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Uganda - Economy

Ugandan policy-makers often remark on their desire for the country to emerge as a strong middle-income economy by emulating the performance of the "Asian Tiger" economies of the late 20th century (e.g. Thailand, South Korea, and Taiwan). While Uganda would like to emulate the Tigers' success, it ironically appears unwilling or unable to follow the formula that led to that success. To its credit, Uganda is committed to sound economic policies, and has made some strides in education through its commitment to universal primary education. However, in reality, the education sector remains seriously underfunded, leaving a surfeit of young people with just enough education to get into trouble.

Rapid-onset disasters can range from short-term food security crises to flash floods, infectious disease outbreaks, and political crisis/conflict situations. Slow-onset disasters stem primarily from food insecurity due to drought, with a number of other factors contributing to root causes.

The vast majority of people in northern Uganda live in rural areas and are engaged primarily in subsistence-based livelihoods, living largely at the mercy of the production capacity of the land and the whims of the weather. For most of the year, these households have little/no cash to purchase food or other essentials, nor do they have any assets to sell. They typically cultivate very small plots of land and own very few livestock.

Agricultural production based primarily on peasant cultivation has been the mainstay of the economy. In the 1950s, coffee replaced cotton as the primary cash crop. Some plantations produced tea and sugar, but these exports did not alter the importance of coffee in the economy. Similarly, some industries developed before 1970, but most were adjuncts to cotton or sugar production, and they were not major contributors to gross domestic product (GDP). Moreover, Uganda did not possess significant quantities of valuable minerals, such as oil or gold. In sum, although the economy provided a livelihood for the population, it was based largely on agricultural commodities with fluctuating international values. This dependence forced Uganda to import vehicles, machinery, and other major industrial equipment, and it limited development choices. Each government after independence altered the identity of the major participants in the national economy without changing the basic nature of that participation. The 1960s government of Milton Obote reduced the privileged status of the southern kingdoms, especially Buganda, and brought northerners into business and politics in increasing numbers. During the 1970s, Amin expelled the Asian commercial bourgeoisie and eliminated many others from the entrenched elite. By expropriating their wealth and nationalizing foreign businesses, Amin's followers acquired substantial resources for patronage purposes, and, as a result, former peripheral groups, such as the Nubian military community, assumed new power and wealth. Many uneducated, untrained military recruits also received important military and political appointments, but by the end of Amin's term in office in 1979, the state's resources for rewarding political clients had begun to dwindle.

Under these conditions of political and economic uncertainty, many skilled workers, even from urban areas, reverted to subsitence cultivation in order to survive. Urban and rural elites fled from state terror tactics and economic destruction, and many who could afford to travel went to other African countries oi Britain.

In the late 1980s Uganda was still struggling to end a period of political and economic chaos that had destroyed the country's reputation as the "pearl" of Africa. Most of the economic infrastructure, including the power supply system, the transportation system, and industry, operated at only a fraction of capacity. Other than limited segments of the agricultural sector-notably coffee and subsistence production-cultivation was almost at a standstill. And in the wake of the much publicized atrocities of the Idi Amin Dada regime from 1971 to 1979 and the civil war that continued into the 1980s, Uganda's once flourishing tourist industry faced the challenges of reconstruction and restoring international confidence. Successive governments had proclaimed their intention to salvage the economy and attract the foreign assistance necessary for recovery, but none had remained in power long enough to succeed.

The service sector was the largest contributor to GDP in 2010 (at 50%). Manufacturing and agriculture contributed 26% and 24%, respectively. Despite their dwindling shares of Uganda’s GDP, the agriculture and fishing sectors provide approximately 80% of employment in Uganda. Uganda is Africa's second-leading producer of coffee, which accounted for about 17% of the country's exports in 2009 and 2010. Exports of nontraditional products, including apparel, hides, skins, vanilla, vegetables, fruits, cut flowers, and fish, are growing, while traditional exports such as cotton, tea, and tobacco continue to be mainstays.

Most industry is related to agriculture. The industrial sector has been rehabilitated and resumed production of building and construction materials, such as cement, reinforcing rods, corrugated roofing sheets, and paint. Domestically-produced consumer goods include plastics, soap, cork, beer, and soft drinks.

Oil experts estimate Uganda’s Albertine Basin has about 2.5 billion barrels of recoverable oil, positioning Uganda to become one of sub-Saharan Africa’s top oil producers and potentially doubling current government revenues within 10 years. Most of Uganda’s known oil reserves are located along Lake Albert and the D.R.C. border, in one of Africa’s most ecologically sensitive areas. Uganda and several private oil companies had hoped to begin small-scale production as early as 2012, but production has been delayed due to a capital gains tax dispute and a parliamentary resolution blocking new agreements with oil companies pending passage of oil legislation. Potential construction of a domestic oil refinery and export pipeline are contingent upon ongoing feasibility studies and negotiations between oil companies and the government.

Roads are the most commonly used transportation infrastructure in Uganda, accounting for more than 90% of cargo freight and passenger transportation. Uganda has about 78,100 kilometers (48,529 mi.) of roads. Only 3,000 kilometers (1,864 mi.) are paved, and most roads radiate from Kampala. The country has a 321 kilometer (200 mi.) rail network, much of which is not currently in use. Uganda's road and rail links to Mombasa serve some of the transportation needs of the neighboring countries of Rwanda, Burundi, and parts of D.R.C. and Sudan. Entebbe International Airport is on the shore of Lake Victoria, some 32 kilometers (20 mi.) south of Kampala.

Historical Background

Peasant agricultural production has been the predominant economic activity since precolonial times. Despite an active trade in ivory and animal hides linking Uganda with the east coast of Africa long before the arrival of Europeans, most Ugandans were subsistence farmers. After declaring Uganda a protectorate in 1893, Britain pursued economic policies that drew Uganda into the world economy primarily to serve Britain's late-nineteenth-century textile industry. Cotton cultivation increased in importance after 1904, and once it became clear that cotton plantations would be too difficult and expensive to maintain, official policy encouraged smallholder farmers to produce and market their cotton through local cooperative associations.

By 1910 cotton had become Uganda's leading export. In the following decades, the government encouraged the growth of sugar and tea plantations. Following World War II, officials introduced coffee cultivation to bolster declining export revenues, and coffee soon earned more than half of Uganda's export earnings. Uganda enjoyed a strong and stable economy in the years approaching independence. Agriculture was the dominant activity, but the expanding manufacturing sector appeared capable of increasing its contribution to GDP, especially through the production of foodstuffs and textiles. Some valuable minerals, notably copper, had been discovered, and water power resources were substantial.

In 1967 Uganda and the neighboring countries of Kenya and Tanzania joined together to form the East African Community (EAC), hoping to create a common market and share the cost of transport and banking facilities, and Uganda registered impressive growth rates for the first eight years after independence.

The economy deteriorated under the rule of President Idi Amin Dada from 1971 to 1979. Amin used nationalist, militarist rhetoric and ill-chosen economic policies to eliminate foreign economic interests and build up the military establishment. In 1972 he expelled holders of British passports, including approximately 70,000 Asians of Indian and Pakistani descent. Many Asians had been active in agribusiness, manufacturing, and commerce. Their mass expulsion and Amin's efforts to expropriate foreign businesses undermined investor confidence in Uganda. Amin also increased public expenditures on military goods, a practice that contributed to escalating foreign and domestic debt during the 1970s. Relations with Uganda's neighbors soured, the EAC disbanded in 1977, and Tanzanian txoops finally led a joint effort to overthrow the unpopular Amin regime in 1979.

By 1980 the economy was nearly destroyed. Following Amin's departure, successive governments attempted to restore international confidence in the economy through a mixture of development plans and austere government budgets. Beginning in 1980, the second government of Milton Obote obtained foreign donor support, primarily from the International Monetary Fund (IMF), by floating the Uganda shilling (USh), removing price controls, increasing agricultural producer prices, and setting strict limits on government expenditures.

In addition, Obote tried to persuade foreign companies to return to their former premises, which had been nationalized under Amin. These recovery initiatives created real growth in agriculture between 1980 and 1983. The lack of foreign exchange was a major constraint on government efforts, however, and it became a critical problem in 1984 when the IMF ended its support following a disagreement over budget policy. During the brief regime of Tito Lutwa Okello in 1985, the economy slipped almost out of control as civil war extended across the country.

Since assuming power in early 1986, Museveni's government took important steps toward economic rehabilitation and adopted policies that have promoted rapid economic development. The National Resistance Movement (NRM) succeeded in stabilizing most of the nation and began to diversify agricultural exports away from the near-total dependence on coffee. But in 1989, just as the hard work of economic recovery was beginning to pay off, world coffee prices plummeted, and Uganda's scarce foreign exchange dwindled further.

The country's infrastructure -- notably its transportation and communications systems that were destroyed by war and neglect -- is being rebuilt. Recognizing the need for increased external support, Uganda negotiated a policy framework paper with the International Monetary Fund (IMF) and the World Bank in 1987. It subsequently began implementing economic policies that resulted in a consistent pace of economic growth. Uganda was the first country to be eligible for the Heavily Indebted Poor Countries (HIPC) initiative and had virtually all of its foreign debts forgiven by the IMF, World Bank, and major donors. Growth rates in fiscal years 2009 and 2010 were 7.2% and 5.2%, respectively. Food prices rose dramatically in 2011 and average annual inflation was 18.7%, the largest increase in two decades.