IMF Executive Board Completes Fourth Review Under the Policy Support Instrument for UgandaPress Release No.12/204
June 5, 2012
The Executive Board of the International Monetary Fund (IMF) has completed the fourth review under a three-year Policy Support Instrument (PSI) for Uganda. The Executive Board’s decision was taken on a lapse of time basis and enters into effect today1. The PSI for Uganda was approved by the IMF’s Executive Board on May 12, 2010 (see Press Release No. 10/195). 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.
The PSI-supported program with Uganda remains on track. All end-December 2011 quantitative assessment criteria were met, as were most of the structural benchmarks.
The stance of macroeconomic policy remains appropriate. Monetary tightening, initiated in July 2011 in response to rising inflation, has been effective in reducing demand and price pressures in the economy. High interest rates supported by tighter fiscal policy have strengthened the currency and raised reserve levels, while private sector credit growth and overall demand pressures are now much reduced. Prices have been generally stable for the last few months and annual inflation is coming down. The disinflationary effort has had limited effect on financial sector stability. Nonetheless, the tighter policies combined with weaker global demand are projected to reduce economic growth this year.
Looking forward, economic growth should recover significantly next year, as the expected decline in inflation will allow a phased and gradual relaxation of the monetary policy stance and a recovery of credit growth. The FY2012/13 budget aims at further moderate fiscal consolidation while increasing spending on infrastructure and other development priorities. In addition, tax policy measures will be introduced and a comprehensive reform of tax exemptions linked to a new tax procedure code carried out, both aimed at improving revenue and budget performance over the medium term. While external borrowing for development is expected to increase in the years ahead, debt sustainability analysis carried out jointly by the IMF and the World Bank establishes that Uganda continues to face a low risk of debt distress.
Key risks to the outlook arise mainly from external factors. Slower than expected global growth would worsen the trade deficit and possibly reduce remittances and capital flows. Higher energy prices would dampen growth, as would deterioration in the regional security environment. However, absent these risks materializing, economic growth is expected to continue to improve, reaching 6 percent by 2013/14, and achieving its estimated potential of about 7 percent by 2014/15.
1 The Executive Board takes decisions under its lapse of time procedures when it is agreed by the Board that a proposal can be considered without convening formal discussions.