The Numbers Don't Lie, But They Can Mislead: Uganda's Economic Reality

 By Richard Sebaggala

  

Recently, I read an article by Chief Business Correspondent Ian Verrender, which criticized the Reserve Bank of Australia (RBA) for relying on outdated economic theories about inflation and employment. Verrender highlighted how economic thoughts, such as the Phillips Curve, are often used by governments and policymakers to justify controversial decisions. For example, he noted that many economists believe that to control inflation, 5% of the workforce must be unemployed, thus normalizing unemployment without considering its devastating effects on individuals and their families.

The argument resonated with me, as I reflected on how Ugandan policymakers and economists often employ familiar economic theories and statistics to justify fiscal and monetary decisions that have perpetuated poverty. In Uganda, the misuse of economic statistics has become a powerful tool for justifying government inefficiencies. Borrowing a famous phrase, “Statistics are like mini skirts: they reveal just enough to keep you interested, but what they hide is far more important.” This sentiment aptly captures how numbers are often manipulated to paint a rosy picture while obscuring deeper systemic failures. Below are key statistics and economic theories that require scrutiny in the Ugandan context.

1. Debt-to-GDP Ratio: A False Sense of Security

The debt-to-GDP ratio has become a prominent metric utilized by government officials to rationalize the escalating levels of national debt. According to a report published by the International Monetary Fund (IMF) in February 2024, Uganda's public debt has surged to unprecedented heights, amounting to 96.1 trillion Ugandan shillings (approximately $25.3 billion or 52 percent of GDP) as of June 2023, as detailed in a recent Auditor General's report. This total comprises 44.6 trillion shillings in domestic debt and 52.8 trillion shillings sourced from international creditors. Notably, this figure does not account for an additional 7 trillion shillings in loans currently awaiting parliamentary approval. Consequently, each of Uganda's 45 million citizens bears a debt burden of approximately 2.5 million shillings.

Emerging evidence indicates that Uganda may be at risk of entering a "public debt safety trap," wherein a seemingly favorable debt position—predicated on conventional debt sustainability metrics—misleadingly suggests that the country possesses greater fiscal capacity for borrowing, particularly when the current debt levels remain beneath established national or international thresholds. By juxtaposing Uganda's debt with its overall economic output, officials contend that borrowing remains within manageable limits. However, this interpretation overlooks essential factors, including the productivity of the borrowed funds, the escalating burden of debt servicing, and the long-term viability of such borrowing practices.

The debt-to-GDP ratio fails to accurately reflect the economic realities faced by the nation, where borrowed capital is frequently allocated to unproductive initiatives, white elephant projects, or is lost to corruption. Instead of critically assessing the efficiency of public expenditure, policymakers often rely on this statistic as a justification for imprudent borrowing practices that ultimately encumber future generations.

2. GDP Growth: The Mirage of Economic Success

The Ugandan government frequently employs impressive GDP growth figures and sectoral successes to construct a narrative of a thriving economy. While these statistics may suggest the country is on the right track, deeper issues such as poverty, inequality, and the need for inclusive growth remain inadequately addressed.  In the 2023 State of the Nation Address, the President highlighted Uganda's economic expansion from $1.5 billion in 1986 to approximately $49.4 billion, projecting continued growth of 6.5-7.0% annually driven by increased manufacturing and regional trade. However, these narratives often obscure the unequal distribution of this growth. Similarly, growth projections and claims of reaching middle-income status are used to paint a rosy economic picture, ignoring the reality that many Ugandans remain in poverty.

The government's focus on infrastructure investments, such as roads and industrial parks, often highlights the visible progress of large-scale projects while sidelining discussions on their actual impact on job creation and poverty reduction. This strategic presentation of economic statistics diverts attention from the critical need for inclusive and equitable economic policies, allowing inefficiencies and inequalities to persist unchallenged.

 

3. Inflation Targeting: Stability at the Cost of Growth

Research indicates that while inflation targeting aims to stabilize prices, it often comes with significant drawbacks, particularly in developing economies. The framework prioritizes low inflation, frequently achieved through high interest rates, which can suppress investment, restrict credit availability, and hinder economic recovery (Atesoglu & Smithin, 2006; Ndikumana, 2016). In Uganda, the Bank of Uganda’s inflation targeting policy exemplifies this trade-off, as the focus on maintaining low inflation leads to elevated interest rates that disproportionately affect the economy’s most vital sectors. High borrowing costs stifle the growth of small and medium-sized enterprises, which are crucial to Uganda’s economic landscape, limiting their capacity to expand, invest, and create jobs. This approach, often justified under the banner of economic stability, overlooks the broader impact on growth and employment, painting a misleading picture of economic health. While the central bank’s policy is lauded for keeping inflation in check, it simultaneously constrains the very drivers of economic development, underscoring the disconnect between inflation targeting and the inclusive growth that Uganda desperately needs.

 

4. Poverty Headcount Ratios: Surface-Level Improvements

Government reports often tout reductions in poverty headcount ratios as evidence of progress. For example, statements like "Uganda has made significant progress in reducing poverty over the past decades, from 56.4 percent in 1992/93 to 19.7 percent in 2012/13 and 20.3 percent in 2019/20" have become commonplace in government policy documents. However, these statistics often fail to capture the depth and severity of poverty, oversimplifying the complex realities faced by many Ugandans.

While it may be true that many Ugandans have risen slightly above the poverty line, they remain vulnerable to economic shocks, such as rising food prices or medical emergencies, which can easily push them back into extreme poverty. The reliance on headcount ratios oversimplifies the complex realities of poverty and masks the inadequate delivery of essential services like healthcare and education. A more comprehensive approach to measuring poverty is needed to accurately assess the country's progress and identify areas where targeted interventions are required.

 

5. Exchange Rate Stability: A Double-Edged Sword

Maintaining a stable exchange rate is often portrayed as a sign of economic prudence. A case in point is the Bank of Uganda’s decision in April 2024 to raise the Central Bank Rate (CBR) to 10%, highlighting the complexities of managing exchange rate stability in a volatile economic environment. While the intention behind a higher CBR is to attract foreign investment and bolster the shilling, this approach can have unintended consequences for domestic economic competitiveness and growth. By propping up the shilling, the Bank of Uganda risks harming exporters and local producers, as Ugandan goods become less competitive on the international market. Additionally, higher interest rates increase borrowing costs and suppress investment in productive sectors, ultimately stifling economic growth and undermining the broader goals of economic stability.

6. Tax Revenue to GDP Ratio: The Overlooked Burden

Uganda's push to increase its tax-to-GDP ratio is frequently touted as a crucial step towards economic development. The Uganda Revenue Authority (URA) Commissioner General  recently highlighted the nation's growth in this ratio to 14% in the last financial year, expressing ambitions to reach 18%—a threshold commonly associated with developed economies. However, Uganda's tax-to-GDP ratio remains lower than the African average of 15.6%, and significantly below many developed nations, which the government uses to justify its push for increased tax collection.

While expanding the tax base is framed as necessary for national progress, the burden often falls disproportionately on lower-income individuals and small businesses. The aggressive tax policies target those least able to bear the costs, while larger firms and politically connected entities frequently benefit from tax exemptions and loopholes, creating a regressive system that exacerbates economic inequality. Between 2010 and 2021, Uganda's tax-to-GDP ratio increased by 3.9 percentage points, yet this growth has primarily been driven by taxing sectors that are already financially constrained rather than tapping into more equitable revenue streams.

 

The prioritization of achieving higher tax revenues often overlooks the impact on economic growth and social welfare. By pushing for higher tax collections in a manner that disproportionately affects the most vulnerable, the government risks stifling small businesses and discouraging economic activity in the informal sector, which employs a large portion of the population. This approach, while intended to bolster state revenues, can inadvertently deepen economic disparities, illustrating how the tax-to-GDP push, though well-intentioned, often masks the underlying burden it places on those least able to afford it.

Conclusion

Uganda's economic statistics and theories, often paraded as evidence of prudent management and progress, are too often used to mask deeper systemic issues. From debt levels to tax-to-GDP ratios, these figures are wielded as tools to justify government inefficiencies and deflect accountability. While Uganda’s GDP growth , borrowing to finance infrastructure projects, low inflation, headcount poverty reduction, and rising tax-to-GDP ratio are celebrated, they fail to capture the full picture of economic challenges faced by ordinary citizens and businesses alike.

 

It's time for economists and policymakers to move beyond surface-level statistics and engage in a more honest appraisal of the country's economic realities. Instead of solely relying on abstract numbers, we must ask critical questions: Are Ugandans truly benefiting from the country’s economic growth? Are families able to afford basic necessities, or are they struggling under the weight of rising living costs? Can they access quality healthcare and education, or are these essential services out of reach for the majority? Are decent, stable jobs available, or do most rely on precarious, informal work that offers little security?

 

Equally important, how are firms coping with the increasing tax burden? Can they meet their tax obligations, or are they forced to cut corners, underreport, or finance taxes through unsustainable means such as high-interest loans? How are businesses, especially small and medium-sized enterprises, surviving under the weight of high taxes, and what impact does this have on their ability to grow, create jobs, and contribute to the economy?

By shifting the focus from statistical achievements to the tangible outcomes affecting people’s lives and the realities faced by businesses, economists and policymakers can better identify and address the underlying causes of poverty, inequality, and economic stagnation. Developing targeted policies that prioritize the real-world needs of Ugandans and firms over the pursuit of impressive statistics is essential. Only then can we begin to tackle the genuine issues that lie behind the often misleading façade of economic success, creating a path toward a more inclusive and equitable economy.