Document of

The World Bank FILE COPYFOR OFFICIAL USE ONLY

Report No. P -3295-UG

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

TO THE

REPUBLIC OF UGANDA

FOR A

SECOND RECONSTRUCTION PROGRAM

April 29, 1982

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its eontents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit: Uganda Shilling (USh)US$1.00 : USh85.40UShl.OO US$0.0117

(From October 1975 to May 1981, the Ugandan Shilling was tied to the IMF'sSpecial Drawing Right (SDR 1.00 = U Sh 9.66) In June 1981, the UgandanShilling was devalued by about 90%; since then it has been floating. As aresult, the US$/U Sh exchange rate is subject to change.)

GLOSSARY OF ACRONYMS

AEL : Agricultural Enterprises LimitedCMB : Coffee Marketing BoardCTB : Central Tender BoardEAC : East African CommunityEADB: East African Development BankLMB : Lint Marketing BoardMPED: Ministry of Planning and Economic DevelopmentPEAC: Presidential Economic Advisory CommitteeUABT: Uganda Advisory Board of TradeUCB : Uganda Commercial BankUDB : Uganda Development BankUDC : Uganda Development CorporationUTGC: Uganda Tea Growers Corporation

FISCAL YEAR

July 1 - June 30

FOR OFFICIAL USE ONLY

SECOND RECONSTRUCTION PROGRAM

CREDIT AND PROJECT SUMMARY

Borrower Government of Uganda

Credit Amount SDR 62.9 million (US$70 million equivalent)

Terms Standard

Project Description:. The proposed credit would, over a nine-month period,finance the importation of agricultural inputs,spare parts and raw materials for industry andtransport and other largely non-capital needs ofhigh economic priority. It would supp~ort theGovernment's recovery program, in particular by:(a) increasing agricultural exports and domesticproduction in high priority areas, and (b)strengthening the Government's capacity to formulateand implement policies and programs in the followingcritical areas: (i) the planning and budgeting offoreign exchange; (ii) the pricing and marketing ofexport crops; (iii) the parastatal organizations;and (iv) external debt management.

The principal risks are that security conditions inUganda could again deteriorate, that the Governmentwould be unable to implement its recovery program,and that shortfalls in financing could furtherreduce import levels and delay recovery. Theserisks have, however, been reduced by the Govern-ment's clear commitment to improving law and orderand to its financial program, and its willingness torespond positively to the concerns of the principaldonors. The Bank Group intends to assist theGovernment in addressing the problem of foreign

* exchange shortfalls in the context of the forth-coming Consultative Group meeting.

Estimated Period ofDisbursements: July 1982 - September 1983

Rate of Return Not applicable

Appraisal Report : None

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

I

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THEINTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORS ON APROPOSED CREDIT

TO THE REPUBLIC OF UGANDAFOR A SECOND RECONSTRUCTION PROGRAM

1. I submit the following report and recommendation on a proposedsecond reconstruction credit to the Republic of Uganda for the equivalentof SDR 62.9 (US$70) million on standard IDA terms, to help finance theGovernment's economic recovery program.

PART I - THE ECONOMY

2. An economic mission visited Uganda in August 1981 and its report(3773-UG) dated 'March 31, 1982 has been distributed to the ExecutiveDirectors. A summary of social and economic data is given in Annex I.

Background

3. Uganda achiev(ed independence in 1962 with a number of importantadvantages: a favorabla climate (with two rainy seasons in most parts ofthe country); fertile soils; a well-established indigenous smallholder sec-tor producing a widening range of export crops (coffee, cotton, tea, andtobacco) and an ample domestic food supply; a small industrial sector con-tributing exports of textiles and copper; a well-developed transport infra-structure; an exportable surplus of hydroelectricity; and one of the mostadvanced education systems in East Africa. Uganda's complement of skilledand trained manpower was greater than that of either Kenya or Tanzania.With those two countries it shared well-developed services: the railways,ports, an airline, posts and telecommunications. These favorable initialconditions, combined with competent economic management, resulted in asteady 2% per year growth in per capita GDP (1963-70), and an average sav-ings rate of 13%, which in turn permitted a high level of investment with-out inflationary pressure. A balance of payments current account surpluswas maintained in most years, while central government revenue increasedfaster than recurrent expenditure, contributing a significant proportion ofdevelopment outlays.

4. Uganda's political situation was less felicitous. Long-standingconflicts between the largest single kingdom (Buganda), the other kingdomsand the rest of the country continued during the 1960s, and became furthercomplicated by ideological and social rivalries. This led to increasingdependence on the military, and in 1971, an army coup brought a militaryregime to power.

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The Economy Urder the Military Government 1971-79

5. From 1971 to 1979 (the year when the military government fell),the economy declined drastically:

• GDP stagnated and per capita incomes fell.

Domestic savings fell to less than 8% of GDP and foreign economicassistance effectively ceased. As a result, investment was cur-tailed. Few development projects were started, plant andequipment became obsolete, and infrastructure was notmaintained.

• Production of export crops declined to 40% of their 1970 level in1978, while coffee rose from 54% of merchandise exports in 1970to over 90%. Despite the accumulation of more than US$90 millionin payment arrears, imports in 1978 were less than half their1971 level.

Government revenue declined from 14% of GDP in 1971/72 to 9% in1975/76; expenditure was concentrated on internal affairs, pol-ice, prisons, defense and finance rather than on the productivesectors and budget deficits exceeded 60% of recurrent revenueevery year except 1977/78 (the coffee boom year).

Black marketeering and corruption flourished -- to such an extentthat no account of Uganda's economy can avoid the term that des-cribes it: "magendo". This took many forms: the smuggling andunder-invoicing of exports, over-invoicing of imports, preferen-tial allocati'on of foreign exchange, resale of imports and domes-tically-produced goods purchased at official prices, the exploit-ation of "choke points" in the transport and distribution sys-tems, bribery and theft.

6. Only subsistence agriculture continued growing during this periodin response to both food security needs and the curtailment of earningopportunities in the monetized sectors. The coffee boom in 1977 providedtemporary respite and for a time imports recovered. But, by the time of theLiberation (April 1979), the combined impact of the previous years' depre-dations and the damsage and looting during and after the Liberation War it-self, had reduced the economy of Uganda to ruins. Crops were damaged,livestock killed, many buildings and factories gutted and portable goods ofall kinds ranging from school books and office records to tools, equipmentand vehicles were stolen (frequently to be smuggled into neighboring coun-tries).

7. Several factors contributed to this deterioration:

Many of the country's skilled and trained personnel were eitherexpelled, left voluntarily or, if they remained in Uganda, wereharassed, imprisoned or killed.

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A succession of nationalizations and expropriations, which start-ed in 1970 but was intensified during the "economic war" in 1972,resulted in a rapid growth of ill-managed parastatal and privateorganizations, without proper legal or financial status.

The administrative system became increasingly geared to fear andfavoritism with many positions filled by political appointees.Fiscal responsibility was systematically undermined.

* The steady emergence of a highly over-valued exchange rate coupl-ed with price control and falling real agricultural producer pri-ces obliterated the incentive for export cash crops and othermodern sector production, demolished the government revenue baseand encouraged "magendo".

* In common with other oil-importing countries, Uganda experienceda sharp loss of export purchasing power at the time of the 1973-74 oil price shock.

Liberation to Mid 1981

8. As the Commonwealth team of experts that reviewed the Ugandaneconomy in May 1979 observed: "the war simply provided the coup de graceto this already sinking 'magendo economy"'. L/ Indeed, if it had only beenthe damage of war and looting with which the post-1979 government had hadto contend, the task of rehabilitation might not have been so daunting.However, as the Commonwealth team continued "... the problem is not to makegood the war damage oi the past few months by repair and replacement ...The really important need is to reform the institutions and policies thegovernment inherited. More fundamentally still, successful rehabilitationdepends on political leadership to bridge the rifts in Ugandan society --some longstanding, somne of more recent origin -- and to create law, orderand political stability." Their report consequently recommended a rehabi-litation program of administrative and policy reform supported by the in-fusion of foreign exchange to improve the supply of basic consumer goods,inputs and vehicles and to support rehabilitation of the productive sec-tors. The reforms proposed included: the raising of agricultural producerprices and the relief of bottlenecks in the transport and marketing sys-tems; the strengthening of foreign exchange budgeting and import licens-ing; a moratorium on parastatal and cooperative indebtedness to enablebanks to advance import credit while this indebtedness was being studied;and the relaxation of price controls coupled with either devaluation or acombination of foreign exchange auctions and higher taxes.

9. No action was taken on any of these proposals, except the raisingof agricultural producer prices, the value of which was soon wiped out byinflation. This failure to undertake policy and administrative reform,coupled with continuing political instability, drought, the 1979 oil shockand world recession 'Led to even more rapid declines in output and incomesfrom 1979 to 1981 than had occurred previously. GDP fell by some 11% in1979 and 8% in 1980. Taking the deteriorating terms of trade into account,

1/ Prof. Dudley Seers, et al.: The Rehabilitation of the Economyof Uganda, a report by a Commonwealth Team of Experts, June 1979.

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per capita income in 1980 was some 27% below its 1978 level. Althoughthere has probably been some recovery in 1981, especially in the agricul-tural sector, average incomes are still depressed. Domestic savings havecontinued to fall. Despite some increases in external assistance, theinvestment ratio has continued falling -- possibly to as little as 3% in1979 and 1980. Perhaps more seriously, capital productivity is severelyconstrained by inadequate maintenance, a drying-up of raw material andspare parts supplies and the looting of workshops and tools during andafter Liberation.

10. By 1981, the estimated volume of merchandise imports was 30%below the 1978 level, nearly 60% below the 1970 level and somewhat lessthan one-third of the level the Commonwealth team suggested was requiredfor recovery. This was despite an increase in official grant and loan dis-bursements from US$63 million per year in 1977-78 to more than US$200million per year in 1979-81, an increase in payment arrears of US$140million during 1979 and 1980 and a US$100 million drawdown of foreignexchange reserves. (Arrears were reduced, however, by US$90 million during1981.) The main factor responsible for this was a 55% deterioration in theterms of trade over the past three years. Export volume fell in 1980 butrecovered in 1981, especially in the latter half of the year; exportprices, however, declined more than one third in 1981. Capital flight,though unquantifiable, was probably substantial and imports may also havebeen underrecorded.

11. Of the US$400 million of merchandise imports in 1981, aboutUS$120 million was for petroleum and about US$60 million was imported dir-ectly by the Government for security and administration. In effect, 82% ofUganda's merchandise export earnings (US$220 million in 1981) were absorbedby petroleum and government imports. For most other imports and invisiblepayments, including essential consumer goods, drugs and rehabilitationneeds, Uganda depends on official grants and loans, IMF drawings andcommercial credits. This highlights both the difficulty and the criticalimportance of foreign exchange management, in particular the need toscrutinize carefully the Government's own import requirements. TheGovernment is taking steps to improve its procedures for foreign exchangeallocation (see paragraphs 55-57 below).

12. Commitments of external assistance rose from US$113 million in1978 to an average of US$250 million per year in 1979-81. Some 40% ofthese new commitments were in the form of balance of payments support(Table 1). In addition, much project aid was in the form of raw materialsand transport equipment which would normally have been quick-disbursing.Disbursements were delayed, however, by security problems, inadequate aidcoordination and utilization procedures and, up to June 1981, the failureto deal efficiently with pricing and exchange rate distortions.

13. Uganda's external debt was inadequately monitored and controlledduring the 1970s, and it is therefore difficult to present clear data. TheWorld Bank's estimates, based on data from the Uganda Treasury and the Bankof Uganda, show total external debt outstanding of US$970 million at the

Table 1: Commitments of External Assistance, 1979-1981 /a

(LS$ million)

B.of P. Project Assistance Technical Food Fiiergency

Support Agric. Ind. Trans. Other Total Assistance Aid Aid Misc. TOTAL

Bilateral 114.1 - 16.0 85.8 - 101.8 17.4 31.3 5.8 17.9 288.3

Australia 0.9 - - - - - - 1.5 - - 2.4

Canada 4.3 - - - - - - - - - 4.3

France 10.8 - - 24.4 - 24.4 - - 35.2

Germain 9.9 - 4.9 6.4 - 11.3 10.1 - - 1.9 33.2

India 3.3 - 9.2 9.9 - 19.1 - - - - 22.4

Italy - - 1.9 1.0 - 2.9 - - - - 2.9

Japan 1.9 - - - - - - - - - 1.9

Kenya 31.5 - - - - - - - - - 31.5

Netherlands 17.5 - - 5.9 - 5.9 - - 3.8 6.5 33.7

Sweden 2.3 - - - - - - - - 6.0 8.3

United Kingdom 20.7 - - 23.0 - 23.0 5.7 - - - 49.4

United States 8.0 - - - - - 1.6 29.8 2.0 3.5 44.9

Others 3.0 - - 15.2 - 15.2 - - - - 18.2

Multilateral 185.0 144.4 29.2 23.8 33.9 231.3 39.5 7.4 4.3 4.6 472.1

ADB - 24.4 13.0 - - 37.4 - - - - 37.4

ADF - 10.4 - - - 10.4 - - - - 10.4

EEC 66.2 84.4 16.2 23.8 24.9 149.3 11.0 7.4 4.3 4.6 242.8

TIA 72.5 - - - 9.0 9.0 8.0 - - - 89.5

IFAD - 20.0 - - - 20.0 - - - - 20.0IMF/b 41.3 - - - - - - - - - 41.3

OPEC Special Fund 5.0 5.2 - - - 5.2 - - - - 10.2

UNDP - - - - - - 20.5 - - - 20.5

TOTAL 299.1 144.4 45.2 109.6 33.9 333.1 56.9 38.7 10.1 22.5 760.4

/a Excludes debt relief and war-related assistance from Tanzania and Zambia. Coverage may be incanplete.

/b Comnitments fron Trust Fund and gold sales only.

Source: World Bank estimates

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end of 1981, of which US$650 million was disbursed. 2 / (IBRD's share ofthis was 3.8% while 8.9% was due to IDA.) Official development loansaccount for less than two-thirds of outstanding debt. The balance is fromprivate sources or Liberation War-related commitments to Tanzania andZambia. A large part of the debt is in arrears: some US$84 million ofdebt outstanding at the end of 1981 was principal arrears. (Total arrears,including those on short-term debt and current payments are estimated atUS$144 million at the end of 1981). The debt service ratio was moderatelyhiah for a low-income country, at 17.7% iLn 1980, but this situation hasdeteriorated seriously during 1981, since more than one-quarter of debtoutstanding and disbursed at the end of 1.980 fell due during the year. Asa result, the debt service ratio rose to 50% in 1981. Furthermore, morethan one-third of debt outstanding and disbursed at the end of 1981 willfall due over the next two years. A meeting of the Paris Club in November1981 agreed to reschedule obligations falling due in 1981/82.3/ Thesehowever only covered about US$12 million, leaving more than US$130 millionof principal repayments still to be paid during 1982. The rest is owed tonon-participants, with whom the Government is endeavoring to arrangerescheduling on terms comparable to those being concluded with Paris Clubparticipants.

i4. Developments from 1978 to 1981 in public finance also reflect thegeneral decline in the economy as well as weakening financial management.Declining monetary production, pervasive "magendo" transactions, reducedlevels of foreign trade, declining coffee prices and price controls con-tributed to a fall in central government current revenue to less than halfthe 1977/78 level by 1980/81. In 1979/80, government revenues were prob-ably less than 3% of GDP. Government expenditure remained around 5% ofGDP, however, while public administration and defence accounted for morethan half of total government expenditure in 1980/81. Fuelled by theselarge central government deficits, financed primarily by the Central Bank,money supply almost doubled over the two years 1979 and 1980. TheGovernment's share of domestic credit reached a peak of 83% in May 1981(51% at the end of 1971). Although no accurate cost-of-living indices areavailable for recent years, independent estimates of the general rate ofinflation suggest that it has been averagjing close to 100% per year since1978.

PART II - GOVERNMENT POLICIES AND PROGRAMS

Government Objectives

15. The Government's primary goal is to restore law and order, abasic prerequisite for future economic progress. Second only to this, how-ever is the goal of rehabilitating the directly productive sectors, without

2/ Including Uganda's share of former EAC debt and principal arrears, butexcluding use of IMIF credit and short-term debt.

3/ Ninety percent to be repayable in 10 years, including 5 years grace,and 10% repayable over the next four years. The participants alsoagreed to reschedule about US$15 million of debt arrears.

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which, the Government recognizes, there can be no economic development, norexpanded social services,, The first step towards rehabilitation was theintroduction of a financial program for 1981/82. The second is a RecoveryProgram of priority expenditures and actions, which the Government adoptedin April 1982.

The Financial Program

16. In early June 1981, the Government introduced a comprehensivefinancial program to stabilize the deteriorating economy and revive produc-tion by restoring confidence in the currency, eliminating price distortionsand improving fiscal and monetary discipline. In particular:

* It "floated" the Uganda shilling, effectively devaluing itapproximately 90% from USh7.8 to around USh80 to the US dollar(by early 1982, the rate had fallen further to around USh 85);

* It removed administered price controls, except for major exportcrops, petroleum products and public utility tariffs. it raisedofficial producer prices for export crops by between 200% and400% and retail petroleum prices by 650% to 1,000% during 1981and, in January 1982, it increased tariffs on electricity, water,posts and telecommunications;

It reformed tie taxation structure, changing import duties from aspecific to an ad valorem basis and reducing the number ofdifferent rates of duty; merged the Public Sector InvestmentContribution (formerly a separate tax on sales) with sales tax orimport duty; equalized sales tax on imports and domesticproduction and raised effective sales and excise taxes on anumber of revenue-producing items, while converting some exciseduties to an ad valorem basis;

It placed ceilings on government borrowing and domestic creditexpansion, whlile increasing interest rates.

The Government also confirmed its intention of encouraging a "mixed eco-nomy", by allowing former owners to reclaim their property or claim compen-sation and by inviting private investment in a number of areas. The pro-gram was supported by a 13-month IMF stand-by arrangement for US$135 mil-lion and by the releases of US$70 million of the First IDA ReconstructionCredit, disbursements of which had been limited to US$25 million followingthe change of government in May 1980 (see paragraph 41 below). Inaddition, a number of bilateral donors announced increased levels ofassistance to Uganda before and during a special meeting of donors in Parisin November 1981.

17. The system which is now evolving in the wake of these measures ismore market-oriented than before, but still retains important areas ofgovernment control. Foreign exchange allocation, for example, is handledadministratively and the exchange rate is certainly above market-clearing

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levels. The Government has, however, continued adjusting both the exchangerate and other "strategic" prices since June with the aim, in each case, ofreinforcing producers' incentives while maintaining fiscal equilibrium.

18. These measures, combined with improvements in security and addi-tional external resources, have started an economic revival. From June toDecember 1981, coffee shipments were 75% higher than the previous year.Preliminary indications are that the new coffee prices have provoked a sub-stantial increase in supplies to processors, but that export supply is nowconstrained by processing capacity in the cooperatives. More use will haveto be made of private processors (see paragraph 53 below). The increase insupplies may also result from a movement of producers' stocks rather thanincreased production. For industrial products, the removal of pricecontrols, combined with the tax changes, has diverted previous "magendo"profits to the Government and to producers. Prices have stabilized sinceAugust. Food prices indeed fell some 25% initially, probably reflectingbetter weather, expanded acreage and more secure transport routes.Petroleum sales have fallen, probably reflecting less smuggling and lowerdomestic consumption. The government deficit is a smaller percentage ofexpenditure than in 1980/81, through tighter administrative control,including stricter monitoring of spending by government ministries andcloser attention to revenue collection, especially the procedures forcollecting coffee export duties. Some private owners had already respondedto the more favorable government policy towards private investment andreturned to Uganda, especially in the crucial sugar and tea industries,usually on a joint venture basis with the Government.

19. Wages and salaries have increased since June 1981, but are stilllow in real terms. The Government raised the minimum wage more than 100%in August, but even at its new level, it still only buys the equivalent ofabout six kilograms of sugar or three bars of soap per month at prevailingmarket prices. Civil service salaries are so low that, despite subsidizedhousing and other benefits, officials are forced to pursue other occupa-tions. The removal of price controls and privileged access to limitedsupplies of goods has probably resulted in hardship for certain groups,possibly including some poorer ones. While wage and salary restraint aresurely necessary, the success of the program will also depend on its main-taining a minimum standard of living and adequate work incentives.

20. The financial program and the new policies introduced since mid-1981 directly confront the currency over-valuation and domestic price dis-tortions that caused Uganda's decline during the 1970s. They will helpcreate the conditions for Uganda to attract some of the skilled and trainedmanpower it then lost and to relieve some of the burden on the over-extended public sector. The measures required considerable courage andcontinue to involve substantial political risks. While there are importantareas in which further steps are needed (and which are described below), adecisive start to recovery has now been made. With the exception of someexport crop prices, which will require adjustment, the major policy changesneeded have been made. Now, the main areas of action are largely institu-tional and will necessarily take time to implement. Moreover, the Govern-rnent has responded promptly to the evolving situation by continuing theprocess of price adjustment and by initiating a number of institutionalchanges in the key areas of foreign exchange management, budgeting and

planning (also described below). The program itself and the Government'sevolving policies echo precisely the emphasis and directions suggested bythe World Bank's report on development in Sub-Saharan Africa. They meritstrong support and encouragement.

The Recovery Program

21. On April 12, 1982, the Government issued its Recovery Program.This program, which was prepared with the assistance of a team from theCommonwealth Fund for Technical Cooperation, comprises priorityrehabilitation investment and recurrent foreign exchange needs focussed onthose sectors and projects most likely to raise production and improve theforeign exchange position rapidly during the fiscal years 19382/83 and1983/84. The total cost of projects to be started over these two years isexpected to be US$557 million (in 1982 prices), of which about US$390million would be foreign exchange. The sectoral priorities for economicrecovery are described below. The program is based on constrainedassumptions regarding t:he availability of foreign exchange, similar tothose presented below (paragraphs 32-37). Together with the efforts beingundertaken in conjunctlon with the proposed second reconstruction credit toimprove agricultural pricing and marketing (paragraphs 51-53), strengthenplanning and foreign exchange budgeting (paragraphs 54-57) and reform theparastatal organisations (paragraphs 58-61), the Recovery Program isexpected to serve a nurnber of purposes: it will provide (a) a comprehensiveframework within which all resources, especially foreign exchange, can berationally allocated; (b) a basis for the next two government budgets; and(c) a reference point for aid coordination. The program will constitutethe Government's basic document for the May Consultative Group meeting.

22. Economic revival will depend on increasing production levels,especially exports. This entails the highest priority initially beinggiven to export crop production, to the supporting transport and communica-tions infrastructure, and to the production of basic consumer goods, build-ing materials and agricultural requirements by the industrial sector.Other sectors, especially the social sectors, also require urgent rehabili-tation. Improvements in medical services, the repair of damaged classroomsand the rehabilitation of hazardous urban water systems, for example, maybe expected to provide an important, if unquantifiable incentive toproducers. But in the near future, the rehabilitation of these sectorsmust be limited to the extent of their potential contribution in theshorter term to the recovery process.

23. Agriculture dominates the Ugandan economy, providing livelihoodto 90% of the population and supplying almost all Uganda's exports inrecent years. Ugandan agriculture is largely dependent on small- andmedium-scale peasant farms; no attempt was ever made to encourage expatri-ate settlements, and even today, large-scale estates are only significantin tea and sugar production. With its favorable natural conditions, Ugandaproduces an overall food surplus in most years, though areas like Karamojain the north-east, which are vulnerable to drought and which depended on atraditional trade of cattle for grain, have suffered serious food shortagesin recent years as a result of low rainfall and security problems.

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24 The capacity to produce a food surplus helped free family laborto grow export <_rops. When the railway to the coast was opened in theearly 1920s, export production, initially cotton, later (in the 1950s)robusta coffee, grew rapidly. By the end of the 1960s, smallholder tea andtobacco were also being exported, while domestic production was also beingdiversified through the advance of small-scale dairying, modern ranchingand pig farming. The 1970s have seen a substantial decline, especially inexports, reflecting unremunerative prices and the general deterioration incapital assets and infrastructure. Coffee exports fell more than 50%;exports of other crops virtually ceased altogether. Farmers switched tosubsistence production and to supplying the more lucrative domestic foodmarket. For similar reasons, the tea and sugar estates were unable toattract labor.

25. The prospects for export crop recovery are good. Coffee, cotton,tea, and tobacco exports could all grow rapidly within the next three years(although the previous peak levels are not likely to be reached until laterin the 1980s). In addition, food exports to neighboring countries are adistinct possibility. The revival of cotton and other agriculturalproduction would also supply some domnestic industrial needs. The centralconstraint to recovery is the incentive system. Prices for export cropsmust be remunerative, the efficiency of the marketing system must beimproved, and payment for crops must be prompt. Closely related to this isthe supply of inputs, implements, spares for processing and transport, andconsumer goods to stimulate the production of surpluses. These willrequire more foreign exchange. Over the lcnger term, agricultural servicesincluding research and extension will require more attention.

26. The industrial sector accounted for only about 11% of GDP in the1960s. However, it supplied the domestic market with basic goods likeedible oil, soap, paper and cement and produced small exportable surplusesof textiles and copper. By 1980, industrial value-added had fallen toabout one-third of its previous level, or some 5% of GDP. Many industrieshave closed down while others are operating at low levels of capacity util-ization. There has been little new investment over the past decade; in-deed, in recent years, there is evidence of disinvestment in many areas.

27. As a result, the structure of industry has changed little overthe last decade. Significant capacity (and hence recovery potential)exists in the production of basic consumer goods, wood products, buildingmaterials, simple engineering goods, textiles and chemicals. Theseindustries are characteristically inward-oriented, requiring relativelylittle skilled labor (except for machine maintenance) and moderate capitalinvestment. There are few intermediate and capital goods industries and,by contrast with many other African countries, virtually no assemblyindustries. The main structural change in industry over the past decadehas been the shift of ownership from the private to the public sector.

28. The industrial sector is an important potential contributor toUganda's recovery. Virtually all its products, especially basic consumergoods and building materials will be in strong demand and in most cases canbe produced more cheaply than imports. Production of these could alsoexpand quite rapidly. The most obvious and generally binding constraint on

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its recovery is foreign exchange: for raw materials, spare parts and capi-tal goods to replace outdated and damaged plant. Other constraints are,however, apparent in several cases: the low level of agricultural produc-tion, which limits the supply of raw materials, foreign exchange and domes-tic demand for industrial products; the weakness of infrastructural ser-vices, especially transport; over-expansion of, and politicai interterencein the management of the parastatal sector; shortages of qualified managersand technicians; financial constraints, resulting from ownership uncertain-ties, financial indiscipline and, more recently, the impact of the June1981 devaluation on costs. At the same time, there are industrialenterprises, both private and public, which are adequately managed,financially viable and capable of significant production increases even inthe short term.

29. Uganda's transport system, formerly one of Africa's best, deteri-orated rapidly during the 1970s for the same general reasons outlined ear-lier: the departure of skilled personnel, political interference, and in-adequate provision of resources for essential functions like maintenance.In addition, the breakup of the East African Community (EAC) in 1977 had aserious effect, especiaLly on Uganda's access to international traderoutes: as a result Uganda lost virtually all railway rolling stock andaircraft and her part-ownership of railways and port facilities in Kenyaand Tanzania. This both necessitated heavy new investments by Uganda, andseriously disrupted international traffic movements while increasing theircost. Transport was moreover the sector possibly most seriously affectedby the Liberation War and the widespread looting which followed. Thevehicle fleet in particular was decimated.

30. Rehabilitaticn of the transport system is a key requirement forrecovery. Progress since Liberation has, however, been slow and uneven.High priority has been given to imports of road vehicles and railway rol-ling stock and locomotives, while available resources have often not beenfully utilized, especially through over-emphasis on lake ferries, long-haulage trucks (where rail would be cheaper), and larger aircraft forinternational routes. Almost all Uganda's external trade passes throughKenya, so that cooperac:ion between the two countries remains vital forUganda. This has improved of late; Kenya has made a loan to Uganda to helpclear goods at Mombasa port, has rented rolling stock to Uganda and hasincreased the number of trains available to Uganda to five per week.

31. A high priority would be to maximize the use of the railway forinternational trade, and for some internal routes also. This involves fur-ther improving the coordination of railway operations with Kenya, reducingdependence on expensive truck transportation, improving track maintenanceand safety, and repairing locomotives and rolling stock. Road conditionsare, by and large, not a critical constraint, but some high-volume or high-potential roads, especially those providing access to railheads and maincenters, require rehabilitation and there is a general need for improvedroad maintenance. For road transport, including bicycles, which are widelyused for personal and small freight transport, the major need is spareparts. Finally, better international communications will require improvedstandards of navigational, meteorological and safety equipment at Entebbeinternational airport. For most of these purposes, tools, equipment, spareparts, signalling and communications equipment could make a major short-term impact on remaining transport bottlenecks.

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Assistance Needs

32. If recovery is to continue in 1982, Uganda's merchandise importsmust rise at least one-third over 1981 levels, to about US$540 million incurrent prices, with most of the increase in inputs and spare parts foragriculture, industry and transport, and in basic consumer goods. This isstill less than half the 1971 level in real terms and far below the US$660million which the Commonwealth team expected Uganda to require in thesecond half of 1979 alone, a level well in excess of what could be effec-tively used now, given the many administrative weaknesses and constraints.From 1983-85, imports are expected to increase less rapidly, by about 6%per year, since there appears to be ample scope for reestablishing domesticsupply sources and reducing the import content of production. If theseimport levels can be financed and if progress continues on the economicmanagement and institutional issues discussed earlier, GDP could grow at6-7% per year on average during 1982-85, with monetary agriculture andindustry as the leading sectors. Balance of payments data and projectionsare presented in Table 2; economic performance indicators in Table 3.

33. The other major claim on available foreign exchange is debt ser-vice. After allowing for debt relief agreed at the November Paris Clubmeeting, principal repayments will total US$135 million in 1982 and USS90million in 1983. Invisibles may be expected to be a net drain on foreignexchange during the 1980s, even if there is some revival in tourism.Uganda should also provide for a reduction in arrears by about US$40million in 1982 and US$50 million in 1983 and 1984, and some buildup ofexternal reserves. The total financing requirement -- for merchandiseimports, invisibles and reserve accumulation -- is expected to be US$0.8billion in 1982, rising to US$1.1 billion by 1985.

Table 2: Uganda - Balance of Payments Developments and Prospects

(U5$ million)

1970 1977 1978 1979 1980 1981 1982 1983 1984 1985estimates projected

Merchandise exports f.o.b. 261.6 547.8 323.0 397.2 319.1 220.0 314 373 418 480Merchandise Imports c.i.f. -204.9 -421.4 -352.1 -322.1 -503.7 -400.0 -541 -624 -718 -825Non-factor services (net) -15.9 -44.7 -97.5 -53.8 -54.8 -70.0 -77 -87 -98 -109

Resource balance 40.8 81.7 -126.6 21.3 -239.4 -250.0 -304 -338 -398 454

Other invisibles (net) /a -27.5 -18.3 -11.6 -25.6 -8.1 - -28 -37 -68 -72

Current account balance 13.3 63.4 -138.2 -4.3 -247.5 -250.0 -332 -375 -466 -526

Official grant receipts 7.0 3.9 8.8 24.2 84.6 110.0 126 137 144 140Public M & LT loans (net) 21.3 23.9 38.1 104.2 84.2 10.0 -14 -13 66 95- disbursements (27.4) (47.4) (65.8) (144.6) (131.3) (120.0) (149) (78) (106) (138)- repayments /b (-6.1) (-21.7) (-13.5) (-15.6) (-13.6) (-80.0) (-135) (-91) (-40) (-43)- principal arrears (-) (-1.8) (-14.2) (-24.8) (-33.5) (-30.0) (-) (-) (-) (-)

Use of Fund credit (net) - 1.8 -1.8 -3.5 26.4 125.3 108 120 64 -44Other capital (net) /c -36.8 -73.4 50.2 -182.3 -123.4 96.0 - - - -

Financing gap - - - - - - 151 198 265 355

Overall balance of payments 4.8 19.6 -42.9 -61.7 -175.7 91.3 67 67 73 20

Accumulation of arrears - -9.4 61.3 6.2 134.5 -91.3 -43 -50 -50 -Change in net reserves

= increase)d/ -4.8 -10.2 -18.4 55.5 41.2 - -24 -17 -23 -20

Memorandum itemsNet reserve level (end of year) /d 64.8 53.9 72.3 16.8 -24.4 -24.4 - 17 40 60Arrears level (end of year) - 32.8 94.1 100.3 234.8 143.5 100 50 - -

/a Excludes official grant receipts. Projections include debt servicirg on financing gap, assuming average DC tenms: 2-5%interest, 30 years maturity including 8 years grace.

/b Projections include debt servicing on financing gap./c Includes private capital and errors ard omissions./d Use of Fund credit ard the Kenya swap arrangenent are both shoun in the capital account.

- 14 -

Table 3: National Accounts Indicators 1978-81 and 1982-85(growth rates % per year)

1978-81 1982-85

GDP -5.9 6.8Monetary agriculture (-4.5) (10.0)Subsistence Agriculture (-8.3) (3.5)Industry (-15.2) (10.0)Other sectors (0.6) (5.0)

Gross investment - 9.7

Merchandise exports -2.3 13.1Coffee (1.0) (11.4)Cotton (-46.6) (53.8)Tea (-61.4) (148.6)Tobacco (-25.3) (39.2)Other exports (-20.6) (10.3)

Merchandise imports (-11.0) 12.7

PricesExport prices -10.0 7.0Import prices 17.3 7.1Terms of trade -23.2 -0.1

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34. Exports can be expected to make an important contribution towardsmeeting this requirement, depending on how much foreign exchange isavailable to help relieve export constraints. For the next two to threeyears at least, agricultural exports will be the key to recovery. Providedprices are remunerative, marketing becomes more efficient and the supply ofagricultural inputs and consumer goods improves, merchandise exports couldgrow by about 14% per year on average from 1982-85. Although high rates ofgrowth in the main agricultural exports (coffee, cotton, tea, and tobacco)

can be expected, coffee will remain dominant for some years. Uganda'squota under the Int:ernational Coffee Agreement is 156,000 tons in 1981/82,30% above 1980/81. In addition, the International Coffee Organization willpermit Uganda to carry forward the shortfall in its original 1980/81 quotaof 18,000 tons to 1.981/82. By 1985, however, the quota could become a con-straint on coffee exports and would either have to be raised, or Ugandawould have to accept the lower prices available on non-quota markets. Forall the main agricultural exports, it will take time to improve marketingand relieve processing constraints, so that faster export growth cannot bedepended on. Beyond 1985, the prospects for other exports, includingmaize, groundnuts, animal feed, hides and skins, copper, cobalt and cottontextiles are promising, provided the exchange rate is maintained at anappropriate level. During the next two years, the groundwork forproduction of these exports, notably infrastructural rehabilitation andpreinvestment studies must be laid.

35. This recovery in export production will itself require more for-eign exchange, however. And it is clear that even if exports do increase,they will be far from sufficient to meet the country's foreign exchangeneeds. From 1982-84, some US$530-580 million per year over and aboveexport earnings will be needed. If official grant and loan commitments aremaintained in real terms, and disbursements and debt service follow anaverage pattern, t:hese could provide some US$270 million per year onaverage. A further US$100 million per year on average (net) could beavailable from the IMF up to mid-1984, if Uganda becomes eligible forfurther resources under future stand-by arrangements.4/ This leaves aboutUS$180 million per year over the next three years to be met from newresources.

36. Uganda will not be able to finance this gap on non-concessionalterms. If the amount needed were borrowed at 11.6% for nine years, withfour years of graze (terms far better than those available on the market atpresent), Uganda's debt service ratio would increase from 49% in 1982 to61% in 1985, reac'hing 96% by 1990 (including IMF charges and repurchases).Some short-term non-concessional borrowing may prove unavoidable, given thebunching of principal repayments, but care must be taken to ensure that theresulting debt burden is manageable. Without additional externalfinancing, virtually no per capita income growth would be possible. Ugandawill therefore need additional financing on concessional terms to achieveits much-needed recovery. This financing will, moreover, have to befast-disbursing, in the form of balance of payments support or projectswhich focus on immediate and urgent recurrent import requirements. Newinvestment for the next three years and possibly longer must be limited to

4/ The IMF expects to enter discussions of a further stand-by arrangementfor 1982-83 be!fore the beginning of the next fiscal year.

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urgent rehabilitation needs. Given UJganda's comparatively low levels ofper capita income and savings, local cost financing should also beconsidered.

37. Finally, the importance of reviving the export sector and focus-sing incremental foreign exchange supplies on its needs cannot be over-stated. If export volumes grow at 4% per year (instead of 14%), the fin-ancing gap would widen by about US$85 million per year through 1985.

PART III - BANK GROUP OPERATIONiS

38. Bank Group operations in Uganda began with an IBRD loan of US$8.4million for hydroelectric power development in 1961. Between 1967 and1971, Uganda received seven IDA credits totalling US$48.0 million for pro-jects in education, roads and agriculture (tea, tobacco and beef ranch-ing). In addition, Uganda has benefitted from 10 loans totalling US$244.8million for the development of the common services and the East AfricanDevelopment Bank operated jointly by Kenya, Tanzania and Uganda throughtheir association in the former East African Community (EAC). Annex IIcontains summary statements and notes on the execution of ongoing pro-jects. IFC's first investment in Uganda, in a textile company, was sold tothe Government in 1970. The second, to help finance two lodges in thenational parks was cancelled before construction began. IFC is activelyconsidering the role it can now play in rehabilitation as well as inlonger-term development.

39. There was a hiatus in Bank Group operations in Uganda from 1971until February 1980, when a Reconstruction Credit of US$72.5 million (in-cluding a participation of US$17.5 mi:Llion by the Kingdom of the Nether-lands) and an EEC Special Action Credit of US$20.0 million equivalent wereapproved (Credit Nos. 983/983-1-UG and 54-UG). The Association is alsoacting as administrator of a Can$3.0 million grant from the Government ofCanada and of a US$5.0 million program loan for reconstruction from theOPEC Fund. In addition, the Bank Group has provided credits totallingUS$21.0 million (through a Technical Assistance Credit No. 1077-UG, a WaterSupply Engineering Credit, No. 1110-UG, and a Phosphate Engineering Credit,No. 1228-UG, (approved on April 13, 1982 and still to be signed) to financestudies needed to begin building a project pipeline. The Bank Group alsoadministers an IFAD-financed Agricultural Rehabilitation Program of US$20.0million equivalent focussed on the food crop sector. Possible future Bankassistance to Uganda is discussed in paragraph 48 below.

40. Developments affecting the East African Community (EAC) were out-lined to the Executive Directors in a memorandum, dated December 29, 1977,(R77-312) and in a statement made on May 6, 1980 (SecM80-364). One of thepositive results of the ongoing mediation effort has been the PartnerStates' decision, taken upon the mediator's recommendation, that the EastAfrican Development Bank (EADB) -- one of the former Community's institu-tions -- should continue, and a revised charter to this effect has beenenacted. The three governments also commented on the mediator's proposalsfor allocation of EAC's other assets and liabilities; and the presidents ofthe three Partner States, during their meeting in Nairobi in July 1981,

- 17 -

decided to commence negotiations based on the mediator's proposals.Negotiations started December 14, 1981 in Arusha and continued in April inJinja.

The First Reconstruction Credit

41. This Credit was approved by the Executive Directors in February1980 and became effective in May 1980. However, following the change ofgovernment in May 1980, the Bank Group and the Government agreed that dis-bursements should be temporarily limited to US$25 million equivalent cover-ing a specific list of items, including packing materials and agriculturaltools for coffee and tea, educational materials, and telecommunicationsequipment. Disbursements continued to be slow, reaching only US$2.5million by May 31, 1981. The Credit was tranched: the second tranche wasto be disbursed upon finding that satisfactory progress was being made incarrying out needed policy reforms. Accordingly, in June 1981, after theGovernment adopted its financial program (see paragraph 16), the Bank Groupmade the balance of the Credit available. Subsequently, disbursementsaccelerated; by end April 1982, US$37 million had been disbursed andletters of credit opened for an additional US$47 million. Of the US$11million remaining after exchange adjustments, all had been allocated by theGovernment to prospective end-users. The Government will therefore needfurther commitment autlhority if the support provided by the first Credit isto be sustained.

42. Of the US$100.0 million equivalent available under the IDACredit, the Canadian grant, the EEC Special Action Credit and an OPEC Fundloan, US$10.5 million was applied to reimbursements of miscellaneous itemsimported before June 1981. The remainder has been allocated to end-usersby an inter-ministerial committee following such criteria as thebeneficiary's foreign exchange earnings or savings potential, itscontribution to GDP and its impact on government revenue. Most of whatremained has been allocated to industries (US$77.0 million), while US$12.5million went to ministries.

43. There are areas where the Credit is already having a discernibleimpact. Textile production in at least two factories has either started orincreased following the supply of spare parts, looms and sewing machines;some 3,500 hectares of tea under the Uganda Tea Authority (UTA) have beenreclaimed following the arrival of packing materials and pruning knives;some tea factories and a sugar estate have been recommissioned with machin-ery and spares supplied under the Credit; and the supply of gunny bags toprimary cooperatives has enabled them to move coffee to Coffee MarketingBoard stores. In some cases, the amounts allocated were too small to pro-vide all the inputs needed to increase production. Under the proposedsecond reconstruction credit, stricter allocation criteria would be applied(see paragraph 63).

44. Apart from deliberate decisions taken to stop or delay disburse-ment in 1980, disbursements have been slow for three main reasons. First,the procedure described above for prior allocation of the credit proceedstook time to establish and operate. To avoid delays under the second re-construction credit, an understanding was reached at negotiations on theallocation of credit proceeds. Secondly, Ugandan officials were not

- 18 -

familiar with tendering procedures generally and Bank Group procurementprocedures ir , rticular. Many parastatals preferred to procure fromtraditional suppliers. In practice, nearly all procurement, includingparastatal and private companies, was handled by the Central Tender Board(CTB) whose publication, notification, advertisement and bid evaluationprocedures have contributed to delays. Foreign suppliers appear to havebeen unwilling to quote c.i.f. Kampala because of the difficulty intransporting goods to Uganda. Nearly all contracts under the FirstReconstruction Credit were below the US$2.0 million threshold forinternational competitive bidding (ICB). In some cases, Uganda might havebenefitted from full ICB, bringing in a wider range of suppliers. The lackof bid and performance bonds and guarantees has allowed suppliers to revisequotations after tender award, with the result that procurement was delayedor complicated. Tendering procedures have now become more familiar and arecausing fewer delays. The remaining problems are being dealt with eitherthrough technical assistance or under procurement arrangements for thesecond reconstruction credit (see paragraph 70).

45. The third reason for slow disbursements has been the June 1981devaluation, which necessitated renegotiation of several tenders and causedsome companies to face difficulties in raising local cover, since theirassets were undervalued in relation to their borrowing needs. Furthermore,some of the parastatals which had been allocated portions of the creditwere not creditworthy. As a result, the counterpart account required underthe credit has not been adequately funded. By March 10, 1982 only US$18.5million equivalent had been deposited with the counterpart account at theBank of Uganda, compared with disbursements of about US$35 million. Inpart, this reflects delays in the notification of disbursement details, butit also reflects difficulties in raising the local counterpart frombeneficiaries of the Credit. A procedure has now been agreed between theGovernment and the IMF whereby the local cover required by the commercialbanks to open letters of credit is deposited in suspense accounts and paidover to the Bank of Uganda for credit to the counterpart account whendisbursement details become available.

PART IV - THE SECOND RECONSTRUCTION PROGRAM

Background

46. After adopting the new financial program in June 1981, with sup-port from the IMF standby facility and the release of the remaining portionof the First Reconstruction Credit, the Government requested further non-project assistance. This request was appraised in conjunction with theeconomic mission in August 1981. A post-appraisal mission visited Ugandain January 1982. Negotiations were held in Washington in April 1982, witha Government delegation led by Mr. E. R. Kamuntu, Ambassador in the Officeof the President. There is no separate staff appraisal report for thiscredit. A credit and project summary is at the front of this report andsupplemental data are contained in Annex III.

47. The Bank Group's assistance to Uganda is expected to respond tothe needs identified in Part II, i.e.: (a) financing of current importneeds to revive the weak economy, (b) technical assistance to strengthenkey institutions, (c) the preparation of detailed rehabilitation programs

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for the key sectors and (d) the mobilization and coordination of aid. Inaddition to the support already provided (see paragraph 39 above), a numberof operations and other activities are planned in these areas. Followingthe introduction of the financial program in June 1981 and the economicmission in August, the Bank Group, in collaboration with the IMF, theCommonwealth Fund for Technical Cooperation, UNDP and other donors isproviding increasing amounts of technical assistance to Uganda indevelopment policy and planning. The Bank Group is administering aUNDP-financed Planning Assistance Project and is developing a program ofeconomic and sector work which emphasizes policy and planning questions.On aid coordination, the Bank Group reconvened the Consultative Group forUganda in November 1979, participated in a meeting of donors in Paris inNovember 1981 following the Paris Club meeting and will convene a furthermeeting of the Consultative Group on May 18 and 19, 1982.

48. The Bank Group is preparing an agricultural rehabilitationprogram in collaboration with other donors which will focus on the policyand institutional framework for the major export crops, as well as onsectoral financing requiLrements. This program could form the basis for anagricultural operation during the next fiscal year. An industrialrehabilitation project of US$35 million is being proposed to the ExecutiveDirectors at this time to provide capital investment, spare parts and rawmaterials to rehabilitate selected industries. Rehabilitation projects areunder preparation in roads (emphasizing maintenance facilities) andeducation (with emphasis on non-salary recurrent needs like textbooks),while identification of rehabilitation needs in telecommunications andrailways is expected in the coming months.

Objectives and Description

49. Despite the passage of almost three years since the fall of themilitary government, the Ugandan economy and administration remain weak andan exceptional need for current import financing remains. The proposedsecond reconstruction credit would therefore support the Government'sRecovery Program, in particular by:

(a) Increasing agricultural exports and domestic production in highpriority areas; and

(b) Strengthening the Government's capacity to formulate and imple-ment policies and programs in those areas which are critical forUganda's economic recovery. These areas are (i) the pricing andmarketing of export crops; (ii) administration, planning andforeign exchange allocation; (iii) the parastatal organizations;and (iv) external debt management. The agreed actions aredescribed in a Memorandum of Understanding (Annex V). A summaryof actions already taken and to be taken under the program isshown in Table 4.

50. The proposed credit would finance the importation of agriculturalinputs, spare parts and raw materials for industry and transport and otherlargely non-capital ne!eds of high economic priority during the fiscal year1982/83. It would cover about 12% of the imports needed and about 40% of

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Table 4: UGANA - Second Reconstruction Program

Sector and policy issue Action already taken Steps to be taken

1. AU4LNISTRATION, EUOEIGN EXCHANCALLOGATICN AND PLANIS1. Exchange rate Govermnent floated the Uganda Shilling

in June 1981 and effectively devaluedit 90x.

Action

2. Foreign exchange allocation 1. Detailed bidgeting of "free for- Governnent will adopt strirgenteign exchange was introduced in criteria for foreign exchange allo-Novenber 1981. cation.

2. Government is scrutinizing andimproving its export anA pay-ment procedures with IMF assis-tance.

3. Government has adopted the RecoveryProgran as its foreign exchange budgetfor 1982/83 ard as a guideline forits 1983/84 foreign exchange budget.

Action

3. External debt managemnt A Paris Club meetirg was held in Govermnent will prepare a progran toNovenber 1981 to help rescnedule strengthen its external mnnitorirg andUganda's external debt, and a more manage-ent unit by September 30, 1982.canprehensive debt verification ispresently being carried out withtechnical assistance.

Action

4. Planning and aid coordination 1. Goverment Ls strengthening MPED 1. Goverment will use the Recoverywith assistance fran a UlNDP plrr- Program for 1982/83 budgetning assistance project. preparation.

2. Govermnent has established an 2. MPED will monitor and adjust theExternal Resources Mtbilization progran six--nwnthly startirg Decen-Camnittee. ber 31, 1982.

3. Government has adopted a detailed 3. Goverrnit will, by September 30,and conprelhensive Recovery 1982, prepare a program toProgram. strengthen the Ministry of Finance

and ME1D.

4. A Consultative Group neeting isscheduled for May 1982.

Table 4- 21 - Page 2 of 3

Sector and policy issue Action already taken Steps to be taken

ActionII. PULIC FINANCE

1. Taxation Government reformed and simpli- Goverrnent is strengthening tax ad-fied the tax structure in June ministration with assistance frcm1981, raising sales and excise the Ccmonralth Secretariat.taxes and putting then on anad valorem basis.

Action

2. Expenditure 1. Goverrnent has fulfilled original Goverrunent will use the Recoveryor revised performance criteria Progran for 1982/83 budget preparation.under its IMF-supported financialprogran for net credit to theGoverrnent.

2. Expenditure control is beingexamined by an ILNF adviser.

ActionIII. AGRICULTlRE

1. Pricing and marketing Producer prices for 4 nain export 1. Govermnent will review teacrops (coffee, tea, cotton, tobacco) and tobacco prices by July 1,were raised in 1981 to levels exceed- 1982.irg production costs, except for tea.

S tudies

2. Governnent will study ways ofimproving the organization and regr-lation of export crop marketing.

3. Goverrnt will establish a unit foranalyzing domestic and internationalcosts, prices and supply trends andfor making reccmmendations on agri-cultural prices and consult the BarkGroup by September 30, 1982 onimplementation.

S tudy2. Sector planning and

coordination Goverrnent, with Bank Group assistance,will examine proposals for improvementduring April/May 1982.

- 22 - Table 4Page 3 of 3

8ector and policy issue Action already taken Steps to he taken

Action

IV. PARASTATAL ORGANIZATIOW1. Financial viability 1. Price controls were removed in Gover-nent will arrange for production

June 1981. of statenents of affairs, audits andfinancial analysis of parastatals for'hich terms of reference and timetablet%uld be decided by June 30, 1982.

2. Parastatals requiring budgetaryresources must produce financialdata for July-{ecember 1981.Governient guarantees will notexceed 75% of the loan aLunt.

3. Public utility tariffs were raisedin January 1982.

4. The Goverrnent has exanined key para-statal organizations to determineaccounting assistance needed.

,Action

2. Ownership and organization 1. Covernnent will introduce legisla-tion to return businesses toformer owners by June 30, 1982.

2. Government will decide on the re-organization of UDC by December31, 1982.

S tudy

3. Policy developnt Govermnent will define assistanceneeds in parastatal policy-making andseek such assistance by June 30, 1982.

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the financing gap in that year (paragraphs 32-37), leaving the rest to becovered by rescheduling debt held by non-participants in the Paris Club andby additional balance of payments support from other possible donors. TheBank Group is helping Uganda raise these resources by convening aConsultative Group meeting in May 1982. The proposed industrial rehabili-tation project would be complementary to this credit: while this creditwould enable selected industries to increase capacity utilization, theproposed industrial rehabilitation project would also provide capitalequipment to replace or rehabilitate plant and machinery, includingbalancing investment.

Pricing and Marketing of Export Crops

51. After the latest producer price increases for export crops (inOctober 1981), farmers face positive returns in all cases except tea.Price differentials with neighboring countries have narrowed and reducedthe incentive for smuggling. The returns from growing food crops are stillsubstantially higher, however, and without further adjustments, farmers maynot reinvest in export production. With the exception of cotton, the far-mers' share in export earnings is 50% or less, so that scope already existsfor increasing farmers' prices at existing world prices with the presentexchange rate. The balance of the export price is absorbed by excessiveprocessing and marketing margins. In the case of coffee, export taxescould provide as much as 45% of government revenue this year, and hencelimit the extent to which coffee producers can be paid more in the shortterm.

52. While scope exists for increasing the coffee producer pricefurther, the principal constraint in the short term is on cooperativeprocessing capacity, since the last price increase coupled with transportimprovements has provoked a build-up in supplies at processing plants.This constraint is being addressed by an increased supply of spares toprocessors under an EEC-financed project in the coffee sector. But thereare also disincentives to private sector processing and marketing of coffeeand other export crops, including difficulties in gaining access to foreignexchange and credit on an equal footing with cooperatives and parastatals.In the case of tea, the proposed second reconstruction credit would helpimprove green leaf transport and factory capacity for the smallholdercrop. Then the main remaining constraint to increasing producer priceswould be their effect on the finances of the Uganda Tea Growers Corporation(UTGC). This, however, is primarily a short-term difficulty, since anincrease in tea production would reduce UTGC's unit overheads and improve-ment in tea quality would increase its returns. In the case of tobacco,there is a flourishing informal market offering prices two-thirds higherthan the official price. An increase in the official price would thereforebring tobacco sales back into official channels. The Government willreview export crop producer prices, especially for tea and tobacco, in thecontext of the financial program and budget for the 1982/83 fiscal year.

53. The effect of price increases on export supply will be enhancedby improvements in the marketing of crops and the supply of inputs,consumer goods and other items needed by farmers. The efficiency ofpresent arrangements is limited by the disincentives to private processingand marketing referred to above as well as by the export monopoly positions

- 24 -

enjoyed by CMB (coffee), UTA (tea), LMB (cotton) and NTC (tobacco). Manycooperatives are de facto monopsonies in certain areas or for certaincrops. The Government wishes to liberalize agricultural marketing andplans to study the removal of statutory monopolies and alternative ways ofimproving the organization and regulation of export crop marketing. TheBank Group expects to assist in this review during preparation of theagricultural rehabilitation program (paragraph 48). Part of theGovernment's difficulty in taking early action in this area is attributableto a lack of adequate information and analysis of these questions, as wellas poor coordination among the ministries responsible for the sector. TheGovernment will therefore establish a unit to analyze domestic andinternational costs, prices and supply trends of the major agriculturalexport crops and to make recommendations on agricultural producer prices.It will also consult the Association on the terms of reference and staffingrequired for this unit as a condition for clisbursing a second tranche ofUS$30 million of the proposed credit. (Schedule 4.1 to the DevelopmentCredit Agreement and Annex V).

Administration, Planning and Foreign Exchange Allocation

54. Public administration, especially government budgeting, tax col-lection, expenditure control, aid coordination, planning, and data collec-tion, has suffered seriously from both the loss of personnel and the under-mining of professional and moral standards during the 1970s. RebuildingUganda's civil service to its former high standards is a long-term andmulti-faceted endeavor, a start to which has been made by recruitingtechnical assistance in a number of key areas -- notably IMF assistance tothe Bank of Uganda and the Ministry of Finance, World Bank-executed,UNDP-financed assistance to the Ministry of Planning and EconomicDevelopment, and EEC and bilateral donor assistance to sector ministriesand parastatals. In due course, improved accountability will be needed toreinforce these efforts.

55. Given the critical foreign exchange situation, the paramount needin the short term is to ensure that foreign exchange is rationallyallocated. In particular, this means allocating increasing shares of thelimited foreign exchange available to essential consumer items and to theneeds of the directly productive sectors. Efforts have already been madeto improve the foreign exchange allocation system. Since November 1981,the Government has, with technical assistance from the IMF, introducedprocedures for monitoring foreign exchange receipts from exports and cashassistance. A detailed allocation of expected receipts for the forthcomingthree months is proposed to the President's Economic Advisory Committee(PEAC), by the Bank of Uganda. In practice (see paragraph 11 above), oilimports, debt service, defense and administrative needs absorb nearly all"free" foreign exchange. At the same time, the Government, with IMFassistance, is scrutinizing its own export and payment procedures moreclosely, to ensure that all foreign exchange earnings due are surrendered,and is now centralizing all external payments proposed by ministries withthe Ministry of Finance, which mrust approve the release of funds.

56. A somewhat separate approach has been taken to the allocation offoreign exchange in the context of longer term planning. This area hastraditionally been the responsibility of the Ministry of Planning and Eco-nomic Development (MPED) under the general direction and coordination ofthe NIational Planning Commission, a legally--established entity consisting

- 25 -

of ministers holding economic and social portfolios. The Commission, how-ever, has not been operating since June 1981. Instead, the Government hasestablished an External Resources Mobilization Committee consisting of min-isters and senior officials from MPED, the Ministry of Finance, key sectorministries, and the Bank of Uganda through which coordination of planning,finance, and aid mobilization are being carried out. The main reason forthe earlier failure to address longer-term planning issues has been theweakness of MPED itself. This is now improving as the result of somesenior appointments in that ministry and the UNDP planning assistance pro-ject. The Ministry of Finance also needs strengthening in almost all areasof operation. Its technical assistance needs have been identified by theGovernment and presented to various donors, but there are practicalconstraints in the way of mobilizing potential assistance, among themhousing and transportation. The Government would therefore prepare andconsult the Association on a program to strengthen the administrative,managerial and planning capacities of these two ministries, including stepsto obtain priority teclnical assistance, as a condition of disbursing thesecond tranche of the Credit. (Schedule 4.2 to the Development CreditAgreement).

57. Despite the improvements in the short-term monitoring of foreignexchange receipts and expenditures, and in the coordination machinery forexternal assistance, both the planning of foreign exchange allocation andits execution require further improvement. First, inadequate attention hasbeen given to the recurrent import needs of the productive sectors.Secondly, such planning as has been done has been unrealistic about theamounts of foreign exchange likely to be available in practice and hencelittle guide to detailed allocation. Thirdly, the technical capacity toevaluate import requests and relate them to the broad priorities has beenlacking. The preparation of the Recovery Program has gone a long way tohelp rectify these problems. Recurrent import requirements have beenincluded in the program ard their priority assessed. The program is basedon cautious assumptions regarding foreign exchange availability and theproposals it includes have received adequate technical appraisal. TheGovernment has described the use it expects to make of the Recovery Programin the Memorandum of Understanding for this Credit (Annex V) in thefollowing ways:

(a) as a reference point for the coordination of external assistance,starting with the May 1982 Consultative Group meeting;

(b) for budget preparation, especially for the developmentbudget; and

(c) as its foreign exchange budget for 1982/83 and a guideline forthe 1983/84 foreign exchange budget. The Government wouldperiodically exchange views with the Association on the operationof its foreign exchange budgets and on future budget guidelinesduring the Recovery Program, (Section 4.03 of the DevelopmentCredit Agreement). Furthermore, the Government would applystrict criteria to the allocation of foreign exchange inder theproposed second reconstruction credit (see paragraph 63 below).

- 26 -

Monitoring and adjusting the program will be the task of the MPED, whichwill carry this out on a six-monthly basis; the first review will becarried out by December 31, 1982.

The Parastatal Organizations

58. The Government is introducing liegislation to return some of thebusinesses, presently under parastatal organizations, to the privatesector. Meanwhile, many parastatals which are likely to remain in thepublic sector suffer from acute operational and financial difficulties.The first priority is to update parastata:L accounts so that a basis fordeciding policy on individual cases can be made. For the agriculturalparastatals, which are almost exclusively engaged in marketing, the mainconcern is their cost and efficiency. The technical staff of the UgandaDevelopment Corporation (UDC), the main holding company for industrialparastatals, has proposed a reorganization, on which the Government expectsto decide by December 31, 1982, under which some of the subsidiaries itlost in 1972 would be returned. For these, new financial structures mustbe decided. The public utilities face serious financial problems whichwill require both tariff adjustments, improved administrative procedures,and possibly government cash injections to achieve viability. Finally, theEconomic Affairs Department of the Ministry of Finance, which coordinatesparastatal operations and policies, monitors their budgetary and financialimpact, and ensures consistency and feasibility of their objectives, needsto be strengthened. The first step in this direction will be taken by theIMF's fiscal adviser, whose report will examine some of these issues in thecontext of expenditure control. The Government's program to obtaintechnical assistance for the Ministry of Finance and MPED would includethis area (see paragraph 56).

59. The Government has requested Bank Group assistance in approachingthe accounting, auditing and policy questions outlined above. As a firststep, the Bank Group has completed, in April 1982, a preliminaryexamination of 11 key parastatal organizations to determine the nature andextent of accounting assistance required. These organizations have beenselected according to their importance in earning or saving foreignexchange and their actual or potential budgetary cost to the Government(having regard to guarantees given on their behalf to commercial banks).They are:

(a) Agriculture: Coffee Marketing BoardLint Marketing BoardUganda Tea AuthorityUganda Tea Growers Corporation

(b) Public utilities: Uganda Electricity BoardUganda Posts and TelecommunicationsUganda Railways CorporationUganda Airlines

(c) Industry: Uganda Development Corporation and its sub-sidiaries as reorganized

(d) Commerce: TransoceanNational Insurance Corporation

- 27 -

60. The second step would be the appointment of consultants toproduce statements of aifairs, audits and financial analysis, asappropriate, for these and eventually all the remaining parastatals,according to a timetable agreed with the Government. The Government wouldconsult the Association on the terms of reference and timetable forcompletion of this exercise before June 30, 1982, (Section 4.04 of theDevelopment Credit Agreement and Annex V), and expects to finance theconsultants required under the Technical Assistance Credit (No. 1077-UG).

61. In the meantimle, the Government has required all parastatalsrequesting transfers from the Government budget, or Government guaranteesfor commercial bank loans, to submit income and expenditure statements andunaudited balance sheets for the period July-December 31, 1981, by April 1,1982, if the requests are to be included in the 1982/83 budget. In caseswhere the Government dezides to guarantee a loan, that guarantee will notexceed 75% of the total loan amount. In addition, one of the criteria forallocating the proceeds of the second reconstruction credit is that theentity concerned should be creditworthy (paragraph 63).

External Debt Management

62. Attention has already been drawn to the poor management andrecording of Uganda's external debt in the past (paragraph 13). TheGovernment is carrying out a comprehensive verification of its externaldebt, employing the services of the merchant bank Morgan Grenfell andaccountants Peat, Marwick, Mitchell. Technical assistance from the IMF ishelping to improve the monitoring and repayment of existing obligations.In addition, the Government plans to strengthen the unit in the Ministry ofFinance responsible for processing and approving external debt transactionsand for determining future policy on external borrowing. The Governmentwill prepare and consult with the Association on a program to strengthenits external debt monit:oring and management, as a condition of disbursingthe second tranche of the proposed credit (Schedule 4.3 to the DevelopmentCredit Agreement and ArLnex V).

Administration and Allocation of the Second Reconstruction Credit

Foreign Exchange

63. Priority end--users of foreign exchange have been identified by asub-committee of the External Resources Mobilization Committee (see para-graph 59) on the basis of submissions by sectoral ministries, vetted byMPED. In principle, the criterion to be used is the economic rate ofreturn. In present circumstances in Uganda, this is best approximated bythe following criteria, which the Government will apply to the allocationof credit proceeds (Section 3.01(b)(iv) of the Development Credit Agreementand Annex V):

(a) That the imports concerned would maximize net foreign exchangeearnings or savings in the near future;

(b) For imports that would contribute to domestic consumption(principally industrial products), priority would be given tobasic consumer and incentive goods, building materials andagricultural inputs, but only if a clear foreign exchange savingcan be demonstrated;

- 28 -

(c) Imports for infrastructural purposes, particularly transportwould go to relief of critical bottlenecks which prevent earningor saving foreign exchange at minimum cost; and

(d) That the agency or company undertaking the expenditure is finan-cially viable and managerially sound.

In addition, the Government would provide for the future recurrent foreignexchange needs of projects supported by the proposed second reconstructioncredit in its foreign exchange budget (Annex V). These criteria areconsistent with those to be applied by the Uganda Development Bank (UDB)and the Uganda Commercial Bank (UCB) in the selection of sub-borrowersunder the proposed industrial rehabilitation project. The industrialrehabilitation project would, however, apply more stringent economic rateof return criteria to justify the investment proposed for each sub-project.

64. In accordance with the criteria listed in paragraph 63 above,credit proceeds have been allocated to the following end-users:

Agriculture and Livestock (including inputs for industriesproducing agricultural materials, raw materials and inputs forlivestock and fisheries);

Manufacturing Industry (including raw materials and inputs forconstruction, building materials, consumer goods and intermediateproducts);

Transport (including spare parts, tires for vehicles, etc.);

Service contracts for forwarding, transportation, etc., of goodsprocured under the proposed credit and invoiced c.i.f. Mombasa;

Other (including power, water, chemicals, educational materials,telecommunications and broadcasting).

At negotiations of the proposed credit, an understanding was reached on theallocation of the proposed credit among these categories. In addition,credit proceeds would not be allocated to imports indicated in Annex IV(Schedule 1.1 to the Development Credit Agreement).

65. The proposed credit would be disbursed in two tranches. A firsttranche of US$40 million would be available after the credit is declaredeffective. On or before September 30, 1982, the Association would reviewthe progress of the proposed program and determine, in particular, whetherthe conditions for disbursing a second tramche of US$30 million had beenmet, (Section 4.02 of the Development Credit Agreement) namely:

(a) that the Government would establish the unit (described inparagraph 53) for agricultural producer price analysis andrecommendations and consult the Association on its terms ofreference and staffing;

- 29 -

(b) that the Government had prepared and consulted with theAssociation on. a program to strengthen the Ministry of Financeand MPED (paragraph 56);

(c) that a program to strengthen the monitoring and management ofexternal debt had been prepared and the Association consultedwith concerning it (paragraph 62).

Relationship of the Proposed Program to the IMF Stand-by Credit

66. Progress under the IMF stand-by credit has been satisfactory.The performance criteria were observed in September 1981, while theincrease in total net domestic credit and net credit to the Government wasbelow the amount allowed for in understandings negotiated in November1981. The reductions in external arrears in September and December 1981exceeded those agreed with the Fund.

67. Preparation of the proposed program has been closely coordinatedwith the assistance of the IMF and other agencies. An IMF mission reviewedthe stand-by facility at the same time as this program was post-appraised.In particular, the efforts to improve foreign exchange allocation, taxadministration and expenditure controls, to develop a strategy for para-statal reform and to determine appropriate short- and long-term agricul-tural pricing and marketing policies have been the subject of complementaryapproaches. The proposed second reconstruction program and the IMFstand-by credit have been coordinated specifically in the following ways:

(a) Foreign exchange allocation

The IMF and the Government have agreed on measures to acceleratethe surrender of export proceeds, reconcile the recorded value ofexport shipments with the proceeds surrendered to the Bank ofUganda and improve the operation of the foreign exchangeallocation maLchinery. The proposed program would put this in alonger-term framework, including aid receipts, and encourage theallocation of foreign exchange to specific high prioritypurposes.

(b) Public finance

The IMF and the Government have, in addition to taxation measuresand borrowing ceilings, agreed on measures aimed at improving themonitoring and control of government expenditures and taxrevenues, including the reduction of monthly cash allocations forrecurrent expenditure and more timely collection of coffee exportrevenues. The proposed program would support the closercoordination of the economic recovery program with developmentbudget preparation and help identify assistance in the Ministryof Finance and MPED.

(c) Parastatal organizations

The IMF and the Government have agreed on a short-term programfor bringing parastatal requests for budgetary support under

- 30 -

tighier control (paragraph 61 above). The proposed program wouldsupport a clear plan of action for rehabilitation of theparastatal sector over the longer term.

(d) Agricultural pricing and marketing

The IMF has endorsed successive adjustments in agricultural pro-ducer prices. The proposed program would support agreedprinciples for agricultural pricing and marketing, and strengthenthe capacity for putting them into practice.

(e) External Debt

The IMF program stipulated amounts by which debt arrears shouldbe reduced and established limits on external borrowing. Theproposed program would strengthen the machinery for external debtmanagement.

Counterpart Funds

68. Local currency counterpart funds generated by the sale of foreignexchange provided by the proposed second reconstruction credit would beallocated to a special government account at the Bank of Uganda set up forthis purpose. The Bank of Uganda would credit the account with thedomestic counterpart funds as soon as the beneficiaries have beenidentified. The Government would allocate the counterpart funds to therecurrent or capital costs of projects in the Recovery Program (Section3.02 of the Development Credit Agreement).

Accounts, Audit and Evaluation

69. As under the First Reconstruction Credit, the accounts for theproposed project would be audited by auditors acceptable to the Associationand certified copies of the relevant financial statements would be submit-ted to the Association. (Section 4.06 of the Development Credit Agree-ment). The Bank of Uganda would maintain records adequate to record andmonitor project implementation. The MPED would monitor the use andeconomic effects of the credit proceeds. In addition, not later than sixmonths after completion of the proposed program, the Government shallprepare and furnish to the Association a completion report on the costs andbenefits resulting from the proposed project (Section 3.05 of the Develop-ment Credit Agreement).

Procurement and Disbursement

70. Procurement for transactions expected to exceed US$1 millionwould be done by International Competitive Bidding (ICB). In the FirstReconstruction Credit the ICB ceiling was US$2 million; this has beenlowered here to encourage more use of ICB. Procurement for transactionsless than US$1 million and more than US$20,000 would be accomplished on thebasis of the Central Tender Board's normal competitive bidding procedureswhich have been reviewed in detail by the Association. This review sugges-ted several procurement practices and procedures which can be improved. To

- 31 -

help implement these improvements like use of bid and performance securi-ties, more adequate notification and advertisement and improved evaluationprocedures, the Government would arrange for technical assistance satis-factory to the Association (Section 3.03 of the Development Credit Agree-ment). Procurement below US$20,000 would be accomplished by the organiza-tions which have access to the credit funds using competitive proceduressubject to review by the Uganda Advisory Board of Trade (UABT).

71. Disbursements under the proposed credit would be made for theforeign cost of eligible imports against full documentation, includinginvoices paid by the Bank of Uganda or the relevant commercial bank underexisting regulations controlling the allocation of foreign exchange. TheBank of Uganda would. be responsible for collection of the necessary docu-mentation, the preparation and submission of withdrawal applications, andmaintenance of the full accounts and documentation evidencing the finalpayments. Up to US$7.0 million of the credit would be made available tofinance retroactively items for which the Government had either providedforeign exchange financing or had made financial commitments after April 1,1982 (Schedule l(d) of the Development Credit Agreement). Eligibleinvoices would have a minimum value of US$10,000 (Schedule l(g) of theDevelopment Credit Agreement). No reimbursements would be provided againstimports for which other financing has been secured.

Benefits and Risks

72. The principal benefits expected from the proposed credit are thatcredit resources would permit the importation of essential raw materials,intermediate goods, and spare parts to finance the Government's RecoveryProgram. The proposed credit would finance approximately 12% of the totalimport requirements for 1982/83. In the case of inputs for the agricul-tural and transport sectors, the proposed credit would contribute directlyto increased exports and hence improve the prospects of sustainingrecovery. Other imports would contribute to increasing domestic output,especially of those basic goods most likely to improve producers' incen-tives. If further financing can be secured, the result could be a turn-around in Uganda's economic performance from falling GDP during 1979-81 to6-7% growth over the period 1982-85. In conjunction with the Government'sfinancial program and possible further support from the IMF, the proposedcredit would support and strengthen the process of policy and institutionalreform in Uganda and lay the groundwork for longer-term growth and develop-ment.

- 32 -

73. The principal risks facing the proposed credit are that securityconditions in Uganda could again deteriorate, that Government would beunable to implement its recovery program, and that shortfalls in financingcould further reduce import levels and delay recovery. These risks have,however, been significantly reduced by the Government's clear commitment toimproving law and order and to its financial program and by its willingnessto respond positively to the concerns of the principal donors. The BankGroup intends to assist the Government in addressing the problem of foreignexchange shortfalls in the context of the forthcoming Consultative Groupmeeting.

PART V - LEGAL INSTRUMlENTS AND AUTHORITY

74. The Development Credit Agreement between the Republic of Ugandaand the Association, and the Recommendation of the Committee provided forin Article V, Section l(d) of the Articles of Agreement are beingdistributed to the Executive Directors separately.

75. Special conditions of the project are listed in Section III ofAnnex III to this report.

76. I am satisfied that the proposed credit would comply with theArticles of Agreement of the Association.

PART VI - RECOMMENDATION

77. I recommend that the Executive Directors approve the proposedcredit.

A. W. ClausenPresident

Attachments

April 29, 1982Washington, D. C.

ANNEX IPage 1 of 5

BENrC DEVE 'PT DAT - A

GNP PER CAPITA IN 1980 a/ = US$280

CROSS NATICWL PROCU IN 1980 a/ ANNUAL RATE OF GROWIE (Z, Constant Prices)

tE$ Million % 1967-71 1971-79 1980

GNP at Market Prices 3,536 100.0 4.4 -1.7 -8.1Gross Dorestic Investnent 120 3.4 4.0 -13.0 21.9Gross National Savings -128 -3.6 3.8Cairrent Account Balance -248 -7.0Export of Goods, NFS 332 9.4 0.4 -10.6 -22.4Import of Goods, NFS 572 16.2 -0.1 -7.5 18.0

VAL[E ADIED IN 1980 (At 1966 Prices) b/ OUNT FINA1FCECentral Governmnt

LB$ Millicin % (tBh Million) (% cf GDP)1980/81 1980/81 1971/72

Agriculture 424 51.7 Current Receipts 3,096 1.0 13.5Iedustrv 46 5.6 Current Expenditure 9,996 3.1 13.5Services 350 42.7 Current Surplus -6,900 -2.1 -

Total 820 100.0 Capital Experditure 3,400 1.1 8.6

MtEi, CREDIT AND PRICES 1976 1977 1978 1979 1980 1981 d/TIJS1h MillTon Outstanding End Period)

n Supply 4,492 5,787 7,051 10,620 13,905 34,600Barnk Credit to Governrnt 4,790 5,522 7,199 9,198 14,848 29,300Barik Credit to Other Sectors 1,937 2,885 3,221 3,658 5,849 11,500

1976 1977 1978 1979 1980 1981 d/

(percentaRe or Index Numbers)

IknEy as % of GDP 17.0 10.6 10.1 9.0 5.9 8.5General Price Index (1966 = 100) c/ 601 1,133 1,546 4,894 5,474 10,058kAal percentage changes in:General Price Index 46.6 88.5 36.5 216.6 11.9 83.7Bark Credit to Public Sector 32.9. 15.3 30.4 27.8 61.4 97.3Bank Credit to Private Sector 14.3 48.9 11.6 13.6 59.9 96.6

(/ The Per Capita (P estimate is calculated by the sam conversion tecaicTue as the World Bank Atlas (adtustirE for the over-valued exclange rate but nt for ary underrecordirg of "magendo" transactions). The G(P at current prices in US dollarsis derived ly multiplying the per capita figure by popalation. The gross investment rate is assd to be the sane as inthe Ugandan shilling estimates. Given the balance of payments data fran page 2, gross national savings is derived as aresidual.

h/ Up-to-date figures on employment and productivity are unavailable.c/ Kampala lkoi-ixnae cost of living irnex. Indices prior to 1979 may be uniderstated as sane controlled prices ;-re used in

the calculation of the indices. Indices for 1980 anid 1981 are incanplete as cost-cf-living data wre not collected fromOctober 1980 to July 1981. In particular, the increase in the indlex for 1980 is grossly understated, especially for thefocd conponent.

d/ Estimates..nt applicablenot available

11)

4W D3011OMIC DEVELOPMMN DATA - 1UAMA0

~~~-AP IOFPYM2f3W'RCUnDWISE FXORXIS (Average 1978-81)>< C BALANCE OF PAYWMNI w (U LS$ Million % d/Z. c 1978 1979 1980 1981 a/

(tN$ Million) Coffee 329 95.4Cotton 9 2.5

Exports of Goods, NFS 332 412 332 24Q Tei 3 0.8Inports of Goods, NFS -458 -391 -572 -490 Tolneco 1 0.3

Rsesource Gap (deficit -) -126 21 -240 -250 Other Exports 3 1.0Factor Services and Transfers (net) b/ -12 -25 -8 - Sub-Total 345 100.0Ralance oxn Current Account -138 -4 -248 -250 Adjustments e/ -30 -8.6

Total 315 91.4Official Grants 9 24 85 110Public M&LT LDans (net) 38 104 84 10 EXRWRN DE BIT, DECEIIER 31, 1980

Disbursements (66) (145) (131) (120) US$ MillionAmortization (-28) (-41). (-47) (-110)

Use of Fund Credit (net) -2 -4 26 125Other Itenms n.e.i. (net) 50 -182 -123 96 Public Debt, inc-d. CXxaranteod 612 f/Overall Balance of Payments -43 -62 -176 91 No-Guaranteed Private D)ebt

Total Outstandinr and Disbursed 612Net Reserves (enid year) 72 17 -24 -24 NET DlEBT SERVICE RATIO FOR 1980Payment Arrears (end year) 94 100 235 144 X

Petroleun Iports c/ 43 63 124 114 Public Debt, inel. Guaranteed 17.7Petroleun Exports c/ - - - - Non-Cuaranteed Private Debt

Total Outstarding and Disbursed 17.7

RATE OF EXCHANC IHID/IDA ILNDSI (Dec. 31, 1981) (LE$ Milloio)IHID f/ IDA

Annual Avcrages End Perlod1979 1980 Jan.-Sept.1981 Oct.1981 Outstanding and Disbursed 25 58

US$1.00 - tSh 7.4686 7.4242 39.8020 78.700 Undisbursed 1 58tl11.00 tEs$ 0.1339 0.1347 0.0251 0.0127 Outstanding, incl. Undislbursed 26 116

aT Estimates.b/ Exclixdes official grants.c/ Uganda imports all petroleum in the form of prodeucts and has no petrolein exports.d/ % of tuaCdjusted merclhandise exports.e/ Includes errors and anissions, and adjustments for valuation, coverage and timing.f/ Includes Uganda's notional share (15%) of EAC loans.

Debt service payments (amortization and interest) as a percentage of exports of goods and NFS.not available. Mardi 31, 1982

- 35 - ANNEX IPage 3 of 5

TABLE 3A

UGANDA - SOCIAL INDICATORS DATA SHEET

UGANDA REFERENCE GROUPS (WEIGHTED AV RAGES

LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)-TOTAL 236.0 MOST RECENT LOW INCOME MIDDLE INCOME

AGRICULTURAL 106.1 1960 /b 1970 /b ESTIMATE /b AFRICA SOUTH OF SAhARA AFRICA SOUTH OF SAHARA

GNP PER CAPITA (US$) 140.0 210.0 290.0 /e 238.3 794.2

ENERGY CONSUMPTION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 43.2 88.5 38.7 70.05 707.5

POPULATION AND VITAL STATISTICSPOPULATION, MID-YEAR (THOUSANDS) 6806.0 9806.4 12797.0

LRBAN POPULATION (PERCENT OF TOTAL) 5.2 8.0 11.5 17.5 27.7

POPULATION PROJECTIONSPOPULATION IN YEAR 2000 (MILLIONS) 24.45

STATIONARY POPULATION (MILLIONS) 67.0YEAR STATIONARY POPULATION US REACiED 2100

POPULATION UENSITYPER SQ. KN. 28.8 41.6 54.2 27.7 55.0

PER SQ. KM. AGRIGULTIURAL LAND 7Z.0 98.0 16.9 73.7 130.7

POPULATION AGE STRUCTURE (PERCENT)0-14 YRS. 43.3 44.4 45.2 44.8 46.0

15-64 YKS. 53.6 52.6 51.7 52.4 51.265 YRS. AND ABOVE 3.1 3.0 3.1 2.9 2.8

POPULATION GROWTH RATE (PERCENT)TOTAL 2.8 3.7 3.0 2.6 2.8URBAN 7.1 7.8 7.0 6.5 5.1

CRUDE BIRTH RATE (PER THOUSAND) 44.9 44.6 44.7 46.9 46.9

CRUDE DEATH HATE (PER THOUSAND) 20.0 16.5 13.6 19.3 15.8GROSS REPRODUCTION RATE 3.0 3.0 3.0 3.1 3.2

FAMILY PLANNINGACCEPTORS, ANNUAL (THOUSANDS) .. 3.8 16.1

USERS (PERCENT OF MARRIED WOMEN) .. ..

FOOD AND NUTRITIONINDEX OF FOOD PRODUCTION

PER CAPITA (1969-71=100) 107.0 99.0 89.0 89.5 89.9

PER CAPITA SUPPLY OFCALORIES (PERCENT OF

REQUIREMENTS) 89.0 98.0 91.0 90.2 92.3PROTEINS (GRAMS PER DAY) 47.0 55.0 57.0 52.7 52.8

OF WhICH ANIMAL AND PULSE 19.0 24.0 26.0 17.8 16.1

CGILD (AGES 1-4) MORTALITY RATE 29.3 21.9 16.0 27.3 20.2

HEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 44.0 49.0 53.6 45.8 50.8INFANT MORTALITY RATE (PER

THOUSAND) 159.0 120.0

ACCESS TO SAFE WATER (PERCENT OF

POPULATION)TOTAL .. 22.0 35.0 23.9 27.4UKBAN .. 88.0 100.0 55.0 74.3

RUKAL .. 17.0 29.0 18.5 12.6

ACCESS T0 EXCRETA DISPOSAL (PERCEN'?

OF POPULATION)

TOTAL .. 76.0 94.0 26.2URBAN .. 84.0 82.0 63.5RURAL .. 76.0 95.0 20.3

POPULATION PER PHYSICIAN 14062.0/c 14666.2/c 27598.6 31911.8 13844.1

POPULATION PER NURSING PERSON 9423.8/c 2698.0/c,d4297.5 3674.9 2898.6

POPULATION PER HOSPITAL BED

TOTAL 695.4 641.2 624.0 1238.8 1028.4

URBAN 72.2 83.3 .. 272.8 423.0RURAL 1610.5 1827.4 . . 1745.2 3543.2

ADMISSIONS PER HOSPITAL BED .. 154.1/d ..

HOUS INGAVERAGE SIZE OF HOUSEHOLD

TOTAL .. 4.8URBAN .. ..RURAL .. ..

AVERAGE NUMBER OF PERSONS PER ROOM

TOTAL .. ..

URBAN .. ..RURAL .. ..

ALCESS TO ELECTRICITY (PERCENTOF DWELLINGS)

TOTAL .. ..

URBAN .. ..

EURAL .. ..

- 36- ANNEX IPage 4 of 5

TABLE 3AUGANDA - SOCIAL INDICATORS DATA SHEET

UGANDA REFERENCE GROUPS (WEIGHTED AVERAGES- MOST RECENT ESTIMATE)-

MOST RECENT LOW INCOME MIDDLE INCOME1960 lb 1970 /b ESTIMATE /b AFRICA SOUTH OF SAHARA AFRICA SOUTH OF SAHARA

EDUCATIONADJUSTED ENROLLMENT RATIOS

PRIMARY: TOTAL 49.0 39.0 50.0 56.4 73.7MALE 65.0 48.0 58.0 70.7 96.8FEMALE 32.0 31.0 41.0 50.1 79.0

SECOUDARY: TOTAL 3.0 4.0 5.0 10.0 16.2MALE 4.0 6.0 7.0 13.6 25.3FEMALE 1.0 2.0 2.0 6.6 14.8

VOCATIONAL ENROL. (1 OF SECONDARY) 12.0 7.0 5.0 8.0 5.3

PUPIL-TEACHER RATIOPRIMARY 31.0 34.0 35.0 46.5 36.2SECONDARY 18.0 20.0 26.0 25.5 23.6

ADULT LITERACY RATE (PERCENT) 34.9 .. .. 25.5

CONSUMPTIONPASSENGER CARS PER THOUSAND

POPLLATION 3.0 3.0 2.5 2.9 32.3RADIO RECEIVERS PER THOUSAND

POPULATION 13.2 23.5 20.8 32.8 69.0TV RECEIVERS PER THOUSAND

POPULATION 0.1 1.4 6.7 1.9 8.0NEWSPAPER ("DAILY GENERALINTEREST") CIRCULATION PERTHOUSAND POPULATION 8.0 8.5 3.0 2.8 20.2CINEMA ANNUAL ATTENDANCE PER CAPITA 0.3 .. 0.1 1.2 0.7

LABOR FORCETOTAL LABOR FORCE (THOUSANDS) 3040.2 4207.7 5240.4

FEMALE (PERCENT) 35.1 34.6 34.1 34.1 36.7AGRICULTURE (PERCENT) 89.4 85.9 83.3 80.0 56.6INDUSTRY (PERCENT) 3.6 4.6 5.8 8.6 17.5

PARTICIPATION RATE (PERCENT)TOTAL 44.7 42.9 41.0 41.7 37.2MALE 58.8 56.8 54.5 54.3 47.1FEMALE 31.0 29.3 27.6 29.2 27.5

ECONOMIC DEPENDENCY RATIO 1.0 1.1 1.2 1.2 1.3

INCOME DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY

HIGHEST 5 PERCENT OF HOUSEHOLDS .. 20.0HIGHEST 20 PERCENT OF HOUSEHOLDS .. 46.6LOWEST 20 PERCENT OF HOUSEHOLDS .. 6.2LOWEST 40 PERCENT OF HOUSEHOLDS .. 16.6

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. .. 136.0 381.2

RURAL .. .. .. 84.5 156.2

ESTIMATED RELATIVE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. .. .. 99.1 334.3

RURAL .. .. 87.0 61.2 137.6

ESTIMATED POPULATION BELOW ABSOLUTEPOVERTY INCOME LEVEL (PERCENT)

URBAN .. .. .. 39.7

RURAL .. .. .. 68.8

Not availableNot applicable.

NOTES

/a The group averages for each indicator are population-weighted arithmetic means. Coverage of countriesamong the indicators depends on availability of data and is not uniform.

lb Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971; and for Most Recent Estimate, between 1976 and 1979.

/c Registered, not all practicing in the country; /d Government establishments only.

/e This estimate is for 1979. The 1980 estimate, reported in thelatest World Bank Atlas, is US$280 per capita.

May, 1981

-37 - N'NEX TPage 5 of 5

DEFINITIONS OF SOCIAL I fICh:OAS

Naotes Although toe data are doon fro .. o...tes generally lodged the.e -atuthetnim an reiale it should also be noed thot they say t.t ha Otter-

taett-sll _tpatble he-.a.e of the lack of -tadaedlaed defitinlens at oeetsoed.by.diferen roantets_2e clle.tog rho data The d.ah one, on--

thettan,.s -fl nodesc-ba o-ons t gtf d iodinane treds, and obaro.tenlec -etten.i ofeeoe

Tleefategyaeflteaoooo gn afsthes-bjeonto-neryas.dT atnr ':o'e:,aseha ho-goeeoneateotco--e tta-tttcoootcytto

nftesbetttnyfcenforCptl tys901Tyenn -,ropaee"irddIe -naneSoeth1 frta ao hddle h-set inoboset. beca.se ofa

aocto-oononalaffnltseaf In the refe-ene_ Edoor denta the an.cage at_io t o slhedattenlonan fa aho lodlanon and thonony ne

aaloeotyootheoooterteaoosgeooyba.s ..a.a ..e...e ...oha..r .ioen gnores. .to.ooo.o. asneettoaosoyor ohaoltuyrdtand Is no oolfoea,oaoe toonoen heeeecleed n eclat ig acenogs of oneindtoatonto anothr. Thesesoentlee-re only aeeodl I

LaOS h_.abeI t.dIIOt. IIe d-A, f-toonshhnf jj.loto;nhsoo e-co ot,oota -. ;,ctttl

hAND clurl hAsneo agloloalocasaeeyraly_yranolyaolahletnphde tcoc- yrooo ecnaaodycatadc-taad

foe mTe , astae , oeketand Itchen -gare d cr00 "Ie fa-ol199daa hatnado ceters. bohal ar e.. ht... or Iea-.oortl staffd

E ~ &, it.11-1 .. a I--- -,"atil .1 PI,-,Ihyyat. leca one nytld . sl hli hehseacu pi-ncfalyoSt

10ff0. 090flh -Of eretosen -dattretmretfie,cl ki-a- rant are r11n ioc.loded. fua 0091 tabls~.-benr, -nlode helt

ralaed y aae nenssftrmetod a keli ank Atlas I tl kT-f hpsise. 1960. anacta otr o enrnl nfe n. hsta hnh

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Life sE tf-a-leetsdiaheoueta.) -pe-trinsi r moeeard ssstsTefn1sntenmr-scsr,d .. i-eI-ta f -a~

- 38 - ANNEX II

Page 1 of 5

STATUS OF BANK GROUP OPERATIONS IN UGANDA

A. STATEMENT OF BANK LOANS AND IDA CREDITS IN UGANDAAS OF MARCH 31, 1982

(US$ million)Amount less cancellation

No. Year Borrower Purpose Bank IDA Undisbursed

One loan and six credits fully disbursed 8.40 40.731

258-UG 1971 Uganda Second Education 7.30 .25

983-UG 1980 Uganda First ReconstructionProgram 72.502 52.90

1077-UG 1981 Uganda Technical Assistance 8.00 8.00

1110-UG 1981 Uganda Water SupplyEngineering 9.00 9.00

Total 8.40 137.53 70.15

of which has been repaid 8.40 4.96

Total now outstanding .00 132.57

Amount sold: 8.32of which has been repaid 8.32

Total now held by Bank and IDA3 .00 132.57

Total undisbursed .00 70.15 70.15

B. STATEMENT OF IFC INVESTMENT AS OF MARCH 31, 1982

Nil

1Includes exchange adjustment.

2lncludes participation of US$17.5 million from the Kingdom of theNetherlands. In addition, an EEC Special Action Credit of $20.0 millionand a Canadian Grant of Can$3.0 million (approximately $2.6 millionequivalent) has been made available toward the reconstruction program.

3Net of exchange adjustments.

- 39 -

ANNEX IIPage 2 of 5

C. SUMMARY STATEMENT OF BANK LOANS FOR COMMON SERVICES INVOLVINGKENYA, TANZANIA AND UGANDA AS OF MARCH 31, 1982

(US$ million)Amount (less cancellation)

No. Year Borrower Purpose Bank4 Undisbursed

Six loans fully disbursed 135.80

638-EA 1969 EAHC Second Harbours 35.00 0.52

865-EA 1972 EAHC Third Harbours 26.50 0.35

914-EA 1973 EAPTC Third Telecommuni-cations 32.50 0.28

1204-EA 1976 EADB Second DevelopmentFinance 15.00 3.11

Total 244.80 4.26

of which has been repaid 71.04

Total now outstanding 173.76

Amount sold 24.36of which has been repaid 24.36 0.00

Total now held by Bank 173.76

Total undisbursed 4.26 4.26

4Net of exchange adjustments.

- 40 -

ANNEX IIPage 3 of 5

UGANDA

D. STATUS OF PROJECTS IN EXECUTION AS OF MARCH 31, 1982

There are currently four projects under execution:

EDUCATION SECTOR

Credit No. 258-UG - Second Educat-ion Project: US$7.3 millionCredit of June 23, 1971; Effective Date: October 26, 1971;Closing Date: December 31, 1981

Delays in project implementation persisted due to, inter alia,transportation difficulties and shortages of local construction materials.Overall completion is about 80%. Since the remaining balance under thecredit is expected to be disbursed shortly, the project's closing date hasnot been postponed. Tork financed under the First Reconstruction Credit(US$2.5 million), involving replacement of looted or destroyed materialsand equipment are expected to complement the project. When completed andfacilities provided under the project are in full operation, theeducational objectives of the project are expected to be realized.

RECONSTRUCTION PROGRAM

Credit No. 983-UG - Reconstruction Credit I: US$72.5 millionCredit of April 2, 1980; Effective Date: May 1, 1980;Closing Date: June 30, 1982

Along with the IDA credit, which includes US$17.5 millionparticipation from the Government of the Netherlands, a US$20.0 million EECSpecial Action Credit, a Canadian Grant of Can$3.0 million and a grant ofUS$5.0 million from the OPEC Fund have been made available to theGovernment in support of its reconstruction program. The IDA credit was tobe released in two tranches. Changes in the Government and delays incarrying out agreed financial and economic policy reforms caused delays inthe use of the credit. The closing date was therefore postponed by 18months to June 30, 1982 to allow for full disbursement of the proceeds ofthe credits and the grants. In June 1981, after the Government adoptedpolicy measures the Association required, it was agreed that the totalamount of the credit would be released. In the meantime about US$37.0million have been disbursed and about anadditional US$47.0 millioncommitted. It is expected that disbursements will speed up in the nextmonths.

- 41 -

ANNEX IIPage 4 of 5

Credit No. 1077-UG - Technical Assistance Project: US$8.0million Credit of January 21, 1981; Effective Date: March 26,1981; Closing Date: December 31, 1985

Some progress has been achieved in implementing this line ofcredit; the first subprojects have been approved and disbursements havecommenced. 11owever, implementation is still slow due to continuedtechnical and administrative problems within MPED.

Credit No. llOL-UG - Water Supply Engineering Project: US$9.0million Credit of May 7, 1981; Effective Date: October 5, 1981;Closing Date: January 31, 1985

Draft feasibility studies on expansion of water supply andsanitation activities have been completed for four towns; the remainder areexpected to be ready in mid-April 1982. The contract for employment ofmanagement consultants to prepare the manpower and training study wassigned in November 1981 and completion of the report is expected in May1982. New tenders for the supply of vehicles will be invited because thevalidity of all old bids had expired; the Bank is reviewing the amendeddraft tender documents. The tender for water meters was advertisedinternationally and bidding documents have been supplied to bidders. TheProject Coordination Unit (PCU) has been established and is adequatelystaffed.

E. EAST AFRICAN COMMUNITY PROJECTS INVOLVING UGANDA

In addition to the projects described above, Uganda also benefitsfrom lending to the East African Community. Following the disintegrationof the East African Community, the allocation among the Partner States 1of undisbursed balance of loans to the East African Community Corporationsat October 1, 1977 was approved by the Executive Directors on January 12,1978 on the basis of recommendations made in a report dated December 29,1977 (R77-312). Agreements in line with those recommendations weresubsequently signed by each of the Partner States on January 25, 1978. Aportion of the undisbursed balances under two loans (Loan 674-EA - EastAfrican Railways Corporation (now fully disbursed), and Loan 914-EA - EastAfrican Posts and Telecommunications Corporation) was allocated to Uganda.Industrial projects in Uganda are also eligible for financing under theongoing East African Development Bank Project (Loan 1204-EA). Progress onimplementation of these projects is summarized below. Although the closingdate for Loan 914-EA has expired, since the amount allocated to andguaranteed by each Partner State is clearly defined under the terms of theagreement of January 25, 1978, disbursements continued to be made.

1 Kenya, Tanzania ancl Uganda.

- 42 -ANNEX IIPage 5 of 5

Loan No. 914-EA - Third Telecommunications Project: US$32.5million Loan of June 22, 1973; Effective Date: September 19,1973; Closing Date: December 31, 1979

The project included provision for procurement of local telephoneexchange equipment, cables and subscriber apparatus, microwave and UHF/VHFsystems and multiplex equipment, interurban cables and wires, automaticswitching and signalling equipment, telegraph, telex and data equipment,and training. All project items are substantially completed. AboutUS$32.2 million of the loan has been disbursed to date.

Loan No. 1204-EA - East African Development Bank: US$15.0million Loan of March 1, 1976; Effective Date: June 7, 1976;Closing Date: June 30, 1982

The environment within the Community has continued to have anegative impact on EADB operations. Level of operations both for appraisaland supervision has been depressed, but there has been some improvement inthe state of the portfolio. About US$11.7 million of the loan has beendisbursed to date. The closing date has been postponed a second time toJune 30, 1982 to allow for completion of the project.

- 43 - ANNEX III

UGANDA

SECOND RECONSTRUCTION CREDIT

SUPPLEMENTARY PROJECT DATA SHEET

I. Timetable of Key Events

(a) First presentation to the Association: July 1981

(b) Appraisal and post-appraisal missions: August 1981 andJanuary 1982

(c) Completion. of negotiations April 1982

(d) Planned date of effectiveness June 1982

II. Special Bank Implementation Action

None.

III. Special Conditions

As conditions for disbursing the second tranche of the proposedcredit, the Govrernment would:

(a) Establish a unit to analyze domestic and international costs,prices and supply trends of the major agricultural exportcrops and for recommending agricultural producer prices andconsult the Association on its terms of reference and staffing(paragraph 53);

(b) Prepare and consult the Association on a program to strengthenthe Ministry of Finance and MPED including steps to obtainpriority technical assistance (paragraph 56);

(c) Prepare and consult the Association on a program to strengthenits externald debt monitoring and management (paragraph 62);

The Government. would also:

(a) Periodically exchange views with the Association on theoperation of its foreign exchange budgets and on future budgetguidelines during the Recovery Program (paragraph 57);

(b) Consult the Association on the terms of reference and timetablefor the production of statements of affairs, auits and financialanalysis for selected parastatal organizations (paragraph 60);

(c) Adopt cr:Lteria for the allocation of credit proceeds (paragraph63);

(d) Allocate counterpart funds to the recurrent or capital costs ofprojects in the investmnent program (paragraph 67);

(e) Arrange technical assistance for the CTB (paragraph 70).

44 - ANNFX IV

WITHDRAWAL OF THE PROCEEDS OF THE CREDITSCHEDULE 1 OF THE DEVELOPMENT CREDIT AGREEMENT

All goods (including contract services) imported into the

Republic of Uganda may be financed out of the proceeds of the credit,except that no withdrawals shall be made in respect of:

(a) expenditures for goods to be supplied under a contractwhich a national or international financing institution(including the Association) or any other agency shall have

financed or agreed to finance;

(b) expenditures for goods intended for a military or

para-military purpose or for luxury consumption; and

(c) without limitation to the foregoing paragraph (b),expenditures for items in the following groups or subgroupsof the United Nations Standard International TradeClassification, Revision 2.

Group Subgroup

112 - Alcoholic beverages

121 - Tobacco, unmanufactured, tobacco refuse

122 - Tobacco, manufactured

667 - Pearls, precious and semi-precious stones,unworked or worked

688 - Uranium depleted in U235 and thorium, and theiralloys, unwrought or wrought, and articlestherefore, n.e.s.; waste and scrap of uraniumdepleted in U235 and of thorium

718.7 Nuclear reactors, and parts thereof, n.e.s.

897.3 Jewelry of gold, silver or binum group metals(except watches and watch cases) and goldsmiths'or silversmiths' wares (including set gems)

917.0 Gold, non-monetary (excluding gold ores andconcentrates).

- 45 - Annex VPage 1 of 6

Memorandum of Understanding on theIDA Second Reconstruction Credit

1. The new Uganda Government inherited an economy in ruins. The

economy has been in almost continual decline since 1971. The decade up tomid-1981 has seen falling production of export crops, a fall in imports toabout one-third of their former level, a virtual stop in investment, a

steady decline in government revenue in relation to GDP, the concentrationof government expenditure on unproductive sectors, burgeoning budgetdeficits, hyperinflation and rampant parallel market activities. In June1981, however, the Government of Uganda embarked on a comprehensivefinancial programme to stabilize and rehabilitate the declining economy.Under this programme, which has been supported by an IMF stand-by credit

and by the release of the balance of the first IDA Reconstruction Credit,the Government has: (a) allowed the Uganda shilling to float, resulting in

a depreciation of the IJganda shilling against the US$ from 7.8 to 85 shill-ings per US$ (represent:ing a devaluation of over 90%); (b) dramaticallyraised official producer prices for export crops while removing other

administered price controls except for petroleum products and publicutility tariffs; (c) reformed the taxation system; and (d) placed ceilingson government borrowing and domestic credit expansion while increasinginterest rates.

2. Since introducing that programme, the Government has, moreover,

taken further actions, in consultation with the IMF. The exchange rate ofthe Uganda shilling has been further adjusted; electricity, water, postsand telecommunications charges were raised in January 1982, and a number ofchanges have been introduced to improve procedures and implementation ofthese policies. In particular, efforts have been made to improve theadministration of foreign exchange and government budgetary procedures.The measures have started to yield some results. Coffee deliveries to pro-

cessors have increased significantly, the supply of goods has improved andprices have stabilized for the time being.

3. Government recognizes that the establishment of law and order isa prerequisite for effective economic recovery and has accordingly madethis its first prioril:y. Government has moreover, stated that it willencourage a mixed economy in which the state, the private sector and thecooperatives will compete in a free market economy.

4. The Government recognizes, however, that it will have to takefurther steps beyond the 1981/82 financial programme to sustain economicrecovery. Four areas of action have been identified as requiring priorityattention:

(a) the identification of investment and expenditure priorities,which the Government has now completed in the form of theRecovery Programme, and the allocation of resources,especially foreign exchange, in accordance with thesepriorities;

- 46 - Annex V

Page 2 of 6

(b) improving the incentive to produce and market export crops,with the objective of increasing foreign exchange earningsas rapidly as possible;

(c) improving the implementation capacity of modern sectorenterprises, most of which are parastatal organizations, byresolving outstanding issues regarding their ownership,organization and financing; and

(d) improving external debt management.

The remainder of this memorandum sets out present Government policy inthese areas, describes the actions to be undertaken to clarify and imple-ment these policies and presents an indicative timetable for these actions.

The Recovery Programme

5. The Government has completed an investment programme, withCommonwealth Secretariat assistance. This is a comprehensive two-yearprogramme, covering the fiscal years 1982/83 and 1983/84, comprisingpriority rehabilitation investment and recurrent foreign exchange needs,focussed on those sectors and projects most likely to raise production andimprove the foreign exchange position rapidly. The costs of the projectsin the programme will not exceed US$557 million over those two years, ofwhich about US$390 million would be foreign exchange. The cost of therecurrent imports during the same period is estimated at US$800 million.These requirements have been based on:

(a) projections of export volumes and prices;

(b) a cautious view of the capacity of the Uganda economy togrow and absorb imports productively; and

(c) expectations of a steady increase in the volume of externalassistance.

The Government believes the size and scope of the programme thus determinedis appropriate, but accepts that unexpected changes in these parameters mayrequire changes in the programme. Monitoring the programme and adjustingit will be the task of the Ministry of Planning and Economic Development,which will carry this out on a six-monthly basis. The first such reviewwill be carried out by December 31, 1982. The Government expects to usethe programme in the following ways:

- 47 - Annex VPage 3 of 6

(a) As a comprehensive framework for resource allocation,especially foreign exchange. It expects to use it as areference point for the coordination of external assistanceto Uganda, starting with the May 1982 Consultative GroupmeetirLg. Specifically, the Government would, to the extentpossible, encourage external donors to direct their supportto the programme, and only accept support outside theprogramme to the extent that present and future claims ondomestic resources (budgetary, credit, scarce manpower) wereminimal.

(b) As an input into the 1982/83 and 1983/84 budgets. Thedevelopment budget would be limited to projects included inthe investment programme. Its recurrent budget would makeadequate provision for the programme's recurrent needs. TheGovernment further expects that, in order to keep the budgetdeficit and domestic bank borrowing within acceptable limitsand, in particular within the limits likely to be acceptableto a higher tranche IMF programme, this could entailadditional measures, and will entail stricter expenditurecontrol, especially in non-commodity producing areas.

(c) As the basis for a foreign exchange budget for 1982/83 andguidelines for a 1983/84 foreign exchange budget. Thiswould go beyond the Government's present system of quarterlyforeign exchange budgeting, which is confined to 'free'foreLgn exchange only, and would in particular provide forforeign exchange earnings from exports to be allocated on anincreasing extent to the needs of the productive sectors.In this context, the Government proposes to subject its ownimports and invisible payments, as well as foreign exchangereceipts, to increasingly strong scrutiny, in an effort toconserve foreign exchange. The Government will continue toutilize existing technical assistance from the IMF in thepreparation of this foreign exchange budget. The foreignexchange budget would be administered, as at present, by theBank of Uganda, using the existing machinery. To make thiseffective, the monitoring of aid receipts and projects bythe Ministry of Finance would be strengthened. Quarterlymonitoring of the budget would, as at present, beundertaken, with all deviations from planned allocations

- 48 - Annex V

Page 4 of 6

fully explained. The foreign exchange budget committee ofthe Board of the Bank of Uganda has already coopted theChairman of the Uganda Advisory Board of Trade, the Chairmanof the Coffee Marketing Board, the Secretary, Central TenderBoard and a representative of the Ministry of Planning andEconomic Development.

Foreign Exchange Allocation Criteria

6. In deciding the allocation of foreign exchange under the IDASecond Reconstruction Credit, the Government will apply the followingcriteria:

(a) That the imports concerned would maximize net foreignexchange or savings in the near future;

(b) For imports that would contribute to domestic consumption(principally industrial products), priority would be givento basic consumer and incentive goods, building materialsand agricultural inputs, but only if a clear foreignexchange saving can be demonstrated;

(c) Imports for infrastructural purposes, particularlytransport, would go to relief of critical bottlenecks whichprevent earning or saving foreign exchange at minimum cost;and

(d) That the agency undertaking the expenditure is financiallyviable and managerially sound.

In addition, the Government would provide for the future recurrent foreignexchange needs of projects supported by the Second Reconstruction Credit inthe foreign exchange budget. To the extent possible, the Government willendeavor to apply these criteria to the allocation of all available foreignexchange, not only the Second IDA Reconstruction Credit proceeds.

Pricing and Marketing of Export Crops

7. The Government recognizes that improvements in the pricing andmarketing of export crops (principally coffee, tea, cotton, and tobacco)are critical to increasing the volume of exports. In the short term, itwill review export crop producer prices, especially for tea and tobacco, in

- 44 -Annex VPage 5 of 6

the context of the financial programme and budget for the 1982/83 fiscalyear. The longer-term aims of the Government's agricultural and pricingpolicies can be summarized as follows:

(a) Export crop producers should receive larger shares of exportprices. Price interventions and distortions should bereduced to a minimum; subject, most notably in the case ofcoffee, lo Government revenue and equity considerations. Astudy in this regard will be carried out during the programperiod.

(b) Competition among buyers and sellers for the export cropswill be further encouraged so as to reduce marketing andprocessing margins. The Government will therefore study ona crop-by-crop basis the removal of statutory monopolies,the alternative ways of organizing and regulating exportcrop marketing and related needs in market information andinfrastructure.

For the longer term, the capacity of the three sector ministries (Agricul-ture, Cooperatives and Animal Industry) to collect and analyze informationon production costs and. relative crop prices to develop plans will bestrengthened, if necessary by technical assistance.

The Parastatal Organizations

8. By the end of June 1982, the Government expects to have submittedlegislation to Parliament that will permit former owners of enterprisestaken over under the previous military government to reclaim their businessor claim compensation. In addition, the Government expects to close downor sell off a number of existing parastatal organizations. It expects toreorganize some of those remaining in the public sector and to restructurethem financially by increasing their tariffs, revaluing their assets andinjecting new capital as appropriate. As a first step, the Government withBank Group assistance, is carrying out a preliminary examination of 11 keyparastatal organizations to determine the nature and extent of assistancerequired to update their accounts as a basis for these decisions. Thispreliminary examination should be completed by April 30, 1982. The secondstep will be the appointment of a contractor to produce statements ofaffairs, audits and financial analysis, as appropriate for these and even-tually all the remaining parastatals, according to a timetable to beagreed.

-50 - Annex V

Page 6 of 6

9. Proposals have already been made to reorganize the UgandaDevelopment Corporation, the principal parastatal holding company, and itssubsidiaries. The Government expects to decide on this reorganization byDecember 31, 1982. Finally, the Government wishes to strengthen its owncapacity to coordinate parastatal operations and policies, monitor theirbudgetary and financial impact and ensure consistency and feasibility oftheir objectives. Responsibility for these functions is located in theEconomic Affairs Department of the Ministry of Finance. Government willdefine and seek assistance in this area as part of its programme to obtaintechnical assistance for the Ministry of Finance.

External Debt Management

10. The Government recognizes that better monitoring and managementof its external debt is a vital part of its overall economic management,and has already taken steps to effect such improvement. It has: (a)employed a reputable merchant bank to verify its external debt and toadvise on the strengthening of its external debt management; (b) arrangedtechnical assistance from the IMF to improve the monitoring and repaymentof existing obligations, especially in relation to the foreign exchangebudget; and (c) sought formal rescheduling of its external debt obliga-tions at the Paris Club in November, 1981 and with non-participants at theParis Club. Furthermore, the Government is committed to developing amechanism for ensuring that external borrowing is kept within prudentlimits.

Signed by:

For Government of Uganda Regional Vice Presidentfor IDA

Date: