Fellow countrymen, greetings and felicitations for the New Year. I hope you all had a Merry Christmas and Idd Adhuha. The year 2006 has been an engaging and challenging period. We have, however, made a number of achievements:

The successful elections under the multi-party political dispensation and the eventual victory of the NRM party;
The discovery of petroleum in Uganda;
Progress has been registered in ending the Kony terrorism in Northern Uganda.

However, we have also been faced with challenges like energy; as well as the need to launch the Prosperity for all (Bonna Bagaggawale) scheme, which we intend to focus on in 2007 as elaborated in my speech.

Overview of the Economy
Our economy performed well over the past year, in spite of the slower growth in agricultural production as a result of the poor weather conditions.

In the last financial year (the year ending June, 2006) real Gross Domestic Product (GDP) grew by 5.4 per cent, as stronger growth in the Services sector (9.2 %) and Industrial output sector (4.5%) more than offset the slower growth in agricultural production, which arose as a result of inadequate and sometimes unevenly distributed rains. Within the industrial sector, construction (13.7%), as well as mining and quarrying registered exceptionally well. This, as already said above, was complemented by strong service sector (9.2%) performances in the areas of transport, communications (20.7%), as well as hotel and restaurant services (21.8%).

On account of the strong performance by industry and services, the share of agriculture in GDP dropped to 34 per cent last year from the previous level of 35.6 per cent, while services and industry increased as shares of GDP to 45.5 per cent and 20.5 per cent, respectively. These shifts constitute the continued process of structural transformation of our economy, as we strive to move away from subsistence-based agriculture to a mixture of commercial agriculture, services and industry.
We expect agricultural commercialisation to increase agricultural productivity and value-addition and raise farmers' incomes.

This will free up labour for use in other sectors of the economy and stimulate demand for non-agricultural goods and services, continuing the shift in the pattern of production over-time.

Inflation
Nonetheless, there have been concerns, and rightly so, that the growth of our economy has somewhat slowed over the last few years, as the average real economic growth rate between 2000/01 and 2005/06 was 5.6 per cent per annum, as compared to 6.6 per cent between 1995/96 and 1999/2000.

In order to achieve our overall long-term objective of reducing to 10 per cent the number of people living in absolute poverty by the year 2017, there is need to restore growth in the medium to long-term to an average rate of 7 per cent per annum.

To this end, Government will continue to ensure that:
Bureaucratic barriers to investment are minimised;
Continued improvement in transport infrastructure and utility services;
Modernization and commercialisation of agriculture by encouraging rural populations to move from mere subsistence farming and move to commercial farming as well as laying emphasis on value-addition;
Improve rural access to finance and to strengthen Small and Medium Scale Enterprise (SME) development;
Enhancement of environmental sustainability;
Security in Northern Uganda and Karamoja is restored.
These actions need to be undertaken within an environment of continuing macroeconomic stability.
High inflation is detrimental to growth as it generates uncertainty in the economy, reducing investment, output and employment and leading to an increase in the incidence of poverty. Consequently, the control of inflation remains the cornerstone of our macroeconomic management.

On account of the high and volatile international oil prices, coupled with high food crop prices, annual inflation last financial year rose above the 5 per cent per annum target and has remained above for the first five months of this financial year. 

While international oil prices have recently reduced, the increase in utility prices - notably energy and water - as well as the high food prices in the economy - have kept annual inflation rates high (9.2%).

The heavy rains experienced in most parts of the country, although most welcome, have affected the transportation of farm produce to the markets, which, in turn, has resulted in increased food crop prices.   The level of annual inflation, over the next year, is nevertheless expected to subside as utility prices stabilise and weather conditions improve.

The exchange rate of the Shilling to the dollar remained relatively stable in the last year but the shilling has recently gained in strength compared to the dollar. The increase of the strength of the shilling (appreciation) has been largely due to stronger export earnings - notably from coffee exports, as well as investment inflows to the recently announced share offers by one of the financial institutions in the country. The monthly average exchange rate appreciated by 25 shillings or 1.3 per cent as compared to October, as dollar supply exceeded demand. The average rate during November was sh1,819 to a dollar as compared to the October average of sh1,843.

Export performance
Our export performance has continued to improve in the last year. Total exports of goods and services grew by 19 per cent to US$1,395 million or an equivalent of 15 per cent of GDP, as the Government's strategy to promote export diversification has started to bear fruit.

Non-coffee exports accounted for 81 per cent of total goods exports. The challenge that remains in order to further improve on our export earnings is adding value to our exports.

This will be achieved through improving the quality and branding of our products so that they access premium niche markets, such as the market for organic coffee, or by adding value to our raw materials through processing. For example, we can spin our organic cotton into high quality yarn for use in the production of designer clothing, or we can process our fish skins for use in the production of designer accessories, such as bags, shoes, etc.

These efforts, on their own, are not sufficient to ensure strong economic growth and poverty reduction. We also need to have markets for our products. Somebody must buy what we produce. In this regard, the establishment of the East African Customs Union was the first step towards a common East African market that will boast of over 110 million people. We expect the East African Customs Union to boost production in the medium to long-term, as domestic producers benefit from duty free imports from within the Union and produce for a larger internal market. The integration will open up bigger market opportunities for our agricultural produce (processed and non-processed) and also improve on the diversity of products available to consumers within our common borders.

We also expect the union to provide a stronger platform for joint negotiations for preferential access to global markets and fight against tariff escalation for processed goods.  Unity of East Africa will enable us to have a stronger voice in the world.  As I have always said in several fora, "trade and not aid" is the key to economic success, it is the key to social transformation and poverty eradication.  Uganda is no exception to this rule.  

Meanwhile, I want to remind Ugandans that through our efforts, supported by some brothers and sisters in the USA, we have already won zero-tariff, quota-free access to the USA market. 

We also won the same access to European Union (EU) market and the access, recently, to the Chinese market.  This is a great opportunity for Uganda.
It is a gold mine to export, at zero tax rate and without any limit as to the quantities, to the huge US market of US $11,000 billion. The whole of the African market is only US $ 550 billion.  Therefore, the political class, the bureaucrats and the Uganda business class should know this and take advantage of it.

Social welfare
As a Government, we are proud of the significant gains that have been made in recent years in reducing poverty in the country and improving the population's access to basic services. These achievements have registered, the fact that the number of households that we are serving has increased from 4.2 million to 5.2 million between 1999 and 2006 - an increase of one million households - notwithstanding.
This greater number of households had to be clothed, fed, treated and educated.

The 2006 Household Survey results show that the proportion of Ugandans who are able to meet their basic needs (such as food, medicine, water and housing) has increased from 62 percent that was recorded in 2002/2003 to 69 percent now. The change is even more fundamental when you reflect back to where we are coming from when the proportion of the population above the poverty line was 44 percent in 1992.  

In simple terms, for every ten people, seven Ugandans are able to purchase their basic needs compared to only four in 1992. This is, indeed, a remarkable achievement for the National Resistance Movement and the Government as a whole.

This progress has translated into improvements in welfare at household level. Monthly household expenditure on basic items and household assets has increased from about sh130,000 in 2002/2003 to over sh150,000 in 2005/06, the change being more observable in the rural areas where the majority of the Ugandans live. The additional sh20,000 that households have, can now enable two additional members of the household to access Malaria treatment in a typical village.

There are several factors that explain this positive movement out of poverty and general improvement in household welfare across the country:

Coffee prices
International coffee prices have increased from an average of 56 US cents per kilo in 2002/03 to about US$ 1.5 per kilo in 2005/06 which has provided an incentive for increased production and exports by our farmers. More than three million farmers depend heavily on coffee as a major income source. This upward trend in the coffee prices has definitely led to increase in their incomes and of those who indirectly depend on the coffee sub-sector including the processors and exporters.

Although we have seen a large number of people getting out of poverty, there have been some consumption problems:

Sugar prices
During the last month or so there has been a sudden rise of the price of sugar from sh1,500 per kilogramme to between sh2,500 sh3,000 per kilogramme.  This is attributed to both exogenous and endogenous factors:

The main endogenous factor was the temporary closure of Kinyara sugar factory for maintenance.  It is now open. However, the major factors are the exogenous ones. These are, mainly, two: the big and new market in Southern Sudan as well as Congo and the higher international sugar prices caused by Brazil deciding to convert their sugar into fuel in the form of ethanol. This has caused the tonne of sugar, internationally, to go from US $280 to $480. 

Otherwise, the sugar production in Uganda has not declined significantly in spite of some local problems such as too much rain reducing the sugar content in the cane.
Last year the production of sugar in Uganda was 193,000 tonnes.

By September this year, the production had reached 147,000 tonnes. The answer, therefore, is to increase production so as to take advantage of the new opportunities such as Southern Sudan.

We are, therefore, planning to build another sugar factory in Gulu district and another one in Sango Bay in Rakai. These difficulties are actually opportunities not problems in the medium term.

NAADS
The Government has been implementing the National Agricultural Advisory Services (NAADS) since 2001 to improve farmers' access to advisory services to enable them adopt profitable technologies and management practices.

So far, we have been able to cover 346 sub-counties in 49 districts. There is evidence of increased productivity and household incomes in areas where NAADS is functional when compared to areas where the programme is yet to be implemented. For example, in Manibe sub-county in Arua district, farmers have realised a five-fold increase in yield as a result of planting improved groundnut varieties - Serenut 2 and 3. In Mukono, over 100 farmers have gone into production of upland rice after a huge harvest of 2000kg per acre in one season. Government plans to roll out the NAADS programme to the rest of the country over the coming years.

After cabinet has sat in January 2007 and approved the Bonna Bagaggawale scheme, we shall be able to advise farmers to maximize returns from their small bibanja, using the production models like those of Mr. Nyombi of Mityana or Mrs. Kiiza of Masaka. This is the ability to use small pieces of land to earn high incomes.

Rural financial services
The increased transfer and improved access to credit under the rural micro-finance scheme has had a positive impact on household incomes and expenditures in the last two to three years.

Results from the National Household Survey conducted recently show that households that had access to transfers and credit were less poor than those, which had not got access to trade.
Most of the borrowed funds were used to expand non-agricultural enterprises, education and health expenses in addition to consumption of goods and services.

It is Government's intention to expand outreach of financial services especially in the rural areas to consolidate the gains that have been realised so far. Under the Bonna Bagaggawale programme, Government is facilitating the establishment of one SACCO in every sub-county where they don't exist and linking the existing ones to Post Bank Uganda. The SACCOs will be the main mechanism through which financial services are channelled to the remote rural areas at reasonable interest rates of nine (9) percent for agriculture to the SACCO and 13 percent for commercial activities. The Government will also use other banks to disburse the funds as long as they adhere to our guidelines.

Peace in Northern Uganda
The peace prospects that started to prevail in Northern Uganda after the UPDF gained the upper hand, followed, eventually by cessation of operations, have created opportunities for resumption of social and economic activities in the region.

This has made it possible for the internally-displaced people to return back to their areas of origin.  At the same time, local governments and development agencies have intensified the emergency and development interventions that have led to improvements in people's lives. All these efforts must be sustained and supported so as to increase outreach.

To this end, Government has prioritized the implementation of the Peace, Recovery and Development Plan for Northern Uganda (PRDP) as a way of deepening service delivery and spurning development in Northern Uganda and the neighbouring districts. Strategic interventions will be undertaken over the medium term in four key areas namely:
Consolidation of state authority involving the cessation of armed hostilities, re-establishing the rule of law, protection of human rights and strengthening local governance and expanding the road density in the area as insurance against any future wrong elements;
Rebuilding and empowering communities through improvement in conditions and quality of life in the IDP camps while facilitating the return and re-integration of the displaced populations;
Revitalization of the economy by paying special attention to re-activating and strengthening production, marketing, processing and services;
Peace building and reconciliation between the victims and perpetrators of the crimes.

Education
After 10 years of implementing the Universal Primary Education programme, 7.2 million children are now accessing primary education, which has contributed greatly to literacy and human development in the country. In order to enhance the quality of education, Government has continued to improve the terms and conditions of service of primary school teachers.

Primary teachers' salaries were increased from sh150,000 to sh200,000 per month in this year's budget. In addition, hardship allowance amounting to sh330 million was paid to 847 teachers to enhance teaching in hard to reach areas such as the Buvuma Islands of Mukono and Karamoja region. The primary curriculum was reviewed with a view  of putting in place a thematic curriculum for lower primary with emphasis on numeracy, literacy and life skills.

A total of 126,227 teachers had accessed the payroll by June 2006. This brings the pupil-teacher ratio to 52:1. 

The stock of textbooks in schools was raised to 12.3 million from 11.1 million in the previous financial year (2004/05), while the number of classrooms also increased from 79,499 in 2004/05 to 82,165 in 2005/06.  As a consequence of these measures, numeracy and literacy has generally improved in primary schools. 

The challenge now is to ensure that these children are able to complete primary seven and are able to access secondary education and other skills training that will enable them earn a living in future.

Bursary scheme
Another important development that has benefited poor families is the introduction of the Bursary Scheme. A total of 47,000 students benefited from the bursary scheme that contributes sh 47,000 as school fees for children whose parents live in IDP camps in war-ravaged areas and sh3b has been availed over the financial year for this purpose. In addition, a total of 5,500 students benefited from the bursary scheme for the needy bright students in secondary schools.

Government introduced this scheme three years ago, with two students being nominated every year from all sub-counties at a cost of sh 270,000 per student, per year.

Health
There is now clear evidence that Government's universal primary health care policy and the recent reforms within the health sector have brought about a significant expansion in the usage of the health system.   The proportion of poor people seeking health care from public health facilities has almost doubled in the last five years. Immunisation coverage has increased dramatically leading to a marked reduction in the incidence of immunizable diseases.
There has been a progressive improvement in provision of basic medicines and health supplies at the various levels of the health system with particular focus on the primary health care level.

The budget allocated to procurement of drugs has more than doubled in the last few years at central and local government levels. About 68 percent of the approved staff positions have been filled by appropriately trained health workers such as doctors, nursing assistants and theatre assistants. The provision of ARVs has reduced the ravages of HIV/AIDS and prolonged peoples lives.

However, despite these interventions, ill health continues to be a major challenge to the country. We all need to work together to ensure that we improve hygiene and sanitation around our homes and villages to prevent the incidence of Malaria, as well as other sicknesses caused by poor hygiene which is rampant. The fight against HIV/AIDS must continue aggressively and we shall continue to support the affected and infected.

Water
The increased access to safe water by households, communities and institutions in Uganda has played a significant role in improving health and hygiene and institutional performance. More than half of the communities in rural and urban areas now have access to clean water for household use. During the financial year 2005/06, the Government provided new improved water sources to an estimated 562,795 people in the rural areas. The NGOs too provided improved water sources to an additional 113,420 people.

As Government continues to decongest the camps in the North and facilitate the resettlement of the internally displaced, efforts have continued to ensure that those who are still displaced in camps have safe water within easy reach.
At least 75 per cent to 90 per cent of the Internally Displaced Persons (IDPs) in the six most affected districts of Adjumani, Gulu, Kitgum, Pader, Lira and Apac have access to safe drinking water.

Decentralisation
It has been possible to expand outreach of services to even the remotest parts of the country because of the decentralised approach to service delivery. Through the Local Government structures, all Ugandans are able to participate in the development and decision-making processes which has had a major benefit of ensuring that the services that are being delivered are relevant to the needs of the different sections of the population. 

Democratic governance has helped in entrenching constitutionalism and the rule of law that we shall continue to uphold and deepen in the coming years.

Key Priority Areas

Roads
It is an undisputable fact that road infrastructure is critical for the development of the country in terms of connecting communities to internal and external markets, facilitating transportation of and access to goods and services and promoting information flow, among many other benefits.

Thus, the Government has invested over US$ 100 million annually into road development and maintenance since 1996. However, despite this huge investment, severe challenges remain in the maintenance and development of the road infrastructure. The budget for national road maintenance has stagnated at about US$ 40 million annually over the last five years, which is almost 50 per cent below the required level of US$ 70 million annually. The current allocation for district and urban roads is about US$ 12 million, far less than the required level of US$ 30 million annually. 

As a consequence, it is only about 60 per cent of the total road network that is in fair to good condition, with the rest having deteriorated especially during the severe weather conditions. That is why it is important for public service to be frugal and not misuse money so that we focus on production and infrastructure.

In order to address these challenges, the Government will soon table the Uganda Roads Fund Bill 2006 to Parliament that seeks to establish a National Road Fund that would finance routine and periodic maintenance of public roads in the country and the Uganda Road Fund Agency to manage the fund and create a conducive environment for the efficient and effective maintenance the road network.

Universal Secondary Education (USE)
USE is the equitable provision of quality post-primary education and training to all Ugandan students who have successfully completed primary leaving examination. The implementation modality will be:
It will be implemented in phases, starting with only Senior One in February, 2007.
This policy will target those pupils who will complete P7 and qualify in school year 2006.
There are about 750,000 pupils in P6 and 432,218 in P7. If all these transit successfully through P7, the demand for secondary education will increase rapidly in future years. Numbers seeking entry into secondary schools are likely to rise to 250,000 per year.
Double shift teaching is proposed for selected large enrolment schools.
Schools charging more than sh75,000 per term per student will not participate in the USE programme.
USE will cover non-boarding expenses for students enrolling in deserving Government-aided schools enrolling P7 leavers.
This is the reason why Government has prioritized investments into the secondary education sub-sector.

The Government has already trained and re-tooled 307 teachers from the three districts of Tororo, Butaleja and Masaka under the Secondary Science and Mathematics Teachers Project, supported by technical assistance from the Government of Japan.

In addition, 54 laboratories and 13 libraries were constructed and equipped under GoU/ADB funding.
Science materials in form of science kits and basic equipments to carry out experiments were distributed to all the 103 Government-aided schools in war-ravaged areas.

Energy
As a long-run solution to the current energy shortages, construction of new hydropower stations in Bujagali and Karuma is planned to start in February and September 2007, respectively. These activities will be carried out under public-private partnerships. And in order to ensure that the Government's part of the partnership is in place, an Energy Fund has been set up, initially containing sh99.4 billion this financial year. Government will put into the Fund another sh100 billion next financial year and subsequent ones so that by financial year 2011/12, both these hydropower stations, will be operational.

However, in the meantime, Government is also putting in place an energy-loss reduction plan in the power system, and further actions to improve efficiency in energy use and demand are being implemented through, for instance, the importation of energy saving bulbs.  Moreover, support will be given to consumers, both private and commercial, in installing solar-lighting and water-heating systems. The use of bio-gas, improved efficiency stoves to cater for rural energy requirements and production of electricity from municipal waste for sale of power into the grid will be enhanced.

We are also supporting the development of several projects including small hydro power options, co-generation in sugar mills (e.g. the Kakira sugar works project) and biomass-gasification plants that are being developed as public-private partnerships to generate at least 50MW for the grid. Mini-hydro projects will, for instance, electrify areas in Rukungiri, Masindi, and Kibaale.

Water for production
Strategic investment studies estimate that water for production is only 47 per cent of the actual demand. The current water demand for livestock and wildlife is estimated at 27.5 million cubic metres and projected to rise to 30 million cubic metres in 2015. Government will work with the private sector to ensure that more investments are channelled to this area.

Human development
Government will continue investing in the Health and Education sectors to consolidate the gains that have been made.


Fellow Ugandans, I am confident that once we focus on the above issues, 2007 will be an era of social transformation, industrialisation and prosperity in Uganda.

I wish you all a Happy and Prosperous New Year.