Uganda and the IMF

Press Release: IMF Completes the First Review Under Uganda's PRGF Arrangement and Approves US$2.8 Million Disbursement
June 25, 2003

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Uganda—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Kampala, Uganda
June 9, 2003

The following item is a Letter of Intent of the government of Uganda, which describes the policies that Uganda intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Uganda, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. We recently held discussions with Fund staff on the first review of the economic program supported by a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), which was approved by the Executive Board on September 13, 2002.

2. The attached memorandum of economic and financial policies (MEFP) reviews the implementation of the program for fiscal year 2002/03 (July-June) and describes the objectives and policies that the government intends to pursue for the remainder of the year and in 2003/04. The government is committed to reducing the incidence of poverty in Uganda through the continued implementation of sound economic and financial policies necessary for sustained economic growth and macroeconomic stability. The 2003/04 budget to be submitted to parliament on June 13, 2003 is crafted to maintain the overall fiscal deficit, excluding grants, essentially unchanged, reflecting the need to balance increased defense spending to meet the country's security needs and the expansion of social and economic programs designed to meet the Poverty Eradication Action Plan objectives. The domestic budget balance, however, would decline by over one-half of one percent of GDP. The deficit would be largely covered by expected net inflows of donor support. The focus of the structural program is on building up tax revenues, strengthening budget management, enhancing accountability of both central and local government, improving financial sector regulations, and fighting corruption.

3. In light of the progress achieved in the implementation of the program for 2002/03, and the supporting details provided in the MEFP, the Government of Uganda requests a waiver for the missed observance of the performance criteria for the accumulation of new domestic arrears; submission of a plan to Cabinet to streamline Public Administration; and submission to Parliament of a bill to repeal the National Social Security Fund Statute. The government also requests a disbursement of SDR 2.0 million upon completion of the first review.

4. The Government of Uganda will continue to provide the Fund with such information as the Fund requires to assess Uganda's progress in implementing the policies described in this letter and the accompanying MEFP. In addition, the Government will continue to consult with the Fund on its economic and financial policies, in accord with the Fund's policies and practices on such consultations.

5. The Government of Uganda authorizes the publication and distribution of this letter and MEFP and all reports prepared by Fund staff regarding the PRGF-supported program.

Sincerely yours,

/ s /

Gerald M. Ssendaula
Minister of Finance, Planning, and Economic Development

Memorandum of Economic and Financial Policies
of the Government of Uganda for 2003-04

1. The government's economic and financial policies are guided by the Poverty Eradication Action Plan (PEAP), which aims to reduce poverty by sustaining high rates of economic growth while preserving macroeconomic stability, and implementing social and economic programs targeted to increase the incomes of the poor and improve the quality of their livelihood. Uganda's program to reduce poverty is supported by the International Monetary Fund through a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF). This memorandum of economic and financial policies (MEFP) reviews recent economic performance and the progress in implementing the program and sets out the government's policies and targets for the remainder of the 2002/03 fiscal year (July-June) and for 2003/04.

I. Recent Economic Performance under the PRGF-Supported Program

2. All quantitative benchmarks and performance criteria for end-September and end-December 2002 were met, with the exception of the zero limit on new domestic arrears (Table 1). Based on the partial coverage of the Commitment Control System (CCS), U Sh 3 billion of new arrears on nonwage expenditures were accrued during the first half of 2002/03. This slippage was in part due to the late announcement of spending cuts, mainly to finance unbudgeted defense expenditures. Under the new Public Finance and Accountability Bill, approved by parliament in April 2003, there will be greater constraints on any such supplementary expenditures, which should help to eliminate arrears in the future. Moreover, the planned computerization of the CCS over the next two years would facilitate monitoring of spending by the line ministries and ensure stricter compliance with budget limits. Based on this corrective measure, we are requesting a waiver for missing this performance criterion. In addition, while the ceilings for net credit to the government by the banking system were observed, this outturn is based on data for check float, the quality of which needs to be improved. Therefore, to improve our check-tracking system and methods of measuring check float, we are requesting technical assistance from the Fund.

3. With regard to the structural program, while there have been a few slippages, most measures were met through December 2002: the Uganda Revenue Authority (URA) prepared a business plan for improving tax collections; aggregated local government financial statistics for fiscal year 2000/01 were produced; all commercial banks developed a capital compliance plan well in advance of the increase in the minimum paid-in capital requirement; and the privatization of the Ugandan Development Bank (UDB) was assigned to the Privatization Unit, although there were some delays in contracting a privatization advisor (Table 2). However, the end-December 2002 performance criterion to submit a plan to cabinet to streamline Public Administration was not met until March 2003. Also, the performance criterion to submit a bill to parliament by end-March 2003 to repeal the National Social Security Fund (NSSF) Statute was not met, owing to the need to build greater political support for the measure beforehand. Based on the discussion below of corrective measures, we are requesting a waiver for these missed performance criteria.

4. Economic activity has been weaker than anticipated thus far in 2002/03. For the year as a whole, real GDP is expected to grow by 5.4 percent, more than one percentage point lower than program projections, owing mainly to delays in the construction of the Bujagali hydro electricity project and the impact of adverse weather conditions on the agricultural sector. Compared to program projections, food crops and some cash crops (coffee, cotton, and tea) have experienced particularly low growth. A sharp increase (over 25 percent) in the prices of food crops, together with the weaker Uganda shilling and high world oil prices, boosted the 12-month headline inflation rate to 8.6 percent in March 2003, and is expected to reach 10 percent by June, for the first time in many years. The rise in underlying inflation, which excludes food crop prices and is thus less volatile, would be considerably lower. On an annual average basis, underlying inflation is expected to rise to 2.9 percent, which would be below the average over the past five years of 3½ percent and would be in line with program projections.

5. Overall fiscal performance has been in keeping with the program, although the composition of spending has deviated from budget intentions. Government revenues have performed broadly in line with projections, led by strong outturns in income and value-added tax (VAT) collections, despite a shortfall in nontax revenue. Through the first half of 2002/03 total expenditure were 3 percent lower than projected in the program, despite higher-than-budgeted defense spending (undertaken to quell the long-running insurgency by the Lord's Resistance Army (LRA) in northern Uganda), an unexpected increase in interest payments on treasury bills, and supplementary spending on public administration. While the government will respect the budget limit on total spending by cutting sharply nonwage discretionary expenditures not protected under the Poverty Action Fund (PAF), the change in the composition of government outlays will result in a budget different from that which parliament had approved and donors had agreed to support. This has led some bilateral donors to cut back or suspend disbursements of budget support (by a total of US$35 million.) For 2002/03 as a whole, the overall fiscal deficit (excluding grants) is expected to decline by 1.3 percentage points to 11.4 percent of GDP, compared with the previous year.

6. The base money program has focused on sterilizing the liquidity injection associated with donor-supported government spending and mopping up commercial banks' excess reserves that had accumulated during the previous year. Mainly for sterilization purposes, net issues of treasury bills totaled 1.4 percent of annual GDP during the first nine months of 2002/03, while the Bank of Uganda's (BOU) net sales of foreign exchange amounted to another 3 percent of GDP (US$181.9 million). As a result, treasury bill yields have risen substantially during this period, while the Uganda shilling depreciated against the U.S. dollar by 8 percent. Initially, the shilling depreciated gradually, but in late February 2003, a confluence of factors, including uncertainty about world petroleum prices, regional tensions, and concerns about the sustainability of donor aid flows, adversely affected market sentiment, resulting in a sharp depreciation of the shilling and increased volatility. As these concerns dissipated, the downward pressure on the shilling abated. Despite the tightening of liquidity, broad money growth (M2) has remained high (at 22.6 percent during the 12-months ending in February 2003), partly reflecting an increase in the money multiplier. After having stagnated in 2001/02, commercial bank credit to the private sector has recovered in recent months, rising sharply by 32.1 percent during the 12 months ending February 2003.

7. Overall, the health of the financial system has continued to improve in 2002/03. The conclusion of the privatization and merger of Uganda Commercial Bank (UCB) with Stanbic Bank has contributed significantly to the stability of the banking system and has spurred the expansion of much needed financial intermediation. The stability of the banking system was further enhanced by the closure and subsequent takeover by a healthy institution of one small bank, and the recapitalization of another small bank. New capital requirements came into effect on January 1, 2003, raising the minimum paid-up capital to U Sh 4 billion. However, the exposure of some financial institutions to single borrowers has increased substantially.

8. Net international reserves exceeded the end-December 2002 program target by about US$50 million, reflecting lower net sales of foreign exchange by the BOU, and the BOU's migration to International Accounting Standards (IAS) 39. For the year as a whole, the external current account deficit should be narrower than expected, on account of stronger private transfers, particularly in support of NGOs, and a smaller trade deficit. Export earnings are slightly above program projections, as substantially higher-than-expected export prices have compensated for much lower growth in export volume (3.7 percent compared with 18.4 percent in the program), owing largely to the poor weather conditions. Crops that experienced good production, such as tobacco, found ready export markets available, suggesting that Ugandan exports were maintaining their competitiveness. Imports are expected to be lower than program expectations, mainly reflecting the delay to the Bujagali project, although this decline has been tempered by an increase in other imports.

II. Policies for the Remainder of 2002/03 and 2003/04

9. Based on the outturn thus far in 2002/03, we propose only modest changes to the quantitative program for the remainder of the fiscal year-namely, a shift in the burden of sterilization and liquidity management toward greater net sales of foreign exchange (see Table 1). The ceiling on BOU net sales of foreign exchange would be raised to US$227 million for 2002/03, with a corresponding decrease in net sales of treasury bills. Targets for the fiscal deficit and the base money program would remain essentially unchanged. The composition of government spending, however, would be different than was budgeted so as to accommodate the additional defense spending and overruns in public administration expenditures, as well as higher domestic interest payments. Reflecting an agreement reached with some donors, spending on defense and public administration would not exceed their budget allocations by more than the equivalent of US$17.5 million and U Sh 15 billion, respectively. Strict adherence to these objectives over the remainder of this fiscal year would help to enhance mutual confidence between the government and its development partners.

10. The broad outlines of the program for 2003/04 are consistent with the PEAP. The macroeconomic framework is based upon a recovery in real GDP growth to about 6 percent, assuming a return to normal weather conditions for crops. The monetary program will aim to lower underlying inflation to 3 percent during the year, in line with experience over the past several years, while headline inflation would drop to 2.7 percent, as food crop prices respond to a rebound in supply. Despite a projected increase in defense spending, the Government seeks to achieve a slight reduction of the fiscal deficit relative to GDP so as to continue on the path toward improved macroeconomic sustainability and a smaller burden of sterilization operations over the medium term. The monetary authorities will pursue a flexible exchange rate policy, while limiting the share of sterilization operations through BOU foreign exchange sales, so as to allow for continued improvements in Uganda's international competitiveness. The BOU's gross international reserves are projected to be maintained at or above 5½ months of imports of goods and services during the year. To encourage longer-term growth and strengthen international competitiveness, the structural program would continue to address the main impediments to doing business in Uganda, with measures aimed at fighting corruption, building up and restoring transportation infrastructure, expanding financial intermediation, and improving the effectiveness of government economic and social programs. Moreover, as insecurity is a main cause of persistent poverty, the government is committed to providing a safe environment in which all Ugandans can live and work.

11. The greatest challenge in the year ahead will be to maintain a sound fiscal program in light of higher defense spending and a possible reduction in donor support. While providing for a modest increase in poverty-related spending protected under the PAF, a number of areas of nondefense discretionary expenditures will have to be trimmed. To minimize the burden of this tight budget situation, it will be essential that government achieve a solid revenue performance, identify and cut nonessential expenditures, and achieve maximum effectiveness of spending programs. It will also be necessary to avoid unwarranted supplementary expenditures, avoid the accumulation of new arrears, and guard against contingent liabilities arising over the course of the year.

12. The overall fiscal deficit (excluding grants) is programmed to be 11.3 percent of GDP, declining by 0.1 percentage points from the previous year. Government revenues are programmed to increase by 0.5 percentage points, mostly reflecting tax policy measures and some gains from tax administration. Total spending, relative to GDP, is projected to increase by 0.4 percentage points. Assuming that only half of the projections for non-HIPC Initiative non-PAF general budget support is disbursed, net donor support, including HIPC Initiative assistance would fall to 9.8 percent of GDP.

13. Tax policy measures of at least U Sh 34 billion (0.3 percent of GDP) are needed to meet revenue targets. In this regard, the value-added and excise tax regimes will be reviewed and revenue enhancing measures will be proposed in the budget for 2003/04. The fees and rates for nontax sources of revenue will also be reviewed with the aim of raising revenue. In addition, collection of debts and obligations falling due to the government is critical for obtaining adequate resources. In particular, government loans to utilities and private enterprises, including those made through agencies and trusts, must be serviced in a timely manner.1

14. Improved tax administration is critical to both increasing government revenue and improving the business environment. URA management will follow up on the conclusion of the investigation into corruption in the URA by the judicial commission of inquiry (JCI), with the pursuit of an aggressive campaign to restore the integrity of the institution. Staff found to have committed wrongdoing will be disciplined or dismissed. To assure continued vigilance against corruption, a unit will be established in the office of the Inspector General of Government (IGG) to identify future cases of improper conduct and to review staff's asset declarations. At the same time, the URA will recruit qualified new staff, implement a training program for both new and existing staff, and obtain the necessary tools and equipment, including the implementation of the computerization strategy, so that a professional and effective URA staff will be able to efficiently apply the law. URA management will submit a business plan for 2003/04 and will agree with the Ministry of Finance on a set of objective indicators to monitor improvements in tax administration.

15. As regards expenditure, the expansion in the budgets of a number of line ministries would need to be curtailed to accommodate the increase in defense spending. The government views the reduction of public administration expenditure as a central element of its strategy to maintain spending on poverty-related and economic priority areas. To achieve this objective, the government has developed an action plan for streamlining public administration expenditures to be implemented starting in 2003/04. The budget for public administration, which had expanded rapidly in recent years, will thus be reduced to U Sh 362 billion in 2003/04. Based on these actions, the government requests a waiver for the missed structural performance criterion for end-December 2002 on this matter. Defense spending will increase to not more than U Sh 311 billion (2.4 percent of GDP) in 2003/04.

16. The government will also take steps to clear the outstanding stock of domestic arrears and to prevent the accrual of new arrears and future contingent liabilities. The government will set its commitment to clear the stock of nonpension domestic arrears in the budget speech. Pension arrears will be dealt as part of a comprehensive plan to reform the public service pension scheme that will be defined during the fiscal year 2003/04. To assure the financial sustainability of the pension system, recommendations of the pension study completed in 2001/02 will be implemented. Also a list of contingent liabilities will be complied and updated on a quarterly basis, starting from end-June 2003.

17. For the benefits of the programs on productivity, poverty reduction, and security to be fully realized, it is essential to improve the effectiveness of government spending. Hence, the government will build on the progress made thus far with expenditure management through the commitment control system (CCS). The Ministry of Finance will ensure that all provisions of the CCS are strictly adhered to, including the clearing of all expenditure over-commitments sustained in any one quarter by the end of the subsequent quarter, the imposition of penalties for incorrect or misleading monthly returns, and that regular audits of the CCS will be carried out by the Internal Auditor/Auditor General's Office at each line ministry/department. Also the computerization of the CCS will be extended to six line ministries in 2003/04 and to all ministries the following year.

18. With the decentralization of much of the delivery of social services, it is also critical that local governments improve the effectiveness of their operations. To complement steps being taken to strengthen tendering procedures, it is necessary to clarify and enforce the accounting, reporting, and monitoring of local governments. Government could also offer support to local governments that seek to enforce their own manual CCS procedures. To help with the follow-up needs of the CCS in the national government and to build up the accounting, reporting, and monitoring procedures and capacity at the local level, while the new integrated financial management system is being rolled out over the next several years, the government will request the assistance of a technical advisor.

19. Monetary policy will be aimed at keeping inflation low. While this task will be facilitated by the narrowing of the fiscal deficit, the monetary authorities will adhere strictly to the reserve money program. Growth in base money during 2003/04 is programmed to be 11.3 percent, while broad money (M2), excluding foreign exchange deposits, and commercial bank credit to the private sector are projected to grow by 15 percent and 14 percent, respectively. The BOU will further enhance its monetary and exchange rate policy instruments to assure a stable environment for the financial and external sectors.

20. As the foreign exchange market stabilizes and the need to sterilize liquidity declines, the size of the regular daily sales will be adjusted according to seasonal patterns and the liquidity injected. Foreign exchange interventions by the BOU will be limited under the program to those required to counteract disorderly market behavior subject to the program's overall ceiling. The liquidity management framework will be further enhanced by improving coordination with the Ministry of Finance, ensuring timely reconciliation of check float numbers, and minimizing the unwarranted use of the rediscount window.

21. In the financial sector, the BOU will continue to consolidate the advances made in banking supervision, regulation, and the health of the banking system. Increasing confidence in the banks has generated strong growth in deposits over the past two years, and, more recently, a revival in lending to the private sector. The BOU will continue to monitor the credit risk of financial institutions and ensure strict compliance with the prudential requirements on credit concentration and single borrower limits.

22. Access to financial services will be enhanced by the approval by parliament in November 2002 of the Microfinance Deposit-Taking Bill. Passage of the new Financial Institutions Bill (FIB)—which addresses identified problems in the current code—should improve public confidence in the banking system and further strengthen the regulatory and supervisory framework by introducing prudential provisions consistent with international standards and ensuring prompt bank interventions and other corrective actions deemed necessary by the regulatory and supervisory authorities. To prevent money laundering, which would undermine the integrity of Uganda's financial system, an Anti-Money Laundering Bill has been drafted and circulated to commercial banks for comments before being submitted to cabinet. This would fill an important gap in the legal framework governing the financial sector by introducing specific legislation for the control of money laundering. In the meantime, the BOU has issued guidelines for the commercial banks to follow and will continue to carefully monitor banking activity.

23. The government remains committed to reforming the private pension system. Stakeholders, which include members of parliament, are currently discussing a way forward and will soon present proposals to government. Repeal of the National Social Security Fund (NSSF) statute in the near future would be difficult without carrying out prior consultation and sensitization of parliament. Government will seek to work closely with members of parliament to design an effective bill that will support sound financial practices by the NSSF, building on last year's replacement of the NSSF senior management team with finance professionals, and will aim at submitting a bill for parliamentary approval by end-December 2003. Government will also seek prompt and proper disclosure of NSSF accounts and the institution of measures to ensure that best practices in investment of the funds are adhered to. On these grounds, the government seeks a waiver for the missed performance criterion for submission to parliament of a bill for the repeal of the current NSSF Statute by end-March 2003. It will also be necessary to take steps to build up the capacity of the Capital Markets Authority, so that it can eventually play a greater role in nonbank financial regulation and supervision.

24. External sector policies are aimed at enhancing Uganda's international competitiveness and achieving a more sustainable external position over the medium term. The focus is on increasing productivity in the export sector and developing new markets for Ugandan products, including regional integration and improved access to the U.S. and European Union. Private sector activity in both traditional and nontraditional exports has picked up, supported by various donor projects and advances in monitoring standards. The Plan for the Modernization of Agriculture (PMA), a key element in the implementation of the PEAP, is currently being implemented, with advisory services expected to reach farmers' cooperatives in 188 subcounties during 2003/04, nearly double that of the previous year. The government has complemented the PMA with immediate direct government support to selected agricultural products under the strategic exports program (SEP), in order to accelerate an expansion and broadening of the export base.2 The PMA and SEP have been largely, though not entirely, protected from budget cuts.

25. The government has participated actively in reestablishing the East African Community (EAC) with Kenya and Tanzania. This should open up regional markets for Ugandan goods, particularly food crops that were previously limited to the domestic market. The arrangements for a customs union are expected to be finalized by November 2003, and should take effect shortly thereafter. Efforts are aimed at improving the EAC's transportation and telecommunications networks. The government also remains committed to further trade liberalization in the context of the World Trade Organization (WTO).

26. Uganda's external debt sustainability position is set to improve over the medium term, especially if the International Development Agency's (IDA) were to provide substantial amounts of assistance in the form of grants, rather than loans, and solid growth in exports (8 percent a year). The ratio of the net present value (NPV) of external debt to exports is projected to decline from 193.5 percent in 2002/03 to 186 percent by 2004/05, assuming the full delivery of assistance under the HIPC Initiative on outstanding debt. Some progress has been made in obtaining debt relief from India and securing agreements of HIPC Initiative assistance, mainly through negotiations with the OPEC Fund and the announcement that, by the end of 2003, Japan will revise its laws to allow full debt forgiveness. Additionally, Pakistan, Libya and South Korea have recently pledged to provide relief on official debt. The government will be requesting the modalities for providing this soon. Little progress has been made in securing agreements for HIPC Initiative relief from some non-Paris Club creditors, while others, primarily commercial creditors, have won litigations against the government to recover claims of US$40 million. To improve debt management, we will develop a plan for computerizing and linking the debt database systems of the Ministry of Finance and the BOU to allow greater coordination in debt monitoring and analysis.

27. Privatization is a key element of the structural measures aimed at enhancing the business environment in Uganda. Looking ahead, critical transportation links will be upgraded, by offering a long-term concession for the operation, maintenance, and expansion of the Ugandan railroad possibly in conjunction with the national railroads of Kenya and Tanzania. Initial discussions on a joint concession with the Kenyan railway have already begun. A 20-year concession for operating the electricity generating company was finalized in December 2002 and negotiations for the operating concession for the distribution company are expected to be concluded by June 2003. Although with some delay, a privatization advisor has been contracted for the sale of the Uganda Development Bank (UDB). The government remains committed to privatizing the UDB, or failing that, liquidating the institution. Pending divestiture, the UDB will not engage in any new lending, including on-lending on behalf of the government or the BOU.

28. To expand private sector investment activity, with a view to increasing value added from Uganda's resource base and gaining a foothold for exports to the United States under the African Growth on Opportunity Act (AGOA), the government has granted investment incentives to some selected investors on an ad hoc basis. To ensure that these incentives meet their objectives, the government will request periodic accounting of the allocated funds. Government policy, however, is to phase out all ad hoc incentives and to move to a more harmonized system of incentives for the EAC. To this end, the government has requested technical assistance from the Fund and the World Bank to review the structure of incentives in the three EAC countries. It will await the results of that review before introducing any new measures.

29. The BOU has taken steps to meet the recommendations of the recent safeguards assessment by the IMF. The financial statements for the year ended June 30, 2002 have been finalized—with some delay, owing to the implementation of IAS 39—and the accounts were approved by the BOU Board and submitted to the Auditor General. It is expected that the audited financial statements, which were completed and signed by BOU officials in April 2003, will be published by end-June 2003. With effect from June 2003, audited financial statements will be finalized within three months of the end of the financial year, as required by the BOU Statute. In addition, the BOU Board approved the Internal Audit Charter and terms of reference of the Board's audit committee in February 2003, at which time a three-member audit committee was set-up. A reorganization of the Internal Audit Department to fully operationalize the audit committee was completed in April 2003.

Use the free Adobe Acrobat Reader to view Table 1.

Table 2. Uganda: Structural Performance Criteria and Benchmarks, and Status of Implementation
Under the Programs for 2002/03 and 2003/04

Performance Criteria/Benchmark

Policy Measure

Date of Implementation

Implementation Status



Performance criterion

Submit to cabinet a plan to reduce government expenditures, drawing from the Presidential Committee's report on Effective Public Administration Budgeting, indicating (a) initial measures to be taken immediately, (b) measures that require prior notification of affected parties, to be taken in 2003/04, and (c) measures that may require a constitutional amendment.

December 31, 2002

Observed late

A series of measures to be included in the 2003/04 budget proposal was agreed upon by cabinet in March 2003.


Production of a business plan for the Uganda Revenue Authority (URA) that will spell out its strategy for improving tax collection and associated costs.

September 30, 2002




Verification of domestic budget arrears outstanding as at end-June 2002

March 31, 2003



Performance criterion

Announce plan to clear the outstanding stock of nonpension domestic arrears.

June 30, 2003


New measure


Develop a time-bound plan to clear the stock of pension arrears as part of a comprehensive plan to reform the public service pension scheme.

December 2003


New measure


Develop the annual business plan for implementing tax administration measures in 2003/04, in accordance with the URA's 5-year corporate plan, and a plan for the completion of the computerization of the URA.

June 30, 2003


New measure


Establish a unit in the IGG to identify and investigate cases of improper conduct and corruption by URA or staff.

June 30, 2003


New measure

Fiscal decentralization


Produce aggregated local government financial statistics for 2000/01 fiscal year.

September 30, 2002




Produce aggregated local government financial statistics for 2001/02 fiscal year.

September 30, 2003


New measure

Financial sector

Performance criterion

Submit to Parliament a bill to repeal the National Social Security Fund (NSSF) Statute to pave the way for regulation of the NSSF by the Bank of Uganda (BOU).

March 31, 2003

Not observed

Government to build support in Parliament for the bill. Measure to be implemented by December 31, 2003.


Development by all banks of a Capital Compliance Plan detailing proposals for complying with January 2003 capital requirement for minimum paid-up capital.

September 30, 2002




Assign the privatization of UDB to the Privatization Unit and engage a privatization advisor to handle the privatization.

December 31, 2002

Observed late

Assigned to the privatization unit on time. Selection of privatization advisor finalized in March 2003.

Performance criterion

Privatize Uganda Development Bank (UDB).

June 30, 2003



Safeguards Assessment Report


Publish the audited financial statements of the BOU for the year ended June 30, 2002.

April 30, 2003


New measure

The audited financial statements were completed and signed by BOU officials in April 2003. They are expected to be published by end-June 2003.


Publish the audited financial statements of the BOU for the year ended June 30, 2003.

September 30, 2003


New measure


BOU and the Ministry of Finance enter into a Memorandum of Understanding to ensure that unrealized gains will be excluded from the distributable profits.

June 30, 2003


New measure

Uganda—Technical Memorandum of Understanding
(June 9, 2003)

I. Introduction

1. This memorandum defines the quantitative benchmarks and performance criteria described in the memorandum of economic and financial policies (MEFP) for the 2002/03 and 2003/04 financial program that would be supported by the IMF Poverty Reduction and Growth Facility (PRGF), and sets forth the reporting requirements under the arrangement.

A. Base Money

2. 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 BOU and Development Finance Funds (DFF) contributed by commercial banks held at BOU. Under this definition, the end-June 2002 base money was estimated at U Sh 630 billion. The base money limits for the 2002/03 program will be cumulative changes from end-June 2002, and the base money limits for the 2003/04 program will be cumulative changes from end-June 2003, and will be monitored from the monetary authority balance sheet, provided to the IMF by the BOU.

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

3. 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 project accounts. Credits comprise bank loans and advances to the government and holdings of government securities and promissory notes. The component of credit to government in the form of securities and promissory notes will be calculated based on data from balance sheets of the monetary authority and commercial banks. This will be adjusted for any discrepancy between the stock of Treasury bills recorded on the Central Depository System (CDS) and stock of Treasury Bills recorded on the commercial banks balance sheets.3 The limits on the change in net claims on the central government by the banking system will be cumulative from end-June 2002 for the 2002/03 program, and end-June 2003 for the 2003/04 program.

C. Net International Reserves of the Bank of Uganda

4. Net international reserves (NIR) of the Bank of Uganda 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 maturities less than one year, contracted by the Bank of Uganda and include outstanding IMF purchases and loans.

5. For program monitoring purposes, reserve assets and short-term liabilities (excluding liabilities to the IMF) at the end of each test period will be calculated by converting reserve assets measured in Uganda shillings as reported by the BOU using the end-month Uganda shilling per U.S. dollar exchange rate. The U.S. dollar value of outstanding purchases and loans from the IMF will be calculated by converting the outstanding SDR amount reported by the Treasurer's Department of the IMF using the US$ per SDR exchange rate at the end of each quarter.

D. Expenditures Under the Poverty Action Fund

6. The expenditures under the Poverty Action Fund (PAF) include both wage and nonwage current expenditures under the PAF, and domestic development expenditures under the PAF. The minimum expenditures under the PAF are defined as 95 percent of the budgeted expenditures under the PAF, which cumulatively are U Sh 141.9 billion for end-September 2002, U Sh 299.5 billion for end-December 2002, U Sh 464.1 billion for end-March 2003, and U Sh 647.3 billion for end-June 2003 for the 2002/03 program. The minimum expenditures under the PAF are defined as 95 percent of the budgeted expenditures under the PAF, which cumulatively are U Sh 151.8 billion for end-September 2003, U Sh 327.3 billion for end-December 2003, U Sh 502.1 billion for end-March 2004, and U Sh 712.8 billion for end-June 2004 for the 2003/04 program.

E. New Domestic Budgetary Arrears of the Central Government

7. The nonaccumulation of new domestic payment arrears is a continuous performance criterion under the program. New domestic payments arrears are defined as the sum of: (i) any bill that has been received by a spending Ministry from a supplier of goods and services delivered (and verified) and for which payment has not been made within 30 days; (ii) unpaid and due personal claims, including, wages and salaries; and (iii) unpaid debt service due on government debt. For the purpose of program monitoring, the Audit General's/Internal Auditor Office's of the Ministry of Finance, Planning and Economic Development audits of arrears at end-December 2002 and at end-June 2003 shall be used to determine the new arrears created in the first six months and during the entire 2002/03 fiscal year, respectively, and the Audit General's/Internal Auditor Office's of the Ministry of Finance, Planning and Economic Development audits of arrears at end-June 2004 shall be used to determine the new arrears created during the entire 2003/04 fiscal year. The result of these audits should be available not later than 7 weeks following the close of the covered period. These audits should include all arrears regardless of whether or not the area of expenditure is covered by the Commitment Control System (CCS).

F. Ceiling on Public Administration Expenditures

8. The quarterly expenditure limits for the public administration sector are U Sh 57.7 billion for the first quarter to end-September 2002, U Sh 125.4 billion for the second quarter to end-December 2002, U Sh 188.1 billion for the third quarter to end-March 2003, and U Sh 250.8 billion for the fourth quarter end-June 2003. The quarterly expenditure limits for the public administration sector during 2003/04 are U Sh 56.5 billion for the first quarter to end-September 2003, U Sh 123.0 billion for the second quarter to end-December 2003, U Sh 184.5 billion for the third quarter to end-March 2004, and U Sh 246.0 billion for the fourth quarter end-June 2004. For the purpose of program monitoring, the public administration sector includes the following votes: Office of the Prime Minister (004) (excluding development), Foreign Affairs (006), Missions Abroad (0A0), MFPED (008) (excluding URA, Contingency, Accountability, and Development), URA (008), State House (002), Public Service (005), Public Service Commission (027), Local Government (025) (excluding development), Mass Mobilization (034), Office of the President (001) (excluding ISO/ESO and E&I), Specified Officers-Salaries (300), Parliamentary Commission (315), Local Government Finance Commission (033), Uganda Human Rights Commission (347), Electoral Commission (349). Any supplementary allocation to votes in the public administration sector that would exceed program ceilings will be accommodated by cuts to votes belonging to other categories within this same sector.

G. Promissory Notes

9. A promissory note is a written promise by the government to pay a debt, where government is defined as the central government4, local governments, and autonomous government agencies. It is an unconditional promise to pay on demand or at a fixed or determined future time a particular sum of money to or to the order of a specified person or to the bearer. The government will not use promissory notes or any form of a promise to pay for goods and services at a future date, and all domestic arrears payments will be settled in cash or by the transfer of immediately available funds.

H. Adjusters

10. The NIR target is based on assumptions regarding import support, assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative, and external debt-service payments. The NCG target, in addition to being based on the two aforementioned assumptions, is also based on assumptions regarding domestic nonbank financing of central government fiscal operations. On a cumulative basis, from July 1, 2002, the Uganda shilling equivalent of import support plus HIPC assistance will amount to U Sh 73.9 billion at end-September 2002; U Sh 526.4 billion at end-December 2002; U Sh 629.0 billion at end-March 2003; and U Sh 816.0 billion at end-June 2003. On a cumulative basis, from July 1, 2003, the Uganda shilling equivalent of import support plus HIPC assistance will amount to U Sh 76.5 billion at end-September 2003; U Sh 294.9 billion at end-December 2003; U Sh 391.2 billion at end-March 2004; and U Sh 696.2 billion at end-June 2004. Debt service due, before assistance under the Highly Indebted Poor Countries (HIPC) Initiative, excluding debt service owed to creditors that have not yet reached agreement on the delivery of HIPC assistance is programmed at U Sh 54.4 billion at end-September 2002; U Sh 92.3 billion at end-December 2002; U Sh 157.6 billion at end-March 2003; and U Sh 205.3 billion at end-June 2003. For the 2003/04 program the debt service due, before assistance under the Highly Indebted Poor Countries (HIPC) Initiative, excluding debt service owed to creditors that have not yet reached agreement on the delivery of HIPC assistance is programmed at U Sh 50.3 billion at end-September 2003; U Sh 104.6 billion at end-December 2003; U Sh 154.4 billion at end-March 2004; and U Sh 201.3 billion at end-June 2004.

11. The ceiling on the cumulative increase in NCG will be adjusted downward (upward), and the floor on the cumulative increase in NIR of the Bank of Uganda will be adjusted upward (downward) by the amount by which import support, grants and loans, plus HIPC assistance, exceeds (falls short of) the projected amounts. The ceiling on the increases in 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 payments inclusive of debt service financed with HIPC assistance plus the debt service payments on court awards regarding external arrears falls short of (exceeds) the projections of debt service due before assistance under the Highly Indebted Poor Countries (HIPC) Initiative, excluding debt service owed to creditors that have not yet reached agreement on the delivery of HIPC assistance.

12. The ceiling on the increase in NCG will be adjusted downward (upward) by any excess (shortfall) in nonbank financing5 less payment of domestic arrears accumulated prior to introduction of the CCS (up to a maximum amount of U Sh 50.2 billion) relative to the programmed cumulative amounts of minus U Sh 130.5 billion at end-March, 2003; and minus U Sh 40.0 billion at end-June, 2003. The nonbank financing programmed for 2003/04 are, cumulative from end-June 2003: negative U Sh 75.3 billion at end-September, 2003; negative U Sh 103.6 billion at end-December 2003; negative U Sh 87.9 billion at end-March 2004; negative U Sh 25.0 billion at end-June 2004. Furthermore, NCG will be adjusted downward by the amount by which expenditures under the Poverty Action Fund (PAF) fall short of 95 percent of the cumulative budgeted amounts of U Sh 149.3 billion at end-September 2002; U Sh 315.3 billion at end-December 2002; U Sh 488.6 billion at end-March 2003; and U Sh 681.5 billion at end-June 2003. The cumulative budgeted amount of PAF from end-June 2003: U Sh 159.8 billion at end-September 2003; U Sh 344.5 billion at end-December 2003; U Sh 528.5 billion at end-March 2004; U Sh 750.3 billion at end-June 2004.

13. If excess reserves of the commercial banks increase on account of a shortfall in the cumulative quarterly flows of private sector credit relative to programmed amounts of U Sh 26.7 billion end-March, 2003; and U Sh 66.5 billion end-June 2003, and 12-month underlying inflation is below 4.5 percent, the base money ceiling will be adjusted upward up to U Sh 9 billion. The base money ceiling will not be adjusted upward if the underlying 12-month inflation exceeds 4.5 percent.

14. The Development Finance Department (DFD) of BOU provides export credit guarantee schemes (ECGS) to commercial banks. As of March 23, 2003 the outstanding ECGS's amounted to U Sh 2.35 billion, of which U Sh 1.0 billion will expire before June 30, 2003. These contingent liabilities fall due on the BOU balance sheet, therefore do not affect the program targets for the NIR and the NCG.

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

15. 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 Bank of Uganda. 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 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 is set at zero and is to be observes 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.

16. 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: (a) 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 lessor 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.

17. 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 Bank of Uganda and by statutory bodies6 from their level at end-June 2002. It comprises those external arrears reported by the Trade and External Debt Department of the BOU, Macro Unit and Parastatal Monitoring Unit of the Ministry of Finance that cannot be rescheduled because dispersed after the Paris Club cutoff date.

J. Monitoring and Reporting Requirements

18. The authorities will inform the IMF staff in writing at least 10 (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 Bank of Uganda, or any statutory bodies, and any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities.

19. The information such as the issuance of treasury bills, the intervention in the foreign exchange market, daily average exchange rates, and the interest rate on government securities will be transmitted to the IMF's resident representative weekly, within five working days of the end of each week.

20. The Bank of Uganda will reconcile the monetary survey data with the financial statements, on an annual basis, and with the financial records on a quarterly basis. The Internal Audit Department (IAD) of BOU will review the reconciliations of monetary survey data to the financial records and the audited financial statements.

21. The government will provide the IMF staff with a summary of the fiscal accounts both on a monthly and quarterly basis with a seven-week lag from the end of the reporting month and quarter. Revenues will be recorded on a cash basis as reported by the Uganda Revenue Authority and the MFPED. Expenditures shall be recorded when checks are issued except for domestic and external debt-service payments, cash transfers to districts, and externally funded development expenditures. Expenditures on domestic interest will be recorded on accrual basis and external debt service will be recorded on a commitment basis (i.e., when payment is due). Cash transfers to districts will be recorded as expenditures of the central government when the transfer is effected by the Bank of Uganda. Expenditures on externally funded development programs will be recorded as the sum of estimated disbursements of project loans and grants by donors, less the change in the stock of government project accounts held at commercial banks in Uganda. Information on required and approved supplementary allocations in each month should be provided to the IMF within 15 days of the end of each month.

22. The government will provide the IMF staff with a summary of expenditure cash limits on a quarterly basis with a one-week lag from the date they are provided to ministries, and no later than two weeks after the beginning of the quarter.

23. The government will provide the IMF staff with a summary of the contingent liabilities of the central government on a quarterly basis with a seven-week lag from the end of the reporting quarter. For the purpose of the program contingent liabilities include all borrowings by statutory bodies, loans borrowed by public enterprises or the private sector and guaranteed by government and claims against the government in court cases that are pending or court awards that the government has appealed.

24. Final accounts of the local government authorities for fiscal years 2001/02 will be consolidated by end-September 2003 by the Ministry of Finance, Macro Department. The summary Status of Submission of District Monthly Accounts Returns will be provided to the IMF Resident Representative within 45 days of the end of each month. A report explaining any noncompliance with thee monthly reporting requirement by districts will be provided at the same time as the summary status report to the IMF. Any noncompliance by 45 days following the end of a month will result in a reminder letter being sent from the Treasury Inspectorate Department to the District Chairperson. Any noncompliance for an additional month will result in a memorandum being sent from the Commissioner of the Treasury Inspectorate Department to the Budget Director indicating that the Monitoring and Accountability Grants to the noncompliance districts should be discontinued until compliance is restored. A memorandum indicating this action will be sent to each noncompliant district.

25. The quarterly summaries prepared under the CCS and the over-commitments not backed by cash accumulated in the previous quarter that was cleared in the quarter will be provided to the IMF staff within 40 days after the end of each quarter.

26. As supplementary information, the government will provide the IMF staff on a monthly basis, with a seven-week lag from the end of the reporting month, a statement of: (i) outstanding stock of checks issued by the Uganda Computer Services of the MFPED, disaggregated into checks issued for commitments arising during July 1, 2002 through June 30, 2003, payment of arrears accumulated prior to July 1, 1999, and checks issued to settle intra-ministerial payment obligations; (ii) the value of budget support (grants and loans) received by the government, and the value of projections of donor project support received so far. The government will provide the IMF forecasts of the value of budget support and project support (grants and loans) expected to be received for the rest of the current year and the medium term, by donor and sector, by the end of each reporting quarter.

27. As supplementary information, the Bank of Uganda will provide the IMF staff on a monthly basis, with a seven-week lag from the end of the reporting month, a statement of: (i) cash balances held in project accounts at commercial banks; (ii) total value (measured at issue price) of outstanding government securities from the Central Depository System (CDS); (iii) the stock of government securities (measured at issue price) held by commercial banks from the CDS.

28. The government will provide the IMF staff on a quarterly basis, with a seven-week lag from the end of the reporting quarter, (i) a statement on new loans contracted during the period as per the loan agreement with additional information on disbursement provided within six months, (ii) a statement on creditor participation in the HIPC Initiative, the status of creditor litigation cases and cash payments relating to the settlement of awards.

29. The BOU will provide the IMF staff on a quarterly basis, with a seven-week lag from the end of the reporting quarter, (i) monthly commodity and direction of trade statistics, (ii) the stock of debt, disbursements, principal and interest, flows of debt rescheduling and debt cancellation, arrears, and committed undisbursed balances—by creditor category, (iii) the monthly composition of nominal HIPC assistance into grants, flow rescheduling and stock of debt reduction by creditor.

30. The consumer price index will be transmitted monthly to the IMF with no more than a two-week lag from the end of the reporting month. The balance sheet of the Bank of Uganda, the consolidated accounts of the commercial banks, and the monetary survey will be transmitted to the IMF on a monthly basis with a lag of no more than seven weeks from the end of the reporting month.

31. Standard off-site bank supervision indicators for deposit money banks will be transmitted to the IMF quarterly and on-site reports transmitted as needed based on the findings of the off-site reports.

1 At the same time, arrears to these borrowers should be settled.

2 The crops that receive support are coffee, cotton, tea, fish, livestock, and horticulture. Textile manufacturing and information technology are also supported by the SEP.

3 The monetary authority values the securities and promissory notes at issue price, while some commercial banks value securities and promissory notes at face value although they should be reporting at cost value.

4 Central government consists of the state house, cabinet ministers, all ministries, parliament, the judiciary, and committees.

5 Comprising check float and the change in government securities and government promissory notes held by the nonbank public.

6 This definition is consistent with the coverage of borrowing defined by the Fund (Public Sector Debt-defined as at least 50 percent owned by the government regardless of whether the debt is formally publicly guaranteed) for the Public Sector and Public Finance and Accountability Bill 2002 (Part V - Control of the Finances of State Enterprises).