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Cablegate: Uganda: 2008 Agoa Eligibility Review

VZCZCXRO7206
RR RUEHROV
DE RUEHKM #1391/01 2901353
ZNR UUUUU ZZH
R 161353Z OCT 08
FM AMEMBASSY KAMPALA
TO RUEHC/SECSTATE WASHDC 0795
INFO RUCNIAD/IGAD COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHC/DEPT OF LABOR WASHDC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 06 KAMPALA 001391

STATE FOR AF/E AND AF/EPS J. POTASH AND T. DAVIDSON STATE ALSO FOR
EBB/TPP M. LURIE AD DRL K. GILBRIDE
STATE PASS TO USTR FOR C. HAMILTON AND W. JACKSON
ALSO PASS TO USAID AFR/EA
TREASURY FOR VIRGINIA BRANDON

SIPDIS

E.O. 12958: N/A
TAGS: AGOA ETRD PGOV KCOR EINV ECON UG
SUBJECT: UGANDA: 2008 AGOA ELIGIBILITY REVIEW

REF: A) STATE 85086

1. Country: Uganda

2. Current AGOA Status: Eligible

3. Country Background Summary: After two decades of broad-based
economic growth and political stability, Uganda is now confronting a
range of economic and governance challenges as it tries to sustain
and deepen economic growth and development. The Government of
Uganda (GOU) has supported the passage and implementation of laws
and regulations to create greater government accountability, open
markets, expand infrastructure, and build a more attractive
environment for foreign investment. Uganda's judiciary remains
largely independent, though corruption continues to be a major
problem. Political parties function, but government restricts both
the press and grassroots political activity. Four labor reform
bills passed by Parliament in 2006 significantly improved labor
rights but have not yet been implemented. Uganda has not engaged in
activities that undermine U.S. foreign policy interests or national
security and Uganda continues to actively support U.S.
counter-terrorism goals in East Africa.

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COMMENTS ON ELIGIBILITY REQUIREMENTS
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I. MARKET-BASED ECONOMY
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A. Major strengths identified:

-- The Government of Uganda (GOU) is making commendable economic
progress, with sound macroeconomic policies emphasizing low
inflation, steady growth, and low debt levels.

-- The country maintains a liberal trade and foreign exchange
regime, and largely adheres to IMF/World Bank programs to fight
poverty, maintain macroeconomic stability and restructure the
economy.

-- External debt levels, at roughly 20% of GDP, are low by
international standards. Inflation has remained in the single
digits for most of the last decade, though a spike to 15.9% in
August 2008, three times the Government's estimate, is cause for
concern.

-- The GOU continues to make progress increasing the role of the
private sector in the economy. It has privatized most of its public
enterprises over the past few years, including entities in the
banking, telecommunications, and energy industries. About 30 firms
remain in GOU hands.

-- There are no foreign exchange controls affecting legitimate
trade and investment, and Ugandan law allows 100% foreign ownership
of domestic enterprises. The capital markets sector is steadily
improving with more listed companies expected in 2009

-- The Heritage Foundation's Index of Economic Freedom listed
Uganda's economy as the fifth freest economy in sub-Saharan Africa
in 2007, based on factors such as the ease of doing business,
openness to trade, property rights, and fiscal and monetary policy.


-- Important sectors are seeing strong growth as a result of
private investment. The fastest growing sectors of the economy are
services (especially financial services), construction and
manufacturing, though the transport (road, rail and air) and
telecommunications sectors are also experiencing strong growth.

-- Uganda's banking sector is seeing strong development as a result
of the approval of new licenses by the Bank of Uganda. The number
of licensed banks in Uganda rose to 20 from 15 in 2008. Several
other banks are expected to apply for approval and begin operations
in 2008 or early 2009. With an increase in the number of banks is a
rise in competition and the number of products offered to customers.
Five new bank branches opened recently in Gulu, in northern Uganda,
demonstrating that area's development after years of conflict.

-- Recently, GOU initiatives have focused on infrastructure
investment, the promotion of foreign investment, value-added
manufacturing and increased international trade. This strategy has

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reaped rewards, with growth at 9.1% in the 2007/2008 Ugandan fiscal
year and estimated at 8.1% for 2008/2009. (Note: The Ugandan
Government has recently revised its methodology for measuring
economic growth, resulting in growth figures roughly two percentage
points higher than those used previously. End Note.)

-- President Museveni continues to speak out in favor of open trade
with his mantra that "trade, not aid" will fuel Uganda's economic
development and reduce poverty. The country has recently seen
success, with exports rising 40% to $1.34 billion in 2007 on the
back of high commodity prices and higher exports to regional
markets.

-- Shifting away from its traditional European markets, Uganda saw
regional exports explode in 2007. Exports to the Democratic
Republic of Congo rose by 127% to $100 million last year, and to
Sudan by 72% to $157 million. Uganda also saw 78% export growth to
the countries that make up the Common Market for Eastern and
Southern Africa (COMESA).

-- The 2008/2009 budget aims to improve the country's
infrastructure, increasing funding for roads to $687 million from
$390 million and providing some $70 million to build a hydropower
dam at Karuma Falls on the Nile.

-- Uganda is aggressively trying to diversify its energy sector to
reduce the amount of current load shedding, planning 1,045 MW of new
capacity in the next five years. The largest generation project is
a 250 MW hydropower dam at Bujagali Falls on the Nile river. It is
expected to be completed in mid-2011.

-- The discovery of modest oil reserves near Lake Albert in western
Uganda should eventually help alleviate Uganda's power shortage.
Oil production should begin in late 2009, with initial production of
5,000 barrels per day. GOU sources say their plan is to refine this
oil into heavy fuel oil and build an 80 MW power generation plant.


-- The East African Customs Union agreement between Uganda, Kenya,
and Tanzania continues to harmonize duties, standards and practices,
which should decrease costs and time associated with exports within
the region.

-- Tax revenue collections by the Ugandan Revenue Authority (URA)
continue to increase.

-- Uganda continues to improve its physical and regulatory
structure; including draft legislation to upgrade Ugandan
intellectual property protections.

B. Major issues/problems identified:

-- Limited access to affordable credit remains a challenge for
business. Credit for commercial loans remains difficult, with the
Ugandan schilling rate for prime corporate borrowers ranging from 17
to 19%.

-- Uganda's drought has largely ended, benefiting hydropower
generation plants. Analysts say new power demand is increasing at
8% per annum, however, outstripping the power created by new
generation projects. Electricity shortages and transportation
bottlenecks hinder economic growth and trade in every sector.

-- Corruption and lack of transparency have caused difficulties for
some U.S. investors, and senior GOU officials do not always respond
adequately to Embassy advocacy for a level playing field for all
market participants. Major public tenders in the past year have
resulted in multiple investigations for fraud, mismanagement, and
abuse.

-- Critics assert that the benefits of privatization went
overwhelmingly to insiders, and not all privatizations have proved
successful. The privatization of the former Kenya-Uganda Railway to
a South African firm for $288 million, as reported in the 2007 AGOA
report, has resulted in no visible investment to date and railway
cargo to and from Kenya remains at a trickle.

-- A key GOU challenge will be managing and investing oil resources
in a fair and transparent way. Uganda is not expected at this time
to export oil, though no final decision has been made.

-- The recent global financial crisis could make raising foreign
capital more challenging.

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-- Uganda needs to combat counterfeit goods much more aggressively
in order to protect local manufacturers and trading partners. A
long-standing case involving counterfeit Kiwi shoe polish, owned by
Sara Lee, remains languishing in court.

-- While the GOU steadfastly supports AGOA and promotes its
benefits, it has experienced significant difficulties realizing its
full potential. Uganda receives similar benefits for its exports
from nearly all developed markets, including the European Union, its
largest trade partner. Uganda's 2007 exports under AGOA and the
General System of Preferences were valued at $1.7 million and
included apparel, tungsten concentrates, cut flowers, wooden
ornaments, and jewelry.

-- Apparel exports, a previous focus of Uganda's AGOA strategy,
have faced challenges under AGOA. Tri-Star Apparel and Pheonix
Logistics had exported to the United States, but both operations
have since gone bankrupt, with significant losses to the GOU, which
had invested in the enterprises. This led critics to blast
President Museveni for an ad hoc approach to AGOA that favored a few
firms and individuals instead of taking a strategic approach that
invested in critical export sectors.

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II. POLITICAL REFORMS, RULE OF LAW, ANTI-CORRUPTION
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A. Major Strengths Identified:

-- Uganda's judiciary is independent, especially at the highest
levels, but understaffed and under-funded. The judiciary has on
several recent occasions ruled against the Government on major
issues, though the Executive has not complied with some court
decisions.

-- The GOU has taken steps to increase the number of judicial
officers, and hired 12 new justices in March 2008. The GOU
continues its efforts to improve judicial efficiency and promote
alternative methods of dispute resolution. Special courts to
resolve commercial disputes are now functioning. Due process rights
are generally respected in civil and criminal cases.

-- "Multi-partyism" was reintroduced in 2006 after President
Museveni had banned parties for nearly two decades. The ruling
National Resistance Movement (NRM) party of President Museveni
dominates the parliament, but opposition parties and independent
representatives are in charge of key oversight committees.

-- The new multi-party parliament has in place oversight mechanisms
that have helped combat corruption. All oversight committees are
headed by members of the small but vocal, opposition parties. For
instance, Parliament's Local Government Accounts Committee has
pursued local officials over financial issues raised in government
audits. Corruption cases, when brought to court, are generally
decided on a transparent basis.

-- Uganda signed a $10 million Millennium Challenge Corporation
Threshold Country Plan (MCC TCP) in 2007 and began implementation in
2008. The plan is aimed at tackling corruption in government
procurement. The GOU has committed $2.2 million toward this
project, $1 million of which was allocated in the 2008/2009 budget.

B. Major issues/problems identified:

-- Despite transparency at the higher levels of the judiciary,
there are still significant inefficiencies including occasional
incompetence and/or corruption at lower levels of the court system,
in particular at the magistrate level.

-- There were several politically charged court cases in 2008 where
the GOU failed to charge individuals in court within the
Constitutionally-mandated 48-hour period.

-- Significant judicial backlogs continue to cause long delays in
the justice system, particularly in northern Uganda, which is
transitioning back to a civilian law and order regime after decades
of insurgency.

-- The press has been under fire, in part because it has become an
outlet for internal dissent within the ruling party. Government
actions against the media included harassment of journalists,
monitoring of independent newspapers and radio programs, charging

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journalists with various media code violations, the temporary
closure of an independent television station for political reasons,
and the curbing of the primary opposition newspaper's content.

-- Government security forces arrested three officials from the
Buganda Kingdom in July 2008. After they were released, the GOU
negotiated with Buganda Kingdom officials to tone down the CBS radio
station's criticism of the Government's proposed land bill
amendments. Critics saw the Government's pressure upon CBS as an
infringement upon the freedoms of speech and expression, guaranteed
in Uganda's Constitution.

-- Corruption is a serious problem in Uganda and the Government's
political will to fight corruption remains questionable. Uganda
fell 15 places, to 126 from 111 Transparency International's 2008
country corruption rankings.

-- The Inspector General of Government (IGG) has an independent
mandate and broad powers of investigation and prosecution. However,
the media and observers have criticized the IGG for being under the
President's influence and for refusing to cooperate with other
anti-corruption agencies. Parliament, to whom she is
constitutionally mandated to report, has called into question the
effectiveness of the institution as currently constituted.

-- The GOU has proposed constitutional changes to limit the IGG's
power, but these have not yet been considered or adopted by
parliament.

-- Under ethics legislation, a wide range of public officials,
including the President, are required to declare their wealth and
there is a provision that allows for the dismissal of politicians
for failure to declare their full wealth. In practice, this power
has been exercised only selectively, however.

-- In September 2005, the Global Fund for HIV/AIDS (GF) suspended
its five grants worth over $201 million to Uganda after evidence
emerged of serious mismanagement of $45 million that had been
expended. A Judiciary Commission of Inquiry released a 400-page
report in 2006 placing primary blame on the former Health Minister,
the former State Minister for Health, and the former Minister of
State for Primary Health Care for fraud and mismanagement of the
funds. In April 2007, however, the Cabinet issued a white paper
exonerating these former ministers, which in the minds of many
critics called into question the government's commitment to
combating corruption. In a second major scandal, high-level
government insiders allegedly diverted funds for the Global Alliance
for Vaccines and Immunizations in order to assist their political
campaigns. The case is currently in court.

-- In the second half of 2008, Parliament began investigations into
another high-level corruption case involving the National Social
Security Fund (NSSF), the state-run pension system, over the
latter's purchase of allegedly over-priced land from a company owned
by the Minister of Security. The NSSF Chairman testified that the
Ministers of Security and Finance pressured him into buying land,
much of which was determined to be wetland, for a low-cost housing
project. The Committee's report will likely include a
recommendation that the Finance and Security Ministers resign on the
grounds of influence peddling and conflict of interest and pay back
the funds from the dubious land deal.

-- Several senior Government and military officials accused of
corruption have not been prosecuted. The GOU has also failed to
follow up on plausible UN reports indicating high-level involvement
in the illegal exploitation of natural resources in the Democratic
Republic of Congo, illegal defense procurement arrangements, and
other corrupt practices.

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III. Economic Policies to Reduce Poverty
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A. Major Strengths Identified:

-- The GOU continues to allocate resources to fight poverty.
Uganda's 2008/2009 budget addresses the issue of poverty and
increases spending 28% overall.

-- Among other initiatives, the budget nearly doubles spending on
roads and other infrastructure, which will assist the poor and
overall economic development. It also represents a decline in aid
dependence, with 32% of the budget coming as direct support from

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foreign donors, down from just under 50% only two years ago. (Note:
These figures do not include U.S. assistance and other donor
support that is provided off-budget. The U.S. provides only
off-budget support. End Note.)

-- Recent statistics show that the poverty rate has declined from
38% in 2004 to 31% in 2006, the most recent figure available.

-- The Poverty Eradication Action Plan (PEAP), launched in 1997 and
revised every four years, continues to focus the GOU's poverty
reduction activities, specifically by improving health and
sanitation, access to clean water, universal primary education, the
transport system, and growth in the agricultural sector. The goal
is to reduce poverty to 10% by 2017. A fourth PEAP will be launched
in 2009 to focus the GOU's poverty reduction activities.

-- Another program, the Peace, Recovery, and Development Plan
(PRDP), focuses on development and poverty alleviation in northern
Uganda. The new budget increased its allocation for PRDP by 20% to
$195 million.

-- Economic conditions and trade in northern Uganda have improved
significantly in the past year as a result of increased security.
There have been no attacks in northern Uganda since August 2006.
The majority of the 1.8 million internally-displaced persons in
northern Uganda have returned to or near their homes.

-- Trade between northern Uganda and southern Sudan is booming as a
result of improved security in southern Sudan and northern Uganda.

-- USAID is currently implementing a $35 million poverty reduction
program aimed at improving rural livelihoods, particularly in the
north.

-- On the health side, Uganda has developed a model program to
combat HIV/AIDS, and prevalence rates have decreased from 15% in the
1990s to 6.4% in 2006. The United States is a critical partner in
Uganda's HIV/AIDS efforts, contributing $284 million in FY 2008 to
HIV/AIDS initiatives through the President's Emergency Plan for AIDS
Relief (PEPFAR).

B. Major issues/problems identified:

-- Population growth of 3.5% annually creates an urgent need for
sustained and broad-based economic growth. The GOU will be
particularly challenged to create jobs, as Uganda's working age
population will double in 15 years.

-- Corruption and mismanagement of government resources discourages
investment and decreases the effectiveness of anti-poverty
programming.

-- Uganda's weak infrastructure, health and education systems have
a larger-than-average impact upon the poor.

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IV. Worker Rights, Child Labor/Human Rights
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Major Strengths Identified:

-- Four labor reform bills passed by the Parliament in March 2006
significantly improved labor rights in Uganda. The laws have not
yet been implemented, however.

-- The new laws reduce the minimum number of workers required to
establish a union from 1,000 to 20, remove the requirement that at
least 51% of employees join a union before management is required to
engage in collective bargaining, and set new timeframes for union
recognition, collective bargaining and strikes.

-- The Industrial Court is now funded directly by the national
budget (not through the Labor Ministry), and the President of the
Industrial Court has been elevated to the status of a judge. The
Industrial Court has the power to re-instate employees who are
improperly dismissed, and to impose fines against employers.

-- The National Organization of Trade Unions (NOTU) is the largest
labor federation, and includes about 15 unions. Its rival, the
Central Organization of Free Trade Unions (COFTU), includes five
unions. An estimated 855,000 of 2 million persons working in the
formal sector belong to unions.


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-- Uganda cooperates with the International Labor Organization
(ILO) and has ratified all eight ILO conventions.

-- In May 2007, the GOU launched its national child labor policy,
which was passed in Parliament in November 2006. Comprehensive
anti-trafficking in persons legislation was introduced into
Parliament on July 3, 2007, and is now in committee. The
legislation will likely pass in November 2008. There are active
programs underway, with support from the ILO and the U.S. Department
of Labor, to combat child labor, but the practice nevertheless
remains a concern in Uganda, particularly in the informal sector.
The United States has supported efforts to move the legislation
forward.

-- Approximately 100 district-based labor officers have
responsibility for inspecting workplaces and processing worker and
management complaints. Though not fully effective, this mechanism
contributes to the enforcement of labor standards.

B. Major Issues/Problems Identified:

-- The Ministry of Gender, Labor and Social Development, which
oversees national labor policy and helps enforce labor laws, is
under-staffed and under-funded.

-- Child labor remains common, especially in the informal sector
and agricultural industries.

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V. International Terrorism/U.S. National Security
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A. Major Strengths Identified:

-- Uganda has not engaged in activities that undermine U.S. foreign
policy interests or national security and in fact Uganda continues
to actively support the United States on counter-terrorism matters.

-- The GOU's cooperative attitude was demonstrated during the
Commonwealth Heads of Government Meeting (CHOGM), held in Uganda in
November 2007, when the GOU worked closely with over 50 foreign
governments on security matters to host this complex event.

-- In preparation for CHOGM, the GOU initiated additional security
steps at its ports of entry (specifically the airport). These
security steps have resulted in the detention and/or arrests of
transiting individuals suspected of having links to international
terrorist organizations.

-- Uganda's provision of around 1,700 military troops in support of
the African Union Mission to Somalia (AMISOM) since early 2007
strongly demonstrates its willingness to contribute to regional
stability.

B. Major Issues/Problems Identified:

-- Uganda's anti-terrorism security capabilities are generally low.


-- Uganda's location in East Africa and porous borders make Uganda
a known terrorist transit point.
HOOVER

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