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This article was produced with the support of UDB
Uganda has emerged as one of Africa’s fastest-growing economies, with GDP growth rising from 5.3% in the financial year 2022-2023 to 6.2% in FY 23/24. The World Bank projects further acceleration to 6.6% in the current fiscal year, surpassing earlier forecasts of 5.8%. This strong growth is primarily being driven by investments in the oil sector.
Uganda discovered commercially-viable oil reserves nearly 20 years ago, but production was delayed due to lack of infrastructure – a situation that is presently changing. “The ongoing construction of an estimated $20bn in oil-related infrastructure in Uganda will keep economic activity strong until oil production takes off by end of 2025,” the World Bank says in its latest economic update on the country. At peak, Uganda plans to produce about 230,000 barrels of crude oil per day.
The country’s growth is particularly noteworthy because it is happening alongside falling inflation. This combination is a recipe for a thriving economy as it translates to enhanced purchasing power for households and increased investment opportunities for businesses. At an average rate of 3.6% in the twelve months to May 2024, Uganda’s inflation is one of the lowest in the region. Annual headline inflation has reduced from the peak of 10.7% in October 2022 to 3.6% in May.
“The reduction has been a result of good coordination of monetary and fiscal policies, leading to low inflation for most food crops, manufactured foods and essential commodities like laundry bar soap, sugar and cooking oil,” Matia Kasaija, minister of finance, told members of parliament in his budget speech this June.
Patient, affordable capital
According to Kasaija, Uganda’s government is focusing on four key pillars to drive economic growth in the coming years: agro-industrialisation, tourism development, mineral development (including oil and gas) and science, technology and innovation.
Kasaija highlighted the crucial role of the Uganda Development Bank (UDB) in implementing this strategy. He noted that, in line with its mandate, UDB has significantly increased its lending to the private sector in recent years, providing much-needed patient and affordable capital in an environment where capital is scarce and the need is high.
“Uganda Development Bank has grown into a formidable Sh1.6 trillion bank in assets, offering patient and relatively affordable capital to those adding value to agricultural raw materials, manufacturers, as well as investors in tourism and hospitality, infrastructure and education. It has created a total of 51,841 jobs,” he stated.
He emphasised the government’s ongoing financial support for UDB, announcing that the government will support the bank with an additional Sh1 trillion in funding in the new financial year.
Making farming more productive and profitable
The majority of Uganda’s population resides in rural areas and depend on agriculture for their livelihood. This is why UDB, while supporting a variety of sectors, allocates the majority of its capital to agriculture. UDB’s portfolio in agriculture and industry accounts for 70% of its total lending, its annual report for 2023 reveals. This encompasses agro-processing and medium to large-scale agricultural projects, reflecting the Bank’s ambition to make farming more productive and profitable.
Kasaija notes that UDB’s interventions in agriculture complement grassroots government investments by funding the introduction of new technologies for plant and animal husbandry, such as improved crop seeds and animal breeds. The bank also finances production of high-value crops like coffee, tea and cocoa and promotes standards in post-harvest handling to ensure competitive products can enter local and regional markets.
Access to finance remains a significant challenge for many farmers in Uganda, especially those who have not transitioned from subsistence farming to commercial agriculture. This lack of financial resources makes it difficult for them to acquire quality inputs such as fertiliser, seeds and equipment.
In its bid to rectify this, UDB is leveraging technology to enhance financial access for Ugandan farmers. In 2023, in collaboration with partners including the United Nations Capital Development Fund (UNCDF), the Food and Agriculture Organization (FAO) and fintech company Ensibuuko, UDB launched UDB AgriConnect. This innovative digital lending solution enables smallholder farmers, organised in village savings and loans associations (VSLAs) in rural Uganda, to access finance from the bank.
Through this initiative, smallholder farmers can save and obtain micro-loans of up to Sh3.5m (about $9400) to support essential production activities, including the purchase of seeds and other key farm inputs. Launched in April 2023, the pilot phase saw UDB deploy over Sh1.0bn to support up to 1,460 beneficiaries in 201 VSLAs across the Northern and West Nile regions.
Addressing climate change
Although Uganda’s economy is growing healthily, Kaisaija acknowledged that climate change poses an existential risk, given the country’s reliance on rain-fed agriculture. “Our growth prospects face some risks that will need to be mitigated,” he said, noting that the government is implementing climate change adaptation measures and exploring cheaper sources of financing, including climate finance.
By virtue of UDB’s unique position in facilitating capital flows, it has a central role to play in transforming the country to a low carbon economy, contends Patricia Ojangole, the Bank’s managing director. She reveals that to bolster its commitment to building a climate-smart economy, UDB launched the Climate Finance Facility (CFF) in April last year with an initial capital of Sh50bn. This Special Purpose Vehicle focuses on project finance and non-financial interventions aimed at unlocking and catalysing private sector investment and commercially viable public investments in local green sectors.
“In 2023, following the launch of our Climate Finance Facility, the Bank approved projects worth Sh92bn, constituting 13.3% of the total funding approvals,” said Ojangole. Approved projects span sectors including climate-smart agriculture, climate-resilient infrastructure, green manufacturing, low-carbon industry and eco-tourism, she disclosed.
Investing in human capital
Addressing climate change is just one of several steps Uganda needs to take to steer its economy in the right direction. According to the World Bank, inadequate spending on social sectors poses a risk to long-term growth and must be addressed for Uganda to achieve inclusive growth.
Keith Hansen, the World Bank’s country director for Kenya, Rwanda, Somalia and Uganda, emphasises that human capital – comprising the knowledge, skills and physical health that enable productivity – will be crucial for Uganda’s development. “For Uganda to benefit from a demographic dividend, the government must invest more in education, health and social protection, while leveraging efficiency gains to maximise the impact of its limited resources,” he noted.
Currently, government spending on social sectors is insufficient, with human capital expenditures accounting for just 16% of total government spending in the first half of FY 23/24. Specifically, spending on education, health, social protection and water, sanitation and hygiene was 8.2%, 5.5%, 0.4% and 1.5% of the budget, respectively.
