Uganda
2008 Article IV Consultation and Fourth Review Under the Policy Support Instrument: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uganda
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International Monetary Fund
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Publication Date:
05 Mar 2009
eISBN:
9781451838879
Language:
English
Keywords:
ISCR; CR; pose downside risk; Uganda; debt; monetary policy; fiscal year; core inflation; private sector; economic growth; banking system; Inflation; Exchange rates; Real exchange rates; Global
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The staff report for Uganda’s combined 2008 Article IV Consultation and Fourth Review Under the Policy Support Instrument is presented. Building on a foundation of two decades of sound policies, Uganda achieved an impressive economic performance, with high growth, low inflation, and steady poverty reduction. The deteriorating economic environment could expose weaknesses in banks’ risk management practices, gaps in home-host supervisory arrangements, operational risks as financial innovation outpaces banks’ systems and controls, and increasing risk appetite owing to intensifying competition from the surge of new banks.

Abstract

The staff report for Uganda’s combined 2008 Article IV Consultation and Fourth Review Under the Policy Support Instrument is presented. Building on a foundation of two decades of sound policies, Uganda achieved an impressive economic performance, with high growth, low inflation, and steady poverty reduction. The deteriorating economic environment could expose weaknesses in banks’ risk management practices, gaps in home-host supervisory arrangements, operational risks as financial innovation outpaces banks’ systems and controls, and increasing risk appetite owing to intensifying competition from the surge of new banks.

I. Introduction

1. Over the past two decades, Uganda has experienced one of the most impressive economic turnarounds in Africa. The amelioration of conflict kick-started rapid economic growth, which has now been sustained for some 20 years. And the growth momentum has remained strong, with the real economic growth averaging close to 9 percent over the last 5 years. This growth record has likely been made possible by the reduction of macroeconomic imbalances and spread of reasonably well-functioning markets to virtually all parts of the economy. Importantly, growth has contributed to a sharp decline in poverty from 55 percent of the population in 1992/93 to 31 percent in 2005/06.

Figure 1.
Figure 1.

Real GDP Per Capita Growth

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Soure: Country authorities; IMF Staff estimates
Figure 2.
Figure 2.

Percentage of Population Below Poverty Line

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Ugandan authorities

2. This remarkable growth performance, however, has not been accompanied by a significant structural transformation of the economy. Compared with other countries that have experienced such long episodes of sustained growth, Uganda remains more reliant on subsistence agriculture and correspondingly less on high-productivity manufacturing. Staff’s research in this area1 points to the need for greater infrastructure services, more focused government intervention, and improved export competitiveness.

3. The global financial turmoil has hit Uganda as the country was tackling these medium-term challenges, and has caused a greater-than-usual degree of uncertainty for policymakers:

  • What will happen to private capital inflows? In recent years such flows have been buoyant, fueling increased consumption and investment. Foreign direct investment has also become increasingly important in financing infrastructure investment, particularly in the energy sector.

  • Is the impact on Uganda going to be greater because of its open capital account? In October, the shilling depreciated by 20 percent against the U.S. dollar as capital inflows waned and non-resident portfolio investors liquidated some of their holdings.2 This was a steeper fall than most other currencies in the region, and the ensuing volatility has raised the risk premium and complicated investment decisions.

  • Will development partner support be affected? Development partners have so far not reduced their support. However, since one-third of the budget continues to be financed by grants or concessional loans, any future change in support would have important implications for Uganda.

Figure 3.
Figure 3.

Evolution of Capital Inflows and Net International Reserves

(US$ million)

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Ugandan authorities; IMF Staff estimates
Figure 4.
Figure 4.

Exchange Rate of Selected Currencies to the US $

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Thompson Datastream; Ugandan authorities

4. The last Article IV discussions took place in 2006.3 Fund policy advice focused on upgrading Uganda’s infrastructure, expanding revenue collection and improving expenditure management, and calibrating the sterilization mix (see Box 1).

Key Fund Policy Recommendations and Implementation

In line with advice from the Fund and other development partners, the authorities have launched an ambitious three-year infrastructure investment program in 2008/09.

The authorities are following the recommendations aimed at strengthening the Uganda Revenue Authority, although the increases in revenue-to-GDP ratio were revealed to have been smaller than expected following the recent upward revision to the GDP series. Progress in expenditure management remains slow, as underbudgeting and disregard for proper procurement procedures continues to lead to the accumulation of new domestic arrears.

In the face of strong foreign exchange inflows through September 2008, the authorities have been reluctant to adjust the sterilization mix in favor of foreign exchange sales due to concerns about an appreciating exchange rate. They have used foreign exchange sales when market conditions were favorable.

II. Performance Under the PSI

5. Uganda has had a PSI-supported program since early 2006. The program focuses on maintaining macroeconomic stability, alleviating infrastructure deficiencies, deepening the financial sector, and strengthening the business environment. Performance has been broadly in line with program objectives, and all reviews have been successfully concluded.

6. All assessment criteria for the fourth review have been met:

  • Fiscal performance at end-June 2008 was in line with the 2007/08 budget and the program’s objective of gradual fiscal consolidation; the ceiling on net credit to government by the banking system was observed.

  • Net domestic assets were well below the program ceiling due to larger-than-programmed accumulation of net international reserves by the BOU.4 However, the indicative target (ceiling) for base money was exceeded by 6 percent. In recent months, base money has returned to the program path.

  • The indicative targets on spending under the Poverty Action Fund and on the stock of domestic budgetary arrears were observed.

III. Global Turmoil: The Impact on the Ugandan Economy

The Ugandan economy has been resilient to shocks—growth has been sustained for more than 20 years against the backdrop of conflict in neighboring countries, sharp swings in the terms of trade, and unfavorable weather conditions. Would the economy be able to take the severe shocks of the last several months in its stride too? Overall, staff and the authorities agreed that the country was well positioned to do so. While growth would almost certainly slow down, there is no need for exceptional financing. Prudent economic management of recent years—avoiding a procyclical bias in policies and building up reserves for a rainy day—should ensure that Uganda weathers this storm successfully.

7. Even before the recent turmoil in global financial markets, Uganda was affected by the sharp rise in world food and fuel prices. In particular, core inflation was pushed to some 15 percent—a level not observed since the mid-1990s. High inflation also contributed to the sharp real effective appreciation of the shilling observed through September. The mission’s analysis, presented in the selected issues paper, suggests that the pass-though from international food and fuel prices accounts for about 5 percentage points of the increase in the consumer price index.5 This includes both first-round, direct effects as well as the second-round impact on goods and services that are indirectly affected. Increases in world prices for other commodities may have contributed to high domestic inflation as well. The more recent decline in international food and commodity prices should nonetheless help reduce core inflation to around 7 percent by mid-2009.

Figure 5.
Figure 5.

Contribution to Core Inflation

Jan 2007-Oct 2008

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Ugandan authorities; IMF Staff estimates
Figure 6.
Figure 6.

Inflation Rates, January 1994 - Oct. 2008

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Ugandan authorities
Figure 7.
Figure 7.

Effective Exchange Rates

January 2002 - Sept 2008

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Ugandan authorities; IFS

8. The deterioration in the global environment is, at a minimum, expected to moderate growth from its rapid pace of recent years. Staff and the authorities agreed that the transmission channels would likely include:

Figure 8.
Figure 8.

T-Bill Rates, Jan 06 - Oct 08

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Ugandan authorities
Figure 9.
Figure 9.

Nominal Exchange Rates Jan 02 - Oct 08

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Ugandan authorities

  • Private capital inflows—private remittances, foreign direct investment, portfolio flows, and loans—in the next few years are likely to revert back to pre-2006 levels. And lower inflows are going to imply lower investment and consumption.

  • Official inflows—expected to remain broadly unchanged in nominal terms in the short term given multi-year commitment of most donors—would likely decline as a share of the budget and output over the medium term.

  • There would also likely be lower demand for Uganda’s exports from neighboring countries and beyond.

  • The heightened economic uncertainty, including on account of the sharp movements in the exchange rate in October, may also delay investment decisions.

In light of there considerations, staff expects economic growth in 2008/09 to fall to about 7–7½ percent, from an average of 9½ percent during the previous three years. With the turmoil in global financial markets still ongoing, however, the downside risks around this baseline scenario are significant.

9. Uganda’s fiscal and balance of payments positions are also likely to be affected, albeit to a manageable degree. Revenue collection is likely to be somewhat weaker than projected in the budget, continuing a trend that started in the first quarter of 2008/09, although scope remains for further improving tax administration. The impact on the overall fiscal position is likely to be mitigated, however, by delays in the implementation of the ambitious infrastructure projects. The external position is also likely to come under pressure, and export growth is projected to slow down to about 5 percent in 2008/09 as a result of lower growth in trading partner countries.

10. The banking sector appears sound overall, although vulnerabilities exist in some areas. The banks are well-capitalized and there is no indication that they are directly exposed to the toxic debt that has caused havoc elsewhere. At the same time, the rapid expansion of the banking system and the significant share of foreign exchange-denominated assets and liabilities on banks’ balance sheets may present risks. In particular, nonperforming loans have started to increase in nominal terms, although as a result of rapid balance sheet growth they remain modest as a fraction of total assets. Stress tests suggest that credit risk, rather than direct foreign exchange exposure, represents the main risk for the banking system.

IV. Tackling the Crisis: Policies in the Short Term

Given the country’s strong fundamentals, staff called for near-term policies to focus on minimizing undue volatility in the exchange rate and calibrating a measured response to cyclical weakening of revenues.

11. The mission called for monetary policy to sustain confidence in the currency while supporting disinflation. The mission saw merit in targeted intervention in the foreign exchange market to stem unwarranted overshooting of the exchange rate. An increase in regular foreign exchange sales for sterilization purposes would also help to support this objective. The authorities agreed, noting their long-standing policy of only intervening to avoid undue volatility in the exchange rate. The BOU had intervened strongly in recent months, and regular foreign exchange sales for sterilization purposes had also resumed. At the same time, the authorities underlined the need to safeguard reserves in view of the changed outlook for capital inflows.

12. The authorities plan to contain base money growth in 2008/09 well below that in the previous year. While the planned expansion in development expenditure has the potential to increase inflationary pressures, staff and the authorities agreed that the proposed monetary stance should allow twelve-month inflation to decline to 7 percent by June 2009, helped by falling world market prices. The authorities agreed that it was important to seize the opportunity to bring inflation back down toward the medium-term objective of 5 percent.

Figure 10.
Figure 10.

BOU Policy Response, Aug 2006 - Oct 2008

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Ugandan authorities

13. The mission recommended a measured response to cyclical weakening of revenues. The anticipated slowdown in economic activity raises questions about the feasibility of the 2008/09 revenue targets. Indeed, according to the preliminary data for the first quarter of the fiscal year, revenue collection was five percent below target, notwithstanding higher-than-expected inflation. While the precise magnitude of the cyclical component in revenue decline is uncertain, staff felt that cuts to the already-tight current spending levels should be avoided. Besides the risk that further cuts could lead to accumulation of arrears, staff pointed to indications that the capital budget would be underspent as another reason to maintain the current spending profile. The authorities nonetheless felt that the annual nominal revenue target could still be achieved. They noted that in the event of the revenue shortfall spending cuts would be avoided as much as possible, and emphasized that ministries and spending agencies were working hard to ensure that the capital budget would be implemented to the fullest extent possible.6

14. Containing financial sector risks calls for continued vigilance. With most banks foreign-owned, an immediate priority should be to strengthen collaboration and information exchange between the BOU as host supervisor and the home supervisors of banks operating in Uganda. In particular, there is a need to agree on contagion crisis arrangements to ensure that problems in banks’ home countries are not resolved at the expense of the Ugandan subsidiaries. The BOU should also strengthen its risk analysis. In particular, with foreign exchange-denominated loans representing about 30 percent of banks’ loan portfolios, it is important to ensure that they are not exposed to undue risk by strengthening regulations on foreign currency lending to unhedged borrowers. The authorities welcomed the mission’s advice and agreed with most of its recommendations.

V. Maintaining Momentum: Medium-term Outlook and Challenges

The authorities are in the process of preparing a new National Development Plan (NDP), which is expected to sustain the re-orientation of government spending towards improved infrastructure services—most notably, transport and energy infrastructure as well as water for agricultural production. At the same time, the weaker external environment may affect the financing of investment projects, placing additional emphasis on ensuring value for money in public spending. Staff’s analysis suggests that Uganda’s exchange rate is broadly in line with fundamentals.

A. Fiscal performance, infrastructure, and the financial sector

15. Fiscal consolidation has been central to Uganda’s macroeconomic policies in recent years. The authorities, while not adhering to an explicit anchor, have strived to gradually reduce the overall deficit (excluding grants) and avoid domestic borrowing. This was done to reduce donor dependence, encourage private sector development, and ease appreciation pressures on the shilling.

16. This consolidation is set to be temporarily reversed as the government scales up investment to address prominent infrastructure needs (see Box 2). Over the medium term, development expenditure is projected to expand by nearly four percentage points of GDP from the level currently budgeted for 2008/09, and total expenditure to taper off at nearly 22 percent of GDP by 2012/13. Under the authorities’ conservative assumptions about future foreign assistance flows (significantly below the 8 percent average ratio to GDP observed over the last five years), this expenditure path could be financed through a combination of higher tax revenue and domestic borrowing (see text table). Possible delays in project implementation, however, could result in corresponding postponement of expenditure.

Text Table 1.

Uganda: Domestic Primary Balance and Financing 2007/08-2012/13 1

(percent of GDP)

article image

Authorities’ estimates for 2007/08 and 2008/09; staff projections for 2009/10 onwards.

Grants and loans.

Errors and omissions plus drawdown of project accounts at the BOU.

17. Fiscal policy could benefit from a strong and transparent medium-term anchor. In Uganda’s context, the mission argued that the key objective of macroeconomic stability—providing sufficient room for private sector credit growth and safeguarding debt sustainability—would be best served by a medium-term deficit or financing target. Sufficient flexibility should be provided to ensure that high-return public investment does not get crowded out. At the same time, the recent emphasis on value-for-money needs to be retained, and indeed strengthened, to ensure that available resources are spent well. This will be especially important once oil revenues begin to flow. The authorities were in broad agreement with the mission and expected to consider the issue in the forthcoming NDP.

18. A drawdown in net international reserves (NIR) could allow the banking system to provide for the government’s additional financing needs without unduly crowding out the private sector. With NIR currently covering more than six months of imports and assuming that the global financial crisis does not have a substantial impact on this stock beyond the US$117 million drawdown projected for 2008/09, there is space to use some of these resources to finance Uganda’s infrastructure needs and still maintain reserves in excess of four months of imports by 2012/13. Private sector credit is expected to grow at a healthy 20 percent per year, well above nominal GDP growth rates, consistent with the authorities’ goal of promoting financial deepening.

19. The authorities remain committed to their target of increasing tax collection by ½ percent of GDP annually. Despite significant efforts, Uganda’s tax collection lags behind other countries in Sub-Saharan Africa. Raising the revenue effort will require further improvements in tax administration and the authorities are taking some steps in the short term (see MEFP, paragraph 7). In the medium term, further measures could include reform of the Tax Procedure Code, launch of the Medium Taxpayer Office, and strengthening of the Domestic Tax department of the Uganda Revenue Authority.

Infrastructure needs

With the notable exception of the rapidly expanding telecommunication sector, the state of Uganda’s infrastructure is poor. Road density indicators are at par with the average for Sub-Saharan Africa, but a much smaller fraction of the roads are paved. The existing railways are in poor shape and carry a negligible volume of freight. Electricity supply lags far behind demand, is unreliable (forcing firms and households to invest in expensive diesel generators), and is available to less than one-tenth of the population. (Source: Uganda: Moving Beyond Recovery, Country Economic Memorandum, World Bank, 2007.)

UA01fig01

Percentage of Roads Paved

(2004)

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Figure 11.
Figure 11.

Fiscal Revenue in 2007/08, % of GDP

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Country authorities
Figure 12.
Figure 12.

Tax Revenue, % of Non-Primary GDP

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Country authorities; Fund staff estimates

20. Domestic expenditure arrears continue to pose challenges. The introduction of the Integrated Financial Management System (IFMS) neither prevented further accumulation of domestic arrears—the stock of arrears had grown from 0.5 to 0.7 percent of GDP between June 2006 and June 2007—nor allowed for timely reporting. The authorities are nevertheless confident that recent improvements in the IFMS system and the planned roll-out of an integrated payroll and personnel system (a structural assessment criterion) will reduce the occurrence of new arrears (see MEFP, paragraph 8). The verification of all arrears for 2007/08 is expected by end-March 2009, and the 2008/09 budget includes an allocation of one percent of GDP for the clearance of old arrears.

21. The authorities, jointly with their EAC counterparts, are working on developing Uganda’s financial sector (MEFP, paragraph 19). The depth and reach of Uganda’s financial sector remain limited, and its further growth will be instrumental in facilitating private sector development and poverty alleviation, and in enhancing the authorities’ ability to rely on open market operations for the conduct of monetary policy.

Figure 13.
Figure 13.

Interest Rates, Jan 06 - July 08

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Ugandan authorities
Figure 14.
Figure 14.

Private Sector Credit, percent of GDP

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Country Authroities

B. Real exchange rate and competitiveness

22. In the face of strong foreign exchange inflows, the real exchange rate has appreciated by some five percent over the past two years. While allowing some exchange rate flexibility, the authorities regarded part of the inflows as temporary; aiming to avoid undue appreciation, the BOU accumulated significant foreign exchange reserves during this period. In this environment, growth of exports has exceeded overall GDP growth in recent years and the volume growth of major export commodities (except coffee, which has been affected by the coffee wilt disease) was either in line or above the average volume growth of world exports. This suggests no obvious competitiveness problem, although export-to-GDP ratio remains low by regional standards.

23. Staff’s analysis suggests that Uganda’s exchange rate is broadly in line with fundamentals. In the medium term, faster productivity growth than in partner countries, and strong official and private capital inflows, would allow Uganda to sustain significant current account deficits for some time to come—consistent with an appreciation of the equilibrium real exchange rate (see Box 3). The risk of lower foreign exchange inflows due to the global financial crisis, however, limits the scope for appreciation in the short term. Uganda’s open capital account suggests that it is best-served by allowing exchange rate flexibility to dampen external shocks while using foreign exchange intervention judiciously to avoid excessive volatility of the exchange rate.

Figure 15.
Figure 15.

Exports, % of GDP

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Figure 16.
Figure 16.

Export Performance by Product

(1999/00 - 2007/08)

Citation: IMF Staff Country Reports 2009, 079; 10.5089/9781451838879.002.A001

Source: Fund staff estimates

Analysis of real exchange rate fundamentals

Following IMF (2006), three approaches were used to study the evolution of fundamental factors affecting the real exchange rate in the medium term: equilibrium real exchange rate (ERER), macroeconomic balance (MB), and external sustainability (ES).

I. Staff estimated the ERER as a function of medium-term fundamentals (terms of trade, trade volumes, GDP, and aid). The results were inconclusive, pointing to under- or over valuation of RER depending on the exact specification of the model.

II. In the two-step MB approach, staff first calculated the gap between (i) the current account balance projected over the medium term at prevailing exchange rates; and (ii) an estimated equilibrium current account balance (the “norm”), which is a function of macroeconomic fundamentals (fiscal balance, demographics, oil balance, economic growth). Second, staff estimated the adjustment in the real exchange rate that is needed to close the gap derived above.

Results: the current account deficit projected under the constant real exchange rate assumptions (4 percent of GDP in the medium term) is one percentage point below the estimated equilibrium current account deficit (5 percent of GDP). Given the estimated elasticity of changes in balance of payments to changes in real exchange rate, a real exchange rate appreciation of some 9 percent would be needed in the medium term.

III. The ES approach is based on the idea that the present value of future trade surpluses must be sufficient to pay for the country’s external liabilities As under the MB approach, staff calculated the gap between the current account balance projected over the medium term and the current account “norm.” Under the ES approach, however, the “norm” is defined as the current account balance that stabilizes Uganda’s external position at some benchmark level.

The results point to real exchange rate appreciation; the exact magnitude depends largely on the view of what constitutes a sustainable external position. Thus, between 1995 and 2004 (the latest period for which the data are available), Uganda’s NFA fluctuated between -40 and -60 percent of GDP (Lane and Milesi Ferretti, 2006). Assuming high GDP growth (8 percent) and low inflation (5 percent) in the medium term, projected appreciation will be 4 percent, if NFA is targeted at -40 percent of GDP and 27 percent, if NFA is targeted at -60 percent of GDP.

References:

IMF, 2006, Methodology for CGER Exchange Rate Assessments.

Philip Lane and Gian Maria Milesi Ferretti, 2006, The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970–2004, IMF Working Paper 06/69.

C. Other Issues

24. Regional integration is proceeding and represents an opportunity for sustaining good economic performance in the region. The economic benefits of a common market in goods and services are potentially large. Going forward, strong political commitment will need to be accompanied by intensified technical efforts on the ground, for example in the elimination of remaining barriers to trade and the harmonization of economic statistics. Financial integration, and the establishment of a currency union, also have significant implications for economic policies today. The authorities are working jointly with their EAC counterparts on the relevant issues (see MEFP, paragraphs 15-17 and 19). A chapter in the selected issues paper discusses capital market integration in the EAC and the limits to the conduct of independent monetary and exchange rate policies this will impose on the member countries.7

25. Joint analysis with the World Bank suggests that Uganda’s risk of debt distress remains low. Uganda’s debt ratios have improved substantially over the past few years (thanks to HIPC and MDRI debt relief) and are projected to remain low over the medium term and beyond under the baseline scenario.

26. Progress is being made toward the adoption of a more formal inflation targeting framework. The new measure of core inflation will be very helpful. Going forward, developing high frequency economic activity indices and a formal inflation forecasting model should have priority (see MEFP, paragraph 14).

27. Oil exploration continues, with small-scale production expected to commence in 2010. Uganda now has confirmed petroleum development potential from a number of discoveries. The scale of potential recoverable reserves, however, remains uncertain, and no discovery has yet been declared commercial. Consequently, oil production has not been incorporated into the macroeconomic framework yet.

VI. Program Implementation and Monitoring

28. For monitoring performance under the program, quantitative assessment criteria for December 2008 and June 2009, quantitative indicative targets for December 2008, March and June 2009, and June 2010, and structural assessment criterion and benchmark have been set (MEFP, Tables 1 and 2). The date of implementation for structural assessment criterion on integrated payroll and pension system has been shifted from January to July 2009 due to delays in procurement process.

VII. Staff Appraisal

29. Uganda’s economy has been among the fastest-growing in Sub-Saharan Africa. Building on a foundation of two decades of sound policies, Uganda has achieved an impressive economic performance, with high growth, low inflation, and steady poverty reduction.

30. This remarkable growth performance, however, has not resulted in a significant structural transformation of the economy. Compared with other countries that have experienced such long episodes of sustained growth, Uganda remains more reliant on subsistence agriculture and correspondingly less on high-productivity manufacturing.

31. In 2008 Uganda has been buffeted by two major shocks. First, the global surge in food and fuel prices has caused domestic inflation to rise above 15 percent, well beyond traditional comfort levels. Second, the global economic downturn is likely to affect both the demand for Uganda’s exports and, more significantly, the availability of financing for critical investment projects.

32. Economic growth in 2008/09 will decline, although it will remain high by global and regional standards. Staff estimates that growth could fall to 7-7½ percent in the current year, as activity in the construction and services sectors slows down. However, against the backdrop of heightened global uncertainty, the downside risks to economic growth are significant. Exchange rate volatility, in part related to Uganda’s open capital account, has increased sharply in recent months, raising risk premia and complicating the disinflation process.

33. Monetary policy should aim at sustaining confidence in the currency while supporting the disinflation process. While maintaining the primary objective of price stability, there is merit in targeted intervention in the foreign exchange market to avoid excessive volatility. Bringing down core inflation will be helped by falling international food and fuel prices, and monetary policy should seize the opportunity to bring inflation back down toward its medium-term target of 5 percent.

34. Fiscal policy should maintain the orientation of the 2008/09 budget and offer measured response to cyclical weakening of revenues. The anticipated slowdown in economic activity is likely to make the ambitious revenue target more difficult to achieve. Nevertheless, immediate cuts in current expenditures should be avoided. Precipitous cuts would likely exacerbate the problem of domestic arrears; moreover, signs that capital spending could fall short of target also suggest that further expenditure reductions should not be rushed.

35. The banking sector remains sound overall, although vulnerabilities exist in some areas. The banks are well-capitalized and there is no indication that they are directly exposed to the toxic debt that has caused havoc elsewhere. At the same time, the rapid expansion of the banking system and the significant share of foreign exchange-denominated assets and liabilities on banks’ balance sheets may present risks. Stress tests suggest that credit risk, rather than direct foreign exchange exposure, represents the main risk for the banking system.

36. Containing financial sector risks calls for continued vigilance. With most banks foreign-owned, an immediate priority should be to strengthen collaboration and information exchange between the BOU as host supervisor and the home supervisors of banks operating in Uganda. In particular, there is a need to agree on contagion crisis arrangements to ensure that problems in banks’ home countries are not resolved at the expense of the Ugandan subsidiaries. The BOU should also strengthen its risk analysis. In particular, with foreign exchange-denominated loans representing about 30 percent of banks’ loan portfolios, it is important to ensure that they are not exposed to undue risk should borrowers not be perfectly hedged.

37. The medium-term outlook for Uganda remains favorable, but constraints on growth are likely to become binding. Scaling up investment in transport and energy infrastructure is a critical priority for sustaining and indeed raising Uganda’s medium-term growth potential. However, the international environment will be more challenging, perhaps for some years to come, which could affect the financing of investment projects. This places an additional premium on broadening the domestic revenue base and ensuring value for money in public spending.

38. Uganda’s exchange rate is broadly in line with fundamentals. Despite some real appreciation in recent years, export performance has been strong, indicating that Uganda remains competitive. Analysis of exchange rate fundamentals suggests that, over the medium term, there is a room for Uganda’s real exchange to appreciate, as productivity growth outpaces that in partner countries. In the short term, however, Uganda’s open capital account implies that the economy is best served by allowing exchange rate flexibility to dampen external shocks while using foreign exchange intervention judiciously to avoid unwarranted overshooting of the exchange rate.

39. The PSI-supported program remains on track, all assessment criteria for the fourth review have been met, and the staff recommends completion of the review.

40. It is proposed that the next Article IV consultation be held in accordance with the decision on consultation cycles approved on July 15, 2002.

Table 1.

Uganda: Selected Economic and Financial Indicators, 2006/07–2012/13 1

article image
Sources: Ugandan authorities; and IMF staff estimates and projections.

Fiscal year begins in July.

Percent of M3 at start of the period.

Percent of exports of goods and nonfactor services.

Including Fund obligations; reflects actual debt service paid, including debt relief.

Table 2.

Uganda: Fiscal Operations of the Central Government, 2006/07–2012/13 1

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Sources: Ugandan authorities; and IMF staff estimates and projections.

Fiscal year begins in July.

Includes arrears.

Table 3.

Uganda: Monetary Accounts, 2006/07–2012/13 1

(U Sh billions; end of period, unless otherwise indicated)

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Sources: Ugandan authorities; and IMF staff estimates and projections.

Fiscal year begins in July.

The public sector includes the central government, the public enterprises, and the local government.

Including valuation and the BOU’s claims on private sector.

Reclassification of non-bank institutions added approximately Ush 250 bn to the stock of private sector credit. Excluding this amount, credit to the private sector grew by 40 percent.

Table 4.

Uganda: Balance of Payments, 2006/07-2012/13 1

(US$ millions)

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Sources: Ugandan authorities; and IMF staff estimates and projections.

Fiscal year begins on July 1.

Table 5.

Uganda: Quantitative Assessment Criteria and Indicative Targets for end-June 2008 - end-June 2009 1

(Cumulative change from the beginning of the fiscal year, unless otherwise stated) 2

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The assessment criteria and indicative targets under the program, and their adjusters, are defined in the TMU.

Fiscal year begins on July 1.

Indicative target.

For June 2008, cumulative changes from the average of June 2007. For September and December 2008, cumulative changes from average of June 2008, as defined in the TMU.

Continuous performance criterion.

Cumulative change from December 1, 2006.

Excluding normal import-related credits.

Arrears incurred after end-June 2004. Excludes new arrears accumulated during the current fiscal year.

Table 6.

Uganda: Structural Assessment Criterion and Benchmark 1

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Assessment criteria also apply on a continuous basis to the standard provisions on the exchange and trade issues that apply to programs supported by the Fund’s financial resources.

Table 7.

Uganda: Selected Banking Sector Information, June 2005–June 2008

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Source: Ugandan authorities.

Foreign exchange exposure is calculated using the short-hand method.

Table 8.

Millenium Development Goals

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Source: World Development Indicators database 1 Figures in italics refer to periods other than those specified.

Appendix I. Letter of Intent

Kampala, Uganda

December 5, 2008

Mr. Dominique Strauss Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss Kahn:

On behalf of the Government of Uganda, I would like to inform you of the progress we have made under our economic program backed by the Fund’s Policy Support Instrument (PSI) and transmit the attached Memorandum of Economic and Financial policies (MEFP), which sets out the objectives and policies that the Government intends to pursue in the short and medium term. The policies outlined in the MEFP are drawn from the Government’s initiatives to promote employment and rapid economic growth in the context of a stable macroeconomic environment.

All assessment criteria for the fourth review under the PSI were observed. Reflecting our economy’s strong fundamentals, the impact of the global financial crisis on Uganda has to date been limited. In particular, our banking system remains well capitalized, foreign exchange reserves are in a very healthy position, and providing donor support is disbursed on time, we expect to implement the fiscal program outlined in the 2008/09 Budget as envisaged. Nonetheless, as a small and highly open economy, the expected slowdown in activity in our major trading partners is also likely to lower growth in the current fiscal year to some extent.

The Government of Uganda believes that the policies set forth in the MEFP are adequate to achieve the objectives of our PSI-supported program. Given our interest in macroeconomic stability, we stand ready to take additional measures as may be necessary to achieve needed objectives. Our PSI proposes assessment criteria for the performance target dates of end-December 2008 and end-June for the fifth and sixth reviews, which are expected to be completed by end- May 2009 and end-October 2009. We stand ready to work with the Fund and other development partners in the implementation of our program and will consult in advance should revisions be contemplated to the policies contained in the PSI.

The Government of Uganda authorizes the publication and distribution of this letter, its attachments, and all reports prepared by Fund staff regarding the current PSI review and the Article IV consultation, including the Selected Issues Papers.

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Appendix I—Attachment I Uganda: Memorandum of Economic and Financial Policies Update

1. The Government of Uganda remains committed to sustained macroeconomic stability, economic growth, and poverty reduction. This updated Memorandum of Economic and Financial Policies (MEFP), summarizes the Government’s strategy to achieve these goals as set out in the Poverty Eradication Action Plan (PEAP). The Government and the International Monetary Fund (IMF) are cooperating on the economic program through a three-year Policy Support Instrument (PSI). This MEFP describes performance under the program through November 2008, specific policies and targets for 2008/09, and medium-term objectives.

I. Performance Under the PSI

2. All assessment criteria have been met. Fiscal performance in 2007/08 was in line with program projections, and, accordingly, the ceiling on net claims on government by the banking system was observed. The ceiling on net domestic assets of the Bank of Uganda (BOU) and the floor on the stock of net international reserves of the BOU were also comfortably observed. Base money exceeded somewhat the allowed 5 percent band with respect to the indicative target. Indicative targets for poverty-related spending and on the stock of domestic budgetary arrears were met.

II. Objectives and Policies Looking Forward

3. The central objective of our economic policies is to maintain the high economic growth of recent years to achieve rapid and sustained poverty reduction. We are currently reviewing our growth strategy, as outlined in Uganda’s Poverty Eradication Action Plan, and are preparing to replace it with a new five-year National Development Plan (NDP). The NDP sets out an objective of maintaining real GDP growth in the 8-9 percent range, supported by macroeconomic stability, openness to trade, sound public finances, and addressing key constraints to private investment. In particular, we plan to significantly increase public investment in infrastructure (with a particular focus on roads, energy and agriculture) in the coming years to address one of the principal constraints on growth in Uganda.

4. Growth in 2008/09 could fall short of the 8 percent mark we have targeted, in the wake of the global financial crisis. The likely slowdown in our trading partners might reduce demand for Uganda’s exports and remittances from broad, while pressures in international financial markets may force the local banks to curtail their lending activities. We are monitoring the situation closely and intend to use the available monetary and fiscal policy tools to limit damaging repercussions of the crisis.

A. Fiscal Policy

5. Recent developments affected our budget for 2008/09. Revenue performance has been below target in the first few months of the fiscal year, but the full-year target should still be within reach in light of the higher-than-expected inflation and expected improvements in tax administration. Barring adverse development, we intend to maintain the expenditure appropriations recently passed by Parliament. In the event that there are delays in implementation of road projects, the additional allocations earmarked for trunk roads and not spent in 2008/09 will be carried over to the next fiscal year.

6. Over the medium term, fiscal policy will be anchored by macroeconomic stability considerations. Our key objective will be to ensure that public sector does not crowd out private sector lending and does not endanger debt sustainability. Two other considerations that will guide our spending profile over the medium term will be (i) implementation and absorption capacity (particularly once oil revenues begin to accrue to the budget) and (ii) value-for-money or high rate of return on all areas of government spending.

7. The policy of annually increasing tax collections by ½ percent of GDP remains in place, even though improvements in tax administration have been yielding somewhat less than that in recent years. To ensure that the revenue targets for 2008/09 are met, the Uganda Revenue Authority will take a number of steps, including speeding-up the collection of corporate income taxes due, conducting an increased number of audits for businesses with high import value declarations, and use of new data sources to reduce valuation fraud.

8. The government remains committed to reducing arrears. New CCS arrears in 2007/08 are estimated at U Sh 43 billion, compared to some U Sh 100 billion in 2006/07. The root causes of new arrears accumulation remain (i) underbudgeting and (ii) failure by line ministries and agencies to abide by their budgets. Going forward, as outlined in our Debt Strategy published in December 2007, we intend to reduce the build up of domestic expenditure arrears by:

  • ensuring adequate provision of resources for utilities and rent expenditures;

  • enforcing compliance to the commitment control system, by publishing on a quarterly a list of Votes and Agencies that over commit government without authority; and

  • ensuring that the Accountant General does not recognize expenditure commitments made outside the IFMS system for both IFMS and non IFMS Votes as arrears and these commitments therefore not be programmed for payment in future budgets by the Ministry of Finance.

9. Relatedly, the Ministry of Public Service will implement the new Integrated Personnel and Payroll System in three Commissions (Public Service Commission, Health Service Commission, Education Service Commission), four Ministries (Ministry of Finance, Ministry of Health, Ministry of Public Service, Ministry of Education), and two local governments (Lira and Jinja Districts) by July 2009. This should improve payroll and pension records and ensure accurate payroll and pension figures. The implementation deadline is being extended from January 2009 due to delays in the procurement process.

10. Oil exploration continues apace with small-scale production expected to commence in 2009/10 for thermal power generation. The timeline for full-scale commercial development remains unclear, pending completion of exploratory activity. With the view of insuring prudent and transparent use of Uganda’s oil wealth, our intention is to put oil revenues in a dedicated oil fund to be managed by the Bank of Uganda. The use of these resources will then be captured in our Medium-Term Expenditure Framework and will be subject to existing public financial management regulations, including appropriation by Parliament.

B. Monetary and Financial Sector Policies

11. We remain committed to keeping annual average underlying inflation at or below five percent guided by our reserve money target. The significant part of the run-up in prices in 2007/08 can be attributed to higher international food and fuel prices, although domestic price pressures also played a role. To control the domestic price pressures we will substantially reduce the growth of base money in 2008/09 (compared with the previous year), but at the same time loosen the target level somewhat (vis-à-vis the original program target for 2008/09) reflecting higher-than-expected inflation outturn. The softening of international prices in the wake of the global financial crisis may help reduce inflation further.

12. In the context of the global financial crisis, the BOU will rely on an appropriate mix of foreign exchange sales and domestic securities to sterilize excess liquidity. This will allow us to reduce exchange rate and interest rate pressures. In view of shallowness of Uganda’s foreign exchange markets, we will also pay particular attention to preventing undue exchange rate volatility.

13. The BoU will carefully monitor developments in the banking system. Uganda’s financial system has been relatively insulated from the global financial crisis, but the increasing risk aversion from investors and the spiral effects of a depressed world economy could present significant challenges. The general sell-off of emerging market currencies coupled with capital outflows and shallow markets has caused exchange rate volatility. Our banks have remained sound and stable as improved supervision has helped banks build large capital cushions and the deposit mobilization by banks have provided a stable source of funding for banks. The diversified structure of the banks’ balance sheets and income sources should also contribute to banking system resilience. At the same time, there is need for close monitoring as the deterioration in the external environment could affect the banking system. To preserve financial stability in the increasingly challenging environment, we will:

  • Enhance our communication with the markets on the evolving impact of the global financial turmoil, in order to forestall panic and herd behavior.

  • Intensify our oversight of bank credit evaluation policies and enforce the regulation on unhedged foreign currency borrowing.

  • Improve cooperation and exchange of information with the home supervisors of our foreign owned banks;

  • Seek to establish contingency cross border crisis management arrangements for the all financial institutions;

  • Advance our efforts in strengthening the supporting financial infrastructure, including expediting the establishment of the credit registry and further strengthening our deposit protection fund to align it with international principles;

  • Strengthen capacity for financial risk analysis and reporting, including strengthening the stress testing framework.

14. The BOU is preparing for an inflation targeting framework for monetary policy. In June 2007, UBOS rolled out a new measure of underlying (core) inflation that would more accurately capture inflationary trends and is expected to roll out a quarterly GDP index by July 2010. The BOU will also start developing an appropriate communication strategy. In particular, the BOU will produce a semiannual monetary conditions report that would relate current economic trends to monetary operations and the inflation target.

15. Negotiations for the East African Common Market protocol are ongoing. We are working together with our EAC counterparts to lay groundwork for the establishment of the EAC Monetary Union. In pursuance of this objective, a two-phased convergence criteria has been established. In stage 1 (2007–2010), the primary benchmarks include maintenance of an overall Budget Deficit to GDP Ratio of not more than 6 percent (excluding grants) and of not more than 3 percent (including grants). In addition, annual average inflation rates should not exceed 5 percent, while external reserves are expected to cover more than four months of future imports of goods and non-factor services.

16. The secondary criteria include achievement of sustainable real GDP growth rate of not less than 7 percent, a national savings to GDP ratio of not less than 20 percent. Furthermore, countries are expected ensure that that their ratios of total debt as a percentage of GDP and the Current Account Deficit as a percentage of GDP are kept at sustainable levels. In addition, countries are expected to maintain stable and market determined interest and exchange rates, implement the 25 Core Principles of Bank Supervision and Regulation, and adherence to the Core Principles for Systematically Important Payment Systems by modernizing payment and settlement systems.

17. During the second stage (2011-2014) the primary benchmarks become tighter, with the overall Budget Deficit to GDP Ratio (excluding grants) of not more than 5 percent and of not more than 2 percent (including grants). In addition, annual average inflation rates should not exceed 5 percent, while external reserves are expected to cover more than 6 months of imports of goods and non-factor services.

C. Other Structural Reforms

18. The government attaches utmost importance to meeting Uganda’s growing demand for electricity. Financing arrangements for the Bujagali hydropower project have been finalized and its construction is on track, to be completed by 2011. In the near-term, government will continue to support the private sector by carrying some of the cost of temporary electricity generators. The next major sustainable energy project is expected to be the Karuma hydro electricity generation project—identified as the next least cost alternative to Bujagali. Barring the appearance of a new project developer, which in the current external financing environment could well prove difficult, the GOU will be the sole developer of the project as necessary. Financing for the project would be expected to come from the resources in the accumulated Energy Fund and borrowing. Relatedly, legislation to govern the use of the resources in the Energy Fund are expected to be tabled to Parliament in 2009.

19. The Financial Markets Development Plan (FMDP), which was formulated as a result of a participatory and consultative strategic planning process, was approved in May 2008 by the Monetary Affairs Committee (MAC) of the East African Community. The plan reflects the intention to develop the financial markets in Uganda, and integrate them with the broader East African Markets with the aim of developing sound and vibrant financial markets, and supporting efficient mobilization of resources necessary for economic diversification and sustainable growth. The plan is also intended to lead to the harmonization of the regional macroeconomic policies and integration of the financial markets.

Attachment I. Table 1.

Uganda: Quantitative Assessment Criteria and Indicative Targets for December 2008 - June 2010 1

(Cumulative change from the beginning of the fiscal year, unless otherwise stated) 2

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The assessment criteria and indicative targets under the program, and their adjusters, are defined in the TMU.

Fiscal year begins on July 1.

Indicative target.

For June 2008, cumulative changes from the average of June 2007. For September and December 2008, and for June 2009, cumulative changes from average of June 2008, as defined in the TMU.

Continuous performance criterion.

Cumulative change from December 1, 2006.

Excluding normal import-related credits.

Arrears incurred after end-June 2004. Excludes new arrears accumulated during the current fiscal year.

Attachment I. Table 2.

Uganda: Structural Assessment Criterion and Benchmark1

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Assessment criteria also apply on a continuous basis to the standard provisions on the exchange and trade issues that apply to programs supported by the Fund’s financial resources.

Appendix I—Attachment II: Uganda: Technical Memorandum of Understanding

A. Introduction

1. This memorandum defines the targets described in the memorandum of economic and financial policies (MEFP) for the July 2006–June 2009 financial program supported by the IMF Policy Support Instrument (PSI), and sets forth the reporting requirements under the instrument.

B. Net Foreign Assets (NFA) and Net Domestic Assets (NDA) of the Bank of Uganda (BOU)

2. The net foreign assets of the BOU are defined as the monthly average (based on daily data) of foreign assets minus foreign liabilities, and include all foreign claims and liabilities of the central bank. The monthly average values of all foreign assets and liabilities will be converted into U.S. dollars at each test date using the average cross exchange rates for June 2008 for the various currencies and then converted into Uganda shillings using the average U.S. dollar-Uganda shilling exchange rate for June 2008.

Program Exchange Rates

(US$ per currency unit, unless indicated otherwise)

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Net domestic assets (NDA) of the Bank of Uganda (BOU) are defined as the monthly average (based on daily data) of base money (defined below) less net foreign assets of the BOU (as defined in para. 2). Based on this definition, the NDA limits will be cumulative changes from the average of June 2008 to the average of December 2008, and March and June 2009, and cumulative changes from the average of June 2009 to the average of June 2010.

(In billions of shillings)

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B. Base Money

3. Base money is defined as the sum of currency issued by Bank of Uganda (BOU) and the commercial banks’ deposits in the BOU. The commercial bank deposits include the statutory required reserves and excess reserves held at the BOU and are net of the deposits of closed banks at the BOU and Development Finance Funds (DFF) contributed by commercial banks held at the BOU. The base money limits will be cumulative changes from the daily average of June 2008 to the daily average of December 2008, and March and June 2009, and cumulative changes from the daily average of June 2009 to the daily average of June 2010.

C. Net Claims on the Central Government by the Banking System

4. Net claims on the central government (NCG) by the banking system is defined as the difference between the outstanding amount of bank credits to the central government and the central government’s deposits with the banking system, excluding deposits in administered accounts and project accounts with the banking system, including the central bank. Credits comprise bank loans and advances to the government and holdings of government securities and promissory notes. Central government’s deposits with the banking system include the full amount of IMF MDRI. NCG will be calculated based on data from balance sheets of the monetary authority and commercial banks as per the monetary survey. The quarterly limits on the change in NCG by the banking system will be cumulative beginning end-June in the previous fiscal year.

D. Net International Reserves of the Bank of Uganda

5. Net international reserves (NIR) of the BOU are defined for program monitoring purpose as reserve assets of the BOU net of short-term external liabilities of the BOU. Reserve assets are defined as external assets readily available to, and controlled by, the BOU and exclude pledged or otherwise encumbered external assets, including, but not limited to, assets used as collateral or guarantees for third-party liabilities. Short-term external liabilities are defined as liabilities to nonresidents, of original maturities less than one year, contracted by the BOU and include outstanding IMF purchases and loans.

6. For program-monitoring purposes, reserve assets and short-term liabilities at the end of each test period will be calculated in U.S. dollars by converting them from their original currency denomination at program exchange rates (as specified in para. 2).

E. Ceiling on Domestic Budgetary Arrears of the Central Government

7. The stock of domestic payment arrears under the Commitment Controls System (CCS) will be monitored on an annual basis. Domestic payments arrears under the CCS are defined as the sum of all bills that have been received by a central government spending unit or line ministry delivered prior to the beginning of the current fiscal year, and for which payment has not been made within 30 days under the recurrent expenditure budget (excluding court awards) or the development expenditure budget. For the purpose of program monitoring, the quarterly CCS reports, which will include arrears accumulated at IFMS and non-IFMS sites, prepared by the Internal Audit and Inspection Office will be used to monitor arrears. Arrears can be cleared in cash or through debt swaps.

8. The payments of pre-CCS, non-CCS, and CCS arrears accumulated up to end-June 2004 (“group A arrears”) are covered by specific budget allocations for 2008/09 and 2009/10. The program ceiling on the stock of CCS arrears only covers accumulation of arrears after end-June 2004 (“group B arrears”). According to the verified report prepared by the Internal Audit and Inspection Office, this stock of arrears is estimated at U Sh 111 billion as of June 2007.

F. Expenditures Under The Poverty Action Fund (PAF).

9. The compliance with the indicative target on minimum expenditures under the PAF will be verified on the basis of releases (PAF resources made available to spending agencies).

G. Adjusters

10. The NDA and NIR targets are based on program assumptions regarding budget support, assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), and external debt-service payments. The NCG target, in addition to being based on the aforementioned assumptions, is also based on assumptions regarding domestic nonbank financing of central government fiscal operations. In addition, the NDA target depends on the legal reserve requirements on deposits in commercial banks. Finally, the NDA and NIR targets are based on program assumptions regarding automatic access by commercial banks to the BOU’s rediscount and discount window facilities.

11. The Uganda shilling equivalent of budget support (grants and loans) plus HIPC Initiative assistance in the form of grants on a cumulative basis from July 1 of the fiscal year is presented under Schedule A. The ceilings on the cumulative increase in NDA and NCG will be adjusted downward (upward), and the floor on the cumulative increase in NIR of the BOU will be adjusted upward (downward) by the amount by which budget support, grants and loans, plus HIPC Initiative and MDRI assistance, exceeds (falls short of) the projected amounts.

Schedule A: Budget Support Plus Total HIPC Initiative Assistance

(Cumulative billions of Uganda shillings, beginning July 1 of the fiscal year)

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12. The ceiling on the increases in NDA and NCG will be adjusted downward (upward) and the floor on the increase in NIR will be adjusted upward (downward) by the amount by which debt service due1 plus payments of external debt arrears less deferred payments (exceptional financing) falls short of (exceeds) the projections presented in Schedule B. Deferred payments are defined to be (i) all debt service rescheduled under the HIPC Initiative; and (ii) payments falling due to all non-HIPC Initiative creditors that are not currently being serviced by the authorities (that is, gross new arrears being incurred).

Schedule B: Debt Service Due, Before HIPC Initiative Assistance

(Cumulative billions of Uganda shillings, beginning July 1 of the fiscal year)

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13. The ceiling on the increase in NCG will be adjusted downward (upward) by any excess (shortfall) in nonbank financing2 less payment of domestic group A arrears relative to the programmed cumulative amounts presented in Schedule C. For the purpose of this adjuster, payment of domestic group A arrears cannot exceed the programmed amount by more than U Sh 45.0 billion.

Schedule C: Nonbank Financing Minus Repayment of Domestic Arrears

(Cumulative billions of Uganda shillings, beginning July 1 of the fiscal year)

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14. The ceiling on NDA of the BOU for end-June will be adjusted upward by the daily average amount of commercial bank automatic access to the BOU discount window and rediscounting of government securities by commercial banks.

15. The ceiling on NDA of the BOU for every test date will be adjusted downward/upward to reflect decreases/increases in the legal reserve requirements on deposits in commercial banks. The adjuster will be calculated as the percent change in the reserve requirement multiplied by the actual amount of required reserves (Uganda shillings and foreign-currency denominated) at the end of the previous calendar month.

H. External Borrowing Contracted or Guaranteed by the Central Government, Statutory Bodies, or the Bank of Uganda, and Arrears

16. The assessment criterion on short-term debt refers to contracting or guaranteeing external debt with original maturity of one year or less by the government or the Bank of Uganda. Excluded from this assessment criterion are normal import-related credits. The definition of “debt” is set out in paragraph 18.

17. The program includes a ceiling on new nonconcessional borrowing with maturities greater than one year contracted or guaranteed by the government, statutory bodies, or the BOU.3 Nonconcessional borrowing is defined as loans with a grant element of less than 35 percent, calculated using average commercial interest rates references (CIRRs) published by the Organization for Economic Cooperation and Development (OECD). In assessing the level of concessionality, the 10-year average CIRRs should be used to discount loans with maturities of at least 15 years, while the 6-month average CIRRs should be used for loans with shorter maturities. To both the 10-year and 6-month averages, the following margins for differing payment periods should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15–19 years; 1.15 percent for 20–25 years; and 1.25 percent for 30 years or more. The ceiling on nonconcessional external borrowing or guarantees is to be observed on a continuous basis. The coverage of borrowing includes financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms. Excluded from the limits are changes in indebtedness resulting from refinancing credits and rescheduling operations, and credits extended by the IMF. For the purposes of the program, arrangements to pay over time obligations arising from judicial awards to external creditors that have not complied with the HIPC Initiative do not constitute nonconcessional external borrowing. For the purposes of the program, the Bujagali project is defined as the hydroelectric dam and related equipment located at the dam site.

18. The definition of debt, for the purposes of the limit, is set out in point 9 of the Guidelines on Performance Criteria with Respect to External Debt (Executive Board’s Decision No. 12274-(00/85), August 24, 2000). It not only applies to the debt as defined in Point 9 of the Executive Board decision, but also to commitments contracted or guaranteed for which value has not been received. The definition of debt set forth in No. 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements reads as follows:

  1. For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

19. The ceiling on the accumulation of new external payments arrears is zero. This limit, which is to be observed on a continuous basis, applies to the change in the stock of overdue payments on debt contracted or guaranteed by the government, the BOU, and statutory bodies4 from their level at end-June 2006. It comprises those external arrears reported by the Trade and External Debt Department of the BOU, the Macro Department of the Ministry of Finance that cannot be rescheduled because they were disbursed after the Paris Club cutoff date.

I. Monitoring and Reporting Requirements

20. The authorities will inform the IMF staff in writing at least ten business days (excluding legal holidays in Uganda or in the United States) prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Such policies include but are not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises. The authorities will similarly inform the IMF staff of any nonconcessional external debt contracted or guaranteed by the government, the BOU, or any statutory bodies, and any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities. The authorities will furnish an official communication to the IMF describing program performance of quantitative and structural assessment criteria and benchmarks within 8 weeks of a test date. The authorities will on a regular basis submit information to IMF staff with the frequency and submission time lag as indicated in Table 1. The information should be mailed electronically to AFRUGA@IMF.ORG.

Attachment II. Table 1.

Summary of Reporting Requirements

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1

Selassie, Abebe Aemro, Beyond Macroeconomic Stability: The Quest for Industrialization in Uganda, IMF Working Paper 08/231.

2

At end-September 2008, non-resident investors were estimated to have held some US$400 million in local government securities.

3

See Uganda—Staff Report for the 2006 Article IV Consultation Country Report No. 07/29, and the Public Information Notice (PIN/07/8).

4

For program purposes, net domestic assets are defined as base money minus net international reserves.

5

See “Impact of Rising International Food and Fuel Prices on Inflation in EAC Countries,” in Rwanda and Uganda—Selected Issues.

6

To the extent that the additional funds appropriated for the roads sector in the 2008/09 budget are not utilized in the current fiscal year, unspent amounts would be ring-fenced and carried over to the next year.

7

See “Progress Toward Harmonization of Capital Account Regulations and Capital Market Integration in the East African Community,” in Uganda—Selected Issues.

1

Debt service due is defined as pre-HIPC Initiative debt service due, but from 2003/04 onwards, this excludes HIPC Initiative debt rescheduling.

2

Comprising the check float and the change in government securities and government promissory notes held by the nonbank sector. The change in government securities held by the nonbank sector will be calculated from the data provided by the Central Depository System (CDS).

3

Contraction is defined as approval by a resolution of Parliament as required in Section 20(3) of the Public Finance and Accountability Act, 2003

4

This definition is consistent with the coverage of public sector borrowing defined by the Fund (includes the debt of the general government, monetary authorities, and entities that are public corporations which are subject to the control by government units, defined as the ability to determine general corporate policy or by at least 50 percent government ownership).

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Cover IMF Staff Country Reports
Uganda: 2008 Article IV Consultation and Fourth Review Under the Policy Support Instrument: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uganda
Author:
International Monetary Fund
Volume/Issue:
Volume 2009: Issue 079
Publisher:
International Monetary Fund
ISBN:
9781451838879
ISSN:
1934-7685
Pages:
86
DOI:
https://doi.org/10.5089/9781451838879.002
Figure 1.

Real GDP Per Capita Growth
Figure 2.

Percentage of Population Below Poverty Line
Figure 3.

Evolution of Capital Inflows and Net International Reserves

(US$ million)
Figure 4.

Exchange Rate of Selected Currencies to the US $
Figure 5.

Contribution to Core Inflation

Jan 2007-Oct 2008
Figure 6.

Inflation Rates, January 1994 - Oct. 2008
Figure 7.

Effective Exchange Rates

January 2002 - Sept 2008
Figure 8.

T-Bill Rates, Jan 06 - Oct 08
Figure 9.

Nominal Exchange Rates Jan 02 - Oct 08
Figure 10.

BOU Policy Response, Aug 2006 - Oct 2008

Percentage of Roads Paved

(2004)
Figure 11.

Fiscal Revenue in 2007/08, % of GDP
Figure 12.

Tax Revenue, % of Non-Primary GDP
Figure 13.

Interest Rates, Jan 06 - July 08
Figure 14.

Private Sector Credit, percent of GDP
Figure 15.

Exports, % of GDP
Figure 16.

Export Performance by Product

(1999/00 - 2007/08)