Uganda is one of the top countries attracting foreign direct investment (FDI) in East Africa. It is a great place to invest because of its natural resources and location in sub-Saharan Africa. The government is also working to improve Uganda’s business environment. It recently won the award for the best investment destination in Africa.

Uganda also won the best investment destination in East Africa in 2023. Foreign direct investment inflows to Uganda grew from $1.36 billion to $1.5 billion in 2023. Foreign investments have helped improve the country’s infrastructure and economy. This blog will discuss the impact of FDI on Uganda’s economic recovery.

Source: Monitor

Figure: Deputy Speaker of Parliament Thomas Tayebwa (center) inspects a production line at Unisteel in Mbale District recently. 

Uganda is a top FDI destination in East Africa, winning awards for investment appeal in 2023.

FDI inflows grew from $1.36 billion to $1.5 billion in 2023.

Investments have boosted infrastructure and economic recovery.

• Infrastructure is a key factor in attracting FDI. It includes reliable power, transportation, water, and communication. Investors are more attracted to countries with proper infrastructure due to minimal challenges.
• A stable economy shows the country’s commitment to long-term economic stability and development. Low labour costs are important for cost-saving FDI. Low inflation attracts investment in labor-intensive industries. Stable exchange rates help reduce uncertainty, making investment more attractive.

Figure: Economies that are involved in Uganda’s FDI inflows

• Engagement of other foreign businesses attracts more FDI. For example, industrial or economic zones often provide additional incentives like tax exemptions. Foreign companies support host economies by creating jobs that contribute to GDP.
• Political stability and supportive government policies also impact FDI. Investors are more interested in stable countries with low risks of conflicts. Studies also show that higher corruption levels can reduce per capita FDI inflows.
• Incentives like tax breaks and security are important for attracting FDI. Company branches in regions with favorable trade policies can be beneficial. For example, the East African Community supports avoiding import taxes.

FDI contributes to higher GDP growth in Uganda. Studies show that FDI helps increase capital, transfer technology, and improve productivity. The government is also offering incentives to improve the business environment. As a result, FDI increased, especially in agriculture, oil, manufacturing, and technology.

According to the UNCTAD World Investment Report 2023, FDI in Uganda grew by 39% in 2022, reaching USD 1.5 billion. FDI is a key driver of sustainable growth. Hence, policymakers use this understanding to encourage FDI and foster economic development.

Employment Generation:

Foreign investment creates jobs. It helps to cope with Uganda’s high population growth and the low number of local job opportunities. Economic development improves people’s living standards. Hence, a favorable investment environment, including foreign capital, is crucial.

Figure: Foreign vs. Domestic firm employment in Uganda

Source: Moss et al. (2004, p 10)

Expanding Knowledge and Technology:

Local employees gain skills through working with foreign workers. Workers share knowledge and technology, which boosts their productivity and competitiveness.

Supporting Local Enterprises:

Small and medium businesses provide goods and services to foreign workers. Foreign industries lead to the growth of local enterprises and contribute to the country’s economy.

Improving Manufacturing:

Foreign investors use local products as raw materials. Local producers and manufacturers can benefit by providing materials to them.

Government Revenue:

Foreign investors and employees pay taxes that increase government income. The Netherlands was Uganda’s largest source of FDI, contributing 38%. The UK followed closely with 37%. Other significant sources included Mauritius (7%), Kenya (5%), and Switzerland (3%).

Infrastructure Development:

Foreign investment helps improve infrastructure, which benefits the economy. It includes improving roads, airports, and utilities.

Despite the growth in Foreign Direct Investment (FDI), Uganda faces several challenges.

• Inadequate infrastructure increases costs for investors. Bad roads, poor electricity, and telecommunications cause difficulties.
• Inconsistent law enforcement creates uncertainty in business. Unclear laws and regulations often make it difficult for investors to take part.
• Political instability and security risks undermine investors’ confidence. Strong governance is important as it has a significant impact on attracting FDI.
• Conflicts of interest also affect foreign investment. While host countries seek development, foreign investors may focus on their business goals. Investors may exploit resources without benefiting the local economy, which affects FDI growth.
• Dependence on foreign investment is another concern. The economy may become reliant on foreign companies. So, there is a slight risk of collapsing if they withdraw.

By solving these issues, Uganda can attract and increase foreign investment.

Uganda focuses on several steps to maximize the benefits of FDI. Policy implications and the following recommendations are crucial in this regard.

Improved infrastructure:

Improved infrastructure plays an important role in attracting FDI. The government of Uganda focuses on transportation, energy, and telecommunications. It reduces costs and improves connectivity.

Regulatory Reforms:

Simplifying administrative procedures encourages investors. It reduces regulatory difficulties and increases transparency to attract investors. Reformed policies ensure regulatory improvements. It strengthens institutional linkages and enhances political stability. This unlocks FDI potential to develop a better investment environment in Uganda.

Supportive Environment:

Ensuring a supportive business environment is also crucial. This will enhance competitiveness. Supportive environment and institutional and infrastructure development stimulate economic growth.

Promoting Investment:

Strong institutional capacity enhances business growth. Offering support services to foreign investors will also attract more investment.

Uganda has a great potential for foreign investment. The country has benefited from its large market size, regional integration, and young population. Additionally, supportive policies like the Africa Continental Free Trade Agreement offer advantages.

In 2021, the IMF approved $1 billion under its ECF program to support private sector growth. The program helped Uganda recover from the economic impacts of COVID-19.

Uganda has seen a rise in FDI. Increased FDI Inflows contribute to economic growth, particularly in telecommunications, energy, and manufacturing.

According to the Bank of Uganda, Foreign Direct Investment (FDI) rose by 79.2% to $2.9 billion in 2023, up from $1.4 billion in 2022. About 75% of the FDI was focused on oil projects. It also included pipelines, drilling, and transportation, with an estimated value of $10 billion by 2025.

FDI drives job creation in Uganda. With proper guidance, it can expand technology. It also has a significant impact on infrastructure development in Uganda. A recent report by the World Bank, “The Global Economic Prospect 2024,” states that “Uganda will also benefit from infrastructure investment ahead of new oil production in 2025.”

Institutional reforms and support for businesses can unlock Uganda’s full potential for FDI. These steps can help diversify FDI inflows. The government should better integrate foreign investment with the local economy.

Foreign Direct Investment (FDI) plays a major role in Uganda’s economic growth. FDI significantly impacts sectors like telecommunications, energy, and manufacturing. Growth in FDI shows Uganda’s commitment to foreign investors. By addressing challenges such as poor infrastructure and regulatory issues, Uganda can fully benefit from FDI.

Improving political stability is important to maximize the benefits of FDI. Supporting Uganda’s macroeconomic conditions and regulatory frameworks is also crucial. With effective FDI, Uganda can achieve sustained economic growth.