## cr17206

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### EXECUTIVE SUMMARY — context and structural backdrop
- Growth averaged 8 percent per annum during 1992–2010, tripling per capita GDP and more than halving poverty to 35 percent (20 percent based on the national poverty line).
- Growth slowed around 2010 due to negative productivity growth in agriculture and industry, and investment heavily concentrated in real estate.
- A third of the population is still below the poverty line, and some 40 percent of the population are vulnerable to falling below the poverty line (2013 data).
- Main government objectives: commence oil production and achieve middle-income status by 2020.
- Uganda hosts over one million refugees; emergency needs are estimated at about US$1.4 billion this year. By government estimates, Uganda has spent the equivalent of ½ percent of GDP on refugees in 2016.

### RECENT DEVELOPMENTS AND MACROECONOMIC PERFORMANCE
- Growth and outlook
  - Initial H1-FY16/17 growth estimate: 1.6 percent.
  - Staff and authorities’ projection for FY16/17: 3.9 percent (about ½ percent in per-capita terms), down from 4.7 percent in FY15/16.
  - Infrastructure and oil sector investments can revive growth over the next 3−5 years; medium-term growth could reach 6−6½ percent, but downside risks are significant.
- Sectoral and supply shocks
  - Drought in the Horn of Africa likely reduced growth by about ½ percentage point, exposing some 11 million Ugandans to food insecurity.
  - Fall armyworm infestation poses a risk (projections assume it can be controlled).
  - Regional conflicts and spillovers (e.g., South Sudan) have weighed on growth.
- External sector and reserves
  - Current account deficit: estimated 2 percent of GDP in H1 FY16/17 (narrowed, driven by lower investment-related imports).
  - Overall balance of payments: surplus of 0.6 percent of GDP.
  - Real effective exchange rate: depreciated by 2 percent since July 2016.
  - Reserves buffer remains comfortable at above four months of next year’s imports; international reserves projected to remain at around 4½ months of prospective imports.
- Inflation and monetary policy
  - Food price inflation: rose from 5 percent year-on-year in September 2016 to 23.1 percent in May 2017.
  - Headline inflation: 7.2 percent year-on-year in May 2017.
  - Core inflation: 5.1 percent year-on-year in May 2017, in line with the BoU’s 5 percent target.
  - Bank of Uganda policy rate: reduced by 600 bps since April 2016 to 11 percent; Supplement: MPC cut policy rate by 100 bps to 10 percent on June 19, bringing cumulative cut to 700 bps since April 2016.
  - BoU’s inflation-targeting regime has maintained core inflation in a narrow band around 5 percent; BoU uses repos/reverse repos to steer the 7-day interbank rate.
- Fiscal developments and public investment
  - Revenue collection in nominal terms was slightly lower-than-projected through March due to lower nominal growth, but policy and administration measures yielded a near ½ percent of GDP increase in the revenue ratio.
  - Recurrent expenditures were ¼ percent of GDP ahead of program projections at end-March, broadly corresponding to additional domestic arrears clearance.
  - Domestically-financed development spending on track; significant under-execution of foreign-financed development budget and construction of hydropower dams (Isimba ~70 percent complete; Karuma ~50 percent complete).
  - Overall fiscal deficit for Q1–Q3 FY2016/17 was 3 percentage points of GDP lower than anticipated and is projected at 3½ percent of GDP for the year (compared to 6 percent at the time of the seventh review).
  - Authorities relied on BoU advances late in the fiscal year, cancelled June auctions, and subsequently mopped up liquidity with costly repo issuance.
- Financial sector and credit
  - Non-performing loans (NPLs): 6.3 percent at end-March.
  - Real private sector credit growth turned negative in late 2016 (adjusted for valuation effects) and is recovering slowly.
  - NPLs concentrated in agriculture, construction, and trade and commerce; causes cited include government domestic arrears in FY15/16, diversion of borrowed funds and fraudulent activities, political instability in South Sudan, and the economic downturn with exchange rate and interest rate volatility.
  - Mobile money has greatly enhanced access, but credit to the private sector remains low; banks are well-capitalized despite elevated NPLs; insurance and asset management sectors remain nascent.

### KEY RISKS AND CONSTRAINTS
- Main downside risks
  - Delays and implementation problems in the public investment program, which could undermine growth and debt sustainability.
  - Agricultural sector exposure to weather effects and pest infestations (fall armyworm).
  - Unfavorable regional and global developments.
- Institutional capacity
  - Public investment management capacity needs improvement to achieve the planned scaling up; timeline for developing the oil sector and getting to first oil is described as ambitious.
- Other risks (tilted to the downside)
  - Renewed accumulation of government domestic arrears would aggravate banks’ NPL problem and hit growth via the credit channel.
  - Large shilling depreciation could impact foreign investor holdings of government securities and contribute to rising NPLs.
  - Tightening global financing conditions could hold back portfolio inflows and reduce offshore participation in Uganda’s Stock Exchange.
  - Cuts in aid flows would undermine the sustainability of spending, particularly in the social sectors.

### POLICY STANCE, INSTITUTIONAL ISSUES, AND RECOMMENDATIONS
- Fiscal policy
  - Fiscal policy attempts to balance spending needs within a constrained resource envelope; infrastructure spending is prioritized, tightening current spending.
  - Public debt is manageable if infrastructure spending raises growth and revenue improves further.
  - Authorities have increased revenue collection, but the tax take remains low (FY16/17 revenue collection: 14 percent of GDP).
  - FY17/18 budget specifics:
    - Budget envisages a further ½ percent of GDP increase in the revenue ratio.
    - Current expenditure to be compressed and decline by 0.4 percent of GDP compared to FY16/17.
    - Allocations for social spending budgeted to stay broadly unchanged in Shilling-terms and thus decline as a percentage of GDP from 6.3 percent of GDP in FY2016/17 to 5.7 percent in FY2017/18.
  - Staff recommendations: strong expenditure control to avoid recurrence of domestic arrears; consider reducing corporate tax exemptions and prefer accelerated depreciation allowances; prefer a direct subsidy to the Bujagali power station rather than a tax exemption.
- Monetary and liquidity management
  - Monetary policy has kept core inflation on target under inflation targeting.
  - Better fiscal-monetary coordination would facilitate liquidity management.
  - Staff recommends BoU remain on hold for a while to confirm limited second-round effects after food price spike.
  - Financial market reforms: develop master repo agreement, consider standing facilities corridor, replace OTC trading with a trading platform, expand direct access to central depository.
- Financial sector policy and development
  - Implement remaining FSAP recommendations, particularly strengthening regulation and supervision (e.g., on classification and provisioning for “watch loans”).
  - Ongoing initiatives should expand service availability and reduce costs to enhance financial sector contribution to growth.
  - Encourage asset recovery company initiative and improved credit information (second credit bureau); both bureaus should look beyond loan repayments to other payment obligations.
- Program and structural reforms
  - Performance under the PSI through March 2017: broadly satisfactory. Authorities met cornerstones of the quantitative program and most criteria; some indicative targets were missed (e.g., revenue narrowly missed; repayment of BoU advances missed in December and March).
  - Staff recommends completion of the eighth review under the Policy Support Instrument (PSI) and encourages completion of pending structural reforms.
  - Structural reform progress: One structural benchmark met on time; three implemented with delay; six not met but intended for implementation. AML/CFT legislative agenda approved to support exit from FATF “grey” list.
  - Pending items highlighted: BoU Act amendments (draft to be shared with cabinet), finalizing report on end-December unpaid bills, publication of Appraisal User Manual (finalized but printing/distribution delayed), and policy for regulating mobile money being revisited.

### OIL SECTOR — Box 2 key points
- Recoverable reserves: approximately 1.7 billion barrels.
- Authorities aim to have oil production commence in 2020; production would continue for over 40 years.
- Government expects to receive between 0.5-4 percent of GDP in oil-related revenue per year during production.
- Upstream extraction:
  - Joint venture of three international companies and Uganda National Oil Company (UNOC) will carry out extraction.
  - International joint venture partners expected to make final investment decisions by end-2017.
  - Production could commence as early as 2020 and quickly rise to a peak of 200,000 barrels per day.
  - Total investment cost of upstream extraction is approximately US$8 billion.
- Pipeline and refinery:
  - Pipeline (joint venture including Tanzania) costing US$4-5 billion to transport oil to a sea port in Tanzania.
  - Domestic refinery initial capacity of 30,000 barrels per day to be constructed by a UNOC subsidiary joint venture.
- Regulatory and fiscal regime:
  - Petroleum Regulatory Authority established in 2015.
  - PFM Act of 2015 requires all oil revenue to be deposited in a Petroleum Fund.
  - Tax arrangements governed by Production Sharing Agreements; corporate income tax rate 30 percent.
- Outstanding issues:
  - Pipeline construction must be completed before production; refinery timing and tax regimes for pipeline and refinery unresolved.
  - Public road infrastructure required for access to oil fields; external financing being sought.
  - Policy on use of Petroleum Fund revenues needs development; current withdrawals limited to infrastructure.

### MACROECONOMIC OUTLOOK — selected projections and levels (as presented)
- Real GDP: 4.7 5.0 3.9 5.5 5.0 5.5 6.0 6.5 6.5
- Headline inflation (period average): 6.6 5.4 5.8 4.8 5.9 4.9 5.0 5.0 5.0
- Core inflation (period average): 6.7 5.0 5.2 4.6 5.7 5.3 5.0 5.0 5.0
- Credit to non-government sector: 4.0 8.3 8.5 15.0 12.6 13.6 15.6 16.7 17.0
- Overall fiscal balance: -5.3 -6.0 -3.5 -4.9 -3.7 -5.5 -4.0 -3.0 -1.6
- Public gross debt: 35.7 38.6 38.7 41.5 38.6 40.9 41.6 41.6 40.7
- Current account balance (including grants): -6.3 -7.1 -4.8 -8.2 -6.3 -8.0 -8.0 -9.2 -5.8
- Gross international reserves (US$ billions): 3.0 3.0 3.2 3.1 3.3 3.6 4.0 4.1 4.6
- Gross international reserves (months of next year's imports): 5.3 4.2 5.1 4.0 4.5 4.4 4.4 4.5 5.1
- Memorandum item — GDP per capita (Nominal US$): 673 626 694 648 718 737 799 833 861
- Note: Fiscal year runs from July 1 to June 30.

### FINANCIAL SECTOR STABILITY — Crane Bank resolution (Box 5) and stress tests
- Crane Bank resolution
  - October 2016: BoU took over Crane Bank (third largest domestic bank: just under 10 percent of total credit to the private sector; 7.5 percent of total banking system assets).
  - BoU placed the bank in receivership, appointed a statutory manager, suspended the Board, commissioned financial and forensic audits.
  - January 2017: DFCU chosen to acquire most of Crane Bank’s balance sheet; BoU retained some non-performing assets.
  - Corrective adjustments to Crane Bank’s financials contributed to worsening sector indicators; NPLs rose from 8.3 percent in June to 10.5 percent in December 2016, then to 6.3 percent at end-March (no longer includes most of Crane Bank’s toxic assets).
- Strengthening surveillance and macroprudential measures
  - Mapping interconnections, developing contagion matrix, establishing three financial stability indices, and developing a real estate price index.
  - Regulatory responses to FX mortgage NPLs: maximum loan-to-value ratio; FX mortgages limited to borrowers with foreign exchange income.
  - Second credit bureau established; credit bureaus encouraged to consider broader payment obligations for scoring.
- Stress test highlights (Annex V)
  - Credit shock: first D-SIB reaches breaking point when 21 percent of its assets become nonperforming; least resilient bank breaches minimum CAR when 8.3 percent of performing loans become nonperforming.
  - Industry NPL ratio increase scenario: with industry NPL ratio at 15.6 percent (a rise of 5.2 percent), all banks would meet minimum CAR of 8 percent but three banks would breach minimum paid-up capital.
  - Liquidity bank-run scenario (5% daily withdrawal demand/savings, 3% term): Day 5 failing banks: 3; Day 7 failing banks: 8; all banks have adequate liquidity buffers to absorb the shock; only one bank’s liquid assets to total deposits ratio would fall below 20 percent regulatory minimum.
  - Alternate bank-run scenario (higher withdrawal assumptions): Day 3 – 4 banks failing; Day 5 – 9 banks failing; Day 7 – 10 banks failing.
  - Combined exchange rate and interest rate shocks: 15% depreciation combined with a 50% drop in net interest income – CAR of 15.6%, with 1 bank failing; 30% depreciation – CAR of 15.6%, with 2 banks failing.

### PUBLIC INVESTMENT MANAGEMENT, GOVERNANCE, AND ARREARS
- Public investment management and budget process
  - Success of fiscal strategy depends on continued revenue mobilization and strong public investment management.
  - Recommendations: annual review and prioritization of project pipeline; phased development of integrated project database.
  - Budget process weaknesses: ambitious foreign-financed plans often not realized; tight recurrent envelopes lead to supplementary budgets; FY16/17 budget only 59 percent aligned with National Development Plan (68 percent in FY15/16).
- Governance and arrears
  - Anti-corruption efforts: several high-level arrests; Uganda ranked 151 out of 176 in the 2016 Transparency International Corruption Perception Index.
  - Domestic arrears: stock at end-June 2016 published at 3.2 percent of GDP (Shs 2,701 billion); preliminary reduction to Shs 2,300 billion in December 2016 reported after clearance by MDAs.
  - Measures: tightened commitment controls, migration to prepaid utilities, instruction that accounting officers be held responsible for accumulating arrears; staff notes overly tight envelopes can perpetuate renewed arrears.

### SOCIAL SPENDING, GROWTH, INEQUALITY, AND POVERTY (Box 3)
- Inequality: Gini coefficient around 0.4.
- Fiscal policy effects (CEQ Institute):
  - Net impact of taxation and spending reduces the Gini coefficient by 0.03 points.
  - Impact on poverty is negligible.
  - Direct transfer programs reach around 3 percent of Ugandan households in a given year.
- Social spending trends:
  - Education spending fell from around 5 percent of GDP in the mid-2000s to roughly 2 percent of GDP in 2013.
  - Health spending declined to around 2 percent of GDP from a peak of 3 percent of GDP in 2010.
  - Pension spending flat at ½ percent of GDP since 2010.
  - On-budget social spending is below the EAC average.
  - Off-budget donor spending estimates: 25−30 percent of total spending in health sector and about 10 percent in education sector.
- Implication: modest redistributive impact reflects low levels of public expenditure and revenue collection, rather than inefficiency of social spending.

### PROGRAM STATUS, OUTLOOK, AND REQUESTS
- Program performance under current PSI: broadly satisfactory; most QACs and indicative targets met through March 2017; reserve accumulation floor exceeded.
- Authorities requested completion of the eighth review under the PSI and plan to request a successor PSI in the fall.
- Growth outlook:
  - With sound policy implementation, growth could accelerate to 5 percent in FY17/18 if weather conditions improve, private credit recovers, and public investment program is implemented.
  - Medium-term growth could reach 6 to 6½ percent, conditional on private sector credit growth of 10−11 percent per annum in real terms.
- Fiscal medium term:
  - Government debt projected to peak at 42 percent of GDP in FY19/20 when infrastructure scaling-up is completed.
  - Charter of Fiscal Responsibility targets: government debt below 50 percent of GDP (NPV) and overall fiscal deficit no more than 3 percent of GDP by FY20/21.
  - Staff suggests adopting the projected debt trajectory as an operational ceiling to provide a buffer to the Charter’s debt ceiling.
- Authorities’ commitments: increase tax-to-GDP ratio by ½ percent of GDP per year; prepare medium-term national revenue mobilization strategy; protect social spending while creating space for priority public investment (including roads for oil sector).

*International Monetary Fund staff compilation of CR17206 (selected excerpts).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and structural backdrop
- Growth averaged 8 percent per annum during 1992–2010, tripling per capita GDP and more than halving poverty to 35 percent (20 percent based on the national poverty line).
- Growth slowed around 2010 due to negative productivity growth in agriculture and industry, and investment that is heavily concentrated in real estate.
- A third of the population is still below the poverty line, and some 40 percent of the population are vulnerable to falling below the poverty line (2013 data).
- Main government objectives include commencing oil production and achieving middle-income status by 2020.
- Uganda hosts over one million refugees; emergency needs are estimated at about US$1.4 billion this year. By government estimates, Uganda has spent the equivalent of ½ percent of GDP on refugees in 2016.

### Recent developments and macroeconomic performance
- Growth and outlook
  - Initial H1-FY16/17 growth estimate: 1.6 percent.
  - Staff and authorities’ projection for FY16/17: 3.9 percent (about ½ percent in per-capita terms), down from 4.7 percent in FY15/16.
  - Infrastructure and oil sector investments can revive growth over the next 3−5 years; medium-term growth could reach 6−6½ percent, but downside risks are significant.
- Sectoral and supply shocks
  - Drought in the Horn of Africa likely reduced growth by about ½ percentage point, mainly in agriculture and food processing, exposing some 11 million Ugandans to food insecurity.
  - Fall armyworm infestation poses a risk; projections assume it can be controlled.
  - Regional conflicts and spillovers (e.g., South Sudan) have weighed on growth and raised political/economic uncertainty.
- Macroeconomic aggregates and external sector
  - Current account deficit: estimated 2 percent of GDP in H1 FY16/17 (narrowed, driven by lower investment-related imports).
  - Overall balance of payments: surplus of 0.6 percent of GDP.
  - Real effective exchange rate: depreciated by 2 percent since July 2016.
- Inflation and monetary policy
  - Food price inflation: rose from 5 percent year-on-year in September 2016 to 23.1 percent in May 2017.
  - Headline inflation: 7.2 percent year-on-year in May 2017.
  - Core inflation: 5.1 percent year-on-year in May 2017, in line with the BoU’s 5 percent target.
  - The Bank of Uganda’s inflation-targeting regime has maintained core inflation in a narrow band around its 5 percent target; international reserves are at a comfortable level.
- Fiscal developments and public investment
  - Revenue collection in nominal terms was slightly lower-than-projected through March due to lower nominal growth, but policy and administration measures yielded a near ½ percent of GDP increase in the revenue ratio.
  - Recurrent expenditures were ¼ percent of GDP ahead of program projections at end-March, broadly corresponding to additional domestic arrears clearance.
  - Domestically-financed development spending is on track; significant under-execution of foreign-financed development budget and construction of the two hydropower dams (Isimba ~70 percent complete; Karuma ~50 percent complete).
  - Overall fiscal deficit for Q1–Q3 FY2016/17 was 3 percentage points of GDP lower than anticipated and is projected at 3½ percent of GDP for the year, compared to 6 percent at the time of the seventh review.
  - The authorities relied again on BoU advances late in the fiscal year, cancelled June auctions, and subsequently had to mop up liquidity with costly repo issuance.
- Financial sector and credit
  - Non-performing loans (NPLs): 6.3 percent at end-March.
  - Real private sector credit growth turned negative in late 2016 (adjusted for valuation effects) and is recovering slowly.
  - NPLs concentrated in agriculture, construction, and trade and commerce; BoU survey cites causes including government domestic arrears in FY15/16, diversion of borrowed funds and fraudulent activities, political instability in South Sudan, and the economic downturn with exchange rate and interest rate volatility.
  - Mobile money has greatly enhanced access, but credit to the private sector remains low; banks are well-capitalized despite elevated NPLs; insurance and asset management sectors remain nascent.

### Key risks and constraints
- Main downside risks
  - Delays and implementation problems in the public investment program, which could undermine growth and debt sustainability.
  - Agricultural sector exposure to weather effects and pest infestations (e.g., fall armyworm).
  - Unfavorable regional and global developments.
- Public investment management capacity needs improvement to achieve the planned scaling up; the timeline for developing the oil sector and getting to first oil is described as ambitious.

### Policy stance, institutional issues, and recommendations
- Fiscal policy
  - Fiscal policy attempts to balance spending needs within a constrained resource envelope.
  - Infrastructure spending is given priority, leaving a tight envelope for current spending that has given rise to supplementary budgets, domestic arrears, or central bank financing.
  - Public debt is manageable if infrastructure spending raises growth and revenue improves further.
  - Authorities have increased revenue collection, but the tax take remains low.
- Monetary and liquidity management
  - Monetary policy has kept core inflation on target under inflation targeting.
  - Better fiscal-monetary coordination would facilitate liquidity management.
- Financial sector policy and development
  - Ongoing initiatives should expand service availability and reduce costs to enhance financial sector contribution to growth.
  - Implement remaining FSAP recommendations, particularly strengthening regulation and supervision (e.g., on classification and provisioning for “watch loans”).
- Program and reforms
  - Performance under the PSI through March 2017: broadly satisfactory.
    - Authorities met cornerstones of quantitative program and all end-December and continuous quantitative assessment criteria, including overall deficit, net international reserves, and non-accumulation of external arrears.
    - BoU achieved its inflation target in December 2016 and March 2017.
    - Indicative targets on poverty alleviating expenditures were met; preliminary data indicate the target on domestic arrears clearance was met at end-December.
    - Indicative target on revenue collection in December and March was narrowly missed.
    - The indicative target on repaying BoU advances was missed in December and March; the government subsequently reversed repayments made under the program.
  - Staff recommends completion of the eighth review under the Policy Support Instrument (PSI) and encourages the authorities to complete pending structural reforms.

*EXECUTIVE SUMMARY, June 21, 2017*

### 13.      The authorities have made some progress on structural reforms. One structural

### 13.      The authorities have made some progress on structural reforms. One structural 

### Structural reform progress
- One structural benchmark was met on time.
- Three structural benchmarks have been implemented with delay.
- Six structural benchmarks have not been met, though the authorities intend to implement them going forward (see Table 1.2 of the authorities’ letter of intent).
- Most notably, the authorities approved the AML/CFT legislative agenda that will support Uganda’s exit from the Financial Action Task Force “grey” list.
- The Ministry of Finance, Planning, and Economic Development published reconciled reports on the stock of outstanding domestic arrears at end-June 2016 (3.2 percent of GDP).
- Looking ahead, continued capacity building and a focus on prioritization and selectivity should facilitate reform implementation.

### Pending reforms (items and status)
- Sending the BoU Act Amendments to Parliament:
  - It took longer than expected to agree on some technical aspects between the Ministry of Finance, Planning, and Economic Development and the BoU.
  - An understanding has now been reached, and the draft amendments are about to be shared with cabinet.
- Finalizing and publishing the report on end-December unpaid bills:
  - The authorities have compiled information on gross settlements of domestic arrears in the first half of the year.
  - Capacity constraints have slowed the reporting on unpaid bills, and further work is needed to strengthen domestic arrears monitoring within the fiscal year.
- Publication and issuance of the Appraisal User Manual:
  - Expected by end-June.
  - The Manual has been finalized, but the actual printing and distribution has been delayed.
- Sending to cabinet a policy for regulating mobile money:
  - The authorities are revisiting the best course of action to provide for a sound regulatory framework.

### Real sector developments and indicators (findings)
- Growth has decelerated.
- Some leading indicators suggest that economic activity is rebounding.
- After a temporary depreciation in 2016, the Shilling has stabilized.
- Effective exchange rates have depreciated marginally.
- Core inflation is in line with BoU’s target.
- Headline inflation is mainly driven by drought-related food price increases.

### External sector developments (findings)
- The current account deficit is expected to have narrowed from FY15/16, driven mainly by a lower trade deficit due to lower imports.
- An increase in foreign direct investment contributes to a higher capital and financial account.
- Foreign investors’ participation in government securities has been significant, but declined recently.
- Public external debt has risen due to increased borrowing for infrastructure investments.
- The reserves buffer remains comfortable at above four months of next year’s imports.

### Fiscal sector developments (findings and short-term outlook)
- Revenue has increased due to policy/administration reforms.
- Grants have declined, as Uganda relies less on aid.
- Public investment has been scaled up.
- Recurrent expenditure has also increased.
- Poverty-alleviating expenditures have recently met or exceeded the PSI target.
- Public investment is a key driver of the fiscal deficits and rising public debt.

### Monetary sector developments (findings)
- The central bank rate has been cut by 600 bps since April 2016.
- Treasury bill rates have declined, in line with the policy rate.
- Lending rates declined less and with lags, leaving the interest rate spread elevated.
- Interest rate spreads remain broadly unchanged, and shilling spreads are high.
- Excess reserves edged up again after a steady decline through 2016.
- Repo sales continued on an upward trend.

### Financial sector developments (findings)
- Overall, the banking sector remains well-capitalized.
- The banking system’s liquidity ratio exceeds the regulatory minimum.
- NPLs are elevated, even after the resolution of Crane Bank.
- NPLs are concentrated in agriculture, transport and communication, construction, and trade.
- NPL levels are about the same for foreign currency and shilling lending.
- The recent decline in large exposures and insider lending reflects the resolution of Crane Bank.
- Profitability and earnings declined, reflecting the rise in NPLs.
- The FX loans-to-deposit ratio remains below the regulatory norm.
- The growth of Shilling deposits has accelerated, while that of FX deposits levels off.
- Shilling loans are rebounding, while FX loans continue to decline.
- Credit was concentrated in personal lending, trade, and agriculture. Lending to manufacturing contracted.

### Economic outlook and risks
- With sound and steadfast policy implementation, Uganda’s economic outlook is broadly favorable.
- If weather conditions continue to improve, private sector credit recovers, and the public investment program is implemented as planned, growth could accelerate to 5 percent in FY17/18.
- Over the medium term, infrastructure and oil sector investments could yield growth rates of 6 to 6 ½ percent (Box 2). Such growth rates would require private sector credit to grow by 10−11 percent per annum in real terms.
- The authorities broadly agree with the outlook, while anticipating a somewhat higher growth dividend over the medium term from the planned infrastructure and oil sector investments.
- The current account deficit will be driven by developments in the oil sector in the coming years:
  - Initially, the deficit is projected to widen, driven by investment-related imports.
  - Once oil exports start, the current account is projected to gradually improve and turn into a surplus.
- International reserves are projected to remain at around 4½ months of prospective imports.

Risks (tilted to the downside)
- Weak implementation of public investment could undermine growth.
- Regional developments (conflicts, possible disruptions during upcoming elections) could undermine growth.
- A slowing of global trade could undermine growth.
- Renewed accumulation of government domestic arrears would aggravate banks’ NPL problem, and hit growth via the credit channel.
- Uncertainty persists over when oil production will commence and the phasing of investment in the sector.
- The agricultural sector remains exposed to climate conditions and pest infestations, with the spread of the fall armyworm posing an immediate danger.
- A large shilling depreciation could impact foreign investor holdings of government securities and contribute to rising NPLs.
- Tightening global financing conditions could hold back portfolio inflows and reduce offshore participation in Uganda’s Stock Exchange.
- Cuts in aid flows would undermine the sustainability of spending, particularly in the social sectors.

### Box 2 — Managing Oil Wealth (key points)
- Uganda has approximately 1.7 billion barrels of recoverable oil reserves, the fourth largest in sub-Saharan Africa.
- The authorities aim to have oil production commence in 2020. Production would continue for over 40 years.
- During this period, the government expects to receive between 0.5-4 percent of GDP in oil-related revenue per year.
- Oil Extraction:
  - A joint venture of three international companies and a government owned oil company (Uganda National Oil Company, UNOC) will carry out upstream oil extraction.
  - The international joint venture partners are expected to make final investment decisions by end-2017.
  - Production could commence as early as 2020 and quickly rise to a peak of 200,000 barrels per day.
  - The total investment cost of upstream extraction is approximately US$8 billion.
  - The government, through UNOC, has a carried interest share, and is fully involved in all commercial decisions.
- Pipeline and Refinery:
  - (i) A pipeline to be constructed by a joint venture of international companies, a UNOC subsidiary and the government of Tanzania (costing US$4-5 billion) will transport oil from Uganda to a sea port in Tanzania.
  - (ii) A domestic oil refinery (with initial capacity of 30,000 barrels per day) will be constructed by a joint venture consisting of a UNOC subsidiary and other partners yet to be identified.
- Regulatory and Fiscal Regime:
  - A Petroleum Regulatory Authority was established in 2015.
  - The Public Financial Management (PFM) Act of 2015 requires all oil revenue to be deposited in a Petroleum Fund.
  - Tax arrangements for upstream oil production are governed by Production Sharing Agreements (PSAs) that provide for: (i) royalties; (ii) distribution of ‘profit oil’; (iii) corporate income tax (30 percent rate); and (iv) state participation with initial private partner coverage of development costs.
- Outstanding Issues:
  - Construction of the pipeline must be completed before oil production commences, and the authorities also aim to have the refinery operational in time.
  - The tax regime for the pipeline is under negotiation between the governments of Uganda and Tanzania; the regime for the refinery is still to be determined.
  - Public road infrastructure is required to allow access to oil fields and the government is seeking external financing to commence road construction as soon as possible.
  - A policy on the use of oil revenue deposited in the Petroleum Fund needs to be developed to ensure an appropriate balance between investment and saving.
  - For now, withdrawals from the Petroleum Fund are limited to infrastructure spending. However, when the previous Oil Fund was closed, its resources were pooled in the Consolidated Fund, and the ringfencing of the saved oil revenue for infrastructure was dropped.

### Macroeconomic outlook table (selected projections and levels)
- Real GDP: 4.7 5.0 3.9 5.5 5.0 5.5 6.0 6.5 6.5
- Headline inflation (period average): 6.6 5.4 5.8 4.8 5.9 4.9 5.0 5.0 5.0
- Core inflation (period average): 6.7 5.0 5.2 4.6 5.7 5.3 5.0 5.0 5.0
- Credit to non-government sector: 4.0 8.3 8.5 15.0 12.6 13.6 15.6 16.7 17.0
- Overall fiscal balance: -5.3 -6.0 -3.5 -4.9 -3.7 -5.5 -4.0 -3.0 -1.6
- Public gross debt: 35.7 38.6 38.7 41.5 38.6 40.9 41.6 41.6 40.7
- Current account balance (including grants): -6.3 -7.1 -4.8 -8.2 -6.3 -8.0 -8.0 -9.2 -5.8
- Gross international reserves (US$ billions): 3.0 3.0 3.2 3.1 3.3 3.6 4.0 4.1 4.6
- Gross international reserves (months of next year's imports of goods and services): 5.3 4.2 5.1 4.0 4.5 4.4 4.4 4.5 5.1
- Memorandum item — GDP per capita (Nominal US$): 673 626 694 648 718 737 799 833 861
- Note: Fiscal year runs from July 1 to June 30.

### Policy discussions and FY17/18 macroeconomic policies
- The 2017 Article IV consultation centered on: (i) balancing infrastructure investment, social spending needs, and debt sustainability; (ii) macro-financial linkages and growth prospects; and (iii) other policies to foster inclusive growth.
- With fiscal policy mainly focused on the development strategy, monetary policy is the main instrument for counter-cyclical policy.
- In the near term, high NPLs impede credit and weigh on activity.
- Over the medium term, financial sector deepening is needed to promote sustained and inclusive growth.

Fiscal policy specifics for FY17/18
- The FY17/18 budget seeks to create space for priority public investment expenditures through revenue mobilization and recurrent expenditure restraint.
- The authorities plan to increase development spending to allow for constructing roads needed for the oil sector.
- The budget envisages a further ½ percent of GDP increase in the revenue ratio.
- Current expenditure is to be compressed and decline by 0.4 percent of GDP compared to FY16/17.
- Allocations for social spending are budgeted to stay broadly unchanged relative to FY16/17 in Shilling-terms, and thus decline as a percentage of GDP from 6.3 percent of GDP in FY2016/17 to 5.7 percent in FY2017/18 (Box 3).
- The authorities believe that the allocations are adequate, if tight, and warranted to create space for their development spending priorities.
- Staff notes that strong expenditure control will be needed to avoid a recurrence of domestic arrears or the need for a supplementary budget, and that social spending is important for achieving inclusive growth.

*International Monetary Fund staff summary of chapter content.*

### 19.      The authorities’ FY17/18 revenue target continues the path of strengthening domestic

### 19. The authorities’ FY17/18 revenue target continues the path of strengthening domestic

### Revenue mobilization and fiscal policy
- FY16/17 revenue collection: 14 percent of GDP.
- Authorities’ medium-term objective: increase the revenue to GDP ratio by about ½ percent of GDP per year.
- FY17/18 budget measures:
  - Specific tax-raising measures, including a base expansion of the infrastructure levy.
  - New tax exemptions intended to promote investment and reduce the cost of electricity.
  - Administrative measures envisioned: intensifying risk-based audits of large and medium taxpayers.
- Staff assessment and recommendations:
  - Cautions that the measures may not be sufficient to achieve the targeted revenue gain.
  - Suggests consideration of reducing corporate tax exemptions.
  - Notes that general tax exemptions have a poor record of attracting investment.
  - Recommends accelerated depreciation allowances as a better targeted and effective option.
  - Recommends a direct subsidy to the Bujagali power station instead of a tax exemption for greater transparency and to facilitate informed budget-priority discussion.

### Growth, inequality, and poverty (Box 3)
- Inequality: Gini coefficient of around 0.4.
- Fiscal policy effects (CEQ Institute findings):
  - Net impact of taxation and spending reduces the Gini coefficient by 0.03 points.
  - Impact on poverty is negligible.
  - Direct transfer programs reach around 3 percent of Ugandan households in a given year.
- Social spending trends and levels:
  - Education spending fell from around 5 percent of GDP in the mid-2000s to roughly 2 percent of GDP in 2013.
  - Health spending declined to around 2 percent of GDP from a peak of 3 percent of GDP in 2010.
  - Pension spending flat at ½ percent of GDP since 2010.
  - On-budget social spending is below the EAC average.
  - Off-budget donor spending estimates: 25−30 percent of total spending in the health sector and about 10 percent in the education sector in Uganda.
- Implications:
  - Modest redistributive impact reflects low levels of public expenditure and revenue collection, rather than inefficiency of social spending.
  - Design of the tax system yields limited impact on poverty because the very poor fall below personal income tax thresholds and benefit from VAT exemptions on essential items.

### Monetary policy and inflation targeting (including Box 4)
- BoU policy rate actions:
  - Reduced policy rate by 600 bps since April 2016 to 11 percent.
- Inflation outlook and BoU assessment:
  - Headline inflation projected to increase in coming months due to a drought-related spike in food prices; assessed to be temporary.
  - BoU projects core inflation to remain within its narrow band of +/- 2 percentage points around the 5 percent target.
  - Staff recommends the BoU remain on hold for a while to confirm limited second-round effects.
- Inflation targeting history and performance:
  - IT introduced in July 2011; core inflation target of 5 percent with a band of ±3 percent over a 12 months’ horizon (initial framework).
  - At inception, core inflation fell within a year from over 30 percent to about 5 percent.
  - BoU uses open-market operations (repos/reverse repos) to steer the 7-day interbank rate to align with the Central Bank Rate set every other month.
  - BoU adopted a flexible exchange rate with interventions limited to volatility smoothing.
  - Remaining challenges: maintaining fiscal discipline, strengthening fiscal-monetary coordination, and developing a shallow financial market to improve monetary policy transmission.

### Financial market architecture and liquidity management
- Recent tools and reforms:
  - Introduction of deposit auctions (certificates of deposit with tenors of 28-day and 56-day auctioned weekly to banks).
  - Work ongoing to develop a master repo agreement to facilitate interbank liquidity management.
  - All banks given direct access to the central depository system to enhance trading in government securities.
  - Consideration of replacing over-the-counter trading with a trading platform to enhance market efficiency.
  - Authorities could consider introducing a standing facilities corridor to delink routine liquidity provision from emergency liquidity assistance currently provided under the Lombard facility.

### External sector assessment
- Calendar year 2016 outcome:
  - Net international investment position: -56 percent of GDP at end-2016.
  - Current account deficit narrowed to 4.4 percent of GDP.
- Outlook and policy guidance:
  - Scaling-up of infrastructure investment and oil sector development expected to temporarily widen the current account deficit.
  - Maintaining external sustainability depends on achieving the envisaged growth dividend from these investments.
  - EBA-Lite methodologies do not indicate significant misalignments; international reserves exceed the assessed adequacy level.
  - BoU should maintain reserves in line with the EAC convergence criterion of at least 4½ months of imports.
  - Flexible exchange rate regime continues to serve Uganda well; authorities agree.

### Medium-term fiscal framework and public debt
- Debt projections:
  - Government debt projected to peak at 42 percent of GDP in FY19/20 when infrastructure scaling-up is completed.
  - Debt trajectory broadly unchanged from the latest DSA (IMF Country Report No. 17/7), which found the risk of debt distress to be low but noted increased risks.
  - Fan-chart assessment: negligible probability of exceeding 56 percent of GDP (NPV threshold in public debt DSA) given past shocks; a potential breach of the 50 percent of GDP line (NPV ceiling in the Charter of Fiscal Responsibility) is within the 90 percent confidence interval.
- Fiscal anchors and recommendations:
  - Charter of Fiscal Responsibility requires keeping government debt below 50 percent of GDP (NPV) and achieving an overall fiscal deficit of no more than 3 percent of GDP by FY20/21.
  - Fiscal projections are consistent with the Charter’s deficit target and keep government debt below the Charter’s ceiling.
  - Staff suggests adopting the projected debt trajectory as an operational ceiling to provide a buffer to the Charter’s debt ceiling in case of adverse shocks.

### Public investment management and budget process
- Key dependencies for fiscal strategy success:
  - Continued revenue mobilization and strong public investment management.
  - Authorities committed to increasing tax-to-GDP ratio by ½ percent of GDP per year over the medium term.
  - Considering a medium-term revenue strategy in collaboration with the G20 initiative, with possible IMF lead.
- Public investment management recommendations:
  - Undertake an annual review and prioritization of the project pipeline for cabinet approval to ensure consistency with the medium-term fiscal framework.
  - Phased development of an integrated project database to track completed and planned projects with information on appraisal, financing, monitoring and evaluation of outcomes.
- Budget process weaknesses:
  - 2015 Public Financial Management Act provides a sound legal framework, but implementation issues persist.
  - Ambitious plans for foreign-financed development spending often not realized; tight recurrent envelopes lead to supplementary budgets.
  - National Planning Authority: FY16/17 budget only 59 percent aligned with the National Development Plan (68 percent in FY15/16).
  - Supplementary budgets complicate financing because they do not require legal authorization to raise domestic financing and can lead to financing gaps closed with ad hoc measures including BoU advances.

### Governance, arrears, and local content policy
- Anti-corruption efforts:
  - Authorities focused on reducing corruption; several high-level arrests including at the Ministry of Finance, Planning, and Economic Development.
  - Uganda ranked 151 out of 176 countries in the 2016 Transparency International Corruption Perception Index.
  - Uganda ranks 113 out of 138 countries in the World Economic Forum’s 2016 Global Competitiveness Report for factors problematic for doing business.
  - Based on World Bank 2015 Governance Indicators, Uganda is ranked below EAC peers Rwanda, Tanzania, and Kenya.
- Domestic arrears management:
  - FY16/17 budget prioritized settlement of outstanding domestic arrears, but reports of new arrears accumulating; end-June 2017 report will clarify the stock.
  - Government could consider securitization of outstanding arrears to help suppliers service bank loans.
  - Measures taken: tightened commitment controls, moved regular payments onto pre-paid schedules, announced that accounting officers would be personally held responsible for accumulating domestic arrears.
  - Staff notes that overly tight budget envelopes can perpetuate pressures for renewed arrears accumulation.
- Local content (Buy Uganda, Build Uganda - BUBU):
  - New procurement guidelines require at least 30 percent of procurement goes to local companies in specific sectors.
  - Plans to enhance capacity of local providers and develop a brand and marketing strategy for Ugandan goods and services.
  - Staff cautions initiatives must be carefully designed to avoid discretion, ensure quality and cost effectiveness, minimize compliance costs, and be consistent with EAC commitments.

### Financial sector stability and banking system resilience
- Banking sector metrics and recent developments:
  - Most banks meet or exceed Basel III capital requirements and comply with the liquidity coverage ratio, expected to be binding by end-2017.
  - Profitability has declined due to rising non-performing loans (NPLs) and provisioning costs.
  - NPLs increased from 8.3 percent in June to 10.5 percent in December 2016, driven largely by Crane Bank developments (taken over by BoU in October 2016).
  - NPLs at end-March: 6.3 percent (no longer includes most of Crane Bank’s toxic assets).
  - Watch list remains high; authorities expect NPLs could rise further in the next two quarters.
  - Uganda Bankers’ Association initiative to set up an asset recovery company to purchase bad loans from commercial banks.
- Supervision, stress testing, and risks:
  - BoU performs quarterly top-down stress tests: single-factor credit and liquidity tests; ad hoc tests include interest and foreign exchange risk and combined scenarios.
  - Staff concurs that stress tests suggest the system can weather credit shocks but notes risks from deposit concentration.
  - Staff notes reporting quality is a risk to stress test validity, as highlighted by the Crane Bank episode.
  - Authorities agree experience calls for more intrusive supervision and focus on banks’ risk management frameworks.

*Source: IMF staff report (cr17206).*

### Box 5. Resolution of Crane Bank

### Box 5. Resolution of Crane Bank

### Background and BoU intervention
- In October 2016, the BoU appropriately took over management of Crane Bank, which had become under-capitalized and encountered liquidity problems.
- Crane Bank was the third largest domestic bank, accounting for just under 10 percent of total credit to the private sector, and 7.5 percent of total banking system assets.
- The bank had underreported its NPLs, and there were other problems with its financial reporting.
- Facing a steady deposit outflow, the bank was close to being illiquid, with signs of asset stripping.
- BoU intervened and placed the bank in receivership, appointing a statutory manager and suspending the bank’s Board of Directors.
- BoU commissioned financial and forensic audits which are still in progress.
- In January 2017, the Development Finance Corporation of Uganda (DFCU)—a domestic bank with foreign ownership—was chosen to acquire most of Crane Bank’s balance sheet.
- BoU took over some of the non-performing assets.

### Strengthening BoU financial surveillance toolkit (policy actions and measures)
- With support from the World Bank, the authorities are:
  - mapping the interconnections within the Ugandan financial system to strengthen consolidated supervision;
  - developing a contagion matrix, encompassing cross-border exposures;
  - establishing three financial stability indices to better monitor financial stability risks.
- A real estate price index is being developed that could form the basis for counter-cyclical provisioning.
- In response to NPLs in foreign exchange denominated mortgages, the regulator has:
  - introduced a maximum loan-to-value ratio; and
  - required that banks extend these mortgages only to borrowers that have foreign exchange income.
- Staff cautions that in the case of real estate, rents may be denominated in foreign exchange, thus documenting the income of the borrower, but tenants may ultimately only have shilling incomes so that the foreign exchange risk is simply pushed to another balance sheet, but not eliminated.
- Staff encourages the authorities to consider imposing loan-to-value ratios on all real estate lending, including in shilling terms.
- A second credit bureau has been established to improve on the quality of service delivery.
- Both credit bureaus should look beyond loan repayments to other payment obligations to derive credit scores.

### Key findings and implications
- The corrective adjustments to Crane Bank’s financial statements contributed to the worsening of financial soundness indicators of the banking sector.
- BoU’s intervention included receivership, statutory management, suspension of the board, and commissioning of audits to address capitalization, liquidity, and reporting failures.
- The resolution involved transfer of most of the balance sheet to DFCU, with BoU retaining certain non-performing assets.
- Strengthened surveillance tools (interconnection mapping, contagion matrix, financial stability indices, real estate price index) aim to improve consolidated supervision and macroprudential policy capacity.
- Targeted regulatory measures on FX mortgage exposure (maximum LTV, FX-income requirement) attempt to mitigate currency mismatch risk but may leave residual risk if tenants’ incomes are in shillings.
- Enhanced credit information infrastructure (second credit bureau and broader scoring) is expected to improve credit risk assessment and financial deepening.

*IMF staff summary based on Box 5. Resolution of Crane Bank*

### 47.      It is proposed that the next Article IV consultation with Uganda take place on the

### 47.      It is proposed that the next Article IV consultation with Uganda take place on the

### Consultation timing and program status
- It is proposed that the next Article IV consultation with Uganda take place on the 12 month cycle.
- The authorities have requested a successor PSI, and discussions could commence this fall.

### Output, prices, and exchange rate (selected series as presented)
- Real GDP: 2.7 5.2 5.1 4.7 5.0 3.9 5.5 5.0 5.5 6.0 6.5 6.5
- GDP deflator: 6.1 3.4 3.8 3.3 5.1 4.8 4.7 5.8 5.2 5.0 5.0 5.0
- Headline inflation (period average): 4.8 5.3 2.9 6.6 5.4 5.8 4.8 5.9 4.9 5.0 5.0 5.0
- Core inflation (period average): 6.6 4.6 3.2 6.7 5.0 5.2 4.6 5.7 5.3 5.0 5.0 5.0
- Terms of trade ("–" = deterioration): -8.2 4.7 18.8 5.3 -0.3 1.8 -1.3 -1.2 -0.7 -0.9 -1.1 -0.4
- Exchange Rate (Ugandan Shilling/US$): 1.3-2.0 11.4 21.8 ........................
- Real effective exchange rate ("–" = depreciation): 3.3   7.8 -3.7 -7.2  ......   ... ...   ............

### Money and credit (select series)
- Broad money (M3): 6.6 17.4 15.9 7.1 5.8 12.7 17.4 13.7 15.0 16.6 17.1 17.5
- Credit to non-government sector: 6.4 13.9 20.4 4.0 4.0 8.3 8.5 15.0 12.6 13.6 15.6 16.7 17.0
- Bank of Uganda policy rate (CBR): 11.0 11.0 13.0 ... 15.0  ......   ... ...   ............
- M3/GDP (percent): 18.6 20.1 21.3 21.1 19.8 21.9 21.1 22.4 23.2 24.3 25.5 26.8
- NPLs (percent of total loans): 4.0   5.8  4.0 8.3  ......   ... ...   ............

### Central government fiscal aggregates (selected data)
- Total revenue and grants (Billions of Uganda Shillings): 8,245 8,868 11,045 12,647 14,868 14,039 16,451 16,577
- Revenue: 7,309 8,165 10,114 11,500 13,150 13,012 15,052 15,062
- Tax: 7,005 7,831 9,542 10,833 12,424 12,288 14,304 14,318
- Grants: 936 702 931 1,147 1,718 1,027 1,399 1,516
- Expenditures and net lending: 10,523 11,684 14,379 16,727 20,464 17,214 21,483 20,345
- Current expenditures: 5,813 6,706 7,689 9,169 9,710 9,912 10,623 10,569
  - Wages and salaries: 2,160 2,385 2,759 2,966 3,359 3,437 3,549 3,548
  - Interest payments: 890 970 1,213 1,682 2,188 2,355 2,703 2,684
- Development expenditures: 4,237 4,937 5,230 5,907 9,054 6,520 9,285 8,682
  - Externally-financed projects: 2,163 1,871 1,933 2,384 4,804 2,296 4,568 4,316
  - Government of Uganda investment: 2,074 3,066 3,296 3,523 4,250 4,224 4,716 4,366
- Net lending and investment: 409 211 1,235 1,532 1,539 585 1,415 739
- Overall balance (Billions): -2,084 -2,463 -3,402 -4,393 -5,596 -3,174 -5,031 -3,768
- Underlying balance (excl. one-off spending): -1,675 -2,443 -2,287 -2,780 -3,315 -2,447 -1,688 -1,496
- Financing (total): 2,084 2,463 3,402 4,393 5,596 3,174 5,031 3,768
  - External financing (net): 1,418 887 919 2,494 4,920 2,323 4,000 2,688
  - Domestic financing (net): 666 1,576 2,483 1,899 676 851 1,031 1,080

### Fiscal operations (percent of GDP, selected ratios)
- Total revenue and grants: 12.7 12.6 14.4 15.2 15.9 15.5 15.9 16.5
- Revenue: 11.3 11.6 13.2 13.8 14.0 14.4 14.6 15.0
- Tax: 10.8 11.1 12.4 13.0 13.3 13.6 13.8 14.2
- Expenditures and net lending: 16.2 16.6 18.7 20.1 21.9 19.0 20.8 20.2
- Current expenditures: 9.0 9.5 10.0 11.0 10.4 11.0 10.3 10.5
- Development expenditures: 6.5 7.0 6.8 7.1 9.7 7.2 9.0 8.6
- Overall balance: -3.2 -3.5 -4.4 -5.3 -6.0 -3.5 -4.9 -3.7
- Underlying balance (excl. one-off spending): -2.6 -3.5 -3.0 -3.3 -3.5 -2.7 -1.6 -1.5

### Quarterly fiscal snapshot (FY2015/16–FY2016/17 excerpts)
- Total revenue and grants (annual): 12,647 (FY2015/16 est.) → 14,039 (FY2016/17 proj.)
- Revenue (annual): 11,500 → 13,012
- Tax (annual): 10,833 → 12,288
- Expenditures and net lending (annual): 16,727 → 17,214
- Overall balance (annual): -4,393 → -3,174
- Underlying balance (excl. one-off spending) (annual): -2,466 → -2,447

### Monetary accounts (select balances and ratios)
- Net foreign assets: 8,427 8,844 9,656 10,329 11,049 12,409 12,267 12,826
  - Bank of Uganda: 8,305 9,455 10,092 10,642 11,411 12,109 12,629 12,579
- Net domestic assets: 3,621 5,291 6,733 7,228 7,527 8,089 9,547 9,545
- Money and quasi-money (M3): 12,047 14,142 16,389 17,557 18,575 19,795 21,814 22,511
- Broad money (M2): 8,932 10,195 11,095 12,085 12,786 13,762 15,015 15,672
- Foreign exchange deposits: 3,115 3,947 5,294 5,472 5,789 6,033 6,798 6,839
- Base money: 3,545 4,092 5,053 5,651 5,711 6,355 6,127 7,418
- Memorandum annual growth rates:
  - Base money: 17.7 15.4 23.5 11.8 1.1 12.5 7.3 16.7
  - M3: 6.6 17.4 15.9 7.1 5.8 12.7 17.4 13.7
  - Credit to the private sector: 6.4 13.9 20.4 4.0 4.0 8.3 8.5 15.0 12.6

### Balance of payments (selected lines, US$ millions)
- Current account: -1,582 -2,106 -1,997 -1,522 -1,884 -1,242 -2,316 -1,708 -2,336 -2,571 -3,149 -2,132
- Trade balance: -2,123 -2,367 -2,250 -1,887 -2,183 -1,519 -2,416 -1,994 -2,447 -2,649 -2,941 -1,986
- Exports, f.o.b.: 2,912 2,706 2,738 2,688 2,865 2,957 3,149 3,136 3,530 4,065 4,487 5,341
  - Of which: coffee: 423 404 400 352 388 402 457 449 472 500 530 564
- Imports, f.o.b.: -5,035 -5,074 -4,988 -4,574 -5,048 -4,476 -5,565 -5,130 -5,977 -6,714 -7,428 -7,327
  - Of which: oil: -1,028 -1,090 -933 -646 -743 -647 -811 -697 -726 -807 -859 -630
- Income (net): -528 -613 -492 -492 -462 -575 -623 -681 -836 -974 -1,146 -1,305
  - Of which: interest on public debt: -39 -45 -42 -47 -110 -114 -188 -180 -199 -207 -233 -255
- Transfers: 1,473 1,204 1,345 1,411 1,351 1,374 1,280 1,506 1,638 1,826 1,966 2,018
  - Private transfers: 1,130 999 1,111 1,173 987 1,166 1,027 1,222 1,399 1,524 1,706 1,788
  - Workers' remittances (inflows): 817 696 730 803 721 844 779 892 1,057 1,165 1,328 1,390
- Capital and financial account: 1,519 1,813 952 1,060 1,906 1,204 2,438 1,789 2,654 3,011 3,226 2,596
- Gross international reserves (US$ billions): 2.9 3.4 2.9 3.0 3.0 3.2 3.1 3.3 3.6 4.0 4.1 4.6
- Reserves in months of next year's imports of goods and services: 4.5 5.2 5.0 5.3 4.2 5.1 4.0 4.5 4.4 4.4 4.5 5.1
- Current account balance (percent of GDP): -6.3 -7.6 -7.3 -6.3 -7.1 -4.8 -8.2 -6.3 -8.0 -8.0 -9.2 -5.8
- Current account balance (excluding grants): -6.6 -7.9 -7.7 -6.7 -7.4 -5.2 -8.5 -6.5 -8.9 -8.8 -9.8 -6.4

### Banking sector indicators (Mar 2013–Mar 2017 snapshots, selected series)
- Regulatory capital to risk-weighted assets (percent): 24.5 24.3 23.1 22.1 23.6 22.8 22.5 22.2 23.2 21.2 19.7 21.0 21.8 21.7 22.5 19.8 22.8
- Regulatory tier 1 capital to risk-weighted assets (percent): 21.4 21.2 20.3 19.1 20.9 20.3 19.9 19.7 20.8 18.8 17.3 18.6 19.1 19.0 19.8 17.3 20.4
- NPLs to total gross loans (percent): 4.7 4.0 4.4 6.0 6.2 5.8 5.3 4.1 4.2 4.0 3.9 5.3 6.9 8.3 7.7 10.5 6.3
- NPLs to total deposits (percent): 3.5 2.9 3.2 4.3 4.2 4.1 3.7 2.9 3.1 2.9 2.9 3.9 4.9 5.8 5.4 7.4 4.1
- Specific provisions to NPLs (percent): 55.1 53.1 47.3 64.8 53.9 62.1 55.4 48.9 53.7 51.9 45.4 41.6 47.2 54.3 51.8 60.4 43.4
- Return on assets (percent): 3.6 3.3 3.2 2.0 2.4 2.1 2.2 2.6 2.5 2.8 2.7 2.6 2.8 2.2 2.5 1.3 1.4
- Return on equity (percent): 21.0 20.4 18.9 12.4 14.2 12.8 13.1 16.0 15.6 17.7 17.2 16.0 16.8 13.8 14.9 8.3 8.3
- Net interest margin (percent): 12.5 12.2 11.8 11.6 11.4 11.5 11.3 11.0 11.0 10.9 11.0 11.3 11.6 11.9 12.3 12.8 12.7
- Liquid assets to total deposits (percent): 42.7 41.1 40.6 42.5 45.4 46.5 41.8 44.0 44.2 46.4 46.0 46.4 42.5 43.4 45.4 51.5 48.8
- Foreign currency loans to foreign currency deposits (percent): 72.3 72.8 63.0 57.6 73.7 65.0 64.3 64.5 58.8 61.3 60.8 59.2 60.5 60.4 59.2 58.2 62.6

*Italic: Source: IMF staff compilation of the document content.*

### Annex I. Progress in Achieving Millennium Development Goals

### Annex I. Progress in Achieving Millennium Development Goals

### GOAL 1: ERADICATE EXTREME POVERTY AND HUNGER
- Poverty headcount ratio at $1.25 a day (PPP, % of population): Initial Year 1990: 87; Last Year 2013/14: 35; Target: 44; Status: M
- Malnutrition prevalence weight for age (% of children under 5): Initial Year 1990: 26; Last Year 2013/14: 14; Target: 13; Status: NM

### GOAL 2: ACHIEVE UNIVERSAL PRIMARY EDUCATION
- Total enrollment, primary (% net): Initial Year 1990: 67; Last Year 2013/14: 91; Target: 100; Status: NM
- Primary completion rate, total (% of relevant age group): Initial Year 1990: 60; Last Year 2013/14: 53; Target: 95; Status: NM
- Persistence to last grade of primary, total (% of cohort): Initial Year 1990: 38; Last Year 2013/14: 25; Target: 95; Status: NM

### GOAL 3: PROMOTE GENDER EQUALITY AND EMPOWER WOMEN
- Ratio of female to male primary enrollment (%): Initial Year 1990: 80; Last Year 2013/14: 102; Target: 100; Status: M
- Ratio of female to male secondary enrollment (%): Initial Year 1990: ...; Last Year 2013/14: 88; Target: 100; Status: NM
- Ratio of female to male tertiary enrollment (%): Initial Year 1990: 39; Last Year 2013/14: 79; Target: 100; Status: NM

### GOAL 4: REDUCE CHILD MORTALITY RATE
- Mortality rate, under-5 (per 1,000): Initial Year 1990: 179; Last Year 2013/14: 66; Target: 60; Status: M
- Mortality rate, infant (per 1,000 live births): Initial Year 1990: 107; Last Year 2013/14: 44; Target: 36; Status: NM

### GOAL 5: IMPROVE MATERNAL HEALTH
- Contraceptive prevalence (% of women ages 15–49): Initial Year 1990: 15; Last Year 2013/14: 30; Target: 95; Status: NM
- Maternal mortality ratio (per 100,000 live births): Initial Year 1990: 780; Last Year 2013/14: 360; Target: 195; Status: NM

### GOAL 6: COMBAT HIV/AIDS, MALARIA AND OTHER DISEASES
- Incidence of tuberculosis (per 100,000 people): Initial Year 1990: 624; Last Year 2013/14: 179; Target: trend reversal; Status: M
- Tuberculosis case detection rate (all forms): Initial Year 1990: 13; Last Year 2013/14: 69; Target: trend reversal; Status: NM
- Prevalence of HIV, total (% of ages 15–24): Initial Year 1990: 12; Last Year 2013/14: 7; Target: trend reversal; Status: NM

### GOAL 7: ENSURE ENVIRONMENTAL SUSTAINABILITY
- Forest area (sq. km): Initial Year 1990: 25; Last Year 2013/14: 14; Target: trend reversal; Status: NM
- Terrestrial protected areas (% of total surface area): Initial Year 1990: 8; Last Year 2013/14: 12; Target: trend reversal; Status: M
- CO2 emissions (kg per PPP $ of GDP): Initial Year 1990: 0; Last Year 2013/14: 0; Target: trend reversal; Status: NM
- Improved sanitation facilities (% of population with access): Initial Year 1990: 26; Last Year 2013/14: 34; Target: 63; Status: NM
- Improved water source (% of population with access): Initial Year 1990: 42; Last Year 2013/14: 75; Target: 71; Status: M

### GOAL 8: DEVELOP A GLOBAL PARTNERSHIP FOR DEVELOPMENT
- Total debt service (% of exports of goods and services): Initial Year 1990: 81; Last Year 2013/14: 10; Target: 27; Status: M
- Telephone lines (per 100 people): Initial Year 1990: 0; Last Year 2013/14: 0.6; Target: 50; Status: NM
- Mobile cellular subscriptions (per 100 people): Initial Year 1990: 0; Last Year 2013/14: 50; Target: 50; Status: M

*Sources: World Bank Development Indicators, TAC mdgTrack, and Ugandan authorities.*

### 4.5 months of next year's imports (EAC criterion)

### 4.5 months of next year's imports (EAC criterion)

### Stress Test Results — Overview
- Sources: Ugandan authorities and IMF staff calculations
- Gross International Reserves (in billion of US$) — Projection (figure referenced)
- Tests include: Credit Shock Scenarios, Liquidity Shock Scenarios (bank run), Ad Hoc Tests, Sectoral credit shock scenarios, Concentration risk, Interest rate risk, Exchange rate risk, Combined exchange rate and interest rate shocks.

### Credit Shock Scenarios
- When the tier 1 capital of a D-SIB would fall below the regulatory minimum of 8 percent following a deterioration of performing loans:
  - The first D-SIB reaches the “breaking point” when 21 percent of its assets become nonperforming. This is an improvement over December 2015, when the first D-SIB reached the breaking point at 13 percent of its assets.
- The impact of a deterioration in the performing loans on capital for all banks:
  - The least resilient bank will breach the minimum CAR when 8.3 percent of its performing loans become nonperforming—an improvement of 1.5 percent from the previous quarter.
- The impact of the increase in the industry NPL ratio to 15.6 percent—a rise of 5.2 percent, which is equivalent to the annual increase in the year to December 2016:
  - All banks would meet the minimum capital adequacy ratio of 8 percent.
  - Three banks would breach the minimum paid-up capital requirement.
- Loan concentration: the effect of the default of the single largest borrower in each bank:
  - Three banks would break the minimum paid up capital requirement—an improvement over the past six months.
  - Loan concentration is mostly problematic for small banks.

### Liquidity Shock Scenarios — Bank run scenario (primary)
- Tests the impact of a bank run over a 7-day period.
- Assumes a daily withdrawal rate of 5 percent for demand and savings deposits, and 3 percent for term deposits.
- Failing banks:
  - Day 5: 3 Banks
  - Day 7: 8 Banks
- Withdrawal scenarios:
  - Withdrawal of single largest depositor in each bank.
  - Withdrawal of the three largest depositors in each bank.
- Results:
  - All banks have adequate liquidity buffers to absorb the shock.
  - Only one bank’s liquid assets to total deposits ratio would fall below the 20 percent regulatory minimum.

### Ad Hoc Tests — Sectoral credit shock scenarios
- Shocks are 5 pp higher than the December 2016 NPL ratios in both shilling and foreign currency, for all sectors.
  - All banks would meet the minimum capital adequacy ratio of 8 percent.
- Combined extreme credit shock to agriculture (NPL ratio of 29.4%) and manufacturing (NPL ratio of 18.8%) concurrently:
  - Only 1 bank is unable to meet the required minimum core paid-up capital of Ush. 25 billion.

### Ad Hoc Tests — Concentration risk
- The 3 largest exposures per bank become NPLs:
  - 4 banks are unable to meet the minimum CAR of 8 percent and an additional 5 banks breach the minimum core capital requirement of Ush. 25 billion.
- The 5 largest exposures per bank become NPLs:
  - 7 banks are unable to meet the minimum CAR of 8 percent and an additional 5 banks breach the minimum core capital requirement of Ush. 25 billion.

### Liquidity Shock — Alternate bank run scenario (ad hoc)
- Assumes a daily withdrawal rate of 10 percent for demand-shilling deposits, 5 percent for demand-foreign deposits, 5 percent for term-shilling deposits and 3 percent for term-foreign deposits.
- The liquid-assets to total deposits ratio declines from a pre-shock level of 51.5 percent to:
  - Day 3 – 40 percent, with 4 banks failing
  - Day 5 – 31 percent, with 9 banks failing
  - Day 7 – 21 percent, with 10 banks failing

### Interest Rate Risk
- Test measures the impact on CAR of a 50 percent drop in net interest income caused by changes in nominal interest rates.
  - 1 bank is unable to meet the required minimum core paid-up capital and 22 banks are loss making, however the system CAR remains above the regulatory minimum.

### Exchange Rate Risk
- Test measures the impact on banks’ CAR and their net open FX position of a 10, 15, and 30 percent exchange rate depreciation.
  - All banks are adequately capitalized to withstand the exchange rate shocks.

### Combined Exchange Rate and Interest Rate Shocks
- Test measures the impact on banks’ CAR when a 10, 15, and 30 percent exchange rate depreciation is combined with a drop of 50 percent in net interest income.
  - 15% Depreciation – CAR of 15.6%, with 1 bank failing
  - 30% Depreciation – CAR of 15.6%, with 2 banks failing
  - 50% . Depreciation – CAR of 15.5%, with 2 banks failing

*Annex V. Stress Test Results — Uganda; Sources: Ugandan authorities and IMF staff calculations.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Program progress and reform actions
- Maintained stability while scaling up infrastructure investment and keeping debt on a sustainable path.
- Strengthened the inflation targeting framework and progressing on development of a master repo agreement.
- Advanced key structural reforms including:
  - Adoption of the PFM Act and its Regulations and the Charter of Fiscal Responsibility.
  - Expansion of the Treasury Single Account (TSA) framework to local governments.
  - Adoption of key amendments to laws to facilitate exit from the FATF Gray list.
  - Establishment and issuance of National Identification Cards under the new national identification system to support revenue collection, financial sector client identification, and AML/CFT efforts.

### Macroeconomic performance in FY16/17
- Real GDP growth:
  - FY15/16: 4.8 percent.
  - FY16/17: likely to result in growth of 3.9 (as stated).
- Private sector credit growth:
  - Average of only 6.4 percent as of Q3 FY16/17.
- Current account:
  - Projected to narrow to 4.7 percent of GDP in 2016/17.
  - Export receipts increased to 11 percent of GDP but remain constrained.
- External financing flows:
  - FDI rose by USD 61 million.
  - Portfolio flows recorded a net inflow of USD 11 million.

### Weather shocks and agricultural interventions
- Prolonged drought from around October 2016 to end-February 2017 and Fall Armyworm attack caused severe crop failure in several parts of the country.
- Government interventions:
  - Provided food relief to affected households.
  - Allocated resources to procure fast maturing seed and plantlets for the March - May planting seasons.
  - Constituted a National Inter-agency Task Force for Fall Armyworm control.
  - Supplementary funding of Shs. 2.1 billion to procure pesticides and provide technical support.
  - Allocated Shs 168 million to the National Agricultural Research Organization for research into pest control.

### Banking sector and financial stability
- Banking sector described as sound and resilient; banks well capitalized and liquid.
- Non-performing loans (NPLs):
  - Reduced from 10.5 percent in December 2016 to 6.3 percent in March 2017, mainly due to write-offs and debt restructuring.
  - NPLs remain high and likely to weigh on bank capital and financial intermediation in the near term.
- Stress tests indicate the system remains strong; authorities continue close monitoring.

### Fiscal developments and revenue mobilization
- Tax collection in first three quarters: mobilized Shs 9,277 billion.
- Indicative target setting a tax floor for end March 2017 was missed by a small margin.
- Measures to improve compliance and revenue:
  - Taxpayer Registration Expansion Program (TREP).
  - Tax audits and arrears collection.
  - Implementation of the Regional Electronic Cargo Tracking System (RECTS).
  - Tax education initiatives.
- Noted tax measures from FY16/17 budget: excise duty on petrol & diesel, ready-to-drink spirits, sugar; VAT on bulbs other than fluorescent bulbs.
- Expenditure outcomes:
  - Under-execution of externally financed projects due to capacity constraints, land acquisition challenges, and procurement delays.
  - Some increase in current spending late in the year for food relief and other needs.
- Fiscal deficit:
  - Met the deficit quantitative assessment criteria (QAC) in December 2016.
  - Expect the deficit to be 3.5 percent of GDP at end of FY16/17.
- Financing decisions:
  - Drew down available resources with Bank of Uganda in the Consolidated Fund; thus unable to repay the advance taken from BoU last year as originally planned.
  - Two government guarantees to Uganda Development Bank (UDB) resulted in breach of the IT on issuance of guarantees.

### Monetary policy and inflation developments
- Central Bank Rate (CBR):
  - Gradual reduction to 11 percent in April 2017 (in text).
  - Supplement notes: MPC cut policy rate by 100 bps to 10 percent on June 19, bringing cumulative rate cut to 700 bps since April 2016 (Supplement).
- Inflation:
  - Core inflation: 5.1 percent in May 2017 (core and headline line states core and headline inflation reached 5.1 percent and 7.2 percent respectively in May 2017).
  - Headline inflation: 7.2 percent in May 2017.
  - Food price spike due to drought was main driver of headline inflation; lower international food prices and weak domestic demand partly offset effects; second-round effects not expected to be significant.
- International reserves:
  - Net international reserves floor exceeded agreed floor by US$147.43 million.
  - Level of international reserves expected to remain adequate at around 4.0 months of future imports (projection for FY17/18).

### Structural benchmarks, AML/CFT, and public investment management
- AML/CFT and legal measures:
  - Approval of the Anti-Terrorism (Amendment) Bill 2017, Capital Markets Authority Act (Amendments), and the Insurance Bill to facilitate tracing, identification and freezing of terrorist assets and support exit from FATF gray list.
  - National Risk Assessment concluded by the Financial Intelligence Authority; expected submission to Cabinet in May 2017.
- Domestic arrears:
  - Stock of domestic arrears as at June 2016: Shs 2,701 billion (published).
  - Preliminary calculations show reduction to Shs 2,300 billion in December 2016 due to clearance by MDAs.
  - Accounting officers instructed to migrate electricity and telephone utilities from post-paid to prepaid by 30th June 2017 to prevent utility arrears; funds to be withheld from non-compliant MDAs thereafter.
- Public Investment Management (PIM):
  - Appraisal User Manual and Development Committee Guidelines completed.
  - Manual setting out national parameters, shadow prices and conversion factors still being developed; to be completed in the coming months.
  - Treasury instructions for follow-up on value-for-money audit recommendations finalized and to be issued to MDAs by June 2017.
- Mobile money regulation:
  - Process commenced; policy framework and principles on national payments system to be presented to Cabinet.
- Bank of Uganda Act amendments:
  - Not presented to Parliament by March due to extensive consultations; planned presentation to Cabinet by end June 2017.

### Outlook and FY17/18 projections and policy intentions
- Growth projection for FY17/18:
  - Real GDP growth expected to rebound to 5 percent.
  - Factors cited: contribution of large infrastructure investments, strengthened credit growth expected to reach 12 percent, and the end of the drought.
- Inflation:
  - Projected to remain in line with its medium-term target.
- Current account:
  - Likely to increase reflecting 6.8 percent of GDP (as stated).
- Fiscal strategy for FY17/18:
  - Aim to increase tax-to-GDP ratio by at least ½ percentage points through tax measures and enhanced compliance.
  - Preparing a medium-term national revenue mobilization strategy; plan to leverage the G-20 Medium-Term Revenue Strategy initiative with IMF, DFID, WB and others.
  - Plan to increase development expenditures to accommodate US$ 303.3 million for oil roads while maintaining social spending and reasonable borrowing to avoid crowding out the private sector or increasing debt distress risk.
  - Expect the deficit to rise to 5.6 percent of GDP in FY17/18.
- Monetary policy intentions:
  - Continue enhancing inflation-targeting framework; stand ready to adjust the CBR depending on inflation expectations.
  - Reform government securities operations and primary dealership framework.
  - Strengthen oversight and supervisory frameworks: consolidated supervision, setting up a contagion matrix, and adopting Basel III among others.

### Quantitative assessment criteria and indicative targets (highlights from Table 1.1)
- Ceiling on the overall deficit of the Central Government (cumulative changes):
  - Program Adjusted Target and Outturns listed with multiple date columns; some instances:
    - Program 5,382; Adjusted Target 3,798; Outturn 4,260 — Not Met.
    - Later rows show other date-specific targets and met/not met statuses.
- Minimum increase in net international reserves of the Bank of Uganda:
  - Examples:
    - Program -150; Adjusted Target -145; Outturn 174 — Met.
    - Program 18; Adjusted Target 15; Outturn 163 — Met.
    - Program 18; Adjusted Target 7; Outturn 313 — Met.
  - Net international reserves outturn assessed using program exchange rates.
- Floor on tax revenue:
  - Proposals and outturns show several Not Met entries; for example:
    - Program 11,040; Outturn 10,833 — Not Met.
    - Program 8,936; Adjusted Target 8,833 — Not Met.
- Expenditures on poverty alleviating sectors:
  - Multiple entries showing Met (e.g., Program 3,032; Outturn 3,241 — Met).
- Ceiling on issuance of guarantees by the Government/BoU:
  - Program 0; Outturn 92 — Not Met (indicating guarantees granted to UDB resulted in a breach).
- Core inflation target (annual percentage change, twelve-month period average):
  - Target 5.0; several outturns recorded as:
    - Outturn 6.7 — Met.
    - Outturn 6.4 — Met.
    - Outturn 5.9 — Met.
    - Outturn 5.6 — Met.

### Supplementary information and staff recommendations
- Monetary policy update (June 27, 2017 supplement):
  - Bank of Uganda’s MPC cut policy rate by 100 bps to 10 percent on June 19; cumulative cut of 700 bps since April 2016 (staff supplement).
  - MPC expects core inflation to remain close to the 5 percent target over the next 12-18 months but sees risk that growth in FY17/18 could be weaker than projected.
  - Staff encourages close monitoring of food price inflation, exchange rate depreciation, and second-round effects; staff agrees core inflation is likely to remain within a +/- 2 percent band around the 5 percent target with the rate cut.
- External arrears supplement (July 6, 2017):
  - Uganda incurred external arrears to a Norwegian company in May 2017; payment due May 17, 2017; non-observance of the continuous assessment criterion (CAC) on zero ceiling of external payment arrears on June 17, 2017.
  - Authorities have written to the creditor and undertake to clear the arrears during July 2017.
  - Staff supports a waiver of the CAC on external arrears to complete the Eighth Review under the PSI on grounds that authorities are taking corrective action, while regretting the incurrence and encouraging prompt payment.

### Requests and procedural matters
- Authorities request completion of the eighth and last review under the Policy Support Instrument (PSI).
- Plan to request a successor PSI agreement in the fall to continue program support.
- Authorities consent to publication of the staff report and the letter of intent for the 2017 Article IV consultation and the Eighth Review of the PSI.

*Source: Appendix I. Letter of Intent, Kampala, Uganda, June 20, 2017.*

### 2009. Starting June 2016, BOU has expanded the coverage of other depository corporations to include

### cr17206 - 2009. Starting June 2016, BOU has expanded the coverage of other depository corporations to include

### Financial sector surveillance
- BOU reports all 12 core financial soundness indicators (FSIs) and 7 of the 13 encouraged FSIs for deposit takers.
- Additional FSIs reported: 1 FSI for households and 2 FSIs for real estate markets.
- All FSIs are reported quarterly for posting on the IMF’s FSI website.
- Since June 2016, BOU expanded coverage of other depository corporations to include deposit taking savings and credit cooperative societies (SACCOs).
- BOU compiled SRF-4SR covering other financial corporations.

### External Sector Statistics (ESS)
- BOU compiles quarterly balance of payments and international investment position (IIP) statistics based on BPM6.
- Oldest time series: BPM6-based quarterly balance of payments from Q1-2001 and IIP from Q1-1999.
- BOU, with STA support, developed a system to collect information on financial positions with non-residents in other East African Community (EAC) partner states to enable compilation of MFS for the EAC.
- Recommendations and data-development priorities:
  - Continue developing source data for services, specifically construction services (under DFID Balance of Payments Module 2).
  - Address intra-EAC trade discrepancies.
  - Apply a common approach to estimating cross-border informal trade.
  - Separate balance of payments transactions from other flows (revaluations and other volume changes) to improve measurement of IIP financial stocks.

### Data Standards and Quality
- Uganda implemented the e-GDDS recommendations in November 2016.
- Uganda is publishing all fifteen data categories recommended under the e-GDDS on its National Summary Data Page.
- Uganda is well on track to becoming an SDDS subscriber.
- A Report on the Observance of Standards and Codes (ROSC) was published in July 2006.

### Reporting to STA and Table of Common Indicators (as of June 13, 2017)
- Uganda reports government finance statistics (GFS) data according to the GFSM 2014 framework for the GFS Yearbook; does not report high frequency data for inclusion in the International Financial Statistics (IFS).
- Selected entries from the Table of Common Indicators Required for Surveillance:
  - Exchange Rates: Date of Latest Observation May 12, 2017; Date Received May 19, 2017; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation March, 2017; Date Received April 30, 2017; Frequency M/M/M.
  - Reserve/Base Money: April, 2017; June 5, 2017; M/M/M.
  - Broad Money: April, 2017; June 5, 2017; M/M/M.
  - Central Bank Balance Sheet: April, 2017; June 5, 2017; M/M/M.
  - Consolidated Balance Sheet of the Banking System: April, 2017; June 5, 2017; M/M/M.
  - Interest Rates: Date of Latest Observation May 12, 2017; Date Received May 19, 2017; Frequency of Data D; Frequency of Reporting M; Frequency of Publication M.
  - Consumer Price Index: May, 2017; May 31, 2017; M/M/M.
  - Revenue, Expenditure, Balance and Composition of Financing - Central Government: April, 2017; June 6, 2017; M/M/M.
  - Stocks of Central Government and Central Government-Guaranteed Debt: FY2015/16; October, 2016; A/A/A.
  - External Current Account Balance: Q2 FY2016/17; April, 2017; Q/Q/Q.
  - Exports and Imports of Goods and Services: April, 2017; June, 2017; M/M/M.
  - GDP/GNP: Q2 FY2016/17; April, 2017; Q/Q/Q.
  - Gross External Debt: FY2015/16; April, 2017; A/A/A.
  - International Investment Position: December 2016; April 2017; Q/Q/Q.
- Memo items on data quality reflect the ROSC assessments (published July 12, 2006) using observance categories: O, LO, LNO, NO, NA.

### Statement by Mr. Mkwezalamba (Executive Director for Uganda) and Ms. Gasasira-Manzi (Advisor) — July 7, 2017
- Authorities broadly agree with staff’s assessment of macroeconomic policies and welcome analysis in the selected issues paper.
- Key challenges cited:
  - Disruption in trade and tightened financial conditions.
  - Influx of refugees exerting pressure on social amenities and resources (nearly one million refugees referenced later).
  - Subdued credit growth.
  - Effects of climate change and drought undermining agricultural production and food security.
- Authorities’ response: measures to enhance agricultural production and accelerate industrialization.
- Authorities intend to request a successor PSI arrangement in the Fall.

### Program Performance
- Performance under current PSI described as broadly satisfactory.
- All end-December 2016 and continuous Quantitative Assessment Criteria (QAC) and most indicative targets were met through March 2017.
- Reserve accumulation floor was exceeded; the inflation consultation clause was observed.
- Indicative target on poverty alleviating expenditures was met.
- Minor underperformance in revenue due to slowdown in economic activity; overall deficit remained lower than programmed at end-December 2016.
- Breach: indicative target on zero-ceiling for government guarantees — government granted two guarantees to the Uganda Development Bank (UDB) to recapitalize UDB and support affordable lending to priority sectors.
- Structural reform progress: improvements in AML/CFT regime (Anti-Terrorism (Amendments) Bill 2017, Capital Markets Authority Act (Amendments), Insurance Bill) aimed at exiting FATF gray list.
- Pending reforms: amendments to the Bank of Uganda (BOU) Act; publishing report for end-December 2016 unpaid bills; policy on regulation of mobile money.

### Recent Economic Developments and Outlook
- Growth:
  - Growth slowed to 3.9 percent in FY2016/17 from 4.7 percent in FY15/16.
  - Causes: long drought, fall army worm outbreak affecting agriculture, slow recovery in private sector credit, slow execution of externally-financed public investment projects.
  - Growth expected to pick up to 5 percent in FY2017/18 with improved weather and recovery in private sector credit.
- Inflation:
  - Headline inflation in May 2017: 7.2 percent.
  - Core inflation in May 2017: 5.1 percent (in line with BOU target of 5 percent).
  - At June 2017 MPC meeting, BOU lowered policy rate by 100 basis points to 10 percent.
- External position:
  - 2016 external position broadly consistent with fundamentals.
  - Current account deficit projected to narrow in 2016/17 due to increased export earnings and decreased Government and private sector imports.
  - Current account deficit expected to temporarily widen over the medium term due to increased imports related to investments in infrastructure and the oil sector.
  - International reserves: 5.1 months of prospective imports (in line with EAC Monetary Union protocol convergence criterion of 4½ months).

### Fiscal Policy
- Medium term fiscal framework anchored to the Charter of Fiscal Responsibility (CFR).
- Charter targets: overall fiscal deficit no more than 3 percent of GDP by FY2020/21 and government debt below 50 percent.
- Fiscal outcomes and projections:
  - Fiscal deficit for FY2016/17 expected to be lower than anticipated at about 3.6 percent (owing to slow execution of externally-financed public investment).
  - Fiscal deficit for FY (text indicates "However, for FY 2016/17, it is expected to widen to about 5.5 percent" — source text contains overlapping statements); document presents both 3.6 percent and about 5.5 percent in relation to FY2016/17 and expansionary fiscal stance for infrastructure respectively.
  - As of December 31, 2016, Uganda’s external and domestic public debt amounted to about 33.8 percent of GDP.
- Revenue mobilization:
  - Tax revenue projected to reach 14.6 percent of GDP in FY2017/18 compared to 13.6 percent estimated for FY 2016/17.
  - Strategy: focus on tax administration, taxpayer education, strengthening detection of non-compliant taxpayers, recovery of tax arrears, combatting smuggling, undervaluation and under declaration, automation of online assessments, and electronic tracking of transit goods.
- Expenditure and arrears:
  - Authorities intend to compress current expenditure in FY 2017/18 by 0.4 percent of GDP compared to FY 2016/17 while protecting social spending.
  - Resources earmarked in FY 2017/18 budget for clearance of arrears.
  - Measures to avoid recurrence of arrears: sanctions for accounting officers who accumulate new arrears, withholding future disbursements for departments that delay payments, use of prepaid payments for utilities, full utilization of IFMIS.
- Social programs: continued support for Youth Livelihood Program, Uganda Women Entrepreneurship Program (UWEP), and pilot Social Assistance Grant for Empowerment (SAGE).

### Monetary and Financial Sector Policies
- Inflation targeting framework maintained.
- BOU continued easing cycle started in April 2016; since then CBR reduced by 700 basis points to 10 percent.
- Expectation: near-term increase in headline inflation; core inflation to remain around the 5 percent target.
- Banking sector: remains sound and resilient; banks well capitalized and liquid; Non-performing loans (NPLs) remain a concern with many in the watch category.
- Following failure of a large commercial bank last year, BOU is strengthening supervision and monitoring, focusing on banks’ risk management frameworks.
- Financial deepening measures: introduction of agency banking, Islamic banking, and mobile banking.
- Pension and insurance sector reforms to mobilize domestic savings and finance for long term capital.
- Microfinance Institutions and Money Lenders Act passed to regulate microfinance institutions, including SACCOs, money lenders, and credit institutions, while promoting savings and inclusion.
- Government plans to reduce domestic borrowing in the short to medium term to support private sector credit growth.
- Authorities plan to strengthen fiscal-monetary policy coordination given implications for monetary policy management.

### Structural Reforms
- Reforms to promote investment and private sector development:
  - Developing demarcated industrial and business parks.
  - Investing in energy and transport infrastructure to reduce cost of doing business.
  - Supporting SMEs through skills development and improved access to financing.
- Agricultural sector strategy:
  - Adopt pro-active mitigation measures against weather shocks, including fast-tracking irrigation and promoting agro-processing and extraction of minerals to boost industrialization.
  - Objective: address unemployment and deliver inclusive growth.
- Measures to improve public sector efficiency and combat corruption:
  - Leadership code amended to permit confiscation of properties acquired through corruption.
  - Directorate established in Inspectorate of Government to handle high profile cases.
  - Financial Intelligence Authority strengthened to enforce AML/CFT in collaboration with international counterparts.

### Conclusion
- Authorities committed to reinvigorating growth and achieving poverty reduction and equality.
- IMF-supported Policy Support Instrument (PSI) credited with contributing to economic stability and inclusive growth, and catalyzing financial and capacity-building support from development partners.
- Refugee situation:
  - Influx of nearly one million refugees from regional conflicts is exerting pressure.
  - Solidarity conference on June 30, 2017 raised pledges of $358 million against an estimated $2billion required to address the refugee crisis.
- Authorities seek Executive Directors’ support for completion of the eighth and last review of the PSI and intend to pursue a successor arrangement.

*IMF country report CR17206 (selected excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17206.pdf_