Uganda - Country Assistance Strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16540-UG MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ONA COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF UGANDA April 30, 1997 Country Department for Uganda Macroeconomics II, AFTM2 Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  GOVERNMENT FISCAL YEAR July 1 - June 30 (FY96 and 1995/96 = July 1, 1995 to June 30, 1996) CURRENCY EQUIVALENTS Currency Unit = Ugandan shilling (U Sh) Interbank Market mid-rate: US$1.00 = U Sh 1,025 (March 1997) ACRONYMS AND ABBREVIATIONS ADB African Development Bank CAS country assistance strategy CEM country economic memorandum CBI Cross-Border Initiative COMESA Common Market for Eastern and Southern Africa DANIDA Danish International Development Agency EDI Economic Development Institute EU European Union FIAS Foreign Investment Advisory Service FY fiscal year GDP gross domestic product GEF Global Environment Facility HIPC highly indebted poor country ICR implementation completion report IDA International Development Association IFAD International Fund for Agricultural Development IFC International Finance Corporation IMF International Monetary Fund KFW Kredietanstalt fur Wiederaufbau (Germany) MIGA Multilateral Investment Guarantee Agency NEMA National Environmental Management Authority NGO non-governmental organization NORAD Norwegian Agency for International Development ODA Overseas Development Administration (United Kingdom) PEAP Poverty Eradication Action Plan PER public expenditure review PFP policy framework paper SAC structural adjustment credit SAPRI Structural Adjustment Participatory Review Initiative SIDA Swedish International Development Authority UCB Uganda Commercial Bank UEB Uganda Electricity Board UIA Uganda Investment Authority UNICEF United Nations Children's Fund UPE universal primary education USAID (United States) Agency for International Development VAT value-added tax Vice President : Callisto E. Madavo Country Director : James W. Adams Technical Manager Roger Grawe Task Team Leader Ritva Reinikka  FOR OFFICIAL USE ONLY Uganda CAS Contents EXECUTIVE SUMMARY ........................................................i L ECONOMIC, SOCIAL AND POLITICAL DEVELOPMENTS .............1............ A. ECONOMIC PERFORMANCE AND PROGRESS IN POVERTY REDUCTION ...........I Growth and Poverty ............................................................1 Private Investrnent and Export Response ................................................2 Lessons for the Future ........................4...................................4 B. POLITICAL DEVELOPMENTS ......................... ...................................4 II. GOVERNMENT'S DEVELOPMENT STRATEGY ...........................................5 A. POVERTY REDUCTION THROUGH RAPID AND SUSTAINED GROWTH .............. 5 B. REVITALIZATION OF RURAL DEVELOPMENT ..................................................7 C. ACCELERATED HUMAN DEVELOPMENT .........................................................9 D. CROSS-CUTITING THEMES ........................ ................................... 10 m. ECONOMIC OUTLOOK AND PROSPECTS FOR POVERTY REDUCTION ........................................................1.1 A. EXTERNAL ENVIRONMENT ............................ ............................... 12 B. THE BASE CASE ........................................................... 12 C. A HIGHER CASE ........................................................... 13 D. CONSTRAINTS AND RISKS ........................ ................................... 13 IV. THE BANK GROUP'S COUNTRY ASSISTANCE STRATEGY .................. 15 A. LESSONS FROM THE LAST CAS ............................................................ 15 B. TOWARDS A POVERTY-FOCUSED ASSISTANCE STRATEGY ........................... 15 Non-Lending Services ............................................................ 16 Management of Existing Portfolio ........................................................ 18 Proposed Lending Program ............................................................ 18 Donor Coordination ............................................................ 22 V. AGENDA FOR BOARD DISCUSSION ....................................................... 22 TIhis document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ii Uganda CAS Contents (cont'd) FIGURES: Figure 1: GDP Growth Rate Figure 2: Annual Average Inflation BOXES: Box 1: Poverty in Uganda Box 2: Poverty Eradication Action Plan Box 3: Who Benefits from Education Expenditure Box 4: Health, Poverty and Public Spending Box 5: Consultations for the CAS Box 6: Improving the Investment Environment in Uganda TEXT TABLES: Table 1: Average Annual Growth Rates FY87-96 Table 2: Social Indicators Table 3: Structural Change in the Ugandan Economy ATTACHMENTS: Attachment 1 - CAS Matrix Attachment 2 - ECONOMIC SCENARIOS: THE BASE CASE AND A HIGHER CASE Attachment 3 - PORTFOLIO OVERVIEW AND IMPROVEMENT STRATEGY Attachment 4 - IDA LENDING AND NON-LENDING PROGRAM FY98-0 1 Attachment 5 - CIVIL SOCIETY CONSULTATIONS Attachment 6 - CONSULTATIONS WITH THE PRIVATE SECTOR Attachment 7 - STANDARD ANNEXES MAP: IBRD No. 24881R  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF UGANDA EXECUTIVE SUMMARY The last Country Assistance Strategy (CAS) for Uganda, which was considered by the Board in June 1995, reviewed the Bank Group's close and productive relationship with Uganda since the Government of President Museveni took office in 1986. That CAS made an effort to focus on poverty reduction. Progress has been made in a number of areas, but much remains to be done to reorient the Bank Group's assistance program so that it can reach the poor majority of Ugaiidans. The emphasis of this CAS is squarely on economic growth and poverty. We believe that substantial poverty reduction in Uganda can be achieved through rapid economic growth, vastly improved social services and regionally targeted public investment, mainly to the North. Hence, the key challenge facing the Bank program is to ensure that the rapid growth of the past decade is sustained and more effectively translated into poverty reduction, particularly in regions that have lagged behind. As poverty in Uganda is predominantly rural, agriculture and off-farm activities will have to be the main sources of growth, supported by robust private investment and export diversification. Maintenance of security, macroeconomic stability and investor-friendly policies are necessary conditions, and fall within the purview of the Government. Public expenditure priorities are roads, education, and health, with an emphasis on capacity building. As public service delivery suffers from poor quality and inefficiency, achieving substantial institutional improvements will be central to the Bank's activities in Uganda over the next three years. This CAS has the following themes: For Uganda * Sustaining the growth rate of 7 percent to allow significant poverty reduction; and * Implementing a poverty-focused development strategy. For the Bank * Maintaining emphasis on improved performance of the existing portfolio; * Increasing analytic work to raise operational quality; and * New lending to support high growth and to enhance poverty focus. For the first time, the CAS was widely discussed in Uganda, including Government, donors and the private sector. We also made an effort to reach Ugandan civil society. A pilot participatory poverty exercise was carried out jointly with Government to ensure that the priorities of the Government's Poverty Eradication Action Plan and the Bank Group's CAS are widely shared.   UGANDA COUNTRY ASSISTANCE STRATEGY I. ECONOMIC, SOCIAL AND POLITICAL DEVELOPMENTS A. ECONOMIC PERFORMANCE AND PROGRESS IN POVERTY REDUCTION 1. Over the past decade, Uganda has emerged as the most consistent good performer in Africa. Following a long period of social and political turmoil and economic decline, the Government under President Museveni has established a record of solid economic reform and sustained growth, particularly since 1992. As reflected in Figure 1, GDP growth has averaged 6.4 percent during the past decade and 8.1 percent over the past three years. Figure 2 reflects the Government's perfornance with respect to inflation. As one reviews Uganda's record, the impact of the impressive strengthening of economic reform since 1992 is clear: fiscal policy has been disciplined, IMF targets have consistently been met, and the effect on most performance indicators has been positive. Figure 1: GDP Growth Rate Figure 2: Annual Average Inflation 12-~~~~~~~~~~~ 250 10 I 2001 U 0 I~~~~~~~ 8 / 15 6 CL ~~~~~~~100-J O C 0- 10 1 1 1 1 1 1 1 1 I 9 2- ~ ~ ~ ~ ~ ~ ~ ~ ~ t- Cm / b 0 _ ts vi,00 00 00 o a O N -2- / t > > >~ > >4 Source: National Accounts 2. The most important structural and institutional reforms carried out since 1987 include substantial import liberalization, the opening of export marketing to competition, foreign exchange liberalization, privatization of public enterprises, revamping of tax administration, financial sector reform, and downsizing the civil service. Despite being complex and controversial, the return of the departed Asians' properties has been completed. A considerable demobilization of the army has also taken place. Further structural reforms are needed in trade policy, the financial sector and in public utilities; measures in these areas are included in the Third Structural Adjustment Credit (SAC III). The Government has made less progress in ensuring compatibility between incentives in the civil service and achieving improved service delivery. This risks constraining progress towards a substantial reduction in poverty. Growth and Poverty 3. As shown in Table 1, during the adjustment period growth in industrial output and services (at over 10 percent) was much faster than in agriculture (4.2 percent). While monetary  2 Uganda CAS agriculture grew rapidly (6.1 percent), real output in non-monetary agriculture, i.e., home consumption, representing half of the agricultural output, fell slightly in per capita terms. 4. As the poor are predominantly rural Table 1: Average Annual Growth Rates and agriculture is the main source of FY87-96 (%) employment for about 80 percent of the Real Output Real Income population, data on real agricultural Agriculture 4.2 3.7 incomes suggest the likely changes in Monetary 6.1 7.3 poverty during the past decade. First, real Export Crops 6.3 24.2 poverty e ecae. ea ~~~~~~~~Food Crops 7.9 6.1 incomes from traditional export crop Non monetary 2.4 0.5 production have grown strongly (24.2 Manufacturing 11.6 7.7 percent per year, on average). As many Construction, monetary 10.3 18.7 Ugandan households, poor and non-poor, Trade 8.7 0.2 U Hotels and restaurants 14.4 14.6 tend to grow export crops, there have been Community Services 7.5 14.8 broad benefits from export liberalization Total 6.3 6.3 and the recent coffee boom. Second, real Source: Staff calculationsfrom National Accounts. income growth from marketed food crops has also been strong (6.1 percent per year) with a similar positive impact. Third, those households, particularly in the North and the East, that do not have access to the market have gained much less; some may even have become poorer (growth is estimated only at 0.5 percent). 5. Social indicators, particularly Table 2: Social Indicators health status and educational attainment, 1988/89 1995 show a more dismal picture, largely a Life expectancy 49 4 legacy of social and economic disruption in Infant mortality 119 9 Immunization (%,12-23 months) 31 4 the 1 970s and early-i 980s. Some Malnutrition (%, stunting) 43 3 improvements in social indicators have No Education (%) been recorded recently, however, such as a Female, 15-19 years 21 1 fall in infant mortality and an increase in Males, 15-19 years n/a the immunzo r. ( l 2Net enrollment age 6-10 (%/o) 47 6 the immunization rate. (Table 2) Although Gross enrollment P7(%) n/a 4 female-headed households as a group are Male n/a 5 not poorer than other households when Female n/a 3 assessed by consumption (given the Literacy (%) 54 6 importance of remittances), women are Female 45 4 Source: Demographic and Health Survey, 1995; Integrated disadvantaged on social indicators, with Household Survey 1992/93; World BankAtlas lower school enrollment for girls, and lower Note: Literacy and enrollment figures are not fully usage of curative health care. comparable between years. 6. As there is an urgent need to achieve a greater understanding of changes in poverty and the impact of policies on poverty, establishing a system of effective poverty monitoring is a priority. Despite substantial progress in reviving the Ugandan Statistics Department, survey work continues to need special attention (Box 1). A concerted effort is required to produce a set of representative and reliable household surveys; user and community surveys to ensure that publicly subsidized services are really reaching the target populations is another priority. Private Investment and Export Response 7. Improved resource allocation and capacity utilization have been the major sources of growth, but during the past three years, private investment has increased by 25 percent per annum, spurred by the recent coffee boom. The private response in machinery and equipment  Uganda CAS 3 Box 1. Poverty in Uganda Who are the poor9 - 61 percent of Ugandans were below the poverty line in 1992/93. By then poverty had not yet Malen subgtantially in Uganda, but hard-core poverty had been reduced. * The poor are predominantly rural; the east and the north are the poorest regions. * Female-headed households are not poorer than other households when assessed by consumption. * Incomne distribution is relatively even, but urban areas are in general much better-off than rural areas. Why are they poor? a Research based on the 1992/93 housebold survey finds that the most serious constraints are lack of market access, education, and the small size of land holdings. Education, for example, is associated with higher agricultural productivity, also farmers tend to be note productive when their neighbors are more educated. Some characteristics of the poor householdsb * The poor grow proportionately the satne amnount of cash crops as the nonpoor and proportionately more coffee in the central region.