The impact of coffee prices on inflation and the national debt in Uganda Mungyereza Ben Paul

NAT 1 ONS UNi ES

NSTITUT AFRICAIN DE DEVELOPPEMEN~

ECONOMIQUE ET DE PLANIFICATION DAKAR

UNITED NATiONS.

AFRICAN INSTITUTE FOR ECONOMIC DEVELOPMENT ·AND PLANNING

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THE 1MPACT OF COFFEE

PRICE~ 0~\1

INFLATiON AND THE NATIONAL DEBT IN UGANDA

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MUNGYEREZA BEN PAUL

Submitted in Partial Fulfillment of the Requirements for the Award of the Degree of Masters of Arts in Economie Development and Planning at the African Institute for Economie Deve.-1opment and Planning (I DEP), has boen r ead and Appr·oved by :

Chief Superviser :Prof. P.

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AFRICAN INSTITUTE FOR ECONOMIC DEVEL.OPMENT AND PLANNING

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THE IMPACT OF COFFEE PRICES ON INFLATION AND THE NATIONAL DEBT IN

UGANDA

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MUNGYEREZA BEN PAUL

Submitted in Partial Fulfillment of the Requirements for the Award of the Degree of Mast ers of Arts in Economi c Deve 1 opme nt and Planning at the African Institute for Economie Development and Planning (IDEP), has been read and Approved by :

Chief Supervisor :Prof. P. K. Quarcoo Thesis Committee: Member :.Prof. 1<. Ka ne

External Examiner:Prof. G .

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ACKNOWLEDGEMENTS

I must thank all who contributed bath physically and morally to the preparation of this document .

Firstly, I wish to gratefully thank my employer, the Institute of Statistics and Applied Economies (Makerere University) and my

sponsor, the Commonwealth Fu nd for Techn ica l Co-operation for grant i ng me the sponsorsh i p caver-i ng the ent ire two-year M. A Programme cycle. Without this fellowship, it would not have been possible for me to complete this course successfully.

Secondly, I would like to thank my chief superviser-, Professer Quar-coo, for bath his technical and mor-al advice. I must admit that much of what appears in the document is the result of our r2gular dialogue and the fruitful comments made by him on my drafts right from the initial stages. My special thanks also go to my external examiner-, Prof. Abalu and my second superviser, Prof. Kane tor their comments on my final draft. I would also like to extend my sincere thanks to all IDEP staff, mainly the Chief Librarian, Mr.

Odoteye and the ot.ficer of the Computer Unit, Miss. Quénum for- their invaluable assistance. In absentia, my thanks also go to the

Late Prof. Seck who unfortunately passed away during the 1nitial stages of writing this document. It is from him that I lear-nt most of the computer techniques wh i ch we r-e a use fu l tao l in the analysis.

Finnlly, I would like to thank all the staff in the Statistics Divisions of the Uganda Coffee Development Authority and the Uganda Coffee Marketing Board for availing me of vital infor-mation used in

this study.

A 11 er-ror-s and ami ss ions r-el at i ng to the study, howeve r, remain the responsibility of the author.

Ben P. Mungyereza

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ABSTRACT

G_he aim of this study is to analyze the relationship between coffee priees (both producer and international) on inflation and the national debt in Uganda. The basic hypothesis under investigation is that in addition to coffee priees affecting its demand and supply, they have led to the worsening of Inflation and the national debt in the Ugandan economy. An analytical framework was developed to trace these effects using time series data over the peri od 1970-92. The resu l ts part l y supported the hypothes 1 s that higher (lower) producer priees of coffee led to higher (lower) levels of inflation but only for the period 1987-92 when farmers were paid promptly. The results also indicated a difference between the combined response of coffee supply to changes (increase and decrease) in the real producer priee and the response due t o only a priee increase. Whereas the former was found to be positive, the

latter was found to be negative.

On the other hand, the results indicated that internat1onal coffee priees, reflected by the coffee income terms of trade, play a minor role in the determination of the national debt. The most important factor affecting the level of the national debt was found to be the cost of borrowing represented by the interest rate on foreign loans. However, a reduction in the international priee of coffee was found to lead to an increase in its demand~

The study therefore concludes that whereas increases in the coffee producer priee have led to increases in the general level of priees in the Ugandan economy, particularly during the structural adjustment period, a decline in the world coffee priees has not

increased the economy's national debt significantly .

List List

CHAPT ER ^{1 :} 1 . 1 1 . 2 1 . 3 1. 4

CHAPT ER 2:

2. 1 2.2 2. 2. 1 2.2.2 (a) ( b) 2.2.3 2.3

CHAPT ER 3:

3. 1 3. 1. 1 3. 1. 2 3. 1. 3

3. 1. 4

3. 1. 5

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TABLE OF CONTENTS

Fi gl.Jres . . . .

T a b l e s . . . i i

INTRODUCTION . . . . Preview . . . . Nature of the Problem and Justification .. . Objectives of the Study . . . .

2 6

Organi zation of the Report... 7

THE ROLE OF COFFEE IN THE UGANDAN ECONOMY. 8 Review of the Agricultural Sector 8 The Coffee Sub-sector. .. . . .. . . . 14

P r e v i e w . . . 14

Review of Policies in the Sub-sector... 1/

Coffee Production P o l i c i e s . . . 17

Coffee Pricing Policies . . . . Strategy for Research and Quality Control. 2 1 28 Coffee Priees and the Ugandan Economy... 30

COFFEE PRICES, INFLATION AND THE NATIONAL DEBT... . . . . . . 38

Literature R e v i e w . . . 38

Farm Level Production Analysis . . . . 38 African Coffee and the World Market . . . . 43

Coffee Priees and the Inflationary Process . . . .. 50

Fiscal Deficits and the Inflationary P r o c e s s . . . 53

Commodity Priees and the Debt Problem... 56

The Major Research Questions... 59

H y p o t h e s i s . . . 60

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4. 1

4. 1 . 1

4. 1. 2 4 .1. 3

4. 1. 4

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4.3 4.4 CHAPT ER 5:

5. 1

5.2 5.3 5.4 CHAPT ER 6:

6. 1 6.2

6. 2. 1

6.2.2 6.2.3 ANNEX ANNEX ANNE X

2 3

THE ANALYTICAL FRAMEWORK... 61

Theoretical Background .. . . 61

Coffee Supply.. . . 63

Coffee Demand... .. . . . . . . . . 65

The National Debt. . . . . . . . . . . . . . . . . . . . . 68

Inflation... 70

Specification of Functional Forms . . . 75

Evaluation Procedures... 76

Data Sources and Limitations . . . 77

EMPIRICAL ANALYSIS OF RESULTS AND POLICY IMPLICATIONS... 82

Farmer Response to Producer Priee . . . 85

Demand Response to World Coffee Priees... 92

Coffee Priees and the National Debt... 95

Coffee Priees and Inflation . . . 100

CONCLUSIONS AND POLICY RECOMMENDATIONS ... 110

Conclusions . . . 110

Policy Recommandations . . . 111

The Setting of Coffee Producer Priees and Inflation . . . 111

Developing the Coffee Sub-Sector . . . 112

Reducing the National Debt . . . 113

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REFERENCES

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LIST OF FIGURES

Figure 2.1: Composition of Uganda's Exports (1970-92) . . . . 10

Figure 2.2: The Share of Agriculture in GDP ( 1970-91).... 11

Figure 2.3: Producer's Share in the World Priee of

Coffee (1970-92) . . . • . . . 26

Figure 2.4: Comparison of the Trends in Coffee Income Terms of Trade and the Total Outstanding

Debt Index (1980=100) . . . 32

Figure 2.5: The Ratio of Coffee Priee to Banana Priee

(1970-1992) . . . · · · . . . 36

Figure 2.6: Comparison of the Share of Crop Finance in Total Credit and the Inflation Rate

in Quarters (1986.1 - 1993.1) . . . 37

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LIST OF TABLES

Table 1.1: Distribution of Employed Household

Population by Economie Activity (1989/90)... 2

Table 2.1: Growth Rates for GDP and Seme of its

Components at Constant 1987 priees (1982-91 ) . . 1 ~

Table 2.2: Marketed Production of Coftee in Thousand

Metric Tonnes l 1980/81-1991/92) . . . . ^{1 6}

Table 2.3: Comparison of the Recurrent Revenue and

Tax Revenue in Billion Uganda Shillings . . . 3~

Table 3.1: Elasticities of Supply in Selected Countries .. 40

Table 3.2: Sources of Demand for C o f f e e . . . 4~

Table 3.3: Incarne and Priee Elasticities of Coffee Demand for Uganda' s Trading Partne rs. . . . . . . . . . . . . 4b

Table 5.1: Results for the Coffee Supply Function . . . 85

Table 5.2: Food Crops given as Most Important... 8!

Table 5.3: Cash Crops given as Most Important... 87

Table 5.4: Amounts Received by Farmers from the

given First Cash Crop . . . : . . . 88

Table 5.5: Results for the Coffee Demand Function... ~~

Table 5.6: Results for the National Oebt Funct1on: . . . . ⁹⁵

Table 5.7: Results for the Inflation Function . . . 101

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Table 2A.1: Uganda's Experts by Product and Value . . . 116

Table 2A.2: Share of Agriculture in GDP (1970-91) . . . 117

Table 2A.3: Producer's Share in the World Priee of Coftee 118 Table 2A.4: Coftee Incarne Terms of Trade and the Index of Total Outstanding Debt ( 1980=100) . . . 119

Table 2A.5: Calculation of the Ratio of Coffee Priee to Banana Priee . . . 120

Table 2A.6: Share of Crop Finance in Total Credit and Inflation in Quarters . . . 121

Table 4A.1: Calculation of the Real Exchange Rate for Uganda . . . 122

Table 4A.2: Uganda's Experts to the Five Major Trading Partners . . . 123

Table 4A.3: Shares of Uganda's Experts to the Major Importers... . . . . . . . . . . . . . . . . . . 124

Table 4A.4: The Gross National Products of the Importing Countries and the Combined Foreign Income Variable in Billion US$ . . . 125

Table 5A.1: Data used in the Coffee Supply Function . . . 126

Table 5A.2: Data used in the Coffee Demand Function . . . 127

Table 5A.3: Data used in the National Debt Function . . . 128

Table 5A.4: Data used in the Inflation Function . . . 129

Table 5A.5: Data for Variables used in the Inflation

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CHAPTER 1

INTRODUCTION

1.1 PREVIEW

After i ndependence in 1962, Uganda had promi si ng economi c prospects for about ten years. Good agricultural conditions supported a w ide range of food c rops in the subs i sten ce secto r

together with valuable cash crops led by coffee and cotton.

Agriculture was the dominant economie activity, supplemented by the manufactu ring sec tor wh i ch contr i buted about 7 percent of GDP.

Valuable minerals, especially copper, had been discovered and potential water power resources were considerable. Between 1965 and 1971, the economy grew by about 4 per.cent per year. By 1980, however, much of the national economy lay in ruins after a decade of civil strife and war. The subsistence farming sector, however,

su rv i ved in reasonab le arder, toge the r w i th coffee production, which by that time made up more than 95 percent of export earnings.

Currently, agriculture accounts for about 60 percent of GDP while manufacturing accounts for less than 5 percent. More than 80 percent of the population is engaged in agricultural activities compared to only 2 percent in manufacturing. The proportion of the

rural population that is engaged in agriculture is even-higher (87 percent) w i th on l y 1 . 5 percent engaged in rural i ndustry. The

distribution of employed household population 1s shown in Table 1.1

below.

TABLE 1.1: DISTRIBUTION OF EMPLOYED HOUSEHOLD POPULATION BY ECONOMIC ACTIVITY AS IN 1989/90 (in percentage).

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1.2 NATURE OF THE PROBLEM AND JUSTIFICATION

Many deve 1 op i ng countr i es in Afri ca st i 11 depend on one primary commodity for foreign ex change earnings and government

revenue. Uganda is no exception.

The economie decline in the 1970s led to the deterioration 1n

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Uganda such as tea, cotton and tobacco. This left the economy with no other choice but to depend on coffee. The crop remained the main foreign exchange earner for the economy, accounting for more than 90% of export earnings in the 1980s. Coffee was grown by small

holders and hence, despite declining real producer priees, they persisted production because the crop was earning them some reasonable regular income. Coffee also provided a large share of government revenue in the form of export dut i es. In addition to these roles, the production, transportation and marketing provided income and employment to a large proportion of the population.

The coffee sub-sector, however, was al so affected by the economie decline of the 1970s. There were constraints both on the domestic and the international scenes which had an effect on 1ts production, export, foreign exchange earnings, government revenue and on the income of the coffee growers.

The constraints on the domestic scene included, among others, the following:

low producer priees which led to neglect of the sector by some p roduce rs, on the one hand, and the smugg ling of the

produce to neighbo~ring countries, on the other;

lack of well organized extension programmes and .trained field staff to advise the coffee growers;

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delayed payments to farmers which was partly due to shortage of crop finance, and its misappr-opriation acted as a

disincentive to improved coffee production;

lack of adequate supplies of farm inputs, particularly fertilizers at priees which farmers could afford;

poor nursery capacity for the. production of coftee seedlings; and

lack of programmes for the promotion of domestic consumption and export of roasted coffee.

On the international scene, the following constraints also observed:

were

over years Uganda has been facing steep competition and losing market share as producers li ke I ndones i a, I nd i a and

Th ail and have expanded the ir production tak i ng an increasing share of the international coffee trade; and,

a fa ll in coffee pr i ces fo ll ow i ng the suspension of t,he International Cottee Agreement (ICA) export quota system

in 1 989 seri ous l y affected robusta cotfee maki ng the priee differential between it and arabica to widen.

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Bearing in mind that more than 95% of Uganda's coffee experts are of the robusta type, this had a serious negative effect on the economy's export performance. The gains by the various participants

in the coffee sub-sector also went dawn due to depressed international priees.

The poor performance of the coffee sub-sector tends to have a negative impact on the earnings of the processors and exporters, most of whom continue to operate at a loss. The foreign exchange earnings from coffee experts are accordingly, significantly

reduced. The coffee industry being a major contributor to foreign exchange i s ref 1 ected in the adverse effect on the ba 1 ance of payments position and the increased dependence on external

borrowing in arder to finance the current account and fiscal deficits. The debts accumulated are also difficult to pay because

they are financed by experts.

Given this state of overdependence on coffee, any policy which affects the supply and demand of the commodity is expected to have an influence on two major macroeconomie variables, viz, inflation and the national debt, among ethers. In particular, the pricing policy plays a major role in the demand and supply of cotfee. If international coffee priees decline, the demand tor the commodity is expected to increase but the income terms of trade may dec11ne leading to an increase in the national debt. On the ether hand, an incrcase in tt1e r·eal producer priee of coffee l.o t~ncourag(~ ^rnor·H

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production would increase the purchasing power of the producers and hence drive up priees. If the increase in priees is not matched by another increase in the producer priee, the real producer priee may fall again. All these would undermine the intentions of authorities in their pricing policies. Hence there is a need to test the effect of coffee priees on the demand and·supply for the commodity, and on inflation and the national debt.

1.3 OBJECTIVES OF THE STUDY

The major objectives of this study are as follows:

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to analyze the coffee supply response to changes in the real producer priee;

to determine the major factors i nfl uenci ng the demand for Ugandan coffee on the international market;

to analyze the effect of international coffee priees on the

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to analyze the effect of coffee priees (both producer and

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1.4 ORGANIZATION OF THE REPORT

The report is divided into six chapters. The first chapt~r 1s a general introduction. The second chapter deals with the role of coffee in the Ugandan economy. Ch apte r 3 cave rs the li te ra tu re survey about coffee priees, inflation and the national debt. The fourth chapter provides the analy~ical framework for the study.

Chapter 5 provides the empirical analysis of results and policy implications. Finally, Chapter 6 contains the conclusions and policy recommandations.

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CHAPTER 2

THE ROLE OF COFFEE IN THE UGANDAN EGONOiJiY

The coffee sub-sector plays a major role in Uganda. Although its share in total experts has been declining over time i t still forms more than 60 percent. The importance of coffee bath in the agricultural sector and in the whole economy therefore cannat be

underestimated.

2.1 REVIEW OF THE AGRICULTURAL SECTOR.

Agriculture is the major economie activity of the Ugandan economy. As noted earlier, the sector accounts for about 60 percent of GDP and ove r 90 percent of ex ports (average for the peri od 1980-90). It also employs 80 percent of the household populat1on.

Agricultural output cornes almost exclusively from about 2.5 million small holders, 80 percent of whom have less than 2 hectares each.

On 1 y te a and sugar are g rown on 1 ar ge esta tes wh i ch total about 40,000 hectares .

Food crop production dominates the agricultural sector, totalling 71 percent of agricultural GDP, with livestock products another 17 percent. Export crop production is only 5 percent of agricultural GDP, the fisheries sub-sector account,s for 4 percent and forestry for 3 percent.

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For the period 1970-79, the economy was exporting copper but the rest of the years i t had on 1 y ag ri cu 1 tura 1 ex ports 1 ed by coffee. However, even during the 1970-79 period when copper was - bei ng exported, i t ave raged on 1 y about 3. 4 percent of the tot a 1 export value. Figure 2.1 shows how Uganda's experts are dominated by coffee. Diversification in Uganda has not been an easy task.

Agriculture's contribution to GDP which declined from 48 percent in the immediate post independence period to 44 percent in 1968

increased again significantly to about 74 percent in 1978. This i nd i cated a notable re tu rn to subs i sten ce as the i ndustry and service sectors broke down. Since then, the share of agriculture in GDP has declined unevenly. From 1987, when the share was about 62

percent, it has been declining gradually following the process of industrialization, reaching 59 percent in 1991 .

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FIGURE 2.1: COMPOSITION OF UGANDA'S EXPORTS BY VALUE (1970-92)

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Economie development in Uganda since the early 1970s has been a victim of the effects of armed conflicts, the disintegration of public infrastructure and services, the collapse of government regulation and the uncertainties of high inflation and scarcity ot forejgn ~xchange. However, the agricultural sector has grown

radidT~ ·in the recent years recording a 4.9 percent average annual growth rate betweeri 1986 and 1991. This rapid growth is, unfortunately, a recovery from a very low base. Agricu !tura ¹ out,put

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has only recently gone above the levels achieved in the late 1970s.

According to World Bank estimates (World Bank, 1993), if the ave rage an nua l a gr i cultural g rowth rate of 2. 7 percent a chi eved - betweeh 1963 and 1978, a rate above the average for sub-saharan Africa then, had been sustained through 1991, agricultural output would have been about 26 percent higher than its present levels.

Figure 2.2 shows the share of agriculture in the gross national product for the period 1970-91.

FIGURE 2.2: THE SHARE OF AGRICULTURE IN GDP FOR THE PERIOD 1970-91 .

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There was a 2.9 percent average annual growth in agricultural output between 1981 and 1991 . This was consistently led by higher growth in food crop production of 3.2 percent per annum for the period. Export crop and livestock production grew more slowly at between and 2 percent per annum for the same period. In 1990 and 1991, the growth in agricultural output slowed considerably. From annual growth rates of 8.7 percent and 6.4 percent in 1988 and 1989

respectively, they dropped to 2.9 and 2.5 percent in 1990 and 1991 respectively. The main cause of the slowdown was slow growth in food crop production down to 2.5 percent in 1990 and 1 percent in 1991 from a high of 7.5 percent in 1989. This could reflect the saturation of the domestic market with much of the substitution for food imports completed, and slow growth in incomes from other sub- sectors. Table 2.1 shows the growth rates in GDP and some of its components under agriculture for the period 1982- 90.

TABLE 2.1: GROWTH ~ATES FOR GDP AND SOME OF ITS COMPONENTS AT CONSJANT 1987 PRICES IN PERCENTAGE (1982-91)

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1984 -6.54 -9.88 -5.80 -13.55

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1985 1. 98 4.41 4.79 7. 1 6 ₁

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1986 0.64 0.23 -4.59 1 . 29 1

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1987 5.21 2.82 4.04 ·- - · -------5.50 · ^. ---- .1 1988 9. 13 8.67 - - - --4.35 · ---·- - - ·6.67 --·· 1 Il

1989 7.32 6.44 7.34 7.52 Il

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1990 4.04 2.92 . - - - ----4.15 ----- 2.46 -- ^··-- ·- Il

1991 4. 14 2.54 2.50 1. 04

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SOURCE: Background to the Budget 1992/93; June, 1992.

With the tremendous fall in production, depleted socia l and physical infrastructure, a decline in export values and the assac i ated shortage of foreign exchange, shortage of goods and services, inflation, widespread parallel market activities and smuggling, increase in government deficit and balance of payments problems, the government instituted a programme of recovery during 1981-84 intended to remove the deteriorating economie conditions.

The main objectives were to restore production and exports, eliminate priee distortions, discourage parallel market activities and curtail the high aggregate demand. The programme was based on changes in the exchange rate, more flexible priee pol1cies,

increased producer priees, relaxation of exchange contra 1

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regulations, greater restraint and di sei pline in the fiscal and domestic credit policies and the rehabilitation of the productive sector. However, the government did not go far enough in rest rai ni ng monetary expansion, achi evi ng a real i st i c ex change rate, liberalizing the goods and foreign exchange markets, maintaining farmers' incentives and removing other supply bottlenecks. In addition to this, external assistance was inadequate and mainly short term. The export sector, on the other hand, did not have sufficient incentives to fi ll the foreign exchange gap which had been temporarily filled by the Internat1onal

Monetary Fu nd short te rm fu nd i ng. A ll these, coup led w i th the unstable security situation which culminated in a coup in 1985,

reduced government capacity to pursue the recovery programme. By 1986, export proceeds were stagnant because of a fa 11 in wor l d priees and lack of incentives to farmers. The government had to depend more and more on inflationary financing for ~ts deficits;

shortages of goods were apparent and inflatiunary pressures were reinforced because production and imports were falling while money supply was expanding.

2.2 THE COFFEE SUB-SECTOR

2.2.1 Preview

As e<!rl ier mentioned, coffee is a major sub-sector in the economy accounting for a large share of export earnings and

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government revenue. Two types of coffee are produced in the economy, namely, robusta and arabica. Robusta coffee is the predominant type constituting about 94 percent of the economy's total coffee production. This is mostly grown in the central Lake Victoria crescent area. Arabica coffee, which accounts for the remaining 6 percent of total production is grown mostly in Mbale and Kaptchorwa districts in the east and, to a 1 esser extent, scattered at the higher altitudes in the west of the country.

It is estimated that about 1.03 million farmers are growing robusta coffee on an area of about 370,000 hectares. This implies an average effective a rea of robusta per farm of about 0. 36 hectares. About 93,000 farmers are estimated to be growing arab1ca coffee in the eastern Mount Elgon region on an area of some 17,000 hectares, producing about 8,000 tonnes of clean coffee per annum. Very little is known about the western arabica type, except that about 10,000 hectares were planted in the 1950s and the ^1~60s and

that production by 1988 was only about 2,000 tonnes of clean cottee per annum.

The average production figure for the period 1960-70 wAs 161 . J thousand metric tonnes in which 148.2 thousand tonnes was robusta and 13.5 thousand tonnei was arabica. During this period, the peak year was 1969 with a record of 250.9 thousand metric t,onnes of wh i ch 230. 1 Uwusand was robusta wh i 1 e 20.8 thous<-~nd t.onn~s W<î~;

arabica. In 1976 and 1977 when there was a significant improvement 1 5

in international coffee priees, Uganda tailed to tully benefit from it due to transport difficulties, temporary closure of the border w i th Kenya and l ack of foreign exchange to pu re hase bags for packag i ng. This re sul ted in large stock pi les of coffee 1 n the economy. After the 1979 war, production was believed to have been hi ghe r th an wh at appeared in export vol urnes due to 1 ack ot transport and smuggling sorne of the produce into Kenya (for arabica) and Zaire (for robusta) . Table 2.2 below shows the marketed production of coffee from 1980/81 to 1991/92.

TABLE 2.2: MARKETED PRODUCTION OF COFFEE IN THOUSAND METRIC TONNES (1980/81-1991/92)

------ ---- ----·--- ^..

1 1 1 1

Season Robusta Arabica _. Total 1 ₁

------ ^{. ..}

1980/81 97. 16 _{-·- ---}0.39 _{- ---} 97.55 ₁

.... ---. -- ---

1981/82 163.20 3.30 166.50 ^Il ₁

- - - ------- ---- -------- ·

1982/83 153.24 4. 18 _- - - ------ ---157.42 -- Il 1!

1983/84 150.95 - - -- - - -- --7.75 --- --- - - --158.70 ----- Il Il

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1984/85 142.42 10.58 153.00

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1985/86 134.73 8.56 143.29 li

- --· ------ ---. -- . ---

1986/87 151.25 9.75 --···- ·--------161 ---. 00

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1! 1987/88 144. 1 8 1 1 . 9 2 _-···- 156.10 _{----------- ·-} il 1988/89 166.31 7.70 -- --· ------174.01 ------·-· --··· . . ii li

1989/90 - 120.80 8.61 ^{- ----- ---- - - -·-}129.41 Il Il _Il 1990/91 _- 133.88 6.42 _{-- -- ·- ------}140.30 _---- . -. Il

1991/92 90. 15 5.88 96.03 Il ₁

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SOURCE: Coffee Marketing Board Files

From the tab 1 e above, i t can be observed th at the 1 96 9 peak was not reached at all during the period 1980-92. The highest production level recorded for this period, 174.01 thousand tonnes, attained in 1988/89, was about 31 percent lower than the 1969 peak.

Information on total prod~ction varies widely. The only reliable indicator are the purchases made by the Coffee Marketing Board and, after 1990, the other marketing agencies/individuals.

As noted earlier however, these figures on production do not tal<e into account the possible leakages due particularly to smuggl1ng and also the stocks held by farmers and hulleries.

2.2.2 Review of Policies in the Coffee Sub-Sector

a) Coffee Production Policies

Policy on any aspect of development is never static. Cotfee poli cy in Uganda has al so un de rgone changes as ci rcumstances changed with time. The early 1950s and 1960s witnessed the expansion of coffee cu 1 ti vat ion because the market for robusta coffee genera ll y tended to expand wi th the i ncreased usage of soluble coffees in the manufacture of wh i ch robustas we re used extensively. Some robustas were a 1 so used in roast.ed and gr·ound

blends but witlî the preference placed on neutrRI-fiF.Ivoun:ci, pulpPL1

and washed coffee.

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Under the 1962 International Coffee Agreement (ICA), Ugan(ja was allocated a basic annual export quota of about 1.8 mill1on bags of 60 kilos each equivalent to about 3% of global production wh1ch was about 65 million bags at that time. During that period, the country enjoyed good trading relations with the tradit1onal markets 1 and greatly increased the volume of its experts to those markets and thereby avoided a situation of bullding up retainable stocks. Recognizing the dangers of mounting competition everywhere, howeve r, Uganda dec i ded to 1 i mit the p roduct 1 on of coffee. The policy encouraged the production of alternative crops tor exrort which was a positive step but it suspended replanting more cottee which could be taken as a negative stepL. ~

The late 1960s and early 1970s policies supported the ear11er ones. Four related approaches were employed in this per1od. These were:

Improvement of robusta coffee quality and diversiticat,lon.

Quality was to be achieved through a number of actions including the emphasis on proper husbandry pract1ces, application of the recommended nitrogenous fertilizers, subsidy on drying trays and other equipment, increased wet processing and pulping, demonstration and farmer

~hese were, United Kingdom, Canada, Australia Germany and Israel.

2This policy taken in tl1e 1960s is reflected in the çurrent status nt Uganda's coffee. Production and even quality has started declining because of ageing trees. Most of the coffee trees were planted in 1950s and eat·iy 1Yb0s.

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education, quality tests and use 0f p~emia and penalties

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^{on g~ade. On the othe~ hand,} dive~sification was to be ach i eved th ~ough the app 1 i cati on and encouragement of alternative ente~p~ises which we~e expected to fetch hi ghe ~, o~ at 1 east equa 1 , re tu ~ns to coffee su ch as dairy fa~ming, cocoa, tea, sugarcane and horticultural crops. The main objective of this last app~oach was to discourage further robusta coffee expansion and to replace i t where possible.

Development of Mount Elgon a~abica. This app~oach emphas1zed the replacement of old and low-yielding va~ieties with

new, high yielding va~ieties, p~ovision of effective extension servi ces and estab 1 i shment of an arabi ca coffee research station in the area.

Development of western arabica. The programme here involved progressive ~eplacement of ~obusta with arabica and

expansion of arabi ca coffee ac rea ge, spray i ng aga i nst major coffee diseases like antesia and coffee berry disease and the construction of pulpe~ies to imp~ove

processing capacity and coffee quality.

The effects of previous policies ^we~e beginning to show up by 1980. Some of these we~e:

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as government coffee nurseries were abolished due to the no- replanting pol icy, ageing coffee trees could not be biologically replaced implying an anticipated disappearance of the industry;

use of inferior materials for ·planting by the farmers;

increased productivity (more yield from the same area) could not be achieved as inputs were not easi ly avai lable

especially nitrogenous fertilizers due to the economie cri sis;

free spraying against pest and disease was not sustained; and

subsidies disappeared as the re tai ned earn ⁱ ngs from coffee ex ports were used to finance other government

parastatal s.

The 1980s prompted a wave of change. The government real1zed that production had dropped sharply from an annual average ot about 185 thousand met ri c tons to about 100 thousand met ri c tons by 1·980 with a corresponding drop in revenues. To subdue the problem, a US$

27 million projeci known as Coffee Rehabilitation Programme (CRPJ was started with three major objectives, namely: to arrest the decline in coffee production, to restore production to normal, and

to increase and surpass previous levels of production.

This meant the restoration of nurseries, provision of inputs, spraying against pests and diseases, rehabilitation of major coffee factor i es, and the re activation of research and extension. The po 1 i cy on research emphas i zed the conti nu at ion of selection of better quality coffee trees from the old coffee trees. This project expired in 1985.

b) Coffee Pricing Policies

The pricing of agricultural products is a continuous exerc1se and priee policy is a dynamic management tool to monitor and constantly update priees payable to farmers in arder to protect their real incarnes. The government policy framework as set out in the Rehabilitation and Development Plan 1987/88-1991/92 recognized the importance of mai nt ain i ng adequate p roducer i nee nt iv es by regularly adjusting minimum producer priees. Before then there was no expl icit pricing pol icy. The priees were autonomously determined by government. In 1987, the Agricultural Secretariat of the Central Bank, in accord ance w i th i ts terms of re fe renee, carr i ed out a priee review exercise for the ten major crops. 3 The main purpose of the review was to assess the adequacy of the then official producer

pr i ces and marg i ns for processors and marketing boards aga i nst

•,

current domestic inflation and world market priee fluctuations.

3coffee, cotton, tea, cocoa, tobacco, maize, beans, groundnuts, simsim and soyabeans.

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Following the recommendations of the Agricultural Priee Review Committee (June, 1988), the coffee pricing and taxation po licy was

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changed in the 1990s. During the first half of the 1990/91 coffee season, the priee paid to farmers and the margins allowed to the primary buyers, processors and the exporters were predetermined and fixed by the government. However, as from 2nd July 1991, the po licy on pricing was revised. Producer priees were also increased from Shs.120 per kilo to Shs.210 per kilo for robusta. The margins for primary buyers, processors and exporters were also to be negotiated

...

^,_ between the exporters and the processors.

The taxation system was also revised from the residual to a marginal system with the following elements:

no export tax if the total cost·of exporting, processing and production was equal or higher th an the expor-t

realization;

whe re the export real i zat ion exceeded the total costs o t·

production, processing and marketing, an export tax of 5 percent on robusta and 20 percent on arabica would be

levied on the FOB priee; and

the threshold priee representing total costs of product1on, processing and ex~orts w~s set at US$ 1.05 per kilo.

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However, the policy of fixing reference priee by government attracted criticisms from various circles for its inadequacy 1n p rov id i ng i nee nt iv es to the exporters to i ne rease the export ot good quality coffee and also to maximize the unit price.4

In addition to this, fixing the reference priee in United States dollars had the weakness of passing over virtually all the benefits of any depreciation in the local currency to the exporter, whi le

the government would receive only 5 percent of these benet1ts and the primary producer would receive none. It was, therefore, agreed that thresholds should be adjusted periodically or at best whenever a significant depreciation of the local currency occurred.

Following the criticisms, the following were agreed on:

the tax was to be levied on 70 percent of the taxable surplus (the difference between the export realized priee and the

computed threshold) -this was dictated by projections on priees, export volumes and go~ernment's budgetary requirements;

the threshold was to reflect the cast of production, processing and marketing with a 2 percent physical

contingency;

4For example an exporter realizing US$ 1.06 per kilo wou Id be worse ott, after taxation, than one realizing US$ 1.02 per kilo untaxed.

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there would be different threshold priees for arabica and robusta coffee reflecting differences in costs ot

production, processing and marketing; and

the Uganda Coffee Deve 1 opme nt Author i ty wou l d re vi ew the threshold priee quarterly ·and seek authority for

implementation from the Ministry of Finance and Economie Planning.

In ^{August 1 9 91 ' new} guidel ines pertaining to the liberalization of internal coffee marketing were issued. The major elements of the guidelines were as follows:

The original coffee bu yi ng, process i ng and f ac tory li censes were reduced to a requirement of only one license - the

coffee buying license to be issued by the Coffee Development Authority. This license would be valid for

only the coffee season for which it was issued and would allow for buying/processing of coffee from/in any

district without restrictions.

Anyone intending to erect a coffee processing factory was tree to do so if in his opinion it would be profitable.

The government would only fix minimum priees for- cottee payable to the farmers. The commission and transport

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margins would be negotiated between the primary societies/buyers, coffee processors and exporters.

Following the guidelines, the government was committed to license more exporters in the new coffee year 1991/92. In May ^19~2, the government moved away from the policy of announcing minimum coffee pri ces and deci ded that they wou l d be determi ned as a function of market forces. Only an indicative priee would be set on recommendat ion of the Coffee Deve l opme nt Author i ty. The i mp 1 i cat 1 on of this policy was that i t exposed the farmers to the fluctuations in wor l d pr i ces, just as the ex porters had be en. Howeve r, as a result of the introduction of new exportera and the liberalization of the margins for processors and exporters, farmers had alreaoy started getting competitive priees for their coffee. Despite this, priee variations were expected to occur for the producers due to the following:

distance from the processing and/or export point wh1ch would lead to a difference in transport costs;

quality of coffee delivered which was a function of age ot trees and harvesting practices among others; and

terms of payment (cash or credit) for the coftee negot1ated between the sellers and the buyers.

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Figure 2.3 shows how the share of the produeer priee of coftee in its world priee was fluetuating for the period from 1970 to 1992.

FIGURE 2.3: PRODUCER'S SHARE IN THE WORLD PRICE OF COFFEE FOR THE PERIOD 1970-92.

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70 72 74- 76 78 80 82 84- 86 88 90 92 Years

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The coffee marketing liberalization process came with a reduction in the taxation of the coffee industry. Fixed margins were paid to the various market intermediaries and the difference went to government. However, this system was replaced in July 1991, by a marginal taxation system. In April 1992, another revision of the tax rate was made. This time the government decided that a flat rate of 5 percent on the FOB coffee proceeds would be levied. The flat rate was recognized as more efficient, straight forward, easy to compute and administratively convenient.⁵ Periodic reviews in the coffee taxation system have been carried out in an effort to make the coffee export tax rate more reasonab 1 e over ti me. The climax of the taxation policy occurred in July 1992 when the government decided to abolish virtually all forms of taxation· on coffee experts effective from the fiscal year 1992/93. This removed one of the key obstacles to increased profitability in the export of coffee. It was, therefore, believed that this would encourage more exporters to join the business. Meanwhile, with the increasing purchasing competition at farm level, this would eventually lead to improvement in the quality produced because each buyer would aim at obtaining the best quality possible.

5rn the previous system, the tax was levied on the surpluses over thé threshold priee. This meant that when the surplus was zero or negative, no tax would be levied.This was prone ta manipulation and abuse, and with the persistently falling priees, the government would not be assured of any revenue from the industry.

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• 2.2.3 Strategy for Research and Quality Control .

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^{For a} long time, there was no collaboration between the different actors in the coffee i ndustry in Uganda. This 1 ed to unco-ordinated policies within the sector. Pri or to the liberalization and restructuring of the coffee sub-sector, a process that is hardly three y~ars old, the sub-sector was

• characterized by the following:

1 ow p roduce r pri ces, us ua ll y l ess th an 20 percent of the world priees even during the coffee boom of the late

1970s;

high stock levels with the Coffee Marketing Board and even more at the farm level resulting from marketing

rigidities and crop finance constraints;

limited funding for research and development programmes including promotional activities and extension. Donor

funds were the main source but were of limited lifespan;

the Coffee Marketing Board had the monopoly of exporting the coffee and the Ministry of Agriculture had the monopoly

for research and extension programmes and shared regulatory tunctions with the Ministry of Market,ing.

However, often the researchers at the government

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ag ri cul tu ra l research station wou l d not get ac cess to priee or quality information from the Coffee Marketing Board. The c 7 on a 16 coffee sc reened at this re se arch station in the 1970s, therefore, did not get funding support for propagating the material for the farmers.

One of the key elements of the liberalization and restructuring policy implemented between July 1990 and July 1992 was the creation of a central authority, the Uganda Coffee Oevelopment Authority (UCDA) to oversee the entire sub-sector with

sustainable funding from the sub-sector itself through retained earnings from the coffee exports.

In the area of research, UCDA in conjunction with Makerere Uni vers i ty and the Ag ri cul tu ra 1 Research Station, estab li shed a technical committee that played a key role in defining priority research themes and advising on funding requirements (UCDA, 1992).

The researchers in this approach were directly involved not only in conducting research projects but also in research po ¹ i cy formulation. The research programmes UCDA is currently undertaking include, among ethers, the following:

assessment of low cast tarrn technologies for the production of planting materials;

6This is a scientific name for a certain variety of coffee with high y1eld potential.

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intercropping studies and analysis of comparative costs

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returns to coffee production relative to competing crops;

screening of new hybrids of arabica;

coffee bi-product utilization including the production ot charcoal, biogas and tertilizers; and

assessment of the impact of tarrn leve\ harvesting and processing techniques on coftee quality.

2.3 COFFEE PRICES AND THE UGANDAN ECONOMY

The predominant role of agriculture and the importance ot coffee to the cash economy creates a strong linkage between the agricultural sector and sorne key macroeconomie variables. In the first place, experts of coffee determine the import capacity, a key factor in growth and development. Secondly, the coffee export tax was a major contri butor to government recurrent revenue in the 1980s, even though its share was graduallY declining before i t was removed in 1992. Thirdly, agricultural finance especially for the purchase, processing and marketing of coffee land other crops to a