Post-Conflliict Recovery iin Uganda Frank Warnock and Patrick Conway World Bank Institute Washington, D.C. Copyright © 1999 The International Bank for Reconstruction and Development/The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. The World Bank enjoys copyright under protocol 2 of the Universal Copyright Convention. This material may nonetheless be copied for research, educational, or scholarly purposes only in the member countries of The World Bank. Material in this series is subject to revision. The findings, interpretations, and conclusions expressed in this document are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or the members of its Board of Executive Directors or the countries they represent. Posttt-Conffflliicttt Recoverrry iin Uganda Frank Warnock and Patrick Conway 1999. 34 pages. Stock No. 37152 Contents Parrrttt A::: Posttt-Conffflliicttt Recoverrry iin Uganda,,, 1987 .......................................................................................................................................................................................................................................1 Background..................................................................................................................................................................1 Pre-Independence Economy ..................................................................................................................................2 Political and Economic History: Independence Through 1985........................................................................3 The First Year of Museveni's Regime: 1986............................................................................................................4 The Current Political and Economic Situation: January 1987.............................................................................6 Policy Decision............................................................................................................................................................8 Bibliography.................................................................................................................................................................8 Sources.........................................................................................................................................................................8 Appendix...................................................................................................................................................................10 Parrrttt B::: Posttt-Conffflliicttt Recoverrry iin Uganda,,, 1992 ....................................................................................................................................................................................................................................15 Overview of Policies and Aggregate Performance: Fiscal 1987­88 to 1990­91.......................................15 International Support for the Reform Program....................................................................................................17 Government Budgetary Policy................................................................................................................................17 Financial Sector Development ...............................................................................................................................18 Foreign Exchange Availability .................................................................................................................................18 Agricultural Sector Performance............................................................................................................................19 Manufacturing and Service Sector Performance................................................................................................20 The Current Situation: June 1992..........................................................................................................................20 Policy Dilemma ..........................................................................................................................................................21 Bibliography...............................................................................................................................................................21 Sources.......................................................................................................................................................................21 Appendix B................................................................................................................................................................22 Postttscrrriipttt::: Posttt-Conffflliicttt Recoverrry iin Uganda,,, 1995 ..................................................................................................................................................................................................................29 Tablles and Charrrttts Table A1. Selected Economic Indicators, 1965­86.............................................................................................10 Table A2. Selected Social Indicators, 1960­85.....................................................................................................10 Table A3. Central Government Operations, Selected Years................................................................................11 Table A4. Industrial Origin of Gross Domestic Product at Factor Cost, 1960­86. ..........................................11 Table A5. Industrial Origin of Gross Domestic Product at Factor Cost, 1965 and 1986. ..............................12 Table A6. Production and Trade, 1960­86. ...........................................................................................................12 Tablles and Charrrttts (contttiinued) Table A7. Major Trading Partners, 1960­86. ...........................................................................................................13 Table A8. Exchange Rates, 1960­86. .......................................................................................................................13 Chart A1. Ugandan Coffee, 1965­86.......................................................................................................................14 Table B1. GDP by Sector at Constant 1991 Prices, Fiscal 1985­91. ..................................................................22 Table B2. GDP by Sector at Constant 1991 Prices, FY 1985­91.........................................................................22 Table B3: Contributions to Real GDP Growth by Expenditure, Fiscal 1985­91 ...............................................23 Table B4. GDP by Expenditure at Constant 1991 Prices.......................................................................................23 Table B5. GDP by Expenditure at Constant 1991 Prices.......................................................................................24 Table B6. Production of Principal Commodities, 1986­92 ..................................................................................24 Table B7. Exports of Cash Crops, 1986­92 ............................................................................................................25 Table B8. Balance of Payments, FY 1985­91...........................................................................................................25 Table B9. Exchange Rates, FY 1985­91....................................................................................................................26 Table B10. Financial Indicators, FY 1986­91............................................................................................................26 Table B11. Central Government Operations, FY 1985­91. ..................................................................................27 Table B12. Destination of Central Government Expenditure................................................................................27 Chart B1. Price of Ugandan coffee, 1965­92. ........................................................................................................28 Part A::: Post-Conflliict Recovery iin Uganda,,, 1987 Francis Unyofu sat back in his office chair and stared at the dilapidated ceiling. He had not thought life in the government would be quite like this. But fifteen years of political and economic chaos could not be erased in just one year. And there were certainly higher pri- orities than renovating this government office. At least, there was peace now--well, in most parts of the country--so Uganda could try to return to some form of normalcy. At independence in October 1962, there was little indication that Uganda was headed for such privations. Independence came without a struggle: the British set a timetable for their withdrawal and stuck to it. It was Ugandans, not Europeans, who now grew the cotton and coffee, bringing a relatively high living standard, financing the education of their children, and raising expectations for the future. There was an impressive number of educated and pros- perous middle-class professionals, the prestigious national Makere University, and a gleaming new teaching hospital at Mulago. At independence, Uganda looked optimistically to the fu- ture. Now, twenty-five years later, it is just looking to rebuild. It is January 1987, one year after Yoweri Museveni led the National Resistance Army (NRA) to power. The past year was spent bringing an inclusive coalition together and debating the country's economic and political future. These have been exciting times in the capital, Kam- pala. But the time for debate is past. The people are getting edgy: long queues exist for con- sumer goods, unemployment is so high that it is not even counted, and many factories are not operating. Yes, the time for debate is past. It is now time for a concrete economic pro- posal, and it is up to Francis Unyofu as advisor to the new finance minister, Dr. Crispus Ki- yonga, to draw it up. Dr. Kiyonga was quite clear in his orders to Francis: devise a strategy to increase economic activity while maintaining macroeconomic stability. Backgrrround Uganda is blessed with a pleasant climate and excellent growing conditions. Situated at the equator, rain is much more regular than in other African countries; only in the northern lowlands is the climate hot, dry, and less suitable for cultivation. About the size of Ghana (197,000 square kilometers), Uganda is surrounded by Kenya, Sudan, the former Zaire, Tan- zania, and Rwanda and, therefore, landlocked. The nearest seaport is in Mombasa, Kenya, 1,300 kilometers by rail from Kampala. Uganda is also overwhelmingly rural: government esti- mates from 1986 show that, of its 15.1 million inhabitants, only 458,000 live in Kampala. Jinja, the next largest city, has only 45,000 inhabitants. Although Uganda has twenty-eight tribal groups, the major ethnic division occurs be- tween the mainly pastoral Nilotic tribes of the north, such as the Acholi and the Lango, and the mainly agricultural Bantu tribes of the south, the largest being the Baganda. Historically, the southern Bantu tribes have been less warlike and aggressive than the northern Nilotes. The This is the first part of a three-part case created by Frank Warnock and Patrick Conway of the Univer- sity of North Carolina at Chapel Hill on the subject of Ugandan economic growth. Thanks to Philip English and Jorge Araujo for useful comments on its content. 1 Post-Conflict Recovery in Uganda British capitalized on this distinction by recruiting its security forces from the northern tribes. This initiated a military domination of the south by the north, which lasted from before inde- pendence until 1986, when the predominately Bantu-based NRA seized power. In addition to the traditional tribal divisions, powerful religious divisions exist. Two-thirds of the population is Christian, evenly split between Roman Catholics and Protestants, whereas 15 percent is Muslim. Membership of the religious communities often cuts across tribal divi- sions. For example, at independence the main political parties included the Kabaka Yekka (KY), which was mainly Protestant and Bagandan; the United People's Congress (UPC), which was Protestant but non-Bagandan; and the Democratic (DP), which was Bagandan and mainly Roman Catholic. Prrre-IIndependence Economy At independence and throughout the 1960s, Uganda had one of the most vigorous and promising economies in Sub-Saharan Africa.1 It relied overwhelmingly on agriculture, which accounted for almost two-thirds of gross domestic product (GDP) and 90 percent of ex- ports in 1960. The manufacturing sector, although small, was growing and supplied the economy with basic inputs and consumer goods. The transportation system, which included an effective network of roads, railways, and port and air transport, was widely regarded as one of the best in Sub-Saharan Africa. Railroads and paved roads connected Uganda with the seaport of Mombasa. Airports linked the more important Ugandan towns with other East African territories (Kenya and Tanganyika). Entebbe boasted a modern international airport, and steamer services ran on the lakes and the River Nile. In addition, Uganda had a large sub- sistence sector. This nonmonetized sector comprised almost one-third of the country's eco- nomic activity, and much of the population remained outside the formal economy. Uganda's two biggest cash crops, cotton and coffee, made up 76 percent of its ex- ports. Some of the world's best quality tea was grown on a few large Asian-owned estates. Valuable minerals, notably copper, had been discovered, and water power resources were substantial. Export earnings not only financed the country's import requirements but also re- sulted in a current account surplus. Prior to independence, the major destinations of Ugandan exports included India (20 percent of total exports, mostly cotton), Britain (16 percent, mainly cotton and coffee), the United States (15 percent, all coffee), and Kenya (12 percent, sugar and a variety of prod- ucts). Ugandan imports were primarily manufactures from the United Kingdom (19 percent of total imports) and Japan (9 percent). Imports from Kenya were also significant, representing 24 percent of total imports. At independence, Uganda was a member of the East African Currency Board along with Kenya and Tanganyika. The currency board was the sole issuer of notes and coins, and the East African shilling was at par with the United Kingdom shilling. Inflationary financing of fiscal deficits was not an option and pre-independence fiscal deficits were correspondingly small, amounting to 0.1 percent of GDP in 1960. 1All tables supporting the data discussed in this text are in the appendix of part A. Much of the data is presented for years representing the various regimes since 1960: pre-independence (1960), Obote I (1965), Amin (1971 and 1977), Obote II (1981), and Museveni (1986). 2 Part A: 1987 Uganda's relative affluence had been translated into strong governmental social welfare services. The country's health sector had developed into one of Africa's most extensive and had pioneered health and nutrition programs for low-income citizens. Primary and secondary education was characterized by a pupil-teacher ratio that was 25 percent below the African average in 1960. Although prospects were bright at independence, some seeds of economic misman- agement had already been planted. The colonial government strictly regulated the buying and selling of major cash crops through marketing boards. At first, the marketing boards were set up as a way to unify sales to Allied wartime supply agencies and provide some insurance to growers against fluctuating prices. Later, however, as coffee and cotton prices rose on the world markets, the marketing boards did not raise the prices they paid to the farmers. As substantial surplus funds accumulated, considerable transfers were made to the central gov- ernment for direct budget support. Steep export taxes were also imposed, particularly on cotton. The producers of cash crops, thus, began to finance government expenditures. Polliitttiicall and Economiic Hiistttorrry::: IIndependence Thrrrough 1985 When Uganda became independent on October 9, 1962, Dr. Milton Obote, a Protestant northerner of the Lango tribe, was the first prime minister. Obote packed his government and army with ethnic and religious compatriots. Dissent from the southern Bantu tribes was bru- tally repressed, and, in March 1968, Obote suspended the constitution and assumed all powers of government. The economy did relatively well in the 1960s, as real GDP growth averaged 4.8 percent per year from 1965 to 1970. Cash crop production was quite strong, with 1965 coffee and cotton production at 218,000 tons and 243,000 tons, respectively. Copper production was at a historical high in the late 1960s at more than 16,000 tons per year. The manufacturing sector was small but growing, reaching 6 percent of GDP by 1965 and 7.3 percent by 1971. In 1966 the Bank of Uganda became the Central Bank. It promptly withdrew from the East African Currency Board and issued a new currency, the Ugandan shilling, which remained at par with the UK shilling until 1973.2 The bank also took over exchange control and the func- tion of controlling commercial banks through credit control. In this way, the government could decide who would get foreign exchange and who had access to bank credit. Central government borrowing to finance fiscal deficits began increasingly to crowd out private borrowing, and the annual rate of growth of domestic credit quickly increased from nearly zero in the early 1960s to more than 20 percent by 1967. In 1971 General Idi Amin, a member of a northern Nilotic tribe called the Kakwa, staged a successful coup and went on to brutalize the country with a surge of tribal massacres and political killings. Amin carried out murderous acts in particular on Obote's Lango tribe and their neighbors the Acholi and maintained a constant persecution of Christians. After redis- covering his Islamic heritage in an effort to secure aid from Libya and Saudi Arabia, Amin promptly reduced Uganda's Muslim population by expelling almost all of Uganda's 70,000 Asians of Indian and Pakistani decent. The Asians, who had been active in agribusiness, manufacturing, and commerce, were forced to leave behind their businesses and belong- 2 In following references to currency, "shilling" and "USh" refer to the Ugandan shilling, unless otherwise specified. 3 Post-Conflict Recovery in Uganda ings. But they could have faced a worse fate: in the eight years under Amin's rule, an esti- mated 300,000 people were killed. Uganda's once vibrant economy collapsed during Amin's reign. Real GDP growth aver- aged 0.2 percent per year in the first half of the 1970s. The second half was worse as real GDP fell an average of 3.5 percent per year from 1976 to 1980, while per capita incomes fell to among the lowest levels in the world. Cash crop production suffered during the Amin regime. By 1977 cotton production had fallen to 14,000 tons, just 6 percent of the 1965 level. Although India was once the single largest destination for Ugandan products, the expulsion of Asians and reduction of cotton production effectively reduced exports to India to nil. Asians managed many of the tea es- tates, so tea production all but ceased as well. Coffee production also fell, but not nearly as much, as Ugandan smallholders were still able to produce even with political unrest. Copper production in 1977 was just 15 percent of its 1971 level, and by 1979 copper production ceased. The manufacturing sector began to contract. Uganda registered a substantial budget deficit for nearly every year in the 1970s as mili- tary expenditures grew substantially. Deficits equivalent to more than 50 percent of current revenues were not unusual: in 1974 the deficit reached 134 percent. Only in the mid-1970s, when the price of coffee skyrocketed, were the deficits relatively small. Even then, the gov- ernment was crowding out private investment: by the mid-1970s, claims on the central gov- ernment (government borrowing) were consistently near 70 percent of domestic credit. Pri- vate savings and investment were reduced to about 6 percent of GDP, well below the 1960s ratio of 15 percent. Amin was forced to flee the country in 1979, and Milton Obote returned to power in 1980 in an election that was widely regarded as rigged. Obote's new army conducted sav- age acts of reprisal against tribes that had been loyal to Amin. For the Baganda, persecuted in Obote's first reign, it was more of the same. By 1981 guerrilla groups were forming in the bush. The largest was Yoweri Museveni's National Resistance Movement, which drew its sup- port from the southern Bantu tribes. After five years of civil war, Obote was overthrown for a second time in July of 1985 by a group led by General Tito Okello (an Acholi). In January 1986, Museveni seized power. Okello's army retreated to the north, looting along the way. The Fiirrrsttt Yearrr offf Musevenii'''s Regiime::: 1986 Yoweri Museveni came to power in January 1986 in a devastated Uganda. The country had suffered dictatorship, tribal and regionally based violence, army lawlessness, and brutal human rights abuses for most of its twenty-three years as an independent nation. Life expec- tancy, measured as less than fifty years, was one of the worst in the world. Real government spending on health programs and education fell to 27 percent and 9 percent, respectively, compared with their average levels in the 1970s. Uganda was in economic shambles. Its roads, railways, hospitals, and schools were de- stroyed. Real per capita GDP, at $230, was 60 percent of its level in 1971.3 Its average annual rate of growth from 1965 to 1985 was -2.6 percent, the lowest in the world for that period. The only sector that grew substantially in this period was the government. The nonmonetary sector (primarily agriculture) remained resilient throughout the turmoil and, in 1986, made up 3 In the following references to currency, the word "dollar" and the symbol "$" refer to U.S. dollars. 4 Part A: 1987 40 percent of overall production. Indeed, most Ugandans relied on this subsistence sector for the basic means of their survival. Coffee, which is grown mainly by smallholders in Uganda, had fared much better as a sector during the fifteen years of unrest than had the largely estate-grown cotton and tea sectors. In 1986 coffee production was at 160,000 tons or 73 percent of its 1965 level, while cotton production plummeted to only 7 percent of its 1965 level. The sugar industry, which had once produced enough to satisfy domestic demand and export to nearby coun- tries, collapsed in the early 1980s. With the closing of the Kilembe copper mine in 1977, copper production virtually ceased. The industrial sector had suffered greatly from the country's unrest and economic prob- lems. After years of neglect and destruction, Uganda's factories were operating far below capacity: only ten of eighty-three establishments surveyed by the Ministry of Planning and Economic Development in 1985 were operating at more than 30 percent of capacity, whereas twenty-nine recorded no output at all. Estimates of capital-labor ratios in the mid- 1980s indicate that Uganda's average capital-labor ratio was only 10 percent that of Tanzania and 7 percent that of Kenya. The lack of foreign exchange to buy spare parts and lack of functioning infrastructure pre- sented serious obstacles to industrial growth. One need only look at the dilapidated road system in and around Jinja, the nation's former industrial hub to understand the formidable task facing manufacturers: even if they secured the foreign exchange needed to buy im- ported inputs, transporting their goods was nearly impossible. The banking sector had contracted during fifteen years of negative economic growth. In 1970 Uganda had 290 commercial bank branches. By 1987 only eighty-four remained, of which fifty-four were branches operated by government-owned banks. And why would a Ugandan want to deposit money at a bank? With inflation at more than 200 percent and Cen- tral Bank­controlled interest rates around 20 percent, it was a losing proposition. Not surpris- ingly, Uganda's gross domestic saving and investment each represented less than 10 percent of GDP, and domestic consumption was consistently more than 100 percent of GDP. The Ugandan shilling had not fared well. Fixed at 7 shillings to the dollar for most of its existence, it was repeatedly devalued during Obote's second regime. At first, in mid-1981, Obote let the shilling float: it immediately fell to 4 percent of its previous value before settling at a rate of 78 per dollar. A shortage of foreign exchange gave rise to the kibanda (informal and illegal) market. By the end of 1985, the official rate was 1,400 shillings to the dollar, whereas the kibanda rate was almost three times higher at 4,000, indicating that even at 1,400 the official rate was vastly overvalued. Once at par with the Kenyan shilling, the Ugan- dan shilling had become virtually worthless: on the streets of Kampala, one Kenyan shilling could fetch 500 Ugandan shillings. Museveni faced a difficult transformation from guerrilla leader to the leader of a nation. He could have pursued the route of previous Ugandan coups and massacred his defeated oppo- nents, looting along the way, but instead moved to discipline his forces. Drake Ssekeba, the editor of The Star, an independent Ugandan newspaper, noted this: "Every time there is a coup in Uganda there is looting. When Museveni and his men came, there was no looting. That was one of the earliest signs that Museveni was different from those who came before him." 5 Post-Conflict Recovery in Uganda At his installation Museveni voiced his concern for human rights: "The people of Uganda should only die from natural causes, which are not under our control." To be sure, he contin- ued to fight insurgent groups, mostly in the north, but offered total amnesty to those who surrendered their weapons. In forming a government, Museveni chose a broad, national front regime: anyone who wanted to join his party was to be accepted, even if they were enemies the day before. The coalition government was inclusive and comprised leaders from many of the movements that formed in opposition to Milton Obote. Peace finally came to most of Uganda. The slaughter of political dissidents and of families and children stopped after his National Resistance Army took power. Yet, by late 1986 con- cern grew that the Museveni government was failing to provide the direction or policies needed to rebuild the country's devastated economy and improve the plight of the average Ugandan. The skills needed to conduct a successful guerrilla war were not necessarily the same as those needed to steer the country toward recovery. The Currrrrrenttt Polliitttiicall and Economiic Siitttuatttiion::: Januarrry 1987 The first year of the Museveni regime was marked by a tentativeness in governance that led, according to some, to serious misjudgments in economic policy. A senior Western fi- nancial expert noted that "agriculture is heavily, heavily discriminated against in favor of the urban consumers, traders, and importers." Several economic decisions have benefited urban consumers with a calamitous effect on Uganda's fiscal condition. The new economic strategy announced in August 1986 by the finance minister, Mr. Pon- siano Mulema, a professor of economics, was a disaster. Its centerpiece was a huge revalua- tion of the Ugandan shilling. Since May 1986, two legal exchange rates had existed: official transactions were carried out at a rate of 1,400 shillings to the dollar and all other transactions at a legal market rate of about 5,000 shillings to the dollar. Transactions also occurred in the informal kibanda market. Mr. Mulema abolished the legal market rate, so all legal transactions would be at the 1,400 shilling rate. Every exporter has since vowed to keep his money abroad; every would-be importer rushed to get licenses to import at the new, artificially fa- vorable rate. The kibanda rate immediately shot up to 8,000 shillings per dollar. In October 1986, Mulema was replaced by Dr. Crispus Kiyonga, who has a medical background Kiyonga has a difficult task. The government's finances are shaky at best. In an attempt to enable Ugandan citizens to purchase imported consumer goods, the government fixes their prices below world prices. This, of course, puts considerable pressure on the government's finances: for example, in July 1986 the government imported $4.8 million worth of sugar to sell at subsidized prices. Similarly, government subsidies enable Ugandans to buy petrol for about 10 US cents per liter, the lowest price in any country that does not produce oil. The subsidies of imported consumer goods put pressure on the government in another way: it requires foreign exchange. At independence, exports of cotton, coffee, tea, grain, copper, and a few manufactures earned a substantial amount of foreign exchange. Uganda now exports only coffee. Export earnings of $400 million per year barely covers the $200 million debt service payments and imports of oil, sugar, and spare parts for the army. With the nonmonetary sector representing almost 40 percent of economic activity, col- lection of income taxes has become a formidable problem, forcing the government to turn 6 Part A: 1987 again to the coffee producers. Export taxes on coffee provide more than 50 percent of the government's revenue. Moreover, the government controls the marketing of coffee through the Uganda Coffee Marketing Board (CMB). The international price of Ugandan coffee has in- creased almost 50 percent since its 1980 lows, but it has been the government, not coffee growers, that has benefited. CMB periodically increases the prices it pays growers, but in practice the currency depreciation wipes out any increased purchasing power: increases in official CMB prices consistently bring the price paid to producers back up to 10 percent of the world price (computed at the kibanda exchange rate). Coffee grows in Uganda, even if it is neglected, but farmers pick the beans only if they are paid to do so. Some farmers sidestep CMB by smuggling their coffee into Kenya or Rwanda for sale at the average world price of about $1.80 a pound. Bananas, which grow with little maintenance on the smallholder coffee estates, give coffee growers another choice: they can pick bananas, a stalk of which fetches, in Ugandan shillings, at least seven times as much as a pound of coffee. Smuggling has become a way of life in Uganda and not only for coffee farmers. Price controls on consumer goods, along with the controlled official exchange rate, offer smug- glers profitable opportunities. A small-time Ugandan smuggler can buy 20 liters of petrol for $2, strap it to his bicycle and cross the border to Kenya or Rwanda and sell it for $20. Back in Uganda, he can sell the foreign exchange at the kibanda rate of 16,000 shillings to the dollar, reaping a net one-day profit of 288,000 shillings. By comparison, a government minister's monthly salary is about 90,000 shillings. The minimum monthly wage is 10,000 shillings, not enough to buy a stem of bananas or two pounds of sugar. The manufacturing sector is hampered by its own foreign exchange problem: imported parts and machinery are required to rehabilitate existing factories, but the foreign exchange to purchase them is unavailable. Skilled workers--specifically, engineers and repair peo- ple--and people with management experience are greatly needed. Moreover, a substantial portion of the manufacturing sector is based on processing agricultural products. The prob- lems plaguing the agriculture sector also hamper industrial production. Overseas companies seem interested in investing in Uganda but are still quite cautious. The memories of the expulsion of the Asian business community hold some companies back. The government is trying to attract foreign investment by publicly welcoming it, but in prac- tice overseas companies are finding ambivalent attitudes among individual government offi- cials, who give different impressions based on their own viewpoints. Uganda's relationships with its neighbors are not as smooth as in the past. Political and economic strains caused the demise of the East African Community in 1977. Uganda's rela- tionship with Kenya deteriorated further in 1986, as each country alleged the other had been providing support for opposition groups. In the west and north, the movement of ethnic groups across the boundaries with Rwanda, Zaire, and Sudan has been a source of friction. Relations with Tanzania have remained good, although its economy is in poor shape as well. Ugandans believe in Museveni, but their patience is wearing thin. "Rehabilitation by the government is very slow," says the Reverend Wilson Sentongo, waiting for rations of food and other supplies. "We do not know what their plan is. They are telling us to tolerate things. Museveni has sympathy for us, we know, but the problem is supplies are not here and we need help." 7 Post-Conflict Recovery in Uganda Members of the government and many other Ugandans are deeply divided on which course the economy should take. Exchange rate policy and government price controls are the two main issues; the August 1986 budget already cut back fiscal spending. The World Bank and other donors are pushing strenuously for exchange market reform, but Museveni is determined not to let them dictate Ugandan policy. At the same time, Museveni is a pragma- tist who wants to do what is best for Uganda. Polliicy Deciisiion A presidential economic council has been set up to coordinate all aspects of national economic planning and investment. The council is advisory to the president and includes Dr. Kiyonga, the ministers of marketing and commerce, and the governor of the Bank of Uganda. Museveni has stressed that he wants economic activity to reattain pre-independence levels. As an economic advisor to Dr. Kiyonga, Francis Unyofu must draw up a strategy to increase economic activity without compromising macroeconomic stability. Biiblliiogrrraphy Barro, Robert and J. W. Lee. "International Measures of Schooling Years and Schooling Quality." Ameri- can Economics Review 86(2): 218­33, 1993. Economist Intelligence Unit (EIU). Country Profile: Uganda. London, 1988. ------. Country Report: Uganda. London, 1987. International Bank for Reconstruction and Development (IBRD). The Economic Development of Uganda. Baltimore, Md.: Johns Hopkins Press, 1962. International Monetary Fund (IMF). International Financial Statistics. Washington, D.C., 1985 and 1995. ------. Direction of Trade Statistics Yearbook. Washington, D.C., various years. King, Robert G. and Ross Levine. "Capital Fundamentalism, Economic Development, and Economic Growth," Carnegie-Rochester Conference Series on Public Policy, Amsterdam: North-Holland, 1994. Library of Congress, Federal Research Division. Uganda: A Country Study. Washington, D.C., 1992. Sharer, Robert and Calvin McDonald. "Uganda, 1987­94," in Michael T. Hadjimichael and others, Ad- justment for Growth: The African Experience. Washington, D.C.: International Monetary Fund, 1996. World Bank. World Development Report. Washington, D.C., various years. ------. Uganda: The Challenge of Growth and Poverty Reduction. Washington, D.C., 1996. ------. Uganda: Growing Out of Poverty. Washington, D.C., 1993. Sourrrces Francis Unyofu is a creation of the authors, but the other details of Ugandan history are factual. Rather than interrupt the narrative, we credit here those sources from which substantial information has been drawn. More detailed citations are available, when needed, from the authors. "Background" was drawn from Library of Congress (1992). "Pre-Independence Economy" was drawn from IBRD (1962). 8 Part A: 1987 "Political and Economic History: Independence Through 1985" was drawn mainly from EIU quar- terly Country Reports and annual Country Profiles. "The First Year of Museveni's Regime: 1986" was drawn from EIU (1988), Library of Congress (1992) and various articles that appeared in The New York Times, The Economist, and The Financial Times, with precise citations available from the authors. "The Current Political and Economic Situation: January 1987" was drawn from EIU (1988) and vari- ous articles that appeared in The New York Times, The Economist, and The Financial Times. 9 Post-Conflict Recovery in Uganda Appendiix Table A1. Selected Economic Indicators, 1965­86. (percent) Indicator 1965­70 1971­75 1976­80 1981­86 Real GDP growth 4.8 0.2 ­3.5 3.0 Real per capita GDP growth 2.5 ­2.5 ­6.0 1.6 Gross domestic investment 14.4 10.9 6.0 7.2 (percent of GDP) Gross domestic savings 16.0 11.1 6.0 4.6 (percent of GDP) Inflation 4 17 59a 78 a. Average annual inflation rate for 1976 to 1978. Sources: Sharer and others (1996); IMF (1985 and 1995). Table A2. Selected Social Indicators, 1960­85. Indicator 1960 1970 1980 1985 Pupil teacher ratio 30.7 33.5 33.6 34.5 (primary) (42.6) (43.1) (41.2) (39.2) Drop-out rate 22.4 24.3 24.3 (43.4) (36.6) (37.5) Adult illiteracy 65 60 52 57 (85) (70) (63) (48) Population per physician 15.0 9.2 26.8 21.9 (thousands) (39.4) (31.8) (22.9) (23.8) Life expectancy 44 50 54 48 (38) (45) (47) (51) Sources: Barro and Lee (1993) data set; World Bank, World Development Report (various years). Note: Averages for Africa in parentheses. 10 Part A: Appendix Table A3. Central Government Operations, Selected Years. 1960 1971­75 1976­80 1981­86 Central government (percent of GDP) Revenue 12.9 10.0 8.3 5.3 Grants 1.1 0.1 0.1 0.4 Expenditure 13.9 17.2 10.4 8.2 Deficit (-) -0.1 -7.2 -2.0 -2.4 Claims on central government n/a 63.9 69.2 53.7 (percent of domestic credit) Domestic credit n/a 29.3 32.9 65.3 (annual growth rate) Sources: IMF (1995); IBRD (1962). Table A4. Industrial Origin of Gross Domestic Product at Factor Cost, 1960­86. (percent of real GDP) 1960 1965 1971 1977 1981 1986 Agriculture 63.8 53.2 51.1 54.4 55.1 63 Manufacturing 4 6 7.3 6.4 3.9 3.3 Construction 2.6 1.9 1.7 1.1 0.6 2.9 Transport, communications, and commerce 12.1 17 16.8 12.3 10.6 17.1 Government 4.3 6 6.9 10 14 6.5 Other monetary 13.2 15.9 16.2 15.8 15.8 7.2 Nonmonetary 27.2 32.9 30.0 30 39.8 39.2 Sources: IBRD (1962), EIU Country Profiles (various issues). 11 Post-Conflict Recovery in Uganda Table A5. Industrial Origin of Gross Domestic Product at Factor Cost, 1965 and 1986. (at 1966 prices) 1965 1986 millions of USh millions of USh percent percent Agriculture 3,077 53.2 3,968 55.1 Mining and quarrying 111 1.9 7 0.1 Manufacturing 373 6.4 314 4.4 Electricity, gas, and water 60 1.0 95 1.3 Construction 107 1.8 54 0.8 Transport, communications, and commerce 982 17.0 702 9.8 Government 345 6.0 932 13.0 Other services 732 12.6 1,126 15.6 GDP 5,787 100.0 7,196 100.0 (o/w nonmonetary) 1,904 32.9 2,867 39.8 Average annual growth rate of 1.0% real GDP, 1965­86: Sources: Quarterly Economic Report and Country Profile (EIU). Table A6. Production and Trade, 1960­86. 1960 1965 1971 1977 1981 1986 Coffee Production (thousands of tons) 113 218 191 156 128 160 Percent of total exports 40.8 42.0 50.7 92.9 98.0 96.6 Cotton Production (thousands of tons) 210 243 75 14 4 18 Percent of total exports 35.9 23.1 17.6 2.6 0.9 1.2 Copper Production (tons) 14,515 16,870 16,900 2,500 nil nil Percent of total exports 8.9 11.0 8.3 0.0 0.0 0.0 Sugar (percent of exports) 3.6 1.2 1.0 0.0 0.0 0.0 Tea (percent of exports) 3.5 3.3 4.7 2.1 0.1 0.8 Total Exports (percent of GDP) 27.4 3.3 1.8 1.0 4.6 10.3 Total Imports (percent of GDP) 17.1 25.7 17.2 4.1 nil 16.7 Sources: IBRD (1962); World Bank (1993); IMF (1995). 12 Part A: Appendix Table A7. Major Trading Partners, 1960­86. 1960 1971 1977 1981 1986 Exports (percent of total) United Kingdom 16.2 21.8 17.5 13.7 15.6 United States 15.3 20.1 37.8 40.2 29.1 Japan 2.7 9.8 3.2 5.6 3.8 India 20.1 7.4 nil 0.0 0.0 Kenya 12.3 8.7 0.4 0.7 0.3 Imports (percent of total) United Kingdom 18.7 24.6 9.1 14.3 13.5 United States n/a 5.4 0.7 1.9 1.5 Japan 8.7 10.3 3.2 1.5 5.7 India 2.2 3.6 2.6 5.3 7.6 Kenya 23.7 21.5 56.6 33.0 37.4 Source: IMF, Direction of Trade Statistics Yearbook, (various years). Table A8. Exchange Rates, 1960­86. Official Kibanda Real Effective (USh/US$) (USh/US$) (1987=100) 1960­74 7 1977 8 1980 8 435 1981 85 308 1982 106 107 1983 240 83 1984 520 57 1985 1,400 4,000 74 1986 1,400 12,000 78 Sources: Bank of Uganda and International Monetary Fund. Note: Official and kibanda rates are end of year. The real effective rate is annual average. 13 Post-Conflict Recovery in Uganda Chart A1. Ugandan Coffee, 1965­86. (US dollars/pound) $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 14 Part B::: Post-Conflliict Recovery iin Uganda 1992 Progress has been made, thought Francis Unyofu. Six years after Yoweri Museveni and his National Resistance Movement took power, Uganda has made remarkable strides in over- coming as grim a legacy as any African government has known. Improved security has been an important factor in allowing the country to rebuild. Economic policy has helped, too. The past six years has seen economic growth averaging more than 5 percent per year, as idled land and vacant factories were brought back into use. The economy has also achieved lower price inflation. Now, in 1992, Uganda is at a crossroads. Economic growth is slowing, and inflation is beginning to rise. Uganda is highly indebted to foreign lenders. Further increases in capacity utilization will be a costly means to grow and cannot represent a strategy for sustained eco- nomic growth. Infrastructure remains inadequate in transport and communications. The pre- ferred road is clear: public and private investments are needed to continue the reconstruc- tion. Some of this can come from abroad, if Uganda's economic prospects appeal to inter- national investors, although Uganda is currently seen as a high-risk country. But what about Ugandans, Francis thought? It is June 1992, and Francis is a department head in the Finance Ministry--now called the Ministry of Finance and Economic Planning. The minister, his boss, is recently appointed--Mr. Joshua Mayanga-Nkangi, the former minister of planning and economic development, re- placed Dr. Kiyonga. His department has been tasked to devise a strategy to increase produc- tive investment for the next five years while maintaining fiscal and monetary discipline. The minister has asked Francis to direct this effort. Overrrviiew offf Polliiciies and Aggrrregattte Perrrffforrrmance::: Fiiscall 1987­88 ttto 1990­91 In May 1987 the Museveni government announced its first economic program.4 It had six basic components: · A new Ugandan shilling (USh) went into circulation at a rate of 60 to the dollar.5 This represented a 77 percent reduction in value of the shilling. Old shillings could be converted to new shillings at the rate of 100 to 1, but such conversions were subject to a 30 percent tax. · The Rehabilitation and Development Plan was inaugurated. This plan was a timetable for government expenditures designed to restore production capacity and rehabili- tate economic and social infrastructure. The plan called for funding of $1.3 billion for This is the second part of a three-part case created by Frank Warnock and Patrick Conway of the University of North Carolina at Chapel Hill on the subject of Ugandan economic growth. Thanks to Philip English and Jorge Araujo for useful comments on its content. 4 The Ugandan fiscal year runs from July 1 to June 30. 5 In the following references, the word "dollar" and the symbol "$" refer to U.S. dollars. The word "shilling" and acronym "Ush" refer to the Ugandan shilling, unless otherwise noted. 15 Post-Conflict Recovery in Uganda four years, with transport to receive the major share (29 percent), followed by agri- culture (24 percent), industry and tourism (21 percent), social infrastructure (17 per- cent), and mining and energy (7 percent). · Prices paid to farmers were increased by up to 500 percent as an incentive to revive agricultural production. · The price of petrol was increased by 50 percent, somewhat closer to its real market value, in an attempt to reduce smuggling and government outlays. · The salaries of civil servants were doubled in an effort to restore some of their lost purchasing power. · Under an International Monetary Fund program, the government promised to tighten its budget and reduce inflation by restricting monetary expansion. In the first year, insufficient tax revenues along with a falling international price for coffee led to a large budget deficit. The government turned to the Bank of Uganda to finance its deficit, thus, continuing its inflationary policy of previous years. In July 1988, however, the government redoubled its efforts at macroeconomic stabilization. In his fiscal 1988­89 budget presentation, Finance Minister Crispus Kiyonga announced additional economic re- forms: · The shilling would be devalued by a further 60 percent to USh150 to the dollar. · Further efforts would be made to reduce the budget deficit. · Producer prices and public sector wages would be increased. Still later, a policy of regular adjustments of the exchange rate to maintain a real effective depreciation was introduced. In the period under consideration, growth in real GDP exceeded 5 percent on average. In the prior fiscal year (fiscal 1986­87), real growth was 3.7 percent a year. In the subse- quent four fiscal years the annual growth rate averaged 6.2 percent. In fiscal 1991­92, the economic growth rate once again fell to under 4 percent a year.6 Both public and private investment increased during the period represented by fiscal 1986­87 to fiscal 1991­92. Private investment rose from 8 percent of GDP in fiscal 1985­86 to 10.6 percent on average for the period fiscal 1987­88 to 1990­91, but settled back to 9 percent of GDP in fiscal 1991­92. Public investment, in contrast, rose throughout the period from 3.5 percent of GDP in the prior fiscal year to 6.8 percent of GDP in the final year. The period 1980­93 was char- acterized by a strong push in primary education and tremendous increases in enrollment in that age cohort. Secondary education, however, remained below average for low-income countries. This investment was for the most part financed through foreign borrowing, because do- mestic saving (public and private) was negative on average for each period. The public fiscal deficit played a large part in this negative saving; fiscal deficits rose from 4.2 percent of GDP in 1985­86 to 14.1 percent of GDP in 1991­92. In fiscal 1990­91 the annual inflation rate was down to 25 percent, representing a drastic improvement from more than 200 percent inflation in 1986­87. As noted above, however, the inflation rate rose in fiscal 1991­92 to above 40 percent. 6Tables providing evidence corroborating the discussion in the text can be found in the appendix to part B. 16 Part B: 1992 IInttterrrnatttiionall Supporrrttt ffforrr ttthe Reffforrrm Prrrogrrram The World Bank, International Monetary Fund, and other donors responded vigorously to Museveni's reform policies by pledging $310 million in aid in fiscal 1987­88. This was $50 million more than the government had sought and was earmarked for purchasing essen- tials--imports of raw materials, spare parts, and capital goods needed to get production rolling again. All debt repayments that Uganda was to make in fiscal 1987­88 were also re- scheduled; this released the country from $66 million in international payments that year. Goverrrnmenttt Budgetttarrry Polliicy The desired fiscal deficit reduction did not materialize during fiscal 1986­87 to 1990­91. Government revenue remained quite low as international coffee prices plummeted, tax col- lection remained inadequate, and the proposed sale of twenty-two parastatal enterprises did not develop as quickly as planned. With the government's commitment to public invest- ment and the continuing petrol subsidy, reduction of the budget deficit became an impossi- ble task. Fiscal deficits averaged nearly 7 percent of GDP in the late 1980s. Grants and foreign aid financed a portion of the deficits, but Uganda accumulated a substantial foreign debt as well. Uganda's debt service ratio (as a percent of exports) rose above 70 percent by 1991. A number of government policies were intended to reduce the adverse effects of these deficits: · First, the government for the most part avoided borrowing from the Bank of Uganda in financing its fiscal deficits. The government was increasingly able to turn to external funding, both loans and grants, with the result that domestic borrowing averaged only 0.2 percent of GDP during these years. · Second, the government lessened its reliance on revenues from coffee taxes and the Coffee Marketing Board. By fiscal 1990­91, coffee taxes and budgetary contributions of the board represented only 10 percent of government revenue, down from 35 percent in fiscal 1986­87. This was accomplished by reducing the coffee export tax rate and increasing collection of customs duties and sales taxes, which became the principal sources of recurrent revenue by fiscal 1990­91. The Museveni government also became more successful in income tax collection by in- creasing delegation of responsibility for collection by local governments. Nevertheless, the restructuring of revenue collection was hampered by the sheer size of the nonmonetary sector. Although its importance declined during this period, at the end of the period, it re- portedly still represented 32 percent of total economic activity. The government realizes that social and infrastructural spending has been inadequate be- cause central government spending has, in the past, been dominated by defense. Official numbers indicate that defense swallowed 22 percent of government spending in fiscal 1990­91, although unofficial estimates are closer to 50 percent. At the same time, education received only 14 percent of recurrent spending, and health received a meager 5 percent. To be sure, the government has tightened its belt in some areas. For example, the civil service has undergone a restructuring; almost one-half of the 225,000 civil service positions were eliminated in 1990­91. Unfortunately, this has done little for the image of the govern- ment, because many low-level workers were released, whereas the extravagance of high- 17 Post-Conflict Recovery in Uganda level officials is chronicled daily in the press. Moreover, those still at work earn a less-than- subsistence salary. At the bottom end of the ladder, civil servants earn only 1,000 shillings per month--the price of a bunch of bananas. Permanent secretaries heading government agencies earn only 6,000 shillings monthly. Most bureaucrats spend much of their time work- ing on outside income-earning activities. Fiinanciiall Sectttorrr Devellopmenttt Most private citizens have had access to commercial banks or other saving institutions but have remained uninterested in depositing their earnings with those institutions. In 1970 banks held time deposits valued at 5.9 percent of GDP, but by 1989 the same ratio had fallen to 0.7 percent. (In contrast, in 1991, in neighboring Kenya, time deposits represented 17 percent of GDP.) Two reasons appeared paramount in the private choice not to save through the banking system: · The Bank of Uganda set nominal interest rates, but these rates were lower in annual terms than the inflation rate. Putting money in the bank, thus, was a losing proposition for Ugandans, because the purchasing power of the funds withdrawn from the bank, even after interest was earned, was less than its original value. · Corruption scandals have lowered confidence in banking institutions. In 1989 the state-owned Uganda Commercial Bank was charged with defrauding depositors. In 1991 the bank was again linked to a conspiracy to defraud the government. (A Dan- ish aid worker discovered the conspiracy and was subsequently shot in broad day- light in Kampala.) These frauds were associated with documented mismanagement at the bank and were made worse in the public eye by the extravagant lifestyle of the bank's managing director. High-ranking officials in other banks were also charged with fraud. Also in 1991, the manager of the Orient Forex Bureau was arrested at Entebbe airport while smuggling out $1 million in cash, traveler's cheques, and bank drafts. The Bank of Uganda was accused of inadequately supervising the banking system; in- deed, in the banks investigated, reserves against deposits were discovered to be woefully below the required 10 percent. Evidence also exists of insolvency on the part of the larger commercial banks, including the state-owned Uganda Commercial Bank. These banks have substantial accumulated losses, a high proportion of nonrecoverable loans, and a weak cash flow. Forrreiign Exchange Avaiillabiilliittty Foreign exchange remained the single biggest constraint for businesses. Hard currency continued to be available only erratically and without advanced notice, making planning im- possible. According to one report, even some parastatals (government-controlled enter- prises, many of which were confiscated or taken over when abandoned by Asians expelled in 1971) were driven to buy dollars on the kibanda (informal and illegal) market to pay for essential imports. Moreover, the Bank of Uganda was under attack for widespread misman- agement and corruption in the area of foreign exchange and import licenses. In an attempt to gain some control of the illegal market in hard currencies, in 1990 the government legalized the kibanda by introducing a system of authorized foreign exchange (forex) bureaus. 18 Part B: 1992 The continued overvaluation of the shilling on the official foreign exchange market made life difficult for Ugandan exporters. Even with periodic devaluations, the shilling was vastly overvalued: the kibanda rate was typically two or three times higher than the official rate. Even the later policy of real effective depreciation was only partially successful. This helped to close the gap between the official and kibanda rates, but by 1991 the official rate was up to 558, compared to 780 in the forex bureaus, for a remaining premium at 40 percent. Not surprisingly, Uganda's annual trade deficit averaged more than $400 million. Agrrriicullttturrrall Sectttorrr Perrrffforrrmance Much of Uganda's economic growth during this period is attributable to the agricultural sector. Funding of $400 million from the Rehabilitation and Development Plan helped, as did improvements in infrastructure. Efforts were made to both increase production of traditional cash crops (coffee, cotton, tea, and tobacco) and promote cultivation of nontraditional agri- cultural crops (NTA) such as maize, beans, peanuts, soybeans, sesame seeds, and a variety of fruits. Traditional cash crops on average contributed little during this period to real GDP growth, but NTA crops contributed almost 30 percent of observed real growth. Some of the traditional cash crops made a comeback. Recognizing the linkages cotton has with other industries such as local textile mills, soap factories, and animal feed, the gov- ernment initiated an emergency cotton production program in 1989 that provided extension services, tractors, and other inputs for cotton farmers. Although cotton suffered from rural insecurity and labor shortages in the central and southeastern regions of the country, exports increased from about 3,000 tons per year in the late 1980s to nearly 8,000 tons in 1991. The return of Asians expelled in the early 1970s revitalized the tea and sugar sectors. Tea exports rebounded dramatically, rising from 2,000 to 3,000 tons in the late 1980s to 7,000 tons in 1991. Sugar production also increased substantially--from nil in 1987 to more than 40,000 tons in 1991--as old estates were rehabilitated in joint government ventures with the original owners. This period was unfortunately a difficult time for Ugandan coffee growers, pulling down the average contribution of cash crops to GDP growth. Even in good times the price that CMB paid to growers never amounted to much more than one-tenth of the world price. In December 1988, the situation worsened: due to its own budgetary shortfalls CMB was un- able to pay farmers for new deliveries. Although the government agreed to provide funds for these obligations, some farmers were unpaid for another year. The situation deteriorated fur- ther in July 1989 when the International Coffee Organization--a consortium of coffee- producing nations that set international production quotas and prices--collapsed and coffee prices plummeted. Furthermore, the government continued to apply the official exchange rate to coffee exports (but not to other exports), denying the industry the benefits of the more advantageous rates of the new forex bureaus. Coinciding with the collapse of world coffee prices, the government took the first step in liberalizing the Ugandan coffee market. In 1990 CMB's monopoly in the export of coffee was broken as four private cooperatives were licensed to export directly; however, low produc- tion and farm level productivity--many of the coffee trees were more than 40­50 years old and had reached the end of their economic life--continued to plague the coffee sector. 19 Post-Conflict Recovery in Uganda Because the domestic market is small, agricultural exports are the key to growth. Several government programs were intended to expand NTA exports. In late 1988 the government made it easier for private companies to retain foreign exchange earned for NTA exports and to use it to purchase imports. The general patterns of NTA exports have been quite erratic, however, and have been significantly influenced by exogenous factors, such as the 1990­91 drought in Sudan. Manufffacttturrriing and Serrrviice Sectttorrr Perrrffforrrmance The industrial sector grew strongly in the late 1980s. It began (and remained) a small per- centage of total GDP, but represented between 20 and 40 percent of the annual contribu- tions to aggregate growth observed in the period 1986­92. Construction was the most buoyant part of the industrial sector, but manufacturing grew strongly during this period as well. The services sector represented about one-third of GDP throughout this period and grew at roughly the growth rate of GDP. A main goal of the government in the late 1980s was to decrease Uganda's dependence on imported manufactured goods by rehabilitating existing enterprises. Run-down plant and equipment and shortages of spares and foreign exchange, however, continued to hamper the manufacturing sector's recovery. Growth in construction was strong but held back by a shortage of inputs such as cement, even though the requirements for basic construction are all produced locally. The Currrrrrenttt Siitttuatttiion::: June 1992 Fiscal 1991­92 has been a difficult one in Uganda. Real GDP growth, which averaged more than 5 percent per year in the first five years of Museveni's regime, slowed to 3.6 per- cent as a drought reduced crop production. Coffee prices did not recover, and coffee ex- port receipts fell to $117 million, one-third of the fiscal 1986­87 level. Imports fell to levels not seen since 1986. Donor countries slowed aid disbursements, necessitating government borrowing from the Bank of Uganda to finance a large fiscal deficit. The drought put upward pressure on food prices, and this, coupled with increased government borrowing, resulted in a setback on the inflation front as inflation increased to 42 percent. The shilling continued its depreciation on the kibanda market to 1,000 per dollar, a 76 percent fall in value from the previous year. The new four-year Rehabilitation and Development Plan continues the government's ag- gressive public expenditure policy but emphasizes changes in the government's spending priorities. Resources are being switched out of the productive sectors into social infrastruc- ture, primarily as a result of the government's determination to fight the HIV/AIDS epidemic. Water projects are also receiving a greater share compared to the previous Rehabilitation and Development Plan; fewer funds are available for manufacturing and agriculture. The public is growing increasingly disillusioned with high-level corruption. The ministries of agriculture, commerce, and energy have figured prominently in continuing revelations of corruption and malpractice. Corruption is also reportedly hampering the sales of parastatals, because there is talk of delays designed to favor candidates with government links. Problems with corruption persist throughout the civil service, in which salaries are still too low. 20 Part B: 1992 On March 28, 1992, Dr. Crispus Kiyonga, the finance minister since November 1986, was sacked. A new joint ministry of finance and economic planning was formed. Kiyonga's re- placement was Joshua Mayanga-Nkangi, formerly minister of planning and economic devel- opment. Nkangi pledged to get back on the path of fiscal and monetary discipline that Ki- yonga had initially chosen. Polliicy Diillemma Economic growth during the first six years of the Museveni government was strong, es- pecially when compared with Uganda's previous economic results. Now, in mid-1992, there is evidence that the engine of growth for that period has run out of steam. Foreign investment has trickled into Uganda, especially as expropriated properties are returned to their owners, but investor confidence remains low. Finance Minister Nkangi is committed to maintaining tight fiscal control in a period of lagging fiscal revenues. The scope for expansion without active private participation in productive investment, thus, is likely to be limited. Francis Unyofu's department must devise an economic strategy to increase productive investment while maintaining fiscal and monetary discipline. The minister recognizes that this might require a reallocation of existing public investment funds and seeks recommendations for such reallocations if necessary. Biiblliiogrrraphy Economist Intelligence Unit. Country Profile: Uganda. London, 1988 and 1991. ------. Country Report: Uganda. London, 1992. International Monetary Fund. International Financial Statistics. Washington, D.C., 1995. Library of Congress, Federal Research Division. Uganda: A Country Study. Washington, D.C., 1992. Sharer, Robert and Calvin McDonald: "Uganda, 1987­94" in Michael T. Hadjimichael and others, Ad- justment for Growth: The African Experience. Washington, D.C.: International Monetary Fund, 1996. World Bank: Uganda: Growing Out of Poverty. Washington, D.C., 1993. ------. Uganda: The Challenge of Growth and Poverty Reduction. Washington, D.C., 1996. Sourrrces Francis Unyofu is a creation of the authors, but other details of Ugandan history are factual. Rather than interrupt the narrative, we credit here those sources from whom substantial information has been drawn. More detailed citations are available, when needed, from the authors. All data in Appendix B are as presented in World Bank (1993 and 1996). "Overview of Policies and Aggregate Performance: Fiscal 1987­88 to 1990­91" is drawn from Li- brary of Congress (1992), EIU Country Profile (1988 and 1991), and various articles that appeared in The New York Times, The Economist, and The Financial Times, with precise citations available from the authors. "The Current Political Situation: June 1992" is drawn mainly from EIU (1992). 21 Post-Conflict Recovery in Uganda Appendiix B Table B1. GDP by Sector at Constant 1991 Prices, Fiscal 1985­91. (percent of GDP) 1987­88 to Sector 1985­86 1986­87 1990­91 1991­92 Agriculture 56.2 55.2 53.7 50.2 Cash crops 3.8 3.5 3.3 3.4 Food crops 38.0 37.6 36.8 33.5 Industry 10.3 11.3 12.5 13.8 Mining and quarrying 0.1 0.1 0.2 0.3 Manufacturing 5.0 4.9 5.5 6.6 Coffee, cotton, sugar 0.5 0.5 0.6 0.9 Food products 0.6 0.6 0.8 0.8 Construction 4.3 5.4 5.9 5.9 Services 33.5 33.5 33.9 36.0 Trade 10.4 10.3 10.9 11.8 Transport and communication 3.9 4.0 4.1 4.2 General government 3.8 3.7 3.5 3.7 Education 4.0 3.8 3.6 3.6 Health 1.6 1.6 1.5 1.5 GDP at factor cost 100.0 100.0 100.0 100.0 o/w nonmonetary 35.8 35.3 33.6 30.1 Source: Statistics Department, Ministry of Finance and Economic Planning. Table B2. GDP by Sector at Constant 1991 Prices, FY 1985­91 (average annual growth rates) 1987­88 to Sector 1985­86 1986­87 1990­91 1991­92 Agriculture 1.3 1.8 5.0 ­1.1 Cash crops ­16.4 ­3.8 5.2 5.2 Food crops 5.3 2.6 5.0 ­3.2 Industry ­4.6 13.3 9.8 11.2 Mining and quarrying ­12.2 ­9.7 33.8 12.4 Manufacturing ­4.8 2.4 10.7 18.9 Coffee, cotton, sugar ­0.6 4.3 10.1 54.5 Food products ­5.6 12.3 12.2 9.0 Construction ­5.9 28.4 9.0 3.8 Services 0.5 3.8 7.1 7.9 Trade ­2.6 2.6 8.4 9.0 Transport and communication 5.1 7.0 6.9 4.5 General government 1.6 2.8 4.3 11.8 Education 0.6 0.2 5.1 1.5 Health 2.3 3.6 3.5 6.1 GDP at factor cost 0.4 3.7 6.2 3.6 o/w nonmonetary 4.5 2.3 3.8 ­3.1 Source: Statistics Department, Ministry of Finance and Economic Planning. 22 Part B: Appendix Table B3: Contributions to Real GDP Growth by Expenditure, Fiscal 1985­91 1986­87 to Expenditure 1985­86 1986­87 1990­91 1991­92 Consumption 128.3 ­609.4 81.6 90.5 Private 125.1 ­528.1 75.9 43.1 Public 3.4 ­81.5 5.7 55.2 Gross domestic investment 13.1 ­649.2 22.3 ­19.7 Fixed capital formation 18.6 ­1,232.5 12.8 ­10.7 Private 247.9 ­529.3 5.1 ­22.0 Public ­87.8 ­804.8 7.7 16.4 Net change in stocks Resource balance ­41.4 1,358.6 ­3.9 29.2 Exports GNFS 4.6 54.8 1.7 24.1 Imports GNFS 45.6 ­1,160.5 5.6 ­11.6 GDP at market prices 100.0 100.0 100.0 100.0 Addendum: ­0.3 3.8 5.9 3.2 Growth rate in GDP at factor cost Source: Statistics Department, Ministry of Finance and Economic Planning, and authors' calculations. Table B4. GDP by Expenditure at Constant 1991 Prices (percent of GDP) 1987­88 to Expenditure 1985­86 1986­87 1990­91 1991­92 Consumption 104.9 104.0 101.4 101.6 Private 94.0 93.1 91.2 89.8 Public 10.9 10.9 10.2 11.8 Gross domestic investment 12.5 14.7 16.6 14.6 Fixed capital formation 12.5 16.5 16.7 14.7 Private 9.0 10.8 10.6 8.0 Public 3.5 5.7 6.0 6.8 Net change in stocks 0.0 0.3 ­0.0 ­0.1 Resource balance ­15.7 ­20.2 ­18.2 ­14.5 Exports GNFS a 8.3 7.7 7.0 7.2 Imports GNFS 24.0 27.9 25.2 21.8 GDP at market prices 100.0 100.0 100.0 100.0 Source: Statistics Department, Ministry of Finance and Economic Planning. aGoods and nonfactor services. 23 Post-Conflict Recovery in Uganda Table B5. GDP by Expenditure at Constant 1991 Prices. (average annual growth rates) 1987­88 to Expenditure 1985­86 1986­87 1990­91 1991­92 Consumption 2.0 2.9 5.4 4.6 Private 2.2 2.8 5.6 2.5 Public 0.5 3.7 3.8 24.0 Gross domestic investment 1.8 22.0 9.1 ­6.9 Fixed capital formation 2.5 37.1 5.2 ­3.7 Private 46.0 24.3 3.3 ­14.2 Public ­42.1 70.0 8.6 12.5 Net change in stocks Resource balance 4.4 33.4 1.4 ­10.3 Exports GNFS a 0.9 ­3.5 1.6 17.1 Imports GNFS 3.2 20.7 1.5 ­2.7 GDP at market prices ­0.3 3.8 6.4 3.2 Source: Statistics Department, Ministry of Finance and Economic Planning. aGoods and nonfactor services. Table B6. Production of Principal Commodities, 1986­92 Commodity 1986 1987 1988 1989 1990 1991 1992 Sugar (tons) 0 0 7,535 15,859 28,915 42,456 53,539 Beer (thousands of liters) 6,603 16,484 21,139 19,516 19,420 19,529 18,718 Textiles (thousands of 9,733 10,465 11,067 11,589 8,172 8,901 9,650 square meters) Cement (tons) 16,376 15,904 14,960 17,378 26,920 27,138 37,881 Source: Statistics Department, Ministry of Finance and Economic Planning. 24 Part B: Appendix Table B7. Exports of Cash Crops, 1986­92 1986 1987 1988 1989 1990 1991 1992 Coffee Tons 140,800 148,153 144,254 176,453 141,489 124,819 119,006 Value 394,200 307,535 265,279 262,811 140,384 117,641 95,372 (thousands of US$) Percent of total 96.9 92.2 99.6 94.6 79.0 67.9 63.1 exports Tea Tons 2,800 2,100 3,079 3,195 4,760 7,018 7,816 Value 3,100 1,900 3,079 3,195 3,566 6,780 7,721 (thousands of US$) Percent of total 0.8 0.6 1.2 1.2 2.0 3.9 5.1 exports Cotton Tons 4,875 3,443 2,088 2,321 3,808 7,819 7,535 Value 5,086 4,097 2,968 4,020 5,795 11,731 8,218 (thousands of US$) Percent of total 1.3 1.2 1.1 1.4 3.3 6.8 5.4 exports Tobacco Tons 0 0 39 490 2,269 2,467 2,322 Value 0 0 58 569 2,821 4,540 4,333 (thousands of US$) Percent of total 0.0 0.0 0.0 0.2 1.6 2.6 2.9 exports Source: Statistics Department, Ministry of Finance and Economic Planning. Table B8. Balance of Payments, FY 1985­91 (in $US millions) 1985­86 1986­87 1987­88 1988­89 1989­90 1990­91 1991­92 Exports GNFS 389.0 406.0 323.9 304.0 245.7 198.9 195.1 o/w coffee 360.0 365.0 285.9 276.0 159.0 127.0 116.9 Imports GNFS 446.0 600.0 682.0 712.0 675.8 670.5 581.5 o/w petrol 61.0 63.0 69.0 76.0 78.0 87.0 57.0 Trade balance ­57.0 ­194.0 ­358.1 ­408.0 ­430.1 ­471.6 ­386.4 Net factor income ­44.0 ­47.0 ­57.0 ­66.0 ­77.0 ­58.2 ­87.0 Current private transfers 101.0 100.2 120.0 114.0 78.0 80.5 135.9 C/A balance (excl. grants) 0.0 ­140.8 ­295.1 ­360.0 ­429.1 ­449.3 ­337.5 Official transfers 31.0 40.1 92.4 131.0 152.7 261.9 206.1 C/A balance (incl. grants) 31.0 ­100.7 ­202.7 ­229.0 ­276.4 ­187.4 ­131.4 Overall balance 24.0 ­78.7 ­64.7 ­101.9 ­44.1 ­101.3 ­121.1 Sources: Bank of Uganda and International Monetary Fund. 25 Post-Conflict Recovery in Uganda Table B9. Exchange Rates, FY 1985­91. 1985­86 1986­87 1987­88 1988­89 1989­90 1990­91 1991­92 Official rate (USh/$) 11 22 60 170 320 558 983 Average bureau rate (USh/$) 30 110 285 474 662 780 1,130 Premium bureau/official 166 407 376 178 107 40 15 (percent) Sources: Bank of Uganda; Statistics Department, Ministry of Finance and Economic Planning Note: Forex bureaus were legalized in July 1990. Table B10. Financial Indicators, FY 1986­91. 1985­86 1986­87 1987­88 1988­89 1989­90 1990­91 1991­92 (annual growth rates) Domestic credit 70 141 195 183 16 51 58 Broad money (M2) 150 91 212 125 57 47 ­84 (percent) M2/GDP 10.2 6.8 6.8 6.7 6.8 7.5 7.6 Claims on private sectora 44 50 56 50 51 61 88 Inflation 148 217 168 131 45 25 42 Nominal interest rateb 38 43 39 37 32 Real interest rate ­130 ­88 ­6 12 ­10 a. Percent of total domestic credit. b. Ninety-one-day treasury bill, end-year basis. Sources: Bank of Uganda; Statistics Department, Ministry of Finance and Economic Planning. 26 Part B: Appendix Table B11. Central Government Operations, FY 1985­91. (percent of GDP at market prices) 1987­88 to 1985­86 1986­87 1990­91 1991­92 Total revenue 6.4 4.6 6.7 6.7 Tax revenue 6.3 3.8 6.1 6.2 o/w coffee 4.3 1.6 0.9 0.1 Total expenditure 10.7 8.8 12.8 20.9 Current expenditure 7.9 5.5 6.9 11.6 o/w wages and salaries 1.2 1.0 1.1 1.7 Capital expenditure 2.7 3.3 5.7 9.0 Overall deficit (cash) ­4.2 ­4.2 ­6.7 ­14.1 Financing Budgetary grants 1.1 0.4 2.5 7.0 External 1.0 0.3 4.1 5.1 Domestic 2.1 3.4 0.2 2.0 Sources: Ministry of Finance and Economic Planning, Statistics Department, and the International Monetary Fund Table B12. Destination of Central Government Expenditure (percent of total expenditures) 1986­87 1987­88 to 1990­91 1991­92 Total current expenditure 62.5 54.8 56.4 General public services 11.5 9.4 Defense and security 26.4 23.7 Education 7.6 8.1 Health 1.9 2.4 Other social services 3.6 1.3 Economic services 6.9 3.8 Interest payments 4.5 6.2 15.7 Total capital expenditure 37.5 45.2 43.6 General public services 6.6 18.9 Defense and security 1.4 2.2 Education 4.0 2.1 Health 0.7 1.5 Other social services 2.1 1.5 Economic services 22.8 19.1 Source: International Monetary Fund. 27 Post-Conflict Recovery in Uganda Chart B1. Price of Ugandan coffee, 1965­92. (US$/pound) $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 Note: The dotted portion of the line indicates the period of time addressed in part B of this case. 28 Postscriipt::: Post-Conflliict Recovery iin Uganda,,, 1995 Since launching the first Reconstruction and Development Plan in 1987, Uganda has made steady progress in macroeconomic stabilization. After a brief setback in fiscal 1991­92, the government introduced a policy shift to encourage private saving and investment. The com- ponents of this policy were: · Foreign exchange controls have been eliminated, and the shilling is determined on the market. · Marketing of cash crops has been opened to competition, although in practice the old marketing boards still market a large share of the crops. · Price controls have been eliminated. The role of the government in cash crops has subsequently shifted toward supervision and quality control. · The Ugandan Revenue Authority was established in an attempt to broaden the gov- ernment's revenue base. · The size of the civil service and army were cut in half. · The Ugandan Investment Authority was established to provide information and li- censes, greatly simplifying the old system. · The Bank of Uganda stopped controlling the level of interest rates. Uganda has achieved a degree of macroeconomic stability. Vast improvements have been made on the inflation front as reduced fiscal deficits and restrictions on government borrowing from the Bank of Uganda brought inflation to below 10 percent by 1993, a far cry from the 200 percent rate observed in the mid-1980s. Exporters are actually having to deal with an appreciating Ugandan shilling, something unheard of for a generation. Production has responded to the economic and political stability of the Museveni regime. Growth in real GDP picked up again after a disappointing fiscal 1991­92, averaging between 5 and 10 percent per year, as all formal sectors--agriculture, industry, and services--expanded. In particular, the food crop sector, recently freed from a myriad of government regulations and in position to export to drought-stricken areas of Africa, posted strong gains (12.3 percent in- crease) in fiscal 1992­93. The manufacturing sector grew almost 15 percent in fiscal 1993­94, although crumbling infrastructure continues to be a problem. To be sure, some infrastructure has been renovated; many roads, in particular, have been completely resurfaced. The value of exports continued to fall until the world price of coffee recovered in fiscal 1994­95. Export diversification, however, has been quite successful: nontraditional exports doubled in 1993 and are currently about 30 percent of total exports. A large gap, however, still exists between exports and imports. Although macroeconomic stability and the removal of various disincentives have helped Uganda recover from its crisis, the country still faces a number of economic problems. Fore- This is the third part of a three-part case created by Frank Warnock and Patrick Conway of the Uni- versity of North Carolina at Chapel Hill on the subject of Ugandan economic growth. Thanks to Philip English and Jorge Araujo for useful comments on its content. 29 Post-Conflict Recovery in Uganda most are the low levels of investment and savings, which by 1995 increased to 18 and 5 per- cent of GDP, respectively. At the heart of the problem is the weak performance of the financial sector, which is still far too narrow, consisting only of the seriously undercapitalized Bank of Uganda, ten commercial banks--still dominated by the now privatized Uganda Commercial Bank--and two development banks. Bad loans are taking their toll on the banking system, as the widening spreads between deposit and lending rates point to profitability problems. Moreo- ver, the public is still somewhat wary of the financial sector, although the ratio of time deposits to GDP has risen by 1993 to 2.3 percent of GDP. A financial reform program has been de- signed with the World Bank. Among the recommendations of that program is a recapitalization of the Bank of Uganda to enable a strengthening of regulatory powers. The government, even with the establishment of the Revenue Authority, still suffers from low revenue collection. Foreign aid finances 60 percent of government spending. As HIV/AIDS continues to sap the resources of the nation, there is a great need for human capital investment, particularly in the areas of health and education. Government spending for health and education has increased steadily in real terms in the 1990s, mostly to increase salaries. Spending in these areas as a share of GDP still falls short of averages for Sub-Saharan Africa. 30