Uganda Uganda at a Glance: 2005-06

Country Report

Uganda Uganda at a glance: 2005-06

OVERVIEW The president, Yoweri Museveni, has given his clearest indication yet that he will stand for a third term at the presidential election scheduled for 2006. The constitution will have to be amended to allow for this. Owing to the government’s large majority in parliament and the considerable amount of resources that Mr Museveni’s supporters are currently dedicating to increasing their support, parliamentary approval of the necessary constitutional amendments is probable. Once the amendments have been passed in parliament, a national referendum will be held, when a large majority of the Ugandan public is likely to vote in favour of them. Owing to the power of incumbency and strong rural support, it is likely that Mr Museveni and his National Resistance Movement Organisation will be victorious in the presidential and legislative elections. However, they face a stiff challenge from the Forum for Democratic Change. Economic growth is expected to improve slightly, to 5.3% in 2005 and 5.6% in 2006, supported by continued growth in manufacturing, construction, transport and communications. A current-account deficit of 4.2% of GDP is forecast for 2005, widening to 5.4% of GDP in 2006 as strong economic growth and election-related spending lift import demand.

Key changes from last month Political outlook • There have been no major changes to the Economist Intelligence Unit!s political outlook. Economic policy outlook • With the appointment of Ezra Suruma"who is known to be in favour of state intervention in the economy"as the new minister of finance, donors may worry that a shift in economic policy is being considered. This could affect the inflow of financial assistance on which Uganda depends. Economic forecast • The poor rainfall that led to increases in food prices in the second half of 2004 has continued into early 2005. As a result, we have raised the forecast for average inflation to 7.3% in 2005, from our previous forecast of 5.4%. Even assuming a return to normal rainfall patterns, average inflation is expected to remain relatively high in 2006, at 5.8%, as pre-election spending increases and the cost of imports rises as the shilling depreciates. April 2005

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Contents

Uganda

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2005-06 7 Political outlook 9 Economic policy outlook 11 Economic forecast

14 The political scene

24 Economic policy

28 The domestic economy 28 Economic trends 29 Agriculture 30 Manufacturing 30 Energy 30 Infrastructure

31 Foreign trade and payments

List of tables

11 International assumptions summary 13 Forecast summary 15 Key ministries after the reshuffle 32 Trade deficit

List of figures

13 Gross domestic product 13 Consumer price inflation 28 Annual headline rate of inflation

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Uganda 3

Uganda April 2005 Summary

Outlook for 2005-06 The president, Yoweri Museveni, and his Movement-led government are expected to remain in office throughout the forecast period. Although the opposition parties are expected to pose a stiff challenge, particularly the Forum for Democratic Change (FDC), 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 mid-to-late 2006. Real GDP growth rates of 7-8% per year are required to make an impact on poverty but, although it will continue to pursue many of the reforms advocated by donors, the government is unlikely to execute the bolder reforms needed to raise the growth rate to such a level. Economic 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 president has boosted his support in a cabinet reshuffle that has rewarded those loyal to him rather than those most capable. Kizza Besigye has been chosen as the leader of the FDC, although the government is likely to attempt to make his return from exile difficult. The stuttering peace negotiations with the Lord’s Resistance Army are dragging on. A UN report has accused Uganda of illegally selling arms to militias in the Democratic Republic of Congo.

Economic policy The appointment of Ezra Suruma as minister of finance has raised fears that a shift in economic policy towards greater state intervention is on the horizon. The latest IMF report on Uganda has called for new reforms to boost economic development. In an attempt to cut the cost of borrowing, the Bank of Uganda has announced plans to take billions of shillings of project funds away from the country’s commercial banks.

The domestic economy Adverse weather conditions, and the ensuing food shortages, have raised inflation. The government has reintroduced crop subsidies, a move likely to be unpopular with the donor community. Continuing power shortages have forced electricity exports to stop.

Foreign trade and payments Coffee exports have benefited from better prices, and non-coffee exports are also performing well. However, import growth has surged and the trade deficit has widened. The East African Community customs union has come into effect, but disagreements over its implementation remain. Editors: Philip Walker (editor); Christopher Eads (consulting editor) Editorial closing date: April 11th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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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 (presidential and legislative) due in mid 2006

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 January 2005

Main political parties Anticipating a return to a party system during 2005, the ruling authority, the Movement, has registered as a political party under the name the National Resistance Movement Organisation (NRMO). 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, the largest of which is the Forum for Democratic Change (FDC)

President & commander-in-chief Yowe ri Museveni Vice-president Gilbert Bukenya Prime minister Apollo Nsibambi First deputy prime minister & minister of disaster preparedness & refugees Lt-General Moses Ali Second deputy prime minister & minister of public service Henry Kajura

Key ministers Agriculture, animal industry & fisheries Janat Mukwaya Defence Amama Mbabazi Education & sports Namirembe Bitamazire Energy & minerals development Syda Bbumba Finance, planning & economic development Ezra Suruma Foreign affairs Sam Kutesa Gender, labour & social development Zoe Bakoko-Bakoru Health Jim Katugugu Muhwezi Internal affairs Ruhakana Rugunda Justice & constitutional affairs and attorney general Kiddu Makubya Local government Tarsis Kabwegyere Trade, industry, tourism, wildlife & antiquities Daudi Migereko Water, lands & environment Colonel Kahinda Otafiire Without portfolio Crispus Kiyonga Works, housing & communications John Nasasira Minister for the presidency Beatrice Wabudeya Minister in the prime minister’s office George Mondo Kagonyera

Central bank governor Emmanuel Tumusiime-Mutebile

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Economic structure

Annual indicators 2000a 2001a 2002a 2003a 2004b GDP at market prices (NUSh bn) 9.5 10.2 10.9 12.7 13.8 GDP (US$ bn) 5.8 5.8 6.1 6.5 7.6 Real GDP growth (%) 5.5 5.1 6.7 4.7b 5.0 Consumer price inflation (av; %) 2.8 2.0 -0.3 7.8 3.6a Population (m) 23.5 24.2 25.0 25.8 26.5 Exports of goods fob (US$ m) 449.9 475.6 480.7 563.0 705.2a Imports of goods fob (US$ m) 949.7 975.4 1,053.3 1,241.7 1,478.3a Current-account balance (US$ m) -825.4 -367.5 -411.4 -390.0 -249.8a Foreign-exchange reserves excl gold (US$ m) 808.0 983.4 934.0 1,080.3 1,309.4a Total external debt (US$ bn) 3.5 3.7 4.1 4.3b 4.4 Debt-service ratio, paid (%) 7.9 4.1 7.2 10.9b 10.9 Exchange rate (av) NUSh:US$ 1,644.5 1,755.7 1,797.6 1,963.7 1,810.3a a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002a % of total Components of gross domestic product 2002a % of total Agriculture 39.8 Private consumption 79.8 Government & community services 19.1 Government consumption 13.1 Commerce 18.0 Fixed capital formation 16.8 Manufacturing 9.7 Net change in stock 0.4 Construction 7.6 Exports of goods & services 11.8 Other 5.8 Imports of goods & services -21.8

Principal exports fob 2003/04b US$ m Principal imports cif 2002a US$ m Coffee 108 Petroleum & related products 174 Fish 98 Road vehicles 105 Tea 38 Cereals 73 Cotton 29 Non-metallic mineral manufactures 41 Electrical machinery 40

Main destinations of exports 2003c % of total Main origins of imports 2003c % of total Netherlands 15.8 Kenya 44.6 Belgium 10.2 South Africa 6.6 US 9.0 India 5.6 Germany 7.8 UK 5.3 Spain 6.6 China 4.5 a Official estimates, calendar year. b Official estimates, fiscal year July-June. c Based on partners’ trade returns; subject to a wide margin of error.

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Quarterly indicators 2003 2004 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Prices Consumer prices, Kampala (2000=100) 107.1 110.1 109.8 111.6 109.4 110.9 114.1 118.6 Consumer prices, Kampala (% change, year on year) 6.3 9.6 9.4 6.1 2.1 0.7 3.9 6.3 Financial indicators Exchange rate NUSh:US$ (av) 1,898.6 1,990.9 1,995.9 1,969.5 1,910.0 1,864.3 1,731.8 1,735.2 Exchange rate NUSh:US$ (end-period) 1,971.5 2,002.8 1,984.7 1,935.3 1,925.7 1,788.8 1,746.8 1,738.6 Bank rate (end-period; %) 16.83 19.58 21.58 25.62 15.81 12.87 14.27 16.15 Deposit rate (av; %) 9.32 10.27 9.33 10.48 9.77 5.72 7.50 7.97 Lending rate (av; %) 17.73 18.43 20.12 19.48 22.92 20.48 19.89 19.12 Treasury bill rate (av; %) 14.10 16.64 17.24 19.49 14.09 5.90 7.33 10.29 M1 (end-period; NUSh bn) 1,159.9 1,182.4 1,211.4 1,234.9 1,299.1 1,357.3 1,315.2 1,341.2 M1 (% change, year on year) 18.2 16.2 16.7 12.3 12.0 14.8 8.6 8.6 M2 (end-period; NUSh bn) 2,204.2 2,395.5 2,391.2 2,428.7 2,459.2 2,641.1 2,620.7 2,697.7 M2 (% change, year on year) 25.5 24.5 22.7 17.9 11.6 10.3 9.6 11.1 Sectoral trends (annual totals; ‘000 tonnes) Coffee productiona ( 186.0 ) ( 186.0 ) Cotton, lint production ( 22.2 ) ( 22.2 ) Seed cotton productiona ( 67.0 ) ( n/a ) Foreign trade (NUSh bn) Exports fob 313.77 292.99 243.84 251.80 305.59 272.85 279.55 239.47 Imports cifb -566.02 -565.55 -604.11 -720.95 -652.82 -630.12 -689.63 -667.23 Trade balance -252.25 -272.57 -360.26 -469.15 -347.23 -357.27 -410.09 -427.76 Foreign reserves (US$ m) Reserves excl gold (end-period) 825.9 965.3 983.6 1,080.3 1,059.7 1,133.9 1,133.1 1,309.4 a Preliminary figures for 2004. b Cash basis. Sources: Food and Agriculture Organisation; IMF, International Financial Statistics.

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Outlook for 2005-06

Political outlook

Domestic politics The president, Yoweri Museveni, and his Movement government are expected to remain in office over the forecast period. 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. Presidential and legislative elections are to be held in March or April 2006, according to a revised version of the government!s political roadmap for 2006. However, as the timetable is tight and includes little room for slippage, the Economist Intelligence Unit expects that the elections are unlikely to take place until at least mid-2006. This is likely to upset the opposition parties, as the government will have slightly exceeded its five-year mandate (by three or four months), but no serious problems are expected to result from the delay. Before the elections are held a number of changes must be made to the country’s constitution, and these are currently being debated in the Ugandan parliament. Among the changes there are two major amendments. The first, a change from the Movement-based political system to a multiparty political system, has broad support across most of the political spectrum. The second amendment"the repeal of the two-term limit on the presidency, thus allowing Mr Museveni to stand at the forthcoming election"is extremely contentious. The president!s desire (assumed, but not yet declared) to remain in power for a third term is already dividing the Movement. The president has not hesitated to remove senior members of the cabinet and the army who did not seem to be fully behind his attempts to secure another term, and a recent cabinet reshuffle appeared to reward loyalty rather than performance. Parliamentary approval for repealing the term limit is likely to be granted owing to the large amount of resources that Mr Museveni’s supporters are currently dedicating to swinging the vote in their favour. After the constitutional reforms have been approved by parliament, they will go to a national referendum, currently scheduled for July 1st 2005. It is unclear what exactly the Ugandan people will be asked to vote on. They may simply be asked to approve the reintroduction of multiparty politics, which a large majority will probably vote in favour of. The other likely option is that Ugandans will be asked to approve all of the constitutional amendments at once, removing their ability to vote specifically, for example, against the removal of term limits but for multiparty politics. Whatever the case, Mr Museveni and his close allies in government will structure the vote in what they see as the best way to get the results that they desire. This careful structuring of the referendum, and the president’s large rural support, suggest that multiparty politics will return and that Mr Museveni is highly likely to be allowed to stand in the next presidential election.

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Election watch Mr Museveni!s political manoeuvring as he seeks approval for a third term has created a sizeable, and potentially influential, dissatisfied element within the Movement, some of whom have formed their own party, the Forum for Democratic Change (FDC). This new party is likely to enjoy nationwide support, providing stiff competition to the Movement"a prime weakness of the main traditional opposition parties is their inability to mobilise support on a national basis. Kizza Besigye, the runner-up to Mr Museveni in the 2001 presidential election, was recently elected as the interim national chairman of the FDC, and many party members hope that he will go on to be the FDC!s presidential candidate. Mr Besigye was a strong challenger to Mr Museveni in the 2001 presidential election, before fleeing to South Africa shortly afterwards under pressure from the government, where he remains at present. Mr Museveni appears to be wary of the potential challenge from Mr Besigye, and it is possible that the government will attempt to prevent his return. Efforts are already under way to link Mr Besigye to an anti-government rebel organisation based in the Democratic Republic of Congo (DRC), which could lead to a legal case against him if he returns. Without the unifying presence of Mr Besigye, the FDC may struggle to agree upon a single presidential candidate, although one potential candidate would be Mugisha Muntu. Mr Muntu was a former officer in Mr Museveni!s guerrilla force that took power in 1986, rising to become army chief of staff, and is currently a member of the East African Legislative Assembly. The government will probably use its legal powers to the utmost to limit the activities of the opposition parties, although it will have to withstand the scrutiny of donors and a collection of various international non-governmental organisations, all of which support the move to multiparty democracy. However, we still believe that Mr Museveni and his reconstituted Movement party (now the National Resistance Movement Organisation"NRMO) have the resources and broad-based support to win the elections.

Security watch There has been a series of ceasefire agreements between the Ugandan Peoples! Defence Forces (UPDF; the Ugandan army) and the Lord!s Resistance Army (LRA; a rebel group active in the north of Uganda and which has bases in southern Sudan) since late 2004. Peace talks to help to bring about an end to the brutal 19-year conflict have made slow progress. The LRA!s new willingness to negotiate seems to be largely the result of the recent military successes of the UPDF, backed up by increased support from the Sudanese and US pressure. This type of hybrid military/diplomatic approach is probably the best solution that donors can hope for, as an entirely diplomatic solution seems unrealistic given the leadership and brutality of the LRA. A note of caution should be sounded, however, as the LRA used ceasefire agreements in 1994 to regroup and step up its military campaign.

International relations Relations between Uganda and Rwanda have been poor for a number of years, and are not helped by personal animosity between their respective presidents. Developments in the DRC will have a large part to play in terms of regional security, as both Uganda and Rwanda face rebel groups based in the DRC’s eastern provinces. Insecurity in the DRC is a big problem, because conflict

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between tribal militias with different sponsors could draw Uganda and Rwanda into opposition, as occurred in 1998. A damning UN report recently accused Uganda and Rwanda of supplying weapons and military support to militias operating in eastern DRC, despite a current arms embargo. The step-up in operations of the UN mission in the DRC, MONUC, should help to mitigate the chance of regional conflict. However, the number of MONUC forces present is insufficient to monitor the entire region effectively. Many donor countries are unhappy with Mr Museveni!s attempts to secure a third term in office. This has angered Mr Museveni, and tensions with donors are likely to increase over the forecast period. However, Uganda is viewed by many donors as one of Africa!s few success stories, and they will therefore be reluctant to withdraw their support, particularly at a time of political transition. Because of this, donor funding, on which Uganda remains dependent, is likely to remain on course over the forecast period, but subject to periodic setbacks.

Economic policy outlook

Policy trends Uganda!s three-year poverty reduction and growth facility (PRGF) will continue to be the framework for guiding medium-term economic policy; it is due to expire in September 2005 and is expected to be replaced by a new, similar agreement for 2006-09. 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 country!s infrastructure. This IMF-guided policy framework has been broadly adhered to in recent years and has yielded reasonable rates of real GDP growth, although not high enough to significantly reduce poverty. Relations with donors are likely to come under strain, particularly over contentious issues such as the high levels of government spending (particularly on defence and public administration) and efforts to improve governance, including tackling corruption. Mr Museveni feels some unease at what he sees as excessive donor intrusion into Uganda!s internal politics. The recent appointment of Ezra Suruma as minister of finance is unlikely to be a popular move with donors, owing to his previous criticism of the speed at which economic liberalisation has taken place in Uganda. The appointment of Mr Suruma could be an indication of Mr Museveni’s frustration with the IMF/donor group. This frustration will not have been helped by the critical tone of the latest IMF review of the PRGF. The Ugandan government is too dependent on donor funding for a fundamental change of policy, but there is evidence, such as the new cotton subsidy, that suggests its willingness to strain at the IMF leash. Donors, for their part, will be prepared to give the government some leeway as the country prepares for the historic elections set for 2006, and so donor funding is expected to remain on course. Also, if a lasting peace is achieved in northern Uganda, financial support for the social and economic development of the region is expected to increase substantially.

Fiscal policy Fiscal discipline will continue to be poor in 2005-06, and the fiscal deficit (excluding grants) will remain high. Two key problems will persist. First,

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expenditure on non-priority areas, such as government administration and defence, is too high, representing over 30% of total expenditure. Substantial amounts are being spent in key development areas, but expenditure on these less critical areas also remains high and contributes little to overall economic growth. Interest payments on domestic debt will also pose a burden. Second, domestic tax revenue as a percentage of GDP is extremely low; donors account for around 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, but progress has been slow. Moreover, the implementation of the East African Community Customs Union will constrain growth in customs revenue, although the government has introduced additional tax policy measures in the budget for fiscal year 2004/05 (July-June) to offset this. Total government expenditure for 2004/05 is expected to rise by 8.5%, as poor expenditure controls and pressure to increase spending in priority sectors make any meaningful cutbacks impossible. However, the government!s new tax measures are expected to boost total domestic revenue, which is forecast to increase by 10.4%. Overall, we expect a slight reduction of the fiscal deficit, to 11% of GDP (excluding grants) in 2004/05, from 11.3% of GDP in 2003/04. Spending pressures will increase in the second half of 2005 and into 2006 as the government prepares for elections. Because of this, the fiscal deficit, excluding grants, is forecast to increase to 11.4% of GDP in 2005/06. Donors are expected to continue contributing large amounts of budgetary assistance, especially in 2005/06, given that the international community has put a lot of effort into pushing for the adoption of multiparty politics in Uganda, and will be keen to see free and fair elections taking place. However, donor inflows will not be sufficient to meet the large spending increases by the government, and the fiscal deficit (including grants) is forecast at 4.3% of GDP in 2004/05 and 3.5% of GDP in 2005/06. The government will continue to finance the deficit through a combination of domestic and external borrowing. Domestic debt has been increasing in recent years, as donor contributions have not covered the large budget deficits. Domestic debt is expected to increase to over 10% of GDP by 2006, which is low by African standards, but stood at as little as 1.8% of GDP as recently as 1998.

Monetary policy Monetary policy will have to remain tight in 2005-06 to address the effects of large fiscal deficits and keep inflation under control. The Bank of Uganda (the central bank) is in the process of attempting to stabilise interest rates in the long term. This has been helped by the introduction of two- and three-year Treasury bonds during 2004, which means that it is no longer necessary to finance the deficit entirely through short-term Treasury bills. Another move designed to bring down interest rates in the long term is the central bank!s plan to withdraw project funds currently held in the country!s commercial banks, banking them at the central bank instead. Uganda receives millions of dollars a year in project funding from its donors, and their withdrawal from the commercial banks should increase competition in the sector both for new customers and government debt. This should allow interest rates on lending

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and T-bills to fall. Depositing the funds with the central bank will also help to boost foreign-exchange reserves, aiding the central bank!s ability to reduce volatility in the foreign-exchange markets. The fact that project funds are no longer spread around the commercial banks should also make their misappropriation more difficult, aiding the battle against corruption. However, in the short-to-medium term the interest rates charged by commercial banks may increase, as they will lose an important source of revenue.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 Real GDP growth World 3.9 5.0 4.2 3.9 OECD 2.0 3.3 2.3 2.3 EU25 1.1 2.4 2.0 2.1 Exchange rates ¥:US$ 115.9 108.1 99.3 92.8 US$:€ 1.132 1.244 1.365 1.400 SDR:US$ 0.714 0.675 0.639 0.626 Financial indicators ¥ 2-month private bill rate 0.03 0.00 0.05 0.34 US$ 3-month commercial paper rate 1.10 1.48 3.29 4.38 Commodity prices Oil (Brent; US$/b) 28.8 38.5 42.0 37.0 Coffee (robusta; US cents/lb) 37.0 36.0 36.0 32.0 Food, feedstuffs & beverages (% change in US$ terms) 6.6 9.1 -6.5 -1.4 Industrial raw materials (% change in US$ terms) 13.0 21.0 3.5 -6.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. There are signs that growth is decelerating in some of the world’s major economies, and the outlook for 2005-06 is for a more modest pace of expansion when compared with 2004. We estimate that world GDP growth (on a purchasing power parity basis) accelerated to a rapid 5% in 2004, but forecast that it will moderate to a still robust 4.2% in 2005 and 3.9% in 2006. The pace of economic growth in the EU"which is vital for Uganda!s trade"is expected to be weak: real GDP growth is forecast at 2% in 2005 and 2.1% in 2006. Coffee demand is expected to rise only slowly, owing to stagnation in most of the traditional markets of North America and Western Europe. Against this, supply is expected to rise as Brazilian output recovers and Vietnam records impressive harvests. However, owing to bullish market sentiment and an under-reporting of the harvest in Vietnam, prices in early 2005 will be high, maintaining the average price of robusta for the year at 36 US cents/lb. In 2006 prices will better reflect demand and supply conditions, and the average price will fall to 32 US cents/lb. The recent bout of cold weather in Europe and North America and continued industrial growth in China have contributed to the surge in oil demand this year. On the supply side, there are growing concerns that spare capacity among OPEC producers is becoming thin. As a con- sequence, we expect the price of Brent crude to increase to an average of

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US$42/barrel in 2005, before prices ease to US$37/b in 2006 as stocks and spare capacity are increased.

Economic growth Poor rainfall during the second half of 2004 and early 2005 has impacted heavily on agricultural output. This will affect real GDP growth, which is forecast at 5.3% in 2005"well below the government!s medium-term annual growth target of 7%. Assuming normal weather conditions for the remainder of the forecast period, the agricultural sector should recover in the second half of 2005 and into 2006. Excluding agriculture, Uganda!s real GDP growth in 2005-06 will be supported by strong growth in non-traditional exports such as horticulture, 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 are stimulating construction and quarrying, and strong growth in mobile telephony is boosting communications. However, this growth is likely to be tempered somewhat by the elections in 2006: the political uncertainty surrounding the polls may delay some investment. Real GDP growth in 2006 is thus expected to improve only slightly, to 5.6%.

Inflation Food prices constitute around 45% of Uganda!s consumer price index, which makes the index highly sensitive to food-price movements. Poor weather in 2004 seriously affected harvests in the second half of the year, and food prices rose substantially. Poor levels of rainfall have continued to be experienced in many areas during the first quarter of 2005, and so food prices are expected to remain high. The strong Ugandan shilling should mitigate the overall growth of inflation, but high oil prices will also contribute to price increases. We forecast average inflation of 7.3% in 2005. It is assumed that weather conditions will return to normal by 2006, but inflation is expected to remain relatively high, at 5.8%, as the volume and price of imports increase as the currency depreciates and as government spending increases as the elections approach.

Exchange rates The Ugandan shilling appreciated steadily during 2004, averaging NUSh1,810:US$1 for the year, compared with an average of NUSh1,964:US$1 in 2003. The strengthening of the currency is largely the result of the weakness of the US dollar, but is also attributable to relatively strong export performance. The Ugandan shilling is expected to remain broadly stable in 2005, owing mainly to the continued weakness of the US dollar. A stronger depreciation is forecast in 2006 as international interest rates rise, the government increases spending in the run-up to the elections and import demand grows. The low base set in early 2005 also means that year-on-year comparisons will show fairly large deprecations. We forecast that the shilling will average NUSh1,823:US$1 in 2005 and NUSh2,009:US$1 in 2006.

External sector Total exports are expected to rise from US$705m in 2004 to US$721m in 2005. Higher investment in fish-processing facilities will aid productivity in the sector, and tea exports will benefit from improved management of the tea estates. Total exports are forecast to increase again in 2006, but only marginally, to US$726m, as coffee prices decline and fish production moderates as over- fishing in some areas reduces catch sizes. Imports are also expected to increase,

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to US$1.6bn in 2005 and US$1.8bn in 2006, owing to greater foreign investment in industry (mainly manufacturing and textiles) and preparations for the elections. As a result, the country!s trade deficit is set to widen from US$773m in 2004 to US$1.1bn in 2006. The services account will remain firmly in deficit, despite modest improvements in banking, tourism and information technology 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 in surplus and will increase in 2005-06, owing to high levels of donor support for the elections and high inflows of private remittances. Overall, the current- account deficit is expected to widen from 3.3% of GDP in 2004 to 4.2% of GDP in 2005 and 5.4% of GDP in 2006.

Forecast summary (% unless otherwise indicated) 2003a 2004a 2005b 2006b Real GDP growth 4.7c 5.0c 5.3 5.6 Industrial production growth 5.0c 5.6c 6.0 5.8 Gross agricultural production growth 4.2c 3.8c 4.2 5.2 Consumer price inflation (av) 7.8 3.6 7.3 5.8 Consumer price inflation (year-end) 6.2 8.0 5.0 6.0 Short-term interbank rate 18.9 20.6 18.0 18.5 Government balance (% of GDP)d -3.9 -3.3 c -4.3 -3.5 Exports of goods fob (US$ m) 563.0 705.2 720.7 726.1 Imports of goods fob (US$ m) 1,241.7 1,478.3 1,600.4 1,789.4 Current-account balance (US$ m) -390.0 -249.8 -355.6 -461.8 Current-account balance (% of GDP) -6.0 -3.3 c -4.2 -5.4 External debt (year-end; US$ bn) 4.3c 4.4c 4.6 4.6 Exchange rate NUSh:US$ (av) 1,963.7 1,810.3 1,823.4 2,008.7 Exchange rate NUSh:¥100 (av) 1,694.3 1,674.3 1,837.2 2,165.7 Exchange rate NUSh:€ (year-end) 2,441.2 2,354.4 2,812.2 2,792.1 Exchange rate NUSh:SDR (year-end) 2,875.8 2,700.8 3,209.1 3,192.8 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates. 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.

Gross domestic product Consumer price inflation % change, year on year av; %

Uganda Sub-Saharan Africa Uganda Sub-Saharan Africa 7.0 10

6.0 8 5.0 6 4.0 4 3.0 2 2.0

1.0 0

0.0 -2 01 02 03 04 05 06 01 02 03 04 05 06 2000 2000

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The political scene

The president boosts his The president, Yoweri Museveni, carried out an extensive cabinet reshuffle in support in a cabinet reshuffle January. The last reshuffle was in June 2003, and, with the deaths last year of two senior cabinet members, James Wapakhabulo and Francis Ayume (July 2004, The political scene), this reshuffle had been expected for some time. However, the precise timing and nature of the changes do appear to be significant, as they demonstrate the president’s determination to consolidate his authority in government ahead of the crucial forthcoming debates about the constitution, particularly the move to abolish the two-term limit on the presidency. In the past, Mr Museveni’s cabinets have sometimes included people widely seen as belonging to the political opposition, especially in the early days, when he was mindful of the need to broaden his ethnic and regional support, but there appears to be no place for dissident voices among his latest promotions. The new team has been dubbed by many political commentators in Uganda as Mr Museveni’s “war cabinet”, and it will be expected to ensure that the outcome of the imminent constitutional upheaval is in line with his preferences.

Major changes occur in the The reshuffle saw the departure from the cabinet of Gerald Ssendaula, who finance and foreign ministries had presided over the Ministry of Finance, Planning and Economic Develop- ment for seven years. Mr Ssendaula’s long stay says much about his competence and, perhaps, his good standing with the international financial community. It is still unclear whether he was sacked or chose to leave himself, with conflicting reports indicating both. On balance, the latter appears to be most likely, as Mr Ssendaula has previously indicated his wish to retire and Mr Museveni intends to retain his services as senior presidential adviser for financial affairs. Mr Ssendaula’s replacement as finance minister is Ezra Suruma, a newcomer to the top level of government. Mr Suruma comes from the secretariat of the ruling Movement party (now the National Resistance Movement Organisation"NRMO), where he was director for economic affairs and a member of the fast-track East African political federation committee. He has in the past been the administrative director of the Uganda Commercial Bank (UCB), the deputy governor of the Bank of Uganda (the central bank) and the deputy secretary to the Treasury. There has been talk that Mr Suruma’s appointment as finance minister may signal a different emphasis in economic policy (see Economic policy). The high-profile job of the late (and highly respected) James Wapakhabulo at the Ministry of Foreign Affairs has gone to Sam Kutesa, a veteran Museveni supporter. Mr Kutesa has close links through marriage to the president’s family, and this promotion marks something of a political comeback for him after his censure by the previous parliament for abuse of ministerial office (January 1999, The political scene). The other top-level changes were at agriculture, justice, trade and education. The new minister for agriculture, animal industry and fisheries is Janat Mukwaya, the former minister of justice and constitutional affairs, which role Kiddu Makubuya takes over, together with the additional role of attorney-general, following the death of the previous attorney-general, Francis Ayume. Mr Kiddu’s previous cabinet seat at education

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and sports went to Namirembe Bitamazire, the new woman in the cabinet. The new minister for trade, industry, tourism, wildlife and antiquities is Daudi Migereko, replacing Edward Rugumayo, who was made ambassador to Paris.

Key ministries after the reshuffle Ministry Minister Finance, planning & economic development Ezra Suruma Foreign affairs Sam Kutesa Agriculture, animal industry & fisheries Janat Mukwaya Justice & constitutional affairs & attorney general Kiddu Makubuya Education & sports Namirembe Bitamazire Trade, industry, tourism, wildlife & antiquities Daudi Migereko

The changes reward Unsurprisingly, the opposition media have been critical of the cabinet changes, Museveni loyalists describing them as the recycling of old and discredited people or the promotion of sycophants. There has been much public speculation about the appropriate- ness of those chosen for promotion by the president, as opposed to those who were overlooked. Many of the new faces in the cabinet have been effective in mobilising support for the president among the Movement members of parliament (MPs; many of whom are known to be wavering), and their enhanced status will add to their leverage. Before parliament went into recess, one of the new cabinet recruits, Nyombi Thembo, introduced a motion proposing a change in the normal parliamentary procedure of secret voting on matters relat- ing to major amendments of the constitution. This would make it impossible for Movement MPs to conceal whether they had voted against the government.

The new inspector-general of Mr Museveni appointed Faith Mwondha, a High Court resident judge for government is named Mbale, as the new inspector-general of government (IGG), and Raphael Baku as her deputy. Ms Justice Mwondha was a member of the Uganda Human Rights Commission before her appointment to the judiciary in 2002. In the light of the prominence given to issues of corruption by politicians and high-ranking civil servants, both at home and abroad, the IGG has a high-profile role and needs to be seen as independent of the executive. However, there is uncertainty as to whether or not this is the case in practice. Ms Mwondha’s predecessor, Jotham Tumwesigye, found himself on the receiving end of criticism from the president and the vice-president for making public the wealth of people in high office. His contract as the IGG was not renewed when it expired in November 2004 (January 2005, The political scene). High-profile launch of the FDC

The Forum for Democratic Change (FDC) took a major step onto Uganda’s political stage with a high-profile launch in February. Formed only last August, from the merging of Reform Agenda, the Parliamentary Advocacy Forum and the National Democrats Forum, the FDC is the newest and most dynamic political force in the country, and the only party likely to present a serious challenge to the Movement party in next year’s legislative election (October 2004, The political scene). For such a new organisation the FDC has progressed rapidly, with the launch event at party headquarters in the capital, Kampala, kick-starting its election campaign very effectively. Dignitaries and representatives from the US, members of the EU and many African countries were invited to the ceremony, together with the party

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leaders of the ruling Movement party, the Uganda People’s Congress and the Democratic Party, as well as top people from religious communities and the business world. A party spokesman, Wafula Oguttu, said that the party would also make a formal entrance into parliament and begin registering members immediately at its offices throughout the country. The FDC chooses Mr Besigye Some three weeks before its launch, the interim executive of the FDC (or as its standard-bearer transitional council, as it calls itself) chose Kizza Besigye as its leader and flag- bearer for the 2006 presidential and legislative elections, although he will have to be endorsed by a delegates’ conference, probably in May or June. Mr Besigye was always going to be the front-runner for party leader after his good performance against Mr Museveni at the last presidential election, in 2001, and his leading role in the emergence of Reform Agenda from within the Movement organisation. The leaders of the other partners in the FDC, all of whom might have harboured ambitions, made it abundantly clear that Mr Besigye was the consensus candidate. However, for the choice of Mr Besigye to have any relevance he will have to return from exile in South Africa, where he has been based since he fled Uganda in fear of his life four years ago. The FDC leadership within Uganda appears to be confident, after discussions with the authorities, that Mr Besigye will be able to return to Uganda and live without harassment. In addition to Mr Besigye, the FDC has an impressive line- up of top officials, many of whom are MPs and, like Mr Besigye, defectors from the Movement or from other parties. People like Eriya Kategaya, Sulaiman Kiggundu, Mugisha Muntu and David Pulkol, all of whom have experience in government, will provide the FDC with a degree of instant credibility among the electorate.

The government campaigns to Despite his good political credentials, Mr Besigye is not without his enemies, discredit the FDC leadership even among his party members, some of whom are understood to have raised objections to him because of suspicions about his involvement with the rebels of the People’s Redemption Army (PRA)"rumours of which the government has been spreading assiduously for some time in an effort to discredit him. Speaking in parliament in March, the defence minister, Amama Mbabazi, was at pains to elaborate the links between the PRA and Reform Agenda, the parliamentary group led by Mr Besigye. Insisting that the PRA did indeed exist (for there is as yet no record of any rebel operations), Mr Mbabazi said that it was led by two renegade Ugandan Peoples! Defence Forces (UPDF; the Ugandan army) officers, Samson Mande and Anthony Kyakabale, both currently living in Sweden, and, as well as developing support networks inside and outside Uganda, it was trying to establish links with other rebel groups, such as the Lord!s Resistance Army (LRA; a rebel group active in the north of Uganda and which has bases in southern Sudan). The government is clearly worried about the impact that the FDC has made, and would probably prefer not to have a repeat of the 2001 presidential election, in which Mr Besigye did well. It would not be surprising, therefore, if the authorities were to make it too difficult for Mr Besigye to return from exile by threatening legal action against him on the grounds of his alleged links with a terrorist organisation. If that proved to be the case, it is widely believed that the FDC would choose Mugisha Muntu as its fallback presidential candidate.

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Mr Muntu, a former army chief for nine years, is the most senior in military rank (major-general) of a number of former top UPDF officers in the FDC, and, interestingly, Mr Museveni chose to focus on them (and on Mr Muntu in particular) in recent attacks on the new party, describing them as failed soldiers.

The FDC is concerned about The next elections are still a year away but, in the light of the imminent politically motivated violence changes to the constitution, there is a feeling that they will be of special significance, and they are casting a long shadow. Opposition groups are already expressing their anxiety about a possible repetition of the heavy-handed methods used by Movement supporters in previous elections to intimidate their supporters and obstruct their political campaigning. The local press is rife with stories concerning the harassment of the opposition, and of FDC supporters in particular"an indication that the government is taking the FDC threat very seriously. Another story currently circulating among local sources is that the Movement has placed moles in the FDC organisation in order to sabotage its operations. It is impossible to say whether there is any truth in this, although it is certainly the case that many of the FDC leading lights were staunch Movement/Museveni men not long ago.

The traditional opposition The confidence and optimism surrounding the FDC have encouraged parties face marginalisation defections from the main traditional opposition parties, the Uganda People’s Congress (UPC) and the Democratic Party (DP). According to press reports, the DP has lost more than half its parliamentary strength through these defections. In addition to the pulling power of the FDC, a major problem for the DP is that it has signally failed over a number of years to resolve the problem of finding a new leader to replace the elderly Paul Ssemogerere, despite the efforts of younger members of the party. This has resulted in the DP now existing as four separate factions. Even if the differences can be reconciled, it is difficult to see how the DP will now be able to attract support beyond its traditional Catholic/Baganda constituency. The UPC appears better placed for the elections in 2006, although it has not been without its internal problems, notably what to do about its leader-in-exile, the former president, Milton Obote. The UPC does appear to have sorted out its local leadership problems and looks likely to go into the elections as a reasonably united party under James Rwanyarare. The challenge for the UPC (similar to that faced by the DP) will be how to reach beyond its northern political heartland and present itself as a national party capable of dealing with the range of contemporary issues that face the country. If, as seems likely, the main contest in the forthcoming elections proves to be between the FDC and the currently governing NRMO, the old political parties could find themselves marginalised.

A revised pre-election The government responded to accusations that it was dragging its feet over the timetable is released new constitutional legislation by publishing a new timetable for the parliamentary business that will have to be dealt with leading up to the parliamentary and presidential elections due in 2006. The new schedule was needed because the previous timetable, published last July (October 2004, The political scene), was running four months late. It remains to be seen whether the

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authorities will be any more successful with the new dates, bearing in mind the amount of business that will be involved. According to the new schedule, the presidential and parliamentary elections, together with elections for local council leaders, will be held between February 12th and March 12th 2006. Before then, a number of important steps will have to be taken this year, beginning with winning parliamentary approval for the bill to amend a number of clauses in the constitution that was presented to MPs in February. The bill should be passed by April 28th, after debates that took place between March 9th and April 7th and the second and third readings. The bill contains an important proposal to repeal article 105 (2) of the constitution, which would scrap the limit on presidential terms and allow Mr Museveni to stand again, if he wished to do so. The other (less contentious) part of the bill is the amendment of the Political Parties and Organisations Act to introduce a multiparty system. The legal and parliamentary affairs committee passed the constitution amendment bill in March, and the approval of parliament as a whole is seen as inevitable, given the size of the majority enjoyed by the Movement and the resources that they have dedicated to influencing wavering MPs (January 2005, The political scene).

The opposition groups press Assuming that all goes to plan, after parliament has signified its approval of the fo r sho rt-cuts amendments the electoral commission will embark on a programme of civic education and updating of voter lists in preparation for the referendum on the political systems aspect of the bill, which itself is due on July 1st. What exactly will be asked at the referendum is unclear. The constitution does not require a referendum as long as a two-thirds parliamentary majority supports the amendments. This implies that the real point of the referendum is its propaganda value, as Mr Museveni and his supports seek to prove to their detractors that the Ugandan people are firmly behind the constitutional amendments, including the lifting of term limits. Assuming that the referendum confirms popular support for the constitutional changes, the electoral commission will then have the job of organising another programme of civic education before the elections themselves, and updating the voters’ register again. Opposition MPs, who are anxious to see the removal of the legal straitjacket that prevents political parties from operating, have suggested that the majority of the 119 constitutional changes that have been proposed are not essential for the political transition to take place. They would like parliament to focus its attention on the few amendments that relate specifically to the political transition and leave the remainder to be dealt with at length by the next parliament. However, the government is unlikely to favour this route, as it may not enjoy the large majority that it has at present in the next parliament.

Mr Museveni desires influence Mr Museveni gave the clearest indication so far of his continuing political beyond the next elections ambitions at a closed meeting for Movement MPs at Munyonyo in March, when he urged MPs to support the government’s proposal to remove the limits on presidential terms. Anonymously leaked accounts of the meeting reported that the president spoke for two hours, making it clear that he saw a leading role for himself on Uganda’s political stage not just in the immediate future but also in the years stretching ahead. His comments, if reported correctly, suggest a

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man who is convinced that he is still the best person to lead the country. He said that he would retire when the time was right, but he wanted to have the opportunity to return if his successors were doing a bad job. As an example, Mr Museveni cited the president of Nigeria, Olusegun Obansanjo, who returned as president in 1999 after handing over power in 1979. Mr Museveni believes that young countries like Uganda should avoid rigid constitutions that prevent them from making the best use of their scarce human resources. Moreover, lifting the limit on presidential terms did not necessarily result in the incumbent staying in power indefinitely, as Kenneth Kaunda of Zambia discovered when he was voted out after 27 years as president.

Attempts to reach a peace deal Despite the most strenuous efforts of the government negotiating team led by with the LRA continue to falter the internal affairs minister, Ruhakana Rugunda, and a former minister of state for northern Uganda, Betty Bigombe (as mediator), a peace deal with the LRA that looked to be close as last year drew to an end (January 2005, The political scene) slipped frustratingly away. The government has been under enormous pressure from all sides to keep the negotiations going"from the local population in the north and their civic and church leaders, from non- governmental organisations working in the region and, not least, from the international community, especially donor countries"but finding a way through the mistrust that had enveloped the process has proved almost impossible. Numerous ceasefire agreements were made in late 2004 and early 2005 but each expired before a permanent peace deal could be established. Between ceasefires came reports of renewed rebel attacks and atrocities, and the launching of the army’s new “Sweep Operation” to counter them.

The troubled northern region Major town Main road International boundary Regional boundary

Juba SUDAN Kapoeta

ETHIOPIA Yei

Moyo Nimule

D . E R Kitgum NILE le M i N O t r A e c C b h O l R Arua A w F a Kotido A R NORTHERN . C T O I N C Gulu A gu KARAMOJA G R g a O E R P UGANDA . U Nebbi B ictori 0 km 50 100 150 L Pakwach V a Nil . IC e R Lira 0 miles 50 100

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The surrender of an LRA Mrs Bigombe and the government team appear to have done their utmost to negotiator causes confusion gain the confidence of the rebels, with Mr Rugunda even describing them as “our LRA brothers”. A number of meetings took place in a cordial atmosphere in February, although still without the rebels’ leader, Joseph Kony. However, the process then fell apart rather abruptly, seemingly following the decision of the LRA chief negotiator, Sam Kolo, to surrender to the army. He had headed the LRA team since last December and, with the rank of brigadier, was the most senior in a series of rebel officers to take up the government’s amnesty offer. Having phoned his intentions to Mrs Bigombe, Mr Kolo hid away from his fellow officers and had to be rescued by the UPDF. He said that he had surrendered to promote the peace talks, but his actions threw the talks into a state of uncertainty and may well have provoked the LRA into resuming their attacks. The government continues to express its readiness to resume negotiations, but the recent opportunity looks to have ended. Mr Kony’s reluctance to agree a peace deal

The Ugandan government appears to have done everything that it could to meet the concerns of the Lord’s Resistance Army (LRA; a rebel group active in the north of Uganda and which has bases in southern Sudan) during negotiations for a peace deal, with the help of foreign diplomats at crucial stages. The government has apparently even indicated that it is willing to withdraw its case against the LRA’s leader, Joseph Kony, at the International Criminal Court (ICC). However, whether it is in a position to do so is in doubt, as the ICC has subsequently begun preparations for the commencement of action against Mr Kony.

At one time it seemed that a peace deal with the rebels was only hours away, and the sticking-point appears to have been the unwillingness of Mr Kony himself to take the plunge. Despite its stated aim to replace the government of Uganda with one following the principles of the Bible’s Ten Commandments, the LRA has never shown any interest in political negotiation, and the recent talks were mainly about securing the safety of the rebels, in particular the leadership, if they agreed to surrender. Mr Kony has shown himself to be particularly anxious about this, and many would say that he has good reason to be so, given his responsibility for so much mayhem in the northern region for almost two decades. It is for this reason that he may now be reluctant to sign a peace agreement until the ICC makes its position clear on whether or not it will seek to arrest him. Despite its apparent determination to carry on the fighting, the LRA’s days are surely numbered. Its members, once counted in thousands, are now widely reported to be a few hundred, and the Ugandan Peoples! Defence Forces (the Ugandan army) know that they are at last gaining the upper hand. With the faltering peace negotiations, it is beginning to look as if the end of the civil war will come only if Mr Kony is captured or killed. South Sudan promises help to The ending of 21 years of civil war in southern Sudan, marked by the signing of defeat the LRA a comprehensive peace accord between the Muslim government of Sudan based in Khartoum and the southern-based Christian Sudan People’s Liberation Army (SPLA) on January 9th in Nairobi, Kenya, offers renewed hope of a military success for the UPDF. While the civil war in Sudan was being waged, the LRA was supported and equipped by the government of Sudan in

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retaliation for Uganda’s support of the SPLA, but these circumstances no longer apply. Furthermore, LRA attacks on southern Sudanese settlements made enemies of the new SPLA government in southern Sudan. Under the terms of the Sudan peace agreement, southern Sudan will enjoy a large measure of free- dom to administer its own internal affairs. John Garang, the leader of the SPLA, a long-time friend of Mr Museveni and now head of the new regional government in the south, has made it clear that his administration will be doing all it can to help Uganda to bring its own regional civil war to a conclusion. In a reference to the LRA, Mr Garang said in a lecture given in the Ugandan capital, Kampala, that his government would not countenance any armed foreign groups in its country. The SPLA deputy governor for political affairs, Johnson Okot, said that the LRA would be smoked out and wiped out if it did not negotiate a peace deal with the Ugandan government. Recognising the part played by the Ugandan government in the successful outcome of the SPLA’s long struggle for independence, Mr Okot said that the SPLA would not hesitate to support the UPDF in its campaign to bring peace to neighbouring Uganda.

Sudanese refugees are The ending of the civil war in Sudan has not been received with universal reluctant to return home rejoicing by all the Sudanese refugee communities in Uganda. After the peace deal was signed in Nairobi, some 10,000 enthusiastic Sudanese refugees reportedly left Uganda immediately to return to a home that many of them had not seen for 20 years. A month later, however, the remaining refugee groups were displaying much less enthusiasm. According to the UN Refugee Agency (UNHCR), Uganda has taken in about 200,000 Sudanese refugees and there are some 40,000 additional refugees living unregistered in the border region. The Ugandan authorities had been planning a voluntary repatriation of the refugee communities, but many of them proved to be reluctant to move, voicing concerns about the lack of basic facilities in Sudan and about their security under the new political arrangements. Some who had made the journey home have subsequently returned to Uganda, where (according to the UNHCR) refugees enjoy better conditions in their camps than elsewhere in Africa.

DRC instability drives a new Although the tensions between Uganda, Rwanda and the Democratic Republic flow of refugees into Uganda of Congo (DRC) that raised fears of a new regional war towards the end of 2004 have subsided (January 2005, The political scene), there remains instability in the eastern region of the DRC. The problems that cause the instability, which in turn gives rise to tensions, have not gone away, notably rivalries between ethnic DRC militias and the presence in the region of Ugandan and Rwandan dissident groups. In early 2005 an outbreak of violence, reportedly between local militias and Rwandan Hutu rebels, caused a fresh outflow of refugees from the DRC into Uganda. A Ugandan army spokesman said that up to 7,000 Congolese refugees had sought refuge in the frontier district of Kanungu, with thousands more around Ishasha, near Lake Edward. If they prove to be true, reports that the Forces démocratiques de liberation du Rwanda (FDLR)"one of the major Rwandan dissident groups operating in the DRC"intends to end its campaign of violence should mean that the flow of refugees in the region will decline. However, a lasting peace for the turbulent region is still a long way off.

UN says Uganda and Rwanda A report by UN experts, published at the end of January, alleging that Uganda have broken arms embargo and Rwanda had both violated the terms of the international arms embargo imposed on the easternmost regions of the DRC (Ituri, North-Kivu and South- Kivu) drew angry denials from both governments. The report said that members of a UN panel had found credible evidence that both Uganda and Rwanda had provided “state-authorised arms transfers” to insurgent groups in these regions, and that their troops had been directly involved in supporting them. Uganda was accused of shipping machine guns, rocket launchers, mortars and land mines across its border to a militia group in Ituri known for pillaging, torturing and killing residents, and that this group exploits the gold resources of the region to barter with the Ugandan authorities for its supplies. The breaking of the arms embargo is seen as part of a wider picture in which renegade troops, militia leaders and shadowy businessmen continue their exploitation of the region’s rich natural resources with the connivance of the governments of Uganda and Rwanda. In Kampala a Ugandan military spokesman, Shaban Bantariza, denying the allegations, accused the UN of seeking to cover up the failure of the UN force in the DRC (MONUC) to bring peace to the region by placing the blame elsewhere. It is the case, however, that Uganda and Rwanda both made allies of some of the rebel militias in the DRC during the period of the regional war in the mid-to-late 1990s, when their armies controlled large tracts of the eastern region. The MONUC force was set up in 2002, following the (official) end of the war in the DRC and in anticipation of the withdrawal of Ugandan and Rwandan forces, to enforce security in the region. However, the scale of the problem was always likely to be too great for such a small UN force (initially only about 10,000-strong, and currently still only around 16,000) in terms of both the extent of the area involved and the magnitude of the ethnic strife. Moreover, both Uganda and Rwanda consider that they still have legitimate grounds for concern about the situation"the perpetrators of the 1994 genocide, in the case of Rwanda, and anti-government rebels, in the case of Uganda, are based in eastern DRC. Whether Rwanda will scale back its interference in the DRC should its enemies, as recently reported, be preparing to end their hostilities remains to be seen.

Ugandan rebels are pinpointed As recently as February, both Ugandan and Congolese military intelligence in the DRC reported identifying three camps of the Allied Democratic Forces (ADF), a Ugandan rebel group, in the eastern region. The identification was based on joint aerial surveillance in a plane provided by MONUC. Lieutenant-Colonel James Mugira, a military intelligence officer, told journalists that the number of rebels was estimated to be no more than 1,000. Colonel Mugira did not expect the rebels to become a serious threat, as the border is well patrolled by the UPDF. However, the confirmation of their existence provides Uganda with a powerful diplomatic weapon in establishing the justice of its security concerns. The ADF caused huge problems to the authorities in the 1990s, launching ruthless attacks against military and civilian targets in western Uganda from the safe haven of the DRC (then Zaïre). The presence of these rebels was the main pretext given by the government for sending the Ugandan army into the DRC in the late 1990s. Colonel Mugira said that the rebels were taking advantage of

the absence of central authority in the DRC to regroup under the command of Jamil Mukulu, their former political leader, and Yusuf Kabanda, their former field commander. Colonel Mugira could not say whether Uganda would feel compelled to strike at the camps if the Congolese and UN authorities failed to take action against them.

The government is praised for In contrast to the negative publicity caused by its alleged breaking of the arms its regional peace efforts embargo, Uganda was singled out for its positive contribution towards achieving peace in the Great Lakes region by the US deputy assistant secretary of state for African affairs, Donald Yamamoto, following tripartite talks held in Washington in February. The talks were the latest in a series of tripartite talks set up by the US in 2004, involving Uganda, Rwanda and the DRC. However, on this occasion they were initiated by Uganda in response to the growing tension in the region last December, when Rwanda appeared to be on the threshold of sending its troops back into the DRC to deal with a perceived threat to its security from the Hutu militia (January 2005, The political scene). Early in the new year the secretary-general of the UN, Kofi Annan, urged greater co-operation between the three governments to reduce the tension, and called on Uganda to play a positive role in helping the transitional government in the DRC to extend its authority throughout the Ituri region. Uganda’s new foreign secretary, Sam Kutesa, said that the tripartite meeting had been called by Mr Museveni in order to clarify what had previously been agreed and to clear the air on how to exchange information. Mr Yamamoto also praised Uganda for indicating its commitment to a non-military solution to the security problems of the DRC’s volatile eastern region, and added that representatives of the African Union (AU), the EU, the UN and Burundi had been invited to contribute to the talks and were now part of the process.

UPDF troops prepare for Two battalions of the UPDF (about 800 soldiers) are to undergo two months of peacekeeping in Somalia training to prepare them for a peacekeeping role in Somalia. The Ugandan forces will form part of an international African force of 7,000 that will help to provide security for the country’s new transitional government when it returns home from exile in Kenya. The decision to deploy the force with or without the support of the Somali warlords was taken at a meeting of the Intergovern- mental Authority on Development (IGAD; consisting of Uganda, Djibouti, Ethiopia, Eritrea, Kenya, Somalia and Sudan), following a powerful plea from Mr Museveni, although the decision has to be endorsed by the foreign ministers of the seven-nation group in April. The IGAD mission is seen as an interim measure until the AU can take responsibility. It may well raise tensions within Somalia, where the warlords have indicated their opposition to the presence of troops from neighbouring countries. According to an army spokesman, the Ugandan troops will consist of men experienced in anti-insurgency operations, whose training will be supervised by Colonel Levi Karuhanga, who led the Ugandan contingent in Liberia. The new force could be the first stage in the creation of an IGAD Africa Stabilising Force, in which Uganda would like to play a central role.

Economic policy

Mr Ssendaula’s exit may signal The main talking-point of the recent cabinet reshuffle was the replacement of a change in economic policy Gerald Ssendaula as finance minister by Ezra Suruma. The appointment is seen as particularly interesting because Mr Suruma is known to be in favour of state intervention in the economy, a policy abandoned by the president, Yoweri Museveni, shortly after he and his National Resistance Army seized power in 1986. The first economic policies announced by the new Museveni regime, then the National Resistance Movement, leaned very heavily on left-wing ideology and were designed to free the country from the perceived limitations caused by colonial distortions. However, faced with the unavoidable need for external assistance to kick-start economic recovery, Mr Museveni and his team displayed pragmatism and embraced the orthodox policies of the IMF with growing enthusiasm. The economic progress made by Uganda during the following decade was impressive. Mr Suruma, then deputy governor of the Bank of Uganda, disapproved of the change of economic direction and (with other dissenters) was banished into the political wilderness. Eventually, though, he ended up in the Movement secretariat, and now he is the finance minister. Not surprisingly, there are some who see the promotion of Mr Suruma as evidence of a rekindling in Mr Museveni of his former convictions. He has, after all, never ceased to complain about the structural disadvantages suffered by less-developed countries. Moreover, despite toeing the IMF line of budgetary discipline over the years and espousing free-market policies on matters such as pricing and privatisation, Mr Museveni has recently become tetchy about IMF intervention in government business. He has been increasingly resentful about the IMF-imposed budget restrictions, and particularly about IMF (and donor) criticism of defence spending (July 2004, Economic policy). In Mr Museveni’s view, placing limits on the defence budget would seriously restrict the army’s capability of dealing with the reality of security threats.

The government intends to Indications of a possible change in the emphasis of government thinking came reduce donor dependence in reports of a supposedly secret meeting, held in February, when ministers and permanent secretaries considered a policy paper drafted by Mr Suruma. As well as addressing job creation and rural development, and increasing local revenues, the measures included a proposal to limit donor funding to US$200m annually (annual budgetary assistance currently approaches US$500m). This was described as a deliberate attempt to reduce reliance on donor funding, which currently accounts for over 40% of the state budget. A minister in the finance department, in a press interview, would not confirm the US$200m figure, but said that the government hoped to reduce the budget dependence on donor funding to 25% over a period of ten years. The additional local resources would be mobilised from local borrowing, savings, increased wealth and higher taxes. According to reports, Mr Suruma had proposed a return to a more interventionist model of macroeconomic management because he felt that the current market approach had left productivity in Uganda at the bottom of the world scale.

Although a gradual reduction in Uganda’s dependence on its donors would be desirable, it is difficult to see how the government could turn its back on the IMF in the short term, given the extent of the dependence. The IMF ceased its financial assistance to the Obote administration in 1984 when it deliberately ignored budget restrictions imposed by the terms of a structural adjustment facility. Although direct financial assistance from the IMF is low, most of the donors that provide the bulk of the money condition their support on good relations being maintained with the IMF. The good track record established by the Ugandan government in boosting economic growth, reducing poverty and tackling HIV/AIDS, and the current progress towards peace in the north of the country is likely to persuade donors that some slack is warranted. However, should the government begin to implement some of the interventionist policies that it is talking about, then the donor community would probably restrict its assistance. Without external support Uganda’s economy would collapse. Despite the current rhetoric, the government is fully aware of its dependence on donors, and will not want to push them too far. Nevertheless, a period of strained relations between Uganda and the IMF could be in prospect.

The latest IMF report on In February the IMF announced the completion of the fourth review of U gand a cal l s fo r n ew re fo rm s Uganda’s performance under its US$20.3m, three-year poverty reduction and growth facility (PRGF). As a result of this, the Fund approved the disbursement of a further US$3m, bringing the total disbursement so far under the programme to US$14.3m. As in the past, Uganda had asked for waivers in respect of some aspects of the conditionality that had not been met, and these were granted, as follows: • the ceiling on the increase in base money liabilities of the Bank of Uganda; • the ceiling on the increase in net claims on the government by the banking system; • the accumulation of new budgetary arrears under the commitment control system; and • new lending by the Uganda Development Bank prior to divestiture. Although this approval signifies the Fund’s continuing support of the government’s economic policies, the IMF statement drew attention to a number of concerns, and the tone was sharply critical. In general terms, it said that the impressive achievements in economic growth and poverty reduction that had followed a first wave of reforms had begun to taper off. For three years in a row Uganda had failed to meet its growth target of 7%, and although this can be partly attributed to drought, low commodity prices and high oil costs, new reforms and fighting corruption were essential. A second wave of reforms was therefore needed to increase the rate of economic growth, address the challenges arising from high population growth, and continue to reduce poverty and achieve the UN’s Millennium Development Goals. After cutting the poverty rate from 56% in the early 1990s to 34% by 2000, the rate had crept up to 38% by 2003, and more than 70% of people in the north were below the poverty line (January 2005, Economic policy). A revised poverty eradication action plan (PEAP) would have to address these matters, together with the

achievement of peace and security throughout the country. Although it recognised the recovery of economic growth in 2003/04, owing to greater agricultural output, and the decline in inflation, the Fund pointed out weaknesses in the implementation of fiscal policy, with weak budget control. In underlining the need for political will by the government to mount an effective drive against corruption, the IMF seemed to be implying that this will had weakened.

The government says that it The government’s answer to the Fund’s criticisms is to sustain a higher rate of will meet the challenge growth by pursuing a medium-term fiscal consolidation policy, to maintain debt sustainability and to create more room for the private sector. This strategy rests on increasing domestic revenue mobilisation and enhancing expenditure management, including a better monitoring of the government’s domestic arrears and a strengthening of administrative capacity at the local level. In this regard, the Fund welcomed the restructuring of the Ugandan Revenue Authority (URA), particularly in the light of expected revenue losses through the implementation of the new East African Community customs union. Forcefully addressing corruption in the URA was seen as key to the building of confidence in public institutions. The export-processing zones that are being established had to meet international standards and had to be ring-fenced to prevent tax evasion. Monetary policy would continue to be aimed at preserving price stability, and the flexible exchange-rate policy would help to maintain reserves at a comfortable level. Early passage of the anti-money- laundering law through parliament would build further confidence in the financial system, and divestiture of the Uganda Development Bank should enhance credit delivery to the private sector. The Fund expressed concern about the rise in the external debt burden, and noted that it would be important for the authorities to rely more on grants than on loans, while promoting export growth and diversification.

The authorities act to cut the Two developments have reflected growing concerns about the high costs of costs of overseas borrowing borrowing. At the end of January, in a move that took the commercial banks aback, the Bank of Uganda announced plans to take billions of shillings of project funds away from the banks and place them with the central bank, with immediate effect. To mitigate the impact on the operations of the commercial banks, which derive most of their deposits from these sources, the withdrawals will be made in three stages, over a period of 18 months, spread over two financial years. All commercial banks in the country will be affected by the changes, although the international banks (like Standard Chartered, Stanbic, Barclays and Baroda) will feel the greatest impact, as they deal with the lion’s share of project funds. The governor of the central bank, Emmanuel Tumusiime-Mutebile, said that the changes had been initiated in order to reduce interest rates. By removing a prime source of revenue for the commercial banks, the sector should become more competitive for alternative sources of revenue, including attracting new customers and buying government debt. It was hoped that his competition would bring down lending and Treasury-bill rates.

The high costs of borrowing were also highlighted in February, when parliament rejected a request by the government to borrow US$35.7m from the EU to finance private-sector developments, on the grounds that the rates of interest imposed by the commercial banks for handling the funds (made available to Uganda at 1% or less) were too high. A committee of members of parliament had recommended, on the basis of past experience, that the government should channel the funds through the development banks, which would charge less, and they wanted the government to renegotiate the loan to provide for at least 30 years of maturity to benefit long-term investment. Meanwhile, the government has signed an agreement with the World Bank worth US$70m, also for financing private-sector developments. This forms part of the support for Uganda from the International Development Association (IDA) during the present financial year, worth US$327.6m, of which US$190m is made up of grants, and is intended to support the PEAP. The World Bank credit is made available on standard IDA terms, with a commitment fee of 0.35% and a service charge of 0.74% over 40 years, with a ten-year grace period.

More time is requested for The government has asked the World Bank to extend the period of the privatisation privatisation programme, which has been funded by the Bank since 2001, for one or two years beyond the 2005 completion date. The authorities say that they lost a year at the beginning because the programme started a year behind schedule in 1993, so they think that it is reasonable to ask for permission to extend the completion date. Although 60% of the scheduled privatisations have been completed (numbering 115 parastatals), there remain 34 more still to be sold off, including the Dairy Corporation, the Water and Sewerage Corporation, Uganda Railways, the National Insurance Corporation and the National Housing and Construction Company. The proposal was put to a World Bank team of experts in February. The Bank is known to be unhappy about some aspects of the privatisation programme, including the delay in putting the state share of the insurance business up for sale and, particularly, about continual political interference in the sales process. The Bank also wants the authorities to take action to recover money still owed by some of those who acquired state companies through privatisation.

Parliament orders an inquiry The most recent example of political interference in the privatisation process into the Dairy Corporation was the order given by Mr Museveni to lease the Dairy Corporation to a Thai company, Malee Sampran Sampran. This order came at the time that bids from companies in South Africa, Kenya and Zimbabwe were under consideration by privatisation staff. Parliament acted swiftly to stop the completion of the leasing agreement until it had had the opportunity to study the details, including the financial standing of the Thai company. The episode has revived memories of the ill-fated 1998 privatisation of the Uganda Commercial Bank (UCB) to a Malaysian company, which turned out to be a scam (January 1999, The political scene), and has rekindled concern about the level of corruption that has frequently marred the privatisation process. A number of bids had already been received for the very profitable Dairy Corporation when Mr Museveni ordered the minister in charge of privatisation, Peter Kasenene, to award control of the company to the Thai firm (which had

not put in a bid) for the sum of US$1. Mr Museveni’s reasoning was that the Dairy Corporation had been leased, not sold, that it was a management agreement with no profits going to the company, that free milk would be provided for schoolchildren and that the Dairy Corporation would come up for privatisation again in three years. However, even if Mr Museveni’s intervention was made for the laudable reasons of social welfare, and assuming that no malpractice is uncovered, the affair does not reflect well on the government at a time when transparency is essential.

The domestic economy

Economic trends

Food-crop shortages raise The main measure of inflation, the annual headline rate (which includes food inflation prices), has continued to increase during recent months. The trend has been steadily upwards since June 2004, when it registered 0.9%; in March 2005 it reached 10.6%, up from 9% in February. Price increases have been recorded virtually across the board since mid-2004, although the main inflationary surge has been in food prices, which constitute 45% of the consumer price index. Food prices fell steeply during the year to April 2004, when the index was −12.3%, but there has been a sharp reversal since then, and the index has climbed every month, reaching over 20% in March 2005, with particularly sharp rises recorded in staple foods. The problem is due to prolonged dry conditions, which have affected much of the country and severely curtailed supplies of agricultural produce. The rate of increase of underlying inflation, which excludes food prices, has meanwhile remained relatively stable, at an annual rate of 5.1% in March 2005, compared with 4% the previous year.

Annual headline rate of inflation % change, year on year 12

-2 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2004 05 Source: Economist Intelligence Unit.

The shilling settles after The period of progressive (though uneven) appreciation, which saw the shilling strong gains gain about 15% of its value against the US dollar between September 2003 and September 2004, appears to have ended. Between October 2004 and January 2005 the exchange rate settled down at about NUSh1,735:US$1. Moreover, during the last few months the stability of the foreign-exchange

market has been such that the Bank of Uganda (the central bank) has intervened only minimally (the central bank aims only to intervene in the market to iron out short-term fluctuations). During this period the central bank’s foreign-exchange reserves have remained strong, reaching US$1,310m at the end of December, equivalent to more than six months of imports of goods and services, compared with US$1,080m at the end of the previous year, an increase of about 20%

Interest rates edge up Interest rates in the domestic money market fluctuated at the end of 2004 and into 2005. Treasury-bill rates edged up in November and December, mainly because of the government’s liquidity management measures, triggered by the increase of currency issues during the festive season and by mild inflationary pressures. In January and February, however, the T-bill rates edged down again, owing largely to a higher level of over-subscription, to stand at 8.35% on the 91-day bills. Correspondingly, the central bank’s rediscount and bank rates dropped to 14.48% and 15.48% respectively. The outstanding stock of T-bills fell between October 2004 and January 2005, from NUSh1,255bn (US$720m) to NUSh1,163bn (about 7%), but stocks of the longer-term Treasury bonds increased during the same period, from NUSh285bn to NUSh395bn (about 38%), following the reopening of two bonds, one of five years, with a face value of NUSh20bn, and another of three years, with a face value of NUSh30bn, and the opening of a new two-year bond with a face value of NUSh30bn. Any large falls in Uganda’s interest rates over the next two years are unlikely, as monetary policy will have to remain tight in order to address the effects of large fiscal deficits and keep inflation under control.

Agriculture

The government reintroduces Last December the president, Yoweri Museveni, announced that the govern- crop subsidies ment intended to resume its policy of providing crop subsidies by making NUSh6.4bn (US$3.7m) available for the ailing cotton sector. This is the first time that the government has intervened in the pricing regime since it adopted the free-market approach imposed by the IMF nearly ten years ago. As a result of the new policy, the farm-gate price of cotton increased by NUSh50 (3 US cents), to NUSh350. Cotton used to be one of the mainstays of Ugandan agriculture, especially in the north, where the climate is particularly suitable, but cultivation collapsed during the chaos of the 1970s, and successive attempts to revive it have so far proved unsuccessful. If the regional economy of the north is ever to recover, it seems likely that cotton will have a significant role to play. However, until peace is established in the region, growth in cotton production will be slow. There has been criticism that Mr Museveni is using the subsidy to buy support for his attempt to amend the constitutional limit on presidential terms, and for his subsequent election campaign. Mr Museveni and his government are unpopular in the north of the country, and it is unlikely that they are unaware of the potential benefits to their election campaigns if they implement policies that benefit the region. It remains to be seen what the IMF and the donor community think of the subsidies, but it is unlikely that these will be well received.

Manufacturing

Foreign investors plan an A factory making instant coffee for the export market is to be built at instant coffee factory Bweyogerere, about eight kilometres from the capital, Kampala. The project is a joint venture between CCL Products India and a UK company, Associated Coffee Merchants International. The Uganda Coffee Development Authority is to take a 10% share for a period of three to five years. The promoters have been awarded several tax incentives, including: • the waiving of import duty; • the delaying of value-added tax on imported machinery and equipment; and • 50% and 20% tax write-offs on equipment expenditure costs and building costs respectively for one year. The factory is expected to employ 500 workers, and training expenses will be tax-deductible.

Energy

Power shortages stop The government has been forced to suspend exports of electricity to Kenya as electricity exports the only way of coping with a national power crisis. Demand for electricity is estimated at around 330 mw (a figure that is growing, moreover, by about 6% a year) but, because of the fall in the water level of Lake Victoria, production is running at only 220 mw. Halting the sales to Kenya will free about 25 mw towards the 110-mw shortfall and, in a reversal of the traditional power relationship between the two countries, Uganda is now buying power from Kenya, which, fortunately for Uganda, has a current surplus. A test run was carried out in February, and Uganda is importing between 10 mw and 20 mw on a daily basis, although the price has yet to be announced. The Ugandan government has called on the private sector to build two diesel-fired thermal power plants to add a further 50 mw to the grid. The ending of electricity exports will cause losses of about US$15m of revenue, and these losses, taken together with the additional costs of importing Kenyan power, will mean that electricity tariffs will have to increase for Ugandan consumers, although there should be fewer power cuts. In a country with such an enormous untapped power potential, these power problems underline the costs to the economy of the delays that have dogged the plans for building the new hydroelectric power station at Bujagali (July 2004, The domestic economy: Energy).

Infrastructure

The government campaigns for The government’s campaign for a more equitable sharing of the waters of the a new Nile water agreement River Nile has been taken a step further with the drawing-up of a Nile Development Framework (NDF) by a group of countries that make up the Nile Basin Initiative, of which Uganda currently holds the presidency. The purpose of the campaign is to put diplomatic pressure on Egypt to agree to a reduction in what is seen as its disproportionate share (90%) of the water under the

existing system. Uganda wants the East African Community to press for renegotiations of the 1929 and 1959 Nile Water Agreements, and hopes to win the support of other Nile basin countries. The government would like to see the creation of a River Nile Commission and to broaden the scope of the business to include existing agreements, such as the Lake Victoria Basin Protocol. The latest initiative is seen as a way of shifting the tactics away from bilateral approaches to Egypt, which have tended to be unproductive, towards a multilateral approach.

Foreign trade and payments

Coffee exports benefit from Coffee exports during January 2005 amounted to 211,514 60-kg bags, compared better prices with 296,301 bags in January 2004, a decline of 28%. However, the decline in value, from US$13.39m to US$11.45m, was proportionally less because prices were slightly better. On a cumulative basis, since the beginning of the coffee year, the volume of coffee sales between October 2004 and January 2005 was 815,761 bags, worth US$40.37m, compared with 796,572 bags, worth US$34.94m during the comparable period last season, representing increases of 2.4% in volume and 15.5% in value. The average realised price for coffee beans during the present season was 82 cents/kg, compared with 73 cents/kg in the previous season. The increase in prices owes largely to bullish market sentiment and an under-reporting of the harvest in Vietnam.

Non-coffee exports continue Non-coffee exports did well during the first half of the current financial year to do well (2004/05; July to June), reaching US$286m by the end of December, representing 83% of total exports (with coffee making up the rest). Fish and fish products continued to set the pace, and were worth US$69m by December (compared with US$56m for coffee exports), representing 24% of non-coffee exports and 20% of total exports. About a third of fish exports went to countries in the region, although the bulk of sales (worth US$52m) went outside the region, mainly to the EU. Gold exports varied from month to month, but were running second to fish in the non-coffee sector, grossing US$39m (11% of total exports) between July and December 2004. It is unclear what proportion of this gold represents re-exports from the Democratic Republic of Congo (see The political scene). Other good performances were recorded by horticulture, tea, tobacco and oil re-exports, each worth between US$14m and US$17m during the six-month period, representing around four or five per cent of total exports. Cotton exports continued to lag, and sluggish exports of food crops, particularly maize, reflected the impact of the dry weather conditions on harvests. As the year progresses the value of exports will be depressed by the ending of sales of electricity to Kenya.

Buoyant imports widen the Data for the first half of the financial year 2004/05 show that imports trade gap continued to surge ahead, reaching US$807m by December, representing a 24% increase compared with the same period of 2003/04. With total exports growing much less quickly (to US$342m), the trade gap looks set for a further significant increase this financial year. Almost 90% of the imports were in the private sector, around 10% of which were imports of oil. Of the much smaller

government import sector, most of the imports appear under the heading of project imports. These were worth US$79m during the first half of 2004/05 (approximately the same as oil imports).

Trade deficit (US$m) 1999 2000 2001 2002 2003 2004 Exports (fob) 483.5 449.9 475.6 480.7 563 705.2 Imports (fob) -989.1 -949.7 -975.4 -1053.3 -1241.7 -1478.3 Trade balance -505.6 -499.8 -499.8 -572.6 -678.7 -773.1

Source: IMF, International Financial Statistics.

The new EAC tariffs come The East African Community (EAC) customs union protocol came into effect in into effect January, and manufacturers in the three member countries (Kenya, Tanzania and Uganda) will have to adapt to the new tariff bands, although it looks as if there are going to be some teething troubles (January 2005, Foreign trade and payments). The Uganda Manufacturers Association continues to oppose the introduction of the new tariffs, on the well-rehearsed grounds that its members will suffer an impossible disadvantage in comparison with Kenyan manufacturers. However, Kenyan manufacturers have also now objected to the list of 174 products that Uganda wants to be zero-rated in the Kenyan market. The list affects industries that manufacture cement, yeast, glucose, syrup, malt, petroleum jelly, ink, resins, paper and board, yarn, brake linings and pads, iron, steel, and aluminium. Kenyan interests want these products to attract a tariff of between 10% and 25% because they consider them to be finished or semi- finished goods.