Uganda's coffee industry: Understanding the origins of UCDA

In 1986 when the National Resistance Movement captured the apparatus of government, coffee was by far the most important export product of Uganda. 

Coffee had enjoyed this supremacy since the 1950s when it overtook cotton as the most important “cash crop” and export.

By 1986 all other export commodities, such as tea and cotton, had faded and only coffee, which accounted for as much as 95 percent of the country’s export earnings, remained as a viable commodity within the Ugandan economy. In addition to being the most important source of the country’s export earnings, coffee also emerged as a major contributor to government revenue through export taxes.

Given its great economic significance, coffee was synonymous with foreign exchange and enjoyed the same aura and importance as foreign exchange itself. The management of coffee exportation and the initial receipt of foreign exchange from coffee exports were in the hands of the Coffee Marketing Board (CMB). 

In the eyes of the general public, the manager of the CMB was at par with if not slightly more important than the governor of the Bank of Uganda. Together with the secretary of the CMB, the CMB manager had direct access to foreign exchange since money earned from selling coffee abroad was deposited directly into the bank account of the CMB.

This practice gave the manager and members of the board initial access to the hard currency before it was eventually sold to the central bank. As a consequence of this prior access to the export proceeds, the CMB was able to determine how much foreign exchange to transfer to the central bank and when to do so.

The CMB had offices in a number of major cities around the world, the most prominent of which were London and New York. The CMB’s international offices and the residences of its foreign officers were as good, if not better, than those of the embassies of Uganda in those same cities.

In London, for example, the CMB office appeared to have the means to arrange logistics and provide other services to visiting dignitaries more easily than the embassy.

The managers of the board were often on the delegation of the President when he visited foreign capitals. And when the IMF and World Bank missions came to Kampala, one of the first offices they visited was that of the CMB.

But how well did the CMB manage the coffee business? Actually, not very well. Nevertheless, the truth did not emerge until early 1987 when farmers began to destroy their coffee trees and replace them with cassava plants and other crops. It turned out that while a lot of people in Uganda were benefiting from the foreign exchange earned from the export of coffee, the farmers who actually produced the coffee were not beneficiaries at all.

Instead of paying farmers with the funds received from selling the coffee in foreign markets, the CMB gave them so-called IOU chits, which were only a promise to pay in some distant future. In addition to the fact that the IOUs were not interest bearing, the farmers were not assured by the CMB that these IOUs would be honoured when presented for payment.

Nevertheless, farmers held on to the IOUs. But when the CMB took too long to honour its promises and pay them, many farmers opted to get out of the coffee business and invest their resources in other agricultural pursuits. Many of them chose to plant cassava and other crops, which could easily be sold in local markets for cash.

Alarmed by the pending demise of what was the only remaining source of foreign exchange earnings, the government decided to take immediate action to remedy the situation. It ordered the Bank of Uganda to intervene and pay farmers the money owed them by the CMB.

The central bank sent officials to the fields to begin the process of honouring the CMB’s promises to the farmers, as well as to pay cash to farmers who had coffee to sell. In fact, the governor of the central bank personally supervised this process as a way of assuring farmers that the government was serious about resolving their problems and making certain that coffee remained a viable export crop in Uganda.

The central bank was now performing a job that was supposed to be within the purview of the CMB, a state of affairs that could not be maintained for long. For one thing, the central bank was not in the business of marketing export crops; its primary function was to carry out monetary policy, and this activity was not part of that mission.

Of course, it was the CMB’s inability to manage its finances that created this emergency. Ideally, the CMB purchased coffee from farmers on credit, sold it abroad for cash, then sold the foreign exchange earned to the central bank, and used the proceeds of that sale (which was in Ugandan shillings) to pay farmers.

The process, though simple, ran into problems because the management of the CMB usually preferred to keep the foreign exchange earned from the export of coffee instead of proceeding directly to the central bank to secure the Ugandan Shillings needed to pay farmers. In the process, some of the export earnings were misappropriated, resulting in delays and, worse, failure to pay farmers for their coffee.

There was an alternative method to deal with coffee exports, one that many Ugandans believed could eliminate the problems that were threatening to derail the country’s coffee market. The alternative system called for the CMB to secure funds from other sources (for example, a loan from a commercial bank) and pay farmers cash for their coffee up front, then sell the crops abroad and repay the lenders after exchanging the foreign currency for Ugandan Shillings at the central bank.

This borrowing from the domestic financial sector was popularly termed crop finance. The amount required to buy the coffee, however, was so great that it became Uganda’s number one macroeconomic problem.

Although it was clear that the amount of money required to purchase coffee from farmers was quite significant, no one at the time knew exactly how much money would be needed. This was due to the fact that there were no accurate figures on per-season coffee production.

The main coffee season in Uganda ran from September to December, and the minor season was in May and June of each year. Before the coffee season began, the Minister of Finance, Bank of Uganda, CMB, IMF, and commercial banks would make a joint effort to find crop finance.

Each commercial bank would announce how much credit it was able and willing to provide. Whatever the bank provided was guaranteed by the government and the Ministry of Finance. The agreed amount would then be allocated and transferred to the CMB to go to the rural areas and to the stores of the cooperative unions to buy the coffee.

The process of determining the credit required by the CMB to purchase coffee from farmers was complex and severely taxed the meetings among the financial decision makers consisting mainly of officials from the Ministry of Finance, the Bank of Uganda, the CMB and the major commercial banks. 

At this point of time in Uganda’s economic development, we simply did not have the tools and know-how to accurately forecast coffee production statistics. Nor were we in a position to determine accurately the macroeconomic impact of the coffee financing programme.

There was still a critical shortage of skilled manpower in virtually all parts of the economy, and the NRM administration had not yet been able to restore many of the institutions responsible for the gathering of agricultural statistics and the regulation of the state-owned enterprises. In fact, when the central bank ventured into the field to pay farmers, there still were no institutional safeguards to ensure accountability and to make certain that there was no abuse of discretion.

From: Advancing the Ugandan Economy-A Personal Account by Ezra Suruma (Brookings Institution, Washington DC, 2014).