Uganda: Risk Assessment
Country Risk Rating
Business Climate Rating
- Natural resources: fertile land, oil fields, hydroelectric potential
- Diversification efforts, particularly in the agri-food sector
- International support for infrastructure projects
- Debt mainly on concessional terms
- Africa’s leading coffee exporter
- Endemic poverty, persistent inequalities
- Inadequate infrastructure
- Insecurity in border areas (Democratic Republic of Congo, South Sudan)
- Slow progress in governance (particularly control of corruption)
Health, political and climate uncertainties will hamper the recovery
In 2020, growth was hit hard by the effects of the COVID-19 pandemic, which chiefly impacted tourism, trade, manufacturing, construction and agriculture. In 2021, public investment is expected to support recovery through the development of transport and energy infrastructure, which remains a priority. In particular, the construction of a pipeline to bring future Ugandan oil production to the Tanzanian port of Tanga could be a catalyst for growth following the signature of an implementation agreement in September 2020, with construction scheduled to begin in March 2021. However, since the final investment decision has not been made, this project could be subject to hold-ups. As the increase in imports of capital goods is expected to outpace the more gradual recovery in export revenues (especially those related to tourism), foreign trade is likely to be a drag on activity in 2021. As incomes and remittances from abroad recover, consumption should be a growth driver in 2021. However, in addition to the uncertainty related to the pandemic, household and business confidence could be affected by political uncertainty, particularly if the results of the elections scheduled for early 2021 are contested. Moreover, low rainfall forecasts and locust invasions could threaten the incomes of households dependent on agriculture (which provides more than 70% of employment opportunities). Lower agricultural yields could feed through to inflation, which may also be sensitive to increased tariff barriers to support the import substitution strategy and to potential shilling depreciation, particularly during the election period.
The crisis increases the risks to external accounts
The budget deficit is expected to continue to widen in 2020/21, after being hit by reduced domestic revenue collection and increased spending because of the pandemic-related crisis. The increase in the deficit will be fuelled by higher capital expenditure. However, since domestic revenues and subsidies are expected to rise only gradually, the increase in these expenditures is likely to be constrained by limited financing possibilities. While interest payments absorbed about 15% of revenues before the crisis, current expenditure is expected to be eased through the G20 initiative to suspend debt service until the end of June 2021. The risk of debt distress should thus remain limited thanks to the large share of concessional debt (over 60% of the external debt stock).
The current account deficit was smaller in 2020, notably due to the rapid decline in imports, but is expected to widen in 2021. Despite an expected recovery in exports, which should be supported by high gold prices, the recovery in imports, especially of capital goods, will contribute to a larger goods deficit. Uncertainty related to the pandemic is expected to curb growth in tourism revenue, maintaining a high deficit in the services account. It could also depress remittances from abroad and weaken their contribution to the transferred surplus. Profit repatriation by foreign investors will continue to sustain the income deficit. With the decline in FDI in 2020, financing of the current account deficit relied on the support of international financial institutions and foreign exchange reserves (which cover about five months of imports). The current account deficit will expose the shilling to depreciation, particularly in the event of electoral uncertainties.
Yoweri Museveni heads for a sixth term
President Yoweri Museveni, who has been in power since 1986, and his party, the National Resistance Movement (NRM), will face general elections scheduled between 10 January and 8 February 2021. Widespread poverty, which has been exacerbated by the economic crisis and the health emergency related to the coronavirus pandemic, frustration with corruption and the NRM's domination of political life for over three decades will continue to be sources of social unrest and could hurt President Museveni at the polls. Nevertheless, despite seemingly declining support, the 76-year-old president will go into the elections as favorite. Not only does he retain some support at the national level, he will also benefit from the incumbent’s advantage and from the fact that the opposition remains fragmented despite the efforts of Robert Kyagulanyi, also known as Bobi Wine, a singer turned MP, to present a united front. Even before the elections, accusations of political repression by the ruling party are increasing, suggesting that the election will take place in a tense political climate. The country also faces an unstable political and security situation on its borders (South Sudan, Democratic Republic of Congo) and recurring border tensions with Rwanda.
Despite the authorities' focus on making improvements, the business climate continues to suffer from weak governance, difficulties in access to credit, and a lack of infrastructure.