Uganda - Reconstruction Credit Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-26 7 la-UG REPORT AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED REOCNSTRUCTION CREDIT TO THE REPUBLIC OF UGANDA January 29, 1980 This documat bas a resricted distibution and may be used by recipients only In tbe perfonmance of their ofecl dutl. Its contents may not otherwise be disclosed witbout World Bank u Iorizston  CURRENCY EQUIVALENTS Currency Unit = Uganda Shilling (USh) US$1.00 = USh 7.5 UShl.00 = US$0.13 FISCAL YEAR July 1 - June 30  FOR OFFICIAL USE ONLY UGANDA RECONSTRUCTION CREDIT Table of Contents Page No. Summary ......................................................i Part I - The Economy . ...................... .************........... 1 Part II - Government Policy and the Rehabilitation Program ........ 5 Part III -Bank Group Operations ................................. 18 Part IV -The Reconstruction Credit ............................. *. 20 Part V- Legal Instruments and Authority ......... ................. 25 Part VI - Recommendation ................................. ............ 25 Annex I - Country Data Annex II - Status of Bank Group Operations in Uganda Annex III - Supplementary Data Sheet Annex IV - Imports Eligible for Financing under the Reconstruction Credit Annex V - Statistical Annex This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contenst may not otherwise be disclosed without World Bank authorization.   UGANDA RECONSTRUCTION CREDIT SUMMARY OF THE PROPOSED CREDIT Borrower : Government of Uganda. Credit Amount : US$72.5 million, of which US$17.5 million would be provided under a participation arrangement with the Government of the Netherlands. Terms : Standard Cofinancing : IDA will administer an EEC Special Action Credit of approximately US$20 million equivalent (on standard IDA terms) and a grant of Can$3 million (approximately US$2.6 million equivalent) on behalf of the Government of Canada. Purpose The proposed IDA credit, together with the EEC Special Action Credit and the Canadian grant would make avail- able a total of approximately US$95 million to help meet the priority import requirements of the Government of Uganda's economic reconstruction program. These funds would be allocated to the procurement of replace- ment equipment for manufacturing enterprises, raw materials and spare parts, agricultural implements and inputs, vehicles and vehicle spare parts in accordance with the Government's foreign exchange allocation budget. Counterpart funds would be allocated to the recurrent or capital costs of projects included in the reconstruction program. The main risk which this operation faces is whether the Government will take necessary policy actions to remove the distortions resulting from the present over- valuation of the Uganda shilling, and whether at the same time the Government can adequately control the internal distribution system to prevent smuggling and diversion of essential commodities away from their intended users. However, we have received assurances concerning the administrative and financial actions which the Government has taken and intends to take in the near future to deal with this risk. Estimated Period of Disbursements : March - June 1980. Procurement Arrangements : Procurement would be on the basis of normal commercial practices except that contracts of over US$2 million would require international competitive bidding. Imports  - ii - will be procured by the Government, parastatal enter- prises or private firms. All Government import orders are reviewed for price and quality standards by the Central Tender Board of the Ministry of Finance. Similar review procedures for parastatal and private sector imports are performed by the Uganda Advisory Board of Trade. The Bank of Uganda reviews the recom- mendations of the Central Tender Board and the Advisory Board of Trade in making allocations of foreign exchange. Appraisal Report None.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED RECONSTRUCTION CREDIT TO THE REPUBLIC OF UGANDA 1. I submit the following report and recommendation on a proposed reconstruction credit to the Republic of Uganda for the equivalent of US$72.5 million on standard IDA terms, of which US$17.5 million would be provided under a participation arrangement with the Netherlands Government. The IDA credit would be supplemented by a proposed Special Action Credit equivalent to approximately US$20 million. The Special Action Credit would be made to the Republic of Uganda from the EEC Special Artion Account in accordance with the terms of the agreement of May 2, 1978, between the Association and the European Economic Community. The Association will also administer a grant of Can$3 million (approximately US$2.6 million equivalent) from the Government of Canada in accordance with the terms of the agreement of April 22, 1977, between the Government of Canada and the Association, as amended. PART I - THE ECONOMY 2. The last economic report on Uganda was circulated in June 1969 (Report No. AE-2). Since 1971 there has been a hiatus in World Bank Group operations in Uganda, as reviewed in Part III below. However, after the change in Government in early 1979, two economic missions visited the country; the first was a reconnaissance mission in July 1979 and the second was an appraisal mission for this reconstruction credit in September 1979. The findings of these missions are incorporated in this report. In addition, analysis of the present situation of the Ugandan economy and its reconstruc- tion needs has been greatly assisted by a report prepared, at the invitation and with the assistance of the Government, by a team of experts under the auspices of the Commonwealth Secretariat. 1/ 3. As the Commonwealth Report eloquently put it: "The Government of the National Liberation Movement inherited a country in ruins." Uganda, which in 1970 had one of the highest per capita incomes in Eastern Africa, experienced a decline in real GDP estimated at about one percent per annum on average from the early 1970s through 1978. With population growth averaging more than three percent per annum, per capita GNP fell by about 25 percent. The decline was particularly severe in the modern sector, with the output of monetary agriculture, manufacturing, mining and construction all having fallen. Only subsistence agriculture achieved some growth, as farmers turned away from the production of export cash crops (principally coffee, tea, cotton and tobacco) towards essential food crops. Real investment also fell sharply. 1/ Commonwealth Secretariat, Fund for Technical Cooperation, The Rehabilita- tion of the Economy of Uganda; two volumes, London, June 1979.  4. The decline in the modern sector of the economy was reflected in the changing structure of output. In the early 1970s, about 70 percent of GDP originated in the monetary economy; monetary agriculture accounted for some 24 percent; industry 11 percent; and modern tertiary sector activity about one-third. By 1978, it is estimated that the share of subsistence agriculture had increased from 27 percent to over one third and that the non-monetary economy accounted for nearly 40 percent. Almost all modern sector production declined. The table below compares previous production levels for selected agricultural commodities and manufactured goods with estimates for the most recent period. TABLE 1 Production of Selected Agricultural and Industrial Commodities Unit Production Peak Year Latest Year Monetary Agriculture Coffee '000 metric tons 251 (1969) 120 (1978/79) Cotton of " " 79 (1972/73) 15 (1978/79) Tea " t " 23 (1971/72) 11 (1978/79) Sugar ' " ' 141 (1970/71) 8 (1978/79) Tobacco ' " " 5 (1972/73) 2 (1978/79) Manufacturing Average 1971-73 Latest Year Consumer Goods Vegetable oil " " " 14 1 (1978) Cotton oil million sq. meters 44 25 (1978) Blankets million pieces 1,154 595 (1978) Soap '000 metric tons 11 1 (1978) Industrial Goods Steel ingots " " 21 3 (1978) Corrugated iron sheets " " 11 2 (1978) Cement " " " 171 50 (1978) Hoes million pieces 1 - (1978) Source: Data provided by the Ugandan authorities.  - 3 - 5. These output declines were largely attributable to the policies followed by the Government. In 1970, the Government took majority participa- tion in a number of large companies. After the change in Government in 1971 this policy was at first reversed; however, when the "economic war" was declared by Amin many more foreign-owned businesses were nationalized. In 1972, most Ugandans of Asian origin were expelled and their businesses allocated to Government nominees. In 1975, more foreign businesses were expropriated. Uganda did not possess the manpower resources to cope effi- ciently with this sudden increase in the number of businesses in the public sector or in the hands of inexperienced businessmen. No program was devel- oped to augment the manpower resources available (in fact, Uganda lost trained manpower during this period), or to support and strengthen the newly-created parastatals and small private businesses. Only bank credit was provided -- from 1971 to 1978, credit to the private and parastatal sectors more than trebled, in many cases under pressure from the authorities to lend to unviable enterprises. As a result, many parastatals became heavily encumbered with debt. In addition, periodic attempts to impose price control worsened the parastatals' economic problems and stimulated the trend towards black marketeering. 6. The balance of payments situation was seriously affected by these trends. From 1970-71 to 1978 both exports and imports fell by over 55 per- cent in real terms. Uganda had formerly exported significant quantities of tea, tobacco, sugar and cotton, but production of these cash crops declined precipitously, leaving coffee as the only significant export crop. Coffee's share in export receipts increased from 53 percent in 1971 to over 90 percent in 1978, despite a decline in official coffee exports from 175,000 tons in 1971 to 113,000 tons in 1978. The cumulative balance of payments deficit for the period 1970-78 amounted to over US$130 million, of which some US$100 million accumulated as unpaid arrears. While Uganda experienced some respite from its balance of payments problems during the coffee price boom of 1976-77 (when higher coffee export earnings permitted some relaxation of import con- trols and the country was able to import vehicles, spare parts, raw materials and consumer goods), with the decline in coffee prices in 1978 the balance of payments again showed a large deficit. By the end of 1978 gross foreign exchange reserves covered less than two months' import requirements and net foreign assets were only marginally positive. 7. In addition to declines in the real value of exports and imports, Uganda experienced a fall in net capital inflows. In 1971 and 1972, net official capital inflows were approximately US$30 million per year; by 1978 they had declined to US$12 million, implying a much greater decline in real terms. At the same time, outflows of short-term capital increased. However, a corollary of the decreasing level of external assistance flows to Uganda after 1971 was a correspondingly low level of public debt; recorded external public debt outstanding rose from US$210 million at the end of 1972 to only US$270 million at the end of 1978.1/ As a result, the ratio of Uganda's debt 1/ The World Bank Group accounted for 21 percent of total debt outstanding at the end of 1978, the USSR for 20 percent, and the UK for 12 percent.  -4- service to export proceeds fell to 5 percent in 1978; however, if payment arrears on external debt are added to debt service, this ratio would have been 8 percent. 8. Despite the contracting real economy, the Government's budgetary operations were strongly expansionist. Total expenditures increased fromi UShs 1.9 billion in 1970/71 to.UShs 5.2 billion in 1976/77, while revenuep only increased from UShs 1.3 billion to UShs 3.4 billion, and net foreign borrowing actually decreased. Net domestic financing, almost entirely through the banking system, rose from a little over UShs 350 million in 1970/71 to UShs 1.6 billion in 1976/77. This heavy deficit financing by the Government was the major cause of the nearly six-fold increase in the money supply between 1971 and 1978. While the improvement in coffee prices boosted Govern- ment revenues significantly and reduced the recourse to deficit financing in 1977/78, the deficit and Government borrowing from the banking system both rose sharply again in 1978/79. The Government's finances are presented in Table 2 below (page 11). 9. Because of the severe shortfalls in domestic production and the scarcity of imports, coupled with heavy Government deficit spending and resultant monetary expansion, inflation was rampant. The official low-income consumer price index (which may actually understate true price inflation) rose at an average annual rate of 36 percent from 1970 to 1978. Despite this high inflation rate the official minimum wage was increased only 54 percent over these years; civil service salaries also fell sharply in real terms. 10. By early 1979, these trends had resulted in a serious deterioration in economic and social conditions. The war with Tanzania, which led to the fall of the Amin regime, and the looting which followed the fighting, greatly exacerbated the situation. After the war, shops stood empty and closed; people queued for essential commodities; industrial and repair facilities lay idle and deserted; tea and sugar estates were overgrown; the roads, the railway and its rolling stock stood in need of repair, and the main airport at Entebbe was closed to international traffic. The lorry fleet, which numbered over 7,000 in 1970, had fallen to about 1,600 shortly after the liberation, many of the trucks having been driven to neighboring countries. Buses, private autos and tractors in large numbers were also stolen. There were shortages of essential drugs and medicines; diseases which had formerly been largely eliminated from Uganda (such as cholera) had spread once again; schools and hospitals had been ransacked; and water and sewerage systems were in a state of severe dilapidation. The discipline and organization of the modern economy had been undermined; almost everyone, including Government officials,had to participate in the black market to survive. 11. The new Government of Uganda thus faced a most difficult and demanding set of problems upon taking office. However, the priorities for action were clear. The first requisite was to reestablish basic law and order and political stability. This had to be coupled with a resumption of the flow of essential commodities into normal market channels, which would in turn depend upon a resumption of the flow of imports and of domestic produc- tion. Restoration of domestic manufacturing production would also increase  -5- urban employment and Incomes, thus reinforcing the effort to reduce lawless- ness and insecurity. Economic revival would obviously depend on both revers- Ing the deterioration in the administrative and policy environment which had developed over the previous eight years and on a massive inflow of foreign exchange. The exchange rate was overvalued, agricultural producer prices were inadequate, the cooperative and parastatal sectors were seriously in debt, government finance was out of control and external debt was in arrears. Both Internal and external transport bottlenecks impeded economic recovery. Foreign exchange was needed to Increase the flow of essential imports, to provide the machinery, raw materials and spare parts of which Ugandan indus- try had been starved for years, to alleviate the transport bottlenecks and to start the maintenance or rehabilitation of Infrastructure. Since foreign exchange was a critical element in economic revival, and because restoration of export production (other than coffee stocks already in the supply pipe- line) would require some time, It was apparent that the Government would need substantial amounts of external assistance to begin reconstruction. PART II - GOVERNMENT POLICY AND THE REHABILITATION PROGRAM Economic and Social Policy 12. In October 1979, the new Government issued an economic and social policy declaration which had been reviewed by all concerned ministries and endorsed by the interim legislative body, the National Consultative Council. The policy statement declares the central objectives of the Government to be rapid economic growth, improved Income distribution, an equitable spread of development across the entire country, and improved social services. 13. The respective roles of the Government, the private and cooperative sectors are defined in the policy statement. The Government will be respons- lble for social services and essential infrastructure (roads, power, water supply and telecommunications). In addition, the Government will, through parastatal organizations, participate in productive sectors in cases where an industry is of strategic importance, where a development need is evident, or where capital requirements are too large for private enterprise. Consequently, the Government will retain a controlling interest in key industries and will continue to control the marketing of key crops and minerals. It will also retain its interests in the financial, insurance and external trade fields. In the statement the Government acknowledges the financial problems inherited by the parastatal organizations and expresses its commitment to address them; the statement emphasizes that the Government expects public enterprises to be efficient and profitable. 14. The statement notes that the private sector, comprising both local and foreign investors, will be encouraged either to participate jointly with the Government in the enterprises in which the Government has decided to take a controlling interest, or to operate independently in those areas where the Government is not directly involved. Indigenous private entrepreneurs will be  - 6 - given certain preferences, but foreign investors will be safeguarded under the provisions of the 1964 Foreign Investment Protection Act. 1/ 15. The statement highlights the role of agriculture, which is the major occupation of the people of Uganda. The Government intends to support small- holders as well as to encourage medium scale farming, by ensuring appropriate production incentives (adequate producer prices, availability of inputs, provision of training, extension services and credit). It also intends to strengthen the marketing and cooperative systems, both of which suffered under the previous regime. An outline of the Government's priorities in the other major sectors--livestock, mining, forestry, fisheries, manufacturing, tourism, housing, manpower and education--is also presented in the policy paper. 16. The policy paper is essentially a general statement of the Govern- ment's overall views and the direction in which it wishes to move. However, during the implementation of the rehabilitation program more specific policy decisions will have to be made in such areas as the role of controls, invest- ment incentives, incomes policy, etc. The Rehabilitation Program 17. The Government has adopted a two-phase strategy to revive the economy. The priorities in the first phase (which it was hoped could be accomplished within six months) are to restore essential service and stimulate the production and sale through official channels of export cash crops (coffee, cotton, tea and tobacco). The Government has estimated that imports totalling about US$670 million would be needed for this first phase, of which the main components, reflecting the priorities indicated above, would be agricultural and industrial inputs (24 percent), transport equipment and spares (17 per- cent), basic consumer goods (15 percent), petroleum (13 percent), housing (12 percent), and social services and administration (11 percent). 18. The second phase (expected to cover an additional 18 months) calls for the initiation of a medium-term investment program directed at rehabilitat- ing the key productive sectors and social infrastructure to the levels which prevailed in 1970. It comprises a broad range of needed expenditures across 1/ The Foreign Investment Protection Act of 1964 protects foreign investors against compulsory acquisition and provides for the remittance of bona fide profits, proceeds of sale, debt service or compensation payments related to foreign enterprises approved by the Government.  all sectors, many of which (by contrast with phase one) may be more easily identified as discrete projects. The total cost of the second phase is estimated at US$1.5 billion, of which US$1.2 billion would be foreign exchange. A large proportion (36 percent) would consist of social infrastructure, and 15 percent is earmarked for financial institutions (principally the Uganda Development Bank and the Uganda Development Corporation). The remaining expenditure would cover industry and tourism, agriculture and transport (each 14 percent of the program), and telecommunications (8 percent). 19. In addition to adopting the framework of this two-phase approach to rehabilitation, the Government has had to make a series of policy decisions on important economic issues. While in many areas specific policies are still evolving, the Government's present views on the major economic issues are summarized below: (a) Domestic Prices and the Exchange Rate 20. A major obstacle to rehabilitation is the present divergence between official, black market, and international prices. Black market prices for basic consumer items generally range from three to five times the official or controlled retail price, which is in turn usually related to but higher than the border price of that item, reckoned at the official exchange rate. Furthermore, while reliable data are lacking, it is apparent that the majority of transactions take place at black market rather than at official prices. Correspondingly, the black market exchange rate for the Uganda shilling has fluctuated between eight and twelve times the official rate in recent months. In this situation the profit opportunities for those who are able to buy locally produced goods at official prices, or to obtain foreign exchange licenses at the official exchange rate but sell the imported goods at the black market price, are great. Thus, both the price control system and the foreign exchange allocation system are being subjected to enormous pres- sures. In addition to black market profit opportunities and smuggling, the present overvaluation of the Uganda shilling has further important adverse effects on a range of areas; to name a few, the incentives to agricultural export production, the profitability of import-substitution manufacturing at controlled prices, the level of rural and urban wages, and the Government budget. 21. There are various approaches to the black market aspect of the problem. In a situation of continuing foreign exchange scarcity it could be at least partially dealt with through a foreign exchange auction system or by taxes on the use of foreign exchange. However, either of these might effec- tively institute a dual exchange rate and would create further administrative problems. A further measure would be to make more foreign exchange available, either from increased export earnings, foreign assistance or external borrow- ing. An increased volume of imports could then be procured which would drive down domestic prices. Similarly, more foreign exchange allocated to the procurement of raw materials and spare parts for domestic manufacturing establishments would permit a resumption of local production; the resulting increase in supply would have the same effect on the present black market price level. However, the needs for foreign exchange under this alternative  would be enormous. Similiasly, given the limited domestic production capacity, even a significant increase in the availability of local goods would still leave their prices, in most cases, well above their border equivalents. 22. Of course, on the demand side, downward pressure on domestic prices can be exercised by reducing li4uidity in the financial system. However, to reduce black market prices to official levels would probably require a more massive reduction in money incomes than could realistically be envisaged, given the present low consumption levels of the population. It is in any case doubtful whether the monetary authorities control enough of the pur- chasing power available to the Ugandan public to enable such strict monetary control to be effective. Thus, while some decrease in liquidity may have resulted from the introduction of a new currency in October, 1979, it is unlikely to have been substantial. 23. It is evident, taking all the above factors into consideration, that an adjustment in the official exchange rate will be required. In addition to reducing black market profits, a devaluation would bring a number of longer- run benefits. It should stimulate an increase in export supply over the medium-term, and quite possibly within a shorter time (perhaps one year), provided part of the benefits are passed on to producers in the form of higher shilling prices. The price increase recently introduced for coffee (para. 35 below) has already had a positive effect in attracting more output into official marketing channels, leading to a higher volume of official exports, and may also have stimulated some improvements in crop husbandry. A devalua- tion would also have a positive impact on the Government budget since it would raise the shilling value of export taxes on coffee, the shilling value of imports and thereby of customs duties, and also the shilling equivalent of external financing. Finally, a devaluation could permit an increase in nominal wages. Such labor-intensive agricultural operations as sugar harvest- ing and tobacco and tea cultivation are now constrained by the non-availability of rural labor at the present rural wage. A substantial increase in the shilling value of these export crops should permit cultivators to pay higher wages. 24. Accepting this analysis, the Government sees devaluation as a key element in the reconstruction program, and has categorically stated that it will take appropriate action on the exchange rate in the near future, before the end of the 1979/80 financial year. However, the Government believes that an exchange rate adjustment would have maximum effect if syn- chronized with other aspects of the reconstruction program, including a massive increase in the availability of goods, both from imports and from domestic production. It is the Government's view that if devaluation were to take place before a revival in supply, the result could be a short-term disruption due to a speculative withdrawal of supplies from the market. In addition, devaluation would be ineffective in stimulating production if unaccompanied by an increase in the supply of goods. The Government has therefore concluded that the perceived risks of devaluation would be much reduced if it were carried out once goods become more readily available on the market.  -9- (b) Fiscal Policy 25. Preparation of the 1979/80 budget was disrupted by the war in the first half of 1979. As a result, the new Government did not have time to issue the 1979/80 budget before the beginning of the fiscal year on July 1. In addition, the fiscal accounts of the previous government required careful review because monitoring systems and expenditure controls had largely broken down. As indicated earlier, budgetary performance throughout the 1970s was characterized by large deficits, which were financed through recourse to the banking system, by sharp increases in unproductive items of expenditure such as defense, police, prisons and internal affairs, by misappropriation of funds, and by accumulation of unpaid bills and extra-budgetary expenditure, while virtual collapse of revenue administration led to widespread evasion of taxes. 26. However, the new Government has given high priority to addressing these inherited fiscal problems, and specifically to producing a more real- istic budget. As a result, in early December, after thorough review and preparation, a comprehensive budget and financing plan were published. These have been analyzed and accepted by the IMF as part of the understandings in the recently approved program for use of Fund facilities (para. 53 below). Data assembled in Table 2 bring out the salient features of the new budget, together with comparative figures for the past four years. The 1979/80 budget shows total revenue of UShs 4,871 million, including external grants for rehabilitation of UShs 504 million, compared with UShs 3,197 million in 1978/79. The actual revenue for 1979/80 would be further improved when the Government adjusts the exchange rate. 27. Recurrent expenditure in the past two years ranged around UShs 4.1 billion but is projected at UShs 5.0 billion in 1979/80; this amount includes UShs 821 million for financing security arrangements with Tanzania. However, it does not include any provision for public sector salary increases which will, in due course, be needed if incentives are to be restored in the public service. These will only be affordable once revenues increase significantly through the general revival of economic activity and an exchange rate adjustment. 28. Development expenditure in 1979/80 is estimated at UShs 1,815 mil- lion; of this total, UShs 965 million is to finance on-going projects, while only UShs 850 million is earmarked for new capital expenditures under the rehabilitation program, an amount determined by the level of foreign aid commitments received to date and not by absorptive capacity. The bulk of the capital outlays for rehabilitation will be on-lent to the parastatals and some will be lent indirectly to the private sector. Of the UShs 1,048 million external aid (grants of UShs 504 million, loans of UShs 544 million) committed for rehabilitation during the 1979/80 fiscal year (the data differ from those in paragraphs 40-43 below on the balance of payments which are on a calendar year basis) some UShs 943 million will finance capital outlays (with UShs 105  - 10 - million or 10 percent financed locally.) The rehabilitation program included under the 1979/80 budget is, however, only a very small proportion of the total reconstruction effort; the bulk of it has to await the mobilization of additional external resources from the international community. If additional aid is committed well before the end of the fiscal year, absorptive capacity exists to increase the rehabilitation component of the development budget accordingly. 29. The overall deficit in 1979/80 is estimated at UShs 1,934 million, as compared with UShs 2,244 million in 1978/79. Of the overall deficit, foreign borrowing (net) is expected to cover UShs 344 million (UShs 43 million in 1978/79), while borrowing from the domestic banking and non-bank sectors will cover UShs 1,590 million (UShs 2,201 million in 1978/79).  - 11 - TABLE 2 Uganda: Central Government Financial Accounts, 1975/76 - 1979/80 (In Millions of Ugandan Shillings) 1975/76 1976/77 1977/78 1/ 1978/79 2/ 1979/80 3/ REVENUE Recurrent revenue 2,223 3,369 5,841 3,156 4,305 External grants 107 2 - - 504 Development revenue 13 21 15 41 62 Total 2,343 3,392 5,856 3,197 4,871 EXPENDITURE Recurrent 2,954 3,632 4,113 4,134 4,990 4/ Development 816 1,037 1,755 1,098 1,815 Other 5/ 257 496 419 209 - Total 4,027 5,165 6,287 5,441 6,805 (of which: Defense) (678) (992) (1,187) (967) (1,403) 4/ OVERALL DEFICIT 1,684 1,773 431 2,244 1,934 FINANCING Foreign (net) 280 148 68 43 344 Domestic (net) 1,404 1,625 363 2,201 1,590 6/ Banking system (1,373) (1,459) (323) (2,052) Non-bank (31) (166) (40) (149) 1/ Provisional. 2/ Estimate. 3/ Budget. 4/ Includes Shs821 million for financing Tanzanian security forces. _/ Includes extra-budgetary expenditure, the difference between cheques issued and paid in the same fiscal year, and unrecorded cash outlays. 6/ Includes UShs61O million domestic sale of Government stock. Information is not available on the distribution of this stock sale between the banking and non-bank sectors.  - 12 - (c) Foreign Aid Mobilization 30. The new Government has exerted considerable effort to mobilize the foreign economic assistance essential to mount the reconstruction program. An aid coordination office has been set up in the Ministry of Finance and technical assistance to this department is being provided by the Bank Group. An initial conference of bilateral and multi-lateral aid donor representatives and non-governmental aid organizations was convened in Kampala in July 1979. A follow-up meeting to review the priority needs of the transport sector was held in August. However, the response to these initial appeals was minimal. Therefore, in order to provide the framework for a more comprehensive approach to the donor community, in November a Consultative Group Meeting of donors was held in Paris with the assistance and under the chairmanship of the Bank Group. At this Meeting, following a full and frank discussion of Uganda's problems and external assistance needs, more concrete assurances of assistance from donors were forthcoming. However, as elaborated below (paras. 41-43), the amount of quick-disbursing assistance now likely to be available over the coming year is still well below the requirements of the first phase of reconstruction. (d) Planning 31. The initial attention of the new Government correctly focussed on the priorities of the short-term rehabilitation program. However, the Govern- ment also intends to reestablish machinery for effective medium-term planning. It has set up a National Planning Commission, consisting of ministers with economic and social portfolios, with a secretariat in the Ministry of Plan- ning and Economic Development. In the past the planning ministry has not had sufficient influence on determination of macro-economic and sectoral priorities or on project selection and review. It is therefore especially important that it be strengthened so that it can play a central role in the new planning system. To assist in this effort, the Bank Group, as executing agency for a UNDP-financed project, will provide assistance to the ministry in staffing and training. In addition, a National Manpower Council is being proposed, to take stock of available and potential Ugandan manpower and to reinstitute manpower planning. The Bank Group is also preparing a tech- nical assistance project which will provide funding, to supplement that available from other sources, for consultant studies, project identification, feasibility studies, and training in project appraisal. (e) Domestic Credit and the Parastatal Sector 32. The financial viability of some of the cooperatives, particularly of coffee growers, has improved following the increases in crop producer prices recently enacted, and many now are able to obtain credit on a commercial basis. In addition, the poor financial position of some of the parastatals and cooperatives is due to low turnover and should be improved simply through  - 13 - a revival in import supply. Moreover, the issue of parastatal indebtedness has not yet become pressing, in large part because the imports for which domestic finance will be required have not yet become significant due to the insufficiency of foreign exchange. Of the US$160 million equivalent allo- cated by the Bank of Uganda for imports during July-November 1979, only some US$27 million was unutilized for lack of domestic credit. However, in order to support the reconstruction program, action may soon be required to re- organize and refinance some of the parastatals which experienced losses under the previous regime and to adjust prices so that they become viable. With this problem in mind the Government has established a task force in the Ministry of Finance to review parastatal organizations and make recommenda- tions on their future status, including their financial needs. As it will take some time for this review to be completed, in the interim priority should be given to mechanisms which will enable a quick response to credit requests by parastatals to finance essential imports under the reconstruction program. (f) External Debt and Compensation Claims 33. The new Government has inherited a manageable external public debt and commercial arrears problem, but at the same time it is confronted with a large number of compensation claims resulting from expropriations carried out by predecessor regimes. These concern enterprises taken over prior to 1971, during the 1972 "economic war" and subsequent to 1972; they involve both foreign individuals and companies and Ugandan citizens, mainly of Asian origin. With respect to external public debt, the Government is examining the purposes for which past debt was incurred and, in cases where legitimate obligations exist, intends to continue with scheduled payments or to work out alternative repayment terms with creditors. In numerous cases Uganda has already or will be afforded debt relief for past bilateral development loans. With respect to private compensation claims, the Government has been conduct- ing negotiations with some former owners of agricultural and industrial enterprises in Uganda. The Government hopes that this will lead to the return of these companies and individuals, and their involvement in the rehabilita- tion of export crops and essential consumer goods production. In addition, the Government has publicly stated its resolve to settle expropriation cases through the payment of fair compensation. A Compensation Committee has been established to investigate claims and to conduct negotiations. (g) Foreign Exchange Allocation 34. The Government has reestablished systems for regulating public procurement and foreign exchange allocation to eliminate the serious abuses which occurred under the previous regime. These mechanisms return responsibi- lity for expenditure control and foreign exchange budgeting to the Ministry of Finance and the Bank of Uganda. These systems are described in Part IV below.  - 14 - (h) Agricultural Producer Prices 35. The principal export crop producer prices have been raised in a commendable effort to improve the incentive to produce and market through official channels. The increases, which were announced in July 1979, were: robusta coffee, from UShs3.50/kg to UShs7.00/kg; tea, greenleaf, from UShsl.25/kg to UShs2.00/kg; and seed cotton, from UShs.5.00/kg to UShs6.00/kg. The increase in the coffee price seems already to have had a positive impact on official marketings, whereas any impact from the cotton price cannot be determined until the next crop season in 1980. The effectiveness of these price increases will also depend on complementary actions in other areas, e.g., in improving input supplies, transport facilities, repair of processing facilities, and availability of consumer goods. Furthermore, given the present imbalance between producer prices and consumer goods prices, as well as the possibility of continuing inflation, it may be necessary to raise producer prices again in order to maintain incentives. (i) Transport 36. Some steps have been taken by the Government to improve the trans- port system: new lorries were purchased or leased and some have already been delivered. Agreement has also been reached with Kenatco Transport Co. of Kenya to supply additional trucks for transporting coffee to Mombasa. Further- more, limited use is being made of routes to the coast through Tanzania which were previously not available to Uganda. One result of these efforts is that the flow of coffee leaving the country has increased to over 10,000 tons per month, or about double the rate during the second quarter of 1979. Despite these improvements, however, the transport system remains inadequate to handle Uganda's reconstruction needs, especially for imports. Mombasa still accounts for most of Uganda's external traffic and the railway within Uganda and in Kenya is suffering from both technical and organizational problems, as well as poor working relations between the two railway systems. Normal international air services have still not been resumed since the hostilities, although action is underway to address the technical difficulties presently blocking the reopening of Entebbe airport to international traffic. Internal transport bottlenecks also impede the distribution of needed imports for agriculture and industry, as well as consumer goods, and the transfer of coffee and other export crops from farmers to cooperatives and processors. More lorries and spare parts must be procured for the public, private and parastatal sectors. Reflecting the magnitude of these problems, the Government has estimated the foreign exchange requirements of the transport sector during the first phase of reconstruction to be approximately US$120 million. It recognizes that elimination of the transport bottlenecks is clearly of the highest priority in the rehabilitation program. (j) Distribution 37. The distribution system in Uganda faces various difficulties. Most important, under the former regime, and especially after the expulsion of  - 15 - citizen and non-citizen Asians, businesses were allocated to unqualified Ugandans. Then, during and immediately after the war, many businessmen fled and their shops were looted. The Government has made some progress in allocating these businesses, an important step in the process of reactivating the supply of consumer goods and repairing the damage done by looting. Commercial properties were gazetted for reallocation by the Ministry of Commerce in August 1979, and committees have been established in each district to scrutinize applications in accordance with criteria emphasizing business qualifications and creditworthiness. In the interim, the Government has established a public distribution system for essential commodities which works through allocation committees set up at the regional and district levels. (k) Government Administration 38. In general, Uganda has the manpower needed to implement the recon- struction program. While there remain specific shortages, the civil service has managed to retain many capable individuals and it has already been strengthened by returning exiles. The key problem is less a shortage of manpower than the demoralization of the civil service because of the abuses and maladministration of the previous regime. In addition, as mentioned earlier, the real value of government salaries has fallen substantially. The new Government has already taken certain steps to reestablish appropriate standards of conduct and competence among public servants. It has recently set up machinery, under the Public Service Commission, to review and evaluate the performance of senior civil servants. If used to reward competent per- formance, this will be an important factor in restoring administrative effi- ciency. Furthermore, the Government has established an interministerial technical liason committee, chaired by the Permanent Secretary of the Ministry of Finance, to coordinate the reconstruction effort. This committee has been meeting regularly and has proven to be an effective forum for bringing together all the ministries and agencies concerned with reconstruction. 39. Evaluation of Progress. Overall, the new Government's rehabilita- tion strategy is sound, focussing as it does on reviving existing capacity in the productive sectors, on eliminating transport bottlenecks, and on addressing the administrative and policy problems inherited from the previous regime. Moreover, as reviewed above, the Government has taken a number of important. steps to deal with major policy issues. While further action is still needed in certain key areas - in particular the exchange rate, price control, parastatal and cooperative debt - the Government has done all that could have been expected thus far with the extremely limited resources at its disposal. The resource constraints and their effect on the implementation of the reconstruction program are discussed in detail below (para. 41-43). In addition, the policy areas which were focused on in the preparation of the reconstruction credit are summarized in para. 55.  - 16 - The Balance of Payments and External Assistance 40. Uganda's balance of payments experience from the early 1970s through 1978 was discussed in paragraphs 6 and 7 above. With the exception of the coffee price boom in 1976-1977, the balance of payments situation was characterized by trade deficits, low levels of grant and loan assistance, chronic overall deficits, and the accumulation of substantial payments arrears. The situation did not improve markedly in 1979 (see Table 3). Export revenues, over 95 percent of which are derived from coffee, are expected to be slightly above the depressed 1978 level, but well below the level of 1977. Imports, however, are expected to fall below the 1978 level even in nominal terms, reflecting the fact that the expansion of imports called for in the first phase of reconstruction had not yet really begun. Official grant and loan assistance is expected to amount to only US$50 million on a net basis, excluding US$7 million drawn in August under the IMF's Compensatory Financing Facility which has been included in the change in net foreign reserves. Payment arrears are expected to decrease by about US$30 million. 41. Looking ahead to calendar year 1980, it is apparent that a much higher level of imports will be needed if the rehabilitation effort is to take off. The Government's estimate is that, for the first full year of reconstruction, the minimmum import requirement to achieve the first phase out- lined earlier will be US$1,030 million. Imports of this nominal amount would be roughly equal in real terms to the level of imports in 1970-71, the last years of relatively normal economic activity in Uganda and the benchmark years for rehabilitation. However, even this level of imports would not permit the economy to move to the 1970-71 level of production, since a large share of the imports would be needed for replacement and maintenance that has not been carried out for the past eight years and for rebuilding inventories. Net services, debt amortization and other payments will probably require about US$99 million, to which should be added about US$45 million of planned arrears reduction, leaving payments arrears at only some US$25 million at the end of 1980, and about US$46 million increase in gross foreign exchange reserves. Export revenues are expected to total approximately US$450 million, comprising coffee exports of 145,000 tons (up from an expected 136,000 tons in 1979) at a world market price of US$3.10/kg, and other exports of around US$30 million. Taking all of the above estimates into consideration, net financing of approx- imately US$767 million would be needed from all sources - development assist- ance, IMF resources and private finance - to enable Uganda to achieve the import level necessary to implement the first phase of reconstruction. This assistance would clearly have to be of a quick-disbursing form, i.e. program or commodity assistance, in order to permit completion of the first phase of rehabilitation during 1980.  Table 3 UGANDA: Balance of Payments 1971-80 (US$ million) 1971 1975 1976 1977 1978 1979 1980 Prov. Projected Trade Balance -40.8 -25.2 85.9 131.4 -32.0 32.0 -241.7 Exports of goods 243.9 237.2 323.6 547.9 322.0 378.7 453.3 Imports of goods -284.7 -262.4 -237.7 -416.5 -354.0 -346.7 -695.0 Net Services -40.1 -43.4 -40.7 -55.7 -98.5 -66.7 -66.7 Net Transfers 1/ -4.8 12.6 2.1 -2.6 -3.0 16.7 117.0 Current Account Balance -85.7 -56.0 47.3 73.1 -133.5 -18.0 -191.4 Private Capital (Net) 10.6 19.5 -42.0 -44.0 95.9 18.0 85.3 Net direct investment and loan disbursements 2/ (30.8) (41.1) (-23.8) (-22.4) (122.6) (35.1) (99-3) Long term capital outflow (-20.2) (-21.6) (-18.2) (-21.6) (-26.7) (-17.1) (-14.0) Public Long-term Capital (net) 26.4 19.0 -0.4 -5.7 12.4 -2.0 142.7 Disbursements (55.5) (29.1) (10.6) (23.6) (17.7) (15.3) (168.0) Amortization (-29.1) (-10.1) (-11.0) (-29.3) (-5.3) (-17.3) (-25.3) Other Capital (net) 3/ 3.8 -10.4 -6.4 - -33.1 - 6.7 Overall Balance 44.9 -27.9 -1.5 23.4 58.3 -2.0 43.3 Accumulation of arrears - 28.0 2.7 -24.7 72.7 -28.0 -44.7 (- = decrease in liabilities) Monetary authorities (net) 4/ 44.9 -0.1 -1.2 1.3 -14.4 30.0 1.4 (- = increase) Source: Bank of Uganda, IMF and IBRD staff estimates. 1/ Includes capital grants 2/ Includes net short term capital, errors and omissions 3/ Includes allocation of SDRs 4/ Includes net use of IMF resources  - 18 - 42. Development assistance already committed to Uganda or expected to disburse during 1980 can currently be estimated at only US$100 million in the form of grants and US$90 million of loans. Included in these totals are several multilateral donors and those bilateral donors who have made reason- ably firm commitments. Present indications are that a further US$100 million of private loans and investments might be negotiated. In addition, US$48 million will be available from the IMF under the First Credit Tranche and Compensatory Financing Facility. Together with the proposed IDA credit (in- cluding the Netherlands participation) the Special Action Credit, and the Canadian grant, this would give Uganda a total of US$434 million in balance of payments assistance during 1980, sufficient, ceteris paribus, to finance total imports of only US$695 million. 1/ While this would be far short of what would be required to complete the first phase of reconstruction, it would be sufficient to make a start on the reconstruction effort. An import level of US$695 million would be slightly higher in real terms than imports in 1977, when high coffee prices permitted a slight recovery in economic activity. 43. Uganda thus would need additional external assistance of US$335 mil- lion during 1980 to achieve the target import level of US$1,030 million - nearly double the amount already commited. It is likely that over the course of 1980 more donors will commit additional quick-disbursing balance of pay- ments assistance to Uganda. Additional commercial loans may also be nego- tiated, and the Government may, later in 1980, approach the IMF for drawings under higher credit tranches. These further commitments would, however, almost certainly fall short of the additional US$335 million needed. Reflect- ing this foreign exchange constraint, it is therefore clear that the first phase of reconstruction will be more protracted than originally planned. PART III BANK GROUP OPERATIONS 44. Bank Group operations in Uganda began with an IBRD loan of US$8.4 million for hydroelectric power development in 1961. Between 1967 and 1971 Uganda received seven IDA credits totalling US$42.6 million for projects in education, roads and agriculture (tea, tobacco and beef ranching). In addi- tion, Uganda has benefitted from ten loans totalling US$244.8 million which have been extended for the development of the common services and development bank operated jointly by Kenya, Tanzania and Uganda through their association in the former East African Community. IFC's only investment in Uganda, in a textile company, was sold to the Government in 1970. Annex II contains summary statements of IBRD loans and IDA credits to Uganda and the East African Community as of November 30, 1979, and notes on the execution of ongoing projects. 1/ This is the import level which is shown in Table 3. The corresponding public and private capital inflows and grant assistance are also shown on a net basis in Table 3.  - 19 - 45. Because of the lack of an adequate development program and sound economic policies, there has been a hiatus in Bank Group operations in Uganda since 1971; no new loans or credits have been extended since June of that year. The Bank Group nevertheless continued to disburse funds against prior loans and credits. At present, only two projects, in roads and education, are still under implementation. Out of the original credits of US$11.6 million and US$7.3 million only US$0.6 million and US$1.6 million, respectively, remain to be disbursed. We anticipate completion and final disbursement for the roads project by early 1980 although the Bank and Government have agreed that sufficient funds from the credit will be put aside to continue funding technical assistance to the Ministry of Works through 1980. The education project, on the other hand, had been a problem project even before the recent war and was adversely affected by the fighting and subsequent looting (see Annex II for details). However, a supervision mission which visited Uganda in November 1979 confirmed that the Government wishes to complete the project and the closing date has been posponed to permit this. 46. Following the change in Government the Bank Group was requested to reestablish a project lending pipeline in Uganda. Reflecting our conclusion that the present Government is fully committed to carrying out a viable development program, the first steps in this process have begun. Since the initial reconnaissance mission in July 1979 an effort has been made to assess the basic constraints facing the Government in the productive sectors and in transportation. Industrial, agricultural and transport (roads and railways) sector reconnaissance missions have already visited Uganda and follow-up missions are scheduled for the near future. An initial water supply mission and the education mission mentioned above also visited Uganda in recent months. These missions have started the project identification and preparation process in these sectors. In addition, preparation of a technical assistance project (para. 31 above) is well advanced and we expect to present it to the Board of Directors for consideration during the current fiscal year. Assistance from the Bank Group in a number of other sectors has been requested by the Government and we expect to respond positively to these requests. Thus, assuming that progress on the reconstruction program continues, we expect over the next twelve to eighteen months to reestablish an active project pipeline and to propose new project lending in Uganda. In addition, given the analysis of short-term balance of payments needs outlined above and the likely need for further quick-disbursing support, it may be necessary for the Bank Group to consider further balance of payments lending, provided the policy framework for reconstruction continues to be satisfactory. East African Community 47. Lending from the Bank Group to the East African Community con- tinued until 1976 when the problems facing the Community made it impossible to continue lending within that framework. Uganda continued to benefit directly from loans made to the Community after 1971; for telecommunications in 1973 and for the East African Development Bank (EADB) in 1976. Uganda is also an indirect beneficiary of a 1972 harbors loan, although the proceeds  - 20 - of that loan are being disbursed entirely in Kenya and Tanzania. Since October 1, 1977, all remaining undisbursed balances under the Community loans, with the exception of the EADB loan, have been disbursed on the basis of separate national guarantees. Under the agreed allocation of undisbursed balances for each loan, as approved by the Executive Directors, some US$2 million was allocated to Uganda for completion of projects in that country, US$1.9 million for railways and. US$0.1 million for telecommunications. As of November 30, 1979, only US$0.11 million of the railway loan remained to be disbursed. 48. The major developments affecting the Community were outlined in a report to the Executive Directors dated December 29, 1977 (R77-312) and more recent developments were reported in a statement to the Executive Directors at the Board meeting held on January 14, 1979. The three former Partner States have employed Dr. Victor Umbricht as an independent mediator to recommend disposition of the assets and liabilities of the Community corporations and the General Fund Services. Dr. Umbricht has visited East Africa on numerous occasions, has employed consultants to assist in the appraisal of Community assets and liabilities, and has now prepared reports to the Partner States on the results of his fact-finding work and on the methodology adopted in the appraisal process. The next phase of the Mediator's work will be to make formal recommendations on the allocation of these assets and liabilities. Meanwhile, the Mediator's report and recommendations on the future structure of the EADB have been accepted in principle by the Partner States and the revised EADB Charter along with the Treaty to enact the new Charter have been submitted to the three Governments for signature. PART IV - THE RECONSTRUCTION CREDIT 49. During the Bank Group reconnaisance mission which visited Uganda in July 1979 (para. 2 above), the Government requested balance of payments support for the reconstruction effort. An appraisal mission for the proposed reconstruction credit visited Uganda during September 14-27, 1979, and nego- tiations were held in Washington on December 19, 1979. The Ugandan delegation was led by the Commissioner for Revenue, Ministry of Finance, Mr. Bangirana. 50. It is clear from the foregoing sections that the case for balance of payments assistance to Uganda is a strong one. The Ugandan economy has been severely run down through mis-management and diversion of resources over the past eight years. In addition, extensive physical damage was caused by the recent war and the looting which followed. In the present circumstances, project or sector lending could not accomplish the rapid resource transfer which is required for short-term reconstruction; only flexible program lending can meet the urgent rehabilitation needs of the economy. Through this credit the Bank Group can make a significant contribution to the first phase of reconstruction, the execution of which has been delayed by the lack of foreign exchange resources. Our funds will help reestablish the flow of essential imports of replacement machinery, raw materials, spare parts, transport equip- ment, agricultural implements and inputs, and building materials. An improved  - 21 - supply of these essential imports will in turn permit a revival of the productive sectors leading to increases in the output of agricultural export crops and basic consumer goods for domestic consumption. 51. The proposed credit would support the reconstruction program des- cribed above. The policy framework for our balance of payments assistance has been established by the new Government's economic and social policy statement and the various Government policy decisions 'outlined above. In making this credit the Bank Group would be strengthening the capacity of the Government to carry out further policy reforms which are critical to reconstruction. In particular, the improved supply of imports which our credit will facilitate will enable the Government to carry out an exchange rate adjustment in the near future. 52. It is our view that without increased balance of payments support the Ugandan economy cannot begin the recovery process which is an essential first step to the resumption of economic growth and development over the longer term. Thus program lending from the Bank Group at this time, and possibly subsequently, will hasten the progress of the economy to the second phase of reconstruction in which more conventional project lending to meet longer range development objectives will be possible. Coordination with the INF 53. As was indicated earlier, the new Government of Uganda approached the DMF shortly after taking office to discuss use of DMF facilities. In June 1979 Uganda drew its reserve (gold) tranche and in August SDR 5 million under the Compensatory Financing Facility. In November 1979 the Government reached agreement with the IMF on a further drawing of SDR 55.5 million under the First Credit Tranche, Trust Fund and the Compensatory Financing Facility. These drawings were approved by the Board of the IMF on January 4, 1980, and have been taken into account in our balance of payments forecast for 1980. 54. In preparing this reconstruction credit, information and analysis have been exchanged with the IMF to ensure consistency. In particular, the analysis of the fiscal and balance of payments situations presented in this report is broadly consistent with that presented by the DMF in its latest report on Recent Economic Developments, and in its recent decision to permit Uganda to draw under the First Credit Tranche, the Compensatory Financing Facility and the Trust Fund. The Fund has been kept informed of the progress of the proposed credit. In addition, the Bank and the Fund are providing complementary assistance to the Government in the area of fiscal policy. Policy Understandings 55. During the preparation of this credit, policy discussions between Bank Group staff and the Government have focussed on three principal areas: (a) the need for an overall economic and social policy framework to guide reconstruction; (b) the importance of a published budget as evidence of  - 22 - restoration of fiscal accountability; and (c) the need to deal with the dis- tortion in the exchange rate. The Government's progress in dealing with issues (a) and (b) has been excellent, as described above. On the exchange rate issue, the Government has developed a clear strategy to deal with the problem. It has decided to carrying out an exchange rate adjustment as soon as an increased flow of imports, financed with additional aid and export revenues, nas begun to have an impact in restoring a more normal supply situation in domestic markets. Given the increased inflow of foreign exchange from coffee exports evident in late 1979, and the imminent arrival of some aid and commer- cially financed supplies, the Government expects this revival to begin in the early part of 1980. It has therefore committed itself to an exchange rate ad- justment by mid-1980. In the interim, the Government has taken a number of administrative measures in an effort to control the distribution of essential commodities, to regulate and monitor the allocation of foreign exchange, and to ensure that items procured with foreign exchange made available prior to devaluation are not diverted to other than the intended users. The Government's actions and commitments on the policy areas discussed with the Bank Group are detailed in a letter of intent from the Minister of Finance, which is being distributed separately. Allocation of the Reconstruction Credit 56. Foreign Exchange. The proposed IDA credit of US$72.5 million includes a participation of US$17.5 million from the Government of the Netherlands; the IDA credit will only be disbursed above US$55 million if the funds from the Netherlands are available to the Association (Schedule 1, para. 2(g) of the draft; Development Credit Agreement). Discussions are presently ongoing to work out the arrangements for the participation. It is expected that under these arrangements the Netherlands contribution will be made available to the Association and that each withdrawal application by the Uganda Government would be financed out of the Association's and Netherlands' resources in an agreed proportion. To reflect the fact that the Netherlands' participation is expected to be on a grant basis, the arrangements would provide that, upon each withdrawal of the proceeds of the credit, the Ugandan Government shall be treated as having prepaid the credit in an amount equal to that part of the withdrawal which is financed out of the participation. Along with this credit, a proposed Special Action Credit is approximately US$20 million and a Canadian grant of Can$3 million would be available to finance a wide range of essential imports including industrial raw materials and spare parts, vehicles, vehicle spare parts and workshop equipment, agricultural inputs and implements, constructions equipment, building materials and telecommunications equipment. Specifically, the credits and the grant would be allocated to imports in categories 2, 5, 6, 7 and 8 of the SITC, except for those items specified in Annex IV (Schedule 1 of both the draft Development Credit Agreement and the draft Special Action Credit Agreement). The amount of imports required under these categories for the first phase of reconstruction is almost US$400 million; thus quick disbursement of the credits and grant should be possible. 57. While the total of the Special Action Credit and Canadian grant will be eligible for disbursement after effectiveness, the IDA credit will be dis- bursed in two tranches in order to provide for a mid-term review of the Govern- ment's progress in implementing the program of policy reforms required for reconstruction: a first tranche of US$30 million would be available for dis- bursement after the credit is declared effective and a second tranche of US$42.5 million would be disbursed upon a finding that satisfactory progress was being made in carrying out the needed policy reforms (Schedule 1, para. 2(f) of the draft Development Credit Agreement).  -23- 58. Counterpart Funds - Local currency counterpart funds generated by the sale of foreign exchange provided by the credits and the grant would be allocated to a special Government account in the Bank of Uganda. The Govern- ment has agreed that such counterpart funds will be allocated to the recurrent or capital costs of projects included in the reconstruction program (Section 3.02(a) and (b) of both the draft Development Credit Agreement and the draft Special Action Credit Agreement). Accounts, Audit and Evaluation 59. The project account (para. 58) would be audited by auditors accept- able to the Association and certified copies of the relevant financial state- ment would be submitted to the Association by June 30, 1981 (Section 3.02(c) of both the draft Development Credit Agreement and the draft Special Action Credit Agreement). The Bank of Uganda will maintain records adequate to record and monitor project implementation (Section 3.04(a) of both the draft Development Credit Agreement and the draft Special Action Credit Agreement). In addition, not later than six months after completion of the project, the Government shall prepare and furnish to the Association a completion report on the costs and benefits resulting from the project (Section 3.04(b) of both the draft Development Credit Agreement and draft Special Action Credit Agreement). Procurement and Disbursement 60. Procurement would be on the basis of normal commercial practices, except that international competitive bidding with prior review of documents by the Association will be required for contracts estimated to total US$2 million and above (Schedule 3 of both the draft Development Credit Agreement and the draft Special Action Credit Agreement). As speed of disbursement is the prime requisite to meeting Uganda's urgent rehabilitation needs, this objective can best be met by using the import licensing and payment proce- dures which have been adopted by the new Government. These procedures have been reviewed by the Association. All Government purchases exceeding UShs 10,000 for any single ministry in any financial year and contracts for services or civil works exceeding UShs 25,000 for any ministry in any year must be approved by the Central Tender Board, under the Ministry of Finance, which requires either competitive bidding or submission of not less than three quotations from different suppliers. The Board also issues import licenses for overseas procurement. The Uganda Advisory Board of Trade under the Minister of Commerce performs an overseer function for parastatal and private sector imports. It reviews the prices and quantities of all applications and makes an assessment of the priority of the items requested. Recipients of import licenses must then apply to the Foreign Exchange Allocation Committee of the Bank of Uganda for a foreign exchange license. This committee screens all applications to ensure that allocations are made in accordance with the previously determined reconstruction priorities, and again reviews price and quality standards. 61. Disbursements under the IDA credit, the Special Action Credit and the Canadian grant would be made for the foreign cost of eligible imports against full documentation, including invoices paid by the Bank of Uganda or the relevant commercial bank under existing regulations controlling the allocation of foreign exchange. While IDA and Canadian funds would be dis- bursed against eligible imports from any Bank Group member country and  - 24 - Switzerland, disbursements under the Special Action Credit would be limited to imports from the nine EEC countries or any developing country which is a member of the Association and a potential recipient of a Special Action Credit (Section 2.02(b) of the draft Special Action Credit Agreement). The Bank of Uganda would be responsible for collection of the necessary documenta- tion, the preparation and submission of withdrawal applications, and mainten- ance of the full accounts and documentation evidencing the final payments. No reimbursement will be provided against imports for which other financing has been secured. Resources from the Special Action Credit would be disbursed before the IDA credit to the extent feasible (para. E of the preamble to the Special Action Credit Agreement). Benefits and Risks 62. The principal benefits anticipated from the proposed credit are that the credit resources would permit the importation of essential raw materials, intermediate goods, spare parts and equipment to begin the rehabilitation of the Ugandan economy. The proposed credit, and the IDA administered cofinanc- lng, would finance approximately 9 percent of the total import requirement of the first phase of reconstruction, but would cover 16 percent of the proportion of imports requiring foreign financing (net of anticipated export earnings) and approximately 20 percent of the first phase reconstruction re- quirements of the sectors to which the funds would be allocated. Specifically: (a) the increased flow of imports would permit a restoration of productive capacity which has been underutilized for the past eight years. (b) the Bank Group's action, and use of DMF resources, will strengthen Uganda's resource position and capacity to implement rehabilita- tion which will in turn encourage bilateral lenders and institu- tions to provide assistance. (c) the proposed credit would also strengthen the capacity of the Government to carry out further policy changes which are essen- tial to rehabilitation and to a restoration of normal conditions in domestic markets. As noted above, an exchange rate adjust- ment will be directly facilitated by this operation. 63. The principal risk facing the proposed credit would be that the Government was unable to take necessary action on the exchange rate to remove price distortions. Allied to this is the risk that the Government would prove unable to regulate internal distribution channels to prevent diversion of goods from intended end users. However, on the basis of the actions which the Government has taken to date, and of the assurances which have been detailed above, we believe that an adequate policy framework will be developed and implemented. Furthermore, in view of the critical role of IDA resources in providing the basis for the initial injection of foreign exchange for rehabilitation we believe that the benefits from the credit far outweigh this potential risk.  - 25 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 64. The draft Development Credit Agreement between the Republic of Uganda and the Association, the draft Special Action Credit Agreement between the Republic of Uganda and the Association as administrator of the Special Action Account established with funds contributed by the member states of the EEC, the draft Development Grant Agreement between the Republic of Uganda and the Association as administrator of the funds contributed by the Government of Canada and the Recommendation of the Committee provided for in Article V, Section I (d) of the Articles of Agreement are being distri- buted to the Executive Directors separately. 65. Special conditions of the project are listed in Section III of Annex III of this report. 66. A special condition for effectiveness of the Development Credit Agreement would be that all conditions precedent to the effectiveness of the Special Action Credit Agreement and the Canadian Grant Agreement have been met other than the effectiveness of the Development Credit Agreement (Section 6.01 of the draft Development Credit Agreement). There are parallel cross- effectiveness conditions in the Special Action Credit Agreement and the Deveopment Grant Agreement (Sections 6.01 and 4.01 respectively). 67. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association; that the Special Action Credit would comply with the criteria established by the Agreement of May 2, 1978, between the Association and the European Economic Community; and that the Canadian grant would comply with the criteria established by the the Agreement of April 22, 1977, between the Association and the Government of Canada, as amended. PART VI - RECOMMENDATION 68. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President January 29, 1980  - 26 - ANNEX I UacA * SOCAL 1210ICAYORS DATA SS S urnU cS CIou,s (ADno T * WANDA A IW D 0.t.)- HMOST RECw_ SrzMAu7 h ` LhL SAK5 SA.Z a= -I1012 CcELrrM 103.5 aHS UCT GOAPlC 12IC0m INCOMI L960 .t 1970 , ZSTZ-AXR j ZGZol u OaouP a i G ROU cm Pu CAWIA 111SS 160.0 240.0 2S0.0 306.1 209.6 467.3 flOt;T C0 UOWN 7 CAMA (83300221S 01 0061. ZlqnvSlLUT) 30.0 74.0 41.0 80.6 83.9 262.1 PO"r o A VrtL STATISTICS POGULAntON. KID-TZL (NZ.LZONS) 6.8 9.8 2.0 DM1I pONLA (i P Or TOTAL) 4.& 6.9 9.2. 17.1 12 24.6 POFMLATIOl ?UJWTOUS 1OPULATIN 33168U 200 (N=OW) 33.0 UATZONAAT OULATN (Lb0US) 51.0 MM S?AZONST POPULATION U1 U8A 2130 POIULAtIOU DsmTY i sq. m. 29.0 42.0 51.0 18.4 * 9.4 45.3 ?a SQ. 11. AC IruIs LAW 72.0 9J.0 116.0 S0.8 2U2.0 149.0 POPULATON AGt ShXOCTUht m CIF) 0-14 TZs. 43.8 4.0 45.0 4".1 *3.1 43.2 15-44 TYu. 53.0 33.0 52.0 52.9 53.2 5.9 65 1U. Am AB0 ' 3.2 3.0 3.0 2. 3.0 2LS POPULATION 0801f SAX (PUCt) TOTAL 2.J 3.7 3.0 2.7 2.4 2.7 t0865 7.3 6.3 8.3 5.7 4.6 4.3 C021 61 sinT RZ (PER IUSAND) 45.0 45.0 *5.0 46.3 42.4 39.4 C O3D DIATS lAn (PO 3100861D) 2.0 17.0 14.0 17.2 15.9 11.7 own U?IDUCTOU UAZZ 2.6 3.0 3.0 3.1 2.9 2.7 ACCZPr8. IMAL (18l S 3S) .. 3.8 16.1 USERS (PCur or MAUD ) .. .. .. .. U.2 13.2 7000 AND W.TRITTION nmz or POOD rTboro P CaPITA (1"99-71-100) 101.0 100.0 94.0 94.3 98.2 99.6 rn CAA SUPPLY or 0400111 (PERCENT Of U 5}QOIRfls) 93.0 91.0 90.0 89.5 93.3 96.7 rsr%NS (GtAcS FM DAY) 56.0 55.0 54.0 15.8 52.1 56.3 af VIcr ANIML AW N UtD Z .. 31.3/t 22.1 17.9 13.6 17.4 CVlLO (AGO 1-4) Nl&LZTT MAZ 30.0 22.0 17.0 22.3 18.3 11.4 Lin ZrvTAscy AT axa (116s) 44.0 49.0 53.0 47.0 49.3 54.7 13116 NWO UAIT PATE (RZ 2, 056A0) .. 120.0 .. .. 105. 4 68.1 ACCESS 0 WSAXZ WAX (1P5027 Of POPULATION) TOTAL .. 22.0 35.0 20.3 26.3 34.4 UAN .. U.O 100.0 53.9 58.5 57.9 3U21 .. 17.0 29.0 10.1 15.J 21.2 ACCZS5 0 T ZXETA OtSPOSAL (7Ic5 r or PoFuATow) OAL .. 76.0 94.0 22.5 It.0 40.J URBN ".. 8.0 82.0 (a.5 65.1 71.3 ALa*z. .. 76.0 95.0 13.9 3.5 27.7 POPULATION PE P575C7X L3000.0L 9210.0 28330.0 17424.7 11396.4 6799.4 POPULATIO PER SURS0W P*SaN 9450. OLz 6030.0LU'4410.0 2506.6 5552.4 1522.1 POPUAToN Pa 30SPIAL AU TOTAL 760.0 6"0.0 640.0 202.3 1417.l 726.5 N .. .. .. 201.4 197.3 272.7 A.L .. .. .. 1603.6 245S.9 1404.4 ADOtSSIONS FM bOs5 3UD .. 154.13 .. U.4 24.8 27.5 AVEAGE SIZZ o0 aO017011L TOTAL .. 4.8 .. 4.9 5.3 5.4 .. .. .. .. 4.9 4.9 5.1 RURAl. .. .. .. 3.3 5 .S 5 .5 AVUACZ 2MWEU 01 P5503 750 ROOM TOTAL .. ... .. aR . ' . . .. .. .. 109....6 . .. .. .. ACCESS TO ELCZ1ICT (P1CZ:T o0 0MM2LLNCS) TAL .. .. .. .. 22.5 28. 1 URBAS .. .. .. .. 17.8 -5.1 UCAL .. .. .. .. .. 9.9  - 27 - Annezx Pass 2 UGANDA - SOCIlL 2DICATOU DATA SEU' B FELEnCE GtOUPS (AOJUSTD AL ES UGANDA TXD AS- Mosr azcr: esrE) SAME SA lo w HICKER .STS IEcE.'T GZOGPSIC I'COHE (COME 1960 /b 1970 /b ESI1IATE /b EGION /c GROUP /d CROUP /a EDUCATION A JUStED OLLLME1'T RInos P?IMARLY: TOTAL 49.0 61.0 51.0 59.0 63.3 S2.7 IALE 65.0 72.0 61.0 6-.2 79.1 37.3 ILE 32.0 * 9.0 42.0 * 4.2 48.4 75.8 SZCONDAXy: TOTAL 3.0 6.0 7.0 9.0 16.7 21.6 MALE 4.0 9.0 10.0 12.0 22.1 33 0