Economy growth faces election-year risks, says World Bank

KAMPALA - Uganda’s economy is projected to grow by 6.2% in the 2024/25 financial year, but rising election-related spending could widen fiscal deficits and debt, economists at the World Bank said in a report. Ali Twaha brings you the details.

The latest edition of the World Bank Economic Update launched at the Serena Hotel notes that the fiscal deficit is expected to climb to 5.7% of gross domestic product (GDP) ahead of the 2026 general elections, up from 4.9% in the 2023/24 financial year (FY), as the Government ramps up public spending on infrastructure, subsidies and social programmes to garner voter support. 

A fiscal deficit happens when a government spends more money than it earns from taxes and other incomes. 

The economists at the World Bank project that increased spending may push public debt to over 52% of GDP, which could raise concerns about long-term sustainability. 

“The budget for FY2024/25 projects a deficit increase of nearly 1% of GDP, driven by ambitious spending. The budget targets a fiscal deficit, including grants of 5.7% of GDP,” the report reads in part. 

“While non-wage expenditures are expected to remain at last year’s levels, current spending is set to increase by almost 1% of GDP. A closer look reveals that this rise in recurrent spending is due to higher interest payments and in part, to higher governance and security expenditures — likely expenditures related to the upcoming elections.” 

Qimiao Fan, the World Bank country director for Kenya, Rwanda, Somalia and Uganda, said Uganda’s growth path remains resilient in the medium term. 

However, he noted that vulnerabilities to future growth may include delays in oil production and climate-related shocks.

Fan said oil-related infrastructure imports have kept the current account deficit high despite robust export growth, which has led to continued pressure on foreign reserves. 

“Improved export diversification, along with exchange rate flexibility, will be important going forward. External sector sustainability underscores the need to rebuild external buffers through continued fiscal consolidation and improved export diversification, along with a greater flexibility of the exchange rate,” he said. 

Uganda’s oil revenues are projected to slash fiscal and trade deficits by generating export revenue and reducing Uganda’s fuel import bills. 

Key projects such as the Tilenga and Kingfisher oil fields, along with the East Africa Crude Oil Pipeline (EACOP) are attracting large foreign and domestic investments. 

“To sustain the resilience and achieve inclusive growth, Uganda needs to enhance its fiscal space and improve the quality of its fiscal consolidation,” said Mukami Kariuki, country manager at World Bank. 

Inflation, currently under the central bank’s 5% target, faces threats from volatile global commodity prices, climate shocks to agriculture and potential currency depreciation if election spending weakens the shilling. 

The report urges “rule-based management” of future oil revenues to avoid wasteful spending and calls for implementing long-delayed tax reforms to broaden domestic revenue base. 

Without these measures, it warns, election-driven fiscal pressures could undermine growth and debt sustainability.

Uganda’s oil revenues are projected to slash fiscal and trade deficits by generating export revenue and reducing Uganda’s fuel import bills.

Performance of exports 

Despite strong export growth, up by 46% in FY2023/24, Uganda still faces pressures in its external sector. 

The report said high import demands for infrastructure projects and oil-related investments have widened the current account deficit to 6.7% of GDP. 

Although foreign direct investment inflows remained resilient, according to the World Bank report, they were insufficient to cover the overall deficit, leading to a decline in foreign exchange reserves. 

The depreciation of the Ugandan shilling by about 6% earlier in the year against the dollar added to concerns, but has since reversed slightly, appreciating by 6.6% by November 2024. 

Experts caution that continued pressure on reserves could hinder long-term stability unless export diversification improves. Currently, Uganda spends only 2.7% of its GDP on education, below the recommended minimum of 4%. 

The report highlights the importance of expanding access to quality pre-primary education, improving maternal and child health services and addressing issues such as stunting, which affects 24.4% of children under five. 

Fred Muhumuza, the director, of the Makerere University Business School (MUBS) Economic Forum, said: “When the budget goes up, the amount available for discretionary allocation goes down because half or more of the budget is to pay debt. 

Debt takes the first call on resources. There are conversations about domestic resource mobilisation, but the pond is dry.” Muhumuza said there should be rationalisation of government, including rationalisation of public expenditure to cut wasteful expenditures.

Government plan 

The Government is implementing a tenfold economic growth strategy projected to expand the economy to $500b by the year 2040. The plan will prioritise agro-industrialisation, tourism development, mineral-based industrial development (including oil and gas), as well as science, technology, and innovations. 

State minister for finance Henry Musasizi, said the economy has fully recovered from shocks, including the COVID-19 pandemic, increased global commodity prices and climate change effects. 

“The COVID-19 experience strengthened health systems and the suspension of new funding from the World Bank has helped to reinforce the country’s reserve to boost domestic revenue mobilisation and diversify export markets,” he said. 

“The Government is implementing fiscal efficiency measures through a fiscal consolidation agenda and boosted revenue collection, as well as borrowing for strategic projects that will accelerate economic growth and socio-economic transformation.” 

The Government is also implementing the rationalisation of government programmes, which is expected to cut wasteful spending within ministries, agencies and departments to free some resources. 

Moses Bekabye, the technical advisor for economic affairs in the finance ministry, said government is carrying out reforms supported by the World Bank, aimed at improving public investment management.