Uganda - Debt reduction program

Documnt of The World Bank FOR OMCIAL USE ONLY Report No. P-5935-UrG REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED GRANT OF tP TO US$13.7 MILLION FROM THE DEBT REDUCTION FACILITY FOR IDA-ONLY COUNTRIES TO THE REPUBLIC OF UGANDA FOR A DEBT REDUCTION PROGRAM NOVEMBER 17, 1992 This document has a restricted distribution and may be used by recipients oyIy_i the performance of  CURRENCY EQUIVALENTS Currency Unit: Ugandan shilling (U Sh) Official Rate: US$1.00 = U Sh 1185 (August 1992) Foreign Exchange Bureau Rate: US$1.00 = U Sh 1256 (August 1992) ABBREVIATIONS AND ACRONYMS BOU Bank of Uganda DOD Debt Outstanding and Disbursed EDMO External Debt management Office EEC European Economic Community ERC Economic Recovery Credit ERP Economic Recovery Program ESAF Enhanced Structural Adjustment Facility GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development ICA International Coffee Agreement IDA International Development Association IMF International Monetary Fund MOF Ministry of Finance NRM National Resistance Movement OECD Organization for Economic Cooperation and Development PFP Policy Framework Paper SAC Structural Adjustment Credit SAF Structural Adjustment Facility SSA Sub-Saharan Africa  FOR OFFICIAL USE ONLY REPUBLIC OF UGANDA DEBT REDUCTION FACILITY FOR IDA-ONLY COUNTRIES PROGRAM SUMMARY Recipient: Republic of Uganda Beneficiary: Republic of Uganda Amount: Up to US$13.7 million Terms: Grant Program Description: The proposed grant would provide up to US$13.7 million from the Debt Reduction Facility for IDA-Only Countries (the Facility) to the Republic of Uganda in support of Uganda's proposed commercial debt reduction operation. The proposed grant would consist of US$10 million contributed to the Facility from IBRD's FY89 net income and up to US$3.7 million contributed to the Facility for the operation by the Governments of the Netherlands and Switzerland. Under the debt reduction operation, the Republic of Uganda will repurchase its outstanding commercial debt at a substantial discount. The amount of eligible debt is estimated to be US$188 million as of September 30, 1992, which consists of about US$161 million principal and US$27 million of past due interest, evaluated at current exchange rates. This amount may be modified based on the reconciliation of any discrepancies with creditors following the submission of responses to the operation and as a result of changes in the exchange rate for debt denominated in currencies other than U.S. doliars. The operation is structured as a cash buy-back. The Government will offer to pay commercial creditors 12 cents for each dollar of eligible debt in satisfaction of all amounts owed with respect to such eligible debt, including principal and all unpaid interest penalties and commissions up to September 30, 1992. The total financing required for the offer if all eligible creditors were to accept would be about US$22.6 million. In addition to the proposed grant, Uganda has received a formal commitment from the German Government to provide US$5 million equivalent for the operation while the EEC has indicated that it is actively considering providing the Government with US$4 million equivalent, from STABEX This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ii funds, subject to completion of its internal review process. These resources would be provided directly to Uganda to complete the financing required for the operation. Disbursements from the Facility for the operation will be conditional on adequate financing being available to Uganda to complete the operation. The implementation of the program will be contingent upon acceptance of the creditors holding at least 60 percent of the principal amount of the eligible commercial debt outstanding of Uganda. Program Benefits: Obtaining significant debt relief is critical for Uganda to attain balance of payments viability in the long term and for the country to achieve sustained per capita income growth as a result of its adjustment efforts. As part of its overall external debt management strategy, Uganda is seeking an orderly termination of its commercial debt obligations and accumulated arrears through the proposed debt reduction operation. The buy-back operation would elimijiate about one-third of the total external arrears of the country as of June 30, 1992, 78 percent of the total commercial debt and over 7 percent of the total stock of debt. Risks: The principal risk is that the critical mass of participating creditors will not be attained and the operation will not proceed. However, based on informal discussions with commercial creditors, the financial advisors to the Government for this operation, believe that there will be substantial acceptances from such creditors. Disbursement: The grant funds from the Facility would be disbursed, upon compliance with the conditions of effectiveness and disbursement in the grant agreement, for the purchase of eligible debt pursuant to the offer and for incidental costs incurred by the Government (up to a maximum of US$100,000) and approved by the Association in order to complete the operation. The proposed grant's closing date is expected to be no later that 180 days after the signing of the grant agreement. Rate of Return: N.A.  IREPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPI&NT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED GRANT FROM THE DEBT REDUCTION FACILITY FOR IDA-ONLY COUNTRIES TO THE REPUBLIC OF UGANDA Table of Contents Program Summary ............................................ i-ii I. THE ECONOMY ............................................ 2 Background .............................................. 2 Performance under the Adjustment Program .......................... 2 Economic Outlook and The Unfinished Agenda ........................ 3 External Capital ReqWurements................... ............... 4 I. EXTERNAL DEBT SITUATION .................................. 7 M. EXTERNAL DEBT STRATEGY .................................. 8 (1) Paris Club Debt Eligible for Debt Forgiveness/Rescheduling .............. 9 (11) Paris Club Debt Ineligible for Debt Forgiveness/Rescheduling .... ........ 10 (I) Non-OECD Bilateral Creditors ............................... 11 () Buy-Back and Restructuring of Uninsured Commercial Debt .... ......... 12 (V) Multilateral Debt Service ................................... 12 IV. EXTERNAL DEBT MANAGEMENT ............................... 13 V. THE PROPOSED OPERATION ................................... 14 Description of the Operation ................................... 15 Nature of Creditors and Eligible Debt ............................. 16 Benefits and Risks of the Operation ............................... 18 Minimum Participation Level ................................... 19 Eligibility ............................................... 19 VI. BANK GROUP STRATEGY AND OPERATIONS ....................... 19 Lending Program and Economic and Sector Work .............. ........ 20 VII. COLLABORATION WITH THE IMF AND OTHER DONORS .... .......... 21 VIII. RECOMMENDATION . ...................................... 21 Annex 1-3 ..... 23  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED GRANT FROM THE DEBT REDUCTION FACILITY FOR IDA-ONLY COUNTRIES TO THE REPUBLIC OF UGANDA 1. I submit the following report and recommendation for a proposed grant of up to US$13.7 million to the Republic of Uganda from the Debt Reduction Facility for IDA-Only Countries (the Facility) in support of Uganda's proposed commercial debt reduction operation. The Republic of Uganda wishes to use up to US$10 million from the IBRD FY89 net income contribution to the Facility, together with an additional amount of up to US$3.7 million expected to be contributed to the Facility for the operation by donors to repurchase its outstanding commercial debt at a substantial discount. These donors are the Governments of the Netherlands and Swit4erland. The Government of Switzerland has formally agreed to contribute US$0.7 million to the Facility for this operation. The Government of the Netherlands has confirmed its agreement, in principle, to make a contribution for the operation in the amount of US$3 million. However, a formal contribudon agreement has not yet been signed with the Government due to the need for it to complete its internal authorization procedures. Therefere, the actual grant amount will consist of US$10 million from IBRD's FY89 net income and US$0.7 million contributed to the Facility by Switzerland and such additional amounts as are committed under contribution agreement between the Government of the Netherlands and IDA, as Trustee of the Facility. This commitment is expected prior to approval of the proposed grant by the Executive Directors. 2. The total amount of debt eligible for the proposed operation is estimated to be US$188 million as of September 30, 1992, which consists of about US$161 million principal and US$27 million of past due interest, evaluated at current exiiange rates (Table 4). Uganda proposes to offer to purchase this debt at 12 cents for each dollar of eligible debt owed through September 30, 1992. Consequently, the total financing required for the offer, if all eligible creditors were to accept, would be about US$22.6 million. In addition to the proposed grant, Uganda has received a formal commitment from the German Government to provide US$5 million equivalent for the operation while the EEC has indicated that it is actively considering providing the Government with US$4 million equivalent, from STABEX funds, subject to completion of its internal review process. These resources would be provided directly to Uganda to complete the financing required for the operation. Disbursements from the Facility for the operation will be conditional on adequate financing being available to Uganda to complete the operation. 3. An information memorandum on the proposed operation was circulated to the Executive Directors on July 22, 1992 ("Uganda: Allocation of Resources of the Debt Reduction Facility for IDA-Only Countries for a Proposed Debt Reducdon Operation and Grant from the Facility for Legal Advisors for the Preparation of the Proposed Operation" (IDA/R92-1 10). The proposed grant is in addition to the grant of US$500,000 provided to Uganda at that time from the Facility for legal advisers for the preparation of the operation. Although the operational guidelines for the Facility state that "Facility resources available to any country should not exceed US$10 million unless there are exceptional circumstances providing strong justification for a greater level of support', the proposed total amount of Facility resources for the operation of US$10.5 million from IBRD's net income contribution is necessary in this case to complete the financial resources needed to fully  -2- prepare and implement the operation. The allocation is not expected to affect materially the availability of resources for Facility operations in other countries. I. THE ECONOMY 4. The latest Policy Framework Paper for Uganda was distributed to the Executive Directors on November 11, 1992. Background 5. With a per capita income of under US$250, Ugpnda today is one of the poorest countries in the world; indeed, it is a living testament of the havoc caused by the political turmoil and economic decline brought about by several years of despotic rule. At independence (1962), Uganda had one of the most vigorous and promising economies in Sub-Saharan Africa (SSA), and the years following independence amply demonstrated this economic potential. Favored with a good climate and ferdle soil, the country was self-sufficient in food, with the agriculural sector being a large earner of foreign exchange. The manufacturing sector supplied ihe economy with basic inputs and consumer goods and was also a source of foreign exchange earnings through the export of texles and copper. Export earnings not only financed the country's import requirements but also resulted in a current account surplus. Fiscal and monetary managemen . was sound and the domestic savings rate averaged about 15 percent of GDP, enough to finance a respectable level of investment. Uganda's system of transportation was widely regarded as one of the best in SSA and included an effective network of roads, railway, port and airline facilities. 6. The Amin regime radically reversed the economic and social progress attained since independence and the ensuing civil strife resulted in a tremendous loss of human life. It is estimated that as many as 500,000 Ugandans lost their lives and as many as 1 million more were internally displaced from their homes and farms. Economic mismanagement accompanied the ensuing periods of civil war and professional standards deteriorated rapidly as skilled personnel fled the country. Between 1970 and 1980, Uganda's GDP declined by about 25 percent, exports by 60 percent, and import volumes by close to 50 percent. With large increases in defense expenditures, the government budget became increasingly untenable and was largely financed by bank borrowing which resulted in average inflation rates well in excess of 70 percent. The economic mismanagement and abuse of human rights on a massive scale coninued under the Obote regime. By 1985 government expenditures on education and health, in real terms, amounted to about 27 percent and 9 percent respectively of 1970s levels. Perfornunce under the Adjustment Prsgram 7. When the National Resistance Movement (NRM) Government assumed power in January 1986, its key objectives were to build a broad-based government and restore peace and security in the country; to bring about internal financial stability by lowering the rate of inflaton and reducing the imbalances in the economy; and to lay the basis for the alleviation of poverty by promoting rehabilitation and growth. Accordingly, the Government introduced its Economic Recovery Program (ERP) of rehabilitation investments and policy reform to facilitate the economy's recovery from the devastation of the war years. The ERP has been supported by two Economic Recovery Credits (ERC I and ERC II) and a Structural Adjustment Credit (SAC 1) from IDA; two arrangements under the Structural Adjustment Facility (SAP) and three arrangements under the Enhanced Structural  -3- Adjustment Facility (ESAF) from the IMF; and assistance from other multilateral 4n4 bilateral donors. 8. Under the ERP umbrella, a great deal has been accomplished on the policy f.ont. The exchange and trade system is now largely market-based, and export and import procedures have been fully ltberalized. Competition has been introduced into the marketing of coffee and other crops. Price controls, which were few to begin with, have been eliminated. The Government is tackling the very difficult issue of properties expropriated by the Amin regime. It has passed an Ivestment Code and established the Uganda Investment Authority to promote investment. With the establishment of the Uganda Revenue Authority, the poor tax collection effort is finally being addressed. Public expenditure controls have been improved, and a structural shift ha.s been affected in the composition of expenditures away from defense and towards economic and social services. A significant portion of the economic and social infrastructure has now been rehabilitated. Tne number of ministies has been substantially reduced. Recently, the Ministries of Fmance and Planning have been merged in an effort to improve coordination. A major effort to restructure and streaumline the civil service is underway. Finally, the Government, with considerable donor support, has started an ambitious program of demobilizing a significant percentage of its armed forces. 9. The impact of these policies has manifested itself in economic growth which has exceeded 5 percent on average since the Economic Recovery Program was introduced; these growth rates have enabled real per capita income to grow by about 2 percent annually. The engine of growth remains agriculture which stll contnbutes over 50 percent to GDP. Overall grow-' has also been facilitated by the rapid expansion of the private service sector and the buoyant manufacturing sector. Economic Outlook and The Unfir:shed Agenda 10. Despite these favorable developments, the economy continues to be characterized by low savings, private investment and exports, as well as heavy relance on foreign savings. To sustain and even accelerate the present rate of GDP growth, Uganda needs a much higher rate of private investment than what is being achieved at present. 11. Uganda's economy has the potential to become one of the strongest in Sub-Saharan Africa. Given the exceptionaly favorable climatic and soil conditions over most of the country, agriulture will remain the engine of growth for some time. Over the last four years, improved security and tranWsport infrastructure have brought land and rural labor back into agricultural production, primarily of food crops. Future growth will need to come from increased yields, as well as the expansion of the area cultivated. Uganda sdll has a comparative advantage in the producdon of its traditional export crops such as coffee, cotton, tea, and tobacco. Of the food crops presendy produced, several are competitive within the region. Iternatonal competitiveness, however, is limited by high transport and bandling costs resulting from Uganda's landocked position. Uganda's export strategy aims to recapture lost export markets for the traditonal crops, in particular those of cotton and tea; to develop nontraditional exports, including livestock, forestry, fisheries and horticutural products; and to promote import substitution in dairy products, sugar, tobacco, and edible oils. The market upheaval that has occurred since the collapse of the quota arrangement under the International Coffee Agreement (ICA) in July 1989 shows just how imperative it is for Uganda to reduce its dependence on coffee for its foreign exchange requirements. This gives export diversification a new urgency.  -4 - 12. The attainment of these objecdves was for a long time constrained by inadequate producer incentives for tiaditional export crops. However, this is no longer a major problem. The main constraints that remain include inefficiencies of the export processing industries, export marketing systems (especially cotton) and institutions, the weakness of the financial system and its lack of outreach in rural areas, poor feeder roads Pnd other economic infrastructure, weak agricultural support services (research, extension, seed distribution and credit), and a weak capability for agricultural sector policy formulation. The latter is especial'lv important since the sustainability of agricultural growth depends on rational use and management of the cointry's natural resource base. 13. The small but growing industrial sector in Uganda declined precipitously from 1970 to 1985 with the large-scale acquisition of enterprises by Government, the deportation of foreign entrepreneurs, and the general economic devastation during those years. With an increased supply of inputs and minor rehabilitation, capacity utilizatior: has already expanded in industries. Th, manufacturing sector has the potential to expand production for export as well as for the domestic markets, especially for processed food products and textiles. A small but growing number of produlcts are becoming competitive in regional markets as a result of exchange rate adjustments and increased efficiency of production. The liberalization of the exchange and trade system has also improved incentives for the export of industrial products. 14. Encouraging the growth of output in general, and exports in particular, will need to be the key focus in the period ahead. Without growth in production, resources will simply not be availablc to provide the jobs and investments in human resources which Uganda desperately needs; and without growth in exports, the foreign exchange required for sustainable growth will not be available. The private sector will have to play the primary role in generating both output and exports. Thus, a central preoccupation of government policymakers must be the creation of ad enabling environment for efficient private sector activity rather than direct intervention in the productive sectors. 15. To realize its growth potential, Uganda needs the following improved macroeconomic management, enhanced market incentives for production, an improved climate for private investment, a strengthened financial sector able to meet the financing needs of businesses, farms and households, better public revenue and expenditure management, an enlarged and adequately maintained economic and social infrastructure, and an efficient civil service. Sustainability of growth also requires attention to environmental issues. Progress in all these areas requires a clear vision of the role of Govermnent. External Capital Requirements 16. The sustainability of the Ugandan reform agenda is critically dependent on adequate external financing. The collapse of the quota arrangements under the International Coffee Agreement (ICA) in July 1989 and the accompanying fall in coffee prices have had a devastating impact on the foreign exchange earning capacity of the Ugandan economy. Whereas in 1986/87, coffee provided the econiory with about US$365 million in foreign exchange earnings and financed about 70 percent of the country's imports, coffee exports in 1991/92 ondy amounted to US$117 million, capable of financing only about 28 percent of the import requirements. Despite measures to increase non-coffee 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. At the same time, the economy needs a minimum level of imports to meet its growth and stabilization targets. Policy reforms are a necessary but not sufficient condition for growth; considerably enhanced donor assistance will also  ......... ... ..............V ml  be required to sustain these reforms. 17. Table 1 presents the financing requirements for the Ugandan economy for the current PFP period, 1992/93-1994/95. As the table reveals, the medium-term external financing outlook remains grim. Internatioml price prospects for coffee are bleak; the price for Ugandan coffee is projected to remain in the US$0.80-US$0.90 per kilogram range for the next few years, implying prices which will still be less than 50 percent of what they were in 1986/87. While the volume of coffee exports should receive a boost from the adoption of the new system of remunerating coffee exporters, whereby coffee export proceeds are converted into Ugandan shillings at the foreign exchange bureau rates, and by the abolition of the coffee export tax, the production response will only marginally compensate for the large decline in international prices. Non-coffee exports should continue to benefit from the elimination of marketing monopolies and the further liberalizadon of the exchange and trade regime. Already non-coffee exports have registered a large increase as a result of the improved policy enviroment, from US$6 million in 1988/89 to an esdmated US$55 mill:on in 1991/92. However, giver the extremely small base of these exports, the impact on the financing requirements has been marginal thus far and a significait quantitative impact on the balance of payments can only be expected over the medium term. As a result, it is andcipated that Uganda will continue to be heavily dependent upon donor support for some dme to come. Even with the right policies in place, it would be unrealistic to expect a significant decline in donor dependence until the turn of the century. 18. Uganda has enjoyed substantial and growing financial support from the international community in recent years and this increase in assistance has gone a long way to offset the decline in the international price of coffee. There appears to be widespread recognition among the donors that the country has suffered an exogenous shock of dramatic proportions and has reponded by taking a series of corrective policy actions. It is estimated that between 1989/90 and 1991/92 Uganda annually received, on average, disbursements of approximately US$410 million in foreign loans and grants, as compared with an average level of US$265 million in the preceding free-year period', partally compensating the country for the over US$200 million loss in annual coffee earnings. While this represents a significant increase, it represents about US$25 of aid per capita per year, still slightly below the average level of assistance for Sub-Saharan Africa (US$28), not all of which was subject to external shocks of the same magnitude as Uganda. Moreover, bilateral flows to Uganda continue to remain much bower than in other SSA economies, about US$10 per capita, compared to US$17 per capita for Sub-Saharan Africa. 19. In addition to the increase in the levels of external assistance, the past two years have also witnessed a welcome shift in the pattern of aid allocation. Whereas, for much of the 1980s, project- related assistance accounted for weUl over 80 percent of gross disbursements, it declined to about 72 percent in 1987/88. In 1991/92 project aid is estimated to be only about 60 percent of total aid, as donors increasingly sought to assist the Government through import support aid, thereby not only providing much needed balance of payments support but also addressing the local financing problem, since such assistance generates resources for the budget in the form of counterpart funds2. IMF purchases are exhtded. 2 W9hile some of the coupa funds disbused to Ugauda h impot support are tid to pecial donor initaves, mos finds re available to the Govemen for unresrkt budgery v*port. mhe di between prqect aid and balance of paymens support is therefore a crtical issue for govrment aid pokcy.  20. The financing requirements projections for the Ugandan economy. presented in Table 1, are consistent with the Government's GDP growth target of 5 percent per annum and seek to reverse the significant import compression that has taken place in the country during the past two years. For 1992/93, total financing requirements are estimated at US$861 million, excluding the settlement of arrears. Own resources, including coffee exports and private transfers, are expected to finance about 35 percent of the foreign exchange requirements, or about US$298 million, leaving a gap of about US$563 million to be financed from external sources. Existing conuitments of project aid, import support and IMF purchases could provide the economy with an additional US$415 million, yielding a residual finance gap of around US$148 million, of which approximately US$50 million will be bridged as a result of the recently concluded Paris Club meeting (see below). At the last Consultative Group meeting for Uganda (May 1992), donors pledged a sum of US$830 million. This level of commitment will be sufficient to close the residual financing gap for 1992/93 and will, in addition, provide the Government with critical balance of payments and investment support for future years. The financing requirements do not include the setdement of external arrears. It is worth noting that, of the total financing requirements in the next two years, almost a quarter are needed to meet Uganda's scheduled debt-servicing obligations. II. EXTERNAL DEBT SITUATION 21. The decline in coffee prices has come at a time when the NRM Government has been making a major effort to rebuild the Ugandan economy and improve the quality of life of its citizens. Consequently, to implement its recovery program, the Government has had to resort to heavy foreign borrowing, albeit largely on concessionary terms. This has resuted in a near doubling of the stock of debt outstanding in the period since the NRM regime assumed power in 1986. At the same time, the decline in earning capacity has also adver3ely affected Uganda's ability to service its debt, resulting in an extremely rapid accumulation of arrears in recent years. 22. As summarized in Table 2, Uganda's stock of debt outstanding and disbursed (DOD) was eistimated at US$2.6 billion as of June 30, 1992, of which approximately US$583 million was in arrears. Approximately 66 percent of this debt is owed to multilateral organizations, with the World Bank and the IMP accounting for about 76 percent of multilateral debt. Bilateral debt accounts for about 25 percent of DOD, with OECD bilaterals accounting for about 11 percent and inn-OECD bilaterals 14 percent. The remaining 9 percent of DOD is ow:fl to commercial creditors. Commercial creditors account for the largest proportion of arrears, about 38 percent of the total; followed by non-OECD bilaterals, 33 percent; multilateral creditors, 15 percent; and OECD- bilaterals, 14 percent. Total DOD is over 122 percent of gross domestc product and the principal and intermst paymenFt ncessary to service this debt, estimated at US$176 million in 1992/93, imply a debt-service ratio of about 80 percent, on a commitment basis3. Ths does not include any servicing of the outstanding arrears which represent an additional 265 percent of the export of goods and non-factor services in 1992/93. The debt-service ratio for 1991/92 was 128 percent, largely reflecting the higher payments due to the IMP. 23. An analysis of the composition and profile of Uganda's DOD and debt service obligations reveals the extremely difficult external financial position that the country finds itself in. First, it is abundantly clear from the high debt-service ratio that the current level of foreign exchange earnings of the economy is insufficient to service the stock of outstanding debt. Second, the preponderance e debt-servie rtio ha been caulated using the expoV of goods and no-facr services in the denominaor.  -8 - of ~ ~ ~ ~ ~ ~ ~ ~ ~ 6 mutltrldb7eeeylmtstebnft9bt6 onyca civ bog rdtoa resneing snc mutiatraloranzaton d no rscedue eb. lnid,of me$293 mllo owe to Patis Clb(EDbltrl)ceios 2pren U$1 ilo) aotcefe mecu-ofdate fr~4 July 1,3 191 x ai lbdesntrshdl rrdueaydb bc a foeen ~ ~ ~ ~ ~ ~ 5~., cotatdalra.gedctofdt out,lfl rcdneitAo eOdln m.db owd o o4E iatera credtors wh 4confrtelretodo1fnnmlltrlDD Fmly fte ee fuinue omrca et(J$22mlin, bu S4ymlincno be ~~ receue orrdcdo ihyfvrbliem sanme flanarowdtcnrcos with~ ~~~~~~~~~~~77 wor in~ prgeso r eurdi aiuas ofmutilaxternal debt severlyms limit thvernbenehas thamtthed cutry cani achineve thrrouigh traditonalsw reschedulig, siance mulentilfatleraraiastin do pecnot. rshdl et hrd fte$7 ilo 2.Gvnthe ut-off daeooJl f,91 the Piaris Clu does noternes hesdueveorpeduc anydeb wich hasetl owpedentoino n- bilternal crdebtors,rtg who accountdo tchievlrest poertio ofe-ya nonmuilateral DoD be recheuledy' oxtrna rduedtponlm hihly faorbletiers as ah numbraofeoan are to()rsowed tora cotrorsin  .9 - UGANDk Extemal Debt Profile DOD OECD B8ata8 (11%) Mu_als~Nn~SC Dultaal (4 Na-MBdanb (14%) CMOamiua Non-Dank (8%) MulNaaruto (46%) relations with creditors by clearing the bulk of the accumulated principal and interest arrears which are causing legal action against the Government and threats to seize assets to satisfy claims, the imposition of sancdons on disbursements and the disruption of development projects; (ii) stop e increase in outstanding debt resulting from the accumulation of penalty and late interest charges; and (Oii) reduce annual contractual debt service due to a level commensurate with Uganda's ability to pay, i.e. about US$130 million annually. The strategy is based on the general principle that aU creditors will be treated fairly but that precedence in debt service payments will be given to muitilateral creditors, who represent the main source of new concessional financing for Uganda, and those creditors who provide a positive flow of funds into the country. 26. The Government's strategy includes five elements, which are discussed below. All figures discussed are as of June 30, 1992 and do not include arrears, late interest and penalty charges and servicing of additional disbursements accumulated since then. (1) Paris Club Debt Eligible for Debt ForgivenessRescheduling 27. Uganda has already benefitted from a number of debt cancellations granted by Paris Club creditors, in addition to the reductions obtained under the 1989 rescheduling on Toronto terms and the 1992 rescheduling on enhanced Toronto terms. These include cancellations from France, Germany, UK and USA on loans originally provided on concessional terms. According to the precedent established by OECD donors, concessional loans made to low income countries are eligible for complete write-off, in addition to Paris Club reschedulings. The profile of debt outstnding to this group of creditors as of June 30, 1992 indicates that all concessional debt to Uganda has already been written off. All remaining debt due to OECD creditors is contracted on non-concessional terms, except for recent concessional loans from Austria and France and mixed credits from Spain, all of which are still being disbursed. 28. As Table 2 reveals, approximately US$279 million is outstanding to Paris Club creditors of which US$81 million represents arrears and penalty charges; US$26 million of principal and interest payments are due in 1992/93 to Paris Club creditors. The Paris Club does not reschedule or reduce any debt which has been contracted after an agreed date, which in the case of Uganda is unusually early at July 1, 1981 (the cut-off date). Of the total amount outstanding to Paris Club creditors, 42  - 10- percent (US$118 million) was contracted after the cut-off date. Consequiently, only about -JS$50 mifllon in arrears and cuffent maturities due in respect of pre cult-off date debt was eligible -for rescheduling in the Jun 1992 agreement reached with the Paris Club. US$46 million of arrears and US$11 milUion of 1992/93 maturities on post cut-off date debt, on the other hand, xvere ineligible for rescheduling and remain due for payment. 29. Notwithstnding the lirated gann to be made from Paris Club rescheduling, the GJovernment's debt strategy calls for Uganda to seek year-by-year rewheduHing of eligibbe Paris Club debt on the most generouis terms possible. Table 3 presents a brief summary of Ugand's Paris C-lub history. On June 17, 1992, the Government was granted "enhanced Toronto" Wems (i.e. a 50 percent write-off on a net presnt value basis of the debt rescheduled) by the Paris CMu on the amounts due in this category of debt, which represents the most favorable terms currently granted to debtor nations. The debt tD be reduced/rescheduled includes all eligible arrears as of June 30, 1992 and maturities up to November 30, 1992. It was agreed that maturities up to November 30, 1993 would also be restructured under this agreement, subject to Uganda agreeing a fourth year ESAF arrangement with the IMP. The year-by-year rescbeduling approach adopted by creditors under these terms will require Uganda to reXrn to the Paris Club on a regular basis for the foreseeable future. (II) Paris Club Debt Ineligbibe for Debt Forgiveness/Rescheduflng 30. With respect to the amount of arrears on post cut-off date Paris Club debt (US$46 million as at June 30, 199X), the Paris Club has agreed to accept payment of dims amounts over 1992193 and 1993194. This represents the element of the debt strategy which caal for Uganda to seek annually the na7drum deferral possible of such an-ers. There have only been a few iknstnes of such deferrals being granted in the past. Of the deferrals that bave been granted, the associated terms have been quite stringent, with no grace period, short repayment periods, and no reduction of principal and interest. Moreover, debt service coming due is not deferred and arrears once deferred are not eligible for any future deferrals. Uganda's debt service profile shows that the short repayment period associated with the deferrals will serve to increase the debt servce due in future  - 11 - \. ~ ~ ~ ~ ~ ~ ~ ~ ~ . 3~ years to levels that Uganda might find difficult to service, but which it will not be able to re-defer or reschedule. However, it is important to point out that, given the extremely tight foreign exchange situation brought about by the decline in the international price of coffee, this element of the debt strategy serves to buy Uganda some time in which to mobilize additional export earnings, i.e. via the promotion of non-coffee exports. (Ill) Non-OECD Bilateral Creditors 31. Non-OECD bilateral creditors are owed a significant amount of arrears and penalty charges, totalling US$193 million and the principal and interest payments due to them in 1992/93 are about US$35 million. Accordingly, the Government has initiated discussions with non-OECD bilateral creditors requesting either a write-off of debt or long-term reschedulings of arrears and the entire stock of debt outstanding to try to obtain at least equivalnt treatment of creditors, as required in the Official Minute of the Paris Club. It is again important to emphasize that there are few precedents for rescheduling non-OECD bilateral debt and, unlike the Paris Club, no forum exists where the issue of non-OECD bilateral debt can be addressed. Most of the arrears owed under this category are due to creditors such as India, Tanzania and Yugoslavia who, because of their own financial constaints, may find it difficult to accept long-term reschedulings and reductions of the amounts immediately due. The creditors have been asked to reschedule the total stock of debt, regardless of whether it is incurred after the Paris Club cut-off date, and to maintain the concessional or semi-concessional interest rates that apply to the underlying loans for the rescheduling. 32. As in the case of disbursing loans from Paris Club creditors, there are a number of loans in this category which it would not be appropriate to reschedule at present and which will continue to be serviced as far as possible. These represent highly concessional loans whose terms are more beneficial than the proposed rescheduling terms; loans which are currently disbursing or represent work in progress; and loans which have recentdy been subject to rescheduling.  - 12 - (IV) Buy-Back and Restructuring of Uninsured Comnnercial Debt 33. As outlined in Table 4 above, about US$242 million of debt (consisting of about US$209 million in principal and US$33 in past due interest) is outstanding to uninsured commercial creditors at September 30, 1992. Approximately US$226 million of this category of debt represents obligations to non-bank commercial companies, mostly in respect of trade arrears and suppliers' credits, while the remaining US$16 million represents recent obligations to commercial banks. The Government intends to restructure its commercial debt by converting some of the debt into equity; rescheduling a portion of the debt; and discharging the remainder in a buy-back operation at a significant discount to face value using the IDA Debt Reduction Facility and amounts contributed directly to Uganda by bilateral donors for the operation. 34. The amounts to be converted into equity, approximately UVS$13.1 million, maindy include arrears due to the private sector joint venture partner of the Go"e>inment in the Toro Mityana Tea Company and an American investor who intends to set up a project that could make a significant contribuuon to the generation of non-traditional exports. The Government is currently in discussion with these creditors to swap these arrears for Government assets in accordance with the privatization program. 35. Approximately US$41 nillion of commercial uninsured debt represents amounts due to creditors who have current work-in-progress or hold some form of security. It would be inappropriate to offer these creditors a cash settlement at a deep discount to face value, as proposed in the buy-back operation. The Government intends to try and negotiate on an individual basis the most favorable terms of rescheduling possible with these creditors and has already recently agreed on the rescheduling of US$18 million outstanding in this category. 36. The Government has made a request to use the IDA Debt Reduction Facility to help buy back the remaining debt of US$188 million (representing US$161 million of principal and US$27 million of past due interest) at a deep discount to face value. This amount may be modified based on the reconciliation of any discrepancies with creditors and as a result of changes in the exchange rate for debt denominated in currencies other than U.S. dollars. Details of this proposed operation are described in Section V below. (V) Multilateral Debt Service 37. The fifth and final element of the Government's debt strategy calls for increased effort on the part of the Government to try and mobilize bilateral donor assistance for servicing multilateral debt. Under the ongoing Fifth Dimension facility, Norway and Sweden have provided the Government with resources equivalent to IBRD repayments and the Government has requested these donors to try to set up a similar facility for servicing the debt of other multilaterals, notably the African Development Bank. Efforts have been and continue to be made to restructure the arrears due to certain regional multilaterals. Agreement was reached recently on the rescheduling of arrears due to the Arab Bank for Economic Development in Africa and discussions are currendy being held with the East African Development Bank and the Islamic Development Bank on the restructuring of amounts outstanding to them.  - 13 - IV. EXTERNAL DEBT MANAGEMENT 38. In conjunction with the development of its own external debt strategy, the Government has also reviewed the institutional arrangements for contracting, recording and monitoring external debt. This review has highlighted certain weaknesses which, the Government recognizes, have compounded the problems of the external debt burden and resulted in the fragmentation of the aid coordination function. As part of the Government's commitment to resolve the external debt situation, ways of improving the institutional framework underlying external debt management and aid coordination are actively under consideration. 39. The responsibilities for aid coordination and debt management are presently shared, in varying degrees, by the Aid Coordination Unit in the (former) Ministry of Finance; the Commissioner/Treasury Officer of Accounts; the External Debt Management Office (EDMO) in the Bank of Uganda; Foreign Exchange Operations in the Bank of Uganda; the Aid Coordinadon Unit in the (former) Ministry of Planning and Economic Development; and the Aid Coordination Unit in the Prime Minister's Office4. The exact role of each institution was not clearly defined and backed by fuil legislative authority. The flow of information between units has been weak, which has led to poor coordination and record keeping, and inefficient verification and monitoring of debt. The External Loans Act of 1962 and the Loans (Guarantee) Act of 1958 jointly vest legal authority for the contraction and management of external debt with the Minister of Finance. The Ministry of Finance (MOP) currently manages the country's external debt portfolio by dividing its management role between the Aid Coordination Unit within MOP and the Treasury. The Aid Coordination Unit within MOF serves as the Minister's Secretariat and assists in the negotiation of new loans and tediitates the flow of aid-related funds into the country. The Treasury, as stipulated in the External Loans Act, authorizes all disbursement requests and also authorizes all debt service payments and therefore has a comparative advantage in maintaining up-to-date external debt related information. Despite this comparative advantage, the Treasury is institutionally weak and does not presently have adequate capacity to perform this debt reporting function. As a result, in recent years, the responsibility for debt reporting has been taken over by EDMO within the Bank of Uganda. Dependence on EDMO has been further increased by capacity constraints within MOF's Aid Coordination Unit and its apparent inability to "take charge' of the country's aid portfolio, as authorized by law. With the recent merger of the Ministry of Finance and the Ministry of Economic Planning, the task of rationalizing the aid coordination and debt management funetion has become even more imperative. 40. As a result of insufficient information and poor coordinadon, the Government has not been able to ensure that all new debt is contracted on terms compatible with the country's external debt burden and its ability to service and repay this debt in the future. Since the mid-1980s the Government has been largely successful in ensuring that implementing ministries do not sign loan agreements independently of the Minister of Finance and most new borrowings have been contracted on concessional terms. However, there have been several instances where implementing ministries have conducted negotiations with lenders and suppliers without the early involvement of the Ministry of Finance or the Bank of Uganda. In some cases this has meant that financial commitments have had to be accepted on terms that are unfavorable. There have also been exceptions to the exclusive authority of the Minister of Finance in incurring debt, particularly in respect of debts other than project loans. These include supply contracts, supplements and extensions to contracts and projects 4 Ue Mbinisty of Fmance and the Mifsty of Planning and Economic Development were merged on Marh 27, 1992.  - 14 - where there has been pressure to begin work urgently. In the past, arrears have been accumulated on the current expenditures of implementing Ministries either due to overspending or overestimation of the foreign exchange allocated to them. These arrears eventually become medium-term debt, carrying expensive terms. 41. Moreover, there has been no clearly articulated policy defining a strict order of priority in which creditors should be paid, although the Government has been successful in ensuring that amounts due to the IMF and the World Bank group have always been serviced. The foreign exchange budgeting system has often overestimated the funds available for debt servicing, thereby compounding the problems of not having a well-defined payments policy. As a result of this situation, creditors who apply persistent pressure, but who would not necessarily provide the maximum future benefits to Uganda, have sometimes been paid ir preference to other creditors. Furthermore, on occasion, the Bank of Uganda has had to resort to borrowing under short-term commercial facilities to make payments to key multilateral creditors. 42. The Government recognizes these weaknesses and has, during the past year, conducted an extensive debt management exercise within the Bank of Uganda. As a result, the total national public sector debt has been verified with creditors and recorded centrally; a thorough analysis of the debt profile has been conducted; the debt records are currendy in the process of being computerized to facilitate access and their future maintenance; and the staff of EDMO have been trained in the principles of external debt management. The development of a debt strategy has also meant that priorities in payments have been identified and all debt service payments are now made in a manner that is consistent with the debt strategy and after following a strict authorization process. The necessity to control the contracting of future debt has been appreciated and, in order to avoid failing into a similar debt-trap in the future, the Government has decided to restrict new borrowing to loans which have a grant element of at least 75 percent. 43. The Government now intends to commence putting in place a set of insdtutional arrangements which will enable it effectively to take charge of the external debt funictin. It is intended that the funtdons of the various units at the operational level will, to a large extent, be eventually centralized in order to pool the limited resources and technical expertise available; improve control and coordination of policy; eliminate duplication of effort; and ensure the efficient transfer of information. A number of detailed changes are to be implemented to improve the systems for a) ensuring that all Government foreign exchange obligations are approved by the Minister of Finance; b) monitoring disbursements; c) verifying, on a priority basis, receipt of goods; d) verifying creditor's claims for payment; d) authorizing and makdng payments; and e) recording and analyzing debt and aid flows. It is also intended that the centralized debt unit and the other institutions involved in debt management will be vested with the necessary legal authority to undertake their tasks effectively. V. THE PROPOSED OPERATION 44. The Republic of Uganda wishes to use up to US$10 million from the IBRD) FY89 net income contribution to the Facility, together with an additional amount of up to US$3.7 million expected to be contributed to the Facility for the operation by donors to repurchase its outstanding commercial debt at a substantial discount. These donors are the Governments of the Netherlands and Switzerland. The Government of Switzerland has formally agreed to contribute US$0.7 million to the Facility for this operation. The Government of the Netherlands has confirmed its agreement, in principle, to make a contribution for the operation in the amount of US$3 million. However, a  - 15 - formal contribudon agreement has not yet been signed with the Government due to the need for it to complete its internal authorization procedures. Therefore, the actual 'grant amount will consist of US$10 million from IBRD's FY89 net income and US$0.7 million contributed to the Facility by Switzerland and such additional amounts as are committed under contribution agreement between the Govermnent of the Netherlands and IDA, as Trustee of the Facility. This comnitment is expected prior to approval of the proposed grant by the Executive Directors. 45. The total amount of debt eligible for the proposed operation is estimated to be US$188 million as of September 30, 1992, which consists of about US$161 million principal and US$27 million of past due interest, evaluated at current exchange rates (Table 4). This amount may be modified based on the reconciliation of any discrepancies with creditors following the submission of responses to the operation and as a result of changes in the exchange rate for debt denominated in currencies other than U.S. dollars. The total financing required for the offer, if all eligible creditors were to accept, would be about US$22.6 million. In addition to the proposed grant, Uganda has received a formal commitment from the German Government to provide US$5 million equivalent for the operation while the EEC has indicated that it is actively considering providing the Government with US$4 million equivalent, from STABEX funds, subject to completion of its internal review process. These resources would be provided directly to Uganda to complete the financing required for the operation. Disbursements from the Facility for the operation will be conditional on adequate financing being available to Uganda to complete the operation. Description of the Operation 46. The operation is structured as a cash buy-back. Following the approval of the proposed grant by the Executive Directors, the Government will offer to pay commercial creditors 12 cents for each dollar of eligible debt in satisfaction of all amounts owed with respect to such eligible debt, including principal and all unpaid interest penalties and commissions up to September 30, 1992. The amount of interest arrears represents less than 15 percent of the face value of the debt, but its inclusion in the calculation of the settlement price is considered to be critical to achieving a successfil level of acceptance of the offer. In the opinion of the Government's financial advisors, this price reflects the minimum level of payment acceptable to the commercial creditors in light of the present financial situation of Uganda and should result in substantial acceptance of the offer by the commercial creditors. The bid and offer price of Ugandan commercial debt quoted in the secondary market is 17 and 25 cents to the dollar, respectively. Trading of bank debt which took place during the second half of last year was believed to have been at over 20 cents. There may be transactions currently taking place at a slightly lower price. Nevertheless, the disparate group of creditors and the small amount of debt has meant there is no real secondary market and regular trading in Ugandan debt. The offer to pay commercial creditors 12 cents for each dollar of eligible debt is the result of negotiations between the Government's financial advisors and its commercial creditors. 47. The Government intends to rnake the offer as soon as possible following the approval by the Executive Directors. Creditors will be given a few weeks to respond to the offer. The closing of the operation is anticipated to take place in April 1993. Eligible debt denominated in a currency other than U.S. dollars will be paid either in U.S. dollars based on exchange rates prevailing a short period of time before the closing date of the offer or in the original currency at the choice of the creditor, provided the original currency is either Pound Sterling, Japanese yen, ItaLian Lira or Deutschmarks.  - 16- 48. The amounts contributed to the Facility for the operation from the various donors, including IBRD, will be disbursed on a pro rata basis. The contribution agreements between the Association and the Government of the Netherlands will provide that any unused portion of its contribution will be returned and that the Association will remit to the Government its pro rta share of any payments received by the Association from the Government of Uganda under the grant agreement. The Executive Directors are being asked to ratify such provisions, in the context of para. 8(d) of Resolutions No. 89-13 and No. IDA89-4 of the Executive Directors, which provide that on termination of the Facility pursuant to the Resolutions, any surplus assets of the Facility should be transferred to the general resources of the Association. Staff believe that this provision was intended to apply only to resources contributed to the Facility by IBRD and not by other donors. The Executive Directors have previously approved such provisions in the Niger (December 1990) and Mozambique (May 1991) debt reduction programs. Under the framework agreement for the Facility between the Association and the Government of Switzerland, any ur ised portion of the Swiss funds will be retained in the Facility for use in other operations. 49. The grant agreement contains inter alia the following conditions of effectiveness: (a) the details of the offer and related agreements are satisfactory to the Association; (b) the Association has received satisfactory legal opinions on the offer and related agreements; and (c) the Association has received satisfactory evidence that additional adequate financing is available to the Government to fully carry out the operation. 50. The grant funds from the Facility would be disbursed for the purchase of eligible debt pursuant to the offer and for incidental costs incurred by the Government (up to a maximum of US$100,000) and approved by the Association in order to complete the operation. No disbursements from the grant account can be made unless the conditions precedent to the purchase set forth in the offer, including the acceptance of the offer by commercial creditors holding 60 percent of the esbimated total eligible debt, have been satisfied. The proposed grant's closing date is expected to be no later than 180 days after the signing of the Grant Agreement. 51. The funds to be made available for the operation will enable Uganda to make payments to creditors that would otherwise not be feasible. It is considered likely, therefore, that the bulk of the existing commercial debt will be extinguished under the terms offered. However, it is possible that some creditors will not tender their claims. As time and resources permit, Uganda will attempt to reach a satisfactory resolution with the remaining commercial creditors for the still outstanding debt. However, in view of our current appreciation of Uganda's medium term prospects, it is not expected that Uganda will be in a position to purchase or service this debt from its own resources in the foreseeable future. Nor is it anticipated that commercial creditors not participating in this operation would be able to obtain more favorable treatment than creditors tendering their claims under this offer. Nature of Creditors and Eligible Debt 52. While the Board has approved, in principle, the buy-back of suppliers and trade credits, this would in fact be the first operation of its kind in the Bank, in that most of the debt consists of such credits rather than debt owed to commercial banks. The review of the commercial loan portfolio of  - 17- the Government of Uganda by their financial and legal advisors has revealed that some of the debt has the characteristics described below. 53. Defence Related Loans Two loans were made to the Ministry of Defence in October 1986 and September 1987 by the Bank for Foreign Economic Affairs of the former Soviet Union. Although insufficient information is available in Uganda to confirm the exact purpose of the loans, it is possible that these loans may have been for military equipment. These two loans, which amount to US$24 million and account for approximately 10 percent of Uganda's commercial debt, have been sold sometime since 1987 to a Swiss commercial trading company which currently holds them. There are also some loans with respect to non-armament supplies to the army (e.g. uniforms and cooking oil, etc.) which are held by the same Swiss company. 54. The remaining commercial loan portfolio is non-defence related. It is proposed that the two loans mentioned above be included in the buy-back. While the orginal loans might possibly have been for military equipment, they are, at present, simply debt instruments legally held by a commercial third party. The Facility funds would be disbursed simply to reduce Uganda's existing commercial debt and not for the acquisition of any goods of any nature. The reduction of this debt, like all other eligible debt under the operation, would be in the best development interest of Uganda. The financial advisors feel that the exclusion of these two loans from the buy-back operation wold be very disruptive in that the Government of Uganda would have to make a separate settlement with the creditor. 55. Former Russian Debt Of the total estimated amount of the buy-back of US$188 million, approxirately US$96 millon (including the two military equipment and other defence-related loans referred to above) is owed to a Swiss trading company which has purchased the debt from the Bank of Foreign Economic Affairs of the former Soviet Union and from two Russian suppliers. Wile this debt apparently was originally official bilateral debt, it appears that it has been purchased by the Swiss company over time in return for supplies of goods to Russia from the Swiss company, which is a long-standing trading partner of Russia. Tle Swiss company has been pressing the Government of Uganda for payment and has business interests and contacts in Uganda which might enable it to obtain more favorable terms of settlement if they are excluded from the buy-back. The Swiss company has, however, agreed to accept the buy-back offer that will be made on the understanding that this is an equitable global offer to all commercial creditors and that no bilateral arrangements will be made with the Government. Neither the Board resolutions nor the guidelines pertaining to the Facility define what is meant by the term "commercial debt". In maldng the determination as to whether the debt is commercial or official, Management believes that the primary test should be the identity of the current holder. If that entity is a commercial bank or another commercial entity, the debt should be considered commercial and therefore eligible for Facility resources. 56. Debt to Former GDR Companies Approximately US$18 million is owed to former German Democratic Republic companies with respect to uninsurer suppliers' credits extended by these companies to Uganda. The debt now appears to be held by Treuhandanslt, a German Government holding company. The German Government has indicated that it intends to treat this debt as commercial debt. It is proposed that this debt be included in the buy-back. Although the current holder of the debt is an official entity, the German circumstances are unique as a result of the unification.  - 18 - 57. Debt Due to a Serbian Company Approximately US$5 million is owed to a Serbian company. We have been advised that while, under the current sanctions imposed by the United Nations, the Government of Uganda cmld make this offer to the Serbian company, it would not be possible for Government or IDA to make a payment to close the offer. It is proposed that this debt be included in the offer and that, if the creditor accepts, the relevant funds be held in an escrow account by the closing agent for payment to be made upon lifting of the sanctions. Benefits and Risks of the Operation 58. The buy-back operation, if completely successful, would eliminate about one-third of the total external arrears of the country as of June 30, 1992, 78 percent of the total commercial debt (the remainder being ineligible for the buy-back and intended to be restructured in other ways as discussed above) and over 7 percent of the total stock of debt. The impact of the whole of the debt strategy, of which this buy-back is an integral part, would be to reduce arrears from the present level of US$583 million to approximately US$76 million. This assumes that the buy-back is 100 percent successful and that all the terms of rescheduling, restructuring and write-offs assumed in all the categories of debt are achieved in a timely manner. If on the other hand, the debt strategy is not implemented it is estimated that arrears could rise to US$650-675 million by the end of 1992/93 and to over US$1 billion by 1995. 59. A successful buy-back operation would be extremely beneficial to the Goverment since the creditors involved are a very aggressive group who continue to apply persistent pressure for payment and some of whom have taken or are currently pursuing legal action against the Government. Creditors' acdons have proved disruptive to the Government's commercial operations and have weakened its ability to obtain operational banking facilities. Potential foreign investors and exporters and importers are also concerned about possible disruptions arising from these disputes and about the ability of the Government to meet current obligatior- in view of the arrears. The urgent settlement of this problem is therefore essential for Uganda to resume normal commercial operations. While concern has sometmes been expressed that buy-back operations at a deep discount could affect a government's ability to obtain access to short-term credit on reasonable terms in the future, in the case of Uganda the magnitude of these arrears and the Government's inability to settle them in cash or to service their rescheduling on commercial terms has already reduced the Government's access to short term credit and trade lines. Most of the eligible debt has been in arrears for several years (an average of 5 years) and the fact that the Government is trying to resolve the problem and start afresh widl undoubtedly serve to improve the Government's image and its creditworthiness. 60. Moreover, with the return of security to the country, the improved economic environment, the enactment of the new investment code, the establishment of the Uganda Investment Authority and the acceleration of the return of Custodian Board properties, the Government is actively trying to attract foreign investors and promote Uganda as a profitable place to invest. For these efforts to bear fruit, it is imperative that Uganda be able to start with a clean slate and be free of some of the financial encumbrances referred to above. 61. Risks The principal risk is that the critical mass of participating creditors will not te attained and the operation wili not proceed. The precise amount of this debt which will be tendered will not be known until the expiration date of the offer. However, based on informal discussions with the commercial creditors, the finacial advisors to the Government have indicated that they believe that there will be substantial acceptances from such creditors.  - 19 - Minimum Participation Level 62. There is, however, no readily available forum, such as a Bank Advisory Committee, for negotiations with these creditors which, as mentioned above, are principally non-bank institutions. Suppliers and trade creditors are also unlikely to have made provisions for losses in the same way as banks and a number may be unwilling to accept the write-offs on their balance sheets that a discounted buy-back would require. The creditors are a very mixed group of companies and fiuthermore, the debt has been incurred at different times, mainly beginning in the early 1980's up to the start of the Government's Economic Recovery Program in 1987. The creditors have therefore had arrears outstanding to them for varying periods and have different expectations about the ability of the Government of Uganda to pay them in full. 63. In view of this, it is difficult to be certain of the exact level of deot that will be tendered. A minimum acceptance level of 60 percent of the eligible debt will be required and actual acceptances are expeced to be higher. This conservative minimum acceptance rate would ensure the success of the transaction in a situation where the Government's inability to settle with creditors who accept the offer would damage its credibility and prove very disrtive. Furthermore, even at a 60 percent acceptance level, the Government would successfully manage to settle with a key number of creditors who are disrupting the Government's normal commercial operations as discussed above. Alternative methods of settdement, such as reschedulings, on terms which the Government can afford in its current financial position are not possible and the ability to setde even 60 percent of the outstanding eligible debt is critical to the Government's debt strategy. Eligibility 64. The debt retirement program of the Republic of Uganda meets al the conditions specified in the Operational Guidelines and Procedures for the Use of the Resources of the IDA Debt Reduction Facility for IDA-Ony Countries (R89-156, IDA/R89-103, July 19, 1989; R92-33, IDA/R92-26, March 9, 1992): * The Government is currently implementing a comprehensive medium-term adjustment program which is acceptable to the Association, and has succeeded in adhering closely to the policy changes specified in the Policy Framework Papers covering the 1987 to 1992 period (paras. 7-9). * The Republic of Uganda has an external debt management stra -gy satisfactory to the Association (paras. 38-43). * This debt management strategy will materially enhance Uganda's growth and development prospects (paras. 58-60). VI. BANK GROUP STRATEGY AND OPERATIONS 65. The Bank has played and will continue to play a leading role in assisting the Government to design and implement the Economic Recovery Program in order to move the economy towards susLainable long-term growth, and to mobilize the required financia resources to support the Government's development program. 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  - 20- 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. 66. The principal elements of the Bank's overall country strategy will be to support efforts to: (a) maintain macroeconomic stability through improved revenue coilection, the attainment of a unified, market-determined exchange rate, enhanced monetary restraint, and increased resources for key economic and social sectors through a reallocation of budget expenditures; (b) improve the climate for private investmeat and production through deregulation, privatization of public enterprises, strengthening of the financial sector, rehabilitation and expansion of basic infrastructure, and improvement of essential support services, such as agricultural research and extension; (c) enhance the country's h!unan resource base by strengthening the education system and basic health services; (d) develop and implement programs to arrest the environmental degradation that is occurring, with special efforts to reverse the depletion of the country's rain forests, to increase the intensity of cultivation on existing farmlands, and to slow the rapid rate of population growth; and (e) improve external aid mobilization and coordination. Lendng Program and Economic and Sector Work 67. IDA and IMF supported an initial effort at economic stabilization and recovery during the early 1980s. In June 1981, the Government adopted a comprehensive Recovery Program. IDA committed the Reconstruction II and III 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 experience was encouraging, both in terms of stabilization and recovery of output. However, in 1984 the economic program went off track, and the recovery effort was overwhelmed by the intensification of civil strife. 68. Since resuming lending to Uganda in FY87, IDA has provided 29 credits totalling US$1.2 billion. Of this amount, four IDA credits, five supplements, and two African Facility Credits totalling US$483.6 million were in the form of quick disbursing assistance. 69. 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 lmowledge that has been established by economic and sector work over the past few years. The sector work prepared during this period has covered the agricultural and industrial sectors, the financial sector, the social sectors, the private sector and the transport sector. The macroeconomic measures needed for laying the basis for sustainable long-term development  - 21 - have been identified in a similar manner, with particular attention to the study of public expenditures. The forthcoming Country Economic Memorandum for Uganda (FY93) will focus on poverty and growth issues. 70. Pending the overall restructur ng of the financial sector, which will be supported by a planned FY93 financial sector adjustment operation, the Enterprise Development Project (FY92) provides for pre-shipment export financing as part of a package of initiatives towards the export diversification objective. The second Structural Adjustment Credit (FY94) will build upon the foundations laid during SAC I and deepen the Government's reform effort in areas such as the restructur1ng of public expenditures, civil service reform, and further improvements in the investment climate. Building on the, recommendations of the Agriculture Sector Memorandum, projects focusing on agriculture research and extension will provide much needed services aimed at promoting agricultural growth and increasing the productivity of the Ugandan farmer. The Bank's activities in the human resource field, as articulated in the Social Sector Strategy Report, aim at improving access to basic social services. Accordingly, Education V will focus on basic education and Health II will continue efforts to strengthen basic health services. An AIDS projects will help strengthen the capacity of the Government to deal with the multiple economic and social aspects of the impact of the disease. A small town water supply project will aim at improving overall access to safe water in the country. Building on the Transport Sector Memorandum, a transport sector rehabilitation project will help improve transport capacity and efficiency. Institutional weaknesses limit the Government's ability to implement the policy agenda and impede project implementation. Significant resources will, therefore, be allocated to capacity building and institutional reform. The recently approved Economic and Financial Management Project focusses on strengthening core Government Ministries and agencies involved in economic and financial management. An institutional development project in FY94 wil address broader issues of capacity building, including training in such areas as economics , accounting and auditing, and the continuation of civil service reform. VII. COLLABORATION WITH THE IMF AND OTHER DONORS 71. The Bank and IMP have collaborated closely thrughout the design, implementation, and monitoring of Uganda's Economic Recovery Program. This has been pardtularly beneficial in getting the Government to focus on key macroeconomic stabilization measures, as well as long-term structural reform. Furthermore, since 1987, the Bank and IMP staff have carried out joint missions anmually to develop with the Government the three-year Policy Framework Papers (PFP). 72. The Bank has been very active in aid coordination in Uganda over the past few years, with efforts directed at helping to ensure that both the amount and the composition ef donor assistance are appropriate to Uganda's circumstances. This has been done through the annual Consultative Group (CG) process and through the framework of the Special Program of Assistance (SPA). Several donors participated in the preparation of the Structural Adjustment Credit and are co- financing the operation. In order to facilitate frequent contact with donors, regular meetings of local donor representatives are chaired by the resident mission in Kampala. VIII. RECOMMENDATION 73. I am satisfied that the proposed grant from the Debt Reduction Facility for IDA-Only Countries would comply with Resolution No. 89-13 and No. IDA 89-4 of the Executive Directors, except as otherwise noted herein, and recommend that the Executive Directors approve the proposed  - 22 - grant on the terms and conditions proposed herein, including the return to the Government of the Netherlands any unused portion of its contibution. Lewis T. Preston President by Ernest Stern Washington, D.C. November 17, 1992  UGANDA ANNEX TABLE 1 KEY MACROECONOMIC INDICATORS Est <- Projectios -> 1989/90 1990/91 1991192 1992/93 1993/94 1994/95 Growth Rates: GDP (Factor Cost) 5.3 4.2 442 : 5.0 : 5.0 5 . 0S Gross Domestic Ilcome 73 .2 3.6 5 .9 5.9 GDY per capita 4 .64 1.6 0.9 206 .: 3. Private Consumption per capita .1 0.1 . 4.6 . 0.0. f.8 Debt Service 1/:. Debt Service (US$ million) 197,() ; 244. 174; 195,- 8.0 o/w Interest (US$ million) : 7.0 -0 7:.0 .7.0 . ..0. Debt ServiceiXGS 2/ 0. 7.4 A0 '46 Debt Service/GDP 4". 43 8 52 5 4 Ratios to GDP', Constant Prices: Gross Iavestment PubhicInvwtment 52, $3 37 3 Private Investment Ratios to GDP, Constant Prices: Domestic Savings 41 - National Savings Rat (1878 = 100) Ptublic Saving -Ap43 ~ 4 1~ - ~ 0Z Private Savings 41 a 31 Radios to GDP, Cwurnt oPries: :c . Govessmet Revenues o f s 5. -1 Govemnment Expenditures 12. 14e d in 2Gi tabl Overall Deficit 3/ -6s1s Miscellaneous:- CPI (1987/88 =100) 94 411 8$ 715 832 942 Real Exchange Rate (1987/88 100) 76~ 63 ~ Export Growth Rate of '-od -5) 74 i p Exports/GDP 4/320nt Imports Growth Rate '44 <6m 224 141 5 Imports/GDP 4I . i1 /~ ~I5 $ Current Accoiunt, (US$ million) ~ 2+ ~3S~4 A$ '4. Current Account/GDP 4/ .. 40'-8 3 Gross Rewrves (months of imports)eo V 4 of 15 rate Source: Staff estimates based on data provide by Government authoities. Note: Uganda does not have a GDP by Expendr series. The data in this table have been estmated by staff based on Information provided by Govenment authorities, and should therefre be treated with caution. 1/ On a commiftment basis. 21 Exports of goods and services, Indluding private transfers. 3/ Excludes grants. 4/ Expresse in constant prices to remove the Impact of exchange rate adjustments. VI Does not include import support assisance held by the Bank of Uganda.  UGANDA ANNEX TABLE 2 BALANCE OF PAYMENTS In millions of IUS dollars Eat <- Projections > 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 Exports (g+nfs) 246 200 95 215 253. 25 Merchandise (fob) 210. :177 172 190 227 . 260 o/w Coffee 159 126 117. 103 .1.9 . 139 Non-Factor Services 36 23 23 25 26 27 Imports (g+nfs) 676 658 523 -637 695 658 Merchandise (cif) 5..84 550'. 425 521 571 625 o/wPetrol - 8 87 57 - 1 19 -9 Non-Factor Services . 9 108 398 .16 .124 133 Resource Balance 430 -;458 -328 -422 443 -463 Net Factor Income 77... -6 -142 ::36 450 '459 o/wNetInterest 4 -762 -7 -79 . 87' .j -90 CurrentPrivateTransfers : - 80: 12 133; 47. C/A Balance (Exci grants) -429 . 4 - '42 . 4 4 648 C/A Balance (ncl grants) -276 -39 '426 -164 9-. 6 . -158 Official Transfers : : 217 . 2: . 7 -.0 o/w importSupport : :: 17.;7 128 .:.139 Net M&LT Loans 1A5 131 Disbursemet 292' 217 140C .2 '31.."52" Project Loans 5 1177 14 '1419 Import Support Loans . :99 6 *:W - .. Repayments .7 7 :6 . 79 ' 99 7: Foreign nvestment/Kenya Co0p. . i -.2 2 3 . ' A Short-Term,net 12 ; : . -4V...-1 . ' -7 Errors/Value Adjustment/Other / / . (0 - . : -S ; Overal Balance -44 1 1 6 . -3 1 Financing: 44' 0 1 ~$ .1 Monetary Authonties t O '41 - - .4 -4 GrossReserve Changes : i . 1 . :-5 - 45' . 45 IMF, net - -- 52 21 . 9 SAF/ESAFandPurchases 42 89 : 55 28 ;.8 .0 Short Teim/Commercial 12 : 2 -. '-- 0 External Arrears -19 . 5 1 - -58 0 0 Exceptional Financing 41 1 ...... 4. 22 Rescheduling .0 0 : 1) :73 :6 0 DebtCancellation 2 ' 0 .0 . . 0 ResidualFinanceGap O ' . 0 22 Memo IBem: Gross Reserves (EOP) 1825 - 29. .- 67 - 2 . .9 in months of imports 0.4 .0. 1.5 - 17 - Source: Bank of Uganda, IMF, and staff estimates. 1/ Including visbles outside official channels.  UGANDA ANNEX TABLE 3A STATUS OF BANK GROUP OPERATIONS IN UGANDA As of September 30, 1992 A. STATEMBNT OF BANK LOANS AND IDA CREDITS ---US$ Milon------ Amount (Less Cancel1ations) Loan or Fiscal Undis- Credit No. Year Borrower Purpose Bank IDA bursed One (1) loan and twenty-five (25) fully disbursed, of which SECALs, SALs and Program Loans/Credits a/ . 525.45 Cr. 03400 1988 Uganda Economic Recovery Credit/SAF 24.00 Cr. 18441 1989 Uganda Economic Recovery Credit 0.00 1,10 Cr. 12520 1982 Uganda Reconstruction Credit H 0.0 10.00 Cr. 14740 1984 Uganda Reconstruction m .00 .00 Cr. 18440 1988 Uganda Economic Recovery Credit Q.00 65.0 - Cr. 18443 1990 Uganda Economic Recovery Credit 000 1.50 Cr. 20871 1991 Uganda Economic Recovery Credit II 000 - 2 3 Cr. A0341 1990 Uganda Economic Recovery Credit 0,0 ;1.80 Cr. 18442 1989 Uganda Economic Recovery Credit , .00 25.00 Cr.13280 1983 Uganda Agricultural RehabIlitation 0.0=' '4.93 Cr. 14450 1984 Uganda Third Highway '8.0 - 7.71 Cr. 15390 1985 Ug a Agricutu-ral Development 88 Cr. 15600 1985 Uganda Second Power ' Cr.15610 1985 Uganda Petroleum Exploration Prom 5.10 3.67 Cr.18030 1987 Uganda Fourth Hiway 18.00 2.41 Cr.18240 1987 Uganda Foreste itation .R.. ' 3.00 :. 4144 Cr.18690 1988 Uganda Sout LWest Ag. Reab. 10.00 7.52 Cr.18930 1988 Uganda Sugar Rehabilitation - 4,90 '4.89 Cr. 19340 1988 Uganda HealthRec 42.50 22,04 Cr.19510 1988 Uganda Tech. Asst. I - 18.00 -'5.08 Cr.19620 1989 Uganda Public Enterprises ,5.0- 7.80 Cr.19650 1989 Uganda Education I' 2.:00 7.07 Cr.19860 1989 Uganda Railways I :00. .465 Cr.19910 1989 Uganda Telecom II -:: . 30 4.49 Cr.20870 b/ 1990 Uganda Ecomic Recovery Credit , :.00 045 Cr.20880 1990 Uganda Poverty & Sos. Costa' '':;x 2.12 Cr.21240 1990 Uganda Water Supply 1i '600 " 3.21 Cr.21760 1991 Uanda Livestock ,I.00 21.58 Cr.21900 bI 1991 Ugna Agetor Adj. Credit100 28 Cr.22060 1991 Uganda Ua C 2870- 2.36' Cr.22680 1991 Uganda Power m .00 126.10 Cr,20872 b/ 1992 UgEada Econ. Recovery , ,,,, 1.,4 Cr.23140 b/ 199 Ugna SAC I 32$O0 7.3 Cr.23150 1992 Uganda Enterprise Deveopmeat 6-.60 .54 Cr.23620 c/ 1992 Uganda Northern Reconstruct. 71.20. 75.31 Cr.24180 cl 1993 Uganda Econ. & Financial Management 29.00 30.76 Cr.24240 1993 Uganda Agric. Extension Prog. 13.79 15.96 Total '8.40 1715.94 71603 of which repaid W.4 29.96 Total held by Bank & IDA . 1685.98 Amount sold 8.32 of which repaid 8.32 TOTAL Undisbursd '7103 a/ Approved after FY80 b/ SAL, SECAL or Program Loan/Credit c/ Not yet effctive.  UGANDA ANNEX TABLE 3B STATUS OF BANK GROUP OPERATIONS IN UGANDA As of September 30, 1992 B. STATEMENT OF IFC INVESTMENTS IN UGANDA Fiscal ---US$ Million- Year Obligor Type of Business Loan Equity Total 1985 DFCU Development Finance Companies 0.00 0.38 0.38 1965 14ULCO Spinning Weaving & Finig 4.32 0.71 5.03 1984 TAMTECO Food Products 1.62 0.00 1.62- 1972 TPS Tourism Services. 1.11- 0.00 - I'll: 1984 Uganda Sugar Cocoa Chocolates, Sugar - .00 0.-00- 8. 1985 Uganda Tea Food Products NEC 2.81 -0.00 2.81 Total gross commitmens 17.86 109 - 18.95 Less: Repaynents, cancellations, exchange adjustmnts,- terminations and saes - .31 .7 o.03 Total Commitment now held by IFC: 0-9. 0.38- .. 2 Total undisbursed 0.0 0 00 0.00 Total Outstanding IFC 9.55 0.38 992