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Uganda: Why is the middle class shrinking despite its economic growth?

By Musinguzi Blanshe
Posted on Monday, 27 September 2021 17:25

A Ugandan businesswoman counts Ugandan Shilling banknotes in Kampala, Uganda Thursday, Feb. 27, 2014. (AP Photo/Stephen Wandera)

Reports confirming South Africa’s retail shopping stores Shoprite and the Massmart-owned Game would be exiting the Ugandan market have triggered a debate as to whether the country’s economy squeezed them out or they simply failed to understand their market. We take a closer look at Uganda’s economy to better understand the situation.

Those who argue that the two retailers failed to understand the economy cite locally-owned retail businesses, which are thriving and growing, even though they aren’t as big as Shoprite and don’t maintain as high a standard. They also argue that these big stores were selling products – such as apples imported from South Africa and expensive food items – that Ugandans could easily purchase on the roadside or from small and medium retail shops in Kampala at half the price.

Others argue that the exits are an indicator of how the economy is growing, but without creating a larger middle-income class that can sustain these stores. Given that it’s difficult to gather accurate data on economic performance across Africa, Timothy Kalyegira, a retired journalist and independent researcher, says such companies that are listed on the London or Johannesburg Stock Exchange, which operate under strict scrutiny, provide a perfect measure of performance for Uganda’s economy.

“Companies like Shoprite and Game deal in commodities of average people, they are a good indication of the true nature of the economy,” Kalyegira says.  “They are not Toyota or BMW [whose products] only the elite can afford. They [Shoprite and Game] sell things which anybody can buy.”

Before the exit, Shoprite had been operating in Uganda for two decades and thus, Kalyegira argues, it is implausible to say that the retailer failed to understand the market within this period. Apart from Uganda, Game is also leaving Kenya, Tanzania, Nigeria and Ghana, while Shoprite is exiting from Madagascar.

A floating middle income class

About 21 million Ugandans are in the middle-income class bracket, according to a report published last year by Guloba Madina from the think tank Economic Policy Research Center.

However, this middle income class is dominated by a floating class: those who spend between $2 to $4 per day and make up 61% of Uganda’s middle income class. The lower middle income group (people who spend $4 to $10) make up 33%, while the upper middle income (people who spend $10 to $20) comprise a paltry 6%.

“Evidence suggests that the quality of Uganda’s middle class is wanting. It is fragile and highly unstable, as it is susceptible to risks and shocks,” researchers say.

A floating middle income group, the researchers argue, is incapable of driving the economy to achieve and sustain the middle-income status aspiration. Thus, “a source of substantial economic power for the country, capable of providing a stable ground for sustained growth and middle-income status” is the upper middle income group. Growing a substantial upper middle-income group requires generation of about 700,000 decent jobs for youths entering the labour market; but only 75,000 jobs have been created, according to the World Bank (WB).

If we assume [that] Uganda continues to grow at 6% going forward, in the medium term as before Covid-19 and with stable inflation and exchange rate, we think that lower middle-income status could be achieved […] by 2033 or 2034.

The majority of Ugandans who have climbed to the middle-income ladder live in urban areas. They have been a political headache for Museveni for two decades because they don’t vote for him. For the first time, in the last election, Museveni lost entire districts (Kampala, Mukono and Wakiso) – at the presidential and parliamentary levels – to Robert Kyagulayi aka Bobi Wine, a political novice. It’s thought that 70% of the country’s GDP lies in these three districts, says Fred Muhumuza, an economist at Makerere University.

Unlike rural poor voters who continue to vote for Museveni, Barnard Sabati, a public policy analyst, says urban voters are more educated, exposed and have higher expectations. “The more Uganda becomes urbanised, the more he loses support,” he says.

Growing GDP, not GDP per capita

Uganda’s GDP per capita hasn’t grown at the same pace with its overall GDP. While the economy has increased from $26bn to $37bn in the decade ending 2020, it’s the only country in East Africa whose GDP per capita has not grown in the past decade. The country’s GDP per capita in 2020 was $817, slightly lower than the $819 of 2010, according to data from the World Bank.

  • Rwanda’s GDP per capita has grown from $609 in 2010 to $797 in 2020.
  • Kenya, which achieved lower middle income status in 2012, has doubled its GDP per capita in a decade.
  • Tanzania also climbed to the lower middle income status ladder in 2020, following recognition by the World Bank.

However, government officials have been presenting alternative GDP per capita figures whose source they cannot explain. In May, Museveni told his ministers that Uganda’s GDP per capita had reached $900. He argued that Uganda had not achieved lower middle income status by 2020, a target he set in 2016, because of Covid-19. Yet even before the pandemic, the country’s GDP per capita wasn’t growing.

Fred Muhumuza, a development economist, says Uganda’s GDP per capita hasn’t grown at the same rate as its GDP because of a higher population growth rate. “GDP per capita grows with the population. If the economy grows and the population grows faster as in the case of Uganda, then per capita can’t grow,” he says. With a 3.27% population growth rate in 2020, Uganda had the fifth fastest growing population in the world, according to World Bank data.

According to the IMF, Uganda still has about a decade to achieve lower middle income status. “If we assume Uganda continues to grow at 6% going forward in the medium term as before Covid-19 and with stable inflation and exchange rate, we think that lower middle-income status could be achieved […] by 2033 or 2034,” Izabela Karpowicz, the IMF’s country representative told a local news agency in July.

Another metric that shows how Uganda’s economy has performed dismally is the tax to GDP ratio. Uganda has the lowest GDP to tax ratio – 12.9% (as of 2019) – in East Africa, according to the WB. The country’s revenue authority has not met its target in the past couple of years and only one million Ugandans actively pay tax.

Focus on uplifting the poor

In the past decade, the government has launched several poverty alleviation programmes, including:

  • A poverty eradication action plan: the program was launched in 1997, a decade after Museveni captured power and a year after winning the first presidential election of 1996.
  • A youth livelihood programme: it was launched in 2013, targeting to give seed capital to unemployed youth.
  • Operation wealth creation: launched in 2013, the program is led by Museveni’s youth brother Gen. Salim Saleh. Its focus is raising household income and creation through transforming substance farmers into commercial farmers.
  • Emyooga: it’s a presidential program on job creation through skilling and availing capital to specialised groups in the informal sector. It was launched in 2019.
  • Parish model: It is the latest poverty alleviation program launched by the government and was launched in 2019. For every financial year in this budget program, the government will be sending about $25,000 to more than 10,000 parishes in Uganda.

The parish model programme was designed by Salim Saleh’s team at Operation Wealth Creation. Museveni appointed Saleh’s economics advisor, Ramathan Ggoobi, as permanent secretary in the ministry of finance and secretary to the treasury. He will superintend its implementation.

Despite many interventions, 22% of Ugandans are still living below the poverty line, according to data released by Uganda Bureau of Statistics (UBOS) in June this year.

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