## _cr1001 ## Source details **Canonical URL:** [_cr1001](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1001.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1001.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1001.pdf.json) --- ### Executive summary — key findings and near-term outlook - Real GDP growth: "real GDP growth (at 7 percent)" and "7.1 percent in FY 2008/09". - Growth projection: "growth in 2009/10 is forecast to decline slightly to 6.3 percent, gradually rebounding to its potential of 7 percent over the next two years". - Core inflation: "12-month rate of 9.1 percent in October, the lowest in 19 months"; core inflation expected to edge to "about 8 percent" and converge to medium-term target of "5 percent". - Headline inflation driven by food: "prices of local food crops increased by a record 29 percent over August-September 2009"; food prices rose sharply by "30 percent in the first three months of 2009/10". - External accounts: current account performed better than expected due to strong cross-border exports; gross international reserves "stood at the equivalent of about 5 months of imports at end-September 2009". - Exchange rate and capital flows: shilling depreciated then regained strength after portfolio outflows and FDI declines in 2008/09; between June 2008 and March 2009 Ush depreciated by 22 percent vs. US$ and by 7 percent vs. the Euro. - Program status: PSI-supported program on track; staff recommends completion of the 6th review and supports authorities’ request to extend the PSI to December 14, 2010. - Structural constraints: weaknesses in project implementation and rigidities in domestic financial markets limited scope for fiscal and monetary stimulus in 2008/09. - Policy priority: renewed, more comprehensive structural reform agenda needed to increase absorptive capacity and policy effectiveness. ### Fiscal policy, execution, and public investment strategy - 2009/10 fiscal stance: - Program aims for a "healthy stimulus (about 0.5 percent of GDP)". - Investment spending slated to increase by "1.7 percent of GDP", including an expansion of "about 1½ percent of GDP in donor-financed projects". - Budget includes agriculture support: credit guarantee scheme "at an estimated cost of Ush 30 billion or less than 0.1 percent of GDP". - Fiscal outturns and implementation: - 2008/09 budget aimed to widen fiscal deficit after grants by "1.1 percent of GDP" but end-June fiscal deficit (including grants) ended "2 percentage points of GDP lower than projected" due to weak project implementation and shortfalls in external project financing. - Underexecution made fiscal stance slightly contractionary despite an initially expansionary budget. - Staff view: large, rapid increases in implementation and absorption capacity are necessary; underexecution likely to limit cyclically-adjusted fiscal impulse to "0.5 percentage point of GDP" in 2009/10. - Fiscal impulse and key statistics (table excerpt): - Overall fiscal balance (including grants): Actual 2007/08 = -2.4; Est. 2008/09 = -1.7; Proj. 2009/10 = -2.5; Proj. 2010/11 = -3.8. - Primary balance: 2007/08 = -1.1; 2008/09 = -0.9; 2009/10 = -1.5; 2010/11 = -2.8. - Fiscal impulse (unadjusted) 1/: 2007/08 = 0.7; 2008/09 = -0.3; 2009/10 = 0.6; 2010/11 = -1.3. - Cyclical adjustment: 2007/08 = 0.3; 2008/09 = 0.0; 2009/10 = -0.1; 2010/11 = -0.1. - Fiscal impulse adjusted for cyclical position 2/: 2007/08 = 1.0; 2008/09 = -0.2; 2009/10 = 0.5; 2010/11 = -1.4. - GDP growth: 2007/08 = 8.7; 2008/09 = 7.1; 2009/10 = 6.3; 2010/11 = 6.6. - Potential GDP growth assumed = 7.0 (all years shown). - Output gap: 2007/08 = 1.7; 2008/09 = 0.1; 2009/10 = -0.7; 2010/11 = -0.4. - Cyclical elasticity of primary balance assumed = 0.2 (all years). - Debt and financing considerations for stepped-up investment: - An increase in public investment of 3 percent of GDP would require immediate, sizeable capacity strengthening. - Preliminary calculations: external debt stock could rise quickly, reaching 20 percent of GDP by 2013/14 (an increase of 1 percent of GDP every year). - Sustainable financing likely to require some nonconcessional borrowing; preliminary assessment suggests debt vulnerabilities could remain manageable and the risk of debt distress low if access is limited to semi-concessional resources (terms equivalent to multilateral banks). - Staff caution: higher public investment would boost imports, could pressure the exchange rate and reserve cover, raise external vulnerabilities, and crowd out private sector growth; maintaining balances may require limiting private sector credit growth much below recent high levels (above 30 percent year-on-year growth). - Nonconcessional borrowing request for Lake Victoria port: - Authorities request a non-zero ceiling of EUR 75 million to provide a guarantee to a new harbor project on Lake Victoria (MEFP ¶20). - Export credit grant element: about 4 percent; required grant threshold: 35 percent. - Project would increase the NPV of external debt by 0.38 percent of GDP. - Staff: support conditional on confirmation of project viability through an independent feasibility study. ### Public financial management, arrears, and tax administration - PFM reforms and recommendations: - Strengthen technical and administrative capacity of spending agencies; more frequent, systematic monitoring of budget allocations (MEFP ¶11). - Staff recommends a thorough review of account management procedures and Treasury operations. - Expand coverage of the Integrated Financial Management System (IFMS) to all spending agencies. - Design a new, all-encompassing PFM reform strategy aligned with stepped-up public investment. - Payment controls and budget classification: - Measures to tighten payment controls and strengthen auditing (MEFP ¶25, 28); staff expectation these be fully enforced. - Issue: substantial recurrent expenses (staff compensation and maintenance) are classified under development spending, hampering forecasting and auditing; staff suggests some reclassification to strengthen budget integrity. - Tax administration and exemptions: - Tax revenue-to-GDP ratio declined in 2008/09 after prior steady increases; Uganda’s tax ratio is low by international standards (about 12 percent noted elsewhere). - Authorities’ measures expected to increase tax collections by more than 0.2 percent of GDP (Ush 90 billion) relative to initial estimates (an increase of 0.3 percent with respect to the previous year’s outcome): - Rolling-out the medium taxpayer office. - Tighter controls over smuggling. - Automation of tax processes. - Authorities agreed to undertake a comprehensive review of existing tax exemptions: compile a register, quantify fiscal cost and net economic impact, and aim to eliminate unproductive tax expenditures in the FY 2010/11 budget (MEFP ¶22). - Arrears management: - Target: reduction of the stock of domestic arrears under the Commitment Control System (CCS) to Ush 51 billion by end-June 2010. - Verified stock of “group B arrears” estimated at USh 94 billion as of June 2009 (preliminary estimate). - Preliminary information suggests indicative target on clearance of past domestic arrears was missed; government taking measures to reduce the stock and prevent new arrears. ### Monetary policy, liquidity management, and financial sector reforms - Monetary objectives and targets: - Continue reducing core inflation towards 5 percent medium-term goal; BOU aims to reduce core inflation to 7.9 percent by June 2010. - Targets: restrict broad money growth to 21.2 percent and reserve money growth to 21 percent. - Authorities signaled readiness to tighten monetary stance should core inflation fail to decline as expected. - Liquidity and operating framework changes: - BOU introduced a more flexible monetary and liquidity management framework (designed with MCM assistance): de-linked structural liquidity management (regular primary securities auctions and regular daily foreign exchange sales) from daily liquidity management (repos and reverse repos). - Preliminary evidence suggests reduced volatility of interest rates; assessment planned after pilot concludes end-November. - Flexible reserve money program intended as a step towards eventual adoption of inflation targeting. - Exchange rate policy and reserves: - Maintain a market-determined exchange rate; intervene only to smooth excessive volatility (MEFP ¶15). - Authorities do not intend to draw down their SDR allocation in the near future as the overall balance of payments is projected to remain in surplus (MEFP ¶15). - Gross foreign exchange reserves projected to increase by USD 288 million, including recent SDR allocation. - Financial sector health and supervision: - Banking sector largely shielded from global crisis due to limited integration with international financial markets, strong regulatory environment, and strong capital adequacy. - Reported ratios and indicators: - Regulatory capital to risk-weighted assets ratio of over [20] percent. - Average ratio of non-performing loans to total loans was 4 percent in June 2009. - Observed indirect effects: increase in funding costs, small increase in non-performing assets, intermittent liquidity pressures. - Establishment of a Financial Stability Department in BOU and enhanced monitoring of early warning indicators. - Regulatory reforms planned: update Financial Institutions Act (2004) and Microfinance Deposit-taking Institutions Act (2003); upward revision of minimum capital requirements; provisions for Islamic banking products; review restrictions on lending maturities over three years. - Regional cooperation: increased information sharing across East Africa to reduce contagion risks. ### Structural reforms, financial market development, and data - Financial market segmentation and suggested reforms: - Domestic financial markets are segmented and weakly responsive to policy signals despite liberalization. - Staff welcomed BOU efforts to upgrade legal framework and develop financial infrastructure. - Suggested reforms include land titling (to enable collateral for agricultural credit) and establishment of a pension sector regulator. - Implement a five-year financial markets development plan: establish a credit reference bureau, strengthen the payment system, revise commercial laws to strengthen contract enforcement. - Data and transparency: - Recommendation: publication of official high-frequency data (including quarterly GDP series now produced by Uganda Bureau of Statistics) to better guide decisions. - Pension sector liberalization: - Government decision to liberalize the pension sector; Bill and policy paper expected to be submitted to Parliament by end June 2010; structural benchmark for September 2009 was delayed. ### Medium-term infrastructure needs and oil prospects - Infrastructure indicators (Box 4 summary for Uganda): - Electricity coverage: 8.6 percent of households. - Households reporting access to modern cooking fuels: 3.2 percent. - Improved water source (%): 56.0. - Households using piped water as major source of drinking water: 10.8 percent. - Improved sanitation facilities (%): 41.0. - Households reporting access to a flush toilet (%): 1.7. - Road density, land (road-m/sq-km): 190.0. - Paved roads (% of total roads): 7.0. - Telephone (cell+fixed) subscribers (per 1,000 inhabitants): 32.7. - Households with own telephone (%): 2.7. - Historical budget actions and infrastructure focus: - 2008/09 budget proposed increase in development spending from 3 to 5.5 per cent of GDP until 2010/11. - Government doubled allocation to the road sector to 4 percent of GDP. - 2009/10 budget retained focus on infrastructure investment. - Oil prospects and fiscal framework: - Recent estimates suggest commercially-exploitable oil reserves may be as large as 2 billion barrels. - Commercial extraction unlikely to commence before 2012 at the earliest. - Simple scenarios suggest government oil revenues may account for one third to one half of total government revenue at its peak. - Authorities committed that all oil revenues will be fully and transparently incorporated into the budget: all revenue to be collected by the URA and all spending to take place through the budget process. - Authorities agreed a fuller assessment of macroeconomic impact and policy implications of oil production will be a priority for discussion of a successor PSI. - PPPs and debt analysis: - Authorities interested in public-private partnerships; staff underscores need for a well-crafted legal and institutional PPP framework to avoid contingent liabilities. - A fully-fledged debt sustainability analysis to be undertaken at the time of the 7th review once the public investment program is finalized (MEFP ¶19-21). ### Program monitoring, performance criteria, and reporting requirements - Program monitoring and PSI: - Quantitative assessment criteria and structural benchmarks for end-December 2009 and end-June 2010 (seventh and eighth reviews) presented in the MEFP (Attachment I to the Letter of Intent). - All end-June assessment criteria met for the sixth review; indicative target on base money missed only by a very small margin; two structural benchmarks missed (pension regulatory framework and IPPS rollout) and rephased. - Key numeric program elements and targets (selected TMU figures and table entries): - Ceiling on nonconcessional borrowing request: EUR 75 million (Central Corridor, Lake Victoria port—contingent on feasibility study). - Grant element of export credit: about 4 percent; required threshold: 35 percent. - Projected increase in gross international reserves (US$mn): -115 263 276 288 (minimum increase values shown). - Indicative target—Cumulative change in base money (Billions of Uganda shillings): 260.8 335 410. - Stock of domestic budgetary arrears under the CCS: 8/51 (target Ush 51 billion by end-June 2010). - Minimum expenditures under the Poverty Action Fund (including UPE component): 160 536.5 817.6 1,097.0. - Schedule A—Budget support cumulative (quarter figures): December 31, 2009: 609.3; March 31, 2010: 851.4; June 30, 2010: 901.4. - Schedule B—Debt service due before HIPC (quarter figures): December 31, 2009: 119; March 31, 2010: 160.8; June 30, 2010: 194.5. - Adjuster for nonbank financing (quarter figures): -74.4 -66.9 -54.7; domestic arrears repayment: -40.1 -65.8 -76.1; total = -34.3 -1.1 21.5. - Reporting and communication requirements: - Authorities will inform IMF staff in writing at least ten business days prior to policy changes that could affect the program. - Authorities will furnish official communication on program performance within 8 weeks of a test date. - Selected reporting frequencies and submission lags specified for BOU and Ministry of Finance items (weekly to quarterly; submission lags 2 to 6 weeks depending on item). - Definition and limits on external arrears and debt: - Ceiling on accumulation of new external payments arrears is zero (continuous performance criterion). - Definition of "debt" follows Guidelines on Performance Criteria with Respect to External Debt, No. 9 (loans, suppliers’ credits, leases; arrears and penalties included). - Nonconcessional borrowing defined as loans with grant element < 35 percent (OECD CIRR-based calculations); exclusions specified (e.g., Karuma hydropower plant, JBIC Phoenix loan guarantee, Central Corridor within limits in Table 1). ### IMF staff appraisal and policy recommendations - Macroeconomic assessment: - Sound macroeconomic policies supported external and domestic confidence; economy performed better than expected and is headed for a steady rebound after a modest dip. - Barring unexpected shocks, external financing position seems set to remain strong. - Policy recommendations and priorities: - Step up public investment to overcome infrastructure bottlenecks while preserving fiscal and debt sustainability and space for private sector growth. - Renewed, comprehensive and well-coordinated structural reform agenda to raise implementation and absorptive capacity. - Strengthen public financial management: broaden IFMS coverage, tighten payment controls, improve budget classification and auditing, and enforce zero tolerance on off-IFMS expenditures. - Strengthen tax administration and review exemptions to increase revenues: roll-out medium taxpayer office, tighten smuggling controls, automate tax processes, compile register of incentives, and aim to eliminate unproductive tax expenditures in FY 2010/11. - Enhance monetary framework flexibility and stand ready to tighten if second-round inflationary pressures emerge. - Assess nonconcessional borrowing requests on a case-by-case basis with independent feasibility/viability studies; staff supports EUR 75 million ceiling for Lake Victoria port contingent on confirmed viability. - Carefully prepare for oil revenues: integrate into budget, collect via URA, and fully incorporate spending through the budget process; perform fuller macroeconomic impact assessment in successor PSI. - Improve high-frequency data publication and transparency to guide policy and private decisions. - Program governance and sequencing: - Staff supports extension of PSI to December 14, 2010 to align successor PSI with budget cycle and National Development Plan. - Quantitative and structural benchmarks for December 2009 and June 2010 to be monitored in seventh and eighth reviews. *Source: IMF staff report, Executive Summary, Sections I–II, MEFP, and APPENDIX I (Letter of Intent) as provided in _cr1001.* ### Executive Summary ...................................................................................................... ### _cr1001 - Executive Summary ### Executive summary — key findings - The Ugandan economy is weathering the impact of the global financial crisis better than anticipated. - Real GDP growth remained strong by regional and international standards: "real GDP growth (at 7 percent)" in the Executive Summary and "7.1 percent in FY 2008/09" (¶1). - Core inflation has been easing despite an increase in headline inflation driven by higher food prices. - The external current account performed better than expected, buoyed by strong cross-border exports. - The shilling regained strength after earlier portfolio outflows and declines in FDI in 2008/09; gross international reserves remain strong (about 5 months of imports at end-September 2009). - Structural rigidities — persistent weaknesses in project implementation and rigidities in domestic financial markets — limited the scope for fiscal and monetary stimulus in 2008/09. - A renewed, more comprehensive structural reform agenda is needed to increase absorptive capacity and policy effectiveness. - Preliminary plans to further step up public investment are justified by Uganda’s large infrastructure deficit, but caution is required to preserve fiscal and debt sustainability and space for private sector growth. - Commercial exploitation of oil remains distant and will raise additional challenges; authorities committed to manage oil revenue carefully and transparently through the budget process. - The PSI-supported program remains on track and staff recommends completion of the 6th review; staff support the authorities’ request to extend the PSI to December 14, 2010. ### Recent developments and outlook - Growth and inflation - Real GDP growth: "7.1 percent in FY 2008/09" (¶1). - Executive Summary statement: "real GDP growth (at 7 percent)." - Food prices: "prices of local food crops increased by a record 29 percent over August-September 2009" (¶2). - Core inflation: "12-month rate of 9.1 percent in October, the lowest in 19 months" (¶2). - Core inflation expected to edge slightly lower to "about 8 percent" and converge to medium-term target of "5 percent" (¶5). - External accounts and reserves - Current account: performed better than expected due to strong cross-border exports (Executive Summary; ¶2). - Capital flows: declining FDI and reversal of portfolio flows pressured exchange rate in first half of fiscal year; more recently the shilling regained most of its strength (¶2). - Gross international reserves: "stood at the equivalent of about 5 months of imports at end-September 2009" (¶2). - SDR allocation: provides additional buffer against shocks and downside risks (¶5). - Monetary and financial conditions - Rigidities in domestic financial markets reduced the effectiveness of monetary easing: interbank rates fell but lending rates remained high; private sector credit subdued; banks accumulated deposits and broad money rose (¶3). - The unintended shortfall in budget execution complicated monetary management, sometimes resulting in a tighter-than-intended monetary stance and increased interest rate volatility (¶3). - Fiscal execution and structural constraints - The 2008/09 budget aimed to widen fiscal deficit after grants by "1.1 percent of GDP" but end-June fiscal deficit (including grants) ended "2 percentage points of GDP lower than projected" due to weak project implementation and shortfalls in external project financing (¶3, bullet). - Underexecution of investment spending in 2008/09 made the fiscal stance slightly contractionary despite an initially expansionary budget (¶8). - Program performance under PSI - All end-June assessment criteria met; the indicative target on base money missed only by a very small margin (¶4). - Two structural benchmarks missed: draft regulatory framework for pension funds delayed (end-September benchmark) and rolling-out of Integrated Personnel and Payroll System postponed, now expected by September 2010 (¶4). - Indicative target on minimum expenditures under the Poverty Action Fund (PAF) met by a comfortable margin (¶4). - Preliminary information suggests indicative target on clearance of past domestic arrears was missed; government taking measures to reduce stock and prevent new arrears (¶4). - Near-term outlook and risks - Growth projection: "growth in 2009/10 is forecast to decline slightly to 6.3 percent, gradually rebounding to its potential of 7 percent over the next two years" (¶5). - Core inflation projection: "about 8 percent" converging to "5 percent" medium-term target (¶5). - Gross international reserves projected to remain at a comfortable level (¶5). - Projections subject to high uncertainty from global and regional growth path, weather-related shocks, and domestic absorption capacity weaknesses (¶5). ### Policy discussions — overarching objectives - Main macro policy aim for 2009/10: expand public infrastructure while mitigating impacts of external shocks on domestic activity (¶6). - Emphasis on enhancing policy effectiveness and mitigating adverse impact of price and exchange rate volatility on demand (¶6). - Need for a renewed, more comprehensive fiscal and financial structural reform program to increase absorptive capacity and policy flexibility (¶6). ### Fiscal policy — design and implementation - 2009/10 fiscal stance and investment - Program aims for a "healthy stimulus (about 0.5 percent of GDP)" to the economy through the 2009/10 budget (¶7). - Investment spending slated to increase by "1.7 percent of GDP", including an expansion of "about 1½ percent of GDP in donor-financed projects" (¶7). - Budget includes measures to support agriculture, including a limited credit guarantee scheme "at an estimated cost of Ush 30 billion or less than 0.1 percent of GDP" (¶7). - Implementation capacity and coordination - Large, rapid increases in implementation and absorption capacity are necessary for the fiscal stimulus to materialize; underexecution is likely to limit the cyclically-adjusted fiscal impulse to "0.5 percentage point of GDP" in 2009/10 (¶8). - Staff encouraged authorities to strengthen capacity to refine and adjust fiscal forecasts to facilitate coordination of fiscal and monetary management and provide clearer signals to the private sector (¶8). - Authorities noted underexecution in prior year fell on externally-financed projects and emphasized need for more accurate and timely reporting from donors to better ground investment forecasts (¶8). - Policy stance and social priorities - Authorities maintained commitment to trade openness and resisted pressures to restrict agricultural trade during the drought; staff noted market-based incentives will help boost sustainable agricultural growth, export diversification, and poverty reduction (¶8). - Staff emphasized that infrastructure focus should not come at the expense of continued expansion of social programs, including health and education, especially given the slowdown (¶8). ### Fiscal impulse and related statistics (table excerpt) - Fiscal impulse (unadjusted) and adjusted figures shown in text table: - Overall fiscal balance (including grants): Actual 2007/08 = -2.4; Est. 2008/09 = -1.7; Proj. 2009/10 = -2.5; Proj. 2010/11 = -3.8. - Primary balance: 2007/08 = -1.1; 2008/09 = -0.9; 2009/10 = -1.5; 2010/11 = -2.8. - Fiscal impulse (unadjusted) 1/: 2007/08 = 0.7; 2008/09 = -0.3; 2009/10 = 0.6; 2010/11 = -1.3. - Cyclical adjustment: 2007/08 = 0.3; 2008/09 = 0.0; 2009/10 = -0.1; 2010/11 = -0.1. - Fiscal impulse adjusted for cyclical position 2/: 2007/08 = 1.0; 2008/09 = -0.2; 2009/10 = 0.5; 2010/11 = -1.4. - GDP growth: 2007/08 = 8.7; 2008/09 = 7.1; 2009/10 = 6.3; 2010/11 = 6.6. - Potential GDP growth assumed = 7.0 (all years shown). - Output gap: 2007/08 = 1.7; 2008/09 = 0.1; 2009/10 = -0.7; 2010/11 = -0.4. - Cyclical elasticity of primary balance assumed = 0.2 (all years). - Notes: 1/ impulse = change in primary fiscal balance w.r.t. preceding year; (-) = fiscal withdrawal. 2/ adjusted impulse accounts for deviation of growth from potential. *Source: IMF staff, Executive Summary and Sections I–II of _cr1001 - Executive Summary.* ### 9. A renewed, more comprehensive effort to address structural weaknesses in ### _cr1001 - 9. A renewed, more comprehensive effort to address structural weaknesses in ### Public financial management (PFM) - Authorities are strengthening the technical and administrative capacity of spending agencies and instituting more frequent, systematic monitoring of the use of budget allocations (MEFP ¶11). - Staff recommendation: conduct a thorough review of account management procedures and Treasury operations. - Staff recommendation: expand coverage of the Integrated Financial Management System to all spending agencies to facilitate monitoring and reduce leakages. - Staff recommendation: design a new, more all-encompassing strategy of public financial management reform that takes stock of past achievements and shortcomings and defines priorities aligned with stepping up public investment. - Authorities planned to further discuss the review of the PFM strategy in the context of the forthcoming mission, scheduled for March 2010. ### Payment controls, auditing, and budget classification - Measures are being introduced to tighten payment controls and strengthen auditing procedures to prevent further accumulation of arrears (MEFP ¶25, 28). - Staff expectation: these measures should be fully and strictly enforced. - Issue identified: substantial share of recurrent expenses (including staff compensation and maintenance) are currently classified under development spending, which: - Hampers accurate forecasting and auditing of total current costs. - May contribute to cost inflation. - Staff suggestion: some reclassification of government expenditure to strengthen budget integrity and ensure better value for money. ### Tax administration and exemptions - Observation: After steady increases in tax collections, the tax revenue-to-GDP ratio declined in 2008/09 due to the economic slowdown; Uganda’s tax ratio is low by international standards. - Authorities’ measures expected to increase tax collections by more than 0.2 percent of GDP (Ush 90 billion) with respect to their initial estimates (an increase of 0.3 percent with respect to the previous year’s outcome): - Rolling-out of the medium taxpayer office. - Tighter controls over smuggling. - Automation of tax processes. - Staff recommendation: ensure appropriate financial, technical and political support to the Uganda Revenue Authority (URA). - Authorities agreed to undertake a comprehensive review of existing tax exemptions: - Compile a register of all existing incentives and exemptions. - Quantify their cost—in terms of lost revenue—and net economic impact. - Aim to eliminate unproductive tax expenditures in the FY 2010/11 budget (MEFP ¶22). ### Monetary policy and inflation objectives - Monetary targets for the remainder of FY2009/10 aim to facilitate a further decline in core inflation to about 8 percent by end-June. - Authorities adjusted moderately the path of base money in the first half of 2009/10 to accommodate first-round effects of food price increases and intend to revert to a base money path consistent with the disinflation program in the second half of the year (MEFP ¶13). - Authorities signaled readiness to tighten the monetary stance should core inflation fail to decline as expected. ### Bank of Uganda (BOU) liquidity and exchange rate frameworks - BOU introduced a new, more flexible monetary and liquidity management framework (designed with assistance from MCM) that: - De-linked structural liquidity management (regular primary securities auctions and regular daily foreign exchange sales) from daily liquidity management (implemented through repos and reverse repos). - Preliminary evidence suggests reduced volatility of interest rates. - Assessment planned once the pilot implementation program concludes at end-November. - BOU’s flexible exchange rate policy: - Authorities committed to maintain a market-determined exchange rate, intervening only to smooth excessive volatility (MEFP ¶15). - Staff observation: reforms to support development of hedging instruments could help mitigate exchange rate volatility. - Authorities do not intend to draw down their SDR allocation in the near future as the overall balance of payments is projected to remain in surplus (MEFP ¶15). ### Banking supervision and financial stability - Ongoing fine-tuning of monitoring and oversight of the banking system, including in a regional context (MEFP ¶16). - Uganda’s banking sector largely shielded from the global financial crisis due to limited integration with international financial markets, strong regulatory and supervisory environment, and strong capital adequacy. - Indirect effects of the global crisis observed: increase in funding costs, a small increase in non performing assets, and intermittent liquidity pressures. - Establishment of a financial stability department in the BOU and enhanced monitoring of early warning indicators to improve crisis identification and resolution. - Increased information sharing across regulators in East Africa will help lessen risks of uncontrolled regional spillovers. ### Structural reforms for financial markets and data - Domestic financial markets are segmented and weakly responsive to policy signals despite liberalization and lack of entry barriers. - Staff welcomed BOU’s efforts to upgrade legal framework and develop financial infrastructure. - Suggested additional reforms: - Land titling (to enable collateral for agricultural credit). - Establishment of a pension sector regulator. - Recommendation: publication of official high-frequency data (including quarterly GDP series now produced by Uganda Bureau of Statistics) to better guide private and public decisions. ### Exchange rate developments during the Global Financial Crisis (summary of Box 3) - Between June 2008 and March 2009, the Ugandan shilling (Ush) depreciated by 22 and 7 percent with respect to the US dollar and the Euro, respectively, and appreciated slightly vis-à-vis the Pound Sterling. - Volatility increased significantly; Ush has been recouping some losses with reversal of private outflows and better-than-expected export earnings; volatility higher on the down trend. - BOU interventions during initial crisis stages: - Smoothing exchange rate movement. - Stepped up provision of short-term liquidity to banks, temporarily loosening monetary stance while allowing a modest drawdown in international reserves. - Outcomes noted: - Current account held well by regional standards. - Draw down of gross official reserves was relatively marginal; adjustment largely borne by the exchange rate. - Inflation remained high relative to pre-crisis level and the region due to exchange rate pass-through, exogenous factors (recent rise in food prices, supply rigidities), and increased regional demand for food. ### Medium-term issues: infrastructure investment - Medium term shaped by desire to overcome infrastructure bottlenecks through large investment projects and the prospect of commercial oil exploitation. - Staff stressed importance of consistency between macro-economic goals in the medium-term budget framework (MTBF) and the forthcoming National Development Plan (NDP); NDP expected to be finalized in early 2010. - Key risks and considerations for ramping up public investment: - Without decisive enhancements in fiscal and financial management capacity, absorptive capacity constraints will continue to hamper implementation. - To be effective, an increase in public investment of 3 percent of GDP, as envisaged, would require immediate, sizeable efforts to strengthen technical and administrative resources. - Sustainable financing likely to require supplementing grants and concessional resources with nonconcessional borrowing; preliminary calculations suggest debt vulnerabilities could remain manageable and the risk of debt distress low if access is limited to semi-concessional resources (on terms equivalent to those provided by multilateral banks). - Projected external debt stock would still rise quickly, reaching 20 percent of GDP by 2013/14 (an increase of 1 percent of GDP every year). - Higher public investment would boost imports and could put pressure on the exchange rate and reserve cover, raising external vulnerabilities and crowding out private sector growth. - Maintaining internal and external balances would require limiting private sector credit growth much below recent high levels (above 30 percent year-on-year growth), though it would still grow somewhat faster than nominal GDP. - Infrastructure investment expected to have positive impact on competitiveness and growth, but net effect is difficult to assess given data limitations. - Authorities intend a temporary, time-bound expansion in public investment to unlock private sector growth and expressed interest in public-private partnerships (PPPs). - Staff underscored need for well-crafted legal and institutional PPP framework to avoid significant contingent liabilities and recommended careful prioritization and screening of projects. - A fully-fledged debt sustainability analysis to be undertaken at the time of the 7th review, once the authorities finalize the public investment program underpinning the NDP (MEFP ¶19-21). ### Uganda’s infrastructure needs (summary of Box 4 data) - Electricity coverage: 8.6 percent of households in Uganda versus 34.7 for Low-income Countries and 27.2 for Sub-Saharan Africa. - Households reporting access to modern cooking fuels: 3.2 percent in Uganda. - Improved water source (% of population with access): 56.0 in Uganda. - Households using piped water as major source of drinking water: 10.8 percent in Uganda. - Improved sanitation facilities (% population with access): 41.0 in Uganda. - Households reporting access to a flush toilet (% of population): 1.7 in Uganda. - Road density, land (road-m/sq-km): 190.0 in Uganda. - Paved roads (% of total roads): 7.0 in Uganda. - Telephone (cell+fixed) subscribers (per 1,000 inhabitants): 32.7 in Uganda. - Households with own telephone (% of households): 2.7 in Uganda. - Historical budget actions: - 2008/09 budget proposed increase in development spending from 3 to 5.5 per cent of GDP until 2010/11. - Government doubled allocation to the road sector to 4 percent of GDP. - 2009/10 budget retained focus on infrastructure investment. ### Oil prospects - Recent estimates suggest commercially-exploitable oil reserves may be as large as 2 billion barrels. - Commercial extraction unlikely to commence before 2012 at the earliest. - Simple calculations under hypothetical scenarios suggest government oil revenues may account for one third to one half of total government revenue at its peak. - Authorities focused on setting up legal and institutional framework and strengthening domestic management capacity before oil revenues materialize; Fund and other partners providing technical assistance. - Authorities committed that all oil revenues will be fully and transparently incorporated into the budget: - All revenue to be collected by the URA. - All spending to take place through the budget process. - Authorities agreed a fuller assessment of macroeconomic impact and policy implications of oil production will be a priority for discussion of a successor PSI. ### Program monitoring - Quantitative assessment criteria and structural benchmarks for end-December 2009 and end-June 2010 (seventh and eighth reviews of the PSI) are presented in the authorities’ Memorandum of Economic and Financial Policies (MEFP) (Attachment I to the Letter of Intent). - Assessment criteria derived from indicative targets for end-December 2009 established at fifth review, adjusted for changes in economic conditions: - NFA target set to reflect increase in gross reserves, including recent SDR allocation. - NDA changed accordingly. - NCG revised on basis of new fiscal projections. - Table 2 of the MEFP presents structural measures proposed to be monitored under the PSI. *Source: IMF staff report (MEFP references and boxes as provided in the source PDF).* ### 25. The authorities request a non-zero ceiling on nonconcessional borrowing, for an ### _cr1001 - 25. The authorities request a non-zero ceiling on nonconcessional borrowing, for an ### Nonconcessional borrowing request and assessment - Authorities request a non-zero ceiling on nonconcessional borrowing for an amount of EUR 75 million to provide a guarantee to a new harbor project on Lake Victoria (MEFP ¶20). - Purpose: facilitate access to the port of Dar es Salaam and help lower transportation costs, thereby supporting export growth over the medium term. - Export credit characteristics: - Grant element of about 4 percent, well below the required threshold of 35 percent. - Conditions for nonconcessional borrowing met: - (i) Concessional resources are not available from development partners for such commercial infrastructure development. - (ii) Financing of the project does not endanger debt sustainability over the near or medium term: the project would increase the NPV of external debt by 0.38 percent of GDP. - Contingency: Authorities requested an assessment of the economic viability of the project. - Staff position: Support for the authorities’ request to use nonconcessional financing contingent upon confirmation of project viability through an independent feasibility study. ### Staff appraisal — macroeconomic outlook and program status - Macroeconomic performance: - Sound macroeconomic policies have supported external and domestic confidence in the Ugandan economy. - The economy performed better than expected and activity looks headed for a steady rebound after a relatively modest dip in growth. - Barring an unexpected internal or external shock, the external financing position seems set to remain strong. - Program status: - The PSI-supported program is on track and staff recommend completion of the review. - All assessment criteria for the sixth review have been met. - Two structural benchmarks for this review have been missed, but there has been good progress in advancing parallel reforms in the PFM and financial areas. - Authorities strongly intend to implement the measures included in the benchmarks in this fiscal year. - Staff support the authorities’ request for an extension of the current PSI to align a possible successor PSI with their budget cycle and the National Development Plan currently under preparation. ### Monetary policy and inflation risks - Monetary management considerations: - Need to balance accommodating the first-round impact of higher food prices against risks of fueling broader, lasting inflationary pressures. - Authorities have been successful in gradually reducing core inflation in the context of fast exchange rate depreciation in the first half of 2009. - Recent, drought-related surge in food inflation may stall further declines in the near term. - Recommendation: Authorities should stand ready to tighten their stance if second-round price pressures were to emerge. ### Fiscal monitoring, coordination, and debt management - Fiscal monitoring: - Strengthening fiscal monitoring capacities would allow closer coordination of fiscal and monetary policies and increase near-term effectiveness of macroeconomic management. - Unforeseen budget under execution has at times resulted in a tighter-than-expected monetary stance last year. - Introduction of more flexible modalities for short-term liquidity management has given monetary authorities more latitude to react to unexpected shortfalls in public or private money demand. - Recommendation: Higher-frequency and more accurate monitoring on the fiscal side to enhance transmission of macroeconomic policy decisions. - Debt and infrastructure borrowing: - Large financial resources will need to be mobilized to reduce Uganda’s infrastructure deficit over the medium term. - Important to ensure that the terms and sequencing of this borrowing do not compromise external nor fiscal sustainability. - Recommendation: Selection and prioritization of public investment projects should be submitted to rigorous and transparent procedures. ### Structural reform priorities - Observations: - Renewed emphasis on comprehensive, well-coordinated structural reforms could help raise both implementation capacity and the economy’s absorptive capacity. - Authorities introduced several reforms over recent years to strengthen public financial management and deepen financial markets, but efforts have been scattered and not always well synchronized. - Recommendation: Take stock of past achievements and reset priorities, in line with the new focus on stepped-up investment in infrastructure. ### Key numeric points cited - EUR 75 million: requested nonconcessional borrowing ceiling for the harbor project guarantee. - Grant element of available export credit: about 4 percent. - Required grant threshold: 35 percent. - Project impact on NPV of external debt: increase by 0.38 percent of GDP. *IMF staff appraisal and program assessment as presented in the source text.* ### APPENDIX I. LETTER OF INTENT ### APPENDIX I. LETTER OF INTENT ### I. Introduction and Request - Government requests extension of test dates under the current PSI until June 30, 2010 to allow finalization of the National Development Plan (NDP) and alignment of the successor PSI with the fiscal year of GoU. - Government requests extension of the current PSI through December 14, 2010 to permit two additional reviews covering test dates at December 31, 2009, and June 30, 2010. - Government transmits the attached Memorandum of Economic and Financial Policies (MEFP) setting out objectives and policies for the period ahead. ### II. Performance under the PSI and FY08/09 Macroeconomic Outturn - PSI performance through the 6th review: - The six assessment criteria under the PSI for June 2009 were all met. - The indicative target on the minimum expenditures under the poverty action fund (PAF) was comfortably achieved. - The indicative target on the ceiling on base money was missed albeit by a very small margin. - Preliminary estimates show the indicative target on the stock of domestic budgetary arrears has been missed. - Two structural benchmarks were missed: (i) submission to Parliament of a draft regulatory framework for pension funds; and (ii) introduction of pilots for the Integrated Personnel and Payroll System. Government requests these two structural benchmarks be rephased for 2010. - Real GDP growth in fiscal year 2008/09: - 7.1 percent at market prices. - 6.2 percent at basic prices. - Compared with 8.7 percent in 2007/08, indicating a slowdown due to the global economic crisis. - Inflation: - Headline and core inflation fell by 3.6 and 2.6 percentage points respectively from their peaks in August 2008 to June 2009. - Core inflation ended the fiscal year approximately 0.8 percentage points higher than initially programmed, largely due to pass-through of the sharp nominal depreciation of the exchange rate. - Fiscal outturn 2008/09: - Revenues underperformed by 0.3 percent of GDP relative to original budget. - Overall expenditures underperformed by 4.3 percent of GDP relative to original budget. - Fiscal deficit excluding grants was 4.4.percent of GDP compared to 7.7 percent of GDP in the budget. - Tax revenues in Ush fell short of budgeted amounts by 5 percent, largely due to weak indirect taxes. - Total expenditures fell short of budget by 20 percent; development expenditures were short by 43 percent in domestically financed and donor funded projects. - Monetary and exchange rate developments: - BOU initial base money growth target of 18 percent; raised to 20.5 percent in second half of fiscal year. - BOU maintained a flexible exchange rate regime. - Balance of payments and reserves: - Trade deficit larger in 2008/09 than previous year by USD 130 million. - Build up of international reserves (net of valuation effects) of USD 545 million in 2007/08; decline of reserves of USD 62 million in 2008/09. - Nominal depreciation of the exchange rate of 37 percent against the US dollar between end-September 2008 and mid May 2009; exchange rate rebounded by 10 percent between mid May and end-June 2009. ### III. Outlook and Key Economic Objectives for 2009/10 - Key macroeconomic goals: - Increase production, improve productivity, and reduce poverty via investments in infrastructure for sustainable growth. - Continue reducing core inflation back towards the target of 5 percent. - Ensure external stability is not undermined. - Macroeconomic projections: - Real GDP growth projected at 6.3 percent in fiscal year 2009/10. - Core inflation expected to decline to 7.9 percent by end of this fiscal year. - Food price shock and response: - Food prices rose sharply by 30 percent in the first three months of 2009/10, attributed to high regional demand and drought-reduced production. - Government initiatives to increase food production include: - Reforming and refocusing National Agricultural and Advisory Delivery Services (NAADS) and ensuring value addition. - Working with commercial farmers to increase availability of seed and other planting materials. - Establishing a credit guarantee scheme to encourage commercial banks to provide credit to agriculture and agro-processing at subsidized interest rates, with Government providing initial seed money of Ushs 30 billion. - Providing equipment for irrigation. - Upgrading rural infrastructure including rural electrification and feeder roads. - Balance of payments expectations: - BOP expected to improve in 2009/10 with a more favorable external environment, allowing some recovery of remittances and capital flows. - Aggregate demand expected to remain relatively subdued in the first half of the fiscal year, picking up in the second half due to higher government spending and recovery in global and regional demand. ### IV. Fiscal Policy 2009/10 - Primary objective: provide a fiscal stimulus and continue re-orientation of the budget towards development expenditures. - Revenue administration: continue roll-out of medium taxpayer office and step up enforcement. - Expenditures and net lending: - Programmed to rise by 0.9 percent of GDP from the 2008/09 outturn, largely due to higher development expenditures. - Fiscal deficits: - Fiscal deficit before grants programmed at 5 percent of GDP. - Fiscal deficit after grants budgeted at 2.5 percent of GDP. - Financing: - Government’s financing requirement to be met primarily through external sources projected at 2.4 percent of GDP on a net basis. - Expenditure reallocation: - Shift allocations toward capital formation while maintaining on-going programs; education and health remain largely recurrent in nature. - Measures to strengthen implementation and absorptive capacity: - Output-based budgeting reforms: (i) base expenditure releases on concrete work plans and evidence of outputs; (ii) advance planning including procurement and recruitment plans; (iii) establish Budget Monitoring and Analysis Unit (BMAU) within MFPED to undertake sample expenditure tracking; (iv) institute ministerial quarterly reviews and strengthen audit in the Treasury. - Anticipated expenditure outturns—particularly donor-financed project infrastructure—may be less ambitious than available financing given current absorptive capacity. ### V. Monetary and Exchange Rate Policy 2009/10 - Monetary objective: - Continue reducing core inflation towards long-term goal of 5 percent while supporting activity consistent with potential output. - BOU aims to reduce core inflation to 7.9 percent by June 2010. - Targets: restrict broad money growth to 21.2 percent and reserve money growth to 21 percent. - BOU will tighten monetary targets for June 2010 if food price shocks feed through to core inflation such that the target of 7.9 percent might not be met. - Monetary operations and framework: - Continue quantitative target for reserve money and intermediate target for broad money. - Revised operating procedures (with Fund TA): de-link structural liquidity management (regular primary securities auctions and regular daily foreign exchange sales) from daily liquidity management (repos and reverse repos) to dampen money market volatility and allow flexible reserve money adjustments. - Flexible reserve money program intended as a step towards eventual adoption of inflation targeting. - Long-run commitment to participation in the East African Monetary Union (EAMU). - Exchange rate policy: - Continue flexible exchange rate policy; intervene only to dampen excessive volatility. - Gross foreign exchange reserves projected to increase by USD 288 million, including recent SDR allocation. - No intention to draw down the SDR allocation in the near future. ### VI. Financial Sector Policies - Banking system health: - Banking system remained resilient to the global financial crisis; minimal exposure to toxic assets abroad. - Regulatory capital to risk-weighted assets ratio of over [20] percent. - Average ratio of non-performing loans to total loans was 4 percent in June 2009. - Non-performing loans ratio has crept up and may rise further if slowdown persists; BOU will closely supervise regulated financial institutions and implement remedial measures as needed. - Regulatory reforms and supervisory actions: - BOU intends to update the Financial Institutions Act of 2004 and Microfinance Deposit-taking Institutions Act of 2003, including: - Upward revision of minimum capital requirements. - Provisions to cover Islamic banking products. - Regulations to cover insurance products offered by banks and regulated non-banks. - BOU will review regulatory restrictions on lending with maturity over three years to encourage longer-term lending by banks. - East African central banks implementing measures to strengthen information sharing and cross-border regulation. - Financial Stability Department: - BOU has set up a Financial Stability Department within its Supervision Function to monitor systemic stability, analyze issues, and produce a bi-annual financial stability report. - Supervision Function receiving Fund TA to support this activity. ### VII. Medium-Term Outlook, Debt, and Structural Reforms - Medium-term macro strategy: - Maintain sound fiscal policy to allow Government investment in critical areas addressing binding constraints to growth while ensuring macro stability and creating room for private sector credit and investment. - Fiscal and monetary policies to be consistent with macroeconomic convergence criteria for the East African Community member countries in view of EAMU participation. - Infrastructure and private participation: - Medium-term budget policy to address constraints and reduce costs of doing business by increasing spending on roads, railways, energy and water for irrigation. - Create fiscal space through efficiency measures, mobilize external resources consistent with the Debt Strategy, and seek private sector participation in infrastructure projects. - Request for nonconcessional borrowing ceiling increase: - Government requests a €75 million increase in the ceiling on nonconcessional loans to accommodate a strategic project to establish a new port facility on Lake Victoria. - Government will only contract the loan upon confirmation of economic viability based on completion of a feasibility study by an independent reputable institution. - Public Private Partnership and debt analysis: - Government preparing a Public Private Partnership (PPP) Policy Framework to facilitate private involvement in provision of public goods. - Government intends to undertake a Debt Sustainability Analysis in March 2010 to inform borrowing strategy. - Tax policy and incentives: - Continue to strengthen tax administration with IMF TA support. - Government intends to conduct a review of all existing tax incentives and exemptions prior to the next IMF review under the PSI, aiming to compile a register of all incentives and exemptions, quantify their fiscal cost, compare costs to net economic benefits, and eliminate exemptions that do not deliver value for money in the FY2010/11 budget. *Source: APPENDIX I. LETTER OF INTENT, Memorandum of Economic and Financial Policies, December 1, 2009.* ### 23. The National Development Plan currently under preparation will be consistent with ### _cr1001 - 23. The National Development Plan currently under preparation will be consistent with ### National Development Plan (NDP) and Medium Term Expenditure Framework (MTEF) - The NDP under preparation will be consistent with the macroeconomic policy objectives of Government. - The NDP will provide strategic guidance for expenditure allocation in the MTEF to ensure optimal use of resources. - The NDP will be periodically reviewed to ensure emerging priorities are reflected in expenditure planning. ### Structural Reforms: overview - Government decision to liberalize the pension sector to allow entry of private pension providers to compete with the National Social Security Fund. - A Bill to establish a regulatory framework for the pension sector and other retirement benefits schemes is in Cabinet. - A policy paper detailing the nature of the liberalization is being prepared. - Expected submission of the Bill and policy paper on the regulatory framework to parliament by end June 2010. - The structural benchmark for September 2009 was delayed to consider results of an East African Community Secretariat study on consolidated regulation of financial services in the East African Community, due by December 2009. ### Pension payment systems and payroll reforms - Implementation of Straight Through Payment (STP) for both salaries and Pensions will be completed this Fiscal year to eliminate further accumulation of pension and salary arrears arising from under-provisioning of pension and gratuity payments. - Government undertaking a forensic audit of existing pension arrears to determine the actual stock and prioritize settlement. - The November 2009 structural benchmark for introduction of a pilot of the integrated Personnel Payroll System (IPPS) was missed due to procurement capacity challenges and delays in connecting four service commissions to the IFMIS. - A trial run of IPPS is envisaged by end July 2010 and full IPPS roll out in September 2010. - Tabled structural benchmark: Implement pilot Integrated Personnel and Payroll System in four Commissions and specified Ministries and Local Governments by End-September 2010. ### Oil and fiscal framework - Emergence of an oil and gas sector is presented as a unique opportunity for Uganda’s growth and poverty reduction. - Oil revenues will be integrated into the medium term fiscal framework and budgetary process. - Fiscal policy will incorporate a target for the non-oil structural fiscal balance to ensure sustainable use of oil revenues over the long term. ### Public Financial Management (PFM) and arrears management - Continued rollout of the Integrated Financial Management System (IFMS) to cover all spending agencies. - PFM will be monitored under the Joint Assessment Framework (JAF) with specific performance indicators related to budget credibility and value for money. - Actions to minimize domestic arrears by January 2010: - Submission to Cabinet of a priority list of international organizations for subscription over the next three years. - Verify stock of arrears to international organizations and specify that membership fees be paid from budgets of responsible line ministries for FY 2009/10. - Accountant General to implement zero tolerance policy on issuance of expenditure and accounting warrants for expenditures incurred outside the IFMS. - Establish CCS arrears accumulated since March 2008 to be paid by responsible line ministries from their FY 2009/10 budgets. - Program target: reduction of the stock of domestic arrears under the Commitment Control System (CCS) to Ush 51 billion by end-June 2010. ### Internal audit and oversight - Government will ensure operational independence of Internal Audit by reporting directly to the Permanent secretary/Secretary to the Treasury and the six sectoral audit committees. - From 2009/10, planned performance audits, risk management, IT audits and enhanced quality assurance. ### Financial markets development - Implementation of a five year financial markets development plan to deepen financial markets and strengthen financial intermediation. - Plan includes measures to establish a credit reference bureau, strengthen the payment system, and revise commercial laws to strengthen contract enforcement. ### Program monitoring framework - Progress monitored through assessment criteria (ACs), indicative targets, and structural benchmarks. - Quantitative targets established for end-December 2009 and end-June 2010; program performance assessed in seventh and eighth reviews before end of May and November 2010 respectively. - Selected quantitative figures and targets (as presented): - Ceiling on the increase in net domestic assets of the Bank of Uganda: 486 187 237 289 (table entries shown). - Ceiling on the increase in net claims on the central government by the banking system: 199 -59 -92 88 (table entries shown). - Ceiling on the stock of external payments arrears incurred by the government or the Bank of Uganda: 5/0000 (continuous performance criterion). - Karuma hydropower plant: 400 400 400 400. - JBIC loan guarantee to Phenix textile factory: 6 6 6 6. - Central Corridor (Lake Victoria port, in Euro millions): ** 0 75 75 75 75 (contingent upon completion of feasibility/viability study). - Minimum increase in net international reserves of the Bank of Uganda (US$mn): -115 263 276 288. - Indicative target—Cumulative change in base money (Billions of Uganda shillings): 260.8 335 410. - Stock of domestic budgetary arrears under the CCS: 8/51. - Minimum expenditures under the Poverty Action Fund (including Universal Primary Education component of development expenditure): 160 536.5 817.6 1,097.0. ### Technical Memorandum of Understanding (TMU): key definitions and numeric parameters - Net Foreign Assets (NFA) of the BOU: monthly average (based on daily data) of foreign assets minus foreign liabilities; converted into U.S. dollars at average cross exchange rates for October 2009 and then into Uganda shillings using average US$-USh exchange rate for October 2009. - Program Exchange Rates (US$ per currency unit): - Euro 1.48164 - British pound 1.61854 - Japanese Yen 0.011066 - Kenya shilling 0.01329 - SDR 1.5896 - Uganda shilling (per US$1) 1898.28 - Net Domestic Assets (NDA) definition: monthly average of base money less net foreign assets of the BOU; NDA limits are cumulative changes from average of June 2009 to averages of December 2009, March and June 2010. - Base money definition: sum of currency issued by BOU and commercial banks’ deposits in the BOU (including statutory required reserves and excess reserves), net of deposits of closed banks and Development Finance Funds (DFF) contributed by commercial banks. - Net Claims on the Central Government by the Banking System (NCG): difference between outstanding bank credits to the central government and the central government's deposits with the banking system, excluding deposits in administered and project accounts; includes central government’s deposits with the banking system including full amount of IMF MDRI. - Net International Reserves (NIR) of the BOU: reserve assets of BOU net of short-term external liabilities of the BOU; reserve assets exclude pledged or encumbered external assets; short-term external liabilities defined as liabilities to nonresidents with original maturities less than one year and include outstanding IMF purchases and loans. - Stock of domestic payment arrears under the CCS monitored annually; definition provided for CCS arrears; verified stock of “group B arrears” estimated at USh 94 billion as of June 2009 (preliminary estimate). - Compliance with minimum expenditures under the Poverty Action Fund (PAF) verified on basis of releases to spending agencies. ### TMU adjusters and specific program numeric schedules - NDA and NIR targets adjusted for budget support, HIPC Initiative and MDRI assistance, and external debt-service payments. - Schedule A—Budget support, including HIPC Initiative grants, cumulative from July 1 of fiscal year (quarter figures shown): - December 31, 2009: 609.3 - March 31, 2010: 851.4 - June 30, 2010: 901.4 - Schedule B—Debt service due before HIPC, excluding exceptional financing (quarter figures shown): - December 31, 2009: 119 - March 31, 2010: 160.8 - June 30, 2010: 194.5 - Adjuster for nonbank financing and domestic arrears repayment—quarter figures shown: - (A) Nonbank financing: -74.4 -66.9 -54.7 - (B) Domestic arrears repayment: -40.1 -65.8 -76.1 - (C) Total = (A) – (B): -34.3 -1.1 21.5 - NDA ceiling adjustments: upward by daily average amount of commercial bank automatic access to BOU discount window and rediscounting; adjusted by changes in legal reserve requirements based on percent change multiplied by actual amount of required reserves at end of previous calendar month. ### External borrowing and arrears - Assessment criterion on short-term debt: contracting or guaranteeing external debt with original maturity of one year or less by government or BOU (excluding normal import-related credits). - Ceiling on new nonconcessional borrowing with maturities greater than one year contracted or guaranteed by government, statutory bodies, or the BOU. - Nonconcessional borrowing defined as loans with a grant element of less than 35 percent, calculated using average commercial interest reference rates (CIRRs) published by OECD, with specific discounting and margin rules for different maturities and repayment periods. - Exclusions from nonconcessional borrowing limits: refinancing credits and rescheduling operations, credits extended by the IMF, and specified nonconcessional borrowing for Karuma hydroelectric project, JBIC loan guarantee to Phoenix Textile factory, and Central Corridor (port facility at Lake Victoria) within limits in Table 1 of the MEFP. *Source: _cr1001 - 23. The National Development Plan currently under preparation will be consistent with (PDF chapter/section).* ### 19. The definition of debt, for the purposes of the limit, is set out in point 9 of the ### 19. The definition of debt, for the purposes of the limit, is set out in point 9 of the ### Definition of "debt" (Guidelines on Performance Criteria with Respect to External Debt, No. 9) - Debt means a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. - Primary forms of debt include: - (i) Loans: advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements). - (ii) Suppliers' credits: contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided. - (iii) Leases: arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. - Under this definition, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are included as debt. - Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. - The definition applies not only to debt as defined in Point 9, but also to commitments contracted or guaranteed for which value has not been received. ### Ceiling on accumulation of new external payments arrears - The ceiling on the accumulation of new external payments arrears is zero. - This limit is to be observed on a continuous basis and applies to the change in the stock of overdue payments on debt contracted or guaranteed by: - the government, - the BOU, - statutory bodies from their level at end-June 2006. - It comprises those external arrears reported by the Trade and External Debt Department of the BOU, the Macro Department of the Ministry of Finance that cannot be rescheduled because they were disbursed after the Paris Club cutoff date. ### Reporting, notification, and communication requirements - Authorities will inform the IMF staff in writing at least ten business days (excluding legal holidays in Uganda or in the United States) prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Such policies include but are not limited to: - customs and tax laws (including tax rates, exemptions, allowances, and thresholds), - wage policy, - 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, - any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities. - 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. - Authorities will on a regular basis submit information to IMF staff with the frequency and submission time lag as indicated in Table 1. The information should be mailed electronically to AFRUGA@IMF.ORG. ### Coverage note on public sector borrowing - The definition is consistent with the coverage of public sector borrowing defined by the Fund: includes the debt of the general government, monetary authorities, and entities that are public corporations which are subject to the control by government units, defined as the ability to determine general corporate policy or by at least 50 percent government ownership. ### Summary of selected reporting requirements (institutions and key items) - Bank of Uganda (selected items and frequencies/submission lags): - Issuance of government securities. Weekly; Submission lag: 5 working days - Interest rates on government securities. Weekly; Submission lag: 5 working days - Operations in the foreign exchange market and daily average exchange rates. Weekly; Submission lag: 5 working days - Consumer price index. Monthly; Submission lag: 2 weeks - Balance sheet of the BOU, consolidated accounts of the commercial banks, and monetary survey. Monthly; Submission lag: 4 weeks - Composition of foreign assets and liabilities of the BOU by currency of denomination. Monthly; Submission lag: 4 weeks - Statement of (i) cash balances held in project accounts at commercial banks; (ii) total value (measured at issue price) of outstanding government securities from the Central Depository System (CDS); and (iii) the stock of government securities (measured at issue price) held by commercial banks from the CDS. Monthly; Submission lag: 6 weeks - Summary of stock of external debt, external arrears, and committed undisbursed loan balances by creditor. Quarterly; Submission lag: 6 weeks - Summary table of preliminary program performance comparing actual monthly outcome with adjusted program targets for (i) base money; (ii) net claims on central government by the banking system; (iii) stock of external arrears; (iv) new nonconcessional external borrowing; and (v) net international reserves. Quarterly; Submission lag: 5 weeks - Ministry of Finance (selected items and frequencies/submission lags): - Summary of central government accounts (cash basis for revenues; expenditures when checks are issued except specified items; domestic interest on accrual basis; external debt service on commitment basis). Monthly; Submission lag: 6 weeks - Summary of outstanding stock of group (B) domestic arrears (Group (B) arrears comprise the stock of CCS/IFMS arrears incurred after end-June 2004). Quarterly; Submission lag: 6 weeks - Summary of contingent liabilities of the central government (includes all borrowings by statutory bodies, government guarantees, claims against the government in court cases pending, or court awards that the government has appealed). Quarterly; Submission lag: 6 weeks - Detailed central government account of disbursed budget support grants and loans, HIPC support, and external debt service due and paid. Monthly; Submission lag: 4 weeks - Statement on new loans contracted during the period according to loan agreements. Quarterly; Submission lag: 6 weeks - Updated national accounts statistics (real and nominal) according to UBOS and medium-term projections. Quarterly; Submission lag: 4 weeks ### Selected relations with the IMF and program context (Appendix I highlights) - Outstanding Fund credit was SDR 6 million (3.3 percent of quota) at end-October, 2009. - Membership status: Joined: September 27, 1963; Article VIII. - Quota: Quota 180.50 (SDR Million) 100.00 percent of quota; Fund holdings of currency 180.51 (SDR Million) 100.00 percent of quota. - PRGF Arrangements outstanding: 6.00 (SDR Million) 3.32 percent of quota. - Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal forthcoming: 2009 0.20; 2010 1.00; 2011 1.20; 2012 1.20; 2013 0.20 - Charges/Interest forthcoming: 2009 0.04; 2010 0.12; 2011 0.12; 2012 0.11; 2013 0.11 - Total forthcoming: 2009 0.04; 2010 0.32; 2011 1.12; 2012 1.31; 2013 1.31 - Implementation of HIPC Initiative (selected figures): - Assistance committed by all creditors (US$ Million): Original framework 347.00; Enhanced framework 656.00 - Of which: IMF assistance (US$ million): Original framework 68.90; Enhanced framework 91.00 - Disbursement of IMF assistance (SDR Million): Assistance disbursed to the member 51.51 (original) and 68.10 (enhanced) totaling 119.61; Interim assistance -- 8.20; Completion point balance 51.51 and 59.90 totaling 111.41; Additional disbursement of interest income -- 2.06; Total disbursements 51.51 and 70.16 totaling 121.67 - MDRI-eligible debt (SDR Million): 87.73; Financed by: MDRI Trust 75.85; Remaining HIPC resources 11.88 - Safeguards assessment: Update assessment of the Bank of Uganda completed on April 10, 2007; concluded that the BOU had strengthened its safeguards framework since the 2003 assessment (implementation of International Financial Reporting Standards, publication of financial statements, establishment of an audit committee, strengthening of internal audit). Staff made recommendations to address remaining vulnerabilities in legal and internal control areas. - Exchange rate: As of October 30, 2009, the official exchange rate was U Sh 1883.8 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 floating. - 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. - Resident representative: The Fund has maintained a resident representative in Uganda since July 1982. *Source: IMF staff report excerpts (Informational Annex, prepared by the African Department, December 1, 2009).* ### 2. Fund Work ### _cr1001 - 2. Fund Work ### Program timeline - Sixth Review and Request for an Extension of the PSI: Oct 2009 — Dec 2009 - Seventh Review and Request for a new PSI including development of a macroeconomic scenario incorporating oil; and a cost-benefit analysis of tax exemptions: March 2010 — May 2010 - Staff visit on the government budget: May 2010 — June 2010 - Joint DSA: March 2010 — May 2010 - JSAN on the NDP (new PRSP) when it is completed: May 2010 ### IMF Press Release: Sixth Review and PSI extension (Press Release No. 09/476, December 22, 2009) - The IMF Executive Board completed the sixth review under a three-year Policy Support Instrument (PSI) for Uganda and approved an extension of the PSI for one year through December 14, 2010 to align a possible successor arrangement with the budget cycle and the National Development Plan currently under preparation. - PSI approved on December 15, 2006; program goals include macroeconomic stability, sustainable economic growth, poverty reduction, financial sector deepening, and improved public sector financial management. - PSI framework: designed for low-income countries that may not need IMF financial assistance but seek close cooperation; PSI-supported programs are based on country-owned poverty reduction strategies and are reviewed semi-annually. Key statements by Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair: - Uganda weathered the global crisis relatively well due to prudent economic management and strong fundamentals. - Despite a slowdown, growth remains strong by regional and international standards. - Core inflation has declined; headline inflation increased driven by higher food prices. - External current account performed better than expected, buoyed by strong cross-border exports; international reserves remain adequate. - Flexible exchange rate regime facilitated adjustment to external shocks. - Financial sector largely spared by the crisis and remains sound. - Policy guidance: - Overcome infrastructure bottlenecks while mitigating external shocks. - Address technical and administrative capacity constraints to improve budget execution. - Step up public investment to address infrastructure deficit while preserving fiscal and debt sustainability. - Evaluate borrowing for infrastructure projects on a case-by-case basis for cost effectiveness and impact on debt and fiscal sustainability; embed borrowing decisions in a debt management strategy and medium-term public expenditure management framework. - Increase flexibility in liquidity management to support private demand while bringing down inflation; Bank of Uganda should monitor incipient inflationary pressures and be ready to adjust policy. - Emphasize comprehensive and well-coordinated structural reform agenda, strengthen public financial management, enlarge the local tax base, and boost efficiency of revenue collection. - Manage future oil revenue carefully and transparently through the budget process. ### Statement by Samuel P. Itam, Executive Director for Uganda (December 22, 2009) Findings on recent developments and prospects: - Real GDP growth: - 2007/08: 8.7 percent - Estimated to decline to 6.3 percent in 2009/10 due to external shocks, tightening of liquidity, and slowdown in construction. - Exports: decline to Europe and the United States, offset by surge in exports to regional markets; total exports increased. - International recognition: Named in May 2009 as one of the fastest growing destinations for FDI by fDi Intelligence. - Fiscal outturn 2008/09: - Revenue relative to GDP estimated to have stagnated. - Overall expenditure fell appreciably below original budget estimates, resulting in a smaller-than-programmed budgetary shortfall of 4.4 percent of GDP. - Underexecution of donor-funded projects due to lower-than-expected disbursements and absorption constraints. - Monetary outcomes: - Core inflation easing; headline inflation rose because of higher food prices attributed to high demand for food and drought. - Bank of Uganda uses reserve money as the operating target and broad money as the intermediate target. - Financial sector: resilient due to limited exposure to toxic assets, well-supervised and capitalized banks; banks are liquid, loan quality relatively good, non-performing loans remained relatively low. Policy response — objectives and measures: Fiscal policy - Objective: restore growth to potential trajectory while preserving medium-term macroeconomic stability. - 2009/10 fiscal stance: - Expenditures and net lending to increase by 0.9 percent of GDP. - Financing requirement to be met primarily through external sources, projected at 2.4 percent of GDP on a net basis. - Domestic revenue mobilization: - Acknowledge low tax-to-GDP ratio of about 12 percent. - Measures: roll out the medium taxpayer office; step up enforcement and audit. - Addressing underexecution of donor-funded projects: - Engage development partners to align procurement procedures with authorities in line with the 2006 Paris Declaration on aid effectiveness. Monetary and exchange rate policies - Monetary framework objectives: price stability and credit growth to support economic activity. - Operational change: BOU revised procedures to de-link structural liquidity management from daily liquidity management with Fund support. - Commitment to East African Monetary Union (EAMU) with EAC partners; appreciates Fund TA on regional macro financial issues. - Exchange rate: flexible exchange rate regime maintained, interventions limited to smoothing excessive volatility; flexibility has helped navigate volatility. Financial sector policies - Supervision and regulation: - BOU to closely supervise regulated financial institutions and implement remedial measures if financial condition weakens. - Plans to update Financial Institutions Act of 2004 and Microfinance Deposit-taking Institutions Act of 2003. - New regulatory framework to include upward revision of minimum capital requirements; provisions to cover Islamic banking products; regulations to cover insurance products offered by banks and other non-banking financial institutions. - Review regulatory restrictions on lending with maturity over three years to encourage longer term lending by banks. - Strengthen information sharing and regulation for financial institutions operating across borders with other central banks in the East African Community. Structural reforms - National Development Plan (NDP) launched for 2010-2015; aims to transform Uganda from peasantry to a modern and prosperous country within 30 years. - Priority on addressing infrastructure deficit; reforms underway in pension sector, public financial management, and deepening financial markets. - Public Financial Management (PFM): - Roll out Integrated Financial Management System to cover all stakeholders. - Financial markets development: - Implement a five-year financial markets development plan to deepen financial markets and strengthen financial intermediation. - Measures include establishing a credit reference bureau, strengthening the payment system, and revising commercial laws to enforce contracts. - Oil sector preparations: - Establish a sound legal and institutional framework for the oil sector and strengthen resource management capacity. - Authorities welcome Fund TA and engagement in assessing macroeconomic impact of oil exploitation, including Dutch disease effects. Regional initiatives - Deepening EAC integration seen as catalyst for medium-term growth. - Plan to establish a new facility port on Lake Victoria. - Common market protocol concluded, foreseen to come into effect in July 2010; customs union expected to come into effect in January 2010. - Authorities request Fund TA to facilitate regional policy discussions and coordination between EAC members. Conclusion and requests - Uganda’s strong macroeconomic fundamentals and policy framework have helped weather the global crisis. - Authorities committed to continue sound macroeconomic and structural reform policies consistent with the program. - Authorities request continuous support from the Fund, other international financial institutions, and development partners to: - Strengthen macroeconomic stability. - Restore high growth rates with low inflation for poverty reduction. - Attain the MDGs. *Source: _cr1001 - 2. Fund Work (IMF content unit).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1001.pdf_