75324 v2 UGANDA ECONOMIC UPDATE BRIDGES ACROSS BORDERS Unleashing Uganda’s Regional Trade Potential February 2013 -First Edition The World Bank Unleashing Uganda’s Regional Trade Potential UGANDA ECONOMIC UPDATE BRIDGES ACROSS BORDERS Unleashing Uganda’s Regional Trade Potential February 2013 -First Edition The World Bank Edition No.1 February 2013 i Unleashing Uganda’s Regional Trade Potential This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Cover photos: Great Lakes Film Production Ltd Printed in Uganda by Fathil International Projects Additional material relating to this report can be found on the World Bank Uganda website (www. worldbank.org/uganda). The material includes a documentary video and a number of blogs relating to issues in the report. © 2013 International Bank for Reconstruction and Development / International Development Association The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 URL: htpp//www.worldbank.org ii Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Table of Contents List of Boxes...............................................................................................................................................iv List of Tables...............................................................................................................................................iv List of Figures.............................................................................................................................................iv Annexes...................................................................................................................................................... v Abbreviations and Acronyms...................................................................................................................vi Foreword................................................................................................................................................... vii Acknowledgements..................................................................................................................................viii Key Messages............................................................................................................................................. 1 Part 1: The State Of Uganda’s Economy................................................................................................... 9 1.Recent Economic Developments.......................................................................................................... 10 1.1 A Dip in Growth: Global Turbulence and Other Factors........................................................................................... 11 1.2 Tight Money Policy Restrained Soaring Inflation........................................................................................................ 12 1.3 Fiscal Adjustments to Restore Confidence.................................................................................................................... 15 1.4 External Balance Improves, Trade Balance Deteriorates.......................................................................................... 18 2. Economic Outlook................................................................................................................................ 21 2.1 Growth Prospects for 2013-2014 and the Medium Term......................................................................................... 21 2.2 Risks: External Shocks, Declining Aid, Poor Weather and Political Will............................................................... 24 2.3 The Need for Renewed Growth Momentum................................................................................................................ 26 Part 2: Regional Trade: Harnessing the Potential.................................................................................. 28 3. Prospering through Cooperation and Trade with Neighbors........................................................... 29 3.1 The Benefits of Outward-Orientated Policies............................................................................................................... 30 3.2 Regional Integration: To Open Up the Region............................................................................................................. 32 3.3 Is Regional Integration Working to Promote Economic Growth in Uganda?................................................... 35 4. Leveraging Opportunities in the Region and Beyond....................................................................... 38 4.1 Beyond the EAC: Uganda as a Land Bridge to Connect Landlocked Nations with Coastal Regions........ 38 4.2 Uganda’s Products: Survive, Diversify and Grow......................................................................................................... 41 4.2.1 Agriculture: Leveraging Uganda’s Position as the Breadbasket of Eastern Africa....................................... 41 4.2.2 Climbing the Value Chain by Developing Capabilities.......................................................................................... 42 4.2.3 The Services Sector: Where Uganda’s Landlocked Status Doesn’t Matter..................................................... 44 Edition No.1 February 2013 iii Unleashing Uganda’s Regional Trade Potential 5. Building Bridges to Deepen Regional Trade................................................................................... 51 5.1 Lower Transport Costs: The Key to Increasing Trade............................................................................................. 51 5.1.1 The Vital Need for Revamped Infrastructure......................................................................................................... 52 5.1.2 Beyond Infrastructure: The Hidden Costs of Under-developed and Dysfunctional Logistics............ 54 5.2 Non-Tariff Barriers: Stop NTBs from Undermining Trade Liberalization......................................................... 56 5.2.1 Over-Regulation as a Constraint to Regional Trade............................................................................................ 59 5.2.2 How Can Uganda Address the Constraints Created by NTBs?....................................................................... 63 5.3 The Services Sector: How to Turn Opportunities into Gold................................................................................ 64 6. Summary and Concluding Remarks................................................................................................. 67 Statistical Annex.................................................................................................................................... 69 List of Boxes Box 1: Summary Assumptions for the Medium Term Outlook........................................................................23 Box 2: Uganda’s Gains from Liberal Trade Environment....................................................................................31 Box 3: Status of Regional Integration Efforts in EAC...........................................................................................33 Box 4: How Could Leveraging Regional Integration Accelerate Uganda’s Competitiveness?.............34 Box 5: Uganda can Move to Higher Value Exports – the Product Space View..........................................43 Box 6: Education Service Export on the Rise.........................................................................................................48 Box 7: Tariff Regime is not an Immediate Challenge..........................................................................................57 Box 8. Non- Tariff Barriers: What are they?..............................................................................................................58 Box 9: The Case of Harmonized EAC Standards Becoming Potential Trade Barriers...............................62 List of Tables Table 1: Central Government Operations, 2008/09 - 2012/13............................................................................18 Table 2: Balance of Payments Position, FY10 – Quarter 1 of FY13....................................................................20 Table 3: Classification of Exports by Change of Competitive Advantage 2005-2010................................37 Table 4: A Snapshot of Uganda’s Services Trade, 2010..........................................................................................45 List of Figures Figure 1: Uganda’s FY12 Growth Lowest in the Region..........................................................................................11 Figure 2: Squeeze in Domestic Demand as Investments Decline and Consumption Shrinks..................11 Figure 3: Agriculture Growth Improved While Other Sectors Decelerated.....................................................12 iv Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Figure 4: Uganda’s Maize Price Tracks Developments in Kenya, While Contribution of Imported Food Became Important..................................................................................................................................13 Figure 5: Rapid Increase in Fuel Prices Driven by International Prices, Fed into Transport Prices............13 Figure 6: The New Policy Rate May Have Signaled Continuous Tightening Stance Started in September 2010, But Raised Responsiveness of Commercial Banks’ Rates.........................................................14 Figure 7: With overheads Still Pushing Margins, Interest Spreads are Yet to Genuinely Come Down....15 Figure 8: : Uganda’s Revenue Effort Continues to Lag, While Bulk of Revenues is from International trade.............................................................................................................................................16 Figure 9: A shift from Domestic to External Borrowing...........................................................................................17 Figure 10: Worsening Current Account, But Inflows on Capital Account Turned Around Overall External Position.................................................................................................................................................19 Figure 11: The Shilling Recouped Value in Second Half of FY12 Both in Nominal and Real Terms.........20 Figure 12: Fiscal Strategy Focusing on Key Constraints..........................................................................................24 Figure 13: The Slide in Growth in FY12 Makes the Downward Trend Observed in Uganda’s Growth in Recent Years More Pronounced...............................................................................................................27 Figure 14: Uganda’s Top 10 Regional Trade Goods in 2012 - Exports Concentrate in Agricultural Produce, Many of the Manufactured Goods Exports are also Imported........................................36 Figure 15: EAC Countries Exporting More to Each Other and Catching Up with Traditional Destinations.........................................................................................................................................................38 Figure 16: Potential Market for Uganda’s Products Could Expand by 50 percent, as Sudan Becomes Largest Trading Partner During 2000s.....................................................................................40 Figure 17: Global Perspective Dwarfs Regional Markets as Uganda Expands Trading Space...................41 Figure 18: Within EAC, Uganda and Rwanda Have Transformed Export Structures Fastest......................44 Figure 19: Uganda’s Meager Share East African Tourism........................................................................................46 Figure 20: Uganda Still Needs Skills Capacity.............................................................................................................49 Figure 21: Uganda’s Services Trade Restrictiveness in Comparison to EAC Countries and Across Sectors......................................................................................................................................................50 Figure 22: Uganda and Kenya Have Largest Number of Barriers, Even for Intra Regional Trade..............59 Figure 23: Uganda and Kenya are the Most Affected by NTMs Relative to Other SSA Countries............60 Figure 24: Significant Price-Raising Effect of NTBs on Food in Kenya and Uganda.......................................61 Figure 25: More NTBs Identified, and More Time Given For Removal................................................................63 Annexes Statistical Annex ...................................................................................................................................................................69  Edition No.1 February 2013 v Unleashing Uganda’s Regional Trade Potential Abbreviations and Acronyms ASEAN Association of Southeast Asian Nations BOU Bank of Uganda BOP Balance of Payments CBR Central Bank Rate CET Common External Tariff CAGR Compound Annual Growth Rate COMESA Common Market for Eastern and Southern Africa DSA Debt Sustainability Analysis DRC Democratic Republic of Congo DTIS Diagnostic Trade Integrated Study EABC East African Business Council EAC East Africa Community EAPSP East African Professional Services Platform EU European Union FDI Foreign Direct Investment FTA Free Trade Area GDP Gross Domestic Product HIPC Highly Indebted Poor Countries Initiative ICT Information and Communications Technology IFC International Finance Corporation IMF International Monetary Fund ITC International Trade Centre IUCEA Inter University Council of East Africa LIBOR London Interbank Offered Rate MDRI Multilateral Debt Relief Initiative MFPED Ministry of Finance, Planning and Economic Development MTTI Ministry of Trade and Tourism NDP National Development Plan NEER Nominal Effective Exchange Rate NTBs Non-Tariff Barriers NTMs Nontariff Measures ODA Official Development Assistance RCA Revealed Comparative Advantage REER Real Effective Exchange Rate SMEs Small and Medium Enterprises SSA Sub-Saharan Africa UEU Uganda Economic Update URA Uganda Revenue Authority USAID United States Agency for International Development VAT Value Added Tax WB World Bank WDI World Development Indicators WITS World Integrated Trade Solution WTO World Trade Organization vi Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Foreword Uganda is a reform-inclined country with a remarkable track record. More recently, the country has foundered, but shows steps towards refocusing on accelerated and sustained growth. Its ambitious target is to become a middle income country in a decade. For this to happen, however, Uganda will have to exceed its 7% growth rate of the 1990s and the early 2000s, and hit a high of 10% sustained over a period of time. To get to this, Uganda will need the kind of resilience that has been absent in the last few years when growth rates have fallen. The keys to building resilience lie in diversifying the economic base and in appropriate use of resources, which Uganda can achieve by transforming its production and marketing value chain processes. This is not a far-off goal for Uganda. The exploitation of oil resources is an opportunity that could transform the country through smart use of oil revenues in the non-oil sectors, and hence spur rapid and sustained growth. Beyond national resources, Malaysia, Singapore and South Korea offer good examples of how the interplay between local productivity and external markets can lead to socio-economic transformation. The tenacity, speed, strength and determination with which these three countries pursued outward-oriented growth strategies – allowing for trade with their neighbors, yielded growth and jobs for their populations, hence their being branded “the Asian Tigers�. In similar fashion, Uganda can become the economic “Lion of Africa� if it harnesses the potential that regional trade offers. This will however only be possible if Uganda’s neighbors agree to work together as a village community; open up for each other, and devise policies that enhance rather than frustrate free movements of goods, services, and people. It will take the entire region working together to realize the potential that each individual nation has. Through regional trade, Uganda can remove the obstacle of being landlocked and become integrated into a land-linked economy. Higher productivity and better access to markets will underpin growth in regional trade. The two most critical entry points to achieve this are developing better infrastructure that will ease transportation and lower the cost of doing business, and overcoming non-tariff barriers to trade. Uganda’s ambition to become a regional economic giant is therefore not far-fetched. Adopting the right policies and investments, as well as a refocusing on growth will lead to transformation. Middle income status is achievable, but it will require Uganda to work twice as hard and fast not to miss the window of opportunity. Philippe Dongier Country Director Tanzania, Uganda and Burundi Edition No.1 February 2013 vii Unleashing Uganda’s Regional Trade Potential Acknowledgements The first edition of the Uganda Economic Update was prepared by a team that was led by Rachel Kaggwa Sebudde and that comprised of Nora Carina Dihel, Charles Kunaka, Anton Dobronogov, Daniel Mwanje, Clarence Tsimpo, Jakob Rasmussen, and Jean-Pascal Nguessa Nganou. In addition, Jacques Morisset played a supervisory role, guiding the team on the structure and messaging; Clare Busingye provided the logistical support, while Sheila Gashishiri and Steven Shalita led the efforts on the communications and dissemination strategy. The Uganda country team provided useful feedback during the preparation of the report. Albert Zeufack (Sector Manager) and Moustapha Ndiaye (Country Manager), provided overall guidance on the project. The report benefitted from insights of peer reviewers including Paul Brenton, Daniel Lederman, and Wolfgang Fengler, and from Olivier Cadot who led the updating of the 2012 Uganda Diagnostic Trade Integrated Study (DTIS). Special thanks are due to the external reviewers whose collaboration was valuable to inform the content and relevance of the messages from practitioners’ views. These included the Private Sector Foundation (Gideon Badagawa and Moses Ogwal), Bank of Uganda (Adam Mugume and Martin Brownbridge), Uganda Manufacturers Association (Godfrey Ssali), Economic Policy Research Centre (Annette Kuteesa), Ministry of Finance, Planning and Economic Development (Moses Bekabye, Albert Musisi and Andreas Eberhard), and Ministry of Trade and Cooperatives(Silver Ojakol). Professional editing by consultants David Sseppuuya and Irfan Kortschak, is also appreciated. viii Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Key Messages Despite having one of the world’s highest rates of investment, leading to a decline in the rate of growth. population growth, Uganda has an impressive record of The prolonged drought in Uganda has had a significant economic growth and poverty reduction. Over a period negative impact on the performance of the agricultural of approximately 20 years, from the 1990s until around sector. This, combined with poorly directed government 2010, the average annual rate of economic growth spending and poor financial management, has had a stood at around 7 percent. During this same period, the negative impact on the macro environment. In turn, this proportion of the population living below the poverty has resulted in a slowing down of the services and industry line declined from 56 percent in 1992 to 24 percent in sectors. The slowdown in private investment and exports FY10. was followed by a weakening external current account, driven by a dramatically increased import bill. While the In sub-Saharan Africa, Uganda was a pioneer of combined impact of efforts to achieve stabilization, good liberalization and pro-market policies in the 1980s. This weather and receding shocks might have facilitated a established the foundation for the country’s remarkable recovery in FY13, uncertainties created by governance- economic performance in the 1990s and the 2000s. related aid cuts and a decline in investor confidence are During this period, the country diversified its exports, continuing to stifle growth. The World Bank forecasts mainly through fisheries and tourism, with high levels of that the rate of growth of the Ugandan economy in FY13 private investment. Exports of agricultural commodities will be in the range of 4.3-5.0 percent, a modest increase (particularly innovative crops such as compared to FY12 and far lower flowers, tobacco and maize, on top than the country’s recent historical of the traditional exports of coffee, To harness the potential rates. From a longer perspective, tea and cotton) grew by 16 percent of regional trade, Uganda vulnerabilities have also become per annum during most of the 2000s. needs to adopt a multi- evident over the past five years, when Private investment, which increased pronged approach to raise public investments have become the to an average of 18 percent of GDP at productivity and to get the key driver of growth. Exports remain the end of the century from 11 percent products to markets. In this driven by the agricultural sector, which in the 1990s, was mostly driven by regard, interventions that is sensitive to climate change. construction. create incentives for farmers, firms and services providers If Uganda is to achieve middle However, in recent years, the rate of are vital measures to raise income status, it must rebuild a more growth has slowed down and has productivity. resilient economy. Such resilience been characterized by increased will be achieved through a more volatility. From an average of 9.3 rapid diversification of the economic percent per annum in the period from FY01 to FY08, base, characterized by the production of higher value the rate of growth declined to 7.2 percent in FY09 and products and the judicious exploitation of the country’s to 5.9 percent in FY10. There was a short-lived recovery oil resources. This has the capacity to boost the economy, in FY11, with the rate increasing to 6.7 percent, before including the non-oil sector, and to close current external falling again to 3.4 percent in FY12. Developments in first and fiscal imbalances. Intensified regional trade will be half of FY13 suggest that the rate of growth will remain the catalyst for a market-oriented growth strategy to around 4.5 percent. Uganda, which used to have the best accelerate this process. performing economy of the nations in the East African Community, now lags behind all the others, with all the To harness the potential of regional trade, Uganda other member nations recording rates of growth of at needs to adopt a multi-pronged approach to raise least 4.5 percent per annum since FY12. productivity and to get the products to markets. In this regard, interventions that create incentives for farmers, The global economic crisis of FY09 and its after effects firms and services providers are vital measures to raise have resulted in the deterioration in Uganda’s terms of productivity. Farmers can then produce outputs in trade, with commodity prices declining while oil prices sufficient quantities and quality. Firms can invest in higher increased. This had a negative impact on exports and value export products. And service providers can invest Edition No.1 February 2013 1 Unleashing Uganda’s Regional Trade Potential in quality enhancement to enable Uganda to tap into budget had demonstrated the Ugandan government’s the regional market. Transport costs must be reduced intention of utilizing spending and taxation as the main through the development of better quality infrastructure instrument to stimulate aggregate demand and supply, and improved logistics, non-tariff barriers to goods trade particularly through a large investment program. Up to must be addressed, and restrictions to services trade must 29 percent of the FY13 budget was allocated to support be eliminated. Deeper regional integration is the main major road works, the rehabilitation of water ferries, the means to ensure the establishment and implementation first stages of a design of a standard gauge rail, and the of interventions that promote a high volume and quality commencement of construction of the 600MW Karuma of trade and technology transfers. hydro-electricity dam. Despite these expectations, recovery has been Part I: State of the Economy: Recent constrained by lower than expected expenditure Economic Developments and Economic resulting from failure to achieve tax revenue collection Outlook targets, budget execution problems, and the recent uncertainty arising from governance scandals and corresponding aid cuts. During the first quarter of FY13, In FY12, Uganda experienced the double blow of the level of tax revenue collection was 3.8 percent below a high rate of inflation and a slump in growth, with target. The rate of absorption for the development inflation averaging 23.5 percent and growth declining budget stood at a mere 69.6 percent, compared to 94.2 to 3.4 percent. These two phenomena had not occurred percent for the recurrent budget. This has undermined concurrently since 1992, when the economic stabilization the public expenditure program, even as security and reform process begun. The causes for this double and public administration budgets were overrun. Key whammy were the global economic turbulence that investment projects, such as the construction of the resulted in a decline in exports and investment, higher 600MW Karuma hydro-electricity dam, have also been food and oil prices, together with slippages in fiscal and delayed. Finally, the governance scandals involving the monetary policy originally meant to counter the global Office of the Prime Minister and the Ministry of Public crisis effects, the implementation of which was affected Service during the second quarter of the year resulted by the February 2011 elections and security spending into a freeze of aid estimated at US$ 300 million (4-6 pressures. percent of the national budget or 0.9 percent of GDP). This has not only impacted fiscal operations, but it has In FY13, tight management of monetary policy, and in also resulted in increased economic uncertainty, with support prudent fiscal policy, has stabilized the economy. implications for planning and investment, even in the The economy has also benefited from a decline in food private sector. and energy prices due to external factors, from improved weather, and from the appreciation in the value of Uganda’s external transactions position improved during Uganda’s currency. With the combined impact of these FY12 on account of short term portfolio inflows and factors, inflation came down to below the 5 percent target increased foreign investment in oil exploration. However, by the end of the first half of FY13. Fiscal adjustments the current account position deteriorated further, that reduced the deficit by more than 3 percent during following the downward trend experienced in the past FY12 also supported efforts to reduce inflation. However, five years. In FY13, the balance of payments has been both policy measures also contributed to a slower rate of threatened by lower interest rates that have reduced the economic growth. short-term portfolio and by the governance scandals that have resulted in aid cuts and increased uncertainties In FY13, Uganda had high expectations for a recovery amongst investors. of the economy, supported by macroeconomic stability. With the restoration of stability, both increased Uganda’s short term economic outlook remains mixed, as government spending and a moderate easing of the economy maneuvers the uncertainties surrounding monetary conditions were expected to stimulate governance-related disruptions to aid and the decline in overall demand in the economy. At the same time, the investor confidence. Maneuvering these uncertainties is Central Bank Rate was cut by 8 percentage points, to vital if the country is to sustain recovery following the dip 12 percent as of December 2012. As a result, the level in FY12. A positive growth outlook is highly dependent of lending to the private sector began to gradually on restored macroeconomic stability, characterized by increase during the second quarter of FY13. The FY13 lower inflationary pressures and looser monetary and 2 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential fiscal policies to stimulate aggregate demand in the consistent with recent historical performance. The short term. Favorable weather will also boost agricultural spending geared at alleviating constraints to growth, output, allowing the agricultural sector to regain its particularly constraints related to energy supply and importance. However, the services sector will remain the transport infrastructure, should, in the medium term, key driver of economic growth. revive private investments, boost agriculture production, and energize the light manufacturing sector. The new oil The World Bank forecasts that the rate of growth of the economy will dramatically change Uganda’s economic Ugandan economy in FY13 will be in the range of 4.3- outlook through stepped-up investment in production 5.0 percent, a modest increase compared to FY12 and infrastructure. In future years, when production facilities far lower than the country’s recent historical rates. With become active, actual oil revenues could double the curtailed momentum as a result of the governance country’s current level of fiscal revenue. The experience scandals and ensuing disruptions to aid, the economy of other countries shows that the oil development is expected to recover only modestly in the second half preparation phase is often characterized by a high level of of the FY13 financial year. Facing these problems, the foreign investments that significantly impact economic Ugandan government is expected to reduce its level of performance, at least in the regions implementing expenditure, including expenditure in the key transport those investments. Developing institutions to ensure sector. Hence, while agricultural output is expected to transparency and the prudent management of revenue improve as projected, the reduction in government will facilitate the optimal utilization of the country’s oil spending is expected to curtail economic activity, even resources. if aid assistance may resume later in the year, following a government commitment to corrective actions However, Uganda’s economic prospects could be regarding the misappropriation of funds. However, if the negatively impacted by either external or internal strategies of the medium term expenditure program and developments or both. In the short term, external efficiency reforms are sustained and if aid disbursement turbulence from Europe, where the Euro Zone is struggling, resumes, economic recovery may gain instability due to the Arab Spring, poor momentum in FY14. relations with donors, and rising food Uganda’s economic prospects and oil prices could destabilize the As a result of the slowdown in the could be negatively impacted domestic economy and slow down global economy, Uganda’s external by either external or internal growth. Government expenditure position is expected to remain weak, developments or both. In the remains vulnerable to implementation with increases in exports failing to short term, poor relations constraints and lack of political will to offset the rapidly increasing growth with donors, and rising food enforce discipline in the utilization of in imports. Consumer imports, mainly and oil prices could destabilize limited financial resources. The short- consisting of foodstuffs such as dairy the domestic economy and term prospects for increased domestic products, fruits and vegetables from slow down growth. revenue remain slim, as measures to Kenya and South Africa, and clothing eliminate the leakages resulting from and household items from China, tax exemptions are still either lacking Europe and USA, are increasing. The or are poorly enforced. Uganda’s large weak external current account will also public investment program continues continue to reflect the large gap between the country’s to be funded through external financing, as collected increasing investment needs and its low level of domestic domestic revenue, equivalent to 13 percent of GDP, savings, which currently stands at a value equivalent to is barely enough to cover the recurrent expenditures. 13 percent of GDP, compared to the average level of 17 Furthermore, corruption and related scandals may result percent for sub-Saharan Africa. in the diversion of public resources and the derailment of the public investment program, 50 percent of which was In the medium term, Uganda’s economic performance is expected to be financed with external resources. expected to improve as a result of the government’s pro- growth policies, which involve reforms to enhance fiscal In this period of transition to becoming an oil producing efficiency and to generate productivity improvements in nation, poor relations with donors could exacerbate private activities. In addition, revenues derived from the instability. By January 2013, the cuts in aid announced by production of oil will make an increasingly significant donors amounted to 4 percent of the total FY13 budget. contribution. With these factors, the growth of GDP These cuts could be managed through cuts in some could revert to the rate of approximately 7 percent, non-priority expenditures. However, lack of progress in Edition No.1 February 2013 3 Unleashing Uganda’s Regional Trade Potential improving spending efficiency and a failure to entrench levels of openness and transparency can help ensure good value-for-money practices in government the achievement of these goals by facilitating access operations could worsen donor relations and result to new markets (demand side) and by pushing firms to in further declines in investor confidence. This in turn become more competitive (supply side). This leads to an could result in ongoing negative impacts for Uganda, expansion in production, diversification and increased whose international rankings for transparency and good employment opportunities. governance remain poor. In the medium term, the challenge remains for Uganda to utilize its oil resources to create economic opportunities. Part II: Harnessing the potential in The manner in which oil resources are utilized will be regional trade to help Uganda’s economy a major factor in mapping the country’s medium- and expand and diversify. long-term development path. Oil revenues can substitute for aid, but the transition could be a source of macro risk if these revenues are not managed properly. Elsewhere If a typical African village is used as a metaphor for the in the world, the prospect of increased revenues from Great Lakes region, Uganda is in the position of a typical oil has often been associated with increased levels of villager who can only grow by developing deeper corruption. If corruption continues to increase in Uganda, links with neighbors and members of surrounding further reductions in aid are likely, making the transition communities. In Uganda’s case, it must develop deeper towards a well-managed oil economy more difficult. links between domestic producers and external markets. Uganda has been at the forefront of regional integration, Uganda will require a significantly increased rate of which is a key means of facilitating intensified regional economic growth to achieve its vision of reaching middle trade. It has entered into a number of regional income status in the next 10 years. With the medium- agreements, including the EAC and COMESA. These term projection of 7 percent, which is based on a high- regional agreements have yielded significant dividends, growth scenario, Uganda’s per-capita income could almost doubling Uganda’s regional exports over five reach US$ 814 by 2025. To achieve a per capita income years, to 25 percent of total exports in FY11. They have of US$ 1000 within a decade, Uganda must achieve a enabled Uganda to diversify its export base into industrial rate of growth in excess of 10 percent per year. Faster output such as iron sheets, cement and plastics, and to diversification of the economy and appropriate use of progressively reduce its imports, as it is now increasingly resources, including oil, must be the engine to facilitate producing inputs that it previously imported. These the renewed growth momentum required to achieve achievements notwithstanding, regional integration is this figure. In addition to having the potential to close still in its infancy, with many benefits yet to materialize. the current account deficit, oil can boost the capacity of Uganda’s level of trade with its regional neighbors is still the economy, particularly the non-oil sector, enabling it sub-optimal, with trade remaining distorted by many to grow at a more rapid rate. factors, including high transport costs, non-tariff barriers, limited currency convertibility, and failure to manage the Regional trade may be the catalyst to ensure rapid social and political impacts of the unequal distribution of economic growth. To achieve this, Uganda’s economy benefits and costs. At the same time, the development must undergo a fundamental transformation. This of new regional markets remains affected by ongoing transformation must affect what the country produces, regional insecurity. how it produces it, and where it finds markets for its outputs. Policies to improve the business environment, Uganda must tap the remaining underutilized to develop human capital, and to raise the stock opportunities within the region. Amongst other of infrastructure will remain the key drivers of this measures, this involves exploiting its position as a land transformation. To overcome implementation challenges, bridge linking other landlocked countries to the coastal improving the efficiency of fiscal policy, including factors economies; diversifying the export base within the that influence it, such as good governance, cannot agricultural sector and out of agriculture into higher value be overlooked, particularly when the country makes products; and tapping the potential of services trade. the transition to becoming an oil producer. However, To achieve this, working together with others, Uganda international experience suggests that it is hard for a has to build the bridges to facilitate intensified regional small landlocked country such as Uganda to move alone trade. While this agenda involves regional cooperation, along the path of economic development. Improved Uganda must pursue a re-energized policy action that 4 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential focuses on what the country can do on its own. Uganda countries, especially through the development of better cannot afford to wait. This economic update proposes an infrastructure and institutions to support trade. action plan to achieve these goals, as follows: (ii) Boosting Uganda’s regional trade by moving (i) Beyond the East African Community: Uganda as a beyond food crops land bridge for the Great Lakes region Uganda must continue to harness its agricultural The first opportunity to exploit the dynamic regional potential to feed the region. However, the full benefits of market lies within the EAC. However, beyond that, regional trade will only be realized by climbing the value Uganda must position itself as a land bridge to connect export ladder and by exporting services. Facilitating other nations within the Great Lakes regions with coastal intensified regional trade must involve three strategic nations. In the period from 2001 to 2010, the EAC was pillars, as follows: the second-fastest growing economic bloc in the world. The Community has a rapidly expanding population and PILLAR 1: Harnessing the agricultural sector to rapidly expanding levels of intra-regional trade. Uganda’s feed the region: Uganda has a flexible climate and level of trade within the EAC has grown more rapidly than fertile soils. This gives it prospective comparative its trade with the rest of the world. However, Uganda has advantages as a food basket zone for the EAC, the potential to almost double its trading space through principally Kenya. Agricultural exports, particularly an expansion of trade with nearby nations in the Great the export of food commodities, will buttress Lakes region, such as South Sudan and the Democratic export growth and facilitate diversification if Republic of Congo. In such nations, Uganda’s private productivity improves to meet the rising demand sector has already established trading partnerships, associated with the growth of regional economies mainly through informal means. Building on these and the urbanization of their populations. The existing trade relations, Uganda must play a stronger challenge lies in ensuring farms produce outputs strategic role in coordinating and harmonizing policies in sufficient quantities and of sufficiently high relating to trade between EAC and non-EAC Great Lakes quality at competitive prices and are able to Rice Growing in Butaleja District to support food exports to the region (Great Lakes Film Production Ltd), November 2012 Edition No.1 February 2013 5 Unleashing Uganda’s Regional Trade Potential get this produce to markets. Recent efforts to in the travel and tourism sector. This situation raise productivity include the special cluster- could improve if trade constraints are removed based interventions to raise production of key in strategic sectors including tourism, transport, commodity exports, including maize and beans, and logistics. The situation could also improve if by improving access to enhanced seeds, fertilizers, Uganda is able to build on recent trends that have mechanization and water for production. These made it a growing regional hub for education and efforts will be central to supporting Uganda’s transit for goods in the Great Lakes region. competitiveness as a food surplus producer. Beyond raising productivity on the farm, (iii) A waiting game will be a losing game: Uganda improvements in storage, transport logistics, and can do a lot on its own to enhance regional trade. connectivity are urgently required to link farmers to markets and to link the domestic market to the Harnessing the potential of regional trade will not be regional market. easy, given that many of the constraints to such trade lie beyond Uganda’s borders and are beyond its control. PILLAR 2: Climbing the export value ladder However, Uganda cannot afford to wait for others to act. by expanding Uganda’s range of outputs: This There is still much that it can do on its own initiative. will be achieved by building on what Uganda To stimulate regional trade, Uganda has to implement already produces and by participating in regional a multipronged approach that ranges from raising production chains. Moving from low to higher productivity to getting outputs to the market at a value exports requires building production competitive price. Action must focus on the following capabilities and capacities. In the EAC, Uganda three priorities: has made the fastest transition from low value primary product exports to higher value primary To reduce transport costs, more efficient modes of products, resource based manufactures, and low transport will need to be developed and to become technology manufactures. This has expanded operational. Uganda has made commendable progress its opportunities to develop other products of towards improving roads in the trade corridors. These similar and substitutable or adaptable capabilities. efforts must be sustained and complemented through Uganda can also participate in regional production government-led initiatives to work with neighbors to chains and trade in “parts� or “tasks�. For instance, by maintain these roads and to improve ports. In the short- exporting plastics, Uganda has built capabilities to to-medium term, rail and water transportation systems assemble and/or manufacture toys. It could build must be made more viable through the rehabilitation upon these capabilities to produce car parts or of existing lines. The EAC has already committed to higher level outputs. Beating the stiff competition the installation of a standard railway gauge network. from the more economically developed Kenya This is an important measure towards facilitating will remain a challenge, given that Uganda is a regional connectivity both within and beyond the EAC, small landlocked country, far from the coast, and encompassing nations including Ethiopia, Somalia, its industrial sector lags behind Kenya’s, with less Zambia and Malawi. Improving lake transport will also established businesses and a lower level of access improve the efficiency of railway transport, reducing to technologies and skills. Better connectivity and distances and easing connections, compared to use of the removal of non-tariff barriers will be vital if rail-road intermodal transport. Uganda is to leverage these trade opportunities optimally. Improvements in physical infrastructure must be accompanied by improvements in logistics services. PILLAR 3: Promoting the export of services: There is evidence that reductions in transport costs are Amongst other benefits, this may be one means driven by improving both infrastructure and transport for Uganda to overcome distance disadvantages logistics, including improvements to the trucking, associated with its landlocked status. Although the freight, and storage industries. Heavy taxation and high services sector accounts for more than 45 percent operational costs exacerbate distance disadvantages, of GDP, Uganda remains a net importer of services, with Uganda still being required to import transit with exports accounting for 9 percent of GDP services, as the regional fleet is dominated by Kenya and while imports account for 14 percent. About 55 Tanzania. Introduction of a regional customs bond will percent of the service imports are in the transport reduce constraints on forwarding businesses, especially services sector, while 56 percent of exports are the small freight forwarders, who form the bulk such 6 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential operators. Breaking down “cartel� practices in the and implement an adequate regulatory framework to trucking business to improve trade competitiveness will support existing engagements in education, regulation, require renegotiating road-user fees with EAC partners; trade policy, and labor mobility. accelerating improvements in key strategic border operations, including those connecting Uganda to South To conclude, while developing other factors of growth, Sudan, DRC, and Congo; and increasing the capacity of Uganda needs to sustain its efforts to deepen regional bonded storage facilities. integration as a means of facilitating greater trade opportunities, but primary agenda remains it its own A solution must be found to the problem of non-tariff hands. The first point of action is to address constraints barriers. The ineffectiveness of past efforts to eliminate to productivity growth in sectors that have the NTBs cannot be an excuse for inaction. Efforts to intensify highest potential for regional expansion, including the trade are self-defeating unless they are accompanied agriculture, manufacturing and services sectors. Uganda by efforts to reduce or eliminate non-tariff barriers must ‘advocate by setting an example’ by removing its (NTBs). Such NTBs are currently mainly manifested own NTBs as a means of encouraging neighboring through rules and regulations. Although these rules and countries to address theirs. However, it also needs to use regulations are sometimes legitimate, they are often its position to persuade the coastal countries to do their inappropriately implemented. Common NTBs include part, since they will also benefit from such programs. standards regulations and weigh bridges. In addition to In addition, Uganda must seize every opportunity to creating delays for traders, NTBs also result in increased promote peace and tranquility in the Great Lakes regions. cost through the imposition of illegal fees and charges. Without peace, there can be no trade. NTBs raise the prices of traded goods in the same manner that tariffs would. Uganda and Kenya’s NTBs Deeper regional integration will facilitate the have the most significant negative impact on regional development of regional public goods such as roads and trade. Building on previous efforts to raise awareness railways; reduce transaction costs and create economies and improve transparency in the management of the of scale; provide a regulatory environment in which goods NTBs, Uganda must enter into bilateral negotiations with and services can flow freely; and support cross-border strategic partners to harmonize trade policies. A strong production networks. It will also reduce the constraints commitment to remove its numerous trade-related rules faced by many local firms in accessing the essential and regulations would assist in negotiations with partner services and skills that are needed to boost productivity states to remove theirs. Regionally, the introduction of a and further diversify into higher value-added production mutual recognition of conformity-assessment procedures and trade. Implementing this regional agenda will not be and a sanctions system of the sort implemented by easy. However, as a landlocked country, Uganda cannot other regional blocs, such as ASEAN and the EU, would afford to forget her neighbors. Therefore, the country help. Such measures must be accompanied by the must choose its strategic positioning carefully. introduction, through the EAC framework, of regional sanctions, as well as strengthened sanitary and phyto- sanitary testing and verification capabilities. In addition, efforts must be made towards mutual recognition of A solution must be found to the conformity assessment procedures. problem of non-tariff barriers. The ineffectiveness of past efforts To unleash the potential of the service exports, a to eliminate NTBs cannot be an number of restrictions must be eliminated. Uganda needs to prioritize specific sector interventions in the excuse for inaction. Efforts to area of tourism, education and professional services, intensify trade are self-defeating and transportation and logistics services for the unless they are accompanied by greater hinterland. In the tourism sector, for instance, efforts to reduce or eliminate non- in addition to improving human resources, the public tariff barriers (NTBs). Such NTBs sector can play an important role by developing the appropriate infrastructure to reduce the cost of access are currently mainly manifested to tourist centers and potential tourist attractions. In the through rules and regulations business and professional services sector, more flexible immigration regulations are crucial to ensuring the mobility of service providers. The challenge is to develop Edition No.1 February 2013 7 Unleashing Uganda’s Regional Trade Potential Kampala is the barometer of the economy (Great Lakes Film Production Ltd), November 2012 8 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Part 1: State of The Economy • Uganda’s economy came under test during FY12, as growth slowed down to 3.4 percent, inflation rose to a peak of 30 percent, and both the interest rates and local currency moved up and down against a weak external balance. • A decisive tight monetary policy and supportive fiscal restraint may have contributed to slower growth, but it gradually restored stability. This was helped by declining food and energy prices. • In FY13, Uganda had high expectations for a recovery of the economy. Following the restoration of stability, the subsequent increase in government spending and a moderate easing of monetary conditions, were expected to stimulate the economy, while agriculture recovered under good weather. • The short term economic outlook is mixed given the lower-than-expected fiscal spending and economic uncertainties emerging from governance scandals and corresponding aid cuts, amidst a weak external position. GDP growth may recover only modestly to 4.3 – 5.0 percent in FY13. • In the medium term, economic performance can improve if Government’s pro-growth policies realize efficiency and productivity improvements, and oil resources create economic opportunities. The main downside risks are a worsening global economy, regional insecurity, and poor fiscal management • Uganda needs a renewed growth momentum to achieve its vision of reaching middle income status in 10 years. To achieve this, it must grow above 10 percent per annum, much higher than the impressive historical rates of 7 percent per annum. • Regional trade can be the catalyst to spur rapid economic growth by facilitating access to new markets and pushing firms to become more productive. This leads to expansion in production, diversification and increased jobs. Edition No.1 February 2013 9 Unleashing Uganda’s Regional Trade Potential 1. Recent Economic Developments Uganda’s two decade record of prudent macroeconomic management and growth has recently faced significant tests. In the 2012 financial year, the rate of economic growth declined to almost 3 percent, while inflation rose to unprecedented levels. This decline was largely the result of a turbulent global economy and domestic shocks. Government’s corrective fiscal and monetary stance helped to restore stability and confidence in the first few months of 2012. As a result, growth had been anticipated to recover strongly in the 2013 financial year. However, a new wave of shocks, related to corruption scandals and related aid cuts, is testing the economic momentum, which was already constrained by the slower rate of private investment and a decline in exports over the past five years. Kampala city has been the engine of growth, (Great Lakes Film Production Ltd), November 2012 For a period of approximately 20 years, from the 1990s pro-market policies. For two decades, the Ugandan and into the 2000s, Uganda recorded an outstanding government managed its fiscal and monetary policy economic performance. During this period, up until 2010, well, while a more liberal market encouraged private the annual rate of economic growth averaged 7 percent. local and foreign entrepreneurs to invest in the economy. Despite an extremely high rate of population growth, The main engines of growth were exports, particularly in per capita GDP growth accelerated from 3.4 percent in the fisheries and tourism sectors, and private investment. the 1990s to 4 percent in the period from 2000 to 2008. New agricultural commodities, such as flowers and maize, Similarly, the proportion of the population living below rather than the traditional export commodities, coffee, the poverty line declined from 56 percent in 1992 to 24 tea and cotton, supported a 16 percent per annum percent in FY10. growth in exports throughout most of the 2000s. Private investment increased to an average value equal to 18 Sound macroeconomic policies accounted for Uganda’s percent of GDP in the 2000s, up from 11 percent in the remarkable economic performance. In the 1980s, 1990s, with most of this investment in the construction Uganda was one of the first countries in sub-Saharan sector. Africa to implement trade liberalization and multi-sector 10 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential 1.1 A Dip in Growth: Global Turbulence This is a low rate of growth compared to other East African Community countries (EAC), all of which and Other Factors recorded rates at least 4.5 percent in the same period. In recent years, Uganda’s economy has experienced The average growth rate in the sub-Saharan African (SSA) a decline in its rate of growth. The main cause for this region in the 2012 financial year stood at 5 percent (see decline has been a fall in average prices of the country’s Figure 1). Uganda’s rate of growth in 2012 was also the commodity exports, higher fuel prices, bad weather, lowest rate recorded since 2000, and approximately 3 and other negative effects associated with the global percent less than the average for the past decade. economic crisis. From an average rate of growth in GDP of 9.3 percent in the period from 2001 to 2008, the rate The dramatic fall in the growth rate during FY12 declined to 7.2 percent in FY09 and to 5.9 percent in FY10. was the result of a combination of external and Several factors explain this decline in growth, with these domestic factors. The global crisis resulted in a decline in factors including the impact of the global economic the demand for Uganda’s exports, while rapidly increasing crisis of 2009 and deterioration in the terms of trade as oil prices in the world market affected production and commodity prices declined while oil prices increased, transport costs. As a result, the contribution of net which had an adverse impact on the growth of exports exports to GDP growth remained negative in 2011 and and investment. Domestically, the prolonged drought 2012. This compares to the pre-global crisis period, when had a significant negative impact on the agricultural the trade sector contributed positively to growth every sector. Following this, fiscal and monetary slippages year (average of 0.1 percentage points of GDP). disrupted the macro environment which in turn resulted in a slowing down of the services and industry sectors. Figure 2: Squeeze in Domestic Demand as Investments Decline The declining growth of private investment and exports and Consumption Shrinks was followed by a weakening external current account, driven by a dramatically increased import bill. 8.0% % contribution to GDP growth 6.0% Uganda experienced a short lived economic recovery in the 2011 financial year. Following the 4.0% global turbulence and domestic shocks, including a high 2.0% rate of inflation, the country experienced further declines 0.0% in FY12. While the rate of growth recovered to 6.7 percent in FY11, it again declined to 3.4 percent in FY12. -2.0% -4.0% Public Private Figure 1: Uganda’s FY12 Growth Lowest in the Region Consumption Net Exports Investment Investment FY11 7.3% 1.7% 1.0% -3.3% FY12 0.4% -0.5% 1.1% 2.4% 10.0 9.0 FY11 7.7 8.0 FY12 Source: Uganda Bureau of Statistics, 2012 6.8 7.0 6.0 5.2 5.0 5.0 4.5 The decline in the rate of growth of GDP was also Change(%) 4.0 3.4 the result of corrective measures to fiscal and 3.0 monetary policies. After several years of expansion, the 2.0 government had to adjust its budget policies, leading to 1.0 a severe reduction in public spending, particularly capital 0.0 expenditures, in FY12. This situation was exacerbated Uganda Kenya Tanzania Rwanda Burundi SSA(Dev.) by a slowdown in private investment and declines in consumption, resulting from higher interest rates due to tighter monetary conditions and increasing uncertainty Source: Uganda Bureau of Statistics, WDI & Global Economic Prospects June 2012 in business environment (see Figure 2). Edition No.1 February 2013 11 Unleashing Uganda’s Regional Trade Potential Figure 3: Agriculture Growth Improved While Other Sectors By contrast, the agricultural sector recorded higher Decelerated rates of growth. In FY12, this sector recorded a growth rate of 2.2 percent, compared to 0.7 percent in FY11 (see 10.0% Figure 3). This was principally the result of improved climatic conditions, following two years of severe 8.0% droughts. Within the agricultural sector, the rate of growth of cash crops, which had declined by 6.5 percent in FY11, 6.0% recovered significantly, recording a rate of growth of 4.0% 16.5 percent. The level of agricultural exports, including maize, beans, and flowers, increased significantly during 2.0% the first half of FY12, largely due to higher international prices and increased volume of trade. However, the rate 0.0% of growth of the agricultural sector as a whole was barely agriculture services construction manufacturing above the population growth rate and insufficient to -2.0% compensate for the poor performance of the services FY11 FY12 and manufacturing sectors in terms of the overall rate of growth in the GDP. At the sectoral level, the overall weak economic growth recorded in FY12 is explained by the During the first half of FY13, the economy began deceleration of the services and construction to show signs of recovery and stabilization. Due sectors, which together account for approximately to the fiscal and monetary adjustments implemented 42 percent of all Uganda’s goods and services. These in the second part of FY12, the stabilization of the main previously booming sectors lost about 5-6 percentage key economic financial indicators, including the inflation points each. Financial and trade services decelerated due and exchange rates, contributed to a restoration of to increasing uncertainty in the business environment confidence amongst most operators. Improvements in and tighter liquidity conditions that led to higher interest energy supply also had a positive impact on activities rates and more prudent behavior by commercial banks. within the transportation and manufacturing sectors. Construction, including the residential houses sub- Within the construction and manufacturing sectors, sector, grew by only 3.2 percent, which was a less than improved supply conditions were also evident, with the half of the growth rate reported in FY11 (7.8 percent), deceleration of producer prices and construction price with the decline partially the result of the cuts in public indices during the first quarter. With a quarterly rate investment. of growth of 1.8 percent during the first quarter of the year, quarterly GDP estimates had showed that overall Manufacturing faced triple jeopardy during FY12, economic growth could rebound strongly, to above 5 being affected by power shortages and higher percent in FY13. electricity prices, financing constraints resulting from tighter liquidity, and lower demand from global markets. The sector declined by 1 percent. Electricity 1.2 Tight Money Policy Restrained load-shedding affected the manufacturing sector, with water levels for hydroelectricity generation remaining Soaring Inflation low due to near-drought conditions; expensive thermal During FY12, Uganda experienced its highest rate generators being switched off due to insufficient of inflation since the early 1990s, with the rate funding; and construction of the Bujagali hydropower peaking at 30.8 percent in October 2011. Although dam being delayed by almost a year.1 At the same time, this rate declined to 18 percent in June 2012, the average a tariff revision was required to improve the financial and rate of 23.5 percent for the year was almost four times operational viability of the electricity sector, pushing higher than recorded in FY11. Uganda recorded the up businesses’ operational costs2. Concurrently, credit highest inflation in the region: in Kenya, inflation peaked became more expensive, with commercial banks at 18 percent, but subsequently declined to 8.7 percent. tightening credit conditions. In Tanzania and Burundi, inflation peaked at 19.8 percent 1 By the time the first 50 megawatts unit of Bujagali, previously ex- pected to have come on board in May 2011, was switched on in April 2012, and 25 percent respectively before declining to around load-shedding had reached an average of 12 -18 hours a day. 15 percent in both countries. Rwanda enjoyed the lowest 2 The industrial sector had enjoyed a subsidy of over 60 percent of rate of inflation within the EAC, with an average rate of the total cost of energy; a tariff increase of 68 percent for large industries and 38 percent for medium pushed up operation costs. 5.7 percent for 2012. 12 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Higher food and energy prices were the initial Local food prices were also affected by regional factors main causes behind the inflation surge. Food prices as they followed closely regional patterns, in particular rose because of higher demand from South Sudan and in Kenya. The subsequent decline in food prices, as the Kenya, while domestic harvests were reduced due to bad result of improved weather conditions, has been a major weather. As a result, prices of food crops, with a weight of factor behind the gradual deceleration of inflation since 13.5 percent in the Consumer Price Index (CPI), increased November 2011 (see Figure 4). by an average of 33 percent in the first part of FY12. Figure 4: Uganda’s Maize Price Tracks Developments in Kenya, While Contribution of Imported Food Inflation Became Important 0.16 2500 60 0.14 Uganda maize(Ksh /Kg) 50 0.12 2000 0.1 % contribution to overall inflation 40 Uganda shillings per Kg Kenyan shs per Kg 1500 0.08 30 0.06 1000 0.04 20 Kenya maize(Ksh /Kg) 0.02 500 10 0 40359 40420 40481 40542 40602 40663 40724 40785 40846 40907 40968 41029 41090 41151 41212 41273 -0.02 0 0 -0.04 Food crops Other food (livestock and imports) Source: Uganda Bureau of Statistics, 2012 As usual, increases in fuel and transportation costs (PMS or petrol); by 26 percent for automotive gasoline were the major drivers of inflation in 2012 (see diesel (AGO); and by 27 percent for kerosene (paraffin). Figure 5). High international oil prices were transmitted Exchange rate fluctuations, supply bottlenecks and to local markets, resulting in an increase in domestic inefficiencies in the petroleum industry contributed to pump prices by 15 percent for petroleum motor spirit volatility in petroleum prices. 3 Figure 5: Rapid Increase in Fuel Prices Driven by International Prices, Fed into Transport Prices 4500 0.05 140 4000 0.04 120 International price US $ per barrel 3500 0.03 Retail price in Shs per litre 100 % contribution to overall inflation 3000 0.02 80 2500 0.01 60 2000 40 0 40359 40420 40481 40542 40602 40663 40724 40785 40846 40907 40968 41029 41090 41151 41212 41273 1500 20 -0.01 1000 0 -0.02 38168 38321 38472 38625 38776 38928 39081 39232 39385 39537 39690 39843 39994 40147 40298 40451 40602 40754 40907 41059 41212 -0.03 Diesel retail price PMS retail price International price(crude oil US$/BBL) Elec, Fuel & Utilities (EFU) Transport and Communication 3 World Bank 2010, Petroleum Markets in Sub-Saharan Africa, Extractive Industries for Development Series No. 15, March 2010 Edition No.1 February 2013 13 Unleashing Uganda’s Regional Trade Potential Source: Uganda Bureau of Statistics, 2012 in June 2011 to a peak of 27.8 percent in March 2012 before declining in the last quarter of FY12, when the Other factors also influenced inflation during FY12, tight monetary policy began to ease. The higher lending including local currency fluctuations and an increase rates translated into credit expansion with a lag, with the in the volume of money in circulation. By September rate of expansion declining to a mere 16 percent for the 2011, the depreciation in the value of the shilling over year ending in June 2012. a one-year period reached 25 percent4, resulting in an increased cost of imports. Concurrently, the growth in Inflation continued to decline through the first half money supply reached a peak of 30 percent in July 2011, of FY13, driven by lower food and oil prices and tight fueled by the rapid expansion of credit to the private monetary conditions. Both core and headline inflation sector, which grew at a rate in excess of 40 percent fell to below the target rate of 5 percent by the end of the during the first quarter of the year. At this point, the Bank first half of FY13. This decline in inflation gave the Central of Uganda adopted a tighter monetary policy, raising the Bank confidence to gradually reduce its policy rate (CBR) Central Bank Rate (CBR). This new policy rapidly resulted to 12.0 percent by December 2012. This recent move has in higher Treasury Bill rates and lending rates (see Figure allowed a gradual easing of liquidity conditions, with 8).5 The average lending rate increased from 19.9 percent an ensuing increase in the level of commercial banks’ lending to the private sector, starting in August 2012. Figure 6: The New Policy Rate May Have Signaled Continuous Tightening Stance Started in September 2010, but Raised Responsiveness of Commercial Banks Rates 35.00 30.00 30.00 25.00 25.00 20.00 20.00 15.00 15.00 10.00 10.00 5.00 5.00 0.00 Dec-08 Jun-08 Dec-09 Jun-09 Dec-10 Jun-10 Dec-11 Mar-09 Dec-12 Sep-08 Mar-10 Jun-11 Mar-11 Jun-12 Sep-09 Sep-10 Mar-12 Sep-11 Sep-12 0.00 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Jun-08 Mar-09 Jun-09 Mar-10 Jun-10 Mar-11 Jun-11 Mar-12 Jun-12 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 91 Days 7-12 months 91 Days Core Inflation Central Bank rate Central Bank rate Lending Rates Source: Uganda Bureau of Statistics, 2012 Predictably, the tight monetary policy stance loans, which have continued to decline even further contributed to a slowdown in growth during FY12, during FY13. By contrast, forex denominated loans have as the cost of borrowing from banks increased. Higher expanded at a steady rate since November 2012. interest rates reduced the growth of private sector credit The negative impact of tighter monetary policy on to 11 percent per annum during FY12, down from 44 economic growth has been exacerbated by existing percent in FY11, which had a negative impact on growth structural deficiencies in the local financial system. and the level of private investment. The decline in credit Commercial banks continue to report high overhead mainly impacted shilling denominated costs and excessive spreads between borrowing 4 Historically there is strong pass-through of exchange rate move- and lending rates (see Figure 7). These deficiencies ments into domestic prices – for everyone percentage point depreciation of the Uganda shilling, the largest impact on prices comes in the third month exacerbate the limited access to affordable credit for after the shocks. The effects then gradually die off over about six months. many enterprises. 5 The correlation between BOU’s policy rates and lending rates is 60 percent for Treasury Bills, 80 percent for the Bank and Rediscount Rates, and 90 percent for the CBR. ; 14 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Figure 7: With Overheads Still Pushing Margins, Interest Spreads are Yet to Genuinely Come Down 25.00 30.00 lending rate 20.00 25.00 % of total spread 20.00 15.00 15.00 interest margin 10.00 10.00 5.00 5.00 Deposit rate 0.00 0.00 2005 2006 2007 2008 2009 2010 Reserves Overheads Provisions Pro�t Source: BOU and WB staff calculations Increased transparency and innovation would 1.3 Fiscal Adjustments to Restore improve the development of inclusive finance and reduce overhead costs. Regulatory authorities Confidence should closely monitor banks’ practices and, if necessary, In FY10 and FY11, the government’s level of take punitive action to correct them. In addition, the expenditure increased substantially, leading to implementation of regulatory reforms in the area of land an increasing financing gap. Increased expenditures and movable assets and the registration of companies, were first justified as a measure to mitigate the impact together with measures to streamline systems for the of the global financial crisis through countercyclical resolution of commercial disputes and to strengthen spending. Later, increased expenditure was related the court system, will improve the lending environment. to security measures and election-related spending In addition, authorities should devise a framework that pressures. Election-related spending pressures were supports the full disclosure of the cost of borrowing, apparent with the adoption of supplementary budgets improve interconnectivity of bank platforms, reform that increased public spending from 1.5 percent to 5.5 laws on sharing of customer information, and develop percent of GDP in FY11, leading to substantial budget consumer protection laws. Finally, broader access re-allocation and raising questions about the credibility to financial services should be encouraged through and sustainability of the budget. the promotion of the microfinance industry and through the development of new products that The overall fiscal deficit jumped from 4.9 facilitate increased access, such as mobile money. percent of GDP in FY10 to 7.2 percent in FY11. While access to traditional financial services has been While domestic revenues increased by a modest one limited to 28 percent of the population, most of whom percentage point to 13.3 percent of GDP in FY11, reside in urban areas; services such as mobile money overall expenditure increased by 3.2 percentage points reach demographic groups that would be unlikely to a total value equal to 22.8 percent of GDP.6 The to be covered by traditional banking services in the financial gap was closed through increased domestic near future. By July 2011, approximately 2.4 million borrowing, which rose from value equal to 2.1 percent customers were registered for mobile money services, of GDP to 5.9 percent, as the government drew down with up to 5 million more being expected to register in the Central Bank accounts. By contrast, the value of the near future. Beyond BOU’s monitoring, appropriate external financing (excluding grants) declined from a regulation, including regulations covering non-bank value equal to 2.2 percent of GDP to 1.4 percent. correspondent networks, would support this sector’s expansion. 6 This increase was 1.6 percentage points of GDP above the budget originally approved by Parliament, and was used for security and election-related expenditures and for subsidies directed to thermal power generation. Edition No.1 February 2013 15 Unleashing Uganda’s Regional Trade Potential In FY12, the high rate of inflation and the growing Unfortunately, increasing government expenditure imbalances in government operations were was not accompanied by increased tax revenues, addressed through corrective fiscal measures. The the level of which remains the lowest in the EAC. government cut its fiscal deficit to a value equal to 3.9 The composition of the collected tax revenues was percent of GDP by decreasing spending on exceptional characterised by a shift towards domestic indirect taxes, security measures and power sector subsidies, with the share of such taxes constituting 21 percent of which together were the main contributors to the total tax revenues, up from 19 percent in the previous unprecedented increase in the FY11 deficit. Such an year. However, trade taxes still constituted 45 percent adjustment was achieved even though development of total tax revenues, a proportion unchanged from the expenditures increased compared to FY12, largely as previous year (see Figure 8). a result of the expenditure on preparations for the development of the Karuma hydro power project and a range of new road projects. Figure 8: : Uganda’s Revenue Effort Continues to Lag, While Bulk of Revenues is from International Trade 30 Government Revenue, Excluding Grants (% GDP) Fees & Nontax Licenses(17.8% revenue(47%), ), 2% 1% 25 20 Burundi Income tax (22.4%), 33% 15 Tanzania Rwanda Rwanda International Uganda Trade 10 tax(16.9%), 45% Indirect tax(e.g VAT)- (13.8%), 5 19% 2004 2005 2006 2007 2008 2009 2010 2011 Source: Ministry of Finance Planning and Economic Development, WDI and World Bank staff calculations In FY12, the government used external financing being used to finance infrastructure-related projects, rather than domestic financing to close the fiscal including energy and transportation infrastructure. Such gap. Compared to FY11, the share of external financing borrowing was contracted on highly concessional terms, (excluding grants) almost doubled, reaching a value with most loans sourced from the IDA (74 percent) equal to 2.4 percent of GDP (or 73 percent of the overall and other multilaterals (12 percent). Hence, public and deficit). Concurrently, the inflow of grants remained at a publically guaranteed external debt increased modestly value equal to 2.3 percent of GDP, the same proportion as from US$ 2.3 billion (equal to 15.3 percent of GDP) in in FY11. By contrast, public borrowing on the domestic FY10 to US$ 2.9 billion (19.5 percent of GDP) in FY11. market declined to a value equal to 0.1 percent of GDP. Over the same period, domestic debt also increased, This is a significant decrease compared to the level of from a value equal to 9.5 percent of GDP to 13.4 percent. public borrowing in FY11, when the value stood at If total public domestic and external debt is estimated 2.9 percent of GDP, with the decrease reflecting the to have reached a value equal to 19.7 percent of GDP restrictive monetary policy implemented by the Central by the end of FY12, this remained far below the total for Bank. neighboring Tanzania, where the figure stood at close to 40 percent. The debt service ratio stood at 38 percent, At the end of FY12, the government still reported while the external debt service to exports ratio stood at low public debt ratios by both regional and 3.2 percent. These figures are both far below thresholds international standards. In spite of increases in public of 35 percent and 25 percent respectively, indicating low expenditures in FY10 and FY11, debt management levels of fiscal and debt distress. remained prudent, with new external borrowing mainly 16 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Figure 9: A Shift from Domestic to External Borrowing 8 Fiscal Balance and Domestic Financing Public and publically guaranteed debt 6 (% of GDP, excl exceptional spending) (1999-2012) -----> post HPIC, MDRI debt relief 7.0 4 6.0 Net Domestic Financing 5.0 million, US $ 2 Net Domestic Financing 4.0 3.0 0 2.0 1.0 -2 -2 0.0 -4 -4 Balance (Incl. Grants) FiscalBalance Fiscal External Domestic -6 -6 2004/5 2005/6 2006/07 2005/06 2006/7 2007/08 2008/9 2009/10 2007/8 2008/09 2010/11 2011/12 2009/10 2010/11 2011/12 Source: Ministry of Finance Planning and Economic Development and World Bank staff calculations In June 2012, following the achievement of fiscal Nonetheless, by December 2012, the implementation stabilization, the government announced its of the FY13 budget had experienced a series of intention to use fiscal policy as the main instrument significant setbacks. During the first quarter of FY13, to stimulate aggregate demand and supply. This policy the value of collected tax revenue was below target by move was demonstrated through the approved FY13 3.8 percent, mainly on account of lower than expected budget, which made allocations to increase overall revenues from taxes on international trade, which expenditure, up by 0.2 percent of GDP compared to account for 45 percent of total tax revenue. The value of FY12, with a greater emphasis on capital expenditures. revenues derived from income taxes levied on small and Almost one-third of the FY13 budget was allocated to medium taxpayers was also lower than anticipated. The support major road works, the rehabilitation of water implementation of the budget was characterized by low ferries, the initial design of the standard gauge rail, and absorption rates, especially in terms of expenditure on the construction of the 600MW Karuma hydro-electricity capital development, where the rate stood at only 69.6 dam. percent. This was largely due to significant delays in key investment projects, including delays to the construction of the 600MW Karuma hydro-electricity dam. Booming activity like this in Kalerwe, a suburb of Kampala, will need to enter the tax bracket, (Sheila Gashishiri), May 2012 Edition No.1 February 2013 17 Unleashing Uganda’s Regional Trade Potential Table 1: Central Government Operations, 2008/09 - 2012/13 In percent of GDP 2009/10 2010/11 2011/12 2012/13 Budget 2012/13Proj. Revenues and grants: 14.7 18.4 15.6 15.8 16.4 Domestic revenues 12.2 16.2 13.3 13.6 14.5 o/w Tax revenues 11.7 12.7 12.0 13.3 12.6 Grants 2.5 2.3 2.3 2.3 1.9 Total expenditure 19.6 22.8 18.6 20.0 19.9 Recurrent 12.3 15.3 11.2 10.2 10.3 o/w Wages 3.7 4.3 3.7 3.9 3.9 Interest payments 1.1 1.1 1.2 1.5 1.7 Development 6.6 7.1 6.9 9.7 9.4 Overall balance (including grants) -4.9 -7.2 -3.8 -4.1 -4.8 Overall balance (excluding grants) -7.3 -9.4 -6.1 -6.4 -6.7 External Financing 2.2 1.4 2.4 2.3 1.8 Domestic Financing 2.1 2.9 0.1 1.8 1.6 Errors & omissions -0.5 0.0 -0.6 0.0 0.0 Memorandum items: Public debt stock 24.6 32.9 32.2 35.2 35.2 o/w External 15.3 19.5 19.7 24.0 24.0 Domestic 9.3 13.4 12.7 11.2 11.2 Source: Ministry of Finance, Planning and Economic Development, IMF, and World Bank Staff Estimates The implementation of the approved FY13 budget extractive industries. The volume of exports of goods has been affected by the governance scandals that rebounded from the lower levels recorded in FY11, erupted in the Office of the Prime Minister and Ministry rising by 16.5 percent as exports responded to rising of Public Service during the second quarter of the year. commodity prices on global markets. As an example of Not only did this result in the misallocation of public the increasing commodity prices, the unit value of coffee funds, it also resulted in a freeze in aid estimated to reach rose by more than 330 percent. a value of US$300 million (equal to 4-6 percent of the FY13 budget or 0.9 percent of GDP). Levels of FDI increased dramatically, especially in the oil exploration and tourism sectors. With these 1.4 External Balance Improves, Trade inflows, Uganda was the largest recipient of FDI among Balance Deteriorates East African countries, capturing up to half of the total inflows into the region. FDI increased from US$ 719 Uganda’s overall position in terms of its million in FY11 to US$ 1,405 million, a value equivalent transactions with the rest of the world improved to 8.3 percent of GDP. Of the total value of FDI of US$ 1.7 in FY12 on account of increased capital inflows. At the billion received by East African nations by 2010, Uganda same time, the current account deficit deteriorated (see accounted for US$ 850 million. The remaining challenge Figure 10). The meager improvement in services did not for Uganda, and the other nations of the EAC, is to compensate for deterioration in the trade balance of stimulate investment into sectors other than the natural goods. The volume of merchandise imports grew rapidly, resources sector and to generate broader linkages with largely due to higher levels of expenditure on capital the local economy. goods and partly funded by increased levels of FDI in 18 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential High domestic interest rates also resulted in in the second and third quarters of FY12, compared to a significant increases to short-term soft investments deficit position of $78 million in the same period in the flows in FY12. However, these increases were temporary. previous year. However, with the gradual decline in the Peaking in January 2012, the differential between returns interest differentials between Uganda’s Treasury Bill and on the Ugandan 91 day Treasury bill security and the international markets, these short-term portfolio inflows LIBOR7 rate reached 1500 basis points, compared to reverted to previous levels, as recently observed in FY13. Kenya’s security market, where the differential stood at It is the total value of external loans to the government 500 basis points. The total value of investments inflows that increased from US $304 million in FY11 to US$ 545 in government securities increased to US$ 220 million million in FY12. Figure 10: Worsening Current Account, but Inflows on Capital Account Turned Around Overall External Position7 6000.00 15.00 0.00 7.00 5000.00 10.00 FY06 FY07 FY08 FY09 FY10 FY11 FY12 -500.00 4000.00 5.00 3000.00 -1000.00 2.00 0.00 2000.00 -1500.00 -5.00 1000.00 -3.00 -10.00 0.00 -2000.00 FY08 FY09 FY10 FY11 FY12 -1000.00 -15.00 -8.00 current accout/GDP(%) Other investments(Project loans) -2500.00 Portfolio investment & Derivatives Foreign Direct Investment Capital and Finanacial account/GDP(%) -3000.00 -13.00 Overall balance/GDP(%) Trade Balance Net Services Net Income Source: BOU and WB staff calculations Reflecting these movements in the country’s In real terms, the shilling appreciated more strongly, external position, the shilling’s value remained by 9 percent, due to a widening of inflation differentials unstable throughout FY12. With the weakening of with trading partners. It is feared that the shilling is now the current account during the first half of FY12, the overvalued, eliminating any competitive advantage gains shilling depreciated heavily against the US dollar, with Ugandan exporters enjoyed over the last three years as the depreciation in value reaching a peak of 25 percent the currency adjusted to the worsening current account. by September 2011. The subsequent increase in short However, these trends are gradually reversing, with a term capital inflows helped the local currency regain its depreciation resulting from the slowdown in short term value. As a result, the nominal effective exchange rate inflows, and from the suspension of aid and the decline appreciated by 4.7 percent over FY12 (see Figure 11). in confidence resulting from governance scandals. During the first half of FY13, Uganda’s overall position of transactions with the rest of the world remained weak, as short term flows slowed 7 LIBOR is the London Interbank Offered Rate, the rate at which banks are prepared to lend to each other at the international foreign ex- down and exports remain subdued. With the slight change flows, and hence provides a good reference for investors considering improvement in terms of trade during the first quarter, other markets Edition No.1 February 2013 19 Unleashing Uganda’s Regional Trade Potential the value of exports reached US$ 250 million per month, the overall balance of payments has remained weaker approximately 15 percent higher than average monthly (see Table 2). The value of the shilling, which was stable value for exports in FY12. However, the value of imports through the first quarter, has also depreciated since to support investments grew at an even faster rate. As September 2012 (see Figure 11). portfolio flows reversed with the declining interest rates, Figure 11: The Shilling Recouped Value in Second Half of FY12 3000 0.8 160 2800 0.7 150 2600 Nominal Shs/US $ 0.6 140 (left axis) 2400 0.5 NEER 130 2200 0.4 Index FY06 = 100 120 2000 0.3 110 1800 0.2 100 1600 0.1 REER 90 1400 0 Change % 80 1200 (right axis) -0.1 1000 -0.2 70 39234 39387 39539 39692 39845 39995 40148 40299 40452 40603 40756 40909 41061 41214 60 39234 39356 39479 39600 39722 39845 39965 40087 40210 40330 40452 40575 40695 40817 40940 41061 41183 Source: BOU and WB staff calculations Table 2: : Balance of Payments Position, FY10 – Quarter 1 of FY13 In millions of US $ FY10 FY11 FY12 Q1 FY13 Current account balance -1,554.8 -1,749.0 -2,108.3 -539.5 Goods trade balance -1,799.5 -2,373.4 -2,614.8 -521.0 Services trade balance -536.2 -670.7 -513.5 -126.4 Income balance -336.6 -329.3 -470.6 -193.1 Current transfers balance 1,117.6 1,624.4 1,490.7 301.1 Capital and Financial Account 1,563.7 940.6 2,404.7 597.7 Foreign Direct Investments 694.8 721.2 1,404.7 305.9 Portfolio investments -31.3 2.1 2643.6 -66.4 Other investments 905.5 220.1 706.5 340.9 o/w Donor net disbursements 370.7 304.3 545.8 39.5 Errors & omissions 202.0 227.2 450 138.8 Foreign Exchange Reserves build-up 26 -585 741 194.2 20 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential 2. Economic Outlook Uganda’s economy is expected to recover gradually in FY13 and FY14 thanks to renewed macroeco- nomic stability and good weather. However, the extent of recovery will depend on how the Ugandan government manages the uncertainties surrounding aid cuts and the decline in investor confidence. In the medium term, dividends from ongoing reforms; from measures to remove binding constraints to growth; and from increased investment in oil production, are expected to boost the economy, ensuring its return at least to its historical growth rates. However, risks remain. These risks include impacts from a declining or stagnant global economy, bad weather, regional insecurity, aid cuts and poor macro and fiscal management. Diversifying the economy will help to hedge those risks and to maximize the expected benefits from oil production in the longer term. Good infrastructure, like this Masaka-Mutukula road to enable economic recovery, (Charles Kunaka) May 2011) 2.1 Growth Prospects for 2013-2014 and increased rate of growth will largely be driven by oil production and associated activities and a higher level the Medium Term of integration between Uganda’s economy and regional The World Bank forecasts that the rate of growth of and world economies. the Ugandan economy in FY13 will be in the range of 4.3-5.0 percent. This is a modest increase compared In FY13, consistent with the pattern of the last to FY12 and far lower than the country’s recent historical several years, the main driver of growth will remain rates. Contrasting developments during the first half of the service sector, contributing to approximately 8 the year, should result in a decline in the rate of growth percent of GDP. As drivers of growth, communications of GDP, at least on a temporary basis. Over the medium and finance will continue to be the most significant term, if existing uncertainties in fiscal management are sub-sectors. The contribution of the tourism sub-sector resolved, Uganda’s rate of economic growth should will most likely also increase, although this sub-sector gradually increase, reverting to and perhaps even remains highly sensitive to security developments in exceeding historical averages of 7-8 percent. This the East African region. It also remained sensitive to Edition No.1 February 2013 21 Unleashing Uganda’s Regional Trade Potential social, health and other issues, including the impact constitute 29 percent of the budget (see Figure 12). These of infectious killer diseases such as Ebola and Marburg budget allocations have been formulated to support major hemorrhagic fevers. Within the industrial sector, the road works, the rehabilitation of the water ferry system, rate of growth of the manufacturing and construction and the initial design process for the standard gauge sub-sectors are projected to recover to approximately 7 railway line. In addition, construction of the Karuma dam percent per annum, as financial conditions and energy is scheduled to begin in FY13. In the same year, designs provision improve. New FDI in extractive industries should for another 600MW Ayago hydro dam will be completed boost construction activities. The rate of growth of the and support will be provided for the development of agricultural sector is expected to reach approximately 5 mini hydros (125MW). The Rural Electrification Program percent in FY13 as long-term weather forecasts continue will be expanded to improve access, with distribution to point to more favorable climatic conditions and better losses to be addressed through the roll out of pre-paid rainfalls than experienced in FY12. meters. Concurrently, the authorities are placing greater emphasis on improved efficiency and effectiveness in The expected recovery in domestic economic the social sectors. Amongst the social sectors, the most activities has been and will continue to be driven significant budget allocation in the FY13 budget was for by the renewed macro-stability, particularly a lower the education sector (14.9 percent), with an allocation of and less volatile rate of inflation. The gradual easing of Shs 290 billion to raise the salaries of primary teachers and monetary policy by the Central Bank has already led science teachers in post-O Level institutions. In addition, to a more rapid increase in the level of credit available efficiency measures to address absenteeism continue to the private sector, boosting construction activities. to be implemented. In the health sector, several referral The government has also implemented a number of hospitals will be rehabilitated. If successful, those trends measures aimed at improving the business environment, should help to improve the country’s stocks of physical which remains one of the least conducive in the region, and human resources in the medium- to long-term. with Uganda being ranked 120th out of 185 countries surveyed in the World Bank’s ‘Doing Business’ survey.8 However, capital expenditure has traditionally been Amongst these measures, the streamlining of business constrained by the low capacity of the government registration, the establishment of one-stop shops, and to mobilize additional domestic revenues, which the provision of targeted assistance to SMEs should bring remain at a level equivalent to less than 13 percent of benefits to private investors in a relatively short time GDP, one of the lowest levels in Africa.9 In addition, the frame. As a result, private investment growth will remain government is facing additional constraints as a result robust. In spite of a deceleration from 18.9 percent of of the recent corruption-scandals-related cuts in aid GDP in FY12 to 15.0 percent in FY13, private investment inflows, currently estimated at about US$ 300 million (4 is forecast to gradually increase to 16.9 percent in FY14. percent of FY13 budget) . In response, the authorities have prepared an action plan to strengthen the fiduciary Fiscal policy remains a major source of uncertainty environment, including the development of internal in the growth forecast for FY13. Initially, as described audit functions, to correct the misuse of the public money. earlier, the Ugandan government had projected to The rapid and satisfactory implementation of this plan is stimulate aggregate demand and supply though hoped to restore confidence and to persuade donors to higher overall spending and an increased emphasis lift the freeze on aid. If aid continues to be suspended on capital expenditures. The increased emphasis on throughout the remainder of FY12/13, the government capital expenditure was aimed at addressing the will need to adjust its budget targets through spending existing infrastructure deficits, which continue to be cuts and/or by accessing other sources of financing a major constraint to private sector development. In for the remainder of the financial year. The scandals FY13, allocations for the development of infrastructure, underscore the need for Uganda to address her structural particularly transportation and energy, are expected to and other persistent weaknesses in governance, with the 8 During 2012, Uganda’s ranking in Doing Business improved from country ranking close to the bottom of the majority of 123rd to 120th, on account of (i) strengthened insolvency process(i.e. rules internal transparency and government indicators over on creation of mortgages clarified, duties of mortgagors and mortgagees the past decade. established, priority rules defined, remedies for mortgagors and mortga- gees provided, and powers of receivers increased), and (ii) easier processes for transferring property (i.e. title registry records digitalized, efficiency of the assessor’s office increased, even though transferring property was made more difficult and time consuming with the introduction of a requirement for property purchasers to obtain an income tax certificate before registra- tion, resulting in delays at the Uganda Revenue Authority and the Ministry of 9 Revenue targets were missed by almost 4 percent in the first Finance) quarter of FY13 as reported earlier in the update. 22 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Box 1: Summary Assumptions for the Medium Term Outlook (i) Despite recent upward pressure on food prices caused by increasing international prices of food and oil and by depreciation is in the exchange rate, the inflation rate is projected to remain below 7 percent in FY13 and in FY14-15, thanks mainly to improved liquidity management and the limited financing of government activities by the Central Bank. (ii) Fiscal policy will continue to be prudent and supportive of economic growth and poverty reduction, with improving government revenue and gradually declining public expenditure; (iii) After a slight deterioration in FY13, mostly due to the rise in imports needed for infrastructure investments, the trade balance will improve in FY14 and beyond, reflecting the impact on exports of efforts announced by the government to raise productivity in the agriculture sector. Import growth will gradually decline from 8.4 percent reached in FY12 to an average of 4.8 percent for FY13-15; and (v) The current account deficit will remain weak above 11.0 percent of GDP on average in FY13- 15, compared to historical level of 9.6 percent in FY10; Box Table 1.1: The Medium Term Macroeconomic Framework, Baseline Scenario Indicator FY12 FY13 FY14 FY15 GDP growth 3.4 4.3 6.0 6.5 Private investment ( percent of GDP) 18.9 15.0 16.9 19.1 Public investment ( percent of GDP) 5.8 7.6 7.5 7.7 Fiscal deficit ( percent of GDP) 3.0 3.4 4.8 4.8 Revenues ( percent of GDP) 13.3 14.5 13.7 14.1 Expenditures ( percent of GDP) 18.6 19.9 20.3 20.2 External financing 2.4 1.8 2.6 2.9 External current account deficit ( percent of GDP) 12.5 11.8 15.0 15.7 Exports growth ( percent) 16.5 4.9 4.4 6.9 Imports growth ( percent) 13.2 3.9 9.9 7.1 Inflation ( percent) 23.5 6.2 6.7 7.1 Source: MFPED, IMF and WB staff estimates Edition No.1 February 2013 23 Unleashing Uganda’s Regional Trade Potential Figure 12: Fiscal Strategy Focusing on Key Constraints will commence. However, in the long-term, it is clear that the country’s production of oil will dramatically Works & Transport 15.2 change Uganda’s economic outlook. Uganda has proven Education 14.9 oil reserves of at least 800 million barrels, although the Energy 13.6 actual figure may be closer to 3.5 billion barrels. With PSM 9.4 this level of reserves, production could reach 150,000- Security 8.5 Health 7.8 200,000 barrels per day over a 25-year production period. Interest Payments 7.7 Revenues derived from oil could potentially double Accountabi-lity 5.4 Budget share in FY13 Change from FY12 the government’s total revenues in less than 10 years, JLOS 4.8 contributing up to US$ 3 billion at current prices. At Agriculture 3.5 Water & Environment 3.3 these levels, Uganda will not be totally dependent on Public Administration 2.2 oil revenues. They will nonetheless have a significant Legislature 2 impact, placing considerable pressure on government Other 1.6 regulatory and oversight systems. If current estimates of -4 -2 0 2 4 6 8 percent(%) 10 12 14 16 18 the country’s oil reserves are correct, the level of Uganda’s dependence on oil would place it in the company of Source: Ministry of Finance Planning and Economic Development, Budget Speeches countries such as Azerbaijan, Sudan, and Trinidad & Tobago, rather than classic petro-states such as Angola, Equatorial Guinea, and Nigeria. In this year, the balance of payments is projected to remain at approximately the same level as in FY12, The timing of the commencement of oil production with increases in FDI compensating for deteriorations in is dependent on the construction of production the trade balance. Uganda’s export earnings are expected infrastructure, including refineries and possibly pipeline. to increase by 5 percent in FY13, driven by a modest rise Full scale export-driven production is not expected to in international food and fuel prices. However, the rate of begin for at least five years. Although limited production growth in the volume of imports will also remain strong of 10,000-20,000 barrels per day, primarily for domestic as a result of the need to purchase inputs to support use, could begin within two to three years, full-scale oil infrastructure development. The capital balance should production will require investments of several billion remain roughly unchanged, as the expected decline dollars in downstream infrastructure development. This in official transfers following the recent governance will require large FDI inflows by multinational companies. scandals should be offset by a higher level of FDI, This construction cycle could take up to 5-7 years, and particularly in extractive activities. The current account will be influenced by recent oil discoveries in Kenya. deficit will remain in the range of 12 percent of GDP in FY13. 2.2 Risks: External Shocks, Declining Over the medium term, the rate of growth of Aid, Poor Weather and Political Will the economy should revert to recent historical levels. The main driving factors for improvements to Uganda is a relatively small, open economy. As the economy should be the gradual improvement of such, it remains vulnerable to a number of external infrastructure and increased agricultural productivity shocks, including fluctuations in prices of its main (see Box 1). The rate of growth of the industrial sector exports and imports. Experiences of the recent past could accelerate, boosted by improved infrastructure illustrate how volatile commodity prices and financial (e.g. improved energy supply) and the implementation distress in industrial countries can impact the local of growth-enhancing reforms and interventions. In economy. Such risks remain, as a prolonged slowdown in addition, the growth of the services sector, including the Euro zone cannot be discarded. The country’s trade growth in the banking and telecommunications sub- prospects are also influenced by the security situation in sectors throughout the EAC, will also contribute to neighboring countries such as Sudan, Burundi and the the positive macroeconomic outlook. Under those Democratic Republic of Congo (DRC). Global commodity conditions, the overall projected growth of the economy prices, including oil prices, remain volatile. A decline in the could rise to an average of 6.5 percent in FY14 and FY15. global economy could result in a corresponding decline in the volume of Uganda’s trade with industrial countries, It is still not clear what the extent of Uganda’s oil reducing its export values. It could also result in lower resources is or when Uganda’s production of oil capital inflows, including inflows from remittances and 24 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential in the form of aid. In case of such a decline in the global investments and ineffective implementation could lead economy, the economic forecast will need to be revised to a waste of public resources. There is no guarantee downwards as a result of the significant additional that a high level of development expenditure will lead pressures on the balance of payments, which might to increases in the stock of physical capital. Despite the precipitate a depletion of reserves or the depreciation allocation of significant resources to the development of the local currency. While a depreciating shilling would budget, these will have limited benefits if those are used to ensure exports remain competitive, it could also lead to finance non-capital expenditures and if the maintenance increases in inflation. of existing infrastructure is neglected. Thirdly, corruption and theft could undermine the fiscal program, with Uganda is subject to a possible ongoing decline in consequences including a possible further decline in the official aid inflows, depending on the implementation provision of aid and other financial assistance by donors. of corrective measures to address recent corruption scandals. A significant and permanent decline in aid The rate of inflation could increase again as the will require a major fiscal adjustment, particularly in the result of excessively accommodating fiscal and investment program, for which at least half of the funding monetary policies. This could be exacerbated by is still externally sourced. At the same time, the short- increases in food and energy prices as a result of regional term prospects for increased domestic revenue remain and global factors. If the recent increases in global slim, as measures to eliminate the leakages resulting food prices persist, Uganda could face import inflation, from exemptions are still lacking or poorly enforced. especially if regional supply conditions deteriorate. Thus, the government will have to cut both non-priority The authorities may face a trade-off in adjusting spending and planned capital investment. Such cuts macroeconomic policies, with the need to control the will reduce aggregate demand in the short term and are inflation rate having to be balanced against the risk of likely to have a negative impact on the projected growth reducing the rate of economic growth. rate. The current temporary freeze in aid to a value of US$ 300 million by development partners is already The increased level of borrowing will support the estimated to have reduced the rate of growth in GDP by meager savings to finance public investments. approximately 0.7 percent in FY13 However, it will need to be accompanied by improvements in debt management. The government The agricultural sector contributes to approximately plans to use non-traditional sources, including Public- a quarter of Uganda’s total production and employs Private Partnerships (PPPs) and contractor facilitated approximately three-quarters of its workforce. This financing, to finance the infrastructure development sector, and therefore the overall Ugandan economy, is program. The government also plans to borrow on non- subject to climatic risk. Unfavorable climatic conditions, concessional terms for commercially and economically particularly poor rains, could reduce the level of viable infrastructure projects for which no other source agricultural production and affect the living conditions of funding is available. With such sources of financing, of a vast number of households in rural areas. Such government debt may increase from an estimated 19.7 negative impacts occurred during the 2010-2011 Greater percent of GDP in FY12 to 24 percent in FY14, before Horn of Africa drought. Although this drought did not rising to about 32 percent in the medium term. The affect Uganda directly, it is estimated to have reduced prospects of future oil revenues may also place pressure food production, resulting in a decline of about three on the government to borrow excessively in advance. The percentage points . current level of debt is sustainable because of past debt relief10, and because borrowing has been concessional There are also a number of risks to the macroeconomic for the past 7 years. Nonetheless, the close monitoring of outlook that could arise from the government’s debt is warranted over the short and long terms. lack of discipline in the area of expenditure, which is sometimes significantly influenced by political decisions. Lastly, Uganda’s economic performance may be Firstly, fiscal discipline must be supported by the affected by deterioration in the political climate. central administration to avoid any new slippages in Civil unrest may undermine the economic recovery public spending. Lack of restraint in the face of political by increasing uncertainty and disrupting business, demands, such as demands for the creation of new especially in urban areas, where most civil unrest occurs. districts, could derail Uganda’s fiscal position, resulting in shifts in expenditure to non-planned, non-priority areas. 10 HIPC and MDRI, which , effectively canceled all outstanding posi- Secondly, the inappropriate prioritization of infrastructure tions up to 2007 Edition No.1 February 2013 25 Unleashing Uganda’s Regional Trade Potential 2.3 The Need for Renewed Growth On the demand side, growth is increasingly being driven by government spending, rather than Momentum by the activities of the private sector. Private sector In the past, Uganda has reaped the rewards from investments have slowed down from an average of 12 reforms implemented in the 1990s and 2000, percent of GDP in the period from 1991 to 2005, to 7.8 which generated accelerations in economic growth that percent over the past 5 years. The widening trade deficit almost doubled the average per capita income. That has increasingly drained GDP, with net exports declining notwithstanding, its ability to continue reaping these from -7.5 percent to -22 percent of GDP. Consequently, rewards is uncertain. With the rapid rate of economic the public sector has increasingly become the main growth, which increased from an average of 6.3 percent driver of growth in aggregate demand, particularly during the 1990s to 7.0 percent during the 2000s, through public investments, which have increased by 11 Uganda’s per capita income growth stood at an average percent per annum over the past 5 years, compared to of 4.0 percent per annum. This was significantly higher a rate of 1.4 percent per annum in the period from 1991 than the SSA average of 0.8 percent over the same to 2005. period. More recently, Uganda’s rate of growth has been less impressive. Since 2006, the rate of growth of GDP has The slowdown in private investment and the decelerated gradually, converging with and eventually decline in net exports have been accompanied by lagging behind SSA (see Figure 13). a growing imbalance between export earnings and import bills over the past few years. Driven by a rapidly The gradual deceleration in economic growth over expanding import bill, the weakening of the external the past few years was the result of a combination current account also reflects the savings-investment of factors. Because of negative climatic conditions, the gap. Uganda’s level of domestic savings remains low, agricultural sector grew at the slower pace of 1.6 percent at 13 percent of GDP. This compares to the figure of 17 per annum in the period from 2006 to 2012, less than percent of GDP recorded by its neighbor Tanzania, which half of the average rate of growth of 3.4 percent in the is also the sub-Saharan African average. At the same period from 1991 to 2005. Over the same periods, the time, Uganda’s patterns of consumption are increasingly rate of growth of manufacturing sector decelerated from involving a shift to imported goods. 9.8 percent to 6.1 percent. The rate of growth of the previously booming construction sector also declined These recent developments in the supply and from 9.6 percent to below 7.4 percent between these two demand sides of the economy may make it more periods. The exception has been the rate of growth for difficult for Uganda to achieve its objective of the services sector, which accelerated from 7.3 percent becoming a middle-income country by 2025. At US$ 510 to 7.7 percent, largely as a result of the rapid expansion per person, Uganda remains a poor country, even by SSA of the communication and banking sectors. standards. Thus, it cannot afford low growth.11 Uganda’s aspirations towards middle income status, which imply a The slowdown in labor-intensive sectors, US$ 1000 per capita average income, will only be realized particularly the agricultural sector, where more if it Uganda’s economy grows at a rate in excess of 10 than 75 percent of the labor force is employed, has percent per year over the next decade.12 made the growth process less inclusive. Employment opportunities in the agricultural and non-agricultural A more rapid diversification of the economy and wage sector grew fast, accelerating from 6-7 percent the appropriate use of resources, including oil, will during the 1990s to approximately 12-13 percent per drive this renewed growth momentum. In addition annum during the 2000s. The non-agricultural wage to providing a means to close the current account sector absorbed approximately 18 percent of the new deficit, the production of oil can boost the capacity of entrants to the labor force. With the growth of labor- the economy through the development of backward intensive sectors, particularly agriculture, lagging behind and forward linkages and through the smart use of oil overall GDP growth, the economy is failing to create related revenues.13 Policies to improve the business sufficient employment opportunities for its rapidly environment; to develop human capital; and to improve 11 The lower the income, the more likely for it to grow fast, as it is growing population. starting from a low base. 12 Shanta Devarajan and Wolfgang Fengler 2012, Is Africa’s Recent Economic Growth Stable at The Institut français des relations internationals (Ifri), October. 13 Even before oil revenues start to flow, private sector investment is likely to increase significantly to respond to production infrastructure needs during the preparation phase. 26 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential the stock of infrastructure, will remain key drivers of this (demand side) and by encouraging firms to become transformation. International experience also strongly more competitive (supply side). It could therefore lead to suggests that economic liberalization and integration an expansion in production, increased diversification, and is vital for the achievement of productivity gains and the creation of additional employment opportunities. economic expansion, especially for a small landlocked Regional trade will also play a significant role in the country such as Uganda. Increased openness could help achievement of these goals. stimulate economic growth by providing new markets Figure 13: The Slide in FY12 Makes the Downward Trend Observed in Uganda’s Growth in Recent Years More Pronounced : The Slide in FY Figure 13: end Observed in Uganda’s Gr Y12 Makes the Downward Tre rowth in Recent Years More Pronounced Source: Source: Ugganda Uganda BureauBureau of Statistics, 2012 o 2012 of Statistics, Edition No.1 February 2013 27 Unleashing Uganda’s Regional Trade Potential Part 2: Regional Trade: Harnessing the Potential • If it persists, the decline in economic growth rates observed in Uganda in recent years will shatter the country’s dream of achieving middle income status. Uganda also remains vulnerable to domestic and external shocks. • Uganda can leverage regional trade to renew its growth and job creation momentum while reducing its degree of vulnerability to external shocks. Most importantly, this will be achieved through deepening of regional markets by; • Tapping into agriculture’s trade potential; • Diversifying into higher value-added products by expanding into the regional market for low-to-medium value manufactured goods, and exploring trading in parts or tasks of regional production chains; and • Exploiting the opportunities of trade services, including tourism, transport and transit services, education and business. • Harnessing the potential of regional trade requires priority interventions that must achieve the following: • Reduce transport costs; • Address non-tariff barriers; • Boost services trade, particularly in tourism, transport and logistics services and education and business services. Newly constructed Kisoro road to boost trade between Uganda and Rwanda, (Sheila Gahsishiri), January 2013 28 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential 3. Prospering through Cooperation and Trade with Neighbors In a typical African village, there are specialists in different fields. There is a trader who runs the local shop, a tailor who repairs everyone’s clothes, a bicycle mechanic to whom everyone runs, a nurse or doctor who will handle the simple ailments, the man who buys the local produce, and there will be a weekly market at which sales of what the village does not produce are availed in timely fashion. In the market, one person sells cassava, while another stocks bananas. There is a vegetable specialist and an elderly woman who has always sold spices. Her husband of 43 years has, from time immemorial, been the supplier of pots and pans, which he brings in from a town some 60km away. This couple’s household is an epitome of class, diversifying and growing with time. Suppose Uganda was one of the households in a typical African village, and obviously with some spe- cialties in some areas, like producing maize or education services, and deficits in others like vehicles to transport its goods or high tech manufacturing, the optimal model of development would be to work together with other villagers. Uganda may have some natural advantages, and could be on the path of developing others, but it cannot survive for long without other villagers. Even though most of its food comes from its own farm, it also needs to buy merchandise from other villagers; and from other vil- lages and towns very far away from it. There are also opportunities to sell its surplus to other villages as well. It cannot afford to be hostile in any way to outsiders, lest the road to the best buyer will not be fixed. It would be suicidal for the villager or the individual traders in the market to discriminate against people from the other villages or for them to declare that they will not avail certain produce because somebody’s cows strayed into another person’s garden. Those would be non-tariff barriers. Warehousing services, like this depot in Nakawa to ease regional trade (Charles Kunaka), April 2011 Edition No.1 February 2013 29 Unleashing Uganda’s Regional Trade Potential For Uganda to achieve renewed growth momentum, per annum.14 This compares to Tanzania, where the it must ‘think beyond its borders’ and cooperate with corresponding rate was 9.7 percent, while Rwanda’s its neighbors, just as the typical African villagers described stood at 5.8 percent, Kenya’s at 4.3 percent, and Burundi’s in the story must do. However, in Uganda’s case, the village at 1.2 percent. During the 2008-09 global economic crisis, is the large and expanding regional markets that exist regional trade provided a buffer for Uganda’s economic within the Great Lakes region. Uganda must build upon activity. its remarkable historical economic success to develop a more resilient economy. It must address its vulnerabilities While the figures above represent a fair to boost economic growth and create employment accomplishment, Uganda is still not achieving opportunities for a greater proportion of its population. optimal trading results. Uganda’s total trade With the current state of the village, there are both represents approximately 59 percent of GDP. However, opportunities and constraints facing Uganda in its efforts at its level of income, the country’s openness to trade to move to the next level. Uganda can achieve economic remains less than might be expected. In a number of resilience and sustained growth through a higher degree countries with similar income levels and sizes, trade of interaction between domestic producers and external accounts for up to 80 percent of GDP. Uganda’s limited markets. The successful experiences of many countries, success in this area is a result of under-exporting. including Malaysia, Singapore and Korea, suggest that Uganda under-exports to many countries, including trade openness and regional integration can drive its neighbors Tanzania and Kenya, and other countries growth and create job opportunities in small economies including India, Brazil and US. By contrast, Uganda over- such as. For the spice trader to make opportunities for imports from most countries other than Rwanda and the growth of her business and for gainful employment Burundi.15 In contrast to the situation presented in the for her children and grandchildren, she cannot keep story of the ideal African village, Uganda is dependent doing things the way she did 30 years ago. The criticisms on merchandise from outside, while at the same time it that have been leveled against liberalization and has not fully developed productive activities where it has opening up notwithstanding, two critical questions must competitive advantages. Even though imports can bring be addressed: (i) What has Uganda gained from trade new technology which in turn can promote productivity openness so far to justify further outward orientation? gains in the local firms, over-dependency creates an and (ii) Can regional integration be the gateway for unhealthy imbalance. further trade? Building on the liberal trade regime Uganda has developed, the country can still benefit from outward oriented policies that encourage farmers and businesses 3.1 The Benefits of Outward Orientated to make better choices regarding what to produce, how Policies much to produce and with which inputs. In turn, this will promote improved efficiency amongst firms and During Uganda’s two-decade reform process, farms and encourage the development of new products the country established a liberal environment to and services and the emergence of new markets. A support the free exchange of goods, capital and ideas higher level of integration will not be possible if Uganda beyond its borders. The liberalization and reform process continues to sell the same old products produced in the that began in 1993 resulted in big gains, increasing the same old way. country’s openness, diversifying products and markets, and increasing FDI (see Box 2). Today, Uganda exports almost US$ 5 billion worth of goods and services each year, which represents a value equal to 27 percent of its GDP. This compares to the early 1990s, when exports accounted for only 7 percent of GDP. On the other hand, Uganda now imports goods and services worth US$ 7.6 billion, equal to 45 percent of GDP. By comparison, in the early 1990s, the total value of imports was equal to 14 Growth rates calculated as the compound annual growth rate only 19 percent of GDP. Within the EAC village, Uganda’s over the reference period 15 Based on gravity model allows comparing actual relationships of exports per capita grew faster over this period than any a country and its trading partners, with predicted values based on country of its neighboring countries, at a rate of 10.2 percent characteristics. 30 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Box 2: Uganda’s Gains from Liberal Trade Environment As a result of a liberalized trade environment: (i) Uganda trades in a greater range of products: This is particularly true for agricultural products, but trade diversification has extended into non-agricultural products, particularly non-traditional service exports. Uganda’s goods and services became more diversified as local firms became more competitive, particularly in non-traditional exports, such as processed fish, flowers and foodstuffs such as grains. Uganda’s goods exports sector is dominated by agricultural produce (vegetables, animals, and foodstuffs) the share of which remained at 85 percent of total exports in the period from 1996 to 2010. However, the share of vegetables dropped from 75 to 51 percent over the period, although the share of foodstuffs and animals increased. These two products have the highest revealed comparative advantage (RCA) index. There is still a relatively high degree of concentration, with Uganda’s top 10 exports of products accounting for 60 percent of the export basket. However, recently, the most important exports have included nonagricultural projects, such as cement. In addition, the services trade has experienced strong growth, supported mainly by the boom in services beyond traditional transport and travel. From increased export diversification, Uganda’s exports are no longer dominated by coffee which, from contributing to 90 percent of total export earnings in the 1990s, now contributes only 25 percent. Rather, is exports include a more diversified range of products, including processed fish and sugar, among others. Figure 3.B.1. Selling into new markets accounted for 60 percent of export diversification (ii) Uganda has diversified markets: Uganda increased its share of the world export market in the period from 1990 to 2010, while at the same time, Kenya and Burundi’s share declined. While trade beyond the continent remains very important, trade within Africa has grown at a considerably faster rate. In proportionate terms, the share of exports to the EU, the main destination for Uganda’s exports, declined by 25 percent in the period from 1996-98 to 2006-10, mostly due to increased trade with the Great Lakes regional economies. As the terms of trade became favorable to Uganda in the 2000s, exporters diversified into new markets. While Uganda runs a trade deficit with its two biggest neighbors, Tanzania and Kenya, it enjoys a trade surplus with Rwanda and Burundi. (iii) Uganda has become East Africa’s most attractive investment destination: Uganda’s inward flows of FDI expanded from 1.4 percent of GDP in 1990 to 5.3 percent in 2010. At US$ 755 million in 2010, Uganda received more than 50 percent of total FDI inflows to East Africa. FDI supported investments mainly in finance (30.5 percent of total flows), the manufacturing sector (11.3 percent), and mining and quarrying, including oil exploration (18.0 percent), and ICT (10.9 percent). Source: World Bank staff calculations from World Development Indicators. Edition No.1 February 2013 31 Unleashing Uganda’s Regional Trade Potential 3.2 Regional Integration: To Open Up the Political economy considerations also explain the limited progress towards a higher level of regional Region integration. While the benefits of such integration are Uganda has been a pioneer in the promotion of clear, its achievement involves a number of challenges. regional integration within Africa, entering into a In particular, these challenges relate to the unequal number of regional arrangements, including EAC and distribution of benefits and costs between and within COMESA (Common Market for Eastern and Southern member countries. In the short term, some members of Africa). The rationale for its participation in these the community may gain, while others will lose. While the arrangements is that regional integration will help intensified competition resulting from the development Uganda gain access to regional markets and to use of a common market is likely to have positive effects on these markets as a platform to expand its global import productivity and consumer welfare in the medium-to- and export markets. The experiences of relatively small longer terms, it presents a challenge for some elements landlocked countries in Asia, EU, and Latin America within Uganda’s private sector in the short term. Increased underscore the importance of regional integration to regional trade, especially in food staples, may also result develop regional public goods, reduce transaction costs, in increased consumer and producer prices in Uganda. promote the development of a regulatory environment While the welfare effect of a price increase for regionally in which goods and services can flow freely, and to traded commodities, such as matooke, sweet potatoes, support cross-border production networks. Regional cassava, maize, millet/sorghum, onions, tomatoes, beans, integration can also reduce the constraints faced by and groundnuts, is positive for net sellers, it is negative many firms in accessing the essential services and skills for net buyers. However, on balance the benefit derived that are needed to boost productivity and diversify into by net sellers far outweighs the loss incurred by net higher value-added production and trade. buyers but these asymmetries have implications on the willingness and ability of different members of the The EAC is the most promising regional bloc in community to further develop interventions to achieve a Africa. However, while it has grown fast, efforts to higher level of integration. achieve a high level of integration are still in their infancy. Since 1993, when the three founding countries (Kenya, More broadly, the lack of symmetry in regional Tanzania and Uganda) revived the community, the EAC integration becomes particularly apparent when has been the second-fastest growing economic bloc in the geographical location of businesses is considered. the world, after ASEAN. Since that point, the EAC has Economic geography16 dictates that as borders become doubled its GDP to US$ 79 billion. Leveraging more space thinner, through removal of trade barriers or as a result for trade makes sense for Uganda. While Uganda has a of other factors, businesses may seek to locate their very small market share, it is one of the fastest growing operations to maximize their profitability and proximity economies within the region in terms of trade volumes to markets. For higher-end manufacturing industries and in terms of its rate of growth of GDP. Nonetheless, the aiming to penetrate global markets, this may mean EAC faces a number of challenges in the area of policy locating their operations closer to the coast, as this coordination and harmonization. The Customs Union, location allows them to access larger global markets being only at the second stage of the four planned for more efficiently. Otherwise, they may seek to locate their EAC full integration, is far from complete (see Box 3). operations in a city such as Nairobi, which is the densest There are a number of reasons for its slow development, city in the Great Lakes region, to benefit from market size including issues related to multiple trade partnerships; and economies of scale. Considering this, Uganda has to the lack of an effective joint revenue sharing mechanism; advocate for policies to improve regional connectivity the persistence of multiple customs controls; and the and facilitate Ugandan firms’ access to the global markets. rise in significance of non-tariff measures. Despite the 2005 adoption of the EAC Common External Tariff With no divisions and reduced distance, Uganda (CET), regional trade remains distorted by a number of could start focusing on regional production factors, including numerous non-tariff barriers to trade chains driven by trade in parts and components and limited currency convertibility. While the benefits (“trade in tasks�). This will contribute to export growth of regional integration go beyond trade (see Box 4), the and diversification, increase vertical specialization, EAC’s efforts have so far only focused on trade of goods and create employment opportunities. A higher level and services. 16 Economic geography is the branch of economics that focuses on the location, distribution and spatial organization of economic activities, and was the focus of the Bank’s World Development Report (WDR) 2009. 32 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Box 3: Status of Regional Integration Efforts in EAC i. A Long History of EAC Integration Efforts Kenya, Tanzania and Uganda have a long history of successive regional integration arrangements: 1927: Customs Union between Kenya, Tanzania and Uganda 1948-1961: East African High Commission 1961-1967: East African Common Services Organization 1967-1977: East African Community 1993-2000: East African Co-operation 2000: East African Community The EAC Treaty establishing the community was signed on 30 November 1999 and entered into force on 7 July 2000 following its ratification by the original three partner states – Kenya, Tanzania and Uganda. Burundi and Rwanda acceded to the EAC Treaty on 18 June 2007. The EAC today is a regional intergovernmental organization of Kenya, Tanzania, Uganda, Rwanda and Burundi, with its secretariat in Arusha, Tanzania. South Sudan and Somalia have made applications to join. ii Lessons Learnt from EAC Collapse in 1977 The collapse of the EAC in 1977 can be attributed to a number of reasons including governance challenges, economic imbalances (in part arising from the socialist system in Tanzania and capitalist system in Kenya), political disagreements, and an extremely limited dissemination of information. Two reasons stand out: (i) the relatively low engagement of stakeholders in civil society, the private sector and amongst EAC citizens, in the decision-making and management processes of community integration; and (ii) the lack of a dispute resolution process for sharing the costs and benefits arising out of EAC integration. Since 1977, steps have been taken to address some of these problems, including a Mediation Agreement (1984) for determining and dividing EAC assets and liabilities, and an agreement for the establishment of the Permanent Tripartite Commission for East African Cooperation (1993). Nonetheless, citizen engagement, knowledge sharing and consensus building are, and will continue to be the key components for a successful integration. iii The EAC Today: Good Progress But Much Remains to be Done The EAC integration is on the second stage of the four planned stages – Customs Union, Common Market, Monetary Union and Political Federation. In 2005, the EAC adopted the Customs Union protocol that established, (i) a duty-free trade between the partner states (with the successful reduction of intra-regional tariffs), (ii) common customs procedures between the partner states and a common external tariff (i.e., an identical rate of tariff is imposed on goods imported from foreign countries). The next stage came with the Common Market protocol in 2010 that established a single market allowing the free movement of goods, capital and labor within the region. Partner states have been required to review domestic rules and regulations and ensure compliance with the protocol, in order to harmonize policies and regulations within the region. This involves the removal of restrictions on the free movement of factors of production and on the right of establishment, as well as pursuing mutual recognition of academic and professional qualifications. Allowing free movement of goods, capital and labor across all partner states is more complicated than had been anticipated, and hence delays are expected. iv. Challenges in Advancing the Regional Integration Agenda Full implementation of a single Customs Union/Common Market (second stage) remains a challenge for the following reasons: (i) the membership in multiple regional economic communities can distort the common external tariff; (ii) customs clearance and tax collection remain destination-based while a joint revenue sharing mechanism for tariffs is absent; (iii) the persistence of various controls at customs for goods circulating within the Community; (iv) the limited institutional authority to ensure compliance with the Customs Union policy framework; and (v) the prevalence of non-tariff barriers (ASI 2012). Once the Customs Union has been established, significant efforts will be needed to progress towards the realization of the Common Market enacted in 2010 and the effective implementation of the free movement of capital, goods and labor, it entails. Given delays in the full implementation of Customs Union and Common Market protocols, the third stage – Monetary Union – expected to bring a single currency to the region, and the fourth and final stage – Political Federation, previously anticipated for 2012 and 2015 respectively, might be postponed further. Edition No.1 February 2013 33 Unleashing Uganda’s Regional Trade Potential Box 4: How Could Leveraging Regional Integration Accelerate Uganda’s Competitiveness? Landlocked Uganda has to rely on its neighbors’ capacity and willingness to supply substantial services for Uganda’s benefit and public goods in the form of good transit policies, regulations, infrastructure and institutional arrangements. i. Promoting regional infrastructure projects The disparities across countries and an unequal distribution of costs and benefits hamper the efficient supply of regional public goods. In particular, coastal countries are responsible for investments in their infrastructure that is being used by landlocked countries, creating an incentive for underinvestment. This will require the establishment at the EAC level of political and technical mechanisms to deal with the asymmetric benefits and costs of integration policies. Every strategy for addressing infrastructure bottlenecks should consider the region a single entity and seek to facilitate investments on regional rather than national lines. The benefits from better connectivity tend to be indirect and long term, and asymmetric across countries, while costs are immediate. To avoid underinvestment that can arise from this mismatch, agreement on the appropriate allocation of costs, especially for large projects, must be arrived at the regional level. ii Improving trade facilitation Removal of non-tariff barriers is a regional issue given the capacity and political economy of its removal. The resistance to removal of some barriers arises from the desire to protect some sectors by some countries. Coping with such vested interests will require strong political commitments at the regional level. Capacity-building programs focusing on regional integration such as the one currently being implemented. TradeMark East Africa will support trade facilitation and NTB removal. iii. Introducing effective standards and other regulatory instruments Regional agreements such as the EAC Common Market Protocol may also make it possible to reap scale economies in regulation and supervision, particularly where national regulatory agencies face skill and capacity constraints; they could also reduce scope for the capture of national regulation by private sector interests and reduce regulatory heterogeneity. Regional regulatory cooperation can also provide gains as a commitment mechanism to strengthen the credibility of a country’s reform. Strategic regional partnerships aimed at attracting FDI will help Ugandan firms increase profitability resulting from economies of scale generated by a bigger market and better supporting services. iv. Promoting regulatory cooperation A good example of regulatory cooperation is in the professional services, where regional agreements on the mutual recognition of professional qualification can help with the development of adequate curricula for various professions, and provide guidance for employers, mentors and trainees regarding the practical experience requirements for professionals. Furthermore, Uganda can work with regional bodies such as the IUCEA, the EABC, or the EAPSP to undertake in-depth, cross-country comparative assessments of professional qualifications (entry requirements, education and training, and practical experience requirements) and the regulations governing the professionals in each EAC member state. This is critical for implementation of the Mutual Recognition Agreements of professional qualifications and licensing requirements (MRAs). Uganda’s participation in the professional services knowledge platforms in East Africa and COMESA can help the country with the development of a meaningful reform program that includes the elimination of explicit barriers and regulatory, education and immigration reforms. Mutual recognition of educational and professional qualifications, intra-African arrangements could be more suitable than global ones for the supply of regional public goods. In tourism, Uganda can participate in EAC-wide tourism projects to increase its exports of tourism services. 34 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential of labor mobility, as envisaged under EAC’s Common (see Figure 15). The level of trade complementarity17 with Market protocol, would help address critical skill gaps, Uganda’s regional peers has been increasing over the while generating important agglomeration effects in the last 10 years, suggesting a lessened risk of trade diverting medium to long term. to other non-EAC countries as the region integrates. This suggests that Uganda could satisfy a larger part Regional trade, particularly the trade of agricultural of the domestic market, while also consolidating and commodities, has the potential to stimulate growth and expanding into regional markets. to improve the living conditions of the high proportion of the population employed in the agricultural sector. Export dynamism has spread across partner states At the same time, net buyers, who are mainly residents in the region with Kenya maintaining its traditionally of urban areas, may lose out, at least in the short term. stronger position while Uganda emerges strongest (see The balance of costs and benefits is expected to be Table 2). Of the EAC nations, Kenya remains the strongest positive for Uganda, especially if one considers the cost exporter, with more than 16 revealed comparative of maintaining the status quo. However, there will most advantage products through the 2000s. This compares likely be adjustment costs, at least initially. This means to Uganda and Tanzania, each with nine comparative that it is vital to engage in dialogue with all relevant actors advantage products. However, more recently, Uganda in Uganda, for which the recently revived public-private has had the highest number of products with revealed dialogue mechanism offers an appropriate framework. comparative advantage. Emerging products of this sort include dairy produce, animal/vegetable fats, sugars and confectionaries, tobacco, lime and cement, soap, 3.3 Is Regional Integration Working to base metals, and printed books and newspapers. The Promote Economic Growth in Uganda? bulk of these are also Kenya’s classic products, implying that Uganda needs to raise productivity to remain It is a great thing for a village to have a well- competitive. constructed road. However, it could be argued that the success of the road is only demonstrated if it effectively facilitates the flow of goods, services, and people. Similarly, the success of regional integration can be determined in terms of the extent to which it has achieved the objective In the short term, of improved trade and labor flows, both at the regional level and at the broader international level, following some members of the improved access and harmonized policies. community may gain, while others will lose. In terms of regional trade, Uganda has increased its While the intensified volume within the EAC and with regional markets outside the EAC, such as DRC and Sudan, over the past competition resulting five years. Uganda’s exports to the four EAC partners have from the development grown at a rate 2 percent faster than to elsewhere in the of a common market is world. As a result, its share of total EAC regional exports likely to have positive increased from 15 percent in FY07 to 25 percent in FY11. effects on productivity and Exports to non-EAC regional trading partners (South Sudan and DRC), grew even more rapidly, at a rate of 10 consumer welfare in the percent. For these markets, the share of Uganda’s exports medium-to-longer terms, rose from 32 percent in FY07 to 48 percent in FY11. it presents a challenge for some elements within The diversification of exports has been mainly Uganda’s private sector in driven through exports to regional markets. At present, the bulk of Uganda’s exports to the region consist the short term. of primary agricultural products and processed agro- produces. However, industrial exports, involving produce such as iron sheets, lime and cement, beverages, plastics, 17 Trade complementarity measures the fit between one country’s paper and soap, are becoming increasingly significant exports and the imports of its trading partners. It was calculated on the ex- ports side to assess the potential market access gains on partner markets given Uganda export capabilities. Edition No.1 February 2013 35 Unleashing Uganda’s Regional Trade Potential Figure 14: Uganda’s Top 10 Regional Trade Goods in 2012 - Exports Concentrate in Agricultural produce, Many of the Manufactured Goods Exports are also Imported Diary products, eggs, honey, edible animal… Exports Imports Electrical, electronic equipment Articles of iron or steel Machinery, nuclear reactors, boilers, etc. % share of total imports from EAC Edible vegtables, & certain roots &tubers Vehicles other than railway, tramway % Share of total exports to EAC Minerals fuels, oils, distillation products, etc Soaps, lubricants, waxes, candles, modelling pastes Machinery, nuclear reactors, boilers, etc Pharmaceutical products Soaps, lubricant, waxes, candles, modelling… Paper & paperboard, articles of pulp, paper and board Cereals Plastics and articles thereof Iron &steel Beverages, spirits and vinegar Salt, sulphur, earth, stone, plaster, lime &… Iron and steel Animal, vegetable fat & oils, cleavege… Mineral fuels, oils, distillation products, etc. Coffee, tea, mate & spices Salt, sulphur, earth, stone, plaster, lime and cement - 5 10 15 20 25 -25 -20 -15 -10 -5 0 Source: ITC data, World Bank staff calculations Uganda’s share of regional imports declined from its imports. The share of informal imports declined from 15 percent in 2005 to 12 percent in 2010. Uganda’s 2.7 percent to 1.2 percent due to tougher regulations imports are mainly in machinery and equipment (25 and surveillance of imports by the revenue authority. At percent), and petroleum products (15 percent), the bulk the same time, its share of informal exports increased of which could not be sourced from within the region. from 18 percent to a peak of 30 percent in FY10, before However, other imports such as chemicals, plastics and declining to 18 percent in FY11. Therefore, Uganda enjoys other industrial products could be sourced from the a relatively high regional trade surplus. However, it could region, if they were cheaper than those from China. reduce its import bill through import substitution and Informal trade, which is mainly with South Sudan, DRC by raising productivity to compete in existing regional and Kenya, contributes more to Uganda’s exports than to markets. Petroleum imports truck their way through the Northern Corridor, (Great Lakes Film Production Ltd), November 2012 36 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Table 3: Classification of Exports by Change of Competitive Advantage 2005-2010 Kenya Tanzania Uganda 1. Flowers 1. Fish 1. Fish 2. Edible vegetables 2. Edible fruits and nuts 2. Coffee/tea/spices 3. Coffee/tea/spices 3. Products of milling industries 3. Cereals 4. Animal vegetable fats 4. Oil and grain seed fruits 4. Cocoa and products thereof 5. Sugars 5. Tobacco 5. Beverages/spirits/vinegar 6. Preparation of vegetable fruits 6. Ores/slag/ash 6. Raw hides and skins RCA (2005)=1 RCA(2010)=1 7. Salt/cements 7. Wood and articles thereof 7. Cotton CLASSICS 8. Mineral fuels/oils 8. Cotton 8. Iron/steel & articles thereof 9. Inorganic chemicals 9. Natural pearls and stones 10. Pharmaceuticals 11. Soap 12. Plastics 13. Raw hides and leather 14. Paper products 15. Iron/steel & articles thereof 16. Aluminum and articles thereof 1. Vegetable products 1. Fertilizers 1. Dairy produce EMERGING CHAMPIONS 2. Beverages, spirits and vinegar 2. Paper and paper board 2. Animal/vegetable fats 3. Electrical machinery and parts 3. Textile articles 3. Sugars and confectionaries RCA (2005)=0 RCA(2010)=1 4. Vehicles and their accessories 4. Boilers and mechanical appliances 4. Tobacco 5. Electrical machinery and parts 5. Salt/cements 6. Soap 7. Other base metals and articles thereof 8. Printed books/ newspapers 1. Raw hides and skins 1. Cereals 1. Products of animal origin DISAPPEARANCES 2. Paper and paper board 2. Cocoa 2. Products of milling industries RCA (2005)=1 RCA(2010)=0 3. Other made up textile articles 3. Residues/waste from food indus- 3. Oil and grain seed fruits tries 4. Articles of stone plaster 4. Vegetable plaiting materials 4. Other vegetable textile fibers 5. Electrical machinery equip- 5. Glass and glass ware ment and parts 6. Copper and articles thereof 6. Vehicle parts and accessories Notes 1. The RCA index measures the relative advantage of a country’s industry or product in trade. The RCA index above unity indicates the country’s share of exports in that product/ industry exceeds the global export share of the same sector. In such a case, the country has a comparative advantage in that sector. Since high export volumes can result from subsidies or other incentives provided, including under-valued exchange rates, the RCA index captures competitiveness rather than comparative advantage (Siggel, 2006). 2. Classics are those products that maintained RCA at 1, Emerging champions are those that did not reveal comparative advantage before, but do so in the latter period, while Disappearances would have revealed before, but are not competitive anymore. Source: World Bank calculations based on Customs data, 2005-2012 Edition No.1 February 2013 37 Unleashing Uganda’s Regional Trade Potential 4. Leveraging Opportunities in the Region and Beyond If it proceeds appropriately, enormous opportunities lie ahead for Uganda. If it develops an increas- ingly outward orientation, this will allow its farms and firms to make better choices regarding what to produce, how to produce it, how much to produce and what inputs to use. This is the key benefit to be derived from the free exchange of goods, capital and ideas across borders. But this is not enough. Uganda has to adopt the appropriate strategies to sustain and grow the regional markets that it has tapped so far. The country’s strategic plans must be streamlined, first, to broaden the regional mar- ket, which will require Uganda to think beyond EAC, its traditional regional market for centuries. Second, it must deepen trade by developing and exploiting a greater range of products. This will require thinking beyond food exports and low-value manufacturing exports. Mukwano Industries in Kampala loading goods for the Juba market in Sudan, (Great Lakes Film Production Ltd), November 2012 4.1 Beyond the EAC: Uganda as a Land the rest of the world. But Uganda can also almost double its trading space through the inclusion of additional Bridge to Connect Landlocked Nations neighboring markets within the Great Lakes region. with Coastal Regions These markets include countries such as South Sudan and the Democratic Republic of Congo, where the private The EAC presents the first opportunity to leverage sector has already established trading partnerships, the dynamic regional market, with Uganda’s trade mainly through informal means. Building on the existing with the EAC region having grown faster than that with trade relations, Uganda must take strong measures to 38 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential coordinate and harmonize policies to facilitate trade Between now and 2020, Uganda, Kenya and Tanzania are between EAC and non-EAC Great Lakes countries, expected to be among the fastest growing economies in especially through better infrastructure and institutions the world, given how they have applied their productive to support trade. capacities to their respective export structures.18 As with the elderly spice trader who tapped the The fast expansion of trade between the EAC fast-growing incomes and population of her countries suggests that these countries have taken village through interactions with her near neighbors advantage of proximity and good neighborliness first, the EAC presents the first opportunity to leverage to export more within the region than to rest of the the dynamic regional market, given the fast-growing world. The value of exports from the founding members size, incomes and population of EAC members. Uganda’s reached US$ 20 billion in 2010, following an annual GDP, amounting to approximately US$ 17 billion in 2011, average rate of growth of 16 percent in the period from is only the third largest amongst EAC nations. Trailing 2001 to 2010. Rwanda and Burundi are also expected Kenya and Tanzania, it accounts for just 21 percent of to increase their rate of growth of exports from 2015 the regional economy. With the EAC regional market onwards.19 Intra-regional exports as a share of total worth approximately US$ 79 billion, Uganda’s potential exports increased from approximately 15 percent in market expands six-fold. In principle, this market should 2000-04 to approximately 19 percent in 2009-10, and be relatively accessible because of its close proximity. now amount to US$ 2.2 billion. Growth rates for EAC Growing faster than the sub-Saharan African average of exports within the region exceed those of EAC exports to 2.6 percent, the EAC’s population grew from 110 million in the rest of the world (see Figure 15). Unlike EAC exports 2002 to 138 million in 2010. Of this, Uganda’s population to the rest of the world, which mainly consists of primary accounts for only 23 percent. Per capita incomes are also commodities, the bulk of intra-regional exports consist gradually increasing, with Uganda’s average per capita of semi-processed and lower value manufactured goods income of US$ 500 being somewhere in the middle of the (e.g. food products, beverages, tobacco, cement), to range, between the figure of US$ 795 recorded in Kenya which Uganda contributes significantly. and that of US$ 192 recorded in Burundi. Thus, there are opportunities for expanding markets and improving economies of scale. Prospects for the region are positive. Figure 15: EAC Countries Exporting More to Each Other and Catching up with Traditional Destinations Source: Comtrade/World Integrated Trade Statistics(WTI) and WDI Uganda is the land bridge for the rest of the Great DRC and Congo Republic, total regional GDP increases Lakes region, connecting a number of landlocked by approximately 48 percent, to US$ 118 billion (see countries to the coastal countries. This could enable Figure 16). As political efforts to include South Sudan and Uganda to expand its trading space by almost 50 Somalia into the EAC continue, the private percent, if the near markets of South Sudan, DRC and the 18 Centre for International Development Harvard University, (2012) Congo Republic are included. EAC’s GDP currently stands The Atlas of Economic Prosperity: Mapping Paths to prosperity at US$ 79 billion. With the inclusion of South Sudan, 19 Nathan Associates (2011), Corridor Diagnostic Study on Northern and Central Corridors of East Africa. Edition No.1 February 2013 39 Unleashing Uganda’s Regional Trade Potential sector is trading with these countries, mainly through Building on these strong trade relationships, informal channels. At least up until 2010, South Sudan Uganda has an important role to play in and DRC accounted for 38 percent and 20 percent of coordinating and harmonizing policies related to Uganda’s total exports respectively. Thus, they absorb trade between EAC and non-EAC Great Lakes countries. a greater proportion of Uganda’s exports than Kenya, There are many impediments to trade in the region. For which accounted for 19 percent. In 2011 and 2012, trade example, on the Uganda-South Sudan border, Ugandan to these non-EAC countries slowed down, mainly on traders persistently complain about mistreatment and the account of the political and economic turmoil both in arbitrary introduction of new regulations. The absence South Sudan and DRC. However, if the situation in these of institutions to support trade is the main reason that countries normalizes, trade between them and Uganda a high proportion of trade between the countries is should again boom. informal. To facilitate improved arrangements and better outcomes, Uganda should strive to broker good relations between the different countries in the region. Figure 16: Potential Market for Uganda’s Products Could Expand by 50 percent, as Sudan Becomes Largest Trading Partner During 2000s Rwanda $5.6m(5%) Burundi Regional economic size (GDP) $1.6m(1%) Kenya $32m(27%) S.Sudan $13m(11%) Other Cong Republic $38(32%) $12m(10%) Uganda $17 m(15%) Congo Democratic Republic $13m(11%) Tanzania $23m(20%) Source: World Bank staff calculations with WDI data, and Yoshino, Ngungi, and Asebe (2012), with UBOS data Uganda’s strong participation in the regional market US $65 billion, existing potential is limited because of the creates increased opportunities for a higher level of relatively small size of this market. By way of illustration, trade with larger global markets. With the total value of the total value of this market is equivalent to 3.5 percent the EAC regional market, excluding Uganda, standing at of India’s GDP, which stood at US$ 1800 billion by 2010. A market in Juba, a destination to Uganda’s food and manufactured exports, (Great Lakes Film Production Ltd), November 2012 40 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential In fact, from a global perspective, the economic weight markets is not an option. Rather, it is important to of EAC, the Great Lakes market or even the entire African pursue policies that can minimize the disadvantages for market is quite limited (see Figure 17). Therefore, the small landlocked Uganda. These policies should include regional market can be seen as a stepping stone to reach measures to reduce distance through the development larger markets, even for prospective investors in the of better infrastructure connectivity and better transit region who wish to take a long-term vision of markets. management and to facilitate labor mobility to support From a policy perspective, the isolation of regional the density and efficiency of economic activity. Figure 17: Global Perspective Dwarfs Regional Markets as Uganda Expands Trading Space Source: World Development Report 2009 4.2 Uganda’s Products: Survive, include nonagricultural produce, such as cement. At the same time, trade in services has experienced a strong Diversify and Grow rate of growth, largely due to the boom in services and Uganda must continue to harness its agricultural other than traditional transport and travel services. potential, given the importance of the agricultural sector to the country’s trade. However, the full benefits of regional trade will be derived from 4.2.1 Agriculture: Leveraging Uganda’s deeper diversification into non-agricultural products, Position as the Breadbasket of Eastern particularly non-traditional service exports. Uganda’s Africa goods and services have become more diversified as local firms became more competitive. This has resulted Uganda has natural comparative advantages in the in an increased volume of non-traditional exports, form of good weather and fertile soils that support such as processed fish, flowers and foodstuffs such as the cultivation of a range of crops and livestock. On the grains. Uganda’s goods exports sector is dominated basis of these advantages, the country can achieve further by agricultural produce (vegetables, animals, and export diversification through the development of a foodstuffs), which constituted 85 percent of total range of agricultural exports. Uganda’s flexible climates exports in the period from 1996 to 2010. During this and fertile soils support the cultivation of a range of period, the contribution of vegetables to total exports food crops, particularly cereals and year-round drought- dropped from 75 percent to 51 percent, while the share resistant crops. With its ability to produce a surplus of of other foodstuffs and livestock increased. There is still cereals for export to deficit regions, Uganda has been a relatively high degree of concentration, with exports referred to as EAC’s “food basket�. In Eastern Uganda, of the top 10 products accounting for 60 percent of the where the cultivation of bananas and cassava ensure total. However, increasingly, the most important exports domestic food security, maize exports to chronically Edition No.1 February 2013 41 Unleashing Uganda’s Regional Trade Potential food-deficient Kenya thrive.20 In the period from maintained a free market environment and agricultural 1996 to 2010, Uganda’s export of agricultural products prices were “just right�. As a result, Ugandan producers (vegetables, animal, and foodstuffs) constituted 85 received the highest pass-through of prices from the percent of total merchandise exports. Of its agricultural international markets in Africa, with margins reflecting products, Uganda had the highest rate of revealed competitive costs rather than resulting from government comparative advantage for foodstuffs and animals. With regulations. However, recent measures by the Ugandan the share of these products to total exports increasing, government to ban processed maize so as to encourage the share of vegetables declined. As the global economic value addition could create disincentives for producers in crisis resulted in a decline in global demand, Uganda an environment where agro-processing capacity is low. actively engaged in trade within the region in industrial At the same time, trade in food in the region remains far cash crops and food staples. It conducted this trade both from free, despite efforts to achieve harmonization in across borders and through the World Food Program, for policies and the regulatory environment. Despite these which Uganda is the largest source of locally procured efforts, the arbitrary and erratic imposition of barriers maize in Africa. With no established suppliers for maize, undermines private sector confidence and distorts sugar, oil, or ready-to-eat meals in South Sudan, this incentives, encouraging the production of cash crops country had to import more than 200,000 tons of grain while discouraging the production of food staples. in 2011. By 2011, 56 percent of Uganda’s regional exports through customs were agricultural or agro-processed Increased trade within the region should not products. Of these exports, 60 percent were comprised necessarily result in increased volatility in food of foodstuffs, particularly animal products, vegetables prices. To prevent this, weaknesses in production and vegetable oils and fats, and cereals. This percentage structures need to be eliminated through measures increases dramatically when informal trade is included. to achieve a higher level of productivity and improve By contrast, only 7.6 percent of Uganda’s imports from transportation and logistics systems. With international the region consist of agricultural produce. food prices peaking in 2009, Kenya and South Sudan responded by revising sourcing strategies, shifting focus However, relying on natural advantages alone will onto Uganda where prices were relatively low. Huge be dangerous for Uganda. Rather, the country needs price differentials, to the magnitude of 400 percent for to increase agricultural productivity and to reduce or maize or 200 percent for beans between Juba and Gulu eliminate production-curtailing regulations in order to in Northern Uganda, or 100 percentage points between beat competition. Uganda is not the only food producer Kampala and Nairobi, underpinned the food trade boom. in the region. Tanzania also often produces a food surplus: With unstable supplies, prices for a number of foodstuffs, of 1.1 million tons of maize produced in Tanzania during especially beans, have become very volatile. Uganda 2011, approximately 100,000 tons were exported to the could enhance the productivity of its agricultural sector region. South Sudan, with similar vegetation and climate and improve transportation and logistics infrastructure to northern Uganda, has the potential to grow its own to maintain and enhance its level of competitiveness. food. To some extent, it is realizing its potential, as can be seen from its reduced level of imports from Uganda With expanding populations, rapid urbanization, since 2011. Northern Zambia, Northern Mozambique, and increasing incomes across Africa, the potential and South Africa are other food surplus producers in the demand for agricultural exports is virtually endless. region. The imbalance in food production endowment creates opportunities for Uganda as integration of regional trade For Uganda to retain its market share, it must links farmers to consumers across borders and mitigates improve productivity. In this regard, measures to the effects of periodic national food shortages and protect domestic markets would have detrimental increasing global prices. effects on producers and on longer term prospects for competiveness. As an example, in July 2011, when Tanzania imposed a food export ban, maize price in Dar- 4.2.2 Climbing the Value Chain by es-Salaam declined to US$ 284 per ton, while at the same Developing Capabilities time, Nairobi was paying almost twice the price (US$ 513 per ton), reducing incentive to produce for Tanzanian Uganda can export products of higher value, farmers. Unlike Kenya and Tanzania, Uganda had building on those it is already exporting within the region. Making the transition from low to higher value 20 World Bank (2012), Africa Can Help Feed Africa: Removing Barriers exports requires Uganda to build production capabilities to Regional Trade in Food Staples, Washington DC. 42 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential and capacities. However, for this to occur, Uganda’s This will enable Uganda’s participation in regional current exports must be close to a number of products production chains, where trade in parts and components already being produce by others elsewhere in the world (“trade in tasks�) may present a great opportunity. Like (see Box 5).21 By leveraging existing value exports, such as the spice seller who made the transition from being a low and medium technology manufactures, Uganda can producer of vegetables to selling processed spices, establish the basis for increasing vertical specialization. Uganda can build the capabilities it requires to export high value products. Box 5: Uganda Can Move to Higher Value Exports – the Product Space View Coffee Tea & Fish /tobacco Oil seeds Fruits Petroleum cluster Plastics Textiles Core of the forest - goal Cotton Garments Source: Hidalgo, Klinger, Varabais, 2007 According to of Hausmann and Klinger (2006), the possibilities for export diversification in any country can be mapped in the product space. The product space is like a forest of all possible products that countries export. Each product is like a tree and a firm or country that produces the product is like a monkey located on its tree. Firms can jump from one tree to another, depending on their capabilities. The red nodes represent a product. Similar products form a cluster. Some clusters such as those of coffee, cocoa, tea and tobacco are relatively far from the core of the product space. But products in clusters at the core are usually manufactures and make it easier for a country to jump from one to another, expand to other manufactures. Few cotton exporters export textiles or garments (distance is long). But many textiles exporters also export garments (distance is short). Uganda’s manufactured exports: plastics, iron and steel products, processed foods, and fruits, place Uganda closer to the clusters. Why shouldn’t Uganda look at possibility of producing motor vehicle parts or toys (i.e. unsophisticated plastic based manufactured goods) that are being imported into the region today? Uganda already exports manufactured produce It can leverage its position to export other products such as plastics, iron and steel, chemicals, paints, of similar and substitutable or adaptable capabilities. cosmetics, construction materials, pharmaceuticals, and Amongst the EAC countries, Uganda has been the fastest processed foods. to make the transition to higher value exports (see Figure 21 Hausmann R and B. Klinger (2007), The Structure of Product Space and the 18). When informal exports are included in the equation, Evolution of Comparative Advantage, CID Working Paper No. 146, April 2007. the degree to which it has made this transition becomes According to this model, changes in the revealed comparative advantage of even more pronounced, as most ofthe informal trade nations are governed by the pattern of relatedness of products at the global level. Edition No.1 February 2013 43 Unleashing Uganda’s Regional Trade Potential involves industrial products.22 Uganda can leverage manufacture jerry cans today be used to create products existing exports as an entry point to higher value that substitute for Chinese plastic imports, thereby export products. Having particularly good potential are expanding regional markets? resource-based/agro-industrial products, with Sudan and DRC representing significant opportunities as With the rising regional demand for manufactured markets. However, Uganda has the potential to exploit goods, Uganda has the potential to compete with other products of similar and substitutable or adaptable more industrial Kenya. Uganda may have a lower capabilities. For example, Uganda already produces competitive edge23 in manufactured goods, compared plastics and steel products. It is certainly conceivable to Kenya, partly because it is far from the coast. This will that it could leverage these capabilities to produce need to be addressed through improved connectivity to motor vehicle parts and other higher-value outputs. reduce the cost of imported inputs and through reducing Across the entire region, driven by external factors, the the cost of doing business in Uganda. This will enable the opportunities for import substitution are expanding country to compete with its coastal neighbors, especially fast. With rising labor costs, China may not retain its for a larger share of the regional market. competitive advantages as a producer of toys or other similar low value manufactured goods beyond the next 10 years. Why can’t the plastic that Uganda uses to . Figure 18: Within EAC, Uganda and Rwanda Have Transformed Export Structures Fastest 4.2.3 The Services Sector: Where manufacturers located at great distances from maritime port facilities. However, this disadvantage does not Uganda’s Landlocked Status Doesn’t apply or is greatly diminished for the export of services, Matter especially if their export is facilitated through distance- reducing technologies including mobile platforms. Landlocked countries such as Uganda can Uganda could be a regional hub to the Great Lakes overcome the disadvantages implied by their region for the provision of services, including financial, landlocked status by exporting services. In terms back office functions, legal, construction, equipment of accessing global markets, transportation costs will leasing, medical and bio-tech research, insurance and always represent a comparative disadvantage for 23 Kenya is at a higher level of industrialization than Uganda and 22 Some of the industrial products are re-exports from Kenya and hence produces most industrial goods more competitively than Uganda. China, but over 60 percent of informal exports are Ugandan made, including 24 Paul Collier, “Uganda’s structural transformation� Paper delivered plastics, cement, and iron sheets at the launch of the Country Economic Memorandum 2007, September 22, 2007 44 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential trade logistics services.24 In addition, if Uganda opens up rate of increase stood at approximately 25 percent. By to the import of services, this will increase the level of comparison, the rate of increase in Kenya was 17 percent, competition and result in the more efficient servicing of while in Burundi and Tanzania it stood at 15 percent. other sectors of production. Currently, the total value of Uganda’s export of services is equivalent to 9 percent of its GDP, which is three times Services constitute the largest share of economic the level at the beginning of the decade. However, the activity in Uganda and have driven the transformation total value of its import of services in proportion to of its production structure. However, Uganda still GDP has doubled to almost 14 percent over the same imports more services than it exports. By FY12, services period, which means that the country is still running accounted for 45 percent of Uganda’s GDP, making it the deficit services account. To achieve its full potential, fastest growing sector since 2002. The level of export of Uganda must seize the opportunities created by its services has increased by 19 percent per annum over a strong services sector. In particular, it must leverage the decade, a rate exceeded only by Rwanda’s, where the potential of tourism, transport and logistics, education and business services. Table 4: A Snapshot of Uganda’s Services Trade, 2010 US$ millions (and percent of total) Exports Imports Commercial services 983.5 (75 percent) 1809.3 (98.6 percent) Transport 3.7 percent 54.6 percent Travel 55.7 percent 13.6 percent Communications 2.3 percent 0.9 percent Construction .. .. Insurance 0.9 percent 12.0 percent Financial services 1.7 percent 6.8 percent Computer and information 3 percent 1.8 percent Royalties and license fees 0.3. percent 0.2 percent Other business services 7.6 percent 15 percent Personal, cultural and recreational services .. .. Government services 326.5 (24.9 percent) 25.9 (1.4 percent) Total 1310.1 1835.1 Source: IMF BOP 2012. Note: Government the number of international travel arrivals more than goods and services byservices includes international transactions organizations, in both embassies, quadrupling in the 2000s, the sector contributed US $1.1 or military units and their staff in the host countries billion to the economy in 2012. However, less than half of this was direct tourism earnings, implying Uganda takes a) Tourism: Why Don’t More Tourists a meager share of the East African market for tourism. Visit Beautiful Uganda? Despite a resource endowment that should facilitate its ability to create potentially highly valuable products such Given Uganda’s large endowment of vegetation, as wildlife safaris, primate tracking, adventure tourism, rivers, lakes, mountains and wildlife, the fact that bird watching, cultural tourism, mountain ranges, and the tourism sector contributes a mere 3.2 percent to GDP source of the Nile tours, Uganda earns only around US$ should be considered a national embarrassment. With 800 million a year from such activities, lagging far behind Edition No.1 February 2013 45 Unleashing Uganda’s Regional Trade Potential The Gorilla, one of Uganda’s tourism attractions, (Great Lakes Film Production Ltd), November 2012 Kenya (US $3.8 billion) and Tanzania (US$ 3.4 billion) (see Figure 19). To develop the potential of the tourism sector, it will be necessary to focus on improving human resources, implementing conservation measures to protect wild life and its habitats, developing a sound marketing strategy, and on building tourism infrastructure. The priority for the government is to facilitate the development of the necessary supporting infrastructure, while other challenges might be addressed through private-public partnerships. By far the largest potential market for tourism lies outside the region, but Source: World Bank Sub-Saharan Africa Tourism Database (2012) regional initiatives, including the development of multi- country tour packages, could help Uganda tap into this Note: Figures were taken for 2009, the last year for which market more successfully. Uganda should also leverage complete data sets are available for all four countries; its competitive edge in education services (see below) Burundi is not included, as the country has not published by organizing high level conferences and seminars, official arrival figures since 2006 which will further benefit the tourism sector. Figure 19: Uganda’s Meager Share East African Tourism b) Transportation and Logistics: Making the Land Bridge Pay Uganda’s central position in both northern and central corridors needs to be developed more zealously. The country must serve as a bridge to connect the traditional EAC group with a larger trading zone. At present, exports to South Sudan go through Gulu, either directly from the Kenya-Uganda border or through Kampala, rather than through the traditional Kenya-Juba route where insecurity affects the Lokichoggio-Juba segment. Similarly, traders prefer to keep their goods 46 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential in bonded warehouses in Kampala to shorten delivery times into Juba. Not only have transit volumes grown, but In order to achieve the optimal development of the also a distribution industry has emerged in Kampala and growing transit and logistics industry, Uganda must Jinja. Similarly, on the transit hub through the Northern be able to provide excellent logistics and transit services. Corridor linking Rwanda, Burundi, and Eastern DRC with With stability restored in the border area between Kenya Kenya, only the weakness of the Central Corridor through and South Sudan and with Kenya recently announcing Tanzania allows Uganda to retain its competitive edge in its intention to develop the Sudan-Kenya corridor with the provision of transit services for Rwanda and DRC. support from EIB through the EAC Secretariat, Uganda must invest in infrastructure connectivity and trade To develop Uganda’s role as a land bridge, it is facilitation to maintain its competitive edge, the shorter vital to develop its transport and logistics sectors, distance on the alternative routes notwithstanding. enabling the country to minimize its imports of these Moreover, the recent establishment of the Common services and to export them to other landlocked Market for Eastern and Southern Africa free trade area countries in the region. At present, Uganda’s export of (COMESA FTA) has increased Uganda’s potential to transport and logistics services contributes to only 3.7 serve as a transit hub between and among Sudan, percent of its total export of services. At the same time, Kenya, Rwanda, and Burundi. Thus, Uganda should such services constitute 55 percent of its total import of strive to facilitate a harmonization of border policies and services, with the greatest proportion of these imports regulations and to address behind-the-border regulatory coming from Kenya. While the expansion of regional issues within all these countries to tap this potential trade creates opportunities for Uganda in terms of its role market. linking coastal countries, particularly Kenya, with inner- land landlocked neighbors (South Sudan, DRC, Rwanda, Burundi), the main transit road remains in a poor state c) Education Services: Meeting and logistic services are undeveloped. The Kampala- the Needs of Foreign Students and Nimule-Juba road is the main corridor between Uganda Developing Uganda’s Human Resources and South Sudan. However, because more than half of this route is in poor state, some imports go through There has been a dramatic growth in Uganda’s Oraba-Kaya for Juba. Improvement of the Nimule-Juba exports of educational service. This growth can road (funded by USAID) is expected to greatly facilitate be sustained if Uganda works to raise awareness and the flow of traffic. to ensure that the services it provides meet the needs Nimule Juba road constraining traders, (Great Lakes Film Production Ltd), November 2012 Edition No.1 February 2013 47 Unleashing Uganda’s Regional Trade Potential of non-Ugandans in terms of regulations, curriculum, inadequate learning facilities and limited access to ICT and recognition of the qualifications. The dramatic infrastructure, limited measures to adapt the national increase in Uganda’s export of educational services curriculum to international standards, and limited (see Box 6) has been driven by the reputation of the recognition of academic qualifications abroad. country’s education system; the liberalization programs initiated in the 1990s; and the relative affordability of In order to optimize the benefits to be derived from Uganda’s educational services compared to regional the export of educational services, the government and international institutions elsewhere. While private must commit to implementing Uganda’s National sector participation has helped to drive the increase Export Strategy of 2007. The stated aim of the strategy in these exports, a number of significant constraints is to transform Uganda into “a center of excellence for have prevented Uganda optimizing the benefits of quality and affordable education in the region and such exports. These include a lack of awareness of the beyond�. Despite these laudable sentiments, five years business and export opportunities, lack of a well-defined after its adoption, it has not yet been implemented. regulatory framework, inadequate marketing programs, Box 6: Education Service Export on the Rise Over the past decade, Uganda’s education system has attracted increasingly large numbers of foreign students. While this trend is also apparent at the secondary school, it is particularly true for university education. With a total of 29 universities, 24 of which are privately- run, the total number of Uganda’s University students increased by 3.4 percent, from 137,190 in 2006 to 183,985 in 2010. The number of foreign students rose from a few hundred in the early 1990s to 6,000 in 2008, then rapidly increasing to 16,000 in 2010. The contribution from these sources to educational service exports is estimated to reach a value of approximately US $ 35 million. The greatest number of foreign students is from Kenya, with others from Rwanda, Tanzania, Sudan, Burundi and the Democratic Republic of the Congo. Beyond the East Africa region, there are also a small but growing number of students from other neighboring countries, including Somalia, Zambia, Angola and Zimbabwe. Kampala International University (KIU) has the largest number of foreign students, at 6,715 students. It is followed by the universities of Makerere (2,444), Bugema (862), the Islamic University in Uganda (767), the Makerere University Business School (MUBS) (671), and the Busoga University (575). International students are mostly found at private universities, with many public universities lacking the capacity to accept international students. For many private universities, the international student market is a new market segment. The main comparative advantages of these educational services are affordable tuition fees, low cost of living, and the strong education system that offers a wide range of academic programs. The Uganda Exports Promotion Board (UEPB), working with 20 universities, is developing a strategy to exploit this niche in sub-Saharan Africa and to consolidate Uganda’s position as a regional education hub. Source: Commonwealth Secretariat and UEPB, 2012 and BOU d)Business and Professional Services: Uganda faces strong competition from Kenya. However, even if its level of performance falls short of Kenya’s, it Smart Money could still gain a significant market share in this area. Uganda has taken the initial steps to establish trade links with other EAC countries to provide In addition to exporting a significant volume of business services. Through such measures, there has business services, Uganda is also a significant been an increase in the volume of exports in virtual importer of such services. In particular, a large connectivity (computer and information technology, IT) number of foreign professionals are employed in the area and finance. The development of such services has been of accounting and auditing services, with the presence facilitated by increased rates of internet connectivity of these professionals helping to build the capacity of and the increasingly high level of penetration of mobile their Ugandan counterparts. In the period from 1994 to services. The most dynamic exports are in higher value- 2007, 17 percent of the health and social services and added sectors, such as information technology services civil works implemented by the Rwandan government and financial intermediation. The growth of the volume were undertaken by Ugandan firms. Over the same of exports in these areas in the period from 2004 to 2009 period, 23 percent of similar work implemented by the was more than 30 percent, compared to the rate of Ugandan government was undertaken by Kenyan firms. growth of 20 percent for services as a whole. In this area, According to business surveys, more than 50 percent of 48 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential legal services in Kenya are imported, while 25 percent services, but also for other types of services, such as are exported. By contrast, the figures for Uganda for the business outsourcing. Under the common market, free same services are 17 percent for import and 10 percent movement of factors of production, most probably for export. For accounting services, Uganda imports 17 from Kenya’s surplus market, could partially alleviate this percent and exports 20 percent. The main export markets problem. for these services are within East Africa and are related to intra-region trade. In addition, services are exported to Overall, despite private-sector efforts to develop DRC, South Africa, Mauritius, EU, China and India. exports, most service sectors remain undeveloped on account of existing barriers to entry. Despite dynamic To increase the volume of exports of business growth rates, performance indicators for many backbone services, Uganda must address the skills deficits services in Uganda are below the level of their peers in of higher level professionals. It must also address the EAC, affecting competitiveness. Compared to its overregulation that has in some instances segmented neighbors, Uganda has more significant restrictions the domestic market. The government has declared to exporting services. In a recent World Bank survey of its commitment to developing professional services applied trade policies in five services sectors (banking as a matter of priority due to its potential to contribute and insurance, telecommunications, retail distribution, to exports. Other priority areas identified by the maritime transport, and professional services) in more government include information technology, education than 50 countries, Uganda’s overall restrictiveness index and construction. However, the development of all of of applied services policies, which measures explicit these areas is constrained by a skills shortage, with a lack market access and national treatment barriers in addition of highly skilled higher and middle level professionals in to selected discriminatory regulatory measures, is higher the legal and accountancy professions, amongst other than its landlocked neighbors, Rwanda and Burundi. areas (see Figure 20). In addition, undeveloped and Reducing this at least to the level of these neighbors segmented domestic markets and excessive regulation would be a key target to increase the volume of export of undermine Uganda’s competitiveness. Skills shortages services (see Figure 32). The restrictions are most evident act as a constraint not only for the export of business in the areas of retail, professional and financial services. Figure 20: Uganda Still Needs Skills Capacity Rwanda Comparison of professionals density across the region Zambia Burundi Uganda Malawi Accountants Tanzania Lawyers Kenya South Africa Mauritius 0 20 40 60 80 100 no. of professionals per 100,000 inhabitants Source: World Bank (2010) and Niyongabo(2011) Edition No.1 February 2013 49 Unleashing Uganda’s Regional Trade Potential Furthermore, because of the large deficit in technical and institutional capacities, no coherent and effective regional integration policy has been formulated or implemented. Promoting the export of educational services will have wider spill-over effects, given that the skills deficit is a major constraint in many potential service export sectors. The education system needs to prepare itself not only to provide world class services that meet the needs of foreign students, but also to produce world class graduates that have the necessary skills to support the service sector, especially tourism and professional services. Figure 21: Uganda’s Services Trade Restrictiveness in Comparison to EAC Countries and Across Sectors 50 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential 5. Building Bridges to Deepen Regional Trade It will not be easy for Uganda to harness the potential in regional trade. With the majority of con- straints lying outside Uganda’s borders, it must strive to raise productivity and deepen regional inte- gration. Firstly, government policies should focus on facilitating the modernization and diversifica- tion of the agricultural sector to improve its productivity and competitiveness. Recent efforts to raise productivity include the special cluster-based interventions to raise production of key commodity exports, such as maize and beans, by improving access to improved seeds, fertilizers, mechanization and water for production. These efforts will also support Uganda’s competitiveness as a food surplus producer. However, incentives for farmers to produce outputs in sufficient qualities and of sufficiently high quality, must be improved through pricing regulations that allow good quality to be rewarded appropriately. They must also be supported through the provision of better training and improved ac- cess to finance for farmers to improve cash flow management and to enhance access to ware-housing systems. Beyond raising productivity on the farm, issues related to storage, transport logistics, and connectivity must not constrain the movement of goods from farms to markets. With the majority of farms small and scattered, load consolidation could go a long way to improving access to markets. Malaba Border post will need to maintain efficiency to support Uganda build land bridges to the other countries, (Great Lakes Film Production Ltd), November 2012 Second, for firms to diversify into a wider range 123 out of 183 economies overall in 2012. In particular, of products, particularly higher value exports, the difficulties involved in establishing a business and constraints to investment must be addressed. acquiring licenses are among the major constraints Uganda’s non-conducive legal and regulatory regime affecting businesses. An improved business registration remains one of the greatest constraints against private process could stimulate the formalization of MSMEs. sector growth. In the Global Competitiveness Index In turn, this could reduce poverty through expanded 2010, Uganda ranked 118 out of 139 countries measured, employment, increase access by MSMEs to financial and down from 108 in 2009. The country also performs poorly technical services and increase tax revenue. in the World Bank Doing Business (DB) report, ranking Edition No.1 February 2013 51 Unleashing Uganda’s Regional Trade Potential Beyond production, access to markets is crucial. Uganda in Southern Africa and 60-70 percent higher than their should take measures to reduce transport costs, redress counterparts in the United States and Europe. For non-tariff barriers and remove barriers to services trade. landlocked Uganda, transport costs can constitute up to Given that these measures will require cooperation with 75 percent of the value of exports. neighboring countries, Uganda must strive to promote deeper regional integration, which will provide a basis of The Northern Corridor is shorter and more cooperation. competitive that the alternative Central route. However, with the lack of efficient railway services, it is still expensive by any international standard. Connecting 5.1 Lower Transport Costs: The Key Kampala to Mombasa in Kenya, the Northern Corridor to Increasing Trade is about 500km shorter than the only alternative route through Northern Tanzania to Dar-es-Salaam port. It has Transportation costs remain a major challenge three modes of transport: the Mombasa-Malaba-Kampala for land-locked Uganda. Uganda’s transportation highway; the railway; and a multi-modal water/rail route system remains characterized by poor roads, limited connecting Mombasa to Kampala through Kisumu compatibility between different modes of transport, and Port Bell or Jinja. Presently, with the relatively good and poor logistics systems, including at ports of entry condition of roads and plans for further rehabilitation, at Mombasa and Dar-es-Salaam. While Uganda is road transportation is the preferred option. Such striving to improve trade logistics, high transportation transportation provides the quickest link to Kampala. costs resulting from poor infrastructure and logistics Ideally, rail transportation would be a more efficient long systems constrain the trade of goods and services and haul transport mode to connect landlocked Uganda to prevent Uganda from exploiting its revealed strategic the coast. However, limited rail transportation capacities position as a transit hub.25 The high cost of transport have led to a modal shift towards road transport, which is largely due to poor roads that are badly maintained, costs far more than a well-managed rail transportation overloaded, and poorly managed. Trade logistics systems system would. The transportation costs for containerized are characterized by high berth and yard congestion at imports to Kampala are on average US$ 2500 per 20ft ports, slow customs clearance at some border posts container for road transport, compared to costs for rail that have not been modernized, excessive dwell times transportation of US$ 1920. Rail rates are not necessarily for ships, limited compatibility between different modes cost-based, but are priced just below road transport. This of transport, low quality of services, low operating is because rail transport does not have current surplus efficiency, and ineffective regulation. High transport capacity. Overall, transport prices of about US$ 0.08 per costs also constrain production. km compare unfavorably with the cost of US$ 0.06 per km between Durban and Lusaka, US$ 0.05 per km in 5.1.1 The Vital Need for Revamped China, and US$ 0.04 per km in USA. Infrastructure Use of the lower cost rail transportation system has Being in poor condition, both the Northern and remained limited because the service is slow and Central corridors that connect Uganda to coastal unreliable. This results in a costly imbalance between regions are expensive to use. Cost inefficiency import and export trade. Only 16 percent of Uganda’s is exacerbated by poor governance, organizational trade is transported using the rail/water alternative on this deficiencies, revenue inadequacy, and underinvestment, corridor, given the lack of services. Apart from the slow all of which have led to deficient and dilapidated regional rehabilitation of the network, since the joint concession infrastructure networks. The Ugandan trader faces freight Uganda-Kenya Railway began operations in mid 2000s, costs that are 30 percent higher than their counterparts the bulk of the remaining wagons operate in Kenya. Indeed, while merchandises take less than 24 hours to 25 The World Bank’s Logistics Performance Index (LPI) is a move from Mombasa to Nairobi, they take an additional benchmarking tool to help countries identify the challenges and opportunities they face in their performance on trade logistics, based on 7 days to get to Kampala, with water transportation a worldwide survey of operators on the ground - global freight forwarders services through Lake Victoria being very limited. New and transporters. It is based on a survey of nearly 1,000 logistics professionals high-value non-traditional exports are transported (international freight forwarders) across 155 countries to assess status of trade logistics, including customs efficiency, infrastructure quality, ability to out by air. However, the aircraft used to facilitate this track and trace shipments, timeliness in reaching a destination, competence transportation arrive half-empty, meaning the cost of air of the domestic logistics industry in the country, and the ease of arranging and managing international. Uganda moved to 66th position out of 155 freight is borne disproportionately by exporters. On the countries surveyed in 2010. other hand, trucks are often empty or carry less than their 52 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential full capacity on the route to Mombasa, meaning that the The government’s effort to improve road cost of the two-way trip is borne by importers. infrastructure on the main trading corridors is commendable. However, it must also strive to develop The Central Corridor alternative could be more a multi-modal transportation system to reduce logistical competitive. However, this requires cheaper water costs. The government has made the rehabilitation of the transportation services on Lake Victoria and more national roads that form an integral part of the corridors a efficient railway services to support a more efficient top priority. The Kampala-Masaka-Mbarara-Kabale-Kisoro multi-modal regional transport system. At present, corridor has just been completely rehabilitated, while only 2 percent of Uganda’s international trade uses the the Kampala to Malaba road is due for rehabilitation Central Corridor. In fact, the dependency on a single and expansion through the development of an express transportation route could render trade vulnerable to highway that will improve trade traffic flow. Despite unexpected events, as demonstrated by events during these initiatives to support regional trade, the Ugandan Kenya’s post-election violence in 2008. The additional government must address the following: distance involved in the use of the Central Corridor need not necessarily render it uncompetitive. Factors a. Road transportation: It is vital to ensure such as shipping and line connectivity, the availability connectivity with areas of production. The of return loads, and short border crossing times are vital establishment of connectivity across Uganda’s in determining trader references in this regard. With the borders will need to involve regional cooperation. right supporting factors, the Durban-Lusaka Corridor The national roads that are part of the corridors must in Southern Africa is 2400km long but is preferred to be prioritized for rehabilitation and maintenance, other, shorter routes to ports in Mozambique. The while connectivity between producing areas and Central Corridor could also be competitive, distance markets has to be improved to boost agricultural notwithstanding, if Dar-es-Salaam port becomes more exports. Beyond its borders, Uganda must negotiate efficient and if road conditions improve. However, the with its neighbors to ensure that roads servicing most critical factor is the establishment of reliable water/ the corridors are maintained. This should entail rail services. In addition to the recent commissioning of upgrades of road capacity through the addition of the MV Kaawa, RVR’s plans to rehabilitate carriers, wagons lanes to roads with heavy traffic; the rehabilitation of and locomotives, is a move in the right direction. paved roads whose poor condition affects the flow of traffic along the corridors; and the upgrading Uganda’s role as a land bridge and transit point of key feeder roads connecting producers to the is also highly dependent on the quality of the corridors from gravel to paved standards. two corridors. Being positioned at the central point on both corridors, Uganda will benefit from improved b. Rail transportation: In the short to medium connectivity. Improved connectivity will enhance term, action must be taken to make rail/water Uganda’s potential as a transit point between markets in transportation systems more viable. With the Great Lakes region and markets and port facilities in transportation costs almost doubling the price the coastal areas. of transported goods, the development of the railway transportation system makes economic Beyond the trade corridors, limited connectivity sense for traders and consumers. It also makes between areas of production and markets within long term economic sense as the most viable and outside the country remains a major constraint to basis for regional connectivity. The EAC has already producers. The poor quality of roads in Kampala acts as a decided to install a standard gauge, with the significant constraint against the efficient transportation system extending beyond the EAC to other African of goods and agricultural products transiting the capital countries including Ethiopia, Somalia, Zambia and and against production and processing in Kampala. With Malawi. As these plans progress, the rehabilitation feeder roads in a sorry state, high transportation costs are of existing lines will be critical to support regional one of the major beyond-the-farm gate constraints to trade over the next 5 to 10 years. productivity and commercialization (World Bank 2012).26 c. Water transportation: Rail transportation can be made even more efficient if combined with 26 World Bank 2012, Uganda Promoting Inclusive Growth – Trans- forming Farms, Human Capital and Economic Geography well-developed water transportation systems. Given the huge untapped potential of Lake Victoria, improving transportation on the lake by Edition No.1 February 2013 53 Unleashing Uganda’s Regional Trade Potential refurbishing wagon ferries is an important measure. fees that put Uganda’s truckers at a disadvantage. On the The government must support measures to enable Central Corridor, 50 percent of the trucks are Tanzanian- the private sector to develop facilities and offer registered. On the Northern Corridor, approximately 90 services in the medium to long term, with public percent of the trucks are Kenyan-registered. While there procurement of roll-on roll-off facilities on Port Bell are no direct restrictions in the Tripartite Agreement that vessels and load-on/load-off facilities at Mwanza governs road transport, Uganda’s trucking industry is and Port Bell to ease connectivity between water heavily constrained by high operational costs resulting and other modes of transport. from the countries transportation policies and by infrastructure access fees, which favor coastal countries. Since infrastructure investments can be costly, In 2011, a move to standardize the fee for the ‘transit financing this infrastructure development strategy goods’ license at US$ 200 per annum across EAC countries without a financial market will be a significant challenge. and to facilitate mutual recognition helped Uganda’s Before oil resources increase the government’s available trucking industry. However, additional country-specific revenues, one means of overcoming this challenge charges remain. For example, Tanzania imposes a US$ could be through the use of PPPs. However, when the 20 per truck entry fee, a US$ 5 fuel tax, and a road user oil revenues begin to flow, the careful prioritization of fee of US$ 10 per 100 km. In addition, a large number investments will be even more important if the country of informal charges are imposed, as in the case of weigh is to boost regional trade and maximize returns. bridges, which are more prevalent in Kenya and Tanzania. Secondly, if Ugandan trucking businesses were to 5.1.2 Beyond Infrastructure: The engage in the more lucrative import business, they Hidden Costs of Under-developed and would still receive lower margins, given that with the low Dysfunctional Logistics volume of exports, vehicles en route to ports in Mombasa and Dar-es-Salaam would be mostly empty. Operators Uganda must undertake strategic investments would also face much higher fuel costs. Internal taxation to close gaps and constraints across the entire policies and a harmonization of infrastructure access fees transport chain. These investments must address are required in order to make running a freight business pressing constraints affecting the trucking, freight and from Uganda more competitive. storage industries. Transportation in Uganda is expensive because of bad infrastructure, congestion and taxation Freight forwarding businesses are constrained by policies. With 4 of the top 10 taxed activities being in difficulties in the establishment of customs bond the transport sector, taxation places a heavy burden on guarantees; the low level of ICT access; and the lack of an agriculture and on regional trade. Vehicle operating costs accreditation system. With bonds organized on a national account for 50 percent of transport costs in Uganda. basis, cooperation between forwarders in both transit and This is significantly higher than in most countries, destination countries is required. For the majority of small with the international average running at around 30 freight forwarders, who account for more than 80 percent percent due to high fuel costs, with the high cost being of the registered association members in Uganda, this largely due to high fuel taxes and inefficient fuel use. In issue is a real constraint, resulting in increased operating turn, the average age of the vehicle fleet exacerbates costs. Because of the lack of regulation at entry, facilities inefficiencies. Transporters tend to import older and less for submitting customs documents are poorly developed fuel-efficient vehicles, because the cumulative burden of and badly managed. Private sector associations, import duties and withheld VAT makes the importation including transporters’ associations (such as the Tanzania of newer vehicles uneconomic. 27 Truck Owners Association and Uganda Truck Owners Association), freight forwarders (such as the Tanzania Ugandan traders continue to import a significant Freight Forwarders Association), chambers of commerce proportion of trucking services from Kenya and and others, can contribute to the development of these Tanzania. This is mainly because Uganda’s trucking logistic services. Recently, the government, clearing and industry is constrained by the country’s taxation and forwarding agents and major importers in Uganda came transport policies and by regional infrastructure access together to establish the Uganda Shippers Council. The council seeks to support cargo owners in the negotiation of freight rates and provides advice on international 27 World Bank 2007, Country Economic Memorandum Uganda shipping. An interim executive committee has been Moving Beyond Recovery: Investment and Behavioral Change formed and other institutional structures are being 54 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential established. At a more strategic level, there is need to border outside normal working hours are not processed. better regulate freight services and to provide training in matters related to logistics for both government and To improve trade logistics, the government should private sector services providers in the trade facilitation implement the following: industry. (i) Introduce a regional customs bond that If existing inland bonded storage facilities have a would reduce the cost and time of transacting larger capacity and were more efficiently managed, business. This will ease constraints on the freight they could attract a high volume of business through the forwarding business, particularly for smaller hub. As part of Uganda’s strategy to develop Kampala freight forwarders who make up a majority of as a regional logistics hub, it is necessary to increase such operators. An accreditation system would the number and capacity of bonded storage facilities. promote professionalism in an industry which is Presently, Uganda businesses own and operate storage currently open to all, irrespective of the level of facilities in Mombasa, Nairobi and Dar-es-Salaam. This knowledge and skills of operators; indicates that the management of their inventories relies (ii) Improve market access and break down trucking to some extent on coordination with operators in the industry cartels by renegotiating road-user fees neighboring countries. The availability of storage facilities with EAC partners. This may be politically difficult, largely influences the choice of routes and corridors for but it is nonetheless a necessary measure; Ugandan trading firms. In fact, while enterprises with (iii) Accelerate improvements in border operations storage facilities in Dar-es-Salaam are more likely to at Malaba, Mutukula and Katuna and initiate use the Central Corridor, those with storage facilities improvements at other posts, including Nimule, in Mombasa and Nairobi prefer the Northern Corridor. Oraba, and Bunagana; Over the years, Ugandan clearing and forwarding agents (iv) Improve border management through measures have developed their own infrastructure or established to facilitate interaction with strategic agencies relationships with businesses in Kenya to provide in neighboring countries, including agencies in temporary storage facilities in Mombasa. However, the Rwanda, Sudan, and DRC; number of such relationships with Tanzanian businesses (v) Increase the capacity of bonded storage facilities remains limited, although increased utilization of by supporting private investors in this area; the corridor should encourage their development. (vi) Reform regulations and institutions to enable Nonetheless, to reduce the reliance of trading firms on transportation and logistics service providers storage facilities in Mombasa and Dar-es-Salaam, the to deliver high quality, competitive and capacity of existing storage facilities in Uganda needs to efficient services along trade networks. Top be expanded and their management improved. priority should be placed on the regulatory reform of logistics services, including trucking, In some areas, progress has been made towards warehousing, customs clearing, and freight improving customs clearance and border forwarding services; management systems. However, such improvements need to be implemented at all border posts. When URA (vii) Review taxation of the transportation sector introduced the Malaba one-stop border post in 2009, in the context of Uganda’s public finances, border crossing times were reduced from 1-2 days particularly if alternative sources of revenue to 1-2 hours. URA’s improved risk management, the could be found that would permit the reduction vetting of clearing agents and the streamlining of traffic of the taxes on freight vehicle imports. Not only and parking rules for truck drivers have decongested would this reduce capital costs, it would also the customs-controlled zones. Nonetheless, the EAC serve to reduce operating costs by permitting Customs Management Act, which provides a basis for the import of newer vehicles. the full implementation of one-stop operations, has not yet been fully implemented. There are plans to develop a one-stop border post at Gatuna-Katuna (Uganda- Rwanda). However, similar plans need to be developed for other border posts across the region. Moreover, despite formal support for 24-hour operations, such operations are constrained by a lack of supporting services such as banking services, which means that goods arriving at the Edition No.1 February 2013 55 Unleashing Uganda’s Regional Trade Potential 5.2 Non-Tariff Barriers: Stop NTBs from the different countries are caused by the limited dissemination of information on harmonizing regulations Undermining Trade Liberalization to all the implementing agents involved in cross-border transactions. It also appears that many NTBs could be Tariff reform has drastically reduced restrictive sustained for protectionist purposes and to offset the trade protection. However, numerous behind-the- negative impact of EAC tariff liberalization on member border barriers in form of non-tariff measures (NTBs) countries. continue to constrain intraregional trade. Adoption of the EAC Customs Union could have made Uganda’s Due to these barriers, the prospects for the tariff regime more restrictive. However, this is not as development of regional production chains driven by significant a constraint for regional trade and hence trade in parts and components (“trade in tasks�) remain not an immediate challenge (see Box 7). NTBs must be limited. The removal of such barriers would facilitate addressed if regional trade is to prosper. an increase in the volume of Uganda’s existing exports, including the export of low and medium technology NTBs inflate transport costs by causing long delays, manufactures. It would also facilitate an increase in the imposition of inappropriate payments and increased vertical specialization. Over the long-term, it could enable levels of uncertainty. Thus, NTBs work against the positive Uganda’s participation in regional production chains that effects of trade liberalization and under-mine efforts create employment opportunities and promote export to deepen regional trade. Whether NTBs take the form diversification. Conversely, the removal of NTBs could of restrictions relating to rules of origin, import/export also render domestic industries/services vulnerable bans, or costly import licenses (see Box 8), these barriers to competition, at least in the short run. This may be result in a high level of additional cost due to: (i) lost compensated for by medium to long term gains, but man-days during transit and clearance; (ii) non-official it makes decisions on how to implement their removal expenses related to corruption in policy implementation; sensitive. In light of such sensitivities, a gradual approach (iii) official payments; and (iv) lost business opportunities. to their removal may be the preferred option. Differences in regulation and immigration procedures limit services. Sometimes procedures and rules in A traffic jam as trucks wait to get onto the weigh-bridge on Mombasa Kampala road, delaying traders, (Great Lakes Film Production Ltd) November 2012 56 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Box 7: Tariff Regime is not an Immediate Challenge Uganda has dramatically reduced tariffs over the past two decades (see Box Figure 4.1). During the early 1990s, Uganda cut its trade tariffs by more than 75 percent. In January 2005, adoption of the EAC Common External Tariff (CET), which has three bands (0 percent, 10 percent and 25 percent for capital goods, intermediate goods and finished goods respectively), increased the highest rate from 15 percent to 25 percent. Box Figure 4.1: Uganda Reduced Tariffs Faster than EAC Counterparts Source: Winston and Castellanos, IMF 2011 Uganda’s trade regime is more restrictive than before CET, raising questions whether it could have reduced efficiency of Uganda’s trade policy and hence should reviewed. Uganda is ranked 116th out of 125 countries on the World Bank’s Trade Tariff Restrictiveness Index. Justification to review the tariff structure is distributional since the adverse trade effects of a higher tariff have washed away. The higher external tariff following CET adoption created some trade diversification, though there was also sluggish growth of tariff revenues, rising intra-EAC trade, and reduced growth of imports from outside EAC. However, these effects were not as big as would have been expected given the change in valuation to CIF Mombasa after the CET adoption, and simultaneous elimination of 4 percent withholding tax and 2 percent environment tax. Furthermore, the effects have weakened as firms seem to have gradually learnt to work with the CET through the CET remission system. CET remission distorts the market structure, but has also contributed to revenue losses). Customs firm level data suggests that by 2011, very few Ugandan firms importing from non-EAC countries were paying the CET – in FY11, these losses are estimated at US $ 147 million (equivalent to 7.3 percent of total revenues or 50 percent of budget support), the bulk of which under minerals and prepared foodstuffs. The firms benefitting from remissions are large firms, implying that the tariff structure promotes larger firms to export more and grow faster, but not small firms, which account for most Ugandan businesses. For the consumers, the CET remains as regressive as the tariff structure was earlier, as goods consumed by the poor pay the highest tariffs, raising the cost of living for the bottom of the income distribution by 12 percent, compared to 6 percent for the top (World Bank 2012). Edition No.1 February 2013 57 Unleashing Uganda’s Regional Trade Potential Box 8. Non- Tariff Barriers: What are they? Non-tariff barriers (NTBs) are any form of government or government backed non-tariff measures to protect a domestic market. Legitimate (e.g. food safety regulations to protect consumers), or otherwise (e.g. as substitutes to tariff to protect some domestic products), private-sector surveys have repeatedly shown that NTBs can raise trade costs, divert managerial attention, and penalize especially the small exporters and those located in low-income countries, where access to legal and regulatory information is difficult. The elimination of the NTBs that are applied in a trade-restrictive manner is a major dimension of multilateral and regional trade negotiations. This objective is explicitly stated in the EAC Customs Union Protocol (Art. 13) but limited progress has been achieved by member states since the establishment of the Customs Union. A wide range of NTBs and regulatory measures restrict intra-regional trade in East Africa. These include restrictions relating to rules of origin, import and export bans, and costly import licenses. The main NTBs limiting intra-EAC trade concern the following categories: 1. Customs and administrative entry and passage procedures (number and effectiveness of institutions involved, arbitrary use of rules of origin, excessive verification of transit cargo, etc.). Complex, opaque and country-specific rules continue to add to monetary costs and loss of time. Unequal treatment according to the country of origin of the goods and/or truck and opportunities for fraudulent behavior remain frequent. 2. Government participation in trade and restrictive practices tolerated by it (ports and internal container freight station operations, delays at the numerous weighbridges and non-harmonization of authorized weight per axle, etc.). 3. Distribution restrictions (multiple police roadblocks causing delays and rent extortion, prohibition on transportation of locally produced goods by returning trucks, etc.). 4. Specific limitations (use of immigration and visa procedures, business registration, etc.). Technical barriers to trade and sanitary and phyto-sanitary measures. Kito kya polici (road block) in Kasingada in Tanzania, are some of the sources of nontariff barriers 58 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential 5.2.1 Over-Regulation as a Constraint to imports than do any other surveyed sub-Saharan African country (see Figure 22). Kenya imposes more restrictions Regional Trade on imports from its EAC partners than on imports from If an African village creates an even greater the rest of the world. This contrasts to the situation in number of restrictions on trade between residents of all other SSA countries, all of which impose more NTBs the village than on trade with those outside the village, on imports from the rest of the world. With these NTBs, something is wrong. However, the EAC is doing exactly Uganda and other EAC countries face more significant that. Of EAC members, Uganda has the largest number constraints when exporting to Kenya than they do when of NTBs, followed by Kenya.28 These two East African exporting to other non-EAC counterparts. countries impose significantly more NTBs on their Figure 22: Uganda and Kenya Have Largest Number of Barriers, Even for Intra-regional Trade Percentage of imports affected by at least one NTB 100 90 80 70 60 50 World 40 EAC 30 20 10 0 Uganda Kenya Mauritius Source: Cadot and Gourdon, World Bank 2012 Uganda’s and Kenya’s regulations on safety, and percent. Fully documented Ugandan milk consignments technical inputs into products could be considered cases were also allegedly held at the border for more than two of over-regulation. The frequency29 and coverage30 weeks without justification. This led transporters to refuse ratios of key types of NTBs constraining trade in five to carry Ugandan products. Dairy processors in Uganda African countries suggest such rules and regulations in and Tanzania complained that Kenyan authorities had a Uganda and Kenya are considerably more restrictive than pattern of imposing these NTBs as a means of protecting in other selected African countries (see Figure 23). The local dairy producers. Conversely, Kenyan exporters categories of rules and regulations include rules related complained that Uganda requires advance laboratory to the following issues: (i) sanitary and phytosanitary analysis of every single shipment of dairy products, (SPS), (ii) technical barriers to trade (TBT), which arise in violation of the mutual recognition of conformity when standards, regulations, and assessments systems assessment procedures in the EAC. intended to ensure safety are not applied uniformly, (iii) pre-shipment, (iv) price controls, and (v) quantity controls. 28 Based on a World Bank survey of a group of Sub- Saharan Africa Concrete examples of the impact of such regulations countries, including Mauritius, Senegal Madagascar, Kenya and Uganda are not hard to find. In 2009, one of Uganda’s largest 29 The frequency ratio shows the percentage of import transactions covered by a selected group of NTMs for an exporting country. It accounts milk processors complained that the Kenya Bureau only for the presence or absence of an NTM, without indicating the value of of Standards established a new quality standard for imports covered. imported milk powder. The standard imposed a minimum 30 The coverage ratio gives the percentage of trade subject to NTMs for an exporting country at a desired level of product aggregation. It allows level of 34 percent protein in cream powder, even though weighting the frequency ratio with the value of imports for the affected tariff cow milk cannot have a protein level in excess of 25-26 lines. Edition No.1 February 2013 59 Unleashing Uganda’s Regional Trade Potential In addition, according to Kenyan processors, as such measures and restrictions result in increased Uganda imposes dairy standards on imports that domestic prices, SPS and TBTs raise the cost of production, are more stringent than standards that apply in domestic resulting in increased final consumer prices and less markets in Kenya and Uganda, which meant that they had competitive exports. Unfortunately, NTBs have the most to produce special “export-grade� produce to trade with significant impact on food products from Uganda (see EAC partners, even though consumers may not require Figure 23). Apart from discouraging the import of food, dairy products produced to such stringent standards. this also has detrimental effects on this potential food basket. SPS raise the price of rice and bread by 30 percent That rate of occurrence of such regulations significantly in Uganda, relative to the average price for such products exceeded that in other surveyed African countries. This in countries surveyed (see Figure 24).31 With their limited suggests that Uganda and Kenya may be over-regulating, production levels, the benefits to domestic producers irrespective of how well designed and implemented the are minimal and consumers lose out.32 On the other rules and regulations could be. In effect, over-regulation hand, corruption, roadblocks, customs procedures, and is a subtle policy reversal of the trade liberalization harassment or discrimination in the granting of licenses policies that Uganda adopted two decades ago. and municipal or council permits account for more than 50 percent of total maize transfer costs in Uganda, These regulations have raised the price of products compared to nearly 35 percent in Kenya.33 in the same way that tariffs would have done, if tariffs had not been eliminated. The number of impact of explicitly formulated price control measures and quantitative restrictions is quite limited in Uganda. Nonetheless, just Figure 23: Uganda and Kenya are the Most Affected by NTMs Relative to Other SSA Countries34 Frequency Coverage Source: Cadot and Gourdon, World Bank 2012 31 The estimated “price gaps� refer to the difference between do- mestic prices and the sample average at the product level. 32 Annex 1 sets out in more detail the estimated price-raising effect of NTMs, by product, for Kenya and comparator countries ( percent) 33 Karugia et al, 2009, A Study on the Impact of Maize and Beef Cat- tle Cross Border Trade in the East African Community 34 Sanitary and Phytosanitary (SPS); Technical Barriers to Trade (TBT) 60 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Inappropriate standards can stifle trade. Standards regional standards to the specific preferences, needs may be desirable at the regional rather than the national and capacities of regional actors in order to avoid non- level, in order to exploit economies of scale in regulatory compliance and unnecessary implementation costs (see expertise; to prevent fragmentation of the market Box 6). Failure to do this partly explains the challenge resulting from varying standards; and to limit the scope in implementing the standards that have so far been for regulatory capture. However, it is important to tailor developed. Figure 24: Significant Price-raising Effect of NTBs on Food in Kenya and Uganda Source: Cadot and Gourdon, World Bank 2012 Non tariff barriers imposed on products like maize have raised prices, (Great Lakes Film Production Ltd), November 2012 Edition No.1 February 2013 61 Unleashing Uganda’s Regional Trade Potential Box 9: The Case of Harmonized EAC Standards Becoming Potential Trade Barriers Dairy sector: In 2006, the EAC adopted harmonized dairy standards for eight categories of product. These standards followed the international Codex Alimentarius standards for dairy products almost verbatim. EAC standards therefore assume that consumer incomes and the quality of production infrastructure in East Africa are equivalent to Western levels, which is obviously not the case. Consistent with developed country norms, the new EAC standards focus on pasteurization as the key to ensuring product safety. This technology is widespread in developed countries but it is difficult and expensive to apply in the context of smallholder dairying, which is the dominant form of production in East Africa. While smallholders in Africa can and do supply perfectly good raw milk for pasteurization, the infrastructure and quality control systems needed for delivery of smallholder supplies to a processing plant results in consumer prices that are four to five times higher than for raw milk traded through informal channels. Moreover, East African consumers have found an alternative to reducing health hazards not recognized in the EAC standards, which is to consume raw milk after boiling. This practice reduces the otherwise high bacteria levels found in East African milk to safe levels, a point not recognized during the harmonization process because the Codex standards were developed for Western countries that consume pasteurized milk. As a result of setting the regional standards too high, the EAC’s harmonized dairy standards have been difficult to implement and provide little practical guidance for farmers, dairy traders, and large processors on how to upgrade their operation. According to the letter of the law, more than 95 percent of the EAC’s milk supply is technically illegal because it does not comply with the new standards requirements. Thus, regional trade could be stopped as a result of non-compliance at any time. Maize sector: A similar situation is emerging with maize. The newly developed EAC standards for maize are more stringent with respect to levels of discolored and immature/shriveled grains than either the Codex standard or the existing national standards of Burundi, Tanzania, and Uganda. Given that compliance with the EAC quality standards will be mandatory, the newly harmonized EAC standards will not only result in additional certification costs, they will also make it difficult to find smallholder supplies of maize that are of suitable quality. Ugandan butter in Rwanda: A good example of how quality standards and laboratory testing requirements can act as a constraint to formal sector trade is the story of Uganda’s exports of butter to Rwanda. In this case, Rwanda’s only credit license to import butter into the country decided to stop imports because of difficulties in the recognition of Ugandan quality certificates and demands for additional laboratory tests by the Rwanda Bureau of Standards (RBS). According to the importer, this was because the batch numbers were not identical throughout each consignment, since the butter was manufactured on different days. This problem also meant the trader could not obtain pre-clearance for the goods. As a result, the importer decided it would be easier to stop trading in butter and cancelled all orders with the Ugandan supplier. Despite this move, Ugandan butter remained on store shelves in Kigali. As explained by border officials, it is impractical to stop small consignments from crossing and many dairy products are brought into Rwanda in small quantities, sometimes in cool boxes but otherwise with no refrigeration or any other kind of quality control. Just as formal sector dairy chains have a difficult time competing with informal milk vendors in domestic markets, this story shows that formal traders also have a difficult time competing with informal traders in the international market. While the efforts to regulate the dairy trade and to harmonize regional standards may seem like an obvious step towards improving the trade regime, such moves can actually have negative consequences for formal sector operators. While it is important to have a well-regulated trade system, the system must be cost competitive and simple to use in order to avoid creating further constraints on formal dairy operators. Source: World Bank (2012), Africa Can Help Feed Africa, Jensen and Keyser (2012), p. 191. 62 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential 5.2.2 How Can Uganda Address the Authority in August 2012 on Ugandan goods destined for transit through Kenya. The bond was imposed Constraints Created by NTBs? suddenly and without prior warning, significantly altering procedures related to the taxation of transit goods. Prior Over the past five years, efforts to eliminate NTBs to the measure, importers and exporters were required have been largely ineffective. It is clear that the to procure an insurance bond. The policy was applied successful removal of NTBs will depend on the level of only on sugar and cars and was intended to prevent commitment of all the EAC trader partners. However, the practice of dumping transit goods on the Kenyan Uganda should commit to doing its part. Rules and market without paying dues and thereby undercutting regulations still affect many sectors. Some of these rules local vendors and denying the two states much-needed and regulations, such as some governing food safety, revenue. The policy shift has had a significant impact on have been implemented for legitimate reasons to protect trade in the short term, with approximately 2000 vehicles consumers. However, when they are unduly restrictive and 600 containers being stranded in Mombasa. It will or poorly designed and implemented, they become a also have medium- to long-term ramifications, resulting barrier to trade. Over the past 5 years, in cooperation with in increased consumer prices and a decline in demand. the East African Business Council, the EAC has put in place This is exacerbated by a policy which means that traders a mechanism involving National Monitoring Committees will now have to wait to get their cash bonds refunded, to report, monitor and publicize NTBs.35 A Time-Bound running the risk of tying up capital. Program for the Elimination of Identified NTBs sought to identify NTBs that could be easily eliminated in order to It is acknowledged that the ‘Time Bound’ program generate a growing consensus for further reform. So far, has been largely unsuccessful. In response, more the results have been dismal. Since the establishment of time has been allocated for the removal of NTBs. Only these mechanisms, there has actually been an increase in around 50 percent of the NTBs identified in 2008 and 30 NTBs, suggesting possible increased political resistance percent of the NTBs identified in 2010 in the EAC were (see Figure 25). eliminated within the agreed timeframe (see Figure 24). There have been very few such “quick wins�36 and it was Cases of recurring NTBs, particularly in the dairy just as difficult to move goods across borders in 2010 as and poultry sectors, are common, while reporting it was in 2005,37 except at a few border points where joint did not deter from cost rising for the trader. An example clearing has been implemented. of this is the cash bond introduced by the Kenya Revenue Figure 25: More NTBs Identified, and More Time Given for Removal 35 In cooperation with the East African Business Council, the EAC Secretariat has set up a mechanism to identify and monitor the elimination of NTBs (EAC / EABC 2008), which has since then been completed by an online reporting and monitoring mechanism at the COMESA-EAC-SADC Tripartite level (see: www. tradebarriers.org). 36 Kirk 2010 37 World Bank / IFC 2011 Edition No.1 February 2013 63 Unleashing Uganda’s Regional Trade Potential The removal of NTBs is influenced by political 5.3 The Services Sector: Turning economy considerations. To address these considerations, it is vital to take into account who Opportunities into Gold wins and who loses as measures to eliminate them are formulated. For instance, some studies38 have showed A strategic approach to promoting the growth of that in the case of maize, the elimination of NTBs would the priority service sectors of tourism, transport reduce the high transfer cost in the region and would cut and logistics, education and business services will maize producer prices by about 9 percent and consumer help unleash their potential. prices by about 3 percent in Kenya. On the other hand, it would raise producer prices in Uganda by 20 per cent In tourism, beyond capacity and skill development, and consumer prices by 24 per cent. This would result in the public sector will play an important role by a 2 percent rise in Uganda’s maize consumption and a 3 developing the appropriate infrastructure to reduce the percent rise in production. Thus, the biggest winners from cost of accessing tourist centers. The Hotel and Tourism the elimination of NTBs in East Africa would be Uganda’s Training Institution should be revamped and provided maize producers, while the biggest losers would be maize with equipment and staff to raise skills. However, access producers in Kenya. to tourist sites should not be constrained by bad roads. Working closely with the private sector, new innovations Raising awareness and improving transparency are must be developed to create niche markets, given the necessary steps. However, the voluntary and unilateral stiff competition from Kenya and Tanzania for traditional removal of NTBs by each partner state, without any game tourism. sanctions for non-compliance, is proving to be ineffective. Bilateral negotiations such as those being conducted In the transportation sector, the development of the between Uganda and Rwanda can help, but a sanctions appropriate infrastructure and improvements to system would support the achievement of better logistics systems should be the top priority. Beyond results through such efforts. Strengthening the existing that, the development of a level playing field could be monitoring system would also help authorities to gain a facilitated by removing charges that raise the cost of good understanding of the most detrimental measures entry for Ugandan truckers and freight services providers faced by Ugandan operators and to adopt a proactive into the regional transport market. This will support the attitude in negotiations on NTBs. growth of the industry. Uganda needs to cooperate with its EAC partners to In professional services, beyond capacity and improve the regulatory environment by eliminating skill development, restrictive immigration rules NTBs, amongst other measures. Priority action areas need to be relaxed to facilitate the improved mobility include, amongst others: of providers. The challenge is to institute an adequate regulatory framework to support implementation of • Strengthening SPS testing and verification existing engagements in education, regulation, trade capabilities and involving private labs in the process; policy, and labor mobility. At the national level, a regulatory assessment mechanism covering all professional and • Working with EAC partners toward the mutual education services sectors should be instituted and a recognition of conformity-assessment procedures; roadmap for action with concrete objectives developed. Domestic policy reform should be complemented • Relentlessly working with the EAC Secretariat to through intensified international and regional cooperation strengthen the EAC NTB monitoring mechanisms involving the participation of WTO, EAC and COMESA and and enabling it to act upon identification of barriers. other entities. For instance, sectoral agreements on the mutual recognition of professional qualifications could help with the development of adequate curricula for various professions. Such agreements could provide guidance for employers, mentors and trainees regarding the practical experience requirements for professionals. The Ugandan government should work with regional bodies such as the IUCEA, the EABC, or the EAPSP to undertake in-depth, 38 W Karugia et al, 2009, A Study on the Impact of Maize and Beef Cattle Cross Border Trade in the East African Community cross-country comparative assessments of professional 64 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential qualifications, including entry requirements, education qualitative improvements in domestic regulation. and training, and practical experience requirements, Disproportionate cumulative entry requirements need to and of the regulations governing professionals in each be relaxed. For example, narrowing the scope of exclusive EAC member state. Such benchmarking exercises are tasks in certain professions would contribute to this necessary tools for the appropriate implementation goal. Exclusive rights can lead to increased specialization of the negotiated Mutual Recognition Agreements of amongst professionals and guarantee a higher quality Professional Qualifications and Licensing Requirements of service. However, if these exclusive rights result in the (MRAs). Uganda’s participation in the Professional Services establishment of monopolies, they can have adverse Knowledge Platforms in East Africa and COMESA can price and allocation impacts, especially when granted for help the country with the development of a meaningful services for which adequate quality can be provided at a reform program that includes the elimination of explicit lower cost by less-regulated middle-level professionals. barriers and the implementation of necessary regulatory, Disproportionate restrictions that limit competition need education and immigration reforms. to be eliminated. Price regulations affecting legal services and public procurement contracts in engineering are Trade reform to eliminate explicit trade barriers supported by professional associations or the government, needs to be integrated with an open and transparent who claim that they are useful tools to prevent adverse process of regulatory reform. Under this process, selection problems. However, less restrictive mechanisms, decisions on the nature and pace of reform need to be including mechanisms to facilitate the improved access based on careful analysis and an understanding of good to information related to services and services providers, practices. Regulatory frameworks should not restrict would accomplish the same goals at a lower economic competition or slow down expansion. Taking the example cost. On the other hand, allowing advertising by of professional services, the regulation affecting the accounting and legal services would facilitate competition conduct and the operations of professional firms tends to by raising the awareness of consumers regarding different be more restrictive than in several neighboring countries. products. As such, they could be used as a competitive This is apparent in price regulations covering legal tool for new firms entering the market. services, in prohibitions on certain forms of advertising and in restrictions on the form of permitted businesses in It is not less regulation that is required, but better both accounting and legal services. An equally important regulation. ‘Better regulation’can be defined as regulation problem is the absence of regulation, which can create that facilitates the achievement of policy objectives a legal vacuum that actually constrains business growth without unduly escalating cost of services. Policy makers and creates opportunities for unfair competition and need to assess whether existing or new regulation corruption. facilitates the achievement of sector-specific public policy objectives without hindering market openness. Box 10 The key challenge to reforming services in Uganda presents some experiences with regulatory tools from relates to the coordination of regulatory reform with which Uganda can learn. liberalization. Reforms need to focus on incremental, Business services like computer use to boost more trade, (Sheila Gashishiri, October 2012 Edition No.1 February 2013 65 Unleashing Uganda’s Regional Trade Potential Box 10: Services Regulatory Initiatives The OECD principles on key market-oriented and trade-and-investment-friendly regulation could offer guidance to the regulation of services sectors in Africa. Furthermore, the APEC-OECD Integrated Checklist on Regulatory Reform (adapted to developing countries’ needs) could provide further guidance on how to undertake such a combined assessment of regulatory and competition policies, and market openness policies. The Checklist highlights key issues that should be considered during the process of development and implementation of regulatory policy and could be useful in building domestic capacities for quality regulation. The APEC-OECD Checklist is a voluntary tool that Uganda and other EAC economies may use to evaluate their respective regulatory reform efforts. The checklist has four sections including 40 specific open questions in total. The first is a horizontal questionnaire that deals with the degree of integration of regulatory, competition and market openness policies across levels of government, and on the accountability and transparency mechanisms needed to ensure their success. The second is on regulatory policies which are designed to maximize the efficiency, transparency and accountability of regulations based on an integrated rule-making approach and the application of regulatory tools and institutions. The third is on competition policies which promote economic growth and efficiency by eliminating or minimizing the distorting impact of laws, regulations and administrative policies, practices and procedures on competition, and by preventing and deterring private anti-competitive practices through effective enforcement of competition laws. The fourth is on market openness policies which aim to ensure that an economy can reap the benefits of globalization and international competition by eliminating or minimizing the distorting effects of border as well as behind-the-border regulations and practices. Other regulatory experiences such as the ASEAN Mutual Recognition Arrangement Framework on Accountancy Services, the ASEAN Mutual Recognition Arrangements on Engineering Services and on Architectural Services could provide further guidance to the Uganda and the EAC countries which are willing to engage in mutual recognition discussions. Furthermore, the experience of the EU with the internal recognition of professional qualifications as well as the regulatory dialogues and regulatory platforms established with third countries could give additional guidance to Ugandan policy makers. Sources: OECD, APEC, ASEAN Makerere University Kampala to tap into more education exports through quality and standards enhancement, (Great Lakes Film Production Ltd), November 2012 66 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential 6. Summary and Concluding Remarks In recent years, Uganda has experienced a slowdown in economic growth and increased vulnerabili- ties. The country faces the challenge of achieving sustainable growth at a rate sufficiently high to keep pace with the rapid rate of growth of the population, to create enough employment for its citizens and to fulfill its aspirations of becoming a middle-income country. Amongst other means, Uganda may achieve this by harnessing the potential of expanding regional trade to renew growth and to expand employment opportunities. Uganda can harness the potential of regional trade by: (i) leveraging its agricultural exports, particularly the export of foodstuffs within the region; (ii) diversifying Uganda’s export base into higher value exports while also promoting trading in tasks or parts to establish re- gional production chains; and (iii) diversifying more deeply into services. The priority interventions to achieve this are two-fold: Improved water transport to remain the key to lowering transport costs (Charles Kunaka), April 2011 i. Addressing constraints to business growth, c. Accelerating reforms in regulations and service agricultural transformation and to raising overall restrictions. productivity; ii. Easing access to markets by, amongst other On the issue of access to markets, deeper regional measures: integration will be the key means to achieve a. Measures to reduce transportation costs progress over the long-term. However, Uganda must involving both improvements to infrastructure move to address issues under its own control without and improvements to trade and transport waiting for its neighbors to act. As a landlocked country logistics, with relatively limited capacities and resources, Uganda will benefit if deeper integration reduces trading costs b. Addressing non-tariff barriers to trade to allow by providing the regulatory environment for trade to the free flow of goods and services, and flow freely and for cross-border networks to flourish. Edition No.1 February 2013 67 Unleashing Uganda’s Regional Trade Potential This integration should also be leveraged to reduce President Museveni currently presides over three regional constraints faced by firms in accessing key inputs for organizations, including the East African Community, productivity and diversifying into higher value-added the International Conference for Great Lakes Countries production and trade. Beyond promoting trade, deeper (ICGLC), and the African Union. With this position, he regional integration will facilitate the development of has a strategic opportunity to facilitate regional peace regional public goods, reduce transaction costs, provide and stability. A lasting solution to conflict in the region a regulatory environment in which goods and services will boost regional trade growth, much to the benefit of can flow freely, and support cross-border production regional economies, including the landlocked but land- networks. bridged Uganda. Uganda must define its strategic positioning. Public awareness and stakeholders support for The integration of the Ugandan economy with larger regional integration appears to be limited in and more competitive economies creates a number of Uganda. Arguably, efforts to mobilize public and the opportunities, but it also means that Uganda has to build support of key groups at the onset of the EAC integration competitive advantage. However, trade agreements process have been too limited. For example, consumers among a smaller set of partners are more likely to have not been involved in the EAC and COMESA facilitate deeper integration, involving differentiation integration process, despite the critical importance of and diversification, leading to welfare gains. their participation. Similarly, there is a need to consult private sector organizations and to take into account Progress towards deepening integration and their interests. Special attention should also be given to boosting regional trade are highly dependent small and medium-sized enterprises (SMEs) and informal on regional peace and security. Instability in the traders. All this matters, because commitments made Democratic Republic of Congo, South Sudan or any without proper consultations with the stakeholders other country in the sub-region has a negative impact concerned are likely to exacerbate the political economy on trade between Uganda and these neighbors and challenges and to constrain implementation. In the long prevents Uganda from benefiting from growth in term, consumers are likely to benefit from the regional regional trade. Accusations that Uganda has supported integration of goods and services markets. Involving the insurgency in Eastern Congo (see recent UN Report) them and other key stakeholder groups in the process could create uncertainty within the private sector and will help to build support for the measures that will allow impact its efforts to expand to new regional markets. Uganda to achieve its aspirations. 68 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Statistical Annex Annex Table 1: Key Macroeconomic Indicators Indicator Unit 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 measure Population Millions 26.7 27.6 25.6 29.6 30.7 31.8 32.9 GDP USD 9,957.99 11,902.81 14,440.13 15,596.12 15,245.68 14,790.53 16,903.84 Per capita income USD 372.40 430.79 564.51 527.07 497.25 465.40 513.17 GDP growth % 10.8 8.4 8.7 7.2 5.9 6.7 3.4 Gross Domestic as % of GDP 13.2 16.0 15.9 12.2 12.2 11.3 10.2 Savings Gross Investments as % of GDP 21.2 23.6 23.0 23.5 24.2 24.7 25.2 Inflation % 6.6 6.8 7.3 14.2 9.4 6.5 23.4 (period average) Exchange Rate UGX/USD 1825.10 1777.99 1696.45 1904.70 2029.90 2323.40 2568.83 (period average) External Sector Exports - Goods Million USD 1,041.2 1,473.8 2,073.0 2,216.4 2,317.3 2,297.8 2,676.9 and Services Imports - Goods Million USD -1,969.0 -2,495.2 -3,510.4 -4,062.2 -4,116.8 -4,671.1 -5,289.7 and Services Current Account Million USD -314.5 -342.0 -902.7 -1,258.6 -1,435.0 -1,686.3 -2,070.5 Balance Balance of Payments Million USD 198.23 703.85 562.99 -45.70 210.89 -581.22 731.37 (overall balance) Foreign Reserves Million USD 1408.3 2090.8 2684.4 2442.0 2384.7 2044.0 2346.1 External Debt Million USD 4464.4 1466.8 1687.0 2046.4 2343.4 2904.9 3254.1 Foreign Direct Million USD 512.04 718.28 760.58 785.22 692.72 755.07 1065.34 Investment Tourism Earnings '000 USD 449 590 564 662 805 Monetary Sector Average Deposit Rate % 2.6 2.2 2.2 2.1 2.0 2.6 3.3 Average Lending Rate % 16.1 16.9 18.2 18.8 18.2 19.2 23.0 Growth in % 16.4 17.4 31.1 25.0 31.7 25.9 15.7 Money Supply Government Finance Total Domestic as % of GDP 12.5 12.6 12.8 12.5 12.2 13.3 13.1 Revenue Tax Revenue as % of GDP 11.8 11.9 12.3 11.8 11.7 12.7 12.5 Non Tax Revenue as % of GDP 0.7 0.7 0.5 0.7 0.6 0.6 0.6 Total Expenditure as % of GDP 18.6 18.6 17.9 17.3 19.6 22.8 19.4 Recurrent as % of GDP 12.3 11.5 11.8 10.9 12.3 15.3 11.1 Expenditure Development as % of GDP 6.0 6.1 5.6 5.6 6.6 7.1 7.9 Expenditure Grants as % of GDP 5.4 4.5 2.7 2.6 2.5 2.3 2.6 Fiscal Balance as % of GDP -0.8 -1.5 -2.4 -2.2 -4.9 -7.2 -3.8 (after grants) Source: IMF, UBOS Edition No.1 February 2013 69 Unleashing Uganda’s Regional Trade Potential Annex Table 2: Growth and Structure of Uganda’s Economy Economic Activity 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 Real GDP Growth Rates (%) Agriculture 0.5 0.1 1.3 2.9 2.4 0.7 2.2 Industry 14.7 9.6 8.8 5.8 6.5 7.9 2.4 o/w manufacturing 7.3 5.6 7.3 10.0 6.6 8.0 -1.0 o/w construction 23.2 13.2 10.5 3.7 5.9 7.8 3.2 Services 12.2 8.0 9.7 8.8 8.2 8.4 3.3 GDP at market prices 10.8 8.4 8.7 7.2 5.9 6.7 3.4 Shares of GDP (%) 2002 Prices Agriculture 24.1 22.3 21.4 23.1 23.6 22.7 24.4 Industry 22.8 25.2 25.8 24.7 24.9 25.3 26.4 o/w manufacturing 7.1 7.1 7.3 7.9 7.7 8.6 8.3 o/w construction 11.7 13.1 13.6 12.3 12.7 13.0 13.0 Services 47.2 47.0 46.9 46.4 45.5 46.2 44.3 FISM and net taxes 5.9 5.6 6.0 5.7 6.0 5.8 4.9 Contribution to Real GDP Growth (%) Agriculture 0.1 0.0 0.2 0.5 0.4 0.1 0.4 Industry 3.5 2.4 2.2 1.5 1.6 2.0 0.3 o/w manufacturing 0.5 0.4 0.5 0.7 0.5 0.5 -0.1 o/w construction 3.0 1.9 1.6 0.6 0.9 1.2 0.3 Services 6.0 4.0 4.8 4.4 4.2 4.4 1.6 Shares of GDP by type of expenditure (%) Final Consumption 91.9 89.7 84.7 88.2 89.5 93.5 92.3 Expenditure Households 77.8 76.9 73.5 78.1 79.8 83.6 83.6 Government 14.1 12.7 11.2 10.1 9.7 9.8 8.7 Gross Capital Formation 21.2 23.7 23.0 22.0 23.5 25.0 24.4 Gross fixed capital formation 21.0 23.4 22.7 21.7 23.2 24.8 24.1 Charges in inventories 0.2 0.2 0.2 0.3 0.2 0.2 0.3 Net exports -13.1 -13.3 -7.7 -10.1 -12.9 -18.5 -16.7 Gross domestic saving 13.2 16.0 15.9 12.2 12.2 11.3 10.2 (% of GDP) Public -1.2 -0.8 -0.1 0.9 -0.4 -5.3 -0.3 Private 14.3 16.8 16.0 11.3 12.6 16.6 10.5 Source: IMF, UBOS 70 Edition No.1 February 2013 Annex Table 3: Quarterly GDP Growth Rates FY2008/9 - 2012/13 Hotels Transport Real Public Health Manu- Con- Whole- & & com- Finan- estate Other admin- & Other Taxes GDP at GDP at Live- factur- Electric- struc- Ser- sale & restuar- munica- cial activi- busi- istra- Educa- social ser- on prod- basic market Year Quarter Agric stock Fishing Industry ing ity tion vices retail ants tions services ties ness tion tion work vices FISIM ucts Cost prices 2008/9 1.7 0.1 -0.5 3.6 6.4 5.4 2.0 3.7 6.3 1.3 2.9 11.2 3.8 3.5 1.8 1.9 1.1 2.4 14.9 2.5 3.2 3.1 2009/10 0.6 0.9 1.1 0.4 -0.7 2.3 1.1 1.5 -0.2 3.1 5.1 3.0 -1.3 4.4 5.6 -1.2 -0.5 3.4 9.1 0.3 0.8 0.8 2010/11 -1.1 0.7 0.6 2.7 4.1 2.4 2.2 2.3 0.7 0.3 3.4 6.1 3.4 -0.2 -1.3 5.9 3.9 3.9 7.3 2.5 1.7 1.8 2011/12 1.4 0.8 0.4 1.0 -1.4 2.6 2.1 0.2 -0.8 5.0 2.4 -5.9 0.2 1.5 -2.3 -0.9 -0.4 3.1 -5.9 1.5 0.7 0.8 2007/8 Q4 0.6 -1.6 -2.0 -4.8 -8.1 2.7 -3.3 -4.0 -12.3 0.1 1.1 0.4 -2.5 -0.4 -1.4 -2.0 -5.5 4.3 -5.3 -0.4 -3.4 -3.1 2008/9 Q1 3.2 -1.4 -0.7 13.0 16.9 4.3 11.9 8.8 21.7 2.0 10.3 -0.7 -2.9 6.6 2.5 9.3 6.4 4.0 3.0 -1.3 9.0 7.9 Q2 -6.0 1.7 -0.4 -2.5 -2.8 7.6 -2.6 -0.3 -2.5 -0.2 -5.5 22.5 -1.7 5.9 4.5 0.2 -0.9 3.1 12.1 9.4 -2.0 -0.9 Q3 3.6 -0.4 -1.5 0.2 2.1 -7.5 -0.4 3.9 -0.6 0.3 5.5 19.8 20.6 0.3 -0.9 -1.4 -7.3 1.7 41.3 4.5 2.4 2.6 Q4 6.1 0.3 0.5 3.5 9.6 17.1 -0.8 2.5 6.7 3.2 1.2 3.2 -0.9 1.3 1.3 -0.6 6.1 0.7 3.2 -2.7 3.4 2.7 2009/10 Q1 -10.6 1.5 1.1 6.9 2.6 0.9 10.3 3.3 -4.3 4.9 14.8 7.7 2.1 8.5 8.3 1.2 0.3 4.2 29.1 5.9 1.5 2.0 Q2 14.5 0.6 1.1 -3.3 -7.4 0.4 -1.1 -0.3 -2.3 1.7 -1.9 2.3 -0.8 -0.4 0.6 2.3 2.4 2.7 6.5 -3.3 1.0 0.5 Q3 -2.9 0.7 2.5 1.6 6.6 3.5 -1.9 1.9 6.4 9.5 -0.9 4.1 -7.8 5.2 6.4 -3.7 -3.4 5.7 7.6 -1.2 0.9 0.6 Q4 1.3 0.7 -0.5 -3.3 -4.6 4.3 -3.0 1.0 -0.7 -3.6 8.5 -2.0 1.4 4.1 7.0 -4.7 -1.2 1.1 -6.9 -0.5 0.0 0.0 2010/11 Q1 -6.0 1.0 -0.6 9.7 0.1 0.2 16.3 2.2 -5.2 -4.2 5.0 8.9 4.5 5.2 8.0 10.0 3.0 1.0 20.5 8.9 2.5 3.1 Q2 11.6 0.4 -0.8 2.8 15.1 4.3 -2.9 3.8 13.1 -0.9 -2.4 10.7 1.9 0.1 -0.3 0.6 1.5 3.8 11.7 2.0 4.6 4.3 Q3 -4.9 1.0 4.6 -2.4 -3.4 2.3 -2.7 1.4 -2.9 1.9 9.2 -2.4 4.8 -3.3 -5.8 4.8 3.1 0.5 -3.2 -3.6 -0.6 -0.9 Q4 -5.1 0.5 -0.8 0.7 4.6 3.1 -1.9 1.9 -2.1 4.4 1.9 7.1 2.2 -2.6 -7.2 8.3 8.2 10.2 0.0 2.8 0.5 0.8 2011/12 Q1 9.6 0.9 -0.2 1.2 -5.6 -0.6 5.4 0.7 6.5 6.7 5.1 -9.1 1.3 7.9 1.2 -17.8 -14.5 3.7 -6.5 1.4 2.3 2.2 Q2 -5.0 0.5 -0.4 -0.2 -1.9 1.3 0.4 -1.2 -2.6 5.6 -3.0 -5.1 1.0 -0.1 -4.8 2.9 6.2 -7.1 -5.6 -0.7 -1.4 -1.3 Edition No.1 Q3 1.3 1.0 1.8 1.8 1.6 4.3 2.0 0.6 -2.6 4.6 5.3 -7.4 -2.8 -4.2 -7.3 8.1 3.5 9.5 -5.6 7.2 1.2 1.8 Q4 -0.3 0.8 0.5 1.3 0.3 5.5 0.7 0.7 -4.4 3.2 2.4 -1.9 1.3 2.6 1.7 3.3 3.2 6.2 -5.6 -1.8 0.9 0.6 2012/13 Q1 3.1 1.0 1.4 -1.2 -4.0 -1.8 0.3 3.4 -7.0 1.9 7.5 9.0 7.8 14.9 15.6 5.4 6.8 -5.2 2.7 -0.5 2.1 1.8 Unleashing Uganda’s Regional Trade Potential Source: UBOS February 2013 71 Unleashing Uganda’s Regional Trade Potential Annex Table 4: Fiscal Framework (as percent of GDP) 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Actual Budget Outturn Total revenue 19.7 17.8 17.4 17.1 17.1 15.5 17.2 15.1 16.6 14.7 16.0 15.6 15.6 14.8 and grants Revenue 13.1 12.5 12.1 12.6 13.0 12.8 13.1 12.5 13.0 12.2 13.1 13.3 12.6 12.3 Tax 12.5 11.8 11.9 11.9 12.6 12.3 12.8 11.8 12.8 11.7 12.9 12.7 12.4 11.8 Nontax 0.6 0.7 0.2 0.7 0.5 0.5 0.3 0.7 0.2 0.6 0.2 0.6 0.2 0.5 Grants 6.6 5.4 5.3 4.5 4.1 2.7 4.1 2.6 3.6 2.5 2.9 2.3 2.9 2.6 Budget support 3.9 4.1 2.6 3.7 2.1 1.9 1.6 1.8 1.7 1.3 1.6 1.3 1.3 1.3 Project grants 2.6 1.3 2.6 0.9 2.0 0.8 2.5 0.9 1.9 1.1 1.3 1.0 1.7 1.3 Total 21.0 18.6 20.1 18.6 19.3 17.9 20.4 17.3 20.3 19.6 19.1 22.8 19.8 19.5 Expenditure Recurrent 11.8 12.3 11.2 11.5 11.1 11.8 10.5 10.9 10.3 12.3 11.7 15.3 10.0 11.3 Development 8.4 6.0 8.2 6.1 7.8 5.6 9.0 5.6 9.9 6.6 7.1 7.1 9.4 7.6 Overall balance Including grants -1.9 -0.8 -2.7 -1.5 -2.2 -2.4 -3.1 -2.2 -3.7 -4.9 -3.1 -7.2 -4.2 -4.7 Excluding grants -8.5 -6.1 -8.0 -6.0 -6.3 -5.1 -7.2 -4.8 -7.3 -7.3 -6.0 -9.5 -7.2 -7.2 Financing 1.9 0.6 2.7 1.7 2.2 2.0 3.1 0.3 3.7 4.4 3.1 7.3 4.2 4.7 External 2.7 1.7 2.5 3.3 3.1 2.5 2.1 1.7 3.0 2.2 1.9 1.4 2.4 2.7 financing (net) o/w Budget 0.6 0.4 1.2 1.9 0.8 0.9 0.6 0.8 0.7 0.7 0.1 0.6 0.7 0.8 support Domestic -0.8 -1.1 0.2 -1.7 -0.9 -0.5 1.0 -1.4 0.6 2.1 1.2 5.9 1.9 2.0 financing (net) Source: IMF, MFPED Annex Table 5: Balance of Payments (percent of GDP unless otherwise stated) Variable 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 Current Account (incl transfers) -3.2 -2.9 -6.3 -8.1 -9.4 -11.4 -12.2 Exports of goods 10.46 12.38 14.36 14.21 15.20 15.54 15.84 Imports of goods -19.77 -20.96 -24.31 -26.05 -27.00 -31.58 -31.29 Services (net) -1.8 -2.3 -3.3 -2.8 -2.7 -4.5 -3.4 Trade balance -9.3 -8.6 -10.0 -11.8 -11.8 -16.0 -15.5 Income (net) -2.5 -1.9 -1.8 -2.0 -2.2 -2.2 -2.2 Current transfers (net) 10.4 9.9 8.8 8.6 7.3 11.3 8.8 Capital and Financial Account 8.8 8.9 8.2 8.0 10.3 7.5 13.2 Capital account* 1.3 28.8 0.0 0.0 0.0 0.0 0.1 Financial account 7.6 -19.9 8.2 8.0 10.3 7.5 13.1 o/w direct investment 5.1 6.0 5.3 5.0 4.6 5.1 6.3 Overall Balance 2.0 5.9 3.9 -0.3 1.4 -3.9 4.3 Gross International Reserves (million USD) 1408.3 2090.8 2684.4 2442.0 2384.7 2044.0 2346.1 Gross international reserves in months of imports 5.1 5.6 6.0 5.1 4.2 3.4 3.6 Source: IMF, BOU 72 Edition No.1 February 2013 Annex Table 6: Monthly Imports of Merchandise, 2011-2012 (in USD Million) 2011 2012 Nature of Imports Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Formal Private Sector Imports: Animal & Animal Products 1.4 1.3 1.3 1.4 1.4 1.7 1.3 1.4 1.4 1.6 1.7 2.4 1.8 1.9 1.5 1.7 1.5 3.3 1.7 1.6 1.4 2.1 1.6 Veg Pdts, Animal, Fats & Oil 29.0 30.7 37.3 27.3 41.0 28.4 37.2 40.8 30.6 37.0 34.9 29.7 34.2 40.1 40.3 37.3 41.2 43.9 44.4 35.3 43.0 38.4 38.7 Prep Foodstuff, Beverages 14.4 11.0 12.4 12.0 12.1 12.0 12.5 16.7 19.8 21.1 39.0 40.4 36.7 28.4 25.7 22.8 25.5 19.1 16.1 18.0 14.2 16.8 16.7 & Tobacco Mineral Products (excl oil 27.1 24.8 29.2 29.5 33.1 31.5 34.5 35.4 31.8 28.5 26.2 28.2 30.0 26.4 36.5 31.5 35.1 35.7 30.9 30.9 22.0 12.7 10.2 products) Petroleum (Oil) Products 55.0 53.5 69.9 65.7 70.3 70.2 69.7 78.4 67.6 66.6 63.3 72.3 78.8 69.1 72.0 62.1 72.9 64.9 58.4 80.1 76.6 85.7 84.0 Chemical & Related Products 29.7 28.9 37.8 26.3 33.0 28.3 29.8 43.3 30.1 35.7 33.0 33.5 30.3 35.6 35.9 34.6 64.8 35.1 35.7 38.0 32.7 33.4 44.0 Plastics,Rubber, & Related 17.9 15.0 16.0 18.3 19.7 21.7 20.1 22.0 16.9 21.6 19.7 18.2 20.1 18.0 21.6 20.9 22.8 20.6 24.1 19.7 16.6 18.4 20.5 Products Wood & Wood Products 12.6 10.1 9.4 11.8 9.4 10.1 12.5 14.7 8.9 10.2 8.9 9.5 9.5 10.1 11.4 11.3 12.2 13.8 9.9 11.6 11.5 10.4 12.0 Textile & Textile Products 11.7 12.9 11.7 9.1 9.9 10.4 9.1 12.0 8.9 9.6 10.4 12.4 14.1 10.7 12.6 10.9 13.5 12.7 10.9 11.4 9.8 11.0 11.3 Miscelanneous Manufac- 12.9 12.7 11.5 9.5 12.0 14.2 16.7 18.7 13.2 13.9 14.0 14.8 12.6 13.8 13.0 13.4 19.4 17.3 18.6 16.9 17.6 17.1 15.7 tured Articles Base Metals & their Products 27.9 23.4 29.0 25.9 31.6 31.3 26.0 31.1 29.0 28.6 27.9 24.8 29.6 34.2 30.2 27.8 25.2 36.0 18.4 24.2 20.0 24.5 25.2 Machinery Equip, Vehicles & 114.7 92.7 120.8 94.3 116.5 122.0 121.1 119.1 87.5 90.7 84.3 97.8 86.2 94.2 116.3 105.3 116.2 145.6 119.4 120.3 134.6 119.7 111.0 Accessories Arms & Ammunitions & 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Accessories Electricity 0.6 0.4 0.4 0.4 0.5 0.8 0.9 0.7 0.7 0.6 0.8 0.8 1.2 0.9 1.1 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4 Subtotal (formal private sec- 354.9 317.4 386.7 331.4 390.5 382.7 391.4 434.4 346.3 365.8 364.1 384.7 385.2 383.2 417.9 380.0 450.8 448.4 388.8 408.5 400.4 390.7 391.4 tor imports) Other Estimated Private Sec- 4.5 4.4 4.2 4.1 4.4 4.9 4.8 5.7 3.5 4.0 3.9 5.5 6.2 4.0 5.4 5.0 4.6 3.3 3.0 4.1 3.8 4.6 4.1 tor Imports Government Imports 19.0 40.1 120.2 20.1 12.4 51.3 11.8 45.4 55.3 28.7 46.5 40.9 66.7 50.7 31.1 29.7 19.0 55.7 11.9 44.9 14.9 20.8 43.2 Total Imports (fob) 378.4 361.9 511.0 355.6 407.3 438.9 408.0 485.5 405.1 398.5 414.5 431.1 458.1 438.0 454.4 414.8 474.4 507.4 403.8 457.5 419.1 416.1 438.7 Total Imports (cif) 461.1 441.2 626.0 434.4 495.8 534.8 497.0 593.3 493.8 487.1 506.8 521.4 561.6 535.2 556.0 507.4 581.5 623.1 493.9 560.1 511.5 508.5 537.6 Edition No.1 o/w freight 79.2 76.0 110.1 75.5 84.8 91.9 85.2 103.3 85.0 84.8 88.4 86.5 99.1 93.2 97.4 88.7 102.6 110.8 86.3 98.3 88.5 88.5 94.7 o/w insurance 3.5 3.4 4.9 3.3 3.7 4.1 3.8 4.6 3.8 3.7 3.9 3.8 4.4 4.1 4.3 3.9 4.5 4.9 3.8 4.3 3.9 3.9 4.2 freight as % of total imports 17.18 17.22 17.59 17.38 17.10 17.18 17.14 17.40 17.20 17.42 17.44 16.59 17.65 17.41 17.51 17.48 17.64 17.78 17.48 17.55 17.31 17.40 17.62 cif Unleashing Uganda’s Regional Trade Potential insurance as % of total 0.76 0.76 0.78 0.77 0.75 0.76 0.76 0.77 0.76 0.77 0.77 0.73 0.78 0.77 0.77 0.77 0.78 0.79 0.77 0.77 0.76 0.77 0.78 imports cif February 2013 Source: BOU 73 74 Annex Table 7: Monthly Exports of Merchandise, 2011-2012 (in USD Million) 2011 2012 Nature of ID Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Edition No.1 Exports Formal Exports: 162.8 174.3 191.5 165.1 187.3 194.2 191.4 184.7 174.3 167.5 177.9 192.3 181.5 197.5 204.5 181.7 216.3 221.2 216.7 220.0 208.9 182.2 197.4 Manufactured/ Semi processed 44.4 43.0 48.4 47.5 53.0 53.5 42.9 46.3 47.2 48.9 54.9 56.0 53.0 54.5 55.5 52.3 63.6 64.8 57.0 64.5 53.1 47.1 51.2 goods Base Metals & 1 7.2 8.2 10.8 9.9 10.7 15.0 9.7 9.6 10.3 10.2 10.5 9.9 9.2 12.7 10.2 9.3 11.5 10.7 12.8 12.7 12.6 10.2 11.1 Products February 2013 2 Sugar 4.5 6.5 8.2 9.6 9.0 6.1 2.7 5.3 5.1 6.7 9.1 8.3 5.9 5.7 10.3 10.7 17.4 18.0 11.0 12.7 9.3 5.7 8.8 Fish & its 3 16.7 12.5 9.4 10.4 13.2 12.1 9.4 9.6 9.6 11.2 12.3 15.9 12.5 12.5 11.8 10.6 12.0 10.4 9.4 8.1 8.5 9.4 8.8 products 4 Cement 6.7 5.5 7.9 6.1 6.9 8.4 8.7 9.1 8.8 8.5 8.9 8.4 8.5 7.0 8.0 8.8 8.6 10.0 9.7 11.2 9.2 8.8 8.2 Edible Fats and 5 3.6 4.9 4.7 4.3 5.1 4.2 4.5 4.5 4.9 4.7 5.5 3.5 6.2 5.1 4.6 3.2 4.4 4.3 4.4 3.8 3.8 3.2 3.5 Oils 6 Soap 2.0 1.7 1.9 2.2 2.4 1.7 2.4 2.6 2.9 2.0 2.1 2.3 3.2 3.2 3.3 2.8 2.8 3.2 2.2 2.7 2.7 2.5 2.4 7 Plastic Products 0.8 0.6 1.7 1.1 2.1 1.9 1.6 2.1 2.3 2.1 2.3 1.9 2.2 2.5 2.3 2.6 1.8 2.4 2.5 7.3 2.1 1.8 2.5 Unleashing Uganda’s Regional Trade Potential 8 Beer 1.4 1.7 2.2 2.4 2.2 2.2 1.9 1.7 1.6 1.6 2.0 2.2 1.6 2.0 2.2 1.8 2.2 2.5 1.8 2.1 2.0 2.2 2.3 9 Water 0.4 0.2 0.4 0.4 0.4 0.4 0.3 0.3 0.2 0.5 0.7 1.4 1.7 2.0 1.6 1.6 1.6 1.8 1.9 2.1 1.6 2.0 2.2 10 Baker's wares 0.8 1.0 1.2 1.1 1.0 1.5 1.6 1.4 1.5 1.2 1.5 2.2 2.1 1.8 1.3 0.9 1.3 1.3 1.5 1.8 1.3 1.2 1.5 Traditional 72.1 75.0 87.9 64.2 77.0 86.3 84.2 72.6 76.8 58.1 62.5 67.0 73.4 78.6 79.9 59.3 82.3 78.4 73.4 61.9 51.1 53.9 63.6 exports 11 Coffee 30.0 27.8 34.1 26.9 40.0 57.9 54.6 44.4 48.8 30.5 34.7 37.0 33.7 36.2 30.2 21.9 35.8 36.6 40.5 31.5 23.5 23.7 28.8 12 Cotton 12.4 17.5 23.5 12.9 8.6 1.5 4.1 1.2 0.2 0.0 0.2 3.7 9.3 11.4 16.3 12.6 9.3 9.2 1.5 1.6 1.3 2.3 0.8 13 Tea 6.6 3.6 4.3 6.0 6.9 6.0 7.1 5.5 5.9 6.3 6.8 6.9 7.4 4.2 3.0 3.7 8.3 6.4 7.1 6.5 5.8 6.7 8.0 14 Tobacco 3.3 6.6 7.3 3.8 4.7 4.3 2.5 3.2 4.0 3.0 6.5 5.4 7.0 6.2 5.7 2.7 5.2 6.7 7.9 5.2 2.2 2.9 6.3 15 Maize 1.7 1.8 1.6 1.3 2.4 1.2 3.0 5.6 3.7 2.9 1.3 0.9 1.7 5.0 8.3 4.1 5.3 5.3 2.9 5.0 8.0 5.0 5.7 16 Flowers 3.9 4.5 3.9 3.7 5.5 4.9 5.5 5.2 4.6 4.0 3.6 3.3 4.7 4.9 4.4 3.7 6.1 5.6 4.8 5.0 3.7 3.6 3.3 17 Hides & skins 2.1 2.9 3.3 3.1 2.6 3.0 2.1 1.9 2.6 3.8 3.2 2.5 2.5 3.5 4.0 3.6 4.9 4.3 3.2 3.2 3.9 4.0 3.2 18 Cocoa Beans 7.4 5.0 5.7 3.7 2.7 3.2 2.1 1.1 2.0 3.0 4.2 4.0 3.8 4.1 4.5 3.1 3.0 2.0 1.1 2.2 1.0 3.0 4.0 19 Simsim 3.2 3.8 3.1 1.3 1.5 0.4 0.1 1.0 1.2 0.8 0.3 0.4 2.0 1.3 2.0 2.2 2.9 0.6 0.3 0.0 0.3 0.4 0.1 20 Beans 0.8 1.1 0.3 0.5 0.9 3.3 2.3 2.7 2.4 2.8 0.8 0.9 0.3 0.7 0.6 0.7 0.3 0.7 3.0 0.7 0.6 1.5 2.3 Fruits & Vegeta- 21 0.8 0.5 0.9 1.1 1.1 0.6 0.7 0.9 1.2 1.0 1.0 1.8 0.9 1.1 1.0 1.1 1.2 1.0 1.0 1.1 0.8 0.7 1.1 bles Source: BOU Annex Table 7: Monthly Exports of Merchandise, 2011-2012 (in USD Million) Minerals 0.9 2.1 2.1 1.9 1.9 1.9 2.4 2.0 1.5 3.4 1.9 3.2 1.5 2.5 1.4 1.7 2.2 1.4 2.1 2.8 1.5 2.6 1.2 22 Cobalt 0.5 1.6 1.8 1.6 1.6 1.6 1.6 1.6 1.0 1.6 1.6 1.6 0.5 1.6 0.5 0.5 1.1 0.5 1.6 2.1 1.1 2.6 1.1 23 Gold 0.4 0.5 0.3 0.3 0.3 0.3 0.8 0.5 0.5 1.8 0.3 1.6 1.0 0.9 0.9 1.2 1.1 0.9 0.5 0.6 0.5 0.0 0.2 Other exports 45.5 54.1 53.1 51.6 55.4 52.5 61.9 63.7 48.8 57.1 58.6 66.2 53.5 62.0 67.8 68.3 68.2 76.7 84.1 90.8 103.1 78.5 81.4 24 Cellular Phones 7.0 10.8 10.1 9.7 9.0 9.3 15.2 14.7 6.5 11.0 10.8 14.3 9.5 6.0 10.5 7.3 10.1 12.5 13.8 13.9 17.7 17.0 19.3 25 Crude oil 3.6 1.5 3.5 4.0 4.5 3.7 4.1 5.1 3.9 3.9 4.8 3.8 6.5 5.3 3.5 5.2 4.9 4.9 4.6 5.4 16.7 6.1 4.7 26 Rice 0.8 1.0 1.3 0.9 1.5 1.5 1.8 1.7 1.4 2.0 1.8 2.6 2.1 2.4 2.4 3.9 2.8 3.8 3.0 3.7 3.7 3.4 3.7 27 Electricity 1.1 1.1 1.3 1.2 1.2 1.5 1.5 1.7 1.5 1.4 1.4 1.3 1.0 1.5 1.4 1.7 1.5 1.4 1.0 1.2 1.2 1.1 1.1 28 Oil re-exports 9.0 7.9 7.8 9.1 8.1 9.2 9.7 8.1 8.9 9.6 10.4 9.1 7.1 11.7 12.2 9.5 15.7 11.4 12.0 12.6 12.0 12.1 10.9 29 Other items 23.9 31.8 29.1 26.6 31.1 27.3 29.5 32.4 26.6 29.2 29.6 35.1 27.4 35.1 37.7 40.7 33.2 42.7 49.7 54.1 51.8 38.7 41.7 Informal Exports (Cross Border 31.5 28.4 25.2 23.0 29.5 31.8 32.8 36.5 29.3 25.7 30.3 31.8 31.8 28.0 34.4 35.6 36.9 33.6 30.1 40.3 43.3 45.5 43.0 Trade): Industrial 1 20.2 19.0 15.5 14.0 18.8 21.5 22.2 25.6 19.5 15.5 16.6 19.7 19.4 16.5 22.2 22.9 23.5 20.2 18.0 24.8 24.3 23.4 24.1 products 2 Maize 1.4 0.8 0.3 1.0 1.5 0.3 2.2 2.1 1.6 1.4 1.7 1.2 1.5 1.8 1.6 1.8 2.1 2.4 2.2 4.6 4.7 7.0 5.4 3 Fish 2.3 2.5 2.8 2.1 2.8 2.8 2.1 1.9 1.5 1.8 2.4 2.4 2.7 2.5 3.1 3.5 3.9 2.8 2.9 3.0 3.6 3.3 3.3 4 Beans 2.3 1.7 1.1 1.4 1.4 2.6 1.3 1.5 1.6 1.0 2.3 3.0 2.6 1.3 0.7 0.8 1.0 2.2 1.5 1.3 1.6 2.3 1.7 5 Other grains 0.9 0.7 0.6 0.4 0.6 0.5 0.6 0.5 0.5 0.7 0.9 0.5 0.4 0.2 0.9 0.7 0.5 0.7 0.6 0.8 0.7 0.7 0.7 6 Bananas 0.4 0.4 0.4 0.4 0.4 0.3 0.3 0.4 0.3 0.5 0.4 0.4 0.6 0.3 0.5 0.5 0.5 0.5 0.6 0.5 0.6 0.7 0.6 Other agricultur- 7 3.5 2.6 3.8 3.1 3.8 3.6 3.7 4.0 4.0 4.4 5.7 4.3 4.3 4.9 4.6 4.7 4.9 4.6 3.9 5.1 7.6 7.8 6.8 al commodities 8 Sugar 0.3 0.4 0.5 0.4 0.1 0.1 0.2 0.4 0.2 0.2 0.1 0.2 0.3 0.4 0.3 0.4 0.4 0.2 0.2 0.2 0.1 0.2 0.2 9 Other products 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.5 0.3 0.1 0.1 0.3 0.0 0.2 0.1 0.1 Edition No.1 Total Exports 194.3 202.6 216.7 188.1 216.8 226.0 224.1 221.2 203.6 193.2 208.3 224.2 213.3 225.5 238.9 217.3 253.1 254.8 246.8 260.4 252.2 227.6 240.5 Source: BOU Unleashing Uganda’s Regional Trade Potential February 2013 75 Unleashing Uganda’s Regional Trade Potential Annex Table 8: Inflation Rates Percentage Changes 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 CPI (annual average) -2.0 5.7 5.0 8.0 6.6 6.8 7.3 14.2 9.4 6.5 23.5 CPI (end of period) 3.5 2.4 5.0 4.7 5.2 7.8 8.0 12.5 7.8 6.3 24.3 Food (end of period) -0.1 3.0 0.0 -6.1 -4.6 7.9 5.4 27.9 16.5 9.3 30.6 Non Food (end of period) 7.3 7.9 8.9 6.7 5.7 20.3 Source: IMF, UBOS Annex Table 9: Quarterly Average Prices for Selected Items (UGX/Unit) 2010 2011 2012 Item Unit Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Sugar Kg 2,250 2,451 2,558 2,418 2,420 2,695 4,738 5,217 3,088 2,817 2,965 3,069 Milk Liter 854 842 1,112 1,047 1,102 1,045 1,048 1,006 1,242 1,134 1,110 1,084 Beef Kg 5,000 5,000 5,046 5,262 5,966 6,625 7,181 7,842 8,000 8,000 7,827 7,835 Washing Kg 2,227 2,300 2,307 2,572 3,138 3,477 3,673 3,895 3,906 3,874 3,740 3,720 soap Matooke Kg 535 413 311 499 551 625 532 660 477 611 612 770 Maize floor Kg 1,472 1,244 1,081 1,057 1,261 1,807 2,133 1,843 1,737 2,096 1,955 1,803 Rice Kg 2,433 2,355 2,191 2,040 2,273 2,714 2,985 3,246 3,432 3,722 3,186 3,225 Dried beans Kg 1,682 2,060 1,928 1,961 2,020 2,574 2,058 2,049 2,209 3,052 2,207 2,103 Paraffin Liter 1,760 1,918 1,980 2,093 2,366 2,670 2,839 2,935 2,727 2,794 2,612 2,799 Petrol Liter 2,471 2,936 2,970 3,155 3,264 3,557 3,805 3,860 3,483 3,667 3,529 3,668 Diesel Liter 2,072 2,298 2,351 2,481 2,718 3,201 3,390 3,600 3,277 3,223 3,135 3,397 Source: UBOS 76 Edition No.1 February 2013 Annex Table 10: Inflation Rates (for selected items), 2011-2012 2011 2012 Items Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec All items 5.0 6.4 11.2 14.1 16.0 15.7 18.8 21.4 28.3 30.5 29.0 27.0 25.6 25.7 21.1 20.0 18.6 18.0 14.3 11.9 5.5 4.5 4.9 5.5 Food 3.6 8.8 23.7 30.8 35.3 33.4 40.7 42.9 50.4 45.8 40.4 34.6 27.2 27.6 15.4 15.0 13.7 12.8 5.4 4.2 -2.8 -2.5 -2.0 0.0 Food crops 1.5 6.9 29.1 39.3 44.2 39.0 42.3 33.7 38.8 35.3 25.9 20.4 13.5 21.4 10.1 9.1 8.0 11.3 7.5 12.8 6.3 4.4 7.5 7.3 Non food 6.0 5.4 5.4 6.5 7.4 7.9 9.1 11.7 18.2 22.9 22.9 22.9 24.2 24.3 23.7 22.3 21.0 20.4 19.0 16.0 10.1 8.3 8.6 8.3 Beverages 8.9 8.3 9.3 10.3 10.8 10.6 12.1 25.2 26.1 23.3 23.8 24.6 24.1 25.0 23.6 23.2 25.1 25.5 23.6 9.9 6.1 6.2 5.2 8.5 and tobacco Clothing and 8.7 11.3 13.7 16.5 21.5 22.7 26.0 31.6 37.0 45.0 43.0 43.7 43.8 42.7 39.0 34.9 27.0 19.0 12.5 6.4 2.3 -2.7 -1.2 -3.9 footwear Rent, fuel and 8.7 5.7 7.1 9.5 9.9 8.9 8.5 11.9 26.1 31.8 30.3 30.9 34.5 35.0 31.8 29.1 27.0 25.7 26.9 23.3 10.3 6.0 6.4 7.4 utilities Household and personal 11.5 12.8 15.7 17.7 21.0 22.8 24.9 25.9 29.6 30.5 31.8 31.0 28.0 27.3 24.5 22.3 19.4 18.2 15.9 13.1 9.7 7.6 6.3 4.5 goods Transport and communica- -11.2 -9.7 -15.5 -14.6 -14.7 -12.4 -11.9 -11.2 -1.2 16.9 19.6 19.2 20.9 16.7 24.1 20.8 20.4 17.4 17.4 15.9 4.0 3.6 4.7 5.5 tion Education 6.4 5.0 5.1 5.3 5.7 8.2 8.9 9.3 10.7 10.7 10.7 10.6 10.9 14.8 14.9 14.7 14.4 18.1 16.9 16.5 16.5 16.5 16.5 16.2 Health, entertainment 11.7 11.8 12.8 13.1 14.3 13.0 15.3 17.3 20.0 20.2 20.2 18.7 20.9 20.6 19.2 19.5 19.0 18.0 15.9 13.9 12.3 11.2 11.5 10.2 and others Edition No.1 Other goods 8.5 9.5 13.9 16.6 19.5 20.3 26.0 33.3 44.5 44.0 43.5 42.0 38.0 34.9 27.8 26.6 24.0 20.5 13.6 7.8 -1.0 -1.7 -2.2 -0.8 Services 3.1 2.8 1.7 2.1 2.5 3.2 3.7 4.8 8.5 14.0 14.3 13.7 16.6 17.8 18.9 17.9 17.5 17.7 18.0 16.7 13.5 12.5 13.1 12.8 Unleashing Uganda’s Regional Trade Potential Source: UBOS February 2013 77 Unleashing Uganda’s Regional Trade Potential Annex Table 11: Exchange and Interest Rates, 2011-2012 Lending Lending Nominal TBR (91) CBR* Deposit (LC) Deposit (FC) (LC) (FC) Year Month UGX/USD % % % % % % 2011 Jan 2,332.47 8.8 13.1 2.2 1.2 20.1 10.8 Feb 2,341.93 9.4 13.9 2.0 1.7 19.6 9.5 Mar 2,393.31 8.6 13.3 2.1 1.3 20.0 10.1 Apr 2,367.59 8.8 13.1 2.2 1.3 20.0 9.9 May 2,387.68 10.4 14.7 2.0 1.3 19.9 9.7 Jun 2,461.04 12.1 16.7 2.6 1.3 19.9 9.4 Jul 2,587.23 13.1 13.0 2.8 1.3 21.7 9.7 Aug 2,753.23 14.5 14.0 4.3 1.2 21.3 9.8 Sep 2,814.02 15.6 16.0 2.5 1.1 23.3 9.7 Oct 2,805.37 18.8 20.0 2.4 1.1 23.6 9.5 Nov 2,582.18 19.6 23.0 3.1 1.6 26.0 10.3 Dec 2,446.91 20.1 23.0 3.3 1.3 26.7 10.1 2012 Jan 2,414.19 20.3 23.0 3.4 1.3 27.3 10.3 Feb 2,327.97 17.6 22.0 3.3 1.3 26.8 10.4 Mar 2,485.02 15.7 21.0 3.4 1.3 27.6 10.0 Apr 2,506.21 16.3 21.0 3.7 1.2 26.1 8.2 May 2,479.05 16.4 21.0 3.4 1.4 26.7 9.3 Jun 2,484.36 16.7 20.0 3.4 1.6 27.0 8.4 Jul 2,473.96 16.7 19.0 3.4 1.2 26.9 9.0 Aug 2599.60 12.7 17.0 3.6 1.3 26.4 9.1 Sep 2592.97 10.7 15.0 3.1 1.2 25.7 8.7 Oct 2621.40 9.1 13.0 3.0 1.2 24.9 10.7 Nov 2624.96 9.3 12.5 2.8 1.2 23.6 10.4 Dec 2614.37 9.4 12.0 Note: i) LC - Local Currency; FC - Foreign Currency ii) * bank rate to commercial banks for Jan-Jan 2011 Source: IMF, BOU 78 Edition No.1 February 2013 Unleashing Uganda’s Regional Trade Potential Annex Table 12: Monetary Indicators Indicator 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11 2011/12 % Monetary Aggregates 10.8 M3 as % of GDP 18.0 18.1 20.6 20.9 23.8 26.7 20.9 9.5 M2 as % of GDP 14.1 14.1 15.9 16.3 18.4 20.3 15.3 10.1 M3 growth rate (%) 8.7 16.4 17.4 31.1 25.0 31.7 25.9 9.9 M2 growth rate (%) 12.1 18.9 16.7 30.1 26.3 30.3 23.9 9.7 Domestic Credit 9.4 Total domestic credit (% of GDP) 6.5 4.6 7.0 10.1 13.7 18.5 16.1 9.7 Total domestic credit growth (%) 20.5 -17.6 75.4 78.6 56.9 50.5 11.4 9.8 Private sector credit (% of GDP) 8.0 8.5 11.1 11.9 12.8 16.6 14.3 9.7 Private sector credit growth (%) 28.7 23.2 51.5 32.1 25.0 44.4 9.8 9.5 Interest Rates Structure 10.3 Average TB rate (period average, 7.6 8.9 7.9 8.4 5.3 7.6 17.2 10.1 %) Average lending rate (%) 19.2 18.8 19.6 20.9 20.7 19.8 24.6 Average deposit rate (%) 2.5 2.7 2.1 2.1 2.0 2.1 3.2 10.3 Source: UBOS Edition No.1 February 2013 79 Unleashing Uganda’s Regional Trade Potential 80 Edition No.1 February 2013 Rwenzori House, 4th Floor P.O.Box 4463 Kampala, Uganda Tel: +256 414 230094 E-mail: info@worldbank.ord The World Bank