Elections: boost or burden for Uganda’s economy?

In August, the election season is likely to kick off. With it, the flood of promises brings both opportunities and challenges for the economy. One of the major concerns for economists, business owners and some candidates running for elective office is the fear of the influence of money in elections.

While flooding the system with money might give incumbents or challengers a temporary boost in their bid for public offices, it almost always leaves a trail of long-term devastation for the economy, according to analysts who have seen these events play out before.

Take Uganda’s bond yield curve as an example. Every election year, there has been an uptick in demand for government debt when investors and lenders play what they see as a numbers game.

“In 2014, interest rates were around 14.125%. When it came to 2015 and 2016 (election periods), there was a lot of political activity and interest rates on bonds reached close to 18% by the end of 2016. In such times, there is a bit of pause in funding by global players,” Alex Kakande, a finance and investment specialist, says.

“Interest rates are already up (in the market), but it is anticipated that they will rise further because investors are demanding compensation for the increased risk as the Government borrows more money.”

The biggest downside for the economy during election cycles has been the reduced tourism and foreign direct investment inflows due to heightened or perceived risks that come with it. This has created forex exchange volatility during this period.

The suspension of foreign aid for several countries, including Uganda, by the US adds to the challenge. Aid has been an important component of Uganda’s fiscal system.

Donor aid has, over time, provided the necessary resources to fill gaps in key sectors that are not adequately funded through the main budget. The disruption in donor aid is anticipated to cause shocks in fiscal planning where the government cash position is already constrained.

However, Uganda remains one of the leading destinations for foreign direct investment in East Africa. The Africa Risk-Reward Index for 2023, compiled by Oxford Economics Africa, ranked Uganda as East Africa’s most rewarding economy to invest in after posting one of the biggest positive movements in their overall risk-reward scores between 2022 and 2023.

“Every time there is a political risk, investors usually request a higher return for their investment. We have seen it in Kenya, Tanzania and other countries,” Kakande says.

He says borrowing during campaign cycles by the Government can lead to a squeeze in lending to the private sector credit.

Uganda’s overall gross domestic product is projected to expand from sh224 trillion (about $57.5b) in the 2024/25 financial year to sh250 trillion (about $63.6b) in the 2025/26 fiscal year, according to data from the finance ministry.

What economic issues are at play?

Adam Mugume, the Bank of Uganda executive director for research, says the net impact of elections on the economy depends on how well leaders balance general measures with long-term fiscal discipline.

“Electioneering is like any pothole when you are driving a car and you know you have to navigate. You have to make sure you don’t overspeed during that time because you know you are driving a Vitz car and it will be swallowed by a pothole in the road,” Mugume says.

“Elections come with a combined effect. They normally come with low agricultural production and a volatile exchange rate. That combination is what complicates the period. It is not necessarily about government expenditure.

“It is about people not being in the garden digging because they are getting free money from elections. Then the exchange rate is depreciating because foreign direct investment is sitting on the fence and you have a question mark about the policy rate that is about to come. All that combination is what complicates the story.”

Mugume says the central bank predicts a repeat of the 2011 scenario, where inflation rose to 30%, partly linked to government spending during election time.

“The only year that caught us off guard was 2011 and 2012. We believe that this time round, we have managed to constrain liquidity. That has helped in exchange rate stability. We know where the liquidity is.

“We also know that the Government is constrained on the expenditure side,” he notes.

“We are coming from a background to elections that is more stable. Inflation will remain below 5% unless something extraordinary happens such as if the wars within the region escalate and global dynamics become worse than we are seeing.”

Using money in campaigns

Recently, the Electoral Commission raised concerns about the high costs of elections linked to the commercialisation of politics.

When money in circulation increases excessively, as it might happen during the election period, it may lead to inflation, currency depreciation or widening wealth gaps that create challenges for the economy.

In their paper, Voting With The Shilling, Wilson Muna and Michael Otieno note that money is an important ingredient in winning any elections in Africa, a practice they wish could be strongly controlled.

“Despite influential political actors exploiting legal gaps, successful electoral reforms must focus on reducing the cost of campaign financing. In every election cycle, an independent body should continue to monitor and suggest ways to limit the use of money in wooing voters,” the paper reads in part.

“And since money has often been cited as the root cause of bad governance, limiting the amount of money flowing or being pushed into the system is the obvious remedy.”

Last year, the Cabinet endorsed a proposal to curb the commercialisation of politics while at a retreat at the National Leadership Institute.