Uganda - Agricultural sector memorandum (Vol. 1 of 3) : Executive summary

Report No. 10715-UG Uganda Agricultural Sector Memorandum (In Three Volumes) Volume I: Executive Summary March 3, 1993 Agriculture and Environment Operations Division Eastern Africa Department Africa Region FOR OFFICIAL USE ONLY V~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ MICROFICHE COPY Report No.: 10715-UG Type: (SEC) Title: AGRI CULTURAL coECTOR MEMORANDUM Aut,hor: COATS, J Ext. :34190 Room:J10069 Dept. :AF2AG )-- z 3 VOLS - - 0, 4 Doxam6t of the ;: Id Oink Thtscurei1bas a re5trcted distributJon and.may be used b'y recipients only in the performance of their official duties, fts contents may not otherwise be disclosed wil.aut World Bank authorization , b s , 4' ' s ' t :., , ' . .V  UGANDA AGRICULTURE SECTOR MEIORANDUM ABBREVIATIONS AND ACRONYMS AEL Agriculture Enterprises Limited AfDB African Development Bank APC Agriculture Policy Committee, Government of Uganda AS Ammonium Sulphate ASAC Agriculture Sector Adjustment Credit ASN Ammonium Sulphate Nitrate BCGA British Cotton Growers Association BOU Bank of Uganda CAN Calcium Ammonium Nitrate CBPP Contagious Bovine Pleuropneumonia CDC Commonwealth Development Corporation CMB Coffee Marketing Board CMBL Coffee Marketing Board Limited CPI Consumer Price Index DANIDA Danish International Development Agency DFCU Development Finance Company of Uganda DRC Domestic Resource Cost EEC European Economic Community EPADU Export Policy Analysis and Development Unit EPC Export Promotion Council FAO Food and Agricultural Organization GTZ German Agency for Technical Cooperation IDA International Development Association IDRC International Development Research Center IFAD International Fund for Agricultural Development IFPRI International Food Policy and Research Institute IMF Inteinational Monetary Fund LTC Land Tenure Center, University of Wisconsin MAAIF Ministry of Agriculture, Animal Industry & Forestry MCIC Ministry of Commerce, Industry and Cooperatives MPED Ministry of Planning and Economic Development MISR Makerere Institute of Social Research NARO National Agricultural Research Organization NGO non-governmental organization NICU National Inputs Coordination Unit NTAE Non Traditional Agricultural Exports OECD Organization of Economic Cooperation and Development PTA Preferential Trade Area SDR Special Drawing Right TAMTECO Toro and Mityana Tea Company UCB Uganda Commercial Bank UCA Uganda Coooperative Afliance UCDA Uganda Coffee Development Authority UDC Uganda Development Cooperation UNDP United National Development Program UNEP United National Environmental Program USAID United States Agency for International Development UTGC Uganda Tea Growers Corporation WFP World Food Program  Volume }: EXECUTIVE S Volume II: PREFACE I. AGRICULTUI A. Sectoral B. Agricult, Agr Agr C. Macroeconomi H. THE RESOURCE B A. Natural Resow Soils Farni B. Land Use Curren, Trends C. Land Use D. Forests.... E. Land Tenure Current, A Strate F. The Rural Po Consul Farr G. Rural Lab .q!:m The Lab H. RuralW I. Regional J. Social Ind MI. AGRICULTURAL A. Governme The F=Z Agr A-- o This document has a re |of their official duties. I  Page No. B. Farmer Cooperatives ..............,.,.,,.,,,,,... 51 Comparative Advantages .51 The Cooperative Societies Statute .52 Restructuring Primary Societies . ................................ 53 Union Restructuring . ...................................... 53 C. The Rural Financial System .54 Current Status . .......................................... 54 A Proposal for Reform. 5 D. The Supply of Agricultural Inputs .60 Chemical Inputs, Implements and Machinery: Current Status .60 Chemical Inputs, Implements and Machinery: A Strategy for Reform .61 Draft Power Use and Potential .62 E. Rural Infrastructure .64 IV. SOURCES OF GROWTH ..66 A. Market Prospects for Uganda's Produce .66 Traditional International Markets and Prospects. 66 Regional Markets .67 Domestic Markets .68 B. Diversificat:on and Expansion of Exports .69 Comparative Advantage and Competitiveness .70 Supply Response for Agriculture .71 Crop Returns .72 Coffee .73 Cotton .82 Tea .92 N..iitraditional Agricultural Exports .99 Food .104 Sugar . 111 Livestock and Dairy .114 Fish .120 V. AN AGRICULTURAL DEVELOPMENT STRATEGY .124 A. Previous Bank Strategy Proposals .124 The 1960 Bank Review and Recommendations .124 The Agriculture Sector Memorandum 1984 .125 B. The Macroeconomic Framework ..................... 126 C. Government Objectives for the Agricultural Sector .127 ASAC Letter of Development Poliq .127 Way Forward I ........ .......... ...................... 127 D. Lessons from this Review .129 Growth in Food Production .129 Expansion in Area Cultivated .130 Competition in Inte.-mational Markets .130 E. Structural Adjustment in Agriculture and Canstraints to Growth .131 Agriculture Rehaoilitation Project .131 Agriculture Sector Adjustment Credit .131 Constraints to Growth .132  Page No. F. An Agricultural Sector Strategy ................................... 133 Development Objectives and Priorities ........ 133 Short Term Strategy: An Export Action Plan ........ 135 Miedium-Term Agricultural Development Strategy ........ 137 G. Envi;onmental Impact of Agricultural Growth .......................... 145 H. The Alleviation of Rural Poverty .................................. 145 VI. IMPLICATIONS FOR PUBLIC EXPENDITURE AND GROWTH PROSPECTS .... .... 147 A. Public Expendi!-ire ........................................ . 147 B. Prospects for Growth in Agriculture ................................ 148 Food ....... 149 Export Crops ..... . ......................................... 151 Volume HI: Statistical Annex MAPS: Rural Population Density (IBRD 24185), Farming Systems (IBRD 24186), Administration and Infrastructure (IBRD 24187), Annual Rainfall (IBRD 24188), and Agricultural Areas (IBRD 24189). .. e .......... .. ....... ........ p~aW r B s fo~.Tewaz at-~da msit bt. ~S.L M~n~a ake, t. N.. Shi ....... ...... Wgral r.YS I z N.w.>. ...,.,..., _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..... Mv. L Xatunse, Pr. ~~~~~~~. T~~4km, X~~~~CLlsy~~~~Mr. ~~.N4 Xaxubanp, Mr 3. Ky.maqwa~. . ............. .... ~ ~ ~ ~ J~~ ~ 4 Mv. ~~~.~yi, Mv. U. ~~~~exuaku1a........... Tiryhik-.y Mr PLSbcle n.1.|=*$*l kao~ t1~Yg~M _ ,=rk, I5(ML=. ie~ 4 ~htos r  PREFACE Tbis report is the result uf a collaborative effort between the Government of Ugaida, and the World Bank. The Government team, crganized under the Agricultural Policy Committee, was coordinated by Mr. Lawrence Eturu of the Agricultural Secretariat in the Bank of Uganda. The collaboration of staff in the various ministries involved in supporting development in the agriculture sector, led by the Ministry of Agriculture, Animal Industry and Fisheries and the Ministry of Finance and Economic Planning, is gratefiriy acknowledged This report draw3 on two major Government/Donor reviews of the agricultural sector undertaken in recent years. The first was the Agricultural Task Force of 1986/87, which produced working papers on all aspects of t'ie agricultural economy. The second was the Working Groups exercise of 1989/90 which produced 10 papers on selected aspects of the agricultural sector, and underpinned the reforms supported under the Agricultural Sector Adjustment Credit (Cr 2190-UG) approved in December 1990. In addition, there have been sector specific studies used in the preparation of IDA operations in the Livestock and Forestry subsectors. The report synthesizes the findings of previous studies anl projects, !nd presents a vision of opportunities open to Government (and donors) for stimulating sustainable agricultural growth. The analysis uses a careful review of specific cases to make generalized policy recommendations. Firstly the stage is set for the analysis with a brief review of agricultural growth since independence, and a description of the macroeconomic framework (Section 1). The report then sets the parameters for action, with a description of the natural resource base and characteristics of rural Uganda (Section II). The analysis of constraints, and hence opportunities for change and progress, is woven into the detailed review of institutions and subsectoral performance. Thus, Section m provides a review of those institutions: Govermnental, cooperative, financial and private, which interact with the farming community and through which change can be promoted. Problem areas, and measure needed to overcome these problems are identified for each case. Similarly, in Section IV, the report goes through the review of each of the productive subsectors in agriculture. The section is labeled "Sources of Growth", because it looks into the problems affecting each productive sector, identifying constraints, and proposing measures to overcome these problems, and obtain growth. This section begins with an evaluation of export competitiveness and market potential. The limits to expansion and profitability are then established for each of the sub- sectors. The detailed review of the "micro" problems affecting each crop and animal product, then leads naturally to Section V, where the problems are categorized, general conclusions drawn, and priorities and sequencing established according to Government's development priorities, and the flexibility of the response from each sub-3ector. The sector strategy provided in Section V is the result of "sifting" the various measures available to Government to stimulate agricultural growth through a "sieve" of national priorities. The costs and benefits of the various various policies, rapidity of results, effects on the balance of payments, regional growth, rural poverty, the environment, are then used to formulate a short term, export oriented stratcgy based primarily on the revival : cotton production. The medium term strategy proposes a series of actions on a broad range of production and institutional issues. Effects on the environment, the consequences for the alleviation of rural poverty, and the potential increases in exports which could result from the strategy (Section VI), are then evaluated.  - ii - The short term strategy advocates continued efforts to regain market share in traditional exports: cotton, coffee and tea. While production margins are very thin, and international prices low, out analysis shows that Uganda due to its exceilent natural conditions, is a low zost producer of these products, and can compete in international markets, even at depressed prices, if processing and marketing efficiency is restored. There is need for a rapid restructuring and liberalization of the cotton ginning and export marketing industry. In coffee, choice of export routes should be liberalized. In tea, Government should divest itself of parastatal factories and estates, and conclude the Custodian Board review process, which is keeping a significant number of the estates out of production. These changes would generate significant increases in foreign exchange, and have a broad based income generatioli esfect in rural areas. At the same time, short term measures should be taken to support the process of export diversification, which can grow very rapidly, as experience with sesame and fish exports in recent years indicates. Priority should be given to dry goods such as sesame, tobacco, bides and skins, spices and other products which do not rely too heavily on specialized packaging, critical transportation timing, expensive cooling infrastructure, and a commitment to constant, standardized quality deliveries. In the medium term, the report argues that a series of measures are needed to support fiurther diversification in agricultural exports. Development of high value specialized crop exports will increase returns and taxable profits, and stabilize export revenue. Government's role in developing these new activities should be indirect. Its focus should be on reducing unnecessary regulation, improving transport infrastructure and telecommunications, and smoothing the responsiveness of the land, labor and financial markets to profitable production opportunities. In addition, to raise rural incomes and ease the growth in food production, Government should take indirect measures to improve migration into underutilized areas of good agricultural potential. Careful management of this process will be needed to minimize enviromnental costs. Growth in yields is another key element of the agricultural strategy. Many traditional food and cash crops face disease and husbandry problems. Experimentation with new high value crops will require a high class, responsive research and extension service. Continued support for agricultural research and extension services is argued for, as is the need to provide improved monitoring and regulation of the use of natural resources- grazing lands, forests and fish-as population pressures are exacerbated.  AGRICULTURE SECTOR MEMORANDUM FOR UGANDA EXECUTIVE SUMMARY Sectoral Background 1. Agriculture is the mainstay of the Ugauldan economy. Eighty-nine percent of the population is rural. The sector accounts for 51 percent of GDP (1991) and over 90 percent of exports, and employs 80 percent of the employed household population. Agricultural output comes almost exclusively from about 2.5 million smallholders--80 percent of whom have less than 2 hectares eachl. Only tea and sugar are grown on large estates, which total 40,000 ha. The predominance of smallholder farming implies that the benefits from sectoral growth will be equitably distributed. Income per capita in 1990 vas estimated at US$ 140 using the market exchange rate. 2. Food crop production carries the agricultural sector in Uganda--totaling 71 percent of agricultural GDP, with livestock products another 17 percent (average 1989-91). Export crop production is only 5 percent of agricultural GDP, the fisheries subsector accounts for 4 percent, and forestry for 3 percent. Only one-third of food crop prod.c.ion is marketed, compared with two-thirds of livestock production, and all export crop output. 3. Although the agricultural sector has grown rapidly in recent years-achieving a 4.9 percent average annual growth rate between 1986 and 1991--this should be seen in the context of the past twenty years. Economic development in Uganda since the early 1970s has been hostage to the effects of armed conflicts, the disintegration of public infrastructure and services, the collapse of Government regulation, and the uncertainties of high inflation and scarcities of foreign exchange. Agricultural output has only recently reached the levels achieved in the late 1970s. Indeed, if the average annual agricultural growth rate of 2.7 percent achieved between 1963 and 1978-a rate above the average for sub-Saharan Africa then-had been sustained through 1991, agricultural output would be about 26 percent higher than present levels. A s it was, agricultural output has grown at only 0.9 percent per annum since 1968. Total GDP increased at 0.4 percent per annum in the same period. With population growing at 2.6 percent per annum, GDP per capita has declined markedly. Lessons From This Review 4. As a prelude to proposing a strategy to support growth in agriculture, this section summarizes the main conclusions of this report, and lists the market and production constraints that determine Uganda's alternatives in its drive to promote growth and alleviate poverty. 5. Three main conclusions on the nature of past performance--and the possibilities for future expansion emerge from this report: agricultural expansion has resulted from the rapid increase in the production of food for a resurgent domestic market, the increase in food production has resulted from expansion in area cultivated, and the international markets for Uganda's traditional export crops have become much more competitive than in the early 1970s.  - ii - Growth In Food Produsdion 6. The engine of growth in the 1980s bas been the re-establishment of peace and security, combined with release of the foreign exchange constraint, rehabilitation of key infrastructure, and the adoption of free-market policies-including the decontrol of food prices and trade. This has resulted in an expansion in food production as production and marketing costs fell and the population tried to recapture consumption levels of the mid-1970s. Food production has been the lead sector in agriculture, both in 1980-83 and since the advent of the current Government in 1986. Trend growth in food production was 3.2 percent per annum for the decade, and 4.8 percent per annum since 1986. Since 1986, growth in agricultural demand has been led by the urban demand for food. The rapid rise in urban incomes-and demand-resulted in part from the refurbishment of Industries, services and Government, which was undertaken with high levels of donor support. 7. Food has become an attractive cash crop. For fifteen years-with the exception of the early 1980s and 1991 (Figure 40)-the relative returns c- s --duction of food versus cash crops has been above the levels of the early 1970s. Because r & to land is almost universal, wages needed to hire labor away from own production have risen as well. The rise of labor costs has squeezed profit margins on estates. With lower returns to export-crop production, farmers' time devoted to export crops has declined, affecting yields and quality. The main cash earners for rural families are now food crops or dairy products sold in urban areas, rather than the export crops of the 1970s. 8. One consequence of having food as the engine of agricultural growth is the dependence on the growth in domestic demand for continued impetus. Based on projected population and income increases (para 51) the domestic market is expected to increase at no more than 3 to 4 percent per year over the next decade. Much of the potential for growth through import substitution in the dairy, sugar, md tobacco subsectors has already been exploited. During 1991 and early 1992, the markets for " natoke" (banana.-the main foodcrop), milk, sugar, beef, and maize has been soft. And real for d prices have been falling in the last half of the decade, except for a sharp increase in 1989. If current levels of growth in the domestic market are to continue, the focus will have to be on raising rural incomes through technological change and increases in labor productivity, diversifying of export markets, and raising urban incomes through increased import substitution and processing of local raw materials. 9. Growth in agricultural output slowed considerably in 1990. From increases of 8.7 and 6.4 percent in 1988 and 1989, growth dropped to 2.9 and 2.5 percent in 1990 and 1991. The main cause of the slowdown was slow growth in food crop production, down to 2.5 in 1990 and 1.0 percent in 1991 from a high of 7.6 percent in 1989. Export crop GDP actually declined between 1986 and 1990 at -0.8 percent per annum, reflecting poor incentives for coffe6 production. A -harp recovery in 1991 brought the average rate of growth in traditional export crops since 1986 up to 3.6 percent per annum. In response to the incentives for diversification, fish products grew at 12 percent per year between 1986-91. The drop in growth in the food sector could have resulted from a several factors: completion of the reoccupation of the cultivated areas abandoned in the 1970s; the successful substitution for imported foods, such as sugar and milk; the saturation of the domestic market for food, given income levels; and the slow growth in incomes in nonfood sectors of the economy.  - iii W Table 1: Rural Population and Land Availabilit by District Area Avgo Area Required Percent Region Rural Cultivable Cultivated for 1991 Cultivable Broad and Pop'n Land Agea Density per Person Pop'n Land Usd Soil District 1991 il Kn1) 2/ 1991 (ha) 3/ (KQ ) in 1991 ClaS Central Mpigi 796 4,406 181 0.38 3,025 69% 1 Mukono 717 4,061 177 0.38 2,725 67% 1 Luwero q08 7,986 51 0.38 1,550 19% n Masaka 747 5,542 135 0.34 2,540 46% n Rakai 366 3,500 105 0.34 1.244 36% m Mubende 463 8,963 52 0.32 1,482 17% n Easwtem Iganga 899 4,489 200 0.328 2,949 66% m Jirza 208 619 336 0.328 682 110% n Kanuti 473 3,694 128 0.328 1,551 42% m Kapohorwa 112 1,064 105 0.386 432 41% a Kumi 225 2,454 92 0.787 1,771 72%f m Mbalo 645 2,022 319 0.384 2,477 122% nI Soroti 384 8,407 46 0.787 3,022 36% Hm Tororo S/ 842 3,887 217 0.387 3,259 84% m Northern Apac 454 4,962 91 0.542 2,461 50% m Anm 598 6,578 91 0.255 1,525 23% m Gulu 296 11,321 26 0.533 1,578 14% IV Kitgum 340 13,536 25 0.533 1,812 13% IV Kotido 181 10,352 17 N/A m Lim 471 6,950 68 0.542 2,553 37% U Moroto 158 7,540 21 N/A IV Moyo 168 4,313 39 0.255 428 10% IV Nebbi 292 2,689 109 0.255 745 28% n Wetern Bundibugyo 116 394 294 0.2 232 59% m Busbenyi 735 3,559 207 0.25 1,838 52% 11 Hoima S/ 395 6,633 60 0.316 1,248 19% H/m Kabale 5t 598 2,353 254 0.286 1,710 73% Wim Kabarole 741 7,607 97 0.25 1,853 24% W/m Kasese 343 1,478 232 0.2 686 46% n Masindi 275 5,369 51 0.316 869 16% n Mbarara 930 9,477 98 0.174 1,618 17% m Rukungiri 388 1,391 279 0.286 1,110 80% I/I Total 14,764 167,596 88 50,973 30% 1/ National Census Figures. V B. W. Langlands, 'Soil Productivity and Land Availability Studies', Makerere 1974. 3/ Report on Uganda Census of Agricultum; Langlands, op cit. 4/ Langlands: I = Very good; H = Good; m = Moderate; IV - Poor. 5/ 1991 Census: Tororo + Pallisa, Hoimna + Kibale, Kabale + Kisoro  - iv - Expansion of Area Cultivated 10. Agricultural growth this decade has been due to an expansion In cultivated area, rather than an Increase in yields. The area under cultivation-4.6 million ha-is still below the level of the late 1970s. Food crop cultivation, at 4.3 million ha, is at the levels of the early 1970s.Cash crop cultivation-at 0.3 million ha, due to the decline of cotton-is less than half the level of the 1960s. Agricultural lau.d, while not limiting growth for the country as a whole, is a constraint in certain, high-potential, high-population regions in the Southwest and Northeast (table 1). There is a gradual inter-regional migration, from the most densely populated areas to less-populated regions of good potential. Reestablishing peace north of Lake Kyoga will make large underutilized areas available for cuiltivation. The area cuTrently under cultivation, while utilizing the regions of hI'ghest potential, is still l1 ss than 30 percent of potentially cultivable areas. Competition in International Markets 11. There has been a sea change in the internatlonal prices of Uganda's traditional export crops: coffee, tea, and cotton face much lower prices in real terms now than in the early 1970's. Prospects for trend improvements ar limited. ;3fits and rents from these crops, most of which were captured by Government, have been severely reduced to keep the country competitive in international markets. Successful international competition now requires continued increases in the efficiency of export production and processing, with little margin for taxation. Uganda, due to its excellent agricultural resources, is a low-cost producer in these three crops and with improved efficiency in the processing industries can expect to profitably sell all it can produce. 12. The regional market for food, especially maize and beans, can be expected to increase. Uganda's landlocked status and reliable rainfall provide it with the opportunity to supply food cheaply to several of neighbors-one of whom, in any given year, can be expected to be undergoing a drought. Growth in this market depends however, on the annual food import requirements of a client country in a given poor agricultural year, and may not go beyond 300,000 to 400,000 tons of food per year. Structural Adjustment in Agriculture and Constraints to Growth Agriculture Rehabilitation Project 13. Government's efforts to reform the production and marketing arrangements in agriculture since 1980 have received support from two IDA funded projects supporting sectoral adjustment: a) the Agriculture Rehabilitation Project (ARP) Cr 1328-UG of February 1983, and b) the Agriculture Sector Adjustment Credit, (ASAC), Cr 2190-UG of Decemb.r 1990. Under the ARP the physical rehabilitation of export processing facilities in the cotton, coffee and tea sectors was successfully financed. No provision had been made for supporting operational reforms, however, ane l ot all of the facilities have been used profitably. The ARP also financed a large share of agri.altural imports between 1983 and 1992, when it closed. Perhaps the mo,: important contribution was support for the newly established Interministerial Agricultural Policy Committee and its executive arm, the Agricultural Secretariat in the Bank of Ug? ida. Through this structure, Government kept in touch with production and incentives problems facing farms and processing industries and was able to implement ARP conditionality which required that farmgate prices for export crops be adjusted to maintain production incentives. While still administered by  Government, prices and margins for export crop purchase and processing were adjusted upwards during the early 1980s to maintain production and export incentives within a monopolistic, state controlled system. There was some response in the coffee, tea, cotton, and tobacco sectors, subsequently dampened by security problems in the mid 1980s, the collapse of international markets (Figure 6), and a decline in real farmgate prices. Agriculture Sector Adjustnent Credit 14. ASAC was designed in 1990 to address the salient issues in adjustment of agriculture and their macroeconomic ramifications. ASAC's main focus was to control credit expansion for crop finance and imsprove export marketing efficiency and production incentives for coffee - which in 1990 provided over 90 percent of export revenue. Its share has since declined, due to the growth in non-traditional exports, and the drop In coffee prices. In addition, funds were provided to improve policy making in the ag.icultural sector and strengthen agricultural research and extension capacity. The project has been successful and provides a model for how to proceed in the liberalization of other export crop marketing systems. Government has gone beyond the conditionality set forth in the operation in order to achieve the agreed objectives. Control of credit expansion to finance the purchase of the coffee crop, the largest single source of demand for funds in the financial system (Figure 9), has been achieved by shifting the responsibility for providing this credit to the commercial banks, thus removing the Bank of Uganda from its position as financier of last resort and improving Government's capacity to monitor developments in the subsector. Inflation declined from around 240 percent per annum in FY 1988 to around 30 percent in FY 1990 (Main Report, para 5.11). Coffee exports have been maintained in a time of declining world prices (Figure 29) by improving processing efficiency and farmgate production incentives. First, this was achieved through the promotion of competition. The monopoly control on exports held by CMB was dismantled. Participation by cooperative unions and private sector expor=rs was promoted. Government-imposed farmgate prices and marketing margins have been discontinued. The farmgate price of coffee, which had been declining in real terms since 1986, rose in May 1991 (Figure 10) when Government set the procurement price for the last time. Since then the market determined price for coffee at the farmgate has been market determined, and has fallen from its May 1991 level. CMB's regulatory functions were shifted to a separate Uganda Coffee Development Authority (Main Report paras 4.294.56). Second, Government has significant;y reduced its tax on coffee exports. At present coffee export earnings are converted at the market rate of exchange, and the tax rate-having dropped to a flat 5 percent on export value in late 1991-is now zero. In addition to conditionality on coffee marketing and rural credit policy, ASAC is strengthening Government's policy formulatiun capacity for agriculture with technical assistance and training in the three main Ministries: MAAIF, MCIC and MPED. The Agricultural Secretariat, the locus for policy analysis in agriculture, continues to be assisted, although its role has shifted from administration of export prices and margins towards monitoring of product and inputs markets and prices, and providing analytical support for further adjustment and regulatory initiatives of Government. Agricultural research and extension are scheduled to receive long term support under two IDA funded projects, recently appraised, prepared with resources provided under ASAC. Also, ASAC provides support for the promulgation of a new Land Law which would extend freehold tenure. ASAC has addressed the first tier of constraints to agricultural growth. There is still an agenda for adjustment in agriculture, which is discussed below.  - vi - Constraints to Growth 15. Growth in agriculture in Uganda has been hampered during the 1980s by a series of structural constraints related to: (i) Government control of food and export crop marketing and pricing which inhibited incentives to improve the quality and quantity of output in the farm and factory; (ii) ir-"'ecuate transportation infrastructure and shortage of vehicles; (iii) shortages of foreign exchange, and high and unpredictable inflation; and (iv) physical insecurity. In addition, agricultural growth has been held back by a series of institutional factors which include: (v) ineffective Government research and extension services; and (vi) segmented, inefficient and discriminatory markets for capital, labor, and agricultural inputs. The effects of the above mentioned constraints on the development of each subsector are described, by institution and by crop, in Sections III and IV of the Main Report. 16. Over the past six years, many of the structural constraints to growth in agriculture listed above have been removed. As the sectoral analysis undertaken in the Main Report indicates, since 1986 growth in the agricultural sector has been due, at different times, to: (i) the re- establishment of peace and security in the Center, South and West, which resulted mainly in increases in cultivated area under food; (ii) the decontrol of food marketing; (ii) improvements in transportation infrastructure between food producing areas and Kampala; (iv) rehabilitation of production and processing capacity for estate-based cash crops (tea, sugar); (v) decontrol of coffee processing and export marketing-which prevented serious declines in output, and (vi) the establishment of an open market in foreign exchange, which has provided an incentive for the development of non-traditional agricultural exports. The effects of the structural changes in the framework for agricultural growth undertaken over the past 6 years will continue to work themselves out during the 1990's. Increased competition in the coffee industry should result in improved processing and export marketing efficiency. Open markets in foreign exchange will result in investment export oriented industries. The rehabilitation of the tea sector will proceed slowly, helped by the resolution of Custodian Board cases. 17. There is still an agenda for structural change in agriculture. Rapid increases in output in the cotton sector should result from changes in ownership and the introduction of more efficient management, improved access to credit, and increased competition amongst ginneries and export marketing agents. Adjustment in the cotton sector will be fairly complex and cumbersome however, given the dispersed location and ownership of ginneries, and the significant changes in ownership, management and finances involved. In tea, half of the gardens and many factories have yet to be rehabilitated. However, this is contingent on progress in the divestiture of Government-owned enterprises, the resolution of ownership claims for tea estates held by the Custodian Board, and the restructuring of factory ownership and management in the smallholder tea sector. 18. The quickest gains from structural change have already been captured. The constraints to economic growth now facing the agricultural economy are not so easily dealt with. This point has already been made for food (para 9). Continued growth in agriculture will have to come from joint improvements in: (i) technology generation and dissemination; (ii) the responsiveness of the capital market, and the availability of long term finance; (iii) access and infrastructure to hitherto under-utilized areas; (iv) the re-establishment of peace and security North of Lake Kyoga; (v) the fluidity of the labor market; and (vi) tenure security, and the establishment of freehold tenure. The gradual release of constraints to growth in these areas will result from improvements in the  - vii - effectiveness of Government in the provision of essential public goods and establishing indirect regulatory mechanisms. All these efforts require a long term commitment to slow, steady change. An Agriculture Sector Strategy Development Objectives and Priorities 19. In designing a development strategy for agriculture, priorities in the use of scarce financial and managerial resources should be set. The Government's objectives in stimulating growth in the agricultural sector are to meet the country's food requirements, generate foreign exchange, and improve living standards (Main Report, paras 5.13-5.14). Rapid growth in the food sector since 1986 has returned the country to food self sufficiency and brought about a broad based increase in rural incomes. The most fragile aspect of the recovery program in Uganda now is the lack of response in exports-which must grow in value in the next few years if economic growth is to be sustained. The capacity to finance imports has declined sharply due to the drop in coffee prices. Imports in 1990 were 3.5 times export revenue (Main Report, para 1.21). The availability of concessional donor funding to continue to bridge this gap is unlikely to be sustained at current levels,1/ and additional private sector finance is practically unavailable. 20. The strategy to be followed must also acknowledge that the nature of agricultural growth will have to change over the next ten years. The lead will have to shift, from food production for the domestic market, to production of raw materials for processing and/or direct e.xport. Over the past 6 years improvements in physical security in rural areas, reductions :'- --conomic uncertainty and inflation, increased availability of foreign exchange, and reductions in transport costs have driven the increases in agricultural GDP. The most responsive secto- was food production, for the market and for own consumption, where marketing and pricing controls had been removed early on. Food production, excluding livestock, grew at 5.9 percent per annum between 1986 and 1990. Growth in export crop production languished due to continued Governmental interference, depressed world markets, and financial and managerial weaknesses in the marketing and processing industries. 21. The scope for continued rapid growth in food production will be limited in future, due to its dependence on the size of the domestic market. Growth in domestic demand for food will be constrained to the increase in population, and increases in per capita income induced by expansion in urban based industries and services, and revitalized agricultural exports, the new lead subsector. If these factors produce a growth rate of 1.5 percent per annum in per capita income, then the demand for food is likely to be in the order of 3 to 4.5 percent per annum, in order to also cater for population growth (Main Report paras 4.13-4.16). Projections on this and other variables are developed in Section VI of the Main Report. 22. In light of these imperatives, the report argues for a two pronged agricultural development strategy. In the short term, the agenda for adjustment and investment should continue to focus on increasing agricultural exports in traditional cash crops as rapidly as possible, while seeking diversification amongst the least investment-intensive non-traditional /1 Mr. F.X. Colaco, Director, Eastem Africa Depariment, assessing the outcome of the Annual Meetings of September 1992 at Departmental Meeting of September 25, 1992.  - viii - agricultural exports. This will provide for a new source of growth in the sector, not limited to expansion of the internal market, and will address one of the key macroeconomic disequilibria and constraints to sustainable growth. In the medium term, deeper measures should be taken to diversify agricultural exports, improve technology generation and dissemination in the sector, and reduce transactions costs, entry barriers and market failures in the land, labor and capital markets as described below. 23. The short term strategy advocates continued efforts to regain market share in traditional exports: cotton, coffee and tea. While production margins are very tcin, and international prices low, our analysis shows that Uganda due to its excellent natural conditions, is a low cost producer of these products, and can compete in international markets, even at depressed prices, if processing and marketing efficiency is restored (Main Report, paras 4.184.21). There is need for a rapid restructuring and liberalizati: A of the cotton ginning and export marketing industry. In cohi,e, choice of export routes shouh; be liberalized. In tea, Government should divest itself of parastatal factories and estates, and conclude the Custodian Board review process, which is keeping a significant number of the estates out of production. These changes would generate significant increases in foreign exchange, and have a broad based income generation effect in rural areas. 24. At the same time, short term measures should be taken to support the process of export diversification, which can grow very rapidly, as experience with sesame and fish exports in recent years indicates. Priority should be given to dry goods such as sesame, tobacco, hides and skins, spices and other products which do not rely too heavily on specialized packaging, critical transportation timing, expensive cooling infrastructure, and a commitment to constant, standardized quality deliveries. While the contribution to agriculture GDP from these crops is small (under 5 percent) their contribution to exports has been rising rapidly, and reached 20 percent in 1990, with the collapse in the price of coffee. 25. In the medium term, the report argues that a series of measures are needed to support further diversification in agricultural exports. Development of high value specialized crop exports will increase returns and taxable profits, and stabilize export revenue. Government's role in developing these new activities should be indirect. Its focus should be on reducing unnecessary regulation, improving transport infrastructure and telecommunications, and smoothing the responsiveness of the land, labor and financial markets to profitable production opportunities. In addition, to raise rural incomes and ease the growth in food production, Government should take indirect measures to improve migration into underutilized areas of good agricultural potential. This will reduce the hunger for land in the densely populated districts of the Southwest and the Northeast, and permit labor augmenting technology to be used, increasing output per person. Careful management of this process will be needed to minimize environmental costs. Growth in yields is another key element of the agricultural strategy. Many traditional food and cash crops face disease and husbandry problems. Experimentation with new high value crops will require a high class, responsive research and extension service. Continued support for agricultural research and extension services is argued for, as is the need to provide improved monitoring and regulation of the use of natural resources -grazing lands, forests and fish - as population pressures are exacerbated. 26. The growth strategy advocated in this report should take place within bounds set by acceptable levels of environmental impact. self determination and equity. The approach utilized in promoting growth should lead to sustainable use of natural resources, enable local communities to participate and direct the development process, and provide the largest number of employment  - ix - opportunities possible to the rural poor. Uninhibited pursuit of a strategy to expand cultivated area could result in the mining of poor soils and the devastation of natural vegetation without providing a base for sustained increase in crop or livestock agriculture. Under the proposed strategy, policies which lead to increased internal migration should take into consideration the rights of the residents of the receiving areas, as well as the difficulties of adjustment faced by both incoming as well as resident families. Decisions on how production-processing-marketing relationships are structured, and the use of smallholder outgrower production schemes, can have broad beneficial effects. Prevention of concentration of land ownership through judicious management of titling and tenure of public lands will also benefit the rural poor. The effects of the proposed strategy on the alleviation of rural poverty, and the development of sustainable farming systems and participatory production relationships are noted below (paras 59 and 60), following the description of the growth strategy. Short Term Strategy: An Export Action Plan 27. Coffee. With coffee exports 80 to 100 percent of annual exports in the past fifteen years, it has been the clear initial target for improvements. As described in Main Report paras 4.29- 4.56, and para 14 above, over the past two years there have been a series of radical reforms in the structure of the domestic coffee processing and export business-opening the industry to competition, reducing governmental control, and taxation. The policy reforms have gone as far as was necessary to set the stage for a competitive, aggressive attempt to win back some of the country's share of the world coffee market. No furer basic changes in export policy in the coffee sector should be made for at least three ye_ars While continuing evaluation of the effectiveness of current policies should continue, the industry should be allowed to adjust to the market-oriented framework established to date. With a no tax, and exports converted at the bureau exchange rate, there are strong incentives for exporters to raise quality and volume as much as possible. It will take time for the incentives to raise export output and quality-to filter back through the processing industry to the producers. There is, however, one area where action in the short term will significantly improve export incentives, and reduce uncertainty: - Coffee exporters should be allowed to select the most competitive export channel and route (road or rail), and export inspections and customs procedures should be streamlined to reduce wasted time-and resulting cost increases. 28. Cotton. The third largest export earner (after sesame seed) in 1990-91, cotton should be the focus of the Government's efforts to raise export earnings. The reasons are compelling. * At market-based prices and reasonable levels of ginning efficiency-well above current levels-even low-input, low-output cotton production as practiced in Uganda is profitable; * An important constraint to increased efficiency and growth in the sector is the lack of competition in ginning and export marketing. This can be solved with changes in policy, adjustments in laws and regulations, and assistance in rationalizing ginnery ownership, now held entirely by cooperative unions of which many are insolvent; * The production response from farmers is expected to be rapid. In spite of the unsat.sfactory system of cotton purchases and payment now in place-with  - x - routinely long delays-some 70,000 ha were planted in 1991. When payment is adequate and prompt, the incentives for increased production should be strong; * The regions north of Lake Kyoga, where cotton has traditionally been grown, are not as severely affected by security problems as they were one or two years ago, and the situation is improving, * Capital has already been invested in a partial refurbishing of nominal ginning capacity, which far exceeds current output; * The three key ingredients to improving operations in the cotton sector-working capital finance, managerial and technical skills-can be provided by private entrepreneurs, without additional Governmental involvement, once it is clear that a stable policy based on freely convertible export earnings and a competitive ginning and export marketing environment is put in place. 29. The steps necessary to revitalize the cotton sector include: * The re-establishment of peace and security in production regions North of Lake Kyoga; * The revocation of the Lint Marketing Board's monopoly on cotton exports, and other restrictive provisions of the LMB Act, * The revocation of area monopsony power provided to cooperatives in the purchiase of seed cotton, and other restrictive provisions of the Cotton Act, * Provision of assistance to cooperat;ve unions to enable them to solve financial and managerial constraints, and increase use of their ginaing facilities. Sale, lease and/or management contracts with viable private sector entities are envisaged; * The establishment of a cotton development authority, funded by a small cess-less than 1 percent-on cotton exports, to assure quality standards, to promote the industry at home and abroad, and to fund research and extension once industry profitability has been established. 30. Tea. Whereas the estate sector has by and large been privatized, there remains the question of the tea estates and factories of the Government owned Agriculture Enterprises Ltd (AEL). These estates are inefficiently run at well under capacity. Privatization of their operations would permit these resources to be brought back into operation, with gains in employment and foreign exchange to the country. * The Government should divest itself of AEL holdings in the tea sector as soon as private sector buyers with capacity to make full and profitable use of the assets have been identified. 31. Nontraditional Agricultural Exports. The other area for immediate attention, and where the production response can be rapid, is in nontraditional agricultural exports. Growth can be rapid, as the evolution from 1989 through 1992 showed when NTAEs jumped from US$2.1 million to US$23.8 million in 1990 to US$ 42.6 million in 1991. The most important products  - xi - include sesame seed, beans, maize, other cereals, hides and skins, fish, and fruit and vegeta.bles. This rapid growth must be supported. But markets for these products are small and volatile. The measures to foster this type of growth are indirect, and focus on the need to improve the reliability and efficiency of export channels, and facilitate access to term finance. Support from MAAIF and NARO on resolution of production problems for !ittle known crops of high potential (spices, silk) is also needed. Priority measures would include: * Review of the functions of the Export Policy Analysis and Development Unit. the Export Promotion Council and the Investment Authority, to harmonize their policy making, promotional and regulatory activities, and simplify the array of review and approval procedures faced by potential investors and entrepreneurs. These agencies should jointly develop a plan to address potential constraints to new investors in Uganda: improve export facilities, including regular air freight availability to Europe, reduce license and approval procedures, provide specialized communication services, and provide specialized export processing and storage infrastructure, targeted at key industries. * Design of a mechanism to improve the availability of local and foreign funding to qualified investors. While the financial sector is under adjustment, the need for exports in the short term may justify the creation of a dedicated line of credit, or the establishment of an organization capable of providing ventlire capital finance and reducing the business risk to investors with likely new projects. Medium-Term Agricultural Development Strategy 32. The medium-term strategy outlines Government's role in inducing structural change and investment in agriculture until the turn of the century. The framework for the strategy cites the need for Government intervention in three main areas: (a) improving incentives for agricultural production and processing, (b) improving the efficiency of the land, labor, and capital markets, and (c) inducing technological change through improvements in agricultural research and extension, and strengthening management of natural resources. Recommendations, which are provided by crop or institution, synthesis the most important of the detailed recommendations contained in Section IV. 33. Incentive Framework. Government administration of prices and processing and marketing margins in the agricultural sector has been almost completely discontinued. Only cotton, tobacco, cocoa and tea continue to have farmgate prices set by flat. Government intervention in the sector will be justified to: (a) take direct or indirect measures to increase efficiency in processing, mainly through the promotion of competition, and (b) enter the market on the side of the producer in cases where processing industries exercise monopsony control on crop purchase prices. The cotton, tea and sugar subsectors are cases in point. The implementation of these measures is very dependant on accurately designed policies and programs which achieve desired objectives without diminishing production and investment incentives. 34. The key entity in the formulation of Goverrnent policy in the sector is the Agriculture Policy Committee, which brings together the top civil servants in the Agriculture, Finance and Economic Planning, Commerce and related ministries, the Bank of Uganda and the Uganda Commercial Bank. Much effort has been made in recent years (under ARP, ASAC and various donor funded Technical Assistance projects) to develop Government's policy analysis and formulation capacity. The agriculture planning departments in the MAAIF, MCIC and MFEP  - xii - have all received support, as has the Agricultural Secretariat of the Bank of Uganda, the executive arm of the Agriculture Policy Committee. The system has worked well to date. Many of the major reforms liberalizing marketing, processing and exports have been successfully carried out under this structure. The system has now to be redesigned to play a role in the more indirect management appropriate in a market based economy. A Task Force constituted under the APC has addressed the question of planning and policy formulation for the agricultural sector. 2/ Points made in this report include the need to: * Establish comprehensive and reliable sources of regular data on product and factor prices across the country; * Strengthen policy analysis and strategic thinking in the Ministry of Agriculture, Animal Industry and Fisheries, to enable it to lead in the formulation of sectoral development policy; * Consolidate the interministerial planning framework for annual budgeting anw public investment program review in the agricultural sector, under the leadership of MFEP; * Encourage producers and agro-industries to organize their own associations to represent their points of view before the policy makers. Such associations should be encouraged to "self regulate' their industry in their own interest; 3 Maintain, for the present, the use of an Agricultural Policy Committee for the formulation of agricultural development policy, with the Agricultural Secretariat as an executive arm. This system is flexible and efficient and has proven well able to bring about consensus and produce results to date. 35. In the coffee industry, competition is developing in export processing and marketing following the recent structural adjustment process (para 14). The recent Cabinet decisions freeing producer prices and processing and marketing margins to market forces, and allowing exporters to convert coffee export proceeds at the bureau exchange rate should fundamentally improve the incentive environment in the industry, assure fair competition between cooperatives and private- sector operators, and improve the responsiveness of the coffee industry to international conditions. In addition to the recommendations made for the short term plan, the report notes that: * Coffee sector incentive policies, on pricing, taxation and licensing should be stabilized for at least three years, to allow the industry to adjust to the new rules. Monitoring of industry parameters should be constant, to permit a Government response to unpredictable destabilising events; * Measures should be designed and enforced by UCDA to prevent collusion and maintain competition among coffee processors and exporters, * Privatization of the Coffee Marketing Board Limited should be completed, with ownership st --s gradually sold off to the private sector, 2/ Goverment of Uganda, APC, Progsmme for Strengthening Agiulul Sector PHannig (PASP)W, Rpont of the Task Force on Agdculaue Sector Planning, Kampa. lauy 1922.  - xiii -