Uganda - Second Economic Recovery Credit

Document of The World Bank FOR OFFCIAL USE ONLY Report No. 13687 PROJECT COMPLETION REPORT UGANDA SECOND ECONOMIC RECOVERY CREDIT (CREDITS 2087-UG, 2087-1-UG AND 2087-2-UG) NOVEMBER 7, 1994 Country Operations Division Eastern Africa Department Africa Region This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ABBREVIATIONS AND ACRONYMS ADF African Development Fund BOU Bank of Uganda CIDA Canadian International Development Agency CMB Coffee Marketing Board EAU Economic Analysis Unit EDMO External Debt Management Office ERC Economic Recovery Credit ERP Economic Recovery Program ESAF Enhanced Structural Adjustment Facility GDP Gross Domestic Product IDA International Development Association IMF International Monetary Fund KFW Kreditanstalt fuer Wiederaufbau LCs Letters of Credit MOF Ministry of Finance MFEP Ministry of Finance and Economic Planning MPED Ministry of Planning and Economic Development MPS Ministry of Public Service NRA National Resistance Army NRM National Resistance Movement OGL Open General License PCR Project Completion Report PFP Policy Framework Paper PSRRC Public Service Review and Reorganization Commission RMEA Regional Mission in Eastern Africa, Nairobi SDR Special Drawing Rights SIDA Swedish International Development Authority SIP Special Import Program U Sh Uganda shilling  FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation November 7, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Uganda - Second Economic Recoveiy Credit (Credits 2087-UG. 2087-1-UG and 2087-2-UG) Attached is the Project Completion Report on Uganda - Second Economic Recovery Credit (Credits 2087-UG, 2087-1-UG and 2087-2-UG). Pans I and III were prepared by the Uganda Resident Mission with Part II contributed by the Borrower. The ERC II, a follow-up adjustment operation to ERC I, was approved by the Board on February 1, 1990, for an amount of US$133 million, and was subsequently increased to US$137 million. In addition to these amounts, there was co-financing equal to US$72 million. Most of the credit was released in two tranches, one for US$70.5 million equivalent in early 1990, and another for US$56.5 million in October 1990. The credit closing was delayed for eighteen months in order to complete disbursement of the co-financiers' funds and the small, remaining amounts of the Credit. ERC II conformed to the various Bank/IDA design and procedural directives applicable at the time. The main focus of the operation was on: (i) strengthening coffee and other private sector production and investment incentives, through exchange rate and trade reform and privatization of marketing facilities; (ii) increasing domestic savings and private investment levels through reduction of public sector deficits and greater financial controls; (iii) broadening the tax base and raising the tax/GDP ratio; and, (iv) increasing the efficiency of the public sector while reducing the size of the civil service, both in the context of increased public expendirure/GDP ratios. Hyper-inflation had been conquered, by monetary restraint, before Board presentation. Based on the analysis in the PCR, the operation's outcome is rated as satisfactory and its institutional development as negligible. Sustainability is rated as uncertain because the success in strengthening the public sector has not yet led to strong private sector development. An audit is planned. Attachment r-- |ltis doruiuni. bas a restricted distAibutiou and way be used by recipieuts ouly in the performuance of their official duties. I Ls touutiics way *,ot odherwise be disclosed without World Bank authorizationi.   FOR OFFICIAL USE ONLY PROJECT COMPLhTION REPORT UGANDA SECOND ECONOMIC RECOVERY CREDIT CREDITS 20870-UG. 20871-UG. 20872-UG Table of Contents PREFACE ....................................................... i EVALUATION SUMMARY .................... I ...................... Part I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE .............. 1 A. Project Identity .............................................. B. Project Background ............................................. 1 Economic and Political Developments Prior to ERC II ................. 1 Bank Group Assistance Strategy ............................... 4 C. The Second Economic Recovery Credit ............................... 5 Origins and Objectives ..................................... 5 Policy and Institutional Measures Supported by ERC I ................. 6 Implementation and Monitoring of Measures Supported by ERC II ... ....... 7 Evaluation of Performance ................................. 10 Other Aspects of ERC G .................................... 14 The Role of the IMF ...................................... 14 Cofinancing of ERC II ..................................... 15 Results under ERC II ...................................... 15 D. The Main Lessons Learned ....................................... 16 Part II. PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ...... 17 A. Background, Evolution and Development of the Program ..................... 17 B. Implementation of the Program ..........................19 C. Evaluation of the Program ........................................ 20 Conclusions ................................................... 21 This document has a restricted distribution and may be used by recipients only in thc performance of their official duties. Its contents may not otherwise be disclosed without World B3ankc authorization.I  Table of Contents (cont'd) Part III. STATISTICAL INFORMATION. ............................ 23 Table 1 ERC II Cofinancing Contributions (text table). ...................... 19 Table 2 Credit Position. . ......................................... 23 Table 3 Cumulative Estimated and Actual Disbursements ...................... 23 Table 4 Project Dates ............. .............................. 23 Table 5 GDP at Factor Cost, 1987-1990, at Constant (1991) Prices .............. 24 Table 6 GDP at Constant (1991) Prices - Percentage Annual Growth Rates, 1987-1992 . .. 25 Table 7 Procurement, Production and Exports of Principal Agricultural Products ... ... 26 Table 8 Production of Selected Commodities ............................. 26 Table 9 Index of Industrial Production (Base 1987 = 100) ..................... 27 Table 10 Balance of Payments .27 Table 11 Government Budgetary and Financial Operations .28 Table 12 Monetary Survey, 1989 - 1993 ................................ 29 Table 13 Structure of Interest Rates, 1987 - 1993 .......................... 30 Table 14 Exchange Rates ......................................... 31 Table 15 Composite Consumer Price Index (Base: September 1989 = 100) .... ...... 32 Table 16 Producer Prices for Major Export Crops ......................... 32 Table 17 Uganda Government Revenue Collections .33 Table 18 Sale of Petroleum Products by Type of Industry .33 Table 19 Consumer Prices for Petroleum Products .34 Table 20 OGL and SIP Foreign Exchange Allocations, February 1990 - March 1991 ..... 35  PROJECT COMPLETION REPORT UGANDA SECOND ECONOMIC RECOVERY CREDIT (CREDITS 20870-UG.20871-UG. AND 20872-UG) PREFACE 1. This is the Project Completion Report (PCR) for the Second Economic Recovery Credit (ERC II) in Uganda for which IDA Credit 20870-UG in the amount of SDR98.1 million was approved by the IDA Board on February 1, 1990. This was supplemented by resources from IDA reflows in the amounts of SDR1.5 million and SDR1.2 million, which were signed on November 7, 1990 and January 9, 1992, respectively. The credits were fully disbursed; the last disbursement was in September 1993. The closing dates were extended twice, first to June 30, 1992, and then to June 30, 1993. This was to allow the Government more time to utilize all the funds, including those from donors who co-financed the credit and whose funds were administered by IDA. 2. The PCR was prepared by the Uganda Resident Mission (Preface, Summary, Part I and Part III), and by the borrower (Part II). 3. The preparation of the PCR was based on the President's Report, the credit agreements, supervision reports, and internal bank memoranda. i   PROJECT COMPLETION REPORT UGANDA SECOND ECONOMIC RECOVERY CREDIT CREDITS 20870-UG.20871-UG. 20872-UG EVALUATION SUMMARY Background i. In the years immediately following independence in 1962, Uganda was regarded as one of the most progressive countries in Sub-Saharan Africa (SSA). The takeover of power by the army led by Idi Amin in 1972 was the beginning of a period of 15 years of horror for the Ugandan people. This period was marked by political instability and brutal dictatorships, a civil war and severe deterioration of the economy. During the period of military rule, from 1972-79, the excesses of the Government undermined the basic institutions in Ugandan society, and encouraged violence, corruption and a breakdown of financial discipline. Between 1971 and 1978, the GDP declined by more than 20 percent. ii. The elections for the government to take over from the transitional administration that replaced the Amin regime, were purportedly won by ex-President Milton Obote and his party. However the results were widely disputed by the other parties. The disenchantment with the results of the election and the conduct of the Obote regime developed into a civil war in which the destruction of life and property rivalled that of the Amin regime and the 1978-79 war. This war ended in January 1986, with a victory for the National Resistance Army (NRA) and its political arm, the National Resistance Movement (NRM). By this time the economy was in shambles, the education system had deteriorated and the health system almost destroyed. Basic goods and services were in short supply. There were severe distortions in the goods, money and labor markets. The civil service was demoralized, and undisciplined. Government revenue was very low and inflation was in triple digits. iii. The initial strategy of the NRM Government was to revive the economy by heavy government intervention. However, this intensified the existing market distortions and aggravated the shortages of goods and services. Inflation rose to 356 percent by December 1986, compared to 130 percent in the previous year. The gap between the official exchange rate, set by the Bank of Uganda (BOU) and the parallel market rate remained very wide. The Government's interventionist approach was not working. This led the NRM Government to change its economic strategy. In May 1987 it launched the Economic Recovery Plan (ERP), prepared with the assistance of the World Bank and the International Monetary Fund (IMF). iv. The program had three major aims: (i) to bring about internal financial stability and lower the rate of inflation; (ii) to reduce the imbalances in the external accounts; and (iii) to promote economic growth. Due to the severity of the imbalances in the economy, the main focus during the first phase of the program was on stabilization through improved demand management. During the 1987/88 - 1989/90 period, the Bank supported the program with the First Economic Recovery Credit (ERC I) which was followed by the Second Economic Recovery Credit (ERC II) for the period 1989/90 - 1991/92. iii  Objectives f ERC II v. The aim of ERC II was to support the third phase of the implementation of the ERP. ERC II focussed on measures to: (i) reinforce demand management; (ii) liberalize trade and revitalize the private sector; and (iii) reform and rationalize public sector management. Implementation Experience vi. The implementation of the ERC II program, unlike ERC I, got off to a fast start. The Uganda Government performed better overall, largely due to the experience it had acquired during the early phase of the ERP, its improved commitment to the implementation of the program and the Bank's strong support. The Government was encouraged by some of the successes under ERC I and understood better the procedures of the Bank. Above all, Government was very well aware that the proceeds from ERC II, as well as complementary donor support, were making an important contribution to the continued inflow of essential imports. The appointment of an energetic ERC II coordinator, with direct access to the Minister of Finance, and with some computer and communications facilities, helped the implementation of the program. The Economic Monitoring Committee, started under ERC I, proved to be very useful for coordination and taking corrective actions. vii. IDA, on its part, entered into ERC II with a better grasp of the political, social and economic situation of the country and was thus able to better tailor its policies to the country's circumstances. For the ERC II program, the Bank put emphasis on stabilization as well as on the implementation of structural reforms to address the country's long term development constraints. Implementation was also strengthened by the continued determination of the Government to attain of the objectives of the ERP despite major adverse external shocks. Results viii. There were notable accomplishments under ERC II. In July 1990, the parallel market in foreign exchange was legalized by the establishment of foreign exchange bureaux (FEBs or forex bureaux). The official foreign exchange rate, managed by the BOU, was frequently devalued to bring it closer to the forex bureau rate. By October 1991, the gap narrowed to about 9.4 percent, only to widen again to 32.7 percent by the end of the year, just before a foreign exchange auction was introduced. The rate of inflation was brought to an annual rate of 21 percent in December 1991 and interest rates had turned positive in real terms for the first time in several years. However, real GDP which had grown by 7.0 percent in 1989, grew by only 4.5 percent in 1990. This still represented growth in real per capita income. Govermnent revenue collections rose to 8 percent of GDP in FY90/91, from 7 percent in FY89190 and 5.3 percent in FY88/89. ix. Internal trade was almost totally liberalized and the monopolies of the Coffee and Produce Marketing Boards were abolished, while similar consideration was underway for the Lint Marketing Board. Shortages of goods and foreign exchange were substantially reduced. Export and import procedures were simplified, and barter trade arrangements were nearly all eliminated. The investment climate was improved by the enactment of the Investment Code (1991). Regarding public expenditure, a number of key subsectors -- primary health care, primary education, road maintenance, rural water supply, rural feeder roads, and agricultural research and extension - were selected as budget priorities. iv  To continue to improve services in these areas, the Government agreed to make increased budget allocations to them and to release these allocations in full. x. The Public Service Review and Reorganization Commission (PSRRC) completed its report which laid the basis for the reform of the civil service. Immediate steps were taken to retrench 50 percent of the group (casual, non-regular) employees. The number of ministries and agencies was reduced from 38 to 21. xi. The functional rationalization of ministries did not take off in the way that was planned however, and the teachers' staffing and payroll was not cleaned up as scheduled. The liberalization of export and import procedures was delayed due to lack of support from the implementing ministry. Budgeting and expenditure control remained weak and discipline in managing the budget was lacking. These tended to undermine efforts at controlling inflation. While the required reforms of the tax and tariff structure were carried out, the arrangements for duty drawback on imported inputs to export production and exemptions from sales taxes on production inputs, were not implemented. xii. ERC II was instrumental to building the strong foundation on which more fundamental reforms were to subsequently take place. In particular, ERC II was a learning opportunity for the Government that liberalization is not necessarily disruptive. Further the causal relationship between fiscal deficits, money supply, exchange rates and inflation became clearer to policy makers, with the experience gained in implementing ERC I and ERC I. Findines and Lessons Learned xiii. The key reasons for the achievements under ERC H were (a) Government's appreciation of the need for economic reform, which was continuously reinforced by the results being achieved over time through ERC II implementation; and (b) the quality and continuity of IDA's advice in responding to issues encountered during implementation. In addition, the timing of ERC H helped to generate commitment: the country had an acute need for foreign exchange; at the same time it benefitted from the experience with implementation of ERC I and from a better understanding by IDA and the IMF of the country's circumstances. Finally, establishment of the ERC H coordination office and the Economic Monitoring Committee helped ease coordination problems. xiv. As could be expected, there were some delays in the implementation of such a wide-ranging program-- due to lack of capacity in government but also to resistance of vested interests to reform. For the future, greater emphasis should be given to involving affected parties in the reform process--even though it should be recognized that only so much can be achieved through persuasion. xv. Ultimately, what countss is continuity of purpose on the part of Government and the Bank/IDA. Thus, while all project objectives may not have been achieved under ERC H, e.g. civil service and trade reforms, these objectives were achieved later on through follow-up operations and Uganda now has one of the better performing adjustment programs in Africa. v   PROJ.ECT COMPLETION REPORT UGANDA SECOND ECONOMIC RECOVERY CREDIT CREDITS 20870-UG. 20871-UG. 20872-UG PART I. PROJECT REVIEW FROM THE BANK'S PERSPECTIVE A. Project Identity -Project Name: Second Economic Recovery Credit -Credit No: 20870-UG -RVP Unit: Africa Region, Country Department II -Country: Uganda -Sector: Macroeconomic B. Project Background Economic and Political Developments Prior to ERC II 1. Uganda was formally colonized by Britain in 1894 and the territorial consolidation under British rule was completed in 1912. Until independence in 1962, the territory was controlled by a British Governor assisted by a very well organized and disciplined civil service. Cotton, the first raw material agricultural export product, was introduced in the colony as early as 1903 and with the later introduction of coffee, Uganda's economy grew steadily within a stable social and political environment. 2. From the country's independence on October 9, 1962, Uganda's government was based on a Westminster model, with a Prime Minister, who was the head of Government, and a Governor-General, who was a titular head of state. The country's constitution provided for features of a federal system although the decentralized status seemed to be enjoyed only by Buganda. However, this arrangement did not last long: the subsequent power struggles between Milton Obote, the Prime Minister, and the supporters of the head of state, King Freddie, the Kabaka of Buganda, led to the ouster of King Freddie by force. The power struggle culminated in the promulgation of the 1967 unitary Republican Constitution which also made Milton Obote the Executive President. His stay in power heavily relied on the support of the military. The pivotal role of the army in the politics of the country was soon exploited by Army Commander Idi Amin who staged a successful military coup in January 1971. 3. The power struggles of the 1960s did not appear to disturb the economic performance of the country, which by 1970 was one of the most progressive SSA countries. The economy was largely agricultural but there was also a small but rapidly growing industrial import substitution sector, largely controlled by the Asian community.  4. The agricultural sector, dominated by smallholders, produced sufficient food to meet domestic needs and a surplus for export. The main export commodities were coffee, cotton, tea, tobacco, and hides and skins. The country was self-sufficient in essential manufactured commodities like salt, sugar and beverages. There was external and internal balance as well as internal financial stability. Fiscal discipline was good, and although the exchange rate was fixed, the Uganda shilling was not overvalued, Uganda's exports were competitive and the external debt was relatively small and manageable. The country had an excellent road and rail network, a reliable communications infrastructure and good health and educational systems. 5. However, beginning in 1972, Uganda's social and economic progress went into a steady decline. In September 1972 Amin summarily expelled the Asian community from the country and by November the same year, they had virtually all emigrated to other countries. The country's economic infrastructure began to collapse. Henceforth Amin became defiant of the international community, while running a brutal dictatorship at home. By 1980 the country had been reduced to one of the poorest and most socially and politically unstable countries in SSA. 6. The Asian properties and businesses were allocated to the favorites of the regime. These proved not competent to keep the businesses going and, by the middle of 1973, acute shortages of most manufactured goods were rampant. The regime continued to keep itself in power against internal and external opposition, by brutalizing major segments of the country's population. The educated elite became the prime target of Amin's brutality as they were suspected of collaborating with the regime's real or imagined enemies. 7. The educated people subsequently fled the country in large numbers and the social, political and economic infrastructure deteriorated further due to an acute shortage of experienced personnel. The once organized and disciplined civil service, health and educational systems suffered the most, as skilled Ugandans were murdered or fled the country. By 1979 industrial production hit its record low and agricultural exports had dwindled to the lowest levels. The international sanctions imposed on the Amin regime for the gross violation of human rights, had also substantially reduced the imports, as the country was forced to pay cash for all its imports. Between 1972 and 1978 Uganda's GDP declined by over 20% even though it was a largely agrarian economy with an abundance of fertile soil. 8. Amin invaded Tanzania in October 1978. After an intense but short war, Amin was removed from power in April 1979. However, acute instability continued in the country for about another year and a half until December 1980, when Obote returned to power after elections that were widely disputed. 9. On assumption of power, the Obote II government quickly embarked on a comprehensive Rehabilitation and Recovery Program with assistance from the World Bank, the International Monetary Fund and other donors. The program however soon ran into difficulties as disenchantment over the conduct of the elections developed into a civil war, whose destruction of life and property rivalled that of the Amin regime and the 1978-79 war combined. The Obote II regime was overthrown by the Army in July 1985 but the civil war continued until January 1986 when the National Resistance Army (NRA) defeated the remnants of the then Ugandan Army and marched into Kampala. The victory for the NRA brought to power the National Resistance Movement (NRM), headed by the current President, Yoweri Museveni. -2-  10. By the time the NRM came to power, the recklessness of the Amin regime, the 1978-79 liberation war, and the 1981-86 guerilla and civil wars, had sapped the strength of both the Ugandan society and economy. Acute material scarcities, the breakdown of civil law and order, and political brutalization resulted in the moral degradation of the Ugandan society. Economic mismanagement had destroyed the industrial base and disrupted the production and marketing of agricultural products. Agricultural production had virtually ceased in the once fertile areas of Luwero and Mukono which had borne the brunt of the 1981-86 guerilla and civil wars and the once prosperous farms there were destroyed by the fighting. 11. The transport and communications infrastructure was in a poor state; the education system had deteriorated badly and the once well maintained health system was almost completely destroyed. The once organized, disciplined and neutral civil service was now demoralized, politicized and undisciplined. The previous stable administrative structure had been disrupted and revenue collection was low and chaotic. Violent crime was rampant in Kampala and other cities, and armed anti-NRM forces were operating in some parts of the country, particularly in the North. There were severe shortages of goods and services and low production of the traditional cash and other export crops. This in turn resulted in shortage of foreign exchange, and a severe shortage of essential imports. Distortions in the goods, money and labor markets were rampant, the parallel market in foreign exchange was flourishing, and inflation was in triple digits. The NRM Government inherited a shattered society and economy. 12. The NRM Government's initial strategy for economic recovery was built on heavy intervention in the economy by the Government. The Government took control of the internal and external trade on essential commodities like sugar and salt, maintained a fixed exchange rate and increased government spending through bank borrowing. It engaged in international barter trade transactions and through this procured goods and services for the army and the reconstruction of various facilities. These actions intensified the existing market distortions, aggravated the shortages of goods and increased inflationary pressures. By December 1986 inflation was running at an annual rate of 356 percent, compared to 130 percent at the beginning of the year. 13. The continuing shortages of goods and services, internal revenue, foreign exchange and the three digit inflation were all a manifestation of the failure of the interventionist policies. This led the NRM government to seek other ways of managing the country's economy, and in late 1986, the NRM government approached the World Bank and the International Monetary Fund for assistance in this regard. With the assistance of the Bahk and the IMF, the Government put together and launched the Economic Recovery Program (ERP) in May 1987. 14. ERP was based on the first Policy Framework Paper (1987/88-1989/90), developed jointly by the Uganda Government, the World Bank and the IMF. The broad objectives of the ERP were (i) rapid economic recovery; (ii) attainment of internal financial stability and a rapid decline in the rate of inflation; (iii) the reduction of external imbalances; and (iv) the reconstruction and rehabilitation of productive enterprises and social infrastructure. The ERP was supported by IDA's first Economic Recovery Credit (ERC I). 15. ERC I focussed on improving demand management, liberalizing the trade regime, increasing producer incentives for export commodities, raising government revenues, and improving expenditure management. A high level Economic Monitoring Committee, chaired by the Ministry of Finance, and consisting of the Governor of the Bank of Uganda and ministers in key economic portfolios was set up to keep track of fiscal and monetary aggregates, and to propose corrective measures when necessary. -3-  The role of the Committee was expanded to include monitoring the implementation of ERC I. A limited Open General License (OGL) system was set up to assure that priority activities received foreign exchange. The Special Import Program (SIP) was later introduced for the allocation of foreign exchange, on a more liberal basis, to importers of goods and services not catered for under the OGL. 16. These measures sustained the high rate of growth of the economy attained during the first phase of the program and caused the annual rate of inflation to decline from about 200 percent in early 1988 to about 60 percent in the latter part of the year. Peace and security improved considerably in the northern and eastern parts of the country where the rebel activities had continued. This was a result of the efforts of the Government to make peace with the rebels. However, due to excessive crop finance, high government expenditure and low coffee world market prices, the rate of inflation swung back into triple digits during the January to July 1989 period. Bank Group Assistance Strategy 17. The Bank Group assistance strategy for Uganda aimed to support the Government's Economic Recovery Program, help to restore the productive capacity, and steer the economy toward sustainable long-term growth. This strategy focussed on (i) the restoration of macroeconomic stability; (i) the rehabilitation of physical infrastructure; and (iii) the implementation of structural reforms and investments in physical capital and human resources to meet long-term development needs. In the short- term, emphasis was on stabilization, improved financial intermediation, the creation of an environment conducive to growth of the productive sectors, and the rehabilitation of social services. For the medium term, the focus was on the key growth sectors of agriculture and industry, and the supporting sectors such as power and transport. 18. The Bank Group strategy recognized that sustainable and equitable long-term development will require substantial increases in productivity and in the levels of investment and savings. Thus the Bank's adjustment operations, including ERC II, and its support for restoration of public services and infrastructure rehabilitation, were intended to create an enabling environment for the private sector. To ensure that growth was sustainable in the long-term, the strategy put a special focus on environmental issues in investment lending and technical assistance. The strategy also emphasized education and health sectors, in both economic and sector work and lending, to ensure that the poor have access to social services and productive assets. Because of the severity of institutional weaknesses, the strategy also put priority on capacity building. 19. A number of major studies were planned to support the assistance strategy. These included a major public expenditure review (PER), a financial sector review, and a private sector assessment. The PER was intended to provide the analytical foundation for improvements in budgetary allocations. Initial results from the PER helped in the formulation of the FY90/91 budget and the design of the Government's priority programs. The Financial Sector Review was to carry out an in-depth analysis of the relationship between macroeconomic stabilization and the behavior of the financial sector. The Private Sector Assessment was to help in the design of a program of policy, regulatory and institutional reforms to promote private sector development. These studies were completed by the end of 1990 and helped in the design of the first Structural Adjustment Credit (FY9 1), and the Financial Sector Adjustment Credit (FY93). 20. The UNDP financed, World Bank executed Trade Expansion Project carried out a study of the trade and tax regime in Uganda. This study was helpful in the design of reforms of indirect taxes -4-  and the trade regime. In addition the IMF carried out studies of the tax structure in Uganda, which led to new measures to broaden the tax base and increase revenues. C. The Second Economic Recovery Credit Origins and Objectives 21. Encouraged by some positive developments achieved during the first and second years of the ERP, the Bank agreed to continue support for the ERP with the Second Economic Recovery Credit (ERC II). An Initiating Memorandum in respect of the proposed credit was issued on April 26, 1989 and the Credit was appraised in May/June 1989. Negotiations between the Government of Uganda and the Bank started in Kampala on November 2, 1989 and were successfully concluded in Paris on December 2, 1989. A Letter of Development Policy, formally requesting IDA for the provision of a Second Economic Recovery Credit in the amount of US$125 million was forwarded by Uganda's Minister of Finance to the Bank on December 19, 1989. The Credit was approved on February 1, 1990 and the Credit Agreement signed on February 8, 1990. It became effective on February 20, 1990. 22. The objective of ERC II was to support the third phase of the Government's Economic Recovery Program spelled out in the Policy Framework Paper (1989/90-1991/92). In this phase of the implementation of ERP, the objectives were: (i) an annual GDP growth rate of 5 percent and a subsequent rise in income per capita of 2 percent per year; (ii) a rate of inflation of 7.5 percent by the end of 1992; and (iii) strengthening the balance of payments sufficiently in order to permit substantial improvement in Uganda's net international reserves. These objectives were to be achieved by the implementation of measures to: * improve and maintain incentives for the expansion and diversification of exports and efficient import substitution, through competitive exchange rates, trade and exchange rate liberalization, price incentives to producers and the provision of adequate services and infrastructure; * mobilize domestic savings, through incentives for private savings and reduction of the fiscal deficit and the operating losses of parastatals and marketing boards; * improve the efficiency of the public sector; * strengthen the financial sector, improve credit control and the performance of financial institutions; and * broaden the tax base and strengthen the revenue effort. 23. The NRM Government's goals for the program supported by ERC II were more ambitious than those under ERC I and the policy measures needed to achieve them were also broader and more extensive. Their success required a strong commitment by the Government and a strong effort in mobilizing financial support from donors. -5-  Policy and Institutional Measures Supported by ERC II 24. Of the ERP policy measures outlined above, policy measures supported by ERC II fell into the following broad categories: * the reinforcement of demand management by structural reforms, improvements in the efficiency of use of resources, and strong revenue mobilization efforts. * liberalization of trade and revitalization of the private sector; * rationalization of public sector management. 25. Specifically, IDA required that the release of the ERC II second tranche would be conditional on implementation of the following policy measures by the Uganda Government: * a comprehensive tax and tariff structure reform specifying: (i) the levels of sales tax, excise tax duties and customs tariffs to be applied to each commodity; (ii) a streamlined drawback or exemption arrangements for sales tax on production inputs and for customs tariffs on imported inputs incorporated in export production; * recurrent and development budget expenditures in line with the fiscal targets endorsed by the Fund and consistent with development priorities; * a comprehensive plan for the liberalization of the export marketing of coffee. The plan was to include: (i) the active participation of the private cooperative sector in coffee marketing; (ii) administrative arrangements for export revenue recovery and taxation and tax incentives to encourage the development of a competitive export trade; (iv) the establishment of a coffee market intelligence service and institutional arrangements for the coordination of exporters handling and storage requirements at port of shipment; (v) appropriate reforms in the Government's barter trade practices for coffee and other export crops; * replacement of the export licensing system with renewable export certificates and satisfactory implementation of actions to strengthen customs administration and establish the ex-post monitoring system on the agreed timetable; -6-  * expansion of the establishment register, payroll number scheme, and computerization of staff lists to incorporate the teaching service and the local authorities; * commencement of the implementation of the rationalization program covering the Ministries of Agriculture, Public Service and Cabinet Affairs and two other Ministries identified as having overlapping and duplicate functions, or where merging of their functions would result in greater efficiency of resource use. Implementation and Monitoring of Measures Supported by ERC II Demand Management. 26. Because of Uganda Government's experience gained during the previous two phases of ERP, the implementation of the measures to strengthen demand management got off to a relatively fast start. These consisted of measures for improving revenue generation, tightening the control of public expenditure, restrictive monetary and credit policies as well as the liberalization of the coffee sub-sector. 27. Revenue Generation/Tax Reforms. Due to the evasion of taxes by a large volume of transactions in the informal sector, the narrow coverage of tax instruments, the heavy dependence of Government on the coffee export tax and the deterioration in the Government's tax collecting ability, in 1989 Uganda's tax effort stood at a meager 6 percent of GDP compared with an average of 18 percent in SSA. As a consequence, Government relied on central bank credit and foreign assistance for the financing of the larger proportion of its budget. To resolve this problem on a permanent basis it was necessary to reform the country's tax system, strengthen tax administration and collection, broaden the tax base and reform the parastatal sector. 28. Following the IMF review of the tax system and tax administration in October 1990, the Government took a number of measures to broaden the tax base, and increase compliance with taxes so as to increase revenues. Customs duties were introduced on all imported raw materials at the rate of 10 percent; an excise duty of 5 percent was introduced on a number of manufactured products, and the definition of taxable commodities was widened so as to bring those that had hitherto been exempt within the tax net. Fees and licenses for motor vehicles were henceforth to be charged on their gross rather than net weight. The personal income tax threshold was raised from U Sh5O,000 to 240,000 per year, the maximum individual rate was lowered from 60 to 55 percent, and the corporation tax was reduced from 60 to 45 percent and subsequently to 40 percent. These reductions in personal and corporate taxes were made to encourage compliance and promote investment. 29. In FY91/92, the Government moved to provide autonomy to tax administration so as to enhance revenue collection. The most important of these measures was the establishment of the semi- autonomous Uganda Revenue Authority. Changes were also made in the tax system. The maximum individual income tax rate was again lowered to 50 percent and was to apply to an annual income of more than U Sh2.62 million. A commercial transaction levy of 10 percent was introduced, and road user charges were reduced to two categories U ShlOO and 300, from the original four. 30. Expenditures, Fiscal discipline was lacking, and budget allocations were generally not respected. Expenditure on the military consumed over 40 percent of all recurrent expenditures. The lack of budget discipline was a major factor in the underlying internal financial stability and hence inflation. Monitoring of budget performance during the fiscal year was generally poor; it was only after the creation -7-  of the Economic Analysis Unit in the MOF that it became possible to get rudimentary data on revenues, budget releases and expenditures during the fiscal year. However, it was only in FY92/93, after the merger of MOF and MPED, that a serious effort was made to use this information to control spending. Thus during ERC II, lack of fiscal discipline continued to stand in the way of achieving a low and stable inflation. 31. Coffee Sub-Sector. In 1989, the BOU took over the provision of crop finance from commercial banks. lhis inevitably led to a situation where the marketing boards received more crop finance than was prudent. The situation was aggravated by the barter trade protocols which had been entered into by the Government. The Government did not pay the marketing boards for the crops procured for barter, increasing the crop finance needs of the boards. Indirectly the BOU was financing these barter deals. Coffee was the principal consumer of crop finance. Given the importance of coffee to the economy, and its role in the financial hemorrhage, it was essential to liberalize the sector, ensure the active participation of the private sector in coffee exporting, and commercial banks in providing crop finance. 32. ERC II therefore required the Government to prepare a plan to reform and liberalize the coffee sector. The Government, in collaboration with the Bank, produced this plan which led to far reaching reforms of the coffee subsector. The reforms were supported mostly by IDA's Agricultural Sector Adjustment Credit, which was approved by IDA's Board in December 1990. But ERC II set the stage for these reforms. 33. Four cooperative unions (Banyankole Kweterana, Bugisu, Masaka and Busoga) were licensed in 1990 to process and export coffee, and in 1991 two others (Sebei and West Mengo) were also licensed. Also in 1991, the Cooperative Societies Act was amended to enable the cooperative unions to operate as independent business entities. Controls on producer prices, processing and export margins were removed to allow farmers' prices and other margins to be determined by market forces. The Coffee Marketing Board was restructured with its commercial functions taken over by the Coffee Marketing Board Ltd. Its regulatory functions were assumed by the Uganda Coffee Development Authority. 34. Effective from November 1991, the crop finance functions for the coffee subsector were transferred from Bank of Uganda to the comrnercial banks; and from March 1992, coffee export proceeds were allowed to be exchanged at the forex bureaux rate. In July 1992 the export tax on coffee was removed although a 2 percent withholding tax on agricultural processing, including coffee, was introduced. During FY91/92 13 private companies were licensed to participate in coffee procurement, processing and export. With these reforms, the coffee farmers were paid promptly. This led to the reversal of the tendency of the farmers to uproot coffee trees; instead, they began to plant higher yielding varieties. 35. Interest Rate and Monetary Policies. During the third phase of ERP, the phase supported by ERC II, the emphasis was on a steady adjustment of the exchange rate, the active monitoring of monetary and credit developments so as to achieve the program targets, the review of the level and structure of interest rates and the maintenance of crop finance within the ESAF monetary benchmarks. In December 1989, the Bank of Uganda raised its commercial lending rate to 55 percent from 45 percent. This made the real rate of interest positive for the first time in many years. All coffee barter exports were limited to a cumulative maximum of 240,000 bags and all existing coffee barter contracts were required to be registered with the Ministry of Finance. A Presidential Decree directed that all coffee be exported for cash as long as the International Coffee Agreement quotas were not in effect. -8-  Reform of the Indirect Tax System 36. In the 1990/91 budget, the Government adopted a tax reform specifying levels of sales tax, excise duties and customs tariffs to be applied to each commodity and streamlining the drawback or exemption arrangements for the sales tax. The import duty rate bands were reduced from several to only five, ranging from 10 to 50 percent. The rates above 50 percent were abolished. The sales tax rate bands were set at only four, with the rates applying equally to locally produced and imported goods. The excise duties had a two-rate structure, i.e., 30 and 60 percent, with the taxes being restricted to alcoholic beverages, soft drinks, cigarettes and all soap except bar soap. Rerorm of the Exchange Regime 37. An overvalued exchange rate as well as uncoordinated monetary policies had continued to plague Uganda's economy even after the implementation of the first and second phases of the ERP. During the implementation of ERC II there were a series of exchange rate regime adjustments. The most important step was the legalization of foreign exchange transactions on the parallel markets in July 1990, with the licensing of a number of forex bureaux to retail foreign exchange at market determined rates. This immediately opened a wide gap between the market rate and the official rate, set by BOU. Subsequently, the official rate was devalued regularly in an effort to close the gap between the market and the official rates. This gap was 45 percent in July 1990 and closed to 9.4 percent in October 1991 before widening again to 30 percent in December 1991. 38. In January 1992, a foreign exchange auction was introduced by BOU, to allocate the proceeds of donor import support on a market basis. The marginal rate at this "Dutch" auction was taken as the official exchange rate. However, because of relatively high transactions costs in obtaining foreign exchange from the auction, there remained a gap of about 15 percent between the marginal auction rate and the bureau rate. In March 1992, the Government decided that the rate for official transactions would be determined by the average of the foreign exchange bureaux rates. Trade Liberalization and Private Sector Revitalization 39. The reform of the incentive and regulatory system was an important component of ERC II. As a condition for the release of the ERC II second tranche, the Government was required to replace the existing export licensing system with renewable export certificates. The Government was also to take the necessary actions to strengthen customs administration and to establish an ex-post monitoring system for exports and imports on a timetable agreeable to the IDA. While ERC required that the Government abolish export licensing only, the Government moved ahead to apply the same principles to import licensing. In September 1990, the timetable for the establishment of the ex-post monitoring system was agreed with IDA and consultants commenced work on the establishment of the system. In November 1991, both export and import licenses were abolished and replaced wi4h renewable export and import certificates. 40. Under the ERP, two parallel schemes, the Open General License System (OGL) and Special Import Program (SIP) were established for the allocation of the proceeds for import support. Under the OGL system, established in 1987, foreign exchange was allocated to a number of selected firms operating in key industries, for the importation of essential production inputs. In December 1989, the number of firms under the system was expanded to 63 from the original 25 so as to spread the benefits as wide as possible. Under the system, foreign exchange was allocated by the OGL committee to the importers on -9-  the basis of their requirements for essential raw material inputs and spares. 41. The Special Import Program (SIP) was designed to cover imports not covered under OGL. Under SIP, foreign exchange was sold on a first come first served basis at the official exchange rate. By the end of March 1991 US$25 million was used up under the OGL while the more liberal SIP III sold US$99 million (see Table 20). The plan under ERC II was to merge the OGL and SIP into a more liberal system that is closer to the SIP than the OGL. This plan never materialized. The OGL and SIP foreign exchange allocation systems were abandoned in January 1992 when the foreign exchange auction was introduced to allocate the proceeds of donor import support on a market determined basis. 42. To create a conducive environment for private investment, a review of the laws and regulations pertaining to the establishment and operations of enterprises was undertaken. Following this, the Investment Code (1990) was enacted, and the Investment Authority was established in 1991. The Government made a firm commitment to return the expropriated Asian properties to their original owners and the data work necessary to accomplish this started under ERC H. Public Sector Management. 43. On assumption of power, the NRM Government inherited a demoralized and undisciplined civil service. There were 38 ministries and agencies, with overlapping functions as well as many redundant employees, especially at the lowest levels. No accurate record of the number of civil servants existed. The unwieldy size, poor compensation and low morale in the civil service undermined the Government's ability to deliver public services and implement recovery and development programs. In 1989, the Government set up the Public Service Review and Reorganization Commission (PSRRC) to make recommendations for the reform of the civil service. 44. As a condition for the release of the second tranche of ERC II of the Government was required to extend the Establishment Register, payroll number scheme, and computerization of staff lists to incorporate the teaching service and the local authorities and to start the functional review of all ministries with a view to rationalizing their functions and staffing. 45. By the second half of 1990, detailed payroll data on all 47 budget votes had been compiled and work linking the payroll to the establishment register and staff lists was completed in July 1990. The Public Service Review and Reorganization Commission completed its work in September 1990 paving the way for the implementation of the Civil Service Reform. There was a retrenchment of 50 percent of the civil servants classified as group employees. The information on the Teachers Service and Local Authorities payroll and staff lists was delayed and was completed only in 1991. This was primarily due to the lack of cooperation between the Ministry of Education and Sports, and the Ministry of Public Service (MPS). There was an endless dispute between the two ministries about the number of teachers. Because of this dispute, it took another two years before the teachers' payroll could be fully computerized. Evaluation of Performance 46. The implementation of the ERC II program got off to a fast start, compared to ERC I. The Government performed better overall due to the experience it had acquired. It had a better understanding of World Bank procedures, particularly operation of special accounts, procurement, and disbursements. Government commitment to the ERP and the policy reform program was much stronger than under ERC -10-  I. There were a few key officials in Government who understood the linkages between the reforms of ERC and rapid economic recovery and development in the medium and long run. There remained however, within Government, many skeptics and opponents of reform. However, the Government was well aware that the proceeds of the IDA Credit and complementary donor support were making an important contribution to the continued inflow of essential imports to the economy. There was therefore a determination to see the program move along. 47. IDA, with the experience of ERC I behind it, had a better grasp of the political, social and economic situation of the country, its needs and implementation capacity of the Government. The design of ERC U took most of these factors into consideration. The first tranche of the credit was made available immediately on credit effectiveness and 20 percent of it went towards retroactive financing of imports, recognizing the urgent need at the time for foreign exchange for financing essential imports. 48. The credit of US$125 million was disbursed in two unequal tranches. The first tranche was US$70 million, of which a large amount (US$40 million) was deposited into the Special Account on credit effectiveness. The credit also made a substantial amount (US$35 million) available for petroleum imports. Although during ERC H, stabilization was paramount, the Bank also focussed on the structural reforms to reinforce demand management and address the country's long term development objectives. The second tranche was released later than planned, but the Bank was encouraged by the Government's effort and growing commitment to achieve the objectives of the ERP, and the overall success of the program up to that point, despite the adverse external shocks. 49. Performance of Government. The problems with the implementation of the program had to do with the Government's capacity to implement the program. The commitment of some of the implementing ministries was in doubt. There was little understanding of the program and commitment at the civil service level, apart from a few top officials in the core economic ministries. The civil service was undisciplined and underpaid. Absenteeism was high mainly because staff needed to have other jobs to make a living. Lack of coordination was endemic and the absenteeism made it worse. The staff tended not to take the implementation of the policies and conditions seriously. 50. Unlike ERC I however, there was a focal point for the implementation of the program. The appointment of an ERC H Coordinator in October 1989, before Board presentation of ERC I, facilitated the implementation of the program. The coordinator had a small staff, and direct access to the Minister of Finance. More importantly, the office was equipped with computers, printers, copiers, and communications facilities which enabled the coordinator to produce documents quickly and communicate with the ERC II task manager in Washington. The coordinator used these facilities effectively. 51. Under ERC II, substantial progress was made in the liberalization of economic activities, including coffee reforms, and the exchange and trade regimes. Even in these areas, progress was not painless due in part to resistance from implementing ministries. For instance, the replacement of export licenses by renewable export certificates was a condition for the release of the second tranche. The announcement of the change was made before the release of the tranche in October 1990, but operationally, the new system was not in place until November 1991. The abolition of import licenses, and replacement with certificates also became operational in November 1991, after substantial delays. The reason for the delays was that the implementing ministry, the Ministry of Commerce, Cooperatives and Marketing, was opposed to the reforms. -11-  52. On revenue generation, until the Revenue Authority was established in 1991, the tax collection effort was hampered by inefficiency and corruption. Although a substantial increase in revenues (50 percent) was recorded in FY90/91, this was from a very low base and the increases could not be sustained without improvements in tax administration. 53. On budget allocations and control of expenditures, progress was made but at a very slow pace. This was primarily due to the weakness of the MOF and the BOU. One of the second tranche conditions of ERC II was that the Government and IDA should agree on the size and composition of the recurrent and development budgets. When the ERC II second tranche review mission visited in early June 1990, there was not even a broad outline of the Government's budget proposals to discuss, although the budget had to be read before the end of the month. The mission had to then make specific proposals to the Government on issues of concern to it. When the budget was presented to IDA, it did not have much of a choice but accept the Government's proposals, as there was no time to make any changes. 54. Expenditure control remained a serious problem. The defence expenditure was high relative to other areas, but the army routinely exceeded its budget because it lacked basic discipline to control its expenditures and MOF had no capacity to monitor expenditures and take corrective action. Ministers and other officials obtained funds from the Bank of Uganda without the authority of the Ministry of Finance. Unbudgeted expenditures abounded. These issues came to a head in FY91/92 when MOF allowed expenditures to exceed revenues and grants by a very wide margin. The Bank of Uganda passively financed the huge deficit and inflation accelerated. The President replaced the Minister of Finance, and merged the MOF with the Ministry of Planning and Economic Development to form the Ministry of Finance and Economic Planning (MFEP). Since then there has been more effort to control expenditures and the result has been a reduction of inflation to single digits. 55. Progress on rationalizing public sector management was poor. ERC II had an ambitious agenda of rationalizing the functions of ministries and building up an information base that could be used to end abuses of government employment and payroll. It was proposed to link the establishment register with staff lists and payroll data to prevent the emergence of ghosts. This exercise was also to be extended to the teachers and employees of local authorities. Substantial analytical work was done to permit these actions to be taken. 56. Implementation of the necessary actions was, however, harnpered by the bureaucracy and ineffective political leadership at the ministries concerned. The Ministry of Public Service was at the center of the reforms. However, it did not have the capacity or incentive to implement the reforms. The Ministry of Education and Sports, in charge of the teachers' payroll, did not co-operate in the exercise and was unwilling to accept any numbers which it did not determine. It refused to accept the results of the census of teachers conducted under the auspices of MPS. It was not until 1993 that the teachers' payroll was computerized, although there remained ghosts in the payroll. 57. Functional rationalization of the five ministries selected did not take off in the way that was planned, primarily because MPS did not have the capacity to carry it through. In July 1991, the number of ministries and agencies was reduced from 38 to 21, through a Presidential directive. This was done by combining existing ministries, and did not appear to be the result of the previous analytical work which was done on the rationalization of ministerial functions. Under SAC I, a fresh review of functions of ministries was initiated, targeting five large ministries. Under ERC II, the public sector reform component did not achieve its objectives, although it helped to sensitize the ministries involved of the actions that need to be taken to achieve an efficient civil service. -12-  58. The implementing line ministries were not brought into the design of the program at an early stage. Thus they were being asked to implement programs whose origins and rationale were foreign to them. The team that the Government fielded for negotiations in Kampala was drawn from the Ministry of Planning and Economic Development, the Ministry of Finance, the Bank of Uganda, and the Ministry of Justice. The composition of the team indicated the lack of involvement by the implementing line ministries in the design and negotiation of the program. 59. Overall, the performance of the Government in the implementation of ERC II, though much better than ERC I, was mixed. In some areas it was satisfactory, perhaps even remarkable -- exchange regime, tax reforms. In others the objectives were not achieved--public sector management reforms. In all cases, it took a lot of work on the part of the coordinator, ERC II task manager and missions, and the Resident Mission staff, to get results. It was important to put constant pressure on the implementing ministries, otherwise no action would be taken. Bank staff played a large role in coordinating the activities of the various ministries, something that belongs to the lead implementing ministry - the Ministry of Finance. But because of the large job involved in coordination, MOF needed help as its own capacity was weak. 60. ERC II has been instrumental to building the foundation on which more fundamental reforms under SAC I took place. The program was a learning opportunity for the Government, that liberalization can work without being disruptive, and in particular that a free market for foreign exchange does not lead to excessive undervaluation of the exchange rate and high inflation. In addition, the causal relationships among fiscal deficits, money supply, exchange rates and inflation became clearer to policy makers, with the experience gathered in implementing ERC I and ERC II. 61. Performance of IlDA. For ERC II, IDA's overall aim was to support the Government's Economic Recovery Program by helping to restore productive capacity while steering the economy towards sustainable long term growth. The Bank worked closely with the Fund towards the achievement of stabilization, improved financial intermediation, creation of an environment conducive to growth of the productive sectors as well as the rehabilitation of the social sectors. Despite Government's lackluster performance under ERC I, the Bank responded positively to the country's need for policy advice and balance of payments support under ERC II. 62. The badly needed first tranche of the credit was released immediately upon credit effectiveness, while the second tranche, though its release was delayed for about three months, was disbursed relatively quickly once it was released. Furthermore the Bank extended two reflows of SDR 1.5 and 1.2 million on November 7, 1990 and January 9, 1992 respectively. Disbursement of the credit proceeds was on schedule and regular, although there were some delays in the disbursements of funds provided by other donors through cofinancing. 63. The Bank was responsive to the needs of Uganda. With a large initial deposit in the Special Account, the Bank wanted to avoid a situation where the Special Account was used up before Uganda had enough documents to replenish it. This was a lesson from ERC I. The Bank also provided a large amount of money to finance petroleum imports, taking into account the fact that Uganda had little free foreign exchange of its own to finance petroleum. Even the credit amount was large by any standard, but this recognized the urgent need of Uganda for foreign exchange and budgetary support. The Bank also played an important role in mobilizing donor support for the ERP. It also worked closely with the Fund in assisting the Government to negotiate debt relief from its creditors. -13-  64. ERC II supported a broad program of stabilization and adjustment. It was clearly aimed at the major problems confronting Uganda but the capacity to absorb and implement the reforms was not there. Furthermore, the commitment was not strong; these factors were well known at the beginning of the program. Some effort was made, with the assistance of the Bank, to build capacity, particularly in the MOF, with the ERC II coordination office and the Economic Analysis Unit, and in the Bank of Uganda, with the External Debt Management Office (EDMO). The technical assistance component of ERC II paid for some of these units and funded the necessary studies. 65. The Bank supervised the implementation of the credit very closely. Supervision and monitoring was done by the regular Bank Missions to Uganda and by continuous discussion with, and reminders to, the officials in charge of the implementation of the various measures required under the credit. The ERC II coordinator kept in close touch with the Task Manager and the Resident Mission. The Bank Resident Mission also kept close contact with Government officers responsible for the implementation of the program policies. Other Aspects of ERC II 66. Procurement. ERC II proceeds were used to finance 100 percent of the cost of general imports, petroleum products and technical assistance. By March 1991 a total of US $ 123 million had been allocated for petroleum and general imports. 67. Disbursements. The IDA ERC Jl credit equivalent to US$133.3 million was fully disbursed by June 30, 1993. The first tranche was released immediately on credit effectiveness on February 20, 1990, while the second tranche was released in October 1990. The two reflows extended by the Bank to the Government on November 7, 1990 and January 9, 1992 respectively, were also fully disbursed by the time of the credit closure. The planned closure of the credit was December 31, 1991. This date was extended to June 30, 1993 to enable the Government to utilize all the credit proceeds, particularly from the cofinancing donors, that still remained on the credit account. 68. Utilization. ERC II was administered by Bank of Uganda which, under the terms of the agreement, maintained a special account in an offshore commercial bank in which the credit proceeds were deposited by IDA upon request by the Bank of Uganda. The credit funds were allocated under OGL and the Special Import Program. The funds set aside for oil imports were allocated by the Bank of Uganda to qualifying oil companies and were fully utilized as planned. The funds intended for technical assistance were also fully utilized and were allocated on request by the Project Coordinator. 69. Accounts and Audits. Under the ERC II, accounting procedures in Bank of Uganda were strengthened and regular statements of credit accounts were prepared by the External Debt Management Office of Bank of Uganda, and these were regularly audited by the Government's Auditor General as required by the Credit Agreement. The Role of the IMF 70. The Fund played the lead role in the design of the macroeconomic stabilization program and the reforms of the exchange regime, provided the fiscal and monetary benchmarks, and supervised and monitored these aspects of the program. The Bank and the Fund shared information and worked closely at all levels in assisting the Government in the design of the ERP, in supervising and monitoring the program, and in assuring the consistency of the various programs. The Fund was also instrumental in -14-  the negotiations between the Government and the donor community for the rescheduling of some of the country's external debt. The Fund also extended a Credit of SDR 219.2 million under its Enhanced Structural Adjustment Facility which covered the April 1989 to November 1993 period. Cofinancing of ERC II 71. The Bank played a key role in the mobilization of external donor support for the ERP. The Netherlands, Sweden, Canada, Switzerland and Germany cofinanced the third phase of the ERP. These donors provided an equivalent of about US$72 million which were used to finance general and petroleum imports. Results under ERC II 72. A major focus of ERP was to stabilize the economy. In this respect, the program was successful under ERC II. Inflation was in the 60 - 70 percent per annum range in the second half of 1989, but in the corresponding half of 1990, inflation was in the 20 - 25 percent per annum range. It bottomed out at 19.8 percent in January 1991 and rose to 32 percent by the end of the year. Thus the actions taken in the period of ERC II brought down inflation. 73. The deficit on external current account remained unchanged between 1989 and 1990. Export receipts fell in 1990 due to adverse terms of trade but imports also dropped sharply, leaving the BOP deficit largely unchanged. Another sharp drop in imports occurred in 1991, leading to a fall in the BOP deficit. While the current account was close to that envisaged in the program, the composition of trade, with lower imports and exports, differed from what was programmed. The rate of growth of GDP fell from 7.0 percent in 1989 to 4.5 percent in 1990 and 3.4 percent in 1991. However, the decline in the growth of GDP was also, perhaps primarily, due to the drought which adversely affected agricultural production in both 1990 and 1991. 74. Many of the structural measures under ERC II were successfully implemented. The coffee subsector was substantially liberalized, the monopoly of the Coffee Marketing Board was broken. Cooperative unions and private companies were licensed to participate in the subsector. Interest rates were raised, making them positive in real terms for the first time in many years. The import and export trading was reformed and liberalized. 75. One of the main areas of difficulty in reform in SSA has been the liberalization of the exchange regime. In Uganda actions taken under ERC I and ERC II laid the foundation for the more fundamental reforms to come. This started with tentative steps under ERC I with the introduction of the SIP and continued under ERC II with the introduction of the forex bureaux. Further actions took place under SAC I with the introduction of the foreign exchange auction and subsequently the replacement of the auction with an inter-bank market for foreign exchange, where trading in foreign exchange is carried on by the banks and bureaux with minimum intervention by the Bank of Uganda. These changes in the foreign exchange market have occurred without disruptions in supplies of foreign exchange, and without unanticipated shifts in exchange rates. This process of change has been made possible by close consultation between the Bank, the IMF and the Government. 76. Progress was slow in other areas. Expenditure control remained a serious problem under ERC II. This undermined the stabilization effort. The objectives of the public sector management reform were not achieved. The proposed agenda was too ambitious to start with, given the weakness of the Ministries -15-  involved. The work on the teachers' payroll did not get the cooperation of the Ministry of Education and Sports. This delayed the removal of ghosts and the computerization of the teachers payroll. Although export licenses were replaced by renewable export certificates, this occurred in November 1991 rather than the planned date of August 1990. 77. However, the policy measures undertaken under ERC II formed the foundation for the more fundamental measures that were to follow. They provided a learning experience for a wide range of officials in implementing policy reform. This facilitated the implementation of reforms under the follow- on program -- SAC I. D. The Main Lessons Learned 78. The main lesson relates to the importance of Government commitment to the success of the program. More commitment at the top level of Government and in the core economic ministries, compared to under ERC I, led to better results. The Government appreciated the need for reforms, and the country's dire need for foreign exchange reinforced Government's determination to implement the program despite misgivings with some components. There was wide support for some components: stabilization, and revenue mobilization; this made them relatively easy to implement. For others, -- civil service reform, trade reform -- conceptual differences existed between the Bank and the implementing agencies, hence the delays in getting the programs underway. 79. ERC II was a wide ranging reform program, designed to be implemented by the core and line ministries. The line ministries in particular lacked the capacity to implement the program. Their commitment was weak, stemming from a poor understanding of the program and very little involvement in its design. This delayed the implementation of the program, and in some cases, the planned objectives were not met. Future adjustment credits should ensure wide participation in the design of the program. 80. The appointment of an energetic coordinator, with direct access to the Minister of Finance, facilitated the implementation of ERC II. The coordinator monitored the program closely and kept regular contact with Bank staff at the Resident Mission and at Headquarters. This ensured that timely corrective action was taken, and delays in implementation were brought to the relevant authorities. The Economic Monitoring Committee helped with high level coordination. 81. The persistence of the Bank, and some people in government, and the flexibility that the Bank showed in the implementation of the program helped in the successes that ERC II achieved, and in building a strong foundation for the more fundamental reforms that were to come. -16-  PART II. PROIECT REVIEW FROM THE BORROWER'S PERSPECTIVE A. Background. Evolution and Development of the Program 82. When the NRM Government came to power in January 1986, it inherited a society and an economy in ruins. While political mismanagement of the previous post-1971 regimes had destroyed the country's political and administrative infrastructure, their arbitrary administrative brutality and gross mismanagement of the economy had sapped the country's moral fiber and destroyed the social and economic infrastructure. The administration of justice had broken down, the once vibrant and growing industrial sector had been disrupted and plant and equipment had badly depreciated and dilapidated; agricultural output particularly that of the traditional export crops had declined; the civil service was in disarray and demoralized; and there was rampant three digit inflation, largely caused by the acute shortages and distortions in all economic sectors and markets. 83. During the first year of its administration, while trying to bring the last pockets of armed resistance under control, especially in the north and eastern parts of the country, the NRM Government attempted to undertake the rehabilitation and recovery of the economy by increasing producer prices; controlling the trade in essential commodities like sugar and salt; monopolizing the exports of coffee and cotton in the hope that this would best maximize the source and use of the scarce foreign exchange; arranging barter trade arrangements to acquire essential imports without use of convertible currencies and by maintaining two levels of exchange rates, one for the essential and the other for the general imports. 84. By the end of 1986 however, it became clear to the Government that the economic measures it had undertaken were not achieving the desired results. Acute shortages in the economy continued and by December 1986 the rate of inflation had reached a record level of 356 percent per annum. But above all, due to an inadequate tax base for the generation of internal revenue, the Government was short of necessary revenue to administer public services without resorting to heavy borrowing from the Central Bank. 85. In January 1987 therefore, the NRM Government approached IDA and the International Monetary Fund for financial assistance, the design of a macroeconomic strategy that would underpin economic recovery and growth, and the mobilization of additional external support. With the assistance of the Bank, the Fund and other donors, the Government launched the Economic Recovery Program (ERP) in May 1987. 86. The first phase of ERP was supported by the First Economic Recovery Credit (ERC I) which was approved by IDA's Board in mid-September 1987. In implementing the first phase of the Program the Government immediately took a number of important measures which included the devaluation of the shilling by 77 percent; a currency reform which imposed a 30 percent conversion tax on currency and bank deposits held by the public; substantial increase in crop producer and petroleum prices; and the introduction of the Open General Licensing system which guaranteed access to foreign exchange at the official exchange rate to a number of manufacturing firms in key industries. 87. During the second phase of the Program, the Government tightened control over current expenditure, set up an Economic Monitoring Committee and an Economic Analysis Unit to monitor economic performance on a monthly basis. During the first nine months of the 1988/89 fiscal year the exchange rate was cumulatively devalued three times by about 87 percent and interest rates were -17-  increased by about 20 percent across the board between July 1988 and March 1989. The Government extended 100 percent retention of export proceeds to non-coffee exports and restrictions on domestic trade were removed. 88. A combination of these measures during the two phases of the ERP resulted in an estimated GDP growth of about 5.9 percent, and a substantial decline in the rate of inflation. But internal and external imbalances, shortages and distortions in all markets still remained. The attainment of fiscal and monetary discipline also remained elusive. The economic recovery efforts therefore needed to be pursued further with vigor if the Government's aims of recovery and development were to be attained. It is with this objective in mind that the Government of Uganda again approached IDA to extend to it the Second Economic Recovery Credit which would be used to finance the third phase of the ERP. 89. The Second Economic Recovery Credit was the fifth in a series of program lending extended to Uganda after the war of 1979 to help the country to reconstruct, recover and adjust for development. The first informal contacts in respect of ERC II began early in 1989 and from then on progress was rapid. The Initiating Memorandum was drawn up in April 1989 and the credit was appraised from May 28 to early June the same year. Negotiations for the credit between Uganda Government and IDA started in Kampala on November 2, 1989 and were concluded in Paris on December 2, 1989. A formal request for an IDA loan equivalent to US$125 million was forwarded by the Uganda Government to IDA on December 19, 1989. It was approved by the Board of IDA on February 1, 1990 and the Credit Agreement was signed on February 8, 1990. The credit became effective on February 20, 1990. Its planned closing date was December 31, 1991 but this was later extended to June 30, 1993 to enable the Government to use up all the credit proceeds. 90. The direct and primary use of the credit was the financing of 100 percent of the foreign exchange costs of an important proportion of the country's essential import requirements, particularly recurrent inputs, spare parts, petroleum products, urgent replacement equipment for agricultural and industrial production and selected essential consumer goods. Therefore, the first tranche of the Credit was disbursed immediately on the Credit's effectiveness. A Uganda Program Coordinator for ERC II was confirmed by IDA on February 23, 1990. 91. The credit was intended to support the country's macroeconomic adjustment as well as structural reform to enhance rehabilitation and development. To this end the Bank made the release of the credit's second tranche conditional on the fulfillment of the following conditions by the Uganda Government: (a) comprehensive tax and tariff structure reform; (b) recurrent and development budget expenditures in line with the fiscal targets endorsed by the IMF as well as the Government's development priorities. (c) the preparation of a comprehensive plan for the liberalization of the export marketing of coffee; (d) replacement of the export licensing system with renewable export certificates and satisfactory implementation of actions to strengthen customs administration and establish the ex-post monitoring system on the agreed timetable; -18-  (e) expansion of the establishment Register, Payroll Number Scheme, and Computerization of staff lists to incorporate the Teaching Service and the Local Authorities; (f) commencement of the implementation of the rationalization program covering the Ministries of Agriculture, Public Service and Cabinet Affairs and two other Ministries identified as having overlapping or duplicate functions. 92. IDA was instrumental in mobilizing other donor support for the third phase of the ERP. The donor contributions, all in the form of grants, amounted to US$72 million bringing the total package, including IDA's contribution, to US$209 million. The contribution of donor cofinanciers was smaller, by about US$40 million, than that under ERC I. The main difference was that ADF did not participate in ERC II while it had made a concessional loan of US$35 million under ERC I. The administration of the funds was much easier under ERC II. Except for the Canadian and Swiss grants, the rest of the grants were efficiently administered by IDA. The Government commends the Association (IDA) for mobilizing support from bilateral donors and administering the funds efficiently. The respective donor contributions to the Program are indicated in the table below. Table 1: ERC II Cofinancing Contributions DONOR CURRENCY AMOUNT US $ EQUIVALENT NETHERLANDS NLG 35.000 19.182 SIDA GRANT 3 SEK 30.000 5.130 SIDA GRANT 4 SEK 74.000 12.294 CIDA GRANT CDN 2.500 2.132 SWISS GRANT CHF 9.827 6.846 KFW GRANT DM 30.000 26.500 Total 72.087 Source: EDMO, Bank of Uganda B. Implementation of the Program 93. The implementation of ERC II got off to a relatively fast start compared to its predecessor, ERC I. However, because of the lack of ownership and understanding of the program by the various officials involved in its implementation, there were some delays in meeting the conditions for the release of the second tranche of the credit. By October 1990, the Bank was satisfied that the Government had fulfilled the second tranche release conditions and the tranche was released on October 16, 1990. Two further supplements to the credit, of US$2.011 million and US$1.667 million were obtained from IDA on November 7, 1990 and January 9, 1992 respectively. ERC II was to have closed on December 31, 1991 but the Government requested and the Bank agreed to extend the closing date to June 30, 1993 so that the Government could utilize all the proceeds of the Credit including those that had been extended by the credit's cofinancing donors. -19-  94. One of the lessons learnt from the preceding ERC I program was that the initial advance for deposit into the Special Account should be large enough to facilitate opening and confirmation of LCs without any bottlenecks between turnaround of replenishment. For ERC II, the Association allowed a very generous initial deposit of US$40 million. 95. Special Accounts facilitate the disbursement of funds. The Association and all other co- financiers, except the Swiss, allowed the use of special accounts. For the entire import support funding of US$209.11 million, US$121.123 million, representing 57.86 percent was disbursed through special accounts. The Swiss funds were the slowest to disburse because, first, there was no special account, and second, the donor chose to hold the funds directly instead of passing them to IDA to administer. The small CIDA grant was also slow to administer because, although there was a special account, the donor held the funds directly and would release only doses at a time to IDA. 96. The credit proceeds were allocated through the Open General License (OGL) system and the Special Import Program (SIP), both administered by the Bank of Uganda. The number of firms eligible to use the OGL was increased from 21 under ERC I to 63 under ERC II. The SIP provided foreign exchange to importers at the official exchange rate on a first-come, first served basis. The users of the SIP had to have available the local cover in order to purchase foreign exchange. With these two sources of foreign exchange, and foreign exchange available from the foreign exchange bureaux, which had been legalized in July 1990, the supply of essential imports was ample. 97. The Technical Assistance provided by ERC II (ERC II TA) financed consultants to provide assistance in oil procurement, records management systems for the Custodian Board, forex management systems for the Bank of Uganda, and export monitoring and coffee budgeting. In particular, the overhauling of the records of the Custodian Board was a most welcome aspect financed by the credit. The proceeds from ERC II TA were also used towards the purchase of vehicles, computer equipment and stationery for External Debt Management of the Bank of Uganda, the office of the ERC II Coordinator, and Uganda Revenue Authority (URA). The equipment and vehicles provided to the URA enabled it to get to a quick start. 98. The implementation of the Program was closely supervised and monitored by both the IDA and the Government. The first IDA Review Mission came to Uganda in April 1990. Several further missions, including a Multi-Donor-Agency Joint Evaluation Mission (JEM) of November 1992, reviewed the country's performance during the course of the program. RMEA Nairobi staff also made several visits to Uganda and were most helpful in giving guidance and dealing with various questions related to the disbursements under the program. The Bank's Resident Mission also played a major role in the supervision and monitoring of performance and the Resident Bank staff worked closely with Government officers involved in the implementation of the Program. The ERC II Coordinator closely monitored the implementation of the program and kept Bank staff fully informed of progress. The Economic Monitoring Committee, chaired by the Ministry of Finance and composed of the ministers in key economic portfolios, monitored progress at high level and asked for corrective action to be taken when necessary. C. Evaluation of the Program 99. The program performance may be evaluated by examining whether the policy measures required by the program were met and the targets set under it were achieved. The objectives of ERC II were to assist the Government to improve demand management, reform the tax regime, liberalize the -20-  economy and revitalize the private sector, and rationalize the public sector management including civil service reform. 100. Demand Management. The results were encouraging. The Government brought bank credit creation and the related problem of excessive crop financing under control, raised interest rates to more realistic levels to encourage savings and put a check on excessive credit demand, and the exchange rate was substantially devalued. The result was that inflation progressively fell from 65-70 percent per annum in the second half of 1989, to 20-25 percent in the first half of 1991. Revenues rose rapidly, from U Sh44.7 billion in FY88/89 to U Shl33.3 billion in FY90/91. However, Government realized that tax administration was weak and that these rapid increases could not be sustained unless this was improved. The establishment of the semi-autonomous Uganda Revenue Authority in 1991 was intended to improve tax administration and maintain the momentum of rapid revenue growth. The Government made efforts to improve budgeting and control of expenditures but results in this area were mixed. 101. Tax Reforms. With the guidance of IDA and the IMF, the Government undertook a number of measures to reform the tax system. These measures were to broaden the tax base, increase revenues and simplify the tax system. 102. Economic Liberalization and Private Sector Revitalization. Visible success was achieved in this area. Most internal trade was freed from price and distribution controls, the monopolies of the Coffee and Produce Marketing boards were broken and similar consideration was underway for the Lint Marketing Board. Export and import procedures were simplified while the barter trade arrangements were substantially reduced. Prices of domestically produced and imported goods, except petroleum products were decontrolled, leaving them to be determined by the markets. The investment climate was improved by the enactment of the Investment Code (1990) and the suspension of the Industrial Licensing Act (1969). In 1991, the Investment Authority was established to promote investment and implement the investment incentives provided for by the Investment Code. 103. Public Sector Management. By January 1990 detailed payroll data on all 47 budget votes had been compiled and work linking the payroll to the Establishment Register and staff lists was completed in July 1990. Information on the Teaching Service and Local Authorities was completed in 1991 and the Public Service Review and Reorganization Commission (PSRRC) completed its work at the end of 1990. A number of ministries were selected for rationalization of their functions following a review of the scope of their activities. In 1991, the number of ministries and agencies were reduced from 38 to 21 by combining functions. To begin the process of reducing the size of the civil service recommended by the PSRRC, Government retrenched a large number of group employees. In addition, a large number of 'ghost' employees were eliminated from the payroll. Government is continuing the process of retrenchment and elimination of ghosts in order to build a smaller, more efficient civil service. Conclusions 104. The implementation performance under the third phase of the ERP, supported by ERC II, was better than in the first two phases of ERP. The financing provided under ERC II (including the cofinancing) enabled Uganda to buy essential imports for the rehabilitation of productive facilities. A survey of major beneficiaries indicated that the funds played a key role in the maintenance of supplies, both industrial and consumer, thereby maintaining and improving production and capacity utilization. The major beneficiaries were also major contributors of Government revenues. The credit therefore -21-  pool of counterpart funds from the project helped to ease Government budgetary constraints. 105. Overall ERC II was successful in the execution of the policy reform objectives. Perhaps the greatest gain from it was that it set the stage and helped finance the initial set-up in the liberalization of markets in the fields of exports, imports and the exchange regime. It also laid the foundation for improved revenue generation, investment promotion, public sector management reforms, and the rationalization of government expenditures which were undertaken under SAC I. -22-  PART III. STATISTICAL INFORMATION Table 1: ERC II Cofinancing Contributions (see text table page 19) Table 2: Credit Position (Amount in US$ million) Credit Original Disbursed Canceled Repaid Outstanding 20870 UG 133.345 133.345 0.00 0.00 133.345 20871 UG 2.011 2.011 0.00 0.00 2.011 20872 UG 1.667 1.667 0.00 0.00 1.667 Table 3: Cumulative Estimated and Actual Disbursements (20870-UG) (Amount in US$ million) FY89/90 FY90/91 FY91/92 FY92/93 FY93/94 Planned 70.000 125.000 125.000 125.000 125.000 Actual 70.491 127.305 132.877 132.875 133.335 Table 4: Project Dates Original Actual Initiating Memorandum April 26, 1989 April 26, 1989 Letter of Development Policy December 19, 1989 December 19, 1989 Negotiations December 2, 1989 December 2, 1989 Board Approval February 1, 1990 February 1, 1990 Credit Agreement February 8, 1990 February 8, 1990 Effectiveness February 20, 1990 February 20, 1990 Second Tranche Release August 1990 October 16, 1990 Credit Closing December 31, 1991 June 30, 1993 Completion January 31, 1994 January 31, 1994 Source (Tables 2, 3 & 4): World Bank, Kampala. -23-  Table 5: GDP at Factor Cost. 1987-1990. at Constant (1991) Prices (U Sh million) SECTOR 1987 1988 1989 1990 1991 1992 Agriculture 390,968 423,071 449,005 469,318 475,779 485,779 Mining & Quarrying 1,661 1,570 1,811 4,851 6,372 6,870 Manufacturing 53,888 64,184 73,387 76,908 84,963 90,850 Utilities 10,755 9,508 10,301 11,574 13,770 14,299 Construction 81,723 89,129 99,659 104,948 110,650 115,155 Conunerce 196,456 220,549 238,933 250,487 260,145 270,572 Transport & 72,361 76,395 80,355 83,841 87,607 89,557 Communication Other 218,588 231,725 246,408 262,965 275,390 288,055 MONETARY GDP 1,026,400 1,116,131 1,199,859 1,264,892 1,314,678 1,361,137 NON-MONETARY GDP 583,194 617,420 654,564 673,242 689,376 707,551 TOTAL GDP 1,609,594 1,733,551 1,854,423 1,938,134 2,004,054 2,068,688 GDP PER CAPITA 106,649 111,791 116,388 118,390 119,144 119,698 'Other - Public services, rents and misccUaneous Source: Statistics Departient, Ministry of Finauce and Econoaic Planning, Entebbe. -24-  Table 6: GDP at Constant (1991) Prices - Percentage Annual Growth Rates. 1987-1992 SECTOR 1987 1988 1989 1990 1991 1992 Agriculture 2.9 8.2 6.1 4.5 1.4 2.1 Mining & Quarrying -17.1 -5.5 15.4 167.9 31.4 7.8 Manufacturing 16.4 19.1 14.3 4.8 10.5 6.9 Utilities 10.7 -11.6 8.3 12.4 19.0 3.8 Construction 50.8 9.1 11.8 5.3 5.4 4.1 Commerec 8.3 12.3 8.3 4.8 3.9 4.0 Transport & Conun. 7.1 5.6 5.2 4.3 4.5 2.3 Other' 3.2 6.0 6.3 6.7 4.7 4.6 MONETARY GDP 7.7 8.7 7.5 5.4 3.9 3.5 NON-MONETARY GDP 4.5 5.9 6.0 2.9 2.4 2.6 TOTAL GDP 6.5 7.7 7.0 4.5 3.4 3.2 PER CAPITA GDP 3.7 4.8 4.1 1.7 0.6 0.5 Other = Public services, rents and miscellaneous Source: Statistics Department, Ministry of Finance and Economnc Planning, Entebbe. -25-  Table 7: Procurement. Production and Exports of Principal Agricultural Products (U Sb million} COFFEE COTTON TEA TOBACCO Year Procure Export Production Export Procure Export Procure Export 1987 167,067 148,153 2,754 3,443 3,511 2,100 1,214 0 1988 151,157 144,254 1,836 2,088 3,512 3,079 2,639 39 1989 169,042 176,453 3,210 2,321 4,658 3,195 3,456 490 1990 128,747 141,489 4,249 3,808 6,704 4,760 3,322 2,268 1991 147,369 124,819 8,212 7,819 8,877 7,018 5,140 2,467 1992 120,755 122,883 6,819 7,536 9,504 7,816 6,686 2,364 Source: Statistlcs Department, Ministry of 1lnance and Economic Planning Table 8: Production of Selected Commodities COMMODITY UNIT 1987 1988 1989 1990 1991 1992 Meat Tonnes 189 861 436 444 91 212 Procesed Milk 000 liters 16,898 20,885 17,112 17,319 21,319 22,705 Sugar Tonnes 0 7,534 15,859 28,913 42,455 53,539 Beer 000 liters 16,881 21,493 19,516 19,421 19,529 18,718 Soft Drinks 000 liters 7,865 15,733 17,898 24,273 25,982 21,768 Fabrics 000 sq Ms 10,246 11,472 11,755 8,152 8,904 9,649 Paper Tonnes 39 126 262 393 346 460 Soap Tonnes 15,722 18452 27,110 30,552 33,284 - Cement Tonnes 15,905 14,960 17,378 26,920 27,138 7,755 Hoes 000 Pcs 633 519 532 803 784 - Pencils Gross 2,444 4,635 3,941 1,967 6,468 1,787 Iron Sheets Tonnes 642 723 1,377 1,254 2,296 3,000 Source: Statistics Department, Ministry of Finance and Econormic Planning -26-  Table 9: Index of Industrial Production (Base 1987 100) INDUSTRY ESTABS WT 1987 1988 1989 1990 1991 1992 Food Procesing 52+ + 20.70 100.0 128.0 153.7 174.9 227.4 245.6 Tobacco & Beverages 12 26.10 100.0 139.6 143.7 155.2 176.1 155.2 Tcxtiles & Clothing 13 16.30 100.0 121.8 132.7 116.3 110.9 111.9 Leather & Footwear a 2.30 100.0 62.0 62.9 75.3 60.1 79.5 Timber Paper and Printing 23 9.00 100.0 135.1 169.4 183.6 198.2 223.4 Chemnicals, Paint & Soap 21 12.30 100.0 111.2 162.9 183.5 192.9 250.3 Cement & Brich 14 4.30 100.0 94.5 109.0 154.2 162.6 203.1 Steel & Steel Products 19 5.30 100.0 87.2 98.9 107.7 149.3 190.7 Micellaneous 17 3.70 100.0 134.0 204.2 181.3 251.2 271.7 ALL ITFMS 179 100.00 100.0 123.7 145.2 155.5 178.2 191.2 ANNUAL PERCENTAGE CHANGE 16.1 23.7 17.4 7.1 14.6 7.3 Table 10: Balance of Pavments (USS million) ITEM 1985 1986 1987 1988 1989 1990 1991 1992 Exports f.o.b. 379.0 406.8 333.6 266.3 277.7 177.8 173.8 150.2 Imports c.i.f. -264.1 438.2 -598.3 -658.2 -740.0 -617.6 474.4 -512.6 TRADE BALANCE 114.9 -31.4 -264.7 -393.9 462.3 439.8 300.6 -362.3 Services (net) -98.9 -126.6 -113.5 -125.4 -108.8 -116.5 -197.5 -196.1 Unrequited Transfers 61.0 209.6 266.0 322.4 311.6 293.0 324.4 424.4 CURRENT ACCOUNT BALANCE 77.0 51.6 -112.2 -194.9 -259.5 -263.3 -173.7 -134.1 CAPITAL ACCOUNT BALANCE -27.4 -3.9 121.2 45.7 317.5 177.5 34.9 6.1 OVERALL BALANCE 66.9 92.0 28.1 -7.1 16.5 -85.8 -138.8 -128.0 Change in Grows Reserves 29.6 2.6 -24.8 2.3 2.3 11.6 -9.5 -51.8 Exceptional Financing - - - - - 34.6 103.3 150.9 IMF (net) -89.5 -94.5 -3.2 5.5 -18.8 40.0 45.1 28.3 Other (net) -7.0 -0.1 -0.1 -0.7 -0.1 -0.4 -0.1 0.6 TOTAL FINANCING -66.9 92.0 -28.1 -7.1 -16.5 -85.8 -138.8 -128.0 Source: Statistics Department, Ministzy of Finance and Economic Planning, Entebbe. -27-  Table 11: Government Budgetarv and Financial Operations (U Sh million) BUDGET 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 REVENUES AND GRANTS: Revenue 5005.0 22,262.3 49,719.0 86,458.7 136,807.8 187,900.8 287,111.2 Grants - - - 24,891.2 143,189.0 185,908.6 281386.2 Total - - - 111,349.9 279,996.8 373,809.4 568,497.4 EXPENDITURES: Recurrent 8026.5 27,205.0 58,350.7 105,522.5 138,712.8 302,929.2 350.830.7 Development - - - 63,741.7 214,079.5 258,483.5 380,094.4 Dom. Funded 2,237.1 16,048.7 12,072.9 21,469.0 52,070.0 36,706.6 31,803.3 Ext. Funded - - - 42,272.7 162,009.5 221,777.0 348,291.1 TOTAL DEFICIT -5,557.0 -5,499.1 -14,436.0 -57,914.4 -78,295.3 -196,103.3 -159,596.7 FINANCING: External (net) 1,362.0 556.1 12,912.0 74,298.8 70,124.3 159,824.4 204,695.0 Domestic 4,195.0 4,943.0 1,524.0 16,384.4 8,171.0 38,798.9 -45,098.3 -Bank 2,182.0 4,481.0 978.0 19,326.4 3,700.0 42,447.6 -13,423.4 -Non-Bank 2,013.0 462.0 546.0 -2,942.0 5,709.0 - 3,023.4 Change in Arrears - - - - -1,238.0 -2,520.0 -34,698.5 TOTAL 5,557.0 5,499.1 14,436.0 57,914.4 78,295.3 196,103.3 159,596.7 Source: Background to the Budget, Ministry of Finance and Economic Planning, June 1993. -28-  Table 12: Monetary Survey. 1989- 1993 (U Sb billion) ITEM March 1989 March 1990 March 1991 March 1992 March 1993 FOREIGN ASSETS (net) -36.91 -79.14 -136.67 -241.06 -238.83 DOMESTIC CREDIT: 37.36 70.97 115.10 218.54 177.98 Govermnent 8.04 5.23 15.36 63.28 9.27 Private Sector 29.32 65.74 99.74 155.26 168.71 MONEY SUPPLY Foreign Accounts Deposits - - - - 33.31 Currency in Circulation 25.35 38.65 54.71 87.22 102.43 Demand Deposits 21.07 36.52 52.80 83.78 102.84 Timne and Savings Deposits 4.26 12.56 22.12 38.12 63.97 OTHER ITEMS -50.23 -98.87 -151.19 -267.45 -362.89 CURRENCY REVALUATION -38.65 -71.06 -131.20 -249.75 -256.32 Source: Statistics Department, Ministry of F5nanae and Economic Planning, Entebbe. -29-  Table 13: Structure of Interest Rates. 1987 - 1993 1986 1987 1988 1989 1990 1991 1992 Feb Dec July Dec Dec Sept Sept Dec 1993 BANK OF UGANDA Ways and Means 5.0 5.0 15.0 15.0 14.0 14.0 14.0 14.0 Re-discount rate 35.0 32.0 38.0 48.0 43.0 40.0 40.0 36.0 Bank rate to Commercisl 36.0 31.0 45.0 55.0 50.0 46.0 41.0 37.0 Banks TREASURY BILLS 35 Days 30.0 23.0 33.0 38.0 34.0 35.0 - - 63 Days 32.0 25.0 35.0 40.0 36.0 36.0 - - 91 Days 35.0 28.0 38.0 43.0 39.0 37.0 34.0 20.0 GOVERNMENT STOCKS 5 Years 40.0 30.0 40.0 45.0 40.0 40.0 42.0 42.0 10 Years 45.0 32.0 42.0 47.0 42.0 42.0 44.0 44.0 15 Years - 35.0 45.0 50.0 45.0 45.0 47.0 47.0 COMMERCLkL BANKS Deposit Rates: Demand deposits 10.0 7.0 15.0 20.0 18.0 13.0 8.0 - Savings Deposits 28.0 18.0 28.0 33.0 30.0 32.0 25.0 11.0 rune Deposits: 3-6 months 25.0 15.0 28.0 33.0 30.0 34.0 28.0 14.0 4-12 months 30.0 20.0 30.0 35.0 32.0 35.0 29.0 15.0 Minimum one year 35.0 22.0 32.0 37.0 33.0 36.0 29.0 15.0 Leading rates: Agriculture 38.0 22-25 32-35 25040 36 37.0 37.0 23.0 Export &Manufacturing 38.0 - - - - - - - Commerce 40.0 30.0 40.0 50.0 45.0 41.0 Soume: Statistiks Department, Ministry of Fnance and Economc Planning, Entebbe. -30-  Table 14: Exchan2e Rates (U Sh/USS) Year Month Bureaux Mid rate Off;iCal Mid rate Premium 1990 July 637.39 440.00 44.86 August 697.19 450.00 54.93 September 730.87 480.00 52.26 October 725.27 480.00 51.10 November 750.00 510.00 47.16 December 768.50 540.00 42.31 1991 January 778.21 570.00 36.53 February 787.03 600.0 31.17 March 814.62 620.00 31.39 April 847.22 640.00 32.38 May 888.1 670.00 32.58 June 939.0 700.00 34.14 July 957.32 800.00 19.66 August 973.20 800.00 21.65 September 980.58 850.00 15.36 October 1,001.08 915.00 9.41 November 1,069.77 915.00 16.91 December 1,184.16 915.00 29.42 1992 January 1240.23 970.00 27.86 FebrUary 1260.08 985.48 27.86 Marcb 1249.80 1160.08 7.70 April 1207.81 1158.91 4.20 May 1216.18 1164.94 4.40 June 1224.69 1166.06 6.70 July 1248.35 1177.86 6.00 August 1256.09 1185.29 6.00 September 1233.07 1185.15 4.00 October 1222.21 1181.07 3.50 November 1241.26 1196.34 3.80 December 1248.50 1213.93 2.80 1993 January 1234.72 1217.12 1.40 February 1238.12 1217.09 1.70 March 1251.32 1217.52 2.80 April 1254.09 1218.09 3.00 May 1245.25 1213.27 2.60 June 1215.31 1199.09 1.40 Source: Bank of Uganda. -31-  Table 1S: Composite Consumer Price Index (Base: September 1989 = 100) Food Beverages Clothing Rent, Household Transport Other All Annual & & Fuel & Goods & Itencs % Tobacco Footwear Utilities Comm. Change Weight 50.1 10.0 6.6 10.8 10.7 4.3 7.6 100.0 Year Month 1990 Jun 100.3 118.5 131.7 153.6 114.0 136.4 135.3 115.7 Aug 102.3 124.8 139.2 153.5 119.1 146.9 143.2 119.4 Oct 119.3 127.6 140.7 163.8 125.4 166.5 150.1 131.5 24.8 Dec 118.2 139.7 144.6 166.2 129.8 166.7 152.3 133.4 21.1 1991 Mar 129.3 150.3 165.1 185.1 136.9 169.3 177.6 146.1 22.4 Jun 134.9 148.5 178.8 202.2 144.1 169.4 187.5 153.1 32.3 Sep 132.9 162.3 182.3 241.2 156.1 194.4 208.1 161.7 29.4 Dec 152.5 171.2 186.7 243.5 181.9 204.1 220.2 176.8 32.5 1992 Mar 195.8 219.2 220.6 264.7 218.2 245.9 266.3 216.8 48.4 Jun 251.3 233.8 224.0 299.5 224.9 267.2 300.7 254.5 66.3 Sep 234.6 282.2 233.9 309.2 226.6 294.6 332.1 256.3 58.5 Dec 233.5 269.0 240.6 321.7 223.8 295.1 341.8 257.0 45.4 1993 Jan 224.4 269.4 242.6 323.0 226.4 291.1 340.9 252.6 34.2 Mar 207.6 259.2 246.4 326.2 225.8 285.5 361.7 244.9 13.0 Jun 209.2 255.2 247.3 337.3 230.3 288.5 379.4 248.5 -2.4 Sep 210.9 317.7 230.5 352.8 241.0 288.6 386.2 257.7 0.6 The index is the weighted average of Kampala/Entebbe, Jinja, Mbale, Masaka and Mbarara. Source: Statistics Department, Ministry of Flnaace and Economic Planning, Entebbe. Table 16: Producer Prices for Maior Export Crops (U Sh tper kg) Date Robusta Arabica Flue- FSre- AR Seed BR Seed Green Cocoa Coffee Ccffee Cured Cured Cotton Cotton Leaf Tobacco Tobacco May 1986 8.50 16.S2 10.0 7.00 4.00 2.00 1.40 5.50 May 1987 24.00 43.66 38.00 25.00 19.00 10.00 5.00 22.00 Jul 1988 60.00 110.00 220.00 117.00 80.00 42.00 20.00 75.00 Jun 1989 60.00 110.00 410.00 210.00 130.00 65.00 35.00 - Jul 1990 75.00 180.00 480.00 480.00 160.00 65.00 35.00 Jul 1991 210.00 471.00 851.00 540.00 220.00 110.00 60.00 Mar 1992 240.00 440.00 950.00 570.00 340.00 170.00 80.00 Source: Statistics Department, Ministry of Flnance and Economk Planning. -32-  Table 17: Uaanda Government Revenue CoOections (U Sb million) Period Income Export Customs Excise Tax Sales Tax CTL License, Total Tax Tax Duty Fees and Unallocated 1988/89 4,773 5,427 7,790 4,906 17,548 933 3,282 44659 1989190 9,458 13,449 25,0S5 7,247 28,288 2,005 4,024 89,556 1990/91 13,870 12,728 49,582 12,416 36,559 3,054 5,156 133,365 1991/92 23,638 2,005 76,588 15,026 43,319 5,417 14,335 180,328 1992/93 42,707 - 39,296 18,779 73,638 9,731 15,213 281,282 Source: Statistics Department, Ministry of Fnbance and Econoic Planning, Entebbe. Table 18: Sale of Petroleum Products by TVne of Industry (Cubic Meters) Period Petrol Aviation Diesel Fuel Industrial Kerosene LPG Toal Fuel Oil Diesel 1986 96,381 22,736 79,546 13,357 413 43,189 508 256,130 1987 101,540 30,000 85,238 18,200 580 41,022 850 277,430 1988 112,566 21,653 97,242 15,310 222 43,544 779 291,316 1989 123,673 31.946 108,536 13,156 136 47,220 562 325,229 1990 120,408 16,796 100,649 14,868 622 42,360 488 296,191 1991 109,512 17,546 92.672 12,809 0 34.562 567 267,668 1992 107,752 17,721 85,108 13,039 0 29,409 632 253,720 Source: Statistics Department, Ministry of Finance and Economic Planming, Entebbe. -33-  Table 19: Consumer Prices fo. Petroleum Products (Kampala Pump Prices. U Sb per liter) Year Month Premium Diesel Kerosene 1985 Jun 3.50 3.00 3.00 Dcc 6.50 5.00 5.00 1986 Aug 11.00 5.00 7.50 1987 Mar 12.50 6.50 8.00 May 30.00 19.80 14.40 Jun 32.00 22.00 12.00 1988 Jan 38.00 27.00 16.00 Jul 70.00 50.00 45.00 Nov 90.00 70.00 60.00 1989 Mar 120.00 90.00 75.00 Jul 145.00 110.00 90.00 Sep 180.00 145.00 110.00 Oct 200.00 160.00 130.00 1990 Feb 250.00 195.00 175.00 June 310.00 230.00 210.00 Aug 360.00 270.00 240.00 Sep 500.00 400.00 350.00 1991 Jul 650.00 500.00 460.00 Oct 680.00 530.00 500.00 1992 Jan 740.00 600.00 570.00 Mar 820.00 660.00 630.00 Jun 850.00 680.00 630.00 Jul 940.00 760.00 680.00 Aug 950.00 770.00 680.00 1993 Jan 920.00 770.00 700.00 Mar 850.00 750.00 680.00 May 910.00 780.00 690.00 Jun 910.00 810.00 690.00 Oct 950.00 830.00 710.00 Source: Statistics Department, Ministry of Finance and Economic Planning, Entebbe. -34-  Table 20: OGL and SIP Foreizn Exchange Allocations. February 1990 - March 1991 Year Month SIP III OGL TOTAL 1990 Feb 3.02 - 3.029 Mar 19.357 4.895 24.252 Apr 11.144 2.989 14.133 May 5.221 1.623 6.844 Jun 8.370 0.849 9.219 Jul 1.523 1.171 2.694 Aug 0.831 1.642 2.473 Sep 3.782 0.484 4.266 Oct 7.692 0.192 7.884 Nov 7.322 6.319 13.641 Dec 10.933 2.111 13.044 1991 Jan 6.507 0.941 7.448 Feb 4.783 0.063 4.846 Mar 8.317 1.267 9.584 TOTAL 99.000 25.000 123.000 Souurce: Bank of Uganda -35-