Previous Quarterly Editions
Expropriation Risk: 61 61 61 59 ▼ Political Violence Risk: 60 60 60 60 ► Terrorism Risk: 40 40 40 38 ▼ Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ► Sovereign Default Risk: 66 66 66 66 ►
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
President Yoweri Museveni has a track record of emphasising his government’s commitment to addressing climate change. In April 2021, parliament unanimously adopted a Climate Change Act, which ratifies Uganda’s commitments under the Paris Agreement and received presidential assent in August of the same year.
The act significantly bolsters institutional capacity for enacting and monitoring climate action and establishes a new Climate Change Department to coordinate planning, implementation and monitoring of climate action schemes nationally, and a technical National Climate Change Advisory Committee to provide independent oversight of this. The act also creates a standalone legal Court for Climate Change.
Donors and civil society groups welcomed the new law. Nonetheless, Uganda’s climate action record has been poor. For example, the country did not commit to ending and reversing deforestation at the November 2021 COP26 international climate meetings, whereas many other countries did commit to this. Deforestation is increasing in Uganda, with government also failing to develop a national approach to address the loss of wetlands, as this too is accelerating.
The government’s inaction appears to come from concerns over a populist backlash from the rapidly growing and increasingly urbanised population. Although recent decades have seen a number of large industrial logging projects, deforestation’s main driver is a continuing and widespread reliance on wood and charcoal as primary cooking fuels.. Wetland depletion, especially at city limits as they expand, is especially driven by the search for new agricultural land among the new urban poor.
The government’s stance on climate sits uncomfortably with Uganda’s vulnerability to extreme weather events, which hit the economically poor hardest. High rainfalls saw major landslides in 2010 which killed 400 people and injured 5,000 more. Recent years have also seen an increase in extreme floods and drought, bringing with them the associated levels of food insecurity, especially for the rural poor.
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Museveni is keen to regrow foreign direct investment (FDI), as part of the country’s post-pandemic recovery. Even before the pandemic, the government was seeking to boost FDI, in 2019 passing a new Investment Code Act which contains various new provisions on protection from expropriation. The code did away with restrictions on foreign investment in certain sectors, especially crop and livestock production, and monetary thresholds for investors to qualify for incentives.
Following the COVID-related slump, the imperative to boost FDI has become even more compelling. Pre-pandemic, FDI in Uganda was concentrated in the extractives sector – in 2008-17, the sector accounted for 55% of all FDI. This in turn accelerated the slump during COVID-19 leading to FDI falling by approximately 35% in 2019-20. Given this situation, and in a context of increasing competition for FDI from Uganda’s regional neighbours, the government is keen to make the country as attractive for investors as possible. Although the screening processes for new companies entering the country remain burdensome, the expropriation risk is diminished.
Uganda’s security situation has improved in recent years, following resolution of several major armed insurgencies. However, a number of armed groups remain active across the border in the eastern Democratic Republic of the Congo (DRC) and they retain the ability to launch strikes into Uganda. Throughout 2021, a group called Cooperative for the Development of Congo continued attacks in Uganda’s border zone with the DRC and has occasionally led raids into northwest Uganda.
Meanwhile, as Museveni continues to maintain power through a creeping authoritarianism, there remains a risk small-scale violent street protests could re-emerge. Although the dust has now settled on last year’s troubled general elections, it could take only a small trigger for further violent protests to erupt.
While Museveni remains in power, given his control over the security services, any such protests could escalate into broader civil violence. On several occasions, the president has tried to assuage public concerns, by admonishing security services agents who have allegedly committed human rights abuses and stating any such allegations would be investigated. However, this more conciliatory rhetoric stands in contrast to some of his government’s actions, including the arrest of government critics.
Uganda has occasionally been targeted by terrorist attacks. As the largest contributor to the African Union Mission in Somalia (AMISOM), Uganda remains a prime target for al-Shabaab attacks. However, the Uganda military and intelligence services have extended their counterterrorism surveillance, including with major technological upgrades provided by the U.S., Israel and Russia. This reduces the chances of successful attacks.
In 2021, the U.S. State Department reclassified the Allied Democratic Forces (ADF) as a designated Foreign Terrorist Organisation. Although the ADF originated in Uganda, and initially recruited primarily from Kampala’s slum areas, it has been based in the eastern DRC, although conducting occasional attacks inside Uganda. In November, the group committed several suicide bombings in Kampala, which left at least four people dead. One attack was close to the parliament building, another the central police station.
In response, special forces raided a series of alleged ADF strongholds across the capital. The security services also carried out operations against alleged ADF infiltrators from the DRC. One of these operations, in a border town, turned violent, resulting in a shootout where at least four ADF cadres were killed.
Uganda does not have restrictions on capital transfers into or out of the country. However, if a foreign investor has benefitted from tax incentives on an original investment, they are required to get a certificate of approval from the authorities to ‘externalise’ those funds. There are no restrictions on the currencies investments can be converted into, as the Uganda Shilling (UGX) floats on global currency markets.
Following last year’s contested elections, both the U.S. and European Union have sharpened their criticism of the government’s increasingly autocratic rule. However, as the U.S.’ main security ally in the region, it is highly unlikely sanctions would be imposed against the Museveni regime.
Uganda’s economic recovery continued apace throughout 2021, reflecting the Bank of Uganda (BoU)’s decisive action early to stave off COVID-19’s worst effects. The BoU vastly increased liquidity and engaged in broad credit-relief measures for the banking sector. In combination, these actions helped to overcome vulnerabilities, and to keep the economy afloat.
Throughout 2021, the benefits of this approach showed, as domestic demand and trade rebounded strongly. The services sector, which accounts for around 51% of gross domestic product (GDP), was the leading growth driver, led by construction and education.
However, this headline economic success story cannot mask the economy’s growing external economic vulnerabilities. Uganda rapidly expanded its external debt during COVID-19, and this has continued climbing in 2021. Initially, most of this new debt came from the International Monetary Fund (IMF), which provided emergency grants, but more recently has been acquired from a diversity of lenders.
In July, the finance minister expressed concern Uganda’s debt levels are becoming unsustainable. Debts are forecast to rise to 51.9% of GDP in the 2021/22 financial year, with around two-thirds being owed to external creditors. Uganda’s total debt stock is now around USD18 billion, up from USD13.3 billion in 2019.
Both the BoU and IMF agree the country’s debt is still within an acceptable ceiling, such that debt distress is unlikely in the near term. Nevertheless, this could change quickly, especially if Uganda experienced a major shock. In November, reports emerged that Uganda was close to defaulting on a USD200 million loan it had received from China to rebuild its main international airport, at Entebbe, and that Beijing was therefore preparing to take over managing the facility. Although the reports were quickly denied by all, how plausible they initially appeared can be taken as evidence of how precarious Uganda’s situation regarding external debtors has become.
In particular, both parties remain optimistic about the prospects for Uganda’s nascent oil industry to generate rapid economic growth. Following years of production delays caused by regulatory hold-ups, production is due to begin in 2025. The likelihood of this target being met increased in August when the Uganda and Tanzania governments, and French oil company Total, announced they had agreed the building of a USD3.5 billion heated pipeline to export Uganda’s estimated 2.2 billion barrels of recoverable oil from its source in the Lake Albert basin to the Tanzanian port of Tanga.
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