## _cr10132 ## Source details **Canonical URL:** [_cr10132](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10132.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10132.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10132.pdf.json) --- ### Executive summary — key findings - Performance under the three-year PSI has remained strong; all assessment criteria for the seventh review have been met and staff recommend completion of the review. - The global financial crisis and the regional drought had a relatively limited impact on Uganda’s economy thanks to prudent macroeconomic policies. - The authorities request a new three-year PSI to supersede and cancel the current PSI; the new PSI will be aligned with the budget cycle and guided by the National Development Plan (NDP). - The new PSI will: - Continue to target investment spending to address Uganda’s large infrastructure gap while maintaining low inflation, a flexible exchange rate and a comfortable level of international reserves. - Rely more on domestic revenue and additional external sources, including on less concessional terms, in view of prospective declines in aid. - Reinvigorate structural reforms to strengthen fiscal oversight, increase revenue mobilization, and deepen domestic financial markets. - The PSI-supported program will begin preparing for commercial exploitation of oil and the establishment of the East African Monetary Union (EAMU). - Medium-term outlook favorable but risks are rising; growth expected to rebound to potential in the coming two years; inflation projected to hover around 5 percent; international reserves projected to rise above 5 months of imports. ### Background — institutional and program context - The current PSI was approved by the Board on December 14, 2006 and extended by one year in December 2009; authorities request cancellation of the current PSI and approval of a new three-year PSI. - NDP approved by the cabinet in February 2010; broadens focus from ‘poverty reduction’ to ‘structural transformation’. - Government strategic role centered on: - human resources development (health, education and skills building); - physical infrastructure, particularly energy and transportation; - science, technology and innovation; - facilitation of private access to critical production inputs, particularly in agriculture. - Near-term political environment: preparations for the 2011 presidential and legislative elections; election-related uncertainties noted. ### The 2006–2009 PSI — objectives, achievements and challenges - Objectives: - Create fiscal space for rapid scaling up of public sector investment and encourage private-sector-led growth. - Fiscal policy: increase revenue and rationalize current spending. - Monetary policy: keep inflation at around 5 percent. - Structural reforms: improve tax collection, strengthen public financial management, develop financial infrastructure. - Achievements: - Core and headline inflation declined to 5 percent in 2008 before rising later. - Real GDP growth averaged around 8 percent during the first three years of the PSI; growth peaked at 9.5 percent in 2007/08 and was 7 percent in FY2008/09. - Gross international reserves grew to over $2 billion, or about 5 months of imports. - Challenges and constraints: - Weak public financial management; capital spending repeatedly fell short of budget. - Accumulation of arrears; compliance with structural conditionality declined to 40 percent. ### Recent developments and program performance (first half 2009/10) - Growth and inflation: - Real GDP growth 7 percent in FY2008/09; activity decelerated more markedly in FY2009/10. - Growth expected to rebound and reach 5.6 percent for FY2009/10 as a whole. - Core inflation decelerated to a 12-month rate of 6.5 percent in March (from 9.9 percent in September 2009). - External and financial indicators: - External current account projected at 5 percent of GDP in FY2009/10 (small increase largely on account of lower official transfers). - Shilling appreciation and subsequent depreciation: appreciated by 19 percent between June and November 2009; depreciated by around 9 percent between November 2009 and March 2010. - Gross international reserves (including the SDR allocation) stood at about 5.1 months of imports in December. - Financial sector: system capitalization adequate in aggregate; NPLs increased but overall level still low; decline in overall bank profitability; operational risks from rapid mobile banking expansion. ### The new PSI — objectives and policy focus - Guided by the National Development Plan (NDP). - Policy priorities: - Maintain low inflation, a flexible exchange rate, and comfortable international reserves while targeting investment to close infrastructure gaps. - Strengthen fiscal oversight and PFM to prevent accumulation of arrears and improve budget execution. - Increase domestic revenue mobilization and deepen domestic financial markets. - Prepare for management of oil resources and macro implications of EAMU participation. - Structural conditionality approach: narrower focus on incremental, macro-critical steps; priority actions include strengthening account management and control of arrears, tax policy reforms and tax administration improvements, and financial sector reforms to consolidate banking stability. ### Macroeconomic outlook and risks - Outlook: - Growth expected to rebound to potential in the next couple of years on a supportive fiscal stance and higher global and regional demand. - Inflation projected to hover around 5 percent. - International reserves projected to rise above 5 months of imports. - Main risks: - Regional vulnerability to security and weather-related shocks. - Unexpected shortfalls in aid (donor grants expected to decline). - Domestic election-related tensions and resistance to structural reform. ### A. Fiscal policy — targets, measures, and financing - Public investment target: - Increase from 6 ½ percent of GDP in 2008/09 to 8 percent by 2011/12. - New financing needs: - Donor grants expected to decline to about 1½ percent of GDP by the end of the program period (from 3½ percent in FY2008/09). - Raising public investment ratio to 8 percent of GDP will require mobilizing additional financing equivalent to about 3½ percentage points of GDP. - Revenue mobilization: - Program target: increase tax collections by 1½ percent of GDP over the coming three years. - Review all existing tax incentives and exemptions in initial program year. - Borrowing strategy and limits: - PSI includes a ceiling of $500 million on non-concessional borrowing for the duration of the program (equivalent to about 0.7 percent of GDP a year, on average over the PSI period). ### Fiscal measures to strengthen spending controls (selected) - Report to Parliament of unspent budget balances at the end of each fiscal year mandatory; subsequent use allowed only with new Parliamentary appropriation. - Review and close government accounts not associated with legitimate government activities (structural benchmark). - Extend centralized payment procedure to utilities and rents in the next budget cycle (structural benchmark). - Mandatory rotation of accountants and procurement officers to reduce collusion (structural benchmark). - Expand use of integrated management and payroll systems across government entities (structural benchmark). ### B. Monetary and financial sector policies - Monetary objectives and tools: - Aim: keep annual underlying inflation at 5 percent on average, using base money as an operating target. - Exchange rate: remain flexible, sporadic BOU intervention to smooth undue volatility. - Reserve policy: - Objective to maintain comfortable international reserves; reserve accumulation projected to slow in near term before regaining steam. - Financial market development: - Financial markets development plan expected to be finalized in June 2011. - Pension sector reform: bill approved by Cabinet in December 2009 and on track to be submitted to Parliament before year end. - Steps to increase minimum bank capital requirements and extend regulatory coverage to large deposit-taking microfinance institutions. ### C. Management of oil resources - Uncertainty and potential scale: - Reserves potentially as large as 2 billion barrels. - Oil could account for around 8 percent of Uganda’s GDP, and up to one third of government revenues. - Oil reserves currently expected to last for around 25 years. - Macro implications and risks: - Competitiveness risks from real exchange rate appreciation and inflation. - Increased foreign exchange market size and volatility; risk of asset bubbles from private financial inflows. - Monetary policy alone likely insufficient to address appreciation and inflation pressures; fiscal policy will play a central role. - Policy responses: - Establish sound legal and institutional framework for management and use of oil revenues; expert review of public finance legislation. - Consider fiscal rules (e.g., savings rule or public spending-to-GDP ceiling) to preserve wealth and smooth spending. - Strengthen PFM, raise non-oil tax collections, improve infrastructure and financial access, and implement transparent public communication strategy. ### Monitoring framework, quantitative targets and TMU (selected) - Monitoring via assessment criteria (ACs), indicative targets (IT), and structural benchmarks (SBs); assessment dates for first year: end-June 2010 and end-December 2010. - Selected quantitative ceilings and floors (cumulative changes and program points): - Ceiling on the increase in net domestic assets (NDA) of the Bank of Uganda: 252 54 144 181 221 (table alignment to test dates). - Ceiling on the increase in net claims on the central government by the banking system: 94 31 82 103 123. - Ceiling on the contracting or guaranteeing of new nonconcessional external debt with maturities greater than one year by the public sector: 500 500 500 500 500. - Minimum increase in net international reserves (NIR) of the Bank of Uganda (US$mn): 288 183 649 60. - Indicative target — Ceiling on the increase in base money liabilities of the Bank of Uganda (cumulative change): 373 89 213 274 335. - Stock of domestic budgetary arrears under the Commitment Control System (CCS) (monitored annually): 5 1 5 1. - Minimum expenditures under the Poverty Action Fund (USh millions): 1,097.0 160.0 579.0 883.0 1,184.8. - TMU definitions and program exchange rates (selected): - Uganda shilling (per US$1) 1898.28. - Euro 1.48164; British pound 1.61854; Japanese Yen 0.011066; Kenya shilling 0.01329; SDR 1.5896. - Reporting requirements: detailed monthly, quarterly and annual reporting by BOU and Ministry of Finance with specified submission lags. ### Structural benchmarks (selected first-year) - Complete and publish review of tax holidays and exemptions and submit recommendations to Cabinet — Date: June 30, 2010. - Extend STP to utility sector (electricity, water, telephone, and rental payments) — Date: July 31, 2010. - Submit Retirement Benefits Authorities Bill to parliament — Date: August 31, 2010. - Implement pilot IPPS in four commissions, four ministries, judiciary and two local governments — Date: September 30, 2010. - Report on implementation of mandatory rotation of accountants and procurement officers — Date: December 31, 2010. - Inventory and closure of unjustified government accounts — Date: December 31, 2010. - Develop high-frequency activity indicators for formal sector — Date: March 31, 2011. ### Debt sustainability and borrowing policy (selected) - Public and publicly guaranteed external debt was 13.8 percent of GDP in 2008/09. - Domestic debt amounts to less than 10 percent of GDP. - DSA conclusions: - Public and publicly guaranteed external debt expected to remain sustainable over next 20 years; debt-burden indicators remain well below policy-dependent thresholds. - PV of debt-to-GDP: rises from 8 percent in 2009/10 to 13 percent in 2014/15, then stabilizes at about 14 percent in outer years. - Stress tests: external debt resilient to standardized shocks. - Policy implications: - Continue reliance on concessional borrowing; limited non-concessional borrowing feasible for high-yield investments. - PSI includes ceiling of $500 million on non-concessional borrowing for duration of program. ### Projections and key macro-fiscal indicators (selected, preserved exactly) - Growth and inflation: - Real GDP: 7.1 (2008/09 actual), 6.3 (2009/10 Prel.), 5.6 (Sixth Rev.), 6.4 (Proj. 2010/11), 7.0 (Proj. 2011/12), 7.2 (Proj. 2012/13), 7.4 (Proj. 2013/14). - Headline inflation (end of period): 12.3 (2008/09), 12.2 (2009/10), 5.0 (Sixth Rev.), 5.3 (2010/11), 5.2 (2011/12), 5.3 (2012/13), 5.5 (2013/14). - Core inflation (end of period): 11.1, 7.9, 3.9, 5.0, 5.0, 5.0. - Public finance ratios (percent of GDP): - Revenue: 12.5 (2008/09), 12.8 (2009/10), 12.5 (Sixth Rev.), 12.5 (2010/11), 13.5 (2011/12), 14.0 (2012/13), 14.4 (2013/14). - Grants: 3.4, 2.6, 2.4, 1.8, 1.8, 1.6, 1.4. - Total expenditure and net lending: -17.8, -17.8, -17.2, -18.1, -18.8, -18.7, -18.9. - Overall balance (including grants): -1.9, -2.5, -2.3, -3.2, -3.6, -3.2, -3.1. - Public (domestic) investment (percent of GDP — public component): 6.2, 7.2, 5.6, 6.7, 7.9, 7.9, 8.1. - External sector and reserves: - External debt (including Fund, percent of GDP): 13.9, 14.3, 14.0, 15.6, 17.6, 18.9, 19.9. - Current account balance (including grants, percent of GDP): -4.8, -6.7, -5.3, -6.2, -6.1, -5.7, -5.6. - Gross foreign exchange reserves (months of next year's imports): 4.9, 4.9, 5.1, 4.8, 4.9, 5.0, 5.1. - Key program numeric targets and projections (preserved): - NDP approval: February 2010. - Public investment: from 6 ½ percent of GDP in 2008/09 to 8 percent by 2011/12. - Grants projected decline: from 3½ percent in FY2008/09 to about 1½ percent of GDP by the end of the program period. - Additional financing required to reach 8 percent public investment: about 3½ percentage points of GDP. - Program target to increase tax collections: 1½ percent of GDP over the coming three years. - PSI non-concessional borrowing ceiling: $500 million for the duration of the program. - Non-concessional borrowing equivalent: about 0.7 percent of GDP a year, on average over the PSI period. - Inflation projection: hover around 5 percent. - International reserves projection: rise above 5 months of imports. - Oil potential: reserves potentially as large as 2 billion barrels. - Oil share estimates: oil could account for around 8 percent of Uganda’s GDP, and up to one third of government revenues. - Oil reserves expected duration: around 25 years. - Financial markets development plan expected finalization: June 2011. ### Program monitoring, implementation and staff appraisal - Monitoring framework: quantitative assessment criteria, indicative targets, and structural benchmarks; continuous assessment criteria include nonaccumulation of external arrears and ceilings on new nonconcessional external debt. - Assessment dates for the first year: end-June 2010 and end-December 2010. - Staff appraisal: - Prudent macroeconomic management allowed Uganda to emerge from shocks relatively unscathed. - Persistent structural rigidities and PFM weaknesses remain priorities for reform. - Staff recommend completion of the 7th review and support request for a new PSI focused on infrastructure build-up and narrowly focused structural conditionality. - Main program risks: - Loss of investor and donor confidence due to pre-election uncertainties. - Regional shocks given fragile security in neighboring countries. - Program predicated on conservative financing assumptions. *Source: Excerpt from IMF staff report chapter on the new PSI and Uganda’s NDP.* ### Executive Summary........................................................................................4 ### _cr10132 - Executive Summary ### Executive summary — key findings - Performance under the three-year PSI has remained strong, although progress in structural reforms has been mixed. All assessment criteria for the seventh review have been met and staff recommend completion of the review. - The global financial crisis and the regional drought had a relatively limited impact on Uganda’s economy thanks to prudent macroeconomic policies. Activity decelerated recently but remains robust and is expected to rebound shortly. - The authorities request a new three-year PSI to supersede and cancel the current PSI. The new PSI will be more closely aligned with the budget cycle and guided by the National Development Plan (NDP). - The new PSI will: - Continue to target investment spending to address Uganda’s large infrastructure gap while maintaining low inflation, a flexible exchange rate and a comfortable level of international reserves. - Rely more on domestic revenue and additional external sources, including on less concessional terms, in view of prospective declines in aid. - Reinvigorate structural reforms to strengthen fiscal oversight, increase revenue mobilization, and deepen domestic financial markets. - The PSI-supported program will begin preparing for commercial exploitation of oil and the establishment of the East African Monetary Union (EAMU), both of which pose multiple policy challenges. - The medium-term outlook is favorable but risks are rising. Growth is expected to rebound to potential in the coming two years, supported by a fiscal stance and higher global and regional growth, but remains vulnerable to exogenous shocks (including unexpected shortfalls in aid) and election-related uncertainties. *Source: Executive Summary* ### Background — institutional and program context - Uganda has shown firm commitment to prudent macroeconomic policies throughout the PSI-supported program; a strong policy framework helped make the economy more resilient to exogenous shocks. - Program positioning and rationale: - The current PSI was approved by the Board on December 14, 2006 and extended by one year in December 2009. The authorities request cancellation of the current PSI and approval of a new three-year PSI aligned with the budget cycle and dovetailing with the NDP. - With prudent macro policies, ample foreign exchange reserves, and low external debt, Uganda remains well positioned for continued engagement under the PSI. - Near-term political environment: preparations for the 2011 presidential and legislative elections; President Yoweri Museveni and the NRM widely expected to win a fourth term, but political and ethnic tensions are flaring and governance issues are being exacerbated by prospects of large fiscal revenues once oil reserves are commercially used. ### The 2006–2009 PSI — achievements and challenges (Box 1) - Objectives of the 2006 PSI: - Create fiscal space for rapid scaling up of public sector investment and encourage private-sector-led growth. - Fiscal policy: increase revenue and rationalize current spending. - Monetary policy: keep inflation at around 5 percent through increased foreign exchange sales from aid inflows to reduce interest rates and encourage private sector credit growth. - Structural reforms: improve tax collection, strengthen public financial management (especially control of spending arrears), and develop financial infrastructure to support financial deepening. - Achievements: - Macroeconomic stability largely maintained. - Both core and headline inflation declined to 5 percent in 2008 before rising later due to world food and fuel prices, and a regional drought. - Real GDP growth averaged around 8 percent during the first three years of the PSI; growth peaked at 9.5 percent in 2007/08 and was 7 percent in FY2008/09. - Gross international reserves grew to over $2 billion, or about 5 months of imports. - Challenges and constraints: - Lack of progress in public financial management and weak implementation capacity constrained scaling up of public investment; capital spending repeatedly fell short of budget. - Weak expenditure commitment controls led to accumulation of arrears. - Exchange rate appreciation and surge in portfolio inflows required adjustments to monetary policy. - Compliance with structural conditionality weakened over the course of the program: overall compliance declined to 40 percent (compared to 80 percent under previous Fund programs and 50 percent in other PSIs); the highest number of missed conditions related to public financial management. ### Recent developments and program performance - Growth and inflation: - The first-round impact of the global financial crisis was relatively limited for Uganda. - Real GDP growth was 7 percent in FY2008/09. - Activity decelerated more markedly in FY2009/10; growth is expected to rebound and reach 5.6 percent for FY2009/10 as a whole. - Core inflation decelerated to a 12-month rate of 6.5 percent in March (from 9.9 percent in September 2009). - Core and headline inflation had declined to 5 percent in 2008. - External and financial indicators: - Exports continued to expand while import growth slowed, narrowing the trade deficit. - External current account projected at 5 percent of GDP in FY2009/10 (small increase largely on account of lower official transfers). - Rebound in capital inflows pressured the shilling: appreciated by 19 percent between June and November 2009; subsequently depreciated by around 9 percent between November 2009 and March 2010. - Gross international reserves (including the SDR allocation) stood at about 5.1 months of imports in December. - Financial sector: system capitalization adequate in aggregate; NPLs increased but overall level still low; decline in overall bank profitability with some smaller banks registering losses and periodic liquidity stresses; operational risks increased as mobile banking expanded rapidly. - Transmission and policy implementation constraints: - Monetary transmission to the real economy has been weak. Large liquidity injections by the Bank of Uganda (BOU) led to a sharp fall in interest rates on government securities, but lending rates did not fall commensurately as banks adopted a more conservative risk stance; private credit growth slowed markedly and trended up only marginally by the end of 2009. - Reserve money, broad money and private sector credit grew below program levels in the year to December 2009. - Budget under-execution prevented the delivery of the expected fiscal stimulus: VAT receipts, personal income taxes and import duties grew more slowly; capital spending was significantly under-executed due to investment planning weaknesses and teething problems with new procurement procedures. - The BOU used foreign exchange operations actively to smooth volatility and support activity while maintaining commitment to a flexible exchange rate. - Program monitoring and fiscal management: - All end-December assessment criteria and indicative targets have been met through the first half of FY2009/10. - No structural benchmarks were due for this review, but progress was noted toward submission to Parliament of a draft regulatory framework for pension funds and rollout of the Integrated Personnel and Payroll system. - Evidence of weakening in budget management: arrears accumulated since FY2004/05 through January 2010 estimated at around ½ percent of GDP; unspent balances equivalent to about ½ percent of GDP carried forward from the previous fiscal year outside established budget procedures. ### The New PSI — objectives and policy focus - Overall guidance: - The new PSI-supported program will be guided by the National Development Plan (NDP). - Beyond maintaining macroeconomic stability, policies will continue to alleviate constraints to growth via a build-up in public infrastructure and provide new impetus to structural reforms, particularly in the fiscal area. - The government program will aim to strengthen institutions ahead of expected oil production and lay groundwork for Uganda’s participation in the future East African Monetary Union. - Policy priorities highlighted: - Maintain low inflation, a flexible exchange rate, and a comfortable level of international reserves while targeting investment spending to close infrastructure gaps. - Strengthen fiscal oversight and PFM to prevent accumulation of arrears and improve budget execution. - Increase domestic revenue mobilization and deepen domestic financial markets. - Prepare for management of oil resources and address macroeconomic implications of oil and EAMU participation. *Source: Executive Summary and Sections I–III of the IMF staff report* ### 13. The new PSI will be guided by the objectives and policies outlined by the new ### 13. The new PSI will be guided by the objectives and policies outlined by the new ### PSI objectives and link to the National Development Plan (NDP) - The NDP, approved by the cabinet in February 2010, broadens the policy focus from ‘poverty reduction’ to ‘structural transformation’. - Government strategic role: elimination of growth constraints and promotion of private investment in selected priority targets. - Government action centered on four main areas: - human resources development (health, education and skills building); - physical infrastructure, particularly in energy and transportation; - science, technology and innovation; - facilitation of private access to critical production inputs, particularly in agriculture. - PSI-supported program will: - continue to target infrastructure development while ensuring a stable macro-economic environment; - maintain a focus on transport and energy; - recognize likely decline in donor assistance, requiring higher mobilization of domestic revenue and access to new financing sources, including on less concessional terms; - preserve sustainable fiscal and debt positions; - use monetary policy to anchor inflationary expectations and a flexible exchange rate regime to maintain competitiveness and a comfortable level of international reserves; - continue targeted programs in health and education to improve living conditions of the poorest segments as described in the NDP. ### Constraints to growth (Box 2) - Identified main impediments to economic growth and poverty reduction: - Weak public sector management and administration: - PFM slippages affect efficiency in absorbing public funds. - Insufficient funding of spending agencies constrains public institutions and delivery of public goods and services. - Inadequate financial services to the private sector: - limited availability and access to financial services due to lack of financial services infrastructure, high cost of financing, and an underdeveloped capital market. - Weak infrastructure: - Except for a rapidly expanding telecommunications sector, infrastructure is poor. - Transport costs equivalent to effective protection of over 20 percent and an implicit tax on exports of over 25 percent. - Road density indicators at par with average for Sub-Saharan Africa but a much smaller fraction is paved. - Existing railways are in poor shape and carry a negligible volume of freight. - Electricity supply: only 11 percent of the population having access to power from the grid. - Internet infrastructure nascent, concentrated in Kampala. - Insufficient production inputs: - farm inputs and irrigation are costly and not widely employed, increasing agriculture vulnerabilities. ### Structural reform agenda and conditionality - Observations: - After a strong start, progress in structural reforms has slowed; new weaknesses emerged, particularly in public financial management. - Multiplicity of objectives and lack of prioritization overwhelmed local implementation capacity and sometimes overshadowed functional reforms. - Limited progress on longstanding problems such as accumulation of domestic arrears and weak account management practices. - Structural conditionality approach: - Narrower focus on specific, incremental steps that can bring quick results in macro-critical areas and improve reform implementation. - Continue to cover fiscal and financial sectors to increase policy effectiveness and raise future growth. - Many actions will require external technical support. - Agreed priority actions: - Public financial management: strengthen account management and control accumulation of domestic arrears (immediate priority). - Tax policy reforms + improvements in tax administration to raise domestic revenue and create fiscal space for public investment. - Financial sector reforms: consolidate banking stability and facilitate financial deepening through institutional and legal reforms. ### Macroeconomic context and outlook - PSI prepares for two major future events: commercial exploitation of oil and establishment of the East African Monetary Union (EAMU); dates uncertain and years away but will raise macroeconomic policy challenges. - Program policies aim to reach consistency with EAMU requirements over the medium term (including international reserve cover and fiscal deficit) and strengthen competitiveness and fiscal transparency in preparation for the oil era. - Outlook and risks: - Growth expected to rebound to its potential in the next couple of years on supportive fiscal stance and higher global and regional demand. - Inflation projected to hover around 5 percent. - International reserves projected to rise above 5 months of imports. - Risks mounting, mostly on the downside: regional vulnerability to security and weather-related shocks, unexpected shortfalls in aid, domestic election-related tensions, and resistance to structural reform that could put pressure on fiscal position and donor/investor confidence. ### A. Fiscal Policy — targets, measures, and financing - Public investment target: - Increase from 6 ½ percent of GDP in 2008/09 to 8 percent by 2011/12 (scaled down slightly due to implementation and absorptive capacity constraints). - Implementation and controls: - More efficient budget execution required; step up capacity building in spending agencies. - Expanded use of Public Private Partnerships (PPPs) encouraged; support for establishing a sound legal and monitoring framework for PPPs (MEFP ¶23). - Strengthen spending controls and oversight; procedures to ensure transparent treatment of unspent budget balances. - Targeted measures have had some success (e.g., centralized payment system appears to have stemmed increase in pension arrears). - New financing needs: - Donor grants expected to decline to about 1½ percent of GDP by the end of the program period (from 3½ percent in FY2008/09). - Raising public investment ratio to 8 percent of GDP will require mobilizing additional financing equivalent to about 3½ percentage points of GDP. - Scope to raise domestic revenue: - Uganda’s tax-to-GDP ratio is low by international and regional standards, including in the EAC. - Recent efforts relied on improvements in revenue administration; forthcoming national identification system will help reduce tax evasion. - Initial program-year objective: review all existing tax incentives and exemptions and recommend streamlining (MEFP ¶14). - Authorities agreed to consider additional tax policy measures in subsequent years (MEFP ¶21), potentially including broadening coverage of taxes on property, capital gains or informal activities. - Program target: increase tax collections by 1½ percent of GDP over the coming three years. - Measures to strengthen spending controls (Box 3): - Strengthening account management: - Report to Parliament of unspent budget balances at the end of each fiscal year will become mandatory and their subsequent use allowed only with new Parliamentary appropriation. - Authorities to review all existing government accounts and close promptly those not associated with a legitimate government activity (structural benchmark). - Relevant financial legislation to be reviewed and amended as needed to remove scope for diverting budgetary funds. - Controlling domestic arrears: - Centralized payment procedure to be extended to utilities and rents in the next budget cycle (structural benchmark). - Introduce more realistic budget projection mechanisms to prevent under-provisioning of recurrent spending. - Mandatory rotation of accountants and procurement officers to reduce opportunities for collusion (structural benchmark). - Expand use of integrated management and payroll systems across government entities to improve oversight (structural benchmark). - Borrowing strategy and limits: - Uganda intends to continue to rely on concessional resources as far as possible and resort to non-concessional borrowing only if a shortfall materializes (MEFP ¶24). - Debt sustainability analysis indicates measured amounts of non-concessional borrowing could be contracted without endangering debt sustainability. - Domestic financing could be increased as long as monetary stability and inflation targets are not endangered. - Constraints: limited absorptive capacity and still evolving public investment procedures. - PSI includes a ceiling of $500 million on non-concessional borrowing for the duration of the program (equivalent to about 0.7 percent of GDP a year, on average over the PSI period); leaves debt indicators well below DSA thresholds and is consistent with preliminary investment program. Could be revisited as investment plans and regional infrastructure options are specified. ### B. Monetary and Financial Sector Policies - Monetary policy objectives and tools: - Aim: keep annual underlying inflation at 5 percent on average, using base money as an operating target. - Exchange rate: remain flexible, with only sporadic BOU intervention to smooth undue volatility. - Authorities will seek to build up international reserves in the context of the EAC. - Operations and coordination: - Monetary management will rely on a mix of foreign exchange and domestic securities operations. - With MCM technical assistance, BOU to enhance flexibility of short-term liquidity management. - Absence of high-frequency activity indicators has complicated decisions; authorities taking steps to fill gap (MEFP ¶15). - Closer coordination with Ministry of Finance on near-term cash flow projections emphasized. - Reserve policy and considerations: - Objective to maintain comfortable international reserves given vulnerability to external shocks and oil-sector uncertainties. - Shortfalls in donor aid, particularly in election year, may dampen reserve accumulation. - Large public investment drive may pressure reserve cover if investments entail large import increases. - Reserve accumulation projected to slow in near term before regaining steam in outer years. - Targeted foreign exchange market intervention seen as meritorious to smooth excessive volatility. - Financial market development and supervision: - A new, comprehensive financial markets development plan is being prepared under a common EAC framework, aiming to harmonize legal and regulatory infrastructure regionally. - Plan will include a roadmap to increase access to financial services (including rural areas) and reduce borrowing costs for smaller enterprises; expected to be finalized in June 2011 and could form the basis for structural reforms in later PSI years. - External technical expertise, including from the IMF, would be desirable for implementation. - Pension sector reform: bill establishing a pension fund regulator approved by Cabinet in December 2009 and on track to be submitted to Parliament before year end; assessment of viability of National Social Security Fund and other schemes planned (MEFP ¶25). - BOU oversight improvements: - Financial stability department established; first Financial Stability Report published in January 2010. - Steps to increase minimum bank capital requirements in line with other EAC members and extend regulatory coverage to large deposit-taking microfinance institutions (MEFP ¶17). - Staff recommend continued watchfulness on small banks with deteriorating balance sheets and urged review of crisis preparedness and capacity for contingency planning and crisis resolution. ### C. Management of Oil Resources - Uncertainty and potential scale: - Timing, scope and pace of oil production uncertain; ongoing exploration and technical analyses determine outcomes. - Reserves potentially as large as 2 billion barrels. - Oil revenues likely to exceed one third of total government revenues. - Macro implications (Box 4 summary): - Preliminary estimates suggest oil could account for around 8 percent of Uganda’s GDP, and up to one third of government revenues. - Oil reserves currently expected to last for around 25 years. - Substantial size of oil revenues combined with short duration and volatility pose significant macroeconomic management challenges. - Main risks: - Competitiveness: demand for non-tradables will rise with government spending and private expectations; resulting shilling appreciation (inflation and/or nominal exchange rate) risks competitiveness. - Money and foreign exchange markets: oil export earnings will increase foreign exchange market size abruptly; oil price movements will increase exchange rate volatility; risk of asset bubbles from private financial inflows. - Monetary policy alone likely insufficient to address appreciation and inflation pressures; fiscal policy will take a more central role. - Policy responses and preparedness: - Authorities committed early to establishing sound legal and institutional framework for management and use of oil revenues; initiating expert review of public finance legislation and ready to introduce necessary amendments (MEFP ¶29). - Authorities value technical assistance from the Fund and development partners; staff and authorities agreed that a fiscal ROSC would provide timely assessment of fiscal institutions. - PSI-supported structural reforms to prepare for oil era: - Strengthen public financial management systems for efficient oil revenue spending. - Raise non-oil tax collections to ensure post-oil fiscal sustainability and offset potential aid retrenchment. - Improve public infrastructure and increase financial access to mitigate competitiveness strains from oil-related appreciation pressures. - Promote a more fluid and supportive investment climate and reduce transaction costs—policies with long lead times and to be initiated promptly. - Implement a transparent and well-focused public communication strategy with investors, donors and civil society to manage private expectations. - Fiscal rule considerations: - A fiscal rule could govern accumulation and spending of oil wealth to: (i) preserve a share of oil wealth for future generations; (ii) smooth spending to insulate the non-oil economy from volatile oil revenues; (iii) mitigate deterioration in competitiveness as public spending typically features a large non-tradable component. - Examples: Timor-Leste and Chile operate commodity funds with complex fiscal rules; Uganda may consider a simpler fiscal rule initially with sufficient flexibility. - Authorities expressed interest in anchoring fiscal policy through a ceiling on the public spending-to-GDP ratio; technical assistance may be useful. ### Key numeric targets and projections (preserved exactly as in source) - NDP approval: February 2010. - Public investment: from 6 ½ percent of GDP in 2008/09 to 8 percent by 2011/12. - Grants projected decline: from 3½ percent in FY2008/09 to about 1½ percent of GDP by the end of the program period. - Additional financing required to reach 8 percent public investment: about 3½ percentage points of GDP. - Program target to increase tax collections: 1½ percent of GDP over the coming three years. - PSI non-concessional borrowing ceiling: $500 million for the duration of the program. - Non-concessional borrowing equivalent: about 0.7 percent of GDP a year, on average over the PSI period. - Inflation projection: hover around 5 percent. - International reserves projection: rise above 5 months of imports. - Oil potential: reserves potentially as large as 2 billion barrels. - Oil share estimates: oil could account for around 8 percent of Uganda’s GDP, and up to one third of government revenues. - Oil reserves expected duration: around 25 years. - Financial markets development plan expected finalization: June 2011. *Source: Excerpt from IMF staff report chapter on the new PSI and Uganda’s NDP.* ### Box 4.The Macro-Economic Implications of Oil (concluded) ### Box 4. The Macro-Economic Implications of Oil (concluded) ### Oil, fiscal rules, and the East African Monetary Union - Uganda is the only prospective EAMU member with large proven oil resources. - In a future EAMU, Uganda’s business cycle would not be fully synchronized with those of other oil-importing EAMU members. - Monetary policy in the EAMU will be set based upon economic conditions in the union as a whole; it would likely be loosened during oil price booms to support growth in oil importers, fueling further inflationary pressures in oil-exporting Uganda. - The monetary union will place an additional burden on fiscal policy as a counter-cyclical instrument in Uganda. - Policy recommendations: - Consider measures to strengthen automatic stabilizers (through an increased tax effort and the development of social transfers). - Consider a fiscal rule that weakens the link between oil prices and domestic activity—for instance, a savings rule that places a relatively low discount rate on the consumption of future generations. ### IV. The program for the remainder of 2009/10 and 2010/11 — objectives and near-term outlook - Near-term aim: revive growth back to its potential and implement an ambitious, upfront effort at fiscal structural reforms to improve fiscal spending efficiency. - Growth projections: - Growth in FY2009/10: 5.6 percent. - Growth in FY2010/11: 6.4 percent. - Inflation and reserves: - Inflation is expected to ease to about 5 percent at the end of the fiscal year but pressures may arise from the recent depreciation of the shilling. - Gross international reserves are projected to remain at a comfortable level, reflecting, inter alia, the positive impact of the SDR allocation, which provides an additional buffer against shocks and downside risks. ### A. Fiscal policy — stimulus, execution risks, and 2010/11 stance - Near-term fiscal measures: - Public spending is being accelerated in the second half of FY2009/10 to provide stimulus to domestic demand. - Expenditure worth around ½ percent of GDP is being reallocated from development to current items to address humanitarian emergencies and provide for under-budgeted pensions. - Unspent balances from the FY2008/09 development budget are being carried forward, for an amount equivalent to another ½ percent of GDP. - Assuming full execution of the revised budget, the fiscal stance will be roughly neutral for the year, but strongly expansionary in the second half. - Structural measures and governance: - Carry-forward of unspent balances from 2008/09 without Parliamentary re-appropriation creates potential for leakages and ineffective spending; authorities agreed to tighten relevant legislation (MEFP ¶27). - Reallocated items should be subject to the same budgetary discipline as items approved in the original budget. - FY2010/11 stance and financing: - Fiscal stance will remain slightly expansionary in FY2010/11. - Investment spending is scheduled to increase by around 1 percentage point of GDP as spending agencies gain familiarity with planning and procurement procedures. - Tax revenue will rebound with the pickup in activity and efficiency gains, but is expected to be insufficient to cover the expected shortfall in grants. - To avoid squeezing public infrastructure investment and denting the recovery, the program envisages a temporary increase in domestic financing of the government budget of 0.6 percent of GDP (year-on-year) and a small dip in the reserve cover. - These are upper bound estimates; less-than-complete execution of the budget, and higher donor disbursements, would reduce financing needs. - Key fiscal and macro statistics (from table "Uganda: Fiscal Impulse of the Central Government, FY2007/08–2010/11") - Columns: 2007/08 (Actual); 2008/09 (Est.); 6th Review; 2009/10 (Proj.); 2010/11 (Proj.) - Overall fiscal balance (incl. grants): 2007/08 -2.4; 2008/09 -1.9; 6th Review -2.5; 2009/10 -2.3; 2010/11 -3.2 - Primary balance: 2007/08 -1.1; 2008/09 -1.0; 6th Review -1.5; 2009/10 -1.3; 2010/11 -2.1 - Fiscal impulse (unadjusted for cyclical position)1: 2007/08 0.7; 2008/09 -0.1; 6th Review 0.6; 2009/10 0.3; 2010/11 0.8 - Cyclical adjustment: 2007/08 0.3; 2008/09 0.0; 6th Review -0.1; 2009/10 -0.3; 2010/11 -0.1 - Fiscal impulse adjusted for cyclical position2: 2007/08 1.0; 2008/09 -0.1; 6th Review 0.5; 2009/10 0.0; 2010/11 0.7 - GDP growth: 2007/08 8.7; 2008/09 7.1; 6th Review 6.3; 2009/10 5.6; 2010/11 6.4 - Potential GDP growth: 2007/08 7.0; 2008/09 7.0; 6th Review 7.0; 2009/10 7.0; 2010/11 7.0 - Gap: 2007/08 1.7; 2008/09 0.1; 6th Review -0.7; 2009/10 -1.4; 2010/11 -0.6 - Cyclical elasticity of primary balance: 2007/08 0.2; 2008/09 0.2; 6th Review 0.2; 2009/10 0.2; 2010/11 0.2 - Notes: - 1 The impulse is calculated as the change in the primary balance with respect to the preceding year; (-) = fiscal withdrawal. - 2 The adjusted fiscal impulse is equal to the fiscal impulse, adjusted for the fiscal impact of the deviation of growth from potential; the calculation assumes an elasticity of 0.2 and a potential GDP growth of 7 percent. ### B. Monetary and exchange rate policies - Near-term stance: - Monetary policy will be cautiously accommodative. - Reserve money is projected to grow by 19 percent in FY2009/10 to cover shortfalls in budget financing while providing room for private sector credit growth. - This stance is not expected to generate inflationary pressures given weak activity, but authorities should remain vigilant and ready to tilt policy as demand picks up. - FY2010/11 stance: - Reserve money growth of about 14 percent, consistent with a core inflation target of 5 percent, is predicated on a pick-up in economic activity and full execution of the planned fiscal stance. - Authorities view the development of high-frequency activity indicators as key to enhancing the efficiency of monetary policy. - Reserves: - International reserves are not expected to come under strain in the near term. - In FY2009/10, muted import growth is expected to lead to an additional build-up of reserves despite weaker capital inflows. - The expected shortfall in budget support may constrain the ability to increase reserves further in the following year; a drawdown in reserves to cushion a temporary shock was deemed appropriate by the authorities and staff. ### C. Program monitoring under the three-year PSI - Monitoring framework: - Quantitative assessment criteria, quantitative indicative targets, and structural benchmarks have been proposed (MEFP Tables 1 and 2). - Quantitative targets monitored semiannually include net credit to the central government from the banking system, net domestic assets of the central bank, and net international reserves of the BOU. - Continuous monitoring targets include nonaccumulation of external arrears, contracting or guaranteeing of new nonconcessional external debt, and new short-term external debt. - Standard provisions on the exchange system and trade issues that apply to the use of the Fund’s financial resources will apply as continuous assessment criteria under the PSI. - Assessment dates for the first year: end-June 2010 and end-December 2010. ### V. Staff appraisal — evaluation and recommendations - Macroeconomic assessment: - Prudent macroeconomic management has allowed Uganda to emerge from a succession of adverse external shocks relatively unscathed. - Although growth has slowed, it remains enviable by international standards and is set to rebound quickly. - The authorities' focus on closing the infrastructure gap while maintaining a sound macroeconomic environment should help raise potential output and future income levels. - Structural challenges: - Persistent structural rigidities—including financial sector segmentation and fiscal capacity constraints—have prevented full delivery of intended fiscal and monetary stimulus. - Weaknesses in public financial management affect the efficient use of scarce public resources. - Revamping and refocusing the structural reform program on these hurdles is an important priority; well-targeted external technical assistance can help. - Program endorsement: - Staff recommend completion of the 7th review under the PSI; all quantitative assessment criteria have been met. - The impact of emerging weaknesses in budget implementation and spending controls has been limited and has not jeopardized program objectives; authorities have agreed to take early action in the requested successor PSI. - Staff support the authorities’ request for a new PSI focused on continued infrastructure build-up and narrowly focused structural conditionality to enhance prospects of success. - The PSI-supported program will help maintain macroeconomic stability through the forthcoming election period and prepare Uganda for East African integration and the oil era. *Box 4. The Macro-Economic Implications of Oil (concluded).* ### 47. There are risks to the program but they appear manageable. The first would be a ### _cr10132 - 47. There are risks to the program but they appear manageable. ### Risks and program stance - Main program risks: - Loss of investor and donor confidence due to uncertainties in the run-up to elections. - Regional shocks given the fragile security situation in some of Uganda’s neighbors. - Program mitigation and assumptions: - The program is predicated on conservative financing assumptions. - The authorities have a solid track record of maintaining macroeconomic stability in the face of adverse domestic and external shocks, and staff trust that they will be able to continue to do so if the need were to arise. ### Macroeconomic projections and key statistics (selected) - Real GDP: 7.1 (2008/09 actual), 6.3 (2009/10 Prel.), 5.6 (Sixth Rev.), 6.4 (Proj. 2010/11), 7.0 (Proj. 2011/12), 7.2 (Proj. 2012/13), 7.4 (Proj. 2013/14) - Headline inflation (end of period): 12.3 (2008/09), 12.2 (2009/10), 5.0 (Sixth Rev.), 5.3 (2010/11), 5.2 (2011/12), 5.3 (2012/13), 5.5 (2013/14) - Headline inflation (average): 14.2, 9.5, 4.1, 5.2, 5.3, 5.2 (same order as above years) - Core inflation (end of period): 11.1, 7.9, 3.9, 5.0, 5.0, 5.0 - Broad money (M2, percent change): 26.3, 21.2, 19.3, 13.7, 15.6, 15.9, 16.0 - Domestic credit (percent change): 24.1, 13.7, 11.3, 8.8, 8.3, 8.2, 8.9 - Private sector credit (percent change): 31.6, 21.4, 17.1, 12.7, 13.8, 13.9, 14.2 - Savings and investment gap (percent of GDP): -8.1, -9.2, -7.7, -8.0, -7.9, -7.3, -7.1 - Domestic investment (percent of GDP): 24.2, 24.9, 23.3, 24.7, 26.0, 26.2, 26.6 - Public: 6.2, 7.2, 5.6, 6.7, 7.9, 7.9, 8.1 - Private: 18.0, 17.7, 17.7, 17.9, 18.1, 18.3, 18.5 - National savings (excluding grants, percent of GDP): 16.1, 15.7, 15.6, 16.7, 18.2, 19.0, 19.6 - Public: 0.9, 2.2, 0.9, 1.7, 2.6, 3.1, 3.6 - Private: 15.2, 13.5, 14.7, 15.0, 15.6, 15.9, 16.0 - Current account balance (including grants, percent of GDP): -4.8, -6.7, -5.3, -6.2, -6.1, -5.7, -5.6 - Current account balance (excluding grants, percent of GDP): -8.1, -9.2, -7.7, -8.0, -7.9, -7.3, -7.1 - Net donor inflows (percent of GDP): 4.5, 6.1, 5.3, 3.8, 4.4, 3.8, 3.4 - External debt (including Fund, percent of GDP): 13.9, 14.3, 14.0, 15.6, 17.6, 18.9, 19.9 - External debt-service ratio (percent of exports of goods and nonfactor services): 1.6, 1.0, 1.1, 1.0, 1.3, 1.7, 1.6 ### Government budget and debt (selected) - Revenue (percent of GDP): 12.5 (2008/09), 12.8 (2009/10), 12.5 (Sixth Rev.), 12.5 (2010/11), 13.5 (2011/12), 14.0 (2012/13), 14.4 (2013/14) - Grants (percent of GDP): 3.4, 2.6, 2.4, 1.8, 1.8, 1.6, 1.4 - Total expenditure and net lending (percent of GDP): -17.8, -17.8, -17.2, -18.1, -18.8, -18.7, -18.9 - Overall balance (including grants, percent of GDP): -1.9, -2.5, -2.3, -3.2, -3.6, -3.2, -3.1 - Overall balance (excluding grants, percent of GDP): -5.3, -5.0, -4.7, -5.0, -5.4, -4.8, -4.5 - Stock of domestic debt (percent of GDP): 8.4, 6.7, 7.6, 7.0, 6.7, 6.6, 6.5 Memorandum items: - Nominal GDP (U Sh billions): 29,972; 36,330; 35,213; 39,040; 44,014; 49,725; 56,246 - Overall balance of payments (US$ millions): 178; 291; 291; 602; 372; 842; 288 - Gross foreign exchange reserves (months of next year's imports): 4.9; 4.9; 5.1; 4.8; 4.9; 5.0; 5.1 ### Fiscal operations (selected levels, U Sh billions) - Total revenue and grants: 3,800 (2007/08 actual), 4,773 (2008/09 actual), 5,577 (2010/11 Sixth Review), 5,242 (2010/11 Prog.), 5,804 (2011/12), 6,719 (2012/13), 7,722 (2013/14), 8,921 (later proj.) - Revenue: 3,145; 3,758; 4,642; 4,408; 5,106; 5,929; 6,938; 8,116 - Tax revenue: 3,024; 3,560; 4,439; 4,186; 4,856; 5,682; 6,659; 7,805 - Grants: 656; 1,014; 936; 834; 698; 790; 784; 805 - Total expenditures and net lending: 4,384; 5,339; 6,472; 6,046; 7,048; 8,287; 9,320; 10,644 - Current expenditures: 2,881; 3,198; 3,737; 3,810; 4,125; 4,655; 5,243; 5,929 - Development expenditures: 1,362; 1,915; 2,599; 1,987; 2,662; 3,521; 3,961; 4,602 - Overall balance (including grants, U Sh billions): -583; -566; -895; -804; -1,245; -1,568; -1,598; -1,724 - Financing (total): 541; 526; 895; 805; 1,245; 1,568; 1,598; 1,724 - External financing (net): 618; 592; 863; 710; 1,022; 1,413; 1,436; 1,478 - Domestic financing (net): -78; -663; 294; 223; 155; 162; 246 ### Monetary accounts and banking indicators (selected) - Money and quasi-money (M3, U Sh billions): 5,038; 6,298; 7,630; 7,512; 8,541; 9,877; 11,444; 13,277 - Broad money (M2): 3,895; 4,921; 5,961; 5,869; 6,674; 7,717; 8,942; 10,374 - Net foreign assets (U Sh billions): 5,087; 5,711; 5,508; 5,893; 6,370; 7,169; 8,115; 9,130 - Base money (U Sh billions): 1,614; 1,950; 2,360; 2,324; 2,658; 3,099; 3,591; 4,166 - Gross reserves of BOU (US$ millions): 2,684; 2,442; 2,730; 2,730; 2,790; 3,022; 3,301; 3,589 - Banking system indicators (Dec-09): - Return on equity: 18.7 - Return on assets: 2.9 - Regulatory capital to risk weighted assets: 18.7 - Non performing loans to total advances: 4.2 - Loan loss provisions to non performing loans: 79.8 ### External sector and balance of payments (US$ millions) - Current account (selected actuals and projections): -469 (2007/08), -758 (2008/09), -1,196 (2009/10), -942 (2010/11 Prog.), -1,156 (2011/12), -1,246 (2012/13), -1,283 (2013/14) - Percent of GDP: -3.2; -4.3; -6.4; -5.3; -6.2; -6.1; -5.7; -5.6 - Trade balance (US$ millions): -913; -1,139; -1,294; -978; -1,140; -1,233; -1,224; -1,289 - Exports, f.o.b.: 2,597; 3,085; 3,421; 3,432; 3,657; 3,924; 4,229; 4,552 - Coffee exports (volume, millions of 60-kg. bags): 3.0; 3.2; 3.3; 3.3; 3.4; 3.6; 3.8; 4.0 - Imports, f.o.b.: -3,509; -4,225; -4,715; -4,409; -4,797; -5,158; -5,453; -5,842 - Transfers (US$ millions): 1,278; 1,378; 1,322; 1,285; 1,309; 1,383; 1,438; 1,513 - Private transfers: 852; 857; 838; 865; 974; 1,014; 1,082; 1,158 - Capital and financial account: 1,139; 1,434; 1,487; 1,234; 1,216; 1,483; 1,567; 1,685 - Foreign direct and portfolio investment: 817; 631; 816; 816; 923; 1,020; 1,125; 1,245 - Overall balance (US$ millions): 563; 178; 291; 291; 602; 372; 842; 288 ### Quantitative assessment criteria and indicative targets (selected, December 2009) - Ceiling on the increase in net domestic assets of the Bank of Uganda (NDA, cumulative change from June 2009): 187; 288; 121 (Prog./Adj./Prog. figures shown) - Status:  (met) - Ceiling on the increase in net claims on the central government by the banking system (NCG): -59; 62; -64 - Status:  (met) - Ceiling on the stock of external payments arrears incurred by the government or the Bank of Uganda: 0; 0; 0 - Status:  (met) - Ceiling on new nonconcessional external borrowing with maturities greater than one year contracted or guaranteed by the government or the Bank of Uganda: - Karuma hydropower plant: 400; 400; 0 - JBIC loan guarantee to Phenix textile factory: 663 - Other: 0; 0; 0 - Status:  (met) - Minimum increase in net international reserves of the Bank of Uganda (US$ mn): 263; 210; 241 - Status:  (met) - Indicative target — Ceiling on the increase in base money liabilities of the Bank of Uganda (BM, cumulative change from June 2009): 261; 261; 210 - Status:  (met) - Minimum expenditures under the Poverty Action Fund (including the Universal Primary Education component of development expenditure): 537; 537; 586 - Status:  (met) ### Structural benchmarks (selected) - Implement pilot Integrated Personnel and Payroll System in four Commissions, Ministries, Judiciary, and Local Governments (Lira and Jinja Districts). - Date of Implementation: End-September 2010 - Submit to Parliament draft regulatory framework for pension funds. - Date of Implementation: End-June 2010 ### Policy intentions, program continuity, and priorities (from Letter of Intent and MEFP) - The Government requests a new three-year PSI for 2010–2013 aligned with the National Development Plan (NDP, 2010/11–2014/15). - NDP priority objectives: human resource development through health and education; eliminating infrastructure bottlenecks to growth (particularly energy and transportation); supporting science, technology and innovation; facilitating private access to critical inputs to production, especially in agriculture. - Government position and commitments: - Performance under the PSI through the 7th review has remained strong; all end-December assessment criteria have been met. - The strong policy framework limited the impact of the global financial crisis; growth has slowed but remains robust and is set to recover quickly; inflation has been kept under control. - The Government seeks cancellation of the current PSI immediately upon conclusion of the seventh review and commencement of a new three-year PSI. - The new PSI will place specific emphasis on infrastructure investment to address critical constraints to growth and will seek to rejuvenate the structural reform agenda. - The Government remains committed to strengthening the structural reform agenda and will take further measures as appropriate; it authorizes publication of the Letter of Intent and attachments. *Source: IMF staff summary of the IMF staff report and accompanying tables and attachments for Uganda (April 25, 2010).* ### 2. This memorandum outlines the performance of the economy in the first half of ### 2. This memorandum outlines the performance of the economy in the first half of ### Performance under the PSI - All of the six quantitative assessment criteria for end-December 2009 were met. - Both indicative targets were met. - Both structural benchmarks under the PSI have 2010 deadlines which Government expects to meet. ### II. ECONOMIC AND POLICY DEVELOPMENTS — Outturn in the first half 2009/10 - Real GDP growth showed indications of slowdown in H1 2009/10 because of drought in Q1 2009/10 and delays in implementation of government spending. - Core consumer price inflation fell from an annual rate of 11 percent in June 2009 to 7.4 percent in December 2009. - Annual headline consumer price inflation rose from 12.3 percent in June 2009 to 14.6 percent in September 2009 due to a sharp rise in food crop prices in Q1 2009/10, then fell to 11 percent in December 2009 after recovery in food supply and continued fall in core inflation. - Fiscal stance in H1 2009/10 was tighter than programmed due to delays in public expenditures, especially capital expenditures: - Total expenditures were Shs 246 billion lower than budgeted in H1. - Revenues underperformed by Shs 85 billion, partly due to weakness in import growth. - Overperformance in several direct and indirect domestic tax handles, including excise taxes and VAT on domestic goods, attributed to stronger enforcement by the Uganda Revenue Authority. - Monetary growth was lower than projected in H1 2009/10 due to weak money demand from subdued private sector consumption: - Reserve money was 2.4 percent lower than programmed. - Yields on 364 day Treasury Bills fell from 14 percent in June 2009 to 9 percent in December 2009. - Lending rates declined only marginally. - Balance of Payments (BOP) improved in H1 2009/10 with an overall surplus and net accumulation of international reserves of US$ 93 million. - Nominal exchange rate appreciated on a trade weighted basis by 8.2 percent between June and December 2009. ### Projections for the second half of 2009/10 - Aggregate demand projected to pick up in H2 2009/10 due to recovery of consumer demand and faster implementation of budgeted public expenditures. - Real GDP growth for the fiscal year projected at 5.6 percent, which is 0.7 percentage points lower than programmed. - Annual core inflation projected to decelerate to 3.9 percent in June 2010, despite monthly core inflation beginning to accelerate in H2. - Annual headline inflation projected at 5 percent in June 2010. - Fiscal outturn for 2009/10 projected to be slightly less expansionary than at the time of the 6th Review, largely due to underperformance of development expenditures by 1.6 percent of GDP: - Reallocations from capital to current spending will raise current expenditures above programmed levels by 0.5 percent of GDP. - Expenditures amounting to 0.5 percent of GDP, mainly roads projects, will be implemented from budgetary resources carried forward from the previous fiscal year. - Revenues projected to underperform by 0.3 percent of GDP. - Overall fiscal deficit, including grants, projected at 2.3 percent of GDP (lower than programmed by 0.2 percent of GDP). - Overall fiscal deficit, excluding grants, projected at 4.7 percent of GDP (lower than programmed by 0.3 percent of GDP). - Financing: net external borrowing of 2.0 percent of GDP and net domestic financing of 0.3 percent of GDP (the latter 0.2 percent of GDP higher than programmed). - Monetary projections: - Annual broad money growth for the fiscal year projected at 19.3 percent. - Reserve money growth projected at 19.1 percent. - Private sector credit projected to grow at 17.1 percent in 2009/10. - BOP projected to record an overall surplus of US$ 291 million in 2009/10 (in line with programmed level). - Current account deficit projected to widen from 4.8 percent of GDP in 2008/09 to 5.3 percent of GDP in 2009/10 due to higher services and lower official transfers despite a lower trade deficit. ### Economic Policies for 2010/11 — Objectives and outlook - Main macroeconomic objectives for 2010/11: - Support demand while maintaining macroeconomic stability. - Raise output back towards potential real growth estimated at 6-7 percent per annum. - Maintain core inflation at a maximum of 5 percent (barring exogenous shocks). - Run a BOP surplus to accumulate international reserves. - Risks and constraints: - Election year may cause private sector expenditure to increase more quickly than programmed; authorities will exercise caution in monetary and fiscal policy. - Projected worsening of external terms of trade will constrain macro policy support for growth. - Real GDP growth projected to rise to 6.4 percent in 2010/11. ### Fiscal Policy for 2010/11 and medium term - Fiscal strategy centers on implementing capital projects and social programs in the NDP to boost real growth and reduce poverty by creating fiscal space for higher public investments through curtailing growth in recurrent spending on non-productive activities. - Key 2010/11 budget goal: remedy absorption constraints in execution of government programs via external technical assistance on contracting and procurement, and training of accounting officers on work plans, execution and reporting. - Fiscal balance 2010/11 projections: - Overall deficit excluding grants projected at 5 percent of GDP (roughly similar to 2009/10 projected outturn). - Expenditure and net lending expected to increase by 0.9 percent of GDP in 2010/11 from the outturn in 2009/10. - Revenue projected to increase by about ½ percent of GDP. - Revenue mobilization measures: - Focus on improving enforcement and collection of non-tax revenues due to limited near-term options for new tax sources. - Authorities will undertake and publish a review costing revenue loss and assessing effectiveness of all existing tax holidays and exemptions, and formulate recommendations to Cabinet for streamlining before end-June 2010. ### Monetary policy for 2010/11 - Aim: support economic growth while being mindful of potential inflation pressures. - BOU will continue flexible implementation of the reserve money program developed with TA from the Fund. - BOU will review quantitative targets for monetary aggregates monthly and intervene daily with repos and reverse repos to ensure money market stability. - Intermediate target for broad money growth provisionally set at 13.7 percent for 2010/11, taking into account projected growth of potential real output, BOU’s inflation target, and projected fall in velocity of circulation. - Monetary program designed to provide room for bank lending to the private sector to grow at the same pace as nominal GDP. - BOU will develop a set of high frequency indicators to capture activity and demand in the formal sector by March 2011. ### External sector for 2010/11 - BOP projected to record a modest overall surplus of US$ 60 million in 2010/11, given a less favorable external environment. - Exchange rate to remain flexible; BOU will intervene only to dampen volatility and avoid significant misalignments arising from external capital flows. ### Financial sector policies - Banking system indicators: - Aggregate tier 1 capital to risk weighted assets of 20 percent, above statutory minimum of 12 percent. - Government intends to introduce amendments to the Financial Institutions Act (FIA) in Parliament during 2010/11 to: - Raise the minimum paid up capital for a bank. - Allow commercial banks to offer insurance and Islamic banking products. - Government will prepare and implement a comprehensive strategy to deepen and diversify financial markets: - Detailed strategy to be prepared by June 2011 and included in the midterm review of the NDP. - Strategy to cover legal and institutional reforms and be coordinated with EAC partner states. - Credit reference bureau has commenced operations and is expected to become fully operational in 2010/11. - Government will establish a Small Commercial Claims Court to speed resolution of small business disputes. - BOU intends to strengthen regulation of deposit taking microfinance institutions by bringing larger SACCOs under the Microfinance Deposit Taking Institutions Act. ### III. MEDIUM TERM POLICIES - Macroeconomic strategy: maintain sound fiscal policy to invest in public infrastructure to alleviate growth constraints while ensuring macro stability. - Revenue targets and fiscal metrics: - Raise revenue to GDP ratio from current level of about 12.5 percent to over 14 percent during the medium-term. - Public expenditure projected to increase from 17.2 percent of GDP in 2009/10 to an average of 18.8 percent of GDP per year. - Fiscal deficit (excluding grants) projected at 4.9 percent of GDP per year on average over the NDP period. - Measures to broaden the tax base: - Establishment of the National Identification system for movement of persons within the East African community; Government has procured an external firm to undertake the identification exercise. - Public investment and PPPs: - NDP prioritizes public investments that facilitate regional integration. - Some priority projects to be executed through public-private partnerships (PPPs); Government finalizing PPP policy framework and institutional arrangements during FY 2010/11. - Borrowing policy: - Government requests IMF to maintain the ceiling for non-concessional borrowing at US$ 500 million in the next PSI. - Nonconcessional resources intended exclusively for investment expenditures, including the Karuma hydropower dam and other high-yield infrastructure projects. - Government may require increases in the ceiling on nonconcessional borrowing to finance share of regional EAC transportation projects. ### IV. STRUCTURAL REFORMS - Pension sector reforms: - Retirement Benefits Authorities Bill approved by Cabinet in December 2009, with policy on liberalizing the sector. - Bill expected to be submitted to Parliament by end-August 2010; new regulator to be in place by 2011. - Government will request IMF technical assistance for an actuarial evaluation of the NSSF. - Domestic expenditure arrears — measures to curtail accumulation of new arrears: - (i.) Accounting officers required to provide detailed account of how arrears arose; information used in independent investigation. - (ii.) All new non-statutory arrears will raise an automatic audit query and be scrutinized by the Public Accounts Committee (PAC) of Parliament. - (iii.) Quarterly releases to spending agencies will be adjusted downwards by the magnitude of new accumulated non-statutory arrears, starting with Q4 of fiscal year 2009/10. - (iv.) Arrears will have a first call on spending agencies’ resources for next fiscal year. - (v.) The “straight-through payment” system (STP) used for pensions will be extended to utility sector (electricity, water, telephone, and rental payments) by July 2010. - (vi.) Mandatory rotation of accountants and procurement officers will start July 2010, with a report on implementation by end-December 2010. - Directorate of Budget of MoFPED to undertake by end-July 2010 a review of annual utility services consumed by government departments. - Budgetary carry forward procedures — measures to reduce misuse: - Publish balances as at June 30 and September 30 of each calendar year on all government accounts at the BOU and commercial banks. - Minister responsible for Finance to present these accounts to Parliament by July 31 and October 30 of the following fiscal year. - To spend balances held over from previous fiscal year beyond end-June, parliamentary approval and supporting work and procurement plans showing utilization required. - All unspent balances not re-appropriated by Parliament by end-September must be returned to the Government Consolidated Fund. - Government to propose amendments to the PFAA and other relevant laws and regulations; undertake inventory of existing accounts and close those no longer justified by end-December 2010. - Government will seek Fund technical assistance to amend the PFAA and other regulations in accordance with international best practices. - Integrated Personnel and Payroll System (IPPS): - Implementation of first phase started with procurement of main contractor in October 2009, staff training, establishment of data centre in MoPS, updating Establishment register, job descriptions and specifications. - Phase scheduled to be completed by September 2010; will cover four commissions, four ministries, and two local governments (Lira and Jinja). - Petroleum revenue management: - Government will ensure transparent handling of petroleum revenues and will strengthen institutional and regulatory framework through amendments to the PFAA ahead of commercial production. - Government requests IMF to prepare and publish a revised Report on the Observance of Standards and Codes (ROSC) to provide an updated assessment of Uganda’s fiscal governance. *Source: IMF staff memorandum contained in the supplied PDF content.* ### 30. Progress in the implementation of the policies under this program will be monitored ### _cr10132 - 30. Progress in the implementation of the policies under this program will be monitored ### Monitoring framework and calendar - Progress will be monitored through assessment criteria (ACs), indicative targets (IT), and structural benchmarks (SBs) detailed in attached Tables 1 and 2 and through semiannual reviews. - Assessment criteria are proposed for end-June 2010 and end-December 2010, to be monitored respectively at the first and second reviews. - The first review is expected to be completed by end-December 2010 and the second review by end-June 2011. - The attached Technical Memorandum of Understanding (TMU) contains definitions and adjustors and is an integral part of the Memorandum. - During the program period the authorities will refrain from imposing or intensifying exchange restrictions, restrictions on imports for balance of payments reasons, and from introducing or modifying multiple currency practices. - Test dates and program points shown: Sep. 30 2010, Dec. 31 2010, March 31 2011, June 30 2011 (listed as Prog./Prog./Prog./Prog./Prog. in source). ### Quantitative assessment criteria and indicative targets (Table 1) — key numerical limits (cumulative changes from beginning of fiscal year unless otherwise stated) - Assessment criteria (cumulative changes; Billions of Uganda shillings unless noted): - Ceiling on the increase in net domestic assets (NDA) of the Bank of Uganda: 252 54 144 181 221 (values aligned to test dates as presented in table rows). - Ceiling on the increase in net claims on the central government by the banking system: 94 31 82 103 123. - Ceiling on the stock of external payments arrears incurred by the public sector (continuous assessment criterion): 0 0 0 0 0. - Ceiling on the contracting or guaranteeing of new nonconcessional external debt with maturities greater than one year by the public sector: 500 500 500 500 500. - Ceiling on new external debt with maturity up to one year contracted or guaranteed by the public sector (short-term): 0 0 0 0 0. - Minimum increase in net international reserves (NIR) of the Bank of Uganda (US$mn): 288 183 649 60. - Indicative targets: - Ceiling on the increase in base money liabilities of the Bank of Uganda (cumulative change): 373 89 213 274 335 (as per table alignment). - Stock of domestic budgetary arrears under the Commitment Control System (CCS) (monitored annually): 5 1 5 1 (as shown). - Minimum expenditures under the Poverty Action Fund (including the Universal Primary Education component of development expenditure) (USh millions): 1,097.0 160.0 579.0 883.0 1,184.8 (values listed across program points in table). - Notes from Table 1 (verbatim): - "The assessment criteria and indicative targets under the program, and their adjusters, are defined in the technical memorandum of understanding (TMU)." - "Fiscal year begins on July 1." - "Indicative targets." - "Cumulative changes are from June 2009 (averages for NDA and BM) for June 2010 targets and from June 2010 for FY 2010 11 targets, as defined in the TMU." - "Continuous assessment criterion." - "To be used exclusively for infrastructure investment projects. Cumulative change from May, 2010." - "Excluding normal import-related credits." - "Monitored annually." ### Structural benchmarks (Table 2) — first year under the new PSI (2010-13) - Fiscal Sector benchmarks: - Complete and publish a review of existing tax holidays and exemptions and formulate and submit to Cabinet recommendations for their streamlining (¶14) — Date of Implementation: June 30, 2010 — Macroeconomic rationale: Strengthen revenue mobilization. - Extend the “straight-through payment” system (STP) now employed for pensions to the utility sector (electricity, water, telephone, and rental payments) (¶26) — Date of Implementation: July 31, 2010 — Rationale: Help control accumulation of arrears. - Implement pilot Integrated Personnel and Payroll System (IPPS) in four (4) commissions, four (4) ministries, judiciary (courts and judicature) and two (2) local governments (¶28) — Date: September 30, 2010 — Rationale: Strengthen oversight and control of public payroll. - Report on the implementation of mandatory rotation of accountants and procurement officers (¶26) — Date: December 31, 2010 — Rationale: Help control accumulation of arrears. - Undertake an inventory of existing government accounts and close immediately those which are no longer justified by a current project or legitimate activity (¶27) — Date: December 31, 2010 — Rationale: Enhance transparency and monitoring of public finances. - Financial Sector benchmark: - Submit the Retirement Benefits Authorities Bill to parliament (¶25) — Date: August 31, 2010 — Rationale: Encourage development of long-term savings. - Other benchmark: - Develop a set of high frequency indicators designed to capture activity and demand in the formal sector of the economy (¶15) — Date: March 31, 2011 — Rationale: Enhance macroeconomic information. ### Technical Memorandum of Understanding — definitions and reporting (Attachment II) — selected definitional and operational provisions - Purpose: - The TMU defines the targets for the May 2010–May 2013 financial program supported by the IMF Policy Support Instrument (PSI) and sets reporting requirements. - Net foreign assets (NFA) of BOU (para. 2): - Defined as the monthly average (based on daily data) of foreign assets minus foreign liabilities; include all foreign claims and liabilities of the central bank. - Monthly average values will be converted into U.S. dollars at each test date using the average cross exchange rates for October 2009 and then into Uganda shillings using the average U.S. dollar–Uganda shilling exchange rate for October 2009. - Program exchange rates (US$ per currency unit, unless indicated otherwise): - 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) of BOU (para. 2): - Defined as the monthly average (based on daily data) of base money less net foreign assets of the BOU. - NDA limits are ceilings on cumulative changes from the monthly average based on daily data for June 2009 to the same monthly average for June 2010, and cumulative changes from the monthly average for June 2010 to the monthly averages for September and December 2010. - Base money (para. 3): - Defined as the sum of currency issued by BOU and commercial banks’ deposits in the BOU (statutory required reserves and excess reserves), net of deposits of closed banks and Development Finance Funds (DFF) contributed by commercial banks held at the BOU. - Base money limits are cumulative changes from the monthly average based on daily data for June 2009 to the same monthly average for June 2010, and from June 2010 to September 2010 and December 2010. - Cumulative changes (in billions of shillings) for June 30, 2010; September 30, 2010; December 31, 2010 (source table): - Cumulative change in base money: 373 | 89 | 213 - Cumulative change in NFA: 121.4 | 34.3 | 69.2 - Cumulative change in NDA: 251.6 | 54 | 143.8 - Net claims on the central government (NCG) by the banking system (para. 4): - Defined as bank credits to the central government minus the central government’s deposits with the banking system (excluding administered accounts and project accounts), including the central bank. - Credits include bank loans and advances and holdings of government securities and promissory notes. - Central government’s deposits include the full amount of resources freed by the IMF MDRI. - NCG will be calculated from monetary authority and commercial bank balance sheets as per the monetary survey. - Quarterly limits on the change in NCG are cumulative beginning end-June in the previous fiscal year. - Net international reserves (NIR) of BOU (paras. 5–6): - Defined as reserve assets of the BOU net of short-term external liabilities of the BOU. - Reserve assets are external assets readily available to and controlled by the BOU and exclude pledged or otherwise encumbered external assets. - Short-term external liabilities are liabilities to nonresidents with original maturities less than one year, and include outstanding IMF purchases and loans. - For monitoring, reserve assets and short-term liabilities will be calculated in U.S. dollars by converting from original currency denominations at program exchange rates. - Ceiling on the stock of domestic budgetary arrears of the central government (para. 7): - Stock of domestic payment arrears under the Commitment Controls System (CCS) monitored annually. - Defined as bills received by a central government spending unit or line ministry prior to the beginning of the current fiscal year and unpaid by end of fiscal year under recurrent or development budgets (excluding court awards, subscription to international organizations and pensions). - CCS reports from the Accountant General, including arrears at IFMS and non-IFMS sites, will be used to monitor arrears. - Arrears can be cleared in cash or through debt swaps. - Verified report: stock of arrears incurred after end-June 2004 is estimated at USh 99 billion as of June 2009. - Expenditures under the Poverty Action Fund (PAF) (para. 8): - 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). - Adjusters (paras. 9–15): - NDA and NIR targets are based on program assumptions regarding budget support, HIPC Initiative and MDRI assistance, and external debt-service payments. - NCG target also depends on domestic nonbank financing assumptions; NDA depends on legal reserve requirements on deposits in commercial banks. - NDA and NIR targets assume automatic access by commercial banks to BOU rediscount and discount window facilities. - Schedule A presents the Uganda shilling equivalent of budget support plus HIPC Initiative assistance on a cumulative basis from July 1 of the fiscal year. - Schedule A (Cumulative billions of Uganda shillings, beginning July 1 of the fiscal year): Budget support, including HIPC Initiative grants — 991.3 | 105 | 389.5 (aligned to quarter headings June 30, 2010; September 30, 2010; December 31, 2010). - Adjustments: ceilings on NDA and NCG adjusted downward (upward) and floor on NIR adjusted upward (downward) by the amount budget support plus HIPC/MDRI assistance exceeds (falls short of) projected amounts. - Schedule B presents debt service (cumulative billions of Uganda shillings, beginning July 1 of the fiscal year): - Debt service due before HIPC, excluding exceptional financing — 207 | 57 | 121 (by quarter headings June 30, 2010; September 30, 2010; December 31, 2010). - Adjustments: NDA, NCG, and NIR adjusted by deviations of debt service due plus payments of external debt arrears less deferred payments (exceptional financing) from Schedule B projections; deferred payments defined in para. 12. - Schedule C: Nonbank financing minus repayment of domestic arrears (cumulative billions USh, beginning July 1 of fiscal year): - (A) Nonbank financing: 0 | 100 | 100 - (B) Repayment of domestic arrears on pensions, to international organizations, and for court awards: 76.1 | 52 | 105.4 - (C) Total = (A) – (B): -76.1 | 48 | -5.4 - Ceiling on the increase in NCG will be adjusted downward (upward) by any excess (shortfall) in nonbank financing less payment of domestic arrears on pensions, to international organizations, and court awards, relative to Schedule C; payments of such arrears cannot exceed the programmed amount by more than Ush 45.0 billion. - NDA ceiling 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. - NDA ceiling adjusted downward/upward to reflect decreases/increases in legal reserve requirements; adjuster = percent change in reserve requirement × actual amount of required reserves (Uganda shillings and foreign-currency denominated) at end of previous calendar month. - Ceiling on contracting or guaranteeing of new nonconcessional external debt by the public sector and on external payments arrears (paras. 16–18): - Short-term debt assessment criterion refers to contracting or guaranteeing external debt with original maturity of one year or less by the public sector; excludes normal import-related credits and non-resident holdings of government securities and promissory notes. - Ceiling on new nonconcessional borrowing with maturities greater than one year contracted or guaranteed by the public sector. Nonconcessional borrowing defined as loans with grant element < 35 percent, calculated using average commercial interest reference rates (CIRRs) published by OECD. - Concessionality assessment: use 10-year average CIRRs to discount loans with maturities ≥ 15 years and 6-month average CIRRs for shorter maturities. Add margins for differing payment periods: 0.75 percent (<15 years); 1 percent (15–19 years); 1.15 percent (20–25 years); 1.25 percent (30 years or more). - Ceiling on nonconcessional external borrowing or guarantees is continuous. Coverage includes financial leases and other instruments giving rise to external liabilities, including contingent liabilities on nonconcessional terms. - Excluded from limits: changes from non-resident holdings of government securities and promissory notes, refinancing credits and rescheduling operations, and credits extended by the IMF. - Arrangements to pay over time obligations from judicial awards to external creditors not participating in HIPC do not constitute nonconcessional external borrowing for program purposes. - Definition of "debt" follows Guidelines on Performance Criteria with Respect to External Debt (Executive Board Decision No. 6230-(79/140), as amended), including commitments contracted or guaranteed for which value has not been received. - Debt includes: (i) loans (advances, deposits, bonds, debentures, commercial loans, buyers' credits, repurchase agreements, official swaps); (ii) suppliers' credits; (iii) leases (present value at inception of lease payments excluding operation/repair/maintenance payments). - Arrears, penalties, and judicially awarded damages arising from failure to pay contractual obligations that constitute debt are included. *Source: _cr10132 - 30.* ### 19. The ceiling on the accumulation of new external payments arrears is zero. This ### 19. The ceiling on the accumulation of new external payments arrears is zero. This ### Ceiling on 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 public sector from their level at end-June 2006. - External debt payment arrears are defined as external debt service obligations (reported by the Statistics Department of the BOU, the Macro Department of the Ministry of Finance) that have not been paid at the time they are due as specified in the contractual agreements. - Arrears shall exclude arrears on obligations subject to rescheduling. ### Monitoring and reporting requirements - The 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. - Policies triggering prior notification include, but are not limited to: customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises. - The authorities will similarly inform IMF staff of: - any nonconcessional external debt contracted or guaranteed by the government, the BOU, or any statutory bodies; and - any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities. - The authorities will furnish an official communication to the IMF describing program performance of quantitative and structural assessment criteria and benchmarks within 8 weeks of a test date. - Regular submission of information to IMF staff is required with the frequency and submission time lag as indicated in Table 1. The information should be mailed electronically to AFRUGA@IMF.ORG. ### Summary of reporting requirements (selected highlights from Table 1) - Bank of Uganda (BOU) reporting (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. - The Internal Audit Department (IAD) of the BOU will review reconciliations of monetary survey data with financial records and audited financial statements. Any revisions to monetary survey data, per IMF safeguards mission recommendations, will be documented and reconciled with the previous presentation. - Composition of foreign assets and liabilities of the BOU by currency: Monthly — 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 — 6 weeks. - Summary of (i) monthly commodity and direction of trade statistics; (ii) disbursements, principal and interest, flows of debt rescheduling and debt cancellation, arrears, and committed undisbursed balances—by creditor category; and (iii) composition of nominal HIPC Initiative assistance, disaggregated into grants, flow rescheduling, and stock-of-debt reduction by creditor: 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. - Summary table of preliminary program performance comparing actual 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. - Daily average amount of commercial bank automatic access to the BOU discount window and rediscounting of government securities by commercial banks: Quarterly — 4 weeks. - Ministry of Finance reporting (frequency — submission lag): - Summary of central government accounts (revenues recorded on a cash basis; expenditures recorded when checks are issued except specified items; domestic interest on accrual basis; external debt service on a commitment basis): Monthly — 6 weeks. - Summary of outstanding stock of verified domestic arrears comprising the stock of CCS/IFMS arrears incurred after end-June 2004: annually — 6 weeks. - Summary of contingent liabilities of the central government (including borrowings by statutory bodies, government guarantees, pending court claims, or appealed court awards): 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. - Updated national accounts statistics (real and nominal) according to UBOS and medium-term projections: Quarterly — 4 weeks. ### Relations with the Fund and key financial figures (as of dates noted in text) - Outstanding Fund credit was SDR 6 million (3.3 percent of quota) at end-March, 2010. - Membership status: Joined: September 27, 1963; Article VIII. - Quota: 180.50 (SDR Million) — 100.00 percent. - Fund holdings of currency: 180.51 — 100.00 percent. - Net cumulative allocation (SDR Department): 173.06 — 100.00 percent. - Holdings (SDR Department): 143.64 — 83.03 percent. - Outstanding Purchases and Loans: PRGF Arrangements 6.00 — 3.32 percent of quota. - Latest financial arrangements (dates and amounts as presented): - PRGF: Sep 13, 2002 to Jan 31, 2006 — 13.50 approved, 13.50 drawn (SDR Million). - ESAF/PRGF: Nov 10, 1997 to Mar 31, 2001 — 100.43 approved, 100.43 drawn (SDR Million). - ESAF: Sep 06, 1994 to Nov 09, 1997 — 120.51 approved, 120.51 drawn (SDR Million). - Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal: 2010 0.20; 2011 1.00; 2012 1.20; 2013 1.20; 2014 1.20. - Charges/Interest: 2010 0.07; 2011 0.08; 2012 0.09; 2013 0.09; 2014 0.09. - Total: 2010 0.27; 2011 1.08; 2012 1.29; 2013 1.29; 2014 1.29. - HIPC and MDRI figures excerpted: - Assistance committed by all creditors (US$ Million) under original/enhanced frameworks: 347.00 / 656.00 (as presented). - Of which IMF assistance (US$ million): 68.90 / 91.00. - SDR equivalent in millions: 51.51 / 68.10. - Completion point dates: Apr 1998 / May 2000. - MDRI-eligible debt (SDR Million): 87.73; Financed by: MDRI Trust 75.85; Remaining HIPC resources 11.88. - Exchange rate (official as of March 31): U Sh 2084.4 per U.S. dollar. - The Executive Board concluded the last Article IV consultation on January 7, 2009. - Policy Support Instrument (PSI): Uganda initiated a 16-month PSI in January 2006; replaced by a new three-year PSI in December 2006; extended for an additional year in December 2009. - Safeguards assessment: Update assessment of the Bank of Uganda completed on April 10, 2007, concluded that BOU had strengthened its safeguards framework since the 2003 assessment; main developments included implementation of International Financial Reporting Standards, publication of financial statements, establishment of an audit committee, and strengthening of the internal audit function. Staff made recommendations to address remaining vulnerabilities in legal and internal control areas. ### Programmatic implications and priorities - Continuous adherence to the zero ceiling on new external payments arrears is integral to the program's monitoring framework. - Emphasis on timely notification to IMF staff for policy changes that could affect program outcomes, and on comprehensive, periodic reporting by BOU and Ministry of Finance according to the specified frequencies and submission lags. - Technical assistance and future priorities include 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, audit, and debt management. *Prepared by the African Department (In consultation with other departments); April 27, 2010.* ### 1. Sound macroeconomic policies and cautious public borrowing following debt ### _cr10132 - 1. Sound macroeconomic policies and cautious public borrowing following debt ### Current debt position and recent developments - HIPC (in 1999/2000) and MDRI (in 2005/06 and 2006/07) debt relief reduced Uganda’s debt burden sharply; all debt indicators declined to levels well below their policy-dependent thresholds. - Public and publicly guaranteed external debt was 13.8 percent of GDP in 2008/09. - IDA accounts for 58 percent of total external debt (Figure 1 breakdown: IDA 58%, Non-IDA multi-lateral 29%, Non-Paris club 10%, Paris Club 3%). - Domestic debt, issued exclusively for the conduct of monetary policy, amounts to less than 10 percent of GDP. - The authorities have guaranteed somewhat more than $100 million in private external loans over 2006-09 (mostly as part of financing for the Bujagali hydropower dam); the guarantee has remained uncalled. - Box 1 — Changes in Debt Indicators since the Last DSA: - Public and publicly guaranteed external debt increased from US$ 1.8 billion (11.8 percent of GDP) to US$ 2.0 billion (13.8 percent of GDP) between 2007/8 and 2008/09. - Debt service to exports fell from 6.0 percent to 3.5 percent over this period. - Domestic debt declined from 10.7 percent in 2007/08 to 8.4 percent of GDP in 2008/09 (mostly on account of high growth). - Total public debt declined slightly to 22.2 percent of GDP, from 22.5 percent recorded in 2007/08. - The debt-service-to-revenue ratio declined from 33.0 to 24.8 percent over this period. ### Medium-term policy priorities and financing mix - The authorities’ medium-term policies prioritize a sharp increase in public investment to remove persistent growth bottlenecks, with infrastructure (mostly energy and transportation) as the main focus; flagship projects include the Karuma hydropower plant. - Capacity building is expected to raise implementation and absorptive capacity, alleviating constraints to budget execution. - Financing sources: - Combination of domestic and external sources. - Authorities committed to raise domestic revenue over the medium term, partly to offset an expected decline in aid. - Large share of financing to remain concessional; limited non-concessional borrowing planned for large high-yield investments such as Karuma. ### Key long-term assumptions (Section II) - Growth assumptions: - Growth expected to remain below potential in 2009/10 and 2010/11 due to the global slowdown and regional drought, then rebound to around 7 percent thereafter (about the historical average of the past nine years). - Inflation: improved monetary policy management expected to keep inflation around 5 percent. - Public sector deficit (including grants): increases in the near term due to public investment drive, then stabilizes at about 2.5 percent of GDP. - Compared with the 2008 DSA, the baseline assumes a more marked near-term slowdown and a less ambitious medium-term growth path, reflecting a slightly scaled-down profile of infrastructure investment due to capacity and implementation constraints. - Ex post Box 2 findings on 2008 DSA: - Exports over-performed due to better recording of informal cross-border trade and resilience to global slowdown. - Higher growth led to more sustained imports. - Current baseline includes slightly less external borrowing compared to the 2008 DSA. - Public revenue and expenditure did not perform as well as envisaged in the 2008 DSA; assumed to grow smoothly as capacity constraints are lifted and tax policy improves. ### External position and financing projections - External current account deficit: widens early due to high import content of infrastructure investments, then stabilizes around 3 percent of GDP in the long run. - Exports: 2009 exports were well above projections; subsequently assumed to grow in line with GDP before accelerating over the long term. - Imports: pick up during investment drive, reaching 35 percent of GDP before returning to 30 percent of GDP over the long term. - Trade deficit: stabilizes at around 6 percent of GDP in the long term. - Total transfers: decline from 9 to 4 percent of GDP over time. - Remittances: assumed to stabilize at about 3.5 percent of GDP over the long term, with a slowly declining trend. - FDI: stabilizes at about 4 percent of GDP. - Concessional donor inflows: projected to continue contributing to budget financing but gradually taper off. - Use of non-concessional resources: grows to provide about half the new external financing at the end of the projection period (Figure 2). - Grant element of new public borrowing: declines from over 40 percent to less than 10 percent by the end of the projection period. - Public domestic debt: grows in line with GDP, hovering over 8 percent of GDP. - Financing projections: somewhat below those of the previous DSA, reflecting slower projected growth in public investment. - Note on non-concessional borrowing assumptions: assumed to be contracted on IBRD-like terms, with LIBOR rates, 10 years of grace and 20 years of repayment. ### Oil and exclusions from the baseline - The current scenario excludes the impact of oil due to high uncertainty on scope, timing and pace of petroleum exploitation and infrastructure costs. - Most recent estimates indicate production and commercialization cannot be expected before 2017. - The next full DSA will explore oil impacts when more information becomes available. ### External Debt Sustainability Analysis (Section III) - Authorities agreed with DSA results and intend to rely primarily on concessional borrowing; they used conservative assumptions on non-concessional borrowing. - Authorities are considering public-private partnerships and strengthening regulatory frameworks to better assess contingent liabilities. - Public and publicly guaranteed external debt expected to remain sustainable over the next 20 years: - All five debt-burden indicators remain well below their policy-dependent thresholds throughout the period. - PV of debt-to-GDP: rises from 8 percent in 2009/10 to 13 percent in 2014/15, then stabilizes at about 14 percent in the outer years. - PV of debt-to-exports: expected to peak at 86 percent in 2019/20 before declining to 70 percent at the end of the projection period. - Debt service-to-exports ratio remains very low due to the large share of highly concessional borrowing. - Stress tests: - External debt expected to remain resilient to all standardized shocks. - Under all 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 indicative threshold values throughout the next 20 years. - Historical scenarios reflect uneven past performance (GDP and export growth, inflation, transfers, FDI) but stronger performance since 2005 increases resilience. - International reserves: stand at 5 months of imports in 2009/10 and are projected to remain close to this level. ### Fiscal Debt Sustainability Analysis (Section IV) - Total public debt (external + domestic) path is sustainable under all stress tests. - Baseline dynamics: - PV of public debt to GDP and revenue increases in the medium term, then returns to a very low level over the long term. - Debt service is broadly stable as a share of revenue. - Bound tests: - A permanent shock to growth has the strongest impact on debt indicators. - PV of debt to GDP remains below 30 percent and close to the baseline under all scenarios. - PV of debt to revenue is relatively robust to most shocks but significantly affected by a shock to growth. - A permanent shock to growth would raise the present value of the debt service-to-revenue ratio to 30 percent, constraining fiscal spending significantly. - This underscores that investment selection is critical to ensure long-term debt sustainability. ### Key implications and policy-relevant findings - Continued prudent fiscal management and cautious debt management since debt relief have preserved a sustainable debt position. - Heavy reliance on concessional borrowing and targeted domestic revenue mobilization are central to financing medium-term infrastructure priorities while maintaining sustainability. - Non-concessional borrowing is feasible in limited amounts for high-yield infrastructure projects, but requires careful project selection and monitoring due to sensitivity of debt-service-to-revenue to growth shocks. - Strengthening frameworks for public-private partnerships and contingent liability assessment is important as alternative financing instruments are considered. - Excluding oil from the baseline is prudent given uncertainties; the fiscal and external outlook could change materially once oil production and commercialization prospects are clarified. *Prepared by IMF and World Bank staff in consultation with the authorities; all debt indicators refer to Uganda’s fiscal year (July-June).* ### 14. Uganda’s public and external debt are expected to remain sustainable under the ### _cr10132 - 14. Uganda’s public and external debt are expected to remain sustainable under the ### Overview - Uganda’s public and external debt are expected to remain sustainable under the baseline scenario as well as under alternative shock scenarios. - Sustainability is attributed to a cautious strategy combining reliance on concessional borrowing (especially in the near future) to finance infrastructure projects and a prudent fiscal stance. - Public debt indicators are sensitive to a protracted adverse growth shock, highlighting the importance of improvements in project selection, investment planning processes, and implementation capacity if there is a shift toward non-concessional borrowing. ### Key findings on debt dynamics and sustainability - Baseline projections and alternative scenarios cover 2010-2030 with staff estimates and projections based on country authorities’ data. - Stress-test identification: - "The most extreme stress test is the test that yields the highest ratio in 2020." - Examples of most extreme shocks identified in figures: One-time depreciation shock, Terms shock. - Debt accumulation and composition: - PV of external debt series (selected values): 13.5, 14.9, 17.0, 19.0, 19.6, 19.8, 17.9, 21.8, 20.4 (years unspecified in extract). - PV of PPG external debt (selected values): 7.7, 8.3, 9.5, 11.4, 12.9, 14.0, 13.1, 16.9, 13.9 (years unspecified in extract). - Debt service and ratios (selected values from tables): - Debt service-to-exports ratio (in percent): 9.8, 6.0, 3.5, 4.3, 6.1, 6.5, 7.5, 8.2, 8.4, 10.2, 12.0 (periods not all labeled). - PPG debt service-to-exports ratio (in percent): 4.0, 2.4, 0.7, 1.5, 1.4, 1.6, 1.9, 2.0, 2.1, 3.0, 3.9. - PPG debt service-to-revenue ratio (in percent): 5.4, 4.1, 1.3, 2.8, 2.6, 2.7, 3.1, 3.1, 3.2, 3.6, 4.6. - Gross financing need (Billions of U.S. dollars): -0.1, -0.2, 0.1, 0.2, 0.4, 0.4, 0.4, 0.4, 0.2, -1.1, -2.0 (selected sequence). - Grant-equivalent financing (in percent of GDP, selected): 3.4, 3.1, 2.9, 2.5, 2.3, 1.9, 1.8, 1.2, 1.6. - Grant-equivalent financing (in percent of external financing, selected): 71.9, 66.1, 54.2, 53.2, 52.9, 46.1, 48.8, 45.0, 49.0. ### Sensitivity and stress-test results (selected) - Table 2a and 2b show sensitivity of PV of debt-to-GDP, PV of debt-to-exports, and PV of debt-to-revenue ratios under alternative scenarios and bound tests for 2010-2030. - Alternative scenarios include: - A1. Key variables at their historical averages in 2010-2030. - A2. New public sector loans on less favorable terms in 2010-2030. - Bound tests include shocks such as: - B1. Real GDP growth at historical average minus one standard deviation. - B2. Export value growth at historical average minus one standard deviation. - B3. US dollar GDP deflator at historical average minus one standard deviation. - B4. Net non-debt creating flows at historical average minus one standard deviation. - B5. Combination of B1-B4 using one-half standard deviation shocks. - B6. One-time 30 percent nominal depreciation relative to the baseline in 2011. - Example stress outcomes (selected table entries): - PV of debt-to-GDP ratio under baseline and selected shocks (selected values): baseline 35, alternative A1 35, A2 23, B1 35, B6 35 (table layout indicates year-by-year values). - PV of debt-to-exports ratio under baseline and shocks (selected values): baseline 67, A1 66, A2 26, B1 66, B6 66 (table layout indicates year-by-year values). - PV of debt-to-revenue ratio under baseline and shocks (selected values): baseline 212, A1 211, A2 221, B1 212, B6 212 (table layout indicates year-by-year values). ### Public sector debt indicators and projections (selected from Table 3 and Table 4) - Public sector debt (percent of GDP, selected series): 23.6, 22.5, 22.2, 20.9, 22.1, 23.9, 25.3, 26.3, 24.6, 28.0, 24.1. - Foreign-currency denominated share (percent, selected): 11.4, 11.8, 13.8, 13.3, 15.1, 17.2, 18.7, 19.9, 18.2, 18.2, 16.2. - Change in public sector debt (percent of GDP, selected): -31.7, -1.1, -0.3, -1.4, 1.2, 1.8, 1.4, 1.0, -1.7, 0.0, -0.5. - Identified debt-creating flows (percent of GDP, selected): -37.2, -1.0, 0.4, -0.7, 1.5, 1.5, 0.9, 0.6, -1.5, -0.3, -0.5. - Primary deficit (percent of GDP, selected): 0.0, 1.1, 0.8, 1.2, 1.5, 1.3, 2.3, 2.6, 2.3, 2.1, 2.5, 2.2, 1.4, 0.7, 1.3. - Revenues and grants (percent of GDP, selected): 17.1, 15.5, 15.9, 14.9, 14.9, 15.3, 15.5, 15.9, 15.9, 17.1, 18.7. - Primary (non-interest) expenditure (percent of GDP, selected): 17.1, 16.6, 16.7, 16.2, 17.2, 17.9, 17.8, 18.0, 17.9, 18.5, 19.5. - Automatic debt dynamics contribution (percent of GDP, selected): -11.3, -2.1, -0.5, -2.0, -0.8, -1.1, -1.4, -1.5, -4.0, -1.8, -1.2. - PV of public sector debt (percent of GDP, selected): 12.2, 10.7, 16.2, 15.9, 16.6, 18.2, 19.5, 20.5, 19.5, 23.1, 21.8. - PV of public sector debt-to-revenue and grants ratio (in percent, selected): 71.3, 69.1, 101.5, 107.1, 111.5, 119.1, 125.4, 129.2, 126.0, 135.0, 116.2. - Debt service-to-revenue and grants ratio (in percent, selected): 41.7, 27.3, 19.6, 20.8, 19.0, 18.6, 18.0, 17.3, 17.4, 17.8, 18.0. - Primary deficit that stabilizes the debt-to-GDP ratio (percent of GDP, selected): 31.7, 2.2, 1.1, 2.7, 1.1, 0.8, 0.9, 1.1, 4.1, 1.4, 1.3. ### Macroeconomic assumptions used in projections (selected) - Real GDP growth (in percent, selected sequence): 8.6, 8.5, 7.1, 9.1, 5.0, 5.6, 6.4, 7.0, 7.2, 7.4, 7.5, 6.8, 7.0, 7.0, 7.0. - GDP deflator in US dollar terms (change in percent, selected): 10.1, 11.8, 1.8, 1.5, 10.4, 6.5, -0.4, 2.4, 2.4, 2.4, 2.7, 2.7, 4.2, 4.2, 4.2. - Effective interest rate (percent, selected): 1.7, 4.3, 3.4, 2.4, 0.8, 3.2, 3.9, 3.9, 4.0, 4.2, 4.3, 3.9, 4.3, 5.5, 4.7. - Growth of exports of G&S (US dollar terms, in percent, selected): 30.2, 57.1, 18.9, 19.1, 19.2, 11.1, 6.7, 7.1, 7.6, 7.6, 6.9, 7.9, 10.9, 12.5, 11.3. - Growth of imports of G&S (US dollar terms, in percent, selected): 24.5, 39.1, 20.2, 15.1, 13.4, 7.1, 8.8, 7.5, 8.7, 5.7, 6.6, 4.7, 6.7, 10.5, 12.0. - Grant element of new public sector borrowing (in percent, selected): 43.5, 45.1, 31.1, 30.3, 30.4, 26.3, 34.4, 20.4, 7.8, 17.2 (series includes "............." where not specified). - Government revenues (excluding grants, in percent of GDP, selected): 12.6, 12.8, 12.5, 12.5, 13.1, 13.5, 14.0, 14.4, 14.4, 15.8, 17.7, 16.3. - Aid flows (in Billions of US dollars, selected): 0.5, 0.8, 0.5, 0.7, 0.8, 0.8, 0.8, 0.8, 0.7, 1.1, 1.9. - o/w Grants (Billions of US dollars, selected): 0.5, 0.4, 0.5, 0.4, 0.3, 0.4, 0.4, 0.4, 0.3, 0.6, 1.5. - o/w Concessional loans (Billions of US dollars, selected): 0.0, 0.4, 0.0, 0.3, 0.5, 0.5, 0.4, 0.4, 0.4, 0.5, 0.5. ### Policy recommendations and institutional priorities - Continue reliance on concessional borrowing in the near future to finance infrastructure projects while maintaining a prudent fiscal stance. - If shifting toward non-concessional borrowing, combine that shift with medium-term improvements in: - Project selection. - Investment planning processes. - Implementation capacity. - The new PSI-supported program aims to: - Maintain macroeconomic stability. - Alleviate constraints to growth through scaling up public investment spending and structural reforms to enhance absorptive capacity. - Support strengthening of institutions ahead of expected oil production and Uganda’s participation in the future East African Monetary Union. - Structural reform priorities highlighted: - Public financial management: strengthen spending controls and efficiency, increase domestic tax revenue. - Financial sector reforms: enhance banking stability and facilitate financial deepening. - Macroeconomic policy stance recommended: - A cautious monetary stance. - A flexible exchange rate regime. - Maintain a comfortable level of reserves to help keep fiscal and debt positions within sustainable bounds. ### Annex — Recent economic developments (selected) - Uganda weathered the first-round impact of the global financial crisis relatively well. - Economic growth: 7 percent in 2008/2009. - Growth drivers cited: strong cross-border exports and recovery of private investment flows. - The slowdown in the following year was more marked, due to prolonged drought and uncertainties about the path of global growth; "Growth is expected to reach" (text truncated in source). *Sources: Country authorities; and staff estimates and projections. Press Release No. 10/195 FOR IMMEDIATE RELEASE May 12, 2010.* ### 5.6 percent for 2009/2010, but should rebound quickly over the next couple of years. ### _cr10132 - 5.6 percent for 2009/2010, but should rebound quickly over the next couple of years. ### Medium-term outlook and oil opportunities - The medium-term outlook is described as favorable. - The prospect of substantial oil revenues offers an opportunity to raise growth and eliminate poverty, but also poses important policy challenges. - Uganda will need robust fiscal and financial institutions, a supportive business environment and scaled-up infrastructure to prepare for oil revenues and the establishment of the East African Monetary Union. ### Program summary and objectives - Uganda's PSI will be guided by the objectives and policies outlined in the new National Development Plan launched in April 2010. - Fiscal policies will target a bold scaling up of energy and transportation infrastructure. - Public investment is targeted to increase from 6.5 percent of GDP in 2008/2009 to 8 percent in 2011/2012. - Monetary policy will aim at keeping annual inflation at around 5 percent on average. - The exchange rate will remain flexible; authorities will seek to build up reserves in preparation for the East African Monetary Union. - A financial markets development plan is being developed under the common EAC framework to enhance banking stability and facilitate financial deepening. ### Key economic projections and indicators (FY2008/09–2013/14) - Real GDP (percent change): 7.1 (2008/09 Act.), 6.3 (Sixth Rev.), 5.6 (2009/10 Proj.), 6.4 (2010/11 Proj.), 7.0 (2011/12 Proj.), 7.2 (2012/13 Proj.), 7.4 (2013/14 Proj.) - Headline inflation (end of period): 12.3 (2008/09 Act.), 12.2 (Sixth Rev.), 5.0 (2009/10 Proj.), 5.3 (2010/11 Proj.), 5.2 (2011/12 Proj.), 5.3 (2012/13 Proj.), 5.5 (2013/14 Proj.) - Headline inflation (average): 14.2 (2008/09 Act.), 9.5 (Sixth Rev.), 4.1 (2009/10 Proj.), 5.2 (2010/11 Proj.), 5.3 (2011/12 Proj.), 5.2 (2012/13 Proj.) - Core inflation (end of period): 11.1 (2008/09 Act.), 7.9 (Sixth Rev.), 3.9 (2009/10 Proj.), 5.0 (2010/11 Proj.), 5.0 (2011/12 Proj.), 5.0 (2012/13 Proj.), 5.0 (2013/14 Proj.) - Broad money (M2, percent change): 26.3 (2008/09 Act.), 21.2 (Sixth Rev.), 19.3 (2009/10 Proj.), 13.7 (2010/11 Proj.), 15.6 (2011/12 Proj.), 15.9 (2012/13 Proj.), 16.0 (2013/14 Proj.) - Domestic credit (percent change): 24.1 (2008/09 Act.), 13.7 (Sixth Rev.), 11.3 (2009/10 Proj.), 8.8 (2010/11 Proj.), 8.3 (2011/12 Proj.), 8.2 (2012/13 Proj.), 8.9 (2013/14 Proj.) - Private sector credit (percent change): 31.6 (2008/09 Act.), 21.4 (Sixth Rev.), 17.1 (2009/10 Proj.), 12.7 (2010/11 Proj.), 13.8 (2011/12 Proj.), 13.9 (2012/13 Proj.), 14.2 (2013/14 Proj.) - Savings and investment gap (percent of GDP): -8.1 (2008/09 Act.), -9.2 (Sixth Rev.), -7.7 (2009/10 Proj.), -8.0 (2010/11 Proj.), -7.9 (2011/12 Proj.), -7.3 (2012/13 Proj.), -7.1 (2013/14 Proj.) - Domestic investment (percent of GDP): 24.2 (2008/09 Act.), 24.9 (Sixth Rev.), 23.3 (2009/10 Proj.), 24.7 (2010/11 Proj.), 26.0 (2011/12 Proj.), 26.2 (2012/13 Proj.), 26.6 (2013/14 Proj.) - Public: 6.2 (2008/09 Act.), 7.2 (Sixth Rev.), 5.6 (2009/10 Proj.), 6.7 (2010/11 Proj.), 7.9 (2011/12 Proj.), 7.9 (2012/13 Proj.), 8.1 (2013/14 Proj.) - Private: 18.0 (2008/09 Act.), 17.7 (Sixth Rev.), 17.7 (2009/10 Proj.), 17.9 (2010/11 Proj.), 18.1 (2011/12 Proj.), 18.3 (2012/13 Proj.), 18.5 (2013/14 Proj.) - National savings (excluding grants): 16.1 (2008/09 Act.), 15.7 (Sixth Rev.), 15.6 (2009/10 Proj.), 16.7 (2010/11 Proj.), 18.2 (2011/12 Proj.), 19.0 (2012/13 Proj.), 19.6 (2013/14 Proj.) - Public: 0.9 (2008/09 Act.), 2.2 (Sixth Rev.), 0.9 (2009/10 Proj.), 1.7 (2010/11 Proj.), 2.6 (2011/12 Proj.), 3.1 (2012/13 Proj.), 3.6 (2013/14 Proj.) - Private: 15.2 (2008/09 Act.), 13.5 (Sixth Rev.), 14.7 (2009/10 Proj.), 15.0 (2010/11 Proj.), 15.6 (2011/12 Proj.), 15.9 (2012/13 Proj.), 16.0 (2013/14 Proj.) - Current account balance (including grants, percent of GDP): -4.8 (2008/09 Act.), -6.7 (Sixth Rev.), -5.3 (2009/10 Proj.), -6.2 (2010/11 Proj.), -6.1 (2011/12 Proj.), -5.7 (2012/13 Proj.), -5.6 (2013/14 Proj.) - Current account balance (excluding grants, percent of GDP): -8.1 (2008/09 Act.), -9.2 (Sixth Rev.), -7.7 (2009/10 Proj.), -8.0 (2010/11 Proj.), -7.9 (2011/12 Proj.), -7.3 (2012/13 Proj.), -7.1 (2013/14 Proj.) - Net donor inflows (percent of GDP): 4.5 (2008/09 Act.), 6.1 (Sixth Rev.), 5.3 (2009/10 Proj.), 3.8 (2010/11 Proj.), 4.4 (2011/12 Proj.), 3.8 (2012/13 Proj.), 3.4 (2013/14 Proj.) - External debt (including Fund, percent of GDP): 13.9 (2008/09 Act.), 14.3 (Sixth Rev.), 14.0 (2009/10 Proj.), 15.6 (2010/11 Proj.), 17.6 (2011/12 Proj.), 18.9 (2012/13 Proj.), 19.9 (2013/14 Proj.) - External debt-service ratio: 1.6 (2008/09 Act.), 1.0 (Sixth Rev.), 1.1 (2009/10 Proj.), 1.0 (2010/11 Proj.), 1.3 (2011/12 Proj.), 1.7 (2012/13 Proj.), 1.6 (2013/14 Proj.) - Revenue (percent of GDP): 12.5 (2008/09 Act.), 12.8 (Sixth Rev.), 12.5 (2009/10 Proj.), 13.1 (2010/11 Proj.), 13.5 (2011/12 Proj.), 14.0 (2012/13 Proj.), 14.4 (2013/14 Proj.) - Grants (percent of GDP): 3.4 (2008/09 Act.), 2.6 (Sixth Rev.), 2.4 (2009/10 Proj.), 1.8 (2010/11 Proj.), 1.8 (2011/12 Proj.), 1.6 (2012/13 Proj.), 1.4 (2013/14 Proj.) - Total expenditure and net lending (percent of GDP): -17.8 (2008/09 Act.), -17.8 (Sixth Rev.), -17.2 (2009/10 Proj.), -18.1 (2010/11 Proj.), -18.8 (2011/12 Proj.), -18.7 (2012/13 Proj.), -18.9 (2013/14 Proj.) - Overall balance (including grants, percent of GDP): -1.9 (2008/09 Act.), -2.5 (Sixth Rev.), -2.3 (2009/10 Proj.), -3.2 (2010/11 Proj.), -3.6 (2011/12 Proj.), -3.2 (2012/13 Proj.), -3.1 (2013/14 Proj.) - Overall balance (excluding grants, percent of GDP): -5.3 (2008/09 Act.), -5.0 (Sixth Rev.), -4.7 (2009/10 Proj.), -5.0 (2010/11 Proj.), -5.4 (2011/12 Proj.), -4.8 (2012/13 Proj.), -4.5 (2013/14 Proj.) - Stock of domestic debt (percent of GDP): 8.4 (2008/09 Act.), 6.7 (Sixth Rev.), 7.6 (2009/10 Proj.), 7.0 (2010/11 Proj.), 6.7 (2011/12 Proj.), 6.6 (2012/13 Proj.), 6.5 (2013/14 Proj.) - Memorandum: Nominal GDP (U Sh billions): 29,972 (2008/09 Act.), 36,330 (Sixth Rev.), 35,213 (2009/10 Proj.), 39,040 (2010/11 Proj.), 44,014 (2011/12 Proj.), 49,725 (2012/13 Proj.), 56,246 (2013/14 Proj.) - Gross foreign exchange reserves (months of next year's imports): 4.9 (2008/09 Act.), 4.9 (Sixth Rev.), 5.1 (2009/10 Proj.), 4.8 (2010/11 Proj.), 4.9 (2011/12 Proj.), 5.0 (2012/13 Proj.), 5.1 (2013/14 Proj.) ### Program performance and recent developments - All end-December assessment criteria under the PSI through the seventh review have been met. - Structural benchmarks with deadlines in 2010 are expected to be met. - Real GDP growth slowed in the first half of 2009/10 due to drought and delays in government spending. - Annual consumer price inflation decelerated from 11 percent in June 2009 to 7.4 percent in December 2009, mainly due to slower consumer spending and appreciation of the Uganda shilling. - Aggregate demand is projected to increase in the second half of 2009/10 due to recovery of consumer spending and better execution of capital expenditures. - Fiscal stance in the first half of 2009/10 was tighter than programmed because of delays in capital expenditures; revenue overperformed in some domestic tax categories but total revenue underperformed because of weak imports. - The Bank of Uganda pursued an accommodative monetary policy; lending rates declined only marginally and credit to the private sector remained unchanged due to market rigidities and tighter lending standards. - The financial sector remained resilient to the global crisis but NPLs increased from a low base; mobile banking extension may have introduced new operational risks. ### Policy framework under the new PSI — Fiscal policy - Authorities intend a modest expansionary fiscal strategy near to medium term to scale up infrastructure investment while maintaining spending on the MDG clusters. - Plans to create fiscal space and address public sector absorption capacity constraints. - Commitment to restrain expenditure growth in non-productive activities and focus on revenue-enhancing measures. - Near-term revenue efforts to focus on improving enforcement and collection of non-tax revenues. - Steps to strengthen budget execution and absorption capacity via external technical assistance on contracting and procurement, and training of accounting officers on work plans, execution and reporting. ### Policy framework under the new PSI — Monetary and exchange rate policies - BOU monetary policy will focus on supporting growth while remaining vigilant on inflation risks and ready to tilt stance when warranted. - BOU committed to developing high frequency activity indicators to improve monetary policy efficiency. - BOU will continue to review quantitative targets for monetary aggregates monthly and stands ready to intervene with repos and reverse repos to ensure money market stability. - Exchange rate: BOU committed to a flexible exchange rate and will intervene occasionally to smooth excessive volatility. - Authorities will seek to accumulate international reserves consistent with East African Monetary Union convergence criteria over the medium term. ### Financial sector measures - BOU will strengthen supervisory and regulatory services to stem exposure from mobile banking strains and rising NPLs. - Authorities intend to update the Financial Institutions and Microfinance Deposit-taking Institutions Acts. - Proposed measures include upward revision of minimum and paid-up capital requirements; provisions to cover Islamic banking products; regulations for insurance products offered by banks and other non-bank financial institutions; and bringing large savings and credit unions under regulation. ### Structural reforms and infrastructure - NDP prioritizes addressing infrastructure bottlenecks—road, rail, energy, telecommunications—to enhance productivity and competitiveness. - Authorities considering participation in regional transportation infrastructure projects in the EAC. - To finance investment priorities, measures include allocative and technical efficiency improvements and use of PPPs; current ceiling for non-concessional borrowing maintained in the new PSI, with possible future requests for increases after due diligence. - Authorities focused on developing an oil and gas intervention plan, legal and institutional frameworks for the oil sector, and strengthening resource management capacity; they seek Fund TA and engagement on macroeconomic impact assessment, including Dutch disease effects. - PFM strengthening will be fast-tracked in light of increased public investments in oil and gas. - Pension sector reforms to allow entry of private pension providers; a Bill to establish a regulatory framework for the pension sector will be submitted to Parliament at the start of the 2010/11 financial year, with a new regulator to follow enactment. ### Regional integration - Authorities view deepening EAC regional integration as a catalyst for medium-term growth. - Commitment to progress on Customs Union and Common Market protocols and harmonization of monetary and fiscal policies toward an EAC monetary union. ### Conclusion and requests - Authorities emphasize Uganda’s strong macroeconomic fundamentals and commitment to sound macroeconomic policies and structural reforms. - They request continuous support from the Fund, other international financial institutions, and development partners to strengthen macroeconomic stability, restore high growth rates with low inflation, reduce poverty, and attain the MDGs. *Statement by Samuel P. Itam, Executive Director for Uganda — May 12, 2010* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10132.pdf_