Fiscal Adjustment and Growth in Uganda

The paper reviews the effect of fiscal adjustment on the growth of the Ugandan Economy. No single factor is responsible for the growth of any economy but rather a blend of various policies and factors combine to propel a country to growth. Fiscal adjustment has been one of the various growth-oriented structural adjustment measures that Uganda has embarked on since 1987 to revive the economy that had suffered 15 years of decay and decline. Fiscal health is necessary for long term growth and stability but like most structural adjustment policies, fiscal adjustment policies in Uganda have been contested for their contradictions and repercussions on growth. Fiscal adjustment policies are indeed contractionary in the short run especially if there exist market rigidities but the long run effects may be expansionary. However, depending on the efficacy with which the measures are designed and implemented, even the short run need not be contractionary. The notion that the budget deficit is not bad for growth as long as it can be financed by noninflationary means like external and domestic non-bank borrowing does not hold a solution for Uganda. The capital market of stocks and bonds is still rudimentary and underdeveloped. External borrowing has increased Uganda's debt overhang to alarming rates. A high external debt ratio to GDP acts as a tax to future investors as proceeds from investment have to be used to repay the loan and the interest that accrues to it. Besides foreign investors are reluctant to invest in highly-indebted countries and this has negative repercussions for growth. There was therefore a strong case for Uganda to undertake fiscal adjustment. Reducing the deficit was not the only reason for fiscal adjustment in Uganda. Other objectives included improving productive and X-efficiency as well as "getting the priceslincentives right" all of which are necessary for growth. This study on Uganda is aimed at evaluating the effect of the various measures of fiscal adjustment on the factors that affect the growth of the economy. Obviously, there exist both positive and negative effects of fiscal adjustment and these are reviewed in the paper. In a nutshell, total investment as a share of GDP increased following fiscal adjustment, Inflation rates fell, improved efficiency was recorded especially in the manufacturing sector, enrollment at tertiary education level increased slightly, health care consumption declined especially in the rural areas, and the gap between the rural poor and urban population widened. The period of fiscal adjustment coincides with a period of commendable growth in Uganda. Other factors aside from fiscal adjustment were also at play during the time of fiscal adjustment. These included liberalisation of trade and the exchange rate and financial liberalisation. Improved Infrastructure (road-networking), and export enhancement and diversity also contributed to Uganda's growth in that period. Conclusively, growth-oriented fiscal adjustment should not adversely affect the work effort, induce capital flight, suffocate the export sector, reduce private investment or lead to a reduction in the savings leveL It should therefore aim at achieving a reduction in the deficit with minimum inhibition to growth. The elimination of expenditure on inefficient SOEs and a down-sizing of the inefficient civil service were plausible policies for Uganda for the inefficiencies they cause hamper growth. Fiscal adjustment that will be durable and efficient in impact while at the same time bearing minimum costs on growth underscores the importance of prudence and efficiency in designing and implementing fiscal adjustment measures.