IMF Executive Board Concludes 2013 Article IV Consultation with UgandaPublic Information Notice (PIN) No. 13/78
July 8, 2013
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 June 28, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Uganda,1 completed the sixth and final review of the country’s performance under an economic program supported by a Policy Support Instrument (PSI) arrangement and approved a three-year PSI (see Press Release No. 13/239).
Growth has started to pick up following the lowest rate of economic expansion in a decade, and—driven mainly by investment and trade—is projected to reach 5¼ percent this fiscal year. Private sector activity was boosted by a good harvest, by the inauguration of the Bujagali hydropower plant, which lowered manufacturing costs, and by a loosening of the fiscal stance towards the end of the year due to faster than expected implementation of road projects. Inflation was brought down to close to the 5 percent target level as a result of careful monetary management by the Bank of Uganda.
External performance was stronger than anticipated, owing to strong non-coffee exports and a temporary deceleration of imports. Aided by foreign exchange inflows attracted by high shilling rates, international reserves grew significantly and now stand at a comfortable level equivalent to four months of imports, providing a welcome buffer to the economy in the context of an uncertain international environment. Uganda is assessed at a low risk of debt distress, while the banking sector remains solvent, liquid and profitable despite some increase in the stock of nonperforming loans.
Growth is projected at 6–7 percent in the medium term in the context of low inflation. A moderate expansion in the underlying fiscal deficit to support growth, a flexible exchange rate, and monetary management supportive of low and stable inflation, underpin a favorable macroeconomic outlook.
Executive Board Assessment
Executive Directors welcomed the authorities’ successful policies to reduce inflation, revive economic activity, and accumulate international reserves, while noting that progress on structural reform was mixed. They stressed the importance of maintaining prudent macroeconomic policies and stepping up governance and structural reforms to underpin plans for oil exploitation and economic diversification.
Directors endorsed the authorities’ plans to boost infrastructure and development spending to support growth. They stressed the importance of decisive action to increase revenue collection through tax reform and improved revenue administration. They encouraged the authorities to prepare an action plan to reduce tax exemptions, including implementing the recommendations of the ongoing VAT gap analysis. This will underpin efforts to reduce reliance on donor support and external borrowing, and to limit nonconcessional borrowing to high-economic return projects.
Directors acknowledged the progress in strengthening public financial management. They encouraged the authorities to continue to tighten spending controls and to move swiftly toward introducing a Treasury Single Account to improve budget execution, transparency, and cash management. Directors welcomed submission to parliament of the draft public finance management bill and its amendments.
Directors commended the authorities’ commitment to maintaining price stability and urged strong policy coordination to keep inflation under control. They advised the Bank of Uganda (BoU) to remain vigilant and adapt the monetary policy stance to domestic demand developments and possible external spillovers. Directors welcomed the authorities’ decision to further strengthen the operational and institutional aspects of their inflation targeting framework and to formally introduce inflation as a program target. They supported the inter-institutional agreement to implement the first stage of the recapitalization of the BoU, as well as the plans to further strengthen the independence, accountability, and technical capacity of the central bank.
Directors noted staff’s assessment that the real effective exchange rate is broadly in line with economic fundamentals, and supported the exchange rate flexibility that underpins the monetary framework. They welcomed the authorities’ commitment to limiting interventions to smoothing excessive exchange rate volatility and maintaining reserve cover.
While the banking sector remains solvent, liquid, and profitable, Directors recommended strengthened bank supervision and regulation enforcement to mitigate vulnerabilities resulting from increased foreign currency lending. A few Directors suggested that macroprudential or capital flow management measures could be considered. Directors welcomed plans to expand financial deepening and inclusion.
Directors looked forward to the authorities’ long-term development plan to promote inclusive growth. They underscored the importance of accelerating structural reforms and addressing governance weaknesses to strengthen the business environment, raise competitiveness, and maximize the benefits of integration in the East African Community. In preparation for oil production, Directors recommended setting a framework for efficient use of the resource wealth, and welcomed Uganda’s plan to join the Extractive Industries Transparency Initiative. A well-tailored social safety net will be important to help vulnerable groups share in prosperity.