Financial liberalisation involves diluting or dismantling regulatory controls over the institutional structures, instruments and activities of agents in different segments of the financial sector. It has had a profound impact on Uganda, as it has on other African economies over the last 40 years, but it has not driven economic transformation.
The issues of financial liberalisation and capital controls in Uganda, as in the continent generally, have come to the fore due to ongoing crises – i.e. climate change, high trade deficits, negative health impacts (including high out-of-pocket fees, vaccine and pharmaceuticals dependence), debt distress and economic contraction. The Covid-19 pandemic intensified the preexisting structural challenges exemplified by commodity dependence because of the limited economic transformation in many countries (see Dispatch Annuals 2022, Springs 2022).
Africa requires resources to address all these challenges. Given the dwindling levels of Official Development Assistance provided by wealthy countries and the increasing debt burden, domestic revenues can contribute massively to addressing the current challenges. Therefore, for African countries, the debate around financial liberalisation and capital controls is inextricably related to the urgent quest to mobilise resources by capturing the possible investible surplus for investment. Thus, most post-independence African governments instituted measures to minimise the share of foreign profits repatriated and maximise what was retained in their economies. These included regulations on the repatriation of profits and taxes on foreign investment and profits. Governments also directly supported their economies through state enterprises, capturing the profits that would otherwise have accrued to foreign capital, repatriated, and lost to the domestic economy.
However, the Structural Adjustment Programmes (SAPs) imposed upon Africa by the IMF and World Bank in the 1980s dismantled all these policies, replacing them with neoliberal policies, i.e. economic and financial liberalisation, reformulating the role of government to merely providing a ‘conducive environment’ for the private sector to thrive and the promotion of private sector-led economic development. Given the weak domestic private sector in Uganda, and in many other African countries at that time, a new slate of policies was developed by African governments to incentivise foreign direct investment (FDI). These included tax incentives and the relaxation or total dismantling of regulations on financial flows in and out of the domestic economy.
The lasting negative legacy of financial liberalisation
The effects of financial liberalisation have varied across countries. However, the literature has shown that although financial flows increased in some countries, financial liberalisation and capital account liberalisation has presented a number of challenges for African countries (see Dispatch Springs 2022). These include: Increased volatility and vulnerability to external shocks due to exposure to volatile capital flows; instability in the countries’ financial systems and pressure on the exchange rate with negative impacts on macroeconomic stability and economic growth; appreciation of the domestic currency due to increased capital flows making exports less competitive; and the weakening of the domestic financial sector.
Specifically, for Uganda, the liberalisation of its capital account in 1997 was carried out as part of a series of stabilisation and reform policies undertaken since 1987 under IMF and World Bank Group SAPs. The government, among other measures, allowed the free flow of capital between Uganda and the rest of the world, permitting residents and non-residents to hold foreign exchange-denominated accounts in the domestic banking system and residents to hold foreign exchange-denominated accounts and instruments outside the country. Liberalisation of the capital account in Uganda was justified on the grounds of closing the savings-investment gap to promote sustainable long-term growth, and to address its fiscal deficit to finance infrastructure projects.
Since liberalising its economy, Uganda has not seen increased capital flows, but key macroeconomic indicators have deteriorated. For example, according to IMF data, in 1998, the inflows accounted for 3.19 per cent of GDP, while in 2020 and 2021 they accounted for 2.32 per cent and 2.82 per cent of GDP respectively. The fiscal deficit has also increased from 7.1 per cent of GDP in 1998-99 to 9 per cent in 2020-21; while public debt to GDP ratio has increased from 45.1 per cent in 1998 to 52.2 per cent in 2022. The trade deficit has also increased from a trade balance of 6.8 per cent of GDP in 1964 to a deficit of 10.1 per cent of GDP in 2021.
These adverse figures conceal a profound structural change that has happened in Uganda since the liberalisation of its financial sector including the collapse of local banks with reduced lending to the rural and informal sectors, persistently high lending rates at between 18-20 per cent and the redirection of investments away from the productive sectors of the economy. Financial liberalisation has thus failed to drive investment to sectors that could actually structurally transform the Ugandan economy. It has in effect perpetuated economic underdevelopment while facilitating the extraction of profits by foreign investors. Thus Uganda remains among the poorest economies in the world.
Uganda’s experience demonstrates the urgent need for African governments – and the IMF – to rethink the efficacy of capital account liberalisation, based on an assessment of the cost of these neoliberal policies on their economies especially given the current polycrisis (see Dispatch Springs 2023).
