IMF Executive Board Completes Seventh Review under Uganda's PSI and Approves a Three-Year Policy Support Instrument

Press Release No. 10/195
May 12, 2010

The Executive Board of the International Monetary Fund (IMF) completed today the seventh review of Uganda's economic performance under the Policy Support Instrument. At the request of the authorities, the Executive Board cancelled the current PSI and approved a new three-year program. Uganda's previous PSI was approved on December 15, 2006 (see Press Release No. 06/281).


The PSI for Uganda aims at maintaining macroeconomic stability and alleviating constraints to growth through a scaling up of public investment spending and structural reforms to enhance the country’s absorptive capacity. It will also support the strengthening of institutions ahead of expected oil production and Uganda’s participation in the future East African Monetary Union.

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).

Following the Executive Board’s discussion on Uganda, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“Prudent macroeconomic policies have enabled Uganda to maintain macroeconomic stability despite a series of external shocks. Notwithstanding a recent deceleration, output growth has been strong and is expected to rebound quickly. Inflation has moderated, and the external position has remained solid, buoyed by robust exports and foreign investment flows. Limited central bank intervention has helped smooth excessive exchange rate volatility, and the financial sector has remained sound.

“Looking ahead, the main challenge is to accelerate infrastructure development while ensuring macroeconomic stability. The new PSI-supported program aims to support the objectives of the recently adopted National Development Plan. The authorities aim to raise domestic revenue and, if needed, use a limited amount of non-concessional borrowing to finance the increase in public spending. A cautious monetary stance, a flexible exchange rate regime, and a comfortable level of reserves will help keep the fiscal and debt positions within sustainable bounds.

“To improve efficiency and raise future growth, the government is committed to reinvigorate structural reforms. These will focus on public financial management, including strengthening spending controls and efficiency, and increasing domestic tax revenue. Financial sector reforms will seek to enhance banking stability and facilitate financial deepening.

“Large-scale oil production and the establishment of the Eastern African Monetary Union will present opportunities but also pose significant policy challenges for Uganda in the years to come. The authorities are taking steps to further strengthen their institutional and policy frameworks which, together with improving infrastructure, should help the country prepare effectively for these developments”, Mr Shinohara added.

ANNEX

Recent Economic Developments

The Ugandan economy weathered the first-round impact of the global financial crisis relatively well. Despite the reversal of portfolio inflows and lower foreign direct investment, economic growth remained strong by international standards (7 percent in 2008/2009), driven in part by strong cross-border exports and recovery of private investment flows.

The slowdown was more marked this year. Economic activity decelerated due to a prolonged drought and the uncertainties about the path of global growth. Growth is expected to reach 5.6 percent for 2009/2010, but should rebound quickly over the next couple of years.

The medium-term outlook remains favorable. Looking forward, the prospect of substantial oil revenues offers an opportunity to raise growth and eliminate poverty, but also poses important policy challenges. Uganda will need robust fiscal and financial institutions, a supportive business environment and scaled-up infrastructure to prepare for this event. The fiscal policy framework must also be further bolstered in preparation for the establishment of the East African Monetary Union.

Program Summary

Uganda's PSI will be guided by the objectives and policies outlined in the new National Development Plan launched in April 2010. Fiscal policies will continue to target a bold scaling up of energy and transportation infrastructure. Public investment is targeted to increase from 6.5 percent of GDP in 2008/2009 to 8 percent in 2011/2012. Monetary policy will aim at keeping annual inflation at around 5 percent on average. The exchange rate will remain flexible and the authorities will seek to build up reserves as they prepare for the forthcoming East African Monetary Union. A financial markets development plan is being developed under the common EAC framework with a view to further enhancing banking stability and facilitating financial deepening.


Uganda: Selected Economic and Financial Indicators, FY2008/09–2013/14 1

 
  2008/09   2009/10   2010/11 2011/12 2012/13 2013/14
  Act.   Sixth Rev. Proj.   Proj. Proj. Proj. Proj.
 

GDP and prices (percent change)

                 

Real GDP

7.1   6.3 5.6   6.4 7.0 7.2 7.4

Headline inflation (end of period)

12.3   12.2 5.0   5.3 5.2 5.3 5.5

Headline inflation (average)

14.2     9.5   4.1 5.2 5.3 5.2

Core inflation (end of period)

11.1   7.9 3.9   5.0 5.0 5.0 5.0

Core inflation (average)

12.5     7.0   4.5 4.9 5.1 4.9

External sector (percent change)

                 

Terms of trade (Based on commodities, deterioration –)

6.6   -2.7 5.9   -8.4 -2.4 -1.1 -1.3

Terms of trade (based on all exports, deterioration -)

11.6     7.8   -4.0 1.1 1.8 1.8

Real effective exchange rate (depreciation –)

  0.3   -- -- -- --

Money and credit (percent change)

                 

Broad money (M2)

26.3   21.2 19.3   13.7 15.6 15.9 16.0

Domestic credit

24.1   13.7 11.3   8.8 8.3 8.2 8.9

Credit to the central government 2

6.8   1.4 1.5   1.6 0.6 0.6 1.3

Private sector credit

31.6   21.4 17.1   12.7 13.8 13.9 14.2

Savings and investment gap (percent of GDP)

-8.1   -9.2 -7.7   -8.0 -7.9 -7.3 -7.1

Domestic investment

24.2   24.9 23.3   24.7 26.0 26.2 26.6

Public

6.2   7.2 5.6   6.7 7.9 7.9 8.1

Private

18.0   17.7 17.7   17.9 18.1 18.3 18.5

National savings (excluding grants)

16.1   15.7 15.6   16.7 18.2 19.0 19.6

Public

0.9   2.2 0.9   1.7 2.6 3.1 3.6

Private

15.2   13.5 14.7   15.0 15.6 15.9 16.0

External sector (percent of GDP)

                 

Current account balance (including grants)

-4.8   -6.7 -5.3   -6.2 -6.1 -5.7 -5.6

Current account balance (excluding grants)

-8.1   -9.2 -7.7   -8.0 -7.9 -7.3 -7.1

Net donor inflows

4.5   6.1 5.3   3.8 4.4 3.8 3.4

External debt (including Fund)

13.9   14.3 14.0   15.6 17.6 18.9 19.9

External debt-service ratio 3, 4

1.6   1.0 1.1   1.0 1.3 1.7 1.6

Government budget and debt (percent of GDP)

                 

Revenue

12.5   12.8 12.5   13.1 13.5 14.0 14.4

Grants

3.4   2.6 2.4   1.8 1.8 1.6 1.4

Total expenditure and net lending

-17.8   -17.8 -17.2   -18.1 -18.8 -18.7 -18.9

Overall balance (including grants)

-1.9   -2.5 -2.3   -3.2 -3.6 -3.2 -3.1

Overall balance (excluding grants)

-5.3   -5.0 -4.7   -5.0 -5.4 -4.8 -4.5

Stock of domestic debt

8.4   6.7 7.6   7.0 6.7 6.6 6.5

Memorandum items:

                 

Nominal GDP (U Sh billions)

29,972   36,330 35,213   39,040 44,014 49,725 56,246

Average exchange rate (U Sh per US$)

1,905    

Treasury bill yield (percent)

6.0    

Overall balance of payments (US$ millions)

178   291 291   60 237 284 288

Gross foreign exchange reserves

                 

(months of next year's imports of goods and services)

4.9   4.9 5.1   4.8 4.9 5.0 5.1
 

Sources: Ugandan authorities; and IMF staff estimates and projections.
1 Fiscal year begins in July.
2 Percent of M3 at start of the period.
3 Percent of exports of goods and nonfactor services.
4 Including Fund obligations; reflects actual debt service paid, including debt relief.



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