Abstract

Since the end of the civil war in 1986, Uganda has made impressive progress in laying the appropriate foundation for improving the well-being of the public through sustained macroeconomic stability and growth. Although implementation of stabilization policies in the early years of adjustment proved quite difficult, the strong commitment of the Government to adjustment and consistency in its actions led to a remarkable recovery in economic activity. This process was helped considerably by the IMF, World Bank, and other members of the donor community. After seven years of adjustment efforts, the result is a marked improvement in internal balances and external sector performance. Not only has Uganda increased its growth performance, but despite an unfavorable external environment for its main export during most of the period, the country has been able to normalize its relationships with creditors and make important steps toward external viability and a sustainable balance of payments. Although the situation remains fragile, Uganda is poised to take advantage of its improving terms of trade and the successes of the various institutional and structural reforms implemented in the past seven years.

Since the end of the civil war in 1986, Uganda has made impressive progress in laying the appropriate foundation for improving the well-being of the public through sustained macroeconomic stability and growth. Although implementation of stabilization policies in the early years of adjustment proved quite difficult, the strong commitment of the Government to adjustment and consistency in its actions led to a remarkable recovery in economic activity. This process was helped considerably by the IMF, World Bank, and other members of the donor community. After seven years of adjustment efforts, the result is a marked improvement in internal balances and external sector performance. Not only has Uganda increased its growth performance, but despite an unfavorable external environment for its main export during most of the period, the country has been able to normalize its relationships with creditors and make important steps toward external viability and a sustainable balance of payments. Although the situation remains fragile, Uganda is poised to take advantage of its improving terms of trade and the successes of the various institutional and structural reforms implemented in the past seven years.

Uganda's considerable progress can be attributed to a number of important reforms. First, the liberalization of domestic markets, in particular, prices and trade, provided a tremendous boost to domestic agriculture. This process was, of course, facilitated by the return of peace and security in many agricultural regions, following the end of the civil war. Second, the achievement of price stability through monetary restraint helped restore confidence, external competitiveness, and the real value of consumption expenditures. Price stability has also been crucial to the financial sector by ensuring positive real interest rates, which in turn provided important incentives for an improved saving rate and the efficient allocation of financial resources. Third, the liberalization of the foreign exchange, payments, and trade system contributed to a significant improvement in the competitive and efficient allocation of foreign exchange resources. The result is that Uganda's exports have become more diversified and its nontraditional agricultural export sector has become more competitive in external markets, the exchange rate now reflects fundamentals in the economy, and foreign exchange market segmentation has disappeared. Fourth, fiscal adjustment efforts contributed to the stabilization of the economy through the elimination of bank financing of the budget, such that the public sector is now poised for generating positive savings as a percentage of GDP. Important reforms in the civil service, the parastatal sector, army demobilization, revenue-enhancing measures, and expenditure rationalization have all laid an important basis for an improved fiscal outlook in the near term. Fifth, the liberalization of interest rates, implementation of a treasury bill market, and other financial sector reforms have strengthened the prospects for sound monetary management.

Uganda's experience demonstrates that successful adjustment with growth requires a policy mix that is all-encompassing, including adjustment at the macro-economic level, as well as important institutional and microeconomic reforms, to ensure the efficient functioning of markets and their integration. Sequencing of the policy reforms is also critical. Early removal of domestic price distortions and a progressive liberalization of the trade, payments, and exchange system provided powerful incentives to producers and exporters, which helped Uganda adjust in the face of an unfavorable external environment. Periodic delays notwithstanding, proper timing and sequencing of donor support also facilitated both the fiscal and external adjustment needed for successful implementation of the overall policy reforms.

Despite the progress made, Uganda still needs to resolve many important policy issues. For external viability and a sustainable balance of payments, there will have to be continued improvement in domestic performance. Uganda has made substantial efforts at achieving price stability, but it must now succeed in maintaining a low inflation rate in line with its main trading partners. Although growth has been impressive in the past seven years, higher levels may be required in order to make a more significant impact on the lives of Ugandan people through increased employment generation and adequate provision of social services. For higher growth, Uganda needs to raise both its domestic saving and investment efforts. Higher saving and investment ratios will come only from a reinforcement of the financial intermediation process, and from stronger fiscal adjustment, in particular, a higher tax revenue/GDP ratio and further improvement in public investment expenditure projects. Uganda will also have to demonstrate in the medium term that it can pursue prudent macroeconomic policies when terms of trade shocks are positive just as when they are negative. The improved outlook for coffee prices and continued capital inflows provides an important challenge to macro-economic management as well as an incentive for exporters of nontraditional commodities to boost productivity and efficiency in the face of a likely appreciation in the real exchange rate. Macroeconomic management will have to be supported by an intensification of financial sector reforms, including a deepening of financial markets, a broadening of financial instruments, and an improvement in the solvency of problem banks. On the fiscal front, it is advisable for the public sector to pursue a permanent income stance over the coffee boom cycle, so as not to return to an unsustainable deficit situation.

Although Uganda faces important challenges ahead, a critical foundation has been laid. The prospects for a strong performance over the medium term in the domestic economy, as well as on the external front, are real. Uganda faces important opportunities, both domestic and external. An added dimension to growth prospects may come from the regional integration movement under the CBI, which offers the prospect of an improvement in Uganda's terms of trade in the eastern and southern Africa region, in addition to new export markets for agricultural output. While the development process is a slow one, and important social variables take time to improve, Uganda's performance provides lessons for African countries involved in adjustment efforts: success is critically dependent on commitment, the courage to take the first steps, and consistency of policy implementation along the road to growth and development.

Cited By

Adjustment with Growth, 1987-94
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