Document of

The World Bank

FOR OFFICIAL USE ONLY

Repwt No. P-6221-UG

REPORT AND RECOMMENDATION

OF THE

PRISlDENT OF THE

INTERNATIONAL DEVELOPKENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED IDA CREDIT

IN THE AMOUNT OF SDR 57.8 MILLION

TO THE

REPUBLIC OF UGANDA

IN SUPPORT OF THE SECOND STRUCTURAL ADJUSTMENT CREDIT

APRIL 18, 1994

MICROGRAPHICS

Report No: P- 6221 UGType: PR

This document has a resticted distribution and may be used by recipients only in the perfomanmce oftheir ofricial duties. Its contents may not otherwise be disclosed without World Ban;k authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Ugandan Shillin (U Sh)US$1 U Sh 1047.22 (February 1994)

U Sh 1 US$0.000954US$1 = SDR 0.7213

SDR1 = US$1.3865

GOVERNMENT FISCAL YEAR

July I - June 30

ABBREVIATIONS AND ACRONYMS

ASAC - Agricultural Sector Adjustment CreditCAS - Country Assistance StrategyCEM - Country Economic MemoradumCMB - Coffee Marketing BoardCMBL - Coffee Marketing Board LimitedDAPCB - Departed Asians Property Custodian BoardDFI - Direct Foreign InvestmentEDMO - External Debt Management OfficeEEC - European Economic CommunityERC I - First Economic Recovery CreditERC 1I - Second Economic Recovery CreditESW - Economic and Sector WorkFSAC - Financial Sector Adjustment CreditGDP - Gross Domestic ProductICB - International Competitive BiddingIDA - International Development AssociationIMP - International Monetary FundLMB - Lint Marketing BoardMPEP - Ministry of Finance and Economic PlanningMPS - Ministry of Public ServiceNEAP - National Environmental Action PlanNRM - National Resistance MovementODA (UK) - Overseas Development Administration (United Kingdom)SAC I - First Structural Adjustment CreditTIN - Taxpayer Identification NumberUCDA - Uganda Coffee Development AuthorityUIA - Uganda Investment AuthorityURA - Uganda Revenue AuthorityURC - Uganda Railways CororationUSAID - United States Agency for Iternational DevelopmentVAT - Value Added Tax

FOR OFFICIAL USE ONLY

REPUBLIC OF UGANDA

SECOND STRUCTURAL ADJUMMENT CREDfT

PRESIDENT'S REPORT

CONTENTS

Page

CREDIT SUMMARY ............... ; i

PART I: COUNTRY POLICIES AND BANK GROUPASSISllANCE SIRATEGY ........ .................... 1

A. Historical Perspective on Economic and Political Developments .... 1.. B. Recent Economic and Social Performance .................... 3C. Uganda's Development Objectives and Policies .... ............ 8D. Bank Group Assistance Strategy ....... .................. 11

PART II. THE SECOND STRUCTURAL ADJUSTMIENT CREDIT .... ..... 19

A. The Regulatory and Business Climate .......... ............ 19B. Divestiture of the Custodian Board Properties ....... .......... 23C. Domestic Revenue Mobilzation ........... .............. 25D. Public Expenditure Prioritization ............ 27E. Civil Service Reform ............... ................. 29

PARTII. THE PROPOSED CREDT. 32

A. Credit Amount and Expected Cofinancing .32B. Tranching .32C. Disbursement .32D. Procurement .32E. Management, Monitoring and Accounts .33F. Conditionality .33

PART IV. BE3ESANDRISKS .35

A. Benefits .35B. Poverty Category of the Proposed Operation .35C. Risks .35

PART V. RECOMMENDATION .36

lbis document has a restricted distribution and mlay be used by recipients only in the perfonnance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authotization.

ANNEXES

1. Leter of Development PolicyII. Policy Matrix11. I Balance of Payments111.2 External Financing RequirementsIV. CAS Tables

Table 1: Selected Indicators of Portfolio Performance and ManagementTable 2: Bank Group Fact SheetTable 3: Poverty and Social Development IndicatorsTable 4: Key Economic IndicatorsTable 5: Key Exposure IndicatorsTable 6: Status of Bank Group Operations in UgandaTable 7: Statement of IFC Investments

V. Statemnent of Bank Loans and IDA CreditsVI. Uganda: Disbursement Issues

UGANDA

SECOND STRUCTURAL ADJUSTMENT CREDIr

CREDlT StMMY

Borrower: Republic of Uganda

Executing Agency: Ministry of Finance and Economic Planning

Credit Amount: IDA: SDR 57.8 million (US$80 million)

Terms: Standard IDA terms with a maturity of 40 years

Description: The proposed credit has as its theme poverty reduction through acceleratedeconomic growth and rapid human resource development. Accordingly, it willassist the Government to achieve a mumber of key objectives. First, it willsupport firiher deregulation of the economy involving the removal of theremaining barriers to trade and investment in the coffee subsector andliberalization of the cotton industry. Second, the credit will support actionsaimed at completing the divestiture of the Custodian Board properties. Third,it will assist the Government to step up domestic revenue generation which is stillonly around 8 percent of GDP. Fourth, the credit will help to deepen theGovernment's efforts aimed at prioritizing both recurrent expenditure anddevelopment expenditure. Fifth, it will support further measures directed atdownsizing the civil service and raising its efficiency.

Benefits: The specific actions to be supported by the credit will benefit Uganda in anumber of ways. Improvements in the regulatory and business climate will helpunleash the full potential of the private sector as the engine of growth. The finalphase of divestiture of the Custodian Board properties is expected to sparkincreased rehabilitation investment and reinforce Uganda's pro-business image.Civil service reform is aimed at building a competent, results-oriented servicewithout which the present ineffectiveness of government programs will persist.Sharp increases in domestic revenue are needed to underwrite not only civilservice reform (salaries in particular) but also much higher levels of expenditurein the social and economic sectors, especially health, education and roads.Public expenditure rationalization will lead to more productive use of theGovernment's own limited resources and the resources provided by donors.

Risks: There are both extemal and intenal risks to the program to be supported by thecredit. Coffee prices on the world market have firmed over the past few monthsbut the risk of a further slide in prices cannot be ruled out. The best wayUganda can protect itself against such an eventuality is to promote noncoffeeexports vigorously. Uganda has no control over international developments butit has demonstrated a readiness to respond to external shocks. On the domesticfront, the main risks are a return to fiscal laxity in the run-up to presidential andparliamentary elections in 1994 and a weakening of resolve in implementingstructural reforms, especially those involving retrenchment and revenue

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generaton. On the posilve side, the i a much greater commitment to fiscalprudence than beo, and the centra bank has become more vigilant inmanaging the Government's accounts. Moreover, the merger of finance andplanning has resulted in a more cohesive budget management structure. Toreduce the risk of lost momentum on stuctura reform SAC II supports many up-front acdons.

Povety Category The proposed credit has a strong poverty focus.

Economil Rateof Return: Not applicable.

EstmatedDisbursements: The credt will be disbursed in two tranches of approximaely equal amowts,

with the first tranche released upon credit effectiveness and th second tranchebe)ming available about nine months later once the relevant conditions havebeen filfilled.

REPORT AND RECOMMENDATION OF THE PRESIDENT OF TIHEINTERNATIONAL DEVELOPhMT ASSOCIATION

TO THE EXECTIE DIECTORSON A PROPOSED SECOND SRUCTURAL ADJUSTMNENT CREDIT

TO THE REPUBLIC OF UGANDA

1. I submit the following report and recommendation for a proposed Second StructuralAdjustment Credit (SAC U) in the amount of SDR 57.8 million (US$80 million) to the Republicof Uganda on standard IDA terms, with a maturity of 40 years.

2. DA has supported Uganda's stabilization and adjustment program, launched in May1987, with two Economic Recovery Credits (ERC I and ERC 11), an Agricultural SectorAdjustment Credit (ASAC), a Structural Adjustment Credit (SAC I) and a Financial SectorAdjustment Credit (FSAC) as well as several investment operations which have attractedsubstantial amounts of cofinancing or parallel financing from other donors. The program has alsobenefitted from significant resource flows from the IMP. The proposed credit will support thedeepening of some of the important policy reforms and institutional measures that have beenimplemented over the past six years.

3. Part I of this report presents Uganda's macroeconomic and structural policies and theBank Group's assistance strategy. The reforms to be supported by the proposed credit arediscussed in Part H. Part m descnbes the specific features of the credit. The benefits and risksof the program to be supported by the credit are discussed in Part IV. Part V Is the President'srecommendation.

Part I: Country Policies and Bank Group Assnce Strategy

1.1 This part of the report serves three purposes. First, it provides a brief !, ;toricalbackground on the economy and politics. Secondly, it discusses receitt economic developments,focusing on progress towards stabilization and adjustment and the key development issues facingthe country. Thirdly, it reviews the Bank's assistance strategy in Uganda.

A. Historical Perspective on Economdc and Political Developments

Historical Perspective

1.2 With a per capita income of only around US$180 in FY93, Uganda ranks among thepoorest countries in the world. Poverty in Uganda is largely the consequence of civil war,political instability and economic mismanagement. The country has good growth potential,however. It is blessed with fertle soils and a good climate. Agriculture is the mainstay of theeconomy: it accounts for more than 50 percent of GDP, about 75 percent of export earnings andaround 80 percent of employment; and it provides inputs for a number of manurig and

processing industries. Smallholders are the backbone of Ugandan agriculture; over 80 percentof the farmers cultivate less than 2 hectares. The country is predominanly rural, with only 11percent of the population living in towns and cities. Industry has grown rapidly in the past sixyears but its contribution to GDP is only around 12 percent. Manufacturing accounts for abouthalf of industrial output.

1.3 The years immediately following independence in October 1962 were marked byreasonably strong economic performance. The annual average rate of real GDP growth was 6percent between 1963 and 1973. The balance of payments was in surplus during much of thisperiod and inflation was low and stable. The advent of the repressive Amin regime in January1971 changed things drastically. Amin expelled large numbers of Ugandan Asians andeypropriated their properties. His regime mounted a systematic attack on key institutions suchas the judiciary, the civil service, the churches, the press and the banks. Accountability andfinancial discipline broke down. Economic activity was driven largely underground and thecountry became internationally isolated. This turn of events resulted in a 20 percent decline inGDP during the 1970s. After the overthrow of Amin in 1979, attempts were made to implementan economic recovery program, with the support of the Bank, th6 Fund and other donors. Aftersome initial successes, these efforts were overtaken by a renewed civil war which lasted from1981 to 1985.

1.4 The National Resistance Movement (NRM) waich assumed power in January 1986inherited an economy which was in ruins. The war had disrupted crop production and marketing.Manufacturing activity had virtually ground to a halt. Foreign exchange reserves were depleted.lTe roads were in an acute state of disrepair and there was a severe shortage of trucks and othertransport equipment. Telecommunications, water and power supplies were at best erratic.Moreover, large parts of the north and east of the country continued to be plagued by insecurity.In responding to these challenges the Government initially adopted an interventionist stance andintroduced expansionary fiscal and monetary policies. Notwithstanding tentative signs ofeconomic recovery, the results of these policies proved disastrous, as evidenced by the sharpacceleration of inflation from 130 percent in January 1986 to 361 percent in May 1987. Overthe same period the parallel market exchange rate of the Ugandan shilling depreciated rapidly,from U Sh 30 to U Sh 144 per US dollar compared to an official rate of U Sh 60 per US dollar.In May 1987 the Government adopted new economic policies with the basic objective of creatinga free market economy.

Govemnance

1.5 Uganda has a government of national unity. There is a parliament whose members wereelected on an individual basis rather than on the basis of party affiliation. There is anindependent judiciary, respect for individual liberties and freedom of the press. At the height ofthe insurgency in the north and east there were incidents of abuse of human rights but, with theending of rebel activities, these have virtually ceased. A draft new national Constitution is dueto be adopted by the Constituent Assembly which was elected in March 1994. Presidential andparliamentary elections are planned for late 1994. The great unresolved question is whether thereshould be a return to multiparty democracy in 1994 or at a later date.

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B. Recent Economic and Social 1erformance

1.6 The Government of Uganda embarked upon an Economic Recovery Program (ERP) inMay 1987. The basic objective of the program was to bring about rapid and sustainedImprovements in the standard of living of the average Ugandan. This objective was to beachieved through policy and structural reforms aimed at: (i) restoring internal and externalfinancial stability and lowering inflation through prudent flscal and monetary management; (ii}creating the conditions for rapid and sustained growth of GDP through deregulation of theincentive and regulatory framework; and (iii) developing human capital through investments ineducation, health and other social services.

1.7 Summary Assessment of Progress on Stabilization and Structural Adjustment. TheGovernment has scored a number of successes in reforming the economy. First, it has achievedprice stability. Year-on-year inflation, as measured by the consumer price index for Kampala,dropped to minus 0.5 percent in June 1993 compared to 63 percent a year earlier, before edgingup to 12.5 percent in March 1994. The attainment of price stability took too long, as theGovernment was slow to bring public expenditure and monetary growth under control. Pricestability has been accompanied by exchange rate stability, although between November 1993 andFebruary 1994 the Ugandan shilling appreciated against the US dollar. Secondly, theGovernment has deregulated the incentive and regulatory framework to the point where Ugandacan boast of a free market economy. Thirdly, it has begun to reform public sector institutions:the size of the civil service and the military has been reduced; there is better control over the civilservice payroll; and a few public enterprises have been sold and many more put on the market.The sui,ply response to the reforms has been encouraging: the downward slide in the productionof coffee, the main export, has been halted; nontraditional exports havs been growing rapidly butfrom a very low base; between FY88 and FY93 real GDP grew at an average annual rate of 5.7percent, or 2.8 percent in per capita terms.

1.8 In spite of these achievements Uganda faces formidable hurdles that must be overcomebefore there can be any assurance of rapid and sustained economic growth and poverty reduction.First, a civil service competent enough to guide social and economic development is absent.Secondly, agriculture remains technologically backward. Thirdly, the human capital base is verydeficient. Fourthly, a strong financial system capable of mobilizing and allocating savings islacking. Fiftlily, external payments viability remains a distant prospect. The challenge for theGovernment, the Bank and other donors is to systematically remedy these deficiencies.

1.9 Key Policy and Institutional Reforms. Uganda launched its Economic RecoveryProgram at a time of high and volatile inflation. The immediate goal of economic policy,therefore, was to achieve macroeconomic stabiliy. To this end the Government sought to tightenfiscal and monetary policies. Up until the final quarter of FY92 these attempts were largelyunsuccessful as the Government repeatedly exceeded its expenditure targets and resorted to larger-than-programmed borrowings from the central bank. The overall deficit (excluding grants) asa percentage of GDP rose from 5.6 percent in FY88 to 14.5 percent in FY92. The rise in thedeficit was caused not only by inappropriate fiscal policies but also by the collapse ofinternational coffee prices which virtually eliminated income from the coffee export tax, hithertothe mainstay of government revenue. In FY93 the overall deficit/GDP ratio declined markedly

to 11.2 percent. This was achieved largely by tightening expenditure control and adhering tostrict limits on bank financing. The tighter fiscal stance, together with increased supplies of foodfollowing good rainfall, brought about a sharp deceleration in inflation, as noted in paragraph 1.7above.

1.10 Uganda was fortunate in that at the time it embarked upon its stabilization and adjustmentprogram it did not suffer from pervasive price controls and did not therefore have to undergowhat is often a politically difficult and socially disruptive process of pris &Meglation. Still, inthe product markets a number of important prices were subject to direct or indirect control.Among these were the prices of major locally-manufactured products, producer prices of themajor export crops (coffee, cotton, tea and tobacco) and the prices of certain importedcommodities of which petroleum was the most important. The Government first removed theprice controls on industrial products. Ibis was followed by the removal of controls on cropproducer prices in FY92. Finally, the price controls on petroleum products were removed inJanuary 1994.

1.11 Price deregulation was accompanied by the removal of entry barriers to markets. First,the monopoly of the Produce Marketing Board over exports of foodstuffs was terminated. Thisaction opened the way for private traders to compete for supplies of nontraditional exports suchas beans, maize and simsim. This was followed by the abolition of the export monopoly of theCoffee Marketing Board (CMB) in 1990. With the abolition of the CMB's export monopoly,private traders lost no time in entering the coffee export business and now handle about 60percent of Uganda's coffee exports. As a result of this and other measures taken to deregulatethe subsector, coffee production has recovered somewhat, from 122,154 metric tons in FY91 to130,000 metric tons in FY93, despite very low world prices for coffee. The Cotton DevelopmentStatute, which came into force in February 1994, did away with the two remaining monopoliesnamely, the cooperative unions' monopoly over cotton ginning and the Lint Marketing Board'smonopoly over cotton exports.

1.12 Uganda has also carried out a far-reaching deregulation of the foreign exchange market.This proceeded in stages. The first stage lasted until the end of FY90. Its main characteristicwas reliance on periodic devaluation of the currency to maintain (unsuccessfully) a competitiveexchange rate. In this period foreign exchange allocation involved a combination of a limitedOpen General License (OGL) system and administrative allocations. To improve theadministrative allocations the Government introduced in December 1988 a Special ImportProgram (SIP) which provided access to import support funds that were surplus to therequirements of the OGL, on a first-ome first-served basis. The second stage of liberalizing theforeign exchange market dates to July 1990 when the Government permitted the setting up offoreign exchange bureaus, a move which effectively legalized the parallel exchange market. Thethird stage began in January 1992 when the Government replaced the OGL and SIP with a weeldyforeign exchange auction involving the sale of donor import support funds to the commercialbanks. At the start foreign exchange channelled through the auction sold at a discount of over20 percent to the bureau rate. Over time the gap narrowed. However, owing to thesegmentation of the two markets and differences in documentation requirements, full convergenceof the rates on the two markets proved difficult to achieve. The other problem was that someforeign exchange transactions were still subject to administrative procedures. In particular, coffeeexporters still had to surrender export proceeds to the central bank (albeit at the market rate witheffect from April 1992) and foreign exchange for petroleum imports was administrativelyallocated by the central bank. In the latest stage of liberalization the Government abolished,

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effective November 1, 1993, the auction and introduced a unified foreign exchange system inwhich the market-makers are the commercial banks and the bureaus. In the new setting thecentral bank would intervene from time to time to achieve certain monetary or balance ofpayments objectives. With the introduction of this foreign exchnge system Uganda now has aunified, market-determined exchange rate. The foreign currency market is free of controls onvirtually all current account transactions. As a result of these actions, public confidence in theshilling has been restored and funds held abroad have been flowing back into the conntry.During FY94 the market bas been so well supplied with foreign exchange in the form of exportearnings, private capital and transfers and donor import support that the Ugandan shillingappreciited strongly against all the major foreign currencies. From December 1993 the centralbank resorted to market intervention to stem the appreciation of the currency.

1.13 In the financial sector reform has focused on interest rate policy and prudentialuervision of banks. With regard to interest rates substantial progress has been made towards

deregulation. Interest rates are now market-determined except for the rates on agricultural loans,term loans and one-year deposits which are linked to a moving average yield on treasury bills;treasury bills are auctioned weekly. Interest rates have come down over the past year but not byas much as inflation. The interest rate paid on savings deposits dropped from 21 percent inDecember 1992 to 11 percent in December 1993 while loan rates generally declined from 33percent to 23 percent. The banks have maintained a constant spread of 12 percentage pointsbetween lending and deposit rates. The banks have clearly been slow to reduce interest rates,with the result that. for a time, borrowers faced real interest rates of 10 percent or higher. Fourreasons may be adduced for the banks' reluctance to lower interest rates. First, their loanportfolios and balance sheets are very weak. Secondly, their operating costs are high. Thirdly,there is litde or no competition among them. Finally, they still harbor fears of high and volatleinflation. With respect to prudential supervision, the newly-enacted Bank of Uganda Act and theFinancW Institutions Act have, among other things, increased capital requirements and grantedthe central bank greater supervisory powers over the financW system; however, implementationhas as yet been inadequate.

1.14 Intitutional dvelMent has also been an important component of the adjustmentprogram. The notable actions taken in firtherance of this goal include: the merger of the financeand planning ministries in April 1992 which has resulted in a more coherent fiscal and economicmanagement structure; the reorganization of the Bank of Uganda which has set the stage forimproving the central bank's operations and accounting; the strengthening of the Office of theAuditor General in an effort to improve accountability for the use of public fuids; tieestablishment of the Uganda Revenue Authority (URA) with the primary objective of revampiugtax administration; the creation of the Uganda Investment Authority (UIA) as the focal point forassisting investors in obtaining the necessary approvals; the downsizing of the civil service to169,000 in 1994 from 320,00 in 1990; and the implementation of a veterans assistance programwhich made it possible to cut the size of the military by 23,000 in just one year.

1.15 The Environment. Uganda had earned the distinction of being referred to as 'the Pearlof Africa' because of the richness of its natural endowment of forests, mountains, waterways,wildlife, fertle soils and agreeable climate. Until the early 1970s the country had a well-managed system of natural areas which served as the basis for an expanding tourist Industry.This progress was interrupted and indeed reversed during fifteen years of political and military

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turmoil which took a heavy toll on the people, the natural resources wad the economy. Theperiod of turmoil was marked by extensive encroachment on forest and wildlife habitats.Moreover, ecological damage to Lake Victoria has been on the rise. The Government has takena number of actions which have set the stage for addressing the environimr-ntal problems facingthe country, including the assignment of respon.ibility for environmental matters to a particularministry. It is about to complete a National Env.ronmental Action Plan. A number of projectsare already supporting improvements in the management of forests and other natural resources.

1.16 An Evaluation of Overall Economic Performance. The reforms have had a positiveoutcome on a number of counts. First, macroeconomic stability has been achieved; it needs tobe sustained, however. Secondly, the supply response has been strong. GDP at factor cost grewby an average of 6.6 percent per annum during FY88-FY90, reflecting the impact of the reformsand the spurt in activity following the restoration of peace and security to most parts of thecountry. The next two years (FY91-FY92) saw the annual average GDP growth rate decline toabout 3.5 percent, owing largely to the effects of poor rainfall on crop production. Provisionaldata, however, show that, in spite of the sharp disinflation, the economy cebounded strongly inFY93; GDP grew by 7.2 percent as agricultural production recovered from the near-droughtconditions of the previous year. Thirdly, the reforms have stimulated the production ofnontraditional exports but, in the aggregate, these are still very small. Overall exportperformance has, however, remained poor mainly because of the collapse of coffee pricesfollowing the July 1989 suspension of the quota arrangements under the International CoffeeAgreement. The external current account deficit (excluding grants) remains large (11.0 percentof GDP in FY93) but has started to decline. Also gross investment is very low (15.3 percent ofGDP in FY93 compared to an average of 27 percent for low-income countries).

1.17 There are no longer any major distortions in the incentive structure. Product prices, theexchange rate and interest rates are all determined by market forces. The labor market ispractically free of regulations. Moreover, state monopolies have been abolished. Theinefficiencies of public sector bureaucracies and of the financial system, however, continue toImpose unnecessary costs on the economy.

1.18 Sustainability of Recent Progress. It is too early to suggest that the macroeconomicstability that Uganda has achieved is sustainable. For one thing, there is as yet only a verynarrow constituency in favor of tight fiscal and monetary policies. Moreover, a much strongerdomestic revenue effort and more rapid and diversified export growth are needed to underpinmacroeconomic stability. The revenue/GDP ratio is well below the Sub-Saharan African averageof 20 percent. Overall exports have still not recovered from the slump induced by the collapseof world coffee prices in July 1989. The upshot of this is that the sustainability ofmacroeconomic stability is closely tied to the availability of import support funds provided by thedonors. Import support per se is not as critical to the economy as it was a few years ago.However, the government budget is just as dependent upon the local cturrency generated fromimport support as, if not more so than, it was in the earlier stages of the Economic RecoveryProgram.

1.19 Although the risk of policy reversal can never be ruled out, there is a fair chance thatstructural reforms involving improvements in the incentive and regulatory framework as well asin the institutional setup would be sustained. The main reason for being sanguine about tle

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sustainability of the structural reforms is that there is no organized opposition to the reforms.Moreover, many of the reforms have been enshrined in law so that they are not ad hoc measureswhich can be easily overturned. But even if the structural reforms are sustainable, the averagerates of economic growth recorded over the past six years may not be. The main reason whygrowth may falter is that savings and investment rates in Uganda are too low. The ratios ofsavings and investment to GDP were 3.4 percent and 15.3 percent, respectively, in FY93. Theinefficiency and ineffectiveness of the banking system retard the mobilization and allocation ofdomestic savings. Two other factors militate against the sustainability of recent rates of economicgrowth. One is widespread illiteracy. The other is the combination of inadequate physicalinfrastructure and weak public institutions which serve to raise the costs of doing business InUganda. Finally, there is the question of political stability. Given Uganda's history of politicaland social turmoil, both local and foreign investors still need to be convinced that politicalstability is here to stay. The parliamentary and presidential elections due at the end of 1994 willprovide a test of that.

1.20 Progress in Poverty Reduction and Improvement of Social Indicators. One of thefindings of the 1992 Bank CEM entitled Growing Out of Poverty is that on average the welfareof the rural and urban poor improved in real terms by 16 and 14 percent, respectively, betweenFY88 and FY92. Although difficult to disaggregate, the improvement in welfare appears at leastpartly attributable to the adjustment program. Other factors at work were the restoration of peaceand security to the entire country and inflows of significant amounts of external resources frommultilateral and bilateral donors. Another finding of the CEM is tht, even though US dollarprices have declined, producers of cash crops have seen a rise in their terms of trade owing toreforms in the exchange, trade, tax and marketing systems. The poor benefitted from thisdevelopment as the main cash crops are produced by smallholders. The terms of trade formarketed foodstuffs declined as supplies increased. The incomes of foodstuff producersnevertheless lose because the impact of production increases more than offset the effect of pricedeclines.

1.21 The social sectors were not immune from the general collapse that Uganda sufferedduring the 1970s and the first half of the 1980s. The poor health status of Uganda's 17 millionpeople attests to this. Life expectancy at birth is 46 years compared to 59 years for low-incomecountries as a group (see Annex TV, CAS Table 3). With an infant mortality rate of 118 per1,000 live births and a maternal mortality rate of 550 per 100,000 live births, Uganda also rankswell behind other low-income countries with regard to these health indicators. Preventablediseases such as malaria, tuberculosis and diarrhea continue to be leading causes of death. Lackof access to safe drinling water is a major contributory factor to the health problems facing thecountry. Only 21 percent of the population have access to safe drinking water. The fertility rate(7.3 in 1990) in Uganda is high; this is an indication of the lack of an effective population policy.The education indicators are equally poor. Primary school enrollment is about 71 percent butthis is somewhat deceptive as completion rates are esdmated to be as low as 32 percent.Moreover, owing to lack of instructional materials, shortage of trained teachers and low pay, thequality of the education is very poor. Over the past six years the Government has takenimportant steps towards laying the groundwork for improvements in the social indicators. It hasembarked upon the physical rehabilitation of the infrastructure in the social sectors whileincreasing budgetary allocations for operations and mainenance, especially instructionalmaterials. It has carried out a review of social sector policies. An important outcome of this

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review Is that the Government will concentrate its limited resources on basic social services whichhave the broadest impact on the population. In FY94 the Government singled out the teachersfor special treatment; it doubled the salary of the lowest-paid teacher while civil servants ofsimilar rank received a salary Increment of only 19 percent. The Government recognizes thatthese efforts can only bear fruit In the long term.

1.22 The Extemal Environment. Uganda's accomplishments to date with regard tostabilization, adjustment and growth have been in spite of a number of setbacks on the externalfiront. To start with, Uganda is a landlocked country, dependent upon its neighbors for outletsto the sea. On occasion Kenya has closed its borders with Uganda, causing disruption to the flowof imports and exports. Fortunately, these episodes have been few and short-lived. The realextal shock has been the massive deterioration in Uganda's terms of trade. In FY90 alone themerchandise terms of trade declined by 72 percent as a result of the collapse of internationalcoffee prices. There were further declines of 6 percent and 14 percent, respectively, in FY91and FY92. The coffee price decline wreaked havoc on Uganda's balance of payments. Coffeeexport earnings declined from US$286 million in FY88 to US$104 million in FY93, withresultant severe limitations on the capacity to import and service extemal debt. One outcome ofthis is that Uganda accumulated sizable arrears to its external creditors (see Table I). Thegovernment budget was also adversely affected by the sharp fall in world coffee prices whichdestroyed the tax base for coffee revenue which accounted for almost half of government revenueat the start of the ERP. The Government responded to the world price decline by liberalizingcoffee exports, freeing the producer prices of coffee, abolishing the export tax and allowingcoffee export proceeds to be convered into local currency at the market exchange rate.

1.23 Uganda's dependence on a single commodity, that is, coffee, for merchandise exportearnings is still high (about 66 percent in FY93) but is nowhere near as high as it was (around95 percent) four years ago. The share of official development assistance in total publicexpenditure is very high. Aid accounts for up to 90 percent of annual development expenditure.Apart from project aid, exter assistce provides about a third of budgetary resources in theform of local currency generated from sales of import support fimds. Uganda's total stock of

trnal debt was US$2.6 billion as of the end of June 1993 (see Table 1). The debt-serviceburden has been coming down but remains onerous; in FY93 the debt service ratio beforerescheduling was 83 percent. About two thirds of the debt is owed to the multlateraldevelopment institutions. This reduces Uganda's options for seeking debt relief.

C. Uganda's Development Objectives and Policies

1.24 Sources of Growth. Uganda is an agricultural country and will remain so for a long timeto come. The transformation of agriculture is therefore key to any successfil developmentstrategy. The sector has great potential: it can feed a growing population; supply the regionalmarket with food; generate new exports as well produce more of the traditional export crops; andbe a source of industrial raw materias. The key to realizing this potential is by increasing cropyields. For a wide variety of crops yields can be doubled, or even tripled. The prerequisites toincreasing yields include improved security of land tenure, enhanced availability of basic socialservices and increased but more focused public expenditure on research and extension, controlof plant and animal disease and feeder roads. Ihe industrial sector also offers scope for increasedproduction, with obvious linkages to the agricultural sector. At present, the emphasis is onimport-replacing investments. But as the experience of countries such as the Republic of Korea,Malaysia and China has demonstrated, import substitution is likely to be efficient only if it is part

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of an outward-oriented development strategy. Given the dearth of lonterm fiace, the absencoof modern tecnology and the lack of knowledge of foreign markets and modern managementpractices, foreigp investment can play a crucial role in promoting Industrial development.Agricultural and industrial growth would be enhanced by the development of key services suchas banking and finance, insurance, accounting and auditing.

Table I: EtRna Debt by Creditor (as of June 30, 1993)(USS million)

Arars

Creditor Debt Outaiginluding APncpal ntert Total DOD

lPicpal Arrar

Multiateral 1,835 12 9 1,843IDA/IBRD 1,174 0 0 1,174IMP 344 0 0 344Other 317 12 9 326

BilateWals 621 148 41 663Non-OOECD 365 120 16 381Pais Club, PreCutoff 152 4 19 171Pais Club, Post-Cutoff 104 24 7 110

Psivate 108 59 29 137Commerci Non-Baub 55 30 6 61Commei Bank 11 11 3 14Otder Lan Category 42 17 20 62

Total 2,564 218 79 2,643

Sour: EDMO, Bank of Uada

1.25 Key Constanh on Growth and Developmnt. Political iostability in the 1971-1985period was a major hindrane to development In Uganda. This Is no longer the case. SinceJanuary 1986 the cunry has been politically stable. Moreover, the quality of governa hasimproved a great deal, as shown by the Governmne's commimnto accountability ad te ruleof law. The present indications are that polidcal stability in a democratic frmework willcondne to prevail in UgVda. his should boer Investor confidence and thus induce increasedlong-term investment. Until recentiy, macroeconomic instablity, c principally byhigh and volatle inflation, was a key constraint on economic gowth. On this score too there hasbeen a draumatic turnaround over the past two years, with inflaon beIg virtually eldmna bythe end of FY93. However, the fight against inflation is far from over. Uganda needs todemonsrate its commitment to the mainace of low and stble inflation in the long term andthus give people the condce to save and make long-term invstmen. The key remainconstraints on growth and development are low saving and investment rates, low rates of literacyand numeracy, indequate physical ifastucture and ineffective and inefficient public sectorInsiuions. As elabord below, the basic goal of goverme policy is to fmd ways and mnsof overcomi ese consain.

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1.26 Development Objectives and Polides. The Government's development objectives andpolicies are set out in the Policy Framework Paper, 1992193-1994/95. The primary developmentobjective is to rapidly improve the living standards of the population through acceleratedeconomic growth and human resource development. To bring this about the Government willmaintain prudent macroeconomic policies, improve public sector management, promote privatesector development and protect the environment.

1.27 Sustained macroecononmiQ. hiily is the first prerequisite to accelerated economic growthand poverty reduction. The Government therefore intends to pursue prudent fiscal, monetary andexchange rate policies aimed at managing aggregate demand, mobilizing domestic resources andpromoting external competitiveness. The Government's objective is to keep inflation below 10percent. Attaining this goal will take a firmer fiscal stance which in turn calls for increasingpublic revenues sharply and maintaining firm control over public expenditure while implementinga sound set of spending priorities. In this regard, the Government continues to implement anIMF-supported program in the context of the fourth annual arrangement under the ESAF whichhas been extended to June 30, 1994.

1.28 The public sector will focus on its basic functions of maintaining macroeconomic stability,providing adequate infrastructure and developing human resources. Further reform of ukllcsector management will build upon the progress that has been made in three interrelated areasnamely, civil service and parastatal reform, domestic revenue generation and public expenditureprioritization. In the case of the civil service substantial progress has already been made inreducing staff numbers and instituting controls on hiring and the payroll; between July 1993 andJanuary 1994 over 25,000 ghosts were eliminated. The size of the military has also been reducedby over a quarter. The Government will continue to work towards the creation of a smaller,better-paid and more competent civil service. As the civil service is slimmed down further, theministries will be appropriately reorganized and restructured so that they can focus on thosecritical functions and activities that, in whole or in part, should be undertaken by the publicsector. The Government has also embarked upon decentralization. It will place increasingemphasis on decentralization over the next few years as it considers initiatives in this area to beessential to improving the delivery of public services. In order to maximize the peace dividendfrom the cessation of rebel activity, the Government plans to complete the implementation of theveterans assistance program before the end of FY96. Parastatat reform, including divestiture,is underway, with 3 public enterprises already sold and another 23 put up for sale. In addition,8 parastatals have been liquidated. Divestiture of government interests in commercial activitieswill be accelerated and broadened, where necessary. Revenue generation is another importantpublic sector management issue which has serious implications for the maint-mnance ofmacroeconomic stability and the Government's ability to pay a living wage, maintain and expandthe economic and social infrastructure and develop human resources. Uganda's revenue/GDPratio has only risen by about 2 percentage points from the start of the adjustment program to 7.2percent in FY93 compared to an average of 20 percent for Sub-Saharan African countries. Inview of this the Government will intensify recent efforts to improve tax administration andbroaden the tax base. The other public expenditure management issue is expenditureprioritization. A start was made by designating, since FY91, a set of basic recurrent expenditureprograms (primary education, primary health, agricultural research and extension, rural watersupply and road maintence) as candidates for increased budgetary allocations. This wasfollowed in FY94 by the classification of the development budget into core and noncore projects.

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The Government intends to tighten expenditure priorities. In this regard, it wili, given thepaucity of domestic revenue and the limitations on implementation capacity, concentrate availableresources on the essential tasks of improving the incentive structure for civil servants, makingadequate provision for the operation and maintenance of basic economic and social infrastructreand expanding the stock of infrastructure that is likely to have the broadest impact on thepopulation.

1.29 The private sector holds the key to increased production for the local market and forexport. The Government will therefore continue to foster rivate setor develomn. Itsapproach is to rely on market forces. The most recent actions in this regard include thederegulation of the cotton industry and the removal of the remaining regulatory restrictions onthe coffee trade. The utility companies excepted, these actions more or less complete the removalof sectoral impediments to private investment. The establishment of free markets is, however,not enough. Petty bureaucracy is still a major impediment to investment and production. Thisis a problem that the Government will increasingly turn its attention to. Even more important,the Government needs to create the conditions necessay for rapid increases in domestic savingswhich are now equivalent to only 3.4 percent (GNS-to-GDP ratio) of GDP. An efficient andeffective banking system is indispensable to any effort to step up the mobilization of domesticsavings. The Government will strive for the emergence of such a banking system. TheGovernment's other major goal is to make Uganda an attractive destination for direct foreigninvestment (DFI), as it is crucial to supplement domestic savings with private foreign savings.

1.30 In the field of environment Nrotection the fundamental issue that the Government facesis that poverty, population and the environment feed on each other in a destructive way: povertyencourages rapid population growth; rapid population growth in turn increases pressure on theenvironment; a degraded environment breeds further poverty and so on. To arrest this spiral ofdestruction the Government will use the NEAP as a basis to improve environment and naturalresource management. This will involve establishment of an environmental database andmonitoring system; research and land management to ensure sustainable agriculturd development;protection of wedands; conservation of forests and wildlife; and improvement of surface watermanlagement.

D. Bank Group Assisance Strtegy

1.31 The primary objective of Bank Group assistance to Uganda is to help the country lay thefoundations for rapid, sustained and equitable growth as an instrument for poverty reduction. Tothat end the Bank Group's assistance strategy aims to support the Government's efforts to sustainmacroeconomic stability, raise the standard of public administration, create the conditionsnecessary for the emergence of a strong private sector and protect the environment. Theimplementation of this strategy will require a combination of the usual Bank instruments, that is,policy dialogue with the Government, economic and sector work, lending operations and portfoliomanagement and supervision. The discussion of these instruments is preceded by a brief reviewof the prospects for accelerated economic growth.

1.32 Econondc Prospects. Uganda's economic prospects depend upon how quickly thefndamentals of development can be put into place. The first fundamental is macroeconomicstability. The Government has now achieved macroeconomic stability but must work assiduously

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to sustain it. To assure continued macroeconomic stability the Government will have to step updomestic revenue generation and enlarge the constituency which supports sound fiscal andmonetary policies. The Ugandan economy has also changed in another fundamental way: it isnow free of major distortions in the incentive and regulatory framework. However, otherfundamentals are not so sound. Specifically, Uganda is deficient in human capital, lacks a strongfinancial system, is saddled with low productivity in agriculture and is devoid of strong andeffective public institutions. Remedying the deficiencies in these four areas while consolidatingmacroeconomic stability is the key to accelerated growth and poverty reduction in Uganda. Thebase case scenario presented in Table U below assumes the continuation of present trends. In thiscase economic growth would remain level at 5 percent through the year 2000. Table II alsopresents a high case scenario. This scenario assumes that the Government moves quicldy todevelop human capital, create a strong financial system, raise agricultural productivity and buildstrong institutions. The projections in Table II indicate that if these efforts are successful theannual growth rate would rise to around 8 percent by the year 2000. With population growingat 2.7 percent per annum, economic growth at 8 percent a year would make it possible to doubleGDP per capita in 14 years, instead of 31 years which would be the case under a 5 percentgrowth scenario.

1.33 Assessment of the Government's Development Strategy. Tne Government'sdevelopment strategy focusing on poverty reduction through growth and spending on social sectorprograms is sound. The Bank has no differences with the Government, or with the IMP andother donors, on this strategy. However, there have been differences with the Government withregard to the speed and sequencing of a number of policies (exchange rate unification, forexample) needed to implement the strategy. Similarly, there have been differences with theGovernment regarding the delineation of a core of recurrent and development expenditures whichare better geared to overcoming the deficiencies in human capital formation, agriculturadevelopment and other areas. The basic principles underlying the core/noncore disdnction havebeen agreed with the Government. Obtaining the agreement of the other donors to put theseprinciples into practice is, however, proving more difficult.

1.34 Bank Intruments for Implementing the Country Assistance Strategy. The BankGroup has had a constructive Qliy dialogue with the Government over the past six years. Theissues that are usually the source of controversy (the exchange rate, interest rates, pricing, etc.)have already been successfully dealt with. Still there is a need for continuing dialogue with theGovernment in a number of areas. In the area of macroeconomic management the dialogue willfocus on tax and expenditure policy, with the aim of building upon the recent gains In domesticrevenue collection and expenditure control and establishing and adhering to a set of spendingpriorities which address the fundmentals of development. In the area of public sectormanagement the dialogue will concentrate on further shifts in the role of the state (pruning of thecivil service, privatization and liquidation of parastatals) and improved performance andaccountability. Dialogue on private sector development will aim at improving the legal andregulatory climate for business at the micro level.

1.35 The Bank has produced a considerable body of eonQmic and sector work (ESW) onUganda. The most recent includes an Agricultural Sector Memorandum, a Country EconomicMemorandum entitied Growing Out of Povert and a Social Sector Strategy Report, aU issuedbetween March and April 1993. A study of Non-Governmental Organizations (NGOs) has also

Table II: Projections - Key In,dicators for CAS

Growth Rates - In Percent

Exports of GNFS, constant 16.5 18.5 11.7 7.8 8.0 8.1 16.5 18.5 14.3 12.3 12.1 13.1

Exports of GNFS, nominal 23.2 28.7 18.4 12.6 11.0 9.5 23.2 28.7 21.2 17.0 15.0 14.8

Imports of GNFS, constant 19.2 8.9 4.7 4.5 4.0 3.8 19.2 8.9 6.5 6.3 7.3 7.2

ImportsofGNFS, nominal 21.1 11.5 7.2 7.1 6.6 6.1 21.1 11.5 9.0 9.0 10.0 9.6

GDP at FC 6.1 5.0 5.0 5.0 5.0 5.0 6.1 6. 6.6 7.1 8.2 8.2

GDP at MP 6.5 5.6 5.5 5.6 5.0 5.0 6.5 6.7 7.1 7.7 8.2 8.2

Ratios to GDP -in Percent

CurTent Acct, incl. Grants -2.9 -3.1 -3.1 -3.1 -3.0 -3.0 -2.9 -3.0 -3.5 -3.6 -3.7 -3.5

Current Acct, excl. Grants -9.0 -7.8 -7.3 -7.0 -5.9 -5.5 -9.0 -7.7 -7.3 -6.9 -5.7 -5.1

Fiscal Deficit(-)/Surplus(+) -10.5 -9.5 -8.6 -7.9 -1.3 0.1 -10.5 -9.5 -8.0 -6.8 1.8 3.0

Other Rados - In Percent

Debt Service/Exports GNFS 63.8 47.2 44.1 40.8 36.6 38.5 63.8 47.2 43.5 39.8 34.8 31.6

ConsumptionlGDY 101.6 100.0 98.7 97.5 94.4 93.1 101.6 99.3 97.8 96.5 92.5 91.3

Gross National SavingslGNY 5.0 7.3 8.1 9.1 11.4 12.3 5.0 7.9 8.8 9.7 12.3 13.0

Levels - In US$ milons

Current Account - US$m -348.4 -334.7 -344.4 -355.9 -402.7 -435.6 48.4 -334.6 -353.4 -369.5 -463.2 -513.0

Direct Foreign Investment - US$m 5.0 6.0 7.0 8.0 27.4 36.2 5.0 7.0 10.0 25.0 75.0 117.2

Sources: Government of Uganda, IMF and Bank staff esfimates.

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been completed. These various pieces of work provide the underpinning for the Bank's dialoguewith the Govermnent on macroeconomic and sector policies and the lending program. MoreESW is in progress or is plarmed for the next few years. The National Environmental ActionPlan (NEAP) is nearing completion. This year's Public Expenditure Review has involvedworking with the Government and other donors to bring about further improvements in theallocation of public resources. The CEM planned for FY95 will explore in greater depth the keypolicies and programs needed to achieve rapid, sustained and labor-absorbing growth. Sectorwork will concentrate on issues of competitiveness and investment constraints in industry, landtenure in agriculture and resources assessment in the water sector. An assessment of the energysituation is under preparation.

1.36 The "base" IDA lending program proposed for Uganda would provide about US$200million per year, or US$1,000 million for 16 operations over the period 1993-97. This level ofIDA financing is conditional upon the Government keeping its stabilization and structuraladjustment program on track. Tae proposed lending program is somewhat smaller than theUS$250 million per year committed in the FY90-92 period; this reflects the expected tailing-offof adjustment lending and the constraint on new investment lending due mainly to lack of budgetresources. Investment lending is likeih to be particularly constrained in the next year or two, asUganda tries to bring its development budget more in line with its capacity to inplement projectsand fund the requirements for operations and maintenance. Uganda's stabilization and adjustmenteffort is not expected to slacken, but should it do so for some reason, the proposed lendingprogram would be scaled down. In the event of a major reversal in disciplined macroeconomicmanagement or a slackening of the pace of structural reform (with some of the critical reformconditions incorporated in the SAC not being met) IDA would retreat to a core program of notmore than US$80 million a year focussed on direct poverty-reducing activities such as basiceducation and health.

1.37 The lending program seeks to achieve a balance between investment projects and quick-disbursing import support. The focus of investment lending is on growth (agriculture andinfrastructure development) and improvement of the social indicators (human resourcedevelopment). To this end, IDA is supporting agricultural extension and agricultural researchand training through projects approved in FY93. These projects have a strong focus on reducingpoverty and improving the economic status of women. The Fifth Education Project, alsoapproved in FY93, is aimed mainly at improving primary education. Also approved in FY93 isthe Economic and Financial Management Project which supports further strengthening of the coreeconomic agencies. FSAC, approved in FY93, is designed to improve the legal and regulatoryframework for financial intermediaries and strengthen the financial system. Projects alreadyapproved in FY94 include the Transport Project to rehabilitate feeder roads and strengthen roadmaintenance capacity, the Suall Towns Water Project and the Sexually Transmitted InfectionsProject designed to reduce the incidence and impact of sexually transmitted infections includingHIV/AIDS. The other FY94 project is the Cotton Development Project. Other investmentprojects in the pipeline include District Health, Institutional Development and EnvironmentalManagement in FY95, followed by Agriculture Sector Investment and Private SectorDevelopment in FY96. In one way or other, these projects will benefit the agricultural sectorwhich provides a livelihood for 80 percent or more of the population and where over 90 percentof the poor eke out a living.

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1.38 Since 1987 Uganda has received five adjustment credits. The first two credits, ERC I

and ERC II, have been fully disbursed. The first sector adjustment operation, the AgriculturalSector Adjustment Credit, was approved by the Board on December 13, 1990. This is a hybridoperation with an adjustment component and a small investment component. All the majorobjectives of this credit have been largely achieved. The second tranche of ASAC was releas Adin December 1992. ASAC was followed by the first Structural Adjustment Credit. The twinobjectives of SAC I namely, enhancing private sector development and Improving public sector

management, have been achieved in many important respects. The second tranche of SAC I was

released in March 1993. The Financial Sector Adjustment Credit was approved by the Board inMay 1993 and became effective on August26, 1993; some delay in release of the second tranche,scheduled for August 1994, is likely. The current lending program includes one further

adjustment operation in FY96.

1.39 An important instrument for getting results on the ground is portfollo Mana.gagn and

ugrision. The status of the existing portfolio is presented in Annex IV, CAS Table 6. Thereare twenty-seven projects under implementation. Most projects are rated as satisfactory.However, the implementation of investment projects has generally been slow. There are three

principal reasons for this. First, In the past project start-up was often delayed because of the

failure to put in place the requisite project management team or to meet the conditions ofeffectiveueiis in a timely manner. Secondly, the availability of counterpart funis nas been a

major problem. Thirdly, there are weaknesses in procurement which cause delays in projectimplementation.

1.40 A number of steps have been taken to meet both these generic and project specificproblems. Starting in mid-1993, IDA has worked to help the Government identify a core list ofhighest priority on-going projects which are to receive full counterpart funding. While there have

been some problems in its application, this approach has helped improve Implementation of IDA-

fimanced and other donor-financed projects included in the core program On the basis of this

effort by the Government to rationalize its development budget, restructring of IDA-financedprojects has been initiated, and the remaining problem projects are currently under intensivereview and discussion with the Government, aimed at their restructuring or cancellation. A

number of other generic issues have been addressed through the Country Portfolio PerformanceReviews. IDA has assisted the Government to improve its procurement procedures and practicesboth through the CPPRs and a procurement assessment. The operation and accounting for specialaccounts has been improved, in part by shifting them from the Bank of Uganda to commercialbanks, and the timeliness and accuracy of audits has been increased by Government's agreeing

to appoint private auditors to do this task. While problems remain in the portfolio, progress has

been made and implementation is improving.

Main Features of the Bank1s Assistance Strategy

1.41 Sustained Macroeconomic Stability. Uganda has been very successful In reducinginflation over the past two years. Fears had been expressed that the sharp disinflation that

occurred in FY93 would trigger an economic downturn. This has not happened. On the

contrary, the economy grew by 7.2 percent in FY93, reinforcing the twin messages that

squeezing inflation out of the economy is not inimical to growth and that macroeconomic stability

is needed to give both Ugandans and foreigners confidence to invest and produce.

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Macroeconomic stability is basic to the success of the entire adjustment program. The Bank'sassistance strategy will therefore give special emphasis to helping the Government to maintinprice stability and a competitive exchange rate and overcome debt servicing difficulties.

1.42 Human Capital Formation. Uganda needs to invest more in human capital formation,especially primary education and primary health. This will benefit the poor directly. It wouldalso prepare them to participate more fully in the growth of the economy. The Bank's assistancestrategy aims to: support the Govermnent's efforts to expand basic education and health servicesto the entire population; reflect the emphasis on development of human capital in the Bank's ownlending program; and build consensus among the donors on the need for redirecing resourcetowaras basic education and health.

1.43 Agricultural Development. Poverty in Uganda is largely a rural phenomenon. theattack on poverty must therefore focus on agricultural development. Ugandan agriculture istechnologically very backward. High-yielding varieties, even when they are available, arepractically unknown outside of the research stations. Fertilizer is used on a very limited s:ale.The extension services are ineffective. The challenge for the Bank is to assist the Governmentto raise the productivity of the farmers through improved research and extension and an expandedfeeder road network.

1.44 Strengthening the Financial System. The financial sector has a key role to play in themobilization and allocation of resources. In Uganda the financial system barely extends beyondthe capital, Kampala. Worse still, the operations of the banks are clouded by insolvency, weakmnanagement controls and inadequate prudential supervision. Given the critical role the financsystem must play in raising savings and investment rates, the Bank's assistance stratea wiUemphasize the speedy reorganization (including privatization) of the problem banks and beefed-upsupervision by the central bank.

1.45 Improving Public Sector Management. Much progress has been made in getting theGovernment out of a host of activities which more properly belong to the private sector. Thisprocess has to continue. But even with the diminished state involvement in the economy, theGovernment is in many respects incapable of discharging its remnaining functions satisfactorily.This means that the performance of the public service requires significant improvement.Wholesale improvement will be difficult and will take considerable time. The Bank's assistancestrategy to institution building will therefore include innovative approaches to creatg a core ofpublic servants capable of managing the economy from policy formulation to programmonitoring.

External Flnandng Requirenents

1.46 While meeting an increasing percentage of foreign exchange requirements from its ownresources, Uganda will, over the medium term, continue to rely on foreign assistance on asignificant scale. Annex m.2 presents the estimated financing requirements for the period1993/94-1995/96. The balance of payments is presented in Annex M. 1. This table shows thatthe balance of payments is improving but remains fragile. Coffee export earnings declinedfurther, from US$117 million in the previous year to US$104 million in FY93. Internationalcoffee prices have picked up recendy to around US$1.20/kg, with beneficial effects on Uga sda's

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balance of payments, but whether or not these prices would be sustained remains to be seen.With regard to noncoffee exports, the recorded data, which are far from comprehensive, presenta picture of stagnation but there is strong anecdotal evidence that noncoffee exports have beengrowing rapidly.

1.47 Imports have been rather volatile over the past few years, declining in FY92 beforepicking up again in FY93. The projected financing requirements assume that GDP would growby about 5 percent per annum over the next few years. On the assumption that a sizeable amountof arrears would be carried forward, Annex m.2 shows that Uganda's FY94 external financingrequirements will be fully met. Uganda's FY95 external financing requirements are estimatedat US$1,159 million. Available financing consists of US$593 million in export earnings plusprivate transfers and US$383 million in drawings on existing donor commitments, leaving afinancing gap of US$183 million, to which must be added arrears of US$232 million, bringingthe overall gap to US$415 million. New commitments of project aid needed to fill this gapwould have to be tailored more closely to Uganda's expenditure priorities, especialy in the socialsectors, and its ability to adequately fund operations and maintenance expenditures andcounterpart fund requirements. With regard to balance of payments support, much greaterflexibility is needed to meet Uganda's requirements which are now not so narrowly focused onforeign exchange with which to pay for merchandise imports and related services. TheConsultative Group for Uganda is expected to meet again in July 1994 to consider the country'sexternal financing requirements.

1.48 A key issue in addressing Uganda's external financing requirements is the overhang ofdebt. The total stock of external debt is estimated at US$2.6 billion. Servicing this debt in theface of depressed international coffee prices has posed a serious challenge for the Government.The debt-service ratio remains high for three reasons. First, nearly two thirds of the debt ismultilateral debt which cannot be rescheduled. Secondly, the Paris Club cut-off date is June 1981which severely limits the amount of debt that is eligible for relief. Thirdly, It is only recentlythat Uganda implemented the decision to borrow only on the most concessional terms. TheGovernment's objective is to normalize relations with its creditors. To this end it has beenimplementing a six-pronged strategy, with the following elements: year-by-year rescheduling ofeligible Paris Club debt; maximum anmnal deferral of post-cut-off debt on a bilateral basis; write-off or long-term rescheduling of arrears and debt owed to non-OECD bilateral creditors;extension of bilateral balance of payments support to multilateral debt service; buy-back ofuninsured commercial debt; and cessation of government or government-guaranteed externalborrowing on all but the most concessional terms. Implementation of the debt strategy has metwith some success. In June 1992 the Paris Club granted Uganda enhanced Toronto terms whichit has extended to June 1994. A similar treatment is expected in FY95. Using the DebtReduction Facility for IDA-Only Countries, Uganda bought back in FY93 US$152 million ofuninsured commercial debt (representing 6 percent of the total debt and 63 percent of thecommercial debt) at 12 cents on the dollar.

IFC and MIGA

1.49 IFC has investments in agro-business (sugar and tea) and in financial services(development banking and insurance). Through the African Enterprise Fund, IFC has supported

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four smaller projects. It has also completed for the Government three advisory assignmentscovering cotton, telecommunications and the stock market. IFC's priorities are to render furtherassistance in relation to the privatization process and institution building in the financial sectorwhile continuing its traditional investment role when suitable project opportunities arise. MIGAhas also been active in Uganda. It has issued guarantees against the risks of expropriation andwar and civil disturbance for a cobalt extraction project and a fish processing project. Inaddition, MIGA organized a workshop in June 1992 which brought together policy implementorsand their private sector counterparts to discuss regulatory rules and procedures which discouragedirect foreign investment.

Relations with the IMF and other Donors

1.50 The Bank and the IMF have worked closely to monitor the adjustment program and tohelp the C0vernment design the next phase of reform, particularly with regard to the integrationof the foreign exchange markets, improvement of the tax system and the restructuring of thefinancial system. There is also increased coordination with other donors through the regular localdonor representatives meetings. Donor coordination is especially important for the purpose ofliberalizing and harmonizing import support disbursement procedures further and prioritizingpublic expenditure. Representatives of a number of donors participated in the preparation of thecredit.

Key Issues for Consideration

1.51 Summary Assessment. Uganda has implemented a wide range of macroeconomic andstructural adjustment policies since it launched its economic recovery program in May 1987.Most of the important issues relating to the macroeconomic frontier have been successfully dealtwith. Also measures have been introduced to address the most important structural impedimentsto growti and human resource development. Owing mainly to capacity constraints, theimplementation of structural reforms in certain key areas (financial sector restructuring, publicexpenditure prioritization, etc) has been slow. From every indication the Government'scommitment to the maintenance of macroeconomic stability is firm. The only caveat Is that theforthcoming parliamentary and presidential elections could test its resolve to pursue prudentmacroeconomic policies. On the other hand, its ability to actually implement structural measuresin a number of areas will remain limited for some time to come.

1.52 Issues for Board Consideration. The Board may wish to focus on the following issueswhich are critical to assessing economic and social progress in Uganda:

o The maintenance of macroeconomic stability.

* Public expenditure prioritization.

o The attainment of balance of payments viability.

* The achievement of higher rates of saving and investment.

0 Improvements in governance and public administration.

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Part II. The Second Structural Adjustment Credit

2.1 Against the background of the recent CEM focusing on poverty, the proposed SecondStructural Adjustment Credit has as its theme poverty reduction through accelerated economicgrowth and rapid human resource development. To that end it will assist the Governmenw toachieve the following key objectives: further deregulation of the economy, focusing onliberalization of the cotton and coffee subsectors; completion of the divestiture of the CustodianBoard properties; further improvement in revenue generation; prioritization of public expenditure;and raising efficiency in the civil service. The following sections describe the main componentsof the credit. The reform program is presented in a policy matrix in Annex HI.

A. The Regulatory and Business Climate

2.2 The regulatory and business climate has greatly improved over the past five years. Thishas come about as a result of the following actions: import and export licensing was eliminated;except for a handful of items, import prohibitions were lifted; price controls have been abolished;export monopolies have been eliminated; a new Investment Code was introduced and the UgandaInvestment Authority created to administer the Code; the restrictive Industrial Licensing Act wasrepealed; the exchange and payments system has been nearly fully liberalized; and for all exportsthe requirement that export proceeds be surrendered to the central bank was eliminated.

2.3 In spite of the above actions, regulatory barriers still hold back private sector activity incertain areas. Removing these barriers will involve, in the main, legislative and institutionalchanges. The key issues which form the basis of the program being supported by SAC IH arediscussed below.

2.4 Further Liberalization of the Coffee Subsector. The opening up of coffee exports toprivate traders, with the support of ASAC, has had important beneficial effects on the economy.To start with, the availability of crop financing has ceased to be a problem since financing is nowprovided by the traders, their foreign principals or local banks, or some combination of thesethree, rather than by the central bank. Moreover, owing to increased competition for the crop,farmers are receiving prompt payment and somewhat higher prices in spite of low world prices.Consequently, they are showing renewed interest in replanting old coffee bushes, especially withclonal varieties. The Government has decided to reinforce this positive trend by removing theremaining barriers to the coffee trade. In January 1994 it removed the restriction on the methodby which exporters can sell coffee. Before then exporters were not allowed to sell coffee by anymethod other than by tender, unless the, transaction was prefinanced. At the same time theGovernment lifted the ban on road transport of coffee to the sea ports. This ban had meant thatall coffee had move to the coast by rail. In theory, the Government could have issued permitsfor road transport of coffee when the Uganda Railways Corporation (URC) proved incapable ofmeeting demand from coffee exporters but no such permits were issued. The result was thatURC had a complete monopoly on the transport of coffee to the ports. At the peak of the coffeeseason URC had been known to let exporters down by failing to move coffee to the ports in timeto meet delivery dates. The Government has also begun to deal with another restraint on thecoffee trade; that is, the floor price mechanism which allows the Uganda Coffee DevelopmentAuthority (UCDA) to fix minimum export prices below which traders cannot sell coffee. Givenreal competition in domestic procurement of coffee and a very liberal exchange and payments

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system, there is no longer any justification for the floor price mechanism. The Government will,as a condition of second tranche release, abolish the floor price mechanism. In the meantime theGovernment, in consultation with the private exporters, revised the formula used to calculate theexport floor price and started to announce the export floor price before 10:00 a.m. each day.To give exporters some flexibility in their marketing decisions, the announced floor price is kepta few US cents per pound below the price given by the formula. The Government also amendedthe UCDA Statute to restructure the UCDA and eliminate licensing of exporters. Prior to theamendment the Minister responsible for Trade and Industry appointed all the members of theUCDA Board of Directors, most of whom were civil servants. The new membership of theBoard is more representative of the industry. The ultimate goal is to turn the UCDA into anindustry-based organization. Licensing was abolished because it had served as barrier to entryinto the coffee export business. In place of licensing the Government will, by regulations madeunder the UCDA Statute, introduce a system of registration under which an exporter will pay aregistration fee and post a performance bond prior to commencing business. Issuance of theseregulations is a condition of credit effectiveness. The Government will also change UCDA's rolein export quality control to the training of coffee graders and monitoring of quality. Actualquality control will be the responsibility of the coffee processors. As a condition of erediteffectiveness the procedures governing the delegation of quality control authority to theprocessors will also be laid down through regulations made under the UCDA Statute.

2.5 Since 1990 the Coffee Marketing Board Limited (CMBL) has operated in a competitiveenvironment. Still, the Government wants to ensure that CMBL does not squander theconsiderable assets (estimated at U Sh 67 billion) that it accumulated as a parastatal. These assetsinclude warehouses in Mombasa, real estate in Kampala and the Bugolobi coffee processing plant.CMBL has suffered a heavy loss of market share (down to 40 percent compared to 100 percentthree years ago) without a commensurate reduction in its overheads. As a result, its coffeetrading activity is now effectively subsidized with profits from other activities, especially coffeeprocessing at Bugolobi. CMBL needs to disengage from unprofitable activities which havenecessitated cross-subsidies in its operations. The Government's medium-term objective forCMBL is to privatize it.

2.6 Liberalization and Revitalization of the Cotton Subsector. In the 1960s and early1970s, Uganda derived up to 25 percent of its foreign exchange earnings from cotton. Thepolitical, military and economic turmoil that engulfed the country between 1972 and 1986 wasaccompanied by a sharp decline of the cotton industry. The seed multiplication system collapsedand, with the rapidly declining crop size, seed for replanting became increasingly scarce. In thescramble for seed in the northern growing areas, the seed cotton and planting seed for the twovarieties, SATU and BPA, became mixed, with the result that some of the characteristics thatearned Ugandan lint a premium on the international market were lost. Not only was seed in shortsupply but mandatory seed dressing with cuprous oxide to prevent bacterial blight was not doneor was not done properly, leading to the breakdown of genetic resistance of both SATU and BPAto the disease. Moreover, the SATU-growing areas of the northeast which depended on workoxen to prepare land for cotton lost almost all the animals as a result of the civil wars and cattleraiding. Moreover, the late 1960s cotton ginning had become the monopoly of the cooperativeunions while the Lint Marketing Board (LMB) was granted a complete monopoly of the cottonlint and cotton seed trade.

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2.7 For a variety of reasons, including political interference, management standards in thecooperative unions and LMB deteriorated drastically. At present all but four or five of theeighteen cooperative unions are insolvent or nearly so. Another prime cause of their insolvencyis the heavy burden of debt that they owe to the Cooperative Bank, the Uganda Commercial Bankand LMB. The bulk of the debt was incurred for the purpose of rehabilitating the ginneries, butin most instances the work was never completed. LMB Is also indebted to foreign buyers ofcotton for failing to honor supply contracts. The management and financial difficulties of theunions and LMB led to a complete erosion of two of the key factors responsible for the earlierrapid expansion of cotton output namely, ease of marketing the crop at the village level and thereliability and promptness of payment. By the 1990191 season production had fallen from a peakof 467,000 bales in the early 1970s to 46,000 bales which accounted for about 6 percent offoreign exchange earnings. In the absence of a striking improvement in these two areas namely,ease of marketing seed cotton and promptness of payment, no dramatic production increases canbe expected. Recent efforts to revive the crop without addressing these issues testify to this;production has increased to only 65,000 in the 1992/93 season.

2.8 The Govermment has initiated actions aimed at improving the policy and institutionalframework relating to cotton production, ginning and marketing. It recently removed, de facto,the LMB's export monopoly by granting export licenses to four cooperative unions. In addition,some unions have started negotiating to sell or lease their ginneries to private investors.However, further measures are needed to foster competition in ginning and marketing of cotton.In this regard, the parliament enacted the Cotton Development Statute in January 1994; theStatute was amended in April 1994 to remove the provision which empowered the Minister toacquire a ginnery in the national interest. Among other things, this Statute abolished the unions'monopoly over cotton ginning and LMB's monopoly over cotton exports; eliminated licensingand other regulatory barriers; and established a new organization, the Cotton DevelopmentOrganization, whose main fiucdon is to regulate and organize cotton seed production, dressingand distribution. It is the Government's intendon to turn the Cotton Development Organization(CDO) into an industry-based organization as soon as the industry is strong enough to performthe relevant functions.

2.9 The revitalization of the ginning industry is critical to restoring a reliable, easy andprompt payments system at the farm level. This requires the emergence of ginneries which areunder competent management and are controlled by creditworthy operators. This in turn wouldmean alliances between private investors and the cooperative unions for the purpose ofrehabilitating existing ginneries, or green-field investments in ginneries by private investors. Inprinciple, joint ventures between the unions and private operators offer the best prospect ofrevitalizing the ginning industry in the short to medium term. However, the large overhang ofginnery rehabilitation loans constitutes a serious impediment to the striking of such alliancesbetween the unions and private investors. The debts originated from ADB and IDA loans whichthe Government passed on to UCB and the Coop Bank which in turn on-lent the funds to theunions. These loans, which were instrument in creating the present installed ginning capacityof 400,000 bales of cotton, are now nonperforming assets in the books of the two banks. Ratherthan wait for these bad loans to be dealt with under the Nonperforming Loans Recovery Trustto be set up under FSAC, the Government has decided to use the nonperforming ginneryrehabilitation loans as leverage over the unions to facilitate the striking of business alliancesbetween the unions and private investors. The plan is' this: the Govermnent, together with the

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Coop Bank and UCB, would enter into a business cum debt restructuring arrangement with anyunion which is ready to reorganize its ginning operations. For its part, the Government would,if requested, provide a union with technical assistance in preparing a business plan designed torestore financial viability within the medium term. Based on an acceptable business plan, theGovernment would agree to substantially write down the union's outstanding debt, subject to theunion meeting certain benchmarks.

2.10 In November 1993 the Government notified the unions and the creditor banks of theproposed arrangements for the restructuring of each union's ginnery business, which wouldprovide the basis for debt relief for the unions. The banks and interested unions have alreadysignified their acceptance of the Government's proposals. To prepare the way for therestructuring and debt relief the Government has, with the assistance of a firm of auditorsrecalculated each union's debt to the banks and LMB and the fair market value of the ginneries.As a condition of second tranche release the Government will take all necessary measures tofacilitate the transfer, by way of outright sale, lease, management or by restructuring, ofginneries with installed capacity of at least 100,000 bales to creditworthy and viable operators(see paragraph 20 of the Letter of Development Policy).

2.11 Review of the Investment Code. The Investment Code, 1991, was brought into effectin January, 1991 after having gone through a fairly long period of gestation during the latter partof the 1980s when the economic policy environment was still very restrictive. The mainobjectives of the Code are to provide favorable conditions for investment and to establish theUganda Investment Authority (UIA) to promote, facilitate and monitor investments and to advisethe Government on investment promotion policies. The establishment of the UIA and theabolition of the Industrial Licensing Act 1969 were among the measures supported by SAC I.

2.12 The Government has had three years of experience implementing the provisions of theInvestment Code. This experience has brought out a number of issues which need to be studiedand appropriate actions taken where necessary. As presently structured, the fiscal incentivesprovided under the Code (tax holidays and exemptions from customs duty and import sales tax)pose the danger of undermining the Government's efforts aimed at stepping up domestic revenuemobilization. In addition to having a negative revenue impact, the Investment Code creates a biasagainst labor and distorts effective rates of protection by providing duty-free access to plant andmachinery. Moreover, there are grounds for concern about the ambitions of the UgandaInvestment Authority: it has plans to establish industrial estates and construct a headquartersbuilding for its own use and for lease. Furthermore, the UIA's style of vetting of investmentapplications is so bureaucratic as to border on licensing. The Government has therefore agreedwith IDA to carry out the review of the Investment Code and UIA's activities, which will takeinto account the regional context within which Uganda must operate. Terms of reference forthe study have been agreed with IDA and consultants have been invited to submit proposals.Signing of the contract with the consultants selected to carry out the study is a condition of crediteffectiveness, As a condition of second tranche release the Government will consider, inconsultation with IDA, the recommendations arising from the study.

2.13 Decontrol of Petroleum Product Prices. Since FY89 the Government has implementedfill pass-through of import and local costs of petroleum products. It has also taxed petroleumheavily to encourage efficient use. In the case of kerosene, no firther increases in taxation are

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now contemplated, as it Is a preferred substitute for fuelwood. However, the Governmentmaintained price controls on petroleum products long after all other price controls had beenabolished. Given the liberal economic environment that prevails in the country the Governmentfinally lifted the controls on the prices of petroleum products with effect from January 1, 1994.

B. Divestiture of the Custodian Board Properties

2.14 In August 1972 Idi Amin expelled large numbers of Asians from the country by cancelingtheir entry permits and certificates of residence. By Decree No. 27 of 1973, the Assets ofDeparted Asians Decree, Amin vested the properties of the departed Asians in the Governmentand created the Departed Asians Property Custodian Board (DAPCB) to administer the properties.Furthermore, by the Properties and Businesses (Acquisition) Decree of 1975 (Decree 11 of 1975)Amin nationalized 53 properties and businesses. After the overthrow of the Amin regimeParliarm1ent passed the Expropriated Properties Act of 1982 (Act No. 9 of 1982), whose mainobject is the return of the properties to the former owners. However, for a long time, the lackof political will and the power of vested interests precluded any serious effort being made toreturn the properties to the owners.

2.15 Things have changed radically over the past three years. In 1991 the Governmentlaunched a serious effort to return the properties to the owners. The results have beenimpressive. Of the original 686 noncitizen claims for repossession of properties, 640 were foundto be supported by the requisite documentation and the properties were accordingly returned tothe owners. In the case of citizen claims, over 2,000 claims have been received by the CustodianBoard, of which about 1,860 met the documentation requirements and were approved and theproperties returned to the owners.

2.16 The return of a large number of expropriated properties to the owners is one of the mostpowerfil signals that the Government has given investors that Uganda respects property rightsand is serious about attracting investment. A number of the properties returned have alreadyundergone, or are undergoing, major rehabilitation. The Government has now embarked uponthe final phase of divestiture of the Custodian Board properties. To aid this process, a localconsultant prepared a report which clarifies many of the legal issues pertaining to the properties.

2.17 The final phase of divestiture involves a combination of repossession, compensation, saleand reversion of the properties to the landlords. With regard to repossession the Governmentissued in May 1993 a notice to all claimants, including those who had applied for compensation,inviting them to repossess their properties. In terms of this notice the deadline for filing claimsfor repossession was October 30, 1993. The properties remaining unclaimed after that date willbe disposed of in accordance with the law.

2.18 Repossession. Once the October 30, 1993 deadline for making claims for repossessionpassed the Government moved swiftly to complete the repossession exercise. All the citizen andnoncitizen properties with valid repossession claims have now been returned to the owners. Atthe request of would-be repossessors, the Government has given ciaimants whose documents areincomplete up to the end of April 1994 to furnish the missing documents to the Custodian Board,falling which their claims would be dismissed.

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2.19 Dbposal of Unclaimed Properties by Exercise of landlords' Reversionary Interats.One of the cardinal points of the law pertaining to the Custodian Board properties is that citizenproperties are not covered by the Expropriated Properties Act. The Government couldconceivably take over the properties remaining unclaimed after the October 30, 1993 deadline formaking claims by invoking the principle of bona vacantia, i.e. goods without an owner. TheGovernment has decided not to follow this approach. Rather it decided to allow the unclaimedproperties which did not vest in the state to revert to the controlling authorities (i.e. urban andtown councils) and other landlords. Accordingly, the Government announced in January 1994that the controlling authorities and other landlords are free to exercise their reversionary interestsin all the remaining unclaimed properties that are not covered by the Expropriated Properties Act.To aid the process of reversion, as well as the sale of properties and the settlement of noncitizencompensation claims, the Government classified the remaining properties into citizen andnoncitizen properties.

2.20 Disposal of Properties by Sale. As required under Section 8 of the ExpropriatedProperties Act, the Government must issue an Order to give notice of its decision to sell orotherwise dispose of the unclaimed noncidzen properties, including those for which compensationcla-rms are pending. Moreover, the properties to be sold must be gazetted and a Board of Valuersappointed as required by Section 11 of the Regulations. The Government issued the Order to sellin January 1994. It also gazetted the properties to be sold and appointed the Board of Valuers.

2.21 Properties will be sold by competitive tender. Prospective buyers will have 30 dayswithin which to submit sealed bids. A 10 percent deposit will accompany each bid. Once awinning bid has been announced the buyer will have 60 days within which to pay. Propertiesmay be offered for sale in lots. Properties that remain unsold after baving been offered for salemay be re-offered for sale a second time or allowed to revert to the controlling authority orlandlord, as is the case with citizen properties. The Govement has agreed with IDA on theprocedures that will govern sales of the properties. As a condition of second tranche release theGovernment will offer for sale all the properties covered by the 1982 Expropriated Properties Actthat have not been claimed by the owners or for which compensation claims are pending, takinginto account prevailing market conditions. The proceeds of sale of noncitizen properties 'whichare not the subject of compensation claims will be deposited into the Divestiture Account and willbe used to setde any other compensation claims against the Custodian Board.

2.22 Settlement of Compensation Clims. The Expropriated Properties Act does notspecifically provide for application for compensation but at the time the law came into force atotal of about 1,700 owners actually applied for compensation rather than repossession. At anyrate, in terms of Sub-section (1) of Section 11 of the Act, the Government is liable to paycompensation to noncitizens who choose not to apply for repossession. The Government acceptsthe obligation to pay compensation. Its policy is that the proceeds of sale of noncitizen propertieswhich are the subject of compensation claims, less a deduction of not more than 5 percent tocover sales expenses, will be remitted to the claimant. Every effort will be made to remit theproceeds of sale to the claimant within 90 days, once he/she has provided the necessary addressand account particulars. The Government has developed and announced the detailed proceduresthat will govern the setdement of compensation claims.

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2.23 Management of the Divestiture Program. In view of the fast-dwindling revenue baseof the Custodian Board in tandem with repossession and given the fact that the distinctionbetween citizen and noncitizen properties is now largely irrelevant to the repossession exercise,the Government replaced the Verification Committee and the Executive Committee by a smallcommittee of four members. Prior to this change the annnual bill for the two committees ran ashigh as U Sh 136 million, a cost which the Custodian Board could ill-afford. The Governmenthas taken other measures to control costs at the Custodian Board. It will continue to downsizethe Custodian Board to reflect the reduced level of activity.

C. Domestic Revenue Mobilization

2.24 Over the past few years the Government has taken a number of measures to bolsterrevenue generation. It has tried to exploit most of the available tax bases to the maximum.Thus, it has levied high rates of tax on the two products (beer and cigarettes) for which demandis fairly inelastic and raised tariffs on petroleum products to a very high level. Super petrol istaxed at 175 percent, diesel at 130 percent and kerosene at 90 percent. In view of the fact thatkerosene is an environmentally preferred substitute for fuelwood, no further increase in the rateof tax on this product is contemplated. Attempts have also been made to broaden the tax base,as illustrated by the enforcement of the commercial transactions levy and the Imposition of therental income tax. Furthermore, with assistance from the IMF, IDA and ODA, the Governmenthas devoted a great deal of effort to improving tax administration, culminating in theestablishment of the Uganda Revenue Authority (URA) in 1991. In spite of these and otheractions the tax base remains narrow and tax administration is still in need of improvement. Theratio of revenue to GDP increased from 5.8 percent in FY88 to only 7.2 percent in FY93. Thatthe tax base is very narrow is shown by the fact that almost 50 percent of total revenue comesfrom just four products namely, petroleum, beer, cigarettes and soft drinks. The challenge is tobroaden the tax base significantly while continuing to improve tax administration and bringingtax rates down in an effort to improve taxpayer compliance.

2.25 Broadening the Tax Base. The Government has continued its efforts to broaden the taxbase, as shown by the revenue measures introduced in FY94. The key measures that were passedin FY94 are:

o more effective taxation of rental income from real estate at a rate of 20percent on 80 percent of gross rent in excess of U Sh 840,000 perannum, regardless of the age of the property;

o elimination of the customs duty exemption provided under the InvestmentCode for construction materials;

* reimposition of a minimum 10 percent customs tariff on raw materials;

* imposition of a 10 percent customs duty on agricultural inputs, excludingfertilizers, pesticides and seeds;

a elimination of the tax-free status enjoyed by the army shop;

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o outright exclusion of certain goods (mineral waters, alcoholic beverages,tobacco products, motor vehicles of a cylinder capacity of 2,000 c.c. andabove etc) from eligibility for exemptions except wherebilateral/multilateral agreements apply.

2.26 lRationalizing the Tax Structure. The FY94 budget session of parliament also saw anumber of measures aimed at rationalizing the tax structure and improving the yield of varioustaxes adopted. With regard to income tax these were the key changes: the Government broughtall employment benefits and allowances into the tax net; increased the personal income taxthreshold from U Sh 600,000 to U Sh 840,000 per annum; lowered the top marginal rate from40 percent to 30 percent on personal incomes above U Sh 4.2 million; reduced the number ofpersonal tax brackets from four to three; and reduced the rate of corporation tax from 35 to 30percent. The sales tax on domestic goods as well as imports was simplified to four rates (0, 10,20 and 30 percent) compared to the previous rate structure with a top rate of 100 percent. TheGovernment plans to move to a Value Added Tax (VAT) in the medium term. The customstariffs were rationalized by elimiating the two top rates of the present six-rate structurecomprising 0, 10, 20, 30, 40, and 50 percent. The Govemment hiked the excise tax rates from50 to 80-100 percent on cigarettes and 80 percent on beer, and from 30 percent to 50 percent onsoft drinks. It also raised the maximum graduated tax (a local government tax) from U Sh40,000 to U Sh 80,000 per annum.

2.27 Improving Tax Administration. With the establishment of the URA, the institutionalframework for much more effective tax administration is in place. The URA now has the fullcomplement of tenior managers; it pays salaries which are very generous by civil servicestandards; and it is reasonably well supplied with motor vehicles and other equipment. Againstthis background, the URA is inteDsifying its efforts to improve revenue collection. One of thefactors hampering these efforts has been lack of a proper valuation system for imports procuredwith funds secured through the foreign exchange bureaus. With effect from August 1, 1993 theGovernment extended preshipment inspection to all imports valued above US$2,500 comparedto US$5,000 previously. This should facilitate the valuation of imports for customs purposes andbolster customs revenue collection.

2.28 The absence of a comprehensive taxpayer identification system has also impactedadversely on revenue collection. URA needs such a database to be able to monitor systematicallyand in a timely manner the status of each taxpayer's account; i.e. to determine whether or nota return has been filed, an assessment made, tax due paid or is in arrears, penalties and interesthave been applied etc. Moreover, a comprehensive taxpayer database is needed to facilitate theexchange of taxpayer information between one tax department and another. To address thisproblem URA has initiated actions to create a comprehensive taxpayer database and develop andinstall a system for assigning each taxpayer a permanent identification number. So far over10,000 taxpayer identification numbers (TINs) have been generated and assigned to limitedliability companies. In addition, personal TINs have been created for all government employees.The Government intends to complete the assignment of TINs to existing limited liabilitycompanies and individual taxpayers by October 1994.

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2.29 Tax Policy Formulation. The Ministry of Finance and Economic Planning needs a strongcapacity to formulate tax policies. Such a capacity is needed to continue the process ofbroadening the tax base, rationalizing the tax structure and making the tax system simpler, moreefficient, equitable and stable. The Government is reviewing the structure and staffing of the TaxPolicy Unit in MFEP with a view to strengthening it. The unit is expected to be restructured andproperly staffed by the end of FY94.

D. Public Expenditure Prioritization

2.30 In FY91 the Government began a process of expenditure prioritization, starting with therecurrent budget. It identified primary education, primary health care, water supply, agriculturalresearch and extension, and road maintenance as high priority programs. The selected programswere to receive substantial real increases in allocations in successive budgets. The allocationsin turn were to be protected from expenditure cuts when revenue collection fell short of theapproved estimate. In effect, the high priority programs were to benefit from automatic releasesof funds by the Treasury during the fiscal year.

2.31 The above approach to expenditure prioritization has had a measure of success. Thedesignated programs have benefitted from increased budget allocations and, except for thedifficulties experienced in the final quarter of FY92, allocations have been protected from cutsand releases made automatically. As a result, the repetitive budgeting that flows from revenueshortfalls is confined to programs that are not protected. This makes the task of budgetmanagement easier.

2.32 Prioritizing Recurrent Expenditure. With effect from FY94 the Government expandedthe list of high priority recurrent expenditure programs to include the Police Service, Justice andthe Judiciary, the Office of the Auditor General and Office of the Inspector General ofGovernment. The Government's policy is to continue to channel more resources into the highpriority programs, particularly those which provide basic social services. Allocations for the highpriority recurrent programs would be made after taking care of the following items which havefirst call on resources: wages, interest, amortization, domestic arrears, statutory expenditure,funding for the URA and counterpart funds for the core development budget. Against all thecompeting demands, the Government decided to channel about 60 percent (U Sh 11 billion) ofthe net incremental resources towards boosting spending on the high priority programs in theFY94 budget, to a total of U Sh 67.0 billion. In reflection of this, the share of the high priorityprograms in total resources after satisfying the first-catl demands on the budget would increaseto 41 percent from 39 percent in the previous year. As a condition of second tranche release theGovernment will release all the agreed recurrent budget allocations for the high priority programsin FY94 and for FY95 agree with IDA on the level and composition of nonwage recurrentexpenditure.

2.33 Rationalizing the Development Budget. Just as with recurrent expenditure, theGovernment has tended to spread its limited resources and implementation capacity thinly overa large number of development projects, some of doubtfil economic value. The shortage ofcounterpart funds to support donor projects and the slow implementation of projects stronglysuggest that the development budget has grown too big. The development budget is also toolarge in relation to the recurrent budget. Also, insufficient consideration is being given to the

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recurrent cost implications of new projects. Moreover, many projects do not fit into theGovernment's highest expenditure priorities namely, provision of essential infrastructure andmore rapid development of human resources. Accordingly, the Government has decided that,in a time of extreme scarcity of resources, it should concentrate on its core functions of:

a providing basic social services (basic education, basic health and watersupply) with broad impact;

e providing basic economic infrastructure (roads, with emphasis on feederroads, agricultural research, extension and disease control);

a protecting the environment; and

o mainting law and order.

2.34 In line with the above criteria, the development budget was divided into core and noncoreprojects in FY94. The core projects, numbering 160, are to receive full conerpart funding.The total FY94 allocation for government counterpart funds is U Sh 42.7 billion, of which U Sh33.2 billion will be for the support of core projects. The balance of U Sh 9.5 billion will supporta large nunber of noncore projects, many of which will receive only minimal releases ofcounterpart fiuds or none at all, and will therefore proceed at a slow pace or even come to asaundstill. For this reason, it is necessary that, with effect from FY95, the Government workclosely with the donors to start the process of terminating projects which no longer fit into itsdevelopment priorities. As a condition of second tranche release the Government will release infull the FY94 counterpart allocations for the core projects and for FY95 agree with IDA on thelevel and composition of the development budget.

2.35 Salay Enha t. Remuneration within the civil service continues to be characterizedby extremely low levels of basic pay combined with an inequitably distributed array of allowancesand nonmonetary benefits. Government has endorsed the recommendations of the Public ServiceReview and Reorganization Commission (PSRRC) for improving the transparency and equity ofthe remuneration structure and committed itself to a staged progression towards a level of totalemoluments that is commensurate with the qualifications, experience and responsibilities ofserving officers, subject to its own budget constraint. It recognizes that the introduction of asignificant real increase in the level of civil service emoluments is essential to the attraction,retention and motivation of suitably qualified personnel. Accordingly, it has increased the wagebill by 42 percent, from U Sh 62.5 billion in the previous year to U Sh 89 billion in FY94. Thisin turn has meant that the share of wages and salaries in total noninterest recurrent expenditurehas gone up to 27 percent in FY94 compared to 25 percent last year and 22 percent in FY91.Owing to the low levels of civil service pay, reductions in the workforce do not provide sufficientbudgetary savings to underwrite large increases in wages and salaries.

2.36 The bulk of the incremental resources available for civil service wages in FY94 (U Sh20 billion out of U Sh 26.5 billion) were used to improve salaries in the teaching service. Asa result, the salary of the lowest tained teacher on the U7 scale has roughly doubled to U Sh35,000 per month while that of his or her counterpart on U7 in the traditional civil service hasrisen by only 19 percent. The Government gave the teachers preferential treatment becaume it

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is keen to bring about early Improvements in education. It was, however, necessary to delay thepayment of the new salaries (not just for teachers but for all civil servants) until October 1, 1993in order to give the Ministry of Public Service time to remove overdue leavers and audit thepayroll of more schools and eliminate duplicate names and ghost teachers from the payroll.Preliminary results show that the Government has succeeded in removing from the teachingservice payroll a large number of teachers, most of them ghost teachers. Thus the number ofteachers on the payroll shrank by 15,417 between June and September 1993; based on the newU7 teacher's salary, this would translate into budgetary savings of U Sh 6.5 billion (which isequivalent to US$6.21 million) in a full year. Agreement with IDA on the FY95 wage bill andIts distribution will be a condition of second tranche release.

E. Civil Sevice Reform

2.37 The policy framework for civil service reform is derived from the analysis andrecommendations of the PSRRC which were presented to the Government in September 1990.Government reviewed the report and responded through Sessional Paper No. 1 of 1992 whichdefines the policy framework for civil service reform. The primary objective of civil servicereform is to strengthen Government's capacity to deliver services to the people. That means thatreform measures must foster the development of service delivery systems that are cost-effectiveand affordable within the resource constraints facing Government. The key issues in civil servicereform are rationalization and downsizing of the service; reform of remuneration policy andpayroll administration; restructuring of ministries and decentralization of governmental functions;and development and introduction of improved personnel management systems.

2.38 Rationalizing and Downsizing the Civil Service. The total number of ministries andself-accounting departments and offices was re-luced through consolidation from 34 to 21. FromFY89 a number of actions have been taken to reduce the numbers of civil servants. These actionsinclude: the elimination of about 40,000 ghost workers from the civil service payroll followingthe reintroduction of a computerized payroll for the traditional civil service based on verified stafflists; a reduction of the number of group (or temporary) employees from 110,000 to 44,000; andretrenchment of 6,339 established civil servants in June 1992, followed by the layoff of another7,469 civil servants in July 1993. All the retrenchees have been paid their severance packagewhich was more attractive than current pension benefits. A selective hiring freeze has been ineffect for a number of years. However, the freeze has not been entirely effective in controllingstaffing levels as new hiring appears to have offset some of the retrenchment that has occurred.

2.39 Over the past year the Government has achieved a furither substantial reduction in the sizeof the civil service. This was done largely through cleaning up the teachers payroll and sharplyreducing the number of group or "temporary' employees. introducing a voluntary redundancyscheme. The number of teachers was reduced from 115,912 in June to 100,495 in September1993. In the same period the number of group employees was cut by nearly 16,000. TheGovernment's intention is to absorb up to 13,000 of the remaining group employees into thetraditional civil service and abolish this category of staff altogether. The Government has alreadyintroduced a voluntary redundancy scheme which is expected to lead to the separation of another10,000 or more civil servants. The scheme includes safeguards against Government losing mostof its skilled manpower. Trimming the Government workforce is a necessary step towardsrationalizing the payroll and setting the stage for payment of a living wage. However, this effort

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has to be complemented by measures to address the payroll management problem. In this regard,the Government must accelerate the development and installation of establishment, staffing andpayroll control systems that offer protection against corruption of databases. In this way MPSwould be in a position to ensure that civil servants who have been laid off are no longer on thepayroll and ghost workers do not reemerge.

2.40 Monetization of Benefits. The purpose of monetization is to make fully transparent thepresent composition anid value of the remuneration package as a first step towards reform of theoverall structure of pay and emoluments. Monetization of benefits will contribute to efficiencyby reducing the overhead costs associated with the procurement, allocation, repair andmaintenance of houses and vehicles. It will also make the remuneration structure moretransparent. Monetization of benefits is not to be confused with salary enhancement; it is justthe cash commutation of an existing benefit as defined in the Unified Terms and Conditions ofService of the Uganda Public Service. These state, for exanple, that a civil servant will receivea housing allowance equivalent to 40 percent of basic salary. The cash value of this allowancefalls far short of what is needed to meet housing costs under current market conditions but theinadequacy of the allowance derives from the low level of basic salaries. As part of the processof monetization of benefits, all cash allowances should be consolidated into a single salary thatcomprises the total remuneration of a civil servant. The existing overall salary structure for thecivil service is characterized by excessive compression, particularly in the middle ranges of theprofessional and management cadres, and by extensive anomalies within and across ministries andservices. Reform of the existing salary structure should follow the monetization of benefits.

2.41 The Government has decided to divest itself of pool houses allocated mainly to seniorcivil servants (but not institutional housing units allocated mainly to staff of the police, prisons,teaching and health services). Civil servants occupying pool houses are to be given the optionof first refusal to buy the houses. The Government has also decided to abolish the transportbenefit which involves: (i) transfer, under the co-ownership scheme, of a government vehicle tosenior civil servants at a fraction (10 percent) of the cost, together with a fuel allowance of upto U Sh 500,000 per month; (ii) allocation of official vehicles for personal use; and (iii) allocationof pool vehicles to transport staff to and from work. In January 1994 the Government terminatedthe vehicle co-ownership scheme. The Government has also prepared and agreed with IDA animplementation plan for the divestiture of the pool houses, and "personal use" and pool vehicles.The monetization of the housing benefit (except for those accommodated in institutional housing),if done in accordance with the existing terms and conditions of service, would mean that the basicpay of eligible civil servants would be increased by 40 percent. Continued progress towards thereplacement of the housing and transport benefits with cash payments and satisfactory progresstowards the disposal of pool houses, personal vehicles and pool vehicles (except for a limitednumber of office-holders who are entitled to government housing and transport) will be jcondition of second tranche release. The pace of monetization of the housing and transportbenefits will be determined by the incremental resources that are available for wages and salaries.In applying the additional resources that will be available for wages in FY95, the Governmentwill give priority to the monetization of benefits. Since the salary structure that will emerge fromthe monetization exercise will look unduly compressed the Government will have to move quicldyto decompress this structure in order not to penalize those in the skilled and professionalcategories.

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2.42 Mnisterial Restructuring and Decentralization. A key aspect of civil service reformis ministerial restructuring. Assessments of the functions and staffing of ten ministries have beencompleted and the Government endorsed proposals for restructuring five of these ministries.However, on closer examination, it became apparent that the functions and total establishmentrecommended for the first ten ministries for which reviews had been completed do not adequatelyreflect the liberalized economic environment and the severe resource constraints facing theGovernment. In view of this the Government decided to carry out additional assessments, takinginto account decentralization initiatives underway, with a view to cutting out noncore functionsand activities and revising the staffing rationalization plans for the following ministries for whichreviews had been completed: Agriculture, Animal Industry and Fisheries; Trade and Industry;Works, Transport and Communications; Natural Resources. (he terms of reference for theremaining seven ministries/offices were amended to include a more rigorous examination of thefunctions and activities and preparation of an implementation plan). The Government thendecided on the noncore functions and activities from which the Ministries of Agriculture, Trade,Works and Natural Resources will disengage as well as on staffing levels commensurate with theredefined role of these ministries. Elimination of the noncore functions and implementation ofthe first-stage (i.e prior-to-decentralization) staffing rationalization plans for the ministries ofAgriculture, Trade, Works and Natural Resources as agreed with IDA will be a nditionosecond tranche release.

2.43 The Government has initiated decentralization of administrative authorities andresponsibilities to the district level. Conceptually, the central headquarters functions will bereduced to policy formulation, planning, inspection and the management of national programs.The framework for implementing the decentralization policy is outlined in the restructuringassessments of the ministries but more detail, together with a fuller costing, is needed before thebudgetary impact of this policy can be assessed realistically. What is certain is thatdecentralization will be costly in terms of developing the physical infrastructure at the districtlevel and, for some functions, in terms of staffing requirements. As the practical details ofdecentralization are worked out there will be a need to reassess the core functions and activitiesof the central ministries vis-a-vis the districts. Implementation of the decentralization policy hasstarted on a pilot basis in PY94, with thirteen districts allotted separate budget votes coveringrecurrent expenditure.

2.44 Improved Personnel Management and Establishment Control. The development andintroduction of improved systems for personnel and payroll management are essential elementsof the reform program. Efforts to develop a computerized personnel and payroll database wereinitiated in FY89. The principal operational legacy of these earlier efforts is the computerizedpayroll system for the traditional civil service, the police service and the prisons service. TheEstablishment and Staff Control System (ESCS), developed in MPS for the teaching service andmade operational in February 1993, represents a more comprehensive attempt to develop anintegrated personnel and payroll records system. The system is being used to establish controlover the teaching service payroll, by among other things, identifying and removing ghost teachersfrom the payroll. The extension of ESCS to the traditional civil service is in progress, and,reinforced by audit and verification procedures now being installed, will establish MPS controlover staffing levels and payroll changes in the various services. Another problem facing the civilservice is the breakdown of the system of staff performance evaluation. This is an issue thatneeds to be addressed.

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Part I. Ihe Proposed Credit

A. Credit Amount and Expected Cofinandng

3.1 The borrower is the Republic of Uganda. The borrower's program of reforms to besupported by the credit are set out in the Letter of Development Policy (LODP) in Annex I. TheIDA credit amount is SDR 57.8 million (US$ 80 million equivalent). Ihe credit would start todisburse in FY94 but it will meet the bulk of Uganda's import finncing gap for FY95.Additional Import financing for the program to be supported by the proposed credit is expectedfrom the EEC, African Development Fund, ODA (UK), the Netherlands, Japan and USAID.The proposed credit amount compares with US$125 million for SAC I and US$100 million forPSAC, representing a continuing decline in quick-disbursing commitments by IDA.

B. Tranching

3.2 The proposed credit will be disbursed in two tranches of approximately equal amounts.The first tranche will be available upon credit effectiveness. The second tranche would becomeavailable about nine months later, subject to satisfactory Implementation of the adjustmentprogram and fulfillment of the specific conditions for second tranche release. The programsupported by the credit is expected to be completed by June 1995 and the credit will close byDecember 1995.

C. Disbursement

3.3 The proceeds of the credit will be used to finance general imports, subject to a negativelist, and will be disbursed on a reimbursement rather than a replenishment basis. Expendituresfor goods procured under conuuct costing less than US$2,500 or its equivalent will not financedunder the credit. Procurement of goods costing less than US$500,000 or its equivalent may bedone on the basis of statements of expenditure. The Government has put in place a system whichgenerates the documentation required for reimbursement of prior foreign exchange expendituresfinanced through the commercial banks and the bureaus. The documentation to be submitted toIDA to justify expenditures out of the proceeds of the credit includes Form E, the customs biUlof entry and the final invoice, and where post-payment is involved, evidence of payment. Thenew disbursement procedures were introduced in the context of the unified interbank foreignexchange market which became operational on November 1, 1993. A number of reforms haveaccompanied the introduction of the interbank market. These include: the delegation of morepowers to authorized foreign exchange dealers; the application of a uniform set of regulations tothe commercial banks and the bureaus; and the transfer of transactions relating to oil imports andcoffee exports from the Bank of Uganda to the interbank market. With the implementation ofthe interbank market the Bank of Uganda ceased to auction donor import support funds.

D. Procurement

3.4 The credit will finance 100 percent of the foreign exchange cost (c.i.f. Kampala) ofgeneral imports, except those on the negative list. Imports procured under contracts of less thanUS$2,500 will not be financed under the credit. Procurement will follow standard BankGuidelines. Simplified international competitive bidding will apply to individual importtansactions worth US$2 million or more. Procurement below the ICB threshold by the privatesector and parastatals using import support funds conforms with internaionally accepted

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commercial practice. Government procurement is subject to Tender Board procedures based oncompetitive bidding which are acceptable to IDA. Procedures exist for ex post review ofprocurement documentation below and above the ICB threshold. Government continues to usethe services of an import inspection firm.

3.5 Financing of petroleum products will be limited to SDR14.5 million. Up to the end ofOctober 1993 the Bank of Uganda allocated foreign exchange administratively at the auction rateto each of the six oil companies operating in Uganda for the procurement of petroleum products.Prom November 1, 1993 individual oil companies have obtained their foreign exchangerequirements from the interbank market. The Government has decided in principle to move toICB for the procurement of petroleum products and is now examining the practicality of such astep.

E. Management, Monitoring and Accounts

3.6 Ihe Ministry of Finance and Economic Planning will have overall responsibility for themanagement of the program. The Government has established a Coordinating Group made up

of key staff from the ministries and agencies which will actually carry out the various proposedactions to be supported by the credit. This group has worked closely with IDA staff in thepreparation of the credit and will provide the focal point for the implementation of the program.The resident mission will play an important role in program supervision. The Government'scapacity to ma=inn adequate records and accounts in respect of quick-disbursing credits hasshown some improvement. It is therefore in a better position to comply with the standardcovenants relating to accounts and audit reports.

F. Conditionality

3.7 Prior to submission of the proposed Credit to the Board, the Government has, inter alia:

(a) abolished LMB's monopoly over cotton exports;

(b) abolished the cooperative union's monopoly over cotton ginning;

(c) agreed on the modalities for restructuring the cotton industry, includingtransferring a large part of the industry to private ownership;

(d) eliminatd licensing of coffee exporters and provided for registration only;

(e) restructured the Uganda Coffee Development Authority to increase industryparticipation;

(f) revised the floor pricing formula for coffee exports to introduce greater flexibilityfor exporters, removed the restriction on method-of-sale for coffee and eliminatedthe requirement that coffee be transported to port by rail only;

(g) removed the controls on pump prices of petroleum products;

(h) returned all remaining properties with valid repossession claims to their ownersand agreed on procedures for the sale of unclaimed non-citizen properties;

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(i) terminated the vehicle co-ownership scheme and agreed with IDA on a plan todivest 'personal use' and pool vehicles; and

(j) agreed with IDA on a plan to divest Government "pool" houses.

During the implementation of the program to be supported by SAC II the Government of Ugandawill pursue appropriate economic and financial policies in the context of an IMF-supportedprogram. In addition to keeping the macroeconomic program on track, the Government willimplement a number of actions as conditions of credit effectiveness and second tranche releaseof the credit.

3.8 Before the Credit becomes effective the Government will:

(a) Gazette regulations covering registration of coffee exporters and qualitycontrol of coffee exports.

(b) Sign a contract with the consultant selected to carry out the UIA studyto review the Investment Code and the operations of the UIA.

3.9 Before second tranche release the Government will implement these actions:

(a) Abolish the floor price mechanism for coffee exports.

(b) Cause all necessary measures to be taken to facilitate the transfer, byway of sale, lease, management or the restructuring, of ginneries withinstalled capacity of at least 100,000 bales to creditworthy and viableoperators.

(c) Review, in consultation with IDA, the recommendations of the studyrelating to the Investment Code and the operations of the UgandaInvestment Authority.

(d) Take all necessary measures to offer for sale (taking into account marketconditions) all properties covered by the 1982 Expropriated PropertiesAct not claimed by their owners or for which compensation claims arepending.

(e) Release all the agreed FY94 budget allocations for the high priorityrecurrent programs and for the core projects; and for FY95 agree withIDA on the level and composition of the wage bill, nonwage recurrentexpenditure and development expenditure.

(f) Continue to make progress in replacing transport and housing benefitswith cash payments and make satisfactory progress towards the disposalof the pool houses and personal-use and pool vehicles for civil servantsother than Judges, Ministers, Deputy Ministers and those entitled toinstitutional houses; and eliminate the noncore functions and implementthe first-stage staffing rationalization plans for the ministries ofAgrculture, Trade, Worls and Natural Resources.

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Part IV. Benefits and Risks

A. Benefits

4.1 After a number of years of somewhat uneven progress, Uganda has only very recentlybecome a very strong reforming country. It has achieved macroeconomic stabiliq bait needs tosustain it. It has implemented important structural reforms needed, principally, to spur growthand develop human resources. The credit will support a program designed to deepen the reformsthrough regulatory and institutional measures. It will contribute towards maintenance ofmacroeconomic stability by generating local currency counterpart funds for the governmentbudget. Until the Government's efforts to improve revenue generation start to show significantresults, these funds will be crucial to progress towards budgetary balance. By providing importfinancing while Uganda's own foreign exchange earnings remain depressed, the credit willpromote growth.

4.2 The specific actions to be supported by the credit will benefit Uganda in a number ofways. Improvements in the regulatory and business climate are intended to help unleash the fillpotential of the private sector as the engine of growth. The final phase of divestiture of theCustodian Board properties is expected to spark increased rehabilitation investment and reinforceUganda's pro-business image. Civil service reform is aimed at building a competent, results-oriented service without which the present ineffectiveness of government programs will persist.Sharp increases in domestic revenue are needed to underwrite not only civil service reform(salaries in particular) but also much higher levels of expenditure in the social and economicsectors, especially health, education and roads. Public expenditure rationalization will lead tomore productive use of the Government's own limited resources and the resources provided bydonors.

B. Poverty Category of the Proposed Opertion

4.3 The proposed operation has a strong poverty focus. First, on the production side, thecredit will support actions to revitalize the coffee and cotton subsectors. These two crops havetraditionally been important sources of cash income for smallholder farmers. The restoration offavorable conditions for the expansion of cotton output will be especially beneficial to thepeasants in the north and east, regions which have lagged behind the rest of the country becauseof the late cessation of rebel activities. Second, the credit aims to bring about improvements inthe social indicators by reforming public expenditure and shifting resources into programs(primary education, primary health, feeder roads etc) that benefit the poor.

C. Risks

4.4 There are both external and internal risks to the program to be supported by the credit.On the external front the risk lies mainly in the possibility of a fiuther deterioration of the worldeconomic situation and a worsening of relations between Uganda and her neighbors. Coffeeprices on the world market have picked up, partly in reflection of the decision by producingcountries to operate a stock retention scheme, but the risk of a furher slide in prices cannot beruled out. The best way Uganda can protect itself against such an eventuality is to promotenoncoffee exports vigorously. Uganda has no control over international developments but it hasdemonstrated a readiness to respond to external shocks. The political and military turmoil in

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some of the neighboring countries could spill over into Uganda and create pressures for increaseddefense spending. To forestall this risk Uganda is very active in promoting peace In thesubregion. On the domestic front, the main risks are a return to fiscal laxity in the run-up topresidental and parliamentary elections in 1994 and a weakening of resolve in implementingstructural reforms, especially those involving retrenchment and revenue generation. There will,no doubt, be strong pressures to increase government expenditure in the period leading up to theelections. That i the negative side. On the positive side, there is a much greater commitmentto fiscal prudence, and the central bank has become more vigilant in managing the Government'saccounts. Moreover, the merger of finance and planning has resulted in a more cohesive budgetmangement stucture. To reduce the risk of lost momentum on structural reform SAC II hassupported many up-front actions.

Part V. Recmmendation

5.1 1 am satisfied that the proposed Development Credit would comply with the Articles ofAgreement of the Association and recommend that the Executive Directors approve the proposedDevelopment Credit.

Lewis T. PrestonPresident

AtachmentsWashigton D.C.April 18, 1994

ANNEX IPage 1 of 17

Tesbom _ e \} Mof aC o' 1D ECOnOI Plmi

r-See470~S (10 Liurn) P.O. Sx 8147.Tdepwis WinO. ~~Kamp"la

tna~ mz . h I W 116 tA U rLanda.

April IZ,.1994.

Le(e of Deelopmet Pwolcy

Mr. Lewis T. PresronPridentInenaional Development AssociationlI8s H Seteet NWWasblngron, DC 20433USA

Denr Mr. Poeston,

1. As you know, the Govrnmen of the Nationul Resistance Moumn lauched in May 1987an economic rcovery program aimed at recomuemng our economy which had been devated bypoldcal and miliaryupheaval. ae Govem of Ugandapratthe sptprovridedbylDAIn the form of two Economic Recovey Craeds (ERC I and ERC ). an Agricurl SeoMrAdjustmet Credit (ASAC), a Strcmral AdJustmea Creft (SAC 1), a Fnanal Sector Adj'usmenCredk SAC) and severa investment credi. Our economic recovey prgm bas also amacudsubstata resource flows from the DI4F and other multilal and bilata donos. Iu November1992 we negotated the sixth PolUcyF ramework Paper (PM) coveing FY93-PY95 wh MDA and tWDO. On Novembe 22, 1993 the IMF exended the fouth amwaal under the ESAF to'ime 30, 1994.

2. In the long run we expect an increasing perenta of our foreign exchmp i be met from our own export earnings. However, we wn. In the medium tetm, coinue to rdy oDfripn assist to a significan ette Accordingy, by dhs la1tr the Govemen of Ugandareques frther assmnce from IDA iii suppott of the an phase of its stuctural adjusnmeprogram. The objectives of the program, Its a sco m o-da a the actio plannd for tent two or dhree yeas, which will be suppoted by-the Second SruC Ad*tmem Credit (SAC

m are dc ed below.

Objecdves of Eonomic Reform

3. Overte past six fiscai years our economy grew, o0 avage, by 5.7 pecn a yraw, whicmen ta pe capita income rosve by 2.8 percem per annum. This has, hower made only a smallden in povey: at US$170, avage per capta income remains very low. even by developilgcomtny sdards. Our oveidi onomic goal. theefore nains the reducdon of povey at afasoer pac. To this end weill seek to consolida macroeconmic sabiity, ster pivat seordevelopment and improve public socor W_r We conv.rced hat good 3 i anestal gediof dewopmem In etection of this e Govenmehas mrd *eedomof th

ANNEX IPage 2 of 17

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press and independence of th judiciay. We have an eleaed Parliamen A draft nationlWConstition is due to be debated and adopted by a Constituent Assembly in 1994. This will befollowed by parlilmenty and presidential elecdons.

Recnt Economic Adjustment Efforts and the Resuls

4. Over the pa%t eigbteen months we have accelerated the pace of maoconomic and strunralreform. As a result one key objective of economic policy has ftnally been ahievedi: btladon hasbeen brought zmder control. Year-on-year inflatiOn, Measured by chnges in the consm prcindex for Kaupa1aO has dropped sharply. In June 1992 it was 63 percent. A year lIter It was minus0.5 percent In March 1994 it edged up to 12.5 percen We reckon that undedying inflaion is Of*h order of 9.2 percent per annum. 'he sharp drop In oflaton Is partly explained by good weatherwhich resulted in bumper harvests which In turn ransated Io falling food prices. The main reason,however, is the tdgening of control over public axpendimre. This has meant limt peding eaumonth to the dometic revenue collected and the local currency generated fron sales of Importsupr finds. The success against ilation has brought greater exchange rae smbilty. Morcver,high rea interest tatu, couplb w tabl hgerare, seem to have aaCW large inw ofprivt funds into Ugnda.

S. While rening in inflation, we have pressed ahead with structural rdorms. Suffice It tomenton omly four of the notable actions that: we have aken recendy. Flrsty, we have retund over2,5w of the propeies oxpropriated by Amin in thfe ealy 1970s to fte owners. We are beginnto see major rehabiliion Invesments in a number of the properts repossased by the ovne, wiha resultan expansion of employment and income opportunities.

6. Secondly, we have conffnued die process of prioring public expenditur. he des tedhIgh priorm recurrent programs (primary education, primary heblth, wat supply, agicultmal

search and etesion and road mainenance) received increased budgetary alocatons FY9 andwer protected fom expendime cuts necessid by the shortfl in the local cmrency genated*om Import support fis.

7. Thirdly, we have completd faciWial reviews often miniss. Retruuig proposals forthese minist e being reviewed wkh a view to enuing dt Govermet miniie" amddepatmesu focus on their core functions. Over the past e _he months we laid Off about 40,000cii seaants; mny of these were ghost workers. In addilon, during FY93 we compled the Muphase of miittay demobiltadon which resulted in tMe s_reoTZ3,UUU so_otus kom the aTSonalResisancc Army. This will ald our efforts to further reduce defense expeture wbIch had alreadyrgone down frm 41 percent of reurrent expenditue in FY91 to 25 percent in FY93.

8. Fourhly, we have liberalized makes. Thus, we abolished the xpo moopolY enjoyYd bytheCofeMarkeiag Board. Wehavealso deld theforeignehagemad Weinoducedu kinubak tbreign exagema rket in November 1993. We now have pracdally no otols oncurt account osaIons. We have also made progress towards liberalizing ints rar; ratsas ether marktrdevxilned or linked t a moving average yield on treaSUY bills whi armaucdoned weekdy.

ANNEX IPage 3 of 17

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9. We believe that the benefits of stabiliadon cam stuctural adjustment bgS to show.We see signS of an upswing in private sectr confidence and in inves t The econowmy harebounded from the drought-induced recession of FY92: povisional data suggest tiu GDP grew by7.2 percent in FY93. Purditimore, from a very low base, nonoffee xport show sigs ofexpandig songly, although statistics tend to under-record this cagory of exports.

The Medium Term Program of Adjustment Meawres

10. Over thLe pasn six years we have adopted a wide range of structural polcies ta havo retedin the creaion of free markers and some improvemet in public sector zanagemet In spite of *Jsprogress, m;jor challenges remain. This means ha we must address th nex geneaon ofstructalcsmainu vigorously in order to susmln the recovy of output gmwth ad acceleate humanresource development. We see dure main areas as reqiring priority atention over the coming 2-3years. First and foremost, we recognze that the prvae ivestment rae (around 6 percent of GDP),while rising, is too low to provide a sound basis for faste econamic gow. Invnesmen Isconstained by low domesic saving but in some areas it is also hampered by lega and regultorybarriers. Under the program for which we are seek 3 DA support we intend to do away wh themelegal and reultry bariers. We know tha pivate insment wil also be stimulated by acdons tocomplete the divesdwe of the Custodian Board properdes and speed up the privataion of publicenterprises and we intend to Implement the required acdons as expidouly as posible

11. Second, we are awae that domestic savings remain inadeqtate compared to the performsancof most African counties- Tis constrains domesc investme whlch has to be oe engine ofg3owth. On the one hand, private savings are very low. On the o*er had, public sVIgP aXnegaive. The prae savings/GDP ratio is of th order of 6-7 pe¢ce Low priva svig alWctin part a lack of confidence In the financial system, coupled with the low m dio of theeconomy. In recogaition of this we will accelerat e impl on of the program supporaed bythe Financial Sector Adjustment Credit which alms at s h the finan sector. We wialso step tp our efforts to improve domestic revenum generation.

12. Third, we know that ecouomic growth is being held back by dequacies In the public SCrprovision of essential economic and social n cr. and devdopmeat of humn resources Weare addressing this consraint thmrugh fimter reorm of *e public serice and a more rigoroupriotftlation of both recurrent expediture and development exndlwdo

13. The rest of this letter elaborates upon the geneal tenor of th structurl reform measum aswell as he specific actions thar w plan to implement under te pwram o be suppored by theproposed Seond Stuural Adjument Credit.

M acroeconomic Sthization

14. We il adopt policies which wm assist us to consolidae the mac e stabiy thatis emerging. Thu means that we wil strive to keep Ihation low and stable. Our aim is m to anowavage Intox to exceed 7.5 percem In FY94 an 5 peren in the followIqg yW. At the sametime we wil aim to achieve a real GDP gowth re of at lent 5 percen. main irediea Inour trate for maintaining maooic abily am reducing he ovea fil dck a mossustainable lewel; steadily improvng our external paymeans posion; keepirg monGW7 eqNsioncoisisten with noninflatiouary growth of GDP; and m iag a competii eange rtO. Ouremnomic A financial polities for FY94 are being monitred by the IP pin8 the ePPropria

ANNEX IPage 4 of 17

peformance crteria and souctural benchmarks in the context of the extended fourth annualarrangement under the ESAF. We will bave an economic and financial program with the IMFcoverin FY95.

Private Sostor Development

15. We have come a long way in improving the incentive framework for production andremoving regulatory barriers to trade and Investment. This is shown by the fact that we eliminatedImport and export licensing; did away with import prohibitions, except for a handful of items; createda very liberal exchange and payment sysem abolisbed all price contmls; eliminted domestcmarketing and export monopolies; introduced a now Investment Code and set up the UgadInvetment Authority; and repealed the Industrial Licensing Act. We will continue remove any legaland regulatory barrirs to trade and Investment that remain.

16. Dereulating the Coffee Subsector Further. Over the past three years we have opened upthe coffee indust to competition. with beneficial effecs on the economy. For one thing, theavailability of crop finance has ceased to be a problemr Moreover, because of compeiion, firuersare treiving not only higher prices (in spite of depressed world prices) but also prompt payment.In order to reinforce this positive tred we are taking addltonal measures.

17. Since the beginning of January 1994 we have taken the following actions. Licensing of coffeexporters baa bee replaced with a system of rgistratio, and we undertake tO promplte regulationsunder the amended 1991 UCDA Statute to cover registion procedures. As an nerim measeprior to ablition, we have reviewed, in consultation with the privae exportes. the price formulaused to calculate'the export floor price, made the price formula public and sare announcing thexport floor price before 10-00 a.m. ach day. To give exponers some flexibility, the announcedfloor price Is being kept up to 3 US cent per pound below the price yielded b:- the f*mula. It isexpected that during times of fatling prices. or backwardaton in the coffee futures mke, theflexibility margins will be set near or at 3 US cents per pound, but not less ta 1 US cet perpound. which is the flxibUity in pratice currenty granted by the UCDA. We have emoved therestriction on the method of export sale of coffee so that exporters are now free to sell by tender orany other method, and we have lifted the restriction on the mode of port of coff to t seapor. We also amended the UCDA Stue to make the UCDA Board of Dir mrprsentative of the coftee industy. As to te UCDA's rol inq ualit ontrol. wo rcoi atthe UCDA will contmiue to have overall supervisory responsibility while export processing plants wlhave diret responsibility for quality control. To this end, we will promulgate regulations under teamended 1991 UCDA Stat instiuting procedures for qualit assurance. We wll abolish th floorprice mechanism for cofle expot before March 1, 1993. We also plan to restmuture the operadonsof CMBL.

18. Revitalizing the Cotton Subsecor. In the 1960s and oarly 1970s wWaeived up to 25 percentof our export eanings from cotton. Owing to the politcal, milary and economic turmil thatengulfed the country between 1972 and 1986 the cotton industry sufferd a sharp dacline. Tha seedmultiplicatlon system collapsed, the seed cotton and plantig seed for the two varieties. SATU andBPA, becam mixed, with the result tha soum of the charaberistics that earnd Ugndan linr apremium on the interational market wer ios. Morever, the population of the work oxen nededfor land preparaion in the SATU-grwing areas of the northest w decimated by the civil wars andcatle raiding. Furthermore. by the late 1960s coton gining had become the monopoly of thecooperative unions while the Lint Marketing Board (LMO) was granted a complete monopoly of the

ANNEX IPage 5 of 17

- 41 -

cotton lInt and catton seed trade. For a variety of reasons management standards In the cooperativeunions and LMB deteriorated drastically. At present all but four or five of the eighteen cooperativeunions are insolvent or nearly so. A prime cause of their msolvency is the heavy burden of debt thatthey owe to the Cooperative Bank, the Uganda Commercial Bank and LMB. The bulk of the debtwas incurred for the purpose of rehabilitating the gineries but in most instances the work was nevercompleted. LM8 is also indebted to foreign buyers of cotton for failing to honor supply contracts.the management and financial difficulties of the unions and LMB led to a complete erosion of twoof the key factors responsible for the rapid expansion of cotton ourput namely. ease of marketing thecop at the villag tevel and the reliability and prompmes of payme nt.

19. Our aim is to improve the policy and instutiona frmework relating to cotton production,ginning awd marketing. To this end parliament enacted i January 1994 the Cotton Development Actwhich, among other thWngs, abolished the LMBs monopoly over cotton exports and the unions'moopoly over ginning. We are also taking steps to create the right conditions for th8 emergenceof ginneies which are under competent management and are controlled by creditworthy opertors.We will, if requested, provide a union with technical asssance in pearing a business plan designedto rstore financial viability within the medium term. Based on an acceptable business plan, theGoveruzuem would agree to substantially write down the union's outanding debt, subject w theunion meeting certain benchmarks. The union's part of the bargain is tht it must enter into a'agremet with private entrepreneur involving the lease, sale or joint veture operation of itsslawy, and, based on Its business plan, seure credit as needsc frm a commeil bank. The debtreief program is ential to reviving cotton production as the Insolvency of the majority of ginneiesrqrants a majot6'bottneck in the cotton production and marketing chain. By writing dovwi theloans the Government will give the unions or potential new ownes of tie ginneries a chance tocm re viability. We havs notified the unions and the creditor banks of the proposed arrangementsfor debt relief and ginnery rmructuring. The uniolhs Interesed In participating In the scheme andthe banks have signified their acceptwce of these arrangements. In the meantime we have takenstock of the debt owed by each union and agree on the modalities for debt relif with the unionz andthe creditor banks. Based on thde arrangements, the Government wilt, before March 1, 1995. takeall neceay measures to facilitate the transfer of ginneries with capacity of a least 100,WO bitesto creditwothy and viable operators through sale, leas: or manugomgetn contracts.

20. The fbllowing are the mesures that the Govanment will take to facilitate the transfer of atleast 100,000 bales of -inning capacity to creditworthy operators:

(a) engag auditors (financed under the proposel Cotton 5tbsector Devalopment Project)to determine the book value and fair value of the unions' debts to UCB, Coop Bankand LMB, the fair value in respect of the debt to UC8 and the Cooperative Bankbeing the value, on a going concern basis, of the gintales secured against such deb;

(b) the auditors will make recommendations to the AgriCultural Policy Committee (APC)regarding the extent of debt relief to be offerd (the relief being the differencebetween tbe book value and the fair value), and the terms and conditions of debtrelief, including terms of repayment of the written down debt;

tc) APC will recommend for the Finance Minister's approvl In principle the extent ofdebt writedown for each union;

ANNEX I

-42- Page 6 of 17

(d) the Minister wUl, where ncssary, seek the authorisatTon of the National ResistanceCouncil (NRC) for the debt relief to be offered to each union, including the relatedterms and conditions for such debt reliet

(e) upon NRC's authorisation, the Minister shall, in the first instance, make the offer ofdebt relief to the union conditions upon the unions' securing the required creditfaciities from flnancial isttatutfons, if needed

(t) each union will prepare a business plan for restucturing the manaement andopertaon of its ginnery. with assistance. If requested, from the Business AdvisoryServices (finance under the propod Cotton Project);

(g) unions which require credit fcilities will submit their business plans to lendingInstitutions; once the credit facility has been approved, a union wll submlt a formalrequest for debt relief to APC. A union which does not require credit faclities wil1submit a fomal request for debt relief, together with a business plan, direaly toAPC;

Qh) APC will recommend to the Minister the granting of the debt reie to the unionswhich have provided satisfactory evidence confirming compliance with the terms andconditions under which the debt rlief was oflrerod. For unions which do not requirecredit facilities, APC will review fbrmal request for debt relief based on satisfactorybusiness plans submitted by unions. and recommend to the Ministe the granting ofdebt relief to those unions;

(i) based on APCs recommendation, the Mnist will grant the debt relief to tXrelevant unions, with dhe provision thh the union catry out the businesslretrueringplan which is the basis of the debt relief.

(0 fthe Ministes approval of the debt relief in respect of a ginnery will signify thecompletion of aclions needed to fcilitae fte transfer of a ginnery int the hands ofcreditworthy and viable opaors, or the restructuring of the operations of tatglunery;

(k) where a union faUs tO seek debt relief within Z80 days fom the date of informing theunions of the arrugemena foc debt reisf the iuister of Finace as original ledWerwill request the creditor bank as subsidiary lenders and LB to demand fullrepayment of outanding loans by September 30. 1994. and t torwClose on defawtingunions by 31 December, 1994; foreclosure will signify coimpledon of the actonsneeded to facUitate the tasfer of a ginney into the hands of creditworthy and viableoperators; t

(O) in the event that any union will fail w caU out the business plan, including, whenrequited, entering into agreenent with commerciul baks and accesing credfacilities, we will withdraw the debt relief previously granted to That union.

21. Reeng .a Investment Code. The Invemeat Code, 1991, was brought into effect onJanuary 25, 1991 after having gone through a fairly long period of gesion during the latr part of

ANNEX I

-43 - Page 7 of 17

the 19Ws when the economic policy environment was still very restrictive. We now have a veryliberal economy and we plan to review the Code and the operations of the Uganda InvestmenAuthority. We bavs agreed with IDA the terms of reference for a study which will review theInvestmen Code and the operations of the UlA. We are currely in the process of selecting aconsultant to carry out the study. The Government will, before Match 1, 1995, consider, inconsultation wit IDA, the recommendations arising from the study.

22. Freeing of Petoleum Product Prics. Given the very liberal economic euvironment thatprevails in Uganda. there was no louger any justfficadon for continued coutrol of the prices ofpetroleum products. The Government therefore abolished price contols on petroleum products atthe beginning of January 1994. There are currently six petroleum companies operatig in Uganda.We expet them to compete.

23. Divestiture of the Remaining Custodian Board Properti In 1991 we launched a majoreffort to rexanm the properties t the owers. So far we bave retmed over 2,50 properties to theformer owners. The return of the expropriated properies to the owners is proof of our commitmetto upholding private property rights and attracting foreign investment. We have now embarked uponthe final phase of divestinzre of the Custodian Board properties. This phase will Involve acombiation of repossession. sale, compensation and revession of the propertes to the landlords. Atthe end of April 1993 we issued a riotice to all cla; ts, including those who bad applied forcompesation, inviting them to repossess their propeties. Ibc notice gave the former ownrs up toOctober 30, 1993 to repossess their properties. We have sinc returned all the remaining propertie(both ctizen and noncitizen properties) with valid repossession cdaims to the owners.

24. The properties that now remain unclaimed will be disposed of in accordance with the law.With regard to th* unclasmed citizen properties we have taken the position that since these propertiesweme never vested In the Government the be way of disposing of them would be to alow thelandlords to exercise their leasehold rights over the affcted land. We have, accordirgly, announcedthat the controlling authorities and other landlords are free to exercise their reversionary interet InaUl the remainiag unclaimed properties that are not covered by th Expropriated Propertis Act. Thatleaves the noncitizen properties (unclaimed or claimed for compensaon) which will be sold. Wehave already issued an Order in terms of Section 8 of the Expropriated Properties Act, giving noticeof Governmet's decision to sell or otherwise dispose of these properties. We have also gazem= theproperties to be sold; appointed a Bo3 of Valuers as required by Secton 11 of the Regulations; andagreed with IDA on thte procedures bat will govern sales of the properdes.

25. The properties are being sold by compedtive tender. Prospective buyer will have 30 dayswithin which to submit sealed bids. A 10 percent depoait will accompany aph bid. Once a winningbid has been announced the buyer will have 60 days wMitin which to pay up. Properties that rgmainunsold after having been offered for sale may be re-offered for sale a second time or allowed wrevet to the contrlling authority or landlord, as is the case with citizen propertis. We will, byMarch 1, 1995, offer for sale all the noncitizen properties that have not bal claimed or for whichcompensation claims ais pending.

26. In terms of Subsection (1) of Section 11 of the Act, the Governmme Is liable to paycompensation to noncitizeus who choose not to apply for rssession and we accept the obligationto pay compensation, We have decided that the proceeds of ale of noncitm propeties which aethe subject of compensation claims, less a deduction of no more than 5 percetm to cover sal;sexpeno, will be remitted to the claimant. We will make every efo to romi the proceeds of sale

ANNEX IPage 8 of 17

-44 -

to the clairnazt within 90 days, once he/she has pmvided the necessary address and accountparticulars. In October 1993 we bad announced the deiled procedures that will Sovem thesettment of compensation claims.

27. As repossession gathered speed, the rvenue base of the Custodian Board began to shrink fastTo take account of this development as well as the decreasing workload the Government replaced theVerificaion Committee and the Executive Committee by a small committee of four membera. TheCustodian Board has takeu other cost-saving measures such as eliminating unnecessary expenditurand limidng the size of the tender committee and the Board of Valuess.

ImIprovement of the PCsrfarmnce of the Public Sector

28. Our e*brts w nurture the private secwor must be complemented by rapid povemens in theperformance of the public sector. Our concer is with the public sector as the collector of taxes., theallocatr of resources and the implememer of projects and programs. Here we focus on the Issuesof domestic revenue mobilization, public expenditure priortizaton ad civil sevice reobm

29. Domestic Revenue Mobilization. Over the past few years we have tried to exploi mot ofthe available tax bases to the maximum, broaden the tax base and improve tax admnstration In1991 we set up the Uganda Revenue Authority (URA). With eftiet from August 1, 1993 weexteded preshipmeat inspection to all imports valued above US$2,500 compared to USSS,000uprviously. This should greatly faclitate te valuadion of Imports for csoms purposes and bolstercustoms revenue collection. In spite of these actions the tax base remains narrow and taxadrninLstration is still in need of improvement. The ratio of rvenue to GDP remais low: 7.6 prcnin FY93 compared to an avere of 20 percent for Sub-Saha African countries.

30. In an affort to broaden the tax base or at least roll back the sev erosion of the tax base weadopted and implemented, among other things, the following revenus mese at th stait of FY94:more effective taxation of rental income from real estate at a rate of 20 parcen on 80 percent of gosrent in excesS of U Sh 840,000 per annum, regardlems of the age of the propenr elimination of thecustoms duty exemption provided under the Investment Code for coamtcion maials; reimpostdonof a minimum 10 percent customs tariff on raw materials; Imposition of i 10 pecent customs dutyon atricultur4l inputs, excluding fertilizers, pestiCides and seeds; elimination of the tax-free statusenjoyed by the army shop; and outright exclusion of certin goods (minera wats, alcoholicbeverages, tobacco products, motor vehicles of a cylinder capactty of 2.000 c.c. and above etc) fomeligibility for exemptions except where bilateralfmultlatrl agreement apply.

31. We also introduced through the FY94 budget a number of measuris aimed at rationalingthe tax structure and improving the yield of various taxes. Wth regard to income tax we broughtall employment benefts and allowances into the tax net; inicreased thpersonal income tax tbresboldfrom U Sh 600,000 to U Sh 84Q,000 per annum; lowered the top maginal ae fm 40 percet to30 percom on personal incomes above U Sh 4.2 million; reduced the numb 4otpmonal tax bracktsfrom four to hree and reduced the rate of corporation tax from 35 to 30 prceu. The sales tax ondomwst goods as well as Imports has been simplified to four ratEs (0, 10, 20 and 30) compared toa top rate of 100 percent previously. We plan w introduce a Value Added 'Ta (VAl) In the moediumtarm. The customs tariffs were rationalized by eliminang the tw top rates of the preset six-ratstucturs comprising 0, 10, 20, 30, 40, and 50 percet We hiked the excise tD s fom 50percet to 80100 percent on cigarettes and 80 perct on beer, and frm 30 to 50 pert on oft

ANNEX IPage 9 of 17

drinks. We also raised the maxiJnum graduated tax (a local government tax) from U Sh 40,000 toU Sh $SO,OO pe annum.

32. We have also intensified our efforts to improve ta administa-don. The absence of acomprehensive taxpaye; identification system has Impacted advesely On revenue collection. URAne0td such a database to bo able to monitor systematically and in a timely manner the status of eachtaxpayer's account. To address this problem URA has initiated actions to creat a comprehensivetaxpayer database and develop and install a system for migning each taxpayer a permaent,idendfication number. URA is about complete the assignment of TINS to limited liability companie.It has already assigned TINs to ZI5,OOO Governmem employees by July 1993. It will comple theassignment of TINF to the remaining individual taxpayers by October 1, 1994.

33. We reognize that thse Ministry of Finance and Economic Planning needs a strog capacityto formulate tax policies. Such a capacity is needed to condnue the proess of broadning the taxbase, rationalizing the tax structure and maing the Ut; system simpler, more efficiet, equitable andstable. We are therefors reviewing the strcture and staffing of the Tax Policy Unit in MFEP wia view to saengthening It. We expect to have a restuctured and properly staffed unit in place byend of FY94.

34. Public Expenditure Prioritiution. In FY91 the Governmet began a proces of expenditrpriritizaon, statng with the recurrant budget. Primary education, primary health e, watersupply, agricultural research and extension, and road malnmuce woe identified as high priortyprograms, given increased allocations and protected fotm expenditwr cuts in tie of reveushortfals. With effect from PY94 we expanded the list of high priority recrrent expenditsprograms to include the Police Service, Justce and the Judiciry. the Office of the Auditor Gnerailand Offc of the Inspector General of Government. The Govenrent's policy is to contiue, tchanmel more sources into the high priority programs, particularly those which provide basic soSsevices. Agains! all the competing demands, the Governmem decided w chanel 60 peteut (U ShiI billion) of the net incremental rewurces towards boosg pending on the high priority programs

in FY94. This raised the share of the high priority progrums in tal resoucs (after satsfying thefrst-call demands on the budget) will go up to 41 percent from 39 prcent in the prvious year. Wewill reease all the agreed recurrent budget allocaions for the high priority progzams in FY94 andlfr FY95 agre with IDA on the recurrent programs to be classifled as higb priority and thebudgetary allocations for these programs.

35. Our approadh to development expenditure is the same as with recurrent expenditure,; th is,to prioriize. We recognize that the dgvelopmen budget Is too large in relation to the recurrentbudget and in terms of the ability to provide countepart fuids as weU as in Prms of implementatioUcapacity. To begin to prioritize we started in FY94 to divide the developnt budget in core andnonwore project (see attachment 1). The core projects, mmberng about 160, will receive fullcountepart fudiug. The total FY94 allocaion for governmt coumtpar thnds is U Sh 50 billioo,of which U Sh 32.9 billion will be for the suppor of core projects. The balace of U Sh 17.1 billionwill support a lae number of noncore projects, many of which will recovt only minimal releasesof countepa flads or none at all and will therdore proceed at a slow pace or even come to astandstill. With effec from FY95 we will work closely with the donors to start the procss oftrminatig projecs which no longer fit into our development pioriies. We wll also implemen thefollowing actions by June 1994: (1) release in full the FY94 counterpart allocaions for the corprojecs; (ii) agre with IDA on the core ptojects to be included in the FY95 deveIopment budget;

ANNEX I

-46- Page 10 of 17

and (iii) agree wlth IDA on the amount of counterpict finding to be provided for the core andnoncore projects in FY95.

36. We have continued the process of salary enhancement within the macroeconomic consu2intsimposed by our low revenue effbrt. For FY94 we increased the wage bill by 42 percent. from U Sh62.5 billion in the previous year to U Sh 89 billion. This in turn has meant that the share of wasand salaries in total nuninterest recurrent expenditure has gone up W 27 percent in FY94 comparedtO 25 percent last year and 22 percent in FY91. We have given priority to taOhers in the distributionof the incremental resources available for wages and salaries in FY94. Thus, the salary of the lowesttained teacher on the U7 scale has doubled to U Sh 35,000 per month while that of bls or hercounterpart on U7 in the taditional clvil service has gone up by only 19 perct We delayed thepayment of the new salaries until October I, 1993 in order to give the Ministry of Public Servicetime to audit the payroll of more schools to eliminate Shosr teachers from the payroll, delete duplicatnames and remove overdue loavers from the payroll. Before June 1994 we will agree with IDA Onthe FY95 wage bill and its distnrbution.

37. Civil Service Reform. The key issues In civil sevice reforn are rationaliloion anddownsizing of the service; reform of remueration policy and payroll administrion; restructuringand dectralizadon of ministries; and development and introduction of improved personnelmanagoment systems. We have already taken a number of actions to reluce the sin of the civilservice. We reduced the number of ministries and self-accounting departments and offices fom 34to 21. Iu addition. we had, by July 1992, eliminated about 40,000 ghost workers from the cvilservice payroll; reduced the number of group (or temporary) employees from 110,000 to 44,000; andlaid off nearly 14,000 civil servants. Since then wo have contnued to reduce the size of the civilservice. In this rezard, we have made good progress in cleanlng up the teachers payroll. with thermuit that the number of teachers declined ftom 115,912 in June to 100,495 in September 1993.Over the same period, we reduced the 8urber of group employee by over 15,000. We wilconsolidate our effrts to develop and instll establishment, stfn and payroll contol systems dtatoffer protection against corruption of databases.

38. In order further to reduce distortions in the salary stucture the Governmen terminated inJanuary 1994 the vecle c-ownership scbeme which allowed senor civil servat to owugovernment-procured vehicles at a nominal cost and provided a generouLs fuel allowance. In the samevein we have decided to abolish the transport and housing benefits enjoyed by cetan categorie ofGovermment employees. To this end we will by June 1994 continue to make progress in replacingtranWort and housing benefits with cash payments. Abolition of transport and housing benefits meausta the Government will divest itself of pool houses (as opposed to institutional bouses for the police,teachers, nurses etc) and the existing fleet of 'personal use" and pool vehiclel. We hwave agreed wihIDA on the modalities for the disposal of the pool houses, the peronal-ub vehicles and the poolvehicles. We will, by March 1, 1995, make substantial progress In divesdng of the pool houses andpersonat use and pool vehicles for civil servans other than Judges, Minister, Deputy Mlilsters andthose entitled to Government housing. I

39. A key aspea of 6wil service reform Is restucuring of minisnies. The Governmmnt hascompleted assmemnt of the finctions and staffing of ten minsries. We have bad to revis theres8uctuing proposals for the first five minisnies in the light of the liberalized ecnomicenvironment and the severe resource constraints f:mcing the country. aSed on this review we haveagreed with IDA on the noncore functions and activities from which the minlalss of AgicultuiTrade, Works and Natural Resources will disengage as weU as on tbestainS rationalzatIon planfor these ministies (Cae attachmem 2). We wil eliminate the noncor funcions aind implemet thefirst-stag (i.eprior-tv-decentralization) stffng rarionalizarionplans for the ministies of Agriculture,Tradc, Works and Natural Resources agreed with IDA by March 1. 1995.

ANNEX IPage 11 of 17

40, Tre development and introduction of Improved systems for personnel and payroll managementis an essential part of the reforn program. Effors to develop a computerized persomel and payrolldatabase wwr initiated In FY89 which have produced a computerized payroll system for thetraditional civU service. the police service and the prisons service. The Establishmemt and StaffControl System (ESCS), developed in MPS for the teacbing service and made operational in Februay1993, Is being used to establish control over the teaching service payroll, by among other things,idendfying and removing ghost teachers from the payroll. Before July 1, 1994 we will extend ESCSto the tnditonal civil service (already In progres) and to the police and prisons services.

41. We have embarked upon the deeutrulizadon of administrative autborities and rsponsibilitito the district level. Actual implemenaion of the decentralization policy started on a pilot basis inFY94, with thiteen districts allotted separate budget votes covering recurrent expenditure. As thepractical dtails of decenwalization are worked out there will be a ceed to reassess the core functionsand activities of the cental ministries vis-a-vis the districts.

COnclusion

42. In ordor to make progress in reducing povery Uganda needs to grow much fat. Towardsthis end, while maintaining macroewonmic stability, must make rapid proges toward Improvngthe social indicators. raising land and labor productivity in agriculture and expanding efficietindustrial production for the domestic market and for export. The progam tt we hve set out Inthis leatter will go a long way in helping us to acbieve these gals. In support of this progrm wehereby request the use of IDA resourmes in the form of a Second Stcrtunl Adjustmen Credit in theamount of US$80 million.

Yoms sincerely,

'. May Ja-QangIMuist of FInanct and Economic Planning

ANNEX 1- 48 - Page 12 of 17Attacbt..t 1

DEVELOPMENffUDGeTr 1iwo4 - PARTA - COiNON-CORE 1 f 5

II ,GrrII JJJEC 1 jJAnuG EUmaIMPIMENTYNG IiCooe IINAME IICORE IIWS3tU00a

AGq I - _- II - noct1t1On

0_ 2100.00

_ _ _ _ _ _~~~ ~~~~~~~ A_

I_W_ :NV__ONENT PF`1iCTOiL 40T E L-01 %-- s u ST) Cq~~ C v 4 k M. ZWN 33 &R

R INLAICPAL WC KWL oNVERVATON 5 T1. a 1~~~~~~~t RB a___"Joy - Ior

L:=~~~~~~~~~~~~~~~TO PLAN) I_ __~~~~AI TO ATrII 46,12Z

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_~~~~tw IME7EW _ I t O2 37WEN OIP-TFOFU WC=NF 6R I 123

510 ENER OWEOP S ME -i- S _~~~12 M IO SDID I _T j J- 70.00

~~~~~~-QF -SAA IE n* A KPO-JErof-~~~~~0 lFVv 5§5A_gM _ - c. Io

WT iNU WAFt AN SA-omHL __LA 441.17[4_ MOl!$ A} ~~~IFURAL %--r 320 875

0* --, IWICLWATe_R P OAO

NARo |AWI jpRICS R&-fW-NTN 1 37w

RncRIV -W DEEOPET - -2-67Fo9c9 "SISATACE TO UANA P=F-ORCE 1§c li * *wao

_~~~~~~~~~A 42 0.x11. ICOT 11 Vl <.

ANNEX 1-49 - Page 13 of 17

AttaC¶t 1

DEVELOPMENT BUDGET 1 tZM4 - PART A - COOJN0N-CORE02-F.b-94

FpRO..ECT j[PROJECT if liGOUIMPLEMENTING IGODE NACOR IIUShs-C

A-NCY- it a _ rll.aIcas

eFt07 IS .NO" IPN UGANDA REC3RNSUCI ION PRO 1l C S705.625

_________________N_A_IN ORM TIO 3__MM25.675

JUSII~~EN4O $18I ANCEY WOo- Mc C.NSTIT. A. . . M

FE' 'CE IIA6UANW I.5O _ tU77,SOIECO. PAIS. PAt4W(u .AAC INEILN 57S4

c d~~~~141v H WAZ3W M_T.TI 4,5-1750

- jI'zbtot ER P t 7 ao

TR~~'UE~~ AN~~ FAOO.

FNCE X -II0G16 ILAGE KATW uvSALT EA31BSLITES UO I t00

EC~~~~~ON PLA G6C IAA^ NVS ME4 C OPPN-At79.525

PAII 4.QFFEE -FAFHC SYSTEMWSMUKOPC

IA7Z(S) ISATIATCALYS DEEOPMENTS PS4.ZPAZC CALGUM AOMIS FANOMs HDSiYF I C I

AITCA I EAA ,I CaOgI 11OO

PAS1 W IISC 11NU C 11 19S 7

1PA025) ISTATISTCAL OEVEf-TASA C- I

TFMXANDIP0i WID6NER IES Mumm R MOM1 ;X

--- 1MA1tN IIUANAPHITINPQ31JHIGCO t II O0I PAt2W IGOi{T EZEUTIOt PROJET 4I I OM

lA5AC. H|PPULTI ENTECR MPA NENT 11V. I II Z91.2g5.. ~~~~~~~UWK ,,4Ti- ,, 11w

1 FUU ANDINU,|AG23(3 |IINEF S .EA0 TtiNPRJC

INU. l V420l3 I!¢AYLL.HL 5TCD.M FWONECT 2I13.00

ANNEX 1

-50- Page 14 of 17

Ee 3 of 5

DEVELOPME4TBUDGET i/4 - PART A - COfEINON-CORIQZ-feb-94

rPrSO.ECT I(PROECT ii [IOuIMPLEMENTING fIJODE JINAME j[C0 s Il(USt'0)

AGENCY.- t7W it Oll reafeca do@

W7s AGS lNVZTRY I 17 t15.000

IW SEAN IVA 4 1.72250, (A)6 l PREGVNIONA OF15 FOT IISE iQ>C .8,4Gi8) NIL F15OSCHP SR 9 if tlS7JOD

4G1 1 m . _ - ll =~~~~~~~~a.375242I I IAF F'6TOR HO'UJIMNG Pf0..E0t 0

IAGt I (E) I IiSH COMMOD SY S CX 37.62

IAG3t 2 lPAN AFRICAN RiINWERFESTUAMPAINIv

1t I~~~~~~~~MMUNISAT-ION EAST CoASr FE-VER I U 7i

_1 ILK I 5NO i3 .1 75_ iS 2 IttYE FiDOtVlEN DEr& -. _ A t2K

- l01 I M - I INE 'tO7V

~~~~~L~ N - 41.750

K25V 1CGA r;Q&w_ I {- 18t.375AG _ SC STEW O 24 aZ

_'~~~~IO w AtCLERLETN59 350=0

0 LTFtYPIR_ , C . _~~~~~~ l.90G31 rrWl 3 ll I GJ IMU IA C .==!

At331 - rsSs CONTROL I NtN BUU UlA D.C_ ,O

_ t31 (F) WHO UFFObTYTV CONSC-T -NW I4G C . -4.

. . IG~~~~~32 IISMBIUATIOO ssu-nlNKw^ IEC 1 1 19 3rm

--03 I1GSMAL SCATLE RR INr & SWAMP FROECT I I C 11 1

F536s IDEELPMCNTOF HOFITIULTIMP U4IUvST T f o.SjAG42(N lAfOO)ilC. ALEVINCENI%ImTBL 1 i 53S

Yk%50 rTRININ FCORt ANING PRAC C II il

I^GZ¢ 11ITAMA04A AV ESIII_ LO

g~~~~~~~~~~~~~~~~~~~U 1t 11 37

*vivR _SISA _itV SYTE I 30, , _,

LANDS,. HOUSINITZ4 IIDEV BrtUIlDlZNG MATS N1WIN AFRICA l C i5000

UR4eA EIV. iE i CET. SURVw } 40,X00

1151070L IINAMUWONGO UPFIRADJ & LOW COST MovaNG II _11 273F

--- ~~~~~~~FS 8; |VSUbtZ:; Ic 11 23.0,zs

EVUCATION~ ~~~lubam & Es-P5MIwIO F4K i,1 - 250

EDIUCAnON DaCAl) Fi-A9EWIMIURlF7MCSUC&N8 jlC--1-53,

aDqrc.EF IUTASStS vrEs-ql EV-AS -j OPK -9 15.qz

IAL EDUCATION I~ ~ ~~c 11 9.500

IStt C ISCHOO HEALT EDUCTIO LFMPROECT 12 _C_II _

_ol()_ FLA PflAR COU-7_ _.5liEM EJ.I-KMMll_"

ON* OF3_0_~~~~~~1 2_50

-51 - ANNEX IPage 15 of 17

At;.rmt 1

DEVELOPMlENT' BUDGE Ti14- PART A- CORE/NO.J4-CORe 4 02-Feb-94

jl 11 ll tI~~~~~~~~~~~JAnni"il Euimales(PRIOJECT J[PROJECT llrOcU

IMtPLEMNNG 11COOE JINAMIE 11COSE ICU$hsI'IXX

~~~~~~~~~~~~~~~I F P rgl u, anY

_~~~~~~~~~~~~~~~~~~~~ _- 210.7g_~ ~ ~~~~~~~DCTO PRJC -ifs _C 11 21t,6a5

I~~~ ~~ EDZ MM4NI -Y 11t OEIN S145( POPJLATIQN 6t FAMUIIw UFt. FO 9CDC)9 Z4.WO

. U1t03> -MEIA ATIJAL STALNUM I UQo

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H -104(B) IIMANIAGEMENT SUPPORT-HEATt UF4Y8T -t5 1250,= 7 = =~1 415 IA0 CON ORMEl!I1URVMIEC Cc 7 t8.01

__7 410gio(s) IAICS C O 8TO P ROG-ue eoo s. c . 1oor

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-~~~~~~~ADFML EM U.3=

~~~~~~~ _VTO LM __0RS7METSFem6,S

ANNEX 1

-52 - Page 16 of 17A4t-,-& t 1Fiw5Of 5

OVELOPMENWBUDGETlM3:4 - PARTA - COPEMON-CORrmOZ-Feb-94

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ANNEX 1Page 17 of 17

- 53 -

Attaehment 2

WoUIore 'unctions to be MliZinted and Extimated staffing Requi:smca*.

Ki=istry of Workx, TrZaSport and Cocmun4cazions

facil taztI.o, Lpotration and dlustcibution of t=ansport enipS=eut;road cOAStructLon, maintenance and _S-aI= (to be contracted out);priovisLon 4=zI mantna4s of ainstltutionaL hous4ig (to be contracted out);road mlatesa.Uce, cazapprcure=nt ¶p.nd maj.tsnauom of read onatruction equipment;facilitatLon of iiportation and diatribution of postal andtelecomunications equipment;ope catLon and matntenance of ferry fervi.cv (to be commerialized);development aad sohablitation of posts and teleemue.tions;maintenance and rehailitatiern o aeriromes (to be left to the CiviAviation Authority).

_euiuted sta.ffng requiemuents 6S4.

Ministry of Natural gesources

fclitatioLn of rehablitation of economically viable mines;determination of pump prices of petroleum products (to be left to marketfforces) feiicatiioAi and monitoring of importation and distribution of petroleumproducts;coordiAation of tha activities oJ the petroleuA companies.

estimated staffing requirement: 2,230.

Ministry of Trade and Zadustry

gui,dace of investors (to be left to OganduL Inesltment Authorltyl;provision of agricuLtural product price information (to be left to theMinistry of Agriculture);interaction wdth bNon-owernmental OrganizationS (TNGOS) Itrai=nig and advising of entrepreneurs;carrying out of promotional activLtles (to be left to Export PromotLonCouncil and JXZA).

est5.m&ted staf fg ru-L1.rement: 500.

Miristry of Agr_iculture, Ari.mnl Industry and Fissheries

fi;sh f admLn;;.young fa.-zs Progren

e*st_nate staffing requirements 6,667.

Page 1 of 7

UGANDA: SECOND STtUCTURAL ADJUSTMENT CREDITPOLICY MATRIX

________ a. SAIC Actmi Fromram and Schedul

1. Regulatory and Busines Climate. The objective is to facilitate private sctor developmentthrough fiuther dereg on and streamlining of investment promotion.

a) Coffee

Producer prices have been a) agree with IDA on fiuther coffee donelibenrized. subsector liberalization measures

relating to licensing, floor prices,Under ASAC a new transport to the ports, method ofcommercially-otiented export sales of coffee and themarketing agency, CMBL, stnre of the Uganda Coffeewas incorporated and the Development Authority (UCDA).export monopoly of CMBwas abolished, thereby b) amend the UCDA Statute to replace doneopening up coffee exports to licensing with a system ofprivate taders. registration of coffee exporters, and

restruture the UCDA.

Responsibility for crop c) revise the export floor price formula donefinance was shifted from the and announce the floor price eachcentral bank to commercial day.banks.

d) remove the restriction on the method doneA National Agdculal of export sales of coffee.Research Organization(NARO) was established. e) liberalize completely the transportation done

of coffee to the sea ports.

f3 Gazetteregulations covering condition ofregistation of coffee exporters and effectivenessquality control of coffee for export.

g) abolish the floor price mechanism. condition for secondtranche release

-56 - Annex IPage 2 of 7

UGANDA: SECOND SRUCTURAL ADJUSMENT CREDITPOLICY MATRIX

-Moultorable Actions.-?ut AdJueb*>ent Wort'SAC Aion PWgr : and Schedule

b) Cotton

Fixed maximum producer a) prepare appropriate new legislation on donepraes have been replaced cotton.by indicative prices.

Seed multiplication and b) obtain parliametay approval and donecotton production activities Presidential assent for the Cottonare being suppored by the Development Bill.IFAD-finaeed SmnaliholderCotton Rehabilitation c) tae stock of debt owed by each union doneProject. Complementary and agree with the union and creditorsupport will be provided banks on the modalities for ginneryunder the proposed IDA rercturing and debt relief.Cotton DevelopmentProject. d) take all necessary measures to condition for second

facilitate the transfer, by way of sale, tranche releaseFour cooperative unions lease, management or restuctuing ofbave been granted licenses ginneries with installed capacity of atto export cotton least 100,000 bales to creditworthy

and viable operators.

Draft legislation toliberalize the industry hasbeen prepared.

Some unions have initiatedefforts to sell or lease theirgineedes to private

.I operators. _ _ _ _ _ _ _ _ _

-57 - Amnex IPage 3 of 7

UGANDA: SEcoND STRucTuRAL ADJUSmNT CREnrrPOuCY MATRIX

. Monitot~~~~~~~~~~~~~~able ctn

c) The Investment Code

The Investment Code came a) agree with IDA on terms of reference doneinto force in 1991. and issue invitations for propoals to

consltants for a study to review tbeThe Uganda Investment Investment Code and the operations ofAuthority was set up to the Uganda Investment Authority.administer tie Code.

b) enter into a contract with consultans condition ofto review the Investment Code and effectivenessoperations of UIA.

c) consider, in consultation with IDA,recommendations of study of the condition for secondInvestment Code and the UIA. tranche release

d) Petroeum Pt,icus

Government has a) remove the controls on the pump doneimplemented full pass- prices of petroleum productsthrough of import and localcost.l

Govemment has also taxedpetroleum heavily toencourage efficient use.

Stting with FY94,Government has refrainedfrom raising the tax onkerosene which is anenvironmentally preferredsubstitute for firewood.

A study of the potentialbenefits and risks ofpetroleum procurementthrough ICB has beencompiated and Cabinetauthority to introduce ICBobtained

58- Annex s-Page 4 of 7

UGANDA: SzCOND STRCTRAL ADJUSlhlNX CRDITPOLICY MATRIX

2. Custodian Board TIh objective is to promot private sector developmant by completing thedivestiture of the properties.

Significant progress has a) advertise locally and abroad a cutoff donebeen made over the past de for reposession.two years in eurning theproperties to tie owners; a b) complete classification of properties donetotal of over 2,500 into citizen and noncitizen categoriespropertes have beenretued. c) develop and announce the procedures done

for the settlement of compensationclaims.

d) replace the Executive Committee and doneVerification Committee of theCustodian Board by a smallcommittee.

e) retu all remainig pperies with donevalid rpossession claims to theowners.

f) announce that tie controlling doneauthorities and odhe landlords arefree to exercise their reversionaryinterests in all remaining unclaimedproperties not covered by theExpropiatd Properties Act.

g) issue an Order giving notice of doneGovernment's decision to sell ordispose of unclaimed noncitizeproperties; gazette the propies to besold and appoint the Board ofValuers.

h) develop satisfactory slle procedures donefor unclaimed noncitizen properties.

i) tale llnecesymeasures to offer condition for secondfor sale (taking into account market tranche releaseconditions) all properies covered bythe 1982 Exropriated Properties Actnot claimed by the owners or forwhich compensaton claims are

I pending.

59- Annex IIPage 5 of 7

UGANDA: SECOND STRUCTuRAL ADJUShENT CREDITPOLICY MATRIX

________________ SACActloiiNogxiuu j M~iWtorable Atin.,X,, :D st~~~.;, ...... A W

3. Domestic Revenue. The objective is to improve the fiscal position through sgnificant increas inrevenue brought about by firther strengthening tax administration and broadening the tax base.

a) Tax Administration

The Uganda Revenue a) develop a comprehensive taxpayer doneAuthority was established in identification number system.1991.

ODA (UK) and IDA b) assign taxpayer identification numbers ongoingtechnical assistance is being to limited liability companies.provided to the URA.

c) assign taxpayer identification numbers ongoingto individual taxpayers.

b) The Tax Base

The coverage of the sales a) review tax and tariff exemptions. donetax was broadened.

The Government started b) agree with IDA on the exemptions to doneenforcing the commercial be eliminated or curtailed.trnsactions levy.

A tax on rental income was c) adopt and implement the proposed doneintroduced. FY94 revenue measures.

The Minister announced inhis 1993/94 Budget Speechmajor new revenuemeasues.

-60- Annex IPage 6 of 7

UGANDA: SECOND STRUCTuRAL ADjuwmENT CREDITPOLICY MATRIX

: ;@ Adjustment :'T SA .Action Wr~atn I ' ztotb1A to

4. Public Expenditure. The objective is to promote human resource development and economicgrowth by increasing and protecting the budgetary allocations for the high priority recurret programsin the economic and social sectors and by restructuring the development budget.

The process of increasing a) remove from the teachers' payroll doneand protecting the budgetary overdue leavers, duplicate names andallocations for primay ghost teachers; postpone the paymenthealth, primary education, of new salaries to October 1, 1993.water supply, roads andagricultural research and b) release all the FY94 budgeted condition for secondextension has continued. allocations for agreed high-priority tranche rolease

recurrent programs and core projects;To improve accountability for FY95, make satisfactory budgetaryand the administration of allocations for the wage bill, nonwagejustice, the Police Service, recurrent expenditure andJustice and the Judiciary, development expenditure.the Office of the AuditorGeneral and the Office ofthe lIspector General ofGoverment have beenadded to the list of highpriority programs.

Expenditure control hasimproved significantly.

Recommendations of thePSRRC for improvingtransparency and equity ofthe remuneration structurehave been endorsed by theGovetnmen

- 61 - Anmex nPage 7 of 7

UGANDA: SECOND STRucTURAL ADJUSMNT CREDITPOLICY MATRIX

: :: f I -I Montorable ACti; 1at tent et 4 SAC Acton Program d ce

5. Civil Service Reform. The objective is to improve public resource management and servicedelivery by creating a small, well-paid and well-motivated civil service.

Retrenchment has a) complete the FY93 retrenchment donecontinued, with 40,000 involving 7,500 established staff.ghost workers eliminatedfrom the traditional civil b) install a payroll validation system, ongoingservice, the number of including detailed instructions to linegroup employees reduced ministries on hiring, promotion, firingby about two-thirds and and retirement.14,000 established staff laidoff in the year to July 1993. c) carry out an audit of the teaching ongoing

service payroll to identify ghostThe functional review of ten workers.ministries has beencompleted and that of d) remove at least 15,000 group doneanother seven ministries has employees from the payroll.statted.

A teachers census was e) agree with IDA on the noncore donecarried out and the results functions to be eliminted by thehave been used to develop ministries of Agriculture, Trade,an establishment and staff Works and Natural Resources and thecontrol system as well as a first-stage staffing rationalization planscomputerized payroll for the for these ministries.teaching service.

f) terminate the vehicle co-ownership donescheme; develop a satisfictory planfor divestiture of pool houses andpersonal use and home-to-office

pool vehicles.

g) continue to make progress in replacing condition for secondtransport and housing benefits with tranche releasecash payments, and make satisfictoxyprogress towards divestiture of poolhouses and personal and home-to-office pool vehicles for civil setvantsother than judges, ministers, deputyministers and those entitled toinstitutional bouses.

h) eliminate noncore functions in the condition for secondministries of Agriculture, Trade, tranche releaseWors and Natural Resources andimplement first stage staffrationaLan plans.

- 63 -

UGANDA ANNEX M.l

BALANCE OP PAYMENTS(In millions of US Dollaii)

Exports GNFS 199 195 206 292 347 396 440Merchandise (fob) 176 172 157 218 266 308 345

o/w Coffee 127 117 104 132 159 184 203Non-Factor Services 23 23 49 74 81 89 95

Imports GNFS 592 753 830 902 973 1039Merchandise (cif) 5 r. 451 573 670 723 180 833

olw Petrol 8' 51' 53 56 59 63 68Non-Factor Services 126 131 180 160 179 193 206

Resource Balae

Net Factor Insome -58 -87 -49 -72 -64 -63 -63o/w Net Interest -9 -87 -49 -46 -39 -35 -34

Current Private Transfars 136 241 279 283 289 296

CIA Balance (exci Grn& 4 $ .s )2~Official Transfers (Grants) 220 -

Import Support 87 75 111 '0 48 48 30Project Aid 175 131 148 141 148 155 163

C/A Balace (mcl GOants) =_

Net M&LT Loans 122 38 '27 158 192 173 181Disbursements 214 163 231 266 276 258 266

Project Loans 115 94 148 141 148 155 163Import Support Loans 99 69 84 126 128 103 103

Repayments 92 125 104 108 84 85 85Foreign Investment/Kenya Comp. 1 2 4 7 0 0 0Short-Term, net -37 31 -43 -5 -12 -7 4Errors/Private Sector Holdings 0 1 0 0 0 0 0

Oven alanc

Fiancin.g: $. -2 -29Monetary Authorties

Gross Reserve Changes -15 -24 -39 -50 -109 -94 -68IMF, net 52 22 10 18 -26 -39 -56

SAF/ESAF and Purchases 89 55 28 26 0 0 0Other, net 0 0 0 0 0 0 0

Short Term/Commercial -2 -4 -4 0 0 0 0Change in Arrears 65 98 -330 -48 -232 0 0Exceptional Financing 1 28 370 40 327 115 112

Rescheduling/Cancellation 1 29 197 28 0 0 0Commercial Buy-Back 0 0 134 0 0 0 0Adjustment 0 0 39 12 0 0 0Residual Finance Gap 0 0 0 0 327 115 112

Memo Item:Gross Reserves (EOP) 15 39 77 127 236 330 398

in months ofimports 0 1 2 2 4 5 6

Source: Bank of Uganda and IMP.

- 64 -UGANDA ANNEXI11.2

EXTERNAL FINANCING REQUIREMENTS(In millions of US Dollars)

Requirements .

Imports GNFS 671 582 753 830 902 973 1039Scheduled Debt Service 188 245 171 162 148 159 175

Amortization 92 125 104 108 84 85 85Interest, net 58 87 49 46 39 35 34IMF Repurchases 37 33 18 8 26 39 56

Reserves Build-Up 1S 24 39 50 109 94 68

Available Fiunacing

Exports GNFS 199 195 206 292 347 396 440o/w Coffee Exports 127 117 104 132 159 184 203o/w Noncoffee Merchandise Exports 49 55 53 86 108 124 143o/w Non-Factor Services 23 23 49 74 81 89 95Private Transfers 81 136 241 279 283 289 296Other Items, net -38 -31 -43 -24 -38 -34 -25

Foreig Fiacing fromExisting Commitments

IMF Purchases 89 55 28 26 0 0 0Project Aid 291 225 295 282 252 233 212

o/w IDA Financing 84 65 79 75 68 60 52Import Support 185 144 195 196 131 90 40

o/w IDA Financing 85 65 56 65 65 58 0Exceptional Financing 1 28 370 40 0 0 0

Change in Arrears (-=increase) -65 -98 330 48 232 0 0

Financing Gap

Source: Bank of Uganda, IMF and saff esimates.

- 65 -

ANNEX lVUGANDA CAS TABLE 1

SELECTED INDICATORS OF PORTFOLIO PERFORMANCE ANDMANAGENME

Port/oio PerformnceNo. of Projects under Implementation 25 28 32 29Average implementation Period (years) 3.7 4.2 4.5 4.9

% Projects Rated '3' or W4"Development Objectives 16 18 13 10Overall Status 16 14 19 17

Average RatingsDevelopment Objectives 1.70 1.63 1.68 1.59Overall Status 1.96 1.96 2.10 2.00

Disbursement Ratio (%) 24.1 14.7 14.6 N/AMemorandum Item % Completed Projects Rated Unsatisfatory 37

Porolo ManagementSupervision Resources (total sws) 381.9 470.1 433.9 219.2Average Supervision sws/project 15.3 16.8 13.6 7.5

Supervision Resources by Location (in %)Percent Headquarters 91.9 90.9 95.0 91.3Percent Resident Mission 8.10 9.14 4.96 8.7

Supervision Resources by Rating Category(staffweeks/project)Projects rated or 2 15.7 18.0 15.0 7.7Projects rated 3 or 4 16.2 9.2 8.7 6.2

Memorandum item date of last CPPR 03/94

As of December 30, 1993.

-66-

ANNEX IVUGANDA CAS TABLE 2

BANK GROUP FACT SHEETIBRD/IDA LENDING PROGRAM, FY91 - 97BY SECTOR AND LENDING INSTRUMENT(% of Total Commitments/Disbursements)

IPA ~ ~ - .. .. :........< a

CommiunentB (US$m) 2762., 2=L4 Z500 L35)

Sector (%)

Ecnomio sm t 18

PubLic Sector Management 1 48 1 30

Poverty Reducion & Human Res. Devi. 31

Human Resource - - 23 19

Private Sector Devlosment 15

Indusy & Finance - 25 58 1

Environmentally Sustainable Dev. 36

inasructure 10 27 - 45

Power 45 -

Agriculture 4 -_ 1

TOTAL 100 100 100 100 100

Lending Instrument (X)

Ad,h?stment 1/ 37 48 45 31 10

Specific Inv.Loans & Others a la a 69 -v

TOTAL 100 100 100 100 100

Disbursements (US$m) 169 I13 -3 77 2/

Adjustment Credits 85 65 56 39 30

Specific mv. Loans & Others 84 65 79 38 70

Pnncipal Repayments (US$Sm) 2 2 4 2 2/

Interest Payments (US$m) 7 8 9 5 2/

1/ Includes IDA Reflows.2/ As of December30, 1993.

-67 - ANNEX IV

UGANDA CAS TABLE 3

POVERTY AND SOCIAL DEVELOPPMNT INDICATORS

*W* Se .rqkihrp N

Unit Of YOM Yom dma. Saaw, LOW iuaoewindtar geo (MM) Afaic noome goup

POVERTYUpper poVerty line loal cur. $,000Headcount index %ofpop. .. .. 30

Lower povaty line low aurr. .. .. 25.00Headcow index %ofpop. .. .. 10

ONPpercapita USS *- * 170 350 350 1,610

SHORT TERM INCOME INDtCATORSUnskilled u w lo . .. .. ..

Unskilled nmal wag'Rural tsm oft*r.de

Cnsunprice inWuex 1987-100 _ .. 815.Lower me 3.0nd,Food * .. .. 364Urban*.........Rural *

SOCIAL INDtCATORSPublic epew on be¢ soWil Su %oiGDP .. .. 6Gross aTiMeMal roatisPrimuy % dioolaVpop. 67 44 71 70 113 100

Male * 83 53 76 76 122 106POj. 4 30 35 63 60 106 98

Mortalityinfutmoality tgoUvLMbirt 119 111 118 104 70 40under 5 moaclity * .. .. 185 177 98 53

1mnwnizaionMeasles %a eMoup _ .. 60 40 73 70DPT .. .. 60 35 81 74

Cild malnuti (udw5) * _ 33 45Uife extocyTotal Yas 47 50 46 51 63 67

Fanaleri/als raio 1.05 1.04 1.02 1.06 0.95 1.08

Tow fetiltytn bib* per wm 7.0 7.2 7.3 6.4 3.7 3.5Ma;rd moraity rta 100,000 lUV. boam . 550

Population growth rate Infant mortality rte Primary enrollment(paceel) (thou. diitbiuiizs) (psaa

6+. 250 120+-

mit60 200 100

4 80150

3 6

2 4

0 tv': 0 ~~~~~~~~~& 0 r

mid60s aidd70s an add 60o mid 70a WAm mid 60a mid 7Os mm

CD Usarda-O Loincome

- 68 - ANNEX IVCAS TABLE 3 cont'd

Ugsnda: Resources And Expenditures

AMes Same ro group Mew23530 15.20 rect - Sub- Aighr

'nA Of YO yw, nam Sa4rdX LO- ico.wndicdaor 15*4* E 'aO (Me) AfO;i: inom group

HUMAN RESOVRCESPopuladon (nurl-P9l) thouaada 8,047 11.228 16,899 488,932 3,127.265 773,803

Age dependency n3io rraio 0.9, 1.00 1.06 0.97 0.66 0.71lueoan %of pop. 6.5 8.3 11.0 28.7 40.1 53.9Population rwtah Mte Annual 4.6 2.6 3.4 3.0 1.9 1.7

Ulrban 9.0 33 9.0 5.0 5.2 3.1

Labor fore(15_4) fthousands 3,949 5,331 8,385 203,947 1,448,104 302,442

AboiuttuS %oflaborfoce 91 U ...

ndustrY '3 4

Femnale 43 43 41 37 33 32Female per 100 males

urban ber.. .. ..

Rursa

NATURAL RESOURCESArea thou. sq. km 236 236 236 23.066 38,828 23-60

Density pop. per sq. km 34.0 48.0 67.0 20.0 77.0 31.0

Agricularal land %oflandares 33.4 36.1 42.6 51.0 47.4 41.8

Change in apicultal iand auwl % 0.0 2.0 0.0 0.0 0.0 0.0

Agricultural and under imptioc % 0.0 0.1 0.1 5.5 13.7 12.6

Fores and woodland thou.sq.km 63 63 56 6,651 9,197 ,396Deforestation(net) ulal% .0.1 0.1 4.9

INCOMEHousehold uncShate oftop 20%/oof housebolds %ofincoote .. 47 ..

Sham of bontom 40% ofhouebols .. 17 42Shae ofboten 20% of hsehol* .. 6 35

EXPENDITUREFood %ofODP .. .. 46.8Staples .. .. 25.3

a fis mi dheeseo e, .. .. 10.9Cereal impots thou. mebictm 44 6 7 7,238 36,008 44,41SFood aidinAerea *. 0 35 2,677 6,669 4,047Food prouion per capita 1979;1-100 109 140 97 94 122 101Fertilizer coonption k0h 1.0 0.0 0.0 14.5 47.5 94.2

Shar oficulte in GDP %ofGDP 48.6 66.6 48.4 29.2 28.7

Housing %ofODP .. .. 12.0Averge household size persm per heold .. .. _.

rban .. .. _Fixed invernen bousing %of0DP .. .. 2.6

Fuel and power % ofODP .. .. 1.7Enrgyconsumptionpa capita kgofoilequiv. 36 43 27 100 350 1,249Households with electicityUrban % otbousebolds .. .. ..

Rural .. .. ..

Transport and conmulatdon %of GDP .. .. 4.2Fixed inveasne aspot equipm' .. .. 2.6Total road length km .. .. 28,332

INV'ESTNIENT IN HUMAN CAPtrALHelthAccas to heath care % ofpop,. .. .. .

Population per physician palm 11,084 9,302 _*Population per rse 3,124 .. ..

Population per hospil bed 3 .1 607 1,248 1,328 1,048 509Access to safb woe %of pop. .. .. 21.0 36.7 70.6

St.ban . . _ 37.0 74.3 79.3Rural *. -- 18.0 24.2 62.8

Oral rehydyrstion trpy (undwr5) % of coo _ _ 15 35 32

EducadonGross enrollme rsioSecondary %ofschoolta pop. 4 4 13 18 44 56Feaale * 2 2 63 14 37

Pupil-techer raSio: primay pupils per tadr 35 34 35 39 39 25Pupil-teadcer ratio: sondy 19 23 1S .. 20Pupilsraclingpade4 %of , U8 .. 69.Pcster rue: pri%oimeroy .. 10 14 to .

Illiteracy %ofpop.5( I 3+) 62 SI 39Famale %of fen (ae 15+) . 65 62 52

Ne44cAlpaper ciulation per thou. pop. 8 7 2 5

Sotuce: World Bank Interetional Economics Depaqmag. Apdl 1993

ANNEX IVUGANDA CAS TABLE 4

KEY ECONOMIC INDICATORS

Natonal Accounts (as % of GDP at current MP - fiscal years)Agriculture (at FC) 55.1 53.8 49.8 48.5 49.4 47.3 46.8 46.2 45.6Industry (at FC) 9.2 9.5 10.8 12.0 11.6 11.8 12.1 12.4 12.7Services (at FC) 31.4 31.0 32.8 33.7 32.8 34.2 34.0 33.7 33.5Net Indirect Taxes 4.2 5.7 6.6 5.8 6.1 6.7 7.2 7.6 8.2

Total Consumption 106.1 105.3 104.0 105.9 104.5 97.6 96.9 96.4 95.8Gross Domestic Investment 10.3 12.2 15.2 15.5 15.3 15,8 15.9 16.2 16.2

Private 7.9 8.2 9.1 8.4 6.9 8.7 9.5 10.2 10.4Public 2.6 4.1 5.8 7.2 7.6 7.1 6.4 6.0 5.8Net Changes in Stocks -0.2 -0.1 0.3 -0.1 0.8 0.0 0.0 0.0 0.0

Exports GNFS 6.7 6.0 6.2 7.3 5.4 7.2 8.1 8.6 8.8Imports GNFS 17.1 17.7 22.9 24.9 23.2 20.6 20.9 21.2 20.9Statistical Discrepancy -5.9 -5.8 -2.5 -3.9 -2.0 0.0 0.0 0.0 0.0

Gross Domestic Savings -0.1 0.5 -1.5 -2.1 -2.5 2.4 3.1 3.6 4.2Gross National Savings 0.7 0.5 -0.8 -0.4 3.4 7.6 8.2 8.6 8.9

Memorandum Items:

GDP (US$ million at current prices) 5293 4365 3306 2830 3236 4033 4305 4583 4984

GNP per Capita (current US$) 332 265 196 161 182 220 229 238 252

Real Annual Growth Rates (96):GDP at FC 6.5 5.5 4.4 2.6 7.2 5.0 5.0 5.0 5.0Gross Domestic Income 7.3 3.4 2.8 1.5 7.0 6.7 5.7 5.7 5.9

Real Annual per Capita Growth Rates (%):GDP at MP 3.8 2.8 1.0 -0.5 4.4 2.9 2.7 2.6 2.8GDP at FC 3.7 2.7 1.6 -0.2 4.3 2.2 2.1 2.1 2.1Total Consumption 3.5 2.8 0.4 1.6 2.2 -1.2 1.6 1.8 2.1Private Consumption 3.9 2.0 1.0 -0.5 3.4 -3.7 0.4 0.5 0.3

ANNEX IVCAS TABLE 4 Cont'd

Balance of Payments (in US$ m - in fiscal years)Exports GNFS 304 246 199 195 206 292 347 396 440

o/w Merchandise, fob 282 210 176 172 157 218 266 308 345Import GNFS 712 676 671 582 753 830 902 973 1039

olw Merchandise, cif 562 584 545 451 573 670 723 780 833Resource Balance -408 -430 -472 -386 -547 -538 -555 -577 -599Net Factor Payments -67 -77 -58 -87 -49 -72 -64 -63 -63

o/w Interest Payments -66 -77 -58 -87 -49 -46 -39 -35 -34Net Current Transfers 114 78 81 136 241 279 283 289 296Current Account Balance (excl Grants) -361 -429 -449 -338 -355 -331 -336 -351 -366Current Account Balance (incl Grants) -230 -276 -188 -131 -96 -120 -140 -148 -173

Official Transfers 131 153 262 206 259 211 196 203 193Net Private Foreign Investment 13 6 1 3 4 7 6 7 8Net Long-Term Loans 125 215 122 38 127 158 192 173 181Other Capital (incl E&O) -11 12 -37 -31 -43 -5 -18 -14 -4

Finacing (- = increase):Change in Reserves (incl IMF resources) 18 10 37 -2 -29 -32 -135 -133 -124Other Financing -46 -119 -198 -83 -222 -220 -100 -88 -81

Memorandum Items:

Resource Balance as % of GDP at MP -7.7 -9.9 -14.3 -13.7 -16.9 -13.3 -12.9 -12.6 -12.0

Real Annual Growth Rates, 1991 PricesExports, GNFS -2.1 32.2 -16.8 9.0 5.8 26.7 13.6 9.0 6.0Merchandise Exports (fob) -0.4 25.0 -14.5 9.9 -8.4 20.9 16.2 10.0 6.9olw Coffee 2.6 -2.7 -19.3 6.7 -11.3 3.6 13.0 9.1 4.3Imports, GNFS 1.1 -7.4 -4.5 -16.0 26.5 8.0 5.4 4.8 3.8Merchandise Imports (cif) -0.2 1.4 -10.2 -19.9 24.2 14.5 4.7 4.8 3.8

Public Finance (as % of GDP at MP - in fiscal years)Recurrent Revenues 5.3 6.8 7.5 6.8 7.2 8.5 9.5 10.2 11.3Recurrent Expenditures 6.7 7.0 7.2 11.9 8.3 8.8 9.4 9.4 9.7Recurrent Deficit (-) -1.4 -0.2 0.3 -5.1 -1.1 -0.3 0.1 0.8 1.6Capital Expenditure 3.2 5.5 7.4 9.2 10.1 8.1 8.1 8.0 8.0Net Foreign Financing (excl Grants) 2.2 6.6 3.6 5.2 5.2 4.4 5.0

ANNEX IVCAS TABLE 4 Cot'd

. .... ... u ".0 X.

Monetary indicators (in fiscal years)M2/GDP 6.7 6.8 7.6 7.8 7.7 8.2Growth of M2 (%) 124.3 57.0 46.7 53.4 41.5 21.9Private Sector Credit/

Total Credit (%) 61.4 88.5 89.3 70.0 80.9 93.2

Price Indices (1991 = 100)

Merchandise Export Price Index 181.7 108.2 105.8 94.3 94.0 107.8 113.4 119.0 124.8Merchandise Import Price Index 92.8 95.1 98.9 102.1 104.6 106.6 110.0 113.2 116.5Merchandise Terms of Trade Index 195.7 113.7 106.9 92.4 89.8 101.1 103.1 105.0 107.1Real Effective Exchange Rate 207.1 179.5 112.9 91.7 90.7 .. ..

Real Interest Rates (using rediscount rate) -35.8 1.8 10.8 0.7 4.4 .. ..

CPI (Kampala) 48.3 70.3 87.5 124.4 159.7 175.0 187.8 197.2 207.0Change in CPI 130.5 45.4 24.6 42.1 28.4 9.6 7.3 5.0 5.0Change in GDP Deflator 116.3 44.2 24.0 46.8 32.9 9.6 7.3 5.0 5.0

ANNEX IVUGANDA CAS TABLE 5

KEY EXPOSURE INDICATORS

..

Debt and Debt Service Indicators (in US$ millios - infiscal years)Total DOD (imci IMF) 1903 2202 2478 2648 2643 2834 3095 3345 3582Total Disbursements (incl IMF) 305 334 303 218 260 292 276 258 266Total Debt Service Due (incl IMF) 240 197 188 245 171 162 148 159 175Stock of Arrears 95 150 378 644 280 232

DOD/Exports GNFS 626.0 896.2 1245.7 1357.4 1282.2 972.3 891.0 844.5 813.9DOD/GDP at MP 36.0 50.4 74.9 93.6 81.7 70.3 71.9 73.0 71.9DS/Exports GNFS 78.8 80.2 94.3 125.8 83.1 55.6 42.7 40.1 39.7

IBRD/IDA DS/Total DS 5.2 6.6 8.0 7.7 12.3 14.5 18.0 16.8 15.5IBRD/IDA DS/Exports GNFS 4.1 5.3 7.5 9.7 10.2 8. 1 7.7 6.7 6.1IBRD/IDA Portfolio Share 35.2 38.1 41.9 43.8 49.5 52.8 54.3 55.8 56.8 .

~~~~~~.ip

MIGA Guarantees - US$ m (in calendar years) 0 0 0 10 40 5Note: US$40 m in 1993 is a commitment only pending completion of specific requirements.

- 73 -

ANNEX IVUGANDA CAS TABLE 6

STATUS OF BANK GROUP OPERATIONS IN UGANDASTATEMENT OF BANK LOANS AND IDA CREDITS

(as of Dmber 31, 1993)

Thirty (30) credits fuly disbursed: 761.46

Cr.14340 1984 Uganda TAS I 15.0 0.0 (22.0) 2 2Cr.15390 198S Uganda Agricutiura Developmeawt 10.00 1.50 (11.7) 2 2Cr.15600 1985 Uganda Second Power 28.80 0.62 (34.6) 1 2Cr.lS610 198S Uganda Petrolewm Exploration Pro 5.10 1.41 (1.S) 1 2Cr.18030 1987 Uganda Fourth Highway 18.00 1.84 S.7 1 2Cr.18240 1987 Uganda Forstry Rehabiliton 13.00 1.16 6.6 3 3Cr.18690 1988 Uganda South West Ag. Rehab. 10.00 6.35 59.4 2 2Cr.18930 1988 Uganda Sugar Rehabtion 24.90 6.52 27.8 1 2Cr.19340 1988 Uganda Heath Rec. 42.50 14.03 28.7 2 2Cr.19510 1988 Uganda Tech. Asst. m 18.00 0.62 (9.3) 1 2Cr. 19620 1989 Uganda Publc Enterprises 1S.00 S.39 2.S 3 3Cr.19650 1989 Uganda Education IV 22.00 6.05 23.6 2 2Cr.19910 1989 Uganda Telecom U 52.30 9.4 17.6 2 2Cr.20880 1990 Ugand Poverty & Soc. Costs 28.0 9A 19.3 2 2Cr.21240 1990 Uganda Water Supply II 60.0 56.5 90.2 1 2Cr.21760 1991 Uganda Livestock 21.0 20.2 78.7 2 3Cr.21900 1991 Uganda Ag. Sector Adj. Credit 100.0 34.8 47.S 1 2Cr.22060 1991 Uganda Urban 1 28.7 22.3 52.4 1 2Cr.22680 1991 Uganda Power m 125.0 110.7 84.1 1 2Cr.23140 1992 Uganda SAC I 125.0 27.1 33.6 2 2Cr.23150 1992 Uganda Entrpris Developmen 65.6 64.6 41.8 3 3Cr.23620 1992 Uganda NorthernReconsuct. 71.2 67.1 (1.S) 1 2Cr.24180 1993 Uganda Econ. & Financial Mgt. 29.0 22.6 (318.1) 2 2Cr.24240 1993 Uganda Agric. Extension Prog. 15.8 13.8 100.0 1 1Cr.24460 1993 Uganda Agric. Res. & Trg. 25.0 23.6 0.0 1 1Cr.24930 1993 Uganda Primary Educ. 52.6 48.2 0.0 1 1Cr.24960 1993 Uganda Financial Sect Adj. Cr. 100.0 99.0 100.0 2 2

Tota 8.40 1882.99 674.67of which repaid 8.40 34.84

Total held by Bank & IDA 1848.15Amount sold 8.32of which repaid 8.32

TOTAL Undlsbursed 674.67

- 74 -

ANNX IVUGANDA CAS TABLE. 7

STATEMENT OF IO7C INVETMENT(As of December 31, 1993)

1993 AEP-Clovergem Canning Preserv & Process 0.85 0.00 0.851993 AEF-NGE-GE Canning Presrv & Process 0.65 0.00 0.651994 AEF-SKYBLUE Hotels & Restaurants 0.51 0.00 0.511985,1993 DFCU Development Finance Companies 0.00 0.98 0.981993 JUBILEE 0.00 0.10 0.101965 MULCO Spinnig, Weaving & Finshing 4.32 0.71 5.031984 TAMTECO Mfg of Food Produce NEC 1.62 0.00 1.621972 TPS Tourism Services 1.11 0.00 1.111984 Uganda Sugar Cocoa Chocolates, Sugar 8.00 0.00 8.001985 Uganda Tea Food Products NEC 2.81 0.00 2.81

Total gross commitments 19.87 1.79 21.66Less: Repayments, cancellations,

-.xchange adjudments,terminations and sales 9.16 0.71 9.87

Total Commitments now held by IFC: 10.71 1.08 11.79Total Undisbursed 2.01 0.00 2.01Tota Outstanding IFC 8.70 1.08 9.78

- 75-

UGANDA ANNEX V

STATEMENT OF BANK LOANS AND IlDA CREDITS(As of December 31, 1993)

g~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~---- --- -hirty (30) credits fully disbursed, 761.46of which SECALs, SALs and Program Loans/Credits a/

Cr. 12520 1982 Uganda Reconstruction Cr. I 70.00Cr. 13280 1983 Uganda Agdc. RAsab. 66.17Cr. 14740 1984 Uganda Reostruction M 50.00Cr.A0340 1988 Uganda Economic Recovery Credit 24.00Cr. 18440 1988 Uganda Economic Recovwry Crodit 65.00Cr. 18441 1989 Uganda Economic Recovery Crodit 1.70Cr. 18442 1989 Uganda Economic Recovery Credit 25.00Cr.A0341 1990 Uganda Economic Recovery Credit 12.80Cr. 18443 1990 Uganda Economic Recovay Credit 1.50Cr.20871 1991 Uganda Economic Recovey 11 2.00Cr.20872 1992 Uganda Economic Recovery n 1.60Cr.23141 1993 Uganda SAC I 1.40Cr.20870 1990 Uganda Economic Recovety Credit 125.00

Cr.14340 1984 Uganda TAS n 15.00Cr.15390 1985 Uganda Agricultual Development 10.00 1.50Ct. 15600 1985 Uganda Second Power 28.80 0.62Cr.lS610 1985 Uganda Petrleum Exploration Prom 5.10 1.41Cr. 18030 1987 Uganda Fourth Highway 18.00 1.84Ct. 18240 1987 Uganda Forestry Rehabitation 13.00 1.16Cr.18690 1988 Uganda South West Ag. Rehab. 10.00 6.35Cr.18930 1988 Uganda Sugar RAabgiltat 24.90 6.52Cr.19340 1988 Uganda Health Roc. 42.50 14.03Cr.19510 1988 Uganda Tech. mAt. M 18.00 0.62Cr.19620 1989 Uganda Publi terprises 15.00 5.39Cr.19650 1989 Uganda Educatlon IV 22.00 6.0SCr.19910 1989 Uganda Telecom U 52.30 9.39Cr.20880 1990 Uganda Poverty & Soc. Costa 28.00 9.40Cr.21240 1990 Uganda Water Supply n 60.00 56.47Cr.21760 1991 Uganda Livesock 21.00 20.21Cr.21900 b/ 1991 Uganda Ag. Sector Adj. Credit 100.00 34.76Cr.22060 1991 Uganda Urban I 28.70 22.29Cr.22680 1991 Uganda Power m 125.00 110.70Cr.23140 b/ 1992 Uganda SAC I 125.00 27.10Cr.23150 1992 Uganda Enterprise Deveopment 65.60 64.55Cr.23620 1992 Uganda Northern Recontruct. 71.20 67.05Cr.24180 1993 Uganda Econ. & Financial Mngemet 29.00 22.60Cr.24240 1993 Uganda Agric. Extension Prog. 15.79 13.84Cr.24460 1993 Uganda Agric. Res. & Trg. 25.04 23.58Cr.24930 1993 Uganda Primary Educ. 52.60 48.24Cr.24960 b/ 1993 Uganda Fnan Sector Adjustment Cr. 100.00 99.00

Total 8.40 1882.99 674.67of which repaid 8.40 3.84

Tota held by Bank A IDA 1848.15Amount sold 8.32of which repaid 8.32

TOTAL Undisbursed 674.67

a/ Approved after FY8O.b/ SAL, SECAL or Program Lon/Credit.

- 76 - ANNEX VI

UGANDA: DISBURSEMENT ISSUFS

1. As of end-December 1993, IDA's portfolio of disbursing projects in Uganda consistedof twenty-seven projects for a total commitment of US$1.09 billion, of which US$674.7 millionwas undisbursed. Over the last five fiscal years, the amount of undisbursed balances increasedat an average rate of 17 percent per annumr, from US$301 million in FY89 to US$564 millionin FY93. This was due mainly to a rapid growth in lending. Disbursements averaged onlyUS$68 million per annum during this period, with a peak of US$84 million in FY91. Thus, thedisbursement factor (ratio of disbursements during the fiscal year to cumulative net undisoursedbalance at the beginning of the fiscal year) deteriorated, falling from an average of about 20percent in FY89-FY91 to about 14.6 percent in FY92 and FY93. In the past couple of years,problem projects increased from about 16 percent to 19 percent of the portfolio.

2. The portfolio's modest disbursement performance is due in part to its relatively youngage structure, an average age of 4.8 years. However, as suggested by the disbursementperformance and the number of problem projects, there are also other factors which haveundermined implementation. These include ineffective project management and coordination, alack of counterpart funds, delays in the procurement of goods and services required under theprojects, difficulties with the use of Special Accounts and with submitting disbursementapplications, and poor financial management and compliance with audit requirements.

3. A Country Portfolio Performance Review (CPPR) in March 1994, organized and carriedout jointly by the Government and the Bank, addressed the main issues affecting projectimplementation. Action plans for addressing these issues were agreed and will be implementedover the next several months. An important aspect of these plans is a major effort to improvethe Government's capacity to monitor implementation of projects and take corrective actions whenproblems arise. Consultants are to be engaged to provide training in project implementation andmonitoring, and to recommend organizational structures and procedures for establishing aneffective monitoring system. In addition, the Public Expenditure Review (PER) currentlyunderway will agree on the "core" development projects to be included in the FY95 developmentbudget. These projects will receive full counterpart funding and will be protected from budgetcuts, should those become necessary. Moreover, on the basis of recent efforts to improveimplementation, culminating in the PER and the CPPR, IDA has initiated a comprehensiverestructring of its portfolio of projects. The remaining problem projects, including thosecategorized as non-core in the PER, are currently under intensive review and discussion with theGovernment with a view to restructuring or canceling them.