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Cablegate: Uganda: 2009 Agoa Eligibility Review

VZCZCXRO4092
RR RUEHROV
DE RUEHKM #1158/01 2800919
ZNR UUUUU ZZH
R 070919Z OCT 09
FM AMEMBASSY KAMPALA
TO RUEHC/SECSTATE WASHDC 1835
INFO RUCNIAD/IGAD COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC
RUEHRC/USDA FAS WASHDC

UNCLAS SECTION 01 OF 06 KAMPALA 001158

STATE FOR AF/EPS G. MALLORY
STATE PASS TO USTR FOR C. HAMILTON
ALSO PASS TO COMMERCE FOR K. BOYD
TREASURY FOR A. IERONIMO

SIPDIS

E.O. 12958: N/A
TAGS: EAGR EAID ECON ENRG ETRD EINV PHUM PGOV AGOA KCOR
UG
SUBJECT: UGANDA: 2009 AGOA ELIGIBILITY REVIEW

REF: A) STATE 97769

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 aimed at improving labor rights were passed by Parliament in
2006. Only some of these have been implemented. Uganda
pro-actively partners with the U.S. in countering regional security
threats and extremism in East and Central 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 were 12.2% of GDP in 2008/09, which remains
low by international standards. While inflation has remained in the
single digits for most of the last decade, it spiked to 15.9% in
2008. As of August 2009, inflation remained high at 12.4%.

-- 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. Twenty-three
companies are yet to be privatized. The GOU intends to retain a
further seven companies deemed to be of national interest.

-- 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, while impacted
by the global financial crisis, is steadily improving with 11
companies listed and one more company expected later in 2009

-- The Heritage Foundation's Index of Economic Freedom listed
Uganda's economy as the fourth freest economy in sub-Saharan Africa
in 2008, 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 21 from 15 in 2007. The larger
number of banks is generating competition and innovation in terms of
the 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
reaped rewards, with economic growth at 7% in the 2008/2009 Ugandan

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fiscal year and estimated at 6% for 2009/2010.

-- 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 to $1.72 billion in 2008 on the back of
high commodity prices and higher exports to regional markets.

-- Shifting away from its traditional European markets, Uganda saw
regional exports continue to rise in 2008. Exports to the
Democratic Republic of Congo rose to $127 million in 2008 from $100
in 2007, and to Sudan to $246 million in 2008 from $157 million in
2007. Uganda also saw export growth to the countries that make up
the Common Market for Eastern and Southern Africa (COMESA) from $506
million in 2007 to $723 million in 2008.

-- The Government of Uganda has significantly increased investment
in infrastructure for the last two years, spending $687 million in
2008/2009, and budgeting $559 million in 2009/2010. This is up from
$390 million in 2007/2008. The budget also provides $170 million
for energy infrastructure development.

-- 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 significant oil reserves (estimated at over two
billion barrels of recoverable oil) near Lake Albert in western
Uganda should eventually help alleviate Uganda's power shortage
while also significantly increasing GOU revenues. Oil production
should begin in 2010, with initial production of 5,000 barrels per
day and a crude oil power plant coming online in 2011 or 2012.
Depending on oil prices, this windfall will eventually result in a
doubling of current government revenues.

-- 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. Access to electricity countrywide increased to
15% in 2008 from 5% in 2001. 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.

-- While Uganda maintains an open economy, high levels of
corruption and a lack of effective infrastructure make it a very
difficult place to do business. The World Bank ranks Uganda as one
of the worst places in the world to do business (108 out of 134) in
its annual Global Competitiveness Index.

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-- A key GOU challenge will be managing and investing oil resources
in a fair and transparent way. The government still has not
developed a revenue management or sharing scheme.

-- 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, has languished in court for the last five years. Sara Lee
made its submission and the case awaits judgment.

-- 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 2008 exports under AGOA and the
General System of Preferences were valued at $1.1 million, down from
$1.7 in 2007. Exports 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 Phenix
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 observers to criticize
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 REFORM/RULE OF LAW/ANTI-CORRUPTION
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A. Major Strengths Identified:

-- Uganda's judiciary is largely independent, 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. Uganda now has a total of 53 judges. 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.

-- Uganda adopted a multiparty system in 2005 after two decades of
a no-party or "movement" system during which political parties were
banned. The ruling National Resistance Movement (NRM) party of
President Museveni continues to dominate the government and
parliament.

-- Uganda signed a $10.4 million Millennium Challenge Corporation
Threshold Country Plan (MCC TCP) on March 29, 2007, and began
implementation in August 2008. The plan is aimed at tackling
corruption in government procurement. The GOU committed $2.2
million toward this project, but only $1.1 million was allocated in
the supplementary 2008/2009 budget. No budget allocation was made
in the 2009/2010 budget. While this program was effective at
enhancing some of the technical capacity for fighting corruption,
political will remains absent. This program is not being renewed
for 2009/2010.

B. Major issues/problems identified:

-- The judicial system continues to suffer 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 2009 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.

-- Government actions against the media included harassment of
journalists, monitoring of independent newspapers and radio
programs, charging journalists with various media code violations

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including sedition and incitement of hatred against the president,
the temporary closure of an independent television station and the
indefinite closure of four radio stations, the suspension of
numerous journalists, and censoring of reporting by independent
newspapers, radios and television stations.

-- Riots in Kampala from September 10-12 left as many as 27 people
dead and more than 100 injured. Riots erupted after the Ugandan
government blocked the Buganda King from visiting the district of
Kayunga north of Kampala. In the wake of the riots, the GOU closed
a number of radio stations and arrested a number of journalists for
allegedly inciting and fueling the riots. Over 800 people were
arrested during and after the riots, including some opposition
politicians. Some suspects have been released on bail while others
remain in prison. More than two dozen suspects arrested for burning
a police post in Kampala were charged with terrorism, which is a
capital offense.

-- Corruption is a serious problem in Uganda and while progress is
being made at the institutional level, the GOU leadership's
political will to fight corruption remains questionable. Uganda
fell 15 places on Transparency International's perceptions of
corruption index, dropping from a ranking of 111 in 2007 to 126 in
2008.

-- 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 (GAVI) in order to assist their
political campaigns. Four people have been charged and sentenced
but three have been released on bail.

-- 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. This year, the NSSF was yet hit by another scandal when
reports by external auditors revealed that the Managing Director and
his Deputy had irregularly acquired loans from the fund to the tune
of $1 million each. NSSF had also earlier been dragged to court for
terminating a contract with a construction company. Court awarded
the construction company US$9 million in damages.

-- Several senior Government and military officials accused of
corruption have not been prosecuted. Illegal defense procurement
arrangements and other corrupt practices remain prevalent, but the
GOU has failed to follow up on such cases involving high government
and military officials.

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III. Poverty Reduction
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A. Major Strengths Identified:

-- Among other initiatives, the budget continues to make roads and
other infrastructure a priority, which will assist the poor and
boost overall economic development. It also represents a decline in
aid dependence, with 32% of the budget coming as direct support from
foreign donors, down from just under 50% only three 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

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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. The GOU is in the process of
reviewing the PEAP and drafting a five year National Development
Plan.

-- Another program, the Peace, Recovery, and Development Plan
(PRDP), focuses on development and poverty alleviation in northern
Uganda. $52 million was allocated in the 2009/10 budget. Uganda
began disbursing PRDP funds to local governments in September 2009.

-- 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 has increased
due to 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 had developed a model program to
combat HIV/AIDS, and prevalence rates have decreased from close to
20% in the 1990s to 6.4% in 2006. The United States is Uganda's key
partner, contributing $285 million in FY 2009 to HIV/AIDS
initiatives through the President's Emergency Plan for AIDS Relief
(PEPFAR). Since 2005, PEPFAR has invested over $1.4 billion in a
balanced program of prevention, care, treatment and capacity
building initiatives with more than 90 implementing partners. PEPFAR
currently funds two-thirds of Uganda's response to the disease,
including funding for anti-retroviral drugs.

B. Major issues/problems identified:

-- Population growth of 3.2% 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.

-- While Uganda had strong initial success in combating HIV/AIDS,
there is growing concern that incidence of new cases is on the rise
due to population growth and complacency on the part of the
government and the general population. Currently, only half of
those that need ARVs are able to access them, and this number is
likely to grow in the coming 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
were aimed at improving labor rights in Uganda. Some of these laws
have not yet been implemented.

-- 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.


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-- 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.

-- 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 passed by Parliament on
April 6, 2008 but is pending the President's signature. 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 approximately 2,600 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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