Uganda Economic Update 13th Edition ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION May 2019 Uganda Economic Update, 13th Edition ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION May 2019 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION PAG E | 2 UGANDA ECONOMIC UPDATE, 13TH EDITION Table of Contents FOREWORD.................................................................................................................................................................................................iii ABBREVIATIONS............................................................................................................................................................................iv ACKNOWLEDGEMENTS.....................................................................................................................................................................v KEY MESSAGES........................................................................................................................................................................................................vi PART 1: STATE OF THE ECONOMY...........................................................................................................................................................................................1 1. RECENT ECONOMIC DEVELOPMENTS............................................................................................................................................................2 1.1 Global growth is moderating.....................................................................................................................................................2 1.2 Growth in Sub-Saharan Africa continues to recover........................................................................................................3 1.3 Uganda’s growth momentum is sustained...........................................................................................................................5 1.4 Monetary policy was tightened to keep inflation in line with policy targets................................................................9 1.5 A rise in revenues and slow execution of capital spending has kept the fiscal deficit well below budget.............10 1.6 Credit to the private sector remains strong even after monetary tightening...........................................................18 1.7 Strong growth in investment good imports and slower remittances widened the current account deficit...............................................................................................................................................................................19 2. ECONOMIC OUTLOOK AND RISKS................................................................................................................................................................23 2.1. Public and private investments to drive higher real GDP growth............................................................................23 2.2. Risks remain tilted to the downside...................................................................................................................................27 PART 2: EDUCATION.....................................................................................................................................................................................................................31 3. ECONOMIC DEVELOPMENT, HUMAN CAPITAL AND DEMAND FOR SKILLS: A CASE FOR INVESTING MORE IN EDUCATION..................................................................................................................................32 3.1. Human capital in Uganda......................................................................................................................................................32 3.2. The demand for skills and the critical role of lower secondary education...................................................................37 4. STATE OF THE EDUCATION SECTOR...........................................................................................................................................................39 4.1. Status of access in primary and secondary education in Uganda............................................................................39 4.2. The learning crisis.....................................................................................................................................................................43 4.3. Regional and gender disparities............................................................................................................................................46 4.4. The early grade ‘bulge’ and its impact on the quality and efficiency in primary education....................................48 5. EDUCATION FINANCING AND PROSPECTS................................................................................................................................................51 5.1. The private sector and households – powerful allies toward the achievement of education goals.......................51 5.2. Education prospects....................................................................................................................................................................54 6. BUILDING UGANDA’S HUMAN CAPITAL TO BOOST ECONOMIC GROWTH – ALTERNATIVE SCENARIO AND RECOMMENDATIONS....................................................................................................................58 6.1. Policy recommendations needed to achieve the alternative scenario......................................................................58 6.1.1. Primary Education: improving quality and completion rates..............................................................59 6.1.2. Lower secondary education: improving access, quality and efficiency.................................................60 6.1.3. Fiscal implications................................................................................................................................................64 6.2. A case for investing more in education..................................................................................................................................65 REFERENCES.............................................................................................................................................................................................................66 PAG E | i ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION PAG E | ii UGANDA ECONOMIC UPDATE, 13TH EDITION Foreword Human capital is essential for countries to grow their economies and improve the well-being of their citizens. Uganda cannot afford to fall behind other countries in developing this asset as it enters a new phase of economic development – one with greater economic diversification and urbanization, closer economic integration with regional and world markets, and larger potential for new, higher-productivity jobs. Youth are a sizable and growing share of the Ugandan population and are essential for realizing this transformation, provided they enter adulthood and the labor market well equipped to acquire, use and develop new knowledge and technologies. Equipped in this way, an educated population can help reduce income inequality, promote social mobility, and foster social cohesion. Unfortunately, Uganda is already falling behind. A child born in Uganda today will only be 38 percent as productive when she grows up as she could be if she enjoyed complete education and full health. This is largely because of the poor quality of education, which is leading to learning outcomes that are below comparator countries. Something needs to be done fast to turn this dangerous trajectory around. Otherwise, Uganda will not benefit from its demographic dividend and will end up with a large and poorly educated population that impedes any hope of a more prosperous future. Uganda needs to adopt a dual priority approach focusing on schooling, specifically on expanding access from pre-primary to lower secondary education, and learning, through improving quality at all levels. This will require internal efficiency gains, additional resources to be allocated to the education sector, and will also hinge on a closer and more collaborative engagement with private sector providers of education. It is against this backdrop that I am pleased to introduce the Thirteenth Uganda Economic Update, which reviews economic development and human capital in Uganda, and makes a case for investing more in education. This report comes at a critical time to inform both budget decisions over the next few years, and the on-going development of Uganda’s Third National Development Plan. In line with the structure of earlier editions of the Uganda Economic Update series, this report reviews recent economic developments, provides an outlook for the macro-economy, and then delves into the special topic of Uganda’s education sector. Carlos Felipe Jaramillo Country Director Eritrea, Kenya, Rwanda and Uganda Africa Region PAG E | iii ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Abbreviations bbl Barrel PIM Public Investment Management BoU Bank of Uganda PIP Public Investment Plan CCS Commitment Control System PLE Primary Leavers Exam DAS Domestic Arrears Strategy PPP Public Private Partnerships DSA Debt Sustainability Analysis PTA Parents Teacher Associations DRC Democratic Republic of Congo PMI Purchasing Managers Index DRM Domestic Revenue Mobilization PV Present Value EAC East African Community RTI/DFID Research Triangle Institute International/ ECD Early Childhood Development Department for International Development ECE Early Childhood Education SACMEQ Southern and Eastern Africa Consortium for Monitoring Education Quality EFU Energy, Fuel, and Utilities SEEP Secondary Education Expansion Project EGRA Early Grade Reading Assessment SOE State-Owned Enterprise ELP Early Learning Partnership SSA Sub-Saharan Africa EMDE Emerging Market and Developing Economies TIMSS Trends in International Mathematics EMIS Education Management Information System and Science Study EPG Education Partnerships Group toz troy ounce ESSP Education Sector Strategic Plan UBOS Uganda Bureau of Statistics FDI Foreign Direct Investment UGX Ugandan Shilling FY Financial Year UNESCO United Nations Educational, GBV Gender-Based Violence Scientific and Cultural Organization GDP Gross Domestic Product UNICEF United Nations International Children’s GER Gross Enrollment Rate Emergency Fund GPI Gender Parity Index UPE Universal Primary Education HCI Human Capital Index URA Uganda Revenue Authority IC Information and Communications US United States ICT Information Communication and Technology USAID United States Agency for International IMF International Monetary Fund Development LAYS Learning-Adjusted Years of School USE Universal Secondary Education LIC Low-Income Country USEEP Undergraduate Software Engineering MoES Ministry of Education and Sports Education Project MoFPED Ministry of Finance, Planning, and Economic USE PPP Universal Secondary Education Development Public-Private Partnership NAPE National Assessment of Progress in Education USh Uganda Shilling NEA National Education Accounts US$ Unites States Dollars NPL Non-Performing Loans VAC Violence Against Children OPEC Organization of the Petroleum Exporting Countries VAT Value Added Tax OTT Over-the-top WDI World Development Indicators PAD Project Appraisal Document PFM Public Financial Management PAG E | iv UGANDA ECONOMIC UPDATE, 13TH EDITION Acknowledgements The Thirteenth Edition of the Uganda Economic Update was prepared by a team consisting of Richard Walker, Tihomir Stucka, Mourad Ezzine, Kirill Vasiliev, Rachel Sebudde, Joanna Juzon, Diana Sekaggya-Bagarukayo, Dmitry Chugunov and Natasha De Andrade Falcao. The team is grateful to Philip Schuler, Quentin Wodon, Harriet Nannyonjo, Jean-Pierre Chauffour and Fernando Im for additional inputs on the structure and messaging of the report. The team appreciates fruitful discussions of the draft report with Ed Barnett (DFID) and Nabendra Dahal (UNICEF). Josiane Vohangitiana and Barbara Katusabe provided logistical support, while Sheila Kulubya managed the communications and dissemination strategy. The Uganda Country Team provided valuable feedback during the preparation of the report. Overall guidance provided by Carlos Felipe Jaramillo (Country Director), Abebe Adugna (Practice Manager, Macroeconomics, Trade and Investment), Safaa El Tayeb El-Kogali (Practice Manager, Education), and Antony Thompson (Country Manager) is gratefully acknowledged. Finally, we would like to thank the Hon. Minister of Education and Sport and First Lady, Janet Museveni, and her staff for their continuous commitment and close collaboration. PAG E | v ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Key Messages State of the Economy: A positive growth outlook, with risks tilted to the downside Although real GDP growth remained strong at revenue base is critical before any significant 6.4 percent during the first half of FY18/19, per oil revenues start accumulating. This will capita growth is insufficient to propel Uganda help contain the rise in public debt, ensure a to lower middle-income status. Growth has stronger social compact in the use of revenues largely been driven by strong investment and and provision of services, and would later consumption performance, favorable weather allow oil revenues to be invested for strategic, conditions and strengthened credit. The long-term needs. Information and Communications (IC) sector sustained double-digit growth levels, financial Capital spending continues to fall short of services continued to recover, and agriculture expectations, diminishing the expected return was boosted by another decent harvest. Given from public investments and committing the very high population growth rate of over resources away from other pressing needs. 3 percent per year, GDP growth will need to Actual first half FY18/19 capital spending accelerate. Moreover, heavy reliance on rain- amounted to about 6.1 percent of GDP, which fed agriculture makes GDP and exports more is well below the levels of spending in the volatile, with disproportionate costs for the first halves of FY’s 14/15 and 15/16, of above poor. Therefore, an increase in agricultural 7 percent of GDP, and only about a quarter of productivity and absorption of excess rural the FY18/19 development budget. Compared labour into better and more productive to peers, capital spending in Uganda stood employment is critical for making growth more at 5.9 percent of GDP in FY17/18, which inclusive. was substantially lower than Rwanda (10.3 percent of GDP) and Kenya (7 percent of GDP). Revenue performance has been strong in Combined with deficiencies in the ‘quality at the first half of FY18/19 and can be further entry’ of projects, cost escalations, and poor enhanced if government remains committed quality of some projects, this under-spending to implementing the new domestic revenue is constraining Uganda’s ambitions for rapid mobilization (DRM) strategy. Tax revenues growth and socio-economic transformation. have been on an upward trajectory, increasing Therefore, concerted efforts are required to 14.5 percent of GDP in the first half of to select projects more carefully (e.g. power FY18/19. Strong coordination and effective generation investments have not been well implementation of government’s five-year sequenced with investments into transmission DRM strategy will be necessary for further and distribution systems) and to improve public revenue growth. This includes establishing investment management (PIM). a framework for managing tax exemptions, which continue to be a drain on public finances. Furthermore, ensuring a robust and diverse PAG E | vi UGANDA ECONOMIC UPDATE, 13TH EDITION The projected widening of the fiscal deficit in public and private investments, especially FY18/19 and use of non-concessional financing to support developments in the energy and will keep public debt on a steep upward oil sectors. However, as the 2021 elections trajectory. Public debt is expected to hit 44 draw closer, heightened political activity and percent of GDP in FY18/19. The growth in uncertainty could lead to a drop in investment budget deficits and the increasing use of non- and economic activity. Reliance on rain-fed and concessional financing are creating pronounced subsistence agriculture continues to expose vulnerabilities. Non-concessional borrowing the economy to risks from adverse weather. results in larger principal and interest Prioritizing spending more effectively, payments and makes debt more vulnerable to improving spending execution rates, and external shocks. Larger interest payments also increasing revenue mobilization would consume fiscal space for spending on poverty maintain Uganda’s macroeconomic stability reduction and public goods. and reduce debt vulnerabilities. Tensions with Rwanda and volatility in the Democratic While the growth outlook for Uganda is Republic of Congo (DRC), South Sudan, and positive, risks are tilted to the downside. The other export markets present risks to external economy is expected to grow by 6 percent in stability and export performance. FY18/19 and FY19/20, driven by intensified PAGE | vii ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Economic development and human capital in Uganda: A case for investing more in education The World Bank’s analysis of cross-country Uganda’s low ranking in the HCI is mainly data on human capital indicates that Uganda is due to the country’s low education outcomes. underinvesting in the future productivity of its A child born today in Uganda is expected to citizens. A child born in Uganda today will only complete only 7 years of education by age 18, be 38 percent as productive when she grows compared to a regional average of 8.1. Because up as she could be if she enjoyed complete of the low levels of learning achievement in education and full health. Uganda is ranked Uganda, this is only equivalent to 4.5 years of among the countries in the lowest quartile of learning, with 2.5 years considered as “lost” due the Human Capital Index (HCI)1 distribution, to poor quality of education (as shown by the with an index slightly lower than the average quality-adjusted years of schooling component for the Sub-Saharan Africa (SSA) region, and of the HCI). Uganda’s score on this component below what would be predicted by its income is the lowest amongst the comparator countries level. and below the SSA average. 1 The World Bank’s Human Capital Index (HCI) measures the impact of underinvesting in human capital on the productivity of the next generation of workers. It is defined as the amount of human capital that a child born today can expect to achieve in view of the risks of poor health and poor education currently prevailing in the country where that child lives. PAG E | viii UGANDA ECONOMIC UPDATE, 13TH EDITION To improve its ranking in the HCI, Uganda needs to be utilized better, as it often delivers to adopt a dual priority approach focusing on similar results at a lower cost compared to the schooling, specifically on expanding access to public sector. This can be achieved through pre-primary and secondary education, and introducing subsidies to support vulnerable learning, through improving quality at all levels. children and using the non-state sector to The country currently shows extremely low manage schools2. Efficient engagement of non- gross enrollment rates (GER) at pre-primary state providers should generate significant and secondary levels. In primary education, savings, as compared to the heavy fiscal burden the near-universal access veils very modest the government would incur because of the completion rates and alarmingly low learning current withdrawal of the PPP scheme. outcomes. With the system’s current quality, efficiency, financing characteristics and trends, it is expected that enrollment rates in primary and secondary education will stagnate and decline by 2025. This would be a major setback, rarely seen in any country in a time of peace. An alternative scenario is proposed that could reverse this trend, through improving the quality-adjusted years of schooling component of the HCI, which will need to grow from 4.5 currently to at least 5.5 by 2025 (i.e. a 20 percent increase). To achieve this ambitious goal, Uganda needs a three-pronged strategy that aims at (i) improving the quality and the completion rate of primary education, (ii) expanding access to secondary education while improving its quality, equity and efficiency, and (iii) devising ways to finance such efforts in a sustainable manner given that absorbing the enrollment increases will cost an additional US$ 330 million on average per year from 2019–25. This would leave a major budget gap. To bridge the budget gap, in addition to raising efficiency, the government needs to mobilize extra public resources. The government should gradually increase its levels of spending on education with a view to allocate 16 percent of the budget by 2025, which is the average for countries in SSA. This could generate up to US$1.6 billion in additional resources between 2019 and 2025. Also, the private sector needs 2 Various options of providing subsidies are suggested in the main body of the report. PAGE | ix PART 1: STATE OF THE ECONOMY UGANDA ECONOMIC UPDATE, 13TH EDITION 1. RECENT ECONOMIC DEVELOPMENTS 1.1 Global growth is moderating3 Global growth is expected to stagnate at 50-year low, increased household wealth from around 3.0 percent in 2019 as the recovery in a booming stock market for most of 2018, and trade and manufacturing activity slackens a reduction in savings. However, U.S. growth (Figure 1). After slightly decelerating from 2.3 is expected to slow in 2019, as monetary policy percent in 2017 to an estimated 2.2 percent accommodation is removed and the fiscal last year, advanced-economy growth is stimulus fades. Higher trade tariffs – stemming expected to continue slowing, as capacity from the on-going tariff war between the U.S. constraints become more binding and policy and China – are expected to weigh further on accommodation is withdrawn. In contrast to economic activity. In the Euro Area, the modest developments in other advanced economies, growth of 1.9 percent in 2018 is projected to the United States (U.S.) economy grew by about decelerate further to 1.6 percent in 2019, as 2.9 percent in 2018, exceeding expectations. monetary stimulus is withdrawn and global This acceleration largely reflects stronger trade growth moderates. Exports have already domestic demand and the procyclical fiscal softened, reflecting the slowing external stimulus. Consumption spending has been demand and appreciation of the euro. supported by an unemployment rate that is at a Figure 1: Real GDP growth (percent y/y) Source: World Bank, 2019 Note: e = estimate; f = forecast; Aggregate growth rates calculated using constant 2010 US$ GDP weights. 3 This section is based on the World Bank, Global Economic Prospects, January 2019 PAGE |2 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION The recovery in emerging market and Prices of commodities are expected to generally developing economies (EMDEs) has lost stabilize in 2019. Energy prices fluctuated momentum and is expected to grow at a rate markedly in the second half of 2018, mainly of just above 4 percent. External financing reflecting supply factors, with sharp falls pressures, slowing external demand, policy toward the end of the year. Prices of most uncertainty, and commodity price declines are metals and, to a lesser extent, agricultural weighing on EMDE growth. Activity remains commodities also weakened, largely due to robust in China, but headwinds are increasing concerns about the effects of tariffs on global in the context of heightened trade tensions growth and trade. Oil prices are projected to with the United States. Growth in China is average around US$70 per barrel (bbl) in 2019 projected to decelerate from 6.5 percent in and 2020, slightly up from the average price of 2018 to 6.2 percent in 2019 on account of US$68/bbl in 2018, but there is high uncertainty weaker exports. Domestic demand is, however, around these forecasts. While growth in oil projected to remain robust, aided by policies to demand is expected to remain robust in 2019, boost consumption. In low-income countries the expected loss in momentum across EMDEs (LICs), growth is still predicted to firm as could have a greater impact on oil demand than infrastructure investment continues and expected. The outlook for supply is uncertain easing drought conditions support a rebound and depends largely on production decisions by in agricultural output. However, LIC metal OPEC and its non-OPEC partners, which may exporters will struggle, as metal prices are prove insufficient to reduce the oversupply of expected to soften. Overall, growth in EMDEs oil. Heightened trade tensions have clouded is predicted to remain at 4.2 percent in 2019, the outlook for commodities demand, and so with a weaker pickup in commodity exporters agricultural and metals prices are projected to accompanied by a sharper deceleration in remain broadly stable in 2019 and 2020. commodity importers. 1.2 Growth in Sub-Saharan Africa continues to recover4 Growth in Sub-Saharan Africa is expected to structural reform agenda gradually gathering increase to 2.8 percent in 2019 from 2.3 percent speed and helping boost investment growth in 2018. This is a slower growth trajectory as investor sentiment improves (South Africa). than the World Bank’s October 2018 forecast. However, growth in the largest economies Growth in 2019 is predicated on diminished will lag the rest of the continent. Both metal policy uncertainty and improved investment exporters (supported in part by stronger in large economies, together with continued mining activity) and non-resource intensive robust growth in non-resource intensive countries (boosted by public investment and countries. Growth in the region’s three largest strong agricultural production) are expected to economies – Angola, Nigeria, and South Africa grow on average at about 4.5 percent in 2019.5 – is expected to improve, driven by a recovery Inflation is expected to pick up across the region in oil production (Angola and Nigeria), and a in 2019, reflecting the pass-through of currency 4 This section is based on the World Bank, Africa’s Pulse, April 2019 5 Non-resource intensive countries exclude South Africa PAG E | 3 UGANDA ECONOMIC UPDATE, 13TH EDITION depreciations during 2018 and domestic price strong performance in the services sector, pressures among metals exporters and non- and strengthening aggregate demand from resource intensive countries. Fiscal balances pending investments and improved business are expected to improve further, reflecting sentiment. Rwanda’s growth is expected to fiscal consolidation efforts as public investment approach 8 percent over the medium term spending slows to stabilize public debt. driven by improved agriculture performance, large infrastructure projects, and strong Economic activity is expected to largely remain exports. The medium-term outlook for the DRC strong in East Africa (Figure 2). Good weather, is favorable, with growth expected to increase sustained infrastructure spending, and to above 6 percent in 2020 from 5.5 percent in increased foreign direct investment (FDI) have 2019. Following the peace agreement, signed broadly underpinned the pickup in activity in September 2018, South Sudan’s economy is in East Africa over the last year. Among starting to recover, with growth of about 1.8 Uganda’s main trading partners, the rebound percent projected in FY18/19. However, this in Kenya’s economy is expected to continue assumes that the peace agreement remains in in 2019, supported by favorable agricultural place and security starts to improve. output, a pick-up in industrial activity, Figure 2: Real GDP growth (percent y/y) Source: World Bank, 2019 Note: e = estimate; f = forecast; Ethiopia is based on fiscal-year numbers PAGE | 4 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 1.3 Uganda’s growth momentum is sustained After rebounding to about 6 percent in FY17/18 by another decent harvest and a recovery in (Figure 3), real GDP growth remained strong fisheries, and the strong recovery in financial/ at 6.4 percent during the first half of FY18/19 insurance services was maintained. The first (Table 1). This is in line with the forecast in the half growth of 8.2 percent in the services sector November 2018 Uganda Economic Update. was also supported by a rebound in trade (5.3 This sustained growth has largely been percent growth compared to only 2.2 percent driven by robust investment performance growth in the whole of FY17/18), and the (building on the performance in FY17/18 – sustained strong performance of the education Figure 3), stronger consumption, favorable sector, which has been growing at or above 7 weather conditions and strengthened credit percent for the past few years and is now one to the private sector – which grew by over 11 of the top five sectors contributing to Uganda’s percent in the first half of FY18/19, compared overall growth (Figure 4). The industrial sector to 5.5 percent in the first half of FY17/18. The expanded by 5 percent in the first half of IC sector continued to experience double- FY18/19, which was a deceleration compared digit growth levels, agriculture was boosted to growth of 6.1 percent in FY17/18. Figure 3: Sources of real GDP growth in Uganda (percent y/y) by sector by spending component Source: UBOS Public and private investment and stronger previous year (see Table 2). At the same time, levels of private consumption seem to have the Purchasing Managers Index (PMI) rose driven growth in the first half of FY18/19. noticeably through the first half of FY18/19 Net FDI inflows more than doubled to over 5 (compared to more constant levels in the second percent of GDP, compared to the first half of half of FY17/18), which reflects stronger levels FY17/18 (see Table 3), while public investment of customer demand as both output and new increased by 0.3 percent of GDP in the first half orders continued to rise.6 These investments of FY18/19 compared to the same period in the and stronger levels of consumption have 6 The PMI is compiled monthly by IHS Markit and is sponsored by Stanbic Bank Uganda. It is a composite index, calculated as a weighted average of five individual sub-components: new orders (30%), output (25%), employment (20%), suppliers delivery times (15%), and stocks of purchases (10%). It gives an indication of business operating conditions in the Ugandan economy. PAG E | 5 UGANDA ECONOMIC UPDATE, 13TH EDITION been particularly beneficial to the services before, and is likely attributed to the roll out of and construction sectors (as discussed further the over-the-top (OTT) tax in July 2018.8 on). Following the positive contribution of net exports to GDP over the last three fiscal years Although mining and quarrying contracted, (Figure 3), this is likely to have reversed with strong growth in construction activities and a imports growing much stronger than exports in rebound in manufacturing supported moderate the first half of FY18/19, leading to a significant industrial sector growth of 5 percent (Table 1) in widening of the current account deficit to 11.4 the first half of FY18/19. The construction sub- percent of GDP (see Section 1.7). sector sustained its upward growth trajectory, growing at 6.7 percent, well above the average The services sector continues to drive growth growth level of 3.9 percent in the same period in Uganda, expanding by 8.2 percent (Table of the two previous fiscal years. This sub-sector 1) in the first half of FY18/19. This is largely has benefited from intensified public and due to sustained double-digit IC growth, private investments in energy and oil projects, resulting from the persistent growth in data real estate activities, and the growth in usage, FinTech, and investments to upgrade industrial zones. Following the last three fiscal infrastructure to support both 3G connectivity years where manufacturing growth averaged country-wide and the roll-out of 4G services7. about 1.5 percent, the rebound to 4.1 percent in However, there was a dip in IC growth to 10.5 the first half of FY18/19 is encouraging. percent in the first half of FY18/19, compared to 14.6 percent in the same period the year 7 FinTech refers to new technology that is used to support or enable banking and financial services. 8 Over-the-top tax is an excise tax levied on internet-based social media, messaging and voice services. PAGE | 6 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Table 1: First half FY18/19 real GDP (percent change y/y unless otherwise indicated, selected sub-sectors) Contribution to Growth rate % share of GDP growth rate GDP 6.4 ---- ---- AGRICULTURE, FORESTRY & FISHING 3.7 24.2 0.95 Cash crops 5.4 1.7 0.10 Food crops 3.3 14.0 0.50 Livestock 1.0 3.7 0.05 Forestry 4.9 3.6 0.18 Fishing 11.9 1.1 0.12 INDUSTRY 5.0 19.2 0.97 Mining & quarrying -0.6 1.7 0.00 Manufacturing 4.1 7.6 0.33 Construction 6.7 6.9 0.45 SERVICES 8.2 56.6 4.46 Trade & repairs 5.3 11.7 0.63 Transportation & storage 9.2 3.1 0.27 Accommodation & food service activities 5.3 2.5 0.13 Information & communication 10.5 11.1 1.08 Financial & insurance 10.3 3.2 0.31 Real estate activities 6.7 5.7 0.37 Public administration 8.7 3.7 0.30 Education 7.1 6.2 0.43 Source: UBOS PAG E | 7 UGANDA ECONOMIC UPDATE, 13TH EDITION Figure 4: Contribution to First Half FY18/19 growth of 6.4 percent (selected sub-sectors) Source: UBOS Note: Red depicts the services sub-sectors; green the agriculture sub-sectors; and blue the industry sub-sectors Sustained growth in crops and a rebound in Although the agriculture sector accounted forestry and fisheries contributed to 3.7 percent for only 0.95 percent of the growth rate of 6.4 growth in agriculture (Table 1) in the first half of percent in the first half of FY18/19 (Table 1), the FY18/19. Crop growth was, however, lower than sector’s importance for livelihoods, poverty in the first half of FY17/18. One explanation for reduction and the broader economy is much this fall in crop growth is the decline in exports greater. Agriculture-based products (i.e. both of key crops such as coffee, maize and beans, primary and processed products) account for whose export values fell by about 21 percent or more than 50 percent of all exports. The sector more in the first half of FY18/19 compared to also employs about 70 percent of the country’s the first half of FY17/18. This is likely due to the labor force and is, thus, critical for household fall in global food prices for these commodities income growth and consumption, which then in the first half of FY18/19 and shows the stimulates growth in other sectors. continued dependence of Uganda’s crop sector on the movement of these global prices.9 9 For example, the price of robusta coffee fell from an average of US$1.95/kg in the first half of 2018 to an average of US$1.80/ kg in the second half of 2018 (World Bank Commodities Price Forecast, February 2019). PAGE | 8 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 1.4 Monetary policy was tightened to keep inflation in line with policy targets In the second half of 2018, an acceleration rebound in prices towards the inflation target in core inflation toward the inflation target of 5 percent, the Bank of Uganda (BOU) raised of 5 percent led to a tightening of monetary the key monetary policy rate by one percentage policy. Both headline and core inflation rose point to 10 percent in October 2018. to 3.7 and 3.8 percent (yoy) in September 2018, respectively, from 2 and 1.7 percent in While inflation eased following monetary February. Heightened inflationary pressures tightening, renewed pressures increased core compared to the first half of 2018 were inflation to 4.8 percent in April 2019. Core caused by higher oil prices, pass-through inflation slowed to 2.8 percent in December effects of faster nominal effective exchange 2018 (yoy) driven by lower food and energy rate depreciation due to surging imports, and price inflation, and a rebound in the exchange indirect tax hikes implemented with the new rate. However, by April, inflationary pressures budget in July 2018. Higher indirect taxes, reemerged and core inflation accelerated especially the OTT tax, led to an acceleration in sharply due to rising fuel and food prices, services’ prices from 1.7 percent in June 2018 particularly fruit and vegetable prices which to 5.3 percent in August 2018. In response to a increased the most. Figure 5: Inflation rose in the second Figure 6: Food prices drop and energy/ half of 2018 (percent, y/y) utilities prices stagnate (percent, y/y) Source: Bank of Uganda Source: Bank of Uganda Note: Heavy dashed line indicates BoU inflation target PAG E | 9 UGANDA ECONOMIC UPDATE, 13TH EDITION 1.5 A rise in revenues and slow execution of capital spending has kept the fiscal deficit well below budget The fiscal deficit in the first half of FY18/19 is withholding tax collections, Value Added Tax well below the budgeted deficit of 6.7 percent (VAT) receipts and excise duties. Withholding of GDP for FY18/19 (Table 2). At 5.1 percent of tax collections increased by close to 70 percent GDP it is only slightly up from the fiscal deficit in the first half of FY18/19 compared to the same in FY17/18 of 4.9 percent of GDP. This slower period the year before. This increase is due than budgeted increase in the fiscal deficit can to reforms introduced in the FY18/19 budget be attributed to both a rise in tax revenues, by including: a 10 percent final withholding tax on an estimated 1.5 percent of GDP during the first commissions by telecommunication companies half of FY18/19 compared to the same period in on mobile money and airtime agents; a 1 percent FY17/18, and slower than planned execution of withholding tax on agriculture supplies; and a capital expenditures. Actual first half FY18/19 withholding tax on all payments for winnings capital spending amounted to about 6.1 percent of gaming, sports and pool betting.11 Going of GDP, which is well below the levels of forward, if government is to continue achieving spending in the first halves of FY’s 14/15 and its revenue ambitions, then it needs to quickly 15/16, of above 7 percent of GDP, and only establish a framework to help manage tax about a quarter of the FY18/19 development exemptions that continue to drain the system budget. of revenues forgone. This framework should include rules related to exemptions to assess Improved collection of taxes so far in FY18/19 their efficiency, impact and equity, and to bodes well for achieving the annual revenue remove them if warranted.12 target. The FY18/19 budget has a tax revenue collection target of almost 14.5 percent of Current spending is growing too fast and is GDP, which is in line with the government’s on course to again exceed the budget target ambition of annual increases of 0.5 percent of for FY18/19. In FY17/18, current spending GDP from new administrative and tax policy increased to almost 14 percent of GDP (Table reforms.10 In the first half of FY18/19 this 2) or 32 percent above the budgeted amount, target has already been met (Table 2), and is also which was a significant factor in the rise of considerably higher (1.5 percent of GDP more) public debt. The FY18/19 budget is aiming to than the first half of FY17/18. This stronger reduce current spending to about 11 percent performance was driven by higher payroll and of GDP. Unfortunately, the performance of 10 The government is finalizing a five-year domestic revenue mobilization strategy, with implementation set to start in FY18/19/20. The strategy targets annual increases of 0.5 percent of GDP from administrative and tax policy reforms and is being developed with assistance from the IMF, World Bank and other development partners. 11 According to URA, for the period July 2018 to January 2019, total agricultural supplies withholding tax collection was about 60 percent higher than target (i.e. USh 13.87 billion collected against a target of USh 8.75 billion). This was supported by administrative measures to bring more fishing and agricultural operators into the tax net. 12 See World Bank, 2017, Uganda: Improving Domestic Revenue Mobilization – An assessment of Uganda’s Domestic Revenue Gaps and how to tap the potential; and World Bank, 2018, Uganda Revenue Authority: An Assessment, Recommendations, and the Way Forward. PAGE | 10 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION current spending in the first half of FY18/19 at end-FY16/17, equivalent to 3.2 percent of is not encouraging, as over 60 percent (or 14.4 GDP. Arrears stagnated in FY17/18 at USh 2.8 percent of GDP) of the current expenditure trillion, which in GDP terms was a reduction to budget has already been spent. There have been 2.8 percent. That said, the reliability, coverage big spending jumps (by about twenty percent and accuracy of the verified stock of arrears or more) in two important areas that constitute is uncertain. Preventing the accumulation about a third of current spending: wages/ of arrears needs to be a key policy priority salaries and transfers to local governments. (see Box 1). The reduction in the value of the petroleum fund from USh 470 billion in June Overspending has resulted in the accumulation 2018 to USh 289 billion at the end of December of arrears and the use of resources from the 2018 was due to a transfer of USh 200 billion to petroleum fund. The stock of verified arrears help finance the FY18/19 budget. This follows at end-FY14/15 stood at about USh 1.1 trillion a similar withdrawal of USh 125 billion in and more than doubled to USh 2.9 trillion FY17/18.13 13 Petroleum Fund, Semi-Annual Report for the period ended 31st December 2018, MoFPED. PAG E | 11 UGANDA ECONOMIC UPDATE, 13TH EDITION Box 1: Preventing the accumulation of arrears Chronic domestic arrears have a negative impact on the domestic economy, the government’s operational costs and implementation of the budget. The accumulation of arrears undermines public confidence in the government’s fiscal policy and its ability to meet future payment obligations. It also curtails economic growth by impeding the cash flow of private suppliers and contractors, which then directly contributes to the build- up of Non-Performing Loans (NPLs) in the banking system.14 A Domestic Arrears Strategy (DAS) was released in March 2018 to address the issue of domestic arrears. The strategy has four main objectives: a) Establish a comprehensive and reliable database for verified domestic arrears. b) Clear existing stock of arrears within four years. c) Strengthen measures to inhibit the diversion of domestic arrears resources. d) Enhance initiatives to stop the creation of new arrears. An arrears verification process is on-going, and resources are being allocated to the clearing of arrears. An independent audit to verify the stock of domestic arrears up to the end of FY16/17 showed that of the total stock of USh 2.9 trillion, about USh 426 billion (15 percent) were rejected. This audit is being extended up to the end of FY17/18 and shall provide a more accurate picture of actual arrears. With USh 277 billion in arrears repayments made in the first half of FY18/19, the DAS target of clearing at least USh 300 billion worth of existing domestic arrears in FY18/19 is likely to be met. More needs to be done, however, to prevent the diversion of resources to clear arrears and, especially, the accumulation of new arrears. Until the verification process is complete and there is information on the age and eligibility of creditors, then allocating funds for the broad clearance of arrears leaves too much room for the diversion of resources. This is also compounded by the limited reporting of arrears performance on a consistent basis.15 In order to address this issue, more consistent reporting must be instituted for those Ministries and Agencies that hold and generate the bulk of arrears. The big issue, however, is preventing the accumulation of new arrears. This will involve (as proposed in the DAS) improving the realism, credibility and adequacy of budgets; requiring that all expenditure categories are covered in the commitment control system (CCS); and stopping over committed votes from engaging in new multiyear commitments. Source: Compiled from discussions with and information provided by the Ministry of Finance, Planning and Economic Development. 14 IMF, Uganda: Technical Assistance Report—Managing and Preventing Expenditure Arrears, Country Report No. 17/271, September 2017 15 The PFM Act (2015) requires that quarterly reports be adopted on domestic arrears performance. PAGE | 12 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Table 2: Government finances 16 Central Government Cash Balance (billions of Shillings) Outcome Budget H1 2016/17 2017/18 2018/19 2017/18 2018/19 Total revenues 13897 15281 18046 7334 8630 (% GDP) (15.2) (15.2) (16.2) (14.2) (15.8) Tax revenues 12593 14076 15939 6703 7926 (% GDP) (13.7) (14.0) (14.3) (13.0) (14.5) o/w VAT 3904 4448 2118 2470 o/w Income and profit 4279 4641 2176 2568 o/w International trade and transactions 1446 1713 830 964 Non-tax revenues 354 431 420 206 289 Grants 950 774 1687 424 415 Expenditures and net lending 17437 20183 25474 10040 11422 (% GDP) (19.0) (20.1) (22.9) (19.5) (20.9) Current expenditures 12133 13986 12170 6800 7840 (% GDP) (13.2) (13.9) (10.9) (13.2) (14.4) o/w Compensation of employees 2151 2412 1187 1398 o/w Purchases of goods and services 2560 3576 1667 1960 o/w Interest payments 2360 2260 1176 1127 (% GDP) (2.6) (2.2) (2.3) (2.1) o/w Grants (transfers) 4335 5259 2570 3069 o/w Local Governments 2562 2569 1340 1616 Capital expenditures 5120 5893 12964 3016 3306 (% GDP) (5.6) (5.9) (11.6) (5.8) (6.1) Arrears repayments 184 305 341 224 277 (% GDP) (0.2) (0.3) (0.3) (0.4) (0.5) Overall balance, incl. arrears payments -3541 -4902 -7428 -2706 -2792 (% GDP) (-3.9) (-4.9) (-6.7) (-5.2) (-5.1) Financing 3541 4902 7428 2706 2792 o/w domestic 603 1358 1985 241 855 o/w external 2609 3496 5442 2181 1823 o/w errors and omissions 329 48 0 285 114 Memoranda: Petroleum fund withdrawals 125 200 Primary balance, incl. arrears payments -1181 -2642 -1530 -1666 (% GDP) (-1.3) (-2.6) (-3.0) (-3.0) Public debt (% GDP) 38.5 41.0 GDP, nominal (in billions of shillings) 91718 100530 111349 51606 54620 Source: MoFPED and BoU; Note: o/w stands for “of which” 16 Capital expenditure includes net acquisition of nonfinancial assets and net lending/repayments for policy purposes. However, for the Budget 2018/19 it includes development expenditures and net lending and investment. PAG E | 13 UGANDA ECONOMIC UPDATE, 13TH EDITION Capital spending continues to fall short track to receive the lowest proportion of budget of expectations, diminishing the expected funding in at least a decade. The impact this is returns from public investments. While capital having on the education sector, including the spending did increase by 0.3 percent of GDP in deterioration in learning outcomes, will be the first half of FY18/19 to 6.1 percent of GDP discussed further in part 2. (compared to the first half of FY17/18), some of this increase was due to domestically financed The recently approved Uganda PFM Reform expenditures to fund unbudgeted priorities, Strategy (FY18/19–FY22/23) and on-going PIM such as purchase of land and planes for the reforms provide a sound basis for reining in revival of Uganda Airlines. However, at 6.1 current spending, improving capital spending percent of GDP, it is still more than one percent and managing the increase in public debt. The of GDP lower than the levels reached in the PFM reform strategy aims to ensure that multi- first halves of FY’s 14/15 and 15/16. This under- year commitments are accurately reflected spending is constraining the ambitions of in annual budgets, commitment controls Uganda’s national development plans for rapid (including reporting and clearing of arrears) are growth and socio-economic transformation. reinforced, and PFM compliance is improved through better incentives and sanctions Resources, including loans, are being committed mechanisms. Although steps have been taken to, particularly, infrastructure projects that to address the issue of domestic arrears (with face implementation challenges whilst there almost USh 300 billion in arrears repayments are pressing needs in other sectors. Converting made in the first half of FY18/19), more investments into productive assets requires needs to be done to prevent the accumulation effective management at all stages of the public of new arrears (see Box 1). Capital budget investment project cycle – from inception to the execution will improve as further reforms are management of the completed asset. Reforms undertaken to streamline and strengthen the to Public Financial Management (PFM) PIM institutional arrangements and capacity, systems in Uganda have ensured that some standardize information and documentation parts of the PIM cycle meet several standards needed to guide the entire project cycle, of good practice. Nonetheless, deficiencies in rationalize projects and improve costing and the ‘quality at entry’ of projects largely explain baseline information in the Public Investment the implementation challenges such as time- Plan (PIP). The PIM process will also need to overruns, contract disputes, cost escalations, be underpinned by an appropriate legal and and abandonment of projects. regulatory environment that strengthens planning, mandates, incentive structures, and At the same time, budget allocations to the accountability.17 Importantly, government is social sectors, such as education and health, committed to ensuring this process applies to have declined progressively over the last all public projects, including those financed and decade (see Box 2) and, from the second budget delivered through Public Private Partnerships call circular for FY19/20 (February 2019), are on (PPPs). 17 See World Bank, Uganda Economic Update, 12th Edition, Developing the Agri-Food System for Inclusive Growth, November 2018 PAGE | 14 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Box 2: Level of public spending in the education sector Education expenditure as a share of the national budget has decreased from 15 to 10 percent over the last few years despite the introduction of the Universal Secondary Education (USE) policy in 2007 (Figure B1). The decline in education spending also coincides with large volumes of development partner support as Uganda has been one of the five top recipients of foreign aid for education at US$1.6 billion disbursed between 2002 and 2014 (World Bank 2017). Figure B1: Education expenditure as a share of the national budget Source: ESSP 2017-2020 In addition, public spending on education in Uganda, as a share of GDP, is low compared to countries of similar levels of educational attainment (Figure B2). As a result, the burden of financing education has been shifting to households, whose share currently represents almost two thirds of total funding (UNESCO, National Education Accounts). Figure B2: Education spending as a percent of GDP Source: World Bank, Facing Forward: Schooling for learning in Africa, 2017 Notes: Group 1 is considered Established, with a high primary GER in the baseline year and is close to 100 percent circa 2013. The rate of out of school children of primary school-going age is low in the latest year of available data and primary retention rates are close to 100 percent in 2013. Group 2 is considered Emerged with a high GER in the baseline year and circa 2013. The rate of out of school children of primary school-going age is low in the latest year of available data and primary retention rates are low. Group 3 is considered Emerging where the GER is low in the baseline year and high by circa 2013. The rate of out of school children of primary school-going age is high in in the latest year of available data and primary retention rates are low. Group 4 is considered Delayed where the GER is low in both the baseline year and circa 2013, and the rate of out of school children of primary school-going age is high in the latest year of available data and primary retention rates are low in 2013. GERs for primary are high if they are at least 90 percent and low if below 90 percent. Out of school children rates are high if they are at least 20 percent, and low if below 20 percent. PAG E | 15 UGANDA ECONOMIC UPDATE, 13TH EDITION The government’s financing needs in the first Public debt rose to about US$11.4 billion, or half of FY18/19 were largely met by foreign 41.3 percent of GDP at end FY2017/18. This borrowing, which went entirely to project represents about a 14 percent increase (in GDP financing with no lending for budgetary terms) over the past five years, which poses support. There was, however, a fall in foreign sustainability challenges (Box 3). Nevertheless, borrowing to 3.3 percent of GDP in the first based on the joint IMF-World Bank debt half of FY18/19 from 4.2 percent in the first sustainability analysis (DSA), Uganda remains half of FY17/18. This reflects completion of the at low risk of debt distress. Two-thirds (US$7.9 two largest infrastructure projects, Karuma billion) of outstanding public debt is owed and Isimba dams, and the fact that major new to external creditors, largely for energy and infrastructure projects, such as access roads infrastructure projects.18 Domestic debt totals to oil wells, are yet to start in earnest. On the US$3.5 billion, with roughly three-fourths in other hand, domestic borrowing was more than Treasury Bonds and the rest in short-term three times higher in the first half of FY18/19 Treasury Bills. Close to 70 percent of external (at 1.6 percent of GDP) than the same period public debt is comprised of multilateral in FY17/18 (at 0.5 percent of GDP). About a financing and is therefore on concessional quarter of this increase was used to finance the terms, which reduces the present value of the revival of Uganda Airlines. public debt stock to 31.3 percent of GDP. This public debt figure does not include contingent liabilities, which were estimated in FY17/18 at 12 percent of GDP (state-owned enterprise debt of 9.1 percent of GDP and a PPP stock of 2.8 percent of GDP).19 Figure 7: Evolution of public debt Source: Uganda Authorities and WB/IMF calculations 18 External debt is measured on a residency basis and includes locally issued debt held by non-residents. 19 IMF and the World Bank, Debt Sustainability Analysis, March 2019. PAGE | 16 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Box 3: Public debt sustainability Although public debt is manageable under current policies and expected economic conditions, debt vulnerabilities remain significant. Simulations conducted in the recent IMF-World Bank DSA find that the three most important risks are an unexpected downturn in GDP growth, the realization of contingent liabilities (from public-private partnerships and debt owed by state-owned enterprise), and the possibility that the full amount required for building transmission lines is financed by government borrowing (Figure B3). Figure B3: Debt sustainability under different scenarios (PV of public and publicly guaranteed debt in percent of GDP) Source: MoFPED, BoU, IMF and World Bank staff estimates Note: In this chart, the temporary growth shock assumes growth rates are 1.5 standard deviation lower than forecast: transmission lines scenario assumes full amount of financing needed The increased reliance on semi-concessional and for the government to repay debt coming due. commercial borrowing to finance investment • Political pressures for higher current spending, projects creates additional vulnerabilities. Not only as well as new ad-hoc tax exemptions. are interest payments higher on these loans, they • If the government nationalizes the electricity also put higher demands on the government’s gross transmission system when the concession financing needs because principal repayments expires in 2025, it might need to borrow funds generally start earlier, due to shorter grace periods, for maintaining and expanding the gridline. and are larger because of shorter maturities. To • There are large investments financed with meet this gross financing need, the government semi- or non-concessional loans that were not may have to borrow more. Therefore, governments included in the DSA simulations and which are that have access to concessional loans should first sources of additional fiscal risk. maximize borrowing from these financing sources before looking to non-concessional financing. Maintaining public debt on a sustainable path will require strengthening the budget process to Other risks to debt sustainability include: ensure that budget targets become more binding, • Oil export receipts are realized later than that public spending and public debt management expected (i.e. beyond FY 23/24), thus postponing become more effective, and that fiscal risks are large inflows of foreign exchange. This would comprehensively monitored. leave the budget without the planned revenue Source: Largely taken from the IMF and the World Bank, Debt Sustainability Analysis, March 2019 PAG E | 17 UGANDA ECONOMIC UPDATE, 13TH EDITION 1.6 Credit to the private sector remains strong even after monetary tightening Despite the increase in the monetary policy rising despite tightened monetary conditions rate, private sector credit continued to grow that have temporarily resulted in a slight strongly (Figure 8). Supported by robust increase in the average lending rate to close economic growth and private investment, as to 21 percent in February 2019, but have since well as a steady reduction in NPLs, lending to fallen to levels seen before the increase in the private sector increased in real terms by the monetary policy rate (19 percent). At the 10.4 percent in March 2019 compared to the same time, the average interest rate on foreign same period last year. This marks the first currency loans remained constant at close time since December 2015 that real growth in to 8 percent. Such average lending rates are private sector lending has hit the double-digit much higher than those of other East African mark. Private sector credit growth continued Community (EAC) countries. Figure 8: Private credit continues with Figure 9: Strong credit growth to agriculture robust growth (percent, y/y, real terms) and households (percent, y/y, real terms) Source: Bank of Uganda Source: Bank of Uganda Note: Nominal credit growth is deflated by CPI. Loans for agriculture, trade and manufacturing of 2018 decelerated to more sustainable levels, are driving the recovery in private sector averaging below 9 percent, in real terms, and credit growth. Credit to the agriculture sector was replaced by a surge in credit to agricultural has seen double-digit growth in real terms production and marketing in 2018. The double- over the past one and a half years, in large digit growth has roughly doubled the share of part led by credit growth in 2017 to finance credit to agriculture to 12 percent since 2012 agricultural processing (Figure 9). Credit to in total credit to the private sector. Strong agricultural processing has in the second half growth in credit to agriculture is in part due to PAGE | 18 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION an increased uptake of the Agricultural Credit The banking sector has recovered from the Facility, whose marketing has been enhanced crisis that erupted two years ago. NPLs have and terms adjusted to allow eligibility of more declined consistently since end-2016 following products along the agricultural value chain.20 the closure of Crane Bank and sizable NPL Credit growth to manufacturers and traders also write-offs in the banking system. By end-2018, rose significantly in 2018, averaging 5.2 and 7 the ratio of NPLs had dropped to 3.4 percent percent (in real terms), respectively, supporting (as a share of total gross loans), from over 10 private consumption and investment. In 2019, percent two years ago. This NPL ratio is one credit to manufacturing doubled to close to 10 of the lowest in the EAC. The banking sector percent, in real terms. continues to show sufficient liquidity in the system, with liquid assets to total deposits around 45 percent at end-2018. 1.7 Strong growth in investment good imports and slower remittances widened the current account deficit The current account deficit rose to 11.4 percent and other business services have also increased. of GDP during the first half of FY18/19 compared Oil imports rose 24 percent during the first half to 6.2 percent of GDP during the same period last of FY18/19 as the price effect outweighed the year (Table 3). Import volumes continued rising decline in imported volumes. strongly at the same rate as last year, outpacing higher exports. Meanwhile, personal transfers Merchandise exports continued to perform stagnated in the first half of FY18/19 compared well, with the structure continuing to shift to the previous year, reducing the surplus in toward refined gold as a significant export good the income and transfers account to only 1.2 (Figure 10). Merchandise exports rose 6 percent percent of GDP, about one third of its value in the first half of FY18/19, after growing 8 from the previous year, and thus contributing percent in FY17/18, and 22 percent the year significantly to the current account deficit in before following negative supply shocks in the the first half of FY18/19. form of droughts and pests. Growth in export volumes of coffee stood at 2.1 percent in the The current account deficit was driven by first half of FY18/19, slightly below last year’s a surge in import volumes fueled by robust performance, while coffee prices declined 10 growth in private consumption and investment. percent. Overall, the value of coffee exports has The structure of imports changed significantly dropped 21 percent in the first half of FY18/19 from last year, with government imports for compared to the same period the previous year. capital projects declining over 20 percent, while For the first time, gold exports exceeded coffee private imports accelerated close to 30 percent exports, recording a value of US$327 million or compared to the first half of FY17/18. Private almost 20 percent of total exports (Figure 10). sector imports were driven by increased non- Gold refining took off three years ago, with oil imports including investment and durable currently three processing facilities in Uganda goods such as machinery and vehicles, as well exporting gold. as chemical products. Net imports of transport 20 The Agricultural Credit Facility was set up by the government in partnership with commercial banks, the Uganda Development Bank, micro deposit taking institutions and credit institutions. The scheme’s operations started in October 2009, with the aim of facilitating the provision of medium and long-term financing to projects engaged in agriculture and agro- processing, focusing mainly on commercialization and value addition. PAG E | 19 UGANDA ECONOMIC UPDATE, 13TH EDITION Figure 10: Share of total exports (main FY18 commodities) and value (in US$ mil) of coffee and gold exports Source: BoU Although the current account deficit has By April 2019 the shilling recovered after widened significantly, it still seems manageable depreciating 5.5 percent in the first half of 2018 as it was largely financed by FDI inflows and (Figure 11). The sharper than usual depreciation development assistance (Table 3). Net FDI rose of the shilling over the period January to to over 5 percent of GDP in the first half of June 2018 was driven by strong demand for FY18/19, financing a large share of the external foreign currency to finance the widening shortfall. At the same time, government’s net current account deficit. Since then, the borrowing of 3.3 percent of GDP was largely shilling recovered somewhat and appreciated through project financing rather than budget 2.7 percent by April 2019 as FDI inflows and support. As a result, foreign exchange reserves government foreign borrowing bolstered accumulated by US$114 million, which implies foreign exchange reserves. a coverage of 4.6 months of imports of goods and services, according to the BoU. PAGE | 20 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Table 3: The current account balance and financing Current Account Balance (millions of dollars) H1 2015/16 2016/17 2017/18 2017/18 2018/19 Merchandise trade -2004 -1494 -2083 -1028 -1404 (% GDP) (-8.3) (-5.7) (-7.6) (-7.5) (-9.9) Exports 2688 3274 3537 1691 1796 Imports 4692 4768 5619 2719 3199 Services -255 -268 -424 -233 -382 (% GDP) (-1.1) (-1.0) (-1.5) (-1.7) (-2.7) Exports 1985 1689 1830 890 1025 Imports 2240 1957 2254 1123 1408 Income and transfers 902 742 701 410 177 (% GDP) (3.7) (2.9) (2.6) (3.0) (1.2) Current account balance -1357 -1020 -1806 -851 -1609 (% GDP) (-5.6) (-3.9) (-6.6) (-6.2) (-11.4) Financing 1243 1133 1090 780 1389 o/w Net FDI inflows (equity and reinvested earnings) 474 552 882 354 736 o/w Intercompany loans 208 162 90 47 30 o/w Portfolio investment 146 177 339 -246 -4 o/w Other investment 705 595 457 624 624 o/w Capital transfers 120 151 105 67 57 Net errors and ommissions 95 157 416 236 279 Change in foreign exchange reserves 99 419 -198 230 114 Memoranda: Total external debt stock, nominal (percent of GDP) 22 24 26 25 28 Foreign exchange reserves, stock (months of imports of G&S) 5.5 5.7 4.5 5.2 4.6 GDP, nominal (in millions of dollars) 24134 25985 27474 13732 14132 Source: Bank of Uganda Note: o/w stands for of which PAG E | 21 UGANDA ECONOMIC UPDATE, 13TH EDITION Figure 11: Nominal exchange rate recovered recently (Ush/USD exchange rate) Source: Bank of Uganda Note: Y-axis reversed PAGE | 22 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 2. ECONOMIC OUTLOOK AND RISKS 2.1. Public and private investments to drive higher real GDP growth Real GDP growth is expected to remain around infrastructure. The scale-up in investments is 6 percent in FY18/19 and could rise further expected to catalyze a rise in consumption, as to 6.5 percent in FY19/20 (Table 4). Given the the bulk of investments support more rapid improved outlook, the projection for FY19/20 growth in construction and services. This is slightly above the forecast of 6.4 percent outlook assumes favorable weather conditions, growth that was made in the November 2018 continued strong external demand, and Uganda Economic Update. The pick-up in further growth in FDI inflows as oil production growth will largely be driven by intensified draws closer (see Box 4). The growth outlook is public and private investments in energy projected to deteriorate slightly in FY21 due to projects, industrial parks, preparation for oil the general elections scheduled for 2021.21 production, and continued expansion of IC 21 Growth has traditionally dipped in election years as heightened political activity leads to lower investment and economic activity. At the same time, however, government consumption expenditure is expected to rise, which will lead to a deterioration in the expenditure mix, significant expansion in the fiscal deficit, and a rise in public debt to almost 50 percent of GDP. PAG E | 23 UGANDA ECONOMIC UPDATE, 13TH EDITION Box 4: Closing regulatory and institutional gaps will ensure maximum benefits from oil Oil production and associated revenues have the potential to transform the Ugandan economy. Uganda’s oil reserves are currently estimated at 1.7 billion barrels, the fourth largest in Sub-Saharan Africa, and production is set to commence in 2023 and last for 25 years. The government expects to receive between one half to four percent of GDP per year in oil related revenues during this period. The anticipated investments in the short to medium-term, especially to support oil production, are expected to be a key driver of economic growth. Over the longer term, oil has the potential to substantially raise government revenues, increase exports and drive even more impressive growth rates. However, these benefits are not guaranteed. Therefore, government has a crucial role in managing these resource revenues effectively and developing synergies with domestic industries. Since oil reserves were confirmed, government has undertaken several legal, institutional and policy reforms. The National Oil and Gas Policy (approved in 2008) and the Petroleum Act (2013) jointly established the National Oil Company to manage the country’s commercial interests in the sector and, through various regulations, their operationalization has also formed the legal basis for mid- and upstream development. An Oil and Gas Revenue Management Policy (2013) and the Public Finance Management Act (2015) include provisions on how Uganda will manage its oil revenues. This legal framework also established a Petroleum Fund, into which oil revenues are deposited once collected by the Uganda Revenue Authority, and a Petroleum Revenue Investment Reserve which is expected to be a sovereign wealth fund for investing a share of oil revenues. The Charter of Fiscal Responsibility was formulated in 2016 and sets a framework for macroeconomic stability and fiscal transparency. Gaps in the fiscal management framework remain and need to be addressed before production commences. The production sharing agreements, Income Tax Act, and special taxation regime for the pipeline provide a good basis for managing the upstream revenue flows. However, several areas related to the use of oil revenues could be strengthened. There are concerns that the fiscal rule implied in the current fiscal regime is not stringent enough to manage rising spending pressures. This is especially due to the lack of both annual fiscal targets and guidelines for fiscal adjustment in the event of major economic shocks. Furthermore, better budget management, enhanced fiscal transparency and reporting, and improved public investment management will be crucial to maximize benefits from oil revenues for the economic transformation of Uganda. Source: Compiled from Government of Uganda, IMF and World Bank documents. PAGE | 24 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION The services sector is expected to continue expected to remain in line with its historical to underpin growth, followed by industry performance of about 3 percent. The current and a limited contribution from agriculture.22 outlook for fisheries looks more positive Telecommunication companies are expected though, with a new fisheries and aquaculture to sustain investments to support both 3G law expected to be enacted this year, which connectivity country-wide and the roll-out will address challenges (e.g. poor-quality fish of 4G services, and, with Uganda’s youthful larvae/fingerlings, limited access to feeds, trade and increasingly connected population, data in illegal and unrecorded immature fish) and usage will continue to expand strongly. Given foster a sustainable fisheries and aquaculture that any agriculture productivity enhancing sub-sector. Addressing these sub-sector initiatives (e.g. irrigation investments to challenges should support a rise in fisheries boost water for agriculture) will take some exports, which have already grown by almost time to deliver results, agriculture growth is 250 percent in the first half of FY18/19.23 Table 4: Medium term outlook (annual percent change unless indicated otherwise) FY18/19e FY19/20f FY20/21f Real GDP growth 6.2 6.5 5.8 Private consumption 4.8 5.7 5.5 Government consumption 4.2 9.7 12.3 Gross fixed capital investment 14.4 10.4 7.5 Exports (goods and services) 6.2 5.5 5.4 Imports (goods and services) 12.6 9.8 9.1 Agriculture 2.6 2.8 2.7 Industry 5.6 6.1 6.0 Services 7.6 7.9 6.9 Inflation (consumer price index) 4.7 4.9 5.1 Current account balance (percent of GDP) -8.3 -8.9 -8.6 Net foreign direct investment (percent of GDP) 4.1 4.3 3.7 Fiscal balance (percent of GDP) -5.7 -6.1 -6.6 Public debt (percent of GDP) 43.6 46.9 49.4 Source: UBOS, IMF and World Bank staff estimates Notes: Gross fixed capital investment Includes both public and private investments. 22 See World Bank, Uganda Economic Update, 12th Edition, Developing the Agri-Food System for Inclusive Growth, November 2018. 23 At around 6 percent of total exports from FY14 to FY18, fish and fish products are Uganda’s fourth largest export, after coffee, industrial products and gold (Figure 10). PAG E | 25 UGANDA ECONOMIC UPDATE, 13TH EDITION The fiscal deficit is likely to remain moderate, At the same time, South Sudan is showing weak as public expenditure falls short of what was signs of recovery, but certainly insufficient to budgeted due to the perennial under-execution support previous Uganda-South Sudan trade of capital expenditures. The government’s levels. Furthermore, prices of commodities are FY18/19 budget envisaged a significant increase expected to generally stabilise in the medium in the fiscal deficit to 6.6 percent of GDP, and 6.1 term.24 So, on balance, export growth is likely to percent the year after, driven by investments be moderate over the next few years. Thus, the in public infrastructure and aircraft purchases expanded current account deficit is expected to for Uganda Airlines. The infrastructure be largely financed by net FDI inflows. With investments include new oil-related roads, oil exports envisaged to gradually take off in the Kampala-Hoima infrastructure/utility 2023/24, this would ensure a sizable reduction corridor, the East African Crude Oil Pipeline in the current account deficit over the longer (from Uganda through Tanzania), completion term. Net FDI inflows and other capital inflows, of the Karima and Isimba dams, and power including external borrowing, should keep transmission and distribution networks to foreign exchange reserves equivalent to a least special economic zones and rural growth four months of imports of goods and services. centers. However, given the historical under- execution of capital expenditures, the fiscal As the growth recovery gains traction, deficit is likely to only expand to 5.7 percent headline and core inflation are anticipated of GDP (Table 4) in FY18/19. Looking forward, to approach the BoU target of 5 percent. Oil the on-going public investment management prices are expected to increase to US$74/ reforms and better implementation of the bbl in 2019, peaking in the first half of the government’s resettlement action plan could year, and declining over the medium term push the fiscal deficit towards what has been to under US$70/bbl.25 This should limit any budgeted for FY20. inflationary pressures from the price of fuel and certain imported goods. At the same time, The rapid growth in imports to support favorable weather and reasonable agricultural the investment drive, combined with only performance will largely keep domestic moderate growth in exports, is expected to inflationary pressures subdued. For these widen the current account deficit to around reasons, the BoU has recently communicated 9 percent of GDP over the medium term. The a more favorable outlook for inflation over the strong investment drive will require significant next twelve months and is expected to maintain imports of oil, machinery, vehicles and chemical the policy rate at around 10 percent over the products. A slower global economy combined course of 2019.26 This should support more with mixed economic performance of Uganda’s reasonable lending rates and, together with the main export markets could undermine exports. positive economic outlook, private sector credit Although countries like Kenya, Rwanda and growth is likely to be sustained through 2019 DRC have strong growth prospects going and to further boost private consumption as forward (Figure 2), the Euro Area growth is more households access credit. projected to decelerate to 1.6 percent in 2019. 24 For example, the price of gold is expected to fall marginally from an average of US$1,259/toz in 2018 to an average of US$1,245/toz in 2019 and US$1,231/toz in 2020. On the other hand, the price of robusta coffee is only expected to rise marginally from an average of US$1.82/kg in 2018 to an average of US$1.85/kg in 2019 and US$1.88/kg in 2020 (World Bank Commodities Markets Outlook, October 2018). 25 World Bank, Commodity Markets Outlook, October 2018. 26 Bank of Uganda, Monetary Policy Statement for February 2019. PAGE | 26 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 2.2. Risks remain tilted to the downside As the 2021 elections draw closer, heightened weaknesses in managing the social risks, political activity and uncertainty could lead to largely emanating from lack of policies and a drop in investments and economic activity. systems to protect communities in which Whereas this has been factored into the outlook these infrastructure investments take place, for FY21, political risks could arise sooner and remains a risk to project execution (see Box 5). impact the nearer term outlook. Uganda is Thus, significant delays in public investment strongly predicating its prospects on the oil execution (and related returns), and further industry and boosting its international image sizable increases in current spending may to grow the tourism sector. However, politically constrain real GDP growth and the future linked riots and civil unrest would increase growth dividend. At the same time, any rise in uncertainty and could lead to a fall in investor U.S. interest rates could result in accelerated sentiment (both domestic and international), depreciation of the Ugandan shilling, which which could slow down oil investments and would result in more expensive repayments of deter tourists from visiting. foreign debt. Spending pressures could jeopardize Uganda’s Swings in global oil prices present varying hard-earned macroeconomic stability. risks to Uganda’s growth prospects. Lower oil Spending pressures may arise from excessive prices are beneficial to Uganda’s trade balance current spending in the run-up to the 2021 and real growth outcomes, but also increase elections, unexpectedly high subsidies to risks to investment plans in the Ugandan oil revive and sustain Uganda Airlines, and/or if sector. Commodity price forecasts suggest contingent liabilities, partially stemming from that oil prices will, over the medium term, increasing use of public-private partnerships, remain above the estimated break-even materialize. On the other hand, new ad-hoc price for production.27 However, there is tax exemptions that put downward pressure uncertainty around these forecasts. If oil prices on tax revenues in conjunction with existing fall significantly, then plans for production exemptions, and weak implementation of may need to be adjusted, with possible delays new tax-enhancing measures and reforms, in realization of oil revenues. These delays may strain the government’s ability to could result in liquidity pressures given the raise additional revenue to offset higher current heavy borrowing for infrastructure expenditures. that is relying on the enhanced repayment capacity from oil exports, and especially if less Poor execution of the capital expenditure concessional financing materializes. budget and slower revenue mobilization would increase public debt vulnerabilities. Procedural Reliance on rain-fed agriculture and and financial delays that have traditionally led susceptibility to the armyworm and other pests to poor execution of the government’s large remain risks to real GDP growth, the poor’s infrastructure programs are being addressed income, and export earnings. The performance through capacity building in government to of the agriculture sector, and corresponding better prepare and appraise projects. However, environmental shocks, has been closely linked 27 World Bank, Commodity Markets Outlook, October 2018. Analysts estimate that an oil price of US$60/bbl is the break-even point for production in Uganda (Patey, L., 2015), which according to the Ministry of Energy and Mineral Development is now envisaged to start in 2023. PAG E | 27 UGANDA ECONOMIC UPDATE, 13TH EDITION to household income growth, and subsequently, in other sectors. The latter is a significant to poverty reduction (Hill and Mejia, 2016).28 challenge, as it is projected that Uganda will To build resilience to weather and other have to accommodate an additional 600,000 shocks, it is crucial to invest in the agricultural new entrants into the labor market each year sector, expand existing or introduce new social up to 2020 – and even more thereafter, given protection programs, and ensure labor demand demographic projections (World Bank, 2018). Box 5: Managing social risks is critical to realizing the returns from capital investments Research has shown that if social risks associated with development projects are not adequately mitigated, they could lead to unintended adverse effects on the well-being and livelihoods of affected communities, particularly poor and vulnerable groups. These risks include i) poorly executed land acquisition/resettlement processes, ii) inadequate stakeholder engagement/consultation, iii) lack of access to functioning grievance redress mechanisms, iv) exacerbation of gender issues and social exclusion, and v) all those risks associated with an influx of labor into targeted communities, including social conflict, spread of communicable diseases, Gender Based Violence (GBV), Violence Against Children (V AC), and labor issues. For example, the World Bank’s Inspection Panel received a complaint in 2015 for the Transport Sector Development Project that raised serious allegations associated with its implementation including road workers’ sexual relations with minor girls and resulting pregnancies, the increased presence of sex workers in the community, the spread of HIV/AIDS, sexual harassment of female employees, child labor, increased dropout rates from school, inadequate resettlement practices, fear of retaliation, lack of community participation, poor labor practices, and lack of road safety. These allegations eventually resulted in the project being cancelled and a Management Action Plan (still under implementation) prepared to address these issues. Since then, the Ugandan government has significantly strengthened its capacity to address infrastructure project related social risks, notably in the transport sector and under the lead of the Uganda National Roads Authority. These have included the (i) provision of emergency remediation for child survivors of abuse in the project area, (ii) strengthening of local prevention and response to GBV and VAC, (iii) elaboration of a program to address the underlying risks of GBV, and (iv) on-going efforts to address endemic social issues associated with infrastructure projects. These challenges, that go beyond the transport sector, highlight the need to strengthen the country’s systems for the prevention, mitigation and management of social risks. In pursuit of its infrastructure development agenda, the Ugandan government is committed to strengthening its Social Risk Management (SRM) architecture and is developing a robust and well-coordinated system for managing these risks in development projects. Once implemented, this system will support a development agenda that is inclusive and sustainable. Key amongst this reform agenda is the policy and legal framework that will ensure proper land acquisition and resettlement, clear and transparent systems for assessing and accounting for social impacts in development investments, and stronger mechanisms for coordinating actions across government. An effective SRM system will ensure inclusive growth, as communities positively benefit from these projects, but will also avoid delays and litigation on project works that delay and ultimately reduce the return on investments. Source: Based on “Uganda Management of Social Risk and Gender Based Violence Prevention and Response Project, Social Impact Assessment. Ministry of Gender, Labor and Social Development, April 2017” and “Strengthening Social Risk Management and Gender-Based Violence Prevention and Response Project,” Project Appraisal Document. World Bank, May 2017. 28 Thus, factors that positively contribute to the development of the agricultural sector (such as enhanced access to markets and regional trade integration) also contribute to the reduction of poverty. PAGE | 28 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Regional and global factors could also stays in place and South Sudan’s economy undermine Uganda’s export performance. increasingly improves, then demand for Reduced foreign demand for Uganda’s exports Ugandan exports may pick up again. Over the could come in the form of regional instability, last decade about 9 percent of Uganda’s exports such as violence or hostilities in the DRC and went to Rwanda. The closure of certain border South Sudan, continued tensions and the posts since February 2019 has put a halt on border closure between Uganda and Rwanda, bilateral trade, which, depending on how long and/or because of the unfolding trade war they stay closed and to what extent they are between the U.S. and China, which might slow reopened, will have a detrimental effect on global growth. Almost a quarter of Uganda’s Ugandan exports. Uganda also serves as an FY18 exports went to the DRC and South Sudan important transit country for Rwanda; both for (World Bank, 2018). The DRC came through the its imports from other countries and exports December 2018 elections relatively peacefully, heading to Kenyan ports. A diversion of this and the country’s medium-term outlook is trade through other countries may affect positive. The power-sharing agreement signed growth in Uganda’s services sectors such as by the South Sudanese leaders in September logistics, transportation and storage. 2018 has been maintained up to now. If it PAG E | 29 UGANDA ECONOMIC UPDATE, 13TH EDITION PAGE | 29 PART 2: EDUCATION UGANDA ECONOMIC UPDATE, 13TH EDITION 3. ECONOMIC DEVELOPMENT, HUMAN CAPITAL AND DEMAND FOR SKILLS: A CASE FOR INVESTING MORE IN EDUCATION 3.1. Human capital in Uganda Human capital is a key determinant of economic Education is a major component of the HCI, and development and wealth. The new generations Africa is the region of the world with the highest of workers are facing an increased demand economic returns to education. The key drivers for higher levels of human capital, including of these returns are the quality of education advanced cognitive and socio-behavioral skills. and the average years of schooling that a child As the nature of work evolves in response may benefit from. Each year of schooling to rapid technological change, investing raises average earnings by 11.3 percent for properly in human capital is considered not males and 14.5 percent for females.31 Education only desirable, but necessary in the pursuit of interventions are shown to have a direct prosperity. To illustrate this concept the World impact on skills, academic achievement and, Bank developed the Human Capital Index (HCI) consequently, earnings. For instance, attending which measures the impact of underinvesting pre-school for one year enhances cognitive in human capital on the productivity of the skills during early childhood, improves next generation of workers. It is defined as academic skills during elementary school, and the amount of human capital that a child born increases earnings by 5 percent.32 Additionally, today can expect to achieve in view of the risks education contributes to empowering women, of poor health and poor education currently allowing them to access better jobs, have fewer prevailing in the country where that child lives children and invest more in each child. (more details in Box 6). Health and education are important Empirical analyses show that the HCI components of human capital and are components are highly correlated to interrelated. Health indicators include productivity and economic growth. The HCI survival, stunting and nutrition. Stunting and GDP per capita correlation is 0.86 (Figure has considerable impacts since a healthy 12). Between 10 and 30 percent of per capita GDP diet during infancy and childhood increases differences are attributable to cross-country achievement at school.29 Also, investing in differences in human capital, which is also an prenatal care and maternal education improves important input to technological innovation infant health, leading to improved educational and long-term growth.33 As illustrated by attainment, mental health and higher earnings figure 12, Uganda’s HCI is below what would be later in life.30 predicted by its income level, whereas Kenya and Burundi, for instance, score much above what is expected by their income levels. 29 Belot and James (2011); Sandjaja et al. (2013). 30 Andrabi, Das, and Khwaia (2012); Gertler et al. (2014); Walker et al. (2011). 31 Montenegro and Patrinos (2014). 32 Berlinski, Galiani and Gertler (2009). 33 Hsieh and Klenow (2010). PAGE | 32 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Figure 12. Relationship between HCI and GDP per Capita (Idem) Analyses of HCI indexes among developing be if she enjoyed complete education and full countries show that Uganda is underinvesting health.34 Uganda is ranked among the countries in the future productivity of its citizens. A child in the lowest quartile of the HCI distribution, born in Uganda today will be only 38 percent with an index slightly lower than the average as productive when she grows up as she could for the SSA region. Figure 13. Human Capital Index in Uganda and other Sub-Saharan African countries 34 The official definition of HCI PAG E | 33 UGANDA ECONOMIC UPDATE, 13TH EDITION Table 5. HCI by components in Uganda and other Sub-Saharan African Countries Ethiopia Kenya Mauritius Rwanda Seychelles Uganda SSA HCI Component 1: Survival Probability of Survival to Age 5 0.942 0.954 0.987 0.962 0.986 0.951 0.934 Contribution to Productivity 0.94 0.95 0.99 0.96 0.99 0.95 0.93 HCI Component 2: School Expected Years of School 7.8 10.7 12.5 6.6 13.7 7.0 8.1 Harmonized Test Scores 359 455 473 358 463 397 374 Learning-Adjusted Years of School 4.5 7.8 9.5 3.8 10.1 4.5 4.9 Contribution to Productivity 0.47 0.61 0.70 0.44 0.73 0.47 0.48 HCI Component 3: Health Survival Rate from Age 15-60 0.786 0.787 0.859 0.808 0.840 0.698 0.732 Fraction of Children Under 5 Not Stunted 0.616 0.738 .. 0.633 0.921 0.711 0.684 Contribution to Productivity 0.87 0.89 0.91 0.88 0.94 0.86 0.87 Human Capital Index (HCI) 0.38 0.52 0.63 0.37 0.68 0.38 0.39 Uganda scores low in the HCI and investing in School’ component in table 5), with 2.5 years education is important to improve outcomes considered as lost due to poor quality. Uganda’s for the population. From 2012 to 2017, score on this component is below the SSA Uganda’s HCI increased from 0.36 to 0.38, average. Learning outcomes are measured by due to improvements in all components of the the Southern and Eastern Africa Consortium index. While further gains in human capital for Monitoring Education Quality (SACMEQ) will require multi-sectoral policies that aim assessment, last administered in 2013. While at reducing child mortality and stunting 70 percent of grade 6 students achieved the and improving adult health, improving the minimum competence level in reading, only education status of the younger generations 40 percent of those tested reached that same will have the highest contribution to competence level in Mathematics. The evidence productivity. A child born today in Uganda of poor learning outcomes is substantiated by is expected to complete only seven years of the national Early Grade Reading Assessment’s education combined by age 18, compared (EGRA) results.36 For instance, only 28 percent to a regional average of 8.1.35 Because of of children can read 20 words per minute the low levels of learning achievement in in the third grade of primary (P3), while the Uganda, this is only equivalent to 4.5 years expectation is that all children should be able of learning (see ‘Learning-Adjusted Years of to read a simple paragraph by that age. 35 Primary level in Uganda is seven grades; lower secondary is four and upper secondary is another two. 36 An assessment focused on early grade proficiency in basic literacy skills, typically conducted in grades 2-4. PAGE | 34 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION To improve its ranking in the HCI, Uganda needs enrollment rate hides alarmingly low learning to adopt a dual priority approach focusing on outcomes and completion rates. Moreover, schooling, in particular on expanding access inequities in access to education persist at to pre-primary and secondary education, and high levels among children across gender, learning, through improving quality at all levels. demographic, socioeconomic, and regional While the country has largely universalized groups. This chapter of the economic update education access at the primary level, it shows aims to recommend solutions on how to extremely low GER at pre-primary, as well achieve this dual priority of learning and as at secondary levels. Both pre-primary and schooling in the most efficient manner, that secondary education enrollments are among is fiscally realistic and sustainable given the lowest in the region, and the secondary Uganda’s current economic performance, enrollment rate has been stagnating for the fiscal policy and macroeconomic management. last decade. In primary education, the high PAG E | 35 UGANDA ECONOMIC UPDATE, 13TH EDITION Box 6: What is the Human Capital Index? The Human Capital Index (HCI) measures the human capital that a child born today can expect to attain by age 18, given the risks to poor health and poor education that prevail in the country where she lives. It is based on three components: Survival Component: Probability of survival to age 5 Measured using the under-5 mortality rate to reflect the fact that not all children born today will survive until the age when the process of human capital accumulation through formal education begins. School Component: Expected years of school and harmonized test scores Combines information on the quantity (expected years of school) and quality (harmonized test scores) of education. Learning-Adjusted Years of School are then generated by multiplying expected years of school by the ratio of test scores – calculated from major international learning assessments – to 625, corresponding to the TIMSS benchmark of advanced achievement. For example, expected years of school in Uganda is 7 and the average test score is 397, then the country has 7 × (397/625) = 4.5 Learning- Adjusted Years of School. The distance between 7 and 4.5 represents a learning gap equivalent to 2.5 years of school. Health Component: Survival rate from age 15-60 and the fraction of children under 5 not stunted This component uses two proxies for the overall health environment: adult survival rates measured by the share of 15-year-olds who survive until age 60, and the fraction of children under 5 who are not stunted. The first reflects a variety of health outcomes that a child born today may experience as an adult. The later serves as an indicator for the prenatal, infant, and early childhood health environments, which have important consequences for adult health and well-being. Human Capital Index The overall index is constructed by multiplying the three components’ contributions to relative productivity, as follows: HCI = Survival × School × Health. The benchmark of complete high-quality education corresponds to 14 years of school and a harmonized test score of 625. The benchmark of full health corresponds to 100 percent child and adult survival and a stunting rate of 0 percent. Source: Gatti, Roberta V.; Kraay, Aart C.; Avitabile, Ciro; Collin, Matthew Edward; Dsouza, Ritika; Dehnen, Nicola Anna Pascale. 2018. The Human Capital Project (English). Washington, D.C.: World Bank Group. PAGE | 36 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 3.2. The demand for skills and the critical role of lower secondary education In addition to raising Uganda’s productivity, young children. Moreover, women’s earnings as evidenced by the HCI, primary and today would be higher if they had been able to lower secondary education are essential to avoid marrying early. This last loss in earnings employability. In Uganda as in other parts alone is estimated at more than US$ 500 million of SSA, the share of non-wage informal during the same period. employment is likely to change very slowly. On average, across countries in Sub-Saharan On the other hand, lower secondary education Africa, eight of every 10 jobs are in agriculture is critical to building the skills—cognitive or non-farm household enterprises. In the and socio-emotional—which will be vital for future, manufacturing and services are realizing the development potential of today’s expected to become more important sources youth. While many of the secondary educated of jobs. However, the movement of labor out youth won’t be able to find employment in the of agriculture in SSA has been slower than in public or the modern sectors of the economy, the rest of the world, and projections show through self-employment they still can seize that even in optimistic scenarios, the share of opportunities and create a decent living for non-wage informal employment – mostly low- themselves and family members on farms productivity and low-earning jobs – is likely to or in non-farm businesses. Some of them, remain high for a long time. with solid entrepreneurship skills, may even be able to create growth-oriented businesses Despite the slow transformation of the content and employ non-family labor. Finally, of jobs, Uganda is at risk of hindering its future the pace of technological change requires economic growth by underinvesting in the tomorrow’s workforce to possess solid digital education of its citizens. Primary and lower skills and competencies that enable them to secondary education are critical education regularly use the internet for digital financial levels affecting both social cohesion and inclusion, or to access other government or economic growth. Up to the lower secondary commercial services. Disruptive technologies level, education is needed for more than present leapfrogging opportunities in many earning income—it enables all aspects of youth areas which can be seized only by digitally transition from dependence to independence, literate workers. These entrepreneurship and plays an important role in building citizenship digital skills and competencies can hardly and unity, and has powerful effects on several be acquired if a worker hasn’t completed the positive social behaviors, such as reducing lower secondary cycle. This is confirmed by fertility and preventing child marriage. As labor market outcomes: in 2017, while only noted in a World Bank publication,37 ending 25.6 percent of children completed this level in child marriage today in Uganda could generate Uganda, analyses of the UNHS 2016/17 show by 2030 up to US$2.7 billion in annual benefits that private returns to education are estimated (in purchasing power parity terms) simply from to be on average 15.8 percent higher for those lower population growth and a reduction in with lower secondary than for those who rates of under-five mortality and stunting for completed primary education.38 37 Wodon, Q. et al. (2018). 38 Wodon, Q. (2019). PAG E | 37 UGANDA ECONOMIC UPDATE, 13TH EDITION The next sections will review the state of the secondary education expands. Only then will education system, analyze the reasons why Uganda start to reduce the learning gap that Uganda has been underinvesting in education separates it from a number of comparator and suggests critical strategic directions and countries in the region and to provide better policies to boost its human capital. As Uganda economic opportunities for all citizens. It is seeks new drivers of sustained, inclusive also worth noting that this report focuses on growth, the pressure on skills building will the part of the education system that lays the grow. The country’s growing working-age foundations for improvement in productivity. population will represent a major opportunity The higher, technical and vocational education to reduce poverty and increase shared levels further build the skills of the population prosperity when the quality of education when these foundations are solid. They will improves and when the coverage of lower need to be addressed in a separate report. PAGE | 38 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 4. STATE OF THE EDUCATION SECTOR 4.1. Status of access in primary and secondary education in Uganda Uganda is one of the pioneers in Sub-Saharan primary education for children of underserved Africa in terms of setting the goal to achieve families. universal access to basic education. After Universal Primary Education (UPE) was introduced in 1997, primary school enrolment Uganda Education System: increased at a rapid pace, growing from 2.5 Primary level – 7 years, P1-P7 million learners in 1996 to 8.3 million in 2015. Lower secondary level – 4 years, S1-S4 As a result, the primary GER increased to 118 Upper secondary level – 2 years, S5-S6 percent in 2011 and stabilised at 111 percent in 2017. As part of the UPE agenda, in 1997, the Government of Uganda (GoU) formally Overall, Uganda’s progress in increasing abolished primary school tuition, Parents and enrolment in primary education is on par with Teachers Association fees, and textbook fees for regional comparator countries (see Figure 14). up to four children per family.39 The expansion Uganda’s GER is higher than Kenya due to of primary education has therefore been pro- relatively more under- and over-age children poor. Indeed, various studies indicate that at the primary level (see below). the UPE policy effectively improved access to Figure 14: GER (%), by Grade 1-6 (standardized) and year Source: Adapted from Bashir et al. 2018.40 Note: GER calculated from analysis of UNESCO Institute of Statistics data. 39 Kan, S., et al. (2018). 40 Bashir S., et al. (2018). PAG E | 39 UGANDA ECONOMIC UPDATE, 13TH EDITION However, despite immense progress towards as well as policies to reduce overcrowding in achieving universal access to primary the early grades.45 education, overwhelming population growth - the student population tripled between 1997 Moreover, the expansion of primary education and 201441 - poses a serious problem to the has not been matched by a similar expansion system. With the absolute number of students in secondary education. Though enrolment in gradually increasing, as a consequence of the secondary education has been growing since growing sizes of each school cohort, a significant the introduction of the Universal Secondary percentage of those who enter primary school Education (USE) policy in 2007, the pace do not reach the final primary grade. Indeed, of growth has been insufficient to offset primary completion rates for Uganda42 demographic growth. Although enrolment are very low and have not shown much increased from 954,000 students in 2007 to improvement for nearly a decade, standing 44 over 1.5 million in 2016, the GER remained percent in 2017 (see Figure 22).43 Low quality stagnant, at 25 percent since 2010. When of education service delivery also appears to focusing on the lower secondary cycle alone, be playing an important role in these low rates which again is the minimum level expected of primary completion. This is evidenced by to be attained by every citizen, since 2010 high repetition rates (at P1 about 10-12 percent the GER has been consistently confined to p.a. officially, but likely much higher as will be between 31 and 35 percent (Figure 15). This last seen later) which are associated with high rates rate is significantly lower than in neighbouring of discouragement and dropout.44 Although Kenya, Rwanda and Ethiopia, where it stood many factors contribute to low completion at 58 (2009), 37 (2016) and 38 percent (2012,) rates, one plausible explanation is that the rapid respectively (more recent data is unavailable)46. expansion of the primary education system As can be expected, the lack of opportunities was not accompanied (often due to capacity of progression to secondary education constraints) by adequate pro-active measures discourages many students from completing to introduce quality standards, boost learning, primary education. Figure 15: GER at lower secondary Source: EMIS 2010-2017. 41 UNICEF, (2019). 42 Measured by the International definition of survival to the start of the last grade in primary. 43 This is according to analyses of household surveys. For more details see Figure 22 and related footnotes. 44 Global Partnership for Education Project Appraisal Document (PAD), (2014). 45 Bashir et al. (2018). 46 UNESCO Institute of Statistics, (2019). PAGE | 40 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION The stagnant enrolment rate in secondary schools to absorb the growing demand or costs education is to a large extent a consequence associated with the schooling. The recent of the declining transition rate from primary influx of 1.2 million refugees, among them to lower secondary education. This rate has secondary education aged children estimated declined from 72 percent to 6147 percent of the to number at least 132,000 (in eight out of 12 graduates from 2013 to 2017 (Figure 16). The refugee hosting districts), only worsened the main barriers to improved transition rates are situation.49 In addition, the evidence suggests low P7 pass rates48 in the Primary Leavers that the distribution of secondary schools Exam (PLE), which stood only at 47 percent throughout the country is not related to actual in 2017 according to the Uganda National demand, and likely reflects other (often supply Examinations Board. Further barriers are driven or political) priorities. due to an insufficient number of secondary Figure 16: Transition rate to S1 Source: EMIS 2010-2017 47 Transition rate is defined as the number of children who transition to S1 as a proportion of students who passed PLE. 48 Pass rates are defined as the number of children who passed the PLE as a proportion of children enrolled in P7. 49 The refugee enrolment data for Kampala, Hoima, Koboko and Lamwo are not available mainly due to the fact that the said settlements are relatively new. PAG E | 41 UGANDA ECONOMIC UPDATE, 13TH EDITION As a result, Uganda has been lagging behind its since 2000. This is considerably worse than neighbours in terms of improving enrolment at most low-income countries shown in the the lower secondary level. As shown in figure graph, and leaves Uganda with a long way 17, despite fast growing demand, barely any to go to achieve universal lower secondary progress has been made to increase enrolment enrolment. Figure 17: Lower-Secondary GER of 34 Sub-Saharan African Countries, by group, 2000 and most recent year Source: Adapted from Bashir et al. 2018. PAGE | 42 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 4.2. The learning crisis While the UPE policy resulted in considerable 18). Numeracy skills are equally poor - only gains in terms of access to primary education, 2 percent of students in Uganda could solve a this was not accompanied by adequate simple, age-appropriate mathematics problem progress in learning outcomes. Only 6 percent by the end of P4. This is much below peers in of students in Uganda can read a paragraph at Kenya and Tanzania, who achieve 10 and 9 the end of the fourth grade (P4), which is well percent, respectively (see figure 19). below the comparator countries (see figure Figure 18: Selected reading skills, 4th grade Figure 19: Selected math skills, 4th grade50 Source: Adapted from Bashir et al. 2018. According to the last national assessment of Sub-standard student learning achievement is progress in education (NAPE) administered in to a large extent predetermined by the lack of 2014, the proportion of P6 pupils who reached support from teachers. Teacher absenteeism the defined proficiency levels in Numeracy is high and pedagogical and subject specific and Literacy in English was 39.4 percent and skills are lacking. The Service Delivery 38.3 percent, respectively. This means that less Indicators study (2013) found that on average than half of the P6 pupils have acquired most 24 percent of teachers across primary schools of the competencies in Numeracy and English are absent from school on any given day, and Literacy specified in the P6 curriculum. of those who are in school only 39 percent are actually in classrooms and teaching. 50 Data represented by blue bar unavailable for Uganda. PAG E | 43 UGANDA ECONOMIC UPDATE, 13TH EDITION The absenteeism rate is higher in public schools the large number of subjects suggests that the (27 percent) as opposed to private schools (14 emphasis is still on learning facts rather than percent). Teachers suffer from lack of basic on critical thinking and problem-solving skills. subject knowledge and pedagogical skills, e.g. On a typical school day, students are expected only 21 percent of grade 4 math teachers could to sit through 10 lessons of 40 minutes each compare fractions and 25 percent could assess (i.e. about 30 minutes of effective teaching students’ abilities. Some recent improvements time51), which is way beyond what is optimal in teacher attendance and performance for learning. can be observed under selected projects (often supported by donors), however, areas Despite the curriculum reform being not targeted by such interventions seldom underway, which will reduce the number of demonstrate improvements. subjects from 40 to 21 at the lower secondary level, inefficiencies related to overloaded Low learning outcomes in secondary education. curricula will remain until the number of Results of the NAPE conducted since 2008 and subjects proposed by each school is drastically targeting Senior Two (S2) students show that reduced. The current practice in most lower student learning in math, biology and English secondary schools is to offer about 15 subjects, is on a declining trend. According to NAPE seven compulsory and eight electives. This (2014), there was a continued decline in the results in a very high number of teachers proportion of S2 students rated proficient in working well below the standard for teaching English language in the period 2008 – 2013. hours in comparator countries,52 or their This proportion dropped from 81.9 percent official workload of 16 hours per week. in 2008 to 43.1 percent in 2013, with a small Uganda has one the lowest weekly teaching increase to 49.3 percent in 2014. loads in the region, and its official annual teaching time is well below the standard in At the lower secondary level, the learning many middle-income countries captured by crises is largely underpinned by an array the World Education Indicators Survey.53 For of inefficiencies related to an overcrowded instance, a typical lower secondary school in a curriculum as well as arbitrary allocation of rural area would have one stream54 only and teachers to schools. Currently the number of less than 250 students in order to be close to different subjects in secondary schools remains local communities. Despite its small size, such too high at 40 and out of line with modern school would endeavor to offer 15 subjects to its pedagogic practices, which favor consolidation students and would need a director, a deputy in a fewer number of subjects to encourage director and about 10 teachers to cover all teachers and students to use multi-subject subjects. Even by assuming that each teacher approaches to teaching and learning. Moreover, covers two subjects, each of them would teach 51 This is considering that 10 minutes are necessary for students and teachers to move from one classroom to another and get ready for the next lesson. This then leaves 30 minutes of “effective” interaction between the teacher and students, which is “effective teaching time”. 52 The average for lower secondary teaching hours in Anglophone Sub-Saharan African countries is around 19.5 hours per week. Source: Mulkeen, A. (2010). 53 Ibid. 54 One class of students per grade. PAGE | 44 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION only about 13 hours per week, which is below This results in substantial inefficiencies and the standard teaching load. In the context additional costs. According to the National of constrained fiscal space, poor teacher Education Accounts (NEA) the cost of service utilization decreases the overall efficiency of provision of lower secondary education is 4.5 the system and increases the government’s times higher per unit than the cost for primary costs per student.55 education, against 1.7 and 1.9 in Senegal and Côte d’Ivoire, respectively (NEA). Consequently, The issue is further exacerbated by poor the government pays for a bloated teacher teacher distribution. As suggested by the graph force which is neither used to its full capacity below (figure 20),56 the allocation of teachers nor efficiently distributed, and that’s a key to schools doesn’t seem to follow a clear reason for the lack of fiscal resources to expand pattern or to be aligned with actual needs. enrollment and raise quality. Poor deployment practices, therefore, result in further additional costs to the government. Figure 20: Teacher distribution according to secondary school size 55 Mulkeen, A. (2010). 56 A common approach for evaluating the degree of inconsistency (randomness) in teacher allocation across schools is to regress school-level data on the number of teachers against the number of students. The regression can be taken as measure of the share of variation in teacher allocation across schools explained by variation in enrolments; conversely, the regression provides a measure of the inconsistency of teacher allocation. PAG E | 45 UGANDA ECONOMIC UPDATE, 13TH EDITION 4.3. Regional and gender disparities As mentioned in the previous section, the districts in the region, and below 10 percent expansion of primary education has been for many of them (Figure 21). There are also pro-poor, and therefore equity of access has dramatic disparities between urban and rural significantly improved. However, access areas. For instance, the GER in the capital city to secondary education remains highly of Kampala was over 50 percent in 2015 while it inequitable. As shown before, access to lower was 10 times lower in rural Kaabong (Karamoja secondary remains largely insufficient to meet district). Variations by welfare quintiles also the growing demand due to inadequate supply reveal that secondary school enrolment and distribution of schools. Consequently, drops sharply with decreasing welfare, from important inequities exist by region, location, 41 percent for the fifth (highest) quintile to 7 wealth, and gender. The Northern region lags percent in the lowest quintile.57 Disparities in far behind in terms of access with a GER below completion58 rates are evident between rural the national average of 28 percent (in 2015 areas, at 6.5 percent, and urban areas, at just for lower and upper secondary) for nearly all over 14 percent. Figure 21: Gross secondary enrollment rates per regions and districts (2015) Source: Uganda Bureau of Statistics and own data. 57 National Household Survey 2012/13. [Data on wealth and enrolment disparities not included in the 2016 National Household Survey] 58 Completion rate here is defined as children completing primary seven as a proportion of children entering primary one. PAGE | 46 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION These regional and wealth related disparities Violence against children in schools is pervasive are much more pronounced for girls. Compared and has proven to have negative effects on to boys, girls’ secondary education experience physical and mental health, which in turn can is characterized by lower access, higher adversely affect educational attainment. A dropout, and lower transition rates. In 2016 recent study identified that 93% of boys and the enrolment rate for boys was four percent 94% of girls, aged 11-14, experienced physical higher than for girls at 29 and 25 percent violence in schools. Sexual violence is also likely respectively, and the Gender Parity Index (GPI)59 to be high, but it tends to be underreported was 86 percent. Nationally, about 25 percent of due to the stigma associated with these girls drop out of school because of pregnancy - experiences.61 the levels are higher in Eastern Uganda at 37.3 percent and in West Nile at 32.3 percent (MoES Early pregnancies and marriage are the 2015). Completion rates for Senior 4 boys stood primary reasons negatively affecting girls’ at 40 percent against 36 percent for girls (EMIS education and have important social and 2016). This is due to several gender-specific economic consequences. At the national level, factors including the practice of son preference, the primary reason for a girl dropping out of low value attached to girls’ education, and high secondary school is early pregnancy at 40 levels of V AC - which predominantly affect percent, marriage at 28 percent, and cost of girls - in schools, home, and communities. schooling at 7.3 percent.62 Though the incidence The disparity widens at the transition point of child marriage and early pregnancy has to Senior 5 with 34 percent of boys and only declined over the years, Uganda’s levels of 24 percent of girls transitioning to upper child marriage are above what would be secondary. Moreover, learning outcomes for expected at its level of income. The share of girls tend to be significantly lower than that women aged 18-22 who married before the age for boys in certain subjects. For instance, in of 18 was 36.5 percent according to the 2011 2016 only 33 percent of girls in Senior 2 were Demographic and Health Survey (latest). One proficient in mathematics in comparison with in seven women aged 18-22 have their first 49 percent of boys.60 child before the age of 18.63 The probability of completing secondary education for a woman aged 25-34 who married after 18 is 12.9 points higher than for women who married earlier. 59 According to UNESCO Institute for Statistics: ‘GPI is a ratio of female to male values of a given indicator (…) GPI equal to 1 indicates parity between females and males. In general, a value less than 1 indicates a disparity in favour of boys, and a value greater than 1 indicates a disparity in favour of girls.’ 60 Education and Sports Sector Annual Performance Report, FY16-17, pp. 200 – 201. 61 Raising Voices (2017). 62 Ibid, pp. 5. 63 Wodon, K. (2016). PAG E | 47 UGANDA ECONOMIC UPDATE, 13TH EDITION 4.4. The early grade ‘bulge’ and its impact on the quality and efficiency in primary education Primary education in Uganda is characterised schooling than normal to produce a graduate in by one of the lowest survival rates in the region. primary and secondary education. On average In 2017, while most school aged children it took 12.6 years for a primary school student start primary education, their survival rate to graduate (primary cycle in Uganda is seven at the end of P7 stood at 44 percent, which is years). Moreover, there hasn’t been much considerably below the primary survival rate improvement over the last decade and recent in Kenya at 95 percent (grade 8), Ethiopia at 63 survival rates are only marginally better than percent (grade 8), and Rwanda at 68 percent the 14 years of schooling it took to produce a (grade 6) (Figure 22). Because of this low overall graduate in 2008. efficiency, it takes almost twice as many years of Figure 22: Survival rates in primary education Source: Bashir et al. 2018.64 64 Analysis of microdata (most recent year) from the World Bank Living Standards Measurement Studies (Burkina Faso, Cote d’Ivoire, Democratic Republic of the Congo, Kenya, Malawi, Rwanda and Uganda); and the Demographic and Health Surveys (Ethiopia, Ghana, Mozambique, Nigeria, and Senegal). Note that the “survival rate” is the percentage of a cohort of students enrolled in first grade, in a given school year, who eventually reach grade six and grade nine, regardless of repetition. Survival rates are estimated using the reconstructed cohort method. PAGE | 48 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION The low survival rates throughout the primary age, 6 and 7 years old, parents and teachers cycle are due to a variety of factors, chief among reported up to 44 percent of pupils aged 8 years them is repetition in the early grades and its and older are still enrolled at that grade (Figure consequences. The analysis of the age profile of 23).66 The difference is particularly high for primary education students reveal the existence overage children, suggesting an underreported of some underage children as younger children issue of repetition in the first grade.67 Official accompany their older siblings to school when statistics (EMIS) report repetition rates in P1 parents cannot look after them. Still, the rate to be 11 percent. However, teachers reported of overage children65 in the early grades is repetition rates in P1 to be 41 percent, while especially high. While official statistics show parents/guardians perceive repetition rates to that most students enrolled in P1 were at target be as high as 51 percent.68 Figure 23: % of pupils per age group in P1 by source Source: RTI, DFID, 2018. The repetition issue creates an enrolment “bulge” or “traffic jam” takes a heavy toll “bulge” in early grades, which is both costly on the quality of teaching and learning, as and counterproductive. On average, children it translates into overcrowded classrooms, spend 1.4 years in P1 suggesting an early demotivated and overworked teachers, and grade ‘bulge’ problem of 40 percent. The same a shortage of teaching and support material, issue persists through P2 and P3, though to especially textbooks. Numerous empirical a lesser extent. This so-called early grades studies have demonstrated that repetition is 65 According to the Uganda Education Act (2008), target age for P1 is 6 and 7 years old. Children entering P1 below this age group are categorised as ‘under-age’, while children entering P1 aged 8 or more are classified are ‘over-aged’. 66 Weatherholt, T. (2018). 67 Ibid, pp. 14. 68 Ibid. PAG E | 49 UGANDA ECONOMIC UPDATE, 13TH EDITION costly and does not improve the achievement the education community has amassed a solid of the low-achiever, nor does it reduce the body of knowledge that points to the fact that range of abilities in a classroom.69 By contrast, implementation of an automatic promotion where automatic promotion was implemented policy in early grades, together with quality in conjunction with quality-enhancement enhancement measures, would in most cases measures, including in SSA, it fostered equity be associated with more fluid student flow, in learning outcomes, especially between male higher efficiency, positive impacts on learning and female students and between rural and outcomes and higher gender and urban/rural urban settings.70 equity. Automatic promotion policies are not unknown Another factor contributing to high repetition in Uganda, and have at least been experimented rates in early grades is the shortage of pre- with, showing clear and multi-dimensional primary programs.74 The vast majority of benefits. A recent study71 suggests that the Ugandan children are totally unprepared when implementation of an automatic promotion they enter primary education and P1 curriculum policy in Uganda in 2005 translated into an does not respond to the needs of those who did increase in learning outcomes in reading and not attend pre-primary education. In 2016, mathematics at P3 and P6. The same study the official GER for pre-primary was only 13 shows that decomposing the effect along percent. As government funding does not gender and school location (rural or urban) support delivery of pre-primary education – the dimensions reveals positive and statistically sub-sector is entirely financed by the private significant effects on literacy and numeracy sector (e.g. families and donors) - these services in both grades, an effect on students’ scores tend to be concentrated in urban areas and in rural areas higher than that on students’ serve wealthier families. This creates a major in urban schools and, in terms of gender, the inequality factor as children from low socio- effect is relatively similar for female students economic backgrounds are less likely to attend and their male counterparts. However, pre-primary than pupils from high socio- the recent data reveals72 that the current economic backgrounds75, and, consequently school practices do not adhere to the policy are nearly four times more likely to repeat of automatic promotion and need to be re- early grades of primary school than those who examined by Ugandan policymakers. While did. As a result, creating more opportunities it is recognised that the automatic promotion for children to access pre-primary education policy alone will not address poor learning should be considered another high impact outcomes,73 if it is implemented consistently policy that could, at the same time, improve and accompanied by quality-enhancement learning acquisition and reduce the enrollment measures, it can yield positive results. Indeed, “bulge” at the early grades. 69 Ndaruhustse, (2008); and Peterson et al., (1987). 70 Chen et al., (2010); and McCoy & Reynolds (1999), Ndaruhustse (2008). 71 Okurut, (2015). 72 Weatherholt, T. (2018). 73 Glick, P., & Sahn, D. E. (2010). 74 Bashir et al. (2018). 75 Ibid, pp. 26. PAGE | 50 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 5. EDUCATION FINANCING AND PROSPECTS 5.1. The private sector and households – powerful allies toward the achievement of education goals In 2013/14, households contributed more than percent of total education financing, while the half of education expenditures, or 3.6 percent rest was shared between the local and central out of the 6.3 percent of GDP spent on education. governments and external financing (Figure Households’ contribution was equal to 57 24). Figure 24: Breakdown of education funding in Uganda by source, 2009/10 – 2013/14 Source: NEA data 2009/10 – 2013/14 Households contribute to education through by households at the primary level and 38 fees and other payments to schools. These are percent at the secondary level.76 The absence of most significant in private schools and at the a transparent framework that holds the schools secondary level. However, even in the public or their parent associations accountable for the system, supplementary payments – for items efficient management of these co-payments is such as uniforms, teaching materials, additional the main reason why they are under-reported. teachers and other expenses – still represent 56 percent of the education expenditures funded 76 Government of Uganda, International Institute for Educational Planning and IIEP-Pôle de Dakar. 2016. National Education Accounts Report. Kampala. PAG E | 51 UGANDA ECONOMIC UPDATE, 13TH EDITION It is highly unusual to see as much a share considering the source of funding at each level coming from households. Comparable National of education, households fully pay for pre- Education reports show that households primary education, and cover 58, 63 and 78 fund approximately a quarter of education percent of the costs of primary, lower and upper expenditure in Vietnam, one-third in Côte secondary, respectively (Figure 25). These are d’Ivoire, and about a half in Nepal,77 against relatively high proportions for the region. 57 percent in Uganda (Figure 24). When Figure 25. Source of funding per student by level of education (both private and public education) Source: NEA data 2009/10 – 2013/14 77 UNESCO. (2016). PAGE | 52 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION The non-state actors in Uganda contribute owing to barriers such as high costs. At the significantly to increasing access to, and primary level, up to 20 percent of total enrolled delivering, a quality education (see Box 7 for pupils are in private schools. At the secondary more information). For example, pre-primary level, up to 53 percent of total enrolled students education delivery is a preserve of the private are in private schools. Indeed, the stagnation of sector/non-state actors, according to the Early the lower secondary education enrolment rates Childhood Education (ECE) Policy. Research over the past decade could have been worse on the demand for ECE in Uganda shows that if not for solid capacity growth in the non- there is significant unmet demand for ECE government education sector. Box 7: Public-Private Partnerships (PPPs) in Uganda Since the introduction of the Universal Secondary Education (USE, 2007), a PPP policy has allowed the GoU to meet the increased demand for education services. It involved providing a government subsidy of approximately US$13 (Ush 47,000) per student, per term to private USE schools (O’Donoghue, J. et al., 2018). The PPP policy contributed significantly to the expansion of access to secondary education – it grew to cover over 800 schools in 2016, compared to only 363 in 2007. Indeed, a recent evaluation done for the government (O’Donoghue, J. et al., 2018) finds that 30 percent of students, or approximately 130,000 students, enrolled in PPP schools wouldn’t be enrolled were it not for the government subsidy. In addition, the PPP subsidy also allowed the government to expand access to secondary education in a more cost-effective manner compared to investing in expanded public provision. In terms of achievements, the PPP USE schools deliver similar academic performance to public schools, but at a lower cost. However, in 2014 the government first called for the PPP programme to be ended and these funds channelled to construct more public secondary schools in order to realise the policy of having a secondary school in every sub-county. In addition, it is the government’s perception that the quality is low in some private schools and that the subsidies are being misused. Thus, in January 2018, the government officially announced its gradual withdrawal of the USE PPP policy. While government’s perception may be true in certain cases, it is not a sufficient reason for ending the PPP subsidies given the similar performance of the non-state schools and public schools. Instead, as proposed by the same evaluation (O’Donoghue, J. et al., 2018), the government’s concerns could be addressed more effectively through a better policy framework, improved engagement by the government, and stronger regulation of the non-state sector. Source: A review of Uganda’s Universal Secondary Education Public Private Partnership programme. James O’Donoghue, Lee Crawfurd, Jacklyn Makaaru, Polycarp Otieno, and Rita Perakis, April 2018. PAG E | 53 UGANDA ECONOMIC UPDATE, 13TH EDITION 5.2. Education prospects Uganda’s education system is plagued with private sector provision in Uganda has been internal inefficiencies such as high repetition critical in supplementing public expenditures and dropout rates, and low completion rates, for capital investment and recurrent costs.78 at both primary and secondary levels. The Indeed, an evaluation of Uganda’s USE PPP main elements that drive the problem of low policy suggested that this policy has been very internal efficiency include the early grades cost effective. It has been estimated that the ‘bulge’ due to under and over-age enrollment, recurrent unit cost to government at a public high repetition and dropouts throughout the USE school is 4.5 times higher than in a private primary education cycle (often associated with USE school, while producing similar learning poor learning outcomes), and low transition outcomes.79 from primary to secondary cycle. If not compensated by a massive increase in the All these inefficiencies mean that the public provision of secondary education, the government is continuously losing resources by phasing out of the USE PPP scheme will likely spending on repeaters and those students who lead to a sharp decline in enrollment. Creating drop out before completing the cycle. According additional capacity in the public sector to to estimates from 2017, inefficient public compensate for this decline, without changing spending on students who repeat and drop-out the current inputs mix, is likely to cost at least amounted to USh 298 billion (US$ 82 million) US$ 110 million of additional government or 24 percent of the overall public spending in expenditures by 2022 (i.e. during the phasing primary education. Although very high, these out period). This estimate uses the assumption estimates are still conservative as they do not that 20 percent of children studying in account for the cost of the numerous students private USE schools (who have been receiving who do reach the upper grades of primary government subsidies) will drop out, as families education, but do not achieve basic literacy and are unable to cover school-related costs such as numeracy skills. uniforms and fees to schools. The remaining 80 percent of the students will transfer to public In addition, the growth of the private education schools or continue in private institutions sector is expected to slow given gradual (assuming a 50:50 split) (Figure 26). According phasing out the USE PPP program, which to these estimates, the additional fiscal burden had been supporting students in private on the government would be at least three schools. Although the decision is expected to times higher than what it would have been have considerable implications on Uganda’s for the same level of enrollment had the PPP ability to achieve progress in the provision of scheme not been phased out. secondary education, it is too early to assess its full impact. Among other things, the 78 Wodon, Q. (2016).. 79 O’Donoghue, J., et al. (2018). PAGE | 54 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION Figure 26: Effect of USE PPP phaseout (students in public and private lower secondary schools, thousands) Source: World Bank estimates based on EMIS data. With the system’s current quality, efficiency, demographic growth of the corresponding age financing characteristics, trends and recent group, secondary education GER is likely to policy changes, it is expected that enrollment fall to 22 percent by 2025, from the current rates in secondary education will decline by 25 percent. Correspondingly, lower secondary 2025, even though the number of students will GER will also decrease from the current 32 continue to grow (see Figure 27). Enrollment is percent to 27 percent by 2025. This would be a estimated by averaging intake, promotion and major setback, rarely seen in any country in a dropout values from the recent years at P1, and time of peace. This ‘Business as Usual’ scenario each subsequent grade of primary and lower is one where the enrollment objectives of the secondary education. Because this growth of current 2017/18-2019/20 Education Sector enrollment is expected to be exceeded by the Strategic Plan (ESSP) will not be achieved. PAG E | 55 UGANDA ECONOMIC UPDATE, 13TH EDITION Figure 27: Projection of primary and lower secondary enrollments (bars, left axis, million pupils) and GER (lines, right axis, percent), 2017-2025 Source: World Bank, 2019 To reverse this trend and achieve the ESSP scenario, the system’s efficiency is gradually enrollment objective for secondary education improved and a lower secondary GER of of 35.5 percent by 2025, a 46 percent GER in 46 percent can be achieved at a cost which lower secondary is required.80 This, in turn, could be within Uganda’s resources and fiscal will require government to improve transition capacity (see Figure 28). This is the ‘Alternative’ and overall efficiency across primary and lower scenario, which will be discussed in the next secondary. Under a revised fiscal and policy section. Figure 28: Gross Enrollment Rate in Lower Secondary Education under two scenarios Source: World Bank estimations 80 Given this report proposes measures targeting primary and lower secondary education, the assumption is that key parameters (e.g. enrollment rates) for upper secondary will remain unchanged. PAGE | 56 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION PAG E | 57 UGANDA ECONOMIC UPDATE, 13TH EDITION 6. BUILDING UGANDA’S HUMAN CAPITAL TO BOOST ECONOMIC GROWTH: ALTERNATIVE SCENARIO AND RECOMMENDATIONS 6.1. Policy recommendations to achieve the alternative scenario As seen in previous sections, Uganda has Building Uganda’s human capital requires been underinvesting in its human capital and drastic measures and actions to improve therefore falling behind its neighbors. This puts the LAYS, which will need to grow from 4.5 the country at risk of reducing its potential for currently to at least 5.5 by 2025 (i.e. a 20 percent growth. To reverse this trend, the GoU needs increase). To achieve this ambitious goal, to set clear objectives regarding the main Uganda needs a three-pronged strategy that components of the HCI, including reducing aims at: (i) improving the quality and completion child mortality and stunting, and increasing rate of primary education, (ii) rapidly expanding adult survival and the Learning-Adjusted Years access to lower secondary education, while of School (LAYS). There is a broad agreement improving its quality, equity and efficiency, that this can be better achieved if, at the same and (iii) devising ways to finance such efforts time, the fertility rate is on a rapidly declining in a sustainable manner. Improving completion trend, especially if it involves better access to of primary education and expanding access education for adolescent girls. to lower secondary education would increase a child’s expected years of education, while Uganda needs to achieve universal education improving quality would reduce the number up to lower secondary level as quickly as of years which are currently lost because of possible. Separate goals and policies for lower poor learning achievement. Together, the two (S1 to S4) and upper secondary education (S5 to results would combine to increase Uganda’s S6) need to be set. For the reasons stated earlier, LAYS indicator and, subsequently, its HCI and lower secondary education is an essential the productivity of its workers. building block of citizenship and plays both a social and economic role, and Uganda should The next section identifies key policies that will seek to make it universal as soon as possible. reduce inefficiencies in the primary and lower Whereas, upper secondary education prepares secondary cycle, thereby boosting enrollment for further professional and academic careers and using financial resources more efficiently. and thus has a unique value in the labor market. The policy recommendations will lead to Accordingly, upper secondary expansion needs efficiency gains that will, in the medium term to be consistent with enrollment capacities in (2019-2025), partly offset the initial investment higher or technical and vocational education, related to the implementation of these policies, as well as with labor market demand and and, in long term (post 2025), generate expectations from families. Growth in the substantial savings for the government. supply of upper secondary education that is either too rapid or too slow may create mismatches between the supply and demand for higher level skills, which can lead to adverse social and economic effects. PAGE | 58 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 6.1.1. Primary Education: improving quality To be able to achieve such an ambitious goal, the and completion rates government needs a two-pronged approach: It is an imperative to raise the completion rate First, whenever possible the government of primary education to close to 100 percent, should add pre-primary classes to existing while improving quality, by 2025. A few primary schools. Its potential to reduce class- countries in the region are already at that sizes in Uganda will be highest in schools level (Ghana, Mauritius, Kenya, Togo81). As where the proportion of under-aged children already discussed, while nearly every child is significant (for instance, where younger gets a chance to start primary education, only children accompany their older siblings to 44 percent reach the end of primary (P7) and, school when parents cannot attend to them). of those who reach that level, only about half However, lack of adequate school infrastructure acquire the minimum level of skills expected. may limit the scope of this approach in its initial To address these issues, the government needs phase. to expand pre-primary education and ECE programs and enact and enforce a policy of Second, an approach is needed to harness automatic promotion in the early grades with the benefits of community-based and public- appropriate qualitative inputs. private partnership programs that are cost- effective and could quickly lead to substantial 1. Pre-primary education and early gains (as evidence has shown in other childhood education programs expanded countries). Subsidies could be offered to support The Government should adopt the recently vulnerable children, who are most at risk of developed Early Childhood Care and Education repeating and dropping out of primary school. Policy. The policy implementation shall aim at These subsidies could be channeled through achieving a concrete target: the proportion of qualified ECE providers or directly to families. children with access to pre-primary programs should increase from 13 percent to 50 percent 2. Automatic promotion policy consistently by 2025. This ambitious target is required to implemented in primary education with bring the indicator closer to current levels of accompanying quality-enhancement pre-primary coverage in Kenya, at 77 percent, policies or Ethiopia, at 60 percent. This would ensure Automatic promotion policies were intended that by 2025, half of the children would benefit to reduce repetition, but are not consistently from programs that stimulate their readiness practiced/enforced by schools, despite evidence to learn and, thus, would be less likely to repeat suggesting their effectiveness in eliminating or drop-out from the early grades. In addition, the enrollment bulge and in improving most early childhood interventions have learning.82 However, these policies need to be positive impacts on children’s emotional and clearly defined and their implementation needs behavioral skills and improve children’s health to be preceded by adequate communication and safety. and consultations with stakeholders to avoid backlash. They also need to be implemented 81 World Bank WDI, (2017) or the latest available data. 82 As stated earlier, early grades repetition levels are under-reported because they are not well captured in official statistics. PAG E | 59 UGANDA ECONOMIC UPDATE, 13TH EDITION in conjunction with quality-enhancement 6.1.2. Lower secondary education: improving measures, such as ECD expansion, remedial access, quality and efficiency courses for under-achieving students, and improving the quality of instruction in early Increasing the lower secondary education grades. In particular, textbooks and teacher enrollment rate from 32 to 46 percent by training are essential resources that need 2025, while reducing geographical and gender to be made more available to every school. equity, is achievable. To realize this goal, the Although the number of English language and government needs to build lower secondary Mathematics textbooks per student improved schools in underserved areas and closer to significantly in recent years, textbooks for communities to make it easier for students, other subjects are still lacking. While most especially girls, to attend. To this end, the teachers received pre-service training and MoES has adopted the ESSP which consists of are certified, many of them still do not have increasing the number of one-stream lower the basic understanding of their respective secondary schools, designed to accommodate subject areas or pedagogical skills. Therefore, 240 students, or 60 students in each of the four additional efforts are required to ensure that levels of lower secondary. teachers receive ongoing support from peers and head teachers, and that school-based However, what works efficiently in a inspection is performed at every school to guide 1,000-student school in terms of curricula, changes in teaching and learning practices. teachers and teaching resources, leads to a Finally, schools need to be further incentivized highly inefficient configuration when a school to ensure that teachers are more frequently is a fourth of that size. For instance, in smaller present in classrooms. schools the laboratories and libraries tend to be used less frequently and teachers are 3. Improving transition to lower secondary underutilized. At the same time, government will need to pay the full cost of these resources. One way to address the issue of low transition In addition, in many cases, capital costs are could be by abolishing examinations in the final higher in smaller schools, which are often grade of primary – a practice that governments located in rural areas (and thus teacher are adopting more widely in the developing and housing is required). Therefore, the capital and developed world alike. The rationale for such recurrent costs need to be rationalized to keep a policy is that most countries now consider the unit costs per student sustainable. primary and lower secondary education as part of the same foundational education level, often A new model of sustainable expansion of lower called basic or foundational education, which secondary education in Uganda needs to be they are making compulsory. However, this developed and implemented, in which capital isn’t a costless policy option as it will require investments in school construction, as well as continuous monitoring of education quality by recurrent costs, are optimized. Key elements of administering formative student assessments such a model are described below. throughout the primary cycle. Moreover, uprooting a strong public belief that a final 4. Building schools in a cost-efficient primary exam is necessary would require manner mindset shifts, which can be achieved through social campaigns and outreach. Achieving lower secondary GER of 46 percent will require constructing facilities needed to accommodate about one million additional students. Expanding at this scale and pace, in a PAGE | 60 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION sustainable manner, would necessitate revising pupils per classroom is at 55:1, meaning the current standards for school construction. that the equivalent of more than 1,000 The following adjustments are proposed: classrooms are not in use. Better utilization of the existing infrastructure can reduce a) Provide teacher housing only where most the number of new classrooms required. needed. Estimates suggest that costs of d) Two-stream schools should be considered as an housing for six teachers is similar to the efficient option in areas with a high population costs to build seven new classrooms. Thus, density and unsatisfied demand for lower providing housing for more than half of the secondary education. Larger schools in such new schools is very expensive and likely to areas will substantially reduce capital and impede expansion goals. recurrent costs (i.e. unit cost per student). b) Employ classroom libraries, rather than dedicated library facilities. Equipping a school In the new model for sustainable expansion with a dedicated library carries a similar of lower secondary education we suggest that cost to the addition of two classrooms. An (i) of the one million new students, half will alternative model should employ ‘classroom enroll into the new schools and half into new libraries’ to place books within easy access classrooms added to existing schools; (ii) half to students. of the new schools will be one-stream and half - two-stream; and (iii) only half of the new c) Make better use of existing infrastructure. schools will require teacher housing (see Figure Given the ESSP sets a target of a pupil- 29). Thus, the following infrastructure will be classroom ratio of 60:1, Uganda faces required: 8,335 new classrooms added to the the daunting prospect of building more new schools; 1,040 new one-stream schools; than 16,000 new classrooms by 2025 520 new two-stream schools; and 780 teacher if expansion targets are to be achieved. housing units. However, the current stock of classrooms appears to be under-utilized: the ratio of Figure 29: Proposed composition of facilities required to accommodate 1 million new lower secondary students 1 million new students 0.5 million new 0.5 million new students students -8,335 additional -new schools classrooms in existing schools 1 stream schools 2 stream schools = 1,040 = 520 Half of new schools (=780) will have teacher housing PAG E | 61 UGANDA ECONOMIC UPDATE, 13TH EDITION 5. Rolling out a new modernized expected load. The official teaching load curriculum for lower secondary should match the regional standard of 20 education, reducing the number of hours per week. subjects offered by schools, and using • A teacher distribution policy should be teachers more effectively clearly articulated and significantly more A new curriculum has been prepared and needs-based than currently. has been formally endorsed, but is yet to be rolled out. While the introduction of the new 6. Implement robust school safety curricula will represent significant progress measures, including towards early compared to the current one, the approach marriage and pregnancies adopted by most schools to offer up to fifteen Violence against children, early marriage and subjects needs to be revised. In fact, small one- pregnancy are major impediments to both stream schools should not offer more than expansion and quality of education. To respond three elective subjects in addition to the seven to such cases, both in and out of school, compulsory core subjects. The elective subjects policymakers need to introduce a package are to be selected by the school to enable of interventions for implementation at the them to specialize in specific profiles (e.g. national level. Such a package would include: sciences, humanities), while achieving more efficiency. With this rationalization, school- • Introducing awareness campaigns for time and resources could be better managed communities; and teachers could spend more time teaching. • Promotion of concepts of appropriate In addition, the need for specialty teachers and inappropriate behavior; and facilities would be considerably reduced, leading to significant budget savings. • Introduction of codes of conduct for teachers; Such savings could be invested in providing • Enhancing existing Grievance Redress schools with modern didactic and learning Mechanisms (GRM); materials, particularly ICT, that enhance teaching, learning and school management. • Strengthening the reporting, tracking, There are many promising ICT based and referral of cases; and educational solutions already available in • Re-enrollment policies for young Uganda, some of them produced locally, mothers. and some borrowed from international best practices. Gradual introduction of such 7. Adopt transparent policies toward resources and technologies would allow full financing from households and for the scale implementation of the new curriculum, non-state sector which reinforces the teaching of digital and ICT related skills. While family funds going into the education system are substantial, they are often In addition, the following teacher practices underreported. Best practices in the region should be implemented: demonstrate that a simple framework that empowers parents’ associations could make • The official teaching load should be clearly the management of these funds transparent stated and consistently adhered to in all and hold the schools accountable. The schools. This will enable school managers expenditures of the private sector and to redistribute work more efficiently to the households represent currently more than half teachers who have less than the minimum PAGE | 62 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION of national expenditures on education, which run by non-state actors and where these is a much higher rate than what is found arrangements, when well managed and in comparable and neighboring countries. with clear accountability frameworks, have These non-government resources have been contributed to improved learning outcomes. leveraged thanks in part to the Uganda USE PPP policy, which offered a per-student subsidy Furthermore, existing government schools, to participating low-cost private secondary which have traditionally performed schools. While the government is phasing out poorly, could be put under non-state this policy, Uganda will not have the necessary sector management contracts, with clear fiscal space in the future to finance the accountability mechanisms to engender growing cohort of students in public schools school improvement. This approach could if it doesn’t adequately leverage the private be taken up on a pilot basis to prove the sector. The private sector and households are concept before a policy is enacted. essential partners to crowd-in resources for both infrastructure and services. To harness The policy framework for governing and the assets of, and maximize synergies with regulating non-state actors shall also define the non-state sector, the government could the principles of contract management, consider two critical actions: including the following: (i) the nature of school operators (i.e. should the operators be a) Develop a policy framework for governing profit or non-profit), (ii) the status of teachers and regulating non-state actors throughout and how they will be managed, (iii) the the education sector. This framework would number of operators that are allowed and clarify the governance for non-state actors the upper limit of the number of schools an in terms of: (i) accountability for learning operator can manage, and (iv) the funding outcomes; (ii) the regulatory environment modalities and criteria for operators that for non-state actors; (iii) appropriate quality government would use to allocate public service standards in areas such as teaching funds. and learning, teacher qualifications, infrastructure, etc.; and (iv) roles and responsibilities for both government and non-state actors. b) Explore non-state sector contract management options for managing schools. The GoU is undertaking an ambitious program of school construction at both primary and secondary level. In addition to the capital costs, these schools will require significant recurrent expenditures. The non-state sector could support government in managing these schools and associated costs, including teaching and non-teaching staff - who could be recruited outside public service. There are numerous examples globally where government schools are PAG E | 63 UGANDA ECONOMIC UPDATE, 13TH EDITION 6.1.3. Fiscal implications the expected efficiency gains / savings from a more efficient primary and lower secondary Table 6 provides estimates of the fiscal education system. It covers a six-year period, implications of introducing the seven policy which is the estimated time frame for measures described in this section, including introducing these measures. Table 6: Summary of additional costs and savings (2019-25 period) of proposed primary and lower secondary education policies Policy measure/program Additional Costs Efficiency Gains/ Savings PRE-PRIMARY & PRIMARY LEVELS 1. Expansion of early childhood education programs (improvement of US$ 111 million US$ 130 million pre-primary GER up to 50 percent by 2025) 2. Consistent implementation of automatic promotion policy, while US$ 72 million US$ 64 million enhancing the quality of instruction 3. Improving transition to lower secondary by abolishing PLE US$ 23 million US$ 119 million LOWER SECONDARY LEVEL 4. Building schools in a cost-efficient manner, including: a) construction costs US$ 1.2 billion US$ 400 million b) capitation grant for new students US$ 99 million US$ 0 c) salaries for new teachers US$ 308 million US$ 0 5. Rolling out a new modernized curriculum for lower secondary US$ 158 million US$ 324 million education and reducing number of subjects offered by schools 6. Implement robust school safety measures in all lower secondary US$ 30 million N/A83 schools 7. Transparent policies toward financing from households and for the Depends on Depends on non-state sector parameters of PPP parameters of PPP framework framework Total ~US$ 2 billion ~US$ 1 billion Source: World Bank calculations based on current unit costs observed in on-going programs in Uganda and in the region (further details available on request) As shown in Table 6, the implementation of the medium to long term. By 2025, the net these proposed policies will ultimately generate increase in spending required to implement the substantial efficiency gains and savings that policy measures will be partially offset by the can be re-invested in the education system. efficiency savings. The estimated financial gap The real fiscal impact will only materialise in for the next six years is close to US$ 1 billion. 83 A World Bank study (Wodon 2018) estimated that ending child marriage and early childbirths in Uganda would result in savings for the government of US$ 257 million (current values) by 2030. However, further analysis would be required to determine the exact savings over the 2019-25 period. PAGE | 64 ECONOMIC DEVELOPMENT & HUMAN CAPITAL IN UGANDA: A CASE FOR INVESTING MORE IN EDUCATION 6.2. A case for investing more in education To sustain higher enrolment (e.g. capitation education with both its previous practices and grants, teacher salaries, learning material, the regional average. This could generate up to etc.) and to close a US$ 1 billion funding gap, US$ 1.6 billion in additional resources between Uganda would need to gradually increase its 2019 and 2025, which would be enough to close public expenditure on education as a share the gap and meet the financing requirements of total public expenditures. The rationale of the alternative scenario. for the increase is quite compelling. Over the past decade, SSA countries have increased These recommendations and simulations do not their public expenditure on education, as a intend to be a readily applicable recipe, as they share of their total public expenditures, from require additional consultations, decisions and an average of 14.8 percent in 1998-2001 to commitments by the government. However, 16.1 percent in 2014-17. In the meantime, the alternative scenario shows that the long Uganda’s public education expenditure, as a period of inadequate learning achievement share of total public expenditures, dropped and low completion rates in primary and lower from 15 percent in FY12/13 to 10 percent in secondary education could be reversed within FY17/18. This uncharacteristic drop may have the next six years. Importantly, this can also been encouraged by a large flow of foreign be done in a financially sustainable manner. education aid to the sector during the same As Uganda is preparing for a new Education period. If not reversed, however, this decline Sector Strategic Plan, the recommendations of suggests that education has a lower national this report should help in setting ambitious yet priority than five years ago. 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