Uganda - Structural Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16797 IMPLEMENTATION COMPLETION REPORT UGANDA STRUCTURAL ADJUSTMENT CREDIT I (CREDIT 2314-UG) June 23, 1997 Macro 2, AFTM2 Uganda Country Department 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.  GOVERNMENT FISCAL YEAR July 1 - June 30 (FY96 and 1995/96 = July 1, 1995 to June 30, 1996) CURRENCY EQUIVALENTS Currency Unit = Ugandan shilling (U Sh) Interbank market mid-rate: US$1.00 = U Sh 1,025 (March 1997) ABBREVIATIONS AND ACRONYMS DAPCB Departed Asians Property Custodian Board ERC Economic Recovery Credit ERP Economic Recovery Product ESAF Enhanced Structural Adjustment Facility GDP Gross Domestic Product ICR Implementation Complefion Report NRM National Resistance Movement PE Public Enterprise PFP Policy Framework Paper PPA Priority Program Area SAC Structural Adjustment Credit I SAP Structural Adjustment Program SDR Special Drawing Rights UIA Uganda Investment Authority URA Uganda Revenue Authority USh Uganda Shilling Vice President C. Madavo Country Director J. Adams Technical Manager R. Grawe Task Team Leader I. Alikhani  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT UGANDA STRUCTURAL ADJUSTMENT CREDIT I (CREDIT 2314-UG) Table of Contents PREFACE EVALUATION SUMMARY ........................................... i-iv PART L PROJECT IMPLEMENTATION ASSESSMENT A. BACKGROUND ................1 B. STATEMENT/EVALUATION OBJECTIVES .........................................2 C. ACHIEVEMENT OF PROJECT OBJECTIVES ..........................................3 D. MAJOR FACTORS AFFECTING THE PROJECT ..........................................7 E. PROJECT SUSTAINABILITY .........................................8 F. BANK PERFORMANCE .........................................9 G. BORROWER PERFORMANCE ......................................... 10 H. ASSESSMENT OF OUTCOME ......................................... 10 L FUTURE OPERATIONS ......................................... 10 J. KEY LESSON LEARNT ......................................... 11 PART II - STATISTICAL TABLES 1. Summary of Assessments 2. Related Bank Loans/Credits 3. Project Timetable 4. Loan/Credit Disbursements: Cumulative Estimated and Actual 5. Key Indicators for Project Implementation 6. Key Indicators for Project Operation 7. Studies Included in Project 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.  8a. Project Costs 8b. Project Financing 9. Economic Costs and Benefits 10. Status of Legal Covenants 11. Compliance with Operational Manual Statements 12. Bank Resources - Staff Inputs 13. Bank Resources - Missions PART III. APPENDICES A. BORROWER CONTRIBUTION TO THE ICR 2  IMPLEMENTATION COMPLETION REPORT UGANDA STRUCTURAL ADJUSTMENT CREDIT I (CREDIT 2314-UG) PREFACE This is the Implementation Completion Report (ICR) for the Structural Adjustment Credit I (SAC I), Cr. 2314-UG to Uganda. SAC I was approved by the IDA Board on November 5, 1991, in the amount of SDR 91.9 million. The Credit was fully disbursed. The closing date was July 31, 1994. The ICR was prepared by the Uganda Resident Mission (Preface, Summary, Parts I and II), and by the Borrower (Appendix A), and is based, inter alia, on the President's Report, the Credit Agreement, Supervision Reports, correspondence between the Bank and the Borrower, internal Bank memoranda, and studies by independent consultants.   IMPLEMENTATION COMPLETION REPORT UGANDA STRUCTURAL ADJUSTMENT CREDIT I (CREDIT 2314-UG) Borrower: The Republic of Uganda Beneficiaries: The Govermment of Uganda and the Private Sector Amount: IDA Credit: SDI 91.9 million (US$125 million equivalent) IDA reflows: SDR 1.01 million (US$1.4 million equivalent) Date Effective: January 1992 Date Closed: July 1994 EVALUATION SUMMARY BACKGROUND i. With a per capita income of about US$225 (est. 1994), Uganda remains one of the poorest countries in the world. The National Resistance Movement (NRM), which assumed power in January 1986, had to face the legacy of 15 years of economic mismanagement. During those difficult years, GDP growth was negative, many Ugandans fled the country, taking with them valuable skills, and the private sector contracted rapidly, particularly when Asian entrepreneurs were forced to leave the country. During that time, the size of the public service expanded rapidly and public expenditure became untenable. Substantial budget deficits were financed largely by bank borrowing, resulting in inflation rates were above 70 percent. Furthermore, the quality of public expenditure programs, and the country's human and physical infrastructure deteriorated significantly. ii. The NRM Government at first adopted an interventionist stance, with expansionist fiscal and monetary policies. As a result, during 1986 inflation almost tripled, the exchange rate appreciated considerably, and shortages of goods and services continued. In May 1987, the Government, with the assistance of the Bank and the Fund, launched an Economic Recovery Program (ERP) to stabilize and restructure the Ugandan economy. This program has been sustained and deepened ever since, and was supported by SAC I reviewed herein. iii. The objective of ERP was to sustain rapid economic recovery by correcting internal and external imbalances, and assisting in the reconstruction and rehabilitation of enterprises and infrastructure. To achieve these objectives the Government's policies focused on improving demand management, liberalizing trade, raising Government revenues and improving public expenditures. Implementation of these reforms was partial, and only modest results were achieved. Peace and security improved considerably and high economic growth was sustained through the second half of the 1980s. Inflation also declined, but remained relatively high, always above 60 percent. PROJECT OBJECTIVES iv. The objective of SAC I was to support private sector development and improved public sector management, while sustaining GDP growth rates of 5 percent p.a., reducing inflation rates to around 10 percent p.a., and building up gross reserves and maintaining them at about 2.3 months of imports. The Credit  had six components. Private sector development was to be encouraged by: (a) reforming the exchange rate and trade policies; (b) promoting investments through the establishment of the Uganda Investment Authority (UIA) and development of an Investment Code; and (c) improving the confidence of foreign investors and signaling the Government's change of attitude by speeding up resolution of claims on the Departed Asians' Property Custodian Board (DAPCB). Enhanced public sector effectiveness was to be achieved by: (d) improving the Government's revenue collection through the establishment of an independent agency, the Uganda Revenue Authority (URA); (e) reorienting public expenditure allocations by protecting high Priority Program Areas (PPAs) in the social sectors, water supply, road maintenance, and agriculture research and extension; and (f) transforming the civil service into a smaller, efficient and manageable service. v. The project objectives were consistent with the CAS, which underlined the need for macreoeconomic sustainability and an improved climate for private production and investment. SAC I objectives and the reform program addressed the most important priorities in these areas. The Report and Recommendation of the President identified the risks of insufficient political commitment to the reform program and inadequate implementation capacity. The ri-sk was correctly judged to be manageable. IMPLEMENTATION EXPERIENCE AND RESULTS vi. Overall, the implementation of SAC I measures is deemed satisfactory. All conditions of tranche release, with the exception of one area (viz., releases of budgeted allocations in the fourth quarter of FY92 for the high priority programs), were implemented. On Government's request, and in view of the overall solid progress in other regards, this condition was waived by IDA. In fact in some respects, actions on DAPCB and civil service reformns appear to have gone beyond what had been envisaged in the program. The observed shortcomings on investment promotion and URA components seem to be attributable more to the narrow focus of the objectives than to inadequate implementation; on public expenditure, notwithstanding a financial crunch in FY92, releases were made during the first three quarters of FY92 and subsequently in the (first two) FY93 quarters leading upto the request for waiver of condition. Nevertheless, the reforms that were implemented can be deemed to have laid the grounds for much of the estimated 6 percent average annual GDP growth Uganda experienced between 1993 and 1995, the low inflation which has prevailed since June 1992, and strong private sector response after 1993. vii. The strong performance of the SAC I reflected several factors: (i) strong political commitment and ownership of the reform program at most levels of Government, demonstrated by highly satisfactory Borrower performance (ii) sufficient institutional capacity to implement the reforms; (iii) internal coherence of the program; and (iv) satisfactory Bank performance. Economic performance under the SAC met or surpassed initial targets and laid the foundation for the sustainable supply response during the remainder of the 1990s. According to the available data, impact on poverty was modest. This is probably partly due to normal lags in response, but might also be explained by the lack of targeted measures. viii. By and large, external factors did not affect SAC I. Implementation started slowly partly because of unclear responsibilities between the Ministries of Finance and Economic Planning, and partly because of some initial political resistance. These problems were addressed within six months of SAC approval. The President sustained full support for the reform program and decided to merge the two Ministries, which concentrated in a single institution the responsibility for seeing through the implementation of the program. ix. Overall, Uganda was successful in implementing important adjustment measures that were politically sensitive. Civil service reform entailed reducing public sector employment, which was politically difficult. Reorienting public expenditures towards PPAs, deregulating the economy and returning DAPCB properties also ran against some powerful vested interest. The overall success of the program reflects the good leadership exercised by the Government and strong ownership of the reform process at both political and technical levels  of Government, including certain groups of civil servants who had to bear some of the costs of adjustment. Further evidence of ownership is that some of the reforms--particularly trade and exchange liberalization-- went well beyond initial objectives. FUTURE OPERATIONS AND LESSONS LEARNT x. The fact that some key accompanying reforms, related to Public Enterprises (PEs) and the financial sector, were implemented more slowly than expected does not appear to have significantly affected short term growth. The unfinished reform agenda, and Uganda's continued need for balance of payments and budget support, clearly suggests that the adjustment effort should be continued. IDA would be expected to play a leading role in program formulation. xi. Institutional capacity was found to be an important determinant of implementation success. SAC I was successfully implemented because, in addition to enjoying political support, it benefited from: (i) continuity in project management -- the program coordinator who had been instrumental in the implementation of ERC II was retained; (ii) deployment of the available managerial talent in its execution; and (iii) IDA and donor financed TA and related programs, which ensured that, where needed, appropriate institutional capacity and know-how was created and that the cost of implementing the reforms was financed. Future Bank operations should ensure that appropriate institutional building is built into the program and financed, so as to provide sufficient human and material resources necessary for implementation of reforms. xii. The strength of the Structural Adjustment Program was that it focused on three priority policies for each of the two broad reform areas and that it had integrated, coherent approach. The reforms were essential for improving the performance of government an enhancing the private sector environment and incentives framework. It was important that this operation avoided the temptation of burdening the reforms program with other measures, such as PE or financial sector reform, which could have disrupted SAC imnplementation. Perhaps the most important lesson learned is that economic reform involves a long process, which requires patience and continuity. It is important to recognize at the outset of reforms that, even under optimal conditions, the implementation of certain measures, such as civil service or tax reform, can only be effectively achieved over a period of 5 years or more and therefore need to be spaced out over at least two adjustment operations. Thus, in many instances, expectations have to be kept modest, correct identification of priorities and sequencing are essential, and there should be a recognition by all stakeholders that once the first steps are taken they might need to be followed by others to address emerging constraints not initially apparent.  i  IMPLEMENTATION COMPLETION REPORT UGANDA STRUCTURAL ADJUSTMENT CREDIT I (CREDIT 2314-UG) PART I. PROJECT IMPLEMENTATION ASSESSMENT A. BACKGROUND 1. Pre-adjustment situation. With a per capita income of about US$240 (est. 1995/96), Uganda remains one of the poorest countries in the world. The National Resistance Movement (NRM), which assumed power in January 1986, had to face the legacy of 15 years of economic mismanagement. During those difficult years, GDP growth was negative, many Ugandan fled the country, taking with them valuable skills, and the private sector contracted rapidly, particularly when Asian entrepreneurs were forced to leave the country. At the same time the size of the public service expanded rapidly and public expenditure became untenable. Substantial budget deficits were financed largely by bank borrowing, resulting in inflation rates well above 70 percent. Furthermore, the quality of public expenditure programs and quality of public service delivery became very poor. 2. Adjustment in the 1980s. The NRM Government briefly adopted an interventionist stance, with expansionist fiscal and monetary policies. As a result, inflation almost tripled, the exchange rate appreciated considerably, and shortages of goods and services continued. A tentative recovery was thus undermined. In May 1987, the Government, with the assistance of the Bank and the Fund, launched an Economic Recovery Program (ERP) to stabilize and restructure the Ugandan economy. The objective of ERP, which was supported by IDA through two Economic Recovery Credits (ERC I and II), was to sustain rapid economic recovery by correcting internal and external imbalances, and reconstruction and rehabilitation of enterprises and infrastructure. To achieve these objectives the Government's policies focused on improving demand management, liberalizing trade, raising Govermment revenues and restructuring public expenditures. Tmplementation of these reforms was partial and the results were modest. 3. Credit Background. In the early 1990s, macroeconomic stabilization had not yet been achieved and high inflation prevailed. Another challenge was that of sustaining supply response. SAC I, reviewed herein, was thus conceived as an instrument which would help deepen the structural adjustment program (SAP) by stimulating private sector-led growth and improving the effectiveness of the Government. The Bank agreed to continue supporting policy reforms under the SAP. The reform program was outlined in the 1991/2-1993/4 Policy Framework Paper (PFP) and discussed by the Committee of the Whole on November 5, 1991. The project grew out of an Initiating Memorandum issued in January 1991 and the appraisal mission of April 1991. Negotiations between the Government of Uganda and the Bank were concluded during October 1991. A letter of Development Policy dated October 25, 1991, requesting IDA I  for the provision of a SAC and highlighting the Govenmnent's reform program, was forwarded by the Minister of Finance to the Bank. The Credit of SDR 91.9 million (US$125 million equivalent) was approved in November 1991, signed on December 12, 1991 and became effective in January 1992. The Credit was supplemented in 1993/4 (vide an amendment to the Development Credit Agreement dated January 8, 1993) with IDA reflows of SDR 1.01 million (US$1.4 million equivalent). 4. Related IDA Activities. Complementary reforms were implemented under other IDA-financed projects, notably: (a) agriculture sector reform, particularly the liberalization of the coffee sector, under the Agriculture Sector Adjustment Credit ; (b) financial sector reform, aimed at strengthening Bank of Uganda's (BOU) supervision and control over the financial sector, enhancing banking discipline and restructuring problem banks, under a Financial Sector Adjustment Credit (FSAC); and (c) public enterprise (PE) privatization and parastatal reform, supported by the Enterprise Development Project (EDP). In addition, SAC I design and implementation was supported through IDA Technical Assistance (TA) Credits; ERC II's TA component was especially important; TA III and the Economic and Financial Management Project financed studies which were helpful in the design some of the reform measures. 5. Donors. SAC I was prepared in the close collaboration with (a) the IMF, and was coordinated with its third-year Enhanced Structural Adjustment Facility (ESAF), and (b) other donors, who provided cofinancing or parallel financing. IMF and ODA (UK) staff, USAID, EEC and Swiss representatives participated in various stages of SAC. These donors as well as UNDP, UNICEF and DANIDA were regularly briefed on SAC design, including a special briefing at the Consultative Group (CG) meetings in Paris in March 1991. Some donors supported SACI's implementation: ODA (UK) funded consultants helped in the design of three components, and subsequently provided assistance for their implementation and USAID provided TA financing for implementation of two SAC I components. B. STATEMENT/EVALUATION OF OBJECTIVES 6. Project Objectives. The objectives of the SAC were to support private sector development and improved public sector management, while sustaining a GDP growth rate of 5 percent p.a., reducing the inflation rate to around 10 percent p.a., and building up gross reserves and maintaining them at about 2.3 months of imports. The Credit had six components. Private sector development was to be encouraged by: (a) reforming the exchange rate and trade policies; (b) promoting investments through the establishment of the Uganda Investment Authority (UIA) and the Investment Code; and (c) improving the confidence of foreign investors and signaling the Government's change of attitude by speeding up resolution of claims on Departed Asians' Property Custodian Board (DAPCB). Improving the effectiveness of Government involved: (a) increasing Government revenues through the establishment of an independent Uganda Revenue Authority (URA); (b) reorienting public expenditure allocations by protecting high priority program areas (PPAs) in the social sectors, water supply, road maintenance, and agriculture; and (c) transforming the civil service into a smaller, efficient and better motivated service. 7. Description of the Reform Program. Disbursement of the first tranche (equivalent to US$60 million) was contingent upon Credit effectiveness, which was not subject to any specific conditionality: as reflected in the SAC Policy Matrix (The Memorandum of the President, Report No. P-5670-UG) all policy measures had been implemented up-front. Second tranche release (of an amount equivalent to US$65 million) was conditional on the following specific actions: (a) Trade Reform - Elimination of discriminatory import systems for licensing and foreign exchange allocation system (known as OGL and SIP); (b) Investment Promotion - Repeal of the Industrial Licensing Act (1969); (c) Custpdian Board - Return of all properties covered by the Expropriated Properties Act of 1982, provided vafid applications had been made and other conditions of the Act were met; and continued satisfactory progress in responding 2  to submission of ownership and Ugandan citizenship at the time such properties were placed under DAPCB control in respect to properties not covered by the Act; (d) Tax Reform-completion of all transitional arrangements between existing departments and URA and transfer of all responsibility for revenue collection to URA; (e) Public Expenditure-release of all budgeted recurrent and development allocations in FY92 for PPAs; (f) Civil Service Reform-achievement of the first-year targets for ministerial reviews, civil service staff reductions and pay reform, and capacity building. 8. Evaluation of Objectives. SAC I objectives were consistent with the CAS, which highlighted the need for macroeconomic stabilization, sustainability, and improved climate for private production/investment. SAC I addressed the important priorities in these areas. The Memorandum of the President identified the risks of insufficient political commitment to the reform program and inadequate implementation capacity. The risk was judged to be manageable because of strong Govemment ownership of the reform program. The assessment was broadly correct and was minimized by front-loading of the Credit conditionality. C. ACHIEVEMENT OF PROJECT OBJECTIVES 9. Overall, the outcome of SAC I is deemed satisfactory. All conditions of tranche release, with the exception of releases of budgeted allocations in the fourth quarter of FY92 for the high priority programs, were implemented. On GOU's request, and in view of the overall solid progress in other regards, this condition was waived by IDA. In fact in some respects, actions on DAPCB and civil service reforms appear to have surpassed what had been envisaged. The observed shortcomings on investment promotion and URA components seem to be attributable more to the narrow focus of the objectives than to inadequate implementation; on public expenditure, notwithstanding a financial crunch in FY92, releases were made during the first 3 quarters of FY92 and subsequently in the (first two) FY93 quarters leading upto the request for waiver of condition. SAC I helped lay the ground for Uganda's strong economic performance, characterized by high GDP growth and low inflation. 10. Trade Reform. Far-reaching deregulation of the foreign exchange market and transactions have gone beyond the letter and spirit of SAC agreements. The new system was institutionalized April '94, when GOU agreed to conform to the obligations of Article VIII, of IMF's Articles of Agreements, committing to place no restrictions on current intemational transactions. As measured by its degree of openness, Uganda's trade regime became very close to the policy frontier. Implementation of trade reforms started in January 1992 when the Govermment replaced OGL and SIP with a weekly foreign exchange market auction to sell donor import support fund to commercial banks. The premium charged by foreign exchange bureaus over the official rate fell to around 20 percent. This gap was caused by the segmentation of foreign exchange markets, mainly due to the official market's documentation requirement and cumbersome administrative procedures, particularly for exporters and petroleum imports. The auction was abolished November '93 and replaced with a unified foreign exchange system, in which commercial banks and foreign exchange bureaus became the market-makers. The USh then became convertible for current and many capital account transactions. II. Liberalization of coffee marketing was achieved in 1994, reviving coffee; tea production also began. Exports taxes on coffee were eliminated in the FY92 budget and were replaced with an excess profit tax, to be levied once world prices surpassed a reference level. This provision was implemented in FY95, mainly for the purpose of ensuring macroeconomic stabilization. Policy makers still disagree about whether, on sectoral and microeconomic grounds, future stabilization should be achieved through such a tax or other means. 12. Investment Promotion. Prior to 1991, the investment regime was embodied in the highly restrictive Foreign Investment Act (1977) and Industrial Licensing Act (1969). These Acts together served as an important entry barrier and a source of administrative red-tap which discriminated against foreign investors. As a condition of second tranche release, the Industrial Licensing Act of 1969 was repealed, thus 3  completing an action started with the suspension of operations of the Industrial Licensing Board. This reform removed a key regulatory constraint. The 1977 Act was abrogated in 1991, and replaced with the Investment Code Act (1991). The Code aimed to attract, promote and facilitate investments, providing fiscal incentives (duty free import of capital goods, and income and dividend tax holidays), protecting foreign and local investors, and introducing a mechanism for externalization of dividends and fees --made redundant by liberalization of current account. 13. The Uganda Investment Authority (UIA) was also established under the 1991 Act to administer the Code. On the business facilitation and investment promotion side, UIA was quite successful in establishing itself as a well run promotional organization. However, with about 30 professional staff in 1994 and annual operating cost equivalent to about US$1.2 million, it was became larger than had been envisaged initially --it was originally thought that only 10-12 professional staff would be required. UIA has had to face problems related to insufficient funds, partly because the volume of business and its size was larger than envisaged initially and partly because expected IDA financing to UIA materialized late. 14. Custodian Board. This component aimed to ensure prompt return or fair compensation of properties under de jure and de facto management of the DAPCB to original owners, most of whom were of Asian descent. The legal framework for the return was provided in the 1982 Expropriated Properties Act and a body of case law. On legal and moral grounds there was a very strong case for returning these properties, but serious political and social obstacles had to be overcome. The fact that the Government was willing to take this political risk reflected its strong commitment to economic reform and recognition of the fact that Uganda's private sector-led economic development depended on foreign investment. Only 400 properties out of about 7,000 had been divested successfully during the 10 years preceding SAC I. Initial actions during SAC preparation included strengthening DAPCB and nomination of a responsible Ministry of State for Finance, appointment of a high level Executive Comiittee and a technical Verification Committee, improved records management and technical assistance financed by USAID and IDA. The Government also issued a statement underscoring its respect of private property rights and clarifying the legal and administrative modalities and timetable for divestiture. 15. To meet second tranche conditionality, all properties covered by the 1982 Act had to be returned, and satisfactory progress had to be made in processing the others, owned by Ugandan citizens. By 1994 impressive results had been achieved and a total of about 640 claims from noncitizens and 1,860 from citizens --out of about 690 and 2,000 claims, respectively-- had been validated and properties returned. This accomplishment was impressive when compared to similar efforts in other countries at addressing expropriation issues. There were delays in returning properties belonging to noncitizens --the process was only completed in 1996. There were good reasons for the delays however, including: (i) not all properties were identified nor were they all claimed; and (ii) the claim registration and validation process took longer than scheduled and, in the interest of fairness, the deadline for applying for repossession was extended. These achievements reflect the effectiveness of technical assistance, as well as support of the process at the highest political level. During his three and half years tenure the technical advisor produced regular reports, reviewed in preparing this ICR. These reports provided an interesting insight into the types of problems encountered which included (i) occasional interference from the Ministers in charge of DAPCB; (ii) clashes between DAPCB, the local authorities and public utilities; and (iii) irregular attendance of meetings and other performance issues involving committee members. 16. Tax Reform. At 7 percent of GDP during FY88-91, Uganda's domestic revenue effort was one of the lowest in the world. Revenues covered only about 50 percent of public expenditure, and this poor record contributed to macroeconomic imbalance and high inflation. The reforms were intended to improve revenue collection and diversify the tax base, primarily by improving tax administration through the 4  creation of URA, an autonomous agency inspired by the Ghana model, outside of the civil service, staffed with qualified, motivated and well-paid personnel. In 1991, URA became responsible for revenue collection while playing an advisory role on tax policy to the Ministry of Finance, who remained responsible for determining fiscal policy and setting taxes. Conditionality related to the effective transfer of all revenue collection responsibilities to URA was achieved in a timely manner during FY92. URA became operational fairly quickly, partly as a result of substantial and effective technical assistance financed by donors, notably ODA and IDA. Table 1: Composition of Tax Revenues (Ush Billion) FY 1990/91 1991/92 1992/93 1993/94 Income Tax 13.9 23.6 40.3 57.4 Customs Duties 49.6 76.6 124.3 152.4 Excise Tax 12.4 15.0 18.8 42.5 Sales Tax 36.6 43.3 73.6 100.0 Commercial Transactions 3.1 5.4 9.6 15.6 Fees and Licenses 5.5 6.2 14.5 19.7 TOTAL 121.1 170.1 281.1 387.6 Revenues/GDP (%) 6.6 6.1 7.1 8.7 Revenues/Modem Sector (%) 30.2 26.7 32.2 40.1 Real Revenues (FY91=100) 100.0 98.7 125.4 162.2 Source: URA 17. As shown in the table above, tax collection, which excludes export tax and unallocated receipts, improved in absolute and relative terms each year between FY91 and FY94. The only exception occurred during FY92 when start up problems were encountered at URA. During the SAC, revenues increases by 33 percent as a share of either GDP or the modem sector and by 62 percent in real terms. Indirect taxes-- customs and excise revenues--continued to account for over 60 percent of receipts. Direct tax revenue--income tax-- grew faster than other taxes, but from a relatively small base. 18. Public Expenditure. The thrust of these reforms was to redress inadequacies in expenditure on social sectors and economic infrastructure. The FY91 budget increased recurrent budget allocation for PPAs and gave priority to investments in these areas. Additional allocations were made possible mainly by increasing expenditures to about 19 percent of GDP for FY92-94, from about 14 percent of GDP during FY88-91. This approach to expenditure prioritization was relatively successful. Except for difficulties experienced in the final quarter of FY92, PPAs were protected from cuts and releases were made automatically during SAC I. Thus, notwithstanding a financial crunch in FY92, releases were made during the first three quarters of FY92 and subsequently in the (first two) FY93 quarters leading upto the request for waiver of the condition (in view of the non-compliance in the last quarter of FY92); on Govemment's request, and in view of the overall solid progress in other regards, this condition was waived by IDA. Overall, these measures were important to start the process of improving the quality and transparency of public expenditures by (i) keeping them within sustainable ceilings; (ii) strengthening annual recurrent expenditure programming; and (iii) monitoring actual expenditure through releases. The SAC also playing a key role in rationalizing the development budget, by screening all new projects, improving quality at entry and ensuring they could be funded. During FY93, a list of low priority or problem projects were identified and classified as non-core. It was agreed that, pending the formulation of exit and/or restructuring plans, such projects would only be funded once the needs of core projects had been met. These measures reduced the amount of counterpart funds required and reduced the strain on the administrative capacity of Government. As a result, in FY95, projects in the public investment program (PIP) received their full allocation of counterpart funds and, for the first time in decades, their implementation was not noticeably hindered by insufficient funding. 5  19. Civil Service Reform. The basic thrust of this component was to help establish a well paid motivated and efficient civil service, and to strengthen Government's ability to deliver services to people. Measures implemented aimed at making progress towards that goal, by initiating a phased approach towards reducing the number of minstries and the size of the civil service and improving civil servants' pay. The number of ministries was reduced from 38 to 21 in 1992. This rationalization was followed by a process of ministerial review to identify duplicate or non-core functions with a view to streamlining their functions. The Government complied with its commitment to undertake such a review for four ministries and, in 1994, agreed to a civil services reform implementation plan with IDA. While SAC conditionality only covered four ministries, a fifth, the Ministry of Public Service (MPS), was added by Government. 20. Rationalization and downsizing the civil service had been under way since FY89. The SAC called for downsizing of civil service through a combination of measure, including displacement of irregularly employed staff and elimination of ghosts workers from the payroll, retrenchment, natural attrition and continued control over recruitment. Achievements under the SAC included a reduction in the number of staff on the payroll from 270,000 in July 1991 to 170,000 people in December 1993. Downsizing between 1990 and 1993 was achieved through cuts in: (i) teaching services--mainly ghosts or unqualified teachers; (ii) traditional civil service; and (iii) group employees--this function was eliminated during FY95. To solidify these reforms, the Government, with the help of donor funded technical assistance, established a computerized payroll and began to define a system of personnel management. These achievements are attributable not only to strong Government commitment, but also to financial assistance provided by donors and administered by IDA. Austria, the Netherlands, ODA, Sweden and Denmark provided US$13 million for severance packages. A related initiative, outside the scope of the SAC, was the demobilization, by end- 1994, of some 20,000 soldiers. 21. Another goal was to improve civil service pay. This was achieved by more than tripling expenditure on wages and salaries between FY91 and FY94 --this more than doubled real wages. The program also called for the formulation of proposals for monetization of transport and housing benefits, as a first step towards overhauling the overall structure of pay and emoluments. Such a plan, was defined and agreed with IDA during FY94 and began to be implemented in FY95. Furthermore, recognizing the need to motivate key civil servants, a number of donors, including IDA, provided salary top-ups, which were completely phased out in July 1996. 22. Macroeconomic Impact. Quantitative macroeconomic targets were generally met or surpassed. Real GDP growth averaged 5.7% per year from FY92 to FY94, thus meeting program objectives. Growth might have been even higher but for poor performance in FY92, caused partly by the drought and partly by the temporary macroeconomic instability. After FY92's fourth quarter, inflation continued on a downward path, declining to 7 percent in FY94. By end FY94 international reserves had been tripled from their level in FY91, reaching 3 months of imports of goods and non-factor services. This success might have come at a price of larger debt and, possibly, distortions in the foreign exchange rate market, with large capital flows from aid tending to cause appreciation of the Ush. By end-1994, despite benefiting from commercial debt buyback in 1993 and a series of rescheduling by Paris Club, Uganda remained highly indebted. However, continued good performance was expected to lead to further debt forgiveness and rescheduling-this expectation has been realized. To alleviate fuiture debt problems, the Govermment also adopted a strategy of only using grants or highly concessional loans for external financing. 23. The impact of non project foreign aid on the economy is hard to quantify. This form of aid might retard the development of exports and discourage the diversification of the production base. There is evidence supporting this hypothesis--little initial export and investment response, high anti-export, low 6  competitiveness of Ugandan industries, and increased import-intensive consumption. On balance, however, the judgment of this analysis is that these adverse effects were small and mitigated by the following: (a) aid flows provided needed foreign exchange to the private sector and boosted private sector confidence; furthermore, prudent reserve management alleviated pressures on the exchange rate; (b) aid was not the only source of foreign exchange entering the country; net private transfers increased to about US$300 million in 1994, more recently the coffee boom was a dominating factor; (c) in most sases, private sector and export response was hindered more by uncertainty, inadequate production capacity and, as shown by recent surveys, insufficient know-how, than appreciation of the exchange rate; and (d) import-substitution activities were sheltered by relatively high effective rates of protection. 24. Government. A better managed government emerged as a result successful first steps towards reforming the public sector. But further reforms were needed to improve the budgeting process and the tax regime. Public enterprise reform and privatization were important complements to the SAP, but not much was achieved during 1992/4. In early 1995, a decision was taken at the highest political level to put privatization and PE reform on a fast track. The successful implementation of this program would help private sector development and free up public resources for high priority programs. 25. Private Sector. By the late 1980s the manufacturing sector had shrunk to about 6 percent of GDP and was stagnant. Most existing industries were poorly maintained and managed and inefficient, and there was little foreign or domestic investment. Macroeconomic stability, the removal of key regulatory barriers and return of properties managed by DAPCB, brought about significant improvements in the business environment and stimulated a favorable, but cautious private sector response, with the urban micro- and small-scale-enterprise sector also experiencing high growth. After 1991, the private sector expanded at the same, or slightly faster pace than GDP. New investment remained relatively modest and resources went into rehabilitating industries and expanding capacity. Due to the normal lag between policy change and shifts in private sector attitudes, as well as the time needed to implemented rehabilitation and new investments programs, the full force of supply response to increased demand, partly fueled by the coffee boom, was only experienced in FY95. To sustain private sector growth, the business environment needed to be improved through the removal of legal regulatory barriers. Legal reform thus emerged as a priority only towards the end of SAC implementation. This included business law reform and the strengthening of commercial jurisdictions, to reinforce property rights and facilitate settlement of business disputes. Another important issue was financial sector reform and the strengthening of the Bank of Uganda (BOU), as FSAC began to be implemented in 1993. Reforms aimed at restructuring the banking sector, particularly the country's largest commercial bank, are still ongoing. The banking sector remains inefficient with high intermediation costs and retards private sector development, particularly that of small and medium Ugandan firms. 26. Social Impact. The SAP helped sustain growth, reduce inflation and increase expenditure in social sectors and rural infrastructure. These are all important factors in fighting poverty. At the end of the SAC Uganda's social indicators remained weak and the "trickle down" effect in rural areas was limited. Nevertheless, SAP reforms did benefit large segments of the population, cash crop farmers, urban consumers and private entrepreneurs were the main beneficiaries. D. MAJOR FACTORS AFFECTING THE PROJECT 27. By and large, external factors did not significantly affect SAC I. Implementation started slowly, partly because of unclear responsibilities between the Ministries of Finance and Econiomic Planning, and partly because of some political resistance. These problems were addressed within six month of SAC approval by the Board. The President expressed his full support of the reform program and the merger of 7  the two Ministries concentrated in a single institution the responsibility for seeing through the implementation of the program. E. PROJECT SUSTAINABILITY 28. Trade Reform. To increase sustainability: (i) many of the liberalization measures have been implemented through administrative measures, while more restrictive laws remain on the books; legal provisions should to be harmonized with practices; (ii) quantitative restrictions still existing on certain items are expected to be removed before 1999; and (iii) roles and responsibilities of some public boards and agencies still regulating trade and investment in some sectors need to be revisited. The present trade and tariff regime remains a source of distortions and anti-export bias. Further tariff reforms are planned, so is the implementation of an effective drawback system, which only exists on paper. 29. Investment Promotion. Experience showed that remaining regulatory barriers, ranging from sectoral licenses to access to public utilities and industrial land, are both significant and numerous, and increase the cost of doing business. UIA plays a facilitating role by helping entrepreneurs fulfill all regulatory requirements. However, the one-stop facility was never made effective, essentially because this would have required authority for delivering the various licenses to be delegated to ULA, which is neither practical nor necessary, especially with the expected simplification and rationalization of all regulatory requirements. Recognizing that UIA, while playing an important economic role, is unlikely to be financially sustainable, Government and donors have supported its operation through subsidies. Such financing would still be needed through the rest of 1990s. A long term issue is whether and how the institution can be made self-sustaining. This could be through partial recovery of the cost of the services provided and/or eventual privatization, as well as focus on core activities and greater cost effectiveness. 30. The investment code provides fiscal incentives to investors. UIA is legally responsible for administering and granting incentives. This policy is being reviewed by Government and UIA in the light of: (a) the much more liberal economic environment now in place; (b) the need to minimize revenue loss through exemptions; and (c) the fact that the tax code could provide equivalent incentives without relying on a regime of exception and imposing undue burdens on UIA. UIA's present business plan recognizes these changing priorities and calls for greater focus on the areas of business facilitation and investment and export promotion. Government has also decided to limit exemptions granted under ministerial statutory powers, which account for about three-quarters of exemptions in Uganda, and is considering complementary tax reforms. 31. Custodian Board. The divestiture policy has paid dividends, some of which can be quantified. According to available information, owners of repossessed industries invested significant amounts in rehabilitating their activities and improving management, as witnessed by the large increase in private transfers and high industrial growth. The Govemment recognizes that in the medium- to long-term sustaining industrial growth would depend on the development of an indigenous private sector. To this effect, it intends to implement a comprehensive private sector development strategy and taking specific measures aimed at tackling many of the constraints remaining in the business environment and enabling local entrepreneurs. 32. Tax Reform. In FY95, the cost of operating URA, including technical assistance, was high --about US$20 million p.a. While there is no evidence that URA is not cost effective at the present time, this needs to be monitored. Other related SAC objectives were fulfilled, but tax policy issues remain. While tax administration was being revamped, the Ministry of Finance did not benefit from any significant capacity building in the area of tax policy. As a result tax laws were never compiled and published, and were often 8  not well known. This is often a source of dispute between tax payers and the tax administration --an exacerbating factor is that the tax regime is subject to modifications from one year to the next, which makes the business environment uncertain. The Government can address most of the remaining problems by ensuring that URA continues to be effective and well run, publishing tax laws and establishing an effective tax dispute resolution mechanism. 33. Public Expenditures. In-spite-of real achievements, it should be recognized that the process of improving public expenditure is a continuing one. The government has broadly met macro targets, but this has recently been at the cost of poor sectoral outcomes. Expenditure shortfalls have also affected PPAs. The thrust of fiture budget reform is based on introduction of program/output oriented budgeting. This would involve developing sector strategies and sector expenditure programs and capacity building in the areas of public accounting and management information systems. The decentralization that is underway further increases the complexity of budget systems that are needed, but would also pave the way for improved service delivery. Finally, Uganda will continue being highly dependent on foreign grants and concessional loans to fund the budget gap, which underscores the fragility of the public finance situation. 34. Civil Service Reform. Even though the quality of the Ministerial reviews turned out to be disappointing and in July 1997 the number of Ministers and Ministries increased again, Central Government employment has been, and continues to be reduced. Pay reforms and monetization of benefits have proceeded satisfactorily. The key remaining problem in this area is ensuring that the most productive civil servants, who are essential to an effective government, are adequately compensated. The planned introduction of results oriented management would also strengthen the reforms and ensure that public service staffing is linked to service delivery objectives. The other remaining issues concern public sector employment in the parastatal sector and local governments, where much remains to be done to improve payroll monitoring and establish norms for retrenchment and pension benefits. F. BANK PERFORMANCE 35. The Bank's performance in the identification, preparation and appraisal stages was highly satisfactory, especially when it came to identifying the priority issues. The Bank responded positively to the country's need for policy advice and balance of payment/budget support, and, during the formulation of the SAP, provided the authorities with advice on institutional measures based on other countries experience -- e.g., the Ghana experience was reflected in the decision to establish URA. To minimize risk of failure, 24 out of the 32 identified conditions were Board presentation conditions. During SAC implementation, the Bank performance was satisfactory and supported government efforts aimed at reducing the external debt burden. When program difficulties arose in 1992, the Bank team played a critical role in facilitating the policy dialogue between Uganda and donors. One shortcoming in supervision relates to the possible understatement of impact and success of the reform program in achieving development objectives --with hindsight, the operation should have been rated as highly satisfactory. Tranche release took longer than foreseen in the President's Report and the Credit closed almost a year behind schedule. The time required to implement some of the SAC measures had been underestimated by the Bank. 36. The Bank also played a key role in the mobilization of external support of the SAP. Cofinancing included Swiss and DANIDA grants administered by IDA, as well as credit/grants from Japan, the EEC, ODA (UK) and the Africa Development Fund. Finally, Bank supervision was satisfactory, and was helped by the Resident Mission who regularly monitored progress and took the leadership in the dialogue with government on public expenditure. 9  G. BORROWER'S PERFORMANCE 37. The Borrower's performance in preparation of the reform program was satisfactory. Project implementation was also very satisfactory thanks to experience gained by government under ERC, better understanding of World Bank procedures, particularly operation. of special accounts, procurement, and disbursements. On the policy side, an increasing number of key officials understood the linkages between the reforms and supply response. But, there remained many skeptics and opponents of reform, even though everyone recognized SAC's contribution to the continued inflow of essential imports and budget. In late FY92, the implementation of the SAP experienced serious difficulties. This was the major cause of delay in second tranche release. Donor support was also temporarily halted and, as a result of Government resorting to domestic financing, inflation picked up again. Following a relatively short period, during which uncertainty prevailed, effective measures were implemented to put the program back on track. Govemment's performance during project implementation was highly satisfactory thereafter because of its clear ownership of a program of aggressive reforms. Finally, ensuring continuity with ERP, the Ministry of Finance, later MFEP, was given responsibility for the overall management of the program. It collaborated effectively with the relevant sector Ministries responsible for the implementation of individual components--particularly with MPS on civil service reform. The project coordinator was effective and prepared satisfactory regular progress reports. 38. All legal covenants and conditions for tranche release were met, with the exception of partial non- compliance with the condition on public expenditures. The Borrower followed the procurement procedures specified in the Credit Agreement. The proceeds of the Credit were used to finance general imports, subject to a negative list, and were disbursed through a special account. The Credit was fully disbursed. A number of factors, either included in the design or introduced during the implementation of the Credit, facilitated disbursement. The fact that private sector procurement for amounts under US$1 million followed established business practices merits to be highlighted as an example where Bank procedures were adapted to the needs of the country and the reality on the ground. Disbursements were also facilitated by the establishment of a unified interbank foreign exchange market on November 1, 1993, and the introduction of simplified paperwork. As agreed with the Bank, all imports above US$10,000 were subject to pre-shipment inspection carried out by Societe Generale de Surveillance S.A. Audit reports show that the operations of the special account were in line with the Credit Agreement. Documentation provided to support statements of expenditure were examined and found to be properly processed and maintained. Finally, disbursements made from the Credit Account were properly authorized by the Bank of Uganda and in line with requirements of the Credit Agreement. Slippage did occur in the preparation of audit reports, and the audit of FY94 accounts was only distributed on April 3, 1994, three months later than scheduled. H. ASSESSMENT OF OUTCOME 39. The overall outcome of SAC I is deemed satisfactory. This assessment is based on: (a) a more than satisfactory overall achievement of objectives; (b) sustainability of the reforms and strong ownership of the program by Govemment; (c) coherence of the program which was also well focused; and (d) good overall performance by the Borrower and the Bank. I. FUTURE OPERATIONS 40. DAPCB and some other SAC I reforms were continued/monitored under SAC 11. In a handful of cases, such as foreign exchange regulations, IDA needs to monitor progressive harmonization of restrictive laws still on the books with the liberal practices established under SAC I. The Credit supported reforms aimed at improving public service delivery and private sector incentives. These initial steps need to be built upon in future Bank operations, which should also address the following sector specific issues: 10  (a) macroeconomic reforms - in the context of future SACs, the budget process should be strengthened so that public expenditures are cost effective and linked to desired outcomes; trade policy reform should be continued to reduce tariff dispersion, promote exports and implement institutional and regulatory measures to facilitate trade; (b) PE restructuring and financial sector reforms - the reform agenda under EDP and FSAC should be completed; future operations should be aimed at improving financial intermediation, restructuring and privatizing PEs, especially public utilities, and improving the financial control of the Ministry of Finance over PEs; and (c) private sector development - the business environment should continue being improved through further regulatory reforms and elimination of red tape. J. KEY LESSONS LEARNT 41. One strength of the SAP was its focus and internal coherence. The reforms were essential for improving the performance of government and the private sector environment. With the benefit of hindsight, it was important to avoid the temptation of burdening the reforms program with other measures, such as PE or financial sector reform, which could have disrupted SAC implementation. The fact that PE and financial sector reforms were implemented more slowly than expected does not appear to have significantly affected short term growth and SAC outcome. The unfinished reform agenda, and Uganda's continued need for balance of payments and budget support, clearly argues in favor of continued adjustment. IDA would be expected to play a continuing role in this. However, to avoid unsustainable increases in multilateral debt, IDA Credits should involve attracting donor grants in parallel. 42. Institutional capacity was found to be an important determinant of implementation success. SAC I was successfully implemented because, in addition to enjoying political support, it benefited from continuity in project management, the deployment of the available managerial talent in its execution, and IDA and donor financed TA and related programs. Future Bank operations should ensure that appropriate institutional building is integrated into the program. The experience under SAP suggests that, to tackle poverty more effectively, the design of future programs and their performance might be further improved by ensuring a good understanding of the reforms and their ownership by all other key stakeholders, including the private sector, NGOs, and local and national political leaders. 43. Perhaps the most important lesson learnt is that economic reform is a long process, which requires patience and continuity. It is important to recognize at the outset of reforms that, even under optimal conditions, the implementation of certain measures, such as civil service or tax r^form, can only be effectively achieved over a period of 5 years or more and therefore these need to be spaced out over at least two adjustment programs. Indeed, SAC II carried through many measures initiated under SAC I. Expectations, therefore, have to be realistic and correct identification of priorities and of their sequencing is essential. Also, as first generation problems are tackled, other important issues come to the forefront and macroeconomic reforms have to be supplemented with microeconomic and sectoral ones. These facts were clearly recognized by the Ugandan Authorities. This probably explains why many of the reforms went well beyond the letter and spirit of the SAC, and why the adjustment effort is expected to be continued during the rest of the 1990s. 11  Table 1: Summary of Assessments A. Achievement of objectives Substantial Partial Neglibile Not applicable Macro policies | X Z Sector policies L L izi I E I IZI Financial objectives X i X | Institutional development j x [IXZ| Physical objectives x E L W Povert reduction IZ| 1 XZh | Gender issues m E Other social objectives x L Zr Environmental objectives | X | Public sector management | X Private sector development | X | Other (specify) L E X B. Project sustainability Likely Unlikely Uncertain Highly C. Bank performance satisfactory Satisfactory Deficient Identification X Preparation assistance X | Appraisal x Supervision Z EIX Highly D. Borrower performance satisfactory Satisfactory Deficient Preparation I I IZIILI Implementation X | Covenant compliance r Z E L Operation (if applicable) Highly Highly E. Assessment of outcome satisfactory Satisfactory Unsatisfactory unsatisfactory m rn E Z X I  Table 2: Related Bank Loans/Credits 1/ Lon/credit title Purpose Year of Status approval receding operations 1. ERC I Adjustment 1988 Closed 2. ERC II Adjustment 1990 Closed . TA I Technical Assistance 1988 Closed 4. ASAC Agriculture Sector Adj. 1991 Ongoing ollowing operafions I. SAC II Adjustment 1994 Closed 2. SAC Im Adjustment 1997 Ongoing . FSAC Financial Sector Adj. 1993 Ongoing 4. EDP Enterprise Reform 1992 Ongoing . EFMIP Technical Assistance 1995 Ongoing 1/ Includes projects in the same sector/subsector as this project and adjustment operations with related objectives.  Table 3: Project Timetable Date actual/ Steps in project cycle Date planned 2/ latest estimate Identification (Executive Project Summary) 11/20/90 Preparation 1/25/91 Appraisal 3/27/91 Negotiations 10/08/91 Letter of development policy (if applicable) 10/25/91 Board presentation 12/3/91 Signing 12/2/91 Effectiveness 12/91 1/3/92 First tranche release (if applicable) 12/91 1/92 Midterm review (if applicable) Second (and third) tranche release (if applicable) 6/92 7/93 Project completion Loan closing 1/31/94 7/31/94 2/ As provided, for example, in the Staff Appraisal Report (SAR).  Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual (US$ thousands) FY 1992 FY 1993 FY 1994 Appraisal estimate 65,000 125,000 125,000 Actual 41,800 83,000 129,910 Actual as % of estimate 64 66 104  Table 5: Key Indicators for Project Implementation Estimated Actual 1. Conditions for Effectiveness/First Tranche Release Disbursement ofthe first tranche ($60 million equivalent) was contingent upon Credit effectiveness which Important progress in substantively completing these key actions as not subject to any specific conditionality; key actions prior to effectiveness related inter alia to: was made prior to the Credit effectiveness in January 1992. er liberalization of import/export procedures; efforts towards unification of exchange rates & implicit bsidies; reduced differential between official-foreign exchange bureau rates; establishment of UTIA; suspension Industrial Licensing Board operations; expeditious return of Asians' properties; efforts to simplify/enhance & tariff system; reorientation of public expenditure towards high priority programs; Civil Services Reform d identifyring pilot ministries. 2. Conditions for Second Tranche Release Incentive & Regulatory System/Trade Reform. Elimination of OGL/SIP import systems Forex bureaus allowed to deal freely Jul. '90;Export/Import Certi- fication replaced Licensing Dec. '9 1;Forex auction introduced Jan '92; OGLISIP eliminated thereafter. Ivestment Promotion. Repeal ofthe Industrial Licensing Act (1969) In order to promote the credibility ofthe Investment Authority, the Act was repealed in Oct. '92, following the suspension of Industrial Licensing Board Operations. Custodian Board. Returnofall properties underthe Expropriated Properties Act (1982) followingfiling By Jan'93, GOUreturned 524 of the 685 properties covered bythe fvalid applications for repossession with DAPCB & that such properties are not included in a fimal list in '82 Act; by '94 impressive results achieved & a total of about 640 respect 4fwhich the Govt. has (in cosfonnity with the '82 Act) determined to conclude joint ventures; and claims from noncitizens and 1,860 from citizens (oult of690 and continued adequate progress in responding to submission of evidence of ownership and Ugandan citizenship 2,000 claims, respectively) had been validated and properties t the time such property was placed under DAPCB control for properties not covered by the '82 Act returned. ax Reform. Completion of all transitional arrangements between the existing Department & URA & URA operational & effective/timely transfer of revenue collection ransfer of all responsibility for revenue collection to URA responsibility (FY92); collections (excl. Export Tax & unalloc. receipts) grew each year bet. FY92 & FY94. Public Expenditure. Release of all budgeted allocation in FY92 for the high priority recusrent and develop- This condition was only partially fulfilled. However, ment programs in education, health, water supply, roads and agri.ulture. recuiTent allocations to PPAs increased to about 19% ofGDP (FY 92-94), from about 14% in FY88-9 1; SAC also helped rationalize development budget by classifying projects as core/non-core (FY93) for counterpart funding. Cvil Service Reform. Achievement ofthe first year targets for ministerial reviews, civil service staff GOU exceeded ministerial review/CSR implementation plan target ductions and pay reform. of 4; real wages more than doubled bet. FY91-94 & civil service scaled down from 270,000 staffto 170,000; Number of ministries reduced from 38 to 21 in '92; efforts to monetize allowances & benefits initiated FY94.  Table 6: Key Indicators for Project Operation L Key implementation indicators in SAR/ Estimated Actual President's Report NA NA II. Modified indicators (if applicable) NA NA Im. Other indicators (if applicable) NA NA Table 7: Studies Included in Project | ~~~~~Purpose as deffined Study at appraisal/redefined Status Impact of study l None NA NA NA _----------  Table 8A: Project Costs Appraisal estimate (US$m) Actual/latest estimate (US$m)Ij Local Foreign Local Foreign Item costs costs Total costs costs Total Total N.A. N.A. 125.0 N.A. N.A. 200.7 Table 8B: Project Financing Appraisal estimate (US$m) Actual/latest estimate (US$m)l Local Foreign Local Foreign Source costs costs Total costs costs Total IBRD/IDA 125.0 131.31 Cofinancing institutions 0.0 69.4 Total 0.0 0.0 125.0 0.0 0.0 200.7 Table 9: Economic Costs and Benefits NOT APPLICABLE  Table 10: Staws of'Legal Cuvenants Uganda StnrcnaIA Ad#jusxsnt Credit ! Original Revised Covenant Present fulfillment fulfillment Descripdon of Agreement Section tVDe Status date date covenant Development 3.02 Procurement Compiled Except as (DA shall otherwise agre, prcvtrement of the oods to be Credit financ:d out of the proceeds of the C:dic shall be governed by the Agreemcnt provisions of Scheduie 2 to this Agrr .:n Developmenc 3.03(a) Accounts! Complied The Borrower shall maintain or cause to be maintained records and Credit audites accounts adequate to reflect in accordance wiEh consistently maintined Agrmeem t sound accounting pracice the txpendic.=s financed out of the proceeds of the Credit. Development 3.03(b) Accounts! Complied The Borrower shall. have the records and accounts referred to in pam Credit audites (af of this secion for each dscai year audited, in accordance with Agreement appropriate auditing principles consistentdy applied, by independent auditors acceptable to IDA; frUnish ro DA as soon as available, but in any case npt Iater than six months aft- he end of ecsh such year. a certified copy of the report of such audit by said auditors. of such scope and in such detail as IDA shall have resonably requested and furnish co iDA such other irnormation concerntia said records and accounts and the audit thereof as IDA shall from ime to time reasonably request. Development 3.03(c) Accountst Compiied For all expenditures with restect to wh;5c withdrawals from the Credit audites Credit Account were made on the basis of statemnents of expenditre, Agreenat the Borrower shall: maintain or cause .o ce maintained, in accordance with para (a) of this sectior. :cords and accounts rerlecting wuch expenditures; rerain. tuntil at least one year aftr IDA bas received the audit report for the fiscai year in which the last last withdrawal from the credit accountr was made, all records evidencing such expenditures: enable IDA's representadves to examine such records; and ensure that such records and accounts are included in the annual audit rferred to in para (b) of this section and that the report of such audit contains a separate opinion by said audirors as to whether the statements of expendiure submitted during such fiscai year, together with the procedures and interzl controls invoived in their preparations, can be relied upon to sucport the related withdrawals. Development Credit Agreement signed on December 12, 1991  Table 11: Compliance with Operational Manual Statements Statement number and title Describe and comment on lack of compliance NONE  Table 12: Bank Resources - Staff Inputs Stage of Actual Project cycle Weeks US$ Preparation to appraisal 60.2 NA Appraisal 65.4 Negotiations through [Board 18.1 Supervision 68.6 Completion 10.9 Total 223.2 654,900 Table 13: Bank Resources - Missions Performance Rating il Stage of Month* Number of Days in Speciaiized Implementation Development Types o Project cycle year persons fteld staff skdils status objectives proble T'hrough appraisal Appraisal through Boasd approval Supervision 02/07/92 3 Economists S U Macro 10/09192 3 Economists S U Macro 07/19/93 2 Economists S S 09/94 1 Economist S S ompletion FY95 1 Economist H.S. H.S. None 1/ S=Satisfactory; H.S.-Highly Satisfactory; U=-Unsatisfactory  APPENDIX A BORROWER CONTRIBUTION TO THE ICR BACKGROUND AND EVOLUTION OF THE PROGRAM 1. During the period between 1986 and 1991 the NRM govemment implemented the Economic Recovery Program supported by the first Economic Recovery Credit (ERCI) which was approved by the International Development Association (IDA) Board in 1987 ad Second Economic Credit (ERCII) which was approved by the IDA Board at the beginning of February 1990. The two operations were co-financed, mainly on grant basis, by a number of donors including United States of America, United Kingdom, Denmark, Germany Sweden and Switzerland. The two operations aimed at reconstructing and rehabilitating the rined economy of Uganda. The reconstruction and rehabilitation objectives were largely achieved, particularly under ERCII. 2. During the first phase of ERP under ERCI, the Government had acute scarcities of foreign exchange, goods and services and Government allocation of resources including foreign exchange was the order of the day. There was very limited ownership and appreciation of the Economic Recovery program and maintenance of Macro-Economic stability was not a priority to many managers in Government. As a result, public borrowing remained high, macro-economic stability was not attained and inflation remained high. On a positive side, ERCI helped the Government to (i) provide foreign exchange which was acutely scarce; (ii) the sale of foreign exchange provided revenue by way of sales revenue (local cover) to the Government and therefore started to counteract the pressure for public borrowing; (iii) the imports procured using that foreign exchange alleviated the shortages; (iv) the taxes leveled on those imports boosted Government revenue; (v) and the open General License availed foreign exchange to the key industries, thus leading to their quick rehabilitation 3. The ERCII follow-up operation was strengthened by emphasizing the ownership of the reform program to the key players in Government, both at a policy and technical level. An Econonic Monitoring Committee was established and a program Coordinator was appointed. The managers of the reform components became more aware of the recovery program and most of the targeted performance benchmarks were met. The number of firms on the open General License (OGL) was increased in order to eliminate unfair access to foreign exchange and a system of Special Import Program (SIP) was introduced in order to ensure that foreign exchange was sold on a first-come-first-serve basis. The increase of the number of firms under OGL and the introduction of SIP was a move towards elimination of an unfair and preferential system foreign exchange allocation which might have been exploited for personal gains by those who were in positions of influence or were allocating the foreign exchange. Following the increase in the number of firms on OGL system and implementation of SIP almost all firms were on OGL and the fear that foreign exchange would be in short supply was no longer an issue. Subsequently, the OGL was eliminated while industrial production and Capacity utilization increased. As counterpart funds from ERCII and its Co-financing facilities increased, the taxes on imports finance by the foreign exchange through this operation also increased thus easing Government budgetary constraints. 4. In addition to setting a basis for improved revenue generation, ERCII also set the ground to further widen and deepen the reform in the areas of exchange rate and trade policy, investment promotions, public  sector management reforms and rationalizing Government expenditures. These issues set the stage for the Structural Adjustment Program (SAP) which was supported by, inter-alia, the IDA, with the first Structural Adjustment Credit I (SAC I). 5. The negotiations between the Government of Uganda (GOU) and IDA for SAC I took place between 8th and 11th October, 1991. After fulfilling the conditions of Board presentation, which included: a) establishment and implementation of an import certificate system which would allow the importation of all items not on the negative list; b) suspension of the operations of the Industrial licensing Board; c) compilation and review by IDA of a detailed list of all the properties expropriated in 1972; d) development of a detailed classification of the Departed Asian Property Custodian Board (DAPCB) properties, drawing a distinction between those covered by the Expropriated Properties Act (1982) and those not covered; e) issuance of a public statement setting out the legal status of the properties and the modalities for their disposal, and informing the public that a list of the properties is available at the DAPCB and will be published in the official Gazette; f) provision to IDA of evidence that Government has submitted for publication in the official Gazette the list of properties classified under (d) above, also indicating which properties are currently being used by the Government for residential and office accommodation; g) confirmation of prompt response to submission of evidence of ownership and Ugandan citizenship for properties not covered by the 1982 Act; h) presenting audit reports on ERCI and ERCII and; i) presenting a letter of Development Policy to IDA. 6. The SAC I was presented to the Board on 5th November, 1991. The legal instruments to empower our embassy to sign the SAC I Agreement number 2314-UG were issued on the 10th December 1991 and the agreement was signed on the 12th December, 1991. The legal Opinion was furnished on 31st December, 1991 and the credit was declared effective on the 3rd January, 1992. All this was possible because of a very strong team put up by the IDA, a close working relationship between the IDA team and the Coordinator who was well facilitated by way of communication facilities and transport, and a firm network between the Coordinator and the Structural reforming agencies or Department on the Govenment side. Also a close review and monitoring by the Government top management made the task which otherwise appeared impossible to be achieved. SACI AND ITS CO-FINANCING FACIATIES 7. SAC I and its co-financing facilities were as follows:- Orilinal Currency US Dollar Eguivalent SACI SDR 91,900,000 125,000,000  ADF FUA 25,000,000 31,000,000 Swiss Grant three SWF 15,000,000 12,000,210 ODA Pound Sterling 15,000,000 22,646,250 Norway (5th Dimension) NOK 25,000,000 3,802,680 SAC I amendment SDR (reflow) 1,010,000 (reflow) 1.373.610 Total 195.822.750 Source: Ministry of Finance and Economic Planning 8. All the co-financing facilities which were pledged at the Consultative Group meeting (CG) were processed as soon as the donors answered the Government call to avail their pledges to the GOU. This availed the much needed foreign exchange to the economy. A lot of counterpart funds were generated and availed to the budget. The Government revenue increased from USh 136 billions in FY 1990/91 to USh. 183.8 billions in FY 1991/92 mainly on account of taxes on import, which imports were mainly financed by SACI and its Co-financing facilities. 9. The Government therefore embarked on the structural reforms under SACI which were complemented by other sectoral reform operations including the Financial Sector Adjustment operation, the Agricultural Sector Adjustment operation and the Enterprise Development Project. All these operations were supported by IDA. In addition to the performance benchmarks mentioned above, SACI was intended to support Uganda's macroeconomic adjustment operations as well as structural reforms to enhance economic growth to a sustainable level and lead to economic development. It was therefore agreed within the SACI program to have the following performance benchmarks conditional to the release of the second tranche; a) eliminating OGL/SIP; b) repealing the Industrial licensing act; c) returning properties with valid applications, which are covered by the 1982 Act, provided the Government did not intend to conclude joint venture arrangements with the former owners; d) Facilitating the orderly return of the properties not covered by the 1982 Act and ensuring that evidence submitted by the claimants is verified without any delay; e) completing all transitional arrangements between the existing departments responsible for revenue collection within the Borrowers' representative Ministry and the Uganda Revenue Authority (URA); f) completing the transfer of all responsibility for revenue collection to URA; g) releasing all budgeted allocations in FY1991/92 to the priority recurrent and development programs; and  h) achieving the annual targets for the civil service staff reductions, ministerial reviews, and pay reforms. PROGRAM IMPLEMENTATION AND EVALUATION 10. After eliminating the OGL/SIP foreign exchange transactions system and replacing it with a weekly foreign exchange market auction to commercial banks, the bureau rate premium dropped from 27.86 percent in January 1992 to 20.39 percent in June. Then the premium gradually dropped with some fluctuations to a bottom level of 0.28 percent in December 1994. The sudden drop of the premium was partly due to the decision of the Government to purchase coffee foreign exchange earnings at the average bureau buying rate. This measure was beyond that agreed to under the SACI and SAP arrangements. It therefore sent a clear signal to the foreign exchange market that the Government was not interested in maintaining an artificial foreign exchange rate. 11. The decision to purchase Coffee foreign exchange proceeds was mainly driven by the collapse of the international market price of coffee which rendered the coffee business unviable. GOU did not want to devalue the Uganda Shilling, whose exchange rate was already being determined by the foreign exchange auction market, on account of coffee unviability. In any case it was clear to Government that even if it devalued the currency, coffee would become viable for a very short time before the costs would rise on account of direct or indirect effects of devaluation. The Government also realized that the macro economic stability would be engendered due to devaluation, yet purchasing the coffee foreign exchange earnings at the bureau rate would be moving towards the actual market norm. 12. In October 1993 the weekly or bi-weekly (sometimes tri-weekly) foreign exchange auction to the commercial banks was closed and was replaced with the inter-bank foreign exchange market. As the bureaus learnt of the inter-bank market, in October the bureau rate premium sharply dropped from 14.04 percent in September to 5.92 percent in October and it plummeted further to 1.69 percent in November 1993. The premium then fluctuated between 1.11 percent and 5.87 percent until it tended towards an equilibrium of less than one percent by December 1994. 13. As the premium dropped, the Uganda shilling also appreciated gaining from about USh. 1213.93 per US dollar at the end of 1993 to USh 925.04 by January 1995. There was also an increase in external transfers to Uganda, the foreign exchange reserves increased and the suppliers credit availed to Ugandan businessmen increased. 14. Following the suspension of the Industrial Licensing Board, the Industrial Licensing Act was repealed. The repeal of the Industrial Licensing Act which empowered the Industrial Licensing Board to literally seek permission from the already established industries to license any other new industry to produce the same product, and the protectionist approach which had encouraged the inefficient industrialist to dominate the economy were eliminated. Following the repeal, Uganda has seen a persistent increase in industrial production as well as capacity utilization. 15. The foreign investment Act was repealed and replaces with the investment Code Act of 1991. The investment Code provided for the establishment of the Uganda Investment Authority (UIA). The UIA was fully established and staffed. Over time, the UIA has proved to be second to none in investment promotion and attracting foreign investment m sub-Saharan Africa. 16. The return of DAPCB properties, which seemed the most difficult due to political and social obstacles, was very successfully implemented. Citizen and non citizen properties were returned. At the end  of 1991 only about 400 properties had been retumed since 1982. By June 1995 more than 3000 properties had been returned to their owners. The return of DAPCB properties has not been easy all the time. There are a number of people who bought the DAPCB properties, some even bought around 1989-1990, but because an Order to sale was not made by the Minister, as provided by the 1982 Act, these properties have been retumed to their claimants where valid claims have been made. Many of such purchasers are threatening to sue Government and to challenge the 1982 Act that it is un-constitutional. The people in Uganda have a constitutional right to their property. The Act provided that all leases stopped counting at the time when the properties were expropriated. This means that a Free Hold land owner who had offered a lease to an Asian at certain agreed terms, his lease automatically stopped counting in-spite-of the failure of the Asian to fulfill the provisions of the lease, yet it is not the Free Hold landowner who caused his departure or caused his failure to service the lease. 17. The above was compounded by the Supreme Court ruling that all properties (citizen and non- citizen) actually vested in to the DAPCB. The Government is doing everything possible to find an amicable solution, to avoid situation where a constitutional court could rule that the 1982 Act was unconstitutional, a situation wlucli would cause a lot of problems not only to the repossessed properties, but to the whole investment climate and the SAP. The Government performed well on all the other performance benchmarks, it performed well beyond the agreed targets except on the public expenditures. CONCLUSIONS 18. The SAP objectives under SACI were implemented very well. Most of them were implemented beyond the agreed targets. The excessive public borrowing by the Government at the end of 1991 and early 1992 taught a lesson. The subsequent merger of the Ministries of Finance and Planning and Economic Development into the Ministry Finance and Economic Planning and the fiscal stance that followed the previous over-borrowing have clearly demonstrated that macro-economic stability is very important in sustaining economy growth and development. 19. All structural reforms planned under the SACI were implemented satisfactorily, a number of them were implemented well beyond the original targets. Revenue has substantially improved from 136 billion FY 1990/91 to 535 billions in FY1994/95, although a lot remains to be done to raise it to a normal level relative to the GDP. The Government has intensified its efforts to privatize public enterprises and the financial sector reforms are being geared up.