Press Release No. 09/476

Press Release: IMF Executive Board Completes Sixth Review and Extends the Policy Support Instrument for Uganda for One Year

December 22, 2009

The Executive Board of the International Monetary Fund (IMF) completed today the sixth review under a three-year Policy Support Instrument (PSI) for Uganda. The Executive Board also approved an extension of the PSI for one year through December 14, 2010 to align a possible successor arrangement with the budget cycle and the National Development Plan currently under preparation.

Uganda’s PSI was approved on December 15, 2006 (see Press Release No. 06/281). The program goals include macroeconomic stability, sustainable economic growth, poverty reduction, financial sector deepening, and improved public sector financial management. 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's discussion, Mr.Takatoshi Kato, Deputy Managing Director and Acting Chair, stated: “ Prudent economic management and strong fundamentals have enabled Uganda to weather the global crisis relatively well. Despite a slowdown in economic activity, growth remains strong by regional and international standards. Core inflation has declined in spite of an increase in headline inflation driven by higher food prices. The external current account has performed better than expected, buoyed by strong cross-border exports, and international reserves remain adequate. Uganda’s flexible exchange rate regime has facilitated adjustment to external shocks. The financial sector has been largely spared by the crisis and remains sound.

“Looking forward, macroeconomic policies in FY2009/10 continue to aim at overcoming infrastructure bottlenecks while mitigating the impact of external shocks on domestic activity. Addressing technical and administrative capacity constraints is key to improving budget execution, providing a healthy stimulus to the economy. Plans to step up public investment will help address Uganda’s large infrastructure deficit. At the same time, caution is needed to preserve fiscal and debt sustainability, and leave space for private sector growth. More generally, borrowing to finance infrastructure projects should be evaluated on a case-by-case basis in terms of cost effectiveness and the impact on debt and fiscal sustainability. It will be essential to embed borrowing decisions in a well-articulated debt management strategy and sound medium-term public expenditure management framework.

“On the monetary side, increased flexibility in the liquidity management framework should allow the central bank to support private demand while bringing down inflation. In this regard, the Bank of Uganda should closely monitor incipient inflationary pressures and stand ready to make policy adjustments should inflation fail to decline as expected.

“ A renewed emphasis on a comprehensive and well-coordinated structural reform agenda would raise both the implementation and absorptive capacity of Uganda. In particular, strengthened public financial management would help improve the quality and efficiency of fiscal spending. Uganda also needs to enlarge the local tax base and boost the efficiency of revenue collection to reduce its dependency on aid.

“The commercial exploitation of oil, though still some years away, will raise additional fiscal and institutional challenges. The authorities are committed to managing oil revenue carefully and transparently through the budget process,” added Mr. Kato.