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
- Poverty and inequality
- Inadequate infrastructure
- Insecurity in border areas (Democratic Republic of Congo, South Sudan)
- Slow progress in governance (particularly control of corruption)
Activity is robust, but decelerating
Growth is expected to remain at a high level in 2020, while also continuing the slowdown recorded in 2019. Momentum should be mainly supported by public investment under the second National Development Plan. The deployment of transport infrastructure, including the Kabaale International Airport, and energy infrastructure (hydroelectric dam projects) will remain a priority. Besides these two sectors, the construction sector is also in line to benefit from public investment, but will likely see more moderate growth, reflecting developments in private investment. Despite the opportunities that the ICT sector and free zones continue to present, the implementation of construction projects related to the development of the oil sector is expected to slow down, after work on the pipeline linking Ugandan oil production to the Tanzanian port of Tanga was suspended following a tax dispute between local authorities and Tullow Oil. Hence, commercial oil development will likely see delays. The contribution of the trade balance is expected to be adversely affected by substantial capital goods import requirements. In addition, the country's two main export products, gold, and coffee, will be hurt, in the first case by the normalization of production at the country's refinery and in the second by a decline in output following drought conditions in 2019. While most households depend on the agricultural sector (about 70% of jobs), their incomes are expected to be affected by lower harvests, which will reduce the contribution from private consumption. It could also suffer as a result of price increases, particularly for food, which would be accentuated in the event of a depreciation of the shilling.
An increasingly vulnerable external situation
In 2019/20, the budget deficit is set to continue to widen, driven mainly by increased capital investment spending, despite chronic under-execution of projects financed by international donors. Current expenditure is also expected to go up due to the increase in the civil service wage bill and debt service payments, which account for almost 20% of revenues collected. While incomes are expected to continue to rise, in particular thanks to the domestic resource mobilization strategy, the tax burden should remain low (around 15% of GDP). The deficit is likely to be mainly financed by external loans and grants, contributing to the increased debt burden. The large share of concessional debt (about 60% of external debt) mitigates the risk of sovereign default, but rising domestic debt service continues to reduce fiscal room for maneuver.
Following the lead of the trade balance, the current account deficit is expected to keep widening. Imports of capital goods are expected to continue to rise sharply. Despite efforts to develop tourism, driven by the relaunch of the national airline Uganda Airlines in 2019, the service account should also remain in deficit, burdened by imports of logistics services. Repatriation of investor profits will maintain the income deficit. Fuelled by remittances from expatriate workers, the surplus in the remittance account could narrow if global economic conditions are less supportive. The large current account deficit is mainly financed by FDI and portfolio investment flows. However, the widening deficit exposes Uganda’s foreign exchange reserves (which cover about 4.5 months of imports) and the shilling to a wave of risk aversion.
The political climate is growing tenser as the 2021 elections draw closer
President Yoweri Museveni, in power since 1986, was re-elected following the 2016 general elections, which also gave his National Resistance Movement (NRM) party an absolute majority. After removing the age limit of 75 years through a constitutional amendment, the President, who was born in 1944, will be able to run for a sixth term in February 2021. Regularly accused of maintaining its grip by silencing dissenting voices, the President's administration was criticized in August 2018 following the arrests and alleged torture of several opposition figures, including Robert Kyagulanyi, better known as Bobi Wine, a singer turned politician. After his arrest, Mr. Kyagulanyi gained domestic importance and drew the international community's attention to the government’s increasingly stronghanded responses to dissent. Declaring his intention to run for President in the summer of 2019, he has entered into negotiations with several parties to create an alliance against the President and the NRM. The lack of political freedom coupled with dissatisfaction over corruption and slow progress in raising living standards are fuelling social unrest. In addition to corruption, the business environment remains difficult, as evidenced by the country 116th place (out of 190) in the Doing Business 2020 ranking, particularly due to difficulties in access to credit for SMEs. The country also faces an unstable political and security situation on its borders. Border tensions with neighboring Rwanda were a notable feature of 2019 and could resurface despite an agreement signed in August to restore calm.