Uganda - Role of the Government in the Economy

More about the Economy of Uganda.

Rehabilitation and Development Plan

In June 1987, the government launched a four-year RDP for fiscal years 1988-91. It aimed to restore the nation's productive capacity, especially in industry and commercial agriculture; to rehabilitate the social and economic infrastructure; to reduce inflation by 10 percent each year; and to stabilize the balance of payments. The plan targeted industrial and agricultural production, transportation, and electricity and water services for particular improvements. The plan envisioned an annual 5 percent growth rate, requiring US$1,289 million funding over the four-year period. Transportation would receive the major share of funding (29.4 percent), followed by agriculture (24.4 percent), industry and tourism (21.1 percent), social infrastructure (17.2 percent), and mining and energy (6.9 percent). Although the response of the international financial community was encouraging in terms of debt rescheduling and new loans, the initial rate of economic recovery was modest. In its first phase, FY 1988, twenty-six projects were implemented under the RDP, but by late 1989, officials considered the plan's success to be mixed. Improved security and private-sector development contributed to economic growth; however, external shocks, overvalued currency, and high government spending continued to erode investors' and international donors' confidence in Uganda's future.

Role of the government

In 1986 the newly established Museveni regime committed itself to reversing the economic disintegration of the 1970s and 1980s. Museveni proclaimed the national economic orientation to be toward private enterprise rather than socialist government control. Many government policies were aimed at restoring the confidence of the private sector. In the absence of private initiatives, however, the government took over many abandoned or formerly expropriated companies and formed new parastatal enterprises. In an effort to bring a measure of financial stability to the country and attract some much-needed foreign assistance in 1987, it also initiated an ambitious RDP aimed at rebuilding the economic and social infrastructure. Officials then offered to sell several of the largest parastatals to private investors, but political and personal rivalries hampered efforts toward privatization throughout 1988 and 1989.

In Museveni's first three years in office, the role of government bureaucrats in economic planning gave rise to charges of official corruption. A 1988 audit accused government ministries and other departments of fraudulently appropriating nearly 20 percent of the national budget. The audit cited the Office of the President, the Ministry of Defense, and the Ministry of Education. Education officials, in particular, were accused of paying salaries for fictitious teachers and paying labor and material costs for nonexistent building projects. In order to set a public example in 1989, Museveni dismissed several high-level officials, including cabinet ministers, who were accused of embezzling or misusing government funds.

Direct Economic Involvement

By 1987 the Ugandan government was directly involved in the economy through four institutions. First, it owned a number of parastatals that had operated as private companies before being abandoned by their owners or expropriated by the government. Second, the government operated marketing boards to monitor sales and regulate prices for agricultural producers. Third, the government owned the country's major banks, including the Bank of Uganda and Uganda Commercial Bank. And fourth, the government controlled all imports and exports through licensing procedures.

In July 1988, officials announced that they would sell twenty-two companies that were entirely or partially governmentowned , in an effort to trim government costs and curb runaway inflation. These enterprises included textile mills, vehicle import companies, and iron and gold mines. Officials hoped to sell some of them to private owners and to undertake joint ventures with private companies to continue operating several others. Among the roughly sixty parastatals that would remain in operation after 1989 were several in which the government planned to continue as the sole or majority shareholder. These parastatals included the electric power company, railroads and airlines, and cement and steel manufacturers. Banking and exportimport licensing would remain in government hands, along with a substantial number of the nation's hotels. Retail trade would be managed almost entirely by the private sector. By late 1989, however, efforts to privatize parastatal organizations had just begun, as personal and political rivalries delayed the sale of several lucrative corporations. The International Development Association (IDA) awarded Uganda US$16 million to help improve the efficiency of government-owned enterprises. Funds allocated through this Public Enterprise Project would be used to pay for consultancy services and supplies, and to commission a study of ways to reform public-sector administration.

By the 1980s, more than 3,500 primary marketing cooperative societies serviced most of Uganda's small-scale farmers. These cooperatives purchased crops for marketing and export, and they distributed consumer goods and agricultural inputs, such as seeds and fertilizers. Prices paid by marketing boards for commodities such as coffee, tea, and cotton were fairly stable but often artificially low, and payments were sometimes delayed until several weeks after purchases. Moreover, farmers sometimes complained that marketing boards applied inconsistent standards of quality and that weights and measurements of produce were sometimes faulty. In 1989 the government was attempting to reduce expensive and inefficient intermediary activity in crop marketing, and Museveni urged producers to report buyers who failed to pay for commodities when they were received.

Budgets

Uganda registered a substantial budget deficit for every year of the 1970s except 1977, when world coffee price increases provided the basis for a surplus. Deficits equivalent to 50 to 60 percent of revenues were not unusual, and the deficit reached 100 percent in 1974. Although declining levels of production and trade, smuggling, and inefficiency all eroded revenues, the Amin government made only modest efforts to restrain expenditures. Amin increased government borrowing from local banks from 50 percent to 70 percent during his eight-year rule.

The budgets of the early 1980s were cautious. They set limits on government borrowing and domestic credit and linked these limits to a realistic exchange policy by allowing the shilling to float in relationship to other currencies. Between 1982 and 1989, current revenue increased continuously in nominal terms, in part because of revisions and improvements in the tax system and depreciation of the shilling. In FY 1985 and FY 1986, export taxes--primarily on coffee--contributed about 60 percent of the total current revenue. Export taxes then declined, contributing less than 20 percent of revenues in FY 1989. The share of sales tax remained roughly constant at 20 percent from FY 1983 to FY 1986 but increased to about 38 percent by 1989. Income tax increased its share of the total revenue from about 5 percent in FY 1986 to about 11 percent in FY 1989.

Government expenditures increased during the early 1980s, and the rate of increase rose after 1984. In 1985 civil service salaries were tripled, but in general, the Ministries of Defense, Education, and Finance, and the Office of the President were the biggest spenders. In 1988 and 1989, the Ministry of Defense spent roughly 2.9 percent and the Ministry of Education about 15 percent of the current budget. The percentage share of the Ministry of Finance declined from about 30 percent in 1985 to about 22 percent in 1989. The 1987 budget ended with a deficit amounting to 32 percent of total spending. This deficit was reduced to about 19 percent in 1988 and rose slightly in 1989 to just over 20 percent.

The government implemented measures to reform the tax system in FY 1988 and FY 1989. A graduated tax rate, with twenty-five grades, rose from a USh300 minimum to a USh5,000 maximum to account for all classes of income earners. Overall income tax rates were raised in order to gain revenue for local authorities and to allow them greater self-sufficiency in rendering public services. The government also called upon local governing bodies, or resistance councils (RCs) to spearhead the war against tax evaders and defaulters by assuming responsibility for assessing and collecting taxes and monitoring the use of public funds. Despite all measures to balance the economy, however, the budget deficit in FY 1989 reached USh38.9 million or nearly one-third of total spending, a substantial increase over the government's original target.

The FY 1989 budget sought to reduce current spending in several government departments, including cuts of 25 percent in the Office of the President and 18 percent in the Ministry of Defense, but defense spending in FY 1989 exceeded budget estimates. At the same time, total government expenditures increased to accommodate civil service wage hikes and infrastructural rehabilitation. The government sought to meet these increased expenditures in part through a major revenue collection effort and increased external aid. To help secure this assistance, it implemented reforms, including cuts in executive spending, advocated by the World Bank and the IMF. The FY 1989 budget also included agricultural producer price increases ranging from 100 percent to 150 percent. But at the same time, its reduced government subsidies for gasoline and sugar prices resulted in substantial price increases for those products.

In FY 1990, total government expenditures amounted to USh169.3 billion, of which USh105.5 billion was for current expenditures and USh63.7 billion for development expenditures. Total receipts came to USh111.4 billion, of which USh86.5 billion was current revenues--only 82 percent of anticipated receipts-- leaving a deficit of USh57.9 billion or about 34 percent of total spending. As in earlier years, the ministries that consumed the bulk of current expenditures were Defense (39 percent) and Education (14 percent), together with Foreign Affairs (4 percent) and Health (4 percent).

Uganda operated under a separate development budget during the 1980s. This budget consisted of domestic revenues and expenditures on development projects, but it excluded revenues from foreign donors. The development budget increased from FY 1981 to FY 1988, primarily because of inflation, but was trimmed slightly in FY 1989. The Ministry of Finance and Ministry of Defense consumed most of the development budget, however, in part because agricultural and livestock projects were often funded by foreign donors. The Ministry of Housing also received nearly 17.3 percent of FY 1988 development allocations, and much of this amount was earmarked for renovations on government-owned tourist hotels.

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