## _cr0979 ## Source details **Canonical URL:** [_cr0979](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0979.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0979.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0979.pdf.json) --- ### Executive summary - Real economic growth averaged close to 9 percent over the last 5 years. - Poverty declined from 55 percent of the population in 1992/93 to 31 percent in 2005/06. - The PSI-supported program remains on track; all assessment criteria for the fourth review have been met and staff recommends completion of the review. - Structural challenge: growth has not been accompanied by significant structural transformation; the economy remains more reliant on subsistence agriculture and less on high-productivity manufacturing. ### Shocks and transmission channels - Two major shocks in 2008: - Global surge in food and fuel prices, which pushed domestic inflation above 15 percent. - Global economic downturn, likely to reduce demand for exports and the availability of financing for critical investment projects. - Key transmission channels: - Private capital inflows (private remittances, foreign direct investment, portfolio flows, and loans) likely to revert to pre-2006 levels, implying lower investment and consumption. - Official inflows expected to remain broadly unchanged in nominal terms short-term but likely to decline as a share of the budget and output over the medium term. - Lower demand for Uganda’s exports from trading partners and heightened economic uncertainty that may delay investment decisions. - Non-resident investors estimated to have held some US$400 million in local government securities at end-September 2008. ### Macroeconomic outlook and key indicators - Growth: - Staff estimates growth will fall to 7–7½ percent in 2008/09, from an average of 9½ percent during the previous three years. - Export growth projected to slow down to about 5 percent in 2008/09. - Inflation: - Core inflation rose to some 15 percent in 2008. - Pass-through from international food and fuel prices accounts for about 5 percentage points of the increase in the consumer price index. - Core inflation is expected to decline to around 7 percent by June 2009 as international food and fuel prices fall. - Medium-term inflation objective: 5 percent. - Fiscal and external positions: - Revenue collection likely to be somewhat weaker than projected in the budget; trend started in Q1 2008/09. - Fiscal impact may be mitigated by delays in implementation of ambitious infrastructure projects. ### Financial sector assessment and vulnerabilities - Overall soundness: - Banks are well-capitalized and not directly exposed to toxic debt seen elsewhere. - Vulnerabilities and risks: - Rapid expansion of the banking system. - Significant share of foreign exchange-denominated assets and liabilities on banks’ balance sheets. - Nonperforming loans have started to increase in nominal terms, though remain modest as a fraction of total assets. - Stress tests indicate credit risk, rather than direct foreign exchange exposure, represents the main risk for the banking system. - Potential weaknesses in banks’ risk management practices, gaps in home-host supervisory arrangements, operational risks from financial innovation, and increasing risk appetite from new banks. - Immediate supervisory priorities: - Strengthen collaboration and information exchange between the BOU and home supervisors. - Agree contagion crisis arrangements. - Strengthen regulations on foreign currency lending to unhedged borrowers. - Strengthen BOU risk analysis and the stress testing framework. ### Monetary policy, foreign exchange intervention, and inflation strategy - Mission recommendation: sustain confidence in the currency while supporting disinflation; targeted intervention in the foreign exchange market to stem unwarranted overshooting of the exchange rate. - Operational advice: increase regular foreign exchange sales for sterilization purposes to support the objective. - Authorities plan to contain base money growth in 2008/09 well below that in the previous year; staff and authorities agreed twelve-month inflation should decline to 7 percent by June 2009. - Monetary policy objective: price stability and a medium-term inflation target of 5 percent. - Exchange rate guidance: - Allow exchange rate flexibility to dampen external shocks. - Use foreign exchange intervention judiciously to avoid excessive volatility. - Staff analysis suggests Uganda’s exchange rate is broadly in line with fundamentals. ### Fiscal stance, revenue performance, and spending priorities - Guidance: - Maintain the orientation of the 2008/09 budget and take a measured response to any cyclical weakening of tax revenues. - Avoid cuts to already-tight current spending levels to prevent accumulation of arrears. - Early fiscal-year performance: preliminary data for Q1 2008/09 showed revenue collection was five percent below target, notwithstanding higher-than-expected inflation. - Specific commitments: - If additional funds appropriated for the roads sector in the 2008/09 budget are not utilized they will be ring-fenced and carried over. - The 2008/09 budget includes an allocation of one percent of GDP for the clearance of old arrears. - Authorities remain committed to increasing tax collection by ½ percent of GDP annually. ### Fiscal projections and medium-term framework (percent of GDP — text table highlights) - Revenue (excluding grants): 2008/09 13.0; 2009/10 12.9; 2010/11 13.4; 2011/12 13.9; 2012/13 14.4; 2013/? 14.9 - Domestic primary expenditure: 2008/09 13.9; 2009/10 14.7; 2010/11 16.3; 2011/12 17.7; 2012/13 18.5; 2013/? 19.1 - Current expenditures net of interest payments: 2008/09 10.4; 2009/10 8.9; 2010/11 8.3; 2011/12 8.7; 2012/13 10.1; 2013/? 10.1 - Domestically-financed development expenditures: 2008/09 2.9; 2009/10 4.7; 2010/11 7.4; 2011/12 8.5; 2012/13 8.0; 2013/? 8.6 - Domestic primary balance: 2008/09 -0.9; 2009/10 -1.8; 2010/11 -2.9; 2011/12 -3.7; 2012/13 -4.1; 2013/? -4.2 - Financing: 2008/09 0.9; 2009/10 2.0; 2010/11 2.9; 2011/12 3.7; 2012/13 4.1; 2013/? 4.2 - Donor budget support (grants and loans): 2008/09 2.0; 2009/10 2.8; 2010/11 2.8; 2011/12 3.3; 2012/13 4.0; 2013/? 4.2 - Memo: Total expenditure 2008/09 17.8; 2009/10 20.6; 2010/11 20.4; 2011/12 20.8; 2012/13 21.4; 2013/? 21.6 ### Infrastructure, spending effectiveness, and investment financing - Medium-term plan: scale up investment in transport, energy, and water for agricultural production. - Projected expenditure path: - Development expenditure projected to expand by nearly four percentage points of GDP from the level currently budgeted for 2008/09. - Total expenditure expected to taper off at nearly 22 percent of GDP by 2012/13. - Financing assumption: under conservative assumptions about future foreign assistance (significantly below the 8 percent average ratio to GDP observed over the last five years), the expenditure path could be financed through a combination of higher tax revenue and domestic borrowing. - Implementation risk: delays in project implementation could postpone expenditure. - Infrastructure gaps: electricity available to less than one-tenth of the population; low fraction of roads paved; railways in poor shape; telecommunication sector an exception. - Bujagali hydropower: - Project cost: US$800 million (financing secured December 2007). - Public sector guarantee: US$115 million. ### Reserves, external financing, and credit growth - Net international reserves (NIR): currently covering more than six months of imports. - Projected drawdown: US$117 million drawdown projected for 2008/09. - Reserve usage scenario: space to use some reserves to finance infrastructure needs and still maintain reserves in excess of four months of imports by 2012/13, assuming no further substantial impact from the global financial crisis. - Private sector credit: expected to grow at a healthy 20 percent per year. ### Debt sustainability and DSA findings - DSA baseline: public debt remains sustainable under baseline; significant reduction in debt due to MDRI. - Baseline external debt indicators: - PV of debt-to-GDP: 14.9 percent in 2006/07; 17.2 percent in 2009/10; 12.4 percent by 2027/28. - PV of debt-to-exports: 89.6 percent in 2006/07; peak at 141 percent in 2012/13. - Debt service-to-exports: peaks at 14.1 percent between 2007/08 and 2012/13 then declines. - Stress tests: - Standardized and historical stress tests leave debt indicators below thresholds for the next 20 years. - Combined shock increases PV-to-GDP to a peak of 22 percent in 2011/12 and PV-to-revenue to 156 percent in 2009/10 in the combined-shock scenario. - Extreme stress: PV of public external debt will not exceed 30 percent of GDP over the projection period; no debt-servicing problem indicated. - Policy implications: - Cautious borrowing strategy, continued stability-oriented fiscal policy, and careful investment selection to ensure value for money. ### Program performance, monitoring, and structural measures - PSI performance: - All assessment criteria for the fourth review observed. - Fiscal performance at end-June 2008 aligned with the 2007/08 budget and program’s fiscal consolidation objective. - Ceiling on net credit to government by the banking system observed. - Net domestic assets were well below the program ceiling due to larger-than-programmed accumulation of net international reserves by the BOU. - Indicative target for base money was exceeded by 6 percent; base money returned to program path in recent months. - Indicative targets on Poverty Action Fund spending and on the stock of domestic budgetary arrears were observed. - Structural measures and timing: - Implementation date for Integrated Personnel and Payroll System shifted from January to End-July 2009 due to procurement delays. - Verification of all arrears for 2007/08 expected by end-March 2009; budget includes 1 percent of GDP to clear old arrears. - Monitoring and reporting: - Quantitative assessment criteria and indicative targets set for December 2008, March 2009, June 2009, and June 2010. - Reporting requirements include frequent submission of BOU and fiscal data and notification at least ten business days prior to policy changes affecting the program. ### Key numerical indicators (selected) - Real GDP (percent change): 8.6; 9.8; 9.5; 7.4; 7.3; 7.1; 8.0; 8.0 - Broad money (M2, percent change): 16.7; 20.3; 30.3; 18.0; 17.6; 16.7; 17.6; 19.0 - Private sector credit (percent change): 22.9; 31.4; 56.1; 26.4; 19.9; 19.9; 19.9; 19.9 - Domestic investment (percent of GDP): 22.1; 24.1; 23.6; 27.3; 29.7; 30.3; 30.2; 31.0 - National savings (excluding grants, percent of GDP): 14.8; 15.4; 14.5; 17.7; 20.2; 21.3; 20.9; 22.2 - Current account balance (including grants, percent of GDP): -2.7; -3.6; -6.1; -5.3; -5.9; -5.5; -5.8; -5.4 - External debt (including Fund, percent of GDP): 11.0; 14.3; 12.3; 13.9; 15.6; 17.1; 18.3; 19.0 - Revenue (percent of GDP): 12.6; 13.3; 13.0; 12.9; 13.4; 13.9; 14.4; 14.9 - Overall balance (including grants, percent of GDP): -1.1; -2.4; -2.1; -3.5; -4.0; -3.9; -4.0; -3.8 - Gross foreign exchange reserves (months of next year's imports): 5.3; 6.0; 6.3; 5.7; 5.6; 5.0; 4.7; ... - Banking sector ratios (June series): Core capital/RWA: 16.5; 16.8; 16.7; 16.5; 18.7; 17.8; 19.4. NPAs/total advances: 2.9; 2.3; 2.8; 2.9; 3.4; 4.1; 4.1 - Fiscal operations (U Sh Billions, 2008/09 actual): Total revenue and grants 3,624; Revenue 2,667; Tax 2,524; Grants 957; Expenditures and net lending 3,856; Current expenditures 2,442; Development expenditures 1,217; Overall balance including grants -231; Excluding grants -1,188 - Program exchange rates (average cross rates for June 2008): Euro 1.55390; British pound 1.96497; Japanese Yen 0.00934; Kenya shilling 0.01570; Tanzania shilling 0.00084; SDR 1.61814; Uganda shilling (per US$1) 1,601.20 ### Statistical, institutional, and regional considerations - Data and statistical improvements: - UBOS rolled out a new measure of core inflation in June 2007; quarterly GDP index expected by July 2010. - March 2008 MFS mission found substantial progress; SRF-based monetary data scheduled for IFS introduction in January 2009. - Regional integration: - EAC integration offers opportunities; requires elimination of remaining trade barriers, harmonization of statistics, and attention to financial integration and potential currency union implications. - EAC stage benchmarks include inflation not exceeding 5 percent and external reserves covering more than four months of imports (stage 1) and more than 6 months (stage 2). - Oil exploration: - Confirmed petroleum development potential; small-scale production expected to commence in 2010; scale of recoverable reserves uncertain and oil production not yet incorporated into the macroeconomic framework. ### Staff appraisal and policy priorities - Uganda among the fastest-growing in Sub-Saharan Africa with high growth, low inflation, and steady poverty reduction built on two decades of sound policies. - Priorities emphasized: - Maintain macroeconomic stability. - Scale up investment in transport and energy infrastructure with value-for-money safeguards. - Broaden the domestic revenue base and press ahead with revenue mobilization. - Strengthen financial sector supervision and contingency cooperation with home supervisors. - Improve public financial management and arrears control. - Further develop tools and preconditions for a formal inflation-targeting framework. *Source: IMF staff report — Executive Summary and Chapter "11. The mission called for monetary policy to sustain confidence in the currency."* ### Executive Summary ...................................................................................................... ### _cr0979 - Executive Summary ...................................................................................................... ### Introduction and Recent Performance - Uganda’s real economic growth averaged close to 9 percent over the last 5 years. - Poverty declined from 55 percent of the population in 1992/93 to 31 percent in 2005/06. - The PSI-supported program remains on track; all assessment criteria for the fourth review have been met and staff recommends completion of the review. - Structural challenge: growth has not been accompanied by significant structural transformation; the economy remains more reliant on subsistence agriculture and less on high-productivity manufacturing. ### Shocks and Transmission Channels - Two major shocks in 2008: - Global surge in food and fuel prices, which pushed domestic inflation above 15 percent. - Global economic downturn, likely to reduce demand for exports and the availability of financing for critical investment projects. - Key transmission channels identified: - Private capital inflows (private remittances, foreign direct investment, portfolio flows, and loans) likely to revert to pre-2006 levels, implying lower investment and consumption. - Official inflows expected to remain broadly unchanged in nominal terms short-term but likely to decline as a share of the budget and output over the medium term. - Lower demand for Uganda’s exports from trading partners. - Heightened economic uncertainty may delay investment decisions. - Non-resident investors were estimated to have held some US$400 million in local government securities at end-September 2008. ### Macroeconomic Outlook and Key Indicators - Growth: - Staff estimates growth will fall to 7–7½ percent in 2008/09, from an average of 9½ percent during the previous three years. - Export growth projected to slow down to about 5 percent in 2008/09. - Inflation: - Core inflation rose to some 15 percent in 2008. - Analysis suggests pass-through from international food and fuel prices accounts for about 5 percentage points of the increase in the consumer price index. - Core inflation is expected to decline to around 7 percent by June 2009 as international food and fuel prices fall. - Fiscal and external positions: - Revenue collection likely to be somewhat weaker than projected in the budget; a trend that started in Q1 2008/09. - The fiscal impact may be mitigated by delays in the implementation of ambitious infrastructure projects. ### Financial Sector Assessment - Overall soundness: - Banks are well-capitalized and not directly exposed to toxic debt seen elsewhere. - Vulnerabilities: - Rapid expansion of the banking system. - Significant share of foreign exchange-denominated assets and liabilities on banks’ balance sheets. - Nonperforming loans have started to increase in nominal terms, though remain modest as a fraction of total assets due to rapid balance sheet growth. - Stress tests indicate credit risk, rather than direct foreign exchange exposure, represents the main risk for the banking system. - Potential weaknesses in banks’ risk management practices, gaps in home-host supervisory arrangements, operational risks from financial innovation outpacing banks’ systems and controls, and increasing risk appetite from a surge of new banks. ### Program Performance and Monetary-Fiscal Mix - PSI performance: - Fiscal performance at end-June 2008 aligned with the 2007/08 budget and program’s fiscal consolidation objective. - Ceiling on net credit to government by the banking system observed. - Net domestic assets were well below the program ceiling due to larger-than-programmed accumulation of net international reserves by the BOU. - The indicative target (ceiling) for base money was exceeded by 6 percent; base money returned to the program path in recent months. - Indicative targets on spending under the Poverty Action Fund and on the stock of domestic budgetary arrears were observed. - Policy calibration: - Monetary policy challenge: sustain confidence in the currency and support the disinflation process. - Fiscal policy guidance: maintain the orientation of the 2008/09 budget and take a measured response to any cyclical weakening of tax revenues. ### Medium-Term Outlook and Policy Priorities - Outlook: - Medium-term prospects remain favorable but growth constraints are likely to become more binding. - The international environment is expected to be more challenging, possibly for some years, affecting financing of investment projects. - Priority policies: - Scale up investment in transport and energy infrastructure to sustain and raise medium-term growth potential. - Broaden the domestic revenue base. - Ensure value for money in public spending. - Exchange rate: - Staff analysis suggests Uganda’s exchange rate is broadly in line with fundamentals. *Source: IMF staff report — Executive Summary (Country Report _cr0979).* ### 11. The mission called for monetary policy to sustain confidence in the currency ### 11. The mission called for monetary policy to sustain confidence in the currency ### Monetary policy, foreign exchange intervention, and inflation - Mission recommendation: sustain confidence in the currency while supporting disinflation; targeted intervention in the foreign exchange market to stem unwarranted overshooting of the exchange rate. - Operational advice: increase regular foreign exchange sales for sterilization purposes to support the objective. - Authorities' stance: long-standing policy of intervening only to avoid undue volatility; BOU had intervened strongly in recent months and regular foreign exchange sales for sterilization purposes had resumed. - Reserve safeguard: authorities underlined the need to safeguard reserves given the changed outlook for capital inflows. - Inflation objectives and stance: - Authorities plan to contain base money growth in 2008/09 well below that in the previous year. - Staff and authorities agreed the proposed monetary stance should allow twelve-month inflation to decline to 7 percent by June 2009, helped by falling world market prices. - Medium-term inflation objective: 5 percent. ### Fiscal stance, revenue performance, and spending priorities - Mission recommendation: measured response to cyclical weakening of revenues; avoid cuts to already-tight current spending levels. - Early fiscal-year performance: preliminary data for the first quarter of the fiscal year showed revenue collection was five percent below target, notwithstanding higher-than-expected inflation. - Risks and rationale: - Cuts could lead to accumulation of arrears. - Indications that the capital budget would be underspent argued for maintaining the current spending profile. - Authorities nonetheless felt the annual nominal revenue target could still be achieved and emphasized that ministries and spending agencies were working to implement the capital budget to the fullest extent possible. - Specific fiscal commitments and figures: - If additional funds appropriated for the roads sector in the 2008/09 budget are not utilized in the current fiscal year, unspent amounts would be ring-fenced and carried over to the next year. - The 2008/09 budget includes an allocation of one percent of GDP for the clearance of old arrears. - Authorities remain committed to their target of increasing tax collection by ½ percent of GDP annually. ### Fiscal projections and medium-term fiscal framework (text table highlights, percent of GDP) - Revenue (excluding grants): 2008/09 13.0; 2009/10 12.9; 2010/11 13.4; 2011/12 13.9; 2012/13 14.4; 2013/? 14.9 - Domestic primary expenditure: 2008/09 13.9; 2009/10 14.7; 2010/11 16.3; 2011/12 17.7; 2012/13 18.5; 2013/? 19.1 - Current expenditures net of interest payments: 2008/09 10.4; 2009/10 8.9; 2010/11 8.3; 2011/12 8.7; 2012/13 10.1; 2013/? 10.1 - Domestically-financed development expenditures: 2008/09 2.9; 2009/10 4.7; 2010/11 7.4; 2011/12 8.5; 2012/13 8.0; 2013/? 8.6 - Domestic primary balance: 2008/09 -0.9; 2009/10 -1.8; 2010/11 -2.9; 2011/12 -3.7; 2012/13 -4.1; 2013/? -4.2 - Financing: 2008/09 0.9; 2009/10 2.0; 2010/11 2.9; 2011/12 3.7; 2012/13 4.1; 2013/? 4.2 - Donor budget support (grants and loans): 2008/09 2.0; 2009/10 2.8; 2010/11 2.8; 2011/12 3.3; 2012/13 4.0; 2013/? 4.2 - Debt service, including exceptional financing: 2008/09 -1.7; 2009/10 -1.6; 2010/11 -1.4; 2011/12 -1.3; 2012/13 -1.1; 2013/? -0.9 - Domestic borrowing: 2008/09 -0.3; 2009/10 0.8; 2010/11 1.0; 2011/12 0.9; 2012/13 1.0; 2013/? 1.0 - Memo: Total expenditure 2008/09 17.8; 2009/10 20.6; 2010/11 20.4; 2011/12 20.8; 2012/13 21.4; 2013/? 21.6 - Memo: Total development expenditure 2008/09 5.5; 2009/10 9.4; 2010/11 10.5; 2011/12 10.7; 2012/13 10.1; 2013/? 10.5 - Note: Authorities' estimates for 2007/08 and 2008/09; staff projections for 2009/10 onwards. ### Infrastructure, spending effectiveness, and investment financing - Medium-term plan: government to scale up investment to address infrastructure needs (transport, energy, water for agricultural production). - Projected expenditure path: - Development expenditure projected to expand by nearly four percentage points of GDP from the level currently budgeted for 2008/09. - Total expenditure expected to taper off at nearly 22 percent of GDP by 2012/13. - Financing assumption: under authorities’ conservative assumptions about future foreign assistance flows (significantly below the 8 percent average ratio to GDP observed over the last five years), the expenditure path could be financed through a combination of higher tax revenue and domestic borrowing. - Implementation risk: possible delays in project implementation could result in postponement of expenditure. - Infrastructure gaps highlighted: electricity available to less than one-tenth of the population; low fraction of roads paved; railways in poor shape; telecommunication sector an exception. ### Reserves, external financing, and credit growth - Net international reserves (NIR): currently covering more than six months of imports. - Projected drawdown: US$117 million drawdown projected for 2008/09. - Reserve usage scenario: assuming the global financial crisis does not have a substantial impact beyond the US$117 million drawdown, there is space to use some reserves to finance infrastructure needs and still maintain reserves in excess of four months of imports by 2012/13. - Private sector credit: expected to grow at a healthy 20 percent per year, well above nominal GDP growth rates. ### Financial sector risks and supervision - Ownership structure: most banks foreign-owned. - Immediate priority: strengthen collaboration and information exchange between the BOU as host supervisor and home supervisors of banks operating in Uganda. - Crisis arrangement need: agree on contagion crisis arrangements to ensure problems in banks’ home countries are not resolved at the expense of Ugandan subsidiaries. - Risk analysis: BOU should strengthen its risk analysis. - Foreign-currency lending risk: foreign exchange-denominated loans represent about 30 percent of banks’ loan portfolios; important to strengthen regulations on foreign currency lending to unhedged borrowers to avoid undue exposure. - Authorities welcomed the mission’s advice and agreed with most recommendations. ### Exchange rate, competitiveness, and real exchange rate analysis - Recent movements: real exchange rate appreciated by some five percent over the past two years in the face of strong foreign exchange inflows. - Export performance: growth of exports has exceeded overall GDP growth in recent years; volume growth of major export commodities (except coffee) was either in line or above average world export volume growth. - Staff assessment: Uganda’s exchange rate is broadly in line with fundamentals. - Medium-term outlook: - Faster productivity growth than partner countries and strong official and private capital inflows could allow Uganda to sustain significant current account deficits and an appreciation of the equilibrium real exchange rate. - Risk of lower foreign exchange inflows due to the global financial crisis limits scope for appreciation in the short term. - Policy recommendation: allow exchange rate flexibility to dampen external shocks, use foreign exchange intervention judiciously to avoid excessive volatility. - Real exchange rate fundamentals analysis (Box 3) — summary of approaches and findings: - ERER approach: inconclusive; under- or overvaluation depends on exact model specification. - Macroeconomic balance (MB) approach: - Projected current account deficit under constant real exchange rate assumptions: 4 percent of GDP in the medium term. - Estimated equilibrium current account deficit (the “norm”): 5 percent of GDP. - Result: a real exchange rate appreciation of some 9 percent would be needed in the medium term given estimated elasticities. - External sustainability (ES) approach: - Results point to real exchange rate appreciation; magnitude depends on target for net foreign assets (NFA). - Example projections (1995–2004 NFA behavior): assuming high GDP growth (8 percent) and low inflation (5 percent), projected appreciation will be 4 percent if NFA targeted at -40 percent of GDP and 27 percent if NFA targeted at -60 percent of GDP. ### Other policy areas and developments - Regional integration: ongoing EAC integration represents an opportunity; requires technical work on eliminating remaining barriers to trade and harmonizing economic statistics; financial integration and potential currency union have significant policy implications. - Debt distress: joint World Bank–IMF analysis suggests Uganda’s risk of debt distress remains low; debt ratios improved substantially due to HIPC and MDRI debt relief and projected to remain low under the baseline. - Inflation-targeting reforms: progress toward adoption of a more formal inflation targeting framework; new measure of core inflation will be helpful; priority actions include developing high frequency economic activity indices and a formal inflation forecasting model. - Oil exploration: confirmed petroleum development potential; small-scale production expected to commence in 2010; scale of recoverable reserves uncertain and no discovery declared commercial; oil production not incorporated into the macroeconomic framework yet. ### Program implementation, monitoring, and structural measures - Monitoring: quantitative assessment criteria for December 2008 and June 2009; quantitative indicative targets for December 2008, March and June 2009, and June 2010; structural assessment criterion and benchmark set (MEFP, Tables 1 and 2). - Implementation timing change: date for structural assessment criterion on integrated payroll and pension system shifted from January to July 2009 due to procurement delays. - Arrears management: - IFMS introduction did not prevent accumulation of domestic arrears (stock rose from 0.5 to 0.7 percent of GDP between June 2006 and June 2007) nor allow timely reporting. - Authorities expect recent IFMS improvements and planned roll-out of integrated payroll and personnel system (a structural assessment criterion) to reduce new arrears. - Verification of all arrears for 2007/08 expected by end-March 2009; budget includes 1 percent of GDP to clear old arrears. ### Staff appraisal: growth, structural transformation, and policy priorities - Growth assessment: Uganda among the fastest-growing in Sub-Saharan Africa with high growth, low inflation, and steady poverty reduction built on two decades of sound policies. - Structural transformation: growth has not resulted in significant structural transformation; economy remains more reliant on subsistence agriculture and less on high-productivity manufacturing compared with countries experiencing similar sustained growth episodes. - Policy guidance emphasized: maintain macroeconomic stability, sustain investment in infrastructure with value-for-money safeguards, strengthen financial sector supervision and contingency cooperation with home supervisors, press ahead with revenue mobilization and public financial management reforms, and develop tools for formal inflation targeting. *Source: IMF staff mission report as presented in the chapter titled "11. The mission called for monetary policy to sustain confidence in the currency."* ### 31. In 2008 Uganda has been buffeted by two major shocks. First, the global surge in ### _cr0979 - 31. ### Shocks and near-term outlook - In 2008 Uganda was buffeted by two major shocks: the global surge in food and fuel prices, and the global economic downturn. - Food and fuel price surge caused domestic inflation to rise above 15 percent. - Global downturn likely to affect demand for Uganda’s exports and the availability of financing for critical investment projects. - Staff estimates that growth could fall to 7-7½ percent in 2008/09 as activity in construction and services slows. - Downside risks to economic growth are significant given heightened global uncertainty and increased exchange rate volatility related in part to Uganda’s open capital account. ### Monetary policy and inflation - Monetary policy objective: sustain confidence in the currency while supporting the disinflation process; primary objective remains price stability. - Targeted foreign exchange market intervention is warranted to avoid excessive volatility. - Bringing down core inflation will be helped by falling international food and fuel prices; monetary policy should seize the opportunity to bring inflation back down toward its medium-term target of 5 percent. - Headline inflation (end of period) from table: 4.4; 10.2; 12.5; 7.7; 5.0; 5.0; 5.0; 5.0. - Core inflation (end of period) from table: 7.3; 11.3; 12.1; 7.0; 5.0; 5.0; 5.0; 5.0. ### Fiscal policy guidance - Fiscal policy should maintain the orientation of the 2008/09 budget and offer a measured response to cyclical weakening of revenues. - Anticipated slowdown likely to make the ambitious revenue target harder to achieve. - Immediate cuts in current expenditures should be avoided to prevent exacerbating domestic arrears. - Signs that capital spending could fall short of target argue against rushed further expenditure reductions. ### Financial sector stability and recommendations - Banking sector remains sound overall: banks are well-capitalized and not directly exposed to toxic debt observed elsewhere. - Vulnerabilities: rapid expansion of the banking system and a significant share of foreign exchange-denominated assets and liabilities on banks’ balance sheets. - Stress tests indicate credit risk, rather than direct foreign exchange exposure, is the main banking system risk. - With most banks foreign-owned, priority actions include strengthening collaboration and information exchange between the Bank of Uganda (BOU) as host supervisor and home supervisors, and agreeing contagion crisis arrangements so problems in banks’ home countries are not resolved at the expense of Ugandan subsidiaries. - BOU should strengthen risk analysis; foreign exchange-denominated loans represent about 30 percent of banks’ loan portfolios and require ensuring borrowers are not exposed to undue unhedged risk. ### Medium-term outlook, investment needs, and exchange rate policy - Medium-term outlook remains favorable, but constraints on growth are likely to become binding. - Scaling up investment in transport and energy infrastructure is critical to sustain and raise medium-term growth potential. - Challenging international environment could affect financing of investment projects, placing a premium on broadening the domestic revenue base and ensuring value for money in public spending. - Uganda’s exchange rate is broadly in line with fundamentals; some real appreciation has occurred, but strong export performance indicates competitiveness is retained. - Over the medium term there is room for Uganda’s real exchange rate to appreciate as productivity growth outpaces partner countries. - In the short term, given an open capital account, the economy is best served by allowing exchange rate flexibility to dampen external shocks while using foreign exchange intervention judiciously to avoid unwarranted overshooting. ### Program status and consultations - The PSI-supported program remains on track; all assessment criteria for the fourth review have been met, and staff recommends completion of the review. - It is proposed that the next Article IV consultation be held in accordance with the decision on consultation cycles approved on July 15, 2002. ### Key numerical indicators (selected from tables) - Real GDP (percent change): 8.6; 9.8; 9.5; 7.4; 7.3; 7.1; 8.0; 8.0. - Broad money (M2, percent change): 16.7; 20.3; 30.3; 18.0; 17.6; 16.7; 17.6; 19.0. - Private sector credit (percent change): 22.9; 31.4; 56.1; 26.4; 19.9; 19.9; 19.9; 19.9. - Domestic investment (percent of GDP): 22.1; 24.1; 23.6; 27.3; 29.7; 30.3; 30.2; 31.0. - National savings (excluding grants, percent of GDP): 14.8; 15.4; 14.5; 17.7; 20.2; 21.3; 20.9; 22.2. - Current account balance (including grants, percent of GDP): -2.7; -3.6; -6.1; -5.3; -5.9; -5.5; -5.8; -5.4. - External debt (including Fund, percent of GDP): 11.0; 14.3; 12.3; 13.9; 15.6; 17.1; 18.3; 19.0. - Revenue (percent of GDP): 12.6; 13.3; 13.0; 12.9; 13.4; 13.9; 14.4; 14.9. - Overall balance (including grants, percent of GDP): -1.1; -2.4; -2.1; -3.5; -4.0; -3.9; -4.0; -3.8. - Gross foreign exchange reserves (months of next year's imports): 5.3; 6.0; 6.3; 5.7; 5.6; 5.0; 4.7; ... - Banking sector ratios (June series): Core capital/RWA: 16.5; 16.8; 16.7; 16.5; 18.7; 17.8; 19.4. NPAs/total advances: 2.9; 2.3; 2.8; 2.9; 3.4; 4.1; 4.1. - Fiscal operations (U Sh Billions, 2008/09 actual): Total revenue and grants 3,624; Revenue 2,667; Tax 2,524; Grants 957; Expenditures and net lending 3,856; Current expenditures 2,442; Development expenditures 1,217; Overall balance including grants -231; Excluding grants -1,188. *Source: Ugandan authorities; and IMF staff estimates and projections.* ### APPENDIX I. LETTER OF INTENT ### APPENDIX I. LETTER OF INTENT ### UPDATE and Program Context - MEFP transmitted December 5, 2008, from Kampala, Uganda, as part of the Government’s PSI engagement with the IMF. - MEFP summarizes performance through November 2008, policies and targets for 2008/09, and medium-term objectives. - Program horizon: three-year Policy Support Instrument (PSI) covering the July 2006–June 2009 financial program. ### I. Performance Under the PSI - All assessment criteria for the fourth review under the PSI were observed. - Fiscal performance in 2007/08 was in line with program projections: - Ceiling on net claims on government by the banking system was observed. - Ceiling on net domestic assets of the Bank of Uganda (BOU) and floor on the stock of net international reserves of the BOU were comfortably observed. - Base money exceeded somewhat the allowed 5 percent band with respect to the indicative target. - Indicative targets for poverty-related spending and on the stock of domestic budgetary arrears were met. ### II. Objectives and Policies Looking Forward - Central objective: maintain high economic growth to achieve rapid and sustained poverty reduction. - Preparing to replace PEAP with a new five-year National Development Plan (NDP) targeting real GDP growth in the 8-9 percent range. - Plan to significantly increase public investment in infrastructure, with focus on roads, energy, and agriculture. - Growth risk: 2008/09 growth could fall short of the 8 percent target due to the global financial crisis; likely channels include lower export and remittance demand and potential curtailment of bank lending. ### A. Fiscal Policy — Findings and Commitments - Revenue performance: below target in first months of 2008/09, but full-year target still expected to be within reach given higher-than-expected inflation and expected improvements in tax administration. - Expenditure: intend to maintain expenditure appropriations recently passed by Parliament; unspent allocations for trunk roads will be carried over to the next fiscal year if delays occur. - Medium-term anchor: ensure public sector does not crowd out private sector lending and does not endanger debt sustainability. - Guiding considerations for spending profile: - Implementation and absorption capacity (particularly once oil revenues begin to accrue). - Value-for-money and high rate of return on government spending. - Revenue strategy: continue policy of annually increasing tax collections by ½ percent of GDP. - Uganda Revenue Authority measures: speed-up collection of corporate income taxes due; increase audits for businesses with high import value declarations; use new data sources to reduce valuation fraud. - Arrears reduction: - New CCS arrears in 2007/08 estimated at U Sh 43 billion (compared to U Sh 100 billion in 2006/07). - Root causes: underbudgeting and failure by line ministries/agencies to abide by budgets. - Measures to reduce domestic expenditure arrears: - ensure adequate provision for utilities and rent expenditures; - enforce commitment control system by publishing quarterly lists of Votes and Agencies that over commit without authority; - ensure Accountant General does not recognize expenditure commitments made outside the IFMS system for both IFMS and non-IFMS Votes as arrears to be programmed for future budgets. - Payroll and pension systems: - Implement Integrated Personnel and Payroll System in three Commissions, four Ministries, and two local governments by End-July 2009 (implementation deadline extended from January 2009 due to procurement delays). - Oil revenue management: - Small-scale production expected to commence in 2009/10 for thermal power generation; timeline for full-scale commercial development remains unclear. - Intention to place oil revenues in a dedicated oil fund to be managed by the Bank of Uganda. - Use of resources to be captured in the Medium-Term Expenditure Framework and subject to existing public financial management regulations, including appropriation by Parliament. ### B. Monetary and Financial Sector Policies — Findings and Actions - Inflation objective: keep annual average underlying inflation at or below five percent guided by reserve money target. - 2007/08 price run-up largely due to international food and fuel prices; plan to substantially reduce growth of base money in 2008/09 while loosening the target level somewhat relative to the original 2008/09 program target. - In response to the global financial crisis: - BOU will use a mix of foreign exchange sales and domestic securities to sterilize excess liquidity to reduce exchange rate and interest rate pressures. - Pay attention to preventing undue exchange rate volatility given shallowness of Uganda’s foreign exchange markets. - Banking system monitoring and resilience: - Banks have remained sound and stable with large capital cushions and deposit mobilization providing stable funding. - Need for close monitoring due to potential deterioration in the external environment. - Financial stability measures to be implemented: - Enhance communication with markets to forestall panic and herd behavior. - Intensify oversight of bank credit evaluation policies and enforce regulation on unhedged foreign currency borrowing. - Improve cooperation and exchange of information with home supervisors of foreign-owned banks. - Seek to establish contingency cross-border crisis management arrangements for all financial institutions. - Expedite establishment of the credit registry and strengthen the deposit protection fund to align with international principles. - Strengthen capacity for financial risk analysis and reporting, including the stress testing framework. - Monetary policy framework development: - BOU preparing for an inflation targeting framework. - UBOS rolled out new measure of underlying (core) inflation in June 2007. - UBOS expected to roll out a quarterly GDP index by July 2010. - BOU to produce a semiannual monetary conditions report relating current economic trends to monetary operations and the inflation target. - Regional integration: - East African Common Market protocol negotiations ongoing; groundwork for EAC Monetary Union being laid. - Stage 1 (2007–2010) primary benchmarks: - overall Budget Deficit to GDP Ratio not more than 6 percent (excluding grants) and not more than 3 percent (including grants); - annual average inflation rates not to exceed 5 percent; - external reserves to cover more than four months of future imports of goods and non-factor services. - Stage 1 secondary criteria include: sustainable real GDP growth rate of not less than 7 percent; national savings to GDP ratio not less than 20 percent; sustainable debt-to-GDP and current account deficit ratios; stable and market-determined interest and exchange rates; implement 25 Core Principles of Bank Supervision and Regulation; adhere to Core Principles for Systematically Important Payment Systems. - Stage 2 (2011–2014) primary benchmarks: - overall Budget Deficit to GDP Ratio not more than 5 percent (excluding grants) and not more than 2 percent (including grants); - annual average inflation rates not to exceed 5 percent; - external reserves to cover more than 6 months of imports of goods and non-factor services. ### C. Other Structural Reforms and Projects - Electricity and energy: - Financing arrangements for the Bujagali hydropower project finalized; construction on track for completion by 2011. - Near-term government support for private sector through partial cost-bearing of temporary electricity generators. - Next major sustainable energy project: Karuma hydro electricity generation project; government may be sole developer if no private developer appears. - Financing for Karuma expected from accumulated Energy Fund resources and borrowing. - Legislation to govern use of Energy Fund resources expected to be tabled to Parliament in 2009. - Financial markets development: - Financial Markets Development Plan (FMDP) approved in May 2008 by the Monetary Affairs Committee (MAC) of the East African Community. - FMDP aims to develop and integrate Uganda’s financial markets with broader East African markets to support resource mobilization, economic diversification, and sustainable growth, and to harmonize regional macroeconomic policies. ### Key Quantitative Targets and Figures (selected from Attachment I and TMU) - Base money cumulative changes: - December 31, 2008: 239 (in billions of shillings) - March 31, 2009: 254 (in billions of shillings) - June 30, 2009: 290 (in billions of shillings) - June 30, 2010: 335 (in billions of shillings) - Net foreign assets (NFA) cumulative change: - December 31, 2008: -160 (in billions of shillings) - March 31, 2009: -187 (in billions of shillings) - June 30, 2009: -188 (in billions of shillings) - June 30, 2010: 117 (in billions of shillings) - Net domestic assets (NDA) cumulative change: - December 31, 2008: 399 (in billions of shillings) - March 31, 2009: 441 (in billions of shillings) - June 30, 2009: 478 (in billions of shillings) - June 30, 2010: 218 (in billions of shillings) - Quantitative assessment criteria (selected lines from Attachment I): - Ceiling on the increase in net domestic assets of the Bank of Uganda: - March 31, 2009: 174 - June 30, 2009: 399 - June 30, 2010: 441 - (other period numbers shown in table) - Ceiling on the increase in base money liabilities of the Bank of Uganda (indicative target): - March 31, 2009: 233 - June 30, 2009: 239 - June 30, 2010: 254 - (additional values up to 335 in table) - Program exchange rates (US$ per currency unit, average cross rates for June 2008): - Euro: 1.55390 - British pound: 1.96497 - Japanese Yen: 0.00934 - Kenya shilling: 0.01570 - Tanzania shilling: 0.00084 - SDR: 1.61814 - Uganda shilling (per US$1): 1,601.20 ### Structural Assessment Criterion and Benchmark (Attachment I. Table 2) - Structural Assessment Criterion: - 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) by End-July 2009. - Structural Benchmark: - Submit to Parliament draft regulatory framework for pension funds by End-December 2008. *Letter of Intent (Kampala, Uganda, December 5, 2008) and accompanying Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding as provided in APPENDIX I.* ### 3. Base money is defined as the sum of currency issued by Bank of Uganda (BOU) and ### _cr0979 - 3. Base money is defined as the sum of currency issued by Bank of Uganda (BOU) and ### A. Definition of base money - Base money is defined as the sum of: - currency issued by Bank of Uganda (BOU), and - commercial banks’ deposits in the BOU. - Commercial bank deposits include statutory required reserves and excess reserves held at the BOU and are net of: - deposits of closed banks at the BOU, and - Development Finance Funds (DFF) contributed by commercial banks held at the BOU. - Base money limits will be cumulative changes from the daily average of: - June 2008 to the daily average of December 2008, and March and June 2009, and - cumulative changes from the daily average of June 2009 to the daily average of June 2010. ### B. Net Claims on the Central Government by the Banking System (NCG) - NCG is defined as: - the difference between outstanding bank credits to the central government and the central government's deposits with the banking system, - excluding deposits in administered accounts and project accounts with the banking system, including the central bank. - Credits comprise: - bank loans and advances to the government, and - holdings of government securities and promissory notes. - Central government’s deposits with the banking system include the full amount of IMF MDRI. - NCG will be calculated based on balance sheets of the monetary authority and commercial banks as per the monetary survey. - Quarterly limits on the change in NCG by the banking system will be cumulative beginning end-June in the previous fiscal year. ### C. Net International Reserves (NIR) of the Bank of Uganda - NIR of the BOU (for program monitoring) are defined as: - reserve assets of the BOU net of short-term external liabilities of the BOU. - Reserve assets are defined as external assets readily available to, and controlled by, the BOU and exclude pledged or otherwise encumbered external assets, including assets used as collateral or guarantees for third-party liabilities. - Short-term external liabilities are liabilities to nonresidents of original maturities less than one year contracted by the BOU and include outstanding IMF purchases and loans. - For program-monitoring purposes, reserve assets and short-term liabilities at the end of each test period will be calculated in U.S. dollars by converting them from their original currency denomination at program exchange rates (as specified in para. 2). ### D. Ceiling on Domestic Budgetary Arrears of the Central Government - Stock of domestic payment arrears under the Commitment Controls System (CCS) will be monitored annually. - Domestic payments arrears under the CCS are defined as: - the sum of all bills received by a central government spending unit or line ministry delivered prior to the beginning of the current fiscal year, and - 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 arrears accumulated at IFMS and non-IFMS 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 2008/09 and 2009/10. - The program ceiling on the stock of CCS arrears only covers accumulation of arrears after end-June 2004 (“group B arrears”). - Verified stock of group B arrears is estimated at U Sh 111 billion as of June 2007. ### E. Expenditures Under The Poverty Action Fund (PAF) - Compliance with the indicative target on minimum expenditures under the PAF will be verified on the basis of releases (PAF resources made available to spending agencies). ### F. Adjusters (NDA, NIR, NCG) - NDA and NIR targets are based on program assumptions regarding: - budget support, - assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), - external debt-service payments, - and automatic access by commercial banks to the BOU’s rediscount and discount window facilities. - NCG target additionally depends on assumptions regarding domestic nonbank financing of central government fiscal operations. - NDA target depends on legal reserve requirements on deposits in commercial banks. - Schedule A (Budget Support Plus Total HIPC Initiative Assistance), cumulative billions of Uganda shillings, beginning July 1 of the fiscal year: - Quarter December 31, 2008 — 309 - March 31, 2009 — 509 - June 30, 2009 — 859 - June 30, 2010 — 1,166 - Adjustment rule: ceilings/floors on NDA, NCG, and NIR are adjusted by the amount budget support, grants and loans, plus HIPC Initiative and MDRI assistance, exceed (falls short of) projected amounts. - Schedule B (Debt Service Due, Before HIPC Initiative Assistance), cumulative billions of Uganda shillings, beginning July 1 of the fiscal year: - Quarter December 31, 2008 — 111 - March 31, 2009 — 158 - June 30, 2009 — 184 - June 30, 2010 — 168 - Adjustment rule: ceilings/floors on NDA, NCG, and NIR will be adjusted by the amount debt service due plus payments of external debt arrears less deferred payments (exceptional financing) falls short of (exceeds) Schedule B projections. - Deferred payments are 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 C (Nonbank Financing Minus Repayment of Domestic Arrears), cumulative billions of Uganda shillings, beginning July 1 of the fiscal year: - Quarter December 31, 2008: (A) Nonbank financing — 58; (B) Domestic arrears repayment — 163; (C) Total = (A) – (B) — -105 - March 31, 2009: (A) Nonbank financing — 145; (B) Domestic arrears repayment — 225; (C) Total = (A) – (B) — -80 - June 30, 2009: (A) Nonbank financing — 170; (B) Domestic arrears repayment — 300; (C) Total = (A) – (B) — -130 - June 30, 2010: (A) Nonbank financing — 170; (B) Domestic arrears repayment — 50; (C) Total = (A) – (B) — 120 - 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 Schedule C programmed cumulative amounts. - For this adjuster, payment of domestic group A arrears cannot exceed the programmed amount by more than U Sh 45.0 billion. - Ceiling on NDA of the BOU for end-June will be 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 of the BOU for every test date will be adjusted downward/upward to reflect decreases/increases in legal reserve requirements on deposits in commercial banks. The adjuster is calculated as the percent change in the reserve requirement multiplied by the actual amount of required reserves (Uganda shillings and foreign-currency denominated) at the end of the previous calendar month. ### G. External Borrowing Contracted or Guaranteed and Arrears - Assessment criterion on short-term debt: contracting or guaranteeing external debt with original maturity of one year or less by the government or the BOU. Excluded: 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 is defined as loans with a grant element of less than 35 percent, calculated using average commercial interest rates references (CIRRs) published by the OECD. - In assessing concessionality: - 10-year average CIRRs should be used to discount loans with maturities of at least 15 years, - 6-month average CIRRs should be used for loans with shorter maturities. - Margins to be added to both 10-year and 6-month averages for differing payment 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 to be observed on a continuous basis. - Coverage includes financial leases and other instruments giving rise to external liabilities on nonconcessional terms. - Exclusions: changes in indebtedness 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. - Bujagali project is defined for the program as the hydroelectric dam and related equipment located at the dam site. - Definition of “debt” follows point 9 of the Guidelines on Performance Criteria with Respect to External Debt (Executive Board Decision No. 12274-(00/85), August 24, 2000), including commitments contracted or guaranteed for which value has not been received. Debt includes loans, suppliers' credits, and leases (present value at lease inception), and includes arrears, penalties, and judicially awarded damages arising from failure to make payments under contractual obligations that constitute debt. - Ceiling on accumulation of new external payments arrears is zero; to be observed continuously. 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. - External arrears coverage comprises those 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. ### H. Monitoring and Reporting Requirements - Authorities will inform IMF staff in writing at least ten business days (excluding legal holidays in Uganda or in the United States) prior to making any changes in economic and financial policies that could affect the outcome of the financial program; such policies include but are not limited to: - customs and tax laws (including tax rates, exemptions, allowances, and thresholds), - wage policy, - financial support to public and private enterprises. - Authorities will inform IMF staff of any nonconcessional external debt contracted or guaranteed by the government, the BOU, or any statutory bodies, and any accumulation of new external payments arrears. - 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. - Information submission: regularly to IMF staff with frequency and submission time lag as indicated in Table 1; information should be mailed electronically to AFRUGA@IMF.ORG. - Selected reporting requirements and schedules (frequency — submission lag): - Issuance of government securities — Weekly — 5 working days - Interest rates on government securities — Weekly — 5 working days - Operations in the foreign exchange market and daily average exchange rates — Weekly — 5 working days - Consumer price index — Monthly — 2 weeks - Balance sheet of the BOU, consolidated accounts of the commercial banks, and monetary survey — Monthly — 4 weeks - Composition of foreign assets and liabilities of the BOU by currency — Monthly — 4 weeks - Statement of cash balances in project accounts; total value of outstanding government securities from the Central Depository System (CDS); stock of government securities held by commercial banks from the CDS — Monthly — 6 weeks - Summary of monthly commodity and direction of trade stats; disbursements, principal and interest, flows of debt rescheduling and debt cancellation, arrears, committed undisbursed balances—by creditor; composition of nominal HIPC Initiative assistance — Monthly — 6 weeks - Summary of stock of external debt, external arrears, and committed undisbursed loan balances by creditor — Quarterly — 6 weeks - Standard off-site bank supervision indicators for deposit money banks — Quarterly — 4 weeks - Bank of Uganda: summary table of preliminary program performance comparing actual monthly outcome with adjusted program targets for (i) base money; (ii) net claims on central government by the banking system; (iii) stock of external arrears; (iv) new nonconcessional external borrowing; and (v) net international reserves — Quarterly — 5 weeks - Bank of Uganda: daily average amount of commercial bank automatic access to the BOU discount window and rediscounting of government securities by commercial banks — Quarterly — 4 weeks - Summary of central government accounts: revenues on cash basis; expenditures when checks are issued except specified exceptions — Monthly — 6 weeks - Summary of outstanding stock of group (B) domestic arrears — Quarterly — 6 weeks - Summary of contingent liabilities of the central government — Quarterly — 6 weeks - Detailed central government account of disbursed budget support grants and loans, HIPC support, and external debt service due and paid — Monthly — 4 weeks - Detailed central government account of disbursed donor project support grants and loans — Monthly — 6 weeks - Statement on new loans contracted during the period according to loan agreements — Quarterly — 6 weeks - Ministry of Finance: updated national accounts statistics (real and nominal) according to UBOS and medium-term projections — Quarterly — 4 weeks *Source: IMF — Uganda: 2008 Article IV Consultation And Fourth Review Under the Policy Support Instrument—Informational Annex (December 19, 2008).* ### APPENDIX I. UGANDA: RELATIONS WITH THE FUND ### APPENDIX I. UGANDA: RELATIONS WITH THE FUND (As of October 31, 2008) ### I. Membership Status - Joined 09/27/1963; Article VIII ### II. General Resources Account - Quota 180.50 100.0 - Fund holdings of currency 180.51 100.0 ### III. SDR Department - Net cumulative allocation 29.40 100.00 - Holdings 0.34 1.17 ### IV. Outstanding Purchases and Loans - Enhanced Structural Adjustment Facility (ESAF)/Poverty Reduction and Growth Facility (PRGF) arrangements 6.00 3.32 ### V. Financial Arrangements - PRGF: Approval Date 09/13/2002 — Expiration Date 01/31/2006 — Amount Approved (SDR Million) 13.50 — Amount Drawn (SDR Million) 13.50 - ESAF/PRGF: Approval Date 11/10/1997 — Expiration Date 03/31/2001 — Amount Approved (SDR Million) 100.43 — Amount Drawn (SDR Million) 100.43 - ESAF: Approval Date 09/06/1994 — Expiration Date 11/09/1997 — Amount Approved (SDR Million) 120.51 — Amount Drawn (SDR Million) 120.51 - ESAF: Approval Date 04/17/1989 — Expiration Date 06/30/1994 — Amount Approved (SDR Million) 219.12 — Amount Drawn (SDR Million) 219.12 ### VI. Projected Payments to Fund (based on existing use of resources and present holdings of SDRs) - Forthcoming Principal - 2008 0.20 1.00 1.20 - Forthcoming Charges/Interest - 2009 0.21 - 2010 0.59 - 2011 0.59 - 2012 0.58 - 2012 0.58 - Total - 2009 0.21 - 2010 0.59 - 2011 0.79 1.58 - 2012 1.78 ### VII. Implementation of HIPC Initiative - Decision point dates: Original framework 4/23/1997; Enhanced framework 2/7/2000 - Assistance committed (1999 NPV terms) - Total assistance (US$ million) 347.00 656.00 - Of which: Fund assistance (US$ million) 68.90 91.00 - Completion point dates: Original April 1998; Enhanced May 2000 - Delivery of Fund assistance (SDR million) - Assistance disbursed to the member 51.51 68.10 119.61 - Interim assistance ... 8.20 8.20 - Completion point balance 51.51 59.90 111.41 - Additional disbursement of interest income 2.06 2.06 ### VIII. Implementation of MDRI Assistance - I. Total Debt Relief (SDR Million) 87.73 - Of which: MDRI 75.85 - HIPC 11.88 - II. Debt Relief by Facility (SDR Million) — 87.73 - Eligible Debt Delivery Date GRAPRGFTotal January 2006 N/A87.7387.73 ### IX. Safeguards Assessments - An update assessment of the Bank of Uganda (BOU) completed on April 10, 2007 concluded that the BOU had strengthened its safeguards framework since the 2003 assessment. - Main developments: implementation of International Financial Reporting Standards, publication of financial statements, establishment of an audit committee, strengthening of the internal audit function. - Staff recommendations: address remaining vulnerabilities in the legal and internal control areas. ### X. Exchange Rate Arrangement - The official exchange rate is determined on the interbank market for foreign exchange. - As of October 31, 2008, the official exchange rate was U Sh 1,881 per U.S. dollar. - The exchange system is free of restrictions on the making of payments and transfers for current international transactions. - Uganda’s exchange rate regime is classified as managed float without predetermined path. ### XI. Article IV Consultation - The Executive Board concluded the last Article IV consultation on December 15, 2006. - The next Article IV consultation with Uganda will be held on the 24-month cycle, subject to the provisions of the decision on consultation cycles approved on July 15, 2002. - FSAP activity: joint World Bank/Fund missions visited Kampala in February and April 2001; final report provided in November 2001; MFD mission discussed report in November 2002; Financial System Stability Assessment prepared for Board discussion in February 2003; FSAP update mission visited in November 2004. ### XII. Policy Support Instrument (PSI) - Uganda initiated a 16-month PSI with the Fund in January 2006. - The 16-month PSI was replaced by a new three-year PSI in December 2006. ### XIII. Technical Assistance (TA) Provided - Extensive TA across fiscal, tax, budgeting, customs, local government budgeting, budgeting and commitment control, Tax Policy and Administration, tax investment incentives harmonization, URA reform, CCS implementation, and Fiscal Decentralization Strategy. - STA missions on macroeconomic statistics, national accounts, money and banking statistics, government financial statistics, balance of payments statistics, and data ROSC preparation. - MFD TA focused on liquidity management, exchange rate intervention, central bank accounting and auditing, and banking supervision; resident advisor appointed mid-July 2001 and subsequently replaced by a second resident advisor. - Specific mission dates: FAD mission April 1998; FAD mission September 1998; resident advisor August 1998–Oct 1999; FAD resident advisor Nov 1998–June 2002; FAD mission October 2000; joint Bank/Fund TA October 2003; FAD TA October 2004, April 2005, April–May 2006; AFRITAC-East resident advisors June 2004–February 2005; STA multisector December 1998; STA follow-ups March–April 2000; GFS mission December 2001; GFS follow-up May 2003; balance of payments mission February–March 2002; BOP follow-up August 2003; STA mission February 2005; MFD missions July 2001 and January 2002; MFD TA March and September–October 2002; TA evaluation June 2003; MFD mission March 2004; FSAP update November 2004; TA on monetary policy August 2005; joint MCM/BOU workshop April 2006. ### XIV. Future Technical Assistance Priorities - Tax administration - Public expenditure management, especially control and monitoring of public arrears at both central and local government levels - Monetary and exchange rate management - Bank supervision - National accounts statistics - Reporting standards for government finance statistics - Monetary and balance of payments statistical reporting - Central bank accounting and audit - Debt management ### XV. Resident Representative - The Fund has maintained a resident representative in Uganda since July 1982. --- ### APPENDIX II. JOINT BANK-FUND WORK PROGRAM, JANUARY – JUNE 2009 ### A. Mutual information on relevant work programs - World Bank key elements of work program in next 12 months: - Poverty Reduction Support Credit to enhance productivity and competitiveness, effective delivery of social services, public sector management, and human development issues. — June 2009 - Continued portfolio focus: infrastructure development (transport and energy), local government service delivery, agricultural research and training, Kampala infrastructure development, Northern Uganda rehabilitation, agricultural technology and advisory services, Northern Uganda social protection, roads development, secondary education, minerals development and environment. — June 2009 - Public Expenditure Review with focus on health sector and public sector wages. — June 2009 - Study on fostering financial deepening — June 2009 - Study on “Understanding and Elimination of Non-tariff barriers to support Trade Integration with the EAC” — June 2009 - Fifth Review under PSI Mar.-Apr. 2009 — June 2009 - Staff visit on the government budget May 2009 — Expected delivery June 2009 - IMF work program in next 12 months: - Sixth Review under PSI October 2009 — Expected delivery Dec. 2009 ### B. Requests for work program inputs - Fund requests to Bank: 1. Finalize the update of the broad strategic priorities in the PFM area (FINMAP) and get agreement with authorities on next steps. — Jun 2009 2. Update of civil service reform agenda. — Jun 2009 - Bank requests to Fund: 1. Continue to monitor the causes of changes in the stock and composition of domestic arrears, feeding advice on remedies (including through IFMS) into the FINMAP update. — Ongoing ### C. Agreement on joint products and missions - Joint products in next 12 months: - Collaborate on the Joint DSA — Sep.- Oct. 2009 — Expected delivery Dec. 2009 *APPENDIX I. UGANDA: RELATIONS WITH THE FUND (As of October 31, 2008).* ### APPENDIX III. UGANDA: STATISTICAL ISSUES ### APPENDIX III. UGANDA: STATISTICAL ISSUES ### Data provision and participation - Uganda participates in the General Data Dissemination System (GDDS); metadata were initially posted in May 2000, with metadata updates received in December 2008. - Uganda is participating in three modules of the Fund’s GDDS Project for Anglophone Africa: preparation for subscription to the Fund’s Special Data Dissemination Standard (SDDS); government finance; and monetary and financial statistics. - The GDDS Project is funded by the U.K. Department for International Development (DFID). - A STA mission prepared a data ROSC in February 2005; results published in July 2006. - An SDDS mission assessed dissemination practices in April 2007. ### Real sector statistics - Quarterly value added at constant 2002 prices has been developed using ISIC Rev III groups; methodological shortcomings remain in benchmarking and indicator series selection. - UBOS compiles Major and Main Index of Industrial Production (IIP) from a sample of manufacturing establishments in the industrial belt. - Labor market indicators (employment, unemployment, wages/earnings): - UBOS aims for annual compilation and dissemination, but resource and data unavailability cause dissemination with a two year lag. - Consumer prices: - UBOS collects prices from six urban centers; inflation rates are disseminated on the last working day of every month. - Plans exist to expand coverage to include another urban center. - Producer Price Index for Manufacturing compiled from a sample of manufacturing establishments. ### Government finance statistics - MoFPED compiles fiscal statistics on general government including budgetary central government and local governments, excluding extra budgetary institutions and the National Social Security Fund. - A revised chart of accounts was implemented from July 1, 2003 for budgetary central government and local government units. - Uganda reports Government Finance Statistics (GFS) data according to the GFSM 2001 framework for the GFS Yearbook, but institutional coverage is limited to budgetary central government and local governments. - External debt for the public sector, external debt guaranteed by the public sector, and debt service schedule data are disseminated in millions of dollars and in Uganda shillings (using end of year exchange rates) for the fiscal year (July to June). - Uganda does not report any high frequency data for inclusion in the IFS. - Under the DFID Phase II project, a GFS mission visited Uganda in September 2008 to assist with improving fiscal data. ### Monetary and financial statistics - March 2008 monetary and financial statistics mission found substantial progress in reporting data to the Fund using standardized report forms (SRF) aligned with the Monetary and Financial Statistics Manual (MFSM). - Beginning May 2008, commercial banks began reporting data on the new system providing: - clear identification of positions with nonresidents; - breakdowns by domestic sectors and financial instruments. - The SRF-based monetary data were scheduled to be introduced in International Financial Statistics (IFS) and the IFS Supplement in January 2009. - Data on other depository corporations do not yet include positions of credit institutions and microfinance deposit institutions that accept deposits. - No progress yet on savings and credit cooperatives. ### External sector statistics - The 2005 data ROSC found balance of payments statistics broadly follow BPM5, but noted departures in definitions, scope, and classifications. - Recommended development of new source data and estimation techniques in: exports of freight and imports of passenger transportation, compensation of employees, direct investment abroad, portfolio investment and financial derivatives. - International trade data improvements suggested: incorporate results from the Survey of Informal Cross-Border Trade and greater use of trade partner country data. - Quarterly and fiscal year data disseminated in BOU’s Quarterly Economic Report and Annual Report, and UBOS annual Statistical Abstract. - Quarterly balance of payments statistics are disseminated in analytical format or on the basis of standard components in accordance with BPM5. - April 2008 mission reviewed private sector financial survey, informal cross-border trade survey, estimation methods for remittances; proposed: - methods for gaps in recording of securities market transactions by nonresidents via secondary market and nominee accounts; - a priority program to cover developments in the oil industry; - several alternative methods to improve remittances estimation; - a timely, small-scale quarterly survey of financial flows. ### Uganda: Table of Common Indicators Required for Surveillance (As of December 3, 2008) — selected entries - Exchange rates: Date of Latest Observation: Aug. 2008; Date Received: Sep. 2008; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. - International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation: Jan. 2007; Date Received: Apr. 2007; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. - Reserve/base money: Sep. 2008 (Date Received: Nov. 2008); Broad money: Sep. 2008 (Date Received: Nov. 2008); Central bank balance sheet: Sep. 2008 (Date Received: Nov. 2008); Consolidated balance sheet of the banking system: Sep. 2008 (Date Received: Nov. 2008). All: Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. - Interest rates: Aug. 2008 (Date Received: Sep. 2008); Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. - Consumer price index: Sep. 2008 (Date Received: Oct. 2008); Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. Data Quality – Methodological Soundness and Accuracy and Reliability entries include codes such as O, LO, LNO, NO as per the ROSC. - Revenue, expenditure, balance and composition of financing — central government: Latest observation June 2006; Date Received July 2006; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. Data quality codes noted (e.g., O, LNO, O, LO). - GDP/GNP: 2006 (Date Received July 2007); Frequency: A; Frequency of Reporting: A; Frequency of Publication: A. Data quality codes noted (e.g., LO, LO, O, LO). - Gross external debt: Dec. 2005 (Date Received May 2006); Frequency: M; Frequency of Reporting: Q; Date Received shown as May 2006; other publication fields noted as "...". - International Investment Position: 2007 (Date Received May 2008); Frequency: A; Frequency of Reporting: A; Frequency of Publication: A. (Note: Data quality assessments reflect the ROSC published on July 21, 2006 based on a mission during February 9-22, 2005. Assessment codes: fully observed (O), largely observed (LO), largely not observed (LNO), not observed (NO).) ### Joint IMF/World Bank Debt Sustainability Analysis — Background and key findings - Prepared by IMF and World Bank staffs; approved December 19, 2008. - Based on the joint Low-Income Country Debt Sustainability Framework, Uganda is assessed to be at low risk of debt distress. - HIPC and MDRI debt relief led to a drastic reduction in Uganda’s debt burden. - Total MDRI relief (including future interest) delivered in 2005/06 and 2006/07 was about US$3.6 billion. - Debt burden thresholds for a “strong performer” per the World Bank’s CPIA: NPV of debt to GDP ratio of 50 percent; NPV of debt-to-exports ratio of 200 percent; NPV of debt-to-revenue ratio of 300 percent; debt-service-to-exports ratio of 25 percent; debt-service-to-revenue ratio of 35 percent. - External public debt indicators (selected historical values): - 2004/05 External public debt (US $ bn): 4.4 - 2005/06 External public debt (US $ bn): 4.5 - 2006/07 External public debt (US $ bn): 1.5 - 2004/05 External public debt (percent of GDP): 47.9 - 2005/06 External public debt (percent of GDP): 45.7 - 2006/07 External public debt (percent of GDP): 11.4 - PPG debt service/Exports (selected years): 14.2; 8.9; 4.1 ### Infrastructure financing and fiscal strategy - Financing for the Bujagali hydroelectric plant secured in December 2007. - Project cost: US$800 million. - Public sector guarantee: US$115 million (compared to US$400 million non-concessional borrowing envisaged in the 2007 DSA). - From 2008/09, budget allocations to the road sector almost doubled to 4.5 percent of GDP over three years, to be financed mainly domestically. - Construction of Karuma hydroelectric plant will start in 2009/10 with about 0.7 percent of GDP per annum to be provided in the budget. - Infrastructure for oil sector (small refinery and pipelines) is at the planning stage. ### Assumptions underlying the baseline DSA (Box 1 — key assumptions) - Bujagali hydroelectric plant: construction began in 2007/08, expected completed by 2009/10. - Real GDP growth: - Expected to decline to 7 percent over the next three years (compared to 9½ percent in 2008/09), then increase to 8 percent in 2011/12. - GDP deflator growth: - Expected to decline from 16.3% in 2008/09 to about 5-6%. - Exports of goods and services: - Projected to grow 13 percent on average between 2007/08 and 2027/28. - Current account: - Would be above its historical norm by 1½ percentage points on average between 2007/08 and 2012/13, peaking at 5½ percent of GDP in 2007/08. - Expected to stabilize at about 3 percent of GDP in the outer years. - Excluding grants, the current account will average 3.2 percent of GDP over the twenty year period. - Fiscal revenues: - Assumed to increase from 12½ percent of GDP in 2006/07 to 15 percent of GDP in 2012/13 and 18 percent beyond 2020. - Grants: - Assumed to decline from 4.5 percent of GDP in FY 2006/07 to around 3 percent of GDP in the medium term; assumed to decline to 2½ percent of GDP in 2018 and below 2 percentage points of GDP in outer years. - Non-interest expenditures: - Include 0.6 percent of GDP over four years for construction of Karuma hydroelectric plant and stepped up road investment; assumed to taper off at 20 percent of GDP, consistent with zero primary balance in the long term. - Official external loans: - Projected to increase tri-fold over 20 years from about US$500 million in 2008/09. - DSA assumes multilateral creditors will scale up support and IDA lending throughout the projection period; on average, multilateral and bilateral official debt contracted on concessional terms. - US$115 million guarantee for Bujagali is assumed to be called in 2008/09 and paid for in five annual installments starting in 2009/10. - Compared with the 2007 DSA: - Current baseline assumes a resilient near-term economy and higher real GDP growth in the medium term despite global downturn. - Export growth assumed at an average of 10 percent between 2008 and 2013 versus about 17 percent in the 2007 DSA. - The DSA uses improved statistics on transfers and services and incorporates best estimates on private external debt. ### Vulnerabilities highlighted - The economy is small and open; external shock risks remain (export growth slowdown, reversal of private capital inflows including remittances, FDI, portfolio flows). - A permanent shock to real GDP growth with growth smaller by roughly 1 percent of GDP on average compared to baseline, and with nominal fiscal expenditure not adjusted, results in marked deterioration in public debt — highlighting risk if growth dividends from investments are lower than expected. *Source: APPENDIX III. UGANDA: STATISTICAL ISSUES; Joint IMF/World Bank Debt Sustainability Analysis (December 19, 2008).* ### 5. External debt is expected to remain sustainable over the next 20 years. (Tables 1a, and 1b, ### 5. External debt is expected to remain sustainable over the next 20 years. (Tables 1a, and 1b, and Figures 1 and 2). ### Baseline outlook for external debt - All five debt-burden indicators remain well below their policy-dependent thresholds throughout the period. - PV of debt-to-GDP ratio: - 14.9 percent in 2006/07 - 17.2 percent in 2009/10 (rise reflecting mainly Bujagali financing as well as higher IDA loans) - 12.4 percent by 2027/28 (decline) - PV of debt-to-exports: - 89.6 percent in 2006/07 - Peak at 141 percent in 2012/13 (as borrowing increases while export growth decelerates on account of the slowdown in global demand) - Debt service-to-exports ratio: - Gradual increase between 2007/08 and 2012/13 to a peak of 14.1 percent (by 2 percentage point higher than in 2006/07) - Declines thereafter, reflecting repayments for Bujagali and the delivery of HIPC and MDRI assistance ### Standardized sensitivity analysis and stress tests - Purpose: assess risks from a deeper global downturn affecting key macroeconomic variables (weaker medium-term export growth, sharp Shilling depreciation, lower concessionality of new external borrowing). - Outcome under standardized stress tests: - Debt-to-GDP, debt-to-exports, and debt service-to-exports indicators of public and publicly guaranteed external debt remain below their threshold values throughout the next 20 years. - Large macroeconomic shock scenarios: - Lower export growth (export value growth at historical average minus one standard deviation in 2008/09-2009/10) raises PV of debt-to-exports to a peak of 130 percent in 2012/13. - A combined shock (by one-half standard deviation) to real GDP growth, exports, GDP deflator, and non-debt creating flows over 2008/09-2009/10 would: - Increase PV-to-GDP ratio to a peak of 22 percent in 2011/12 - Increase PV-to-revenue ratio to 156 percent in 2009/10 - Downside context: - The global slowdown increases the downside risk of such shocks; foreign investor unwind could lead to more costly private capital access and downward exchange-rate pressure, adversely affecting debt ratios. - Historical scenarios highlight risks from Uganda’s uneven performances over the last ten years in GDP and export growth, inflation, transfers, and FDI inflows. - Stronger and more steady outcomes since 2001 indicate increased resilience. - Uganda’s large foreign reserves accumulated in recent years provide a significant cushion against higher foreign-financing needs. ### Extreme stress and overall assessment - Even under the extreme stress test: - PV of public external debt will not exceed 30 percent of GDP over the projection period. - Stress tests do not indicate any debt-servicing problem. - Historical scenario caveat: - Indicators would continue to deteriorate during the entire projection period under the historical scenario of lower performances. ### Fiscal debt sustainability (total public debt = external + domestic) - Under the baseline: - PV of public debt will worsen, but stabilize at 21 percent of GDP. - Debt-service-to-revenue ratio will stabilize in the medium term. - Sensitivity to prolonged lower growth without expenditure adjustment: - If growth is lower than the baseline by roughly 1 percentage point, debt-to-GDP, debt-to-revenue and debt-service-to-revenue ratios would display an increasing trend even in the long run. - The lack of adjustment in the nominal expenditure path leads to a primary deficit that is, on average, higher than in the baseline by 2.2 percentage points of GDP over the period 2009-2028. - Policy implications: - Importance of investment selection to ensure value for money. - Need for adjustment in expenditure growth rates in the event of a permanent shock to GDP growth. - Structural policies to ensure a favorable investment climate for the private sector will be crucial. *Source: _cr0979 - 5. External debt is expected to remain sustainable over the next 20 years. (Tables 1a, and 1b).* ### 10. The DSA analysis shows that Uganda’s public debt remains sustainable under ### _cr0979 - 10. The DSA analysis shows that Uganda’s public debt remains sustainable under ### DSA baseline findings - 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. - With a prudent borrowing strategy and the continuation of the stability-oriented fiscal policy, debt should remain comfortably low during the projection period. - Uganda still disposes of additional fiscal space to finance a higher investment program, but: - Cautious borrowing and reliance on concessional financing remain a critical element of the debt management strategy. - Careful investment selection to ensure value for money and appropriate structural policies to sustain private investment are essential to minimize the risk of a lower growth dividend from public investment. ### Key metrics and projections (selected) - Public sector debt: 57.4 (2005); 55.3 (2006); 23.6 (2007); 23.1 (2008 projected baseline column headings show continued low debt). - o/w foreign-currency denominated: 47.9 (2005); 45.7 (2006); 11.4 (2007). - PV of public sector debt: 9.5 (2005); 9.6 (2006); 19.4 (2007); 18.4 (2008). - PV of PPG external debt (percent of exports, selected series): 46.7; 40.7; 51.7; 63.3; 72.0; 81.3; 90.8; 81.7; 60.5 (series shown in Table 1a). - Debt service-to-exports ratio (in percent): 25.4; 18.7; 12.0; 7.7; 8.3; 10.2; 12.2; 12.7; 14.1; 12.0; 12.8 (series shown in Table 1a). - Total gross financing need (Billions of U.S. dollars) (selected series): 0.2; 0.2; -0.2; 0.1; 0.2; 0.4; 0.5; 0.7; 0.8; 1.0; 1.6 (Table 1a). - Grant element of new public sector borrowing (in percent) (selected): 53.5; 44.7; 51.8; 53.4; 53.7; 52.8; 51.7; 49.6; 47.0; 48.6 (Table 1a). - Grant-equivalent financing (in percent of GDP) (selected): 4.0; 5.9; 4.8; 4.7; 4.7; 4.6; 3.3; 2.0; 2.9 (series shown). - Nominal GDP (Billions of US dollars) (selected): 9.2; 10.0; 11.9; 14.5; 17.6; 20.9; 23.2; 26.1; 29.5; 49.1; 119.3 (memorandum items). - Real GDP growth (in percent) — key macro assumption series in DSA tables (selected): 6.3; 10.8; 8.6; 8.8; 5.3; 9.5; 7.4; 7.3; 7.1; 8.0; 8.0; 7.9; 7.4; 6.7; 7.6 (Table 1a and Table 2a). ### Sensitivity and stress tests (high-level) - A range of alternative scenarios and bound tests were run (Tables 1b and 2b and Figures), including: - A1. Key variables at their historical averages in 2008-2028. - A2. New public sector loans on less favorable terms in 2008-2028. - B1–B6. Bound tests such as lower real GDP growth (historical average minus one standard deviation), lower export value growth, lower US dollar GDP deflator, lower net non-debt creating flows, combination shocks, and a one-time 30 percent nominal depreciation in 2009. - The most extreme stress tests identified which scenario yields the highest ratio in 2018 for each indicator (Figure notes). ### Policy implications and IMF Executive Board assessment - Directors commended sound macroeconomic management and stressed heightened vigilance given the global downturn. - Fiscal policy: - Maintain the modest stimulus in the 2008/09 budget. - In case of revenue shortfalls in 2008/09, avoid precipitous cuts in current expenditures, strengthen expenditure management, and prevent further accumulation of domestic arrears. - For the medium term, support the authorities’ target to increase tax revenues by ½ percent of GDP annually and consider introducing a fiscal rule to underpin fiscal consolidation and prudent use of oil revenues. - Monetary and exchange-rate policy: - Monetary policy should aim at sustaining confidence in the currency while supporting the disinflation process. - Seize the opportunity from falling international food and fuel prices to bring inflation back toward the medium-term objective. - Ensure necessary pre-conditions before introducing a formal inflation-targeting framework. - The flexible exchange rate regime has served the country well; targeted intervention may be warranted to avoid excessive volatility. - Financial sector: - Uganda’s banking sector remains sound overall, but rapid bank lending growth and a significant share of foreign-exchange loans pose vulnerabilities. - Strengthen prudential supervision and enhance collaboration with home supervisors of banks operating in Uganda. - Public investment: - Investing in infrastructure is critical to raise medium-term growth potential. - Careful project evaluation is required to ensure public investment remains cost effective and consistent with long-term debt sustainability. - Other fiscal guidance from Executive Board and staff: - Limit recourse to domestic financing to less than 1 percent of GDP in the near term (as projected). - Monitor international reserves and external financing risks as private capital inflows abate. *Source: Staff projections and simulations.* ### Introduction ### _cr0979 - Introduction ### Overview and authorities' stance - The Ugandan authorities thank staff for the candid and constructive policy dialogue during the mission for the Article IV consultation and the fourth review under the Policy Support Instrument (PSI). - Authorities remain committed to: maintaining macroeconomic and financial stability; sustaining high and broad-based growth; and reducing poverty significantly. - Authorities agree with the broad thrust of the staff report and request Directors’ support for the completion of the fourth review. - All assessment criteria for the period were met. - All but one of the indicative targets were met; base money exceeded marginally the allowed 5 percent band. ### Recent economic developments - Macroeconomic performance buoyant due to disciplined macroeconomic policy implementation and structural reforms; real GDP growth broad-based, propelled by services and manufacturing. - During 2008/09 Uganda faced two shocks: high (albeit subsiding) fuel and food prices; and the global economic and financial crisis. - Inflation and growth: - Annual inflation rose from low single digits in the first half of 2007/08 to about 14 percent in November 2008. - Real GDP growth estimated to slow from 8.9 percent in 2007/08 to 7.4 percent in 2008/09 due to the shocks. - External sector and reserves: - Balance of payments performance and capital inflows strong; some appreciation pressures on the Uganda shilling against the US dollar in 2007/08. - Sharp depreciation pressures in October 2008 mainly because of the recent dollar appreciation against major currencies. - Investors in treasury bills and government bonds did not roll over instruments on maturity, resulting in associated capital outflows. - Gross international reserves equivalent to about 6 months of imports at end-October 2008. - Real effective exchange rate appreciation has been modest; persistent appreciation could, with a lag, hurt export competitiveness. ### Medium-term objectives and development strategy - Replacement of the Poverty Eradication Action Plan (PEAP) with a new five-year National Development Plan (NDP). - NDP aims at real GDP growth of about 8 percent per annum over the medium term, supported by macroeconomic stability, open trade, sound public finances, and measures to address key constraints to private investment. - Recent sovereign credit rating improved from a single B to a B+. - Authorities plan to raise substantially public investment in infrastructure – roads, energy and railways – for the next three years to address principal constraints on growth. - Authorities will monitor the economic situation closely in the wake of the global economic and financial crisis and will use available monetary and fiscal policy tools to limit damaging effects on the economy. ### Fiscal policy - 2008/09 budget: - Revenue somewhat lower in the first few months but projected to reach the target as tax administration improvements take hold. - Spending expected to be as budgeted; unspent development funds (e.g., due to delays in road projects) will be carried over to the next fiscal year. - Future fiscal management: - Authorities will consider introducing a fiscal rule to tamp strong spending pressures, particularly when oil revenues begin to flow in 2010. - For transparent and prudent use of oil wealth, a specific line on oil will be introduced in the National Accounts and incorporated into the Medium Term Fiscal Framework (MTFF). - Committed to improving cash management to avoid build up of domestic expenditure arrears, focusing on: (i) cash flow forecasting; ### Monetary and exchange rate policies, and financial sector reform - Inflation objective and tools: - Uganda remains committed to keeping the average underlying annual inflation around 5 percent, guided by the reserve money target. - Significant part of the 2007/08 run-up in prices attributed to increases in international food and fuel prices. - Monetary policy tools will be used to anchor inflation and expectations, inter alia, by reducing the growth of base money. - Subsiding international commodity prices may help reduce inflation further. - In the context of the global financial crisis, reliance on an appropriate mix of sterilization instruments to manage liquidity, using a combination of domestic Open Market Operations and foreign exchange sales. - Institutional and data developments: - Bank of Uganda (BOU) preparing for an inflation-targeting framework for monetary policy. - Uganda Bureau of Statistics (UBOS) rolled out a new measure of underlying (core) inflation and is expected to roll out a quarterly GDP series by end 2008. - BOU designing monetary and exchange rate policy communication strategies and will produce a semiannual monetary conditions report relating economic and financial market trends to the real economy, growth in monetary aggregates, implementation of monetary operations, and the inflation target. - Exchange rate regime: - Exchange rate remains market-determined; interventions will continue to deal with speculation that may cause damaging exchange rate movements. - Due to shallowness of Uganda’s foreign exchange market, authorities will pay particular attention to other contributing factors to prevent undue exchange rate volatility. - Financial sector resilience and risks: - Uganda’s financial system relatively insulated from the global financial crisis, but increasing investor risk aversion and a depressed world economy could present significant challenges. - Banks have remained sound and stable with large capital cushions and stable deposit mobilization. - Diversified bank balance sheets and income sources should contribute to resilience. - BOU will carefully monitor banking system developments given the deteriorating external environment. ### Other structural reform - Electricity supply: - Government attaches utmost importance to meeting growing demand for electricity. - Financing arrangements for the Bujagali hydropower project have been completed; construction on track for commission by 2011. - In the near-term, government will support the private sector by carrying some of the cost of temporary electricity generators. - Financial market development and regional integration: - Uganda implementing a financial market development strategy in coordination with other Central Banks of EAC partner states. - Under the auspices of the EAC, the Monetary Affairs Committee (MAC) is stepping up technical, policy and institutional preparedness for eventual EAC monetary union. *Source: _cr0979 - Introduction* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0979.pdf_