IMF Executive Board Completes the First Review under the Policy Support Instrument for Uganda and Approves a New Three-Year Policy Support InstrumentPress Release No. 06/281
December 15, 2006
The Executive Board of the International Monetary Fund (IMF) today completed the first review under a 16-month Policy Support Instrument (PSI) for Uganda. The PSI was approved on January 24, 2006 (see Press Release No. 06/14).
The Executive Board also agreed to Uganda's request to replace the current 16-month PSI with a new three-year PSI, to support their near-and medium-term policies. The new program includes 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. Uganda remains a strong candidate for a PSI with its longstanding track record of prudent monetary policies, ample foreign exchange reserves, and low external debt, particularly after the recent Multilateral Debt Relief Initiative (MDRI).
The IMF's framework for PSIs is designed for low-income countries that may not need IMF financial assistance, but still seek close cooperation with the IMF in preparation and endorsement of their policy frameworks. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners. 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 reviewed semi-annually, irrespective of the status of the program (see Public Information Notice No. 05/145).
Following the Executive Board discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, made the following statement:
"Sound macroeconomic management, structural reforms, and substantial donor assistance supported Uganda's long record of high economic growth and poverty reduction. Per capita growth, however, has tapered off in recent years. To maintain high, sustainable per capita growth, there is a need to scale up investment in infrastructure, deepen the financial sector, and continue to strengthen governance.
"In addressing Uganda's infrastructure bottlenecks, careful attention must be paid to financing and macroeconomic considerations. Infrastructure projects need to be well planned and financed to the extent possible through grant scaling up, domestic savings, and concessional borrowing.
"Uganda's financial sector needs deepening to build on recent improvements in the banking sector. The government is developing new supervision and legal arrangements for the provision of long-term capital and is beginning to promote financial services in rural areas. To sustain these initiatives, it will be important for the government to avoid directed lending.
Sustaining the country's fiscal performance will require further efforts to boost revenues and strengthen expenditure management. In this context, caution in the government's efforts to introduce tax incentives to attract investments is warranted. The way forward for Uganda would be to use the country's scarce resources to improve its infrastructure.
As regards structural reforms, the authorities are encouraged to press ahead with their ambitious agenda, covering the public finances, the financial system, and governance. In addition, the recently established East African Community (EAC) customs union should help promote regional trade and provide a forum for discussion of trade policies and advancement of regional integration.
"The first scheduled review under the Policy Support Instrument (PSI) is completed. As envisaged, the current 16-month PSI is being replaced by a three-year PSI. The latter is based on the approved 2006/07 budget, the Medium-Term Expenditure Framework, and Uganda's Poverty Eradication Action Plan. The program—which meets the standard of upper credit tranche conditionality—aims at maintaining macroeconomic stability through continued prudent fiscal, monetary, and exchange policies, while preserving debt sustainability. As in the past, these would set the basis for private sector-led growth and continued poverty reduction," Mr. Kato said.