## _cr13375

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---

### Revenue-Enhancing Plan — key findings and measures
- Fiscal stance and objectives:
  - Overall deficit of about 7 percent of GDP in FY 2013/14 (up from 4 percent of GDP in FY 2012/13).
  - Staff supported expansion of public investment provided it is accompanied by strengthening tax revenue of 1 percent of GDP in the next two years.
  - PSI envisages tax revenue enhancement of ½ percent of GDP a year in the next three years.
- Ad hoc and planned revenue measures:
  - Current budget measures include increasing excise duties on fuels and introducing levies on mobile money transfers and international calls.
  - Government plans a comprehensive review of exemptions under the Income Tax Act, including:
    - elimination of exemptions on income derived from agro-processing;
    - amendment of the thin capitalization rule;
    - introduction of a capital gains tax on disposal of commercial buildings by residents.
  - Capital gain taxes on oil transactions now not expected to materialize this fiscal year owing to procedural delays.
- VAT gap and analysis:
  - Uganda faces a large shortfall in VAT revenues compared with other EAC countries (C-efficiency measure).
  - Government plans to complete a VAT gap analysis to:
    - quantify revenue foregone owing to exemptions or zero-rated goods and services and to compliance gaps;
    - enable cost-benefit analysis to determine which exemptions to maintain or drop;
    - allow URA to better target compliance resources.
  - Reported VAT Revenue Performance in EAC Countries (as reported):
    - Uganda1828.6
    - Burundi1881.7
    - Kenya1644.4
    - Rwanda1841.7
    - Tanzania1845.7
    - EAC Average48.4
- Tax administration and compliance measures:
  - Expand audit coverage; improve audit risk criteria for problematic industries.
  - Better taxpayers’ segmentation and departmental coordination.
  - Systematic use of tax identification numbers for traders.
  - Review VAT register and ledger; widen scope of withholding agents.
  - Legal framework to collect taxes on small businesses historically hard to reach.
- Staff advice:
  - Center tax effort on a comprehensive strategy, avoid piecemeal approach, avoid further delays, engage parliament decisively.

### Infrastructure scaling-up: projects, costs, and financing modalities
- Major planned projects and costs:
  - Two hydropower projects (Karuma and Isimba dams) and related industrial substations, plus oil-related connectivity, at a cost of $2.35 billion spread over the next five years and an additional $200 million for oil-related connectivity.
  - Box 2 key facts:
    - Karuma: 600 MW, cost $1.7 billion, construction expected to start in FY2013/14 and take five years; Uganda to finance 15 percent from savings and borrow the rest non-concessionally from China.
    - Isimba: $570 million; construction to start in FY2013/14 with similar financing scheme.
    - Roads: Kampala-Mpigi and Kampala-Jinja, about $500 million each, start FY2013/14, five-year completion; PPPs being designed with IFC support.
    - Regional railway: total costs $13 billion, Ugandan share $3 billion (early-stage discussions).
    - Refinery and pipeline: construction planned to start in FY2015/16; total capital expenditure estimated at $15–20 billion, financed primarily through FDI; preparatory oil-related infrastructure investment about $200 million financed from non-concessional sources.
- Reported financing modalities and project cost breakdown (Text Table 2, Billions of US$; Financing Modality EF&PF / NCB / PPP):
  - Karuma hydro power project1.70.31.4
  - Isimba hydro power project0.60.10.5
  - Industrial substations for transmission0.10.1
  - Oil-related infrastructure projects 0.20.2
  - Kampala-Mpigi highway 0.40.4
  - Kampala-Jinja highway 0.50.5
  - Total3.50.32.20.9
- Reserve and financing implications:
  - Up-front use of the equivalent to $253 million of shilling denominated government deposits to cofinance projects would reduce international reserves to 3.5 months of imports in FY2013/14.
  - Excluding such deposit withdrawals, international reserves would increase by $113 million in FY2013/14, keeping reserve coverage at 3.9 months of imports.
- Operational expectations:
  - Independent feasibility studies and preliminary cash flow analysis suggest bulk of investment and financial costs could be recovered without subsidies to electricity tariffs; budget may need to cover interest during construction.
  - Authorities plan to create a performance-oriented special unit within electricity companies and implement medium-term institutional reforms.

### Changes in financing modalities and non-concessional borrowing (NCB)
- Change in financing modalities and government request:
  - At PSI approval, Karuma expected financed with government savings and domestic debt; Isimba and roads to be financed with NCB.
  - Financing modalities changed: a Chinese company and China Eximbank to construct and finance 85 percent of both Karuma and Isimba projects; the remaining 15 percent and insurance/fees to be financed by drawing government savings.
  - PPP envisaged for the road program instead of NCB.
  - Authorities requested increase in the NCB ceiling from $1.5 billion to $2.2 billion.
  - DSA notes planned scaling up reported elsewhere as an increase from $1.5 billion to $2.213 billion.
- Staff support and economic rationale:
  - Staff supported NCB increase because projects are macro critical, commercially viable if well managed, consistent with absorptive capacity.
  - External debt NPV estimated increase of 8¾ percent of GDP (Annex 1 in the DSA).
  - Likely combined grant element of at least 10 percent for negotiated financing terms; staff estimate about 11½ percent grant element for prospective Eximbank China loans for Karuma, Isimba, and industrial substation projects.
  - Mobilization from concessional sources unlikely given project size.
- Risks and safeguards recommended:
  - Risks: large planned borrowing subject to delays raising costs; suboptimal PFM could derail funds; weak institutional arrangements could raise fiscal liabilities; volatility in financing terms might raise debt service costs.
  - Staff urged MoFPED to ensure efficiency and transparency by:
    - institutional building of electricity companies;
    - publishing feasibility studies, contract terms, and cash flows of financing and operations;
    - including investment program and financing modalities in the medium-term fiscal strategy.

### Debt Sustainability Analysis (Annex 1) — findings, assumptions, and stress tests
- Baseline and updates:
  - Update to joint IMF/IDA DSA from June 17, 2013 incorporating planned NCB scaling up and contingent liabilities from two PPP projects.
  - NCB ceiling revised upward from $1.5 billion to $2.2 billion (noted elsewhere as $2.213 billion).
- Macroeconomic and fiscal assumptions:
  - Average medium-term growth projected to increase to about 7 percent of GDP; long-term growth projected at 7.2 percent (Box 1 revised long-run growth to 7¼ percent in some adjustments).
  - Average medium-term current account deficit projected at 12½ percent of GDP during construction; long-term current account deficit projected at 7½ percent of GDP in absence of oil exports.
  - Fiscal deficit projected to widen from about 4 percent of GDP in FY2012/13 to 5¼ percent of GDP in the medium term, peaking at 7½ percent of GDP in FY2013/14; long-term average fiscal deficit expected to decline to about 2¾ percent of GDP.
  - Contingent liabilities from two PPP road projects amounting to about 1½ percent of GDP included in baseline.
- Public and external debt projections and indicators (selected)
  - Total public debt at end-2012: 30¼ percent of GDP.
  - External debt increase in 2007–2013: about 5 percent of GDP.
  - Public domestic debt increased by 5½ percent of GDP in same period.
  - Share of external debt remained in range of 55–60 percent.
  - External debt to GDP dropped to 12¼ percent of GDP in 2007.
  - Private sector external debt rose to about 16¼ percent of GDP in FY2012.
- Public Debt Sustainability (selected projections and indicators)
  - Total public debt projected to peak at about 40 percent of GDP in 2018 (below the indicative benchmark of 74 percent).
  - Short average maturity of domestic debt (less than three years) and low revenue base lead to debt service-to-revenue ratio of about 35 percent.
  - Stress test: illustrative scenario with an unchanged primary deficit of 5.9 percent of GDP results in NPV of public debt to GDP rising to 77 percent by 2034.
- External Debt and PV ratios (selected projection highlights)
  - PV of public sector debt (percent of GDP, selected): 2014: 23.0; 2015: 26.6; 2016: 28.2; 2017: 30.8; 2018: 30.6; 2019: 30.0; 2024: 29.8; 2034: 27.2.
  - PV of PPG external debt (percent of GDP, selected): 2014: 7.6; 2015: 10.0; 2016: 12.5; 2017: 15.0; 2018: 16.2; 2019: 17.0; 2024: 17.2; 2034: 16.9.
  - Debt service-to-revenue and grants ratio (percent): 2011: 33.7; 2012: 28.4; 2013: 35.1; 2014–19 average: 33.0; 2024: 30.7; 2034: 27.3.
  - Gross financing need (percent of GDP): 2011: 9.9; 2012: 6.5; 2013: 12.5; 2014–19 average: 12.6; 2024: 11.2; 2034: 7.6.
- Alternative scenarios and illustrative outcomes:
  - Regional railway scenario: additional NCB about $1.6 billion beyond PSI period—debt burden indicators rise but remain within thresholds.
  - Oil illustrative scenario: construction of pipeline and small refinery (FY2015/16), total capital expenditure $15-$20 billion, financed primarily through FDI; oil revenues in exercise amount to more than 50 percent of total government revenues; oil production could account for close to 15 percent of GDP during peak extraction; elimination of external debt by 2025 under illustrative assumptions.

### Macroeconomic projections and selected quantitative series (selected figures)
- Real GDP: 5.9, 6.6, 3.4, 5.3, 5.8, 6.0, 6.2, 6.5, 7.1, 7.2, 7.2
- GDP Deflator: 9.5, 5.0, 24.1, 7.3, 4.7, 5.8, 7.8, 6.9, 4.7, 4.8, 5.0
- CPI (end of period): 4.2, 15.7, 18.0, 5.7, 3.6, 5.7, 7.6, 6.3, 5.0, 5.0, 5.0
- Broad money (M3) (percent change): 33.2, 25.7, 7.2, 10.3, 6.6, 16.1, 11.3, 16.3, 13.4, 13.6, 14.9
- Private sector credit (percent change): 30.6, 43.6, 11.5, 14.5, 6.4, 15.1, 15.4, 14.4, 12.8, 13.6, 13.8
- Savings and investment gap (excluding grants, percent of GDP): -10.8, -13.1, -14.5, -10.7, -10.3, -12.6, -13.8, -12.7, -13.2, -12.6, -11.1
- Current account balance (including grants, percent of GDP): -9.5, -11.8, -13.3, -10.4, -9.9, -12.2, -13.4, -12.4, -13.0, -12.4, -10.8
- Public external debt (including IMF, percent of GDP): 13.6, 17.3, 16.2, 17.0, 17.5, 20.3, 20.2, 22.6, 25.4, 26.2, 26.9
- Gross foreign exchange reserves (US$ millions): 2,385, 2,044, 2,644, 3,044, 2,912, 3,264, 2,772, 3,102, 3,502, 3,832, 4,182
- Months of next year's imports of goods and services: 4.2, 3.2, 4.2, 4.2, 3.9, 4.1, 3.5, 3.6, 3.9, 4.0, 4.0
- Revenue (percent of GDP): 12.2, 16.2, 13.2, 13.0, 13.2, 15.0, 13.7, 14.3, 14.8, 15.1, 15.4
- Total expenditure and net lending (percent of GDP): 19.6, 22.8, 18.5, 18.6, 18.9, 20.2, 22.2, 21.0, 20.8, 20.0, 19.5
- Overall balance (including grants, percent of GDP): -4.9, -4.3, -3.0, -3.9, -4.1, -3.6, -7.1, -5.1, -5.1, -3.9, -3.2
- Overall balance (excluding grants, percent of GDP): -7.3, -6.6, -5.3, -5.6, -5.8, -5.2, -8.5, -6.7, -6.1, -4.8, -4.1
- Net Domestic Financing (percent of GDP): 2.1, 3.4, 0.0, 1.5, 1.3, 1.7, 2.9, 1.3, 0.9, 0.9, 0.4
- Public Domestic Debt (percent of GDP): 9.3, 13.7, 13.4, 13.0, 15.4, 12.7, 14.7, 14.3, 13.8, 12.7, 11.4

### Monetary policy interactions and central bank reforms
- Monetary policy stance and actions:
  - Ongoing food price increases and fiscal spending pressures could affect the policy rate; pass-through to core inflation to date moderate.
  - BoU expected to keep an unchanged policy stance in next few months but willing to tighten if data suggest rise in core inflation.
  - BoU announced foreign exchange purchasing plan expected to help offset impact on reserves of government infrastructure financing needs; staff recommended purchases be fully sterilized and communicated clearly.
  - Staff recommended maintaining close watch over base money developments in line with the program indicative target.
- Operational and institutional refinements for inflation targeting:
  - Improve inflation forecasting techniques.
  - Adapt BoU organization and processes to IT framework; legal amendments of the BoU Act to strengthen central bank independence.
  - Complete central bank recapitalization to bolster credibility and provide additional marketable securities for monetary operations.
  - Streamline BoU’s non-monetary policy related costs; gradual capital injections planned (structural benchmark).

### Structural reforms, governance, and public financial management (PFM)
- PFM and arrears management:
  - TSA expected to become operational; first phase completed October 2013.
  - MoFPED plans to set up cash and debt management units with U.S. Treasury advisor support.
  - Staff urged avoiding a supplementary budget, paying bills timely, and reducing the stock of arrears.
  - Indicative target introduced in the program to reflect commitment to arrears reduction.
  - Approval of the PFMB expected in next few months; implementation preparations to start.
- Legal and transparency measures:
  - Staff welcomed approval of the Anti-Money Laundering Act.
  - Recommended careful approach to PPP Law to ensure efficiency and minimize contingent liabilities.
- Financial sector and inclusion:
  - Credit under 15 percent of GDP; actions to reduce information asymmetries, improve financial literacy, and regulate mobile money (total transaction value equivalent to about 30 percent of GDP).
  - Authorities monitor foreign exchange lending to un-hedged borrowers; may upgrade prudential tools if currency mismatch risks arise.
- Tax administration commitments (from Tables and Letter of Intent):
  - VAT gap analysis under way (with FAD) to inform action plan for FY2014/15 budget.
  - Amendments to Income Tax Act to be sent to Parliament (thin capitalization, capital gains tax on commercial buildings, eliminate exemptions on agro-processing and exports).
  - Termination of VAT exemptions planned for hotel accommodation, textile sector, packaging materials, feeds for poultry and livestock.
  - URA to intensify enforcement, create National Targeting Centre, clean up tax registers, implement PAYE and VAT ledger coverage for larger taxpayers by June 2014.

### Program monitoring, quantitative targets, and structural benchmarks
- Staff recommended completing the first review of the PSI; MEFP outlines macro objectives and reschedules some structural benchmarks.
- Proposed modification to QAC and end-March 2014 targets; increase NCB limit from $1.5 billion to $2.2 billion recommended.
- Selected monitoring and structural benchmarks (dates and status preserved in source):
  - Government to carry out first stage of BoU recapitalization with marketable securities (July 2013) — Met.
  - Government to carry out VAT gap analysis in consultation with IMF staff and publish analysis — Date: March 2014.
  - Government to complete rollout of IPPS to cover payroll of all central government entities — Date: April 15, 2014.
  - Government to complete expansion of IFMS to all central government votes — Date: April 15, 2014.
  - Government to present action plan on tax exemptions from VAT gap analysis in Budget Framework Paper — Date: May 2014.
  - Government to include status report of ongoing PPP programs and contingent liabilities in Budget Framework Paper — Date: March 2014.
  - Government to issue minimum of 1 million ID cards under new national identification system — Date: May 2014.
  - Government to eliminate income tax exemption on income derived from agro-processing — Date: July 2014.
  - Government to continue annual recapitalizations of BoU with marketable securities until BoU Act amendments come into force — Dates: June 2014; June 2015.

### Reporting, data, and surveillance commitments
- Reporting requirements (selected):
  - BoU weekly reports (issuance of government securities, FX operations, interest rates) — submission lag 5 working days.
  - BoU weekly commercial bank prime lending rate — submission lag 10 working days.
  - BoU monetary and balance sheet reports monthly — submission lag 4 weeks.
  - MoFPED summary of central government accounts monthly — submission lag 4 weeks.
  - MoFPED summary of unpaid bills by MDAs quarterly — submission lag 6 weeks.
  - Data to be mailed electronically to AFRUGA@IMF.ORG.
- Statistical issues and TA:
  - UBOS rebasing and improvements ongoing; TA from AFRITAC East and STA planned.
  - Government finance statistics compiled following GFSM 2011 for central and local government; UBOS now responsible for compilation and dissemination.
  - External sector statistics alignment to BPM6 in progress.

### Staff appraisal — implications for policy (high-level)
- Infrastructure-led recovery supported by policies; private sector contribution remains sluggish due to leverage, fall in real incomes, worsening terms of trade, and credit constraints.
- BoU actions to control inflation amid food price hikes struck the right balance; accumulation of international reserves should help meet infrastructure-related needs if interventions are fully sterilized.
- Institutional reforms for inflation targeting, BoU recapitalization, and independence are essential.
- Infrastructure projects are consistent with fiscal and debt sustainability and critical for closing infrastructure gap, job creation, and poverty reduction, provided:
  - timely implementation, strong financial practices, transparent management, and appropriate cost recovery.
  - MoFPED coordinates with BoU the pace of other spending to prevent an upsurge of domestic debt beyond expected levels.
- Tax revenue strategy setbacks need to be overcome to bring tax-to-GDP closer to regional levels and reduce reliance on borrowing and donor financing.
- PFM progress welcome but arrears accumulation remains a serious concern; TSA and accounting upgrades should improve efficiency and deterrence of mishandling.

_Italic: Source — IMF staff report excerpts and annexes in the document titled "_cr13375" (IMF staff report excerpts, Letter of Intent, Annex 1: Debt Sustainability Analysis Update, MEFP excerpts)._

### 1. Revenue-Enhancing Plan ________________________________________________________________________ 9

### 1. Revenue-Enhancing Plan

### Key findings on revenue needs and fiscal stance
- The authorities envisage scaling up public investment while maintaining fiscal sustainability: an overall deficit of about 7 percent of GDP in FY 2013/14 (up from 4 percent of GDP in FY 2012/13), with the underlying balance only marginally higher this year and declining thereafter.
- Staff supported the expansion of public investment provided it is accompanied by strengthening tax revenue of 1 percent of GDP in the next two years and financed by a sustainable combination of external and domestic borrowing and the use of government savings earmarked to infrastructure investment.
- The PSI envisages tax revenue enhancement through policy refinements and administration improvements. An increase in tax revenue of ½ percent of GDP a year in the next three years would narrow the gap with the regional average and reduce reliance on borrowing.
- Some ad hoc revenue measures in the current budget include increasing excise duties on fuels and introducing levies on mobile money transfers and international calls.

### VAT gap and the need for comprehensive strategy
- Uganda faces a large shortfall in VAT revenues compared with other EAC countries, as illustrated by the C-efficiency measure (which captures both revenues lost from statutory exemptions and from poor administration and enforcement).
- The government plans to complete a VAT gap analysis to:
  - quantify revenue foregone owing to exemptions or zero-rated goods and services and to compliance gaps in goods and sectors;
  - enable use of a cost-benefit analysis to determine which exemptions to maintain or drop;
  - allow the Uganda Revenue Authority (URA) to better target limited compliance resources on sectors with highest revenue potential.
- Table 1. VAT Revenue Performance in EAC Countries (as reported):
  - Uganda1828.6
  - Burundi1881.7
  - Kenya1644.4
  - Rwanda1841.7
  - Tanzania1845.7
  - EAC Average48.4

### Income tax and other policy reforms proposed
- The government intends to conduct a comprehensive review of exemptions under the Income Tax Act, including:
  - elimination of exemptions on income derived from agro-processing (noted to face widespread opposition);
  - amendment of the thin capitalization rule to limit excessive use of related-party debt;
  - introduction of a capital gains tax on the disposal of commercial buildings by residents.
- Capital gain taxes on oil transactions envisaged at the time of the PSI approval are now not expected to materialize this fiscal year owing to procedural delays.

### Tax administration measures to improve compliance and collection
- Planned tax administration measures include:
  - expanding audit coverage and improving audit risk criteria for problematic industries;
  - better use of taxpayers’ segmentation and coordination among various departments to boost revenue;
  - more systematic use of tax identification numbers for traders;
  - reviewing the VAT register and ledger to ensure the largest taxpayers can be accurately monitored;
  - widening the scope of withholding agents;
  - putting in place a legal framework to collect taxes on small businesses historically hard to reach.
- Staff urged centering the tax effort on a comprehensive strategy (rather than a piecemeal approach), avoiding further delays, and decisively engaging parliament in the revenue-enhancing strategy.

### Linkages with public investment and financing implications
- Major infrastructure projects are planned: two hydropower projects (Karuma and Isimba dams) and related industrial substations, plus oil-related connectivity, at a cost of $2.35 billion spread over the next five years and an additional $200 million for oil-related connectivity.
- Given the high import content of these projects, the economy is anticipated to absorb the investment without significant impact on inflation or the real exchange rate.
- Up-front use of the equivalent to $253 million of shilling denominated deposits of the government to cofinance the projects would reduce international reserves to 3.5 months of imports in FY2013/14; excluding such deposit withdrawals, international reserves would increase by $113 million in FY2013/14, keeping reserve coverage at 3.9 months of imports.
- Independent feasibility studies and preliminary cash flow analysis suggest that, in the absence of subsidies to electricity tariffs, exploitation of the dams would allow recovery of the bulk of the investment and financial costs; nevertheless, the budget may need to cover interest payments during construction.
- To address preexisting operating losses in electricity companies, the authorities indicated they will create a performance-oriented special unit within the companies to manage new projects and ensure viability and plan to implement institutional reforms in the electricity sector in the medium term.

### Reported financing modalities and project cost breakdown (as presented)
- Text Table 2. Uganda: Financing of Key Infrastructure Projects (Billions of US$; Financing Modality EF&PF / NCB / PPP)
  - Karuma hydro power project1.70.31.4
  - Isimba hydro power project0.60.10.5
  - Industrial substations for transmission0.10.1
  - Oil-related infrastructure projects 0.20.2
  - Kampala-Mpigi highway 0.40.4
  - Kampala-Jinja highway 0.50.5
  - Total3.50.32.20.9
- Note: Drawdown of the Energy Fund and the Petroleum Fund is identified as a financing source.

*Source: IMF staff report excerpts in the document titled "1. Revenue-Enhancing Plan".*

### 11. Changes in project financing modalities would result in higher NCB than earlier

### 11. Changes in project financing modalities would result in higher NCB than earlier envisaged

### Project financing change and NCB ceiling request
- At the time of PSI approval, Karuma was expected to be financed with government savings and issuance of domestic debt; Isimba dam and the road program were to be financed with NCB.
- Financing modalities changed: a Chinese company and China Eximbank will construct and finance 85 percent of both projects.
- The remaining 15 percent, as well as any insurance and fees, are to be financed by a drawing of government savings.
- Use of public-private partnership (PPP) schemes instead of NCB is now envisaged for the road program.
- Authorities requested an increase in the NCB ceiling from $1.5 billion to $2.2 billion.

### Staff support and economic considerations for increasing NCB
- Staff supported the request to increase NCB based on economic considerations:
  - The projects are macro critical, look commercially viable if well managed, and are consistent with the absorptive capacity of the economy.
  - External debt would remain at low levels of distress with an estimated increase in the NPV of external debt of 8¾ percent of GDP (Annex 1 in the DSA).
  - It is unlikely that the required financing could be mobilized from concessional sources given the size of the projects.
  - The terms of financing, still under negotiation, would likely involve a combined grant element of at least 10 percent, resulting in lower costs than floating a market bond or issuing domestic debt.
  - Concerns about weak implementation capacity are mitigated by recent favorable experience with road construction.

### Risks, cautions, and recommended safeguards
- Staff warnings about possible risks:
  - The planned borrowing is large and subject to delays in implementation that could raise costs.
  - Suboptimal public financial management could derail funds.
  - Still weak institutional arrangements could raise fiscal liabilities.
  - Potential volatility in financing terms in international markets could raise debt service costs.
- Staff urged the MoFPED to ensure efficiency and transparency in project management by:
  - Institutional building of the electricity companies.
  - Publishing feasibility studies, terms of the contracts, and cash flows of financing and operations.
  - Including the investment program and its financing modalities in the medium-term fiscal strategy to ensure efficiency in electricity generation, transmission, and distribution and guarantee the envisaged cost recovery.

### Box 2 — Planned infrastructure projects and financing modalities (key facts)
- Hydropower plants:
  - The 600 MW Karuma dam will double current production capacity.
  - Construction is expected to start in FY2013/14 and take five years, at a cost of $1.7 billion.
  - Uganda would finance 15 percent from its savings in the oil and energy funds and borrow the rest non-concessionally from China.
  - Isimba hydropower plant: $570 million; construction would also start in FY2013/14 with Chinese involvement and a similar financing scheme.
- Roads:
  - Program includes construction of roads linking Kampala with Jinja and with Mpigi.
  - Expected to start in FY2013/14 and be completed in five years at a cost of about $500 million each.
  - With support from International Finance Corporation (IFC), authorities are working on the design of PPPs to finance and manage these highways.
- Regional railway:
  - New railway between Kenya, Rwanda and Uganda being planned.
  - Total costs would reach $13 billion, with a Ugandan share of $3 billion.
  - Discussions on execution and financing are at an early stage.
- Refinery and pipeline:
  - Construction is planned to start in FY2015/16.
  - Total capital expenditure is estimated at $15–20 billion financed primarily through FDI.
  - The government would increase external borrowing only marginally to meet its expected equity commitments.
  - In preparation, an investment of about $200 million in oil-related infrastructure works, financed from non-concessional sources, is planned.

### Monetary policy interactions with infrastructure financing
- Ongoing food price increases and fiscal spending pressures could affect the policy rate; pass-through to core inflation to date has been moderate.
- BoU acknowledged potential second-round effects if the shock persists; remaining output gap and likely effect on demand of the September CBR hike mitigate risk.
- BoU expected to keep an unchanged policy stance in the next few months but willing to tighten if incoming data suggest a rise in core inflation.
- Staff recommendations:
  - Be prepared to respond to fiscal developments.
  - The BoU’s announced foreign exchange purchasing plan is expected to help offset the impact on international reserves of the government’s infrastructure financing needs.
  - Communicate clearly the rationale for such purchases and fully sterilize them—allowing interest rates to adjust accordingly—in line with the inflation objective.
  - Maintain a close watch over base money developments in line with the program indicative target.
- Operational and institutional refinements to support inflation targeting are crucial:
  - Improve inflation forecasting techniques.
  - Adapt BoU organization and processes to the IT framework, including revisions of decision-making, communication improvements, and legal amendments of the BoU Act to strengthen central bank independence.
  - Complete central bank recapitalization to bolster credibility and align capital to monetary liabilities, providing the BoU with additional marketable securities for monetary policy operations.
  - Streamline the BoU’s non-monetary policy related costs; negotiations point to gradual capital injections in the next few years (structural benchmark).

### Structural reforms and governance measures related to fiscal management
- PFM and arrears management:
  - TSA is expected to become operational soon.
  - MoFPED plans to set up cash and debt management units with support from a U.S. Treasury advisor.
  - Staff urged avoiding a supplementary budget this year, paying bills timely, and reducing the stock of arrears.
  - Authorities introduced an indicative target in the program to reflect commitment to arrears reduction.
  - Approval of the PFMB is expected in the next few months; implementation preparations to start.
- Improving legal frameworks to increase transparency:
  - Staff welcomed approval of the Anti-Money Laundering Act.
  - Recommended a careful approach to the envisaged PPP Law to ensure efficiency and minimize contingent liabilities.
- Deepening financial markets and supervision:
  - Credit is under 15 percent of GDP, indicating weak intermediation by banks.
  - Actions to reduce information asymmetries, improve financial literacy, and regulate mobile money (total transaction value equivalent to about 30 percent of GDP) are underway.
  - Authorities monitor foreign exchange lending to un-hedged borrowers and may upgrade prudential and supervisory tools if currency mismatch risks arise.
- Progress on EAC integration:
  - Rwanda, Kenya, and Uganda agreed on a single customs territory in October.
  - Regional infrastructure plans discussed; opportunities for economies of scale in water, power, transport, and oil sectors.
  - Some non-tariff barriers persist; issuance of national identity cards expected to facilitate free movement of workers.

### Staff appraisal — implications for policy
- Policies support economic recovery driven mainly by public investment; private sector contribution remains sluggish due to high leverage, fall in real incomes, worsening terms of trade, and credit constraints.
- BoU action to control inflation amid food price hikes struck the right balance; accumulation of international reserves should help meet anticipated needs related to government infrastructure investment if interventions are fully sterilized.
- Institutional reforms to strengthen inflation targeting, secure BoU recapitalization, and gain independence are essential.
- Infrastructure projects are consistent with fiscal and debt sustainability and are critical to closing the infrastructure gap, job creation, and poverty reduction, provided:
  - Timely implementation, strong financial practices, transparent management of funds, and an appropriate cost recovery strategy.
  - MoFPED coordinates with BoU the pace of other spending to prevent an upsurge of domestic debt beyond expected levels.
- Tax revenue strategy setbacks need to be overcome:
  - Authorities encouraged to build consensus to remove tax exemptions that have outlived their usefulness and bring the tax-to-GDP ratio closer to regional levels.
  - A broader tax base will reduce reliance on borrowing and donor financing.
- PFM progress welcome but challenges remain:
  - TSA and accounting upgrades should improve efficiency and deter mishandling.
  - Accumulation of payment arrears is a serious concern; authorities encouraged to reinforce control over unpaid bills, issue national identification cards, and publish unspent balances of government accounts.
  - Approval of the PFMB is critical to ensuring sound management of revenues and the budget process.

*Source: IMF staff report excerpt (section 11 and related material).*

### 24. Staff recommends completing the first review of the PSI. The attached MEFP outlines the

### _cr13375 - 24. Staff recommends completing the first review of the PSI. The attached MEFP outlines the

### Staff recommendation and program adjustments
- Staff recommends completing the first review of the PSI.
- The attached MEFP outlines the macroeconomic objectives and policies for the period ahead and proposes rescheduling some structural benchmarks to take account of ongoing progress.
- To reflect recent economic developments and outlook, modifications are proposed to the end-December 2013 Quantitative Assessment Criteria and end-March 2014 targets.
- An increase from $1.5 billion to $2.2 billion in the NCB limit is recommended.
- These amendments mainly reflect the impact on the fiscal and external accounts of the use of government resources to finance the envisaged large infrastructure projects.

### Macroeconomic projections and indicators (selected series as presented)
- Real GDP: 5.9, 6.6, 3.4, 5.3, 5.8, 6.0, 6.2, 6.5, 7.1, 7.2, 7.2
- GDP Deflator: 9.5, 5.0, 24.1, 7.3, 4.7, 5.8, 7.8, 6.9, 4.7, 4.8, 5.0
- CPI (end of period): 4.2, 15.7, 18.0, 5.7, 3.6, 5.7, 7.6, 6.3, 5.0, 5.0, 5.0
- CPI (average): 9.4, 6.5, 23.5, 6.0, 5.8, 6.2, 7.9, 6.9, 5.0, 5.0, 5.0
- Core inflation (average): 7.8, 6.3, 24.6, 6.8, 6.6, 6.3, 6.9, 5.7, 5.0, 5.0, 5.0
- Core inflation (end of period): 4.6, 12.1, 19.6, 6.7, 5.8, 5.2, 6.7, 5.3, 5.0, 5.0, 5.0
- Terms of trade (based on all exports, deterioration -): -8.1, 4.3, 1.6, -0.5, 1.0, -1.7, -3.7, -3.3, -2.0, -0.4, -0.3
- Real effective exchange rate (depreciation –): 4.8, -0.9, 4.5, ...
- Broad money (M3) (percent change): 33.2, 25.7, 7.2, 10.3, 6.6, 16.1, 11.3, 16.3, 13.4, 13.6, 14.9
- Private sector credit (percent change): 30.6, 43.6, 11.5, 14.5, 6.4, 15.1, 15.4, 14.4, 12.8, 13.6, 13.8
- Savings and investment gap (excluding grants, percent of GDP): -10.8, -13.1, -14.5, -10.7, -10.3, -12.6, -13.8, -12.7, -13.2, -12.6, -11.1
- Gross Domestic Savings: 12.6, 11.9, 10.1, ..., 14.3, ..., 14.6, 13.4, 13.7, 13.5, 14.8
- Domestic investment: 23.5, 25.0, 24.6, 26.1, 24.5, 27.9, 28.1, 26.9, 27.4, 26.8, 26.7
  - Public: 5.6, 5.9, 5.7, 5.8, 6.1, 8.1, 9.2, 7.9, 7.6, 7.2, 6.9
  - Private: 17.9, 19.1, 18.8, 20.2, 18.4, 19.8, 19.0, 19.1, 19.8, 19.6, 19.8

### External sector (selected levels and ratios)
- Current account balance (including grants, percent of GDP): -9.5, -11.8, -13.3, -10.4, -9.9, -12.2, -13.4, -12.4, -13.0, -12.4, -10.8
- Current account balance (excluding grants, percent of GDP): -10.8, -13.1, -14.5, -10.7, -10.3, -12.6, -13.8, -12.7, -13.2, -12.6, -11.1
- Public external debt (including IMF, percent of GDP): 13.6, 17.3, 16.2, 17.0, 17.5, 20.3, 20.2, 22.6, 25.4, 26.2, 26.9
- External debt-service ratio (percent of exports of goods and nonfactor services): 1.8, 1.4, 1.4, 1.6, 1.5, 1.8, 1.6, 1.9, 2.3, 2.7, 3.0
- Gross foreign exchange reserves (US$ millions): 2,385, 2,044, 2,644, 3,044, 2,912, 3,264, 2,772, 3,102, 3,502, 3,832, 4,182
- Months of next year's imports of goods and services: 4.2, 3.2, 4.2, 4.2, 3.9, 4.1, 3.5, 3.6, 3.9, 4.0, 4.0

### Fiscal sector (selected aggregates)
- Revenue (percent of GDP): 12.2, 16.2, 13.2, 13.0, 13.2, 15.0, 13.7, 14.3, 14.8, 15.1, 15.4
- Total expenditure and net lending (percent of GDP): 19.6, 22.8, 18.5, 18.6, 18.9, 20.2, 22.2, 21.0, 20.8, 20.0, 19.5
- Overall balance (including grants, percent of GDP): -4.9, -4.3, -3.0, -3.9, -4.1, -3.6, -7.1, -5.1, -5.1, -3.9, -3.2
- Overall balance (excluding grants, percent of GDP): -7.3, -6.6, -5.3, -5.6, -5.8, -5.2, -8.5, -6.7, -6.1, -4.8, -4.1
- Net Domestic Financing (percent of GDP): 2.1, 3.4, 0.0, 1.5, 1.3, 1.7, 2.9, 1.3, 0.9, 0.9, 0.4
- Public Domestic Debt (percent of GDP): 9.3, 13.7, 13.4, 13.0, 15.4, 12.7, 14.7, 14.3, 13.8, 12.7, 11.4

### Fiscal operations (selected nominal flows, Ush billions)
- Total revenue and grants: 5,136; 7,208; 7,771; 8,300; 8,245; 10,472; 9,608; 11,455; 12,819; 14,638; 16,691
- Revenue: 4,273; 6,317; 6,634; 7,338; 7,309; 9,495; 8,727; 10,343; 12,003; 13,801; 15,830
- Tax: 4,067; 4,958; 5,983; 7,015; 7,005; 8,272; 8,314; 9,866; 11,437; 13,176; 15,120
- Grants: 863; 891; 1,137; 962; 936; 977; 881; 1,112; 816; 836; 861
- Expenditures and net lending: 6,836; 8,900; 9,281; 10,479; 10,523; 12,762; 14,132; 15,183; 16,935; 18,222; 20,022
- Current expenditures: 4,308; 5,963; 5,585; 5,935; 5,813; 6,323; 6,510; 7,668; 8,901; 9,730; 10,971
- Development expenditures: 2,312; 2,774; 3,458; 4,096; 4,237; 6,287; 5,348; 5,835; 6,060; 6,462; 7,461
- Overall balance (Ush billions): -1,699; -1,692; -1,510; -2,179; -2,277; -2,290; -4,524; -3,728; -4,115; -3,585; -3,331
- Underlying balance (excl. one-off items, Ush billions): -1,314; -2,377; -1,942; -1,770; -1,868; -3,033; -2,299; -2,198; -2,292; -1,704; -1,891

### Monetary sector (selected levels and rates)
- Money and quasi-money (M3, Ush billions): 8,388; 10,542; 11,296; 12,371; 12,047; 14,366; 13,412; 15,593; 17,674; 20,087; 23,079
- Net foreign assets (Ush billions, Depository Corporations Survey): 5,200; 6,177; 6,845; 9,099; 8,305; 9,642; 7,388; 8,853; 10,296; 11,072; 12,163
- Claims on the private sector (Ush billions): 4,705; 6,756; 7,532; 8,287; 8,011; 9,539; 9,240; 10,570; 11,920; 13,540; 15,406
- Base money (Ush billions): 2,434; 2,968; 3,013; 3,749; 3,540; 4,347; 4,133; 4,798; 5,430; 6,161; 7,068
- Base money (annual percentage change): 24.8, 21.9, 1.5, 24.4, 17.5, 15.9, 16.7, 16.1, 13.2, 13.5, 14.7
- Credit to the private sector (annual percentage change): 30.6, 43.6, 11.5, 14.5, 6.4, 15.1, 15.4, 14.4, 12.8, 13.6, 13.8
- Gross reserves of BOU (US$ millions): 2,385; 2,044; 2,644; 3,044; 2,912; 3,264; 2,772; 3,102; 3,502; 3,832; 4,182.3

### Balance of payments (selected flows, US$ millions)
- Current account (US$ millions): -1,630; -1,984; -2,611; -2,250; -2,134; -2,874; -3,292; -3,284; -3,647; -3,812; -3,630
- Trade balance (US$ millions): -1,800; -2,383; -2,604; -2,250; -2,061; -2,861; -2,765; -2,834; -3,051; -3,062; -2,806
- Exports, f.o.b. (US$ millions): 2,317; 2,298; 2,660; 2,910; 2,982; 3,059; 3,132; 3,330; 3,588; 3,841; 4,328
  - Of which: coffee: 262; 371; 444; 436; 423; 435; 388; 356; 336; 332; 339
- Imports, f.o.b. (US$ millions): -4,117; -4,680; -5,264; -5,160; -5,044; -5,920; -5,897; -6,163; -6,639; -6,903; -7,135
  - Of which: oil: -501; -679; -947; -998; -1,028; -1,066; -1,094; -1,175; -1,271; -1,372; -1,478
  - Of which: government, infrastructure related: -176; -173; -304; -264; -359; -658; -601; -556; -613; -608; -485
- Transfers (US$ millions): 920; 1,430; 1,238; 866; 1,282; 1,182; 1,336; 1,425; 1,509; 1,618; 1,750
- Capital and financial account (US$ millions): 1,787; 1,081; 2,722; 2,664; 2,320; 3,104; 3,144; 3,613; 4,047; 4,141; 3,979
- Foreign direct investment (US$ millions): 693; 719; 1,398; 1,476; 925; 1,576; 1,066; 1,484; 1,759; 2,110; 2,219
- Gross official reserves (US$ millions): 2,385; 2,044; 2,644; 3,044; 2,912; 3,264; 2,772; 3,102; 3,502; 3,832; 4,182
- Months of imports of goods and services (memorandum): 4.2; 3.2; 4.2; 4.2; 3.9; 4.1; 3.5; 3.6; 3.9; 4.0; 4.0

### Banking sector indicators (selected, percent)
- Regulatory capital to risk-weighted assets (Mar-10 to Jun-13 series): 22.7, 21.7, 21.2, 20.2, 21.2, 19.3, 18.3, 20.3, 21.8, 20.7, 20.9, 21.9, 24.5, 24.3
- NPLs to total gross loans (Mar-10 to Jun-13 series): 3.7, 3.3, 2.8, 2.1, 2.5, 1.6, 1.8, 2.2, 3.4, 3.9, 4.7, 4.2, 4.7, 4.0
- Return on assets (Mar-10 to Jun-13 series): 2.4, 2.3, 2.4, 2.7, 2.9, 3.1, 3.6, 4.0, 4.4, 4.4, 4.3, 3.9, 3.6, 3.3
- Return on equity (Mar-10 to Jun-13 series): 15.5, 16.1, 16.2, 18.0, 19.6, 22.4, 25.4, 27.4, 28.1, 29.5, 27.9, 24.2, 21.0, 20.4
- Net interest margin (Mar-10 to Jun-13 series): 10.0, 9.9, 10.0, 10.0, 10.1, 10.5, 11.0, 11.7, 12.5, 12.8, 12.9, 12.8, 12.5, 12.2
- Liquid assets to total deposits (Mar-10 to Jun-13 series): 45.5, 41.6, 40.5, 39.8, 40.5, 35.6, 36.2, 37.6, 37.5, 38.9, 42.5, 42.0, 42.7, 41.1
- Foreign currency loans to foreign currency deposits (Mar-10 to Jun-13 series): 59.2, 52.1, 54.4, 65.2, 63.4, 68.6, 66.8, 67.9, 74.7, 67.1, 74.8, 87.0, 72.3, 72.8

### Policy implications highlighted
- Rescheduling of some structural benchmarks is proposed to accommodate ongoing progress.
- Modifications to quantitative assessment criteria and targets are proposed to reflect recent economic developments and the fiscal/external impact of financing large infrastructure projects.
- Increase in NCB limit from $1.5 billion to $2.2 billion is recommended to reflect financing needs associated with government infrastructure projects.

*Sources: Ugandan authorities and IMF staff estimates and projections.*

### Annex 1. Debt Sustainability Analysis Update

### Annex 1. Debt Sustainability Analysis Update

### Background and Recent Developments
- Update to the joint IMF/IDA DSA from June 17, 2013, incorporating recent macroeconomic developments, planned scaling up of non-concessional borrowing (NCB), and contingent liabilities from two PPP projects.  
- Planned scaling up of NCB reported as:
  - described initially as an increase from $1.5 billion to $2.2 billion to finance critical infrastructure projects;
  - elsewhere reported as an increase from $1.5 billion to $2.213 billion.
- Debt composition and levels:
  - External debt increase in 2007–2013 was about 5 percent of GDP.
  - Public domestic debt increased by 5½ percent of GDP in the same period.
  - Share of external debt has remained in the range of 55–60 percent.
  - External debt to GDP ratio dropped to 12¼ percent of GDP in 2007.
  - Private sector external debt rose from about 7 percent of GDP in FY2000–2008 to about 16¼ percent of GDP in FY2012, driven by intercompany lending (now more than half of private external debt).
  - Domestic debt stock rose from 9 percent to 13.1 percent of GDP between 2007 and 2012.
  - Total public debt at end-2012: 30¼ percent of GDP.
- Creditor composition of PPG external debt at end-FY2012/13:
  - IDA 60.0%
  - Other Multilateral 29.0%
  - Non-Paris Club 9.4%
  - Paris Club 1.7%
- Debt management improvements:
  - Government undertaking regular assessments of maturities and risks; restructuring debt management processes in 2013; planning a debt management unit within the Ministry of Finance.
  - New medium-term debt strategy accounts for planned NCB scaling up.

### Underlying Assumptions and Macroeconomic Framework
- DSA consistent with the PSI macroeconomic framework; baseline assumes implementation of economic and structural policies in the PSI.
- Infrastructure scaling up assumptions:
  - Projects starting later in the fiscal year include Karuma and Isimba dams and later oil-related infrastructure.
  - Additional NCB needed for the program period to increase from $1.5 billion to $2.2 billion (and noted elsewhere as $2.213 billion).
- Macroeconomic projections:
  - Average medium-term growth projected to increase to about 7 percent of GDP, supported by infrastructure investment.
  - Average long-term growth projected at 7.2 percent.
  - Average medium-term current account deficit projected at 12½ percent of GDP during construction phase; long-term current account deficit projected at 7½ percent of GDP in the absence of oil exports.
  - Fiscal deficit projected to widen from about 4 percent of GDP in FY2012/13 to 5¼ percent of GDP in the medium term, peaking at 7½ percent of GDP in FY2013/14; long-term average fiscal deficit expected to decline to about 2¾ percent of GDP.
- Other assumptions and implementation considerations:
  - Contingent liabilities from two PPP road projects amounting to about 1½ percent of GDP are included in baseline projections.
  - Improvements in implementation capacity expected to be critical; recent improvements in road project implementation noted.
  - Staff estimate that growth stimulus from projects would be compatible with potential output and not lead to overheating.
- Box 1 assumption changes (compared to previous joint IMF/IDA DSA):
  - NCB ceiling revised upward from $1.5 billion to $2.2 billion to reflect changes in financing modalities for Karuma HPP, industrial substations, and smaller oil-related projects.
  - Discount rate increased from 3 percent to 5 percent, in line with new guidelines.
  - Financing terms for NCB: staff estimates a grant element of about 11½ percent for prospective Eximbank China loans for Karuma, Isimba, and industrial substation projects.
  - Long-run growth projections raised from 7 percent to 7¼ percent.
  - Contingent liabilities associated with two PPP road projects amounting to about 1½ percent of GDP included in baseline.
  - Domestic borrowing: effective maturity extended to close to 2.7 years; annual rollover of domestic debt reduced to about 35 percent from the previous 50 percent.

### External Debt Sustainability Analysis
- Baseline assessment:
  - PPG external debt assessed to be sustainable over the projection period.
  - All debt burden indicators projected to remain below Uganda’s country-specific debt burden thresholds under the baseline and standardized stress tests.
- Sensitivity to growth shocks:
  - Staff examined a scenario where long-term GDP growth falls from 7¼ percent to 2½ percent; an implausibly large decline would be required to breach the debt service-to-revenue threshold by the end of the projection period (caveat that the partial-equilibrium analysis does not include feedback effects).
- Alternative scenarios:
  - Regional railway scenario: additional NCB of about $1.6 billion beyond the PSI period to finance Uganda’s share of the Mombasa-Kampala-Kigali railway—debt burden indicators rise but remain within relevant thresholds.
  - Oil illustrative scenario (onset of oil production beginning in 2018) shows substantial improvement in the debt outlook (see Box 2): elimination of external debt by 2025 under the illustrative assumptions.

- Box 2: Oil illustrative scenario assumptions and impacts
  - Cost and financing:
    - Construction of pipeline and small refinery planned to start in FY2015/16.
    - Total capital expenditure estimated at $15-$20 billion, financed primarily through FDI; government external borrowing needs increase only marginally for equity commitments.
  - Growth impact:
    - Real GDP growth in 2016–2023 expected to be 2–4 percent higher than baseline.
    - Oil production expected to account for close to 15 percent of Uganda’s GDP during peak extraction.
    - Oil reserves anticipated to last for about 30 years.
  - Revenue impact:
    - Oil revenues would amount to more than 50 percent of total government revenues in the illustrative exercise.
    - Oil export prices conservatively assumed constant in real terms at 80 dollars a barrel.
    - Domestically refined oil priced at import-parity minus a 20 percent discount.

### Public Debt Sustainability Update
- Baseline assessment:
  - Total public debt (external and domestic) projected to be sustainable over the projection period under the baseline and under stress tests.
  - Public debt-to-GDP ratio projected to peak at about 40 percent of GDP in 2018, well below the indicative benchmark of 74 percent for heightened vulnerability for strong performers.
- Key vulnerability:
  - Short average maturity of domestic debt (less than three years) combined with a low revenue base leads to a debt service-to-revenue ratio of about 35 percent—among the highest in LICs—significantly increasing rollover and interest rate risks.
  - Required policy response: address high debt service-to-revenue through stronger revenue mobilization and deeper financial markets to extend average maturities.
- Stress test results:
  - Illustrative scenario with an unchanged primary deficit of 5.9 percent of GDP over the projection period results in NPV of public debt to GDP rising to 77 percent by 2034, indicating unsustainability without fiscal consolidation.
  - These stress tests highlight the importance of reducing fiscal deficits after the temporary increase during the scaling up of public investment.

### Conclusions and Policy Implications
- Overall debt position:
  - Uganda remains at low risk of debt distress under the baseline and standardized stress tests.
  - External debt remains low relative to peers and below country-specific thresholds.
- Main risks and recommended policies:
  - High debt service-to-revenue ratio (~35 percent) due to short domestic debt maturities and low revenue base—requires policy action.
  - Recommended policy responses include:
    - Stronger revenue mobilization to reduce rollover pressure and lower debt-service-to-revenue ratio.
    - Deepening domestic financial markets to extend average maturities of domestic debt.
    - Continued improvements in public investment implementation capacity to ensure efficient use of scaled-up financing.
    - Fiscal consolidation after temporary scaling up of public investment to maintain sustainability (stress tests show unsustainable paths if primary deficit remains at elevated levels).

*Source: Annex 1. Debt Sustainability Analysis Update*

### 14. Despite the envisaged scaling-up of external borrowing, Uganda continues to face a

### _cr13375 - 14. Despite the envisaged scaling-up of external borrowing, Uganda continues to face a

### Risk assessment and overall finding
- Despite the envisaged scaling-up of external borrowing, Uganda continues to face a low risk of debt distress.
- The government's cautious approach in accumulating new external debt during the post-MDRI period has provided significant borrowing space to scale up public investment.
- Once construction of the planned projects is completed, the temporary increase in fiscal deficits should be halted to bring public debt back to a sustainable path.

### Policy recommendations and fiscal guidance
- Adhere to the planned pace of implementation of public investment projects to avoid delays and inefficiencies that could add costs and affect economic stability.
- Ensure appropriate cost recovery for projects to limit fiscal pressures.
- Halt the temporary increase in fiscal deficits after project completion to restore public debt sustainability.
- Rely on the planned increase in tax revenues and maintain a stable economic environment to reduce existing rollover and interest risk of domestic debt.

### Key indicators and projections (selected figures from Tables and Figures)
- Public sector debt (percent of GDP): 2011: 31.9; 2012: 29.0; 2013: 32.8; 2014–19 average: 40.6 (2014: 36.4; 2015: 38.5; 2016: 41.0; 2017: 40.6; 2018: 39.8; 2019: 38.9); 2024: 34.7; 2034: 28.5.
- Foreign-currency denominated share of public sector debt (percent of GDP): 2011: 18.2; 2012: 15.6; 2013: 17.5; 2014–19 average: 26.2; 2024: 24.5; 2034: 21.0.
- Change in public sector debt: 2011: 7.3; 2012: -2.9; 2013: 3.8; 2014–19 average: -0.4; 2024: -1.2; 2034: -0.2.
- Primary deficit (percent of GDP): 2011: 3.3; 2012: 1.8; 2013: 2.5; 2014–19 average: 3.3; 2024: 1.9; 2034: 1.3.
- Revenue and grants (percent of GDP): 2011: 18.4; 2012: 15.5; 2013: 14.8; 2014–19 average: 16.0; 2024: 16.4; 2034: 16.4.
- Primary (noninterest) expenditure (percent of GDP): 2011: 21.7; 2012: 17.3; 2013: 17.3; 2014–19 average: 17.9; 2024: 17.6; 2034: 17.6.
- Automatic debt dynamics (contribution, percent of GDP): 2011: 0.5; 2012: -6.7; 2013: -0.5; 2014–19 average: -1.9; 2024: -2.5; 2034: -1.4.
- Contribution from interest rate/growth differential (percent of GDP): 2011: -1.0; 2012: -2.7; 2013: -0.9; 2014–19 average: -1.9; 2024: -2.1; 2034: -1.2.
- Contribution from average real interest rate (percent of GDP): 2011: 0.5; 2012: -1.6; 2013: 0.7; 2014–19 average: 0.8; 2024: 0.3; 2034: 0.7.
- Contribution from real GDP growth (percent of GDP): 2011: -1.5; 2012: -1.0; 2013: -1.6; 2014–19 average: -2.7; 2024: -2.4; 2034: -1.9.
- Contribution from real exchange rate depreciation (percent of GDP): 2011: 1.4; 2012: -4.0; 2013: 0.3; 2014–19 average: 0.1; 2024: -1.0.
- Residual, including asset changes (percent of GDP): 2011: 3.5; 2012: 2.0; 2013: 1.8; 2014–19 average: -0.4; 2024: 0.0; 2034: 0.0.
- PV of public sector debt (percent of GDP, selected): 2014: 23.0; 2015: 26.6; 2016: 28.2; 2017: 30.8; 2018: 30.6; 2019: 30.0; 2024: 29.8; 2034: 27.2; later: 23.1.
- PV of public sector debt (foreign-currency denominated, percent of GDP): 2014: 7.6; 2015: 10.0; 2016: 12.5; 2017: 15.0; 2018: 16.2; 2019: 17.0; 2024: 17.2; 2034: 16.9; later: 15.6.
- Gross financing need (percent of GDP): 2011: 9.9; 2012: 6.5; 2013: 12.5; 2014–19 average: 12.6; 2024: 11.2; 2034: 7.6.
- PV of public sector debt-to-revenue and grants ratio (percent): 2014: 155.0; 2015: 176.0; 2016: 178.4; 2017: 195.3; 2018: 190.7; 2019: 184.4; 2024: 182.1; 2034: 166.0; later: 141.1.
- Debt service-to-revenue and grants ratio (percent): 2011: 33.7; 2012: 28.4; 2013: 35.1; 2014–19 average: 33.0; 2024: 30.7; 2034: 27.3.
- Debt service-to-revenue ratio (percent): 2011: 38.4; 2012: 33.3; 2013: 39.6; 2014–19 average: 35.0; 2024: 32.4; 2034: 27.8.

### External debt and balance dynamics (selected external-sector figures)
- External debt (nominal, percent of GDP): 2014: 39.9; 2015: 43.1; 2016: 46.5; 2017: 48.0; 2018: 48.5; 2019: 47.4; 2024: 43.5; 2034: 40.0.
- Public and publicly guaranteed (PPG) external debt (percent of GDP): 2011: 18.2; 2012: 15.6; 2013: 17.5; 2014–19 average: 26.2; 2024: 24.5; 2034: 21.0.
- Change in external debt (percent of GDP): 2011: 6.2; 2012: -0.9; 2013: 4.4; 2014–19 average: 1.5; 2024: -0.6; 2034: -0.1.
- Identified net debt-creating flows (percent of GDP): 2011: 8.1; 2012: 1.5; 2013: 2.9; 2014–19 average: 7.1; 2024: 0.5; 2034: 0.5.
- Non-interest current account deficit (percent of GDP): 2011: 11.5; 2012: 12.9; 2013: 9.6; 2014–19 average: 6.8; 2024: 10.1; 2034: 7.2.
- Exports (percent of GDP): 2011: 22.3; 2012: 23.5; 2013: 23.8; 2014–19 average: 22.0; 2024: 24.8; 2034: 23.5.
- Imports (percent of GDP): 2011: 40.6; 2012: 39.0; 2013: 35.2; 2014–19 average: 36.6; 2024: 34.0; 2034: 34.0.
- Net current transfers (percent of GDP, negative = inflow): 2011: -8.5; 2012: -6.3; 2013: -6.0; 2014–19 average: -7.8; 2024: -5.2; 2034: -5.1.
- Net FDI (percent of GDP, negative = inflow): 2011: -4.3; 2012: -7.1; 2013: -4.3; 2014–19 average: -4.8; 2024: -6.6; 2034: -4.6.
- PV of external debt (percent of GDP, selected): 2014: 26.6; 2015: 30.0; 2016: 32.8; 2017: 36.3; 2018: 38.0; 2019: 38.6; 2024: 38.2; 2034: 35.9; later: 34.6.
- PV of PPG external debt (percent of GDP, selected): 2014: 7.6; 2015: 10.0; 2016: 12.5; 2017: 15.0; 2018: 16.2; 2019: 17.0; 2024: 17.2; 2034: 16.9; later: 15.6.
- PV of PPG external debt (percent of exports): 2014: 32.1; 2015: 45.6; 2016: 57.3; 2017: 67.5; 2018: 73.9; 2019: 76.3; 2024: 76.5; 2034: 72.2; later: 62.8.
- Debt service-to-exports ratio (percent): 2011: 4.4; 2012: 6.2; 2013: 5.0; 2014–19 average: 4.5; 2024: 7.0; 2034: 8.5; later: 9.0.
- PPG debt service-to-revenue ratio (percent): 2011: 3.3; 2012: 3.7; 2013: 3.6; 2014–19 average: 2.5; 2024: 5.4; 2034: 8.2; later: 9.2.
- Total gross financing need (Billions of U.S. dollars): historical 2011–2013: 1.4 each year; projections show peaks (e.g., 2024: 2.9; 2034: 8.1).

### Key macroeconomic assumptions (selected)
- Real GDP growth (percent): 2011: 6.6; 2012: 3.4; 2013: 5.8; 2014–19 average: 6.9; 2024: 7.2; 2034: 7.2; 2020-34 average: 7.2.
- Average nominal interest rate on forex debt (percent): 2011: 1.0; 2012: 1.1; 2013: 1.1; 2014–19 average: 1.5; 2024: 2.4; 2034: 1.9.
- Average real interest rate on domestic debt (percent): 2011: 5.5; 2012: -11.7; 2013: 6.8; 2014–19 average: 5.1; 2024: 9.6; 2034: 5.0.
- Real exchange rate depreciation (percent): 2011: 10.1; 2012: -23.0; 2013: 2.1; further years show values but several cells omitted in source.
- Inflation rate (GDP deflator, percent): 2011: 5.0; 2012: 24.1; 2013: 4.7; 2014–19 average: 5.4; 2024: 3.4; 2034: 5.4.
- Growth of real primary spending (deflated by GDP deflator, percent): 2011: 0.3; 2012: -0.2; 2013: 0.1; 2014–19 average: 0.0; 2024: 0.1; 2034: 0.1.
- Grant element of new external borrowing (percent, selected years): 2014–19 values: 29.7, 28.4, 18.9, 26.7, 27.5, 22.7 (sequence corresponds to years in table); later values include 25.7, 25.8, 19.6.
- Grant-equivalent financing (percent of GDP, historical/projections): selected projection values: 2.7; 2.7; 1.8; 1.8; 1.7; 1.5; 1.0; 0.5; 0.8.

### Sensitivity analysis and stress tests (high-level outcomes)
- Multiple alternative scenarios and bound tests were run for 2014–2034, including:
  - A1. Key variables at their historical averages in 2014-2034.
  - A2. New public sector loans on less favorable terms in 2014-2034.
  - A3. Oil sector development starting from FY2013/14.
  - B1–B6. Bound tests including shocks to real GDP growth, export value growth, US dollar GDP deflator, net non-debt creating flows, combinations, and a one-time 30 percent nominal depreciation in 2015.
- Selected stress-test outcomes (percent, specific years/projections shown in tables):
  - PV of debt-to-GDP ratio: Baseline 2014–2034 values show ranges such as baseline: 10–16% in early rows; alternative and bound tests raise ratios (detailed cells in Table 2a).
  - PV of debt-to-exports ratio and PV of debt-to-revenue ratio: baseline and stress scenarios produce elevated ratios under adverse shocks (see Table 2a and Table 2b for year-by-year percent outcomes).
  - Debt service-to-exports ratio and Debt service-to-revenue ratio: stress scenarios (including one-time 30 percent depreciation) produce notable increases in these ratios in 2015 and beyond (see Tables 2a and 2b for exact percent values by scenario and year).
- Memorandum item: Grant element assumed on residual financing (percent) = 16 applied across residual financing years in Table 2a.

*Sources: Ugandan authorities; and IMF staff estimates and projections.*

### Appendix I. Uganda: Letter of Intent

### Appendix I. Uganda: Letter of Intent

### I. Recent economic and policy developments
- Real GDP growth for FY 2012/13 reached 5.8 percent, 0.7 percentage points higher than projected; driven by stronger-than-expected industrial output, services, and public investment.
- Core inflation developments:
  - Core inflation declined in the second half of FY2012/13 but reversed in Q1 FY2013/14 due to a drought-related food price spike.
  - Core inflation declined from 7.4 percent in September to 7.2 percent in October and is projected to remain within PSI program targets.
- External sector:
  - Gross international reserves rose from US$2.6 billion in FY2011/12 to US$2.9 billion in FY2012/13, equivalent to 3.9 months of imports.
  - Risks include adverse weather effects on agricultural exports, unfavorable global conditions, and oil price increases.
- Fiscal outcomes FY2012/13:
  - Overall deficit of 4.1 percent of GDP, compared to 3.9 percent of GDP in the program.
  - Total expenditures and net lending amounted to 18.9 percent of GDP vs. 18.6 percent of GDP in the program (higher development spending).
  - Fiscal deficit financed largely from external sources (2.6 percent of GDP) vs. domestic financing of 1.3 percent of GDP.
- Monetary and financial sector:
  - Central bank rate (CBR) movements: 23 percent in February 2012 → 12 percent in December 2012 → 11 percent in June 2013; CBR raised by 100 basis points in September 2013 in response to food-price inflation.
  - Lending rates: 26.9 percent in July 2012 → 22.9 percent in June 2013.
  - Private sector credit growth was low; credit growth rate of 6.4 percent at end-June 2013.
  - Banking sector indicators: system-wide NPL ratio 4 percent in June 2013 (from 4.7 percent in March 2013). Capital adequacy strong; liquidity and funding improved.
  - Macroprudential measures: May measures to enhance minimum capital requirements including Basel III capital conservation buffer; liquidity coverage ratio planned for 2014.
  - Financial inclusion expanding via mobile money.

### II. Performance under the PSI
- As at end-June 2013:
  - All quantitative assessment criteria were observed.
  - Structural benchmarks were broadly achieved.
  - Indicative targets on tax revenues and expenditures on poverty- alleviating sectors were missed by small margins.
- Remedial and implementation actions:
  - First stage of BoU recapitalization with marketable securities carried out in May.
  - Ongoing VAT gap analysis (in consultation with FAD).
  - IPPS coverage extended to all central government entities; test runs ongoing; salary payments expected through IPPS starting April 2014.
  - IFMS rollout to cover all central government votes achieved ahead of schedule.
  - First phase of TSA implementation completed October 2013 by consolidating central government accounts.
  - Delay in structural benchmark on quarterly reports on unpaid bills pending passage of the new Public Financial Management Bill; consultations ongoing.

### III. Macroeconomic outlook and risks
- Growth projections:
  - Growth projected at 6.2 percent for the fiscal year (FY2013/14) and 6.5 percent in 2014/15, supported by infrastructure investment and improved agricultural production.
- Inflation outlook:
  - Core inflation expected to decline and converge to the 5 percent medium-term target.
  - Risks: possible increases in imported prices and exchange rate depreciation.
- External balance:
  - External current account expected to worsen due to increased FDI-related imports of goods and services.
- Vulnerabilities:
  - Domestic: unpredictable weather conditions affecting agriculture, exports, and inflation.
  - External: slower-than-projected global recovery affecting export earnings and remittances.

### IV. Fiscal policy and budgets
- Fiscal stance and objectives:
  - FY2013/14 and medium-term fiscal policy to maintain macroeconomic stability, accelerate growth, enhance domestic revenue mobilization, and improve budget efficiency.
  - Domestic revenues projected to increase by about 0.5 percentage points of GDP from new tax measures and strengthened administration.
  - Excluding extraordinary investments, the fiscal stance will expand by 0.2 percent of GDP to support growth recovery.
- Infrastructure investment program:
  - Karuma and Isimba Hydropower Projects (with transmission lines and substations) are national core projects expected to more than double current production capacity.
  - Financing of these large projects amounts to US$ 2.2 billion in the next five years; financing will use government savings in energy and oil funds and external borrowing.
  - Given concessional financing constraints, government intends to contract non-concessional loans consistent with debt sustainability and absorptive capacity.
  - Government requests adjustment of the ceiling on non-concessional borrowing to USD 2.2 billion during the program period (from the prior $1.5 billion ceiling noted elsewhere in the letter).
  - Government does not intend to use future oil revenues as collateral and will ensure projects generate sufficient returns to repay investment costs through an appropriate electricity tariff policy.
  - Government will set up a special purpose vehicle to manage the hydropower dams and separate project revenues from other electricity company transactions.
- Budget FY2014/15 projections:
  - Total revenues and grants projected at 15.8 percent of GDP.
  - Total expenditures and net lending projected at about 21 percent of GDP (including wage increases, election-related expenditures, and hydropower project spending).
  - Overall deficit projected at 5.1 percent of GDP.
  - Financing composition: external sources (including non-concessional loans) about 3.9 percent of GDP; up to 1.3 percent from domestic sources.

### V. Monetary and financial policies
- Monetary policy framework:
  - Target: core inflation over the medium term as close to 5 percent as possible while output is close to potential.
  - Flexible exchange rate regime maintained; sterilized interventions to dampen excessive volatility or accumulate reserves.
- Reserve and exchange rate management:
  - To compensate for reserve loss from planned use of government deposits for infrastructure, BoU increased announced daily dollar purchases.
  - International reserves maintenance targets: 3.5 months of future imports during FY2013/14; subsequently raised to 4 months of imports.
- Financial sector safeguards and oversight:
  - BoU to closely monitor and mitigate risks in the financial sector, coordinate with Uganda Communications Commission and other agencies to reduce mobile money operational risks.
  - Commitment to upgrade prudential measures and enforcement to mitigate risks from foreign currency lending to unhedged borrowers.

### VI. EAC integration
- Customs Union and Single Customs Territory efforts:
  - Ongoing work to consolidate EAC into a Single Customs Territory: eliminate non-tariff barriers; clearance of goods at first point of entry; adopt EAC bond guarantee regime; implement one-stop border posts.
  - Increased use of ICT for tax clearance, cargo tracking, and exchange of trade statistics.
- Common Market:
  - Implementation has been slow; EAC plan developed to guide Common Market Protocol implementation focusing on six rights under the common market; partner states committed to accelerating legal and policy convergence.
- Monetary Union:
  - Negotiations concluded on a Protocol for establishing an EAC Monetary Union, which sets a 10-year road map for a single currency, macroeconomic convergence pre-requisites, and policy/legal harmonization.

### VII. Structural reforms and public financial management
- Treasury Single Account (TSA):
  - TSA implementation began effective October 1, 2013.
  - First phase outcomes: (i) introduced subaccount structure swept daily into the consolidated fund; (ii) closed most inactive accounts; (iii) reconfigured IFMS for TSA operations; (iv) issued operational guidelines to accounting officers.
  - Next steps: extend TSA coverage to salary accounts, holding accounts, non-donor-funded project accounts, and deposit accounts; establish a cash management planning unit.
- IFMS and system interfaces:
  - IFMS coverage broadened to 68 central government ministries and agencies, 14 local governments, 8 donor-financed projects, and 5 referral hospitals.
  - Further rollout to target donor-financed projects and remaining up-country referral hospitals.
  - Plans to enhance interfaces with Uganda Revenue Authority, Integrated Personnel and Payroll System, Debt Management and Financial Analysis System, and improve system security.

*Appendix I. Uganda: Letter of Intent, Kampala, November 28, 2013.*

### 25. Government has revised its medium term debt strategy to take into account recent

### _cr13375 - 25. Government has revised its medium term debt strategy to take into account recent

### Medium-term debt strategy and debt management
- Government revised its medium term debt strategy in 2013 to take into account recent developments on borrowing.
- The strategy requires regular assessments of debt maturities (concessional and non-concessional) and associated risks (exchange rate, roll-over, etc).
- In line with the revised debt strategy in 2013, Government embarked on a restructuring of its debt management processes including its institutional framework.

### Improving tax revenue — policy measures and administrative reforms
- Policy commitments and legislative amendments:
  - Undertake continuous assessments of tax exemptions from a cost-benefit perspective and amend tax laws where exemptions have outlived their usefulness.
  - A VAT gap analysis is under way, with technical assistance from the IMF, to quantify the revenues foregone by statutory exemptions in the law; results will inform an action plan to be presented to Cabinet with the aim of implementing recommendations in the FY2014/15 budget.
  - Send to Parliament amendments to the Income Tax Act previously committed but delayed, including:
    - Amendment of the thin capitalization rule to limit excessive use of related party debt.
    - Introduction of a capital gains tax on the disposal of commercial buildings by resident individuals.
    - Elimination of tax exemptions on income derived from agro processing and export businesses.
  - Further tax measures for the next fiscal year’s budget to include the termination of VAT exemptions on:
    - hotel accommodation,
    - the textile sector,
    - packaging materials,
    - feeds for poultry and livestock.
- Tax administration reforms and compliance enforcement:
  - Intensify enforcement of compliance by improving risk profiles for different taxpayer segments and goods and sectors of operation, with particular focus on problematic industries including wholesale and construction.
  - Conduct a risk profile assessment of the top 216 importers, and top volume clearing agents, to identify, quantify, and channel their trade on the basis of evaluated risk levels.
  - Create a National Targeting Centre and increase staff levels as provided in the customs structure review.
  - Step up enforcement of the use of a unique tax identification number for all businesses receiving trading and other licenses and permits from Kampala City Council Authority and local governments.
  - Enhance partnerships with specific Government institutions through signing and monitoring memoranda of understanding.
  - URA to work closely with other ministries and agencies to identify and address low levels of taxpayer compliance, especially among Government suppliers.
  - URA to clean up tax registers to ensure they contain solely those capable of filing monthly and paying; exercise refocused to cover both the large and medium taxpayers’ offices.
  - PAYE ledgers: system solution already implemented; plan to cover larger taxpayers who bring in at least 90 percent of the revenue by June 2014 for PAYE.
  - VAT ledgers: development solution now at testing level; current plans to cover the larger taxpayers by June 2014 for VAT.

### Dealing with arrears
- Government remains committed to eliminating arrears despite challenging progress.
- Introduce an indicative target on the reduction in the stock of unpaid bills, as measured by the Accountant General through internal audits.
- Data on repayment of domestic arrears and the remaining previous year’s stock of unpaid bills will be transmitted on a quarterly basis within six weeks of the end of each quarter to ensure timeliness and transparency.

### Government’s support of inflation targeting and Bank of Uganda (BoU) reforms
- Legislative and capitalization actions:
  - Government will amend the Bank of Uganda Act to include provisions enabling the BoU to adapt its functions to the inflation targeting framework and bring its capital to an adequate ratio of its monetary liabilities.
  - Government will continue to annually recapitalize the BoU to meet statutory levels, subject to the BoU’s commitment to contain its non-monetary policy related operational and administrative costs.
  - Undertakings of Government and BoU in support of these transactions are contained in a joint Memorandum of Understanding recently signed by both parties.
- Monetary instruments:
  - Issuance of marketable government securities for recapitalization will comprise diverse maturities so the BoU can have appropriate instruments to conduct monetary policy under inflation targeting.

### Program monitoring, targets, and structural benchmarks
- Monitoring framework:
  - Progress monitored through QAC, indicative targets (ITs), structural benchmarks (SBs) detailed in attached Tables 1 and 2, and semiannual reviews.
  - Quantitative assessment criteria proposed for end-December 2013 and end-June 2014, to be monitored at the second and third reviews respectively. Second review expected by end-June 2014; third review by end-December 2014.
  - The Technical Memorandum of Understanding contains definitions and adjusters.
- Selected quantitative targets and results (as presented in Table 1; values preserved as in source):
  - Ceiling on the increase in net domestic financing of the central government: Program Adjusted target 868; Outturn 802; Result 681; Met; other entries include 257, n.a., -421, 736, -54, 1,053, 1,862 (table-format values preserved).
  - Ceiling on the stock of external payments arrears incurred by the public sector: entries include 4, 00Met0, 0Met0, 000 (table-format values preserved).
  - Ceiling on contracting or guaranteeing of new nonconcessional external debt with maturities greater than one year by the public sector: Program 1,500; Adjusted target 0; Outturn Met; subsequent entries include 1,500, 0, Met, 1,500, 2,200, 1,500, 2,200, 2,200 (table-format values preserved).
  - Minimum increase in net international reserves of the Bank of Uganda (US$mn): entries include 361, 358, 392, Met, 16, n.a., 52, 42, 107, 2, -140 (table-format values preserved).
  - Share of oil revenue placed in the Petroleum Fund: 100, 100, 100, Met, 100, 100, Met, 100, 100, 100, 100, 100 (table-format values preserved).
  - Indicative target: Ceiling on the increase in base money liabilities of the Bank of Uganda: values include 836, 527, Met, 239, 109, Met, 504, 434, 591, 541, 593 (table-format values preserved).
  - Indicative target: Floor on tax revenue: 7,015, 7,005, Not met, 1,813, 1,779, Not met, 4,024, 3,988, 5,977, 5,972, 8,314 (table-format values preserved).
  - Expenditures on poverty alleviating sectors: 2,498, 2,448, Not met, 607, n.a., 1,246, 1,246, 1,745, 1,745, 2,612 (table-format values preserved).
  - Net change in the stock of domestic arrears: 0-24-50 (table-format value preserved).
  - Inflation consultation clause — Core inflation target and bands (annual percentage change, twelve-month period average core inflation):
    - Outer band (upper limit): 9.8, 9.0, 9.7, 9.6, 9.3
    - Inner band (upper limit): 8.8, 8.0, 8.7, 8.6, 8.3
    - Core inflation target: 6, 6.8, 6.6, Met, 6.0, 5.7, Met, 6.7, 6.6, 6.3
    - Inner band (lower limit): 4.8, 4.0, 4.7, 4.6, 4.3
    - Outer band (lower limit): 3.8, 3.0, 3.7, 3.6, 3.3
  - Note: Sources listed as Ugandan authorities; and IMF staff estimates and projections. Units indicated as (Billions of Ugandan shillings), (Millions of US dollars), (Billions of Ugandan shillings), (Annual percentage change).
- Structural benchmarks (selected entries from Table 2; dates and status preserved):
  - 1. Government to carry out the first stage of recapitalization of the Bank of Uganda with marketable securities to the amount stipulated by law. Rationale: To enhance monetary policy independence and central bank credibility. Date: July 2013. Status: Met.
  - 2. Ministry of Finance to submit 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. Rationale: To facilitate control and elimination of expenditure arrears. Dates: October 1, 2013, for quarter ending June 30, 2013; January 1, 2014, for quarter ending September 30, 2013; April 1, 2014, for quarter ending December 31, 2013. Status: Not met.
  - 3. Government to carry out a VAT gap analysis in consultation with IMF staff and to publish such analysis. Rationale: To make transparent the costs of VAT tax expenditures. Date: March 2014.
  - 4. Government to complete the rollout of the IPPS to cover management of the payroll of all entities within central government. Rationale: To improve both governance and transparency of budget execution. Date: April 15, 2014.
  - 5. Government to complete the expansion of the treasury system (IFMS) to all of central government votes. Rationale: To improve both governance and transparency of budget execution. Date: April 15, 2014.
  - 6. Ministry of Finance to submit to cabinet amendments to the Bank of Uganda Act including a provision for capital adequacy of BoU as an adequate percent of monetary liabilities, as well as other provisions to support implementation of inflation targeting. Rationale: To enable full monetary policy independence and credibility of the central bank. Date: May 2014.
  - 7. Government to start introducing a treasury single account for IFMS related transactions, including for the TGAs, salaries, and IFMIS projects. Rationale: To improve both governance and transparency of budget execution. Date: March 2014.
  - 8. Government to present to cabinet within the budget framework paper an action plan to implement the recommendations on addressing tax exemptions that come out of the VAT gap analysis. Rationale: To improve tax efficiency. Date: May 2014.
  - 9. Government to include in the Budget Framework Paper a status report of all ongoing PPP programs, including individual estimates of each project’s contingent liability. Rationale: To enhance fiscal transparency. Date: March 2014.
  - 10. Government to have issued a minimum of 1 million ID cards under the new national identification system. Rationale: To support efforts to strengthen revenue collection, promote the unique identification of financial sector clients, and combat money laundering and the financing of terrorism. Date: May 2014.
  - 11. Government to eliminate the income tax exemption on income derived from agro-processing. Rationale: To increase revenue and tax administration efficiency. Date: July 2014.
  - 12. Government to continue with annual recapitalizations of the Bank of Uganda with marketable securities to bring capital to the statutory level until amendments to the Bank of Uganda act come into force, on the basis of the BoU’s implementation of its commitment to contain operational and administrative costs. Rationale: To enhance central bank efficiency; To enhance central bank discipline and monetary policy independence. Dates: June 2014; June 2015.

*Source: _cr13375 - 25. Government has revised its medium term debt strategy to take into account recent (IMF PDF excerpt)*

### 10. The purpose of this assessment criterion is to avoid a situation whereby petroleum revenues

### 10. The purpose of this assessment criterion is to avoid a situation whereby petroleum revenues

### Petroleum revenues and Petroleum Fund
- A petroleum fund will be created upon passage of the revised PFMB; in the meantime, government has established a petroleum revenue account at the Bank of Uganda.
- This QAC will be deemed satisfied if 100 percent of petroleum revenues are transferred to this account upon collection by URA.
- These resources may then be spent or saved as governed by the organic budget law in force at the time (PFAA 2003 until the new PFMB is enacted).

### IX. Tax Revenue
- A floor applies on tax revenue of central government measured cumulatively from the beginning of the fiscal year.
- For program-monitoring purposes, tax revenue is defined as the sum of:
  - direct domestic taxes (PAYE, corporate tax, presumptive tax, other direct taxes, withholding tax, rental income tax, tax on bank interest, casino tax, unallocated receipts),
  - excise duty and value-added taxes net of refunds,
  - and taxes on international trade
  - minus temporary road licenses as defined by the Government of Uganda’s revenue classification.

### X. Domestic Arrears
- A ceiling applies to net change of domestic arrears of the government. The ceiling for each test date is measured cumulatively from July 1, 2013.
- Definition: net change of arrears = gross accumulation of new domestic arrears (difference in stock of unpaid bills, as measured by the Accountant General through internal audits) minus gross repayment of any arrears outstanding since the beginning of the year under review (including repayment of older arrears).
- Reporting requirement: Data on repayment of domestic arrears and the remaining previous year’s stock of arrears will be transmitted on a quarterly basis within six weeks of the end of each quarter.

### XI. Adjusters
- The NIR target is based on program assumptions regarding budget support, assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative and the MDRI, external debt-service payments.
- The NDF target is based on program assumptions regarding automatic access by commercial banks to the BoU’s rediscount and discount window facilities.
- The Uganda shilling equivalent of projected budget support (grants and loans) plus HIPC Initiative assistance in the form of grants on a cumulative basis from July 1 of the relevant fiscal year is presented under Schedule A.
- Ceilings and floors adjustment rules:
  - Ceilings on cumulative increase in NDF will be adjusted downward (upward), and the floor on cumulative increase in NIR of the BoU will be adjusted upward (downward) by the amount by which budget support, grants and loans, plus HIPC Initiative, exceeds (falls short of) the projected amounts.
  - Ceilings on increases in NDF will be adjusted downward (upward) and the floor on increase in NIR will be adjusted upward (downward) by the amount by which debt service due plus payments of external debt arrears less deferred payments (exceptional financing) falls short of (exceeds) the projections presented in Schedule B.
    - Deferred payments are defined as (i) all debt service rescheduled under the HIPC Initiative; and (ii) payments falling due to all non-HIPC Initiative creditors not currently being serviced by the authorities (that is, gross new arrears being incurred).
  - Ceiling on NDF will be adjusted upward (downward) by the amount by which the domestic currency equivalent of Government of Uganda share of spending on the Karuma and Isimba hydropower projects and the associated industrial substations through withdrawals from the Petroleum Fund and the Energy Fund (using the market exchange rate) exceeds (falls short of) the projected amounts as set out in Schedule C. Spending on these projects financed by external borrowing are not included in this adjustor.
  - Ceiling on NDF will be adjusted upward (downward) by the amount by which inflows into the petroleum fund falls short of (exceeds) the projected amounts as set out in Schedule D.
- Schedule references and data extracts (as presented):
  - Schedule A: Budget Support (Ush billions) — Sept-13 Dec-13 Mar-14 Jun-14; Cumulative from July 1, 2013: 92181283433
  - Schedule B: External Debt Service (Ush billions) — Sept-13 Dec-13 Mar-14 Jun-14; Cumulative from July 1, 2013: 4775125206 (note: debt service due is defined as pre-HIPC Initiative debt service.)
  - Schedule C: Expenditures on hydropower projects (Ush billions) — Sept-13 Dec-13 Mar-14 Jun-14; Cumulative from July 1, 2013: 0001,102
  - Schedule D: Inflows into Petroleum Fund (Ush billions and USD millions) — Dec-13 Mar-14 Jun-14; Cumulative change from November 1, 2013: Ush 000 (Energy Fund) 301181 (BoU reserves) Petroleum Fund 1162171 (BoU other assets)
  - Schedule E: Withdrawals from the Energy and Petroleum Funds to Finance HPP (US$ millions) — Dec-13 Mar-14 Jun-14; Cumulative change from November 1, 2013: 000253
  - Note in Schedule B and related text: "Debt service due is defined as pre-HIPC Initiative debt service due, excluding debt service subject to HIPC Initiative debt rescheduling."
- Additional adjustor:
  - Ceiling on NDF will be adjusted upward (downward) by the amount by which the recapitalization of the Bank of Uganda exceeds (falls short of) the projected amounts as set out in Schedule F.
  - Schedule F: Recapitalization of the Bank of Uganda (Ush billions) — Sept-13 Dec-13 Mar-14 Jun-14; Cumulative from July 1, 2013: 0000

### XII. Ceiling on the Contracting or Guaranteeing of New Non-concessional External Debt by the Public Sector, and Ceiling on the Stock of External Payments Arrears Incurred by the Public Sector
- Short-term debt assessment criterion: refers to contracting or guaranteeing external debt with an 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 non-concessional borrowing with maturities greater than one year contracted or guaranteed by the public sector.
  - Non-concessional borrowing defined as loans with a grant element of less than 35 percent.
  - The discount rate used for this purpose is 5 percent.
  - Ceiling to be observed on a continuous basis.
  - Coverage includes financial leases and other instruments giving rise to external liabilities, including contingent liabilities on non-concessional terms.
  - External debt for this assessment criterion means borrowing giving rise to liabilities to non-residents.
  - Exclusions from limits:
    - Changes in indebtedness resulting from non-resident holdings of government securities and government 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 the HIPC Initiative do not constitute non-concessional external borrowing for the purposes of the program.
    - Non-concessional borrowing within the limits specified in Table 1 of the MEFP.
    - Non-concessional borrowing by one state-owned bank, Housing Finance Bank, which poses limited fiscal risk and is in a position to borrow without a government guarantee.
  - Definition of debt for the purposes of the limit: see paragraph 25 (below) and point 9 of the Guidelines on Performance Criteria with Respect to External Debt (Executive Board’s Decision No. 6230-(79/140), as amended by Decision No 14416-(09/91), effective December 1, 2009).
  - The ceiling also applies to commitments contracted or guaranteed for which value has not been received.
- Definition of debt (excerpt from point 9 of the Guidelines):
  - (a) "Debt" means a current, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, 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; payments discharge principal and/or interest liabilities incurred under the contract.
    - Primary forms include:
      - (i) loans (advances of money, deposits, bonds, debentures, commercial loans, buyers' credits), temporary exchanges of assets equivalent to fully collateralized loans (repurchase agreements, official swap arrangements);
      - (ii) suppliers' credits (deferral of payments after delivery of goods/services);
      - (iii) leases (present value at inception of all lease payments expected during the agreement, excluding payments that cover operation, repair, or maintenance).
  - (b) Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are included. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
- Ceiling on the accumulation of new external payments arrears:
  - The ceiling is zero.
  - To be observed on a continuous basis.
  - 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 2013.
  - 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.

*International Monetary Fund — UGANDA (excerpts provided in the source content)*

### 27.  The Government of Uganda will submit information to IMF staff with the frequency and

### _cr13375 - 27.  The Government of Uganda will submit information to IMF staff with the frequency and

### Reporting requirements and data submission protocol
- The Government of Uganda will submit information to IMF staff with the frequency and submission time lag as indicated in Table 1.
- The quality and timeliness of the data submission will be tracked and reported by IMF staff.
- The information should be mailed electronically to AFRUGA@IMF.ORG.

### I. Bank of Uganda — Required reports, frequency, and submission lag
- Issuance of government securities, repurchase operations and reverse repurchase operations.
  - Frequency: Weekly
  - Submission lag: 5 working days
- Operations in the foreign exchange.
  - Frequency: Weekly
  - Submission lag: 5 working days
- Interest rates (7-day interbank, government securities).
  - Frequency: Weekly
  - Submission lag: 5 working days
- Commercial bank prime lending rate.
  - Frequency: Weekly
  - Submission lag: 10 working days
- Excess reserves of commercial banks.
  - Frequency: Weekly
  - Submission lag: 5 working days
- Private sector credit growth by shilling and forex.
  - Frequency: Weekly
  - Submission lag: 10 working days
- Disaggregated consumer price index.
  - Frequency: Monthly
  - Submission lag: 2 weeks
- Balance sheet of the BoU, consolidated accounts of the commercial banks, and monetary survey.
  - Frequency: Monthly
  - Submission lag: 4 weeks
- Daily balances of net foreign assets, net domestic assets, and base money of the BoU.
  - Frequency: Monthly
  - Submission lag: 4 weeks
- Monthly foreign exchange cash flow table of BoU.
  - Frequency: 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.
  - Frequency: 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.
  - Frequency: Quarterly
  - Submission lag: 6 weeks
- Summary of stock of external debt, external arrears, and committed undisbursed loan balances by creditor.
  - Frequency: Quarterly
  - Submission lag: 6 weeks
- Standard off-site bank supervision indicators for deposit money banks.
  - Frequency: Quarterly
  - Submission lag: 4 weeks
- Summary table of preliminary program performance comparing actual outcome with adjusted program targets for (i) base money; (ii) net claims on central government by the banking system; (iv) new non-concessional external borrowing; and (v) net international reserves.
  - Frequency: Quarterly
  - Submission lag: 6 weeks

### II. Ministry of Finance — Required reports, frequency, and submission lag
- Summary of central government accounts.
  - Revenues shall be recorded on a cash basis.
  - Expenditures shall be recorded when checks are issued, except for domestic and external debt-service payments, cash transfers to districts, and externally funded development expenditures.
  - Expenditures on domestic interest will be recorded on an accrual basis and external debt service will be recorded on a commitment basis (i.e., when payment is due).
  - Frequency: Monthly
  - Submission lag: 4 weeks
- Summary of the stock of unpaid bills by central government MDAs, as measured by the Accountant General through internal audits.
  - Frequency: 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.
  - Frequency: 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.
  - Frequency: Quarterly
  - Submission lag: 4 weeks
- Detailed central government account of disbursed donor project support grants and loans.
  - Frequency: Monthly
  - Submission lag: 6 weeks
- Statement on new external loans contracted or guaranteed by the central government and the Bank of Uganda during the period according to loan agreements.
  - Frequency: Quarterly
  - Submission lag: 6 weeks
- Updated national accounts statistics (real) according to UBOS and medium-term projections.
  - Frequency: Quarterly
  - Submission lag: 12 weeks

### Additional institutional and program context (selected key numbers and items)
- Membership Status: Joined: September 27, 1963; Article VIII.
- Quota: 180.50 (SDR Million) 100.00 %Quota
- Fund holdings of currency (Exchange Rate): 180.51 100.00
- Reserve Tranche Position: 0.00 0.00
- Net cumulative SDR allocation: 173.06 100.00
- Holdings: 139.78 80.77
- Outstanding Purchases and Loans: ECF Arrangements 2.40 1.33 (SDR Millions %Quota)
- Latest Financial Arrangements (selected):
  - ECF Sep 13, 2002—Jan 31, 2006: Amount Approved (SDR Million) 13.50; Amount Drawn 13.50
  - ECF Nov 10, 1997—Mar 31, 2001: Amount Approved 100.43; Amount Drawn 100.43
  - ECF Sep 06, 1994—Nov 09, 1997: Amount Approved 120.51; Amount Drawn 120.51
- Projected Payments to Fund (Forthcoming): Principal and Charges/Interest figures presented in the table (years 2013–2017) in the source.
- Implementation of HIPC Initiative (selected):
  - Assistance committed by all creditors (US$ Millions): Original Framework 347.00; Enhanced Framework 656.00
  - Of which: IMF assistance (US$ millions) 68.90 (Original); 91.00 (Enhanced)
  - Completion point date: Apr 1998 (Original); May 2000 (Enhanced)
  - Total disbursements (SDR Millions): 121.67
- Implementation of MDRI:
  - MDRI-eligible debt (SDR Millions): 87.73
  - Financed by: MDRI Trust 75.85; Remaining HIPC resources 11.88
- Exchange rate:
  - Uganda’s de jure exchange rate arrangement: free floating; de facto: floating.
  - As of end-October, 2013 the official exchange rate was USh 2524.04 per U.S. dollar.
- Safeguards Assessments:
  - An update assessment of the Bank of Uganda was completed on April 10, 2007; concluded that the BOU had strengthened its safeguards framework since the 2003 assessment and made recommendations to address remaining vulnerabilities.
- Technical Assistance (selected areas and recent activity):
  - FAD: TA to Uganda Revenue Authority in modernization to increase tax Compliance and improve revenue performance; consolidating customs risk management practices and post clearance audit; follow up missions for introduction of the Treasury Single Account and Cash Management; mission on Assessing Output Budgeting Tool; follow-up mission for the VAT gap analysis planned for early 2014.
  - MCM: TA to refine monetary and foreign exchange operations; assist BoU to implement stress testing; improve licensing framework for banks; National Payments System Oversight Capacity Building; Reform of the Primary Dealer System in Government Securities.
  - STA (with AFRITAC East): TA in price statistics and national accounts; assistance to UBOS in production of rebased GDP estimates and improved quarterly GDP estimates.
  - LEG: comprehensive review of the existing BoU Act.
- Resident Representative:
  - The Fund has maintained a resident representative in Uganda since July 1982.
  - Current Senior Resident Representative: Ms. Ana Lucía Coronel (also Mission Chief for Uganda).

*Prepared By The African Department; December 3, 2013.*

### 3. Joint Work

### 3. Joint Work

### Program: Joint DSA update
- Joint DSA update: October 2013
- Joint DSA update: December 2013
- Joint DSA update: May 2014
- Joint DSA update: June 2014

### Statistical issues (as of October 31, 2013) — I. Assessment of Data Adequacy for Surveillance
- General
  - Overall data provision is adequate for surveillance purposes, although some shortcomings remain.
- Real sector statistics
  - Since 2004 Uganda has been receiving technical assistance from the East African Technical Assistance Center (AFRITAC East) on the compilation of annual and quarterly national accounts.
  - In late 2011 the authorities started to disseminate quarterly GDP estimates at 2002 constant prices by economic activity.
  - UBOS is currently disseminating improved quarterly constant price GDP estimates through its website.
  - The next phase is to produce current price quarterly GDP estimates as part of the rebase exercise with an expected release around end-May 2014.
  - UBOS has recently produced balanced supply and use tables (SUTs) that include preliminary product balances for 155 activities by 161 products, with assistance of AFRITAC East and external consultants.
  - The SUTs will enable UBOS to improve the base year estimates and will put the GDP rebased (2009/10) estimates on a firm footing.
  - AFRITAC East has undertaken several missions over the past three years to assist UBOS with improving data sources and compilation system for the rebased annual and quarterly national accounts.
- Labor market indicators
  - Employment, unemployment, and wages/earnings are infrequently compiled and disseminated.
  - UBOS aims to compile and disseminate these data categories on an annual basis, but due to resource and data unavailability, these data are compiled with a two year lag.
- Prices
  - From January 2010 the consumer price index (CPI) benefited from a rebasing using the (out-of-date) 2005/2006 Uganda National Household Survey.
  - CPI coverage was extended from six to eight urban areas.
  - Improved formulas were adopted: at the elementary level, a geometric average—in accordance with COMESA regulations; at the higher-level, a modified Laspeyres-type to facilitate incorporation of replacement items and better imputations.
  - UBOS compiles and disseminates a Producer Price Index for Manufacturing (separately for domestic and local output) and for hotels.
  - In June 2013, AFRITAC East provided technical assistance for the redevelopment of the producer prices survey (PPS) and producer price index (PPI).
  - Further TA to rebase, improve and expand the PPI will be provided during the next two years.
  - Additional TA is expected to be provided to quality assure the planned new CPI and to develop export and import price indices.
- Government finance statistics
  - The Ministry of Finance, Planning and Economic Development (MoFPED) compiles fiscal statistics following the Government Finance Statistics Manual 2011 (GFSM 2011), but for budgetary central government and local governments only.
  - UBOS has recently been given official responsibility for compiling and disseminating these statistics and have been requesting technical assistance for two years.
- Monetary and financial statistics (MFS)
  - TA in FY2014 will aim at improving the institutional coverage and classification of other depository corporation (ODCs) and initiation of the collection and compilation of data for other financial corporations, mainly insurance companies and pension funds.
  - This would build on previous missions financed by the Department for International Development (DFID) on the standardized report forms (SRFs).
  - Uganda began publishing SRF-based monetary data from 2002 in IFS beginning in early 2009.
- External sector statistics
  - An external sector statistics mission during February 2013 focused on aligning Uganda’s balance of payments and IIP data to BPM6 and further enhancing source data collection.
  - Particular areas of concern include:
    - net errors and omissions for the published BOP with respect to the financial year 2011-12;
    - data collection on transactions in non-resident securities;
    - reliable current/capital transfer split for foreign aid and more detailed data on the costs of embassies abroad.

### Statistical issues — II. Data Standards and Quality
- Uganda has participated in the General Data Dissemination System (GDDS) since May 2000.
- The metadata and plans for improvement need to be updated (from December 2008).
- Uganda is participating in the SDDS, government finance, and monetary and financial statistics modules of the Fund’s GDDS Project for Anglophone Africa (funded by the DFID).
  - This project aims to assist participating countries in implementing plans for improvements identified in the metadata.
- In February 2005, a STA mission prepared a Report on the Observance of Standards and Codes (ROSC), with results published in July 2006.
  - The ROSC mission assessed data compilation and dissemination practices against international standards in national accounts, prices, government finance, and balance of payments statistics.
  - The monetary and financial statistics were not assessed.

### Statistical issues — III. Reporting to STA
- Uganda reports government finance statistics (GFS) data according to the GFSM 2001 framework for the GFS Yearbook, but does not report any high frequency data for inclusion in the International Financial Statistics (IFS).
- The BoU reports regularly monetary data for the central bank and other depository corporations (ODCs) in the format of Standardized Report Forms (SRFs).

### Press Release No. 13/522 — IMF Executive Board Completes First PSI Review for Uganda (December 18, 2013)
- Context
  - The Executive Board completed the first review of Uganda’s economic performance under the program supported by the Policy Support Instrument (PSI).
  - The Board’s decision was taken on a lapse of time basis.
  - The PSI was approved by the Executive Board on June 28, 2013 (see Press Release No. 13/78).
  - The IMF’s framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies.
  - PSIs are voluntary and demand driven.
- Macroeconomic performance and outlook
  - Uganda’s economic recovery continues to gain momentum.
  - GDP growth reached 5¾ percent in 2012/13, mainly driven by public investment and supported by appropriate policies.
  - Growth is expected to rise to 6¼ percent in 2013/14, supported by recovery of private sector activity and significant public investment in the construction of two large hydropower plants and road projects.
  - Monetary policy responded to a recent drought-related food price shock in a timely manner, keeping inflation within the expected path toward the 5 percent medium-term target.
  - International reserves remained at a level equivalent to 3.9 months of imports.
- Program performance and structural reforms
  - Program performance was broadly satisfactory.
  - All the end-June 2013 quantitative assessment criteria were met.
  - Reforms on the structural front advanced, including:
    - completion of the first stage of the Bank of Uganda (BoU) recapitalization, strengthening its balance sheet and reinforcing its independence;
    - actions to improve public financial management practices, including first phase of implementation of a treasury single account and upgrading of key accounting systems;
    - Parliament is examining the Public Finance Management Bill aimed at improving budget execution and credibility, and enhancing reporting and accountability of public finances.
  - Progress on strengthening tax revenue collection has been slow.
  - Further improvements are required to avoid the accumulation of payment arrears and reduce the frequency of supplementary budgets.
- Monetary and fiscal policy guidance
  - Monetary policy, in the context of the BoU’s inflation targeting framework, struck the right balance between signaling commitment to low inflation, avoiding excessive exchange rate volatility, and ensuring consistency with the fiscal policy stance.
  - Ongoing institutional reforms to strengthen central bank operations and consolidate its credibility will be critical.
  - Fiscal policy is expected to accommodate the envisaged scaling up of public investment in infrastructure, while supporting low inflation and avoiding crowding out of private sector activity.
  - It will be important to resist pressures for additional current spending through a strict adherence to the approved budget and financing.
- Hydropower projects and debt implications
  - The construction of two hydropower plants, Karuma and Isimba, will more than double current electricity production and address a critical structural bottleneck to growth.
  - The increase in the non-concessional borrowing ceiling under the PSI to finance these projects is consistent with debt sustainability, and the risk of external debt distress is expected to remain low.
  - To minimize risks it will be important to ensure timely implementation of the projects, transparent and efficient management and an adequate cost recovery strategy.

*IMF — Press Release No. 13/522; Statistical Issues (as of October 31, 2013).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13375.pdf_