UGANDA ECONOMIC UPDATE 24TH Edition Investing in Early ChildhoodDevelopment for Transformationof Human Capital in Uganda February 2025 UGANDA ECONOMIC UPDATE 24TH EDITION Investing in Early Childhood Development for Transformation of Human Capital in Uganda February 2025 © 2025 International Bank for Reconstruction and Development/International Development Association The World Bank Group 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclu- sions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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CONTENTS Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix 1. Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.1. Global growth remains resilient as inflation outlook improves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2. Uganda’s economy continues to strengthen following improvements in net exports . . . . . . . . . . . . . . . .3 1.3. Pressures in the external sector mounted amidst weak financial inflows, despite strong growth in exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 1.4. Fiscal consolidation continued for another year, which could be better balanced with a greater focus on DRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 2. Economic Outlook, Risks and Key Structural Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.1. Uganda’s economic prospects hinge on oil production and strong growth in tourism and agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 2.2. Uganda urgently needs to prioritize jobs-rich economic transformation, including investment in its future labor force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 3. Investing in Early Childhood Development for Transformation of Human Capital in Uganda . . . . . 25 3.1. The case for investing early . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 3.2. The state of ECD services in uganda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 3.3. Building an effective ECD system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 3.4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 3.5. Recommendations for Investing in Early Childhood Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 Annex 1: Central Government Fiscal Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Annex 2: Uganda’s Public Sector Rationalization—An Opportunity to Manage Costs and Enhance Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 i Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda List of Figures Figure B1.1 Headline Inflation in SSA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Figure B1.2 Central Bank's Ex-Post Real Policy Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Figure B1.3 Real GDP Trends, SSA Region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Figure B1.4 Real GDP Growth Projections v/s Realized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Figure B1.5 Human Development and GDP Per Capita. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Figure B1.6 Population Projections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Figure 1 Purchasing Managers Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 2 Core Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 3 Policy Interest Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 4 Commodity Price Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 5 Domestic and External Drivers of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 6 Real GDP Growth and Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 7 Real GDP Trends, SSA Region. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 8 High Frequency Economic Activity Indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 9 Headline Inflation in Uganda and Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 10 Bank of Uganda's Key Interest Rates and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 11 Trend in Money Supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 12 Domestic Credit to Private Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 13 Growth in Exports, Uganda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 14 Uganda’s Export Potential, Product-Wise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 15 Imports, Uganda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 16 FX Reserves and Exchange Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 17 Fiscal Deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 18 Revenue and Expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 19 Uganda Public Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 20 The Heckman Curve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Figure 21 Uganda’s Population Pyramid, 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Figure B2.1 The Nurturing Care Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Figure 22 Children Not Stunted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Figure 23 Childcare Arrangements for Disadvantaged Women Entrepreneurs . . . . . . . . . . . . . . . . . . . . . . 32 Figure 24 Over- and Underage Enrollment in P.1 in Uganda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Figure 25 Public Education Expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 List of Tables Table 1 Balance of Payments Position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Table 2 Central Government Fiscal Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Table 3 Baseline Economic Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Table 4 Selected Indicators Related to the NIECD Policy Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table 5 Cost/Benefit Analysis of Investing in Pre-Primary Education in Uganda. . . . . . . . . . . . . . . . . . . 35 List of Boxes Box 1: Uganda Macroeconomic Snapshot in Regional Comparsion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Box 2: The Importance of a Multisectoral Approach to ECD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ii ABBREVIATIONS AEs Advanced Economies MAAIF Ministry of Agriculture, Animal Industry BoU Bank of Uganda and Fisheries CFR Charter for Fiscal Responsibility MDAs Ministries, Departments, and Agencies DRM Domestic Revenue Mobilization MISs Management Information Systems DRMS Domestic Revenue Mobilization Strategy MoD Ministry of Defence DSA Debt Sustainability Analysis MoES Ministry of Education and Sports DTS Digital Tax Stamps MoFPED Ministry of Finance, Planning and EAC East African Community Economic Development ECCE Early Childhood Care and Education MoGLSD Ministry of Gender, Labor, and Social ECD Early Childhood Development Development ECE Early Childhood Education MoH Ministry of Health EFRIS Electronic Fiscal Receipting Invoice MoWE Ministry of Water and Environment System MTI&C Ministry of Trade, Industry and EMDEs Emerging Markets and Developing Cooperatives Economies NDP National Development Plan EUDR European Union Anti-Deforestation NGO Non-Government Organization Regulation NIECD National Integrated Early Childhood EY Early Years Development FDI Foreign Direct Investment NIRA National Identification and Registration FY Fiscal Year Authority GDP Gross Domestic Product NPA National Planning Authority GEEAP Global Evidence in Education Advisory NRM National Resistance Movement Panel NTC National Technical Committee GGHE-D General Government Health Expenditure PDM Parish Development Model from Domestic Sources PER Public Expenditure Review GoU Government of Uganda PFP Private-for-Profit HCD Human Capital Development PfR Parenting for Respectability HCI Human Capital Index PMI Purchasing Managers Index PFM Public Finance Management SSA Sub-Saharan Africa IMF International Monetary Fund UBOS Uganda Bureau of Statistics iii Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda UCDA Uganda Coffee Development Authority VAT Value Added Tax UDHS Uganda Demographic and Health Survey WASH Water, Sanitation, and Hygiene UShs Ugandan Shilling WHO World Health Organization VAC Violence Against Children iv FOREWORD Despite ongoing global challenges, economic activ- As previous updates, human capital—the knowl- ity in Uganda has been robust and the economy edge, skills, and physical health that enable people to remains buoyant. Growth has been broad-based, be productive—is the key to Uganda’s development. with services and industrial sectors leading the This 24th edition of the Uganda Economic Update way through gains in manufacturing, construction, focuses on the importance of public investment in and electricity production. Inflation decreased Early Childhood Development (ECD) as the frame- significantly—even falling below the central bank’s work to support this goal. This analysis is designed to target—due to the lessening impact of global eco- inform the policy maker as to the vital significance of nomic shocks, a tight monetary policy and stable ECD in harnessing Uganda’s demographic dividend exchange rates. However, whilst fiscal consolidation through its young population. By investing in the early efforts continued, there remains an urgent need to years, ECD programs ensure children receive essen- focus on domestic revenue mobilization to enhance tial nutrition, healthcare, and education to become and protect required expenditures on human capital healthy, skilled, and productive adults. Then, as these investment, particularly in health and education, as well-prepared individuals enter the workforce, they emphasized in the 22nd and 23rd editions of the will drive higher productivity, innovation, and eco- Uganda Economic Update. nomic growth. Therefore, investing in ECD will help Uganda harness this burgeoning potential, capital- Uganda’s growth path remains resilient in ize on the demographic dividend, drive accelerated the medium term, however there are vulnerabilities growth and improve living standards in the medium to downside risks including delays in oil production term. The World Bank supports Uganda’s efforts to and climate-related and other shocks. High oil-related understand and build upon this key opportunity to infrastructure imports have kept the current account transform such a youth-rich population into a valuable deficit elevated for another year, despite robust export economic asset by investing in the future productivity growth, which has led to continued pressure on of its young people now. reserves. Improved export diversification along with exchange rate flexibility will be important going for- ward. External sector sustainability underscores the Qimiao Fan need to rebuild external buffers through continued fis- Country Director cal consolidation and improved export diversification, Kenya, Rwanda, Somalia, and Uganda along with a greater flexibility of the exchange rate. Africa Region v ACKNOWLEDGMENTS This 24th edition of the Uganda Economic Update has the report, and Virgina Larby for editing the report. been prepared by a core team, led by Saadia Refaqat Pearl Namanya (Team Assistant, AEMUG) provided (Sr. Economist, EAEM1), and comprising Shawn logistical support while Bernard Tabaire managed Powers (Sr. Economist, HEAED), Silver Namunane the communications and dissemination strategy. The (Economist, EMFTX), Ellinore Carroll (Young Profes- team gratefully acknowledges the overall guidance sional, HAEE2), Dominick Peschel (Sr. Economist, provided by Qimiao Fan (Country Director, AECE2), DECPG), Barbara Kasura Magezi (Sr. Public Sector Mukami Kariuki (Country Manager, AEMUG), Abha Specialist, EAEG1), Verena Maria Fritz (Lead Gover- Prasad (Practice Manager, EAEM1), Tihomir Stucka nance Specialist, EAEG1), Kristina Noelle Vaughan (Sr. Economist, EEADR), Amer Hasan, (Sr. Economist, (Economist, EAEPV), Jacklyn Makaaru Arinaitwe (STC, HEDGE), and Maja Capek (Economist, HMNED). HAEE2), and Daniel Lukwago (STC, AEMUG). The Finally, the team would like to thank the senior man- team is grateful to Marek Hanush (Program Leader, agement and staff of the Ugandan Ministry of Finance, EAEDR), William G. Battaile (Lead Economist, EAEDR) Planning, and Economic Development as well as the and Pedro Carden-Infantes (Program Leader, HAEDR) Ministry of Education for their commitment and close for their guidance on the structure and messaging of collaboration during the preparation of this report. vii EXECUTIVE SUMMARY State of the economy This trend ranks Uganda among the East African nations with the lowest inflation rates over the past The Ugandan economy continues to demonstrate year. The decline in inflation is driven by the wan- resilience. Uganda’s economy recorded 6.1 percent ing impact of global economic shocks, along with growth in FY2023/24 on top of 5.3 percent growth the tight monetary policy and stable exchange rates. As year before. Moreover, this growth remained broad- a result of higher returns from government securi- based with services and industrial sectors leading the ties, banks allocated more credit to the public sec- way through gains in manufacturing, construction, tor to finance public spending. As a result, private and electricity production. The economy grew by 6.7 sector credit (PSC), remained lackluster for another percent in Q1-FY2024/25, compared to 5.6 percent year, growing by 9.6 percent in FY2023/24 and 8.7 growth in the same period last year. This was on the percent in the first five months of this fiscal year.1 back of strong contributions from the agriculture However, Uganda’s PSC penetration remains lower sector because of high food-crop growing activities. than that of regional peers, which could impact long- Moreover, Q1 growth remained broad-based, growth term growth. in the industrial sector (from manufacturing and construction related activities) as well the services On the external side, the current account sector. Post-COVID-19 policies and eased global sup- deficit remained high despite some moderation ply chain disruptions boosted exports. Government due to improved merchandise trade performance. consumption rose, though domestic demand moder- The current account deficit during FY2023/24 stood ated under tight monetary policies. Early economic at 6.7 percent of Gross Domestic Product (GDP) or activity indicators through November 2024 suggest almost 1 percent of GDP lower than last year. This sustained strong growth. improvement was driven by positive performance of merchandise trade, with growth in exports supported Inflation in Uganda has significantly by favorable terms of trade—particularly in gold, cof- decreased, falling below the central bank’s tar- fee, and metals. Other components of the balance of get. During FY2023/24, headline inflation declined payments, such as the services trade balance, dete- to 3.2 percent, on average, from 8.8 percent in riorated due to higher costs in transport and travel FY2022/23. Food prices slowed due to favorable weather conditions, while core inflation also declined. 1 Loans only. ix Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda services2 and increased demand for business ser- Individuals (HNWIs) and enforce severe penalties for vices. Imports grew significantly, led by private sector non-compliance to improve the fairness of the tax sys- demand for mineral products, machinery, and food, tem and generate additional tax revenues; (iii) provide reflecting the country’s infrastructure and oil explora- capacity-building initiatives for small businesses and tion needs. Foreign direct investment flows remained establish a taxpayer education unit at Uganda Reve- resilient, driven by oil-related investments, while offi- nue Authority (URA) to enhance public understanding cial external financing declined sharply, affecting the of tax policies; and (iv) increase enforcement to ensure government’s budgetary support. Foreign exchange digital companies comply with Value Added Tax (VAT) reserves stood at US$3.4 billion (covering 3 months provisions, thereby improving tax revenues. This fiscal of imports)3 at end-October 2024, reflecting a decline consolidation agenda can be converted into a genu- of US$693 million compared to June 2023, and the ine fiscal adjustment that is more effective and growth Ugandan shilling (UShs) depreciated by about 6 per- accelerating by pursuing a balanced adjustment in cent in the first eight months of FY2023/24 against the spending to allocate more resources to human capital US dollar (US$). Since then, it has broadly recovered development especially ECD as the first building block and indicated an appreciation of 6.6 percent by end for successful learning outcomes. November 2024. These trends underscore the need to rebuild external buffers through continued fiscal con- The medium-term outlook for Uganda solidation, along with more flexibility of exchange rate. remains broadly positive, with significant down- side risks. Real GDP growth is projected at 6.2 per- Fiscal consolidation efforts continue but cent in FY2024/25. The fiscal deficit is projected to need more focus on domestic revenue mobiliza- rise to around 5.7 percent of GDP as election year tion (DRM) to mitigate negative impacts on priority approaches, pushing debt to slightly over 52 percent expenditures like human capital investment. The of GDP while current account deficit (as percent of Central Government’s fiscal deficit (including grants) GDP) is projected to remain elevated for another year. narrowed from 5.5 percent of GDP in FY2022/23 to The start of oil production in late 2025/26, projected 4.8 percent in FY2023/24. Fiscal deficit nevertheless to peak at 230,000 barrels a day, will significantly remained higher than planned, and slightly over what boost growth while making durable improvements in was envisioned in the Charter for Responsibility (CRF). fiscal and external balances in the medium-term. How- Moreover, primary deficit, as a percentage of GDP, rose ever, potential delays in oil production pose a seri- to 1.7 percent of GDP from the fiscal year target of 0.6 ous downside risk to the outlook. Inflation is likely to percent of GDP. Two supplementary budgets totaling remain close to the central bank target yet vulnera- 2.2 percent of GDP were approved during FY2022/23. ble to commodity price volatility, weather conditions, Unplanned spending through supplementary bud- and exchange rate depreciation. Rule-based manage- gets have become a norm that dilutes budget priori- ment of oil revenues, along with implementation of the ties, transparency and predictability. Expenditure cuts delayed DRM strategy in the medium-term, remains that impact human capital investments on essential critical for securing durable fiscal space for Uganda. social programs, including Early Childhood Develop- ment (ECD) have driven Uganda’s fiscal consolidation Human capital—the knowledge, skills, and in recent years. This can undermine the long-term eco- physical health that enable people to be produc- nomic and social benefits that ECD programs provide, tive—will play a pivotal role in improving Uganda’s such as improved educational outcomes, better health, long term potential growth, especially for creat- and increased productivity. Rather than expenditure ing more jobs in non-oil sectors. Improved quality cuts, effective implementation of the Domestic Reve- and equal access of human capital services is key nue Mobilization Strategy (DRMS) can help Uganda to to making future growth more inclusive. As empha- improve the quality of fiscal consolidation. The Govern- ment of Uganda should take steps to: (i) expedite the 2 Higher costs in transport and travel services were driven by a rise in transport payments as increased air implementation of the Tax Expenditure Governance passenger fares and sea freight costs reflected higher Framework to manage tax exemptions effectively and shipping rates and insurance premiums after the Red improve the efficiency of the tax system; (ii) repeal Sea attacks. provisions that exempt the income of High Net-Worth 3 Excluding oil project related imports (BoU). x Executive Summary sized in this Economic Update’s special topic, ECD investments in human capital today, starting with early is crucial for harnessing Uganda’s demographic divi- childhood (as discussed in Part 2 of this report), will dend given its young population. By investing in their determine whether the country capitalizes upon or early years, ECD programs ensure children receive misses its demographic dividend. These investments essential nutrition, healthcare, and education, so they are crucial for addressing challenges such as low or become healthy, skilled, and productive adults. This stalled economic transformation, demographic transi- foundational support transforms a large youth popu- tions, and rapid urbanization. Uganda needs a more lation into a valuable economic asset. As these well- balanced growth paradigm, one in which human prepared individuals enter the workforce, they drive capital development matches infrastructure devel- higher productivity, innovation, and economic growth. opment. Only then can Uganda achieve long-term Investing in ECD will help Uganda harness its young growth potential while accelerating intergenerational population’s potential, capitalize on the demographic economic mobility.4 This will also require expanding dividend, drive accelerated growth and improve living fiscal space through a more balanced adjustment, standards in the medium term. improving efficiency of spending and allocating more resources to human capital development and growth Investment in ECD can significantly shape enhancing activities by strengthening DRM. Further- labor market outcomes for Ugandans and drive more, higher revenues will enhance the government’s economic growth. By enhancing cognitive and non- capacity to spend while reducing reliance on domes- cognitive skills from a young age, increased ECD tic borrowing, benefiting the private sector. investment lays the foundation for higher educational attainment and better job performance, boosting The special topic of UEU24 focuses on the worker productivity. Individuals who benefit from qual- critical importance of ECD for Uganda’s present ity early childhood education are more likely to be pro- and future prosperity. Early childhood is the most ductive, adaptable, and innovative workers, leading critical period for human capital formation, because to increased earnings and job stability. This reduces this is when people acquire fundamental cognitive, unemployment rates and fosters a more efficient and social, and emotional skills that are essential for future dynamic labor market. Improved health outcomes productivity. Given the rapid pace of brain develop- associated with ECD contribute to a healthier and more ment in early life, investments in ECD are more effec- resilient workforce. As these individuals enter the labor tive and cost-efficient than attempting to make up for market, their enhanced skills and productivity drive missed opportunities later. Yet the benefits for ECD economic growth, innovation, and competitiveness. are not only in the distant future: expanding services Overall, the long-term benefits of ECD investments are such as childcare and pre-primary education can substantial, creating a virtuous cycle of development drive economic growth in the near term by enabling that propels economic growth and prosperity. more women to join the labor force and boosting the productivity of women-owned enterprises. Current human capital outcomes are not The special topic of UEU24 focuses sufficient to achieve the country’s growth aspira- on the critical importance of ECD tions, and Uganda must position itself for acceler- for Uganda’s present and future ated growth by investing more, and earlier, in its prosperity people. According to the Human Capital Index (HCI), a child born today in Uganda will be only 39 percent as Early childhood is a critical period, laying the productive when he or she grows up as compared to foundation for long-term productivity. The impact child who receives a complete education and enjoys of human capital on economic development depends full health. With its changing demographics, Uganda on its effective use in the production process. In many is approaching a one-time opportunity for rapid eco- developing countries, including Uganda, reliance nomic growth known as the demographic dividend low-skill-intensity activities (such as subsistence agri- window, when the country will enjoy a highly favorable culture) and inefficient talent allocation hinder pro- ductivity and stall economic transformation. Uganda’s 4 World Bank 2024d. xi Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda ratio of workers to dependents. Investments in human their children’s development. Parents are children’s capital beginning with early childhood can enable first teachers, and interventions that encourage par- Uganda to capitalize on its demographic dividend. ents to interact with young children in a safe and stimulating way can have a large impact on human Despite progress in some early childhood, capital outcomes. Conversely, an unsafe environment health and nutrition outcomes, inequitable service in the early years has long-lasting negative effects on delivery threatens further advances. Access to qual- brain development. This is significant, since violence ity health care, good nutrition, and water and sanita- against children in Uganda is widespread. Evidence- tion services underpin health outcomes beginning from backed parenting support programs have been devel- the pre-natal period. While most of these outcomes are oped in Uganda, and though there is scale potential, on an improving trend, more investment is needed for implementation is small-scale and fragmented. Uganda to achieve its growth aspirations. For example, a forward projection of “business as usual” against stunt- Uganda’s ECD system suffers from a lack ing—a key component of the HCI—will not be sufficient of adequate financing and underdeveloped qual- to achieve Uganda’s Vision 2040 targets. To accelerate ity assurance and coordination mechanisms. progress, Uganda will need to work to overcome signifi- Financing for key ECD sectors is well short of what is cant inequalities in access to basic health, nutrition, and required for adequate service delivery, contributing to water and sanitation services, particularly for house- poor quality and inequitable access across interven- holds in rural areas and with low socio-economic status. tions. There is also a lack of data to monitor quality and poorly developed mechanisms for coordination Currently, pre-primary education is both ineq- and quality assurance. uitable and inefficient, contributing to challenges in primary education and beyond. Uganda has tra- Realizing the vast potential of ECD to accel- ditionally relied on the private sector for pre-primary erate progress in human capital development and education. High parental demand, coupled with a lack economic growth will require a decisive break of affordable private providers , led to improvised pre- from business-as-usual. The UEU24 presents three primary classrooms that fail to meet young children’s high-level recommendations to set Uganda on a new learning needs. Poor early preparation for learning con- trajectory. First, Uganda should commit to a pathway tributes to repetition and dropout in primary school. of increased public expenditure on ECD. Second, the The Cabinet’s approval of a new Early Childhood Care ECD system needs to be strengthened thorough qual- and Education (ECCE) Policy in May 2024 marks an ity assurance mechanisms driven by timely, action- important shift, creating an opportunity for Uganda to able data and incentives. Third, policymakers should address these challenges by introducing a year of qual- prioritize strengthening the ECD workforce by making ity, government-financed pre-primary education. these professions more attractive and implementing practical, hands-on pre-service and in-service training. Childcare is a human capital development opportunity—both for businesses and for unlocking In conclusion, the UEU24 identifies four key potential opportunities for Ugandan women. The ECD investment priorities for scale-up in the near lack of affordable and accessible childcare options, par- term. First, is the expansion of primary health care facil- ticularly for women in the informal sector, limits female ities and community hospitals in underserved areas labor force participation and contributes to suboptimal of the country. Second, in line with the new ECCE Pol- care arrangements for children. Recent legislation and icy, is the introduction of one year of quality, publicly policy developments have aimed to advance childcare financed pre-primary education through government provision in both formal and informal workplaces, such schools. Third, is the development of affordable models as markets. However, without subsidies incentives, pub- of childcare that prioritize women in the informal sector, lic-private partnerships, and suitable regulations for the and particularly those with children under three years of sector, these opportunities remain largely unrealized. age. The fourth and last investment priority for the Gov- ernment of Uganda is to begin the process of scaling Parents in Uganda need more support to up parenting support programs by engaging in prom- provide a safe and stimulating environment for ising “policy pilots” before wide-scale implementation. xii Executive Summary BOX 1: UGANDA MACROECONOMIC SNAPSHOT IN REGIONAL COMPARSION Inflationary pressures have broadly subsided Central banks’ policy stance remained cautious across the Sub-Saharan Africa (SSA) region due to evolving global economic uncertainty FIGURE B1.1 Headline inflation in SSA FIGURE B1.2 Central bank's ex-post real (% y/y change ) policy rate (% per annum, latest) 16 12 14 9 12 10 6 8 3 6 0 4 2 –3 Zambia Cameroon Mauritius Eq. Guinea Lesotho Rwanda Ghana Namibia South Africa Uganda Kenya Mozambique 0 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19 Nov-19 Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 Nov-21 Mar-22 Jul-22 Nov-22 Mar-23 Jul-23 Nov-23 Mar-24 Jul-24 Nov-24 Interquartile range Median for group Uganda Latest Average (2017–23) Source: National Statistics Offices, Haver Source: Central Banks, Haver. Economic growth continues to improve in the …yet, most countries are still quite far from region, albeit at an unbalanced pace… their pre-pandemic growth projections, including Uganda FIGURE B1.3 Real GDP trends, SSA region FIGURE B1.4 Real GDP growth projections (Q4-2021=100, 4qma) v/s realized 130 (% annual average) Ethiopia 125 Rwanda Benin 120 Niger 115 Côte d'Ivoire Tanzania 110 Guinea Djibouti 105 Kenya Guinea-Bissau 100 Uganda 95 Burkina Faso Zambia 2021-Q4 2022-Q1 2022-Q2 2022-Q3 2022-Q4 2023-Q1 2023-Q2 2023-Q3 2023-Q4 2024-Q1 2024-Q2 2024-Q3 Ghana Mozambique Cameroon Zambia Uganda Tanzania South Africa 0 2 4 6 8 10 Rwanda Nigeria Namibia Mauritius Lesotho Kenya Ghana Botswana Average growth, 2020–24 (IMF WEO, Oct 2024) Angola Average growth, 2020–24 (IMF WEO, Oct 2019) Source: National Statistics Offices, Haver. Source: IMF. Reforms, focusing on improving human capital, The urgency for reforms becomes more are needed to increase the potential growth pronounced as the regional population is likely to surge FIGURE B1.5 Human development and GDP FIGURE B1.6 Population projections per capita (2000=100, projections start 1.1 from 2023) 380 1.0 340 0.9 300 0.8 260 HDI, 2022 0.7 220 0.6 180 0.5 140 0.4 100 0.3 60 2000 2004 2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048 0.2 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 Asia Europe Americas Africa, excl. SSA SSA countries, Uganda Uganda SSA countries RoW countries excl. UGA Source: World Bank Source: UN Population xiii 1 RECENT ECONOMIC DEVELOPMENTS Global growth remains resilient 1.1.  inflation. More recently, core inflation in AE eased fur- as inflation outlook improves ther reflecting weakening wage pressures and mod- erating services inflation. In AE, central banks started Against the backdrop of declining inflation, which cutting policy rates (Figure 3). has allowed for easing of monetary policy, global growth has stabilized. This year, growth in Advanced Over the last year, volatility in commodity Economies (AEs) has been driven by steady growth in prices has decreased as global economic growth the United States amid a still-tight labor market, while has stabilized and inflation moderated. Commod- growth in the Euro area has remained subdued amid ity prices are expected to decline moderately all in weak consumption and business investment. Emerg- 2025/26, driven by falling oil prices and softening ing Markets and Developing Economies (EMDEs), agriculture commodities (Figure 4).6 In energy mar- excluding China, have benefitted from a pick-up in kets, geopolitical tensions have remained a critical domestic demand and improvements in manufactur- driver of short-term price movements, with markets ing, while activity in the services sector has expanded responding to geopolitical flare-ups. However, under- at a solid pace (Figure 1). In China, economic activity lying long-term factors trend towards lower oil prices remained robust at 4.8 percent in the first three quar- as global oil consumption is decelerating in line with ters of the year. But growth has moderated since the declining oil intensity of global Gross Domestic Prod- second quarter of 2024, weighed down by subdued uct (GDP), a more diversified global oil supply, and domestic demand and a prolonged downturn in the increased spare capacity by Organization of the property sector.5 Petroleum Exporting Countries (OPEC)+ countries. In the beverage markets, coffee and cocoa prices are Despite trending lower, core inflation has forecast to ease in 2025–2026, after they have risen remained above pre-Covid-19 pandemic lev- rapidly this year due to supply shortages. els, mostly due to resilient services inflation in some EMDEs and AEs (Figure 2). At the same time, declin- 5 World Bank 2024a. ing goods inflation resulted the decline in headline 6 ibid. 1 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda FIGURE 1    PURCHASING MANAGERS INDEX (%) FIGURE 2    CORE INFLATION (%) 58 9 8 7 54 6 5 Percent Percent 50 4 3 46 2 1 42 0 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 May-24 Jul-24 Sep-24 Nov-24 Jul-19 Nov-19 Mar-20 Jul-20 Nov-20 Mar-21 Jul-21 Nov-21 Mar-22 Jul-22 Nov-22 Mar-23 Jul-23 Nov-23 Mar-24 Jul-24 Nov-24 EMDEs EMDEs excl. China Global Global AEs EMDEs Source: Haver. Source: Haver. Note: >50 = expansion. Last observation is December 2024. Note: Median. Sample contains 31 AEs and up to 46 EMDEs. Last observation is November 2024. FIGURE 3    POLICY INTEREST RATES FIGURE 4    COMMODITY PRICE PROJECTIONS 8 250 7 6 200 5 Index, 100 = 2019 Percent 4 150 3 2 100 1 0 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 May-24 Jul-24 Sep-24 Nov-24 50 2019 2020 2021 2022 2023 2024 2025f 2026f AEs EMDEs Energy Agriculture Beverages Metals and minerals Source: Haver. Source: World Bank 2024b. Note: Median. Sample contains 16 AEs and up to 76 EMDEs. Last observation is Note: Beverages include coffee, cocoa, and tea. November 2024. AEs = advanced economies, EMDEs = emerging market and developing economies. Growth in Sub-Saharan Africa (SSA) is pro- Public debt is expected to remain elevated, keeping jected to be 3.0 percent in 2024, before acceler- debt-service costs raised. Risks to the outlook are ating to an average of 4.0 percent in 2025/26.7 tilted to the downside, and an escalation in violent As inflation declines and household demand rises, conflict—especially in East Africa and the Horn—would further policy rate cuts may stimulate investment not only prolong a humanitarian tragedy, including growth and support economic activity. However, fiscal displacement and extreme hunger, but also adversely support remains limited due to consolidation efforts, affect economic growth. and while fiscal balances continue to improve across economies, they are doing so at a decelerating pace. 7 World Bank 2024c. 2 Recent Economic Developments 1.2. Uganda’s economy continues FIGURE 5     DOMESTIC AND EXTERNAL DRIVERS OF to strengthen following GROWTH (% y/y growth, contribution in ppts.) improvements in net exports 20 Real GDP growth recorded 6.1 percent broad- 15 based growth in FY2023/24 compared to a 10 5.3 percent increase last fiscal year. Since start of FY2023/24, net exports have been the key drivers 5 of growth. Amidst robust global demand, this trend is 0 supported by an easing of supply chain disruptions, –5 which helped lower domestic inflationary pressures and improve business confidence, especially among –10 outward-oriented sectors. Reflecting this, real exports –15 exhibited a substantial 46.4 percent increase in FY2023/24 as compared to a 4.7 percent increase –20 12341234123412341234123412341 in real imports.8 Domestic demand, on the other hand, FY18 '19 '20 '21 '22 '23 '24 '25 showed moderation amid tight monetary policy stance Domestic demand Net exports Statistical discrepancy GDP and fiscal consolidation (Figure 5).9 The composition Source: UBOS. of real GDP by expenditure shows that consumption remained the predominant contributor with 80 percent FIGURE 6     REAL GDP GROWTH AND DRIVERS share, and that household consumption accounts (% y/y growth, contribution in ppts.) for almost 82 percent of total consumption. Invest- 15 ment share during FY2023/24 remained constant at around 25 percent. However, within total investment, Annual average growth 10 the share of public investment rose to 32 percent from 25 percent in FY2021/22—driven by public investment in oil related infrastructure—while the private invest- 5 ment share declined to 68 percent from 75 percent in FY2021/22. Amid an inflation-focused monetary 0 policy and a risk-averse banking system, more effec- tive coordination of monetary and fiscal policies is –5 required to create an enabling environment for private- sector growth. The first quarter of FY2024/25 shows similar trends as last fiscal year; however, significant –10 12341234123412341234123412341 statistical discrepancies require caution in interpreta- FY18 '19 '20 '21 '22 '23 '24 '25 tion until the data are further clarified. Agriculture Industry Services Net taxes GDP Source: Uganda Bureau of Staistics (UBOS). Led by improvement in agriculture and indus- try, Uganda’s economy has shown remarkable economy—recorded a robust 6.8 percent increase in resilience in the face of recent global economic FY2023/24 compared to 5.9 percent in FY2022/23. In pressures (Figure 6). Growth accelerated further by the same period, growth in the industrial sector acceler- 6.7 percent in Q1-FY2024/25. After 5.7 percent growth ated to 4.9 percent, led by manufacturing and construc- in the first half of FY2023/24, the real economic out- tion related activities. This growth was also supported put further accelerated in the second half of the fis- by significant (8.9 percent) growth in value-addition cal year with 6.6 percent year-on-year (y-o-y) growth. Broadly, this momentum was mainly driven by manu- 8 Both goods and services contributed towards significant facturing, construction, and mining sectors followed by growth in exports—particularly gold exports (see a strong recovery in retail and wholesale trade, tourism, discussion in the external sector section 1.3). and real estate activities. In particular, the services sec- 9 Domestic demand is defined as the sum of consumption tor—which is about half of the total value addition in the and investment. 3 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda from the electricity sector, driven by increased hydro- FIGURE 7    REAL GDP TRENDS, SSA REGION power generation. Q1-FY2024/25 growth momentum (Q4-2021=100, 4qma) remained bullish as the economy grew by 6.7 percent 130 q-o-q with the agriculture sector recording a robust 8.7 125 percent increase compared to 4.9 percent in the same 120 quarter last year. Improved food crop growing activi- 115 ties—amid moderate weather conditions, and better 110 water availability—remained key factors in first quarter 105 growth, followed by the industrial sector which regis- tered a growth of 5.9 percent y-o-y during the first quar- 100 ter of FY2023/24, driven by higher manufacturing and 95 2021-Q4 2022-Q1 2022-Q2 2022-Q3 2022-Q4 2023-Q1 2023-Q2 2023-Q3 2023-Q4 2024-Q1 2024-Q2 2024-Q3 construction activities. In terms of regional growth comparison, Zambia Uganda Tanzania South Africa Rwanda Nigeria Namibia Mauritius Uganda continues to perform well (Figure 7). Lesotho Kenya Ghana Botswana Uganda has been one of few countries where growth Angola has bounced back to pre-pandemic levels and one Source: National Statistics Offices, Haver. of the four countries, along with Kenya, Rwanda, and Tanzania, that were the largest contributors to optimism (Figure 8).14 In particular, the overall index the East African Community’s growth performance.10 value is hovering around 58 for the last 12 months Uganda has the potential to become the leader of against the benchmark value of 50.15 Specifically, this dynamic region but faces unresolved challenges firms’ optimism for present business conditions along across key sectors. The economy remains heavily reli- with an improved financial situation were the main driv- ant on agriculture, which lacks modernization and as ers. Sectoral indices depict that the firms in construc- a result remains trapped in low productivity11 com- tion, manufacturing, and other services sectors are pared to improvements seen in Kenya and Rwanda more positive about current business conditions than over the past decade. Moreover, Uganda has room those in agriculture and retail trade sectors. to improve in industrial development and infrastruc- ture compared to regional peers like Tanzania and 10 The East African Community was the best performer in Kenya. Similarly, Uganda’s services sector—the larg- the subregion, with a growth rate of 4.7 percent in 2024 est in GDP with a share of around 50 percent—has and an expected rate of 5.7 percent in 2025–26 (World grown steadily in recent years, but productivity in the Bank. 2024c). services sector12 not only significantly lags regional 11 Average Total Factor Productivity (TFP) growth in countries but has also been declining over time. Fur- agriculture has been negative in Uganda for the last two decades (World Bank 2019a). thermore, even though the tourism sector is growing, 12 Labor productivity fell in industry and fell even more in it is less developed compared to most regional peers. services. Although the services sector on average offers Importantly, while some other key regional economies much higher productivity than agriculture, these trends are emerging as a technology and innovation hub, reflect an inflow of workers into low-productivity activities Uganda’s services sector remains less diversified and in the services sectors (World Bank 2019a). faces competition in attracting investment. 13 A high-frequency measure produced by the central bank. 14 The Bank of Uganda’s business tendency indicators measure the level of optimism that executives have High-frequency indicators through Novem- about current and expected outlook for production, ber 2024, point to improvement in economic order levels, employment, prices, and access to credit. activity, similar to FY2023/24. The monthly com- Indicators cover the major sectors of the economy, posite index of economic activity13 grew by 4.6 percent namely construction, manufacturing, wholesale trade, in November 2024 on a y-o-y basis, although, cumula- agriculture, and other services. The overall business tendency indicator above 50 reveals an improving tively, the activity index showed 4.2 percent increase outlook, and below 50 shows a deteriorating outlook. in the first five months of FY2024/25 compared to 7.3 15 Based on the methodology of the diffusion index, a value percent in the corresponding period last year. Busi- above 50 indicates that positive businesses sentiments ness tendency indicators also continue to show strong are outweighing negative sentiments. 4 Recent Economic Developments FIGURE 8     HIGH FREQUENCY ECONOMIC ACTIVITY INDICATORS 2020 2021 2022 2023 2024 J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N D J F MAM J J A S O N Index of Economic Activity Overall Business Tendency Index Present Business situation Business situation in 3 months Order volumes with suppliers Number of Employees Competition Average selling Price Financial situation Access to Credit Construction Manufacturing Wholesale Trade Agriculture Other Services Low Average High Source: UBOS, BOU. A prudent monetary policy stance led to a FIGURE 9     HEADLINE INFLATION IN UGANDA AND sharp decline in inflation DRIVERS (% y/y change, contribution in ppts.) 12 Price pressures in Uganda decreased sharply from an elevated level as inflation remained lower than 10 the central bank target. Headline inflation declined 8 Central bank's target to 3.2 percent in FY2023/24, on average, from 8.8 percent in FY2022/23. Supported by unfavorable 6 weather trends, prices of food crops experienced a 4 substantial slowdown and only grew by 3.3 percent in FY2023/24, compared to a substantial 22.7 percent 2 increase reported in FY2022/23 (Figure 9). Core infla- 0 tion—calculated after excluding food crops, fuel, elec- tricity and metered water—also indicated a significant –2 May-19 May-20 May-21 May-22 May-23 May-24 Aug-19 Aug-20 Aug-21 Aug-22 Aug-23 Aug-24 Nov-18 Nov-19 Nov-20 Nov-21 Nov-22 Nov-23 Nov-24 Feb-19 Feb-20 Feb-21 Feb-22 Feb-23 Feb-24 decline from 7.4 percent in FY2022/23 to 3.0 percent in FY2023/24. Furthermore, Uganda’s inflation was Core: Goods Core: Services Food crops one of the lowest amongst the East African nations Energy, fuel & utilities Headline over the twelve months ending June 2024.16 Source: UBOS. The disinflationary trend broadly contin- other hand, showed significant slowdown as they ues in the ongoing fiscal year. Headline inflation decreased by 1.4 percent (y-o-y) in November 2024. declined to 2.9 percent (y-o-y) in November 2024 as cumulative inflation was recorded at 3.3 percent in The tight monetary policy of the Bank of the first five months of FY2024/25. Core inflation also Uganda (BoU) has helped anchor inflation expec- indicated a similar trend, though with a more grad- tations and counter external sector pressures. The ual pace. Disaggregated data show that the prices of services have kept core inflation relatively sticky over 16 During the twelve months up to June 2024, average the recent period (Figure 10). This contrasts with the inflation in Kenya, Ethiopia, Rwanda, Tanzania, and trend in prices of core goods, which remained broadly Malawi was recorded at 6.2 percent, 26.6 percent, stable in the same period. Non-core prices, on the 7.2 percent, 3.1 percent, and 31.6 percent respectively. 5 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda FIGURE 10     BANK OF UGANDA'S KEY INTEREST FIGURE 11     TREND IN MONEY SUPPLY RATES AND INFLATION (% y/y change, contribution in ppts) (inflation in % y/y change, interest 25 rates in % per annum) 14 20 15 12 10 10 5 8 0 6 –5 4 –10 2 –15 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24 Jul-24 Oct-24 0 Mar-18 Mar-19 Mar-20 Mar-21 Mar-22 Mar-23 Mar-24 Nov-17 Nov-18 Nov-19 Nov-20 Nov-21 Nov-22 Nov-23 Nov-24 Jul-18 Jul-19 Jul-20 Jul-21 Jul-22 Jul-23 Jul-24 Net foreign assets Net domestic assets Broad money-M3 BoU's interest rate corridor BoU policy rate Source: BoU. 7-day O/N rate Headline inflation Source: BoU. BoU monetary policy stance is appropriately tight as the growth in money supply remained contained at the real interest rate, currently around 7 percent, is 8.8 percent. Increase in Net Domestic Assets (NDA) of higher than its historical average. This is in line with the banking system remained the sole driver in mon- most countries in the region and with the general trend etary growth as Net Foreign Assets (NFA) continued observed across many countries recently. In addition to show contraction amid widening current account to a higher real rate, the BoU also tightened the finan- pressures. Increase in NDA could have contributed cial system liquidity following an increase in the cash to inflation. However, due to high real interest rates, reserve ratio in June 2022. This, in turn, consistently private demand remained relatively constrained while kept the seven-day interbank interest rate—the cen- the exchange rate showed stability. Within NDA, gov- tral bank’s operating target—in the upper bound of the ernment borrowing from banks grew by 13.6 percent interest rate corridor, which effectively tightened the in October 2024 and reflected the shortfall in official monetary stance even further (Figure 10). Furthermore, foreign flows to finance the budget deficit. a relatively stable exchange rate helped with the recent decrease in inflation. Disaggregate data revealed that Amid an already tight monetary stance, Uganda has been able to keep inflation relatively lower the increase in credit allocation by commercial than its trading partners and competitors. This bodes banks to the government has disproportionately well for the country’s underlying trade competitiveness.17 affected private sector lending. In the first four months of FY2024/25, growth in banks’ credit to pri- Developments in the monetary sector vate sector decelerated to 5.6 percent from 7.3 percent broadly remained consistent with the overall mon- in FY2023/24. This slowdown is primarily due to lower etary policy stance and the underlying trend in credit disbursements to construction and agriculture economic activity. Broad money supply (M3) grew by 8.5 percent in FY2023/24 compared to 6.6 percent in previous year. In the same period, credit extended to 17 According to Annex-II of IMF 2025, Uganda’s external the private sector increased by 7.3 percent compared position in 2023 was moderately weaker than the level to 3.0 percent growth in FY2022/23. In contrast, due implied by fundamentals and desirable policies. The report also suggests that other indicators, such as global to relatively higher and safer returns from investing in export market share and tourism receipts, which remain government securities, banks’ credit to the public sec- below their pre-COVID 19 averages, also point to a weaker tor grew by 10.7 percent in FY2023/24 (Figure 11). external position. Moreover, the level of gross international The latest data up to October 2024 showed that reserves in 2023 were assessed to be inadequate. 6 Recent Economic Developments FIGURE 12     DOMESTIC CREDIT TO PRIVATE The current account deficit during SECTOR FY2023/24 remained above 7 percent of GDP, (% of GDP, average for 2014–23) while data for Q1-FY2024/25 show a similar 35 trend. The current account deficit stood at 7.9 per- 30 cent of GDP in FY2023/24 (Table 1) and this trend continued in Q1-FY2024/25 as the current account 25 deficit reached 7.5 percent of GDP. Although the def- 20 Average: Common Market for icit was 0.2 percentage points of GDP lower than last Eastern and Southern Africa fiscal year, it remained significantly above the coun- 15 try’s pre-pandemic average levels of around 5 percent 10 of GDP. Disaggregated data indicate that all key com- ponents of the current account, except for the mer- 5 chandise trade balance, deteriorated in FY2023/24 compared to the previous year. This was particularly 0 evident in a widening services trade deficit—driven by Congo Malawi Zimbabwe Uganda Madagascar Zambia Comoros Eswatini Rwanda Burundi Kenya a global surge in the freight transportation19 costs—and a reduced surplus in the secondary income account. Source: World Bank WDI. In contrast, improvement in merchandise trade during the last fiscal year was supported by favorable terms- of-trade, and export prices grew by almost 13 percent sectors. Nonetheless, credit to key sectors like manu- against a 4 percent decline recorded in import prices. facturing and trade experienced moderate growth. The rise in personal loans indicates that household con- Growth momentum in export of goods and sumption, rather than investment, is driving borrowing. services remained strong for another year. Mer- However, over the past decade, private credit penetra- chandise exports from Uganda recorded substan- tion in Uganda has trended lower than its regional peers tial increases as they grew by almost 46 percent in over the past decade (Figure 12). If not addressed pru- FY2023/24 on top of 42 percent growth reported dently, this could limit financial inclusion and adversely in FY2022/23. With moderate 6.3 percent growth in vol- affect the country’s long-term growth prospects.18 umes, the impact of price remained dominant in driving overall exports of coffee from Uganda.20 Furthermore, country-wise data exhibited that the exports to the United Arab Emirates (UAE) and India alone account Pressures in the external sector 1.3.  mounted amidst weak financial inflows, despite strong growth in 18 According to IMF 2024, Uganda’s banks have increased exports their holdings of government debt, rising from 21 percent in 2019 to 29 percent in 2023, due to government’s Uganda’s current account deficit remains at an limited access to international financing and the impact elevated level amid weak financial flows, despite of the pandemic. This shift has led to higher interest rates the significant growth in exports recorded in recent and reduced private sector lending, raising concerns quarters. Specifically, high import demands for infra- over potential credit and liquidity risks. Strengthening Uganda’s capital market could help balance these risks structure projects and oil-related investments, along and lessen the banks’ dependency on government debt. with increasing freight related costs, have widened 19 Freight cost has increased globally due to disruption in the current account deficit in recent years. And, while the Middle East routes leading to a higher outflow as the surplus in the financial account, especially the part of services imports. non-debt creating inflows in the shape of Foreign 20 This was in line with global trends where coffee Direct Investments (FDIs), remained significant, it prices (Robustas) accelerated to US$150.4 cts/lb in FY2023/24 from 107.2 cts/lb in FY2022/23, showing a was insufficient to cover the overall deficit in the cur- sharp increase by 40 percent. Continued dry conditions rent account. This increased pressure on the foreign in major coffee producing countries like Brazil and exchange reserves, showing a notable decline in the Vietnam badly affected the global coffee production in most recent period. the past couple of years (IMF Commodities database). 7 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda TABLE 1     BALANCE OF PAYMENTS POSITION FY2022/23 FY2023/24 US$ billions % of GDP US$ billions % of GDP Current account –3.86 –7.9 –4.15 –7.7 Trade balance, G&S –4.89 –10.0 –4.91 –9.1 Primary income –1.03 –2.1 –1.06 –2.0 Secondary income 2.06 4.2 1.82 3.4 Capital & financial account 3.57 7.3 2.77 5.2 Net FDI 2.95 6.1 3.03 5.6 Government loans 1.16 2.4 0.20 0.4 Disbursements 1.78 3.7 0.87 1.6 Repayments –0.62 –1.3 –0.67 –1.2 Net E&Os 0.24 0.5 0.38 0.7 FX reserves 3.74 7.7 3.59 6.7 Source: Bank of Uganda. FIGURE 13     GROWTH IN EXPORTS, UGANDA (% annual) 60 % growth, 12-month average up to October 2024 Uganda 45 Ghana 30 Rwanda 15 Kenya 0 Cote d'Ivoire –15 Seychelles Nigeria –30 FY20 '21 '22 '23 '24 '24 '25 South Africa 4M Due to: Prices Due to: Volumes Total –10 0 10 20 30 40 Source: Bank of Uganda & Haver. for approximately three-quarters of the total increase in towards diversification in recent years, remains bullish. exports during FY2023/24. Broadly, these underlying Indeed, according to the International Trade Centre, trends in exports continued in the first four months of Uganda’s export potential stands around US$3.5 bil- FY2024/25, albeit at a moderate pace. Overall, in the lion.21 The survey22 also shows that Uganda has con- regional context, Uganda’s recent export performance siderable untapped mineral resources, including gold, remained substantially stronger than peers (Figure 13). copper, cobalt, and limestone (Figure 14). While gold has shown significant export growth in recent years, Uganda’s trade competitiveness is hindered by its lack of export diversification. Uganda’s export 21 https://exportpotential.intracen.org/en/?type=country&​ outlook, particularly in areas such as agriculture, manu- code=800. facturing, and services, driven by its natural resources, 22 https://​www​.un​dp​.org​/ug​a​n​da​/pu​b​l​i​c​a​t​i​o​ns​/ba​s​e​l​i​ne​ strategic location in East Africa, and growing push -as​s​e​s​s​m​e​nt​-de​v​e​l​o​p​m​e​nt​-mi​n​e​r​a​ls​-ug​a​n​da​-re​p​orts. 8 Recent Economic Developments FIGURE 14     UGANDA’S EXPORT POTENTIAL, PRODUCT-WISE Source: International Trade Centre: see https://exportpotential.intracen.org/en/products/tree-map?fromMarker=i&exporter=800&toMarker=w&market=w&whatMarker=k. Note: The darker shades in each box indicate realized potential whereas lighter shades denote unrealized export potential for each product. proper regulation and investment in mining infrastruc- stakeholders in fulfilling the demands of the EUDR. ture could unlock further potential in this sector. How- Coffee is produced in Uganda by thousands of small ever, lack of diversification along with other challenges farmers and less than half of the coffee producers in the form of limited infrastructure, high energy costs, can provide documentation proving compliance with limited access to finance, cumbersome administrative the regulations.25 There are also concerns about the procedures for trade,23 high dependency on agricul- potential effects to smallholder farmers and the dif- ture products, and limited skills continue to undermine ficulty of tracing the origin of the coffee in a largely Uganda from harnessing this potential opportunity. smallholder-based industry. Compliance with the EUDR provides a critical window of opportunity for The coffee sector, which is a key pillar of Uganda but also a critical risk if not well managed. Uganda’s economy, faces the challenge of major transformation from the new European Union Import demand continued to show a more (EU) Anti-Deforestation Regulation (EUDR).24 robust trend in recent years particularly due to Through its EUDR policy, the EU seeks to ensure that imports catering to oil related infrastructure. Total any products such as coffee are not associated with deforestation after the year 2020. Coffee is a major 23 World Bank 2022 identifies the benefits of a dynamic export and a key source of foreign exchange, mak- entry pattern for firms in which low entry costs encourage ing Uganda the largest coffee exporter in Africa after firms to export, highlighting a favorable business Ethiopia. Exports to the EU constitute more than sixty environment in Uganda. However, the report also percent of Uganda’s coffee exports and the EUDR identified major distortions in import markets, where firms laws have led to the Uganda Coffee Development that are unable to import inputs struggle to compete, while larger firms that both import and export manage to Authority (UCDA) beginning the process of captur- survive. Furthermore, the analysis showed that Uganda’s ing geolocation of all the coffee farms and farmers. high tariffs on food imports aim to protect local industries This way, they can verify that certain areas where but ultimately limit opportunities in other sectors and coffee is grown have never contributed to the loss adversely affect consumers. The report concluded that of forest cover. The aim of the registration is to cre- addressing such challenges could unlock Uganda’s ate a national registry, which is intended for the pur- trade potential, promote structural transformation, and enhance welfare across different income groups. poses of planning, tracking and ensuring adherence 24 The EU decided to postpone the date of implementation to the required international criteria. However, con- of the EUDR to 2025 for larger companies, and June 30, cerns have been expressed about the progress of 2026 for small ones. registration and the level of preparedness of some 25 Uganda, S&P December 2, 2024. 9 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda imports grew by 24.7 percent in FY2023/24 on top FIGURE 15    IMPORTS, UGANDA of 24.2 percent in FY2022/23. Detailed data indicate (2019=100, 6mma) that government related imports declined by 16.5 per- 200 cent last fiscal year while imports by private sector 180 grew significantly by 25.8 percent. Imports of min- eral products—excluding petroleum products—have 160 been key drivers, followed by machinery and food 140 related imports. Disaggregated data show that overall 120 import volumes grew by 30.6 percent in FY2023/24 (Figure 15). Nevertheless, a favorable trend in import 100 prices (which decreased by 4 percent) slightly damp- 80 ened the impact of higher volumes. These underly- ing trends in the country’s imports continued in the 60 Jun-20 Nov-20 Aug-21 May-22 Feb-23 Oct-23 Oct-24 Jun-20 Nov-20 Aug-21 May-22 Feb-23 Oct-23 Oct-24 Jun-20 Nov-20 Aug-21 May-22 Feb-23 Oct-23 Oct-24 first four months of FY2024/25 and remained con- sistent with growing infrastructure needs—especially Total Non-oil Oil in the oil exploration sector, amidst strong domestic Value Volume Price demand. Specifically, driven by both government and Source: BoU. private sector, total imports recorded a 20.7 percent y-o-y increase in the first four months of the current fiscal year. decline—US$1.2 billion in FY2022/23, in contrast to US$198 million on net basis received by the general Unlike improvements in the merchandise government in FY2023/24. Detailed data showed that trade balance, other components of the balance foreign inflows for budgetary support contracted by of payments registered marked deterioration. 86 percent, reflecting difficulty in accessing exter- For instance, the balance on services trade widened nal financing. Along with an approximate 8 percent by 21.5 percent in FY2023/24, despite sustained increase in debt repayments, these net flows to gov- improvement in travel related net exports which grew ernment indicated substantial decline in the last fis- by 23.5 percent. Overall, higher freight charges and cal year. demand for other business services contributed to the increased deficit in services accounts recently.26 Reflecting the weak external account In primary income, despite rising FDI inflows in recent position, foreign exchange reserves witnessed years, repatriation of profit by external firms has a depletion. Specifically, gross foreign reserves slightly increased the deficit. Moreover, lower inflows declined by US$841 million in FY2023/24 and under workers’ remittances and government project stood at US$3.2 billion by end June 2024. Cover- aid explained around a 12 percent decrease in deficit ing 3 month of imports,27 the foreign reserves had under secondary income. slightly increased to US$3.4 billion by end Octo- ber 2024 (Figure 16). Driven by these pressures, the On the financing side, while private invest- UShs depreciated by about 6 percent in the first eight ment flows remained resilient, lower official exter- months of FY2023/24 against the US$. Since then, nal flows caused an overall decline in the balance it has broadly recovered and indicated an appreci- of payments position. Net FDI flows increased by ation of 6.6 percent by end November 2024. In the 2.8 percent in FY2023/24 to reach 5.6 percent of same period, the shilling has shown an appreciation GDP after showing a strong 28.3 percent increase of around 5 percent in real effective terms. in the preceding fiscal year. Primarily reflecting oil- related investments, FDI inflows on average were around 6 percent of GDP in recent years and helped 26 Freight charges grew by 14 percent in FY2023/24 on top of 20.8 percent increase in FY2022/23. The same finance a large part of the widening current account. reported a 17 percent surge in Q1 of the ongoing fiscal In contrast to FDI, portfolio investment flows declined year. in FY2023/24 as tight global conditions weighed 27 Excluding oil project related imports (Source: Bank of in. Similarly, net official flows exhibited significant Uganda). 10 Recent Economic Developments FIGURE 16    FX RESERVES AND EXCHANGE RATE (FXR in billion US$) 5.0 105 2017=100, denotes appreciation % y/y Change 4.5 102 4.5 99 4.0 96 3.4 93 3.5 90 3.0 87 2.5 84 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 May-24 Jul-24 Sep-24 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Sep-23 Nov-23 Jan-24 Mar-24 May-24 Jul-24 Sep-24 NEER REER Source: Bank of Uganda. Fiscal consolidation continued for 1.4.  fiscal consolidation, it must not come at the expense another year, which could be of prioritizing spending, such as the emphasis on clos- better balanced with a greater ing infrastructure gaps, in the energy and transport focus on DRM sectors over investing in human capital. Uganda’s fiscal deficit, including grants,28 contin- Frequent use of supplementary spending ued to narrow for another year. The fiscal deficit not only undermines the credibility and planning narrowed from 5.5 percent of GDP during FY2022/23 of the annual budget but also reduces its trans- to 4.8 percent in FY2023/24. Despite this narrowing, parency and alters the budget priorities. Two the fiscal deficit stood 1.2 percentage points of GDP Supplementary Budgets (SBs) were passed during higher than planned and slightly higher than the target FY2023/24,30 increasing total spending by UShs 4.601 set in the Charter for Fiscal Responsibility (CFR)29 of trillion31 or 8.9 percent of the approved budget. This 4.6 percent of GDP for the fiscal year. Consolidation means almost 8.9 percent of spending was operation- efforts largely hinged on curtailing development alized via supplementary routes which does not bode spending (capital investment) which remained 1.4 per- well for budget planning and transparency. Although centage points of GDP lower than planned on account Uganda 2016 Public Finance Management Regula- of huge shortfalls in externally financed projects. Short- tions allow for “unavoidable and unforeseeable” costs falls in revenues and grants vis-à-vis budget remained under SBs, many of the activities could have been allo- huge for the second year (around 1.9 percent of GDP). cated under the budget through better planning. More- Almost 90 percent of fiscal deficit was financed by over, given that the next election is around the corner, domestic borrowing, including BoU advances (see Figure 17 a & b and Table 2, see Annex 1 for details), 28 The deficit is calculated based on data released by as externally financing conditions remained tight. The MoFPED, and GDP is based on UBOS data. curtailing of development spending to manage the fis- 29 https://parliamentwatch.ug/wp-content/uploads/2021​ cal deficit continued in the first quarter of FY 2024/25. /09/Charter-for-Fiscal-Responsibilities-FY-20212022-FY​ As fiscal deficit during Q1-2024/25 stood at 3.9 -20252026.pdf. percent of GDP, almost double the deficit registered 30 November 2023 and April 2024. 31 Major beneficiaries of supplementary budgets were in the same period last year, development spending Ministry of Sci., Tech & Innovation (16.7 percent), was reigned back to 2.2 percent of GDP compared MoD, State House & Presidency (14.4 percent), local to 2.9 percent of GDP recorded in the same quarter Governments (13.3 percent), and Ministry of Energy and of FY2023/24. Although Uganda has continued with Mineral Development. (7.0 percent). 11 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda FIGURE 17    FISCAL DEFICIT (% of GDP) A. Components B. Financing 25 6 9 6 5.3 5.5 4.8 8 3.6 5 5 20 7 3.9 4 6 4 15 1.7 5 3 3 4 10 2 3 2 5 2 1 1 1 0 0 0 0 Budget Actual Budget Actual Actual (Q1) Actual (Q1) FY22/23 FY23/24 FY23/24 (Q1) FY24/25 (Q1) FY22/23 FY23/24 FY23/24 FY24/25 Domestic (net) External (net) Financing gap Revenue & grants Expenditure & lending Fiscal deficit (RHS) Fiscal deficit (RHS) CFR target (RHS) Source: MoFPED and WB Staff Calculations. more attention is needed to ensure that budget trans- in 2005. These reforms modernized the country’s tax parency and predictability remains intact since in the legislation. However, the tax base has been eroded by last election year five SBs totaling almost 3.2 percent exemptions and inconsistent tax policy management of GDP were used, eroding key budget priorities. that has focused on piecemeal adjustments to tax rates. Recent tax reforms, guided by the DRMS, aim to expand During FY2023/24, domestic revenues and the tax base, enhance tax policy, and improve admin- grants reached 14.2 percent of GDP or 1.9 per- istrative efficiency. The noticeable changes include centage of GDP lower than planned (see Figure 17a). adjustments to the depreciation schedule, disallowing Domestic revenues reached 13.7 percent of GDP, concurrent use of initial allowances and normal depre- almost 1 percent GDP lower than planned. Most of this ciation, repealing the initial allowance provision, cap- gap stemmed from low revenue collection due to slow ping the loss carry-forward provision, repealing VAT adaptation of technology solutions such as Electronic exemptions for certain items, and improving the rental Fiscal Receipting Invoice System (EFRIS) and Digital income tax regime. These measures aim to increase tax Tax Stamps (DTS), along with other policy measures revenues and enhance tax system fairness and equity. that resulted in lower tax revenue from VAT and cus- However, gaps remain, and the Government of Uganda toms duty.32 A major VAT collection gap was registered must rationalize wasteful tax expenditures. under the wholesale and retail side due to resistance by traders to the use of the EFRIS which was per- The tax revenue system has been negatively ceived as a “tax” even though it was an administrative affected by the application of tax exemptions, measure.33 There was a slight improvement in domes- growing informality, and diminishing political sup- tic revenue collections during Q1-FY2024/25 which port for tax collection efforts. The significant infor- reached 11.8 percent of GDP compared to 11.4 per- mal sector, estimated at over 50.2 percent of GDP, cent in Q1-FY2023/24, attributed to improvements in further narrows the tax base, which is additionally con- economic activities and tax administration. strained by costly tax incentives targeting new invest- ments, with foregone revenue estimated at UShs 2,972 Uganda’s revenue collection performance billion (1.62 percent of GDP) in FY2022/23. Low tax lit- has improved over recent years; however, it is still eracy exacerbates compliance issues. Additional chal- lower than its peers and its own target. Earlier major tax reforms in Uganda included the introduction of VAT 32 MoFPED 2024. in 1996, income tax in 1997, and the adoption of a com- 33 https://www.independent.co.ug/traders-clash-with-ura​ mon external tariff (CET) under the EAC Customs Union -over-efris-system/. 12 Recent Economic Developments lenges in taxing High Net-Worth Individuals (HNWIs) During FY2023/24, recurrent expendi- and the digital economy complicate tax administra- tures35 increased by 0.8 percent of GDP reach- tion. The delayed rationalization of the EAC Exemption ing 13.2 compared to planned levels. Most of the Regime and continuous use of stays of applications of increase was a result of non-wage recurrent spending, the CET further constrain tax revenue collections. while wages and salaries and interest payments only registered marginal increases. Recurrent spending To manage tax exemptions effectively, remains highly rigid with wage and salaries and inter- the government should consider expediting the est payments continuing to consume almost half of it. implementation of the Tax Expenditure Gover- In Q1-FY2024/25, recurrent spending continued to nance Framework. This includes preventing dis- surge, reaching 14.1 percent of GDP compared to 10.4 cretionary exemptions or the government paying tax percent in Q1-FY2023/24, primarily due to non-wage on behalf of taxpayers, conducting cost-benefit anal- expenditures reaching 7.6 percent of GDP. Mean- yses for new exemptions, evaluating existing exemp- while, development spending (domestic and externally tions, setting a ceiling on exemptions, and ensuring funded) experienced a slight decline, falling to 2.2 per- transparency in the process of incurring new tax cent of GDP in Q1-FY2024/25 compared to 2.9 per- expenditures. There is a need to further simplify the cent in Q1-FY2023/24 (see Figure 18a & b). Despite presumptive tax regime, raise the VAT threshold, and expenditure-rationalization measures36 put in place analyze its implications to reduce the administrative during the year, non-wage expenditure rose by 0.6 per- burden on small businesses. Additionally, provisions cent to 6.5 percent of GDP. As a result, the primary that exempt the income of High Net-Worth Individu- deficit (excluding grants) as a percent of GDP, rose by als need to be repealed, and severe penalties for non- 1.2 percent of GDP or almost 300 percent higher than compliance should be enforced to ensure fairness in the tax system and raise additional tax revenue. Tax 34 For comprehensive evaluation of Uganda’s tax system, administration needs to provide capacity-building please see UEU25, forthcoming. initiatives for small businesses and establish a tax- 35 The total expenditure mentioned throughout the report payer education unit to enhance public understand- includes recurrent & development spending, net lending, ing of tax policies. These initiatives should be carried and domestic arrears payments. 36 This included a moratorium on budget increases across all out jointly with the tax policy unit. Finally, increased ministries, departments, and agencies; tighter restrictions enforcement to ensure digital companies comply with on international travel by government officials; a freeze VAT provisions will contribute significantly to improved on most vehicle purchases; and reduced spending on revenues in Uganda.34 workshops and seminars etc (MoFPED. 2023). FIGURE 18    REVENUE AND EXPENDITURE (% of GDP) A. Revenue B. Expenditure 18 25 16 20 14 12 15 10 8 10 6 4 5 2 0 0 Budget Actual Budget Actual Budget Actual Budget Actual Actual Actual Budget Actual Budget Actual Budget Actual Actual Actual (Q1) (Q1) (Q1) (Q1) FY20/21 FY21/22 FY22/23 FY23/24 FY23 FY24 FY21/22 FY22/23 FY23/24 FY23/24 FY24/25 /24 /25 Tax Non-tax Grants Wages Interest payment Non-wage Dev’t- GoU Dev’t - external Source: MoFPED and WB Staff Calculations. 13 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda TABLE 2     CENTRAL GOVERNMENT FISCAL OPERATIONS FY20/21 FY21/22 FY22/23 FY23/24 FY23/24 (Q1) FY24/25 (Q1) Fiscal year (July to June) (% of GDP) Revenues and Grants 14.3 14.1 14.5 14.2 11.8 12.6 Domestic Revenues 13.4 13.4 14.0 13.7 11.4 11.8 URA 12.4 12.5 13.0 12.7 10.4 10.9 Non-Tax 0.9 0.9 1.0 1.0 0.9 0.9 Grants 0.9 0.7 0.6 0.5 0.4 0.8 Budget Support 0.1 0.1 0.0 0.0 0.0 0.1 Project Support 0.9 0.6 0.5 0.5 0.4 0.7 Expenditure and Lending 23.7 21.5 20.0 19.0 13.5 16.5 Current Expenditures 12.2 13.1 13.7 13.2 10.4 14.1 Wages and Salaries 3.5 3.5 3.8 3.7 3.2 3.3 Interest Payments 2.7 3.1 3.2 3.1 3.0 3.2 Domestic 2.0 2.6 2.6 2.4 2.3 2.5 External 0.7 0.5 0.7 0.7 0.7 0.7 Non-Wage Expenditures 6.1 6.6 6.6 6.5 4.2 7.6 Development Expenditures 10.2 7.9 5.8 5.4 2.9 2.2 Domestic 6.5 5.0 4.0 3.5 0.8 1.3 External 3.7 2.9 1.9 1.9 2.1 0.9 Net lending and investment 0.7 0.2 0.1 0.2 0.0 0.0 Domestic Arrears Repaym. 0.5 0.4 0.4 0.1 0.2 0.2 Primary Deficit –6.7 –4.3 –2.3 –1.7 1.3 –0.7 Overall Fiscal Bal. (excl. Grants) –10.3 –8.1 –6.1 –5.3 –2.1 –4.7 Overall Fiscal Bal. (incl. Grants) –9.4 –7.4 –5.5 –4.8 –1.7 –3.9 Financing: 8.9 6.1 4.7 4.7 1.7 3.9 External Financing (Net) 4.4 2.7 1.3 0.5 0.1 –0.4 Domestic Financing (Net) 4.6 3.4 3.4 4.2 0.1 5.8 Financing Gap 0.4 1.2 0.8 0.1 1.5 –1.5 Source: MoFPED and WB Staff Calculations. Note: See Annex 1 for a detailed fiscal table. planned. Uganda must enhance its fiscal operations to The budget for FY2024/25 projects a defi- improve both allocation of resources and efficiency in cit increase of nearly 1 percentage of GDP, driven the utilization of the resources. There is ample room to by ambitious spending. The budget targets a fiscal readjust the budget and improve budget transparency deficit, including grants, of 5.7 percent of GDP. While and predictability, which would result in a higher growth non-wage expenditures are expected to remain at last path. By rebalancing the resources from governance, administration, and security programs to other pro- 37 World Bank 2024d. ductive sectors (especially agro-industrialization, min- 38 According to World Bank (2024d), resource rebalancing can accelerate average growth to 6.6 percent over erals, and manufacturing)—and towards human capital the period FY2023/24 to FY2029/30 compared to spending (particularly in health and education)—Ugan- 5.2 percent. This resource balancing includes, for example, da’s fiscal policy can generate higher growth and bet- 1 percentage point increase in budget share for each ter social outcomes in the long term.37, 38 growth enhancing program (such as agro-industrialization, 14 Recent Economic Developments FIGURE 19    UGANDA PUBLIC DEBT (% of GDP) (% of total) A. Composition B. Creditors 60 120 50.5 50.7 50.6 48.8 50 100 40 80 30 60 20 40 10 20 0 0 FY20/21 FY21/22 FY22/23 FY23/24 FY21 FY22 FY23 Domestic External Public gross debt Multilaterial Bilaterial Commercial Others Source: IMF and WB Staff Calculations. year’s levels, current spending is set to increase by cent of GDP during the same time. Heavy reliance on almost 1 percent of GDP. A closer look reveals that this domestic financing has been a normal practice since rise in recurrent spending due to higher interest pay- 2020/21,42 and a continued reliance on domestic ments39 and, in part, to higher governance and security borrowing will further constrain private-sector credit expenditures—likely expenditures related to the upcom- growth, hindering long-term economic growth. ing elections. Even though prioritizing human capital development expenditure remains central to the NDP- Uganda’s public debt-to-GDP ratio III,40 budget allocations for FY2024/25 fail to reflect this, remained unchanged in FY2023/24 at just above with allocations for most programs remaining either at 50 percent (Figure 19a). Public and publicly guaran- the same level or, like health programs, reflecting some decline. Thus, it remains unclear how the planned addi- mineral development, and manufacturing), combined tionality will be met without further reducing already with an increase of 2 percentage points in the share of low levels of social sector spending41 or resorting to spending on education and health, while reducing the extra borrowing during the year to enable supplemen- share of administration, governance, and security by tary budgets (SBs). In the last election year, a plethora 2 percentage points. 39 The increase in debt and service payments is largely due of SBs were implemented largely relying on domestic to the Government’s decision to securitize outstanding borrowing. At this stage, the impact of ongoing pub- advances from the BoU by issuing government bonds lic sector rationalization on both fiscal performance or worth 3.5 percent of GDP at market interest rates (IMF service delivery remains unclear (see Annex 2: Ugan- 2024). Consequently, the government made a cash da’s public sector rationalization – An opportunity payment of UShs 1.3 trillion and issued a bond worth to manage costs and enhance productivity). UShs 7.8 trillion to BoU. 40 NDP III (FY2020/21–2024/25) is the third out of six five-year NDPs to implement Uganda’s Vision Domestic borrowing financed most of the 2040. It recognizes the importance of human capital budget, given constraints on external borrow- development in improving the productivity of Ugandans; ing. As external financing disbursements slowed thought policymakers need sensitization to the value of (impacted by both global and domestic conditions) investing early in the life cycle. and global financial conditions tightened, net domes- 41 The World Bank (2024d) revealed that public spending on both education and health has been consistently low tic financing during FY2023/24 stood at 4.2 percent by the standards of peer countries. of GDP or financing over 90 percent of fiscal deficit. 42 Since FY2020/21, share of domestic financing in deficit In comparison, realization of external financing stood financing has been over 50 percent. This rose to 72 percent at 0.5 percent of GDP compared to a planned 2.6 per- in FY2022/23, further rising to 90 percent in FY 2023/24. 15 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda teed debt during FY2022/23 stood at US$25.2 billion, risk of overall public and external debt distress of which US$14.9 billion or 29.9 percent of GDP was as moderate (unchanged from the previous anal- external while US$10.4 billion or 20.8 percent of GDP ysis), with limited space to absorb shocks.46 was held domestically. Almost 35 percent of exter- The analysis indicated all total public debt burden nal public debt was multilaterals (with almost half of trajectories remain below their respective indicative this from the World Bank), followed by bilateral debt thresholds47 and benchmarks over the medium term. at 14 percent and 7.7 percent external debt from com- However, Uganda has limited space to absorb shocks, mercial creditors. Due to large multilateral debt, most since a median shock could lead to a breach of the of the existing stock of external public debt remains external and total debt service indicators. The DSA concessional but the non-concessional component results underscore the importance of the government has been on the rise in recent years (Figure 19b). strengthening debt management; and implementing For instance, almost three quarters of external bilat- the agreed Performance and Policy Actions (PPAs) eral debt is from China Exim bank.43 Domestic debt as per IDA’s Sustainable Development Finance Pol- continues to be long tenor and at the end FY2023/24 icy (SDFP).48 Nevertheless, Uganda’s heatmap shows almost 73 percent was held in bonds, 15 percent as considerable improvement in debt transparency since advances from BoU and 12 percent in treasury bills.44 2020. In fact, Uganda has emerged as one of the best In recent years, reliance on domestic financing has performers in the region49 on debt transparency as sharply risen as a result of limited access to external per the World Bank’s debt transparency heatmap financing. Consequently, the cost of debt as well as 2024. However, there’s room for further improvements the risk indicator of debt have worsened. For instance, in the areas of recently contracted loans as well as the weighted average interest rates on public debt improving time lag associated with availability on have risen from 5.6 percent in June 2019 to 7.3 per- information on debt. cent in December 2023. Similarly, the risk indicators proxied by the Average Time to Maturity (ATM) has worsened from 10.7 years in June 2019 to 8.9 years in December 2023.45 Monetary tightening, along with 43 Mostly owed to Standard Bank of South Africa (SBSA), the public sector’s significant gross financing needs, the Trade Development Bank (TDB), Standard Chartered, has raised real lending rates despite low inflation and and African Export-Import Bank. resulted in shorter loan maturities. As a result, the 44 IMF 2024. average real lending rate rose from 16.7 percent at 45 https://www.finance.go.ug/sites/default/files/reports​ /MEDIUM%20TERM%20DEBT%20MANAGEMENT%20​ end-December 2023 to 19.4 percent in October 2024. STRATEGY%20FY2024.25.pdf. This does not bode well for the private sector. Thus, 46 IMF 2024. effective implementation of the DRMS is crucial, as it 47 The thresholds of the Prevent Value (PV) of the external can help Uganda achieve fiscal consolidation gains debt-to-exports ratio, the PV of the external debt-to-GDP and reduce the risk of debt distress by lowering reli- ratio, the debt service-to-exports ratio, and the debt ance on costly domestic and external (non-conces- service-to-revenue ratio are 180, 40, 15 and 18 percent respectively. sional) financing. 48 PPA’s for 2024 are in the areas of debt sustainability, debt management and fiscal sustainability. The latest joint World Bank-IMF Debt Sus- 49 Along with Tanzania. See https://​www​.wo​r​l​d​b​a​nk​.org​/ tainability Analysis (DSA) assessed Uganda’s en​/to​p​ic​/de​bt​/br​i​ef​/de​bt​-tr​a​n​s​p​a​r​e​n​cy​-re​p​o​rt​/2024. 16 2 ECONOMIC OUTLOOK, RISKS AND KEY STRUCTURAL ISSUES Uganda’s economic prospects 2.1.  tial fiscal revenue to Uganda. According to estimates, hinge on oil production and with oil prices estimated at US$70 per barrel, the strong growth in tourism and country could generate around US$3.3 billion52 in agriculture annual revenue during peak production by 2030. This revenue would represent about 4.9 percent of GDP Real GDP growth is expected to accelerate, and will cover a significant portion of the country’s supported by agriculture and services, with an budget deficit. outlook of 6.2 percent for 2024/25. The oil-driven surge in investments is expected to compensate 50 This growth spur can be primarily attributed to the for the adverse effect of relatively tight monetary development of 14 oil fields in the Lake Albert region. policies, the ongoing fiscal consolidation, and the Together, they are expected to produce up to 84.4 million uncertainty caused by the conflict in the Middle East. barrels of oil annually at peak capacity. Consequently, significant infrastructure is planned, including the Over the medium term, growth is projected to surge 1,443-kilometer East African Crude Oil Pipeline (EACOP) to 10.8 percent in 2025/26 as oil production starts,50 to export oil through Tanzania. Due to various delays, then stabilize around 6 percent as oil production investment costs have exceeded US$13 billion (World plateaus.51 Key oil projects—including the Tilenga Bank 2022). This also included a planned construction and Kingfisher oil fields, the East Africa Pipeline, and of a 60,000 barrels per day refinery in Hoima. Domestic the Kabalega International Airport—are attracting demand at around 35,000 barrel per day will be met by this refinery, with additional pipelines linking it to substantial foreign and domestic private investment, Kampala and potentially to neighboring countries. further boosting the economy. These developments, 51 Anticipated oil revenues could help reduce poverty to including airports and industrial parks, aim to position 40.1 percent in 2026 from 41.3 percent in 2024 (US$2.15 Uganda as an oil exporter and improve regional trade. 2017 PPP poverty line). Overall, the oil projects are expected to bring substan- 52 IMF 2024. 19 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda TABLE 3     BASELINE ECONOMIC OUTLOOK (ANNUAL % CHANGE UNLESS OTHERWISE INDICATED) FY23 FY24 FY25f FY26f Real GDP Growth (baseline) 5.3 6.0 6.2 10.8 Exports, Goods and Services 7.0 8.2 8.4 10.8 Imports, Goods and Services 3.2 8.4 9.0 8.5 Agriculture growth 5.0 5.2 5.4 5.8 Industry growth 3.9 5.5 5.7 12.6 Services growth 6.3 6.7 6.9 12.3 Inflation (Consumer Price Index) 8.8 3.2 4.6 5.0 Current Account Balance (% of GDP) –7.2 –8.4 –7.7 –5.9 Net FDI, Inflow (% of GDP) 5.9 6.0 6.2 5.3 Fiscal Balance (% of GDP) –5.0 –4.8 –5.7 –2.6 Primary Balance (% of GDP) –2.0 –1.0 –1.4 0.5 Debt (% of GDP) 48.3 50.5 52.1 47.9 Sources: UBOS, MoFPED, BoU, and World Bank staff estimates. To avoid creating new vulnerabilities, oil central bank’s 5 percent target over the medium revenues must be managed efficiently through term. However, inflationary pressures remain a sig- stronger institutions and systems. The govern- nificant risk to higher projected growth. Persistent ment has adopted a fiscal rule53 under its current CFR inflationary pressures from supply chain disruptions, (FY2021/22-FY2025/26) that, if followed, could help geopolitical tensions, and commodity price volatility manage volatility during the transition and the antic- could lead to tighter monetary policy by the Bank of ipated revenue boom from growing oil exports. The Uganda, constraining businesses and incomes, and regulatory environment that governs oil has benefited dampening economic activity and investment. from the establishment of the Uganda Petroleum Fund and Petroleum Investment Fund, Oil and Gas Revenue The primary balance is expected to deteri- Management Policy (2012), and PFM Act (2015). How- orate slightly in 2024/25, followed by a 0.5 per- ever, further strengthening of the governing institutions cent surplus in 2025/26. Extending the DRMS to and regulations is required.54 For instance, the regula- 2027 can enable the government to generate addi- tions underpinning the Petroleum Revenue Investment tional tax revenue, estimated at 0.5 and 1.3 percent Reserve (PRIR) need to be revised to clarify its design of GDP in FY2024/25 and FY2025/26 respectively. and functions, provide legal certainty, clarify roles and With limited changes to tax policy, the focus will be responsibilities, and transform it into a genuine sover- on improving tax administration efficiency through the eign wealth fund. A credible regulatory environment and enhanced use of technology, specifically the EFRIS legislations related to oil are critical to ensure long-run and Digital Tax Stamps. Additionally, the use of third- fiscal sustainability.55 Moreover, future revenues related party information through linked government systems to oil are of paramount importance as spending today will improve audits and enhance tax compliance. on social sectors remains inadequate to meet Uganda’s development needs. The Government has prioritized 53 The CFR clearly articulates the fiscal rules that can help closing infrastructure gaps, especially in the energy and prevent Uganda’s economy from overheating from oil transport sector. However, future oil-related revenues production. provide Uganda with the opportunity to invest in the 54 According to the World Bank (2024i), the Petroleum human capital necessary for structural transformation Fund was established to manage excess oil revenue in 2015, but there is no framework for determining how to provide the foundation for long-term potential growth. much revenue to save, when to save it, or how reserves from the fund should be spent. Headline inflation stood at 3.3 percent in 55 Uganda joining Extractive Industries Transparency December 2024 and is expected to remain at the Initiative (EITI) was a very important step. 20 Economic Outlook, Risks and Key Structural Issues Debt is expected to increase slightly to 52.1 percent dividend. Uganda has one of the youngest and of GDP in 2024/25 before decreasing to 47.9 percent fastest-growing populations in the world. Young in 2025/26. However, Uganda’s risk of debt distress people between ages 15 and 34 make up about 34 is rated “moderate,”56 and projected to remain sustain- percent of the population,57 and nearly 70 percent of able over the medium and long term, supported by the working age population. Between 2030 and 2040 accelerated GDP growth, reduced borrowing due to the number of new entrants will exceed one million oil revenues, and enhanced DRM. each year.58 The unemployment rate in the labor force was estimated at 12.0 percent in 2021, however, only The current account deficit (CAD) is 28 percent of the working-age population were in the expected to remain elevated in the near term labor force and 42 percent of the working age popula- due to capital imports for oil production. Over the tion were underutilized.59, 60 The structure of real value medium term, once oil exports commence and the oil added in Uganda has changed much more rapidly refinery becomes operational, the CAD is expected to than jobs in the economy, with employment oppor- improve. Export growth is further expected to bene- tunities lagging and unable to absorb the number fit from a recovery in global demand and increased of young people joining the labor market. Uganda’s regional trade, public infrastructure developments are economy is predominately informal, with 88 percent of likely to drive import growth. FDI flows are projected to people employed informally, excluding agriculture.61 remain strong in the near term. Investment in ECD is essential for Uganda’s However, immediate and short-term eco- achievement of its demographic dividend (see nomic outlooks face significant and varied down- Section 3 of this report). Uganda’s growth over the side risks. Timing mismatches between the start of oil last 15 years averaged 5.1 percent, slightly surpassing production from upstream projects and the completion the stubbornly high population growth rate of 3.1 per- of the East Africa Crude Oil Pipeline (EACOP) threaten cent. Growth since 2015 has been determined solely revenue generation. Uganda’s reliance on mostly rain- by within-sector productivity and that too has slowed fed agriculture leaves it vulnerable to climate shocks, significantly in agriculture. In Uganda, as in other and inaction on climate change could cost Uganda 2 developing countries, the prevalence of low-skill activ- to 4 percent of its GDP annually, making investment in ities like subsistence agriculture, combined with ineffi- climate adaptation essential for both agricultural pro- cient talent allocation undermines the effective use of ductivity and economic stability. Coffee exports face human capital and limits productivity growth, ultimately an immediate danger due to the EU law banning the restraining the country’s potential economic expan- import of commodities linked to deforestation. Addi- sion. Over the medium term, Uganda is expected to tionally, escalation of conflict in the Middle East— receive a economic spurt from oil production, with which accounts for almost 26 percent of Ugandan growth expected to plateau at a pre-pandemic levels exports—could disrupt global demand and severely once this impact dilutes. In order for Uganda to remain impact Uganda’s economic growth. Finally, fiscal risks on a high growth trajectory and mitigate the impact of associated with the 2026 election cycle may lead to Dutch disease, it must invest both beyond oil related increased spending and borrowing, undermining bud- infrastructure and in human capital. These efforts get credibility and eroding investor confidence. require Uganda to enhance its domestic revenue mobi- lization and efficiently manage its oil revenues. 56 According to IMF-WB Debt Sustainability Analysis (IMF Uganda urgently needs to 2.2.  2025). prioritize jobs-rich economic 57 UBOS 2024. transformation, including 58 World Bank 2019. investment in its future 59 According to the Internal Labor Organization, the labor force is underutilized if there is a mismatch between the labor force labor offered by workers (supply), and the employment opportunities available to them (demand). Significant investments in human capital will 60 UBoS 2021. be vital for Uganda to achieve a demographic 61 ibid. 21 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda Rapid economic transformation requires demand, combined with high micro-firm entry and agriculture to be at the center of the Ugandan high informality, leaves Ugandan firms who supply the development paradigm. The agriculture sector domestic market “stunted” and complaining about is pivotal for the economy as it accounts for almost competition. Most Ugandan firms are small, low pro- 70 percent of employment and provides more than ductivity, and non-complex. Larger, more productive half of all exports. Slow agriculture productivity driven firms are not expanding employment on average. The by rural underemployment has been one of the key small size and apparent overcrowding of small firms in factors stalling economic transformation.62 Moreover, domestically oriented services sectors suggests that improving agricultural earnings by even a small mar- while starting a business is not a problem in Uganda, gin has the potential to increase consumer demand of business expansion is. Unless demand for Ugandan over 26 million Ugandans, the majority of whom live in goods and services rises faster, low-productivity, self- rural areas.63 Increasing public expenditure efficiency employed workers will see their hourly earnings con- could create additional fiscal space to finance invest- tinue to decline amid yet more competitive markets.65 ment in agricultural research and more efficient water and land management systems.64 62 World Bank 2022. Low job creation in the formal private sec- 63 Hill and Mejía-Mantilla 2016. tor is another key factor stalling economic trans- 64 World Bank 2019a. formation and sustained growth. Constrained 65 ibid. 22 3 INVESTING IN EARLY CHILDHOOD DEVELOPMENT FOR TRANSFORMATION OF HUMAN CAPITAL IN UGANDA 3.1.  The Case for Investing Early year of life expectancy raises GDP by 4 percent.69 As Uganda seeks to fulfill its aspirations to become Uganda’s future prosperity depends on building an upper-middle-income country by 2040, building human capital. Human capital is “the knowledge, the human capital of its future workforce is a central skills, and health that people accumulate throughout development challenge. their lives, enabling them to realize their potential as productive members of society.”66 It is a key determi- This Special Topic provides a brief overview nant of economic growth; studies attribute as much of the status of ECD service delivery in Uganda as 50 percent of cross-country differences in income level and growth rates to human capital accumula- 66 World Bank 2024g. tion.67 Each additional year of schooling increases an 67 Mankiw, Romer, and Weil 1992. individual’s earnings by an average of nearly 10 per- 68 Patrinos 2016. cent globally, and by 12.5 percent in SSA.68 An extra 69 He and Li 2020. 25 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda and recommends actions to strengthen the FIGURE 20    THE HECKMAN CURVE foundation for human capital and future growth. Rates of return to human capital investment Early childhood is a critical period for human capital Rate of return to investment in human capital accumulation. Generally defined as the period from conception to eight years of age, early childhood is Preschool program the most critical period for human brain development. The foundations for cognitive, social, and emotional skills are established early in life, and the achievement Schooling Opportunity cost of funds of more basic skills is a prerequisite for developing r more advanced skills later. Moreover, brain develop- ment is subject to a series of “sensitive periods,” when Job training specific neural circuits are more plastic and hence primed for learning.70 Most physical brain devel- Preschool School opment takes place during the first 1,000 days of a Post-school 0 child’s life. Developmental biology therefore points to Age an important conclusion: investing in human capital Source: Heckman (2006). early in the life cycle is more effective than attempting to make up lost ground later. tions in early childhood helps protect the population Investing in human capital early maximizes at large from infectious disease which, as Uganda’s returns. For example, stunting reduction, a key indi- recent experience with Ebola and COVID-19 show, can cator of early-life health investments, could increase come with large economic costs. Investments in early GDP by as much as 11 percent per capita in low- childhood programs can also mitigate future social and middle-income countries over time.71 A study issues such as crime and drug use.74 These behaviors from Uganda compared the costs of scaling up pre- impose economic costs by hindering human capital primary education to its benefits in terms of savings formation, preventing individuals from realizing their from reduced repetition in primary school, improved potential, and diverting government resources. lifetime earnings for newly enrolled children, and potential earnings for caregivers whose time would be Expanding access to early childhood ser- freed for income-generating activities. The estimated vices can drive economic growth by enabling returns would be substantial: 16 UShs for every 1 USh more women to join the labor force and boost- invested.72 The cost of inaction is therefore massive, ing the productivity of women-owned enterprises. estimated at $US45 billion.73 The Heckman curve In Uganda, childcare responsibilities disproportion- (Figure 20) summarizes the stylized fact from the inter- ately burden women, limiting their participation in the national literature that investing early will yield larger labor market. For instance, 83 percent of Ugandan returns. This is not a dismissal of important remedial women perform unpaid care work compared with programs or skilling interventions later in the life cycle, 53 percent of men, and women and girls perform but rather an illustration of the short-sightedness of 10 more hours per week on these tasks than men countries that neglect investing in ECD. and boys.75 This imbalance contributes to a signifi- Investments in early childhood develop- 70 Heckman 2006. ment have both immediate returns and payoffs 71 Development Initiatives 2021. later in the life cycle. Even though the economically 72 UNICEF and Genesis Analytics 2023. active years of today’s young children are still decades 73 Ibid. away, some of the payoff from ECD investments 74 A long-term evaluation of a Jamaican early childhood comes much sooner. Expanding access to quality pre- stimulation program found that by age 22, participants had lower involvement in violent crime, and by age 31, primary education improves both the efficiency and they showed reduced substance use and risk-taking cost of primary education by reducing grade repetition behaviors compared to a control group (Walker et al. and improves results in the primary cycle. Ensuring 2022). that children complete the full schedule of immuniza- 75 UBOS 2022. 26 Investing in Early Childhood Development for Transformation of Human Capital in Uganda cant gender gap in labor-force participation: in 2021, average, but far behind neighboring Kenya (55 per- 52 percent of women aged 18–30 were not in educa- cent).83 Uganda has improved key health indicators, tion, employment, or training, compared to 28 percent evident in a 47 percent increase in life expectancy of men.76 Although women own 40 percent of busi- between 1990 (46.3 years) and 2024 (68.5 years), ness in Uganda, they are more likely to be in the infor- which included significant declines in maternal and mal sector and in low-profit sections of the economy, child mortality rates. Yet challenges remain, including resulting in lower productivity and profitability com- stunting, which affects up to 25 percent of children in pared to male-owned businesses.77, 78 Uganda. Moreover, the average Ugandan child com- pletes 6.8 years of schooling, meaning most children Uganda invests too little in human capi- do not complete primary school. Once learning- tal. In 2021, overall public spending on education adjusted, the years of schooling average is reduced stood at 2.7 percent of GDP, which is below rec- to 4.3 years.84 ommended minimum threshold of 4 percent,79 and compares poorly to regional peers that spend 4.2 per- The Government of Uganda recognizes cent of GDP. Health spending is both low and vari- the importance of early childhood and has made able. In 2001 Uganda allocated 1.4 percent of GDP advances in policy development. ECD plays a to health, which then declined to 0.6 percent in 2019 prominent role in the human capital priorities of the before rising again to 1 percent in FY2021/22. In con- upcoming NDP IV. In 2016, the GoU, through the trast peer countries such as Burundi, Kenya, Malawi, Ministry of Gender, Labor, and Social Development and Rwanda allocate 2 percent or more of their GDP (MoGLSD), developed the National Integrated Early to health.80 External partners and private sources Childhood Development (NIECD) Framework to pro- provide most (about 82 percent) of Uganda’s cur- vide a comprehensive approach to harmonize goals rent health expenditure. Additional public funding is and strategies across sectors and levels towards sorely needed, and Uganda has space to accelerate more coordinated and inclusive ECD. Aligned with growth through human capital investments without the Nurturing Care Framework for ECD,85 the frame- any increase in the aggregate levels of government work’s policy mission is to ensure equitable access spending. According to the 2023 Public Expenditure to quality and relevant ECD services, promoting the Review, a “Balanced Fiscal Adjustment” scenario— holistic development of all children from conception which would include a 2-percentage point increase in to eight years of age, and enabling them to reach their the share of spending on education and health, offset full potential. by reductions in other areas—would accelerate annual GDP growth from 5.2 percent to 6.6 percent on aver- Despite progress, ECD remains compara- age through FY2029/30.81 tively neglected in Uganda, and implementation is lagging. While the NIECD put forward strong pro- A child born in Uganda today will only reach posals, including establishing early childhood educa- 39 percent of his or her potential. The World Bank’s tion centers at every primary school and supporting human capital index (HCI) measures human capital community-based centers, the programs were not development. The HCI estimates the future produc- fully implemented. Table 4, taken from the Uganda tivity of a worker born today based on current levels Human Capital Development and Growth Review, of investment in human capital, proxied by survival to age 5, the share of children not stunted, average years 76 Ibid. of schooling completed, internationally benchmarked 77 World Bank 2021. learning outcomes (combined with average years of 78 World Bank 2019b. schooling into Learning-Adjusted Years of School- 79 World Bank 2024g. ing), and adult survival from age 15 to 60. Based on 80 WHO. Global Health Expenditure Database. the HCI, a child born today in Uganda will be only 81 World Bank 2024g. 82 World Bank 2025a. 39 percent as productive when he or she grows up as 83 World Bank 2025a. compared to a child with a complete education who 84 Ibid. enjoys full health.82 This places Uganda in the lowest 85 For more details about the Nurturing Care Framework, quartile of the global HCI distribution, near the SSA visit https://nurturing-care.org/. 27 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda TABLE 4     SELECTED INDICATORS RELATED TO THE NIECD POLICY ACTIONS Primary health care, Early childhood care and Family strengthening and sanitation, and environment Food security and nutrition education support Child protection 68% of pregnant women 49% of children 6–23 38% enrollment in pre- Limited data available on 83% of children attended a fourth antenatal months receive minimum primary educationa parent support interventions, experience violent care visit meal frequency programs are fragmented discipline 53% early stimulation at 2.8% mother to child HIV 9.7 % of children and small in scale home 66% of children covered transmission underweight by birth registration Sources: MoGLSD (2023) except DHIS2 (antenatal care); Nurturing Care (2023) for early stimulation; MoGLSD (2020a) for parenting programs; UBOS 2023 (DHS); Kimuli, Derrick, et al. (2023). a Estimates of pre-primary enrollment in Uganda vary widely. The figure reported in this table is from MoGLSD (2023) based on the Uganda National Household Survey. Other sources put enrollment rates much lower; Genesis Analytics and UNICEF (2023) estimate a gross enrollment rate of 16.6 percent. Measuring access to pre-primary education is challenging due to (until recently) a lack of a functioning Education Management Information System (EMIS) and the high rates of under- and over-age enrollment discussed later in this section. captures the status of selected indicators related to FIGURE 21     UGANDA’S POPULATION PYRAMID, the NIECD Policy Actions. While some of these indi- 2023 cators, such as mother-to-child HIV transmission and 85+ 80–84 the share of children covered by birth registration, are 75–79 improving others—such as the percentage of preg- 70–74 65–69 nant women attending a fourth antenatal visit—have 60–64 deteriorated in recent years.86 55–59 50–54 Age Groups 45–49 40–44 Uganda is approaching a one-time opportu- 35–39 nity for rapid economic growth. Uganda can bene- 30–34 25–29 fit from a significant economic tailwind: the changing 20–24 structure of its population. Uganda is on the cusp of 15–19 10–14 its demographic dividend window—a transitional period 5–9 <5 when social, economic and health advances bring –10 –5 0 5 10 down both mortality and birth rates—yielding a large Percent pool of potential workers with few dependents (children Male (%) Female (%) and elderly) that can accelerate the economy. Countries Source: World Bank 2024 based on UBOS. that are touted today as models for rapid growth and poverty reduction, such as South Korea and Singapore, achieved these results in part by investing in human of the sectoral contributions to ECD (see Table 4), there capital during the demographic dividend window.87 is no perfect way to categorize these investments; Young children are the wide base of Uganda’s popula- the organization of this Special Topic represents a tion pyramid (Figure 21), meaning that the age cohorts compromise among the components of the Nurturing from 0 to 8 are the largest. The 13 million young children Care Framework and NIECD pillars, life-cycle consid- of today are the future labor force for Uganda’s econ- erations, and other technical considerations. The first omy and future leaders for Ugandan society. Whether sub-section covers Health and Nutrition as well as this generation can bring accelerated economic growth Water, Sanitation, and Hygiene (WASH), given the to Uganda will depend in part on decisions made latter’s important contribution to nutritional status in today to invest in their human capital development. the early years. The next sub-section focuses on the interrelated topics of parent and family support and child protection. The third sub-section focuses on childcare, and the next on Early Childhood Educa- The State of ECD Services in 3.2.  tion (ECE), also referred to as pre-primary education. Uganda ECE and childcare overlap, but are provided in distinct This sub-section provides an overview of the land- 86 World Bank 2025a. scape of ECD in Uganda. Given the interrelated nature 87 World Bank 2025a. 28 Investing in Early Childhood Development for Transformation of Human Capital in Uganda BOX 2: THE IMPORTANCE OF A MULTISECTORAL APPROACH TO ECD To be effective, ECD must draw on all the human capital sectors and FIGURE B2.1     THE NURTURING CARE FRAMEWORK other sectors in a holistic way. The Nurturing Care Framework, an ADEQ approach to ECD endorsed by international organizations including UAT LTH EN the World Bank, UNICEF, and the World Health Organization, D HEA UTR OO IT proposes five components for ECD: good health, adequate ION G nutrition, opportunities for early learning, security and safety, and responsive caregiving.a Given these comprehensive needs, ECD requires inputs from all of the Ministries, Departments, and Agencies (MDAs) in a core human capital development program. In O P P O R TU NI TIE S F O R E Uganda, this includes the MoGLSD; the Ministry of Education and COMPONENTS OF Sports (MoES); Ministry of Health (MOH); and the Ministry of Water C A R E GIVIN G NURTURING CARE and Environment (MOWE). However, even the combined efforts on the human capital program ministries cannot fully deliver on all SIVE five components without support from other MDAs. The Ministry A RL PON of Agriculture, Animal Industry and Fisheries (MAAIF) contributes YL RES on nutrition; the National Identification and Registration Authority EAR ING N (NIRA) on security (through birth registration); and the Office of the Prime Minister on service delivery in refugee hosting areas, among SAFETY many others. A N D S E C U RI TY Source: World Bank 2024 based on UBOS. a WHO 2018. settings, and ECE has school readiness objectives as trend. Under-five mortality fell from 128 per 1,000 live well as care objectives. The final sub-section focuses births to 52 between 2005/06 and 2023/24. Over the on building an ECD system and analyzes system-level same period, the fraction of children stunted—i.e., those factors such as financing, data, and accountability. whose height was below a specified range around the child growth standards for their age—fell by more than one third, from 38 percent to 24.4 percent. The mater- Health, Nutrition, and WASH nal mortality ratio per 100,000 live births also declined from 435 to 189. Compared to peer countries, Uganda Access to quality health care, good nutrition, and is more effective at translating existing levels of health WASH services are the foundation for human service delivery into outcomes. Despite a slightly capital development, beginning from the pre-natal below-average performance on an index of health- period. The Nurturing Care Framework emphasizes care access and quality, Uganda has a lower mater- that good health and nutrition are important both for nal mortality rate than peer countries including Kenya, caregivers and children. In order to provide quality Ethiopia, Rwanda, and Sudan.89 Despite this good care, parents and other caregivers must have physical news, the current rate of progress will not be sufficient and mental health, while an expectant mother’s nutri- for Uganda to achieve the human capital levels needed tional status during pregnancy has profound effects for its long-term economic growth aspirations. Under a on the growing child’s brain development.88 Access “Business as Usual” scenario, projections indicate that to safe water and sanitation protects expectant moth- 82.7 percent of Ugandan children will be not stunted ers, other caregivers, and children from infectious by 2040. However, achieving the level of human capital diseases that undermine their nutritional status and development required for the tenfold growth strategy, contribute to maternal and early childhood mortality. would necessitate raising this figure to 93.3 percent of children by the same year (Figure 22). Uganda has made strides in maternal and child health, but faster progress is needed to meet These improvements are linked to better its economic ambitions. The two components of the access to care, even though significant inequal- Human Capital Index directly related to early child- hood—survival of children to age 5 and the share of 88 Nurturing Care 2020. children under 5 not stunted—have shown a positive 89 World Bank 2024i. 29 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda FIGURE 22     CHILDREN NOT STUNTED 77 percent of rural and 90 percent of urban house- 100 holds have access to sanitation, well above the SSA 93.3 90 88.9 average of 63 percent. In health care institutions, how- 82.3 80 78.3 ever, access to WASH services remains dangerously 74 71.1 80.5 82.7 low; even in Kampala, only 17 percent of health care 70 65.4 75.6 78.2 61.6 facilities are connected to a sewer.91 Open defecation 60 55.1 remains a common practice in some regions, with 50 negative consequences for children’s health: survey 40 data indicate that 23 percent of children under age 5 30 with diarrhea were practicing open defecation.92 20 10 Parent and Family Support and 0 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 Child Protection Historical trends Business as usual Vision 2040 acceleration Source: World Bank. 2025. Parents are children’s first teachers, and well- designed parent support programs can make a lifelong difference for children’s outcomes. ities in service provision remain. For instance, A review of impact evaluations from 11 countries, declines in maternal and infant mortality have coin- including Uganda, finds strong evidence that cided with a dramatic rise in health facility deliveries, encouraging stimulation in the home improves chil- rising from 37 percent in 2001 to 91 percent in 2022. dren’s cognitive development.93 These evaluations In the same period, immunization coverage improved focus on encouraging parents and caregivers to by 45 percent for all vaccines, specifically 66 percent play, read, talk, and sing with children ages 0–3. The for the DPT3/Pentavalent vaccine. In 2022, 60 per- intervention in Uganda was tested in 12 parishes in cent of the demand for family planning was fulfilled by Lira. Based on a program developed by the NGO, modern methods. The picture for nutrition is mixed: Plan International, the intervention involved biweekly iodized salt intake is nearly universal due to success- group meetings for caregivers with trained com- ful food fortification efforts, but only 15 percent of munity volunteers, as well as less frequent individual breastfed children aged 6–23 months receive both meetings. Across the studies, similar programs con- the minimum meal frequency and four or more food sistently improved children’s cognitive development, groups. While equitable access is observed for inter- with the largest benefits for the most disadvantaged ventions like immunization and iodized salt intake, with children. One small-scale study from Jamaica was minimal disparities across urban-rural, education, and able to follow participating children into adulthood wealth divides, significant gaps remain in other areas. and found durable improvements in cognitive skills, For instance, facility-based deliveries are 40 percent academic outcomes, mental health, and employ- more common among educated and wealthy women, ment and earnings.94 In the Global Evidence in Edu- insecticide-treated net usage is nearly double in the cation Advisory Panel’s (GEEAP) most recent review wealthiest quintile, and demand for modern family of rigorous international evidence, parent-directed planning is substantially higher among urban, edu- early childhood stimulation (for ages 0–3) is listed cated, and wealthier populations.90 as a “good buy,” meaning strong evidence exists for its cost-effectiveness in improving learning levels in Access to WASH has likewise improved low- and middle-income countries.95 over time, though substantial coverage gaps remain. Provision of safe water and sanitation con- tributes to higher quality of services in health settings, 90 World Bank 2025a. Chapter 3. 91 Ibid. lower stunting, and reduced burden of water-related 92 MoGLSD 2023. disease. Uganda’s access to safe water—72 per- 93 J-PAL 2020. cent in urban areas and 67 percent in rural areas— 94 J-PAL 2020. surpasses the SSA average of 57 percent. Similarly, 95 Akyeampong et al. 2023. 30 Investing in Early Childhood Development for Transformation of Human Capital in Uganda An unsafe environment in the early years— biweekly sessions, including mixed-gender and sin- whether because of physical or emotional violence gle-gender sessions to allow mothers and fathers to or neglect—can have long-lasting negative conse- explore issues both together and separately. One eval- quences for brain development. Mild to moderate uation found that the single-gender sessions were key stress is a normal part of life, and developing skills to successfully involving fathers, as well as tapping into to cope with daily stress is part of a child’s develop- fathers’ motivations to enhance their family’s respect- ment. However, exposure to toxic stress can have last- ability.102 A formative evaluation identified four factors ing negative effects. Toxic stress is defined as “strong, linked to violence which research shows could be mal- frequent, or prolonged activation of the body’s stress leable—poor parent-child attachment, harsh parenting, management system” triggered by “stressful events inequitable gendered socialization, and parental con- that are chronic, uncontrollable, and/or experienced flict—and found that PfR is a culturally relevant interven- without children having access to support from car- tion with the promise of preventing violence.103 Despite ing adults.”96 Scientific research has established that considerable efforts testing and refining this model,104 toxic stress can change the architecture of a child’s there is not yet any mechanism to translate this type of growing brain, leading to overdevelopment of regions programing into large-scale implementation. involved in “fear, anxiety, and impulsive responses” and underdevelopment of areas involved in “rea- Other pathways to prevent and respond to soning, planning and behavioral control,” as well as violence are underutilized. Of all areas of ECD in increased vulnerability to physical and mental health MoGLSD’s situational analysis, child protection was challenges later in life.97 In addition, toxic stress can identified as the most under-resourced. The Sauti be transferred from a caregiver or a pregnant woman helpline, a toll-free and confidential reporting and refer- to her developing child, emphasizing the need to sup- ral hotline for cases of VAC, is used predominantly in port those caring for young children.98 the Central region, and of the 76 staff and volunteers supporting Sauti all but five are funded by develop- Violence against and neglect of children ment partners. Key informants noted that many police in Uganda is widespread. Recent data on violence stations lack officers trained to support children and against children (VAC) are limited and focused pri- families, and that case management systems are partic- marily on school-aged children, but available infor- ularly weak in refugee hosting areas, which are home to mation suggests epidemic levels of VAC in Uganda. some of the most vulnerable populations of children.105 The most recent comprehensive study, the 2018 Uganda Violence Against Children Survey, reported 96 National Scientific Council on the Developing Child that 59 percent of females and 68 percent of males (2005/2014). reported experiencing physical violence during their 97 Ibid. childhoods.99 In 2022, more than 13,000 crimes 98 Harvard University. 2024. 99 MoGLSD. 2018. against children were reported to police, with child 100 MoGLSD 2023. Statistics on reported crimes must be neglect, child desertion, and child abuse accounting interpreted with some caution, since not all abuse and for most cases; this reflects a sharp reversal of a pre- neglect of children is reported. Any reported crime viously declining trend.100 statistic is likely to understate the level of the underlying problem; conversely, an increase in reporting does Uganda has homegrown and evidence- not necessarily reflect a worsening of the underlying conditions, especially if driven by greater awareness or backed parenting support and violence preven- access to the law enforcement system. tion programs, but implementation is small-scale 101 MoGLSD 2020a. and fragmented. An inventory of programs com- 102 Siu et al. 2017. missioned by MoGLSD revealed a wealth of parent- 103 Wight et al. 2022.. ing support initiatives in Uganda, but none are being 104 A randomized evaluation of a short program based implemented at scale.101 Parenting for Respectability on PfR is currently underway in Namisindwa District, in partnership with Makerere University and the World (PfR) is a longstanding program backed by an exten- Bank, to test the program’s effectiveness in alleviating sive body of research. PfR was initially developed in parent stress related to climate change-related disasters 2013 by a partnership including NGOs, MoGLSD, and and other shocks. AEA registry link Makerere University. The flagship program involves 16 105 MoGLSD 2023. 31 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda Childcare FIGURE 23    CHILDCARE ARRANGEMENTS FOR DISADVANTAGED WOMEN ENTREPRENEURS Expanding access to quality, affordable childcare 60 56 is a potential win-win-win for children, parents, and businesses. Access to childcare helps women 50 enter the labor force and return to the labor force n=194 after giving birth, increasing the stock of productive 40 workers in the economy. A quality childcare environ- ment can have many of the same benefits of ECE 30 in providing stimulation to children, increasing their 22 22 readiness for school and developing foundational 20 social and emotional skills. Conversely, an absence of childcare opportunities can have negative side 10 effects on the education system as parents seek other options. As will be discussed in the next sec- tion, parents sending children to school before the 0 Formal childcare Family, friend,neighbor Bringing child to work official age of enrollment creates several challenges services or domestic help or leaving at home in the primary system. Childcare also represents Source: World Bank. 2024h. a business opportunity; meeting the demand for childcare services creates opportunities for childcare entrepreneurs and workers. While demand is high, the cost of childcare services is a significant challenge for low-income There is new, rigorous evidence from women entrepreneurs. A 2024 study conducted Uganda on the benefits of childcare. A recently with 194 low-income women entrepreneurs and 85 concluded impact evaluation106 on the effects of childcare providers in Kampala and Wakiso found providing childcare for 972 businesswomen in six that only 22 percent of participants used formal child- markets around Kampala covering provides some care services (Figure 23). Of those without childcare insights: support, 70 percent of participants cited affordability as the primary barrier, and lack of accessible services a. There is great demand for childcare; more than as a second barrier. Ninety-five percent of women 80 percent of the women said they could use without childcare support expressed an interest in childcare on most days of the week. using services if they were affordable and accessible, b. The cost of childcare is prohibitive—women stating a willingness to pay UShs 50,000–100,000 were willing to pay far less than the prevailing per month. The median amount spent by surveyed market rates per term. women using childcare services was UShs 115,000 c. Childcare allows women to be more efficient at per month, which is unsustainable compared to their work by freeing time for multi-tasking. income level (75 percent of women in the sample d. Provision of childcare accords women the time earned less than UShs 200,000 per month). Mean- to do more self-nurturing and wellbeing activi- while, 19 percent of the surveyed providers cited low ties which give more life satisfaction generally. profit levels and difficulties covering operational costs e. Childcare has strong effects on child develop- as a main challenge.107 ment, especially for the children who attended community childcare centers. In the absence of formal childcare, children may be left in less-than-optimal, or even unsafe, The evaluation was not able to look at a rep- care situations. According to the 2022 Uganda resentative sample of female business owners, and Demographic and Health Survey (UDHS), up to 47 per- more research would be required particularly to look cent of children under age five were left in the care at childcare needs in rural areas. Nonetheless, the results suggest that the demand for and benefits of 106 Herskowicz 2025. childcare services in Uganda could be substantial. 107 World Bank 2024h. 32 Investing in Early Childhood Development for Transformation of Human Capital in Uganda of other children under age ten in the previous week. markets are commonly rented to other businesses. These arrangements affect not only the children left Existing policies on childcare focus on children 3–5 in care, but also the children providing care, if these years of age, with no consideration of center-based responsibilities prevent them from attending school childcare for children under the age of three. There and building their own human capital. Even more con- is likewise no regulation covering hours of operation, cerning, 20 percent of young children in the UDHS which is a crucial consideration for the demand for survey were at some point in the previous week left these services from parents.111 alone. Inadequate supervision of children was more common in rural areas (52 percent) than urban areas A comprehensive approach to childcare (43 percent).108 When women bring children to work, must also consider the needs of school-aged this affects the productivity of their businesses. A study adolescent girls with children. Despite progress in showed that 38 percent of women business owners many human development indicators, teenage preg- bring children to work (compared the zero of their male nancy rates have remained stagnant at around one counterparts), and female businesses where children in four since 2006. The GoU has adopted a progres- were present at work earned 45 percent lower profits sive policy in allowing adolescent mothers to return compared to those where children were not present.109 to school. In practice, however, there are significant barriers to their continuing education, to the detriment Recent legislation and policy development of the human capital of the girls themselves and of have aimed to promote family friendly practices their babies. These barriers include resistance to the in both formal and informal workplaces, though policy from local schools, unaffordable out-of-pocket gaps remain. Policies, such as paid parental leave, expenses, and a lack of childcare options. support for breastfeeding mothers, and childcare ser- vices help parents and caregivers balance work and caregiving responsibilities while enhancing overall Early Childhood Education human capital development. Moreover, family friendly workplaces can benefit employers by reducing staff Pre-primary education is among the most effec- absenteeism and turnover, and by increasing reten- tive and cost-effective investments a government tion, commitment and productivity.110 To date, work- can make. GEEAP’s latest review of rigorous inter- place-based childcare has largely been a matter of national evidence lists pre-primary education as a voluntary action by a small set of employers, includ- “good buy” for governments, emphasizing its proven ing the Parliament of Uganda, Stanbic Bank, Uganda ability to improve learning outcomes at a reasonable Communications Commission, and UNICEF. The cost. Notably, this body of evidence includes “studies Employment (Breastfeeding and Childcare Facilities [which] have tested low-cost models at a large scale at Workplace) Regulations, 2021, call for employers by leveraging existing infrastructure and improving with more than 50 employees to provide a breast- quality by implementing multi-component interven- feeding room and other amenities for children’s play, tions, including teacher training.”112 rest, and hygiene to assist postpartum employees with their return to work. A proposed amendment In Uganda, the current level of investment to the Employment Act 2016 would require employ- in pre-primary education is low and inequitable. ers to provide childcare facilities and make time and The GoU recognizes pre-primary as the first level of space available for breastfeeding for employees’ chil- education. Until recently, however, its provision has dren aged 3–36 months. However, this regulatory been officially the province of the private sector. The approach would only reach the relatively small share lack of public financing presents an affordability of women employed in the formal sector. For the infor- barrier for families, and as a result, children from bet- mal sector, the Markets Act 2023 includes the provi- sion of a baby care and nursing center among the 108 UBOS 2022. criteria for granting a license to operate a public or 109 Delecourt and Fitzpatrick 2021. private market. However, there is no public provision 110 UNICEF. 2024. or subsidy, so the cost of these facilities is often pro- 111 World Bank 2025b. hibitive, and spaces intended for childcare in newer 112 Akyeampong, et al. 2023. 33 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda ter-off households are much more likely to attend. FIGURE 24     OVER- AND UNDERAGE ENROLLMENT An analysis of household survey data in the 2023 IN P.1 IN UGANDA PER found that children from households in the high- 120 est wealth quintile were more than three times as likely 100 15 21 32 31 29 29 to attend pre-primary as those in the lowest (57 and 80 32 28 34 42 34 35 34 17 percent net attendance rates, respectively). Chil- 60 % dren from urban areas are 20 percentage points more 61 61 48 40 52 53 52 50 53 57 52 49 51 likely to attend than those from rural areas (50 and 47 30 percent, respectively).113 Moreover, for those chil- 20 16 18 14 11 23 16 17 19 16 14 20 16 15 dren who have access to pre-primary education, the 0 Total Female Male Quintile 1 Quintile 5 Rural Urban Mountainous Non-Mountainous Central Eastern Northern Western quality is often poor. According to a study conducted by the National Planning Authority (NPA), 56 percent of early childhood education centers were operating without licenses and did not meet basic requirements Total Income Sex quintiles Urban Area Region or minimum standards.114 Under-age (<6) On time (6–7) Over-age (8+) The current state of pre-primary education Source: World Bank. 2023. is highly inefficient. Until recently, while it was offi- cially provided by only private providers, non-govern- mental organizations, and faith-based organizations, icy shift and renewed vigor within government and there is large-scale de-facto provision through gov- other stakeholders in the early childhood sector. ernment schools. The lack of affordable pre-primary The goal of the policy is to “attain adequate early child- programs has given rise to a widespread unofficial hood care and education services in order to improve practice of splitting the first year of primary (P1) into child growth and development; educational outcomes; two sections—a normal P1 class and an improvised health outcomes; in addition, to support the socio-eco- class for underage children (commonly known as nomic development process.” The Policy seeks to “P1A” and “P1B”). This arrangement, while responsive increase equitable access to quality, inclusive, and to parent demand, creates several inefficiencies. First, sustainable ECCE services in Uganda; strengthen given the developmental status of pre-primary aged structures and systems for effective standardization children, the requirements for curriculum, teacher and management of service delivery; increase pub- training, and materials are different than in primary lic awareness on ECCE programs and promote part- education. Age-inappropriate learning environments nerships with stakeholders; increase MoES and local may be detrimental to children’s development, mean- government capacity to support ECCE; and main- ing that while the GoU is paying capitation grants for stream cross-cutting issues into the sector. Crucially, these underage children, the investment may be coun- the ECCE policy allows room for future expansion of terproductive. Second, the presence of both under- government provision of pre-primary education. Under age (from early enrollment) and overage (through Clause 61, the ECCE policy allows government invest- repetition) children in P1 has contributed to an enroll- ment “when deemed necessary and upon approval ment bulge in the early years of primary, straining by Cabinet,” which has been taken to mean in areas resources and lowering quality. As Figure 24 illus- where provision of pre-primary through the private sec- trates, nearly half of P1 students are either underage tor is inadequate to meet the need. or overage. Finally, a national study found that a lack of access to quality pre-primary education resulted A policy shift towards government provi- in many students entering P1 unprepared, contribut- sion and expansion of pre-primary education for ing to high repetition rates.115 This is a further source at least one year could spawn enormous socio- of inefficiency, as government pays multiple times for children to go through the same grade. 113 World Bank 2024f. There was no significant gender gap in pre-primary attendance. The new ECCE policy, approved by Cabi- 114 NPA 2020. net in May 2024, has signaled an important pol- 115 Weatherholt et al. 2018. 34 Investing in Early Childhood Development for Transformation of Human Capital in Uganda TABLE 5     COST/BENEFIT ANALYSIS OF INVESTING IN PRE-PRIMARY EDUCATION IN UGANDA (DISCOUNTED) Category Type Value (UShs Trillion) Savings from reduced repetition Economic Benefit 0.4 Improved lifetime earnings Economic Benefit 155.7 Potential caregiver income Economic Benefit 23.9 Employment opportunities Economic Benefit 3.5 Cost of preprimary education Economic Cost 13.8 Total Net benefit 169.7 Source: UNICEF & GENESIS 2023. Note: The study models the impact of scaling-up the coverage of quality pre-primary education for children in the year before primary school entry. It reports on estimated benefits and costs over different time horizons for reaching universal coverage (by 2030, 2040 and 2063). The scenario presented assumes a moderate pace scale-up which reaches 90 percent coverage by 2040, maintained until 2063. economic benefits for Uganda. These benefits ture in tertiary nearly doubled in the 10 years prior, include improved efficiency and cost savings at other dwarfing that of primary.118 While tertiary education is levels of the education system, enhanced educational important for building human capital, boosting pro- outcomes, and increased lifetime earnings. A recent ductivity, and fostering innovation, public spending study commissioned by UNICEF116 estimated that if on higher education tends to benefit well-off youth. In government accelerates investments in pre-primary Uganda, the top income quintile accounts for more education and achieves a 90 percent access rate by than two-thirds of enrollment.119 Prioritizing ECE would 2040, it could save approximately 0.4 trillion UShs be a more equitable and cost-effective way of spend- (US$6.5 million) by improving internal efficiencies ing public resources. Development partner funding and reducing primary school repetition rates. Freed could help fill the gap, though the share of global aid up caregiver time could be put towards income-gener- allocated to education is on the decline, as donor pri- ating activities, primarily benefitting women and girls. orities have shifted.120 However, the alternative—failing An additional 21,000 pre-primary teachers would need to invest—would generate economic losses estimated to be hired, which would provide employment oppor- at UShs 170 trillion (US$45 billion). tunities. The game-changer would be the increased productivity of workers stemming from higher human Uganda can benefit from lessons learned capital. Each child entering pre-primary in 2024 would from peer countries that have introduced and rap- earn an additional UShs 5.5 million (US$ 1,465) in idly scaled pre-primary education. In 2010, Ethiopia improved lifetime earnings, valued at UShs 156 trillion introduced one year of pre-primary education, known (US$41 billion). Table 5 lays out the costs and benefits as O-Class, resulting in a dramatic increase in enroll- associated with investing in pre-primary. ments from 5 percent at the outset of the program to 46 percent within a decade. A comprehensive study The costs of inaction dwarf the price of of the O-Class experience found that the quality of investing in pre-primary education. Scaling up service delivery varied considerably and that most pre-primary education would indeed require a sub- schools lacked sufficient learning materials and age- stantial financial commitment. The estimated cost— appropriate WASH facilities. Like Uganda, Ethiopia equivalent to 8 percent of the MoES already stretched has decentralized its basic education system, and annual budget projections until 2030—is significant.117 researchers found that the level of regional commit- This increase, while bringing Uganda closer to inter- national benchmarks for education spending, faces 116 UNICEF and Genesis Analytics 2023. stark political and fiscal realities. Trade-offs are inev- 117 Assuming the proportion of the GoU budget to education remains constant at 8.6% until 2030. UNICEF and itable, and a rebalancing of spending at the different Genesis Analytics. 2023. levels of education in Uganda may be necessary. In 118 World Bank 2024g. 2021/2022, Uganda allocated 25 percent of the bud- 119 World Bank 2024g. get to the tertiary level, and the per-student expendi- 120 Nobuyuki Tanaka et al. 2024. 35 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda ment was an important factor in implementation suc- capital development services.124 Strengthening the cess. Budgetary resources for the program were ECD workforce requires adherence to five key princi- limited, and the program relied heavily on mobilizing ples derived from local and international evidence.125 voluntary contributions (e.g., for room construction First, professions within the ECD workforce—includ- and sourcing local learning materials) from communi- ing pre-primary teachers, primary healthcare work- ties. Despite these challenges, children who attended ers, and caregivers—should be made more attractive O-Class were, on average, one year ahead academ- by improving their status, compensation, and career ically in Grade 1 compared to peers who did not progression, with higher salaries considered as attend.121 An impact evaluation from Ghana demon- part of a broader performance-enhancement strat- strates that upskilling existing teachers in play-based egy. Second, pre-service training should include a pedagogy can have a positive impact. This may be strong practicum component or other forms of prac- relevant for Uganda, considering the possible need to tice-based learning to ensure readiness for real- retool primary teachers now teaching improvised pre- world challenges. Third, meritocratic selection and primary classrooms. In-service training and coaching promotion processes should be prioritized to fos- led to improved use of play-based pedagogy specific ter a capable and motivated workforce. Fourth, con- to pre-primary, contributing to improved school readi- tinuous support and motivation should be provided ness among children.122 through quality in-service training that is practice- based, with at least 50 percent of training involving hands-on practice, alongside effective management to drive ongoing improvement. Finally, technology 3.3.  Building an Effective ECD System should be leveraged to complement the human fac- tor, employing digital tools to enhance effectiveness An effective ECD system requires alignment (e.g., self-paced individualized learning) and ensure between policies and institutional mandates, accountability (e.g., attendance monitoring). financing, data collection, and accountability mechanisms. An ECD system includes not only Financing for key ECD sectors falls well the MDAs involved directly in providing services, but short of what is required for adequate service also central authorities such as the country’s political delivery. Public expenditures in health and education leaders and finance ministry, frontline service provid- are too low to support the accelerated human capital ers such as schools and health clinics, recipients of development needed for Uganda’s economic aspira- services including communities and families, and tions.126 In education, overall public spending is around even external donors and development partners. 2.7 percent of GDP, compared to a regional peer aver- Researchers have proposed that for systems to age of 4.2 percent and a recommended minimum function effectively, the relationships between these threshold of 4 percent (see Figure 25).127 Moreover, to actors must be “coherent”—flows of financing, infor- the extent that public expenditures have increased in mation, and accountability that reinforce each other recent years, the new spending has accrued almost toward a common goal. In practice, however, ECD entirely to higher education and central government systems are often “incoherent” (key elements of these relationships are missing or working at cross purposes).123 For example, ECD systems will function 121 Kim et al. 2021. 122 Wolf et al. 2018. sub-optimally when service providers do not receive 123 Powers and Paulsell 2023. adequate resources to fulfill their mandates, data 124 See World Bank2025a for a more in-depth discussion of collection focuses on indicators that are easier to human capital workforce. measure rather than those that reflect the true objec- 125 Adapted from Beteille and Evans 2019. tives of policy, or communities lack a mechanism to 126 The previous two UEU (22 & 23) Special Topics focused hold service providers accountable. on public expenditures in the education and health sectors, drawing on a multisectoral PER. While the analyses were not focused on the EY, both highlight the A well-prepared, motivated, and adequately low levels of spending in these sectors. compensated workforce is the most important 127 4% is based on the UNESCO’s Education 2030 ingredient for the successful delivery of human Framework for Action. 36 Investing in Early Childhood Development for Transformation of Human Capital in Uganda FIGURE 25     PUBLIC EDUCATION EXPENDITURE with little to no information available on the provision 6 and demand for childcare focused on children under 5.1 age 3.131 There is a near-complete absence of data on 5 4.8 parenting, family strengthening and child protection services, and insufficient data to shed light on equita- 4 3.8 ble access to services among marginalized groups.132 3.3 MDAs involved in ECD have made excellent progress 3 2.7 recently on development of their Sectoral MISs. The next step will be to ensure integration and interopera- 2 bility of these MISs so that policymakers have access to comprehensive information about the state of ser- 1 vice delivery and can monitor cross-sectoral issues and interventions effectively. 0 Uganda Tanzania Rwanda Kenya Ethiopia (2021) (2021) (2021) (2021) (2018) There are considerable gaps in quality- Source: World Bank 2024f. assurance mechanisms for ECD services. In some areas of ECD, basic quality standards have been developed, but there is little monitoring or incentive for functions.128 While general government health expen- service providers to meet those standards. For exam- diture from domestic sources (GGHE-D) increased in ple, as part of its mandate in pre-primary education, 2023/2024 to 7.7 percent of total government spend- the GoU has established registration procedures for ing, it remains far below the Abuja Declaration target pre-primary schools. According to one GoU study, of 15 percent adopted by African Union countries in only 18 percent of providers were registered, meaning 2001.129 It amounts to approximately US$9 per cap- that they had demonstrated having met basic quality ita, compared to an estimated need of US$109 per standards.133 In other areas, such as childcare, quality capita for basic health services.130 In the absence of assurance systems are still under development. The public investment in ECD, service delivery depends Parish Development Model (PDM) presents an as- on the ability of households—or in some cases such yet-unrealized opportunity to empower communities as employer-provided childcare, employers—to pay. to demand better ECD services. The GoU launched As discussed throughout this section, the result is the PDM under NDP III as a strategy to leverage com- that many sectors in Uganda show a strong relation- munity-based action to identify needs and strengthen ship between household economic status and access planning, budgeting, and delivery of core services. to services, with the result that the most vulnerable By sensitizing communities to the importance of the Ugandans are least likely to benefit. early years—part of the “mindset change” pillar of the PDM—and providing them with adequate resources The availability of timely data to moni- and training, communities could help hold service tor progress also remains a challenge. The Situ- providers accountable for better outcomes. ational Analysis of ECD in Uganda notes that “data on the current state of ECD, especially as it relates Coordination structures for ECD are sim- to services, is still inadequate.” Basic indicators are ilarly underdeveloped. The MoGLSD is responsi- available for child health, nutrition, and ECE includ- ble for overseeing the implementation of the NIECD ing rates of immunization, stunting, and pre-primary Policy and its coordinated action plan, working along- enrollment. Even when available, however, data are side other MDAs, development partners, and civil sometimes inconsistent or hard to interpret. As noted in Figure 24, estimated rates of access to pre-pri- mary education vary considerably due to the lack of 128 World Bank 2023. 129 World Bank 2024i. a functioning Management Information System (MIS) 130 MoH 2024. and technical challenges posed by under- and over- 131 World Bank 2024h. age enrollment. In childcare, most of the available 132 MoGLSD 2023. data and research focused on children aged 3 to 5, 133 MoGLSD 2020b. 37 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda society organizations. The GOU has also established the Special Topic, and the investment priorities a National Technical Committee (NTC) for ECD. The represent the potential highest-value interventions Situational Analysis of ECD identifies several chal- for each section. The selection of investments takes lenges with the existing institutional arrangements. into consideration: (i) alignment with GoU strategic For example, a recent review of the regulatory frame- and policy directions; (ii) international and Uganda- work for childcare in Uganda found that MoES and specific evidence of effectiveness in contributing to MoGLSD have unclear and overlapping mandates for human capital formation; and (iii) the possibility for provision of childcare to children under age three.134 phased implementation given the fiscally challenging Coordination with development partners is also inad- environment in the near term. equate, with ECD services heavily reliant on donor funding, which poses challenges for sustainability, High Level-Recommendation 1: Commit to a path- alignment with GoU policy, and equitable geographic way of increased, pro-equity public expenditure distribution.135 on ECD and harness development partner and private-sector contributions. • Adopt a balanced fiscal policy: First, the 3.4. Conclusion GoU, led by MoFPED, could switch to the “Balanced Fiscal Policy Path” as described in The potential for ECD to transform human capital the PER. As noted in sub-section 4.7, even with- development in Uganda is vast but unrealized. out any increase in aggregate levels of spend- Uganda’s lofty ambitions for growth, which center on ing, an increase in human capital expenditures growing the economy tenfold and transitioning to an of 2 percentage points could increase average upper-middle income country by 2040, will require annual GDP growth by 1.5 percentage points a rapid increase in its stock of human capital. For- by end of the current decade.136 tunately, the timing for these ambitions could not be • Prioritize basic levels of service delivery: better, as Uganda’s demographic transition is poised Within the Human Capital Development pro- to give the country an extremely favorable ratio of gram budget, the GoU could prioritize increased workers to dependents in the coming decades. To spending on basic levels of service delivery, realize this demographic dividend, however, Uganda which tend to benefit the population more equi- needs a sharp break with a business-as-usual tably, especially young children. In education, approach to human capital development and must this would imply prioritizing expanding pre-pri- begin to invest at much higher levels in the core mary education and improving the quality of pri- sectors of education—including pre-primary and early mary education over further increases in higher learning opportunities—health, social protection, and education. In health, new expenditures would WASH. The most cost-effective interventions available target a faster expansion of quality primary to Uganda now to realize these human capital gains, healthcare in disadvantaged areas as com- focus on the large and growing population of children pared to highly specialized care. under 8 years of age. • Harness ECD finance from partners: the GoU could take a more vigorous approach to lever- aging finance for ECD from development part- ners and the private sector. This may include a Recommendations for Investing 3.5.  greater focus on ECD in requests for develop- in Early Childhood Development ment partner financing and creating incentives and an enabling environment for more private provision of childcare. This section proposes three high-level recom- mendations and four investment priorities for 134 World Bank 2024h. ECD. The high-level recommendations are relevant 135 MoGLSD 2023. across the domains of ECD discussed throughout 136 World Bank 2024g. 38 Investing in Early Childhood Development for Transformation of Human Capital in Uganda High Level-Recommendation 2: Create incen- health and nutrition services and pre-primary educa- tives for quality service delivery and strengthen tion—have detailed estimates of their costs at scale. quality assurance, providing actionable data for Priority 1 primarily involves expanding the reach of decisionmakers. existing services, while Priority 2 involves a phased approach, considering that official government provi- • Strengthen local-level mechanisms: Incor- sion of pre-primary education is new. Priorities 3 and porate ECD service delivery indicators into 4 have strong evidence of their potential in Uganda the performance-based financing formula for but require more research and piloting before being local governments under the Intergovernmen- taken to scale. Taken together, the investment priori- tal Fiscal Transfers Program, to give local gov- ties provide a sequence for Uganda to take a bolder ernments incentives to expand access and approach to ECD while working within the challenges improve quality. In support of this process, train of the current fiscal environment. communities and equip them with simple moni- toring tools to engage with local service provid- Investment Priority 1: Expanded primary health ers under the PDM. care and nutrition services with a focus on • Include more ECD targets in national devel- underserved areas. Although Uganda has made opment planning for better visibility and encouraging progress in key health outcomes such public accountability and invest in the data as maternal and under-5 mortality and stunting, systems required to monitor those targets. further progress is threatened by stubborn inequi- Build on progress with sector-level Manage- ties in access to basic health and nutrition services, ment Information Systems (MISs) by integrat- especially for households in rural areas and with ing systems and addressing gaps, such as low socio-economic status. Additional resources for incorporating childcare data into existing plat- health should prioritize expanding primary health forms like the Education Management Infor- facilities and community hospitals in underserved mation System (EMIS), to ensure effective and areas. There is also an opportunity to expand com- timely monitoring of service quality. munity health and nutrition interventions anchored in the PDM. The fiscal needs for Uganda’s health High-Level Recommendation 3: Prioritize work- sector overall are substantial, and this investment force development for ECD. priority would likely be the costliest to implement. Gradually increasing the share of the GoU budget • Implement staffing norms and profes- for health from 8 percent to 12 percent over the next sional development in primary healthcare six fiscal years would generate considerable fiscal to ensure equitable distribution of healthcare space to expand basic health services, at a cost of workers and enhance their productivity and an additional UShs 3.7 trillion (US$1 billion) per year motivation through revitalized pre- and in-ser- over baseline by FY 2029/30. However, more than vice training. one third of this could be generated through eco- • Scale up a play-based teaching workforce nomic growth and introduction of a dedicated tax on in pre-primary education by re-tooling impro- unhealthy products, such as alcohol and tobacco.137 vised teachers to meet the developmental needs of pre-primary-aged children under the Investment Priority 2: One year of publicly new ECCE policy. financed pre-primary education through govern- • Establish a qualification framework for ment schools. The new ECCE Policy is potentially childcare providers to define minimum a game changer for Uganda’s education system in requirements for caregivers of children under allowing government provision of pre-primary educa- three, paired with short, targeted training pro- tion. However, expanding into pre-primary through grams and continuous post-training support. the government system requires care and attention to quality, as pre-primary age children have distinct The four investment priorities are pre- developmental needs and require appropriately sented in order of readiness for large-scale imple- mentation. The first two priorities—expanded primary 137 Ministry of Health. 2024. 39 Uganda Economic Update – Investing in Early Childhood Development for Transformation of Human Capital in Uganda trained teachers and age-appropriate curriculum Investment Priority 4: Develop affordable child- and materials. Although officially pre-primary extends care options for women in the informal sector down to age three, it is advisable for Uganda to begin with children under 3 years of age. Given scarce with providing one year of pre-primary targeted to resources and the relative lack of development in the five-year-olds and build from there, learning from the childcare sector, expansion of Uganda’s childcare experiences of peer countries such as Ethiopia and system should once again focus on creating options Ghana. Expanding pre-primary education would, that can reach both large numbers of households and along with expanding basic health services, involved those at greatest disadvantage. These considerations the largest up-front fiscal commitment from the GoU. point to the need to develop models of childcare for A “slow” or “medium” pre-primary scale-up scenario women in the informal sector. One promising approach would cost, respectively, an additional UShs 137 billion is to provide incentives—such as startup grants, or UShs 310 billion (equivalent to approximately 0.2 access to government-owned buildings, or ongoing or 0.4 percent of the GoU budget) per year in recur- support such as tax incentives—for non-state providers rent and capital costs.138 As noted above, however, to offer center-based childcare services for children these expenditures would likely be offset by relieving aged zero to three in rural areas. These would ideally overcrowding and reducing repetition in primary focus on areas in which women working in informal schools. Another study puts the breakeven point for sectors are most concentrated. Alternatively, some expansion of pre-primary and quality improvements countries have opted to subsidize the demand side of at primary—the point at which savings from reduced the market, providing vouchers for families to access grade repetition and early grade over-enrollment fully childcare at approved centers. Yet another option is offset the costs—at 12 years.139 that of public-private partnerships.140 A demand and supply assessment for Childcare Services for low- Investment Priority 3: Scale up homegrown income women in Kampala and Wakiso district—likely and evidence-backed parenting and violence the most expensive market for childcare—suggests prevention programs. Considering the benefits that the level of subsidy required would not be large. of parenting programs that include both nonviolent A recent demand and supply assessment for childcare parenting strategies and encouragement of parent- services suggests that the gap between willingness led cognitive stimulation for children, the lack of to pay and the median cost of services is between implementation at scale in Uganda is a major missed UShs 15,000 and 65,000 per month.141 This suggests opportunity. A key priority for a strengthened ECD that a subsidy of as little as UShs 15,000 (US$4) per coordinating mechanism within the GoU could be beneficiary per month could begin to crowd in more to identify the most promising models for parenting demand for these services in Kampala and Wakiso programs and engage in “policy pilots” which test District, and the amounts needed in secondary cities those models in the type of implementation condi- and rural areas could be substantially less. tions that would exist at scale (as opposed to closely supervised and small-scale pilots). With increased resources, this would then provide a pathway to 138 UNICEF and GENESIS 2023. larger-scale implementation and more widespread 139 Weatherholt et al. 2018. impact. A promising, homegrown program, Parent- 140 See World Bank 2024h for a more detailed discussion of ing for Respectability, already has a considerable these options, including country examples. evidence base behind it. 141 World Bank 2024h. 40 ANNEX 1: CENTRAL GOVERNMENT FISCAL OPERATIONS FY2023/24 FY2024/25 FY2020/21 FY2021/22 FY2022/23 FY2023/24 (Q1) (Q1) Fiscal year (July to June) (% of GDP) Revenues and Grants 14.3 14.1 14.5 14.2 11.8 12.6 Domestic Revenues 13.4 13.4 14.0 13.7 11.4 11.8 URA 12.4 12.5 13.0 12.7 10.4 10.9 Non-Tax 0.9 0.9 1.0 1.0 0.9 0.9 Grants 0.9 0.7 0.6 0.5 0.4 0.8 Budget Support 0.1 0.1 0.0 0.0 — 0.1 Project Support 0.9 0.6 0.5 0.5 0.4 0.7 Expenditure and Lending 23.7 21.5 20.0 19.0 13.5 16.5 Current Expenditures 12.2 13.1 13.7 13.2 10.4 14.1 Wages and Salaries 3.5 3.5 3.8 3.7 3.2 3.3 Interest Payments 2.7 3.1 3.2 3.1 3.0 3.2 Domestic 2.0 2.6 2.6 2.4 2.3 2.5 External 0.7 0.5 0.7 0.7 0.7 0.7 Non-Wage Expenditures 6.1 6.6 6.6 6.5 4.2 7.6 Development Expenditures 10.2 7.9 5.8 5.4 2.9 2.2 Domestic 6.5 5.0 4.0 3.5 0.8 1.3 External 3.7 2.9 1.9 1.9 2.1 0.9 Net lending and investment 0.7 0.2 0.1 0.2 — — Domestic Arrears Repayment 0.5 0.4 0.4 0.1 0.2 0.2 Primary Deficit –6.7 –4.3 –2.3 –1.6 1.3 –0.7 Overall Fiscal Bal. (excl. Grants) –10.3 –8.1 –6.1 –5.2 –2.1 –4.7 Overall Fiscal Bal. (incl. Grants) –9.4 –7.4 –5.5 –4.7 –1.7 –3.9 Financing: 8.9 6.1 4.7 4.7 1.7 3.9 External Financing (Net) 4.4 2.7 1.3 0.5 0.1 –0.4 Domestic Financing (Net) 4.6 3.4 3.4 4.2 0.1 5.8 Financing gap 0.4 1.2 0.8 0.0 1.5 –1.5 Source: MoFPED and WB Staff Calculations. 41 ANNEX 2: UGANDA’S PUBLIC SECTOR RATIONALIZATION—AN OPPORTUNITY TO MANAGE COSTS AND ENHANCE PRODUCTIVITY Between 1980 to 2000, line ministries in Uganda had limited capacity to deliver services at the pace required by a government under re- construction. As a result, agencies were created to complement and fast track implementation, while line Ministries concentrated on policy formulation, standard setting, inspection, and quality assurance. Over time, Agencies established by the Constitution, Acts of Parliament, Executive Orders, and administrative arrangements, became an established part of how government works. The establishment of agencies was done on a gradual needs-basis and often unaccompanied by an overall vision of “institutional harmony, functional duplications, overlaps, and affordability”a or sunset clauses to disband agencies upon fulfilment of their intended objectives. By 2020, close to 200 agencies performed a wide range of tasks that had been traditionally performed by line ministries. Over time, as ministries strengthened their capacity to discharge their mandates, competition for resources with agencies increased, in turn constraining service delivery. In 2017, the president directed the Minister of Public Service to review the functionality of agencies and line ministries. In 2018, a review committee was established, and by 2018, a report “Rationalization of Government Agencies and Public Expenditure (RAPEX)” covering 157 agencies was tabled before the Cabinet. In 2020, a Cabinet sub-committee was formed to review the report and make recommendations. By 2021, the Cabinet adopted the RAPEX policy, which provided guidance on merging, mainstreaming, and phasing out agencies. The policy affected 69 agencies and aimed to harmonize mandates, eliminate duplications, reduce wasteful expenditures, and achieve fiscal savings. While Parliament was originally opposed to most of the proposed mergers, the caucus of the majority party agreed with the president in a meeting on September 6, 2024, to go forward with the rationalization agenda, while stipulating transitional periods for selected agencies (a three-year transitional period for the Uganda Coffee Development Authority (UCDA) and the National Information Technology Authority, Uganda (NITA-U) among others).b In the course of 2024, a legislative amendment process was initiated to implement the RAPEX policy—consisting of 41 amendment bills in total. As of end December 2024, of these, 21 had been assented to by the president, 16 bills were awaiting presidential assent, and 4 were still awaiting parliamentary adoption. A RAPEX Steering Structure, led by the Ministry of Public Service (MPS), has been mandated to oversee the implementation of the policy. The Department of Management Services provides support for change management and business process reengineering. However, the process has faced challenges, including significant budget cuts,c resistance from affected stakeholders, and transparency and corruption risks. Overall, severance pay amounting to UShs 21.6 billion has so far been paid to affected staffd in FY 2024/25. Estimated savings from the rationalization are calculated at UShs 906.5 billion (or 0.3 percent of GDP)e per year starting from FY 2025/26. Going beyond the mergers initiated in 2024, MPS also plans to undertake another review of the remaining 162 agencies, focusing on productivity and value addition. Beyond the fiscal savings which remain to be realized, there are concerns about the impact of the reforms on service delivery, potential litigation, financial losses (staff) arising from (possible) non-payment of severance pay. Strong communication and implementation strategies are needed to address concerns and resistance and to ensure a positive balance in terms of costs and benefits from the reform, and to ensure that losses in efficacy are minimized during the transition. Beyond the RAPEX policy, the government has faced challenges related to planning, budgeting, and accountability for results that have affected effective service delivery and impacted economic development. For the RAPEX policy reforms to deliver the intended efficiencies and savings while maintaining effective service delivery, the government will need to pursue a transparent and well-monitored implementation process, undertake business process re-engineering of the merged institutions, and strengthen performance management and accountability systems for results in the newly expanded line ministries. Source: World Bank 2022; IMF 2024; World Bank 2024d. a And this puts to question the completeness of the preparatory activities towards the setting up of these agencies. b Key entities affected by the rationalization included the Uganda Meteorological Authority, National Population Council, National Physical Planning Board, Uganda Road Fund, Uganda National Road Authority (UNRA). c Constrained by time and budget cuts in the FY2024/25, budget releases were reduced from UShs 1.1 bn per quarter to under UShs 600m, which impacted implementation. d Some, but not all agency staff will transition to working in line ministry departments with regular civil service pay. e In terms of FY2025/26 GDP projections. 42 REFERENCES Akyeampong, K. 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