The global financial crisis affected Uganda’s economy through reduced capital inflows, including remittances, portfolio investment, exports and foreign aid, as well as through capital outflows that include repatriation of profits by foreign investors and withdrawal of portfolio investments. Almost all these categories of capital flows decreased and manifested themselves in a depreciation of the local currency. Coupled with increasing food prices, annual inflation rose. As a result, in 2008/09 Uganda recorded a growth rate of 7.1%, against a target of 8.5%. This would ordinarily have an adverse impact on poverty reduction and improvement of people’s welfare.
Uganda’s response to the crisis was not explicit; apart from expenditure reprioritisation to focus more on public infrastructure, the country’s fiscal and monetary policies remained largely unchanged. Even when the shilling depreciated, Uganda did not respond by running down its foreign exchange reserves to defend the local currency, nor did the country utilise the stimulus packages provided by the International Monetary Fund (IMF) and the World Bank. In addressing growth constraints, Uganda had already increased public expenditure for infrastructure development, which later was to be prescribed by the international community as the wise thing to do in response to the crisis. The global financial crisis also coincided with increasing regional trade for Uganda, which has had significant positive effects on the country’s exports.
There are signs that Uganda’s economy is slowly beginning to recover from the adverse effects of the global financial crisis. The Uganda shilling is strengthening, which could be attributed to a rebound in capital inflows and an improved current account balance. The current account balance improved substantially by end-June 2009, recording a positive balance. A similar improvement was observed in direct investment, although portfolio investment remains sluggish. Overall, the balance of payments position has improved. As the economy begins to recover from the adverse effects of the global crisis, growth prospects are brighter, with a likelihood of decreasing poverty.