## cr17268 ## Source details **Canonical URL:** [cr17268](https://www.imf.org/-/media/files/publications/cr/2017/cr17268.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17268.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17268.pdf.json) --- ### Mission context and participants - Mission visit: March 10 to 19, 2015. - Purpose: FAD technical assistance to provide advice on developing the “Charter for Fiscal Responsibility”. - Mission leadership and contributors: Tom Josephs (mission leader), Racheeda Boukezia (FAD), Fazeer Rahim (AFRITAC East). - Financial support: multi-donor Managing Natural Resources Trust Fund (MNRW). - Key meetings and workshop participants: - MoFPED: Mr. Keith Muhakanizi (Permanent Secretary/Secretary to the Treasury); Mr. Lawrence Kiiza (Director of Economic Affairs); Dr. Albert Musisi (Commissioner, Macroeconomic Policy Department); Mr. Moses Kaggwa (Commissioner, Tax Policy); departmental staff including DEA, budget, tax policy, and Accountant General’s office. - Organized MPED team contacts: Mr. Obadia Turinawe and Ms. Lily Sommer. - Bank of Uganda: Mr. Adam Mugume (Executive Director, Research). - IMF office support: Ms. Ana Lucia Coronel (Senior Resident Representative, Kampala), Ms. Caroline Ntumwa (Economist), Ms. Winifred Bisamaza (administrative/logistical support). ### Executive summary: core findings and recommendations - Legal requirement: PFM Act requires publication of a “Charter for Fiscal Responsibility” at the start of each new Parliament; Charter must set measurable medium-term objectives and explain methodology, data, and procedures for measuring performance. - Current plan: base core fiscal objectives on the East Africa Monetary Union (EAMU) convergence criteria: - Overall general government deficit target of 3% by 2020–21. - Annual debt ceiling of 50% GDP on a net present value basis. - Advantages of EAMU-based objectives: - Strong political backing. - Relatively clear and simple; verifiable from reported statistics. - Achievable on the basis of recent projections. - Medium-term deficit target provides flexibility to avoid pro-cyclical policy until the target year. - Key risks and limitations: - Objectives would not provide a hard constraint on policy in the years until 2020–21 because the deficit target applies in 2020–21 and current projections show headroom under the debt ceiling. - Risk of pressure for excessively loose fiscal policy in the interim and the potential need for a costly one-off fiscal adjustment in 2020–21. - Recommended augmentations: - Add interim or additional targets (e.g., intermediate deficit target and/or lower debt ceiling) to provide a backstop against fiscal slippage. - Consider supplementary targets on increasing revenues, meeting existing financing guidelines, and phasing out central bank borrowing in line with the EAMU Protocol. - Escape clauses: - Restrict to severe and unforeseen shocks. - Charter should establish strict and transparent procedures to invoke escape clauses and require publication of a transition/adjustment plan. - Petroleum revenues: - Significant uncertainty over timing and size of revenues; first Charter should not include specific fiscal objectives for petroleum revenues. - Charter should establish key principles, including that fiscal objectives govern all outflows from the Petroleum Revenue Fund. - MoFPED should develop analytical capacity on oil revenue forecasting, long-term projections, risk analysis, and public investment management prior to production; FAD and AFRITAC East can provide further technical assistance. - Fiscal reporting and budget process: - Charter should establish transparent fiscal reporting requirements, robust forecasting practices, and the role of fiscal objectives in guiding the annual budget process. - PFM regulations should address identified budget process weaknesses; further FAD TA can be provided if required. - Key calendar and milestones (exact timings preserved): - Recommendation 2.1 first draft: May 2015; final decision: Feb 2016. - Recommendation 3.1 first draft: May 2015; final decision: Feb 2016. - Recommendation 4.1: MEPD May 2015. - Recommendation 5.1: MEPD May 2015. - Recommendation 5.2: DEA On-going (FAD and AFRITAC East TA available if necessary). - Recommendation 6.1: MEPD May 2015. - Recommendation 6.2: DEA/Budget May 2015. ### I. Introduction — purpose and scope - Charter timing and scope: - PFM Act requires the government to publish a Charter for Fiscal Responsibility within three months of the start of each Parliament after a general election. - Next election: February 2016; MoFPED aims for a Charter covering 2016–17 to 2020–21. - Under Uganda’s Policy Support Instrument with the IMF, a structural benchmark requires the Charter to be finalized internally by MoFPED in May 2015. - Charter must: - Set measurable medium-term fiscal objectives consistent with PFM Act fiscal principles. - Explain methodology, data, and procedures for measuring performance against objectives. - Establish fiscal reporting requirements and procedures for linking fiscal objectives to the annual budget process. - Report focus: core and supplementary objectives, escape clauses, petroleum revenue framework, and fiscal reporting/operations. ### II. Core medium-term fiscal objectives — findings, risks, and recommendation (2.1) - Findings and contextual data: - EAMU convergence criteria under consideration as core objectives: - Ceiling on overall general government deficit of 3% of GDP. - Ceiling on gross public debt of 50% of GDP, on a net present value (NPV) basis. - Under the EAMU Protocol, to meet convergence criteria these objectives must be achieved for at least three years ahead of 2024. - Authorities considering setting a target for reaching the 3% deficit in 2020/21, applying the debt ceiling on an annual basis. - At time of mission (2014–15): - Central government deficit estimated at -6.8 per cent. - Public debt estimated at 25 percent of GDP on an NPV basis. - IMF projections (December 2014) suggested objectives would be achievable and Uganda had significant headroom below the 50% debt ceiling. - Advantages of using EAMU objectives: - Strong political commitment (President signed EAMU Protocol; ratified by Parliament). - Debt ceiling established as guideline in 2013 Public Debt Management Strategy. - Objectives meet IMF criteria for effective fiscal rules: clarity, simplicity, verifiability. - Medium-term deficit target allows flexibility to avoid pro-cyclical policy; current debt headroom reduces pro-cyclical risks for debt. - Risks and limitations: - Medium-term deficit target does not constrain annual deficits up to 2020–21; government could run large deficits provided projections return to 3% by 2020–21. - Risk of large fiscal adjustment in 2020–21 with destabilizing effects and abrupt reductions in investment or other expenditures. - Recommended augmentations (Recommendation 2.1): - Augment core objectives by adding binding additional or interim targets to prevent excessively loose fiscal policy before 2020–21. - Options: - Intermediate deficit target around mid-period of the Charter (example indicated: target of 4% GDP for 2018–19 is achievable on December 2014 projections). - Commitment to a smooth path of deficit reduction (point target or path). - Lower debt ceiling to provide buffer (previous FAD missions suggested a 40% of GDP debt ceiling while still allowing current investment plans). - Further discussion to occur in context of IMF staff visit using latest fiscal projections (IMF staff visit in April of this year). ### III. Supplementary medium-term fiscal objectives (Recommendation 3.1) - Rationale: - Supplementary objectives can promote sound fiscal policy and public financial management practices; Parliamentary approval required to change supplementary targets. - Some supplementary objectives may be indicative rather than binding. - Areas for supplementary objectives: 1) Revenue - PFM Act fiscal principle: “sufficiency of revenue mobilization to finance Government programmes.” - EAMU protocol includes an indicative target for raising the tax-GDP ratio to 25% GDP, which is well above current levels in Uganda. - Recommendation: consider a supplementary objective to raise the tax-GDP ratio over the medium-term, but treat as indicative rather than binding; Charter methodology must require fiscal plans to be based on prudent and realistic revenue forecasts. 2) Domestic and external financing and debt - 2013 Public Debt Management Strategy (PDMS) includes guidelines on financing composition and debt. - Charter could include a supplementary objective that PDMS guidelines and the annual Medium-term Debt Strategy are observed. - In line with EAMU protocol, include commitment to fully phase out government borrowing from the Bank of Uganda by 2024, with transitional arrangements detailed in new PFM regulations. 3) Fiscal risks - PFM Act fiscal principle: “management of fiscal risks in a prudent manner” and requirement to publish a fiscal risks statement. - Charter could reinforce this with objectives on managing important sources of risk (e.g., caps on government guarantees, PPP commitments, other contingent liabilities). - Further analysis required to quantify such commitments in Uganda before introducing specific caps; consider for future Charters. - Scope and risks: - Balance needed between using supplementary objectives to support fiscal management and ensuring the Charter is focused and achievable. - Risks of too many supplementary objectives: - Diluting clarity and focus of the Charter. - Undermining credibility if objectives are not met. - Requiring frequent updates to the Charter; updates should be minimized to preserve credibility. - Illustrative international practice: - Kenya: ceiling on stock of government guarantees; ceiling in 2013/14 set at KSh200 billion (4 percent of GDP). - UK: nominal ceiling on total commitments related to PPP contracts over 2015–16 to 2019–20. - Note: May 2014 FAD report suggests supplementary objectives on petroleum revenue management, but given current uncertainty the first Charter should set broad principles rather than specific objectives. ### IV. Escape clauses — design, triggers, procedures, and Recommendation 4.1 - Findings: - PFM Act specifies circumstances under which government can deviate from fiscal objectives (escape clauses). - Recommended procedural guidance: - Escape clauses should be used only for severe and unforeseen shocks. - Charter should establish strict and transparent procedures for invoking and approving the escape clause. - Require publication of a transition and adjustment plan detailing how fiscal objectives will be met again after the transitional period. - Procedural details recommended: - Procedure for approving use: - Current Act: escape clause can be invoked by the Minister with approval of Parliament. - Charter should require the Minister to publish a statement to Parliament explaining: - (i) the reasons for invoking the escape clause; - (ii) how it corresponds to the circumstances specified in the Act; - (iii) why it cannot be addressed by using the Contingency Fund, other funding mechanisms, or a fiscal adjustment within the objectives; and - (iv) for how long the government expects to deviate from the fiscal objectives. - Transitional plan for return to compliance: - Act requires publication of a report within thirty days of invoking the escape clause. - Charter should specify that the report include a new set of medium-term fiscal plans and projections showing how the government intends to return to compliance, including any new policy measures; this replaces the previous medium-term fiscal framework and should be approved by Parliament. - Triggers and numerical criteria: - Uganda statutory trigger language (quoted): “where Uganda experiences a natural disaster, an unanticipated severe economic shock, or any other significant unforeseen event that cannot be funded from the Contingency Fund or other funding mechanism provided in the Act or using prudent fiscal policy adjustments.” - Example of numerical criterion noted: West Africa Economic and Monetary Union defines a severe economic shock as growth of three percentage points below the average of the past three years. - Cautions: tightly defined numerical triggers are not recommended for Uganda due to data limitations (e.g., annual GDP outturn data from UBoS available with a lag of around one year; quarterly GDP data subject to significant revision). - Independent verification: - Some countries require independent verification (often by a Parliamentary Budget Office, PBO). - Uganda’s PBO provides independent and objective analysis to Parliament but does not currently publish reports to a wider audience. - Recommendation: PBO should provide advice to Parliament on the escape clause, but remit would need widening and capacity enhancement before formal independent verification role is assigned. - Recommendation (4.1): Charter should provide additional detail on procedures and reporting requirements when invoking the escape clause and on the contents of the transition and adjustment plan (MEPD timeframe: May 2015). ### V. Petroleum revenue management — timing, principles, capacity, Recommendations 5.1 and 5.2 - Findings on timing and uncertainty: - Uganda may become a significant petroleum producer over the next decade; timing and value of future government revenues are currently uncertain. - Analysis suggests significant flows of government revenue are unlikely to start until, at the earliest, the very end of the period of the first Charter. - Given uncertainty, first Charter should not include specific fiscal objectives for petroleum revenues. - Principles and next steps: - First Charter should reaffirm key principles for establishing a petroleum revenue policy framework and require updating of the Charter with specific fiscal objectives once there is greater certainty around timing and size of oil revenues (Recommendation 5.1: MEPD May 2015). - Establish principle that fiscal objectives govern all outflows of revenue from the Petroleum Revenue Fund. - May 2010 FAD mission suggested using an objective for the non-resource fiscal balance to manage petroleum revenues. - Target levels should balance using oil revenues for domestic investment versus saving to establish a stabilization buffer and for future generations; consistent with Government’s 2012 “Oil and Gas Revenue Management Policy” and PFM Act fiscal principles (Article 4 (2), including (c) and (d) as quoted in the source). - Capacity building and analytical work before production: - MoFPED should develop capacity on: - Estimates of volume and value of reserves. - Long-term projections of revenue flows under alternative price and production scenarios. - Medium-term fiscal and revenue forecasts. - Fiscal risk analysis. - Public investment management capacity must be strengthened for effective, well-phased investment financed by resource revenues. - FAD and AFRITAC East can provide technical assistance and training (e.g., FAD’s model of fiscal policy frameworks in resource-rich developing countries). - Recommendation (5.2): MoFPED should use the time before production starts to develop capacity on oil revenue forecasting, long-term projections, risk analysis, and public investment management; FAD and AFRITAC East can provide further technical assistance if necessary (DEA On-going). ### VI. Fiscal policy operations and reporting — recommendations 6.1 and 6.2 - Charter reporting and methodological requirements from PFM Act: - Include explanation of methodology and data used to measure government performance against fiscal objectives. - Detail definitions of fiscal indicators used as objectives, wider fiscal reporting requirements, and how objectives will guide fiscal and budget policymaking. - Specific content and practices to establish: - Specification of fiscal indicators: - Refer to relevant international standards and be consistent with EAC definitions and methodologies. - EAC intends to use a measure of the fiscal balance covering general government in accordance with GFSM. - MoFPED needs to accelerate work to ensure a robust general government measure of the fiscal balance is available by Charter publication. - Specification of data sources: - Include source of data underpinning economic and fiscal projections, naming the responsible institution (e.g., UBoS) and the report in which it is found. - Forecasting practices: Charter should reaffirm PFM Act requirements and specify additional good practices: - (i) Forecast based on prudent and realistic assumptions. - (ii) Key forecast assumptions compared to independent external forecasts with explanations for large differences. - (iii) Comparison with the previous government forecast and explanation of key changes. - (iv) Forecast subject to internal scrutiny via review by a cross-department technical group, and accompanied by a statement from the Minister and Secretary to the Treasury attesting to reliability and completeness (consistent with PFM Act). - Fiscal risk statement: - PFM Act requires publication of a fiscal risk statement as part of the Budget Framework Paper. - Charter should specify minimum requirements consistent with the EAC working group template, including: - Macroeconomic risk analysis and sensitivity of fiscal projections to changes in key macroeconomic variables. - Analysis of exposure to specific fiscal risks: civil service pensions, loans and guarantees, public-private partnerships, natural disasters. - Analysis of risks from financial position of public corporations and sub-national governments. - Discussion of institutional risks such as data quality and capacity constraints. - Discussion of the government’s strategy for managing these risks. - Medium-term fiscal framework and publication: - Act requires Charter be published alongside an economic and fiscal update document providing a detailed MTFF showing how Charter fiscal objectives will be met based on stated economic, fiscal, and policy assumptions. - Assumptions should be explicitly stated for future comparison with outturns to explain deviations. - Capacity and process implications: - Act and Charter create additional demands on DEA and wider MoFPED; AFRITAC East mission assessed analytical capacity and provided recommendations (Box 2). - Robust budget preparation, approval, and execution process is vital: - (i) Budget Framework Paper (BFP) should set medium-term expenditure limits consistent with fiscal objectives and be approved by Parliament. - (ii) Annual expenditure limits and revenue policies in the budget should be consistent with the BFP. - (iii) Budget execution procedures should ensure limits are respected. - (iv) In-year reporting should include assessment of progress against fiscal objectives. - PFM Act regulations should be used to develop a robust budget process and address weaknesses identified in May 2014 and October 2014 FAD reports; FAD and AFRITAC East could provide desk-based review of draft regulations and further technical assistance if required. - Recommendation (6.1): Use the Charter to provide further detail on definitions and data sources for the fiscal objectives and projections that are consistent with international standards and EAC definitions, establish robust and transparent forecasting practices, and specify minimum requirements for the fiscal risk statement (MEPD May 2015). - Recommendation (6.2): Use the Charter and PFM regulations to underpin the role of the fiscal objectives in guiding policy-making through all stages of the annual budget process (DEA/Budget May 2015). ### Box 2 — Delivering the new analytical requirements of the PFM Act: DEA readiness and recommendations - Assessment of DEA readiness: - AFRITAC East technical assistance mission in January 2015 assessed DEA readiness for new reporting and analytical requirements. - Mission concluded DEA is well placed to comply with majority of requirements. - Existing capabilities include five-year forecasts of macroeconomic and fiscal variables routinely published and an MoU between MoFPED and BOU formalizing respective forecasting roles. - Identified areas for development: - Timing and coordination: revised budget calendar brings forward activities by two to three months; requires coordination with UBoS to ensure GDP releases are brought forward. - New internal processes needed to produce: - (i) a statement on tax expenditure; - (ii) bi-annual fiscal performance reports; - (iii) a fiscal risk statement; - (iv) in the future, forecasts of petroleum revenues and the operation of the Petroleum Fund. - Forecasting methodology and scrutiny: - BFP needs to document methodologies used in preparing forecasts and systematically explain changes in forecasts and forecast errors. - Current bottom-up approaches rely heavily on forecast judgment; internal and external scrutiny (particularly from UBoS and BOU) on these judgments is limited and should be enhanced. - Additional forecasting models will be needed; two models developed by AFRITAC East can support the main GDP forecasting model. - Recommendations reiterated: - Recommendation (6.1): Use the Charter to provide further detail on definition and data sources for fiscal objectives and projections, establish robust forecasting practices, and specify minimum requirements for the fiscal risk statement. - Recommendation (6.2): Use the Charter and PFM regulations to underpin the role of fiscal objectives in guiding policy-making through the annual budget process. ### Key numeric and dated items (preserved exactly) - Mission visit: March 10 to 19, 2015. - Charter coverage period under preparation: 2016–17 to 2020–21. - Structural benchmark: Charter finalized internally by MoFPED in May 2015. - EAMU core objectives under consideration: - Overall general government deficit ceiling of 3% of GDP (target year 2020–21). - Gross public debt ceiling of 50% of GDP, on a net present value (NPV) basis. - EAMU Protocol requirement: achieve convergence criteria for at least three years ahead of 2024. - Uganda central government deficit (2014–15 estimate): -6.8 per cent. - Public debt (2014–15 estimate): 25 percent of GDP on an NPV basis. - Example intermediate target suggested: 4% GDP for 2018–19. - Alternative debt ceiling suggested by previous FAD missions: 40% of GDP. - Phase out of government borrowing from Bank of Uganda: by 2024 (EAMU Protocol requirement). - Recommendation timing highlights: - Recommendation 2.1 first draft: May 2015. Final decision: Feb 2016. - Recommendation 3.1 first draft: May 2015. Final decision: Feb 2016. - Recommendation 4.1: MEPD May 2015. - Recommendation 5.1: MEPD May 2015. - Recommendation 5.2: DEA On-going. - Recommendation 6.1: MEPD May 2015. - Recommendation 6.2: DEA/Budget May 2015. *Source: cr17268 — Preface, Executive Summary, Sections I–VI.* ### PREFACE _________________________________________________________________________________________ 4 ### PREFACE (cr17268) ### Mission context and participants - An FAD technical assistance mission visited Kampala during the period March 10 to 19, 2015, to provide advice on developing the “Charter for Fiscal Responsibility”. - Mission leadership and contributors: Tom Josephs (mission leader), Racheeda Boukezia (FAD), Fazeer Rahim (AFRITAC East). - Financial support provided by the multi-donor Managing Natural Resources Trust Fund (MNRW). - Key meetings and workshop participants included: - At MoFPED: Mr. Keith Muhakanizi (Permanent Secretary/Secretary to the Treasury); Mr. Lawrence Kiiza (Director of Economic Affairs); Dr. Albert Musisi (Commissioner, Macroeconomic Policy Department); Mr. Moses Kaggwa (Commissioner, Tax Policy); departmental staff including DEA, budget, tax policy, and Accountant General’s office. - Organized MPED team contacts: Mr. Obadia Turinawe and Ms. Lily Sommer. - At the Bank of Uganda: Mr. Adam Mugume (Executive Director, Research). - IMF office support: Ms. Ana Lucia Coronel (Senior Resident Representative, Kampala), Ms. Caroline Ntumwa (Economist), Ms. Winifred Bisamaza (administrative/logistical support). ### Objective of the mission - Provide focused advice to develop the draft Charter for Fiscal Responsibility, addressing: - Choice of fiscal objectives. - Procedures for deviations from objectives (escape clauses). - Handling of future petroleum revenues. - Reporting and operational requirements. *Source: IMF FAD technical assistance mission report (cr17268).* ### EXECUTIVE SUMMARY - The PFM Act requires publication of a “Charter for Fiscal Responsibility” at the start of each new Parliament; the Charter must set measurable medium-term objectives and explain methodology, data, and procedures for measuring performance. - Current plan: base core fiscal objectives on the East Africa Monetary Union (EAMU) convergence criteria: - Overall general government deficit target of 3% by 2020–21. - Annual debt ceiling of 50% GDP on a net present value basis. - Advantages of EAMU-based objectives: - Strong political backing. - Relatively clear and simple; verifiable from reported statistics. - Achievable on the basis of recent projections. - Medium-term deficit target provides flexibility to avoid pro-cyclical policy until the target year. - Key risks and limitations: - Objectives would not provide a hard constraint on policy in the years until 2020–21 because the deficit target applies in 2020–21 and current projections show headroom under the debt ceiling. - Risk of pressure for excessively loose fiscal policy in the interim and the potential need for a costly one-off fiscal adjustment in 2020–21. - Recommended augmentations: - Add interim or additional targets (e.g., intermediate deficit target and/or lower debt ceiling) to provide a backstop against fiscal slippage. - Consider supplementary targets on increasing revenues, meeting existing financing guidelines, and phasing out central bank borrowing in line with the EAMU Protocol. - Escape clauses: - Should be restricted to severe and unforeseen shocks. - Charter should establish strict and transparent procedures to invoke escape clauses and require publication of a transition/adjustment plan. - Petroleum revenues: - Significant uncertainty over timing and size of revenues; the first Charter should not include specific fiscal objectives for petroleum revenues. - Charter should establish key principles for petroleum revenue management, including the principle that fiscal objectives govern all outflows from the Petroleum Revenue Fund. - MoFPED should develop analytical capacity on oil revenue forecasting, long-term projections, risk analysis, and public investment management prior to production; FAD and AFRITAC East can provide further technical assistance. - Fiscal reporting and budget process: - Charter should establish transparent fiscal reporting requirements, robust forecasting practices, and the role of fiscal objectives in guiding the annual budget process. - PFM regulations should address identified budget process weaknesses; further FAD TA can be provided if required. Key calendar and milestones noted in the summary table: - Recommendation 2.1 first draft: May 2015; final decision: Feb 2016. - Recommendation 3.1 first draft: May 2015; final decision: Feb 2016. - Recommendation 4.1: MEPD May 2015. - Recommendation 5.1: MEPD May 2015. - Recommendation 5.2: DEA On-going (FAD and AFRITAC East TA available if necessary). - Recommendation 6.1: MEPD May 2015. - Recommendation 6.2: DEA/Budget May 2015. *Source: Executive Summary, cr17268.* ### I. INTRODUCTION — purpose and scope - The PFM Act requires the government to publish a Charter for Fiscal Responsibility within three months of the start of each Parliament after a general election. - Next election: February 2016; MoFPED aims for a Charter covering 2016–17 to 2020–21. - Under Uganda’s Policy Support Instrument with the IMF, a structural benchmark requires the Charter to be finalized internally by MoFPED in May 2015. - The Charter must: - Set measurable medium-term fiscal objectives consistent with fiscal principles in the PFM Act. - Explain methodology, data, and procedures for measuring performance against objectives. - Establish fiscal reporting requirements and set procedures for linking fiscal objectives to the annual budget process. - This report focuses on outstanding issues: core and supplementary objectives, escape clauses, petroleum revenue framework, and fiscal reporting/operations. *Source: Introduction, cr17268.* ### II. CORE MEDIUM-TERM FISCAL OBJECTIVES Findings and contextual data - EAMU convergence criteria under consideration as core objectives: - Ceiling on overall general government deficit of 3% of GDP. - Ceiling on gross public debt of 50% of GDP, on a net present value (NPV) basis. - Under the EAMU Protocol, to meet convergence criteria these objectives must be achieved for at least three years ahead of 2024. - Authorities are considering setting a target for reaching the 3% deficit in 2020/21, applying the debt ceiling on an annual basis. - At the time of the mission (2014–15): - Central government deficit estimated at -6.8 per cent. - Public debt estimated at 25 percent of GDP on an NPV basis. - IMF projections (December 2014) suggested the objectives would be achievable over the medium term and that Uganda had significant headroom below the 50% debt ceiling. Advantages of using EAMU objectives - Strong political commitment (President signed EAMU Protocol; ratified by Parliament). - Debt ceiling already established as guideline in 2013 Public Debt Management Strategy. - Objectives meet several IMF criteria for effective fiscal rules: clarity, simplicity, verifiability. - Medium-term deficit target provides flexibility to avoid pro-cyclical policy until the target year; current headroom under the debt ceiling reduces pro-cyclical risks for debt. Risks and limitations - The medium-term deficit target does not constrain annual deficits in the years up to 2020–21; government could run large deficits so long as projections return to 3% by 2020–21. - Risk of large fiscal adjustment in 2020–21, potentially destabilizing the economy and forcing abrupt reductions in investment or other expenditures. Recommended augmentations (Recommendation 2.1) - Augment core objectives by adding binding additional or interim targets to prevent excessively loose fiscal policy before 2020–21. - Options for additional constraints: - Intermediate deficit target around mid-period of the Charter (e.g., target of 4% GDP for 2018–19 is indicated as achievable on December 2014 projections). - Commitment to a smooth path of deficit reduction (point target or path). - Lower debt ceiling to provide buffer (previous FAD missions suggested a 40% of GDP debt ceiling while still allowing current investment plans). - Further discussion on interim targets to take place in context of IMF staff visit using latest fiscal projections (noted: IMF staff visit in April of this year). *Source: Section II, cr17268.* ### III. SUPPLEMENTARY MEDIUM-TERM FISCAL OBJECTIVES Rationale - Supplementary objectives can promote sound fiscal policy and public financial management practices; approval of Parliament required to change supplementary targets. - Some supplementary objectives may be defined as indicative rather than binding. Areas for supplementary objectives 1) Revenue - PFM Act fiscal principle: “sufficiency of revenue mobilization to finance Government programmes.” - EAMU protocol includes an indicative target for raising the tax-GDP ratio to 25% GDP, which is well above current levels in Uganda. - Recommendation: consider a supplementary objective to raise the tax-GDP ratio over the medium-term, but: - Treat as indicative rather than binding. - Charter methodology must require fiscal plans to be based on prudent and realistic revenue forecasts, not on assuming revenue objectives will be met. 2) Domestic and external financing and debt - 2013 Public Debt Management Strategy (PDMS) includes guidelines on financing composition and debt. - Charter could include a supplementary objective that PDMS guidelines and the annual Medium-term Debt Strategy are observed. - In line with EAMU protocol, include commitment to fully phase out government borrowing from the Bank of Uganda by 2024, with details on transitional arrangements to be provided in new PFM regulations. 3) Fiscal risks - PFM Act fiscal principle: “management of fiscal risks in a prudent manner” and requirement to publish a fiscal risks statement. - Charter could reinforce this with objectives on managing important sources of risk (e.g., caps on government guarantees, PPP commitments, other contingent liabilities). - Further analysis required to quantify such commitments in Uganda before introducing specific caps; consider for future Charters. *Source: Section III, cr17268.* ### IV. ESCAPE CLAUSES Findings - The PFM Act specifies circumstances under which the government can deviate from fiscal objectives (escape clauses). Recommendations and procedural guidance - Escape clauses should be used only in the face of severe and unforeseen shocks. - The Charter should: - Establish strict and transparent procedures for invoking and approving the escape clause. - Require publication of a transition and adjustment plan detailing how fiscal objectives will be met again after the transitional period. - Recommendation (4.1): The Charter should provide additional detail on procedures and reporting requirements when invoking the escape clause and on the contents of the transition and adjustment plan (MEPD timeframe: May 2015). *Source: Sections III–IV, cr17268.* ### V. PETROLEUM REVENUE MANAGEMENT Findings - Uganda may become a significant petroleum producer over the next decade; significant uncertainty exists around timing and size of petroleum revenue. - Because of uncertainty, the first Charter should not include specific fiscal objectives for petroleum revenues. Principles and next steps - First Charter should: - Reaffirm key principles to be used in establishing a petroleum revenue policy framework. - Require the Charter be updated with specific fiscal objectives once there is greater certainty around timing and size of oil revenues (Recommendation 5.1: MEPD May 2015). - Establish principle that the fiscal objectives would govern all outflows of revenue from the Petroleum Revenue Fund. - Capacity building: - MoFPED should use pre-production time to develop capacity on oil revenue forecasting, long-term projections, risk analysis, and public investment management (Recommendation 5.2: DEA On-going). - FAD and AFRITAC East can provide further technical assistance if necessary. *Source: Section V and Executive Summary, cr17268.* ### VI. FISCAL POLICY OPERATIONS AND REPORTING Findings and recommendations - Charter should develop transparent fiscal reporting requirements and establish the role of fiscal objectives in underpinning the annual budget process. - Recommendations include: - Provide further detail on definitions and data sources for fiscal objectives and projections consistent with international standards and EAC definitions. - Establish robust and transparent forecasting practices. - Specify minimum requirements for the fiscal risk statement. - Use the Charter and PFM regulations to underpin the role of fiscal objectives in guiding policy-making through the budget process. - Implementation timing in summary: - Recommendation 6.1: MEPD May 2015 (definitions, data sources, forecasting, fiscal risk statement). - Recommendation 6.2: DEA/Budget May 2015 (role of fiscal objectives in budget process). - Additional reforms: - New PFM regulations should address weaknesses in the budget process identified by previous FAD missions. - Further FAD technical assistance could be provided if required. *Source: Section VI and Executive Summary, cr17268.* ### Key numeric and dated items (preserved exactly as in the source) - Mission visit: March 10 to 19, 2015. - Charter coverage period under preparation: 2016–17 to 2020–21. - Structural benchmark: Charter finalized internally by MoFPED in May 2015. - EAMU core objectives under consideration: - Overall general government deficit ceiling of 3% of GDP (target year 2020–21). - Gross public debt ceiling of 50% of GDP, on a net present value (NPV) basis. - EAMU Protocol requirement: achieve convergence criteria for at least three years ahead of 2024. - Uganda central government deficit (2014–15 estimate): -6.8 per cent. - Public debt (2014–15 estimate): 25 percent of GDP on an NPV basis. - Example intermediate target suggested: 4% GDP for 2018–19. - Alternative debt ceiling suggested by previous FAD missions: 40% of GDP. - Phase out of government borrowing from Bank of Uganda: by 2024 (EAMU Protocol requirement). - Recommendation timing highlights: - Recommendation 2.1 first draft: May 2015. Final decision: Feb 2016. - Recommendation 3.1 first draft: May 2015. Final decision: Feb 2016. - Recommendation 4.1: MEPD May 2015. - Recommendation 5.1: MEPD May 2015. - Recommendation 5.2: DEA On-going. - Recommendation 6.1: MEPD May 2015. - Recommendation 6.2: DEA/Budget May 2015. *Source: cr17268 — Preface, Executive Summary, Sections I–VI.* ### 10. Overall, a balance should be struck between using the supplementary objectives to ### cr17268 - 10. Overall, a balance should be struck between using the supplementary objectives to ### Supplementary objectives: scope and risks - Balance is required between using supplementary objectives to support wider fiscal management and ensuring the Charter is focused and achievable. - Risks of including too many supplementary objectives: - Diluting the clarity and focus of the Charter. - Undermining credibility if objectives are not met. - Requiring frequent updates to the Charter as economic circumstances change; updates should be kept to a minimum to preserve credibility. - Recommendation (3.1): - Consider including supplementary objectives on revenue, on achieving the guidelines on financing and debt in the 2013 PDMS, and on phasing out central bank borrowing. - Supplementary objectives on fiscal risks could also be considered for future Charters. - Illustrative examples from practice (as noted in the source text): - Kenya: a ceiling on the stock of government guarantees set in line with the PFM Act of 2012; ceiling in 2013/14 was set at KSh200 billion (4 percent of GDP). - UK: introduced a nominal ceiling on total commitments related to PPP contracts over 2015–16 to 2019–20. - Note: The May 2014 FAD report suggests supplementary objectives could be included on the management of petroleum revenue, but given current uncertainty the Charter should set broad principles rather than specific objectives. ### Escape clauses: design, triggers, and procedures - Purpose: - Allow fiscal objectives to be temporarily suspended in the event of an exceptional and unforeseeable shock, while preserving credibility with robust and transparent conditions and approval procedures. - Key procedural details recommended for the Charter: - Procedure for approving use: - Current Act: escape clause can be invoked by the Minister with approval of Parliament. - Charter should require the Minister to publish a statement to Parliament explaining: - (i) the reasons for invoking the escape clause; - (ii) how it corresponds to the circumstances specified in the Act; - (iii) why it cannot be addressed by using the Contingency Fund, other funding mechanisms, or a fiscal adjustment within the objectives; and - (iv) for how long the government expects to deviate from the fiscal objectives. - Transitional plan for return to compliance: - Act requires publication of a report within thirty days of invoking the escape clause. - Charter should specify that the report include a new set of medium-term fiscal plans and projections showing how the government intends to return to compliance, including any new policy measures; this would replace the previous medium-term fiscal framework and should be approved by Parliament. - Trigger definitions and numerical criteria: - Uganda’s current statutory trigger language (quoted): “where Uganda experiences a natural disaster, an unanticipated severe economic shock, or any other significant unforeseen event that cannot be funded from the Contingency Fund or other funding mechanism provided in the Act or using prudent fiscal policy adjustments.” - Example of numerical criterion (noted elsewhere): West Africa Economic and Monetary Union defines a severe economic shock as growth of three percentage points below the average of the past three years. - Cautions against tightly defined numerical triggers: - May be arbitrary and could exclude severe shocks that do not meet the criterion. - Risk of relying on data that is not available timely or is subject to revision (example: annual GDP outturn data from UBoS available with a lag of around one year; quarterly GDP data available more quickly but subject to significant revision). - Overall, numerical-trigger approach is not recommended for Uganda given data limitations. - Independent verification: - Some countries require independent verification (often by a Parliamentary Budget Office, PBO). - Uganda’s PBO provides independent and objective analysis to Parliament but does not currently publish reports to a wider audience. - Recommendation: PBO should provide advice to Parliament on the escape clause, but its remit would need widening and capacity enhancement before formal independent verification role is assigned. - Recommendation (4.1): The Charter should provide additional detail on the procedures and reporting requirements when invoking the escape clause and on the contents of the transition and adjustment plan. ### Petroleum revenue management: timing, principles, and capacity - Uncertainty and timing: - Uganda may become a significant oil producer over the next decade, but timing and value of future government revenues are currently uncertain. - Analysis suggests significant flows of government revenue are unlikely to start until, at the earliest, the very end of the period of the first Charter. - Given uncertainty, the first Charter is unlikely to need fiscal objectives that specifically address the use of oil revenues and setting such objectives now risks inappropriateness and stakeholder confusion. - Principles and future objectives: - Once greater certainty exists, the Charter should be updated to introduce objectives aimed at managing oil revenues. - May 2010 FAD mission suggested using an objective for the non-resource fiscal balance to manage petroleum revenues. - Target levels should be based on analysis balancing: using oil revenues for domestic investment versus saving to establish a stabilization buffer and for future generations. - This approach is consistent with the Government’s 2012 “Oil and Gas Revenue Management Policy” and the fiscal principles in the PFM Act (Article 4 (2), including (c) and (d) as quoted in the source). - Interim requirements for the first Charter: - Reaffirm the principles that will underpin the petroleum revenue policy framework. - State that fiscal policy objectives in the Charter will determine the annual flow of all revenues out of the Petroleum Fund and that these objectives will balance saving and domestic investment. - Require updating the Charter to establish specific operational objectives once there is certainty around revenue flows, using the existing clause in the PFM Act allowing updates with Parliamentary approval. - Capacity building and analytical work before production: - MoFPED should develop capacity to produce analysis necessary for oil revenue management policy. - Analytical needs include: estimates of volume and value of reserves; long-term projections of revenue flows under alternative price and production scenarios; medium-term fiscal and revenue forecasts; fiscal risk analysis. - FAD and AFRITAC East can provide further technical assistance and training (e.g., FAD’s model of fiscal policy frameworks in resource-rich developing countries). - Public investment management capacity must be strengthened to ensure effective, well-phased investment financed by resource revenues. - Recommendation (5.1): The first Charter should reaffirm key principles for the petroleum revenue policy framework and require updating with specific fiscal objectives once there is greater certainty around oil revenues. - Recommendation (5.2): MoFPED should use the time before production starts to develop capacity on oil revenue forecasting, long-term projections, risk analysis, and public investment management; FAD and AFRITAC East can provide further technical assistance if necessary. ### Fiscal policy operations, indicators, and reporting requirements - Charter content required by the PFM Act: - Include an explanation of the methodology and data used to measure government performance against fiscal objectives. - Detail definitions of fiscal indicators used as objectives, wider fiscal reporting requirements, and how objectives will guide fiscal and budget policymaking. - Specific issues to develop in the Charter: - Specification of fiscal indicators: - Refer to relevant international standards and be consistent with EAC definitions and methodologies. - EAC intends to use a measure of the fiscal balance covering general government in accordance with GFSM. - MoFPED needs to accelerate work to ensure a robust general government measure of the fiscal balance is available by Charter publication. - Specification of data sources: - Include the source of data underpinning economic and fiscal projections, naming the responsible institution (e.g., UBoS) and the report in which it is found. - Forecasting practices: Charter should reaffirm PFM Act requirements and specify additional good practices: - (i) Forecast based on prudent and realistic assumptions. - (ii) Key forecast assumptions compared to independent external forecasts with explanations for large differences. - (iii) Comparison with the previous government forecast and explanation of key changes. - (iv) Forecast subject to internal scrutiny via review by a cross-department technical group, and accompanied by a statement from the Minister and Secretary to the Treasury attesting to reliability and completeness (consistent with PFM Act). - Fiscal risk statement: - PFM Act requires publication of a fiscal risk statement as part of the Budget Framework Paper. - Charter should specify minimum requirements consistent with the EAC working group template, including: - Macroeconomic risk analysis and sensitivity of fiscal projections to changes in key macroeconomic variables. - Analysis of exposure to specific fiscal risks: civil service pensions, loans and guarantees, public-private partnerships, natural disasters. - Analysis of risks from financial position of public corporations and sub-national governments. - Discussion of institutional risks such as data quality and capacity constraints. - Discussion of the government’s strategy for managing these risks. - Medium-term fiscal framework and publication requirements: - Act requires Charter be published alongside an economic and fiscal update document providing a detailed MTFF showing how Charter fiscal objectives will be met based on stated economic, fiscal, and policy assumptions. - Assumptions should be explicitly stated for future comparison with outturns to explain deviations. - Capacity and process implications: - Act and Charter will create additional demands on DEA and wider MoFPED; AFRITAC East mission assessed analytical capacity and provided recommendations (summary provided in Box 2 in source). - Robust budget preparation, approval, and execution process is vital: - (i) Budget Framework Paper (BFP) should set medium-term expenditure limits consistent with fiscal objectives and be approved by Parliament. - (ii) Annual expenditure limits and revenue policies in the budget should be consistent with the BFP. - (iii) Budget execution procedures should ensure limits are respected. - (iv) In-year reporting should include assessment of progress against fiscal objectives. - PFM Act regulations should be used to develop a robust budget process and address weaknesses identified in May 2014 and October 2014 FAD reports; FAD and AFRITAC East could provide desk-based review of draft regulations and further technical assistance if required. *Source: cr17268 - 10. Overall, a balance should be struck between using the supplementary objectives to (IMF).* ### Box 2. Uganda: Delivering the New Analytical Requirements of the Public Financial ### Box 2. Uganda: Delivering the New Analytical Requirements of the Public Financial Management Act ### Assessment of DEA readiness - An AFRITAC East technical assistance mission in January 2015 assessed the readiness of the Directorate of Economic Affairs (DEA) in MoFPED to address the new reporting and analytical requirements of the PFM Act.9 - The mission concluded that the DEA is well placed to comply with the majority of the requirements. - Existing capabilities: - Five-year forecasts of macroeconomic and fiscal variables, including GDP, government debt, revenues, and expenditures are already routinely published. - An existing MoU between MoFPED and the BOU formalizes their respective roles and responsibilities in preparing the forecasts. ### Identified areas for development - Timing and coordination: - The revised budget calendar brings forward most activities by two to three months and necessitates that the first round of macroeconomic forecasts be prepared earlier. This will require coordination with UBoS to ensure that GDP releases are brought forward. - New internal processes needed to produce: - (i) a statement on tax expenditure; - (ii) bi-annual fiscal performance reports; - (iii) a fiscal risk statement; - (iv) in the future, forecasts of petroleum revenues and the operation of the Petroleum Fund. - Forecasting methodology and scrutiny: - The Budget Framework Paper needs to document the methodologies used in preparing forecasts and systematically explain changes in forecasts and forecast errors. - Currently, GDP and revenue forecasts are produced using bottom-up approaches. These approaches rely heavily on forecast judgment but internal and external scrutiny (in particular from UBOS and BOU) on these judgments is currently limited and should be enhanced. - Enhancing scrutiny would improve the ability to explain judgments and forecast deviations. - Some additional forecasting models will be needed; in particular, two models developed by AFRITAC East can be used to support the main GDP forecasting model. ### Recommendations - Recommendation (6.1): - Use the Charter to provide further detail on the definition and data sources for the fiscal objectives and projections that are consistent with international standards and EAC definitions, establish robust and transparent forecasting practices, and specify minimum requirements for the fiscal risk statement. - Recommendation (6.2): - Use the Charter and PFM regulations to underpin the role of the fiscal objectives in guiding policy-making through all stages of the annual budget process. *Source: Box text from the IMF content unit "Box 2. Uganda: Delivering the New Analytical Requirements of the Public Financial Management Act."* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17268.pdf_