## _cr14195 ## Source details **Canonical URL:** [_cr14195](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14195.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14195.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14195.pdf.json) --- ### Recent developments - Geo-political environment - Instability in neighboring countries increased refugee-related costs and unexpected fiscal outlays for military engagement. - An early start of the electoral cycle is creating further expenditure pressures. - An anti-homosexuality act (under constitutional court review) generated adverse international reactions, resulting in postponement and redirection of certain grants and concessional loans. - Growth, inflation, and external buffers - Real GDP growth remained robust but leading indicators point to weaker-than-expected activity this fiscal year due to lower external inflows, weaker agricultural output, and delays in construction of two hydropower projects (HPPs). - Growth remains led by public sector activity; private sector contribution—notably from agriculture—remains weak. - Annual headline inflation decelerated to 5.4 percent in May; core inflation decelerated to 3.3 percent in May. - International reserves are set to reach a level equivalent to 4.2 months of imports, bolstered by higher-than-anticipated portfolio inflows. - Fiscal deterioration - Large revenue gap of 0.6 percent of GDP is expected this fiscal year. - About one-third of this gap is explained by lower-than-anticipated growth, notably lower corporate income tax collections linked to increased provisioning of NPLs by commercial banks. - Another one-third is attributable to policy slippages (loophole in tax on money transfers; substitution of higher-yield measures not passed by parliament). - Other contributors: compliance issues, enforcement shortcomings, overestimation of tax base, and delays in government payments to the revenue authority. - Unanticipated spending pressures (troop deployments, allowances, national identity cards) added about 0.7 percent of GDP to the budget. - Higher net domestic borrowing needs of about 1.2 percent of GDP compared to PSI projections; issuance of bonds and T-bills twice as large as last year’s. - Stock of arrears at 1.2 percent of GDP; reduction of 0.4 percent of GDP since June 2013 reflects gradual regularization. - Monetary and banking conditions - Bank of Uganda (BoU) left the central bank rate (CBR) at 11.5 percent from December to May; reduced to 11 percent in June. - Tight monetary stance due to fiscal expansion and potential shocks to food prices and business confidence. - Subdued private sector credit growth due to high lending rates, tightened bank risk management, and banks’ appetite for zero-risk high-yield government paper. - Nominal exchange rate appreciated; real effective exchange rate broadly in line with long-run equilibrium. - NPLs rose sharply from 4 percent to 6 percent of total loans between September and December 2013, leading to significant provisioning; bad loans concentrated in trade and construction. ### Program performance and structural reforms - Quantitative assessment (end-December and preliminary March 2014) - End-December QAC on net international reserves met; IT on base money met; core inflation within consultation clause. - Continuous QACs met. - QAC on government net domestic financing missed by a small amount; IT on tax revenue missed by a wide margin; end-December IT on net change in stock of domestic arrears missed. - Preliminary March 2014 ITs follow the same trend; IT on net change in domestic arrears met by a large margin. - Structural benchmarks - Met: rollout of the payroll system (IPPS), expansion of the treasury accounting system (IFMS), introduction of the treasury single account (TSA). - VAT-gap analysis report published in May with an action plan (publication occurred after March 2014). - FY2014/15 budget to include appropriation to recapitalize the BoU; amendments to BoU Act delayed. - Issuance of national identification cards running late; registration ongoing. - Irregular quarterly production and monitoring of unpaid bills; arrears reports not produced as envisaged. ### Economic outlook and key projections - Growth and inflation projections (values as presented) - Real GDP growth: 3.4 (2012/13), 5.8 (2013/14), 5.7 (2014/15), 6.1 (2015/16) - Headline CPI inflation, period average: 2, 3.5, 5.8, 6.9, 6.9 - Core CPI inflation, period average: 2, 4.6, 6.6, 5.4, 5.7 - External and reserve indicators - External current account balance: -13.3, -8.8, -9.7, -11.2 (percent of GDP) - International reserves (months of imports): 4.2, 4.6, 4.2, 4.0 - Fiscal aggregates (percent of GDP) - Fiscal balance (excluding one-off spending): -3.9, -3.4, -4.8, -3.7 - Overall balance: -3.0, -4.1, -5.0, -7.2 - Total revenue and grants: 14.8 (2012/13), 14.5 (2013/14), 15.4 (2014/15), 15.3 (2015/16) - Revenue: 13.2, 13.1, 13.6, 14.2 - Tax: 12.6, 12.6, 13.1, 13.6 - Expenditures and net lending: 18.9, 19.5, 22.6, 20.7 - Current expenditures: 10.5, 10.7, 10.5, 10.8 - Development expenditures: 7.6, 8.6, 8.2, 6.9 - Net lending and investment: 0.7, 0.2, 3.5, 2.6 - Of which: HPP projects: 0.0, 0.2, 3.2, 2.3 - Of which: Bank of Uganda recapitalization: 0.7, 0.0, 0.3, 0.2 - Overall balance (percent of GDP): -4.1, -5.0, -7.2, -5.4 - Financing (percent of GDP): 3.8, 5.0, 7.2, 5.4 - External financing (net): 2.6, 2.4, 3.6, 3.7 - Domestic financing (net): 1.2, 2.6, 3.6, 1.8 - Commercial and non-bank financing: 1.4, 2.7, 1.9, 1.5 - Policy rate and credit - Policy rate (end of period): 20.0, 11.0 - Credit to the private sector (annual growth, percent): 11.5, 6.4, 10.6, 14.7 - Projections and financing - Real GDP growth projected to increase from 5.7 percent to 6.1 percent next fiscal year, driven by public investment and exports. - Average core inflation projected to slightly increase from 5.4 percent to 5.7 percent next year, then gradually decline toward the 5 percent medium-term target. - Current account deficit projected to expand to 11.2 percent of GDP mainly due to HPPs-related imports. - Financing: lending from Eximbank China, concessional loans, FDI, and some use of international reserves expected to finance the deficit; reserves to remain adequate. - Budget support grants projected at this year’s level (one fourth of the trend observed until two years ago); no budget support loans expected during projection period. - Downside risks (significant) - Early start of electoral cycle limiting scope to address fiscal slippages. - Insufficient parliamentary support for tax revenue enhancement. - Prolonged instability in neighboring countries. - Weaker-than-anticipated project grants and non-concessional lending. - Changes in donors’ sentiment toward Uganda. - Possible reversal of foreign exchange flows due to lower economic stimuli in advanced economies. - Implementation capacity constraints. ### Box 1 — Government domestic debt and private sector crowding out (key findings) - Recent trajectory and debt levels - Government domestic debt rose from about 9 percent of GDP (relatively constant for ten years) to 13¾ percent in FY2010/11; projected to reach about 16 percent this fiscal year. - Total debt/GDP remains at 33 percent. - Rise in domestic debt associated with increased borrowing needs amid lower external financing. - Interest rate and market effects - Following FY2010/11 domestic debt hike, average nominal yield on the 91-day treasury bill increased by 230 basis points even as inflation declined by 300 basis points. - In FY2013/14, increased domestic debt issuance occurred amid depressed credit conditions, putting pressure on interest rates and inhibiting the central bank from reducing the policy rate. - VAR-based impulse response estimates indicate that additional issuances of treasury bills and bonds would raise yields significantly; sustained recent issuance pace could raise interest rates along the yield curve on average by 9-11 percent in 12 to 24 months. - Yields on government paper began to edge up immediately after stepped-up issuances; the 91-day Treasury bill rate increased by 150 basis points between January and April 2014. - Expected issuance of government securities of 2¾ percent of GDP (more than twice last year’s level of 1¼ percent) suggests likely pass-through to lending rates over time. - About 13 percent of the outstanding stock of government paper is now held by foreigners; increased foreign demand may contain interest rate hikes but raises risks from abrupt sentiment changes. - Crowding out and rollover risks - Higher lending rates could crowd out private investment as banks face higher opportunity costs to lend; credit supply is already depressed by deteriorating asset quality. - 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, increasing rollover and interest rate risks. - Addressing these risks requires stronger revenue mobilization and deeper, more liquid financial markets. ### Revenue mobilization — Box 2 (VAT gaps, exemptions, and measures) - VAT compliance and policy gaps - A VAT compliance gap of 5-6 percent of GDP has remained fairly steady over time. - Sectoral exercise based on value added shows a compliance gap of around 60 percent of potential VAT. - To achieve the regional average tax efficiency, Uganda would need to reduce the compliance gap to around 50 percent of potential VAT. - Reducing the compliance gap to around 50 percent of potential VAT would increase VAT revenues by 2–2 ½ percent of GDP. - The VAT policy gap is estimated at 1 percent of GDP. - Key exemptions and impacts - Exemptions and zero-rates in the VAT Act complicate administration and increase the compliance gap. - Examples scheduled for removal in the FY2014/15 budget: exemptions on hotel accommodation and supply of computers and software. - Exemptions on business-to-business transactions (notably agriculture-related inputs and products) create “missing link” effects that contribute to a large compliance gap in downstream sectors. - Removal of the textile exemption was proposed in the FY2014/15 budget; the textile sector exemption that expires on June 30 2014 shall not be renewed. - Envisaged revenue package and yields (FY2014/15) - Authorities and staff adopted a conservative tax base for projections. - Revenue effort required: about 0.8 percent of GDP to achieve the expected yield of 0.5 percent of GDP in FY2014/15. - Projected contribution to the 0.5 percent of GDP yield: - Removal of various VAT exemptions: about 0.4 percent of GDP. - Income tax measures: 0.2 percent of GDP. - Increases in excises: 0.1 percent of GDP. - Tax administration efforts: 0.1 percent of GDP. - Action plan and tax administration - Recommended URA actions: expedite audits of large taxpayers; intensify marketing campaigns; better manage VAT refunds; enhance debt collection. - Use tax gap analyses systematically across URA to guide compliance strategies and performance monitoring. - Structural benchmarks: reform the VAT code to eliminate most exemptions; remove exemptions on interest earned on loans to the agricultural sector; discontinue exemption on supply of goods and services for construction; use trading license regime in at least three municipalities to register, assess, and collect revenue. - Policy recommendations (summarized) - Reform VAT law to remove exemptions and zero-rates that hinder administration and increase leakage. - Remove sectoral and discretionary exemptions where feasible; renegotiate contracts where appropriate. - Strengthen URA enforcement and compliance activities: expedite large taxpayer audits, intensify outreach, improve VAT refund management, and enhance debt collection. - Institutionalize tax gap analyses across URA. - Adopt conservative tax-base assumptions in revenue projections and ensure realistic yield estimates. ### Fiscal policy — preserving sustainability and sequencing - Staff concerns and authorities’ stance - Large fiscal deficit expansion in recent months is raising domestic financing needs and crowding out the private sector. - Authorities intend to limit this year’s deficit to 4.8 percent of GDP and reduce it by about 1 percent of GDP next fiscal year through revenue increases and expenditure restraint. - The envisaged fiscal adjustment would provide space for HPPs (3.2 percent of GDP) and continuation of central bank recapitalization, and cut domestic market borrowing needs in FY2014/15 by 0.8 percent of GDP. - Fiscal sequencing and financing notes - Withdrawals from the Energy and Petroleum Funds restricted solely to co-financing Karuma and Isimba projects with China Eximbank (Government’s share amounting to US$424 million) in FY2014/15. - Government financing profile caps domestic debt issuance in market at Shs1.4 trillion (includes contingency reserve of Shs200 billion); deposits in the BoU to increase by Shs138 billion. - Provision of Shs80 billion made in the FY2014/15 budget for arrears; strategy to eliminate arrears to be published by end of June 2014. - Pace of spending in FY2014/15 expected to be significantly slower than in previous years; other investments and current spending, aside from wages and interest payments, will grow by 2.8% compared to 8.7% for total spending. - Contingency reserve mechanisms and release rules specified (e.g., no vote will use more than 10% of the contingency reserve without Parliament approval). ### Monetary policy and financial sector measures - Monetary stance and objectives - Monetary policy centered on achieving the 5 percent medium-term inflation target using the central bank rate to signal stance. - BoU will adapt daily foreign exchange purchases and fully sterilize purchases; interventions remain limited to contain excessive exchange rate volatility. - BoU to monitor financial sector developments to ensure banks are well capitalized, adequately provision for nonperforming loans, use strong risk management, and are encouraged to restructure viable loans. - Structural and institutional reforms - Amendments to the Bank of Uganda Act to be finalized and submitted to Parliament by April 2015 (structural benchmark); amendments delayed from original May, 2014 timetable. - BoU recapitalization payments scheduled: Shs410 billion in May 2013 (completed); further payments Shs250 billion for FY2014/15, Shs200 billion for FY2015/16, and Shs350 billion for FY2016/17. - Financial supervision to focus on institutions where asset quality deterioration is most evident. ### Arrears management, reporting, and transparency - Definitions and targets - Indicative target: reduction in stock of domestic arrears by UGX 80 billion in each of FY2014/15 and FY2015/16. - Government to publish stock of unpaid bills by all government entities on a quarterly basis within 6 weeks of quarter end. - Publish stock of domestic arrears of all government entities at end-June 2014 by September 30, 2014 (structural benchmarks). - Institutional roles and reporting timetable - Accounting Officers, Internal Audit Department, Accountant General, Director of Budget, Director of Economic Affairs and Permanent Secretary roles defined for arrears verification and reporting. - Quarterly publication dates specified for unpaid bills reports (e.g., November 15, 2014 for quarter ending September 30, 2014). ### Program monitoring, TMU adjustments, and PSI review - Staff recommendation and actions - Staff recommends completion of the second review of the PSI. - Support for waiver for non-observance of government net domestic financing target for end-December 2013 on basis that deviation was minor and corrective action taken. - Authorities propose a new indicative target beginning end-June 2014 to limit use of petroleum and energy funds on key infrastructure projects to programmed levels. - Authorities propose modifications to end-June 2014 QACs on net domestic financing and net international reserves; staff supports. - TMU adjustments (high-level) - Revised TMU redefines and measures arrears in line with new understandings. - TMU modifies adjustors on government net domestic financing and NIR to provide flexibility (within 15 percent above projected levels) to anticipated co-financing of HPPs. - TMU eliminates an adjustor on external debt service that is no longer useful and redefines the adjustor on budget support loans and grants to exclude HIPC grants. - Data submission and reporting requirements - Government to submit information to IMF staff with specified frequency and lags; contact afruga@imf.org for submissions. - Attachment II — Table 1 lists detailed reporting frequencies and submission lags for BoU and Ministry of Finance items (e.g., weekly issuance of government securities with 5 working days lag; monthly summary central government accounts with 4 weeks lag; quarterly stock of unpaid bills with 6 weeks lag). ### Annex 1 — Fiscal risks to EAC integration (highlights) - Convergence requirements and risks - EAC partner countries expected to meet deficit target of 3 percent of GDP in steady state and a tax-to-GDP floor of 25 percent. - Short- and medium-term risks: transitory and structural risks that can increase deficits, worsen debt dynamics, or create contingent liabilities tied to large infrastructure and PPP projects. - Key risk areas and policy responses - Low revenue collection: authorities aimed to raise tax revenue by ½ percent of GDP a year; recent developments suggest target will not be met; elimination of exemptions expected in FY2014/15. - Insufficient budget credibility: supplementary budgets and reallocations explained by underestimation of expenditures; PFM Bill expected to enhance credibility and build contingency balances. - Weak implementation capacity of capital expenditure: delays in hydropower projects risk cost increases; recommendation to adhere to implementation calendars and strengthen institutional arrangements. - Contingent liabilities: central government to assume debt for hydropower dams; recommendation to ensure efficiency, transparency, and monitoring of contingent liabilities. - Spending by sub-national governments: risk from fiscal actions not always authorized by Ministry of Finance; recommendation to move to public sector consolidated accounts and intensify screening of local government fiscal risks. - MEFP highlights (selected numeric projections and measures) - Growth expected at 5¾ percent in FY2013/14 and 6¼ percent in FY2014/15. - Core inflation expected broadly stable at 5¾ percent in FY2014/15. - Current account balance expected to widen from 9¾ percent of GDP in FY2013/14 to 11¼ percent of GDP in FY2014/15. - International reserve coverage: 4.2 months of imports (current) and projected to keep reserves at 4 months of imports. - Unplanned increase in issuance of government securities in domestic market expected to exceed by about Shs680 billion the level envisaged in the program. - FY2014/15 budget package yielding Shs551 billion to increase tax collections by Shs1.5 trillion (increase in tax-to-GDP ratio of 0.5 percentage points). - Expenditure envelope Shs842 billion larger than in FY2013/14; net of large hydroelectric projects and recapitalization of BOU, spending-to-GDP ratio expected to decline by 0.6 percent of GDP. ### Annex I — Selected tax and excise measures (values preserved) - Excise Duties - Impose excise duty of Shs200 per liter on kerosene. - Increase excise duty on petrol by Shs50 per liter. - Increase excise duty on diesel by Shs50 per liter. - Reinstate excise duty on sugar to Shs50 per kilo from the current Shs25 per kilo. - Impose excise duty on mobile money withdrawal fees at 10%. - Increase excise duty on soft cup and other soft cup cigarettes to Shs40,000 per 1000 sticks. - VAT removals and zero-rate endings (examples) - Remove exemption on supply of new computers, desktop printers, computer parts and accessories, computer software and software licenses. - Remove exemption on supply of accommodation in tourist lodges and hotels outside Kampala District. - Remove exemption on supply of liquefied petroleum gas and supply of salt. - Remove exemption on supply of property and casualty insurance services (keep exemption for life insurance). - Add VAT on bank charges. - Remove exemption on supply of specialized vehicles, plant and machinery, feasibility studies, engineering designs, consultancy services and civil works related to hydroelectric power, roads and bridges construction, public water works, agriculture, education and health sectors. - End zero rate on printing services for education materials; seeds, fertilizers, pesticides and hoes; cereals grown/milled/produced in Uganda; processed milk and milk products. - Income tax measures - Eliminate initial allowances on eligible property. - Eliminate the exemption of income tax of educational institutions. - Separate rental income from business income for non individuals. - Impose income tax on gamblers and designate gambling houses to withhold tax (15%). - Increase the presumptive tax. - Eliminate exemption from tax of interest earned on loans granted for the purpose of agriculture. - Add capital gains tax on disposal of commercial buildings by individuals. - Amend the thin capitalization rule to limit excessive use of related party-debt. - Government taxes - Pay government taxes related to industry and company-specific exemptions in the amount of UGX 70 billion. - EAC Common External Tariff adjustments (examples with rates) - Increase duty on aerosols made from non-pyrethrum based insecticides to 25%. - Increase duty on towers and lattice masts to 10%. - Increase duty on welding electrodes to 25%. - Increase duty on used clothing to 15%. ### Technical and operational schedules (schedules preserved as in source) - Schedule A: Budget Support (Ush billions, cumulative from July 1 of respective fiscal year): Jun-14Sept-14Dec-14Mar-15Jun-15 — 21867147219257 - Schedule B: Expenditures on hydropower projects (Ush billions): Land acquisition for Karuma and Isimba HPPs — 120000 0; Government share associated with the China Eximbank loan — 01,1021,1021,102 1,102 - Schedule C: Inflows into Petroleum Fund (Ush billions, cumulative from November 1, 2013): Jun-14Sept-14Dec-14Mar-15 Jun-15 — 0000 0 - Schedule D: Withdrawals from the Energy and Petroleum Funds to Finance HPP (US$ millions, cumulative from November 1, 2013): Jun-14Sept-14Dec-14Mar-15 Jun-15 — 0 / 252252252 252 - Schedule E: Recapitalization of the Bank of Uganda (Ush billions, cumulative from July 1 of respective fiscal year): Jun-14Sept-14Dec-14Mar-15 Jun-15 — 00250250 250 - Currency composition and stocks of Funds (as of May 6, 2014) - Energy Fund: 300 181(BoU reserves) - Petroleum Fund: 1162 172(BoU other assets) ### Key policy recommendations and implementation priorities (synthesized from text) - Fiscal policy and public finance management - Limit the fiscal deficit to 4.8 percent of GDP this year and reduce it by about 1 percent of GDP next fiscal year through revenue increases and expenditure restraint. - Implement contingency reserve in the budget and resist undue supplementary budgets. - Publish quarterly reports on unpaid bills and a domestic arrears strategy; achieve net reduction in domestic arrears by UGX 80 billion per year. - Cap domestic market issuance at Shs1.4 trillion and ensure deposits in BoU increase by Shs138 billion to avoid program inconsistencies. - Revenue mobilization - Reform VAT law to remove exemptions and zero-rates, remove industry-specific discretionary exemptions where feasible, and adopt conservative tax-base assumptions. - Strengthen URA enforcement: expedite large taxpayer audits, intensify outreach, improve VAT refund management, and enhance debt collection. - Implement tax measures and excise increases as detailed in Annex I to yield projected revenue increases. - Monetary and financial sector - Maintain monetary policy stance to keep inflation within consultation clause and refine inflation targeting framework for better signaling. - Strengthen financial supervision, ensure adequate bank capitalization and provisioning, and support restructuring of viable loans. - Finalize amendments to Bank of Uganda Act and implement BoU recapitalization per schedule. - Infrastructure and project management - Ensure hydropower projects proceed timely, consistent with fiscal and debt sustainability, with transparent management and cost recovery. - Limit withdrawals from Petroleum and Energy Funds to programmed co-financing of Karuma and Isimba and ensure TMU adjustors operate as defined. - Institutional and governance reforms - Complete PFM Bill enactment and operationalize regulations, roll out IPPS and IFMS to local governments, and complete TSA coverage to improve fiduciary controls. - Issue national identity cards as planned to enhance transparency of economic transactions. *IMF Country Report content as provided in the source PDF.* ### 1. Government Domestic Debt and Private Sector Crowding Out __________________________________9 ### 1. Government Domestic Debt and Private Sector Crowding Out ### Recent developments - Geo-political environment - Instability in neighboring countries increased refugee-related costs and unexpected fiscal outlays for military engagement. - An early start of the electoral cycle is creating further expenditure pressures. - An anti-homosexuality act (under constitutional court review) generated adverse international reactions, resulting in postponement and redirection of certain grants and concessional loans. - Growth, inflation, and external buffers - Real GDP growth remained robust but leading indicators point to weaker-than-expected activity this fiscal year due to lower external inflows, weaker agricultural output, and delays in construction of two hydropower projects (HPPs). - Growth remains led by public sector activity; private sector contribution—notably from agriculture—remains weak. - Annual headline inflation decelerated to 5.4 percent in May; core inflation decelerated to 3.3 percent in May. - International reserves are set to reach a level equivalent to 4.2 months of imports, bolstered by higher-than-anticipated portfolio inflows. - Fiscal deterioration - A large revenue gap of 0.6 percent of GDP is expected this fiscal year despite reinforced tax administration efforts. - About one-third of this gap is explained by lower-than-anticipated growth, notably lower corporate income tax collections linked to increased provisioning of NPLs by commercial banks. - Another one-third is attributable to policy slippages (loophole in tax on money transfers; substitution of higher-yield measures not passed by parliament). - Other contributors: compliance issues, enforcement shortcomings, overestimation of tax base, and delays in government payments to the revenue authority. - Unanticipated spending pressures (troop deployments, allowances, national identity cards) added about 0.7 percent of GDP to the budget. - Higher net domestic borrowing needs of about 1.2 percent of GDP compared to PSI projections; issuance of bonds and T-bills twice as large as last year’s. - Stock of arrears at 1.2 percent of GDP; reduction of 0.4 percent of GDP since June 2013 reflects gradual regularization. - Monetary and banking conditions - Bank of Uganda (BoU) left the central bank rate (CBR) at 11.5 percent from December to May; reduced to 11 percent in June. - Tight monetary stance due to fiscal expansion and potential shocks to food prices and business confidence. - Subdued private sector credit growth due to high lending rates, tightened bank risk management, and banks’ appetite for zero-risk high-yield government paper. - Nominal exchange rate appreciated; real effective exchange rate broadly in line with long-run equilibrium. - NPLs rose sharply from 4 percent to 6 percent of total loans between September and December 2013, leading to significant provisioning; bad loans concentrated in trade and construction. - Lending rates remain high owing to structural inefficiencies, limited competition, and uncertainty. ### Program performance and structural reforms - Quantitative assessment - End-December QAC on net international reserves met; IT on base money met; core inflation within consultation clause. - Continuous QACs met. - QAC on government net domestic financing missed by a small amount; IT on tax revenue missed by a wide margin; end-December IT on net change in stock of domestic arrears missed. - Preliminary March 2014 ITs follow the same trend; IT on net change in domestic arrears met by a large margin. - Structural benchmarks met or delayed - Met: rollout of the payroll system, expansion of the treasury accounting system, introduction of the treasury single account (TSA). - VAT-gap analysis report published in May with an action plan (publication occurred after March 2014). - FY2014/15 budget to include appropriation to recapitalize the BoU; amendments to BoU Act delayed. - Issuance of national identification cards running late; registration ongoing. - Irregular quarterly production and monitoring of unpaid bills; arrears reports not produced as envisaged. ### Economic outlook and risks - Outlook projections (macroeconomic outlook table highlights) - Real GDP growth: 3.4 (2012/13), 5.8 (2013/14), 5.7 (2014/15), 6.1 (2015/16) - Headline CPI inflation, period average: 2, 3.5, 5.8, 6.9, 6.9 (note: table entries as in source) - Core CPI inflation, period average: 2, 4.6, 6.6, 5.4, 5.7 (note: table entries as in source) - External current account balance: -13.3, -8.8, -9.7, -11.2 (percent of GDP) - International reserves (months of imports): 4.2, 4.6, 4.2, 4.0 - Fiscal balance (excluding one-off spending): -3.9, -3.4, -4.8, -3.7 (percent of GDP) - Overall balance: -3.0, -4.1, -5.0, -7.2 - Policy rate (end of period): 20.0, 11.0 - Credit to the private sector (annual growth, percent): 11.5, 6.4, 10.6, 14.7 - Projections and financing - Real GDP growth projected to increase from 5.7 percent to 6.1 percent next fiscal year, driven by public investment and exports. - Average core inflation projected to slightly increase from 5.4 percent to 5.7 percent next year, then gradually decline toward the 5 percent medium-term target. - Current account deficit projected to expand to 11.2 percent of GDP mainly due to HPPs-related imports. - Financing: lending from Eximbank China, concessional loans, FDI, and some use of international reserves expected to finance the deficit; reserves to remain adequate. - Budget support grants projected at this year’s level (one fourth of the trend observed until two years ago); no budget support loans expected during projection period. - Downside risks (significant) - Early start of electoral cycle limiting scope to address fiscal slippages. - Insufficient parliamentary support for tax revenue enhancement. - Prolonged instability in neighboring countries. - Weaker-than-anticipated project grants and non-concessional lending. - Changes in donors’ sentiment toward Uganda. - Possible reversal of foreign exchange flows due to lower economic stimuli in advanced economies. - Implementation capacity constraints. ### Fiscal policy — Preserving sustainability - Staff concern and authorities’ stance - Large fiscal deficit expansion in recent months is raising domestic financing needs and crowding out the private sector. - Factors: regional insecurity, tax compliance and enforcement issues, accommodation of spending pressures, and failure to adapt expenditure pattern to available resources. - Authorities intend to limit this year’s deficit to 4.8 percent of GDP and reduce it by about 1 percent of GDP next fiscal year through revenue increases and expenditure restraint. - The envisaged fiscal adjustment would provide space for HPPs (3.2 percent of GDP) and continuation of central bank recapitalization, and cut domestic market borrowing needs in FY2014/15 by 0.8 percent of GDP. ### Fiscal policy — Boosting revenue mobilization - Revenue objectives and constraints - Authorities’ program envisaged an increase of 1.5 percent in the tax-to-GDP ratio over three years. - Given the current year’s revenue shortfall, authorities view achieving the full 1.5 percent in the remaining two program years as overly challenging but commit to a 0.5 percent increase in FY2014/15 and at least 0.5 percent in FY2015/16. - Emphasis on broadening the tax base and minimizing impact on vulnerable populations. - Ample scope identified to reduce multiple statutory and discretionary tax exemptions, notably on the VAT front. - Fiscal operations highlights (selected table figures as presented) - Total revenue and grants (percent of GDP): 14.8 (2012/13), 14.5 (2013/14), 15.4 (2014/15), 15.3 (2015/16) - Revenue (percent of GDP): 13.2, 13.1, 13.6, 14.2 - Tax (percent of GDP): 12.6, 12.6, 13.1, 13.6 - Expenditures and net lending (percent of GDP): 18.9, 19.5, 22.6, 20.7 - Current expenditures (percent of GDP): 10.5, 10.7, 10.5, 10.8 - Development expenditures (percent of GDP): 7.6, 8.6, 8.2, 6.9 - Net lending and investment (percent of GDP): 0.7, 0.2, 3.5, 2.6 - Of which: HPP projects: 0.0, 0.2, 3.2, 2.3 - Of which: Bank of Uganda recapitalization: 0.7, 0.0, 0.3, 0.2 - Overall balance (percent of GDP): -4.1, -5.0, -7.2, -5.4 - Financing (percent of GDP): 3.8, 5.0, 7.2, 5.4 - External financing (net): 2.6, 2.4, 3.6, 3.7 - Domestic financing (net): 1.2, 2.6, 3.6, 1.8 - Commercial and non-bank financing: 1.4, 2.7, 1.9, 1.5 ### Box 1 — Government domestic debt and private sector crowding out (key findings) - Recent trajectory - Government domestic debt rose from about 9 percent of GDP (relatively constant for ten years) to 13¾ percent in FY2010/11; projected to reach about 16 percent this fiscal year. - Total debt/GDP remains at 33 percent. - Rise in domestic debt associated with increased borrowing needs amid lower external financing. - Interest rate and market effects - Following FY2010/11 domestic debt hike, average nominal yield on the 91-day treasury bill increased by 230 basis points even as inflation declined by 300 basis points. - In FY2013/14, increased domestic debt issuance occurred amid depressed credit conditions, putting pressure on interest rates and inhibiting the central bank from reducing the policy rate. - VAR-based impulse response estimates indicate that additional issuances of treasury bills and bonds would raise yields significantly; sustained recent issuance pace could raise interest rates along the yield curve on average by 9-11 percent in 12 to 24 months. - Yields on government paper began to edge up immediately after stepped-up issuances; the 91-day Treasury bill rate increased by 150 basis points between January and April 2014. - Expected issuance of government securities of 2¾ percent of GDP (more than twice last year’s level of 1¼ percent) suggests likely pass-through to lending rates over time. - About 13 percent of the outstanding stock of government paper is now held by foreigners; increased foreign demand may contain interest rate hikes but raises risks from abrupt sentiment changes. - Crowding out and rollover risks - Higher lending rates could crowd out private investment as banks face higher opportunity costs to lend; credit supply is already depressed by deteriorating asset quality. - 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, increasing rollover and interest rate risks. - Addressing these risks requires stronger revenue mobilization and deeper, more liquid financial markets. *IMF Country Report content as provided in the source PDF.* ### Box 2. Uganda: Revenue Mobilizing Measures ### Box 2. Uganda: Revenue Mobilizing Measures ### VAT compliance and policy gaps - A VAT compliance gap of 5-6 percent of GDP has remained fairly steady over time. - Sectoral exercise based on value added shows a compliance gap of around 60 percent of potential VAT. - To achieve the regional average tax efficiency, Uganda would need to reduce the compliance gap to around 50 percent of potential VAT. - Reducing the compliance gap to around 50 percent of potential VAT would increase VAT revenues by 2–2 ½ percent of GDP. - The VAT policy gap is estimated at 1 percent of GDP, smaller than the compliance gap. - Policy measures to improve the VAT law are expected to narrow both the policy gap and the compliance gap. ### Key exemptions and their impacts - Exemptions and zero-rates in the VAT Act complicate administration and increase the compliance gap. - Examples scheduled for removal in the FY2014/15 budget: exemptions on hotel accommodation and supply of computers and software. - Exemptions on business-to-business transactions (notably agriculture-related inputs and products) create “missing link” effects that contribute to a large compliance gap in downstream sectors such as food manufacturing and hotels and restaurants. - Discretionary exemptions for selected industries (textiles, steel, chemicals, dairy, palm oil) have a direct impact on the compliance gap; removal requires policy change or contract renegotiation. - Removal of the textile exemption was proposed in the FY2014/15 budget. ### Tax administration, compliance behavior, and diagnostics - Transformation in tax morale is essential to achieve significant reductions in the VAT gap. - Risk factors identified by the Uganda Revenue Authority (URA): tax planning and avoidance by larger companies, diversion of declared exports to the domestic market, smuggling of goods, and widespread failure to register by small taxpayers. - URA reforms have improved taxpayers’ services and relations; priority now is ensuring compliance (that individuals and firms pay taxes owed). - Recommended URA actions: - Expedite audits of large taxpayers. - Intensify marketing campaigns. - Better manage VAT refunds. - Enhance debt collection. - Using tax gap analyses systematically across the URA would: - Provide a unified framework for analysis at all levels. - Allow strategic direction to inform and be informed by operational compliance strategies. - Enable better compliance interventions and more robust performance indicators to monitor reform progress. ### Envisaged revenue package and quantitative yields - Authorities and staff adopted a conservative tax base for projections, reflecting past systematic overestimation of tax revenue. - Revenue effort required: about 0.8 percent of GDP to achieve the expected yield of 0.5 percent of GDP in FY2014/15. - Projected contribution to the 0.5 percent of GDP yield in FY2014/15: - Removal of various VAT exemptions: about 0.4 percent of GDP. - Income tax measures: 0.2 percent of GDP. - Increases in excises: 0.1 percent of GDP. - Tax administration efforts: 0.1 percent of GDP. - Next year’s revenue measures will aim at removing most exemptions that have outlived their usefulness (see Annex I of the MEFP). - Structural benchmarks and measures include: - Reform the VAT code to eliminate most exemptions. - Remove exemptions on interest earned on loans to the agricultural sector (structural benchmark). - Discontinue the exemption on the supply of goods and services for construction (structural benchmark). - Use the trading license regime in at least three municipalities to register, assess, and collect revenue (structural benchmark). ### Action plan for tax administration and implementation - Authorities prepared an action plan to ensure efficiency gains in tax collections and address the large tax compliance gap. - Plan focus areas: - Increased collaboration of the revenue authority with public and private sector agents. - Strengthened capacity of URA data analysis and international taxation units. - The yield of tax administration measures is conservatively estimated in the first year but has potential to increase over time. - The central government has committed to timely payment of taxes to the revenue authority on behalf of exempted taxpayers. - Staff urged renegotiation of tax-break contracts (palm oil, steel, chemicals, dairy) that are hard to cancel before expiration to adapt them to the new fiscal and economic reality. ### Policy recommendations (summarized) - Reform VAT law to remove exemptions and zero-rates that hinder administration and increase leakage. - Remove sectoral and discretionary exemptions where politically and contractually feasible; renegotiate contracts where appropriate. - Strengthen URA enforcement and compliance activities: expedite large taxpayer audits, intensify outreach, improve VAT refund management, and enhance debt collection. - Institutionalize tax gap analyses across URA to guide compliance strategies and performance monitoring. - Adopt conservative tax-base assumptions in revenue projections and ensure realistic yield estimates during the learning phase of new measures. *Source: Box 2. Uganda: Revenue Mobilizing Measures (IMF).* ### 24. With low inflation and comfortable international reserves, Uganda is well placed to ### With low inflation and comfortable international reserves, Uganda is well placed to ### Macro stance and private sector constraints - With low inflation and comfortable international reserves, Uganda is well placed to implement economic policies in support of broad-based growth. - Business plans and access to credit by highly leveraged households and corporations remain constrained by high interest rates and difficulties in the business environment. - The strategy of tightening the fiscal stance and implementing the envisaged infrastructure projects is the right course of action to encourage private sector dynamism, as it should facilitate monetary easing and encourage credit expansion. - Further progress on structural reforms should support confidence—in the context of an uncertain geo-political environment and strained relations with development partners. ### Fiscal sustainability and revenue mobilization - Preserving fiscal sustainability through credible action to strengthen revenue mobilization and streamline spending is critical to achieving the growth objective. - The recent revenue shortfall and unanticipated spending revealed the economy’s vulnerability to fiscal shocks. - Staff welcomes plans to strengthen revenue in FY2014/15 by removing key VAT and income tax exemptions and using excise taxes more efficiently. - These plans are ambitious, and achievement will critically depend on ensuring the needed political backing to bring them to completion, and on carrying out strong enforcement and decisive tax administration efforts. - Given the need to significantly raise the tax-to-GDP while also improving economic efficiency, staff encourages the authorities to develop a strategy to phase out the remaining tax holidays granted to several large industries. - Timely action to adapt the expenditure pace to available revenues—including by resisting spending pressures—will be critical to limiting domestic borrowing to the programmed levels and avoiding further crowding out effects. - The contingency reserve should be part of the budget and limit the need for undue supplementary budgets. ### Monetary policy and financial supervision - Staff encourages the BoU to maintain a monetary policy stance that keeps inflation within the band of the inflation consultation clause. - Continuous refinements in the inflation targeting framework are likely to improve inflation forecasting and better guide the direction of monetary policy. - Further monetary easing should be possible as soon as the fiscal tightening kicks in, but the BoU needs to be vigilant of evolving developments, notably weather and geo-political induced shocks and changing external flows, and adapt policies accordingly. - Credibility of the BoU will be closely related to its success in keeping low and stable inflation and the efficacy of its signaling mechanisms, including on the rationale for intervention in the foreign exchange market. - Financial supervision needs to continuously improve and focus on those institutions where the asset quality deterioration is most evident. ### Governance, public financial management, and arrears - Supported by the upcoming PFMB, stronger accounting systems, and a revamped strategy to monitor and reduce arrears, governance is set to improve. - Staff encourages the authorities to make full use of the upgraded payments and payroll systems and complete the establishment of the TSA to enhance fiduciary controls. - The new PFMB will be a key component of this strategy as it will provide legal backing to sound management of revenues and improvements in the budget process. - The use of a new methodology to manage arrears and unpaid bills—now fully incorporated in the PSI—should facilitate a gradual but steady reduction of the existing stock, and regular publication should improve accountability. - Issuance of national identity cards to all citizens will be another important mechanism to boost transparency of economic transactions. ### Medium-term prospects and resource management - Over the medium-term the economy is set to benefit from the planned infrastructure investment, oil production and regional integration. - Efficient institutions and sound resource management are crucial in achieving success in these areas. - Implementation of the hydropower projects should remain timely, consistent with fiscal and debt sustainability, and subject to transparent management and appropriate cost recovery. - Ensuring full integration of future revenues into the medium-term budget framework, and taking early action to address fiscal risks in support of regional integration are key ingredients for the achievement of medium-term broad-based growth. *Source: _cr14195 - 24. With low inflation and comfortable international reserves, Uganda is well placed to* ### 29. Staff recommends completion of the second review of the PSI. The attached LOI and ### _cr14195 - 29. Staff recommends completion of the second review of the PSI. The attached LOI and ### Staff recommendation and program actions - Staff recommends completion of the second review of the PSI. - The attached LOI and MEFP outline policies for the next fiscal year (notably to redirect fiscal policy to support program objectives); and propose rescheduling of some structural benchmarks to take account of ongoing progress. - Staff supports a waiver for the non-observance of the government net domestic financing target for end-December 2013 on the basis that the deviation was minor and corrective action has been taken. - The authorities propose a new indicative target beginning end-June 2014 to limit the use of the government’s petroleum and energy funds on key infrastructure projects (currently confined to HPPs) to the programmed levels and avoid any undue monetary impact. - The authorities propose modifications to the end-June 2014 QACs on net domestic financing and net international reserves, which staff supports. ### Technical Memorandum of Understanding (TMU) adjustments (footnote) - The revised TMU redefines and measures arrears in line with the new understandings. - The revised TMU modifies the adjustors on government net domestic financing and NIR to provide flexibility (within 15 percent above projected levels) to the anticipated co-financing of HPPs. - The revised TMU eliminates an adjustor on external debt service that is no longer useful. - The revised TMU redefines the adjustor on budget support loans and grants to exclude HIPC grants. ### Recent economic and policy context (summary from figures) - Economic growth is recovering, led by industry and services. - Inflation is low and stable despite volatile food prices. - Private sector credit growth remains subdued. - There is room for improvement in the business environment. - Robust investment flows are financing the current account deficit. - International reserves maintain adequate coverage. ### Selected fiscal, monetary, and external indicators (as presented) - Real GDP: 6.6 3.4 5.8 6.2 5.7 6.5 6.1 6.4 6.6 6.8 7.0 - GDP Deflator: 5.0 24.1 4.1 4.7 7.8 7.3 6.9 7.2 5.0 4.4 4.4 4.4 - CPI (end of period): 15.7 18.0 3.6 7.6 6.0 6.3 6.4 5.2 5.1 5.0 - CPI (average): 6.5 23.5 5.8 7.9 6.9 6.9 6.9 5.4 5.2 5.0 - Core inflation (average): 6.3 24.6 6.6 6.9 5.4 5.7 5.7 5.3 5.2 5.0 - Broad money (M3): 25.7 7.2 6.6 11.3 13.4 16.3 16.3 14.3 14.0 14.0 14.4 - Private sector credit: 43.6 11.5 6.4 15.4 10.6 14.4 14.7 14.3 14.6 13.3 13.0 - Bank of Uganda's policy rate: ...20.0 11.0 ..................... - Revenue (percent of GDP): 16.2 13.2 13.2 13.7 13.1 14.3 13.6 14.2 14.7 15.2 15.7 - Grants (percent of GDP): 2.3 2.3 1.7 1.4 1.4 1.5 1.7 1.1 1.0 0.9 0.8 - Total expenditure and net lending (percent of GDP): 22.8 18.5 18.9 22.2 19.5 21.0 22.6 20.7 21.2 20.9 20.5 - Overall balance (including grants, percent of GDP): -4.3 -3.0 -4.1 -7.1 -5.0 -5.1 -7.2 -5.4 -5.5 -4.7 -4.1 - Overall balance (excluding one-off spending, percent of GDP): -6.1 -3.9 -3.4 -3.6 -4.8 -3.0 -3.7 -2.8 -2.4 -2.2 -2.0 - Net Domestic Financing (percent of GDP): 3.4 0.0 1.2 2.9 2.6 1.3 3.6 1.8 2.1 1.4 0.7 - Public external debt (including IMF, percent of GDP): 17.3 16.2 17.5 20.2 17.5 22.6 20.5 23.6 25.3 26.9 27.9 - Gross foreign exchange reserves (US$ millions): 2,044 2,644 2,912 2,772 3,092 3,102 2,984 3,284 3,534 3,884 4,261 - Months of next year's imports (reserves): 3.2 4.2 4.6 3.5 4.2 3.6 4.0 4.1 4.3 4.2 4.2 - Current account balance (including grants, percent of GDP): -11.8 -13.3 -8.8 -13.4 -9.7 -12.4 -11.2 -9.6 -10.1 -8.9 -9.8 - Exports, f.o.b. (US$ millions): 2,298 2,660 2,955 3,132 2,758 3,330 3,099 3,330 3,558 3,814 4,312 - Imports, f.o.b. (US$ millions): -4,680 -5,264 -5,041 -5,897 -5,126 -6,163 -5,841 -5,923 -6,259 -6,358 -6,877 ### Fiscal sequencing and financing notes (selected) - Authorities propose containing the fiscal expansion through higher revenue mobilization and streamlining current spending to provide space for increased infrastructure spending and align public investment to regional standards while containing domestic borrowing requirements. - Government financing profile (percent of GDP) highlights domestic financing (net) and external financing contributions to meet deficits; note that domestic financing excludes withdrawal of petroleum funds and energy funds and issuance of government securities for the recapitalization of Bank of Uganda. *Source: Ugandan authorities and IMF staff estimates and projections, as presented in the provided content.* ### Annex 1. Fiscal Risks to Successful EAC Integration ### _cr14195 - Annex 1. Fiscal Risks to Successful EAC Integration ### Overview - EAC partner countries are expected to meet convergence criteria on the fiscal stance and the debt position to ensure successful economic harmonization and stability of the envisaged monetary union. - Staff envisages short-term and medium-term risks to achieving a deficit target of 3 percent of GDP in the steady state and a floor of 25 percent in the tax-to-GDP ratio. - Monitoring and managing these risks is especially important as Uganda moves toward the EAC monetary union. ### Short- and medium-term fiscal risks (summary) - Some risks may be transitory and correctable by short-term policies; others are structural and require politically-backed substantial action. - The annex highlights risks that can increase deficits, worsen debt dynamics, or create contingent liabilities tied to large infrastructure and PPP projects. ### Growth impact of shocks - Growth in nominal GDP has experienced substantial fluctuations, affecting the tax base and tax revenue. - For the current fiscal year, a slowdown in growth and potential overestimation of the tax base are putting downward pressure on tax revenues, resulting in higher deficits and worsening debt dynamics. - Policy response: Beginning with the FY2014/15 budget, the authorities will include a contingency reserve to mitigate shocks and enable countercyclical policy. ### Low revenue collection - Revenue as a share of GDP in Uganda is low relative to peers with similar income and structure. - Authorities aimed to raise tax revenue by ½ percent of GDP a year in the next three years through policy refinements and administration improvements; recent developments suggest this target will not be met. - Steps taken: elimination of a significant number of exemptions expected in FY2014/15, though many company-specific exemptions remain; further strengthening of tax administration is needed. ### Insufficient budget credibility - Budgets are generally not credible due to underestimation of expenditures at budgeting, leading to large spending overruns via supplementary budgets and reallocations. - This fiscal year, spending pressures related to upcoming elections led to requests for relatively large supplementary budgets. - Policy response: Approval and implementation of the PFM Bill is expected to enhance budget credibility, build contingency balances, improve cash management, and prepare for efficient oil revenue management. ### Weak implementation capacity of capital expenditure - Large infrastructure needs (notably hydropower) are commercially viable, consistent with debt sustainability, and necessary to close the electricity deficit. - Delays in procurement and project starts (hydropower projects postponed) risk cost increases and weakening of institutional arrangements to limit fiscal liabilities. - Recommendation: Adhere to implementation calendars, strengthen institutional arrangements, and ensure efficiency and transparency in project management. ### Arrears accumulation - Government incurred arrears on contracts with the private sector, wages, other current spending, and payments to URA on behalf of exempted taxpayers. - A pre-payment system for utilities should help reduce arrears in those categories. - Commitment: Government has embarked on a credible plan to reduce arrears by at least 0.1 percent of GDP per year. ### Challenges with external financing - Relationship with development partners was challenged by corruption scandals and by legislation increasing penalties for homosexuality. - Grants decreased from 8.5 percent of GDP in FY2003/04 to 1.7 percent in FY2012/13, reducing dependence on foreign assistance but increasing disbursement uncertainty. - Risk: Further reductions in aid could force increases in government expenditures to close funding gaps or lead to program cuts. - Recommendation: Explore different financing modalities to reduce volatility and complement interest in reducing aid with credible action to strengthen domestic revenue mobilization. ### Spending by sub-national governments - A significant portion of general government expenditures occurs at the local government level, but not all is accounted for because fiscal actions of local governments are not always authorized by the Ministry of Finance. - Risk: Unidentified fiscal risks at the local level on both spending and revenue sides. - Recommendation: Move to public sector consolidated accounts and intensify screening of local government fiscal risks in the interim. ### Contingent liabilities - Explicit or implicit guarantees to public enterprises could arise from upcoming infrastructure projects (hydropower dams, road construction, envisaged PPP contracts). - Example: For hydropower dams, the central government will assume the debt and be responsible for paying it, while electricity companies manage the projects. - Recommendation: Ensure efficiency in operations and transparency in accounts to assess and monitor these fiscal risks. ### Fiscal and macroeconomic performance and policy measures (MEFP highlights) - Growth and inflation: - Growth expected at 5¾ percent in FY2013/14 (somewhat lower than program) and 6¼ percent in FY2014/15. - Core inflation expected broadly stable at 5¾ percent in FY2014/15. - External sector: - Current account balance expected to widen from 9¾ percent of GDP in FY2013/14 to 11¼ percent of GDP in FY2014/15. - International reserve coverage: 4.2 months of imports (current) and projected to keep reserves at 4 months of imports. - Fiscal slippage and corrective measures: - Overall deficit (excluding Karuma and Isimba) expected to widen by about 1.2 percent of GDP this fiscal year compared to the program. - Unplanned increase in issuance of government securities in the domestic market now expected to exceed by about Shs680 billion the level envisaged in the program. - Rather than issue debt beyond planned levels, authorities reduced planned savings at the Bank of Uganda by Shs90 billion. - Identified unused balances of Shs100 billion and enhanced revenue mobilization of Shs20 billion to help contain the fiscal deficit in FY2013/14. - Karuma and Isimba hydropower projects: - Initial delays due to negotiations; compensation payments to landowners commenced in the last quarter of FY2013/14; objective to complete projects by FY2018/19. - Project spending expected to proceed at a fast pace once underway. - Bank of Uganda recapitalization (per Memorandum of Understanding): - Payment of Shs410 billion in May 2013 (completed). - Further payments expected: Shs250 billion for FY2014/15, Shs200 billion for FY2015/16, and Shs350 billion for FY2016/17. - FY2014/15 fiscal strategy: - Intend to significantly reduce the FY2014/15 deficit—excluding Karuma and Isimba spending and BOU recapitalization—by strengthening tax administration, proposing tax measures to Parliament, and establishing a contingency reserve. - The budget presented to Parliament on June 12 contains a package of measures yielding Shs551 billion to increase tax collections by Shs1.5 trillion (an increase in the tax-to-GDP ratio of 0.5 percentage points). - The budget will contain an expenditure envelope Shs842 billion larger than in FY2013/14, resulting in a decline of the spending-to-GDP ratio, net of the large hydroelectric projects and recapitalization of BOU, of 0.6 percent of GDP. *Source: _cr14195 - Annex 1. Fiscal Risks to Successful EAC Integration* ### 15. The program is designed on the assumption that financing of the deficit will restrict ### _cr14195 - 15. The program is designed on the assumption that financing of the deficit will restrict ### Fiscal financing and use of petroleum and energy funds - Withdrawals from the Energy and Petroleum Funds restricted solely to co-financing Karuma and Isimba projects with China Eximbank (Government’s share amounting to US$424 million) in FY2014/15. - Commitment to maintain the principle of restricting withdrawals for macroeconomic stability, liquidity management, and preserving debt sustainability. - In the medium term, remaining petroleum fund resources will be allocated only to key infrastructure projects, taking into consideration macroeconomic stability and debt sustainability. ### Revenue measures (policy package) - A comprehensive package of measures (Annex I) will: - Eliminate a large number of VAT exemptions, including exemptions on supply of new computers, desktop printers, computer parts and accessories, and on bank charges. - Remove several items from the zero-rated VAT list, including processed milk and milk products. - Charge corporate income taxes on several activities, including initial allowances on eligible property, interest earned by banks on loans to the agricultural sector, and educational institutions. - Increase excise duties on fuel, sugar and money transfers. - Specific deletions and changes highlighted: - Removal of exemptions on supply of specialized vehicles, plant and machinery, feasibility studies, engineering designs, consultancy services and civil works related to hydro-electric power, roads and bridges (structural benchmark). - Eliminate existing tax exemption on interest on loans granted for the purpose of agriculture including farming, forestry, fish farming, bee keeping, animal husbandry or similar operations (structural benchmark). - Request to remove from the PSI the structural benchmark to eliminate the tax exemption on income derived from agro-processing (exemption to be retained). ### Tax administration, VAT gap analysis, and compliance targets - VAT gap analysis completed with IMF technical assistance to quantify revenues foregone due to policy and compliance reasons; findings published by Uganda Revenue Authority and Ministry of Finance. - Action plan developed to improve tax administration and compliance, including: - Collaborate with public agencies and private sector to enhance income tax management (including rental income and international taxation) and conduct several customs initiatives. - Tax administration agency will register, assess, and collect revenues in collaboration with local governments in at least 3 municipalities (structural benchmark). - Tax administration agency will conduct 6 document reviews and conclude 2 international tax audits by December 2014. - Conduct another 6 document reviews and 2 international tax audits by June 2015. ### Spending priorities, ceilings, and fiscal tools - Pace of spending in FY2014/15 expected to be significantly slower than in previous years to lower domestic borrowing requirements while preserving space for infrastructure investment. - Other investments and current spending, aside from wages and interest payments, will grow by 2.8% compared to 8.7% for total spending. - Salary payments to teachers and other lowest paid public servants will be increased to compensate for past inflation. - Salary increases and interest payments on debt identified as the two largest components in the increase in spending. - Contingency reserve included in FY2014/15 budget to improve budget credibility, to be used in order of importance: 1) Compensating for revenue shortfalls that could not be accommodated with spending cuts (revenue projections reviewed before start of every quarter). 2) Overruns in fixed costs (salaries, pension obligations, utility bills) that if not executed would lead to arrears (also reviewed at start of each quarter). 3) Unexpected but critically necessary expenses not accommodated through reallocations. - Release of contingency funds requires clear justification and approval by the Minister of Finance. - No vote will use more than 10% of the contingency reserve without approval by Parliament. - Unspent balances in the contingency reserve will result in lower amounts of domestic debt issuance and repayment of arrears. - Implementation of a contingency reserve intended to eliminate the use of supplementary budgets. ### Arrears management, reporting, and limits on domestic debt - Provision of Shs80 billion made in the FY2014/15 budget for arrears; strategy to eliminate arrears to be published by end of June 2014. - Government will publish the stock of unpaid bills by all government entities on a quarterly basis within 6 weeks of the end of the quarter. - Publish the stock of domestic arrears of all government entities at end-June 2014 by September 30, 2014 (structural benchmarks). - Issuance of domestic debt in the market capped at Shs1.4 trillion which includes a contingency reserve of Shs200 billion. - Deposits in the BoU will increase by Shs138 billion. - Any issuance of debt above Shs1.4 billion or accumulation of deposits lower than Shs138 billion would be inconsistent with the PSI program because it will lead to nonobservance of the government net domestic financing ceiling. ### Monetary and financial policy - Monetary policy centered on achieving the 5 percent medium-term inflation target using the central bank rate to signal stance. - Bank of Uganda (BoU) will stand ready to adapt policies to changing domestic and external developments. - BoU will adapt announced daily purchases of foreign exchange to evolving conditions to maintain international reserves at adequate levels and is committed to fully sterilize these purchases; interventions to remain limited to contain excessive exchange rate volatility. - BoU to monitor financial sector developments to ensure banks are well capitalized, adequately provision for nonperforming loans, use strong risk management, and are encouraged to restructure viable loans. - A well capitalized and liquid financial sector seen as supportive of expected credit recovery and growth. ### Structural reforms and institutional initiatives - PFM reforms completed: first phase of the TSA for IFMS related transactions introduced; all central government entities included in Integrated Personnel and Payroll System (IPPS); payroll controls improved and cleaned. - Second phase to include donor accounts and eliminate movements of cash by giving votes appropriate spending authority within cash limits consistent with the macro-framework (structural benchmark). - Salaries for two local governments already processed on IPPS; medium-term objective to roll out IPPS and IFMS to all local governments and government agencies. - Public Financial Management Bill under parliamentary consideration; regulations to operationalize the act (including charter of fiscal responsibility and oil revenue management) to commence after enactment; completion of regulations scheduled for May 2015 (structural benchmark). - National ID issuance initiated: registration started April 2014 with target to register 18 million citizens; production/personalization centre fully set up. - Issue 1 million identity cards by December 2014. - Issue 3 million by July 2015 (structural benchmark). - Issue 18 million by June 2016. - Public Private Partnership (PPP) bill before Parliament to establish legal framework for PPPs; annual budget documents to include status report of ongoing PPP programs, including each project’s contingent liability. - Amendments to the Bank of Uganda Act to be finalized and submitted to Parliament by April 2015 (structural benchmark); amendments delayed from original May, 2014 timetable. - Amendments will include provisions for raising BoU’s capital to an adequate share of its monetary liabilities. - BoU to contain its non-monetary policy related costs as detailed in its business plan (structural benchmark). - BoU to continue improving monetary policy formulation, staff training, economic modeling and forecasting to meet inflation-targeting requirements. - Regional integration milestone: signed joint protocol for EAC monetary union on November 30, 2013; protocol envisages introduction of common currency in 2024. ### Risks to the program - Exposure to external risks due to fully open economy and developments in neighboring countries and advanced economies affecting trade, FDI, and portfolio inflows. - Vulnerability to domestic shocks evidenced by FY2011/12 macroeconomic unraveling and FY2013/14 fiscal slippage. - Recognized program risks: unpredictable weather conditions and implementation capacity constraints. ### Program monitoring and reviews - Implementation monitored through quantitative assessment criteria (QACs), indicative targets (ITs), and structural benchmarks (SBs) detailed in attached Tables 1 and 2B and through semi-annual reviews. - Two QACs (net domestic financing and net international reserves) proposed to be modified for end-June 2014 and a QAC proposed to be established for end-December 2014 to be monitored at third and fourth reviews. - Indicative targets proposed for September 2014 and March and June 2015. - Third review expected to be completed by end-December 2014 and fourth review by end-June 2015. - Technical Memorandum of Understanding contains definitions and adjustors. ### Annex I — Tax measures to be adopted in FY2014/15 (high-level enumerated items and key numeric values preserved) - Excise Duties - Impose excise duty of Shs200 per liter on kerosene. - Increase excise duty on petrol by Shs50 per liter. - Increase excise duty on diesel by Shs50 per liter. - Reinstate excise duty on sugar to Shs50 per kilo from the current Shs25 per kilo. - Impose excise duty on mobile money withdrawal fees at 10%. - Increase excise duty on soft cup and other soft cup cigarettes to Shs40,000 per 1000 sticks. - Value Added Tax — Removal of exempt goods and services (examples) - Remove exemption on supply of new computers, desktop printers, computer parts and accessories. - Remove exemption on supply of computer software and software licenses. - Remove exemption on supply of accommodation in tourist lodges and hotels outside Kampala District. - Remove exemption on supply of liquefied petroleum gas. - Remove exemption on supply of salt. - Remove exemption on supply of property and casualty insurance services (keep exemption for life insurance). - Add VAT tax on bank charges. - Remove exemption on supply of specialized vehicles, plant and machinery, feasibility studies, engineering designs, consultancy services and civil works related to hydroelectric power, roads and bridges construction, public water works, agriculture, education and health sectors. - Value Added Tax — End zero-rating of goods and services - End zero rate on supply of printing services for education materials. - End zero rate on supply of seeds, fertilizers, pesticides and hoes. - End zero rate on supply of cereals, where the cereals are grown, milled or produced in Uganda. - End zero rate on supply of processed milk and milk products. - Income tax measures - Eliminate initial allowances on eligible property. - Eliminate the exemption of income tax of educational institutions. - Separate rental income from business income for non individuals. - Impose income tax on gamblers and designate gambling houses to withhold tax (15%). - Increase the presumptive tax. - Eliminate the exemption from tax of interest earned on loans granted for the purpose of agriculture including farming, forestry, fish farming, bee keeping, animal husbandry or similar operations. - Add capital gains tax on the disposal of commercial buildings by individuals. - Amend the thin capitalization rule to limit excessive use of related party-debt. - Government taxes - Pay government taxes related to industry and company-specific exemptions in the amount of UGX 70 billion. - EAC Common External Tariff adjustments - Increase duty on aerosols made from non-pyrethrum based insecticides to 25%. - Increase duty on towers and lattice masts to 10%. - Increase duty on welding electrodes to 25%. - Increase duty on used clothing to 15%. - Removal of industry-specific exemptions - The textile sector exemption that expires on June 30 2014 shall not be renewed. ### Annex II — Memorandum of Understanding on Arrears (key definitions, reporting timetables, targets) - Definitions - Unpaid Bill: any verified outstanding payment owed by a Government entity for utilities, rent, employee costs, other recurrent, court awards, compensation, contributions to international organizations, development, taxes and other deductions. - Arrear: total stock of unpaid bills as of June 30 of the fiscal year as reported in the consolidated financial statements of the Government of Uganda. - Government entity: all entities listed in Annex A and any other entity that forms part of the central government votes. - Verification and reporting responsibilities - Accounting officers report stock of unpaid bills and arrears; Accountant General produces a report signed and certified by the Accountant General and the PS/ST. - Quarterly reports for quarters ending September 30, December 31, March 31 to be provided within 4 weeks of quarter end and published within 6 weeks of quarter end; report shall contain unpaid bill and repayment categories as shown in Annex B. - Annual report on domestic arrears as at June 30 to be provided and published by September 30 of the same year; report consistent with consolidated financial statements and verified by the Auditor General when released. - Measurement of indicative target - Indicative target: reduction in stock of domestic arrears by UGX 80 billion in each of the next two fiscal years (FY2014/15 and FY2015/16). - “Taxes (VAT and PAYE)” excluded from stock of domestic arrears for evaluating the indicative target on arrears. - For quarters other than quarter ending June 30, stock of unpaid bills used to evaluate the indicative target. - Institutional roles (selected) - Accounting Officers: enter commitments and invoices into IFMS; submit quarterly and annual reports on unpaid bills to Internal Audit Department. - Internal Audit Department: verifies unpaid bills and domestic arrears quarterly; reports positions to PS/ST via Accountant General; drafts Cabinet memos quarterly. - Accountant General: consolidates and publishes quarterly reports; provides quarterly reports to Auditor General. - Director of Budget: ensures fixed costs budgeted as first call on resources; ensures unpaid bills are paid as first call on cash releases of next quarter. - Director of Economic Affairs: formulates an arrears strategy as part of Public Debt Strategy. - Permanent Secretary: approves reports and ensures roles executed. - Assessment of Structural Benchmark (publication dates) - Ministry of Finance to publish quarterly reports signed by the PS/ST on the stock of unpaid bills of all government entities for the previous quarter: - November 15, 2014 for the quarter ending September 30, 2014. - February 15, 2015 for the quarter ending December 31, 2014. - May 15, 2015 for the quarter ending March 31, 2015. - Ministry of Finance to publish a report signed by the PS/ST on the stock of domestic arrears of all government entities: - September 31, 2014 for the quarter ending June 30, 2014. *Source: IMF staff report excerpt in _cr14195 - 15. The program is designed on the assumption that financing of the deficit will restrict* ### Annex A. Government Entities to be Included in Stock of Unpaid Bills ### Annex A. Government Entities to be Included in Stock of Unpaid Bills and Arrears ### Government entities (by listed order and codes) - 1 Office of the President Internal Security Organization Minister of Security Senior Presidential Advisor/Co-ordination of Intelligence Service - 2 State House - 3 Office of the Prime Minister - 4 Ministry of Defense - 5 Ministry of Public Service - 6 Ministry of Foreign Affairs - 7 Ministry of Justice and Constitutional Affairs - 8 Ministry of Finance, Planning and Economic Development - 9 Ministry of Internal Affairs - 10 Ministry of Agriculture Animal Industry and Fisheries - 11 Ministry of Local Government - 12 Ministry of Lands, Housing and Urban Development - 13 Ministry of Education and Sports - 14 Ministry of Health - 15 Ministry of Trade Industry and Co-operatives - 16 Ministry of Works and Transport - 17 Ministry of Energy and Mineral Development - 18 Ministry of Gender, Labor and Social Development - 19 Ministry of Water and Environment - 20 Ministry of Information and Communication Technology - 21 Ministry of East African Community Affairs - 22 Ministry of Tourism, Wildlife and Heritage - 101 Judiciary - 104 Parliamentary Commission - 105 Uganda Law Reform Commission - 107 Uganda AIDS Commission Secretariat - 108 National Planning Authority - 112 Directorate of Ethics and Integrity - 113 Uganda National Roads Authority (UNRA) - 115 Uganda Heart Institute - 120 National Citizenship and Immigration Control - 122 Kampala Capital City Authority - 133 Directorate of Public Prosecutions - 132 Education Service Commission - 134 Health Service Commission - 142 National Agricultural Research Organization (NARO) - 144 Uganda Police Force - 145 Uganda Prisons - 146 Public Service Commission - 147 Local Government Finance Commission - 148 Judicial Service Commission - 149 Gulu University - 151 Uganda Blood Transfusion Service - 152 National Agriculture Advisory Services (NAADS) Secretariat - 155 Cotton Development Organization - 156 Uganda Land Commission - 159 External Security Organization - 161 Mulago Hospital Complex - 162 Butabika Hospital - 137 Mbarara University - 163 Arua Regional Referral Hospital - 165 Gulu Regional Referral Hospital - 170 Mbale Regional Referral Hospital - 167 Jinja Referral Hospital - 169 Masaka Regional Referral Hospital - 164 Fort Portal Regional Referral Hospital - 168 Kabale Regional Referral Hospital - 166 Hoima Regional Referral Hospital - 171 Soroti Regional Referral Hospital - 172 Lira Regional Referral Hospital - 173 Mbarara Regional Referral Hospital - 202 Uganda High Commission in London, United Kingdom - 208 Uganda High Commission in Abuja Nigeria - 211 Ugandan Embassy in Addis Ababa Ethiopia - 212 Uganda Embassy in Guangzhou China - 219 Uganda Embassy in Brussels, Belgium - 220 Uganda Embassy in Rome, Italy - 227 Uganda Embassy in Moscow Russia - 699 Makerere University Business School - 682 Makerere University - 703 Kyambogo University - Uganda Broadcasting Corporation ### Notes on presentation in the source - The list appears as a consolidated annex enumerating central government votes and related entities to be included in the stock of unpaid bills and arrears. - Codes range from single- and double-digit ministries (1–22) to three-digit agencies, commissions, universities, hospitals, and overseas missions (101–703, 682, 699). - Several health and regional referral hospitals are individually listed (e.g., Mulago Hospital Complex 161; Arua Regional Referral Hospital 163; Mbarara Regional Referral Hospital 173). *Source: _cr14195 - Annex A. Government Entities to be Included in Stock of Unpaid Bills* ### 5. Definition. The cumulative increase in net domestic financing of the central government ### 5. Definition. The cumulative increase in net domestic financing of the central government (NDF) ### Definition and scope of NDF - The cumulative increase in net domestic financing of the central government (NDF) is defined from below the line on a cash basis as the sum of: - a. the change in net claims on the central government by the banking system: - Net claims on the central government by the banking system is defined as the difference between the outstanding amount of bank credits to the central government and the central government's deposits with deposit corporations, excluding deposits in administered accounts and project accounts with the banking system, including the central bank. - Credits comprise bank loans and advances to the government and holdings of government securities and promissory notes. - NDF by deposit corporations will be calculated based on data from balance sheets of the monetary authority and deposit corporations as per the deposit corporations’ survey. - b. the change in net claims on the central government of domestic nonbank institutions and households: - Net claims on the general government of domestic nonbank institutions and households are defined as treasury bills, bonds or other government securities held by nonbank institutions and households (including nonresidents and nonresident financial institutions), plus any other liabilities of the central government to domestic nonbank institutions or households. - All changes will be calculated as the difference between end-of-period stocks, net of any valuation changes resulting from currency movements. - Footnote: The central government comprises the treasury and line ministries. ### Net International Reserves (NIR) of the Bank of Uganda (QAC) - NIR definition for program-monitoring purposes: - Reserve assets of the BoU net of short-term external liabilities of the BoU. - Reserve assets are external assets readily available to, and controlled by, the BoU and exclude pledged or otherwise encumbered external assets, including, but not limited to, assets used as collateral or guarantees for third-party liabilities. - Short-term external liabilities are liabilities to nonresidents, of original maturities less than one year, contracted by the BoU and include outstanding IMF purchases and loans. - Calculation and timing: - Reserve assets and short-term liabilities at the end of each test period will be calculated in U.S. dollars by converting the stock from their original currency denomination at program exchange rates (as specified in paragraph 1). - The NIR limit for June 2014 will be a floor on the change of the NIR stock from June 2013 to June 2014. - The NIR limits for September 2014, December 2014, March 2015 and June 2015 will be floors on the change of the NIR stock from June 2014 to September 2014, December 2014, March 2015 and June 2015, respectively. - The NIR limits for June and December 2014 will be quantitative assessment criteria under the PSI-supported program; the floor for September 2014, March and June 2015 will be indicative targets. ### Indicative target: Expenditures on poverty-alleviating sectors (IT) - The indicative target on poverty alleviating expenditures: - Includes domestic expenditures inclusive of wages and salaries in the Health, Education, Water and Environment and Agriculture sectors, as defined by the Government of Uganda’s functional budget classification, excluding those which are externally financed. - Compliance will be verified on the basis of releases. ### Indicative target: Ceiling on issuance of guarantees by the Government or Bank of Uganda (IT) - Aim: prevent accumulation of contingent liabilities by the Government (including Government entities such as ministries, agencies and authorities). - Coverage: - Included are any direct, contingent liabilities of Government issued after June 28, 2013, and including any guarantees issued prior to this date but which are extended after June 28, 2013. - Excludes guarantee programs which have explicit budget appropriations. ### QAC: Share of Oil Revenue Placed in Petroleum Fund - Purpose: avoid petroleum revenues bypassing the Ugandan budget framework. - A petroleum fund will be created upon passage of the revised PFMB; in the meantime, government has established a petroleum revenue account in 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). ### Indicative target: Tax revenue (IT) - 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 and unallocated receipts), - excise duty and value-added taxes net of refunds and taxes on international trade minus temporary road licenses, - and fees to hides and skins, as defined by the Government of Uganda’s revenue classification. ### Indicative target: Net accumulation of domestic arrears of the Government (IT) - A ceiling applies to net accumulation of domestic arrears of the central government as an indicative target. - Timing: - The ceiling for each test date until June 30th 2014 is measured cumulatively from July 1, 2013 and the ceiling for each test date until June 30th 2015 is measured cumulatively from July 1, 2014. - Definition of unpaid bill: - Any verified outstanding payment owed by any entity that forms part of the central government votes for the following: utilities, rent, employee costs, other recurrent, court awards, compensation, contributions to international organizations, development, taxes and other deductions. - Domestic arrears: - The total stock of unpaid bills as of June 30 of the fiscal year as reported in the consolidated financial statements of the Government of Uganda. - Measurement: - For quarters other than the one ending June 30, the net change in the stock of unpaid bills will be used as the indicative target. - For the quarter ending in June 30, the change in the total stock of unpaid bills as reported in the consolidated financial statements of the Government of Uganda will be used as the indicative target. ### Indicative target: Withdrawals from the GoU deposits from the Petroleum and Energy Funds (IT) - Aim: channel resources to key infrastructure projects while ensuring coordination on accompanying impact on liquidity. - A ceiling applies on withdrawals from the GoU deposits from the Petroleum Fund and the Energy Fund measured cumulatively from the beginning of the fiscal year. - Withdrawals will be restricted to meet the following uses: - (i) spending on Karuma and Isimba hydro-power projects and the associated industrial substations, specifically related to the loan agreement between the Government of Uganda and China Eximbank (the Government of Uganda share adds up to US$424 million covering 15 percent of total costs of projects, loan insurance, and management fees); - (ii) spending on land acquisition for Karuma and Isimba HPPs (Ush120 billion). ### Adjusters - NIR 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 NIR target is based on program assumptions regarding automatic access by commercial banks to the BoU’s rediscount and discount window facilities. - Budget support adjustor: - The Uganda shilling equivalent of projected budget support (grants and loans) excluding HIPC Initiative and MDRI assistance in the form of grants on a cumulative basis from July 1 of the relevant fiscal year is presented under Schedule A. - The ceilings on the cumulative increase in NDF will be adjusted downward (upward), and the floor on the cumulative increase in NIR of the BoU will be adjusted upward (downward) by the amount by which budget support, grants and loans, excluding HIPC Initiative and MDRI assistance, exceeds (falls short of) the projected amounts. - Hydropower spending adjustor: - The ceilings on the cumulative increase in NDF and the cumulative withdrawals from the GoU deposits from the Petroleum Fund and the Energy Fund will be adjusted for: - (i) spending on Karuma and Isimba hydro-power projects and the associated industrial substations, specifically related to the loan agreement between the Government of Uganda and China Eximbank (the Government of Uganda share adds up to US$424 million covering 15 percent of total costs of projects, loan insurance, and management fees); - (ii) spending on land acquisition for Karuma and Isimba HPPs (Ush120 billion). - Adjustments: - The ceilings on the cumulative increase in NDF and the cumulative withdrawals from the GoU deposits from the Petroleum Fund and the Energy Fund will be adjusted downward by the amount by which the domestic currency equivalent of the aforementioned spending (i) and (ii) financed by withdrawals from the Petroleum Fund and the Energy Fund (using the market exchange rate) falls short of the projected amounts as set out in Schedule B. - The ceilings on the cumulative increase in NDF and the cumulative withdrawals from the GoU deposits from the Petroleum Fund and the Energy Fund will be adjusted upward by the amount by which the domestic currency equivalent of the spending to meet higher-than-expected Government of Uganda share associated with the aforementioned China Eximbank loan and financed by withdrawals from the Petroleum Fund and the Energy Fund (using the market exchange rate) exceeds the projected amounts as set out in Schedule B up to a cap of the domestic currency equivalent of US$64 million. - Spending on these projects financed by external borrowing are not included in this adjustor. ### Schedule A: Budget Support (Ush billions) - Cumulative from July 1 of respective fiscal year: - Jun-14Sept-14Dec-14Mar-15Jun-15 - 21867147219257 (Note: value preserved exactly as presented in source.) ### Schedule B: Expenditures on hydropower projects (Ush billions) - Cumulative from July 1 of respective fiscal year: - Land acquisition for Karuma and Isimba HPPs - 120000 0 - Government share associated with the China Eximbank loan - 01,1021,1021,102 1,102 (Note: values preserved exactly as presented in source.) ### Petroleum fund inflows adjustor - The ceiling on the cumulative increase in NDF will be adjusted upward (downward) by the amount by which inflows into the petroleum fund falls short of (exceeds) the projected amounts as set out in Schedule C. ### Schedule C: Inflows into Petroleum Fund (Ush billions) - Cumulative from November 1, 2013: - Jun-14Sept-14Dec-14Mar-15 Jun-15 - 0000 0 (Note: values preserved exactly as presented in source.) ### NIR adjuster for withdrawals in foreign currency (Schedule D) - The floor on the increase in NIR will be adjusted upward (downward) by the amount by which withdrawals from the Ush denominated deposits of the GoU in the Energy Fund and the Petroleum Fund (using the market exchange rate) to cofinance spending on Karuma and Isimba hydropower projects and the associated industrial substations, specifically related to the loan agreement between the Government of Uganda and China Eximbank (the Government of Uganda share covers 15 percent of total costs of projects, loan insurance, and management fees) and required to be contributed in US$ according to the loan agreement, falls short of (exceeds) the projected amounts as set out in Schedule D. - The GoU will first withdraw the foreign currency denominated portion of its deposits in the BoU, including any new foreign currency inflows to the Petroleum Fund and the Energy Fund compared to the projected amounts as set out in Schedule D. - The downward adjustment to the change in NIR will be capped at US$64 million earmarked only to meet higher-than-expected Government of Uganda share that will be required to be contributed in US$ according to the loan agreement between the GoU and the China Eximbank financing these three projects. ### Schedule D: Withdrawals from the Energy and Petroleum Funds to Finance HPP (US$ millions) - Cumulative from November 1, 2013: - Jun-14Sept-14Dec-14Mar-15 Jun-15 - 0 - 252252252 252 (Note: values preserved exactly as presented in source.) ### Currency composition and stocks of Funds (as of May 6, 2014) - Stock of the Oil and Energy Fund at May 6, 2014 (Ush billions and USD millions): - Energy Fund: 300 181(BoU reserves) - Petroleum Fund: 1162 172(BoU other assets) - Note: The foreign currency denominated deposits of the Petroleum Fund and the Energy Fund do not constitute part of the BoU’s international reserves and as such are recorded under other foreign assets of the BoU. Any further foreign currency denominated inflows to these Funds will continue to be recorded outside of the reserves and under other foreign assets of the Bank of Uganda. ### Recapitalization adjustor (Schedule E) - The 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 E. Schedule E: Recapitalization of the Bank of Uganda (Ush billions) - Cumulative from July 1 of respective fiscal year: - Jun-14Sept-14Dec-14Mar-15 Jun-15 - 00250250 250 (Note: values preserved exactly as presented in source.) ### Ceiling on contracting or guaranteeing new non-concessional external debt and ceiling on external payments arrears - Short-term debt assessment criterion: - Refers to contracting or guaranteeing external debt with original maturity of one year or less by the public sector. - Excluded are 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 is defined as loans with a grant element of less than 35 percent. - The discount rate used for this purpose is 5 percent. - The ceiling on non-concessional external borrowing or guarantees is 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 the purpose of this assessment criterion means borrowing giving rise to liabilities to non-residents. - Exclusions: changes in indebtedness resulting from non-resident holdings of government securities and government promissory notes, refinancing credits and rescheduling operations, and credits extended by the IMF; arrangements to pay over time obligations arising from judicial awards to external creditors that have not participated in the HIPC Initiative do not constitute non-concessional external borrowing. - Also excluded: non-concessional borrowing within the limits specified in Table 1 of the MEFP and non-concessional borrowing by one state-owned bank, Housing Finance Bank. - Definition of debt for the limit: - As set out in 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). - Debt covers current (not contingent) liabilities created under contractual arrangements requiring future payments in assets or services; forms include loans, suppliers' credits, and leases (present value at inception). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are included. - Ceiling on 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. *Source: _cr14195 - 5. Definition. The cumulative increase in net domestic financing of the central government* ### 27. The Government of Uganda will submit information to IMF staff with the frequency and ### 27. The Government of Uganda will submit information to IMF staff with the frequency 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. ### Attachment II — Table 1. Summary of Reporting Requirements (I. Bank of Uganda) - Issuance of government securities, repurchase operations and reverse repurchase operations. - Frequency: Weekly - Submission Lag: 5 working days - Operations in the foreign exchange market. - Frequency: Weekly - Submission Lag: 5 working days - Interest rates (7 day interbank, commercial bank prime lending rate, government securities). - Frequency: Weekly - Submission Lag: 5 working days - Private sector credit growth by shilling and forex, and excess reserves of commercial banks. - Frequency: Weekly - Submission Lag: 5 working days - Disaggregated consumer price index. - Frequency: Monthly - Submission Lag: 2 weeks - Balance sheet of the BoU, consolidated accounts of the commercial banks, and depository corporations’ 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 ### Attachment II — Table 1. Summary of Reporting Requirements (II. Ministry of Finance) - 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 payments5, 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 government entities contained in the central government votes as reported by the Accountant General and signed by the PS/ST. - Frequency: Quarterly - Submission Lag: 6 weeks - Summary of the stock of arrears by government entities contained in the central government votes as reported by the Accountant General and signed by the PS/ST. - Frequency: Annual - Submission Lag: 3 months - 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 and nominal) according to UBOS and medium-term projections. - Frequency: Quarterly - Submission Lag: 12 weeks - Footnote 5: "The budget records domestic interest payments on cash-basis while for program purposes this entry will be reported on an accrual basis." ### Fund relations and financial data highlights - Membership Status: Joined: September 27, 1963; Article VIII - Quota: 180.50 (SDR Million) 100.00 (%Quota) - Fund holdings of currency (Exchange Rate): 180.51 (SDR Million) 100.00 (%Quota) - Reserve Tranche Position: 0.00 (SDR Million) 0.00 (%Quota) - Net cumulative allocation (SDR Department): 173.06 (SDR Million) 100.00 (%Allocation) - Holdings (SDR Department): 139.17 (SDR Million) 80.41 (%Allocation) - Outstanding Purchases and Loans: ECF Arrangements 1.80 (SDR Million) 1.00 (%Quota) - Latest Financial Arrangements (historical list provided in the source; amounts and dates preserved in the source) - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): forthcoming flows for 2014–2017 include Principal and Charges/Interest with totals presented verbatim in the source (Total: 0.63 1.05 0.25 0.05 0.05). ### HIPC and MDRI implementation figures - Implementation of HIPC Initiative: - Decision point date: Apr 1997 - Completion point date: Apr 1998 - Original Framework assistance committed by all creditors (US$ Million): 347.00 - Enhanced Framework assistance committed by all creditors (US$ Million): 656.00 - Of which: IMF assistance (US$ million) 68.90 (Original), 91.00 (Enhanced) - (SDR equivalent in millions) 51.51 (Original), 68.10 (Enhanced) - Disbursement of IMF assistance (SDR Million): Assistance disbursed to the member 51.51 68.10 119.61 - Interim assistance -- 8.20 8.20 - Completion point balance 51.51 59.90 111.41 - Additional disbursement of interest income2/ -- 2.06 2.06 - Total disbursements 51.51 70.16 121.67 - Implementation of Multilateral Debt Relief Initiative (MDRI): - I. MDRI-eligible debt (SDR Million)1/: 87.73 - Financed by: MDRI Trust 75.85; Remaining HIPC resources 11.88 - II. Debt Relief by Facility (SDR Million): Eligible Debt Delivery Date January 2006 N/A 87.73 87.73 ### Technical assistance, work program, and statistical issues - Technical assistance in first half of 2014 from IMF and AFRITAC East covered: PFM Bill reform, VAT gap estimate, financial regulation, financial asset reporting, forecasting capacity building, oil resource management and tax policies, financial stability (insurance company supervision, mobile payment regulation, payment system and oversight policy), amendments to the BoU Act, harmonizing monetary data in a currency union, CPI rebase, and planned missions on revenue administration, public financial management, financial sector regulation and supervision, monetary policy operations and economic and financial statistics (including national accounts rebase). - Resident representative: Senior Resident Representative Ms. Ana Lucía Coronel (also Mission Chief for Uganda). - Joint World Bank–Fund Work Program (June 2014–June 2015) highlights: - World Bank IDA portfolio: 16 operations with net commitments of US$1.96 billion, and 4 regional projects with net commitments of US$94 million. - Over 60% of the portfolio is financing transport and energy infrastructure investments. - Planned Bank and Fund activities include Public Investment Management, Economic Update series, Country Economic Memorandum, DSA update, and Fund TA priorities (VAT gap analysis; Extractive Industries and general tax policy; PFM reform implementation; Monetary policy and transition to inflation targeting; Review of the BoU Act; Review of MoU between Bank of Uganda and the MoFPED; BoU recapitalization; foreign exchange intervention in the context of inflation targeting; refining macroeconomic forecasting model; Enhancing macroeconomic statistics, including national accounts, BoP data, and GFS). - Statistical issues (assessment of data adequacy for surveillance): - General: Overall data provision is adequate for surveillance purposes, although some shortcomings remain. - Real sector: Rebased (2009/10) GDP estimates expected to be released by September 2014; UBOS disseminates quarterly GDP estimates at 2002 constant prices; SUT developed for 155 activities by 161 products. - Labor market indicators: infrequently compiled and disseminated; UBOS aims for annual compilation but data are compiled with a two year lag. - CPI: current series released January 2010 expected to be replaced in June 2014 by new CPI using 2009/2010 Uganda National Household Survey weights; AFRITAC East mission to review new CPI during June 2014 prior to its release. - PPI: UBOS compiles Manufacturing PPI; AFRITAC East assisting to rebase and expand PPI to mining and quarrying, electricity and water; mission in July 2014 to finalize PPI and commence export/import price indices. - Government Finance Statistics: MoFPED compiles fiscal statistics following GFSM 2001 for budgetary central government and local governments; AFRITAC East to assist UBOS over FY2015 in expanding coverage and quality. - MFS: TA in FY2014 to improve coverage and classification of ODCs and to initiate data collection for other financial corporations (insurance companies and pension funds); SRF-based monetary data published in IFS beginning early 2009; BoU improved external sector statistics and implemented BPM6 standards with AFRITAC East assistance. ### Press Release No. 14/314 — IMF Executive Board Completes Second PSI Review for Uganda (June 27, 2014) - Executive Board completed second review of Uganda’s performance under the Policy Support Instrument (PSI). - Mr. David Lipton statement key points: - "Uganda’s recent economic performance has been broadly satisfactory, with robust growth, low inflation, and strong international reserves. However, the government net domestic financing has expanded beyond the program ceiling, and private sector credit growth has remained constrained." - Short-term fiscal policy expected to focus on offsetting recent tax revenue shortfall by significantly strengthening collection. - Recommended fiscal actions: resist spending pressures, limit domestic borrowing to programmed levels, curb use of supplementary budgets to allow implementation of infrastructure projects and social programs. - Monetary: envisaged fiscal stance would facilitate further monetary easing, but monetary policy should remain attuned to evolving domestic and external conditions. - Institutional reforms: public financial management reforms implemented; adopted new methodology to manage unpaid bills; priority actions include completing introduction of the treasury single account, efficient use of upgraded payments and payroll systems, prompt adoption of the Public Financial Management bill, and legal amendments to strengthen central bank independence to refine the inflation targeting regime. - Emphasis on ensuring timely implementation, transparent management, and appropriate cost-recovery of upcoming infrastructure projects and progress on East Africa Community integration commitments. - Statement by Mr. Saho, Executive Director for Uganda (June 27, 2014): - Authorities appreciate Executive Board and Management engagement, agree with the thrust of the report, and remain committed to macroeconomic reforms under the PSI. ### Program performance summary (from the source) - All December 2013 quantitative criteria were met except on government net domestic financing, which was missed by a small margin. - The indicative target on domestic revenue was not met. - Significant progress on structural benchmarks, though timely completion of some benchmarks proved challenging while others faced capacity constraints. - Authorities requested postponement of implementation of some benchmarks to allow corrective measures to come on stream and requested Executive Directors’ support for completion of the second review under the PSI and request for modification of assessment criteria. *Source: Excerpts from the IMF document as provided in the content unit.* ### 6.2 percent that was projected a year ago. This was a result of a drought-related decline in ### 6.2 percent that was projected a year ago. This was a result of a drought-related decline in ### Economic performance and poverty reduction - Real GDP growth outcome was below earlier projection of "6.2 percent that was projected a year ago." - Growth shortfall attributed to a drought-related decline in agricultural output and the adverse impact of regional conflict. - Long-term poverty reduction: - Proportion living below the poverty line declined from "56.4 percent in 1992/3" to "19.7 percent in 2012/13". - Uganda surpassed the MDG target of halving extreme poverty by 2015. ### Inflation and monetary stance - Annual inflation dropped to "5.5 percent" in May 2014. - Core inflation dropped to "3.3 percent" in May 2014. - Earlier in the year, food-price driven increases occurred due to drought-related price hikes. - The inflation-targeting framework and vigilant monetary policy maintained inflation within the PSI consultation clause. ### Fiscal performance and policy adjustments - Fiscal stance was more expansionary than expected due to significant revenue shortfalls partly from lower economic activity. - Additional spending needs included security-related spending and issuance of national identity cards to comply with the East Africa Community directive. - Overall deficit expected to widen by about "1.2 percentage points" from the program target to about "4.8 percent of GDP". - Revenue-enhancement measures planned: - Strengthen tax collection administration. - Vigorous identification and collection of taxes already due. - Implementation of some new revenue enhancement measures. - Completion of a VAT gap analysis and development of an action plan in line with its recommendations. - Expenditure and borrowing: - Expenditure projected to amount to "19.7 percent of GDP" in FY 2014/15, compared to "18.8 percent in FY2013/14". - Net of the hydroelectric projects and recapitalization of the central bank, spending-to-GDP ratio expected to decline by "0.6 percent of GDP". - Pace of spending in FY 2014/15 expected to be significantly slower and domestic borrowing requirements lowered while maintaining space for infrastructure investment. - Public financial management reforms and safeguards: - Commitment to formulate a charter of fiscal responsibility once the Public Financial Management (PFM) bill is approved. - Completed PFM reforms include introduction of the Treasury Single Account (TSA) for IFMS transactions, inclusion of all central government entities in the Integrated Personnel and Payroll System (IPPS), and a payroll cleanup. - Contingency reserve included in the FY 2014/15 budget with specific guidelines to reduce use of supplementary budgets. - Institutional arrangements for arrears reporting streamlined and a memorandum of understanding reached with the IMF on arrears management. ### Current account, reserves, and external financing - Current account weakened due to widening trade imbalances and low transfers but was significantly lower than projected in the first PSI review. - Factors moderating imports: - Delay in implementation of the Karuma and Isimba hydroelectric projects reduced imports. - Contraction in oil imports attributed to reduced reliance on thermal power plants with Bujagali hydropower plant in full operation. - Current account deficit expected to be financed by loans, FDI and other inflows, supporting international reserve coverage at about "4.2 months of imports". - Over the medium term, reserves expected to be maintained at about "4.2 months on imports" despite expected withdrawal of government deposits from the energy and petroleum funds to finance Uganda’s share of hydropower projects. ### Medium-term outlook and projections - Real GDP growth projections: - Projected to increase from "5.7 percent" to "6.1 percent" in the next fiscal year driven by agricultural productivity, manufacturing, mining and exports. - Projected to rebound to "7 percent" in the medium term. - Core inflation expectations: - Expected to remain broadly stable at "5.7 percent in FY2013/14" due to a stable exchange rate and reversal of drought-related food-price spike. - Expected to average "5 percent" over the medium term. - Current account balance projection: - Projected to widen to "11.2 percent of GDP in FY2014/15" from about "9.7 percent of GDP in FY2013/14", reflecting imports for large infrastructure projects. - Downside risks described as limited and well-managed. ### Infrastructure strategy and public-private partnerships - Authorities committed to scaling up public investment in infrastructure, particularly roads and energy, to address the infrastructure gap while being mindful of absorption capacity and debt sustainability. - Infrastructure financing will consider Public Private Partnerships (PPP); a PPP bill is before parliament to establish legal and institutional frameworks for PPPs. ### Monetary and financial sector policies and reforms - Monetary policy target: achieve medium-term inflation target of "5 percent". - Bank of Uganda (BOU) actions: - Continue strengthening the inflation targeting framework and improve monetary policy formulation and organizational structure. - Amendments to the Bank of Uganda Act, including provisions for raising BOU’s capital to an adequate share of its monetary liabilities, to be finalized and submitted to Parliament by "April 2015". - Alignment of the Act with international best practices delayed completion originally expected by "May 2014". - Financial sector objectives: - Achieve a well capitalized and liquid financial sector to support expected credit recovery. - Supervisory focus on ensuring banks are well capitalized, provide adequately for nonperforming loans, apply risk management practices, and restructure viable loans. - Deepen the financial sector by accommodating alternative banking approaches such as mobile banking regulation. - Amendments to the financial institutions bill, non-bank financial institutions, and capital markets act to be submitted to parliament. - Launch of a financial literacy strategy as part of financial inclusion. ### Conclusion and policy intent - Authorities remain dedicated to maintaining economic stability and supporting sustainable and inclusive growth by generating employment and reducing poverty. - Continued implementation of sound macroeconomic policies, financial sector reforms, and removal of impediments to private sector development and competitiveness. - The Fund and other development partners’ policy advice and technical support are considered critical to overcoming challenges to achieving these goals. *Source: IMF staff report content provided in the supplied PDF extract.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14195.pdf_