Report No. 29377-UG The Republic of Uganda Country Integrated Fiduciary Assessment 2004 (In Five Volumes) Volume II: Public Expenditure Review 2004 Promoting the Efficient Use of Public Resources for Poverty Eradication June 15, 2004 Poverty Reduction and Economic Management 2 Country Department of Uganda Africa Region Document of the World Bank TABLE OF CONTENTS ACKNOWLEDGEMENTS .................................................................................................. IV INTRODUCTION .................................................................................................................. V 1. OVERVIEW OF UGANDA'S MACROECONOMIC AND FISCAL CHALLENGES ....................................................................................................................... 1 A .OVERVIEWOF ECONOMIC PERFORMANCE ................................................................... 1 B. LOOKING TO THE FUTURE: MACROECONOMIC STABILITY AND FISCAL CONSOLIDATION .............................................................................................................. 8 C. OTHER DEVELOPMENT AND POVERTY REDUCTION CHALLENGES .......-12 D. MEDIUM-TERM CHALLENGES AND THE WAY FORWARD .......................... 13 2. UGANDA'S BUDGET PREPARATION PROCESS AND MTEF, 2004/2005 TO 2006/07 .................................................................................................................................... 16 A . INTRODUCTION...................................................................................................... 16 B. ASSESSMENT OF THE 2004/05 BUDGET PROCESS: EMERGING ISSUES OVER PEAP REVISION.................................................................................................... 18 C. MEDIUM-TERM RESOURCE ENVELOPE AND BUDGETARY ALLOCATION 21 D. NATIONAL BUDGET CHALLENGES ................................................................... 25 3 . BUDGET EXECUTION AND MONITORING, FISCAL 2003/04 ............. 27 A. BACKGROUND ........................................................................................................ 27 B. REVIEW OF BUDGET PERFORMANCE............................................................... 27 C. EXPENDITURE PERFORMANCE .......................................................................... 29 D. BUDGET MONITORING AND REPORTING ........................................................ 39 F . CONCLUSION .......................................................................................................... 41 4 . EFFICIENCY OF PUBLIC EXPENDITURES ......................................................... 43 A . OVERVIEW ............................................................................................................... 43 B. BACKGROUND ........................................................................................................ 43 C. SERVICE DELIVERY............................................................................................... 44 D. EDUCATION SECTOR............................................................................................. 44 E. EFFICIENCY OF PUBLIC EXPENDITURES IN THE HEALTH SECTOR .......... 48 F. WATER SECTOR...................................................................................................... 51 G. EXPENDITURE REVIEW FOR THE JUSTICE. LAW. AND ORDER SECTOR.. 52 H. CONCLUSIONS........................................................................................................ 55 5 . CONCLUSION ............................................................................................................. 57 A . BACKGROUND ........................................................................................................ 57 B. ECONOMIC MANAGEMENT CHALLENGES ...................................................... 57 C. BUDGET PREPARATION PROCESS ..................................................................... 58 D . BUDGET EXECUTION ............................................................................................ 58 E. EFFICIENT USE OF PUBLIC FINANCES .............................................................. 59 REFERENCES ...................................................................................................................... 61 ANNEXES .............................................................................................................................. 64 ANNEX 1. MTEF 2004105-2006107 .................................................................................... 64 ANNEX 2 . EVOLUTION OF THE 2004/05 BUDGET ................................................................ 68 ANNEX 3 . PUBLIC EXPENDITURE MANAGEMENT AAP INDICATORS IN UGANDA ........................................................................................................................... 72 ANNEX 4 . PER DONOR STATEMENTS ................................................................................. 73 Figure 1. Real GDP Growth (Market Prices). 1999/00-2003/04 ........................................................ 2 Figure 2. Annual Headline and Underlying Inflation Rates (monthly data since July 2002) ............ 2 Figure 3 . Bank o f Uganda Sterilization Operations (monthly data since July 2002) ......................... 5 Figure 4 . Ugandan Shilling:US$ and Real Effective Exchange Rates (monthly data since July 2002) .............................................................................................................................................. 6 Figure 5 . Export and Tourism Performance (US$ millions 1999-2003) ............................................ 7 Figure 6 . Trends in Treasury Bill Rates since July 2002 ..................................................................... 7 Figure 7. Changes in Budget Allocation by Sector for 2004/05 (including projects)...................... 24 Figure 8 . Provision for Pension Payments .......................................................................................... 34 Figure 9 . Stock o f Arrears: Internally Audited Accounts as at 30 June 2003 .......... ...................... 39 Figure 10. Discrepancy between Budget Allocation and Actual Expenditures................................ 40 Figure 11. Allocation o f Education Budget, 2003/04......................................................................... 47 Figure 12. Allocation o f Health Expenditures, 2002/03 .................................................................... 49 Figure 13. Functional Distribution o f JLOS 2003/04 Budget............................................................ 53 Figure 14. InstitutionalDistributiono f JLOS Budget 2003/04 ......................................................... 54 LIST OF TABLES Table 1. Summary Medium-TermBudget Framework. 2000/0 1-2003/04 ........................................ 4 Table 2. Key LTEF Indicators ............................................................................................................... 8 Table 3. Summary Medium-Term Budget Framework, 2003/04-2006/07 ...................................... 11 Table 4 . Barriers to Investment (% o f respondents giving a negative ranking) ............................... 12. Table 5 . Total Budgetary Allocations, IncludingDonor Projects (USh billions) ............................ 22 Table 6 . Medium-Term Sectoral Shares o f Total Budget Expenditure (percentage)....................... 23 Table 7 . Resource Envelope and Performance, 2003/04 ................................................................... 28 Table 8 . Tax Revenue Performance, 2003/04 (USh billions) ............................................................ 29 Table 9 . Expenditure Performance, 2003/04 ...................................................................................... 30 Table 10. Poverty Action Fund Performance, 2003/04...................................................................... 31 Table 11. Performance of Sectoral Release during 2003/04.............................................................. 32 Table 12. Parliamentary Representation per Capita: Comparison with the United States, India, and Kenya ........................................................................................................................................... 33 Table 13. Number of Days Involved in Transfers from the Consolidated Fund to Spending Agencies....................................................................................................................................... 37 ... 111 ACKNOWLEDGEMENTS The authors would like to express their sincere gratitude for the assistance of, and courtesies extended by all individuals who contributed to and participated in the preparation o f this year’s Public Expenditure Review. Special thanks go to the PER working group, which tirelessly examined the emerging budget challenges during the course o f the year and provided the basis for this year’s PER report. We are grateful to officials o f the Ministry o f Finance, Planning, and Economic Development, especially from the Directorate o f Budget and Macro Unit, for their leadership and guidance during the budget process. We also would like to acknowledge the support o f the Ministry o f Education and Sports, the Ministry o f Health, the Ministry o f Justice and Constitutional Affairs, and the Directorate o f Water Development; we would like to thank these line ministries and other stakeholders in government and civil society who participated in the annual PER workshop and who provided data and answered numerous questions in relation to the report. Special thanks go to Jonathan Beynon o f the DFID, Warner-ten Kate o f the Netherlands Embassy, Lawrence Bategeka o f the Economic Policy Research Centre, and Paul Mpuga and Sudharshan Canagarajah o f the World Bank who contributed to the writing o f this report. We have benefited from comments and suggestions from Florence Kuteesa (Director, Budget), Ishmael Magona (Commissioner, Budget Policy), Laban Mbulamuko and Gregg Smith (Economists), Damon Kitabire (Macroeconomic Adviser), Fiona Davies (Macroeconomist), John Rudman (Budget Adviser), Maris Wanyera (Fiscal Economist), the Hon. James Mwandha (Chairman, Budget Committee o f the Parliament o f Uganda), and Peter Allum (IMF Resident Representative). We would also like to thank the World Bank Uganda Country Team members and other development partners for their inputs during the budget discussions. We also would like to thank Allister Moon, Nicola Smithers, Tim Williams (DFID), and Peter Magnusson (SIDA), who acted as peer reviewers for this year’s PER and provided comments and suggestions on an earlier draft. We are thankful to the overall guidance provided by Kathie Krumm (Sector Manager) and Grace Yabrudy (Country Manager). Finally we are grateful to Joan Williamson for her editorial support and to Sarah Babirye and Arlette Sourou for their assistance in formatting this report. iv INTRODUCTION This Public Expenditure Review (PER) i s part o f a comprehensive Country Integrated Fiduciary Assessment (CIFA) for Uganda. The CIFA draws together the findings o f the annual PER, Country Financial and Accountability Assessment (CFAA), and Country Procurement Assessment Report (CPAR), and reflects the challenges facing Uganda as reported in the action plan. This year’s PER was a collaborative work involving donors from the PER working group: the United Kingdom’s Department for International Development (DFID) and the governments o f the Netherlands and Sweden in particular made important contributions, and have written different parts o f the review. We hope to build on this initiative by seeking more collaborative and more in-depth participation in future PER work. The 2004 PER addresses the budget process challenges that Uganda faced during the fiscal year July 2003 to June 2004. It highlights the progress made and identifies challenges for the future in the areas o f macroeconomic and fiscal policy, budget preparation, budget execution, and budget efficiency. The 2004 review builds on the two preceding PERs, focusing mainly on developments that occurred during the fiscal year and on issues of efficiency in the use o f public finances. Chapter 1 reviews the economic reforms pursued over the year and their implications for the fiscal program. It also highlights the major challenges that must be overcome to achieve economic growth and poverty reduction, reviewing progress made in the implementation o f the Poverty Eradication Action Plan (PEAP) and toward achievement o f the Millennium Development Goals (MDGs). Chapter 2 discusses the budget process, examining in particular the preparation o f the 2004/05 budget; examines the role o f the sector working groups, civil society, parliament and donors; and draws lessons for the future. Chapter 3 provides primarily an analysis o f the 2003/04 budget implementation. A study was undertaken to examine the problems that are caused by the irregular release o f budgeted funds by the Treasury to line ministries and local governments; the findings o f this study are summarised in Chapter 3, with suggestions on how to improve budget release performance so that service delivery objectives and PEAP targets can be met. Chapter 4 addresses budget efficiency issues. The 2004 PER m e s s e s the ways in which the value-for-money tracking studies and benefit incidence analyses o f recent years have been used to reform and prioritize sector programs to achieve greater efficiency. The chapter reviews four sectors: health; education; water and sanitation; and justice, law, and order. It also presents findings from a 2004 study that investigated the benefit incidence o f public expenditure in the health, education, and water sectors. V 1. OVERVIEW OF UGANDA’S MACROECONOMIC AND FISCAL CHALLENGES 1.1. The Government o f Uganda (GoU) currently i s finalizing i t s third Poverty Eradication Action Plan (PEAP). I t s strategy for poverty reduction i s based on the transformation o f the economy through private investment, industrialization, and export-led growth. The PEAP identifies four core challenges: restoring security, restoring sustainable growth, advancing human development, and using public resources more transparently and efficiently. It has five pillars: economic management 0 production, competitiveness, and incomes 0 security, conflict resolution, and disaster management 0 governance 0 human development 1.2. The economic policy framework set out in the PEAP emphasizes the needs for inflation control, strong growth in private investment, a reduction o f the fiscal deficit, and greater revenue generation. This chapter reviews this economic policy framework and identifies the key macroeconomic and fiscal challenges. Section 1.1 provides an overview o f recent economic performance. Section 1.2 looks to the future, focusing on the details o f and rationale for the GoU’s fiscal strategy. Section 1.3 outlines a number o f other developmental and poverty reduction challenges that are o f relevance to the PER. Section 1.4 summarizes the major challenges and issues that must be addressed in the medium term. A. OVERVIEW OF ECONOMIC PERFORMANCE Growth 1.3. Uganda has for more than a decade enjoyed a high degree o f macroeconomic stability and strong economic performance. Real GDP growth has averaged 6.5 percent annually since 1990/91, boosted initially by economic reforms, post-conflict growth, and rising coffee prices. In the last five years growth has slowed to an average 5.7 percent per year (see Figure l), but it recovered from 5.2 percent in 2002/03 (a poor agricultural season) to an estimated 6.0 percent in 2003/04. Annual population growth o f 3.4 percent means that GDP per capita has risen only by an average 2.3 percent per year over the same period. Figure 1. Real GDP Growth (Market Prices), 1999/00-2003/04 8.00 7.00 6.00 5.00 4.00 5 a 3.00 2.00 1.oo I 1999/00 2000/01 2001/02 2002103 2003104 ’ Source: UBOSiMoFPED Inflation 1.4. Headline inflation has averaged 4.8 percent annually over the past decade. The policy o f the GoU i s to keep the underlying rate o f inflation (excluding food prices) at less than 5 percent. This target was briefly breached in mid-2003, partly as a consequence o f a depreciating exchange rate and rising fuel costs, but inflation has been falling steadily since (Figure 2). Figure 2. Annual Headline and Underlying Inflation Rates (monthly data since July 2002) Source: MoFPED (Performance o f the Economy Monthly Report) Source: UBO S/MoFPED Fiscal performance As a proportion o f GDP, govemment spending grew from 17 percent to more than 24 percent over the period 1997198-2001102. Revenues over the same period grew by less than 2 percentage points, to 12.2 percent. The budget deficit before grants consequently doubled from slightly more than 6 percent to about 12 percent o f GDP over the period. This deficit was financed primarily by Highly Indebted Poor Countries (HIPC) debt relief and substantially higher aid inflows, with minimal recourse made to domestic borrowing. -2- Concerns that the imperative to sterilize excess liquidity w i l l have an adverse effect on interest rates and the exchange rate (see below) have prompted efforts to reduce the deficit. Table 1 summarizes some o f the key fiscal aggregates since 2000101. The key points are as follows: The fiscal deficit, excluding grants, marginally increased from 11.2 percent in 2002103 to a projected 11.5 percent o f GDP in 2003104, one percentage point below the 2001102 peak. However, the 2003104 figure i s inflated by changes in the treatment o f certain loans (previously off-budget), on-lent through the Bank o f Uganda (BoU). Donor project expenditures for 2003104 also significantly exceeded estimates as unplanned activities were brought on-budget, and this also served to inflate the deficit. Preliminary estimates in April (prior to these revisions) had forecast a deficit o f 10.1 percent o f GDP. The deficit including grants, as a proportion o f GDP has fallen sharply from a peak o f 5.5 percent in 2001102 to 4.4 percent in 2002103 and a projected 1.8 percent in 2003104 (the budget figure for 2003104 i s 3.2 percent). Total expenditure has risen to 24 percent o f GDP, in line with budget expectations. (Expenditure would have underperformed had donor-funded project spending not been brought on-budget.) Domestic revenue performance improved to 12.5 percent o f GDP in 2003104, but f e l l short o f the budget target o f 12.9 percent. Grants (9.6 percent o f GDP) significantly outperformed budget projections in 2003104, primarily due to the conversion o f the third Poverty Reduction Support Credit (PRSC3) from a loan to a grant. The proportion o f aid provided as grants rose last year from 57 percent to 74 percent. Aggregate aid receipts exceeded budget projections, due in part to the application by the Ministry o f Finance, Planning, and Economic Development (MoFPED) o f more cautious discount factors to donor aid projections' and in part to disbursements that were delayed from fiscal 2001102. A i d receipts accounted for 55 percent o f actual expenditure (budget was 48 percent), but total inflows continue to fall short o f undiscounted donor projections. The proportion o f aid that was provided as budget support f e l l from 57 percent to 50 percent. Domestic financing in 2003104 i s projected to be -0.7 percent o f GDP (that is, a net savings), having been zero in 2002103. This i s a result o f the high level o f donor inflows, which more than cover the fiscal deficit. The need to reduce the deficit has been at the center o f the policy debate for the past three years and i s discussed more h l l y in the next sections. While the GoU and i t s multilateral development partners favor a smaller deficit (before grants) to assist macroeconomic management, other bilateral partners argue that a larger deficit could be accommodated that would support expansion o f the coverage for service delivery. ' Project support was discounted by 10 percent, budget support earmarked to the Poverty Action Fund by 15 percent, and general budget support by 50 percent. In 2002103, all support was discounted by 10 percent. -3 - Table 1. Summary Medium-Term Budget Framework, 2000/01-2003/04 REVENUE and GRANTS 1,867.9 1,968.1 2,251.2 2,733.4 2,927.9 2,934.6 Revenue 1,083.5 1,253.6 1,433.6 1,690 7 1,672 3 1,659 0 Grants 784.4 714.5 817.6 1,042 7 1,255 6 1,275 6 Budget support grants 365.2 363.8 456.4 537 9 838 5 810 5 Project grants 419.2 350 7 361.2 504 8 417 1 465 1 EXPENDITURE 2,264.0 2,534.7 2,769.3 3,155.8 2,977.5 3,176.3 OVERALL DEFICIT (including grants) -396.1 -566.6 -518.1 -422.4 -49.6 -241.7 OVERALL DEFICIT (excluding grants) -1,180.5 -1,281.1 -1,335.7 -1,465.1 -1,305.2 -1,517.3 FINANCING 396.1 566.6 518 1 422 4 49 6 241 7 o f which External financing (net) 372 2 491.0 522 I 320 4 180 1 338 5 Disbursement 427 7 557 0 617.5 480 3 304 4 461 0 Budget support loans I47 0 348 6 360.1 I99 9 41 4 69 8 Project loans 280.7 208.4 257 4 280 4 263 0 391 2 Amortisation -117.1 -122 7 -145.9 -181 1 -155 1 -153 3 Exceptional financing 61.6 56 7 50 5 21 2 30 8 30 8 Domestic financing (net) 23.9 75.6 -4.0 IO2 0 -130 5 -96 8 Bank financing ( - = saving) 46.1 21.4 -89.6 80 2 -2004 -1669 Nonbank financing -22.2 54.2 85.6 21 8 69 9 70 1 [Memo Item: Poverty Action Fund 414.8 589.2 646.1 I 774.9 713.9 743.3 I VENUE and GRANTS 18.6% 19.1% 18.9% 20.9% 22.7% 22.1% 10.8% 12.2% 12.1% 12.9% 130% 125% 7.8% 6.9% 6.9% 8.0% 9.7% 9 6% Budget support grants 3 6% 3.5% 3.8% 4.1% 6 5% 6.1% 4 2% 3.4% 3 .O% 3.9% 3 2% 3.5% EXPENDITURE 22.6% 24.6% 23.3% 24.1% 23.1% 24.0% OVERALL DEFICIT (including grants) -3.9% -5.5% -4.4% -3.2% -0.4% -1.8% OVERALL D E F I C I T (excluding grants) -11.8% -12.4% -11.2% -11.2% -10.1% -11.5% FINANCING 3.9% 5 5% 4.4% 3.2% 0 4% 1.8% 1 of which External financing (net) 3.7% 4 8% 4.4% 2 5% 14% 2 6% Disbursement 4.3% 5 4% 5.2% 3.7% 2 4% 3.5% Budget support loans I.5% 3 4% 3 0% 1.5% 0 3% 0.5% Project loans 2.8% 2.0% 2.2% 2 1% 2 0% 3.0% Amortization -1.2% -1.2% -1.2% .I 4% -1.2% -1.2% Exceptional financing 0.6% 0.6% 0.4% 0 2% 0.2% 0 2% Domestic financing (net) 0.2% 0.7% 0.0% 0.8% -1.0% -0.7% Bank financing (. = saving) 0.5% 0 2% -0 8% 0.6% -1.6% -1.3% Nonbank financing -0 2% 0.5% 0.7% 0.2% 0.5% 0 5% I I GDP current market prices (USh bn) 10,033 10,305 11,884 13,070 12,913 13,249 PAF as % of Discret.Exo lex. i n t & donor oroiects) 31.4% 33.8% 34.3% I 37.3% 35.3% 36.3% as % o f Exp 53.5% 50.2% 51.8% 48.3% 52.4% 54.7% 1 as % of GDP 12.1% 12.3% 12.1% 117% 12.1% 13.1% - budget support as % o f aid -grants as YOo f aid Y % o 1 42.3% 64.7% 56.0% 56.2% 56.9% 57.0% 1 i l:;: 56.4% 80.5% 50.7% 73.5% Sources: [3 1 [31 [31 ~ 3 1 PI [31 [ I ] Budget statement, lune 2003 [2] Indicative Preliminary Revenue and Expenditure Framework for fiscal 2004105-2006107, March 2004 (presented to parliament 1 April) [3] Budget Statement, June 2004 (note: included some upward revisions to 2000101-200103 figures for project aid & exp Cf source [2]) Note: Owing to a change in fiscal methodology, a11 debt and HIF'C figures (affecting external interest and amortization) exclude debts cancelled under the HIPC agreement, apart from those shown in the Approved Budget 2003l04 -4- Monetary performance and sterilization 1.6. Monetary growth has continued to slow down. The annual rate o f growth in broad money (M2) f e l l from 25.2 percent in June 2002 to 17.5 percent in June 2003 and to 12.1 percent in March 2004. Although the GoU has comfortably met i t s International Monetary Fund (1MF)-agreed quarterly ceilings for reserve money by squeezing liquidity at the end o f each reporting period, average base money growth generally has been above target. This has prompted a shift in the poverty reduction and growth facility (PRGF) performance criterion to one that focuses on the quarterly average reserve money figures rather than on end-period figures. 1.7. The rapid growth in aid-financed expenditures has necessitated that the BoU undertake significant sterilization operations (using treasury bills and the foreign exchange markets) to mop up excess liquidity. The stock o f government securities has increased fivefold in the past five years, and B o U sales o f foreign exchange have risen tenfold over the same period.’ Treasury bill (TB) sales have been particularly volatile (Figure 3), but in the last two years there also has been a significant shift away from TB sales in favor o f foreign exchange (FX) sales: in the year to end-June 2003, TB sales amounted to USh274 billion while F X sales (Ugandan shilling equivalent) for sterilization purposes amounted to USh2 13 billion. In the 11 months to May 2004, there were net TB redemptions worth UShlOO billion. Sterilization F X sales for the same period grew to USh265 billion. Figure 3. Bank of Uganda Sterilization Operations (monthly data since July 2002) I FXsales INet TB sales Source: BoU External debt 1.8. To help finance i t s deficit, Uganda has borrowed an additional U S 1 . 5 billion from multilateral donors since the HIPC completion point in 1999. In the prevailing environment o f falling global interest rates and lower export projections, this contributed to a net present value (NPV) o f debt:exports ratio of about 258 percent at end-June 2004, according to IMF estimates. (The ratio at end-June 2003 was 186 percent.) Over the 12 months to June 2004 the nominal debt stock increased by just 1 percent, to US$4.3 billion. Debt service costs as a Data on sales o f foreign exchange for sterilization and intervention purposes were only disaggregated from May 2002. Sterilization has accounted for about 75 percent o f all transactions since then (to M a y 2004). -5- percentage o f exports (10 percent at end-June 2004) and o f domestic revenues (1 1 percent) have remained virtually unchanged since June 2003; they are well below the accepted critical threshold levels o f 15-20 percent and are two to three percentage points below their levels o f three years ago. Exchange rate, exports, and reserves 1.9. The Ugandan shilling depreciated by 10 percent in the first half o f 2003, but then stabilized before appreciating sharply against the weakening US. dollar. The GoU's policy remains that the exchange rate should be market-determined, with some management to smooth short-term fluctuations. The real effective exchange rate (REER), however, has continued to depreciate, although more modestly than in 2002103 (Figure 4). Figure 4. Ugandan Shilling: US$ and Real Effective Exchange Rates (monthly data since July 2002) Exchange Rates 70 2120 2060 66 2000 f 64 1940 2 1 - - a a 62 Q 1880 u+ v) 3 60 1820 I 58 1760 5 u) I 2 56 1700 I 1 -m-REER +Shs/$ ex.rate I Sources: BoU (USh:US$)and IMF (REFR) 1-10. The significance o f coffee to the Ugandan economy has been decreasing. Coffee prices have recovered slightly from a trough in 2002, but remain 50 percent below their 1996197 peak. Coffee export revenue, however, remains static, the 24 percent price increase in the first nine months o f fiscal 2003104 was offset by a 21 percent reduction in export volume as a result o f adverse weather conditions and coffee wilt disease. Coffee now accounts for less than 15 percent o f total export revenue, compared to the mid-1990s peak o f almost 70 percent. In contrast, and despite the strength o f the Ugandan shilling, non-coffee exports have for the last five years been growing strongly. Traditional exports such as tea, cotton, and tobacco have approximately doubled in the last five years; nontraditional exports (NTEs) have) and by a further 20 percent in the first three months o f 2004. NTEs collectively are now much more important than traditional exports. Earnings from tourism also have more than doubled in the last five years. 1.11. Uganda's gross foreign exchange reserves rose by an estimated US$134 million in the year to June 2004, to U S $ l . l billion, increasing from 6.2 to 6.6 months o f import cover. This improvement in reserves was helped by higher-than-expected budget support receipts. -6- Figure 5. Export and Tourism Performance (US% millions 1999-2003) Export Earnings and Tourism Expenditures (US $m) 1999-2003 800 2400 700 ITounsm expenditures 600 OOtherNTEs 3 Lo 500 1500 2 =Gold ~ H u) ,200 2 2 ocutnowsra 400 1 a e 8 IFirhifish prods 300 900 ~ 200 600 ICoffee I 100 300 +EX rate (us$) 0 0 1959 2000 2w1 2002 2003 Year Source: UBOS Interest rates and private investment 1.12. Treasury b i l l rates have been high and volatile for much o f the last 12 months, as a consequence o f the BoU’s sterilization operations to mop up excess liquidity. N e t TB redemptions have enabled a sharp reduction in short-term rates (Figure 6). This has been supported by the recent introduction o f and high demand for the two-, three-, five-, and now 10-year government bonds, with yields at issue o f 20.8 percent (January 2004), 15.5 percent (February 2004), 12.8 percent (March 2004), and 13.5 percent (May 2004). Figure 6. Trends in Treasury Bill Rates since July 2002 I 25 0 TB interest rates 2 20.0 3 E 15.0 CI 1; $ - 100 50 ’ -91 day -182 day -273 day + 3 - 6 .4 .- day Source: MoFPED (Performance o f the Economy Monthly Report 1.13. While high interest rates remain a barrier to investment, credit to the private sector grew by a projected 16.4 percent in 2003/04. This projection follows an increase in 2002/03 o f 28.2 percent, compared to an average o f 5.8 percent in the preceding three fiscal years. Real private fixed capital formation has nearly tripled since the early 199Os, rising -7- particularly strongly (by 46 percent) in the three years to June 2004. Private investment i s forecast to be 16.5 percent o f GDP in 2003/04, up from 15.5 percent in 2002/03 and 9.1 percent in 1990/9 1. B. LOOKING TO THE FUTURE: MACROECONOMIC STABILITY AND FISCAL CONSOLIDATION 1.14. It i s against this background that the GoU has formulated i t s strategy for economic management, as set out in i t s revised PEAP. This strategy has also been informed by work on the long-term expenditure framework (LTEF, based on a modified financial programming framework) undertaken in late 2003 and early 2004. The objective o f the LTEF was to produce 10-year projections o f the budgetary resources available to the central government, consistent with a coherent, comprehensive, and realistic set o f projections for the main macroeconomic variables and with key macroeconomic targets. Table 2. Key LTEF Indicators 2002103 2013/14 Period Av. Annual inflation 5.7% 3.5% 3.9% Annual GDP growth 5.2% 6.5% 5.9% Real exchange rate depreciation 3% 2% 1.9% Private investment (% GDP) 15.5% 21.1% Domestic savings (% GDP) 7.5% 12.4% Private sector credit (% GDP) 7.2% 16.6% Exports (% GDP) 12.6% 16.2% Exports (US$ millions) 790 1750 Trade deficit (% GDP) -14.2% -14% NPV debtlexports 305% 155% Domestic revenue (% GDP) 12.1% 16.3% Fiscal deficit (% GDP) -1 1.0% -6.5% Donor aid (% GDP) 12.2% 8.5% Government expenditure (% GDP) 23.5% 22.9% 22.3% Source: MoFPED (LTEF, 2004, summary table cited in PEAP) A strategy of fiscal consolidation 1.15. At the center o f the GoU’s macroeconomic policy i s the goal o f reducing the fiscal deficit, to contain inflation and to promote private-sector-led growth. The LTEF establishes a deficit target o f 6.5 percent b y fiscal 2009/10 as being compatible with these objectives. Specifically, inflation i s forecast to average 3.5 percent from 2004/05 onward; private sector credit i s forecast to grow at 20 percent each year, with private investment reaching 21 percent o f GDP by 2013/14; the real exchange rate i s projected to depreciate by less than 2 percent each year; and exports are expected to rise from 12.6 percent to 16.2 percent o f GDP by 20 13/14 (see Table 2). Government expenditure i s capped at 23 percent o f GDP, compared to the recent norm o f 21 percent. Domestic revenues are projected to rise steadily from 12.8 percent to 16.3 percent, and aid i s projected to fall from 12.2 percent to 7.8 percent o f GDP in 2009/10, before rising again to 8.5 percent o f GDP in 2013/14. In nominal U.S. dollar terms, aid inflows are projected to remain below their 2003/04 levels until 2012/13. These targets and projections are repeated in the Poverty Eradication Action Plan (PEAP) and form the basis o f the GoU’s macroeconomic strategy for the immediate future. 1.16. Underlying this deficit reduction strategy are two major policy concerns. The first reflects the desire to secure greater efficiency and value for money from public spending. The second reflects the desire to avoid any adverse macroeconomic effects that would inhibit the private sector and leave the government vulnerable to high levels o f indebtedness and donor dependency. -8- Value-for-money concerns 1.17. The PEAP acknowledges that rapid increases in government expenditure, largely financed by higher aid inflows, have been instrumental in achieving key government development priorities, notably in the social sectors. The plan also highlights government concerns that rapid rises in the budget have diminished the need to scale back expenditure in nonpriority areas such as public administration, and that they thus have led to wastage, corruption, and poor value for money. There i s also a concern that some o f the money being channeled into key poverty-eradicating programs i s not being well spent, resulting, for example, in poorly constructed classrooms and poorly built and maintained rural feeder roads. This has prompted MoFPED to focus over the medium term on the quality rather than the quantity o f expenditure. Key objectives in this area include a strengthening o f budget prioritization and a clearer focus on attaining value for money, stronger procurement, and reduced corruption. Macroeconomic and political economy concerns 1.18. The PEAP highlights the following macroeconomic reasons as underlying the government’s fiscal reduction strategy: The high cost o f private sector borrowing. B o U sales o f treasury bills have pushed up interest rates. High domestic interest costs in the budget. Interest costs have risen from USh21 billion in 1998199 (less than 2 percent o f GoU expenditure) to a projected UShl90 billion (8 percent o f GoU expenditure) in 2003/04. An overvalued exchange rate, arising from the B o U sales o f foreign exchange for sterilization purposes. Vulnerability o f the budget to possible cuts in donor aid. Rising external debt burden. Rising domestic debt burden. The stock o f domestic debt rose from less than 1 percent in the mid-1990s to 10 percent in 2003104, 95 percent o f it having maturities o f one year or less. Political economy concerns that excessive aid dependency impinges on Uganda’s sovereignty and constrains i t s economic and budgetary choices. Fiscal targets 2004/05-2006/07 1.19. Table 3 summarizes the GoU’s key fiscal aggregates for the period 2004105-2006107, as set out in the June 2004 budget. For purposes o f comparison, the table includes provisional 2003104 outturn figures. To indicate where changes have been made, it also reports the 2004105 figures projected in the June 2003 budget statement and updated in the draft budget tabled on 1 April 2004 (see the Annexes for the full MTEF fiscal aggregates). The key points to note are that: e The fiscal deficit, excluding grants, resumes i t s downward trend, falling slightly to 11.O percent in 2004105 and then more rapidly to 9.1 percent by 2006107. Increases in the projected deficit during negotiation o f the June 2004 budget primarily reflect the -9- inclusion o f previously off-budget project expenditures, rather than any loosening o f the fiscal stancea3 0 The deficit including grants rises to 4.1 percent a s budget support grant projections are sharply reduced. This reflects the classification o f PRSC4 as a loan in 2004/05 and beyond and the effect o f the discount factors on all donor assistance. The deficit including grants i s projected to fall to 3.4 percent by 2006/07. 0 Total expenditure i s projected to fall slightly to 23.8 percent o f GDP in 2004/05, and then to fall sharply to 21.9 percent in 2006/07. In real terms total spending continues to rise, albeit more slowly than in the past. Increases in spending on the Poverty Action Fund, as a share o f domestic discretionary expenditures, begin to level o f f over the period to 2006/07. 0 Domestic revenues increase modestly to 12.9 percent o f GDP in 2004105, but then stagnate to 2006107. This i s in large part due to the expected fall in customs revenues following the March 2004 signing o f the East African Community (EAC) Customs Union Protocol. In October 2003 this decrease was estimated at USh40 billion (0.3 percent o f GDP) for 2004/05. I t subsequently was revised to USh76 billion (0.5 percent o f GDP). 0 Aggregate aid flows are projected to fall back to less than 50 percent o f government spending from 2004/05. Contrary to the GoU’s expressed wishes, the share o f aid to be provided as budget support i s forecast to continue to fall (this partly reflects the high discount factors applied to budget support), as i s the share o f aid provided as grants. 0 Ifestimates o f donor inflows are correct, modest domestic financing i s projected to be required in the next three years. ~~ ~ The critical issue of concern to MoFPED i s the volume of liquidity being generated, and the implications that this has for monetary management and the inflation rate. Although estimates o f the deficit have been volatile, partly due to the definitional changes discussed above, these liquidity targets have remained essentially unchanged. - 10- Table 3. Summary Medium-Term Budget Framework, 2003/04-2006/07 REVENUE and GRANTS 2,934.6 2,918.2 2,720.5 2,858.3 2,965.7 3,211.8 Revenue 1,659.0 1,855 1 1,793 8 1,866 9 2,002.0 2,211.8 Grants 1,275 6 1,063 1 9267 991 4 963.7 1,000.0 Budget support grants 8105 550 2 487 3 497 8 515.8 536 0 Project grants 465.1 5129 439 4 493 6 447 9 464.0 EXPENDITURE 3,176.3 3,247.2 3,209.4 3,454.4 3,553.3 3,797.5 OVERALL DEFICIT (including grants) -241.7 -329.0 -488.9 -596.1 -587.6 -585.7 OVERALL DEFICIT (excluding grants) -1,517.3 -1,392.1 -1,415.6 -1,587.5 -1,551.3 -1,585.7 FINANCING 241 7 329 0 488 9 596.1 587 6 585.7 of which External financing (net) 338.5 243.9 375 9 479.2 432 3 499 4 Disbursement 461 0 427 8 532.2 632.5 606 1 708 3 Budget support loans 69.8 180 8 191 2 190.1 161.3 170 1 Project loans 391.2 247.0 341.0 442.4 444 8 538.2 Amortization -153.3 -188.7 -167.2 -164.5 -184.2 -219.0 Exceptional financing 1 30 8 48 10.9 11 2 10 4 10.1 Domesticfinancing (net) -96.8 85.1 113.0 116.9 155.3 86.3 . Bank financing ( = saving) -166.9 77.2 82.9 80.0 135 5 66.2 Nonbank financing 70 1 7.9 30.1 36.9 19.8 20 1 I Memo Item: Poverty Action Fund I 143.3 I 821.6 782.8 821.8 1 858.3 908.1 REVENUE and GRANTS 22.1% 20.5% 19.4% 19.7% 18.7% 18.5% 12.5% 13 0% 12.8% 12 9% 12.7% 12.8% 9.6% 7 5% 6.6% 6 8% 6 1% 5 8% Budget support grants 6.1% 3.9% 3 5% 3.4% 3.3% 3.1% Project grants 3.5% 3.6% 3.1% 3.4% 2.8% 2 7% 24.0% 22.8% 22.9% 23.8% 22.5% 21.9% OVERALL DEFICIT (including grants) -1.8% -2.3% -3.5% -4.1% -3.7% -3.4% OVERALL DEFICIT (excluding grants) -11.5% -9.8% -10.1% -11.0% -9.8% -9.1% FINANCING 1.8% 2 3% 3 5% 4.1% 3 7% 3.4% of which External financing (net) 2.6% 1.7% 2.7% 3.3% 2.7% 2 9% Disbursement 3.5% 3.0% 3,8% 4 4% 3 8% 4 1% Budget support loans 0.5% 13% 1.4% 1.3% 1.O% 1.O% Project loans 3.0% 1 7% 2.4% 3.1% 2.8% 3.1% Amortization -1.2% -1.3% -1 2% -1.1% -1 2% -1.3% Exceptional financing 0.2% 0.0% 0.1% 0.1% 0.1% 0.1% Domestic financing (net) -0.7% 0 6% 0.8% 0 8% 1.O% 0.5% Bank financing ( - = saving) -1.3% 0.5% 0.6% 0.6% 0 9% 0.4% Nonbank financing 0 5% 0.1% 0.2% 0.3% 0.1% 0.1% GDP current market prices (USh bn) 13,249 14,232 14,025 14,484 15,820 17,344 ~~ O/ " PT" I.- ' ,& I 6 1% I 7 qw. z7 no/" 31 6% 31 3 % I R IO/" Aid (grants + new disbursements) USh bn 1736.6 1490.9 14589 1623.9 15698 1708.3 as % of Exp 54.7% 45.9% 45.5% 47.0% 44.2% 45.0% as % of GDP 13 1% 10.5% 10.4% 11.2% 9 9% 9.8% -budget suppon as % of aid -grants as % of aid % % 1 50.7% 73.S% I 49.0% 71.3% 46.5% 63.5% 42.4% 61.1% I 43.1% 61.4% 41.3% 58.5% Sources: [31 [I1 PI [31 [31 [31 [ I ] Budget statement, June 2003 [2] IndicativePreliminary Revenue and ExpenditureFramework for FY 2004105-2006107, March 2004 (presented to parliament 1 April) [3] Budget Statement, June 2004 (note: included some upward revisions to 2000101-200103 figures for project aid & exp. Cf, source [2]) Note: Owing to a change in fiscal methodology, a11 debt and HIPC figures (affecting external interest and amortization) exclude debts cancelled under the HIF'C agreement, apart from those shown in the ApprovedBudget 2003104 -11- C. OTHER DEVELOPMENTAND POVERTY REDUCTION CHALLENGES 1.20. In addition to the budget deficit and efficiency issues, there are several other challenges facing Uganda that are o f relevance to the PER in terms o f both the level and the composition o f public spending. These are outlined below. Promoting the private sector 1.21. There are numerous important barriers to private sector investment that need to be overcome (see Table 4). Chief among these are corruption, high interest rates, and inadequate transportation and energy infrastructure. Table 4. Barriers to Investment (% o f respondents giving a negative ranking) 2003 2000 Corruption 71.2 66.7 Inflation 69.9 79.3 Interest rates 65.7 75.6 Electricity supply cost 64.9 45.4 ’ Bureaucracy 60.1 67.3 HIViAids 56.1 18.4 Electricity supply efficiency 54.9 45.4 ’ Inland transport cost 51.1 32.3 ’ Internal revenue efficiency 42.9 58.3 Customs efficiency 40.6 58.3 ’ Source: Uganda InvestmentAuthority (cited in MoFPEDPEAP, 2004) 1= Response in 2000 on electricity 2 = Response in 2000 on roads 3 = Response in 2000 on customs/tax administration Accelerating growth 1.22. The key determinants o f Uganda’s growth through the 1990s have been identified as improved security, the restoration o f macroeconomic stability after years o f chaos, and the removal o f economic distortions. Continued rapid growth w i l l require deeper structural change and institutional reform, however. The PEAP highlights as key needs the removal o f bureaucratic barriers to investment; the improvement o f transportation infrastructure and utility services; the modernizatiodcommercialization o f agriculture (with an emphasis on the addition o f value); actions to improve rural access to finance and to strengthen the development o f small and medium-size enterprises (SMEs); actions to enhance environmental sustainability; and the improvement o f security in northern Uganda. The implementation and integration o f key government initiatives such as the medium-term competitiveness strategy (MCTS), the plan for the modernization o f agriculture, and the strategic export program (SEP) will be critical to realization o f these changes, It i s also essential that the GoU provide better access to Uganda’s productive assets. Poverty and inequality 1.23. The October 2003 Uganda National Household Survey results suggest that poverty increased from 34 percent to 38 percent between 199912000 and 2002103, reversing the downward trend from the 1992 high o f a poverty incidence o f 56 percent. Poverty remains most acute in the north o f the country (63 percent) and has shown the greatest decline in the east (from 35 percent to 46 percent) and for households engaged in crop agriculture. Inequality has increased, with the Gini coefficient rising from 0.39 to 0.43 in the last three years (and from 0.35 in 1997). Achieving a more even distribution o f the benefits o f growth will be a critical challenge for the GoU. Policies aimed at improving agricultural growth and - 12- productivity, and policies targeting improved security, are seen as key components o f a pro- poor growth strategy. Achieving PEAP targets and the MDGs 1.24. Uganda i s likely to achieve some but not all o f the Millennium Development Goals (MDGs). The targets related to the completion o f primary education, the achievement o f gender equality in secondary education, and the reduction o f child and maternal mortality rates are unlikely to be met. The basis for discussing Uganda’s development finance requirements should be framed, however, by Uganda’s own targets as set out in the PEAP. These are s t i l l under revision. In some cases these targets have been more ambitious than the MDGs; in other cases less so. 1.25. Recent analysis suggests that Uganda may require additional resources if it i s to meet i t s targets. For example, estimates compiled in 2003 suggest that full implementation o f the 2000 PEAP would require government spending to increase 63 percent. Attainment o f the MDGs would require a 100 percent increase in universal primary education (UPE) funding and an increase o f more than 200 percent between 2001 and 2015 in expenditure on the minimum health care p a ~ k a g e More .~ recently, the Uganda Millennium Project case study estimated that external budget support averaging US$1.64 billion each year over the period 2005-20 15 would be needed to meet the MDGs. The total Overseas Development Assistance (ODA) commitment in 2001 was US$976 m i l l i ~ n . ~ 1.26. These estimates concentrate mainly on those MDGs that relate to the social sectors (calculating the resources needed to achieve the first MDG on income poverty i s much more difficult). This results in an overemphasis on these sectors at the expense o f other, more productive, sectors that are important for private income growth. The estimates furthermore are highly approximate-for example, increases in spending o f the magnitude suggested would be impossible to absorb in the short term. They also take no account o f the potential effects o f the GoU’s drive to achieve more efficient spending. 1.27. Ensuring that the provision o f more inputs translates into better outputs and outcomes i s a key challenge for government. Success in this area w i l l depend on better monitoring; greater input from the service delivery ministries on the design o f cross-cutting reforms; a stronger focus on value for money; and a stronger focus on equity in the poverty-orientation o f resources. D. MEDIUM-TERM CHALLENGES AND THE WAY FORWARD 1.28. The foregoing analysis suggests a number o f challenges for macroeconomic and budget management. These include the following: 0 The importance o f maintaining macroeconomic stability and o f containing inflation at less than 5 percent. Policy consistency i s an important factor in building private sector confidence in the management o f the economy. Linked to this i s the need to bring down interest rates, to avoid crowding out the private sector and to minimize the burden on the government budget o f domestic debt servicing. MoFPED (2003), “Uganda’s Progress in Attaining the PEAP Targets - in the Context o f the Millennium Development Goals”, background paper for the Consultative Group Meeting, Kampala, 14-16 May 2003, prepared by Ministry o f Finance, Planning and Economic Development.This document also discusses the differences between P E N and MDG targets. ’ Millennium Project (2004), “Millennium Development Goals Needs Assessment: Country Case Studies o f Bangladesh, Cambodia, Ghana, Tanzania and Uganda”, Working Paper (draft 17 Jan 2004), p.198. The need to progressively raise the tax:GDP ratio by expanding the revenue base and improving tax administration. (It should be noted that new tax measures may be difficult to introduce in the run-up to the 2006 elections.) There have been indications that the highly unpopular graduated tax, the main source o f revenue at the local government level, w i l l effectively be removed for the 10 years from 2005106, with likely consequences also for collection rates in 2004105. Revenue losses o f around 0.5 percent o f GDP, incurred through membership o f the E A C Customs Union, also w i l l need to be replaced. Urgent analysis i s needed to identify the most efficient, equitable, and administratively simple alternative revenue streams. The costly tax holidays that erode the tax base also must be eliminated. The GoU needs to act to implement the findings o f the Ssebutinde report into corruption at the Uganda Revenue Authority, and to modernize and enhance the administrative efficiency o f the URA. The need to improve the efficiency o f resource allocation by eliminating low-priority, unproductive elements o f government expenditure and making space for higher- priority, more productive expenditures. Expenditures by the public administration and security sectors in recent years have grown unchecked, and represent a particular problem. Any effort to improve the efficiency o f resource allocation should begin with a study to determine the appropriate balance o f resources between the social and productive sectors o f the budget. The need to secure efficiency savings and better value for money across all sectors o f government. Tougher action must be taken against corruption; procurement-related reforms must be vigorously implemented and public expenditure management reforms more generally dso set in motion; the various sector-level tracking and value-for-money studies must be followed up; and measures should be taken to increase the accountability o f public servants (see also Chapters 3 and 4). 0 The need to make more effective use o f aid resources. Initial findings suggest that budget support i s proving an effective means o f strengthening government systems and supporting service delivery. The GoU has a clear preference for budget support grants, with project loans being i t s least-favored form o f assistance (its preference between budget support loans and project grants i s less clear). N o t all donors are in a position to provide their assistance in the form o f budget support, however, and some o f those that are have in the last three years been discouraged by actions that have been taken that have departed from the agreed budget. Improving the integrity and predictability o f the budget i s an important requirement. 0 A particular challenge to donors i s to provide more timely and accurate information about projected and outturn donor flows (budget support and projects), to facilitate better macroeconomic planning and the allocation o f sector ceilings. This i s particularly important in the light o f government moves to introduce single, integrated sector ceilings (see Chapter 2). 0 The need to reverse the deteriorating trend in Uganda’s N P V o f debt:exports ratio. This may require a reduction in new borrowing andlor a switch from loans to grants. The GoU i s proposing to establish a fixed ceiling on new loan commitments with effect from fiscal 2004105, even though debt service ratios have not risen and remain well below critical thresholds. The impact o f aid, and specifically o f i t s adverse macroeconomic consequences, needs to be closely analyzed. This i s particularly important in the context o f the growing international pressure to increase the work done and to increase the - 14- resources committed to achievement o f the MDGs. It makes no sense for the GoU to borrow domestically (or from nonconcessional external sources) to finance a higher deficit, but a strategy focused excessively on deficit reduction could deter the offer or use o f aid. The necessary analysis should include assessment o f the nature o f the money demand function and the velocity o f circulation; o f the scope for a greater import intensity o f public spending and o f the offshore use o f aid; o f the sensitivity o f private sector investment to interest rates; o f the options for improving the efficiency and competitiveness o f the financial sector in general and o f the treasury bill market in particular; and o f the sensitivity o f export growth to the exchange rate, relative to other supply-side constraints. 0 The long-term predictability o f aid flows, including global fund resources, needs to be improved to enable the GoU to plan ahead with greater confidence and certainty. - 15- 2. UGANDA’S BUDGET PREPARATION PROCESS AND MTEF, 2004/2005 TO 2006/07 A. INTRODUCTION 2.1. The budget preparation process has in recent years become increasingly participatory, but problems s t i l l remain in terms o f the competing demands for resources; o f linking the budget to the Poverty Eradication Action Plan (PEN); o f the large and increasing allocations to defense and public administration; and o f efficiency. In addition, there appears to be inadequate capacity at the local government level and in some sectors to prepare clear and feasible budget framework papers. 2.2. This chapter summarizes and comments on Uganda’s budget preparation process, the implications o f the process for resource allocation, and how these implications have changed over time. I t then discusses the issues that continue to obstruct reform o f the budgeting process and the enhancement o f local government participation in the process. The chapter finally summarizes the process through which the budget for fiscal 2004105 was created and highlights the issues arising from the exercise. 2.3. Uganda’s budget process i s managed under clear constitutional and other legal provisions. The 1995 constitution mandates that the president prepare a national budget and present it to parliament for debate and approval, and this must be concluded within strict deadlines6 Other legal provisions have further shaped the budget process. For example, the 2003 Public Finance and Accountability Act provides guidelines for the management and accountability o f public finances, and the 2001 Budget Act (2001) defines the budget process, specifying the key actors and their responsibilities. (One o f the most important innovations o f the 2001 act i s that i t allows civil society organizations to participate at all levels in the budget process. The extent to which civil society can influence the determination o f sector ceilings i s limited, however, partly because o f poor capacity and partly because o f the competing demands for resources .) The 1997 Local Government Act, by redefining responsibilities and accountability, additionally makes provision for local government to take a greater role in the management o f public finance. 2.4. These legal provisions have impacted the budget preparation process in terms o f the timing o f activities, the participation o f various stakeholders, and by linking the national budget to development priorities. For example, the cabinet now i s meeting i t s legal obligation to comply with a fixed schedule for the presentation to parliament o f the macroeconomic framework, preliminary budget ceilings, and the final budget estimates. The budgeting and planning framework 2.5. In the last five years the budget preparation process has increasingly become participatory, involving key stakeholders such as government line ministries and departments, local government, parliament, donors, and civil society actors. Preparation o f the national budget remains largely the responsibility o f central government, but the participation o f other stakeholders has helped to increase the focus o f the budget on issues o f concern to citizens. It also has greatly enhanced the transparency o f the exercise. MoFPED undertakes these duties through delegation o f authority, and prepares and presents the budget to parliament. - 16- 2.6. The medium-term expenditure framework (MTEF) has since 1998 been Uganda’s major annual budgeting and medium-term planning tool. The MTEF sets sector-spending ceilings that are consistent with macroeconomic stability and economic growth targets, and emphasizes efficiency in both the allocation and the use o f budgetary resources. I t i s linked to the country’s financial program, as agreed with the International Monetary Fund, to keep inflation under control. 2.7. Budget Framework Papers (BFPs), prepared by sector working groups and local government, are used to identify issues for consideration in the national budget process. The Ministry o f Finance, Planning, and Economic Development (MoFPED) amalgamates the local BFPs into a national BFP that, together with a macroeconomic plan and an indicative budget framework, i s submitted to parliament for comments. MoFPED then incorporates these comments as appropriate into the indicative budget framework. 2.8. Public Expenditure Review (PER). In May MoFPED holds an annual Public Expenditure Review workshop, involving all stakeholders, to discuss the MTEF and indicative budget framework. The budget performance for the current fiscal year also i s reviewed at this workshop and the proposed allocations for the next year are discussed. The workshop gives stakeholders another opportunity to provide their input to the budget process. 2.9. In recent years the PER discussions have included not only budget figures but also the overall planning framework. This year was unique in the sense that national budget issues were discussed alongside the Poverty Eradication Action Plan (PEAP) revision process, with a view to strengthening the linkages between the budget and the development targets espoused in the PEAP. This provided an opportunity to put output-oriented budgeting and results-oriented management at the center o f the budgeting process, but the PER process has run ahead o f the PEAP revision discussions, weakening the linkages between the budget process and PEAP development targets. The PER h as become a venue for discussion o f Millennium Development Goal issues and budget linkage, but Uganda needs to demonstrate more strongly the linkage between the two, through budgetary allocations. The PER meetings nonetheless have helped place the issues o f health, education, and water services at the center o f the annual budget process discussions. The subjects o f revenue and fiscal deficit discussions also have become broader, involving stakeholders beyond just the select few o f MoFPED and the central bank. 2.10. The PER initially was supported principally by the World Bank, but it increasingly receives support now from other donors. This i s a consequence o f the mainstreaming o f the PER process through the PER working group, which meets at least four times a year to discuss budget preparation issues. The working group meetings, chaired by MoFPED, provide an important opportunity for budget-support donors to monitor the budget process and outcomes. 2.1 1. Presentation to parliament and budget appropriation. The 2001 Budget Act requires MoFPED, on behalf o f the president, to submit to parliament by 1 April a preliminary indicative budget and a macro and social plan. Parliament must respond with comments to MoFPED by 15 May. After revisions to incorporate any changes suggested by parliament and those received during the PER from other stakeholders, MoFPED prepares the final budget and presents it to parliament in June, for debate and approval. To ensure the smooth running o f government business before approval, parliament authorizes the executive to spend limited amounts o f money on a “vote on account” basis. Once the budget i s approved the vote on account eases, and the sectors may begin implementation o f their activities and projects as provided for in the budget. Given the participatory role o f parliament in the preparation o f the budget, the approval o f sectoral budgets i s now done more quickly than before. - 17- Participation in the 2004/05 budget process 2.12. Greater govemment openness in the drafting process, preference for budget support as a modality for the receipt o f external assistance, and keen interest by stakeholders combined to greatly increase participation in the 2004/05 budget process. 2.13. Stakeholders, for example, now have a better understanding o f MTEF sector ceilings. During the preparatory process for the 2004/05 budget MoFPED held several meetings with donors to discuss issues such as fiscal deficit concerns, MDG issues, and efficiency in the use o f budgetary resources. Members o f parliament (MPs) also participated at almost all levels o f the process. The parliamentary standing committee on the budget played an active role in ensuring that crucial issues were brought to the attention o f parliament early in the process. MPs participated in the sector working group workshops, in the national workshop, and in the local government workshops that were held around the country. Civil society organizations, led by the NGO forum (an umbrella body that brings together various civil society organizations), and development partners participated in the national budget workshop (October 2003), regional workshops (November and December 2003), and the PER workshop (May 2004). The participation o f development partners in particular was engaging and constructive, as numerous issues concerning sectoral allocations had to be resolved. 2.14. The PER workshop was particularly significant in this year's process because neither the development partners nor civil society agreed to endorse the large increases in expenditures that were proposed for defense and public administration. These changes were proposed at the expense o f Poverty Action Fund (PAF) activities. The GoU promised to review the proposals to bring them into line with resource constraints and other priority needs. 2.15. The PER workshop was followed at the end o f M a y b y lengthy debate on where to find additional resources for poverty-related expenditures. This involved discussion o f new financing and saving options and o f the postponement o f expenditures in areas where they potentially might be delayed without harming social service delivery programs or poverty reduction efforts. Government and development partners worked closely together and at the beginning o f June reached agreement on the budget. 2.16. In MoFPED the GoU has a critical mass o f personnel who are conversant with the budget process. There i s however little understanding within the sectors and at the local government level o f the M T E F and the concept o f effective prioritization. Resolution o f this issue i s essential to the success o f the participatory process. The strengthening o f linkages between sectoral and local government priorities and the MTEF w i l l require the development o f additional capacity at the sector and local government levels. The inadequacy o f planning capacity at these levels partly explains the poor linkage between the MTEF and the BFPs o f sector working groups and local government. B. ASSESSMENT OF THE 2004/05 BUDGET PROCESS: EMERGING ISSUES OVER PEAP REVISION 2.17. The national consultative budget workshop and conference on the PEAP revision was held, as required by the Budget Act, over three days in October 2003. Workshops for local government and the preparation o f sector BFPs were held between November and December 2003. B y the end o f January 2004, all sectoral BFPs had been completed and submitted to MoFPED, following which interministerial consultations were concluded by the end o f February. 2.18. The October workshop discussed four main issues: 0 poverty within Uganda; - 18- 0 sector PEAP revision papers; 0 indicative budget ceilings for 2004105 and highlights of the budget call circular; and 0 the MTEF and implementation o f the fiscal decentralization strategy. 2.19. The workshop noted with concem the reported increase in poverty, and called for greater efforts to reverse this trend. I t s discussion o f the Poverty Eradication Action Plan focused on the four pillars o f the 1997 PEAP: economic growth and structural transformation; good governance and security; increasing the incomes o f the poor; and improving the quality o f l i f e o f the poor through the delivery o f social services. The MTEF ceilings for 2004105- 2006107 were presented and discussed, together with public finance management and accountability issues. 2.20. As the October 2003 budget conference was partly intended to strengthen the linkages between the PEAP and the budget, the sector working groups identified and presented the same expenditure priorities for both the new PEAP revision exercise and the 2004105 budget. 2.21. MTEF and linkage to the revised PEAP. The extent to which the M T E F adequately addresses PEAP priorities i s debatable. The PEAP prioritizes social sector spending as a vehicle for poverty reduction, but the plausibility o f this strategy in isolation, given that the returns from these sectors take a long time to realize, i s in doubt. To ensure that the MTEF addresses the challenge o f improving household income, workshop participants called for relatively more government spending on economic services such as power, roads, agriculture, and water. Improvements in these areas should in theory enable households to increase their earnings. 2.22. Agriculture was singled out as a sector in need o f additional hnding. It was noted in particular that spending in the sector should target the production and marketing constraints that farmers must face, such as access to credit and agricultural inputs and access to markets. Policy reversals should be avoided, with new spending to be committed to programs that would build upon the existing development framework. There are however several nonperforming agricultural projects, a fact that raises concems about the effective use o f hnds in the sector. 2.23. The public sector reforms and pay reforms are scheduled to run for 10 years. The program to date has been in operation for three years and has realized some notable returns. For example, pay differentials between senior and mid-level civil servants have narrowed, and resources are now set aside each year to address public service and pay reform concerns (UShl5 billion was committed in this area in fiscal 2003104). Full realization o f the targeted outputs remains a distant proposition, however. For example, a recent j o b evaluation exercise has been accused o f favoring civil servants in management positions rather than those in professional or technical positions. The exercise also i s accused o f failing to adequately address the needs o f doctors. The poor remuneration o f professional civil servants additionally has led to threats o f industrial action, with potentially disastrous outcomes. 2.24. The budget process at the local government level. Four regional budget workshops for local government were held between 24 November and 5 December 2003. The objectives of the workshops were to: 0 disseminate the budget call circular and the local government indicative planning figures for fiscal 2004105 and the M T E F for the 2004/05-2006107; 0 roll out the planning and budgeting process based o n the fiscal decentralization strategy modality; - 19- provide an update on PEAP revision and the link to the budgeting o f local governments; generate issues and areas o f emphasis on local government program implementation for consideration by the SWGs; and discuss problems o f budget execution and agree on the way forward. 2.25. Sector working groups. The SWGs identified their budget priorities as part o f the PEAP revision process, but most o f their budget estimates exceed what could be afforded in the national budget. This i s a problem that typically i s the result o f inadequate planning and management capacity at the sector level. Development partners have in the past granted financial support to raise the capacity o f the sectors such that they are equipped to prepare realistic, output-oriented and activity-linked BFPs. The education sector working group has benefited from this funding and h as greatly improved i t s BFPs, but all sectors and local government authorities need the same capacity. 2.26. The integrated financial management system. The IFMS l i n k s budgeting to financial management as a way o f operationalizing output-oriented budgeting (OOB) and results-oriented management (ROM). These processes became effective in February 2004 when they were piloted with 10 local governments. (The pilot had been planned to start in fiscal 2002/03 but was delayed due to the unpreparednesso f the local governments involved.) The IFMS i s integrated in the sense that budget allocations are not broken down between recurrent and development allocations, but are linked to results or outputs. It also w i l l electronically link local governments to MoFPED. 2.27. Outcome-oriented budgeting. The immediate objective o f the M T E F i s to control inflation, but the operationalization o f OOB and R O M implies that the budget i s increasingly becoming focused on the outcomes and outputs o f public sector pend ding.^ For example, budgeting in the education sector i s targeted at achieving specific pupi1:teacher ratios, pupi1:classroom ratios, and textbook:pupil ratios. Budgeting in the health sector focuses mainly on the number o f health units required (in addition to those already constructed and commissioned) and on population per doctorhurse targets. These inputs are expected to have a bearing on outcomes such as literacy and numeracy rates and on infant and maternal mortality. Implementation o f OOB has progressed well for activities in some line ministries, such as education and roads, but progress has been slow in others, especially defense. 2.28. Fiscal decentralization. Approved by cabinet in June 2002, implementation o f the fiscal decentralization strategy (FDS) has progressed well in the 15 local governments (LGs) with which it has been piloted.8 2.29. The pilot FDS implementation has generated a number o f lessons for the Local Government Budget Committee (LGBC). First, none o f the LGs in the pilot issued a budget call circular to set out the timing o f events in the budget process, with the implication that procedures were not properly followed. Second, none o f the pilot LGs took advantage o f the permitted flexibility in use o f resources. The reason initially put forward for this was the complexity o f the flexibility design process, and this subsequently was changed to make the process easier. In practice, however, it appears that the LGs did not use the permitted flexibility because they had difficulty identifying intersectoral priorities. ’ Efforts to link OOB, spearheaded by MoFPED, and ROM (led by the MoPS) have not yet been fruitful. In terms of implementingROM, there seems to be a disconnection between MoFPED and the MoPS. The pilot LGs included 12 districts: Kampala, Rakai, Kalangala, Masindi, Bushenyi, Kyenjojo, Lira, Yumbe, Kitgum, Soroti, Kotido ,and Tororo. They also included three municipalities: Jinja, Kabale, and Gulu. - 20 - 2.30. Third, it was not possible to verify if any local govemment took advantage o f the 5 percent limit for sectoral grants for district department supervision, inspection, and monitoring activities. Uganda has made good progress toward decentralizing political and administrative functions, in line with the constitution and the 1997 Local Government Act, but some key challenges remain. These include the development and implementation o f appropriate intergovernmental fiscal systems; the development o f technical competence at the local level; ensuring the evolution o f civil society at the local level with respect to inputs and control over the planning, budgeting, and implementation processes; ensuring there i s greater accountability to the population rather than to the center; and enhancing local revenue collection. 2.3 1. The GoU has established two cross-sectoral committees, with local government representation, to spearhead the implementation o f FDS. These are the Local Government Budget Committee (LGBC), chaired by the secretary o f the Local Government Finance Commission, and the Local Government Releases and Operations Committee (LGROC), chaired b y the Director o f Budget, MoFPED. The LGBC has developed two planning and budgeting manuals: the General Guide to the Local Government Budget Process for Districts and Lower Local Government Councillors, NGOs, CBOs, and Civil Society; and Guidelines for Local Government Budget Process under FDS Modality. The LGROC has developed four planning and budget implementation manuals: the General Guide to Budget Implementation, the Technical Budget Implementation Manual, the Sector Budget Implementation Manual, and Formats for Budget Implementation. 2.32. To avoid undermining macroeconomic management, the GoU w i l l with effect from fiscal 2004/05 ensure that the MTEF captures all donor financial flows, including project support (that is, projected project inflows w i l l be included in the sector ceilings). This means that if a l i n e ministry i s a recipient o f project support that exceeds the M T E F ceiling, it w i l l have to forego government budgetary allocation equal to the amount provided under the project in question. The GoU has hired a consultant to advise on how best to streamline project support within the MTEF. The consultant also w i l l advise on the management o f shortfalls in project support during the year, the integration o f cross-cutting projects, and technical assistance projects. 2.33. The inclusion o f projects into the budget has complicated the 2004105 budgetary process. For example, the inclusion o f existing projects in the M T E F means that for some sectors the increase in budget did not translate into an increase in program. Where projects were performing poorly, in particular, the sector felt unfairly treated. In contrast, for sectors such as security and public administration, which received little donor project funding, the growth in budget was real. In the longer term the inclusion o f projects into the budget i s expected to encourage the sectors to be more critical when reviewing the effectiveness o f their projects. There i s a danger that this may not happen, however, in which case a gap would tend to persist between the effectiveness o f GoU funds and the effectiveness o f donor project funds. C. MEDIUM-TERM RESOURCE ENVELOPE AND BUDGETARY ALLOCATION Medium-term resource envelope 2.34. As a proportion o f GDP, domestic revenue has in the last three years stagnated at about 12 percent. This ratio i s projected to increase to about 12.9 percent in 2006/07. As Uganda’s tax structure i s not expected to change significantly in the medium term, the country must continue to rely on donor resources to meet i t s expenditure requirements. Grants are estimated at USh99 1.4 billion for 2004105, USh963.7 billion for 2005/06, and USh1,OOO -21 - billion for 2006/07. Loans w i l l amount to USh493.6 billion in 2004/05; USh447.9 billion in 2005106; and USh464 billion in 2006/07 Medium-term expenditure framework 2.35. Developed in line with the five pillars o f the revised PEAP, the 2004105-2006/07 MTEF i s consistent with both inflation and economic growth targets. Table 5 summarizes allocations by sector in the 2000/0 1-2006/07 period (actual and projection); Table 6 provides a breakdown o f the distribution. Table 5. Total Budgetary Allocations, Including Donor Projects (USh billions) Fiscal year 2000101 2001102 2002103 2003104 2004105 2005106 2006107 Projectio Projectio Sector Actual Actual Actual Approved Estimated n n Security 208.5 237.9 297.7 33 1.2 371.8 385.1 399.6 Roads 127.8 156.7 223.2 325.3 402.3 439.2 504.4 Agriculture 21.8 42.4 114.8 99.4 115.6 129.6 136.2 Education 373.0 455.8 560.8 587.3 621.3 611.6 631.3 Health 110.1 162.9 288.6 385.6 382.7 391.1 413.8 Water 36.4 49.0 90.3 96.6 111.1 88.6 86.2 Justice, law, and order 97.7 127.3 155.5 162.6 177.2 165.0 168.7 Accountability 16.3 21.5 30.6 254.5 204.2 135.7 139.3 Economic functions and social services 75.0 122.4 382.3 279.1 313.0 323.3 398.4 Public administration 301.6 365.8 393.7 373.5 421.5 458.3 447.5 Interest payments 127.6 153.4 180.8 227.8 258.9 306.3 330.4 GRAND TOTAL 1,495.7 1,895.0 2,718.2 3,123.8 3,381.8 3,441.2 3,675.1 Central government functions 789.0 973.1 1,286.8 1,967.3 2,110.0 2,091.8 2,266.3 LG programs 452.3 610.9 659.0 742.3 797.4 822.0 870.8 programs Line ministries and LG ~- 1,241.3 1,583.9 1,945.7 2.709.6 2.907.5 2.913.7 3.137.1 Statutory payments 254.4 311.1 772.5 414.2 474.4 527.4 538.0 Source: Macroeconomics Department, MoFPED, July 2004 2.36. Budgetary allocations for the different sectors show little change in the medium term. The share o f government expenditure allocated to security i s programmed to remain relatively stable, at about 11 percent. The proportion allocated to public administration will remain at around 12 percent, rising to about 13 percent in 2005106 (Table 6). Consistent with the objective o f promoting growth and increasing the incomes o f the poor, public spending on roads i s programmed to increase from 12 percent o f the budget in 2004/05 to 13.7 percent in 2006/07. Spending on agriculture similarly i s planned to increase from 3.4 percent to 3.7 percent. Education i s programmed to receive a diminishing proportion o f the budget expenditure, i t s share declining from 18 percent in 2004/05 to 17 percent in 2006/07. The proportion committed to health w i l l remain almost constant, at slightly more than 11 percent. For the medium term, education w i l l continue to take the biggest share o f budgetary resources. - 22 - Table 6. Medium-Term Sectoral Shares o f Total Budget Expenditure (percentage) 2000101 2001102 2002l03 2003104 2004105 2005106 2006107 Projectio Projectio Actual Actual Actual Approved Estimate n n Security 13.94 12.55 10.95 10.60 11.oo 11.19 10.87 Roads 8.54 8.27 8.21 10.41 11.90 12.76 13.72 Agriculture 1.46 2.24 4.22 3.18 3.42 3.77 3.71 Education 24.94 24.05 20.63 18.80 18.37 17.77 17.18 Health 7.36 8.60 10.62 12.34 11.32 11.37 11.26 Water 2.43 2.59 3.32 3.09 3.28 2.57 2.35 Justice, law, and order 6.53 6.72 5.72 5.20 5.24 4.80 4.59 Accountability 1.09 1.13 1.13 8.15 6.04 3.94 3.79 Economic functions and social services 5.02 6.46 14.07 8.94 9.25 9.40 10.84 Public administration 20.17 19.30 14.48 11.96 12.46 13.32 12.18 Interest Payments 8.53 8.09 6.65 7.29 7.66 8.90 8.99 0.04 0.07 0.22 0.53 GRAND T O T A L 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Central government functions 52.75 51.35 47.34 62.98 62.39 60.79 61.67 LG programs 30.24 32.24 24.24 23.76 23.58 23.89 23.70 Line ministries and LG programs 82.99 83.58 71.58 86.74 85.97 84.67 85.36 Statutory payments 17.01 16.42 28.42 13.26 14.03 15.33 14.64 Source: Derived from Macroeconomics Department, MoFPED, July 2004 2.37. The roads sector w i l l receive the greatest increase in budget allocation from 2003/04 to 2004/05, equivalent to USh77.1 billion (Figure 7). Public administration i s scheduled to receive an increase o f USh48 billion, and the education sector and economic functions and social services increases o f about USh34 billion each. The increase in interest payments w i l l amount to USh3 1.1 billion. Interest payments w i l l remain high as a result o f the large number o f treasury bills issued to absorb and mitigate the adverse macroeconomic consequences o f the large aid inflow (see Chapter 1). 2.38. The biggest decline in budget allocation i s for accountability (USh50.3 billion), following the completion o f certain one-off activities. The second greatest decline i s for health (USh2.9 billion). 2.39. These changes in budget allocation were agreed after a long process o f debate involving MoFPED, civil society, and development partners. The debate focused in large part on the proposed large increases for defense; on the proposed reductions for health and for justice, law, and order; and on the small proposed increase in the allocation to agriculture. (Details o f the changes and revisions in the 2004/05 budget through budget consultations are presented in Annex 2.) - 23 - Figure 7. Changes in Budget Allocation by Sector for 2004/05 (including projects) Assessment of the budget process and stakeholder concerns 2.40. The primary objective o f the MTEF i s to plan government spending such that the objectives o f real sector growth are met, consistent with the macroeconomic framework. To achieve this, the GoU must use the MTEF to ensure macroeconomic stability, particularly in terms o f controlling inflation and maintaining exchange rate stability. This calls for fiscal discipline and the alignment o f public expenditure priorities with the PEAP development aspirations. The M T E F budgetary sector ceilings reflect the link between the MTEF and PEAP priorities. While agreeing that macroeconomic stability i s a prerequisite for economic growth, stakeholders in the budget process have continued to debate the high priority given to it at the expense o f other social welfare priorities. 2.41. There i s some concern that the MTEF does not adequately address long-term development needs. MoFPED accordingly i s preparing a complementary long-term expenditure framework (LTEF). The LTEF, which like the M T E F i s based on a set o f assumptions, i s likely to attract criticism for failing to demonstrate a strong linkage between i t s e l f and the PEAP. There also was l i t t l e consultation during the preparation o f the LTEF, and this could limit both i t s usefulness and i t s potential to catalyze a shift in policy focus. 2.42. The LTEF i s unlikely to require significant change to sector allocations other than to increase the allocation to public administration, to finance a probable national referendum. The proportion allocated to domestic interest payments i s programmed to decrease, however, as the fiscal deficit falls and enables the GoU to reduce the issuance o f treasury bills. While the money saved could be allocated to other sectors, any such reallocation has yet to manifest itself. 2.43. Despite the institutional arrangements that are in place to fight the problem, corruption i s both increasing and spreading. Compounding the problem, very few public officers have been prosecuted for inappropriate use o f budget resources. More needs to be done in this regard. - 24 - D. NATIONAL BUDGET CHALLENGES 2.44. Uganda’s dominant policy challenge i s to promote economic growth while maintaining macroeconomic stability and reducing household poverty. The GoU’s focus on increased spending in the social sectors may be slowing down the rate o f economic growth, however, raising the question o f whether it should transfer i t s spending priorities to economic services. The extent to which the PEAP and M D G targets are driving the national budget also i s unclear. I t may be appropriate to review the global MDGs with a view to realigning them to suit Uganda’s specific circumstances. 2.45. Uganda’s commitment to reducing the fiscal deficit also seems at odds with the pressure to increase public spending to meet the country’s development aspirations (see Chapter 1). The GoU must reduce the fiscal deficit to control inflation, but it also must put in place measures to ensure that the quality and quantity o f social services delivered are not diminished-measures, in other words, to improve the efficiency with which public financial resources are used (see Chapter 4). 2.46. At a practical level, streamlining project support into the MTEF in the short term may prove difficult to achieve. MoFPED has indicated that it w i l l require donors to inform it o f their commitments and the timing o f disbursements. There are two problems associated with this: first, actual project disbursements tend to differ from commitments, and second, the flow o f disbursements may not necessarily follow projected schedules. If project support i s streamlined into the MTEF, the line ministries furthermore would be required to choose between project financing and GoU budget financing. As GoU financing usually i s for recurrent expenditure and project financing primarily i s for development expenditure, this would not be straightforward. 2.47. Linking the national budget to development outcomes i s one o f Uganda’s biggest budget challenges. Achievement o f PEAP objectives requires the contribution o f both the public and the private sectors. The extent to which the budget supports private sector development could be as important as ensuring the effective allocation o f budgetary resources across the competing public sectors; the GoU therefore cannot lose sight o f private sector development. The country’s development framework and government financing o f that framework must be kept constantly under review. 2.48. If Uganda i s to achieve i t s desired development targets it must allocate i t s budget resources appropriately. It also must ensure that these resources are used efficiently. Output- oriented budgeting and results-oriented management have been selected as the means by which to meet these twin challenges, but their implementation has been slow. The National Integrated Monitoring and Evaluation Strategy (NIMES), spearheaded by the Office o f the Prime Minister and intended to meet the government’s monitoring and evaluation needs, hrthermore remains in the early stages o f development. It i s o f the utmost importance that NIMES be progressed to the point where it i s capable o f delivering a wide range o f reliable data, accessible to all stakeholders. 2.49. The capacity at the local government level and in some sectors to formulate BFPs i s weak. I t i s important that the GoU find the resources to train financial managers, planners, and councillors to meet this function. It also i s important that local governments undertake public expenditure reviews to establish a clear picture o f the issues and constraints that they face in the planning, preparation, and execution o f budgets. A thorough review also would help to identify the factors that may be obstructing the efficient and effective use o f local government resources. 2.50. I t i s also important that ways be found to assist the sector working groups through the budget preparation process. The capacity and expertise o f SWG members in the areas o f - 25 - budgeting, policy formulation, and dialogue generally need to be improved. The necessary improvements may be most readily achieved through training and exposure to sectors where progress has already been realized. - 26 - 3. BUDGET EXECUTIONAND MONITORING, FISCAL 2003/04 A. BACKGROUND 3.1. This chapter focuses on the revenue and expenditure performance for fiscal 2003/04, using third-quarter budget outturn and the projected end-of-year figures. The sections on revenue performance examine the performance o f Uganda Revenue Authority (URA) revenue, non-URA revenue, and budget support during the first three quarters o f the year. The sections on expenditure performance look broadly at budget release performance, with a specific focus on expenditure at the sector level; budget releases from the Ministry o f Finance, Planning, and Economic Development (MoFPED) to local governments and line ministries; and Poverty Action Fund (PAF) expenditures. The chapter also gives detailed expenditure performance for selected key sectors. 3.2. Savings arising from debt forgiveness under the Highly Indebted Poor Countries (HIPC) debt relief initiative have since 1998 been channeled through the PAF. This i s in line with the country’s development aspirations, as espoused in the Poverty Eradication Action Plan (PEAP). In addition to these savings, the PAF receives hnds from donors and the national budget. This chapter therefore looks closely at spending on PAF areas, in terms o f the levels and timeliness o f releases and the implications for service delivery and overall poverty reduction. Cognizance i s made o f the fact that the level and efficiency o f other non- PAF expenditures are also important for the realization o f PAF objectives, as these exist in tandem with the revised PEAP and MillenniumDevelopment Goal (MDG) objectives. 3.3. During 2004 the Government o f Uganda (GoU) conducted a release tracking study with funding from the Netherlands Embassy and the World Bank. The findings o f this study have fed into this chapter. The study, which was timed to coincide with preparations for the third Poverty Reduction Support Credit (PRSC3), sought to track budgetary releases from MoFPED to the line ministries and to local government, with a view to suggesting improvements in the flow o f hnds such that the spending units might receive their financial resources in a timely manner. It has since become necessary to expand this inquiry beyond resource flow numbers and to look at the impact o f expenditure o n attainment o f the P E N targets and MDGs. B. REVIEW OF BUDGET PERFORMANCE Revenue 3.4. During the fvst three quarters o f 2003/04 domestic resources f e l l short o f projected value by 0.2 percent (see Table 7). Donor inflows overperformed by about 11.7 percent. Adjusted for resource outflows, the resources available for financing the budget exceeded projection by 18 percent. 3.5. The overperformance o f budget support i s largely attributable to money carried over from the previous financial year, to unprogrammed releases from donors, and to the strengthening o f donor currencies against the US. dollar. (In 2002/03 budget support on a pro rata basis underperformed because o f donor concerns about additional defense spending.) Underperformancei n the budget support loans i s explained by the fact that PRSC3, which initially was conceived as a loan, was disbursed as a grant. - 27 - 3.6. For the first three quarters o f 2003/04, domestic revenue amounted to USh1,248.5 billion, representing a 99.8 percent pro rata performance for the period. USh1,182.1 billion (or 98.3 percent performance) o f this total was net U R A tax revenue, and USh18.3 billion was in the form o f non-tax revenue. (Non-tax revenue includes revenue from ministries and departments; U R A collections on behalf o f ministries; and property income, in the form o f interest on project accounts, dividends, and the rent o f institutional houses.) The URA collections represented a shortfall o f about USh21 billion (1.7 percent) against the target for tax revenue. End-of-year performance projections indicated a small shortfall in total revenue o f about 0.7 percent, although domestic revenue itself was expected to underperform by about 1.2 percent. T h i s shortfall i s projected to be compensated for by budget support, which was projected to overperform by 125 percent, the result primarily o f grant receipts exceeding program by close to 62 percent. Table 7. Resource Envelope and Performance, 2003/04 2003/04 program Performance in Year-end first three quarters projection YOof program YOpro Inflows outturn rata Domestic resource 1,719.4 1,248.5 99.8 1,708.0 99.3 Tax revenue 1655.2 1182.1 98.3 1635.0 98.8 Non-tax revenue 35.7 18.3 73.6 24.0 67.1 Loan repayments 28.5 48.1 206.9 49.1 172.3 Budget support 696.3 436.7 111.7 870.8 125.1 Budget support loans 199.8 2.7 84.5 68.2 34.1 Budget support grants 496.4 434.0 111.9 802.5 161.7 Total resource inflows 2,415.7 1,685.2 102.6 2,578.8 106.8 outflows External debt repayment 135.6 95.9 98.9 129.8 95.7 Repayments Bank financing 62.1 14.4 7.2 -89.8 (144.7) Domestic arrears payment 45.0 18.5 68.9 45.0 100.0 Total resource available for MTEF 2,173.0 1,556.4 118.0 2,493.8 114.8 Source: MacroeconmicsDepartment, MoFPED, July 2004 3.7. Performance o f the different revenue sources was mixed, with higher-than-projected earnings on pay-as-you-earn (PAYE), close-to-target earnings o n international trade taxes, and lower-than-expected earnings for value-added tax (VAT) and non-tax revenue sources (Table 8). 3.8. Direct taxes performed above projections by more than 18 percent. Collections amounted to USh193.93 billion, compared t o a target o f USh163.60 billion. The good performance o f direct taxes is attributable primarily to two factors: the rapid completion o f pay reforms and salary increases, leading t o higher receipts o f PAYE; and the improved performance o f corporate tax. The latter was the result o f increased profitability particularly in the banking and o i l sectors. 3.9. International trade taxes performed at 99.8 percent. The overperformance o f import duty and petroleum duty offset the weak performance o f VAT o n imports and excise duty. The exchange rate appreciation that occurred briefly during the fiscal year did not significantly affect the performance o f international trade taxes. -28- 3.10. Indirect taxes performed at 82.19 percent, mainly due to the appreciation o f the Ugandan shilling. V A T collections amounted to USh108.96 billion against a projected USh142.24 billion, representing a performance o f 76.6 percent. The poor performance o f VAT, particularly the tax on soft drinks, cigarettes, and beer, in large part accounts for the shortfall in U R A revenue collections during the first half o f 2003/04. 3.1 1. Non-URA revenues performed at 77.7 percent. Revenues for the first half o f 2003/04 amounted to UShll.5 billion, against the programmed USh14.8 billion. By the end o f the third quarter, cumulative non-tax revenue collections amounted to USh25.6 billion, representing a shortfall o f almost UShlO billion (30 percent) against the projected collections o f USh36 billion. The shortfall was largely the result o f nonpayment o f dividends by enterprises and agencies in which the government has an interest. The non-tax receipts from central government ministries and agencies additionally were below the targeted level. 3.12. International trade taxes contributed 53.5 percent o f domestic revenue, underlining the GoU’s continuing reliance on international trade for budget resources. Direct domestic taxes contributed 24.4 percent o f domestic revenue; indirect domestic taxes 21-25 percent; and fees and licenses 3.14 percent. Table 8. Tax Revenue Performance, 2003/04 (USh billions) Revenue Budget Half-year performance Pro rata Projections Outturn (”/.I Net collections 1,655.20 799.24 749.9 99.5 Direct domestic taxes 351.46 163.0 193.93 118.54 Indirect domestic taxes 432.80 205.53 168.93 82.19 olw Excise duty 133.28 63.15 59.95 94.86 Value-added tax (VAT) 299.2 1 142.24 108.96 76.60 Taxes on international 863.16 426.1 1 425.1 1 99.76 trade Fees and licenses 49.58 24.89 24.93 100.16 Tax rehnds 41.80 20.90 17.93 85.77 Source: MoFPED, March 2004 C. EXPENDITURE PERFORMANCE Overall expenditure performance 3.13. In the first three quarters o f 2003/04 expenditures performance was largely consistent with projection. Development spending was an exception, creating a risk o f delays in the improvement o f the capacity for service delivery. Wages and non-wage releases performed at nearly 100 percent on a pro rata basis (Table 9). For wage spending, all components-PAF, statutory, and others-performed at or near 100 percent. For non-wage spending, statutory payments and ‘others’ performed at more than 100 percent and the PAF component at 85.3 percent, Development expenditures underperformed by almost 27 percent, the PAF component performing below target by almost 21 percent and ‘others’ by almost 34 percent. (It i s therefore important within the development expenditure category that the GoU increase its focus on PAF areas, to avoid compromising its poverty reduction efforts.) As was the case in 2002/03, interest payments continue to rise and to overperform. 3.14. The increasing share o f interest payments in the overall budget i s becoming a matter of concem. In fiscal 2002103 interest payments overperformed by 25 percent, or almost USh40 billion. By the third quarter o f 2003/04 interest payments already had overperformed by almost 11 percent. Domestic interest payments account for the largest part o f overall - 29 - interest payments, and this share i s growing. The rising domestic interest payments i s a result o f sterilization operations by the Bank o f Uganda, made necessary because o f Uganda’s large fiscal deficit. It i s notable that the amount o f interest payments i s higher than the budget (excluding projects) for the health sector, the justice, law, and order sector, and roads. Improved sterilization operations, the further development o f the financial sector, and greater use o f foreign exchange sales for sterilization operations w i l l not be sufficient to fully resolve the problem o f rising interest payments. 3.15. Supplementary allocations during the financial year amounted to USh100.6 billion (USh69.5 billion being presented in the first schedule and USh3 1.1 billion in the second). The total supplement was approximately 4 percent o f budget-a similar proportion to the share o f the 2002103 budget that was held by that year’s supplementary budget o f USh91.2 billion. The initial request for supplementaries amounted to UShl40 billion, but MoFPED succeeded in reducing this amount. Table 9. Expenditure Performance, 2003/04 Approved First-half performance Performance in first three quarters Budget Releases Pro rata (YO) Releases Pro rata (%) Wage 673.37 329.83 98.0% 504.92 99.98% Statutory 20.3 1 10.05 99.0% 15.08 99.03% PAF 259.82 128.08 98.6% 194.87 100.00% Other 393.24 191.70 97.5% 294.96 100.01Yo Non-wage* 1 843.77 437.19 103.6% 641.00 10 1.29% Statutory 123.91 67.25 108.5% 96.42 103.76% PAF 177.34 77.3 1 87.2% 113.44 85.29% Other 542.52 292.63 107.9% 431.14 105.96% Development * 568.55 241.27 84.9% 312.15 73.20% PAF 336.81 138.85 82.4% 197.23 78.08% Other 231.74 102.43 88.4% 114.92 66.12% TOTAL (excl. interest) 2,085.69 1,008.30 96.7% 1,458.07 93.21% Interest payments 227.80 121.57 106.7% 188.80 110.51% Arrears 50.00 0.96 3.8% 0.00% TOTAL 2,313.49 1,129.87 97.7% 1,646.87 94.91% Memo: Defense total 307.83 156.75 101.8% 230.24 99.73% Source Macroeconomics Department, MoFPED, July 2004. PAF performance 3.16. By the end o f the third quarter o f 2003104, PAF expenditure performance was 87.3 percent o f programmed levels (Table 10). This i s less than the 89.1 percent performance for the first half o f the year, and compares unfavorably with the 99 percent performance for the first three quarters o f the previous year. Wage performance remains at or close to 100 percent but non-wage performance i s poor, especially at the local government level. By the end o f the first three quarters o f 2003104, local government non-wage PAF expenditure performance was only 81.2 percent (on a pro rata basis), compared to 92.3 percent for central government. The overall non-wage performance was 85.2 percent. 3.17. Local government PAF expenditures account for 75 percent o f expenditures related to service delivery activities. In 2003/04 all subcategories o f PAF expenditure performed at less than programmed levels, due to delayed and below-program releases o f equalization grants, wages for nonsectoral P M A grants, and Local Government Development Program releases to districts. Delayed and below-program spending on these activities, which are targeted at reducing inequality, indicate that not enough i s being done to address the inequalities that exist across local governments, regions, and different population groups. - 30 - Table 10. Poverty Action Fund Performance, 2003/04 Approved First-halfperformance Performance in first three quarters Budget Releases Pro rata (YO) Releases Pro rata (YO) Wage 259.82 128.08 98.6 194.87 100.00 Center 1.52 0.68 88.6 1.03 90.52 Local government 256.40 126.44 98.6 192.40 100.05 Statutory 1.89 0.96 01.1 1.44 101.10 Non-wage 177.49 77.31 87.1 113.44 85.22 Center 51.65 24.84 96.2 35.75 92.28 Local government 119.84 49.39 82.4 72.95 81.16 Statutory 6.01 3.09 02.7 4.75 105.35 Development 335.12 138.85 82.9 197.23 78.47 Center 146.76 63.07 86.0 93.02 84.51 Local government 188.36 75.77 80.5 104.22 73.77 TOTAL 772.44 344.24 89.1 505.54 87.26 Center 199.93 88.58 88.6 129.80 86.56 Local government 564.61 251.61 89.1 369.57 87.27 Statutory 7.90 4.04 102.3% 6.18 104.33% Source: Macroeconomics Department, MoFPED, July 2004. 3.18. Only the wages category o f PAF performed well. By the end o f the first half o f the year wage PAF expenditure performance on a pro rata basis was 98.6 percent. At the end o f the third quarter it was 100 percent. For central government votes, which account for the smallest share o f the wages category, the performance was 88.6 percent by the end o f the first half and 90.5 percent after the third quarter; for local governments the performance was 98.6 percent and 100.1 percent. PAF performance encompasses also the h n d i n g o f non-wage and development expenditures and other non-PAF sectors that contribute to the attainment o f PAF development targets, however. As noted earlier, spending on these areas was below budget, making attainment o f the development objectives difficult. Sector expenditure performance 3.19. There generally was significant improvement in the budgetary releases to the different sectors. In the first half o f fiscal 2002/03 security expenditure exceeded program by 18 percent; the comparable figure for 2003/04 was 3 percent. By the end o f the third quarter o f 2003/04 additional improvement in releases for the security sector raised performance on a pro rata basis to 101.3 percent. Table 11 reports expenditure performance by sector for the first three quarters o f 2003104. 3.20. At the end o f the third quarter expenditure on measures to increase the incomes o f the poor, such a s spending on roads and agriculture, was underperforming. Spending on measures to improve the quality o f l i f e o f the poor also was below programmed pro rata estimates for almost all subcategories o f expenditure. Expenditure to improve monitoring and accountability was broadly within pro rata estimates. (This i s true except for PAF monitoring and accountability, repeated underspending in this area contributing to the underperformance o f the PAF for the last several years. This situation i s in urgent need o f redress.) -31- Nt09 P W F F F - \ D m e o m o e 0 x .e a 3 e E G (u 8 + e a 2 3.21. By the end o f the first half, overperformance on public expenditure (PA) was 10 percent o f program, pro rata. By the third quarter this had fallen to 5.9 percent. Overspending on public administration i s a long-standing budget execution challenge for Uganda. The public service needs to be reformed: the functions o f government ministries and departments should be reviewed to identify possible closures and mergers. 3.22. The overperformance in PA for the first three quarters i s attributable to overrelease to missions abroad (168 percent o f programmed expenditure) and to the State House (122 percent). There i s a lack o f discipline in this sector and as many o f these votes are statutory l i t t l e progress has been made to rationalize the sector. In the context o f the Poverty Reduction Support Credit (PRSC) two studies have been carried out to assist with the PA reforms. A cabinet decision on the recommendations o f one o f these studies regarding the size o f PA i s eagerly awaited. Reforms are all the more urgent as requests for further increases in the PA budget, including one to redevelop the State House, already have been tabled for the coming financial year. As the 2006 elections and the planned 2005 referendum approach P A may become prone to further overruns. The situation should be carefully monitored so that it does not become a greater problem. 3.23. The key challenge for public administration i s to achieve a smaller, more realistic budget. The two studies that have been undertaken for the PRSC have made several recommendations, including that political positions such as that o f presidential advisor (of which there are 71, including 38 that were created in 2002 alone) and deputy and assistant Resident District Commissioners (RDCs) be eliminated; that the number o f ministers be reduced from 67; that the number o f local government entities be reduced; and that the number o f foreign missions also be reduced. Parliament also could be reduced in size. These measures have been identified as necessary and supported by the Budget Committee review o f the 2004/05 budget. Comparison with other countries suggests that Uganda has an unusually high number o f parliamentarians: with 307 Members o f Parliament for a population o f about 24 million, each M P represents only 72,000 people (Table 12). Table 12. Parliamentary Representation per Capita: Comparison with the United States, India, and Kenya Country Population (millions) Number o f MPs (or Per capita representation equivalent) Uganda 24 307 72,000 Kenya 30 200 150,000 United States 275 535 500,000 India 936 795 1,700,000 Sources: i.www.parliament.po.ug”udatdmps.hei, July 2004. ii,www.cia.gov/cia/uublications/factbooki, July 2004. 3.24. The policy matrix o f the PRSC states that by M a y 2004 “the Ministry o f Public Service (MoPS) and MoFPED w i l l have completed a comprehensive draft policy paper on issues, measures, and modalities for controlling the size o f public administration.” The MoPS and MoFPED have produced their report but this has yet to be debated in cabinet. It i s o f utmost importance that this report be discussed so that the implementation o f cost-reducing measures can begin. 3.25. To reiterate what was said in the 2003 PER, a comprehensive civil service reform i s necessary that reaches to the entire structure o f the public service, with special focus on public administration. The ongoing public service reform i s far from comprehensive and furthermore i s underfunded-in effect, it received no funding at all in the 2003/04 budget. The capacity o f the MoPS i s a matter o f concern in this respect, but there i s no appreciation by key institutions at the center of government that this public service reform agenda should -33- not be not the exclusive responsibility o f the MOPS. This agenda should be the concern o f all sectors. 3.26. The pension vote i s growing fast. The pension roll grew significantly during the mid- 1990s, when extensive downsizing o f the public service transferred many individuals from the payroll to the pension roll, instantly increasing the state pension obligation. Figure 8 shows the budgetary provisions for pension payments since 1997/98. Figure 8. Provision for Pension Payments I 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 Source: MoFPED, July 2004. 3.27. In addition to i t s annual pension payment obligations, the GoU i s facing a stock o f pensions arrears that at end-June 2004 amounted to USh3 13 billion. The 2003/04 reduction o f these arrears was budgeted at Ush5O billion, but no release had been effected by the end o f the third quarter o f the fiscal year (Table 9). (It i s projected that USh47.3 billion w i l l be committed to this item by the end o f the year.) 3.28. The current rate o f pension payments i s unsustainable: the pension bill for civil servants and teachers alone i s projected to double from i t s current level to UShl20 billion (4.6 percent o f recurrent government expenditures) by 2009/10, and to rise to USh460 billion (5.5 percent o f recurrent government expenditures) by 20 19/20. Only 2 percent o f the working population furthermore i s covered under the current scheme. I t i s clear that a comprehensive strategy to fi~lly fund the ongoing pension obligations and to pay o f f the arrears i s now a matter o f extreme urgency. Government proposals to address these issues must result in actions that w i l l bring this challenge rapidly to closure. 3.29. The roads sector expenditure performance was 77 percent by the end o f the first three quarters o f the 2003/04. However, the wage component performed at 118 percent, compared to 73 percent for development and 85.8 percent for non-wage components. This led to two things: a waste o f wage resources for works not done, and below-target construction o f roads. If the development objectives in this sector are to be achieved on time, the non-wage and development expenditure for roads and works must be released as programmed. 3.30. The road sector furthermore i s taking on commitments that exceed the funding available in the M T E F and that w i l l result in a roads inventory that the GoU i s unable to maintain. The political climate i s contributing to this dilemma, but there clearly i s a need for greater transparency in the selection o f road projects. Government and donor partners need to be more objective in the selection o f funding instruments and the issue o f contracts. - 34 - 3.31. Agriculture performed below target, at 92 percent for the first three quarters o f the year. This performance nonetheless was a significant improvement on that o f 2002/03, which for the first half o f the year was 69.8 percent. Performance for the National Agricultural Advisory Services ( " S ) program in the districts was 95 percent, and wages performed at 105 percent. Expenditure on the Agriculture Extension Project was 94 percent, due in part to the release o f UShl.O billion in November 2003 for the establishment o f the European Good Agricultural Practices (E~rep-GAP)~-compliant system that would enable agricultural exports to meet European Union standards. The agriculture sector PAF component overperformed at 112 percent, due to a special release in October 2003 to the Uganda Coffee Development Authority. The Plan for the Modernization o f Agriculture (PMA) nonsectoral conditional grant performance was 87 percent, compared to 43 percent for 2002/03. 3.32. B y the end o f the third quarter o f 2003/04, releases to the education sector were 92 percent o f program, compared to 90.8 percent in 2002/03. Wage release performance was 102 percent. The underperformance o f the sector as a whole was due to non-wage releases (90 percent) and development releases (66 percent). 3.33. The underperformance o f non-wage expenditure to the education sector was due primarily to lower-than-programmed releases for non-wage expenditure for Gulu University (38 percent) and Kyambogo University (66 percent). The late release o f the district school facilities grant was another contributing factor. Primary school capitation grants recorded an underperformance o f about 15 percent, due to the late submission o f accountability returns by some local governments and also due to the cash limits that were provided for the first half o f the financial year, in accordance with the IMF poverty reduction and growth facility (PRGF) program. 3.34. The underperformance o f the education development budget was largely due to below-program expenditure by the Ministry o f Education and Sports (MoES; 63 percent) and the district school facilities grants (67 percent). The latter was in large part due to the failure o f some local governments to submit timely accountability returns to MoFPED and the MoES. 3.35. The budget performance for the health sector for the first three quarters o f the financial year was 87 percent, compared to 90.2 percent for the previous year. The underperformance o f the sector was due to below-program (75 percent) wage releases to referral district hospitals. Non-wage recurrent releases to the health sector performed at 94 percent, due to the late submission o f accountability returns from local governments to MoFPED and the Ministry o f Health. 3.36. Water sector expenditure performance was 74 percent for the first three quarters ofthe fiscal year. Wage expenditure performance for the sector was 119 percent, compared to 73 percent for non-wage expenditure. The district water conditional grants performance was 67 percent. There has been l i t t l e improvement in the releases made to this sector, a factor that has been identified as a key constraint to the achievement o f sector outputs. 3.37. The justice, law, and order sector expenditure was performing at 100 percent by the end o f the third quarter, in line with pro rata expenditure estimates. This i s despite the fact that at the end o f the first half some components-court awards (79 percent), compensation for a major court case (175 percent), the Ministry o f Internal Affairs (104 percent), and prisons (107.7 percent)-were significantly overperforming. Expenditure overperformance in the prisons sector was due to an unforeseen increase in the bill for feeding prisoners, and for the Ministry o f Internal Affairs was the result o f unanticipated antiterrorism activities. These are standards set by EU member countries that must be met by countries exporting agricultural products to the EU. Agricultural commodities have to be specified, by origin, farming method, type offertilizers used, and other criteria. - 35 - 3.38. The Uganda Law Reform Commission, however, spent j u s t 76 percent o f its budget and the Judicial Service Commission 65 percent. The SWAP (sector-wide approach) development fund, o f great importance to the improvement o f the sector’s performance, performed at 62 percent. Experience shows that the budget lines that are o f importance to improvement o f the judiciary system and governance in Uganda generally have difficulty attracting sufficient funding and usually show budgetary underperformance. The performance o f the sector as a result cannot be judged simply in terms o f the sector’s overall performance, but should be assessed at the vote level. A weak justice, law, and order system potentially can have a serious adverse effect on development. 3.39. Expenditure for the economic functions and social services sector was 77 percent o f budget. Wage payments in the Ministry o f Trade, Tourism, and Industry overperformed by 16 percent, due to staff promotions. Development expenditure releases were 76 percent o f budget, releases for equalization grants were 38 percent, and nonsectoral conditional grants were 67 percent. Budget overruns and underprogramming 3.40. As in the previous three fiscal years (2000/01-2002/03), there were significant budget overruns in 2003/04. In the second half o f the fiscal year a supplementary budget o f UShll3 billion was passed by parliament, a large share o f which went to the financing o f non- PEAP/nonpriority areas. H a l f o f this supplementary budget was financed through cuts to the development spending o f other sectors, and the underperformance o f some sectors may be explained in part by expenditure limits that were imposed by MoFPED for the first half o f the year and that diverged from budgetary provisions. Supplementary budgets o f this nature tend .to undermine confidence in the entire budget process. 3.4 1. Some other instances o f underprogramming-that is, the inadequate allocation o f resources to finance a particular activity-also occurred. Domestic interest payments were overperforming at 115 percent by the end o f the first half, for example. This evident underprogramming for domestic interest payments and for public administration partly explains why MoFPED imposed expenditure limits on some sectors. Expenditure limits that are lower than budget provisions are equivalent to budget cuts, at least in the short run, as they prevent sectors from meeting their programmed output targets. Irregular flow and release o f funds 3.42. Implementation o f the 2003/04 budget was characterized by an irregular flow o f funds. Some progress was made in the release o f funds for the N A A D S and a few other sectors, but a more systematic approach generally i s needed for the release o f funds. A study that MoFPED carried out with funding from the World Bank and the Netherlands Embassy shows that financial releases from MoFPED take between 12 and 43 days to reach the final spending agencies. 3.43. The late arrival o f funds at the sectoral or local government level, the result often o f frontloading o f some sectors at the expense o f others, can distort project implementation. The pattern seen in fiscal 2003/04 was similar to that o f the previous year: defense (103 percent); justice, law, and order (104 percent); and public administration (123 percent) received most o f their fbnds early during the year, but the Poverty Action Fund sectors performed only at 89 percent. Whether or not all budgeted b d s are received within the fiscal year, this erratic flow o f funds hampers program execution and makes it difficult for the sectors to perform efficiently. Opportunities to benefit from economies o f scale also may be lost. 3.44. The release tracking study revealed large differences in the time it takes for different categories o f funds to flow from MoFPED to the spending agencies. Table 13 provides an - 36 - overview of the time it takes for money to move from the Consolidated Fund to spending agencies. Table 13. Number of Days Involved in Transfers from the Consolidated Fund to Spending Agencies To local government T o ministries Minimum Maximum Average Minimum Maximum Average Wage 7 50 18 6 23 12 Non-wage 6 84 32 5 72 23 Development 7 103 27 5 135 43 Source: Author’s own findings from field studies 3.45. The findings show that development grants move more slowly than do recurrent non- wage releases, which in turn move more slowly than do the wage releases for local governments. Development grants furthermore continue to move slowly after reaching local government, as the LG in many cases w i l l wait for the cash release from MoFPED before making commitments on expenditure. Because many development grants involve construction, funds also inevitably get held up in bank accounts pending the completion o f the contracted work. It i s also apparent that releases move more slowly when they reach LGs than they do at the national level. 3.46. MoFPED tends to make most late releases at the beginning o f the year, for two main reasons. First, the vote on account takes longer to process and approve, with the result that July releases typically are effected late in the month or even in August. (This year’s vote on account was prepared well in advance and should not create any delays.) Second, the spending agencies-and especially local govemments-often procrastinate over the opening o f new bank accounts. MoFPED obviously cannot release funds unless it knows the account to which they should be sent. I t i s apparent that the spending agencies do not plan early enough for the new fiscal year. 3.47. MoFPED additionally does not adhere strictly to the PAF general guidelines on the release o f funds, a reaction in large part to the failure on their part o f local governments to follow the conditions and guidelines for use o f these grants. The requirement for the regular submission to line ministries o f quarterly reports and work plans in particular often i s disregarded (more than 30 percent o f LGs submit the required reports late), with the result that the sector ministry w i l l recommend withholding the releases o f further funds to the offending local government. MoFPED also i s on occasion obliged to override the release timetable for macroeconomic reasons, for example to control liquidity in the economy. 3.48. Other causes o f delays include exhaustion o f the funds available for a particular program; delays by local banks in crediting employee salaries; the unavailability o f check signatories; the late award o f tenders; the late completion o f work by contractors; and communication lapses between the center and local governments. 3.49. These problems persist, but the system o f releases nonetheless has improved in recent years. In particular, once MoFPED has communicated the cash limits to the spending agencies, those agencies may be reasonably confident that they w i l l receive their full allocation o f funds and can plan and/or spend accordingly. The Auditor General additionally now gives only one block audit warrant per quarter, and this speeds up the process. 3.50. The recent consultancy study (GoU 2004) offers several recommendations to further reduce the delays in transfers: 0 MoFPED tends to release July funds late. The ministry could improve this situation by securing the vote on account earlier. - 37 - Local governments should open new bank accounts at the beginning o f the financial year, ideally within the first week o f July. Local governments should be able to commit themselves up to the full amount o f the cash limit communicated by MoFPED. This would enable them to put the funds to use as soon as they arrive. The LG should not be required to wait for cash release notes before making commitments, especially on development funds. MoFPED should consider releasing development funds together with recurrent funds, to enable the spending agencies to more quickly implement their development projects. Fewer checks are needed at the spending agency level. Checking should be kept at a single location and pre-auditing should not be performed. Internal audit programs should be strengthened. Where reports are submitted late and other statutory requirements not met, the officer responsible, rather than the spending agency, should in some situations be penalized. The transfer o f funds should be managed through the enforcement o f clear deadlines at the various levels o f the process. Work should be done to raise skills levels in procurement, accounting, and report writing, especially at the lower levels o f local government and at spending units such as schools and health units. Payment o f arrears and the commitment control system 3.51. Uganda has since 1999 operated a commitment control system (CCS), setting a quarterly cash limit for each vote, project, and item. The CCS was implemented initially for non-wage expenditures in 1999, and in 2000 was extended to the development budget at central government level. Substantial progress subsequently was made in arresting the build- up o f arrears. The further extension o f the system to wages, rent, utilities, pensions, and all local government expenditures has been delayed, but it i s clear that the potential gains from the further rollout of the system are significant. Combined with the implementation o f the integrated financial management system (IFMS), the CCS could help reduce arrears at all levels o f government. Introduction o f the system in several districts on a pilot basis i s projected for fiscal 200412005. 3.52. The stock o f arrears i s not systematically recorded. L i n e ministries compile data on arrears in their areas o f responsibility (the Ministry o f Public Service on wage and pension arrears and the privatization management unit on utility arrears, for example), but the reliability o f these data i s questionable. The available data suggest that, as o f June 2003, arrears in payment o f wages amounted to USh8.9 billion and, in respect o f utilities, USh20 billion. Figure 9 summarizes the stocks o f arrears that were registered by the CCS for non- wage and development spending up to June 2003. -38- Figure 9. Stock o f Arrears: Internally Audited Accounts as at 30 June 2003 up to 1998/99 1999/00 2000/01 2001/02 2002/03 1997198 Period Source: MoFPED, July 2004 3.53. The 2003 Public Finance and Accountability Act has made accounting officers liable in law for noncompliance with the CCS, but compliance nonetheless remains incomplete. Common types o f noncompliance include the concealing o f bills until such time that funds become available to pay them; the making o f purchases without a local purchase order and the post-dating o f LPOs; the failure to maintain an invoice register; and the use o f duplicate vouchers. D. BUDGET M O N I T O R I N G AND REPORTING 3.54. Budget monitoring has two related forms: financial monitoring, and the monitoring o f results, outputs, and outcomes. In terms o f financial monitoring, the Office o f the Auditor General i s responsible for ensuring that all ministries and departments produce annual audited accounts, as directed through a range o f financial manuals and guidelines. In terms o f the monitoring o f results, outputs, and outcomes, the new regime o f output-oriented budgeting (OOB) makes the sector working groups (SWGs) responsible for ensuring that their budgets are results-oriented. The stated output o f the OOB becomes the monitoring benchmark o f budget implementation. Where the achievement o f a particular outcome or output depends on the work o f more than one sector, the SWGs are required to work collaboratively. 3.55. The Ministry o f Finance, Planning, and Economic Development has appointed a technical advisor to accelerate the implementation o f output-oriented budgeting, but the rollout o f the system i s being delayed b y the slow implementation o f results-oriented management (ROM), which would make departmental heads filly accountable for results. Departmental heads have no authority to hire and fire staff, with the result that they cannot reasonably be held responsible for implementation o f ROM. 3.56. At the center, the government monitors budget implementation on the basis o f resources performance (that is, revenue and expenditure performance). MoFPED produces a quarterly budget performance report and formally publishes and distributes a half-yearly report. These reports have helped to reduce the discrepancy between budgetary allocations and actual expenditure. The budget discrepancy index (the weighted average o f the absolute percentage deviation between budget and outtums) shows that Uganda has substantially reduced the budget deviation from about 10 in 1998/99 to 5.4 in 2003/04 (Figure lo). - 39 - However, this does not limit sector budget variation, which in some sectors i s preventing the achievement o f program outputs. This i s an area that needs hrther study. Figure 10. Discrepancy between Budget Allocation and Actual Expenditures 12 10 8 8 z .- $ m 6 Q F % 6 4 2 0 ~ 1998199 1999100 2000101 2001102 2002103 2003104 Source: Estimates based on various MoFPED budget documents 3.57. In addition to these improvements in monitoring and reporting, the Public Expenditure Review working group has been reinvigorated and formalized. The PER working group now i s chaired by the Director o f Budget and i s convened approximately four times each year. Additional meetings also are held according to need, as was the case during the finalization o f the 2004105 budget. The formalization o f the group has conferred greater ownership o f the process on MoFPED officials and has encouraged their greater participation, and represents a significant improvement in monitoring and implementation. 3.58. There nonetheless remains much room for hrther improvement. Not all government spending i s included in the budget reports, for example, and as decentralization proceeds it i s increasingly an issue for concern that not all local government entities are included in the process and that other entities report very late. (The Country Financial Accountability Assessment (CFAA) addresses this issue in depth.) E. CHALLENGES FOR THE FUTURE 3.59. Uganda must increase i t s domestic revenue, which as a proportion o f GDP has risen by only 0.5 percentage points annually for each o f the last five years. The country i s heavily dependent on trade taxes for domestic revenue, and i t s entry into the East African Customs Union i s expected to reduce i t s current trade taxes by USh86 billion. 3.60. To increase the revenue: GDP ratio beyond the range o f 11-13 percent, the GoU must revise i t s tax policy. The opportunities for widening the tax base are strictly limited, however, and in the near term may not realistically extend beyond the elimination o f exemptions and o f the preferential treatment given to some sectors and industries. 3.61. Any increase in tax revenues in the short t e r m must come from improvements in tax administration, particularly in the area o f excise duties and V A T on local goods. Implementation o f the recommendations made in the report on corruption in the Uganda - 40 - Revenue Authority also could significantly improve tax administration. Legal complications thus far have delayed this implementation. 3.62. The performance o f non-tax revenue i s consistently below target, partly due to the poor performance o f some non-URA agencies in collecting revenues. The transfer o f some revenue items to the U R A could improve this situation, but as non-tax revenue accounts for a limited share o f total revenue this would not significantly affect overall revenue performance. Non-tax revenue nonetheless should be budgeted for in greater detail, and collections should be properly reported and analyzed for performance according to budget. 3.63. Another challenge facing the GoU i s how to create an environment that encourages donors to maintain a predictable inflow o f aid. Donors have in the last two years expressed serious concerns about the high level o f defense spending, inadequate spending on priority areas, and poor management o f the budget. In some instances they have cancelled or delayed their aid commitments. Uganda must address these concerns if it i s to continue to receive the aid that i s essential to i t s efforts to attain i t s Poverty Eradication Action Plan (PEAP) and MillenniumDevelopment Goal (MDG) targets. 3.64. On the expenditure side, the GoU’s primary objective should be to realize the full implementation of output-oriented budgeting and results-oriented management. Successful implementation o f these approaches i s critical to the realization o f efficient resource use and to attainment o f the PEAP and MDG development targets. The government must as a priority study, identify, and remove all obstacles to implementation. 3 -65. Finally, keeping public administration expenditure to budgeted amounts i s a perennial problem. The GoU must commit i t s e l f to controlling expenditure in this area. A comprehensive reform, linked to results-oriented management, i s necessary o f the entire structure o f the civil service, with a special focus on PA. Numerous studies already have been made o f PA and have recommended many potential changes, including the elimination or reduction in the number o f Assistant Resident District Commissioners (ARDCs) and presidential advisers, and the reduction o f fringe benefits, salaries, and so forth. F. CONCLUSION 3.66. Uganda has significantly improved its budget execution, but new challenges are beginning to emerge. In the area o f revenue mobilization, the main challenges are as follows: 0 Increasing the ratio o f revenue to GDP, which has grown only marginally in the last five years. This will entail widening the tax base and maintaining the high rates o f economic growth recorded in the last decade. 0 Mobilization o f resources from external sources. Uganda has good relationships with i t s multilateral and bilateral donors and must maintain and improve upon these relationships. 0 Encouraging the development o f local enterprise. The GoU should seek to encourage more domestic saving, as this would complement i t s efforts to widen the tax base and support economic growth. 3.67. On the expenditure management side, the GoU needs to focus on the following: 0 Improving budget discipline. This entails full adherence to the budget throughout the budget cycle. The government must eliminate the budget overruns that especially have affected public administration, security, and domestic interest payments. - 41 - 0 Reducing the size o f public administration. 0 Ensuring the timely release o f funding to spending agencies. The most commonly cited reason for delay in the release o f funds by MoFPED i s the failure o f local governments and line ministries to report as required on their management o f previously released funds. This often i s the case, but it i s also true that funds are delayed because they are not in the first instance available to the treasury, due to the constraints o f the cash budget system. 0 Improving budget monitoring, which tends to emphasize the flow o f funds rather than outcomes. The implementation o f results-oriented management, which i s critical to the attainment o f results, has stalled and must be restarted. 0 Ensuring adequate counterpart funding, especially given that future budgets are expected to be tight and that projects w i l l at some point become integrated into the medium-term expenditure framework. Underprogramming i s becoming prevalent, to the extent that i t may be a deliberate strategy to contain the sector budgets. Underprogramming typically leads to the creation o f supplementaries, and these should be avoided. 0 The commitment control system (CCS) i s not functioning properly across sectors. The new Public Finance and Accountability Act makes accounting officers punishable for breach o f the CCS, but few prosecutions have been brought. The areas covered by the CCS need to be expanded to include utilities, rent, wages, and pensions. Given the arrears o f local governments, the planned piloting o f CCS to LGs next year i s a welcome development. 0 Working out a cost-effective pension system. The crisis o f public pensions needs to be immediately addressed. In the interim, resources must be budgeted that can both meet current pension commitments and pay outstanding pension arrears. - 42 - 4. EFFICIENCY OF PUBLIC EXPENDITURES A. OVERVIEW 4.1, This chapter reviews the issues pertaining to the allocative and operational efficiency o f public expenditures in the social sectors: education; health; water and sanitation; and justice, law, and order. These sectors are important for two main reasons. First, they have a strategic role in poverty reduction and improving the quality o f life. Second, the GoU, with the support o f i t s development partners, has been investing increasingly large amounts o f resources in these sectors as it seeks to improve the quality o f l i f e o f the poor. The efficiency with which the sectors disburse their resources i s o f great importance. 4.2. The chapter reviews the extent to which the sectors have implemented value-for- money studies and how these studies have been used to promote efficiency. It also examines the extent to which the recommendations o f sectoral studies on expenditure tracking, value- for-money, and audit reports are used in policy formulation. Several sectoral studies additionally are being commissioned and undertaken to assist planning and policy for mulation. 4.3. The chapter also looks at public expenditures, outcomes, and the prospects o f achieving the Millennium Development Goals (MDGs) and the Poverty Eradication Action Plan (PEAP) targets. Increased public expenditure alone i s not sufficient to ensure attainment o f these goals: greater efficiency o f resource use and the better coordination o f the different sectors also are required. The chapter looks at cross-cutting issues and the challenge o f meeting the M D G and PEAP targets using current budgetary allocations. For example, to reduce infant mortality the GoU must increase i t s spending not only on health care but also on the education o f women, to increase understanding o f the value o f pre- and postnatal services, water and sanitation services, and hygiene, and to raise demand for these services. To improve the effectiveness o f the Plan for the Modernization o f Agriculture (PMA) the government also must increase funding for agricultural extension and improve rural roads, education, and so forth. 4.4. Finally, the chapter identifies and recommends ways to address the weaknesses in public expenditure management. The experiences o f these sectors provide important lessons for other sectors in terms o f their efforts to improve efficiency and increase the value for money realized in the delivery o f public services. Their work also can inform future policy actions that aim to improve accessibility to and the quality o f social services. 4.5. Section 4.2 reviews public expenditure and accountability issues in Uganda. Section 4.3 evaluates the status o f service delivery, in terms o f accessibility, and assesses the allocative and operational efficiency o f procurement and financial management in the education, health, water and sanitation, and justice, law, and order sectors. Section 4.4 discusses the strengths and weaknesses o f public financial management, and Section 4.5 concludes by recommending a way forward. B. BACKGROUND 4.6. Numerous expenditure and release tracking studies have been conducted in the education and health sectors, with far-reaching policy implications. Little has been done in the justice, law, and order sector and the water sector. Increases in public spending alone are not - 43 - enough to guarantee greater public access to social and infractructural services, and public resources in any case are unlikely to increase significantly. The GoU must concentrate instead on improving efficiency in the use and management o f public resources, including tackling corruption. 4.7. Demand for social services far exceeds supply, and this imbalance i s expected to worsen. An estimated 54 percent only o f the population has access to safe water And an estimated 16 percent o f primary school-age children are not in school. The primary seven completion rate furthermore i s about 22 percent o f those who enter primary one. Less than 30 percent o f adult women have access to contraceptives, and infant and maternal mortality rates are 88 per 1,000 and 502 per 100,000, respectively. The population growth rate, at about 3.4 percent, i s one of the highest in the world, with concomitant consequences for service provision and quality. 4.8. To meet the PEAP and M D G goals and the anticipated increase in demand for social services, the G o U clearly must improve the efficiency o f service delivery. Public expenditures must be better targeted to ensure that the available resources benefit those most in need, and that each unit o f expenditure produces the greatest possible output and reaches the most possible people. The government also must identify areas in which it can cut back i t s spending, to make available more funds to support the MDGs. 4.9. In spite o f impressive rates o f growth and poverty reduction over the past 15 years, Uganda remains one o f the poorest countries in the world. The Human Development Index (HDI) ranks Uganda 146 out o f 177 countries (UNDP 2004), with a GDP per capita o f US$240. Between 1999100 and 2002103, the poverty headcount increased from 34 percent to 38 percent and the Gini coefficient increased from about 0.40 to 0.43, suggesting a worsening distribution o f income (Appleton and Ssewanyana 2003). In 2000 poverty had been demonstrated to be mainly a rural phenomenon, most severe in the north, but in 2002103 it was the east and west o f the country that registered the highest increases in poverty. 4.10. The measure o f income poverty does not capture access to and use o f social services, but i t i s clear from other analyses that the poor can benefit greatly from increased access to public services, particularly in the areas o f health (Deininger and Mpuga 2004),education, and water supply (Mpuga and Canagarajah 2004). C. SERVICE DELIVERY 4.1 1. This section evaluates the status o f service delivery in Uganda. This i s done from three perspectives: the efficiency o f public expenditures (separated into allocative efficiency and operational efficiency); procurement; and financial management in the education, health, water and sanitation, and justice, law, and order sectors. D. EDUCATION SECTOR Background 4.12. It i s essential that the education sector be brought to higher levels o f efficiency. Education enables the development o f human capital, which in turn enables the poor, particularly women, to participate in the growth process (MoFPED 2002; World Bank 1993 and 2001).'0 The education specifically o f mothers and female children also leads to healthier children and enhances gender equality in household relations. lo The World Bank concludes that increased education for women improves their health knowledge, which improves their ability to promote the health of their children. Higher education gives women the ability to deal with adverse shocks; it also gives them greater bargaining ability, which increases their say over resource allocation. - 44 - 4.13. The G o U recognizes the importance o f education and has in recent years invested more resources in the sector. The Ministry o f Education and Sports i s developing the Education Sector Strategic Plan (ESSP) 2004105-2014/15 in accordance with i t s mission o f providing, supporting, and coordinating quality education. The ESSP i s designed to guide the department in its regular medium-term and annual planning and budgeting, and w i l l assist the ministry in i t s negotiations with government agencies, stakeholders, and development partners for increased resources and investment in the sector. The plan notes, however, the inadequacy o f human capacity in the sector and acknowledges that Uganda’s projected GDP growth rate i s insufficient to expand the education system to meet the country’s requirements. 4.14. The government policy objective in the education sector since 1996 has been to promote equitable access to education. There have been significant successes in this area. Primary school enrolment has seen a steady increase since 1997, from about 2.2 million pupils to more than 7 million in 2003, and the number o f primary schools has increased from 7,351 to 13,332. The net primary school enrolment rate for children aged 6-12 years has improved from about 56 percent before 1992 to about 84 percent in 2003, and gross enrolment i s now about 127 percent.” The gender gap also has been significantly reduced, with the ratio o f boys to girls in primary school declining from 55:45 in 1986 to 51:49 in 2003. 4.15. As noted in the 2003 Public Expenditure Review, expenditure tracking and value-for- money studies have rigorously reviewed expenditure in the education sector. The policy recommendations o f these studies, and particularly that all releases o f hnds be published in newspapers and on public noticeboards, have helped to substantially increase the proportion o f funds reaching the intended beneficiaries (Reinikka and Svensson 2003 and 2004; Reinikka 2001; Ablo and Reinikka 1998). The incidence o f capture o f public hnds in the education sector f e l l from 80 percent in 1995 to less than 20 percent in 2001. This level o f capture remains too high. 4.16. The major issue o f concern in the sector h as been how to improve the quality o f education, especially at the primary level and especially in terms o f raising the percentage o f children who complete primary seven and go on to secondary and vocational institutions. The introduction o f the universal primary education (UPE) program significantly increased the number o f children seeking a school place. This in turn has had a substantial impact on the capacity o f schools to deliver quality education, in terms o f the pupi1:teacher ratio, classroom space, and other infrastructure. Under the UPE there i s automatic promotion o f pupils to the next class (although repetition rates as high as 14 percent are reported at this level), and this further compromises the quality o f learning. 4.17. The second major concern i s the issue of low survival rates in school. In 2003 the survival rate up to primary four was 67 percent and to primary seven was 23 percent. 4.18. Assisted by the donor community, the GoU has been seeking to address these issues through increased funding o f primary schools, the construction o f more classrooms, the provision o f educational materials, and additional training for and recruitment o f teachers. The government’s expenditure on education as a share o f the national budget increased from 16 percent in 1992193 to 20 percent in 2002l03. The share o f recurrent expenditure rose from 16 percent to more than 26 percent over the same period. Against this backdrop o f investment in the sector, studies have been undertaken to address the issues o f quality and drop-out rates (which are viewed as interrelated). These include a 2002 drop-out study, a 2004 monitoring ” Net school enrolment refers to the proportion o f children in a given age bracket attending school while gross enrolment refers to the total of children attending a given level of school dbided by the number o f children in the ideal age category for that level. - 45 - study o f learning achievement, and a tracking study on the efficient use o f resources in the sector (ongoing). 4.19. These efforts have yielded significant improvements in key education output indicators. I n 2002103 the pupi1:teacher ratio in government primary schools was 56: 1 and the pupils per classroom ratio was 94:l (the targets set for the year were 54:l and 95:1, respectively). Service delivery must be improved, however, and corruption (including the payment o f “ghost” teachers), late completion o f projects, and shoddy work (especially in the area o f classroom construction, putting the lives of pupils at risk) threaten to derail the UPE program. These problems are described in the Auditor General’s report for fiscal 2002103 and the School Facilities Grant (SFG) tracking study carried out by the Uganda Debt Network (UDN 2003). 4.20. Looking forward, the Ugandan education system must address several specific challenges. The first challenge i s to ensure that children enrolled in school achieve literacy, numeracy, and l i f e skills. The National Assessment o f Progress in Education, 1999 (Republic o f Uganda 1999) notes that overall achievement in primary schools i s poor. The study tested for literacy and numeracy among primary three and primary six children, and found that the ability o f these children was inadequate in more than 80 percent and 60 percent o f cases, respectively. An estimated one-half o f primary three children performed badly in terms o f spoken English, the official language o f instruction. Poor performance furthermore i s not restricted to primary level: studies at secondary level have also reported poor performance in English and mathematics. Overall, students are not developing the abilities necessary for them to participate effectively in the world o f work. 4.21. The second challenge i s to extend the achievements made at primary school level in terms o f enrolment and gender equity to the secondary and post-secondary levels. The post- primary education system cannot absorb all primary school leavers, with the result that many children enter the labor market with a basic education only. Total enrolment in the six years o f secondary school i s slightly less than 700,000 students; in 2003 alone, 400,000 children completed primary school. Fewer than half o f these students furthermore are in government schools, and fewer than half are female. Other post-primary enrolment i s only about 26,000 students. Policy intervention to advance more children from the primary level i s urgently needed if Uganda i s to build a critical mass o f citizens with the literacy and numeracy skills necessary to enable the development o f the country. 4.22. Third, post-primary education needs to be restructured to produce graduates with marketable skills, for example, in carpentry, tailoring, and home economics. The current education system emphasizes theoretical subjects, but with little focus on science, and provides little vocational training. The system needs to be reoriented to promote skills development so that graduates can be job-makers rather than j obseekers. Allocative efficiency 4.23. Since the introduction o f the universal primary education program in 1997, public expenditure in the education sector has been steadily shifting toward the primary level and away from the tertiary and secondary levels. This i s consistent with the government’s policy o f promoting basic education for all and ensuring equality o f access for both boys and girls, and in these areas the policy has been successful. 4.24. In 2003/04, the budget allocation (including grants) to the education sector amounted to USh587.3 billion, representing almost 20 percent o f the budget (MoFPED 2003). O f the total education budget, more than 66 percent went to primary education; the secondary, vocational, and tertiary levels received 16 percent, 4 percent, and 10 percent respectively, and central administration took about 3 percent. Recurrent expenditure in education accounts for about 24 percent o f national recurrent spending-a major advance from the allocation 10 years ago, when central administration accounted for more than 60 percent o f the sector’s budget. The rapid decline in the proportion o f the sectoral budget spent at the central level reflects the decentralization o f services that has been effected since 1993. More important, the primary education budget that i s allocated to district local governments includes capitation grants and the school facilities grant (SFG), which i s allocated to the construction o f classrooms. Figure 11. Allocation o f Education Budget, 2003/04 10% 3% Source: MoFPED 2003. 4.25. The government’s focus on primary education has had significant results in terms o f access and benefit. A benefit incidence study conducted for the sector shows that there have been large improvements in the proportion o f the government education subsidy for primary level that has gone to the poor, especially girls, who prior to implementation o f the UPE program had been largely excluded (Mpuga and Canagarajah 2004). In 2002, the poorest 20 percent o f the children attending primary school received more than 24 percent o f the subsidy (in the ratio boys:girls 27:22). The richest 20 percent of pupils gained only 12 percent (in the ratio 11:13). 4.26. Over time, the proportion o f the subsidy going to girls and boys at all levels o f income has tended to even out. This trend i s largely attributable to the UPE program, the aim o f which i s to provide free education for all children, irrespective o f gender. Gender inequality at the secondary level o f education, especially among the poor, remains high and i s increasing, however. In 1992 the proportion o f the secondary education subsidy received by boys and girls in the bottom quintile was 12 percent and 9 percent; by 2002 this had fallen to 8 percent and 4 percent, respectively. While government spending in primary education i s pro-poor and gender-equitable, spending at the higher levels o f education i s not, and i s becoming more unequal. Policy reform i s needed to streamline the benefits o f public spending at the secondary level. Operational efficiency 4.27. Operational efficiency in the education sector i s hampered by a lack o f synchronization between work plans and the release o f funds from the Ministry o f Finance, Planning, and Economic Development. Releases do not follow the annual work plan; the quarterly releases tend to come late; and, with the commitment control system in place to curtail the growth o f arrears, the ministry and schools cannot commit to spending funds until - 47 - they are available, thus delaying sector activities. In addition, the quarterly pro rata limits o f cash releases distort operations and the achievement o f set targets. 4.28. The sector has also had to contend with district budgets being cut, misprocurement, and delays in effecting procurement. These factors have exacerbated inefficiencies in service delivery. The districts, furthermore, have limited capacity in financial management and generally are slow in implementing projects, especially with respect to construction procurement. In several cases district authorities also have failed to account for funds received, thus delaying subsequent releases. E. EFFICIENCY OF PUBLIC EXPENDITURES IN THE HEALTH SECTOR Introduction 4.29. Good health i s a prerequisite for a productive population and thus i s a major input for poverty reduction. In Uganda, however, i ll health i s one o f the most frequently cited causes and consequences o f poverty (MoFPED 2002). 4.30. Good health has a number o f positive externalities that would support a call for increased government spending in this sector12(McPake 1993). Examples include the benefits o f reduced exposure to communicable diseases, and consequently the reduction in the incidence o f such diseases (McPake 1993), reduced expenditures on health care, and so on. 4.31. Increasing public expenditure on health and improving the efficiency o f such expenditures should be central to the overall government strategy o f reducing poverty and promoting economic growth. In the last 14 years the GoU has, through the Ministry o f Health (MoH), made a significant effort to restore the functional capacity o f the health sector, to reactivate disease control programs, and to reorient health services to primary health care (PHC). 4.32. Reforms undertaken since 1989, including decentralization, have in addition led to significant administrative and structural changes in the health care delivery system. Under the new arrangements, the district health system i s used to deliver a package o f health services, while the M o H handles policy formulation, standards and guidelines, and supervision and monitoring (Ministry o f Health 2000b). The overall objective o f the national health policy i s to achieve a sustainable standard o f health for all and to promote a healthy and productive l i f e (Republic o f Uganda 1997). The strategies employed include harnessing the contribution o f the health sector to poverty eradication, human resource development, health service delivery, and community empowerment. 4.33. The M o H i s in the fourth year o f implementation o f the Health Sector Strategic Plan (HSSP) 2000/01-2004/05, the major objective o f which i s to reduce morbidity and mortality from the largest causes o f ill health, including malaria and HIV/Aids. This i s planned to be , achieved through implementation o f a minimum health care package and support services designed on the principle o f preventive health care. Implementation o f the HSSP has accelerated the institutionalization o f policies, structures, and systems that are aimed to support the effective implementation o f M o H policies (Republic o f Uganda 2002). Allocative efficiency 4.34. Over the last three years the GoU has increased the proportion o f funding that goes to the health sector, such that it now comprises 54 percent o f the sector’s resource envelope. The l2 An externality is a side-effect o f either consumption or production, and that i s not traded on the market or taken into account when setting the price o f goods (Knapp 1984). -48- government also has overseen a significant shift in the allocation o f donor assistance from project to budget support. Budget support i s perceived as more e f f i ~ i e n t 'and ~ therefore better able to support the improved delivery o f services. The budget-financed-systems approach i s delivering substantial increases in health outputs, and these should improve health outcomes. 4.35. District PHC funding from the GoU budget increased from 33 percent in 199912000 to 54 percent in 2003104, and this also has been reorganized to achieve a more appropriate balance o f inputs (that is, drugs, human resources, and infrastructure). The per capita funding for drugs increased 50 percent between 199912000 and 2002103, and in 2002103 almost 2,700 PHC workers and more than 4,000 nursing assistants were trained.14 4.36. The health sector receives about 12 percent o f the national budget, including grants. Public health expenditure per capita i s USh14,OOO (about US$7), however, which i s far short o f the U S 3 0 recommended b y the World Health Organisation (2002) and i s inadequate relative to the sector's needs.15 Within the sector, furthermore, administration takes about half o f the budget, despite the government's commitment to decentralization (Figure 12). Primary health care takes about 32 percent, and the national and district referral hospitals together 18 percent. I t i s essential that this high allocation o f funds to areas that are not directly involved in service delivery be reformed. Figure 12. Allocation o f Health Expenditures, 2002/03 8% 0 H e a l t h adm inis tratio n "at io n a referral h o s pitals 0 P rim ary H e a l t h Care 0 Dis tric t ho s p dais Source: MoFPED 2003 Operational efficiency 4.37. The health sector i s using results-oriented management to achieve a more effective and efficient use o f resources. The output and outcome indicators set out by this system are described in the HSSP, and provide the measures against which the performance o f the sector i s evaluated. In addition to the supply-side reforms, the 2001 decision to abolish user fees has 13 The bulk of project resources go toward investment financing, particularly for expatriate technical assistance, infrastructure, vehicles, and training, and not for recurrent spending on important but often underfunded items such as drugs and workers salaries. Much of the donor-project hnds remain at ministry headquarters and regional centers, and do not reach the front-line service providers at the district or lower levels. l4 Information was obtained through interview with Rob Yates, Senior Health Economist, Ministry o f Health. Is It should be noted that not all countries must spend US$30 per capita to get the health budget right. For example, payroll costs vary fromplace to place-as does the spending in other, related sectors, that also could be influential in the improvement o f health indicators. - 49 - been important in stimulating demand for health care services, as noted b y Deininger and Mpuga (2004) and the Fourth Poverty Reduction Support Credit (PRSC4) mission report. 4.38. The impact o f the reform measures i s reflected in the fall in infant mortality rates, in a lower incidence o f stunting, and in the rising utilization o f services (Deininger and Mpuga 2004). The mortality rate among infants in their first year16 declined from 98 per 1,000 to 88 per 1,000 by 1995 (this figure has not been firther improved, however). The incidence o f stunting f e l l from about 40 percent in 1988 to about 36 percent in 1995 and to 34 percent in 2000/0 1. 4.39. The abolition o f public health care user fees has created an influx o f patients seeking treatment in government health centers, indicating a previously unsatisfied demand. The proportion o f the sick who reported to health care centers increased to 80 percent in 2003 from about 55 percent in 1992 (Mpuga and Canagarajah 2004; Deininger and Mpuga 2004; Ssewanyana et al. 2004). The proportion o f the sick who previously did not consult in health centers because o f cost fell from 50 percent (58 percent among the poorest quintile) in 1999 to 35 percent (39 percent) in 2003 (Deininger and Mpuga 2004; Ssewanyana et al. 2004). 4.40. The policy change also has increased the pressure on health care supply, such that stocks o f drugs frequently run out. To address this the GoU has increased i t s financial releases to health facilities and the health subdistricts (the health center four, HC-IV), with 50 percent o f all releases to health centers now earmarked for the purchase o f drugs. The drug supply system also i s under review, with the expectation that decentralization w i l l ease supply problems. 4.41. Other challenges and constraints facing the health sector include the following: few people have easy access to a health care center (only 49 percent o f the population live within 5 kilometers o f a health center); high prevalence o f preventable communicable diseases; e rising incidence o f noncommunicable diseases; a rapidly increasing demand for services, due to population growth and the effects o f HIV/Aids; and 0 resource constraints (the health sector budget i s projected to grow only slowly). 4.42. L i f e expectancy in Uganda i s about 42 years, and evidence on the burden o f disease indicates that about 75 percent o f l i f e years lost because o f premature death are due to preventable diseases. This i s a deplorable situation. The main preventable diseases are perinatal and maternity-related conditions (20.4 percent); malaria (15.4 percent); acute lower respiratory infections (10.5 percent); Aids (9.1 percent); and diarrhea (8.4 percent). Together these account for more than 60 percent o f the total burden o f disease (Ministry o f Health 2000). 4.43. Women and children bear a disproportionate amount o f this burden o f ill-health. There also are significant variations between regions and probably within regions (although the latter i s not well documented), and between urban and rural areas. Poor health nonetheless i s a problem that exists throughout Ugandan society: mothers in the top expenditure quartile, for example, lose almost the same proportion o f their children as do mothers in the bottom expenditure quartile. l6 This refers to the number of child deaths before the age ofone year for every 1,000 children born alive - 50 - 4.44. The challenge, therefore, i s to make a closer examination o f who benefits from current public expenditures on health, and to recommend how best to extend basic health care services to those who are not being served. The main objective o f the National Health Policy and the HSSP i s to reduce the disparities in access to health services between the rich and the poor, women and men, and rural and urban dwellers (Ministry o f Health 2000). F. WATER SECTOR Background 4.45. The 2002 Uganda Participatory Poverty Assessment Study identifies lack o f access to clean water as one of the main causes o f poverty in Uganda. Household use o f unclean water i s a major source o f disease, to the extent that the primary goal o f public investment in water supply i s to improve the health o f the population. The health benefits o f clean water, particularly for children, are well established in the epidemiological literature. Most econometric studies using household survey data show that access to clean water i s inversely correlated with child malnutrition, morbidity, and mortality (Strauss and Thomas 1995). 4.46. The time spent fetching water from distant sources additionally i s time that otherwise could be invested in more productive activities (the average distance to a water source in Uganda i s about 6 kilometers, and in rural areas i s much higher). The chore o f fetching water firthermore falls disproportionately on girls and women. Ilahi and Grimard (2000) report that in Pakistan closer access to water sources reduces the time women allocate to water collection, that this increases the time that they spend in income-generating activities, and that it also increases their leisure time. 4.47. The GoU and donors accord high priority to water sector operations, and have been increasing the allocation o f finds to the sector. This has led to significant improvements in capacity and performance. Several value-for-money studies and expenditure tracking studies, supported by the World Bank, the Danish and Swedish International Development Agencies, and other partners, have been conducted in the last four years. These include a rural water and sanitation study, an urban water study, studies o f water for production and o f water resources management, and an expenditure tracking study, conducted in 2003. 4.48. These studies have informed the development o f sector plans, including the integrated water resources management plan and the sectoral reforms approved by cabinet in 2003. 4.49. The 2003 expenditure tracking study, which was conducted in 10 districts and six urban councils, identified problems related to the delayed release o f funds for water. The longest delays involve finds released by the district chief administrative officer (CAO) to the district and urban water authorities. O n average, the conditional grant processing o f releases from MoFPED to the Bank o f Uganda takes about eight days; it takes 20 days for hnds to then reach the local bank; 10 days to reach the district water authorities; and a further 20 days to get to the urban water authorities and the final beneficiaries. In some districts releases from the CAO were found to take as much as 84 days to reach the district and urban water authorities. At the shortest, it takes 18 days for Ministry o f Water, Lands, and Environmental Management (MWLE) and Directorate o f Water Development (DWD) requests o f finds to reach the district water account, and at the longest, 195 days. 4.50. This situation compares badly with the average period o f 14 days that it takes universal primary education capitation grants to reach the district accounts. It i s critical that the GoU give immediate attention to this problem: for public spending on the water and sanitation sector to be effective, release processing times must be reduced to the recommended average o f no more than five days at each stage. In some districts it should be possible for the CAO to e f f e c t transfers to the district water account within one day. - 51 - 4.5 1. The reasons cited for these delays include a general lack o f awareness that delays in the remittance o f funds i s a cost to service delivery and society in general; inadequate capacity in financial management at the different levels o f action; weak monitoring and evaluation mechanisms; and poor enforcement o f regulations. To address these weaknesses it i s necessary that staff be trained in financial management, that monitoring and evaluation be strengthened, and that the regulations relating to the release o f funds be properly enforced. Processing times for funds at different levels need to be clearly stipulated, and financial officers who exceed these times should be held accountable for inefficiency. A reduction in the number o f channels through which the funds must pass also would be valuable; for example, commercial banks could transfer the funds directly to the district water account rather through the CAO. 4.52. While resource allocation has been increasing, the funds received b y the water sector continue to fall short o f the amount necessary to enable the effective delivery o f services. In addition, by the end o f the third quarter o f fiscal 2003/04 only about 74 percent o f budgeted funds, pro rata, had been released to the spending units (the district water conditional grant performed even worse, at 69 percent). (It should be noted that most o f the resources for this sector come from donors, who finance about 50 percent o f all sector activities.) 4.53. The findings o f the expenditure tracking study show that existing water facilities are overstretched, suggesting the need for expansion. The study also indicated that few o f the communities surveyed were satisfied with the services provided. For example, only 50 percent o f respondents felt that they were given full value for money, and 60 percent were satisfied with the work on and finish o f water installations and with service delivery in general. Visits to water sites found that only about 70 percent were in good condition, and that only 78 percent o f the communities visited had functioning water and a sanitation committee. The water sector operating costs furthermore are high (in part as a result o f poorly fimctioning facilities), and these high costs are transferred to the consumers in the form o f high prices. 4.54. The delivery o f services in the sector in conclusion i s poor. The sector claims to be strong in terms o f technical staffing, office space, and equipment, but it evidently i s constrained by bureaucracy, delays in the remittance o f funds, and by the inability to expedite payments (the latter have to be approved by the MWLE, despite the fact that most services are delivered by the DWD). There i s also a lack o f transparency in sector operations, leading to corruption and obstruction o f the smooth delivery o f services. 4.55. To compound these problems, in March 2003 restructuring work on the D W D was completed, exposing vacant positions at the senior level. District-level positions additionally have not yet been integrated into the district service commissions. G. EXPENDITURE REVIEW FOR THE JUSTICE, LAW, AND ORDER SECTOR Introduction 4.56. The focus o f the justice, law, and order sector (JLOS) i s to improve access to justice through institutional deconcentration and the development o f sufficient human resources to administer justice. In fiscal 2003/04, the JLOS launched a strategic investment plan (JLOS/SIP) that was estimated to have an annual rollout cost o f USh45 billion (about US$24 million). The sector-wide approach (SWAP) allocation under the medium-term expenditure framework (MTEF) for the exercise was only about USh8.9 billion, however, o f which just USh5.6 billion was released to the sector development fund in 2003/04. Allocative efficiency 4.57. The JLOS comprises the police, prisons, internal affairs, Directorate o f Public Prosecutions, the judiciary, courts, the Office o f the Attomey General, and the L a w Reform Center (LRC). The allocation o f resources to the sector largely conforms with the need for reforms and i s made according to the tasks that each institution i s expected t o execute. The sector overall demonstrates a pro-service allocation o f funds: more than 80 percent o f the budget i s committed t o improving the administration o f justice; 8 percent i s allocated to each o f administrative costs and the reform o f legal services; 2 percent i s committed t o civic legal education; and 1 percent i s allocated to criminal law reform (Figure 13). The effort to improve the administration o f justice includes implementation o f the financial management strategy (FMS), provision o f low-cost housing for police officers, improved management o f sector vehicles, the reorganization o f human resources, and capacity building. The sector has reduced the proportion o f its budget that goes to consultants f r o m about 39 percent in 2002103 to about 6 percent in 2003/04. This has released funds for improved service delivery. 4.58. At the institutional level, where the overwhelming responsibility i s that o f maintaining law and order, the police service receives close to 46 percent o f the sector budget. The Office o f the Attorney General receives 19 percent o f the budget and prisons 1 1 percent. Figure 13. Functional Distribution o f JLOS 2003/04 Budget 8% 1% 2 Sources: MoFPED (2003) and discussions with JLOS officials. 4.59. The sector’s activities are constrained by the fact that not all budget allocations are received and others are received late. B o t h factors gravely affect program implementation. For example, in 2003/04 more than 48 percent o f sector hnds was released in the last quarter o f the fiscal year, thus holding up activities that were planned for the first three quarters. The implication o f delayed releases i s that the sector i s forced t o divert development funds for recurrent expenditure t o meet urgent needs, thus putting a h o l d o n development activities. - 53 - Figure 14. InstitutionalDistribution o f JLOS Budget 2003/04 13% 2%1% 46% 1 19% 1 I OPolice BPrisons 0 Internal Affairs ODPP ICourt Awards OAttomeyGeneral IJudiciary OJSC ILRC Source: MoFPED (2003) 4.60. Unpredictable budget allocations and releases also adversely affect the performance o f the sector. The reduction o f MTEF allocations at the time o f budget allocation for the next year, for example, implies that plans cannot be met. 4.61. The management o f resources i s constrained by the small number and the limited competency o f financial management specialists. The sector has just two qualified accountants and one internal auditor to manage the financial affairs o f all JLOS institutions, with obvious negative implications. Few staff in the accounts department are trained in financial management. 4.62. The sector similarly lacks skilled personnel in budgeting, planning, and negotiation, both at the policy and at the institutional level. In the Ministry o f Justice and Constitutional Affairs it i s apparent that some heads o f department delegate their budget preparation responsibility to accountants who are not equipped for this role. There i s a clear need to improve the capacity for budgeting and planning through the training o f staff and the recruitment o f other qualified personnel. 4.63. Non-tax revenue generated by the sector from court fees, fines, and other sources i s not properly recorded. In the Prisons Department, for example, the receipts issued for payments are not standard GoU receipts and are not serially numbered, creating an obvious opportunity for the nonremittance o f collections. The collection o f court fines similarly i s inadequately receipted, and no record o f collections i s kept. These issues raise the question o f why departments that are not equipped to collect revenue should continue to do so, to the detriment o f government, when a revenues collection body, the Uganda Revenue Authority, already exists. The decision to transfer the collection o f fees for passport issuance and renewal from the issuing agency to the URA substantially improved collections, and it i s probable that the transference o f the JLOS revenue areas to the URA similarly would improve the accountability o f collections. 4.64. The long procurement process also tends to slow down activities and the implementation o f sector plans. Tenders must be advertised for 60-90 days before procurement may be made, thus causing long delays in the receipt o f goods. 4.65. The monitoring o f funds in the sector i s weak, and requires immediate attention. Accounts department positions need to be given a higher grading in the service, and - 54 - transparency in the management o f funds-rather than bureaucracy-needs to be emphasized. The JLOS uses manual accounting procedures, adding to the delay in effecting payments and tracing transactions. There are undue delays in the reconciliation o f collection accounts, and the transfer o f non-tax revenue to the government consolidated account i s not implemented on a regular basis, with the result that the sector often i s unsure o f i t s bank balance and thus i s unable to commit i t s e l f to a procurement. Principal accountants should ensure that statements are received from commercial banks and reconciled promptly. Implementation of the financial management study recommendations 4.66. W i t h fimding from the SWAP development hnd, the JLOS commissioned Deloitte and Touche to carry out a baseline study o f the sector’s financial management systems. This financial management study (FMS) raised a number o f issues and made recommendations for the improvement o f financial management. Between June 2002 and May 2003, the findings o f the study were presented to a JLOS/GoU/donor review meeting; to JLOS technical, steering, and donor committees and groups; and ultimately to a GoUPER meeting during which it was agreed that the recommendations should be implemented immediately. 4.67. Inadequate resources, training and infrastructural needs, and human resource management issues render impractical the wholesale introduction o f the changes, however. The sector working group has agreed to prioritize implementation o f the recommendations, identifying four initial areas on which to concentrate: (1) the streamlining o f the collection o f and accountability for non-tax revenue; (2) the improved preparation o f sector budget framework papers; (3) the introduction o f proper controls and accountability for recurrent expenditures; and (4) the tracking o f the impact o f the financial management reforms. 4.68. The FMS recommended the recruitment o f four specialists to work with JLOS staff on implementation o f the financial management strategy, but the sector has proposed instead to form an implementation steering committee, comprising members from the current steering committee, SWAP donors, and representatives o f the Public Expenditure Management Committee (PEMCOM) and the IFMS project management team. Members o f the steering committee are expected to have some experience or interest in financial management. The committee w i l l provide general direction and guidance, w i l l review and approve project plans and budgets, w i l l monitor the project scope and timetable, and will seek to ensure successful implementation o f the study recommendations. 4.69. The monitoring and evaluation function w i l l be contracted to an external financial management firm that w i l l be hired on a periodic basis and as need arises. The main tasks o f this contractor w i l l be to review the overall status o f the project, to identify and report implementation risks, and to evaluate and monitor key deliverables and overall performance. 4.70. The FMS additionally identified the lack o f a qualified financial management specialist as a key weakness o f the sector. A specialist accordingly has been identified and recruited, and was expected to begin work in July 2004. H. CONCLUSIONS 4.7 1, Donor fatigue and the limited capacity o f the GoU to increase domestic revenue make i t essential that the government improve the efficiency with which it uses i t s available resources. This chapter has used evidence from various studies and from discussions with sector working groups to identify key areas in which efficiency gains might be made. Expenditure tracking and value-for-money studies conducted in the education, water, and health sectors have been helped identify obstacles to the attainment o f more efficient service provision. The implementation o f recommendations from these - 55 - studies has greatly reduced the capture o f funds and has helped increased access to services. The reforms made should be reviewed regularly, and successful reforms extended to all sectors that receive public funds. s Implementation o f the integrated financial management system i s expected to improve financial management and deliver greater financial accountability in the JLOS. The IFMS needs to be rapidly extended to all other sectors. s In some sectors a lack o f qualified personnel, especially in financial management, i s adversely affecting program implementation. Qualified staff need to be hired and competent existing staff trained. This w i l l require revision o f the pay structure and the introduction o f incentives to attract and retain staff o f the right caliber. - 56 - 5. CONCLUSION A. BACKGROUND 5.1. The annual Public Expenditure Review (PER), conducted by the World Bank Country Office Team and other donors, describes the progress o f and challenges relating to budget formulation and the performance and efficiency o f public expenditures during the fiscal year. This helps to provide understanding o f the extent to which the national budget i s executed in relation to the needs o f the country and in terms o f the value for money realized. This year’s review coincided with the design o f the Country Integrated Fiduciary Assessment (CIFA), which consolidates a range o f diagnostic processes o f public financial management and accountability. These processes include the PER, the Country Financial Accountability Assessment (CFAA), the Country Procurement Assessment Review (CPAR), the Local Government Integrated Fiduciary Assessment (LGIFA), and the Tracking Poverty, Reducing Spending Assessment (TPSSA). 5.2. The CIFA presents the GoU, donors, civil society, and other stakeholders with a means by which to assess Uganda’s fiduciary risks and to comprehensively address the challenges o f budget formulation, financial accountability, and transparency. This i s particularly important as the country i s in the advanced stages o f adoption o f a single standard assessment o f the public financial management system. The PER assesses current practices, the institutional and legal arrangements for accountability, and the transparency o f public financial management. I t also assesses progress made and identifies areas on which the GoU should focus i t s efforts as it seeks to improve accountability and the management o f public finances. In this it complements the wider-ranging CIFA. 5.3. The preceding chapters o f this report have provided an assessment o f Uganda’s economic performance, budget preparation process, budget execution, and the efficiency o f public expenditure. Uganda has made significant progress in the pursuit o f good economic management for economic growth and poverty reduction, budget preparation, and budget execution. However, if the national budget i s to assist in the attainment o f the country’s development aspirations, as espoused in the Poverty Eradication Action Plan (PEAP), there remain some key elements that must be urgently addressed. B. ECONOMIC MANAGEMENT CHALLENGES 5.4. The G o U should be commended for maintaining macroeconomic stability. This stability provided the foundation for the high rates o f economic growth that Uganda registered during the 1990s, and it i s important that the government act to preserve it. The recent slowdown in the rate o f economic growth, from an average o f about 7 percent per year to less than 5 percent, i s a matter that needs immediate attention, however. The economy needs to grow at a minimum annual rate o f 7 percent if the PEAP goals are to be achieved. The GoU needs to establish the causes o f the slowdown and must devise the means to address them. 5.5. The dependence o f the economy on external assistance i s another key economic management challenge. Attainment o f i t s PEAP targets requires that Uganda achieve a gross domestic savings rate o f about 7.5 percent o f GDP and investment o f about 20 percent o f GDP. The country relies heavily on grants and concessional borrowing to finance i t s fiscal deficit, however. The deficit reached about 12 percent o f GDP in fiscal year 2003104; whether -57- financed by external grants or by loans, this unarguably presents a challenge for monetary and exchange rate management. Unless matched by an offsetting outflow o f foreign exchange, sustained external inflows to finance the budget can cause a lasting appreciation o f the nominal exchange rate, and this could reduce the short-term competitiveness o f exports. If the external inflows were to be spent locally, and if they were not offset by an equivalent increase in the demand for money or by sterilization operations (which in turn could increase interest rates), this would expand the money supply and thus could create inflationary pressures. An increase in aggregate demand would likely increase the relative price o f nontradable to tradable goods, and so reduce the medium-term competitiveness o f the tradables sector. 5.6. In response to these challenges, the GoU plans to reduce the fiscal deficit in the medium to long term. In effect this means that it must use i t s available resources more efficiently in pursuit o f the PEAP targets. It cannot, however, forego all offers o f external aid. Uganda needs additional resources to achieve i t s PEAP and Millennium Development Goal (MDG) targets. A challenge for the medium t e r m i s how to absorb the external resources the country needs to support growth and poverty reduction without compromising the efficiency o f public spending, and without sacrificing macroeconomic stability and private sector competitiveness. 5.7. The public sector has played a dominant role in Uganda’s recent good economic performance, but it has done so at the expense o f squeezing out the private sector. Private sector growth has a high potential for increasing revenue generation and widening the tax base. I t i s important therefore that the GoU put in place measures that are supportive o f private sector growth, including the growth o f small and medium-size enterprises (SMEs). C. BUDGET PREPARATION PROCESS 5.8. Uganda should be commended for the progress it has made in i t s budget preparation process. It has in particular succeeded in making the process more participatory, brining in the contribution not only o f the executive but also o f the legislature, civil society, donors, line ministries, and local government. Increased participation has improved the capacity to identify and articulate the key budget issues, but much nonetheless remains to be done. There are more participants in the process but there remains a problem o f lack o f knowledge and expertise among those participants, with the result that sectoral plans often have been inconsistent with the budget framework papers. This has made it difficult to achieve consistency in the allocation o f resources; a problem that i s most pronounced at the local government level. 5.9. The medium-term expenditure framework (MTEF) has been selected as the instrument to guide medium-term planning. To address long-term development concerns an LTEF also has been prepared. The linkages to the PEAP o f both the M T E F and the LTEF are weak, however, and the various players in the process must coordinate their efforts and build consensus about how these linkages might be strengthened. 5.10. Uganda’s high dependence on donor assistance raises a variety o f challenges for budget preparation. There i s specifically a risk factor associated with this dependence: will the external assistance fail to come, w i l l there be a shortfall, or will it come late? Donor aid commitments have in the past diverged significantly from actual disbursements, for example making budget management difficult. Uganda should develop clear strategies to increase i t s domestic revenues and thus reduce i t s dependency on donor assistance. D. BUDGET EXECUTION 5.1 1, The Ministry o f Finance, Planning, and Economic Development (MoFPED) and other line ministries, including the Ministry o f Local Government, have set in place budget - 58 - execution guidelines. These must be strictly followed and resources must be used efficiently. The commitment control system (CCS), which was expected to facilitate a significant improvement in public financial management, has been implemented slowly and misuse o f the system has not been punished. I t i s important that the GoU ensure that public officers who manage public finances observe all appropriate guidelines and procedures, and that those who fail to do so be punished as provided for in the law. 5.12. The consequence o f failure to enforce such rules and procedures i s corruption and abuse o f office. Payments that are due fail to be made, and those that are not yet due get paid instead. Failure to follow the budget h as led to the accumulation o f arrears (including huge pension arrears), budget overruns (especially for public administration and defense), and the pursuit o f objectives that diverge from stated public expenditure objectives. These budget management problems sometimes arise through political interference. The political leadership must not involve i t s e l f in revenue collection and expenditure but should limit i t s role to the pursuit and prosecution o f i t s officers that break public finance management rules, procedures, and guidelines. At risk i s the success o f the economy as a whole. 5.13. Uganda’s budget execution has for a long time been characterized b y an irregular flow o f finds, especially for Poverty Action Fund (PAF) and development expenditure purposes. The third Poverty Reduction Support Credit (PRSC3) provided for a study to track finds released from MoFPED to the final spending agencies. The study established that there are systemic delays in the flow o f finances, but it i s unclear why the delays are concentrated in the flow o f development expenditure, and in particular in the flow o f PAF development expenditure. The cause o f these delays must be identified: the GoU should establish whether or not there i s a release schedule, the extent to which a schedule i s followed, and the reasons why releases arrive late. The data uncovered should be analyzed in relation to budget overruns, budget cuts, and getting budget priorities right at the budget execution level. E. EFFICIENT USE OF PUBLIC FINANCES 5.14. Chapter 4 examined the efficiency o f the use o f public finances in four sectors: education; health; water and sanitation; and justice, law, and order. This assessment seeks to provide an understanding o f performance and o f what needs to be done within these sectors to achieve better service delivery. Given donor fatigue and the limited capacity o f the GoU to increase domestic revenue, it i s important that Uganda seek to improve the efficiency with which it uses i t s available resources. 5.15. The GoU’s efforts to increase efficiency and to more effectively target i t s resources at priority areas are commendable. It h as significantly increased the budgetary resource allocation to education, and within the education sector has prioritized primary education, introducing universal primary education and thus raising enrolment and improving the gender balance. The output indicators for primary education have improved-but it should be noted that they would have improved even more had the budgetary resources been used more efficiently. The next challenge i s to extend universal education to the secondary and vocational level, so that children who complete primary school can gain tradable skills. 5.16. Another major challenge i s to improve the quality o f the facilities within which teaching i s conducted. The quality o f classrooms constructed under the School Facilities Grant (SFG) varies from district to district, reflecting the relative efficiency with which resources are used. In some local government areas new classrooms have begun to collapse almost literally on completion, but few if any public officers have been punished for shoddy work. The GoU has conducted expenditure tracking studies to examine the extent o f resource leakages, but the terms o f reference for future studies should be expanded also to include evaluation o f resource misuse. Public officers who misuse public finances should be punished as provided for under the law. - 59 - 5.17. Expenditure tracking and value-for-money studies conducted in the education, water, and health sectors have helped identify ways o f improving efficiency, and implementation o f the recommendations made by these studies h as reduced waste and improved access to services. Such studies need to be conducted regularly and extended to cover all sectors that receive public funds, with the goal o f promoting financial accountability. 5.1 8. Implementation o f the integrated financial management system in the justice, law, and order sector i s expected to improve financial management and to enhance financial accountability. The IFMS should be rapidly extended to all sectors. 5.19. A shortage o f qualified personnel, especially in financial management, i s adversely affecting the implementation o f programs in some sectors. Qualified new recruits must be hired and existing staff properly trained. This w i l l necessitate a revision o f the pay structure and the introduction o f other incentives to attract and retain staff o f the appropriate caliber. - 60 - REFERENCES Ablo, E., and R. Reinikka. 1998. “DOBudgets Really Matter? Evidence from Public Spending on Education and Health in Uganda.” World Bank Research Paper No. 1926. Washington, D.C.: World Bank. Appleton, S. and S. Ssewanyana, 2003. “Poverty Estimates from the Uganda National Household Survey 11, 2002/03.” Background paper to the Report o f the Uganda National Household Survey 11,2002/03. Uganda Bureau o f Statistics, Entebbe. Deininger, K., and P. Mpuga. 2004. “Economic and Welfare Impact o f the Abolition o f Health User Fees: Evidence from Uganda.” World Bank Working Paper, No. 3276. Washington, D.C.: World Bank. Knapp, M., 1984. The Economics ofSocial Care. Basingstoke, UK: McMillan. McPake, B. 1993. “User Charges for Health Services in Developing Countries: A Review o f the Economic Literature.” Social Science and Medicine 36(11):1397-1405. Millennium Project. 2004. “Millennium Development Goals Needs Assessment: Country Case Studies o f Bangladesh, Cambodia, Ghana, Tanzania and Uganda.” Working Paper (draft 17 Jan 2004). Ministry o f Health, Uganda. 2000. Health Sector Strategic Plan, 2000/01-2004/05. Kampala: Ministry o f Health, Republic o f Uganda. Ministry o f Justice and Constitutional Affairs, Uganda. 2002. Baseline Study of Financial Management Systems. Study conducted for the Justice Law and Order Sector. Kampala: Ministry o f Justice and Constitutional Affairs, Republic o f Uganda. Mpuga, P., and S. Canagarajah. 2004. “Government Budgets, Gender, and the Poor: Analysis of the Social Service Sectors in Uganda.” World Bank, Kampala. Processed. Okidi, J.A, P.O. Okwi, and J. Ddumba-Ssentamu, 2003. “Welfare Distribution and Poverty in Uganda.” African Economic Research Consortium, Nairobi. Processed. Reinikka, R. 2001. “Recovery in Service Delivery: Evidence from Schools and Health Centers.” In Ritva Renikka and Paul Collier, eds., Uganda’s Recovery: The Role of Farms, Firms, and Government. Regional and Sectoral Studies. Washington, D.C.: World Bank. Reinikka, R., and P. Collier. 2001. Uganda’s Recovery: The Role o f Farms, Firms and Government. Regional and Sectoral Studies. Washington, D.C.: World Bank. Reinikka, R., and J. Svensson. 2003. “The Power o f Information: Evidence from a Newspaper Campaign to Reduce Capture.” World Bank discussion paper. Washington, D.C.: World Bank. , 2004. “Local Capture: Evidence from a Central Government Transfer Program in Uganda.” Quarterly Journal of Economics 119(2). - 61 - Republic o f Uganda. 1999. “National Assessment o f Progress in Education, 1999.” Ministry o f Education and Sports. Processed. . 2002a. Uganda Participatory Poverty Assessment Process: Deepening the Understanding o f Poverty. Second Participatory Poverty Assessment Report. Ministry o f Finance, Planning, and Economic Development. ,2002b. Health Sector Strategic Plan, 2000/0 -2004/05. Ministry o f Health, Kampala. , 2002c. Baseline Study of Financial Management Systems. Study conducted for the Justice, Law, and Order Sector, Ministry o f Justice and Constitutional Affairs, Kampala. . 2003. “Uganda’s Progress in Attaining the PEAP Targets, in the Context o f the Millennium Development Goals.” Background paper prepared for the Consultative Group Meeting, Kampala, 14-16 May 2003. Ministry o f Finance, Planning and Economic Development, Kampala. . 2003a. Background to the Budget 2003/04. Ministry o f Finance, Planning and Economic Development. . 2003b. The Public Finance and Accountability Act, 2003. The Uganda Gazette No. 3, V o l xcv. . 2004a. Indicative Preliminary Revenue and Expenditure Framework, 2004/05-2006- 07. Ministry o f Finance, Planning, and Economic Development. . 2004b. Background to the Budget 2004/05. Ministry o f Finance, Planning, and Economic Development. . 2004c. Semi-Annual Budget Performance FY 2003/04. Ministry o f Finance, Planning and Economic Development. . 2004d. “Uganda Local Government Integrated Fiduciary Assessment Report, 2004.” Ministry o f Local Government. Study sponsored by the World Bank and conducted by consultants from the Overseas Development Institute(ODI). . 2004e. Release Tracking Study, Kebu Consultants and EPRC Report for MoFPED, May 2004. ,2004f. “The Poverty Eradication Action Plan, 2004.” Draft revised version. Ministry o f Finance, Planning and Economic Development. Viewed online at http:ifwww.finance.go.uglpeap-revision, July 2004. ,2004g. “Affording Uganda’s Public Administration Sector.” Background paper to the Fourth Poverty Reduction Support Credit (PRSC4) negotiations prepared by Ranjana Mukherjee, March 2004. , 2004h. “Long-Term Expenditure Framework.” Ministry o f Finance, Planning, and Economic Development, Macro Unit, Kampala. Ssewanyana, S.N., J.O. Nabyonga, I .Kasirye, and D. Lawson. 2004. “Demand for Health Care Services in Uganda: Implications for Poverty Reduction.” Economic Policy Research Center discussion paper, unpublished. - 62 - Ssewanyana, S.N., J.A. Okidi, D. Angemi, and V. Barungi. 2004. “Understanding the Determinants o f Income Inequality in Uganda.” Economic Policy Research Center discussion paper, unpublished. Transparency International. 2004. Global Corruption Report, 2004. London: Pluto Press. UDN (Uganda Debt Network). 2003. Monitoring the Use of the School Facilities Grant (SFG) for Primary Schools. Kampala: UDN. UNDP (United Nations Development Programme). 2004. Human Development Report, 2004: Cultural Liberty in Today’s Diverse World. New York: UNDP. World Bank. 1993. World Development Report 1993. Washington, D.C.: World Bank. .2001. World Development Report, 2001/02. Washington, D.C.: World Bank. . 2003a. Third Poverty Reduction Support Credit Program document. Washington, D.C.: World Bank. Processed. . 2003b. The Republic of Uganda Public Expenditure Review: Supporting Budget Reforms at the Central and Local Government Levels. Poverty Reduction and Economic Management 2, Africa Region. Washington, D.C.: World Bank. . 2004a. Fourth Poverty Reduction Support Credit Program document. Washington, D.C.: World Bank. Processed. .2004b. Fourth Poverty Reduction Support Credit Program, negotiation aide memoire. Washington, D.C.: World Bank. Processed. World Bank and International Monetary Fund. 2004. “The Republic o f Uganda: Tracking Poverty, Reducing Spending: Second Assessment and Action Plan (AAP).” Report prepared by the I M F IWB, June 2004. - 63 - =??X 2 N I I , , I , - r i ' I W W I Annex 2. Evolution o f the 2004/05 Budget As at Budget conference BFP PER Budget October 2003 March 2004 April 2004 June 2004 Domestic Resources I 1,883.90 I 1,849.50 1 1,874.20 I 1,912.40 Tax Revenue I 1,832.80 I 1,763.30 I 1,793.00 I 1,830.20 Non Tax Revenue 32.7 30.5 30.5 36.7 Loan Payments 18.4 55.7 50.7 45.5 - Grants $ 213.1 242.5 249.2 249.2 Loans $ 90.5 95.2 95.2 95.2 Interest Payments (net o f PresidentialJet) 240.7 264.9 266.6 258.91 oiw domestic 176.5 203.4 200.8 193.5 oiw extemal 64.2 61.6 65.8 65.4 Domestic Arrears 41 41 41 55 - 68 - Q) 9 L 0 W N C N " a ' @ N - W B m 0 0 !- SI -t Annex 4. PER Donor Statements A. Development Partners Statement on Budget Performance, Fiscal 2003/04 The Honorable Minister o f Finance, Planning, and Economic Development; members o f parliament; heads o f diplomatic missions; representatives o f civil society organizations and the private sector; Permanent SecretaryEecretary to the Treasury; the Director, Economic Affairs; distinguished participants; ladies, and gentlemen: Introduction On behalf o f the development partners, we wish to thank the Permanent Secretary/Secretary to the Treasury for the clear presentation on the performance and challenges o f the current year’s budget. We note and appreciate that despite the many challenges faced during the year, expenditures in most sectors and votes, with the exceptions o f public administration and the Poverty Action Fund, remained within the limits set out in the budget. There are a few areas o f concern that require particular attention. Revenue performance Overall, revenue collection has performed below target. Tax revenue has performed around 2 percent (or USh27 billion) below projections for the third quarter, and non-tax revenue i s expected to perform almost 30 percent below target for the fiscal year. Additional efforts are required in tax and non-tax areas where performance i s weak. It i s also clear that Uganda needs to make further strides in increasing i t s tax efforts so as to improve i t s domestic revenue to GDP ratio, which i s required to meet the higher expenditure demands for the attainment PEAP and M D G targets. The performance o f the URA in the management o f revenue collection needs to be improved considerably to attain the higher revenue targets. Public administration The budget for public administration i s growing fast, and i t s outturn also has consistently been above the limit. Overshooting o f P A spending has become a pattern rather than the exception, which i s a concern to all o f us. In particular, missions abroad and State House votes had by the end o f the third quarter substantially overshot their pro rata budget allocations. This not only brings about slippage in budget discipline but also exerts pressure on other sectors (for example, roads release performance was only about 77 percent by the third quarter) as the overall ceilings have to be met under a cash budget. We would like to see genuine control measures put in place to reduce budget overruns in this sector in the future. We feel that this hrther underlines the need to undertake swift reforms, as recommended in various recent public administration studies. Performance o f the PAF The outcome o f overruns and front-loading in other sectors, such as public administration, i s that PAF and other non-PAF expenditures that are important for poverty eradication have been reduced or delayed. For example, by the third quarter o f the fiscal year PAF expenditures were underperforming almost 13 percent on a pro rata basis, and this i s likely to have an adverse impact on service delivery. Notwithstanding the assurance for improvement, this i s worse than the 11 percent underperformance recorded for the first half o f the fiscal year, The underperformance o f PAF expenditures results in nonachievement o f key output targets in PEAP priority areas. We appreciate the fact that in some cases these PAF expenditure delays have been due to accountability problems, which need to be addressed through increased monitoring. We, however, want to emphasize that this standard o f discipline should be applied to all sectors and not just to the PAF. We are also concerned that PAF development expenditure outturns were very low, reflecting a likely diversion o f earmarked hnds to recurrent expenditure and/or delayed releases for this area, further constraining service delivery. We wish to note that both diversion and delay in the release o f - 73 - funds for the PAF development budget to cater for the front-loading in public administration and other areas are not helpful for the attainment o f PEAP targets and should not be permitted. Interest payments Domestic interest payments have been claiming an increasingly large share o f domestic resources and have proved to be higher than budgeted for the second consecutive year. By the third quarter o f this fiscal year, domestic interest payments had exceeded the budgeted allocation by close to 20 percent. This raises concerns about the way excess liquidity i s being generated and absorbed, primarily through the sale o f treasury bills. We welcome the government efforts to contain the impact o f rising interest payments, which underscores the need for prudent fiscal policies. Supplementary budget We wish to note that during the second half o f this fiscal year, a supplementary budget with a large share to finance non-PEAPinonpriority areas was presented to parliament. We are concerned to note that half o f this supplementary budget was accommodated through cuts in development spending. These actions not only divert resources that should be appropriated for priority PEAP areas but also undermine confidence in the entire budget process, b y creating uncertainties. In order to maintain the integrity o f the budget process, we strongly urge that supplementaries for nonpriority areas should be avoided in the future. Conclusion We, the development partners, are concerned that the budget targets for the PAF for 2003/04 w i l l not be met. We are also concerned that public administration h as again overperformed, as it has in the last few years. These developments endanger the fulfilment o f the PRSC4 prior action related to budget execution, thus putting to risk the delivery o f PRSC4 and other budget support as programmed. We expect that by the end o f the fiscal year PAF performance w i l l be at least 95 percent and public administration w i l l be constrained within limits. We look forward to continuing our discussions with you on monitoring the budget execution for 2003104 and ensuring that it f u l f i l s the prior agreements reached in the context o f budget support. Thank you. - 74 - B. Statement by Development Partners on the Macroeconomic Framework for Fiscal 2004lO5-2006107 The Honorable Minister o f Finance, Planning, and Economic Development; members o f parliament; heads o f diplomatic missions; representatives o f civil society organizations and the private sector; the Permanent SecretaryBecretary to the Treasury; the Director, Economic Affairs; distinguished participants; ladies, and gentlemen: Introduction On behalf o f all development partners, we wish to thank the Director o f Economic Affairs and the Permanent Secretary/Secretary to the Treasury for their clear presentation o f the medium- term macro framework and budget for 2004105. We recognize that the coming years present a major challenge both to the budget and to the management o f the Ugandan economy. We acknowledge the efforts your ministry has made in preparing the PEAP and in seeking to ensure that this budget i s consistent with the PEAP. We appreciate the various budget consultations that have taken place over the past few weeks, and take note o f the krther changes that you have announced today. We would like to note that we are not able to endorse the draft budget presented to Parliament on 1 April. We do not find it a convincing reflection o f the PEAP priorities, and key elements o f the budget, notably defense and public administration, remain too high. The revised details presented this morning go some way toward addressing our concerns, but do not go far enough. Please allow me to highlight some o f our concerns. Budget Framework and PEAP Priorities We recognize that unexpectedly large shortfalls in Customs Union revenues and growing interest payments are placing severe constraintssn the budget. Hard choices have to be made, and special emphasis has to be placed on improved efficiency and value for money and stamping out corruption in all sectors. But a budget that proposes significant increases in defense and public administration at the expense o f cuts for health, justice, law, and order (JLOS), accountability, and P M A i s not a credible way forward. Defense Iwould like to begin with defense, a topic which we discussed at great length last year. Defense spending rises by 19 percent to a proposed USh367 billion in 2004105, after a 48 percent increase in the preceding two years. Last year’s increase o f 29 percent was presented as being a one-off increase to clear outstanding contractual commitments. We recognize o f course the need to improve security, particularly in the north o f Uganda. But we are not yet convinced that these large increases in proposed defense spending are sufficiently justified, or that the relevant management changes (in both financial and human resources) identified under the Defense Review will be in place to effectively manage such an increase. Some development partners are particularly concerned that the increase i s not sufficiently targeted toward security in the north. We recognize that the findings o f the Defense Review clearly identify costs related to improvements in the management, effectiveness, and capability o f the UPDF. But we believe that there i s substantial headroom within the existing budget to finance these costs. In the absence o f information on how the classified budget i s being used to implement the Defense Review, we are not persuaded that increases o f this magnitude are justified. Nor are we persuaded that they are affordable in the context o f competing priorities. This i s not something the review shows. We would therefore urge the GoU to reconsider i t s defense provision for 2004105, and to set out how i t intends to move forward with implementation o f the review in a manner that addresses these issues. We welcome the intention to establish a sector working group on - 75 - defense. A firm agreement should be quickly reached on the composition o f the group, the frequency and format o f meetings, and the intended mandate. We would like to receive written assurances that common public expenditure management principles w i l l be put in place for the defense sector, and that the sector working group w i l l be operational at an early date to monitor implementation o f the Defense Review recommendations. Progress in this area, and reducing the projected defense budget for next year, w i l l be critical in enabling a number o f Uganda’s development partners to continue providing support at current levels. Public ad ministration Past studies have highlighted the excessive cost o f public administration in Uganda. The excessive numbers o f public office holders and multiple layers o f bureaucracy are expensive to finance. Steps to seriously address the excessive burden o f public administration w i l l be critical to achieve an efficient public service that can support Uganda’s development needs. We understand that work i s underway to identify potential savings in public administration costs. We would strongly support early adoption o f bold and wide-ranging reforms, with a view to realizing savings in 2004105. In addition, we would question whether it i s s t i l l appropriate for the taxpayer to be financing mass mobilization activities, given current moves toward political pluralism, and we would question why USh30 billion has been set aside for a costly referendum when the constitution provides for an alternative method for moving to a multi-party system, a change on which there i s broad political consensus. PEAP priority areas We expect to see additional funding for a number o f priority sectors highlighted in the PEAP. In particular, we would highlight health (not just for salaries), parts o f the justice, law, and order and accountability sectors, road maintenance, NAADS and the PMA, and education. In some cases it may be possible to f i n d these by reallocations within existing sector allocations. In others, additional resources would be needed from savings in defense and public administration, or from additional revenue measures. Unfunded spending commitments The exclusion o f a number o f spending commitments, notably on pensions, rent and utility payments, and wages, risks creating substantial new arrears and supplementaries that would further undermine the credibility o f the budget and the budget process. We would urge that all known and irreversible commitments be factored into the budget in the interests o f comprehensiveness and transparency. We also note that the proposed increases in health workers pay will result in higher resources to that sector, and we are concerned about the implications for public sector pay in other sectors. We would wish to emphasize the need for targeted increases in public sector pay to be managed in the context o f an overall pay reform strategy. Revenues In addition to the removal o f low-priority items and the focus on efficiency highlighted above, additional revenues w i l l be needed to strengthen the budget’s alignment with the revised PEAP and to accommodate some o f the spending commitments identified earlier that are currently unfunded. We welcome assurances from MoFPED that additional revenue-raising measures w i l l be tabled in the 2004/05 budget statement. We would also highlight again the need to strengthen the efficiency o f tax administration, and specific measures to that end need to be developed. Other measures We welcome the emphasis placed b y MoFPED on efficiency and value for money as means o f ensuring better prioritization o f the budget. We would l i k e to see concrete evidence o f what - 76 - i s b e i n g done to ensure that these efficiency savings are realized, in particular through more vigorous and effective follow-up of the various tracking and value-for-money studies that have been carried out in different sectors. The sectors need to do more to ensure their budgets are consistent with PEAP priorities. We recognize the problems caused by the need to sterilize large liquidity injections into the domestic economy, and welcome the stance that MoFPED i s taking on maintaining macroeconomic stability. We would not wish to encourage the government to seek to raise spending in priority areas in a way that would undermine macroeconomic stability and growth prospects. Nor do we believe that seeking to meet key priorities through off-budget fbnding provides a solution, as it diminishes the comprehensiveness and transparency, and hence the credibility, o f the budget. Budget process issues Uganda has made much progress over the past decade in developing strong budget management institutions and procedures. The credibility o f the budget process has been an important factor behind increased donor support for Uganda, particularly budget support. It i s critical that these gains are not eroded. 2004/05 marks the third successive year in which the budget has been subject to significant last-minute or mid-year changes that have shifted resources away from core programs. In order to avoid a fbrther deterioration in trust and confidence, with serious consequences for donor support for Uganda, determined efforts are needed to revise the proposed 2004/05 budget and to strengthen communication with all stakeholders on budget management. In conclusion, we look forward to studying the details behind the changes you have announced today and to further discussions as you finalize the budget, and we hope that the next version of the budget will be one that we can endorse, Thank YOU. - 77 -