Mixed Outlook for the Ugandan MSME Sector

In February, longstanding Ugandan president Yoweri Mouseveni secured his fourth term in office, at a time when the small business sector is sending mixed signals of growth.

The elections were marred by allegations of fraudulent behaviour; intimidating, deployment of troops to polling booths and vote-rigging. The candidate receiving the second highest number of votes, Kizza Besigye from the Forum for Democratic Change (FDC), had 28% of vote; and Mouseveni, 68%. Kizza Besigye cited reports of ballot stuffing, pointing to pre-ticked ballot papers seized by the FDC.

These claims of anti-democratic behaviour comprised the government’s heavy handed threats against protests who would dare attempt to emulate the protest of North Africa, or Tunisia’s so-called “Jasmine Revolution.”

Despite the contentions, the result grants continuity to investment in Uganda, and to economic policy, which has shown progress under the leadership of Mouseveni’s National Resistance Movement (NRM) party.

This economic optimism is noticeable in private investment in Uganda, which increased from 12.2% of GDP to 20.6% in the six years to 2007. This will certainly be a boon for the mostly unregistered micro, small and medium enterprise (MSME) sector. A sector that contributes to up to 20% of GDP and provides employment for 2.5 million Ugandans.

Gender equality has been addressed in a targeted national export strategy for enhancing competitiveness after it was recognised by the government and the World Bank that female owned businesses in Uganda pay higher bribes and were harassed more than their male counterparts. Another improvement has been access to grid electricity, which is rising past 9% of the population due to several projects. The now-defunct Ugandan Electricity Board, after being privatised in 2001, spawned separate generation, transmission and distribution companies under the auspices of a central regulatory body, which is helping to smooth the transition to a modern business environment.

The sector was also supported further in 2010 when, in a move emulating China, the Ugandan government released the first in a thirty year series of National Development Plans (NDPs). The NDP outlines medium term strategic direction, development priorities and policies that are to be implemented to achieve them, many of which targeting the MSME sector.

The plan lists the prohibitive constraints to economic development in Uganda as weak public sector management and administration, inadequate financing, lack of human resources and innovation, and finally, a lack of physical infrastructure in the country. This view was backed by the Ministry of Finance, Planning and Economic Development (MOFPED), which cited poor credit, lack of basic infrastructure such as electricity, telecommunications and transport, and expensive registration and administrative costs as the most serious problems facing Uganda MSMEs.

The World Economic Forum agrees, adding corruption to the mix. However, the facts are that despite these claims, the World Bank, in its annual ‘Doing Business’ report for 2011, ranks Uganda 12th overall in the group of 46 Sub-Saharan nations. This included rankings for ease of access to credit of 6th in the Sub-Saharan group, and 46th in the world, and high ratings for closing businesses and taxation. There is also evidence that international business will become easier, with increases in border crossing and trade facilitation at Rwandan borders and the ongoing development of an East African interface for trade data systems with Kenya and Tanzania.

Other notable areas of improvement for Uganda were the establishment of a credit bureau, an increase in gender equality in business and growth of infrastructure. The credit bureau, founded in 2009, covers more than 200,000 people countrywide and along with the increasing distribution of ATMs, has been a factor in improving access to finance for MSMEs.

Recently, the utility has began subcontracting construction work to qualified firms, reducing connection times to businesses and homes. Other improvements to energy infrastructure like hydroelectric projects are also in the midst of planning, with the aim being to tap the 2000 MW of generation available along the Nile River alone. Despite this, electricity costs are still exorbitant for MSMEs, with access to electricity costing up to 5000% of ‘per capita’ GDP.

These excessive charges are reflected in business registration costs, which cause approximately 60% of Ugandan MSMEs to remain unregistered. It currently costs up to USD$280 to register a company for business and obtain a trading license in Uganda, with the trade license fee being increased further in 2010. Additionally, 18 separate processes are necessary for a business to register, with the entire process taking around a month. This has led the MOFPED to campaign for the creation of a MSME authority to better facilitate organisation and growth of this important Ugandan business sector, as well as institutionalising public-private partnerships to foster professional business practices. The body would be responsible for streamlining the registry process and removing cumbersome procedures like assessing taxation requirements; currently a necessity for small businesses. Streamlining the process also reduces the likelihood of corruption by removing unofficial interference in the registry process.

All these measures have lent hope to the economic climate in Uganda. However, structural changes are likely to undermine some of this growth within the next decade. This is illustrated by Uganda’s industry sector, which has been growing at the expense of agriculture since 2004. Additionally, the services sector’s fractional contribution to GDP has largely lain dormant, indicating that manufacturing and construction are experiencing historically high growth rates. Despite this, there are signs that agricultural productivity is slipping, raising concerns about food security, especially considering that world food prices have recently hit an all time high. Another structural factor weighing on MSMEs is the widening of Uganda’s trade deficit due to increased imports from neighbouring African countries such as Kenya, along with Asian and Middle East economies. This may be countered however by a refocusing of exports away from the traditional markets of Africa and the European Union and towards the Middle East. Recently the share of Middle East exports has drastically increased, with the region accounting for 14% of all exports in 2007.

Along with a switch in export direction, the government is also appealing for a diversification in export goods. Products sent abroad are still mainly primary commodities, however Ugandan farmers are increasingly failing to meet agricultural quality requirements and produce marketing is poor. In this vein, the National Planning Authority, the body responsible for the NDP, concedes that improvements in agricultural productivity are necessary to release labour from agriculture into the wider economy and the innovative MSME sector. Unfortunately, this problem could be solved within the next decade by population growth, with an overcrowded labour market getting worse due to high population growth and the low median age of Ugandans. This is presenting unique difficulties in skills growth and education for the government.

Diversification of the economy is also likely to become significant over the short term, owing to mining and manufacturing expansion. Mining projects are exemplified by the imminent production of oil, the development of a vermiculite industry and growth of the Tororo phosphate industry. To date these plans have been held up by a lack of infrastructure, taxation disputes and the peculiar waxy nature of Ugandan crude. However, the future is bright with Uganda predicted to join the top 50 oil producers worldwide, and the top 10 in Africa, by 2015, providing a windfall to Uganda’s growing service sector.

Likewise, there has been recent development of the manufacturing sector, with the construction of four Jua Kali initiative manufacturing centres and the establishment of a Uganda-China regional trade development centre in partnership with the Chinese Embassy. Support has been garnered by the Uganda Export Promotion Board for these schemes, which has been tasked with growing a market-led export economy in the country. The board is aiming to encourage manufacturing exports through a wide range of incentives such as foreign exchange liberalisation and tax exemptions for exporters. This is certain to be a bonus to the emerging MSME quarter, although benefits are likely to be in the longer term.

On this note it should be mentioned that Uganda still has a long way to go in emulating China’s National Development Plans. The first five year plan was released in 1953, with it having gone through 11 iterations since, and it is likely that for Uganda to experience similar economic success it may take a comparable period. This is sure to make 2011 a demanding year for the Ugandan MSME sector, though with reform and a concerted effort by government, much progress can be and is expected to be made.

By Alec Newman