Sectoral and Welfare Effects of the Global Economic Crisis on Uganda: A Recursive Dynamic CGE Analysis

Abstract

This paper analyses the impact of the global economic and financial crisis on Uganda notably on macro-economic aggregates, sectoral output and household welfare, and the potential role of fiscal policy and reform in mitigating the impacts. We find that second round effects from a reduction in financial inflows such as remittances, foreign direct investments and overseas development assistance, as well as reduction in international demand from cash crops such as cotton, tea and coffee, could lead to a reduction in economic growth by 0.6 percentage points on average annually over the period 2008-2010 compared to a baseline reflecting pre-crisis conditions. A surge in regional exports and early counter-cyclical policies in particular are found to dampen the most adverse impacts of the crisis. The paper also shows that the impact of the government’s expansionary 2009/2010 budget could return growth to pre-crisis levels and illustrates how a re-prioritisation of government expenditure away from expenditure on administration to more productive sectors of the economy, combined with reforms to improve the efficiency of public spending, could lift long-term growth and reduce poverty, especially in rural areas, even more.

Keywords: Sub-Saharan Africa, Uganda, Global Economic and Financial Crisis

JEL Classification: C68, D58, E62, F15, H62, I32