Broad Policy Objectives¹

The broad policy objectives of Uganda's reform efforts were focused on (i) the need to stabilize the economy, in part through the restoration of fiscal and monetary discipline, notwithstanding demands for considerable outlays to restore and rehabilitate the devastated infrastructure; (ii) the liberalization of consumer and producer prices, with the objective of realigning prices in favor of export-oriented production and import substitution; (iii) the progressive movement toward a realistic, market-determined exchange rate within a system free of exchange restrictions; (iv) the strengthening of the balance of payments and the normalization of relations with external creditors; (v) the removal of trade restrictions; (vi) the privatization and rationalization of state enterprises; (vii) the downsizing of the civil service and the army; and (viii) the liberalization of interest rates within a restructured and more efficient financial system capable of mobilizing savings and increasing investments, with a view to raising the rate of economic growth. These objectives were pursued with the financial and technical assistance of the donor community. From the beginning, the Government viewed the implementation of strong macro-economic policy and structural measures as essential to the attainment of the objectives of the Economic Recovery Program. This commitment provided the basis for a coherent set of policy actions and consistency in their implementation.

Policy Implementation

As a first step toward improving the competitiveness of the economy and simplifying the cumbersome foreign exchange allocation system, the Uganda shilling was devalued by 77 percent in May 1987. Thereafter, several discrete devaluations in the official exchange rate occurred between 1987 and October 1989. Moreover, the authorities agreed to institute an open general licensing (OGL) system, under which import restrictions and rationing were removed for selected industrial firms and certain commodities. The coverage of the OGL system was extended on a quarterly basis starting in 1988. In the area of price liberalization, the depreciation of the Uganda shilling in terms of foreign currency made it possible to announce substantial increases in producer prices, including a 182 percent rise in the coffee price paid to farmers. In addition, petroleum prices were increased to reflect all landed and distribution costs. These measures, introduced in early fiscal year 1987/88 (July–June), significantly corrected price distortions in the domestic and external sectors of the economy, thus providing the needed incentives for domestic producers and exporters.

GDP growth responded positively in the first year of adjustment—8 percent over the previous period—but there was less success in achieving the program's stabilization objectives in the early years. Inflation continued to be a major problem, reaching an annual rate of almost 200 percent in 1987/88. Although a variety of exogenous factors contributed to the high rate of inflation—for example, the temporary closure of the Kenyan border in December 1987—domestic policy slippages were chiefly responsible. Budgetary targets were missed, and, as a result, the targeted reduction in net credit from the banking system was not realized, leading to a greater reliance on bank credit, equivalent to 82 percent of the beginning-period money stock. Additionally, interest rates, which were largely negative in real terms, were further reduced early in the fiscal year, thus stimulating a rapid expansion in private sector credit. Consequently, the target on net domestic credit was exceeded and broad money increased by a massive 203 percent rather than the targeted 40 percent.

In the early years of the adjustment process, Uganda had to grapple with deteriorating terms of trade. From a price of $2.05 per kilogram in 1987/88, coffee export prices fell steadily, reaching a low of $0.82 per kilogram in 1992/93, a decline of 60 percent. Accordingly, export earnings were more than halved, dropping to $157 million in 1992/93 from $384 million in 1986/87. Although the Government continued to make important gains in rehabilitating economic and social infrastructure and in increasing output through 1989, the stabilization objectives proved more difficult to achieve. This reflected not only the difficult external situation, but also the continued weaknesses in policy implementation. Inflation rose by 77 percent in 1988/89, as program targets for domestic credit and net bank credit to the Government were not observed, stemming largely from shortfalls in external grants, as well as from strong demands on government outlays. The difficult external situation also made the availability of foreign exchange tight, thus clouding the prospects for reducing external arrears and meeting the objectives regarding minimum increases in gross international reserves.

Strong corrective actions in the 1989/90 program were to have a positive effect in stabilizing the Ugandan economy, without threatening the recovery in output that had been realized. In particular, the Uganda shilling was devalued by 41.2 percent in late 1989, and the original targets with respect to inflation and growth were maintained. Targets in the fiscal, monetary, and external areas were modified to reflect the changed external prospects and the measures being undertaken in the program. Thanks to strong fiscal policies and a decidedly anti-inflationary monetary stance, the broad objectives of the 1989/90 program were met. Uganda observed the benchmarks on external payments arrears and gross international reserves, as well as the performance benchmarks for domestic credit and net bank credit to the Government. The Government's efforts in reducing inflation met with success, as the inflation outcome was slightly below the target of 30 percent. Substantial progress was also made in many structural areas, including frequent adjustment of the exchange rate to maintain competitiveness, implementation of expenditure cuts and revenue-raising measures to improve the fiscal position, and introduction of measures to improve the operational efficiency of the Coffee Marketing Board.

In 1990/91, the consistent implementation of appropriate policies became critical to the effort to consolidate the gains made in the preceding year. In spite of an even more difficult external situation, as a result of declining import support, the fiscal program aimed at generating a substantial improvement in the revenue effort. Monetary and credit policies were kept tight to further the objective of economic stabilization. However, the shortfall in donor inflows, equivalent to 46 percent of beginning-period money stock, made it extremely difficult to reduce external arrears as programmed. Nevertheless, Uganda's restraint in foreign borrowing policies enabled the limit on nonconcessional borrowing to be met. Gross international reserves were above the target, and the Bank of Uganda (BOU) was able to reduce its short-term liabilities. The reduced donor import support precluded the realization of the programmed decline in bank credit to the Government, and, as a result, credit benchmarks were missed. With regard to structural policies, continued progress was made in the areas of a flexible exchange system and financial sector reforms.

By 1991/92, Uganda had advanced substantially in implementing policies to liberalize domestic prices and the exchange system, both of which provided powerful incentives to domestic producers and exporters of non-coffee products. In July 1990, a bureau market for foreign exchange was established, to which foreign exchange receipts from noncoffee exports and private transfers were channeled, and, in March 1992, the average bureau rate was adopted as the official exchange rate in an attempt to begin unifying the exchange system. Although an auction system for donor import-support funds continued to exist, the procedures were changed in June 1992 to allow spot sales of these resources to further reduce the differentials in the exchange rates in the bureau, auction, and parallel markets. As for domestic prices, virtually full decontrol was achieved by 1992 — the exception being petroleum products and several utilities where the Government feared that complete deregulation and a concomitant lack of competition would result in monopoly prices. Even then, these prices were adjusted regularly in line with changes in costs. As a consequence of these policy reforms and adjustment efforts, the external accounts showed some improvement, with a lower current account deficit than anticipated and a continuation of the larger-than-programmed buildup in gross reserves. The task of stabilizing the price level proved rather difficult in 1992 as a result of weather-related supply factors and the larger use of bank credit by the Government, which reflected primarily shortfalls in the import-support counterpart and higher current outlays.

In the 1992/93 program, strong macroeconomic policy implementation led to the achievement of the objectives related to net domestic assets of, and net claims on the Government by, the banking system. For the first time since the start of the adjustment effort, the Government was able to repay the banking system, thanks to its strong policy actions to curtail expenditures. In limiting expenditure releases, the Government nonetheless protected high-priority areas—established in conjunction with the World Bank and other donors—which included primary health care, education, and road maintenance. Despite the strong fiscal efforts, monetary growth remained above target, largely because of increases in net foreign assets, which stemmed primarily from higher private transfers. This demonstrated clearly the underlying realism of Uganda's exchange policies, and the confidence that had increasingly returned to the country. The inflationary consequences were muted by the growing monetization of the economy, and prices actually fell by 0.6 percent. The stabilization achievements were impressive, especially since real growth continued to expand by more than 7 percent. On the external side, Uganda was able to surpass its objectives in reducing payments arrears through cash payments and exceptional financing.

With regard to financial sector reforms, interest rates were substantially liberalized, a treasury bill market was established, and important legislative reforms were enacted. The Bank of Uganda Act was amended, giving the BOU more autonomy in the conduct of monetary policy and the management of foreign exchange reserves, and a new Financial Institutions Act was introduced to strengthen the banking system and the Bank of Uganda's supervisory role. In other structural areas, the first phase of the army demobilization program was launched and 20,000 soldiers were discharged in total. The Government, in cooperation with the World Bank, instituted the Public Enterprise Reform and Divestiture program, and eight enterprises were privatized.

During 1993/94, Uganda completed the liberalization of its exchange and trade system. A unified interbank market for foreign exchange was introduced, and all commercial foreign exchange transactions were to be undertaken by commercial banks and foreign exchange bureaus. Subsequently, on April 5, 1994, the Government accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF's Articles of Agreement, expressing its commitment to a free and open exchange system. Policy implementation remained strong in the fiscal area, owing mainly to strict expenditure control through a monthly release system and to substantial import-support grants. This strong fiscal policy stance, coupled with revenue measures and improved tax administration, resulted in a repayment to the banking system that exceeded program targets by over U Sh 35 billion. Consequently, the program was well within its domestic assets target. This steadfast, firm fiscal adjustment effort was able to offset to some extent the ongoing strong inflows that were responsible for the unexpectedly large growth in foreign assets. Nevertheless, monetary growth was higher than expected and, coupled with supply factors, caused the rate of inflation to increase to 16 percent. For the first time since the inception of the adjustment efforts, Uganda's terms of trade improved—thanks to the recovery of world coffee prices—and an overall balance of payments surplus was recorded. Firm efforts to reduce external arrears were made, and the normalization of relationships with creditors was pursued through rescheduling agreements with a number of countries.

Although considerable progress was made in implementing structural reforms, the ambitiousness of some of the targets proved difficult to achieve. This is particularly true in the civil service area where, although 20 percent of the approximately 200,000 positions were retrenched, the Government still fell short of its ambitious target of 65,000. Privatization efforts also slowed, owing to administrative difficulties, and the completion of the reform of the financial sector suffered further delays. The limited nature of the financial sector reforms, in particular, hampered the implementation of monetary policy. The major commercial bank, the Uganda Commercial Bank, remained undercapitalized and the launching of the Non-Performing Assets Recovery Trust remained behind schedule. These shortcomings notwithstanding, the consistency with which Uganda implemented both its macroeconomic and structural reform policies was impressive and continued to have a positive effect on growth, savings, investment, and fiscal and external variables.

Economic Outturn

The economic outturn of Uganda's adjustment efforts is shown in Chart 1 (see also Table 1). Over the seven years 1987/88–1993/94, Uganda achieved stabilization and adjustment with growth. During this period, economic growth averaged almost 6 percent per annum, inflation dropped substantially, and the fiscal deficit was steadily reduced. In 1986/87, total revenue had shrunk to only 5 percent of GDP, and the overall deficit was financed almost entirely from the domestic banking system. Although the achievement of the broad objective of financial stabilization called for the pursuit of restrictive fiscal policies, the desirability of strengthened economic performance necessitated larger outlays on the restoration and the rehabilitation of devastated infrastructure. The authorities reconciled these objectives by focusing on tax reform to augment revenue and by raising donor disbursements. As a result, by 1993/94 total revenue had risen to about 8 percent of GDP. Despite unfavorable terms of trade for most of the period, the external current account deficit (excluding grants) as a percentage of GDP also declined markedly, from 16.9 percent in 1988/89 to just under 9 percent in 1993/94, while the exchange rate remained competitive, depreciating from U Sh 100 per U.S. dollar at end-1987 to around U Sh 965 at end-June 1994. Although the real effective exchange rate (REER) appreciated somewhat during 1993/94, largely as a result of the appreciating nominal exchange rate, Uganda's external competitiveness is now substantially better than it was in 1987 (Chart 2). The domestic economy has also become more competitive, with the liberalized pricing and interest rate environment resulting in rising shares of saving and investment in GDP since the inception of the adjustment effort.

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Selected Economic Indicators

Sources: Ugandan authorities; and IMF staff estimates.¹ In months of imports of goods and nonfactor services.

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Table 1.

Selected Economic and Financial Indicators

Sources: Ugandan authorities; and IMF staff estimates.

¹The national accounts were revised in May and December 1993.

²Change as a percent of initial period stock of money plus quasi-money.

Table 1.

Selected Economic and Financial Indicators

			1986/87	1987/88	1988/89	1989/90	1990/91	1991/92	1992/93	1993/94 Est.
			(Annual percentage changes, unless otherwise specified)
National income and prices
	GDP at constant prices1		1.0	7.7	6.5	5.5	4.4	2.6	7.2	4.5
	Consumer prices
		Year-end basis	237.0	199.1	76.8	26.9	32.0	63.0	-0.6	16.1
		Annual average	256.0	180.1	102.2	48.1	24.5	42.2	28.3	6.5
External sector (in U.S. dollars)
	Exports, f.o.b.		1.0	-22.2	-7.0	-14.2	-2.9	-1.9	-8.7	51.1
	Imports, c.i.f.		30.0	4.7	1.1	-7.4	-6.2	-17.3	27.2	22.6
	Terms of trade (deterioration-)		-11.0	-28.0	-25.0	-24.0	-14.0	-14.2	-1.9	38.6
Government budget
	Total revenue and grants		192.0	355.8	113.5	85.2	80.3	83.9	56.4	9.4
	Revenue		206.0	288.0	112.2	97.5	44.7	36.0	51.3	29.3
	Expenditure and net lending		142.0	301.2	106.8	91.0	53.9	116.0	23.5	13.7
Money and credit
	Total domestic credit2		139.0	243.2	126.6	52.7	37.4	50.8	8.9	2.3
	Government credit2		200.0	145.2	13.1	6.3	-1.2	32.0	-8.1	-12.2
	Private sector2		92.0	98.0	113.5	46.3	39.4	18.3	17.0	14.4
	Money and quasi-money		95.0	202.9	122.4	56.0	46.8	53.5	41.9	33.4
	Velocity (GDP to M2)		16.0	14.4	14.9	14.8	13.1	12.8	12.9	11.5
			(In percent of GDP)
National income accounts
	Gross domestic investment		9.2	11.6	12.7	13.0	16.3	16.5	16.3	16.4
	Gross domestic savings		-12.6	-10.6	-8.4	-3.4	-1.1	1.0	-0.7	2.2
		Private	-11.2	-9.4	-6.5	-2.3	-0.6	5.3	1.3	3.9
		Public	-1.3	-1.3	-1.7	-1.1	-0.5	-4.3	-1.9	-1.6
External sector
	Current account deficit
		(including officiai grants)	-1.3	-9.6	-9.8	-10.5	-8.1	-5.2	-3.2	-2.2
		(excluding official grants)	-1.8	-14.0	-16.9	-16.7	-19.4	-13.3	-11.7	-8.8
	External debt (including Fund obligations)		22.1	20.2	29.1	39.8	106.8	104.5	88.5	73.6
Government budget
	Deficit (excluding grants)		-4.6	-5.8	-5.2	-6.4	-7.9	-14.5	-12.6	-10.9
	Deficit (including grants)		-4.3	-4.5	-3.6	-5.0	-4.1	-7.3	-4.6	-4.7
	Net foreign financing		0.5	2.2	2.2	6.6	3.6	5.2	5.2	6.4
	Domestic bank financing		4.3	2.0	1.4	-1.4	0.2	1.9	-0.4	-0.8
	Domestic nonbank financing		—	—	0.1	-0.2	0.3	0.2	-0.2	0.2
			(in percent of exports of goods and nonfactor services)
External debt (including arrears)
	Including Fund obligations		309.0	563.0	626.0	895.0	1,246.2	1,357.8	1,300.7	909.5
Debt service ratio
	Including Fund obligations		54.0	62.0	74.0	81.0	95.9	127.7	85.1	56.5
	Excluding Fund obligations		27.0	34.0	40.0	57.0	77.2	110.8	75.4	52.8
			(in millions of U.S. dollars)
Overall balance of payments			-79.0	-74.0	-96.0	-45.0	-101.3	-121.2	-8.2	70.0
	External payments arrears (end-period)		30.0	77.0	106.0	95.0	377.7	609.2	279.7	248.5
Foreign exchange reserves			31.0	35.0	36.0	25.0	49.8	73.6	111.9	207.6
			(In months of imports of goods and nonfactor services)
Foreign exchange reserves			0.7	0.7	0.8	0.5	1.3	2.2	1.8	2.9

Sources: Ugandan authorities; and IMF staff estimates.

¹The national accounts were revised in May and December 1993.

²Change as a percent of initial period stock of money plus quasi-money.

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Table 1.

Selected Economic and Financial Indicators

			1986/87	1987/88	1988/89	1989/90	1990/91	1991/92	1992/93	1993/94 Est.
			(Annual percentage changes, unless otherwise specified)
National income and prices
	GDP at constant prices1		1.0	7.7	6.5	5.5	4.4	2.6	7.2	4.5
	Consumer prices
		Year-end basis	237.0	199.1	76.8	26.9	32.0	63.0	-0.6	16.1
		Annual average	256.0	180.1	102.2	48.1	24.5	42.2	28.3	6.5
External sector (in U.S. dollars)
	Exports, f.o.b.		1.0	-22.2	-7.0	-14.2	-2.9	-1.9	-8.7	51.1
	Imports, c.i.f.		30.0	4.7	1.1	-7.4	-6.2	-17.3	27.2	22.6
	Terms of trade (deterioration-)		-11.0	-28.0	-25.0	-24.0	-14.0	-14.2	-1.9	38.6
Government budget
	Total revenue and grants		192.0	355.8	113.5	85.2	80.3	83.9	56.4	9.4
	Revenue		206.0	288.0	112.2	97.5	44.7	36.0	51.3	29.3
	Expenditure and net lending		142.0	301.2	106.8	91.0	53.9	116.0	23.5	13.7
Money and credit
	Total domestic credit2		139.0	243.2	126.6	52.7	37.4	50.8	8.9	2.3
	Government credit2		200.0	145.2	13.1	6.3	-1.2	32.0	-8.1	-12.2
	Private sector2		92.0	98.0	113.5	46.3	39.4	18.3	17.0	14.4
	Money and quasi-money		95.0	202.9	122.4	56.0	46.8	53.5	41.9	33.4
	Velocity (GDP to M2)		16.0	14.4	14.9	14.8	13.1	12.8	12.9	11.5
			(In percent of GDP)
National income accounts
	Gross domestic investment		9.2	11.6	12.7	13.0	16.3	16.5	16.3	16.4
	Gross domestic savings		-12.6	-10.6	-8.4	-3.4	-1.1	1.0	-0.7	2.2
		Private	-11.2	-9.4	-6.5	-2.3	-0.6	5.3	1.3	3.9
		Public	-1.3	-1.3	-1.7	-1.1	-0.5	-4.3	-1.9	-1.6
External sector
	Current account deficit
		(including officiai grants)	-1.3	-9.6	-9.8	-10.5	-8.1	-5.2	-3.2	-2.2
		(excluding official grants)	-1.8	-14.0	-16.9	-16.7	-19.4	-13.3	-11.7	-8.8
	External debt (including Fund obligations)		22.1	20.2	29.1	39.8	106.8	104.5	88.5	73.6
Government budget
	Deficit (excluding grants)		-4.6	-5.8	-5.2	-6.4	-7.9	-14.5	-12.6	-10.9
	Deficit (including grants)		-4.3	-4.5	-3.6	-5.0	-4.1	-7.3	-4.6	-4.7
	Net foreign financing		0.5	2.2	2.2	6.6	3.6	5.2	5.2	6.4
	Domestic bank financing		4.3	2.0	1.4	-1.4	0.2	1.9	-0.4	-0.8
	Domestic nonbank financing		—	—	0.1	-0.2	0.3	0.2	-0.2	0.2
			(in percent of exports of goods and nonfactor services)
External debt (including arrears)
	Including Fund obligations		309.0	563.0	626.0	895.0	1,246.2	1,357.8	1,300.7	909.5
Debt service ratio
	Including Fund obligations		54.0	62.0	74.0	81.0	95.9	127.7	85.1	56.5
	Excluding Fund obligations		27.0	34.0	40.0	57.0	77.2	110.8	75.4	52.8
			(in millions of U.S. dollars)
Overall balance of payments			-79.0	-74.0	-96.0	-45.0	-101.3	-121.2	-8.2	70.0
	External payments arrears (end-period)		30.0	77.0	106.0	95.0	377.7	609.2	279.7	248.5
Foreign exchange reserves			31.0	35.0	36.0	25.0	49.8	73.6	111.9	207.6
			(In months of imports of goods and nonfactor services)
Foreign exchange reserves			0.7	0.7	0.8	0.5	1.3	2.2	1.8	2.9

Sources: Ugandan authorities; and IMF staff estimates.

¹The national accounts were revised in May and December 1993.

²Change as a percent of initial period stock of money plus quasi-money.

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Effective Exchange Ratesand Relative Price Indices (1980=100)

Source: IMF, Information Notice System.

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The improved macroeconomic outlook in Uganda reflects substantial successes in a number of structural areas. The phased decontrol of pricing and marketing arrangements within the context of a World Bank-financed Agricultural Sector Adjustment Credit — approved in 1990—contributed significantly to the competitive pricing environment and, thus, to efficiency in the economy. The civil service retrenchment of over 40,000 positions, the continued rationalization of ministries and salary enhancements, and progress in the Government's divestiture program have all contributed to efficiency in the public sector. Moreover, by demobilizing about 33,000 soldiers, the Government has been able to reduce military expenditures as a percentage of GDP and to devote more resources to productive ends.

Uganda's adjustment efforts have, however, relied to a large extent on disbursements by multilateral institutions. As a consequence, its external debt grew from $1.3 billion in June 1987 to $2.9 billion at end-June 1994; but since the debt is highly concessional, the average interest rate and maturity improved substantially. Nevertheless, Uganda's debt-service ratio became onerous over the adjustment period, mainly reflecting lower exports because of the drop in coffee prices. It rose from 54 percent in 1986/87 to a peak of 128 percent in 1991/92 before beginning a falling trend to 56.5 percent in 1993/94. During the period under review, Uganda periodically had difficulties in servicing its debt, causing external payments arrears. However, substantial arrears reduction—through cash payments, rescheduling, and debt cancellation arrangements, as well as a successful debt buy-back operation funded by the World Bank—enabled Uganda to normalize its relations with creditors. This issue is discussed in more detail in Section IV.