Uganda Uganda at a Glance: 2002-03

COUNTRY REPORT

Uganda Uganda at a glance: 2002-03

OVERVIEW President Yoweri Museveni will come under increasing criticism in the short term because of allegations of corruption and other misconduct against him and his family. Relations between Uganda and Rwanda are likely to remain cool in the short term, but as the peace process in the Democratic Republic of Congo moves forward, relations are expected to warm slowly. The prolonged slowdown of the global economy—exacerbated by the September attacks in the US—is expected to keep real GDP growth at around 5.6% in 2002, and the predicted global recovery in 2003 is expected to lift real GDP growth to 6.2%. The current-account deficit is expected to narrow to 8.4% of GDP in 2002 and 7.9% of GDP in 2003, mainly as a result of improving export diversity, strong inflows of net transfers and slower import growth. Key changes from last month Political outlook • There are fears among local and international organisations that the proposed Media Bill 2001 may lead to a reduction of press freedoms in Uganda when it replaces current, more liberal, legislation. Economic policy outlook • The World Bank has identified the weakness of the transport and power infrastructure as a major constraint on development in Uganda and is providing funds for the development of the country’s roads and the construction of a new power station. The government will continue to seek improvements in tax administration and has announced that it will allow commercial banks to accept tax payments, previously the preserve of the Uganda Commercial Bank. Economic forecast • As a result of the deeper than expected global economic slowdown, real GDP growth is now expected to be 5.4% in 2001. Assuming normal weather, agricultural growth will be fairly constant at about 5.5% per year over the forecast period, caused mainly by growth in non-traditional crops. Some foreign investment in manufacturing and mining should see industry grow by around 6.5% in 2002 and 6.8% in 2003. Services growth is expected to remain stagnant at 5.8% in 2002, rising to 6% in 2003. October 2001

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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ISSN 1465-640X

Symbols for tables “n/a” means not available; “–” means not applicable

Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK. Uganda 1

Contents

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2002-03 7 Political outlook 8 Economic policy outlook 9 Economic forecast

12 The political scene

19 Economic policy

22 The domestic economy 22 Economic trends 24 Agriculture 25 Manufacturing 25 Mining and minerals 26 Infrastructure and services

28 Foreign trade and payments

List of tables

10 International assumptions summary 11 Forecast summary 14 Gold production and exports 21 Corruption Perceptions Index 25 Coffee production

List of figures

12 Gross domestic product 12 New Uganda shilling real exchange rates 23 Exchange rate, 2001 23 Inflation, 2001 28 Commodity prices

EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001

Uganda 3

Summary

October 2001

Outlook for 2002-03 President Yoweri Museveni will come under increasing criticism in the short term, because of allegations of corruption and other misconduct against him and his family. Two bills will be watched closely by international donors over the forecast period: the Political Organisations Bill and the Media Bill 2001. Both will be indicative of the government’s longer-term intentions. Relations between Uganda and Rwanda are likely to remain cool in the short term, but as the peace process in the Democratic Republic of Congo (DRC) moves forward relations are expected to improve. The prolonged slowdown of the global economy—exacerbated by the September attacks in the US—is expected to result in real GDP growth of about 5.6% in 2002, and the predicted global recovery in 2003 is expected to lift real GDP growth to 6.2%. The current- account deficit is expected to narrow to 8.4% of GDP in 2002 and 7.9% in 2003, mainly because of improving export diversity, strong inflows of net transfers and slower import growth.

The political scene President Museveni has appointed a new cabinet consisting of firm supporters of the Movement. Mr Museveni and family members have been accused of involvement in the 1997 Uganda Commercial Bank (UCB) scandal. The Ugandan-sponsored Congo Probe Commission has begun looking into reports of natural resource theft in the DRC. Colonel Kiiza Besigye has fled to the US, fearing for his safety.

Economic policy The government has continued to move forward with privatisations of UCB and the power sector. Stanbic Bank and Kinyara Sugar Works await market listings. Amnesty International has reported that corruption in Uganda remains a major obstacle to economic reform. The process of collecting tax revenue has been liberalised to improve payment, and amendments to the VAT law have been made to expand the tax base.

The domestic economy The Bank of Uganda has continued to intervene in the foreign exchange market to support the Uganda shilling. The problem of bad loans in the banking sector has improved. Commercial lending to the private sector has remained subdued. Prospects for oil discovery near Lake Albert are better. A new feasibility study for the Eldoret-Kampala oil pipeline has been commissioned. Tax on mobile phones has discouraged investment.

Foreign trade and Coffee export receipts have continued to slide, although tea and fish exports payments have been performing well. Cotton exports have been hindered by low global prices and poor production. The World Bank has approved two loans to develop roads and power infrastructure in Uganda. The International Development Association has announced that it may commit up to US$1.1bn in budgetary assistance to combat poverty. Editors: Christopher Eads (editor); Pratibha Thaker (consulting editor) Editorial closing date: October 8th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report October 2001 © The Economist Intelligence Unit Limited 2001 4 Uganda

Political structure

Official name Republic of Uganda

Form of state Unitary republic

Legal system Based on English common law and the 1995 constitution

National legislature Parliament of Uganda; 282 members, 214 elected by universal suffrage, with the remainder selected by electoral colleges; all serve five years

National elections March 2001 (presidential) and June 2001 (legislative); next elections due in early 2006 (presidential) and mid-2006 (legislative)

Head of state President, elected by universal suffrage for a five-year term

National government The president and his appointed cabinet; most recent reshuffle in September 2000

Main political parties The Movement (formerly the National Resistance Movement) is the ruling authority, but not a formal political party; the Democratic Party (DP), the Uganda People’s Congress (UPC), the Uganda Patriotic Movement (UPM) and the Conservative Party (CP) are all registered political parties, but election candidates stand as independents

President & commander-in-chief Yoweri Museveni Vice-president Specioza Kazibwe Prime minister Apollo Nsibambi First deputy prime minister & minister of internal affairs Eriya Kategaya Second deputy prime minister & minister of disaster preparedness Brigadier Moses Ali Third deputy prime minister & minister of foreign affairs James Wapakhabulo

Key ministers Agriculture, animal industry & fisheries Mugerwa Kisamba Attorney-general Francis Ayume Defence Amama Mbabazi Education & sports Makubuya Kidhu Energy & minerals development Syda Bumba Finance, planning & economic development Gerald Ssendaula Gender, labour & social development Zoe Bakoko-Bakoru Health Jim Katugugu Muhwezi Justice & constitutional affairs Janet B. Mukwaya Local government Jabeli Bidandi Ssali Public service Henry Mugwana Kajura Trade, tourism & industry Edward Rugumayo Water, lands & environment Ruhakana Rugunda Without portfolio Crispus Kiyonga Works, housing & communications John Nasasira

Ministers in the office Presidency Gilbert Bukenya of the president Prime Minister’s Office George Mondo Kagonyera

Central bank governor Emmanuel Tumusiime Mutebile

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Economic structure

Annual indicators

1996 1997 1998 1999 2000a GDP at market prices (NUSh bn) 6.6 7.3a 7.7a 8.8 a 9.5 GDP (US$ bn) 6.3 6.7a 6.2a 6.0 a 5.8 Real GDP growth (%) 9.1 4.7 5.6 7.4a 5.0 Consumer price inflation (av; %) 7.2 6.9 0.0 6.4 2.8b Population (m) 19.9 20.4 21.0 21.6a 22.2 Exports of goods fob (US$ m) 639.3 592.6 510.2 500.1 390.8 Imports of goods fob (US$ m) 986.9 1,042.6 1,166.3 1,096.5 1,190.5 Current-account balance (US$ m) –252.3 –366.9 –502.5 –550.9 –533.0 Foreign-exchange reserves excl gold (US$ m) 528.4 633.5 725.4 763.1 808.0b Total external debt (US$ bn) 3.7 4.0 4.0 4.1 3.7 Debt-service ratio, paid (%) 18.4 20.0 22.3 25.4 17.0 Exchange rate (av) NUSh:US$ 1,046.1 1,083.0 1,240.3 1,454.8 1,644.5b

October 9th 2001 NUSh1,740:US$1

Origins of gross domestic product 2000 % of total Components of gross domestic product 1997 % of total Agriculture 42.0 Private consumption 91.6 Monetary 23.0 Government consumption 11.3 Non-monetary 19.0 Gross domestic investment 17.1 Government & community services 15.7 Exports of goods & services 10.3 Commerce 12.8 Imports of goods & services –30.3 Manufacturing 9.1 GDP at factor cost 100.0 Construction 8.4 GDP at factor cost incl others 100.0

Principal exports fob 2000 US$ m Principal imports cif 1999 US$ m Coffee 125 Machinery incl electrical 171 Gold 43 Petroleum 121 Fish & fish products 24 Road vehicles 97 Tea 37 Medical & pharmaceuticals 74 Cotton 22 Cereals 58 Tobacco 27 Iron & steel 45

Main destinations of exports 2000c % of total Main origins of imports 2000c % of total Germany 11.0 Kenya 41.0 Netherlands 9.1 UK 7.7 Belgium 7.3 India 6.5 Spain 7.2 Japan 3.2 France 3.1 Germany 3.1 a EIU estimates. b Actual. c Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators

1999 2000 2001 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices, Kampala (1995=100) 122 127 123 123 124 132 128 130 % change, year on year 8.5 10.4 3.4 1.7 1.6 3.9 4.1 5.7 Financial indicators Exchange rate NUSh:US$ (av) 1,466.9 1,504.5 1,519.6 1,557.0 1,681.1 1,820.2 1,775.7 1,774.7 NUSh:US$ (end-period) 1,506.1 1,506.0 1,519.9 1,571.7 1,818.3 1,766.7 1,790.1 1,723.8 Interest rates (%) Bank (end-period) 14.75 15.75 15.88 26.99 25.58 18.86 20.73 9.07 Deposit (av) 8.01 8.81 8.79 9.71 10.07 10.79 11.75 7.94 Lending (av) 21.42 20.84 21.36 22.15 24.06 24.11 25.77 n/a Treasury bill (av) 7.25 10.29 9.88 12.83 16.84 13.22 18.28 7.33 M1 (end-period; NUSh bn) 650.12 689.36 712.12 714.84 716.50 805.49 805.53 n/a % change, year on year 17.5 12.6 14.0 11.0 10.2 16.8 13.1 n/a M2 (end-period; NUSh bn) 1,219.0 1,277.4 1,308.2 1,339.1 1,425.6 1,509.1 1,521.7 n/a % change, year on year 20.0 13.6 15.6 15.3 16.9 18.1 16.3 n/a Sectoral trends Production (annual totals; ‘000 tonnes) Coffee ( 236.2 ) ( 205.3a )( n/a ) Cotton, lint ( 15.4 ) ( 22.0a )( n/a ) Seed cotton ( 66.0 ) ( 67.0a )( n/a ) Foreign trade (NUSh m) Exports fob 136,803 218,112 252,551 199,942 121,635 185,145 201,370 199,348 Imports cifb –475,610 –557,368 –538,506 –619,353 –688,069 –640,347 –669,098 –676,258 Trade balance –338,807 –339,256 –285,955 419,411 –566,434 –455,202 –467,728 –476,910 Foreign reserves (US$ m) Reserves excl gold (end-period) 735.5 763.1 721.2 725.9 718.6 808.0 764.2 n/a a Preliminary. b Cash basis. Sources: Food and Agriculture Organisation; IMF, International Financial Statistics.

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Outlook for 2002-03

Political outlook

Domestic politics The president, Yoweri Museveni, will come under increasing criticism in the short term, because of a revelation by the former Bank of Uganda governor, Sulaiman Kiggundu, that Mr Museveni and his family were involved in the scandal surrounding the failed sale of Uganda Commercial Bank (UCB) in 1997. The president’s brother, Salim Saleh, has already been implicated in the scandal. Other allegations of misconduct by individuals close to the president in the eastern Democratic Republic of Congo (DRC), involving the exploitation of natural resources there during the war, will also continue to damage the president’s image. Although President Museveni has been credited with restoring the country’s political stability and economic growth following the turbulent years of Idi Amin, corruption scandals involving close members of his family are likely to damage his reputation. Mr Museveni and his Movement government are far too entrenched in power for these claims to drastically affect his position, but in the long term these allegations and criticisms are likely to damage Ugandans’ support for the president and the Movement.

Two bills will be carefully watched by international donors over the forecast period: the Political Organisations Bill, seen as vital for multipartyism; and the Media Bill 2001. There are fears among local and international organisations that the media bill may lead to a reduction of press freedoms in Uganda, as it replaces current, more liberal legislation. Many donors are now said to be expecting political pluralism by 2003, and a lack of progress on this front will strain the government’s relations with donors. Although minimal efforts to liberalise the political system in Uganda can be expected over the next few years, full multipartyism will remain unlikely. Any move to restrict the voice of the media is expected to damage Uganda’s relationship with the West. There are fears in the international community that Uganda’s political development is regressing, and any attempt to reduce freedoms in the country will be condemned outright.

International relations Pressure from the West will ensure that Uganda continues to withdraw most of its troops from the DRC, although it will retain a force of around 2,000 troops in sensitive areas where there is a perceived strategic threat, particularly the Rwenzori border zone where the Allied Democratic Forces are active. It is unlikely that the Ugandan Peoples’ Defence Force will return to the DRC in support of Congolese rebel groups now that the peace process is moving forward.

Relations between Uganda and Rwanda are likely to remain cool in the short term, as hardliners on both sides are preventing improved relations. However, as the peace process in the DRC moves forward, relations are expected to warm slowly. Moreover, normal commercial contacts continue between the countries, providing cause for optimism. Diplomatic relations at the level of chargé d’affaires were resumed between Uganda and Sudan in August, after a break of five years. However, the Lord’s Resistance Army will continue to cause

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problems in the north of the country, as it will still take some time to break down the group even though it is no longer backed by Sudan.

Economic policy outlook

Policy trends The government will remain committed to further economic liberalisation throughout the forecast period. The World Bank has identified weaknesses in the transport and power infrastructure as major constraints on development in Uganda and is providing funds for the Uganda Road Programme and the construction of a new power station. The government policy of helping to increase coffee production is unlikely to yield significant results over the forecast period, as the slump in world prices shows little sign of abating. Policies to facilitate the expansion of tea production, fishing and the textile industry should see some returns in 2002-03, owing to improved access in both US and European markets.

Privatisation will also pick up, as the government seeks to boost economic growth. The outcome of the sale of the Uganda Electricity Distribution Company and the Uganda Electricity Generation Company will be particularly important for the credibility of the country’s privatisation programme. The winners of the 20-year distribution and generation concessions will be announced on December 10th; financial and legal closure will come three to four months later. Investors are likely to question the independence of the new power regulator, the Electricity Regulatory Authority, as the government forced the agency to reduce the tariff increases it proposed in May 2001 in response to demonstrations by businesses and individuals opposed to the increases. In general, the more independent and effective the new regulatory agency is seen to be, the more attractive Uganda will be as an investment destination.

The government will continue to attempt to improve tax administration and in August announced that it would allow commercial banks to accept payment of taxes, previously the preserve of UCB. This should reduce delays to taxpayers and costs to the Uganda Revenue Authority. The government is also determined to improve its tax base and intends to make it compulsory for all professionals to register for VAT, regardless of their income level. This measure could provoke considerable opposition: a two-week national strike followed the imposition of VAT on businesses in 1996 and was only settled following the intervention of the president. Moreover, until significant progress is made in collection, transparency and accountability, large increases in revenue generation are unlikely.

Fiscal policy The budget for the 2001/02 fiscal year (July-June) did not introduce any major changes of policy. Budget strategy will remain focused on the modernisation of agriculture and on improving the quality of public expenditure programmes at the point of delivery. Total spending is set at NUSh2.52trn (US$1.5bn), and agricultural research and extension, roads, electrification of rural areas, and rural finance schemes are all earmarked for development. Much of this will be achieved at the local level. Export development remains a central plank of long-term policy, and the government has now identified a number of strategic

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exports that will receive special support, including coffee, cotton, textiles, tea, fish, beef, hides and skins, and horticultural products. However, it is not yet clear how this special support—worth NUSh6.9bn (US$3.7m)—will be provided. Military spending remains officially capped at 2% of GDP, and is unlikely to be reduced even in the event of the withdrawal of Ugandan troops from the DRC. The government is maintaining this level of military spending because it plans to modernise the armed forces. On the evidence of past years, it is likely that the Uganda Revenue Authority’s revenue target of NUSh1.26trn (US$740m) will be missed, and spending reduced accordingly. The government hopes to increase tax revenue by raising excise duty on alcohol and cigarettes, and a new 10% tax will be levied on mobile phone use. However, the overall budget deficit, excluding grants, will still amount to nearly 12% of GDP in 2001/02. The budget for 2002/03 is expected to follow IMF recommendations, targeting poverty alleviation and economic diversification. Expenditure will remain roughly constant as a proportion of GDP, with only slight improvements in revenue generation. Therefore, the budget deficit is expected to remain at about 12% of GDP in 2003. As in the past, this deficit will be financed by grants and soft loans from bilateral and multilateral donors.

Monetary policy Interventions by the Bank of Uganda (the central bank) to support the shilling reached US$127m in January-August 2001. In 2002 broad money growth will slow as a result of lower interest rates, reflecting a fall in international rates. In 2003 broad money growth should increase as the economy picks up and higher interest rates attract savings. The central bank will continue to make limited interventions in support of the shilling, to smooth the trend of exchange-rate depreciation throughout 2002-03. Foreign reserves are forecast at around US$800m in 2002-03 and will provide the funds necessary for any interventions. The ability of the economy to maintain this level of foreign reserves, in the face of such interventions by the central bank, is an indication of the continuing strength of donor support.

Economic forecast

International assumptions The global economic slowdown is expected to persist into 2002, although the world economy is still experiencing some growth. We expect global real GDP growth to increase from 2.3% in 2001 (at PPP exchange rates) to 3% in 2002. However, a worsening in the economic health of the US could affect this forecast. Global growth will accelerate to 4.1% in 2003, after the US economy picks up in the latter part of 2002.

Prices for Uganda’s main export, coffee, are expected to remain poor. Coffee accounts for around 40% of Uganda’s export receipts, and prices are forecast to fall by 21% between 2001 and 2003. Prices will remain depressed, with African and Asian coffee production continuing to outstrip demand during the forecast period. Tea prices are forecast to fall slightly in 2002-03, as global production continues to increase. Lower international oil prices are expected in 2002-03; Brent Dated crude is expected to fall to an average of US$21.5/barrel in 2002 and to US$20.5/b in 2003. This will reduce some of the inflationary and financing pressures on Uganda’s heavily import-dependent economy.

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International assumptions summary (% unless otherwise indicated) 2000 2001 2002 2003 Real GDP growth World 4.7 2.3 3.0 4.1 OECD 3.7 1.1 1.6 2.9 EU 3.4 1.7 1.8 2.5 Exchange rates (av) ¥:US$ 107.8 121.2 124.0 121.5 US$:¤ 0.924 0.903 0.968 1.015 US$:SDR 1.32 1.28 1.30 1.33 Financial indicators ¥ 2-month private bill rate 0.24 0.18 0.10 0.63 US$ 3-month commercial paper rate 6.32 3.61 2.38 5.13 Commodity prices Oil (Brent; US$/b) 28.5 25.4 21.5 20.5 Coffee (Robusta; US cents/lb) 41.4 28.0 23.5 22.1 Tea (US$/kg) 1.86 1.56 1.48 1.43 Food, feedstuffs & beverages (% change in US$ terms) –6.1 0.8 14.1 10.9 Industrial raw materials (% change in US$ terms) 13.4 –6.9 3.3 12.2

Note. Regional GDP growth rates weighted using purchasing power parity (PPP) exchange rates.

Economic growth Real GDP is expected to grow by 5.4% in 2001. The prolonged slowdown of the global economy—exacerbated by the recent events in the US—is expected to keep real GDP growth at around 5.6% in 2002. The global recovery expected in 2003 will lift real GDP growth to 6.2%. The Uganda Coffee Development Authority reports that coffee production picked up during the second half of the 2000/01 crop year (October-September), owing to improved harvests in southern and south-western Uganda, and is now expected to be equal to 1999/2000 figures at about 3m 60-kg bags. Assuming normal weather conditions, agricultural growth should be fairly constant at around 5.5% per year over the forecast period, caused mainly by growth in non-traditional crops. Some foreign investment in manufacturing and mining should cause industry to grow by around 6.5% in 2002 and 6.8% in 2003. Services growth is expected to remain stagnant in 2002 at 5.8%; an increase in tourism will push this to around 6% in 2003.

Inflation Annual headline inflation fell to 2.4% in August, compared with 5.3% in July, owing to lower prices for staple foods, sugar, poultry and charcoal. Uganda’s price index is heavily weighted for food products—around 60%—and good harvests in the south-west of the country have been the main cause of lower inflation. Some inflationary pressures are expected to persist in the form of higher prices for health services, mobile phone charges and electricity, but good food-crop harvests in 2001 will ensure that inflation meets the official target of 5% for the year. A slight increase in average inflation for 2002-03 has been forecast to reflect the continued fall of the shilling against the US dollar. We expect consumer price inflation to average 4.5% in 2002 and 5% in 2003.

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Forecast summary (% unless otherwise indicated) 2000a 2001a 2002b 2003b Real GDP growth 5.0 5.4 5.6 6.2 Industrial production growth 6.0 6.2 6.5 6.8 Gross agricultural production growth 4.5 5.0 5.2 5.9 Consumer price inflation Average 2.8 c 4.6 4.5 5.0 Year-end 3.4a 5.5 5.2 5.4 Short-term interbank rate 22.9 c 23.5 22.0 23.0 Government balance (% of GDP)d –10.2 –10.7 –11.7 –11.8 Exports of goods fob (US$ m) 390.8 365.0 360.0 377.6 Imports of goods fob (US$ m) 1,190.5 1,271.5 1,258.4 1,280.2 Current-account balance (US$ m) –533.0 –560.9 –523.0 –501.1 % of GDP –9.2 –9.5 –8.4 –7.9 External debt (year-end; US$ bn) 3.7 3.4 3.2 3.0 Exchange rates NUSh:US$ (av) 1,644.5 c 1,766.1 1,857.2 2,045.9 NUSh:¥100 (av) 1,430.0c 1,529.3 1,533.5 1,490.3 NUSh:¤ (year-end) 1,731.3 c 1,709.4 1,772.2 1,629.9 NUSh:SDR (year-end) 2,329.9 c 2,299.0 2,382.0 2,189.4

a EIU estimates. b EIU forecasts. c Actual. d Fiscal year (July 1st-June 30th); ratio calculated using an adjusted GDP value equal to GDP for the fiscal year.

Exchange rates The shilling appreciated by 3.6% against the US dollar between January and end-September 2001, as a result of the US$127m of central bank interventions made to support the currency. The shilling is expected to average around NUSh1,766:US$1 in 2001. Over the forecast period, the central bank is likely to continue its policy of intervention in an effort to avoid a rapid fall in the value of the shilling as coffee exports continue to perform poorly. However, pressures on the Ugandan shilling should ease in 2002, as import demand falls because of lower domestic demand and foreign investment slows. However, faster growth in 2003 will see downward pressures increase. Overall, the shilling is expected to depreciate slowly, averaging NUSh1,857:US$1 in 2002 and NUSh2,046:US$1 in 2003.

Increased export diversity will help mitigate the negative impact of low global External sector commodity prices. Owing to the continuing fall in international coffee prices, total coffee exports are only expected to reach US$103m in 2001. A forecast 24% fall in coffee prices between 2001-03 will reduce coffee receipts to about US$86m in 2002 and US$80m in 2003. The outlook for non-coffee exports is more positive. Higher tea production is expected to increase tea exports to US$40m per year in 2002-03. Cotton planting schemes should cause cotton exports to improve to US$21m by 2003. Overall, falling commodity prices are expected to reduce total merchandise export receipts from US$365m in 2001 to US$360m in 2002, although the composition of Uganda’s exports will be more diverse. This diversity will pay off in 2003, as improved receipts from fish, cotton, gold, textiles and other non-traditional exports increase exports to US$378m. Imports are forecast to fall in 2002, reflecting lower demand for imported capital goods and weaker domestic demand; they will rise again in

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2003 as a result of faster economic growth. The invisibles balance will remain firmly in deficit during the forecast period because of the structural deficit on the services account and the modest inflows from tourism receipts. Transfer credits will remain strong, owing to high inflows of external aid. Overall, the current-account deficit is expected to broaden slightly in 2001 to 9.5% of GDP, before narrowing to 8.4% of GDP in 2002 and 7.9% of GDP in 2003, mainly as a result of marginal gains in export revenue and strong current transfers.

The political scene

President Museveni names Following the success of Movement candidates sympathetic to President his new cabinet Museveni in the parliamentary election at the end of June, the president named his new 24-member cabinet in mid-July starting with the re- appointment of close ally, the prime minister Apollo Nsibambi. Many positions were unchanged including the vice-president Specioza Kazibwe; the finance minister Gerald Ssendaula; the trade and industry minister Edward Rugumayo; the energy and minerals minister Syda Bumba; and the agriculture minister Mugwera Kisamba. Some other top officials changed places: the first deputy prime minister, Eriya Kategaya, shifted from foreign affairs to internal affairs and the second deputy prime minister, Brigadier Moses Ali, switched from internal affairs to disaster preparedness. New faces include the third deputy prime minister and minister of foreign affairs, James Wapakhabulo; the defence minister Amama Mbabazi, and the attorney-general Francis Ayume. Mr Mbabazi was formerly minister for regional co-operation; Mr Ayume was the speaker in the last parliament; and Mr Wapakhabulo was national political commissar. Making a return to the cabinet, as health minister, is Jim Muhwezi who was censured by parliament and ousted from government in 1998 for abuse of office.

Established Movementists The cabinet is dominated by old allies of the National Resistance Army—the dominate cabinet rebel movement that became the Movement. This is partly a reaction to the relative success of Kiiza Besigye in the March presidential election and the consequent strengthening of the reformist position within the Movement.

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President Museveni has responded by relying on tried and trusted figures, even though some did not stand in the election, such as Eriya Kategaya, or else lost their seats, like Gerald Ssendaula.

Although President Museveni justified the sharp increase in the number of ministers of state from 21 to 40 on the grounds that it would allow a wider range of interest groups to be represented, his final selection was heavily weighted to the pro-Museveni camp. Another historical figure, Sam Kuteesa, who was also censured by the last parliament for abuse of ministerial powers, was appointed as minister of state for planning and investment. Colonel Kahinda Otafire, who was dropped in a previous reshuffle, returns as minister of state for regional co-operation.

Mr Museveni is named in In a blow to his reputation for being above corruption, President Museveni was corruption exposures named in court by Sulaiman Kiggundu, the former governor of the Bank of Uganda (the central bank) and ex-boss of Greenland Bank, as being involved in the illegal sale of shares in Uganda Commercial Bank (UCB) in 1998. Mr Kiggundu, who is accused of running down his bank and making illegal loans, told magistrates in July that President Museveni, his son, Lieutenant Muhoozi Kainerugaba, and his brother, Major-General Salim Saleh, were intimately involved in the secret purchase by Greenland of 49% of UCB in February 1998. Westmont Land Asia had originally acquired the UCB stake following the October 1997 privatisation but resold it to Greenland four months later in contravention of the purchase agreement. Mr Kiggundu claimed that the brother and son informed him of the president’s consent to the deal.

Opposition MPs call for the The revelations immediately led some opposition MPs, headed by Aggrey president’s impeachment Awori, to call for Mr Museveni’s impeachment. Although it is highly unlikely that Mr Kiggundu’s charges will stick, the nature of the allegations is such that, if verified, they could theoretically lead to impeachment. The constitution provides for impeachment for a variety of offences, including abuse of office, but the provisions would be very hard to enact. The first step would require a petition to be signed by one-third of MPs. This would be followed by a tribunal of three Supreme Court judges. If they decided there was a case to answer, a final vote would be taken, requiring the consent of at least two-thirds of MPs. However, there are no rules of procedure for impeachment.

President Museveni denies President Museveni has rejected the allegations, although he was advised by allegations his lawyers to make no formal comment. His son and brother were summoned to the Baganda Magistrates Court in early August as witnesses for Mr Kiggundu’s defence. Lieutenant Muhoozi and General Saleh did not turn up in court, claiming that the summonses had not been served. The case unexpectedly came to a halt in mid-August when Mr Kiggundu’s case file was referred to the principal justice, Herbert Ntabgoba, for direction and further order by Frank Othembi, the new chief magistrate at the Baganda court. Mr Othembi said that the two magistrates who had been hearing the case— Andrew Bashaija and Catherine Bamugemereire—could not be recalled: Mr Bashaija has now been appointed as a High Court registrar and

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Ms Bamugemereire has gone on extended study leave abroad. Mr Othembi also said that the law barred him from taking over the case after the other two magistrates had handled it. It seems likely that authorities behind the scenes caused the stalling of the trial. Earlier the court had banned debate and media comment on the issue, threatening violators with contempt proceedings. Either a new but perhaps less transparent trial will be initiated or some settlement will be reached with Mr Kiggundu to avoid further legal action.

The local Congo Probe The president has also set up a judicial commission of inquiry, under Judge Commission begins David Porter from the UK, into allegations made by a UN inquiry in April that the Ugandan Peoples’ Defence Force (UPDF), and members of the president’s family, were involved in looting and the plunder of natural resources in the Democratic Republic of Congo (DRC). President Museveni has vehemently rejected the UN team’s findings and questioned their competence and independence. The Porter inquiry—referred to as the Congo Probe Commission—began hearings in mid-July and the questioning has been extensive in scope and detail. Almost all witnesses to date have denied the allegations made against them, declaring that trade in goods and services between Uganda and the DRC was properly recorded and taxed. Furthermore, the authorities continue to stress that the UPDF moved into the DRC for reasons of national security, and not for economic gain.

Dara Forest denies wrong- Dara Forest—one of the accused companies—told the Commission that it had doing no connections with the president and that shipments by the firm were legal. Similarly, the acting director of energy and minerals developments said that any anomalies between gold production and gold export statistics were the result of illegal gold mining in Uganda. However, the discrepancy seems too large for this to be true. Judge Porter criticised members of the UPDF for joining in a conspiracy of silence, but he also attacked the previous UN inquiry for not stating the exact source of evidence. Without the names of witnesses, the authenticity of the allegations could not be double-checked.

Gold production and exports (tonnes) 1994 1995 1996 1997 1998 1999 2000 Gold mined 0.002 0.002 0.002 0.006 0.008 0.005 0.004 Gold exported 0.02 3.1 5.1 6.8 5.0 11.4 10.8 Source: Ugandan government.

The president’s close family The president’s son, Lieutenant Muhoozi, his brother, General Saleh, and is again questioned General Saleh’s wife, Jovial, are alleged to have been key players in the plunder of the DRC. General Saleh told the Commission that one of his companies, Air Alexander, had never transported goods out of the Congo and that it had not received payments of NUSh60bn (US$48.3m, 1998 rates) from defence sources in the second half of 1998. Similarly, Lieutenant Muhoozi denied that his firm Calebs International had made any business deals in the DRC, although it had attempted to do so. All three family members denied being partners in the Victoria Group, which is alleged to have played a key role in diamond smuggling. In particular, the registrar of companies told the Commission in

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early August that the registration forms for some of the firms under investigation had gone missing. Despite its best efforts to uncover all the details, it seems unlikely that the Commission will be able to establish with any great certainty what exactly happened in the DRC during the period in question. The withdrawal of Ugandan troops from the DRC will reduce the likelihood of any new allegations being made.

The UN sends a follow-up In response to intense Ugandan criticism of the findings of the original inquiry inquiry into the activities of occupying forces in the DRC, a follow-up UN team arrived in Kampala on August 23rd. The new panel is headed by Mahmoud Kassam of Egypt and is comprised of representatives from Pakistan, Senegal, Switzerland and the USA. President Museveni has urged it to rectify the faults of the first report. The panel was brought up to date on the work of Judge Porter’s inquiry and will gather further information in Belgium, France and the UK. Both the original and amended reports will be presented to the UN secretary-general Kofi Annan at the end of October. It is likely that the tone of the original report will be watered down, not because illegal activities have not taken place, but principally because of the enormous difficulty in proving that they have. Uganda’s position will also be helped by the increased progress towards a resolution of the crisis in the DRC, and the withdrawal of its troops.

Colonel Besigye flees the The runner-up in the March presidential election, Colonel Kiiza Besigye, country secretly fled the country in August and arrived in the US, reportedly via South Africa. Colonel Besigye claimed that he had been harassed by security agents, had twice been prevented from leaving the country and had reliable knowledge of his impending arrest. His escape was either the result of a serious error by the security forces or was facilitated by sympathetic elements within them. If the latter is true, this would suggest serious divisions within the security apparatus and confirm suspicions that support for reform is relatively widespread. Colonel Besigye appeared in the US for a series of talks with officials in an attempt to highlight the political problems in Uganda.

Colonel Besigye attempts to Colonel Besigye has accused the Museveni regime of drifting towards advance reformist agenda dictatorship and covering up corruption. He says the lack of good governance and democracy are undermining what he admits are real economic gains. He presented his ideas with the launch of a Democratic Reform Charter in July, which attempts to identify factors that are hampering democratisation and calls for changes to the constitution. In the US, Colonel Besigye has also been reiterating his call for donors to link financial assistance to good governance and the introduction of a multiparty system. President Museveni has dismissed Colonel Besigye’s claims, labelling him subversive, and has been particularly bothered by Colonel Besigye’s call for aid to be linked to political conditions. The government says that Colonel Besigye’s proposals should be submitted to the Constitutional Review Commission in Uganda.

Colonel Besigye’s wife is Colonel Besigye’s wife, Winnie Byanyima, MP for Mbarara municipality, was arrested arrested on September 10th after a person she stood surety for—and who was wanted by police for alleged subversive activities—escaped. She was detained and released on bail. Mrs Byanyima had appeared in front of magistrates at the

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beginning of August to answer charges of sedition related to alleged comments she made in Nairobi in February about Ugandan training for Interahamwe rebels: the case was adjourned. It appears that having failed to overturn the election result in Mbarara, the authorities are determined to silence Mrs Byanyima, who is a popular and outspoken opposition politician.

Clampdown on the The arrest of his wife has given credence to Colonel Besigye’s claims that the opposition is tightened authorities are increasingly using repression to stifle dissent. Amnesty International, for example, attacked the arrest of Mrs Byanyima and the earlier harassment of Colonel Besigye himself. Amnesty also expressed shock at threats made by President Museveni at the beginning of September—while addressing a Church of Uganda bishops’ conference—to sack any civil servants who were disloyal to the Movement or who sought to sabotage his plans. Amnesty said that such a move was consistent with the clampdown in recognised freedoms that had taken place since the March election.

A new media bill is According to the Kampala daily, The Monitor, a new draft bill—the Media Bill proposed 2001—is expected to replace existing legislation, such as the Press and Journalists Statute (1995) and the Electronic Media Statute (1996). Describing the bill as harsh, The Monitor claims it provides for a Media Council (MC) with wide powers of censorship including the right to confiscate apparatus. The MC would also be responsible for licensing radio and television operators. Under the 1995 constitution, Uganda enjoys considerable press freedom and this could be threatened by the passage of stricter new legislation.

Government proposes new The government has published proposals for new suppression of terrorism terrorism legislation legislation. The proposals call for the death penalty for terrorist supporters and the granting of “extraordinary powers” to officers engaged in anti-terrorism investigations. These powers would include the right to intercept phone calls, faxes and e-mails. The recent attack on the US has given the government an ideal justification to proceed with the legislation, but opponents fear that it could be manipulated to stifle legitimate dissent.

The government fears new The government feared that Colonel Besigye’s disappearance and the defection rebel activity to Rwanda of two pro-Besigye officers in the UPDF—Colonel Samson Mande and Lieutenant-Colonel Anthony Kyakable—would herald new instability in the border region. The defection brings to about 50 the number of ex-UPDF officers in Rwanda who could form the nucleus of a new rebel organisation. Similar fears have been expressed in Rwanda about the presence of ex- Rwandan officers in Uganda. In response to reports of new rebel recruitment in the south-west, the Ugandan government deployed 5,000 extra troops to the area in September.

Relations with Rwanda Following a face-to-face meeting at Gatuna in early July, Presidents Museveni improve and Kagame held further talks at the Organisation of African Unity’s summit in Lusaka and at the UN’s recent anti-racism conference in Durban. The relationship between the two former allies had hit rock bottom in March when President Museveni labelled Rwanda a hostile country and accused it of backing Colonel Besigye’s election campaign. Relations have since improved

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and both sides have repeated pledges that they will not support the training of each other’s dissidents. Reconciliation is likely to be gradual, although there seems to be a renewed political will to solve the crisis. The withdrawal of Ugandan forces from the DRC has given credibility to its stated peaceful intentions. Peace between the two neighbours is a vital ingredient in ending the wider conflict in the Great Lakes region.

The peace process moves The DRC peace process took an important step forward in Gaborone, ahead in the DRC Botswana, at the end of August, when the government of President Joseph Kabila and its internal opponents agreed to start formal inter-party talks in Addis Ababa on October 15th. The Gaborone summit, a technical meeting with foreign participants, was more successful than expected and gave an important boost to the 1999 Lusaka Accord. Foreign countries, including Uganda, will also be present in Ethiopia. The dialogue, which is set to last for 50 days will aim to reach agreement on the following: interim leadership for the country, new election dates and the formation of a new national army. Many problems remain, however, not least exactly who should be invited. Despite opposition from some parties, President Kabila will remain head of state during the transitional period.

Progress on the ground in Progress on the ground is slower and numerous ceasefire violations have taken the DRC is slow place. Nevertheless, the ceasefire is generally being respected and most forces have withdrawn from frontline positions, as agreed. In mid-September, the political committee for implementing the Lusaka Accords commended both Uganda and Namibia for the withdrawal of their forces. The committee also urged the deployment of further planned UN forces in order to bring about more rapid disarmament and demobilisation. However, the UN has made it clear that disarmament is the responsibility of the countries of the region and that it does not have the logistical capabilities to undertake such a task. It is hoped that progress will be made during the Addis Ababa talks. Participants will no doubt be attracted by the aid on offer.

Fissures emerge within The peace process could be threatened, at least temporarily, by splits between rebel groups the two main Ugandan-backed rebel groups—the Mouvement pour la libération du Congo (MLC) and Rassemblement congolais pour la démocratie- Kisangani (RCD-K)—both of which are important players in the wider drama. Under pressure from Uganda, the two groups merged in January this year to form the Front pour la libération du Congo (FLC). The FLC’s Jean-Pierre Bemba was named as the overall leader and the RCD-K’s Mbusa Nyamwisi as his deputy. However, it has been difficult to reconcile the two groups and Mr Nyamwisi staged an internal coup in early August and declared the union over. Given the possible threat to the wider peace process, President Museveni ordered both Mr Bemba and Mr Nyamwisi to Kampala in mid-August where they were to remain until their differences were resolved. Mr Nyamwisi defied this instruction and slipped back into areas held by the RCD-K. There are undoubtedly some within the UPDF who back Mr Nyamwisi, for reasons including his reputedly sympathetic attitude to gold smuggling. RCD-K wants a separate seat at the Addis Ababa talks and is likely to prove an intractable organisation to deal with.

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Bilateral relations with the As part of the wider peace process in the region, relations between Uganda and DRC improve the DRC have continued to improve. The reconciliation process started in early 2001. The presidents of the two countries held talks in Tanzania in early July, which were followed by meetings in Zambia and South Africa. However, President Kabila warned in July that unless Uganda was prepared to hold talks with its internal dissidents, the DRC could not guarantee that rebel attacks would not be launched from its territory. In a positive step, Uganda closed its consulate in Goma in mid-August, which was one of the DRC’s preconditions for reopening its embassy in Kampala. The new Ugandan foreign minister, James Wapakhabulo, said it was his ambition to restore diplomatic relations with all neighbouring countries by the end of the year.

Diplomatic relations with Uganda and Sudan have resumed diplomatic relations after a break of six years. Sudan are restored Sudan appointed a chargé d’affaires to its embassy in Kampala in August, and a month later Uganda announced that it had reopened its embassy in Khartoum. At the end of September Sudan said that relations were heading to complete normalisation, that a joint security committee would meet regularly in Nairobi and that flights between the two countries would resume shortly. The turnaround in relations has been made possible by the ending of Sudanese backing for the Lord’s Resistance Army (LRA) rebels fighting in northern Uganda and a reciprocal ending to Ugandan support for the Sudan People’s Liberation Army rebels of southern Sudan. The LRA leader, Joseph Kony, said in August that Sudan was now its “number one” enemy and fighting has been reported between the two former allies.

Although the LRA has been hit by defections and changes in Sudanese policy, its activities are still destabilising the north of the country. Talks launched in July between LRA representatives and the local government of Gulu province have made little progress. However, the demobilisation and reintegration team from Uganda’s Amnesty Commission visited Khartoum in early September for talks with ex-LRA rebels. They said that there was widespread interest among the rebels in the Amnesty Law passed in 1999, but considerable ignorance about its provisions. Overall, the Amnesty Commission says that over 5,000 dissidents have appealed for help in returning home, including 2,000 ex-LRA men based in Kenya and 3,000 ex-fighters of the Uganda National Rescue Front II based in southern Sudan. The Commission’s activities are severely hampered by a lack of funds: only NUSh1bn of the NUSh19bn budgeted for the commission have been provided by the government to date.

The number of IDPs rises The problem of internally displaced persons (IDPs) shows little signs of abating in the short term. Observers report that the number of IDPs increased by 120,000 in 2000 and now stands at 525,000. This places Uganda in the world’s top 10 for IDPs. The situation has been made worse this year by persistent raids by Karamajong cattle rustlers in the north-east of the country. The number of IDPs in the Katakwi district alone rose to 88,000 in August—up from 60,000 two months previously—representing about one-third of the district’s population. Furthermore, unlike the IDP camps in the north, which have qualified for UN aid under the World Food Programme (WFP), those in Katakwi have not, because they are seen as more of an internal problem. However, food

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aid to the northern camps is set to end in March 2002, the WFP saying that, according to their timetable, IDPs should have returned home by now. The government faces a considerable challenge in bringing normality to the troubled northern areas, although it claims that its efforts, especially in forging peace with Sudan, are gradually paying off.

Economic policy

Privatisation of UCB is The privatisation of scandal-hit Uganda Commercial Bank (UCB)—which still nearly complete has a 25% share of the market—seems to be approaching a final phase. The Bank of Uganda (the central bank), which is handling the divestiture of UCB, opened bids for a 51% stake to four interested parties on October 1st. The four bidders, who have been allowed a thorough inspection of UCB, are believed to be Standard Chartered, Barclays, Stanbic and the Development Finance Company of Uganda.

However, parliamentary opposition to the sale remains strong, despite attempts by the central bank to appease opponents. At the end of September, a parliamentary committee called for the sale to be halted and for various provisions to be put in place before the sale went ahead. MPs called for the sale to be held under the jurisdiction of Public Enterprise Reform and Divestiture statutes and said that the bulk of shares should be offered to the Ugandan public, rather than a foreign competitor. The MPs announced that UCB had recovered from insolvency and had fulfilled profitability and capital adequacy requirements.

The central bank has stated that the sale will go ahead as planned as neither parliament nor the judiciary has the constitutional authority to override the decision. The remaining 49% of the bank may be offered to the public, in phases, via flotation on the stock exchange. However, Sulaiman Kiggundu, who is currently facing serious corruption charges (see Political scene), still holds the sale certificate for the remaining shares, which could complicate matters. Offers for the bank are not expected to be high, despite the comments by MPs about its financial recovery. Reports in July suggested that potential bidders considered UCB to have little commercial value, and ongoing opposition from parliament has increased uncertainty and risk. A major deterrent to buying UCB—its large branch network—was resolved in August when the central bank accepted a plan to share out the branches between the various bidders.

Stanbic will seek a listing Stanbic (Uganda) plans to join the queue for a listing on the stock exchange with a planned offer of NUSh30bn (US$17m) to the public. In September the director of the Privatisation Unit, Michael Opagi, informed the parliamentary committee for finance that talks were well advanced but that the company was proceeding cautiously to avoid hampering the next planned sell-off, that of Kinyara Sugar Works (KSWL). Mr Opagi would not answer questions about when Barclays and Bank of Baroda would float shares, as they are required to do under an earlier agreement. He said that the biggest challenge facing the

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stock market was encouraging individual participation, as over 80% of listed shares are currently owned by institutions.

Kinyara Sugar Works will According to the Privatisation Unit, an arrangement to list 100% of the state- go on the market owned KSWL is nearly complete. The sell-off has been delayed by debt and tax issues. Under the private management of Booker-Tate, the company has returned to full capacity (50,000 tonnes/year) and plans to double production within the next few years. The Privatisation Unit has encouraged Booker-Tate to buy shares in KSWL via the stock exchange and has also said that the company will be given priority treatment. However, it is not clear whether Booker-Tate feels that this method of acquiring a stake in KSWL would be in its best interests.

Power privatisation is The sell-off of the distribution and generation components of the now- imminent dismembered Uganda Electricity Board (UEB) is also approaching its end stage, six months later than planned. Of the eight bids received for pre-qualification for the Uganda Electricity Generation Company (UEGC) and the Uganda Electricity Distribution Company (UEDC), six have been invited to continue. AES and Marubeni were struck off: AES because of its pending construction of the Bajugali Falls hydroelectric power station and the associated risk of a creating a monopoly position; Marubeni on technical grounds. Favourites in the auction are South Africa’s Eskom and Spain’s Union Fenosa. Eskom is particularly well placed given the turnaround effected at the company by the managing director, Paul Mare, who was recruited from the South African company. Indications suggest that even if one bidder makes superior offers for both UEGC and UEDC, no single firm will be given control of both companies, for the sake of competition. Other bidders include Electricity Supply Board (Ireland), Cinergy (US), Tata (India) and Commonwealth Development Corporation Capital Partners. Final awards are now due on December 10th, some 18 days later than stated in a timetable published in July. The legal and financial close had been scheduled for February 1st 2002, but it is now likely to be delayed.

The more difficult challenge awaits the winner of the UEDC contract, given the firm’s role of connecting end users and securing payment from them. Furthermore, the antiquated distribution system needs substantial investment of at least US$62m by 2005. However, the distribution arm also offers the greatest potential for growth: those willing to pay for electricity are said to be four times greater than the number of current subscribers (160,000). The rural electrification programme, officially launched with donor funding in August, will add to this number. A World Bank specialist on private-sector development has described the UEB sale as the most impressive sell-off in 36 countries. The successful completion of the sell-off will give a significant boost to the credibility of the privatisation process in Uganda, especially given the fiasco over UCB. However, the row over tariff rises (see Infrastructure and services) may prove to be a deterrent to investors.

The replacement value of UEDC assets is set at US$225.4m, compared with a much higher total for UEGC—US$534m. Figures measured by operating capacity value (OCV) are much lower at US$76m for UEDC and US$307m for

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UEGC. The third arm of UEB, the Uganda Electricity Transmission Company, will remain in state hands as will the assets of UEGC and UEDC which revert to national ownership at the end of the 20-year concession.

Economic reform is A mid-year report by Transparency International (TI) giving updated figures for threatened by corruption its Corruption Perceptions Index, ranked Uganda as the third most corrupt country in the world, after Bangladesh and Nigeria. Uganda’s rating slipped to 1.9 (out of a maximum of 10) compared with its highest rating since 1998 of 2.7. This decline is potentially embarrassing for donors and challenges government claims that it is making serious inroads into corruption. The authorities predictably attacked the TI report, questioning both its methodology and the size of its samples, but diplomats in Uganda said that the report could affect investor confidence.

Revenue collection is still Following a review of the integrity of staff, TI concluded that revenue poor collection in Uganda was being undermined by endemic corruption. Furthermore, the situation was not being helped by President Museveni’s constant criticism of the Uganda Revenue Authority (URA). The report praised the URA for succeeding in its primary aim of raising revenue as a percentage of GDP from 10% to almost 11%. It also praised the authority for expanding the tax base, introducing VAT and setting up the Independent Tax Appeals Tribunal. However, losses in the customs department are still estimated to be 20-30% of the revenue collected. The fight against corruption is not being helped by MPs as 50% of them refused to declare their assets in the last parliament. TI said that corruption remains a serious impediment to growth.

Corruption Perceptions Index 2000 2001 Scorea Scorea % change Rankingb Botswana 6.0 6.0 0.0 26 Namibia 5.4 5.4 0.0 30 South Africa 5.0 4.8 –4.0 38 Mauritius 4.7 4.5 –4.3 40 Ghana 3.5 3.4 –2.9 59 Malawi 4.1 3.2 –22.0 61 Senegal 3.5 2.9 –17.1 65 Zimbabwe 3.0 2.9 –3.3 65 Zambia 3.4 2.6 –23.5 75 Côte d'Ivoire 2.7 2.4 –11.1 77 Tanzania 2.5 2.2 –12.0 82 Kenya 2.1 2.0 –4.8 84 Cameroon 2.0 2.0 0.0 84 Uganda 2.3 1.9 –17.4 88 Nigeria 1.2 1.0 –16.7 90

a 1=most corrupt and 10=most transparent. b In 2001; out of 91 countries. Source: Transparency International.

Revenue collection is to be The government announced in August that revenue collection would no liberalised longer be the monopoly of UCB—which charges the state NUSh2,000 per transaction—and that six commercial banks can also collect payments. The banks mentioned are Citibank, Stanbic, Standard Chartered, Centenary Rural Development Bank, Crane Bank and Orient Bank. The commercial banks will not be paid for the service but will be allowed to make use of the money collected for a month before passing it on to the authorities. The new system, which will reduce delays for taxpayers, is expected to be operational soon.

VAT law is amended In a further attempt to boost revenue, the finance minister, Gerald Ssendaula, announced amendments to the VAT law in early August. All professionals— such as journalists, engineers and lawyers—must register for VAT immediately regardless of their earnings. Penalties for VAT violations were also increased and VAT evaders will have goods impounded at their own expense. The URA is also considering registering firms by proprietor, rather than company name, as tax evaders are prone to change the name of their organisations. The imposition of VAT on professionals may meet some resistance: the imposition of VAT on businesses in 1996 led to a two-week national strike that was only settled after the president intervened.

Customs laws are changed The last step before Ugandan exporters can start benefiting from duty-free to help exports to the US access to the US for selected commodities under the Africa Growth and Opportunity Act (AGOA) is almost complete. Parliament approved the amended Customs Management Act in September and it only remains for the president to give his assent, which is expected soon. Changes in the Customs Management Act were needed to make it compatible with certain aspects of AGOA. This has delayed implementation of the scheme.

AGOA may create jobs According to the Uganda Investment Authority (UIA), implementation of AGOA could lead to the creation of 100,000 jobs within a year owing to increased foreign direct investment. However, the UIA believes that the maximum benefits of AGOA will not be realised until the Land Act is amended to allow foreign ownership of real estate. Although this is a contentious issue it could lead to increased investment and employment opportunities, especially in cotton production. This, in turn, would provide a boost to joint-venture textile enterprises, which are the main potential beneficiaries of AGOA.

The domestic economy

Economic trends

The central bank The Uganda shilling depreciated slightly in August, slipping from intervenes to help shilling NUSh1,726:US$1 in July to NUSh1,751:US$1 according to the Bank of Uganda (the central bank). Year on year, the shilling was down 4.4% in August, compared with the 11% decline in May. The shilling appreciated against the US dollar in June and July, reflecting the weakness of the dollar since mid- year—a trend that will not have been helped by the recent terrorist attacks.

According to Oanda.com, the average monthly interbank rate improved from NUSh1,833:US$1 in May to NUSh1,759:US$1 in July, before slipping to NUSh1,788:US$1 in August. September’s monthly average was slightly stronger at NUSh1,773:US$1.

The central bank felt compelled to intervene on the foreign-exchange market in August to arrest the weakness of the shilling. Sales of dollars almost doubled in August to US$19.4m, from US$10m in July, to combat the decline in confidence associated with weak commodity prices, especially for coffee. This took total dollar sales in the January-August period to US$127m. Total foreign exchange reserves remain healthy and rose to around US$800m in August according to a finance ministry spokesman. The latest International Financial Statistics data put foreign reserves at US$777m in May, and the Economist Intelligence Unit forecasts that they will be around US$785m by end-2001.

Monthly inflation subsides The annual year-on-year headline rate of inflation has fallen sharply in recent months in line with the drop in food prices. According to the central bank, the rate fell from 6.4% in June—the highest since December 1999—to 5.3% in July, 2.4% in August and minus 0.3% in September. The underlying inflation rate year on year, which excludes staple foods, is also on a downward trend, falling from 7.7% in July to 6% in September. Price increases for drugs, charcoal and other services have been more than offset by reductions in the prices of new clothes, alcohol and medical treatment. The relatively high underlying rate of inflation reflects recent increases in electricity and mobile phone tariffs. However, both of these have been amended downwards, and the underlying inflation rate will continue to fall. The target headline rate for the 2001/02 financial year is 5%, which is in line with the Economist Intelligence Unit’s estimate.

Banks say the worst of the In mid-August the Ugandan Bankers’ Association (UBA) noted the big bad loan problem is over improvement in non-performing asset ratios over the past two years. Central bank figures show that the proportion of bad loans fell to around 8.2% in June 2001, compared with 35% five years ago. Despite improved earnings for Uganda’s 17 commercial banks, they remain cautious about expanding into rural areas, a fact confirmed by the UBA. Although the introduction of banking

services to farming communities would give a significant boost to the economy, the UBA rightly says that banks will want to remain close to where business activity takes place: at the moment this is predominantly (80%) in the Kampala region.

Banking income remains dominated by earnings from risk-free Treasury-bill holdings, although the UBA says that this is not the fault of the banks who would be very interested in potentially higher-return private lending were it not for the dearth of good propositions. The UBA said that planned legislation making it possible for banks to share loan information would help promote private-sector lending.

Lending to the private Commercial bank lending to the private sector remains depressed, according to sector remains subdued the central bank. It rose by 6.8% in the year to August, down from 9.3% in the year to July. This compares with the central bank’s 16% growth target. Earlier the UBA had said that private lending fell from NUSh635bn (US$359m) in February to NUSh618bn in April. A Treasury official denied that the downturn would affect overall GDP growth prospects although it is clear that government paper remains the preferred debt instrument: the T-bill market was oversubscribed eightfold in August.

Mandate may be renewed The Non-Performing Assets Recovery Trust (NPART) has recovered NUSh26.6bn for debt recovery trust (US$15m) of the NUSh65bn in debts to the Uganda Development Bank (UDB) that it was mandated to collect. According to an NPART official in early July, the organisation will be unable to recover the remaining NUSh38.4bn by the time its mandate expires at the end of September 2001. The authorities may decide to extend NPART’s mandate although the UDB is slated for imminent privatisation. The amount collected by NPART exceeds the minimum target set by the African Development Bank as a condition for the further funding of the UDB.

Agriculture

Uganda’s largest coffee Germany’s Neumann Kaffee Gruppe is to invest US$7.5m over five years in a plantation is opened 2,500 ha coffee plantation at Kaweri. In a country where coffee is mostly grown by smallholders, the plantation will be the largest in Uganda. Using high-yielding clonal robustas, the contribution to national output is forecast to reach 10,000 tonnes/year (or 166,000 60-kg bags per year)—equivalent to 5.5% of current coffee production. While this venture alone will not make significant inroads into the extra 5m bags per year that Uganda aims to produce within the next five years it is symbolically important, given the policy aim of moving to larger-scale production units. The first tree was planted on the estate by President Museveni in August. This coincided with a call to Neumann Kaffee Gruppe—which plans to process the beans in Uganda before direct shipment to customers in Germany—to contribute to the development of local grinding and roasting activities. The government also indicated that large plots of land could be made available to similar investors. However, Neumann Kaffe Gruppe has shown little inclination to contribute to

local development and reports say that up to 1,500 people have been evicted from the estate, leading to severe local problems.

The replanting programme The replanting programme—a vital component in the plan to more than continues double output to 8m bags per year—is proceeding. Between 17m-18m new trees will be planted in 2001 which will bring the total number of trees planted since 1993/94 to around 50m. Budget allocations for the purpose have been cut from NUSh3.5bn in 2000/01 to NUSh1.5bn in 2001/02 in response to problems in the global market. The objective is to replace 290m old and diseased trees by 2020.

Coffee production 1997 1998 1999 2000 2001 Tonnes 219,624 205,056 236,245 205,306 180,000a

a Official estimate. Source: UN FAO; Uganda Coffee Development Authority.

Farmers complain about The Kampala District Farmers’ Association told parliament in August that high taxes taxes of up to 60% on agricultural implements were preventing the mechanisation of farming. It claimed that local farmers could become more globally competitive given the right business environment and incentives, including availability of loans. In a move that will benefit farmers, the International Fund for Agricultural Development has advanced a US$107.9m loan to Uganda, on favourable terms, to support a seven-year agricultural advisory services programme. Furthermore, reports in early August said that the government had provided NUSh228bn (US$129m) to put its Plan for the Modernisation of Agriculture into effect.

Manufacturing

Manufacturing gets a small Korika Uganda—a company owned by a Korean investor resident in Kampala— boost started assembling high-voltage electric transformers at its Kampala factory in July. One unit has already been tested and approved by the Uganda Electricity Distribution Company, which described it as an important development for local manufacturing capabilities. At a reported NUSh5m (US$2,800) per unit, the transformer is 20% cheaper than imported alternatives. Korika has invested US$300,000 in production capacity and aims to treble this within five years. Most of the raw materials are imported from South Korea.

Mining and minerals

Prospects for oil discovery Drilling for oil will begin in March 2002 near Lake Albert following the link up improve in August between Heritage Oil and Gas (Canada) and Energy Africa (South Africa). Heritage, which holds the concession on Block 3, had hoped to start drilling in February but the proposed joint venture with a subsidiary of China’s Sinopec fell through. Energy Africa has now taken 50% of the concession and will provide the drilling equipment, while Heritage will retain 50% and the

operating rights. The new joint venture, known as Eagle Drill, will undertake seismic tests between October and January to identify the most promising sites for drilling. A four-year study of the Semiliki-Albertine Basin by Heritage, which has already spent US$4m on the development, suggests thick sediments and significant oil deposits. One potential problem is that the oilfield may lie under a lake, which would complicate extraction.

Hardman Resources (Australia) is also interested in returning to the area. The company pulled out of Block 2 in 2000 because of commitments in Mauritania, but oil finds there have improved the company’s financial position. Talks are at an advanced stage, according to the commissioner for petroleum exploration and production, and a licence may be issued by the end of 2001. Other companies are also reported to be interested in the five blocks in western Uganda, including TotalFinaElf (France) and RSM Production Corporation (US). Any significant finds would give a useful boost to the economy since Uganda’s oil imports account for 10% of total imports.

Prospects for oil pipeline Further progress has been made on the proposed oil pipeline from Eldoret, in improve Kenya, to Kampala, which would cut the cost of oil imports and also reduce damage to roads caused by oil tankers. Officials from Kenya and Uganda will soon select a consultant to undertake a final feasibility study for the 320-km pipeline. The study will update the financial and management aspects of an earlier feasibility study funded by the European Investment Bank (EIB) in 1999. A core private investor will be sought for the scheme which will cost US$80m and the EIB has indicated that it may be interested. The feasibility study is due to be completed in early 2002 and work is scheduled to start in mid-2002. Final completion is slated for December 2004.

Vermiculite venture gets Commercial mining of vermiculite—used in horticulture and insulation—has under way been initiated by Canmin Resources (Canada) at the Namekara mine in south- west Mbale district. Given the high quality of the deposits, the absence of asbestos and the relatively low investment cost (US$1m), the venture is set to become profitable within a year. Output is expected to rise to 40-50,000 tonnes/year, the bulk of which will be exported. Canmin has secured a 21-year exclusive licence to exploit the deposit.

Infrastructure and services

New airtime tax hits The 10% excise duty imposed on mobile phone airtime in the June budget, telecom investment which was later reduced to 7% following intense lobbying by service providers and the Uganda Communications Commission (the independent regulator), is having a negative impact on investment in the sector. All three providers (MTN Uganda, Celtel Uganda and Uganda Telecel) have scaled down their plans as demand for airtime has fallen.

The largest player, MTN Uganda (50% owned by South Africa’s MTN), with around 75% of the market and 150,000-200,000 subscribers, has put investment plans on hold following a 13% drop in revenue in July until the longer-term picture becomes clearer. The company has already invested

US$100m in Uganda but scheduled investment of US$22m has been suspended. MTN says that while the drop in revenue may be temporary in Kampala, it could be more long-lasting in rural areas which account for 60% of the company’s business. Furthermore, MTN says that it may have to close some of its more remote facilities which are costly to maintain. The company also complains that the government is in effect hampering the spread of advanced technology given that traditional, fixed phone lines are not affected. In early August Celtel shareholders withheld approval for investment of US$10m as the tax had created uncertainty. The newest entrant in the mobile market, Uganda Telecel, says that only 90% of its investment plans may now be fulfilled.

Power tariff dispute At the end of August the president finally amended the sharp increases in rumbles on power tariffs announced at the end of May. This followed sustained pressure from the public, parliament and businesses included in the Uganda Manufacturers’ Association. A peaceful protest took place in late August. Mr Museveni finally conceded that the burden on the consumer was too high. The rise had been consistently defended by the new power regulator, the Electricity Regulatory Authority (ERA), and the energy minister, Syda Bumba, as vital for securing investor confidence in the ongoing privatisation of the components of the Uganda Electricity Board (UEB).

The tariff increases were cut from 102% to 88% for domestic consumers and from over 60% to 39% for small and medium-sized businesses. The increase for large users remains unchanged at 7%. This may still not be enough to satisfy parliament, and a draft report by MPs in September called for no increase at all given UEB’s healthy finances. The failure of the government to push through the increases as planned will not please potential investors in the Uganda Electricity Distribution Company (UEDC). Current arrangements allow for a quarterly review of tariffs by ERA, mainly to account for currency fluctuations, but if ERA is shown to have no real authority, investors will doubt the effectiveness of these reviews. Provided the recent cuts satisfy parliament and consumers, the issue will probably subside.

The president also secured debt relief for UEB from donors and creditors. The UK and Danish development agencies agreed a NUSh10bn (US$56m) debt write-off and a similar amount may be written off by the World Bank and African Development Bank. This represents about half of the interest due to be paid by UEB this year.

Prospects for power Talks between Kenya and Uganda over a new power supply contract are exports to Kenya improve making progress. The current arrangement calls for Uganda to supply 30 mw per year but deliveries are regularly curtailed when local demand peaks. Kenya has called for agreed deliveries to be contractually binding. In August bilateral talks reached an advanced stage for the supply of 80 mw to Kenya in the short term and 160 mw by 2004. Uganda also aims to supply 140 mw to Tanzania and Rwanda, given the successful conclusion of proposed power generation projects. The agreement of a new contract with Kenya would allow for the planned development by Norpak (Norway) of a 200-mw facility at Karuma.

Foreign trade and payments

Coffee exports continue to Despite higher than expected export volumes in July and August, coffee slide earnings have declined as the slump in worldwide prices shows no signs of abating. According to the Uganda Coffee Development Authority (UCDA), the realised export price fell from 63 US cents/kg in May to 45 US cents/kg in August while farm-gate prices dropped to NUSh200 (12 US cents), the lowest since the 1980s. Farmers have reacted to bleak price prospects and the need to make room for the new harvest by releasing stocks. Export volumes consequently surged in August to 354,000 60-kg bags, an increase of 61% year on year. However, this only increased monthly earnings by 1.8% year on year. The UCDA has revised its estimates of this year’s (October-September) exports to over 3m 60-kg bags, compared with earlier estimates of 2.9m 60-kg bags. Despite this satisfactory performance, the government expects export earnings in the year to end-September to be just US$105m—44% down from last season’s US$187m.

Attempts are made to Uganda hopes to increase coffee earnings in the medium term by increasing increase coffee receipts gross sales and boosting unit values. Various tactics are being employed to boost unit values including: exploiting speciality markets; attempting to penetrate the Chinese market; and increasing the proportion of higher-value Arabica coffee in total output from 10% to 15% by 2005. Marketing initiatives have had mixed results. Despite China’s decision in 2000 to allow Ugandan investors to open coffee bars, progress has been stifled by stringent duties of between 37% and 52% on coffee imported into China. Uganda is trying to gain duty-free access to the market although this is unlikely to take place on a bilateral basis. Furthermore, although sales of organic coffee were buoyant between 1998/99 and 1999/2000—rising from 667lb to 3,160lb—exports of gourmet coffee collapsed during that period, leading to an overall decline in speciality sales. In a more recent move in September 2001, representatives from six East African countries announced the formation of the East African Fine Coffee Association. Based in Kampala, this private-sector organisation will seek to promote the region’s coffee and undertake research.

Tea exports perform well Sales of tea, mainly through the weekly auction in Mombasa, rose by 12.2% year on year in the first half of 2001 to 14.8m kg. According to the agriculture minister, exports of tea were valued at US$30m in the 2000/01 financial year (July-June). Production estimates for 2001 range from 26m kg to 30m kg, compared with 29.3m kg in 2000.

Cotton exports suffer from Cotton exports have been more subdued, totalling 88,000 bales in the first 11 low prices and production months of the marketing year (which runs to the end of September), compared with a target of 90,000 bales. Production in 2000/01 totalled 100,000 bales, down from 116,000 in 1999/2000, and export earnings will slip from US$29m to US$27m. This reflects both lower output and the weakness of world prices. According to the Cotton Development Organisation, production in 2001/02, for which planting ended in July, is set to rise to 120,000 bales.

Fish exports improve Since the lifting of the EU ban on fish exports, Uganda has regained its vital category-one status, which allows it to sell its fish on the open EU market, rather than on a bilateral basis. The benefits of such a change are clear: of total fish exports in June of 1,693 tonnes (worth US$4.58m), 1,089 tonnes (65%) were shipped to EU markets. Fish export earnings in June rose by US$300,000 compared with fish export earnings in May because of higher sales of fresh and chilled products.

The experiment in chilli Chilli production collapsed this year to 15 tonnes from 108 tonnes in 2000 exports fails following the withdrawal of financial and technical support worth around US$400,000 by Investment in Developing Export Agriculture (IDEA; which is fully funded by the US Agency for International Development). IDEA said that poor farming skills had caused its withdrawal. Whereas vanilla exports topped US$4m this season alone, chilli exports plunged to US$500,000, despite prices of up to US$2,800/tonne on export markets. Some farmers felt cheated after exporters rejected their produce.

Loans approved for In early July the World Bank approved two loans to Uganda totalling transport and power US$126.5m. The first, for US$64.5m, covers the second stage of the Uganda Road Programme and involves upgrading two high-capacity national roads, studies into low-volume roads and the preparation of the national transport strategy. The second loan, for US$62m, is for the power sector. Both loans are from the International Development Association (IDA) and have a lifespan of 40 years with a 10-year grace period. This brings total World Bank lending to Uganda’s power sector to US$470m. The latest loan is for the construction of the Kiira power station—also known as the Owen Falls extension—a vital component in Uganda’s electricity expansion strategy. Other contributors to the US$89m project include the Nordic Development Fund (US$11.3m) and the Norwegian Agency for Development Co-operation (US$6.7m). Funds for the project will be released on October 31st 2001. The World Bank has identified both road transport and electricity supply as vital components in the development process in Uganda. Uganda is the World Bank’s second largest client in Sub-Saharan Africa: a report in August indicated that lending to Uganda in the 2000/01 financial year totalled US$358m.

Budget support helps fight The IDA may commit funds totalling US$1.1bn to Uganda between 2001 and poverty 2003, 40% of which will be used to support the budget. Financial requirements under the Poverty Eradication Action Plan through its medium-term expenditure framework are estimated at US$7.3bn. The government is expected to raise US$5bn of this, with the remainder coming from external sources, including debt relief. The United Nations Development Programme is also going to spend US$20m on a new poverty alleviation programme running from 2001 to 2006.