IMF Executive Board Completes Final Review of Uganda's PRGF Arrangement and Approves 16-month Policy Support Instrument

Press Release No. 06/14
January 24, 2006

The Executive Board of the International Monetary Fund (IMF) has completed the sixth and final review of Uganda's economic performance under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement and approved a disbursement for an amount equivalent to SDR 2.0 million (about US$2.9 million). This would bring total disbursements under the PRGF arrangement to SDR 13.5 million (about US$19.5 million).

In completing the review, the Executive Board granted Uganda's request for waiver for the non-observance of two performance criteria relating to the accumulation of domestic arrears under the commitment control system and to the new lending by the Uganda Development Bank (UDB). Uganda's PRGF arrangement was approved on September 13, 2002 (see Press Release No. 02/41) for SDR 13.5 million (about US$19.5 million).

The Executive Board also approved a 16-month Policy Support Instrument (PSI) for Uganda under the IMF's PSI framework, which is intended to support the nation's economic reform efforts. Uganda's PSI begins on February 1, 2006, immediately after the expiration of the current PRGF arrangement, which was earlier extended through January 31, 2006.

The PSI for Uganda is aimed at maintaining macroeconomic stability and at promoting structural reforms, as well as implementing the broader policy agenda as envisaged in the Ugandan authorities' Poverty Eradication Action Plan (PEAP). Approval of Uganda's PSI signifies IMF endorsement of the policies outlined in the program. A multi-year PSI would be discussed following the presidential and parliamentary elections scheduled for February 2006. In addition to macroeconomic stability, the multi-year PSI program would address the next layer of structural reforms needed further to implement Uganda's poverty alleviation strategy.

The IMF's framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies. PSIs are voluntary and demand driven. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. Members' performance under a PSI is normally reviewed semi-annually, irrespective of the status of the program (see Public Information Notice No. 05/145).

In commenting on the Executive Board decision, Mr.Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"Under the PRGF arrangement, Uganda has achieved macroeconomic stability and a strong external position, and has implemented a range of key structural reforms. Prudent monetary and fiscal policies, complemented by large external inflows, have contributed to higher growth and broad price stability, setting the stage for increased investments in health, education, and physical infrastructure, and improved living standards for Uganda's fast-growing population.

"Looking ahead, continued gradual fiscal adjustment lies at the heart of Uganda's medium-term macroeconomic strategy. This will help promote macroeconomic stability and sustainable private sector-led growth, and reduce dependence on support from donors. The pace of fiscal adjustment would carefully balance these objectives with the need to provide sufficient resources for implementing the Poverty Eradication Action Plan (PEAP) and meeting the Millennium Development Goals.

"The efficient use of international aid flows will remain high on the policy agenda. The government is bolstering budget and expenditure management procedures to ensure that resources are used as intended.

"Uganda's medium-term structural agenda aims at fostering private sector growth and will include anti-corruption policies, infrastructure development, and trade enhancement. Second-generation reforms will include (i) increasing electric power generation; (ii) removing regional transport and trading obstacles; (iii) deepening financial sector services; and (iv) improving government services to businesses.

"The comprehensive program, which meets the standard of upper credit tranche conditionality, and will be supported by a 16-month Policy Support Instrument (PSI) from the Fund, aims at sustaining macroeconomic stability and structural reforms already under way. Fiscal policies are based on the approved 2005/06 budget and the Medium-Term Expenditure Framework. Budget management will focus on reducing domestic arrears and ensuring adequate fiscal space for critical infrastructure spending, notably the Bujagali hydroelectric project. Monetary policies will try to keep inflation in check and maintain ample international reserves in the context of a flexible exchange rate regime. Further strengthening Uganda's financial sector is also a priority, including ensuring sound management and supervision of the Uganda Development Bank. Poverty reduction policies under the PSI are based on the PEAP.

"The 16-month PSI could be replaced by a multi-year PSI in 2006, depending on progress in defining medium-term objectives and policies. This would provide an opportunity to incorporate debt relief into the medium-term framework and allow the program period to be aligned more closely with the budget cycle. The multi-year program would include structural measures to spur private sector activity, lower business costs, and improve Uganda's competitiveness. Macroeconomic policies would continue to emphasize stability and sound management of aid flows," Mr. Kato said.


Recent Economic Developments

Macroeconomic stability remains a cornerstone of Uganda's reform efforts. Fiscal restraint, coupled with prudent monetary management, have supported Uganda's robust growth and helped contain inflation to single digit levels over most of the past decade. In recent years, these policies have contributed to a very comfortable level of international reserves. Implementation of Uganda's Poverty Eradication Action Plan has improved living conditions, although per capita income gains have been modest because of the country's high population growth rate. Uganda has also completed most of its structural reforms initially planned and has begun to tackle the next layer of reforms which addresses the business environment.

Macroeconomic developments in 2004/2005 were in line with assumptions under the current PRGF program and confirm Uganda's stable macroeconomic situation. Economic growth remained strong and inflation in check despite drought conditions and crop diseases, and structural reforms are advancing as well. In the medium-term, nonetheless, Uganda faces a number of challenges. Economic growth needs to increase to at least 7 percent to provide for a substantial reduction in poverty and to achieve the related Millennium Development Goals. This will require continued policies aimed at macroeconomic and debt sustainability, new electric power generation capacity, and second-generation reforms to promote private sector activity.

Program Summary

Uganda's PSI will focus on sustaining macroeconomic stability and structural reforms already under way. Fiscal policies are based on the approved 2005/06 budget and the Medium-Term Economic Framework (MTEF). Budget management will focus on addressing domestic arrears and ensuring adequate fiscal space for critical infrastructure spending. Monetary policies will target nonfood inflation of 5 percent or less and maintain ample international reserves in the context of a flexibly exchange rate regime. Further development of Uganda's financial sector is also a priority, and this will include establishing sound management and supervision of the Uganda Development Bank (UDB). Poverty reduction policies under the PSI are based on the PEAP approved in May 2005.

To monitor Uganda's performance under the PSI, quantitative and structural assessment criteria and structural benchmarks have been set. Quarterly quantitative targets include ceilings on base money and net claims on government by the banking system and a floor on net international reserves of the Bank of Uganda. The quantitative targets for end-2006 may be revised to reflect the 2006/07 budget. The structural assessment criteria will cover the measures related to domestic budgetary arrears.

Uganda: Selected Economic and Financial Indicators, 2003/04-2006/07 1/

  2003/04 2004/05 2005/06 2006/07
      Proj. Proj.

  (Annual percentage change)

National income and prices


GDP at constant prices

5.6 5.6 6.0 5.9

External sector


Terms of trade (deterioration -)

7.5 4.0 13.7 4.0


(Annual changes in percent of beginning-of-period stock of money, unless otherwise indicated)

Money and interest rates



10.0 12.1 14.5 10.5

Velocity (GDP/M2) 2/

7.2 7.4 7.6 7.4

Interest rate (in percent) 3/

14.1 8.5 ... ...


(In percent of GDP at market prices, unless otherwise indicated)

External sector


Current account balance


(including official grants)

-1.7 -1.2 -4.0 -4.3

(excluding official grants)

-12.0 -10.2 -11.4 -10.0

Government budget



12.6 12.9 12.9 13.6


9.5 8.4 6.8 5.4

Total expenditure and net lending

-23.8 -21.6 -21.7 -21.3

Government balance (excluding grants)

-11.1 -8.7 -8.8 -7.7

Government balance (including grants)

-1.6 -0.3 -2.0 -2.3



Net donor inflows

11.9 9.4 9.8 8.0

Net present value of external debt 4/

193.0 179.1 168.6 50.7


(In millions of U.S. dollars, unless otherwise indicated)

Overall balance of payments

214 237 121 99

Gross foreign exchange reserves

1,135 1,326 1,386 1,423

(in months of imports of goods and services)

5.9 6.0 5.9 5.7

Sources: Ugandan authorities; and Fund 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/ Weighted annual average rate on 91-day treasury bills.
4/ In relation to the current year of exports of goods and services.


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