Uganda - Second Structural Adjustment Credit (SAC II)

Report No. PIC1046 Project Name Uganda-Second Structural Adjustment Credit (SAC II) Region Africa Sector Non-Sectoral Project ID UGPA2967 Implementing Agency Ministry of Finance and Economic Planning Date PID Prepared April 29, 1994 Projected Board Date May 10, 1994 Background 1. With a per capita income of only around US$180 in 1993, Uganda ranks among the poorest countries in the world. Poverty in Uganda is largely the consequence of civil war, political instability and economic mismanagement. The country has good growth potential, however. It is blessed with fertile soils and a good climate. Agriculture is the mainstay of the economy: it accounts for more than 50 percent of GDP, about 75 percent of export earnings and around 80 percent of employment, and it provides inputs for a number of manufacturing and processing industries. Smallholders are the backbone of Uganda agriculture; over 80 percent of the farmers cultivate less than two hectares. The country is predominantly rural, with only 11 percent of the population living in towns and cities. Industry has grown rapidly in the past six years but its contribution to GDP is only around 12 percent. Manufacturing accounts for about half of industrial output. Adjustment Program 2. The Government of Uganda embarked upon an Economic Recovery Program (ERP) in May 1987. The basic objective of the program was to bring about rapid and sustained improvements in the standard of living of the average Ugandan. This objective was to be achieved through stabilization and structural reforms aimed at: (i) restoring internal and external financial stability and lowering inflation through prudent fiscal and monetary management; (ii) creating the conditions for rapid and sustained growth through deregulation of the incentive and regulatory framework; and (iii) developing human capital through investments in education, health and other social services. 3. The Government has scored a number of successes in reforming the economy. First, although requiring a long time price stability has been achieved. Relatively low inflation has been accompanied by a fairly stable exchange rate, although after the introduction of inter-bank market for foreign exchange in November 1993 the Ugandan shilling has experienced two temporary appreciation episodes. Secondly, the Government has deregulated the incentive and regulatory framework considerably. Thirdly, it has begun to reform public sector institutions: the size of the civil service and the military has been reduced; there is better control over the civil service payroll; and a few public enterprises have been sold and many more put on the market. The supply response to the reforms has been encouraging: the downward  slide in the production of coffee, the main export, has been halted; nontraditional exports have been growing rapidly but from a very low base. Between FY88 and FY93 real GDP grew at an average annual rate of 5.7 percent, or 2.8 percent in per capita terms. 4. In spite of these achievements Uganda faces formidable hurdles that must be overcome before there can be any assurance of rapid and sustained economic growth and poverty reduction. First, institutional capacity to guide social and economic development needs strengthening. Secondly, agricultural technology and knowhow currently in use requires substantial improvement. Thirdly, the human capital base is very deficient. Fourthly, a strong financial system capable of mobilizing and allocating savings is lacking. Fifthly, external payments viability remains a distant prospect to accelerate growth. Finally, Uganda needs a much stronger private investment response. The challenge for the Government, the Bank and other donors is to systematically remedy these deficiencies. The Credit 5. The objective of the proposed credit is to reduce poverty through accelerated economic growth and rapid human resource development. Accordingly, it will assist the Government to achieve a number of key objectives. First, it will support further deregulation of the economy involving the removal of the remaining barriers to trade and investment in the coffee subsector and liberalization of the cotton industry. The latter will benefit a large number of small-scale producers, including the poorest regions of the country. Second, the credit will support actions aimed at completing the divestiture of the Departed Asians' Custodian Board properties. Third, it will assist the Government to step up domestic revenue generation which is still only around 8 percent of GDP. Fourth, the credit will help to deepen the Government's efforts aimed at prioritizing both recurrent expenditure and development expenditure. Fifth, it will support further measures directed at downsizing the civil service and raising its efficiency. 6. The Credit amount is SDR 57.8 million (US$80 million equivalent). The Credit will be disbursed in two tranches of approximately equal amounts. The proceeds of the Credit will be used to finance general imports, subject to a negative list, and will be disbursed on a reimbursement basis. Additional import financing for the program to be supported by the Credit is expected from the EC, African Development Fund, ODA (UK), the Netherlands, Japan and USAID. Poverty Category 7. Poverty-focused operation Environmental Aspects 8. Not Applicable Contact Point: Public Information Center The World Bank 1818 H Street N.W. - 2-  Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. - 3 -