Uganda - Economic Recovery Program

Document of The World Bank FOR OFFICIAL USE ONLY /( 3 X (7C/ Z Report No. P-4625-UG REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIArION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 50.9 MILLION AND A PROPOSED AFRICAN FACILITY CREDIT OF SDR 18.8 MILLION TO THE REPUBLIC OF UGANDA FOR AN ECONOMIC RECOVERY PROGRAM August 19, 1987 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discbsed without World Bank authoizaton  CURRENCY EQUIVALENTS Currency Unit Uganda Shilling (USh) USh 1.00 = US$0.06 US$1.00 USh 60 US$1.00 = 1.27802 SDR a/ ACRONYMS APC Agricultural Policy Committee CIDA Canadian International Development Agency CMB Cotton Marketing Board DANIDA Danish International Development Agency EAC East African Community ICO International Coffee Organization LMB Lint Marketing Board KRA National Resistance Army ODA Overseas Development Administration (UK) OGL Open General Licensing PEC Presidential Economic Council PIE Public Industrial Enterprise Secretariat PFP Policy Framework Paper PMB Produce Marketing Board SAF Special Adjustment Facility SIDA Swedish International Development Authority UDC Uganda Development Corporation FISCAL YEAR Government: July 1 - Jtmne 30 a/ As of June 30, 1987.  FOR OFFICLAL USE ONLY UGANDA ECONOMIC RECOVERY CREDIT AND PROGRAH SUMMARY Borrower2 Government of Uganda Amountt IDA: SDR 50.9 millicn (US$65 million equivalent) African Facility: SDR 18.8 million (US$24 million) Termst Standard for IDA and the African Facility Proaramme Description: (a) Obiectives. The proposed credits would support policies and measures under the Government's Economic Recovery Program. Some of the policy actions which have already been taken include: (i) a currency reform unde. which one new Uganda Shilling would be equivalent to 100 old Ugandan Shillings; (ii) a 77 percent devaluation; (iii) increases in producer prices including coffee robusta (182 percent), coffee arabica (158 percent), seed cotton (375 percent), green leaf tea (257 percent) and flure cured tobacco (280 percent); (iv) increase in prices of petroleum products thus establishing parity with neighbouring states and, (v) doubling of the civil service wage bill as of June 1, 1987. Future actions include those reforms agreed to in the context of the Policy Framework Paper (PFP) in the areas of fiscal management; where the restoration of financial discipline is called for; money and credit where a key objective is to reduce inflation; the exchange rate, where there is need to maintain a realistic exchange rate for the Uganda Shilling and trade policy where the main in'tiative will be the introduction of a limited Open General Licensing System under which import licenses and foreign exchange will be provided freely upon request. Overall, the thrust of the policy reforms over the next twelve to eighteen months will be towards stabilizing the economy and thus creating a policy environment conducive to rapid growth with an efficient use of resources. (b) Benefits. The Recovery Programme aims at a growth rate of 5 percent per annum in the 1987-90 period. In its initial phase, the program is designed to reduce the rate of inflation significantly while referring to fiscal and external balances. The greater availability and increased efficiency in the allocation of imports will provide the main stimulus to industrial growth. In agriculture, the restoration of adequate price measures will provide the major stimulus for growth. On balance, the implementation of the Recovery Program can be expected to have a strong positive social impact and improve welfare levels in Uganda. The Government will have more resources to increase the provision of basic services, e.g. health, 'ucation and water supply. This document has a restricted distribution and may be used by recipients only in the petforma4ce of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  -ii- Riskst The Government is well positioned to impleauent the program. It enjoys broad based support; the security situation has improved and discipline is being restored in public administration. Moreover, there is broad consensus on the policy agenda on which the Government has embarked. This is fully supported by the Donor community as evidenced at the recent Consultative Group Meeting. Nevertheless, there are at least three risks which could debilitate the implementation of the program: (i) Government's implementation capacity; (ii) delays in supply response; and, (iii) the sustainability of the current relatively stable political situation. To offset these risks, an intensive supervision and monitoring schedule on the part of the Bank and the IDF will be maintained. On its own behalf, the Government has established a high powered Presidential Economic Council which will inter alia oversee the implementation of the Recovery Program. Financing Plan: (US$ million) IDA 65.0 SFA 40.0 TOTAL 105.0 Estimated Disbursements: The Credits will be disbursed in two tranches. The first would amount to US$60.0 million consisting of US$30.7 million from IDA, US$13.3 million from the African Facility and US$16.0 million from Special Joint Financing (ODA, UK). The second tranche would be available following a review in 9 January, 1988. Rate of Return: Not applicable.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT FOR AN ECONOMIC RECOVERY PROGRAM TO THE REPUBLIC OF UGANDA 1. I submit the following report and recommendation on a proposed De,elopment Credit of SDR 50.9 million (US$65 million equivalent) and a proposed African Facility Credit of SDR 18.8 million (US$24 million equivalent) on standard IDA terms to the Republic of Uganda to support the Government's Economic Recovery Program. PART I - THE ECONOMY 2. A report entitled Uganda: Progress Towards Recovery and Prospects for Development (Report No. 5595-TUG) and dated June 5, 1985 has been distributed to the Executive Directors. A summary of social and economic data is given in Annex IV. A. Background 3. At inm.ependence, in 1962, Uganda had one of the strongest and most promising economies in Sub-Saharan Africa. Despite the disadvantage of being a land-locked covntry, with favorable climatic and soil conditions. the agricultural sector was able to provide ample food to feed the population, as well as generate foreign exchange. Lven though agricultural exports were dominated by coffee and cotton, rapid progress was being made on developing new export crops, such as tea and tobacco. The industrial sector, although small, supplied the economy with basic inputs and consumer goods, and contributed foreign exchange through exports of textiles and copper. Uganda's transport system was regarded as one of the best in Sub- Saharan Africa, and through common services with Kenya and Tanzania (later to be formalized in the East African Community), Uganda shared access to an effective network of railway, port and airline facilities. On the energy front, the country was blessed with an abundant potential for hydro- electric development, a potential which was already being harnessed. Although school enrollment was still low, the country had developed a reputation for the quality of its education at all levels. 4. The initial years after independence clearly demonstrated the economic potential of the country. Real Gross Domestic Product (GDP) grew by 5.8 percent per annum from 1963 to 1970, implying an increase in per capita terms of at least 2 percent per annum. The country also was able to maintain a reasonable savings rate, averaging 15 percent of GDP, and permitting the implementation of a respectable investment program without undue pressure on domestic prices or the balance of payments. Although Uganda's export volumes grew slowly, at about 3.5 percent per annum, export  -2- earnings were more than adequate to cover import requirements and the country mai..:ined a current account surplus in most years. The Government's budgetary position was also basically sound. 5. However, starting in 1970, a decade of political turmoil and gross economic mismanagement radically changed the situation. Many of the best trained personnel fled the country, the parastatal sector became bloated with the addition of many abandoned or confiscated industries, and professional standards within the administration were seriously eroded. On top of this, the Ugandan economy was shaken by a series of external shocks: the sharp rise in petroleum prices after 1973, and the breakup of the East African Community in 1977. As a result real GDP declined by about 20 percent during the 1972-1978 period. This era of extensive economic, social and political destruction culminated in a war in 1979 to overthrow the regime, entailing further destruction and economic decline. B. Recent Economic Developments 6. The Ugandan economy proved to be resilient, however, and its capacity to rebound quickly from prolonged economic contraction was demonstrated in the years 1981-1984. During those years, economic growth accelerated in response to changes in economic policy, supported with considerable donor assistance, including assistance from the