Uganda Economic Update Fourth Edition, June 2014 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Reducing OldAgeand EconomicVulnerabilities: Why Uganda should Improve its Pension System itsPensionSystem Why UgandashouldImprove a Uganda Economic Update Uganda Economic Update Fourth Edition, June 2014 Reducing Old Age and Economic Vulnabilities Why Uganda should Improve its Pension System Uganda Economic Update This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. Cover photo: Ann Hoel Cover design and interior navigational graphics: Artfield Graphics Ltd, info@ artfieldgraphics.com. Design / layout: Artfield Graphics Ltd. Printed in Uganda by Artfield Graphics Ltd Additional material relating to this report can be found on the World Bank Uganda website (www.worldbank.org/uganda). The material includes a brochure, a documentary video and a number of blogs relating to issues in the report. © 2014 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org ii Uganda Economic Update Fourth Edition, June 2014 Table of Contents ABBREVIATIONS AND ACRONYMS ......................................................................................................v FOREWORD ....................................................................................................................................... vi ACKNOWLEDGEMENTS ...................................................................................................................... vii KEY MESSAGE ...................................................................................................................................viii PART 1 STATE OF THE ECONOMY ....................................................................................................... 1 1.1. Recent Economic Developments ....................................................................................................3 1.2 Economic Outlook ......................................................................................................................... 14 1.3. A more efficient pension system could support equitable old age protection and economic growth .......................................................................................................23 PART 2 PENSIONS: REDUCING VULNERABILITIES AT INDIVIDUAL LEVEL WHILE SUPPORTING ECONOMIC GROWTH .........................................................................................................................26 2.1 Why should Uganda be concerned about pensions? ......................................................................28 2.2 How countries are building effective pension systems ...................................................................38 2.3 Designing and implementing a pension system that can maximize value for Ugandans ............................................................................................................................45 2.4 Conclusion ................................................................................................................................. 51 LIST OF FIGURES Figure 1: Quarterly real GDP growth at market prices stabilizing ...........................................................4 Figure 2: Declining GDP growth places Uganda below some of its peers in the region .......................................................................................................................................4 Figure 3: Services and industry maintain strong growth as agriculture stagnates ...........................................................................................................................................5 Figure 4: Volatile food inflation did not feed into core inflation ...........................................................6 Figure 5: Lending rates not declining as fast as other interest rates ....................................................7 Figure 6: Outstanding credit to the private sector ..............................................................................7 Figure 7: Private sector credit growth across sectors ...........................................................................8 Figure 8: Changing destination of exports helped Uganda’s external position .............................................................................................................................................9 Figure 9: Capital and Financial Account more stable than usual ...........................................................9 Figure 10: Shilling appreciated further in spite of shortlived volatility in forex flows ............................. 10 Figure 11: Domestic development budget .............................................................................................11 Figure 12: Deviation between approved and executed budget ..............................................................11 Figure 13: Performance of the recurrent budget in the first half of FY 2013/14 (approved vs. released) .................................................................................................... 12 Figure 14: Performance of the development budget in the first half of FY 2013/14 ................................ 12 Figure 15: Proposed sector allocations for FY 2014/15 ......................................................................... 17 Figure 16: Debt could be pushed beyond sustainable levels ............................................................... 21 Figure 17: A comparison of African countries: Uganda has among the lowest share of population above legal retirement receiving pension ............................................................................................ 31 Figure 18: Pension savings low: Uganda’s workers could build stronger first step to descent retirement ....................................................................................................... 31 iii Uganda Economic Update Figure 19: Projected increases in the proportion of Uganda’s elderly population ...............................32 Figure 20: Projected government annual expenditure on public sector pensions ..............................33 Figure 21: Replacement rate: Uganda pays a relatively high pension to its civil service retirees compared to national and civil service schemes in other countries .......................................34 Figure 22: Costs of managing pension liabilities (percentage of total assets) .....................................37 Figure 23: Costs of managing pension liabilities (percentage of total assets or IPDs) .........................37 Figure 24: NSSF Portfolio – changed in size, but not in composition or return ...................................38 Figure 25: Cost of social pensions in Africa ......................................................................................50 LIST OF TABLES Table 1: Central government operations: FY2010/11 – FY2013/14 ....................................................... 13 Table 2: State of Uganda’s pension system ......................................................................................29 Table 3: Poverty profile by employment status of household head ....................................................35 Table 4: Pension reforms in African countries ..................................................................................39 LIST OF BOXES Box 1: Assumptions for economic performance for FY 2014/15 and the medium term .......................... 15 Box 2: Conflicting Signals over uganda’s sovereign debt rating, but positive outlook......................... 16 Box 3: Where could Uganda’s oil produce jobs? ............................................................................... 18 Box 4: Investing in public investment management will pay off, but where exactly are the gaps? ....... 19 Box 5: Lesotho’s non-contributory social pension ensuring universal, but costly, coverage .......................................................................................................................................40 Box 6: Mbao: How innovation is helping Kenya expand pension coverage and adequacy ....................................................................................................................................... 41 Box 7: How Cabo Verde managed to reduce public pension costs .....................................................42