1.        Uganda has been implementing an ambitious and successful program of macroeconomic adjustment and structural reform since 1987, with strong support from multilateral and bilateral creditors and donors. The government’s continued application of appropriate fiscal and monetary policies and of a program of substantial economic liberalization has maintained high growth, low inflation, a steadily improving balance of payments, and an increasingly vibrant and diversified private sector. In April 1998, Uganda became the first country to reach its completion point under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) as the Executive Boards of the IMF and IDA agreed that the necessary conditions had been fulfilled. This document focuses on the government’s objectives, strategies, and policies for the three-year period 1998/99–2000/01 (July–June).

2.        Uganda has continued to build on the progress begun over a decade ago when it embarked on a set of important macroeconomic and structural reforms with the assistance of bilateral and multilateral creditors. During the period 1994/95–1996/97, annual real GDP growth averaged 8 percent and inflation was brought down to 5 percent a year. In 1997/98, however, real GDP growth was only 5.5 percent as a result of heavy rains, which adversely affected food and coffee production, transportation, and exports. Nonetheless, inflation was contained at moderate levels, averaging 5.8 percent, despite fluctuations during the year. This outcome reflects the pursuit of prudent fiscal and monetary policies. The overall fiscal deficit (excluding grants) amounted to 6.4 percent of GDP in 1997/98 (compared with an annual average of 6.9 percent in the previous three years). Broad money grew by 21.7 percent in 1997/98. Base money rose by 12.5 percent, but there was an upward shift in the money multiplier. Because of the effects of the bad weather on coffee exports, the external current account deficit excluding grants, as a share of GDP, rose to 8.3 percent. At the same time, however, buoyant capital and official transfer inflows more than financed the larger current account deficit and generated an overall balance of payments surplus, so that gross international reserves rose to 4.9 months of imports of goods and nonfactor services.

3.        In 1997/98, the government continued to press ahead with structural reforms. Tariffs were reduced, and three of the four import bans were lifted. An important stage of financial sector reform was completed with the privatization of the Uganda Commercial Bank (for which an on-site examination subsequently took place) and only the final legal steps remain for the recapitalization of the Bank of Uganda. However, the pace of privatization slowed down as this program ran into a number of difficulties, some of which were beyond the control of the government, and as the government prepared a shift in the focus of privatization toward high-impact enterprises; nonetheless, important progress was made and as of end-1997/98, a total of 85 enterprises had been privatized. In mid-August, parliament passed a resolution calling for the suspension of the privatization program pending investigation of procedures followed in some recent divestiture cases. The privatization program has since substantially resumed following the reaching of understandings between parliament and the government. At the Uganda Electricity Board (UEB), the number of staff was reduced from 3,060 in June 1997 to 2,268 as at end-June 1998, and a new management structure is expected to be put into place soon in preparation for the division of the internal functions—generation, transmission, projects, finance, and distribution—into separately managed and financed units. The size of the public service, excluding primary school teachers, was cut significantly, and the number of ministries was reduced from 22 to 17.

4.        Under the HIPC Initiative, Uganda’s multilateral creditors have agreed to reduce the net present value (NPV) of their claims as at end-June 1996 by 21 percent, and commensurate actions were taken by the Paris Club, and are being sought from other (non-Paris Club) bilateral and commercial creditors to achieve an NPV of external debt-to-exports ratio of 196 percent, as at end-June 1997 well within the target range of 192 to 212 percent. In nominal terms, total debt relief under the HIPC Initiative over time is projected to amount to some US$650 million. (Uganda’s total external debt amounted to US$3.7 billion at end-June 1998.)

III. Objectives, Strategy, and Policies for 1998/99–2000/01

5.        The principal objective of the government’s reform program remains sustaining high and broad-based economic growth in which the poor are able to participate. Given that nearly half of all Ugandans live below the poverty line (a ratio that has improved substantially in the 1990s), poverty eradication is a fundamental objective of the government’s development strategy. The latter will focus on maintaining macroeconomic stability; further liberalizing the economy to promote diversified, export-oriented growth; undertaking structural and institutional reforms that will further reduce impediments to economic growth by improving the quality of, and access to, physical and social infrastructure (roads, agricultural extension, power facilities, schools, and health facilities); and promoting good governance. These policies are key components of the government’s Poverty Eradication Action Plan (PEAP), which focuses on reducing poverty through human and physical resource development. The actions and strategies contained in the PEAP are also embedded in the government’s sector-specific policies presented in this paper. Fundamental to the government’s development strategy will be the completion of ongoing structural reforms in the financial sector, public service, tax policy and administration, external trade, privatization, and public enterprise restructuring. The government will direct proportionately more fiscal resources to social sectors, and it will improve the effectiveness of public resources through decentralization with enhanced accountability and public management reform. The provision of security is an important element of the government’s strategy. The government is also aware of the need to improve Uganda’s technical capacity and statistical base, especially balance of payments, monetary statistics, and social indicators.

6.        On the basis of the policies outlined in this paper, the government expects to achieve during the period 1998/99–2000/01 an annual average real economic growth of 7 percent; annual inflation of 5 percent a year; a decline in the external current account deficit, excluding grants, as a share of GDP to 6.7 percent by the end of the period; and maintenance of gross international reserves at a minimum equivalent to about five months of imports of goods and nonfactor services; and a deepening of structural reforms.¹ Achieving these objectives will require a continuation of prudent fiscal and monetary policies. The government aims to raise the current relatively low ratio of fiscal revenues to GDP by building up the domestic resource base; over the three-year period, revenue will be raised from 11.4 percent of GDP in 1997/98 to 13 percent in 2000/01. The prospects for relatively high levels of donor funding for social and priority areas appear favorable, and net foreign financing plus grants to the budget should average about 8 percent of GDP during the three-year period. With efforts to mobilize the projected revenues and the prospective levels of foreign support, the fiscal deficit (excluding grants) will be gradually reduced to 6.0 percent of GDP by 2000/01. The medium-term framework is based on broad money growth of 14–17 percent a year and the continued strong expansion of credit to the private sector. The government will keep this medium-term macroeconomic framework under review; if the prospects for donor financing prove more favorable, the government will consider higher, donor-funded expenditures on urgent social and priority areas provided that revenue performance is good, inflation remains low, sufficient credit would be available to the private sector, and the higher donor inflows are compatible with external debt sustainability.

7.        Achieving the targeted economic growth would require an increase in the real investment rate from 14.8 percent of GDP in 1997/98 to about 16.7 percent in 2000/01; this increase would occur against the background of both the recovery of the agricultural sector following two years of inclement weather and the general improvement in the efficiency of capital arising from ongoing structural and institutional reforms. In nominal terms, the investment rate would remain largely unchanged. These projections assume continued confidence in the economy, the rationalization and liberalization of the tax structure, a healthy financial sector, and development of domestic money and capital markets.

8.        The government’s public investment program will focus on the development of the nation’s road system and social infrastructure. The government has already allocated a substantially increased portion of its budget to priority program areas (PPAs), including education and health, and will continue to increase this proportion and put in place mechanisms for monitoring the effectiveness of these expenditures. The privatization of the power sector management will help improve the performance of public utilities, which is crucial to the enhancement of private investment. During the program period, structural reforms would be completed or intensified in the areas of trade liberalization, financial markets, public service, privatization, public enterprise restructuring, expenditure management, and tax administration and pension reforms.

9.        The government of Uganda is committed to enforcing good governance and the rule of law, which are important components of achieving fiscal sustainability, enhancing the effectiveness of public expenditures, and developing private sector activity. To this end, the government is preparing an integrated strategy to enhance transparency and improve accountability. As part of this strategy, the government has strengthened the Office of the Inspector General of Government to allow more effective investigation and prosecution of corruption. The government will rigorously enforce tax compliance, ensure that customs procedures are properly implemented, and curb the incidence of smuggling and fraud. The government will also intensify investigation into suspected fraud, and vigorously pursue convictions and penalties within the law. To promote fiscal transparency and accountability, the government will improve expenditure control and monitoring, as well as the timeliness of published audited accounts of the budget, expenditures for the PEAP district government finances, and public enterprises.

Fiscal policies

10.        Fiscal sustainability is a key objective for the medium term. The most important challenge in this regard will be to regain momentum in the improvement of revenue collection while liberalizing and rationalizing the tax structure. Revenue enhancement will require substantial improvements in customs and tax administration and improvements in audit, collection, and enforcement procedures for the value-added tax (VAT) introduced in 1996. The government will continue to resist pressures to take measures that would weaken the new Income Tax Act, such as restoring nontaxable allowances. To reduce reliance on excise taxes, the current relatively high duties on petroleum products will be lowered to regional levels, taking into account the revenue implications. Substantial progress has been made on the rationalization of the tariff structure; the government will consider eliminating the discriminatory excise taxes on selected imports during 1999/2000–2000/01. The export duty drawback system has been improved by establishing a dedicated desk within the VAT department with the objective of limiting the processing time for all complete claims to no more than two months and one month by June 1999 and June 2000 respectively, and to clear the back log of outstanding claims by June 1999. This administrative improvement, coupled with a lower tariff structure, would enhance export competitiveness.

11.        To improve revenue collection, the authorities have recently taken a number of measures, starting with increased capital funding for the Uganda Revenue Authority (URA) in the 1998/99 budget, as well as efforts to address weaknesses in the URA’s administration. Additionally, the VAT law has been changed to include new measures to improve compliance, including stricter penalties. Other measures include a commitment to process VAT refunds within 30 days, the installation of seals on all petrol station pumps (to be followed up by on-site audits of all stations by June 30, 1999); the establishment of the Large-Taxpayer Unit to oversee the 100 largest taxpayers; the creation of a centralized inventory of all available information on the business sector’s tax arrears; the auditing of all enterprises whose tax holidays will have expired by June 30, 1999; the initiation of a campaign to instill confidence in the URA and improve its public image and its relationship with taxpayers; and the establishment and operation of a Tax Tribunal. The newly adopted Income Tax Act, which provides for appropriate tax incentives through the replacement of tax holidays by accelerated depreciation allowances, is being implemented.

12.        On the expectation of substantial donor funding for the budget, in 1998/99 expenditures are programmed to rise from 17.8 percent of GDP to 18.8 percent, and to rise slightly more during the subsequent two years. The composition of expenditures will shift further toward outlays for development, social sectors, and PPAs, which together will grow at least at the rate of nominal GDP over the program period. Security needs are important, and the budget provides for an increase in defense expenditures from 1.6 percent of GDP to 1.9 percent in 1998/99, a level that will be maintained for the subsequent two years. Restraint on nonpriority expenditures is indispensable. Beginning in August/November 1998, two resident advisors will assist the government, one with the implementation of a commitment monitoring and reporting system in ministries with a history of weak expenditure control, and another with the preparation of a uniform budget and reporting system for the districts. The Ministry of Finance, Planning, and Economic Development (MFPED) has begun including the previous year’s budget and provisional outturn and a three-year budget framework in budget estimates submitted to parliament for approval, in order to promote the design of realistic budget allocations and to improve transparency and accountability. The MFPED has established an Arrears Monitoring and Reporting Unit (including a Verification Subcommittee) with the objective of assessing the full extent of existing domestic arrears and proposing a plan for their complete elimination within three years. The accounting officers of line ministries and government agencies have submitted a report of outstanding arrears at June 30, 1998. The Verification Subcommittee will verify these claims and submit a report to the Arrears Monitoring and Reporting Unit by December 31, 1998, which will finalize a plan by end-February 1999 for clearing these arrears. No new promissory notes will be issued, except to regularize domestic payments arrears outstanding as of June 30, 1997, and the stock of outstanding domestic payments arrears will be completely cleared over the three-year period ending 2000/01.

13.        Low, stable inflation will remain the key objective of monetary policy. The recapitalization of the Bank of Uganda (BOU) is in the final legal stages; upon completion, the BOU will be provided with a stock of tradeable government securities. The automated book-entry system is operational, and will soon be used for the electronic settlement of secondary market transactions in government securities and open market operations. The BOU will rely progressively less on the primary issuance of government securities for managing bank liquidity and will increasingly execute open market operations using its own stock of government securities. The BOU has circulated to all commercial banks a master repurchase agreement to serve as a guide to all sales of government securities. For 1998/99 the BOU will continue to use the manual system as a back-up. The BOU will also continue its efforts to broaden and deepen the government securities market through education of the nonbank financial sector and the public.

14.        The recent sale of the Uganda Commercial Bank (UCB), together with the earlier restructurings of the Nile, Sembule, and Co-op banks, completed necessary steps in Uganda’s financial sector reform. With a view to maintaining banking facilities in rural areas, the government intends to provide subsidies, if needed, to keep selected rural branches of the UCB operating. The Nonperforming Assets Recovery Trust (NPART), whose mandate was extended by two years to October 1999, will receive the full support of the government in its attempt to recover the bad loans transferred earlier from the UCB and will aim to collect these loans expeditiously. The government is aware of the need to intensify monitoring and regulation of some of the smaller banks before their problems escalate.

15.        Institutional and regulatory reforms in the financial sector will focus on intensified banking supervision, and the expansion of the capacity of the BOU to regulate nonbank financial institutions. The BOU will rigorously enforce all banking regulations, taking all necessary steps, including bank closures, to enforce compliance. Its objective is to perform on-site exams of every commercial bank at least once a year beginning in 2000/01. Toward this goal, the BOU will complete 12 on-site examinations, and transmit the examination reports to the banks under review in 1998/99, with special focus on the four commercial banks already identified as failing to comply with banking regulations. The BOU will conduct follow-up examination on any banks found to be in less than full compliance with Bank regulations and rigorously enforce penalties on offending banks failing to implement corrective actions strictly in line with BOU requirements. The BOU will enforce reserve requirements on foreign exchange deposits, strengthen prudential limits on foreign exchange exposure of banks, and will adequately supervise the Bureaux de Change. Legislation will be submitted in 1999 to amend the financial institutions statute to strengthen prudential requirements on banks, nonbank financial institutions, and the supervisory powers and responsibilities of the Bank of Uganda. Over the medium term, banking supervision will be strengthened through the training of new bank inspectors and through the program of annual on-site inspections of each bank. To prevent further fragmentation of the financial sector, the BOU has extended its moratorium on new bank licenses until December 1999, with specified exceptions. The government’s policy remains to allow interest rates to be determined through market forces. Interest rates on 91-day treasury bills fell from 9.8 percent in June 1997 to 7.0 percent by June 1998, with all of the decline coming in the second half of the year, but had risen to 9 percent by end-September 1998. The average spread between lending and time deposit rates remained fairly constant (and high) at about 9 percentage points.

External sector policies

16.        The exchange rate will continue to be market determined, with the BOU intervening to the extent necessary to smooth seasonal fluctuations, mindful of its international reserve and inflation objectives. In the event of temporary foreign exchange inflows, the BOU would build up international reserves to contain upward pressure on the exchange rate. The competitiveness of exports will continue to be monitored.

17.        Recognizing that Uganda’s future economic growth is closely linked to international trade, the authorities will aim to achieve a sustainable long-term balance of payments position through the promotion of export growth, the diversification of the export base to reduce the vulnerability of the external sector, and the encouragement of foreign direct investment. Diversifying and developing the export base would involve reducing the reliance on coffee (which accounted for 58 percent of export earnings in 1997/98), eliminating barriers to the development of nontraditional exports, and enhancing the duty drawback system. The government has continued to liberalize trade, lowering the maximum import duty from 20 percent to 15 percent, reducing the number of tariff bands from four to three in June 1998, and lifting import bans on beer, soft drinks, and automobile batteries in April 1998. The only remaining import ban (other than those imposed for health or security reasons), which is on cigarettes, will be eliminated by March 31, 1999. The temporary additional tariffs on beer, soft drinks, and automobile batteries will be phased out by March 2001, and those imposed on imported cigarettes and other tobacco products will be eliminated by June 2001. Through active participation in the Cross-Border Initiative and Common Market for Eastern and Southern Africa (COMESA), intraregional trade barriers are being dismantled and cooperation enhanced, notably in the areas of payments settlements, transportation, and communication. Uganda, Kenya, and Tanzania recently agreed in principle to eliminate among themselves all tariff and nontariff barriers. As part of this agreement, they adopted in June 1998 a common threshold for preshipment inspection purposes.

18.        Following the successful liberalization of the current account in November 1993, capital account transactions were liberalized effective July 1, 1997. In order to effectively monitor any potentially disruptive effects on macroeconomic management of volatile capital flows, the government will continue to maintain an appropriate macroeconomic, supervisory and reporting framework, and it will take steps, including undertaking a survey on foreign direct investment, to improve data collection on private capital flows, private transfers, and trade. The new Foreign Exchange Act, which supersedes the Exchange Control Act and formalizes the legal framework for the liberalization of international capital transactions, will be presented to parliament by March 1999.

Public enterprise reform

19.        The goal of the public enterprise reform program is to reduce the flow of subsidies to public enterprises while improving the coverage and quality of infrastructure services for the population at large. This goal is to be achieved through (i) privatization and/or restructuring of key public enterprises, and (ii) improved financial discipline. With respect to the former, the key sectors to be targeted include telecommunications, water, rail, power, aviation and postal services. The government's strategy is to introduce private sector participation and competition in the infrastructure sectors, divest some of the public enterprises that provided these services, and regulate utilities independently and cost-effectively.

20.        The government’s privatization program plays a vital role in the overall strategy of relying increasingly on the private sector as the source of income generation and investment, and it will be conducted transparently. While substantial progress has been made to date, it is recognized that there is a need for better preparation and sequencing of the program so as to maintain its momentum and improve its quality. Accordingly, the government has accelerated the privatization program by divesting larger, more strategic, and more fiscally burdensome enterprises, streamlining the process and making it more transparent, and intends to broaden share ownership. It aims to have approved for sale 16 of the remaining 18 commercial enterprises by June 1999. The government also aims to complete virtually all of the ongoing privatization program for commercial enterprises by December 1999. To this end, it will develop mechanisms for broad public participation, including the public offering of shares through the securities exchange. The government will closely monitor the disbursement of privatization proceeds and use them only to prepare firms for privatization, make severance payments to workers, and pay other expenditures directly related to the restructuring of the enterprises to be divested.

21.        The legal basis for privatization is the Public Enterprise Reform and Divestiture Statute, formulated over six years ago. Experience elsewhere has shown that these procedures can be streamlined. Furthermore, since the early 1990s, circumstances in Uganda have changed significantly, and there is much greater understanding of, and support for, privatization. In view of this, the government intends to adopt in 1999 amendments to the existing statute providing for privatization of all public enterprises and for streamlining of procedures; a draft of the amendments will be presented to the cabinet by June 1999.

22.        With respect to financial discipline, the government’s strategy calls for (i) the elimination of subsidies for commercial public enterprises; (ii) the explicit budgeting of all direct subsidies to public enterprises with social missions (e.g., rural electrification); (iii) the liquidation of all arrears and, where warranted, financial restructuring; and (iv) ensuring that payments to utilities are adequately budgeted and that obligations are met in a timely manner. The liquidation of arrears and financial restructuring may involve debt swaps and one time financial restructuring to put public enterprises on a sound footing. To limit the burden of other public enterprises on the budget, the government will make sure they are operated efficiently and that their existence as public entities is justified. To this effect, a study to further restructure and rationalize the enterprises designated to remain in the public sector will be completed by March 1999. Based on this study, by June 1999 the government will adopt an action plan and announce a policy regarding rules and procedures consistent with its objective of reducing the role of the public enterprise sector.

23.        To improve the financial oversight of public enterprises, the government will strengthen their boards by making them and management more accountable, and by enhancing the capacity of the Office of the Auditor General. The government will strengthen the financial oversight over public enterprises of the Ministry of Finance, Planning, and Economic Development.

24.        Regulatory overview is required where monopolistic market structures exist and minimum service standards need to be established. To this end, the government is studying whether public regulation should be conducted under a single, independent, cross-sectoral regulatory body or under separate agencies. This decision will be made during the first half of 1998/99, and the chosen approach will be implemented immediately thereafter.

25.        Public service reform and decentralization continue to be pursued within the context of the government’s public service reform strategy, which is aimed at (i) optimizing the size and structure of the civil service; (ii) enhancing skills by improving training and evaluation and introducing pay reform; (iii) strengthening control systems; and (iv) monitoring and improving operating efficiency and effectiveness. A major effort will be needed to improve payroll monitoring. Employees that are currently working but are pending access to the payroll will be expeditiously put on the payroll, and in future the waiting period between the date of reporting to work and being put on the payroll will be strictly limited to four weeks. Building on the substantive progress already made in civil service ministerial restructuring, the government will complete the major part of the remaining staff cuts in 1998/99. It will reduce the size of the number-limited staff (excluding primary school teachers) from 54,982 in June 1998 (including pending cases) to 51,640 by end-June 1999. During 1998/99 the government will complete the determination of appropriate establishments for secondary and tertiary institutions and for other number-limited semiautonomous and autonomous bodies (e.g., Mulago Hospital). In 1998/99 the government will complete the job evaluation and grading review of the public service, which will permit a closer linkage between workers’ performance and remuneration. During 1998/99, the government will introduce the Results-Oriented Management (ROM) program in all central ministries and local governments. This program will sharpen the focus on service delivery and on performance management to enhance this delivery. The government will also complete the National Service Delivery Survey (NSDS), which will focus on key services delivered in all 45 Districts by five pilot ministries (including education, health, and agriculture). In addition to supporting ROM, the NSDS will provide the government with information to measure the quality of services delivered by central and district governments, and it will provide a basis for government decision making, especially with regard to financial capabilities.

26.        Implementation of the institutional framework for decentralization, as specified in the Constitution and the 1997 Local Government Statute, is politically and administratively well advanced. To implement fiscal decentralization (i.e., to shift the management of resources to the levels of government where services are delivered), the government is preparing the Decentralization Implementation Plan, which is expected to be completed by December 1998. This plan will, inter alia, specify medium-term financial targets for the total level of transfers to districts as a percentage of government revenue or expenditure and the timing and sequencing of the various actions needed to achieve these targets. In this regard, priority will be given to transferring to districts savings from the ministerial restructurings to improve service delivery. The plan will also specify actions to improve the administrative capacities of local governments (and of central ministries in their new, more focused roles). Conditional grants will be transferred to districts meeting accounting and reporting deadlines being developed by concerned line ministries and the MFPED.

27.        The recent monetization of working benefits combined with the 1994 changes to the pension formula have increased replacement rates well beyond international standards, while pre-1996 pensions continue to be extremely low. The government aims to submit to parliament proposed legislation to replace the current pay-as-you-go system with a defined benefit-contributory system and to reduce the current level of defined benefits to international standards. Toward this end, the government will establish a working group on pension reform which will have a clear timetable for its program, and will commission an actuarial study of the current system to assess the long-term financial requirements of the pension system. The government will seek technical assistance in this area. Meanwhile, all pension commitments for 1998/99 will be fully provisioned for in the budget.

Agriculture

28.        Increasing agricultural productivity is essential to both economic growth and poverty reduction. Despite the 35 percent increase in the area under cultivation and the 70 percent growth in output since 1986, the legacy of the earlier insecurity and the rapid population growth is that food production is still below its 1971 level. The government has initiated a participatory process aimed at developing a consistent sector-wide approach which will redefine the government’s role in the agricultural sector, taking into account the need to decentralize functions and strengthen capacity, and including a prioritization of the investment program consistent with the medium-term budget framework. This process is expected to be completed by December 1999. In the meantime, the government is committed to increasing spending on agriculture extension and research over the program period. The government will produce in 1998/99 detailed data on agriculture extension unit costs to determine the cost-effectiveness of these services and to facilitate the establishment of appropriate delivery and output targets. Also during the program period, the government will undertake a number of actions to improve the environment for private investment in agriculture. These include encouraging the spread of freehold land ownership; reviewing all marketing regulations on agricultural outputs and inputs and removing any remaining constraints; and simplifying export procedures for all agricultural exports.

29.        Roads. Recognizing the critical importance of rehabilitating and maintaining roads, the government is implementing the first phase of the ten-year Road Sector Development Program (1996/97–2005/06). This program aims at increasing government funding so that the government fully finances maintenance for the classified road network by 2001, and at providing greater access to private sector contractors. While government spending has been in line with these objectives, utilization of donor funds has lagged significantly, averaging only 43 percent of planned budgetary provisions over the last three years. The government recognizes that constraints on implementation capacity have been partly responsible for this shortfall. To address the problem, the government has decided to set up by July 2000 an autonomous Road Agency/Authority; as an interim measure and to streamline execution, a Road Agency Formation Unit (RAFU) was set up within the government in April 1998 and was fully operational in September 1998.

30.        Rural feeder roads are critical for increasing returns to farmers and are main components of both the Poverty Eradication Action Plan (PEAP) and the Agriculture Modernization Plan. In 1998/99 the government has doubled its budget allocations for rural feeder roads. Given the heavy investment requirements and resource constraints, the government is preparing an investment plan for prioritized rural feeder roads and urban roads. This investment plan will address the relative balance between rehabilitation and maintenance, as well as strengthen institutional capacity. It is expected to be completed by  June 1999.

31.        Railways and aviation. The Uganda Railways Corporation (URC) receives large direct and indirect government subsidies (amounting in 1997 to U Sh 30 billion), and direct cash subsidies of U Sh 6-7 billion a year are likely to be needed to keep it operational. Operating losses of U Sh 1 billion per year are incurred on the Kampala-Kasese line, and maintaining this line would require additional emergency investments of U Sh 1 billion just to keep the track open. Over the longer term, minimum investments of U Sh 45 billion will be required for the  Kampala-Kasese line's rehabilitation, and during 1998/99 the government will take a decision regarding its continued operation. Meanwhile, options are being studied for increasing private sector involvement in the operation of the URC to increase its operating efficiency, either through a short-term management contract or through a longer-term concession contract. The government will make a decision on the best approach by December 1998. Additionally, the  government is privatizing Uganda Airlines, a process that is expected to be completed in 1998/99.

Power

32.        The cabinet will approve, by March 15, 1999, a plan for restructuring the power sector to increase its operational efficiency and to promote private sector participation. This program will include the timetable for submitting a revised electricity law and establishing an independent regulatory function.

33.        The government is pursuing the least-cost development of the country's abundant hydroelectric potential. The first construction phase of the 200 MW Owen Falls Extension will be commissioned in 1999. In addition, the government has entered into agreements with independent power producers (IPPs) to develop new hydropower facilities on the Nile River with private investment. The government will continue to pursue agreements with IPPs that are consistent with the potential growth of domestic and external demand, and it will establish a transparent process for evaluating the technical, financial, and environmental aspects of each project, and for selecting the most economic order and timing of the projects. This approach would result in the implementation of a sequence of power projects involving private participation. A decision on the appropriate timing and sequencing of the IPP investments will be taken by December 31, 1998.

34.        Meanwhile, the government is looking to transform the performance of the UEB through privatization. During the restructuring, UEB will continue to improve its operational performance by (i) reducing energy losses from about 30 percent in 1997 to 26 percent in 1998 and to 22 percent by 2000; (ii) reducing accounts receivable from almost eight months of sales in June 1998 to four months of sales by December 1999, and to three months from 2001 onward; (iii) lowering the UEB’s operating ratio from 44 percent in December 1997 to 36 percent by January 2000; (iv) further downsizing staff from 2,268 in June 1998 to 2000 by December 1998 and (v) completing the divestiture of non-core activities by March 1999.

35.        New communications legislation has been passed, providing the platform for restructuring the Uganda Posts and Telecommunications Corporation and establishing the Uganda Communications Commission (UCC). The second national operator’s license was awarded on a competitive basis and authorizes the consortium to provide a wide range of local, long-distance, international, and cellular telecommunications services, introducing competition in almost all important market segments. The sale of Uganda Telecommunications Ltd. (UTL) is being re-tendered.

Water supply and sanitation

36.        The government has set as an objective the universal provision of safe water by 2015. The strategy for achieving this objective is based on increasing the involvement of the private sector and the local communities in the adoption and management of systems to ensure long-term sustainability. Because of the sizable investments required over the next four years to achieve the announced objective and the importance of these investments for poverty eradication, the government is embarking on a comprehensive review of its policy, which it expects to complete before the end of 1999, and has increased funding in this sector, and expects to increase it further over the program period. Urban water supply and waste water services are under the responsibility of the National Water Supply and Sewerage Corporation (NWSC). The NWSC's performance indicators are poor and its tariffs are high. Increased private participation in the NWSC is envisioned as both boosting investment and increasing its operating efficiency. The Government intends to subcontract NWSC's technical and commercial operations to a private operator within the framework of a medium-term contract that provides for performance incentives. The responsibility for developing the piped water supply in smaller towns is under the Directorate for Water Development (DWD), and the responsibility for managing these supplies is under local governments. The government is committed to implementing a policy of full cost recovery for such systems.

IV. Poverty Reduction

37.        There has been a substantial reduction in poverty in recent years in Uganda. While in 1992 nearly 56 percent of Ugandans were below the poverty line, by 1996 this figure had fallen to 46 percent. The sharpest fall was in the central and western regions, while the eastern and northern regions experienced more modest declines in poverty. Coffee liberalization appears to have been one of the measures that had the greatest positive impact on household incomes. While the poverty head count index fell by 18 percent for the country as a whole, the fall in the incidence of poverty was 32 percent for households engaged in cash crop farming (mostly coffee).

38.        Despite the overall positive trend, the government recognizes that poverty remains widespread, particularly in rural areas and in the east and the north. The North, which was initially the poorest region, experienced the smallest improvement. Poverty actually worsened for households whose heads were not working. The government's two-pronged strategy to abate poverty, articulated in its Poverty Eradication Action Plan (PEAP), consists of measures to increase household incomes and to improve the quality of life of the poor. Public sector efforts to raise incomes include investment in, and maintenance of, main and feeder roads, market infrastructure, electrical power generation, and agricultural extension services, while efforts to improve the quality of life of the poor focus on the provision of basic services, such as primary health care, primary education and water supply. A targeted initiative is also being planned for the eastern and northern regions. Recognizing that the delivery of services is in need of major improvement across the board, the government is defining a minimum package of services in key sectors, with the intention of informing the public of basic services that are being funded and, hence, should be available.

39.        The adoption of the PEAP has led to the revision of several sectoral policies and investment programs. Strategies for primary education and the main roads are in place and are being implemented, while work is ongoing in the agriculture, health, water, and feeder road sectors.

V. Human Resource Development and the Environment

A. Education

40.        The government's strategy will focus on implementation of the Universal Primary Education (UPE) program, and development of an overall sector strategy. To this end, the government will (i) clarify the roles and responsibilities of various stakeholders in implementing the UPE; (ii) increase efficiency, accountability, and transparency in the use of public resources in the sector; (iii) increase public spending on primary education; (iv) improve the quality of education; and (v) address weaknesses in sector management, planning, budgeting and information systems. To clarify the respective roles, the government will implement the agreed dissemination strategy to all key stakeholders. Measures to increase the efficiency of public resource use include the revision of the staff establishment formula for primary schools; double-shift teaching; multigrade teaching in schools with small classes; the rationalization of teacher training programs; and the strengthening and consolidation of the policy on classroom construction. The government will also implement a monitoring system to account for public funds, following guidelines developed for transparency and accountability. The quality of basic education will be improved by increasing the supply of textbooks and instructional materials, as well as by expanding in-service training to cover all districts. An Education Management Information System (EMIS) will be established to measure sector performance, setting clear and obtainable objectives, and the teacher payroll will be updated and its management strengthened. To address the implications of the UPE program for the sector as a whole, an overall sector strategy will be finalized by June 1999.

B. Health, Population, and Nutrition

41.        Health and nutrition are central to the government's strategy to eradicate poverty. While recent years have seen some improvements in Uganda's health indicators, they still remain lower than in the other countries in the region. The government has therefore set targets over the next three years for a substantial improvement of key health indicators including a reduction in infant, child, and maternal mortality rates; an increase in immunization coverage; and a rise in the use of contraceptives. The government's strategy for improving health outcomes is based on devoting a larger share of public expenditures to primary health care to ensure the provision—particularly to women and children in rural and suburban areas—of an essential package of clinical and public health services, supported by referrals to district hospitals. Attention will be given to the health problems that contribute most to mortality and disease, such as malaria, childhood diseases, and HIV/AIDS. Population and reproductive health services, and specific nutrition interventions will continue to be strengthened alongside other basic curative and public health services. The government is updating its health sector policy to reflect current priorities and to address strategic policy decisions within likely public resource availabilities. Updating this policy will involve changing the role of the public sector in health service provision; facilitating a greater role for nongovernmental organizations (NGOs) and the private sector; implementing the new roles set for the Ministry of Health and districts in line with decentralization; strengthening the development of alternative sources of health care financing; and improving cost-effectiveness in the delivery of health services, examining options in this regard in the context of developing a medium-term health sector strategy. This update, along with a five-year strategic plan, is expected to be completed during 1998/99. The government has begun to implement a program to improve nutrition through a package of locally based services including the monitoring and promotion of growth, parental education, and community-initiated activities.

C. Environment

42.        The government has acknowledged the challenges and accepted the goal of making development environmentally sustainable. Government activities will focus on specific activities aimed at addressing the priority environmental problems identified during the development of the National Environmental Action Plan (NEAP). The NEAP consists of a National Environmental Policy, an Institutional Framework for Environment Management, and an Environment Bill. The adopted environmental policy calls for alignment of sectoral development strategies to address priority environmental concerns relating to land degradation, deforestation, loss of wetlands, and dwindling fish stocks. The policy also emphasizes strategies cutting across sectors by addressing, for example, the need to control population growth and enhance the security of land tenure. Finally, it advocates environmental education and a system of environmental impact assessments as essential means of promoting rational resource use. The Environmental Bill includes the establishment of the National Environmental Management Authority (NEMA) to coordinate the implementation of the NEAP through sectoral ministries and serve as a central environmental policy advisory body. Rehabilitation and management of conservation areas, revitalization of the tourism industry, and empowerment of local governments and communities to manage and benefit from the sustainable use of natural resources are also high priorities for the government. To this end, the government is undertaking a program to strengthen the capacity of the Uganda Wildlife Authority (UWA), which has overall responsibility for all parks, game reserves, and wildlife in the country.

VI. External Financing Requirements and Debt Sustainability

43.        Coffee volumes are expected to recover from the weather-related setbacks experienced in 1997/98, although during 1998/99–2000/01 they will not revert to the exceptionally high level of 1996/97. The price of Ugandan coffee is expected to average about US$1.47 a kilogram during 1998/99–2000/01. Noncoffee export volumes will also grow, so that by 2000/01 noncoffee exports will come to account for about 48 percent of merchandise exports. Total export value for 1998/99–2000/01 is projected at US$1,888 million. Over the same period imports are estimated at US$4,910 million, and private transfers at US$2,154 million.

44.        The financing requirement for 1998/99 amounts to US$1,032 million. It comprises a current account deficit (excluding official grants) of US$586 million, scheduled amortization payments of US$73 million, a programmed accumulation of US$82 million in gross reserves (which will keep import coverage at about five months of imports of goods and nonfactor services), and a reduction in external arrears of US$274 million. The financing requirement for 1998/99 is expected to be met by disbursements of official grants and loans for nonproject and project financing (US$260 million and US$406 million, respectively), along with Fund disbursements of US$44 million, and debt relief of US$321, including HIPC assistance of US$37 million. The total financing requirement over the three-year period is projected at US$2,434 million and is expected to be covered by nonproject loans and grants (US$613 million), project support (US$1,340 million), IMF disbursements (US$80 million), and debt relief of US$401 million, of which US$117 million would be provided under the HIPC Initiative. Given Uganda’s highly volatile and uncertain terms of trade, the financing requirements provide for a reserve cover of about 5 months of imports of goods and nonfactor services through 2000/01.

45.        The government’s enhanced debt strategy aims to secure grants wherever possible, or else to borrow on highly concessional terms, for projects that have high economic and social returns. The government will continue to improve its capacity to monitor its external debt, to enable it to meet all its external debt-service obligations in a timely and transparent manner. A permanent technical working group, comprising the debt and macroeconomic units of the Ministry of Finance, Planning and Economic Development and the Bank of Uganda, will continue its efforts to integrate debt analysis into policy formulation and to facilitate coordination through quarterly reports within the government and to donors. With external assistance, capacity-building and internal debt-management structures will be buttressed and steps will be taken to ensure that debt-management skills are disseminated widely among the core economic agencies.

VII. Technical Assistance Requirements

46.        The government has benefited from substantial technical assistance from bilateral and multilateral creditors and donors, and intends to continue to avail itself of additional assistance in a wide range of areas. With regard to fiscal operations, additional technical assistance is envisaged in the areas of tax and customs administrations and expenditure management. The government also will be seeking technical assistance in implementing the improved financial management and accounting systems over the program period. Assistance will continue to be sought in the areas of the civil service, pensions, public enterprise reform, and preparing economic and financial statistics. The government will be seeking multisectoral technical assistance for the preparation and presentation of macroeconomic statistics. The government is committed to improving the monitoring of social expenditures and collecting reliable data on social indicators, and it will also be seeking technical assistance in this regard. The Bank of Uganda will seek technical assistance in improving financial sector supervision. The government will review the progress made in implementing recommendations of past technical assistance, with a view to assessing the effectiveness of such assistance and identifying areas in need of additional support.