Uganda Uganda at a Glance: 2004-05

Country Report

Uganda Uganda at a glance: 2004-05

OVERVIEW The political environment in Uganda is on the verge of change as the country prepares for a return to multiparty politics. Despite disagreement within the cabinet, the president, Yoweri Museveni, is expected to secure the constitutional change necessary for him to stand for a third term in office. The opposition parties are beginning to get their act together, and are expected to pose a stiff challenge at the presidential and legislative elections scheduled for 2006. Nevertheless, Mr Museveni and his reconstituted Movement party are likely to retain their strong grip on power and win the elections. The peace agreement in Sudan and technical assistance from the US are expected to help the Uganda People!s Defence Forces (UPDF, the Ugandan army) in its struggle against the rebel group known as the Lord!s Resistance Army (LRA). Economic reforms will continue to shape policy. Average inflation is forecast to fall to 3.5% in 2004, with strong agricultural production keeping food prices down, before rising slightly in 2005, to 4.5%, as food prices creep up and the price of imports increases as the shilling depreciates. The Economist Intelligence Unit forecasts a deterioration in the current-account deficit, to 8.3% 0f GDP in 2004 and 9.6% of GDP in 2005, as a more robust economy and strong exchange rate lift import demand.

Key changes from last month Political outlook • The have been no major changes to our political outlook. Economic policy outlook • The finance minister, Gerald Ssendaula, presented the budget for fiscal year 2004/05 (July-June) on June 10th. Total government expenditure is expected to rise by 7.8%, whilst total domestic revenue is forecast to increase by 12%. The projected increase in revenue is mainly due to higher tax revenue. A large fiscal deficit, projected at 11% of GDP, excluding grants, will be financed mainly by donor support. Grants are forecast to account for about 30% of total fiscal revenue. Economic forecast • Real GDP growth for 2004 and 2005 is forecast at 5.5% and 6% respectively, up from our previous forecasts of 5% and 5.6%, mainly because we expect stronger agricultural performance to drive increases in private consumption and exports. July 2004

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Contents

Uganda

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2004-05 7 Political outlook 8 Economic policy outlook 10 Economic forecast

13 The political scene

19 Economic policy

24 The domestic economy 24 Economic trends 27 Agriculture 27 Energy

29 Foreign trade and payments

List of tables

10 International assumptions summary 12 Forecast summary 21 Government finances, 2004/05 25 Government finances, 2003/04 26 Monetary indicators 30 External trade account

List of figures

12 Gross domestic product 12 Consumer price inflation 26 Consumer prices

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Uganda 3

Uganda July 2004 Summary Outlook for 2004-05 The president, Yoweri Museveni, and his Movement-led government are expected to remain in office throughout the forecast period. Although the opposition parties appear to have realised that they need to work hard to eliminate their internal problems, it is likely that Mr Museveni, who is expected to be allowed to stand for a third term, and his reconstituted Movement party will win the presidential and legislative elections expected in 2006. Real GDP growth rates of 9-10% per year are required to make a strong impact on poverty, and although the government will continue to pursue many of the reforms advocated by donors, it is unlikely to execute the bolder reforms needed to raise the growth rate to such a level. Growth will, therefore, remain in the range of 5-6% per year over the forecast period, supported by strong export performance and continued growth in manufacturing and construction. The political scene The contentious issue of altering the constitution to remove the two-term limit on the presidency, thus allowing Mr Museveni to stand again, is causing much debate in Uganda. It has yet to be decided how a "third term" can be implemented without causing a political furore, but a referendum would seem to be the president!s preferred option, as parliamentary backing for him is far from certain. The recent signing of a power-sharing agreement in Sudan was welcomed by Uganda. Senior officials hope that the establishment of one authority in southern Sudan, including the area bordering Uganda, will quickly translate into success against the rebel group, the Lord!s Resistance Army. Economic policy The finance minister, Gerald Ssendaula, presented the budget for fiscal year 2004/05 (July-June) on June 10th. A large fiscal deficit, projected at 11% of GDP excluding grants, will be funded mainly through donor support. Donors rejected the draft proposals for the budget, stating that key expenditure elements, notably those for defence and public administration, were too high, and, once again, the Ugandan government was forced to make cuts. The domestic economy Uganda has continued to benefit from a strong economy, with real GDP growth for financial year 2003/04 estimated at 6.0%, up from 5.2% in 2002/03. Although this rate is still below the government!s target of 7.0%, it compares favourably with the overall growth rate for Sub-Saharan Africa of 2.7%. Stable food prices and exchange rates have continued to support low inflation. Foreign trade and payments Export figures for fiscal year 2003/04 appear extremely impressive. Total export earnings for goods and services increased by 20% to US$928m, from US$774m in 2002/03, owing to strong growth of non-coffee exports. Editors: Philip Walker (editor); Pratibha Thaker (consulting editor) Editorial closing date: June 25th 2004 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report July 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004 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 are elected by universal suffrage; the remainder are 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 Anticipating a return to a party system during 2004/05, the ruling authority, the Movement, has registered as a political party under its original name, the National Resistance Movement. Of the traditional parties, the Uganda People’s Congress (UPC), the Democratic Party (DP) and the Conservative Party (CP) have also registered, together with a number of new parties whose support is likely to be very small. Reform Agenda is not yet a party, but could be significant if it decides to register

President & commander-in-chief Yowe ri Museveni Vice-president Gilbert Bukenya Prime minister Apollo Nsibambi First deputy prime minister & minister of internal affairs Brigadier Moses Ali Second deputy prime minister & minister of disaster preparedness Vacant after death of James Wapa khabulo Third deputy prime minister & mi n i s ter o f fo reign affai rs Henry Kajura

Key ministers Agriculture, animal industry & fisheries Kisamba Mugerwa Attorney-general Francis Ayume Defence Amama Mbabazi Education & sports Makubuya Kidhu Energy & minerals development Syda Bbumba Finance, planning & economic development Gerald Ssendaula Gender, labour & social development Zoe Bakoko-Bakoru Health Jim Katugugu Muhwezi Internal affairs Ruhakana Rugunda Justice & constitutional affairs Janat B Mukwaya Local government Tarsis Kabwegyere Trade, tourism & industry Edward Rugumayo Water, lands & environment Kahinda Otafiire Without portfolio Crispus Kiyonga Works, housing & communications John Nasasira Presidency Kirunda Kivejinja Prime minister’s office George Mondo Kagonyera

Central bank governor Emmanuel Tumusiime-Mutebile

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Economic structure

Annual indicators 1999a 2000a 2001a 2002a 2003b GDP at market prices (NUSh bn) 8.1 8.9 9.9 10.5 11.7 GDP (US$ bn) 5.6 5.4 5.7 5.8 6.0 Real GDP growth (%) 7.9 5.5 5.1 6.7 4.4 Consumer price inflation (av; %) 6.4 2.8 2.0 -0.3 7.8a Population (m) 23.8 24.5 25.2 25.9 26.5 Exports of goods fob (US$ m) 483.5 449.9 451.6 480.7 513.2 Imports of goods fob (US$ m) 989.1 949.7 1,026.6 1,113.5 1,183.2 Current-account balance (US$ m) -710.7 -825.4 -802.4 -421.4 -439.2 Foreign-exchange reserves excl gold (US$ m) 763.1 808.0 983.4 934.0 1,080.3a Total external debt (US$ bn) 3.5 3.5 3.7 4.1 4.0 Debt-service ratio, paid (%) 13.8 7.9 4.2 7.1 11.6 Exchange rate (av) NUSh:US$ 1,454.8 1,644.5 1,755.7 1,797.6 1,963.7a a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002 % of total Components of gross domestic product 2002 % of total Agriculture 40.5 Private consumption 76.3 Food crops 29.0 Government consumption 13.1 Export crops 6.9 Gross domestic investment 16.1 Industry 18.8 Exports of goods & services 14.1 Services 40.7 Imports of goods & services -20.0

Principal exports fob 2002a US$ m Principal imports cif 2002a US$ m Coffee 97 Petroleum 174 Fish 88 Road vehicles 105 Tea 31 Cereals & cereal preparations 73 Cotton 10 Iron & steel 55 Electrical machinery 40

Main destinations of exports 2002b % of total Main origins of imports 2002b % of total Belgium 16.3 Kenya 44.8 Netherlands 13.8 South Africa 6.7 Germany 7.2 India 5.6 Spain 5.6 UK 5.4 Hong Kong 4.7 France 3.3 a Official estimates. b Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators 2002 2003 2004 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Prices Consumer prices, Kampala (2000=100) 100.5 100.4 105.2 107.1 110.1 109.8 111.6 n/a Consumer prices, Kampala (% change, year on year) -2.4 -0.9 3.7 6.3 9.6 9.4 6.1 n/a Financial indicators Exchange rate NUSh:US$ (av) 1,795.7 1,809.3 1,834.8 1,898.6 1,990.9 1,995.9 1,969.5 1,910.0 Exchange rate NUSh:US$ (end-period) 1,797.2 1,818.8 1,852.6 1,971.5 2,002.8 1,984.7 1,935.3 1,925.7 Bank rate (end-period; %) 8.33 8.08 13.08 16.83 19.58 21.58 25.62 15.81 Deposit rate (av; %) 3.71 4.64 7.48 9.32 10.27 9.33 10.48 n/a Lending rate (av; %) 18.47 19.78 17.79 17.73 18.43 20.12 19.48 n/a Treasury bill rate (av; %) 4.66 6.18 8.82 14.10 16.64 17.24 19.49 14.09 M1 (end-period; NUSh bn) 1,017.3 1,038.1 1,099.4 1,159.9 1,182.4 1,211.4 1,234.9 n/a M1 (% change, year on year) 23.3 23.7 21.0 18.2 16.2 16.7 12.3 n/a M2 (end-period; NUSh bn) 1,924.3 1,948.1 2,060.6 2,204.2 2,395.5 2,391.2 2,428.7 n/a M2 (% change, year on year) 22.0 22.0 25.0 25.5 24.5 22.7 17.9 n/a Sectoral trends (annual totals; ‘000 tonnes) Coffee productiona ( 189.0 ) ( 186.0 ) n/a Cotton, lint production ( 22.2 ) ( 22.2 ) n/a Seed cotton productiona ( 67.0 ) ( 67.0 ) n/a Foreign trade (NUSh bn) Exports fob 189.27 198.07 239.23 313.77 292.99 243.84 251.80 305.59 Imports cifb -497.70 -507.70 -500.52 -566.02 -565.55 -604.11 -720.95 -652.82 Trade balance -308.43 -309.63 -261.29 -252.25 -272.57 -360.26 -469.15 -347.23 Foreign reserves (US$ m) Reserves excl gold (end-period) 867.3 881.8 934.0 825.9 965.3 983.6 1,080.3 n/a a Preliminary figures for 2003. b Cash basis. Sources: UN Food and Agriculture Organisation; IMF, International Financial Statistics.

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Outlook for 2004-05

Political outlook

Domestic politics The president, Yoweri Museveni, and his Movement-led government are expected to remain in office throughout the Economist Intelligence Unit!s forecast period. As head of state, Mr Museveni retains the power to appoint and dismiss military officers and overseas military operatives. Nonetheless, the political environment in Uganda is on the verge of change: the Movement’s decision-making body, the National Executive Committee (NEC), and the president have, under pressure from donors, clearly stated their support for a return to multiparty politics. The government!s original plan was to put the question of a shift to multiparty politics to a national referendum in late 2004 (or early 2005) and for presidential and legislative elections to take place in 2006. It is clear that the opposition parties see this as an attempt to delay the implementation of their full freedom of operation, while donors have indicated their concern regarding the financial costs of a referendum. Some form of compromise is expected between the government and the opposition on the referendum issue, and although the government will drag its heels in allowing the opposition total freedom of operation, opposition party activity is expected to increase over the forecast period. An even more contentious issue is the altering of the constitution to repeal the two-term limit on the presidency, thus allowing Mr Museveni to stand for a third term at the next election. The president!s desire to remain in power for a third term is already dividing the National Resistance Movement (NRM). This matter will almost certainly go to a national referendum, not least because Mr Museveni can expect more support from the large rural electorate than he can from his own party"the president has not hesitated to remove senior members of both the cabinet and the army who did not seem to be fully behind his attempts to secure another term"and it is expected that he will be allowed to stand in the next presidential election. Although the opposition parties appear to have realised that they need to work hard to eliminate their internal problems, it is likely that, if elections are held in 2006, Mr Museveni and his reconstituted Movement party will win. However, some of the opposition parties are expected to make large gains, provided the elections are "free and fair". Also, Mr Museveni!s political manoeuvring as he seeks approval for a third term has created a sizeable, and potentially influential, anti-Museveni elite, which could organise itself into a coherent opposition beyond the forecast period. All in all, Uganda!s political situation will warrant close monitoring.

Security watch Uganda will be hoping that the peace agreement reached on May 26th between the Sudanese government and the Sudan People!s Liberation Army (SPLA) will encourage Sudan to take more aggressive action against the rebel group, the Lord!s Resistance Army (LRA), which is active in the north of Uganda and has bases in Southern Sudan. It is expected that the US will supply increased technical assistance for the Uganda People!s Defence Forces (UPDF, the

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Ugandan army), and that the LRA!s morale will probably decline, at least among the rank and file, so the chances of forcing an end to the rebellion are improving. Many Ugandans are also hoping that the capture or assassination of the LRA!s leader, Joesph Kony, like the assassination of Jonas Savimbi, the rebel leader in Angola, will lead to an end to the fighting. However, Mr Kony and the LRA have apparently been near defeat before, only to fight on with renewed vigour. Donors will continue to push for a diplomatic solution, although this appears to be unrealistic given the leadership and brutality of the LRA.

International relations The risk of regional conflict involving Uganda has declined in recent months, but areas of potential strife remain. Now that the majority of Ugandan troops have withdrawn from the Democratic Republic of Congo (DRC), relations between Uganda and Rwanda are set to improve. Nevertheless, the lucrative business of illicit resource exploitation in the region will ensure that both Rwanda and Uganda remain active in the DRC, and tensions between the countries may flare up from time to time. This has become more likely recently, as the Congolese peace accord"which has always been fragile"may be beginning to unravel in the turbulent east of the country. If it holds, the recent peace agreement in Sudan is likely to be of great benefit to Uganda. Relations between Uganda and Sudan have historically been strained because of the tacit support given by each government to its neighbour’s main armed opponent, but this should now end. However, given its delicate nature, the peace agreement could easily collapse at some point in the forecast period, making Uganda’s anti-insurgency efforts all the more difficult. Uganda will remain focused on strengthening ties with its major trading partners and with donors. Uganda has adhered relatively well to donor-sponsored schemes and is expected to continue to do so. Because of this, donor funding, which the country depends on, is likely to remain fairly stable over the forecast period.

Economic policy outlook

Policy trends Uganda’s three-year, US$17.8m poverty reduction and growth facility (PRGF), agreed with the IMF in September 2002, will remain the framework for guiding medium-term economic policy. The key objectives of the current PRGF are to improve tax collection, control the fiscal deficit, widen access to education and healthcare, and improve the infrastructure. This IMF-guided policy framework has been adhered to in recent years and has yielded reasonable rates of real GDP growth. In its second review, in December 2003, the Fund concluded that the government was making reasonable progress and that the Ugandan authorities’ approach had continued to provide a sound basis for concessional assistance. Although the Fund broadly commended Uganda’s macroeconomic stability, it once again urged the government to reduce the overall fiscal deficit by meeting agreed fiscal revenue targets and curbing non-essential expenditure. The recently announced budget for fiscal year 2004/05 (July-June) re- emphasised the government’s commitment to stimulating the private sector and export growth, while at the same time ensuring efficiency and effectiveness in public expenditure. Worryingly, donors rejected a draft budget,

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stating that key expenditure elements of the budget, notably those for defence and public administration, were too high. Uganda!s reliance on donor support means that it cannot afford to anger its benefactors, and the implicit threat of a reduction in donor funds should the government fail to alter the budget appears to herald a period of stricter supervision of the country!s economic planning. Although some senior Ugandans may resent this as a threat to the country!s sovereignty, the consequences of a significant drop in donor funding would be disastrous and so the government is expected to co-operate. Although the authorities will fail to meet some of the donors! targets, funding is expected to remain on course.

Fiscal policy Fiscal policy will continue to be poorly managed throughout the forecast period and the fiscal deficit (excluding grants) will remain high. Two key problems will persist. First, expenditure on non-priority arrears is too high. Substantial amounts are being spent in key development areas, but expenditure in areas such as government administration and defence will remain high and will contribute little to overall economic growth. Interest payments on domestic debt will also pose a burden. Second, even by the standards of Sub-Saharan Africa, tax revenue as a percentage of GDP is extremely low. Uganda’s domestic revenue/GDP ratio stood at 12.9% in fiscal year 2003/04, compared with the Sub-Saharan African average for 2002 of 23% of GDP; donors account for approximately 40% of Uganda!s budgetary revenue. The Uganda Revenue Authority is making progress in implementing reforms aimed at boosting fiscal revenue, and the fight against corruption has benefited from a substantial increase in the number of internal auditors. The implementation of the East African Community Customs Union will constrain growth in tax revenue, but the government has included additional tax policy measures in the 2004/05 budget designed to increase overall tax revenue by 12%. We calculate that the fiscal deficit (excluding grants) widened slightly from 11.2% of GDP in 2002/03 to 11.3% of GDP in 2003/04. Total government expenditure for 2004/05 is expected to rise by 7.8%, whilst total domestic revenue is forecast to increase by 12%, owing mainly to higher tax revenue. Total domestic revenue will amount to 54% of the total revenue required to finance the budget. In line with the government!s budget targets, we expect a reduction of the fiscal deficit to 11.0% of GDP in 2004/05, owing to increased tax revenue. Weak fiscal policy and high spending pressures will make any meaningful reduction impossible. Priority will be given to spending on poverty-reduction projects, but, as in previous years, overspending in areas such as public administration will be balanced by reductions in development expenditure. Spending pressures will increase in the second half of 2005 as the government distributes largesse ahead of the elections in 2006. Although donors are expected to continue contributing large amounts of budgetary assistance, the fiscal deficit including grants will still be almost 4% of GDP in 2004/05, and the government will continue to finance this through a combination of domestic and external borrowing.

Monetary policy The recent introduction of two-year and three-year Treasury bonds will contribute to a lowering of interest rates in the long term by reducing the need

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for short-term T-bills. In terms of fiscal management, the introduction of the T- bonds will enable the Bank of Uganda (the central bank) to mop up and sterilise excess liquidity in the banking system over longer periods. The bonds have taken the pressure off the T-bill market, with interest rates tumbling recently, and this will allow the commercial banks to reduce their lending rates to the private sector. However, to address the effects of a large fiscal deficit, the central bank will have to maintain a tight monetary policy over the forecast period, and is, therefore, constrained in how far it can lower interest rates.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2002 2003 2004 2005 Real GDP growth World 2.9 3.9 4.9 4.3 OECD 1.6 2.1 3.5 2.8 EU25 1.2 1.1 2.2 2.4 Exchange rates ¥:US$ 125.3 115.9 111.8 108.5 US$:€ 0.945 1.132 1.202 1.293 SDR:US$ 0.772 0.714 0.688 0.662 Financial indicators ¥ 2-month private bill rate 0.10 0.03 0.03 0.10 US$ 3-month commercial paper rate 1.70 1.10 1.38 3.00 Commodity prices Oil (Brent; US$/b) 25.0 28.8 33.5 26.0 Coffee (robusta; US cents/lb) 30.0 37.0 37.2 37.0 Food, feedstuffs & beverages (% change in US$ terms) 12.7 6.6 10.6 -0.7 Industrial raw materials (% change in US$ terms) 2.2 12.7 18.8 -0.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. The global economy looks set to expand at its fastest pace for about 20 years during 2004. We forecast that world GDP growth (on a purchasing power parity basis) will accelerate from an estimated 3.9% in 2003 to an extremely strong 4.9% in 2004, before moderating to a still robust 4.3% in 2005. The pace of recovery in the EU25"which is vital for Uganda’s trade"is weak, and its real GDP is now estimated to have expanded by a modest 1.1% in 2003, although growth will rise to 2.2% in 2004 and 2.4% in 2005. Uganda benefited from increasing prices for coffee"an important commodity export"in 2003, with average prices for robusta reaching 37 US cents/lb in 2003. Demand in 2004 has been rising more slowly, thanks to stagnation in most of the traditional markets of North America and Western Europe. Against this, supply is expected to continue rising, despite a slowdown in Brazilian output, because the recent higher sales returns have stimulated production elsewhere. We therefore expect prices to remain flat during 2004/05, averaging 37.2 US cents/lb in 2004 and 37.0 US cents/lb in 2005.

Economic growth Real GDP growth is estimated to have slowed from 6.7% in 2002 to 4.4% in 2003, owing to meagre rains in the first half of the year. In 2004-05 real GDP growth will be supported by strong exports, especially non-traditional exports

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such as fish"a sector that has gone from strength to strength since an EU ban on Ugandan fish imports was lifted in 2000"and by continued growth in manufacturing, construction, transport and communications, which have attracted considerable inflows of foreign direct investment. A host of donor- funded road projects is stimulating construction and quarrying, and strong growth in mobile telephony is boosting communications. Assuming normal weather conditions, improved macroeconomic management under the auspices of the IMF and World Bank will encourage private consumption, exports and investment over the forecast period, so that real GDP growth is expected to improve in both years, to 5.5% in 2004 and 6.0% in 2005.

Inflation Owing to the negative effect of dry weather on harvests in the first half of 2003, annual inflation averaged 7.8%. Food prices constitute around 45% of Uganda’s consumer price index, which makes the index highly sensitive to food-price movements. Consequently, weather patterns and their effect on harvest size drive inflation. The higher food prices recorded in the first half of 2003 should make year-on-year comparisons less striking in 2004. Also, so far this year, indicators point towards a favourable harvest. Rising oil prices will provide some inflationary pressure, although the strong Ugandan shilling and the expected decline in oil prices will temper imported inflation. Average inflation is, therefore, forecast to fall to 3.5% in 2004 before rising slightly in 2005, to 4.5%, as the volume and price of imports increases at a time of currency depreciation.

Exchange rates The Ugandan shilling has appreciated from a low of around NUSh2,011:US$1 in early August 2003 to NUSh1,788:US$1 on June 24th 2004. The strengthening of the currency is largely the result of steady growth in exports, central bank intervention to reduce volatility and a weak US dollar. Because of this, the shilling is expected to appreciate by 3.7% in 2004, averaging NUSh1,891:US$1. In 2005, owing to a stronger US dollar, higher international interest rates, rising government spending in the run-up to the referendum/elections and strong import demand, we forecast a 4.9% depreciation in the shilling to an average of NUSh1,984:US$1.

External sector Total exports are expected to perform well during the forecast period, rising from US$513m in 2003 to US$663m in 2005. Stronger international coffee prices lifted coffee export receipts to an estimated US$104m in 2003, but owing to the gloomy global outlook for coffee and with disease significantly affecting yields, coffee exports are expected to increase only marginally during the forecast period, reaching US$107m in 2005. Strong export growth is expected in the non- coffee sector. Higher investment in fish-processing facilities is set to lift the value of fish exports above that of coffee. Higher cotton prices and an improved production strategy being implemented by the ginners will result in higher cotton revenue. Tea exports will benefit from improved management of the tea estates; and flower export earnings are projected to increase as result of an increase in farm size and the construction of more green houses. However, imports are also expected to increase in 2004-05, as greater foreign investment in industry (mainly manufacturing and textiles) and a more robust

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economy will result in solid import demand; we expect goods imports to rise from an estimated US$1.18bn in 2003 to US$1.43bn in 2005. As a result, the country’s trade deficit is set to widen from US$670m in 2003 to US$768m in 2005. The lack of a significant services industry in Uganda will keep the services account firmly in deficit, despite modest improvements in banking, tourism and information technology (IT) receipts, as higher imports will result in increased trade-related costs. The income account will also remain in deficit, reflecting high external debt-service obligations, particularly to the IMF. However, net transfers will remain strongly in surplus in 2004-05, given high levels of donor support and high inflows of private remittances. Overall, following an estimated current-account deficit of 7.4% of GDP in 2003, we forecast a deterioration to 8.3% 0f GDP in 2004 and 9.6% of GDP in 2005.

Forecast summary (% unless otherwise indicated) 2002a 2003b 2004c 2005c Real GDP growth 6.7 4.4 5.5 6.0 Industrial production growth 7.3 5.0 4.8 5.5 Gross agricultural production growth 4.9 3.6 4.8 5.4 Consumer price inflation (av) -0.3 7.8a 3.5 4.5 Consumer price inflation (year-end) 3.9 6.2a 4.5 5.0 Short-term interbank rate 19.1 18.9a 17.0 16.5 Government balance (% of GDP)d -4.4 -4.3 -3.3 -3.8 Exports of goods fob (US$ m) 480.7 513.2 618.2 662.5 Imports of goods fob (US$ m) 1,113.5 1,183.2 1,288.9 1,430.1 Current-account balance (US$ m) -421.4 -439.2 -554.7 -677.8 Current-account balance (% of GDP) -7.2 -7.4 -8.3 -9.6 External debt (year-end; US$ bn) 4.1 4.0 3.9 3.8 Exchange rate NUSh:US$ (av) 1,797.6 1,963.7a 1,890.7 1,984.0 Exchange rate NUSh:¥100 (av) 1,434.0 1,694.3a 1,691.1 1,828.6 Exchange rate NUSh:€ (year-end) 1,942.8 2,441.2a 2,349.2 2,702.0 Exchange rate NUSh:SDR (year-end) 2,518.6 2,875.8a 2,817.4 3,121.4 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Fiscal year (July 1st-June 30th). Ratio calculated using an adjusted GDP value equal to GDP for the fiscal year of July 1st-June 30th.

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The political scene

Uncertainty surrounds issues Uganda is currently gripped by debate over issues of constitutional change, of constitutional change namely the return to a multiparty system of government and proposals to remove the two-term limit on the presidency. The crux of the argument in both cases regards how to go about implementing the changes, whether this should be done via parliamentary approval or popular referendum. Regarding the political system, there is no disagreement between the government and the various opposition groups: both want Uganda to revert to a party system in the parliamentary elections, which are scheduled to take place in 2006. The government favours a popular referendum on the matter, presumably aware of the fact that this will consign the opposition groups to another year of restrictions on their activities. The opposition, wanting full freedom of operation as soon as possible, points to the fact that according to the 1995 constitution, parliament has the right to make constitutional changes, which would take less time to complete than a referendum. A ruling by the Constitutional Court on June 25th further complicated matters. In a case brought by a group of opposition politicians, the Constitutional Court ruled that a referendum that took place in 2000, and which resulted in the prolonging of the Movement system of government, was null and void on the grounds that it had bypassed usual legislative procedures. A direct implication of this ruling is that a referendum on the issue of a return to multiparty politics cannot be held as the law stands. The court!s decision drew a predictably angry response from the government, and a number of hastily arranged cabinet meetings took place. It seems likely that the government will appeal against the court!s decision, with some senior officials already hinting that this appeal is likely to delay the political transition further. The issue of the "third term", as it is now called, is even more contentious. The president, Yoweri Museveni, has still not made his personal views public, although the recommendation for lifting the current two-term limit that came from the cabinet is widely assumed to reflect his position. Also, his recent tour around the country, in the well-orchestrated glare of the media, is reminiscent of events prior to the announcement that he was to run in the 2001 presidential election. How a "third term" can be implemented without causing a political furore is now being decided, but a referendum would seem to be the president!s preferred option. The great majority of Uganda’s rural electorate, thankful for the security and economic improvements that Mr Museveni has given them, can probably be relied upon to give him their support, whereas his parliamentary backing is less certain.

Mr Museveni faces a divided The Constitutional Review Commission, chaired by Professor Frederick cabinet Ssempebwa, made its findings public at the end of March in a report that recommended that the "third term" issue be put to a national referendum, and that the party system should be adopted through a parliamentary resolution. The cabinet discussed the report in a three-day session in May and, according to leaked reports, members were divided over the “third term” issue and discussions became heated. This is hardly surprising, as Mr Museveni!s decision

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to press for the change has caused him to lose the support of some of his oldest and staunchest political friends (whom he then sacked). James Wapakhabulo, a long-time Museveni supporter, seen by some as a possible future president, but who died in April after a long illness, wrote to Mr Museveni in 2003 saying that a referendum would have "propaganda value and nothing else". The president rejected this view, and others, in a forceful letter, written in May to the vice- president and all cabinet members, which expressed his passionate belief in "the people’s authority". Other notable supporters to have lost their positions include Major-General James Kazini of the Uganda People!s Defence Forces (UPDF, the Ugandan army) and the former vice-president, Speciosa Kazibwe. The suitability of the referendum plan has also been seriously questioned by donors. In early May donors refused to approve Uganda!s budget (see The domestic economy), one factor being the NUSh30bn (US$15m) proposed cost of carrying out the referendum, despite the existence of a broad political consensus on many of the issues. In the end, a kind of compromise appears to have been agreed between the government and donors, although the actual details are somewhat confused. The government has now written to the chairperson of each of the country!s 56 administrative districts, asking them whether or not they want a plebiscite on a "third term" for Mr Museveni. For it to take place, the referendum will have to be supported by a majority of the total membership and, if successful, the actual vote will take place some time before the elections scheduled for 2006. District leaders are now taking advantage of the uncertainty to press for services for their people in return for their support for the referendum.

The traditional parties begin to Faced with the prospect that in 2006 they will be able to field candidates in a get their acts together general election for the first time since the flawed elections of 1980, Uganda!s political parties are at last beginning to get their various acts together. During the past year, the Conservative Party (CP), Democratic Party (DP), Justice Forum (JEEMA), National Democrats’ Forum (NDF), Reform Agenda (RA), Free Movement (TFM) and the Uganda People’s Congress (UPC) have worked together in a group known as G7. Their main concern has been to argue with the government about the details of the transitional period up to 2006, rather than sort their internal structures out. Now, belatedly, they appear to have woken up. The UPC, one of the two major traditional parties, has formed a 15- man committee to reconcile its two rival factions. The other major traditional party, the DP, has just seen its chances of unity vastly improved by the decision of its veteran leader, Paul Ssemogerere, not to stand again as party leader, a post he has held since 1972. Francis Bwengye, who set up his own faction within the party in 2001, and contested the presidential election of that year, looks likely to succeed him. Like the UPC, the DP is now working feverishly to close ranks.

Reform Agenda is dithering One of the problems facing the traditional parties is their historical association with rather specific tribal regions"the east for the UPC and the south for the DP. Neither of these traditional heavyweights can lay claim, as can Mr Museveni!s newly named National Resistance Movement (NRM), to a national constituency. The group (not yet a party) that comes closest to matching the NRM!s national presence is the Reform Agenda (RA), which began

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life as a pressure group within the Movement, subsequently fielding a presidential candidate, Kizza Besigye, who was a strong competitor to Mr Museveni in the presidential election of 2001. In April, the RA said that it was preparing to register as a party, and that it hoped to form an alliance with other parties to challenge the NRM in 2006. Later in the month, the RA changed its mind, citing concerns about the current political atmosphere and fears that it would be vulnerable to harassment if it were to register. Many think that owing to its national presence, the RA could probably mount a serious threat to Mr Museveni and the NRM in 2006, although it remains to be seen whether it will join the contest.

Plans to deploy reservists The government!s plans to deploy units of the reserve army throughout the cause a furore country have received a predictably hostile reception from the opposition parties. The proposal was contained in a white paper tabled in parliament by the defence minister, Amama Mbabazi, in May. The white paper is the outcome of a defence review that the army has been carrying out for the past two years. The existing reserve force comprises mainly demobilised soldiers, and is headed by the president’s brother, Lieutenant-General Salim Saleh. The main thrust of the objections put forward by the opposition groups is that the intention to deploy soldiers in this way, reserve or otherwise, is part of a plan to militarise the election process. The same argument has been made in the past when the army has been used to provide security for the election process. There have previously been instances of heavy-handedness towards opposition candidates, and disruption of opposition rallies. Donors condemned such behaviour before the 2001 presidential election.

Peace in Sudan raises hopes of The signing on May 26th of a power-sharing agreement between the defeating the LRA government of Sudan and the Sudan People!s Liberation Army (SPLA) was welcomed by the leadership of the UPDF, which hopes that the establishment of one authority in the south of Sudan, including the area bordering Uganda, will quickly translate into success against the rebel group, the Lord!s Resistance Army (LRA). The LRA has historically been able to prosper from the absence of security in the region, and from the crossborder rivalries between governments and rebels; Uganda has previously given support to the SPLA, while Sudan has supported the LRA. However, the Sudan peace accord was only achieved after months of tortuous negotiations, and it remains to be tested against the inevitable tensions of events in a region that has experienced so much civil strife. It remains to be seen, also, whether the embryonic peace in the south of Sudan will survive any shocks spilling out from the growing insecurity in the west, where pro-government Arab militias have been accused of genocide.

The LRA may still need to be The successful outcome of the peace talks in Sudan, after so many years of defeated militarily bitter conflict, has been presented by some, in Uganda and elsewhere, as an example of what can be achieved by negotiation. The implication is that the Ugandan government should adopt the same approach with respect to the LRA. The UK secretary for international development, Hilary Benn, on a two- day visit to Uganda in April, during which he saw some of the devastation in the north, articulated the concerns of many in the international community when he said that he did not believe that a military solution alone would solve

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the problem. However, to be fair to the Ugandan authorities, the two situations are hardly comparable. In Sudan, the SPLA rebellion arose out of genuine political aspirations, which meant that there was a basis for discussion; in Uganda, the LRA has used brutal methods and has unrealistic goals (it wants to rule Uganda by adhering to the Old Testament!s Ten Commandments), and its leader, the elusive mystic, Joseph Kony, has continued to prove an unreasonable and erratic negotiator. If there is to be a peace dividend for Uganda from the developments in Sudan, it is likely to come from the opening of a real window of opportunity to inflict a military defeat on the LRA (with help from Sudan), or to persuade the rebel rank and file to end the war. In April, the UPDF turned down the offer of assistance from the Equatoria Defence Force (EDF), a Sudanese militia group that had taken up arms against the LRA in retaliation for the LRA’s attacks against the civilian population in southern Sudan. The EDF was also collaborating with the SPLA, and this alliance ruled out any complicity with the UPDF under the terms of Uganda’s commitment to Sudan not to assist the SPLA. This problem presumably no longer exists.

Mr Museveni enjoys US With Uganda!s president coming under attack from so many directions for not support doing enough to end the war in the north, he can take some satisfaction from the support he is receiving from the US. In April the choice of Entebbe for a meeting of representatives from countries that receive US aid under the East Africa Counter-Terrorism Initiative (EACTI) showed the importance that Washington attaches to the role of Uganda in fighting the war against terror in Africa. The US ambassador to Kampala, Jimmy Kolker, announced that Uganda was one of several countries joining a Terrorism Interdiction Programme (TIP), a computer database for tracking the movements of suspicious people and organisations. A group of US counter-terrorism specialists visited Gulu in Northern Uganda to assess the possibility of setting up a counter-terrorist institute there, for co-ordinating the training of regional anti-terrorist units. If this goes ahead, the US is expected to meet the financial costs. The choice of Uganda for such a project is said to be based not just on its favourable geographical location, but also on the attitude of Mr Museveni, who provided unflinching support for the US president, George Bush, in the wars in Afghanistan and Iraq, and who has had his own problems with terrorism. It is also thought that the US experts could provide invaluable help to the UPDF in its efforts to bring the northern war to a satisfactory military conclusion (though there is no suggestion that the LRA has links with al-Qaida). According to information in The Indian Ocean Newsletter, General Charles Wald, who is in charge of African operations at US Central Command, visited Mr Museveni in Kampala in March, and accepted that US aid against the LRA was to be more than simply moral support. However, Mr Kolker is aware that there are also humanitarian and diplomatic elements to the northern problem, and he is ready to encourage dialogue between the government and the rebels.

LRA rebels wear UPDF The conflict between the LRA and UPDF has continued, and the army reported battledress that at least 170 people, including 55 civilians, 108 rebels and six government soldiers, were killed in May. According to press reports, Joseph Kony is putting on a brave face, despite his increasing disadvantage, and has ordered his troops to intensify their attacks on the camps of internally displaced people in the

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Acholi region. The UPDF has experienced some extremely bad publicity after rebel forces wearing government uniforms were found carrying out atrocities, as at Barlonyo last February, when more than 200 people were massacred. The army authorities have always denied reports of LRA infiltration (although many former rebels have been redeployed into the UPDF after they surrendered), but the recent revelations have led to an investigation. An army spokesman, Major Shaban Bantariza, said that rebel sympathisers could get access to uniforms, which are in any case available from local manufacturers, so that the army could be wrongly blamed for rebel activities.

Insecurity in the DRC poses a The recent temporary occupation of Bukavu, in the South Kivu region of the threat to Uganda Democratic Republic of Congo (DRC), by a Tutsi rebel group, suggests that last year’s Congolese peace accord, always fragile, may be beginning to unravel in the turbulent east of the country. The ethnic tensions demonstrated in South Kivu could very easily spread to the North Kivu and Ituri regions of the country that border Uganda. If that were to happen, the coming months could see the return of the regional anarchy that drew in Ugandan and Rwandan forces in 1998, with devastating results. The UPDF patrols the border, but it cannot prevent what is happening inside the DRC. Further uncertainty has been caused by the activities of interahamwe forces in the area; these are Rwandan Hutu militia groups responsible for much of the slaughter in the 1994 genocide, who are now on the run from the Rwandan army. Uganda is worried about this because, in 1999, a group of around 100 interahamwe entered Uganda and killed eight tourists in the Bwindi Impenetrable National Park. Their presence in the DRC was the excuse Rwanda gave in 1998 for sending its forces across the border, where their bloody confrontation with Ugandan forces nearly led to war. In light of the recent history of antagonism, and the fragile political situation within the DRC, the current deployment of both Ugandan and Rwandan forces along each side of the border gives rise to concern.

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Uganda enters the Nile water Access to the Nile!s water resources has recently become controversial, the controversy upstream countries having asked that they should be permitted to use a proportion of the water previously allocated overwhelmingly downstream to Egypt. In April Mr Museveni became the first head of state to enter the debate publicly, calling on Egypt not to monopolise the water. An intervention made by the Ministry of Defence in May to halt the progress of a parliamentary motion aimed at renouncing the formal agreements signed during the colonial era in 1929 and 1959, which safeguarded supplies of water to Egypt, confuses things, but indicates that access to the Nile!s water is considered an issue of national security. Uganda’s water minister, Maria Mutagamba, had previously said, after a visit to Cairo, that Uganda had demanded a revision of the colonial arrangements, and that a full understanding had been reached with Egypt on the best use of shared water resources, within the framework of the Nile Basin Initiative (NBI). The NBI, which was set up in 1999, brings together the ten African countries that have an interest in the Nile!s waters"Burundi, the DRC, Egypt, Eritrea, Ethiopia, Kenya, Rwanda, Sudan, Tanzania and Uganda.

Corruption is still widespread According to a survey carried out by the Switzerland-based, World Economic Forum, Uganda is the seventh most corrupt country in Africa. The survey assessed 21 African countries in terms of corruption and good governance, ranking them all on a scale from 1 (most corrupt) to 7 (least corrupt). Uganda scored 3.30, slightly better than Kenya, with 3.16, and Zimbabwe, with 3.17. Chad came out worst, with 2.36, and the highest score was for Botswana, with 5.45. According to the 2003 report on graft and abuse of public office published by the Inspector General of Government (IGG), Uganda!s police force remains the most corrupt institution (for the fourth year running), followed by local government, the judiciary and public hospitals. The report stated that corruption among policemen usually takes the form of small bribes, but that officials in local government and the judiciary are more demanding. A magistrate may demand as much as NUSh100,000 (about US$50) to "hear a case properly". Presenting the report, the IGG!s chief, Jotham Tumwesigye, said that local government officials at district level handed out jobs only to political supporters, and that chairmen of tender boards were appointed on the basis of their political loyalty rather than merit. It was commonplace for patients (or their relatives) to pay small amounts of money for services that are supposedly free in government hospitals. The government regularly receives reports from the IGG, and does appear to take note of them, but any significant action against corruption has yet to materialise.

Ugandan companies fail to It appears that Ugandan companies have lost out in their bid for a share of win contracts in Iraq US$18.6bn worth of contracts for the reconstruction of post-war Iraq because of technical deficiencies and a lack of security capacity to provide protection against possible terrorist attacks. As a constant supporter of the US-led coalition, Uganda had high hopes of winning a share of the lucrative reconstruction fund. This is a second disappointment, following the failure last year to win any construction contracts, although that was because the deadline for submitting tenders was missed. Companies have had to accept, albeit reluctantly, that their standards were not up to the requirements, although some construction

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companies (for example, HL Investment, Mugoya and Roko Construction) have established a presence in Kuwait and are still hopeful of finding opportunities in terms of sub-contracts. The feeling is that Ugandan companies may still be able to benefit from opportunities in some sectors, such as food and drinks, but probably only if they form a consortium.

Economic policy

The 2004/05 budget is On June 10th the finance minister, Gerald Ssendaula, presented the budget for announced fiscal year 2004/05 (July-June), with the stated theme of "promoting economic growth and reducing poverty through public expenditure". The budget focused on the priority interventions that will ensure the development and competitiveness of the private sector as the engine of growth, while at the same time ensuring efficiency and effectiveness in public expenditure. In order to address the emerging development challenges, the government has produced a revised Poverty Eradication Action Plan (PEAP). In the course of the consultations for the revised PEAP, five strategic intervention areas have been highlighted as central to public policy and financing in the medium term: • economic management; • enhancing production; • competitiveness and incomes; • security; • conflict resolution and disaster management; and • good governance and human development. The finance minister said that these areas call for enhanced and effective collaboration and focus on the part of the government and all other stakeholders, in order to achieve the requisite transformation of the economy through enhanced private investment, industrialisation and export-led growth. Mr Ssendaula emphasised that it is equally important to ensure good governance and peace throughout the country, as well as improved service delivery.

Expected out-turns for 2004/05 Mr Ssendaula predicted real GDP growth of 5.9% for 2004/05 and affirmed that are presented maintaining inflation at an average of 5% will continue to be the cornerstone of the government’s macroeconomic policy. Economic growth will be buoyed by the strong performance of cash crops, manufacturing, construction and wholesale and retail trade. However, the budget speech reaffirmed that the medium-term objective remains restoring GDP growth rates to 7% per year"the level of growth required, among other things, to eradicate absolute poverty. The government recognises that in order to achieve this objective, the continued implementation of sound macroeconomic policies, the acceleration of critical supply-side reforms required to remove bottlenecks to private-sector development, and increased competitiveness are all required.

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Reform measures in the 2004/05 budget

Building on the budget’s core recommendations, the government vowed to implement a number of tangible reform measures, including the following. • In order to improve credit delivery, the Uganda Development Bank will be merged with the Development Finance Department of the Bank of Uganda (the central bank). Management of the institution will be contracted to a private firm. • In order to strengthen the capacity of micro-finance institutions in the country, a credit of US$18m has been secured to facilitate the expansion of the outreach services of the rural financial system. • The government will continue to finance the present stock of pension arrears, estimated at about NUSh300bn (US$159m), over the medium term, while at the same time converting the present system to a contributory scheme, to prevent further accumulation of arrears. • To address the problem of domestic arrears, companies will be urged to move to a pre-payment system. An annual list of all verified arrears will be published in order to remove doubt as to who is owed money by the government. • During financial year 2004/05 (July-June), the government will divest the following enterprises: National Insurance Corporation; Kinyara Sugar Works; and a 20% stake of New Vision Printing and Publishing through a public offering of shares. The government will also continue to implement actions designed to improve the performance of those parastatals that are not slated for divestiture in the medium term. • The government has decided to have Uganda internationally rated by reputable credit-rating agencies. • To strengthen the business environment, there will be extra investment in transport, communication in rural areas, water and sewerage treatment, and a new business park. • There is an urgent need for improvements in land registration. Over the next five years the government will invest about US$20m to rehabilitate existing land records, establish a land information system, and equip zonal land offices. • To address any security threats to the country, and to build a professional and capable army, a Defence Policy and a Transformation Strategy have been prepared for implementation over the medium term. A Sector Working Group for Defence (SWG) will also be set up, the major focus of which will be the implementation of the standard public-expenditure management principles in the defence sector, including the preparation of a comprehensive budget framework. • In order to improve financial management and accountability in local government, the financial and accounting regulations for local government are being revised to align them with the Public Finance and Accountability Act 2003. • Interventions in the marketing and agro-processing strategy, such as the certification of organic export products and the procurement of wet-processing units for coffee, are aimed at further improving value addition, export competitiveness and access to markets. • The policy of attracting and retaining teachers in schools in places referred to as the "hard to reach areas" will be enhanced, with the construction of another 280 teachers’ houses in 2004/05.

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Large fiscal deficit and reliance Total government expenditure for 2004/05 is projected to rise by 7.8% to on donor funds will remain NUSh3,381bn (US$1.8bn), of which NUSh1,933bn will be on recurrent expenditure and NUSh1,449bn on development expenditure. Domestically funded development expenditure is projected at NUSh513bn. In addition, NUSh55bn has been allocated for the clearance of domestic arrears. Total domestic revenue will amount to NUSh1,867bn or 54% of the total revenue required to finance the budget. Tax revenue is projected to increase by 12% to NUSh1,830bn while non-tax revenue will amount to NUS37bn. The overall deficit, excluding grants, is projected at 11% of GDP. The deficit will be financed with grants and highly concessional loans, in line with the government’s debt strategy. Donor grants, which include project grants and debt relief (as part of the heavily indebted poor countries initiative), will provide NUSh991bn while NUSh633bn will be provided through long-term soft loans. The burden of Uganda’s external debt was also a feature of the budget speech. The finance minister is putting in place a process that will enable the government to put a ceiling on annual new borrowing to a level that is consistent with debt sustainability. Once the process is established, this ceiling will be announced each year during the annual budget speech.

Government finances, 2004/05 (NUSh bn) Domestic revenue 1,867 Tax revenue 1,830 Non-tax revenue 37 Expenditure 3,381 Re-current spending 1,933 Development spending 1,449 Balancea -1,587 % of GDP 11.0 a Does not sum in source. Source: Ministry of Finance, Budget Speech 2004.

Ta xati o n

Newly imposed tax measures for fiscal year 2004/05 (July-June) include the following. • The East African Community (EAC) customs union between Kenya, Tanzania and Uganda is due to begin on January 1st 2005. Goods entering the EAC will be subject to a Common External Tariff (CET), with three tariff bands: 0% for essential goods, raw materials and capital goods; 10% for intermediate goods; and 25% for finished goods. • The excise duty on domestically produced tobacco products is being raised from 130% to 150% and is expected to generate NUSh1.9bn (US$1m). • The excise duty on locally produced spirits is being increased from 45% to 60%, and is expected to generate NUSh1bn. To encourage the greater utilisation of locally produced fruits by manufacturers of wine, excise duty on wine produced from local fruits has been reduced to 20%.

• The withholding tax of 4% on both imports of final consumer goods and on payments for goods and services purchased by the government, a government institution or a local authority will be raised to 6%. Compliant taxpayers are not liable to pay this tax. This measure is expected to generate NUSh22bn. • A new board of directors has been appointed at the Uganda Revenue Authority (URA) in an attempt to speed up the progress of administrative reforms and streamline operations, as well as to enhance the operation of the URA!s revenue collection activities. Donors reject draft budget Prior to the presentation of the 2004/05 budget to Parliament, strenuous proposals for 2004/05 negotiations had taken place between the Ministry of Finance and donors, who historically have contributed about 40% of the country!s total fiscal revenue. Although these had produced some revisions from the Ugandan side, they were insufficient to satisfy the donors, and in mid-May the World Bank manager for Uganda, Grace Yabrudy, presented a detailed statement for the donor community, rejecting the draft proposals for the 2004/05 budget. Donors recognised that the coming years present a major challenge in budget terms, and acknowledged the efforts that had gone into the preparation of the budget, but said that key expenditure elements of the budget, notably those for defence and public administration, were too high. It was noted that shortfalls in fiscal revenue and the growth of interest payments placed severe restraints on the budget, so that special emphasis had to be placed on improved efficiency and value for money in all sectors. Nevertheless, a budget that proposed significant increases in defence and public administration at the expense of cuts in sectors like health and agriculture, was not seen as a credible way forward. Ending on a more positive note, the statement welcomed the government’s stance on achieving macroeconomic stability and said that it did not wish to see this put at risk. Conceding that much progress has also been made over the past decade in developing strong budget-management institutions, it said that the credibility of the budget process had been an important factor behind increased donor support, and that these gains should not be eroded. However, the 2004/05 budget was the third in succession that had been subject to last-minute or mid- year changes. Ministers have sought to play down the extent of the disagreement with the donor group, but there seems to be little doubt that relations reached a critical point, at least for a short period.

Defence spending is a major For several years Uganda’s donors have been pressing the authorities to reduce sticking point defence spending, cut out waste and stop corruption, in order to shift resources into development areas. The government has resisted these pressures, insisting that improving the security situation was a priority, and that it was doing its best in other areas. The disagreement also reflects different perceptions of the civil war in the north, with donors feeling that not enough has been done to explore the possibility of a negotiated end to the conflict, and Mr Museveni adamant that the UPDF could win a military victory if it had more resources. The draft budget indicated that defence expenditure was set to rise by 19%. This comes after a 48% increase in the previous two years, including a supposedly one-off increase of 29% in 2003/04. Although they recognised Uganda’s security problems, donors were not convinced that the increases were justified, or that the additional resources would be spent effectively, and they asked the

government to think again. They wanted written assurances that common public-expenditure management principles would be put in place for the defence sector, and that a defence working group would be in place at an early date to monitor the situation. In light of donor objections, the government subsequently revised the defence budget to NUSh347bn, down from NUSh367bn, which appeared to be enough to satisfy Uganda!s donors, for the time being at least.

Health data confirm the The surveillance report of the Ministry of Health’s STD/AIDS Control improvement in AIDS Programme, June 2003, confirms that significant improvements have been made during the past decade, but acknowledges that the magnitude of the epidemic remains a daunting challenge. The data collected from 20 sentinel sites distributed throughout the country for 2002 showed that HIV prevalence rates ranged from 0.7% in Moroto, in the east, to 11.9% in Gulu, in the north, with an overall rate of 6.2% (7.9% in urban areas and 5.1% in non-urban areas). These are antenatal prevalence rates, relating to women of child bearing age. To put these figures into perspective, the historical data show that prevalence rates reached a peak in 1992/93, with figures of up to 30% recorded in some places, notably in Kampala and large regional centres, such as Mbarara. Since those peak years, the decline in prevalence rates has been nothing short of dramatic, and is evident throughout the country. This trend confirms that although the total number of HIV/AIDS cases continues to increase, the rate at which the epidemic is infecting the population is now much lower. The report claims that the improvement is due to the success of the government’s AIDS prevention programme (including the promotion of the ABC method"Abstinence, Be faithful, and use Condoms).

US research underlines the Another perspective on the HIV/AIDS situation was provided by Dr Jonathan problems of the rural poor Mermin, an epidemiologist working in Uganda with the Centre for Disease Control and Prevention (CDC) and the US Department of Health and Human Services (HHS), in a report to the subcommittee on African Affairs of the US Senate Committee on Foreign Relations. Among other aspects of the problem, Dr Mermin’s report deals with the difficulties of coping with the HIV/AIDS epidemic in a very poor country. For example, on any given day in Uganda only 5% of health facilities can perform an HIV test, and only 20% cent can diagnose and treat tuberculosis, the leading cause of death for people with AIDS in Africa. Dr Mermin and his colleagues are studying how people living in rural, resource-limited settings can best access quality, comprehensive HIV care, treatment and preventive services, including anti-retroviral therapy (ART). ART has proved to be very effective in the West in extending life and improving the quality of life, but it remains beyond the reach of most Ugandans, partly because of cost, but also because of other deficiencies in the healthcare system. Counselling and testing are not widely available; there is often no sustained system for the distribution of drugs; and access to electricity, sanitation and clean water is limited, as is access to transport"a major problem for a widely dispersed population. The cost of testing for the suitability of ART can sometimes be greater than the cost of the drugs themselves. This report presents a sobering assessment of the situation to set beside the optimistic picture offered by the clinical data. The impact of the AIDS epidemic in Uganda

will continue to create enormous problems for many decades, not only in terms of countless personal and domestic tragedies, but in all sectors of the economy, and particularly among the poorest and remotest farming communities.

Ugandan workers are The Federation of Uganda Employees has claimed that efforts to attract foreign described as inefficient investment could be being hampered by low labour productivity, compared with neighbouring countries in the East African Community. The federation cites evidence in support of this claim: on average, a Ugandan worker in the tea sector picks only 20 kg of tea per day, compared with 60 kg in Kenya and 40 kg in Tanzania; in the hospitality industry, a Ugandan worker manages 12 rooms a day, compared with more than 14 rooms in Kenya and Tanzania, and a waiter copes with only 15 people at a buffet, compared with 20 in the other two countries; and in the leather industry, a worker in Uganda makes five pairs of shoes in an average day, compared with seven pairs in Kenya and Tanzania.

Uganda and Kenya collaborate Uganda and Kenya have signed an alliance with the Africa Office of the World on water and sanitation Bank’s Water and Sanitation Programme (WSP-AF). The alliance, signed in April, formalises the ongoing support that the WSP has been offering to the water ministries in the two countries, and strengthens their capacity to achieve the millennium development goal (MDG) of halving the number of people without access to water by 2015. The signing of the agreement officially commits the governments to working with the WSP and to providing the information and documentation that are needed for the formulation of policies"a significant requirement in a field where one of the main handicaps is poor policy. The WSP is an international partnership, established in 1979 and administered by the World Bank in Washington, that works with governments, international financial institutions and donors, with the aim of providing poor people with access to water and sanitation.

The domestic economy

Economic trends

Economic performance during As part of his budget speech, the finance minister, Gerald Ssendaula, stated that 2003/04 was strong Uganda continued to benefit from strong economic growth, projecting real GDP growth for financial year 2003/04 (July-June) at 6%, up from 5.2% in 2002/03. Although this is below the government!s 7% target, it compares favourably with the overall growth rate for Sub-Saharan Africa in 2003 of 2.7%. Strong agricultural growth was a major factor driving overall growth, but all economic sectors registered positive growth. Export earnings are expected to record a large increase from the 2002/03 level of US$774m, with the government estimating a jump of 20% in 2003/04 to US$928m. Non-coffee exports are thought to have performed particularly well in 2003/04, increasing by 30% to US$521m. Underlying inflation (excluding food crops) was largely subdued, despite higher fuel prices, and strong agricultural production saw the headline rate average 5% for the financial year.

Performance was mixed in The budget approved for 2003/04 last July forecast an overall deficit of 11.2% of terms of the 2003/04 budget GDP, excluding grants, whereas the projected out-turn is expected to be 11.3% of GDP. A strong out-turn in budgetary assistance from Uganda!s donors meant that revenue performance for 2003/04 was better than expected. However, this masked the fact that indirect domestic taxes under-performed by 17% as VAT collections fell short of targets, owing to poor compliance by the eligible players. Overall domestic revenue was equivalent to 12.9% of GDP, against the budgeted level of 13.2% of GDP. On the expenditure side, there were three main areas that overshot their budget allocations: non-wage expenditure for public administration; security; and domestic interest payments. As a result, expenditure was reduced in other areas, particularly the domestic development component. The authorities claim that high levels of non-discretionary expenditure (statutory expenditure and the wage bill) are a major constraint to budget management, accounting for 46% of the entire budget. However, this has been a problem in Uganda for many years, and it should be something the government has got to grips with by now.

Government finances, 2003/04 (NUSh bn) Approved budget Projected out-turn Revenue & grants 2,709 2,934 Domestic revenue 1,691 1,663 Grants 1,018 1,271 Expenditure & lending 3,147 3,162 Recurrent spending 1,735 1,787 Development spending 1,338 1,358 Domestic development 539 497 Balance (excl grants) -1,456 -1,499 % of GDP 11.2 11.3

Source: Ministry of Finance, Background to the Budget.

Inflation remains low Inflation is still firmly under control. It continued to fall during March and April 2004, and the annual headline rate of 0.4% in April was the lowest since September 2002, although it edged up again in May to 1.4%. All parts of the country have benefited from the low prices, and there appears to be no reason why this situation should not continue, despite pressure from high oil prices. The main reason behind the current low levels of inflation has been the continuing favourable weather conditions and plentiful harvests. Food crops have a weighting of 24.3% in the consumer price index (CPI), and the food group as a whole (which includes processed food) has a weighting of 45.2%. The index of annual inflation for food crop prices fell by 7% in March, 12% in April, and a further 10% in May. Annual underlying inflation (that is, excluding food crops) continues to fluctuate at around 3-4%, but the trend of recent months is downwards. For the year, inflation is forecast to average 3.5%.

The Ugandan shilling holds Between January and April the Ugandan shilling appreciated by about 3%, and up well on June 24th the shilling closed at NUSh1,788:US$1. Now that the Bank of Uganda (the central bank) is pursuing an interventionist policy in the foreign- exchange market, both to maintain stability and to sterilise inflation-causing rises in liquidity, sharp month-on-month fluctuations are relatively rare. A steep appreciation in February was put down to transfer inflows from Ugandans living abroad, an increase in foreign participation in the Kampala Stock Exchange, and the depreciation of the US dollar. In February the net transactions of the central bank amounted to a sale of US$2.0m, compared with a net purchase of US$1.17m in January. In March the bank intervened for sterilisation purposes with net sales of US$16.7m, rising to net sales of US$29.5m in April. Foreign-exchange reserves have remained strong, standing at US$1,078m in March, equivalent to about six months of imports of goods and services.

Treasury-bill interest rates The last few months have seen a sharp reduction in interest rates in the tumble Treasury-bill market, rates that were previously proving attractive outside Uganda. By April, the rates for the 91-day and 182-day bills were 5.20% and 6.61%, respectively, compared with 19.25% and 21.25%, respectively, at the beginning of the year. A similar steep decline was apparent for the 273-day and 364-day bills, although the 8.57% and 8.82% rates, respectively, represented a slight easing up compared with the March rates. The decline in rates was caused by increased liquidity in the market. In addition, issues of new, longer- term Treasury bonds (April 2004, The domestic economy: Financial markets) have taken pressure off the T-bill market.

Monetary indicators 2003 2004 1 Qtr 2 Qtr 3 Qtr 4 Qtr Jan Feb Mar Annual growth in M1 (% change) 18.2 16.2 16.7 12.3 19.9 13.5 - Annual growth in M2 (% change) 25.5 24.5 22.7 17.9 20.9 16.3 - Treasury-bill rate 14.1 16.6 17.2 19.5 20.0 14.4 7.8

Source: IMF, International Financial Statistics.

The money supply continues The money supply in general continued to expand during the first quarter of to grow, but slowly 2004, although some elements within it contracted. Currency in circulation declined from NUSh546bn (US$282m) at the end of 2003 to NUSh521bn at the end of March. Demand deposits grew from NUSh692bn at the end of the year to NUSh771bn in February, but fell back to NUSh756bn in March, so narrow money (M1) as a whole, comprising currency in circulation and demand deposits, grew by about 3% during the quarter. Time and savings deposits continued to grow through the quarter, from NUSh577bn to NUSh601bn, so M2 (comprising M1 and time and savings deposits) also increased by about 3%. Broad money, which also adds in foreign-exchange deposits, increased, to NUSh2,507bn at the end of March, compared with NUSh2,407bn three months previously, an increase of about 4%, owing mainly to a 6% increase in foreign- exchange deposits. M1 continues to make up about half the money supply, shared approximately 40:60 between currency in circulation and demand deposits, with time and savings deposits and foreign-exchange deposits sharing the remainder in roughly equal proportions.

Agriculture

Coffee replacement Experience has shown that the coffee varieties promoted in recent years are programme faces problems also vulnerable to the wilt disease that has destroyed up to 40% of the country!s mature bushes. Many farmers are now changing to lowland arabica varieties, which tests have proved to be more resistant to disease than the robusta varieties that have traditionally produced about 90% of Uganda’s coffee. A programme to promote lowland arabica was launched two years ago in the region of Bushenyi, through what were termed "coffee villages". Lowland arabica can be grown down to an altitude of about 300 metres, is quick yielding, occupies little space, is drought resistant, and produces crops twice a year. The programme is being put at risk by the government’s failure to pay suppliers for providing the seedlings that are being used to replace old and diseased bushes. The Uganda Coffee Development Authority (UCDA) buys the seedlings from nurseries, and then provides them, free, to farmers. However, the UCDA has failed to pay its suppliers, who are now owed some NUSh6bn.

Energy

The Bujagali project looks to The government is still hoping to revive the Bujagali hydroelectric power be on again project after the suspension of the scheme in 2003 after eight years of work, following a bribery scandal involving a government minister and the US company AES (formally known as Applied Energy Services; April 2003, The domestic economy: Infrastructure). Ironically, investigations subsequently carried out by the US government cleared both the minister and the company of any wrongdoing, but by then AES had pulled out. The energy minister, Syda Bbumba, has warned that unless a replacement for AES can be found, in three years time the country will not be able to meet the power requirements generated by growing local consumption and exports. Local demand is rising

by 10%, thanks to a booming construction industry, and both Kenya and Rwanda are keen to increase their imports of Ugandan electricity. The government is determined to press on with the project, but its request to the World Bank that the US$500m loan agreed with AES should be provided directly to the Ugandan authorities has been turned down, and the government has been advised to look for another co-investor. A good number of independent power producers expressed an interest in bidding for the contract and Mr Bbumba sent letters of invitation to sixteen companies. An inter-ministerial sub-committee was set up to consider the bids, before formal invitations were sent out to a shortlist of five companies. Two of these can be considered as regional: Madhvani International, which is owned by a Ugandan businessman, and Industrial Property Services (IPS) of Kenya, part of a business structure headed by the Aga Khan. The other three are all international companies: Stucky Consulting Engineers, of Switzerland; Montgomery Watson Harza, of California; and the Wakisi Hydro Consortium, which includes the South African firm, Eskom, already well established in Uganda (see below), and is considered the favourite to gain this contract. In addition to Eskom, Wakisi also comprises the Industrial Development Corporation (IDC) of South Africa, the Netherlands Development Finance Company, and the African Infrastructure Investment Fund.

Norpak presses the A Norwegian consortium, Norpak Power, is also pressing the Ugandan government over Karuma authorities for permission to go ahead with its plans for a hydroelectric dam at Karuma, also on the River Nile but further downstream. Norpak had been approached by the Ugandan authorities to join the Bujagali project, but declined. Originally, the Karuma scheme was intended to come after the Bujagali development, but with Bujagali unlikely to be operational for at least another five years, Norpak is unhappy about the prospect of a long delay. Norpak may be able to benefit from financial support from the Norwegian state-owned company, Statkraft Norfund Power Invest (SNPI), which was in the frame, at one time, to participate in the funding of the Bujagali project, but decided against the idea (April 2004, The domestic economy: Infrastructure). However, it seems that Norpak may have to wait, as the Ugandan government would prefer to give priority to Bujagali, a project that has always been pushed by the president, Yoweri Museveni. Meanwhile, according to a statement from the Ministry of Energy, faced with the delays in the big projects, Uganda hopes to speed up rural electrification by developing smaller hydroelectric schemes. Less financially complicated than big projects, smaller schemes tend to have an added advantage in that they are less controversial in environmental terms.

UEDC gets a managing The concession to manage the recently privatised Uganda Electricity consortium Distribution Company (UEDC) has been granted to a consortium of British and South African companies to be known as Umeme. The consortium brings together the Commonwealth Development Corporation’s subsidiary, Globeleq, and Eskom of South Africa. Umeme will pay the government US$1.4m when it takes over UEDC in September, plus a further US$18m for annual rental of UEDC’s assets. However, before formal operations can begin, Umeme needs to secure a World Bank guarantee, organise insurance cover, agree a tariff

structure, and submit an investment programme to Uganda’s electricity regulator. Globeleq and Eskom were the only two candidates in the frame, and Eskom had the advantage of having already won the contract to run the Uganda Electricity Generating Company (UEGC), but, nevertheless, hammering out the terms of the agreement took nearly a year of hard bargaining. During the next five years, Umeme has undertaken to invest US$65m in developing the power grid (of which US$5m is to be invested in the first 18 months) and make a total of at least 60,000 new connections (10,000 fewer than the government was pressing for), increasing to 25,000 per year from the sixth year. At present, fewer than 5% of Ugandans have access to the power grid. The government hopes that the improved efficiency of the private sector will help to keep tariffs down, although Umeme has won an assurance that it will not be subject to systematic attacks against price rises from the regulator.

Foreign trade and payments

Export performance was As part of the budget speech, the finance minister, Gerald Ssendaula, has impressive in 2003/04 announced very impressive export figures for financial year 2003/04 (July- June). Total export earnings for both goods and services are estimated to have increased by 20% to US$928m, from $774m in 2002/03. Exports of goods increased by 24% to US$628m, while exports of services grew by 13% to US$300m. The improved export performance was put down to larger volumes and improved prices, especially for non-traditional exports. Earnings from non- coffee export goods increased by 30% to US$521m on account of strong performance by maize, cotton, tea, flowers and fish. Earnings for fish exports alone increased by 17% to US$98m. However, closer inspection of the data raises some questions. In the Ministry of Finance!s report, Background to the Budget 2004/05, a breakdown of Uganda!s exports of goods and services over the past four financial years does indeed show strong growth in non-traditional exports, but also a massive leap in "others". The value for these "other" exports is given at US$105.5m in 2002/03 and US$252.7m in 2003/04, an increase of 140%. Even when recalculated to take into account an apparent error in the figures, the "other" export component still displays high growth, of 35%. The footnote to explain the "other" component states that it includes gold, regional fish exports, simsim, beans and oil re- exports. Uganda has not historically been a major producer of gold from domestic mines"much of its gold tends to have come via the Uganda People!s Defence Forces (the Ugandan army) stationed in the DRC. The re-exporting of oil is presumably occurring as Ugandans take advantage of price disparities in the region. Neither of these exports is likely to be sustainable in the long run.

External trade account (US$ m; financial years Jul-Jun) 2000/01 2001/02 2002/03 2003/04a Exports fob 458 476 508 628 Coffee 110 82 105 108 Fish 50 81 84 98 Tea 36 27 29 38 Tobacco 28 32 40 39 Cotton 14 18 17 29 Flowers 13 16 17 27 Maize 6 13 8 18 Imports fob 955 1030 1149 1340 Trade balance -497 -556 -641 -712 a Official estimate. Source: Ministry of Finance, Background to the Budget 2004/05.

Members of the EAC sign up Despite a three-month delay and fears of further stalling (April 2004, Foreign for a customs union trade and payments), Uganda and its two fellow members of the East African Community (EAC)"Tanzania and Kenya"signed a historic customs union agreement on March 2nd. This aims to eliminate all tariff and non-tariff barriers to internal trade within five years, and sets a three-band common external tariff (CET) of 25% for finished goods, 10% for intermediate goods and zero for raw materials. These rates were a compromise, reached after dogged negotiations that saw Uganda and Tanzania raising their rates from 7.5% and 12.5%, respectively, and Kenya lowering its rate from 35%. Members can also nominate sensitive goods to which the CET does not apply. With regard to internal trade, Kenya will allow immediate duty-free entry for all Tanzanian and Ugandan goods, but over 400 Kenyan products sold to Uganda will continue to attract initial duty of 10%, before being phased out over five years. This imbalance recognises the relatively advanced state of Kenyan industry and is a response to the justifiable concerns of Ugandan manufacturers about domination by Kenya. However, it is likely that Kenya will still be the dominant regional manufacturer by the end of the five-year period. Kenya is Uganda’s main source of imports, and the trade balance is overwhelmingly (more than 95%) in Kenya’s favour. The EAC customs union includes rules of origin whereby products qualifying for internal free trade must contain at least 35% local content, although inefficiencies in monitoring may lead to a certain amount of leakage. The EAC also contains anti-dumping safeguards and other lines of defence. The raising of the CET from 7.5% to 25% will raise some consumer prices in Uganda, but it should also contribute to a modest increase in government revenue. That Tanzania is a member of the Southern African Development Community (SADC) while Kenya and Uganda belong to the rival Common Market for Eastern and Southern Africa (Comesa) also raises the prospect of potential conflicts, as attempts to reconcile their trade liberalisation agendas with the EAC, and with each other, have so far been a failure. However, Uganda’s primary commitment is to the EAC. The customs union is scheduled for ratification by the East African parliament and respective national parliaments by mid-year and is due to come into force on September 1st 2004, three months

later than originally planned. However, this is just an "indicative" date, and haggling over the fine print is set to continue in coming months. Such is the depth of concern about the Kenyan threat among the business communities in Uganda and Tanzania that non-tariff barriers are likely to be maintained, and could even be increased, as tariffs are lowered. As a result, further delays cannot be ruled out. According to the EAC’s long-term plan, the customs union is not an end in itself but is a forerunner to the creation (in order) of a common market, a currency union and a political federation. The three countries had a combined population of 95m in 2003, with a combined GDP of about US$29m.

Officials consider an export One of the topics apparently discussed during the recent inter-governmental route through Sudan meetings with Sudan was the possibility of developing a trade route between Uganda and Port Sudan. This was put forward as an alternative to the Mombasa route, which is Uganda’s main trade artery. Uganda’s business community has often complained about Mombasa’s inefficiency and, especially at times when political relations between Uganda and Kenya were strained, consideration has sometimes been given to improving links to the Indian Ocean through Tanzania. However, it is difficult to see how a Port Sudan route can be taken seriously. In terms of distance alone, Port Sudan is some 1,200 miles from Ugandan territory, even as the crow flies, compared with about 500 miles for Mombasa. Furthermore, most of the route would take it through regions with a poorly developed infrastructure. It is true that Sudan has become the second most important destination for Uganda’s exports of tea and coffee, but the volume of trade between the two countries is very small, and it is difficult to see how such a project could be considered economically viable.

Uganda loses out on US aid Uganda has been struck off a list of countries eligible for a crucial US aid programme, under the Millennium Challenge Account, worth US$1bn during 2004, and rising to US$2.5bn in 2005 and US$5bn in 2006. It made the original list of 63 countries, but that was based on only one criterion"membership of the world’s poorest countries, measured by income per head. According to a State Department source, Uganda was dropped from the final 16 countries because of concerns about governance and corruption. This will be a big disappointment to the Ugandan authorities, but it may not have come as a surprise, given the concerns expressed by donors in recent years at Uganda’s failure to crack down on corruption, and at the slow pace of political reform.

Iraq looks for debt repayment A delegation from the Iraq Fund for International Development is due to visit Kampala in the near future to discuss the non-repayment of a government debt of US$6.8m, which is accruing US$60,000 interest per year. It goes back to a loan of US$2.6m negotiated in 1975 by the government of Idi Amin. Uganda would like to reschedule the debt, but the Iraq Fund argues that the money is owed to the Fund, an independent entity, not to the Iraqi government, and says it is prepared to take legal action if necessary. According to reports, the Ugandan authorities have sought to excuse themselves on the grounds that there is no legitimate government in Baghdad to which they could make the payment, but this will no longer apply after June 30th, when a new interim Iraqi administration is expected to take power. Uganda is likely to delay any payment until 2005, when Iraq is expected to hold elections.