Economic Diversification and Growth

nue will need to be accompanied by an equivalent reduction
in expenditure. With a credible limit based on an enforced
NONG fiscal deficit rule, the government would have to
continue ongoing efforts to widen the tax base and improve
the administrative efficiency of tax collection.
D. Other issues: spending pressures
4.38. In many resource-rich countries social protection
programs have also taken the form of subsidies to sensitive
products such as basic foodstuffs, electricity and/
or refined petroleum products, yet these are not always
effective in reaching out to the poor. Table 4.2 provides
the key results in terms of the targeting performance to the
poor of various simulated social programs including energy
subsidies. The benefit-targeting indicator is the ratio of the
share of total benefits received by poor households to the
proportion of households that are poor. If the value of the
indicator is unity, the scheme is neutral and the poor receive
benefits in proportion to their numbers. A value greater than
unity is progressive but a value lower than unity is regressive,
with non-poor households receiving a larger share of
the total subsidy pool than their proportion in the population.
Programs like general funding for health service, free
uniforms at the primary school level, general funding for
education, and free access to reproductive health would be
potentially well-targeted.
4.39. Energy subsidies are particularly costly and regressive.
Subsidies on the price of electricity and petroleum
products such as diesel and petrol would benefit mainly the
richest segment of the population. Other programs like kerosene
subsidies would benefit the poor, but a high proportion
of the benefits would accrue to the richest households. The
opportunity cost of petroleum subsidies would not only be
foregone government revenue, it would also be the missed
opportunity of funding social programs that reach the poor
and contribute to poverty eradication in a more efficient
Table 4.2: Effectiveness of Various Programs Reaching the Poor
Program / Subsidy Benefit-Targeting Actual Vs. Simulated
Potentially well targeted programs
Free uniforms at the primary school 1.24 Simulated
General funding for education 1.21 Simulated
General funding for health service 1.54 Simulated
Free access to reproductive health 1.07 Simulated
Subsidies with limited benefits for the poor
Kerosene 0.79 Simulated data
Poorly targeted subsidies
Electricity 0.05 Actual data
Petrol/Diesel 0.02 Simulated data
Source: World Bank Staff estimates based on UNHS 2012/13 (Aguinaga et al. 2014).
way. Therefore, the government should consider financing
social programs in education and health rather than petroleum
subsidies. Improvements in the access and quality of
education and health services are key for Uganda to achieve
the middle-income level status and implement its growth
and development agenda.
products will help avoid fuel shortage and price spikes.
Third, given that Uganda is a landlocked country without
pipelines, the cost of transportation of petroleum products
is very high. However, given that the country is going to
invest a sizable amount of resources in infrastructure
improvement, the cost of transportation of oil will decrease
in the coming years, leading to lower prices at the pump.
4.40. As observed in many oil producing countries,
domestic production of oil and gas may create expectations
and pressures to keep domestic petroleum prices
low, and even below international levels. There are three
main factors that could help the government manage expectations
in terms of oil subsidies once production starts. First,
Uganda does not currently have substantial fuel subsidies;
in fact, the only subsidy is the exemption of excise duty on
kerosene. In general, domestic prices follow international
prices, and as such non-subsidized prices are standard. Second,
Uganda has repeatedly suffered from prolonged fuel
shortages and price spikes due to its limited fuel storage
capacity equivalent to 20 days (one of the lowest in the
region) and its dependency on fuel imports from the Mombasa
4.41. A second best option would be to introduce an
automatic price mechanism to smooth the adjustment
of prices by limiting the magnitude of any single price
change (per week or month), but still ensure full passthrough
over the medium term. Although this would
reduce domestic price volatility, it would also lead to greater
fiscal volatility. Avoiding subsidies also requires smoothing
when international prices decline without a full passthrough
to consumers. Looking at examples of automatic
price mechanisms, the only successful and lasting case is
South Africa. The transparency and credibility of the automatic
pricing process in South Africa contributed to its
durability since 1950s.
refinery. Therefore internal availability of
petroleum
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