Foreign direct investment in Uganda: An untapped opportunity for economic recovery

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There are tangible steps that can be taken to recover and scale up FDI in Uganda.
Photo: Mustafah Kahakaira

In Uganda, the impact of COVID-19 has been felt deeply at the firm level, with half of all firms requiring financial support, including 85 percent of women-led firms. Similarly, employment in sectors such as tourism, which were prominent recipients of foreign direct investment (FDI), fell by more than 50 percent according to an estimate by the Ministry of Tourism, Wildlife and Antiquities. With a significant reduction in FDI, the country faces a challenge in planning for the future, but there are tangible steps that can be taken to recover and, indeed, scale up FDI in Uganda.

Uganda has significant untapped foreign investment potential. Factors such as a young population, regional integration most recently enhanced through the Africa Continental Free Trade Agreement, and good market size offer advantages.  Yet, these are not being fully capitalized on. 

Even before the COVID-19 crisis, Uganda was performing below other Sub-Saharan African countries, with FDI averaging 4 percent of GDP over the last decade, while the regional average was at 5.5 percent of GDP. Foreign investments are concentrated in extractives with almost 55 percent of FDI between 2008 and 2017 going to this sector. This reliance on commodities also contributed to the steep decline in FDI between 2019 and 2020, when Uganda experienced a 35 percent decrease as COVID-19 hit the country.

At the same time, FDI inflows were a significant part of external development finance, reaching 25 percent, while Kenya, Rwanda, and Nigeria remained below 20 percent. Moreover, the diversification of foreign investment flows towards the services sector, which contributed 31 percent of the total FDI inflows between 2009 and 2019, was another positive. In services, the largest single recipient of FDI inflows was the financial sector at 12 percent. Improvements in the regulatory framework of the financial sector such as the Electronic Signatures Act for financial transactions were key to this.

The real importance of foreign investment inflows, however, lies not just in its ability to mobilize capital but also in its linkages with the domestic economy and spillover effects on job creation. Uganda is a country of young people with thousands of job seekers entering the market every year. With the entry of foreign investors in the economy comes the opportunity to link domestic firms with international firms and boost knowledge spillovers across the sectors. Research shows that when foreign investment flows to sectors with well-functioning and productive local firms, the productivity spillovers are largely positive. These local firms are the main job creators in the economy.

In this context, the World Bank conducted an analysis of FDI trends and opportunities to garner insight into areas for further development in terms of enabling the environment for FDI in Uganda. A key objective is to identify actions that would be needed for Uganda to take advantage of its potential to attract foreign investment.

How can we then unlock this potential and make sure that FDI flows are directed to sectors which offer key opportunities for inclusive growth?

Findings show gaps in the FDI framework that constrain Uganda’s potential

Our analysis found that one key aspect is to further enhance the policy and institutional environment. For example, investors seeking to enter the market may be subject to screenings that are not specified upfront, and this uncertainty can influence investors to look elsewhere.

There is also room to provide investors with the full spectrum of protections. The current investment framework does not offer some essential protections necessary to support investor confidence, including equitable treatment and free transfer of funds. With regional competition for investment heating up, a strong policy environment is essential to translate Uganda’s potential into inclusive economic growth. 

Another aspect is ensuring that the domestic economy and firms are ready for foreign investment, either as potential joint venture partners or as downstream linkages with foreign firms moving into Uganda. This requires a combination of investments in firm upgrading, product and service diversification, and workforce training. In fintech, for example, while some foreign investment has entered the sector, limited access to and affordability of digital technologies constrain the growth and uptake of services.

Uganda’s potential for FDI is a significant untapped opportunity. This can be capitalized on through a combination of institutional reforms and firm-level support which can diversify areas for foreign direct investment inflows and integration of FDI with the domestic economy.africa can

Authors

Qursum Qasim

Private Sector Specialist

Ulla Heher

Private Sector Specialist

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Eng. Nvirimbi Charles Kalule
August 24, 2022

I am strongly interested in the Local and foreign investment portfolio in Uganda as the GPA is continuing to fall.