Overall framework

The PEAP aims at contributing towards transforming Uganda into a middle-income country. Such a process of transformation will involve industrialisation based on private investment in competitive enterprises. Middle-income countries invariably have a higher share of industry in GDP, both because they have a higher capital stock and because they have higher domestic demand for manufactured output.

It is now recognised that the best way to industrialise is usually not to protect domestic industry, but to enhance competitiveness. Protection leads to the establishment of uncompetitive industries and also, in low-income countries, tends to increase inequality. Uganda is therefore aiming at a path of economic development that will expand the country’s ability to compete in international markets

Because of the country’s geographical position and strong (though vulnerable) natural resource base, one of the main forms of industrialisation will be value-addition by processing agricultural products. For this to happen, the country’s farmers need to understand the technical and quality requirements of commercial production. The incomes generated as a result will represent a crucial infusion into rural areas, where most poor people in Uganda live.

While manufactured exports will depend on agricultural inputs, manufacturing for the domestic market will depend on the demand for manufactured goods, and this in turn depends on rural incomes. For both these reasons, manufacturing growth will depend on agricultural development, even though the rate of manufacturing growth is likely to continue to be faster than that of agricultural growth, corresponding to patterns observed elsewhere.

Government’s strategy in the short run is therefore aimed at strengthening both agriculture and manufacturing. For agriculture, critical interventions include infrastructure (especially rural roads), information and support to farmers’ marketing. For manufacturing, Government will strengthen infrastructure (especially electric power), improve governance (since corruption has been identified as a constraint for manufacturing), boost the education of the workforce, improve the financial system, and establish a regulatory regime that ensures a level playing field.

As Chapter 2 notes, there has been a marked increase in inequality in the last few years. Government aims to tackle this by increasing the ability of the poorer households to participate in economic growth. There are three main channels. First, many of the poorest households depend heavily on their own agricultural production thus the need to improve quality and enable them to enter the market, while strengthening their property rights. Secondly, non-agricultural self-employment has been increasingly important as a route out of poverty as well as wage employment.

The process of economic development will both cause and depend on social and human development. As economic development occurs, the health, educational level and empowerment of the population will improve. Government recognises the importance of community empowerment at all stages of development, and is committed to involving communities more fully in the provision of services and the identification of new economic opportunities.

Core Challenges and Priority Action for the PEAP

Since 2000 there have been major developments in the delivery of social services and continued economic growth. However, this growth has been highly unequal and as a result, poverty has increased. The growth has also been accompanied by environmental degradation. Also, information now available shows that there was less improvement in human development indicators in the 1990s than had previously been thought (except for the achievement with AIDS). Insecurity has persisted, causing changes in the regional pattern of poverty.

This set of circumstances implies the following core priorities for action in this PEAP.

• Restoring security, dealing with the consequences of conflict, and improving regional equity

Over the PEAP period, Government will endeavour to end armed conflict in all parts of the country, to enable Internally Displaced Persons (including formerly abducted children) to return home or to find new livelihoods (according to their preference), and to start to repair the damage done by the war to the economies of the North and North-East.

• Restoring sustainable growth in the incomes of the poor

During the period 2000–2003, income poverty increased, and inequality has been increasing markedly since 1997. Government will aim to achieve increases in per capita consumption and halt or reverse the increasing trend in inequality, so that per capita incomes and consumption as well as savings of the poor rise. This growth must take a form that maintains and protects the environment and natural resource assets on which the poor depend.

• Human development: addressing quality and drop-out in UPE and planning for post-primary education, cutting mortality and increasing people’s control over the size of their families

Uganda has achieved major increases in the volume of primary education, but quality and drop-out remain concerns. There will be an increased demand for post-primary education in the coming years. AIDS prevalence has fallen dramatically, but has recently levelled out. Progress in reducing child and infant mortality and promoting family planning has been disappointing.

Government will endeavour to improve the quality of primary education and reduce dropout, to expand post-primary education, and reduce infant and child mortality. Government will ensure that family planning services are accessible to all those who need them and that all households are aware of their responsibility of protecting themselves from HIV/ AIDS and to make sure that they can support their children.

• Using public resources transparently and efficiently to eradicate poverty

Government enjoyed a major expansion of resources during the late 1990s and early 2000s, as a result of increased donor in flows. This expansion was not accompanied by an increase in domestic revenues, and hence increased the deficit. In order to control the deficit, Government resources will expand more slowly over the PEAP period, unless the expansion is funded by domestic revenues. Hence the focus has to be on improving the efficiency with which resources are used. Government will endeavour to reduce corruption and increase accountability in the use of resources: to improve the allocation of public resources by giving high priority to the actions identified in the PEAP and reducing the proliferation of uncoordinated initiatives. Streamlining the structures within the public sector itself will be a major challenge.

The Process of Revising the PEAP

The Government of Uganda embarked on the process of revising the PEAP in November 2002 with the development of the 2003 Poverty Status Report (PSR 2003). The PSR 2003 brought together all available evidence on the progress we have made in the implementation of the PEAP and the outstanding key challenges that we see in the revision process. During 2003 and 2004, three major stakeholder workshops were held, bringing together over 1000 stakeholders from central government, local government, the civil society and private sector in each workshop.

The first workshop was used to launch the revision process and explain the PEAP Revision Guide to all the stakeholders. After the first workshop, different groups held independent consultations. Government Sector Working Groups developed sector PEAP revision papers, which have been synthesised in the draft PEAP itself. Civil society and the private sector ran consultative processes led by the Uganda NGO forum and the Private Sector Foundation respectively. A working group on cross cutting issues integrated issues of gender, HIV/AIDS and environment into the whole PEAP revision process. The second workshop reviewed the draft sector papers, and the third workshop reviewed the first draft of the PEAP itself. Two workshops were held by Parliament during the preparation of the PEAP and their input is reflected in the document.

Several research initiatives and studies have been used in the revision process. The latest National Census data (2002) and the Uganda National Household Survey (2002/03) provided the quantitative research evidence that was used in the revision of the PEAP.

Qualitative data on poverty was provided by the findings of the 2nd participatory poverty assessment process, conducted in 12 districts in 60 sites in all regions of Uganda¹. All these data sources gave statistical as well as qualitative research evidence that has been sharpening Government’s overall strategy for poverty eradication. This consultative process has therefore been one of learning and sharing information, which are key ingredients in any country’s poverty eradication strategy.

What is New in the PEAP

• a) More focus on linking public expenditure to the PEAP priorities: PEAP 2004 provides a clear link between the PEAP priorities and public expenditure. A new chapter that focuses on issues of public expenditure and the PEAP implementation has been added.

• b) Making the PEAP more functional: The new naming of the pillars in this PEAP is based on the functions that will be implemented under each pillar. In this way the PEAP 2004 is now a document that allows sectors to relate to various parts of the PEAP in the implementation process.

• c) Developing a PEAP Results and Policy Matrix: A PEAP Results and Policy Matrix has also been developed making the monitoring and evaluation of the PEAP much more clearer.

• d) Balance between Social and Productive Sector Spending: This PEAP has also created a balance between the productive and social sectors. The PEAP 2000 did emphasize investment in the social sector and we have been able to see significant improvements. However, we have also observed slow growth in the productive sector and therefore this PEAP emphasizes a strategy that is linked to both sectors.

• e) Prioritizing Ending Insecurity: A new pillar on security and conflict resolution has been introduced as a direct recognition that security of all Ugandans needs to be treated as a national priority and in a holistic manner so that we can cater for interventions both in conflict areas and also post conflict areas.

• f) Cross cutting Issues: The PEAP 2004 has also paid attention to several cross cutting issues that affect people’s livelihoods and have an impact on the PEAP. The environment sector working group, HIV/AIDS sector working group and gender sector working group organized their own consultations and contributed evidence that has been used in the PEAP revision process. It is now clear that removing constraints caused by HIV/AIDS, Environment and above all gender inequalities is key to achieving Uganda’s poverty eradication goals.

• g) Process of Consultation: The process of consultation in the revision of the PEAP is probably the most detailed since the PEAP 1997 was developed. The PEAP 2004 is based on consultations with very many stakeholders. We have consulted local governments who conducted their own consultation in their respective local governments, sectors have prepared Sector PEAP Review Papers, the Civil Society Organizations sent in contributions, the private sector organized consultations among themselves and many of development partners sent in comments on the various drafts of the revised PEAP. The PEAP 2004 therefore represents the aspiration of very many Ugandan stakeholders at all the different levels.

Economic management

Key priorities in economic management are:

• The maintenance of macroeconomic stability

• Fiscal consolidation

• Boosting private investment

Production, competitiveness and incomes

Key priorities in this area are:

• The modernisation of agriculture

• Preservation of the natural resource base, particularly soil and forests

• Infrastructure including roads, electricity and railways; better maintenance, cost-reduction and private sector participation will be key to achieving improvements in the context of fiscal consolidation.

• Enhancing private sector skills and business development.

Security, conflict-resolution and disaster-management

The key priorities in this area are:

• Ending rebel insurgency, by peaceful means if possible

• Ending cattle-rustling

• Dealing with internal displacement and abduction, which are major sources of distress in contemporary Uganda

Governance

The key priorities are:

• Human rights and democratisation

• The development of a better legal system

• Transparency, accountability and the elimination of corruption

Human development

Key priorities are:

• Primary and secondary education: with a clear focus on quality and the ultimate objective of learning, and with better targeting of public expenditure on secondary education at those who could not otherwise afford it.

• Improving health outcomes: this will be the joint achievement of several sectors

• Increasing people’s ability to plan the size of their families

• Community empowerment including adult literacy

The identification of an area as a priority does not necessarily mean that spending on this area will increase. The chapter on public expenditure examines the relations between the existing and projected resource envelope and Government’s plans in various sectors, and uses this analysis to see which areas are currently underfunded.

The Role of Government

The state is responsible for ensuring a basic framework of legality, rights and freedom and intervening in the economy to promote economic efficiency, equity and growth. Interventions are appropriate for three main reasons:

• - Promoting the right incentives to encourage private production

• - Ensuring that public goods are supplied

• - Reducing inequality. (This is particularly relevant in a context where income inequality has been increasing sharply)

One of the objectives of the PEAP is to develop consensus on how to interpret these principles in Uganda. All sectors were asked to analyse the public sector’s role in their submissions for the PEAP revision. Likewise, the PMA and the MTCS provide frameworks for the public sector’s role in supporting economic production. This PEAP re-emphasises the importance of some public goods, such as agricultural extension, while exploring the option of public funding for private provision in a number of areas.

Government is committed to serving all citizens of Uganda irrespective of ethnic background, sex, or religious beliefs. This fundamental commitment will underlie all Government policies in the PEAP.

Legislature and executive

Most of the actions included in the PEAP are implemented by the executive arm of Government. The fundamental commitments, however, are guided by the vision of Government as reflected in the promises made to the electorate. Parliament has a fundamental role both in passing legislation that bears on poverty-eradication, and in scrutinising the executive. The Public Finance and Accountability Act sets up an improved framework for this scrutiny.

Autonomous and semi-autonomous agencies

There are a large number of autonomous and semi-autonomous agencies within the public sector. Some of these have essential public roles including policy formulation, independent monitoring, service delivery, and the procurement of services. These are expected to pursue the interests of the population as a whole in the same away as central Government. Others are expected to operate on an essentially commercial basis though subject to regulation.

The roles of these agencies are subject to review. There are concerns about the efficiency of some of these agencies, the very substantial gap between remuneration in them and in the public service, and the amount of revenue that is effectively hypothecated by being assigned to these agencies. There is also some concern that social and commercial missions have been blurred in some cases, leading to a reduction in the efficiency of investment.

The Private Sector (national and international)

It is the private sector, including the many small-scale farming households, that is responsible for the majority of productive investment. In general, the motivation for investment is expected to be commercial, and Government will therefore seek to ensure that the incentives in the economy encourage the kinds of investment that will generate pro-poor growth. In some cases, the commercial private sector supports public goods for altruistic, cultural or prestige reasons. For instance, commercial sponsorship of sport is an important international phenomenon. The private sector has contributed significantly to the priorities identified in this PEAP.

Over time, it is hoped that producer organisations will be strengthened. Services such as information about marketing opportunities, which benefit an industry as a whole, can be usefully provided by such organisations. Producers’ organisations in grain trading and horticulture already play an important role, and Government will collaborate with such organisations in promoting private sector development.

Civil Society

It is essential to the concept of civil society that its actions are not planned or dictated by Government. However, Government enjoys productive partnerships with civil society in a number of areas and there are four general roles that civil society organisations play:

• Advocacy, particularly for the interests of groups who might otherwise be neglected;

• Voluntarily financed service delivery in sectors not covered by Government programmes;

• Publicly financed service delivery, subcontracted by Government;

• Support to conflict resolution; and

• Independent research on key policy issues

Civil society has made a substantial input into the policies proposed in this PEAP, and even to the structure of the document.

Donors

Donors continue to play a critical part in financing public expenditure in Uganda. In accordance with the partnership principles spelt out in Volume 3 of the previous PEAP, the donors are encouraged to support Government programmes through budget support rather than through projects. With the introduction of sectoral ceilings for the development budget including donor projects, both sectoral ministries and donors need to understand that each additional project will have an opportunity cost for the sector in terms of flexible resources for the sector’s priorities. This is being done to ensure that project funds are subject to the same process of prioritisation as more flexible resources.

Some donors provide support direct to NGOs and to some districts outside the central government budget. The amounts are not currently integrated into the national resource envelope, but information is collected on them. The amounts are not large enough currently to have substantial macroeconomic effects.

Government has developed partnership principles, discussed in chapter 8, to guide interactions with donors.

Trends in income poverty and inequality

During the 1990s, income poverty fell dramatically. The proportion of Ugandans whose expenditures fell below the poverty line (the poverty headcount) fell from 56% in 1992 to 44% in 1997/8 and even faster to 34% in 2000. These changes were driven mainly by increases in average income, rather than by redistribution. Inequality was basically steady from 1992 to 1997, but increased thereafter; the Gini coefficient² was between 0.37 and 0.35 until 1997, but rose to 0.39 in 2000. Since 2000, the trends have been less encouraging. Income poverty increased from 34% to 38% between 2000 and 2003, and inequality as measured by the Gini coefficient rose markedly from 0.39 to 0.43.

There has been extensive discussion of the relation of these findings to participatory evidence⁵. While the participatory data show less perceived improvement, this arises partly because the period of comparison was different. While most Ugandan households in 2000 were economically better off than they had been in 1992, they were not necessarily better off than they or their parents had been in the 1960s or early 1970s, because of the decline in incomes during the 1970s and early 1980s.

The results in ^{Table 2.1} have a number of implications for poverty in the period 2000–2003:

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• Poverty rose in almost all regions of the country, with a particularly sharp rise in the East. However, the North (in which poverty fell slightly, although it must be noted that the sample excludes the insecure areas of Pader, Kitgum and Gulu) remains the poorest region in the country.

• The regional shares of population changed markedly, with an increase in the share of the East and a reduction in the share of the North. This partly reflects the movement of some displaced persons to the East because of insecurity.

• Inequality increased markedly, with the Gini coefficient rising from 0.39 to 0.43.

• The sectoral shares of household heads changed dramatically, with a major shift out of crop agriculture. This may be partly due to a change in the sample, although the share of households owning land is constant across the two surveys. This is accompanied by a large drop in consumption of home-produced food, while consumption of purchased food increased.

• The increase in poverty is particularly marked for households in crop agriculture, although other sectors such as trade and hotels also show large increases. By contrast, workers in government services experienced reductions in poverty.

The evolution of durable assets and welfare indicators shows a more encouraging pattern, with some improvements. The proportion of households with metal roofing and with radios rose over the period, as did the proportion of households eating meat or fish. Seven per cent of households now use a mobile phone, and as many as 35% of households in Kampala. Communications among urban households have thus been successfully transformed by the adoption of new technology in a liberalised environment.⁶ Recent research shows that more than 40% of the households who had livestock or a bicycle at the end of the 1990s reported that they had not had the corresponding asset in 1992⁷.

Households’ access to land is likely to be squeezed by population growth and land scarcity. The rate of urbanisation has been gradual rather than dramatic, and the proportion of households with agricultural land appears to have changed little between 2000 and 2003⁸. Hence an increased number of households are using the country’s limited resources of land. There are also some signs that land inequality is growing. The Village Census conducted for UPPAP found that the richer households had accumulated land and other assets over the 1990s much more than other households.⁹

While the role of depressed producer prices gives reason to think that the increase in poverty is likely to be a temporary phenomenon, a more disturbing fact is the increase in inequality that has been evident over the last six years. This is particularly disappointing in the context of increased public expenditure. Inequality has increased not only because of different growth in different sectors but also because of increased dispersion within particular sectors. In particular, wages became more unequal both in the public and the private sectors¹⁰. For this reason, while short-term shocks provide part of the explanation for what happened, there are more underlying structural concerns that need to be confronted.

Explaining the trends in poverty and inequality

Regional inequalities

While most parts of the country shared in the benefits of growth between 1992 and 2000, the North was left behind. The proportion of people in the North below the poverty line fell from 72% in 1992 to 60% in 1997/8, but rose again to 66% in 2000. This pattern is observed even though the most insecure areas were omitted from the sample. Between 2000 and 2003, the North remained relatively poor; also, the second-poorest region, the East, suffered a significant deterioration, partly because of distress migration. If real consumption had grown during the period 1992–2003 in the North at the same rate as the rest of the country, real consumption would now be 38% higher in the North and aggregate national consumption would be about 3.3% higher.

The major reason for the increasing regional gap is insecurity. Households that are physically insecure cannot make economic investments. While the dollar values of household assets increased sharply between 1992 and 1999 in the West and Central regions, this was not observed in the East and West. Households in the North, who started with smaller asset values, were unable to increase their investments in land or no land assets (see Annex Table A 2.1). This may be mainly because of the low prices of assets n the North, since livestock holdings are fairly similar, although holdings of land (often communally owned) and modern consumer goods are lower in the North¹⁸.

While other factors including poor prices for cash crops and the specific problems faced by pastoralist communities contributed to the relative poverty of the North, there is no doubt that security is the most important factor.

There is also a wide gap between urban and rural areas, even when the higher prices for some consumer goods in urban areas are taken into account¹⁹. Human development indicators are also mostly much better among urban households. Urban poverty also often reflects migration from rural areas and therefore can be addressed partly by making conditions in rural areas better. Nevertheless, there are some particular problems faced by the urban poor including the shortage of decent housing and sanitation.

Gender inequalities

It is too simple to say that women are poorer than men. However, there are specific groups of women who are particularly likely to be poor, and there are some dimensions of poverty in which women are generally at a disadvantage.

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Women-headed households were found to be poorer than MHH in 1999, but not 1992 or 2003. However, households headed by female widows are consistently poorer than others, and households headed by married women (probably mostly married to polygamous or absent husbands) are poorer than other households in both the later two surveys.

If the delayed age at first intercourse for both has certainly added to the decrease in HIV prevalence, women remain more affected by HIV/AIDS than men. In addition to biological susceptibility, there is the problem of unequal power relationships, when women cannot control their sexuality. The impact of the HIV/AIDS epidemics is also more heavy for women who often have to care for the sick and the dependant.

Women’s land rights are limited in Uganda both by the inequitable legal structure²¹ and by traditional practice. Data show that female-headed households have less land than male-headed households, even when corrected for household size, if the head is married, divorced or single. Widows have quite high land holdings per adult equivalent, but they tend to lose these assets over time as their male children grow up. However, the lack of a gap in income poverty suggests that women-headed households are able to compensate for their lack of land.

Women participate less in the labour market than men, and women’s wages have been found to be significantly lower than men’s. In 2003, 51% of currently employed women had wages of 40,000 per month or below, compared to 44% of currently employed men²². This may be at least partly due to the difference in average educational status, or it may reflect labour market institutions that discriminate against women.

It has often been found that women work longer hours than men, when domestic tasks are considered. Recent work on the household²³ data finds men have slightly longer working hours than women on economic activities. However, women almost certainly work much longer hours on domestic activities than men. As a result, women are overburdened, as the second round of UPPAP²⁴ found.

Male-headed households spend more on alcohol, especially on local brews other than beer; for instance, households headed by divorced men devote more than 6% of their expenditures to alcohol²⁵. By comparison, female-headed households spend more on school fees²⁶.

Poverty by occupational group

The largest group of poor households in Uganda have consistently been those in agriculture. The poorest occupational group in Uganda consists of households who specialise mainly or solely in crop production. Participatory evidence in the second UPPAP study has shed particular light on pastoralists, fishermen and their families, and estate workers.

Inequality within the group

Although inequalities between regions and between occupational groups and demographic groups are important, recent studies show that most inequality is explained by differentials within regions and within groups. For instance, the sex of the household head explains virtually none of the observed inequality; the rural-urban gap explains 20% of inequality; differences between regions explain 13%; and the economic activity of the head of households explains 15%. Even education, the most powerful determinant of inequality, explains only 25%.²⁷ It is likely that inequalities in physical and financial assets are an important proximate determinant of inequality.

Other disadvantaged groups

There are a number of specifically disadvantaged groups who need attention.

Chronic poverty and vulnerability

Vulnerability in some societies takes the form of temporary income shocks due to climatic factors. These can be translated into chronic impoverishment if households are unable to insure themselves against the shocks without selling vital assets and do not receive outside assistance.

In Uganda’s case, much vulnerability takes the form of the disruption of the household membership, often due to the illness or death of a member. This makes a permanent change in the household’s ability to raise income. Households headed by female widows are particularly vulnerable to asset depletion and impoverishment.

Incomes and economic transformation

In order to become a middle-income country, the structure of Uganda’s economy must change. Currently, most households derive much of their income from subsistence agriculture, but many households are moving into production for the market and self-employment outside agriculture.

The structure of the labour force is changing (^{table 2.4}). Between 2000 and 2003, the proportion of households whose head is mainly employed in agriculture fell from 71% to 58%, and there is a corresponding increase in the proportion of those who are self-employed outside agriculture from 12% to 25%. Farmers’ incomes fell during the period, so that the proportion of farming households in poverty rose from 39% to 49%. This was accompanied by an increase in poverty among those in non-agricultural self-employment (17% to 21%). Nevertheless, for the individual household non-agricultural self-employment is still a way out of poverty; poverty is much lower among those with non-agricultural self-employment (21%) than among those who depend on agriculture (49%).

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Although data are highly sensitive to definitions, the pattern of incomes in urban and rural areas is shown in ^{table 2.5}

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Unemployment

Open unemployment is relatively rare, and is found mainly in urban areas, particularly among the most highly educated and amongst women (Annex Table 2.2).

Underemployment (working on economic activities less than 40 hours a week) is widespread, affecting 65% of adults, including 75% of women and 55% of men. This reflects the burden on women’s time from ‘non-economic’ activities such as childcare and fetching fuel wood and water. Women cannot devote 40 hours a week to ‘economic’³⁶ activities because they are so heavily committed to these ‘non-economic’ activities.

Visible underemployment (working on economic activities less than 40 hours a week despite being available for work) is the best way of capturing the dimensions of underutilised labour. This is higher among men than women, and higher in rural areas than urban areas (^{table 2.6}). The lower rate of underemployment among women reflects the ‘non-economic’ burdens on their time.

Table 2.6:

Visible underemployment, % of labour force³⁷

Table 2.6:

Visible underemployment, % of labour force³⁷

Age group	Rural	urban	total
	male	Female	total	male	female	total	male	female	total
10-19	12	12	12	8	5	6	12	11	12
20-29	24	17	20	8	9	8	18	15	16
30-39	19	15	17	11	12	12	18	15	16
40-49	18	13	15	7	11	9	16	13	15
50+	12	6	9	7	8	8	11	6	9
Total	18	14	16	9	9	9	16	13	15

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Table 2.6:

Visible underemployment, % of labour force³⁷

Age group	Rural	urban	total
	male	Female	total	male	female	total	male	female	total
10-19	12	12	12	8	5	6	12	11	12
20-29	24	17	20	8	9	8	18	15	16
30-39	19	15	17	11	12	12	18	15	16
40-49	18	13	15	7	11	9	16	13	15
50+	12	6	9	7	8	8	11	6	9
Total	18	14	16	9	9	9	16	13	15

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Production and economic transformation

Corresponding to the shift in labour force is a shift in the structure of the economy. Over time, two major shifts are expected; towards industry, and towards exports. For nine comparator countries that reached an income level which would be achieved by Uganda in twenty years’ time with a good growth performance, the average proportion of manufacturing to GDP when they reached this level was 21.9% and the average proportion of exports to GDP was 24.5%. The equivalent ratios in Uganda in 2001/2 were 9.7% and 11.8%⁴⁰. As noted in Chapter 3, the share of industry has increased significantly over the last twelve years in Uganda.

In Uganda’s case, the natural resource endowment and location of the country means that industry is most likely to be internationally competitive if it adds value to agricultural output (and other natural resource based activities such as forestry). Agro-processing is therefore an important sector within industry that is expected to expand over the next several years. This process has started in a number of areas; for instance, there has been a marked expansion in processing and exports of commodities such as coffee, fish and cut flowers.

Prospects for the reduction of income poverty

The LTEF allows a forward projection of poverty. If population grows at 3.6%over the next fifteen years, income distribution is constant⁴¹, and GDP grows at about 6% over the period, then the proportion of people below the poverty line is projected to fall to 28% by 2013/4. Clearly, faster poverty eradication is desirable and can be achieved in three ways:

• Higher GDP growth. Given a population growth rate of 3.4%, an increase in economic growth from 5 to 7% represents more than a doubling of per capita growth and an even more dramatic impact on the rate of poverty reduction.

• Reductions in inequality. If the Gini coefficient were to fall to 0.39 over the next ten years, reversing the increases in inequality observed over the last three years, then with 6% real growth the poverty headcount would fall to 23%.

• If, in addition to the above assumptions, population growth falls to 2.4%, then poverty is projected to fall to 18%.

A 6% real rate of growth is considered realistic based on the macroeconomic projections; the reduction in inequality and in population growth, while ambitious, are possible if growth in the regions and sectors where the poor are located is promoted. Hence an ambitious, but reasonable target for the proportion in poverty by 2013/4 is 18%.

GDP Growth

Uganda has experienced strong economic growth over the past decade. Real GDP growth at market prices has averaged 6.5% per annum since 1990/1991. Recently, concerns have been raised that growth has slowed slightly over the past five years, as the average growth rate between 1998/99 and 2002/03 was 6.1% per annum, as compared to 6.8% between 1990/91 and 1997/98. In fact, the higher average growth rate between 1990/91 and 1997/98 was boosted by three years of exceptionally strong growth in the early 1990s, which was driven by the economic reforms implemented in the first half of the 1990s and the coffee price boom.

Real GDP Growth at Market Prices 1990/91 – 2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

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Real GDP Growth at Market Prices 1990/91 – 2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

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Real GDP Growth at Market Prices 1990/91 – 2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

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The determinants of growth in Uganda during the 1990s have been identified as improved security, the restoration of macroeconomic stability, the removal of economic distortions and an improvement in the terms of trade, as a result of the mid-nineties coffee price boom.¹ Growth in total factor productivity, meaning the efficiency with capital and labour are used, made a significant contribution to GDP growth during the 1990s, reflecting the scale of rehabilitation of production processes after the restoration of peace to most of the country.

On a sectoral basis, industrial production saw the highest rate of growth, averaging 10.4% per annum between 1990/91 and 2002/03 as a whole, although it slowed slightly to an average of 7.7% per annum in the last five years. Services grew by an average of 7.5% per annum between 1990/91 and 2002/03, and by 6.9% per annum over the past five years. Agriculture had the slowest growth rate amongst the major sectors, averaging 3.8% per annum between 1990/91 and 2002/03, although growth was slightly higher in the last five years, at 4.4% per annum.

Sectoral GDP growth rates 1990/91-2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: MoFPED

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Sectoral GDP growth rates 1990/91-2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: MoFPED

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Sectoral GDP growth rates 1990/91-2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: MoFPED

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Structural Transformation

Production has been shifting slowly towards services and industry, as growth in those sectors has outpaced agricultural growth. Agriculture accounted for 38.7% of GDP in 2002/03, as compared to 51.1% in 1991/92, as subsistence agriculture declined by 10 percentage points of GDP over the period. Services increased as a share of GDP from 36.6% in 1990/91 to 41.8% in 2002/03, and industrial production rose from 12.4% to 19.5% over the same period.

Sectoral Shares of GDP 1990/91–2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: MoFPED

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Sectoral Shares of GDP 1990/91–2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: MoFPED

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Sectoral Shares of GDP 1990/91–2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: MoFPED

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These shifts constitute the beginning of the process of structural transformation in the economy, whereby production slowly moves away from subsistence-based agricultural to a mix of commercial agriculture, services and industry as a result of shifts in demand and labour patterns in the economy. Agricultural commercialisation is expected to lead to increased demand for non-agricultural goods and services, and increased agricultural productivity is expected to free up labour for use in other sectors of the economy, leading to a slow shift in the pattern of production over time.

However, given Uganda’s natural competitive advantage of fertile land and a good climate, it is not expected that Uganda will move away from agricultural production altogether, but that it will orientate its agricultural output towards regional and international export markets. Increasing the share of exports within agricultural production is important because increased supplies of basic food crops to the domestic market will depress farm gate prices, transferring part of the benefits of production to urban consumers. Consequently, Government’s agricultural strategy is focusing on the production and processing of agricultural exports, both traditional exports such as coffee and cotton and non-traditional exports such as horticulture, vanilla and honey.

Increasing agricultural commercialisation and export production is particularly important for poverty reduction given the dependence of the majority of the poor on agriculture as their main source of income. This dependence of the workforce on agriculture is illustrated by the 2003 Labour Force Survey, which shows that in spite of the twelve percentage point decline in agricultural production as a percentage of GDP between 1990/91 and 2002/03, agriculture in Uganda remains very labour intensive. Sixty-nine percent of the labour force was employed in agriculture-related activities in 2003, as compared to 23% in services and 8% in industry².

To achieve its objectives of agricultural commercialisation and export production, however, Government cannot rely on Uganda’s natural comparative advantage of fertile soils and a good climate alone. It has to safeguard the environment by ensuring long-term environmental sustainability. Research conducted for this PEAP suggests that farming practises which contribute to soil nutrient depletion pose a significant threat to land productivity in Uganda³. Population pressures also diminish land productivity. In a study sample, 95% of farmers were found to be taking out more nutrients from the soil than they were putting back. Actions to address environmental sustainability are discussed in detail in the following chapter.

Per Capita growth

Although Uganda’s overall GDP growth averaged 6.5% per annum between 1990/91 and 2002/03, the rate of per capita GDP growth was much slower on account of Uganda’s high rate of population growth. GDP per capita grew by 2.7% per annum over the period as the population grew by 3.4% a year. Uganda has the third highest population growth rate in the world, with the average Ugandan woman giving birth to almost seven children in her lifetime. A reduction in the rate of population growth would have a positive impact on the level of per capita GDP growth, and on per capita incomes, particularly in the ten to fifteen year phase when the labour force would be large relative to the total population as the birth rate slowed. This PEAP commits the Government of Uganda to extend the national coverage and effectiveness of family planning services, to allow women to meet their ‘unmet needs’ for family planning, as identified in the most recent Demographic Health Survey⁴. Further actions to reduce family size and to increase female participation in income-generating activities are discussed in Chapter 4 and 7.

Future Growth Prospects

Uganda’s objective remains strong, private sector-led growth which can contribute to economic development and poverty reduction. This PEAP, like the previous ones has set a real GDP growth target of 7% per annum as one of the conditions for achieving the required poverty reduction. The actions needed to boost growth from the average rate of 6.1% seen over the past five years to 7% are as follows:

• Removal of administrative barriers to investment

• Improvement in transport infrastructure and utility services

• Modernisation/commercialisation of agriculture, with emphasis on value-addition

• Actions to improve rural access to finance and to strengthen SME development.

• Actions to enhance environmental sustainability

• Security in Northern Uganda

• Actions to enhance gender equality

Policies to achieve the above objectives are discussed in detail in subsequent chapters.

The East African Customs Union is also expected to boost production in the medium to long term, as domestic producers benefit from duty free imports from within the Union, and produce for a larger internal market.

In addition, agricultural commercialisation, environmental sustainability and measures to reduce family size will also be important factors in reducing income inequality. Poverty estimates based on existing levels of inequality, a population growth of 3.6% per annum and real GDP growth of 6% per annum, estimate that 26% of the population will be living in poverty in 2017. If this PEAP meets its objectives of reducing inequality and raising GDP growth to 7% per annum, poverty can be expected to fall below this level. For example, a fall in the rate of population growth to 2.8% per annum would reduce poverty to 21% by 2017, even if annual real GDP growth remained at 6%.

Objectives of Macroeconomic Management

The central objectives of Uganda’s macroeconomic management are Inflation control and private sector-led growth. Government’s fiscal policies are subordinated to these objectives, meaning that Government expenditure should be restricted to a level that is compatible with them by controlling its fiscal deficit. Too high a fiscal deficit, even when funded by donor in flows, can generate Inflation or crowd out the private sector by appreciating the exchange rate, driving up interest rates or limiting the funds available to commercial banks for private sector lending.

Uganda’s macroeconomic performance

Uganda brought Inflation under control in 1992/93, mainly as a result of exercising tight control over Government expenditure.⁵ Annual average headline Inflation has averaged just 4.8% per annum over the past decade as a result of the Government’s sound macroeconomic policies.

Annual headline Inflation 1990/91–2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

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Annual headline Inflation 1990/91–2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

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Annual headline Inflation 1990/91–2002/03

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

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Once Inflation had been brought under control and key markets, such as the foreign exchange and financial markets, were liberalised in the first half of the 1990s, private investment began to expand rapidly. In real terms, private investment in 2002/03 was three times higher than it had been in 1991/02. As a percentage of GDP, private investment rose from 9.1% of GDP in 1990/91 to 15.6% of GDP in 2002/03.

Real private investment 1990/91–2002/03

(constant 1997/98 prices)

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

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Real private investment 1990/91–2002/03

(constant 1997/98 prices)

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

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Real private investment 1990/91–2002/03

(constant 1997/98 prices)

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

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However, since 1997/98, the Government’s fiscal deficit excluding grants⁶ has risen substantially, as a result of an increase in donor aid in flows to finance Government expenditure. Between 1997/98 and 2001/02 the fiscal deficit doubled as a percentage of GDP, from just over 6% in 1997/98 to 12.4% in 2001/02. It fell back slightly in 2002/03, but remained in double figures, at 11.2% of GDP.

Although the increase in the donor-funded fiscal deficit has enabled Government to increase expenditure more rapidly than the growth in domestic revenues alone would allow, it has led to an increase in the net issuance of Government securities and sales of foreign exchange by the Bank of Uganda, in order to control Inflation at 5%. Government’s net issuance of securities has risen by 500% over the past five years, whilst Bank of Uganda’s foreign exchange sales have risen by 1000%. The increased sale of Government securities has tended to drive up interest rates and to reduce Commercial Bank’s extension of private sector credit as they increase their TB holdings, whilst the increased sale of foreign exchange to the domestic market has appreciated the level of the real exchange rate.

Long-term macroeconomic policy objectives and indicators

The Government is committed to maintaining Inflation at 5%. It is also committed to reducing its fiscal deficit excluding grants, to enable further scope for private sector development. The Long Term Expenditure Framework (LTEF)⁷ prepared for this PEAP revision shows that reducing the fiscal deficit to 6.5% of GDP by 2009/10, and keeping it constant thereafter, is compatible with a rise in private sector investment to 22% of GDP by 2013/14, and a rise in exports from 12.6% of GDP to 15.4% of GDP.

Uganda’s macroeconomic indicators for the next ten years as projected in the LTEF are summarised below.

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The objective of the LTEF, which was prepared for this PEAP, has been to produce 10 year projections of the budgetary resources available to the Central Government for expenditure which are consistent with a coherent, comprehensive and realistic set of projections for the main macroeconomic variables, and with Government’s macroeconomic targets, such as the target for Inflation. The expenditure levels derived from the LTEF are used as a basis for the sectoral costings given in Chapter 8.

Inflation control

High and unpredictable rates of Inflation discourage private investment and savings as their value is eroded by price increases. The erosion of the value of savings by higher prices particularly affects the poor, who have few savings in the first place. Low levels of savings and investment and high prices in turn reduce the real growth rate of the economy, and high Inflation acts as an incentive for subsistence production instead of commercial production.

Government has therefore established a policy target of keeping the annual underlying Inflation rate to a maximum of 5%.⁸ The main policy instrument for achieving this target is monetary policy, which aims to control the growth of broad money in line with estimated money demand. Monetary policy cannot be subordinated to fiscal policy. If the Government’s domestic borrowing requirement is too large, either the money supply must expand at a faster rate than that of money demand, which will fuel Inflation, or private sector credit will have to be squeezed through monetary policy actions to restrain the growth of the money supply.

Raising the Inflation target from the current level 5%, either in an attempt to generate economic growth or to accommodate a more expansionary fiscal policy, is not a viable policy option. Uganda’s consistent record of maintaining low rates of Inflation sends a powerful signal to private investors about the credibility of macroeconomic policy; the Inflation rate is the most visible signal available to the private sector to judge the quality of macroeconomic management. Allowing the Inflation rate to rise would undermine the credibility of Government’s macroeconomic policy which has been painstakingly built up over the last 10 years.

Adopting a higher Inflation target would also make Inflation control more difficult, because the Inflation rate becomes more volatile as Inflation rises. It would erode the private sector’s expectations of low Inflation, which in turn would affect how future prices are determined. For example, higher expected Inflation would lead workers to demand larger wage increases to compensate for the expected erosion of the real value of their wages.

Deficit Reduction

A central objective of Government’s macroeconomic strategy is to reduce the overall fiscal deficit, excluding grants.⁹ The fiscal deficit widened sharply, by six percentage points of GDP, between the mid 1990s and 2001/02, when it peaked at 12.4% of GDP. The increase in the fiscal deficit was mainly attributable to an expansion of Government expenditure, which was not matched by increased domestic revenues. Between 1995/96 and 2001/02, Government expenditure rose by seven percentage points of GDP, to 24.6% of GDP, whereas domestic revenue increased by less than two percentage points of GDP, to 12.2% of GDP.

Government expenditure, revenue and fiscal deficit, 1998/99–2002/3

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: Macro Department

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Government expenditure, revenue and fiscal deficit, 1998/99–2002/3

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: Macro Department

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Government expenditure, revenue and fiscal deficit, 1998/99–2002/3

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: Macro Department

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The expansion in Government expenditure was mainly funded by an increase in donor aid flows. The primary purpose of the aid flows was to help fund key Government priorities in social services provision, such as Universal Primary Education and Primary Health Care. These programmes have undoubtedly benefited from increased resources, as will be outlined in Chapter 7, but the rapid increase in the Government budget at the same time diminished the need to scale back expenditure in non-priority areas such as public administration, leading to wastage, corruption and poor value for money in some areas of the budget. In addition, it is now becoming evident that even some of the money being channelled into key poverty-eradicating programmes is not being well spent, resulting, for example, in poorly constructed classrooms, and poorly built and maintained rural feeder roads.

These problems have signalled the need for Government to focus on the quality rather than the quantity of expenditure over the medium term. Key actions in this area include strengthened budget prioritisation, clearer focus on value for money, strengthened procurement, and actions to reduce corruption. They are discussed in greater detail in Chapters 6, 8 and 9.

These budget implementation problems arising from the scale of Government expenditure, poor accountability and absorptive capacity constraints have coincided with macroeconomic problems arising from the size of the fiscal deficit, which could potentially jeopardise future private sector development and fiscal sustainability, unless tackled immediately. Recognising these budgetary and economic problems, Government has begun to implement a strategy to scale back the fiscal deficit, and as a result the overall deficit excluding grants reduced to 11.2% of GDP in 2002/03. Government aims to reduce the fiscal deficit to around 6.5% of GDP by the end of the decade by restraining the growth of Government expenditures to less than the growth of domestic revenues. At the same time, Government will also endeavour to raise domestic revenues to around 16% of GDP by the end of the decade.

There are several sound macroeconomic reasons for Government’s fiscal deficit reduction strategy:

• Cost of private sector borrowing

The increase in the fiscal deficit has led to an increase in the net issuance of Government securities to control Inflation. As a result, the stock of Government securities has increased by more than 500% in five years, and interest rates have become sharply higher and more volatile. The average interest rate on a 364 day Treasury Bill was 17% in 2002/03, as compared to 9% in 1998/99, and the rate reached a peak of 34% in January 2001. Because an increase in Treasury Bill rates drives up Commercial Bank lending rates to the private sector, the increase in the fiscal deficit has sharply increased the cost of borrowing for the private sector, placing a constraint on private sector investment.

• Volume of private sector borrowing

The increase in the fiscal deficit has also been observed to have negative consequences for the volume of private sector credit extended by Commercial Banks. The rapid increase in the net issuance of Government securities to control Inflation, as noted above, has led to a rapid increase in net Government borrowing¹⁰ from the commercial banks, and this has inevitably squeezed the resources available for bank lending to the private sector.

Bank loans to Private Sector and Government as a % Deposits end June 1995- end June 2003

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: MoFPED

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Bank loans to Private Sector and Government as a % Deposits end June 1995- end June 2003

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: MoFPED

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Bank loans to Private Sector and Government as a % Deposits end June 1995- end June 2003

Citation: IMF Staff Country Reports 2005, 307; 10.5089/9781451838770.002.A001

Source: MoFPED

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• High domestic interest costs

The increase in both the stock of Treasury Bills and Treasury Bill interest rates has also led to a significant increase in Government’s interest costs. As of 2003/04, Government interest costs have increased by 1000% in six years, from shs 21bn in 1998/99 to shs 190bn this financial year. Government’s domestic interest costs now account for more than 8 % of Government of Uganda expenditure. A reduction in the fiscal deficit will lead to a gradual decline in the burden of interest payments on the GoU budget. The LTEF projects that interest payments should amount to just 3% of the Government budget by 2013/14 if the deficit is scaled back to 6.5% of GDP.

• Exchange rate

Bank of Uganda’s sales of foreign exchange have risen ten fold as donor in flows and the fiscal deficit have increased, from $25m, equivalent to 2% of private sector foreign exchange sales, in 1998/99, to $247m, equivalent to 16% of private sector foreign exchange sales, in 2002/03. The increase in aid flows and Bank of Uganda’s foreign exchange sales coincided with the fall in Uganda’s terms of trade, as the price of coffee and other major export commodities fell in the late-1990s. Consequently, the impact of the fall in the terms of trade on the exchange rate was partially offset, adversely affecting the shilling incomes of exporters. More broadly, a recent study suggests that Uganda’s exchange rate has been overvalued since the late 1990s, and attributes considerable proportion of this overvaluation to the behaviour of aid flows¹¹. Going forward, the Government believes that fiscal deficit reduction will help alleviate upward pressures on the exchange rate generated by aid flows, thus stimulating export-led growth.

• Budget security

The Government’s dependency on donor aid has increased the vulnerability of the budget to a sudden cut-back in donor aid. In 1997/98 domestic revenues were sufficient to fund 79% of GOU expenditures plus external debt repayments, but this had fallen to only 60% in 2001/02, when the fiscal deficit peaked.¹² The reduction in the fiscal deficit in 2002/ 03 brought about a small improvement in the share of GOU expenditures and external debt repayments which could be funded from domestic revenues, to 66%. Despite the improvement in 2002/03, the Government budget remains vulnerable to any substantial cutback in donor aid. While a temporary loss in donor aid could be absorbed through a limited rundown of the BOU’s foreign exchange reserves, a cutback in aid which lasted for much more than one year, given Uganda’s current level of dependence on donor aid, would force Government to make severe budget cuts.

• External Debt Sustainability

Uganda’s current dependence on donor funds also has implications for the sustainability of its external debt burden, as external loans currently account for approximately 40% of donor in flows in any given year. Uganda was the first country to qualify for the Highly Indebted Poor Countries (HIPC) debt relief initiative in 1998, and on its exit from the Enhanced HIPC Completion Point in April 2000, it was pledged debt relief amounting to $1billion in Net Present Value (NPV) terms from multilateral and bilateral creditors. This debt relief was intended to ensure that Uganda’s future debt burden remained at a sustainable level, defined as the ratio of the debt stock in NPV terms not exceeding 150% of export earnings. Uganda has borrowed $1.5bn from multilateral donors since the HIPC Completion point, and although these loans have been on highly concessional terms, their impact on the debt stock, combined with lower export growth as a result of the fall in coffee prices and low prevailing world market interest rates, has been to raise Uganda’s NPV of debt to exports ratio to 305%, which is more than double the HIPC threshold. Uganda’s policy of gradual deficit reduction will enable it to bring its debt stock back down to manageable levels.

• Domestic Debt Sustainability

Uganda’s stock of domestic debt has risen from less than 1% of GDP in the mid 1990s to 10% of GDP this financial year. The rapid increase in Uganda’s domestic debt burden is directly associated with the increase in the fiscal deficit, as Bank of Uganda has increased its net issuance of Government securities to mop up the domestic liquidity arising from donor-funded Government expenditure, so that annual Inflation remains on target, at 5% or less. Although Government has recently introduced long-term bonds to the domestic securities market to extend the yield curve, 95% of Government securities nonetheless have a maturity of one year or less. This means that if the budget were to be subject to an aid shock which reduced Government’s injection of liquidity into the domestic market, monetary and fiscal policy management would be placed under significant pressure, as a large number of Government securities would require redemption within a short time period.

• Political Economy

Excessive aid dependency inevitably impinges on the sovereignty of the aid recipient and constrains its economic and budgetary choices, which is not consistent with the development of a healthy and equal relationship between aid recipients and the donors, based on mutual respect. Reducing dependence on aid is crucial for the development of democracy and the accountability of government.

Government’s fiscal deficit reduction strategy means that in future it will focus on the quality rather than the quantity of its donor support. Budget support grants are Government’s preferred modality of donor aid, since they directly fund GoU’s expenditure priorities, as guided by the PEAP, and do not contribute to Uganda’s external debt burden. By contrast, project support loans are Government’s least preferred form of donor support, since they do not directly fund the GoU budget, and they add to Uganda’s external debt burden. Government’s policy therefore is to encourage donors to shift to budget support, particularly budget support grants, and to be more selective about the projects it accepts as it gradually reduces its fiscal deficit. Plans to integrate donor projects within sector ceilings to improve budget prioritisation are discussed in Chapter 8. Furthermore, Government does not intend to accept any tied aid over the PEAP period, even if given as a grant, as aid which restricts Government’s procurement choices does not offer value for money.

Revenue Generation Constraints

The main elements that hamper domestically-generated revenue mobilisation are:

1. The large size of the informal sector: The economy is characterized by a large share of agriculture in total output and employment; by large informal sector activities and occupations; by many small establishments; by a low share of wages in total national income, with many workers paid in cash, ‘off the books’; and by a small share of total consumer spending in large modern establishments that keep accurate records of sales and inventories. These characteristics of the economy reduce the possibility of efficiency gains from such taxes as personal income tax and Value Added Tax (VAT), and undermine the possibility of achieving high growth of domestic revenues

2. Lack of reliable data: Revenue collection is also hampered by the absence of reliable data, which severely restricts the government’s ability to assess tax policy. The paucity of data has many sources, including the taxpayers’ limitations in keeping proper accounts; the large role played by informal activities; the limited reporting requirements; the low capacity in many private economic establishments, as well as financial constraints.

3. Uneven income distribution: Income distribution in Uganda is highly uneven with a rising Gini coefficient which implies that for tax revenue collections to generate high revenue, the top deciles have to be taxed significantly more proportionally than the lower deciles

The existing challenges in tax administration are currently being tackled by the Uganda Revenue Authority, including significant weaknesses in customs administration, particularly in areas such as duty drawback and customs valuation, and problems in VAT administration, particularly compliance and the operation of VAT refunds. A recent report has highlighted the key challenges in this area¹³, and the Government is working with the URA to tackle them. Improving tax administration will deliver efficiency gains for Government in revenue collections, as well as improving the operating environment for the private sector.

However, improvements in tax administration alone are unlikely to deliver sufficient revenue growth to maintain Government expenditure at 22%-23% of GDP as the fiscal deficit reduces. The Government therefore faces hard choices as to how to raise additional revenue, particularly in the light of the need to retain a competitive tax system which stimulates private sector development. Over the past decade, Uganda has been pursuing an aggressive policy of reducing taxes to remove distortions, to reduce protection, to improve competitiveness, to improve incentives for export activity, to facilitate tax administration and to promote taxpayer compliance. Any significant reversal aimed at either mobilising further revenue or protecting domestic, or firm-specific, production would send negative signals to investors and raise serious doubts about the credibility and stability of government’s economic policies. They would also make tax administration and tax compliance more difficult.

In addition, as of 2004, Uganda with its other partners in East African Community (EAC) will finalize a Protocol establishing a Customs Union. This will have implications in terms of revenue and trading arrangements. The negative revenue effects of the Customs Union, which include trade liberalization within the EAC and the likely abolition of import commission, might impede revenue growth in the medium term.

Given the likely revenue shortfall arising from the East African Customs Union, and given the need to maintain an internationally competitive tax regime, Government will have to make upward adjustments to domestic consumption taxes over the PEAP period if it is to maintain expenditure at 22%-23% of GDP whilst reducing the fiscal deficit. Failure to do so will result in lower overall Government expenditure, which could compromise service delivery and the Government’s ability to meet PEAP targets.

Financial Sector Development

As explained in previous sections, Uganda’s long term economic strategy is to promote private sector-led economic growth. If the private sector is to achieve rapid growth it requires finance for fixed investment and working capital. Uganda’s financial markets are both shallow – they are small in relation to GDP – and poorly developed, being dominated by commercial banks. Commercial bank lending to the private sector plays a key role in supporting the growth of the private sector in Uganda, because there are so few alternative sources of finance. The main alternative sources of domestic finance for the private sector are non bank financial institutions (NBFIs), such as leasing companies and a housing finance company, and the Stock Exchange, but the NBFIs are small relative to the commercial banks, and only well established companies with a track record of profits can raise funds by issuing securities on the Stock Exchange.

Growth in bank lending to the private sector must be consistent with maintaining the maximum growth rate of the money supply which is needed to deliver low Inflation. Given the constraints imposed by the imperative to control monetary expansion, bank lending to the private sector can only grow quickly if the growth of other, competing, demands on commercial bank resources are restrained. The most important competitor of the private sector for commercial bank resources is Government, mainly through the Treasury Bills, which are issued by the BOU to sterilise base money created by fiscal operations. At end-June 2003, Government securities comprised 29% of commercial banks’ total assets and loans to the private sector comprised 26% of total assets. Therefore, the most effective strategy for promoting more rapid growth of bank lending to the private sector, without jeopardizing the control of money supply and Inflation, is for Government to reduce its demands for funds from the commercial banks, by reducing its fiscal deficit.

Financial Deepening

Financial deepening refers to the increase in the holding of financial assets by economic agents relative to GDP. It enhances financial intermediation, which is the process of channelling financial resources from surplus economic agents into the productive investment opportunities of agents with financial deficits, which in turn promotes economic growth. Financial depth as measured by M3 as a percentage of GDP has grown steadily over the past thirteen years, from 8% in 1990/91 to 20% in 2002/03. It is expected to continue to rise over the medium term, as the economy becomes increasingly monetised, and domestic savings rates increase. The LTEF projection is for financial depth to increase to 29% of GDP by 2013/14.

Gross domestic savings grew rapidly in the early 1990s, from 2% of GDP in 1990/91 to 8.8% of GDP in 1994/95, as macroeconomic stability was restored and Inflation was brought down to single digits. Since then, the level has fluctuated, and gross domestic savings in 2002/03 amounted to 6.6% of GDP. Savings are expected to grow substantially over the medium term, to 13.6% of GDP by 2013/14, as GDP growth is expected to outpace the average growth in consumption, and as the reduction in the fiscal deficit raises public savings.

The mobilization of savings into deposits in the banking system, thereby increasing financial depth, will be enhanced by financial product development. Currently, the main financial assets available in the financial sector apart from bank deposits are corporate bonds and equities, of which there are few, and government treasury bills. However, a government long-term bond has been introduced recently, and further areas of possible product development include mortgage and insurance products and mutual funds.

In addition, the Financial Institutions Act (FIA 2004) was assented to by the President in March 2004 and is now law. Among other provisions, the FIA 2004 provides for the setting up of a Credit Reference Bureau through which information about borrowers will be made available to financial institutions, in order to reduce the risk of creating non-performing loans. This is expected to boost credit extension to the private sector to support economic growth. However, besides the newly enacted Financial Institutions law, there is need to revise the laws that govern financial sector innovations and operations in order to address elements such as electronic financial products and services, and leasing operations.

Micro Finance & the Formal Financial Sector

As mentioned earlier, financial deepening enhances financial intermediation. However, while financial institutions’ coverage of the urban areas is relatively sufficient, outreach to the rural areas specifically by formal institutions is still limited. As much as efforts are underway to encourage rural outreach by the formal banks, the socio-economic and cultural setups in the rural areas do not favour the formal banking system. To this extent, the Micro Finance Institutions law was enacted by Parliament in April 2003 to allow soundly managed and well-capitalized Micro Finance Institutions (MFIs) to intermediate resources in the rural areas. The defined legal status of these MFIs now puts them into a position that should forge links with the formal banking system.

With the legal status of the micro finance deposit taking institutions now clearly defined, it is expected that the formal banking sector will increase their transactions with these institutions. These are expected to act as retail institutions for both deposit taking and credit extension to rural agents, since they have a relatively better information base on agents in the rural areas than the formal banks. The role of the banks will be to wholesale both deposit taking and credit extension to the MFIs. Such a linkage should further increase the provision of financial services to the rural areas.

Pension Sector Reform

Government’s plan to reform the pension sector will liberate a major source of long-term capital for the domestic financial market. Social Security, pension and provident funds represent the most important sources of long-term capital in most economies. Defined contribution schemes such as the National Social Security Fund (NSSF) should, therefore, play an important role in the financial sector because they hold a large amount of fixed liabilities (individuals’ pension contributions) and have a huge potential in creating long-term assets (as they invest the contributions to ensure real returns for future pensioners). Unfortunately, the NSSF has not been successful in fulfilling these roles, and has to a large extent undermined the potential for capital accumulation and financial sector deepening. Although it has an asset base of approximately shs 250bn, which is equivalent to 10% of the total assets of commercial banks, the NSSF has to date invested almost all its liabilities in short-term Government securities and property, thus depriving the private sector of vital source of long-term investment funds.

The Government is committed to reforming the pension sub-sector in order to introduce competition in pension provision. This should in turn increase the efficiency with which pension funds are invested, bringing greater long-term capital to the financial market, and raising the level of private sector investment. The Government will also ensure appropriate regulation of the sub-sector.

Comparative Advantage of the Economy

Exports are only profitable if they reflect the comparative or competitive¹⁵ advantage of the economy. In Uganda’s case, these advantages are largely in agriculture and agro processing. Labour in Uganda is not cheap as in India or China¹⁶, and high transport costs (partially reflecting the geographical positions of the country) make it unlikely that Uganda can quickly become competitive in the assembly of goods from imported components. Manufacturing in Uganda is likely to focus mainly on production for the domestic market, and to some degree the regional market, except where it is processing products based on natural resources in Uganda – agriculture, forestry and fisheries. Uganda may also be able to develop a comparative advantage in some services, but will face stiff international competition in this area.

The Government trade policy supports the export sector by minimising domestic and international barriers to trade. Government does not levy taxes on exports¹⁷, and export procedures in the country have been simplified. The exchange rate is market determined, thus ensuring it reflects supply and demand for foreign exchange and does not distort price incentives. However, it is important to understand that having a market determined exchange rate will not of itself deliver an exchange rate that is competitive for exports. Even when market determined, the exchange rate may be overvalued relative to trade fundamentals if the economy experiences strong in flows of foreign exchange from sources other than exports, as has been discussed above.

In addition to having a market-determined exchange rate, there are no restrictions on capital account transactions, and it is not government’s policy to protect domestic industry. Domestic protection stifles export-led growth because it induces producers to focus on the local market, and the firms/farms make little or no efforts to develop capacity to compete in export markets. This in turn causes a welfare loss for the domestic consumer, who inevitably faces higher prices for the goods he/she is buying, and for the economy as a whole, as demand in the domestic market is limited, therefore limiting production.

In addition, Government does not intend to pursue a policy of firm-specific interventions. Firm specific interventions are undesirable because they are widely perceived to be inequitable (thus eroding the certainty of the investment climate and increasing its risks), inefficient (Government is less well equipped than the private sector to ‘pick winners’) and create a climate for lobbying rather than entrepreneurship¹⁸. Government’s policy is to create a level playing field for all investors, whereby private incentives are not distorted by public policy, to minimise economic cost and risk, to reduce barriers to production and to address market failures through sector-wide interventions. These latter policies will be covered in greater detail in the section on Production, Competitiveness and Incomes.

Export Diversification

Uganda’s exports are vulnerable to fluctuations and/or downward trends in international commodity prices, and still face both tariff and non tariff barriers abroad which inhibit their growth, particularly in the value-added end of the market. For example, the country’s exports face tariff escalation from its trading partners (increase in the level of tariffs with the level of processing), which discourages value-addition to our products. The non-tariff barriers it faces are mainly sanitary and phytosanitary (SPS) measures imposed by developed countries such as the European Retailers Good Agricultural Practices (EUREPGAP). Under these measures, Uganda is required to establish a residue monitoring system and monitor the chemical content of its products, which increases transaction costs.

As will be discussed in the section on production, competitiveness and incomes, Uganda’s strategy on export diversification and value addition is primarily intended to boost agricultural output and productivity, thus boosting economic growth and poverty reduction, but it is also in part designed to mitigate the effects of fluctuations in global commodity prices on export performance. Uganda lost $700m in coffee earnings between 1998/99 and 2002/03 as a result of a decline in coffee export prices, which fell by more than 60% over the period. Reducing the economy’s dependency on any single commodity, and shifting production to the value-added end of the market is designed to reduce this vulnerability, and will be complemented by market-based insurance schemes for farmers to hedge against short-term price volatilities during a production season, which are currently being piloted in Uganda.

However, the country will not be able to benefit in full from its strategy of value-addition unless Government works to reduce the tariff and non-tariff barriers placed on Ugandan exports by its trading partners. Government is to strengthen its capacity to engage in multilateral, regional and bilateral trade negotiations to help reduce market access problems to both trade in goods and services through negotiations. Formalization and facilitation of the Inter-Institutional Trade Committee are the major activities planned in order to strengthen the country’s trade negotiation capacity. Government also intends to strengthen its institutional ability to respond to export challenges, through the institutionalisation of quality management in industry, enforcement of standards, quality assurance and procurement of market information. These initiatives will be covered in greater detail in the section on production, competitiveness and incomes.

Agricultural research and technology development

Research⁷ on returns to public expenditure (discussed in more detail in Chapter 8) has shown that the impact of spending on agricultural research and extension on income poverty is higher in Uganda than that of spending on roads, education or health. Government is developing a national agricultural research system (NARS) that will be more decentralised, efficient, effective and responsive to the needs of the poor than the existing set-up. A National Agricultural Research Policy has been produced that seeks to promote the delivery of high quality and efficient agricultural research services by enhancing the participation and co-ordination of both public and private sector service providers. Farmers, particularly poor women and men, are to be empowered to demand and control agricultural research processes and services.

It is expected that a new National Agricultural Research Act will be enacted during the 2004/05 financial year and implementation of a revised programme of agricultural research will then begin in earnest. The components of the new NARS are: (i) establishment and operation of a National Agricultural Research Council; (ii) core funding for NARO and a rationalised network of public agricultural research institutes; (iii) support to demand-articulation structures; and (iv) national & zonal competitive agricultural technology research funds.

Priority actions for agricultural research

Government will enact the NARS bill and implement the provisions in the bill including:

• Completing a functional analysis of NARO

• Implementing the agricultural research competitive grants system

• Establishing the NARS apex institutions

• Increasing the involvement of the private sector and other stakeholders in the provision of research services, incorporating socio-economic and poverty concerns.

Agricultural advisory services

Information is an important constraint in smallholder agricultural production and it can be effectively addressed by public action. The National Agricultural Advisory Services programme began implementation in 2001. It seeks to increase the proportion of market-oriented production by empowering farmers to demand and control agricultural advisory and information services. Implementation of the programme will be consolidated and reviewed in depth during 2004/05. Assuming that the assessment is favourable its implementation will be stepped-up to cover the remaining Districts over the subsequent four-year period. As NAADS expands into the sub-Counties of each District, the existing District agricultural extension staff will be replaced by contracted services. Extension staff are being assisted to become service providers in the private sector if they wish to do so.

Under the NAADS approach, extension services are delivered by private providers who are awarded short-term contracts to promote specific enterprises. There is a coordinator at sub-country level who works with the LC3 and the local community to identify priorities and manage the allocation of contracts. By the end of 2003/04, the Programme will cover a total of 21 Districts (up from 6 in 2001/02 and 16 in 2002/03) located in all regions of the country.

The Programme is working principally with the economically-active poor – those with limited physical and financial assets, skills and knowledge – rather than with the destitute or large-scale farmers. The districts covered include both better-off and worse-off districts. A poverty and gender strategy has recently been completed, providing clear guidelines to be used from now on by staff working under the Programme, in both its design and implementation.

One important challenge is how to ensure that the selection of enterprises is based on good social and economic analysis. It is essential for the success of NAADS that products can be marketed at prices that make them profitable for farmers. This requires realistic technical assessments of productive potential as well as a sound assessment of future market conditions for the product. Some useful work has been done by organisations including EPRC⁸ and IFPRI⁹ NAADS, FEWSNET, IITA and NRI in this area.

Another challenge for NAADS is to balance support for crops grown for subsistence and those for the market. Women may have a better chance of sharing in the benefits of subsistence production than marketed production. However, significant increases in productivity in most ‘subsistence’ crops are likely to lead either to production of a surplus for the market, or a shift in labour to other activities. NAADS will therefore focus mainly on crops that can be developed into marketable ventures. There is a risk, because NAADS alone cannot guarantee a market for any product. Recently, for instance, the price of vanilla, which is one of the enterprises supported by NAADS, fell sharply. Close links between NAADS and the Marketing and Agro-Processing Strategy are needed to minimise these risks. Likewise, links with NARS are important to ensure that where new inputs are recommended they are approved for release and multiplication by NARS.

Priority actions for agricultural extension

Government will:

• Review the NAADS roll-out roadmap, and harmonise and realign with the existing resources and on-going extension projects/programmes

• Deepen the targeting of the poor

• Integrate advice on the needs of commercial producers

• Integrate environmental concerns, especially soil fertility, into the advice given by NAADS

• Finalise the strategy for linkages between NAADS and NARS.

Livestock

Recent work has shown the importance of livestock in household incomes, indicating that the poor tend to lack livestock. Better-off households had four times as much livestock as the poorest households. Livestock ownership is more widespread than commonly believed – involving the majority of farmers in most parts of the country, beyond areas normally associated with livestock (the “Cattle Corridor”). At the same time, the majority of livestock-keepers do not hold animals in order to provide direct income but, rather, for other reasons, including investment of savings, social and cultural reasons. The importance of small stock species – poultry and goats, in particular – to poorer households in rural areas is only now being recognised. The share of noncrop agriculture in households incomes rose from 1.3% to 4% between 1997 and 2000.

Government will therefore develop an over-arching policy and strategy for the livestock sub-sector that explicitly recognises the main national policy objective of poverty reduction. The current focus on maximising livestock production alone needs to be replaced by one that recognises the multiple contributions that livestock make to livelihoods. This will require a greater understanding of who are the clients of livestock development efforts/services and what their priorities are. Lack of such understanding is the reason why there has been only limited uptake of ‘improved’ livestock technologies, which have been largely inappropriate to meeting the needs of livestock keepers in general and pastoralists, in particular. Hence pastoralists and their farming systems will be a key component in the new policy.

This policy will need to include disease control. Fast response to disease outbreaks including the control of animal movement is critical to minimising their costs, particularly for those producers who are aiming at the export market. Likewise, the affordability of veterinary services for the poorest livestock keepers is a concern. If preventive veterinary measures are unaffordable, this causes problems for them and other producers.

Priority actions for livestock

• Government will develop a strategy for the livestock sector, covering disease control, and addressing the needs of pastoralists.

• In the meantime, Government will undertake necessary actions to control the spread of livestock diseases.

Strategic Exports Programme

In September 2001 Government launched the Strategic Exports Programme (SEP) aimed at increasing competitiveness through stimulating value addition investments in selected sectors of the economy and removing bottlenecks that impede the private sector’s ability to take advantage of emerging trade opportunities under various initiatives including AGOA and EBA. The selected sectors include coffee, cotton, tea, fish, livestock, horticulture, Irish potatoes, and information and communication technology (ICT). So far, interventions under the programme have included the distribution of coffee and tea seedlings and cotton seeds to farmers; the importation of improved breeds of livestock (Boer goats and boran bulls); the supply of fish fry to farmers with fish ponds; the importation of processing equipment for the cotton and coffee sectors; and training for farmers involved in the production of tea, livestock and horticultural products.

A review of the programme has recommended the need to rationalise some of the activities under the programme with those already under the PMA (including NAADS and MAPS); supporting identification of interventions with analytical work along the entire market chain and minimising the production bias in the current activities; greater private sector involvement in the selection, funding and implementation of the interventions. Commodity sector associations such as the Uganda Fish Processors and Exporters Association (UFPEA) and the Uganda Flower Exporters Association (UFEA) can play an important role in the achievement of SEP objectives. Future emphasis will be put on supporting such associations so that they can play a leading role in identifying constraints and implementing the agreed interventions.

In order to enhance the integration of production, value addition and market access, a countrywide Zonal Initiative has been developed. The Agricultural Zoning Initiative will contribute to the realisation of the objectives of SEP and the NAADS enterprise development component by ensuring the selection of zonal commodity enterprises based on factors that go beyond agro-ecological conditions. Critical to the selection of enterprises will be additional factors such as profitability, value addition, export potential, availability of service providers and infrastructure. Commodity/sector clusters will be created to ensure that selected sectors will be supported on a sustainable basis. This will ensure that farmers will produce products that can be marketed, in quantities and standards that meet the requirements of the market. The development of the National Export Strategy will provide the framework within which SEP and the Zonal Production Initiative will be implemented.

Priority actions for strategic exports

Government will:

• Harmonise some of the current SEP activities within the PMA and MTCS programmes and activities, coordinated by the MTCS Secretariat.

• Implement SEP and the Agricultural Zoning Initiative in a manner that focuses activities along the commodity value chain.

• Encourage private sector leadership (through commodity associations and clusters) in the identification and implementation of interventions.

Agricultural policy framework

It is often assumed that large-scale commercial farming is more productive than smallholder farming. This is not always true; in Uganda, as in other countries, farm size is negatively associated with output per hectare and total factor productivity. However, there are a number of areas where estate production can play an important role in agricultural development: For instance, in crops such as horticulture, the formal commercial sector uses land very intensively, such as horticulture, where it is reported that 120 workers are employed per hectare. For some crops, profitable smallholder production depends on the availability of processing facilities, but the private sector will not invest in these facilities without a nucleus estate. Tea is a good example.

The decision whether a particular area of land should be used for large-scale production or small-scale farming is a matter of private initiative, and Government’s role is mainly regulatory. Government will seek to ensure that large-scale investors in farming face a conducive business environment; for instance, improved functioning of the land market should make it possible for people to buy large areas of land for commercial production, conditional on land use policy at the district level, while also ensuring that existing property rights are not disturbed.

Two other areas that require policy attention are urban agriculture and biotechnology. Policy and legislation relating to farming in the country’s rapidly-growing urban centres need to be drawn up if the livelihoods of those practising them – often amongst the poorest strata of society – are to be made more secure. National bio-technology and bio-safety policies are needed to provide guidance both to producers and to consumers.

Transport infrastructure

Improving transport infrastructure (roads, railway, air, waterways) is important in boosting production, incomes and competitiveness because it links producers to consumers. Poor or inadequate road infrastructure is partly responsible for low production and productivity of some parts of the country. Producers should have reliable road networks to quickly transport their produce to markets, many of which are perishable in nature (milk and vegetables are examples). A good road network also facilitates market integration by linking surplus to deficit areas, as well as linking producers to input markets. Government is committed to expanding and maintaining a good road network. The railway network has virtually collapsed, save for the Kampala-Malaba route, yet it is a cheaper way of moving bulky agricultural products. Air transport is vital for perishable, high-value products such as fresh cut flowers and fish exports.

Recent research on the Ugandan experience shows that Government spending on rural roads has had a substantial effect on rural poverty reduction. The impact of low grade feeder roads was shown to be larger than that of higher grade murram and tarmac roads. The large impact of lower grade roads was mainly through improved agricultural productivity, whereas the impact of higher grade roads was mainly through improved non-farm employment opportunities. Government will also seek opportunities for other methods of reducing transport costs including the provision of an oil pipeline to Kenya and measures to encourage competition in the haulage industry.

Priority actions for roads

Government will:

• Continue to invest in road rehabilitation and maintenance in accordance with the RSDP

• Ensure that adequate funds are available for maintenance. The sector will have responsibility for allocating funds between rehabilitation and maintenance within its overall ceiling.

• Enforce the axle load restrictions

• Develop a price index for construction to enable the unit cost of construction to be monitored more accurately.

• Establish the National Road Authority in 2004/05 financial year.

For district, urban and community access roads (ducar-roads) Government will:

• Continue to provide financial resources for ducar-roads including urban infrastructure improvement.

• Give priority to those rural roads which could unlock areas with potentially high agricultural surplus and also enable the rural populace to access basic social services as well as product and input markets.

• Strengthen local capacity for road management with a focus on labour intensive work methods to provide employment and income.

• Examine the scope for enhancing support to community roads; this may be an appropriate area for spending under the Local Government Development Programme (LGDP) and the Non-Sectoral Conditional Grant (NSCG)

• Through the White Paper specify a long-term strategy for the sub-sector and how it is to be implemented

Regarding private sector participation, Government will:

• Support pilot activities to be launched in FY 2005/06 for area wide long-term maintenance contracts on a performance basis.

• Develop a strategy to increase private sector participation in management, investment and maintenance of projects within the transport sector as well as strengthening the national construction industry.

Priority actions for railways

Governement will:

• Finalise negotiations for the concessioning of the railway system in Uganda in a joint operation with Kenya.

• Consider how to improve private sector incentives to invest in the rehabilitation of operational lines, in the re-opening of closed lines and in connecting the Ugandan Railways network including the marine wagon service on Lake Victoria with that of the neighbouring countries.

Priority actions for air transport

Government will:

• Consider the best way of funding necessary infrastructure at Entebbe including a new runway, taxi way, lighting system and apron

• Upgrade the navigational system at Entebbe Airport

• Consider whether East African Civil Aviation School in Soroti should be supported with public funds.

Priority actions for water transport

The Government will:

• Continue to provide ferries on existing ferry connections, landing sites and navigation aids as needed and economically feasible.

• Strengthen the regulation of all regular water transport services.

• Promote private sector participation in regular water transport services.

Priority actions for communications

• The restructuring and privatisation of Uganda Postal Services will be achieved by the end of FY 2004/05. This will include some subsidy for socially needed but unprofitable services.

• The UCC will continue to support communications in rural areas.

• All ministries and government agencies’ ICT requirements will be mainstreamed in their budgets.

Water for production

Water for production covers water for crops, livestock, wildlife, aquaculture and rural industry. Government has developed a strategy on water for production for the period 2004-15 which clarifies roles for public and private sector. The major public sector roles in most sub sectors are information and capacity-building. However, there is some role for investment in irrigation and a considerable role in water for livestock.

Priority actions for water for production

Government will:

• Implement the water for production strategy

• Make investments based on likely returns, taking into account local livelihoods and preferences

Energy

Priority actions and prospects in energy

• Generating capacity will be increased by attracting private investors

• The rural electrification strategy will be implemented.

• Government will monitor unit costs and socio-economic returns to rural electrification

• MEMD will cooperate with other sectors in promoting technologies that allow the use of fuel wood to be reduced.

Mining

Uganda’s mineral endowment includes gold, tin, wolfram, cobalt, copper, iron and petroleum. It represents an important, though so far unquantified, national asset. The challenge is to exploit this asset in the way that will provide the best returns for Uganda. These returns include taxes and royalties on the resource and the earnings of artisanal miners from the sale of the resource, as well as employment opportunities and infrastructure. To this end, a framework is needed that encourages private exploration while ensuring that the country gets a good return.

In the 1950s, mining accounted for one-third of the country’s export earnings, and provided formal employment for over 15,000 people. The sector later declined until the 1990s. The value of declared mineral production rose from virtually nothing in 1990 to US $40.8 million in 2000 of which US $13.2 million consisted of industrial minerals and construction materials, and US $27.6 million of metallic minerals.

Currently, most mining is carried out by artisanal and small-scale miners whose activities represent an important source of direct and indirect income for a relatively large rural population. It is estimated that 50,000 to 100,000 people are involved in mining activities depending on the agricultural season. A sustainable management of minerals Project has been put in place with initial support from development partners. It aims at supporting geodata collection, dissemination of information and provision of extension services to key artisan miners.

The establishment of an enabling environment that is internationally competitive for attracting investment is a prerequisite for developing the mineral resources of any country. The interventions include the provision of adequate and modern geological information, modernizing the legal and regulatory framework for the mining sector, increasing capacity of government sectoral institutions, and adequate infrastructure.

To address these challenges, Government has formulated the Mineral Policy in 2001 and enacted the new Mining Law in May 2003. This allows benefits of mining to be share with local communities. A countrywide Mineral Sector Development Programme has bee developed, which will address technical and social issues of the sector including the improvement of conditions for small-scale mining, the development of Geological Infrastructure, capacity building and mining related environment management systems.

Mining royalties are set in the Mining Act, and can be waived in a particular case. Petroleum royalties are negotiated on a case-by-case basis at the time when prospecting licenses are issued. Also, mining companies pay a distinct rate of corporate income tax, which is levied on a sliding scale. The principle is to maximise benefits to Uganda—including both the income stream and the employment and spin-off benefits – while providing an attractive investment opportunity for the private sector.

Priority actions and future prospects in mining

Government will:

• Put in place Mining Regulations to operationalize the new mining law.

• Improve the information it provides to investors and artisanal miners, and establish an environmental and social impact management framework for mining activities.

Tourism

Tourism has been an area of high growth for the economy in recent years. The number of tourists visiting the country increased from 189,348 in 1999 to 254,000 in 2002 (this included a sharp increase in tourists from Africa, while tourists from Europe and America have grown more slowly). Foreign exchange earnings from the tourism industry rose from US$ 102 million in 1999 to $185million in 2002.. Standards have been agreed among the EAC countries. The tourism industry has used a number of cheap and simple methods to market Uganda as a high quality tourist destination, such as the use of the http://www.visituganda.com website and participation in trade fairs and public relations campaigns.

Direct poverty-reduction benefits of tourism come from employment generated (60% of employees are female), and the creation of markets for handicrafts and agricultural products. Partnerships between public and private sectors are critical to the development of the tourism sub-sector. The development of the sub-sector will also depend on improved infrastructure and security. Training (which maybe privately provided) is needed especially for tourism planning and development, business skills and marketing.

Priority actions for tourism

Government will:

• Continue to support increased promotion of Uganda as a tourist destination abroad

• Promote diversification of tourism products including agro-tourism, cultural routes, community tourism, etc

• Support training of staff in the industry.

• Support the provision of business development services for tourism, in cooperation with the private sector.

Science, Technology and Industrialisation

One of the key factors hindering Uganda’s competitiveness is the export of low value and unprocessed products. Efforts to add value to Uganda’s leading exports such as coffee, cotton, fish and livestock products through processing and other innovative marketing approaches such as branding, export of organic products and others hold the key to increased export earnings. Unfortunately, available processing technologies tend to be not most suited for Uganda’s production systems. Coffee roasting plants, milk powder processing factories and textile mills are beyond the reach of the average entrepreneur. Uganda’s production systems are based on small holdings. This demands that value addition facilities are based on cooperatives or farmer associations or based on a lead firm that provide appropriate scale of value addition facilities and applies economies of scale in product marketing.

Government will intensify efforts in promoting innovations from scientists so that they can transform science in appropriate technologies that can be applied in the production of products and services that compete in the global market. This demands putting in place a system of incentives that reward hard-working scientists that produce innovations that have practical relevance to Uganda’s situation. There is also need for institutional reforms and strengthening in the area of assessment and importation of technologies and their modification to suit the Uganda situation. This may involve providing facilities for the incubation of industries, piloting and prototyping technologies. Uganda’s Industrial Research Institute (UIRI) recently became a statutory body. However, it needs to be restructured and resourced to be able to play the new mandate. This applies to other institutions that support science and technology development and export promotion including the Uganda Council of Science and Technology (UNCST), Uganda Export Promotion Board (UEPB) and the Uganda National Bureau of Standards (UNBS).

Priorities for Action

Government will prioritise the following over the medium term:

• Establish a system of incentives including Innovation Awards to scientists that generate innovations of promise in addressing Uganda’s development needs,

• Strengthen the institutional capacities for incubation centres, technology prototypes and piloting for commercialisation building on the mandate of UIRI.

• Implementing the industrialisation policy.

• Provide a set of interventions, within the framework of the MTCS and the PMA, that promote enterprises based on scientific innovations and add value to Uganda’s exports. These will be transparent and, as discussed in Chapter 3, will not involve firm-specific incentives.

Access to Microfinance

Credit services for the poor have been found to make positive impact on household income. Some borrow for investment, leading to increase in income, and others for consumption smoothing in periods of hardship, thus maintaining their consumption levels without running down productive assets. To promote economic development, there is a need for both short-tem and long-term financing for both the formal and informal sectors. For the informal sector, the fast-expanding microfinance industry is very effective at financing investments with quick and high returns. Micro, Small and Medium Scale Enterprises (MSMEs) tend to be more attractive to MFIs because most of them have quick returns and owners can begin to pay back the loans in a relatively short time. The micro finance industry has hitherto been less effective at financing agricultural activities, whether for marketing or seasonal credit or loans for small agricultural investments. Government is therefore exploring an initiative with the International Fund for Agricultural Development (IFAD) and other development partners to promote better access to agricultural credit for smallholders, as well as promoting the expansion to rural areas of microfinance services through the Microfinance Outreach Plan.

As noted in Chapter 3, Government has undertaken legislative reform to enable advanced microfinance institutions to accept deposits within a prudential environment, and has also legislated for the establishment of a Credit Reference Bureau. Commercial law reform, should make it easier and quicker to resolve disputes between creditors and debtors. The development of Business Development Services should also improve the functioning of financial markets.

Microfinance has grown considerably in recent years in Uganda. A survey, by the Ministry of Finance, Planning and Economic Development (MFPED) in 2002, of over 1,000 Microfinance Institutions (MFIs) revealed that MFIs had just under 1 million members, and a total loan portfolio of Shs 86.5billion; the average loan size was Shs 262,533.The majority of loans are to non-agricultural enterprises in urban or peri-urban areas. Micro-finance institutions have been supported by a variety of donors and NGOs. Mapping of micro-finance institutions has revealed informal institutions even in areas not reached by formally constituted MFIs.

Microfinance institutions fill an important gap in the financial market. International experience shows that many good institutions need support for a sustained period of time before becoming self-sustaining, and that public resources devoted to microfinance have in some countries had higher returns in terms of poverty reduction than those devoted to other public interventions.

Government is seeking to encourage the microfinance institutions to move into less served areas and activities, in particular agriculture. Under the Microfinance Outreach Plan, Government will provide capacity building and matching grants that will provide incentives for service delivery in rural areas. The grants are designed to favour delivery of innovative products in relatively remote areas. The plan is intended to promote an average growth of 25% over the entire period on the client base, so that there should be 1.3 million clients and 9 million indirect beneficiaries by 2006, of which 60% should be in rural areas. It will be important to monitor the extent to which microfinance institutions are able to meet the needs of agriculture so that, where necessary, changes in strategies can be made to better serve borrowers in the sector.

As discussed in Chapter 3, Government will promote the development and application of innovative financial products for the private sector including leasing. The pension sector will be reformed to provide a basis for availing medium- and long-term financing to the private sector. In addition, the Development Finance Department (DFD) and Uganda Development Bank will be restructured to make them appropriate institutions for providing term finance to the private sector.

Priority actions for credit services

Government will:

• Continue to implement the Microfinance Outreach Plan to ensure increased coverage – reaching out to more poor people in rural areas.

• Develop and monitor mechanisms through which MFIs can meet the needs of small-scale agriculture.

• Continue to review how the financial needs of medium-scale enterprises can be met, with the preferred approach being increased use of commercial banks to access development financing.

• Support capacity building and business skills development, especially for MSMEs.

Micro, Small and Medium Scale Enterprises

Environment and Natural Resource Use and Management

Uganda’s economic growth and its sustainability will depend on how well the environment and natural resources are managed and used. However, Uganda’s recent rapid economic growth has put significant stress on its ENR base resulting in environmental degradation. Consequently the quality and quantity of resources on which sustainable economic growth and poverty reduction depends, is declining.

Recent estimates of the cost of natural resource degradation in Uganda suggest that the cost of natural resource degradation is as high as 17% of gross national income per year, of which 6% consists of forest degradation and 11% soil degradation¹². Although the estimate is highly approximate¹³, it is confirmed by However, the finding receives dramatic confirmation from households’ own experience. In UPPAP 2 communities in all 12 districts reported that the distance travelled to collect fuel wood was increasing. Declining soil fertility was reported in 11 out of 12 districts¹⁴. The average age of the tree stock and the distance travelled to fetch water is rising, suggesting that the existing use of forests is unsustainable and that the negative consequences are being felt by poor people, especially women. Water resources need to be well managed and protected from degradation for obvious reasons, including water for direct animal and human use, as well as being a habitat for capture fisheries and aquaculture. The land rights of the poor need strengthening and protecting.

Many of the resources managed by the ENR Sector, such as wildlife, forest reserves, natural water bodies, and wetlands, are held by Government in trust for the people of Uganda under article 237 of the Constitution. It is of particular importance that Government honours this trust and resists any interference by vested interests. Examples of actions in this area include: improved wetlands management, control of illegal timber harvesting and trade, control on the use of illegal fishing gear and enforcement of environmental impact assessment regulations. A more harmonised approach to managing this responsibility is also required.

The overall guiding framework for environmental management is the National Environment Management Policy of 1994 and the National Environment Statute of 1995. The NES (1995) established the National Environment Management Authority to monitor, supervise and enforce regulations, standards and guidelines and to coordinate all matters on the environment in Uganda. The main role of NEMA is to ensure that all government plans, policies and programs address relevant environmental concerns and promote sustainable development and prudent use of natural resources. Capacity-building in local governments and sectors levels is needed, because the implementation of environmental management rests with them. Also, the National Environment Statute (1995) and the subsequent laws developed to safeguard the environment are only framework laws which need regulations, standards and guidelines to operationalise them.

The benefits of a sector-wide approach to planning have now become evident throughout Government. However, this approach is yet to take root in the ENR sector.

Priority actions for Environmental Natural Resource Use and Management

Government will:

• Develop a strategy for the ENR sector.

• Ensure adequate funding for the recurrent costs of NEMA as project support is phased out. The costing will be based on the needs of NEMA in the context of the environmental sector rather than on previous expenditure levels.

• Build capacity for environmental management at sectoral and district level.

• Develop regulations to implement the National Environment Statute of 1995.

• Define boundaries of the ENR sector and work towards closer collaboration, a single investment plan, and a single budget vote planned and allocated by the ENR SWG. In the medium term the administrative set-up of ENR, now divided over several Ministries, will be brought in line with the sector make-up.

Water Resources Management

Water as a resource is Uganda’s backbone for socio-economic development. At first site Uganda seem to be endowed with freshwater resources but this vary in time and space. A number of strategies including legal and policy framework have been developed to address various water resources demands, development, conservation and management without jeopardizing the needs of the future generation. The legal and institutional framework provide enabling environment upon which support upgraded planning and prioritization capacities of decision makers at all levels. As the vast majority of the Ugandan population is dependent on land and water resources for their livelihoods through rudimentary land use practices that are detrimental to the general environment, the water quantity, quality and their sources stand threatened (MWLE, 2003d). In flood and drought prone areas it can impact directly on household income of some of the poorest and most vulnerable people. It also enables more rational management of key natural resources, thus positively impacting on the quality of life and economic prospects of future generations.

Through water Resource protection and effective water shed management, water resources management ensures availability in quantity of the resource and minimization of source pollution so that the rural community gets water for domestic use at low cost. Decentralization of Water Resources Management (WRM) activities aims to improve efficiency and effectiveness, and foster integration of WRM with other activities at all levels of service provision. The expected outputs of the WRM decentralization programme include the sensitized local governments and all stakeholders on WRM issues with increased involvement of local government structures in WRM (MWLE, 2003f). Through regular and consistent monitoring of the nation’s water resources, data generated has been used in the planning and design of water related projects.

Priority ActionsWater Resource Management

Government will:

• Finalise the WRM reform study and develop an action plan for the short, medium and long term strategy for the Water Resources Management.

Land

In 1998, Uganda passed a Land Act and since then has been implementing a Land Sector Reform programme. The overall guiding framework of this sub-sector is contained in the Land Sector Strategic Plan (2001-2010). The focus of the plan is the protection of land rights of the poor, improved access to land and tenure security. Central government land institutions are comprised of Physical Planning, Lands and Surveys, Land Registration and Valuation and Uganda Land Commission.

Findings from the Village Census (2001) reveal that the size of land held by the poor is diminishing, land is increasingly concentrated in the hands of the few and that the middle and poorest categories have seen landownership decrease significantly since 1993. Recent evidence shows that a more equal distribution of land would be likely to increase productivity, because small farms are more productive per unit of land than larger farms. The land reform process has the following potential benefits:

• Improved security for existing tenants.

• Greater freedom of action for existing occupants. People who ‘borrow’ land often have limited use rights¹⁵

• Reduction of disputes. Land disputes are a serious drain on the resources of poor households. So far, the evidence suggests that disputes have increased in recent years¹⁶, but where systematic titling has been applied disputes are generally reduced (see Annex Table A 4.5).

• Increased ability to use land as collateral

• Greater transparency of titling process.¹⁷

• Improved availability of land to purchase. Investors report some difficulty acquiring land; this relates to difficulties in the functioning of the land registry¹⁸.

• Improved balance of rights within the household (strengthened rights for women in particular), with potentially powerful impacts on incentives and productivity¹⁹. Orphans would be able to inherit land formally from their deceased parents.

• Enhanced opportunities for orphans to inherit land formally from their deceased parents.

• More equal distribution, with equity and efficiency benefits. In UPPAP2 (2001/02), shortage of land was the second most frequently cited cause of poverty after health.

The distribution of benefits perceived by households from one particular aspect of land reform, pilot projects in systematic titling, are shown in Table 4.6.

Priority actions for the land subsector

• Policy and legal reform. In addition to the legal reforms already achieved, there is a strong case for strengthening women’s land rights and for enhancing districts’ ability to raise land taxes.

• A Land use policy is being finalised, which will link land reform to poverty reduction strategies, covering the strengthening of women’s rights, improved access to land for the poor, and the framework for urban and peri-urban land rights and management.

• Land information: Currently the state of information about land is unsatisfactory. Important improvements include:

  • A cadastral update (important for revenue raising),

  • Improved facilitation of the land registry

  • A geodetic network, and the systematic production of certified general and thematic maps.

  • Systematic demarcation. Under this approach, titling is undertaken for a given area of land at a community level, rather than by a land office on receipts of individual applications. This ensures that different local stakeholders are able to participate in the process and reduces the risks of rural households being effectively expropriated.

  • Government land inventory

  • Public information campaigns

  • Operation of the Land Fund. Immediate priorities are the rehabilitation of the environment through resettlement of persons, the purchase and redistribution of land to the inhabitants of Kibaale district, facilitating land readjustment in mailo areas to enhance productivity, and piloting loans on small scale to identify sustainable approaches²⁰. Potentially, a Land Fund can assist with resettlement and could provide a powerful means of reducing the poverty of the landless. However, costs and transparency are issues.

A Poverty and Social Impact Assessment is to be undertaken to establish more clearly the magnitude of the benefits, so that expenditure needs can be assessed and prioritised.

Housing

The national housing stock is estimated at 4.2 million units of which less than 20% are of permanent construction materials. About 50% are semi permanent and the remaining 30% are grass-thatched huts. In urban areas, over 60% of residents in urban areas stay in slums, characterised by poor sanitation, high disease incidence and frequent epidemics. The increase in the number of IDPs further aggravates the housing problem.

The overwhelming majority of housing in Uganda is provided by the private sector (including individual households) and it would be unaffordable to change this. National Housing and Construction Corporation, which was a Government parastatal charged with the function of provision of housing, is now in the advanced stages of privatisation. Nor can Government afford to extend its commitments further by extensive subsidy of private housing.

Hence the main task of public policy will be to make the housing market work better. Regulation is justified to ensure minimum standards and prevent the negative externalities associated with extreme overcrowding and lack of sanitation. However, if standards were made excessively high the poor would not be able to afford legally acceptable housing and would therefore be forced back into illegal slums.

The malfunctioning of the urban land market impedes the functioning of the housing markets. People who do not have well-defined legal title to their properties are discouraged from investing in them. The improvement of living conditions for the urban poor is therefore one of the potential benefits of an effective land sector reform.

Priority actions for Housing

Government will:

• Complete divestiture of National Housing and Construction Corporation

• Enact the building control bill during 2004

• Establish the need for local public infrastructure in low-income urban areas in order to improve the lives of slum dwellers

• Capitalise and privatise Housing Finance Company of Uganda

Forestry

Forests provide an annual economic value $360m (6% GDP) of which only $112m is captured in the official statistics. The sub-sector employs 100,000 people directly and 750,000 subsistence workers. Forests cover 24% of the total land area, of which 70% is on private and customary land. Forests on private land are mainly in the form of scattered trees, forest patches and agro-forestry crops. Trees (through fuel wood and charcoal) provide 90% of energy demands (18m tonnes per annum) and are expected still to be contributing 75% in 2015. Forests also provide a number of ecological services: biodiversity, climate regulation, soil and water conservation, and nutrient recycling. These are important for agricultural performance and people’s livelihoods.

Recent work²¹ has shed light on the role that forests play in the lives of the poor. Evidence from Masindi shows that the people living near forests raise as much as 18% of their incomes from the forest. Richer households raise about as much in absolute terms as poorer households, so that in proportional terms poorer households are much more dependent on the forests than richer households.

It is becoming increasingly clear that Uganda’s forests are being seriously degraded. Encroachment due to open access and unclear land ownership, conversion for other uses, unsustainable harvesting, urbanisation, industrialisation and institutional failure are to blame. For example, the average distance travelled to collect firewood has risen markedly from 0.06km in 1992 to 0.73km in 2000²². Also, the average age of the tree stock is increasing, with signs of an acute shortage in five years’ time, when prices are expected to rise and movement into natural forests is feared.

There is great potential for increases in wage employment and production for export. Forest products like firewood, timber and poles form important inputs into other economic industries such as construction, tobacco, and lime and brick making. Non-timber and other forest products also reduce livelihood vulnerabilities. Hence Government is encouraging the private sector to invest in forests with a view to increasing the resource base and increasing access.

While increasing wage employment, it is also desirable to reduce the subsistence burden of fetching firewood, which falls heavily on adult women in rural areas. This requires a strengthening of the management of community forest institutions.

Under the National Forest Plan (2002), which states the “need to capitalise on economic, social and environmental opportunities without undermining the resource base”, Government has created a semi-autonomous National Forestry Authority (NFA), to be funded by revenues from royalties and sales of forest produce from the Central Forest Reserves (CFR), which comprise 30% of all forests in Uganda, for which NFA will be responsible.

The NFP also provides for a decentralisation of responsibilities to Districts for the remaining 70% of Uganda’s forests and woodlands (comprising of Local Forest Reserves (LFR) and private and customary forests). This will be carried out through the District Forestry Service (DFS).

The DFS will play a fundamental role in the promotion, registration and advisory of formal Community Forests. Communal Land Associated, which are provided for in the Land Act of 1998, will be able to register ownership of a forest. Certificate of Customary Ownership, as its members can better demonstrate customary ownership of the land than other associations.

Through FID, MWLE will be responsible for additional policy formulation, development of national guidelines and training manuals, publicity and advocacy, and for monitoring the implementation of the activities carried out by the DFS. During the next three years, there is a need to allocate and transfer resources to the district level to support the DFS to fulfil its mandate.

Priority actions for Forestry

Government will:

• Enhance implementation of the National Forest Plan

• Promote private sector investment in privately owned forests, through provision of information and technical advice on the management of forests; providing permits to grow trees in central forests reserves with secure land and tree tenure; reviewing tax and other disincentives; through the continued operation of the Saw log Grant Scheme and establishing a Tree Fund in accordance with the National Forestry and Tree Planting Act.

• Promote the establishment of community woodlots through the launch of the DFS for extension and advisory services to private and community members interested in tree planting, and for promotion of tree planting.

• Further develop the National Tree Seed Centre; establish a framework for decentralised seed production. The establishment of a National Tree Fund, may help communities access necessary resources.

• Investigate the possibility of benefiting from commercial markets for ecological services such as carbon trading in global markets, in line with the Kyoto Protocol.

Fisheries

Over the last decade, fish have become one of Uganda’s major export commodities. Recent estimates indicate that in the FY2001/2002 capture fisheries, including marketing, had an annual economic value of $301m (whereas currently $130m is attributed to fish in the national accounts), equivalent to around 6% of GDP. Of these earnings, about 70% come from sales of fish at the shore whereas the remaining 30% constitute value addition by traders, transporters and processors.

Fish exports have grown from US $1.4 million in 1990 to US$87.5 million in 2002.²³ Current projections suggest that fish export earnings will reach US $90 million during 2003/4.²⁴. The sub-sector is estimated to employ 300,000 people, with 1.2m people dependent on fisheries as their main source of household income. Fish also contributes to the nation’s food security through providing 17 million people annually with a high quality sources of dietary protein.

Whilst the contribution of fisheries to the economy is significant, illegal and harmful fishing and trading practices threaten the sustainability of the resource base. These illegalities have largely resulted from poor management. Past management was centrally driven and did not adequately include local people in decision-making; the services provided by extension officers were not positively appreciated by fishing communities. Fish landing sites remain poorly served by infrastructure (including electricity) and public services.

The fisheries sub sector also faces some social problems; for instance, the circumstances of fishermen often expose them to a high risk of HIV infection, with devastating consequences for some fishing communities, and the theft of fish nets represents a constraint on investment²⁵.

Government, through the Department of Fisheries Resources (DFR), is addressing these concerns through the National Fisheries Policy, (2003), which promotes a participatory approach involving fisheries stakeholders working with government to manage fisheries resources. The Policy will be implemented through the 2003 draft Fisheries Sector Strategic Plan (FSSP).

A key feature of the new fisheries co-management approach is the formation of legally empowered community Beach Management Units (BMUs) at fish landing sites for fisheries planning and management. BMUs explicitly involve women, young people and the poor in decision-making structures and processes to ensure their interests are included in the management and sustainable use of the resources, thereby reducing the vulnerability of poorer stakeholders within fisheries communities. BMUs will work closely with government in enforcing regulations to reduce harmful and illegal fisheries activities on water and land. In addition, BMUs form the foundation of lake management organisations, which have a broader remit than fisheries alone, taking a more integrated approach to managing lakes.

The Policy requires the establishment of controlled access to lake fisheries. The new participatory approach to enabling access will ensure that poverty-focused licensing promotes access for women and controls the number of boat vessel licenses for sustainable management.

The FSSP details a major Monitoring Control and Surveillance (MCS) programme on water and land to reduce illegal fishing and fish trading practices. The fisheries sector is also striving to improve the quality of fish for domestic consumption and export, reducing losses and increasing value and incomes. This is being done through the improvement of handling, processing and marketing facilities at fish landing sites and throughout the marketing chain.

Another major component of the FSSP is the collection of information, vital for improved planning and management within the sector. This is beginning to be implemented through BMUs, transferring information to districts, lake wide organizations and central government.

Cabinet has approved the formation of the Uganda Fisheries Authority (UFA). The rationale is that it will provide a more autonomous and cost-effective institution capable of delivering rapid responses to the changing needs in accordance with its core functions to promote, support, guide and monitor the sector. The UFA provides not only the “competent authority” needed to improve and expand fish exports, but also the umbrella framework linked to international fisheries organisations, domestic lake wide management organisations and community BMUs. This is modelled on other parastatals serving specific production sectors such as UCDA.

Priority actions for fisheries

Government will focus on the following priorities:

• Implementation of the FSSP

• Establishment and capacity-building of community institutions to manage beaches and lakes

• Monitoring and control of illegal practices

• Development of quality guarantees for fish exports

• Development of a central information system

• Stock enhancement for dams and small lakes

• Evaluation of options for fish technologies.

• Protection of children by BMUs against exploitation and abuse

• Management and control of HIV/AIDS among fishing communities

Wetlands

Wetlands account for 13% of Uganda’s total land surface area and play an important role in the socio-economic development of the country. Wetlands provide a range of benefits including crops (yams, rice, papyrus), fish, inputs into domestic production (including roofing materials, livestock fodder and raw materials for crafts) and services (e.g, water storage, purification, flood control). Wetlands are thought to employ about 320,000 workers directly and provide a subsistence employment for over 2.4m people.

Various widely divergent estimates have been made of the economic value of wetlands, depending on the methods used and the benefits and costs included. However, many figures tend towards an annual direct production value of $ 300-600 per hectare, whereas high estimates, including services like purification and carbon sequestering, may go as high as $ 10,000 per ha However, there is a shortage of work comparing the economic value of different uses of the wetlands.

Two aspects typical for wetlands require special management measures: firstly, wetlands are often a common property resource, ‘owned’ by a community rather than by individuals; secondly, the impacts of wetland degradation are carried upstream and downstream over hundreds of kilometres, well beyond the view and understanding of those who are causing the degradation.

A significant amount of encroachment on wetlands has occurred. NEMA estimates that 64% of the total seasonal wetlands in Iganga and 68% in Pallisa have been reclaimed for rice cultivation.²⁶ In Kampala, many sections of wetlands have been converted to industrial use or have gradually been taken over by semi-slum residential housing and associated uses such as cultivation, waste disposal, etc.²⁷ Nationally, it is estimated that 2,376 sq. km of Uganda’s wetland areas have been drained²⁸

Government has acted to ensure that wetlands are protected, as reflected by the endorsement of a Wetland Policy in 1995, the inclusion of extensive wetland legislation and regulations under the National Environment Statute, and the adoption of a Wetland Sector Strategic Plan and part of its funding under PAF.

The Wetlands Sector Strategic Plan (2001-2010) aims to encourage a sustainable use of the resource, focusing on benefits to the poor with collaborative community level participation. Incomes derived from wetlands have the potential to be increased. Focus should be on improving wetlands product quality and pricing and efforts to reach export markets. Alternatives to wetlands resources and better management practices also need to be promoted to reduce on the costs of degradation. There is a need to provide incentives for districts to discharge their wetland management responsibilities as stipulated in the Local Government Act 1997. In this regard, the sub-sector will strengthen linkages with PMA and NAADS. There is need to develop, strengthen and operationalise comprehensive wetlands legislation and enforcement structures to ensure sustainability and resolve ownership issues. The sub-sector will also promote increased community participation through the development and implementation of community wetland management plans as a means to empower communities. to manage their wetland resources and identify opportunities for improving livelihoods. The communities adjacent to the wetlands will implement this with technical support from the local governments and the Wetland Inspection Division.

It has been suggested that water users should pay for some of the benefits of water purification that accrue from the wetlands. It might be possible to allocate some of the proceeds to communities to provide an incentive for them to manage the wetlands.

Priority actions for wetlands

Government will:

• Assess financial, economic and environmental relative profitability of different wetland uses

• Further development and dissemination of guidelines for wise use of wetland resources

• Improve community skills and diversification of wetland products in order to add value to wetland products

• Enforce appropriate policies, laws, procedures and regulations to curtail degradation of wetland resources

• Assess wetland resources to determine resource availability and trends

• Support community initiates that promote wise use of wetlands

Climate

Priority actions for climate

Government will:

• Strengthen data collection capacity to ensure adequacy and timeliness of data to generate weather and climate information, with particular focus on reaching the rural poor.

• Carry out an in-depth assessment of user needs including the rural poor and develop, generate and disseminate user-specific products. The analysis should establish effective dissemination, utilisation and monitoring and evaluation mechanisms,

• Strengthen human capacity, including providers and users of the service.

• Investigate and establish the appropriate institutions to take advantage of opportunities under the CDM.

Wildlife

Wildlife based tourism has an annual economic value of $163 million, employing around 70,000 people directly. The parks also provide local climatic and water resource benefits, which have not been quantified. Uganda has 10 national parks, 12 wildlife reserves and 5 community wildlife areas with unique wildlife species such as the mountain gorilla. Government has allocated management of these facilities to semi-autonomous organisations such as Uganda Wildlife Authority (UWA) and Uganda Wildlife Education Centre (UWEC). UWA is funded out of park fees as well as project funds. Local Governments are also empowered by the Uganda Wildlife Act to pass user rights and bylaws to manage wildlife resources.

Government’s policy objectives in this sub sector include the preservation of wildlife, in particular for species where Uganda has a large share of the world’s remaining population, generating income, and ensuring that the communities near the parks share the benefits and are made aware about wildlife conservation. Illegal small-scale trade in wildlife and its products also requires investigation.

The Uganda Wildlife Act provides for 20% of all entry fee collections to flow directly to the relevant community. A total of US $ 516,288 has been disbursed to the communities neighbouring protected areas in the last four years. Funds are allocated by the communities, and have been used to rehabilitate roads, clinics, schools and water sources. Examples such as Buhoma camp site, Magombe swamp and Lake Mburo sport hunting show the potential for wildlife to contribute towards poverty eradication.

Government is committed to local consultation before taking decisions on the use of land for conserving wildlife. In particular, pastoralists’ needs for grazing lands will be taken into account in decisions to create and manage protected areas. Greater community awareness about the value of wildlife to the community will make it easier for livestock and wildlife to coexist.

Priority actions for wildlife

• The Wildlife Division will revise the Wildlife policy and legislation

• Inspection and coordination will continue under the Wildlife Division for quality assurance and compliance in management of wildlife resources.

• UWEC will continue to carry out conservation awareness programmes (with healthy wild animal exhibits) and provide quarantine services under the CITES trade arrangement.

• With community and district-level cooperation, all Protected Area (PA) boundaries will be marked and trees will be planted along forested ones. Dialogue with communities will be strengthened to minimise encroachment.

• Offices, accommodation and outposts will be constructed in selected PAs.

• Revenue will be shared with local communities in those PAs where the practice has not yet taken off. A regular (at least annual) disbursement will be institutionalised to ensure that communities benefit from the 20% of entry fees to which they are entitled. The funds will be used to implement community designed and approved projects to benefit the communities immediately neighbouring the PAs.

• MOUs will be developed with enterprises, communities and local governments to manage wildlife and benefit from wildlife related enterprises, including community tourism.

• UWA will work with districts in the management of problem animals and vermin to reduce crop losses for the community.

• Management plans will be developed, and bylaws introduced where appropriate, to protect critical wildlife habitats outside PAs.

Improving the functioning of the labour market and the productivity of workers

Priority actions for enhancing the supply of labour

• Priorities for the educational system are presented in Chapter 7.

• Government will strengthen labour market information.

Priority actions for wages and working conditions

Government will:

• Consult with the private sector on the revision of minimum wages for estate workers

• Consider revision of the Workers Compensation Act, to provide a more effective system with lower burdens on employers.

• Consider the role of labour inspections in the protection of workers’ welfare.

Public sector employment

In the long run, Government should cease to be the main provider of formal employment, which should be mainly generated by the private sector. Hence Government will not undertake activities mainly to generate employment. However, where an activity is being undertaken because it provides valuable public goods, Government will explore the possibilities of using labour-intensive methods in areas of high visible underemployment. This has been done successfully for some road projects.

Priority actions for Public Sector Employment

• Government will use labour-intensive techniques where technically feasible and economically cost-effective. Knowledge of such techniques will be disseminated by the Labour Department in MGLSD.

• Government will promote community participation in infrastructure development and maintenance.

Increasing Competitiveness

The fact that Uganda is landlocked and has a small domestic market demands that she develops an export oriented economic development strategy based on high value low volume commodities and services. This can only be achieved if the country is able to exploit Uganda’s comparative advantage and promote enterprise competitiveness.

Uganda’s geographical position, the huge water masses she posses and big market potential of border countries provide her with the potential to be a regional hub in the Great Lakes region. Improvements in infrastructure and utilities such as railway, water transport and inland port facilities could help exploit this position putting Uganda ahead of her neighbours (DRC and Sudan). In addition, Uganda’s electricity generation potential (2,000 MW possible on river Nile alone), plus potential in education, health and tourism services could be exploited by a good mix of technological application and entrepreneurship. For these reasons, Uganda has excellent competitive potential, but much remains to be done to realise this potential.

For Uganda’s products to be competitive in regional and international markets, they must be produced in the most efficient and effective manner. For most of its exports, Uganda is a price taker, meaning that the volume of its exports is not large enough to influence the price in the international market. For Uganda to be competitive, it needs to work on the factors that influence the cost of production and transportation. Some of these factors have to do with the businesses themselves and others have to do with the public sector. Companies have to work hard to cut costs of production linked to the structural nature of their businesses; these vary from one company to another. However, in most surveys on business operations in Uganda, the major constraints are largely public in nature, including infrastructural (roads, rail, air), utilities (electricity, water), legislative, and administrative (corruption, taxation) constraints. (See annex tables A 4.1 and A 4.2).

Supply constraints for businesses have to be addressed in a holistic manner and for the entire private sector rather than for selected enterprises, which would undermine competition and discourage foreign direct investment. Smart subsidies can be offered to businesses in a way that is accessible to all firms on an equitable basis, such as establishment of industrial parks with common utility supplies (water, electricity and telecommunications) and infrastructure (roads, sewerage line, waste disposal facilities), thus reducing the costs that individual businesses would incur in accessing them. International cooperation to strengthen transport networks, such as better links to Mombasa and Dar es Salaam, ould also improve competitiveness. Some of these investments can be handled under public-private partnership involving a group of countries. The NEPAD initiative provides a good framework for this cooperation. Regional integration under the EAC is a step in the right direction and will be used as a framework for investment, while ensuring that the expenditures remain within Government’s overall expenditure programme.

On the demand side, while Uganda’s export volume may not influence prices received by exporters, the public sector still has a role to play including negotiating the different trading arrangements to reduce trade barriers, both tariff (such as tariff escalation on finished goods) and non-tariff (such as the stringent sanitary and phytosanitary measures). This calls for capacity building in trade negotiations within the relevant institutions such as the Ministry of Tourism, Trade and Industry (MTTI). Such capacity is currently limited and needs developing. However, the approach to trade negotiation may sometimes bring faster results when done as a trading block rather than as individual small countries. Therefore, government will, where possible negotiate for better trade arrangements under the East African Customs Union (EACU) or the Common Market for Eastern and Southern Africa (COMESA).

Based on the above discussions government will focus on the following actions:

• Strengthen institutions that fight corruption

• Finalise commercial contract legislation

• Establish industrial parks to minimise fixed costs, especially for start-up enterprises

• Invest in capacity building in trade negotiations and market intelligence in MTTI

• Negotiate better trade terms as a part of a trading block rather than on a bilateral basis

Government Efforts to Increase Competitiveness

In 2000 the government formulated the MTCS which aims to create a favourable environment for the private sector to grow, become profitable and compete both locally and abroad. The seven priority areas of the MTCS are: Trade, Investment and Export Promotion; Financial Sector Reform; Infrastructure and Utilities; Enabling Environment for Micro, Small and Medium Enterprises (MSMEs); Commercial Justice; Sector Specific issues; and Creating an Enabling Environment The MTCS incorporates initiatives included under the Strategic Export Programme, most of which are being implemented by the agricultural sector.

Supply-side interventions in the MTCS include infrastructure and utilities, legal and regulatory services, market information and access, standards, financial services and business registration and licensing. Annex A 4.1 shows constraints to doing business in Uganda. Since 2000, there have been significant improvement in the communications sub-sector, but the business community still perceive access and cost of financing, tax rates and tax administration, electricity and corruption as key constraints. Annex Table A 4.2 shows that businesses suffer delays often caused by bureaucracy. In some cases, such as fish exports, delays can be disastrous for the quality of produce. Delays in tax refunds are of course particularly serious in the context of high interest rates. These constraints are particularly critical for micro, small and medium enterprises (MSMEs) and actions to address them are discussed in detail in Section 4.3

Recent studies have shown that since 2000, when the MTCS was launched, a number of constraints have been addressed but others remain. Under the MTCS framework, priority areas for action will be elaborated and implemented under a coordinated approach led by a high level MTCS Steering Committee supported by a Secretariat.

Some of the constraints that the MTCS intends to address have been discussed above. One common area shared by the MTCS with the PMA is marketing and agro-processing. Studies of agricultural marketing in Uganda suggest that most segments of the marketing chain work quite efficiently, but that the weak social organisation and limited information of farmers reduce the prices they receive.

Marketing cannot be an afterthought but needs to be factored into the production decision. In order for this to happen, the advice given to farmers needs to be based on a sound knowledge of the market as well as the technology proposed. Farmers need to understand the importance of quality and reliability to their buyers. Government is reviewing the MTCS to address the remaining challenges for competitiveness in domestic, regional and international markets.

The Marketing and Agro-processing strategy

A marketing strategy is expected to link producers to consumers, both domestic and foreign, combines with strategies for processing to add value, reduce bulk and increase shelf life. Government’s approach to marketing and agro-processing is set out in the Marketing and Agro-Processing Strategy (MAPS), which was developed by MTTI for implementation under the PMA. Priority actions for public intervention under MAPS that address some of the constraints discussed under NAADS and MTCS include:

(a) Trade Policy/Negotiations and finance

• Improved capacity to undertake trade negotiations in regional and international fora;

• Establishment of expert teams to provide trade/market analysis and intelligence;

• Improved access to financing for marketing/value-added interventions/agri-business;

• Improved rural contract law to govern producers and buyers in rural areas.

(b) Producer support

• Provision of market information to farmers and traders

• Improved farmer organisation at production and marketing levels

• Educational programmes to engage farmers more effectively in the liberalised market environment.

(c) Infrastructure

• Increased rural road investments to link farmers with input and product markets;

• Reduced rates for air and rail freight

• Strengthening the Uganda commodity exchange

• Establishing and operationalizing the warehouse receipt system

(d) Export Competitiveness

• Strategic Exports development

• Value addition/new product development

• Promotion of products in domestic, regional and international markets

Cooperatives and Area Marketing Cooperative Enterprises

Co-operative activities in Uganda can be traced as far back as 1913 when indigenous Ugandans started organising themselves into cooperatives to enable themselves participate in trade especially of coffee and cotton. In 1946, the first law was passed to govern cooperative activities. During 1946-1970 co-operatives grew in all sectors of the economy, with the majority in agricultural marketing. However, political turmoil and poor leadership during the 1970s and 1980s adversely affected their performance and many cooperatives became insolvent. The Ugandan Cooperative Alliance is leading the revival of the cooperative movement, and Government will provide extension services to assist their formation, organisation and development.

Area Marketing Cooperative Enterprises are formed by bringing together primary cooperative societies, farmer associations, and large-scale farmers at the sub-county level. The purpose is to match quantity and quality to the needs of the market. As noted in the Agricultural sector, the relationship between cooperatives and farmers’ groups under NAADS will need further clarification, since in future both institutions will often exist in the same areas.

Priority actions for cooperatives

• Government will promote the roll-out of Area Marketing Cooperative Enterprises, working alongside NAADS.

Access to international markets

Sustainable economic growth and poverty reduction will depend on access to sustainable markets, both regional and international. Uganda’s domestic market is small and can easily be saturated as has been demonstrated from time to time with a glut of maize in just one crop season. Agricultural commodity producers need to be sure that there is a sure market for their products. In order for the market to guide resource allocation efficiently, producers need accurate information on current prices and -even more important - realistic forecasts of future prices. Such information is particularly difficult for the poorest small scale producers to access. Government therefore needs to provide market intelligence to producers.

Negotiations regarding the formalization of a customs union with by the three East African partners (Uganda, Kenya and Tanzania) will see Ugandan goods enjoy free movement within a market of approximately 85 million people. Uganda has also gained from the US market access initiative, African Growth and Opportunity Act (AGOA), which has allowed it to export textiles and apparels to the American market. Furthermore participation in the EU’s Everything But Arms (EBA) initiative a well as other Generalized System of Preferences (GSPs) such as those of Canada and Japan has been beneficial to Uganda. At the WTO level, Uganda has continued to comply with its commitments, allowing Uganda to maintain its position in an important forum through which its voice can be heard on trade issues. Challenges include strengthening the capacity of negotiators and ensuring a common position, and continued efforts to reduce tariff and non-tariff barriers. As a lead institution, MTTI has the responsibility for conducting negotiations under the WTO, EPA, EAC and COMESA.

Trade negotiations and regional integration also involve the Ministry of Foreign Affairs (MOFA). Uganda’s missions abroad need more support to promote trade, investment and tourism opportunities. For example, commercial attaches can usefully contribute by meeting potential foreign investors. Effectiveness of these roles depends on well articulated responsibilities between MTTI and MOFA.

Priority actions for international trade

Some of the priorities have already been outlined under MAPS above. Additionally, government will:

• Increase the complementarity of MTTI and MOFA in trade negotiations

• Support Uganda’s trade negotiators and trade or commercial attaches at Uganda’s foreign missions to promote trade, tourism and investment

• Institutionalise a trade negotiation team to participate actively in trade negotiations

Services to promote exports and investment

Services to promote exports and investment are provided by Uganda Export Promotion Board (UEPB) and Uganda Investment Authority (UIA). Consideration is being given to merging these two institutions or otherwise clarifying their respective mandates.

UEPB’s major activities are market intelligence, market entry strategy support and export skill training. UEPB has facilitated the development of some infrastructure and is promoting export villages. It is assisting producers to meet the standards under the European Union’s Good Agricultural Practices initiatives. UEPB is also pursuing access to ‘soft markets’ in middle-income countries, which often present less severe barriers than those in Europe and America, and has plans to develop an export training school to inform entrepreneurs about marketing products for export.

UIA aims to offer a ‘one-stop shop’ for investors in Uganda. Registration with UIA is mandatory for foreign but not domestic investors. A major innovation is the purchase of land for business parks, which will offer a more convenient site for investors.

Priority actions for export competitiveness

Government will:

• Develop a national export strategy

• Continue to review the relative roles of UIA and UEPB in the provision of services for exports and investment.

• Set up industrial parks; the appropriate balance between public and private investment in establishing them will be considered.

Product Standards

Recent experience has demonstrated that a further barrier to market entry for the Ugandan private sector has been a failure to comply with international quality standards. Examples include the substandard methods of operation that led to the European Union fish ban and the difficulties faced in complying with the Sanitary and Phytosanitary and European Union Retailer Good Agricultural Practices (EUREPGAP) measures implemented by the developed countries. These examples show that insufficient public monitoring of quality can prove costly.

The Uganda National Bureau of Standards (UNBS) has the mandate to develop and promote standardisation, quality assurance, laboratory testing and metrology. The Bureau provides information and issues certificates on export standards; inspects imports to prevent the import of substandard goods and provides information for importers to send on to suppliers abroad; calibrates measuring equipment and surveys markets to eliminate shoddy products; and, assists industries to meet standards. Currently, the Bureau has no permanent home and has no space for laboratories. It is much smaller than its counterparts in neighbouring countries. The bureau also certifies some private agencies to monitor standards. For agricultural products which form the bulk of Uganda’s exports, UNBS must work with the Ministry of Agriculture, Animal Industry and Fisheries (MAAIF) to ensure that standards are developed and maintained to increase competitiveness of the products.

Priority actions for standards

In order to improve and maintain standards, Government will:

• Explore the appropriate division of labour between the private sector, sectoral ministries and UNBS in the promotion of standards.

• Ensure that UNBS works closely with MAAIF to ensure that standards are maintained for agricultural products

Sector-wide approaches

As mentioned above, there is no overriding strategic framework for the Environment and Natural Resources (ENR) sector. This is holding the sector back from adopting common implementation approaches, exploiting synergies and collaborating to improve efficiency of service delivery. Steps to move towards a Sector Wide Approach are being taken, and should be further supported and accelerated. First steps should be to define the sector against a common vision and a set of shared goals. Then that sector should begin to draw up a sector investment plan.

However, there has been, during the last 5 years, an impressive process of sub-sector level strategic planning. Activities are guided by the National Forest Plan (2002), the Wetlands Sector Strategic Plan (2001), the Land Sector Strategic Plan, the Fisheries Plan (2003) and the National Environmental Action Plan.. The challenge will be to develop a sector-wide plan that recognises the existence of functional sub-sector plans but that contains sector-wide programmes and initiatives for collaborative implementation. Priority ‘SWAp’ areas might be data collection and analysis, land inventories and mapping, district level coordination and capacity building and landscape restoration.

There is also a lack of a sector-wide approach in the Economic Services sector, which includes MTTI, MEMD and various agencies. Some of the activities in this sector have strong linkages with some activities undertaken in the accountability sector, such as microfinance and support to MFIs. Expenditure in the economic services sector is currently scatted among a number of agencies and projects. Hence a sector-wide approach is badly needed.

The agriculture sector is developing a sectoral investment plan, and the roads sub sector has a long-term plan.

Priorities for expenditure in the agriculture sector

Public expenditure implications for the ENR sector

All the sector’s areas of intervention are potentially important, but unit costs have not been received for most of them. Existing activities have a very high share of project funding, which may be associated with costly modalities of implementation. Moreover, the establishment of agencies with powers to raise their own funds in the forestry and fisheries sub sectors make it harder for expenditure to be monitored or managed in the sector as a whole.

Three sub sectors that have indicated a need for extra funding are meteorology, fisheries and forestry. Amounts involved have been quantified for meteorology; to start the revamping of this service is estimated to cost about 6 billion shillings. However, a decision will be needed whether to have meteorological staff at district level; the service might be delivered more cheaply by focusing resources at the centre. The cost of district forest services is currently about 2.4 billion shillings. The cost of supporting beach management units is estimated at about 2 billion shillings per annum, but this may be funded out of the producers’ levy to be raised by the newly established Fisheries Agency.

An important area for public action in the medium term is land reform. The implementation of systematic demarcation offers an opportunity significantly to strengthen the property rights of the poor. Current estimates suggest it may be possible to perform phased systematic demarcation of all rural areas for a total cost of the order of $50-$60 million. A Poverty and Social Impact Assessment is planned to assess the effectiveness of systematic demarcation in enhancing the property rights of the poor; if favourable, this programme will be treated as a priority for funding in the medium term. In the short term, a priority is improvement of the Land Registry.

The development of a sectoral plan should be undertaken within MTEF ceilings. However, the needs of the sector will be reviewed as the strategy is developed. In the meantime, the piloting of systematic demarcation, the improvement of the Land Registry and the management of the district forest services will be treated as priorities.

Expenditure priorities in the economic services sector

This sector has no sectoral strategy and a high proportion of the expenditures have hitherto been on projects and often disbursed through agencies. This has led to excessive costs and duplication. The objective must therefore be to develop a sectoral strategy in which all the priorities are dealt with jointly.

Transport, housing and communications

Expenditure issues for water for production

Water for production is currently divided between the agricultural and water sectors. MWLE has now prepared a subsectoral strategy. This implies annual expenditures of about 18 billion shillings of which 12 billion would be for water for livestock. Under the water for production strategy, the investments proposed during 2003–6 total $ 37 million of which $24 million are water for livestock, including $ 11 million already budgeted by DWD.

Irrigation has an important role to play in increasing production. However, there is need to further establish the cost implications. Efficiency could be improved by accommodating the cost within the agricultural sector.

Water infrastructure for livestock (valley dams) is directly relevant for the livelihoods of some relatively poor people and can also contribute positively to enhancing production, security and stability.