## _cr0804 ## Source details **Canonical URL:** [_cr0804](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0804.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0804.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0804.pdf.json) --- ### Executive Summary — macro performance and outlook - Real GDP growth of 6.5 percent in 2006/07, supported by strong regional demand and the year-old ceasefire in northern Uganda. - Merchandise exports grew by 42 percent in 2006/07—the fastest rate in more than a decade—helped by an improvement in the terms of trade. - Electricity shortage partially alleviated with addition of new generating capacity; Bujagali dam construction imports will widen the current account deficit but are not expected to undermine external sustainability. - Headline and underlying inflation pushed up by temporary factors; underlying inflation expected to fall below the targeted ceiling of 5 percent by end 2007/08. - Foreign exchange inflows intensified in late 2006 and into 2007, producing appreciation pressure on the shilling; causes included export demand for construction goods in neighboring countries, high coffee prices, improved prospects for oil production, and new inflows into government securities. - Staff recommends completion of the second review and supports a waiver for the missed base money ceiling because the deviation was temporary. ### Program performance, monitoring, and staff appraisal - Second review: all end-June 2007 assessment criteria met except the ceiling on increase in base money; base money returned within the program ceiling during July-September and the end-September indicative base money target was observed. - Revenue collection exceeded initial projections by 0.3 percent of GDP. - Structural measures implemented as envisaged, including allocation of more than 1 percent of GDP to arrears repayment in the 2007/08 budget. - Program monitoring adjustments: - Starting end-December 2007 test date, assessment criterion on base money replaced by assessment criterion on NDA of the BOU; ceiling on base money becomes an indicative target. - Repayment of the Bujagali bridge loan reprogrammed from end-December 2007 to end-June 2008; quarterly (not end-year) targets for NIR and net credit to government changed accordingly. - Additional structural assessment criterion—allocating U Sh 300 billion for arrears repayment in 2008/09—added. - Staff supports a waiver for the missed base money ceiling because the deviation was temporary and the end-September indicative base money target was observed. ### Monetary policy and foreign exchange management - Price stability is the primary objective of monetary policy amid strong inflows. - BOU to rely primarily on sales of foreign exchange to manage liquidity, while avoiding destabilizing Uganda’s shallow foreign exchange market. - BOU has ample reserves to deal with potential reversals and will intervene to reduce volatility but not to counter fundamental pressures. - Measures to allow BOU flexibility and limit sterilization costs: - Introduce Net Domestic Assets (NDA) of the BOU as the near-term operating target; base money remains the fundamental instrument for controlling inflation. - Base money target for 2007/08 will (i) incorporate the U Sh 32 billion excess base money observed in June and (ii) allow for a larger decline in velocity than in the past. - Prepare for eventual adoption of inflation targeting; BOU is in initial stages and is enhancing data collection, analysis, and outreach. - Policy actions during August 2006–September 2007: BOU halted repo operations and cancelled treasury bill auctions when faced with strong appreciation pressures; short-term interest rates fell sharply, base money expanded, and by end-August the shilling-dollar exchange rate returned to late-2006 levels. - NDA and base money operational definitions and limits (as specified in TMU): - NDA limits are cumulative changes from the average of June 2007 to the average of December 2007, March 2008 and June 2008: increases of Shs210.6 billion, Shs261.2 billion and Shs125.6 billion, respectively. - Table of cumulative changes (In billions of shillings): Cumulative change in base money: 206.3 / 210.7 / 207.6 (Dec 2007 / Mar 2008 / Jun 2008); Cumulative change in NFA: -4.3 / -50.5 / 82.3; Cumulative change in NDA: 210.6 / 261.2 / 125.3. - Program exchange rate (Uganda shilling per US$1): 1,645.7 (June 2007 basis) and listed conversion rates for other currencies (Euro 1.3417; British pound 1.9843; Japanese Yen 0.0082; Kenya shilling 0.0150; Tanzania shilling 0.0008; SDR 1.5113). ### Fiscal policy, budget, and public finances - 2007/08 budget aims to improve domestic revenue by 0.7 percentage point of GDP, to 14.1 percent of GDP, and to reduce the deficit excluding grants. - Current expenditures to remain broadly constant as a share of GDP; priority increases for infrastructure investment, energy, education, rural development, and arrears repayment. - Government plans to address emerging spending pressures (CHOGM, emergency flood spending, peace in the North) totaling about 0.5 percent of GDP by reallocation within the budget envelope or, if needed, a supplementary budget bill. - Steps to address domestic arrears: - Roll out integrated personnel and payroll system; verify pension and gratuity arrears for FY 2006/07; tighter expenditure control through IFMS; prioritize international commitments. - 2007/08 budget doubles allocation for clearing old arrears from 0.7 percent to 1.3 percent of GDP. - Tax measures: - Government announced tax holidays for exporters; expected revenue loss in 2007/08 is around 0.1 percent of GDP. - Domestic interest cost of monetary policy is about 1 percent of GDP and will remain significant; emphasis on foreign exchange sales and financial market development should help lower these costs over time. - Authorities aim to increase public sector savings in the medium term to promote private-sector development and to minimize costs of sterilization. ### Infrastructure strategy and debt policy - Bujagali hydropower project: - Financing not finalized but expected before end 2007; construction started using a US$75 million bridge loan provided by the government, to be repaid when full financing is in place. Construction expected to last three years. - Selected external borrowing entries reference Bujagali: 400; 400; 400; 400; 400 (context: ceiling on new nonconcessional external borrowing contracted or guaranteed by the government or the BOU). - Government considering turnkey projects to speed implementation; may be financed on nonconcessional terms but could be implemented faster and yield substantial savings relative to donor-financed projects; projects must be evaluated case-by-case for cost-effectiveness and impact on debt sustainability. - New Debt Strategy to be finalized by end of 2007 to govern project selection and financing, allowing borrowing only for priority sectors (water, electricity, roads) on concessional terms, though some priority projects could have a grant element less favorable than IDA. - Joint IMF–World Bank DSA finds Uganda at low risk of debt distress; room to borrow for priority infrastructure subject to careful financing choices. ### Debt sustainability analysis — baseline and stress testing - Baseline projections: - NPV of debt-to-GDP ratio: 5.9 percent in 2006/07; rises to 9.9 percent in 2012/13; declines to 6.9 percent by 2026/27. - NPV of debt-to-exports expected to peak at 61.4 percent in 2009/10 and decline thereafter. - Debt-service-to-exports ratio expected to continue downward trend reflecting HIPC and MDRI delivery. - Sensitivity and stress tests: - Combined macro shock (one-half standard deviation to growth, exports, GDP deflator, and non-debt creating flows in 2007/08-2008/09) would raise NPV of debt-to-exports to 152.8 percent in 2008/09, placing Uganda at high indebtedness for a prolonged period, though NPV of debt-to-GDP and debt-service ratios would remain below thresholds. - High investment scenario (additional public investment financed 75 percent by non-concessional loans) increases vulnerability under extreme shocks; policy implication is to avoid excessive reliance on non-concessional borrowing. - Fiscal DSA highlights: - NPV of public debt projected to peak at about 19 percent of GDP in four years then decline; debt-service indicators remain manageable with debt-service not exceeding 10 percent of revenues in projections. - Policy recommendations: - Maintain prudent mix of concessional and non-concessional financing for infrastructure. - Continue fiscal consolidation while managing short-term energy-related spending pressures. - Monitor exposure to combined shocks and stress-test borrowing plans. ### Financial sector development and structural reforms - Shallow financial sector limits capacity to absorb inflows and constrains faster growth; progress needed on access to financial services in rural and urban areas and availability of longer-term credit. - A comprehensive financial sector development strategy is being prepared; BOU drafted a five-year financial market development plan with stakeholder comments to be incorporated. - Structural measures and benchmarks: - Finalize and publish Government of Uganda Debt Strategy — End-December 2007. - Submit policy paper for regulatory framework for nonbank financial institutions — End-June 2008. - Implement pilot Integrated Personnel and Payroll System in specified entities — End-May 2008. - For 2008/09 budget, allocate U Sh 300 billion for payments of verified group (A) domestic arrears — End-June 2008. - Issue tender to select provider for national identity card system — End-June 2008. - BOU to finalize comprehensive draft financial market development strategy — End-May 2008 (structural benchmark). ### Letter of Intent — objectives, commitments, and key quantitative targets - Letter dated November 26, 2007 transmits updated MEFP and reports progress under the three-year PSI; all assessment criteria for first review observed except base money ceiling; waiver requested. - PSI proposes assessment criteria for end-December 2007 and end-June 2008 (third and fourth reviews), expected to be completed by end-April and end-October 2008, respectively. - Selected quantitative assessment entries (as presented): - Minimum increase in net international reserves of the BOU (US$ millions): 192; -3; -31; 50; 17. - Ceiling on the increase in base money liabilities of the BOU (U Sh billions): 207; 206; 211; 208; 214. - Stock of domestic budgetary arrears under CCS (U Sh billions): 60; 60; ...; 30; 20. (Note: stock amounted to U Sh 43 billion at end-June 2007.) - Minimum expenditures under the Poverty Action Fund (U Sh billions): 596; 600; 904; 1,222; ... - Schedule A: Budget support, including HIPC Initiative grants (cumulative U Sh billions from July 1): 237 / 321 / 672 / 669 (Dec. 31, 2007 / Mar. 31, 2008 / June 30, 2008 / June 30, 2009). - Schedule B: Debt service due before HIPC (cumulative U Sh billions): 119 / 169 / 195 / 183 (Dec. 31, 2007 / Mar. 31, 2008 / June 30, 2008 / June 30, 2009). - Schedule C: Nonbank financing vs repayment of domestic arrears (cumulative U Sh billions): (A) Nonbank financing: -13 / 28 / 31 / 150; (B) Domestic arrears repayment: 112 / 210 / 280 / 330; (C) Total = (A) – (B): -125 / -182 / -249 / -180. ### Reporting, notification, and TMU provisions - Authorities will inform IMF staff in writing at least ten business days prior to any policy changes that could affect program outcome (customs and tax laws, wage policy, financial support to enterprises, etc.). - Authorities to furnish official communication describing program performance within 8 weeks of a test date. - Key reporting frequencies and submission lags (selected from Table 1): - Issuance of government securities: Weekly, 5 working days. - Consumer price index: Monthly, 2 weeks. - Balance sheet of the BOU, consolidated accounts of commercial banks, and monetary survey: Monthly, 4 weeks. - Summary of central government accounts: Monthly, 6 weeks. - Summary of stock of group (B) domestic arrears: Quarterly, 6 weeks. - Updated national accounts statistics: Quarterly, 4 weeks. - TMU definitions and adjusters detailed for NFA, NDA, base money, NCG, NIR, arrears ceilings, external borrowing concessionality calculations, and a zero ceiling on accumulation of new external payments arrears. ### Key risks identified - Short-term risks: - High world oil prices could dampen growth and add to budgetary pressures. - Continued strong and volatile foreign exchange flows complicate monetary policy. - Overshoot of CHOGM-related expenditure may jeopardize priority spending. - Recent floods in northern and eastern Uganda (September) may have significant macroeconomic impacts yet to be estimated. - Medium-term risks: - Delays in addressing road, power, and water infrastructure deficits could undermine medium-term growth. - Delays to the Bujagali dam would impose substantial medium-term costs on government and business. - Heavy reliance on non-concessional borrowing for large investment programs could raise vulnerability under adverse shocks. ### Key statistics and projections (as presented) - Real GDP: 5.1 6.2 6.5 7.1 7.0 - Headline inflation (average): 6.6 7.5 6.8 4.5 5.0 - Underlying inflation (average): 5.2 8.1 7.8 4.8 4.0 - Terms of trade (deterioration–): 16.5 11.7 6.8 -4.0 -3.2 - Broad money (M2): 18.9 15.3 16.7 16.6 14.8 - Domestic credit: 7.2 3.3 -6.4 14.3 15.3 - Credit to the central government: 2 -4.8 -7.2 -17.2 0.8 -0.4 - Private sector credit: 28.3 22.2 22.9 28.7 30.3 - Domestic investment: 23.4 24.2 24.5 27.6 28.4 - Public investment: 4.9 5.1 5.4 7.0 7.8 - National savings (excluding grants): 13.8 15.7 15.9 15.0 14.7 - Current account balance (including grants): -4.0 -2.5 -2.0 -8.0 -9.5 - Net donor inflows: 8.1 8.6 10.0 8.1 8.0 - External debt (including Fund): 43.0 13.6 11.7 15.9 19.5 - External debt-service ratio3,4: 5.7 3.3 4.9 5.0 3.5 - Revenue (percent of GDP): 13.1 13.1 13.4 14.1 14.6 - Grants (percent of GDP): 6.5 5.9 6.3 4.3 3.9 - Total expenditure and net lending (percent of GDP): -20.4 -21.5 -21.9 -21.8 -22.8 - Overall balance (including grants) (percent of GDP): -0.8 -2.5 -2.3 -3.4 -4.2 - Overall balance (excluding grants) (percent of GDP): -7.3 -8.4 -8.6 -7.7 -8.2 - Nominal GDP (U Sh billions): 17,330 19,934 19,962 22,223 24,880 - Average exchange rate (U Sh per US$): 1,825 ... 1,778 ...... - Overall balance of payments (US$ millions): 254 172 719 864 1 - Gross foreign exchange reserves (months of next year's imports of goods and services): 4.7 4.7 5.8 5.2 4.8 *Source: Executive Summary; Chapter 21; APPENDIX I—LETTER OF INTENT; Technical Memorandum of Understanding excerpts; DSA and staff report excerpts (content unit _cr0804).* ### Executive Summary ...................................................................................................... ### _cr0804 - Executive Summary ...................................................................................................... ### Good performance amid concerns about shilling appreciation - Real GDP growth of 6.5 percent in 2006/07, supported by strong regional demand and the year-old ceasefire in northern Uganda. - Merchandise exports grew by 42 percent in 2006/07—the fastest rate in more than a decade—helped by an improvement in the terms of trade. - The electricity shortage was partially alleviated with the addition of new generating capacity. - Headline and underlying inflation had been pushed up by temporary factors but underlying inflation is easing and is expected to fall below the targeted ceiling of 5 percent by end 2007/08. - Foreign exchange inflows intensified in late 2006 and into 2007, producing appreciation pressure on the shilling; causes included export demand for construction goods in neighboring countries, high coffee prices, improved prospects for oil production, and new inflows into government securities. ### Second review—broadly on track - All end-June 2007 assessment criteria were met except the ceiling on increase in base money; base money returned within the program ceiling during July-September and the end-September indicative base money target was observed. - Revenue collection exceeded initial projections by 0.3 percent of GDP, reflecting URA administration reforms and new tax measures; the end-June assessment criterion on net credit to government was met. - Structural measures were implemented as envisaged, including allocation of more than 1 percent of GDP to arrears repayment in the 2007/08 budget. - Staff recommends completion of the second review and supports a waiver for the missed base money ceiling because the deviation was temporary. ### Positive outlook and prominent challenges - Growth projections revised upward to 7 percent over the next few years, reflecting progress on electricity shortages and peace prospects in northern Uganda. - Inflation is projected to return to below 5 percent by end 2007/08 as earlier shocks dissipate. - Imports for Bujagali dam construction will widen the current account deficit but are not expected to undermine external sustainability. - Key downside risks and challenges: - High world oil prices could dampen growth. - Continued strong and volatile foreign exchange flows complicate monetary policy. - Delays in addressing road, power, and water infrastructure deficits could undermine medium-term growth. - The frontloaded 2007/08 spending profile leaves little room to deal with additional budget pressures. - Delays to the Bujagali dam would impose substantial medium-term costs on government and business. - Recent floods in northern and eastern Uganda (September) may have significant macroeconomic impacts yet to be estimated. - Uganda is assessed to be at low risk of debt distress. ### Monetary management in an environment of volatile foreign exchange flows - Price stability remains the primary objective of monetary policy in the face of strong inflows. The BOU will rely primarily on sales of foreign exchange to manage liquidity, while avoiding destabilizing Uganda’s shallow foreign exchange market. - The BOU has ample reserves to deal with potential reversals and will intervene to reduce volatility but not to counter fundamental pressures. - Measures adopted to allow BOU flexibility and limit sterilization costs: - Introduce Net Domestic Assets (NDA) of the BOU as the near-term operating target; base money remains the fundamental instrument for controlling inflation. - Allow for a cautious expansion of base money: the base money target for 2007/08 will (i) incorporate the U Sh 32 billion excess base money observed in June and (ii) allow for a larger decline in velocity than in the past. - Prepare for eventual adoption of inflation targeting; BOU is in initial stages of moving to inflation targeting and is enhancing data collection, analysis, and outreach. - Policy actions taken during August 2006–September 2007: the BOU halted repo operations and cancelled treasury bill auctions when faced with strong appreciation pressures and mounting sterilization costs; short-term interest rates fell sharply, money base expanded, and by end-August the shilling-dollar exchange rate returned to late-2006 levels. - A shallow financial sector limits capacity to absorb inflows and constrains faster growth; progress is needed on (i) access to financial services in rural and urban areas and (ii) availability of longer-term credit. A comprehensive financial sector development strategy is being prepared. ### The 2007/08 budget and MTEF - The 2007/08 budget aims for measured increases in domestic revenue and continued expenditure control. Targets include: - Improve domestic revenue by 0.7 percentage point of GDP, to 14.1 percent of GDP. - Reduce the deficit excluding grants. - Current expenditures will remain broadly constant as a share of GDP; priority increases for infrastructure investment, energy, education, rural development, and arrears repayment. - The government plans to address emerging spending pressures (Commonwealth Heads of Government Meeting in November, emergency flood spending, peace in the North) totaling about 0.5 percent of GDP by reallocation within the budget envelope or, if needed, a supplementary budget bill. - Steps to address domestic arrears include rolling out an integrated personnel and payroll system, verification of pension and gratuity arrears for FY 2006/07, tighter expenditure control through IFMS, and prioritization of international commitments. The 2007/08 budget doubles the allocation for clearing old arrears from 0.7 percent to 1.3 percent of GDP. - The government announced tax holidays for exporters; expected revenue loss in 2007/08 is around 0.1 percent of GDP. - Any revenue from oil production—expected to commence in 2009—will be incorporated into the MTEF; a national energy policy is planned to balance transparency, macroeconomic stability, fiscal sustainability, current spending, and saving for future needs. - Domestic interest cost of monetary policy is about 1 percent of GDP and will remain a significant spending item in the near future; emphasis on foreign exchange sales and financial market development should help lower these costs over time. ### Boosting productivity through investment in infrastructure - Bujagali hydropower project financing not finalized but expected before end 2007; construction has started using a US$75 million bridge loan provided by the government, to be repaid when full financing is in place. Construction expected to last three years. - Government is considering turnkey projects to speed implementation; while possibly financed on nonconcessional terms, turnkey projects could be implemented faster and yield substantial savings relative to donor-financed projects. Projects must be evaluated case-by-case for cost-effectiveness and impact on debt sustainability. - A new Debt Strategy, to be finalized by end of 2007, will govern project selection and financing, allowing borrowing only for priority sectors (water, electricity, roads) on concessional terms, though some priority projects could have a grant element less favorable than IDA. ### Program monitoring - Quantitative assessment criteria, indicative targets, and structural assessment criteria and benchmarks are set for program monitoring. Key adjustments: - Starting with end-December 2007 test date, the assessment criterion on base money will be replaced by an assessment criterion on NDA of the BOU; the ceiling on base money will become an indicative target. - The end-December 2007 assessment criterion on net claims on government was modified to reflect intrayear spending reallocation and later-than-expected repayment of the Bujagali bridge loan. - Repayment of the bridge loan reprogrammed from end-December 2007 to end-June 2008; quarterly, but not end-year, targets for net international reserves and net credit to government changed accordingly. - Implementation date for the structural assessment criterion on a policy paper for a new regulatory framework for nonbank financial institutions moved from end-January to end-June 2008. Former benchmarks on roll-out of the Integrated Personnel and Payroll System and on introduction of national identity card system have been modified and made assessment criteria. - An additional structural assessment criterion—allocating U Sh 300 billion for arrears repayment in 2008/09—and three new benchmarks were added to facilitate financial sector expansion, strengthen PFM, and ensure prudent use of oil reserves. ### Staff appraisal - Staff recommends completion of the second review. Competent macroeconomic management and an appropriate response to the electricity crisis facilitated better-than-expected performance. All assessment criteria, except the ceiling on base money, were observed. Staff supports a waiver for the missed assessment criterion because the deviation was temporary and the end-September indicative base money target was observed. *Source: Executive Summary (content unit _cr0804).* ### 21. A prudent approach to public finances is at the heart of Uganda’s past ### _cr0804 - 21. A prudent approach to public finances is at the heart of Uganda’s past ### Fiscal stance and public savings - A prudent approach to public finances is central to Uganda’s past success and current economic program. - Authorities aim for increased public sector savings in the medium term to promote private sector development and to minimize the costs of sterilization. - Government spending profile for 2007/08 is heavily frontloaded to account for CHOGM and several other one-off items, leaving little room to deal with additional budgetary pressures later in the year. - The government will need to remain focused on priority spending to limit new arrears. ### Infrastructure, borrowing space, and energy - Uganda faces a well-known infrastructure deficit that must be addressed to secure favorable medium-term growth prospects. - The joint World Bank-Fund DSA shows that the risk of debt distress remains low and that there is room to borrow. - For macrocritical infrastructure, turnkey projects could be considered on a case-by-case basis and subject to careful cost-benefit analysis, implementation safeguards, and transparent accounting. - The main medium-term risk is failure to enhance Uganda’s infrastructure and electricity-generating capacity; inadequate road networks and delays in construction of the Bujagali dam would impose substantial costs on the public and private sectors. ### Monetary policy and foreign exchange - Authorities are commended for their commitment to price stability. - Bank of Uganda (BOU) intervention during June–July was instrumental in reducing pressure on Uganda’s shallow foreign exchange market and was therefore appropriate. - Changes to the monetary framework should help deal with short-term foreign exchange inflows. - If foreign exchange inflows persist, longer-term prospects hinge on making businesses more productive by alleviating infrastructure bottlenecks and encouraging further development of the financial sector. - Authorities intend to design a strategy for further development of the financial sector. ### Oil revenue management - Staff welcomes government deliberations to make the best use of Uganda’s oil resources. - It will be important to ensure that oil is used prudently and transparently and that the macroeconomic impact of oil is taken into account. ### Risks to the program - Short-term risks: - High oil prices could slow economic growth and add to budgetary pressures. - An overshoot of CHOGM-related expenditure may jeopardize priority spending. - Medium-term risk: - Failure to enhance infrastructure and electricity-generating capacity (notably delays in Bujagali dam) would be a significant brake on growth. ### Key statistics and projections (as presented) - Real GDP5.16.26.57.17.0 - Headline inflation (average)6.67.56.84.55.0 - Underlying inflation (average)5.28.17.84.84.0 - Terms of trade (deterioration–)16.511.76.8-4.0-3.2 - Broad money (M2)18.915.316.716.614.8 - Domestic credit7.23.3-6.414.315.3 - Credit to the central government2-4.8-7.2-17.20.8-0.4 - Private sector credit28.322.222.928.730.3 - Domestic investment23.424.224.527.628.4 - Public investment4.95.15.47.07.8 - National savings (excluding grants)13.815.715.915.014.7 - Current account balance (including grants)-4.0-2.5-2.0-8.0-9.5 - Net donor inflows8.18.610.08.18.0 - External debt (including Fund)43.013.611.715.919.5 - External debt-service ratio3, 4 5.73.34.95.03.5 - Revenue13.113.113.414.114.6 (percent of GDP) - Grants6.55.96.34.33.9 (percent of GDP) - Total expenditure and net lending-20.4-21.5-21.9-21.8-22.8 (percent of GDP) - Overall balance (including grants)-0.8-2.5-2.3-3.4-4.2 (percent of GDP) - Overall balance (excluding grants)-7.3-8.4-8.6-7.7-8.2 (percent of GDP) - Nominal GDP (U Sh billions)17,33019,93419,96222,22324,880 - Average exchange rate (U Sh per US$)1,825...1,778...... - Overall balance of payments (US$ millions)2541727198641 - Gross foreign exchange reserves (months of next year's imports of goods and services)4.74.75.85.24.8 *Source: _cr0804 - 21. A prudent approach to public finances is at the heart of Uganda’s past.* ### APPENDIX I—UGANDA: LETTER OF INTENT ### APPENDIX I—UGANDA: LETTER OF INTENT ### Overview and Program Context - Letter dated November 26, 2007 from Dr. Ezra Suruma, Minister of Finance, Planning, and Economic Development, to Mr. Dominique Strauss Kahn, Managing Director, IMF. - Government reports progress under the three-year Policy Support Instrument (PSI) and transmits an updated Memorandum of Economic and Financial Policies (MEFP). - All assessment criteria for the first review under the PSI were observed, except non-observance of the ceiling on base money; a waiver is requested because the overshoot reflected unforeseen external factors. Program modified to limit future occurrences. - The PSI proposes assessment criteria for performance target dates of end-December 2007 and end-June 2008 for the third and fourth reviews, expected to be completed by end-April and end-October 2008, respectively. - Government authorizes publication and distribution of the letter, its attachments, and all Fund staff reports regarding the current PSI review. ### I. Performance Under the PSI - Fiscal performance in 2006/07: - Revenue collections exceeded target. - Ceiling on net claims on government by the banking system was observed. - Base money: - Exceeded end-June program ceiling following large portfolio inflows at end-2006/07. - Overshoot described as temporary; by mid-August base money was brought back to the targeted path. - Net international reserves: - Floor on the stock of net international reserves of the BOU was exceeded by a substantial margin. - Indicative targets observed: - Stock of domestic budgetary arrears under the Commitment Control System (CCS). - Poverty alleviation expenditure. - Structural measures: - Allocation of more than one percent of GDP to arrears repayment. - Structural measures generally reported as on track. ### II. Objectives and Policies Looking Forward — Fiscal Policy - Medium-term fiscal stance: - Continue reducing central government deficit (excluding grants) while increasing infrastructure spending and providing counterpart funding for donor-financed infrastructure projects. - Emerging spending pressures since approval of 2007/08 budget: - (i) Infrastructure and other projects related to 2007 CHOGM. - (ii) Recent flooding in eastern and northern regions. - (iii) Higher subsidies to the electricity sector due to unanticipated increases in global oil prices. - Government frontloaded cash releases for (i) and (ii) in Q1 and Q2 of 2007/08, while protecting the poverty action fund; may need to increase spending envelope later in the year. - Revenue strategy: - Policy of annually increasing tax collections by 0.5 percent of GDP over the medium term remains. - In 2006/07 uplifted ratio by 0.3 percentage points despite electricity crisis. - Ongoing modernization at the Uganda Revenue Authority and tax changes approved by Parliament. - Plan to produce a tax procedure code. - Tax incentives: - Introduction of tax incentives for qualified exporters. - Expected revenue loss: around 0.1 percent of GDP in 2007/08. - Commitment to avoid enterprise-based discretionary tax preferences; implementation conditional on budgetary resources and URA monitoring capacity. - Measures to limit accumulation of new domestic arrears: - IFMS rolled out to all central government; to be rolled out to selected local governments where feasible. - All commitments against the Accounting warrant, including those not backed by cash, will be captured in the IFMS CCS module. - Starting in March 2008, expenditures committed outside the IFMS system for both IFMS and non-IFMS votes will not be recognized by the Accountant General as arrears and therefore will not be programmed for payment in future budgets by MoFPED. - Clearance of category B arrears to take first call on resources availed on a quarterly basis. - Long-term commitments (pension, rent, contributions to international organizations) or unplanned events (e.g., court awards) to be handled through realistic budgeting and review of policy. - Ministry of Public Service to implement Integrated Personnel and Payroll System in specified commissions, ministries, and Local Governments by May 2008 to improve payroll and pension records. - Ministry of Finance, Planning and Economic Development with Ministry of Foreign Affairs to submit updated list of international subscriptions and related host ministries to Cabinet; subscription obligations to be met within ministries’ own budgets starting 2007/08. - Additional fiscal reforms: - Extend medium-term planning period from three to five years. - Build capacity for debt sustainability analysis. - Move forward with public service pay reform as resources permit. - Seek ways to deliver government services more efficiently. ### II. Objectives and Policies Looking Forward — Monetary and Financial Sector Policies - Inflation and monetary anchor: - Commitment to keep annual average underlying inflation below five percent. - Monetary policy anchored by base money with allowed flexibility to address unanticipated currency inflows or shifts in money demand. - Net Domestic Assets (NDA) of the BOU will become an assessment criterion under the PSI; existing assessment criterion on base money will become an indicative target. - Deviations from the monthly average base money target limited to plus or minus five percent and only on account of external balance of payments shocks evidenced by instability in foreign exchange market. - Liquidity management: - BOU to continue using sales of foreign exchange to sterilize shilling liquidity injections arising largely from government expenditure, subject to foreign exchange market conditions. - BOU will rely more heavily on open market operations for liquidity management if interbank foreign exchange market conditions do not allow full sale of programmed foreign exchange. - Financial intermediation and sector development: - Strategy to increase financial intermediation to reduce borrowing costs and boost private investment. - Government measures: - Submit to Cabinet legislation to regulate pension and other non-deposit-taking financial institutions (including private and public pension funds, Uganda Development Bank). - Issue a tender to select the provider for the national identity card system to track individual borrowing and repayment records. - BOU actions: - Lead development of Uganda’s financial market; drafted a five-year financial market development plan with stakeholder comments to be incorporated. - Inflation-targeting preparations: - BOU advancing research program and working with UBOS to produce high frequency data. - BOU and Government to work together to meet obligations for inflation targeting. ### II. Objectives and Policies Looking Forward — Energy and Infrastructure - Priority sectors: - Agriculture and infrastructure development, including transportation, electricity, and water, prioritized in 2007/08 budget and medium term. - Electricity strategy: - Two-stage strategy: near-term support for private sector temporary generators; medium-term final agreements for Bujagali expected to be signed and full scale construction to begin soon after. - Government planning additional dam projects; commitment that projects be least cost options, financing consistent with debt strategy, and procurement in line with Uganda law. - Roads: - Considering options to speed up repairs and new construction, including “turnkey” projects subject to debt strategy and legal compliance. - Use of the Road Fund to ring fence resources for road maintenance. - Oil prospects and strategy: - Prospects for commercial oil production improved; production could begin in the next several years. - Government recognizes challenges of windfall oil revenues and is developing a national strategy to ensure transparent management consistent with macroeconomic stability. - Anticipated timeline for strategy and accompanying legislation: by end-June 2008. - IMF has committed to provide assistance on these areas. ### II. Objectives and Policies Looking Forward — Other Issues and Technical Assistance - Regional integration: - Steps to facilitate closer integration among East African Community members, including closer economic ties, joint approach to customs policy and investment incentives, and eventual monetary union. - Technical assistance requests to the IMF: - Oil (tax policy design). - Balance of payments (collection and analysis of data on informal cross-border trade and on offshore investments). - National accounts. - Inflation targeting. - Government also requested TA on supervision of non-bank financial institutions; IMF may be able to accommodate. ### Quantitative Assessment Criteria and Indicative Targets (selected figures as presented) - Minimum increase in net international reserves of the Bank of Uganda (US$ millions): 192; -3; -31; 50; 17. - Ceiling on the increase in base money liabilities of the Bank of Uganda (U Sh billions): 207; 206; 211; 208; 214. - Note: For December 2007, March 2008, and June 2008, cumulative changes from the average of June 2007, as defined in the TMU. For June 2009, cumulative changes from the average of June 2008. - Stock of domestic budgetary arrears under the Commitment Control System (CCS) (U Sh billions): 60; 60; ...; 30; 20. - Note: Arrears incurred after end-June 2004. The stock amounted to USh 43 billion at end-June 2007. The end-June 2008 target was changed from U Sh 10 billion to U Sh 30 billion to reflect the authorities' commitment to give priority to repayment of pension arrears. - Minimum expenditures under the Poverty Action Fund (including the Universal Primary Education component of development expenditure) (U Sh billions): 596; 600; 904; 1,222; ... - Selected external borrowing entries in the quantitative table include references to Bujagali hydropower plant: 400; 400; 400; 400; 400 (context: ceiling on new nonconcessional external borrowing ... contracted or guaranteed by the government or the Bank of Uganda). - The assessment criteria and indicative targets under the program, and their adjusters, are defined in the technical memorandum of understanding (TMU). ### Structural Assessment Criteria and Benchmarks (specified measures and dates) - Structural Assessment Criteria: 1. Finalize and publish the Government of Uganda Debt Strategy — End-December 2007. 2. Submit to Cabinet a policy paper outlining establishment of a new regulatory framework for financial institutions not under statutory supervision of the BOU (will include private and public pension funds, Uganda Development Bank) — End-June 2008. 3. Implement pilot Integrated Personnel and Payroll System in three Commissions (Public Service Commission, Health Service Commission, Education Service Commission), Ministries (Ministry of Finance, Ministry of Health, Ministry of Public Service, Ministry of Education), and Local Governments (Lira and Jinja Districts) — End-May 2008. 4. For 2008/09 budget, allocate U Sh 300 billion for payments of verified group (A) domestic arrears, with priority given to pension arrears — End-June 2008. 5. Issue a tender to select the provider for the national identity card system — End-June 2008. - Structural Benchmark: 6. The BOU, in consultation with other members of the Monetary Affairs Committee of the EAC, will finalize a comprehensive draft financial market development strategy — End-May 2008. *Source: APPENDIX I—UGANDA: LETTER OF INTENT and attached MEFP (November 26, 2007).* ### 7. The Ministry of Finance, in conjunction with the Ministry of Foreign ### _cr0804 - 7. The Ministry of Finance, in conjunction with the Ministry of Foreign ### Short-term actions and deadlines - The Ministry of Finance, in conjunction with the Ministry of Foreign Affairs, will submit to Cabinet the complete list of international subscriptions and the related payment obligations. End-April 2008 - Update national energy (Oil) policy to include macroeconomic policy options. End-June 2008 ### Purpose of the Technical Memorandum of Understanding (TMU) - Defines the targets described in the memorandum of economic and financial policies (MEFP) for the July 2006–June 2009 financial program supported by the IMF Policy Support Instrument (PSI), and sets forth the reporting requirements under the instrument. ### Net Foreign Assets (NFA) of the Bank of Uganda (BOU) - NFA defined as the monthly average (based on daily data) of foreign assets minus foreign liabilities, including all foreign claims and liabilities of the central bank. - Monthly average values of all foreign assets and liabilities will be converted into U.S. dollars at each test date using the average cross exchange rates for June 2007 for the various currencies and then converted into Uganda shillings using the average U.S. dollar-Uganda shilling exchange rate for June 2007. - Program Exchange Rates (US$ per currency unit, unless indicated otherwise): - Euro 1.3417 - British pound 1.9843 - Japanese Yen 0.0082 - Kenya shilling 0.0150 - Tanzania shilling 0.0008 - SDR 1.5113 - Uganda shilling (per US$1) 1,645.7 ### Net Domestic Assets (NDA) of the BOU and cumulative targets - NDA defined as the monthly average (based on daily data) of base money less NFA. - NDA limits are cumulative changes from the average of June 2007 to the average of December 2007, March 2008 and June 2008. - Respective cumulative changes are increases of Shs210.6 billion, Shs261.2 billion and Shs125.6 billion. - Table of cumulative changes (In billions of shillings): - Dec 2007 / Mar 2008 / Jun 2008 - Cumulative change in base money: 206.3 / 210.7 / 207.6 - Cumulative change in NFA: -4.3 / -50.5 / 82.3 - Cumulative change in NDA: 210.6 / 261.2 / 125.3 ### Base Money definition and limits - Base money = currency issued by BOU + 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: cumulative changes from the daily average of June 2007 to the daily average of December 2007, March 2008 and June 2008, and cumulative changes from the daily average of June 2008 to the daily average of June 2009. ### Net Claims on the Central Government (NCG) by the banking system - NCG = outstanding bank credits to the central government minus the central government's deposits with the banking system, excluding administered accounts and project accounts. - Credits include bank loans and advances, holdings of government securities and promissory notes. - Central government’s deposits with the banking system include the full amount of IMF MDRI. - Quarterly limits on the change in NCG are cumulative beginning end-June in the previous fiscal year. ### Net International Reserves (NIR) of the BOU - NIR defined as reserve assets of the BOU net of short-term external liabilities of the BOU. - Reserve assets: external assets readily available to, and controlled by, the BOU; exclude pledged or otherwise encumbered external assets. - Short-term external liabilities: liabilities to nonresidents, original maturities less than one year, contracted by the BOU, including outstanding IMF purchases and loans. - For monitoring, reserve assets and short-term liabilities at end of each test period will be calculated in U.S. dollars by converting from original currency at program exchange rates (as specified). ### Ceiling on Domestic Budgetary Arrears (CCS) - Stock of domestic payment arrears under the Commitment Controls System (CCS) monitored quarterly. - CCS arrears definition: bills received by a central government spending unit or line ministry in that quarter for which payment has not been made within 30 days under the recurrent expenditure budget (excluding court awards) or the development expenditure budget. - Quarterly CCS reports (including IFMIS and non-IFMIS sites) prepared by the Internal Audit and Inspection Office will be used to monitor arrears. - Arrears can be cleared in cash or through debt swaps. - Payments of pre-CCS, non-CCS, and CCS arrears accumulated up to end-June 2004 (“group A arrears”) are covered by specific budget allocations for 2006/07 and 2007/08. - Program ceiling on the stock of CCS arrears covers accumulation after end-June 2004 (“group B arrears”). - Verified report by the Internal Audit and Inspection Office estimates group B arrears at U Sh 43 billion as of June 2007. ### Adjusters affecting NDA, NIR, and NCG targets - NDA and NIR targets based on assumptions about budget support, HIPC Initiative and MDRI assistance, external debt-service payments, and automatic access by commercial banks to BOU rediscount and discount window facilities. - NCG target also depends on assumptions regarding domestic nonbank financing of central government fiscal operations. - NDA target depends on legal reserve requirements on deposits in commercial banks. - The Uganda shilling equivalent of budget support (grants and loans) plus HIPC Initiative assistance in the form of grants on a cumulative basis from July 1 of the fiscal year is presented under Schedule A. - Adjustments: - Ceilings on cumulative increase in NDA and NCG will be adjusted downward (upward), and the floor on cumulative increase in NIR will be adjusted upward (downward) by the amount by which budget support, grants and loans, plus HIPC Initiative and MDRI assistance, exceeds (falls short of) the projected amounts. - Schedule A: Budget Support Plus Total HIPC Initiative Assistance (Cumulative billions of Uganda shillings, beginning July 1 of the fiscal year): - Quarter Dec. 31, 2007 / Mar.. 31, 2008 / June 30, 2008 / June 30, 2009 - Budget support, including HIPC Initiative grants: 237 / 321 / 672 / 669 - Ceilings on increases in NDA and NCG will be adjusted downward (upward) and the floor on the increase in NIR will be adjusted upward (downward) by the amount by which debt service due plus payments of external debt arrears less deferred payments (exceptional financing) falls short of (exceeds) the projections in Schedule B. - Deferred payments defined as: (i) all debt service rescheduled under the HIPC Initiative; and (ii) payments falling due to all non-HIPC Initiative creditors that are not currently being serviced by the authorities (gross new arrears being incurred). - Schedule B: Debt Service Due, Before HIPC Initiative Assistance (Cumulative billions of Uganda shillings, beginning July 1 of the fiscal year): - Quarter Dec. 31, 2007 / Mar.. 31, 2008 / June 30, 2008 / June 30, 2009 - Debt service due before HIPC, excluding exceptional financing: 119 / 169 / 195 / 183 - Ceiling on the increase in NCG will be adjusted downward (upward) by any excess (shortfall) in nonbank financing less payment of domestic group A arrears relative to programmed cumulative amounts in Schedule C. - For this adjuster, payment of domestic group A arrears cannot exceed the programmed amount by more than U Sh 45.0 billion. - Schedule C: Nonbank Financing Minus Repayment of Domestic Arrears (Cumulative billions of Uganda shillings, beginning July 1 of the fiscal year): - Quarter Dec. 31, 2007 / Mar.. 31, 2008 / June 30, 2008 / June 30, 2009 - (A) Nonbank financing: -13 / 28 / 31 / 150 - (B) Domestic arrears repayment: 112 / 210 / 280 / 330 - (C) Total = (A) –(B): -125 / -182 / -249 / -180 - Ceiling on NDA for end-June adjusted upward by the daily average amount of commercial bank automatic access to the BOU discount window and rediscounting of government securities by commercial banks. - Ceiling on NDA for every test date adjusted downward/upward to reflect decreases/increases in legal reserve requirements on deposits in commercial banks. Adjuster = percent change in reserve requirement × actual amount of required reserves (Uganda shillings and foreign-currency denominated) at end of the previous calendar month. ### External borrowing, concessionality, and arrears limits - Assessment criterion on short-term debt refers to contracting or guaranteeing external debt with original maturity of one year or less by the government or the BOU; excludes normal import-related credits. - Program includes a 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 average commercial interest rates references (CIRRs) published by OECD. - Concessionality assessment: use 10-year average CIRRs to discount loans with maturities of at least 15 years, and 6-month average CIRRs for loans with shorter maturities. Add margins to these averages for differing repayment periods: - 0.75 percent for repayment periods of less than 15 years - 1 percent for 15–19 years - 1.15 percent for 20–25 years - 1.25 percent for 30 years or more - Ceiling on nonconcessional external borrowing or guarantees observed on a continuous basis and covers financial leases and other instruments giving rise to external liabilities on nonconcessional terms. - Exclusions from limits: changes from refinancing credits and rescheduling operations, and credits extended by the IMF. - Arrangements to pay over time obligations arising from judicial awards to external creditors that have not complied with the HIPC Initiative do not constitute nonconcessional external borrowing for program purposes. - For the program, the Bujagali project is defined as the hydroelectric dam and related equipment located at the dam site. ### Definition of debt (per Guidelines on Performance Criteria with Respect to External Debt) - Debt defined per Point 9 of the Guidelines (Executive Board’s Decision No. 12274-(00/85), August 24, 2000), including: - (a) Debt as a current liability created under a contractual arrangement through provision of value in the form of assets or services requiring future payments in assets or services to discharge principal and/or interest. - Primary forms include: (i) loans (deposits, bonds, debentures, commercial loans, buyers' credits, repurchase agreements, official swap arrangements); (ii) suppliers' credits; (iii) leases (debt equals present value at inception of all lease payments expected during agreement period, excluding payments covering operation, repair, or maintenance). - (b) Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are included. - Definition also covers commitments contracted or guaranteed for which value has not been received. ### External payments arrears ceiling - Ceiling on accumulation of new external payments arrears is zero; observed on a continuous basis. - Applies to change in stock of overdue payments on debt contracted or guaranteed by the government, the BOU, and statutory bodies from their level at end-June 2006. - Comprises 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. ### Monitoring and reporting - Monitoring and reporting requirements are specified (section H) for program implementation and verification against the performance criteria and adjusters described above. *Source: Uganda: Technical Memorandum of Understanding (attachment to MEFP), July 2006–June 2009 PSI program, excerpts as provided.* ### 19. The authorities will inform the IMF staff in writing at least ten business days ### _cr0804 - 19. The authorities will inform the IMF staff in writing at least ten business days ### Notification and Communication Requirements - The authorities will inform the 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. - The authorities will similarly inform the 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 on a regular basis 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. ### Reporting Requirements (Table 1) — Key entries and timing - 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 - Note: The Internal Audit Department (IAD) of the BOU will review the reconciliations of monetary survey data with the financial records and the audited financial statements. Any revisions to monetary survey data, in line with the recommendations of the IMF safeguards mission, will be documented and reconciled with the previous presentation to ensure accurate reporting. - Composition of foreign assets and liabilities of the BOU by currency of denomination. - Frequency: Monthly - Submission lag: 4 weeks - 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) 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 stock 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 - 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 - Daily average amount of commercial bank automatic access to the BOU discount window and rediscounting of government securities by commercial banks. - Frequency: Quarterly - Submission lag: 4 weeks - Summary of central government accounts. 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. - Frequency: Monthly - Submission lag: 6 weeks - 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. For the purpose of the program, contingent liabilities include all borrowings by statutory bodies, government guarantees, claims against the government in court cases that are pending, or court awards that the government has appealed. - 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 - Updated national accounts statistics (real and nominal) according to UBOS and medium-term projections. - Frequency: Quarterly - Submission lag: 4 weeks ### Additional procedural and definitional notes - A definition footnote states: "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)." - The IAD of the BOU will review reconciliations of monetary survey data and document any revisions in line with IMF safeguards mission recommendations. *Source: Excerpt from the IMF staff report chapter on reporting and notification requirements contained in the Second Review Under the Policy Support Instrument and Modifications to Assessment Criteria—Informational Annex (prepared by the African Department, approved November 29, 2007).* ### 1. Uganda’s development strategy is based on the revised Poverty Eradication Action ### Uganda’s development strategy is based on the revised Poverty Eradication Action Plan (PEAP) ### PEAP: objectives and pillars - Launched in May 2005 as a medium-term national planning framework guiding government policy at sector and district levels. - Aims: accelerating economic growth, reducing poverty and inequality, and improving human development. - Five pillars: - (i) economic management; - (ii) production, competitiveness and income; - (iii) security, conflict-resolution, and disaster management; - (iv) good governance; - (v) human development. - Note: The PEAP was first prepared in 1997, revised in 2000 and 2004, and preparations for the third round of revision (2008) are underway. ### Bank Group strategy and budget support - World Bank assistance set out in the Joint Assistance Strategy (UJAS) approved January 2006; guides activities of 10 other development partners. - World Bank provides substantial support to the PEAP through annual Poverty Reduction Support Credits (PRSCs); PRSC6 approved April 2007. - Debt relief as direct budget support: - Uganda received 100 percent debt relief under the Multilateral Debt Relief Initiative (MDRI) approved March 28, 2006, effective July 01, 2006. - MDRI will cancel US$2.7 billion of Uganda's debt owed to IDA. - Uganda reached HIPC completion point in April 1998 and Enhanced HIPC completion point in May 2000. ### Bank portfolio (as of September 30, 2007) and pipeline - Portfolio: 20 Bank-supported projects, total net commitments of US$1430 million. - Fiscal year 2007/08 Board approvals (additional financing): - US$12.0 million to the Second Agricultural Research and Training project. - US$34 million to the Kampala Institutional and Infrastructure Development project. - Projects in pipeline include: - Local Government Management Service Delivery (US$55 million, of which US$23 million will support the Northern Uganda Peace, Recovery and Development Plan); - Second Lake Victoria Environment Management project (US$28 million); - PRSC 7. - Fiscal year 2006/07 approvals included: - PRSC6 (US$125 million); - Power Sector Development project (US$300 million); - Private Power Generation (Bujagali) project (US$115 million) — note: the US$115 million from IDA is in form of a partial risk guarantee for syndicated commercial loan, supplementing other World Bank Group funding of US$130 million from IFC and a MIGA guarantee of US$115 million for the sponsor’s equity. - Investment note: The investment in the Bujagali project is expected to reach US$800 million; plans call for financing through equity participation and loans to the private consortium, with the government intending to negotiate favorable financing terms if it finances a portion. ### Bank–Fund collaboration: areas and activities - Poverty reduction strategy paper: - Joint staff assessments of the PRSP and progress reports. - Joint Staff Advisory Note on the Poverty Status Report presented to the two boards in June 2007. - Debt sustainability analysis: - Staffs worked with authorities to update the Uganda DSA, last updated November 2006. - Public expenditure management: - 2005 public expenditure review (PER) produced an action plan for public expenditure and financial accountability; monitored annually by a Government-chaired working group. - Bank PERs moved “upstream” to consider fiscal space, strategic allocation across sectors, and efficiency of sector spending. - 2007 PER analyzed efficiency in the education sector and was delivered to government in June 2007. - 2008 PER will focus on the health sector. - Public Financial Management: - Joint staff mission to assess budget reporting and review the functioning of the Integrated Financial Management Information System (IFMIS). - Financial sector reform: - Financial Sector Assessment Program update completed March 2005. - Bank Country Economic Memorandum assessed priorities for growth and financial deepening; capacity-building coordinated with the Fund’s PSI. - Trade reforms and regionalization: - Joint dialogue on trade reforms and regional integration, particularly in the East African Community (EAC). - 2006 diagnostic trade integrated study (DTIS) under the Integrated Framework for Trade Development in LDCs completed; Bank supports DTIS implementation. - Bank report “Options for strengthening EAC’s Trade Integration” completed, focusing on consolidating the CU; developing a common trade policy; and rationalizing overlapping commitments. ### Statistical issues — overall - Overall data provision adequate for surveillance; some shortcomings remain. - Uganda participates in the GDDS; metadata initially posted on the Fund’s DSBB in May 2000. Partial updates of real and external sector metadata completed August 2005. - Participating in SDDS, government finance, and monetary and financial statistics modules of the Fund’s GDDS Project for Anglophone Africa (funded by DFID). - February 2005 STA mission prepared a data ROSC (results published July 2006) assessing national accounts, prices, government finance, and balance of payments; monetary and financial statistics were not assessed. - April 2007 mission conducted SDDS assessment focusing on coverage, periodicity and timeliness. ### Real sector statistics - Since 2004, technical assistance from East AFRITAC for quarterly national accounts and training. - Compilers developed quarterly value added estimates at constant 2002 prices using ISIC Rev III groups; methodological shortcomings remain relating to benchmarking. - UBOS collects output data from a sample of manufacturing establishments to compile Major and Main Indices of Industrial Production (IIP). - Labor market indicators (employment, unemployment, wages/earnings) compiled and disseminated infrequently; UBOS aims for annual compilation but currently compiles with a two year lag due to resource and data unavailability. - Consumer prices collected from six urban centers; inflation rates disseminated on the last working day of every month; plans to expand to another urban center. - Producer prices (factory gate) collected from 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 extra budgetary institutions and the National Social Security Fund. - Revised chart of accounts implemented July 1, 2003 for budgetary central government and local government units. - Uganda reported GFS data according to GFSM 2001 for the 2004 GFS Yearbook; further submissions pending. - 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 - February 2006 mission found monetary statistics basically sound for data integrity and timeliness but needing improvements to align with MFSM recommendations: - (1) reverse repos between the BOU and ODCs not classified as advances to banks; - (2) inconsistency among BOU departments on which foreign assets are reserve assets; - (3) loans and advances presented net of provisions for loan losses; - (4) classification difficulties in Development Finance Department where accounts use original source of funds rather than unit subject to claim or liability; - (5) unclear economic and accounting nature of administered and internally managed funds of the BOU. - Coverage of the depository corporations survey (DCS): BOU and 18 ODCs, three under liquidation; DCS does not include seven credit institutions and four microfinance institutions that accept deposits, though their data are collected monthly and published in BOU quarterly and annual reports. - Mission recommended defining the depository corporations sector to include these deposit-taking financial institutions and to include their deposits in monetary aggregates. - A monetary and financial statistics mission planned for March 2008 to review progress and assist adoption of standardized report forms. ### External sector statistics - 2005 data ROSC mission: balance of payments statistics broadly follow BPM5 but some departures from recommended definitions, scope, and classifications; urged completion of conversion to BPM5. - Areas needing new source data and estimation techniques: exports of freight and imports of passenger transportation, compensation of employees, direct investment abroad, portfolio investment and financial derivatives. - International trade data could be improved by incorporating Survey of Informal Cross-Border Trade and greater use of trade partner country data. - Balance of payments data compiled and disseminated for calendar and fiscal years in BOU publications (Quarterly Economic Report and Annual Report) and UBOS Statistical Abstract; quarterly BOP data disseminated in analytical format per BPM5. - BOU has requested technical assistance to improve trade data compilation and to capture securities trading and deposits from off-shore agents in the balance of payments. ### Table of Common Indicators Required for Surveillance (As of November 13, 2007) — selected entries - Exchange rates: Date of Latest Observation Jul 2007; Date Received Aug 2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - International reserve assets and reserve liabilities: Date of Latest Observation Jan. 2007; Date Received Abr. 2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Reserve/base money: Date of Latest Observation Jun 2007; Date Received Aug 2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Broad money: Date of Latest Observation Jun 2007; Date Received Aug 2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Central bank balance sheet: Date of Latest Observation Jun 2007; Date Received Aug 2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consolidated balance sheet of the banking system: Jun 2007; Aug 2007; M; M; M. - Interest rates: Date of Latest Observation Jun 2007; Date Received Sept 2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consumer price index: Date of Latest Observation Jul 2007; Date Received Aug 2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological Soundness: O, LO, O, O; Data Quality – Accuracy and Reliability: O, O, LO, O, O. - Revenue, expenditure, balance and composition of financing—central government: Date of Latest Observation June 2006; Date Received July 2006; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological Soundness: O, LNO, O, LO; Data Quality – Accuracy and Reliability: O, O, O, O, LO. - Stocks of central government and central government-guaranteed debt: Date of Latest Observation June 2006; Date Received July 2006; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - External current account balance: Date of Latest Observation Q2. 2007; Date Received Oct. 2007; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q. - Exports and imports of goods and services: Date of Latest Observation Mar. 2007; Date Received May 2007; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M; Data Quality – Methodological Soundness: LO, LO, LO, LO; Data Quality – Accuracy and Reliability: LO, O, O, O, LO. ### Joint IMF–World Bank Debt Sustainability Analysis (Joint DSA) — key findings and baseline assumptions - Assessment summary: - Based on the joint Low-Income Country Debt Sustainability Framework, Uganda is assessed to be at low risk of debt distress. - Debt ratios have improved substantially due to HIPC and MDRI debt relief and are projected to remain below policy-dependent thresholds under the baseline scenario. - Total MDRI relief (including future interest) delivered in 2005/06 and 2006/07 approached US$3.6 billion. - Debt stock and indicators: - External debt was US$1.5 billion (13 percent of GDP) at end-2006/07, compared with US$4.5 billion (47 percent of GDP) a year earlier. - Debt service-to-exports ratio fell from 15.3 percent in 2004/05 to 6.5 percent in 2006/07. - Authorities’ plans and infrastructure priorities: - Authorities plan increased spending on infrastructure (transportation, electricity, water) in the 2007/08 budget and medium term, including the Bujagali hydroelectric plant financed by a private consortium with multilateral lender participation. - As of mid-November, terms, conditions and guarantees for financing of Bujagali had not been finalized. - Construction of another hydroelectric plant (possibly Karuma) and infrastructure for oil sector development (small refinery and pipelines) remain at planning stage. - Baseline DSA assumptions on public financing of infrastructure: - Government would contract or guarantee debt on non-concessional terms up to US$400 million, with annual average disbursements of ¾ percent of GDP. - Multilateral and bilateral official debt assumed contracted on concessional terms. - Baseline DSA excludes: (i) construction of Karuma hydroelectric plant; (ii) investment in oil sector infrastructure; (iii) oil production (expected to commence in 2009) — scale of production not yet determined. - Box 1 — key macroeconomic and projection assumptions under the baseline: - Bujagali construction begins in 2007/08 and completed by 2009/10. - Real GDP growth: average 7 percent between 2007/08 and 2012/13, slowing to 6 percent by 2019/20. - Exports of goods projected to grow 11½ percent on average between 2007/08 and 2026/27, largely from non-traditional export volumes. - Current account deficit: above historical norm of 5 percent of GDP by 2½ percentage points on average between 2007/08 and 2012/13; peaking at 9½ percent of GDP in 2008/09; stabilizing at 6 percent of GDP in outer years. - Current account deficit excluding official transfers improves from 8½ percent of GDP in 2006/07 to 7 percent of GDP in 2026/27. - Fiscal revenues assumed to increase from 13½ percent of GDP in 2006/07 to 16 ¾ percent of GDP in 2012/13. - Grants declining below 3 percentage points of GDP in the medium term; non-interest expenditures projected to decline slightly to about 19 percent of GDP, consistent with a primary balance close to zero in the outer years. - Official external loans projected at US$485 million per year on average throughout the medium term, and US$420 million per year in the outer years. - DSA assumes IDA will support Uganda with lending throughout the projection period. - Comparison with 2006 DSA: - Current baseline assumes higher real GDP growth, higher imports (particularly for construction of Bujagali over next three years), and higher exports driven by improved performance and partner country demand forecasts. - Export projections driven by WEO forecasts of partner country demand growth averaging 8½ percent in real terms over 2007-13 and assumed to grow at same rate to 2027. - Baseline includes upward revision of MDRI relief for Uganda (includes relief of US$486 million from AfDF not included in 2006 DSA) and a downward revision to expected external loans in line with authorities’ projections. - Fiscal assumptions broadly unchanged. *Prepared by IMF and World Bank staffs; approved by Robert Corker and Mark Plant (IMF) and Sudhir Shetty and Brian Pinto (IDA); Joint DSA dated November 30, 2007.* ### 4. The external debt dynamics during the next 20 years would be favorable ### 4. The external debt dynamics during the next 20 years would be favorable ### External debt outlook — baseline projections - All three debt-burden indicators are expected to remain well below their policy-dependent thresholds throughout the period. - NPV of debt-to-GDP ratio: - 5.9 percent in 2006/07 - rises to 9.9 percent in 2012/13 - declines to 6.9 percent by 2026/27 - NPV of debt-to-exports: - expected to peak at 61.4 percent in 2009/10 and decline substantially thereafter - Debt-service-to-exports ratio: - expected to continue along a downward trend, reflecting the delivery of HIPC and MDRI assistance ### Standardized sensitivity analysis (risk assessment) - Baseline scenario indicates low risk of debt distress: debt-to-GDP, debt-to-exports, and debt service-to-exports indicators remain below threshold values throughout the next 20 years. - Combined macroeconomic shock (one-half standard deviation to growth, exports, GDP deflator, and non-debt creating flows in 2007/08-2008/09): - would raise Uganda’s NPV of debt-to-exports ratio to 152.8 percent in 2008/09 - would put Uganda at a high indebtedness level for a prolonged period - NPV of debt-to-GDP and debt-service ratios would nonetheless remain well below the policy-dependent thresholds ### Customized sensitivity analysis — High investment scenario - Additional public investment assumed beyond baseline: - Karuma and the oil sector: US$422 million during 2007/08-2010/11 - Other infrastructure: US$1.5 billion during the first decade, and US$2 billion during the subsequent decade - Financing assumption for these investments: - blend of concessional (one quarter) and nonconcessional (three quarters) loans - Outcomes: - Debt ratios remain within policy-dependent thresholds under most stress tests - Under the most extreme combined shock to growth, exports, GDP deflator, and non-debt creating flows, the NPV of debt-to-exports threshold is breached in 2008/09-2010/11 - Result is sensitive to the 75 percent share of non-concessional borrowing; a smaller share lowers Uganda’s debt indicators, including under combined stress tests - Policy implication: - Uganda could become vulnerable to debt distress should it rely excessively on non-concessional borrowing ### Fiscal debt sustainability analysis (fiscal DSA) - Key assumptions: - Continued fiscal consolidation, initially at a more moderate pace due to the power crisis - Emergency budget spending on the energy crisis amounting to about 2 percent of GDP cumulatively in the next two years - Grants declining from 6.3 percent of GDP in FY 2006/07, before stabilizing at below 3 percent of GDP in the medium term - Domestic revenues projected to increase gradually to some 16½ percent of GDP in 2012/13 - After a spike related to the energy crisis, non-interest expenditures will decline moderately as a percent of GDP, but then will increase again to about 19 percent of GDP - Primary balance close to zero - Public debt outcomes: - NPV of public debt projected to increase gradually after a sharp decline resulting from MDRI - NPV of public debt will peak at about 19 percent of GDP in four years, and then decline gradually - Debt-service indicators remain manageable, with debt-service not exceeding 10 percent of revenues - Under extreme stress test, NPV of public debt will not exceed 30 percent of GDP over the projection period - Stress tests do not indicate any debt-servicing problem ### Key conclusions and policy recommendations - Baseline and most stress scenarios: low risk of external debt distress; key debt indicators stay below policy-dependent thresholds over the next 20 years. - Large combined macroeconomic shocks can sharply worsen NPV of debt-to-exports and produce prolonged high indebtedness. - High public investment financed predominantly by non-concessional loans (75 percent) raises vulnerability under extreme shocks; reducing the share of non-concessional borrowing mitigates that vulnerability. - Policy priorities: - Maintain prudent mix of concessional and non-concessional financing for infrastructure - Continue fiscal consolidation while managing short-term energy-related spending pressures - Monitor exposure to combined macroeconomic shocks and stress-test borrowing plans accordingly *Source: Staff projections and calculations.* ### 12. The DSA analysis shows that Uganda’s public debt remains sustainable under ### _cr0804 - 12. The DSA analysis shows that Uganda’s public debt remains sustainable under ### Main finding: baseline sustainability - The DSA analysis shows that Uganda’s public debt remains sustainable under the baseline scenario. - Uganda’s public debt has been reduced significantly as a result of the MDRI, and with a prudent borrowing strategy and the continuation of the stability-oriented fiscal policy, debt should remain comfortably low during the projection period. - While the alternative scenario shows that Uganda can adopt a higher investment program, caution on borrowing is warranted and reliance on concessional financing remains essential. ### Key projected debt and external-sector indicators (selected figures from staff simulations) - External debt (nominal), public and publicly guaranteed (PPG): 67.5; 65.6; 50.6; 47.0; 13.1; 16.2; 19.2; 20.4; 20.7; 20.7; 20.4; 14.2 (table entries as presented). - Change in external debt: 2.3; -1.8; -15.0; -3.6; -33.9; 3.1; 3.0; 1.2; 0.3; 0.0; -0.3; -0.7. - Identified net debt-creating flows: -0.8; -6.7; -15.2; -4.0; -4.4; 2.6; 3.7; 2.5; 1.3; 0.6; 0.3; 0.4. - Non interest current account deficit (selected entries): 5.3; 1.7; 2.8; 3.6; 4.6; 2.1; 1.8; 7.9; 9.3; 8.2; 6.7; 5.9; 5.9; 5.8; 5.9. - Exports (percent of GDP, selected entries): 12.0; 14.3; 13.8; 14.7; 15.7; 15.7; 15.7; 16.3; 17.2; 18.6; 21.7; 25.3. - Imports (percent of GDP, selected entries): 26.7; 27.6; 26.9; 29.9; 32.0; 34.2; 34.3; 33.7; 32.3; 32.3; 33.6; 35.0. - Net FDI (negative = inflow, selected entries): -2.2; -3.4; -3.9; -3.9; -2.5; 1.0; -3.9; -4.6; -4.7; -4.6; -4.2; -4.3; -4.6; -4.7; -4.6. - Endogenous debt dynamics (selected entries): -3.9; -5.0; -14.1; -3.7; -2.4; -0.7; -0.8; -1.0; -1.2; -1.0; -1.0; -0.7. - Contribution from nominal interest rate: 0.5; 0.6; 0.4; 0.4; 0.2; 0.1; 0.2; 0.2; 0.1; 0.3; 0.2; 0.1. - Contribution from real GDP growth: -2.9; -3.3; -3.5; -2.4; -2.6; -0.8; -1.0; -1.2; -1.3; -1.3; -1.1; -0.8. - Residual (including exceptional financing entries): 3.0; 4.9; 0.2; 0.4; -29.5; 0.5; -0.8; -1.3; -1.0; -0.6; -0.6; -1.1. Of which: exceptional financing: -0.3; -0.1; 0.0; 0.3; 0.2; 0.3; 0.2; 0.1; 0.0; 0.0; 0.0; 0.0. - NPV of external debt (selected projection entries): 5.9; 7.6; 9.2; 10.0; 10.2; 9.9; 9.5; 6.9. - NPV of external debt in percent of exports (selected entries): 37.8; 48.8; 58.6; 61.4; 58.9; 53.3; 43.7; 27.1. - Debt service-to-exports ratio (percent, selected entries): 20.1; 17.3; 15.3; 9.7; 6.5; 2.7; 3.6; 4.1; 3.9; 3.6; 2.0; 1.7. - Total gross financing need (US$ millions, selected entries): 342.8; 51.3; 85.5; 105.8; -116.4; 470.3; 750.6; 669.1; 558.5; 438.9; 477.7; 905.8. - Non interest current account deficit that stabilizes debt ratio (selected entries): 3.1; 3.5; 17.8; 7.2; 35.7; 4.8; 6.3; 7.0; 6.4; 6.0; 6.2; 6.5. - Nominal GDP (US$ millions, memorandum item, selected entries): 6,240; 6,802; 8,737; 9,495; 11,227; 12,806; 14,585; 15,976; 17,443; 19,118; 27,772; 60,069. ### Macroeconomic assumptions used in projections (selected) - Real GDP growth (percent, selected entries): 4.7; 5.4; 6.8; 5.1; 5.6; 1.2; 6.5; 7.1; 7.0; 7.0; 7.0; 7.0; 6.9; 6.0; 6.0; 6.0. - GDP deflator in US dollar terms (change in percent, selected entries): 2.3; 3.5; 20.3; 3.4; -0.3; 9.6; 11.0; 6.5; 6.4; 2.4; 2.0; 2.4; 5.1; 1.9; 1.9; 1.8. - Effective interest rate (percent, selected entries): 0.8; 0.9; 0.8; 0.8; 1.0; 0.2; 0.5; 1.2; 1.2; 1.1; 0.5; 1.4; 1.0; 0.9; 0.8; 0.9. - Growth of exports of G&S (US$ terms, percent, selected entries): 7.6; 29.2; 24.6; 15.7; 8.0; 16.0; 25.7; 14.1; 14.1; 13.7; 15.5; 18.5; 16.9; 9.7; 9.8; 10.2. - Growth of imports of G&S (US$ terms, percent, selected entries): 7.7; 12.6; 25.2; 20.9; 7.5; 11.8; 26.2; 22.3; 13.9; 7.7; 4.8; 9.4; 14.1; 8.5; 8.5; 8.5. - Grant element of new public sector borrowing (percent, selected entries in projections): 48.0; 34.4; 39.2; 35.7; 43.8; 49.1; 41.7; 49.1; 49.1; 49.1. ### Public sector debt framework (selected public-debt metrics) - Public sector debt (percent of GDP, selected entries): 59.4; 55.9; 21.7; 24.8; 27.8; 28.9; 29.3; 29.1; 28.8; 22.6. - Foreign-currency denominated share of public sector debt (percent, selected entries): 50.6; 47.0; 13.1; 16.2; 19.2; 20.4; 20.7; 20.7; 20.4; 14.2. - Change in public sector debt (selected entries): -14.2; -3.5; -34.2; 3.1; 2.9; 1.2; 0.4; -0.2; -0.3; -0.7. - Identified debt-creating flows (selected entries): -7.2; -4.3; -37.8; 1.8; 1.6; 1.0; 0.3; -0.8; -1.1; -0.8. - Primary deficit (selected entries): -0.9; -0.6; 1.9; 2.8; 1.1; 2.1; 3.0; 2.7; 2.0; 1.0; 2.0; -0.1; -0.1; -0.4. - Revenue and grants (percent of GDP, selected entries): 20.7; 19.6; 19.6; 18.4; 18.5; 18.5; 18.6; 20.3; 20.2; 22.2. - Grants (percent of GDP, selected entries): 7.9; 6.5; 6.3; 4.3; 3.9; 3.4; 3.0; 4.2; 2.4; 2.4. - Primary (noninterest) expenditure (percent of GDP, selected entries): 19.8; 18.9; 20.7; 20.5; 21.6; 21.2; 20.6; 21.4; 20.1; 22.1. - Automatic debt dynamics (selected entries): -5.9; -3.3; -12.1; 0.0; -1.2; -1.5; -1.6; -1.7; -0.9; -0.6. - Contribution from interest rate/growth differential (selected entries): -1.1; -3.0; -3.5; -0.5; -1.0; -1.4; -1.6; -1.7; -0.9; -0.6. - Contribution from real GDP growth (selected entries): -4.7; -2.9; -3.4; -1.4; -1.6; -1.8; -1.9; -1.9; -1.6; -1.3. - Debt relief (HIPC and other) contribution (selected entries): -0.4; -0.4; -26.8; -0.3; -0.2; -0.2; -0.2; -0.2; -0.1; 0.0. - Residual, including asset changes (selected entries): -7.0; 0.8; 3.6; 1.3; 1.4; 0.2; 0.1; 0.6; 0.8; 0.0. - NPV of public sector debt (selected entries): 8.8; 13.7; 14.5; 16.3; 17.8; 18.6; 18.8; 18.3; 17.9; 15.3. - NPV of public sector external debt (selected entries): 4.8; 5.9; 7.6; 9.2; 10.0; 10.2; 9.9; 9.5; 6.9. - Gross financing need (percent of GDP, selected entries): 9.7; 6.9; 6.0; 6.4; 7.5; 8.3; 8.0; 7.1; 5.3; 5.4. - NPV of public sector debt-to-revenue ratio (percent, selected entries): 42.6; 69.7; 74.0; 88.6; 95.9; 100.3; 100.8; 90.3; 88.7; 68.9. - Debt service-to-revenue ratio (percent, selected entries): 18.7; 12.9; 12.1; 7.6; 9.8; 9.5; 9.1; 7.8; 7.1; 7.0. - Primary deficit that stabilizes the debt-to-GDP ratio (selected entries): 13.3; 2.9; 35.4; -1.1; 0.1; 1.5; 1.6; 1.3; 0.2; 0.6. ### Sensitivity and stress-test results (high-level) - Baseline and alternative scenarios and bound tests are reported for 2007-2027, including scenarios: - A1. Key variables at their historical averages in 2008-27. - A2. New public sector loans on less favorable terms in 2008-27. - B1-B6 bound tests including shocks to real GDP growth, export value growth, US$ GDP deflator, net non-debt creating flows, combined shocks, and a one-time 30 percent nominal depreciation relative to the baseline in 2008. - Selected baseline and scenario outcomes for NPV of debt-to-exports ratio (percent, 2007 baseline entries shown): Baseline 37.8; A1 37.8; A2 37.8; B1 37.8; other stress tests produce higher peaks (table and figures depict trajectories through 2027). - High investment scenario charts show higher debt indicators under a high-investment baseline versus the baseline, with stress tests producing the most extreme ratios in some years. ### Policy implications and recommendations (as emphasized in the Press Release and staff commentary) - Continue a prudent borrowing strategy and stability-oriented fiscal policy to keep debt "comfortably low" during the projection period. - Rely on concessional financing for additional investment; caution is warranted if financing is non-concessional. - Maintain restraint on less-essential current expenditure and continue efforts in tax revenue collection to raise public saving and provide room for poverty-reducing spending and to avoid domestic arrears. - Maintain price stability as the primary objective of monetary policy, given increased volatility in foreign exchange flows. - Give strong focus to public investment to eliminate infrastructure bottlenecks and increase productivity; evaluate projects carefully for cost effectiveness and impact on debt sustainability, especially when financing may be non-concessional. - Ensure transparency and an appropriate balance between spending and saving to maximize benefits from future oil production; the government’s comprehensive approach to management of oil resources and plans to introduce a national energy policy are noted as encouraging. *Source: Staff simulations; Press Release No. 07/299, December 19, 2007; IMF Executive Board statement excerpts as provided in the content unit.* ### 1. The Ugandan authorities express appreciation to the Executive Board, Management ### 1. The Ugandan authorities express appreciation to the Executive Board, Management and staff ### Recent Macroeconomic Developments and Performance - Authorities welcome staff reports as "concise, informative and balanced" and are in "broad agreement with the thrust of the analyses, conclusions, and recommendations." - Key indicators of recent performance: - Real GDP growth of 6.2 percent in 2006/07, compared to 5.1 percent in 2005/06. - Underlying inflation expected to fall below the targeted ceiling of 5 percent in 2007/08. - Factors contributing to performance: - Competent macroeconomic management. - Appropriate response to acute electricity supply bottlenecks. - Progress in addressing electricity shortages and boosting economic activity. - Favorable international commodity prices. - Recent inflationary pressures attributed mainly to: - One-time shock of increases in electricity tariffs. - Temporary sugar and diesel fuel shortages. - Exchange rate and monetary response: - Bank of Uganda (BOU) managed surge in foreign exchange inflows since late 2006 with monetary measures to arrest appreciation of the shilling. ### Performance Under the PSI - Compliance with assessment criteria: - All end-June 2007 assessment criteria observed except the ceiling on base money (temporary deviation). - Base money target subsequently met at end-September 2007. - Causes of monetary expansion: - Policy measures by BOU to stem shilling appreciation following strong foreign exchange inflows and rising sterilization costs. - Revenue and fiscal performance: - Ugandan Revenue Authority (URA) revenues exceeded initial program projections by 0.3 percent of GDP. - URA performance contributed significantly to meeting the end-June 2007 assessment criterion on credit to government. - Financial sector stability: - BOU policy implementation facilitated banking system soundness and exchange rate stability. - Introduction of Net Domestic Assets (NDA of the BOU) as near-term operating target to allow flexibility in dealing with temporary currency flows and shifting money demand. - Preparations underway for eventual adoption of inflation targeting via enhanced data collection, analysis and outreach. - Structural measures: - Authorities’ implementation of structural measures under the PSI instrumental to achieving program objectives. ### Macroeconomic Policies for 2007/08 and the MTEF - Policy priorities: - Maintain macroeconomic stability, stimulate sustainable growth, and reduce poverty. - Increased budget allocations for infrastructure, energy, education, rural development, and arrears repayment. - Projections and expectations: - Real GDP growth projected at 7 percent over the next few years. - Inflation projected at below 5 percent by end-2007/08. - Imports for Bujagali dam construction expected to widen the current account deficit without undermining external sustainability. - Oil and energy outlook: - Commercial oil production due to commence in 2009, with oil revenue to be incorporated into the MTEF. - Planned national energy policy aims at transparency, fiscal sustainability, and balance between current spending and savings for the future. - Risk considerations and mitigation: - Risks: increased oil prices; electricity and infrastructure bottlenecks; delays in Bujagali dam construction; overshoot in CHOGM-related expenditure jeopardizing priority spending. - Mitigations: substantial budget allocations for growth-enhancing infrastructure; CHOGM-related spending focused on revamping infrastructure (roads and airport) expected to support productive activities; temporary limited government loan to Bujagali to minimize construction delays and costs; expectation that domestic oil production in 2009 will enhance revenue profile. ### Fiscal Policy and Public Sector Reforms - Budget strategy: - 2007-08 budget anchored on targeted increases in domestic revenue collection and sustained expenditure control under the MTEF. - Improvement in domestic revenue targeted at 0.7 percentage point to 14.1 percent of GDP. - Budget provides for reduction in the deficit, excluding grants. - Revenue performance and measures: - Better-than-expected tax revenue in Q4 2006/07 and Q1 2007/08 supports targets. - Ongoing efforts to improve tax administration. - Announced tax holidays for exporters involve revenue loss of 0.1 percent of GDP and are inline with East African Community practice; viewed as manageable and exceptional. - Managing spending pressures: - Reallocation within the budget envelope to address CHOGM-related and emergency flood/peace spending without incurring new arrears. - Steps to address domestic arrears include introduction of integrated personnel and payroll system, and verification of gratuity and pension arrears for FY 2006/07. - Debt management: - New Debt Management Strategy to support selection and financing of turnkey projects to speed investment in productivity-enhancing infrastructure deemed viable by the Bank-Fund DSA. - Projects evaluated case-by-case for cost effectiveness and impact on debt sustainability. - Strategy provides for borrowing for priority sectors on concessional terms and will guide domestic and external borrowing and repayment of arrears. ### Monetary and Financial Sector Policies - Inflation objective: - Monetary authority committed to bringing underlying inflation to under 5 percent by end 2007/08. - Policy instruments and sterilization: - BOU using a mix of instruments and conducting sterilization to contain effects of rapid capital inflows on the exchange rate. - Financial sector status and challenges: - Ugandan banks are well-capitalized and profitable and provide more credit to the private sector. - Access to financial services limited in rural areas due to high costs and shallowness of the financial sector. - Financial sector development: - Government and BOU preparing a comprehensive financial sector development strategy aimed at financial deepening and facilitation of credit for productive activities nationwide. ### Other Structural Reforms - Regulatory and governance reforms: - Policy paper on new regulatory framework for non-bank financial institutions under preparation for Cabinet consideration. - Continued pursuit of governance reforms and improvements in public procurement. ### Conclusion and Requests - Overall assessment: - Authorities reaffirm commitment to effective implementation of macroeconomic and structural reform policies under the PSI. - All end-June 2007 assessment criteria met except the ceiling on base money, for which a waiver is being requested. - Budget and debt stance: - Budget strategy anchored on expenditure restraint and increased revenue mobilization in line with the MTEF. - New Debt Management Strategy to guide borrowing to ensure debt sustainability. - Requests to international community: - Authorities call on the international community, including the Fund, to continue support. - Request a waiver of the missed assessment criterion and approval for completion of the second review of performance under the PSI. *IMF staff report excerpt: "The Ugandan authorities express appreciation to the Executive Board, Management and staff..."* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr0804.pdf_