The Uganda Coffee Development Authority (UCDA) says the local prices of coffee dropped by 53 percent in the country.

The Uganda Coffee Development Authority (UCDA) Executive Director, Mr Emmanuel Iyamulemye, said  exporters have been monitoring the market that has in the last few days witnessed few movements.

Meanwhile, the Executive Director of Uganda’s National Union of Coffee Agribusiness and Farm Enterprises (Nucafe), Mr Joseph Nkandu, said that the fall in the price of coffee has forced some farmers to hold onto their stocks.

“We are holding on to stocks for a while until the prices get better. When this happens then we shall be able release the stock,” he said.

Uganda is Africa’s leading coffee exporter with about 4.6 million 60-kilogramme bags worth $508m (Shs1.9 trillion) exported annually.

The country currently exports 4.6 million 60-kilograme and is expected to increase to 20 million by 2025.

It would be recalled that prices of coffee globally decreased in July 2018 iindicating a fall of 4 per cent to $110.54.

According to analysis, this has resulted in some major exporters staying away from the market.

VON

Member countries of the East African Community are preparing to simultaneously table the 2018-2019 Budgets in their respective parliaments. In Uganda, finance minister Matia Kasaija will present a 30.9 trillion Uganda shilling (USD$8 billion) budget. Sarah Logan examines the economic context of Uganda’s annual budget and the associated challenges.
 
What is the context in which this year’s budget is being tabled?
 
The Ugandan government is facing pressure to deliver on many fronts. Economic growth slowed in recent years, averaging 4.5% in the five years to 2016. That’s down from an average of 7.8% in the previous five year period. Curtailed growth was due to lower commodity prices. Uganda’s main commodity exports of coffee, cotton and copper all experienced diminished world prices.
 
Other contributing factors were an increased incidence of drought and the conflict in neighbouring South Sudan, Uganda’s main export trade partner. Relatively high population growth, averaging 3.4% in the five years to 2016, eroded much of the gains from economic growth in recent years, resulting in declining GDP per capita and increased poverty.
 
Constraints to growth and productivity remain notable, particularly in agriculture and manufacturing. These sectors are hampered by infrastructure gaps, high interest rates that have made borrowing expensive, and difficulties accessing high quality inputs. These constraints have had a marked impact on micro, small, and medium enterprises, which constitute 93.5% of Ugandan firms. Such limitations pose obstacles to achieving production at scale, which is needed for firm growth.
 
In recent budgets, the government has significantly raised investment in public infrastructure (notably in transport, works, and energy) to address these constraints. It’s also tried to cater for relatively rapid urbanisation. But long project timescales, poor project selection and execution, and absorptive capacity constraints mean that maximum gains from these investments have not been realised.
 
These investments have also necessitated greater government spending in recent years, financed by increased borrowing from both domestic and external sources. As a result government debt has grown to 38.6% of GDP, up from 19.2% in 2009. But debt remains within the confines of what is considered sustainable.
 
What are the most challenging factors heading into this budget?
 
Working out the right balance between investing in infrastructure and social sectors is a key challenge. While more spending on infrastructure development is vital, it has necessitated budget cuts to arguably already underfunded social sectors, including health and education. But the right balance cannot be judged on budget allocations alone: these figures don’t take into account off-budget financing, which is common in social sectors.
 
International targets (where they exist) are also of limited value in guiding allocations as spending needs vary across countries and over time.
 
Another key challenge is how to fund the budget. The National Budget Framework Paper envisions both external and domestic borrowing, as well as the use of domestic tax and non-tax revenues. Government’s domestic borrowing has contributed to raising interest rates, making borrowing more expensive.
 
Consequently, a growing portion of government spending now goes on servicing its debt obligations, estimated at 12.3% of total revenues for 2018/19. In time, this figure should be lowered, thus opening up funds for spending on development priorities.
 
Domestic tax and non-tax revenues are generally a preferred source of budget funding as they do not incur debt. The contribution from these sources is expected to rise to 53% through anticipated improvements to tax administration and compliance. This is a positive sign.
 
What policy highlights would you want to see and why?
 
Continued investment in energy and infrastructure should be pursued, but it is necessary to improve the efficiency of these public investments. For example, up to 60% of the works and transport budget was reportedly not spent.
 
The government has recognised in its National Budget Framework Paper that issues around under-execution of development projects need to be addressed and it is working on ways to better allocate funds based on absorptive capacity. The government is also cognisant of the need to provide funds to cover operations and maintenance costs in coming years to slow infrastructure deterioration.
 
The government has acknowledged the need to raise the country’s tax to GDP ratio, which at 13.5% is relatively low. The Uganda Revenue Authority is exploring several avenues to improve tax administration and compliance.
 
More could be done to expand the tax base and minimise distortions through, for example, greater focus on value added tax – one of the more progressive tax instruments – rather than import tariffs. Imports are vital as inputs for manufacturing, and restrictions on imports reduce firms’ productivity and competitiveness.
 
Rwanda’s experience with raising value added tax through mandatory usage of electronic billing machines is valuable in this regard.
 
How are Uganda’s growth prospects looking?
 
In coming years, GDP growth is set to accelerate as recent and ongoing public investments begin to yield returns.
 
Credit: The Conversation
Image 20170308 24204 krgyz0
Drying coffee beans in Bugitimwa village, in the area of Mt. Elgon, eastern Uganda. Shutterstock

Astrid R.N. Haas, International Growth Centre

Until recently Vietnam and Uganda shared a similar trajectory in the development of their coffee sectors. Today, Vietnam has emerged as the second largest coffee producer in the world. In Uganda, poor agricultural inputs and a failing institutional environment have resulted in low yields and slower development of the sector.

In January 2017, world coffee exports already amounted to 9.84 million bags. As one of the most extensively traded agricultural commodities, coffee trade has an interesting structure given the fact that it is exclusively produced in developing and emerging markets. In fact, it’s estimated that 25 million small holder farmers are responsible for 80% of overall coffee production. But nearly all the 2.25 billion cups of coffee consumed every day are drunk in the developed world.

In the 1980s, Uganda was one of the largest exporters of coffee, responsible for about 2% of the world’s coffee supplies. In 1980 it was producing approximately 2.1 million bags compared to Vietnam’s 77 thousand bags. At this time Vietnam hardly exported any of its produce.

Now the tables have turned. Vietnam is one of the world’s top coffee exporters, accounting for over 18% of global coffee exports, while Uganda’s has stagnated to between 2% and 3%.

What’s interesting is that since the 1980s the development of the sectors in both countries followed similar trajectories – from heavy regulation through various policy reforms in the 1990s, to being relatively deregulated today.

But one fundamental difference stands out – productivity. Vietnam has far outperformed Uganda over the past two decades due to its levels of productivity. This is down to the use of agricultural inputs for production, particularly the quality and quantity of fertiliser and machinery.

Uganda’s low yields

Coffee has been an important export for Uganda since it was introduced to the country in the 1900s. In 2015 it contributed 17.76% of Uganda’s total value of exports.

The Coffee Marketing Board, established in 1930 to regulate the coffee sector, steadily gained powers until it eventually held a state monopoly over the coffee industry following Uganda’s independence in 1962.

Between independence and the early 1990s the heavily regulated industry faced numerous challenges as a result of poor governance. It was eventually dismantled in the 1980s and 1990s and the sector became fully liberalised.

Today the coffee industry in Uganda is dominated by a large number of smallholder farmers, each with about 0.5 - 2.5 hectares of land. It’s estimated that about 1.7 million households are engaged in coffee production. In 2010 this amounted to a total of around 182,875 hectares under production, compared to 549,100 hectares in Vietnam. Middlemen are needed to collect the small quantities of coffee produced by the multitude of farmers.

The large number of smallholder farmers is not a problem in itself. The challenge is that they produce very low yields per hectare. This coupled with relatively high transportation and processing costs are the main reasons that Uganda’s coffee production has stagnated.

Vietnam’s rise

Like Uganda, 85%-90% of the coffee in Vietnam is produced by smallholder farmers, who had 670,000 hectares of agricultural land under coffee production in 2015. Today, Vietnam is the second largest coffee producer after Brazil, producing 27.5 million bags of coffee in the 2015/16planting season. Since 2007, coffee has become the country’s second largest source of export revenue.

Coffee was first introduced to Vietnam in 1857. It took until 1989 for increased production and regular trade in coffee to take off. Like Uganda, the increase in Vietnamese coffee production also followed the implementation of policies and reforms that liberalised the sector. For example, reform of land administration meant stronger property rights, allowing individual producers to own the titles to their land.

In addition, progressive dismantling of state-owned enterprises broke up the monopoly on agricultural trade.

And Vietnam put in place a number of interventions to address productivity levels. This resulted in Vietnam’s agricultural production being far more capital and input intensive than Uganda’s resulting in higher yields per hectare. For example, in the 2005/2006 planting season, Vietnam had 257 tractors per square kilometre of arable land, compared to Uganda’s 9.

Equally important is fertiliser use. For the years that data is available, it appears that Vietnam was using 300 times more fertiliser than Uganda, per hectare of arable land. Fertiliser use has a significant impact on the yield per hectare.

For its part, Ugandan productivity has been poor. Uganda’s 2008 agricultural census shows that the yield gap from low input use in the coffee sector amounts to 2734kg/hectare. This means that on average, farmers are producing 396kg/hectare when they could be producing 3130kg/hectare.

Determining quality

This phenomenon of low input use isn’t confined to Uganda’s coffee sector. It’s a systemic feature of Uganda’s agricultural sector at large. For example, recent research on maize inputs showed major shortfalls in quality. The findings showed that 30% of nutrients were missing from fertiliser, and hybrid seed contained less than 50% of authentic material at retail level.

Although no similar study has been conducted for the Ugandan coffee sector, there are numerous examples that can be used as reference, particularly since the introduction of new higher yielding varieties of coffee plants. For example, in 1992 the government launched a national coffee replanting programme to replace old coffee trees with newer, higher yielding varieties. The programme was ended in 2004 due to the low survival rate of the plantlets.

Uganda’s untapped potential

There are, of course, other theories and reasons that further compound the differences between the two countries. One is that Vietnam is deemed to have a far more conducive environment for setting up businesses than Uganda. And the Vietnamese government’s assistance to the agricultural sector since the 1990s has been more supportive, helping the coffee sector withstand negative shocks due to weather and price volatility than has been the case in Uganda.

Notwithstanding these differences, the success of Vietnam’s coffee sector hints at the untapped potential that lies in Uganda’s coffee industry. To achieve similar growth, it’s imperative to improve productivity via increased and improved agricultural inputs, fostering a supportive business environment and adopting newer technologies for smallholder farmers.

Astrid R.N. Haas, Senior Country Economist, International Growth Centre

This article was originally published on The Conversation. Read the original article.

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