Uganda - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14460-UG MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF UGANDA MAY 9, 1995 Eastern Africa Country Department II Africa Region 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 disclosed without World Bank authorization.  PREVIOUS CAS May 10, 1994 CURRENCY EQUIVALENTS Currency Unit = Ugandan Shilling (U Sh) US$1 = U Sh 933 (December 1994) U Sh I = US$0.001072 US$1 = SDR 0.688568 (December 1994) SDR 1 = US$1.45229 GOVERNMENT FISCAL YEAR July I - June 30 ABBREVIATIONS AND ACRONYMS BOU - Bank of Uganda CEM - Country Economic Memorandum CPPR - Country Portfolio Performance Review ERP - Economic Recovery Programme ESW - Economic and Sector Work FY - Fiscal Year GDP - Gross Domestic Product GEF - Global Environment Facility HRD - Human Resource Development IDA - International Development Association IFC - International Finance Corporation IMF - International Monetary Fund LMB - Lint Marketing Board NGO - Non-Governmental Organization NRM - National Resistance Movement NURP - Northern Uganda Reconstruction Project PAPSCA - Program for the Alleviation of Poverty and Social Costs of Adjustment PER - Public Expenditure Review PFP - Policy Frainework Paper PPA - Priority Program Area SPA - Special Program of Assistance SSA - Sub-Saharan Africa UCB - Uganda Commercial Bank UIA - Uganda Investment Authority VAT - Value Added Tax  FOR OFFICIAL USE ONLY CONTENTS MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR UGANDA A. Recent Economic and Social Performance ...............................................1 Historical and Economic Perspective ........1....................................... Efforts to Stabilize the Economy ...............................................I Progress on Structural and Institutional Reforms ............................................2 Sustainability of the Reform Process .............................................4 Recent Growth and Social Performance .............................................4 Progress in Poverty Reduction .............................................5 Governance and Recent Political Developments ............................................6 B. Exte rnal Environment .............................................7 C. Uganda's Development Objectives and Policies ..............................................7 Enhancing the Poverty Focus .............................................7 Maximizing Growth .............................................7 Increasing Domestic Resource Mobilization ..............................................8 Improving Public Sector Management ........8....................................8 Promoting Growth Through Private Sector Development .............................................8 Sustainable Growth and the Environmnent .............................................9 D. Bank Group's Country Assistance Strategy .............................................9 IDA's Poverty Reduction Strategy .......9......................................9 IDA's Strategy on Gender ............................................ 10 Continuing the Ongoing Reforms ............................................ 11 Support to Decentralization ............................................ 11 Beneficiary Consultation ............................................. 11 Lending Strategy and Program ............................................ I I Less Inport Support ............................................ 12 Infrastructure Development ............................................ 12 Generating Growth ............................................ 12 Improving Social Services ............................................ 13 Capacity Building ............................ 13 Greater Emphasis on Implementation ............................. 13 Environmental Protection and Management ............................. 14 Economic Prospects and Extemal Financial Requirements ........................................ ....... 14 Base Case Scenario .............................................. 14 High Case Scenario .............................................. 15 Low Case Scenario .............................................. 15 Structure of External Debt and Debt Management Strategy ....................................... ....... 16 Debt Sustainability ............................................... 17 IFC and MIGA ............................................... 19 Relations with the IMF and Other Donors .............................................. 19 E. Agenda for Board Consideration .............................................. 19 Key Issues for Consideration .............................................. 19 This document has a restricted distribution and may be used by recipients only in the performance of their l official duties. Its contents may not otherwise be disclosed without World Bank authorization. l   MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR UGANDA A. Recent Economic and Social Performance 1. Historical and Economic Perspective. With a per capita income of about $220 (1994 estimate), Uganda today is one of the poorest countries in the world. Its current economic situation is the legacy of nearly 15 years of political turmoil and economic decline. At independence in 1962, Uganda was one of the most promising economies in Sub-Saharan Africa (SSA). That promise was largely fulfilled up to 1971, as the economy continued to strengthen within a framework of both internal and external equilibrium. Real GDP grew by an average 4.5 percent per annum during this period, the country was self-sufficient in food and manufacturing supplied the economy with basic inputs and consumer goods. The health and education systems were among the best in SSA, as was the transportation system. Export earnings not only financed the country's import requirements but also resulted in a current account surplus. Fiscal and monetary management was sound, so inflation was low and the domestic savings rate averaged about 15 percent of GDP, enough to finance a respectable level of investment. 2. The repressive regimes and civil disturbances after 1971 devastated the economy. Between 1972 and 1977, real GDP growth fell to an annual rate of 0.5 percent, representing a decline of over 2 percent annually in per capita income, and while there was slight positive per capita growth in the early 1980s, the economy continued to perform poorly. The government budget became increasingly untenable due to large increases in defense expenditures and expanding state ownership in the economy, leaving fewer resources for other programs. Financed largely by domestic bank borrowing, the rapidly growing fiscal deficits resulted in annual inflation rates consistently above 70 percent. Indicative of the deterioration that occurred, by 1985 government expenditure on education and health, in real terms, amounted to about 27 percent and 9 percent respectively of the levels of the early 1970s. Abuse of human rights occurred on a massive scale during the Amin regime and continued through the Obote regime in the early 1980s. As a consequence of these developments, many Ugandans fled the country taking with them valuable managerial, professional and technical skills. 3. The National Resistance Movement (NRM) which assumed power in January 1986, at first adopted an interventionist stance, introducing expansionary fiscal and monetary policies. Notwithstanding tentative signs of economic recovery, these policies proved unsustainable and inflation soared to triple digit levels. In 1987, amidst a rapidly deteriorating economic situation, the Government embarked upon an Economic Recovery Program (ERP) which aimed at: (i) restoring internal and external financial stability through prudent fiscal and monetary management; (ii) creating the conditions for rapid and sustained growth through improved economic incentives and regulatory reform; and (iii) developing human capital through investments in education, health and other social services. The ERP included widespread structural reform of the economy as well. 4. Efforts to Stabilize the Economy. The annual rate of inflation had been brought down to only about 7.0 percent by the end of December 1994, from nearly 65 percent as of June 30, 1992. This was achieved largely through tight control over public expenditures, which resulted in the Government eliminating its borrowing from the commercial banks and substantially reducing its overdraft with the Bank  2 of Uganda. Control over monetary growth was less effective; however the economy was able to absorb the increased money supply without excessive inflationary pressures. The low inflation contributed significantly to stability of the exchange rate and thereby supported the trade and exchange liberalization that took place also during this period. 5. Progress on Structural and Institutional Reforms. When the ERP was launched, Uganda's economy was highly regulated. Parastatals dominated in nearly all sectors of the economy, inefficient state trading boards abounded, government controls circumscribed private sector activity in nearly every aspect of economic activity and institutional inefficiencies had a debilitating effect on private business initiative. To reverse this situation, the Government embarked upon a comprehensive policy and institutional reform program designed to deregulate the economy, eliminate direct state involvement in all but the essential public services and improve institutional efficiency. Only slow progress was made on stabilization and economic reform from 1987 to 1992. Since then, however, implementation has been greatly strengthened and notable successes have been achieved. 6. Although Uganda did not suffer from pervasive price controls when the ERP was introduced, a number of important products, including most major export items and some imported goods (e.g., petroleum), were price controlled. As part of the reform program, price controls were first removed on industrial products, then in FY92 on major crops and lastly on petroleum pump prices in January 1994. Price deregulation was accompanied by the removal of entry barriers to markets and the dismantling of state marketing boards. First to go was the Produce Marketing Board which controlled the internal trade and export marketing of produce. The export monopoly on coffee was abolished in 1991 with the dismantling of the Coffee Marketing Board (CMB). As a result, about 73 percent of coffee exports are currently in the hands of private exporters and the Coffee Marketing Board Limited (CMB reconstituted under the Companies Act) is required to compete with the private exporters. In 1990, the export monopoly in the cotton subsector was removed with the dismantling of the Lint Marketing Board (LMB) and in 1994 the cooperative unions' monopoly over cotton ginning was abolished. It is expected that a substantial part of ginning capacity will be sold to private operators. 7. Uganda also moved quickly to deregulate the trade and payments system. First, in 1992 the licensing of exports and imports was replaced by simple registration systems, and the level and dispersion of import duty rates were reduced. All quantitative restrictions on imports were removed, except for those on a small negative list imposed mainly for public safety reasons. The surrender requirement on export eamings was removed and exporters are now pernitted to hold foreign currency balances abroad. The market for foreign exchange was progressively liberalized; the latest step being replacement of the foreign exchange auction in November 1993 with a fully-liberalized interbank market. The interbank market has been functioning smoothly and the exchange rate is now determined by market forces. This liberalization of the foreign exchange regime enabled Uganda to accept in April 1994 the obligations of Article VIII, Sections 2,3 and 4 of the Fund's Articles of Agreement, under which the country agrees to place no restrictions on recurrent intemational transactions. Uganda has also been at the forefront in support of regional integration and has been a strong advocate of the Cross Border Initiative (CBI). 8. In an effort to stimulate private sector investment and growth, and because they considered it the right thing to do, the Government took on the politically very sensitive task of returning properties expropriated, mainly from Asians, during the Amin regime. All citizen and non-citizen properties for which valid claims were filed were retumed to their rightful owners or compensation paid. In all, out of a total of 4,709 claims, 3,486 have been retumed or compensation paid. Most of the remainder had defective claims (e.g., could not prove ownership) or the property no longer existed (e.g., destroyed in the war). All unclaimed properties and those where claims were rejected are being sold, with the proceeds going first to  3 settle any compensation claims. The whole exercise of returning and selling unclaimed properties was carried out in a transparent manner and is expected to be completed by end-June, 1995. 9. In another important initiative under ERP, the Government has undertaken a wide-ranging reform of the civil service, with a view to improving economic management and enhancing the delivery of public services. This reform involves a substantial downsizing and restructuring of Government, with the goal being a much leaner, adequately remunerated, and more effective cadre of public servants. The reform to date has reduced the civil service from 320,000 in 1990 (including ghost and temporary workers) to around 150,000 in December 1994. In addition, all government ministries and agencies have been reorganized and restaffed along functional lines. Concurrently, wages and salaries have been raised as rapidly as resources permit, including progressive monetization of housing and transport benefits. At the same time, the army is being downsized. About 33,000 soldiers have been demobilized in the past two years, with another 12,500 to be returned to civilian life in 1995. When completed, the demobilization program will represent an estimated 50 percent reduction in the nation's military forces. 10. Uganda's reform efforts in the financial sector have focused on liberalizing interest rates and strengthening the banking system by restructuring problem banks, fostering competition in the sector and enhancing prudential supervision by the Central Bank. Through the passage of new Banking and Financial Institutions Acts, the autonomy and authority of the Bank of Uganda (BOU) have been increased to enable it to manage monetary policy and supervise the commercial banks more effectively. Unlimited access to overdraft facilities at BOU was ended, as was intervention in credit allocations by BOU. Interest rates, previously tied to the Treasury Bill rate, were totally liberalized in July 1994. Capital requirements on banks were tightened and procedures for licensing banks made more stringent. Although some improvement has occurred, the sector remains highly inefficient. All commercial banks have high percentages of non- performing loans, including insider loans, in their portfolios and six of the fifteen private banks are technically insolvent. Despite low inflation and a sharp fall in the T-bill rate (about 8 percent currently), lending rates have remained in the 20-25 percent range, while interest paid on savings deposits by banks has dropped concomitant with inflation. The lack of competition and dominance over the sector by one large inefficient state-owned bank (Uganda Commercial Bank-UCB) allows all banks to maintain large spreads. UCB itself is technically insolvent. Faced with continued deterioration in the sector, the Government has decided on an urgent shift in strategy and is implementing measures in the following areas: a) moving from a strategy of restructure and then privatize, UCB is to be put up for sale immediately "as is" with assistance of an international merchant bank; b) setting and aggressively enforcing short-termn targets for problems banks in key areas such as capital adequacy, insider lending and management performance; c) reinforcing BOU's capacity to deal with problem banks by recapitalizing BOU itself and strengthening senior management skills; and d) taking other complementary measures such as allocating budgetary funds to compensate depositors of closed banks, enforcing financial discipline in the banking sector, introducing policy reforms to reduce systemic risks, lowering the cost of intermediation, and strengthening the payments system and accelerating money market development. In implementing this strategy BOU has recently taken over two of the more serious problem banks (one was closed earlier) and is more closely supervising the others. 11. With assistance from IDA, the Government has been carrying out a major reform of public expenditures, including reforms of both the recurrent and development budgets. In the first instance, the budget process was streamlined through the adoption of a three-year rolling budget, with the annual budget exercise initiated by a "budget framework paper" setting forth budget objectives and tentative sectoral budget allocations. This paper provides the basis for discussions with line ministries on work programs, etc., and helps to ensure a more balanced public expenditure program. The reform also provided for unification of the recurrent and development budgets, which were previously considered separately. Lastly,  4 both the recurrent and development budgets have been rationalized to identify priority "core" activities for full funding and protection against cuts in cases of revenue shortfall. 12. In another major initiative, Uganda embarked a few years ago on a parastatal reform and privatization program. The importance of this effort is underlined by the fact that subsidies (mainly indirect) to parastatals have recently been estimated to be equivalent to about half of public recurrent expenditure. Unfortunately, partly because of a flawed design, the program got off to a very slow start and only a few public enterprises have been privatized. Recently, the program was redesigned and an accelerated program of reform, with strong backing of the President, is now underway. The essential elements of the revised strategy are the appointment of a Minister of State responsible for privatization and the transfer to that Ministry of the shares of public enterprises slated for divestiture. Also, the President has directed that 85 percent of the public enterprises be sold by end 1997, which should accelerate the process. Parastatals not privatized (mainly public utilities) are to be restructured to raise their efficiency. Indirect subsidies to parastatals are to be converted to direct subsidies, which then are to be eliminated for enterprises in the productive sectors, and phased out for others, notably utilities. In other institutional reforms, a quasi-independent Uganda Revenue Authority has been established with the objective of raising revenue through improved tax administration and reduced corruption; and an Uganda Investment Authority has been established to facilitate private sector investment. Lastly, the Government has embarked on a wide-ranging decentralization program under which much of public service delivery is being devolved to district and local governments. This program has major implications for IDA (and other donor) assistance. 13. Sustainability of the Reform Process. A number of the structural reforms are now well advanced and appear to be accepted in Uganda. Nonetheless, these reforms are exacting a cost on Ugandan society, with few perceived benefits as yet, and the reform program has its detractors. Consequently, it is still very fragile. Expectations for increased employment opportunities and rising living standards are high. If these expectations are frustrated, it may well be difficult to maintain the momentum of reform. The key to more rapid growth is increased investment, especially in the private sector. There is good potential in Uganda, but despite the reforms and liberalization, investment has not taken off as fast as it could. Achieving higher investment and growth, therefore, is critical for the sustainability of the program. Macroeconomic stability remains fragile also, notwithstanding the progress that has been made in curtailing public spending and strengthening the Shilling. With widespread poverty and massive unmet public needs, it will be a challenge to maintain expenditure constraints, especially with national elections looming later this year. Experience in Uganda has shown that any increase in the budget deficit is translated immediately into higher inflation. The key is to mobilize additional tax revenue, which is a very low proportion of GDP in Uganda. Doing so has not proven easy. The "taxable" sector of the economy is very small. Agriculture, which is about half the economy, is smallholder based, with a large number of farmers growing crops mainly for home consumption. A large part of the economy is in the informal sector and thus escapes taxation. As a result there is a very small portion of the economy overburdened by taxes. Better tax administration, fewer exemptions, stronger enforcement, etc., can help in the short run, but any significant gains in revenue will come at best only in the medium-term. Uganda's current balance on the external account is also fragile. While internal price and exchange rate stability, together with good prospects for extended political calm, has generated a substantial inflow of private capital over the past several months, these flows could be reversed quickly if inflation or exchange rate volatility were to reappear. The dilemma facing policymakers, is to get the economy moving ahead more rapidly, without generating inflation which could unravel the entire adjustment program. 14. Recent Growth and Social Performance. Uganda's economic growth since 1987 has been good, but not spectacular. Real GDP grew by an average of 5.4 percent per annum from FY87 to FY93, a gain of about 2.5 percent per annum in per capita terms. To a large extent this growth was the result of bringing land and capital back into production, made possible by increased peace and security. More recently  5 growth has also been fueled by some private investment and by the impact of trade, exchange rate and crop marketing liberalization. Preliminary indications are that real GDP rose by 5 percent in FY94, mainly due to strong performance by the manufacturing and construction sectors. Growth was somewhat suppressed by drought in part of the country. The point has now been reached where further growth will depend on increased private investment. There are a number of reasons for the relatively low level of private investment, including a regulatory framework that is still stultifying despite substantial reforms; a legacy of concern over economic and political stability that will only be relaxed through an extended track record; and constraints created by poorly functioning infrastructure, the high cost of services and inefficiency in the banking system. The low level of domestic revenue remains a constraint to public investment most of which is financed by donors. There is also an absorptive capacity constraint on public investment. 15. The social sectors were not immune to the general collapse that Uganda suffered during the 1970s and the first half of the 1980s. Life expectancy at 47 for men and 50 for women is one of the lowest in the world, and it is difficult to foresee any significant improvement in the near future, especially in light of the AIDS pandemic. AIDS has recently emerged as one of the primary causes of mortality not only among the adult population, but also amongst infants and children. Therefore, the already high infant and child mortality rates, currently estimated at 117 and 180 deaths per thousand respectively, can be expected to rise further in the future. Uganda's crude death rate, at 20 per 1,000, is considerably above the average for SSA. Malaria is the principal cause of death amongst those admitted to hospitals, but pneumonia, diarrhea, and anemia are also reported as primary causes of mortality. The high fertility rate (7.3 in 1990) reflects the lack of an effective population policy, and the low level of women's education. 16. The Government White Paper on Health Policy, apart from calling for more resources to be devoted to health and for improved utilization of these resources, shifts the emphasis from curative to preventive and promotional services, provides for planning of health service provision and training at the district level, discourages the expansion of new centralized hospitals and major facilities (though providing for rehabilitation and maintenance of existing hospitals), and envisages closer cooperation with NGOs and the private sector. The White Paper provides a good basis for future development of the health sector in Uganda and is receiving support from IDA and the donor community generally. 17. The education indicators are equally poor. Enrollment ratios are low, especially for girls. While the primary enrollment ratio of 71 percent is about average for SSA, the secondary enrollment ratio is only about half of the SSA average, with the girls' secondary enrollment ratio particularly low at only 7 percent. Most children start primary school, however the primary cohort survival rate is low, at only 32 percent. Very high school fees and the poor learning conditions are the main factors discouraging attendance. The percentages of boys and girls entering primary school are almost equal, however a decided gender gap emerges at higher levels on the educational ladder. For children entering the first grade of primary, the probability of a boy completing lower secondary is twice that of a girl, and the probability of a boy completing upper secondary education is three times greater than that of a girl. This gender gap reflects perceptions in Uganda of women's role in society and household labor requirements. 18. Uganda's Cabinet and Parliament approved a Government White Paper on Education in 1993 and the Ministry of Education and Sports prepared a five-year sector investment progran for FY93-97. These documents envisage, inter alia, achieving universal primary education by 2000/02, eliminating tuition at the primary level, substantially increasing public spending on education, eliminating the gender gap, providing vocational education at the primary and secondary levels, and expanding university education. 19. Progress in Poverty Reduction. Assessment of the overall impact of structural adjustment on poverty is clouded by measurement difficulties. The household survey data show no reduction in poverty during 1989-1992 for which data are available, although casual observation since then suggests the situation has improved substantially. The 1989-1992 period was one of negative external shocks. First,  6 there was the effect of the collapse of coffee prices. This was followed in FY92/93 by a drought which significantly reduced rural consumption and incomes. In addition, the period of real structural adjustment in Uganda began only in the later years of this period, i.e. FY91/92 on, and it takes time for the benefits of adjustment to be realized. Now though, it appears that the liberalization of the coffee industry, together with the recent sharp increase in world prices, has led to considerable increases in farm incomes. Strong poverty reduction benefits are expected from the ongoing cotton sector reform as well, since cotton is grown in some of the worst poverty areas of the country. The shift in public expenditures towards agricultural research and extension introduced recently is also expected to help the rural poor by raising productivity. 20. To better understand the level and causes of poverty, the Bank prepared a poverty assessment, entitled "Growing out of Poverty", in 1993. This work provided a definition of the poor and delineated some of their characteristics. It also underscored the serious data deficiency in Uganda which constrains any analysis of poverty. The 1995 Country Economic Memorandum (CEM) will take the analysis of poverty a step further in order to identify more specific policies and interventions in agriculture and the social sectors to reduce poverty, and by delineating more clearly both the economic and non-economic impediments to poverty reduction. There are a number of interesting preliminary findings coming from the CEM work. The data suggest that the domestic terms-of-trade of food crops have declined somewhat since 1990 and those for cash crops have increased, thus the rural poor may have had an effective increase in their purchasing power. This shift in relative prices, although still modest, may also have provided them with the incentive to switch to the higher value cash crops and off-farm activities, thereby starting the process of structural change needed for a sustainable increase in incomes. These trends are linked directly to changes implemented as part of the adjustment program, notably the abolition of marketing monopolies, and market deregulation. Other findings show the relatively heavy dependence of the rural poor on remittances from others, suggesting that there is a substantial informal welfare system operating in the country. Lastly, while cash crops, notably coffee, account for a relatively small share of rural incomes, they are a somewhat more important source of income for the poor than for the non-poor, a finding which is in contrast with some other SSA countries. 21. Much more needs to be done to measure and monitor changes in poverty in Uganda and to identify measures that would strengthen the impact of growth on poverty reduction. In the first instance, a major effort is needed to improve the statistical base on poverty indicators so that accurate and reliable data are available for analysis. The Government continues to increase the share of public expenditures going to health, education, agricultural extension, rural roads and water supply in an effort to reach the rural poor. In addition, there is a case in Uganda for specific targeted programs for vulnerable groups such as widows and orphans, AIDS inflicted, disabled war veterans and their families, who are unable to take advantage of the opportunities provided by the economic reforms. Lastly, further analytical work is needed to judge the impact of the development strategy being followed by Uganda on the problems associated with the gender division of labor in rural areas. 22. Governance and Recent Political Developments. Uganda is ruled by the National Revolutionary Movement (NRM) headed by President Yoweri Museveni, who has formed a government of national unity with representation from many of the country's ethnic and religious groups. Parliament and local governments are elected on an individual, non-party basis. The major political event during the past year was the election of a Constituent Assembly (CA) to prepare a new constitution. The CA is expected to finish its work on the new constitution in June 1995, and general elections are scheduled for December 1995. Major issues yet to be resolved by the CA are if, and if so how soon, to move to a multi-party democracy, and what should be the role of the Kingdoms in any future system. Although there have been some serious incidents of banditry in the north recently, peace and security prevail generally throughout the country.  7 B. External Environment 23. Uganda's economy is subject to two significant external influences. The first is drought which periodically suppresses agricultural output, usually in selected areas rather than nationwide. Given the importance of agriculture in the economy though, drought often causes real GDP to decline a few percentage points and consumer food prices to rise. The second external influence is the volatile international coffee price. Uganda's balance of payments is highly dependent on coffee, 66 percent of export revenues, and low prices for coffee can constrain imports and other payments, e.g., debt service. This became a serious problem in 1989 when the International Coffee Agreement fell apart and coffee prices plummeted. The current coffee boom is providing a temporary rise in incomes for smallholder farmers and exporters, and allowing the Bank of Uganda to build reserves. On the downside, it is also causing the exchange rate to appreciate and there is the danger that Uganda's competitiveness in extemal markets will be eroded, which can delay diversification of the export base, one of the main goals of the structural adjustment program. This is particularly the case in that this boom comes at a time when private capital inflow are exceptionally strong. So far the Government has managed the boom rather well: inflation has actually fallen and the nominal exchange rate has appreciated only 4 percent since June 1994, despite the additional large forex inflows. In a further action, the authorities recently imposed a stabilization tax on coffee exports, which will sterilize a significant portion of the additional revenues. C. Uganda's Development Objectives and Policies 24. Enhancing the poverty focus of the development effort is an important objective of Uganda's strategy. The aim is to reduce poverty by generating employment and income opportunities through accelerated economic growth and by increasing the provision and effectiveness of public services, especially health and education. In addition, the Government has been gradually expanding the poverty focus of its strategy in recent years through initiatives in high poverty areas (Northeast Uganda), greater poverty focus to expenditure programs, and selective targeting of food security assistance to drought areas. In 1994, the Government established a Poverty Reduction Committee and charged it with developing proposals for reducing poverty. The Committee recommended development of a national strategy for overcoming poverty and the creation of a high-level Poverty Reduction Council, comprising representatives of both the private and public sectors, to oversee implementation of the strategy. The Committee also recommended actions to foster more effective use of existing resources, develop safety nets for vulnerable groups, and improve statistical data for tracking changes in poverty and the effects of poverty programs. Further initiatives are currently being discussed within government. 25. Maximizing growth is one of the main objectives of Uganda's development program. The country has good growth potential, with favorable prospects in agriculture, industry and tourism. With the current policy and incentive framework, the economy is able to sustain a growth rate of 5-6 percent per annum, however with more rapid policy and institutional reforms, and higher investment, a more accelerated rate of growth, 7-7.5 percent per annum, should be achievable. In agriculture, the greatest potential is in cash crops for export. Apart from coffee, cotton, once a major export crop, has substantial room for expansion and present reforms aimed at deregulating and restructuring this subsector to facilitate private investment should provide the impetus for its rapid growth. Nontraditional export crops, such as maize, beans, fish, cut flowers, horticultural products, also have good potential. Maintaining an internationally competitive exchange rate will be a key factor in determining the growth of non-coffee agricultural exports. The rising domestic demand which fueled agricultural growth in the recent past has largely been met and future growth in the internal market will depend largely upon population and income growth. There is substantial scope for yield increases and efficiency gains in foodcrop production though, through new technology and improved varieties. To achieve this, the Government is expanding its research and extension programs and supporting the provision of feeder roads and other infrastructure in rural areas. Manufacturing has grown  8 rapidly over the past several years and has the potential for further significant increases. The processing of agricultural raw materials and the production of consumer goods to substitute for imports seem to have the best prospects for growth. Tourism is receiving increased attention from external investors as the Government moves to privatize the industry. 26. Increasing domestic resource mobilization is essential for Uganda's development. Both public and private resource mobilization are exceptionally low. Tax revenue, only about 9 percent of GDP, suffers from leakages due to excessive exemptions, weak administration, and a poor tax-paying culture. Practically all investment authorizations grant extensive and broad tax holidays, and the leakages from donor-related and NGO exemptions are an important drain on public revenues. Government's efforts to increase tax revenue, which include establishment of an independent revenue authority and efforts to broaden the tax base, have been partially successful, with revenues increasing by 1 percent of GDP per annum in the last couple of years, but the budget remains heavily dependent on the counterpart to donor funding. Government is planning to reduce the number of existing exemptions and to tighten tax administration through the use of tax identification numbers, which are currently being issued to taxpayers. It also plans to introduce a VAT in the FY96 budget. Greater efforts are to be made in cost recovery and privatization of public enterprises will both increase taxes and reduce the budgetary drain through subsidies. Private saving, which is constrained by a number of factors, including a legacy of high inflation and negative real interest rates on financial saving, and an inefficient banking system, are still far too low to finance a significant level of investment. The initiatives toward financial sector reform, together with continued growth in confidence in economic management, should increase private saving. 27. Improving public sector management continues to be high on the Government's development agenda. Good progress has been made on civil service reform, as described above. Now, however, the reform needs to be carried through to completion, especially as regards the monetization of benefits and salary enhancement, improved personnel policies, complement control, accountability, etc. The government's decision to decentralize governmental functions to the district and local levels creates a host of important new public sector management problems. This includes matters such as the interface between the central, district and local government levels, personnel issues, the allocation of funding sources to the various levels, etc. Uganda's Ministry of Public Service has been providing technical assistance to district and local governments on financial control and accountability, on expenditure allocation policy and on personnel matters. However, a full fledged, sequenced decentralization plan, emphasizing capacity building requirements, needs to be formulated to guide the process. Managing the public sector is made more difficult also by the large number of parastatals and public enterprises, most of which are highly inefficient and a large drain on the budget. The program to accelerate divestitures and remove subsidies to these enterprises, together with further progress in focusing public expenditures on priority recurrent and development needs, are key elements of the Government's efforts to improve public management. 28. Promoting growth through private sector development is the basic tool for addressing poverty in Uganda's development strategy. The key is how to encourage private investment, both by domestic and foreign investors. This is to be done by directing efforts towards four major objectives. First, maintaining a stable macroeconomic environment with a minimum of price and market distortions; second, establishing an attractive business environment through a conducive legal and regulatory framework, competitive and open markets, and a supportive physical infrastructure (mainly energy, telecommunications and transport); third, redefining the role of the State so that the private sector can enter and operate in markets without unfair state competition; and fourth, strengthening the financial system. Progress has been made in each of these areas, but investment is still sluggish and these reforms need to be accelerated. Most important are further deregulation of investment through reform of UIA, reduced distortion in incentives, faster privatization, more effective and lower cost telecommunications and cheaper, more reliable electricity.  9 29. Sustainable Growth and the Environment. Uganda's environmental problems are not as serious as those of many other East African countries. There are, however, two problems that are particularly serious in terms of their economic and environrnental costs. The first of these is deforestation. Expansion of agriculture over the last 40 years has been achieved largely at the expense of Uganda's rich tropical forest. When agriculture's effects are coupled with the heavy industrial demand for timber, the impact on these forests has been severe. As much as 40 percent of the country's forest cover may have been lost since the late 1950s. The cost has been high in terms of soil erosion, in terms of damage to valuable watersheds, and in the loss of critical habitats which have supported a highly diverse flora and fauna, some possibly with tremendous medicinal value. The second major environmental problem relates to the degradation of Lake Victoria and other lakes. Fish harvests have been exceeding sustainable yields and the commercial introduction of a number of predatory species have virtually wiped out valuable native species. Moreover, the extensive conversion of bordering wetlands to agriculture has reduced the natural filtering processes, significantly increasing pollution of the lakes. The rapid spread of suffocative water plants is threatening the lake ecosystems, as is urban water pollution from a number of major cities on Lake Victoria. To put the problem in perspective, it is estimated that as much as 50 percent of the protein in Ugandan diets comes from lake fisheries, which gives the problem major implications for food security. 30. Uganda's research and extension activities are partly aimed at intensifying agricultural production in order to reduce the pressure to expand into uncleared forest areas. Regional plans (with Kenya and Tanzania) for better management of Lake Victoria are under preparation, with GEF support. In a broader context, Uganda is beginning to develop the capacity to better understand problems of environmental management and to address these problems through policy and legislation. The country's National Environmental Action Plan (NEAP) lays out a framework for integrating environmental concems in the national development strategy. A recently completed State of the Environment Report provides a comprehensive overview of environmental problems. D. Bank Group's Country Assistance Strategy 31. IDA's Poverty Reduction Strategy. The primary objective of the Bank's assistance strategy for Uganda is to reduce poverty. The key elements of this strategy, as outlined in the initial poverty assessment (1993), are: a) to maximize labor-intensive economic growth with the view to maximizing employment and income opportunities; b) to strengthen economic and social infrastructure, both to support economic growth and to facilitate the provision of services to the population, especially to the poor; c) to support human resource development as a means of increasing income earning prospects of the population; and d) to enhance the provision of public services, including through capacity building, with emphasis on ensuring that these services reach the poor and vulnerable groups. The strategy includes strong gender and environmental protection aspects, and supports the maintenance of macroeconomic stability. Another critically important issue is to be able to measure effectively changes in poverty over time, and among various groups in society, e.g., vulnerable groups, including orphaned children, widows and female headed households, disabled persons, etc., rural vs. urban areas, etc. IDA will be working closely with Uganda's Central Statistics Department to improve the availability, relevance and reliability of poverty data. 32. The main thrust of IDA's strategy over the medium term is to support govenmment's efforts to accelerate economic growth. While the rate of growth has risen recently and there are signs of increased well-being, poverty is not being reduced as quickly as needed or desired. The strategy for achieving faster growth is to promote private investment, especially in the agricultural and agroprocessing sectors. IDA plans to work with Govemment to reduce further the red tape that an investor must go through at UIA and the line ministries to get permission to set up or expand a business. At the same time, IDA will support infrastructure investments in transport, energy and telecommunications (to be privatized) with a view to increase their reliability and lower their cost to business and the public generally. By continuing to assist  10 Uganda with its privatization and parastatal reform program, and the return of expropriated properties, IDA will help establish a more positive climate for investors. In addition, with its work on civil service reform and capacity building, including at the district and local levels, IDA expects to assist the authorities improve the delivery of public services to businesses and public alike. Along with the Fund, IDA will assist in ensuring continued macroeconomic stability, the absence of which has a particularly damaging effect on the poor. Also, IDA will support actions to maintain an internationally competitive exchange rate, not only to encourage exports, but also to promote labor and domestic input intensive production. 33. As regards its efforts to reduce poverty directly, IDA has been working with the Government to improve the focus of both recurrent and development expenditures on essential public services, e.g., basic health and education, water and sanitation, agricultural research and extension (to raise productivity in the agricultural sector where there are high concentrations of poverty), and maintenance. Priority program areas (PPAs) in the recurrent budget have been agreed with Government and the allocation of resources to these areas significantly increased. The PPAs cover programs which should have the greatest benefits for the poor. However, the extent to which these benefits are actually reaching the poor is uncertain and one of the next steps in the Public Expenditure Review (PER) work is to trace with government the final impact of these expenditures. The development budget has been categorized into core and non-core projects, with the former containing mostly priority projects in the health, education, agriculture and other sectors with maximum potential for poverty reduction. Funding for the core projects is also protected from budget cuts relative to non-core projects. 34. The more specific activities of the Bank's poverty reduction strategy in Uganda, i.e., targeted programs, are concentrated in the Alleviation of Poverty and the Social Costs of Adjustment (PAPSCA) and the Northern Uganda Reconstruction (NURP) projects. Both projects are targeted to areas of highest concentrations of poverty; PAPSCA is targeted mainly to Luwero, Rakai, Lira, Gulu, and Apac districts and NURP to the Northern part of Uganda. These are also the areas most devastated by war and the AIDS epidemic. In PAPSCA there are components targeted to orphans, to widows and their dependents, as well as to poor women and children generally. While this project moved slowly initially, implementation picked up considerably in the last couple of years. NURP focused on providing social infrastructure, rehabilitating technical institutes, health centers and clinics, water supply and sanitation systems, etc., and also established a Social Fund (financed by the Netherlands) to assist three of the n.ost poverty stricken districts in Northern Uganda. There is also a focus on areas of high Guinea worm infestation in the Rural Water Supply project, support for small indigenous contractors in the Transport Rehabilitation and Small Towns Water projects, and the provision of essential drugs and other interventions targeted to AIDS patients under the First Health and Sexually Transmitted Diseases projects. 35. IDA's Strategy on Gender. Measures addressing gender issues have been included in almost all recent IDA projects in Uganda, reflecting IDA's strategy of incorporating specific targeted actions on gender wherever possible in projects and economic and sector work. Consequently, the Agricultural Extension Project provides that the numbers of women in agricultural colleges be increased and that women be recruited as extension agents. It also provides that women farmers be targeted for visits by extension agents. Components promoting women's access to income generating activities are present in the Agricultural Extension and Livestock Services projects. In the NURP, women are given preference in access to licenses for market stalls, in employment on road maintenance work crews, and in membership on management committees under the water and sanitation component. The education component promotes school attendance of girls through a waiver of fees and the integrated teacher training component gives preference to women teachers. The credit component of the Agricultural Development Project (transferred into NURP) specifically provides for credit access by women's groups. Lastly, the Bank has initiated and is managing under cofinancing with SIDA a study on the "Legal Constraints to the Economic Empowerment of Women" in Uganda. The study is to produce an action plan for gender-responsive legal reform, along  11 with strategies for implementing changes. Once the results of this study are available, IDA intends to place them at the forefront of its dialogue with the Government and to integrate them in its own strategy. 36. Continuing the Ongoing Reforms. IDA's assistance in coming years will continue to focus on supporting the ongoing reform program, to set the stage for increased economic efficiency and output growth, and better delivery of social and infrastructure services. On stabilization, this will involve assisting the Government to identify new sources of revenue and through public expenditure reviews, to rationalize further recurrent and development spending and increase its impact. IDA will continue to work with the Government on policies and programs to strengthen the international competitiveness of Ugandan exports, to reduce the external debt burden, and to improve management of the country's international reserves. IDA's continuing assistance on the structural reform program will include working with Government to accelerate the financial sector and parastatal reform and privatization programs; to complete the retrenchment (including military) and ministerial rationalization programs, the monetization of benefits (housing and vehicle use benefits) and the salary enhancement programs, all within the overall civil service reform program; and to ensure effective implementation of the coffee and cotton subsector reforms. IDA will also assist the Government to enhance incentives for private investment and business activity through reform of the Uganda Investment Authority (UIA) and to strengthen the operations of the Uganda Revenue Authority (URA) and customs to ensure effective administration of taxes and fiscal incentives directed towards private business activity. 37. Support to Decentralization. The Government's decentralization program will have profound implications for IDA's operations in Uganda. With responsibility for both recurrent and development expenditure programs being devolved to the districts and local communities, IDA will have to become much more involved at those levels in implementing its lending and ESW activities. Although there are many advantages to the decentralization program, there are also a number of potential pitfalls, including questions concerning institutional and human resource capacity at the district level, issues of financial control and accountability, and matters regarding coordination between the district and national levels. In addition, decentralization will substantially increase the difficulty of undertaking sector investment operations. On the other hand, it has good potential for improving the delivery of critical public services, especially to the poorer segments of Ugandan society and for bringing decisions closer to beneficiaries. IDA supports the decentralization effort. 38. Beneficiary Consultation. Client consultation and beneficiary participation are becoming standard aspects of IDA lending. The increasing use of project workshops, seminars, etc., to involve beneficiaries is one avenue being used to achieve this goal. One example of this in action is the establishment of a mechanism under the Small Towns Water Supply project for having communities choose the water supply systems they want and can most afford (piped system or standpipes), thereby ensuring that water is made available to broad-based groups in the community and not only the wealthy. Having projects designed and implemented by districts will significantly increase the opportunities for consultation and participation by beneficiaries. Also, the early discussion with government of Project Concept Papers (PCPs) is another method of consultation being used in the Uganda program. 39. Lending Strategy and Program. IDA's proposed lending operations directly support the strategic objective of reducing poverty and are concentrated on the twin pillars of the strategy: maximizing labor- intensive economic growth and human resource development. These operations are integrated with previous IDA lending and with what other donors are doing in those areas. They are also consistent with the policy agenda in the current Policy Framework Paper and in the adjustment operations. IDA lending will increasingly emphasize sector investment lending operations, under which IDA would finance a portion of the country's sector investment programs. As indicated below, sector investment programs have been identified and are being prepared in several sectors of the economy, e.g., transport, agriculture and  12 education. IDA's work with the Government on the sector investment programs will complement the public expenditure review (PER) work which aims to rationalize the development budget indicates the linkages between the proposed lending operations economic and sector work and IDA's strategy. Where resettlement is involved, IDA's lending will include strict application of the Bank's policy provisions on the subject. In addition, the Bank is helping the Government formulate a national "resettlement" policy. The proposed policy, which has been discussed broadly within the Government through workshops to ensure participation, is consistent with the provisions of the OD. 40. Less Import Support. Uganda now has less need for balance of payments support, due to the move to a market based exchange system and to improved foreign exchange earnings - particularly currently due to the high international coffee price. The need for budgetary support is also declining as revenue generation improves, and it is extremely important to continue this trend, since the outlook for sustained inflows of budget support is uncertain. It is perhaps particularly important to reduce dependence on borrowed funds for budget support purposes. IDA has gradually been phasing down non-project lending over the past couple of years, both by increasing the time between commitments, and by progressively reducing the amounts of adjustment credits. Barring unforeseen developments beyond the country's control, and assuming that absorptive capacity for investment lending will gradually increase, the shift in the composition of IDA lending towards investment financing is expected to continue. 41. Infrastructure Development. Although much remains to be done, a considerable portion of Uganda's basic infrastructure has been rehabilitated over the past few years. The existing main road network has been redone and is quite serviceable. Also, the Government has embarked on a five year road maintenance program financed partially from the budget and partially by donors, including IDA. Upgrading and rehabilitation of roads will continue to be a major component of IDA's strategy during the next few years. The next priority is to rehabilitate the secondary road network and the feeder roads into areas of high agricultural potential, which is an important thrust of IDA's ongoing Transport Rehabilitation Project, in addition to financing maintenance. To provide the framework for this further work, the Government has prepared a national feeder roads strategy and is preparing a National Transport Development Plan to establish policies and investment priorities in these areas. IDA's proposed lending for transport infrastructure includes a Rural Roads project, which focuses on rehabilitating feeder roads using labor intensive techniques, and a project to finance a portion of Uganda's transport sector investment program. IDA plans to support decentralizations through a District Development Sector Investment project, which is a multi-sector operation that will provide funding to districts and local communities for planning and infrastructure development, and a Institutional Capacity Building Project to raise capacity at district and local areas. With DANIDA taking the lead on developing rural water and sanitation systems, IDA has done considerable work on urban water supply and sanitation systems. The proposed lending program contains a Peri-Urban project to provide water, sanitation and other services to high-poverty areas surrounding the major towns, including Kampala. The nation's main power system, the Owen Falls complex, is currently being rehabilitated and its capacity expanded and IDA would consider supporting the next phase of the least-cost power system expansion. In addition, a Telecommunications project will assist the Government to split the postal and telecommunications sectors and privatize the latter. 42. Generating Growth. IDA's recent assistance to promote growth in Uganda has emphasized deregulating the economy and getting policies right, combined with selective investmnent projects to support restructuring of subsectors. This strategy is expected to continue, but with even greater emphasis given to encouraging private sector activity. Thus in agriculture, which is almost totally private sector, IDA has supported research and training, extension, livestock, and coffee and cotton restructuring projects, and expects to continue this assistance through an Agricultural Sector Investment project and an Agricultural Sector Capacity Building project. In industry, IDA's support has been mainly through structural adjustment credits to finance imports based on policy improvements and through support to the Government's  13 privatization and parastatal reform efforts. Further support from IDA will be through a Private Sector Investment project. IDA is supporting financial sector reform through an ongoing Financial Sector Adjustment Credit. IDA will also support privatization of telecommunications through a Telecommunications project. Gender based obstacles preventing women from accessing financial services will be integral components of the Agriculture Sector Investment and Private Sector Investrnent projects. 43. Improving Social Services. Improvements in health and education are among the highest priorities in IDA's assistance strategy in Uganda, and future lending will build upon recent interventions in these sectors. In health, IDA's emphasis is on primary and preventive care, which is being pursued under the First Health project, and on attacking the devastating AIDS problem through the recently-approved Sexually Transmitted Infections project. IDA will be assisting the Government implement its decentralization program in the health sector with the District Health project (approved in February 1995). The decentralization of health services will bring decision making on the provision of health services closer to the beneficiaries, which should enhance the poverty reducing focus of those services. IDA will be working closely with community groups, NGOs and other donors in implementing this project. Future lending in the health sector is expected to include a Reproductive Health project and a project to support Child Nutrition, both of which will have strong and direct links to IDA's poverty reduction objective, as well as to the gender aspects of the strategy. 44. IDA's approach in the education sector continues to be the provision of support on the supply side at the primary and secondary levels, including the training of teachers for those levels. Thus, the ongoing IDA Fifth Education project (Primary Education and Teacher Development project - PETDP) is designed to strengthen primary education by rehabilitating school facilities, improving primary curricula, providing textbooks and rehabilitating primary teacher colleges. The decentralization of primary (and secondary) education presents serious management capacity problems. Consequently, IDA is planning to prepare an Education and Training Sector Note which will review progress made thus far in improving and expanding primary education, assess the implications of the Government's decentralization program for the education sector, evaluate the main conclusions of the ongoing secondary education studies, and assess the potential for introducing cost recovery at the secondary and university levels. Recognizing that households are the principal investors in human capital formation, IDA is planning to shift its support to the education sector to encompass demand-side financing initiatives. This support would provide finance to the demand as well as supply side of the equation with a view to developing markets for educational services. The Student Financing project currently being prepared would be the first IDA operation in Uganda to encompass this new approach. 45. Capacity Building. Past efforts to increase local capacity have focused on institution building and training of staff in selected core agencies. The ongoing civil service reform is also a central element of capacity building efforts. Despite these efforts, implementation capacity in the public sector remains a bottleneck. The need to raise capacity has been heightened by introduction of the decentralization program. Capacity at the district levels is particularly in need of support. IDA's Institutional Capacity Building (FY95) and District Development (FY96) projects will be important supplements to the efforts of Government and other donors to raise capacity at the district and local government levels. 46. Greater Emphasis on Implementation. Good progress was made during the past year in improving project implementation. One of the main constraints on implementation, lack of counterpart funds, was largely resolved by designating certain projects in the development budget as core (high priority) projects, to which the Government agreed to provide, and has been providing, full counterpart funding. The Government is expected to reduce further the number of projects in the development budget with the view to having only core projects in the FY96 budget. To improve its portfolio, IDA has restructured a number of projects to make them more responsive to the Government's priorities and to remove non-performing  14 components. In addition, IDA held a highly successful CPPR to address generic issues affecting projects. One of the outcomes of this Review was the creation of a "Club of Project Managers" which meets regularly to monitor project implementation. Other important outcomes were the establishment of procurement committees for IDA projects as a means of resolving the bottleneck at the Central Tender Board, and more frequent training for Project Managers on IDA's procurement regulations. In coming months, IDA will focus on upgrading quality at entry, ensuring client commitment and strengthening the implementation culture that has been established through the Club of Project Managers. Better quality at entry will be sought through strengthening the peer review process and through the Project Concept Paper (PCP) initiative. 47. Environmental Protection and Management. An important focus for Bank support for environmental protection includes two GEF-financed initiatives: the Bwindi Impenetrable National Park and Mgahinga Gorilla National Park Conservation Project and the Lake Victoria Environmental Management Plan. The Bwindi project addresses biological diversity conservation objectives by establishing a trust fund, the income from which will be used, to support park management and research activities. The Lake Victoria Environmental Management Plan seeks to promote regional cooperation between Kenya, Tanzania, and Uganda in developing a coherent strategy for addressing the issues associated with degradation of the lake. Both the country's wildlife resources and necessary infrastructure have been badly degraded since the early 1970s, when tourism was the country's third largest foreign exchange earner. The proposed Protected Area Management and Sustainable Use project (PAMSU) will focus on improving the management of protected areas, developing tourism infrastructure and the management capacity to maintain it, and supporting sustainable use of protected areas by communities living in their vicinity. Uganda's National Environmental Action Program (NEAP) highlighted the lack of environmental management capacity. Thus, the proposed Environment Management Capacity Building project will support the development of information, planning, and legal and policy-making capacity with the Ministry of Natural Resources. Finally, environmental protection and management is a critical feature of Bank-supported initiatives in the agriculture sector. Poverty reduction through support for sustainable systems of agricultural production has been shown to have a significant impact on reducing pressures on threatened ecosystems. These aspects of land and resource management feature prominently in the Agriculture Sector Investment project, as well as in the Agricultural Sector Capacity Building project. 48. Economic Prospects and External Financial Requirements. Uganda has good prospects for economic growth and eventual poverty reduction. If the constraints on efficient private investment can be removed, the prospects become very good. Nevertheless, three growth scenarios are presented here; a base case or most likely scenario which assumes steady progress on the adjustment program and a gradual increase in the investment ratio, a high case scenario which assumes accelerated implementation of the adjustment program and more rapid investment growth, and a low case scenario which assumes backsliding on the adjustment program and stagnant or declining investment. The Technical Annex shows the outcome of these various scenarios. 49. Recent developments show a much improved economic outlook for FY95 and FY96, due in particular to higher-than-expected international coffee prices. This positive external shock in the terms of trade is expected to have direct and indirect repercussions in the economy, not only in the balance of payments through higher exports, imports and reserves, but also in consumption, investment, fiscal revenues, net foreign assets and monetary growth. This in turn is expected to increase the rate of GDP growth, perhaps to over 7 percent for a brief period, and put pressure on domestic price levels. Managing the coffee boom is a major challenge to Uganda policymakers. 50. Base Case Scenario. The base case scenario envisages implementation of the Government's economic program as set out in the Policy Framework Paper for FY95-FY97. Key indicators which would  15 characterize policy performance under the base case are set out in Box 1 below. This scenario foresees a spurt in growth to about 7.0 percent in FY95 and FY96 as a result of the sharply improved external terms of trade resulting from the coffee boom, with growth then falling progressively to around 5 percent. Due to the large inflow of resources in FY95 and FY96, inflation rises to near 10 and 7.0 percent in those two years respectively, after which it retums to 5 percent under this scenario. Total investment is seen to expand to about 18 percent of GDP by 2003, from 15.3 percent in FY93, with the increase coming from private investment. Once the lingering effects of the coffee boom have subsided, export volumes are projected to grow at 5.5 percent a year in response to a favorable policy environrment. Export values show a declining growth pattern, however, reflecting the expected decline in coffee prices. The resource balance narrows during the coffee boom years and rises somewhat after FY96, but still remains less than pre-boom levels. Under a policy of tight expenditure control and steady growth in revenue (other than the coffee tax), the Government deficit falls sharply in FY95 and FY96 in this scenario and then rises gradually to reach 7.9 percent of GDP in the FY2000/03 period, which is below pre-boom levels. The degree of expenditure and monetary control in this scenario keeps inflation in check, without stifling growth entirely. Under this scenario, it would be appropriate for Uganda to smooth the impact of the coffee boom by accumulating substantial foreign reserves for later use, which in turn underlines the importance of sound reserve management. 51. The external debt would increase to around US$5.0 billion in FY2003 from around US$3.0 billion in FY94 and would be the equivalent of 53 percent of GDP in the former year, compared with 75 percent in FY94. However, the scheduled debt service ratio before debt relief (see Table 1 below) would decline from about 54 percent in FY94 to about 18 percent in FY2003, due to a combination of prepayment and restructuring of official debt, and favorable terms on new borrowing. IDA lending in the base case would be in the $150-200 million per annum range. This is below the normative allocation for Uganda because of absorptive capacity constraints. 52. High Case Scenario. Uganda has the potential to achieve a higher rate of economic growth than that projected in the base case. To do so will require a higher level of export growth, based on higher private investment, together with complementary public sector investments, particularly in rural infrastructure. Consequently, actions would need to be taken quickly to create an export-oriented incentive structure, an improved business climate, a more efficient financial sector and greater efficiency in public services. Also, continuing efforts are needed to mobilize greater domestic resources through broadening of the tax system and better tax administration. If these additional actions are taken, they could trigger real GDP growth in the 6-7 percent range throughout the projection period. Investment would rise to 20 percent of GDP by FY2003 in this scenario, due to increased private investment. The resource balance would improve somewhat relative to the base case, mainly because growth in non-traditional exports. The increased economic activity, along with a more effective collection effort, would lead to higher revenues and a lower fiscal deficit compared with the base case. Inflation is expected to remain under control in this scenario, similar to the base case. Should these more accelerated actions be taken, IDA would support the process by expanding its lending to US$200-225 million per annum range. 53. Low Case Scenario. This scenario assumes that substantial delays or reversals occur in implementing the macroeconomic and structural adjustment programs. It would be characterized by loss of control over expenditures and stagnating revenues, leading to a large increase in the budget deficit; by a lack of movement on rationalizing the incentive structure; by failure to move aggressively on parastatal and financial sector reform; by an increase in the size of the civil service; and by lack of progress in restructuring public expenditures (e.g., not giving priority to the PPAs). These reversals would trigger a move to the low case scenario. Failure to limit substantially borrowing to highly-concessional terms would also trigger IDA's movement to the low case lending scenario. If these reversals occur, internal stability would be undermined, private sector investment would stagnate and real GDP growth would fall to the 2 percent or less range throughout the FY98-03 period. Inflation would soar to the 40 percent range, driven  16 by a sharp increase in the fiscal deficit (to 12 percent by FY2003), and the exchange rate would depreciate sharply. Export growth would slow and external assistance would likely decline, leading to a substantial loss in international reserves. The debt service ratio would be expected to increase as a result of the slow growth in exports and the increased government borrowing required to cover the deficit. A significant part of the borrowing would be at less than concessional terns. Such a slowdown in economic growth would severely set back the poverty reduction effort in Uganda. If this should happen, IDA would revert to a lower level of lending of around US$50-75 million per annum. IDA lending in this situation would focus almost entirely on the social sectors. Box 1: Uganda: Indicators for Lending Scenarios Base Case - Continued steady improvement in revenue performance. - Continued strong expenditure control, including for decentralized activities. - No significant recourse to domestic banking system for deficit financing. - Continued increases in allocations to PPAs and rationalization of development budget. - Progress in privatizing UCB and strengthening prudential supervision. - Progress in parastatal divestiture, towards goal of divesting 85% of enterprises by end-1997, including early privatization of UPTC. - Progress in reducing tax exemptions and rationalizing incentive structure. - Achieving monetization of benefits for civil servants. - Progress in restructuring/privatizing cotton ginning. - Substantially limiting new external borrowing to highly concessional terms. - Sound management of extemal reserves. High Case As in Base case, plus: - Accelerated progress in improving the efficiency and impact of public expenditure in PPAs. - Rapid movement towards competitive and sound financial sector. - Quick movement towards creating export-oriented incentive structure, and strongly supportive regulatory environment. - Accelerated phase-out of subsidies to utilities. - Rapid increases in revenue mobilization and corresponding acceleration in reducing fiscal deficits. Low Case - Loss of expenditure control. - Stagnation of revenue effort. - Reversal of public expenditure rationalization, with PPA allocations suffering relative decline. - No significant progress in parastatal or financial sector reform. - No movement on private sector incentive rationalization. - Increases in civil service employment. - Significant borrowing on other than highly concessional terms. 54. Structure of External Debt and Debt Management Strategy. Uganda faces a serious debt problem. As of December 1994, Uganda had US$3.26 billion in total external debt outstanding and disbursed (equivalent to about 80 percent of 1994 GDP), which included around US$250 million in principal and interest arrears. About 70 percent of total debt outstanding and disbursed was owed to multilateral institutions (including US$1.55 billion to IDA, and US$342 million to the IMF). About 24 percent of the total external debt was owed to official bilateral creditors, about half of which was owed to Paris Club creditors. Scheduled debt service obligations (including IMF charges) in 1994 were equivalent  17 to 54 percent of exports of goods and services. Multilaterals accounted for over half of the debt service payments that year. IDA debt service amnounted to 7.6 percent of exports. 55. In 1992, the Govemrnment of Uganda adopted a well-articulated strategy for managing its debt. The strategy had five components: (i) year-by-year rescheduling of eligible Paris Club bilateral debt from the pre-June 1981 period, and maximum annual deferral of all Paris Club bilateral debt accumulated thereafter; (ii) write-off or long-term rescheduling of all non-OECD bilateral debt; (iii) extension of bilateral balance-of-payments support to cover less-concessional multilateral debt service payments; (iv) buy back of uninsured commercial debt; and (v) virtual cessation of govemment or govemrnment-guaranteed extemal borrowing on all but highly concessional terms. There has been progress in implementation: (i) Uganda has secured rescheduling from the Paris Club, most recently through application of Naples Terms; (ii) some non-OECD bilateral debt has been rescheduled, although much remains untreated; (iii) IBRD debt has been fully paid (most recently through prepayment financed by Norway), but ADB debt, though relatively small, is still uncleared; (iv) a buyback of unsecured commercial debt, financed by the Debt Reduction Facility for IDA-only countries and bilateral donors, was successfully completed; and (v) Uganda has avoided almost all new non-concessional borrowing. The recent Naples terms rescheduling with the Paris Club accorded Uganda only a 3 percent reduction in the present value of total debt, however. 56. Debt Sustainability. The analysis of debt sustainability is based on the following assumptions: (i) no further relief would be forthcoming from the Paris Club; (ii) non-OECD bilateral creditors would grant Uganda relief comparable to that obtained from the Paris Club; (iii) ADB debt would be covered by bilateral donors; (iv) Uganda would continue to borrow only on highly concessional terms (except for a small amount of non-concessional borrowing for purposes for which concessional credits are not available); (v) new official financing continues at its current level in real terms, including about $200 mnillion a year from IDA as at the high end of the base case; and (vi) after rising slightly more rapidly in the late 1990s, exports would grow at about 5.5 percent a year in real terms over the longer term as envisaged in the base case projections. On this basis, the projections indicate that the country's scheduled debt service obligations in the 1995-96 period would be halved. In the following decade, the payments on the rescheduled official bilateral debt become due, adding to Uganda's debt service obligations. After 2005, however, the country's debt service obligations increase more gradually due to the highly concessional nature of future borrowing. An analysis of Uganda's liquidity situation as suggested by the "liquidity ratio" (debt service as a percentage of total exports) shows that once all of the various debt relief measures assumed in the projections are accounted for, the ratio rises from 12 percent in 1995 to 17-18 percent in 2000/05, and after which it falls gradually to around 14 percent in 2014 (Table 1). The ratio of IDA debt service to exports, while rising until the year 2010, stays below 10 percent throughout the period. Net transfers to Uganda are projected to remain positive throughout the entire 1995-2014 period. Table 1. Liquidity Ratios, 1995-2014 Actual Debt Service Projected Debt Service Obligations Obligations 1993 1994 1995 2000 2005 2010 2014 Debt Service/Exports of G & S: Before Debt Relief 83.4 54.1 23.6 28.9 17.5 13.0 12.6 After Debt Relief 83.4 54.1 11.9 17.2 18.2 14.0 13.7 Note: Private transfers are excluded from exports; however, in Uganda's case they include some misreported export receipts. Source: World Bank Staff estimates.  18 57. An evaluation of the likely budgetary impact of debt service payments that is derived from the ratio of debt service (excluding IMF) to GDP suggests that, although greatly reduced in 1995 as a result of the debt relief described above, the burden increases modestly from less than 1 percent of GDP in 1995-97 to about 1.6 percent of GDP by 2005 (Table 2), after which it declines slightly. Given the assumptions underlying the projections, IDA contributes only a modest share of this increase. While a level of 1.6 percent of GDP (implying that 8 percent of public expenditure would be used for debt service if expenditures amount to 20 percent of GDP) appears manageable, the increasing burden after the year 2000 underlines the importance of Uganda obtaining grant terms on new bilateral financing as far as possible. Table 2. Debt Service to GDP Ratios, 1995-2014 Actual Debt Service Projected Debt Service Obligations Obligations 1993 1994 1995 1997 2000 2005 2010 2014 Debt Service (excl IMF)/GDP: Before Debt Relief 4.8 4.2 2.1 1.9 2.1 1.5 1.3 1.4 After Debt Relief 4.8 4.2 0.8 1.0 0.9 1.6 1.4 1.5 Source: World Bank Staff estimates. 58. The future high debt service requirements of Uganda's existing debt underlines the importance of a combination of further debt relief, rapid export growth and achieving favorable terms for new financing, for achievement of a long-term sustainable debt position. Since there would appear to be limited prospects for debt relief further to what is assumed above, the critical determinant of longer term debt sustainability would be the terms of new financing and the rate of growth of exports. With full implementation of the debt strategy and export growth as under the base case described above, the sustainability of the country's debt should be considerably strengthened. 59. As mentioned in paragraph 55, Uganda has undertaken to substantially avoid new borrowing except on highly concessional terms, and failure to meet this objective would trigger a move to the low case lending scenario. Uganda has substantial export potential, and achieving export growth at or above that incorporated in the base case is judged feasible. There is major potential for growth in "traditional" exports: coffee production is already responding to the major improvements in producer incentives arising from liberalization; cotton production could recover to and beyond the levels achieved twenty five years ago (despite tripling from the late 1980s to the present, it is still only 13 percent of the 1970 peak); and tea production also has large growth and recovery potential. There is also great potential for a wide range of "non-traditional" exports, including tourism, fish, flowers and other horticultural products, vanilla, basic foodstuffs, etc. Non-traditional exports have already grown rapidly, at about 40 percent a year over the past 3 years, albeit from a low base. 60. Clearly achievement of rapid export growth will depend on the implementation of furtfer policy reforms, to further strengthen the environment for export-oriented private investment, as envisaged under the base case (see Box 1). If the reform program falters, as under the low case scenario, export growth The ratio of the present value of debt service on existing debt to average 1993-95 exports was 451 as of end- December 1994 and is still high at 318 afteer taking into account the impact of recent Naples terms by the Paris Club and comparable treatment by other bilateral creditors, along with prepayment of some multilateral debt. This reinforces the importance of implementing the debt strategy and maximizing export growth, which would lower this ratio to 150 by the year 2002.  19 could stagnate and, together with renewed borrowing on hardened terms, this would quickly lead to an unstainable debt situation. It will be important to keep the debt situation under careful review. 61. IFC and MIGA. The objective of IFC's activities in Uganda is that of developing the private sector through project financing, capital market development and advisory services. Such activities support and complement Bank activities airned at creating an enabling environment for private sector development through the rehabilitation of essential infrastructure and the liberalization of the economy. IFC has investments in agro-business (sugar and tea) and in financial services (development banking, leasing company and insurance). In addition, the IFC has been working with the Bank on restructuring the privatization process and in identifying future operations in the telecommunications sector. Through the African Enterprise Fund, IFC has supported six smaller projects (fishing, flower production, sack production, private schools, hotel apartments and office blocks). It has also completed for the Government three advisory assignments covering cotton, telecommunications and the stock market. IFC's priorities are to render further assistance in relation to the privatization process and institution building in the financial sector while continuing its traditional investment role when suitable project opportunities arise. Since 1992, the objective of MIGA is to support private foreign investment and assist the country in improving its ability to attract investors. MIGA has been active in Uganda. It has issued commitments and guarantees for US$ 57.1 million against the risks of currency transfer, expropriation, war and civil disturbance for a cobalt extraction project, a fish processing project and a coffee processing project. A number of other investments are at various stages of development. 62. Relations with the IMF and Other Donors. The Bank and the IMF have collaborated closely over the last three to four years in the development and monitoring of the adjustment program in Uganda, as well as on more recent discussions with the Uganda Government on the next phase of the reform agenda, particularly in regard to the structure of taxation and tax administration and in the restructuring of the financial system. The IMF has collaborated with the Bank on the Public Expenditure Review exercises and the IMF and the Bank have worked closely on the identification of macroeconomic and sectoral reforms as outlined in the FY95-97 Policy Framework Paper. Several bilateral and multilateral donors have participated formally in IDA's Public Expenditure Reviews and have collaborated on various sector programs, e.g., road maintenance initiative, AIDS and other health sector programs, water and sanitation. E. Agenda for Board Consideration 63. Key Issues for Consideration. Uganda has achieved notable successes since 1987 in deregulating the economy, liberalizing the exchange and trade regimes and achieving macroeconomic stability. Important gains have been made on civil service reform and on military demobilization. The advances made in FY94 included introduction of the interbank market, liberalization of petroleum pump prices and further steps towards full liberalization of the coffee and cotton subsectors. While these have been solid achievements, much remains to be done. Macroeconomic stability must be maintained and the Government must not let up on completing the ongoing reform efforts and stimulating growth to reduce poverty. Efforts to improve public sector management and governance, and to accelerate financial and parastatal sector reform will be important elements of the country's future reform agenda. Increased resource mobilization by both the public and private sectors remains a high priority, while implementing the decentralization program will present new challenges. Meanwhile, the country has much to look forward to, not the least of which is the promise of a stable political situation.  20 64. In assessing whether IDA's proposed strategy is appropriate to present conditions in Uganda, the Board may wish to focus on the following aspects: * Measures and actions to accelerate poverty reduction; * Whether the strategy appropriately addresses issues of public sector management and capacity (including the key problem of domestic revenue mobilization) and private sector development; * Whether the medium-term goal of increasing investment lending on a sector-wide basis and reducing balance-of-payments support is appropriate. Richard H. Frank President ad interim Washington, D.C. May 9, 1995  -21- ATTACHMENT 1 Page 1 of 2 Table 1: Stabilization and Structural Reform Objectives and Progress OBJECTIVES PROGRESS Stabilization: Contain inflation to 7.5 percent in FY94/95 and 5 percent Annual inflation through December 1994 was 7.0 percent; inflation per annum thereafter. target expected to be met. Fiscal Policy: Strengthen budgetary processes; maintain prudent fiscal Budget processes have been strengthened to include improved budget policy consistent with extemal financing and non-inflationary domestic formulation and three year rolling budgets; budget deficit (excluding financing; define priority recurrent and capital spending areas and fully fund grants) fell to 9.8 percent in FY93/94 from 14.5 percent in FY91/92, these; increase tax revenues by broadening the tax base and improving tax through tight control over expenditures; priority spending areas have administration. been delineated in both recurrent and development budgets and these are being fully funded; an independent, adequately paid, revenue authority has been established and revenues are increasing, albeit gradually. Monetary Policy: Reform banking and financial institutions acts; strengthen Banking and financial institutions acts have been revised to give BOU BOU's internal operations and prudential supervision capacity; restructure more autonomy and powers, and to strengthen capital and operating and privatize UCB; maintain positive real interest rates; strengthen requirements on commercial banks; BOU's intemal accounting and indigenous banks. other systems have been strengthened, as has its prudential supervisory capacity; the restructuring of UCB is underway and actions to privatize the bank are being developed; interest rates remain positive in real terms; govenmment is studying ways to strengthen indigenous banks. Trade and Payments Policy: Liberalize trade and payments system; All restrictions on current account transactions have been removed and establish and maintain market-determined exchange system; reform tariff those on capital transactions are limited; export and import licenses structure; maintain intemationally competitive exchange rate. have been replaced by simple registration procedures; except for a very short negative list, imports are liberalized; an interbank market in foreign exchange has been established and the exchange rate is market detemiined; Uganda's intemational competitiveness has been undermined recently by the strength of the shilling; the tariff structure has been simplified and average tariffs reduced, although further review is required. Civil Service Reform: Reduce the size of the civil service to level The size of the civil service has been reduced to about 150,000, from commensurate with essential functions required of government; match skills 320,000 when the reform began; reviews of functions and skills mix mix with job requirements; pay adequate remuneration to civil servants; have been completed for several ministries; wages have been increased monetize housing and vehicle benefits in tandem with salary enhancement. substantially in real terms in the past two years, but are still extremely low; housing and vehicle benefits are being monetized, however the pace is very slow. Parastatal Reform/Privatization: Privatize all non-strategic public Privatization is underway, but progress has been less than anticipated enterprises/parastatals; restructure remaining parastatals to increase and process should be accelerated; parastatals that remain are to be efficiency; eliminate subsidies to parastatals; avoid creation of new restructured to raise their efficiency, direct subsidies to parastatals have parastatals. been eliminated and government is reviewing indirect subsidies with a view to removing them; any new parastatals must meet rigorous criteria for their existence. Decentralization: Progressively devolve functions to district and Devolution of functions to the district level has begun for the health and community level; establish interface budgetary mechanism between central educations sectors, however the interface between district and central government and district/local govemments; enforce strict standards of government has not been fully designed or worked out yet; standards of financial control and accountability. financial control and accountability still need to be fully established.  -22- ATTACHMENT 1 Page 2 of 2 Table 11: SECTORAL DEVELOPMIfENT OBJECTIVES AND PROGRESS Objectives Progress Social Sectors: Reduce poverty; improve the health status Poverty reduction through accelerated economic growth, provision of essential social services and specific of the population; accelerate the development of Uganda's targeted programs being implemented. Essential services, including health and education programs, are human resources: eliminate gender inequalities; strengthen being given priority in the national budget and government is seeking donor support to expand targeted community based anti-poverty programs. programs in high poverty areas and for vulnerable groups. To increase beneficiary participation in decisions, the Government has begun to decentralize these services to the districts and local communities. The Goverrnrent is supporting actions to further the empowerment of women. A poverty reduction strategy is being prepared and the Government is providing assistance in the form of separation packages, training, etc. to retrenched civil servants and demobilized soldiers. Agriculture and Environmnent: Maintain food security and Integrated national research and extension programs have been developed and are being implemented to contribute to export diversificatinn and growth by develop and disseminate improved agricultural technologies. Rural feeder road rehabilitation and maximizing growth of food and cash crops through: maintenance programs are underway with donor support and additional plans are being developed. State provision of effective support services, e.g., agricultural marketing boards for produce, coffee and cotton have been eliminated and private sector participation in research and extension; investments in rural infrastructure, marketing these products is allowed. Markets have been deregulated and sector institutions are being especially connecting and feeder roads; reliance on market strengthened. A National Environmental Action Plan is being implemented. Initial actions include a joint systems; elimination of state trading monopolies, e.g., program with Kenya and Tanzania on cleaning up Lake Victoria and protection of Bwindi Forest reserve. coffee and cotton marketing boards: restructuring of processing and marketing systems, e.g., introduction of private sector in processing and marketing (including exporting) of coffee, tea and cotton; and institutional strengthening. Improve natural resource management under a National Environmental Action Plan that addresses pressing environmental concerns, e.g., pollution of Lake Victoria, land and soil degradation, preservation of wildlife and natural forest, and unsustainable population growth. Infrastructure: Rehabilitate economic and social The Government is preparing a National Transport Development Plan to guide future investment in the infrastructure to contribute to economic growth and human sector and comprehensive road maintenance program has been developed and is being implemented with resource development, with focus on areas of high poverty; donor support. A rUral feeder roads strategy will be part of this plan. Also a water resource management institutional strengthening of planning and implementation program is being prepared with donor support and IDA is assisting with water projects designed to capacities; increased cost recovery based on ability to pay: involve and assist the poor. An energy assessment is being prepared as the basis for a comprehensive and increased communitv and private sector participation. energy program for urban and rural areas. A decentralization program in now underway, which would ultimately enable local government to deliver infrastructure services responsively and efficiently. Health and education infrastructure are also being given priority, particularly rural health clinics and schools. Cost recovery is being stressed for those able to pay. lIndustry: Maximize industrial growth, and thereby Investment, export and import licensing have been replaced by simple registration, the marketing of both employment and income growth, by: deregulating domestic and export crops has been deregulated and the private sector is free to engage in these activities. investment and business activity; divesting/privatizing all Prices remain free of controls. Expropriated properties have been returned to their rightful owners, non-strategic parastatals and public enterprises; improving confirming the Government's respect for property rights. Progress, albeit slow, is being made on the efficiency and effectiveness of remaining strategic parastatal reform and privatization. Strategic parastatals, especially in power and teleconununications, are parastatals; maintaining a conducive business climate, inefficient and discourage private investment. Macroeconomic policies have created a conducive business including macroeconomic stability, consistent and stable climate by maintaining stability. Political stability and a supportive government, reinforced by a economic policies and incentives; a supportive political commitment to democratic processes, is providing a stable business environment and should encourage regime; and the effective provision of essential public investment. Reform of the financial sector is high priority, but proceeding more slowly than expected. services, including efficient financial services at reasonable costs. Export Development: Increase and diversify the country's The interbank market for foreign exchange is working efficiendy, with the exchange rate now market- export base to reduce the dependence on coffee and generate determined; nearly all export and import restrictions have been removed; the tariff structure has been economic growth, by: providing a conducive policy simplified and tariffs reduced; and incentives in the form of tax rebates on imports going into exports are framework, including maintaining an internationally being provided. The Government is actively promoting investment in export industries through promotion competitive, market-determinedexchangesystem; promoting campaigns abroad and is improving trade related infrastructure. The capacity for export promotion in the the growth of non-traditional exports abroad; providing Uganda Investment Authority and the Ministry of Trade and Commerce is being strengthened. needed infrastructure (e.g., transportation, storage, etc.) to facilitate export production and marketing; and strengthening the institutional capacity for promoting non- traditional exports.  IDA Uganda Country Strategy Investment Operations ( ~Goal| I Reduce Poverty Objective Objective Maximize Human Resource Economic Growth Development I Ifratrutue/ | Private Sector Social I t Cpct I Environment Development Services Building FY 90-95 First Urban Livestock PAPSCA Primary Education Small Towns Water Enterprise Development AIDS Econ. and Fin. Management Power III North Uganda Reconstruction District Health Institutional Capacity Transport Rehabilitation Agriculture Extension. Building Environment Management Agriculture Res. and Training Cotton Development FY 96 Peri-urban Protected Areas/Tourism Agriculture Capacity District Development Primary Sector Development Building FY97 Rural Roads Child Nutrition Student Finance Telecommunications FY 98 Main Roads Sector Agriculture Sector Investment Reproductive Health k4m  Uganda Country Strategy: Economic and Sector Work Goal | Reduce Poverty Objective Objective Maximize Human Resource I Economic Growth DeveloDpment Infrastructure/T1 Private Sector Policy Environment Development Framework FY 90-94 Uganda: Agriculture Financial Sector Review Uganda: Social Sectors Private Sector Assessment Poverty Assessment FY95 Water Sector Review Eastern Africa - Survey of Financial Sector Strategy Education Sector Note Foreign Investors Update Energy Sector Assessment Sustaining Policy Reform in PER Eastern Africa: Tools for Private Sector Development CEM PSD Strategy Paper Tax Policy Note Incidence of Recurrent Expenditure Note FY96 Biodiversity Strategy Agriculture Sector Update Training Sector Note  UGANDA CAS SCENARIOS (In Fiscal Years) ACTUAL HIGH BASE LOW 1993 1997 2000 2003 1997 2000 2003 1997 2000 2003 GDP at MP Growth Rates 7.2 7.0 6.5 6.0 5.4 5.4 4.8 3.0 2.0 2.0 Inflation p.a. 32.9 5.0 5.0 5.0 5.0 5.0 5.0 30.0 40.0 40.0 NominalExchangeRatep.a.. 1202 1103 1185 1275 1103 1185 1275 1103 2808 7162 DOD (US$ mill.) 2644 3783 4434 5050 3783 4434 5050 3783 4730 5447 DOD/GDP (%/.) 81.7 61.2 54.6 48.5 62.2 57.8 53.1 51.4 56.2 56.7 Debt Service (US$ mill.) 175 186 212 227 186 212 227 186 238 290 DebtServiceRatio(%) 83.4 25.3 30.3 26.7 25.8 32.6 30.5 26.7 43.5 51.1 Gross Investment/GDP (%) 15.3 17.4 19.3 19.9 16.6 17.5 17.8 14.4 13.9 13.7 Private Investment/GDP(%/6) 5.1 9.3 10.7 11.3 8.4 9.2 9.4 7.0 6.4 6.2 Public Investment/GDP(%) 10.1 8.2 8.6 8.6 8.2 8.3 8.4 7.4 7.5 7.6 Public Savings/GDP (%) -2.5 1.2 1.5 2.2 1.2 0.4 0.6 1.4 -2.2 -4.3 Revenues/GDP (