Thursday, September 2, 2010

Getting Economic Reforms done- Uganda Experience

My six-year reform experience was like driving a reform bus on a long journey, eliciting passengers along the way to a shared destination
-Florence Kuteesa

An interesting book on Ugandan Economic Reforms;
Uganda's Economic Reforms -Insider Accounts;

1. Overview of Ugandan Economic Reform since 1986
This synthesis chapter draws out the main findings from the individual chapters. After much agonizing over the direction of economic policy, three fundamental reforms between 1990 and 1992 —legalization of the parallel foreign exchange market, liberalization of coffee marketing, and the establishment of fiscal discipline — brought macroeconomic stability. Together with trade liberalization and privatization, Uganda was set on the road to a liberal, capitalist economy. Concern that growth was bypassing the poor led to a focus on poverty reduction between the mid 1990s and early 2000s. Measures such as decentralization, the Poverty Eradication Action Plan, the Medium Term Expenditure Framework, the Poverty Action Fund, and Sector Working Groups succeeded in attracting increased aid and channeling it into poverty reduction. Sound economic management and a clear commitment to poverty reduction together explain why Uganda was the first beneficiary of both HIPC debt relief and the shift from project aid to budget support. The resulting increase in public service delivery contributed to rapid poverty reduction. The pace of reform has eased since 2002. The chapter concludes by emphasizing the crucial importance of political support for successful economic reform.

2. Institutional and Political Dimensions of Economic Reform
This chapter provides the institutional and political context for the technical reforms discussed in subsequent chapters. It summarizes the abortive attempts at reform of the Obote II government and discusses changes made by the NRM to the economic institutions it inherited in 1986. The long, heated debate over the direction of economic policy was resolved with the merger of the finance and planning ministries and the establishment of fiscal discipline in 1992. The critical role of the President in key economic decisions such as fiscal discipline, the commitment to poverty reduction, and the sale of Uganda Commercial Bank is highlighted. The role of Parliament has increased with the restoration of democracy. The chapter also examines how the finance and planning ministry became one of the strongest in Africa.

3. Exchange Rate, Fiscal, and Monetary Policy
This chapter identifies three phases in Uganda's transformation from a war-torn economy into one that has sustained rapid growth and low inflation since 1992. There were two major reforms in the early 1990s. First the parallel foreign exchange market was legalized in 1990. Following the merger of the finance and planning ministries in 1992, a sharp fiscal adjustment established fiscal discipline and reduced inflation to single figures. The second phase was one of unconventional macro policy for the rest of the 1990s. With little scope for monetary policy, low inflation was sustained largely by tight, short-term fiscal control. In the 2000s, financial deepening and budget reforms have provided a foundation for a more orthodox mix of fiscal and monetary policy.

4. Public Service Restructuring and Pay Reform
This chapter discusses two elements of Public Service reform of particular relevance to the overall economic reform programme the restructuring of the Public Service and pay reform. It highlights the halving of the size of the Public Service between 1990 and 1995 and the subsequent increase following the Poverty Eradication Action Plan commitment to increased provision of basic public services. It also looks at the collapse in real wages during the 1980s and examines progress towards paying public servants a ‘living wage’.

5. Tax Reform
By 1990 tax revenue in Uganda had declined to 5% of GDP. Revenue was heavily dependent on export taxes, which discouraged exports. This chapter discusses the policy and administrative measures taken during the 1990s to make the tax system more transparent and productive. Export taxes were replaced by import taxes, which were progressively reduced to relatively low levels. The most significant single reform was the introduction of Value Added Tax in 1996. Despite initial resistance by traders, strong political support enabled VAT to take root. The Uganda Revenue Authority has spearheaded revenue administration reform since 1991. This chapter discusses the key drivers in setting up an autonomous revenue agency, the successes and challenges in revenue administration, and what could have been done better. It also looks at the challenges and lessons of implementing VAT in an environment of low tax compliance.

6. Planning and Development Budget Reform, 1990–1995
The NRA victory triggered substantial aid flows, accounting for over half of public expenditure. However, the planning and budgeting systems had collapsed,; so donors largely did their own thing and much aid was ineffective. This chapter describes the measures adopted to establish some order and bring government policy priorities to bear on donor allocations and public expenditure generally. It discusses the key reforms, designed to attract increased aid and improve the effectiveness of all public expenditure: the merger of the finance and planning ministries; consolidating responsibility for sector policy, planning, and budgeting in a single division; capturing aid in the plan and budget; integration of the plan and development budget; establishment of internal review processes and the challenge function; and management of counterpart funding. Aspects of Uganda's ‘legacy’ are highlighted, such as: the Paris Declaration principle that aid should align behind government plans; the PIP as the forerunner of the Poverty Eradication Action Plan and poverty reduction strategies; linking plan and budget; and Public Expenditure Tracking Surveys.

7. The Poverty Eradication Action Plan
Uganda was a pioneer in designing a holistic, comprehensive development plan targeted at poverty eradication. The 1997 Poverty Eradication Action Plan was the original prototype ‘poverty reduction strategy’, which is now a prerequisite for countries wishing to access HIPC, World Bank, IMF, and other donor support. This chapter shows how the PEAP developed from the Public Investment Plan of the early 1990s through an extensive consultative process. It discusses the influence of the PEAP on resource allocation and sector policies. It describes how the PEAP has evolved during subsequent revisions, the changes in the institutional framework for planning and monitoring, and the efforts to maintain the relevance of the PEAP over time.

8. Budget Reform and the Medium Term Expenditure Framework
The initial budget reforms from 1992, aimed at establishing macroeconomic stability and credibility of the budget, focused on the short term. This chapter shows how, once these immediate targets were achieved, the finance and planning ministry gradually implemented a Medium Term Expenditure Framework. This was intended to facilitate a realignment of public expenditure in line with the political priorities set out in the Poverty Eradication Action Plan and to improve the predictability of public funds, while adhering to the aggregate resource envelope. The chapter examines trends in sector allocations, to assess whether the MTEF facilitated significant shifts, and looks at progress towards improving the predictability of the budget. It also discusses the pioneering measures taken to promote public and political consultation on the budget. Other reforms discussed include the virtual Poverty Action Fund, output oriented budgeting, fiscal transfers to local government, and public expenditure reviews.

9. Sector Wide Approach and Sector Working Groups
Once fiscal discipline had been restored and basic expenditure management systems established at the central level, the finance and planning ministry increasingly turned its attention to expenditure at the sector level. This chapter discusses the evolution of Sector Working Groups and Sector Wide Approaches. It shows how responsibility for drawing up sector policy and expenditure priorities was increasingly delegated to SWGs. These were led by sector ministries but included representatives from other government institutions in the sector, the finance ministry, donors, and civil society. They assumed an increasingly important formal role in determining sector allocations in the budget process. The chapter shows how SWAps emerged as a mechanism which fused the policy, planning and budget processes through the development of inclusive sector investment plans, budgets to implement those plans, and joint monitoring mechanisms. They helped develop common donor approaches within sectors, improving alignment to government policies, and promoting the use of government systems.

10. Poverty Monitoring
Political concern that rapid economic growth did not appear to be benefiting the poor led to an increased focus in the mid-1990s on ensuring public expenditure was pro-poor and on monitoring poverty trends. This chapter discusses the measures adopted to increase the poverty focus of the budget. It also looks at the institutional arrangements and the methods used to monitor poverty trends. Household survey data shows that between 1992 and 2006 Uganda experienced one of the largest and fastest reductions in income poverty recorded anywhere in modern times. Participatory Poverty Assessments, which were pioneered in Uganda, and other non-quantitative methods illustrate the multi-dimensional nature of poverty and the unevenness of progress towards poverty reduction.

11. Statistics Reform
Many of the economic reforms were dependent on reliable statistics. Like many other government systems, statistics collection virtually collapsed during the 1970s. This chapter shows how systems for collecting, analysing, and disseminating official statistics have been rebuilt since the late 1980s. It starts with a historical review of statistics institutional development before going on to look at the main categories of statistics currently collected, and at their analysis and dissemination.

12. Debt Management and Debt Relief
This chapter shows how the rapid accumulation of debt from 1986 led to a debt crisis in 1990. It discusses the debt management strategies adopted following the crisis to ensure that it would not recur. Paris Club rescheduling and commercial debt buy-back helped reduce the stock of arrears. However, this increased the share of multilateral debt, which could not be rescheduled, to 75%. Uganda was in the vanguard of the debt relief movement of the 1990s, which culminated in the Highly Indebted Poor Countries initiative, and was the first country to benefit from HIPC. This chapter shows how sound economic management and a strong commitment to poverty reduction underpinned the case for multilateral debt relief in a country where debt was vividly crowding out social expenditure. It also looks at Uganda's role in the HIPC initiative and shows the impact of debt relief on debt service costs.

13. Aligning Aid with Government Fiscal Objectives
This chapter evaluates efforts by the government to encourage donors to shift their aid into budget support and to ensure that aid flows were consistent with the government's macroeconomic objectives for fiscal policy and its strategic expenditure priorities. Aid to Uganda rose sharply in the second half of the 1990s, funding a major expansion of public expenditure. This was accompanied by a shift in aid modalities, from projects to budget support, in line with government preferences. Uganda was in the forefront of the rapid growth in budget support, which has been one of the most profound developments in the aid business in recent years. The chapter examines the key institutional reforms intended to encourage the shift towards budget support and looks at some of the problems encountered with aligning budget support with the Medium Term Expenditure Framework. It also examines the reasons for government's strategic objective of reducing the budget's dependence on donor aid.

14. Fiscal Decentralization
In the 1990s Uganda embarked on an ambitious programme of political, fiscal, and administrative decentralisationization reforms as a means of rebuilding and expanding the delivery of basic services, and fostering local democracy and accountability. This chapter examines the roots and evolution of the reforms, focusing on the fiscal side of decentralisationization. It examines how a rapid expansion in central grants helped support the expansion of basic services, the tension between centralised funding and local autonomy, the stagnation of local taxation, the incentives for and establishment of public financial management capacity, and the evolution of planning and budgeting systems. It concludes by asking whether the decentralisationization process was managed in a way that helped or hindered the expansion of basic services.

15. Financial Management and Accountability Reform
Macroeconomic stability and increased growth were achieved in the early 1990s despite very weak financial management and accountability systems. This chapter shows how these weaknesses became even more pronounced following the adoption of the 1995 Constitution, decentralization, expanding budgetary demands, and the requirements of the Poverty Eradication Acton Plan, among others. Strengthening public financial management and accountability was critical if progress was to be sustained and if donors were to be persuaded to channel more aid through government systems. Yet in 1998 the entire government had just two professional accountants. The chapter presents the key reforms adopted to strengthen financial management and accountability, looking at changes in the areas of the legal and policy framework, institutional capacity building, and processes and systems, particularly the introduction of the Integrated Financial Management System.

16. Privatization and Parastatal Reform
By the late 1980s Uganda's large public enterprise sector had become a major drain on the Treasury and a bottleneck to economic growth. To address this situation the government embarked on a major privatization and public enterprise reform programme in 1993. By 2005 the programme was largely complete and most public enterprises had been privatized, reformed, or closed down. This chapter discusses the key issues, reforms, and institutions that were central to the divestiture and reform of public enterprises. The implementation process is discussed along with the various methods adopted, the numbers that were divested and the proceeds from the process. The chapter identifies the key challenges faced during the process and assesses the impact of the reforms on issues such as government finances and post-divestiture performance. It concludes with an appendix on utility reform.

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