88683 Fourth Edition, June 2014 Reducing Old Age and Economic Vulnerabilities: Why Uganda should Improve its Pension System a Uganda Economic Update Fourth Edition, June 2014 Reducing Old Age and Economic Vulnabilities Why Uganda should Improve its Pension System Uganda Economic Update 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 necessarily 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. 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The material includes a brochure, a documentary video and a number of blogs relating to issues in the report. © 2014 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org ii Fourth Edition, June 2014 Table of Contents ABBREVIATIONS AND ACRONYMS....................................................................................................... v FOREWORD........................................................................................................................................ vi ACKNOWLEDGEMENTS....................................................................................................................... vii KEY MESSAGE....................................................................................................................................viii PART 1 STATE OF THE ECONOMY........................................................................................................ 1 1.1. Recent Economic Developments. . ...................................................................................................3 1.2 Economic Outlook.. ........................................................................................................................ 14 1.3. A more efficient pension system could support equitable old age protection and economic growth ....................................................................................................... 23 PART 2 PENSIONS: REDUCING VULNERABILITIES AT INDIVIDUAL LEVEL WHILE SUPPORTING ECONOMIC GROWTH.......................................................................................................................... 26 2.1 Why should Uganda be concerned about pensions? . . ..................................................................... 28 2.2 How countries are building effective pension systems.. ..................................................................38 2.3 Designing and implementing a pension system that can maximize value for Ugandans.. ........................................................................................................................... 45 2.4 Conclusion.................................................................................................................................. 51 LIST OF FIGURES Figure 1: Quarterly real GDP growth at market prices stabilizing............................................................ 4 Figure 2: Declining GDP growth places Uganda below some of its peers in the region.. ...................................................................................................................................... 4 Figure 3: Services and industry maintain strong growth as agriculture stagnates............................................................................................................................................5 Figure 4: Volatile food inflation did not feed into core inflation ............................................................6 Figure 5: Lending rates not declining as fast as other interest rates .....................................................7 Figure 6: Outstanding credit to the private sector ...............................................................................7 Figure 7: Private sector credit growth across sectors............................................................................8 Figure 8: Changing destination of exports helped Uganda’s external position..............................................................................................................................................9 Figure 9: Capital and Financial Account more stable than usual............................................................9 Figure 10: Shilling appreciated further in spite of shortlived volatility in forex flows . . ............................ 10 Figure 11: Domestic development budget .. ............................................................................................11 Figure 12: Deviation between approved and executed budget . . .............................................................11 Figure 13: Performance of the recurrent budget in the first half of FY 2013/14 (approved vs. released)..................................................................................................... 12 Figure 14: Performance of the development budget in the first half of FY 2013/14................................. 12 Figure 15: Proposed sector allocations for FY 2014/15.......................................................................... 17 Figure 16: Debt could be pushed beyond sustainable levels ................................................................ 21 Figure 17: A comparison of African countries: Uganda has among the lowest share of population above legal retirement receiving pension.. ........................................................................................... 31 Figure 18: Pension savings low: Uganda’s workers could build stronger first step to descent retirement.. ...................................................................................................... 31 iii Uganda Economic Update Figure 19: Projected increases in the proportion of Uganda’s elderly population................................ 32 Figure 20: Projected government annual expenditure on public sector pensions ...............................33 Figure 21: Replacement rate: Uganda pays a relatively high pension to its civil service retirees compared to national and civil service schemes in other countries........................................34 Figure 22: Costs of managing pension liabilities (percentage of total assets).. ....................................37 Figure 23: Costs of managing pension liabilities (percentage of total assets or IPDs). . ........................37 Figure 24: NSSF Portfolio – changed in size, but not in composition or return....................................38 Figure 25: Cost of social pensions in Africa . . .....................................................................................50 LIST OF TABLES Table 1: Central government operations: FY2010/11 – FY2013/14........................................................ 13 Table 2: State of Uganda’s pension system.......................................................................................29 Table 3: Poverty profile by employment status of household head. . ...................................................35 Table 4: Pension reforms in African countries...................................................................................39 LIST OF BOXES Box 1: Assumptions for economic performance for FY 2014/15 and the medium term........................... 15 Box 2: Conflicting Signals over uganda’s sovereign debt rating, but positive outlook......................... 16 Box 3: Where could Uganda’s oil produce jobs?. . .............................................................................. 18 Box 4: Investing in public investment management will pay off, but where exactly are the gaps?........ 19 Box 5: Lesotho’s non-contributory social pension ensuring universal, but costly, coverage ........................................................................................................................................40 Box 6: Mbao: How innovation is helping Kenya expand pension coverage and adequacy........................................................................................................................................ 41 Box 7: How Cabo Verde managed to reduce public pension costs...................................................... 42 Box 8: How Kenya’s Retirement Benefits Authority securing pension savings.....................................43 Box 9: Nigeria: Trying to improve efficiency through competition and choice.. ....................................44 Box 10: Simulation of fiscal costs of reform of the public sector pension system. . ...............................49 ANNEXES Statistical Annexes . . ....................................................................................................................... 52 Table A 1: Macroeconomic Indicators. . ..............................................................................................54 Table A 2: Growth and Structure of Uganda’s Economy.....................................................................55 Table A 3: Quarterly growth rates FY 2010/11 - 2013/14. . ...................................................................56 Table A 4: Fiscal framework (as percent of GDP)...............................................................................57 Table A 5:Balance of payments (percent of GDP unless otherwise stated)..........................................58 Table A 6: Monthly Imports of Goods, 2012-2013 (in US$ Millions)....................................................59 Table A 7: Monthly exports of goods, 2012-2013 (in US$ Millions). . ...................................................60 Table A 8: Inflation Rates................................................................................................................ 61 Table A 9: Inflation rates (for selected items) 2011-2013.. .................................................................. 61 Table A 11: Monetary Indicators . . ......................................................................................................63 iv Fourth Edition, June 2014 Abbreviations and Acronyms BoU Ba n k of U g a n d a BOP Ba la n c e of Pay m e nt s CBR C entra l Ba n k Rat e DSA D ebt Susta i n a b i li ty A n alysi s EAC Ea st Afr i c a n Co m m u n i ty EU Euro pea n Un i o n FDI Fo r ei g n Di r ec t Inv e st m e nt GDP G ros s D o mesti c P ro d u c t HIPC H i g h ly In d ebted Po o r Co u nt r i e s ICT In fo r mati o n a n d Co m m u n i c at i o n s T e c h n o lo gy IFC Inter n ati o n a l F i n an c e Co r p o rat i o n IFPRI Inter n ati o n a l Fo od Po l i cy R e se ar c h I n st i t ut e ILO Inter n ati o n a l L a b o u r O r gan i z at i o n IMF Inter n ati o n a l M o n et ar y Fu n d IPPS Integ rated Pay a n d Pe n si o n Syst e m LIBOR Lo n d o n Inter b a nk O f f e r e d Rat e MDRI M ulti latera l D ebt R e l i e f I n i t i at i v e MFPED M i n i str y of F i n a nc e , Pl an n i n g a n d E co n o m i c Dev e lo p m e nt MoPS M i n i str y of P ub li c S e r v i c e NDP N ati o n a l D ev elo p m e nt Pl a n NEER N o mi n a l Effec ti v e E x c h an ge Rat e NSSF N ati o n a l S o c i a l S e c u r i ty Fu n d NTBs N o n -Ta r i ff Ba r r i e rs NTMs N o n -Ta r i ff M ea s u r e s ODA Offi c i a l D ev elo pm e nt Ass i st a n c e PIMS P ub li c Inv estment Ma n a ge m e nt Syst e m PSPF P ub li c S er v i c e P e n si o n Fu n d PSPS P ub li c S er v i c e P e n si o n S c h e m e REER Rea l Effec ti v e E x c h a n ge Rat e SMEs S ma ll a n d M ed i u m -si z e d Ent e r p r i se s SSA Sub - Sa h a ra n Afr ic a UEU U g a n d a E co n o mi c u p d at e UGX U g a n d a Sh i lli n g s URA U g a n d a Rev en ue Aut h o r i ty URBRA U g a n d a Reti r eme nt B e n e f i t s R e gu l ato r y Aut h o r i ty VAT Va lue Ad d ed Ta x WB Wo r ld Ba n k WDI Wo r ld D ev elo pm e nt I n d i c ato rs v Uganda Economic Update ForEwOrd I am pleased to introduce the fourth edition of the Uganda Economic Update series. Following the structure of earlier editions, the Economic Update discusses recent macroeconomic developments, as well as a special topic - why Uganda should improve its pension system. Over the past year, Uganda has managed to grow above five percent amidst droughts, disruptions related to civil unrest in South Sudan, and aid cuts. Furthermore, prices have stabilized and foreign direct investment has surged. The country’s chronic deficiencies in physical infrastructure are also being addressed by an ambitious public investment program, which has the potential to lay the foundation for an acceleration of economic growth, toward seven percent or above annually, required for Uganda to reach middle-income status over the next decade. However, the Government will have to balance its ambitious investment program by raising more domestic revenues. On this front, Uganda’s performance has continued to be poor, when compared to peers, and needs to be tackled by strong measures. In view of declining aid, commercial borrowing on both domestic and foreign markets has become a realistic option but should be carefully managed. Not only debt and fiscal sustainability are at stake but the Government will have to be cautious not to crowd out the domestic private investment, which has been growing slowly. Over the past two decades, Uganda has made great strides in reducing poverty, which has more than halved from almost 60 percent in 1992 to below 20 percent in 2013. Acceleration in economic growth is expected to reinforce this trend in the future. However, growth alone may not be sufficient. As experienced in many countries, part of the population is likely to be left out from the benefits of growth benefits. In that context, an effective social protection system is needed to protect vulnerable groups from negative economic shocks such as loss of employment, death of bread winner or bad weather. There are several groups of vulnerable people in Uganda, each with differentiated needs. One such group is the elderly, whose distinct needs may warrant a distinct policy response. While this group is still a small fraction of the population today, it is projected to increase fast, reaching approximately six million people by 2050. In this context, the fourth Economic Update asks whether the Uganda pension system could play a better role in protecting the elderly against poverty and vulnerability at the individual and household levels. Can the pension system contribute to achievement of broader economic goals? Are reforms needed to reduce fiscal liabilities related to paying pension benefits? These questions, and others (also related to the Uganda pension system), are examined in the second part of this Economic Update in light of the recent experience in Uganda as well as of international best practices. As with previous editions, I hope that this fourth Uganda Economic Update will stimulate, and contribute to, the debate among stakeholders on this important agenda. Philippe Dongier Country Director | Tanzania, Uganda and Burundi vi Fourth Edition, June 2014 Acknowledgements The Fourth Edition of the Uganda Economic Update was prepared by a team led by Rachel Kaggwa Sebudde and that included Fiona Stewart and Andreas Eberhard; with contributions from Jacques Morisset, Andrea Mario Dall’Olio, Asger H. Borg, Sarah Coll-Black, Barbara Magezi, Moses Kibirige, Chiara Bronchi and Jean-Pascal Nguessa Nganou. Jacques Morisset also played a supervisory role, guiding the team on the structure and focus of the update. Gladys Alupo provided logistical support, while Lillian Foo and Sheila Gashishiri managed the communications and dissemination strategy. The Uganda country team provided useful feedback during the preparation of the report. Albert Zeufack (Sector Manager) and Moustapha Ndiaye (Country Manager) provided overall guidance on the project. The report benefitted from insights of peer reviewers including Mark Dorfman, Senior Economist; Gustavo Demarco, Lead Economist; and Sarah Coll-Black, Social Protection Specialist, Close collaboration with external stakeholders was intended to ensure the relevance of the messages to policy makers and practitioners. These external collaborators included the Uganda Retirement Regulatory Authority, the Ministry of Gender and Social Development, and the Ministry of Finance, Planning and Economic Development. Consultants, Lillian Keene Mugerwa and Prof. Vincenso Galasso, analyzed the political economy of pension reform. Irfan Kortschak provided professional editing services. vii Uganda Economic Update Key Message Only 2% of elderly Ugandans are covered by any form of pension protection. The rest age at their own peril, surviving through family support or toiling away in subsistence activities, particularly in agriculture. Margaret Nsubuga may have earned her pension as a public servant, but she has not been receiving any pension since January 2001, when her file disappeared(Great Lakes Film Production, 2014). Around 275,000 Ugandans qualify for go a long way towards addressing efficiently managed, it will allow savers pensions following their retirement under poverty and vulnerability in old age for a to receive a reasonable return on their the country’s public pension scheme. larger proportion of the population. Less savings. Second, a better managed Although the pensions paid through this than five percent of Uganda’s population pension system will reduce the fiscal system are not large, they go a long way is above the age of 60. However, many pressure that may arise as the number towards meeting the basic needs of the people in this age bracket are vulnerable of recipients of public pensions grows. recipients and their families. In addition, a to poverty, with 65 percent suffering Third, if appropriately managed, number of other Ugandans may receive from old-age related disabilities and these assets may contribute to the entitlements after making contributions with 11 percent of them living alone. The development of long-term finance for to the National Social Security Fund majority of Uganda’s elderly population investment and of financial markets. or to voluntary schemes established continues to fulfil household and by employers in the private sector. family responsibilities. With Uganda’s As with previous editions of this However, at present, only two percent demographic changes, the elderly update, the fourth Uganda Economic of elderly Ugandans are covered by will constitute an increasingly large Update provides information related any form of pension protection. The rest proportion of the population, placing to the current state of the economy, age at their own peril, surviving through greater pressure on the Government to before focusing on a particular subject family support if their families are able provide social protection. of importance, in this case, on how and willing to provide it, or toiling away pensions can reduce vulnerabilities at in subsistence activities, particularly in Improvements in the functioning of the both individual and macroeconomic agriculture. pension sector can generate sizeable levels. Well designed and managed macroeconomic impact and a number pension systems can contribute Ongoing pension reforms currently of benefits for the broader population. significantly to the country’s ongoing being implemented in the country may First, if existing pension assets are transformation. Part 1: State of the economy The Ugandan economy has continued rate is still lower than recent historical since the slump in FY 2011/12, the the process of recovery that began averages, which were in excess of economy has clearly returned to its in FY 2012/13, growing by 5.9 percent seven percent. However, with eight previous strong growth path. Growth during the first half of FY 2013/14. This consecutive quarters of positive growth was supported by a sustained increase viii Fourth Edition, June 2014 in public investment, from a value Official aid inflows declined by 17 the agricultural sector, which employs equivalent to 5.7 percent of GDP in FY percent during FY 2012/13, following the bulk of the labor force, is unlikely to 2011/12 to 6.1 percent of GDP in FY corruption scandals in that period. In achieve high rates of growth because 2012/13, and eventually to a projected contrast, foreign direct investment and of persistent supply-side constraints, value equivalent to 6.8 percent in remittances have remained strong, such as the limited use of improved the current year. Consequently, the preventing the country’s overall inputs, the lack of irrigation systems construction subsector recorded a external position from deteriorating as and low levels of mechanization. good rate of growth due to increased official donor inflows decline. However, The economy could grow at an even public investment in infrastructure. the external position is expected to more rapid rate if the completion As has been the case in the recent deteriorate as the implementation of of current public infrastructure past, growth during the current year infrastructure projects accelerates, projects result in higher levels of has been mostly driven by increased resulting in increases to the import bill. private investment and the business economic activity within the services In addition, the crisis in South Sudan environment improves. sector, which employs an increasingly resulted in a decline in the volume of large proportion of the labor force. exports to the South Sudanese market High levels of public investments in the The manufacturing sector is also in the first three months of 2014. medium term will also lead to widening growing fast, benefitting from improved fiscal deficits, which Government electricity supplies, lower interest Pressure on the fiscal side is continuing envisages to finance through higher rates, and increased domestic and due to the lower than expected levels commercial borrowing on the external regional demand. However, both private of domestic revenue collection, with market. This may also increase investment and consumption have the Uganda Revenue Authority failing debt levels. Part of the increase in been slow in recovering, partly because to collect 0.6 percentage point of GDP expenditure in FY 2013/14 involves commercial banks took longer to adjust of taxes, especially corporate taxes one-off investments that are necessary to the easier monetary conditions during and value added taxes. In addition, the to address Uganda’s infrastructure gap. FY 2012/13. continued decline in official aid inflows However, there are still inefficiencies amidst planned high expenditures on in public investment management. With low inflation and a stable local infrastructure may be disruptive. The Therefore, if these investments currency, Uganda’s monetary policy overall deficit could therefore exceed a are not accompanied by measures stance remained mostly unchanged figure equivalent to five percent of GDP, to strengthen public investment for the first half of FY 2013/14. As a although several large infrastructure capabilities, the increase in public result, commercial banks started to projects have not been implemented as expenditure could lead to the build-up reduce their interest rates. The real cost planned. The Government has financed of an unsustainable debt stock. of credit declined to an average of 14 the higher deficit through domestic percent by March 2014, compared to borrowing. Higher fiscal deficits are expected 20 percent of the previous year. This, to slow down private investments as together with the gradual increase As a result of increased public a result of the increasing domestic in foreign interest rates, has resulted investment, the Ugandan economy borrowing by Government. During the in an increase of more than seven is likely to grow faster, at a rate first half of FY 2013/14 the real cost of percent in shilling-denominated credit of approximately 6.2 percent in credit declined. However, the excessive to the private sector over the first eight FY2014/15, and to maintain this upward issuance of domestic government debt months of FY 2013/14. trajectory into the near future. The to fill the gap created by declines in predominant source of growth will be aid inflows or to facilitate increased The current account significantly an increase in the economic activity expenditure may be extremely costly to improved during FY 2012/13, reaching of the construction sector, as Uganda the economy, possibly resulting in the a value equivalent to 7.4 percent prepares for the production of oil and crowding out of private investment as it of GDP, almost three percentage invests heavily in a number of major drives up interest rates. points lower than in the previous year. infrastructure projects. Unfortunately, ix Uganda Economic Update Key Message To ensure that Uganda continues to particularly health and infrastructure. that the mere achievement of a high achieve a high rate of growth, the Therefore, the Government will have to rate of economic growth is not enough Government will have to manage a resist additional spending pressures and to ensure inclusive development. With number of risks, particularly those increase efforts to collect tax revenues. the rapidly expanding population, the resulting from weaknesses in the fiscal With the upcoming 2016 elections, proportion of the population living below management regime. The reduction particular care will be required to contain the poverty line is still large, with many of aid inflows to Uganda could have spending pressures to prevent non- households remaining vulnerable to implications for the Government’s priority expenditure in the pre-election shocks and to the risk of falling into commitment to accelerating expenditure period, causing excessive inflation. poverty. on infrastructure and for the macro- stability of the economy. If aid flows The biggest external risk relates to the Looking forward, social policies have to to the Government are redirected to South Sudan crisis. Given Uganda’s complement growth policies and hence non-government organizations so that increased dependence on South Sudan should be pursued concurrently to overall aid inflows to the country are markets for its exports, the protracted eliminate extreme poverty. In the short maintained at current values equivalent crisis in South Sudan could have severe run, this will face challenges, especially if to approximately 1.4 percent of GDP, consequences for trade, remittances and spending on social policies is considered the impact on the macroeconomic overall economic activity. to be taking away resources from those outlook would not be as severe as had areas, such as infrastructure, that would been feared. However, disruptions With eight million Ugandans still living generate growth faster. may be experienced by some sectors, below the poverty line in 2013, it is clear Part 2: Pensions: Achieving the vision of a transformed Uganda means addressing vulnerabilities at both individual and at country levels A coherent policy of social protection A well-functioning pension system long-term finance for investment and of for vulnerable groups, including the can reduce the risk of a significant financial markets. elderly, can promote positive social proportion of the population falling into transformation and accelerate economic poverty in their old age. Pensions also Uganda’s pension system is about 80 development. The establishment bring benefits for those that are not years old, serving all public servants of a comprehensive national social direct recipients, as incomes are often through the Public Service Pension protection system that meets the needs shared with household members. For Scheme (PSPS), and some private of all Ugandans, including the poor and instance, elderly household members pensioners who contribute to the vulnerable, will require a significant often provide food, clothing and National Social Security Fund (NSSF) or allocation of resources, a high level of school materials for grandchildren or to other voluntary schemes. However, commitment, and considerable thought. other dependents. At the macro level, pension coverage is too limited to Hence, a step-by-step approach is appropriate management of pension achieve the primary objective of required. Pensions are only one element assets also (i) ensures that savers get a providing social protection, and the of this strategy, but reforming the reasonable return on their savings, (ii) system still fails to generate many of the pension system can bring additional potential benefits that could accrue from reduces the fiscal burden of providing benefits in terms of financial deepening, pensions as the number of recipients a well-functioning pension system. fiscal sustainability and equity, and of public pensions grows, and (iii) The current social pension scheme economic growth. contributes to the development of covers only about 10 percent of the x Fourth Edition, June 2014 working age population, most of whom economic growth and to increased higher than that of the population at are urban workers. It does not extend savings. Under the right conditions, large. With the average long-term rate to the majority of citizens, including properly managed pension systems of population growth estimated at 2.6 those employed in the agricultural can play an important role in the percent, the number of old people in sector, the self-employed, and those development of financial and capital Uganda will be four times greater by employed in the informal sector. markets, which in turn contributes to 2050 than at present. economic development and growth. The bulk of Uganda’s expenditure Uganda is already taking steps to on pensions involves the payment A well-managed pension system can establish an effective pension system. of pensions under the PSPS. This also facilitate an increase in financial With the objective of improving scheme is extremely expensive and savings, as a well-designed pension coverage, adequacy, security, unsustainable, involving entitlements system requires workers to put aside sustainability and efficiency in the that are on average equivalent to current income for future use. management of pension assets in three times the per capita wage. There is an urgent need for Uganda the country, Uganda has begun to Despite the low overall coverage to concretize steps toward the implement a series of reforms to the of the scheme, with less than two development of a comprehensive pension sector. It has established a percent of the population receiving social protection system, as detailed regulator to oversee the operations retirement benefits, Government in the draft National Social Protection of the sector, it has proposed the spending on this sector reaches a Policy. Failing to establish such a liberalization of the private pension value equivalent to 0.4 percent of system will mean that a significant system to allow more competition and GDP. In the long run, this is forecast to proportion of the population faces choice by workers, and it has proposed more than triple. the risk of poverty in their old age, reforms to the public pension system endangering the social pact in the to improve its efficiency and to ensure In the private pensions, the bulk country. The establishment of a its sustainability. of the existing pension assets are coherent pension system that provides held by the NSSF, which for a long effective protection against poverty in Experience from other countries, time suffered from weakness in old age for Uganda’s citizens is one of including those in the African region, administration, resulting in the loss the components of this system. has shown that, although never easy of pensioners’ money through direct and often controversial, successful fraud, mis-investment, and high Since Uganda currently has a young reforms can be implemented to cost of administration. Estimates workforce with a relatively small build efficient pension systems. suggest that for every one percent proportion of citizens of a pensionable However, even where reforms annual loss charged on the assets age, it should seize the opportunity have been implemented, significant over a pensioner’s full career span, to build up its pension funds now, challenges remain, especially with the ultimate value of an individual’s before its elderly population swells. respect to improve the governance pension is reduced by 20 percent. The United Nations Department of of the new schemes to prevent Using this assessment, the NSSF Economic and Social Affairs projects fraud and corruption; to address the pensioner ultimate incomes have that by 2050, 80 percent of people capacity gaps within government, been reduced significantly over the aged over 60 years will live in new institutions and markets; and to past years. developing countries, with the number manage the fiscal costs of transition of Ugandans in this age bracket into contributory schemes. Apart from providing a social safety numbering six million. This implies net for the elderly, a well-managed that the rate of growth of this group in pension system may contribute to Uganda will be a full percentage point xi Uganda Economic Update PART 1 State of the economy Fourth Edition, June 2014 Farmer in Mukono: Livestock farming is one of the pathways to accelerate agricultural commercialization(Great Lakes Film Production, 2012) 1 Uganda Economic Update Part 1: State of the economy • The Ugandan economy grew by 5.9 percent during the first half of FY 2013/14, driven mostly by the services and industry sectors. Eight consecutive quarters of positive growth since the slump in FY 2011/12, confirm that the economy has returned on the strong growth path and may reach a rate of growth of 6.0 percent per annum in FY 2013/14. • With low inflation and a stable shilling, the monetary policy stance remained mostly neutral allowing the shilling denominated credit to private sector to start picking up. • In spite of the decline in aid flows, Uganda’s external position remained robust during FY 2012/13 due to strong foreign direct investment (FDI) inflows, but the position may deteriorate as import-heavy infrastructure projects start and the crisis in South Sudan lowered exports. • The overall fiscal deficit reaching a value equivalent to about 5 percent of GDP during FY 2013/14 will be lower than had been programmed, but it is still high and mainly driven by revenue shortfalls and overruns in recurrent expenditure, while problems in the execution of large infrastructure projects continue. • The economic outlook is positive with growth projected at approximately 6.2 percent in FY 2014/15; and is expected to keep the upward trajectory into the near future. The predominant source of growth will be an increase in economic activity of the construction sector, as Uganda prepares for the production of oil and invests heavily in a number of major infrastructure projects. • The positive outlook is subject to risks, key among which will be those emanating from its fiscal management regime due to continuous low revenue collection and reduction of aid to Uganda; increased spending pressures in the advent of the 2016 elections, and accelerating public investments amidst gaps in public investment efficiency. In addition, given its recently increased dependency on the South Sudan market for its exports, the protracted crisis in South Sudan could have severe consequences to the Ugandan economy. Straight from the garden, this farmer sells freshly harvested tomatoes in Masaka town (Sheila Gashishiri, 2013). 2 Fourth Edition, June 2014 Compared to the high growth rates to 19.5 percent in FY 2012/13. On the basis with those intended to reduce poverty. achieved following the restoration of of these figures, Uganda has already Firstly, in order to promote economic peace and the adoption of wide-ranging achieved the first Millennium Development growth, the Government has often economic reforms in the 1990s, the rate Goal (MDG) to halve the proportion of prioritized the development of costly of growth of the Ugandan economy has people living in poverty by the year 2015. infrastructure projects, thus leaving slowed down in recent years. Over the The reductions in poverty have been little fiscal space for social programs. past five years, the economy grew at an achieved in both rural and urban areas, Secondly, Uganda’s population is growing average of 5.8 percent, compared to an although a significantly greater proportion at a faster rate than the rate of growth average of seven percent over the past of people in rural areas continue to live in of productive employment, leaving a two decades. This slowdown has occurred poverty, with the rate declining from 60.2 significant proportion of the population as a result of several shocks, including percent to 25.4 percent in rural areas and underemployed and vulnerable to poverty. the global financial and economic crisis, from 28.8 percent to 10.5 percent in urban Thirdly, significant oil reserves have been recurrent droughts, and high commodity areas over this period. discovered in Uganda and the country prices. In addition, it has also been the is making a transition towards becoming consequence of a waning growth dividend Despite this significant decrease in the an oil producer. While this will almost resulting from the recovery and economic incidence of poverty, a large proportion certainly result in an accelerated rate of reforms in the 1990s, while the constraints of the population remains vulnerable. economic growth, it will only facilitate a to growth, such as poor infrastructure, have Approximately eight million people reduction in poverty if the appropriate become increasingly binding. continue to live in absolute poverty, while pro-poor public policies are put in place. an estimated 43 percent of the population Without such policies, it is by no means Notwithstanding this decline in Uganda’s remains highly vulnerable to falling back certain that wealth will trickle down to growth rates, the country has achieved into poverty due to the negative effects of benefit those currently employed in low significant results in terms of poverty changes in employment status, of natural growth, unproductive sectors, or those not reduction, with the rate of poverty disasters, and of other shocks, either at the employed. The challenge will therefore declining by more than 50 percent over personal, household, or community level. entail identifying the right mix of policies the past two decades. According to the that will allow the country to achieve faster National Household Survey, the proportion Looking forward, the Ugandan policy growth and economic transformation, while of Ugandans living in poverty steadily makers will have to balance the pursuit also gradually reducing the number of declined from 56.4 percent in FY 1992/93 of policies that promote rapid growth people threatened by poverty. 1.1. Recent economic developments In the recent past, the Ugandan economy been delayed, which has reduced public forecast for this period. In the first half of has faced several shocks, including investments. the current fiscal year, the economy grew the recurrent droughts, the disruptions by 5.9 percent1 . Since 2012, the rate of related to the civil unrest in South Sudan 1.1.1. Uganda’s economy growth of GDP has been positive in all and aid cuts. However, the economy continues to grow eight quarters for which data is available. began to recover in FY 2012/13 and This is the longest period of continued continues to perform strongly in FY After a series of economic setbacks that economic expansion since 2007. In 2013/14. Uganda’s external position began in 2012, the Ugandan economy addition, quarterly real GDP growth has has remained strong on account of began to recover in FY 2012/13, with this been much less volatile than in the period continued FDI inflows, strong remittances recovery continuing into the first half prior to this because of the more stable and an improved trade balance. of FY 2013/14. Growth in GDP continued macroeconomic environment. Since the However, the fiscal deficit will be one to gain momentum, increasing from a beginning of FY 2012/13, the rate of growth of the highest over the last decade recent historic low of 3.4 percent in FY of real quarterly GDP has ranged between due to lower revenues, and higher than 2011/12 to 5.8 percent in FY 2012/13. This 0.4 percent and 2.6 percent per quarter expected recurrent expenditures. The was considerably higher than the rate (see Figure 1). Government’s infrastructure program has of 5.0 percent that the authorities had 1 Growth rate is calculated on year-on-year basis. 3 Uganda Economic Update Part 1: State of the economy Figure 1: Quarterly real GDP growth at market prices stabilizing Source: Uganda Bureau of Statistics The current growth rate is still below to 8.7 percent during the previous five such as inadequate infrastructure and the long run average of 7 percent years (see Figure 2). A range of external inefficient financial intermediation are achieved over the last two decades shocks, such as the global economic and increasingly slowing down economic and is also lower than levels recently financial crisis, high commodity prices activity. Uganda’s growth has also achieved by some regional peers. and the recurrent drought conditions remained below some of its peers in the Average annual real growth over the last across the country, contributed to region over the past five years. five years fell to 5.8 percent, compared this slowdown. In addition, constraints Figure 2: Declining GDP growth places Uganda below some of its peers in the region Source: World Bank, International Monetary Fund, and Uganda Bureau of Statistics The recovery in the economy was a result, public investment increased recovering, partly because commercial the result of corrective measures to from a value equivalent to 5.7 percent banks took longer to adjust to the easier fiscal and monetary policies. After the of GDP in FY 2011/12 to 6.1 percent of monetary conditions during FY 2012/13. Government adjusted its budget policies GDP in FY 2012/13, and is projected It is only recently that commercial bank to stimulate growth, public spending, to reach 6.8 percent in the current credit to the private sector has started to particularly capital expenditures, has year. Yet, both private investment and accelerate slightly. been increasing since FY 2011/12. As consumption have been slower in 4 Fourth Edition, June 2014 The main driver of economic growth has sector also absorbed the largest proportion construction sub-sectors. Operators within continued to be the services sector. This of labor outside the agricultural sector. the manufacturing sub-sector, including sector, which contributes more than 50 By the end of FY 2012/13, 82 percent of those involved in food processing and percent of the total value added to the Ugandan workers outside the agricultural the production of industrial materials, economy, has achieved an average rate sector were self-employed, mainly in the have particularly benefitted from better of growth of 1.7 percent per quarter since services sector, compared to 40 percent in electricity supply, lower interest rates, and the start of 2012. This is higher than the FY 1992/93. high domestic and regional demand, while overall average quarterly GDP growth of 1.6 the growth in the construction sub-sector percent over the same period. Within this The industrial sector2 has also recorded has mainly been driven by increased sector, growth was driven mainly by the significant growth, with an average rate public investment in infrastructure. More telecommunications, wholesale and retail of growth of 2.6 percent per quarter recently, there has also been strong growth trade sub-sectors and, to a lesser extent, since the start of 2012. This growth was in mining and quarrying activities3 , which by public administration. The services mainly driven by the manufacturing and more than doubled their output in 2013. Figure 3: Services and industry maintain strong growth as agriculture stagnates Source: Uganda Bureau of Statistics Although the agricultural sector employs a higher frequency of droughts; limited during the first quarter of FY 2013/14, it a larger proportion of workers than investment in irrigation; soil depletion later declined to 7.1 percent by March 2014. any other sector, its rate of growth is resulting from limited fertilizer usage; and On the one hand, the return to a lower significantly lower than for the overall rising population pressures are creating inflation rate was driven by the strength of economy. The average rate of growth additional challenges for the sector. the shilling, which appreciated in value over of value added in the agricultural sector the year, shielding the domestic economy has been only 0.2 percent each quarter 1.1.2. Inflation stable amidst from a pass-through of foreign price since the start of 2012 (see Figure 2). As shocks volatility. On the other hand, a reduction in most Ugandan farmers continue to rely the international price of oil and improved on traditional farming techniques and After runaway inflation in 2011, the rate energy supplies contributed to price use few improved inputs, commercial has declined to moderate levels over moderation. In fact, the tariff reduction activity is only slowly beginning to pick the past two years, but remains volatile. announced by Uganda’s Electricity up. An increasingly unpredictable climate; While the rate of inflation increased slightly Regulatory Authority4 is estimated to have 2 According to the National Accounts, ‘Industry’ covers mining and quarrying, electricity supply, water supply and construction. Construction takes the largest share, 50 percent, while the share of manufacturing is 32 percent. 3 Mining and quarrying does not include oil activities. These are currently captured under construction. 4 In January 2014, the Electricity Regulatory Authority reduced electricity tariffs for the first time in nine years. 5 Uganda Economic Update Part 1: State of the economy reduced the electricity bills by around the end of March 2014, a sharp contrast these swings reflects Uganda’s ongoing 1-3 percent during the first quarter of to the decline of 8.5 percent per annum exposure to weather hazards, particularly 2014, depending on clients’ consumption at the same point in the previous year prolonged droughts, the effect of which levels. However, the volatility in food (see Figure 4). While a certain degree is exacerbated by the limited use of crop prices5 continued to cause sharp of volatility in the price of food would irrigation systems in the agricultural sector movements in inflation. Food crop prices appear to be normal, given Uganda’s increased by 28.3 percent per annum at bi-annual crop season, the magnitude of Figure 4: Volatile food inflation did not feed into core inflation Source: Uganda Bureau of Statistics 1.1.3. Lending to private sector second-round effects from food supply However, commercial lending rates in weak recovery shocks. However, this policy rate was later had declined to a far lesser extent and reduced to 11.5 percent in December 2013 with significant time lags (see Figure 5), Monetary policy has been cautiously as these fears subsided. The CBR has although by December 2013, the Bank applied to prevent spillover inflation been maintained at this level since. of Uganda’s CBR was 11.5 percent points resulting from spikes in food prices. below its peak level in January 2012. This Through its inflation targeting framework , 6 While commercial banks are quick to asymmetrical behavior is reflected in the the Bank of Uganda has managed to adjust their deposit rates in response to persistently high interest margins as has control the rate of inflation, with decisive monetary policy, they are slow to revise been discussed in previous editions of adjustments in its policy rate, the Central lending rates and maintain high interest this Update (Uganda Economic Update, Bank Rate (CBR). The Bank of Uganda margins. Lower policy rates reduced Edition 1, February 2013). raised the CBR by half a percentage point interest rates on deposits, thus enticing to 12 percent in September 2013 to curb savers to seek alternative investments. 5 The food crops component carries a weight of 13.5 in the consumer price index. 6 The BoU changed its monetary policy framework in 2011 introducing a new arrangement for controlling inflation which was termed the “Inflation Targeting Lite Framework”. Rather than relying solely on open market operations and foreign exchange transactions to control liquidity in the monetary system, this new framework intends to emulate more advanced regimes targeting interest rates to control inflation. 6 Fourth Edition, June 2014 Figure 5: Lending rates not declining as fast as other interest rates Industries , including these in the Namanve Industrial Park, Kampala, struggling to grow because of the high Source: Bank of Uganda cost of credit (Sheila Gashishiri, 2013). Despite these problems in the to the private sector grew by seven beginning of FY 2013/14, credit to the transmission of monetary policy, percent over the first eight months manufacturing sector has grown by 13 lending rates are declining faster in of FY 2013/14 (see Figure 6). This is a percent; to construction by 11 percent; the first eight months of FY 2013/14, welcome development, given that in and to the agricultural sector by nine contributing to slightly higher private recent years private sector credit growth percent (see Figure 7). Lower interest sector credit growth. In March 2014, real had almost exclusively come from rates have also supported an increase lending rates stood at an average of 14 loans denominated in foreign currency. in consumption, with the aggregate total percent, compared to 20 percent a year These types of loans carried nominally value of personal and household loans ago. This could have been one of the lower interest rates, but also bear an growing by more than 33 percent since reasons why shilling-denominated credit additional exchange rate risk. Since the June 2013. Figure 6: Outstanding credit to the private sector Source: Bank of Uganda 7 Uganda Economic Update Part 1: State of the economy Figure 7: Private sector credit growth across sectors Source: Bank of Uganda 1.1.4. External position was of non-traditional exports, such as metal the value of investments in short term robust in spite of lower aid and plastic products, bottled water, and instruments (normally referred to as inflows rice, with an increasing proportion of portfolio investments) declined by 90 these exports going to regional markets. percent. This decline was largely due Uganda’s external position continued At the same time, Uganda’s traditional to the fall in domestic interest rates and to improve during FY 2012/13, largely commodities, including coffee and tea, market unease resulting from aid cuts. due to a decline in the value of imports are still the most significant contributors At US$ 1,245 billion, the value of FDI into the country. The current deficit value to exports, accounting for 30 percent of remained almost at the same level as equivalent to 7.4 percent of GDP in FY the total value of export earnings during last year. With the large improvement 2012/13, was significantly lower than in the last fiscal year (see Figure 8). in the current account, Bank of Uganda the previous year with 10.5 percent. The increased foreign reserves during lower current deficit was largely due to Strong inflows from tourism, the year, with the import cover rising a decline in the value of imports due worker’s remittances and foreign to a value sufficient for 4.6 months to delays to the implementation of a direct investment (FDI) more than of imports of goods and services, number of major infrastructure projects compensated for the rapid decline compared to 4.3 months at the same and to uncertainties surrounding the in portfolio flows. In spite of the good point in the previous year. Kenyan general elections during the performance of the tourism sector, third quarter of FY 2012/13. Indeed, which generated US$ 1.1 billion in The country’s external position has merchandise imports, which shrunk by foreign exhange earnings during the weakened in first half of FY 2013/14. 3.8 percent, accounted for the bulk of year, the overall services and income This resulted from an increase in the decline. Consquently, the total value accounts worsened, mainly due to Government imports and declining of imports of goods declined to a level increased expenditure on imported remittances. In particular, the total value equivalent to 23.9 percent of GDP, from business services. At the same time, of Government imports to support 27 percent in FY 2011/12. At the same current transfers increased, driven development projects have more than time, the value of exports increased, by increases in the value of workers’ doubled during the current year, with following a period of low global demand, remittances by more than 30 percent, to a large proportion of expenditure on with a total growth in value of 12.2 a total value of US$ 1.1 billion, while the these imports being for machinery and percent in FY 2012/13. The increase was value of official grants disbursements equipment. The value of these imports primarily driven by a growth in the value declined by 17 percent. The financial account for approximately one quarter and capital account fell by 11 percent as of the total value of all goods imported 8 Fourth Edition, June 2014 into the country. Nonetheless, the overall of FY 2013/14, were 19 percent lower than at US$ 478 million during the first half import bill has remained lower than last the level recorded in the correpsonding of FY 2013/14, 15 percent lower than year’s, mainly on account of lower prices perido of FY 2012/13. The re-emergence the value realized in the first half of FY on global markets. The total value of of violence in that country since March 2012/13. FDI inflows reached US $ 562 imports during the first eight months of FY 2014 is bound to further adversely million, a value which was 44 percent over 2013/14 reached the equivalent of US$ affected trade for the reminder of the year. that realized during the first half of FY 3,325 million, 1.3 percent lower than the In contrast exports to Europe have started 2012/13. Meanwhile, portfolio investment value during the correpsonding period to increase as the continent begins to inflows have been more volatile due to in FY 2012/13. Due to the impact of the recover from several years of recession their short-term nature, often responding South Sudan crisis, exports to the markets and as international prices begin to rise. to movements in money market interest in that country during the first nine months The value of remittances inflows stood rates (see Figure 9). Figure 8: Changing destination of exports helped Uganda’s external position Victoria seeds Ltd, in Masindi, processing grains, one of the main Source: Bank of Uganda commodities trade in the region(Sheila Gashishiri, 2013) Figure 9: Capital and Financial Account more stable than usual The value of remittances inflows stood at US$ 478 million during the first half of FY 2013/14, 15 percent lower than the value realized in the first half of FY 2012/13. Source: Bank of Uganda 9 Uganda Economic Update Part 1: State of the economy Trends in the balance of payments as an adjustment to recoup some rates of its major trading partners, flows have resulted in increases to of the value lost when the news of the real effective exchange rate the value of the shilling. The value reduced aid sparked depreciation. appreciated even more steeply, by 8.0 of the shilling has appreciated since With a lower rate of inflation in Uganda percent over the first eight months of the beginning of the year, possibly corresponding with the unchanged FY 2013/14 (see Figure 10). Figure 10: Shilling appreciated further in spite of shortlived volatility in forex flows Nominal US $/UGX Source: Bank of Uganda 1.1.5. Fiscal policy under The significant rise in fiscal deficit come from domestic development, pressure was mainly explained by the which now accounts for 39 percent of Government’s strong committment total expenditure in the FY 2013/14, In FY 2013/14, Ugandan policy to increased capital investments compared to 27 percent in FY 2011/12. makers continued to use fiscal policy to address existing infrastructure as the main instrument for addressing constraints to private investments Due to implementation problems, key constraints to economic growth. and growth. In order to sustain the however, increasing allocations for To stimulate growth, the Parliament high growth rates realized in the development have not resulted in approved an expansionary budget past, Uganda has to overcome its higher realized levels of development for FY 2013/14, which projected infrastructure constraints, which spending. This has contributed to an increase in total spending of 25 requires considerably higher spending the huge backlog of infrastructure percent in nominal terms. As a share levels than in the past. Therefore, investments. Actual development of GDP, total spending was budgeted since the inception of the National spending has remained well below to increase from a value equivalent Development Plan (NDP) in FY 2010/11, the levels envisaged in the NDP. to 18.9 percent of GDP in FY 2012/13 the Government has substantially Meanwhile, domestically financed to 20.5 percent in this FY 2013/14. increased its budget allocation for development budgets have been Domestic revenues were projected the development budget, which has under-executed by almost 40 percent to increase from a value equivalent to increased by 126 percent in nominal in both FY 2011/12 and FY 2012/13. In 13.2 percent of GDP to 13.8 percent, terms over the last four years. fact, there has been no change in the partly compensating for the decline in The external contribution7 to the composition of spending over the past external grants from 1.7 percent to 1.4 development budget has remained five years. As a result, the backlog of percent. Therefore, in the approved constant at a figure equivalent to planned infrastructure investments has budget, the overall fiscal deficit was around 4.0 percent of GDP. Hence, increased by over US$ 1 billion, adding projected to increase from 4.1 percent the largest contribution to the growth to planned infrastructure investments of GDP in FY 2012/13 to 5.3 percent. of the development budget has over the next five to seven years 7 Including only donor projects financed through grants or concessional loans. 10 Fourth Edition, June 2014 estimated at about US$ 9 billion8. These on additional resources from domestic grants have not performed well either. planned projects include a standard- revenues, have not materialized. In the first Following last year’s interruption to budget gauge railway line, three large dams for seven months of FY 2013/14, the Uganda support payments to the Government in hydropower generation, an oil refinery, Revenue Authority recorded a shortfall response to the uncovering of a major and two highways connecting the capital in the value of collected tax revenues of corruption scandal, this year may witness Kampala with Jinja, which is the main east UGX 290 billion. The Government projects another shortfall in aid inflows due to the gateway for the country, and to Entebbe, the shortfall to reach UGX 302 billion by passing of the Anti-Homosexuality Act. the main air gateway. the end of the fiscal year. The bulk of the By December 2013, foreign donors had shortfall is due to a lower than expected disbursed only 29 percent of UGX 917 Both lower than expected domestic performance of 24 percent in corporate billion worth of the grants that had been revenues and declining aid inflows taxes and 11 percent in value added taxes, budgeted for FY 2013/14. Few donors have complicated the implementation compared to the targets. Overall domestic have so far announced outright cuts in of the FY 2013/14 budget. As in the past revenue mobilization is projected to response to the Anti-Homosexuality Act, three years, the Government has had reach a value equivalent to 13.2 percent but several have indicated that they are to accommodate the rising investment of GDP, which is 0.6 percent lower than revising their overall assistance strategy to allocations amidst stagnant tax revenue the original target. This sluggish revenue the Government. and declining aid levels. The Government’s performance, leaves Uganda far worse original financing plans, which were based off than its peers in the EAC9. External Figure 11: Domestic Development Budget Figure 12: Deviation between approved and executed budget Source: Ministry of Finance, Planning and Economic Source: Ministry of Finance, Planning and Economic Development Development The revenue shortfalls have exclusively since it is mostly comprised of salaries over-executed, while the development been absorbed through lower for teachers and civil servants. Instead, expenditure has fallen below its approved development spending, which is easier the Government has often decided to allocation in all but one year (see Figure to postpone. As in many countries cut investment spending, which can be 12). Similarly, during the first half of FY elsewhere, the Government has found postponed more easily. Indeed, since FY 2013/14, 49 percent of the approved it difficult to cut recurrent expenditure, 2008/09, the recurrent budget has been recurrent budget had been released, with 8 Musisi and Richens (2014): “Uganda’s Public Sector Borrowing Requirements, Financing Options and the Implications for Economic Performance”, Ministry of Finance, Planning and Economic Development Working Paper. 9 In FY 2011/12 domestic revenue as a share of GDP stood at 23 percent in Kenya, 17.6 percent in Tanzania, 14.3 percent in Rwanda and 14.8 percent in Burundi. 11 Uganda Economic Update Part 1: State of the economy performance almost equally spread across (excluding donor projects). Though the December 2013 (see Figure 14). In addition, the sectors (see Figure 13). Releases of implementation of some activities of this the government has requested Parliament development spending amounted to only project have already started, there has to approve a supplementary development 35 percent of the approved domestic been a delay of major construction work budget of almost UGX 140 billion to fast- development budget. this year, partly due to the Government’s track the implementation of the national recent decision to change the way it will ID project that foresees the creation of a Like in previous years, development finance the project. Without Karuma, biometric national identification register expenditure in FY 2013/14 is likely to 45 percent of the budget had been and the issuance of national identification be lower than had been budgeted on executed during the first half of the year. In cards for all Ugandan citizens. Overall, the account of delays in the construction of particular, the works and transport sector, development expenditure is expected to the Karuma dam. The construction of the which accounts for 33 percent of domestic reach a value equivalent to 8.9 percent of Karuma dam, accounted for 25 percent development budget, had executed 56 GDP, which is 1.5 percentage points lower of the approved development budget percent of its planned expenditure by than in the approved budget. Figure 13: Performance of the recurrent budget in Figure 14: Performance of the development budget in the first half of FY 2013/14 (approved vs. released) the first half of FY 2013/14 (approved vs. released) Source: Ministry of Finance, Planning and Economic Source: Ministry of Finance, Planning and Economic Development Development In contrast, recurrent spending is to Parliament in February 2014 amounted FY 2013/14. The bulk of these additional expected to be 0.6 percentage points to UGX 220 billion. This is expected to resources have been earmarked to cover higher than had been planned, as a increase recurrent expenditure by 0.6 Uganda’s military intervention in South result of supplementary expenditures. percentage points of GDP above the Sudan (55 percent) and to provide training The Government’s total supplementary originally planned budget of a value for the Uganda Police Force (27 percent). request for recurrent spending submitted equivalent to 10.7 percent of GDP for This will increase the share of recurrent 12 Fourth Edition, June 2014 expenditure to 55 percent of total budget, to the increase in recurrent expenditure increasing deficit through the issuance of compared 49 percent that had been and lower revenues, the fiscal deficit is Government securities and specifically planned in the budget, while that of still projected to reach a value equivalent for the Karuma project to draw on development expenditure declines from to five percent of GDP. This would be 0.3 Government savings accumulated from 51 percent to 45 percent. percentage points of GDP lower than the oil related capital gains tax10 . The in the approved budget, but still one of postponement of major construction Despite not spending as planned on the largest fiscal deficits in more than a work at the Karuma site implies that the critical projects, the overall fiscal decade. drawdown in savings will not materialize deficit is expected to remain high. during FY 2013/14. Instead, the bulk of Total expenditure is expected to reach a The overall deficit will be financed the fiscal deficit will be financed through value equivalent to 19.6 percent of GDP, through an increase in domestic greater domestic borrowing, projected almost a full percentage point lower than borrowing. Originally, Uganda’s to rise to 2.6 percent of GDP, the largest projected in the budget. However, due authorities had planned to finance the since FY 2010/11. Table 1: Central Government Operations: FY2010/11 – FY2013/14 FY2013/14 FY2013/14 In percent of GDP FY2010/11 FY2011/12 FY2012/13 App. Budget Proj. Revenues and grants: 18.4 15.5 14.8 15.2 14.6 Domestic revenues 16.2 13.2 13.2 13.8 13.2 o/w Tax revenues 12.7 11.9 12.6 13.5 12.6 External Grants 2.3 2.3 1.7 1.4 1.4 Total expenditure 22.8 18.5 18.9 20.5 19.6 Recurrent 15.3 11.1 10.5 10.1 10.7 Development 7.1 6.9 7.6 10.4 8.9 Domestic Development 4.4 3.5 3.7 4.7 4.9 Donor Projects 2.7 3.4 3.9 3.8 3.8 Karuma Project 0 0 0 4.0 0.2 Overall balance -4.3 -3 -4.1 -5.3 -5.0 External Financing 1.4 2.3 2.6 2.5 2.4 Domestic Financing 2.9 0.7 1.5 2.8 2.6 o/w Petroleum Fund withdrawals 0 0 1.2 0 o/w Domestic Borrowing 3.4 0 1.2 1.6 2.6 Memorandum items: Nominal GDP (Shs billions) 39,086 50,172 55,574 63,679 62,712 Source: Ministry of Finance, Planning and Economic Development, IMF, and World Bank 10 These revenues arose from the taxes levied on the US$ 1.5 billion sale of oil exploration rights between Heritage and Tullow oil companies. 13 Uganda Economic Update Part 1: State of the economy 1.2. Economic outlook 1.2.1. Growth prospects remain level of integration between Uganda’s in recent years due to low interest rates robust as Uganda prepares for oil economy and regional and world in many developed economies. As the economies. stimulus packages in these economies The World Bank forecasts that are wound down and as central banks the rate of growth of the Ugandan During FY 2014/15, stable inflation and start to scale back quantitative easing a recovering external environment are programs, foreign interest rates will start economy will rise above 6.2 percent expected to spur growth, if the increase to rise and entice Ugandan commercial in FY 2014/15, from 6.0 percent in FY in domestic borrowing does not raise banks to increase their level of foreign 2013/14. The increase will be driven interest rates and lead to a slowdown assets while reducing borrower’s demand by sustained macro-stability and the in private investments. Barring spikes in for foreign currency denominated loans. ongoing implementation of infrastructure international energy and food commodity projects. This is a modest acceleration prices and the expected volatility in The pattern of growth will remain similar and still leaves the country’s growth domestic food prices due to changes in to that realized during the past decade rate below the levels it has achieved weather, the inflation rate is projected to and a half. The predominant source of in recent history. Over the medium remain moderate at around seven percent growth will be an increase of economic term, if existing uncertainties related over the next year. In this environment, activity in the construction and services to fiscal management and key growth monetary policy is likely to remain sectors, as manufacturing grows from a bottlenecks are addressed, Uganda’s neutral. However, the drastic increase in small base. Growth in the output of the rate of economic growth should Government borrowing from the domestic agricultural sector will continue to be gradually increase up to or beyond the market could slow down the decline in subdued, due to supply-side constraints. recent historical average of around seven interest rates observed during FY 2013/14 Though still accounting for only a small percent. This increased rate of growth and result in reduced investment by the share of GDP, the mining and quarrying will largely be driven by an increasingly private sector. Private investment could sector could be a significant source of rapid transformation of production to also be affected by higher interest rates further growth in coming years, as the higher productivity sectors, oil production on foreign currency denominated loans. sector’s proven potential starts attracting and associated activities, and a higher These loans have increased substantially increased attention from investors. Uganda’s rate of economic growth should gradually increase up to or beyond the recent historical average of around seven percent. A view of Murchison Falls on the Nile River, one of the attaractions to boost foreign exchange revenues(Sheila Gashishiri, 2013) 14 Fourth Edition, June 2014 Box 1: Assumptions for economic performance for FY 2014/15 and the medium term Driven by an increase in public investment as the economy prepares for the impact of oil production, the real rate of growth of GDP is expected to accelerate to 6.2 percent in FY 2014/15, rising to 6.9 percent by FY 2015/16. With continued low international commodity prices, the rate of inflation is expected to remain in single figures. Public expenditure and net lending is expected to rise above 20 percent due to the acceleration in public investment, resulting in higher fiscal deficits over the next two years but declining thereafter as domestic revenue mobilization improves gradually. The current account is expected to deteriorate on account of a reduction in official grants and an increase in imports driven by a faster implementation of public investment projects. Together with a drawdown of Government savings to finance infrastructure investments, this is expected to lead to somewhat lower foreign exchange reserves in FY 2014/15-16, which should however quickly recover thereafter. FY2012/13 FY2013/14 FY2014/15 FY2015/16 National Income and Prices Actual Proj. Proj. Proj. Real GDP Growth 5.8 6.0 6.2 6.9 Real GDP per capita 2.3 2.5 2.7 3.4 GDP Deflator 4.7 6.5 6.5 6.5 CPI (period average) 5.8 6.9 6.9 5.4 National Accounts Gross Domestic Saving 14.3 16.2 16.2 12.5 Gross Public Investment 6.1 6.8 9.0 6.7 Gross Private Investment 18.4 19.0 20.7 20.7 Public Sector Domestic Revenue 13.2 13.2 13.8 14.1 Grants 1.7 1.4 1.7 1.1 Total Expenditure and net Lending 18.9 19.6 22.8 20.5 Fiscal Balance incl. Grants -4.1 -5.0 -7.3 -5.3 Balance of Payments Trade balance -9.9 -8.7 -9.9 -8.5 Current Account balance, incl. grants -7.4 -5.9 -7.9 -7.5 Foreign Reserves and Debt Gross foreign reserves (months of imports) 4.6 4.2 4.0 4.1 Public debt 32.9 33.6 36.9 40.2 Source: World Bank estimates based on Uganda MacMod (2014). Other agencies seem to confirm the expected positive outlook of the economy. Even as Standards and Poor downgraded Uganda’s rating from B+ to B on account of widening fiscal and external current account deficits, it foresaw solid growth to offset the risks of these imbalances (see Box 2). 15 Uganda Economic Update Part 1: State of the economy Box 2: Conflicting Signals over Uganda’s Sovereign Debt Rating, but positive outlook On 17 January 2014, the Standard & Poor’s (S&P) rating agency lowered Uganda’s sovereign credit ratings from ‘B+’ to ‘B’ with a stable outlook. To some observers, this came as a surprise following the upward revision by the rating agency Fitch in September last year, which was reaffirmed last month. The downward revision by S&P was mainly on account of a larger than projected fiscal deficit, following the suspension of aid and lower than expected revenue increases. Meanwhile, Fitch argued that the possible aid suspension in response to the Anti-Homosexuality Act would only have a limited impact on the budget, as the Government had greatly reduced its reliance on foreign aid. In addition, Fitch highlighted that the underlying balance which strips out one-off investments such as the Karuma and Isimba hydropower projects will only rise moderately from a value equivalent to 3.4 percent of GDP to 3.6 percent. However, both rating agencies stress that the continued infrastructure investments and the solid medium-term growth prospects in Uganda partly offset the risks from fiscal and external imbalances. In an international comparison, Uganda’s ratings are similar to several of its peers in Sub-Saharan Africa as depicted in the table below. Fitch Rating S&P Rating Uganda B Positive B Stable Kenya B+ Stable B+ Stable Rwanda B Positive B Stable Ghana B Stable B Negative Zambia B Stable B+ Negative A better global outlook will also of a value equivalent to 7-8 percent of Fiscal policy is expected to be contribute to an increase in Uganda’s GDP in FY 2014/15. The capital balance expansionary to address constraints to exports to the US and the EU, as the should remain roughly unchanged, as the growth. Total expenditure is envisaged economic growth of these countries expected decline in official aid transfers to increase from a value equivalent to appears to accelerate, which should drive following the withdrawal of some donors 19.6 percent of GDP in FY 2013/14 to an increase in international commodity due to the Anti-Homosexuality Act 22.8 percent in FY 2014/15. The major prices. This could also help offset the should be offset by a higher level of FDI, driver of this increase in expenditure is potentially adverse effects of a protracted particularly in extractive activities. In the the acceleration of construction works political crisis in South Sudan, which until short run, the planned increase public on the Karuma and Isimba hydro-power recently was Uganda’s fastest growing investments will most likely also lead to a plants. Once completed, these projects export market. In addition, increasing reduction of international reserves at the are expected to double Uganda’s power exports will help to counteract the Bank of Uganda from a value sufficient for generation capacity and ease doing widening current account deficit, which 4.6 to 4.0 worth of months of imports, as business in the country. According to is set to increase as Uganda accelerates the Government uses a portion of savings the 2014 National Budget Framework spending on infrastructure. The current to finance some of the initial infrastructure Paper, 30 percent of the budget will account deficit will remain in the range investments in oil (see below). be allocated for roads and energy (see 16 Fourth Edition, June 2014 Figure 15) in line with the Government’s current year. Uganda Revenue Authority percent of GDP, i.e. 2.3 percentage points strategy to prioritize measures to address has recently announced measures to higher than in FY 2013/14. Uganda’s infrastructure gap. Meanwhile, boost revenue collection. These measures the proportion of the budget allocated include among others the intensification The overall deficit will be financed for education will be reduced due to a of enforcement of tax compliance, through an increase in external non- decline in aid levels, with this proportion sensitization on integrity and capturing concessional borrowing and a drawing declining to 11.9 percent, compared to the of new tax payers in the informal sector, of Government savings. The Government 13.3 percent that had been budgeted in and the reduction of the clearance time in recently decided to finance part of the FY 2013/14. The proportion of the budget customs using electronic tracking devices Karuma dam and the Isimba dam through allocated for health will be 8.4 percent. and the roll-up of the new Automated greater external borrowing, mainly with System for Customs Data (ASYCUDA). the Exim Bank of China (EBC) financing Domestic revenues are projected to However, despite higher revenues in 85 percent of the Karuma and the Isimba reach a value equivalent to 13.8 percent FY 2013/14, the strong acceleration in hydropower projects. The remainder of GDP, an uphill task given shortfalls in infrastructure spending will still result will be financed through the drawing of revenue collection performance in the in a sharply widening fiscal deficit to 7.3 Government savings as originally intended. Figure 15: Proposed Sector Allocations for FY 2014/15 Construction of roads in Mbarara, one of the key activities paving the way to higher UGX billions investment and growth (Sheila Gashishiri, 2013) Source: Ministry of Finance, Planning and Economic Development The oil sector is expected to boost development of Uganda’s oil resources with an initial capacity of 30,000-60,000 economic activity, particularly in the in the Albertine Region. It is expected barrels per day (BPD) considered construction sector. The recent signing that up-front investments amounting sufficient to cater for the region’s of a memorandum of understanding to a total value of US$ 8-12 billion will demand for refined petroleum products; between the Government and a number be required over the next five years to and a pipeline joining the oil fields to the of international oil companies11 has been prepare Uganda for oil production. This Kenyan coast for the export of crude oil. a significant milestone in initiating the includes the construction of a refinery 11 The Government and the three international oil companies Tullow Oil (UK), Total (France) and the state owned China National Offshore Oil Corporation (CNOOC) recently agreed in a Memorandum of Understanding to build a refinery with a capacity of 30,000 - 60,000 BPD. 17 Uganda Economic Update Part 1: State of the economy Box 3: Where could Uganda’s oil produce jobs? The 3.5 billion barrels of proven reserves could support production of 100,000-200,000 barrel per day (BPD) over 20 to 40 years depending on the speed of extraction. More than 60 percent of the oil rich Albertine Graben remains unexplored though the approval of a new legislative and regulatory framework in December 2012 paved the way for a new round of exploration licensing. As a landlocked country, Uganda will face logistical challenges exporting its oil. The proposed refinery with a capacity of 30,000 - 60,000 BPD, is sufficient to cater for the region’s demand for refined petroleum products. In addition, the Memorandum of Understanding between oil companies and GOU foresees the construction of a pipeline joining the oil fields to the Kenyan coast for crude exports. Direct jobs in the sector - Actual oil production may not come on stream until 2018, but preparatory activities such as the construction of the pipeline and the refinery as well as the overall development of oil fields is expected to have a significant impact on the economy even before the production starts. The total cost to prepare the Albertine Region for oil production has been estimated at US$ 8-12 billion. Uganda’s international oil companies estimate these investments could lead to the creation of 13,000 jobs at peak construction over the next 3-4 years. It is expected that over 60 percent of these jobs will be for craftsmen and technicians, 25 percent for the unskilled workers and 15 percent for the engineers and managers. After the construction phase and once actual production starts, the number of direct jobs needed for operating the refinery and the oil fields will decline to 3,000. Jobs through linkages - There is a large potential for induced and indirect jobs once oil comes on stream. As oil companies start operating, there will be an increasing demand for several indirectly associated activities with the oil and gas industry, such as environmental services, manpower agencies, transportation and logistics, etc. Moreover, as part of the oil revenue is spent locally (either by the Government or by employees of the oil and associated industries) the number of induced jobs in sectors such as hotels, banks, insurance companies, or new schools will also rise considerably. Based on experience from other countries, the total number of direct, indirect and induced jobs generated could be in the range of 100,000-150,000. Training is required to ensure Ugandans benefit - To ensure that the majority of these jobs go to Ugandans many existing craftsmen and technicians will have to be certified. In addition, the existing number of mechanical and electrical technicians in Uganda will not suffice to meet the demand of the construction activities in the Albertine Region, requiring several hundred new technicians to be trained. To maximize the benefits for Ugandans, a massive training initiative will therefore have to take place with a focus on vocational skills. Source: World Bank staff estimates According to the oil companies, construction is projected to start next fiscal year. With these projects and activities, it is highly likely that Uganda will experience a massive construction boom over the next five years. As a consequence, the demand for construction services is set to increase substantially and potentially increase jobs even before actual oil production starts (see Box 3). 18 Fourth Edition, June 2014 Over the medium term, the economy on infrastructure through better public productive investments and the could grow at a rate even faster investment management. Better efficient and timely implementation of than the historical average of seven public investment management projects. The planned improvements percent. This will be achieved if would require appropriate project to public investment management are higher productivity dividends are selection to ensure that public an important step in achieving these realized from accelerated expenditure expenditure is used to finance objectives (see Box 4). Box 4: Investing in public investment management will pay off, but where exactly are the gaps? In 2011 the World Bank conducted a review of public investment management practices in Uganda, which highlighted a number of challenges: • Few feasibility or pre-appraisal studies are performed by Ministries, Departments and Agencies (MDAs) of Government before projects proposals are submitted to the Development Committee (DC). The DC is in charge of deciding whether a project is included in the Government’s Public Investment Plan (PIP). • The DC does not conduct systematic cost and benefit analysis to prioritize and evaluate projects before deciding on their inclusion in the PIP. The DC does not possess the sufficient analytical capacity while there are no established templates of submission of applications. • The PIP is a project database that includes not only investment projects but also Technical Assistance (TA) projects as well as spending of recurrent and even administrative nature. • There is no real system of incentives to implement investment projects within budget and timeline. The procedure of submission of applications, and budget planning otherwise, are lax and frequently by-passed. • The PIP does not require any realistic procurement plan and effective contract management plan. This should be critical to prevent excessive delays and allow for the management of ex-post price adjustment. • Internal controls in project implementation seem to be quite weak and there is limited follow-up of value for money audits. • Project evaluation only takes place for a range of larger projects based on simple comparisons of project costs, timeliness and deliveries, while only very few rigorous impact evaluations are taking place. In order to address some of these issues it has been proposed to develop public investment guidelines and procedures through a DfID-financed TA project administered by the World Bank. In the medium term, this TA will consist in (i) cleaning and ‘purging’ the PIP and link it to the BOOST database; (ii) developing a project databank, complemented with step by step M&E; (iii) developing an associated training manual; and (iv) training core Government team of trainers in utilizing the database. In addition, the recent creation of a new department within the Budget Directorate in the Ministry of Finance, Planning and Economic Development (MoFPED) for Project Analysis, Assessment and Evaluation is a positive step. This department will work with all the appropriate parties involved in originating projects and the coordination with MoPFED to determine the feasibility and assess the relative cost-benefit of all project proposals. 19 Uganda Economic Update Part 1: State of the economy Preparation for oil production could and trading across borders. Uganda’s commitment to accelerating spending also drive an increase in the activities ranking compares very poorly with that on infrastructure and on the macro- of the light manufacturing sector in of neighboring Rwanda, which has been stability of the economy more generally. Uganda. However, in the short term, it very successful in establishing a business If overall aid flows are maintained at will also exert pressure on the country’s friendly environment, and thus placed as current levels, with only the channel of external position. The increased demand 32 in the report. In the past, Uganda has transmission changing, the impact on for construction services is expected to often enacted legislation without fully the macroeconomic outlook may not be benefit Uganda’s construction industry, implementing and enforcing it. Enactment profound. Such re-channeling would not including the manufacturers of light and enforcement are vital if the new laws necessarily cause potentially damaging construction materials. Following a are to genuinely improve the business depreciation pressures on the shilling number of recent investments in the environment. To this end, the Government and a degree of continuity would be steel and iron industry, Uganda could must vigorously strive to formulate maintained. Another offsetting factor become a leading producer of steel and plans for the operationalization of these could be increases in FDI resulting from iron products in the region12. However, laws and to ensure that these plans are preparations for the exploitation of oil. it is unlikely that Uganda will be able to implemented. meet all the increased demand locally. In Second, with the Government’s fact, a recent study by Uganda’s foreign 1.2.2. Downside risks remain commitment to an enormous oil companies13 suggests that Uganda’s substantial infrastructure development program, industrial sector will face substantial persistent shortfalls in revenue could supply-side constraints in meeting the While the outlook for the economy is worsen the fiscal deficits and make total demand resulting from the various generally positive, there are a number debt unsustainable. The increase in construction projects. Thus, many goods of downside risks, the most important Government development expenditure and services will have to be imported of which relate to fiscal management, can be justified on the grounds that it from abroad, which will considerably both in the short and the medium term. mainly represents one-off investments, worsen Uganda’s current account. First, following the donor cuts during FY which are necessary to address Uganda’s This deterioration will be financed by 2012/13 due to the mismanagement of infrastructure gap. For the same reason, continued large FDI inflows. funds in various government ministries, the Government has had to raise its several donors have recently announced external non-concessional debt ceiling In addition to addressing infrastructure a revision of their aid budgets in from US$ 1.5 billion to US$ 2.2 billion. gaps, Uganda needs to place an response to the enactment of the Anti- Short term destabilizing effects on the increased priority on reforms aimed at Homosexuality Act. It is not yet clear macroeconomy could be mitigated improving the business environment to how this will affect total aid flows to because the planned projects have a high ensure that Uganda remains competitive the country. While some donors have level of import content14 , which should in the region and accelerates private indicated that they intend to divert prevent upward pressures on prices. investments. In 2013, Uganda’s ranking on funding from Government institutions to However, in the absence of improvements the World Bank’s Ease of Doing Business civil society organizations, others have in public investment capabilities, the Index fell for the third consecutive year, suggested that they are reconsidering increase in expenditure on infrastructure dropping to 132 out of 189 countries. their engagement with Uganda could quickly lead to the build up of Uganda fares particularly badly in the altogether. This potential reduction in the debt stock. Projected to reach 33.6 area of the costs and complexity of the level of aid to Uganda could have percent of GDP by the end of FY 2013/14, procedures involved in establishing a implications for the Government’s Uganda’s debt level is still generally business, securing electrical power, regarded as sustainable and considerably 12 The completion of three iron and steel manufacturing plants east of Kampala have made Uganda’s Roofings Group amongst East Africa’s biggest steel producer by installed capacity. 13 Total E&P (2014): The Industrial Baseline Survey. 14 It is assumed that 90 percent of such projects are used to finance imports, leaving a mere 10 percent to be spent in the local economy. 20 Fourth Edition, June 2014 lower than the average of 42 percent in country. In fact, according to the joint growth or are delayed as has been the the rest of Sub-Saharan Africa (excluding World Bank-IMF Debt Sustainability case for the construction of Karuma, oil-exporting countries). Assessment (DSA) from December they could also result in a quickly rising 2013, maintaining a permanent primary debt-to-GDP ratio, most likely in excess However, persistent high fiscal deficits deficit of 3.6 percent could raise debt of 50 percent, a key convergence criteria of five percent and above will only be levels significantly higher than any other agreed upon in the East African Monetary tenable if they lead to a strong increase scenario assessed15 in the medium term Union Protocol last December by all East in growth and if they promote strong (see Figure 16). In addition, if investments African Community member states. socio-economic development in the in infrastructure do not drive strong Figure 16: Debt could be pushed beyond sustainable levels A fisherman on Lake Victoria (Sheila Source: IDA-IMF Joint DSA, November 2013 Gashishiri, 2014)) Excessive domestic borrowing debt management framework. Prior to often used to fill short-term financing combined with a failure to increase FY 2012/13, Government securities were gaps. However, a high level of borrowing revenues from domestic taxes poses a only used as a monetary tool by the Bank on the thin domestic capital market could threat to macro-stability. The issuance of of Uganda to manage liquidity levels also result in the crowding out of private domestic debt for fiscal policy purposes in the economy, and not to finance the investment as it pushes up interest rates, will become a component of the budget. Explicit issuance of domestic which have barely begun to respond to Government’s new debt strategy, which debt to finance the budget could greatly the easier monetary policies implemented is currently being finalised by the Ministry improve the transparency of fiscal during FY 2013/14. While the level of of Finance, Planning and Economic policy and ultimately reduce the use of the overall public debt stock of Uganda Development (MoFPED). This represents advances from the Bank of Uganda to appears to be manageable, interest a marked change in the Government’s the Government, which in the past were payments already account for 7.8 percent 15 Within the DSA, among the scenarios assessed include (i) the baseline scenario that applies macro variables to the best knowledge of how they will be evolving and how policy plans to respond to them; (ii) the historical scenario which applies the policy variables equal to the average attained over the past 10 years; (iii) the fixed primary deficit applies assumptions that can yield a same primary deficit through the projection period as would the last actual deficit observed, and (iv) the most extreme scenario that applies the most extreme outcomes out of the shocks such as reduced growth, reduced exports, reduced inflows, and a combination of all the shocks. 16 As in the National Budget Framework Paper for FY 2014/15. 21 Uganda Economic Update Part 1: State of the economy of the budget, almost as much as the total from UGX 803 billion as of end June Lastly, events in South Sudan may have value of allocation to the health sector. If 2012 (or 1.6 percent of GDP). While the an ongoing impact on Uganda’s economy. the proposed administrative reforms to the Government introduced a treasury single In recent years, the Ugandan and South various tax codes materialize16, particularly account earlier this year, its implementation Sudanese economies have become with regards to the fiscal regime governing should be accelerated to capture all increasingly intertwined. The volume of natural resources and international tax spending entities for it to address the trade between the two countries has agreements, these codes could result problem of arrears. On the other hand, risen dramatically over the last decade, in increased tax revenue collection. implementation of the integrated personnel as have financial flows in the form of FDI However, it is unlikely that these measures and payment system (IPPS) may help to and remittances. Thus, the interruption will suffice, since a critical review of tax facilitate the timely payment of salaries of these cross-country flows as a result exemptions to large scale businesses is and the elimination of ghost workers and of a deepening of the conflict in South still required in order to bring domestic pensioners from payrolls. Sudan could have severe consequences resource mobilization to levels similar to for Uganda’s economy. Although recent those in other EAC countries. In addition to fiscal risks, Uganda remains export data shows that exports to South vulnerable to climatic conditions and Sudan have remained relatively resilient, a Third, while the Government is committed volatility in food prices, both of which shut-down of the South Sudanese economy to the fiscal program, pressure to could result in the destabilization of the due to a deepening internal conflict could increase expenditures may intensify as macro-economy. Although the overall have a substantial negative impact, given Uganda approaches its next presidential inflation rate has been relatively low in the that Uganda’s exports to South Sudan and parliamentary general elections recent past, food prices have remained contributed to 16 percent of all export in early 2016. The increase in recurrent volatile. With the lack of irrigation systems, earnings in FY 2012/13, more than any other spending observed in FY 2013/14, in part food price volatility is likely to remain an single country. In addition, the impact of resulting from an increase in allowances issue. Moreover, a recent study jointly a prolonged crisis could be particularly to the military and the police to ensure conducted by the Government and high, since a large share of Ugandan domestic security and prepare the 2016 the International Food Policy Research exports to South Sudan occurs through elections, suggests that the electoral Institute (IFPRI) shows a strong pattern of informal channels, which are very sensitive spending pressures are already on the divergence in food price developments to changes in local security conditions; as rise. This may result in the delay of the across the country. This suggests that food such exports incur limited fixed investment. implementation of some key programs, as value chains continue to be insufficiently Moreover, several thousand Ugandans have has been discussed in previous editions of integrated. Supply-side constraints in the reportedly found work in South Sudan over this Update (see Second and Third Uganda production of food can be very damaging recent years, a large proportion of whom Economic Updates). In addition, financing in an agrarian-based economy such as send remittances back to their families in these increases in recurrent spending Uganda’s, as agriculture continues to Uganda. According to data from the Bank through higher domestic financing could be the major source of employment. of Uganda, Uganda received more than contribute to inflation spikes as observed In addition, if high food prices lead to US$ 210 million in personal transfers in in the aftermath of the 2011 election or increased inflationary pressures, it may 2012 from South Sudan, the second largest lead to rising interest rates and crowd-out force the Bank of Uganda to intervene by source of remittances after the United private investment. rising interest rates, with negative effects Kingdom. Of course, a prolonged conflict on the rest of the economy. Finally, the could also result in a humanitarian crisis, Fourth, the accumulation of domestic lack of integration of food value chains can which could create serious security and arrears is a continued concern, as it also make it more difficult for the Bank of stability problems in Northern Uganda. The undermines budget credibility and Uganda to implement monetary policy in Government has already had to request hampers policy analysis. By June 2013, response to food price shocks, as shocks a supplementary budget to a value of arrears had increased to UGX 1,156 billion, are transmitted asymmetrically across the UGX 120 billion to pay for military security which is equivalent to 2.1 percent of GDP, economy. operations in South Sudan. 16 As in the National Budget Framework Paper for FY 2014/15. 22 Fourth Edition, June 2014 1.3. A more efficient pension system could support equitable old age protection and economic growth Over the past two decades, the six million in 1992 to 13.2 million today. Ugandan economy has recorded both a This high level of vulnerability among strong growth in GDP and a strong per the population is due to the negative capita income growth, with increases impact of changes in employment status, in the latter averaging 3.5 percent per droughts, and personal disasters, among annum. With this growth, the country other shocks. has also made significant achievements in the area of poverty reduction, with Older people still represent a small the proportion of the population living percentage of the population, but they below the poverty line having declined too are vulnerable to poverty. Today, from 56.4 percent in 1992 to less than 25 1.4 million people, or less than five percent by 2009/10. While a number of percent of Uganda’s population, are economic shocks over the past five years above the age of 60. Many people in this have resulted in a slowdown in the rate age bracket are vulnerable to poverty, of economic growth, the poverty rate with 65 percent suffering from old-age has continued to decline, reaching 19 disability and 10.7 percent of them living percent in 2013. alone. Approximately 15 percent of the households in the country are headed by In spite of these achievements, Uganda an elderly individual, of whom almost 72 is still a poor country, with an average percent have responsibilities for caring per capita income of only US$ 510 in for children and the sick. Furthermore, 2013. This means Uganda is among the 2.5 percent of all households are 20 poorest countries in the world, and elderly people who live on their own. is ranked second last before Burundi The risks of poverty are even graver for Areas like this in Karamoja would need amongst the East African nations. elderly women, especially when they special interventions to integrate them With its rapidly expanding population, have lost their husbands. With women with fast growing parts of the country. approximately eight million of its citizens representing 63.2 percent of the total (Great Lakes Film Production, 2012) still live below the poverty line. In of the elderly, there are more widows addition, while rapid growth has provided than widowers (15.3 percent) among this reasonable opportunities to members group. In most Ugandan cultures, elderly of poor households to escape poverty, widows are often left helpless and are Uganda is among the approximately 24 percent of those who stripped of their properties after the 20 poorest countries were slightly above the poverty line in death of their husbands. in the world, and 2005/06 had fallen back into poverty by 2009/10. Over the same period, Like many governments across the is ranked second approximately eight percent of those world, the Government of Uganda last before Burundi who were previously in the middle class recognizes that the establishment and had become poor. Indeed, according to implementation of social protection amongst the East the Poverty Status Report of 2012 , the systems to reduce the number of African nations. 17 number of people who are still insecure people living in absolute poverty is an (those who can meet their basic needs, important means to eliminate extreme but who have very volatile incomes) poverty. Properly implemented, such has more than doubled, from about social protection systems can serve as 17 Government of Uganda (2012): Poverty Status Report 23 Uganda Economic Update Part 1: State of the economy drivers for the achievement of inclusive, covered by social assistance or safety Furthermore, for Uganda to sustain pro-poor and equitable growth. The net programs. rapid growth, the financial sector in multiple vulnerabilities faced by certain Uganda will need to operate more categories of the population, particularly The establishment of a comprehensive efficiently, as inefficiency in this the elderly, children, youth, women and national social protection system sector remains one of the key binding people with disabilities, do not only affect that meets the needs of the poor and constraints to investments and growth their own socio-economic circumstances, vulnerable will require a significant Although Uganda’s efforts to develop they also have an impact on national allocation of resources, a high level the banking system have been relatively development. The cost of failure to invest of commitment, and considerable successful, only 180 people per 1000 hold in social protection can be significant thought. A well-structured pension a bank account, a far lower number than and long-lasting, as households forego system could form one of the several in neighboring Kenya, where the figure is nutritious food, pull children from school components of the social protection 650 people per 1000. Intermediation of and engage in other negative coping program that provides protection to one available resources within the banking strategies to deal with poverty and of the vulnerable groups, the elderly, as system is also problematic, as seen by economic shocks. traditional social safety nets weaken. the large margins between savings and lending rates. At the same time, the total The Government would have to put Unfortunately, Uganda’s pension value of domestic savings in Uganda more effort in the implementation programs still cover a small proportion amounts to the equivalent of only 13 of initiatives. In terms of actual of the population, are inequitable and percent of GDP. While these figures are implementation, the Government’s fiscally unsustainable. In Uganda, less similar to those in a number of other social protection initiatives have been than 10 percent of the working age African countries, Ugandans save far described as “limited in scope and population is covered by any form of less on average than individuals in fast coverage and not coordinated with formal pension. The bulk of expenditure growing economies in East Asia and a unified framework, leading to poor on social protection is utilized for the in the middle income countries that implementation, duplication, wastage of payment of public pensions to former Uganda aspires to emulate. Past growth resources and social exclusion18. ” This civil servants, with the average level of diagnostics across the world show that is partly because the Government has retirement income provided through no country has sustained high levels of failed to allocate sufficient resources to this scheme being equivalent to almost economic growth when it has a low level implement an effective social protection three times the average per capita of low domestic savings19. Encouraging policy. In Uganda, total expenditure wage. With this program providing pension savings and utilizing the existing on social safety nets amounts to such a high level of entitlements to a pension assets in the country more approximately five percent of the total relatively privileged group, it is clearly effectively could be an important catalyst value of public expenditure, which is not designed to provide protection to the to raise the overall level of savings in the equivalent to approximately one percent poorest and most vulnerable members country. of GDP. This is significantly lower than of society. In addition to the governance the level of expenditure of many other challenges facing the management of this Part 2 of this update discusses how Sub-Saharan African countries, with public sector scheme, spending on this the pensions system could support the regional average amounting to relatively privileged group absorbs a fairly the objective of promoting equitable 2.8 percent of GDP. With this low level substantial proportion of Government protection against poverty amongst the of allocation of resources, the overall revenues. This spending is projected to elderly, while helping to mitigate the rate of coverage of social protection increase rapidly, and could crowd out fiscal risk and to support financial sector programs intended to benefit poor and much needed resources, which could be development, among other benefits. vulnerable households is also low, with used to cover the poor elderly and other a mere 4.6 percent of the population vulnerable groups in society. 18 Government of Uganda (2014): Draft National Social Protection Policy 19 Commission on Growth and Development (2008), The Growth Report Strategies for Sustained Growth and inclusive Development 24 Fourth Edition, June 2014 Mrs. Tumusiime, wife to Adonia, selling ghee along Ishaka-Bushenyi road, to feed her family (Sheila Gashishiri, 2014) Adonia Tumusiime, 67, has been living in Gayaza a suburb of Kampala for the last two months. Since he retired from the Kampala District Local Government 12 years ago, he has come to live in this suburb with the family of his distant relative. It is too expensive for him to make the many journeys from his home in Bushenyi District in Western Uganda to Kampala as he follows-up his pension payment for this year. Back home in Bushenyi, Adonia leaves behind his wife and two school age grandchildren tilling the land. When he eventually gets his Shs 150,000 per month worth of his pension, the money will help him pay for the scholastic materials for his two grandchildren, who came under his care 4 years ago when their father (Adonia’s son) passed away. He can also buy seedlings for the next planting season. Adonia is one of the 275,000 pensioners who can receive pensions from the public pension scheme once retired. Although it is not a lot and in spite of the difficulties in accessing it, the pension will support him to meet some of the basic needs for his family. Other pensioners would have saved with the National Social Security Fund or some of the existing voluntary schemes that have been set up by various employers. Unfortunately, in totality, only two percent of the elderly population in Uganda is covered by some form of pension protection. The rest of the population age at their own peril – surviving through family support where it still exists or toiling away in subsistence activities, particularly in agriculture. Can the on-going pension reforms address old age poverty and vulnerability for a larger part of the population, as it has done for a privileged few like Adonia? 25 Uganda Economic Update PART 2 Pensions: Reducing Vulnerabilities at individual level while supporting economic growth Fourth Edition, June 2014 Cissy Kiguli, matooke farmer in her farm in Mpanganti -Zirobwe in the Luwero district, 64 kilometers from Kampala 27 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth • A coherent policy of social protection, including for the elderly, can promote social transformation and accelerate economic development. • Uganda’s pension coverage is too limited to achieve the primary objective of social protection. Both the Public Service Pension Scheme and National Social Security Fund cover less than 10 percent of the working age population in Uganda, mostly urban workers. • The bulk of Uganda’s spending on social resources, amounting to 0.4 percent of GDP, is for the public pensions for former civil servants, which constitute less than 2 percent of the population and are relatively well paid. These costs will rise over time, absorbing scarce Government resources, which could be directed to more vulnerable groups. • Apart from providing a social safety net for the elderly, under the right conditions, well managed pension systems can contribute to economic growth and increase savings. • Uganda is already taking steps to start building an effective pension system, but challenges remain in ensuring transparent and proper governance of the pension funds; achieving efficiency objectives, building up the institutional capacity, and managing the fiscal pressures due to expenses to existing pensions and the new public pension scheme at the same time. Many countries have developed pension has been protracted. The establishment lessons can Uganda learn from other systems that provide protection against and implementation of such a system in countries in its endeavors to establish a extreme poverty and vulnerability Uganda can benefit from experiences more effective pension system? (iv) what in old age. The experience of these elsewhere, including from within Africa. is being done in Uganda? And (iv) what countries clearly demonstrates that This Economic Update is intended to are the challenges and risks involved in the initial establishment of an efficient provide input to the deliberations on this reform process and how can they be and effective pension system is not pension reform in Uganda focusing on mitigated? easy. Indeed, for many countries, the the questions: (i) why should Uganda process of establishing such systems be concerned about pensions? (ii) what 2.1 Why should Uganda be concerned about pensions? Uganda has been building its pension Later, in 1985, the National Social Security from achieving their stated objectives. system for a considerable period. The Fund (NSSF) was established to provide Uganda’s pensions system currently country’s first steps to establish a pension social security to private sector workers. comprises of four different types of system began almost 80 years ago. The In addition, other voluntary schemes have pension schemes (see Table 2). In the oldest scheme, the Armed Forces Pension been established by a range of employers public sector, there are two schemes, Scheme, was first implemented in 1935 to provide retirement benefits to their one of which is the Armed Forces to provide social protection to retired employees. However, these private sector Pensions Scheme, which is drawing soldiers. Following the establishment of schemes have not yet been subject to on the Government’s budget, but for this scheme, a number of other schemes regulation, and little is known about their which limited information is available for have since been created, including the parameters, scope and performance. analysis. Amongst the challenges that Public Sector Pension Scheme, which affect the public sector schemes are lack was first established in 1946 to provide Uganda’s pension schemes face a of timely access to benefits and access retirement benefits to public servants. range of challenges that prevent them by unqualified beneficiaries through the 28 Fourth Edition, June 2014 enrolment of ghost pensioners, partly due providing social protection to all members voluntary occupational plans, but the lack to lack of proper records. As a result of of society. Private pension schemes have of regulation in the past has left them these and other issues, the fiscal burden been negatively impacted by low returns open to the risks of assets being used by of these schemes is increasing, while they resulting from the poor management the plan sponsor rather than invested in are still failing to achieve their goal of of pension assets. Little is known of the the interest of plan members. Table 2: State of Uganda’s Pension System Scheme Armed Forces Public Service Pension National Social Security Occupational Retirement Pension scheme Scheme Fund (NSSF) Benefit Schemes Legal Framework Armed Forces Pensions Act 1946, Amend NSSF Act 1985 (CAP 222) Trust Law. Retirements Pensions Act 1935 1994 (CAP 286) Regulatory Authority Act (CAP 298) 2011 How many people Unknown 275,000 workers 450,000 workers Unknown are covered? ~ 2% of Uganda’s workforce ~ 3% of Uganda’s workforce Who is covered? Military officers All civil servants (Central Private sector employees Employees of private Government, police and of formal sector companies sector firms that voluntarily prison officers, judiciary, with more than 5 choose supplemental doctors, primary and employees pension arrangements, secondary school teachers) beyond NSSF How are benefits National Budget National Budget Workers’ accumulated Worker’s accumulated funded? savings from mandatory savings from voluntary contributions (5% of salary contributions (generally by employee and 10% of employer contributions) salary by employer) Who is covered? Old age (retirements); Old age (retirements); Old age (retirements); Unknown invalidity; invalidity; survivorship; short- invalidity; survivorship; survivorship; short- service gratuities withdrawals; emigration service gratuities grant. What is the design Defined benefit Defined benefit Defined contribution Defined contribution of the schemes? defined benefit (depending on plan) What does the Worker receives Worker receives benefits Worker receives lump sum Workers receive benefits design imply for benefits based on based on length of service based on returns earned at retirement based on workers? length of service and and salary during service. on contributions individual scheme rules salary during service Survivors receive benefits in case of death before Survivors receive benefits retirement in case of death before retirement How are benefits Part lump sum Part lump sum on retirement Lump sum on retirement Lump sum and/or annual received? payment and annual and annual pension pension payments pension payments payments (depending on scheme rules) What is the funding Unfunded: Requires Unfunded: Requires budget Funded: Funds stand at Mostly funded: Members status today? budget allocation allocation of UGX 250 billion20 UGX 3 trillion (or 5% of savings estimated at UGX (undisclosed) or 0.4% of GDP per year GDP), which are managed 0.25 trillion managed by by NSSF and invested in the pension scheme or various assets. external service providers 20 Estimated total pension payment for FY2013/14 according to World Bank modeling 29 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth In its current state, it is highly older family members (as is the case in mainly in subsistence agriculture. Their questionable whether the country’s the Bolsa Familia system in Brazil). The susceptibility to ill-health coupled with pension schemes are achieving the policy to adopt by a country depends on the high cost and lack of availability objective of providing a solid basis its social and poverty conditions. of medical care suited to their needs for an effective social protection exacerbates their vulnerability. system for elderly citizens. It is also The observed impacts of well- questionable whether public resources functioning social security systems At present, only two percent of people are being used equitably; whether these provide a strong justification for above retirement age receive any systems can be sustained in the long the efforts of governments to build form of pension income (see Figure term; and whether they are contributing effective systems that provide benefits 17). Currently there is no national, social optimally to the country’s development. to all elderly people. All elderly people, safety net scheme to provide security regardless of their employment history for the elderly and other vulnerable 2.1.1 Limited pension or of their level of contribution to pension groups. While the Government has coverage, limited protection schemes, should have the means to implemented a pilot non-contributory against poverty in old age sustain themselves either through social pension scheme, this presently contributory schemes or through the covers only 17 districts. Other elderly Experiences around the world receipt of social safety nets pensions people are supported through food demonstrate that a well-functioning provided through reliable, efficiently aid in the north of the country. To social security system can reduce the administered, sustainable, and affordable address this lack, the Government has risk of a significant proportion of the schemes. Such systems enable aging formulated the Draft National Social members of society to face their future Protection Policy to address the need population falling into poverty in old with realistic expectations and a certain for coverage for elderly citizens and age. This can be achieved in various level of security, without placing an other vulnerable groups. ways. Either a non-contributory, social unbearable burden on Government pension can be paid to all or subset of finances or younger generations. Building own savings is another elderly citizens. This can have significant step to building well-functioning implications for a great number of Despite the clear need to address pension schemes. Around the world, in people other than the direct recipient of the needs of the elderly and other addition to providing old-age pensions, the pension, as benefits are commonly vulnerable groups, Uganda’s social many governments have recognized shared with the recipient’s household protection system still fails to achieve the need to encourage citizens to members, through contributions to food its primary objective of providing accumulate their own savings to sustain costs, clothing and school materials to protection against poverty and themselves beyond retirement, with members of the recipient’s extended vulnerability in old age. Even though this being widely recognized as an family. For example, in South Africa, it is expected that the elderly will important step to ensuring a decent members of families of the recipients become less productive as they age and income in retirement. Despite the broad of pensions are 11 percent less likely withdraw from mainstream economic recognition for the need for pension to become poor, while girls living in a activities, the majority of Uganda’s schemes to be augmented by personal household with an older woman who elderly have not accumulated significant savings, only less than 10 percent of receives a pension are on average savings during their working life and the working age population in Uganda 3-4 centimeters taller than those in therefore lack the means to effectively currently participates in formal savings households without a family member sustain themselves and their dependents schemes for their old age (see Figure in receipt of a pension. Similarly, in in their old age. Thus, as the productive 18). Based on the 2010 Uganda National Zambia, a pilot social pension scheme to capacity of the elderly declines, they Household Survey (UNHS), Uganda had benefit older people caring for orphans become increasingly dependent on a total of 15.2 million workers, of whom resulted in improved school attendance. others for support. Elderly citizens who 2.5 million were employed in the formal Alternatively, social safety nets can be are not supported by extended family or sector. The current pension system targeted to poor households, which community institutions must therefore covers only about 450,000 of these would in turn provide protection for continue to engage in strenuous work, workers (18 percent of all private sector 30 Fourth Edition, June 2014 Figure 17: A comparison of African countries: Uganda has among the lowest share of population above legal retirement receiving pension Source: World Bank Pension Data bank, www.worldbank.org/pensions workers) through their contributions to of coverage is comparable to many levels and hence coverage will rise as the National Social Security Fund (NSSF). other African countries, but is on average Uganda develops. However, a broad In addition, a small proportion of workers less than half of the rate of coverage in range of policies could be put in place in the public sector participate in pension Latin America. On average, 44.7 percent to encourage pension savings rates to schemes, with approximately 275,000 of workers in Latin America contribute increase from broadening social security teachers and civil servants qualifying for to a pension system, with a number of coverage to developing savings schemes the Public Sector Pension Scheme. That countries, including Chile, Uruguay, and from the informal sector, to measures leaves a large proportion (71 percent) of Costa Rica, achieving a rate as high as promoting greater financial inclusion. wage earners who do not contribute to 70 percent. Pension coverage is closely any form of pension scheme. This level positively related to GDP per capita Figure 18: Pension savings low: Uganda’s workers could build stronger first step to descent retirement Source: World Bank Pension Data bank, www.worldbank.org/pensions 31 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth In general, the main limitation of social services (24 percent); and, far behind, Department of Economic and Social insurance schemes in Uganda is their mining and quarrying (one percent) and Affairs projects that by 2050, more than limited rate of coverage. Formally fishing (one percent). In this context, the two billion people worldwide will be aged employed workers in the public and establishment of a pension system that over 60. Of these, 80 percent will live in private sectors, most of whom live in covers rural and informal workers will be developing countries, with the number in urban centers, are covered, but this particularly challenging in Uganda. Uganda amounting to almost six million. includes less than 10 percent of the As fertility rates and the average size of working population. In Uganda, the 2.1.2 Old age social protection: families decline, the elderly will constitute majority of the working population The need will grow with an increasingly large proportion of the consists of rural smallholder farmers, demographic change total population. In Uganda, it is projected informal sector workers, and self- that the rate of growth of the elderly employed. Generally, these members With approximately 50 percent of population will be a full percentage of society are not covered by any form Uganda’s population below the age of point higher than the average rate of of comprehensive social protection 15, it is a fair question to ask whether the population growth, which is predicted system. According to the Urban Labor country needs to worry about pensions to reach 2.6 percent. With this rate of Force Survey 2009, among employers at this point in time. Uganda is still young growth, the absolute number of the and self-employed workers outside the and has not yet begun the demographic elderly in Uganda is estimated to reach agricultural sector, 68 percent and 83 transition that has characterized many four times its current level by 2050. This percent respectively were engaged in developed and emerging nations. is quite close to the average increase for the informal sector21, with the 2009/2010 However, as demographic changes Africa as a whole, for which the absolute UNHS showing that there were a total of progress, the average age of the number of the elderly is projected to be 1.8 million informal businesses operating Ugandan population will increase, with five times the current level at the same in the country. The majority of informal a corresponding increase in the number point in time (see Figure 19). businesses were in the agricultural of the country’s vulnerable elderly sector (27 percent) followed by trade and citizens. Projections by the United Nations Figure 19: Projected increases in the proportion of Uganda’s elderly population Source: United Nations, Department of Economic and Social Affairs, Population Division (2011). World Population Prospects: The 2010 Revision, CD-ROM Edition Social and economic factors will also many African countries, Ugandans have provided protection for the elderly and drive the need for the provision of a strong tradition of caring for their members of other vulnerable groups formal pensions. In the past, extensive aging relatives. Yet the Government’s have weakened over time due to a social and extended family networks Draft National Social Protection Policy number of factors, including the high rate have limited the need for old age social Framework for Uganda accepts that the of rural-urban migration; high levels of protection systems. As is the case in social networks that have traditionally unemployment and underemployment; 21 Uganda Bureau of Statistics (2009): Labour Force Survey Report 32 Fourth Edition, June 2014 the HIV/AIDS pandemic; civil conflicts and now in order to take advantage of this low rate of coverage, Government widespread poverty. current demographic circumstances. spending on this scheme amounts to 0.4 Global experience shows that measures percent of GDP, a figure projected to more Therefore, while the need for a pension to address the care and security of the than triple in the long run22 (see Figure system may not seem particularly elderly will be far more effective if they 20). As a percentage of the Government pressing at present, it will become are implemented at such a point in the budget, expenditure on this scheme is increasingly so into the future. It country’s development. set to increase from the current level of would be highly advantageous for 2-3 percent to 10 percent over the long the Government to take advantage of 2.1.3 The current pension run, which will place intense pressure the current demographic sweet spot, system: Neither fiscally on the Government’s ability to allocate characterized by a young workforce and a sustainable nor equitable funds for other key social programs. proportionately small number of those of The Government’s accrued liabilities to pensionable age, to develop a functional In spite of its low coverage, the public members of the public sector pension pension system. This would facilitate the pension scheme cost 0.4 percent of GDP scheme, which measures the present value development of such a system at a time per annum, which is equivalent to the of the benefit promises made to date, when associated costs would be relatively budget for primary health care. This cost amount to US$ 4.9 billion, or more than 23 low, hence avoiding the old-age trap that is bound to increase in future to cover percent of GDP. The experience of other is afflicting many developed countries the entire health sector budge today. As countries in Africa shows how expenditure and a number of developing countries, stated above, one of the main components on pensions can rise rapidly, even in young where the elderly constitute a much larger of Uganda’s current pension system is countries. For example, Government proportion of the population. Similarly, the Public Service Pension Scheme. This expenditure on pensions has risen as a given that the accumulation of savings scheme covers all 275,000 civil servants proportion of GDP by almost three times to achieve security in old age should be and an undisclosed number of staff of in Mali and Kenya, from a figure equivalent a lifelong endeavor, measures to ensure the armed forces, representing less than to 0.5 percent of GDP in the mid-1990s to that the working population increases their two percent of the population. In spite of almost 1.5 percent in 2010. level of savings should be implemented Figure 20: Projected Government annual expenditure on public sector pensions (percent of GDP) The Treasury currently pays 0.4 percent of GDP for pensions every year (Great Lakes Film Production Ltd, 2014) Source: World Bank PROST Modeling 22 World Bank PROST model. Uganda spent 0.4 percent of GDP of 2012 on pensions for civil servants and other special schemes. Assuming no change to the system and its governing parameters over the next 50 years, this amount will almost treble to 1.1% of GDP. As data was not made available, the costs of the Armed Services Pension Scheme are not included in these numbers. 33 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth The fiscal burden created by Uganda’s countries, where a range of 60 to 70 fiscal burden of pension liabilities will public sector pension scheme is due to percent is more common (see Figure 21). increase, which could constrain the the generosity of entitlements provided This, together with the increasing size of Government’s ability to finance equally through the scheme. The Ugandan public the civil service and the increasing average important priorities for public expenditure, sector pensioner receives a pension with age of its employees, is increasing the cost including the expansion of social an average value of up to 87 percent of this scheme, raising questions regarding protection programs for the poorest and of their final salary before retirement. its sustainability. Without reform to reduce most vulnerable members of society. This replacement rate is very high when the generosity of the scheme (technically compared to similar schemes in other referred to as parametric reforms), the Figure 21: Replacement rate: Uganda pays a relatively high pension to its civil service retirees compared to national and civil service schemes in other countries Source: World Bank Pension Database Governance problems within the lengthy bureaucratic processes that delay pensioners in the system, which places pension sector exacerbate the fiscal sanctioning of those involved in corrupting additional pressures on Government burden. In general, the Government the scheme and encourage impunity.. resources. According to a report by the acknowledges that corruption is one of Auditor General submitted to Parliament in the main challenges facing the country Another issue relates to constraints December 2012, a total of UGX 165 billion and has put in place an extensive legal on access to pensions affecting those (US$ 66 million) was lost in the period from framework, policies and institutions to possibly qualified to receive them due 2009 to 2012 as a result of the fraudulent improve overall governance. Specific to a lack of proper records, a breakdown enrolment of 3,000 ghost pensioners. The to the provision of pensions under the of the infrastructure for administering problem led to the suspension and delay public sector pension system, the system the scheme, and the lack of a system to of pension payments for approximately is negatively impacted by organized facilitate access for those living in remote 60,000 retirees for up to a year. syndicates comprised of public and private locations. In the past, delays to payments sector officials strategically located within due to these factors have been the main Finally, the cost of the scheme for the different Government and private sector source of arrears for the Government. armed forces is unknown. While it is institutions who conspire to embezzle There have also been cases of culpable drawing from the consolidated fund, public funds and, more generally, by mismanagement of pension records, information on the armed forces pensions the limited institutional capacity and particularly through the enrolment of ghost is not available, creating fiscal uncertainties 34 Fourth Edition, June 2014 due to the fact that these costs cannot that covers less than one percent of the or self-employment age (see Table 3). be accurately determined and that population, the high level of expenditure Effectively, the rest of the economy, future costs cannot be accurately on pensions results in a redistribution including those on low incomes and projected. of public resources towards a higher in poverty, is subsidizing the better- earning group, which is less likely to fall off public pension recipients, with the The degree to which the current into poverty in old. Household surveys average pension paid by the public public pension system represents suggest that public servants are less sector scheme (US$ 1,370) amounting to equitable spending of public resources likely to be poor compared to their a value equivalent to almost three times is questionable. For a pension scheme counterparts in private sector wage the average wage. Table 3: Poverty profile by employment status of household head Poverty estimates Population share (%) Head count Poverty gap Squared poverty gap Self-employment 79.7 33.6 9.5 3.8 Government employment 4.7 7.2 0.9 0.2 Private employment 11.9 24.0 6.7 2.7 Others 2.4 36.2 12.3 5.4 Inactive 1.3 19.2 3.3 1.2 Uganda 100.0 31.1 8.7 3.5 Source: Uganda Bureau of Statistics (2004/05): Uganda National Household Survey 2.1.4 Well-managed pension one of the best researched cases. phone-based pension savings schemes systems could potentially One study 23 presented evidence of a has moved savings into the formal contribute to the development direct impact from pension reform on financial system 25. of financial systems and total savings and hence on economic growth, estimating that approximately Uganda’s policy makers recognize the savings half of the increase in total savings link between well-managed pensions between 1981 and 2001 (4.9 percent of and financial sector development. In addition to their role as a vital GDP) was due to these reforms. In other These possible benefits of pension component of a social protection countries, the evidence of an impact on reform to the financial sector are system, under some circumstances, savings, financial market development identified in the Ugandan National well-managed pension systems and growth is mixed but generally Development Plan (2010/11-2014/15), can play an important role in the positive, especially in the case of which includes the stated aim of development of financial and capital developing countries 24. For example, developing a competitive, effective and markets, which in turn contributes to a link between the growth of pension well-governed pension sector in order economic development and growth. assets and the increasing duration of to develop the financial services sector The strongest evidence for this is Government securities can be found in and to ensure the long-term supply of found in Latin America, with Chile being Kenya. Likewise the launch of mobile capital. A key underlying critical function 23 Corbo, V. and Schmidt-Hebel, K. (2003): Efectos Macroeconómicos de la Reforma de Pensions en Chile 24 For example, López Murphy and Musalem (2004) show that the introduction of mandatory funded pension systems contributed to higher savings in a sample of developing countries that they analyze. 24 Source Retirement Benefits Authority, Kwena, R., M., Turner, J., A., (2013): Extending Pension and Saving Scheme Coverage to the Informal Sector: Kenya’s Mbao Penion Plan. 35 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth of a good pension system is to allow savers commitment from the Government, NSSF is the largest investor in the country. consume fairly the same amount after they financial sector regulators, the Bank of As such, the manner in which it manages have stopped working, as they did during Uganda and broader stakeholders will its investments has a significant potential their working time, so as to have smooth be necessary to ensure that the enabling impact on growth and development. The consumption pattern through their lifetime. environment is sufficiently robust to allow fund owns 80 percent of listed equities and the pension system to flourish. approximately 25 percent of Government To realize the link between pensions and securities, which significantly affects the financial sector development, Uganda However, currently existing pension liquidity of the domestic markets. would need to build a robust legal assets in Uganda are not being put to and regulatory framework, financial best use. Uganda has one large mandatory Inefficiency in the NSSF is also infrastructure, and an array of financial social security fund, the National Social demonstrated by the high costs instruments. It should be stressed that the Security Fund (NSSF), which has a associated with its administration. link between pension reform and financial monopoly on the collection of contributions Indeed, a recent study26 found the NSSF market development cannot be taken for from formal sector workers and their to be one of the most expensive public granted. Rather, a number of enabling employers and on the investment of the pension funds surveyed in the world, conditions need to be in place for a funds so derived. Holding a monopoly, taking the size of the fund, the level of positive synergy to occur. These conditions the NSSF has had limited incentives to economic development and other factors include a strong commitment from the improve efficiency, reduce administrative into account (see Figure 22). These costs Government to ensuring the development costs, improve corporate governance and significantly reduce the ultimate value of a robust legal framework and financial maximize returns. Given that the fund of pension savings and entitlements. It is infrastructure, a strong supervisory has assets equivalent to a value of UGX 3 estimated that if applied over a full career framework and the adequate availability trillion under its management, representing span, for every additional one percent of financial instruments. While the pension more than 25 percent of the financial annual charge on assets, the ultimate reform process in Uganda is intended system’s total assets and equivalent to value of an individual’s pension is reduced to foster these conditions, continued approximately five percent of GDP, the by 20 percent. Holding a monopoly, the NSSF has had limited incentives to improve efficiency, reduce administrative costs, improve The NSSF, at the Workers House, Kampala, is currently the only corporate governance mandatory body responsible for private sector workers’ pensions and maximize returns. 26 Sluchynsky, O., (2014): Defining, Measuring and Benchmarking Administrative Expenditures of Public Pension Programs. 36 Fourth Edition, June 2014 Figure 22: Costs of managing pension liabilities (percentage of total assets) Source: Sluchynsky, 2014 Past problems are closely related to Figure 23). Criticism includes the fact that the fact that union members represent the poor quality of governance of the members of the tripartite board are largely only 15 percent of the workers enrolled fund, which includes the culpable appointed on the basis of their position in the NSSF and that only seven percent mismanagement of assets. The NSSF within organizations they represent, of NSSF funds are unionized. In addition, ranked very low in a recent worldwide rather than for their knowledge of investment decisions have to be cleared survey related to levels of transparency and investment issues, with these organizations by the Ministry of Finance, Planning and quality of governance in the management representing Government, employers Economic Development, which can cause of public pension reserve funds (see and, predominantly, trade unions, despite transactions to be blocked and/or delayed. Figure 23: Costs of managing pension liabilities (percentage of total assets or IPDs) Source: Musalem and Souto 201227 27 Musalem A.R., Souto P. (2012): Assessing Governance and Transparency of National Public Pension Funds. 37 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth It should be noted that over the recent Currently, the investment portfolio is prices. Rather than delivering a return to years, the performance of NSSF has being diversified into longer duration members, funds have been used as a improved. Under new management, assets and external fund managers have source of financing for the Government, which has set clear investment targets been appointed. However, investments often resulting in distorted rates in a and established a model portfolio, returns remain concentrated in bank deposits small, illiquid market. These funds are on savers’ contributions increased from and Government bonds, with a large often used to provide financing for the three percent in 2009 to 11.3 percent in exposure to property and limited, heavily achievement of social or development 2013. Unfortunately, this was also during a concentrated equity investments (see objectives or are directed towards illiquid, period of high inflation, implying that real Figure 24). Given that the NSSF holds non-transparent investments. With the returns on investments remained negative 80 percent of listed shares in Uganda lack of a vibrant secondary market, for most of this period. While administrative and more than one-quarter of all pension assets have not facilitated access charges also declined to around 1.75 Government securities, it operates in a to long-term capital by borrowers, nor percent of assets, they still remain well context of extremely limited liquidity, have they contributed to improving the above international standards, where making it very difficult for the fund to liquidity of the financial markets or to central collection systems can cost well trade without having an impact on market lowering interest rate margins. below one percentage points of assets. Figure 24: NSSF Portfolio – changed in size, but not in composition or return UGX billions Average inflation Real returns Source: National Social Security Fund Financial Statements Low returns on retirement savings and making it impossible for these members level of security provided to members. methods of payment undermine the to maintain pre-retirement consumption Overall, mismanagement of NSSF funds security of pension savings in NSSF. levels. In addition, the NSSF currently in the past has also contributed to a lack The poor returns derived by this fund only pays out entitlements in the form of public confidence in pension savings have a direct negative impact on the of a lump sum, rather than an annual systems. value of members’ retirement savings, pension income, further reducing the 2.2 How countries are building effective pension systems The test for any effective pension key characteristics: (i) coverage; (ii) manner is not easy. Therefore, despite system is whether it provides old-age adequacy; (iii) sustainability; (iv) security; the potential benefits, many countries income security for the population and (v) efficiency. Achieving all these face difficulty in making the changes it covers. For this to be realized, the five elements of a pension system in an necessary for the establishment of more pension system should consist of five economically and politically acceptable efficient and effective pension systems. 38 Fourth Edition, June 2014 In recent times, reforms have been pension reforms have been taking place such as Botswana and Namibia, to full undertaken in numerous countries to address the same issues as in Uganda: scale Chilean-style reforms in Nigeria. around the world to address these Low coverage, unsustainable expensive Where the specific reform measures challenges and to try to make pension public service schemes and the inefficient addressed themselves to the above- systems more effective. Though the use of existing pension assets. Reforms mentioned five key characteristics of an demographic pressures are less urgent range from the introduction of non- efficient pension system is summarized in in Africa than in other parts of the world, contributory social pensions in countries Table 4 below. Table 4: Pension reforms in African countries Principle Reform effected Country examples Coverage Expand social Universal schemes: Cape Verde, Mauritius, Namibia, Seychelles assistance to poor and vulnerable households Means tested or other targeted schemes: Kenya, Lesotho, Swaziland Pilot schemes: Ghana, Nigeria, Zambia Pension tested schemes: Lesotho, Swaziland Household targeted schemes: Ethiopia (productive safety net programs, direct support component), Kenya (Hunger Safety Net Program) Adequacy Expanding coverage 2011: Kenya Mbao pension developed by Retirement Benefit Authority (RBA) for informal of formal firms and sector pension savings via mobile phones designing schemes for informal sector workers 2008: Namibia Agriculture Retirement Fund introduced to cover farmers Sustainability Changed public sector Botswana, Cape Verde, Senegal, Sierra Leone, Zambia pension schemes from PAYGO to contributory schemes Security Pension regulator 2001: Kenya RBA established to supervise all pension funds established 2004: Nigeria established National Pension Commission under the Pension Reform Act 2008: Ghana established the National Pensions Regulatory Authority 2008: Tanzania Social Security Regulatory Authority established Efficiency Reform of monopoly 2004 Nigeria: Structural reform to replace state run mandatory defined benefit DB civil social security funds service and private sector system with a funded define contribution DC 2008 Ghana: Multi-tier system, with part contribution to individual fund managers introduced 2011 Malawi: Parliament adopted a bill establishing a system of mandatory individual accounts for most workers in the country 2012 Kenya: Contracting out of part of social security contributions from National Social Security Fund permitted Source: World Bank reports 39 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth 2.2.1 Coverage Namibia, universal old age pension Lesotho is a good example of how schemes are financed through general pension reform involves trade-offs The principle of adequate coverage taxation, with these schemes covering between the different goals of the pension all residents and providing them with an system, with coverage and adequacy pertains to ensuring that all individuals annuity. In South Africa, a social assistance having to be balanced against cost and have support in their old age. Some scheme, financed through general sustainability (see Box 5). Determining countries have developed universal taxation, covers elderly individuals (aged where poverty is concentrated and how programs to ensure that all the elderly, 60 or more) with low means, providing the elderly in the population are looked irrespective of their previous employment them with an annuity. In these countries, after must be analyzed properly to status, are catered for through the the percentage of those over the age understand whether directing programs provision of uniform pensions. This of 65 receiving old age benefits is in the to this group is the best use of scarce basically serves as a safety net for the range of 75-90 percent, compared to Government resources. Targeting elderly, who may not have put aside other ranges from around only five percent these programs towards poor people forms of savings, to ensure they are not in Uganda and Tanzania to 12 percent above a given age is one way to control left in extreme poverty. Other countries in Ghana. These schemes ensure that costs. Efforts to extend the coverage of have implemented these programs the elderly who do not participate in contributory schemes to all formal sector through the use of different types of contributory, employment-based social workers and to create savings or pension security and private pension schemes testing for legibility for the programs. schemes for informal sector workers are are covered. However, these schemes other means of extending coverage in the are characterized by high costs and are In a number of Sub-Saharan African thus usually adopted by countries with medium to longer term. countries, including Botswana and relatively high per capita incomes. Box 5: Lesotho’s non-contributory social pension ensuring universal, but costly, coverage Introduced in 2004, Lesotho’s social pension scheme is intended to provide basic income assistance for individuals not covered by an extensive network of voluntary occupational schemes for formal sector workers. Everyone over the age of 70, except those already receiving a Government pension, is registered with photo identification. The applications are screened and information filed in a dataset, which is updated on a monthly basis to capture the latest entries and exists. Based on the register, monthly disbursements of M450 (US$ 43) each month are made through 300 post offices throughout the country. It normally takes around 10 days to reach all the beneficiaries. The Ministry of Finance and Development Planning administers the scheme. This ministry also determines the benefit level. By 2008, the proportion of the population above legal retirement age receiving a pension was over 80%. The scheme is financed out of the state budget. Even though the program is pension tested, meaning that only those not already receiving a pension from other sources are eligible, the cost is equivalent to 1.8% of GDP. This is due to the relatively high level of the benefit, which has a value equivalent to 35% of per capita GDP, compared to other social pensions in the region, where the value ranges from between 5-25%. Another challenge is the problems of ghost pensioners, resulting from the non-reporting of deaths by next of kin. Source: Stewart, F.,Yermo, J. (2009): Pensions in Africa; with updates from World Bank database. 40 Fourth Edition, June 2014 2.2.2 Adequacy informal sector and with a largely agrarian India, the New Pension System, which is economy. Under these circumstances, mandatory for civil servants and voluntary Adequacy of pension benefits ensures it is necessary to develop schemes for the rest of the population, has been that the elderly have at least enough specifically designed for the many small adapted into what is known as a ‘Lite’ to meet their basic needs. In this case, firms in the informal sector and for groups form specifically to meet the needs of adding contributory pension savings on such as farmers operating in rural areas. workers in rural areas, with less stringent top of the basic minimum provided by contribution and withdrawal requirements social pensions is required to ensure a Despite the challenges involved, and utilizing community-based higher level of security in old age. While there are good examples of schemes associations for collection. In Kenya, the encouraging or requiring pension savings developed for these groups in other pension regulator has been instrumental within the formal sector can be achieved countries. For example, a scheme in the development of a pension savings through appropriate regulation to ensure specifically for agricultural workers has system, Mbao, which leverages the that workers contribute, the challenges been developed in China, even though growing mobile money network (see Box are greater in countries with a large this provides only limited benefits. In 6). Box 6: Mbao: How innovation is helping Kenya expand pension coverage and adequacy Pension reforms in Kenya started about 15 years ago, with the establishment of the pension regulator, the Retirement Benefits Authority of Kenya (RBA). Like in many other African countries, Kenya’s informal sector employs about 80% of the labor force, which presented a major challenge to expansion of pension coverage. The Kenya National Social Security Fund was covering workers in firms with more than 5 employees. This left a large proportion of the labor force uncovered. After 10 years of building experience in licensing, regulating and supervising retirement benefit funds, including administrators, fund managers and custodians, the RBA established the Mbao pension plan in June, 2011. This was done under an arrangement between RBA and National Federation of Jua Kali Associations. The Mbao program covers medium-and-small micro enterprises and Jua Kali associations. Members commit to save at least about 20 Kenyan shillings a day or $6.00 per month towards retirement. Mbao members can make payments through the leading mobile transfer services with payments through M-PESA and Airtel money transfer services. The strong payments and financial inclusion infrastructure in Kenya helps this to work well. Within a month after establishment, the scheme had 42,000 members and has since grown to be the largest Individual Pension Plan in Kenya. A similar scheme is currently being developed between the RBA and “Matatu” (taxi and minibus) operators. The challenge for schemes such as Mbao going forward will be how to balance flexibility with adequacy. Schemes for the informal sector rightly need to be flexible due to the needs of the targeted group and the objective of encouraging these voluntary savings. However, if money is removed before old age it can be questioned whether these really are pension schemes or rather another form of longer-term savings vehicle. Source: Kenya Retirement Benefits Regulatory Authority 41 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth 2.2.3 Sustainability changes, to make pensions schemes more of a basic pension for those who had affordable. In other regions, such as Latin made insufficient contributions to finance This aspect pertains to the capacity to America, the most significant change has a minimum pension. In order to achieve deliver the promised level of retirement been the shift from systems that define sustainability, several countries in Africa, benefits and to the affordability of the workers’ benefits (defined benefit) to those such as Cabo Verde (see Box 7), have funding of associated schemes, whether which defines some form of contribution reformed public service pension plans, the benefits are provided by governmental, by the worker and his or her employers expenditure on which constitutes the bulk private sector or individual finances. As to their retirement package (defined of their total expenditure on pensions. expenditure on pension schemes has contribution schemes). National schemes have also been increased, pension reform has been reformed to ensure their long-term fiscal a focus of policy action in developed In this regard, many countries have sustainability. For example, parametric countries, particularly those with rapidly followed the lead of Chile, which replaced reforms were undertaken to the national, aging populations. In these countries, its social security system with a mandatory, contributory Seychelles Pension Fund to particularly in Europe, countries are privately managed, defined contribution, tackle its fiscal unsustainability, with on- reforming their systems to reduce benefits individual account pension scheme in going reforms directed at improving the and increase retirement ages, among other the 1980s. A major reform of the system level of equity of the fund. took place in 2006, with the reintroduction Box 7: How Cabo Verde managed to reduce public pension costs Cabo Verde previously had two separate contributory pension schemes - the Adminstracao Pulbica (AP) scheme for civil servants and the Instituto Nacional de Previdencia Social (INPS), a mandatory social security scheme for private sector workers. In 2006, a law was passed to integrate the two schemes. Fiscal relief were achieved by moving new entrants to the civil service to the INPS, which had a lower level of benefits, although these benefits were still generous by international standards, with an 80 percent replacement rate compared to the 100 percent paid under the AP scheme. Parametric reforms were also implemented at the INPS, with these reforms including reducing the maximum replacement rate, increasing the minimum contribution period from three to 15 years and changing the benefit calculation base from best three years to best 15 years of salary. However, additional reforms are still required to make the fund sustainable over the long-term. Savings initially amounted to a value equivalent to 0.1 percent of GDP, rising to around two percent at the peak. In addition, cost savings were achieved though economies of scale derived from merging the funds, given that Cabo Verde is a small country and the number of participants in each of the schemes was limited, with around 55,000 contributors in the INPS and only around 10,000 in the AP scheme. These contributory schemes are supported by a non-contributory universal pension, which is means tested and provides a benefit with a value equivalent to 22 percent of GDP per capita, at a total cost of 0.4 percent of GDP. In this case, moving civil servants to the national system met with general acceptance, as they gained health benefits through participation in the national scheme. Merging schemes has been met with more resistance in other countries, with many public sector schemes, particularly in Africa, remaining independent. Source: World Bank Studies 42 Fourth Edition, June 2014 2.2.4 Security improving the security of pension regulators have played an important savings through the licensing of pension role in cleaning up the pension system In this context, security involves schemes and the implementation of and ensuring the long term growth minimizing the risk that funds that have oversight through the establishment of of savings in countries such as India been or should have been accumulated dedicated pension regulatory authorities, (through the Pension Fund Regulation to provide retirement benefits are lost as has been the case in Ghana, Kenya and Development Authority) and Kenya or misappropriated before the benefits and Tanzania, though some of these (through the Retirement Benefits are delivered. Several countries are regulators are proving to have greater Authority). powers in practice than others. Pension Box 8: How Kenya’s Retirement Benefits Authority securing pension savings Following the promulgation of the Retirement Benefits Act (1997), the Kenya Retirements Benefit Authority (RBA) became active in 2000. Prior to this, all pension and provident schemes operated without clear regulatory guidance. In spite of the huge growth potential of the industry, it had been neglected. It also needed reform in view of the growing real and potential risk of the mismanagement of existing pension schemes. The RBA was mandated by law to “regulate and supervise the establishment and management of pension schemes,” with a clear goal of protecting the interests of members who contributed to schemes. How did it secure pensions? RBA established standards to govern the establishment and management of pension schemes, starting with the registration of schemes and service providers. It introduced a certification process for trustees, which although appointed by members and employers, had to be approved by the RBA, for various private sector schemes that were being established as trusts. It enforced the holding of annual general meetings, mandated disclosure retirements, organized training for scheme members to increase their awareness of their rights, introduced a whistle blower system for fraud, adopted a risk-based model of supervision, and simplified dispute resolution processes. It also began the outsourcing of asset management, the custody of scheme assets and, in some cases, scheme administration. An initial focus of the authority was on the improvement of the funding levels of schemes to ensure they could pay promised benefits. What has RBA achieved? The measures implemented by the RBA have increased the level of confidence in saving for retirement due to the creation of a regulatory body; increased member awareness through board representation; improved investment portfolio returns and increased diversification through the use of independent investment managers; increased the security of scheme assets through the separation of asset custody to independent custodians; and increased transparency and accountability through annual audited financial statements and other statutory returns and regulatory oversight. Today, Kenya has about 1,240 pension schemes operating alongside the NSSF. Since its creation and the passing of pension legislation and regulation, levels of professional misconduct have declined substantially, with transparency and whistle blowing making it much harder for pension plan sponsors to divert scheme funds into unauthorized business or engage in other misconduct. The RBA also prepared the ground for the liberalization of the NSSF in the context of challenges such as the high cost of administration; poor record keeping; only offering small lump-sums benefits; imprudent investments; qualified accounts and insufficient accountability, all of which had inevitably led to a loss of confidence in the scheme. In 2013, the NSSF was converted from a provident fund into a pension fund, with two tiers comprising the mandatory 12 percent of pensionable earnings to be deposited with NSSF, while the additional savings could be out-sourced by employers. Challenges remain for the RBA, not least of which is ensuring the compliance of NSSF with the regulatory environment. The authority is also refining its risk-based approach to supervision to better target problematic funds. Source: Kenya Retirement Benefits Regulatory Authority 43 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth 2.2.5 Efficiency management of social security assets. such as the Central Provident Fund in Such inefficiency has been characteristic Singapore, are increasingly using external When it comes to the efficiency of of the management of several schemes fund managers to invest at least a portion pension systems, the main objective in the past, with many failing to deliver of the assets under their management, is to maximize the level of retirement a real return on assets. To address this, while others, such as the Kosovo Pension benefit generated from the contributions some degree of outsourcing of central Trust, outsource the management of all of by optimizing investment returns and social security assets has been adopted the assets for which they are responsible. minimizing costs. This is especially by several countries in the region. For In other countries, such as Nigeria important in defined contribution example, contributions into the social and Malawi, increased competition is schemes, in which the employees security fund in Kenya above a minimum achieved through the establishment of bear the ultimate risk, since there is no earnings limit can be contracted out and privately managed individual pension guarantee regarding the performance of managed by alternative schemes which accounts. However, a strong enabling the fund and since they have no recourse meet certain criteria. Similarly, in Ghana, environment, with sufficiently developed to the employer. five percent of mandatory contributions capital markets and a robust regulatory can be managed by private, occupational and supervisory oversight, amongst other The main thrust of pension reforms in schemes. Elsewhere in the world, social factors, are necessary to make these Africa has been to address the inefficient security fund and provident funds, individual account systems work. Box 9: Nigeria: Trying to improve efficiency through competition and choice The Contributory Pension Scheme (CPS) was established by the Pension Reform Act in 2004. This is contributory, fully funded, privately managed defined benefit (DC) system based on individual accounts. Membership is compulsory for public sector employees and for those private sector employers with more than five workers. A minimum of 7.5 percent contributions are made by employers and employees (tax free) and voluntary contributions are allowed. Benefits (tax free) are received in the form of an annuity or program withdrawal and a certain amount as a lump sum. All retirement savings account holders who have contributed for 20 years are guaranteed minimum pension specified by the Government. Pension funds can only be managed by pension fund administrators, chosen by the employee, which have obtained a license from the regulator, the National Pension Commission - which also controls their fees and regulates the asset classes they can invest in. Nigeria was the first country in sub-Saharan Africa to introduce a pension system based on ‘Chilean style’ individual, funded accounts. The question which arises from this experience is whether the Nigeria had the infrastructure to support the operation of such a system. There has been some criticism that Nigeria was at a different level of development to Chile when the reforms were introduced (in terms of economic, social and pension system development) and there was a lack of governance, records, financial institutional capacity, and market development. Certainly the diversification of pension assets has not been achieved to the extent expected and most assets remain in Government bonds. Consistent data on administrative costs and returns is not disclosed in Nigeria making it difficult to establish whether the costs benefit of the reforms has so far been positive. Moreover, as 90 percent of individuals work in the informal sector, the new system is unable to meet the fundamental goal of providing most Nigerians with access to formal social security programs. Some have therefore argued that Nigeria still needs a basic social pension – which the Chileans have introduced through reforms to their own system. Comprehensive revisions of the Investment Regulation for the mandatory funds were undertaken between 2006 and 2012 in order to protect the ultimate beneficiaries. This reform aimed at (i) expanding the investible window for pension assets, considering the huge and growing inflows of monthly contributions; (ii) ensuring that more pension fund investments are directed to the real sector of the economy – for employment generation and infrastructure development of the country; and (iii) enhancing risk/return profile of the portfolios so that pension funds earn ‘real returns’ in the long term. New asset classes such as infrastructure were introduced, but so far the funds remain concentrated in bonds. Source: Stewart and Yermo (2009) 44 Fourth Edition, June 2014 2.3 Designing and implementing a pension system that can maximize value for Ugandans Uganda has started on a number of reforms to the pension sector to improve the regulatory environment. As summarized in Table 5, each of the suggested reforms are intended to facilitate improvements in terms of at least one of the five key aspects of an efficient pension system defined earlier. Table 5: Pension reform to move Uganda towards old-age security Principle Reform to be effected Instrument Expand social assistance to poor Draft National Social Protection Policy Coverage and vulnerable households Liberalization Bill (Retirement Benefits Sector Bill) Pension schemes for informal sector Adequacy Liberalization Bill (Retirement Benefits Sector Bill) workers launched Sustainability Reform of Public Sector Pension Scheme PSPF Reform Plans Uganda Retirement Benefits Regulatory Authority (URBRA) Act of 2011 Security Pension Regulator established PSPF Reform Plans Efficiency Reform of monopoly social security funds Liberalization Bill An effective pension system should consist of five key characteristics: coverage; adequacy; sustainability; security; and efficiency. Without pension, this former civil servant resorts to coffee farming in Zirobwe, Luwero, Central region (Great Lakes Film Production Ltd, 2014) 45 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth 2.3.1 Key aspects of Uganda’s Government employer and civil service proposed reform to the pension The proposed Liberalization Bill, employees. The planned reform of the system currently before Parliament, seeks to Public Service Pension Fund has two create a more competitive environment main goals. On one hand, a parametric The Government has started to reform for the management of social security reform of the existing pension benefits the pension sector with main objective contributions in an attempt to improve is intended to reduce the scheme’s of protecting the savings of workers. the rate of return for investors. The Bill generosity to ensure its future fiscal Goals include ensuring these savings are proposes that employees can choose to sustainability. The scheme will be invested well to give a good return to invest at least part of their contributions contributory, but with a formula that savers whilst minimizing against potential with a licensed retirement benefits guarantees the level of pension based risk, ensuring that those who save get scheme other than the NSSF. The on number of years of service, level of their benefits in the form of pension, lump NSSF will not disappear, and workers pay and other parameters. In addition, sum or other forms of benefit, improving can choose to leave their money with the Fund’s establishment as a funded, the administration of the sector, and to the fund. However, it is argued that independent scheme, with a trustee provide a policy and legal framework to creating a more competitive environment board and oversight by URBRA, will grow retirement savings in the economy . 28 and introducing professional fund improve transparency and discipline management into the system will improve into the governance of the scheme. The first step was to create the regulator levels of transparency and accountability Administrative improvements to support for the pension sector. The Uganda induce innovation in collection methods, this reform and to address governance Retirement Benefits Regulatory Authority products and new investments, and problems include the change from the (URBRA) Act of 2011 established a ultimately lead to higher returns on Pension Information Management System pension sector regulator to provide existing pension assets. URBRA will (PIMS) to the Integrated Personnel monitoring and oversight. The authority regulate the financial market for private and Payroll System (IPPS) designed to will license all schemes, including the pensions. In addition, the Bill proposes track employees from recruitment to NSSF, to ensure that these schemes to extend coverage to all workers in the retirement. There are also plans to clean meet international standards for formal sector, rather than merely those up the payroll and pension records investment and risk management. in firms employing five or more workers. through decentralization as a means of Investment Regulations, specifying the This will extend coverage to a potential tackling the issue of the enrolment of instruments into which the funds may 2.5 million workers, or 17 percent of the ghost pensioners. The reforms should invest (including within the East Africa current labor force, although enforcing ensure that pensioners who currently Community), have already been issued. compliance rates amongst small firms will struggle to get their pensions or even All schemes now have to be established be difficult. Employees and employers die without being paid actually get their as trusts, with Boards of Trustees, in the informal sector or self-employed benefits. including member representatives, workers can also choose to make responsible for investment decisions voluntary contributions into a licensed Finally, the Government also has a and assets separated from sponsor retirement benefits scheme. The Bill also long-term vision for the pension sector. funds (so that employers cannot access proposes replacing the current lump sum Although the current focus of the or misappropriate members’ savings). payments made by NSSF, with a system Government’s pension reforms is to URBRA will play a key role in building that pays annual installments until the place existing schemes on a sounder confidence in the pension system, a vital beneficiary dies. financial footing and to improve their prerequisite if long-term savings systems governance, the longer-term goal is to are to flourish. Without proper oversight The Government is furthermore extend pension coverage throughout of the financial sector, Ugandans will proposing to reform the public sector the Ugandan society. At present, an not be prepared to trust either public pension scheme by turning it into an extension of the NSSF to cover all formal or private sector institutions with their independently-managed pension sector workers has been proposed. money. fund with contributions from both the However, this will still leave a significant 28 Source: Ministry of Finance, Planning and Economic Development, URBRA 46 Fourth Edition, June 2014 proportion of the country’s workers transforming the Public Service Pension are established, the governance without cover, since the vast majority of Fund into a funded system. challenges, which the reforms are Ugandans work in the informal sector. meant to fix, will remain unaddressed, Extending coverage to this group will i. Governance amidst high fraud and with the reformed system continuing to require the development of schemes corruption be vulnerable to future abuse. specifically designed to meet the needs As with any reforms in Uganda, of employees at the country’s numerous reforms to the pension system may Making NSSF comply with new small informal sector firms and of entail substantial governance-related regulations and prevent governance agricultural workers. risks, both on a macro level and more problems transferring the private specifically for the pension sector. Petty sector are important challenges. The Government has been piloting a and high-level corruption is prevalent, Governance of the NSSF should be social pension scheme in 17 districts as indicated by Uganda’s low ranking improved through the application to test the provision of support in the Transparency International’s of fit and proper standards to the for vulnerable elderly people not Corruption Perception Index and by the trustee board and through the use of covered by social security. The goal of Global Integrity Report’s opinion that professional, external fund management providing support to the elderly people corruption is the biggest obstacle to and custodian arrangements. Creating a is recognized in the Government’s doing business in Uganda. more competitive environment through Draft National Social Protection Policy the involvement of the private sector Framework. Details regarding the With regard to the pension sector, the in the management of the NSSF and possible extension of the scheme, its transformation of the Public Sector mandatory social security contributions coverage and the possible targeting Pension Scheme into a separate, is intended to improve efficiency by of the benefit through means testing funded pension fund should facilitate facilitating greater transparency and or other mechanisms are still being the achievement of higher levels of higher levels of professionalism. Under studied. transparency. However, it is important the proposed reforms, all pension funds that measures to improve the quality need to be licensed, regulated and 2.3.2 Addressing reform of governance, with these measures supervised. International experience challenges including the appointment of a trustee (including from regions such as Latin board, the requirement to use external America, which has suffered from The Government will face a number asset managers and custodians and governance problems in the past) has of challenges in its endeavors to oversight from the regulator, URBRA, shown that, individual incidents aside, implement reforms to the pension are fully and appropriately implemented, the private management of pension system. Such endeavors almost rather than being merely a formal funds has resulted in higher levels of always involve the implementation requirement. protection to pension fund members of measures that may be deeply against loss of assets. However, in a unpopular with parts of the population The new Integrated Payroll and context of weak financial institutions and with vested interests. Therefore, Personnel System, which is designed and inadequate supervision, the change it is likely that these measures will to improve the quality of governance could simply shift the governance be met with resistance. In addition, of the public service pension scheme, risk from the public to the private it will be challenging to implement continues to face implementation financial sector. This risk can only be reforms due to their breadth and to problems, including the quality of the managed through proper regulation and the limited capacity of the institutions data transferred and the dysfunctional supervision. involved. Finally, the measures state of a number of internal checks. At may trigger economic and public the same time, the decentralization of The overall challenge in regulation financial management issues due payroll and pension systems continues and supervision of the sector lies to the Government having to raise to be highly politicized. Unless robust in the strength and effectiveness finance to cover the transition costs of data, collection and payment systems of URBRA. URBRA has responsibility 47 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth for the oversight of all pension funds been tackled in a number of ways in inability to achieve portfolio diversification in Uganda, including the NSSF and different countries, with measures ranging and a failure of domestic capital markets voluntary occupation funds. Its mandate from cost caps to low cost default funds. to develop have been factors driving the is: To enforce the key elements of the URBRA will have to learn from these reversal of pension reforms seen in recent existing regulatory framework; to separate experiences. years in Eastern Europe. Plans to develop functions of various entities; to ensure the financial and capital markets need to limits for investments are adhered Pension fund administration and be strengthened if pension assets are to to; to ensure that funds meet the set investment management both benefit contribute to long-term financing. performance benchmarks; and to ensure from economies of scale. Therefore, costs that the assets are valued appropriately. could actually rise if the NSSF centralized Key stakeholders already appreciate URBRA is a new institution, which will be system is replaced by a plethora of the need for a broader range of financial required to quickly develop the capacities smaller schemes. This is important, as instruments in order to ensure that to fulfill its supervisory role and to the effect of seemingly small increases pension assets generate acceptable formulate a vision for the pension market in annual charges have an accumulated returns. The current management of NSSF in the post-liberalization period. A strong, effect over a number of years. For is diversifying the portfolio of assets under independent regulator will play a vital example, it has been estimated that for their management. The management of role in making the reformed, competitive every one percent increase in annual NSSF supports the idea of allowing for pension system work effectively and in charges, if applied over the full period for the investment of assets in international building a strong basis for the extension of which a worker contributes to a pension markets. The management of the potential pension coverage. In this regard, learning scheme, the level of benefits is reduced buildup of assets in the PSPF fund will from the experiences of newly established by approximately 20 percent. A factor also need careful consideration. Recycling authorities that have successfully tackled exacerbating the challenges created by these assets back into Government bonds the challenges related to difficult reforms the implementation of reforms is that no would achieve little. Additional resources to the pension systems can be derived clear picture has emerged regarding what will also flow to the capital market from the from the experiences of a number of other the post-liberalization pension market contributions of formal workers who were countries, including Chile and Kenya. will or should look like. In order to create previously not covered under the NSSF. clarity, questions related to whether or Regulations issued by URBRA and its ability ii. Increased costs, limited capital not contribution collection should be to monitor the sector will be critical to markets and low capacity may centralized; how many fund managers a enhancing the sector’s efficiency. constrain benefits relatively small market can support; and the potential role for the NSSF in the new The main challenge to the reform of There are concerns that private sector system all need to be addressed. the public service pension fund is competition will simply mean higher the lack of institutional capacity at costs within the pension sector, due to The level of development of the capital the Ministry of Public Service (MoPS). marketing battles to secure mandatory market also remains low and this may Following governance issues in 2012, the contributions. Failure to control costs create challenges to the achievement management team at MoPS, together with has been a persistent problem in the of some efficiency objectives. The the technical team responsible for the establishment and management of NSSF portfolio is highly concentrated management of pensions, was replaced privately managed pension systems and dominates both the local equity and entirely. While this change may have been around the world. Marketing costs have Government bond markets. Without both necessary, it places great strain on the stayed persistently high, and individuals the development of a broader range of new management team, which will need have proven insensitive to pricing issues, local investment opportunities and the to quickly build the capacities required to arguably only reacting to short-term possibility for increased geographical manage the proposed reforms. performance measures. How Ugandans, diversification, it will not be possible to with limited financial experience, are greatly increase the returns generated by A unique personal identification meant to develop the capacities to make the NSSF or private sector players. Also, system is an essential building block informed choices regarding their pension concentration and related governance risks for administrative reform and will be funds is not clear. These problems have will remain. Similar issues related to the required before pension coverage 48 Fourth Edition, June 2014 can be substantially expanded. The service schemes around the world remain pension debt explicit, which would also recently inaugurated national identity unfunded (in contrast to national social raise Government debt levels. This needs card is expected to address this, but if not security schemes) because of similar to be seen in the context of the recent successful, the lack of a national, universal transition issues. The short-term transition deterioration of the Government’s fiscal personal identification system could costs associated with the establishment policy stance, which has threatened to jeopardize the goal of further increasing of national funded schemes were not erode Uganda’s track record of sound coverage of the pension system. fully appreciated or accounted for in macroeconomic management. Given the Eastern Europe, which was one of the tight budgetary conditions, financing the iii. Fiscal cost of pension will increase in reasons for the recent reform reversals. transition costs of moving to a funded the short term before declining The International Labor Organization (ILO) PSPF could be challenging. Though likely supports the continuation of pay-as- to only represent a small percentage of The move from an unfunded to a funded you-go pensions for these fiscal reasons, GDP, this could represent a significant public pension scheme involves fiscal amongst others. The cost of providing portion of the Government’s revenues, costs. The suggested reform implies pensions will increase before declining given the low rate of tax collection in that Government will have to continue (see Box 10), but their magnitude will also the country. In the long run, the financial paying existing pensions accrued under be increasing the longer the reform is sustainability of the fund could be put the old public pension system while at postponed. If the Government were to at risk if the parametric reforms to the the same time also making contributions transfer all the previous pension rights, PSPF scheme are not sufficient to balance into the new public pension scheme in which public servants had accrued to the contributions and benefits, and if the order to fund future benefits. Many civil new fund, this would make an implicit Government fails to pay its contributions. Box 10: Simulation of fiscal costs of reform of the public sector pension system What is the current cost of the public sector pension system (PSPF)? The major and most pressing issue with the current structure of PSPF is its cost. Currently, the Government spends 0.4 percent of GDP on PSPF pensions (excluding military). In the future – with the same size of civil service relative to population – that indicator almost triples. The main factors contributing to the rapidly increasing cost of the scheme are demographic changes (growing system dependency rate) and the design of the scheme. What reform? Suppose Government reformed the PSPS and established a new system for civil servants as a separate entity funded by contributions by employees (5 percent) as well Government (10 percent) as is currently being done for the private sector pension under NSSF. If in addition some of the parameters (for example the retirement age and the accrual rate) in new arrangement are revised to reduce the cost of the scheme such that the replacement rate declines from the current 87 percent to about 50 percent. What would happen to cost of providing pensions for public servants? The cost of providing pension will increase in the short-term because of the need to pay for accrued rights while starting to pay the 10 percent contribution for the staff in the new scheme. In addition, the Government may grant a pay rise at the time the reform is introduced to compensate for public sector workers also having to make contributions into the fund. Moreover, if the Government (and not the Pension Fund) takes responsibility for the accrued pension rights, the Government would have to raise some sort of bond to compensate the new fund for taking on these liabilities, which would have fiscal implications. By how much could costs increase? The transition cost could amount to about 0.1 percent to 0.3 percent of GDP, depending on how the different parameters of the scheme are changed. This would raise the total pension obligations for Government to increase to a peak of about 0.75 percent of GDP by 2019 (i.e. about 5 years after the reform), which is almost twice the current cost, before it starts to come down. In about 5 years, government would have reduced the cost of pensions to the 10 percent of wage bill. Source: World Bank staff calculations 49 Uganda Economic Update Part 2: Pensions: reducing vulnerabilities at individual level while supporting economic growth In addition, the Government will need implications for the costs of such schemes arguments for directing support to young to start planning for how to pay for in short- and longer-term (see Figure 25). people should poverty rates be higher social assistance for older Ugandans. Firstly, universal schemes are often more among this group. Finally, the costs of While evidence from countries around expensive than those targeting support such programs will evolve over time as the the world shows that social assistance to a sub-set of the population, including population ages and as the reforms in the programs are affordable and can be an those most in need. Secondly, there may pension sector take hold (or not). Extending effective means of reducing poverty be scope to provide support to vulnerable the coverage of contributory schemes and vulnerability, a range of questions older person under the umbrella of a social will reduce the need for Government to with regards to the scale, design and assistance program that is targeted to poor provide public support to vulnerable and sequencing of interventions will have households, although public resources poor older people. Figure 25: Cost of social pensions in Africa Universal schemes are often more expensive than those targeting support to a sub-set of the population, including those most in need. In Jinja, touring the source of River Nile (Ann Hoel, 2009) 50 Fourth Edition, June 2014 2.4 Conclusion Despite Uganda’s young population, Experience from other countries, collection methods, products, style of there is an urgent need for pension including those in the African region, investment and ultimately returns on reform. Limited social protection is has shown that, though never easy the pension assets. The new regulator leaving vulnerable elderly members of and often controversial, the reforms should build sufficient capacity to ensure society exposed to poverty, a situation required to establish efficient, equitable the market operates efficiently to realize that is exacerbated by the fact that few pension systems can be successfully these anticipated benefits. workers save for their own retirement. implemented. The reforms that are This failure results in a low domestic currently being launched in Uganda are If the proposed reforms are successful, savings rate, with under-developed steps in the right direction. For the public Uganda can expect to have a better capital markets acting as a brake on sector pensions, the proposed reforms retirement benefits process for potential growth and development. In are expected to convert the pension its citizenry, which is more fiscally addition, the limited range of existing system into a fiscally sustainable sustainable and contributing to the pension schemes has been poorly scheme, where government, the development of financial system and managed and has suffered from employer, and its employees contribute generation of higher savings, both of governance problems, which destroy to the public service pension fund, which can support higher investment. the confidence in financial systems proper governance and administration that form the basis for public trust in so that pensioners access their However, it is a long path to the long-term savings schemes. Finally, benefits appropriately and in a timely achievement of the final goals of these Government spending on pensions manner. The proposed change in some reforms. A high level of sustained provided benefits primarily to a small, relatively highly paid group of public parameters of the scheme will also Government commitment will be sector workers, with this expenditure make it more affordable by government. necessary to address the serious set to rise. This rising expenditure For the private sector pensions, challenges, especially in relation to places limits on the available fiscal introducing competition and professional governance, that are bound to arise in resources for other vitally necessary fund management is expected to order to see the reforms through to a poverty alleviation and development improve levels of transparency and successful conclusion. programs. accountability, induce innovation in 51 Uganda Economic Update Statistical Annexes 52 Fourth Edition, June 2014 53 Table A 1: Macroeconomic Indicators 54 Unit measure 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 Population Millions 26.7 27.6 28.6 29.6 30.7 31.8 32.9 35.4 GDP USD 9,958 11,903 14,440 15,596 15,246 14,791 19,620 21,448 Per capita income USD 372 31 506 527 497 465 596 606 GDP growth % 10.8 8.4 8.7 7.2 5.9 6.7 3.4 5.8 Gross Domestic Savings as % of GDP 13.2 16.0 15.9 12.2 12.2 11.3 10.1 14.3 Gross Investments as % of GDP 21.2 23.6 23.0 23.5 24.2 24.7 24.6 24.5 Inflation (period average) % 6.6 6.8 7.3 14.2 9.4 6.5 24.6 6.6 Exchange Rate (period average) UGX/USD 1825 1778 1696 1905 2030 2323 2557 2591 External Sector                   Statistical Annexes Exports - Goods and Services Million USD 1,041.2 1,473.8 2,073.0 2,216.4 2,317.3 2,297.8 2,660.4 2,982.5 Imports - Goods and Services Million USD -1,969.0 -2,495.2 -3,510.4 -4,062.2 -4,116.8 -4,671.1 -5,264.3 -5,044 Current Account Balance Million USD -314.5 -342.0 -902.7 -1,258.6 -1,435.0 -1,686.3 -2,070.5 -2,134 Balance of Payments (overall bal- Million USD 198.23 703.9 563.0 -45.70 210.9 -581.2 731.4 386 ance) Foreign Reserves Million USD 1408.3 2090.8 2684.4 2442.0 2384.7 2044.0 2346.1 2,912 External Debt Million USD 4464.4 1466.8 1687.0 2046.4 2343.4 2904.9 3972.3 4,824 Foreign Direct Investment Million USD 512.04 718.28 760.6 785.22 692.72 755.07 1065.3 925 Tourism Earnings ‘000 USD 449 590 564 662 805 1,062 1,198 Monetary Sector                   Average Deposit Rate % 2.6 2.2 2.2 2.1 2.0 2.6 3.3 3.0 Average Lending Rate % 16.1 16.9 18.2 18.8 18.2 19.2 24.6 24.8 Growth in Money Supply % 16.4 17.4 31.1 25.0 31.7 25.9 15.7 6.6 Government Finance                   Total Domestic Revenue % of GDP 12.5 12.6 12.8 12.5 12.2 13.3 13.3 13.2 Tax Revenue % of GDP 11.8 11.9 12.3 11.8 11.7 12.7 12.3 12.9 Non Tax Revenue % of GDP 0.7 0.7 0.5 0.7 0.6 0.6 0.2 0.3 Total Expenditure % of GDP 18.6 18.6 17.9 17.3 19.6 22.8 18.6 18.9 Recurrent Expenditure % of GDP 12.3 11.5 11.8 10.9 12.3 15.3 10.9 10.5 Uganda Economic Update Development Expenditure % of GDP 6.0 6.1 5.6 5.6 6.6 7.1 7.2 7.6 Grants % of GDP 5.4 4.5 2.7 2.6 2.5 2.3 2.3 1.7 Fiscal Balance (overall) % of GDP -0.8 -1.5 -2.4 -2.2 -4.9 -4.3 -3.0 -4.0 Source: Bank of Uganda; Uganda Bureau of Statistics; Ministry of Finance,Planning and Economic Development Fourth Edition, June 2014 Table A 2: Growth and Structure of Uganda’s Economy Economic Activity 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 Real GDP Growth Rates (%) 10.8 8.4 8.7 7.2 5.9 6.7 3.4 5.8 Agriculture 0.5 0.1 1.3 2.9 2.4 0.7 2.2 1.5 Industry 14.7 9.6 8.8 5.8 6.5 7.9 2.4 6.8 o/w manufacturing 7.3 5.6 7.3 10.0 6.6 8.0 -1.0 5.7 o/w construction 23.2 13.2 10.5 3.7 5.9 7.8 3.2 7.5 Services 12.2 8.0 9.7 8.8 8.2 8.4 3.3 6.5 GDP at market prices (%change) 13.4 16.7 15.5 22.9 16.0 11.9 28.4 10.8 Shares of GDP (%) 2002 Prices                 Agriculture 24.1 22.3 21.4 23.1 23.6 22.7 24.4 13.0 Industry 22.8 25.2 25.8 24.7 24.9 25.3 26.4 25.2 o/w manufacturing 7.1 7.1 7.3 7.9 7.7 8.6 8.3 6.7 o/w construction 11.7 13.1 13.6 12.3 12.7 13.0 13.0 15.2 Services 47.2 47.0 46.9 46.4 45.5 46.2 44.3 53.0 FISM and net taxes 5.9 5.6 6.0 5.7 6.0 5.8 4.9 8.8 Contribution to Real GDP Growth (%)                 Agriculture 0.1 0.0 0.2 0.5 0.4 0.1 0.4 0.2 Industry 3.5 2.4 2.2 1.5 1.6 2.0 0.3 1.7 o/w manufacturing 0.5 0.4 0.5 0.7 0.5 0.5 -0.1 0.4 o/w construction 3.0 1.9 1.6 0.6 0.9 1.2 0.3 1.1 Services 6.0 4.0 4.8 4.4 4.2 4.4 1.6 3.5 Shares of GDP by type of expenditure (%)                 Final Consumption Expenditure 91.9 89.7 84.7 88.2 89.5 93.5 92.3   Households 77.8 76.9 73.5 78.1 79.8 83.6 83.6   Government 14.1 12.7 11.2 10.1 9.7 9.8 8.7   Gross Capital Formation 21.2 23.7 23.0 22.0 23.5 25.0 24.4   Gross fixed capital formation 21.0 23.4 22.7 21.7 23.2 24.8 24.1   Charges in inventories 0.2 0.2 0.2 0.3 0.2 0.2 0.3   Net exports -13.1 -13.3 -7.7 -10.1 -12.9 -18.5 -16.7   Gross domestic saving (% of GDP) 13.2 16.0 15.9 12.2 12.2 11.3 10.2 13.3 Public -1.2 -0.8 -0.1 0.9 -0.4 -5.3 -0.3 1.5 Private 14.3 16.8 16.0 11.3 12.6 16.6 10.5 11.9 Source: Uganda Bureau of Statistics 55 Uganda Economic Update Statistical Annexes Table A 3: Quarterly Growth Rates FY 2010/11 - 2013/14 Year 2010/11 2011/12 2012/13 2013/14 Quarter Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 GDP at market prices 1.6 5.3 -0.3 0.5 0.5 -0.6 2.7 1.7 1.6 0.6 1.4 2.1 1.0 2.3 GDP at basic prices 0.8 5.7 0.1 0.2 0.4 -0.5 2.2 2.2 1.9 0.4 0.8 2.2 0.9 2.9 Agric., forestry and fishing -8.8 14.5 -3.5 -5.7 5.8 -1.9 -1.6 1.0 2.0 -2.7 3.7 0.9 -3.4 0.2 Cash crops -3.8 10.4 -8.2 -3.4 14.5 -1.6 -2.3 6.4 -4.5 -2.3 14.8 3.6 -3.4 -4.2 Food crops -15.3 25.9 -6.2 -10.0 7.9 -3.6 -2.1 0.2 4.0 -5.1 3.7 0.5 -6.5 0.7 Livestock 1.1 0.6 0.5 0.6 1.2 0.4 0.5 0.6 1.0 0.5 0.6 0.7 0.9 0.6 Forestry 0.7 0.8 0.8 0.9 0.9 0.8 0.7 0.6 0.6 0.7 0.8 0.9 1.1 1.1 Fishing -1.4 -1.3 6.7 -0.3 0.4 0.5 -4.8 1.2 1.7 1.3 1.3 0.6 0.5 0.1 Industry 4.8 4.6 -0.4 1.0 -2.8 1.3 3.8 3.6 0.8 -0.1 0.2 4.2 2.9 4.8 Mining and quarrying -2.0 56.0 -3.3 8.7 -15.3 9.5 -7.9 20.8 -11.1 -5.6 -4.7 23.0 15.8 36.1 Manufacturing 0.8 15.1 -1.8 1.2 -5.3 -2.4 4.2 6.6 -1.2 -1.4 -1.8 10.3 1.9 8.5 Formal 3.2 8.5 -0.5 0.2 -4.1 -6.5 8.3 4.0 0.7 -1.5 0.0 7.7 -3.7 1.4 Informal -7.2 39.5 -5.5 4.0 -9.0 10.0 -6.4 14.4 -6.3 -1.4 -7.0 18.6 17.6 25.1 Electricity supply 0.5 4.2 2.0 2.7 -1.0 1.5 4.9 2.4 3.6 1.5 1.1 2.7 0.5 -0.7 Water supply 1.2 0.5 1.4 2.3 0.6 -0.3 1.5 1.9 1.8 -0.5 2.1 0.3 2.9 -0.2 Construction 7.5 -0.2 0.0 0.4 -1.7 3.0 4.1 2.1 1.7 0.5 0.9 1.7 3.2 3.1 Services 2.4 4.2 1.2 1.4 0.2 -1.1 2.3 1.7 2.6 1.5 0.2 1.5 1.2 2.7 Wholesale and retail trade -5.3 14.0 -1.6 -4.4 4.5 -2.2 1.5 4.0 -1.5 -1.5 -1.5 7.3 0.5 7.5 Hotels and restaurants -4.0 -0.8 1.0 5.0 7.4 5.6 3.0 0.5 -0.1 -0.3 4.0 -0.9 0.2 2.5 Transport & communications 4.9 -2.4 9.4 2.0 5.3 -3.3 6.3 0.6 8.1 5.6 -3.8 0.5 1.4 0.6 Road, rail & water transport -3.0 -23.2 55.2 -14.5 4.5 -11.8 18.5 -11.9 3.3 12.4 -10.0 3.7 0.3 0.8 Air transport & support svcs 5.2 1.8 -7.7 6.4 3.5 5.2 5.3 2.5 1.0 -0.5 4.0 4.3 -1.9 -0.2 Posts & telecommunication 12.9 15.4 -15.4 19.3 6.1 2.2 -1.6 10.1 12.0 2.2 -0.6 -1.7 2.4 0.6 Financial services 8.9 10.7 -2.4 7.1 -12.2 -3.0 -4.3 2.4 1.6 6.5 4.0 -8.0 1.7 2.0 Real estate activities 6.2 2.4 1.8 1.0 1.3 0.3 2.9 1.1 1.4 1.4 1.2 0.9 0.7 1.2 Other business services 4.6 0.4 -2.5 -1.5 9.2 -0.7 -6.0 -0.1 11.2 -3.3 -0.5 -1.2 -2.5 3.0 Public administration 8.0 -0.3 -5.9 -7.5 0.6 -5.4 -8.0 1.1 16.5 -0.2 1.8 -0.4 -2.7 2.5 Education 10.0 0.7 4.9 8.4 -17.8 2.8 7.9 3.1 -1.3 2.7 0.1 1.5 7.9 -2.1 Health and social work 2.7 1.3 4.0 9.9 -12.8 5.6 0.7 -1.5 -0.6 -5.8 -3.5 11.6 -4.8 -3.1 Other personal & comm. svcs 1.1 3.9 -2.2 13.3 5.7 -6.0 5.8 -1.5 0.2 5.8 10.4 -2.3 1.5 5.5 FISIM 20.4 11.7 -2.9 -0.3 -8.8 -3.5 -2.2 -0.6 5.2 5.1 -3.7 0.1 4.8 3.8 Net taxes on products & 8.8 2.0 -3.5 2.9 1.6 -0.9 6.8 -2.4 -1.5 2.2 6.9 1.0 1.8 -2.9 imports Source: Uganda Bureau of Statistics 56 Table A 4: Fiscal Framework (as percent of GDP) 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 as % of GDP Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Outturn Budget Outturn Total revenue and grants 19.7 17.8 17.4 17.1 17.1 15.5 17.2 15.1 16.6 14.7 16.0 18.4 15.6 15.5 15.9 14.9 Revenue 13.1 12.5 12.1 12.6 13.0 12.8 13.1 12.5 13.0 12.2 13.1 16.2 12.6 13.2 13.6 13.2 Tax* 12.5 11.8 11.9 11.9 12.6 12.3 12.8 11.8 12.8 11.7 12.9 12.7 12.4 11.9 13.3 12.6 Nontax 0.6 0.7 0.2 0.7 0.5 0.5 0.3 0.7 0.2 0.6 0.2 0.6 0.2 0.3 0.3 0.6 Fourth Edition, June 2014 Grants 6.6 5.4 5.3 4.5 4.1 2.7 4.1 2.6 3.6 2.5 2.9 2.3 2.9 2.3 2.3 1.7 Budget support 3.9 4.1 2.6 3.7 2.1 1.9 1.6 1.8 1.7 1.3 1.6 1.3 1.3 1.2 0.9 0.4 Project grants 2.6 1.3 2.6 0.9 2.0 0.8 2.5 0.9 1.9 1.1 1.3 1.0 1.7 1.1 1.4 1.3     Total Expenditure 21.0 18.6 20.1 18.6 19.3 17.9 20.4 17.3 20.3 19.6 19.1 22.8 19.8 18.5 20.0 18.9 Recurrent 11.8 12.3 11.2 11.5 11.1 11.8 10.5 10.9 10.3 12.3 11.7 15.3 10.0 11.1 10.2 10.5 Development 8.4 6.0 8.2 6.1 7.8 5.6 9.0 5.6 9.9 6.6 7.1 7.1 9.4 6.9 9.7 7.6     Overall balance   Including grants -1.9 -0.8 -2.7 -1.5 -2.2 -2.4 -3.1 -2.2 -3.7 -4.9 -3.1 -4.8 -4.2 -3.0 -4.1 -4.1 Excluding grants -8.5 -6.1 -8.0 -6.0 -6.3 -5.1 -7.2 -4.8 -7.3 -7.3 -6.0 -7.1 -7.2 -5.3 -6.4 -5.8     Financing 1.9 0.6 2.7 1.7 2.2 2.0 3.1 0.3 3.7 4.4 3.1 4.8 4.2 3.0 4.1 4.1 External financing (net) 2.7 1.7 2.5 3.3 3.1 2.5 2.1 1.7 3.0 2.2 1.9 1.4 2.4 2.3 2.3 2.6 o/w Budget support 0.6 0.4 1.2 1.9 0.8 0.9 0.6 0.8 0.7 0.7 0.1 0.6 0.7 0.6 0.5 0.6 Domestic financing (net) -0.8 -1.1 0.2 -1.7 -0.9 -0.5 1.0 -1.4 0.6 2.1 1.2 3.4 1.9 0.7 1.8 1.5 *Excludes Taxes on oil transactions Source: Ministry Finance, Planning and Economic Development 57 Uganda Economic Update Statistical Annexes Table A 5:Balance of Payments (percent of GDP unless otherwise stated) Variable 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 Current Account (incl transfers) -3.2 -2.4 -6.0 -7.8 -9.9 -11.8 -10.5 -7.4 Exports of goods 10.5 -8.6 -10.0 -11.8 -11.8 -16.0 -13.4 -9.9 Imports of goods -19.8 12.4 14.4 14.2 15.2 15.4 13.6 14.0 Services (net) -1.8 -21.0 -24.3 -26.0 -26.9 -31.4 -27.0 -23.9 Trade balance -9.3 -1.8 -3.0 -2.6 -3.2 -4.2 -2.0 -1.7 Income (net) -2.5 -1.9 -1.8 -2.0 -2.2 -2.3 -2.5 -3.2 Current transfers (net) 10.4 9.9 8.8 8.6 7.3 10.7 7.3 7.3 Capital and Financial Account 8.8 8.3 8.0 7.5 9.9 5.4 11.2 9.2 Capital account* 1.3 28.8 0.0 0.0 0.0 0.0 0.1 0.2 Financial account 7.6 -20.5 8.0 7.5 9.9 5.4 11.1 9.1 o/w direct investment 5.1 6.0 5.3 5.0 4.5 4.8 6.5 5.9 Overall Balance 2.0 5.9 3.9 -0.5 1.5 -4.1 3.8 1.6 Gross International Reserves (million USD) 1,408.3 1606.9 2063.6 2704.4 2442.9 2044 2644 2912 Gross international reserves in months of imports 5.1 5.8 5.4 5.9 5.9 3.2 4.2 4.4 Source: Bank of Uganda 58 Table A 6: Monthly Imports of Goods, 2012-2013 (in US$ Millions)   2013 2014 Nature of Imports Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Formal Private Sector Imports:                   Animal & Animal Products 1.2 1.8 1.6 1.5 2.1 1.8 2.4 1.7 2.1 1.98 2.06 1.92 Veg Pdts, Animal, Fats & Oil 36.6 33.1 43.9 24.4 27.1 28.4 33.2 33.8 33.5 31.64 41.62 39.70 Prep Foodstuff, Beverages & Tobacco 20.7 23.3 21.1 21.5 19.7 14.6 20.4 20.5 23.2 21.98 18.62 24.81 Mineral Products (excl oil products) 9.1 9.9 9.9 11.9 11.9 12.5 14.4 12.4 11.5 28.09 11.62 12.72 Fourth Edition, June 2014 Petroleum (Oil) Products 78.8 81.5 85.4 85.0 82.8 83.3 83.7 84.5 77.2 76.90 112.60 94.27 Chemical & Related Products 33.4 45.6 33.2 65.7 39.4 40.2 38.7 32.9 37.9 34.39 37.46 34.82 Plastics, Rubber, & Related Products 20.8 23.3 24.3 19.5 19.4 18.0 19.8 22.5 21.2 22.04 16.93 20.92 Wood & Wood Products 7.4 12.1 8.9 10.4 10.1 9.4 9.6 9.3 11.6 8.82 14.13 8.40 Textile & Textile Products 8.7 12.6 11.4 12.7 11.4 12.5 12.6 13.7 16.7 13.76 14.60 12.84 Miscellaneous Manufactured Articles 30.6 22.5 20.2 18.2 19.6 19.5 17.9 20.1 20.1 20.47 15.50 17.79 Base Metals & their Products 25.3 29.7 34.8 33.9 23.3 24.9 23.7 28.4 26.2 27.26 26.94 26.08 Machinery Equip, Vehicles & Accessories 79.3 107.8 93.7 111.5 109.8 95.7 93.3 87.7 88.1 96.46 94.56 141.37 Arms & Ammunitions & Accessories 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.00 0.00 0.00 Electricity 0.6 0.8 0.8 0.7 0.7 0.8 0.9 0.9 0.9 0.78 0.85 0.36 Subtotal (formal private sector imports) 352.5 404.1 389.4 416.7 377.3 361.7 370.7 368.4 370.2 384.57 407.50 435.99 Other Estimated Private Sector Imports 4.2 4.3 4.1 4.2 4.2 5.2 4.5 4.6 5.0 4.07 3.90 4.07 Government Imports 47.3 26.0 50.3 14.7 48.5 38.9 28.7 37.0 45.0 7.40 37.07 21.97 Total Imports (fob) 404.1 434.4 443.8 435.6 430.0 405.8 403.9 410.1 420.3 396.04 448.47 462.03 Total Imports (cif) 495.2 532.6 545.1 534.8 528.3 495.8 494.8 500.1 513.8 484.46 551.17 564.95 o/w freight 87.2 94.0 96.9 95.0 94.1 86.2 87.0 86.2 89.5 84.68 98.36 98.57 o/w insurance 3.9 4.2 4.3 4.2 4.2 3.8 3.8 3.8 4.0 3.74 4.34 4.35 freight as % of total imports cif 17.62 17.66 17.78 17.76 17.82 17.39 17.59 17.24 17.42 17.48 17.85 17.45 insurance as % of total imports cif 0.78 0.78 0.79 0.78 0.79 0.77 0.78 0.76 0.77 0.77 0.079 0.77 59 Source: Bank of Uganda Uganda Economic Update Statistical Annexes Table A 7: Monthly Exports of Goods, 2012-2013 (in US$ Millions)   2013 2014 Nature of Exports Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Formal Exports: 194.6 226.1 214.8 202.1 191.3 185.1 189.0 190.0 180.1 Manufactured/Semi pro- 47.4 46.2 46.7 50.7 50.2 49.0 51.4 49.8 46.7 42.95 47.85 46.65 cessed goods Base Metals & Products 11.3 11.9 11.7 14.0 12.1 11.7 12.1 11.3 9.5 8.12 10.18 10.77 Sugar 10.2 6.3 5.5 5.2 7.0 5.9 6.3 6.6 6.6 4.32 6.27 6.06 Fish & its products 5.7 3.0 8.1 8.3 7.6 7.6 8.9 9.4 8.4 9.10 8.12 7.55 Cement 8.1 9.3 9.0 9.2 9.4 9.4 8.4 6.7 8.1 6.18 7.02 6.83 Edible Fats and Oils 0.7 4.0 3.3 3.0 3.4 3.5 3.5 4.0 4.3 5.53 5.17 4.63 Soap 2.3 3.1 2.4 2.6 2.5 2.9 2.4 2.3 2.7 3.28 3.02 3.39 Plastic Products 2.9 3.3 2.0 3.6 2.7 2.8 4.1 3.2 2.5 2.86 3.40 2.85 Beer 2.4 2.0 1.6 1.7 2.0 1.9 1.8 2.1 1.9 0.63 1.83 1.60 Water 2.1 1.9 2.1 2.2 2.6 1.9 2.4 3.1 1.6 1.89 1.83 1.72 Baker’s wares 1.8 1.5 1.1 0.9 0.9 1.5 1.4 1.0 1.1 1.04 1.02 1.25 Traditional exports 75.4 86.3 78.2 76.0 72.4 65.6 68.8 71.2 68.5 91.71 81.54 91.83 Coffee 30.5 48.3 42.8 45.1 35.9 25.0 22.7 26.7 25.5 38.88 35.53 38.87 Cotton 6.5 5.0 2.3 1.2 0.2 0.1 1.2 0.0 0.1 1.78 2.38 5.58 Tea 7.9 9.3 7.2 6.4 4.0 5.6 8.6 7.9 7.7 7.73 4.63 4.30 Tobacco 15.0 5.8 2.0 3.0 7.2 13.6 18.7 16.3 12.3 7.81 4.91 6.86 Maize 3.1 4.8 3.3 2.7 7.9 5.5 2.9 1.3 0.6 1.50 2.38 2.10 Flowers 1.6 3.7 6.2 5.1 4.9 4.7 4.4 4.0 4.0 2.88 1.68 4.48 Hides & skins 0.9 1.0 3.3 6.3 6.0 5.9 6.0 6.0 5.1 8.14 6.30 7.59 Cocoa Beans 5.0 3.3 6.0 1.9 2.6 2.6 2.6 4.1 10.3 7.61 8.99 7.90 Simsim 3.5 4.3 1.7 0.5 1.9 1.2 0.0 0.1 0.4 12.58 11.80 8.30 Beans 0.4 0.4 2.5 2.8 0.6 0.5 0.8 3.4 1.5 1.64 1.07 4.83 Fruits & Vegetables 1.2 0.4 1.0 0.9 1.2 0.9 0.9 1.4 1.0 1.14 1.87 1.01 Minerals 1.8 1.1 0.9 1.2 0.5 1.1 0.6 0.5 0.0 0.00 0.00 0.00 Cobalt 1.1 1.1 0.5 1.1 0.5 1.1 0.6 0.5 0.0 0.00 0.00 0.00 Gold 0.7 0.0 0.4 0.1 0.0 0.0 0.0 0.0 0.0 0.00 0.00 0.00 Other exports 70.0 92.5 88.9 74.2 68.1 69.4 68.2 68.4 64.9 65.06 64.15 65.65 Cellular Phones 4.5 5.3 6.4 2.0 4.1 4.4 1.5 1.4 2.0 0.73 0.22 1.05 Crude oil 5.9 4.3 4.2 3.9 4.4 4.0 4.5 3.5 2.4 4.12 4.27 4.36 Rice 2.9 3.7 5.0 2.5 2.7 3.5 3.3 3.2 2.8 2.28 1.71 1.97 Electricity 1.3 1.5 1.4 1.5 1.7 1.4 1.4 1.4 1.3 1.40 1.20 3.08 Oil re-exports 11.0 12.0 11.2 11.7 11.6 10.7 11.5 11.9 14.2 13.31 10.89 11.97 Other items 44.3 65.7 60.7 52.7 43.7 45.3 46.0 47.0 42.2 43.20 45.86 43.23 Informal Exports (Cross 36.8 39.1 32.0 33.5 33.8 36.2 35.4 36.0 36.9 30.16 25.91 30.16 Border Trade): Industrial products 24.0 24.6 17.8 19.7 19.6 23.5 22.4 23.4 22.2 17.82 14.94 17.82 Maize 2.7 2.3 2.6 2.5 2.5 2.4 2.2 2.1 2.2 1.91 2.53 1.91 Fish 3.2 3.9 3.8 3.6 3.8 1.7 2.6 2.3 1.9 2.20 2.00 2.20 Beans 0.7 1.1 2.2 1.3 1.5 1.3 1.4 1.4 1.8 2.03 1.06 2.03 60 Fourth Edition, June 2014   2013 2014 Nature of Exports Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Other grains 0.7 0.6 0.5 0.6 0.6 0.3 0.4 0.3 0.3 0.32 0.32 0.32 Bananas 0.4 0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.37 0.37 0.37 Other agricultural commodi- 4.7 5.6 4.5 4.9 5.0 6.5 5.7 6.0 6.2 5.18 4.49 5.18 ties Sugar 0.4 0.3 0.2 0.3 0.2 0.0 0.1 0.1 0.0 0.17 0.10 0.17 Other products 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.8 0.16 0.10 0.16 Total Exports 231.3 265.1 246.8 235.6 225.1 221.2 224.3 226.0 217.0 231.03 225.74 237.39 Source: Bank of Uganda Table A 8: Inflation Rates Percentage Changes 2007/8 2008/9 2009/10 2010/11 2011/12 2012/13 CPI (annual average) 7.3 14.2 9.4 6.5 23.5 5.8 CPI (end of period) 8.0 12.5 7.8 6.3 24.3 3.6 Food (end of period) 5.4 27.9 16.5 9.3 30.6 -1.4 Non Food (end of period) 7.9 8.9 6.7 5.7 20.3 6.5 Source: Uganda Bureau of Statistics Table A 9: Inflation rates (for selected items) 2011-2013   2013 2014 Items Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr All items 4.9 3.5 4.0 3.4 3.7 3.6 5.1 7.3 8.4 8.1 6.8 6.7 6.9 6.8 7.1 6.7 Food 0.0 -2.0 -0.9 -2.6 -2.1 -1.4 2.8 9.1 11.7 10.9 8.1 9.2 -0.7 11 12.7 12.2 Food crops 3.0 -6.2 -8.5 -7.5 -5.2 -6.2 -0.2 12.9 5.3 -1.1 -4.3 0.0 0.2 25.2 28.3 25.4 Non food 7.2 6.0 6.5 6.6 6.8 6.5 6.5 6.8 6.6 10.9 8.1 9.2 5.7 5.1 4.7 4.2 Beverages and tobacco 12.0 12.6 14.0 13.7 12.3 12.3 13.0 13.7 14.8 12.3 13.1 8.7 -1.2 2.7 1 0.8 Clothing and footwear -4.4 -4.8 -2.9 -1.0 1.5 6.1 8.4 9.6 10.7 13.1 10.0 10.6 -0.5 9.2 5.4 4.6 Rent, fuel and utilities 3.9 3.9 3.8 4.8 6.4 6.4 5.9 5.3 5.8 4.1 4.7 4.8 0.8 2.2 3.1 2 Household and per- sonal goods 5.4 4.4 4.5 4.9 4.3 3.5 3.8 3.7 3.6 4.0 4.0 4.3 -0.2 2.6 2.3 1.6 Transport and com- munication 2.5 4.0 4.7 4.3 4.1 4.9 4.0 6.6 5.9 6.8 4.3 1.8 -1.5 5 4.4 4.6 Education 15.8 8.2 8.2 8.3 8.0 4.3 4.5 4.2 4.8 4.8 4.8 4.8 0.1 6.1 5.9 5.8 Health, entertainment and others 9.9 9.8 10.1 9.0 8.0 8.5 8.5 8.6 8.9 8.7 8.1 8.0 1.0 6.9 6.5 6 Other goods 1.2 3.0 5.0 3.5 3.4 4.4 5.7 5.6 6.6 6.4 6.6 5.2 2.8 1.4 1.1 1 Services 10.1 7.3 7.6 7.9 7.8 7.1 6.8 7.4 6.7 7.5  6.7 6.2 6.6 6.9 6.7 6.2 Source: Uganda Bureau of Statistics 61 Uganda Economic Update Fourth Edition, June 2014 Uganda Economic Update 64 Fourth Edition, June 2014 65 Uganda Economic Update For more information, please visit: www.worldbank.org/uganda Join the discussion on: http://www.facebook.com/worldbankafrica http://www.twitter.com/worldbankafrica http://www.youtube.com/worldbank 66