Following its independence in 1962, Uganda initially witnessed a period of considerable economic progress. Between 1963 and 1973, the annual average rate of GDP growth was 6 percent. Additionally, the balance of payments was in surplus during most of this period, and inflation was low. However, in 1971, a military regime assumed power under General Idi Amin, and Uganda moved away from the outward-oriented policies pursued in the immediate postindependence period. Local industries were granted significant protection, the size and involvement of the public sector in economic activity expanded considerably, and members of the Asian community, which had dominated the industrial and commercial sectors, were expelled and their properties expropriated. Efficiency and financial discipline suffered, leading to a significant decline in output of about 20 percent during the 1970s. As budgetary revenues collapsed, there was an increasing reliance on domestic bank financing, which intensified inflationary pressures. Despite mounting inflation, and the consequent appreciation of the real effective exchange rate, the official exchange rate and agricultural producer prices were kept practically fixed throughout the 1970s.

As a result of these policies, significant damage was done to the competitiveness of the economy, and particularly to that of the export sector. By 1980, Uganda had become dependent on one crop—coffee—for 98 percent of its exports. Reflecting declining incentives on account of the unrealistic exchange rate, the volume of coffee exports in 1980 amounted to barely half the shipments achieved in the early 1970s. The volume of other traditional exports—particularly cotton, tea, and tobacco—became negligible, and copper exports ceased.

There was a relatively brief attempt to stabilize and revitalize the economy during the regime of Milton Obote in the early 1980s, with donor assistance, including three stand-by arrangements from the IMF plus a purchase under the compensatory financing facility (CFF), totaling SDR 365 million (about $392 million), loan commitments from the World Bank totaling $473.5 million, and debt rescheduling from Paris Club creditors. (For a review of IMF activities in Uganda, see Box 1.)

The stabilization program included the introduction of a more flexible exchange rate policy, the decontrol of many prices, and regular reviews of producer prices. Much of the World Bank funding was in the areas of reconstruction, industrial and agricultural rehabilitation, and technical assistance. Despite a recovery in the growth of real GDP, which averaged 6 percent a year during 1981/82–1983/84, the recovery remained weak because of the major structural problems that had emerged during the previous decade, as well as the uncertainty of the political climate caused by the eruption of a civil war in the early 1980s. By the end of 1983/84, increased political instability and the intensification of the civil war had led to the collapse of the economic stabilization efforts. The ensuing period was characterized by economic devastation until the National Resistance Movement (NRM) Government came to power in early 1986.

In 1987/88, the NRM Government launched a comprehensive economic recovery program with the support of the IMF, the World Bank, and other donors. The Government's program faced an unfavorable internal and external environment. Internally, the civil war devastated transportation, power, and water facilities. Manufacturing plants had either closed or were operating at very low rates of capacity utilization, and much of the formerly productive agricultural sector had reverted to producing for subsistence consumption. By June 1987, per capita GDP was estimated at about 40 percent below the level of 1970, and the inflation rate, on an annual basis, had risen to 240 percent. On the external side, a fixed nominal exchange rate had further eroded Uganda's competitiveness, leading to a considerable spread between the rates in the official and the parallel markets, an acute shortage of foreign exchange, and increasing external payments arrears. These developments were exacerbated by a steep deterioration in the terms of trade associated with the collapse of the International Coffee Agreement.

Despite this difficult starting point, Uganda staged a remarkable economic recovery in the next six years, as measured against the ambitious objectives of the Economic Recovery Program (ERP). This process has been characterized by renewed economic growth and major progress in structural adjustment, setting an example for many countries to follow. The support of the IMF since 1987 has been critical. Under the structural adjustment facility (SAF), the enhanced structural adjustment facility (ESAF), and the CFF, resources totaling SDR 318.8 million (about $446.3 million) were disbursed between 1987 and early 1994. Over the same period, the World Bank Group disbursed loans totaling approximately $1.4 billion. This support for Uganda's efforts to attain external viability and sustained growth and development continues, and in September 1994 the IMF's Executive Board approved a new ESAF arrangement for the three-year period 1994/95–1996/97 (July–June), amounting to SDR 120.5 million (about $168.7 million). The first disbursement of SDR 16.7 million (about $23.4 million) was made on September 30, 1994. Additionally, on May 10, 1994, the World Bank approved a second structural adjustment credit of $80 million.

Uganda's turnaround since 1987 has been impressive by any standard. Economic growth has averaged almost 6 percent per annum in the years through 1994, with inflation falling sharply; the economy has been stabilized; and, despite a severe deterioration in the terms of trade during much of this period, the external current account deficit (excluding grants) has declined markedly. Moreover, substantial structural reforms have taken place in the economy in the areas of price liberalization, exchange and payment liberalization, public enterprise reform, financial sector reform, civil service reform, and army demobilization.

Despite these achievements, Uganda still has some way to go to ensure sustained growth and development, with a view to attaining long-run external viability. In particular, GDP remains very low, and given its high population growth rate of around 3 percent per annum, Uganda needs to raise its real GDP growth rate to a higher path. This requires continued improvements in the efficiency of resource allocation and increases in public and private saving rates to raise significantly the investment-GDP ratio. To facilitate further improvement in economic performance, greater attention needs to be paid to infrastructural investments, as well as investments in human capital, and to upgrading the social well-being of its citizens. An improved domestic performance will undoubtedly contribute to external viability; in this context, Uganda needs to continue reducing its sizable external debt overhang (much of which was contracted on nonconcessional terms in the early 1980s) and its debt-service ratio.

The rest of this paper explores not only the recent adjustment efforts but also the prospects for Uganda in the medium term. Section II provides an overview of recent economic performance. Section III considers the economy's performance with respect to growth, saving, and investment. Section IV provides an analysis of Uganda's external adjustment efforts and, in particular, its move toward external viability and a sustainable balance of payments position. Section V surveys fiscal adjustment over the period and the prospects for a sustainable fiscal position, as well as the all-important areas of public enterprise reform and army demobilization. Section VI focuses on the evolution and prospects of monetary policy and financial sector reform. Section VII examines the economy from a regional perspective, and Section VIII presents the concluding remarks.