NATIONALIZATION IN UGANDA: PROGRESS AND EFFECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600040025-0
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: December 12, 2016
• Document Release Date: March 7, 2002
• Sequence Number: 25
• Publication Date: February 1, 1971
• Content Type: IM

i&RoP1rV5 6f*o* L L.j Ar1. .L 0_LV I LV ,L/ ~'LZ A J-) 1-1
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Nationalization In Uganda: Progress And Effects
Confidential
ER IM 71-24
February 1971
Copy No. 43
Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
WARNING
This document contains information affecting (lie national
clefense of the United States, within the mcanimg of Title
16, sections 793 and 191, of the US Code, as amended,
Its transmission or r(?velation of its contents to or re-
ceil)t by an u11aUthori7cd 9('rsoll is prohibited by law.
Gdu~i.-t h?- o~iom5dc
----_ pr Ic,a Cc nn
Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
February 1971
Introduction
On 1 May 1970, Uganda announced its decision to
acquire 60% ownership of all commercial banks and
the most important private companies in manufac-
turing, mining, plantation agriculture, and trans-
portation. At the same time, trade was national-
ized completely, and measures were announced to
limit the business activities of foreigners and
to replace immigrant labor with Ugandans as
rapidly as possible. In general, partnership agree-
ments with the government have been accepted by the
foreign companies involved. The move against non-
citizen immigrant labor, however, has aggravated un-
employment problems in the neighboring East African
countries and sensational newspaper accounts have
created popular resentment over the manner in which
it has been carried out.
The overthrow of President Obote on 25 January
coincided with late stages of negotiations re-
garding nationalization procedures. Although the
new military leaders included complaints about high
taxes, rising consumer prices, and a growing class
of wealthy rulers among their justifications for
the coup, they have not objected to the national-
ization measures themselves. This memorandum pre-
sents the background and progress of the Ugandan
nationalization to date and assesses the economic
implications of nationalization and related poli-
cies for Uganda and the East African Community.
Note: This memorandum was prepared by the Office
of Economic Research and coordinated within the
Directorate of Intelligence.
Approved For Release 200gM,IVI0K-NMJ 0875 R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
CONFIDENTIAL
Background
1. During 1970, Uganda introduced measures to
increase state control over nearly all economic
activity and to exclude foreigners from the mone-
tary economy. In early May 1970, Kampala passed a
series of legislative acts authorizing the govern-
ment to acquire a 60% interest in the share capital
of all oil, insurance, and bus companies; the banks;
the Kilembe copper mine; and all important planta-
tions and industries. The government was also given
control of all import and export activities. Among
the companies affected were 84 private enterprises,
of which 24 were foreign owned. Uganda would in-
demnify the companies out of future profits within
15 years. Measures also were passed to limit many
business activities to Ugandan citizens and to pro-
vide for the progressive exclusion of noncitizens
from gainful employment in certain geographic
areas. The executive branch was directed to review
its policies concerning immigrant laborers for the
purpose of limiting the number.
2. In a related move, Kampala imposed temporary
controls on payments between Uganda and its two
partners in the East African Community, Kenya and
Tanzania (see the map). Currency movements were
restricted, and all Ugandan currency held outside
the country was declared inconvertible. In
announcing these measures, the Ugandan authorities
stated that the controls would be removed as soon
as feasible and that their sole purpose was to
prevent capital flight.
3. Prior to nationalization, government par-
ticipation in the economy mainly involved invest-
ments in certain manufacturing and mining enter-
prises by the government-owned Uganda Development
Corporation (UDC). UDC's primary role was to
provide funds when private money was either not
available or inadequate. The Corporation exercised
relatively lii.tle control over the economy. As in
the majority of the less developed countries in
Africa, most economic activity in Uganda is in
agriculture, which produces nearly 60% of the gross
domestic product and 75% of export earnings and
supports 90% of the population. Government partici-
pation in agriculture has been limited mainly to
- 2 -
Approved For Release 2 biY2W 4 00875 R001600040025-0
 Approved For Release 200211 5 If Mt75ROO1600040025-0
S U D A N
UGANDA
Int' 'niI;onnI
boundary
-?- District boundary
o Ka
o
abon
o National capital
y
p,! K E N Y A
D District capital
~;.
Railroad
W T M A D 1 Kitgum ,i
Road
L E
Arua
~J A C H 0 L I
f.
0 25 50 Mlles
5,0 Its
T
1 \.
Gulu
o
25 50 KII=etes
KARA
-~ ~--?~"
JA
oroto
Pakwach f
I
it
I Lira N
LANG O
DEM RATIC REP BLIC r n ~s / E S
OF 'THE CO GO
Bunla
Masindi
-Sorot`.~
gUNY 0
LA M.
1
Hoima 1'00
.
?-?~...~
~ - 1
T
~`
~ .ItapchorWa
it ~1 f
~
`~'
~
.`
~1.`.
~. ?~ '_, t .
?\S E:6El'
f I1
~J
\`- E ST
I
?
UK
Mbale.
Kitale
.`
ED
BUSOGA~B
MENGO
U,mrS
Fort
`Tororo
N
~
Portal
MUBE
ti?~
D Bombo
B I 0.Mubende Ipanga
\
Eldoret
TOR
O r
Inla
C*
_
) Mltyana
K9M ,( ~..
Butere
), t
WEST M O//~
K E N Y
SESEISLANI~S
ANKOLE' Lyantonde Marka
barara
MdSAKA
~
Kr Zll,~ .;
b
a
T A N Z A N I A
Kyaka ,
Bukoba
Musorria
RWA A
Approved For Release 2002/O9. S d13850875R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
CQNYMENTIAL
efforts at diversification away from the two prin-
cipal cash crops, coffee and cotton, by developing
the livestock industry and expanding such export
crops as tea, tobacco, and sugar.
Progress of Nationalization Measures
4. Despite their initial pessimism, many of
the 84 companies affected have reached agreement,
at least in principle, on partnership with the
government. With the possible exception of the US-
owned Mobil Oil Company, none of the 24 foreign-
owned firms have rejected government participation.
Moreover, except for the petroleum industry, for
which the government has agreed to a 50% share, all
either have accepted or appear to be prepared to
accept the short end of a 60/40 arrangement. The
remaining 60 firms involved are for the most part
locally Asian-owned and have no real choice but to
accede.
5. The government has been relatively flexible
in negotiations with the companies, and consequently
they generally believe they can operate profitably
with government participation. Most either have
been earning good profits, or are about to do so,
and recognize that 40% or 50% of future profits is
still worthwhile. Moreover, some firms, notably
the banks, have recently invested large sums of
capital and hope to recover what they can by con-
tinuing operations.
6. Management of the nationalized companies is
formally vested in the Uganda Development Corpora-
tion, but Uganda does not have the personnel to take
over effective management. Management contracts
are being negotiated so that present management will
continue for 4 to 10 years. The takeover of foreign
trade also is being implemented gradually, depending
on the availability of organizational and manpower
resources.
7. The nationalized firms may also receive
relatively liberal compensation for the assets
taken over by the government. Although the law
calls for payments within 15 years out of future
earnings, the government in most cases has been
willing to negotiate agreements guaranteeing pay-
ments in about half that time. These agreements
CONFIDENTIAL-
Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
 Approved For Release 2002CONFIDENTIAO 75R001600040025-0
also generally guarantee that loan repayments and
future profits will be freely remittable abroad in
convertible currency. The main outstanding issue
is valuation, and a government committee is in the
process of studying the companies' records and
assessing their worth.
The Companies Involved
8. Eight US companies, with a total investment
of about $10 million, are affected. The major com-
panies are Esso, Caltex, and Mobil, whose operations
are limited to marketing; American Life Insurance
Company, which has formed a new general insurance
company, Uganda American Insurance Company, Ltd.
(40% US-owned and 60% Uganda-owned); and three
locally incorporated commercial banks with control-
ling British interest -- National and Grindlays
(40% owned by First National City Bank of New York),
Standard (14% owned by Chase Manhattan), and Bar-
clays (3% owned by Bank of America). In addition,
Interkiln Engineering, Inc. of Houston holds a 17%
($70,000) share in the African Ceramics Company in
which the government is increasing its equity
interest from 55% to 60%.
9. Other major internati.onal firms affected
are owned by Canadian or West European interests.
Chief among them are Kilembe Mines, Ltd., in which
Falconbridge Nickel Mines, Ltd. (Canadian) has a
$13 million equity investment; Agip (Italian), Total.
(French) , Shell (British and Dutch), and BP (BritisL:)
oil companies; Bata Shoe Co. (Canadian); and the
British-American Tobacco Co. (British). Detailed
information on the more important companies involved
and on the progress of negotiations is given in
Table 1.
Nationalization and Regulation of Trade
10. All foreign trade is now vested in the
state-owned Export and Import Corporation, estab-
lished on 26 May 1970 with an authorized capital
of $7 million. The corporation was given the
authority to acquire the holdings of all trading
firms and to carry on most of the trade not already
carried on by the government or by semigovernment
CONFIDENTIAL
Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
Major Foreign-Owned Firms in Uganda, Status of Nationalization
Type of Nationalization
Name of Company Parent Country Business Status Basis
American Life Insurance United States Insurance Accepted 60/40 The first foreign-owned firm to reach an
agreement with the Ugandan government.
A new joint company, Uganda American
Insurance, Ltd., was formed with manage-
ment held by American Life.
acknowledge a previously agreed upon
independent appraisal.
United States
Petroleum
---
50!50
Negotiations nearing completion on all
substantive points.
Mobil
United States
Petroleum
Not accepted
---
Mobil is the smallest oil company in
Uganda and probably will go out of
business rather than participate in a
joint ownership arrangement.
Shell-BP
United Kingdom
Netherlands
Petroleum
Accepted
50/50
Negotiations completed.
Total
France
Petroleum
Accepted
50/50
Negotiations completed.
Agip
Italy
Petroleum
Accepted
50/50
Negotiations completed.
national and Grindlays
United Kingdom
United States
Banking
Accepted
60/40
Valuation completed satisfactorily by
National and Grindlays and Ugandan
valuation committee. General agreement
pending.
Barclays
United Kingdom
United States
Banking
60/40
Negotiations continuing. Major problem
concern methods of valuation.
Standard
United Kingdom
United States
60/40
Negotiations continuing. Barclays and
Standard would merge if they could.
Together they are about the size of
National and Grindlays and through
Caltex United States Pe-__ leum --- 50/50 Negotiations continuing. Unresolved
issues include Uganda's refusal to allow
Caltex to repatriate accumulated
profits earned prior to 1 May and
capital surplus as well as Uganda's
decision to evaluate company's finan-
cial position itself rather than
Approved For Release 2002/03/25 : CIA-RDP85T00875~b$n (yqualize the latter's
ize a vantage.
 Major Foreign-Owned F4.rms in Uganda, Status of Nationalization
(Continued)
Name of Company
Parent Country
Business
Status
Basis
Bank of Baroda, Ltd.
Bank
f I
di
T-.dia
Banking
60/40
These two banks will mer
e
C
o
n
a, Ltd.
India
Banking
60/40
g
.
omplete
agreement with Uganda is probable
Kilembe Mining
Canada
Copper
60/40
after the merger.
Negotiations completed.
Canada
Footwear
60/40
Negotiations continuing on valuation
Uganda Breweries, Ltd.
Kenya
Beer
60/40
methods.
Negotiations completed.
The Uganda Company
United Kingdom
Cotton
60/40
Negotiations completed.
0
British American
Tobacco
Brooke-Bond Uganda Ltd.
United Kingdom
Tobacco
Tea and
60/40
60/40
Negotiations continuing on valuation
methods and duration of compensation
payments.
Negotiations completed
n
0
C
til
z
I
coffee
.
Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
CONFIDENTIAL
institutions.* During the transition period, pri-
vate traders will continue to act as agents of the
corporation. The corporation also will be respon-
sible for the government's export promotion policy.
11. Many Asian traders have been forced to leave
Uganda as a result of the citizen-only status re-
quired for participating in most domestic commerce.
on 1 January 1970, Uganda instituted its Trade
Licensing Act, reserving to citizens the right to
sell specific consumer items and permitting non-
Ugandans to trade only in specified sections of
principal towns. The government is encouraging
Ugandans to engage in trade and to take over the
closed shops of noncitizens. Although little finan-
cial assistance has been made available, gover!.iiaont
officials have traveled throughout the country ex-
plaining the new Act and helping to resolve the
problems of newly established traders and business-
men. The government also is pursuing its Ugandiza-
tion policy through the Immigration Act of 1969,
under which entry permits are issues. to noncitizens
for periods ranging from one to five years, after
which noncitizens will be required to leave.
East African Community Labor Issue
12. Further Ugandization measures are being en-
forced under a government directive requiring all
employers to replace some semiskilled and all un-
skilled foreign labor with Ugandan citizens by
30 September 1971. By the end of 1970, an esti-
mated 12,000 Kenyans, 20,000-25,000 Rwandans, and
an undetermined number of workers from Tanzania and
Burundi had already been dismissed. Still more may
have left the country voluntarily.**
Before May 1970, both domestic trade and imports
were undertaken mainly by private traders, a large
proportion of whom consisted of noncitizens. The
public bodies that were engaged in domestic trade
were the National Trading Corporation (NTC), which
also engaged in import trade, the Produce Marketing
board (PMB), and the Dairy Corporation. Coffee and
cotton, the two main exports, are marketed mainly
through the Coffee Marketing Board and the Lint
Marketing Board. The Produce N.arketing Board markets
tobacco, but other minor crops are exported by private
organizations.
** The total number of foreign workers is not known
but it probably is 80,000 or more.
- 8
(~(~N~` -- ,c~ I~
Approved For Release 20Zf~T03~15I CFA'- ~~85T00875R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
CONFIDENTIAL
13. The move against noncitizen African labor
was intended to reduce Ugandan unemployment and the
drain on foreign exchange reserves caused by foreign
workers repatriating their wages. The annual re-
patriation to Kenya alone probably has been about
$18 million, or about 9% of export earnings. The
foreign workers are concentrated mainly in private
manufacturing, food processi:ig, agriculture, and
construction. Through the years, immigration was
encouraged to alleviate the shortage of unskilled
labor, caused by the reluctance of local Africans
to abandon subsistence agriculture in favor of wage
employment. In recent years, however, the number
of Ugandans seeking paying jobs has increased sub-
stantially, and the domestic unskilled labor pool
now more than meets the country's needs. The foreign
influx has continued, however, encouraged by unem-
ployment in the migrant workers' home countries.
Economic Effects of Nationalization
14. For several years prior to the National-
ization act of 1970, Uganda's economy had grown at
an average of roughly 4% per year, only slightly
greater than the estimated population growth of
about 3.5%. Economic growth fluctuated consider-
ably from year to year, moreover, because of the
sharp variations in export earnings from coffee
and cotton. Current budget surpluses, which have
been an important source of development financing,
declined from about $15 million to $2 million from
1966/67 through 1969/70 -- mainly because of stepped-
up expenditures for education and administrative
services. In the meanwhile, budgeted development
expenditures doubled. The foreign trade surplus
has been declining steadily, and in 1969, only a
sharp increase in net inflow of private capital, re-
sulting from a ruling that commercial banks bring
in funds to meet local incorporation requirements,
maintained the balance-of-payments surplus (see
Table 2).
15. Despite the cautious and reasonable approach
adopted by the government in implementing national-
ization, sharp fluctuations in economic activity
took place during the first nine months of national-
ization. During an initial period of local trade
uncertainties, an abnormal reduction in imports took
Approved For Release 2002/0 : iC1T R&85 A6%hR001600040025-0
 Approved For Release 20Q2(09?.&gAY100875R001600040025-0
Table 2
Uganda: Summary of Balance of Payments
Million US
1967
1968
1969
lance of trade
B
24.9
23.4
17.5
a
Exports
209.3
208.6
211.7
Imports
-184.4
-185.2
-194.2
isibles (net)
I
-35.0
-26.4
-29.1
nv
ital (net)
C
22.7
11.9
33.0
ap
official 14.6
12.1
18.3
Private 8.1
-0.2
14.7
ors and omissions -2.9
E
1.2
-12.0
rr
Change in reserves 9.7
10.1
9.4
aa. Estimate.
place mainly as a result of private traders drawing
down inventories. After several months, however,
shortages of imported goods plus a degree of renewed
confidence in the economy led to a surge of imports.
The merchants are also stocking up in anticipation
of higher prices as imports of specific commodities
are taken over by the government.
16. The government's fiscal position has worsened
seriously. With the loss in customs revenues and
sales taxes as a result of the decline in imports
in May and June 1970, the current budget surplus for
fiscal year 1970* was the lowest ever -- about $2
million. Meanwhile, development budget expendi-
tures continue to grow, so that the overall budget
deficit for fiscal year 1971 is expected to reach a
' The Ugandan fiscal year runs from 1 JuZy of the
previous year through 30 June of the stated year.
Approved For Release 200fe'9 3 FMW- P8;fi'C)'1r875R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
CONFIDENTIAL
record $65 million. Moreover, the government is
faced with large expenditures not included in the
budget, notably about $3 million to finance the
holding of national elections and construction of
a $16 million conference hall and hotel for the
June 1971 summit meeting of the organization of
African Unity. Recently, the government instructed
all ministries to cut expenditures by 20% in fiscal
year 1971.
17. Foreign exchange reserves have fluctuated
widely, reflecting the swings in imports. On
30 September 1970, reserves had climbed to an all-
time high, but by 31 December they had fallen one-
third from $67 million to $44 million. Foreign
exchange reserves, plus Special Drawing Rights of
$5.4 million available since 1970, are the equiva-
lent of slightly more than thre. months' impo.ts.
This level might be acceptable to Uganda were it
not for the present uncertainties. In early
January 1971 the government instructed commercial
banks to tighten credit to the private sector and
especially to importers.
18. The uncertainty over the future of private
enterprise and the role of noncit4.zens could have
far-reaching implications for investment. Private
investors, mostly foreigners, have played an impor-
tant role in the economy, accounting for about 35%
of total investment budgeted under Uganda's two
Five-Year Development Plans (1961-71), and future
investment from these sources may not be forthcoming
without adequate assurances. By itself the applica-
tion of the 60/40 ownership principle may deter
private investment in the future. Compensation has
already placed strains on government funds, and the
lack of governmental financial resources could con-
strain new private investment.
19. Uganda's ability to pay the compensation
bills for the foreign firm:; acquired -- currently
estimated to be between $84 million and $140 mil-
lion -- has become increasingly uncertain. The
original intention, to compensate the firms out of
current profits over a 15-year period, would have
imposed little or no strain on the government. The
present agreement for repayment within five to seven
years, however, will require payments considerably
Approved For Release 200Wr2 : ClA-RDP85T00875R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
CONFIDENTIAL
in excess of p_afits, and the government will have
to uip into the treasury to meet its obligations.
In view of its difficult fiscal situation, the
government, in January 1971, returned to its
original 15-year payment period in its negotiations
with the Standard Bank.
20. Increased participation in .rade by govern-
ment organizations is likely to entail transitional
costs and inefficiencies and result in a rising
cost of living thro cThout much of Uganda. Price
increases reflecting increased costs already have
occurred at the village level because of the decline
of the number of Asian suppliers and the imposition
of the National Tra3ing Corporation (NTC) as an
extra middleman in the distribution of primary
products, such as sugar, locally produced cotton
textiles, and matches. Villagers complain that
prices of items handled by the NTC have risen
sharply and that some of these good; are in short
supply. On 25 January 1971 an army spokesman listed
the lack of basic iecessities and rising prices for
consumer goods amo:.g the justifications for the coup.
Impact of Ugandan Nationalization Measures in East
Africa
21. The series of unilateral actions by Uganda
undermined confidence in and lessened cooperation
among the member countries of the East African
Community, particularly Kenya, to some degree. The
measures restricting the use of Tanzanian and Kenyan
currency in Uganda have generated similar restric-
tions on Ugandan currency in those countries, and
markets along the borders of the three countries
have been disrupted. Thus far, however, intra-
community trade continues at approximately previous
levels.
22. Uganda's restrictions on noncitizen labor
have adversely affected both employment and income
in neighboring African countries. Uganda acted
without consultation and without attempting to
mitigate the effects on its neighbors, and as a
consequence has created an atmosphere of resentment.
Retaliatory measures in kind would have small effect,
however, as relatively few Ugandan laborers work in
these countries. At present, the impact has been
Approved For Release Q2/D'3/25':`CIA_b5T00875RO01600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
CONFIDENTIAL
lessened by the fact that not all employers in
Uganda have complied with the labor directive in
full. In many cases the absence of sufficiently
trained replacements for noncitizens was considered
too damaging to company operations, and foreign
workers have been retained.
Conclusions
23. Uganda has either nationalized or is nego-
tiating the takeover of almost all. of the more
important private businesses, both local and foreign
owned, in the country. In addition, the g,)vernment
has limited sharply the economic activities of non-
citizens and Asians. In 1970, some tens of thousands
of semiskilled and unskilled foreign black workers
were repatriated to neighboring countries and their
jobs filled by black Ugandans. Asian traders and
shopkeepers were harassed, restricted to certain
areas of the larger towns, and finally drive out of
business in large numbers. Their shops and small
businesses were being taken over by local Ugandans
with active government support. The government,
which already controlled most of the export trade,
announced the gradual takeover of all import trade
as well.
24. While foreign black Africans and resident
Asians experienced considerable hardship and finan-
cial loss, the country's economy was largely un-
affected. Most semiskilled and unskilled jobs held
by foreign Africans were easily filled with only a
moderate increase in inefficiency. The displace-
ment of the Asian traders, who dominated the coun-
try's domestic commerce, did result in some disrup-
tions and higher Prices. The government's reasonable
negotiating approach in nationalizing the country's
larger private businesses -- some 84 in all, in-
cluding 24 that were foreign owned -- assured that
their operations continued largely without inter-
ruption. The government's share of the former
private companies was limited to 50% or 60%, and
the former owners were given management contracts
on generous terms to continue running the businesses.
Uganda might well have difficulty in meeting the
Approved For Release 200FWk`0875R001600040025-0
 Approved For Release 2002/03/25 : CIA-RDP85T00875R001600040025-0
CONFIDENTIAL
repayment schedule for the nationalized businesses,
however. Earlier plans to pay for the takeovers
out of profits over 15 years were compressed to an
unrealistic five years or so. This change implies
that some of the payments will have to be made out
of general revenues, which are barely adequate to
meet normal government expenditures.
25. There is no persuasive evidence that eco-
nomic conditions or the nationalization policies
had anything to do with the recent coup, although
high prices and other economic factors were cited
by General Amin as part of the evidence of former
President Obote's mismanagement. Since the national-
ization and ousting of fore'k.gn workers and Asian
traders was generally popular, it is unlikely that
any of these actions will be reversed, although the
pace of implementation may slow, and the terms of
settlement may be more favorable to the companies
concerned.
Approved For Releasec0OD,'PM P: CIA-R4 T00875R001600040025-0