Uganda - Structural Adjustment Credit Project

Docummt of The World Bank FOR OMCIAL USE ONLY Repurt N. P-5670-UG REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIkECTORS ON A PROPOSED IDA CREDIT OF SDR 91.9 MILLION TO THE REPUBLIC OF UGANDA IN SUPPORT OF A STRUCTURAL ADJUSTMENT CREDIT NOVEMBER 1, 1991 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 withat World Bank authorization. CURRENCY EQUFv ALENTS Currency Unit Uganda Shilling (U Sh) US$1 = U Sh 915 (October 1991) USh 1 = US$ 0.001093 US$1 = SDR 0.7352 SDR I = US$1.3602 GOVERNMENT FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS ASAC - Agricultural Sector Adjustment Credit BOU Ban: of Uganda CO - Consultative Group CMB - Coffee Marketing Board CML - Coffee Marketing Limited CPI - Consumer Price Index DAPCB - Departed Asians' Property Custodian Board EDP - Enterprise Development Project EEC - European Economic Community EFMP Economic and Financial Management Project ERC I - First Economic Recovery Credit ERC II - Second Economic Re%overy Credit ERP - Economic Recovery Programme ESAF - Enhanced Structural Adjustment Facility DANIDA - Danish International Development Agency GDP - Gross Domestic Product ICA - International Coffee Agreement ICB - International Competitive Bidding IDA - International Development Association IFC - International Finance Corporation IMF - International Monetary Fund LMB - Lint Marketing Board MOF - Ministry of Finance MPS - Ministry of Public Service MPEI> - Ministry of Planning and Economic Development NGOs - Non-governmental Organizations NRS - National Revenue Secretariat (of Ghana) ODA - Overseas Development Administration (United Kingdom) OGL - Open General License PAPSCA - Program for the Alleviation of Poverty and the Social Costs of Adjustment PFP - Policy Framework Paper PMB - Produce Marketing Board PSRRC - Public Service Review and Reorganisation Commission RDP - Rehabilitation and Development Plan SAC - Structural Adjustment Credit SAP - Structural Adjustment Facility SDA - Social Dimensions of Adjustment SIP - Special Import Program SITC - Standard International Trade Classification SPA - Special Program of Assistance UNDP - United Nations Development Program UNICEF - United Nations Children's Fund URA - Uganda Revenue Authority USAID - United States Agency for International Development FOR OFFICIAL USE ONLY UGANDA STRUCTURAL ADJUSTMENT CREDIT TABLE OF CONTENTS Credit Summary ............................................... i Part 1: Country Policies and Bank Group Assistance Strategy .................. 1 A. Economic Performance Since 1987 ................ 1 B. Medium-Term Macroeconomic and Structural Policies .... 4 C. Bank Assistance Strategy ...................... 7 ObjectivesandStrategy ....................... 7 Lending Program and Economic and Sector Work ....... 8 Aid Coornation .......................... 10 D. Ongoing and Proposed Bank Adjustment Operations ..... 10 E. Summary Assessment........................ 12 Part II: Propesed Structural Adjustment Credit .......................... 12 A. Private Sector Development .................... 13 TradeReform ............................ 13 Investment Promotion . 16 Divestment of Properties Under the Custodian Board 18 B. Public Sector Management .................... 23 TaxReform ............................. 23 PublicExpenditure ......................... 25 Civil Service Reform ........................ 27 Part III: Features of the ProposedCredit ............................. 30 Credit Amount, Tranching, Coordination and Cofinancing . 30 Disbursement and Procurement 31 Management and Monitoring of the Progra3 33 Conditions for Second Tranche Release ............. 34 PartIV.lVBenefitsandRik ....................................... 35 EconomicImpact .......................... 35 Sociallmpact............................. 36 Risk s .................................. 37 Part V:Recommendation ........................................ 38 This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authoriation. i ANNEXES Annex I Letter of Development Policy Attachment: Policy Matrix Annex II : Tables Annex I. 1 : Key Macroeconomic Indicators Annex 11.2 Balance of Payments Annex 11.3 : External Financing Requirements and Sources Annex III Supplementary Data Sheet Annex IV Statement of Bank Group Operations (Bank and IFC) UGANDA STRUCTURAL ADJUSTMENr CREDIT CREDIT SUMMARY Borrower: Republic of Ugadda Executing Agency: Ministry of Finance Credit Amount: IDA: SDR 91.9 million (US$125 million) Description of Credit: In earlier adjustment operations IDA has been supporting Uganda's Economic Recovery Programme (ERP). The proposed credit will continue support for the ERP by focussing on structural adjustment while continuing to emphasize stabilization. To this end, the credit will have two main themes: (i) the removal of remaining constraints on the private sector and the creation of an environment in which private initiative can flourish and Uganda's comparative advantage can be realized; and (ii) the improvement in the effectiveness of the Government. The credit has six components. First, it will improve the trade regime by further easing restrictions on exports and imports, and removing the implicit exchange rate subsidies enjoyed by some importers. Second, it will promote investment through the establishment of an Investment Authority which will, among other things, administer the incentives provided under the Investment Code. Third, it will speed up the resolution of claims on Custodian Joard properties; this will provide an important signal to investors, particularly foreign ones, that Uganda is no longer hostile towards foreign investment. Fourth, the credit will improve the Government's revenue collection through the establishment of an independent revenue authority. Fifth, it will reorient public expenditure allocations; among other things, it will seek to protect a set of high- priority programs in primary health, primary and secondary education, water supply, road maintenance, and agricultural research and extension. Finally, the credit will support a major program to transform the civil service into a small, efficient, effective and manageable service. Benefits and Risks: The credit will stimulate economic growth and contribute to poverty alleviation by helping to consolidate the gains made so far in restoring macroeconomic stability; increase domestic resource mobilization; improve the efficiency of government operations and the allocation of public expenditures; and improve the climate for private investment (both Ugandan and foreign). The operation faces political and implementation risks. The political risks are greatest in the proposals for the reform of the civil service and the disposal of Custodian Board properties. On the implementation side, the chronically weak administrative capability of the Government is a serious risk to the operation. REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED IDA CREDIT TO THE REPUBLIC OF UGANDA FOR A STRUCTURAL ADJUSTMENT CREDIT 1. I submit the following report and recommendation for a prrposed Structural Adjustment Credit (SAC) to the Republic of Uganda for SDR 91.9 million (US$125 million equivalent) on standard IDA terms with a maturity of 40 years. 2. The proposed adjustment program would build on the reforms already undertaken by the Government of Uganda under the two Economic Recovery Credits provided by IDA, and the Structural Adjustment Facility (SAF) and Enhanced Structural Adjustment Facility (ESAF) arrangements supported by the IMF. The Government's economic reform program has been described in its fifth Policy Frimework Paper (PFP), 1991/92-1993/94, which will be discussed by the Committee of the Whole on November 5, 1991. 3. The Ugandan Government has shown a strong commitment and determination to bring about financial stability and to carry out structural reforms. Over the past few years, the Government has implemented a wide range of policy and institutional reforms. These iclude: exchange and trade policies aimed at restoring a viable balance of payments position; fiscal policies conducive to the return of financial stability; monetary and credit policies geared towards the mobilization of domestic savings and the control of inflation; institutional programs aimed at improving the Governments capacity to mobilize and use resources ifficieutly; and sectoral policies directed at rehabilitating infrastructure and reactivating the private secto-. 4. Part I of this memorandum gives an overview of Uganda's economic performance since 1987; the country's medium-term macroeconomic and structural policies for the period of the proposed credit; the Bank's assistance strategy in Uganda; and the Bank's ongoing and proposed adjustment operations. The proposed Structural Adjustment Credit is outlined in Part U. Part Ill describes specific features of the credit, while Part IV discusses its benefits and risks. Part I: Country Policies and Bank Group Assistance Strategy A. Economic Performance Since 1987 5. Uganda is endowed with considerable economic potential. Its soils and climate can support the production of a wide variety of crops and livestock, while its lakes are rich in fish. Unfortunately, this potential has not been realized. In fact, throughout most of the 1970s and early 1980s the country suffered from poor government economic policies, civil wars, and generalized instability that destroyed the economic base to such an extent that today GDP, the volume of exports, and the number of export products are all much smaller than they were at the beginning of the 1970s. With the advent of the administration of the National Resistance Movement in 1986, peace and security have gradually been restored in most parts of the country, permitting a resurgence of economic activity. In 1987, the Government introduced its Economic Recovery Programme (ERP) of rehabilitation investments and policy reform to facilitate the economy's recovery from the devastation of the war years. The principal objectives of the ERP are: to promote economic rehabilitation and growth; to restore internal financial stability and TAmE 1: KEY MACROECONOMIC INDICATORS, 1987/88-1993/94 RSL pmj _VW& Xtesi 197/88 1W9889 198919M 1990/91 1991/9 1992/93 io GDP Growth Rate 6.8 6.8 4.8 4.2 5.0 5.0 5.0 Private Consumption per Capita 6.4 5.2 1.8 1.6 0.5 3.2 1.4 Growth Rate Debt Serviie/B,ports of Goods 51.0 58.4 66.2 66.6 64.5 53.5 48.3 and Servicet Gross Investment/GDP2 11 3 10.5 1. 11.7 12.1 13.2 13.7 National Savings/GDP2 6.1 4.3 5.1 7.0 7.5 9.2 10.2 Government Revenues/GDP 6.7 6.5 1.5 8.1 9.4 10.7 12.5 Covernment Expenditures/GDP' 1?.0 12.0 13.9 16.6 22.7 21.2 22.0 Overall Deficit/GDPV 6.3 -5.5 -6.4 -8.5 -13.4 -10.5 -9.5 CPI (1984/85 = 100) 100.0 186.2 .J9.6 332.4 382.2 420.5 449.9 Real Effective Exchange Rate 131.4 114.0 98.9 62.4 54.3 54.3 54.3 (1984185 = 100) Exports Growth Rate (nominal) -22.4 -3.3 -27.1 -15.7 12.4 23.1 19.2 Imports Growth Rate (nominal) 6.0 18.9 -9.9 -5.8 7.3 11.0 9.0 Current A/C Balance (USS Mill) -295.1 -389.8 -429.0 -444.0 471.0 470.0 -483.0 Current A/C Balance/GDP2 -5.2 -6.1 -5.9 -4.7 4.5 -3.9 -3.5 Debt Service: on a commitenntbasis; exports of goods and services include private transferz. * Expkassed in constant prices to isolate the impact of rapid exchange rate ajustment. ' Government expenditure levels in 1990/91 and 1991/92 are not comparable to previous years owing to a fuller coverage of development expenditures. Itis Is part of an exercise to improve overall budgetary procedures. 4 Excluding grats. achieve lower inflation; and to reduce the imbalances in the external accounts, particularly through increases in the volume and diversity of exports. The ERP has been supported by two Economic Recovery Credits (ERC I and ERC II) from IDA, two arrangements under the Structural Adjustment Facility (SAF) and two arrangements under the Enhanced Structural Adjustment Facility (ESAF) from the IMF, and assistance from other multilateral and bilateral donors. 6. Average real GDP growth in the four fiscal years since the ERP was introduced (i.e., FY88- FY91) has been about 6 percent per annum (see Table 1). Much of this growth has come from the recovery of the depressed agricultural sector, which has been helped by the restoration of security in the countryside and the rehabilitation of roads; growth in agricultural production has averaged about 5 percent since FY88. Production in the small manufacturing sector (which accounts for about 5 percent of GDP) has also picked up mainly on account of the removal of price and distribution controls, improved supply of power, and availability of foreign exchange for imported raw materials. 7. On the policy front, there have been periodic increases in the producer prices of coffee, which accounts for over 70 percent of total merchandise export earnings; until recently, these prices bave not been adequately remunerative (see paragraph 46). This has contributed to falling coffee procurement by the Coffee Marketing Board (CMB) since FY89; for the first time since the launching of the ERP, there was a significant fall in the volume of coffee exports in FY91. 2 Domestic and export marketing of tea and food crops has been fully liberalized. in the case of cotton, while domestic marketing has been liberalized, the monopoly of the Lint Marketing Board (LMB) in exports still persists. However, even in domestic markedag, there is de facto monopoly since the cooperative unions are the only ones with the license to operate ginnerles. Hence producers selling on the domestic market are obliged to sell to the cooperatives. The Bank is pursuing a dialogue with the Government under the Agricultural Sector Adjustment Credit (ASAC) with the objective of removing this monopoly. Price controls on all industrial products have been eliminated. 8. Restoration of internal financirl stability and balance of payments vibbility has been greatly frustrated by the virtual collapse of the international price of coffee and continued strong increases in spending on defence and internal security. From FY85 to FY87 coffee contributed an average of 53 percent of government revenues. Owing to the precipitous fail in international coffee prices since FY8 (by FY91, pwas were only about half of their FY88 level), coffee is no longer a major source of revenue; its contribution to total domestic revenues in FY91 was less than 10 percent. Further, in the initial years of te program, Government's lack of familiarity with donor procedures delayed the disbursement of import support, and hence reduced import taxes which form a substantial part of government revenues. In addition, the extrem.,, weak tax administration contributed to the poor performance of total domestic revenues-an average of 7.2 percent of CDP over FY88-91. 9. The poor revenue performance has put a low ceiling on budgetary expenditures, which have averaged 14 percent of GDP over FY88-91. Although the trend has been improving, the Government has been unable to contain certain expenditure items, particularly for defence. Defence expenditures have been rising even while there has been restoration of peace and security over most of the country; indeed, defence expenditures for FY89 and FY90 grew by over 40 percent per annum in real terms and in FY90 accounted for 45 percent of recurrent expenditures. Combined with the low government revenues, the rising defence expenditures have led to severe under-funding of critical programs, particularly in the social sectors. Government budget deficits, averaging well over 6 percent of GDP, have been financed mostly by money creation which, together with large net credits to the CMB for crop financing, have contributed to annual money (M2) growth of over 110 percent on the average. However, this average growth rate masks an improving trend over the past three years. In FY90, ,. relatively low 57 percent M2 growth was recorded mostly on account of net repayments to the banking system by the Government and the CMB. With the reduction in the growth of money supply, inflationary pressures eased. The inflation rate, as measured by the year-on-year change in the Consumer Price Index (CPI), fell from 243 percent in FY88 to 29 percent in FY90, but picked up again to 39 percent in FY91. 10. The rise in oil prices during the Gulf crisis and the shortfall in coffee tax revenue resulting from lower-than-expected coffee exports in FY91 contributed to the reversat of the progress in stabilization that was beginning to take hold in FY90. With regard to the Gulf crisis, the Government responded aggressively to the challenge, promptly raising the domestic prices of petroleum products to reflect the rise in the international price of oil and devaluing the official exchange rate more frequently, and by greater magnitudes, than planned under the FY91 ESAP program. It also raised coffee producer prices in an effort to stimulate deliveries by the farmers. These measures, together with prompt financial assistance from donors, helped to stem the deterioration in the fiscal and external accounts. 11. During the past few years, Uganda has faced severe external payments pressures, mainly because of the dramatic fall in the international prices of coffee. This has led to a steady deterioration in the current account. In FY91, the current account balance deteriorated further as a result of the significant reduction in the volume of coffee exports (and hence coffee export 3 receipts) from US$159 million in FY90 to about US$126 million in FY91. The fall in coffee exports was accompanied by a 5.8 percent nominal decline in the value of nerchandise Imports. A number of policy initiatives undertaken by the Government, as well as increased financial assistance from donors, helped ease the pressure on the balazce of payments. First, a 100-percent retention scheme for nontraditional exports Introduced in FY89 has helped to increase significantly the value of nontraditionil exports sinue FY89. However, given the low base from which these exports started, US$6 million compared to US$282 million for coffee in FY89, the increase has not led to much in the way of export diversificatic. Second, thk authorities relaxed the restriction on imports financed by the private sector's own foreign exchange, with the result that the value of those imports rose to roughly half of the value of imports financed by official foreign exchange. Third, starting in July 1990, the Government went further and legalized the buying and selling of foreign currencies on foreign exchange bureaus. Non-coffee exporters can now exchange their export earnings on the bureau market, and all legal imports can be financed by the private sector through the bureaus. Lastly, foreign financial assistance, mostly on concessional terms, rose from an average of US$241 million a year over FY85-87 to US$366 million a year over FY88-90. 12. Although Uganda was able to reschedule its official development assistance debts on extended Paris Club terms in 1989, since then it has been less successful in obtaining debt relief (see paragraph 23), vad the debt-service burden is now about 66 percent of exports of goods and services, on an accrual basis. Total debt outstanding as of June 30, 1991 was US$2,592 million (over 150 percent of GDP), of which US$372 million (22 percent of GDP) were in arrears. 13. In summary, und,r the ERP launched in 1987, the Government has made steady progress towards macroeconomic stabilization. While the fiscal situation remains fragile, the rate of monetary expansion to finance government deficits has been falling, leading to a significant decline in the rate of inflation, although this trend was reversed in FY91. Impressive progress has been made in improving production and export incentives, particularly through exchange rate adjustments. The combination of improvements in policy, rehabilitation investments, and the restoration of peace and security, has led to high GDP growth rates. Non-coffee export volumes have also increased, but not by as much as expected, and significant progress is yet to be made in the otective of export diversification. Moreover, owing to adverse terms-of-trade movements, the balance of payments situation remains precarious, and coffee is no longer a major source of government revenue, although it remains the country's principal source of foreign exchange earnings. B. Medium-Term Macroeconomic and Structural Policies 14. Given the progress made over the past three years, the stage is now set for the Government to place greater emphasis on addressing underlying structural impediments not only to deal with critical short-term problems (particularly, further reducing inflation and coping with the difficult balance of payments situation) but, more importantly. also to ensure sustainable growth, alleviate poverty, and improve the quality of life for its people in the medium-to-long term. This will require further reforms in the incentives and regulatory framework to facilitate and sustain growth, with emphasis on agriculture and agriculture-based products; significant improvements in the devastated economic and social infrastructure and services; specific policy actions aimed at poverty alleviation; reversal of environmental degradation and improved natural resource management; and a concerted attempt at institutional strengthening and capacity building. In other words, emphasis now needs to shift from general economic recovery to structural reform and adjustment. 15. The Governments medium-term macroeconomic framework and structural policies for the next three years, as outlined in the Policy Framework Paper (1991/92-1993/94), are geared 4 to reducing inflation to a level compareble to that of Uganda's major trading partners. Specifically, financial policies will be designed to pevent slippages in fiscal and monetary policy. In tis regard, the Government aims to take steps to increase significantly the revenue effort by establishing a new revenue authority and thus strengthening tax administration, and to keep expenditures at targeted levels. In addition, structural reforms in the following areas will also be undertaken to curb inflationary lending: (a) completing the transfer of responsibility for crop finance from the Bank of Uganda (BOU) to the commercial banks, and turning the CMB into a commercial organization with private shareholding; and (b) improving bank supervision by the BOU and restructuring government- owned banks. 16. To facilitate and sustain growth, the Government intends to broaden and deepen reforms in the incentives and regulatory framework. In particular, as a follow-up to the removal of export licensing (under ERC II), the Government aims to remove restrictions on the Importation of most products in conjunction with plans to achieve a unified market-clearing exchange rate by the end of 19. The export retention scheme covering all non-coffee products will continue in order to improxe incentives and boost exports, while unification of the exchange rate will permit additional increases in the returns to coffee producers. The Government recognizes that agriculture wili continue to be the engine of growth and the key to export diversification and is therefore taking steps to raise productivity in the sector and remove marketing and other constraints. The Government also aims to make improvements in the indsual climate to attract private investment, particularly through the establishment of an Investment Authority, streamlined regulatory policies, and speedy divestment of Custodian Board properties (i.e., properties seized by the Amin regime in the early 1970s). In addition, the Government intends to carry out a divestiture program in the parastatal sector and restructure the remaining public enterprises. 17. The Government intends to cantinue making significant improvements to the devastated economic and social infrastructure. This includes making adequate provisions for the maintenance of rehabilitated highways, rehabilitation and maintenance of the vast network of feeder roads which, though essential to the recovery and growth of agriculture, is in an acute state of disrepair, investments to improve power transmission and distribution, and strengthening agri.ltural research and extension to increase yields and facilitate export diversification. The Government also intends to make significant improvements in the quality of, and access to, basic social services - primary health care, primary and secondary education, and water supply. The Gove ment recognizes the severity of the AIDS problem and is intensifying its efforts to control the spread of the disease and care for those who are afflicted. 18. Finally, the Government is taking actions to address serious capacity constraints on economic management and development administration. These include measures to strengthen economic management in key institutions and ministries, particularly the Bank of Uganda (BOU), the Ministry of Finance (MOF), the Ministry of Planning and Economic ]Development (MPED), and the Ministry of Public Service (MPS), as well as a program to reform the overstaffed, poorly paid and ineffective civil service. Significant progress has been made in establishing a permanent information system for the civil service and carrying out a major review, and the Government now intends to streamline and rationalize the civil service to make it smaller, better paid and more effective. 19. External Capital Requirements. The sustainability of the Ugandan reform agenda is critically dependent on adequate external financing, since the country faces an extremely difficult balance of payments situation in which coffee export receipts have fallen as a result of the collapse of the quota arrangements under the International Coffee Agreement (ICA), aggravated by the subsequent decline in domestic coffee production. In addition, for a while, the latest oil price increase brought about by the Gulf crisis further compounded the problem. The Government has 5 taken important steps to respond to these shocks, including regular exchange rate adjustmen:s, as well as prompt and full pass-through of exchange rate 4.l international oil price incre2ses to domestic petroleum prices. Despite measures to increase exports, It will take time for these to increase sufficiently to offset the terms-of-trade shock or to reverse the impact of the precipitous decline over the years. While non-coffee traditional exports (such as cotton and tea) and nontraditional exports (such as sesame, maize, pineapples, etc.) show considerable potential, significant export returns from these crops can only be expected over the medium term. At the same time, the economy needs a minimn level of imports to meet its growth and stabilization targets. Policy reforms are therefore a necessary but not sufficient condition for growth; considerably enhanced donor assistance will also be required to sustain these reforms. 20. The targeted 5 percent growth rate would necessitate that imports grow at roughly the same rate in real terms. This includes imports of agricultural and industrial inputs, raw materials and spare parts, and petroleum imports nee&d for private sector production. This Implies merchandise import requirements rising from about US$50 million in FY91 to about US$714 million by FY94. Taking into acco-rt scheduled debt service, an annual settlement of US$20 million of external arrears, and reserves build-up (to a level equivalent to 2.5 months of imports by FY94), total external financing requirements are projected to amount to US$983 million in FY92, rising to over US$1 billion by FY94. or a total of about US$3.1 billion over the three-year period. 21. Towards meeting these requirements, exports of goods and non-factor services are projected to grow from an estimated US$216 million in FY91 to US$240 million in FY92 and US$337 million by FY94. This reflects both a modest projected recovery in international coffee prices and a projected growth in the volume of non-coffee exports (on account of export retention, improved infrastructure and inputs). After taking into account private transfers, the financing requirements for the period under consideration decline to about US$1.9 billion, or an annual average of about US$640 million; these will need to be met through external assistance. 22. Disbursements from existing conunitments of import support assistance are estimated at US$291 million, while US$425 million in existing project -id should be disbursed over the 1991/92-1993/94 period. Based on the pledges made by the donors at the last Consultative Group meeting for Uganda held in March 1991, and assuming similar levels of assistance during the next two years, it is estimated that additional disbursements of US$572 million in import support aid will become available from new commitments, with IDA accounting for about US$300 million of this assistance. New project aid disbursements are projected at US$391 million over the three- year period, resulting in a cumulative residual finance gap of about US$240 million. IMF ESAF resources are further expected to reduce fals gap to about US$185 million. This gap does not include the settlement of Uganda's arrears which amounted to US$372 million as of June 30, 1991. 23. While more favorable debt reschedaIng represents a potential source for financing this gap, action on a wide variety of fronts will be tvcessary to achieve significant savings, given the structure of Uganda's debt. Approximately 63 percent of Uganda's debt, and 19 percent of the arrears, are owed to multilateral organizations, which do not reschedule. While roughly 11 percent of the debt, and 18 percent of the arrears, are owed to OECD bilaterals, only about 50 percent of this is eligible for Paris Club rescheduling since the remainder was contracted after the Paris Club cut-off date of July 1, 1981. Non-OECD bilaterals account for about 20 percent of Ugandan debt, and about a third of the arrears, but no official forum exists for rescheduling or forgiving such debL Finally, commercial creditors account for the remaining 6 percent of debt and 30 percent of arrears. Given this profile, the key elements of a debt restructuring strategy for Uganda must include: (a) rescheduling eligible Paris Club debt on the most favorable terms possible; (b) asking the Paris Club to defer non-eligible debt with as long a grace period as possible; (e) buying back commercial debt at a discount and exploring whether the buy-back could be extended to some trade credits; and (d) 6 askig non-OECD bilaterals, on an individual basis, to adhere to the Official Minute of the Par.s Club which insists that all bilateral and commercial creditors provide rescheduling terms which are at least as favorable as those granted by Paris club. Implementation of these four key elements of the debt strategy will go a long way in solving Uganda's arrears problem, making debt servicing more manageable, and eliminating the financing gap. The objectives of the stratogy are to reduce Uganda's arrears problem substantially over the three-year PFP period and to reduce debt-svrvice obligations to about 30 percent of the export of goods and all services through the implementation of the measures outlited above. The Government has recruited a team ' -uternational accountants to help it to implement this strategy and is presently in tie process . approaching individual creditors to negotiate the best terms possible. C. Bank Assistance Strategy 24. The Bank will continue to play a leading role in assisting the Government to design and implement its Economic Recovery Programme, to move the economy towards sustainable long- term growth, and to mobilize the required financial resources to support the Government's development program. It undertakes this role by backing .p its policy dialogue with economic and sector work, designing a lending program that combines adjustment and investment lending in a balanced manner, and improving aid coordination. Objectives and Strategy 25. The overall objective of the Bank's assistance strategy for Uganda is to shift the emphasis from short-term objectives of security, stability and rehabilitation to the achievement of an economic environment conducive to poverty reduction through the promotion of long-term sustainable growth and improved basic living conditions. The overall approach will be to strengthen essential government institutions, policies and functions in a manner that will create a favorable climate for a private sector response in both agriculture and industry and improve the delivery of essential social services. 26. The principal elements of the Bank's strategy will be to support efforts to: * Maintain macroeconomic stability through improved revenue collection, attainment of a unified exchange rate and monetary restraint, while increasing resources for the economic and social sectors by a reallocation of budgetary expenditures; * Improve the climate for private production and investment through deregulation, privatization of government enterprises, strengthening of the private and public financial sector, rehabilitation and expansion of the country's basic infrastructure, and improvements in essential services to agriculture such as research and extension; * Enhance Uganda's human resource base by strengthening the education system and basic health services; * Assist the Government in developing programs to stem the environmental degradation that is occurring, with special emphasis on reversing the depletion of the country's rain forests, increasing the intensity of cultivation on existing farmlands, and slowing the rapid rate of population growth; and * Improve external aid mobilization and coordination. 7 Lending Program and Economic and Sector Work 27. IDA and the IMF supported an initial effort at economic stabilization and recovery during the early 1980s. In June 1981, the Government adopted a comprehensive Recovery Programme. IDA committed the Reconstruction II and IWI Credits in 1982 and 1984, respectively, and also an Industrial Rehabilitation Credit (1982) and an Agricultural Rehabilitation Credit (1983). These credits financed imports and reinforced policy measures adopted under the IMF agreements and institutional development efforts under IDA and UNDP technical assistance projects. Initial exped lence was encouraging, both in terms of stabilization and recovery of output. However, in 1984 the economic program went off track, and security conditions began to deteriorate once again. Inflation accelerated to 125 percent in 1985, and the recovery effort was overwhelmed by the intensification of civil strife. 28. Since resuming lending to Uganda in FY87, IDA has provided 24 credits totalling US$852.4 million. Of this amount, three IDA credits, four supplements, and two African Facility Credits totalling US$357.0 million (or 42 percent of Uganda's lending program for FY87-91) were in the form of quick-disbursing assistance in support of the Government's Economic Recovery Programme. Through a technical assistance credit (FY89), IDA has strengthened the administrative and institutional capacity of the key ministries responsible for implementing the recovery program. Other credits have assied in the rehabilitation of Uganda's essential infrastructure. They have improved productive capacity and bolstered basic social services. Annex IV contains a summary statement of Bank loans, DA credits, and IFC investments in Uganda as of July 31, 1991. 29. Implementation of IDA-financed projects, which had slowed down during the civil disturbances in 1985 and 1986, has shown a steady improvement with the return of peace and stability to much of the country. Disbursements rose to US$77.7 million in FY86, declined slightly to US$63.3 million in FY87, and then increased sharply to US$107.1 million in FY88, reflecting the more rapid disbursements under the first Economic Recovery Credit (ERC I). Disbursements in FY89 were US$99.9 million, rising to US$164.9 million in FY90 and US$169.0 million in FY91. The lending program for Uganda increased dramatically from two operations in FY87 to five in FY88, seven in FY89, six in FY90, and five in FY91, including two African Facility Credits and three supplements to ERC I, and one supplement to ERC II. 30. Over the next three years, the Bank's economic and sector work program and its lending operations will be used to implement the strategy articulated above. The lending operations will build on a foundation of knowledge that has been established by our economic and sector work over the past few years. The sector work prepared during that period has covered the industrial and financial sectors, transport, the private sector, and key export-oriented crops. The macroeconomic measures needed for laying the basis for sustainable long-term development have been identified in a similar manner, with particular attention to a study of public expenditure, which has been identified as an area of maximum priority given the extreme resource constraint under which Ugarda will operate for years to come. A second Public Expenditure Review (PER), which is being carried out in FY92, aims at improving public expenditure management. The Strictural Adjustment Credit (SAC) proposed in this memorandum will support continued measures aimed at macroeconomic stability and exchange reform (which will also be the focus of IMF agreements and PFPs); incentive and regulatory reforms; resolution of claims on Custodian Board properties; reform of tax administration; rationalization of public expenditures; and civil service reform. Support to recovery in Northern Uganda will be funded through an operation in FY93, which will involve substantial participation by non-governmental organizations (NGOs). The Economic and Financial Management Project (EFMP), which will provide the technical assistance needed to support the policy reforms of the SAC, and the Enterprise Development Project (EDP), which will support parastatal reform and also provide financing for investment, primarily for export-oriented activities, are being 8 processed in parallel with this credit. The Bank recently completed a paper setting out an export diversification strategy for Uganda.I Pending the overall restructuring of the financial sector, which will be supported by a planned FY93 financial sector adjustment operation, the EDP will also provide for pre-shipment export financing as part of a package of initiatives towards the export diversification objective. Building on the agriculture sector study, a second sector adjustment operation (the first one is described in paragraph 38) will support continued liberalization and restructuring of agricultural marketing, particularly for cotton and tea. An agricultural technology project will help improve extension and research support to agriculture. A smallholder development project will promote agricultural growth in key smallholder-dominated crops such as cotton and dairy products. Building on transport sector work, a transport sector rehabilitation project will help improve transport capacity and efficiency. 31. The Bank's activities in the human resource field would aim at improving access to basic social services. Education V will focus on basic education and Health I will continue efforts to strengthen basic health services. Education V is based on several sub-sectoral studies which have influenced the development of the Ministry of Education's Five-Year Investmen. Program (1992-97). Both operations will be linked to the human resources study to be carried out in FY92. A women in development issues paper has identified key aspects of the status of women which need priority attention, and will provide the basis for their integration into other aspects of the Bank's human resources and agriculture work programs.2 An AIDS project in FY93 will help strengthen the capacity of the Government to deal with the multiple economic and social aspects of the impact of the disease; it will build on recently completed sector work.3 A small towns water supply project, also scheduled for FY93, will aim at an improvement in overall access to safe water in the country. Bank strategy in regard to poverty in Uganda is to work with other donors and NGOs to provide short-term assistance with a visible impact on the most vulnerable groups in the population, while initiating the longer-term actions needed to restore basic social services and achieve sustained growth and employment to alleviate poverty. A program for the alleviation of poverty and the social costs of adjustment (PAPSCA) was designed to provide some support to the poorest in Uganda society, and also to mitigate the adverse effects of adjustment on the poor. It was put into effect last year, and will continue to be under implementation for the next several years. Poverty and growth issues will be the focus of the forthcoming country economic memorandum (FY93). 32. Significant resources will be allocated to the building of capacity of local institutions with a key role in development. The Economic and Financial Management Project will focus on strengthening the effectiveness of the Ministry of Finance, the Ministry of Planning and Economic Development, and the Bank of Uganda in the formulation and implementation of economic policies for development. Building on ongoing sector work that will be completed in FY92, an institutional development project in FY94 will address broader issues of capacity building, including training in such areas as economics, accounting and auditing, and continuation of civil service reform. The World Bank, UGANDA: Expot DiverWficaton Strategy, Eatern Africa Department, July 3, 1991. M ThoWorld Bank, UGAMDA - Women In Deopment: Omear Issues and Agendafor Fwther Rearh, Popuation and Human Resources Division, Eastern Africa Department, June 28, 1991. s The World Bank, UGADA: 7he Economic Ipact qfAiDS, Population and Human Resource Division, Eastern Africa Department, June28, 1991. 9 Aid Coordination 33. An important part of the Bank's activities over the next three years will be to help strengthen and coordinate donor support to Uganda's reform efforts. The reform agenda is large, and will tax the capacity of the Government to the fullest. At the same time, the scope for confusion and contradictory activities by donors is large, with real potential for undermining the reform program. More also needs to be done to increase the support of other donors for Uganda's reform effort. The main responsibility for aid coordination is, of course, the Government's, and the Bank is willing to help improve Government's capacity in this area. But the Bank also has an important role to play in fostering donor coordination by: (a) raking its own views on needed reforms, performance by the Government, and financing needs known to donors; (b) explaining its own proposed activities in support of the reform program to donors; (c) encouraging donors to participate in supporting areas of the reform program where they have specific expertise; and (d) flagging systemic issues which may affect the effectiveness of donor support. This will be done through the framework of the Special Program of Assistance (SPA) and through the Consultative Group (CG) process (with CGs planned every 12 to 18 months). Effective donor coordination also requires frequent contacts with donor representatives and the assurance of a regular flow of information on policy developments and project activities. To facilitate this exchange, an expanded role for the Resident Misbiod is planned. Regular meetings with local donor representatives will be used as a vehicle for intensive consultations with the main donor agencies. The capacity of the Resident Mission has been expanded to increase contacts with the donors and to assist the Government with implementation issues. IDA and the IMF have collaborated closely throughout on the design, implementation, and monitoring of Uganda's Economic Recovery Programme. This has been particularly beneficial in getting the Government to focus on key macroeconomic stabilization measures, as well as long-term structural reform. D. Ongoing and Proposed Bank Adjustment Operations 34. Structural adjustment lending will support the implementation of the policy agenda for growth and stability, and provide needed quick-disbursing financial assistance. Since 1987, Uganda has been the beneficiary of three adjustment operations. A first Economic Recovery Credit (ERC 1) was approved by the Board in September 1987. This was followed by the Second Economic Recovery Credit (ERC I) in January 1990. There is also a sector adjustment operation, the Agricultural Sector Adjustment Credit (ASAC), which was approved by the Board in December 1990. The current and prospective adjustment operations (other than this SAC) are reviewed briefly below. 35. First Economic Recovery Credit (ERC 1). ERC I supported the first phase of the Economic Recovery Programme initiated by the Government. Specifically, a limited Open General License (OGL) system was introduced to improve foreign exchange allocation; a Public Sector Investment Program was prepared, consistent with available resources and the priority needs of the economy; and an action program for the restructuring and divestiture of public enterprises was agreed with IDA and the program was initiated. 36. Second Economic Recovery Credit (ERC II). The basic thrust of ERC U was to deepen and extend the reforms aimed primarily at stabilization and rehabilitation initiated under ERC I. The highest priority was given to reducing the severe imbalances in the economy and lowering the rate of inflation. The credit therefore supported the following demand management policies: improvements in revenue generation; improvements in planning, budget formulation and expenditure control; and adoption of tighter monetary and credit policies. With regard to the incentive and regulatory system, the credit supported a more active exchange rate policy, the simplification of export procedures, further liberalization of the foreign exchange allocation system and further price 10 derontrol. In the area of public sector management, ERC I laid the groundwork for a major civil service reform by establishing a permanent information system and initiating the functional rationalization of ministries. 37. While the implementation of the measures supported by ERC II has been satisfactory, there have been a few problems. On the positive side, the Government has taken the stabilization objective of the ERP more seriously than it did under ERC I. This is especially borne out by the improved monitoring of the budget and tighter expenditure control (defence excepted). The most striking result of this has been a decline in the rate of inflation since 1987/88. The Government has also demonstrated a strong commitment to the attainment of a market-determined exchange rate. There have, however, been slippages in the implementation of some of the measures supported by ERC II, including: delays in increasing coffee producer prices; failure to address the problem of poor tax administration in a fundamental way; and somewhat slow progress towards civil service and parastatal reform. The studies which would pave the way for actions in a number of these areas have, however, been completed. In particular, the Public Service Review and Reorganisation Commission (PSRRC) has made extensive recommendations regarding the re- organization of the civil service and the Government has started to implement them. Studies on parastatal reform have also been completed, and action on parastatal reform is planned under the Enterprise Development Project. 38. Agricultural Sector Adjustment Credit (ASAC). This is a hybrid operation with an adjustment component and a small investment component. ASAC seeks to institute structural reforms, particularly in the coffee subsector, to reinforce the stabilization measures supported by ERC H. It is the first sector adjustment operation under the ERP and reflects the key role that the agricultural sector will continue to play in the Ugandan economy. The actions being supported under the adjustment component include the following: transfer of the responsibility for crop financing from the central bank to the commercial banks; restructuring of the CMB into a commercial organization within a competitive marketing structure; creation of a separate body to regulate the coffee trade; rehabilitation of the cooperative unions; broadening of private sector participation in the coffee export trade; reform of the system of coffee export taxation; and establishment of a semi-autonomous national agricultural research organization. Three major actions have already been taken. First, responsibility for crop finance has been shifted back to the commercial banks. Second, a new commercially-oriented marketing agency, Coffee Marketing Limited (CML), has been incorporated under the Companies Act. Third, the balance sheet audit which will provide the basis for dividing the CMB's assets and liabilities between CML and the proposed new regulatory body has been completed. 39. Financial Sector Adjustment Credit. The Bank recently completed a Financial Sector Review in Uganda.' The review identified the main problems facing the sector as: lack of public confidence in financial institutions; lack of control over credit expansion; constraints on the central bank in the discharge of its responsibilities; the virtual insolvency of two of the largest commercial banks; and the unsustainability of the operations of development finance institutions. These problems have made the twin tasks of macroeconomic stabilization and economic growth more difficult. The Bank is, therefore, preparing a sector adjustment operation which will address the problems of the sector. The proposed credit would support actions aimed at: bolstering public confidence in the financial system; developing more appropriate instruments of financial control; enhancing banking discipline; strengthening the supervisory function of the central bank; and restructuring the problem banks. the Word Bank, UGAJlA: Finan W Sector ReYiw, Repot No. 9099-UG, May 7, 1991. 11 E. Summary Assesment 40. Despite the gains achieved during the first four years of the ERP, Uganda faces major challenges. The inflationary pressures need to be reduced further. Structural reforms in the financial and coffee sectors are required to consolidate stabilization. Strengthened revenue mobilization is needed to provide resources for critical economic and social services. The sharp decline in the export price of coffee underscores the need for Uganda to diversify its export base. Civil service reform is urgently required to achieve a streamlined and manageable service, while parastatal and financial sector reforms need to be stepped up. These challenges are reflected in the Government's Policy Framework Paper for the next three years, as wel as in the Bank's assistance strategy over the next five years. This strategy has three elements. First, through its economic and sector work, the Bank will deepen the policy dialogue in the key areas of the ERP: financial intermediation, public expenditures, civil service reform, export diversification, poverty alleviation, and environmental management. Second, the Bank will support the Government's implementation of policy reforms in these and ancillary areas through structural and sectoral adjustment lendIng. Third, through investment lending, the Bank will assist the Government's continued effort to rehabilitate the country's infrastructure and essential public services. 41. Progress in strategy implementation will be evaluated on the basis of the following three criteria. The first is the Government's ability to implement macroeconomic policies (monetary, fiscal and exchange rate policies) and sectoral reforms (financial sector reforms and coffee subsector policies) that can accomplish and sustain the financial stabilization objectives as measured against the targets for inflation, the fiscal deficit and credit expansion. The second criterion is the Government's capacity to restructure public expenditures to place greater emphasis on primary and secondary education, primary health, water supply, road maintenance, and agricultural support services, and to implement a comprehensive reform of the parastatal sector and the civil service. The fard criterion is future growth and diversification of the economy (measured by the dependence of the economy on coffee for export earnings and government revenues). The policy environment should encourage private sector investment and continued progress in the rehabilitation of the economic infrastructure. Part II: Proposed Structural Adjustment Credit 42. The proposed credit focuses on two themes, which are the key to Bank assistance strategy in Uganda (see paragraphs 25-26). The first is the removal of the remaining constraints on the private sector and the creation of an environment in which private initiative can flourish and Uganda's comparative advantage can be realized. The second is the imp:svement in the effectiveness of the Government The credit has six components. First, it seeks to improve the trade regime by further easing restrictions on exports and imports, and removing the implicit exchange rate subsidies enjoyed by some importers. Second, it aims to promote investments through the establishment of an Investment Authority and its operational guidelines as provided for under the Investment Code. Third, it will speed up the resolution of claims on Custodian Board properties; this will provide an important signal to investors, particularly foreign investors, that Uganda is once again ready and willing to work with them and no longer has a hostile attitude towards foreign investment. Fourth, the credit seeks to improve the Government's revenue collection through the establishment of an independent revenue authority. Fifth, it aims to reorient public expenditure allocations; among other things, it will seek to protect a set of high-priority programs in primary and secondary education, primary health, water supply, road maintenance, and agricultural research and extension. Finally, the credit will support a major program to transform the civil service into a small, efficient, effective and manageable service. The following sections outline the background, past adjustment efforts, and proposed reform under the SAC for each of the 12 components grouped under the two themes of this operation: private sector development (paragraphs 43-78) and public sector management (paragraphs 79-109). A draft Letter of Development Policy, accompanied by a policy matrix for the credit, is presented in Annex I. A. Private Sector Development 43. The Ugandan economy is dominated by the private sector which contributes between 80-90 percent of GDP. The Government favors the development of a strong, efficient and competitive private sector. The steps taken by the current Government to bring peace and order to the country, the continuing efforts to restore macroeconomic equilibrium in the economy, and the exchange rate and trade reforms implemented thus far have been beneficial to private sector activity. However, the development of the private sector in Uganda still faces significant constraints. These include the complex regulatory environment and its administration; the legacy of past political instability which clouds the investment climate; the undeveloped financial sector which denies many enterprises, particularly the small ones, access to credit; lack of qualified personnel necessary for a growing private sector; and business and personal tax systems that are poorly managed. Labor market regulations are outmoded, although hardly enforced; hence the labor markets are, defacto, not regulated. The public enterprise sector, although comparatively small, is inefficient and a significant drain on the meager public resources. 44. Three components of the proposed credit aim at improving the environment for private sector development: trade reform, investment promotion through the Investment Code, and disposal of Custodian Board properties. Trade Reform 45. Measures Supported by Past Bank Credits. The Government has made significant progress on trade reform in the past three years with the support of the Bank under ERC I and ERC U. This progress has been facilitated by periodic adjustments in the official exchange rate which have led to a 64 percent real effective depreciation of the official exchange rate between the second quarter of 1987 and the second quarter of 1991. In addition, starting from July 1990, the Government legalized the buying and selling of foreign currencies by the public on foreign exchange bureaus. Exporters of all products, except coffee, can now convert their foreign currency earnings at the market-determined bureau rate, which has provided great incentive for production and exports. The private sector is now free to finance all legal imports through the bureaus, which has helped to liberalize imports further. In addition, the bureaus may be used to acquire foreign exchange for travel and service payments, including dividends, and management and technical fees. 46. In recent years, coffee farmers and mrketing agencies have been penalized by the exchange and trade system. After remaining fixed for two years, the coffee producer price was increased from U Sh 60 per kilogram of robusta to U Sh 75 in July 1990, U Sh 120 in November 1990, and then U Sh 210 in July 1991. Despite these increases, the price has fallen steadily in real terms since the mid-1980s; by the end of 1990, it was roughly half of its 1987 level, with the share of the coffee producer price in the export price (valued at the parallel market exchange rate) being approximately 40 percent. Realizing that the incentive provided to the coffee producer was inadequate, the Government decided to overhaul the system of pricing and taxing coffee. Starting with the 1991/92 coffee yjar (October-September), the Government has moved to a system where only an indicat0ve floor price will be announced, with the actual producer price determined by market forces (see paragraph 54). Further, under the ASAC, a major reform of the coffee marketing system is being undertaken. The goals of the reform program are to make the CMB more efficient and to allow other agents to compete with it in purchasing and exporting coffee. A 13 restructuring of the CMB has already begun, four cooperative unions have started exporting coffee alongside the CMB, and the Government plans to license private traders as well. 47. Progress has also been made regarding the use of official foreign exchange for private sector imports, reform of import taxes, and streamlining of export procedures. A system to ensure access to foreign exchange for manufacturing firms in selected industrial subsectort was begun in January 1988. Although the system is called an Open General License (OGL) system, unlike the typical OGL system, access is on tha basis of eligible firms in the selected subsectors rather than eligible imports. To supplement the OGL, the Government introduced the Special Import Program (SIP) beginning in December 1988. The SIP operates only when the supply of foreign exchange, mostly from donors, is relatively high. When it operates, it is open to all importers on a first-come first-served basis for the importation of any product not specified on the negative lists of either donors or the Government. Significant progress has also been made in reforming trade taxes. The number of tariff rates has been reduced to only five, ranging from zero to 50 percent. In addition, the excise and sales taxes have been harmonized with the tariffs, and an attempt was made to replace the ring system with a tax-credit system for raw material inputs, a large part of which are imports. Lastly, on exports, the Government has replaced export licensing with export certification, which is essentially a registration and notification process. 48. The system of foreign exchange allocation in Uganda has thus evolved over time such that there are currently two systems operating in parallel. First, there is an official system under which foreign exchange receipts from coffee exports and donor aid are allocated by the Bank of Uganda at an appreciated official exchange rate. In addition to covering BOU's own needs, allocations in this system are made for imports of petroleum products, government imports, and imports under the OGL and SIP systems. About two-thirds of the country's foreign exchange receipts are channeled through this system. Second, there is a foreign exchange bureau system under which foreign exchange receipts from all sources other than those supplying the official system are allocated at a "market" exchange rate by licensed foreign exchange bureaus. At present there are 48 such bureaus, of which 11 are associated with commercial banks operating in the country. Although subject to certain limits and reporting requirements, allocations in this system may be made for general imports, travel, education and medical payments, dividend remittances and debt-related payments, and payments for other services. About one-third, or US$100 million equivalent, of th country's foreign exchange passes through this system. 49. Measures being Supported under the SAC. The progress described above not withstanding, there are still significant distortions and impediments in the trade regime in Uganda. Both the OGL and the SIP give implicit subsidies to importers who get access to them.' A joint Fund-Bank review of the systems in November 1990 found that, while the OGL has led to increased production and hence increased revenue from excise and sales taxes, it does have efficiency problems, some of which are attributable to the fact that access is firm-specific rather than product-specific.' Both systems, as well as imports using foreign exchange obtained from the bureaus, also suffer from very cumbersome procedures. Furthermore, the negative list used by the Ministry of Commerce to regulate imports is loosely defined (in terms of broad categories of imports instead of specific SITC classification), tends to change in an unpredictable manner, and is not well publicized. Regarding exports, the change-over from licensing to certification was initially not sThe ting system allows selected importors (who have been classified as being in the ring) to bring in goods duty free. * UGANMA: An Agenda for Trade Liberafzation, UNDP-World Bank Trade Expansion Program, Country Report 6, May 1990. ' IMF, Uganda. Reform of dse Erchange System, November 30, 1991. 14 properly implemented, leaving room for possible controls on exportation. Lastly, the change-over from the ring system to the tax-credit system also encountered implementation problems: the change was not put on a proper legal basis; the tax authorities were not clear about how the new system would work; and manufacturers were not receiving their credits, prompting them to complain of "double-taxation". Since a significant part of material inputs is imported, this led the manufacturers to clamor for trade protection, which threatened to undo the gains made in tariff reforms and the whole movement towards import liberalization. As a result, the Government has postponed the Introduction of the sales tax credit system. 50. The SAC is designed to help the Government to consolidate and expand trade reform by solving the problems outlined above. The principal objectives are to remove implicit exchange rate subsidies on imports and to liberalize imports and exports by putting them on a "negative list" basis (i.e., all goods not on a well-defined and published negative list may be freely imported or exported). Under the Policy Framework Paper (1990/91-1992/93) agreed to in August 1990, the Government committed itself to establishing a market-clearing exchange rate system by the end of 1991. So long as the official exchange rate remains below a market-clearing level, the allocation of foreign exchange for imports under the OGL and SIP provides implicit subsidies to the recipients. The Government has decided to remove this subsidy by moving the official exchange rate at a brisk pace towards the foreign exchange bureau rate, and establishing a unified market- clearing exchange rate regime. To this end, an understanding has been reached with the IMF under the third-year ESAF to narrow the gap between the official and the foreign exchange bureau rates to no more than 15 percent by October 1991, and to narrow this still further by December 1991. 51. Starting in January 1992, the foreign exchange system will be unified through the introduction of a market-determined system, whereby the Bank of Uganda will sell balance of payments support resources to commercial banks to finance imports. Although the operational details remain to be worked out, in principle sales of foreign exchange will take place at regular and frequent intervals (at least twice a month). To ensure that the foreign exchange and trade system that will be in effect operates smoothly, disbursement procedures will be improved and standardized to reduce the volatility of disbursements. To this end, a foreign exchange pool will be established a month prior to unification of the exchange system; donors will be asked to contribute import support into the pool. Requests for foreign exchange would need to be accompanied by the appropriate import documentation. Government imports will also be transacted at the market- determined rate. Coffee exports would be priced at the market rate and the BOU would purchase these resources at the market rate to satisfy the Government's debt-servicing requirements. Petroleum imports will eventually be channelled through the commercial banks, although initially they will be transacted through the Bank of Uganda. The present OGL/SIP systems will be replaced by the end of 1991 by a more broadly-based import system based on an agreed negative list of imports which will apply uniformly to all importers. In view of these developments, el6rnation of the OGL/SIP impot systems has been made a condition of second tranche release. 52. The Government is also continuing with reforms of export and import procedures to complement the changes in the exchange rate regime. On November 1, 1991, the Government introduced a refined export certificate system which genuinely operates on the negative list principle. Any person or business can register as an exporter and obtain an export certificate which allows the holder to export any good that is not specified on a "negative list" of exports. Goods specified on the export negative list are those whose exports have been prohibited for environmental reasons, or by virtue of diplomatic or international conventions. An export certificate is valid for six months, and is renewable so long as the exporter is not in violation of the foreign exchange control laws. The Government plans to extend the period of validity from six to twelve months in the near future after sufficient experience has been gained from operating the system. Owing to international agreements, certain products not on the negative list may require licensing in addition to the export 15 certificate, At the present time, the only product falling under this category is coffee. Also on November 1 of this year, the Government introduced an import certificate system similar to the one for exports. Any good not on a negative list of imports may be imported by a holder of an import certificate, which is valid for six months. Imports of goods on the negative list are prohibited, and in principle a good may be put on the list only for reasons of public health and safety, state security, and international conventions. Also for health, safety and security reasons, certain products, although not prohibited, require special permits in addition to the import certificate. As further measures to bring about greater transparency and automaticity in the foreign trade regime, the negative lists, as well as the lists of products requiring special permits (and the permit required for each product), are readily available to the public. To minimize the scope for arbitrariness, a clear and open process has been established for adding products to, or deleting products from, the negative lists, and the same applies to the lists of imports and exports requiring special permits. 53. The Government has affirmed its belief in the principle that to promote efficiency, protection of domestic industry should be through moderate tariffs rather than through import prohibition. However, owing to the extreme ineffectiveness of the customs administration in actually collecting scheduled tariffs, it maintains that, as a temporary measure while the customs department is being strengthened (within the context of the new Uganda Revenue Authority being supported by this credit), it will be necessary to prohibit a number of imports for the purposes of protection. The list of such imports is short, comprising the following commodities: beer, soft drinks, cigarettes, foam mattresses, automotive wet batteries and lubricants. It is the Government's intention not to add any items to this list, but rather to review the list periodically with a view to eliminating items from it over time. 54. The Government is also continuing to take measures to improve upon pricing, marketing and other institutional arrangements in order to promote exports. In the 1991/92 budget, the Government introduced a new system of taxation of coffee exports with the following elements. No export tax will be levied if the total cost of producing, processing, and exporting coffee is equal to, or higher than, a reference price which is based on the cost of production. When tht export price exceeds the reference price, then an export tax will be levied on the difference between the FOB price and the reference price. With regard to the producer price, the Government will only set an indicative floor price, which will be adjusted from time to time by the Uganda Coffee Development Authority, while allowing the processors and exporters to compete for the margin between this price and the export price. The Government is also committed to reviving tea and cotton production mainly through the encouragement of private initiative in subsectors currently dominated by parastatals and the cooperatives. In addition, the Government is engaged in a comprehensive examination of all the policies and institutions, as well as physical and supply constraints affecting exports, in order to identify appropriate ways of encouraging rapid increases in foreign exchange generated from the non-coffee sector. Investment Promotion 55. Background. The Government recognizes that at present Uganda projects a poor image as a place to invest and appreciates that private local and foreign investments are critical for economic growth, employment generation and poverty reduction. A joint ODA(UK)-IDA assessment of the private sector was carried out in 1990.' It stressed the importance of improving the investment climate and making potential investors aware of the investment opportunities in Uganda. In January 1991, the President of Uganda signed into law a new Investment Code which UGAlMDA: Dewtoping ae Prvate Sector Thugh Smppot*ng Marke, A Private Sector Asesment, UK-ODA and World Bank, Febuary S, 1991. 16 provides the regulatory framework for foreign and domestic investment; thus the Investment Code Act (1991) repealed the restrictive Foreign Investment (Protection) Act and the Foreign Investment Decree (19t7). The new Code aims to attract, promote and facilitate private investments by removing the regulatory impediments to investing in Uganda, providing fiscal incentives, giving protection to foreign investors against compulsory acquisition, and introducing a transparent mechanism for the externalization of dividends and other fees related to foreign investments and services. The Act established the Investment Authority as the institutional instrument to promote investmert, grant investment licenss and incentive certificates to qualified investment proposals, and advise the Government on national policies for promoting investments. 56. The Investment Authority is to be a public agency, with its own Board of Directors, answerable to the Government through the Minister of Planning and Economic Development. To ensure private sector participation in the affairs of the Authority, the Investment Code sets aside seats on the Board of Directors for the Uganda Manufacturers Association and the Uganda Chamber of Commerce in addition to the five seats to be filled by individuals with a "sound knowledge or practical experience in investments". The Investment Authority has been planned as a "one-stop" processing center for investors. It is expected to secure all other licenses, authorizations, approvals and permits required by investors to commence their investment projects. The Code requires that applications for licenses and incentive certificates be processed in a timely, transparent and automatic fashion. The Government recognizes that the ability of foreign investors, licensees and expatriate employees in Uganda to transfer funds abroad is critical to the efforts to attract foreign direct investment, acquire new technology, and meet the technical and managerial personnel needs of the economy. The Investment Code provides for an approval process that would allow for timely transfers of funds by investors and licensees registered under the Code. Furthermore, the Government has been moving speedily to clear the existing bacidog of dividends, fees and salary remittances of foreign investors, licensees and expatriate employees. 57. SAC-Supported Actions. The Government has moved quickly to make the Investment Authority operational, with assistance from ODA(UK), USAID, and IDA. Consultants funded by ODA(UK) assisted the Government in the design of the structure of the Authority and the preparation of its operating guidelines and procedures. USAID provided funds for the office accommodation of the Authority. IDA staff worked closely with the Government on the implementation of the provisions of the Investment Code, to ensure that it improves the investment climate and that the structure and operating guidelines of the Authority reflect the Governments commitment to break away from a control orientation to a promotional role. To guide the work of the ODA consultants, the Government and IDA staff jointly formulated a set of principles for the establishment and operations ef the Investment Authority. The principles emphasized the need for the Authority to put priority on investment promotion, for strong client orientation, and for a transparent and automatic process of granting investment licenses and incentive certificates. Furthermore, the principles emphasized that the Authority needed to be kept small and independent of civil service regulations, that private sector experience should be required of the top officers of the Authority, and that these officers be selected through a competitive process and offered compensation commensurate with the private sector. To be an effective one-stop shop, a good working relationship with government ministries and other agencies is essential; the principles recommended that the preparation of the operating guidelines should establish processes for these relationships. 58. In June 1991, the ODA consultants submitted their report to the Government which reviewed and accepted the report's recommendations. IDA reviewed the proposals for the operations of the Investment Authority and found them to be consistent with the general principles formulated by the Government and IDA. The Government has begun to implement the recommendations of the report. The consultants and a skeleton supporting staff from the Ministry 17 of Planning and Economic Development have been receiving and processing applications for investment licenses and incentive certificates. In addition, a publication entitled "A Guide to Investing in Uganda" has been prepared and demand for it has been strong. In July 1991, the Minister of Planning and Economic Development inaugurated the Board of Directors of the Authority. The Chairman of the Board of Directors (a non-executive position) has been selected and the Board has formed four committees to expedite the establishment of full operations. The Authority will have, when fully staffed, 10 to 12 professional staff. The post of the Executive Director was advertised both locally and internationally and the selection has been narrowed to two candidates. USAID and ODA(UK) have each undertaken to fund a deputy director with line management, advisory and capacity-building responsibilities. These two positions are being filled through international recruitment. Recruitment of other professional staff is underway through advertisements in the local press. The consultants prepared a three-year operating and investment budget and USAID has agreed to fund the operations for three years. 59. The Government has also started the process of sueamlining the regulatory framework more generally. It reviewed with IDA existing industrial, immigra*ion, health and environmental regulations affecting investors and investments. This review found the Industrial Licensing Act (1969) to be too restrictive, discretionary, control-oriented and generally at odds with the promotional focus of the Investment Code; in particular, it can be used to prevent entry into manufacturing. It is likely to affect a majority of applications to the Authority. Furthermor-, the coexistence of the Industrial Licensing Act and the Investment Code would result in a duplication of regulatory authority; prospective investors in the industrial sector would be required to get clearance from both the Industrial Licensing Board and the Investment Authority. To strengthen the credibility of its new promotional focus and ensure the effectiveness of the Investment Code, the Government has suspended the operations of the Industrial Licensing Board and hence the requirement for obtaining an industrial license. It has also taken the decision to repeal the Industrial Licensing Act (1969) by June 1992 and has initiated the process of repeal. The repeal of de IndrsOil Licensing Act (1969) will be a condon of second tranche release. The Government will review the impact of the Investment Code and other related regulations, and the operation, structure and focus of the Investment Authority after three years, to ensure that these are meeting the changing needs of the economy. Divestment of Properties Under the Custodian Board 60. Background. The Departed Asians' Property Custodian Board (DAPCB or the Custodian Board for short) properties have been in the hands of Government since 1972 when large numbers of Asians were expelled from Uganda by the Amin regime and others fled the country thereafter. The legal basis for the expulsion was provided by the promulgation in August 1972 of the Immigration (Cancellation of Entry Permits and Certificates of Residence) Decree (Decree No. 17). As tht name implies, by this decree the Government canceled the entry permits and certificates of residence held by Asians who were subjects or citizens of the United Kingdom, India, Pakistan and Bangladesh. Using the Assets of Departed Asians Decree of 1973 (Decree No. 27), Amin seized the properties of the expelled Asians. This decree established the DAPCB and charged it with the responsibility of managing the properties. Two years later, using the Properties and Businesses (Acquisition) Decree of 1975 (Decree No. 11), tfe Amin regime nationalized 53 properties and businesses belonging to expelled Asians and other persons. Successive governments have dissociated themselves from the blatant disregard for the rule of law and the violation of private property rights which the expropriation of the properties entailed. In an effort to redress the injustices of the past, Parliament enacted the Expropriated Properties Act (Act 9) of 1982. This is still the law applicable to the properties. 18 61. The Expropriated Properties Act vests in the Government the properties seized by the Amin Government following the promulgation of Decree No. 27 of 1973 and Decree No. 11 of 1975. The properties so vested in the Government are under the de Jure management of the DAPCB. In addition to these properties, there is a second category of properties which have come under the defacto management of the DAPCB. This category of properties fell into the hands of the DAPCB when Amin's rule became more and more capricious and brutal, forcing large numbers of Ugandans and all but a few foreigners to flee the country, leaving behind their properties and businesses. Even where the owners had made proper arrangements for the management of their properties and businesses in their absence, the Amin regime still took over those properties and businesses. 62. The Expropriated Properties Act created the !egal framework for the divestment of the properties which have been vested in the Government. The principal object of the Act is to provide for the return of the properties to the owners. The Government, however, arrogated to itself the right to enter into joint venture anangements with the owners. In addition, Section 8 of the Act empowers the Government to retain, sell or otherwise dispose of a property under the following conditions: the owner failed to apply for repossession within the spulated 90 days; the Minister responsible for Finance is not satisfied with the application for repossession; negotiations betw-vn Government and the owner regarding Government participation in the property fail; or the owner fails to physically return and reside in Uganda within 120 days of having been granted a certificate of repossession. 63. In addition to the 1982 Expropriated Properties Act, a body of case law has developed to buttress the rights of the owners to their properties. Specifically, the Ugandan courts of law have ruled that the following categories of property were not lawfully vested in the Government: Properties belonging to Ugandan citizens; Properties belonging to incorporated bodies and trusts; and Properties left under management arrangements. These properties are under the defacto management of the DAPCB which provides an institutional mechanism for the return of the properties to the owners. In the past, the DAPCB made no distinction between the properties lawfully vested in the Government and those not so vested. The result was that the provisions of the Expropriated Properties Act -'ere applied to properties which are not covered by the Act. This was not in accordance with the court's rulings (see above). After all, the owners of properties which have not been lawfully vested in the Government were (and are) under no obligation to apply within 90 days of the commencement of the Act for the return of their properties. Similarly, they are under no legal obligation to enter into joint venture arrangements with the Government. The Government has now put matters right by restating its policy on divestment and compensation and clarifying the legal status of the properties. 64. Although the Government realizes that on legal, moral and economic grounds the case for the return of the properties to the owners is unassailable, in practice there are serious political and social obstacles to the return of the properties. In law the properties still belong to the owners, except in cases where they have been compulsorily acquired and fair and prompt 19 compensation was paid by the state. The Government has, indeed, paid compensation for some of the properties seized by the Amin regime. Morally, Uganda needs to make amends for the injustices of the past by returning the properties to the owners who want their properties back. These people have been deprived of their properties and businesses for nearly two decades. 65. The economic case for the divestment of the properties is stronger than ever before. The properties represent a substantial component of Uganda's capital stock and once constituted some of the most productive assets in the country. The properties include shops, warehouses, motor garages, office and apartment complexes, residences, manufacturing and over 400 agro-processing plants, agricultural estates and other farms. A former Executive Director of the DAPCB has estimated the proportion of these assets which is under the management of the DAPCB as follows: 60 percent of Kampala, 70 percent of Jinja, and virtually 100 percent of the commercial area of Soroti. After nearly two decades of neglect, misuse and war damage, the properties are in an appalling state of disrepair. The cost of replacing the properties, should they be allowed to deteriorate further and fall apart, would run into billions of US dollars. Hence immediate attention must be given to the rehabilitation of the properties. Returning them to the owners, or selling them if that fails, offers the only avenue for getting the process of repair and rehabilitation under way. Some 1,358 properties are being used by the Government as "pool" houses for civil servants and defence personnel. The other tenants (individuals and businesses) have generally had insecure tenure (since there is much arbitrariness in the grant and termination of tenancies) and have thus shown scant regard for proper use of the properties. 66. The properties also cast a dark shadow over the investment climate in Uganda. A major element of the Economic Recovery Programme is the promotion of private investment, both foreign and domestic. Potential foreign investors are discouraged by the difficulties that the owners of the expropriated properties are encountering in their effort to get back their properties. The delay calls into question Uganda's professed respect for private property rights as well as its open-door policy in respect of foreign investment Potential investors are entitled to ask how their investments could be regarded as safe when persons who once held substantial stakes in the economy are being frustrated in their attempts to regain possession of properties which were wrongfully taken away from them. 67. Past Efforts at the Disposal of the Properties. The exact number of properties expropriated is not known. The number has been variously estimated to be between 6,000 and 7,000. It is known, however, that about 1,700 owners applied, within the time stipulated by the 1982 Act, for the repossession of their properties. So far, about 300 properties have been returned to the owners. In the same period, joint venture agreements in respect of another 29 properties were concluded between Government and the owners, and about 40 sold to the public. Thus, fewer than 400 properties have been conclusively disposed of thus far. 68. The stable political climate ushered in by the NRM Government, coupled with the restoration of peace and security over most of the country, offers the right opportunity to resolve the issue of the expropriated properties in an equitable, transparent and timely manner. Indeed, the Government has put in place the institutional framework for the divestment of the properties. This is demonstrated by the following: the appointment of a full-time Minister of State for Finance in charge of the DAPCB; the appointment of an Executive Committee made up of persons other than Ministers (with the exception of the Minister of State for Finance in charge of the DAPCB) to, among other things, consider and decide upon divestment cases based on the advice of the Verification Committee; 20 the re-activa4lon of the Verification Committee which Is composed of officials chosen on the basis of their professional or technical skills; the preparation of a divestment program with the assistance of USAID; the strengthening of the DAPCB through the provision of technical assistance financed by USAID and IDA; and the recruitment of a firm of consultants to overhaul the DAPCB's properties records and filing systems. The institutional arrangement described above should contribute to the orderly, equitable and speedy divestment of the properties. 69. SAC-Supported Actions. The Government has taken a number of measures over the past nine months aimed at facilitating the divestment of the properties. 70. The Government has issued s-i important public statement which does three things. First, it underscores the Government's respect for private property rights. Second, it clarifies the legal status of the properties; in particular, it draws a distinction between those properties which are covered by the Expropriated Properties Act of 1982 and those which are not. Third, it sets out the modalities and a timetable for the disposal of the properties. As spelled out in the statement, the modalities for disposal will be as described below. 1. In the case of the properties which are not covered by the Expropriated Properties Act of 1982, owners will be asked to submit to the Executive Secretary of the DAPCB the required documentation as listed below in support of their claim for repossession of their properties. In the case of property belonging to a person who was a Ugandan ciSzen in August 1972, the owner (or his/her heirs) would need to provide only two documents, namely: (i) evidence of ownership in the form of a certified copy of the title deed and (ii) proof of Ugandan citizenship at the time of defacto expropriation. In the case of property belonging to an incorporated body or trust, the owner would have to produce: (i) the certificate of registration; (ii) the company's last annual return before the property fell into the hands of the DAPCB; and (iii) a certified copy of the title deed. Once the relevant documents have been received, the Executive Secretary of the DAPCB will issue a letter, within 10 (ten) working days, to the owner, with a copy to the tenant, confirming that either (a) In his judgment, the documents are in order and therefore the owner is free to repossess his property in accordance with the law. In this case, the Executive Secretary will simultaneously notify the present tenant, with a copy to the owner, that he/she has 90 days to vacate the property unless he/she enters into a new tenancy arrangement with the owner; or (b) In his judgment, the Executive Secretary has grounds for considering that the documents are not in order. In this case, he will notify the applicant of this view and give the reasons for it. If the applicant does not hear from the DAPCB within 15 working days of submitting the required documentation to the Executive Secretary of the DAPCB, or if he disagrees with the DAPCB decision, the applicant may pursue his claim in accordance with existing legislation. 72. In order to ensure a smooth transition, owners would be asked to serve notice of repossession on the occupants. During the notice period of 90 days, occupants would pay rent at the current rate to the owners, failing which they would be subject to legal action in accordance with existing legislation. The Government would expect owners to negotiate amicably with the occupals in the first place, with the goal of reaching a mutually agreeable determination on the future occupancy or use of these properties, but, failing that, ;he owners are free to seek recourse through the legal system on the basis of existing legislation. 21 73. In the case of residential and office accommodation now used by the Government, the same procedure will apply except that, in the interest of avoiding disruption, the Government will seek an extended notice period of up to two years to enable it to make alternative arrangements. During this period the Government will pay rent which is to be freely negotiated between the Government and the owner; if negotiations fail, the owner shall have recourse to the courts for redress. 74. The properties which are vested in the Government by law will be disposed of in accordance with the Expropriated Properties Act of 1982; that is, they will be returned to the former owners unless a valid claim for repossession has not been filed or the Government wishes to enter into a joint venture arrangement. In this connection, Government reiterates its commitment to reduce its participation in commercial activities through divestiture of state-owned enterprise based on criteria agreed with IDA in the context of the Enterprise Development Project; and reafi is that joint ventures will only be sought for Custodian Board properties in accordance with these criteria. In cases where the property is not repossessed by the former owner, the Government will pay reasonable compensation. 75. Another recent action taken by the Government which will speed up divestment of the properties is the compilation of the list of properties for which applications for repossession have been filed with the DAPCB, as well as those for which no applications are pending. The properties for which repossession applications are pending have been classified into two categories, namely, those which are covered by the Expropriated Properties Act of 1982 and those which are not. The list of properties, showing the two categories, has been submitted for publication in the Official Gazette and is also available at the DAPCB. The list of DAPCB properties currently in use as government residential and office accommodation will also be published in the Gazette. For properties in the noncitizen category, the Government will also publish in the Official Gazette a list of those properties for which the Government may intend to seek a joint venture; such a list will conform with undstandings reached with IDA in the context of the Enterprise Development Project. 76. The other important action taken by the Government was to put in place the administrative arrangements at the DAPCB for receiving and responding to evidence of ownership and citizenship in respect of properties which are not covered by the Expropriated Properties Act. 77. In spite of the recent actions, the problem of the Custodian Board properties is far from solved; a large number of properties remains to be disposed of. In view of this, thefollowing Wil be a condiea of second ownche release: (a) the rarn of aU properies covered by the Exprpriated Prperles Act of 1982, provided tat vald appicaions for repossession have been fled wie the DAPCB and t such properties are not included o a Jnal Nst f respect of which Me Government has, In conformity with the provisions of the 1982 Ac4r detenntaed to conclude a joint ventr arnagement and (b) condnued progress, sadsfactory to IDA, In responding to submissions of evidence qf ownership and Ugandan cifkenship at tAe thme such property was pleced under DAPCB control In respect ofproperies which are not covered by de Expropfited Psepemaies Act qf 1982. 78. The above strategy for resolving the DAPCB issue is based on the observation that the return of properties to the owners is the least difficult way of disposing of the properties. This is because repossession does not raise any issues of valuation, sale, finance, or compensation. Moreover, repossession will be the predominant mode of divestment of the properties, based on the fact that, according to 2e law, as interpreted by the courts, an important class of properties were never legally expropriated. The vast majority of Custodian Board properties are thought to fall into 3ne or other category of properties that were not lawfully expropriated. This would mean that the 22 properties in question would, in the first instance, be available for repossession, not sale. Sales would only take place as a matter of last resort where the property is not claimed by the former owner or where the owner would rather have compensation. B. Public Sector Management 79. The political turmoil during the 1970s and the first half of the 1980s took its toll on the public sector in Uganda. From lkong one of the very best in Africa, the Ugandan civil service virtually collapsed and its capacity to carry out the normal functions of government, including revenue collection and the delivery of essential economic and social services, was drastically curtailed. The proposed credit will tackle these issues through components covering tax administration, public expenditure rationalization, and civil service reform. Tax Reform 80. Background. Uganda's domestic revenue effort is among the lowest in the world, averaging about 7.2 percent of GDP over FY88-91. In 1990/91, total domestic revenues could only finance about 50 percent of total expenditures. The Government's inability to mobilize domestic resources has contributed to large fiscal deficits which in turn have been partly responsible for the high rates of inflation experienced in recent years. 81. The underdeveloped tax system exhibits many of the same characteristics found in less-developed economies.9 First, there is excessive reliance on trade taxes, which account for over one-third of total revenues. It is estimated that only about 30 percent of potential customs duty revenues are collected and the system is characterized by widespread leakages. Documentary fraud through deliberate misrepresentation of the nature of goods, under-invoicing to reduce the assessed tax liability, and the Government's inability to police the borders with neighboring countries adequately are widely identified as major problems in the administration of Ugandan customs laws. The absence of adequate physical facilities and offices at various border points and the acute shortage of equipment compound the problems caused by poorly paid, under-trained, and poorly motivated customs officials. Second, Uganda has an extremely narrow tax base. Currently, over 95 percent of the excise duty and 80 percent of the sales tax revenues are collected from the domestic production of three items: beer, cigarettes, and soft drinks. While the principal reason for this is the low level of domestic production in the manufacturing sector, it is nevertheless true that a significant proportion of potential revenue is not collected because of weaknesses in tax administration. Third, there is the widespread prevalence of exemptions. On the direct tax front, Uganda has one of the highest thresholds over which individual income tax rates apply. It is now set at U Sh 480,000 per annum, or about six times GDP per capita. This automatically exempts well over 90 percent of the population from paying personal income taxes. In comparison, this threshold is less than twice GDP per capita in Zambia and Togo. Furthermore, agriculture, which accounts for about 70 percent of GDP, is excluded from any form of direct taxation. On the indirect tax front, government imports are exempt from import duty and sales tax while army personnel receive 16 categories of goods duty-free, causing a huge loss of potential revenue to the exchequer, not to mention abuse of exemptions. All of these problems are compounded by an extremely weak system of tax administration which is characterized by inadequate systems and weak data bases, a lack of experienced staff, low level of technical expertise, and pervasive corruption. 82. Past Adjustment Efforts. Through the 1990/91 budget, the Government, supported by the Second Economic Recovery Credit, undertook concerted action to broaden the tax base and * Se UGAND: An Agendafor DaNt Ierwaased, UNDP-Wodd Bank Trade Expansion Prgran, Country Report 6, May 1990. 23 rationalize the tax and tariff system. Until recently, the system of indirect taxation was highly differentiated, was difficult to administer, and created distortions in resource allocation. There existed a multiplicity of sales and excise tax rates. The Government has greatly simplified the system by reducing the number of customs duty rates to five; the number of sales tax rates to four; and excise duty rates to two. The sales tax now applies to all locally produced and imported goods, while the excise duty applies only to alcoholic beverages, soft drinks, cigarettes, and soap. Imported goods are also subject to a surtax, which is similar to the excise on locally produced goods. 83. SAC-Supported Reform Program. Having significantly revised and simplified the existing structure of indirect taxation, the Government now intends to approach tax reform mainly by improving tax administration. 84. There is a consensus that the problems which plague the Ugandan system of tax administration are the very ones which afflict its entire civil service: most of the problems stem from ineffective management, poorly defined goals and objectives, lack of accountability, low wages, and the absence of a system of incentives which rewards the bright and hard-working while penalizing the non-performers. While these problems could be addressed within the context of civil service reform, the Government realizes that such reform would take several years to implement effectively. The revenue problem is extremely critical, calling for urgent and immediate action. For this reason, the Government has decided to establish an organization, outside of the civil service, with complete authority over hiring and firing, internal priorities and expenditures, and compensation which will be closely tied to performance. 85. Accordingly, in the 1990/91 budget, the Government announced its intention to establish an independent revenue authority; this idea was subsequently endorsed by an IMF mission on tax administration.10 The Government followed up by sending a mission to Ghana to learn from the remarkable success achieved there by the National Revenue Secretariat (NRS). To benefit further from the Ghana experience, the Bank's Pre-appraisal Mission included the Chief Director of the NRS as a consultant. In addition, a team of consultants, funded by ODA(UK), prepared a comprehensive report which details the various steps necessary to operationalize the new authority" A team of Ghanaian consultants, funded by the UNDP, is presently assisting the Government in setting up the Uganda Revenue Authority. 86. The SAC, together with the Economic and Financial Management Project, will further support the Governments efforts in the establishment of the Uganda Revenue Authority (URA) which will be charged with the responsibility for the administration of taxation and customs, including assessment or verification of liability, collection of revenue, and accounting for the revenue to the Government. The Author;iy will not be responsible for determining fiscal policy. The Minister of Finance will continue to set fiscal policy, including which taxes should be levied, the tax rates, thresholds and rules on exemptions. However, the URA would contribute to policy formulation, being the agency most closely involved in tax collection, and would therefore have a research and monitoring capacity. 87. The Uganda Revenue Authority will be an executive agency responsible for its own internal management and performance. It will be able to recruit, promote, and discipline its own staff; set salaries and conditions of employment; and introduce management and control systems. DO, Uganda: PosboWdefor Tar R4foun, Octobe 30, 1990. * Planningfor a BewnuedAosyfr Uganda, Dmft Ropon, Marb 1991. 24 The URA will have to justify its proposed spending and bid for its annual expenditure requirements as part of the normal budgeting round for ministries and pirastatal bodies. To assist the cash flow, the URA will be able to retain, within its authorized budget, sums of money from the revenue it collects. It will, however, be required to submit monthly reports to the Ministry of Finance on revenues collected and, at least in the early years, reports on actual expenditures relative to budget. Each department within the URA will bid for its annual budget as part of the annual planning process, with the Heads of Department being responsible for allocating part of the budget to sections and/or remote offices. The URA, like other agencies of the Government, will be subject to scrutiny by the Auditor General, the Public Accounts Committee, and the Inspector General of Government. All legal requirements for the establishment of the URA have been completed and members of the Board of Directors appointed. Government is presently in the process of identifying and recruiting a Chief Executive and the various Department Heads. Compledon of all transidonal arrangements between the exLsdng revenue deparonents and the new Uganda Revenue Autsty and full tranfer of responsibility for revenue collecon to Ohe Uganda Revenue Audeorfy will be a condition for second tranche release. 88. In addition to the above mentioned administrative reforms, the Government has frozen the threshold for personal income tax for the 1991/92 budget at U Sh 480,000 per annum. Moreover, the Government has reviewed its procedures regarding the granting of tax exemptions and has reduced these to a minimum for the coming fiscal year. Public Expenditure 89. Background. The destruction and neglect of critical economic and social infrastructure during the 1970s has meant that there are vital bottlenecks to the supply response; equally important, the quality and access to basic social services have deteriorated dramatically for most Ugandans. A review of the Government's expenditure programs in key sectors reveals that the Government is by and large unable to address these problems and provide the basic preconditions for growth and development. In particular, severe underfunding and weak implementation capacity impede the effectiveness of critical programs: road rehabilitation and maintenance, agricultural research and extension, power transmission and distribution, primary health care, primary and secondary education, and water supply in rural areas and small towns. The problems are both financial and institutional. Overall public expenditures in Uganda are low (13.9 percent of GDP over FY88-91) and are constrained by the very low revenue effort. Even within this constraint, there are dominant requirements for defense expenditures (3 percent of GDP). Moreover, whatever resources are left are dispersed over a large number of ministries/self-accounting agencies, as well as a correspondingly overstaffed, poorly paid and ill-equipped civil service which is therefore ineffective in implementing expenditure programs. Even within key economic and social sectors, however, meager resources are being dissipated over a large number of unproductive or ineffective public facilities and services (e.g., state farms in agriculture or large numbers of teacher training colleges) inherited from the past. The prevailing planning and budgeting system reinforces these problems by allocating historical shares of expenditures to sectors and activities. 90. Past Adjustment Efforts. The FY90 budget contained initial steps to address some of the above problems; these were agreed in the context of the second tranche release of IDA's Second Economic Recovery Credit. The key actions included increases in the FY90/91 recurrent budget allocations for health, education and agriculture, as well as agreement with IDA on the investment program, including the ftree-year Rehabilitation and Development Plan (RDP) and the 25 TABLE 2: SHARES OF KEY SECTORS IN TOTAL MNiStERIAL RECURREmT EXPENDI=URE FY90.. PY91 F9 Oumtan Estate OunUM Estimate Agriculture 1.9 3.2 2.7 3.4 Education 11.4 15.2 16.9 14.6 Health 4.2 8.7 6.3 8.2 Works 2.3 3.7 2.1 3.7 Local Govt 1.5 4.6 3.5 8.0 Water 0.4 0.5 0.5 0.6 FY91 development budget. In addition, the Government has embarked on a Budget Reform Program, which provides the basis for initiating a process of expenditure prioritization. 91. SAC-Supported Reform Program. A recently completed Public Expenditure Review has identified key areas of emphasis and de-emphasis for public expenditure policy, and broad areas of budgetary priorities have been discussed and agreed with the Government.12 In this context, the Government intends to channel increased resources to critical programs in key economic and social sectors, while phasing out unproductive activities. To this end, the Government has set targets for critical recurrent programs (primary and secondary education, primary health, water supply, road maintenance, and agricultural research and extension), and these have been translated into increased budgetary allocations for ministries and expenditure categories. The Government has also identified specific areas for savings (e.g., reductions in numbers of teacher training colleges in education, privatization of state farms) and reflected these in reduced budgetary allocations. In addition, the Government has adopted a wage bill that includes a reduction in the size of the civil service and the number of ministries, combined with an increase in wages and salaries. Finally, the Government has adopted a development budget consistent with overall priorities, and these priorities will also be reflected in the four-year Rehabilitation and Development Plan. 92. Table 2 conveys a sense of the efforts that the Government is making to redirect more resources into high-priority programs. For FY92, increased allocations for operations and maintenance expenditures in the key sectors have been accompanied by an overall improvement in the remuneration of civil servants, as evidenced by the 43 percent increase in the wage bill over last year's outturn. The Government has held defence expenditures in nominal terms at last year's level, thus living up to its promise to allow defence expenditure to fall in real terms over the next few years and thereby correct for the recent excesses of the defence establishment. 93. An IDA review of proposals for the allocations for non-wage operations and maintenance expenditures for critical programs, as identified above, and the wage bill in FY92, the FY92 development budget, and the four-year Rehabilitation and Development Plan was carried out at the time of appraisal of the credit and these agreements have been incorporated in the FY92 budget. As a condin for second teache rweae, the Government wi rle aU budgeted allocattens In FY92 for the high-priory recurrnt and development programs in World Bank, Prhatkfor PMvee lsainavwe, Reot No. 9203-UG, Pebruary 12,1991. 26 education, heakh, water supply, roads and agkaflture. In addition, Government will consult with IDA about the size and composition of the RDP at the next roll-over. Among other things, this will ensure that high-priority programs in the social sectors (e.g., primary health and primary education) that are important for poverty alleviation are protected from budgetary cuts. Civil Service Reform 94. Background. The Ugandan public service grew very rapidly during the early 1980s, in parallel with a continuing decline in public revenue. This entailed a rapid fall in real incomes in the civil service, which combined with the political turmoil of the 1970s and early 1980s to cause a collapse of morale and performance of the service. The severely impaired administrative capacity which resulted from this process is widely recognized as a critical constraint on Uganda's development. A recent study of the civil service culminated in the Report of the Public Service Review and Reorganisation Commission (PSRRC), an extensive review of civil service ineffectiveness which has established the policy framework for a far-reaching reform program. 95. The present size of the civil service greatly exceeds Government's capacity for effective management, and extends government responsibility well beyond the needs of the economy. Current and foreseeable public expenditures on both remuneration and operation and maintenance are far below the levels required to motivate and adequately equip civil servants for effective performance. The PSRRC report concluded that the public service is overstaffed by as much as 37 percent. In addition to ghost workers, the excess consists of poor and non- performers, surplus and redundant staff, over-employment of group employees, and other categories whose employment is irregular. The report proposed a drastic reduction in the size of the civil service both through the elimination of these unneeded staff categories, and through the reduction in the number of ministries. This will help produce a streamlined and more rational civil service structure which has the potential for improved performance, and also yield savings that can be used for improved incentives, and operations and maintenance. 96. Remuneration within the Ugandan civil service is characterized by an extremely low level of basic pay, a complex and inequitably distributed array of allowances, and significant nonmonetary benefits (notably housing, car and domestic servants) which may exceed basic pay by a factor of 50 or more for the senior grades who are eligible for these benefits. Employees in the lowest grades receive only basic pay, which amounts to a small fraction of the minimum subsistence requirements. The poor basic pay structures result in widespread absenteeism, moonlighting, and low morale and discipline. 97. Past and Recent Adjustment Efforts. Government has undertaken several actions in the field of civil service reform in the course of the adjustment program so far. The Public Service Performance Improvement Project developed an Establishment Register for the civil service which, when cross-checked with payroll data and ministry staff lists, has been instrumental in eliminating some 20,000 ghost employees from the payroll to date. The next phase is being extended to the Teaching Service and Local Authorities. Attempts have also been made to reduce the number of group employees (temporary workers), most recently in August 1990 when a 50-percent cut was prescribed. The Government's recognition of the need for a comprehensive program of civil service reform resulted in the PSRRC report in September 1990, and a Cabinet White Paper has been prepared confirming the specific PSRRC proposals which the Government endorses. In a paper prepared for the Consultative Group Meeting in Paris in March 1991, the Government made a commitment to the principle of reform in three key areas 27 proposed in the PSRRC report: functional rationalization of ministries, retrenchment, and salary enhancement. Most recently, at the start of the 1991/92 fiscal year, the Government announced a pay award which averages 43 percent in nominal terms and incorporates professional allowances into the salary scale structure. This is a first, albeit modest, step towards the attainment of the Minimum Living Wage target set in the PSRRC Report. The Government also announced the new structure of minist-les, merging many and reducing the total number of ministries to 20. Finally, the Government established an Implementation Committee which produced an Implementation Plan for the main components of the reform program. 98. SAC-Supported Reform Program. Based on the Government's stated intentions to implement an Integrated program of civil service reform based on the main recommendations of the PSRRC, a detailed Implementation Plan has been designed which will guide the pace and priorities of reform, and ensure that reforms are adequately linked to the Government's resources and technical capacity. The plan proposes a phased approach that will make some essential progress in each of the main reform categories in the first year (FY92) and lay the groundwork for two further phases of implementation over the following two years. Further refinements in Improving managerial and technical performance will take longer, extending the overall program to at least four or five years. The Implementation Plan covers the three core areas of the civil service reform program: (a) the functional rationalization of ministries leading to a smaller and more efficient government structure; (b) the displacement and retrenchment of civil service employees in various categories leading to a substantial reduction in the size of the service; and (c) a program of salary reform which will improve the pay of all civil servants, improve incentives for vital categories of employees, and monetize nonmonetary benefits. The Plan details all of the essential policy decisions and actions needed to reach specified annual goals over the three-year period. 99. The implementation of the functional rationalization of ministries will be based on the newly announced structure of 20 ministries. Steps have already been taken to identify and subsequently shed the most obviously duplicative structures which have resulted from the merger of ministries. Following this action will be a phase of in-depth functional reviews over a two- year period that will involve complex, technical work to guide the streamlining of functions, and organizational and managerial structures. Selective action is also planned to hive off certain functions (like the veterinary service or the government printer) to operate on an independent commercial basis, or self-supporting with a high degree of autonomy. In the first phase, the Government will complete the functional reviews in four ministries: Agriculture, Animal Industry and Fisheries; Commerce, Cooperatives and Marketing; Energy, Minerals and Environment Protection; and Works, Transport and Communications. An implementation plan based on these reviews will need to be agreed with IDA. 100. These first four reviews will be followed by further phases of review and reorganization until the whole of the new government structure has been covered. It is very likely that the actual experience of reorganization will create the need for fine-tuning and additional restructuring not anticipated in the Implementation Plan, and that the entire exercise may well take longer than three years. The Implementation Plan provides for review periods at which the previous phase can be evaluated and the plan changed if needed. 101. Theretrenchment of the civil service will be driven in part by the process of functional rationalization described above, and in part by reducing or eliminating various categories of employees across the board. Special work will be needed to have in place a severance program, as well as a redeployment and training program for those effectively 28 performing staff who will be surplus to requirement after the rationalization. The Government believes that financial assistance will be required for the retrenchment program and is exploring various avenues for raising such assistance. The Implementation Plan provides annual targets for civil service reductions over a three-year horizon. The targets will be met by a combination of instruments: displacement of irregularly employed staff, r.,enchment, natural attrition, and continued control over recruitment. 102. The PSRRC report has identified several categories of employees to whom Government has no legal contractual obligation or only limited obligations. These inciude employees past the retirement age; employees who have entered the service irregularly; and a group of employees whose poor performance or dereliction of duty is beyond dispute. These, together with remaining ghost workers and the next phase of reducing group employees, represent the priority categories for retrenchment during the first year of the Implementation Plan (FY92). The Plan contains a timetable and targets for identifying and displacing such employees. 103. Work has also started on designing the compensation and services that will be provided to staff retrenched because they are surplus to requirement. PAPSCA is funding a supply-demand analysis to identify options in the private sector for civil servants and to guide transitional assistance. 104. Natural attrition will also contribute to attainment of service reduction targets. To this end, proposals are being produced for improved control on recruitment of both established staff and group employees, and controls over extension of service beyond retirement dates. 105. Salary enhancement is a key component of civil service reform in Uganda. The Government has therefore endorsed the PSRRC proposal to improve the transparency, equity and efficiency of the incentive structure, including the rationalization of the system of allowances and monetization of benefits. The overall program of gradual salary enhancement has to be consistent with the constraints of realistic expenditure ceilings. Careful design work is required to establish a program that is realistic in terms of available resources, improves the incentives of key managerial and technical staff upon whom civil service performance depends, and which also achieves basic goals of fairness and consistency, providing a decent living wage for all public servants. Special technical assistance has been provided to establish a payroll modelling system to assist Government identify the scope and options for salary adjustment within different resource scenarios. Technical assistance will also be provided to help the Government clarify options for monetization of benefits. Housing benefits present particular difficulties, given the importance of this benefit component in the overall compensation package of more senior categories of staff, and in view of the inadequacies of the housing market in Uganda and the absence of appropriate housing finance institutions. 106. The Implementation Plan includes details of a three-year program for salary enhancement, including a timetable for rationalization of allowances and an outline plan for monetization of benefits consistent with realistic projections for public expenditure and progress with the retrenchment program. The Government will agree with IDA on the targets for the next phase of salary enhancements and the production of proposals for the monetization of benefits. 107. As a condition for second banche ealese, the Govenment will achieve the flt- year targelsforfunctioal sview of miOststes, civi service staff reductions, and pay reforn, namely: (a) conpleton ofthe functional eviews and the production ofan implementation plan 29 for reorgankzatlon In four middtries (Agriculture, Animal Industry and Fishedes; Commerce, Cooperatives and Marketing; Ener8y, Minerals and Environment Protection; and Works, Transpol and Communications); (b) idenification and displacement of employees according to the tagets set in the Implementation Plan; and (c) agreement with IDA on the taptets for the next phase of salary enhancements and the production of proposals for the moneizadtion of benefb. 108. The ultimate goal of civil service reform is improvement in the performance and productivity of the service. This requires special measures to strengthen management development and selection, personnel management, key management systems and processes, and technical training. Improvements in resource management are therefore an integral component of the civil service reform program. Government is in the processes of defining, on the basis of the PSRRC report, and with further technical assistance, a program in support of enhanced resource management in the civil service, including improvements in the personnel/payroll database and monitoring system, management and staff development, improvements in job design, inspection and management, more effective assessment of training needs for key cadres, the design of effective in-service training programs, and, through the companion Economic and Financial Management Project, for development of improved financial management systems and processes. 109. The Ministry of Public Service (MPS) has been given overall responsibility for the implementation of the civil service reform program. The Implementation Committee established to guide this process consists of key MPS Commissioners responsible for different aspects of the reform program, and representatives from the Ministry of Finance (MOP) and the Ministry of Planning and Economic Development (MPED). The committee is assisted by a secretariat. The Government has recognized that there is little experience within MPS or elsewhere in the country in the technical aspects of civil service reform, and that specialized short-term technical assistance is needed. This assistance is being provided by a joint consulting team funded by ODA(UK) and IDA that is working with the Implementation Committee and its Secretariat. There is also the need to build up the long-term capacity of MPS in critical functions such as payroll modelling, systems development, and administration; establishment management; training and redeployment; functional analysis, job design, and organizational restructuring; the management of the process of change; the des;6n and management of severance schemes and outplacement methods. UNDP has approved a World Bank executed preparatory project to strengthen the overall management of the reform program within MPS and to provide supplementary technical support. The proposed IDA Economic and Financial Management Project provides an additional capacity-building component for MPS to be designed and funded jointly by IDA and ODA(UK); and a longer-term IDA capacity-building project will be in preparation soon and will sustain this effort. Careful donor coordination has been established to ensure that these inputs dovetail and reinforce one another. Part M: Features of the Proposed Credit Credit Amount, Tranching, Coordination and Cofinancing 110. The Borrower is the Republic of Uganda and the credit amount is US$125 million. This amount is necessary to maintain the momentum of the Economic Recovery Programme and, along with other donor support, to help close the financing gap. The proposed IDA credit would be equivalent to 21 percent of the imports of goods required in 1991/92. It 30 would be disbursed in two tranches; the first tranche of US$65 million will be available upon credit effectiveness, expected in December 1991. Disbursement of the second tranche of US$60 million, expected in July 1992, would be contingent on a satisfactory review by IDA of the implementation of the adjustment program and the fulfillment of the second tranche conditions listed below (paragraph 121). 111. The proposed SAC has been prepared in close collaboration with the IMF and other donors. IMF staff working on Uganda have been fully and regularly consulted; the leawr of the Fund's September 1990 tax administration mission participated in the SAC Pre-Appraisal Mission. A special briefing on the SAC was given at the Consultative Group Meeting in Paris in March 1991. ODA(UK) provided a staff member and a consultant who participated in the Identification, Pre-Appraisal, and Appraisal Missions. ODA(UK) also funded consultants who provided technical assistance on the detailed design of the Uganda Revenue Authority and the Investment Authority, as well as the civil service reform component of the SAC. USAID has been providing technical assistance to the Custodian Board and will also provide support to the Investment Authority for three years. The EEC and Switzerland sent representatives to participate in the Identification and Pre-Appraisal Missions. Other donors, including UNDP, USAID, DANIDA and UNICEF, have been extensively and regularly briefed and consulted on the objectives and design of the SAC. ODA(UK), USAID, EEC and Switzerland sent representatives to the SAC negotiations. 112. The adjustment effort in Uganda has been supported by several bilateral and multilateral donors. ERC II was cofinanced by Canada, Germany, Norway, Sweden, and Switzerland. DANIDA, the EEC, Japan, the United Kingdom, and USAID are also providing balance of payments support for the Economic Recovery Programme. A number of donors, including ODA(UK), USAID, EEC, the African Development Bank, the Netherlands and Switzerland have indicated interest in providing cofinancing or parallel financing for the SAC. Uganda's second-year ESAF arrangement was approved by the IMF Board on September 10, 1990 and the mid-term review was concluded by the Fund's Board in April 1991. A third-year ESAF arrangement was negotiated with the Government in June and August 1991, and will be discussed by the Fund's Board on November 8, 1991. A Consultative Group Meeting for Uganda was held in Paris from March 21 to 22, 1991. Disbursement and Procurement 113. The credit will finance 100 percent of the foreign exchange costs (c.i.f. Kampala) of Uganda's general imports, excepting those on IDA's negative list (see Annex III) and the Government's negative list which has been agreed with IDA. It is expected that a large proportion of the credit would be used for raw materials, intermediate goods and spare parts, as well as machinery and equipment for agricultural and industrial enterprises. Consumer goods, except for those on the negative lists, would also be eligible. Financing of petroleum products would be limited to US$25 million, or 20 percent of the credit proceeds. Imports procured under contracts of less than US$5,000 would not be financed under the credit, nor would items financed by other sources. The counterpart funds generated by the credit would go for general budget support. Retroactive financing of up to US$10 million would be provided to cover eligible expenditures made prior to the signing of the proposed credit but after August 1, 1991. This provision will assist the Government to maintain an adequate flow of recurrent imports in early 1992. 31 114. To facilitate disbursements, the Government would establish a US Dollar Special Account in a commercial bank through the Bank of Uganda on terms and conditions satisfactory to IDA. To show its support of the new foreign exchange system, IDA will, upon effectiveness of the credit, deposit the entire first tranche, except what will be required for the first tranche for petroleum (US$20 million) and retroactive financing (up to US$10 million) in the Special Account. The Government will furnish to IDA documents and other evidence showing that payments have been made exclusively for eligible expenditures; however, payments for contracts under US$250,000 would be submitted on the basis of Statements of Expenditure (SOE). The SOE supportive documents such as invoices, evidence of shipment and payment will be retained by the Bank of Uganda for random review by the Bank staff and/or by the auditor. The Bank of Uganda would also be responsible for the coordination and collection of relevant documentation from the commercial banks and the foreign exchange bureaus, as well as the preparation and submission of withdrawal applications and supporting documents to IDA under the Special Account. The Special Account would be audited periodically by an independent auditor. 115. The funds provided by IDA, together with those from other donors participating in the scheme, will form a "pool" of resources that will be sold to the commercial banks and eventually also to selected, financially sound, foreign exchange bureaus. These sales will take place at least every two weeks, with the amount sold depending on the amount committed by donors to the pool. In turn, the commercial banks and foreign exchange bureaus will make the resources available to their clients for eligible imports. They will be responsible for gathering the required documentation on these imports and forwarding them to the Bank of Uganda (they are currently subject to the same documentation requirements). While the exchange rate will be market-determined, a small spread would arise between the exchange rate at which these institutions acquire the foreign exchange from the pool and that at which they sell the foreign exchange to their clients, reflecting the intermediary institution's transaction costs, including those associated with the foreign exchange controls and regulations specified by the Bank of Uganda. Technical assistance would be provided to assist the Bank of Uganda administer the system. Import support from donors not participating in the scheme would be allocated by the Bank of Uganda at the market rate. 116. Procurement regulations for the public sector are presently in the process of being reformed. It is expected that these will be in place in the near future. Discussions with the Chamber of Commerce, the Bank of Uganda, and a few private sector importers indicated that the private sector does follow established commercial practices and, whenever possible, follows competitive bidding or comparative assessment of cost. However, our review of the recent Second Economic Recovery Credit (with an ICB limit of US$2 million) indicated that no ICB procurement was carried out either by the public or private sector. We have, therefore, reduced the ICB limit under the SAC to US$1 million for both sectors. For amounts between US$250,000 and US$1 million, the public sector procurement will seek at least three quotations from eligible suppliers with the exception of proprietary equipment, spare parts and standardized equipment where compatibility with existing equipment is required. Private sector procurement, for amounts below US$1 million, however, will follow established commercial practices and, whenever possible, seek quotations from eligible suppliers in at least two countries, exceptions being proprietary equipment, spare parts and standardized equipment for reasons of compatibility. All imports over US$10,000 will be subject to pre-shipment ihspection, except for price verification which is not permissible for Bank-financed ICB procurement. The pre-shipment inspection will be carried out by the government appointed agency, which is currently the Soci6t6 Gdndrale de Surveillance S.A. 32 117. Petroleum products are currently procured by the six oil companies operating in Uganda under service and supply agreements with the parent enterprises in accordance with a pricing formula agreed with the Government which does not result in a least-cost solution since certain parameters in the formula are not well-defined. Given the country's landlocked status, lack of its own storage facilities at Mombasa and the shortage of foreign exchange, the Government has continued this methodology so as not to disrupt the supply of oil and precipitate a crisis. The Government now wishes to move towards competitive bidding in the procurement of petroleum on the basis of c.i.f Mombasa, with participation by all the oil companies that have storage and handling facilities in Mombasa, with subsequent transit facilities through Kenya and receiving facilities in Kampala. Currently, all six major oil companies operating in Uganda fall in this category. In order to achieve this objective, the Government will employ an expert acceptable to IDA, experienced in international oil trading and marketing to assist with the establishment of the framework for introducing such competitive bidding and monitoring its implementation, including establishing a reasonable unit cost for transit through Kenya. IDA will assist the Government to achieve this objective by providing sample bidding documents for competitive bidding on the basis of c.i.f. Mombasa. Management and Monitoring of the Program 118. The Ministry of Finance will have responsibility for the overall management of the program, although the implementation of individual components will be carried out by the relevant ministries. The Ministry of Finance will be primarily responsible for implementation of the tax, Custodian Board properties, and public expenditure components of the SAC; the Ministry of Planning and Economic Development will also be involved in the public expenditure component. The Ministry of Planning and Economic Development will have primary responsibility for investment promotion and the Investment Authority, while the Ministry of Finance and the Ministry of Commerce, Cooperatives and Marketing will oversee the trade reform component. The responsibility for civil service reform belongs to the Ministry of Public Service. 119. A government-appointed SAC Coordinating Group, chaired by the Permanent Secretary, Ministry of Planning and Economic Development, and representing the key ministries involved in the reform program, which has been working closely with the SAC team on the design of the credit, will coordinate the program's implementation. The Government has appointed a SAC Coordinator, with the responsibility for monitoring the progress of the reform program and alerting authorities to deviations from program targets. The Government will submit quarterly progress reports to IDA, one month after the end of each three-month period, starting in January 1992 for the quarter ending December 1991, to monitor progress and identify obstacles to implementation. 120. The implementation capacity of the Government is weak and therefore close monitoring of the program by Bank staff and technical assistance to the Government will be essential. Monitoring will involve frequent supervision missions by headquarters staff, often in combination with other mission activities. Bank staff will coordinate with IMF staff in monitoring key macroeconomic indicators. Staff at the Resident Mission in Kampala will work closely with all the parties involved in implementing the program, keep headquarters informed of all developments and promote the objectives of SAC through dialogue and follow-up action. Th. Government has sought technical assistance for implementing the program from IDA and other donors. IDA is making available technical assistance for the implementation of various aspects of the program through the Economic and Financial Management Project. This project 33 will assist in the Implementation of the trade reform, Uganda Revenue Authority, public expenditure, and civil service reform components of the SAC, as well as the overall financial and economic management in the core economic ministries and the Bank of Uganda. Technical assistance is also being provided through the UNDP and ODA(UK). Conditions for Second Tranche Release 121. The specific actions listed below are proposed as conditions for second tranche release. Tade Reforn 1. Elimination of the OGL/SIP import systems. Investment Premotion 2. Repeal of the Industrial Licensing Act (1969). Custodian Board 3. (a) Return of all properties covered by the Expropriated Properties Act of 1982 provided that valid applications for repossession have been filed with the DAPCB and that such properties are not included in a final list in respect of which the Government has, in conformity with the provisions of the 1982 Act, determined to conclude joint venture arrangements; and (b) Continued progress, satisfactory to IDA, in responding to submissions of evidence of ownership and Ugandan citizenship at the time such property was placed under DAPCB control in respect of properties which are not covered by the Expropriated Properties Act of 1982. Tax Refonm 4. Completion of all transitional arrangements between the existing departments and the Ugznda Revenue Authority and transfer of all responsibility for revenue collection to the Uganda Revenue Authority. Pulk Expedis 5. Release of all budgeted allocations in FY92 for the high-priority recurrent and development programs in education, health, water supply, roads and agriculture. Civil Service kejbrn 6. Achievement of the first-year targets for ministerial reviews, civil service staff reductions, and pay reform. 34 Part IV: Benefits and Risks Economic Impact 122. This operation, following a number of other successful adjustment operations, seeks to consolidate the gains in the restoration of macroeconomic stability, increase domestic resource mobilization, improve the efficiency of government operations and the climate for private investment (both Ugandan and foreign), and promote private sector growth. The program is expected to enhance the capacity of the Government to finance and implement its development programs. The establishment of the Uganda Revenue Authority will not only increase government revenues, but also make taxation an effective tool for macroeconomic management. Reform of the civil service, to reduce its size and increase and rationalize compensation, will improve coordination and management within the service and raise the morale and performance of public servants. The public expenditure reforms proposed by this operation will maintain existing capital investments in infrastructure and enhance human resource development. The achievement of the objectives of the program should lead to long-run growth of income and employment, and to the reduction of poverty. 123. Private investment is critical to the achievement of sustained economic growth and the diversification of production and exports. Private investment, however, remains low at 4-5 percent of GDP. Flows of foreign direct investment are negligible; the political events and economic policies of the past continue to cloud the investment climate. The changes proposed in the SAC will help improve the investment climate, improve policies and regulations, and facilitate private investment. The resolution of the Custodian Board properties issue, through a return of the properties to the owners and payment of compensation where applicable, will be a strong signal to local and foreign investors that the Government respects private property rights as well as the Constitution of the country. Furthermore, a return of the properties to the private sector, with secure titles, will ensure that they will be rehabilitated, better maintained and used more productively, hence giving a boost to economic production. Uganda has significant investment opportunities, for instance, in agriculture, agro-processing and tourism. The improvement in the investment climate, the changes in policies and regulations, the provision of fiscal incentives for private nvestment, and the establishment of the Investment Authority to promote and facilitate investments, will all help to stimulate private investment. With political stability and the measures supported by SAC, private investment should rise to about 10 percent of GDP by 1995. 124. Uganda's Government revenue effort is very low by any standard; in 1990/91, revenues rose only to about 8 percent of GDP. Several years of socio-political turmoil and economic regression have created a substantial need for public investments in physical and social infrastructure, and for expenditures to rehabilitate and maintain existing public capital stock. In spite of increasing inflows of foreign assistance in recent years, public investment expenditures continue to remain low. It is therefore imperative for the rate of domestic res,urce mobilization by the Government to be increased so that it can provide an adequate infrastructure and other government services to support economic growth. The low level of revenues is due to the weak capacity for collecting taxes rather than the tax rates. There is no alternative to strengthening the revenue effort since, without a consistent effort at collection, manipulating tax rates will not provide any predictable tax yields. The establishment of the Uganda Revenue Authority is expected to improve tax collection and raise the revenue-to-GDP ratio to about 12.5 percent by 1993/94. This will enable the Government to increase expenditures on human resource development, expand and maintain its stock of physical capital investments, provide adequate 35 recurrent expenditures and contain fiscal deficits. Government will be in a position to use tax rates as a tool for macroeconomic management. 125. The result of the proposed civil service reform will be a leaner, better managed and compensated, and more motivated and effective civil service. The reduction in the number of ministries will improve the overall coordination within the Government. The realignment of staff to match job requirements more closely to skills, and :L introduction of better training and manpower planning within the public service will result in productivity improvements. The reduction in the numerical strength of the civil service, and the restructuring and reduction of ministries and other self-accounting units are critical to the sustainability of the improvements in compensation. Budget constraints will not permit the Government to maintain the current level of employment in the civil service while improving compensation; only increases in compensation accompanied by significant reductions in staffing levels, savings in overhead expenditures and increases in productivity will be consistent with the long-run budget constraints. The SAC- supported civil service reform will enhance the capacity of the Government to plan and implement development programs and lead to greater efficiency in the delivery of government services. These will improve the prospects for economic growth. Scial Impact 126. The reform of the civil service and the reduction in staff will adversely affect mainly low-level civil servants who will be displaced. Their prospects for obtaining formal employment in the private sector are not bright, especially in the short run. Assistance will be necessary to enable them to enter ito self-employment ctivities. The Government is preparing a redundancy scheme, under the :,uspices of its Program for the Alleviation of Poverty and the Social Costs of Adjustment (PAPSCA); it intends to start laying off workers only after the redundancy scheme is in place. 127. Civil service retrenchment aside, on balance the ERP is improving the overall economic well-being of Ugandans by reversing the damage wrought by 15 years of mismanagement and civil wars. Peasant farmers will reap the benefits of the freeing of producer prices or, in the case of coffee, improved producer pricing. At the same time, employment opportunities would expand in reflection of increased industrial capacity utilization and new investment. The process of economic rejuvenation would be reinforced by increased budgetary allocations for social services such as primary health care, primary and secondary education, and sanitation and water supply. With an improved economic climate and adequate flows of external assistance, real per capita consumption is expected to grow by about 1-2 percent per annum over the next two or three years. Still, the Government is addressing the special needs of groups which have been the victims of war or AIDS. These include widows, orphans, the disabled, the displaced and the sick. PAPSCA is the main vehicle for addressing the needs of these disadvantaged groups. Recognizing its own limited implementation capacity, the Government decided to make the maximum use of the expertise that local communities and non-governmental organizations (NGOs) can bring to bear on the delivery of services and the creation of assets funded under PAPSCA. The implementation of PAPSCA got off to a slow start but is now firmly under way, with benefits for persons in war-ravaged areas (where schools are being rebuilt and re-supplied) and areas with the worst incidence of AIDS. The impact of the adjustment program oL the poor is being monitored through the Social Dimensions of Adjustment (SDA) initiative. 36 Risks 128. The operation faces political and Implementation risks. The political risks are greatest in the proposals for the reform of the civil service and the return of the Custodian Board properties. Civil service reform entails reductions in the work force and a cut-back in the number of political appointees to ministerial positions. Reducing government employment is always politically difficult in situations of high unemployment and underemployment. It appears that the President uses ministerial appointments as an instrument for sustaining unity among the diverse population groups in Uganda. The Custodian Board properties issue is highly political and the return of the properties will undoubtedly run up against some powerful vested interests. The Government is anxious to avoid social, political and economic disruption arising from the displacement of current occupants. Nevertheless, to minimize this risk, the Government will have to exercise leadership and convince the various parties of the necessity for moving ahead on this matter in an amicable and speedy manner. The chronically weak administrative capability of the Government is a serious risk t e operation. For instance, the proposed Uganda Revenue Authority seeks to move revenue col :ion from inefficient and corruption-prone to performance-oriented and honest institutions. Sim arly, the motivation for the establishment of the Investment Authority is to shift the role of the Government from investment regulation to promotion. This will require the Investment Authority to be an independent, performance-oriented institution, freed from bureaucratic inertia. To create the new culture that will make these institutions succeed will require strong determination and toughness on the part of the Government. The civil service reform is a difficult undertaking that will tax the weak capacity of the Government. It can run up against difficult organizational and political obstacles at any point during the process. There is the temptation in Government to put emphasis on raising civil service compensation before reducing staffing and reorganizing and rationalizing responsibilities. Appropriate sequencing of the reorganization measures and compensation increases is critical to the long-run success of the reforms. A failure to achieve significant staff reductions and/or excessively generous, lumpy, front-loaded and inappropriately paced compensation packages will eventually undermine budget discipline and jeopardize the progress that has been made in reducing inflationary pressures. 130. The political risks of civil service reform can be reduced by providing assistance to retrenched civil servants, for example under the auspices of the PAPSCA program. Furthermore, increases in private sector investment as a result of the improving investment climate will expand employment opportunities which can absorb some displaced civil servants. The implementation risks are being reduced by free-standing technical assistance provided by IDA and other donors, and assistance in the context of other IDA lending operations. An important countervailing factor to the overall risk of the operation is the good relationship that the Bank enjoys with the Government and the open atmosphere in which the dialogue with the authorities is conducted. 37 Part V: Recommendation 131. 1 am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. I recommend that the Executive Directors approve the proposed IDA ciedit. Lewis Preston President Washington, D.C. November 1, 1991 Attachments 38 Annex I Samasea ............................................ . OFFICE OF THE IIINISIER OF FINANCE Tax"smat . ..............I......................... .......... P.O. BOX 8147. 0 "w 4e2081eOSSOM ON M/MF/16 KAMPALA, UGANDA. October 25, 1991 LETTER OF DEVELOPMENT POLICY Mr. Lewis Preston President International Development Association 1818 H Street, N.W. Washington, D.C., 20433 U.S.A. Dear Mr. Preston: 1. Since launch...g its Economic Recovery Programme (ERP) in May 1987, 'the Government of Uganda has been undertaking stabilisation and structural reforms of the economy. As you are aware, the programme has been supported by two Economic Recovery Credits (ERC I and ERC II) from the International Development Association (IDA), two arrangements under the Structural Adjustment Facility (SAF) and two under the Enhanced Structural Adjustment Facility (ESAF) from the International Monetary Fund (IMF), and by assistance from other multilateral and bilateral donors. Much progress has been made over the last four years and we are taking measures to broaden and deepen the reforms further. This has been outlined in the Policy Framework Paper (1991/92-1993/94) which will be discussed by the Committee of the Whole of the Executive Directors of IDA on November 5, 1991. By this letter, the Government of Uganda requests from IDA continued support of these initiatives through a Structural Adjustment Credit (SAC). To this end, I would like to recapitulate the objectives of the ERP, the actions taken to date, and the actions planned for the next phase, with emphasis on those that will be monitorable under this Credit. Progress Under the Economic Recovery Programme 2. The principal objectives of the Economic -Recovery Programme are (i) to bring about internal financial stability and reduce the rate of inflation; (ii) to promote economic growth; and (iii) to reduce the imbalances in the external accounts. To meet these objectives, the Government has, over the past few years, carried out a wide range of reforms which are outlined below. 3. In terms of economic activity, real GDP growth averaged over 6 percent between 1988 and 1990. Much of this growth was accounted for by a recovery of the agricultural sector and the utilisation of excess capacity in the industrial sector; agricultural production grew at an average rate of about 5 percent, while manufacturing grew at an average rate of over 15 percent. This recovery was made possible by improvements in security, infrastructure, producer incentives, and the availability of foreign exchange. 4. An encouraging feature of the manufacturing sector has been the large number of new establishments which started production in the last three years. The construction sector grew at about 16 percent per annum, while the transport and communication sector grew at 9 percent, reflecting the rehabiliation activities. However, some problems were experienced in the supply of utilities as a result of delays in the rehabilitation of these facilities. 5. While the repair of essential basic infrastructure, including roads, power and water, has contributed to the recovery of economic activity, the Government has also taken other steps to stimulate production and exports. The economy has been progressively liberalised through the 100- percent export retention scheme for all non-coffee export proceeds, the licensing in July 1990 of foreign exchange bureaus where foreign exchange is freely traded, the dismantling of the monopoly of the Coffee Marketing Board by allowing free internal trade in coffee and licensing four cooperative unions to expert, and simplifying export procedures. The monopoly of the Produce Marketing Board in the trade of food crops and of the Lint Marketing Board in the domestic trade of cotton has been abolished, while the monopoly of the Lint Marketing Board in cotton export is under review. The licensing of non-coffee exports has been simplified with the introduction of the system of export certificates which became operational on September 3, 1990. Coffee and cotton producer prices have been periodically revised, and further adjustments will be made as needed. Moreover, the Government has dismantled all price controls for essential commodities, including soap, sugar, beer, and soft drinks. 6. The introduction of the Open General License (OGL) system in 1987 has made foreign exchange available to key manufacturing firms on a regular basis. Since then, more firms have been included on the OGL list and, in addition, the Bank of Uganda (BOU) has Jso provided foreign exchange on a first-come first-served basis through the Special Import Programme (SIP). The legalisation of foreign exchange bureaus in July 1990 has also made foreign exchange available to manufacturers without adequate access to OGL and SIP funds. 7. Since the start of the ERP, the Government has regularly adjusted the exchange rate to correct macroeconomic imbalances and to increase Uganda's export competitiveness. The Uganda shilling was devalued by 77 percent in 1987/88 and by a further 60 percent in 1988/89. Since October 1989, the Government has reviewed the exchange rate on a monthly basis and has adjusted it as necessary. As a result, the premium of the official exchange rate over the parallel market rate for the U.S. dollar has fallen from 365 percent in 1987/88 to below 7 percent by October 1991. 8. One of the most important macroeconomic achievements is the substantial reduction in the inflation rate: from 233 percent in the fiscal year 1986/87 to 32 percent as at the end of September 1991, on a year-end basis. The deceleration of inflation was made possible by stringent budgetary and monetary discipline, regular adjustment of the exchange rate to correct imbalances, increased supply response, and an inflow of foreign exchange which made essential imports available. 9. The external position facing Uganda has been consistently unfavourable since 1986, as a result of adverse movements in the country's terms of trade. The major impact on the balance of payments has been the dramatic fall of international coffee prices following the collapse of the quota arrangements under the International Coffee Agreement in July 1989. This has since been compounded by a fall in coffee supplies and hence exports, resulting from inadequate incentives to coffee farmers. Coffee export receipts, which represent well over 90 percent of all our exports, 2 have declined from US$365 million in 1986/87 to about US$126 million in 1990/91. The recent Gulf crisis further add2d to our problems and contributed to a deterioration in the balance of payments in 1990/91. We responded the best we could to the situation and passed along the full price impact to the consumers. The exchange rate has also been adjusted by more than the amount agreed with the IMF under the ESAF programme. 10. Thus, while we have on the whole been successful in stimulating economic recovery and growth and bringing down the rate of inflation, we have been less successful in achieving a viable balance of payments position, partly because of exogenous factors beyond our control. Overview of the Medium-Term Programme 11. In addition to continuing with our stabilisation objective through prudent fiscal and monetary policies, the Government will accelerate the pace of structural reform. We see the need to encourage private sector growth, while at the same time improving the effectiveness of the public sector. To develop the private sector, the Government is taking steps to improve the incentive and regulatory system and to revamp the financial sector. In the pub sector, a major effort is under way to restructure the civil service and raise the performance of civil servants, improve tax collection and rationalise government expenditures. A. Private Sector Development 12. The Government is continuing with reforms aimed at making Uganda more attractive to the private sector as a place to invest and do business. To this end, the Government is putting in place the framework for the market determination of the exchange rate and the liberalisation of the trade regime. Investment laws have been simplified and procedures streamlined so as to encourage both domestic and foreign investors. To reaffirm our respect for private property rights and commitment to due process with regard to investors, Government has already begun implementing a programme to resolve the issue of the properties of departed Asians now under the Custodian Board. Fur'her, the Government, with the help of IDA, is in the process of formulating a reform programme in the financial sector which will, among other things, promote the mobilisation of domestic savings and their efficient allocation to investment and other economic activities. 13. Exchange Rate and Trade Policy Reforms. In June 1990, the Government legalised the buying and selling of foreign currencies in foreign exchange bureaus at rates determined solely by the market. All exports, except coffee, now benefit from the market rates, which have provided a great incentive to production and exports. The introduction of the bureaus has also made it possible to liberalise imports further, with the private sector free to finance imports through the bureaus. We have tried to minimise the discrimination against coffee exporters that arises from the fact that coffee cannot use the bureau rates. In the preceding fiscal year, FY91, we changed the official exchange rate frequently, which made it possible to increase coffee producer prices. We plan to continue to narrow the differential between the official and foreign exchange bureau rates, with a view to unifying the exchange rates and putting the entire system on a market basis by the end of 1991. Consequently, the present OGL and SIP import systems will be eliminated at that time. 3 14. The unification will be accomplished through the introduction of a bidding system under which import support assistance will be auctioned by the Bank of Uganda to the commercial banks for financing imports. Although the operational details remain to be worked out, in principle auctions will take place at regular and frequent intervals, at least twice a month. Requests for foreign exchange would need to be accompanied by the appropriate import documentation. Government imports will also be transacted at the auction-determined rate. Coffee exports would be priced at the auction rate and the BOU would purchase these resources at the auction rate to satisfy the Government's debt-servicing requirements. Petroleum imports will be transacted through the Bank of Uganda at the auction rate. The present OGL will be replaced by the end of 1991 by a more broadly-based import system based on an agreed negative list of imports which will apply uniformly to all importers, whereby all foreign exchange resources will be allocated through the commercial banking system and the foreign exchange bureaus. 15. To complement exchange rate reforms, the Government has instituted major changes in export and import procedures that have essentially resulted in the elimination of licensing. Under the export certificate system introduced in September 1990, any person or business can register as an exporter and obtain an export certificate which allows the holder to export any good that is not specified on a "negative list" of exports. Goods specified on the export negative list are those whose exports have been prohibited for environmental reasons, or by virtue of diplomatic or international conventions. An export certificate is valid for six months, and is renewable so long as the exporter is not in violation of the foreign exchange control and income tax laws. The Government plans to extend the period of validity from six to twelve months in the near future after sufficient experiente has been gained from operating the system. Owing to international agreements, certain products not on the negative list may require licensing in addition to the export certificate. At the present time, the only product requiring special licensing procedures is coffee. In November of this year, the Government will introduce an import certificate system similar to the one for exports. Any good not on a negative list of imports can be imported by a holder of an import certificate, which is valid for six months. Imports of goods on the negative list are prohibited, and in principle a good may be put on the list only for reasons of public health and safety, state security, and international conventions. Also for health, safety and security reasons, certain products, although not prohibited, require special permits in addition to the import certificate. As further measures to bring about greater transparency and automaticity in the foreign trade regime, the negative lists, as well as the lists of products requiring special permits and the permit required for each product, are readily available to the public. Although the Government believes that to promote efficiency, protection of domestic industry should be through moderate tariffs rather than through import prohibition, the extreme ineffectiveness of our customs administration in actually collecting scheduled tariffs compels us, as a temporary measure while we are strengthening customs administration, to prohibit a number of imports for the purposes of protection. The list of such imports is indeed very short, comprising only the following commodities: beer, soft drinks, cigarettes, foam mattresses, automotive wet batteries, and lubricants. It is the Government's intention to review this list periodically with a view to eliminating items from it over time. 16. The Government is also continuing to take measures to improve upon the pricing, marketing and other institutional arrangements in order to promote exports. Exportation of coffee has now been opened up, and the cooperative unions are now competing with the Coffee Marketing Board (CMB). The CMB itself has been restructured and put on a more commercial basis, with funding for its clop purchases coming from commercial banks rather than the Bank of Uganda (BOU). Beginning in July 1991, the Government has introduced a new system for pricing and taxing coffee. Under this system, the Government no longer determines the producer price of coffee 4 but only announces an indicative floor price, thereby letting the producer price be determined by market forces. The coffee tax is now on an ad-valorem basis, based on a reference export price determined by the Government and designed to encourage exporters to increase volumes and also improve upon quality. In addition, the Government is now engaged in a comprehensive examination of all the policies and institutions, as well as physical and supply constraints affecting exports, in order to identify appropriate ways of encouraging rapid increases in foreign exchange generated from the non-coffee sector. 17. Investment Promotion. The Government recognises that the investment climate needs further improvement. It is therefore taking action to promote and facilitate investment in the country. In November 1990, the National Resistance Council (NRC) enacted a new Investment Code and in January 1991, the President signed it into law. The Code simplifies and eases the regulations governing investments in all sectors of the economy, provides fiscal incentives to attract investments, and establishes the Investment Authority to promote and facilitate private resident and nonresident investment and administer the provisions of the Code. The new Code indicates our commitment to break away from control orientation to a promotional role. The Investment Authority is putting priority on promoting Uganda as a place to invest and assisting investors in implementing their investments. It is also expected to advise the Government on policies regarding investment. The structure, staffing, operating procedures and guidelines of the Authority ensure that investment promotion receives priority. The Authority has also been designed as a one-stop processing center for applications for investment. It grants investment licenses and incentive certificates to investors based on well specified criteria and undertakes to secure for investors all the permits necessary for them to commence their investr eats. To assure investors of its commitment to the speedy externalisation of funds as provi ;d by the new code, the Government is committed to clearing up the backlog of dividends and t. iagement fees that had accumulated over the years as the economy contended with severe foreign exchange constraints. The Government will continually review the impact of the Code and other related regulations, and the operations of the Investment Authority, to ensure that these are meeting the needs of the economy. In light of the new Investment Code, the Government has suspended the operations of the Industrial Licensing Board and hence the requirement for obtaining an industrial license. It is taking steps to repeal the restrictive Industrial Licensiag Act (1969) by June 1992. 18. Custodian Board Properties. Approximately 7,000 properties were expropriated by the Idi Amin regime and are currently under the management of the Departed Asians' Property Custodian Board (DAPCB); some of these are covered by the Expropriated Properties Act of 1982, while others are not. The Government is anxious to resolve equitably and expeditiously the issue of the expropriated properties and thereby remove a major blemish on the investment climate. The properties, comprising agricultural estates, agro-processing factories, industrial plants, commercial buildings and residential houses represent a substantial component of our national capital stock. Owing to neglect, poor maintenance cr misuse, the properties are in a very bad condition. Government policy is to return the properties to the former owners who want to get their properties back or dispose of the properties by sale or other means and compensate the owners. In the case of the properties which are covered by the Expropriated Properties Act of 1982, outright repossession will be allowed except where the former owner failed to apply within 90 days from the commencement of the Act or the Government wishes to negotiate a joint venture arrangement with the former owner. The case of the properties which are not covered by the 1982 Act is different. For these properties, including those belonging to persons holding Ugandan citizenship at the time the property fell into the hands of the DAPCB, properties in respect of which the departing owner left behind a management arrangement, and properties of limited liability or foreign registered 5 companies, the conditions under which the Government may choose not to allow repossession do not apply. 19. Following the enactment of the 1982 Act, about 1,700 former owners applied for repossession of their properties. So far about 300 properties have been returned to the owners. Government and the former owners have formed joint venture companies in respect of another 29 properties. In addition, about 40 properties for which no claims for repossession were pending have been sold to the public. The sale of properties is by open tender to the highest bidder. Where a property is sold, it is our policy to compensate the former owner. 20. The stable political climate ushered in by the National Resistance Movement, together with the return of law and order and the restoration of security over virtually the whole country, provide the right opportunity for the divestment of the expropriated properties in an equitable and timely manner. We have already put in place the institutional framework necessary for divestment, as shown by the appointment of a full-time Minister of State in charge of the DAPCB, the appointment of a full-time Executive Committee to oversee the divestment of Custodian Board properties, and the re-activation of the Verification Committee on a full-time basis. In addition, we believe that the Expropriated Properties Act of 1982, together with case law handed down by the higher courts, provide an adequate legal framework for divestment. We intend to issue a public statement on the disposition of the properties which will do three things. First, it will underscore the Government's respect for private property rights. Second, it will clarify the legal status of the properties and, in particular, the distinction between those properties which are covered by the Expropriated Properties Act of 1982 and those which are not. Third, it will set out the modalities and a timetable for the disposal of the properties. 21. The modalities for the disposition of the Custodian Board properties are as follows. In the case of the properties which are not covered by the Expropriated Properties Act of 1982, that is, those properties which belonged at the time of their de facto expropriation to citizens, incorporated bodies, trusts and estates, owners will be asked to submit to the Executive Secretary of the DAPCB the required documentation listed below in support of their claim for repossession of their properties. In the case of property belonging to a person who was a Ugandan citizen in August 1972, the owner (or his/her heirs) would need to provide only two documents, namely: (i) evidence of ownership in the form of a certified copy of the title deed and (ii) proof of Ugandan citizenship at the time of de facto expropriation. In the case of property belonging to an incorporated body or trust, the owner would have to produce: (i) the certificate of registration; (ii) the company's last annual return before the property fell into the hands of the DAPCB; and (iii) a certified copy of the title deed. Once the relevant documents have been received, the Executive Secretary of the DAPCB will issue a letter, within 10 working days, to the owner, with a copy to the tenant, confirming that either (a) In his judgment, the documents are in order and therefore the owner is free to repossess his property in accordance with the law. In this case, the Executive Secretary will simultaneously notify the present tenant, with a copy to the owner, that he/she has 90 days to vacate the property unless he/she enters into a new tenancy arrangement with the owner; or (b) In his judgment, the Executive Secretary has grounds for considering that the documents are not in order. In this case, he will notify the applicant of this view and give the reasons for it. If the applicant does not hear from the DAPCB within 15 working days of submitting the required documentation to the Executive Secretary of the DAPCB, or if he disagrees with the DAPCB decision, the applicant may pursue his claim in accordance with existing legislation. 6 22. The properties which belonged to noncitizens at the time of their expropriation, and only these properties, will be disposed of in accordance with the Expropriated Properties Act of 1982; that is, they will be returned to the former owners unless a valid claim for repossession has not been filed or the Government wishes to enter into a joint venture arrangement. In this connection, we are committed to reducing our participation in commercial activities through divestiture of state-owned enterprises based on criteria agreed with IDA in the context of the proposed Enterprise Development Project; and reaffirm that joint ventures will only be sought for Custodian Board properties in accordance with these criteria. In cases where the property is not repossessed by the former owner, the Government will pay reasonable compensation. 23. In order to ensure a smooth transition, owners would be asked to serve notice of repossession on the occupants. During the notice period of 90 days, occupants would pay rent at the current rate to the owners, failing which they would be subject to legal action in accordance with existing legislation. We would expect owners to negotiate amicably with the occupants in the first place, with the goal of reaching a mutually agreeable determination on the future occupancy or use of these properties, but, failing that, the owners are free to seek recourse through the legal system on the basis of existing legislation. 24. In the case of houses now used by the Government for residential and office accommodation, the same procedure will apply except that, in the interest of avoiding disruption, we will seek an extended notice period of up to two years to enable us to make alternative arrangements. During this period we will pay rent which is to be freely negotiated between the Government and the owner; if negotiations fail, the owner shall have recourse to the courts for redress. 25. To speed up divestment of the properties, the Government has recently compiled a list of properties for which applications for repossession have been filed with the DAPCB, as well as those for which no applications are pending. The properties for which repossession applications are pending have been classified into two categories, namely, those which are covered by the Expropriated Properties Act of 1982 and those which are not. The list of properties in the two categories, as well as the list of DAPCB properties currently in use by Government for residential and office accommodation, have been published in the Official Gazette. For properties in the noncitizen category, we will also publish in the Official Gazette by December 31, 1991 a list of those properties for which the Government may intend to seek a joint venture; such a list will conform with understandings reached with IDA in the context of the Enterprise Development Project. The Government has put in place the admimtstrative arrangements at the DAPCB for receiving and responding to evidence of ownership and citizenship in respect of properties which are not covered by the Expropriated Properties Act. 26. We will, by June 1992, return all properties covered by the Expropriated Properties Act of 1982, provided that valid applications for repossession have been filed with the DAPCB and that such properties are not included in a final list in respect of which the Government has, in conformity with the provisions of the 1982 Act, determined to conclude a joint venture arrangement. Moreover, we will continue to respond promptly to submissions of evidence of ownership and Ugandan citizeShip at the time such property was placed under DAPCB control in respect of properties which are not covered by the Expropriated Properties Act of 1982. In this regard, the Government will, on a monthly basis, furnish IDA with evidence that the DAPCB has dealt with each submission within 10 working days, except in cases of dispute between the DAPCB and the owner or in cases where the owner chooses to have recourse to the law. 7 B. Publi Sector Management 27. Government is committed to sound economic management and, to this end, efforts have been made to restrain both the fiscal deficits and the consequent monetary expansion which have been mainly responsible for inflation. Emphasis has been placed on tax administration and on controlling government expenditures. Moreover, a major civil service reform programme will be carried out, following the recommendations of the Public Service Review and Reorganisation Commission (PSRRC). 28. Tax Reform. we fully recognise that the domestic revenue effort, which presently stands at about 8- percent of GDP, is inadequate to finance the development-related needs of the Ugandan economy and is therefore strongly committed to tax reform. With the support of IDA under the Second Economic Recovery Credit, we have already reformed the tax and tariff system with a view to improving the efficiency of tax instruments. As a result, the system is now easier to administer and provides a more moderate and uniform level of protection. 29. However, despite these structural changes, it has become clear to us that greater efforts need to be made to improve tax administration and collections. We recognise that the basic problem is one of extremely low salary levels, which are not adequate to motivate staff, and the absence of management autonomy which would provide managers with complete authority over hiring and firing decisions, with minimal bureaucratic delays. Consequently, the Government has decided to establish the Uganda Revenue Authority (URA), outside the existing civil service, which will be able to offer better terms of employment and will also provide management with the tools necessary to do its job more effectively. A study by consultants funded by ODA (UK) on the details and logistics of establishing the URA has been completed and the Authority was set up in September 1991 with assistance from UNDP and IDA. 30. The URA will be an autonomous organisation headed by a management board which would be formally responsible and accountable for the management of the Authority and its performance. The Authority will consist of four departments. There will be two main revenue departments, one dealing with direct taxes and the other dealing with indirect taxes. A third department will provide management services to the Authority, i.e. audit functions, research, information and monitoring, and taxpayer education. Finally, a fourth department will deal with administrative matters relating to persortnel, the management of facilities and equipment, and accounting and training. 31. The URA will not be responsible for determining fiscal policy; the Ministry of Finance will continue to set fiscal policy, including which taxes should be levied, the tax rates, thresholds and rules on exemptions. The principal role of the URA would be the administration of taxation including assessment or verification of liability, collection of revenue and accounting for the revenue to the Government. However, the URA will contribute to policy formulation, being the agency most closely involved in tax collection, and will therefore have a research and monitoring capacity. 32. The URA will be an executive agency responsible for its own internal management and performance. It will be able to recruit, promote, and discipline its own staff; set salaries and conditions of employment; and introduce management and control systems. However, being an agency of the Government, the URA will have to justify its proposed spending and bid for its annual expenditure requirements as part of the normal budgeting round for ministries and parastatal bodies. 8 Each department within the URA will bid for its annual budget as part of the annual planning process, with the Heads of Department being responsible for allocating part of the budget to sections and/or remote offices. The URA, like other agencies of the Government, will be subject to scrutiny by the Auditor General, the Public Accounts Committee, and the Inspector General of Government. 33. As has been indicated above, the existing compensation package has been largely responsible for low staff morale and productivity and has served to breed corruption and indiscipline among staff. Salary levels in the new authority will therefore be high enough to attract staff of the highest calibre and will be determined on the basis of comparable positions in the private and parastatal sectors and on the cost of living. The remuneration structure implemented will be one which rewards good performers, with pay rises being determined by the individual's performance in his/her grade. Clear disciplinary policy and procedures will complement the salary structure in order to ensure that staff receive a clear message that corruption and indiscipline will not be tolerated in the Authority. An anti-corruption team will be established within the Management Services Department to identify and expose corrupt practices and the results of their investigations will be publicised. In line with current Government policy towards declaration of assets for those in senior positions, this process will also be extended to all senior appointees of the URA. All staff will be required to declare their commercial activities and staff will be expected not to have outside commercial interests which conflict with their employment at the URA. 34. The URA will increase the volume of training, both initial training for new staff and refresher courses for regular staff. In the short term, this training will focus on the technical aspects of customs, sales and excise tax; investigations in both income tax and customs; organisational methods and procedures; and management training. For the present, facilities of the Institute of Public Administration (IPA) will continue to be used for training, which will be supplemented by other training facilities at the University, rural training centres and hotels. 35. We also intend to introduce greater audit and review of performance, so that staff know that their work will be checked. Internal audits will therefore be conducted periodically, local offices inspected, and comprehensive reports prepared by auditors for the information of the Board and senior management. Detailed internal control procedures will be specified for the URA in an accounting manual. These will cover authorising and recording expenditure, custody of assets, recording and banking of revenues, etc. In addition to designing and implementing appropriate financial procedures, staff will be made aware that both routine and unexpected checks and visits by internal auditors and senior managers will be made. Greater use of computerised information, for example for income tax and customs, will greatly aid assessment of liabilities and monitoring of payments. 36. In addition to the above-mentioned administrative reforms, the Government is committed to further broadening the tax base. In this connection, the income tax threshold will be frozen at its 1990/91 level U Sh 480,000 per annum and the number of tax exemptions granted will be reduced significantly. 37. Public Expenditure Rationalisation. Under ERC II, the Government designed and established criteria for new projects for implementation under the Rehabilitation and Development Plan (RDP); these criteria will continue to guide the selection and inclusion of projects in the RDP. The criteria will be based on economic rates of return or cost effectiveness, within the context of clearly articulated sectoral strategies, taking adequate cognizance of resource constraints and implications for recurrent costs. In addition, attention will be paid to implementation capacity and 9 track record. We have also established consistency between the Rehabilitation and Development Plan and the Development Budget with the intention of ensuring that, with minor exceptions relating to locally financed expenditure on repair and renovation, only RDP projects are included in the Development Budget. In this connection, we will consult with IDA about the size and composition of the Rehabilitation and Development Plan at the next roll-over. 38. The Government is aware that, at an average of about 12 percent of GDP, government expenditures in Uganda are very low. This, combined with the overruns on security- related expenditures, has led to severe underfunding of the social sectors, including education, health an water supply, and essential infrastructure. In keeping with the conclusions and recommendations of the Public Expenditure Review which we carried out with IDA, starting in FY91/92, priorities for expenditure allocations will be guided first and foremost by the requirements in key economic and social sectors. In this connection, therefore, increased funding has been provided for primary and secondary education, primary health care, rural water supply, road rehabilitation and maintenance, and agricultural research and extension. The Government also intends to protect the budgetary allocations in these key areas against general budget cuts or squeezes from overruns in other areas and will carry out a review with IDA to ensure that the original budget allocations to the high-priority programmes in these sectors have in fact been released. The Government has also embarked on a budgetary reform programme which provides the basis for developing and instituting this expenditure prioritisation programme. 39. The Government is concerned about the persistent budgetary overruns for defense expenditures and the effect that this has had on other sectors. We think that it will now be feasible to reduce the share of the total budget going to defense for the following reasons. First, the basic equipment required for our defense is now in place. Thus, some of the expenditures that we have been incurring over the past few years will not have to be repeated. Second, the weak financial management within the Minkstry of Defense is being urgently addressed so as to cut down on uncalled-for leakages. Third, a decision has also been taken not tQ expand further productive activities undertaken by the defense establishment; we will, in fact, cut out those activities that should not be the concern of the production units within the army. Fourth, starting this financial year, the Ministry of Defence will be reimbursed by government ministries and departments for any non-defense expenditures incurred on their behalf by the Ministry of Defence. Consequently, with effect from fiscal year 1991/92, defense expenditure will be seen to fall in real terms and as a fraction of total recurrent expenditures. 40. Civil Service Reform. Government attaches the highest priority to improving the effectiveness of its civil service. Despite the progress made, some bottlenecks, especially in implementation, still exist. Government realises that further progress in the reform agenda urgently requires a revitalised management and institutional capacity so that its policies and programmes can be implemented with ease. To this end, measures have been taken to review and revamp the civil service. The Public Service Review and Reorganisation Commission (PSRRC) was set up in April 1989 to,:eview the public service and make recommendations for its restructuring. The Commission has now made its recommendations to Government which emphasise the need to scale down the size of the civil service and focus its role on those activities best carried out by the public sector, while reducing government's role in areas in which the private sector will, if allowed the opportunity, develop greater comparative effectiveness. The scaling down of ministries will also remove a great deal of duplication and introduce more efficiency. One of the major themes of the Commission's report is the need to take measures to improve the performance of civil servants, through a combination of better incentives, skills upgrading, the retooling of facilities and essential equipment, 10 and the enforcement of discipline. A key factor of the strategy envisaged in the Commission's report is the enhancement of civil service salaries, not only to provide a living wage for all civil servants, but to encourage the attraction and retention of scarce and much needed managerial, technical and analytical skills. Increased salaries will come largely from the increased revenues anticipated from the new Uganda Revenue Authority but will also be paid partly out of a planned retrenchment programme. In addition, clarity and consistency can be provided to salary packages by monetising nonmonetary benefits. The programme of civil service reform, following Government's approval of the Commission's recommendations, will need to be a carefully planned and phased programme, implemented over a period of years, with continuous emphasis on the main purpose which is the provision of a more efficient and effective civil service able to provide the leadership and support needed in a growing economy. 41. A detailed Implementation Plan for civil service reform has been formulated and agreed with IDA, based on the recommendations of the PSRRC. The first-year targets of the Plan include the functional reviews of four ministries (Agriculture, Animal Industry and Fisheries; Commerce, Cooperatives and Marketing; Energy, Minerals and Environment; and Works, Transport, and Communications), staff reductions, and pay reform (including the production of proposals for the monetisation of fringe benefits). 42. Functional rationalisation of ministries will be based on the newly announced structure of 20 ministries. Steps have already been taken to identify and subsequently shed the most obviously duplicative structures which have resulted from the merger of ministries. Following this action will be a phase of in-depth ministerial functional reviews over a two-year period which will involve complex, technical work in functional analysis to guide the streamlining of functions, and organisational and managerial structures. Selective ation is also planned to shed certain functions like the veterinary services to operate on an independent cot.mercial basis, or self-supporting with a high degree of autonomy. In the first year, we plan to complete the functional reviews in four ministries: Agriculture, Animal Industry and Fisheries; Commerce, Cooperatives and Marketing; Energy, Minerals and Environment Protection; and Works, Transport and Communications. Based on these reviews, an implementation program for ministerial reorganisation will be agreed with IDA. These first four reviews will be followed by further phases of review and reorganisation until the whole of the new government structure has been covered. 43. The retrenchment of the civil service will be driven in part by the process of fuactional rationalisation of ministries described above, and in part by reducing or eliminating various categories of employees across the board. The retrenchment programme will include a severance programme, as wel' as a redeployment, training and retraining programme for those effectively performing staff who will be surplus to requirement after the rationalisation. We believe that financial assistance will be required for the retrenchment programme and will explore various avenues for raising such assistance from donors, including IDA. The Implementation Plan provides annual targets for civil service reductions over a three-year horizon. These will be met by a combination of instruments: displacement of irregularly employed staff, retrenchment, natural attrition, and continued control over recruitment. 11 44. The PSRRC report has identified several categories of employees to whom Government has limited or no obligations. These include employees past the retirement age; employees who have entered the service irregularly; and a group of employees whose poor performance or dereliction of duty is beyond dispute. These, together with remaining ghost workers and the next phase of reducing group employees, represent the priority categories for retrenchment during the first phase of the Implementation Plan (FY91/92). The Plan contains a timetable for identification and displacing such employees, and targets. 45. Work has also started on designing the compensation and services that will be provided to staff who are displaced or retrenched. The Programme for the Alleviation of Poverty and the Social Costs of Adjustment (PAPSCA) is funding a supply-demand analysis to identify options in the private sector for civil servants, and to guide the design of transitional assistance. 46. Natural attrition will also contribute to attainment of service reduction targets. To this end, proposals are being produced for improved control on recruitment of both established staff and group employees, and controls over extension of service beyond retirement dates. In special cases, overaged employees who have special skills or experience needed by Government will be retained until adequate replacements can be found. 47. We fully endorse the PSRRC proposal to improve the transparency, equity and efficiency of the incentive structure, including the rationalisation of the system of allowances and monetisation of benefits. We will ensure that this overall programme of gradual salary enhancement is consistent with the constraints of realistic expenditure ceilings. Housing benefits preseni particular difficulties, given the importance of this benefit component in the overall compensation package of more senior categories of staff, and in view of the inadequacies of the housing market in Uganda and the absence of appropriate housing finance institutions. These particular difficulties will be th subject of a study which is expected to identify possible solutions. 48. The Implementation Plan includes details of a three-year programme for salary enhancement, including a timetable for rationalisation of allowances, and outline plan for monetisation of benefits consistent with realistic projections for public expenditure and progress with the retrenchment programme. We will agree with IDA on the targets for the next phase of salary enhancements and on proposals for the monetisation of benefits. Social Aspects of Adjustment 49. Overall, lower-level civil servants will be the largest group adversely affected as a result of the retrenchment and displacement programme. Their prospects of obtaining formal employment in the private sector are not bright, especially in the short run. As indicated in paragraphs 43 and 45, financial and technical assistance will be necessary to enable them to enter into self-employment activities. We are preparing a redundancy scheme, under the auspices of the Programme for the Alleviation of Poverty and the Social Costs of Adjustment (PAPSCA) and will only start retrenching established staff after the redundancy scheme is in place. 12 50. On balance, the ERP is improving the overall economic well-being of Ugandans by reversing the damage wrought by 15 years of mismanagement and civil wars. Peasant farmers will reap the benefits of the freeing of producer prices or, in the case of coffee, improved producer pricing. At the same time, employment opportunities would expand in reflection of increased industrial capacity utilisation and a shift towards labour-intensive methods of production resulting from the removal of price distortions. The process of economic rejuvenation would be reinforced by increased budgetary allocations for social services such as primary health care, primary and secondary education, and sanitation and water supply. With an improved economic climate and adequate flows of external assistance, real per capita consumption is expected to grow by about 1-2 percent per annum over the next two or three years. The Government is addressing the special needs of groups which have been the victims of war or AIDS. These include widows, orphans, the disabled, the displaced and the sick. PAPSCA is the main vehicle for addressing the needs of these disadvantaged groups. Recognising our own limited implementation capacity, we have decided to make the maximum use of the expertise that local communities and non-governmental organisations (NGOs) can bring to bear on the deliver of services and the creation of assets funded under PAPSCA. The implementation of PAPSCA got off to a slow start but is now firmly under way, with benefits for persons in war-ravaged areas where schools are being rebuilt and re-supplied and areas with the worst incidence of AIDS. The impact of the adjustment programme on the poor is being monitored through the Social Dimensions of Adjustment (SDA) initiative. Conclusion 51. The Government of Uganda embarked on a major programme of economic recovery in 1987. Since then, it has had considerable success in achieving financial stability and removing the distortions in the incentive and regulatory framework. In particular, price deregulation has been extended to all products except petroleum; export monopolies in coffee, tea and foodstuffs have beei abolished; import and export licensing have been liberalised; and the overvaluation of the Shilling, has been drastically reduced. At the same time, we have reduced triple-digit inflation to about 30 percent. Progress has been made in rehabilitating the economic and social infrastructure and in reviving economic activity. In an effort to consolidate these gains, we are now turning our attention more to structural reforms. However, given the poor performance and prospects for coffee, upon which we depend for about 90 percent of our export earnings, the programme cannot succeed without adequate provision of quick-disbursing financial assistance. To continue support of our programme, the Government requests for your favourable consideration the provision of a Structural Adjustment Credit in the amount of US$125 million. Yours Ice Dr. .. Minister for Finane 13 Annex 1: Attachment Page 1 of 7 UGANDA: STRucTuRAL ADiUsTMENT CREDIT POuICY MATalX Monitorable Actions Past Adgustatent Effort SAC Action Program and Schedule 1. Incentive and Regulatory System. The objective is to help the Government consolidate and expand trade reform by reducing the distortions and impediments in the trade regime and by further simplifying export and import procedures. The Government has made periodic a) agree on negative lists for done adjustments to the official exchange imports and exports; rate such that the premium for the U.S. dollar over the free market rate b) set up and implement an done has fallen from 365 percent in import certificate system which 1987/88 to 7 percent by October will allow the importation of all 1991; items not on the negative list; foreign exchange surrender c) further reduce the differential ongoing requirements for all non-coffee between the official and foreign exports have been suspended; exchange bureau rates; the buying and selling of foreign d) unify the exchange rate; and by the end of 1991 exchange by foreign exchange bureaus has been legalized; e) eliminate the OGLISIP. condition for second tranche release virtually all parastatal marketing monopolies, including coffee, have been abolished, and the Government has commenced reforming the coffee marketing system; coffee producer prices have been increased; and an OGLAype system to assure access to foreign exchange for manufacturing firms in selected sub-sectors has been introduced; this system has been supplemented by the Special Import Program (SIP), which serves all importers on a first-come-first-served basis. Annex I Attachment Page 2 øf 7 UGANDA: STnucTURAL AnjusrIi~r CEDI PoucY MATRIX Past Austment Efort SAC Actio 1rera . Snieua 2. Investment Climate. The objective is to prove the climate for private sector production and investment by a) puttiag into effect the Governmenat's new attitude towards investment promotion and regulation and b) speeding up the divestment of Custodian Board properties. a) Investment Prmnotion: Exchange and trade system has been a) put i place, prior to the done liberalized; establiaent of the Investment Authority, interim staff and the restructuring and privati~ation of procedures for the processing of public enterprises is being addressed investm~nt licenses as provided under various IDA-sponsored by the Inves~ment Code (1991); initiatives; and b) review existing industrial, done a new Investment Code has been in immigration, health and force since January 1991; it simplifies environaental regulations and regulations goveming investments and the enforcement procedures to provide incentives. nsure consistency with the new lnvestment Code; c) agree with IDA on the don crporate structure, operating guidelines and procedures of the new Investment Authority; d) etablish the Invest~unt don Authority; e) suspend the operations of the done Industrial Licensing Board; and f) repeal the Industrial Licensing condition for second Act (1969). tran~ rase Annex 1: Attactnnt Page 3 of 7 UGANDA: SnucTURAL ADJusmENT CREDiT PDuCY MATRx Monitorble Assoos Pa AUtm n ffort SAIC Action Prorn and Schedule b) Custodian Board: The Departed Asians' Property g) restate Government policy on done Custodian Board has been overhauled expropriated properties and in order to speed up the disposition of confirm the objectives of the properties; over 200 properties have Custodian Board; establish been returned to their former owners, criteria and procedures for achieving these objectives; and develop a compensation policy for those properties which are not subject to repossession claims; h) recruit records and file done management expert; identify in writing any resource constraints; i) compile and review with IDA done a detailed list of all the properties expropriated in 1972; j) develop a detailed done classification of the properties, drawing a distinction between those covered by the Expropriated Properties Act (1982) and those not covered; k) issue a public statement done 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 also be published in the Official Garette; 1) provide evidence to IDA that done Government has submitted for publication in the Official Gazette the list of properties classified under j) above, also indicating which properties are currently being used by the Government for residential and office accommodation; Amx 1: Alachmet Page 4 of 7 UGANDA: STRUCTeaL ADJuSIlWT CREDIT POUCY MATRIX Past A4uslament EAbrt SAC Action Progranm and_$du_ulM m) provide confirmation of done prompt response to submission of evidence of ownership and Ugandan citizenship for properties not covered by the 1982 Act prior to Board presentation; and n) in case of properties covered condition for second by the 1982 Act, return to tranche release former owners provided that valid applications for repossession have been filed with the DAPCB and suchi properties are not included in the final list in respect of which Government has determined to conclude joint venture arrangements; and in respect of properties not covered by the 1982 Act, provide evidence of continued progress in responding to submissions of evidence of ownership and Ugandan citizenship by owners seking repoession. Annex 1: Attachmet Page 5 of 7 UGANDA: STRUCTuRAL ADJUSmmENT CREDIT POLICY MATRIx moniterabl Actions Past A*Abstment Effort SAC Action PrograM and Schedule 3. Tax Administration. The objective is to increase Uganda's domestic revenue effort and to enhance the ability of the Government to mobilize domestic resources so that the much needed improvements in Uganda's devastated economic infrastructure and services can be financed. Simplification and rationalization of a) Government approval for the done the tax and tariff system; establishment of the National Revenue Board (NRB); reduction in the number of customs duty rates to five, the number of sales b) agree with IDA on the done tax rates to four, and the number of reduction in the number of tax excise duty mtes to two; exemptions granted; sales tax to apply to all locally c) agree with IDA on the done produced and imported goods; reduction or freezing of the income-tax threshold; and imported goods to be subject to a surtax, similar to the excise on locally d) complete all transitional condition for second produced goods, to provide adequate arrangements between the tranche release protection to domestic producers; and, existing departments and the Uganda Revenue Authority and broadening of the tax base. transfer all responsibility for revenue collection to the Uganda Revenue Authority. Aamex I:Atachmost Page 6 of 7 UGANDA: STRucTuRAL ADJUSTMENT CREDIT POLICY MARIx Mewftorable Actions Past Ad4shnnt Effort SAC Action Pftgram and Schedule 4. Public Expenditur. The objective is to ensure that significant improvements are made in economic and social infrastructure and in the provision of social services; to phase out unproductive and ineffective activities; and to institute a process of budgetary planning that enables Government to prioritize expenditure allocations. Government has taken action to a) review with IDA allocations done increase recurrent budget allocations for non-wage operations and for primary health, primary and maintenance expenditures for secondary education, water supply, critical programs and the wage road maintenance, and agricultural bill in the 1991/92 recurrent research and extension; budget; the 1991/92 development budget; and the it has agreed with IDA on the three- three-year Rehabilitation and year Rehabilitation and Development Development Plan; Plan; and b) agree with IDA on a set of done it has embarked on a Budget Reform high-priority recurrent and Program. development programs to be protected during budget implementation; c) incorporate these agreements done (ie. under (a) and (b) above) into the 1991/92 budget; and d) release all budgeted condition for second allocations in FY91/92 for the trache release high-priority recurrent and development programs in education, health, water supply, roads and agriculture; and e) consult with IDA about the June 1992 size and composition of the Rehabilitation and Development Plan at the next roll-over. Page 7 of 7 UGANDA: STRUCTURAL ADJusTMENT CREDT POLICY MATRIX MoidtoraMe Acdons .Ast A4mutment Wtort SAC Acion Program and Schedule 5. Civil Service Reform. The objective is to achieve an efficient and effective civil service, which is consistent with the country's resources, by streamlining the civil service to manageable and affordable proportions; paying the remaining civil servants competitive salaries; and providing civil servants with the skills and complementary inputs to do their job. An Establishment Register for the a) agree with IDA on done civil service has been developed which Implementation Plan for civil has been instrumental in the service reform; elimination of some 20,000 ghost employees; b) specify the four ministries done that will be reviewed; the work has now been extended to cover the Teaching Service and Local c) publish the revised salary done Authorities; scales for FY91/92; a 50 percent cut in group employees d) achieve the first annual condition for second was implemented; targets in the Implementation tranche release Plan for ministerial reviews, the Public Service Review and civil service staff reductions, ReorganisationCommissionhas issued and pay reform, including its final report addressing key issues relating to civil service reform; and, (i) completing the reviews of the four selected ministries and the number of ministries has been agreeing with IDA on a reduced to 20. program to implement the results of the reviews; (ii) completing the design and development of severance policies and programs for displaced and retrenched staff and achieving the displacement targets for FY91/92; and (iii) adopting a FY92/93 salary program, acceptable to IDA, and producing detailed proposals for the monetisation of benefits. Annex 11.1 UGANDA: KEY kACROECONOMIC INDICATORS, 1987/88-1993/94 prelim est ****** Projection ****** Item 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 Growth Rates GOP (Factor Cost) 6.8 6.8 4.8 4.2 5.0 5.0 5.0 Gross Domestic Income 7.7 6.0 5.7 6.4 6.0 6.7 6.1 GOY per capita 4.8 3.1 3.1 1.9 3.4 4.1 3.5 Private Consurption per capita 6.4 5.2 1.8 1.6 0.5 3.2 1.4 Debt Service 1/ Debt Service (USS million) 226.3 256.3 215.2 196.9 215.8 210.1 218.2 1w Interest (USS mitlion) 76.3 84.1 91.4 73.5 73.6 71.7 74.0 Debt Service/XGS 2/ 51.0 58.4 66.2 66.6 64.5 53.5 48.3 Debt Service/GDP 4.0 5.7 5.5 6.4 9.0 7.5 6.6 Ratios to GDP Gross Investment 3/ 11.3 10.5 11.0 11.7 12.1 13.2 13.7 Domestic Savings 3/ 5.0 3.5 5.1 6.8 7.4 8.8 9.7 National Savings 3/ 6.1 4.3 5.1 7.0 7.5 9.2 10.2 Public Investment 3/ 6.3 5.1 6.2 5.9 5.6 5.6 5.7 Public savings 3/ *0.5 -1.5 -0.3 -0.5 -2.5 -0.5 0.5 Private Investment 3/ 5.0 5.3 4.8 5.8 6.5 7.6 8.0 Private Savings 3/ 6.6 5.8 5.4 7.5 10.1 9.7 9.7 Goverrment Revenues 6.7 6.5 7.5 8.1 9.4 10.7 12.5 Goverment Expenditures 4/ 13.0 12.0 13.9 16.6 22.7 21.2 22.0 overall Deficit 4/ -6.3 -5.5 -6.4 *8.5 -13.4 *10.5 -9.5 Overall Deficit, inct grants 4/ -4.8 -4.1 -5.5 -4.7 -4.2 -2.6 -2.2 Nfscellaneous CPI (1987/88 a 100) 100.0 186.2 239.6 332.4 382.2 420.5 449.9 Real Exchange Rate (1984/85 - 100) 131.4 114.0 98.9 62.4 54.3 54.3 54.3 Export Growth Rate -22.4 -3.3 -27.1 *15.7 12.4 23.1 19.2 Exports/GDP 3/ 5.7 5.3 4.1 4.0 4.1 4.5 4.8 imports Growth Rate 6.0 18.9 -9.9 -5.8 7.3 11.0 9.0 Imports/GOP 3/ 12.0 12.2 10.0 8.9 8.7 8.9 8.8 Current Account (US$ million) -295.1 -389.8 -429.0 -444.0 -471.0 -470.0 -483.0 Current Account/GP 3/ -5.2 -6.1 -5.9 -4.7 -4.5 -3.9 -3.5 Gross Reserves (months of imps) 5/ 2.2 1.8 1.7 2.1 2.3 2.3 2.4 Source: Staff estimates based on date provided by Government authorities. 1/ On a commtent basis. ' 2/ Exports of goods and services, including private transfers. No rescheduling assumed. 3/ Expressed in constant prices to isolate the Impact of rapid exchange rate adjustment. 4/ The increase in expenditures and the fiscal deficit in 1991/92 is the result of a change in the definition of development expenditures resulting from the integration of the Rehabilitation and Development Plan and the development budget. 5/ Includes reserves of the Bank of Uganda held as tied Import support. Annex 1.2 UGANDA: BALANCE OF PAYMENTS, 1986/87-1993/94 (In millions of US dollars) pretim Eat " Projection *** 1986/87 1987/88 1988/O9 1989/90 1990/91 1991/92 1992/93 1993/94 Exports (gnfs) 406 324 321 247 216 240 288 337 Nerchandise (fob) 384 298 288 210 177 199 245 292 o/u Coffee 365 286 282 159 126 130 153 174 Non-Factor Services 22 26 33 37 39 41 43 45 Ilports (genfe) 600 682 763 677 674 722 796 865 Merchandise (cif) 514 545 648 584 550 590 655 714 o/w Petrol 63 69 76 78 87 84 103 112 Non-Factor Services 86 137 115 93 124 132 141 151 Resource Balance -194 -358 -442 -430 -458 *482 -508 -528 Net Factor Inawe -47 -57 66 -77 -66 -84 -67 *70 o/ Net Interest -47 *57 -66 -77 -62 -66 -67 -70 Current Private Transfers 100 120 118 78 80 95 105 115 C/A Balance (Exct grants) -141 -295 -390 -429 -444 -471 -470 -483 C/A Balance (Inct grants) -101 -203 -225 *276 -239 -211 -196 -182 Official Transfers 40 92 165 153 205 260 274 301 o/ Import Support 0 33 49 29 87 150 152 167 met NBLT Loans 135 125 102 215 131 139 177 197 Disbursements 225 210 188 292 217 247 284 312 Project Loans 192 168 121 125 118 136 149 164 Iaport Support Loans 32 42 66 167 99 111 135 148 Repayments 90 85 86 77 86 108 107 115 Foreign Investment/Kenya Comp. 28 10 13 6 1 2 4 5 Short-Term, not -31 37 -17 11 2 0 0 0 Errors/Value Adjustment -110 -32 19 *1 0 0 0 0 Overall salance -79 -63 -108 -45 -106 -70 -15 21 Financing: 79 63 108 45 106 70 15 -21 Monetary Authorities 22 -14 18 10 41 3 -34 -25 Gross Reserve Changes 33 -4 5 11 -11 -15 -15 -15 IMF, not -3 -17 7 *1 52 18 -19 -10 SAF/ESAF and Purchases 57 34 94 42 89 52 0 0 Other, not -8 7 6 0 0 0 0 0 Short Term/Coquercial 10 -10 6 12 -2 *3 0 0 External Arreers -45 47 26 -19 65 -20 -20 -20 Exceptional Financing 92 40 58 42 2 90 69 25 Rescheduling 92 40 53 40 0 0 0 0 Debt Cancellation 0 0 5 2 2 0 0 0 Residual Finance Gap 0 0 0 0 0 90 69 25 Mm Item Gross Reserves (EOP) 1/ 97 101 96 85 96 111 126 141 In Months of laports 2.3 2.2 1.8 1.7 2.1 2.3 2.3 2.4 Sources Bank of Uganda, INV, and staff estimates. 1/ Includes reserves of the Bank of Uganda held as tied import support. Annex 11.3 UGANDA: EXTERNAL FINANCING REQUIREMENTS AND SOURCES (in mllifons of US dotars) prelim Est "" Projection *** 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 External Financing Requirements: Current Account Deficit 141 295 390 429 444 471 470 483 Amortization 90 85 86 77 86 108 137 115 Change in Arrears 45 *47 *26 19 *65 20 20 20 Change in Reserves -33 4 -5 -11 11 15 15 15 Other Reserve Changes 8 *7 -6 0 0 0 0 0 IMF Repurchases 60 51 87 43 37 34 19 10 Other items, net 110 32 -19 1 0 0 0 0 Total Financing Requirements 421 413 507 558 513 648 631 643 Disbursements: Existing Congitments 329 373 449 516 511 380 234 154 Grants 40 92 165 153 205 190 153 69 Project Aid 40 59 115 124 118 70 52 69 Inport Support 0 33 49 29 87 120 101 0 Loans 225 210 188 292 217 138 81 85 Project Aid 192 168 121 125 118 86 63 85 Iaport Support 32 42 66 167 99 52 18 0 INF Purchases/SAF 32 34 0 0 0 0 0 0 IMF ESAF 25 0 94 42 89 52 0 0 Other, net 7 37 2 29 1 0 0 0 Expected New Conmitments 0 0 0 0 0 178 328 465 Grants 0 0 0 0 0 70 121 232 Project Aid 0 0 0 0 0 41 70 65 Iaport Support 0 0 0 0 0 30 51 167 Loans 0 0 0 0 0 109 203 227 Project Aid 0 0 0 0 0 50 86 79 Iport Support 0 0 0 0 0 59 117 148 INF Purchess/SAF 0 0 0 0 0 0 0 0 INFESAF 0 0 0 0 0 0 0 0 Other, net 0 0 0 0 0 -1 4 5 Total Identified Financing 329 373 449 S16 $11 558 562 619 Financing ap 92 40 58 42 2 90 69 25 Debt Rescheduting/Cancettation 92 40 58 42 2 Residual Gap 0 0 0 0 0 90 69 25 Source: Staff estimates based on data provided by Goverrnent authorities. Page 1 of 3 Supplementary Data Sheet for the Structural Adjustment Credit (SAC) Section I: Timetable for Key Events (a) Time taken to prepare: 12 months (b) Operation prepared by: Ministry of Finance, Uganda (c) Project Identification: November 1990 (d) Appraisal Mission: April 1991 (e) Negotiations: October 1991 (t) Planned Date of Effectiveness: December 1991 Section U: Special IDA Implementation Actions None Section III: Policy Action Conditions of Second Tranche of SAC 1. (a) Elimination of the OGL/SIP import systems; and (b) Repeal of the Industrial Licensing Act (1969). 2. (a) With respect to properties covered by the Expropriated Properties Act of 1982, return of such properties to former owners, provided that (i) valid applications for repossession have been filed with the DAPCB; and (ii) such properties are not included in a final list in respect of which the Government has, in conformity with the provisions of the 1982 Act, determined to conclude joint venture arrangements with the former owners; and (b) With respect to properties not covered by the Expropriated Properties Act of 1982, continued progress, satisfactory to IDA, in responding to submissions, by owners seeking repossession, of evidence of ownership and Ugandan citizenship at the time such property was placed under DAPCB control. 3. Completion of all transitional arrangements between the existing departments responsible for revenue collection within the Ministry of Finance and the Uganda Revenue Authority; and full transfer of all responsibility for revenue collection to the Uganda Revenue Authority. 4. Release of all budgeted allocations in FY92 for the high-priority recurrent and development programs in education, health, water supply, roads and agriculture. Page 2 of 3 5. Achievement of the first-year targets for ministerial reviews, civil service staff reductions, and pay reform, namely: (a) Completion of the functional reviews in four ministries (Agriculture, Animal Industry and Fisheries; Commerce, Cooperatives and Marketing, Energy, Minerals and Environment Protection; and Works, Transport and Communications); (b) Identification and displacement of employees according to the targets set in the Implementation Plan; and (c) Agreement with IDA on the targets for the next phase of salary enhancements and the production of proposals for the monetization of benefits. Section IV: Import Items for Finan' -g Under SAC 6. The proceeds of the credit are to be used for the reasonable cost of any and all goods required during the execution of the Economic Recovery Programme with the following exceptions: (a) expenditures for goods included in the following SITC groups or sub-groups, or any successor groups or sub-groups under future revisions to the SITC, as designated by the Association by notice to the Borrower: Group Sub-Group Description of Items 112 - Alcoholic beverages 121 - Tobacco, unmanufactured, tobacco refuse 122 - Tobacco, manufactured (whether or not containing tobacco substitutes) 525 - Radioactive and associated materials 667 - Pearls, precious and semi-precious stones, unworked or worked 718 718.7 Nuclear reactors, and parts thereof, fuel elements (cartridges), non-irradiated for nuclear reactors 897 897.3 Jewelry of gold, silver or platinum group metals (except watches and watch cases) and goldsmiths' or silversmiths' wares (including set gems) 971 - Gold, non-monetary (excluding gold ores and concentrates) 2 Page 3 of 3 (b) expenditures in the currency of the Borrower or for goods or services supplied from the territory of the Borrower; (c) payments made for expenditures prior to the date of this Agreement, except that withdrawals in an aggregate amount not exceeding the equivalent of SDR 7.3 million may be made on account of payments made for such expenditures before that date but after August 1, 1991; (d) expenditures for goods procured under contracts costing less than $5,000 equivalent; (e) expenditures for goods supplied under a contract which any national or international financing institution or agency other than the Association shall have financed or agreed to finance; (t) expenditures for goods intended for a military or para-military purpose or for luxury consumption; and (g) expenditures in excess of an aggregate amount equivalent to $25 million equivalent for petroleum products. 3 STATUS OF BANK GROUP OPERATIONS IN UGANDA Annex IV ......................................... Page 1 of 2 A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of July 31, 1991) .***USS Nillion--**** Amount(Less Cancellations) Loan or Fiscal Undis- Credit No. Year Borrower Purpose Bank IDA bursed .. .. . . . ...... .. . . .... - -- - - - One (1) toan and twenty-two (22) fully disbursed, 8.40 450.45 Of which SECALe, SALe and Program Loans/Credits a/ Cr. 03400 1988 Uganda Economic Recovery Credit/SAF 24.00 0.03 Cr. 18411 1989 Uganda Economic Recovery Credit 0.00 1.70 Cr. 12520 1982 Uganda Reconstruction Credit II 0.00 70.00 Cr. 14740 1984 Uganda Reconstruction III 0.00 50.00 Cr. 18440 1988 Uganda Economic Recovery Credit 0.00 65.00 Cr. 18443 1990 Uganda Economic Recovery Credit 0.00 1.50 Cr. 20871 1991 Uganda Economic Recovery Credit 11 0.00 2.00 Cr.12480 1982 Uganda IF 1 35.00 2.42 Cr.13280 1983 Uganda Agricultural Rehabilitation 70.00 7.38 Cr.14340 1984 Uganda Second Technical Assistance 15.00 0.34 Cr.14450 1984 Uganda Third Highway 58.00 11.40 Cr.15390 1985 Uganda Agricultural Development 10.00 5.87 Cr.15600 1985 Uganda Second Power 28.80 15.30 Cr.15610 1985 Uganda Petroleun Exploration Prom 5.10 4.55 Cr.18030 1987 Uganda Fourth Highway 18.00 3.86 Cr.18240 1988 Uganda Forestry Rehabilitation 13.00 6.36 Cr.18690 1988 Uganda South West Ag. Rehab. 10.00 8.59 Cr.18930 1988 Uganda Sugar Rehabilitation 24.90 18.23 Cr.19343 1988 Uganda Health Rec. 42.50 30.58 Cr.18442 b/ 1989 Uganda Econ. Recover- Credit 25.00 0.18 Cr.19510 1988 Uganda Tech. Asat. II. 18.00 10.71 Cr.19620 1989 Uganda Public Enterprises 15.00 8.64 Cr.19650 1989 Uganda Education IV 22.00 7.72 Cr.19860 1989 Uganda Railways 1 7.00 5.53 Cr.19910 1989 Uganda Telecom II 52.30 34.16 Cr.20870 b/ 1990 Uganda Economic Recovery Credit 125.00 4.59 Cr.20880 1990 Uganda Poverty & Sos. Costs 28.00 25.52 Cr.21240 1990 Uganda Water Supply II 60.00 59.03 Cr.21760 1991 Uganda Livestock 21.00 21.47 Cr.21900 b/ 1991 Uganda Ag. Sector Adj. Credit 100.00 69.84 Cr.22060 c/ 1991 UJanda Urban I 28.70 27.61 Cr.22680 1991 Uganda Power III 125.00 115.90 Total 8.40 1407.75 505.78 of which repaid 8.40 26.61 Total held by Bank & IDA 0.00 1381.14 TOTAL Undisbursed 505.78 on= a/ Approved after FY80 b/ SAL, SECAL or Program Loan/Credit c/ Not yet effective ugledt.kli 08-19-91 Annex IV Page 2 of 2 B. STATENENT OF IFC INVESTMENTS IN UGANDA (as of July 31, 1991) Amount in USS Million Fiscal .....-.-.-..-.....-.. Year Obligor Type of Business Loan Equity Total 1985 DFCU Developent Finance Companies 0.00 0.38 0.38 1965 MULCO spinning Weaving & Finishing 4.32 0.71 5.03 1984 TANTECO Food Products 1.62 0.00 1.62 1972 TPS Tourism Services 1.11 0.00 1.11 1984 Uganda Sugar Cocoa Chocolates, Sugar 8.00 0.00 8.00 1985 Uganda Tea Food Products NEC 2.81 0.00 2.81 Total gross commitments 17.86 1.09 18.95 Less: Repayments, cancellations, exchange adjustments, terminations and sales 8.52 0.71 9.23 Total Commitments now held by IFC: 9.34 0.38 9.72 Total undisbursed 0.00 0.00 0.00 Total Outstanding IFC 9.34 0.38 9.72 g2edt.ukl 08-19-91