IMF Executive Board Concludes 2006 Article IV Consultation with Uganda

Public Information Notice (PIN) No. 07/8
January 25, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 15, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Uganda.1


Uganda's macroeconomic performance over the past 15 years has been exceptional. Per capita GDP growth exceeded the average in sub-Saharan Africa and international reserves were rebuilt following the earlier period of civil unrest. Sound macroeconomic policies contained debt and brought about price stability. Most markets were liberalized, and the banking system and state-owned enterprises were privatized. Poverty rates came down, and social spending was increased. In recent years, however, per capita growth has tapered off. This, together with volatile terms of trade and increasing income inequalities, has had a negative effect on poverty reduction.

An acute electricity crisis threatens Uganda's macroeconomic performance. The regional drought in 2005/06 reduced Uganda's already inadequate hydropower-generating capacity, resulting in a production gap of nearly one-half of demand. In consequence, many businesses and consumers were forced to rely on high-cost thermal generators. Manufacturing and high-value agriculture, most affected by power cuts, and profits in these industries, are being squeezed. While measured real GDP growth in 2005/06 (5½ percent) remained relatively high, the electricity crisis pushed nonfood inflation slightly above the 5 percent target, and the trade deficit widened because of higher oil prices and diesel fuel import volumes for thermal power generation. The wider deficit drove down the reserve import cover to about 5½ months at end-2005/06, but financing was not a concern because net donor support remained at close to 10 percent of GDP. Debt relief, through the Multilateral Debt Relief Initiative (MDRI), will augment the government's resource envelope in the short and medium term and improve debt sustainability.

Starting in February 2006, Uganda's economic program-based on the Poverty Eradication Action Plan launched in May 2005-has been supported by the IMF's Policy Support Instrument (PSI). Fiscal developments in 2005/06 were broadly in line with the program's consolidation objective. Monetary policy management, with its continued focus on using foreign exchange sales as the primary liquidity sterilization tool, helped interest rates to decline further. Base money was within the program ceiling and the stock of net international reserves of the Bank of Uganda exceeded the program floor by a large margin. On the structural front, progress was made in the repayment of arrears and in preparing guidelines on contracting, managing, and monitoring external debt. Reporting of domestic arrears under the commitment control system remains a problem, but should improve as teething problems with the new computerized system are resolved and as efforts to enforce existing rules are strengthened.

The authorities have requested a new three-year PSI in support of their near- and medium-term policies. The authorities' main objectives are to sustain macroeconomic stability while tackling the ongoing electricity crisis and addressing other infrastructure deficiencies to alleviate existing constraints on growth. Other structural measures under the program will be aimed to enhance financial intermediation and to improve management of domestic arrears and debt.

Executive Board Assessment

Directors commended the authorities' sound macroeconomic management which, together with structural reforms and substantial donor assistance, have supported Uganda's long record of high economic growth and poverty reduction. Directors noted the broadly satisfactory performance of the economy under the PSI. However, concerns were expressed about the slippage in clearing domestic arrears, and Directors welcomed the steps being taken to resolve them.

Directors observed that Uganda continues to face important challenges. Per capita growth has tapered off in recent years and the country remains heavily reliant on donor support while facing severe capacity constraints. Directors underscored that scaling up investment in infrastructure, particularly in the energy sector, deepening the financial sector, and strengthening governance and institutions are key to restoring high, sustainable income growth. In this connection, Directors welcomed the authorities' emphasis on infrastructure in their economic program for 2006/07 and the medium term. They noted that in addressing Uganda's infrastructure bottlenecks, careful attention must be paid to financing and macroeconomic considerations. Infrastructure projects should be financed mainly through grants, domestic savings, and concessional borrowing. Directors supported the cautious approach outlined in the authorities' proposed debt strategy, which strikes an appropriate balance between the need to borrow to address infrastructure needs and recognition of the risk of a rapid debt buildup.

Directors welcomed the authorities' strategy of continued fiscal consolidation in line with Uganda's Medium-Term Expenditure Framework. They supported continued tax revenue mobilization, including by way of further efficiency gains through the ongoing restructuring of the Uganda Revenue Authority. Directors urged caution in introducing tax incentives to attract investments and called for conserving scarce tax resources to help provide for improvements in infrastructure. Fiscal consolidation will also require a continued focus on strengthening expenditure management, including in the local governments.

Directors agreed that Uganda's independently floating exchange rate regime continues to provide an appropriate framework for macroeconomic management. They supported the Bank of Uganda's continuing emphasis on foreign exchange sales for liquidity management. Directors welcomed the authorities' work on new supervision and legal arrangements to strengthen the banking sector. They underscored the need to develop sources for long-term capital and noted the effort to promote financial services in rural areas, however, they cautioned against directed lending by the government in support of these initiatives.

Looking ahead, Directors emphasized that the authorities' goals of sustained growth and poverty reduction would require a firm commitment to implementing the planned reforms in the public finances, infrastructure, and the financial system. In addition, it will be essential to strengthen governance and efforts against corruption as part of measures needed to improve the environment for private sector participation. Directors welcomed Uganda's efforts to advance regional integration. The recently established East African Community (EAC) customs union should promote regional trade and provide a forum for discussion of trade policies and advancement of regional financial integration.

Uganda: Selected Economic and Financial Indicators, 2002/03-2006/07 1/

  2002/03 2003/04 2004/05 2005/06 2006/07

National income and prices (percent change)


GDP at constant prices

4.4 5.7 6.7 5.4 6.2

Nonfood inflation (average)

2.4 5.0 4.7 5.2 6.1

Money and interest rates


M2 (percent change)

17.3 10.0 12.1 18.9 13.8

Velocity (GDP/M2) 2/

7.3 7.2 7.4 7.3 7.0

Interest rate (percent) 3/

9.6 14.1 8.5 7.8 ...

External sector


Current account balance (percent of GDP)


(including official grants)

-5.8 -1.2 -2.1 -4.1 -5.7

(excluding official grants)

-13.5 -11.0 -10.6 -9.9 -12.7

Terms of trade (percent change, deterioration -)

7.2 5.7 1.9 18.2 -0.6

Government budget (percent of GDP)



12.2 12.7 12.8 13.2 13.6


6.5 9.0 7.9 6.6 6.6

Total expenditure and net lending

23.1 -23.3 -21.3 -20.6 -22.3

Overall balance (excluding grants)

-10.9 -10.7 -8.5 -7.5 -8.8

Overall balance (including grants)

-4.3 -1.7 -0.6 -0.9 -2.2

Stock of domestic debt

9.1 9.6 9.8 9.1 7.7



Net donor inflows (percent of GDP)

11.3 11.4 8.9 8.4 9.9

Overall balance of payments (US$ millions)

112 211 240 251 194

Gross foreign exchange reserves (US$ millions)

964 1,135 1,326 1,408 1,577

(in months of imports of goods and services)

6.1 5.8 5.6 5.3 5.3

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

1/ Fiscal year begins in July.

2/ Nominal GDP divided by average of current-year and previous-year end-period money stocks.

3/ Annual average rate on 91-day treasury bills.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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