IMF Concludes Staff Mission to UgandaPress Release No. 12/417
November 6, 2012
An International Monetary Fund (IMF) team visited Kampala from October 24 to November 6, 2012 to carry out discussions with the Ugandan authorities for the fifth review of their IMF-supported economic and financial program. The mission met with Hon. Maria Kiwanuka, Minister of Finance, Planning, and Economic Development, and Professor Emanuel Tumusiime-Mutebile, Governor of the Bank of Uganda, as well as other senior government officials, development partners, and representatives of the private sector and civil society.
At the end of the mission, Ms. Ana Lucía Coronel, IMF senior resident representative and mission chief for Uganda, issued the following statement:
“Uganda’s economic growth rate declined from 6.6 percent in FY 2010/11 to 3.4 percent in FY 2011/12, due to a confluence of a difficult international environment, contractionary monetary policies implemented in response to high inflation, and a tighter–than-budgeted fiscal stance. These policies, aided by declining food prices, helped reduce inflation significantly from its year-on-year peak of over 30 percent in October 2011 to 4½ percent in October 2012. As import demand remained strong despite subdued economic activity, the current account deficit widened slightly from about 11 percent of gross domestic product (GDP) in FY 2010/11 to 11¼ percent in FY 2011/12. The deficit was mainly financed by foreign direct investment, and also by short-term portfolio inflows attracted by high interest rates. These inflows helped sustain a significant accumulation of foreign exchange reserves of about US$600 million during the fiscal year.
“Fiscal policy was tighter than programmed because of an under-execution of the government’s public investment program by 1 percentage point of GDP. While unfavorable to growth, the reduced fiscal impulse contributed to the dampening of demand pursued by the Bank of Uganda through its interest rate policy, and helped achieve the announced inflation target. The sharp decline in the central bank rate should lead to lower commercial bank lending rates. However, with the private sector still recovering from the disinflationary episode, bank lending to the private sector has yet to return to previous levels. The interest rate decline has resulted in a modest reversal of foreign portfolio inflows and some exchange rate depreciation.
“All quantitative targets in the IMF-supported program for the first half of 2012 were met, most of them by a wide margin, reflecting faster-than-anticipated disinflation. Performance on the structural benchmarks was mixed. Progress was achieved on developing macroeconomic forecasting techniques and publishing the beneficiaries of tax exemptions. However, the government’s program commitment to reinforce control over the unpaid bills of line ministries has yet to materialize, and the issuance of national identification cards is facing major delays.
“Going forward, the key goals are to maintain macroeconomic stability and to accelerate economic growth to reduce unemployment and poverty. The policy mix to achieve these objectives should entail a continuation of the accommodating monetary policy stance, a small expansion of the fiscal deficit, some front loading of development spending, and maintenance of a flexible, market driven, exchange rate. Based on this policy mix, GDP growth is projected to increase to 5 percent this fiscal year, with core inflation averaging about 6 percent.
“Macroeconomic policies need to be accompanied by reforms to address the governance problems that have eroded the quality of spending and damaged the credibility of government policies. Toward this end, the government needs to reinforce efforts to improve public financial management by securing approval of a Public Finance Bill that ensures transparent and sustainable revenue management. Improving controls over budget execution and strengthening cash management by introducing a Treasury Single Account are also key priorities.
“The outlook for growth and inflation is favorable, but not without risks. Possible heightened financial or political instability in Uganda’s main trading and development partners poses external risks to the outlook. On the domestic front, the possibility of additional spending delays in key development projects, notably the Karuma hydropower plant—budgeted at almost 2 percent of GDP this fiscal year—could derail growth prospects. Inflation risks could emanate from possible food price and exchange rate pass through effects, but should be mitigated by the gradual economic recovery.
“The authorities are encouraged to create the conditions necessary for growth to reach its potential level of around 7 percent over the medium term by facilitating improvements in the business climate, strengthening tax collections, and optimizing the use of current and future resource revenues.
“The IMF mission wishes to thank the authorities for their cooperation and hospitality, which greatly facilitated the work of the mission.”