The

Economi
c
Environ
ment of
Uganda

Tapas K Chakraborty
A.C.W.A.
Calcutta

Contents
Introduction:.............................................................................................................. 2
Monetary Policy......................................................................................................... 3
Monetary Policy & Economic Growth.............................................................................. 3
Historic Macroeconomic Characteristics............................................................................4
Aggregate Demand and GDP......................................................................................... 4
Regulatory Efficiency................................................................................................... 6
Open Market.............................................................................................................. 6
Current Macroeconomic Characteristics............................................................................6
Ugandas GDP Annual Growth Rate.......................................................................8
Ugandas Unemployment Rate........................................................................................ 8
Economic Prospect.................................................................................................... 11
Recommendation of Macroeconomic Measures.................................................................12
Co-ordination between Fiscal and Monetary Policy............................................................12
Joint Exercises......................................................................................................... 15
Institutional Arrangements........................................................................................... 15
Conclusion.............................................................................................................. 16
References.............................................................................................................. 17

Introduction:
The government of Uganda wants to explore the relevant fiscal and monetary measures and
the impact of their coordination on their national economy in the background of poor
economic and political parameters of the country. The paper emphasises on the key
macroeconomic issues and the policy choices that are likely to occur in the process of fiscal
and monetary measures at the levels of policy making and institutional and operational
procedure. The main findings of the study are coordination of appropriate fiscal and monetary
measures would usher in (i) development of domestic financial market, (ii) avoidance of
inflationary pressure, (iii) controlled interest rate and (iv) sustained economic development.

Monetary Policy
Monetary policy which is regarded as an indispensable tool of macroeconomic management
of the economy is difficult to define precisely. According to Paul Einzig, monetary policy
includes all monetary decisions and measures irrespective of whether the aims are monetary
or non-monetary and all monetary decisions that aim at affecting the monetary system
(Einzig, 1964). As per this definition, monetary policy includes not only measures of every
kind which are taken for the purpose of influencing the value, volume, etc., of money but also
monetary measures that pursue non-monetary, social or political aims. In the same way nonmonetary measures such as price and wage control, physical control, budgetary measures,
export drivers, import cuts (through discouraging measures), income policy, measures to deal
with pockets of unemployment etc., come within the purview of monetary policy so long as
their aim is to influence the monetary situation.

Monetary Policy & Economic Growth

The objectives of monetary policy represent a move of nation in the direction of a welfare
state. If a high standard of living for the people of the country is to be guaranteed then the
economy must grow at a compound rate. Economic growth does not mean increase in money
income without accompanying increase in real income. Economic growth means both
quantitative increases in goods and services as well as rise in purchasing power. Thus, it
means three things; first there must be increase in the real output in the economy, second the
composition and quality of goods and services produced must satisfy the want of the people
of the country since satisfaction of human want is the end result of all economic activities,
and third economic growth should be achieved within the framework of economic freedom.
(Friedman, 2000)

Monetary policy promotes sustained growth of the economy in two ways, firstly the monetary
authority might be interested to discharge its responsibility to keep a balance between money
supply in the economy and economys productive capacity. This requires a flexible policy
where credit is crunched when total demand for money is such that it can trigger price rise
and unsustainable boom, and pumping in bank credit when supply of money is such that it
causes decline in price, income and employment. Thus, monetary policy can promote growth
by stabilising price level and ensuring efficient utilization of the countrys productive
resources. Empirical studies conducted in many countries show positive long run relationship
between public expenditure and economic growth. Studies on Morocco for the time span
1972 to 2002 show that 1% increase in public spending has registered 1.26% increase in real
gross domestic product. (Friedman, 2000)

Historic Macroeconomic Characteristics

Uganda is counted in the league of the poorest countries in the world. Poor economic
condition of Uganda is largely due to political instability, ineffective economic policy
decisions and occasional influx of refugees from across the boundary with Sudan. During the
late 1970s and early 80s Ugandas unemployment rate was about 60%, gross domestic
product was about $3 billion and per capita GDP was $93. During the same period the richest
10% of the population consumed 40% and the poorest 10% of the population consumed
merely 2% of the national output. (World Bank, 2014)

Aggregate Demand and GDP

Aggregate demand is the total demand for consumer goods as well as capital goods. It is a
downward sloping curve moving from left to right. With increase in income aggregate
demand curve shifts in the parallel direction to the right, as a consequence the GDP increases
without causing inflation.

Price Level P

e1

e2
AD1

G1

AD2
G2

Gross Domestic Product

As aggregate demand curve AD1 shifts to the right to AD2 as a consequence of increase in
the level of income the point of equilibrium shifts from e1 to e2, the price level remaining
unchanged at p. As a result the GDP increases from 0G1 to 0G2.
However, typical for an underdeveloped country, Ugandas short run aggregate supply curve
(SRAC) is steeper than that of a developed country resulting in insignificant increase in
GDP and significant increase in general price level.
S
P2

e2

P1
Inflation

e1
S

G1

AD1
G2
GDP

AD2

In the diagram aggregate demand curve and aggregate supply curve intersect at e1 thus OP1
price level and OG1 GDP is determined. As the aggregate demand curve shifts from AD1 to
AD2
the point of intersection moves from e1 to e2 and the new price level is OP2. Thus, increase
in price level is P1P2 and insignificant increase in GDP is G1G2. (Index Mundi, 2014)

Regulatory Efficiency
The regulatory environment in Uganda is not conducive to entrepreneurial activities. There is
no minimum capital requirement for stabilizing a business but requirement for commercial
licenses are time consuming and costly. The formal labour market remains inefficient and
lacks dynamism. The government funds substantial price disturbing subsidies by financing oil
refinery and hydro electric sector.

Open Market
Ugandas average tariff rate is 7.3%. The government does not generally discriminate
against foreign investors but the legal and regulatory system is difficult to navigate. The
financial system is dominated by banking which is relatively open to competition but subject
to government influence. Bank lending to the private sector has gradually increased; capital
markets are relatively small and under developed.

Current Macroeconomic Characteristics

Uganda has versatile and substantial natural resources like fertile soil, flowing rivers, regular
rainfall and good amount of deposits of minerals and oil. Agriculture is the most important
sector of the economy employing about 80% of the workable labour force. Since 1986 the
government of Uganda with assistance from foreign countries and NGOs has been trying to
rehabilitate and stabilize its fractured economy by undertaking currency reform, raising

agricultural producers price, increasing civil wages. The policy changes are specially
designed to check inflation and increase export earnings. Since 1990 the economy started to
move in positive direction with continued investment in infrastructure especially transport,
improved incentives for production and export, lower inflation and better domestic security.
Ugandas foreign and domestic debt has been increasing at the rate of 2% of GDP every
year and there is the fear that in not-so-long time Uganda may fall into debt trap. During early
and mid 2000s Ugandas foreign debt burden was $5.5 billion, as a result there has been huge
outflow of foreign exchange in the form of financial charges. The countrys external debts
burden has increased from $2.4 billion in 2006-07 to $5.4 billion in 2013-14. And
astonishingly 70% of the debt was used in social work and infrastructure development to
fight poverty and enhance productivity. (Index Mundi, 2014)
In the domestic front Ugandas outstanding government securities is $6 billion at the end of
2013-14. The countries current public debt as percentage of GDP now stands at 27.4%
and current inflation rate is 15%. During the period 2010-12 Ugandas GDP varied as
$46.86 billion, $49.98 billion and $51.27 billion, per capita GDP remained constant at $1400
and GDP real growth rate varied as 5.6% , 6.7%, and 2.6% per year. Ugandas 10% poorest
people consume 2.4% where as the richest 10% peoples share is 37%, in between the total
outputs distribution is very imbalanced regionally. The budgeted Revenue and Expenditure
of 2012-13 stands at $3.102 billion and $3.705 billion respectively creating a budget deficit
of $0.603 billion. Taxes and other revenues constitute 14.8% of GDP and Gross National
Saving stand at $3.196 billion. Ugandas current public debt as percentage of GDP now
stands at 27.4%, current inflation rate is 15% of GDP. (Index Mundi, 2014)

Ugandas GDP Annual Growth Rate

The GDP of Uganda expanded at 2.20% in the third quarter of 2013, over the same
quarter of previous year. GDP annual growth rate in Uganda is reported by Uganda bureau of
statistics. From 2008 until 2013 Ugandas GDP annual growth rate averaged 5.6%
reaching at all time high of 12.2% in June of 2009 and a record low of 0.3 % in
December 2011. (Trading Economics, 2014)

12
10
8
6
4
2

Jan-10

Jan-12

Jan-14

Trend of Uganda GDP Annual Growth Rate

Ugandas Unemployment Rate

Unemployment rate in Uganda increased to 4.2% in 2010 from 1.9% in 2007. The
unemployment rate is reported by the Uganda bureau of statistics from 2003 until 2010.
Ugandas unemployment rate averaged 3.2% reaching an all time high of 4.2% in
December 2010 and a record low of 1.9% in December 2007. (Okoed, 2014)

4.5
4
3.5
3
2.5

08

09

10

11

12

Unemployment Rate

Uganda's GDP composition by end use

Household
consumption

86.30%

Government
Consumption

8.70%

Investment in
Fixed Assets

24.60%

Investment in
inventories

20.00%

Export of goods
and services

21.20%

Import of goods
and services

-41.00%

Uganda's GDP
composition by
sector
Agriculture

24.20%

Industry

26.50%

Service

49.30%

Pie Chart Showing Sector Wise Composition of GDP

Labour Force by Occupation

Labour Force by
Occupation
Agriculture
Industry
Service

82.00%
5.00%
13.00%

Pie Chart Showing Composition of Total Labour Force

High Value Export

Values
Year
199
5
199
6
199
7
199
8

USD Million
10000
11000
18000
20000

199
9
200
0
200
1
200
2
200
3

25000
23000
30000
40000
65000

High Value Exports Values

Economic Prospect
To give a sound economic projection of the economy in 2014 it is necessary to reflect on how
the economic indicators fared last year. Reduction of commercial banking rates from 30%
to 22%, maintenance of a stable rate and inflation would definitely help influence private as
well as public investment decisions in all sectors of the economy. Economic analysts believe
the above measures could have a positive effect in shaping growth of the country in 2014
and beyond. Almost all the countries in the African continent have done quite impressive job
and this will continue in 2014 and the continent will not have to depend upon overly on
natural resources, prices and markets.
Investors are encouraged to invest in technology driven sectors including advanced
agriculture, transport, medicine, finance, telecommunication, real estate, education,
heath, oil and retail. Stephen Kaboyo a senior economist and managing director of Alpha
Capital is especially optimistic and opines that during the last few years Ugandas economic
growth has largely been driven by public investments in energy sector as well as modest
growth in export. Kaboyo is of the view that domestic investment is projected to rise,
inflation rate to drop and exchange rate to remain still.

Recommendation of Macroeconomic Measures

Uganda is predominantly an agricultural country with shattered industrial infrastructure and
corrupt political and bureaucratic system. Thus, all the negative characteristics of an under
developed economy stare at the people of the natural resource rich country. Apart from the
theoretical debate about the supremacy of fiscal or monetary policy, empirical study and
analysis failed to uphold either of the two as a fool proof sure shot measure directed towards
economic development of a country. This paper suggests a judicious mixture of the two
policies as a combined measure and properly monitored and directed interaction between the
two as a means to realize the desired objective. There needs to be policy co-ordination at two
levels, coordination of institutional and operational procedures and fulfilment of overall
policy objectives. As regards to fulfilment of policy objective the interaction must focus on
deficit financing and its consequences that are meant to effect monetary management. In the
monetary policy front the government must enhance its capacity to breach the budget deficit,
by affecting the cost of debt service through expansion of available sources of finance at the
same time fiscal policy should regulate institutional and operational autonomy of the
monetary authority that is the central bank.

Co-ordination between Fiscal and Monetary Policy

The most significant objective of any macroeconomic policy is to achieve a sustained
stability in price, income, output and employment. To achieve this, close co-ordination
between fiscal and monetary policy makers with no overlapping actions is the call of the day.
It is worth noting that there will be competition among the private players as well as between
private and public sectors for the limited funds. For this it is necessary to develop the market
for government bonds so that private sector is able to absorb government bonds .Should the
market for bond cannot be developed, the deficit in budget should be briedged by borrowing

from the monetary authority. Voluntary and forced purchase of government debt in domestic
market, debt from foreign government or foreign market and credit from the central bank,
could be considered as sources of fund for deficit financing. The government of Uganda
would do well to rely on the most trusted sources that is voluntary purchase of
government debt in domestic market and foreign borrowing as these two sources have the
goodwill of not inviting inflation as a result of deficit financing. The central bank, the
monetary authority is in the position to balance the impact of budgetary and current account
deficit by manipulating the supply of money through open market operations. Emphasis has
to be given for improving financial market and developing secondary market otherwise
central bank will have to purchase unsold government bonds which were originally
issued for deficit financing. The central bank will have to print money to fulfil government
obligation and it will not be able to reduce money supply by subsequently selling the unsold
bonds in the market. Thus it is clear that monetary policy is dictated by the governments
budget. Dorn Busch and Edward observed that populism driven budget of developing
countries often promise and undertake ambitious development projects without proper
budgetary support. Thus the government largely depends upon central banks money creation
and thereby create inflation.
Professor Sundar Rajan developed a formula to illustrate the relation between fiscal and
monetary policy and the inter relation between budget deficit and the source of deficit
finance. (Rajan, 1998)
Dt = (Bt- Bt-1) ( MBt- MBt-1)
Where, Dt= Budget deficit on cash basis
Bt- Bt-1= Net sale of government bond

MBt- MBt-1= Change in central bank credit

The expression shows that if the budget deficit could be fully met by selling government
bonds then change in money base arising out of central bank credit will be zero and there
wont be any change in government deposits with commercial banks. The change in money
base will be positive if the government bonds could not be fully sold.
Lack of Co-ordination between Fiscal and Monetary Policies may result in three things;
firstly, the central bank being the monetary authority will act independently notwithstanding
the financial need of the government. If the limited financial possibilities limit the budget
deficit, the government would either be forced to reduce the size of the budget deficit or
resort foreign borrowing and selling bonds and thereby increasing rate of interest.
Secondly, if the government, the fiscal authority dominates the monetary authority, it would
determine the budget deficit notwithstanding what the monetary authority opines. If the bond
market is not wide enough, the government would force central bank to provide direct credit
and thereby triggering price rise and inflation and the resultant monetary instability.
Thirdly the fiscal as well as monetary authority may act independently and utonomously,
thereby creating a situation of high inflation and sharp rise in the rate of interest.
Close co-ordination between policy decisions and institutional and operational procedures of
both fiscal and monetary authorities can keep the above mentioned possibilities at bay and it
would also help promote and develop domestic financial market. Many developing countries
have successfully used debt as monetary instrument. Their ought to be ex-ante co-ordination
between fiscal and monetary policies so that their effect on financial market are coherent
and mutually consistent until a well defined mechanism policy is put in place to reconcile
fiscal and monetary policies, institutional arrangements both by fiscal and monetary

authorities will have to be efficiently designed and effectively implemented. Empirical

evidence also suggests that such institutional arrangements have resulted in positive
outcomes. (Fender, 2012)

Joint Exercises
The joint policy exercises should start with unanimity between fiscal and monetary authority
regarding desired rate of inflation and economic growth. Then the central bank would
calculate the rate of growth of money supply consistent with desired rate of inflation and
desired economic growth rate. The central bank should also use its own estimate of net
foreign assets (NFA) and net other income (NOI). The assets and liabilities of consolidated
banking system would take the following form:
NFA + DC = M + NOI
Where, NFA = Net Foreign Asset
DC = Domestic Credit
M = Money Supply
NOI = Net Other Income

Institutional Arrangements
It is necessary that there should be institutional arrangements for realizing the common
objectives and co-ordination of policies. The joint committee vested with the job of fostering
co-ordination of policies should assist in bringing about the desire co-ordination so that the
policies are not in conflict.

Conclusion
There has been a growing recognition of co-ordinating fiscal and monetary policies. No tailor
made model can be perceived but the model should be based on specific characteristics of the
economy. It should be understood that low inflation is conducive to economic growth and
monetary policies should be so designed to achieve the goals that are necessary for higher
and sustainable growth. The recognition of low inflations importance sets the corner stone for
better co-ordination among fiscal and monetary measures and acts as complimentary to
institutional arrangements in place.

References

1.Einzig, P. 1964. Monetary policy. Harmondsworth: Penguin Books.

2.Fender, J. 2012. Monetary policy. Hoboken, N.J.: Wiley.
3.Friedman, B. M. 2000. Monetary policy. Cambridge, MA.: National Bureau of Economic
Research.
4.Index Mundi. 2014. Uganda GDP - real growth rate - Economy. [online] Available at:
http://www.indexmundi.com/uganda/gdp_real_growth_rate.html [Accessed: 10 Apr 2014].
5.Okoed, M. 2014. Youth fund alone not magical solution to unemployment. [online]
Available at: http://www.newvision.co.ug/mobile/Detail.aspx?NewsID=647923&CatID=4
[Accessed: 10 Apr 2014].
6.Rajan, S. 1998. Essential VHDL. [S.l.: S & G Pub.
7.Trading Economics. 2014. Uganda GDP Annual Growth Rate | Actual Data | Forecasts |
Calendar. [online] Available at: http://www.tradingeconomics.com/uganda/gdp-growthannual [Accessed: 10 Apr 2014].
8. World Bank. 2014. UGANDA Moving Beyond Recovery: Investment & Behavior Change,
For Growth. [online] Available at: http://www.hks.harvard.edu/fs/drodrik/Growth
%20diagnostics%20papers/World%20Bank_Uganda_cem_0907_report,%20vol%20II.pdf
[Accessed: 10 Apr 2014].