## _cr12125 — Executive Summary and Staff Report Highlights ## Source details **Canonical URL:** [_cr12125 — Executive Summary and Staff Report Highlights](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12125.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12125.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12125.pdf.json) --- ### Macroeconomic overview and recent developments - Real GDP growth: 6.7 percent y/y in FY2010/11; services contribute over 50 percent of GDP, industry ~25 percent, agriculture ~14 percent. Real GDP growth projected: 5.0 percent in 2011/12; 6.0 percent in 2012/13; 7.0 percent in outer years. - Inflation: - Headline and core inflation reached an 18-year high in October at 30.5 and 30.8 percent (y/y), respectively; November headline inflation 29.0 percent and core inflation 30.4 percent. - Food inflation: 33.4 percent in June 2011 to 45.8 percent by October 2011. - Non-food inflation: 7.9 percent in June 2011 to 22.8 percent by October 2011. - Exchange rate and reserves: - Nominal shilling depreciated by 20 percent against the US$ from January through mid-August 2011; nominal effective exchange rate depreciated by 16.0 percent in 2010/11. - Real effective exchange rate declined by 0.9 percent since January 2011. - Gross international reserves fell to 3.3 months of imports by end-June FY2010/11 (from 5.1 months in FY2008/09); government sale of US$450 million to the central bank boosted coverage to around 3.5 months. - External balances: - Current account deficit (including grants) worsened to 12.9 percent of GDP in FY2010/11 from 9.6 percent in FY2009/10. - Drivers: limited export growth, stronger imports for oil and construction services, large-scale infrastructure spending (e.g., Karuma spending assumption of US$150 million in FY2011/12). ### Monetary policy and financial sector - Bank of Uganda framework and actions: - Introduced "inflation targeting ‘lite’ (ITL)" in early July with a benchmark Central Bank Rate (CBR) and a +/- 4 percent point corridor targeting the 7-day interbank rate. - BoU retained medium-term core inflation target of 5 percent. - Policy tightening: - CBR increased four times since July for a total of 1000 basis points; October and November increases were 400 and 300 basis points, respectively. - As of early-December, CBR was 23 percent, with the upper range of the band at 27 percent. - Reserve money growth decelerated to 24 percent y/y in September (from above 38 percent in January). - Yields on government securities rose from 13.1 percent in June 2011 to 23.3 percent in October 2011; some commercial bank prime lending rates rose to as high as 29 percent. - Financial sector soundness and FSAP update: - FSAP (August 2011) finds banking system generally sound and well regulated; stress testing suggests high degree of resilience. - Risks: higher interest rates, lower growth and exchange rate volatility could pressure asset quality. - Recommended reforms: strengthen off-site supervision; enhance liquidity management framework; monitor cross-border flow volatility; strengthen nonbank financial supervision; adopt a national payments systems law covering mobile services. ### Fiscal policy, arrears, and public financial management - FY2010/11 outcomes and program performance: - Tight cash limits partly successful; net domestic financing higher than expected. Net credit to government (NCG) breached end-June QAC by about 0.9 percent of GDP (missed by about Ush 350 billion). - Power sector arrears accrued to Ush 207 billion (about 0.5 percent of GDP); Ush 192 billion cleared in Q1 FY2011/12. - Six of seven end-June 2011 QACs were met; most structural benchmarks met, several with delay. - FY2011/12 stance and medium-term focus: - Authorities aim to hold nominal spending broadly in line with the FY2011/12 budget, bringing overall deficit (including grants) down to 3.8 percent of GDP this fiscal year compared to 7.2 percent in FY2010/11. Comparable figures excluding exceptional security spending are 3.2 and 4.7 percent of GDP, respectively. - Reduction in current spending by 4.2 percentage points of GDP (excluding exceptional security spending, reduction by 2.3 percentage points of GDP); development spending increase by 0.8 percentage points of GDP. - Targeted primary balance for FY2011/12 is 1.9 percent of GDP, reflecting a contraction of 1.7 percentage points of GDP compared to FY2010/11. - Authorities committed to revenue measures including elimination of a number of tax exemptions in the FY2012/13 Budget; FY2012/13 measures estimated to support an increase in revenues of 0.5 percentage points of GDP next year. - Power sector: - Tariffs not increased since November 2006; real value of tariffs fallen by half since then. - FY2010/11 ended with Ush 207 billion arrears; FY2011/12 approved budget allocation increased to Ush 417 billion, leaving Ush 210 billion to meet current year costs; current year subsidy costs likely to reach Ush 413 billion. - Regulatory authority proposed weighted average increase of 35 percent in first quarter of 2012; government expects a supplementary budget to parliament in April 2012 to cover approximately Ush 200 billion remaining costs. - Power subsidy requirements expected to decline sharply in FY2012/13 due to Bujagali but could rise again in 2014/15. ### Program monitoring, QACs, structural benchmarks, and TMU mechanics - Staff supports completion of the third review, including: - A waiver of nonobservance for missed QAC on NCG at end-June 2011. - Modification of QACs for end-December 2011 and establishment of QACs for end-June 2012. - Key quantitative targets (selected values as presented): - Ceiling on the increase in net domestic assets of the Bank of Uganda (selected series): 877, 652, 830, 892, 1,150. - Ceiling on the increase in net credit to the central government by the banking system (selected series): 633, 119, 302, 481, 829. - Minimum increase in net international reserves of the Bank of Uganda (US$mn, selected series): -121, 309, 282, 300, -51. - Ceiling on the increase in base money liabilities (selected series): 399, 253, 356, 471, 743. - Ceiling on new nonconcessional external debt with maturities greater than one year (US$mn): 800 (series). - Technical Memorandum of Understanding (TMU) highlights: - Definitions for NFA, NDA, base money, NIR, NCG; program exchange rates listed (e.g., US$/Ugandan shillings 2,821.1300). - Adjusters and schedules: Schedule A budget support (Ush billions cumulative): September 30, 2011: 255.74; December 30, 2011: 415.89; March 31, 2012: 842.31; June 30, 2012: 1,089.2. - Schedule D Karuma expenditures (US$ millions cumulative): March 31, 2012: 150.0; June 30, 2012: 150.0. - Monitoring and reporting timetable for BoU and Ministry of Finance with specific submission lags. ### Risks, staff appraisal, and policy recommendations - Key risks identified: - Growth could fall below projections due to stronger-than-anticipated impact of tight policies and weaker global outlook. - Inflationary momentum may be difficult to reverse; exchange rate volatility could resume, pressuring reserves and inflation. - Tight fiscal stance may face domestic political pressures. - Difficulty raising electricity tariffs could require additional spending. - Staff appraisal and recommendations: - Welcome BoU’s tighter monetary policy and encourage maintaining it until inflation expectations reverse. - Fiscal policy must remain tight to support disinflation; strengthen commitment controls and impose effective sanctions on spending units that exceed authorized levels. - Fiscal adjustment should combine revenue enhancement (close tax loopholes and eliminate exemptions) and spending discipline, including gradual phasing-out of power subsidies and establishment of an apolitical, rules-based tariff mechanism aimed at full cost recovery. - Strengthen banking supervision and vigilance given higher interest rates; rely on existing tools and monitor cross-border flows. - Ensure project readiness before scaling up borrowing: develop deep inventory of well-engineered, vetted, appraised, and "shovel ready" projects. ### Selected macroeconomic and fiscal projections and key statistics (selected series as presented) - Real GDP (percent change sequence): 5.9, 6.4, 6.7, 6.6, 5.0, 6.0, 7.0, 7.0. - CPI (end of period sequence): 4.2, 15.0, 15.7, 7.2, 16.8, 3.1, 5.0, 4.8. - Core inflation (average sequence): 7.8, 6.1, 6.3, 10.1, 24.7, 9.6, 5.9, 4.9. - Current account balance (excluding grants, percent of GDP sequence): -10.9, -12.7, -14.3, -11.7, -13.6, -14.5, -12.2, -11.3. - Gross foreign exchange reserves (months of next year's imports sequence): 4.2, 3.4, 3.3, 3.2, 3.6, 3.8, 3.9, 4.0. - Broad money (M2 percent change sequence): 30.3, 25.3, 23.9, 24.2, 15.7, 20.1, 21.1, 21.5. - Private sector credit (percent change sequence): 25.3, 35.3, 44.4, 30.8, 16.0, 19.7, 20.0, 21.6. - Total revenue and grants (USh billions, sequence): 5,136; 6,275; 6,100; 7,420; 7,964; 9,288; 10,528; 11,892. - Total expenditure and net lending (USh billions, sequence): 6,836; 9,162; 8,900; 9,705; 9,876; 12,339; 14,517; 15,069. - Overall balance (including grants) (USh billions, sequence): -1,699; -2,887; -2,800; -2,284; -1,912; -3,052; -3,988; -3,178. - Nominal GDP (USh billions, sequence): 34,909; 38,730; 39,056; 45,681; 50,857; 57,715; 64,692; 71,981. - Average exchange rate (Ush/US$ sequence): 2,030; 2,324; 2,453; 2,442; 2,816; 3,105; 3,255; 3,352. - End of period exchange rate (Ush/US$ selected): 2,485; 2,623; 2,530; 3,009; 3,201; 3,310; 3,395. ### Program governance, sequencing, and technical assistance priorities - Program reviews and timeline: - Third review: October 2011 — December 2011 (completed). - Fourth review: March 2012 — June 2012 (expected completion by end-June 2012). - Authorities’ commitments: - Implement concrete policies to bring inflation down rapidly; put fiscal policy on a sustainable medium-term path; develop and implement strategy to reduce power sector subsidies including gradual tariff adjustments; submit new draft Public Finance Act to Parliament this fiscal year. - Technical assistance priorities: - Revision of PFAA/PFA, monetary policy and transition to inflation targeting, revenue enhancement and administration, oil revenue management, public expenditure/arreas management, debt management, macroeconomic statistics, and central bank accounting/audit. *Source: Executive Summary and staff report excerpts from the IMF staff report provided in the content unit.* ### Executive Summary ...................................................................................................... ### _cr12125 - Executive Summary ### Executive summary — key findings - Growth recovered in FY2010/11, with real GDP growth at 6.7 percent y/y, driven by industry and services; agriculture underperformed (over 70 percent of labor force engaged in agriculture). - Inflation accelerated sharply: headline and core inflation reached an 18-year high in October at 30.5 and 30.8 percent (y/y), respectively. (November headline inflation was 29.0 percent and core inflation was 30.4 percent.) - The nominal exchange rate depreciated by 20 percent against the US$ from the beginning of 2011 to mid-August; the shilling stabilized since mid-August. - External balances deteriorated: the current account deficit (including grants) worsened to 12.9 percent of GDP from 9.6 percent in FY2009/10. - Reserve coverage fell to 3.3 months of imports by end-June (from 5.1 months in FY2008/09); a government sale of US$450 million to the central bank boosted coverage to around 3.5 months. - Tight cash limits in FY2010/11 were only partly successful: net domestic financing was higher than expected and power sector arrears accrued (Ush 207 billion, about 0.5 percent of GDP); Ush 192 billion of these arrears were cleared in Q1 FY2011/12. - Net credit to government breached the end-June QAC by about 0.9 percent of GDP, largely due to under-budgeting for wages, road construction, and a higher-than-expected domestic interest bill. - Six of seven quantitative assessment criteria (QACs) for end-June, 2011 were met; most structural benchmarks were met, several with delay. - Staff supports completing the third review, including a waiver for nonobservance of the ceiling on net credit to government, revision of QACs for end-December 2011, and new QACs for end-June 2012. ### Recent developments — inflation, exchange rate, and growth - Inflation dynamics: - Initial surge driven by external food price shock (drought in the Horn of Africa). - Second-round inflationary momentum evident, with non-food inflation catching up due to strong domestic demand and exchange rate pass-through. - Headline and core inflation: 30.5 and 30.8 percent (y/y) in October; November headline 29.0 percent, core 30.4 percent. - Exchange rate: - Nominal shilling depreciated 20 percent against the US$ from January through mid-August 2011; then strengthened in October–November following monetary tightening. - Real effective exchange rate declined by 0.9 percent since January 2011. - Growth and credit: - FY2010/11 growth of 6.7 percent y/y; services contribute over 50 percent of GDP, industry ~25 percent, agriculture ~14 percent. - Private sector credit growth remained strong, including in domestic currency terms, despite monetary tightening; preliminary reports suggest private credit growth began to decline rapidly in October and November. ### Monetary policy and financial sector - BoU policy framework and actions: - In early July, the Bank of Uganda (BoU) introduced “inflation targeting ‘lite’ (ITL)” with a benchmark central bank rate (CBR) and a +/- 4 percent point corridor targeting the 7-day interbank rate. - The BoU retained a medium-term core inflation target of 5 percent but has not published a detailed intermediate inflation trajectory. - Policy tightening: - The CBR has been increased four times in a row, by a total of 1000 basis points since July. - October and November increases were 400 and 300 basis points, respectively. - As of early-December, the CBR was 23 percent, with the upper range of the band at 27 percent. - Reserve money growth decelerated to 24 percent y/y in September (from above 38 percent in January). - Uganda undertook the most aggressive monetary tightening in the EAC during the period covered. - Financial sector soundness: - An FSAP update found the banking system generally sound and well regulated; regulatory frameworks for other financial services need improvement. - Higher interest rates, lower growth and exchange rate volatility could put pressure on banks’ asset quality, but stress testing suggests a high degree of resilience. ### Fiscal policy, arrears, and program performance - Fiscal stance and medium-term focus: - Monetary tightening is supported by a contractionary fiscal stance; authorities intend to maintain nominal spending broadly in line with the FY2011/12 budget, implying a large real spending contraction. - Over the medium term, fiscal policy focuses on creating fiscal space to scale up public infrastructure investment in line with the National Development Plan, including preparatory measures for oil production. - Authorities are implementing measures to improve public financial management and revenue collection to create room to spend and borrow for priority infrastructure projects. - FY2010/11 fiscal outcomes: - Tight cash limits reined in spending in H2 FY2010/11, but end-June net credit to government target was breached by about 0.9 percent of GDP. - Revenue increased as a share of GDP relative to FY2009/10. - Spending overruns occurred in road construction, interest costs, and the wage bill. - Payment arrears for power sector subsidies accrued to Ush 207 billion (about 0.5 percent of GDP); Ush 192 billion were cleared in Q1 FY2011/12. - Power sector subsidies: - Additional current spending is accommodated in the program to meet power sector subsidies and prevent further arrears accumulation. - The authorities will develop a strategy to reduce power sector subsidies, including gradual increases in user tariffs. - Program performance and corrective measures: - Six of seven QACs for end-June, 2011 were met. - Net credit to government was missed by 0.9 percent of GDP. - Authorities agreed to corrective actions to prevent similar spending overruns, including better intra-year monitoring of spending. ### External sector - Balance and reserves: - Current account deficit (including grants) estimated at 12.9 percent of GDP in FY2010/11 (from 9.6 percent in FY2009/10). - Deterioration driven by limited export growth (weaker external demand) and strong imports (volume and value), particularly for oil and construction services. - International reserves fell to 3.3 months of imports by end-June; government sale of US$450 million in foreign exchange to the central bank in July boosted coverage to around 3.5 months. - External policy considerations: - Exchange rate volatility and reduced reserve coverage underscore vulnerability; disinflation and some reserve rebuilding seen as priorities. ### Staff recommendation and program outlook - Staff supports: - Completion of the third review. - A waiver of nonobservance of the ceiling on net credit to government (end-June breach). - Revision of QACs for end-December 2011 and establishment of new QACs for end-June 2012. - Authorities’ commitments: - Implement concrete policies to bring inflation down rapidly. - Put fiscal policy on a sustainable medium-term path to support sustained high growth and continued poverty reduction. - Develop and implement a strategy to reduce power sector subsidies, including gradual tariff adjustments. *Source: Executive Summary (pages 5–20) of the IMF staff report provided in the content unit.* ### 9. The Executive Board completed the second review under the PSI on June 29, ### _cr12125 - 9. The Executive Board completed the second review under the PSI on June 29, ### Second PSI review, QACs, and structural benchmarks - The Executive Board completed the second review under the PSI on June 29, 2011 after non-completion of the first review in February. Completion was based on a series of corrective measures to set fiscal policy on a more sustainable trajectory, including tax revenue enhancements. - All end-June QACs were observed, except for net credit to government (NCG) by the banking system. - The NCG target was breached by 0.9 percent of GDP, largely due to higher wage and interest costs than foreseen in the budget and spending overruns in road construction. - Authorities agreed to new corrective actions for this fiscal year to ensure budget projections are more realistic and to better monitor spending overruns. - Indicative targets: - The indicative target on base money was observed. - The indicative target on expenditures under the Poverty Action was missed by a negligible margin. - The indicative target on domestic budgetary arrears under the Commitment Control System could not be assessed due to statutory delays in production of audited arrears figures; government acknowledged arrears of more than 0.5 percent of GDP for the power sector. - Monitoring of the quantitative indicative target will be supplemented by a structural benchmark to monitor unpaid payment claims (MEFP ¶5 and ¶34). - Structural benchmarks: - Most were met, but several with delay. - FY2011/12 tax measures outlined in the second PSI review have all been or are in the process of being implemented; impact is too early to assess. - The measure to extend “straight through payments” to utility bills was not met due to decentralized PFM accountability; it will be replaced with a new measure to publish quarterly releases, invoices and payments by ministry and responsible accounting officer, with resulting sanctions for arrears (MEFP ¶5 and ¶33). ### Macroeconomic outlook and disinflation strategy - Overview: - Policy discussions centered on ensuring monetary and fiscal policy decisively support disinflation to safeguard medium-term growth and poverty reduction. - Authorities acknowledge short term costs to adjustment but view them as necessary to contain larger long-term costs from extended high inflation. - Short-run outlook: - The remainder of the fiscal year characterized by disinflation plus slower growth. - Inflation is expected to abate during the first half of 2012, with core inflation likely to fall by about 10–12 percentage points by June, as tighter monetary stance takes effect and pass through of exchange rate depreciation fades. - Staff analysis suggests nominal exchange rate depreciation may take 3–6 months to pass through fully and could have been responsible for roughly one-third of the increase in inflation through October. - Growth is expected to decline, partly due to tighter monetary and fiscal policies, power outages, and weaker global outlook. - External current account: - Expected to remain high over the medium term due mainly to large-scale infrastructure investment. - Forecast assumptions include upfront spending on Karuma in FY2011/12 of US$150 million, with bulk of investment in subsequent two fiscal years, and imports to support infrastructure development for the oil sector. - Current account deficit expected to widen until oil revenues begin to flow. ### Fiscal policy stance and public finances - FY2011/12 fiscal stance: - Authorities aim to hold nominal spending close to original budget envelope, bringing overall deficit (including grants) down to 3.8 percent of GDP this fiscal year, compared to 7.2 percent in FY2010/11. - Comparable figures excluding exceptional security spending are 3.2 and 4.7 percent of GDP, respectively. - Reduction in current spending by 4.2 percentage points of GDP (excluding exceptional security spending, reduction by 2.3 percentage points of GDP). - Increase in development spending by 0.8 percentage points of GDP. - Adjustment implies a contractionary fiscal impulse (Box 1, MEFP ¶23). - Note: projected deficit is also lower than the forecast of 5.0 percent of GDP at the time of the second PSI review, reflecting reduced development spending as Karuma hydropower project will get under way later than expected. - Revenue projections and measures: - Q1 revenue outcome: 14 percent higher in nominal terms than Q1 last year (or approximately half the inflation rate). - Agreed revenue projections are conservative, resulting in slight decline in GDP terms from 12.7 percent in FY2010/11 to 12.5 percent in FY2011/12. - Authorities agreed that any additional domestic revenues realized as a result of higher inflation will be saved to maintain tight fiscal stance (MEFP ¶22). - Authorities committed to proposing elimination of a number of tax exemptions in FY2012/13 Budget (MEFP ¶24). - FY2012/13 measures combined with full impact of FY2011/12 measures are estimated to support an increase in revenues of 0.5 percentage points of GDP next year, with further measures to support similar increases over the medium term. - Intend to issue VAT refunds directly rather than via budget appropriations. - Fiscal targets and indicators (Box 1 / table extract): - Overall fiscal balance (incl. grants) FY2009/10: -3.6; FY2010/11: -4.7; 2011/12 Proj.: -3.2 - Primary balance FY2009/10: -2.5; FY2010/11: -3.6; 2011/12 Proj.: -1.9 - Fiscal impulse (unadjusted for cyclical position) FY2009/10: 1.3; FY2010/11: 1.1; 2011/12 Proj.: -1.7 - Fiscal impulse adjusted for cyclical position FY2009/10: 1.1; FY2010/11: 1.0; 2011/12 Proj.: -2.1 - Output gap FY2009/10: -1.1; FY2010/11: -0.3; 2011/12 Proj.: -2.0 - Targeted primary balance for FY2011/12 is 1.9 percent of GDP, reflecting a contraction of 1.7 percentage points of GDP compared to FY2010/11; cyclically-adjusted impulse implies contractionary impulse of 2.1 percentage points of GDP. - Power sector subsidies and budgetary needs (Box 2): - Power sector tariffs not increased since November 2006; real value of tariffs fallen by half since then; large industrial tariffs about 1/3 lower than average. - FY2010/11 ended with Ush 207 billion in arrears, most cleared in Q1 FY2011/12. - FY2011/12 approved budget allocation increased to Ush 417 billion, leaving Ush 210 billion to meet current year costs. - Current year subsidy costs likely to reach Ush 413 billion. - Regulatory authority proposed a weighted average increase of 35 percent in the first quarter of 2012; government expects to bring a supplementary budget to parliament in April 2012 to cover remaining approximately Ush 200 billion in costs. - Power subsidy requirements expected to decline sharply in FY2012/13 due to Bujagali hydropower plant but could rise again in 2014/15 as demand outstrips supply. - Public financial management and institutional reforms: - Authorities plan to submit to Parliament a wholesale revision of the Public Financial Accountability Act (PFAA) of 2003 by end of fiscal year (MEFP ¶31). - New Public Finance Act (PFA) to include new budgetary calendar, stricter rules on supplementary spending appropriations, greater transparency about intra-year reallocation, better accounting/audits, and institutional framework for oil revenue management (MEFP ¶¶37–38). ### Monetary policy, financial sector, and prudential recommendations - Monetary stance and targets: - Monetary policy stance tightened to stem domestic inflation momentum. - Program targets reduction in core inflation from about 30 percent currently to 20 percent by June 2012, and to 10 percent by December 2012 (MEFP ¶18). - Achieve by reducing base money growth for the year to just under 16 percent and maintaining the CBR at a level to stem credit growth and domestic demand (MEFP ¶19). - Since October, tightening resulted in sharp appreciation of exchange rate, preliminary reports suggest private sector credit growth decelerating rapidly; November inflation was flat and real interest rates have become less negative. - Authorities will monitor demand indicators to assess whether further tightening is needed (MEFP ¶19). - Note: Immediately following the mission, October inflation results became available and the BoU hiked the CBR by 300 basis points. - Program monitoring discussion: - Authorities and mission discussed modifying PSI monitoring framework to specify an inflation consultation arrangement rather than a target for base money; staff argued it would be premature to change program monitoring now because full-fledged IT framework not yet in place. - Financial sector supervision and FSAP update: - Mission urged strengthening banking system supervision in light of much higher interest rates. - FSAP update (August 2011) indicates banking system should be resilient to significant shocks (stress tests), but rapid tightening in credit conditions and exchange rate volatility require vigilance. - Recommendations include strengthening off-site supervision, enhancing liquidity management framework (including prudent and flexible use of standing facilities), and monitoring cross-border flow volatility. - FSAP findings and reforms (Box 4): - Progress in modernizing and expanding financial sector; bank credit grown rapidly; nonperforming loans remain quite low; competition increased; banking sector reasonably well-provisioned. - One third of banks—chiefly small—have been unprofitable for two years. - High inflation poses major challenge; unclear how long banks could sustain credit losses if inflation, high interest rates, and FX vulnerabilities continue. - Basel Core Principles assessment shows room for improvement; legislative and regulatory gaps remain, including oversight of emerging products and services. - Large number of nonbank financial institutions (mainly credit cooperatives) expanded services in rural areas but are not regulated. - Spread of mobile payments integrates with formal systems but poses payment-system stability challenges. - Recommended reforms include: (i) strengthen bank licensing; (ii) enhance cross-border collaboration; (iii) improve liquidity and crisis management; (iv) strengthen nonbank financial supervision; and (v) adopt a national payments systems law, encompassing mobile services. ### External sector, reserves, and borrowing options - Reserves and external outlook: - Agreement that international reserves need to be carefully guarded; tight monetary policy stance will help safeguard reserves. - Forecast shows reserves staying above 3 months’ worth of future goods and services imports, with modest increase over the medium term (MEFP ¶17). - Forecast assumes steady increase in foreign direct investment to support oil sector development, but modest financial inflows otherwise. - Infrastructure financing options: - Traditional financing insufficient for bold investment agenda; authorities considering options (MEFP ¶28). - Domestic financing (e.g., infrastructure bond following Kenya’s example) is an option but may not provide adequate foreign exchange for import-intensive projects. - Authorities studying infrastructure bond possibility; not accommodated in PSI-supported program at this review. - Expanded external financing on commercial terms being examined; immediate objective is to improve credit rating. - Authorities will update their 2007 medium-term Debt Management Strategy by end of fiscal year and are seeking IMF technical assistance (MEFP ¶39). *Source: _cr12125 - 9. The Executive Board completed the second review under the PSI on June 29,* ### 25. The authorities do not anticipate further requests to increase the program’s non- ### _cr12125 - 25. The authorities do not anticipate further requests to increase the program’s non- ### Program borrowing ceiling and infrastructure financing - The authorities do not anticipate further requests to increase the program’s non-concessional borrowing ceiling this fiscal year (MEFP ¶28). - Any commercial external borrowing would take place within the existing ceiling, which has remaining headroom of US$300 million, and be consistent with the stipulation that it be used to finance infrastructure investment. - Despite the space under the ceiling, the authorities prefer to borrow only once projects are “shovel-ready.” ### Waiver request and corrective actions for net credit criterion breach - The authorities have requested a waiver for the nonobservance of the quantitative assessment criterion for net credit to government by the banking system. - They acknowledge the breach was due to poor budgetary planning and a lack of monitoring of spending overruns (MEFP ¶4). - Agreed corrective actions include: - Develop a strategy to set power sector financing on a more sustainable basis, with immediate actions to avoid further accrual of arrears this year. - Strengthen monitoring of unpaid spending claims to prevent general arrears accumulation. - Outline specific new revenue measures that will be included in the FY2012/13 budget to expand domestic resources. - Submit the new draft PFA to parliament this fiscal year. ### Revised quantitative and structural conditions; program monitoring - Revised QACs for end-December 2011 and end-June 2012 (test dates for the fourth and fifth reviews under the PSI), and supportive structural measures, are presented in the authorities’ MEFP (Attachment I to the Minister’s Letter of Intent). - The revised QACs are more ambitious than those presented at the time of the second review, reflecting tightening of fiscal and monetary policy. - The authorities are preparing a progress report on implementation of the National Development Plan, expected to be submitted at the time of the fourth review of the program. ### Risks to program objectives - Identified risks include: - Growth could fall below projections due to a higher-than-anticipated impact of tighter fiscal and monetary policies and a worsening global outlook. - Inflationary momentum may be difficult to reverse. - The tight fiscal stance could prove too hard to implement in light of domestic pressure and protests. - Volatile exchange rate movements could resume, putting pressure on international reserves and inflation. - External sector developments could be worse than projected, putting pressure on reserves. - Difficulty in increasing electricity tariffs to contain power sector subsidies, which could require more spending. ### Staff appraisal — monetary policy - The tighter monetary policy stance of the Bank of Uganda is welcomed. - Staff encourages the authorities to maintain the tight stance of monetary policy for as long as needed to reverse inflationary expectations and reduce inflation as envisaged under the program. ### Staff appraisal — budgetary stance and public financial management - The budgetary stance for FY 2011/12 must remain tight to support the disinflation efforts of the BoU. - Slower GDP growth may affect revenue performance, underscoring the need for enhanced budgetary discipline. - The arrears incurred at the end of FY 2010/11 and the extra spending that led to the need for a program waiver highlight problems with budget preparation and implementation. - Recommended actions: - Strengthen commitment controls, noting they will not prevent arrears if the budget is not realistic. - Ensure spending units face effective sanctions for making spending commitments beyond authorized levels. - Staff welcomes submission to Cabinet of the draft Public Finance Act, which will improve the basic PFM framework and establish an oil revenue management system. ### Medium-term fiscal adjustment and power sector tariffs - Fiscal adjustment should include both revenue enhancement and more spending discipline, including a gradual phasing out of subsidies for power sector tariffs. - Uganda’s revenue performance remains the weakest in the EAC, and its power sector tariffs have not been increased since 2006. - The FY2012/13 Budget is an opportunity to close tax loopholes and exemptions. - Staff welcomes the authorities’ plans to raise power sector tariffs in early 2012, and notes medium-term fiscal sustainability depends on an apolitical tariff-setting mechanism aimed at full cost recovery, whereby electricity tariffs adjust automatically with changes in underlying costs. ### Infrastructure, project readiness, and borrowing strategy - The infrastructure gap remains Uganda’s key bottleneck to growth. - Timing of flagship National Development Plan projects (roads, rail, a refinery, and power projects) will depend on the preparedness of Ugandan planners as much as on financing availability. - Staff concurs that a deep inventory of well-engineered, vetted, and appraised projects that are “shovel ready” and widely agreed must be established before scaling up borrowing, to avoid carrying costs and the risk that funds raised for investment might be diverted to current spending. ### Financial sector resilience and vigilance - Uganda’s financial sector, while judged sound by the recent FSAP, must cope with a period of tighter monetary policy. - Exchange rate volatility coupled with slower growth and much higher interest rates could put some pressure on asset quality, although FSAP stress testing indicates a high degree of resilience. - Staff urges authorities to remain vigilant, rely on existing mechanisms and tools to manage risks, and monitor potential risks from cross-border flows in the current global environment. *IMF staff appraisal and program discussion as presented in the source PDF.* ### 34. Based on the strength of current and envisaged macroeconomic policies, ### _cr12125 - 34. Based on the strength of current and envisaged macroeconomic policies, ### Executive assessment and recommendation - Staff supports completion of the third review based on the strength of current and envisaged macroeconomic policies, including corrective actions taken to address previous slippages. - Staff recommends: - Modification of QACs for end-December 2011. - A waiver of nonobservance for the missed QAC on NCG at end-June 2011, on the basis of the strong actions government is taking to rein in spending during the current fiscal year and improve public financial management through a comprehensive new law. - Staff supports the authorities’ proposed new structural benchmarks aimed to enhance spending controls to prevent accumulation of arrears. ### Macroeconomic projections and key real-sector indicators (selected) - Real GDP: 5.9, 6.4, 6.7, 6.6, 5.0, 6.0, 7.0, 7.0 (percent change; sequence as in table) - GDP Deflator: 9.6, 5.4, 4.9, 10.7, 24.0, 7.1, 4.8, 4.0 (percent change) - CPI (end of period): 4.2, 15.0, 15.7, 7.2, 16.8, 3.1, 5.0, 4.8 - CPI (average): 9.4, 6.4, 6.5, 12.5, 23.0, 9.7, 5.7, 4.8 - Core inflation (average): 7.8, 6.1, 6.3, 10.1, 24.7, 9.6, 5.9, 4.9 - Core inflation (end of period): 4.6, 10.0, 12.1, 7.0, 20.0, 4.8, 5.0, 5.0 ### External sector (selected) - Current account balance (excluding grants): -10.9, -12.7, -14.3, -11.7, -13.6, -14.5, -12.2, -11.3 (percent of GDP) - Net donor inflows: 4.8, 4.8, 3.6, 4.4, 4.1, 3.9, 3.4, 3.2 (percent of GDP) - Public external debt (including Fund): 15.3, 17.7, 17.8, 19.1, 19.4, 22.8, 25.6, 27.2 (percent of GDP) - External debt-service ratio: 1.9, 1.5, 1.7, 1.7, 1.6, 1.8, 1.9, 2.1 (percent of exports of goods and nonfactor services) - Gross foreign exchange reserves (months of next year's imports of goods and services): 4.2, 3.4, 3.3, 3.2, 3.6, 3.8, 3.9, 4.0 (months) ### Money, credit, and banking (selected) - Broad money (M2): 30.3, 25.3, 23.9, 24.2, 15.7, 20.1, 21.1, 21.5 (percent change) - Credit to the central government (percent of M3 at start of period): 12.9, -6.8, 5.2, 8.0, -7.5, 5.5, 6.1, 2.1 - Private sector credit: 25.3, 35.3, 44.4, 30.8, 16.0, 19.7, 20.0, 21.6 (percent change) - Banking-sector capital adequacy (selected dates): - Regulatory capital to risk-weighted assets: 20.7 (Dec-08), 21.7 (Jun-10), 21.2 (Sep-10), 20.2 (Dec-10), 21.2 (Mar-11), 19.3 (Jun-11), 18.3 (Sep-11) (percent) - Regulatory tier 1 capital to risk-weighted assets: 18.7, 19.2, 18.8, 17.5, 18.9, 17.3, 16.2 (percent) - NPLs to total gross loans: 2.2, 3.3, 2.8, 2.1, 2.5, 1.6, 1.8 (percent) ### Fiscal operations and public finances (selected) - Total revenue and grants (USh billions): 5,136; 6,275; 6,100; 7,420; 7,964; 9,288; 10,528; 11,892 (sequence as in Table 2a) - Revenue (USh billions): 4,273; 5,066; 5,210; 6,285; 6,666; 7,878; 9,102; 10,391 - Tax (USh billions): 4,067; 4,818; 4,958; 6,002; 6,374; 7,557; 8,761; 10,016 - International trade taxes: 352; 635; 455; 519; 584; 698; 718; 801 - Income taxes: 1,361; 2,381; 1,750; 2,220; 2,227; 2,533; 2,960; 3,360 - Excises: 1,025; 1,616; 1,186; 1,380; 1,478; 1,742; 2,095; 2,345 - Value-added tax: 1,329; 2,298; 1,567; 1,884; 2,085; 2,585; 2,988; 3,510 - Grants (USh billions): 863; 1,209; 891; 1,136; 1,298; 1,410; 1,426; 1,501 - Total expenditure and net lending (USh billions): 6,836; 9,162; 8,900; 9,705; 9,876; 12,339; 14,517; 15,069 - Current expenditures: 4,308; 5,749; 5,963; 4,838; 5,629; 6,321; 7,061; 7,756 - Wages and salaries: 1,308; 1,639; 1,664; 1,758; 2,034; 2,309; 2,588; 2,879 - Interest payments: 386; 409; 423; 441; 672; 742; 841; 936 - Other current: 2,614; 3,700; 3,875; 2,639; 2,923; 3,271; 3,633; 3,941 - Development expenditures: 2,312; 3,033; 2,774; 4,743; 3,994; 5,827; 7,236; 7,066 - External/donor-financed projects: 889; 1,592; 1,042; 2,063; 1,728; 2,660; 3,517; 3,290 - Government of Uganda investment: 1,423; 1,441; 1,732; 2,679; 2,266; 3,167; 3,720; 3,776 - Overall balance (including grants) (USh billions): -1,699; -2,887; -2,800; -2,284; -1,912; -3,052; -3,988; -3,178 - Overall balance (excluding grants) (USh billions): -2,562; -4,096; -3,691; -3,420; -3,210; -4,462; -5,414; -4,679 - Financing (USh billions): 1,532; 2,888; 3,031; 2,284; 1,911; 3,060; 3,998; 3,187 - External financing (net): 784; 951; 723; 1,355; 1,306; 2,055; 2,779; 2,422 - Domestic financing (net): 749; 1,937; 2,307; 929; 605; 1,005; 1,218; 766 - Memorandum items: - Nominal GDP (USh billions): 34,909; 38,730; 39,056; 45,681; 50,857; 57,715; 64,692; 71,981 - Nominal GDP (US$ millions): 17,197; 16,665; 15,920; 18,706; 18,059; 18,589; 19,873; 21,473 - Average exchange rate (Ush/US$): 2,030; 2,324; 2,453; 2,442; 2,816; 3,105; 3,255; 3,352 - End of period exchange rate (Ush/US$): 2,485; 2,623; 2,530; 3,009; 3,201; 3,310; 3,395 - Petroleum revenues (USh billions) — inflows (including interest): 1,192; 271; 1,312; 123; 90; 44 (selected periods) - Petroleum fund withdrawals (USh billions): --; 316; 527; 761; 1,009; 503 (selected periods) - Petroleum fund stock at end period (USh billions): 1,192; 904; 2,452; 1,799; 880; 421 (selected periods) ### Balance of payments and external flows (selected) - Current account (US$ millions): -1,646; -2,062; -2,212; -2,472; -2,238; -2,245 (sequence as in Table 4) - Trade balance: -1,698; -2,309; -2,431; -2,281; -2,209; -2,283 - Exports, f.o.b.: 2,317; 2,311; 2,631; 3,088; 3,396; 3,777 - Coffee: 262; 371; 423; 444; 467; 491 - Imports, f.o.b.: -4,015; -4,620; -5,061; -5,368; -5,605; -6,060 - Of which: oil: -486; -659; -746; -801; -870; -946 - Capital and financial account (US$ millions): 1,811; 1,258; 2,523; 2,704; 2,502; 2,468 - Financial account: 1,615; 1,098; 2,298; 2,472; 2,255; 2,201 - Foreign direct and portfolio investment: 871; 907; 1,050; 1,186; 1,383; 1,562 - Gross official reserves (BoU) (US$ millions): 2,385; 2,044; 2,344; 2,562; 2,808; 3,018 - Months of imports of goods and services: 4.2; 3.3; 3.6; 3.8; 3.9; 4.0 - Current account balance (percent of GDP): -9.6; -12.9; -12.2; -13.3; -11.3; -10.5 ### Program targets, quantitative assessment criteria, and structural benchmarks (selected) - Assessment criteria and indicative targets for June 30, 2011 (Table 5, cumulative changes): - Ceiling on the increase in net domestic assets of the Bank of Uganda: 2,093; 2,081; 2,047 - Ceiling on the increase in net claims on the central government by the banking system: 1,545; 1,244; 1,593 - Ceiling on the stock of external payments arrears incurred by the public sector: 0; 0; 0 (continuous assessment criterion) - Ceiling on the contracting or guaranteeing of new nonconcessional external debt with maturities greater than one year by the public sector: 500; 500; 450 - Minimum increase in net international reserves of the Bank of Uganda (US$mn): -622; -620; -576 - Share of oil revenue placed in the Petroleum Fund: 100; 100; 100 - Indicative target — Ceiling on the increase in base money liabilities of the Bank of Uganda: 685; 685; 518 - Stock of domestic budgetary arrears under the Commitment Control System (CCS): 176; 176; ... - Minimum expenditures under the Poverty Action Fund (including the Universal Primary Education component of development expenditure): 1,285; 1,285; 1,284 - Memorandum item — Oil revenue inflows to the petroleum fund (US$ millions): 909; ...; 450 - Structural benchmarks (Table 7) — status highlights: - Government to gazette and publish on the internet the names of beneficiaries of all tax expenditures (to enforce discipline in issuance of tax exemptions): Due September 30, 2011, and quarterly thereafter; Status: Met with delay – accomplished on December 9, 2011. - URA to issue and begin to enforce proposed transfer pricing guidelines (to reduce tax planning and prepare for large scale petroleum revenues): Issued by June 30, 2011, for enforcement beginning in July 2011; Status: Met. - Government to maintain transparency over the treatment of unspent budgetary funds at the end of the fiscal year by publishing balances and requiring parliamentary approval and supporting work and procurement plans to spend balances beyond end-June (to enhance budgetary discipline and promote fiscal transparency): Due July 31, 2011, and October 30, 2011, respectively; Status: Partly met with delay. Central government accounts went to zero on June 30, but local government accounts remained. Balances on these were published on Dec 12, 2011. *Sources: Ugandan authorities; and IMF staff estimates and projections.* ### 2011. Parliament did ### 2011. Parliament did ### Structural benchmarks, implementation status, and administrative measures - Submit to Cabinet regular quarterly reports on unpaid bills of nine central government ministries based on data in the Commitment Control System (CCS) for the previous quarter of the fiscal year (MEFP ¶5, 34). - Purpose: To facilitate control and elimination of expenditure arrears. - Target date: June 30, 2011, for the report covering Q3 of FY2010/11, and quarterly thereafter. - Status: Partly met with delay. A report for Q1 FY2011/12 for 7 of the 9 ministries was submitted to Cabinet on December 19, 2011. - Extend the “straight-through payment” system (STP) now employed for pensions to the utility (electricity, water) sector (MEFP ¶5, 33). - Purpose: Help control accumulation of arrears. - Target date: July 1, 2011. - Status: Not met – to be replaced by new benchmark. - Alternative/actions: Publish quarterly releases and actual payments for utilities on a disaggregated (vote) basis; impose administrative sanctions on Accounting Officers who fail to settle legal obligations for power and water; begin agreeing with utility companies on installation of prepaid meters for water and electricity in government institutions. Implementation began December 13, 2011. - Roll-out of the National Identification System (MEFP ¶5, 30). - Purpose: To support efforts to strengthen revenue collection and combat money laundering and the financing of terrorism. - Target date: June 30, 2012. - Status: On track. 4 million Ugandans are meant to have ID cards by June 30, 2012. Full roll-out planned by July 1, 2013. - Produce and disseminate within government a monthly index of economic activity relying on various high-frequency indicators (MEFP ¶5, 29). - Purpose: To facilitate the conduct of monetary policy. - Target date: September 30, 2011, and quarterly thereafter. - Status: Met with delay – first monthly report (through September 2011) distributed on December 9, 2011. BoU began to distribute a Composite Index of Economic Activity within government on December 9, 2011. - BoU to include in Quarterly Report data on the net and gross positions of government in the BoU (MEFP ¶5). - Purpose: Enhance central bank independence and prepare Bank of Uganda to move toward inflation targeting. - Target date: September 30, 2011, and quarterly thereafter. - Status: Met. - Publication and transparency measures: - Government began to gazette and publish on the MoFPED website the names of beneficiaries of all tax exemptions, as of December 9, 2011. - Government posted on the MoFPED website the balances of unspent budgetary funds on all government accounts at the end of the fiscal year 2010/11 as of December 12, 2011. - Government balances for central government agencies were zeroed out at end-June 2011, but there were some balances left on accounts of local governments. These unspent balances were not re-appropriated by Parliament for FY 2011/12. ### Macroeconomic outturns and key indicators (FY2010/11 and 2011 observations) - Growth: - Economic growth in 2010/11 was 6.7 percent; pace declined in second half of fiscal year. - Real GDP growth expected: 5.0 percent in 2011/12; 6.0 percent in 2012/13; 7.0 percent in outer years. - Inflation (annual figures): - Headline inflation: 30.5 percent in October 2011. - Core inflation: 30.8 percent in October 2011. - Food inflation: 33.4 percent in June 2011 to 45.8 percent by October 2011. - Non-food inflation: 7.9 percent in June 2011 to 22.8 percent by October 2011. - Private sector credit and banking sector: - Private sector credit grew by 44 percent in 2010/11 fiscal year, and remained high through September. - Private sector credit as a ratio of GDP increased to 17 percent in FY 2010/11, compared to 13 percent a year earlier. - Non-performing loans fell to around 2 percent (from 4 percent in 2009). - Balance of payments and reserves: - Capital and financial account surplus: US$ 1,258 million in 2010/11, down from US$ 1811 million in 2009/10. - Overall balance of payments: deficit of US$ 581.4 million in 2010/11, compared with a surplus of US$ 210.9 million in 2009/10. - Gross international reserves: equivalent of 3.3 months of imports of goods and services by end-FY 2010/11, compared to 4.2 months at end of previous fiscal year. - Exchange rate and external competitiveness: - Nominal effective exchange rate depreciated by 16.0 percent in 2010/11 compared to depreciation of 7.4 percent in 2009/10. - Monetary policy rates and market interest rates: - Central Bank Rate (CBR) introduced in July 2011 at 13 percent and raised four times to 23 percent in November 2011. - Yields on government securities rose from 13.1 percent in June 2011 to 23.3 percent in October 2011. - Some commercial bank prime lending rates rose to as high as 29 percent. - Fiscal aggregates and arrears: - Tax revenue (excluding oil capital gains taxes) for FY 2010/11 was 12.7 percent of GDP. - Total expenditure to GDP was 22.8 percent in FY 2010/11. - On a cash basis (excluding arrears), the central government deficit including grants for FY2010/11 was 7.2 percent of GDP. - Arrears on thermal power subsidies of about 0.5 percent of GDP incurred, paid in early FY 2011/12. - Net Credit to Government (NCG) target missed by about Ush 350 billion (about 0.9 percent of GDP). ### Causes of macroeconomic pressures and policy responses - Drivers of inflation and exchange rate depreciation: - Poor domestic harvests for most food crops. - Higher international commodity prices (food and fuel). - Higher inflation in countries from which Uganda imports. - Exchange rate depreciation and strong private sector credit growth. - Government and BoU policy responses: - Monetary tightening: raise interest rates to reduce aggregate demand; CBR raised to 23 percent by November 2011. - Fiscal policy: maintain tight fiscal stance in short term to support disinflation; make necessary fiscal adjustments in FY 2011/12 to support BoU’s disinflation effort. - Administrative and structural reforms to strengthen fiscal control and public financial management (see structural benchmarks). - Electricity sector: end-user electricity tariffs to be increased early in the new year to address higher power costs. - Request for IMF waiver: waiver requested for nonobservance of NCG quantitative assessment criterion for end-June 2011. ### Financial sector developments and structural/legal measures - FSAP findings and implications: - Progress since 2005 noted: risk-based supervision, stronger supervisory practices, improved compliance with Basel Core Principles (2005). - FSAP recommends BoU address legislative/regulatory gaps and strengthen cross-border collaboration to reduce banking risks. - Tighter policy stance may slow private sector activity and could lead to deterioration in bank asset quality. - Legislative/structural measures: - Legislation to enable bancassurance and Islamic financial products, and to introduce a capital charge for market risk, is before Cabinet. - Legislation to strengthen anti-money laundering is before Parliament. - Uganda Retirement Benefits Regulatory Authority Act 2011 enacted in June 2011 to establish regulatory framework for the pension sector. ### Outlook, objectives, and strategic priorities - Near-term macroeconomic objectives: - Reduce inflation to single-digit territory by the end of 2012. - Achieve sustainable economic growth while protecting the medium term. - Medium-term priorities: - Scale up infrastructure development (agriculture, power, roads) to clear bottlenecks to growth and poverty reduction, drawing from the National Development Plan. - Enhance revenues and strengthen public financial management to enable infrastructure scaling-up while rebuilding gross international reserves in line with PSI objectives. - Improve central bank independence and prepare BoU to move toward inflation targeting (publication of government net and gross positions in BoU). - Program governance and IMF engagement: - Government requests modification of quantitative assessment criteria for end-December 2011 and establishment of criteria for end-June 2012, as set out in the attached MEFP and TMU. - Government commits to consult with Fund staff in advance should revisions to PSI policies be contemplated. *Memorandum of Economic and Financial Policies, Government of Uganda, December 20, 2011.* ### 17. The BoU’s primary objective is to bring down core inflation towards its 5 percent ### The BoU’s primary objective is to bring down core inflation towards its 5 percent ### Monetary policy and inflation objectives - Primary objective: bring down core inflation towards its "5 percent" target in the medium term. - Reserve rebuilding target: rebuild foreign exchange reserves equivalent to a minimum level of "4 months of imports" by FY "2014/15". - Exchange rate and capital account policy: - Maintain a flexible exchange rate regime to allow economy adjustments after external shocks. - Maintain an open capital account. - Inflation projections: - Overall (headline) inflation projected to decline to about "17 percent" by June "2012". - Core inflation projected at "20 percent" by June "2012" before declining to about "5 percent" in June "2013". - Outlook: consumer prices to ease after peaking as food prices moderate and aggregate demand is reined in through tighter fiscal and monetary policies. - Pace of disinflation depends on the dissipation of supply-side food price shocks and the extent of further exchange rate adjustment required. - Central Bank Rate (CBR) strategy: - BoU will set the CBR to achieve the path for reduction of inflation. - If inflation exceeds forecasts, BoU will raise the CBR to ensure real interest rates increase. - Commitment to raise the CBR by more than the change in the inflation forecast, i.e., tighten further if inflation outlook deteriorates. ### Fiscal strategy for FY 2011/12 and medium term - Budget thrust for FY "2011/12": - Address rising inflation, high unemployment, inadequate infrastructure (power and roads), improve social infrastructure and service delivery. - Restructure budget to refocus on medium-term priorities and create fiscal space via expenditure efficiency measures. - Revenue outlook and reforms: - Non-oil tax revenue to GDP projected to fall slightly to "12.5 percent of GDP" in FY "2011/12" due to slower real GDP growth. - Expected revenue support from reduction in tax exemptions, administration efficiency gains, and exchange rate depreciation. - Government committed to reducing tax exemptions and tax holidays; begun publishing beneficiaries and amounts on the MoFPED website (as of December "2011"). - Specific tax measures: - Terminated tax exemptions on hotels. - Issued and begun implementing new transfer pricing guidelines. - Streamlining agricultural processing exemptions and the 10-year tax holiday under the Income Tax Act. - Eliminating VAT exemptions on sales of motor vehicles or trailers of a carrying capacity of "3.5 tons or more" designed for the transport of goods. - Intend in the 2012/13 budget to propose elimination of additional exemptions, particularly of intermediate sales under the VAT. - Beginning in "2012/13", URA hopes to pay VAT refunds directly rather than through budgetary appropriation. - Expenditure and deficit projections: - Total expenditure projected to decline to "19.4 percent of GDP" in FY "2011/12". - Fiscal deficit (including foreign grants but excluding oil revenues) was "7.2 percent of GDP" in FY "2010/11", projected to decline to below "4 percent" in FY "2011/12" as exceptional military expenditures end. - Deficit financing: - Primarily through external borrowing. - Donor disbursements projected to increase to "3 percent of GDP" in FY "2011/12" from "2.2 percent of GDP" a year earlier. - Banking system financing projected to decline from "4.2 percent of GDP" in 2010/11 to about "1 percent of GDP" in 2011/12. - Main source of financing for the decline: drawdown from the Energy Fund to initiate the Karuma hydropower project. - Contingency for inflation-driven higher nominal revenues: - Some extra revenues to finance expenditure pressures during 2011/12; remainder set aside to tighten fiscal stance to support BoU’s disinflation effort. - Expenditure management measures: - Review and amendments to the Public Finance and Accountability Act (PFAA) expected to be submitted to Parliament during FY "2011/12": - Consider creation of a contingency fund with clear criteria for use. - Restrict virements (reallocations) between and within spending ministries. - Establish mechanism for oil revenue management including a Petroleum Fund (see paragraphs 36–37). - Measures on unspent balances and arrears: - All central government agency accounts zeroed out by June 30, "2011"; balances returned to the Uganda Consolidated Fund (UCF). Local governments allowed to retain some central government funds at Secretary to the Treasury’s discretion. - Quarterly publication of releases and actual payments for utilities by vote and responsible Accounting Officer. - Minister of Finance to submit quarterly reports to Cabinet on unpaid bills for nine central government ministries; reports include civil works certificates, utilities, wages and pensions, compensations/court awards, power subsidies, and unspent balances. - Commitment to strengthen Commitment Control system (CCS) and introduce strong sanctions for Accounting Officers incurring obligations outside CCS. ### Public investment and infrastructure projects - Public investment policy: - Emphasize prudent expansion in public investment aligned with NDP priorities and resource availability. - Early-2012 review of NDP implementation to assess constraints and resource availability. - Medium-term focus on priority infrastructure projects to unlock binding growth constraints. - Projects commencing in FY "2011/12": - Karuma hydropower project. - Kampala-Entebbe express highway. - Medium-term projects: - Rehabilitation of Tororo-Pakwach railway. - Construction of Kampala-Jinja dual carriage way. - Kampala metropolitan roads to reduce congestion. - Financing approach for projects: - Primarily nonconcessional borrowing for the highway, government’s own current domestic revenues (including oil revenues), and possibly proceeds from sale of infrastructure bonds. - Considering issuance of an infrastructure bond in the third year of Karuma construction when oil revenue savings at BoU are expected to be exhausted. - Limited infrastructure bonds may be issued for start-up costs for other critical projects, fully consistent with the macroeconomic stance agreed with the IMF. - At this stage, Government is not requesting an increase in the nonconcessional borrowing ceiling under the PSI, though it may at future reviews. ### Structural reforms and institutional modernization - Monetary policy framework modernization: - BoU introduced an Inflation Targeting Lite (ITL) framework in July "2011". - Operating target: a monetary policy interest rate called the Central Bank Rate (CBR), which targets the 7-day interbank interest rate. - Daily operations aimed at aligning the 7-day interbank money market rate within a band around the CBR. - ITL improved transparency; BoU expanded communications including periodic press briefings by the Monetary Policy Committee. - BoU, in collaboration with UBOS, developed a Composite Index of Economic Activity as a high frequency indicator; an early version is being disseminated within government. - BoU requested IMF technical assistance to enhance compilation of the Index and other high frequency indicators. - Revenue administration modernization: - Roll-out of e-tax services phased across the country, starting with large and medium taxpayers, to facilitate registration, filing and payments and reduce compliance costs. - E-tax implementation will allow URA to pay VAT refunds directly beginning in "2012/13". - National identification system rollout: - Initial coverage of "4 million" citizens by June 30, "2012". - Full roll-out by July 1, "2013". - Public Financial Management (PFM) reforms: - Revised PFAA proposals (submitted to Cabinet in late November "2011") to: - Introduce a contingency fund with clear guidelines. - Restrict virement across and within spending ministries, requiring ex-ante parliamentary approval for significant reallocations. - Consider advancing the budget timetable to enable Parliamentary approval before the start of each fiscal year. - Move over the medium term to a treasury single account system to improve cash management and reduce cost of government borrowing; Government requests IMF technical assistance for TSA establishment. - Clarify and set limits on carry-forward of expenditure appropriations. - Continued measures to limit accumulation of expenditure arrears and strengthen internal controls. - Power sector strategy: - Government intends ERA to set tariffs at cost recovery levels over the medium term. - Bujagali hydropower dam completion (expected April "2012") will reduce the power deficit temporarily; demand projected to exceed generation capacity about "one and half years" after completion. - Budget Framework Paper for FY "2012/2013" to include a medium term strategic plan for tariff cost recovery and options to meet growing demand cost-effectively. - Supplementary budget to be submitted to Parliament by April 30, "2012" to cover any residual subsidy requirements; subsidy requirements will be consistent with power sector tariff structure set by ERA. - Oil revenue management and transparency: - Dedicated account for oil revenues created in the Bank of Uganda; capital gains tax deposited and earmarked for the Karuma Hydropower Project. - Foreign exchange equivalent of oil capital gains taxes sold to BoU in July to boost reserves before formal Petroleum Fund establishment. - Future oil revenues to be retained on the petroleum account of government in the BoU, not comingled with BoU’s international reserves. - Amendments to PFAA will legally establish the Petroleum Fund into which all oil and gas revenues will be deposited; spending done through the budget. - BoU to act as investment manager for these resources on behalf of government; investment strategy short-run consistent with handling of Uganda’s foreign exchange reserves. - Government considering joining the Extractive Industries Transparency Initiative (EITI); PFAA reporting requirements to comply with EITI. - Emphasis that oil revenue management must not compromise growth and export potential of non-oil sectors; will build capacity in managing oil resources and research capacity. - Debt management and asset-liability strategy: - Updating the debt strategy to ensure debt sustainability amid accelerated public infrastructure investment. - Key policy: separate monetary policy instruments from domestic deficit financing by using secondary market operations for liquidity management and primary securities for deficit financing. - Need to enhance coordination between MoFPED and BoU on liquidity management and to develop MoFPED capacity for debt management. - Request for IMF technical assistance on debt management in light of plans to access capital markets for infrastructure financing. - Government intends to establish evaluation and appraisal criteria to ensure all funded projects are economically and financially viable and consistent with macroeconomic framework. - Petroleum Fund to be administered by BoU with government setting investment guidelines and risk tolerance; requests IMF technical support for asset and liability management as a package. *Italicized source attribution: IMF staff report content as provided in the supplied PDF excerpt.* ### 42. Progress in the implementation of the policies under this program will be monitored ### _cr12125 - 42. Progress in the implementation of the policies under this program will be monitored ### Monitoring framework and review schedule - Progress will be monitored through assessment criteria (ACs), indicative targets (IT), and structural benchmarks (SBs), detailed in the attached Tables 1 and 2 and through semi-annual reviews. - Revised assessment criteria are added for end-December 2011 and proposed for end-June 2012, to be monitored respectively at the fourth and fifth reviews. - The fourth review is expected to be completed by end-June 2012 and the fifth review by end-December 2012. - The attached Technical Memorandum of Understanding (TMU) is an integral part of this Memorandum and contains definitions and adjustors. - During the program period, the authorities will refrain from imposing or intensifying exchange restrictions as well as restrictions on imports for balance of payments reasons, or from introducing multiple currency practices. ### Quantitative assessment criteria and indicative targets (Table 1) — key items and numeric ceilings/targets - Assessment criteria — Ceilings / targets (series of values as presented) - Ceiling on the increase in net domestic assets of the Bank of Uganda: 877, 652, 830, 892, 1,150 - Ceiling on the increase in net credit to the central government by the banking system: 633, 119, 302, 481, 829 - Ceiling on the stock of external payments arrears incurred by the public sector 3/: 0, 000, 0 - Ceiling on the contracting or guaranteeing of new nonconcessional external debt with maturities greater than one year by the public sector 3/ 4/: 800, 800, 800, 800, 800 - Ceiling on new external debt with maturity up to one year contracted or guaranteed by the public sector 3/ 5/: 0, 000, 0 - Minimum increase in net international reserves of the Bank of Uganda: -121, 309, 282, 300, -51 - Share of oil revenue placed into Petroleum Fund (in percent): 100, 100, 100, 100, 100 - Indicative targets — Ceilings / targets (series of values as presented) - Ceiling on the increase in base money liabilities of the Bank of Uganda: 399, 253, 356, 471, 743 - Stock of domestic budgetary arrears under the Commitment Control System (CCS) 6/: ... ......0 50 - Minimum expenditures under the Poverty Action Fund: 650, ......1,300, 1,400 - Ceiling on the issuances of guarantees by the Government/Bank of Uganda (US$mn): 0, 0, 0 - Notes appended to table: - 1/ The assessment criteria and indicative targets under the program, and their adjusters, are defined in the technical memorandum of understanding (TMU). - 2/ Indicative target. - 3/ Continuous assessment criterion. - 4/ To be used exclusively for infrastructure investment projects. Cumulative change from May 2010. - 5/ Excluding normal import-related credits. - 6/ Monitored annually. - Table header/context: (US$ millions) Table 1. Uganda: Proposed Quantitative Assessment Criteria and Indicative Targets for December 2011 - June 2012 1/ (Cumulative change from the beginning of the fiscal year, unless otherwise stated) (Ush billions)(Ush billions) ### Structural benchmarks (Table 2) — measures, macroeconomic rationale, and deadlines - Government to begin to gazette and publish on the internet the names of beneficiaries (whether individual or corporation) of all tax expenditures (MEFP ¶5, 24). - Macroeconomic rationale: Enforce discipline in issuance of tax exemptions. - Date: September 30, 2011, and quarterly thereafter - Begin submitting to Cabinet regular quarterly reports on unpaid bills of nine Ministries based on data in the Commitment Control System (CCS) for the previous quarter of the fiscal year (MEFP ¶4, 34). - Macroeconomic rationale: To facilitate control and elimination of expenditure arrears - Date: June 30, 2011, for the report covering Q3 of FY2010/11, and quarterly thereafter. - Produce and disseminate within government a monthly index of economic activity relying on the various high-frequency indicators available (MEFP ¶5, 29). - Macroeconomic rationale: To facilitate the conduct of monetary policy. - Date: September 30, 2011, and quarterly thereafter. - BoU to include in Quarterly Report data on the net and gross positions of government in the BoU (MEFP ¶5). - Macroeconomic rationale: Enhance central bank independence and prepare Bank of Uganda to move toward inflation targeting. - Date: September 30, 2011, and quarterly thereafter. - Government to publish releases by MoFPED for power and water obligations of spending ministries, and actual payments by them, with sanctions to be applied to the named Accounting Officers of agencies that run arrears on these utilities. (MEFP ¶33). - Macroeconomic rationale: Help control accumulation of arrears. Replaces benchmark on “straight-through payments” - Date: December 15, 2011 (for the previous quarter) and quarterly thereafter. - Government to submit to Cabinet a strategy to contain increases in power sector subsidies, including establishing the timeframe over which Energy Regulatory Authority (ERA) is to move power tariffs to a rules-based, cost-recovery level, and setting out options for the period when power demand outstrips the additional capacity coming from Bujagali hydro project (MEFP ¶36). - Macroeconomic rationale: Prevent accumulation of expenditure arrears. - Date: April 1, 2012. - Government to submit to Parliament a supplementary budget to cover known arrears and under-budgeted spending obligations, including those for power sector subsidies which may be required in light of ERA’s tariff setting policy. (MEFP ¶35). - Macroeconomic rationale: Prevent accumulation of expenditure arrears - Date: April 30, 2012. - As part of introduction of national identification system, 4 million additional citizens will have received IDs (MEFP ¶5, 30). - Macroeconomic rationale: To support efforts to strengthen revenue collection and combat money laundering and the financing of terrorism. - Date: June 30, 2012. ### Technical Memorandum of Understanding — key definitions and program mechanics - Purpose: Defines the quarterly assessment criteria and indicative targets described in the MEFP for the period December 31, 2011–June 30, 2012 financial program supported by the IMF Policy Support Instrument (PSI), and sets forth reporting requirements. - Net foreign assets (NFA) of the BOU: - Defined as the monthly average (based on daily data) of foreign assets minus foreign liabilities, and include all foreign claims and liabilities of the central bank, excluding oil revenues in the petroleum fund. - Monthly average values converted into U.S. dollars at each test date using program exchange rates for various currencies and then converted into Uganda shillings using the program average U.S. dollar-Uganda shilling exchange rate for August 31, 2011. - Program Exchange Rates (as presented) - US dollar (US$)1.0000 - British pound/US$1.6282 - US$/Japanese yen76.4600 - SDR/US$1.6094 - US$/Kenyan shillings93.8000 - US$/Tanzania shillings1,619.5000 - Euro/US$1.4398 - US$/Ugandan shillings2,821.1300 - Net domestic assets (NDA) of the BoU: - Defined as the monthly average (based on daily data) of base money less net foreign assets of the BoU. - NDA limits are ceilings on the cumulative change from the monthly average based on daily data for June 2011 to the same monthly averages for December 2011, March and June 2012. - Base money: - Sum of currency issued by BoU and the commercial banks’ deposits in the BoU (including statutory required reserves and excess reserves), net of deposits of closed banks at the BoU and Development Finance Funds (DFF) contributed by commercial banks held at the BoU. - Base money limits are cumulative change from the monthly average based on daily data for June 2011 to the same monthly average for December 2011, and March and June 2012. - Net claims on the central government by the banking system: - Defined as the difference between outstanding amount of bank credits to the central government and the central government's deposits with the banking system, excluding oil revenues in the petroleum fund and deposits in administered accounts and project accounts. - Credits comprise bank loans and advances to the government and holdings of government securities and promissory notes. - Central government’s deposits with the banking system include the full amount of resources freed by the IMF MDRI. - Net international reserves (NIR) of the BoU: - Defined for program monitoring as reserve assets of the BoU net of short-term external liabilities of the BoU. - Reserve assets: external assets readily available to, and controlled by, the BoU and exclude pledged or otherwise encumbered external assets. - Short-term external liabilities: liabilities to nonresidents, of original maturities less than one year, contracted by the BoU and include outstanding IMF purchases and loans. - For monitoring, reserve assets and short-term liabilities at the end of each test period will be calculated in U.S. dollars by converting the stock from their original currency denomination at program exchange rates. - Ceiling on the stock of domestic budgetary arrears: - Domestic payment arrears/unpaid payment claims under the CCS are defined as the sum of all bills received by a central government spending unit or line ministry delivered prior to the end of the quarter in question, for which payment has not been made, under the recurrent expenditure budget (excluding court awards and pensions) or the development expenditure budget. - Reports prepared by the Auditor General will be used following the end of the fiscal year; in the interim, reports prepared by the Accountant General will be monitored. - Expenditures under the Poverty Action Fund (PAF): - Indicative target designed to ensure resources freed by debt relief are used for additional PAF expenditures. - Compliance verified on the basis of releases (PAF resources made available to spending agencies). - Ceiling on issuance of guarantees by Government or BoU: - Indicative target aims to prevent accumulation of contingent liabilities by the Government (including ministries, agencies and authorities). - Included are any direct, contingent liabilities issued after June 30, 2011, and guarantees issued prior to July 1, 2011 but extended after June 30, 2011. - Excludes guarantee programs with explicit budget appropriations. - Share of oil revenue placed in Petroleum Fund: - QAC will be deemed satisfied if 100 percent of petroleum revenues are transferred to the petroleum revenue account in the Bank of Uganda upon collection by URA. These resources may then be spent or saved as governed by the organic budget law in force (PFAA 2003 until the new PFA is enacted). ### Adjusters and schedules (adjustment mechanisms and presented numerical schedules) - General adjuster principles: - NDA and NIR targets are based on program assumptions regarding budget support, HIPC Initiative and MDRI assistance, and external debt-service payments. - NCG target depends on assumptions regarding domestic nonbank financing of central government fiscal operations and legal reserve requirements. - NDA and NIR targets are based on assumptions regarding automatic access by commercial banks to the BOU’s rediscount and discount window facilities. - Schedule A: Budget support (including HIPC and MDRI) (Ush billions, cumulative from July 1, 2011) 1/ Calculated from US$ at program exchange rate - September 30, 2011: 255.74 - December 30, 2011: 415.89 - March 31, 2012: 842.31 - June 30, 2012: 1,089.2 - Schedule B: External Debt Service (Ush billions, cumulative from July 1, 2011) - September 30, 2011: 234.01 - December 30, 2011: 190.03 - March 31, 2012: 301.83 - June 30, 2012: 366.9 - Note: Debt service due is defined as pre-HIPC Initiative debt service due, excluding debt service subject to HIPC Initiative debt rescheduling. - Schedule C: Non-bank Financing (Ush billions, cumulative from July 1, 2011) - September 30, 2011: 208.05 - December 30, 2011: 511.23 - March 31, 2012: 361.21 - June 30, 2012: 124.2 - Schedule D: Expenditures for Karuma hydropower project (US$ millions, cumulative from July 1, 2011) - September 30, 2011: 0.0 - December 30, 2011: 0.0 - March 31, 2012: 150.0 - June 30, 2012: 150.0 - Specific adjusters described: - Ceilings on cumulative increase in NDA and NCG and the floor on cumulative increase in NIR will be adjusted downward/upward by the amount by which budget support (grants and loans), HIPC Initiative and MDRI assistance exceed (fall short of) projected amounts (Schedule A). - Ceilings and floor will be adjusted by the amount by which debt service due plus payments of external debt arrears less deferred payments falls short of (exceeds) projections (Schedule B). Deferred payments include (i) all debt service rescheduled under the HIPC Initiative; and (ii) payments falling due to all non-HIPC Initiative creditors that are not currently being serviced (gross new arrears being incurred). - Ceiling on increases in NCG will be adjusted by any excess (shortfall) in nonbank financing relative to Schedule C. - Floor on cumulative increase in NIR will be adjusted by the amount by which foreign exchange expenditures on the Karuma hydropower project exceed (fall short of) Schedule D; the ceiling on NCG will be adjusted by the domestic currency equivalent of Karuma spending. - NDA ceiling for every test date will be adjusted upward by the daily average amount of commercial bank automatic access to the BoU discount window and rediscounting of government securities by commercial banks. - NDA ceiling will be adjusted to reflect decreases/increases in legal reserve requirements on deposits in commercial banks, with adjuster calculated as the percent changes in the reserve requirement multiplied by the actual amount of required reserves (Uganda shillings and foreign-currency denominated) at the end of the previous calendar month. ### External debt and arrears assessment criteria (short-term and nonconcessional borrowing) - Short-term debt assessment criterion: - Refers to contracting or guaranteeing external debt with original maturity of one year or less by the public sector. - Excluded: normal import-related credits and non-resident holdings of government securities and government 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 a grant element of less than 35 percent, calculated using average commercial interest rates references (CIRRs) published by OECD. - Concessionality assessment: use 10-year average CIRRs for loans with maturities of at least 15 years, 6-month average CIRRs for loans with shorter maturities; add margins of 0.75 percent for repayment periods of less than 15 years; 1 percent for 15–19 years; 1.15 percent for 20–25 years; and 1.25 percent for 30 years or more. - Ceiling is to be observed on a continuous basis and covers financial leases and other instruments giving rise to external liabilities, including contingent liabilities on nonconcessional terms. - Exclusions from limits: changes from non-resident holdings of government securities and promissory notes, refinancing credits and rescheduling operations, credits extended by the IMF, arrangements to pay over time obligations arising from judicial awards to external creditors that have not participated in HIPC Initiative, nonconcessional borrowing within limits specified in Table 1 of the MEFP, and nonconcessional borrowing by Housing Finance Bank (state-owned bank with limited fiscal risk and able to borrow without government guarantee). - Public sector definition for these criteria: - Public sector comprises the general government (central government, local governments, and monetary authorities), and entities that are public corporations subject to ‘control by the government’ (ability to determine general corporate policy or at least 50 percent government ownership). *Attachment II. Uganda: Technical Memorandum of Understanding — content as presented in the source* ### 23. The definition of debt, for the purposes of the limit, is set out in point 9 of the ### The definition of debt, for the purposes of the limit, is set out in point 9 of the ### Definition of "debt" (Guidelines on Performance Criteria with Respect to External Debt, Point 9) - Debt is understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. - Primary forms of debt include: - (i) Loans: advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements). - (ii) Suppliers' credits: contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided. - (iii) Leases: arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. - Under point 9(b): arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are included. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. - The definition also applies to commitments contracted or guaranteed for which value has not been received. ### Ceiling on accumulation of new external payments arrears - The ceiling on the accumulation of new external payments arrears is zero. - This limit is to be observed on a continuous basis and applies to the change in the stock of overdue payments on debt contracted or guaranteed by the public sector from their level at end-June 2006. - External debt payment arrears consist of 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 but shall exclude arrears on obligations subject to rescheduling. ### Monitoring and reporting requirements (summary of obligations and timing) - Submission channel: Information should be mailed electronically to AFRUGA@IMF.ORG. - Bank of Uganda reporting items and schedules: - Issuance of government securities, repurchase operations and reverse repurchase operations — Weekly — Submission lag: 5 working days - Operations in the foreign exchange — Weekly — Submission lag: 5 working days - Interest rates (7 day interbank, commercial bank prime lending rate, government securities) — Weekly — Submission lag: 5 working days - Private sector credit growth by shilling and forex, and excess reserves of commercial banks — Weekly — Submission lag: 5 working days - Disaggregated consumer price index — Monthly — Submission lag: 2 weeks - Balance sheet of the BOU, consolidated accounts of the commercial banks, and monetary survey — Monthly — Submission lag: 4 weeks - Monthly foreign exchange cash flow table of BOU — quarterly — Submission lag: 4 weeks - Statement of (i) cash balances held in project accounts at commercial banks; (ii) total value (measured at issue price) of outstanding government securities from the Central Depository System (CDS); and (iii) the stock of government securities (measured at issue price) held by commercial banks from the CDS — Quarterly — Submission lag: 6 weeks - Summary of (i) monthly commodity and direction of trade statistics; (ii) disbursements, principal and interest, flows of debt rescheduling and debt cancellation, arrears, and committed undisbursed balances—by creditor category; and (iii) composition of nominal HIPC Initiative assistance — Quarterly — Submission lag: 6 weeks - Summary of stock of external debt, external arrears, and committed undisbursed loan balances by creditor — Quarterly — Submission lag: 6 weeks - Standard off-site bank supervision indicators for deposit money banks — Quarterly — Submission lag: 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; ((iv) new nonconcessional external borrowing; and (v) net international reserves — Quarterly — Submission lag: 6 weeks - Ministry of Finance reporting items and schedules: - Summary of central government accounts. Revenues recorded on a cash basis. Expenditures recorded when checks are issued, except for domestic and external debt-service payments, cash transfers to districts, and externally funded development expenditures. Expenditures on domestic interest recorded on an accrual basis and external debt service recorded on a commitment basis (i.e., when payment is due) — Monthly — Submission lag: 4 weeks - Summary of outstanding stock of unpaid payment claims — Quarterly — Submission lag: 6 weeks - Summary of contingent liabilities of the central government and the Bank of Uganda. For the purpose of the program, contingent liabilities include all borrowings by statutory bodies, government guarantees, claims against the government in court cases that are pending, or court awards that the government has appealed — Quarterly — Submission lag: 6 weeks - Detailed monthly central government account of disbursed budget support and project grants and loans (less change in the stock of project accounts held at the BoU and commercial banks), HIPC support, and external debt service due and paid — Quarterly — Submission lag: 4 weeks - Detailed central government account of disbursed donor project support grants and loans — Monthly — Submission lag: 6 weeks - Statement on new external loans contracted or guaranteed by the central government and the Bank of Uganda during the period according to loan agreements — Quarterly — Submission lag: 6 weeks - Updated national accounts statistics (real and nominal) according to UBOS and medium-term projections — Quarterly — Submission lag: 12 weeks ### Key statistics and institutional relations with the Fund (as of dates given) - Membership status: Joined: September 27, 1963; Article VIII - Quota: 180.50 (SDR Million) — 100.00 percent of quota - Fund holdings of currency: 180.51 — 100.00 percent - SDR Department net cumulative allocation: 173.06 — 100.00 percent - SDR Department holdings: 142.27 — 82.21 percent - Outstanding Purchases and Loans: ECF Arrangements 4.80 — 2.66 percent of quota - Latest financial arrangements (type, dates, Amount Approved, Amount Drawn — SDR Million): - ECF: Sep 13, 2002 — Jan 31, 2006 — 13.50 — 13.50 - ECF: Nov 10, 1997 — Mar 31, 2001 — 100.43 — 100.43 - ECF: Sep 06, 1994 — Nov 09, 1997 — 120.51 — 120.51 - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Forthcoming years headings: 2011 2012 2013 2014 2015 - Principal 1.201.201.201.00 - Charges/Interest 0.030.110.100.100.10 - Total 0.031.311.301.301.10 - HIPC Initiative (decision/completion point dates and amounts as reported): - Decision point date: Apr 1997 Feb 2000 - Assistance committed by all creditors (US$ Million): 347.00 656.00 - Of which: IMF assistance (US$ million): 68.90 91.00 - (SDR equivalent in millions): 51.51 68.10 - Completion point date: Apr 1998 May 2000 - Disbursement of IMF assistance (SDR Million): Assistance disbursed to the member 51.51 68.10 119.61 - Interim assistance --8.20 8.20 - Completion point balance 51.51 59.90 111.41 - Additional disbursement of interest income --2.06 2.06 - Total disbursements 51.51 70.16 121.67 - MDRI-eligible debt (SDR Million): 87.73 - Financed by: MDRI Trust 75.85 - Remaining HIPC resources 11.88 - Delivery Date January 2006 — N/A 87.73 - Outstanding Fund credit: SDR 4.8 million (2.66 percent of quota) as of at end-October, 2011. - Official exchange rate: USh 2805-- per U.S. dollar (as of end-October, 2011). - Article IV: Executive Board concluded the last Article IV consultation on February 11, 2011. Next consultation on the 24-month cycle, subject to decision on consultation cycles approved on September 28, 2010. ### Safeguards, PSI, and technical assistance - Safeguards assessment: - Update assessment of the Bank of Uganda completed on April 10, 2007 concluded that the BOU had strengthened its safeguards framework since the 2003 assessment. - 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 the legal and internal control areas. - Policy Support Instrument (PSI): - Executive Board approved a new three-year PSI and completed the seventh and final review under the previous PSI on May 12, 2010. - The new PSI follows on the first three-year PSI, which was approved in December 2006 and extended by one year in 2009, then concluded successfully in May 2010. - Technical assistance (recent and priorities): - Recent TA missions (examples and focus areas): - March 2011: tax policy mission to identify possible reforms to improve buoyancy and efficiency of the domestic tax system. - July 2011: TA mission providing strategic direction for modernization of the Uganda Revenue Authority. - August (year unspecified): TA public financial management mission assisting in redrafting a new Uganda Public Finance Act and discussing fiscal aspects of prospective oil revenues management. - August 2005: TA mission on enhancing effectiveness of monetary policy implementation and developing financial markets. - April 2006: MCM and the BOU joint workshop on financial market development. - June 2011: MCM multi-topic TA mission to enhance central bank capacity in monetary operations and central bank accounting. - Future technical assistance priorities: - Tax administration and tax policy reforms - Oil revenue management - Public expenditure management, especially control and monitoring of government arrears - Monetary and exchange rate management - Bank supervision - National accounts statistics - Reporting standards for government finance statistics - Monetary and balance of payments statistical reporting - Central bank accounting and audit - Debt management *Prepared by the African Department (In consultation with other departments); December 20, 2011.* ### 2. Fund Work ### 2. Fund Work ### Program reviews and timelines - Third Review under the PSI. Program emphasis: fiscal space for high value added infrastructure investment, enhanced revenues, better PFM and budget, coherency of monetary and fiscal policies, preparation for market access and oil revenues. - October 2011 — December 2011 - Fourth Review under the PSI: As above - March 2012 — June 2012 ### TA priorities - revision of PFAA - monetary policy and transition to inflation targeting - revenue enhancement, including tax policy follow-up and revenue administration - Asset and debt management (including petroleum revenue management) - Enhancing macroeconomic statistics, including national accounts, BoP data, and GFS - Timetable: TBD — TBD ### Joint work and timelines - JSAN on the Midterm NDP Review: March 2012 — June 2012 - Joint FSAP: August 2011 — December 2011 - Joint DSA update: March 2012 — June 2012 ### IMF Executive Board action (Press Release No. 12/8, January 13, 2012) - The Executive Board completed the third review under the Policy Support Instrument (PSI) for Uganda. - In completing the review, the Board approved: - a waiver of nonobservance of the ceiling on net credit to government (NCG) - the modification of quantitative assessment criteria - Background: The PSI for Uganda was approved on May 12, 2010 and aims at maintaining macroeconomic stability and alleviating constraints to growth. PSIs are voluntary and demand driven. ### Key assessment and policy messages from Mr. Naoyuki Shinohara (Deputy Managing Director and Acting Chair) - Monetary policy: Ugandan authorities have appropriately tightened monetary policy to help reverse the acceleration in inflation over the past nine months. The tighter policy stance should facilitate a rebuilding of international reserves and reduce exchange rate volatility. - Fiscal policy: Restrained fiscal policy will support disinflation efforts. - Financial sector: Given higher interest rates and inflation, the Bank of Uganda will reinforce financial sector supervision. - Growth outlook: Growth is likely to slow in 2012 because of tighter policies and a weaker global growth outlook; rapid disinflation is critical to restore the stable macroeconomic environment. - Power sector subsidies: Subsidies have grown quite large and consume resources needed to implement Uganda’s National Development Plan. Authorities announced a significant increase in tariffs to contain subsidy costs this fiscal year and plan a system to adjust tariffs automatically in line with changes in underlying costs. - Revenues and PFM: Over the medium term, authorities plan to bring their revenue effort in line with other East African countries, mainly by eliminating tax exemptions and incentives, and to put in place a prudent petroleum revenue management framework. ### Statement by Mr. Majoro, Executive Director for Uganda (January 13, 2012) — summary of authorities’ view and commitments Findings and recent developments - Global and regional context: Second round of heightened global economic uncertainty, regional demand shocks, and structural supply constraints for food. - Growth: Real GDP growth recovered from 5.2 percent in 2009 to 6.7 percent in 2010/2011; projected to decline to 5.0 percent (mainly due to deterioration in the external environment and the tight macroeconomic stance). - Inflation and credit: Inflation has spiked; growth of private sector credit was 44 percent over the past year. - External balances: Current account deficit (including grants) estimated to have worsened to 12.9 percent of GDP from 9.6 percent in FY2009/10. International reserves declined to 3.3 months of imports cover by end-June 2011 from a high of 5.1 months in FY2008/09. - Fiscal stance: Authorities maintained a consolidation stance, resisted pressure to increase public sector wages, and intend to maintain nominal spending broadly in line with the FY2011/12 budget, implying a large real spending contraction. Recurrent spending accommodates power sector subsidies. Authorities’ requests and program performance - Request Directors’ support for completion of the third review of the PSI and for the waiver for nonobservance of the NCG assessment criterion. - Performance: All but one of the end-June 2011 quantitative performance/assessment criteria observed with good margins; structural reforms generally on track. ### Medium-term policy framework and reforms Fiscal policy and related reforms - Objectives: - Strike and maintain balance between addressing rising inflation and sustaining growth momentum, including unemployment and infrastructure/social service deficits. - Restructure the budget to refocus on medium term priorities to create fiscal space for priority services and modestly scale up investment in infrastructure and primary sectors. - Continue structural reforms of the budgetary process to improve budget execution and efficiency. - Revenue mobilization: - Strengthen domestic and concessional resource mobilization. - Enhance revenue reforms to raise revenue yield; streamline tax expenditures, exemptions and holidays. - Implement phased roll-out of e-tax services nationwide. - Request additional Fund TA in revenue administration. - Expenditure prioritization: - Pursue expenditure streamlining while focusing on NDP priorities (roads and energy infrastructure) and prudent spending on MDG clusters. - Enhance budget execution and alignment between policy objectives and the budget through prioritization of public investment. - Public Finance Accountability Act (PFAA) and PFM measures: - Submit a comprehensively reviewed PFAA to Parliament to provide an appropriate mechanism for oil revenue management and amend the current Budget Act. - Strengthen predictability of the budget, modalities for financing emergencies and supplementary budgets. - Strengthen internal commitment and control system to rein in accumulation of expenditure arrears; institute quarterly Cabinet reports on unspent balances and unpaid bills. - Migrate to a treasury single account system for administering government finances and request Fund TA for this and for arrears management capacity. Monetary and exchange rate policies - Monetary stance: - Maintain tightened monetary policy in the medium term to bring down inflation to the BoU’s target of 5 percent. - Set the benchmark central bank rate (CBR) consistent with the disinflationary path under the new inflation targeting lite (ITL) framework. - Bolster open market operations, maintain a flexible exchange rate policy, rely substantially on foreign exchange sales for sterilization of liquidity, and improve liquidity forecasting in cooperation with the Ministry of Finance. - Continue to improve inflation-specific analytical and forecasting tools under the ITL framework. - Transparency and communications: - Enhance transparency of monetary policy conduct, expand communications strategy, and develop a composite index of economic activity as a high frequency indicator for monetary policy analysis (Fund TA requested). - Exchange rate and reserves: - Maintain a flexible exchange rate regime; intervene only occasionally to smooth excessive volatility. - Reserve accumulation target: seek to increase international reserves from the current 3.5 months of import cover to the 6 months cover target consistent with East African Monetary Union convergence criteria. Financial sector - Strengthen supervisory and regulatory services in line with FSAP update recommendations. - Implement Uganda Retirements Benefits Act of 2011 to regulate the entire pension sector. - Continue reforms to align regulatory framework with the 2005 Basel Core Principles and update the Financial Institutions Act to allow banks to offer additional products. - EAC regional integration protocols to guide cross-border flow management. - Legislation to strengthen anti-money laundering is before Parliament. The new oil economy - Authorities intend to ring-fence oil revenues for infrastructure investments by establishing a petroleum fund to: - finance expenditures exclusively through the budget, and - generate revenue savings for future generations. - Consideration of joining the Extractive Industries Initiative (EITI); proposed PFAA amendments’ reporting requirements will be designed to comply with EITI. - Emphasis on building capacity to manage oil resources and ensure oil revenues do not compromise non-oil sector growth. - Authorities appreciate Fund TA under the Topical Trust Fund for Managing Natural Resources Wealth (MNRW-TTF). ### Conclusion and requests - Authorities view macroeconomic fundamentals and policy commitments as having restored growth momentum faster than earlier envisaged. - Acknowledgement of reemerging risks from global uncertainties and regional shocks; prepared to take appropriate measures to protect macro stability. - Near-term program focus: sustaining macroeconomic stability and fiscal consolidation, enhancing domestic resource mobilization, promoting broad-based and pro-poor growth, and increasing investment in infrastructure, primary sectors and core MDG clusters. - Request continued support from the Fund, other IFIs, and development partners to strengthen macroeconomic stability, restore high growth rates with low inflation for poverty reduction and attainment of the MDGs. *Source: _cr12125 - 2. Fund Work (IMF Press Release No. 12/8 and accompanying Executive Director statement), January 13, 2012.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12125.pdf_