The Trade Policy Review of Uganda

The Trade Policy Review of Uganda

Paul Collier

1. INTRODUCTION

O VER the past quarter-century the Ugandan economy has been char-acterised by extremes. Export concentration has been among the highest in

the world, incomes among the lowest. It has experienced among the most severedeclines ever recorded: a fall of nearly 40 per cent in per capita GDP during1971–86; and for the past three years has been one of the world’s most rapidgrowers. It has suffered prolonged periods of civil war and tyranny, and is nowone of the few African countries to have a sitting president elected in a faircontest.

Policies towards trade and foreign investment have been central to thisextraordinary history and the WTO’sTrade Policy Reviewprovides an excellentaccount of them. During the 1970s exports were heavily taxed in a variety ofways and foreign investment was confiscated. During the 1990s these policieshave been reversed. The Ugandan government is currently probably the leadingexponent of liberalisation on the continent. Its measures have already hadsubstantial effects on trade and investment. However, the largest singleimpediment to this recovery is Ugandan history: the country needs to live downits past and has few mechanisms for doing so. Although it is now often forgotten,in the late 1940s many European countries faced a similar problem. The GATTand the European Union, the two institutions through which European nationsliberalised their trade, had two core functions: coordination and enforcement.Coordination enabled governments to sell their own liberalisations politically asthe price of reciprocity. Enforcement made the liberalisations credible and soencouraged investment in the newly profitable sectors.

Uganda has achieved substantial trade liberalisation unilaterally: impressively,the government did not need the political argument of reciprocity to be able toreap the gains from liberalisation. However, because the liberalisation has had nointernational institutional framework it has no enforcement mechanism and soonly limited credibility. In 1994 a survey of 150 potential investors into Uganda

ß Blackwell Publishers Ltd 1997, 108 Cowley Road, Oxford OX4 1JF, UKand 350 Main Street, Malden, MA 02148, USA. 649

PAUL COLLIER is from the Centre for the Study of African Economies, Institute of Economicsand Statistics, University of Oxford.

identified the fear of policy reversalas the single most important obstacletoinvestment(World Bank, 1994). The Ugandangovernmentunderestimatedthecontributionwhich the internationalinstitutionsof tradepolicy could make tocredibility even though there was no need for coordination.Conversely,theinstitutions themselvesunderestimatedtheir potential role in African liberal-isation,preferringto leavethe field to the World Bank. Although the EuropeanUnion intervened through the Cross-BorderInitiative, the objective was tofacilitate coordinationbetweenAfrican governmentsrather than to supply anenforcementmechanism.

Section2 briefly describestheUgandaneconomicrecovery.Section3 focusesuponpoliciestowardstradeandforeign investment.Section4 takesup the issueof credibility. It reviewsthevariouspolicy restraintmechanismswhichhavebeenusedby Ugandato dateandconsidershowtheymightbesupplemented.Section5assessesthe Reviewand the responseof the Ugandangovernmentto it, in thelight of this interpretationof the Ugandanpolicy problem.

2. THE UGANDAN ECONOMIC RECOVERY

During the 1970stradepolicy becamecharacterisedby export taxation andquantitativerestrictionson imports.Exportsweretaxed,directly and implicitly,at very high rates.All exportsexceptfor coffee collapsedunder this taxation.For example,tea production fell from a peak of 20,000 tonnesin the early1970sto around2,000by the early 1980s.Cotton productionfell from a peakof 87,000tonnes,to 2,000 tonnes.Coffee exportsdeclinedby arounda third.The declinewas cushionedby threefactors:coffee treesdepreciatedonly veryslowly, production required few inputs, and about a quarter of it could besmuggledabroad(Henstridge,1996). Hence, exports becamehighly concen-trated in coffee (around 90 per cent). Part of the taxation of exports wasthrough over-valuationof the exchangerate achievedthrough intenseforeignexchangerationing mitigated by an active illegal market. Import-substitutemanufacturingcollapsedalong with the export sectoras a result of shortages,volatility and predation.Policy towardsforeign investmentwas dominatedbyconfiscationwithout compensationas the Asian community was expelled byPresidentAmin.

After theremovalof Amin therewasaneightyearperiodof political volatilitywhich endedin 1986 with the victory of a guerilla movementunder YoweriMuseveni,who becamePresident.The new governmentinheritedan economydominated by the fear of government.The sector which had been leastendangeredby governmentwassubsistence,andprivateagentshadretreatedintoit (Collier andPradhan,1997).Farminghadcometo representover50percentofGDPandabsorbover80percentof theworkforce.Lessthana third of foodcrops

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weremarketed,andthecashcropsrepresentedlessthanfive percentof GDP.Asa result,despitevery high ratesof taxation,governmentwasgeneratingonly fiveper centof GDP in revenue.

Theperiod1986–92wascharacterisedby someconsiderableeconomicpolicyerrors and an even more considerablecapacity to learn from them. ThePresident’sfirst economicact was to revalue the exchangerate, exacerbatingovervaluation. Yet by 1992 Ugandahad a well-conductedforeign exchangeauctionwhich evolvedover the next two yearsinto an inter-bankmarket.Weakfiscal controlculminatedin early1992with anannualisedrateof inflation of 230per cent. Yet from mid-1992a cashbudgethasbeenrigorously enforcedandinflation hasbeencontainedwell below ten per cent.

Since1992the Ugandangovernmenthasmaintaineda stablemacroeconomicpolicy and a convertible currency, while liberating trade. However, theinvestmentcommunityhadby then written off Uganda:by 1992,not only wasAfrica ratedasthemostrisky region,but Ugandawasratedasthe riskiestof the25 African countriescoveredby Institutional Investor.

During 1992–94theeconomyexperiencedgrowthwithout privateinvestment.As confidencerecovered,during1994–96therehasbeena repatriationof capital,a rapid increasein private investmentandan accelerationin the growth rate toninepercent.Uganda’srisk ratinghasimprovedby 2.5pointsperannum,therateachievedby Mauritius after its liberalisationin the early 1980s.However,evenwith this recoveryUgandais still ratedashighly risky: while its reformsandits

FIGURE 1Institutional InvestorRisk Ratingsfor Uganda

THE TRADE POLICY REVIEW OF UGANDA 651


growthrateplaceit at the top of theAfrican leaguetable,its risk ratingplacesitnearthe bottom.

The liberalisationof tradehashada markedeffect on performance.Between1990/91and1995/96exportvolumeshavegrownat anannualisedrateof 17 percent,import volumesat 12 percentandprivateinvestment(at constantprices)by18 per cent.1

3. THE REFORMOF TRADE POLICY

a. TheTradeControl Regime

Thetradecontrolregimewhich thegovernmentinheritedwascharacterisedbyextensivenon-tariff barriers, biasedgovernmentpurchasing,and high exporttaxes.

The non-tariff barriershavevirtually all beenremovedsincethe introductionin 1991of automaticlicensingunderan Import CertificationScheme.By 1995avery shortnegativelist remained,consistingof beer,soft drinks,carbatteriesandusedcartyres.Themainmotivationfor this list wastheenhancedability which itafforded to preventsmugglingand so protect revenue.In particular, only bybanningimports of beercould high taxeson domesticproductionbe sustained.Smuggledbeercouldbedetectedsimply by observingimportsat a point of sale,whereashadimportedbeercarriedahigh tariff insteadof aban,smugglingwouldhavebeenmuchmoredifficult to prevent.

The bureaucracysurroundingimports hasbecomelessarbitrary. Imports aresubjectto compulsorypre-shipmentinspectionby SGSif valuedat over$10,000($2,500until 1994).Thereis anelementof discretionin thesystemsinceappealscan be made to the Minister of Finance.However, the establishmentof anindependent AppealsCommissioneris underconsideration.Customsclearanceusuallytakesonly 2–3days.However,becauseof themanyexemptionsdiscussedbelow,clearancecanbe contentiousandtherearecomplaintsfrom the businesscommunityaboutdelays.

Governmentpurchasepracticeshavealsobeensubstantiallyreformed.Some80 per cent of central governmentpurchasingis in principle subject to opentendering.Ugandansuppliersaregenerallyaffordeda 15–20percentpreferentialmargin over imports. Therehavebeenno counter-tradedealssince1990. Thestructureof tradetaxeshasbeenchangedfrom exporttaxationto import taxation:the coffee export tax was abolishedand tariffs were introduced,initially at afairly high level, although they are in the processof being lowered andconcertinaed.

1 From Governmentof Uganda(1996),Table11b.

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Trade taxeswere retainedbecauseof the questfor revenue.Even by 1996,tradetaxesstill accountedfor over half of revenue,andrevenuehadmore thandoubledasa percentageof GDPover thedecade.In conjunctionwith very largeaid inflows this enabledpublic expenditureto grow far morerapidly thanGDP,which wasitself growingrapidly. It is doubtfulwhetherthis wasa goodstrategy.The very rapid expansionin governmentexpendituremay not, at the margin,havehada very high pay-off, whereasthe costof import taxationwasprobablyhigh both in termsof bureaucraticcontrol andresourcemisallocation.

Therewasa strongrationalefor theremovalof, or substantialreductionin, thecoffee tax since it had manifestlydamagedexports.However,the replacementwith taxeson imports failed to recognisethe equivalencebetweenexport taxesandimport taxes(the LernerEquivalenceTheorem).Had importsbeenfinancedentirelyby coffeeexports,andhadthetwo tax ratesbeenthesame,theenormousadministrativeupheavalinvolvedin thechangewouldhavehadno effect.In fact,various featuresmade the two taxes less than fully equivalent,but only oneconstitutedan argumentin favour of levying the tax on imports insteadofexports.Therewasan obviousargumentagainstthe switch: becausethereweremany tariff rateswhereasthere had beenonly a single rate of export tax, theswitch to import taxation introduced dispersion into trade taxation and soprobably increasedallocative inefficiency. However, import taxation enabledthreecomponentsof importswhich hadnot beenfinancedby coffeeexportsto betaxed.

The first categorywas those imports financed by non-coffeeexports.Theswitchenabledtheseto betaxedasif thetax oncoffeeexportshadbeenextendedto non-coffeeexports.However,thegovernmentwasrightly desperateto increasenon-coffeeexportsto lessenexportconcentration,andwouldhaveavoidedsuchatax at all costshadit beenmadeexplicit.

The secondcategorywas thoseimports which were financedby programmeaid,underwhichdonorslentor gaveforeignexchangeto thegovernmentwhich itthensoldto theprivatesector.Clearly,sincethevalueof this foreignexchangetoprivateagentswasthe valueof the imports it purchased,taxing importshadanoffsettingeffect on the valueof the foreign exchange:the governmentthuspaidthe import tax itself by getting lessfor its salesof dollars.

Thethird categorywasthoseimportsfinancedby privatecapitalinflows. Thiswas the only legitimate casefor the switch to import taxation and it was notnegligible: by 1994 private capital inflows exceededcoffee exports.However,theseinflows of privatecapital in the early yearsof the reformswereprobablysocially useful in a pioneeringrole of reputationrebuildingandso evenin thiscaseit is not clear that the governmentreally wantedto tax them. Further,asdiscussedbelow, the switch from export taxation to import taxation wascombinedwith a massof import tax exemptionswhich introduceda further layerof distortions. It is thereforequestionablewhether the switch from export to



import taxation was worth the immenseincreasein administrativecomplexitywhich it involved.The benefitsof tradeliberalisationcamenot from this switchbut from the reductionin the ratesof taxation.

By 1994/95thetariff schedulehadfive ad valoremratesbetween0 and60 percent.More than95 per centof lines werebetween10 and30 per cent.By 1996the top ratehadbeenreducedto 30 per centand further reductionswereunderconsideration. The averagetariff rate can be calculatedboth by the simpleaverageof the tariff lines andastariff revenuedivided by the valueof imports.On the former measurethe averagewas17.1per cent,that for primary productsbeing18.7percentandthatfor processedgoodsbeing18.4percent.Onthelattermeasurethe averagewas 18.8 per cent. Effective protection rates for localindustrywereoftenmuchhigherthanthesimilarity of primaryproductandfinalgoodaverageratesmight imply. Theywerealsowidely dispersed.Theescalationin tariff rateswasreinforcedby varioustaxexemptions.Domesticproducersweresometimesableto negotiateexemptionsbothon theimport duty on raw materialsand on salesand excisetaxes.Table 1 showsrepresentativeexamplesof thisescalation.

The import taxationsystemwasdominatedby exemptions,legal and illegal.Smugglingis estimatedat 15–20per cent of beerand cigarettes,and 5–10 percent for soft drinks. Legal exemptionsamountedto 25–40per cent of the totalvalue of imports. The major groups were goods imported by internationalorganisations;plant and equipmentimportedby licensedinvestors;non-locallyavailableraw materialsusedby ‘important and high value-addedindustries’asspecified by the Ministry of Financeand Planning in consultationwith theUgandaManufacturersAssociation;discretionaryexemptionfor anything‘in thenationalinterest’;andall inputsincorporatedinto exports.Of these,by 1995/96the importantexemptionsmeasuredin termsof the shareof revenueloss,andincluding excise and sale tax exemptionsas well as import duties, were:embassies,40 per cent; StatutoryInstruments,14 per cent; and the investment

TABLE 1TaxesandChargeson Typical Imports

Raw Materials Intermediates Final(wheat) (steel) (car)

Value f.o.b. 100 100 100Value c.i.f. 105 105 105Import commission 2.1 2.1 2.1Customsduty 10.5 21.0 31.5Excisetax 0 0 41.6Salestax 11.8 15.4 54.1Salesprice 129.4 143.5 234.2

Source: From TradePolicy Review, Table IV.2.

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code,7 per cent.StatutoryInstrumentswerewaiversgrantedby the Minister ofFinancein responseto lobbying.By 1995/96they werealreadybeingcurtailed,havingaccountedfor 30 per centof the revenuelossin the previousfiscal year.

A final sourceof tariff reductionwasthe regionalagreementwith COMESAcountries.Tariff preferencescoveredthe whole product rangeand the simpleaverageratefor COMESAimportswas11.7percentasagainst17.1percentforother imports.

To summarise,the Ugandangovernmenthas made massiveadministrativechangesin tradepolicy. Of these,the most importanthasbeenthe removalofquantitativerestrictionsandforeign exchangerationing.The switch from exporttaxationto import taxationmissedanopportunityto reduceradically thetaxationof exports,therevenuecostof whichat thetime wouldhavebeenmodest.It gavethe appearanceof havingremovedexport taxationwithout the reality, sincethegeneralequilibriumeffectsof import taxationarebroadlyequivalentto theearlierexport tax. Further, it introduceda cumbersomeadministrationand complexpatternof effective protectionthe simplification of which is now the object ofpolicy. Now that governmentexpenditurehas risen to utilise the additionalrevenuesraisedfrom tradetaxation,thereductionof theratesof taxationon tradeis muchmoredifficult than if the import taxeshadnot beenintroduced.

b. TheCoffeeStabilisationTax

Sincethe1940scoffeehasbeenUganda’sprincipalexport.By themid-1980sthe control regimewas operatingfour mechanismsof predationon the sector.First, therewasanexplicit exporttax. Secondly,therewashigh implicit taxationthroughovervaluationof the exchangerateandcompulsorysurrenderof exportreceipts at the official rate. Thirdly, there was a state monopoly of coffeemarketing,theCoffeeMarketingBoard.Fourthly,therewasa statemonopolyonthe transportationof coffee,which could only be exportedby the government-ownedrailways.Of thesefour, the exchangerate mechanismof predationwasremovedby the adoptionof the foreign exchangeauctionandsubsequentinter-bankmarket.Themarketingandtransportmonopolieswediscussbelow.Herewefocuson export taxation.

As discussedabove,the explicit taxationof coffeewasendedin 1992.How-ever, in 1994 it was reintroducedfor purposesof macroeconomicstabilisationassociatedwith theworld coffeeboom.Tax ratesappliedaccordingto thelevelofthecoffeeprice,beingzeroonly at andbelownormallevels.Naturally,this rapidapparentreversalof tax reductioncouldhaveincreaseduncertaintyasto govern-ment intentionstowardsthe long term taxationof the sectorandso the govern-mentwascareful to consultwith andexplain its positionto the privatesector.

Its argumentwasthatwindfall taxationwasnecessaryto reduceexchangerateappreciationduring the boom. Only a quarterof receiptsfrom the tax would



accrueasgovernmentrevenue,andall of this would be setasidefor future use.Therestwouldgo into anaccountat theBankof Ugandawhichcouldbeusedforexchangerateintervention.In effect,theentirerevenuewould besterilisedin thereservesduring the boomwith a quarterof it subsequentlyusedfor governmentexpendituresandtherestleft unspecified.While thiswasareasonableresponsetoa perceivedproblem, it was basedon a mis-readingof private responsesto atemporaryincomewindfall. Ugandancoffeefarmerswerewell ableto rememberthepreviousboomof thelate1970sandsowerewell ableto understandthattheirincomegainswould be temporary.

Facedwith suchanincomepulsetherationalresponseis to haveahighsavingsand investmentrateout of it. Initially, savingswill be in liquid form and thesewill graduallybe convertedinto fixed assetsas time permits.In aggregate,theonly liquid assetwhich the private sector could acquire was claims on thegovernmentin the form of M0, sinceother financial claimsnet out. Hence,thecoffeeboomwould beexpectedto causeaninitially largeincreasein thedemandfor real moneybalances,followed by a declineanda surgein fixed investment.The taskof the authoritieswas to accommodatethis private sectorsavingsandinvestmentstrategyrather than to nullify it throughtaxation.Indeed,sincetheprivate sector had not invested in Uganda for over twenty years, a privateinvestmentboomwassocially highly desirableratherthanan appropriateobjectfor taxation. In the event, the reintroducedcoffee tax provoked such strongpolitical oppositionthat it wasnot collectedfor the first six monthsof theboom(the secondhalf of 1994) and only amountedto around17 per cent of coffeeearnings.In July 1995the tax ratewassubstantiallyreducedandin July 1996itwasremovedfrom the statutebooks.Its effects,goodor bad,on the progressofthe boomwerethereforemarginal.

The monetaryand real effects of the windfall proceededas set out above.Initially therewasa sharpincreasein thedemandfor realmoneybalances.Sincethe Ugandaneconomyis characterisedby highly flexible prices(a legacyof thedemiseof long term contractsunderthe stressof volatility), the private sectorcould achievedesiredreal moneybalancesthroughchangesin the price level.Initially, the centralbankdid not wish to accommodatethe increasein nominalmoneydemandandsotheincreasein realmoneybalanceswasachievedthrougha fall in the price level. In the first four monthsof the boom the price leveldroppedby an astonishingsevenper cent.After this, the nominalmoneysupplywas allowed to breach IMF target levels without causing inflationaryconsequences.

By the secondhalf of 1995 this processwas going into reverseas moneybalanceswere being convertedinto fixed assets.In real terms private fixedinvestmentroseby 38 per cent in the first year of the boom (July 1994–June1995)andby a further17 percentin the following year.The investmentrateoutof the privateincomewindfall from the coffeeboomwasprobablywell over 50

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per cent. Finally, it might be noted that by the early 1990sUgandancoffeefarmers had below-averagehouseholdincomes. Hence, the coffee tax wasregressiveas well as hitting private investment. It proved to have beenunnecessaryasa stabilisationmeasure.Potentiallyit hasalsodiscouragedcoffeeplantingin the long term if coffeefarmersanticipatethat during the next coffeeboom it will be reintroduced.This was why it was particularly important toremoveit from the statutebook even thoughby 1996 the price of coffee hadfallen so that no revenue was being generated.After this experiencethegovernmentprobablyneedsa policy instrumentwhich will bind it not to exceedspecifiedfuture levelsof coffeetaxation.2

c. TheRegulationof Market Structure

Many of Uganda’smarketshave until recently beenhighly uncompetitive.First, much activity hasbeenreservedfor state-ownedenterprises.As of 1993therewere107suchenterprises,spanningthemining, manufacturingandservicesectors.Secondly,traderestrictionspartly reflectingpolicy andpartly dueto thenaturallyhigh barriersimplied by a landlockedlocationandhigh transportcosts,madeactivities disproportionately non-tradeable. Thirdly, becausethe domesticeconomywas so small, there was considerable scopefor collusion by privatefirms within anactivity. Yet Ugandahasno competitionlaw socollusioncannotbe curtailed.

Eachof thesecausesof an uncompetitivemarketstructureis graduallybeingremedied.Privatisationis in progressandby late1996overhalf of the107SOEshad been privatised, with a target of 80 per cent for the end of 1997. Themonopoliesof the agriculturalmarketingboardshavebeenended:fortunately,that of the Coffee Marketing Board was endedprior to the coffee boom. Therestrictionson competitionhavealsobeenlifted: for example,coffeeno longerhasto beexportedby rail. In turn, theexpansionof businessfor privatetransportcompanieshasinducedentry into the market,and this hasbrokenthe market-sharingarrangementswhich hadpreviouslykept priceshigh. As a result,freightrates for export traffic have almost halved in only two years.Similarly, airtransporthasbeenderegulated:12 newcarriersenteredthemarketbetween1991and1994andtherehavebeenfurther entrantsin the pasttwo years.

Nevertheless,some service sectors remain dominated by state-ownedenterprisesnot scheduledfor privatisation. Electricity generationis seriouslyinsufficient, resultingin powercuts.Curiously,undera contractdating back to1959, Ugandaexportssubstantialamountsof electricity to Kenya. Telephonetariffs arehigh andheavilybiasedagainstinternationalcalls.Only 50 percentof

2 A fuller treatmentof policy and investorresponsesto the coffee boom is given in Collier andGunning(1996).



bills arecollected,yet the UgandanPostsandTelecommunicationsCorporationruns at a surplus, indicating severe overcharging for ‘honest’ callers.Modernisation of the electricity and telephone networks and their pricingstructuresarea priority.

d. TheRegulationof Investment

Ugandahasa historyof expropriationof foreign investmentanddiscouragingregulations.The incentivesystemwas biasedin favour of domesticfirms. Forexample,underPTA rules,tariff preferenceswereonly givento firms whichweremajority domesticowned.

The old system was revoked through three major initiatives. First, theInvestmentCodeof 1991 set out the rights of foreign investors.Secondly,theDeparted Asians Property Custodian Board returned properties to previousowners.A statuteof limitations requiredthat claims must be madeby 1995 toprevent indefinite contestability of titles. Thirdly, the dependenceof PTApreferenceson majority domesticownershipwasrevokedin 1992.

Under the InvestmentCode,foreign investmentis subjectto prior, but nearautomatic,approvalby an InvestmentAuthority. Thereis a minimum thresholdvalueof investmentsof $100,000belowwhichapplicationswill notbeprocessed.Onceanapplicationhasbeenmade,the InvestmentAuthority is legally requiredto report on it within 30 daysand to makea decisionwithin another14 days.Normally, decisions take 2–3 days. Applications must be approved if theapplicationis in accordancewith theCodeandtheactivity is not ‘contrary to theinterestsof Uganda’.Approval may be conditional upon: a specific minimumcapital injection by the investor;the employmentandtraining of citizenswith aview to Africanisation;the useof Ugandaninputswherethey are‘competitive’;and that the operationis not ecologically or economicallyharmful. However,therehavebeenno rejectionsto date.

Investment licensing is subject to separateapplication proceduresbut isnormally donehand-in-handwith the approvalof the project.Oncelicensed,allinvestorsare eligible for duty and tax exceptions.Domesticinvestmentsare inprinciplenot subjectto InvestmentAuthority approval,but without a licencetheywould not qualify for anyof thebenefitsundertheCode.Thenormalentitlementis exemptionfrom profits tax for 3–6 years;drawbackof any dutiesand salestaxesleviedon theinputsusedfor exportproduction;andunrestrictedrepaymentof foreign loansandinterests,the transferof dividendsandproceedson disposalof assets.Foreignanddomesticinvestorsareboth eligible for the samebenefitsbut higherqualificationlevelsapplyfor foreigninvestorsthanfor Ugandans.Thethresholdfor certificatesof incentivesis $50,000for localsasagainst$300,000for foreigners.Foreigninvestmentis alsodifferentially treatedaccordingto sectorwith a distinction betweenregulated,non-priority and priority sectors.Foreign

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investment is not permitted in regulated sectors: crop production, animalproductionandthe acquisitionof land for thesepurposes.Benefitsare larger inthe priority than in the non-priority sectors.

e. TheRegulationof the Foreign ExchangeMarket

Since 1994 Uganda has had an inter-bank market for foreign exchangecombinedwith bureauxde change. Although the central bank has sometimesintervenedin themarket,therehasbeenno attemptto influencethe ratethrough‘moral suasion’.However,givenUgandanhistory,privateagentshavenot giventhe governmentthe benefitof the doubt.Whenthe movefrom auctionto inter-bank marketswas first announcedtherewas a run on the currencyin the nextauctionbecausetheprivatesectoranticipated,incorrectlyasit turnedout, thattheinter-bankmarketwouldbelesstransparentthantheauctionandmarkareversionto foreign exchangerationing.

Foreignexchangecontrolsappliedon capitaltransactionsuntil June1997.Allcapitaltransfersweresubjectto individual exchangecontrolapproval.Accordingto the authoritiestherewereno setcriteria andapprovalwasnormally granted.Accordingto the banksthe control systemwasnot used,but evenif it hadbeenthe private sectorhad developedso many meansof capital flight that it wouldhavebeenineffective.Ugandahashadde facto full convertibility. Thereis alsode jure freemovementof capitalwithin COMESA.SincesomeotherCOMESAcountries have full capital account convertibility it is hard to see how theremainingcontrolscould possiblyhavebeeneffective.

Although thereis an inter-bankmarketand21 banks,themarketis muchlessdevelopedthan this might imply. Only one bank has a professionalforeignexchangedealer.Even in this bankstaffing levelsare too low to permit normalsafeguardsagainstown-accounttrading.As a resultof this lack of expertisethereis a severelack of agentswilling and able to take a position in the market.Corporatetreasurers,who in other countriesmight fulfil this role, havenot yetventuredinto it. Over half of the transactionsby value still go through thebureaux de change rather than the inter-bank market, and spreads arecorrespondingly high. There is no forward market and this imposescostsoninternational transactions.For example,coffee marketing firms hold forwardcontractsfor the purchaseof coffeedenominatedin shillings andfor the saleofcoffee denominatedin dollars, with no scopefor covering their exchangeraterisk. Whentheexchangerateappreciatedat theonsetof thecoffeeboomsomeofthesefirms found it better to default on contracts,paying accordingto penaltyclausesandsufferinglossof reputation,ratherthantaketheexchangeratelosses.

Ugandathushashadmostof the institutional rules for a satisfactoryforeignexchangemarket, other than de jure capital accountconvertibility. However,thereis a severeshortageof organisational expertiseto operatethemarketandas



a result spreadsarewide andforward cover is unavailable,imposingadditionalcostsin internationaltrade.

4. THE INSTITUTIONS OF TRADE POLICY REFORM

For eighteenyearsbetween1971 and 1988 Ugandangovernmentsvirtuallystoppedbuilding the institutionsof internationaltrade.A measureof this is thegenerationof legislation.Ugandahas31 piecesof internationaltradelegislation.During normal times, 1964–70and 1989–95,there havebeenon averagetwopieces of legislation per year. Between 1971–88 instead of 36 pieces oflegislation there were three. Under Ugandanlaw internationaltreatiesrequiredomesticlegislationbeforethey are legally enforceable.

The argument presentedabove is that during the 1990s the Ugandangovernmenthassubstantiallyliberalisedboththeratesof taxationof internationaltradeand the market structurein which trade is conducted.However,becauseinvestorrisk startedfrom sucha disastrouslevel, thereis a needfor institutionalinnovations which increase investor confidence. Governmentscan increaseinvestorconfidencepartly throughsignalling andpartly throughlock-in.

The principle behind signalling is that in order to identify itself as beinggenuinely committed to liberalisation, the governmentmust distinguish itselffrom other governmentswhich are currently also liberalising but lack theintention to persist.In order to distinguishitself the genuinegovernmentmustadoptpolicieswhich may not be its first preferencebut which it is willing to dobut which the more equivocal liberalisers will not countenance.This is anargumentfor deepandpainful reform measures.The Ugandangovernmenthasindeedundertakensuch measures,for examplereducing the size of the civilserviceby over a quarterin the yearbeforethe Presidentialelection.However,signallingcanat the maximumindicatethe intentionsof the peoplecurrently inpower,whereaslock-in can increasethe incentivesfor future policy makerstomaintain reforms. Hence, successful lock-in mechanismsare much morereassuringto investorsthan signalling. Lock-in can be by meansof domesticandexternalagenciesof restraint.

In Ugandato datetheprincipaldomesticagencyof restrainthasbeenthe‘cashbudget rule’ of the Ministry of Finance, adopted in 1992. Each monthgovernmentexpenditureshouldnot exceedthe revenueof the previousmonth.While this rule imposescoststhroughvolatility in expenditure,it hasachievedthe fiscal order necessaryfor the trade and exchangerate liberalisations.Underwritingthecashbudgetrule is ultimately anappealto commonsense.ThePresidentapprovestherule andis ableto defendit in Cabinetandin Parliament:it is reducibleto principleswhich do not requirea knowledgeof economics.Bycontrast,the CentralBank hassomedegreeof legislatedindependencebut this

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doesnot give it the powerof restraintbecauseit is not politically grounded.FortheMinister of Financeto overrulethe GovernorheneedsCabinetapprovalandhis directive mustbe submittedto the Legislaturewithin 15 days.Whetherthiswould prove a seriousobstaclein the context of a decision by the FinanceMinister to increaseexpenditurein a popular cause is doubtful. A furtherdomesticagencyof restraintwhich is now developingis the institutionalisedlobbying power of the private sector.Since 1988 there has been a UgandanManufacturers Association, funded exclusively by members and formallyindependent of government.Thereis now a CoffeeExportersAssociation.Bothhaveprovedto havesomemusclein protestingagainstgovernmenttax changes.Potentially, the governmenthas much to gain from having its freedom ofmanoeuvrereducedin this way.

The principal externalagencyof restrainton trade policy is potentially theWTO. Ugandahasno history of using the GATT. Although it joined GATT in1962 it was neither a signatory to, nor an observerat, any of the Tokyoagreements.However, in 1994 it becamea founding memberof the WTO. Itmadeonly limited useof the UruguayRoundto bind its tariff rates.Bindingsapply to only 15 per cent of industrial products,and many boundratesremainmuchhigherthanthe appliedtariffs, beingin the rangeof 40–80percent.Salestax at theappliedrateis boundon itemssubjectto tariff bindings.Thus,to date,theUgandangovernmenthasnot utilised theWTO to lock-in to its presentlevelof liberalisationeventhoughthe intention is to reducetariff ratesfurther.

A secondpotentialsourceof lock-in is COMESA, the successorto the PTA.During thephasewhenCOMESAis beingratified by all its potentialmembers,aCross-Border Initiative is intended to promote within a non-institutionalframeworktradeand investmentflows betweenthe countriesthat haveratifiedthe treaty. The target is for a free trade area by the year 2000. COMESAguaranteesforeign investorsagainstexpropriation, subject to a public interestclause.It also guaranteesthat tariffs againstmemberstatescannot be raisedabovetheir presentlevels.A relatedpotentialsourceis theCommissionfor EastAfrican Cooperationwhich was revived in 1995, having collapsedin 1977.However, its current objectivesare coordinationrather than enforcement.Forexample,the budgetdatesof the Ugandan,KenyanandTanzaniangovernmentshavebeenharmonised.It is doubtful whethertheseregionalschemeshavethepotentialin theshorttermto reassureinvestors.Traderelationsbetweenmembershavebeenpoor.TheKenyangovernmentfor a periodimposedan import banonUgandanmaize,a major ‘non-traditional’ export,andUgandalevied an importsurchargeon a rangeof Kenyangoods.Sincetheregionalagreementsthemselveslack enforcementmechanisms,even where their provisions appear to offerinvestors guaranteesof policy stability they are unlikely to be convincing.COMESA hasa plan for a commonexternaltariff by 2004.Sincethe Ugandagovernmentaspiresto a far moreliberal traderegimethansomeothermembers,



it is hard to seehow this provisioncanbe reconciledwith continuingUgandantradeliberalisation.

A further sourceof external restraint is MIGA. As a sourceof low-costpolitical risk insuranceMIGA remainsnewandlittle-usedrelativeto its potential.Thereis scopefor it to marketits servicesin collaborationwith the InvestmentAuthority.3

Undoubtedly,to datethe major externalrestrainthasbeenthe IMF and to alesserextentthe World Bank. However,this is not without problems.First, theinsistenceon reform promisesas a condition of aid, reducesthe scopefor thegovernmentto revealits true intentions.Closeobserversthink that the Ugandangovernmentwouldhavefreelychosenmostof thereformprogramme.If so,it hasbeendeniedtheopportunityto revealthesepreferences.Further,asdemonstratedby the recenthistory of Ghana,as governmentperformanceimproves,powershiftsfrom thedonorto thegovernment:thedonorfinds it increasinglyimportantto maintainthesuccesswhichhasbeenusedfor public relationspurposes.Hence,donorthreatsbecomelesscredibleandso achievelesslock-in.

The major potential for externalrestraintis the forthcomingagreementwiththe EuropeanUnion, Lome V. The presentagreement,Lome IV, is essentiallynon-reciprocal: Uganda gets certain trade concessionswithout matchingcommitments. A proposalunderconsiderationfor Lome V is that governmentsshouldhavetheoptionof gainingimprovedandguaranteedaccessto EU markets(for example,with waivers on anti-dumpingactionsas presentlyconcededtoIceland),in return for commitmentsnot to exceedspecifiedtariff levels and tomaintain convertible exchangerates. The Ugandangovernmenthas a stronginterestboth in seeingthat this proposalis incorporatedinto Lome V and inutilising it should it be adopted.An EU lock-in mechanismmay provide themechanismto acceleratethe rehabilitationof reputationwhich might otherwisetaketwo decadesto reachlevelswhich investorsregardassatisfactory.4

5. THE REVIEWAND THE GOVERNMENT RESPONSE

The abovesurvey of Ugandantrade policy has drawn on the Trade PolicyReviewratherthansummarisingit. This is partly because,althoughit is a veryserviceabledocument,the Reviewdid not in my view correctly focus on threecoreissues:thecoffeetax, thegeneralequilibrium irrelevanceof switchingfromexport taxesto import taxes,and the needto enhancecredibility throughWTOlock-in mechanisms.

3 On MIGA’s African operationsseeWest (1997).4 SeeCollier andGunning(1995)for a fuller statementof thecasefor usingLome V asa lock-inmechanism.

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Although the Reviewhada substantialdiscussionof the coffeetax, it missedthe key point that asan obviouslytemporarywindfall the main privateresponsewas likely to be investment, so that the tax was reducing precisely thephenomenon that thegovernmentmostwishedto encourage.TheMissionwasinUgandaat preciselythe time whenthe governmentwasconsideringwhethertorenew the tax for a further year. The WTO missedan opportunity to use itsauthorityandexpertiseto counterthe mistakenadviceof the IMF which wastoadvocatethe tax. As it was,thegovernmentmerelyloweredthe tax andit took afurther year before it gainedthe confidenceto go againstIMF advice on thismatterandremovethe tax from the statutebook.

AlthoughtheReviewgraphedthehugeswitchfrom exporttaxesto tariffs asarevenuesource,it did notdiscusswhethertherewasmuchrationalefor thisswitch.It missedthepointthateffectivetariff rateshadrisensharplyasaresultof themoveto acompetitiveexchangerate.AlthoughtheReviewrecommendedthegreateruseof tariff bindingsasa credibility measure,it did not put this in thecontextof theextremenatureof the Ugandancredibility problem.Recall that only threeyearsbeforetheMission,Ugandahadbeenratedastheriskiestcountryin Africa.

Overall, the tone of the Review was congratulatory.This was entirelyappropriategiven the remarkableachievementsof the Ugandanauthoritiesandmusthavecontributedto theupratingof thecountryby investors.However,giventhe limited pool of expertiseon tradepolicy which the governmenthadto drawuponboth within Ugandaandamongits coreadvisinginstitutions,andthe needfor furthermajorreformof tradepolicies,moremight havebeendoneto assistinshapingthe agenda.

This said,theReviewdid point to severalpertinentareasfor policy change.Itquestionedthe proliferation of overlappingregional tradeagreementsand theircompatibility; import banssuchasthat on cigarettes;andthe high excisedutieson,andconsequentsmugglingof, petroleum.It highlightedtheneedto rationalisethe tariff structurewhich gave rise to high and dispersedrates of effectiveprotectionin manufacturing.

The responseof the Ugandangovernmentemphasisedits concernfor thecontinuedreformof tradepolicy. With respectto theinstitutionsandconventionsof internationaltradethegovernmentplannedto establishpermanentrepresenta-tion in Geneva,andhadacceptedbinding internationalarbitrationin investmentdisputes. It was considering acceding to the New York Convention onRecognitionand Enforcementof ForeignArbitral Awardsand was planningtoadhereto theWTO CustomsValuationAgreementby theyear2000.Therewereplansto phaseout import bansand to reducethe higher ratesof tariffs, but thespecificquestionsof thebanon importedcigarettes,theveryhigh ratesof dutyonpetroleum and the compatibility of the various regional agreementsweresomewhatelided.The governmentemphasisedthe needfor technicalassistancein revisingtradepolicy andwaspreparinga requestto the WTO.



REFERENCES

Collier, P. andJ.W.Gunning(1995),‘TradePolicy andRegionalIntegration:Implicationsfor TheRelationsBetweenEuropeandAfrica’, TheWorld Economy, 18, 3, 387–410.

Collier, P, and J.W. Gunning (1996), ‘Policy Towards Commodity Shocks in DevelopingCountries’, Working Paper, ResearchDepartment, International Monetary Fund, 96/84,WashingtonDC.

Collier, P. andS. Pradhan(1997),‘The UgandanEconomicTransitionfrom War to Peace’,in B.HansenandM. Twaddle(eds.)DevelopingUganda(London,JamesCurrey).

Governmentof Uganda (1996), Background to the Budget, 1996/97 (Ministry of Finance,Kampala).

Henstridge,M. (1996), ‘Coffee and Money in Uganda:An EconometricAnalysis’, Dphil. thesis(Oxford University).

West, G. (1997), ‘Political Risk Assessmentand Management:The View from an InvestmentInsurer’s Perspective’,in P. Collier and C. Pattillo (eds.), Investmentand Restraint: UsingAgenciesof Restraintto Reducethe Risksof African Investment(London,Macmillan).

World Bank (1994), ‘Survey of Investor Attitudes to East Africa’ (mimeo, Africa Department,Washington,DC).

World TradeOrganisation(1995),TradePolicy Review:Uganda,1995 (Geneva).

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Documents

The Trade Policy Review of Uganda