credit Facility EMDE’s emerging market and developing economies FDI foreign domestic investment FID final investment decision FIs financial institutions FY financial year GDP gross domestic product GEMs Geo-Enabling method for Monitoring and Supervision GEP Global Economic Prospects GFN gross financing need GNI gross national income HIC high-income country IBP Integrated Bank of Projects IC information and communication ICT information and communication technology IBRD International Bank for Reconstruction and Development IDA International Development Association IFIs International Financial Institutions IMF International Monetary Fund iv LIC low-income country LG local government MDAs ministries, departments and agencies MIC middle-income country MIS management information system MoFPED Ministry of Finance, Planning and Economic Development MSME micro, small and medium enterprise M&E monitoring and evaluation NDP III Third National Development Plan NPA National Planning Authority NPLs non-performing loans OP Office of the President OPM Office of the Prime Minister OPEC Organization of the Petroleum Exporting Countries O&M Operation and Maintenance PAP Project Appraisal and Public Investment Management PFM public financial management PIM public investment management PMI Project Management Institute PMI purchasing managers index PMBOK Project Management Body of Knowledge PMP Project Management Professional (Certification) PPP public-private partnership SDR Special Drawing Right SFIs supervised financial institutions SOPs standard operating procedures SSA sub-Saharan Africa UAE United Arab Emirates UBOS Uganda Bureau of Statistics UHFPS Uganda High Frequency Phone Survey UNHS Uganda National Household Survey UNPS Uganda National Panel Survey URA Uganda Revenue Authority US United States of America VAT value-added tax WEO World Economic Outlook v Acknowledgements The Nineteenth Edition of the Uganda Economic Update was prepared by a team comprising Rachel K. Sebudde, Aziz Atamanov, Christine Kasedde, and consultants including Enock Twinoburyo, Edgardo Mimica, Fernando Brettos and Fred Kasalirwe. The team is grateful to Philip Schuler, Mona Prasad, and Timothy Williamson for additional inputs and their guidance on the structure and messaging of the report. Esther Ampumuza and Lydie Ahodehou provided logistical support, while Kezia Muthembwa and Bernard Tabaire managed the communications and dissemination strategy. The Uganda Country Team provided valuable feedback during the preparation of the report. Overall guidance provided by Vivek Suri (Practice Manager, Macroeconomics, Trade and Investment), and Mukami Kairuki (Country Manager) is gratefully acknowledged. Finally, we would like to thank the Hon. Matia Kasaija – Minister of Finance, Planning and Economic Development – and his staff for their continuous commitment and close collaboration. vi Executive Summary State of the economy: Recovery faces new headwinds With the COVID-19 pandemic waning and the attendant social protection programs remain limited, and reached only mobility restrictions having eased in late 2021, economic 13 percent of households in October/November 2021. The activity gradually gained momentum, before new global full reopening of schools after almost two years of closure, shocks hit, including the impacts of the war in Ukraine. Real augurs well for human capital development. However, GDP grew by 4.3 percent in the first half of FY22 supported authorities still have the challenge of closing the COVID-19 by a strong and speedy recovery of the service sector upon aggravated gap between the children from rural and less the re-opening of the leisure and entertainment industry, privileged households, and their counterparts, who benefitted accommodation, and food services, as well as sustained for virtual learning opportunities during this period. buoyancy of the information and communications sector. The Credit to the private sector remained subdued, despite the suspension of activities related to gold exports in this period low inflation, and a supportive macro-prudential policy moderated the growth of the industry sector while agriculture stance at the Bank of Uganda. Bank of Uganda maintained remained at the mercy of the weather. Consumption demand the Central Bank Rate (CBR) at 6.5 percent for ten consecutive benefitted from the recovery of incomes and employment, months to May 2022 and cautiously phased out credit relief while private investments overcame the Omicron related measures, while introducing new liquidity buffer windows uncertainties to sustain increases in new export and to cater for banks or firms that require longer term liquidity manufacturing orders into the third quarter of FY22. However, support. Monetary tightening will likely raise banks’ credit rising commodity prices (later heightened by Russia’s war risk which remained elevated and kept growth of credit to on Ukraine), disruptions to trade and supply chains in key the private sector low, at an average of 4.9 percent in the first supply regions of China (due to a resurgence of COVID-19), nine months of FY22 – almost half the growth realized in the and tightening financial markets, disrupted the recovery corresponding pre-COVID-19 period. Asset quality may further into the second half of the year. Overall growth for FY22 is deteriorate after the COVID-19 Liquidity Assistance Program estimated at 3.7 percent – below pre-COVID-19 projections expired on May 31, 2022, Credit Relief measures – which of over 6 percent and leaving Uganda’s per capita income have continued to support sectors that were most hit by the estimated at about US$850, well below lower middle-income pandemic and lockdowns – expire in September 2022, and threshold of US$1,045 per person. the BoU has started tightening policy to address increasing Households remain vulnerable to shocks – food insecurity inflationary pressures. Whereas credit growth likely remained and income losses due to work stoppages in early FY22 sluggish through the second half of FY22, risks leaned have likely been exacerbated by rising commodity prices towards more inflationary pressures, BoU raised the CBR by and increased overall cost of living. In addition to the a full percentage point to 7.5 percent. This reveals the difficult 11-percentage point fall in employment between the surveys task already facing monetary policy of maintaining a delicate conducted in March/April 2021 and October/November 2021 balance between curbing inflation pressures due to rising mainly attributed to COVID-19 restrictions, over 50 percent commodity prices and depreciation pressures as portfolio of households reported an increase in food insecurity, with outflows intensify and supporting the private sector to poor weather conditions also adding to the factors driving remain on the recovery path. this phenomenon. The rising food and fuel prices are likely to For the first time since the pandemic broke out, the current have worsened conditions for many households – especially account strengthened during FY22, on the back of stronger those in urban areas which are just recovering from the exports and slower imports. Sluggish domestic conditions, severe effects of the COVID-19 lockdowns. Unfortunately, the rising costs and disruptions to supply chains in source vii countries cut net imports of goods and services by almost 3 private investments, the lowering of fiscal deficits ought not percentage points of GDP. Yet, an extraordinary performance to come at the expense of public investments needed for of exports – bolstered by coffee which reached a 30-year recovery and longer-term growth. record shipment of 1.99 million bags in the first quarter The short-and medium-term economic outlook for Uganda – partially offset the suspended gold exports on account remains uncertain, with the recovery path facing hurdles of a new export levy and retraction in travel inflows and and risks. Optimism about acceleration of growth following remittances. The surge in oil imports and transport prices into the waning pandemic and full re-opening of the economy, the second half of FY22 has likely kept the current account as well as the clearer outlook for Uganda’s oil production deficit at about 8.5 percent of GDP for the full year, largely following the signing of the Final Investment Decision in financed by net external borrowing and drawdown of foreign February 2022, has been checked by new shocks, particularly exchange reserves. rising commodity prices. Under the baseline scenario, real Despite revenue shortfalls, the fiscal deficit has been GDP growth is estimated at about 5.1 percent in FY23, which lower than planned on account of the under-execution is almost half a percentage point below the World Bank of the development budget. While revenue collections December 2021 forecast, mainly due to increased inflation missed the target by 0.8 percent of GDP, expenditure plans pressures and expectation for monetary tightening, tighter did not materialize mainly due to under-execution of the global financial markets, and increased uncertainty, among development projects reflecting weaknesses in public others. Nonetheless, the risks are heavily tilted downwards, investment management. This could further slow economic including the potential for new waves of COVID-19 (given that recovery, which hinged on public investments as private just about 24 percent of the population is fully vaccinated), investments crawl on under the effects of the shocks. The new disease outbreaks such as Ebola hemorrhagic fever fiscal deficit is expected to decline to 7.4 percent of GDP or monkeypox, and a deeper and protracted effect from a for FY22, consistent with the fiscal consolidation plan, worsened global economy related to the war in Ukraine but will remain above the targets on the Charter of Fiscal and sanctions on Russia. Moreover, Uganda remains Responsibility (CFR) path, the achievement of which, is vulnerable to climate shocks, regional insecurity, and the further constrained by weakening budget credibility. slow implementation of projects. Heightened shocks would Meaningful fiscal management will require limiting use potentially lead to rising fiscal pressures and jeopardize the of supplementary budgeting to genuine emergencies, planned fiscal consolidation path. curbing accumulation of domestic arrears, improving To shift from the fragile economic growth to a more resilient budget transparency by reducing allocation to classified and inclusive recovery requires attention to the following expenditures, and addressing the rising costs of public four priority areas: administration. (i) Accelerate the vaccination effort to avoid the Fiscal consolidation is needed to rein in debt and create resurgence of COVID-19 and related consequences. space to respond to shocks that could hurt recovery. Against the background of low tax revenues and increasing (ii) Adopt targeted interventions to support the vulnerable expenditure, Uganda’s public debt could reach about 53 while accelerating building of the foundation for a percent of GDP in FY22, above the CFR target of 52 percent shock responsive social protection system, including and alongside heightened liquidity pressures as debt service a national social register to ensure quick and efficient takes an increasing share of revenues. At moderate risk reach out to target populations once shocks hit, of debt distress, Uganda is also undertaking measures to stronger digital payment platform for efficient and enable it rein-in debt to within desired thresholds, improve transparent distribution of support, and a disaster transparency and strengthen overall fiscal sustainability, risk financing strategy. Labor-intensive public works all of which aims to improve debt sustainability and limit programs need to be developed to help those willing to crowding out of the private sector. Given the slow pace of work but have fallen out of employment due to shocks. viii (iii) Maintain prudent fiscal and debt management to well as closer coordination of monetary policy actions support the fiscal consolidation agenda in tandem with fiscal operations. with the Charter of Fiscal Responsibility, by minimizing Sustaining this recovery over the longer term will require domestic financing of the deficit, reducing domestic arrears, maximizing concessional financing, rationalizing accelerating structural reforms to (i) strengthen revenue expenditure, and closely monitoring all sources of fiscal mobilization through the implementation of the DRMS; (ii) risks, including SOEs financial performance, National improve public investment management; (iii) rationalize Social Security Fund pension restructuring, and lending public expenditure to support faster, sustainable, and schemes. inclusive growth by investing strongly in human capital development; and (iv) improve the trade and business (iv) Adopt a cautious monetary tightening stance in the face of rising inflationary pressures to maintain environment (tapping into prospects of regional integration an appropriate balance between curbing inflation initiatives including the African Continental Free Trade Area) pressures and supporting the private sector and the and green investments. This will also require adhering to the economy to remain on the recovery path. This will call fiscal anchors included in the Charter of Fiscal Responsibility. for a close monitoring of financial system stability as Special focus: Creating space for fiscal consolidation through better public investment management Given the government’s resolve on fiscal consolidation, Cognizant of the benefits that would accrue to closing increasing the efficiency of the capital budget provides a the efficiency gap, the Government of Uganda embarked tangible and sustainable option to pursue this agenda. With on reforms that have administratively improved the pre- up to 56 percent of the budget spent on non-discretionary investment stages of its public investment management items, Uganda’s budget is quite ‘rigid’ and hence in general (PIM) system. These included setting up a dedicated terms, more difficult to adjust in the short to medium term, department in MoFPED to spearhead the PIM reforms. when compared to other SSA countries where this share is This department has developed and promoted the use of much smaller, at 48 percent. This rigidity has increased as standard guidelines and user manuals for project preparation government assumed increased roles and functions that have and appraisal, national parameters to aid in project and evolved over time to become institutional and policy caps, program appraisal, as well as criteria for selecting projects and make it difficult to adjust the budget. With this challenge, into the public investment program (PIP) – all of which it becomes important to increase the output off each shilling aim to streamline the process for preparation of public spent in the budget. The dividend that can be reaped from projects. To strengthen the gatekeeping function for public improving the institutions, systems, and processes guiding projects, an inter-ministerial/inter-agency arrangement decisions on how to prepare, implement, operate, and – the Development Committee (DC) chaired by Permanent maintain public investment projects is significant. According Secretary and Secretary to Treasury of MoFEP – was to IMF estimates, an average country obtains 30 percent constituted as an independent reviewer of project proposals less output in terms of physical infrastructure for a given before they enter the national budget. The guidelines that expenditure than the most efficient countries. Up to two thirds underpin the DC processes and project section criteria are of this efficiency gap could be clawed back through improved publicized, and an integrated bank of projects was set up PIM institutions (IMF, 2015). to digitalize information across the entire project cycle and ix aid the appraisal function of the DC. Capacity enhancement commitments to support a lifetime projects financing that, effort in project preparation and appraisal, as well as selected in most cases, requires more than one year to be executed. strategic areas of procurement has preceded a sustainable Yet not all projects are funded systematically. As a result, capacity development drive started through the Makerere cost- and time-overruns on projects; high commitment fees University PIM Centre of Excellence. in case of externally funded projects, and shortened life span of projects due to poor operation and maintenance of These reforms have brought some good practices to created physical assets persist. The Auditor General’s Report Uganda’s PIM system. The usefulness of a standard process for FY20/21 again noted that out of a sample of 371 projects in for entering projects into the national budget, supported the PIP, 342 projects (92 percent) with budgets totaling UGX39 by guidelines for government officials to prepare projects, trillion had gone past their planned exit periods, with some and a systematic process for reviewing and appraising the extended by more than 12 years and only 40 percent of the projects before they are included in the budget, cannot be projects in the PIP were still within their expected time. underestimated. The effects of these reforms are already visible in the improved quality of projects submitted by MDAs It is evident that the improvements around the to the Development Committee for approval and admission administrative processes of the pre-investment phase of into the PIP. Moreover, the percentage of projects that are PIM are being discounted by challenges in critical areas, underpinned by a cost-benefit analysis (CBA) out of the including project prioritization and selection, budgeting, total entering the PIP, while still low, has improved from and implementation. These must be addressed urgently to 10 percent by 2015, to 37 percent for FY21, as reported by raise value for money in delivery of projects and support MoFPED. While the gatekeeping function is yet to ensure that the envisaged fiscal consolidation agenda. On the one hand, all new projects entering the budget are properly studied and challenges with project prioritization and alignment to the appraised in line with the standardized process, it has also achievement of program (previously sectoral) objectives, stopped some ‘bad’ from entering the system – out of the 222 remain. And since the programs poorly define and do not project proposals that were considered by DC during FY20, 19 appropriately cost their priorities, they also fail to drive were rejected at concept stage and only 122 made it into the the investments that are financed externally. On the other PIP for that year. hand, actual implementation is constrained because budget allocations do not fully cover the costs of implementing Notwithstanding the progress achieved in the PIM process, ongoing projects through genuine multi-year commitments, several challenges remain. There are instances in which while the budget takes on new projects. This is further measures and guidelines have not been adhered to. According exacerbated by budget cuts during budget execution and the to the Auditor General’s Report for FY20/211, out of a sample fact that projects are often not ready for implementation, of 371 projects in the public investment program, 245 projects as well as weaknesses in procurement and contract (66 percent) with total project values of UGX643.4 trillion, management, all of which contributes to poor value for did not have feasibility studies undertaken before they were money in the delivery of public investments. allocated financing. It is also noted that capacities would need to be enhanced in some MDAs to even understand The reforms over the past five years focused on improving the studies that have been done by external agents. Some quality of projects at entry, and they had envisioned externally funded projects have not followed national critical success factors identified in 2015 that still need to guidelines and aspirations when undertaking feasibility be completed. First, government has started working on a studies. On top of this, other challenges crop up during the PIM policy to formalize the administrative reforms that have project cycle, such as securing the right of way after projects already been put in place, and a basis for strengthening the have started implementation; inadequate counterpart funding legal framework, including the gatekeeping function. Before to facilitate elements of projects that would ideally be it reaches finality of strengthening the legal framework, the funded by government under externally funded projects; and reforms that have been undertaken remain administrative poor operation and maintenance of assets that have been actions that could be reversed or ignored without any created. Section 23 of the Public Finance Management Act consequence. Second, although the capacity building effort (Amended 2015) imposes a legal requirement for multi-year has commenced, further work will still be required to create 1. MoFPED 2022, February. x the pool of resources needed to manage projects across Beyond the critical factors of success identified in 2015, the entire PIM cycle. For instance, project preparation and there is work to be done across the various stages of the appraisal skills need to be entrenched in all programs, MDAs, PIM process to further strengthen the gatekeeping function, and different levels of government, and the project managers improve budgeting, and close gaps in implementation of that are critical players in project implementation need to projects. First, the gatekeeping function can be strengthened acquire modern project management skills. The PIM Centre by introducing a legally binding “Seal of Quality” at the end of of Excellence at the Makerere University will need to be the appraisal stage to signify readiness of project proposals nurtured to maturity to ensure a sustainable and affordable for financing, and to strengthen the formal authority of the mode of building these capacities. Third, the project PAP Department to match it with the importance of its function. preparation fund to ensure that priority projects undergo Second, budgeting for projects must improve. Allocation feasibility and/or pre-appraisal studies while awaiting of resources for projects must use the project life cycle inclusion to the PIP, has recently been set up in NPA, which is approach and also close the gaps in budgeting for operational a major step. Such a fund will need to put in place a proper and maintenance costs. To promote the culture of project implementation and governance structure to sustainably maintenance, each project must have at its appraisal, the address the funding challenges in project preparation. Lastly, ex-ante appraisal forecasts of both the project’s capital and beyond the pre-investment stage, the rest of the PIM cycle operational expenditures. And finally, Uganda must improve (especially project implementation and asset management) the implementation phase by building project implementation must be improved if projects are to yield the expected capacities (including procurement and contract management dividend. skills) while at the same time, strengthening and streamlining the M&E functions of the PIM System. xi PART 1 STATE OF THE ECONOMY Recovery Facing New Headwinds Global trade volumes grew 10 percent in 2021, surpassing the pre- pandemic levels. This trend was reversed during the first quarter of 2022 due to increased supply bottlenecks 1 1. RECENT ECONOMIC DEVELOPMENTS 1.1 New shocks derailing the global economic recovery 2 1. The war in Ukraine has introduced new shocks to the recovery of the global economy, which was dragging under the weight of new waves of COVID-19 in some regions and unwinding policies in others. The global economy grew by 5.5 percent during 2021, reversing the COVID-19 driven contraction of 3.1 percent in 2020. Waning COVID-19 infections (Figure 1) and improvements in overall economic conditions sustained the recovery into 2022. However, a variety of factors – and most recently the spillover effects of the Russian-Ukraine war – are slowing global economic activity. In the US, GDP growth may falter further due to worsening supply chain disruptions, domestic inflationary pressures, and rising interest rates as the Federal Reserve Bank unwinds liquidity support and tightens monetary policy.2 The Euro area faces major headwinds because of the substantial direct trade, financial, and migration ties with Russia and Ukraine, neighboring countries in Eastern Europe, the South Caucasus, and Central Asia. Moreover, several major economies in Europe depend on Russia for natural gas and oil, hence they have suffered major economic setbacks as the war progresses and economic sanctions bite. In Asia, a re-surgent COVID-19 pandemic and reinstitution of mobility restrictions, regulatory reforms, and an unclear stance on the Ukraine war, has raised uncertainty and 5.5% further weighed down pressure on economic activity in the region. These risks add to those related to inequalities in vaccine access and vaccination rates (Figure 2) that could spur new variants, as well as new disease outbreaks such as the monkey pox virus,4 all of which The global economy could constrain economic recovery. Overall, global growth is expected growth during 2021, to fall below the forecast of 4.4 percent and 3.1 percent in 2022 and reversing the COVID-19 2023, respectively (Figure 3), due to disruptions in trade and financial driven contraction of 3.1 flows, rising commodity prices, displacement of people and a dent in percent in 2020 market confidence arising from the Russian-Ukraine war. 2. World Bank 2022, January; World Bank 2022, June. 3. U.S. GDP growth forecast has been revised to 3.2 percent for 2022 and 2.1 percent for 2023, from 3.9 and 2.7 percent, respectively during the GEP January forecast 4. During May 2022, the World Health Organization reported a new monkeypox virus in 12 Member States that are not endemic for the virus. 2 Figure 1: COVID-19 new daily reported cases Figure 2: Fully vaccinated in selected regions (% population, March 2022) Daily new confirmed COVID-19 cases per million people 7-day rolling average. Due to limited testing, the number of confirmed cases is lower than the true number of infections. 5,000 4,000 3,000 2,000 Germany France 1,000 United States United Kingdom World Canada India China 0 Mar 1, 2020 Nov 16, 2020 Jun 4, 2021 Jun 24, 2022 Source: Johns Hopkins University CSSE COVID-19 Data CC BY Source: Our World in Data Source: Our World in Data 2. Slower global trade (predating the Russia-Ukraine lower demand – especially from Europe – due to increased crisis) and tightening financial markets are weighing on uncertainties arising from the Russian-Ukraine war. Financing consumption and investments. Global trade volumes grew conditions that had tightened as advanced economies and 10 percent in 2021, surpassing the pre-pandemic levels, but emerging markets and developing economies (EMDEs) this trend was reversed during the first quarter of 2022 due stepped up anti-inflationary measures, faced more pressures to increased supply bottlenecks, increasing costs (especially since March 2022 as sanctions against Russia intensified for energy and gas) and slower demand for manufactured (Figure 4). Amid the ongoing waves of the pandemic goods, especially in advanced economies. The global PMI and supply bottlenecks, tightening financial conditions manufacturing new export orders index dropped below 50 for will dampen economic activity and cause unprecedented the first time since mid-2020. After a modest recovery in 2021, capital outflows from EMDEs causing currency depreciation the trade in services remained below pre-pandemic levels pressures and a spiral of inflation. In February, Goldman into early 2022. This sector remains sensitive to renewed Sachs’ global financial conditions index had reached 100.7 – constraints due to recurring waves of COVID-19 infections the highest since February 2016. and corresponding mobility restrictions, rising costs and Figure 3: Slower global growth into 2022 and 2023 Figure 4: Commodity prices and global inflation Source: World Bank Source: World Bank 3 3. Commodity price surges are fueling inflationary pressures tightening in the advanced and emerging economies, and that were rising prior to the war in Ukraine. Driven by heightened the risk of stagflation, poverty, and inequality. logistical bottlenecks, a shortage of intermediate inputs, and the sluggish supply of energy commodities, inflation in advanced nations and emerging markets has reached 1.2 Sub-Saharan Africa lagging 8 levels last seen during the 2008 global financial crisis and 2011, respectively. Global inflation reached 7.9 percent in 4. Sub-Saharan Africa’s economy grew by 4 percent in 2021, January 2022 – the highest in 40 years.5 Since February 2022 reversing the contraction of 2.2 percent recorded in 2020. (the start of the war in Ukraine), price increases have been This recovery was supported by accommodative policies in large for commodities of which Russia and Ukraine are key most of SSA countries, gradual easing of COVID-19 restrictions exporters; European natural gas prices rose by 50 percent, along with improved vaccination, improving commodity coal prices by more than 25 percent, and wheat prices by prices, increase in global trade, and favorable weather around 30 percent. Crude oil prices that rose 67 percent conditions for agriculture. As a result, private consumption during 2021,6 reached a 10-year high of US$130 per barrel in and investments started picking up to boost aggregate March before settling around $100–110 range, and remain demand. On the supply side, services recovered strongly under pressure due to supply constraints, shortage in supply following the battering suffered during the pandemic. from Russia and Ukraine, and OPEC reluctance to buffer However, the pace of recovery on the continent has so far remained below the world average. While COVID-19 cases supply stocks. Food inflation also shot up to a monthly record have reduced drastically across the continent, and COVID-19 high of 5.7 percent in February 2022 and continued to rise as mobility restrictions have been removed, SSA’s growth is not the war choked off supplies of key food commodities. Prior expected to drastically accelerate, due to fiscal tightening and to the war, Russia accounted for 18 percent (largest global the withdrawal of liquidity support, increasing financing costs exporter) of wheat exports and 14 percent of fertilizer exports; as markets tighten, and increasing commodity prices and while Ukraine held 40 percent of the world’s seed oil exports, inflationary pressures. An output gap of about 4.5 percent 13 percent of corn exports, and 7 percent of wheat exports.7 in FY23, relative to the pre-pandemic forecasts will keep Heightened inflation is hastening shifts to faster monetary employment and prospects for poverty reduction low.9 Figure 5: Growth in SSA and selected East African countries Source: World Bank Note: Ethiopia, Uganda GDP growth rates are on a fiscal year basis (July to June). “e=estimate and f=forecast” 5. World Bank 2022, March. 6. World Bank 2022, May. 7. World Bank 2022, June and UNCOMTRADE 8. World Bank 2022a, April 9. World Bank 2022, June 4 5. Slow vaccination in SSA remains a key risk to sustained still cause deeper and protracted disruptions to recovery, even economic recovery and social economic development. SSA as countries sustain easing restrictions both domestically and has endured four waves of COVID-19 with the latest being the across their borders. These economies also face a worsening highly transmissible but less severe (in terms of illness and global environment, including to the terms of trade, and rising deaths) Omicron. With the sustained reduction in the number inflation due to the war in Ukraine. of new cases and deaths, restrictions have been lifted and community mobility has rebounded past pre-COVID-19 levels. 1.3 Uganda’s economy rebounded However, the region remains unprotected against COVID-19. As of the end of March 2022, only 15.3 percent of the SSA strongly from the slump in the first region population was fully vaccinated, and with just seven quarter of FY22 nations having met the target of having at least 40 percent of its adult population fully vaccinated by end 2021. The pace of 8. Uganda seems to have weathered the COVID-19 virus for vaccination would have to increase nine-fold if the continent now. After two major waves of COVID-19 during FY21, the is to achieve the target of 70 percent rate of vaccination by third – occurring mid FY22 was more temperate albeit highly June 2022. The low vaccination rate is linked to, inter alia, transmissible (Omicron). By March 30, 2022, Uganda was low vaccine access (predominantly foreign supplied), vaccine recording only 150 cases per week, compared to the peak mistrust by the populace, limited resources (financial and of 719 and 1,449 cases per week during the first and second human capacity), and roll out capacity. (Delta) waves. While the cumulative reported cases stood at 6. Commodity price shocks, slower global trade and 163,892 with 3,595 deaths by end March 2022, it is estimated tightening financial conditions pose new risks to the SSA that at least 60 percent of Uganda’s population had been region. If they materialize, overall economic growth – that had infected with COVID-19 at least once.10 Effective January been projected to remain below 4 percent in 2022 and 2023 – 2022, Uganda had removed all COVID-19 restrictions, allowing may be lower. This will be in addition to the lingering effects the opening of schools, bars, religious sites, and any other of COVID-19 and uncertainty amidst low vaccination rates, large gatherings, in addition to easing restrictions on public political tensions in large economies like Ethiopia, heightened transportation in taxis and boda-bodas; Uganda’s Stringency climate change shocks, global geopolitics, contagion of global Index dropped to less than 40 percent, from above 80 percent outlook and limited policy space buffers. through the first half of FY22 (Figure 6). 7. Eastern Africa is expected to fare better, with growth 9.However, vaccination rates would need to be stepped up to likely to pick up considerably as vaccine coverage expands, further reduce the potential for a resurgence of the pandemic. supply chains normalize, and domestic demand improves. The vaccination program, which started in March 2021, Besides South Sudan, all of Uganda’s other main trading recently gained momentum as the government intensified the partners in the region (Kenya, the Democratic Republic of accelerated mass vaccination campaigns, also supported by Congo, and Rwanda) are expected to grow by about 4.5 the World Health Organization and other partners. However, percent or more annually from 2022 onwards (Figure 5), only about 10.8 million people – representing about 23.6 building on the stronger than anticipated post lockdown percent of the country’s population and about 49 percent of recovery that was driven by favorable terms of trade, large the target population – had been fully vaccinated to-date.11 public investments and good weather. However, there are Uganda’s vaccination rate remains low – even relative to East significant risks to these projections, as limited access to African peers, including Ethiopia and Rwanda (Figure 7). The safe water and sanitation facilities, urban crowding, weak scale of vaccination continues to be challenged by supply health systems, and large informal economies – all alongside chains, logistical and financing constraints, with limited uncertain progress in vaccine roll out and insufficient fiscal coordination between public and private stakeholders to space – pose challenges to a sustained containment of the ensure an efficient and equitable COVID-19 vaccine distribution, virus. Therefore, large-scale community transmission could access, and uptake. 5. World Bank 2022, March. 6. World Bank 2022, May. 7. World Bank 2022, June and UNCOMTRADE 8. World Bank 2022a, April 9. World Bank 2022, June 10. Our World in Data (https://ourworldindata.org) 11. Our World in Data. https://ourworldindata.org 5 Figure 6: Cumulative number of COVID-19 cases in Figure 7 COVID-19 vaccine roll out (share of population Uganda and evolution of Stringency Index (January fully vaccinated) in Uganda 2020 to December 2021) Source: Source: WHO, Oxford COVID-19 Government Response Tracker, Source: Our World in Data Blavatnik School of Government, University of Oxford. Note: Stringency index varies from zero to 100 with higher values indicating more stringent government policies. 10. Following the slowdown of the COVID-19 pandemic and uncertainty, the economy rebounded in early 2022, buoyed easing of the attendant mobility restrictions, economic by the reopening of schools, lifting of all mobility restrictions, activity gradually gained momentum in the first half of and a milder third wave of infections. However, the effects of FY22. Real GDP grew on a year-on-year basis at 4.3 percent the Russian-Ukraine war, and especially through commodity in the first half of FY22, which was lower than 7.9 percent prices, introduced new shocks (see Box 1), that likely slowed in the second half of FY21, but a strong rebound from the growth in the second half of FY22. Overall growth for FY22 is decline of 0.6 percent during the corresponding half of FY21 estimated at 3.7 percent.12 (Figure 8 and Table 1). Although Omicron introduced some Figure 8: Uganda’s real GDP growth (quarterly sector contributions % y/y) Source: UBOS 12. This estimate is one percentage point lower than UBOS estimate of 4.7 percent. 6 11. Whereas consumption growth has remained the main growth is expected to have decelerated during the first half driver of growth, the positive effects of a gradual lifting of FY22, compared to the growth of over 7 percent in FY21. The of pandemic related restrictions are being offset by rising recovery following the slowdown in COVID-19 and opening prices. Given the second lock down and corresponding work of the economy, has probably been offset by the impact of stoppages (see section 1.4), slow credit growth (section 1.5) increased food and consumer goods prices into the second and poor performance of the agriculture sector, consumption half of the year. 7 BOX 1 The Impact of the War in Ukraine on Uganda and Policy Responses The invasion of Russian forces on Ukraine, which started to these commodities. An assessment of the possible on February 24, 2022, has had different levels of social impacts of these price changes (as baseline) against and economic effects across the world. There has been a high price scenario benchmarked on the increases an unprecedented array of sanctions imposed by ‘big’ seen during the 2007-08 food and fuel price shocks is countries on Russia’s investments in firms and individuals, summarized as follows: financial transactions, sovereign debt, and trade. Inflation effects: Higher imported inflation is expected. Commodity prices have increased sharply on top of a By April 2022, retail prices for petroleum products with a steep rise since the beginning of 2022, due to disruptions weight of 20 percent in the CPI, already rose 30 percent in production (particularly in Ukraine), trade diversion, and over their 2021 level, before the passthrough to other supply chain blockages. Financial markets have tightened, consumer and producer goods and services, including and migration and refugee seekers reached record levels transport costs. Wheat, while carrying a small share in in Europe, as Ukrainians ran to safety. the overall consumption basket, could manifest through The transmission of these war effects to Uganda has substitution as consumers – both within Uganda and the been seen in the volatile and rising commodity prices – region – turn to other grains. Overall inflation could rise especially for energy and wheat which are key exports by a full percentage point over the previous forecasts, but for Russia and Ukraine. Under the current sanctions, more strongly, by between 4.5 to 10 percentage points Russia’s oil production is estimated to reduce by 2.5 under the high case scenario (price increase of over 60 for billion barrels a day, which is 30 percent of its pre- oil and wheat). invasion exports and 3 percent of global supply. Whereas Trade impact: Net petroleum products and crude oil a combination of diversion of oil to other countries, use imports accounted for about 11.5 percent of Uganda’s total of strategic petroleum reserves, release of inventories by goods imports in 2021. Unless volumes reduce in response the International Energy Agency members, and additional to the price rise, these net-imports could increase in the production from OPEC members may close the deficit, range of 0.7 to 1.1 percent of GDP. Similarly, Uganda’s net prices are expected to continue rising as some of these wheat imports, accounting for about 3.3 percent of total measures will take time to execute. The World Bank goods imports in 2021, could increase by between 0.2 to Commodity Price Outlook for April 2022a/ forecasted a 0.4 percent of GDP. Although the overall trade impact of 42 percent increase in the average Brent Crude oil price an increase in wheat prices is likely to be more muted in 2022. This may even rise higher if European sanctions than for the increase in oil prices, almost half of the wheat are agreed. Similarly, weaker grain production in Russia imports have traditionally been sourced from Russia and and Ukraine, as well as higher production costs, including Ukraine, which accounted for 28 and 21 percent in 2019. for energy, chemicals, and fertilizers, is exerting pressure Nonetheless, this region provided a relatively small share on prices of agricultural products. Russia and Ukraine (jointly about 10 percent of total food imports), which account for a quarter of the global production of wheat, means there are other products and markets that could which has been disrupted by new quotas and restrictions substitute for these wheat imports. The net increase of Russia’s fertilizer exports, and the blockage of Black in imports, amounting to between 0.9 and 1.5 percent Sea passages through which Ukraine exports 90 percent of GDP for both products will curtail the improvement of its grains. Hence wheat prices are projected to rise 42.7 of the current account deficit, currently expected at 8.1 percent during 2022, before they moderate into 2023, as percent (FY22) and 7.3 percent (FY23) of GDP. This is production is substituted into other sources. Beyond these notwithstanding the improvement in commodity exports indicative magnitudes, the impact on a country would as their prices increase too. depend on the duration of the crisis, and direct exposure 8   Oil (petroleum products & crude) Wheat (unmilled & meslin) Total (range) Price increase (% above 2021 avg.) Baseline (42%) High (60%) Baseline (42.7%) High (80%)   Increase in net-imports (US$ million) 336 480 99 186 435-666 Increase in net-imports (% of GDP) 0.74 1.06 0.22 0.41 0.96-1.47 Share of forex reserves (end-2021) 7.76 11.09 2.29 4.30 10.05-15.4 Share of tax revenues (FY22f) 5.96 8.52 1.76 3.30 7.72-11.8 Share of expenditures (FY22f) 3.35 4.79 0.99 1.86 4.4-6.6 Fiscal effects – Revenues may increase due to the increased subsequent tightening lowers global demand for Uganda’s import bill, especially for oil imports which have a low price exports, and raises input costs for agriculture and industry, elasticity. There are currently no fuel subsidies in place, so such as cement. It is also unclear how the Russian war there’s no expectation that the government would absorb the and subsequent sanctions would affect investments into oil price shock. If the government were to consider absorbing preparing for oil production by 2025 – while the Russian the shock – say by cutting taxes, providing subsidies or consortium, RT Global Resources – the best bidder for the goods in kind, like it did under COVID-19 – the full cost would financing and construction of the $4 billion oil refinery – translate into a share of FY22 expenditures of about 2.8 had walked away from the deal in 2016, they re-expressed to 4.8 percent, which would defer the fiscal consolidation interest in 2021 to support the construction, albeit under agenda. The fiscal deficit, that is expected to improve to 7.4 different terms. Financing of the pipeline could also be percent (FY22) and 4.7 percent (FY23) of GDP, could shift further constrained by the tightening financial markets, rising closer to 8 percent and 5 percent, respectively, if imports environmental concerns, and uncertainty. slow down and hence lower revenues. Should government Households’ effects – Higher commodity prices will raise the decide to accommodate the commodity price shock (i.e., cost of food. In addition to substitution effects as Ugandan maintain fuel, grain, and fertilizer prices below market grain finds market in the region, food production will be costs), fiscal expenditures could increase by between 3 and 8 heavily impacted by rising transport prices and fertilizer percent over FY22 projections. On the other hand, tightening costs, with severe consequences to food security. of global financial conditions could lead to a decline in the Treasury securities holdings of offshore investors (US$809 Policy response so far – The government has so far allowed million at end-2021), thereby putting pressure on Treasury the markets to adjust to these commodity price shocks. yields and the exchange rate. Further depreciation of the According to President Museveni’s May 2022 State of shilling – which already depreciated by about 8 percent the Economy Address, there will be neither tax cuts nor between early February and end May 2022 – would also subsidies. To stem inflationary pressures and passthrough of have additional inflationary impacts and put a greater burden the commodity price shocks, the Bank of Uganda raised the on debt servicing costs given that external debt makes up Central Bank Rate by a full percentage point and signaled about two thirds of public debt. further action should the pressure on domestic inflation persist. Growth effects – Real GDP growth effects may be graver than included in our current forecast if higher global inflation and Notes: a/ World Bank, 2022c, April. 9 12. Stronger demand growth has been supported by Bank of Uganda’s Business Tendency Index (BTI).13 Since private sector investment which, in contrast to the decline then, Uganda’s headline PMI remained above 50 percent for during FY21, recovered into the first eight months of nine consecutive months. During this time, new orders and FY22. Even though it has been the main driver of capital purchasing activity remained buoyant, while output grew formation in FY21, public investment moderated given the for all sectors (mining, manufacturing, wholesale, retail, underexecution of the capital budget during the first half of and services) except construction and agriculture. However, FY22. Because of the COVID-19 containment measures and after reaching the peak of 55.7 percent in February 2022, the resultant uncertainty, as well as risk aversion by banks and index was down at 53.9 for April 2022 (Figure 9), due to the sluggish growth in FDI (see section 1.6), private investments declined by 5 percent during FY21. The gradual opening of impact of rising energy prices and transport costs – partly the economy until January, when all activities – including on account of the effects of the war in Ukraine. Investment the entertainment industry and schools – could operate in buildings and other structures remained larger than in freely, supported continuous improvement in the business equipment, with implications to the level of productivity gains conditions through the first half of FY22, as depicted by the generated. Figure 9: Uganda PMI (>50 = improvement since previous month) Source: IHS Markit 13. The strong recovery of the services sector benefitted from in the first and second quarters, leading to more than a the gradual lifting of the COVID-19 restrictions, particularly 43 percent expansion in the first half of FY22. Despite the on the education, accommodation and food services, limited operating hours (a curfew between 9pm and 5am was recreational and professional services sectors. The sector not removed until January 2022) and with only a gradual grew by 8 percent during the first half of FY22, compared recovery in tourism, the art, recreation, and entertainment to the decline of about 3.4 percent in the same period of grew by over 30 percent compared to the previous year, and FY21. The buoyancy in the information and communication the accommodation and food services sector sustained the (IC) activities has continued, with the sector growing at recovery that had been witnessed in the last quarter of FY21. almost 36 percent in the first half of FY22, sustaining the On the other hand, activity has not stabilized in most other growth of FY21, when firms and households adapted to the services sectors, with a notable decline during the first and use of online solutions to ensure continuity of business and second quarters of FY22, reversing the growth of 11.3 percent daily life amongst COVID-19 mobility restrictions. The three in the fourth quarter of FY21. This reflects the recurrent sectors that suffered most from operating and mobility logistical challenges, both domestically and in the main restrictions, have rebounded strongly as the economy started supply chains. At the same time, the transport and storage to re-open. Even before the full re-opening of schools and sector declined by 4.4 percent in the first quarter before learning institutions, the education sector expanded sharply slightly improving into the second quarter. 13. Bank of Uganda. Business Tendency Index (BTI) 10 Table 1: Uganda - Real GDP Outcomes   FY21 FY20 FY21 FY22   Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2   share of GDP y/y growth rates AGRICULTURE 23.3 -1.3 5.5 6.8 6.8 -0.6 0.6 3.9 -1.0 Cash crops 2.5 17.3 -1.7 5.0 7.3 5.8 14.7 15.0 7.9 Food crops 12.3 -11.2 12.6 11.0 10.5 -8.3 -5.5 0.1 -7.8 Livestock 3.4 8.5 7.4 7.9 7.8 7.2 8.2 7.8 7.9 Agriculture support services 0.0 -1.5 -15.0 -8.1 -9.8 27.7 18.4 11.3 7.3 Forestry 3.5 4.4 -2.3 -4.7 0.6 6.4 9.5 14.2 6.8 Fishing 1.6 -10.0 -15.6 -14.9 -5.1 -9.2 -5.3 8.0 -3.9 INDUSTRY 26.4 1.9 -10.1 -2.6 -2.1 2.7 17.7 0.3 6.8 Mining & quarrying 1.4 0.0 -34.8 25.2 -15.4 -14.5 48.9 -47.0 148.8 Manufacturing 15.0 -1.0 -13.9 -3.0 -4.6 1.9 17.9 -8.5 -6.3 Electricity 1.4 16.9 -1.6 6.8 7.1 7.2 25.7 12.5 13.0 Water 2.3 4.2 4.0 4.6 4.9 4.6 5.0 5.6 6.0 Construction 6.2 5.9 -2.7 -13.9 3.6 6.8 16.2 39.6 6.2 SERVICES 43.7 1.4 -5.7 -4.4 -2.4 5.4 13.8 7.0 8.9 Trade & repairs 8.3 -3.2 -11.9 -2.2 -6.8 -3.1 11.2 -8.2 -1.7 Transportation & storage 3.0 -2.3 -10.7 -8.2 -3.5 1.5 10.4 -4.4 0.2 Accommodation & food service 2.5 -2.9 -46.0 -25.9 -19.8 2.8 82.8 9.0 27.4 Information & communication 2.2 20.1 6.3 -2.4 -1.9 16.5 39.1 34.9 36.8 Financial & insurance 3.0 9.6 -7.1 3.2 -1.0 10.1 21.7 -3.7 -1.2 Real estate activities 6.7 6.1 9.5 5.7 8.0 1.4 0.8 -0.8 -0.7 Professional, scientific & technical 2.1 -26.4 -21.9 -35.1 -12.0 60.1 33.6 63.8 36.9 Administrative & support service 2.0 1.7 -1.9 -2.2 -2.8 8.0 6.9 7.3 6.8 Public administration 3.1 15.0 17.8 8.3 13.0 25.5 3.5 15.9 9.5 Education 4.0 0.8 1.5 -18.0 -12.9 -1.8 15.6 50.2 43.8 Human health & social work 3.4 2.8 -5.9 13.1 9.6 0.8 4.2 -12.1 2.0 Arts, entertainment & recreation 0.2 -7.9 -27.2 -27.6 -23.4 -19.2 30.1 36.7 34.9 Other service activities 2.5 0.9 0.8 1.0 2.2 3.7 4.9 5.3 -14.4 Activities of households 0.8 2.8 2.7 2.7 2.7 2.7 2.8 2.8 2.8 ADJUSTMENTS                   Taxes on products 6.7 -0.6 -24.4 -1.6 -3.1 -3.8 43.2 -8.8 -3.3 GDP AT MARKET PRICE 100.0 0.8 -5.7 -0.7 -0.4 2.8 13.2 3.5 5.2 Source: UBoS 14. The recovery of the industrial sector has been bumpy, rate of growth is a significant improvement on the more than even though it benefitted from a resurgence in mining and 2.7 percent contraction of this sector during the first half of quarrying, and a sustained growth in utilities. The industrial FY21. The surge (almost 40 percent growth) in construction sector grew by over 3.6 percent in the first half of FY22. observed in the first quarter was cut short to 6.2 percent in Although below the double-digit growth rates in the first half the second quarter, also reflected in the UBOS Construction of the last few fiscal years during the pre-COVID period – and Index which declined between April and December 2021.14 The far lower than the 9.7 percent of the second half of FY21 – this decline is due to, in part, the lower access to bank credit as 14. https://www.ubos.org/wp-content/uploads/statistics/CSI_December_2021Tables.xlsx 11 risk aversion within the banking sector increased in response improved farming methods, as well as good weather.15 As to increased non-performing assets (see section 1.5). coffee production slightly reduced during the subsequent Furthermore, the low implementation of the planned public quarter, total cash crops growth dropped to 11.1 percent during capital projects registered particularly sluggish activity within the first half of FY22, but above the previous two half years. the civil works, water projects, and roads (gravel and paved) Growing at 10.3 percent during the first half of FY22, the areas. In contrast to improved levels of business confidence forestry has cemented a recovery from the COVID-19 related in other sectors, fewer trade disruptions, and more open slump during the corresponding period of FY21. However, regional borders, manufacturing declined by 7.2 percent in the poorer weather over the first half of FY22 adversely affected first half of FY22. The mining and quarrying sector grew by the production of food crops, which are less resilient and are almost 150 percent in the second quarter of FY22, compared yet to adopt better farming practices to manage the weather to a steep contraction of about 47 percent in the first quarter. and effects of climate change. Food crop production further This growth has been driven by a surge of activity in the declined by 2.7 percent in the first half of FY22, compared to gold mining sector, as gold dealers anticipated a positive 6.7 contraction in the period before, which could continue to outcome from the negotiations with government to reduce adversely affect livelihoods, given that many who had lost the tax levied in July 2022 (see Box 2), and as the number of jobs in non-farming sectors because of the COVID-19 crisis – artisanal and small-scale miners grows. This will likely result particularly the urban and informal poor – had shifted to the in a boom of gold exports in the second half of FY22. agriculture sector as a buffer (see Section 1.4). The fishing sector continues to face trade disruptions – the value of fish 15. Agriculture has realized a boost from cash crops yet exports declined by 13 percent in the first quarter of FY22 – as remains volatile due to weather variability, hence growing well as sectoral challenges such as poor-quality fish stock by a mere 1.8 percent during the first half of FY22. Overall, (e.g., too few adult fish), limited access to feeds, and trade the sector rebounded strongly during the first quarter of in illegal and unrecorded immature fish. Given the continued FY22, propped by cash crops output, forestry, and fishing. scanty rains into the second season, overall agriculture Notably, growth in cash crops was boosted by the continued growth is expected at 3.4 percent, slightly lower than 3.8 reaping of improved coffee exports (see section 1,6) due to percent achieved in FY21. 15. Due to better anticipated financial benefits from cash crops, the adoption and use of improved technologies and practices (e.g., variety, optimal plant populations, and better cultural practices) for cash crops is generally higher than for food crops. This enables cash crops to better withstand weather abnormalities than food crops (usually annuals). 12 1.4 New shocks exacerbating decline was less severe, it was more universally distributed across locations and economic sectors, compared to the households’ vulnerability to poverty 16 first national lockdown where the highest burden fell on the urban workers and those services sector (Figure 11). A 16. Many households have remained vulnerable amidst lower number – about 62 percent compared to 89 percent in COVID-19 related mobility restrictions and new shocks. June 2020 – reported having lost employment due to factors In addition to the rapid increase in poverty during the directly related to COVID-19, such as business closing due first 10 months following the COVID-19 onset,17 the Uganda to COVID-19 restrictions, being ill/quarantined, movement High Frequency Phone Survey (UHFPS) reveals increased restrictions, and furlough. These differences could be vulnerability around subsequent lockdown periods due explained by the strictness of the first lockdown, even though to employment income losses and food insecurity around it was shorter, and a stronger ability to adjust to mobility lockdown periods. Even as these may have ameliorated as restrictions during the second lockdown. Furthermore, some the economy fully opened, the new food and energy price losses reported in October/November 2021 could be related shocks, are likely to reduce real consumption and push more to seasonality and prolonged dry spells observed in different people into poverty. parts of the country in 2021. The contraction is corroborated 17. During the first half of FY22, employment dropped below by Uganda Revenue Authority’s Pay as you Earn trends,18 as pre-COVID-19 levels, but weather shocks became important well as the PMI data depicting a reduction in employment in in explaining work stoppages. According to the October/ both wholesale and retail sectors during the first half of FY22 November 2021 UHFPS, carried out after the second lockdown, before it started improving. employment fell by 11 percentage points, compared to the March/April 2021 levels, which reversed the full recovery from the effects of the first lockdown (Figure 10). While this Figure 10: Working status of respondents across Figure 11: Work stoppages by residence and economic rounds, % of all respondents sector, % of respondents worked in previous rounds Source: UHFPS, World Bank staff calculations. Note: Only the same respondents across seven rounds were included. 16. This section draws from the Uganda High Frequency Phone Surveys (UHFPS). To track the impacts of the COVID-19 pandemic on households in Uganda, UBOS – with support from the World Bank – has conducted seven rounds of the Uganda High Frequency Phone Survey (UHFPS) between June 2020 and November 2021. The survey was conducted every few months and attempted to recontact the entire sample of households that had been interviewed during the 2019/20 round of the Uganda National Panel Survey (UNPS) – where phone numbers for at least one household member or a reference individual exist. 17. According to the Uganda National Household Survey 2019/20 – which covered both the pre-COVID-19 period (September 2019–February 2020) and the COVID-19 period (June-November 2020) – poverty has increased from 27.5 to 32.7 percent respectively. Since both periods cover different months and could be subject to seasonal changes, we have tested robustness of poverty numbers by post-stratifying survey weights in both periods to resemble the rural/urban and regional distribution of the annual data. Results qualitatively remained the same. 18. URA 2022, March. 13 18. Fewer non-farm family businesses closed in October/ operating businesses reported less revenues in October/ November 2021 compared to six months earlier, but almost November 2021 compared to the previous round. Thus, family two-thirds of businesses reported lower revenue. The business revenues were lower for 65 percent of households share of households with open non-farm family businesses compared to revenues in March/April 2021. This was much declined only slightly from 43 percent in March/April 2021 higher than the decline in revenues in March/April 2021 when to 41 percent in October/November 2021, still reversing the only 24 percent of households had family business revenues positive trend observed in previous rounds. Moreover, many lower than in previous rounds. Figure 12: Evolution of severe and moderate composite Figure 13: Incidence of social assistance programs Food Insecurity Experience Scale19 across all rounds, % of across rounds, % of households household members Source: UHFPS, World Bank staff calculations. 19. Food insecurity indices increased sharply in October/ of households in October/November 2021, covering especially November 2021, following the second lockdown. Almost half the Northern and Eastern regions. In-kind non-food aid of household members indicated being moderately insecure (soap, mosquito nets and masks) was more prevalent in the and about 12 percent being severely food insecure (Figure Northern and Eastern regions, while cash transfers were 12). In addition to the second lockdown which started in June more prevalent in the Western region. About 63 percent 2021, other factors such as poor weather conditions and the of respondents mentioned preference for cash transfers, corresponding poor agriculture sector’s performance (as compared to 21 percent for free food, and 16 percent for the discussed in section 1.3) explain the increased food insecurity. balance covering cash for work, subsidized credit, and other This is being exacerbated by the increasing food inflation, types of aid. Despite these preferences, in-kind non-food especially as key staple food like maize, find alternative assistance has remained the main source of social support markets, following the rising cost of wheat and grains, due to (except when food transfers were distributed in Kampala the war in Ukraine. and neighboring areas at the beginning of the pandemic to mitigate its negative socio-economic impacts). Direct cash 20. Food and cash transfers increased during the October/ transfers have been extremely small and prior to October/ November 2021 round, but the social protection programs November 2021 survey, reached no more than one percent of remain limited in coverage and design to mitigate impact households. of shocks on the vulnerable. Overall, access to any type of social assistance increased from four percent in March/ 21. Persistent high inequalities in access to education remain April 2021 to 13 percent in October/November 2021 (Figure a key threat to human development in Uganda during and 13). This was driven by the increased incidence of food and most likely after the pandemic. The gradual re-opening of cash transfers, which covered five percent and four percent schools in early 2021 led to an increase in school attendance 19. Food Insecurity Experience Scale (FIES) is experience-based measures of household or individual food security. The FIES Survey Module consists of eight questions regarding people’s access to adequate food. 14 to 50 percent and eight percent studying from home just Participation in education and learning activities remained before the second lockdown in June 2021. In October/ very unequal, with children in urban areas, and from the November 2021, when schools were closed again after the wealthiest pre-COVID-19 consumption quintiles, having much second lockdown, only 35 percent of children aged 3–18 higher chances to study compared to children in rural areas years were engaged in any learning/education activities. and from the poorest quintiles. Figure 14: Share of children engaged in any learning/education activities before the second lockdown in June 2021 and in October/November 2021 (% of children aged 3–18) Source: UHFPS March/April 2021, WB staff calculations. 1.5 Bank of Uganda shifts to monetary diesel prices which rose by 54 and 36 percent, respectively – between November 2021 and May 2022, also pushed by tightening as inflationary pressures rising international oil prices (see Figure 16), albeit with mount a lag. Food and beverage inflation had also jumped to 11 percent by May 2022. As the global economy reels from the 22. Inflation that had remained within the BoU target for effect of the Russia-Ukraine war and particularly the rising more than two years, shot to 6.3 percent in May 2022, due commodity prices (see section 1.3 and Box 1) and the possible to pressure from rising global commodity prices, supply depreciation of the shilling as capital flows out of frontier disruptions, and elevated shipping costs. Steady appreciation markets, threats to inflation are rising. Overall inflation could pressures over the past two years had partly shielded the jump above 8 percent in June 2022 – the closing month for economy from imported inflation. Furthermore, although the year. some sectors, like education, witnessed price escalation 23. Monetary actions stabilized financial markets, but only as they fully re-opened in the third quarter of FY22, this a few sectors are benefitting through increased credit. Prior was moderated by the deflation pressures in information to the June interest rate hike, the Bank of Uganda (BOU) and communication, recreation and sports, and transport maintained the policy rate at 6.5 percent for ten consecutive as occupancy rates returned to normal. However, a gradual months, effective June 2021, sustaining a dovish monetary rise in the energy sector inflation to 12 percent in May policy stance, alongside carefully phased liquidity support 2022, was due to the liquid energy inflation – petrol and 15 measures.20 Interest rates in the interbank money market, In real terms, annual private sector credit growth averaged government securities market, and on commercial bank 4.9 percent in the first nine months of FY22, compared to deposits remained within the same ranges in the first half 9.3 percent and 9.4 percent in the corresponding periods of FY22, as they were on the previous period (Figure 17). On of FY21 and FY20. Credit to the manufacturers of building the other hand, lending rates remained high and volatile, and construction materials, basic and fabricated metal, and and had peaked at 20 percent in the second quarter of FY22, non-metallic products, has recovered strongly. Yet growth as banks adjusted their pricing to increased non-performing of credit to trade and business sectors remains low, even as assets. Banks also became more risk averse, approving only some businesses benefit from COVID-19 support. Positively, 56 percent of loan applications during the quarter ending in line with the fiscal consolidation effort (see section December 2021, compared to 70 percent before COVID-19. Loan 1.6), government net borrowing from the banking system approvals were lowest in sectors with elevated asset quality decelerated during the first half of FY22 – dropping to an deterioration – particularly the real estate and utilities average of 8 percent in the second quarter of FY22, compared sectors. This risk aversion, combined with the high cost of to 40 percent during the same period in FY21. credit and operational difficulties for businesses, continues to constrain the growth of private sector credit (Figure 18). Figure 15: Inflation developments 2019-2022 (% per year) Figure 16: International Brent crude oil price versus liquid energy prices in Uganda Source: UBOS Source: World Bank Commodity Prices, BoU 24. Monetary policy faces a growing uphill task of as portfolio outflows intensify. On the balance of risk leaning maintaining a delicate balance between curbing inflation towards more inflationary pressures, BoU raised the CBR by pressures and supporting the private sector and economy a full percentage point to 7.5 percent. Credit to the private to remain on the recovery path. Pressures have intensified sector that has still been struggling, may decelerate and from the rising commodity prices and depreciation pressures thereby lower investments and growth. 20. In addition to the COVID-19 Liquidity Assistance Program (2020-2021) which expired May 31, 2022, the BoU supported FIs through (i) The credit relief measures (CRM) facility which exceptionally permitted supervised financial institutions (SFIs) to restructure loans of all borrowers affected by the pandemic, until September 2021. (ii) Extended CRM to sectors that remained under lockdown for a prolonged time, including education and hospitality between November 2021 and September 2022.; and (iii) The Emergency Liquidity Assistance Program (since January 2022) for financial institutions requiring liquidity of longer tenor. 16 Figure 17: Policy and market rates (percent per Figure 18: Private sector credit growth (y/y annum) percentage change) Source: BoU Source: BoU 25. On the back of adjustments in the macro-prudential policy measures, developments in liquidity conditions in the banking system were mixed through the first half of FY22. By December 2021, the liquid assets were 48 percent of total deposits, compared to 50.7 percent a year earlier. Even though the BoU has phased out the credit relief measures cautiously, bank credit risk remained elevated, hence the modest pickup in lending by supervised financial institutions, as discussed above. This reflects bank and customer concerns about the rate of recovery and asset quality. Non-performing loans (NPLs) for banks stood at 5.3 percent of total gross assets in December 2021, the level attained a year earlier, but were lower than 6.5 percent recorded by end September 2021. This ratio remains higher for credit institutions, at 8.6 percent, and micro-deposit taking institutions at 10.1 percent, and could also increase as the macro-prudential measures unwind, which could curtail credit growth and hence real GDP growth. Asset quality may further deteriorate after the credit relief measures – which have continued to support sectors that were most hit by the pandemic and lockdowns – expire in September 2022, and as the BoU starts tightening policy to address increasing inflationary pressures. Going forward, monetary policy must maintain a delicate balance between curbing inflation pressures – that could arise from rising commodity prices and stronger demand with the reopening of the economy – and supporting the private sector and economy to remain on the recovery path. 17 1.6 Current account strengthened as current account deficit narrowed by 1.4 percent of GDP, from 9 percent in 2020. import growth slowed 27. The sluggish domestic conditions, rising costs and 26. The current account deficit strengthened for the first time disruptions to supply chains slowed imports for both since the pandemic started, but due to factors that could consumption and investments. Notwithstanding the constrain acceleration in economic activity. The reduction to sustained real appreciation of the shilling – recorded at 1.9 7.4 percent of GDP in the first half of FY22, from 9.9 percent percent (year on year) by February 2022 – imports declined of GDP during the corresponding half of FY21 was alongside due to lower demand and disruption of supply chains in some a slump in trading activity (represented by the total value source countries like China’s major economic hubs (Shanghai, of exports and imports) to almost half that recorded in FY21. Shenzhen, Dongguan, and Changchun) following Omicron With airport arrivals slowing down during this period,21 variant breakout and mobility restrictions (as discussed in travel inflows also reversed the recovery from the pandemic section 1.1). Machinery, equipment, vehicles, and accessories witnessed in FY21, to only US$349 million – far lower than cut 10 percent of value of the previous year, while minerals what was received in the earlier six months, and less than remained below the boom quantities realized over the past two-fifths of the pre-COVID-19 total. Nonetheless, the deficit two years on account of the tax levy on gold exports imposed in goods and services reduced to 9.7 percent in the first half at the beginning of FY22 (see Box 2). The increase in some of FY22, from 12.3 percent in FY21 and 11.6 percent of GDP in H2 private imports (particularly oil imports) due to higher prices of FY21. Meanwhile, remittances also declined somewhat in notwithstanding,22 total merchandise imports amounted to line with the changed global economic activity and amounted US$3.2 billion – more than 20 percent below levels attained in to about US$530 million, which is 55 percent of pre-COVID-19 the first half of FY21. levels (see Table 3). Over the full calendar year 2021, the Figure 19: Uganda: Key export and transfer Figure 20: Uganda: Financing of current account inflows (percent of GDP) (US$million) Source: BoU Source: BoU 21. Civil Aviation Authority. 22. By the second quarter of FY22, the oil price index for Uganda was 79 percent above its value a year ago. 18 BOX 2 How Efforts to Raise Revenue Halted Gold Exports Uganda’s trade in gold received a boost in 2017, when the government removed all royalties and kept an export tax of 5 percent and a tax of 1 percent on locally produced and imported gold, respectively. The aim was to attract raw gold, irrespective of the source, into the first ever gold refinery that was inaugurated in the same year, and hence grow the country’s potential as a regional center for processing gold. Whereas the refinery already helped grow exports tenfold to US$433 by FY17, from the average of less than US$5 million per year in the preceding half-decade (FY11-FY15), the royalty removal was followed by a boom that has seen gold exports reach US$2250 million by FY21 (34 percent of total exports). Uganda’s own source of raw gold is still small deposits accessed through artisanal mining. The refinery and attractive tax regime attracted raw gold from other is reduced to $100 per kilogram of refined gold while countries, particularly the Democratic Republic of Congo and there will be no export tax on unrefined gold. Once passed South Sudan, hence imports of gold (captured as imports of into law, the revision in the gold taxation regime is expected mineral products) were crucial for the boom in exports. to re-open the trade and smelting of gold that has been recorded at zero through the full three quarters of the FY22. In April 2021, when the government announced its tax proposals for FY22, it included a levy of US$200 per Similar developments have been witnessed in Rwanda, kilogram of gold production and export tax of 5 percent following the introduction of a tax levy on gold during and 10 percent of the value of refined and unrefined gold FY22, which has essentially brought the gold trade and exports, respectively. In turn, gold dealers refrained from smelting to a halt. Like Uganda, Rwanda’s gold industry producing and exporting gold, insisting that the government essentially imports all its gold, processes it, and then reviews the levy. Following negotiations between exports all the output. government and gold producers/exporters, the government tabled a Mining and Mineral (Amendment) Bill before Source: Compiled by staff from various sources including BoUand Parliament in February 2022. The bill proposes that the levy MoFPED documents. 19 28. Even as gold exports stalled during the first half of above the values fetched during the first half of FY21. Coffee FY22, other exports contributed to the recovery in economic export volumes remained low into January and February activity amidst the second wave of COVID-19 and subsequent 2022, and the improvement could further be interrupted by lockdown. Coffee exports performed extraordinarily well, Uganda’s withdrawal from the International Coffee Organization with export volumes hitting a 30-year record of 1.99 million Agreement in February 2022 as well as a not too transparent24 bags in the first quarter of FY22, despite the average price of contracting of a new private firm to have priority rights on all US$1.78 per 60kg bag – 36 percent of the pre-COVID-19 prices.23 coffee produced before export could reverse the recent progress, On the back of improved domestic production practices, this with a raft of legal amendments. Apart from gold exports that development augurs well for economic recovery, employment, recorded zero value as the sector continued negotiations on the and poverty reduction. Even though coffee export volumes new tax levy on gold exports, other non-coffee exports grew by declined by 22 percent in the second quarter due to weather 17 percent and at US$1131 billion during this period, surpassed distractions and related poor harvest, the total value of US$419 the pre-pandemic levels. million earned during the first half of FY22 was 64 percent Table 2: Balance of Payments FY19/20 FY20/21 FY 2021/22 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Current account balance (CA) -6.3 -4.6 -10.3 -8.9 -9.9 -13.1 -7.0 -13.5 -8.3 -8.5 Goods and services, net -9.4 -9.5 -13.2 -11.8 -12.6 -16.2 -9.7 -16.4 -10.4 -11.5 Exports 15.7 17.5 18.7 12.7 16.0 17.3 19.6 20.9 8.9 9.5 o/w coffee 1.3 1.3 1.8 1.5 1.5 1.3 1.6 1.8 2.1 2.1 o/w travel 3.6 3.9 3.3 0.0 0.5 1.3 2.0 2.2 1.2 1.3 Imports 25.1 26.9 31.9 24.6 28.6 33.5 29.3 37.3 15.6 17.4 o/w oil 2.5 2.8 3.0 1.7 1.7 2.2 2.3 2.9 2.3 3.0 o/w government imports 1.0 1.2 1.7 1.0 1.8 1.2 0.7 1.8 0.8 0.8 Primary income, net -1.8 -1.6 -2.3 -1.8 -1.9 -1.7 -2.0 -1.9 -1.8 -1.7 o/w public interest payments (debit) 0.5 0.2 0.3 0.3 0.6 0.2 0.7 0.3 0.5 0.4  Secondary income, net 4.8 6.4 5.2 4.7 4.6 4.9 4.7 4.9 4.0 4.7  o/w personal transfers (credit) 3.7 5.5 3.4 2.4 2.9 3.2 1.4 1.6 2.6 2.8 Capital account balance (KA) 0.1 0.4 0.2 0.1 0.5 0.8 0.4 0.2 0.5 0.3 Financial account balance (FA) 3.5 2.4 7.2 6.7 10.4 4.5 7.3 9.6 -11.9 -4.8 Direct investment, net 3.0 3.3 2.7 2.3 2.2 2.3 2.4 2.4 -3.2 -3.7 Portfolio investment, net -0.8 -1.3 -0.6 -1.1 -0.9 1.0 0.0 2.2 -0.3 1.1 Other investment, net 1.2 0.4 5.1 5.4 9.1 1.2 4.5 7.0 -8.4 -2.3 o/w Government loans, net 1.3 2.3 7.3 5.1 7.2 3.2 -0.2 5.1 1.5 5.4 Disbursements 1.7 2.8 8.0 5.7 8.1 3.7 1.1 5.6 2.9 5.9 Repayments -0.5 -0.6 -0.7 -0.6 -0.8 -0.5 -1.3 -0.5 1.4 0.6 Net errors and omissions (NEO) 2.4 2.4 3.2 3.4 0.5 7.6 -1.6 7.1 0.6 -3.0 Overall balance (CA+KA+FA-NEO) -0.3 0.5 0.3 1.3 1.5 -0.1 -1.9 2.4 -3.6 0.4 Financing 0.3 -0.5 -0.3 -1.3 -1.5 0.1 1.9 -2.4 3.6 -0.4 Central bank net reserves (- increase) 0.3 -0.5 -0.3 -7.8 -1.5 0.1 1.9 -5.3 -3.6 0.4 Use of Fund Credit 0.0 0.0 0.0 6.5 0.0 0.0 0.0 2.9 0.0 0.0 Memorandum GDP, nominal (in mil US$) 9386 8705 8022 7711 9684 9144 8809 8809 9899 10390 Source: Bank of Uganda and World Bank staff estimates 23. BoU 2022, April 24. Uganda Parliament is reviewing the deal with Uganda Vinci Coffee Company signed by Government in February 2022 but has come under criticism for not consulting all stakeholders. By April 25, 2022, the contract was still under scrutiny by the Trade Committee of Parliament. 20 29. The current account deficit was financed mainly 1.7 Fiscal consolidation constrained through public borrowing, largely on concessional terms. by revenue shortfalls amidst high Even as international companies continue grappling with recurrent spending recovery, FDI to Uganda recovered strongly to US$682 million (equivalent to over 3.0 percent of GDP) in the first half of FY22, compared to US$460 million similarly received 30. Despite the suppressed revenues, a sharp reduction in spending due to fiscal adjustment and underspending of the in the first and second half of FY21, but likely to amount to development budget narrowed the overall fiscal deficit to 2.7 percent of GDP for FY22. The recovery was supported 5 percent of GDP in the first half of FY22. The fiscal deficit is by equity and intercompany loan inflows, as well as the expected at 7.5 percent for the full FY22, which is still above reinvestment of earnings. Net government borrowing, on the target path under the Charter of Fiscal Responsibility the other hand, reduced to US$684 million or 3.1 percent of (Figure 21). Nonetheless, with a lower fiscal deficit, domestic GDP in the first half of FY22, which was 31 percent below the financing also decelerated (Figure 22) even though the amount attained during the corresponding period of FY21. domestic securities issued for budgetary activities still Budget support inflows increased to US$430 million during accounted for up to 80 percent of the annual appropriations.25 this period (supported by a disbursement of US$125 million 31. Budget support, which strongly returned to Uganda’s under IMF’s ECF program) but could not fully offset the large financing menu as part of the International Financial decline in project disbursements, as project delivery remains Institutions’ support to the pandemic response, is likely slow due to execution problems (as discussed in Section 1.7). to diminish. In addition to the IMF Extended Credit Facility (ECF) first disbursement of US$125 million during the first Furthermore, whereas some of these loans went to BoU to half of FY22, the African Export-Import Bank and the African reinforce foreign reserves, the level of these reserves further Development Bank disbursed amounts that had been dropped to US$4.4 billion or 4.2 months of import cover in postponed from FY20/21. Whereas further disbursements December 2021, from 4.4 months in June 2021. This happened under the ECF are expected in the second half of the year, as BoU sold more than US$300 million during the quarter such financing is projected to reduce to 3.2 percent of GDP for ended December 2021 to smoothen the market. As the shilling the full FY22, from the previous year’s record 4.5 percent of value deteriorated again and market became jittery into GDP (Figure 22). A small component of this budget support the last quarter of FY22, the room to build reserves through comes in grants – it contributed about 10 percent of all grants purchases of foreign exchange from the market, also shrunk. in FY21 but is expected to have reduced to 5 percent in FY22 and subsequently down to 4 percent of grants in FY23. Figure 21: Fiscal deficit (RHS axis) and total tax Figure 22: Financing the fiscal deficit (% GDP revenues and expenditures (% GDP Source: MoFPED and World Bank calculations Note: Although budget support is part of gross external financing, it is included in Figure 22 to give a sense of its trend since the start of the COVID-19 crisis. 25. MoFPED 2022, February. 21 Execution of projects continues to be hampered by incomplete project preparations uncoordinated budgeting for the government’s own contribution to these projects, poor planning for rights of way and land compensation, poor contract management, and weakness in overall project management. 32. The expiry of the tax-based COVID-19 relief measures, Railway Line, Kiira Motors, and renovation of the National improved tax administration measures and the rebound of Stadium – were to reduce the budget by at least 1.5 percent economic activity is expected to bolster tax revenue to GDP of GDP through FY22. Even then, with under-execution of ratio reaching a projected 12.3 percent for FY22 and above roads and bridges projects, the capital spending reached the pre-crisis levels. Despite disruptions in the recovery just 57 percent of the targeted plan during the first half in economic activity and logistics at the border on account of this year. The underperformance was due to the poor of the July 2021 national lockdown, the URA stepped up execution of both domestically and externally financed efforts to collect taxes following the expiry of the period investments, which delivered 77 percent and 35 percent, for COVID-19 crisis response tax measures to support the respectively, of what had been budgeted. Execution of private sector liquidity in November 2021. A combination of projects continues to be hampered by incomplete project improved tax arrears management and intensified cargo preparations (including lacking detailed feasibility studies management to curb misdeclaration, helped grow revenues and/or implementation plans), uncoordinated budgeting by 16.8 percent during the first half of FY22, compared to for the government’s own contribution to these projects, the same period in FY21. Nonetheless, domestic revenues poor planning for rights of way and land compensation, missed the national budget target by about 0.8 percent poor contract management, and weakness in overall project of GDP during the first half of FY22 and the full fiscal year management. Meanwhile, domestic arrears payments of performance is estimated to be below target. Revenues UGX 449 billion, almost 60 percent above planned levels, collected from most tax heads in GDP declined compared to augurs well for private sector liquidity and lowers the risk the year before – except for import taxes which have been of loan default in the financial sector if new accumulation boosted by import price increases. Overall revenues and has been minimized. Overall expenditure during the first grants are expected at 14.3 percent of GDP, falling short of half of FY22 stood at 85 percent of the planned target. the budgeted target of 14.7 percent (see Table 3). 34. Continued use of supplementary budgeting is 33. The fiscal consolidation has been executed through undermining fiscal consolidation. During the first half the development budget which could constrain economic of FY22, a supplementary budget amounted to UGX 3.8 recovery, even as recurrent spending remains above trillion (approximately 2.4 percent of GDP) was utilized targeted levels. In the first half of FY22, recurrent spending by the Ministry of Defense, Ministry of Health, and State rose to 11.7 percent of GDP, compared to 10.6 percent the House, with direct COVID-19-related expenses accounting previous year. Standing at 107 percent of the planned for only 13 percent of the total supplementary budget. This target, this spending was driven primarily by increased distribution of is like that observed in the previous two spending on wages, salaries and other employee costs, a years (Figure 24). If no further supplementary budgets are spike in transfers to local governments, and higher interest approved during the rest of the fiscal year, the total so far payments on debt, even as domestic financing that had is equivalent to 8.5 percent of the annual budget, will mark reached 4.6 percent of GDP in FY21, declined to 2.5 percent a reduction from 10.6 percent recorded last year, but still of GDP. Notably, spending on use of goods and services above the pre-COVID-19 levels. Supplementary budgeting reduced by 14 percent from the levels utilized in first half ought to be limited to unforeseen and unavoidable of FY21. On the capital side, expenditure cuts – including situations, to avoid distorting the budget process and on projects like the rehabilitation of the Malaba-Kampala national priorities. 22 Table 3: Fiscal developments FY19-FY22   FY20 Actuals FY21 Budget FY21 Actuals FY22 Budget FY22 Estimate FY 23 Budget Total revenue and grants 13.2 14.9 14.4 14.9 14.8 16.1 Revenue 12.4 13.8 13.2 14.0 13.6 14.8 Tax 11.4 12.8 12.4 13.0 12.9 13.7 o/w Income and profits 4.2  - 4.5  -  -  - o/w Goods and services 5.9  - 6.5  -  -  -  o/w International trade taxes 1.2  - 1.3  -  -  - Non-tax 1.0 1.0 0.9  - -  0.6 Grants 0.8 1.1 1.2 0.9 1.1 1.2    Expenditures and net lending 20.3 23.2 23.6 21.4 22.4 23.0 Current expenditures 10.8 11.2 12.5 11.9 12.7 14.5 Wages and salaries 3.5 3.2 3.4  - -  3.2 Interest payments 2.1 2.6 2.7  - -  3.5 Domestic 1.7 1.9 2.1 -   - 2.8 Foreign 0.4 0.6 0.7 -   - 0.7 Other current 5.2 5.4 6.4  -  - -  Development expenditures 8.6 10.9 10.1 9.2 9.0 8.5 External 2.8 5.4 3.6 -   -  - Domestic 5.8 5.5 6.5 -   -  - Net lending and investment 0.6 0.8 0.4 -   -  - Hydropower projects .5 -  0.1  -  -  - Recapitalization BoU 0.1  - 0.3  -  -  - Other spending 0.3 -  0.6  -  -  - Clearance of domestic arrears 0.3 0.3 0.6  -  - 0.4               Primary balance -5.0 5.7 -6.4 -3.6 -4.4 3.5 Overall Balance -7.1 8.3 -9.2 -6.5 -7.5 7.0 Financing 7.1 8.3 9.2     7.0 External financing (net) 4.0 6.0 4.5 4.5 3.9 4.1 Disbursements 4.6 6.8 5.0  - -   - Projects 2.8 5.0 2.8 2.3 2.6 2.6 Budget support 1.7 1.8 2.2 3.4 2.2 1.5 Repayments 0.6 0.8 0.6  - -   - Domestic financing (net) 3.0 2.3 4.6 2.0 2.5 2.9 Banks (net) 1.6 1.3 1.7 1.0 1.4 -  Non-banks (net) 1.3 1.0 3.0 0.9 1.0  - Errors and omissions 0.2 -  0.1 0.1  - -  Source: MoPFED 23 Figure 23: Supplementary expenditures as share of Figure 24: Combined allocation of supplementary budget in GDP (RHS axis) and as increase above budget (%) FY20 and FY21 (as share of GDP) Source: MoFPED Source: MoFPED *Note: FY22 relates to H1 value 35. Public debt is reducing space for responding to shocks revenue and grants, is expected to rise to 40.5 percent for as it surpasses the thresholds under the Charter of Fiscal FY22, from 34.6 percent in FY21. This is driven by the high Responsibility. On the back of persistent and high fiscal interest payments rising to 23 percent of domestic revenues deficits, Uganda debt increased rapidly from 15 percent of during FY22, from 20 percent and 17 percent in FY21 and GDP in FY17 to 49.1 percent in FY21, the latter lower than FY20, respectively. Consequently, the effective interest rate had been anticipated on account of the domestic currency (current-year interest payments divided by previous period appreciation and a lower deficit due to under-execution of debt stock) is expected to reach 2.4 percent in FY22. With the development budget. Nonetheless, debt has increased domestic borrowing increasing to over 35 percent of the particularly fast over the past two years26, partly under the total financing sources, 79 percent of interest payments weight of COVID-19, but also building on momentum during was due on this type of debt. This exposes the budget the three-year period leading to the COVID-19 pandemic. As a to vulnerabilities and limits fiscal space for other critical result, and because of reduced capacity to service its service priorities – the central government interest payment bill of debt, Uganda’s risk of debt distress deteriorated from ‘low to close to 3 percent of GDP alone exceeds spending on both moderate’ in FY21. Even though the fiscal deficit is expected education and health (excluding donor projects) in FY20 and to moderate to about 7.5 percent of GDP for FY22, public debt FY21. The high level of domestic borrowing is against a low will have crossed the 52 percent mark on the path under the rate of private sector credit growth as commercial banks opt Charter of Fiscal Responsibility, to 52.9 percent of GDP. This for investments in government securities, instead of the still notwithstanding the use of Special Drawing Rights up to the highly risky private sector (see section 1.5). With the tight tune of US$250 million during the second half of the year, liquidity conditions, payment of BoU advances was deferred which are expected to provide financing relief. and debt rolled over, with up to 13 percent of the government securities issued for refinancing maturing debt. 36. Liquidity pressures have been exacerbated by the changing structure of debt, towards more non-concessional borrowing. The ratio of total debt service to exports 26. IMF-World Bank (2022) indicates that the increase of almost fourteen percentage points in debt over the past two years was primarily driven by external borrowing, with two-thirds of outstanding public debt owed to external creditors (US$13.2 billion or 31.7 percent of GDP). Domestic debt amounts to about US$7.2 billion (17.4 percent of GDP). 24 25 2. ECONOMIC OUTLOOK, RISKS AND POLICY ACTIONS 2.1 Recovery being threatened by increased uncertainties 37. Real GDP is projected to accelerate to around 5 percent during FY23 and about 6 percent in FY24, having been slashed by the effects of new shocks fueled by the war in Ukraine. There was an upbeat outlook following the waning of the COVID-19 pandemic and full re-opening of the economy in January 2022 – and compounded by the clearer prospects for Uganda’s oil production following the signing of the Final Investment Decision in February 2022 – which now faces new challenges because of rising commodity prices, disruptions to global supply chains, tighter global financial markets, and policy uncertainty. Nevertheless, private consumption is expected to perform better than it did during COVID-19 times. Whereas the recovery in employment and real household income is being discounted by the rising cost of living, the rising commodity prices are expected to boost incomes of cash crop farming households. This will further be sup- ported if the private sector takes advantage of the increasing regional demand whose consumers could substitute away from expensive wheat and oil products due to the disruptions in production and sup- US$20bn ply chains in Ukraine and Russia. Private and public investments are also expected to increase, supported by increased momentum in the construction of oil related infrastructure, estimated at about US$20 billion, targeting the start of oil production in FY25. Furthermore, Uganda’s commodity-based exports, are expected to benefit from Private & public investments the increased commodity prices. These trends are also supported by are expected to increase, recent PMI data, which in April 2022 continued to suggest a sustained supported by increased growth in new export orders and customer demand, new shocks to momentum in the the global economy notwithstanding. construction of oil related infrastructure 26 Table 4: Baseline economic outlook (annual percent change unless indicated otherwise) FY21 FY22 FY23 FY24 Real GDP growth (baseline) 3.4 3.7 5.1 6.0 Figure 25: Real GDP per capita Private consumption 4.2 2.8 4.4 4.2 900 Government consumption 6.1 0.9 -0.6 0.7 880 Gross fixed capital investment 5.1 4.1 7.0 10.2 860 Exports (goods & services) 2.6 11.1 12.4 13.3 NDPIII target 840 Imports (goods & services) 8.6 5.3 8.4 8.6 820 800 Agriculture growth 3.8 3.4 3.6 4.0 post-­‐COVID 780 Industry growth 3.4 2.6 6.8 7.9 760 Services growth 3.3 4.6 4.9 6.9 740 720 Inflation (CPI) 2.5 3.7 6.0 5.0 700 Current account (% GDP) -10.2 -8.2 -7.9 -7.0 FY19 FY20 FY21 FY22 FY23 Net FDI (% GDP) 2.1 2.5 2.7 3.3 Fiscal balance (% GDP) -9.5 -7.5 -5.0 -3.8 Source: UBOS, NDPIII and World Bank estimates Public debt (% GDP) 49.6 52.9 53.5 52.4 Notes: Gross fixed investment includes both public and private investment 38. Rising inflation pressures will challenge monetary policy account. For both FY23 and FY24, the current account deficit to cautiously manage the fragile recovery in economic is projected to be within the range of 7 to 8 percent of GDP, activity. The combination of pent-up domestic demand, as as exports accelerate from improved domestic production, economic activity picks up, and rising global commodity pric- rising global commodity prices, possible substitution of es is exerting pressure on prices. Nonetheless, the output gap food exports in the region in response to wheat supply is unlikely to close and hence will likely moderate the pace shortages, and recovery in gold exports that stalled in FY22 of acceleration of inflation. Monetary response is expected on account of tax level. The weaker global and regional to be carefully calibrated against the lingering effects of the recovery notwithstanding, these factors support a positive pandemic on private sector finances, a risk averse banking outlook for some of Uganda’s major exports – such as system, and tightening liquidity conditions. Thus, core infla- gold, tourism, coffee, and maize – over the next three to tion is projected to climb well over its target to a range of 5-7 five years. Imports will also continue to grow strongly to percent in FY23, as the economic recovery strengthens, and support investments in oil production, although their growth spillover effects of global commodity prices intensify. Addi- has also been discounted due to disruptions to the global tional inflationary pressures, due to sustained increases in supply chains, rising transport costs, as well as effects of the global commodity prices, particularly oil, and/or depreciation resurgence of COVID-19 and the corresponding lockdowns pressures as global financial conditions tighten, will see a in key source areas in China. The expected improvement cautiously tighter monetary policy stance, with central bank in remittances will be muted on account of slower global policy rate increased gradually, to continue to support overall growth and thereafter will largely depend on employment economic recovery. recovery in source countries and the extent of the shift of resources to the increasing refugee crisis within European 39. The troubled global environment could slow the growth countries on account of the Russian-Ukraine war.27 The of exports, tourism, and remittances which, added to outlook for services (particularly tourism in a post-COVID-19 the higher import bill, will put pressure on the current 27. Nearly a third of remittances came from Europe in 2018, led by the UK, Sweden and Germany, whilst nearly a quarter came from the Middle East, led by the UAE (IFAD, May 2021). 27 According to the FY23 Budget Draft Estimates, an intensified implementation of the Domestic Revenue Mobilization Strategy – in particular, the tax expenditure reforms and value-added tax legal reform alongside several tax administration reforms – will raise revenue by a full percentage point during FY23. world) will largely be determined by vaccination trends, reform alongside several tax administration reforms – evolution of the pandemic (as Omicron in January 2022 will raise revenue by a full percentage point during FY23. demonstrated), and related confidence to ease and lift travel After the initial sizable impact, these policy adjustments restrictions.28 Although by January 2022, industry analysts and administration measures aim to increase revenues in projected that global tourism could return to pre-pandemic subsequent years by at least 0.5 percent of GDP a year. 30 levels only by 2024, with some locations recovering faster Compared to the CFR path, the fiscal deficit adjusted a little than others,29 the Russian war in Ukraine risks hampering less than had been anticipated in FY22, but will be expected the return of confidence in global travel, especially for the to adjust steeply - by about 2.5 percent points per year U.S. and Europe. A gradual increase in FDI to 2.7 percent and in both FY23 and FY24 - as expenditures decline to 19.4 3.3 percent in FY23 and FY24 respectively, mainly related percent in FY24, from an estimated outturn of 21.7 percent to oil, will ease the financing needs, minimize government in FY21. 31 Ultimately, this consolidation intends to shift borrowing – partly expected through concessional financing debt back to a more sustainable path32 - peaking at around from IFIs – alongside a drawdown of foreign exchange 52 percent of GDP – consistent with the CFR targets and reserves, which could include further use of the special SDR limiting private sector crowding out. The fiscal consolidation allocation. Financing through non-concessional means is notwithstanding, the increasing shocks underscore the likely to be limited given the negative impact this could have importance of government sustaining efforts to support the on Uganda’s debt profile. recovery and revitalization of key sectors (education and health), which are critical for inclusive growth and poverty 40. Fiscal consolidation will be underpinned by the reduction. This may require further emphasis on a fiscal realization of stronger revenue effort alongside a strategy that creates spaces for critical spending priorities, rebalanced expenditure strategy. Compared to the ambitious as well as continuing to rebalance expenditure away from a path at the beginning of the fiscal consolidation effort, focus on hard infrastructure and back to social sectors such the reduction in the fiscal deficit is expected to be more as education and health. It will also require government moderate – from 7.4 percent in FY22 to 5.0 and 3.8 percent to avoid domestic financing of the deficit, that raises the of GDP in FY23 and FY24 respectively. According to the FY23 exposure of the domestic financial system to macro-fiscal Budget Draft Estimates, an intensified implementation of risks, as well as accumulation of domestic arrears that harm the Domestic Revenue Mobilization Strategy – in particular, the private sector. Instead, focus should be on rationalizing the tax expenditure reforms and value-added tax legal expenditure and additional sources of concessional financing. 28. According to the latest UNWTO Panel of Experts, almost half of all experts (45%) continue to see international tourism returning to 2019 levels in 2024 or later, while 43% point to a recovery in 2023 (https://www.unwto.org/news/vaccines-and-reopen-borders-driving-tourism-s-recovery) 29. McKinsey and Company 2022, April 30. According to the URA, revenue effort will be enhanced through (i) alternative dispute resolution; (ii) implementing of smart business solutions of Digital Tax Stamps and Electronic Fiscal Devices; (iii) leveraging technology to simplify key processes, enhance client support, and and intensify tax education (https://thetaxman.ura.go.ug/revenue-performance/) 31. The FY22 and proposed FY23 budgets include: (i) broad spending cuts, especially to sectors that normally take a large share of the Budget such as Works and Transport (down by 13 percent in FY22) and energy and mineral development (down by over 40 percent in FY22); (ii) scaling down non- essential expenditure such as travel, workshops and seminars; (iii) strengthening of procurement systems to eliminate waste; and (iv) better budget monitoring and use of digital PFM systems to improve efficiencies. 32. Below 50 percent of GDP in nominal terms, as per the new Charter for Fiscal Responsibility FY21/22-FY25/26. 28 Figure 26: Fiscal adjustment to align to CFR (% of GDP) Figure 27: Debt reduction to align to CFR (%) Source: MFPED and staff estimates Source: MFPED and staff estimates 41. Overall, this growth projection falls more than half growth than the pre-pandemic growth projections, the gap a percentage point below that of our December 2021 between actual per capita income and the NDP III target Economic Update which calls for stronger effort if Uganda has widened and the time for Uganda to reach the lower- is to ascend to middle income status in the near future. middle-income target elongated. According to the World Policy makers face new uncertainties and challenges that Bank Atlas Method (see Box 3), Uganda’s per capita income must be managed cautiously given the trade-offs between was estimated at US$840 per person in FY21, lower than the rising inflation and supporting the recovery. With lower threshold of US$1045 for FY22. 29 BOX 3 Placing Uganda in World Bank’s Income Classification Status: According to the World Bank’ Atlas Method, Box 3 Figure 1: Uganda’s per capita income path 1990–2020 Uganda’s per capita income was estimated at US$840 per person during FY21. Uganda’s per capita income improved strongly between 2001 and 2011, and the gap to lower middle-income status shrunk to 17 percent, from 75 percent in 1994. Since then, the gap has remained in range of 19 to 26 percent, as growth slowed down alongside a high rate of population growth. Measurement: To classify countries across income categories, the World Bank Group uses gross national income (GNI), which measures incomes earned by residents, both within and outside the country. This is particularly important because the world is a global village, which implies residents in one country can earn income abroad and nonresidents can earn weights are the amount of each country’s currency income within the country. Over the last two decades, in one SDR unit, which change over time in line with the difference between these two variables has been the composition of the SDR and the relative exchange minimal, yet indicating that Uganda’s GNI was slightly rates for each currency. The SDR deflator is first greater than GDP in the 1990s, while the reverse was calculated in SDR terms, and then converted to U.S. true in the 2000s. This implies that the non-resident dollars using an SDR to dollar conversion factor that income earned within Uganda increased beyond the is calculated as average over three years. income earned by Ugandan residents outside Uganda in Data sources: As indicated above, the World Bank the 2000s. uses country data for country-based variables, and Calculating per capita income GNI Atlas method: The internationally accepted sources for others. variables (used to derive GNP per capita, including: Application: Every year, the World Bank uses the GNI (i) Nominal gross domestic product (GDP) at Atlas method against set thresholds (changed every purchaser’s price in current prices (GDP) as year) to classify countries into low-income countries estimated by Uganda Bureau of Statistics, (LICs), middle-income countries (MICs) and high-income (ii) Net primary income (primary income receivable countries (HICs). The LIC/MIC threshold was raised to by resident units from the rest of the world minus US$1,045 for FY22 from US$1,035 in FY21, almost double primary income payable by resident units to the US$610 in 1990. rest of the world) as estimated within the Balance The World Bank Board uses the country LIC/MIC/HIC of Payments statement by Bank of Uganda, categorization, alongside several other factors, to classify (iii) Mid-year population estimates by the United lending terms for a country (i.e., IDA, Blend, or IBRD). Nations World Population Prospects, 2019 (iv) A weighted average of the exchange rates of the Further information can be found at World Bank: last three years https://datahelpdesk.worldbank.org/knowledgebase/ (v) Adjustment for inflation, using the Uganda GDP articles/378832-what-is-the-world-bank-atlas-method deflator and the SDR deflator inflation, calculated as a weighted average of the GDP deflators of https://datahelpdesk.worldbank.org/knowledgebase/ the countries currently included in the SDR). The articles/906519-world-bank-country-and-lending-groups 30 42. Depending on the evolution of the threshold, Uganda has The increasing frequency of droughts and floods is raising to work harder to achieve MIC in the next six to seven years. the vulnerability of Uganda’s firms, farms, and households An optimistic scenario with a slower pace of population given the limited adaptive capacity to natural disasters and growth in line with the trend observed over the past five climatic stressors; generally low technology adoption rates years; and faster GDP growth, peaking at about 10 percent and limited access to alternative off-farm income streams. when oil production starts in 2025-2026 and as structural Coupled with higher than anticipated input costs due to reforms generate greater efficiency gains from investments, the war in Ukraine, this could reduce yields, lower export including catalyzing private investments, could accelerate earnings, increase food insecurity, and increase poverty Uganda’s per capita income to close the gap that has levels, because a large proportion of the population relies on persisted over the last five years. At the same time, failure to the agricultural sector for livelihoods. reform and/or if hit by a negative shock reducing growth to 45. Fiscal risks abound due to spending pressures that an average of 5 percent would postpone this achievement to would require adjustments to desired fiscal consolidation beyond 2031. efforts. Beyond revenue shortfalls that could result from 43. Achieving middle income status must be accompanied shocks, additional spending pressures could arise for the by real change for the population as is also indicated security sector as well as unforeseen requirements to meet in the country’s NDPIII whose goal is to raise incomes the commitment on developing the oil sector ahead of of households and improve quality of life. This will production in 2025, which may throw the fiscal consolidation require investments in human and physical capital that agenda off course. Moreover, while debt projections are quite will engender a sustainable and inclusive economic sensitive to growth, revenues and exports, the uncertainty transformation. The prospects for this shift will also rely around the external outlook, and increased frequency of on maintaining macroeconomic stability; better supporting natural disasters due to climate change, could worsen the the vulnerable, farmers, and small enterprises; increasing country’s debt outlook. The most extreme shock,33 could the uptake of digital technologies; and more effective use of temporarily push Uganda’s debt (both external and public) public resources. over its respective thresholds and benchmark of 55 percent for countries with a medium debt-carrying capacity. This would further be exacerbated by a slower-than-expected 2.2 . Risks remain tilted to the downside implementation of reforms, further delays in oil production, a shift in the composition of financing towards non- 44. The economic outlook over the next couple of years concessional loans, and the potentially limited capacity of faces significant risks considering the large global and commercial banks to increase their purchase of government domestic uncertainties. First, is the possibility of new securities in response to future shocks. waves of COVID-19 and other disease outbreaks. With just 17.5 percent of the population fully vaccinated, a large 46. Under a downside scenario, growth may drop further, proportion of the population remains at risk, should there closer to 4.5 percent in FY23 and recover only slowly be a resurgence of COVID-19. Serious waves of infections towards 5.5 percent in FY24 (Figure 28). This poorer could be followed with some mobility restrictions, with performance could materialize if the spillover effects of their attendant effects on the economy and social welfare, the Russian-Ukraine war and related economic sanctions especially the education sector that already lost two intensify, further worsening the global environment, with years, the longest period of closure globally. Second, a adverse consequences for Uganda. These might include more severe deterioration of the global economy and a widening trade deficit, as well as lower remittances, stronger passthrough of its effects could necessitate a tourism, and FDI, including a delay in concluding financing tighter monetary policy, which would slow the recovery arrangements for oil production – the signing of the FID in of businesses and household incomes. This may cause a early 2022 notwithstanding. This scenario also assumes sharper deterioration in the asset quality of the banking faster acceleration of commodity prices and stronger sector and increase cost and constrain further access to spillover into domestic inflation, requiring monetary policy to finance for firms in the next few years. Third, adverse be more aggressive to curb inflation and thereby slowing the weather could derail the recovery of the agriculture sector. recovery even further. 33. Under the Joint IMF-IDA Debt Sustainability Assessment, debt projections are subjected to various stress tests including reduction in GDP growth, reduction in exports, increase in primary deficit, reduction in official and private transfers and FDI, and materialization of contingent liabilities. The most extreme stress test is the test that yields the highest ratio in or before 2032. 31 Figure 28: Real GDP growth rate, % Growth may drop further in FY23 closer to 4.5% & recover only slowly in FY24 towards 5.5% Source: UBOS and staff estimates 2.3. Key policy actions to support poverty and food insecurity, especially in vulnerable population groups. As shocks are becoming more recovery frequent and more intense, building shock responsive social protection systems at the national level has 47. Uganda’s economic recovery and growth acceleration become a critical priority. Government must accelerate into the medium term is still expected to be fragile, facing efforts to invest and institutionalize the development a multitude of risks. The rising commodity prices pose new of a national social registry of vulnerable households risks to people’s livelihoods that have just been recovering (which would enable government to respond from the effects of COVID-19. It also threatens to stall the quickly, and expand support beyond those who are socio-economic transformation as the likelihood of falling in the current social assistance programs). Further, into deeper poverty increases. The fiscal consolidation strengthening and expanding the digital payment agenda notwithstanding, the government’s interventions systems will allow efficient and transparent distribution are likely to be constrained by the limited fiscal space due of support to the impacted households. It is also crucial to scanty revenues, project execution challenges, and rising that the government develops a disaster risk financing public debt vulnerabilities. In line with the analysis above, strategy that strengthens the financial resilience of the attention to the following four priority areas is required to country to disasters and allows timely response. Poor sustain a resilient and inclusive recovery: and vulnerable households can be supported through (i) Accelerate vaccination effort: To avoid the resurgence labor-intensive public works and livelihoods support of COVID-19 and related consequences, accelerating activities that reduce negative coping strategies (such the COVID-19 vaccination program must remain an as reducing food, distress selling of assets, pulling important policy priority for government. This will children out of school). In the longer term, these guard against a resurgence of the virus and related programs can help households increase income, build consequences to the socioeconomic welfare of assets and resilience. Ugandans. (iii) Maintain prudent fiscal and debt management to (ii) Adopt targeted intervention to support the vulnerable: support the fiscal consolidation agenda: Raising Whereas government is not planning to distort markets revenues and executing the capital budget more in responding to the rising commodity prices, targeted efficiently to maximize returns on investments are interventions are required to arrest the increase in critical for maintaining fiscal and debt sustainability 32 in tandem with the charter of fiscal responsibility. must maintain a delicate balance between curbing Should new shocks disrupt the fiscal consolidation inflation pressures - that have intensified due to rising agenda, the government should avoid increasing commodity prices and stronger demand following domestic financing of the deficit, through short the reopening of the economy – and supporting the term securities that raises the exposure of domestic private sector and economy to remain on the recovery FIs to macro-fiscal risks, as well as accumulation path. This will call for a close monitoring of financial of domestic arrears that harm the private sector. system stability and lending to the private sector, as Instead, focus should be on rationalizing expenditure well as closer coordination with fiscal operations. and additional sources of concessional financing. 48. These short- to medium-term recovery macro And whereas government is implementing the management policies ought to be integrated with longer Performance and Policy Actions 34 under the World term structural reform that will ensure sustainability. This Banks’ Sustainable Development Finance Policy, to will include accelerating reforms to strengthen revenue ensure debt sustainability, it could further enhance mobilization through the implementation of the DRMS; debt transparency by putting in place a framework for improving public investment management; rationalization closely monitoring all sources of fiscal risks, including of public expenditure to support faster, sustainable, and SOEs financial performance, domestic arrears, National inclusive growth by investing strongly in human capital Social Security Fund pension restructuring, and development and improvement of the trade and business lending schemes, among others. environment, including through green investments, and (iv) Adopt a cautious monetary tightening stance in face tapping into prospects of regional integration initiatives like of rising inflationary pressures: Monetary policy the African Continental Free Trade Area. 34. The World Bank’s Sustainable Development Finance Policy requires countries that have ‘moderate’ or ‘high’ risk of debt distress to formulate and implement Performance and Policy Actions to help them work towards reducing this risk and maintain sustainable debt positions. Since Uganda shifted to the ‘moderate’ category of risk of debt distress, it has formulated and will be implementing policy actions in the areas of debt management to limit the growth of its debt; public investment management to improve efficiency and support fiscal sustainability, and to reform tax policy to expand its tax base. 33 PART 2 CREATING SPACE FOR FISCAL CONSOLIDATION THROUGH BETTER PUBLIC INVESTMENT MANAGEMENT Uganda’s increasing fiscal vulnerabilities can be traced to three factors: a low tax effort, disproportionately high current spending, and consistently ambitious capital spending marred by inefficiencies 34 35 53% of GDP Total public debt is expected to continue rising by FY24 considering the government’s ambitious investment program 3.1 Tracing options for fiscal consolidation 49. Uganda’s fiscal and debt variables have deteriorated steadily since 2015, and vulnerabilities are mounting. The fiscal deficit has expanded substantially over the past few years, from 4 percent of GDP in FY16, to 9.2 percent in FY21 – well above the Charter of Fiscal Responsibility that had aimed to keep the deficit at 3 percent by FY21. In parallel, public debt rose considerably, from 22 percent of GDP to almost 50 percent in FY21 (as discussed in section 1.7). The latter occurred despite the rebasing exercise in 2019 that raised nominal GDP by about 17 percent, thereby enlarging the repayment capacity of the country. Total public debt is expected to continue rising to 53 percent of GDP by FY24 considering the government’s ambitious investment program. Whereas debt is still sustainable, the debt service ratios are charging above the comfortable threshold and hence reducing the fiscal space for responding to shocks. 50. The planned fiscal consolidation is critical to rein in these vulnerabilities and ensure fiscal sustainability. Uganda’s increasing fiscal vulnerabilities can be traced to three factors: a low tax effort, disproportionately high current spending, and consistently ambitious capital spending marred by inefficiencies. According to the recently published Systematic Country Diagnostic,35 these Uganda’s increasing three factors have resulted in large primary deficits, which drove fiscal vulnerabilities the increase in debt. In line with its Charter of Fiscal Responsibility, government expects to reduce the fiscal deficit from 9.2 percent of can be traced to three GDP in FY21 to 3.5 percent into the medium-term. The fiscal policy factors: a low tax effort, consolidation path is expected to be realized through increased disproportionately high effort to implement the Domestic Revenue Mobilization Strategy to current spending, and generate an increase of tax revenue by 0.5 percent of GDP per year consistently ambitious and cutting spending in non-priority areas. capital spending marred 51. On the expenditure side, fiscal adjustment could benefit by inefficiencies strongly from realignment and rationalization of the capital expenditures, and particularly addressing the inefficiencies in spending and implementation of the capital budget. In absolute terms, public expenditure more than doubled over the last 10 years, hence maintaining pace with economic growth. Growth in 35. World Bank 2022b, April 36 the expenditure to GDP ratio has been more pronounced over though Uganda’s capital expenditure shot up since FY18, the past five years – soaring by over 7 points from 12 percent with the share in total spending rising to 28 percent during in FY15 to 19 percent in FY21. Nonetheless, at 18 percent of FY20 and FY21 (Figure 29), its share in GDP has averaged 3.1 GDP, Uganda’s average government expenditure is lower percent, and remains lower than that of its peers (Figure 30). than the SSA regional average of 25 percent (excluding the This underscores the need to raise the efficiency of the capital peer countries) over this period, particularly because of budget to generate more economic growth and contribute the low revenue effort. It was also low compared to Kenya more strongly to fiscal consolidation and sustainability. and Rwanda with 25 and 28 percent, respectively. And even Figure 29. Trend of total revenues and Figure 30. General government expenditure in selected expenditure (% GDP) regional countries, average 2016–21 (% GDP) 28.2 24.8 25.0 18.2 15.9 16.9 Source: BOOST, WEO 2022, April Source: BOOST, WEO 2022, April Figure 31. Share of Public Expenditure by Figure 32. Capital expenditure in selected regional Category (%) countries, average 2016-21 (% GDP) Source: BOOST, WEO 2022, April Source: BOOST, WEO 2022, April. * RWA: 2017-21; ETH: 201 37 52. Fiscal adjustment will be complicated by fiscal rigidities to differences in their identification and budget structure, that require making tough choices, regarding institutional regional peers show a lower rigidity composition.37 Uganda’s arrangements that have become part of public policy. budget share of non-discretionary items of approximately 56 Analysis of Uganda’s budget,36 depicts that the share of non- percent is also far higher than the SSA average of 48 percent. discretionary items of the government expenditure, which Compared to the average of low-income countries, Uganda provides a high-level and broad estimate of budget rigidity, still has a difference of eight percentage points, making it a increased to 56 percent during FY09–FY13, from 46 percent less manageable budget structure in the short-to-medium over FY18–FY21. While the comparison of rigidity levels with term (Figure 33). other countries should be interpreted with caution due Figure 33: Fiscal rigidity: Uganda’s share of non-discretionary spending in comparison with other regions (%) Source: BOOST, WEO 2022 53. The planned fiscal consolidation, alongside demands how to prepare, implement, operate, and manage public to right-size the public sector, will hinge on increased investment projects. The International Monetary Fund efficiency of investment to enable more growth. Given the (IMF) estimates – based on a survey of the efficiency of PIM rigidity of the budget and likelihood that the fiscal space systems in a range of countries having gone through PIM for public capital spending will be capped by the fiscal assessment – suggest that an average country obtains 30 consolidation agenda in the coming years, it becomes percent less output in terms of physical infrastructure for a important to increase the output for each shilling spent given expenditure than the most efficient countries. Up to two on public investment. There is a significant dividend from thirds of this efficiency gap could be clawed back through improving public investment management (PIM) – the improved PIM institutions (IMF, 2015). institutions, systems, and processes guiding decisions on 36. World Bank 2022a. Forthcoming. 37. Lower rigidity may not necessarily reflect similar challenges in implementing fiscal policy as some rigidities may be easier to change in a specific country context, depending on the legal and other institutional framework. 38 3.2 Notable reforms to public proposals for feasibility and viability before they enter the pipeline of ready-to-finance project proposals. To guide investment management but the selection of projects out of the pipeline for financing challenges remain (i.e., into the budget), the DC uses a published criteria for selection of projects into the public investment plan (PIP).40 54. Cognizant of the benefits that closing the efficiency 56. Furthermore, to streamline project information and gap would bring to its public expenditure and overall digitalize the appraisal function in MoFPED, an integrated fiscal management, Uganda already embarked on a bank of projects (IBP) was set up. The IBP system is the series of reforms to strengthen its public investment central tool for MoFPED to manage Government capital management (PIM). The reforms followed a comprehensive investments through four interlinked subsystems, which multi-year action plan derived from a PIM diagnostic ideally operate as the four decision gates through which adopted in 2015, 38 to strengthen the preparation, selection, a project must pass before it is approved – these include implementation and monitoring of projects. Since then, a project concept, project profile, prefeasibility study, and dedicated department in MoFPED – the Project Analysis feasibility study. The system will interface with other and Public Investment Management (PAP) Department – public finance management (PFM) and monitoring systems was established to spearhead the PIM reforms within a (including Aid Management Platform, Program Based clear PIM framework of operation. The key functions of the Budget System, Integrated Financial Management System, PAP Department have included developing and promoting e-Government Procurement System, and Prime Minister’s the use of standard guidelines and user manuals for Information Management System) to enable tracking of project preparation and appraisal, national parameters and the projects throughout the entire project cycle. These economic conversion factors to aid in project and program interfaces eliminate duplication and maximize synergies appraisal, as well as selection criteria for projects into the between and across government. public investment program (PIP). This would ensure that the same approach and process is used across government 57. The reforms have been followed with a strategic in preparation of projects. capacity-building effort aiming to improve MDAs’ capacities across the PIM cycle. Over 200 government 55. In line with the requirement of the PIM framework officials drawn from the PAP Department and select to have an independent reviewer of projects, the MDAs41 have been trained in project appraisal skills and Development Committee (DC) was reconstituted to other critical areas across the PIM cycle, including in perform the gatekeeping function and build a pipeline procurement and impact evaluation. Government has also of bankable projects. Members of the DC are drawn set up a PIM Center of Excellence in Makerere University to from most crucial stakeholder institutions in the project build capacity in this area sustainably and affordably. management process.39 The Permanent Secretary and Secretary to Treasury chairs the DC, and PAP is the 58.These reforms have brought some good practices secretariat. The DC is entrusted with the task of appraising to Uganda’s PIM system. One of the most important the project proposals submitted by the programs, developments has been putting in place a standard process ministries, or agencies as per a standardized PIMS for improving the quality of projects that are entered into framework and using specific guidelines for review and the national budget. Not only are there guidelines for approval of investment projects. The main tool of the DC government officials to prepare projects, but there is also is the Development Committee Guidelines which were a systematic process for reviewing and appraising the published in 2016 and used to review and appraise project projects before they are included in the budget. Alongside 38. MoFPED 2016. 39. Membership includes Office of the President, Office of the Prime Minister, Office of the Solicitor General, Public Procurement and Disposal of Assets Authority, National Planning Authority and MoFPED. 40. MoFPED 2021. 41. Key MDAs that were trained included MoFPED – PAP/PIM, PPPU, Debt and Cash Policy, National Planning Authority, MLHUD, Uganda Revenue Authority, MoWE, PPDA and Ministry of Agriculture Animal Industry and Fisheries. 39 these reforms, a comprehensive and authoritative national past their planned exit periods, with some extended by more development strategy is linked to programs and their program than 12 years and only 40 percent of the projects in the Public implementation action plan. It provides clear strategic guidance Investment Plan (PIP) were still within their expected time. on required investments through a list of investment initiatives 60. The persistent PIM challenges underscore the complexity within the National Development Plan (NDPIII), including their of reforming PIM frameworks, given the many institutions, indicative cost. The effects of these reforms are already visible processes and mandates that must work together to form in the improved quality of projects submitted by MDAs to the a system that is able to manage investments efficiently. Development Committee for approval and admission into the It is not sufficient to prepare and appraise projects so that PIP. Moreover, the percentage of projects that are underpinned they meet criteria for economic return when the budgetary by a cost-benefit analysis (CBA) out of the total entering the allocation process would not fund them efficiently. Nor is it PIP, while still low, has improved from 10 percent by 2015, to 37 useful if implementation weaknesses raise project costs well percent for FY21, as reported by MoFPED. The impacts of some of above the original estimates from the cost-benefit analysis, these reforms may be realized only some time in future, but they thereby converting the project into an economically unviable raise hope that investments are starting to be managed well. venture. Globally, it is well known that whilst the PIM process 59. Notwithstanding the progress achieved in putting in is rooted within the theory of economic efficiency that aims place these processes through the implementation of to maximize the returns on investment, the practical process the PIM action plan, several challenges remain. There of project selection, funding and implementation can be quite are instances in which measures and guidelines have not political. This introduces another critical aspect that must be been adhered to. According to the Auditor General’s Report well understood because reforms that threaten the status for FY20/21,42 out of a sample of 371 projects in the public quo can be met with public or covert resistance. investment program, 245 projects (66 percent) with total project values of UGX643.4 trillion, did not have feasibility studies undertaken before they were allocated financing. It 3.3 Identifying gaps in the public is also noted that capacities would need to be enhanced in investment management system some MDAs to even understand the studies that have been done by external agents. Some externally funded projects 61. A recent assessment of the PIM system updated the have not followed national guidelines and aspirations situation analysis to decipher reasons for the remaining when undertaking feasibility studies. On top of this, other gaps and map a way forward for the next phase of actions. challenges crop up down the project cycle, such as securing As was the case for the 2015 exercise, the diagnostic update the right of way after projects have started implementation; used the World Bank’s standard for PIM systems framework.43 inadequate counterpart funding to facilitate elements of It characterizes a formal system of public investment projects that would ideally be funded by government under management as one that allows for the transformation of externally funded projects; and poor project operation and investment ideas into investment projects and, afterwards, maintenance of assets that have been created. Section 23 of into “investment decisions”. This system should put projects the Public Finance Management Act (Amended 2015) imposes through a complete project life cycle “filter” to systematically a legal requirement for multi-year commitments to support stop bad, uneconomic projects from taking up resources that a lifetime projects financing that, in most cases, requires would otherwise be invested in beneficial, economic projects. more than one year to be executed. Yet not all projects are To assess the efficiency and effectiveness of a country’s PIM funded systematically. As a result, cost- and time-overruns system, the framework provides a comprehensive view of on projects; high commitment fees in case of externally the public investment cycle, allowing the identification of funded projects, and shortened life span of projects due to institutional and procedural gaps across the eight essential poor operation and maintenance of created physical assets features and functions, now commonly referred to as the persist. The Auditor General’s Report for FY20/21 again noted “8-Must-Have Functions.” (Figure 34 and Box 4)44. The that out of a sample of 371 projects in the PIP, 342 projects subsequent sections summarize the assessment outcomes and (92.2 percent) with budgets totaling UGX39 trillion had gone gaps at each stage 42. MoFPED 2022, February. 43. Rajaram, A. et al 2014. 44. Ibid. 40 Figure 34: The public investment management cycle 41 BOX 4 The 8-Must-Have Functions of a Good PIM System 1 The strategic investment guidance, project concept development, and pre-appraisal screening: Broad strategic guidance to guide sector-level decision-makers and preliminary screening to ensure that project concepts meet minimum consistency criteria with the government’s strategic objectives and economic classification. 2 A formal project appraisal process: A regulated set of project preparation steps that involve pre- feasibility and feasibility studies must be completed before a project can be approved for funding and appropriate methods to guide the technical analysis according to the project’s scale and scope. Independent review of the appraisal: Review by the corresponding authority (MoFPED, in the case of 3 Uganda) to counter optimism bias – overestimating demand and underestimating costs. 4 Selection and budgeting: The final decision on project selection and budgeting using a well-managed budget process and linking the appraisal and the choice of public investment projects to the budget cycle, even if the project evaluation cycle is on a different timetable; verification of project eligibility and priority; scrutiny of forwarding costs and funding during budgeting. 5 Efficient project implementation: Scrutiny for implementation realism includes organizational arrangements, procurement planning, a timetable; adequate monitoring systems; and systems for managing total project costs. 6 Ability to make project adjustments: Flexibility to allow changes in the disbursement profile – including discontinuation of nonperforming projects – to take account of changes in project circumstances. 7 Provision for sustainable operation of facilities: Processes to ensure that a new facility is ready for operation and that the intended services can be delivered on a sustainable basis; requires effective handover of management responsibility for operation and maintenance and upkeep of robust and up-to- date capital asset registers. Basic completion reviews and ex-post evaluation: A systematic review of all projects upon completion to 8 assess whether a project was delivered as specified, on time, and according to budget, and to introduce a more sophisticated ex-post evaluation to evaluate the project’s outputs and outcomes against objectives established in the design. Source: Rajaram et al. 2014 42 1. Strategic investment guidance, project first-level screening of project ideas is done at the line ministry development, and preliminary screening or local government level and the program working group (previously sector working groups before FY22). Whereas this 62. The National Development Plan (NDP) is the highest- exercise is limited to screening proposals for public investment level strategy document and provides some guidance for projects for relevance with their respective sector policies, the development of public investment projects. NDP3 has a they cannot pass the first gate of the IBP, until they have list of indicative investment initiatives, including their future demonstrated the strategic relevance to national priorities. investment cost estimates. Several strategies and investment However, not all SOEs and externally funded proposals for plans at the subnational and program levels are coordinated public investment projects are subject to systematic screening. and draw from the NDP3. The National Planning Authority Some of the line ministries review financial plans of SOEs that operates a geo-spatial system that will in future provide an they control on an annual basis, and these plans include a overarching strategic framework based on a long-term vision list of projects, but some ministries and financiers tend to be of the spatial development of the country. Strategic documents concerned with the overall capital investment envelope rather governing the activities in the various programs are, however, than the feasibility of individual projects. In cases where they quite general and do not provide specific guidance for the are externally funded, some project proposals are developed development of public investment projects. Furthermore, through to approval stage before being exposed to any form of project proposals are initiated with reference to high-level screening. strategic guidance, but the project codes in the NDP3 are 65. Overall, this phase of public investment management has different from those in the IBP, and hence are not linked to improved strongly, and hence scores highly in comparison the electronic database of submitted, approved, and on-going to international comparators, yet several gaps need to be projects, making it difficult to distinguish the proportion closed. Project preparation could be better guided with sector of projects within the PIP reflecting originally set national or program specific manuals and methodologies, including priorities from those generated within the sector programs. new concepts like sustainable development, green economy, 63. The PIM Manual for project preparation and appraisal circular economy, resilient infrastructure, climate change, stipulates the format and requirements for initiating and environmental aspects, gender issues, and social inclusion developing project proposals. This provides a standard process (disabilities). In addition, if program policies and plans as for managing project preparation and a systematic process for well as their costed objectives are emphasized as guides to reviewing and appraising the projects before they are included investment decisions, it will also attract the externally funded in the budget. However, practice follows various procedures projects to derive their demand from them. The financiers depending on the type of financing – external donor or also need to understand the benefits of adhering more to the domestic budget financing – for the different sectors’ PPPs, national process to improve efficiency. or at different levels of government. The project preparation guidelines are silent on the procedures run by state-owned enterprises and some local governments feel excluded from the 2. Formal appraisal process PIM process. Similarly, externally funded projects are prepared 66. The manual for project preparation and appraisal conforms according to the standard requirements of the financiers, which to many aspects of international good practice but the actual sometimes flout the processes that have been established. quality of project appraisal falls short of these requirements According to MoFPED, this is sometimes driven by the fact that due to differential application and capacity gaps. In addition such projects are supply-driven, hence do not have sufficient to guidance on writing project concept, project profile, pre- roots within government to support the processing. MoFPED feasibility options, and feasibility alternatives, the manual will need to strengthen the incentives and penalties as well as carries an integrated menu of appraisal options. These include sensitize all stakeholders on the need to standardize processes financial, economic, distributive, project selection, risk analysis to improve efficiency by removing the inherent institutional and management, distributive analysis, cost effectiveness fragmentation, duplication, and lack of clarity on procedures analysis, and public-private partnership project appraisals. and regulations. Combined with the project preparation templates, guidelines 64. The PIM manual and IBP provide clear guidelines on and methodologies, the conversion factor software, and the project profiling, as well as unified requirements for first- national parameters, these facilitate the project appraisal level screening of project ideas for strategic relevance. The process. 43 67. The PIM manual has worked well for infrastructure the quality of subcontracted studies. The tools are also programs but requires adjustments to improve guidance expensive and have not yet been afforded to all MDAs. Indeed, for projects with a social development objective (e.g., some MDAs indicated they carry out stakeholder analysis building schools or hospitals), and to incorporate specific qualitatively, partial sensitivity analysis and qualitative risk methodologies. The PIM manual was designed mainly for analysis in place of standard quantitative methods (e.g., infrastructure projects, hence has had to be adjusted to fit Monte Carlo simulations). Feasibility studies were generally social projects. This has particularly been recognized in of better quality in the transport and energy infrastructure respect to the requirement for all projects to have a 70:30 projects which included detailed cost estimation, demand capex/opex ratio, which is not applicable for some projects. It analysis, and project alternatives, including the option of has also been noted by users that the PIM manual provides doing nothing. These projects also conducted an economic very generic guidance, leaving lots more subjectivity than analysis and calculated the net present value (NPV) and would be desired in the process of preparing projects. MoFPED internal rate of return (IRR). In fact, the roads sector has, would need to spearhead and supervise preparation of since FY09/10, developed a practice of preparing a pipeline program specific methodologies to streamline the process of projects that are funded as finances materializes. More further. These would include program project preparation and capacity enhancement is needed for other sectors. appraisal methodologies with templates, case studies, and 70. The PIM Manual and guidelines are cognizant of the training. Moreover, for the roads, a further differentiation of need for environmental assessment at appraisal stage of the methodologies is required, including for major highways, the project cycle, but it would need to incorporate several urban roads, and rural feeder roads. other practices. The PIM manual provides for environmental 68. However, not all projects have been subjected to these module as one of the key building blocks during feasibility sophisticated processes. According to information in the studies. The PIM manual and its DC guidelines are silent on public investment program (PIP), while there has been some climate change and social safeguards. There is an opportunity increase in the number of projects studying the economic to improve in the integration of environmental and climate and financial viability of their projects before they requested change considerations in the PIM system. funding, only 37 percent of projects that entered the PIP 71. Government’s established appraisal process has in FY21 had undertaken the full cost-benefit analysis, with sometimes been sidelined by requirements for donor funded this number reducing to 21 percent in FY22, due to COVID-19- projects, resulting in unequal application and/or parallel related projects that could have been processed on unusual and duplicated processes. External financiers have own terms. This is mainly due to limited capacity, both in terms processes and requirements that some MDAs use as the of funding, tools and human skills.45 The remarkable capacity standard. Whilst some donor requirements use very detailed, building effort that has been spearheaded by MoFPED is yet specific requirements for construction projects, others either to create a sufficient pool of such skills across line ministries, have gaps or fall below the bar that has been set by the state-owned enterprises, and subnational governments. government. The current practice ensures that these projects Makerere University’s Centre of Excellence in PIM is a are subject to assessment of their feasibility, including both significant step in the right direction, to create this capacity the financial and socioeconomic viability, the intensity differs sustainably. and could jeopardize the project outcomes. This also causes 69. Given the capacity challenges, resource constraints, delays as it creates parallel channels through which projects and related differential application of the requirements, are processed. As the administrative processes become the quality of feasibility studies varies greatly. Many entrenched and formalized, it is crucial for development MDAs outsource their pre-feasibility and feasibility studies, partners to respect the country process, as it will drive more for which they may sometimes not be able to supervise efficiency. 45. World Bank 2022b. Forthcoming. Cost-benefit analysis or discounted cash flow analysis is quite sophisticated. Undertaking an integrated project appraisal would require diverse skill sets across the different components of this analysis. First, a financial appraisal of a public investment project requires strong quantitative skills and knowledge of accounting, taxation, financial math, banking, statistics, and solid financial modelling competencies in Excel. Second, the economic appraisal requires further understanding of applied microeconomics, data analysis (database management), statistics, econometrics, etc. And finally, the risk analysis requires the expert use of Monte Carlo simulation software. Those skills are not available across all MDAs in the Government of Uganda. 44 72. A single appraisal process for all projects irrespective practice for projects to be subjected to an independent of their size, complexity, or risk, has made the PIM process scrutiny. Through its technical sub-committee, the DC lengthy and cumbersome. So far, the practice of undertaking assesses projects for their economic viability, although pre-feasibility and feasibility studies applying integrated the extent and depth to which this is done is not clear. The project appraisals has been minimal in the Government of strategic case for projects is undertaken by the main DC as Uganda. Adopting thresholds in the project’s CAPEX would the final “gatekeeper”, and hence provides the no-objection ease the effort in project appraisal. Thus, small projects for the project to proceed into the PIP for consideration for would not require a complete cost-benefit analysis and could funding. Projects can be approved, fully rejected, or rejected only fill out an enhanced project concept note providing the with comments for revision at the four decision gates. This project’s cost structure. A comprehensive, integrated project has provided some form of handholding, mentoring, and appraisal would be mandatory for medium, big and mega- capacity enhancement for project teams which are guided projects and all PPPs. Furthermore, MoFPED would have to by the DC to improve on their project proposals. At the same develop project-specific project preparation and appraisal time, projects are also rejected – out of 222 project proposals methodologies to provide more specific guidance to the MDAs. that were considered by DC during FY20, 19 were rejected at concept stage, one at profile stage (Figure 35). Nonetheless, 73. Overall, the appraisal function has made major strides, even prior to the COVID-19 disruption, only about 37 percent but generally capacity and funding challenges are holding of new projects in the PIP completed the DC process, which back gains to the PIM process. Government must sustain the indicates that some projects are proceeding even if they capacity-building effort and adopt a more sustainable and have not been cleared by the DC (Figure 36), suggesting efficient approach to financing project preparation, including that the DC is not properly performing its gatekeeper role. feasibility studies and introducing thresholds for projects that Indeed, the DC process would need to mature and adopt a will require feasibility studies, while incorporating stronger standard process with an official or formal ‘Seal of Quality’ avenues for both climate appraisal criteria and social/ provided by the Minister of Finance at the end of this process environmental criteria in the process. - including binding limits on what type and what proportion of projects can be allowed to jump the processes or queue. 3. Independent review of appraisal process Sometimes projects are allowed to do this because of ‘special’ considerations, including urgency for loss of funding in the 74. The Development Committee (DC) is the independent case of externally funded projects or directives. reviewer and gatekeeper of GoU. This mimics the good Figure 36: New projects in the public investment Figure 35: DC appraisal process in FY20 and FY21 program and the DC process Source: MoFPED Source: MoFPED 45 75. Overall, the independent review function is good, but its While drip-financing of ongoing legacy projects is very gatekeeping authority would need to be enhanced to close inefficient, as is the use of past allocations to guide budgets for the gaps. While the composition of experts in the Committee projects. The latter practice introduces a substantial amount of allows to assess the economic case of the projects, the extent sluggishness into the budgetary process or fiscal rigidity that and depth to which this occurs in practice is unclear. The excludes any evaluation of the fit between current spending projection of the workload and requirements on DC members patterns and stated policy goals. It also results in programs could overload their capacity. At the same time, while the DC receiving funding long after their purpose and goals have has exercised its authority and rejected some projects, not become obsolete. This is not helped by the cash rationing all projects in PIP have completed the DC process, which is of the cash flow committee at the vote level rather than the indicative of gaps in the gatekeeping function. This function project level, which further encourages the practice of project could strengthen with a formal “Seal of Quality” to clearly drip-financing. This practice also leads into underbudgeting separate projects that have been appraised and approved operation and maintenance (O&M) expenses. The move into by the DC, alongside clearly stipulated thresholds, and performance-based budgeting, effective FY23, is expected to implications for violation of the process. improve expenditure control, raise efficiency, and enhance performance, given its focus on performance targets, which trigger funds allocation once met. In addition, implementation 4. Project selection and budgeting of the selection criteria for projects into the budget will 76. Selection of projects for funding is executed by DC, reduce drip-financing as it requires that projects are only following the endorsement of quality of the project. This recommended for codes if their multi-year requirements fit in process has been further streamlined after the DC formulated the available MTEF. and adopted the criteria for selection of projects for financing 79. The on-going effort to review the portfolio of projects starting FY22. The criteria, which include strategic readiness, to exit projects that either stalled or ran their course will implementation readiness (e.g., access to right of way, land rationalize the portfolio and greatly improve budgeting. acquisition, and procurement plans among others), promise to The IBP/PIP provides a complete overview of the portfolio address delays that have still been experienced when projects of projects across financing sources. The operation and enter the budget not ‘shovel-ready.’ Nonetheless, it is not clear maintenance module of the IBP, only completed in FY22, will whether projects that have not fulfilled these conditions cannot provide information on many characteristics, and performance enter the budget. of ongoing projects. This will be instrumental in providing 77. Budgeting for public investment projects is done a central location to build a complete inventory of public within the context of a five-year Medium Term Expenditure investment projects, which could be used to assess the Framework (MFTEF), but further improvements would performance of the portfolio and the financial obligations be required. The capital and current budget elements are to complete projects. It will be important to define and integrated within a medium-term budget horizon. However, institutionalize the procedures and criteria for the review and the outer year estimates are re-generated on a yearly basis exit of projects (as is done for their selection into the budget) and the MTEF is thus not operating as a rolling framework to rationalize the portfolio and make room for new projects – and plays only a minor role in the setting of the annual including by terminating, curtailing, or speeding up projects. budget ceilings for subsequent years. Furthermore, capital 80. Overall, budgeting for projects remains a major problem, expenditures (capex) and operational expenditures (opex) are and contributes to the time overruns and failure to maintain separated in the MDA budgets, which leads to underbudgeting investment assets. The new selection criteria must be of operation and maintenance (O&M), especially in the roads implemented strictly as it promised to ensure that no new sector. Several MDAs also indicate that maintenance of projects should enter into the budget unless the readiness completed assets has been a challenge because the O&M for criteria are met, and the existing ongoing projects have been capital projects is not systematically included in the budget. budgeted for in full over the MTEF. Sufficient budgeting for O&M The multi-year ceilings on ministry or investment program requires keeping track of your stock of physical assets, linking capital expenditure are only indicative, but not binding. them to cost centres/programs in the budget, and ensuring 78. There are other practices that make budget financing those cost centres/programs have adequate funding for O&M. inefficient, including drip financing and incremental financing. 46 5. Project implementation are partially implemented. Furthermore, given its staff size and budget, BMAU cannot monitor all public investment projects; 81. Project implementation continues to be a challenge therefore, has to be selective, and hence mainly target big and reflected by the execution rates. The central government’s problem projects. Even then, this financial information and capital budget execution rates averaged 65 percent over the indicators on physical progress of investment projects are not period FY16–FY20, compared to 55 percent over the past five accompanied with performance information to enable tracking years, which indicates the weaknesses in ability to plan and of whether the projects achieve their stated objectives. Without execute investment projects efficiently. Most projects which this overview, government cannot review and revisit on-going started during FY16 and planned to last four years, extended projects across the portfolio and to make timely adjustments their planned duration by 1–4 years. Externally funded projects to the course for projects which are off-track. particularly face delays in completion, with some having taken twice as much time as originally planned. An assessment of the 84. The policy and regulatory framework for public World Bank funded projects revealed that in some cases there procurement has been kept up to date alongside a strong were bottlenecks between approval of the project concept and institutional arrangement, yet procurement remains a completion of the feasibility study; in two cases there were major issue in implementation of projects. A procurement time lags between finalization of technical documentation and policy approved in 2019, has a supporting law – the Public selection for financing; and while procurement processes show Procurement and Disposal of Assets Act, last amended in fewer delays than one might expect, the award of the contract 2021. A department responsible for policy formulation and took almost 10 months in one case. oversight sits in MoFPED, while Procurement and Disposal of Public Assets Authority provides regulatory oversight on 82. While implementation of projects is a responsibility of public procurements. Open competition is the default method MDAs across government, there is not a single governmental for public procurement, and the Law on Public Procurement body to guide, supervise and regulate project implementation. requires project procurements to be based on annual No entity establishes standards for project management nor procurement plans. Pilots for a new e-procurement system supervises MDAS and LGs to ensure set standards are met. are ongoing before the final system is rolled out across There is neither an entity that promotes compliance with the government. For externally funded projects, procurement standards, nor actively engages in the improvement of project procedures are defined by the related agreements and management standards. Therefore, there is no standardization contracts. in project execution. Civil engineers know PMI® 46 and PMBOK®,47 but PMBOK standards are not formally used nor 85. Nonetheless, procurement challenges abound. For the demanded by the GoU. Public officials with a PMP certification case of World Bank funded projects, implementation is heavily are very scarce. affected by delays in preparation of bidding documents; delays in environmental and social safeguard studies; contractors’ 83. The requirements for public investment project monitoring non-performance through not resourcing programs and and reporting are not centrally defined, which results in poor workmanship; delays in payment of service providers a lack of updated information and overview of the full constraining cash flow to support construction; implementation public investment project portfolio. Various bodies within agency staff not being familiar with procurement regulations government collect project information for their own needs, but and changes of procurement staff within the project delivery these are not unified as they rely on standalone applications units, which result in loss of knowledge built under previous coupled with manual updates using ad hoc reporting formats. projects; design changes during implementation stage resulting The Budget Monitoring and Accountability Unit (BMAU) under in time and cost overruns; submission of forged documentation its mission of enhancing the implementation and performance in the bids and misrepresentation of qualification requirements of projects, monitors the project budgetary outlays and the by contractors; bid tampering resulting in other wise physical advance of projects, both in quantity and quality. unqualified bidders being awarded contracts and subsequent BMAU has specialists in roads, energy, water, agriculture, time overruns; and skill gaps in preparation of technical human resources, ICT, education, health planners and certified requirements and contract management. 48 accountants. However, recommendations from these reports 46. PMI® is Project Management Institute Certification. The Project Management Professional (PMP)® Certification from PMI is an acclaimed industry-recognized certification for project managers., 47. PMBOK® is a guide to project management body of knowledge 48. World Bank 2022, April 47 86. Overall, this stage of public investments in Uganda instance, several World Bank funded projects are adopting remains the biggest weakness in the Uganda’s PIM system, real-time data collection and analysis through the Geo- and it must be one of the key next challenges to tackle. Enabling method for Monitoring and Supervision (GEMS). Capacity must be built across government to support the The GEMS method, previously developed for hard-to-reach procurement function to manage not only the process to the areas, enables project teams to use open-source ICT tools for point of award of contract, but also contract management in-field collection of structured digital data from the field that and supervisions. The new e-governmental procurement automatically feeds into a centralized M&E system and MIS. system will need to be harmonized and integrated with the The integrated data can include any kind of indicators, based IBP. And government to explore technology to improve project on tailor-made forms; photos, audio, videos; time and date implementation. The Building Information Modelling (BIM) stamps; and GPS coordinates that allow for automated geo- – which is the foundation of digital transformation in the mapping of the information. Using these tools systematically architecture, engineering, and construction (AEC) industry – allows the project to enhance the transparency and accuracy is one such venture to explore for managing investments in of project planning as well as M&E and third-party monitoring infrastructure programs. throughout the project cycle. This digital platform allows for remote supervision, real-time safeguards monitoring, and portfolio mapping for coordination across project components 6. Project monitoring and adjustment and can be linked to the IBP. 87. The existing systems for M&E in GoU focus mainly on monitoring and, to a lesser extent, evaluation and analysis. 7. Project operation The Office of the Auditor General (OAG) carries out value- for-money audits and ex-post audits for significant capital 90. There are no specific requirements to guide completion projects, and Parliament scrutinizes these. However, project review and ex-post evaluation of public investment audits are different in scope and emphasis from ex-post projects. As a result, there are weaknesses in the process evaluations. There is no clear policy and practice of subjecting of handover of assets and establishing accountability for multi-year projects to review the original business case their ongoing management and use to deliver services. during project implementation when costs, delays, design Governmental assets are registered but not necessarily changes, or demand changes exceed some specified level. managed. Some assets are handed over to the operating There is no evidence of large projects being significantly re- entity but stay idle due to nonexistent legal frameworks, designed, scaled down, or cancelled. mismatch in complementary investments, and over-optimistic demand forecasts for the project assets. Many capital assets 88. MoFPED has started reviewing existing projects that are are under-utilized or poorly maintained due to a lack of no longer relevant in the PIP, as part of the activities on the operations or maintenance funding. There are several cases DC calendar which is shared with all MDAs. The respective where assets are not fit for purpose when handed over for stakeholders are also invited to the DC when their projects service delivery. Clear guidelines, manuals and rules need to are being reviewed. Nevertheless, some MDAs indicated be developed to guide the operation phase of the PIM system that the mechanism that triggers such a review is not clear. With the IBP M&E function fully developed, regular reports on financial and physical progress of public investment 8. Basic completion reviews and ex-poste projects will provide the basis for actively monitoring the evaluation project portfolio from the central level. MoFPED will be able to regularly collect the necessary information to monitor 91. There are no specific requirements in place to guide projects. However, the procedure for the reassessment completion review and ex-post evaluation of public of project implementation is not specified and there is no investment projects. Only a few projects, predominantly systematic review by the MoFPED of whether a project has externally funded, carry out essential ex-post project undergone major adjustments and the criteria for allowing a reviews. The service delivery unit under the OPM and the project’s continued justification if there are material changes Accountant General’s Office institutes a board of survey to to project costs, schedule, or expected benefits. monitor public assets. Some MDAs also monitor public assets under their responsibility, and other external agencies do 89. Actual monitoring and supervision of projects can surveys on public assets. Ex-post evaluations are done very also be enhanced through technological innovations. For infrequently in the GoU, even though such analyses could 48 be instrumental in informing future actions on other projects. work will still be required to create the pool of resources Ex-post evaluation can check whether projects delivered the needed to manage projects across the entire PIM cycle. For benefits expected from them at the time, as well as inform on instance, project preparation and appraisal skills need to which projects did better and which performed worse than be entrenched in all programs, MDAs, and different levels of expected, and why. Therefore, an ex-post evaluation policy government, and the project managers that are critical players and methodology should be formulated, espousing a gradual in project implementation need to acquire modern project adoption, primarily focusing on the more critical projects management skills. The PIM Centre of Excellence in Makerere in the first stage and graduating to more products as the University will need to be nurtured to maturity to ensure a system matures. The idea is to have a conceptual framework sustainable and affordable mode of building these capacities. demonstrating the impacts of infrastructure projects on Third, the project preparation fund to ensure that priority society and a typology of effects for investment projects in the projects undergo feasibility and/or pre-appraisal studies while infrastructure sectors and the timeframe of the impacts. awaiting inclusion to the PIP, has recently been set up in NPA, which is a major step. For sustainability, such a fund will need to put in place a proper implementation and governance 3.4 Some options for further structure to sustainably address the funding challenges in improvements in Uganda’s PIM system project preparation. Lastly, beyond the pre-investment stage, the rest of the PIM cycle (especially project implementation 92. There have been some genuine improvements around and asset management) must be improved if projects are to the administrative processes of the pre-investment phase yield the expected dividend. of PIM in Uganda, but the challenges in critical areas, including project prioritization and selection, budgeting, and 94. Beyond the critical factors of success of back in 2015, implementation need to be addressed urgently to raise value there is work to be done across the various stages of the PIM for money in delivery of projects and support the envisaged process (see Table 4), the crucial issues to address relate fiscal consolidation agenda. On one hand, challenges with to strengthening the gatekeeping function, budgeting, and project prioritization and alignment to the achievement of implementing projects. First, the gate-keeping function can be program (previously sectoral) objectives, remain. And since strengthened by introducing a legally binding “Seal of Quality” the programs poorly define and do not appropriately cost at the end of the appraisal stage to signify readiness of project their priorities, they also fail to drive the investments that are proposals for financing, and to strengthen the formal authority financed externally. On the other hand, actual implementation to the PAP Department to match it with the importance of is constrained because the budget allocations do not fully its function. Second, budgeting for projects must improve. cover the costs of implementing ongoing projects through Allocation of resources for projects must use the project genuine multi-year commitments, while the budget takes on life cycle approach and also close the gaps in budgeting for new projects. This is further exacerbated by budget cuts during operational and maintenance costs. To promote the culture of budget execution and the fact that projects are often not ready project maintenance, each project must have at its appraisal, for implementation, as well as weaknesses in procurement and the ex-ante appraisal forecasts of both the project’s capital and contract management, all of which contributes to poor value operational expenditures. And finally, Uganda must improve for money in the delivery of public investments. the implementation phase by building project implementation capacities (including procurement and contract management 93. The first set of reforms focused on improving quality skills) while at the same time, strengthening and streamlining of projects at entry, and they included critical success the M&E functions of the PIM System. factors identified in 2015 that need to be completed. First, government has started working on a PIM policy to formalize the administrative reforms that have already been put in place, and a basis for strengthening the legal framework, The PIM Centre of Excellence in including the gatekeeping function. Before it reaches finality Makerere University will need to of strengthening the legal framework, the reforms that have be nurtured to maturity to ensure a been undertaken remain administrative actions that could sustainable and affordable mode of be reverted or ignored without any consequence. Second, building these capacities. although the capacity building effort has commenced, further 49 Table 4: Options for strengthening the cycle of public investment management in Uganda Investment guidance, • Incorporate at planning stage, a system for conducting a pre-appraisal analysis of project development, investment initiates (pre-screening phase) before entering them into the NDP-03. Such and preliminary a system would also generate a project code that can be traced to the rest of the project system within the IBP. screening • Establish a capex threshold to support a fast-track process for projects that meet certain characteristics (less challenging projects in terms of demand analysis, technical design and low budget). • Update the project preparation guidelines with elements of the project that have become critical, including gender, circular economy, climate change, and intersectoral projects, that require a joint action taken by multiple government entities. • Develop internal capacities for project preparation, especially at a subnational level if they are to engage in project preparation and screening at the local government levels Formal project appraisal • Develop sector-specific project preparation and appraisal methodologies, including updates of the national parameters to incorporate missing elements. • Update the PIM manual with new critical issues including climate change, gender, green growth, resilient infrastructure, and social inclusion. • Provide dedicated and specific resources for project preparation, including setting up the project preparation fund. • Step up efforts for building capacity of MDAs and public officials in financial modelling, economic analysis and risk analysis. The Makerere University CoE should provide the formal process to train and develop public officials’ skills in project preparation and appraisal to strengthen the in-house capacity in line ministries and other agencies. Independent review of • Introduce a legally binding “Seal of Quality” at the end of the appraisal stage to signify the appraisal readiness of project proposals for financing. • Integrate the Bank of Projects (IBP) to the new e-Government Procurement System (EGP). The procurement system gives codes to project contracts, but the system must ensure that all the contracts belonging to the same project are tracked back to their originating project. • Strengthen the formal authority to the PAP Department to match it with the importance of its function. Organizationally, this could be possible if PAP Department and the PPP Unit are unified under the same umbrella. Alongside this, enhance the functionality of the PAP Department by instituting a PIM Technical Unit to continuously provide strategic thinking for the Unit including developing new technical tools and methodologies, and shadow prices for project appraisal. Project selection and • Improve the process of allocating resources for operational and maintenance costs. Projects budgeting should not be separated into capital budgeting independent from their current budgeting. Each project must have its appraisal, and that ex-ante appraisal forecasts both the project’s CAPEX and its OPEX. This also promotes the culture of project maintenance. • Institute a system for continuous re-assessment of the GoU project portfolio (PIP pipeline) to ensure they remain up to date and ready for financing. • Establish a mechanism within the budget process of ensuring the DC-approved project proposals can go through the selection criteria to implementation-readiness (including accessing rights of way, undertaking compensations, environmental permits, and preparing work and procurement plans). • Accelerate the development of infrastructure corridors as one option to alleviating the land challenges with infrastructure projects. 50 Project implementation • Streamline the M&E functions of the PIM System to address oversight overlap because of different mandates and eliminate duplication in M&E tasks, which fatigues the MDAs. • Improve the coordination of monitoring function. MoFPED, the NPA, OPM, and OP should coordinate to remove to create synergies and the IBP and the O&M System must be compatible and synchronized to ensure harmonization of project codes. • Enforce the PMI®’s PMBoK® Project Management Body of Knowledge standard for project implementation. In this regard, BMAU should adopt concept of Earned Value Management to control and have the complete picture of the projects. • Adopt and enforce standardization for project execution. Engineers are conversant with PMI® and PMBOK®, yet these standards are not formally used nor demanded by the GoU. The pool of public officials with a PMP certification should be increased to support project implementation. And PMP certification should be included in biddings to incentivize contractors with PMP certified personnel and build demand for those professionals. • Introduce and enforce sanctions to public officials’ incompetence or outright corruption in project preparation and execution. Project adjustment • Establish automatic triggers to underperforming projects. • Re-think the procurement controls and project implementation guidelines to control for changes in the project scope, and consistency with the DC initially approved project parameters Facility operation and • Impose an effective process for handover and institutionalization of accountability for asset management effective facility operation. This will clarify mandates and responsibilities for reporting and controlling of expenditure commitments and the timely release of funds, after the project construction is completed to service delivery. • Establish an asset register that espouses the facility management preservation of value to maximize the return from the assets. This can build on the Accountant General Office’s efforts, which is so far exclusively for accounting. • Improve budgeting for maintenance and repairs, as part of the management function for the assets, by strengthening multi-year budgeting and to capture project cost through their life cycle. Project evaluation and • Formulate and adopt an ex-post evaluation policy and methodology, including a conceptual impact assessments framework on the impacts of infrastructure projects on society. • Impose a formal and straightforward process and responsibilities for ex-post evaluations. • Establish a mandatory requirement for short-term ex-post evaluation and reports. A standard project completion report (close-out) should be done for all investment projects by their respective MDAs 51 REFERENCES BOU (Bank of Uganda). 2022, February. Monetary policy statement report BOU (Bank of Uganda). 2022, April. Monetary policy statement report BOU (Bank of Uganda). 2022. Various Statistics Civil Aviation Authority, 2021. Air traffic data. Available at: https://caa.go.ug/statistics. IMF (International Monetary Fund). 2015, June. Staff Report. “Making Public Investments More Efficient.” IMF (International Monetary Fund). 2022, February. Staff Report for the 2021 Article Iv Consultation and First Review Under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria. IMF (International Monetary Fund). 2022. World Economic Outlook, April 2022 “War Sets Back the Global Recovery.” IMF-World Bank. 2022, February. Debt Sustainability Analysis. MoFPED (Ministry of Finance, Planning and Economic Development). 2016. “Strengthening Public Investment Management in Uganda: A Diagnostic Report.” McKinsey and Company 2022, April. “COVID-19: Implications for business.” Available at: https://www.mckinsey.com/ business-functions/risk-and-resilience/our-insights/covid-19-implications-for-business. MoFPED (Ministry of Finance, Planning and Economic Development). 2021. Available at: https://www.finance.go.ug/sites/ default/files/Publications/PROJECT.SELECTION.CRITERIA.pdf MoFPED (Ministry of Finance, Planning and Economic Development). 2021, June. Background to the Budget Fiscal Year 2021/22. MoFPED (Ministry of Finance, Planning and Economic Development). 2022, February. Half Year Macroeconomic & Fiscal Performance Report Financial Year 2021/22. MoFPED (Ministry of Finance, Planning and Economic Development). 2022, February. https://parliamentwatch.ug/wp- content/uploads/2022/02/Consolidated-Auditor-Generals-Report-FY-2021_signed_compressed-1.pdf Rajaram, A.; Le, T. M.; Kaiser, K.; Kim, J. & Frank, J. 2014. “The Power of Public Investment Management: Transforming Resources into Assets for Growth.” Chapter 2. UBOS (Uganda Bureau of Statistics). 2022, May. Consumer Price Indices (CPI). UBOS (Uganda Bureau of Statistics). 2022, March. 2021. Quarterly GDP. URA (Uganda Revenue Authority). 2022, March. Pay-As-You-Earn Data Base. World Bank and Rajaram, A.; Le, T. M.; Biletska, N.; & Brumby, J. 2010. “A Diagnostic Framework for Assessing Public Investment Management.” Policy Research Working Paper 5397, World Bank, Washington, DC. 52 World Bank. 2022, January. Global Economic Prospects. World Bank. 2022, March. Global Monthly. Available at: https://thedocs.worldbank.org/en/doc/ a8b46c2ac87710fa9694cb6ae1a891fa-0350012022/related/Global-Monthly-Mar22.pdf World Bank. 2022a, April. Africa’s Pulse, No. 25. World Bank, 2022b, April. Uganda Systematic Country Diagnostic Washington DC. World Bank, 2022c, April. Commodity Markets Outlook “The Impact of the War in Ukraine on Commodity Markets.” Washington DC. Available at: https://openknowledge.worldbank.org/bitstream/handle/10986/37223/CMO-April-2022.pdf World Bank. 2022, May. Commodities Price Data. Available at: https://www.worldbank.org/commodities World Bank. 2022, June. Global Economic Prospects. World Bank, 2022a. Forthcoming. Uganda Public Expenditure Review FY22-23 Background Paper 1 “Identifying broad options for an effective and sustainable fiscal adjustment.” Washington DC. World Bank, 2022b. Forthcoming. Uganda Public Expenditure Review FY22-23 Background Paper 2 “Public Investment Management Diagnostic Update 2022.” Washington DC.