bank group member country partnership strategy for uganda ... · mcps for uganda, 2011-2015 xi 1....

Supporting Uganda's Socio-EconomicTransformation for Prosperity

Islamic Development Bank Group

Bank Group Member Country Partnership Strategy for Uganda (2011 - 2015)

ISLAMIC DEVELOPMENT BANK GROUP

Bank Group MemberCountry Partnership Strategy for Uganda

1432H - 1436H (2011 - 2015)

Rabi Awwal 1432H (March 2011)

MCPS for Uganda, 2011-2015 iii

Map of Uganda

“The boundaries, colors, denominations and other information shown on any map in this document do not imply any judgment on the part of IDB concerning the legal status of any territory or the endorsement or acceptance of such boundaries”.

Source: Oxford Cartographers.

MCPS for Uganda, 2011-2015 v

CURRENCYUgandan Shilling (UGX); divided into 100 Cents

Value of UGX as at January 14, 2011Currency Buying SellingUSD 2,343.35 2,353.26GBP 3,715.15 3,730.86EURO 3,124.86 3,138.07Fiscal Year (Uganda)1st July - 30th June

ABBREVIATIONS AND ACRONYMSAfDB African Development Bank ITFC International Islamic Trade Finance

CorporationBADEA Arab Bank for the Economic

Development of AfricaJAF Joint Assessment Framework

BTVET Business, Technical, Vocational Education and Training

JBSO Joint Budget Support Operation

CDD Community Driven Development LDMC Least Developed Member CountryCPI Consumer Price Index M/SMEs Micro, Small, and Medium EnterprisesDFCU Development Finance Company of

UgandaMCPS Member Country Partnership Strategy

DPs Development Partners MCs IDB Member CountriesEADB East African Development Bank NDP National Development PlanEU European Union NERICA New Rice for AfricaGCC Gulf Cooperation Council PDF Project Development FacilityGDP Gross Domestic Product PIP Public Investment ProgramHIPC Heavily Indebted Poor Countries’

InitiativePPP Public Private Partnership

ICD Islamic Corporation for the Development of the Private Sector

R&D Research and Development

ICIEC Islamic Corporation for the Insurance of Investment and Export Credit

RBF Results Based Framework

IDA International Development Association STI Science, Technology and InnovationIDB Islamic Development Bank TA Technical AssistanceIDB GROUP IDB, ICIEC, IRTI, ICD, ITFC TCPP Trade Cooperation and Promotion

ProgramIFAD International Fund for Agricultural

DevelopmentUBOS Uganda Bureau of Statistics

IFSD Islamic Financial Services Department UDB Uganda Development BankIRTI Islamic Research and Training Institute UGX Ugandan ShillingISFD Islamic Solidarity Fund for

DevelopmentUIA Uganda Investment Authority

ITAP IDB Group Investment Promotion Technical Assistance Program

USAID United States Agency for International Development

MCPS for Uganda, 2011-2015 vii

ACKNOWLEDGEMENT

MCPS Task Team Members

Country Department (Coordinator)

Director : Rami M. Saeed Ahmad

Division Manager : Saidou Barry

Senior Economist : Abdallah Kiliaki

Country Manager for Uganda : Issahaq Umar Iddrisu

Economist : Saeed Ibrahim

Resources Person(s)

Office of the Vice President (Operations)/ Trust Funds Department : Osman Sheikh Ahmed

IDB Group Entities and Departments

Entity/Department : Representatives

ICIEC/ITAP : Dalla Sonbol

ICD : Mazen Abdullah Al-Asnag

ITFC : Nabie Musa Turay

Islamic Financial Services Industry Department : Azfar Qarni

Agriculture Department : Muhammad Taimur KhanSohail Maqbool Malik

Legal Department : Demba Diallo

IRTI : Abdelrahman Elzahi Saaid Ali

MCPS for Uganda, 2011-2015 ix

Table of ContentsExecutive Summary ................................................................................................................................. xi

I. INTRODUCTION .......................................................................................................................... 1

II. COUNTRY CONTEXT .................................................................................................................. 1

1. Historical /Political Context .................................................................................................... 1

2. Recent Socio-economic Developments & Medium Term Prospects ....................................... 2

2.1 Macroeconomic Performance ...................................................................................... 2

2.2 Social Developments and the MDGs ............................................................................ 5

3. Trends and Challenges in Key Sectors .................................................................................... 6

III. COUNTRY DEVELOPMENTAL STRATEGY, PRIORITIES AND CHALLENGES ........... 7

1. Development Strategy and Objectives ..................................................................................... 7

2. Government Priorities and Core Investment Program ............................................................. 7

3. Development Challenges ......................................................................................................... 8

IV. IDB GROUP SUPPORT STRATEGY .......................................................................................... 9

1. Review of IDB Group Operations ........................................................................................... 9

2. Donor Support to the Country .................................................................................................... 10

3. IDB Group Support Strategy ...................................................................................................... 12

3.1 Guiding Principles for IDB Engagement ...................................................................... 12

3.2 MCPS Focus Areas ....................................................................................................... 13

Pillar 1: Infrastructure Development .............................................................................................. 14

Pillar 2: Enhancing Agricultural Productivity and Value-Addition ............................................... 17

Pillar 3: Promoting Private Sector Development ............................................................................ 19

Pillar 4: Human Resource Development and Institutional Capacity .............................................. 21

Cross-Cutting “Beam”: Member Country-to-Member Country ................................................... 23

Expected Role Play by Members of the IDB Group ........................................................................ 23

Proposed IDB Group Niche Areas within the Pillars ...................................................................... 24

V. IMPLEMENTATION ARRANGEMENTS AND RESOURCE ENVELOPE ......................... 24

VI. RISKS .............................................................................................................................................. 25

VII. CONCLUSION AND WAY FORWARD ...................................................................................... 27

ANNEXES

Annex 1: Indicative Assistance Program of IDB Group .................................................................. 31

Annex 2: Preliminary Framework for Results Based Country Program .......................................... 32

Annex 3: Macroeconomic Indicators ............................................................................................... 35

Annex 4: IDB Operations by Mode of Finance and Sector ............................................................. 36

Annex 5: External Assistance to Uganda by Sector ......................................................................... 37

MCPS for Uganda, 2011-2015 xi

1. The Member Country Partnership Strategy (MCPS) for Uganda signifies a new watershed in the IDB Group-Uganda relations. It aims to develop a multi-year IDB Group strategy to support the country’s development agenda over the next five years. This timeframe has been consciously selected to coincide with the country’s Five-Year National Development Plan (NDP), which covers the period July 2010 – June 20151. This NDP is the first of six (6) five-year national development plans (NDPs) that will be implemented over the 30-year period to achieve the country’s Vision 2040.

2. The Vision aspires “to transform the Ugandan society from a peasant (subsistence) to a modern and prosperous country within 30 years”, effective from July 2010. The Vision implies changing the economic landscape from subsistence agriculture (dominated by land, labor and low productivity) to an investment-driven industrial economy (characterized by capital, labor and good supporting infrastructure). The objective is to make Uganda graduate into a middle-income country by 2017 (that is, seven years from now). This means doubling the per capita income from the current level of about US$500. Both the Vision and NDP were developed through an extensive and broad based country driven consultative process spanning over 2 years. The main theme of this first NDP, as provided by the Vision, is “Growth, Employment and Socio-Economic Transformation for Prosperity”.

3. Uganda has been an impressive economic performer over the last 25 years. The restoration of peace in 1986 led to good economic management and performance. While GDP grew at an average of 7% in the 1990s, it accelerated to about 8% over the 2004-2008 periods (compared with the average of 2.2% for Sub-Saharan Africa). Even with the spillover effects of the 2008 global economic crisis, the economy remained strong with a GDP growth in 2009 of 7.2%. Similar growth rates of 7% per year are projected for the next 5 years. Uganda’s

1Uganda’s Financial/Fiscal Year, like other East African countries, runs from 01 July - 30 June

impressive and sustained performance was a result of the Government’s structural and institutional reforms, coupled with good economic management and pro-growth policies such as heightened investments in infrastructure.

4. Uganda has made great progress towards achieving the MDGs and based on what has been recorded so far, the country is projected to attain most of the MDG targets except infant and maternal mortality. Greater access to quality health services is essential to reduce the mortality rates. Access to safe and clean water and adequate sanitation deserve attention as well, given that child mortality is closed linked to contaminated water and poor sanitation. Special efforts will also be needed to improve the quality of education services and eliminate gender disparity.

5. The role of development partners in support of Uganda’s development agenda is centered on the NDP. The NDP is the cornerstone of the country’s development agenda. It lays the foundation for Uganda’s long-term (30-year) transformation process. It also forms the basis around which all development partners (DPs) are to anchor their assistance. Aligning donor assistance with the NDP will not only facilitate effective planning (by the Government) and improve predictability of external resource flows, but will also improve synergy (between DPs), instill efficiency (by reducing overlap) and ensure successful implementation. Accordingly, all major bilateral and multilateral agencies have taken the NDP as the starting point of their support. Both the African Development Bank (AfDB) and the World Bank have rolled-out their country strategies at the same time as the NDP (2011-2015) and over the same period (five years instead of the usual three).

6. There are many donors present and active in Uganda providing substantial support, mostly in the form of grants and concessionary loans, for almost all sectors. The MCPS would identify niches in priority sectors, where either IDB has a demonstrated comparative advantage (such as Islamic finance), where there are gaps which are not well covered, or

EXECUTIVE SUMMARY

MCPS for Uganda, 2011-2015xii

where it can add visible value, in collaboration with others.

7. IDB Group Strategy: On the basis of: (a) consultations undertaken by the IDB Group with the Ugandan authorities and other stakeholders over the course of the MCPS exercise, (b) the Government’s development priorities as articulated in the NDP, (c) the IDB Group’s comparative advantage, and (d) value-addition to what other donors are doing; the Group support over the next 5-years will focus on four main areas that directly support the Government’s objective of sustained growth for employment-generation and socio-economic transformation. In so doing, the IDB is expected to contribute to Uganda’s vision of becoming a middle income country. There is a high congruence between this vision and the IDB Group’s Vision 1440H, which intends to reduce the number of the Bank’s least developed member countries (by helping them graduate to the middle-income category). The focus areas (pillars) for IDB support strategy are: (i) Infrastructure Development, (ii) Agricultural Productivity and Value Addition, (iii) Private Sector Development, and (iv) Human Resource Base and Institutional Capacity Development. Within each of these areas, the Group will focus on special niches where its mandate and comparative advantage are clear. These have tentatively been spelt out in the main report (see para 100).

8. Estimated financing envelope: IDB Group, consisting of the IDB itself, the ICD, the ITFC, and ICIEC is considering an indicative financing envelope of US$300 Million2 over three years (2011- 2013) to support the above priority areas. For the ICD, the priorities will be the financial sector, SMEs and technical assistance (for SME development and project preparation); with a proposed envelope of US$85 million. The ITFC’s envelope (mainly on trade, especially on critical agricultural and other production inputs) is estimated at US$45 million. The IDB, which will intervene in all the four pillars (including Islamic financial services), is expected to extend US$165 million, with remainder (i.e. US$5 million) expected to come from the Investment Promotion Technical Assistance Program (ITAP).

9. Grants and non-financing support: In addition to its traditional lending activities, the IDB

2The MOU stipulating this financing envelope was signed between the IDB Group and the Government of Uganda on 2 November 2010 in Kampala

Group will also provide grants for capacity building, free advisory services and non-financing activities through the member country country-to-member country support programs. These programs will involve partnering arrangements between Uganda and other IDB member countries with the view to sharing country experiences (success stories, best practices) and knowledge transfer.

10. IDB Group’s assistance to Uganda is susceptible to a number of risks – both exogenous and internal. Uganda will not transform to the level it desires if it does not address the huge deficits in infrastructure. For, no dramatic transformation can occur without adequate power and transport infrastructure. Non-implementation of strategic projects in these two sectors poses a major risk to Uganda’s ambition to transform. Another major risk, at least from the IDB’s side, is the inability of the Government to contract ordinary (non-concessionary) financing. The IDB’s program for Uganda is heavily tilted towards this type of financing. The Government is cautious with non-concessionary borrowing to avoid raising its debt burden to unsustainable levels again. Weak institutional capacities in the public sector also pose a significant risk to their ability to absorb funds and deliver services, thereby undermining the outcomes of IDB interventions. External risks include the so-called “resource curse” resulting from possible mismanagement of the windfall oil income, as well as risks such as international prices for Uganda’s primary commodities; and spillover of conflicts in neighboring countries. Whatever happens in these countries – whether it is economic or social fallout – will have direct adverse effects on Uganda. The “Great Lakes” region is a potentially unstable one from the political standpoint.

11. Going forward, next steps would include mounting dedicated programming missions to Uganda on a yearly basis to agree on specific programs/projects under the MCPS. In particular, the IDB Group missions will attempt to define and delineate specific niche areas that meet the MCPS criteria and are transformational. There will be annual exchanges on the MCPS implementation, and a joint comprehensive mid-term review will be undertaken in 2013.

MCPS for Uganda, 2011-2015 1

I. INTRODUCTION

1. This Member Country Partnership Strategy (MCPS) for Uganda articulates IDB Group support to the development efforts of the Government and people of Uganda and has multiple objectives. First, it is intended to align IDB Group-wide interventions and allocation of resources with Uganda’s development plans and priorities. Second, it will guide the overall cooperation and relations building between the IDB Group and Uganda. Third, it is an instrument for collaboration and synergizing between the entities of the IDB group in support of the country. And fourth, it is a vehicle for collaboration with development partners to support the country’s development objectives, and between IDB member countries (MCs) themselves. Cooperation among MCs will involve several modalities such as pairing (twinning) arrangements; transfer of technology; cross-border investments and trade exchanges; sharing of country experiences; success stories; best practices; etc.

2. This MCPS signifies a new watershed in the IDB Group-Uganda relations. It aims to develop a multi-year IDB Group strategy to support the country’s development programs over the next five years1. This strategy has been built on the basis of the consultations undertaken by the IDB Group with the Ugandan authorities and other stakeholders in the country in the course of the MCPS exercise. Based on the country’s development priorities and IDB Group’s comparative advantage, the MCPS will focus on areas where it can most effectively intervene. In so doing, the IDB Group is expected to contribute to Uganda’s vision of becoming a middle income country by 2017. That vision is in line with the IDB’s own Vision 1440H (2020) that aspires to reduce the number of its least developed

1The MCPS period is five years, but the financing envelope is initially for three years.

member countries by helping them graduate to the middle-income category.

3. The Government of Uganda has identified seven main development challenges that pose a threat to economic growth. These are weak public sector management and administration, inadequate financing, skills gap, limited physical infrastructure, barriers against women, limited application of science & technology and shortage of critical production inputs. The IDB Group will strive to intervene in four most binding constraints, namely skills development, infrastructure, agricultural production and value-addition, and science & technology transfer. The main reason for focusing on these four is because they constrain the economy from growing faster and realizing its full potential. The IDB believes that any efforts at relaxing them will have greater development impact.

II. COUNTRY CONTEXT

1. Historical/Political Context

4. Uganda is a landlocked country lying on the equator in Eastern Africa: Uganda’s location, landlocked and far away (800 kilometers) from the nearest seaport of Mombasa in Kenya, poses its own challenges. Uganda covers a land area of 197,000 sq km, in addition to 36,300 sq km of water (lakes and swamps). Chieftains and traditional kingdoms dominated the local administration landscape in Uganda before the onset of colonization about 120 years ago.

5. Uganda has endured an un-orderly political history: For 68 years (1894-1962), Uganda was under British colonial rule as a “Protectorate”. This implies that Uganda had a certain degree of self determination than would have been the case had it been a “colony”. It gained independence on 9 October 1962 and became a

MEMBER COUNTRY PARTNERSHIP STRATEGY UGANDA

MCPS for Uganda, 2011-20152

Republic in 1967, which also led to the abolition of the country’s traditional kingdoms (only to be restored in 1993). Following a coup in 1971, the country remained under military rule until 1985, with a brief one-year (1980) interlude of civilian rule. A year after the coup (i.e. 1972), the Asian business community was expropriated and expelled from Uganda, much to the detriment of the economy. A larger share of manufacturing and commerce was commanded by this community. Order was restored in January 1986, and since then Uganda has had political stability along with economic and social revival, in spite of a 20-year bloody civil war in the north of the country. The civil war ended in 2005.

6. Uganda has a well-structured, decentralized administrative system: The country is divided into four provinces: Northern, Eastern, Central and Western, which are divided

into 80 districts. The districts are subdivided into counties, sub-counties, parishes and villages. This “decentralized” administrative setup is good for

opinion-seeking and decision-making, as well as for carrying out information, education and communication (IEC) mass campaigns. It also ensures civic participation in development and other nation-wide issues.

2. Recent Socio-Economic Developments & Medium-Term Prospects

2.1 Macroeconomic Performance

7. Uganda has been an impressive2 economic performer over the last 25 years and intends to sustain it. The restoration of peace in 1986 and the economic and institutional restructuring that followed led to higher economic performance. While GDP grew at an average of 7% in the 1990s, it accelerated to about 8% over the 2004-2008 period (compared with the average of 2.2% for Sub-Saharan Africa). Even with the spillover effects of the 2008 global economic crisis, the economy remained strong and grew at 7.2% in 2009 (Table 1). Similar growth rates of 7% per year are projected for the next 5 years. Uganda’s past growth matches the East African Community (EAC) target convergence rate of at least 7%.

8. Uganda’s impressive and sustained performance was a result of the Government’s good economic management and pro-growth policies. It successfully maintained macroeconomic stability, undertook policy and institutional reforms and

2 Why impressive? Various studies by NEPAD/ECA stipulate that Africa needs to grow at a minimum sustained rate of 7-8% in order to have a discernible impact on poverty reduction. The EAC member states (incl. Uganda) have set a minimum benchmark of 7%. Likewise, studies by Dr. Vivi Alatas in MENA (Middle East & North Africa) Region found out that for every 1% increase in real GDP growth, the number of the poor declined by between 4-5%.


directed larger shares of public spending to new priority investments, especially infrastructure. Key macroeconomic indicators are shown in Annex-3.

9. Inflation registered a relatively high headline rate3 of 13% in 2009 (slightly up from 12% in 2008) due mainly to exceptionally high food prices resulting from supply constraints which induced higher demand; as well as high energy prices. Food accounts for a large share of the “consumer basket” in Uganda. On the other hand, core inflation4 rose from 6.6% in 2007 to 11.5% in 2008 before declining slightly to 10.5% in 2009. Though this is twice the EAC convergence rate of 5%, Uganda has a come a long way to reducing inflation (and therefore cost of living). Inflation ran at around 240% in 1986 and 40% in 1992.

3 Headline inflation is more important to the household and the general public than “core” inflation since it measures the overall cost of living. If headline inflation increases more than the rate of income, people’s standard of living falls.4 Core inflation is “total inflation net of food and energy prices”. This is of particular interest to banks (including Central Banks) as it influences monetary policy. The reason being that core inflation is more stable than headline inflation and therefore reflects a rather fairer “overview” of the domestic supply and demand forces. Food and energy prices are inherently volatile and tend to distort the supply-demand paradigm.

10. Sustainable debt level, following the adoption of a cautious external borrowing policy: Uganda came under the Heavily Indebted Poor Countries (HIPC) initiative in 2000. By 2006, the country was no longer in the HIPC category, after having paid all its commitments to the Paris Club. The country’s current total debt stock amounts to US$2.36 billion (as at end-March 2010), equivalent to 20% of GDP, which is considered sustainable. The Government continues with its cautious external borrowing policy so as to prevent its debt from reaching unsustainable levels, hence, negatively impacting on its social-economic gains.

11. Uganda has continued to build healthy foreign reserves and diversify its export base: The overall balance of payments projections for 2009/10 show a net surplus of US$211 million, indicating an improvement over the previous fiscal year which had a deficit of US$43 million. The stock of external reserves amounted to US$2.85 billion as at the end of March 2010, representing an import cover of 5.2 months and in line with the EAC requirement of more than

Table 1: Uganda versus World and Regional GDP Growth Rates2007 2008 2009 2010 2011

Project Actual Project Update Project UpdateApr.-10 Oct.-10 Apr.-10 Oct.-10

World Output 5.2 2.8 -1.1 -0.6 4.2 4.8 4.3 4.2Advanced Economies 2.7 0.2 -3.4 -3.2 2.3 2.7 2.4 2.2USA 2.1 0.0 -2.7 -2.6 3.1 2.6 2.6 2.3Euro area 2.7 0.5 -4.2 -4.1 1.0 1.7 1.5 1.5Japan 2.3 -1.2 -5.4 -5.2 1.9 2.8 2.0 1.5United Kingdom 2.6 0.1 -4.4 -4.9 1.3 1.7 2.5 2.0Emerging and Developing Economies 8.3 6.0 1.7 2.5 6.3 7.1 6.5 6.4Africa 6.3 5.2 1.7 4.0 5.0 5.3Sub-Saharan Africa 7.0 5.5 1.3 2.6 4.7 5.0 5.9 5.5Great Lakes Region 7.3 5.8 4.3 4.7 6.0Tanzania 7.1 7.4 5.5 6.0 6.9 6.5 6.9 6.7Kenya 6.9 1.3 2.4 4.1 4.1 5.8 5.8Uganda 8.4 8.7 7.2 5.8 5.8 6.1 6.1Developing Asia 10.6 7.7 6.2 6.9 8.7 9.4 8.7 8.4China 13.0 9.6 8.5 9.1 10.0 10.5 9.9 9.6India 9.4 6.4 5.4 5.7 8.8 9.7 8.4 8.4Western HemisphereBrazil 5.1 -0.2 5.5 7.5 4.1 4.1Mexico 1.5 -6.5 4.2 5.0 4.5 3.9Source: World Economic Outlook, IMF (April 2010, October 2010)


4 months. The structure of the Uganda export sector has exhibited a significant diversification over the last 20 years, reducing reliance on primary commodities such as coffee as its main foreign exchange earners. Coffee export earnings have dropped from 28% in 2000 to 16% in 2004 and a mere 9% in 2009. Accordingly, the share of non-coffee earnings has risen from 72% in 2000 to 91% in 2009 (Figure-1).

12. The level of openness to trade of the Ugandan economy has been rising. The openness5 of Ugandan economy with respect to international trade as measured by the ratio of exports plus imports of goods and services to GDP has been rising overtime from 30% in 1998 to 48% by end-2009 (Figure-2). This level is bound to further increase with the economic transformation envisaged under the 2040 Vision, and as the country continues to attract FDI, deepen its investment reforms and lay down the legal and regulatory frameworks for PPPs, Islamic banking and other private sector-led investments.

13. The recent actualization of the East African Common Market Protocol presents substantial opportunities to the Uganda private sector. If successful, the protocol will pave the way for labor and technological transfer between

5 Increased openness has positive influence on growth and prosperity. It is argued that Malaysia owes its prosperity to economic openness, with trade as the lifeblood and FDI as the backbone of the economy. And so is China. It achieved spectacular economic growth because of economic reforms and openness which started in 1978. Previously state ownership and collectivization constrained productivity and economic performance.

the five member states of the EAC (Burundi, Kenya, Rwanda, Tanzania and Uganda); and have multiplier effects on domestic demand. Uganda is well placed to attract investments given the abundant opportunities it has in agriculture, energy and infrastructure; and the fact that it is a “business hub” for Southern Sudan, Rwanda and the Democratic Republic of Congo.

14. Domestic savings and investments are important macro-economic variables for promoting employment opportunities thereby contributing to economic growth. National savings are about 16% of GDP (with 15% coming from individual households). The low savings rates limit the Government’s ability to finance a desirable share of its development plan from domestic resources. Two main reasons for this low rate are inaccessibility to financial services (only 26 out of the 80 districts in Uganda have direct access to banking); and narrow range of the tax/revenue range (due to existence of a large informal sector). On the other hand, the current domestic investment rate of 24%6 seems to be a good level to sustain the targeted annual real GDP growth of 7% envisaged under the Five-Year National Development Plan (July 2010-June 2015). The saving-investment gap is being filled by external borrowing and grants, raising issues of long-term sustainability.

6 Uganda’s investment rate is commensurate with the rate of 25% to GDP which the UN Economic Commission for Africa (ECA) way back in 2005 took as a minimum proxy required to reducing poverty by 2015 and spurring growth. Similar rates in the South Asia region average roughly 30% and in East Asia over 40%.


15. Oil, a new economic lifeline: Oil production, scheduled for 2011/12, is expected to produce a positive impact on the balance of payments; improve public expenditure allocations (by easing the fiscal pressure); increase public sector project funding (hence, additional stock of economic infrastructure); cushioning the economy from external shocks and further boost economic growth. Initial oil production will be 500-1,000 barrels per day, which will progressively rise to 10,000 barrels in 2012 and to 150,000 barrels in 2015. The issue at stake will be how to manage and utilize oil revenues for accelerated growth and poverty reduction; and at the same time ensuring that agriculture – the country’s mainstay for generations to come – is not marginalized or abandoned as has happened to other countries.

2.2 Social Development and the MDGs

16. Uganda has a very young and fast growing population, with all the inherent problems associated with a predominantly youthful population: Total population is currently estimated at 32 million, with an average annual growth rate of 3.6% higher than 2.5% average rate for Sub-Saharan Africa. At this rate, the population will double in size in less than a generation, posing further challenges for employment creation and basic service delivery, especially education and health. Presently, about 50% of the population is below 15 years. Close to 85% of the population is rural.

17. Uganda is one of Africa’s “success stories” especially with regard to poverty reduction and disease (HIV) prevention: Despite high population growth, the percentage of the population living below the poverty line has declined from 56% in 1993 to 44% in 1998, and further to 31% in 2006 largely due to high economic growth, diversification in agriculture (into non-traditional crops) and pro-poor interventions. It is currently estimated at 25% according to the latest statistics issued by the Uganda Bureau of Statistic (UBOS). Uganda has also made great progress towards other MDGs, and based on the progress so far, the country is projected to achieve most of the MDGs’ targets except for infant and maternal mortality.

18. However, in spite of the achievements in poverty reduction, lingering inequities still exist: In particular, urban-rural and regional inequalities remain relatively high. This is particularly true in the North, the ex-war zone, where poverty incidence is close to 46% (compared to Eastern 24%, Western 21% and Central 11%). On the other hand, the poverty rate in rural areas averages 42% compared to 12% in urban areas.

19. With regard to infant and maternal mortality rates, greater access to quality health services will be is also essential to reduce these rates. Access to safe and clean water and adequate sanitation deserve attention as well, given that contaminated water and poor sanitation contributes to roughly 90% of the under-five deaths child mortality in


Sub-Saharan Africa (SSA)7. It is said that a child born in SSA is 500 times more likely to die from diarrheal disease than a baby in the developed world. Special efforts will be needed to improve the quality of education services and that gender disparity in education is eliminated. The human development index (HDI) rank of Uganda is 143 out of 194 countries and territories, according to the 2009 Human Development Report. This ranking places Uganda above most of its neighbors – Rwanda (152), Tanzania (148) Democratic Republic Of Congo (168) and Burundi (166); but far below Kenya (128). It is encouraging to note that many development partners in Uganda are very active in the human development area.

3. Trends and Challenges in Key Sectors

20. The economy exhibits an increasing dominance of the services sector in the contribution to the GDP: In very broad terms, the structure of the economy comprises the services, agriculture and industry / manufacturing sectors. While agriculture used to account for nearly 60% of the GDP in the 1970s and 1980s, it has now been overtaken by the services sector. This sector accounted for about 44% of the GDP in real terms in 2008, compared with 32% from agriculture. The remainder (i.e. 24%) was on account of the manufacturing sector (Figure-3). The services sector will continue to be the main driver of growth in GDP, at least in the medium-term. However, agriculture remains the largest employer of the active labor force as discussed further below.

21. The agricultural sector, the largest employer and which holds the greatest potential to reduce poverty on a mass scale, has performed the least. It grew barely by 1% in 2008: Agriculture’s performance in recent years has been rather weak. Having grown almost at par with the GDP in the 2001/02, the sector virtually stagnated in 2006/07 season with a mere 0.1% expansion. It picked slightly in the

7 A joint Press Release by the WHO and UNICEF on 3 June 2005

last two seasons (2007/08 and 2008/09), with real growth rates of 1.3 and 2.6% respectively. The sluggish performance of agriculture, mainly due to low productivity, jeopardizes Government efforts to reduce poverty. Costly agricultural inputs, reduction in fish stocks, post harvest losses, the effects of pests and diseases and floods have contributed to the low productivity. The sector still employs more than 70% of the active labor force. Moreover, about 83% of the farmers in Uganda are women. Continued low productivity in agriculture would have far-reaching consequences, adversely affecting Government’s poverty reduction efforts and transformation objectives. It is for this reason that the Government is attaching utmost importance to the availability of production inputs, irrigation and rural infrastructure over the NDP period.

22. Growth in industrial/manufacturing sector has been mixed: The sector grew at 6.4% into 2007/08 which was lower than the 10% growth recorded in 2006/07. The sources of growth were manufacturing, construction and mining. The industrial (manufacturing) sector is characterized by small operators, who focus mainly on the production of consumer items. Basic industries, that is, producers of capital and intermediate goods, are very few. The sector is plagued by capacity underutilization, estimated at about half of the installed capacity. This is due to power, water supply and logistical problems.


23. Growth in the services sector was fuelled by high expansion in banking / financial services: The services sector grew by 13% in 2007/08 compared to about 9% growth in 2006/2007. The key drivers of this growth were trade, transport and communications, posts and telecommunications, and financial services. The highest growth was in financial services which grew at about 30% as a result of reforms in banking. Nonetheless, the banking penetration ratio in Uganda remains very low and is currently estimated at only 16%.

III. COUNTRY DEVELOPMENT STRATEGY, PRIORITIES AND CHALLENGES

1. Development Strategy and Objectives

24. Uganda has a long-term national Vision framework which aspires “to transform the Ugandan society from a peasant (subsistence) to a modern and prosperous country within 30 years”, effective from 2010: The Vision implies changing the economic landscape from a factor-driven subsistence agricultural economy (dominated by land and labor) to an investment-driven industrial economy (characterized by capital, labor and good supporting infrastructure). An industrial economy is regarded as transformational because of the wider linkage effects it generates to society. However, for industry to thrive; adequate electricity, skilled labour, production inputs and unrelenting government support are deemed necessary. These are the very issues embedded in the country’s development agenda.

25. The First Five-Year National Development Plan (NDP) for the period 2010 – 2015 is the first of six (6) five-year national development plans (NDPs) that will be implemented over the 30-year period to achieve the Vision. The first NDP came into effect on 1 July 2010, and will end on 30 June 2015. The NDP, which succeeds the third Poverty Eradication Action Plan (PEAP) that focused on poverty eradication, is the foundation upon which

the other five national plans will be formulated and implemented – all with the view to achieve a transformed Ugandan economy in the next 30 years.

26. Both the Vision and NDP were developed through an extensive and broad based country driven consultative process spanning over 2 years, and combined a bottom-up and top-down approach through active consultations with the grassroots and those at the local and provincial government levels. Cabinet discussions helped to build greater ownership within Government prior to presentation to Parliament. The articulation and adoption of the Vision and the NDP, therefore, reflect a broad national consensus on the country’s strategy for growth and social progress.

27. The theme of this first NDP, as provided by the Vision, is “Growth, Employment and Socio-Economic Transformation for Prosperity”: Specifically, it will aim at increasing household income; creating more gainful employment; improving the stock and quality of economic infrastructure; increasing access to better social services; promoting the use of science and technology; enhancing institutional and human capital; and strengthening good governance. The NDP will be gauged and judged, come 2015, against these indicators.

2. Government Priorities and Core Investment Program

28. Of the seven development challenges highlighted further below, four are considered as the most binding to promoting economic growth and employment: These are: (i) Human resources development; (ii) Infrastructure development; (iii) Critical production inputs; and (iv) Science, technology and innovation (STI). Efforts by the Government and development partners in relaxing these constraints will lead to greater economic performance and development impact. The four areas are the Government’s topmost priorities and form its core public investment program (PIP), over the medium-term.


29. Government’s priority PIP for the NDP period is estimated at Ugandan Shillings (UGX) 54.0 trillion (or US$27.0 billion): Out of this total amount, 70% is expected to be raised locally and the balance from development partners. About UGX 13.6 trillion (US$6.8 billion) is expected to be financed in partnership with the private sector. With the implementation of the PIP, the economy is projected to grow at a sustained rate of 7.2% per annum in the next 5 years (i.e. over the NDP period). It is envisaged that at this GDP growth rate, nominal per capita income will increase from US$506 currently to about US$ 900 by 2015; and that the country will graduate to the middle income segment by 2017. With its tremendous potential, including the expected windfall from newly discovered oil, and the reforms the Government has undertaken which are expected to be consolidated and strengthened, there is a fairly good chance the country can achieve the NDP objectives. The IDB Group will work with the Government to that end.

3. Development Challenges

30. The NDP, in addition to stipulating the future strategic direction and priorities, also highlights the country’s most binding constraints to economic growth: A systematic methodology for undertaking country diagnosis and identifying these constraints was used in the course of the NDP preparation. The NDP eventually indentified seven such constraints as the most binding. These are:

(i) Weak Public Sector Management Administration: There are two main elements to this constraint namely; (a) weak policy, legal and regulatory frameworks; and (b) weak institutional structures. The combined effect is low absorption of public funds, limited backstopping support to the private sector and poor delivery of services to the general public. By the government’s own reckoning, ‘over 70% of the Government sectors have obsolete, absent or weak policy frameworks’.

(ii) Inadequate Physical Infrastructure: This remains the key developmental challenge and most binding constraint to growth in the country, especially with respect to energy and transport. Only 11% of the population has access to electricity, and 96% of the total road network is unpaved. The huge infrastructural deficit is what makes the country continue to underperform.

(iii) Inadequate Financing and Limited Financial Services’ Industry: The first poses problems in terms of financing public sector projects, while the limited financial services industry limits access by the private sector to financial services, especially medium and long-term loans.

(iv) Inadequate Supply of Skilled Human Resource: There is a shortfall in the supply of skilled human resources to the Ugandan economy which is due to some qualitative aspects of the education system, for example low school completion rates but more importantly, limited capacity in vocational and technical training. The health and education sectors are the ones experiencing serious human resource constraints.

(v) Gender Imbalances and Negative Perceptions towards Women: Women remain marginalized in access to and ownership over land, education, business ownership, skills development, access to financial resources; and formal employment and inheritance rights.

(vi) Limited Application of Science and Technology and Innovation (STI): Total factor productivity can be increased through the application of STI in the production processes and service delivery mechanisms, however, there is a low level of such application of STI in Uganda. The 2040 Vision calls for a deepening application of STI.

(vii) Restricted Supply and Access to Critical Production Inputs such as fertilizers,


seeds, water etc: Production inputs are in serious short supply and expensive in Uganda, especially when compared to neighboring countries, thereby curtailing their widespread use in the value creation process.

31. However, as stated earlier in this section, the Government’s topmost priorities, at least in the short to medium-term, are with regard to: (ii) – physical infrastructure, (iv) – human resource development, (vi) – science, technology and innovation (STI), and (vii) – critical production inputs.

IV. IDB GROUP SUPPORT STRATEGY

1. Review of IDB Operations

32. Uganda joined the IDB on the 28th March 1977: As of December 2010, the Bank has approved a total of 28 operations totaling ID 61.71 million (US$ 88.92 million). These approvals and interventions were in transport, social services and industry, as illustrated in Annex-4. Recent approvals were for the construction of small bridges in northern and north-eastern Uganda; a line of financing facility to the Uganda Development Bank Limited for on-lending to small and medium scale enterprises (SMEs); financing facility to support the microfinance industry; and rehabilitation and expansion of technical and vocational institutes and a teacher training school. Some technical assistance operations were extended on grant basis, such as the one to assist the Bank of Uganda develop a supervisory and regulatory framework for Islamic banking and finance; a feasibility

study for the development of water infrastructure for agricultural production and productivity; assistance to the Uganda Investment Authority (UIA) in its efforts to promote Uganda as an investment destination; and training of village entrepreneurs to produce charcoal briquettes using agricultural and crop waste.

33. Due to the debt strategy of the Government of Uganda, the IDB Group has not been able to deploy much of its ordinary resources to assist the country which explains in part the reason for which there was a virtual break down in relationship between the Uganda and the IDB in the past as highlighted in paragraph 36 below. Hence, the dominant modes of loan financing (which in IDB nomenclature is necessarily concessionary) and grant-denominated technical assistance (T.A).

34. The status of implementation of IDB Group portfolio has been quite low and below satisfactory level: This is illustrated by the low level and amount of disbursement even by IDB standards. Total disbursement as a percentage of total approvals is only 22%. More importantly is the fact that there is a negative net resource transfer from the IDB Group to the country as reflected in total disbursement of US$27.1 million as against a repayment of US$29.6 million. This situation needs to be rectified during the MCPS period and beyond. Although small in size and amounts, the Special Assistance Office has been quite active in Uganda with 7 operations totaling ID2.5 million (US$3.3 million).

35. Project execution has generally been low ostensibly due to both the lengthy procedures in the country and in IDB; and lack of familiarity with IDB Group procedures. Intensified efforts are needed to sensitize the Ugandan authorities and the public at large about the IDB Group’s products and services, and its policies and procedures. This can be done during missions or through start up seminars for newly approved projects. Furthermore, what has been missing and was not given enough attention were activities dealing with capacity and institutional building which


are crucial elements in ensuring sustainability of development programs. Accordingly, any future IDB Group strategy for Uganda would address the issue of institutional capacity development.

36. For about 11 years (1993-2004), Uganda did not benefit from IDB’s assistance: The Government of Uganda considered IDB’s financing terms costly. However, the IDB was able to extend some assistance through (interest-free) loan financing and technical assistance in the last 3 years. More efforts are needed to “market” IDB products and services (especially those of the private sector entities), and their pricing. There is also the need to be selective, focusing on more impactful activities.

37. Trade operations under the former Trade Financing & Promotion Department (TF&PD) and ICIEC operations (business insured) amounted to US$25.46 million and US$9.9 million respectively: Since their establishment, both the ITFC and ICD have not been successful in undertaking any operations in Uganda. As stated above, there is urgent need for these entities to intensify efforts to make their presence and impact felt in the country. Not only do they need to be proactive (not to wait to be approached) but also innovative and flexible (to tailor their products and services to specifically meet the actual needs of the Ugandan private sector).

2. Donor Support to the Country8

38. Uganda receives substantial donor funds, most of which are in the forms of grants, concessionary loans and mainly through budget support: The structure of external assistance to Uganda is in line with the country’s external borrowing strategy aimed at ensuring overall debt sustainability. Total flows to Uganda have averaged US$760 million annually during the period 2001–2009, registering their highest peak at about US$1.2 billion in 2006/07 financial year. The average flows represent about 25% of budget revenues and 6% of GDP.

8 Taken from Development Cooperation Uganda 2008-2009

39. Grant disbursement maintained its prominence over the past eight years due to largely improved reporting and government’s strategy to seek more grant funds to support the PEAP: Grant flows have averaged at around US$496 million annually for the period 2001 – 2009, representing about 70% of average aid flows and 16% of budget revenue. Concessionary loans on the other hand have seen some marginal improvement in recent years with an average yearly flow of about US$240 million, mainly due to improved financial management systems and reporting.

40. In terms of sources of funds, multilateral aid assistance has historically contributed a greater share than bilateral partners: The major multilateral institutions include the International Development Association (IDA) of the World Bank, African Development Bank Group, International Fund for Agricultural Development (IFAD), Global Fund and the European Union. The IDA remains the biggest multilateral partner to Uganda, contributing over 61% of total multilateral aid over the period. Japan, United Kingdom, Denmark, Belgium, Norway, Ireland and Sweden are some of the leading bilateral aid providers to Uganda. These donors are mainly in the following areas and sectors: budget support (33.2%); roads and works (23%); agriculture (11.9%); education (6.4%); public sector management (4.7%); energy and mineral development (5.5%); land, housing and urban development (4.4%), and accountability (4.1%). The predominance of budget support in the share of external assistance is an indication of the Government’s low revenue generating capacity. Overall, the share of investment project assistance accounts for 23%, while project technical assistance is 16%.

41. Project support remains the most common and donor preferred modality through which external assistance is channeled to Uganda: Project aid has averaged about US$400 million annually, representing 54% of total aid flows. It is being provided through two main forms; on-budget and off-budget support. However, project support


is still fragmented with different development partners having their different implementation modalities and assessment frameworks. This makes it very costly for government to coordinate and monitor implementation.

42. Nonetheless, budget support will remain an important modality at least over the medium term: Budget support aid averaged about US$332 million annually, representing 45% of total inflows during the 2001 - 2009 period. It is being provided through the General Budget Support - GBS (where most of the resources are channeled) and Sector Budget Support. The GBS, which was in past fragmented with different development partners having their different assessment frameworks, is being harmonized with effect from 2009/10 fiscal year under the Joint Assessment Framework (JAF). Government and a group of development partners have agreed on a Joint Budget Support Operation (JBSO) and JAF in support of country’s development agenda. This is expected to increase predictability, reduce transaction costs and improve aid effectiveness. The government will, on annual basis, agree with The JBSO Development Partners on performance assessment framework outlining policy actions, development indicators and policy reform measures and triggers. The achievement of triggers will determine the extent to which the commitments will be disbursed. In 2009/2010, US$278 million budget support was disbursed. Of this, approximately 44% was in the form of concessionary loans, while 56% was in grants.

43. Current trends of external assistance show a favorable tendency towards governance, debt relief and the social sectors: External assistance to roads and works declined from 14.7% in 1999/00 to 5.5% in 2005/06; while the percentage share to the agricultural sector has remained relatively small and on the decline compared to other sectors. This is consistent with trends observed in other African countries. It is the lack of investments in agriculture that has been associated with the recent food price crisis. The health sector witnessed an improvement in disbursement in 2005/06 compared with previous

years. Assistance in the form of debt relief/HIPC is on a rising trend, while support for public administration is declining. On the other hand, support for accountability and other governance issues is becoming increasingly important given that its share of external assistance rose from 0.2% to 4.5% in a space of 7 years. A major feature of the aid architecture is the coming together of the 12 largest partners to Uganda to prepare a Joint Assistance Strategy (UJAS). The partners involved in the UJAS account for about two-thirds of all the official development assistance (ODA).

44. The Coordination Group has been very active in Uganda and is involved in most of the priority sectors of the economy. As of 30th June 2010, the cumulative approvals of the Coordination Group totaled 58 projects amounting to about US$ 400 million. The Coordination Group is a loose association of eight development agencies and one monetary agency. The Group was set up in 1975 to provide greater cohesion and effectiveness in the delivery of Arab aid, thereby promoting economic and social development in Arab, Muslim countries and other developing countries around the world. The eight institutions are either based in the Gulf region or have a large shareholding capacity by an Arab state. Alphabetically, the nine institutions are:

(i) Abu Dhabi Fund for Development (ADFD).(ii) Arab Bank for Economic Development in

Africa (BADEA).(iii) Arab Fund for Economic and Social

Development (AFESD).(iv) Arab Gulf Programme for United Nations

Development Organizations (AGFUND).(v) Arab Monetary Fund (AMF) whose main

objective is regulatory, i.e. easing balance of payments problems and developing capital markets. However, the AMF has expanded its programs to include pan-Arab development projects.

(vi) Islamic Development Bank (IDB).(vii) Kuwait Fund for Arab Economic

Development (KFAED).


(viii) OPEC Fund for International Development (OPEC Fund).

(ix) Saudi Fund for Development (SFD).

45. The EU and DFID over the years have become significant and important among the community of donors to Uganda. They have a very large portfolio and their assistance spans almost the entire sectors of the Uganda economy including the private sector and civil society. Both have been assisting the country either through direct project or budget support. The EU in particular is a dominant player in the road sector while DFID is mainly concentrated in governance and economic management.

3. IDB Group Support Strategy

3.1 Guiding Principles for IDB Engagement

46. The MCPS is principally based on, and will ensure, the following:

- Alignment with country needs and priorities. The MCPS has its starting point the country’s vision, strategies and priorities as articulated in Uganda’s 2040 Vision and the current Five-Year National Development Plan. The IDB support program proposed under this MCPS has emerged out of consultations with a wide-range of country stakeholders, including the Ministry of Finance, Planning and Economic Development (Focal Ministry); other government sector ministries and agencies; the private sector; development partners and others. The objective was to better reflect country needs and conditions, and provide a stronger basis for continuity even as, and when, governments and individual key stakeholders change.

- Anchoring with Vision 1440H and IDB Group strategy. The proposed MCPS for Uganda aims to operationalize the IDB Group Vision and the Group’s thematic strategies, under specific country conditions. The MCPS is where the 1440 Vision is being actualized.

- Enhancement of IDB Group synergy. Close collaboration between the different IDB entities in accordance with each institution’s mandate and comparative advantage, is critical for maximizing synergies and scaling-up overall Group support and impact. A Group-wide MCPS for Uganda presents a unified stance and common face to the country and avoids possible duplication of effort.

- Focus and selectivity. Given IDB’s limited (especially concessionary) resources, IDB Group needs to focus on few areas/sectors where it can have visibility and impact. Within each of focus areas, the IDB will focus on niches, such as Islamic Finance, trade, skills development, and transfer of knowledge and experience between MCs.

- Strategic partnerships. The MCPS and the process leading to it, should help align with, and harmonize, IDB Group support with that of other development partners, including MDBs, relevant DFIs, the private sector, development-oriented foundations and uniquely Islamic institutions like Waqf and Zakat institutions, and most importantly members of the Coordination Group, based on respective comparative advantages. This will help catalyze a greater effort in support of the country, and can also be a tool for mobilizing additional resources for it.

- Alignment with work programming and the budget process. The MCPS is envisaged also to guide the allocation of resources it takes to deliver an agreed program, including supervision of ongoing projects.

- Stronger institutional capacity. Support to domestic institutions both as components of financing operations, freestanding technical assistance, or as part of inter-member country cooperation, will be key to help build sustainable institutional capacity to underpin the country’s envisioned transformation “from a peasant society to a modern and prosperous nation within 30 years”.


- Management for development results. Critically, the MCPS will provide a vehicle for results-based programming and monitoring for results.

3.2 MCPS Focus Areas

47. IDB Group’s past experience in Uganda is nothing much to speak about. The volume of lending has generally been low. IDB’s pricing (terms of financing); unfamiliarity with IDB products, services and procedures; and capacity and institutional constraints all contributed to the Bank’s low visibility in Uganda in the past. These and other related issues will be addressed during the implementation of this MCPS; with a focus on innovative and impactful activities.

48. Based on: (a) the country’s priorities (as articulated in the country’s Vision and NDP), (b) the IDB’s 1440 Vision, and (c) sectoral strategies and comparative advantage, and (d) lessons learned from past operations, the IDB Group support and focus areas over the MCPS period (2010-2015) is depicted in Figures 2 and 3 below. The focus areas were agreed with the Government during an IDB Group technical mission to the country in mid-November. The “architecture” of the IDB support strategy (Figure-3) consists of the Government’s overarching objective of sustained, inclusive growth for socio-economic transformation, supported by main pillars representing IDB’s direct support for the Government’s development objectives, which are in turn undergirded by member country-to-member country linkages as

a cross-cutting “beam”. Furthermore, the country vision and development objectives are filtered through the IDB’s own Vision 1440H (2020) to arrive at the IDB support strategy (Figure-4).

49. The overarching objective of MCPS support strategy is sustainable, inclusive growth for employment generation and socio-economic transformation. This will be supported by four major “pillars” (representing the identified focus areas) and one cross-cutting “beam” as illustrated below (Figure-5). The pillars are:

- Pillar-1: Infrastructure development (energy, road and river transport including PPPs, and water for production).

- Pillar-2: Enhancing agricultural productivity and value addition (increasing agricultural productivity, commercialization and value addition agro-industrial inputs, agro-processing, warehousing, low-cost technologies and rural infrastructure).

- Pillar-3: Promoting private sector development (enabling environment, investment promotion, M/SME support, and PPPs), and improving access to finance by promoting Islamic financial services.

- Pillar-4: Enhancing the human resource base and institutional capacity (technical education; skills development, and science and technology

- Cross-cutting “Beam”. This consists of member country-to-member country


support programs through transfer of knowledge and know-how (both inward and outward).

50. The section below discusses the above focus areas in detail. It highlights the main issues under each pillar, what other development partners are doing, proposed IDB Group strategy, and the expected instruments to be utilized by the IDB along with strategic actions.

Pillar-1: Infrastructure Development

Main Sector Issues

51. Inadequate infrastructure is the most critical constraint to economic growth and the development of other sectors such as agriculture and manufacturing: As stated elsewhere in this

report, only a tiny fraction of the road network is paved (4%) but carries virtually the entire total cargo freight (96%). The rail network, usually one-third the cost of road transport, carries only 4% of the freight cargo; and only 28% of the system’s capacity is functional. This compares unfavorably with neighboring countries (Kenya and Tanzania), let alone countries such as China and India where 90% of cargo is by rail. As a result, transportation costs in Uganda are very high, thereby reducing the country’s competitiveness potential.

52. Access to electricity is also low, with only 11% of the population in comparison to 15% in neighbouring Kenya. Uganda has one of the lowest energy consumption levels in the world and power tariffs are the second highest in the world, despite the country’s huge hydropower potential,

COUNTRY VISION &DEVELOPMENT

STRATEGYBroad Strategic Objectives1. Growth and Employment� Private Sector Development (Micro & SMEs, Value, Addition, PPPs etc.)� Agriculture (Agric Inputs, Water for Production, Fertilizer Production)

Infrastructure Development� Energy/Power� Transport Infrastructure� Oil & Gas� ICT

Enhancing Human Devt.� Education� Health� Skills Development� Water and Sanitation

Science, Technology &Innovation� Industry Technology & Inputs� Technology Incubation� Technology Uptake & Commercialization

IDB GROUP STRATEGYFOR UGANDA

Focus Areas

1. Enhancing Agricultural Productivity & Value Addition (this includes low-cost technologies and agri/rural infrastructure)

2. Promoting Private Sector Devl. (regulatory environment, investment promotion, M/SME support, PPPs), access to finance by promoting Islamic finance)

3. Infrastructure Development (energy, road transport, PPPs, water for production)

4. Enhancing Human Resource Base & Institutional Capacity (technical eduction, skills development, and science and technolog)

IDB GROUP VISION

Key Strategic Thrusts(KSTIs)

� Alleviate Poverty� Prosper the People� Empower Women� Expand the Islamic Financial Industry

� Prosper the People� Expand the Islamic Financial Industry� Facilitate Integration of IDB Member Country Economies

� Promote Health� Universalize Education� Empower Women� Improve the Image of the Muslim World

� Facilitate Integration of IDB Member Country Economies

Figure 4: Proposed IDB Group Focus Areas (Pillars) - Based onCountry Ojectives and 1440H Vision


which is the largest in East Africa. The cost per kWH is three times that of neighbouring Tanzania and twice Kenya’s. Currently, the country depends on biomass as the main sources of energy, supplying 92% of energy consumption, with long-term adverse effects on the environment.

Government Objectives and Strategy

53. Government’s objective is to scale up investments in infrastructure to boost growth and enhance domestic linkages: Under the NDP, the Government will increase the stock and improve the quality of public infrastructure with core investments planned for the construction of new hydropower schemes for power generation and improving power transmission and distribution networks; expansion and upgrading of the road system; rehabilitation and extension of the rail network; improvement of water transport on Lake Victoria and construction of large-scale irrigation schemes.

Donor Support

54. There is substantial donor support on both ongoing and planned operations, but financing requirements (and similarly funding gaps) are huge: The World Bank (WB) has US$700 million in ongoing operations including support for the 250MW Bujagali Hydropower Project (co-financed by the African Development Bank and JICA) and a rural electrification project. Future World Bank operations under its new Country Assistance Strategy – CAS (2011-2015) include support for improvements in the transmission grid, rural electrification to improve access for the rural population, build institutional capacity and further support for core hydrocarbon projects.

55. The African Development Bank (AfDB) support to the energy sector is through hydropower projects to increase generation capacity, and improve transmission and distribution networks.

NDP:Over Arching Objective:

30 YearVision

Sustainable Inclusive Growth forEmployment - Generation and Socio-economic Transformation

Member Country to Member Country Transfer of Knowledge and Know-how

Infrastructure Development

Enhancing AgriculturalDevelopment

Human ResourceDevelopment and

Institutional CapacityBuilding

Promoting Private Sector Development

Implementation Strategy and Monitoring for ResultsGood Governance, Rule of Law, Gender Equality, Environment

Figure 5: IDB Support Strategy Architecture


Additional support for upgrading sub-stations is planned under AfDB’s new Country Support Paper (CSP). JICA’s support focuses also on hydropower projects. It is seeking co- financiers for the Ayago Hydropower Project, with a target capacity of 600 MW and estimated cost of US$1.5 billion, to be implemented in four phases, with the first phase at an estimated cost of US$400 million. Like the AfDB, JICA plans to support the development of transmission lines from Bujagali hydropower and electricity grid connections to the Kenya and Rwanda borders. New development partners in the sector include Norway (NORAD) and Germany (KfW). An Energy Sector Working Group, led by the Government, aims to align donor support in the sector.

56. In the road sub-sector, the World Bank will finance the paving of sections of the national roads to Sudan and North-eastern DRC (Congo) and corridors to neighboring countries. It will also finance the improvement of roads in Kampala. The AfDB, European Commission (EC) and BADEA will also support the road network, including the Greater Kampala Area (GKA), to reduce transport costs and enhance connectivity with regional markets. All external support is anchored in the Government’s National Transportation Master Plan and the National Road Program. In water and sanitation, the W/Bank plans to finance investments in selected towns and cities, and the IFC with provide advisory services to establish PPP structures that encourage private water operators. The AfDB plans to support a program for improved water supply in rural areas and small towns.

IDB Group Support Strategy

57. The IDB Group will support infrastructure development, as a major priority area, over the MCPS period: The financing needs of the sector are tremendous, and it is proposed that the IDB Group focuses on two priority sub-sectors for impact. These are: (i) power generation and transmission (including rural electrification), and (ii) road transport.

58. There are 4 major hydropower projects and about 40 mini-hydropower schemes in the NDP: The Government is keen to have IDB involvement and is willing to contract Ordinary financing within the available headroom. One such project to which the Government accords top priority and a good candidate for IDB support is the Karuma Hydropower Project. It is the first of a series of such projects, expected to start next year. The IDB Group can explore possible partnership with other members of the Coordination Group (CG) to finance part of this US$1.2 billion project over 5 years. In addition, the IDB could support the construction of transmission lines for hydropower plant together with other donors – with WB, AfDB and JICA who are planning operations in this area. The IDB can also partner with members of the CG.

59. In the transport sector, the NDP has 13 projects (8 of them on roads, 2 on railways, 2 on airports – including the upgrading of Entebbe airport – and one on water transport). These are underpinned by the Transport Master Plan and National Roads Program. The IDB, through its Ordinary financing and PPP arrangements, may finance 1-2 roads, an airport project, and an oil pipeline project.

Instruments for Group Support

60. The IDB financing in infrastructure will be through ordinary financing (Istisn’a/Leasing) and PPPs. The Bank may also provide: (a) TA grant and project preparation facility (PPF) for project preparation and documentation, (b) advisory services required by the Government for the drafting of the law and safeguards for the PPPs, and (c) a leadership role in mobilizing resources from members of the CG.

61. IDB Group will participate in PPP-based projects which can take various forms such as build-operate-transfer (BOT), build-own-operate and transfer (BOOT) particularly in infrastructure projects focusing on power generation, roads, and urban infrastructure. The IDB Group will also


make efforts to increase use of Shariah-compliant modes of financing during the MCPS period. The Group will further explore avenues of co-financing with MDBs and thus help the country in mobilizing foreign resources to increase the efficiency of PPP investments in infrastructure.

62. There are also specific roles for the Group’s entities – the ICD and ITFC. On its part, ICD may directly finance new industrial parks, and BOOT/BOT projects in the energy and transport sectors (power generation plants, pipeline/refineries and railroad projects). On the other hand, ITFC may utilize its new instrument, the structured financing facility, to finance value-chain operations including the procurement of production inputs and petroleum products for both the public and private sectors.

Pillar-2: Enhancing Agricultural Productivity and Value-Addition

Main Issues

63. Agriculture is a key sector for growth, exports and employment and a base for growth of other productive sectors such as manufacturing and services: However, the sector faces a number of challenges to realize its full potential. About 75% of labor force is employed in the sector but is primarily subsistence-based and accounts for only 23% of GDP, reflecting low productivity. Inadequate physical infrastructure, limited access to modern farming techniques and production inputs (fertilizer use is less than 10%), issues with land tenure and access, inadequate pest control, and access to markets are factors that contribute to the low productivity. Sector growth has lagged behind the rest of the economy with a growth rate of 1.3% over the last five years, compared with 7.2 % for manufacturing, 8.9% for services and 8.1% for the economy as a whole. As a result, the share of agriculture in GDP has declined from 50% in 1988 to 23% in 2008. In addition, the sector suffers from low value-addition with little processing and reliance on primary products for export. Uganda’s limited processing capacity denies the country of vital jobs, earnings, domestic economic linkages

and manufacturing/technological capacity. Simply put, Uganda is (and so is Sub-Saharan Africa) exporting jobs, foregoing income, stifling local innovation and subsidizing the manufacturing sector of advanced countries.

64. Besides, most of the production is rain-fed with little irrigation, despite Uganda’s considerable water resources. Uganda is capable of producing agricultural products 12 months a year. Uganda has 48% of the arable land in East Africa. In spite of this enormous potential, food security remains an issue with average caloric intake below recommended levels of 2000 per adult per day, far below minimum international standards. Additionally, rural Uganda suffers from three critical constraints to agricultural productivity and its value chain. These are: (i) market access related problems due to rural infrastructure constraints, (ii) seed supply related problems due to inaccessibility and unavailability to foundation and certified seed, and (iii) policy related problems due to institutional constraints.


65. The Government aims to enhance agricultural production and productivity through improved technology and effective delivery of advisory services, sustainable land use and improved management of soil and water resources, and increased supply of water for irrigation. Improved production and enhanced livelihoods in Northern Uganda, which has been especially affected by many years of conflict, also remains a priority.

Donor Support

66. Several donors are active in the sector. An Agriculture Sector Working Group plans a strong coordinating support for the sector and aligned with the Uganda-led Comprehensive African Agriculture Development Plan. World Bank assistance includes a multi-year Development Strategy and Investment Program, which provides a framework for its assistance over the NDP period. It includes agricultural technology and agro-based advisory services aimed at increasing yields and


product marketing, as well as investments in irrigation, animal health, pest control, and food safety and quality assurance. The IFC and W/Bank plan to promote commercialization of agriculture through private sector based input production, output marketing and processing/value-addition (support for agri-businesses and value and expansion of PPPs in value chains).

67. Proposed AfDB assistance includes support for agricultural infrastructure improvement in 2011. Other major donors include IFAD and DANIDA. The Alliance for Green Revolution in Africa (AGRA) has also been active in Uganda and is aiming to rapidly scale up food production through integrated value chain interventions. The CG is also very active in this area.


68. IDB Group will collaborate with other development partners to help remove the main impediments to sector productivity and commercialization. IDB support will focus on rural infrastructure, productivity enhancement and commercialization of small-holder production, and support for water (mainly agricultural) production and irrigation.

69. IDB Group support will target integrated value chain interventions with particular focus on the development of rural infrastructure to link farmers with markets. The IDB Group will partner with other development institutions for Integrated Value-Chain Initiatives whereas stand alone interventions will mainly target rural infrastructure initiatives to benefit farmers. These interventions are in line with the IDB 1440 vision and fit well with one of the Bank Group’s Key Strategic Thrusts which calls for helping member countries achieve food self-sufficiency and poverty alleviation. The intervention strategy also meets the objectives of the Bank’s Jeddah Declaration on Food Security.

70. The ITFC and ICD will provide further support by building linkages between farmers and markets through trade and marketing of agricultural products; and ICD will, among other

activities, promote private sector entry in input production and agri-businesses in the value chains. ICIEC will support imports of agricultural inputs by covering the non-payment risks of importers. It will also consider providing political risk coverage for investments flowing into the country.

71. Community Driven Development (CDD) as a holistic approach to agriculture and rural development will be an avenue for the IDB Group and will be primarily used for community mobilization to create awareness among small rural farm holders, interest groups and communities on the objectives of IDB Group’s integrated value chain interventions, in particular its market infrastructure initiatives. With this approach, communities will be able to participate actively in the prioritization, selection and implementation of interventions of their choice in their respective areas. This will also help to establish the necessary structures that will ensure the maintenance and sustainability of IDB Group interventions.


72. The IDB will support the sector through loan financing for rural infrastructure and provision of essential inputs (such as fertilizer and seeds) and CDD interventions. Water for production (irrigation schemes) can be undertaken under Ordinary financing (Istisn’a). Processing and value-addition and support for export infrastructure and behind-the-border export facilitation and logistics will be through PPP. The IDB can also provide TA grant and PPF for project preparation, and mobilize resources from other partners, including from members of the Coordination Group.

73. While IDB’s work will eventually be guided by in-house analytical work and sector strategies, sector and sub-sector strategies done by the Government and other development partners will be used to underpin the Bank Group’s operations over the medium-term. The Bank Group will facilitate the transfer of knowledge and experience from other member countries to benefit Uganda’s agriculture sector – in, inter alia, production technologies, input provision, extension services,


and value addition and output marketing. Given Uganda’s huge untapped potential in agriculture, investment and transfer of knowledge and know-how from other member countries could help unlock that potential.

74. The ITFC, using its structured financing facility and two-step Murabaha where applicable, will finance value-addition activities in the agricultural sector. Also ITFC through its Trade Cooperation and Promotion Program (TCPP) program can act as a catalyst and facilitator in this sector by helping to develop an intra-OIC trade through trade promotion, trade facilitation, capacity building and the development of strategic commodities.

Pillar-3: Promoting Private Sector Development

Main Issues

75. As highlighted in the NDP, the private sector in Uganda consists mainly of micro, and small and medium scale enterprises (M/SMEs), which account for 80% of non-farm private sector employment. These firms employ about 1.5 million non-farm workers but have low-value addition. And despite substantial improvements in the business climate, many impediments to the development of the private sector still remain. Uganda ranks 108 out of 133 countries included in the Country Competitiveness Index Report, below neighbors like Kenya and Tanzania, and way below Botswana (66) and South Africa (45). Similarly, Uganda ranks 112 out of 183 countries included in the “Doing Business Survey, 2010”. The reasons for low ranking are partly due to negative perception of Uganda by potential external investors and unfamiliarity with Uganda’s investment opportunities. The otherwise high FDI figure of US$800 million in 2009 (compared with US$120 million for Kenya and US$600 million for Tanzania) was mainly due to the newly-discovered oil resources.

76. Though Uganda’s financial sector has grown quite substantially over the last decade, it is still small, comprising mainly of commercial

banks. Leasing and insurance activities are under-developed. Within the banking sector, there is high concentration of assets, with the largest four banks accounting for 70% of the assets. Access to term financing is difficult and interest rates are high (average 18%; with inflation of 5.6%, this comes to a real interest rate of 13.2%). Moreover, local commercial banks tend to provide short-term financing facilities not exceeding 3 year tenures which do not meet the need of the private sector for affordable long term financing. There are only two (2) development banks operating in Uganda, namely; the East African Development Bank (EADB) and Uganda Development Bank (UDB). One Development Finance Company of Uganda (DFCU) provides equity capital and medium / long-term loans for manufacturing and commercial agriculture.

77. Ugandan financial services market is being expanded by the introduction of the Islamic financial industry. There are some local and international Islamic institutions which have shown strong interest in developing Uganda’s Islamic finance sector. It is anticipated that with the launching of the proposed Islamic banking law and regulatory framework, the country will require to further develop its legislation in order to continue expanding the Islamic financial services industry. The new legislations are expected to allow a wider range of Islamic financial products and more institutions to be set up.

78. Creating conducive business environment for the private sector would require the Government to continue with macro-economic stability, speed up and intensify the reform of the legal and regulatory environment affecting business, a fair and transparent taxation system, upgrade the level and quality of services in infrastructure, and improve access to financing and infrastructure services, and other support measures.


79. The Government has undertaken major reforms intended to improve the investment


climate. These reforms range from public sector management, tax reforms, financial sector reforms, health reforms, investment laws, tax reforms, energy sector reforms among others. The Government is also implementing measures to ease barriers and improve competitiveness. It has developed a Competitiveness and Investment Climate Strategy to effect the necessary changes. The Government also plans, under the NDP, to improve road infrastructure services to reduce transportation costs (which put domestic production at a competitive disadvantage), energy and water. It plans to use PPPs for large infrastructure projects and is finalizing a proper legal and regulatory framework for PPPs.

Donor Support

80. Uganda has been able to mobilize substantial resources in the form of commercial and concessionary loans, grants and export credit from international institutions and other aid agencies. These include the World Bank, African Development Bank, OPEC Fund, European Union, United States Agency for International Development (USAID), as well as the Swedish, Norwegian and Swiss governments.


81. Macro-economic stabilization, and streamlining the policy and regulatory frameworks are crucial for private sector development, but these are neither a mandate nor areas of comparative advantage of the IDB Group. These areas fall within the purview of sister MDBs like the World Bank and the AfDB. The IDB Group can provide support in investment promotion through its Investment Promotion Technical Assistance Program (ITAP), as well as through the Group’s private sector arms – the ICD for investment, ITFC for trade financing, and ICIEC for investment and export credit insurance.

82. The ITAP will continue to work with the Uganda Investment Authority (UIA) to attract greater flows of investments into Uganda,

particularly investment flows from the Gulf Cooperation Council (GCC) countries. The ITAP-Uganda Project commenced its activities in February 2008 with the initiation of the preliminary assessment and sector analysis study which was successfully completed. In all, the study resulted in identifying six sectors and highlighted investment barriers in each sector for policy advocacy. In April 2008, ITAP signed a financing agreement with the Arab Bank for the Economic Development of Africa (BADEA) for the ITAP Uganda Project. The project succeeded in indentifying at least 50 investment opportunities in Uganda, project profiles were also prepared and promotional materials were produced to be used by UIA for promoting Uganda’s investment opportunities. These efforts have been actualized and expanded since January 2011.

83. The IDB will, through its Islamic Financial Services arm, help improve access to financial services particularly for the M/SMEs. The development of Islamic finance to provide affordable, Shari’ah-compliant financial products is important for private sector development in member countries. The IDB will support creation of an enabling environment for Islamic banking in Uganda, and provide capacity-building and training to the sector.


84. Loans (concessionary financing) and equity stake in Islamic banks, technical assistance and capacity-building grants for creating an enabling environment, support for individual banks and for training and advisory services on Islamic financial products and services.

85. The IDB Group through its private sector entity – the ICD – as part of its new strategy, envisions that local Ugandan commercial banks will take advantage of ICD lines of finance to provide Ugandan SMEs with affordable long-term financing for amounts below US$2 million. The second constraint is inability of entrepreneurs to translate investment opportunities into


bankable projects. The ICD will extend its Project Development Facility (PDF) in Western Africa to help entrepreneurs from Uganda translate their ventures into bankable projects eligible for ICD financing in future. In view of the significant growth of the services sector, ICD direct financing will also be aimed at telecommunication services and other related IT services considering that the services sector is expected to be the main driver behind Uganda’s private sector growth.

86. ICD intends to establish a Global Housing Development Fund which will participate with developers in some member countries to fund the development and construction of relatively low to middle-income houses. The Fund intends to partner with local governments to obtain land and infrastructure incentives, and with local developers to enable use of local expertise. Thus, ICD will assist in providing quality and modern housing units to local people, specifically the low to middle income households where the majority of demand lies and where supply is limited. Of the approved amount, 10-15% has been earmarked for Sub – Saharan Africa for which Uganda can draw on.

87. ICIEC can play a complementary role in attracting foreign direct investment into the country by providing risk mitigation tools to private investors from all over the world, protecting them against country risks and political risk. ICIEC, through its export credit insurance

policies, will support all exports from Ugandan private companies. It will also encourage exporters of strategic products and services to trade with Ugandan importers against non-payment risk coverage from ICIEC. The corporation, via its Documentary Credit Insurance Policy, will also help Banks and Financial Institutions in member countries to enhance their capacity towards letters of credit issued by Banks in Uganda. On its part, the ITFC, through its TCPP arm, will conduct “Trade Fairs” as a platform to promote Ugandan’s products within the region and beyond.

Pillar-4: Human Resource Development and Institutional Capacity

Main Issues

88. Uganda has made tremendous progress in primary education and poverty reduction. However, demographic and policy challenges and quality and skill level of the work force remain as challenges. While Uganda has tripled the access to primary education (from 2.5 million to 7.5 million between 1997 and 2008), has scaled up its expenditures on education (second only to infrastructure) and is slated to attain the goal of universal primary education by the target date of 2015 (with 82% of eligible pupils currently enrolled); quality and efficiency of expenditures are major issues, as are high teacher absenteeism, especially in rural areas and remote communities. Progress in health indicators is less than envisaged

TABLE-2: Role of the IDB Group Entities in Focus AreasFocus Areas IDB ICD ITFC ICIEC/ITAP IRTI

Enhancing Agricultural Productivity & Value Addition (Productivity, agric inputs, agro-processing, commercialization, low-cost technologies, agric /rural infrastructure)

√ √ √ √

Infrastructure Development (Energy, road transport, PPPs, water for production)

√ √ √

Enhancing Human Resource Base & Institutional Capacity (Technical education, skills development, and science and technology)

√ √ √ √ √

Promoting Private Sector Devl. Regulatory environment, investment promotion, M/SME support, PPPs, access to Islamic finance)

√ √ √ √ √


and the country is unlikely to meet MDGs in this area, particularly in infant mortality, having one of the highest child mortality rates in the world. Overall, human development remains low with Uganda ranking 143 out of 194 countries surveyed for the 2009 UNDP Human Development Report. Uganda has also a very young and fast growing population (one of the highest in the world). High population growth poses challenges for employment creation and basic service delivery, especially in education and health.

89. The quality of the workforce (i.e. their education and skills) is a key element in ensuring a competitive edge in the 21st century, where the driving force is science and technology (S&T). Student enrollment in science and technology-related courses at both public and private universities are about one-fourth of total student enrollment. It is estimated that 40% enrolment is the minimum required for rapid economic growth and effective knowledge-based economy. Among the constraints to S&T and innovation are: (a) inadequate focus on research and development by both private and public sectors; (b) inadequate financing and lack of incentives to promote private research; and (c) weak collaboration between planners, research institutions and industry.


90. To enhance the human resource base, build skills and strengthen institutional capacity the Government intends to:

- Increase access and equity to primary education for all, by reducing cost of education to families (tuition for primary schools is already free but there are other costs), working with NGOs to implement special programs for disadvantaged and marginalized groups, and providing incentives (e.g. hardship allowances) to teachers in remote and conflict areas to increase motivation and retention. There will also be increased access and equity in secondary education through continued implementation of the Universal Secondary Education Program, rehabilitate and expand

existing schools to accommodate growing numbers, and improve school equipment and facilities, and strengthen the teaching force;

- Increase access and equity of Business, Technical, Vocational Education and Training (BTVET) and improve the quality and relevance of training by expanding and improving BTVET facilities, modularizing courses (to facilitate tracking of performance and quality improvement) and ensuring that they are in line with labor market and future development needs; and

- Increase equitable access to higher education. Among interventions planned under the NDP are: diversifying the sources and mechanisms for financing higher education, reforming public financing to target science and technology, reforming and improving the curriculum in priority disciplines, and promote applied research.

Donor Support

91. The World Bank has an ongoing “universal post-primary education and training program”. A repeater project is planned for 2013 under its CAS. The World Bank is also supporting education through multispectral operations such as the Northern Uganda Social Fund and through local government management support.

92. The AfDB plans a major operation (in 2012) for Education Sector Support. Other development partners (DPs) active in the sector include UNICEF, EC, Ireland, Netherlands, USAID, Belgium, UNFPA, GTZ and JICA. They support improved access and quality of primary education and post-primary education including technical and vocational education.

93. On health, several DPs are also active, including Belgium, DANIDA, DFID, Italy, and Sweden. The US provides substantial support for HIV/AIDS and Malaria. Global health funds such as for AIDS, Tuberculosis and Malaria and the Global Fund for Vaccines and Immunization provide substantial support. One major gap in


the sector support is vocational and technical education and science and technology.

IDB Support Strategy

94. Given the large number of donors present in human resource development (especially health and education), who provide support through grants or highly-concessionary terms; the IDB will focus and aim to lead on vocational and technical training, institutional capacity-building and science and technology, where there is less donor support and which are the Government’s top priorities.


95. These will consist of concessionary loans for vocational training (through ISFD’s VOLIP), and grants and member country-to-member country transfer of knowledge and experience for S&T and institutional capacity-building. On its part, IRTI will ensure that its capacity building to Uganda is responsive to the expressed needs of the country. In addition to direct assistance in human capital development and training, IRTI will also contribute to the institutional building to Uganda. More specifically, IRTI will:

- Provide advisory services and consultations in Islamic banking and finance, Waqf, and Zakat.

- Assist Bank of Uganda, as part of the IDB Technical Assistance, to develop a supervisory framework for Islamic banking and finance.

- Raise the awareness of bankers in Uganda in Islamic economics, banking and financial services through awareness programs, seminars and conferences.

Cross-Cutting “Beam”: Member Country-to-Member Country Support Program

96. The member country-to-member country partnership arrangement is one distinguishing feature of the IDB’s MCPS process: As a South-South development financing institution, forging cooperation among its member countries has been one of the IDB’s priority activities. The Bank wishes to scale this up further with the MCPS,

in order to augment its traditional role of project and program lending. Through this particular mechanism, the IDB will serve as a facilitator for the member countries to support each other in form of technology transfer; cross-border investments; and sharing of best practices, knowledge and country experiences. Uganda aspires to graduate to a middle-income country, and there are several IDB member countries that have gone through a similar process for which Uganda stands to learn and benefit from their experiences.

Inward Linkages: From other Member Countries to Uganda

97. Institution-building. The Bank could sponsor public sector staff for short term (1-2 weeks) learning tours in IDB member countries with demonstrable success in public administration. Also in the area of Public-Private Partnerships which are starting to play an increasingly important role in Uganda especially in the area of infrastructure development including road construction, industrial park development, energy generation and mineral and oil exploration; the IDB will look for possible partners to help share their experiences and know-how with Uganda. In Oil Resource Management, the IDB Group may work out a cooperation arrangement and technological transfer between PETRONAS (Malaysia) and Uganda as was done in the case of Sudan and Mauritania.

Outward Linkages: From Uganda to other Member Countries

98. Possible areas where Uganda may be of help to other member countries, specially in Sub-Saharan Africa, include statistical capacity building and sharing its experiences in New Rice for Africa (NERICA) and disease (HIV/AIDs) control (Figure 6).

Expected Role Play by Members of the IDB Group

99. The IDB Group entities will each have a role to play in the MCPS by intervening in the four


pillars and specific niche areas as shown below (Table-2). Two areas (promoting private sector development and enhancing human resource base and institutional capacity) will be supported by all the entities of the IDB Group.

Proposed IDB Group Niche Areas Within the Pillars

100. Given the limited resource envelope (paragraph 104), it may appear that focus may be lost by intervening in all four pillars. However, this is not the case. The MCPS proposes Bank Group intervention in narrow niches within each pillar, with each entity focusing on their relative strength and mandate. In Human Resource Development, Group support will be limited to vocational education and skills development, and science and technology. In particular, the Group will not provide support to health and general education, which receive considerable financial support, mainly in grants and concessional basis, from other development partners. In Private Sector Development, IDB Group role will be limited to SME development (mainly by ICD), Islamic financial services (by IFS Department) to improve access to term financing, and investment promotion (by ICIEC/ITAP). In Agriculture, the focus will be on provision of critical inputs (mainly by ITFC but to some extent by IDB under the Jeddah Declaration) and agro-industry development to enhance value-addition (mainly ICD). In Infrastructure, the top-most priority area

of the Government and a critical constraint to the economy, the MCPS proposes emphasis on rural infrastructure in addition to power and transport.

V. IMPLEMENTATION ARRANGEMENTS AND RESOURCE ENVELOPE

101. Enhancing the capacity of Government sectoral ministries and technical agencies would be one key input: Implementation of the MCPS hinges on the capacity of local partners. The IDB, through its regular technical assistance activities, will ensure that this capacity is developed and sustained. The IDB will also facilitate knowledge sharing and twinning arrangements through the member country-to-member country support programs especially in public management, governance and leadership skills.

102. Framework of Implementation: The MCPS for Uganda is targeted for 5-years to specifically coincide with the timing of the NDP. The MCPSs for other countries are on a 3-year cycle. The assistance program and the underlying financing envelope will be for three years, given that any timeframe beyond that is difficult to plan for. However, the strategy itself will remain in force through the 5-year MCPS period. A mid-term stock taking review will be undertaken in 2012/13. To assist in the monitoring and evaluation of this MCPS, an interim results-based framework (RBF) has been prepared as per Annex-2; and this will be comprehensively recast once a work program is derived.

103. Uganda expects the IDB to be one of the major players on the ground: The concept of the member country-to-member country linkages, in which Uganda may also offer its expertise to other member countries, was well received by the authorities. If this is well planned and executed, it will be a distinguishing feature, and indeed an additionality factor of the IDB’s assistance to Uganda.

104. Indicative financing envelope: The IDB Group, consisting of the IDB itself, the ICD, the ITFC, and ICIEC is considering an indicative

MCPS

MC2MC MCMC

‘reverse’ linkages

Figure-6Member Country-to-Member Country (MC2MC) Support Program

IDB Group as a Facilitator


financing envelope of US$300 million for Uganda over three years (2011- 2013) to support the identified priority areas. For the ICD, the priorities will be the financial sector, SMEs and technical assistance on SME development and project preparation. Its total proposed envelope is around US$85 million. The ITFC’s envelope is estimated at US$45 million (or US$15 million per annum) and will be utilized mainly on trade, especially on critical agricultural and other production inputs to facilitate value-chain operations.

105. The IDB itself will intervene in a few, well-focused areas in all the four pillars; including such activities like (a) Islamic finance (by the Islamic Financial Services Department - IFSD), (b) microfinance, community-driven development and vocational literacy (by the Islamic Solidarity Fund for Development – ISFD), (c) legal and regulatory framework for Islamic banking and PPPs (by the Legal Department), and (e) member country-to-member country support programs or “reverse” linkages (spearheaded by the Group Strategic Planning Department). In all, the IDB

proper is expected to extend US$165 million. The Investment Promotion Technical Assistance Program (ITAP) is expected to provide the remainder (i.e. US$5 million).

106. Figure-7 illustrates in more detail the responsibility matrix of the various business units within the IDB Group with regard to the targeted niche areas. The objective here is to show who will be ‘leading’ what areas during the implementation of the MCPS.

VI. RISKS

107. There are a number of risks to the implementation and achieving the outcomes of the MCPS as set forth above and these include the following:

108. Non implementation by the Government of strategic projects especially in the energy sector. For local industries to thrive and sustain themselves there ought to be adequate and reliable sources of electricity and this makes the development of hydropower (and other forms of energy) a necessity. Otherwise, Uganda’s dream

Pillar 1

Figure 7: Specific NichesKeyARD - Agriculture and Rural Development DepartmentHDE - Human Development DepartmentIFSD - Islamic Financial Service DepartmentINF - Infrastructure DepartmentISFD - Islamic Solidarity Fund

Pillar 2 Pillar 3 Pillar 4

IDB/INFICD

IDB/INFISFD

ICDITFCICIEC

IDB/

IDB/

IDB/HDE

IRTI

ICD

HDE/ISFD

IDB/IFS, ARD

IDB/

ICIEC/ITAP

LEGALIFSD

HDE/ISFD

ITFC

IDB/INF

IDB/ARD

Energy

RoadTransport

Water forProduction

RuralInfrastructure

AgricultureBusinesses

ProductionInputs

Vocational &Tech. Training

InstitutionalCapacity Build.

Science andTechnology

RegulatoryEnvironment

InvestmentPromotion

M/SMEs

InfrastructureDevelopment

Agricultural Productivity &Value Addition

HumanResource

Development

Private SectorDevelopment


to modernize its economy may not materialize. Uganda has the largest hydropower potential in East Africa, but it remains grossly untapped. Equally important are the projects in the transport sector (road, rail and water transport on Lake Victoria); which would help reduce transportation costs, boost domestic and regional trade, and enhance Uganda’s competitiveness.

109. The terms and conditions of IDB financing and the limited concessionary resource base poses a challenge to meeting Uganda’s financing needs: The Government has indicated that it will continue with its debt policy of preferring grant and concessionary resources over Ordinary (non-concessionary) financing. This poses a risk to the IDB’s program for Uganda which is heavily tilted towards ordinary financing. Although there is headroom of about US$500 million for this type of financing, this is highly restricted to projects and programs that are of strategic and national importance and which generate foreign exchange. Such projects may also be liable to vetting by the IMF or the World Bank. Furthermore, the financing by the IDB’s private sector entities (ICD and ITFC) is subject to receiving viable projects from the private sector in Uganda and the suitability or acceptability of their respective terms and conditions.

110. Weak institutional capacities in Uganda, especially within the public sector, may stunt the economic growth and social transformation the NDP envisions: Weak institutional capacities in public sector management and administration were identified as one of the major threats to achieving the objectives set out in the 2040 Vision. If not addressed, typical manifestations of this problem such as “understaffing, duplication of roles, protracted institutional infancy, weak client responsiveness and bureaucracy”, will continue to result in low absorption of public funds and poor delivery of services.

111. The so-called “resource curse” poses a risk with respect to the windfall of wealth expected from the recent discovery of oil: Some countries

with discoveries of a valuable natural resource have tended to digress economically with worse development outcomes than countries with fewer natural resources. This “curse” has been especially acute in Africa where new found wealth has been a source of conflict and corruption instead of funding for development and poverty reduction. The reasons for this include increased patronage, deteriorating competitiveness of traditional economic sectors, weaker governance, weak institutional capacity and increased variability of government revenues due to the exposure to the volatile international commodity markets. While this may not directly affect the MCPS program, it may affect the overall environment within which IDB operates.

112. There is a risk of reversals in policy reform: Uganda has maintained a high level of macroeconomic stability and economic growth during the past 20 years, upon which the impressive economic and developmental gains were achieved. With over 80% of the population involved in agriculture and in the face of the inflation in food prices in recent years, the Government may come under pressure to increase spending and state interventions such as subsidies. This may affect the sustainability of IDB-financed operations.

113. The combination of a young population and high youth unemployment could create further challenges such as security risks: As stated earlier, Uganda has one of the youngest populations in the world with half the population below the age of 15. Similarly, over half the unemployed are youth. Even the educated youth face significant problems getting work with the greatest risk of unemployment being the educated youth entering the labor market for the first time. High youth unemployment breeds social unrest, and therefore a security risk.

114. There are a number of exogenous risks to the Uganda which are weather or disaster related: Adverse weather patterns affect domestic food crop output, with conditions such as drought and floods, having a very negative influence


on agricultural output and food security. Aside from droughts and floods, Uganda has also been susceptible to epidemics.

VII. CONCLUSION AND THE WAY FORWARD

115. The preparation of the MCPS has laid the basis for a fruitful dialogue on development priorities with the Government of Uganda, the private sector, the civil society and others. It has also facilitated alignment with other development partners, both bilateral and multilateral. This is a key factor towards harmonization and efficiency gains. Furthermore, the MCPS process has provided opportunities for specific niches for the IDB Group. There is a strong desire among the IDB Group’s private sector entities (ICD, ITFC and ICIEC) to make headway in Uganda after many years of relative inactivity.

116. Uganda is pinning high hopes to benefiting from the member country-to-member country partnership arrangements: To augment its traditional project and program financing, the IDB Group will facilitate knowledge sharing, technology transfer and twinning arrangements through the member country-to-member country support programs especially in public management, skills development, governance and leadership areas. This modality is undoubtedly the IDB’s unique niche area that no other MDB or bilateral agency is providing to Uganda. Additionally, the IDB will provide technical assistance (on grant basis) to enhance the capacity of Government sectoral ministries and technical agencies in Uganda, especially those overseeing its operations.

117. The international development community has, and will continue to be active in Uganda: The country has experienced steady growth and has made substantial progress that towards poverty reduction and other MDGs. These achievements could not be possible without the support of the international development community. There

are substantial opportunities for the IDB Group support to associate with, and help maintain this momentum of progress.

118. It is recommended that IDB support focuses on agriculture, infrastructure (road transport and energy), private sector development, and skills development (human resource): These areas have been identified as priorities by the NDP. These constitute the pillars that the Uganda MCPS will intervene in direct support of the Government’s objective of sustained growth for employment-generation and social economic transformation.

119. Framework of Implementation: The MCPS for Uganda is targeted for 5 years to specifically coincide with the timing of the NDP. However, the financing envelope (US$300 million) is for 3 years. A stock taking and mid-term review will be undertaken in 2012/13. Dedicated programming missions to Uganda will be mounted yearly, with the objective of identifying and mutually agreeing to specific programs and projects that meet the criteria set out in this MCPS.

120. The main instrument of implementing the MCPS will be partnerships: These are partnerships within the IDB Group itself; partnership with the government of Uganda and other DPs; partnerships between Uganda and other IDB member countries through the reverse linkage support programs (with the IDB as the facilitator); and partnerships with the Arab and other private investors through ITAP-sponsored investment promotion activities.

121. Challenges and risks: One major operational risk to the proposed program is the reluctance of the Government to contract obligations under ordinary financing terms, to avoid raising its debt burden to unsustainable levels. This is particularly important to IDB given the paucity of its concessionary resources. The bulk of the proposed envelope is heavily tilted towards ordinary (non-concessionary) financing. On the other hand, the Government’s


own debt sustainability analysis shows that there is headroom (of about US$500 million annually) to contract ordinary financing for strategic projects and programs especially in transport and energy. Nonetheless, the Government has indicated that it may not accept interest rates (or mark-ups) exceeding 2%.

122. Other risks relate to adverse movements in international prices for Uganda’s primary commodities and spillover of conflicts in neighboring countries. Uganda is operating in a supposedly “federated” East Africa. An occurrence in any of the neighboring countries – be it economic, social or political fallout – will

adversely and directly impact Uganda. Historically, the “Great Lakes” region has been socially and politically unstable. And lastly, weak institutional and implementation capacity could undermine the outcomes of the IDB Group interventions.

123. The above notwithstanding, Uganda has set itself on a sustained path to socio-economic transformation – given the resolve of the political leadership and the remarkable progress it has recorded over the last 25 years when the economy was on the brink of collapse. The IDB desires to be part of Uganda’s transformation process.


ANNEXES


ANNEX 1: Indicative Assistance Program of IDB Group:Financing and Non-Financial Services 2011-2013 (US$ million)

IDB ICD ITFC ICIEC (ITAP)

ISFD Total, IDB Group

Human Development

- Vocational & Skills Development 20 20

- Science & Technology 5 5

Infrastructure

- PPP / Energy / Trans. 65 45 110

- Rural Infrastructure 10 10

Agriculture Development 30 15 20 65

Private Sector Development

- M/SMEs 10 25 35

- Islamic Financial Services 10 15 25

- Trade (Non-Agric) 25 25

- Investment Promotion 5 5

Total per Entity 150 85 45 5 15 300

The above tentative financing envelope includes the provision of non-financial services in the form of capacity-building, analytical and advisory services and transfer of knowledge and experience between member countries, over the MCPS period


ANNEX 2: Preliminary Framework for Results Based Country Program

Country Development Goals

Current Challenges/Binding constraints

Outcomes that the IDB Group expects

to support

Milestones/ intermediate

Indicators

IDB Group Program/

instrument (to be confirmed during

programming mission)

Pillar 1: Infrastructure Development

Increase the stock and improve quality of basic infrastructure (roads, railway, power and water transport)

Drastically improve the quality of basic rural infrastructure

Inadequate infrastructure is the most critical constraint to economic growth as well as to the development of main sectors such as agriculture and manufacturing

Access to electricity is equally low (11% and 4% in rural areas).

The country has tremendous hydropower but relies on biomass for 92% of energy consumption

Only 4% of the road network is paved and caries 96% of freight.

High transport costs constitute a significant trade barrier.

Increase in power generation and accessibility

Increased stock of paved roads (and lower operating costs).

At least 1-2 PPPs during the MCPS period in power generation, particularly in hydropower.

The percentage of the road sector which is paved increases from the current 4 per cent.

Kms of rural roads built or rehabilitated

Istisna’a/PPP

power generation and transmission

Road transport operation.

Loan:

Rural infrastructure operation

Grant:

TAs for advisory services for the Government for the drafting of the law and safeguards for the PPPs and Islamic Finance.

ICD directly finance for new industrial parks and BOOT/BOT projects in the energy and transport sectors.


ANNEX 2: Preliminary Framework for Results Based Country Program (Continued)

Country Development Goals


Outcomes that the IDB Group expects to

support


Indicators

IDB Group Program/

instrument (to be confirmed during


Pillar 2: Agricultural Development

Enhance agricultural production and productivity through improved technology, availability of critical production input, and effective delivery of advisory services.

s to enhance productivity and value-addition

Low productivity: About 75% of labor force is employed in the sector but it accounts for only 23% of GDP.

Limited access to physical infrastructure, essential production inputs and modern farming techniques.

inadequate pest control,

Limited access to markets

Weak growth performance: Sector growth has lagged behind the rest of the economy (1.3% over the last five years vs. 8.1% for the economy as a whole).

Low value-addition with little processing and reliance on primary products for export.

Subsistence-based sector needs to be commercialized. Most of the production is rain-fed, with little irrigation despite Uganda’s considerable water resources.

Food security remains an issue with average caloric intake below recommended levels of 2000 per adult per day.

Improved availability and increased affordability of main production inputs (seeds, water, fertilizers and farm machinery)

Community Roads rehabilitated and maintained

Agro-processing and storage units installed and in use.

Increased access to information regarding markets, seeds and use of fertilizers.

Credit access and guarantees given to small holder famers

Increase in households using modern agricultural technology and essential production inputs, such as fertilizer

Increase in percent of framers with access to microfinance credit

Percentage increase in irrigated farm land

Ongoing:

TA grant to Ministry of Agriculture for feasibility study of small dams for irrigation.

Future:

Provision of essential inputs (such as fertilizer and seeds) under Jeddah Declaration

Microfinance scheme for small holders (ongoing operation).

Water for production (irrigation schemes) through Ordinary Financing (Istisn’a).

Processing and value-addition and support for export infrastructure and behind-the-border export facilitation and logistics will be through PPP.

TA grant and PPF for project preparation.


ANNEX 2: Preliminary Framework for Results Based Country Program (Continued)

Country Development

Goals


Outcomes that the IDB Group expects to

support


Indicators

IDB Group Program/instrument (to be confirmed during


Pillar 3: Private sector development and finance

Develop a robust private sector that underpins the envisioned socio-economic transformation and creates jobs for the vast number of new entrants to the labor market.

The private sector mainly consists of micro, and small and medium scale enterprises with low-value addition.

Despite substantial improvements in the business climate, many impediments to the development of the private sector still remain.

Uganda ranks 108 out of 133 countries included in the World Economic Forum’ Country Competitiveness index, and 112 out of 183 countries included in the “Doing Business Survey, 2010”.

Negative perception of Uganda by potential external investors and unfamiliarity with Uganda’s investment opportunities.

Access to term financing is difficult and interest rates relatively high.

Greater flow of FDI beyond the oil sector

Greater access to term finance by M/SMEs

Regulatory and supervisory framework for oversight of Islamic banking and finance developed, enacted and implemented

Development of further legislation for Islamic banking and finance including sovereign, corporate sukuk and takaful.

Well-targeted promotion of Uganda as a competitive destination of FDI.

PPP legislation enacted and implemented

Legislation for Islamic banking enacted and implemented; licensing 1-2 Islamic banks

Ongoing operations:

Line of financing for SMEs through UDB

Microfinance Support Project

Future:

Equity stakes in Islamic banks;

Technical assistance and capacity-building grants for creating an enabling environment support for individual banks and for training and advisory services on Islamic financial products and services.

ICD lines of finance to provide Ugandan SMEs with affordable long term financing for amounts below US$2 million.

Investment Promotion and Technical Assistance Program (ITAP) will work with the Uganda Investment Authority (UIA) to attract greater flows of investments into Uganda, particularly investment flows from Gulf Cooperation Council GCC) countries.


ANNEX 3: Macroeconomic Indicators

Indicator FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

----------------------Actual ------------------- Est. --------------Projected --------------

Population (millions) 28.7 29.7 30.6 31.7 32.7 33.8 34.9 36 37.2 38.4

Real GDP growth (%) 6.3 10.8 8.4 8.7 7.1 5.6 6.4 7.0 7.2 7.4

Real GDP per capita growth (%)

3.0 7.5 5.3 5.4 3.8 2.3 3.0 3.6 3.8 4.0

Government revenues (% of GDP)

12.2 12.5 12.6 12.8 12.5 12.5 13.1 13.5 14.0 14.4

of which grants (% of GDP)

7.5 5.4 4.5 2.7 3.4 2.4 1.8 1.8 1.6 1.4

Fiscal balance (recurrent only; % of GDP)

-1.0 -0.6 0.4 0.3 1.2 0.8 1.6 1.9 2.4 2.0

Consumer price inflation (%)

8.0 6.6 6.8 7.3 14.2 9.5 4.1 5.2 5.3 5.2

Exports (% of GDP) 14.2 15.3 16.7 24.3 23.8 23.6 23.7 23.2 22.8 22.2

of which coffee (% of exports)

12.0 11.2 11.4 11.0 9.0 7.3 7.2 7.1 7.0 6.9

Imports (% of GDP) 24.9 28.4 30.1 32.0 35.3 33.6 34.5 33.9 32.6 31.8

Current acc. ind. grants (% of GDP)

-1.4 -3.4 -3.9 -3.2 -4.3 -5.0 -5.6 -5.5 -5.2 -5.1

External debt (% of GDP)

56.0 53.6 18.3 17.7 19.6 20.1 23.3 25.7 26.3 26.4

Domestic debt (% of GDP)

9.2 8.7 9.3 10.7 8.4 7.6 7.0 6.7 6.6 6.5

Source: Government of Uganda; IMF; Bank staff estimates


ANNEX 4: IDB Operations by Mode of Finance and SectorDistribution by Mode of Financing

Mode No. ofOperations

Amount (in million) Disb.%

ID USD ID

Equity 1 1.38 2.00 0.00 3%

L. EQ/L.LSG 1 6.25 10.00 0.oo 3%

I. Sale 2 9.90 13.23 8.85 6%

Loan 6 38.20 55.86 7.50 13%

Loan(LDMC) 2 2.69 3.49 0.49 6%

T.A. Grant 12 2.69 3.49 0.49 34%

T.A. Loan 4 1.20 1.40 1.00 13%

Sp. Assistance 7 2.50 3.30 2.20 22%

Total 35 64.81 92.77 20.53 100%

Distribution by Sector

Mode No. ofOperations

Amount (in million) Disb.%

ID USD ID

Agriculture 1 0.31 0.50 0.00 4%

Industry 4 4.92 6.75 4.39 16%

Islamic Banks 1 1.40 2.00 0.00 4%

NDFIS & Others 7 24.05 36.14 0.04 25%

Public Utilities 2 4.80 5.90 4.60 7%

Social Services 6 12.60 17.90 2.80 21%

Trans. & Comm. 7 13.70 19.10 6.00 25%

Total 28 56.55 81.04 13.44 100%

Project Status Summary

Status No. Amount (ID mn) %

Under Implement. 14 61.71 32.0%

Completed 13 19.30 43.0%

Sub-total 27 81.01 75.0%

Cancelled 7 26.30 25.0

Total OCR 34 107.31 100.0%


ANNEX 5: External Assistance to Uganda by SectorSector 2007 % 2008 % 2009 %

Security - - - - - -

Works & Transport 104.7 8.5 46.7 10.1 152.6 23.1

Agriculture 61.1 5.0 37.7 8.2 78.8 11.9

Education 24.6 2.0 18.3 4.0 42.6 6.4

Health 155.8 12.7 17.3 3.7 7.3 1.1

Water & Environment 24.2 2.0 34.3 7.4 19.8 3.0

Justice, law & order 3.7 0.3 10.7 2.3 7.0 1.1

Accountability 45.4 3.7 12.2 2.6 27.2 4.1

Tourism, trade & Industry 11.9 1.0 4.7 1.0 8.9 1.3

ICT - - - - 0.0 0.0

Energy & Mineral Development

186.4 15.2 12.1 2.6 36.2 5.5

Lands, housing & urban Development

49.0 4.0 48.3 10.5 28.9 4.4

Social development 0.2 0.0 - - 0.1 0.0

Public administration 12.9 1.1 0.5 0.1 1.6 0.2

Public sector management 40.9 3.3 24.7 5.3 31.1 4.7

Legislature 0.0 0.0 0.0 0.0 0.0 0.0

Budget support 504.8 41.2 194.5 42.1 219.6 33.2

Total 1,225.5 100.0 462.1 100.0 661.7 100

bank group member country partnership strategy for uganda ... · mcps for uganda, 2011-2015 xi 1....

Documents