## _cr07212

## Source details

**Canonical URL:** [_cr07212](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07212.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07212.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07212.pdf.json)

---

### Executive Summary — Performance and Outlook
- Staff recommends completion of the first review: all assessment criteria were met; macroeconomic performance has been good and the outlook is positive.
- Electricity crisis response: temporary diesel generators and appropriate fiscal and monetary policy responses helped stabilize the electric power crisis and avert a major slowdown.
- Real growth outlook: unchanged, between 6 and 6½ percent over the next few years.
- Inflation drivers: one-time increases in electricity tariffs (nearly 100 percent in 2006) and temporary shocks to sugar production and diesel fuel delivery caused a recent spike in inflation; assessed as one-time relative-price events rather than due to an overly expansionary monetary stance.
- Inflation projection: underlying inflation is projected to fall below five percent in 2007/08; program target is inflation of four percent by end-2007/08.
- Poverty indicators: incidence of poverty and income inequality fell according to the Uganda National Household Survey 2005/06; rapid population growth moderated gains; sizeable regional differences remain, highest incidence in the north.

### Program Review — Implementation and Fiscal Management
- All assessment criteria were met through end-May (Tables 6 and 7); disciplined fiscal performance, prudent monetary policy, and structural reforms underpinned the outcome.
- Poverty expenditure: an indicative target on Poverty Action Fund expenditures was missed by a small margin due to lags in expenditure processing.
- Arrears: domestic arrears repayment is on track to meet the 2006/07 budget allocation of 0.75 percent of GDP; the indicative target on the stock of arrears for end-June 2007 was revised upward after new data showed additional arrears accumulation in 2005/06.
- Supplementary budget (2006/07): fully-funded; provided additional funding for parliament, local governments, and a planned temporary bridge loan to the contractor for the Bujagali dam; financed by reallocation from nonpriority spending, privatization proceeds, and higher-than-expected program support loans.
- Revenue-to-GDP: revenue collection in shilling terms appears on track, but the anticipated rise in the revenue-to-GDP ratio is unlikely to materialize, reflecting the electricity crisis and perhaps overestimation of nominal GDP.

### Energy Sector — Short and Medium Term Strategy
- Two-step electricity approach:
  - Near term: high cost temporary diesel generators met through tariff increases (nearly 100 percent in 2006) and government subsidies (about ½ percent of GDP).
  - Medium term: sector expected to be self-financing and subsidy-ending when Bujagali becomes operational around 2011.
- Bujagali costs and financing:
  - Generation costs now estimated at around 10 U.S. cents per kilowatt-hour, up from around 5 U.S. cents estimated two years ago.
  - Plans to finalize arrangements around July 2007 to cover the nearly US$800 million cost through equity and loans from development and commercial banks.
  - Government provided a short-term US$75 million bridge loan—to be repaid during the first half of 2007/08—to the Bujagali project’s developer to jump-start construction.
- Energy infrastructure fund: government transferred money into a special energy infrastructure fund at the Bank of Uganda for (i) a temporary bridge loan to speed Bujagali construction, (ii) escrow accounts related to Bujagali, and (iii) future projects. The bridge loan is to be repaid in 2007/08.
- Oil prospects: test wells indicate limited but commercially viable production could begin by 2009 and could lower energy imports by US$150 million a year; a government task force will study macroeconomic impact and develop a national energy policy.

### 2007/08 Budget and MTEF — Priorities and Constraints
- MTEF aim: increase public savings through expenditure restraint and rising domestic revenue ratio.
- Revenue objectives: a 0.5 percentage point increase in the revenue-to-GDP ratio targeted via URA reforms (computerization, improved taxpayer registration, more frequent audits); legislation to increase local government revenue to be submitted to Parliament.
- Budget priorities: rural development, education, and infrastructure; near doubling (to 1.3 percent of GDP) of allocation to clear arrears; funds committed for universal secondary education constrain new resources for other priorities such as health.
- Donor trends: drop in donor assistance and a shift from budget to project support will necessitate a small amount of domestic borrowing to close the fiscal gap.
- Tax incentives: planned incentives (including Export Processing Zones and possible tax holidays) to encourage foreign investments and exports; staff urged minimizing budgetary impact, administrative burden, and distortionary costs.

### Monetary and Exchange Rate Policy — Calibrated Response to Inflows
- Monetary program: broadly unchanged; no monetary tightening warranted given inflation spike driven by one-time factors; program continues to target base money and to bring underlying inflation to four percent by end-2007/08. The base money ceiling accommodates financial sector development through a decrease in velocity.
- Sterilization and instruments: preference for foreign exchange sales where volumes permit; sales of government securities used when short-term fluctuations in inflows jeopardize the shallow FX market.
- Bank of Uganda (BOU) actions: suspended regular foreign exchange sales for a limited period, relied more on open market operations to sterilize inflows; plans to tighten reporting requirements on treasury bill ownership and study invisible flows in the balance of payments.
- Exchange rate: shilling has been appreciating; appreciation requires monitoring but fundamental shifts should not be resisted.

### Financial Sector Development and Identification Reforms
- Financial sector development, including pensions, will make long-term loans more available for housing and business expansion.
- Government approved plan to strengthen the Uganda Development Bank (UDB) to operate on commercial principles; government will not interfere with UDB operations.
- Restructure legal and regulatory framework for insurance and private pension companies; new framework to cover insurance and pension companies, development banks (including UDB), the NSSF, and any financial institution not under statutory supervision of the BOU. Policy paper to Cabinet by end-January 2008.
- National identity card system:
  - Objective: enhance effectiveness of credit reference bureau; broaden access to financial services and lower borrowing costs by improving borrower identification and credit information quality.
  - Target: introduction of national identity cards by end-February 2008; begin procurement process by End-February 2008.
  - Complementary measures: consider SACCO regulation; Postbank Uganda to assist SACCOs; provision of U Sh 8 billion in the 2007/08 budget to support PBU assistance to SACCOs.
- UBOS, inflation, and monetary reporting:
  - UBOS rollout of quarterly GDP index by October 2007.
  - New measure of underlying (core) inflation to be introduced in June 2007 with a six-month transition monitoring period.
  - BOU to produce a monetary conditions report on a six-monthly basis.

### Debt Management, External Borrowing, and Arrears
- New debt management strategy commits to preserving debt sustainability; centralized debt management unit recommended to improve monitoring and control.
- Strict limits on loan guarantees to the private sector recommended; a proposed one-off exception (the JBIC loan guarantee) should not be repeated.
- Ceiling on accumulation of new external payments arrears is zero; applies continuously to change from end-June 2006 and covers overdue payments on debt contracted or guaranteed by the government, the BOU, and statutory bodies.
- Reporting obligations: authorities must inform IMF staff at least ten business days prior to policy changes affecting the program and furnish official communications on program performance within 8 weeks of a test date.

### Program Monitoring — Quantitative and Structural Targets (selected exact items)
- Assessment/observance:
  - All assessment criteria were observed through end-May 2007.
  - End-June 2007 modifications: net claims on government modified to reflect a slightly lower domestic debt repayment; indicative target on arrears repayment modified to account for newly-discovered stock of arrears from 2005/06.
- Selected quantitative assessment items (exact figures as presented):
  - Ceiling on increase in base money liabilities of the Bank of Uganda (cumulative change from the average of June 2006): end-December 2006 Prog. 174; Actual 186; Adjusted Prog. 168; Actual 171.
  - Ceiling on increase in net claims on the central government by the banking system: end-December 2006 Prog. -219; Actual -285; Adjusted Prog. -308; Actual -50.
  - Minimum increase in net international reserves of the Bank of Uganda: end-December 2006 Prog. 186; Actual 181; Adjusted Prog. 394; Actual 83.
  - Stock of domestic budgetary arrears under the Commitment Control System (CCS): stock amounted to USh 27 billion at end-June 2005; as reported in March 2007, approximately USh 65 billion of new arrears accumulated in 2005/06.
- Structural assessment criteria and benchmarks (selected exact items and deadlines):
  - For 2007/08 budget, allocate U Sh 300 billion for payments of group (A) verified domestic arrears. — End-June 2007. Status: Revised.
  - Verify the amount of pension payments due and prepare a review of pension payment and accounting systems. — End-May 2007. Status: On track.
  - Introduce a system to verify overdue payments from all relevant government entities within 8 weeks of the end of each quarter. — End-April 2007. Status: Completed.
  - Submit to Cabinet new insolvency legislation. — End-June 2007. Status: On track.
  - Establish a new supervisory body for financial institutions not under statutory supervision of the BOU. — End-December 2007. Status: Revised.
  - Begin procurement process for the national identity card system. — End-February 2008.
  - Roll out Integrated Payroll and Pension System in pilot ministries. — End-June 2008.

### Technical Memorandum of Understanding — Definitions and Adjusters (highlights)
- Base money: sum of currency issued by BOU and commercial banks’ deposits in the BOU (including statutory required reserves and excess reserves), net of deposits of closed banks and Development Finance Funds (DFF) contributed by commercial banks held at the BOU.
- Net claims on the central government by the banking system (NCG): outstanding bank credits to the central government minus central government's deposits with the banking system (excluding administered and project accounts).
- Net international reserves (NIR): reserve assets of the BOU net of short-term external liabilities of the BOU; reserve assets exclude pledged or otherwise encumbered external assets.
- Adjusters and schedules (selected exact figures):
  - Schedule A (Budget Support Plus Total HIPC Initiative Assistance, cumulative billions of Uganda shillings beginning July 1): June 30, 2007 1117; Sept. 30, 2007 240; Dec. 31, 2007 394.
  - Schedule B (Debt Service Due, Before HIPC Initiative Assistance, cumulative billions of Uganda shillings beginning July 1): June 30, 2007 194; Sept. 30, 2007 77; Dec. 31, 2007 133.
  - Schedule C (Nonbank Financing Minus Repayment of Domestic Arrears, cumulative billions of Uganda shillings beginning July 1): (A) Nonbank financing 71 -38 25; (B) Domestic arrears repayment 149 19 130; (C) Total = (A) – (B) -78 -57 -104.
  - Base money ceiling adjuster: adjusted upward up to a maximum of U Sh 30 billion in June, September, and December 2007 if the average amount of currency issued by the BOU exceeds projected amounts. Currency adjuster increased from U Sh 15 billion previously.
  - Schedule D (Currency Issued by the BOU, cumulative billions of Uganda shillings beginning July 1 of the fiscal year): June 30, 2007 139; Sept. 30, 2007 41; Dec. 31, 2007 145.

### Risks, Staff Appraisal, and Policy Recommendations
- Principal risks: electricity and infrastructure bottlenecks are the main risks to the economic outlook.
- Specific risk: delays in construction of the Bujagali dam would impose substantial costs on the government and businesses via continued subsidy of expensive thermal generation and higher private-sector costs.
- Staff view on monetary policy: tightening appears unnecessary given one-time inflation shocks; BOU should screen data for signs of underlying price pressures.
- Exchange rate policy: monitor shilling appreciation; market intervention to reduce volatility but not counter underlying movements is appropriate given market shallowness.
- Fiscal recommendations:
  - Prudent control over current nonpoverty spending and efficiency gains in tax collections essential.
  - Redouble efforts to limit wasteful spending and supplementary reallocations in nonpriority areas and continue URA modernization.
  - Fully fund statutory obligations to prevent accumulation of new arrears; implement FINMAP and other strategies quickly.
- Tax incentives: proceed cautiously, weighing expected benefits against administrative capacity and lost tax revenue; enhance regional cooperation to avoid costly tax competition.
- Governance: further progress required; sustained improvements could unlock substantial grant assistance (e.g., U.S. Millennium Challenge Account).
- Financial sector reforms: introduce national ID system and implement FSAP recommendations (corporate insolvency, commercial court capacity, registry improvements) to broaden financial inclusion and lower borrowing costs.

### Key Medium-Term Indicators and Selected Tables (exact figures preserved)
- Key medium-term indicators (2005/06–2008/09):
  - Real GDP growth (percent): 5.4, 6.2, 6.5, 6.5 (2005/06, 2006/07, 2007/08, 2008/09)
  - Underlying average inflation (percent change): 5.2, 8.1, 4.5, 4.0
  - Gross foreign exchange reserves (months of next year's imports): 5.0, 4.7, 4.5, 4.6
  - Net donor inflows (percent of GDP): 8.4, 8.6, 8.0, 6.9
  - Credit to the private sector (percent of GDP): 8.6, 9.0, 10.2, 10.3
- Selected macro projections (exact figures):
  - Real GDP: 2004/05 Act. 6.7; 2005/06 Act. 5.4; 2006/07 Prog. 6.2; 2007/08 Proj. 6.2; 2008/09 Proj. 6.5
  - Headline inflation (average): 2004/05 Act. 8.0; 2005/06 Act. 6.6; 2006/07 Prog. 5.8; 2007/08 Proj. 7.5; 2008/09 Proj. 5.1
  - Underlying inflation (average): 2004/05 Act. 4.7; 2005/06 Act. 5.2; 2006/07 Prog. 6.1; 2007/08 Proj. 8.1; 2008/09 Proj. 4.5
  - Broad money (M2) 12-month change: 2004/05 Act. 12.1; 2005/06 Act. 18.9; 2006/07 Prog. 13.8; 2007/08 Proj. 15.3; 2008/09 Proj. 17.0
  - Private sector credit (12-month change): 2004/05 Act. 13.9; 2005/06 Act. 28.3; 2006/07 Prog. 22.9; 2007/08 Proj. 22.2; 2008/09 Proj. 24.1
  - Current account balance (including grants): 2004/05 Act. -2.1; 2005/06 Act. -4.1; 2006/07 Prog. -5.7; 2007/08 Proj. -2.5; 2008/09 Proj. -7.0
  - External debt (including Fund) (percent of GDP): 2004/05 Act. 50.7; 2005/06 Act. 43.0; 2006/07 Prog. 15.7; 2007/08 Proj. 13.6; 2008/09 Proj. 16.7
  - Revenue (percent of GDP): 2004/05 Act. 12.8; 2005/06 Act. 13.2; 2006/07 Prog. 13.6; 2007/08 Proj. 13.1; 2008/09 Proj. 13.6
  - Grants (percent of GDP): 2004/05 Act. 7.9; 2005/06 Act. 6.6; 2006/07 Prog. 6.6; 2007/08 Proj. 5.9; 2008/09 Proj. 4.4
  - Stock of domestic debt (percent of GDP): 2004/05 Act. 9.8; 2005/06 Act. 9.1; 2006/07 Prog. 7.7; 2007/08 Proj. 7.2; 2008/09 Proj. 6.3
  - Nominal GDP (billions of Uganda shillings): 2004/05 Act. 15,176; 2005/06 Act. 17,234; 2006/07 Prog. 19,307; 2007/08 Proj. 19,934; 2008/09 Proj. 22,004
  - Gross foreign exchange reserves (months of next year's imports): 2004/05 Act. 5.6; 2005/06 Act. 5.0; 2006/07 Prog. 5.3; 2007/08 Proj. 4.7; 2008/09 Proj. 4.5

- Selected fiscal operations (exact figures, USh billions):
  - Total revenue and grants: 2004/05 Act. 3,146; 2005/06 Act. 3,403; 2006/07 Prog. 3,894; 2007/08 Proj. 3,776; 2008/09 Proj. 3,954; 2009/10 Proj. 4,366
  - Revenue: 2004/05 Act. 1,948; 2005/06 Act. 2,267; 2006/07 Prog. 2,619; 2007/08 Proj. 2,602; 2008/09 Proj. 2,993; 2009/10 Proj. 3,454
  - Grants: 2004/05 Act. 1,198; 2005/06 Act. 1,136; 2006/07 Prog. 1,274; 2007/08 Proj. 1,174; 2008/09 Proj. 962; 2009/10 Proj. 912
  - Total expenditures and net lending: 2004/05 Act. 3,233; 2005/06 Act. 3,543; 2006/07 Prog. 4,314; 2007/08 Proj. 4,283; 2008/09 Proj. 4,728; 2009/10 Proj. 5,183
  - Overall balance including grants (USh billions): 2004/05 Act. -86; 2005/06 Act. -139; 2006/07 Prog. -421; 2007/08 Proj. -507; 2008/09 Proj. -774; 2009/10 Proj. -818

- Selected monetary accounts (exact figures, USh billions):
  - Money and quasi-money (M3): 2004/05 Act. 2,811; 2005/06 Act. 3,272; 2006/07 Prog. 3,685; 2007/08 Proj. 3,941; 2008/09 Proj. 4,555
  - Broad money (M2): 2004/05 Act. 2,158; 2005/06 Act. 2,565; 2006/07 Prog. 2,919; 2007/08 Proj. 2,958; 2008/09 Proj. 3,461
  - Claims on private sector: 2004/05 Act. 1,150; 2005/06 Act. 1,475; 2006/07 Prog. 1,813; 2007/08 Proj. 1,803; 2008/09 Proj. 2,238
  - Base money: 2004/05 Act. 928; 2005/06 Act. 1,046; 2006/07 Prog. 1,213; 2007/08 Proj. 1,213; 2008/09 Proj. 1,405
  - Gross reserves of BOU (US$ millions): 2004/05 Act. 1,326; 2005/06 Act. 1,408; 2006/07 Prog. 1,577; 2007/08 Proj. 1,557; 2008/09 Proj. 1,623

- Selected balance of payments (US$ millions):
  - Current account: 2004/05 Act. -183; 2005/06 Act. -384; 2006/07 Prog. -581; 2007/08 Proj. -279; 2008/09 Proj. -846; 2009/10 Proj. -1,039; 2010 Proj. -1116
  - Trade balance: 2004/05 Act. -838; 2005/06 Act. -1,102; 2006/07 Prog. -1,278; 2007/08 Proj. -1,197; 2008/09 Proj. -1,631; 2009/10 Proj. -1,801; 2010 Proj. -2065
  - Exports, f.o.b.: 2004/05 Act. 786; 2005/06 Act. 890; 2006/07 Prog. 1,029; 2007/08 Proj. 1,180; 2008/09 Proj. 1,270; 2009/10 Proj. 1,360; 2010 Proj. 1470
  - Imports, f.o.b.: 2004/05 Act. -1,624; 2005/06 Act. -1,991; 2006/07 Prog. -2,307; 2007/08 Proj. -2,377; 2008/09 Proj. -2,900; 2009/10 Proj. -3,162; 2010 Proj. -3535
  - Overall balance (US$ millions): 2004/05 Act. 240; 2005/06 Act. 254; 2006/07 Prog. 194; 2007/08 Proj. 172; 2008/09 Proj. 91; 2009/10 Proj. 177; 2010 Proj. -180

*Source: IMF staff report content as provided in the supplied PDF content unit.*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Strong Performance Under Unfavorable Circumstances
- Staff recommends completion of the first review: all assessment criteria were met; macroeconomic performance has been good and the outlook is positive.
- Electricity crisis response: temporary diesel generators and appropriate fiscal and monetary policy responses helped stabilize the electric power crisis and avert a major slowdown.
- Real growth outlook: unchanged, between 6 and 6½ percent over the next few years.
- Inflation drivers: one-time increases in electricity tariffs (nearly 100 percent in 2006) and temporary shocks to sugar production and diesel fuel delivery caused a recent spike in inflation; these were assessed as one-time relative-price events rather than due to an overly expansionary monetary stance.
- Inflation projection: underlying inflation is projected to fall below five percent in 2007/08; program target is inflation of four percent by end-2007/08.
- Poverty indicators: incidence of poverty and income inequality fell according to the Uganda National Household Survey 2005/06, though rapid population growth moderated gains; sizeable regional differences remain, with the highest incidence in the north.

### II. Program Review—On Track
- Assessment criteria: all assessment criteria were met through end-May (Tables 6 and 7); disciplined fiscal performance, prudent monetary policy, and structural reforms underpinned the outcome.
- Poverty expenditure: an indicative target on poverty alleviation expenditure was missed by a small margin due to lags in expenditure processing.
- Arrears: domestic arrears repayment is on track to meet the 2006/07 budget allocation of ¾ percent of GDP; the indicative target on the stock of arrears for end-June 2007 was revised upward after new data showed additional arrears accumulation in 2005/06.
- Exchange rate and inflows: the shilling has been appreciating; a pick-up in foreign exchange inflows, including portfolio inflows, has put upward pressure on the shilling-dollar exchange rate. The BOU suspended regular foreign exchange sales for a limited period and relied more on open market operations to sterilize inflows.
- Financial sector: government’s negative borrowing requirement and robust economy supported financial sector development; credit to the private sector has been growing strongly though interest rate spreads remain high.

### III. A Broadly Positive Outlook
- Policy aims: reduce poverty by maintaining macro stability and addressing infrastructure deficits; key challenges include continued fiscal consolidation, maintaining low inflation while minimizing sterilization costs and exchange rate pressures, investing in health/education/physical infrastructure, and supporting private sector growth through second generation reforms.
- Growth and external: strong economic performance expected to continue; real GDP growth projections above six percent for the coming years; trade balance projected to deteriorate due to imports for the Bujagali project and a decline in the terms of trade. Uganda’s external position is sustainable and domestic debt is expected to decline.
- Governance: government taking action on high-profile corruption cases, including misappropriation of donor funds at the Ministry of Health.

Key medium-term indicators (2005/06–2008/09)
- Real GDP growth (percent): 5.4, 6.2, 6.5, 6.5 (2005/06, 2006/07, 2007/08, 2008/09)
- Underlying average inflation (percent change): 5.2, 8.1, 4.5, 4.0
- Gross foreign exchange reserves (months of next year's imports): 5.0, 4.7, 4.5, 4.6
- Net donor inflows (percent of GDP): 8.4, 8.6, 8.0, 6.9
- Credit to the private sector (percent of GDP): 8.6, 9.0, 10.2, 10.3

#### A. Fine-Tuning Spending for the Remainder of 2006/07
- Supplementary budget: fully-funded supplementary budget provided additional funding for parliament (large one-off and smaller permanent allowances), local governments (to correct underbudgeting), and a planned temporary bridge loan to the contractor for the Bujagali dam to allow prompt start of construction.
- Financing: additional outlays to be financed by reallocation from already-approved nonpriority spending, privatization proceeds, and higher-than-expected program support loans so that the fiscal program remains on track.
- Revenue-to-GDP: revenue collection in shilling terms appears on track, but the anticipated rise in the revenue-to-GDP ratio is unlikely to materialize, reflecting the electricity crisis and perhaps overestimation of nominal GDP.

#### B. Energy—Oil and Water
- Two-step approach to electricity sector:
  - Near term: high cost of temporary diesel generators met through tariff increases (nearly 100 percent in 2006) and government subsidies (about ½ percent of GDP).
  - Medium term: sector expected to be self-financing and subsidy-ending when Bujagali becomes operational sometime around 2011.
- Bujagali costs: generation costs now estimated at around 10 U.S. cents per kilowatt-hour, up from around 5 U.S. cents estimated two years ago; scope remains for charges to decline as higher-cost thermal generators are phased out.
- Financing for Bujagali: plans to finalize arrangements around July 2007 to cover the nearly US$800 million cost through equity contributions by the government and a private consortium and loans from development and commercial banks.
- Energy infrastructure fund: government transferred money from divestiture and general resources accounts into a special energy infrastructure fund at the Bank of Uganda for (i) a temporary bridge loan to speed Bujagali construction, (ii) escrow accounts related to Bujagali, and (iii) future projects. The bridge loan is to be repaid in 2007/08.
- Oil prospects: test oil wells in western Uganda indicate limited but commercially viable production could begin by 2009 and could lower energy imports by US$150 million a year; a government task force will study macroeconomic impact and develop a national energy policy.

#### C. The 2007/08 Budget and the MTEF
- MTEF aim: increase public savings through expenditure restraint and rising domestic revenue ratio.
- Revenue objectives: to achieve a 0.5 percentage point increase in the revenue-to-GDP ratio, further reforms at the Uganda Revenue Authority (URA) will continue, including computerization, improved taxpayer registration, and more frequent audits; legislation to increase local government revenue will be submitted to Parliament.
- Budget priorities: rural development, education, and infrastructure highlighted; limited discretionary resources, a near doubling (to 1.3 percent of GDP) of the allocation to clear arrears, and funds committed for universal secondary education constrain new resources for other priority areas such as health.
- Donor trends: a drop in donor assistance and a shift from budget to project support will necessitate a small amount of domestic borrowing to close the fiscal gap.
- Tax incentives: authorities plan to introduce tax incentives (including Export Processing Zones and possible tax holidays) to encourage foreign investments and exports; staff urged minimizing budgetary impact, administrative burden on URA, and distortionary costs.

#### D. Monetary and Exchange Policies: Calibrating the Response to Inflows
- Monetary program: broadly unchanged; no monetary tightening warranted given inflation spike driven by one-time factors; program continues to target base money and to bring underlying inflation to four percent by end-2007/08. The base money ceiling accommodates financial sector development through a decrease in velocity.
- Sterilization and instruments: the mix of instruments will consider volume and nature of foreign exchange inflows. Preference is for foreign exchange sales where volume permits; sales of government securities will be used when short-term fluctuations in inflows jeopardize the shallow foreign exchange market.
- BOU actions: to better assess inflows, the BOU plans to tighten reporting requirements on treasury bill ownership and study invisible flows in the balance of payments.

### IV. Program Monitoring
- Monitoring framework: quantitative assessment criteria, quantitative indicative targets, and structural assessment criteria and benchmarks have been set (MEFP, Tables 1 and 2).
- Modifications: the end-June 2007 assessment criterion on net claims on government was modified to reflect a slightly lower domestic debt repayment; the end-June 2007 indicative target on arrears repayment was modified to account for the newly-discovered stock of arrears from 2005/06.
- Structural criteria: a former structural benchmark on establishing a new supervisory body for financial institutions was modified and made an assessment criterion; an additional assessment criterion on publication of Uganda’s debt management strategy was added.
- Safeguards: a recent voluntary safeguards assessment found notable progress in strengthening the BOU’s safeguards framework.

### V. Staff Appraisal and Risks
- Principal risks: electricity and infrastructure bottlenecks are the main risks to the economic outlook.
- Bujagali delays: delays in construction of the Bujagali dam would impose substantial costs on the government and businesses.
- Infrastructure needs: better and more extensive transport networks and expansion of the pool of long-term savings are critical for sustainable economic growth.

*Source: Executive Summary (IMF country report).*

### 21.      The staff recommends completion of the first review under the PSI. All

### _cr07212 - 21.      The staff recommends completion of the first review under the PSI. All

### Staff recommendation and macroeconomic assessment
- The staff recommends completion of the first review under the PSI.
- All assessment criteria were observed and prospects for growth and macroeconomic stability are good.
- The electricity crisis is identified as the most pressing short-term challenge and is being addressed.
- Macroeconomic policies continue to be well-formulated and implemented.

### Fiscal framework and public expenditure management
- A sound Medium-Term Expenditure Framework (MTEF) underlies Uganda’s macroeconomic program.
- The pace of fiscal consolidation slowed in 2006/07, mainly because of the electricity crisis and its impact on the economy.
- For 2007/08, prudent control over current, nonpoverty spending and efficiency gains in tax collections will be essential.
- Authorities need to redouble efforts to limit wasteful spending and supplementary budget reallocations in nonpriority areas and to continue implementation of URA modernization.
- The government has committed significant resources to repayment of domestic arrears; ultimate success depends on fully funding statutory obligations and commitment to budget principles at all levels of government.
- To control further accumulation of arrears, FINMAP and other strategies should be put in place quickly.

### Debt management and borrowing
- The government’s new debt management strategy expresses commitment to preserving debt sustainability.
- Principles governing the new borrowing are described as sound.
- A centralized debt management unit should improve monitoring and control.
- Strict limits on loan guarantees to the private sector are welcome; a proposed one-off exception (the JBIC loan guarantee) should not be repeated.

### Monetary policy and inflation
- While inflation risks need monitoring, a tightening of monetary policy appears unnecessary at this stage.
- One-time factors that have contributed to the recent spike in inflation are expected to subside; a premature tightening could jeopardize the expansion in private sector credit.
- The Bank of Uganda (BOU) should carefully screen the data for signs of underlying price pressures.

### Exchange rate and competitiveness
- The recent shilling appreciation requires monitoring, but fundamental shifts should not be resisted.
- Given the shallowness of Uganda’s foreign exchange market, the BOU’s policy of market intervention to reduce volatility but not counter underlying movements is appropriate.
- Uganda’s future competitiveness and ability to diversify its exports depend fundamentally on reducing the costs of production through investment in education and infrastructure, and financial market deepening.

### Tax policy and regional cooperation
- Authorities should proceed cautiously on tax incentives, avoiding ad hoc decisions favoring specific market participants.
- Expected benefits should be weighed against available administrative capacity and lost tax revenue.
- Enhanced regional cooperation should be sought to avoid costly tax competition.

### Governance and external assistance
- Further progress on governance is required.
- Sustained improvements in governance indicators could unlock substantial grant assistance available through the U.S. Millennium Challenge Account.

### Main program risks
- Failures to address key infrastructure bottlenecks and to deepen the financial sector are main risks to program objectives.
- Delays in construction of the Bujagali dam would impose substantial medium-term costs via continued subsidy of expensive thermal generation, as well as costs to businesses.
- Effective cost control will be critical.
- Better and more extensive transport networks and expansion of the pool of long-term savings are also critical for sustainable economic growth.
- Uganda’s comfortable reserves provide a buffer to deal with short-term shocks.

### Key statistics and projections (selected exact figures from source tables)
- Real GDP: 2004/05 Act. 6.7; 2005/06 Act. 5.4; 2006/07 Prog. 6.2; 2007/08 Proj. 6.2; 2008/09 Proj. 6.5
- Headline inflation (average): 2004/05 Act. 8.0; 2005/06 Act. 6.6; 2006/07 Prog. 5.8; 2007/08 Proj. 7.5; 2008/09 Proj. 5.1
- Underlying inflation (average): 2004/05 Act. 4.7; 2005/06 Act. 5.2; 2006/07 Prog. 6.1; 2007/08 Proj. 8.1; 2008/09 Proj. 4.5
- Broad money (M2) 12-month change: 2004/05 Act. 12.1; 2005/06 Act. 18.9; 2006/07 Prog. 13.8; 2007/08 Proj. 15.3; 2008/09 Proj. 17.0
- Domestic credit (12-month change): 2004/05 Act. -4.8; 2005/06 Act. 7.2; 2006/07 Prog. 2.9; 2007/08 Proj. 3.3; 2008/09 Proj. 11.6
- Private sector credit (12-month change): 2004/05 Act. 13.9; 2005/06 Act. 28.3; 2006/07 Prog. 22.9; 2007/08 Proj. 22.2; 2008/09 Proj. 24.1
- Domestic investment (percent of GDP): 2004/05 Act. 21.1; 2005/06 Act. 23.1; 2006/07 Prog. 24.7; 2007/08 Proj. 24.2; 2008/09 Proj. 26.3
- National savings (excluding grants): 2004/05 Act. 10.6; 2005/06 Act. 13.2; 2006/07 Prog. 12.1; 2007/08 Proj. 15.7; 2008/09 Proj. 14.8
- Current account balance (including grants): 2004/05 Act. -2.1; 2005/06 Act. -4.1; 2006/07 Prog. -5.7; 2007/08 Proj. -2.5; 2008/09 Proj. -7.0
- Current account balance (excluding grants): 2004/05 Act. -10.6; 2005/06 Act. -9.9; 2006/07 Prog. -12.7; 2007/08 Proj. -8.6; 2008/09 Proj. -11.4
- External debt (including Fund) (percent of GDP): 2004/05 Act. 50.7; 2005/06 Act. 43.0; 2006/07 Prog. 15.7; 2007/08 Proj. 13.6; 2008/09 Proj. 16.7
- Revenue (percent of GDP): 2004/05 Act. 12.8; 2005/06 Act. 13.2; 2006/07 Prog. 13.6; 2007/08 Proj. 13.1; 2008/09 Proj. 13.6
- Grants (percent of GDP): 2004/05 Act. 7.9; 2005/06 Act. 6.6; 2006/07 Prog. 6.6; 2007/08 Proj. 5.9; 2008/09 Proj. 4.4
- Total expenditure and net lending (percent of GDP): 2004/05 Act. -21.3; 2005/06 Act. -20.6; 2006/07 Prog. -22.3; 2007/08 Proj. -21.5; 2008/09 Proj. -21.5
- Overall balance (including grants) (percent of GDP): 2004/05 Act. -0.6; 2005/06 Act. -0.8; 2006/07 Prog. -2.2; 2007/08 Proj. -2.5; 2008/09 Proj. -3.5
- Stock of domestic debt (percent of GDP): 2004/05 Act. 9.8; 2005/06 Act. 9.1; 2006/07 Prog. 7.7; 2007/08 Proj. 7.2; 2008/09 Proj. 6.3
- Nominal GDP (billions of Uganda shillings): 2004/05 Act. 15,176; 2005/06 Act. 17,234; 2006/07 Prog. 19,307; 2007/08 Proj. 19,934; 2008/09 Proj. 22,004
- Average exchange rate (U Sh per US$): 2004/05 Act. 1,738; 2005/06 Act. 1,825
- Overall balance of payments (US$ millions): 2004/05 Act. 240; 2005/06 Act. 254; 2006/07 Prog. 194; 2007/08 Proj. 172; 2008/09 Proj. 91
- Gross foreign exchange reserves (months of next year's imports of goods and services): 2004/05 Act. 5.6; 2005/06 Act. 5.0; 2006/07 Prog. 5.3; 2007/08 Proj. 4.7; 2008/09 Proj. 4.5

### Fiscal operations (selected exact figures, USh billions and percent of GDP)
- Total revenue and grants (USh billions): 2004/05 Act. 3,146; 2005/06 Act. 3,403; 2006/07 Prog. 3,894; 2007/08 Proj. 3,776; 2008/09 Proj. 3,954; 2009/10 Proj. 4,366
- Revenue (USh billions): 2004/05 Act. 1,948; 2005/06 Act. 2,267; 2006/07 Prog. 2,619; 2007/08 Proj. 2,602; 2008/09 Proj. 2,993; 2009/10 Proj. 3,454
- Tax (USh billions): 2004/05 Act. 1,828; 2005/06 Act. 2,142; 2006/07 Prog. 2,474; 2007/08 Proj. 2,457; 2008/09 Proj. 2,826; 2009/10 Proj. 3,271
- Grants (USh billions): 2004/05 Act. 1,198; 2005/06 Act. 1,136; 2006/07 Prog. 1,274; 2007/08 Proj. 1,174; 2008/09 Proj. 962; 2009/10 Proj. 912
- Total expenditures and net lending (USh billions): 2004/05 Act. 3,233; 2005/06 Act. 3,543; 2006/07 Prog. 4,314; 2007/08 Proj. 4,283; 2008/09 Proj. 4,728; 2009/10 Proj. 5,183
- Current expenditures (USh billions): 2004/05 Act. 1,978; 2005/06 Act. 2,233; 2006/07 Prog. 2,358; 2007/08 Proj. 2,392; 2008/09 Proj. 2,522; 2009/10 Proj. 2,568
- Development expenditures (USh billions): 2004/05 Act. 1,187; 2005/06 Act. 1,249; 2006/07 Prog. 1,734; 2007/08 Proj. 1,617; 2008/09 Proj. 1,944; 2009/10 Proj. 2,063
- Overall balance including grants (USh billions): 2004/05 Act. -86; 2005/06 Act. -139; 2006/07 Prog. -421; 2007/08 Proj. -507; 2008/09 Proj. -774; 2009/10 Proj. -818

### Monetary accounts (selected exact figures, end of period unless otherwise indicated)
- Money and quasi-money (M3) (USh billions): 2004/05 Act. 2,811; 2005/06 Act. 3,272; 2006/07 Prog. 3,685; 2007/08 Proj. 3,941; 2008/09 Proj. 4,555
- Broad money (M2) (USh billions): 2004/05 Act. 2,158; 2005/06 Act. 2,565; 2006/07 Prog. 2,919; 2007/08 Proj. 2,958; 2008/09 Proj. 3,461
- Claims on private sector (USh billions): 2004/05 Act. 1,150; 2005/06 Act. 1,475; 2006/07 Prog. 1,813; 2007/08 Proj. 1,803; 2008/09 Proj. 2,238
- Base money (USh billions): 2004/05 Act. 928; 2005/06 Act. 1,046; 2006/07 Prog. 1,213; 2007/08 Proj. 1,213; 2008/09 Proj. 1,405
- Gross reserves of BOU (in millions of U.S. dollars): 2004/05 Act. 1,326; 2005/06 Act. 1,408; 2006/07 Prog. 1,577; 2007/08 Proj. 1,557; 2008/09 Proj. 1,623

### Balance of payments (selected exact figures, US$ millions)
- Current account (US$ millions): 2004/05 Act. -183; 2005/06 Act. -384; 2006/07 Prog. -581; 2007/08 Proj. -279; 2008/09 Proj. -846; 2009/10 Proj. -1,039; 2010 Proj. -1116
- Trade balance (US$ millions): 2004/05 Act. -838; 2005/06 Act. -1,102; 2006/07 Prog. -1,278; 2007/08 Proj. -1,197; 2008/09 Proj. -1,631; 2009/10 Proj. -1,801; 2010 Proj. -2065
- Exports, f.o.b. (US$ millions): 2004/05 Act. 786; 2005/06 Act. 890; 2006/07 Prog. 1,029; 2007/08 Proj. 1,180; 2008/09 Proj. 1,270; 2009/10 Proj. 1,360; 2010 Proj. 1470
- Imports, f.o.b. (US$ millions): 2004/05 Act. -1,624; 2005/06 Act. -1,991; 2006/07 Prog. -2,307; 2007/08 Proj. -2,377; 2008/09 Proj. -2,900; 2009/10 Proj. -3,162; 2010 Proj. -3535
- Transfers (US$ millions): 2004/05 Act. 1,143; 2005/06 Act. 1,237; 2006/07 Prog. 1,213; 2007/08 Proj. 1,470; 2008/09 Proj. 1,423; 2009/10 Proj. 1,482; 2010 Proj. 1570
- Overall balance (US$ millions): 2004/05 Act. 240; 2005/06 Act. 254; 2006/07 Prog. 194; 2007/08 Proj. 172; 2008/09 Proj. 91; 2009/10 Proj. 177; 2010 Proj. -180

### Program monitoring: quantitative and structural targets (selected exact items)
- Ceiling on increase in base money liabilities of the Bank of Uganda (cumulative change from the average of June 2006): end-December 2006 Prog. 174; Actual 186; Observed (√). Adjusted Prog. 168; Actual 171; Observed (√).
- Ceiling on increase in net claims on the central government by the banking system: end-December 2006 Prog. -219; Actual -285; Observed (√). Adjusted Prog. -308; Actual -50; Observed (√).
- Minimum increase in net international reserves of the Bank of Uganda: end-December 2006 Prog. 186; Actual 181; Observed (√). Adjusted Prog. 394; Actual 83; Observed (√).
- Stock of domestic budgetary arrears under the Commitment Control System (CCS): indicative target—no quarterly targets set for December 2006 and March 2007 because of delays in obtaining quarterly data; the stock amounted to USh 27 billion at end-June 2005.
- Indicative minimum expenditures under the Poverty Action Fund (including the Universal Primary Education component of development expenditure): end-December 2006 Prog. 504; Actual 502; Observed (×). Adjusted Prog. 777; Actual 777; Observed (×).

### Structural assessment criteria and benchmarks (selected exact items)
- Structural assessment criterion: For 2007/08 budget, allocate U Sh 300 billion for payments of group (A) verified domestic arrears. Date of Implementation: End-June 2007. Status: Revised.
- Structural assessment criterion: Verify the amount of pension payments due and prepare a review of pension payment and accounting systems, and make recommendations for changes if necessary. Date of Implementation: End-May 2007. Status: On track.
- Structural benchmark: Introduce a system to verify overdue payments from all relevant government entities within 8 weeks of the end of each quarter. Date of Implementation: End-April 2007. Status: Completed.
- Structural benchmark: Submit to Cabinet new insolvency legislation. Date of Implementation: End-June 2007. Status: On track.
- Structural benchmark: Establish a new supervisory body for financial institutions not under the statutory supervision of the BOU (private and public pension funds, insurance companies, and the Uganda Development Bank). Date of Implementation: End-December 2007. Status: Revised.

*Source: IMF staff report content as provided in the supplied PDF content unit.*

### 6. Introduce national identity card system End-February 2008 Revised

### 6. Introduce national identity card system End-February 2008 Revised

### Objective
- Enhance effectiveness of the recently established credit reference bureau through the expected introduction of national identity cards.
- Broaden access to financial services and lower borrowing costs by improving borrower identification and credit information quality.

### Rationale and expected impact
- Improved identification is expected to increase availability of credit by strengthening the credit bureau’s data quality and reliability.
- Better credit information should contribute to lowering borrowing costs and expanding financial inclusion, particularly when combined with other financial sector reforms.

### Related financial sector measures and sequencing
- Implement remaining key recommendations of the Financial Sector Assessment Program (FSAP) update, including:
  - strengthening the corporate insolvency regime;
  - strengthening institutional capacity of the commercial court and of Official Receiver;
  - addressing deficiencies in the land and company registries.
- UBOS rollout and monetary statistics to support financial sector reforms:
  - UBOS is expected to roll out a quarterly GDP index by October 2007.
  - A new measure of underlying (core) inflation will be introduced in June 2007 and monitored for a transition period of six months before publication.
  - The Bank of Uganda (BOU) will start producing on a six-monthly basis a monetary conditions report.

### Implementation, timeline, and complementary actions
- Introduction of national identity cards targeted by end-February 2008 (as per the title).
- Complementary actions to broaden rural financial services and support institutions that will interact with identity cards:
  - Consider options to regulate Savings and Credit Cooperatives (SACCOs) to safeguard member deposits.
  - Postbank Uganda (PBU) to assist SACCOs by bolstering accounting capabilities.
  - Provision of U Sh 8 billion in the 2007/08 budget to support PBU assistance to SACCOs.
- Continued IFMS rollout to all agencies and further strengthening of public expenditure management at the subnational level to support fiscal transparency and payments integrity tied to identification and financial sector interactions.

### Risks and mitigations
- Risk: Implementation delays in identity card rollout could limit near-term benefits to the credit bureau.
  - Mitigation: Continue advancing complementary reforms (credit bureau operations, insolvency regime, registry improvements) that increase credit information utility even prior to full ID rollout.
- Risk: Weak SACCO governance could undermine rural financial inclusion efforts.
  - Mitigation: Provide U Sh 8 billion to PBU to strengthen SACCO accounting capacity and consider regulatory options consistent with the Financial Institutions Act 2004 and its implementing regulations.

*Source: Uganda—Memorandum of Economic and Financial Policies (MEFP), Update, May 17, 2007.*

### 21.      Further development of the financial sector—including pensions—will make

### 21.      Further development of the financial sector—including pensions—will make

### Financial sector development, pensions, and long-term financing
- Finding: Further development of the financial sector—including pensions—will make long-term loans more available for housing and business expansion.
- Policy measures and commitments:
  - Government has approved a plan to strengthen the Uganda Development Bank (UDB) so it can be operated along commercial principles, including providing loans that carry market-based interest rates.
  - Government will not interfere with or direct activities of the UDB.
  - Plan to restructure the legal and regulatory framework for insurance and private pension companies, as these are the natural source of long-term credit.
  - The new regulatory framework will cover insurance and pension companies, development banks (including UDB), the NSSF, and any financial institution not under the statutory supervision of the BOU.
  - Objective: Ensure that pensions and other savings entrusted to these companies are prudently managed.
  - Implementation timetable: Submit the necessary policy paper to Cabinet by end-January 2008.

### Electricity supply, generation strategy, and short-term measures
- Finding: Government attaches the utmost importance to addressing the shortage in power generation.
- Short-term financing and actions:
  - Manage costs in the budget to defray the costs of the two already-installed temporary generators.
  - Stand ready to finance the third generator in similar fashion, should donor financing be delayed further.
  - Provide a short-term US$75 million bridge loan—to be repaid during the first half of 2007/08—to the Bujagali project’s developer to jump-start construction.
  - Install an additional 50mw of diesel generators and a 50mw heavy fuel plant in the first half of 2007/08.
  - When these generators are in place, retire the most expensive diesel generators and phase out the fuel excise tax exemption for large private generators.
- Medium-term strategy:
  - Anchored by hydropower projects, including Bujagali.
  - Final agreements for Bujagali expected to be signed by July 2007.

### Oil prospects and national strategy
- Finding: Prospects for commercial oil production have improved significantly; production could begin in the next several years.
- Policy commitments:
  - Government will put in place a national strategy to ensure that oil benefits all Ugandans.
  - Commitment to manage oil resources transparently and to use them consistently with macroeconomic stability.
  - Intention to begin production with output feeding a refinery that will mainly produce diesel and heavy fuel oil for electrical generation to help alleviate the electricity shortage.

### Infrastructure, agriculture, and budget priorities
- Finding: Inadequate infrastructure and low agricultural productivity are major impediments to sustained economic growth.
- Fiscal priorities and constraints:
  - Agriculture and infrastructure development, including transportation, electricity, and water, have been given priority in the 2007/08 budget and updated MTEF.
  - Debt strategy limits new borrowing to these areas, after sources of grants have been exhausted.
  - Implementation and maintenance of infrastructure projects are key constraints; the government is looking to improve procurement and management in these areas.

### Quantitative assessment criteria and indicative targets (selected figures)
- Ceilings and targets (as presented for June–December 2007; cumulative changes from beginning of fiscal year unless otherwise stated):
  - Ceiling on the increase in base money liabilities of the Bank of Uganda: 167 167 130 207
  - Ceiling on the increase in net claims on the central government by the banking system: -242 -235 -122 -360
  - Ceiling on the stock of external payments arrears incurred by the government or the Bank of Uganda: 0 0 0 0
  - Ceiling on new nonconcessional external borrowing with maturities greater than one year contracted or guaranteed by the government or the Bank of Uganda: Bujagali hydropower plant 400 400 400 400; JBIC loan guarantee to Phenix textile factory ... 666; Other 0 0 0 0
  - Ceiling on new external debt with maturity up to one year contracted or guaranteed by the government or the Bank of Uganda: 0 0 0 0
  - Minimum increase in net international reserves of the Bank of Uganda: 169 169 581 92
- Indicative targets:
  - Stock of domestic budgetary arrears under the Commitment Control System (CCS): 2580 7060
  - Minimum expenditures under the Poverty Action Fund (including the Universal Primary Education component of development expenditure): 1,062 1,062 298 596
- Note: Table title: "Table 1. Uganda: Quantitative Assessment Criteria and Indicative Targets for June - December 2007" (Cumulative change from the beginning of the fiscal year, unless otherwise stated)

### Structural assessment criteria and benchmarks (selected)
- Structural Assessment Criteria (policy measures and deadlines):
  1. For 2007/08 budget, allocate U Sh 280 billion for payments of group (A) verified domestic arrears. — End-June 2007
  2. Verify the amount of pension payments due and prepare a review of pension payment and accounting systems, and make recommendations for changes if necessary. — End-May 2007
  3. Finalize and publish the Government of Uganda Debt Strategy. — End-December 2007
  4. Submit to cabinet a policy paper outlining the establishment of a new regulatory framework for financial institutions not under the statutory supervision of the BOU. These financial institutions will include private and public pension funds, insurance companies, and the Uganda Development Bank. — End-January 2008
- Structural Benchmarks:
  5. Introduce a system to verify overdue payments from all relevant government entities within 8 weeks of the end of each quarter. — End-April 2007 (Completed)
  6. Submit to cabinet new insolvency legislation. — End-June 2007
  7. Begin procurement process for the national identity card system. — End-February 2008
  8. Roll out Integrated Payroll and Pension System in pilot ministries. — End-June 2008

### Technical Memorandum of Understanding (TMU) — definitions and monitoring highlights
- Base money:
  - Defined as the sum of currency issued by Bank of Uganda (BOU) and the commercial banks’ deposits in the BOU (including statutory required reserves and excess reserves), net of deposits of closed banks and Development Finance Funds (DFF) contributed by commercial banks held at the BOU.
  - Base money limits programmed on an end-year basis will be cumulative changes from daily averages of June 2006 to June 2007, and from June 2007 to September and December 2007.
- Net claims on the central government by the banking system (NCG):
  - Defined as the difference between outstanding bank credits to the central government and the central government's deposits with the banking system, excluding deposits in administered accounts and project accounts.
  - Credits include bank loans and advances to the government and holdings of government securities and promissory notes.
  - Central government’s deposits with the banking system include the full amount of IMF MDRI.
- Net international reserves (NIR) of the BOU:
  - Defined as reserve assets of the BOU net of short-term external liabilities of the BOU.
  - Reserve assets exclude pledged or otherwise encumbered external assets.
  - For monitoring, reserve assets and short-term liabilities (excluding liabilities to the IMF) at the end of each test period will be calculated in U.S. dollars by converting reserve assets measured in Uganda shillings using the end-month Uganda shilling per U.S. dollar exchange rate.
  - Outstanding purchases and loans from the IMF will be converted from outstanding SDR amounts using the U.S. dollar per SDR exchange rate at the end of each quarter.
- Domestic budgetary arrears under the Commitment Controls System (CCS):
  - Monitored quarterly; defined as bills received by central government spending units or line ministries delivered in that quarter and unpaid within 30 days under recurrent or development budgets (excluding court awards).
  - The program ceiling on the stock of CCS arrears covers accumulation of arrears after end-June 2004 (“group B arrears”).
  - Verified report: group A arrears stock estimated at U Sh 27 billion as of June 2005; as reported in March 2007, approximately U Sh 65 billion of new arrears accumulated in 2005/06.
- Adjusters:
  - NIR target based on assumptions regarding budget support, HIPC Initiative and MDRI assistance, and external debt-service payments.
  - Ceiling on cumulative increase in NCG and floor on cumulative increase in NIR will be adjusted by differences between actual and projected budget support, HIPC Initiative and MDRI assistance (Schedule A).
  - Schedule A (Budget Support Plus Total HIPC Initiative Assistance, cumulative billions of Uganda shillings beginning July 1 of the fiscal year): June 30, 2007 1117; Sept. 30, 2007 240; Dec. 31, 2007 394.
  - Schedule B (Debt Service Due, Before HIPC Initiative Assistance, cumulative billions of Uganda shillings beginning July 1): June 30, 2007 194; Sept. 30, 2007 77; Dec. 31, 2007 133.
  - Schedule C (Nonbank Financing Minus Repayment of Domestic Arrears, cumulative billions of Uganda shillings beginning July 1): (A) Nonbank financing 71 -38 25; (B) Domestic arrears repayment 149 19 130; (C) Total = (A) – (B) -78 -57 -104.
  - Base money ceiling adjuster: adjusted upward up to a maximum of U Sh 30 billion in June, September, and December 2007 if the average amount of currency issued by the BOU exceeds projected amounts. Currency adjuster was increased from U Sh 15 billion previously.
  - Schedule D (Currency Issued by the BOU, cumulative billions of Uganda shillings beginning July 1 of the fiscal year): June 30, 2007 139; Sept. 30, 2007 41; Dec. 31, 2007 145.
- External borrowing and debt definitions:
  - Assessment criterion on short-term debt: contracting or guaranteeing external debt with original maturity of one year or less by the government or the Bank of Uganda; excludes normal import-related credits.
  - Ceiling on new nonconcessional borrowing with maturities greater than one year contracted or guaranteed by the government, statutory bodies, or the BOU.
  - Nonconcessional borrowing defined as loans with a grant element of less than 35 percent, calculated using OECD CIRRs with specified averaging and added margins (0.75 percent for <15 years; 1 percent for 15–19 years; 1.15 percent for 20–25 years; 1.25 percent for 30 years or more).
  - Coverage includes financial leases and other instruments giving rise to external liabilities; excludes refinancing credits, rescheduling operations, and credits extended by the IMF.
  - Definition of debt follows point 9 of the Guidelines on Performance Criteria with Respect to External Debt (Executive Board’s Decision No. 12274-(00/85), August 24, 2000), including loans, suppliers' credits, and leases (present value at inception), and arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligations that constitute debt.

*Source: IMF staff report (excerpt)._

### 16.      The ceiling on the accumulation of new external payments arrears is zero. This

### 16. The ceiling on the accumulation of new external payments arrears is zero

### Arrears ceiling: scope and measurement
- The ceiling on the accumulation of new external payments arrears is zero.  
- This limit is to be observed on a continuous basis and applies to the change in the stock of overdue payments on debt contracted or guaranteed by the government, the BOU, and statutory bodies from their level at end-June 2006.  
- It comprises those external arrears reported by the Trade and External Debt Department of the BOU and the Macro Department of the Ministry of Finance that cannot be rescheduled because they were disbursed after the Paris Club cutoff date.
- Footnote definition: This definition is consistent with the coverage of public sector borrowing defined by the Fund (includes the debt of the general government, monetary authorities, and entities that are public corporations which are subject to the control by government units, defined as the ability to determine general corporate policy or by at least 50 percent government ownership).

### Monitoring and reporting obligations
- Authorities will inform IMF staff in writing at least ten business days (excluding legal holidays in Uganda or in the United States) prior to making any changes in economic and financial policies that could affect the outcome of the financial program.  
  - Such policies include but are not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises.
- Authorities will inform IMF staff of any nonconcessional external debt contracted or guaranteed by the government, the BOU, or any statutory bodies, and any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities.
- The authorities will furnish an official communication to the IMF describing program performance of quantitative and structural assessment criteria and benchmarks within 8 weeks of a test date.
- The authorities will regularly submit information to IMF staff with the frequency and submission time lag as indicated in Table 1. The information should be mailed electronically to AFRUGA746@IMF.ORG.

### Key reporting requirements and timelines (selected items from Table 1)
- Issuance of government securities: Frequency — Weekly; Submission lag — 5 working days.  
- Interest rates on government securities: Frequency — Weekly; Submission lag — 5 working days.  
- Operations in the foreign exchange market and daily average exchange rates: Frequency — Weekly; Submission lag — 5 working days.  
- Consumer price index: Frequency — Monthly; Submission lag — 2 weeks.  
- Balance sheet of the BOU, consolidated accounts of the commercial banks, and monetary survey: Frequency — Monthly; Submission lag — 4 weeks.  
  - The Internal Audit Department (IAD) of the BOU will review reconciliations of monetary survey data with financial records and audited financial statements. Any revisions to monetary survey data, in line with IMF safeguards mission recommendations, will be documented and reconciled with the previous presentation to ensure accurate reporting.
- Statement of (i) cash balances held in project accounts at commercial banks; (ii) total value (measured at issue price) of outstanding government securities from the Central Depository System (CDS); and (iii) the stock of government securities (measured at issue price) held by commercial banks from the CDS: Frequency — Monthly; Submission lag — 6 weeks.  
- Summary of (i) monthly commodity and direction of trade statistics; (ii) stock of external debt, disbursements, principal and interest, flows of debt rescheduling and debt cancellation, arrears, and committed undisbursed balances—by creditor category; and (iii) composition of nominal HIPC Initiative assistance, disaggregated into grants, flow rescheduling, and stock-of-debt reduction by creditor: Frequency — Monthly; Submission lag — 6 weeks.  
- Summary of external debt, external arrears, and committed undisbursed loan balances by creditor: Frequency — Quarterly; Submission lag — 6 weeks.  
- Standard off-site bank supervision indicators for deposit money banks: Frequency — Quarterly; Submission lag — 4 weeks.  
- Bank of Uganda — Summary table of preliminary program performance comparing actual monthly outcome with adjusted program targets for (i) base money; (ii) net claims on central government by the banking system; (iii) stock of external arrears; (iv) new nonconcessional external borrowing; and (v) net international reserves: Frequency — Quarterly; Submission lag — 5 weeks.  
- Summary of central government accounts (reporting conventions specified): Frequency — Monthly; Submission lag — 6 weeks.  
  - Revenues shall be recorded on a cash basis. Expenditures shall be recorded when checks are issued, except for domestic and external debt-service payments, cash transfers to districts, and externally funded development expenditures. Expenditures on domestic interest will be recorded on an accrual basis and external debt service will be recorded on a commitment basis (i.e., when payment is due). Cash transfers to districts will be recorded as expenditures of the central government when the transfer is effected by the BOU. Expenditures on externally funded development programs will be recorded as the sum of estimated disbursements of project loans and grants by donors, less the change in the stock of government project accounts held at the BOU and domestic commercial banks.
- Summary of outstanding stock of group (B) domestic arrears (Group (B) arrears comprise the stock of CCS/IFMS arrears incurred after end-June 2004): Frequency — Quarterly; Submission lag — 6 weeks.  
- Summary of contingent liabilities of the central government (definition for the program): Frequency — Quarterly; Submission lag — 6 weeks.  
- Detailed central government account of disbursed budget support grants and loans, HIPC support, and external debt service due and paid: Frequency — Monthly; Submission lag — 4 weeks.  
- Detailed central government account of disbursed donor project support grants and loans: Frequency — Monthly; Submission lag — 6 weeks.  
- Statement on new loans contracted during the period according to loan agreements: Frequency — Quarterly; Submission lag — 6 weeks.  
- Ministry of Finance — Updated national accounts statistics (real and nominal) according to UBOS and medium-term projections: Frequency — Quarterly; Submission lag — 4 weeks.

*Source: IMF—First Review Under the Policy Support Instrument and Modifications to Assessment Criteria—Informational Annex (May 31, 2007).*

### APPENDIX II. UGANDA: RELATIONS WITH THE WORLD BANK GROUP

### APPENDIX II. UGANDA: RELATIONS WITH THE WORLD BANK GROUP (As of April 23, 2007)

### I. Partnership in Uganda’s Development Strategy
- Uganda’s development strategy is based on the revised Poverty Eradication Action Plan (PEAP) launched in May 2005.
- PEAP objectives:
  - Accelerating economic growth
  - Reducing poverty and inequality
  - Improving human development
- PEAP five pillars:
  - (i) economic management
  - (ii) production, competitiveness and income
  - (iii) security, conflict-resolution, and disaster management
  - (iv) good governance
  - (v) human development

### II. Bank Group Strategy
- World Bank assistance guided by a Joint Assistance Strategy (UJAS) approved January 2006; UJAS coordinates activities of the Bank and 10 other development partners.
- Bank support channel:
  - Annual Poverty Reduction Support Credits (PRSCs); PRSC6 presented to the World Bank’s Executive Board in April 2007.
- Debt relief:
  - In addition to HIPC initiatives, Uganda receives 100 percent debt relief under the Multilateral Debt Relief Initiative (MDRI) approved March 28, 2006 and effective July 01, 2006.
  - MDRI will cancel US$2.7 billion of Uganda's IDA debt.

### III. Bank Portfolio
- As of March 31, 2007:
  - 18 Bank-supported projects
  - Total net commitments: US$1,013 million
  - Undisbursed amount: US$536 million
- Projects in pipeline (Board date April 26, 2007) for fiscal year 2006/07:
  - PRSC6: US$125 million
  - Power Sector Development project: US$300 million
  - Private Power Generation (Bujagali) project: US$115 million
- Approved in fiscal year 2005/06:
  - PRSC5: US$135 million
  - Public Service Enhancement Program: US$70 million
  - East African Trade and Transport facilitation project: US$27 million
  - Millennium Science Initiative Project: US$10 million

### IV. Bank–Fund Collaboration in Specific Areas
- Joint areas of work:
  - Poverty reduction strategy paper: joint staff assessments of the PRSP and progress reports.
  - Debt sustainability analysis: Uganda DSA last updated November 2006; to be updated during 2007/08.
  - Public expenditure management:
    - 2005 public expenditure review (PER) helped prepare an action plan for public expenditure and financial accountability.
    - Action plan monitored annually by a Government-chaired working group.
    - PERs now consider fiscal space, strategic allocation across sectors, and efficiency of sector spending.
    - The education sector to feature in the current year’s PER.
  - Financial sector reform:
    - Financial Sector Assessment Program update completed March 2005.
    - Country Economic Memorandum assessed priorities for growth and deepening of Uganda’s financial sector.
    - Capacity-building coordinated closely with the Fund’s PSI.
  - Trade reforms:
    - Joint Bank–Fund dialogue on trade reforms in the context of the East African Community (EAC).
    - 2006: Bank completed a diagnostic trade integrated study.
- Contact: Dino Merotto, Country Economist, Tel. (202) 458-1987.

*Italicized attribution line provided separately by the pipeline.*

---

### APPENDIX III. UGANDA: STATISTICAL ISSUES

### Overall assessment
- Data provision: adequate for surveillance purposes, with remaining shortcomings.
- Participation in IMF dissemination frameworks:
  - GDDS participation; metadata initially posted May 2000; partial updates of real and external sector metadata completed August 2005.
  - Data ROSC prepared February 2005; results published July 2006.
  - SDDS assessment mission conducted April 2007 focusing on coverage, periodicity and timeliness.

### Real sector statistics
- Technical assistance since 2004 from East AFRITAC for quarterly national accounts compilation and training.
- Developments:
  - Quarterly value added estimated at constant 2002 prices using ISIC Rev III groups.
- Remaining shortcomings:
  - Benchmarking methodology issues.
  - UBOS collects manufacturing output from a sample in the industrial belt to compile Major and Main Index of Industrial Production (IIP).
  - Labor market indicators (employment, unemployment, wages/earnings) infrequently compiled and disseminated; UBOS aims for annual compilation but currently compiles with a two year lag due to resource/data constraints.
  - Consumer price data collected from six urban centers; plans to expand to another urban center.
  - Producer prices (factory gate) collected from a sample of manufacturing establishments to compute the Producer Price Index for Manufacturing (PPI-M).

### Government finance statistics
- MoFPED compiles fiscal statistics on general government including budgetary central government and local governments but excluding extrabudgetary institutions.
- Revised chart of accounts implemented from July 1, 2003 for budgetary central government and local government units.
- Uganda commenced reporting GFS data according to GFSM 2001 for the 2004 GFS Yearbook.
- Data coverage limitations:
  - Excludes extrabudgetary central government units and the National Social Security Fund.
- External debt and debt service schedule data disseminated in millions of dollars and in Uganda shillings (using end of year exchange rates) for the fiscal year (July to June).

### Monetary and financial statistics
- Monetary survey coverage:
  - Bank of Uganda (BOU) and 18 commercial banks (three under liquidation).
  - Operating banks: 12 foreign owned banks and three domestic banks.
  - Data sources: BOU analytical accounts and commercial banks’ reporting format (BS100) based on Standardized Reporting Forms.
- Exclusions and planned expansions:
  - Monetary survey does not cover balances of four credit institutions and four microfinance institutions that accept deposits and are regulated by BOU.
  - Data from these institutions are collected monthly and included in Quarterly and Annual Economic reports and Monthly Economic Review.
  - BOU intends to compile data from insurance corporations and pension funds and include them in a financial corporation survey by June 2009.
- Base (reserve) money:
  - Defined as currency outside the BOU and commercial bank deposits with the BOU; compiled on a daily basis from central bank accounting records.
  - Detailed data on base money, other liabilities, and domestic and net foreign assets compiled and disseminated monthly.
  - Central bank’s survey does not yet meet SDDS timeliness requirement.
- February 2006 mission findings for monetary statistics:
  - Monetary statistics basically sound with respect to data integrity and timeliness.
  - Areas needing improvement to align with the Monetary and Financial Statistics Manual (MFSM):
    - (1) Reverse repos between the BOU and commercial banks not classified as advances to banks.
    - (2) Inconsistency among BOU departments in identifying reserve assets.
    - (3) Loans and advances presented net of provisions for loan losses.
    - (4) Classification issues in the Development Finance Department because accounts classify by original source of funds rather than by the unit subject to a claim or liability.
    - (5) Economic and accounting nature of administered and internally managed funds of the BOU is unclear.
- Principal issue for Other Depository Corporations (ODCs):
  - Exclusion of two classes of depository corporations from the monetary survey.
  - Recommendation: redefine depository corporations sector to include deposit-taking credit institutions and microfinance institutions and include their deposits in monetary aggregates.

### External sector statistics
- ROSC mission conclusions:
  - Balance of payments statistics broadly follow BPM5 but with departures in definitions, scope, and classifications.
  - Recommended actions:
    - Complete conversion to BPM5.
    - Develop new source data and estimation techniques for:
      - exports of freight and imports of passenger transportation
      - compensation of employees
      - direct investment abroad
      - portfolio investment and financial derivatives
    - Improve international trade data by incorporating Survey of Informal Cross-Border Trade results and greater use of trade partner country data sources.
- Balance of payments dissemination:
  - Compiled and disseminated for calendar and fiscal years in BOU’s Quarterly Economic Report and Annual Report and the UBOS Statistical Abstract.
  - Quarterly BOP data disseminated in analytical format or on standard components consistent with BPM5.
- BOU assistance requests:
  - Technical assistance requested to improve trade data compilation and to capture securities trading and deposits from offshore agents in the balance of payments.

### Uganda: Table of Common Indicators Required for Surveillance (As of May 15, 2007)
- Selected memo items and data points (as presented):
  - Exchange rates: Date of Latest Observation: Mar 2007; Date Received: Apr. 2007; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation: Jan. 2007; Date Received: Abr. 2007; Frequency: M/M/M
  - Reserve/base money: Date of Latest Observation: Feb. 2007; Date Received: May 2007; Frequency: M/M/M
  - Broad money: Date of Latest Observation: Feb. 2007; Date Received: May 2007; Frequency: M/M/M
  - Central bank balance sheet: Date of Latest Observation: Feb. 2007; Date Received: May 2007; Frequency: M/M/M
  - Consolidated balance sheet of the banking system: Date of Latest Observation: Feb. 2007; Date Received: May 2007; Frequency: M/M/M
  - Interest rates: Date of Latest Observation: Mar. 2007; Date Received: May 2007; Frequency: M/M/M
  - Consumer price index: Date of Latest Observation: Mar. 2007; Date Received: May 2007; Frequency: M/M/M; Data Quality – Methodological Soundness and Accuracy/Reliability entries include combinations of O, LO, etc., as presented.
  - Revenue, expenditure, balance and composition of financing—central government: Date of Latest Observation: June 2006; Date Received: July 2006; Frequency: M/M/M; Data quality entries include O, LNO, LO, etc., as presented.
  - Stocks of central government and central government-guaranteed debt: Date of Latest Observation: June 2006; Date Received: July 2006; Frequency: M/M/M
  - External current account balance: Date of Latest Observation: Q4. 2006; Date Received: Apr. 2007; Frequency: Q/Q/Q
  - Exports and imports of goods and services: Date of Latest Observation: Mar. 2007; Date Received: May 2007; Frequency: M/M/M; Data quality entries include LO, O, etc., as presented.
  - GDP/GNP: Date of Latest Observation: 2005/06; Date Received: June 2006; Frequency: A/A/A; Data quality entries include LO, O, etc., as presented.
  - Gross external debt: Date of Latest Observation: Dec. 2005; Date Received: May 2006; Frequency: M/Q/... 

- Footnotes (as presented):
  - 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
  - 2 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
  - 3 Foreign, domestic bank, and domestic nonbank financing.
  - 4 Including maturity composition.
  - 5 Frequency codes: D; W; M; Q; A; I; NA.
  - 6 Data quality methodological soundness assessments reflect the data ROSC published July 21, 2006 based on the February 9–22, 2005 mission; assessment categories: O, LO, LNO, NO.
  - 7 Data quality accuracy and reliability use same categories as footnote 6, referring to source data, statistical techniques, validation and revision studies.

*Italicized attribution line provided separately by the pipeline.*

---

### Press Release No. 07/133 — IMF Executive Board Completes the First Review under the Policy Support Instrument for Uganda (June 15, 2007)

### PSI context and objectives
- PSI approved December 15, 2006.
- Program objectives include:
  - Macroeconomic stability
  - Debt sustainability
  - Financial sector deepening
  - Improved public sector financial management
- PSI framework:
  - Designed for low-income countries that may not need IMF financial assistance but seek close cooperation.
  - PSI-supported programs are based on country-owned poverty reduction strategies and reviewed semi-annually irrespective of program status.

### Executive Board statement (Takatoshi Kato, Deputy Managing Director and Acting Chair)
- Observations:
  - Uganda’s economic performance strong; poverty indicators improving.
  - Authorities committed to program via prudent fiscal and monetary policies and structural efforts.
  - Economic outlook positive.
- Policy guidance and concerns:
  - Prudent control over current nonpriority spending and strengthened tax administration essential to increase public savings.
  - Limit wasteful spending and supplementary budget reallocations in nonpriority areas.
  - Continue modernization of the Uganda Revenue Authority.
  - Exercise caution introducing tax incentives due to budgetary impact and distortionary effects.
  - Budget appropriately sets aside increased resources to repay domestic arrears.
  - Preventing new arrears requires full funding of statutory obligations and commitment to budget principles at all government levels.
  - Strengthen public expenditure management.
  - Maintain debt sustainability after substantial debt relief; implement the new debt management strategy faithfully.
  - A series of temporary shocks has led to a spike in inflation; monetary tightening not necessary at this stage but the central bank should monitor underlying price pressures.
  - Competitiveness and export diversification depend on investment in education and infrastructure, financial sector development, and business environment improvements.
  - Efforts to resolve the electricity crisis are welcome.
  - Continued action to improve governance crucial to attract private investment and unlock additional donor assistance.

### Statement by Uganda’s Executive Director (Peter Gakunu) and Senior Advisor (Godwill Efiong Ukpong) — June 15, 2007
- Authorities’ position:
  - Appreciative of IMF engagement and support under the PSI.
  - Consider the IMF report balanced and informative on achievements, challenges, and prospects.
  - Broad agreement with analyses, conclusions and recommendations.
- Recent macroeconomic developments and performance highlighted by authorities:
  - Disciplined fiscal performance, prudent monetary policy, and structural reforms underlie achievements.
  - Specific outcomes cited:
    - Real GDP growth of about 6.2 percent in 2006/07 despite drought-related electricity supply problems.
    - Subdued average headline inflation of 5.8 percent in 2006/07, relative to 6.6 percent in 2005/06, with a recent spike explained largely by a sharp increase in electricity tariffs and temporary diesel fuel and sugar shortages.
  - Joint Staff Advisory Note and recent National Household Survey indicate robust growth and higher coffee prices over the last three years have benefited many Ugandans and contributed to falls in incidence of poverty and income inequality.

*Italicized attribution line provided separately by the pipeline.*

### 3. A fully-funded supplementary budget in 2006/07 has provided additional funding in

### 3. A fully-funded supplementary budget in 2006/07 has provided additional funding in

### Supplementary budget and monetary stance
- A fully-funded supplementary budget in 2006/07 has provided additional funding in several areas, including parliament, and a temporary bridge loan for commencement of construction of the Bujagali dam, partly guaranteed by the World Bank, and for which financing arrangements are to be finalized around July 2007.
- The monetary authority has maintained a tight monetary policy stance which has helped contain inflation, curtail excess liquidity in the system and create a suitable environment for banks to lend to the private sector.

### Remaining challenges and identified risks
- Important challenges the economy still faces:
  - Need to achieve sustainable higher rates of real GDP growth for further substantial poverty reduction.
  - Keeping inflation continuously in check.
  - Continuing with fiscal consolidation to progressively reduce dependence on donor funds.
  - Maintaining debt sustainability.
- Need to minimize identified risks to the economic outlook, namely:
  - Improving electricity supply.
  - Providing for other essential human and physical infrastructure to stimulate private sector investment and growth.
- Authorities’ ongoing measures:
  - A debt management and sustainability strategy has been developed.
  - The Bank of Uganda (BOU) continues to study and monitor developments in exchange rate to ensure its stability.
  - Supply of credit to the private sector is considered significant to stimulate investment and growth.
  - The electricity crisis, the most pressing short-term challenge, is being addressed.
  - Macroeconomic policies continue to be well-formulated and implemented.

### Performance under the PSI
- The authorities met all assessment criteria through end-May 2007 (Tables 6 and 7).
- Domestic arrears repayment is on track to meet the 2006/07 budget allocation of 0.75 percent of GDP.
- An indicative target on poverty alleviation was missed by a small margin and was related to lags in expenditure processing.
- Government’s negative borrowing requirement and the robust economy have been conducive to development of the financial sector:
  - Interest rates on treasury bills remaining broadly stable.
  - Credit to the private sector growing strongly.
- A pick-up in foreign exchange inflows, including portfolio inflows, has put pressure on the dollar-shilling exchange rate.
- To avoid instability in the forex market, the BOU is relying more on open market operations to sterilize the inflows.

### Macroeconomic policies for 2007/08 and the MTEF
- Policy objectives:
  - Reducing poverty by maintaining macro stability and addressing constraints to growth, especially infrastructure deficit.
  - Continue fiscal consolidation; maintain low inflation; minimize exchange rate pressures; invest in health, education and physical infrastructure; support private sector growth through second generation reforms.
- Projections and targets:
  - Real GDP growth of over 6 percent is projected for the coming years.
  - Underlying inflation is to be reduced to 4 percent by end-2007/08.
  - Domestic debt is expected to decline.
  - Trade balance is projected to deteriorate owing to imports for the Bujagali dam project, which is expected to eventually improve electricity supply.
  - Energy imports by Uganda could be lowered by US $150 million a year if the country’s test oil wells, which show limited but commercially viable production, could come on stream by 2009.
- Staff view:
  - Medium-term economic outlook considered positive.
  - Main risks to the outlook are electricity and infrastructure bottlenecks.
  - Delays in construction of the Bujagali dam assumed to impose substantial costs on government and businesses.
- Authorities’ risk-management measures:
  - Intensification of efforts to conclude funding guarantee with the World Bank.
  - Mobilize more resources internally through improved tax collection and public expenditure management to finance construction of the dam.

### Fiscal policy and public sector reforms
- 2007/08 budget strategy:
  - Increase public savings through expenditure restraint and improved revenue collection.
  - Plan to increase revenue to GDP ratio by 0.5 percentage points through continuous reform of the Uganda Revenue Authority (URA), including further computerization, improved taxpayer registration, and more frequent audits of tax compliance.
  - Priority areas: rural development for poverty reduction; education to enhance human capacity building; infrastructure to induce growth.
  - Continue seeking higher efficiency in service delivery and exploring pay reforms.
- Tax incentives:
  - Authorities noted staff’s recommendation to minimize the budget impact of planned introduction of tax incentives to encourage foreign investment and exports and will bear this in mind before taking a decision.
- Debt management:
  - Comprehensive Debt Management Strategy prepared to support fiscal priorities.
  - Strategy outlines principles for external and domestic borrowing, including only on concessional terms, budget support, and essential infrastructure projects.
  - Sets out modality for repaying old domestic arrears in the next three years and formulation of policies to address underlying causes of accumulation of new arrears.
  - Exception: government’s plan to guarantee US$ 5.5 million non-concessional loan from a Japanese bank to a local textile company on a transaction dating back to 2003.

### Monetary and financial sector policies
- Authorities committed to pursuing a monetary program targeting base money and aiming at bringing underlying inflation to low single digits by end-2007/08.
- BOU instruments and actions:
  - Adopting a mix of instruments to achieve the inflation objective while taking into account the volume and nature of capital inflows and their likely effect on the exchange rate.
  - Relying mostly on sales of government securities for mopping up excess liquidity.
  - Monitoring the recent shilling appreciation.
  - Tightening reporting requirements on Treasury bill ownership.
  - Studying invisible flows in the balance of payments.

### Other structural reforms and governance
- Government is tackling governance issues and taking necessary action on cases of inappropriate conduct, such as misappropriation of donor funds at the Ministry of Health.
- Authorities aware of the value of regional cooperation in provision of incentives, such as tax concessions, to enhance competition and attract investment; such an approach would assist them to avoid or minimize the risk of tax revenue losses.

### Conclusion and request
- Authorities have continued to demonstrate strong commitment to effective implementation of sound macroeconomic and structural reform policies to:
  - Improve economic management.
  - Accelerate sustainable real GDP growth for poverty reduction.
  - Reinforce efforts towards attainment of the MDGs.
- They have met all end-May 2007 assessment criteria under the PSI.
- Government’s budget strategy continues to aim at expenditure restraint and improved revenue collection in line with the MTEF for enhanced investment in rural development, education, and infrastructure.
- In line with the need to exercise caution in contracting loans, avoiding accumulation of unsustainable debt, and maintaining debt sustainability, the authorities have developed a Debt Management Strategy to guide domestic and external borrowing.
- Authorities remain committed to sustaining implementation of the country’s economic reform program under the PSI and call on the international community, including the Fund, to continue to support the country in the effort to overcome the remaining challenges to economic progress and development.
- They request approval for completion of the review of performance under the PSI.

*IMF staff report content.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07212.pdf_