Uganda and the IMF
Press Release: IMF Approves Three-Year, US$17.8 Million PRGF Arrangement for Uganda
Country's Policy Intentions Documents
Free Email Notification
Memorandum of Economic and Financial Policies,
and Technical Memorandum of Understanding
Mr. Horst Köhler
Dear Mr. Köhler:
1. We recently held discussions with Fund staff on an economic program that could be supported by a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), beginning in fiscal year 2002/03 (July-June). Uganda successfully completed the previous PRGF-supported program, which expired on March 31, 2001, achieving strong economic growth and substantial gains in poverty reduction in the process.
2. The government of Uganda has formulated a comprehensive economic program for 2002/03, which is described in the attached Memorandum of Economic and Financial Policies (MEFP). The program aims to reduce the incidence of poverty in Uganda through sound fiscal, monetary, and exchange rate policies, which would contribute to real GDP growth of about 6½ percent and average underlying inflation of less than 3½ percent during the year. The budget submitted to parliament on June 13, 2002, lowers the overall fiscal deficit, excluding grants, to 10.4 percent of GDP, which is more than fully covered by expected net inflows of donor support. The structural program will focus on building up tax revenues, strengthening budget management, enhancing accountability of both central and local government, improving financial sector regulations, and fighting corruption.
3. During the period of the arrangement, the government will consult with the Fund on future economic policies and in order to assess progress under the program and reach understandings on any additional measures that may be needed to achieve its objectives. Uganda will conduct with the Fund two reviews of the first year of the program supported by the arrangement, to be completed no later than May 15, 2003 and October 15, 2003, respectively. The macroeconomic framework will be updated in the context of these reviews of the program. Moreover, while Uganda has outstanding financial obligations to the Fund arising from loans under the arrangement, it will continue to consult with the Fund.
4. On this basis, we are requesting a three-year arrangement under the PRGF in an amount equivalent to SDR 13.5 million, with a disbursement of SDR 1.5 million upon Board approval of this arrangement and two subsequent disbursements of SDR 2.0 million, one each upon completion of the first and second semi-annual program reviews and observance of performance criteria for end-December 2002 and end-June 2003.
5. The government of Uganda authorizes the publication and distribution of this letter and all reports prepared by Fund staff regarding the program under the new PRGF, including reports prepared jointly with World Bank staff regarding Uganda's Debt Sustainability Analysis and Poverty Reduction Strategy Paper Progress Report.
/ s /
Gerald M. Ssendaula
Minister of Finance, Planning, and Economic Development
Memorandum of Economic and Financial Policies
1. Since the expiration in March 2001 of Uganda's last program with the International Monetary Fund under the Poverty Reduction and Growth Facility (PRGF), the Government of Uganda has continued to work closely with Fund staff in the design of its economic and financial policies, as well as on structural measures with significant macroeconomic and financial effects. In addition, the Fund has provided technical assistance in the areas of public finance, banking supervision, monetary and exchange rate policy, and economic and financial statistics. Together with World Bank staff, Fund staff also conducted a thorough study of the Ugandan financial system under the Financial Sector Assessment Program (FSAP).
2. This Memorandum presents a brief background of macroeconomic developments in fiscal year 2001/02 (July/June), outlines the medium-term objectives and policy framework through 2004/05, and sets out the economic and financial policies of the program for 2002/03 that could be supported under a new three-year PRGF arrangement. These policies are embedded in the Government's Poverty Eradication Action Plan (PEAP), which aims to reduce the incidence of poverty in Uganda to less than 10 percent of the population by 2017. The donor community has provided considerable support for implementation of the PEAP, including substantial budget support under the World Bank's Poverty Reduction Support Credit (PRSC).
A. Economic Developments in 2001/02
3. Against the background of the global economic slowdown and continued weakness in the world prices of Uganda's principal exports, the economy performed relatively well in 2001/02. Preliminary estimates indicate that real GDP grew by 5.7 percent, below the budget expectation of 6.4 percent. Favorable weather conditions contributed to solid growth in the economy's agricultural base. Education services continued to perform strongly, reflecting the government's commitment to expand opportunities for building human capital, initiated in the context of the move to Universal Primary Education (UPE) in 1997/98. Communications services continued to grow at a remarkable pace buoyed by the marked expansion of investment and competition in the telecommunication industry, following the deregulation of the sector. Construction activity picked up considerably in 2001/02, partly reflecting preliminary work on the large Bujagali hydro electricity project. However, growth in manufacturing activity dipped. Average headline consumer price inflation was negative 1.8 percent during 2001/02, as food crop prices plummeted by about 20 percent. The underlying inflation rate, which excludes food crops, was held to 3.4 percent on a period average basis. Owing primarily to the low producer prices for food and cash crops, nominal GDP grew by only 6.5 percent in 2001/02, compared with the budget projection of 11.4 percent.
4. The overall fiscal deficit (excluding grants) for 2001/02 remained within the budgeted amounts, despite pressures arising from a modest revenue shortfall and some unanticipated spending. In relation to GDP, however, the deficit rose to 12.6 percent compared with the 12.2 percent of GDP envisaged in the budget, as nominal GDP turned out to be lower than projected. In particular, taxes on imports fell well short of their target, owing mainly to an unforeseen appreciation of the Uganda shilling during the first half of the year. On the positive side, revenue from the broad-based domestic taxes and petroleum excises surpassed expectations, contributing to a rise in total revenue collection relative to GDP to 11.8 percent. This marked a turnaround from the downward trend that had prevailed over the previous two years.
5. With regard to government spending, the expanded coverage of the Commitment Control System (CCS) to encompass the development budget helped to contain total spending within budgeted limits. Nevertheless, relative to GDP, total expenditures and net lending reached 24.4 percent of GDP, compared with the 23.5 percent of GDP envisaged in the budget. Spending on the strategic export promotion initiative announced in September 2001, an increase in allowances for members of parliament, and higher spending on military equipment, State House, missions abroad, and local government elections, were funded through cuts in spending outside the protected Poverty Action Fund (PAF). The spending on military equipment was mostly financed through cuts in other military expenditures; nevertheless, a small excess (on a cash flow basis) of 0.1 percent of GDP above the 2.0 percent of GDP cap on these expenditures, which was agreed with donors, was sustained in 2001/02, and is expected again in 2002/03. The government also incurred a fiscal cost of 0.2 percent of GDP in 2001/02, on account of a one-year discount provided to residential electricity users, to ease the impact of the sharp tariff increase implemented in June 2001. The discount will be eliminated by January 2003.
6. Reflecting the increased emphasis on pro-poor spending, budgetary releases under the PAF increased to 5.7 percent of GDP in 2001/02, compared with 4.2 percent in the previous year. Expenditures on programs designed to improve the quality of life of the poor (primary education, water and sanitation, and primary health) accounted for 83 percent of the PAF releases, of which primary education received almost half. Programs designed to improve the incomes of the poor more than doubled, with releases for the strategic export promotion initiative accounting for 47 percent of this increase. Releases for monitoring and accountability purposes represented 4 percent of the total. Much of the pro-poor public services and investments were delivered by local governments and was financed by transfers from the central government.
7. The 2001/02 fiscal deficit was largely covered by net donor support (11.7 percent of GDP; budget and project), with grants consisting of 7.5 percent of GDP of the total, including HIPC assistance. This contributed to a buildup of government deposits with the Bank of Uganda (BOU). The settlement of outstanding domestic arrears (equivalent to 1.1 percent of GDP), some of which were claims dating back to the civil war in the 1980s, added to the fiscal liquidity injection.
8. Developments in the banking system in 2001/02 point to a strengthening of the sector and increasingly effective supervisory efforts by the BOU. As of March 2002, the ratio of nonperforming assets to total advances stood at 5.1 percent compared with 9.5 percent a year earlier, and the ratio of core capital to risk-weighted assets rose from 18.3 percent to 22.9 percent during the same period. The privatization of the Uganda Commercial Bank (UCB), one of Uganda's largest banks, which was completed in February 2002, marked another important achievement. Previously, while under BOU intervention, the UCB had been mostly restricted to holding government paper, and its private sector lending was sharply curtailed. Profitability of commercial banks has declined over the year, due to lower yields on treasury bills, which accounted for about 60 percent of their earnings. Finally, a new Financial Institutions Bill, which provides for mandatory prompt corrective action for problem banks and for penalties for noncompliance with prudential norms and regulations was approved by the cabinet and sent to parliament in May 2002.
9. Although broad money (M2) growth picked up substantially over the course of the year to 21.9 percent, the expansion in credit to the private sector was sluggish at just 4.8 percent, despite declines in lending rates. For much of the year, treasury bill yields fell steadily from 13.8 percent (on 91-day paper) in August 2001 to less than 3 percent in March 2002, amid a buildup of excess reserves in the banking system. In May 2002, the BOU initiated steps to mop up commercial banks' excess reserves with a view to enhancing the effectiveness of monetary policy, as the 91-day treasury bill yield edged up to just over 5 percent at end-June 2002. Money and quasi-money (M3), which includes foreign currency deposits, grew by 17.6 percent, reflecting a shift back into Uganda shilling deposits.
10. External sector performance in 2001/02 was adversely affected by the continued decline in commodity prices. In particular, the price of robusta coffee, Uganda's principal export, fell to a 40-year low. Total export receipts increased by 3.3 percent over their 2000/01 value, as a 23 percent decline in coffee exports revenue nearly offset a marked increase in receipts from noncoffee exports. This small overall gain marked the first rise in total export earnings in three years. In volume terms, both coffee and noncoffee exports expanded (by 6.7 percent and 11.5 percent, respectively), suggesting that Uganda has remained internationally competitive. After declining in the previous year, imports increased by 11.4 percent, owing partly to the removal of import duties on raw materials and initial stock building for the construction of the Bujagali project. The corresponding widening of the trade deficit was mitigated somewhat by a 40 percent rise in private transfers. Reflecting the above, the external current account deficit (excluding official grants) increased modestly to -14.9 percent of GDP. The capital account surplus increased considerably in 2001/02, as Uganda continued to benefit from generous support from its development partners. Net donor inflows increased to 11.7 percent of GDP from 11.1 percent in 2000/01. Consequently, net international reserves of the BOU increased by nearly US$175 million, with the import coverage standing at a healthy six months at end-June 2002. After appreciating against the U.S. dollar during the first half of the year, the Uganda shilling ended 2001/02 with a 4.2 percent nominal depreciation. On an annual average basis, the real effective exchange rate appreciated by 9.7 percent in 2001/02.
11. Since May 2000, when Uganda reached its completion point under the enhanced HIPC Initiative, some debt sustainability indicators have deteriorated substantially. In particular, the ratio of the net present value (NPV) of Uganda's external debt to exports stood at 200 percent as of end-June 2002, assuming full delivery of HIPC assistance, well above the HIPC target of 150 percent. This deterioration resulted mainly from the sharp decline in coffee prices. With regard to the delivery of HIPC assistance, agreements have been concluded with all Paris Club members. Several Paris Club bilateral creditors have granted debt cancellations beyond their HIPC commitments. As regards to non-Paris Club creditors, Uganda signed agreements with two multilateral and two bilateral creditors in 2001/02. However, there have been some setbacks, as some creditors have resorted to the domestic legal system to force the government to honor its obligations in full. One commercial creditor was awarded a judgment of US$11 million, including compounded penalty interest.
12. During 2001/02, the government has implemented a number of important structural measures. In this regard, in the context of the World Bank's PRSC-supported program, Parliament passed the new Leadership Code in April 2002, requiring all high-level government officials to fully declare their assets, as well as the assets of family members. The privatization program has progressed, with the solicitation of bids for 20-year operating concessions for the generation and distribution of electricity companies. Contracts will be awarded to the winning bidders in 2002/03.
13. Much progress has also been achieved in the revision of national accounts statistics to reflect a more recent base year (1997/98). Statistical techniques based on survey data and, where available, current information on inputs and outputs have been used to improve estimates of value added and to construct a GDP by expenditure series. The revised data also cover a more comprehensive group of manufacturing enterprises. As a result, greater consistency has been achieved between the national accounts and the poverty statistics.
II. Medium-Term Objectives and Policy Framework
14. The main macroeconomic policy challenge facing Uganda over the medium term is to maintain high rates of economic growth, which are essential for achieving the poverty reduction objectives. However, unlike the previous decade, the catalyst for growth will likely come from improvements in sectoral and microeconomic fundamentals, as Uganda has already achieved a high degree of macroeconomic stability and implemented broad economic reforms. Accordingly, in the period ahead, government policies will focus on actions to spur private investment and savings. These include more efficient delivery of public services, expansion of public investment in essential social and economic infrastructure, enhanced financial intermediation, and improved enforcement of laws and regulations. The desired improvements in the productivity of public outlays and the removal of the remaining structural impediments to strong economic growth will require major institutional changes and better coordination and prioritization of public actions, as well as an efficient and motivated civil service. Furthermore, a study of the fiscal implications of the ongoing decentralization process, including an assessment of costs and the most efficient fiscal structure for supporting the decentralized delivery of public services, will be undertaken. In addition, determined efforts to raise exports and to expand the export base will be continued.
15. Accordingly, over the coming three-year period, economic policies will focus on the maintenance of macroeconomic stability; a strengthening of institutions that play a central role in monitoring compliance with existing rules and regulations; capacity building in key areas—such as sector planning, coordination, policy development, and monitoring capability; development of efficient and affordable mechanisms for the delivery of services, including agricultural research and extension services; and improving physical infrastructure (with emphasis on roads, schools, health facilities, and power). These policies will be key components of the government's revised PEAP. Fundamental to the government's development strategy will be an acceleration of, and in a number of cases, completion of ongoing structural reforms in the financial sector, public enterprises, civil service, tax administration, and external trade that will take account of the accelerated timetable for deepening integration in the East African Community (EAC). The government is also aware of the need to further improve Uganda's statistics.
16. The government is committed to good governance and upholding the rule of law, which are essential to enhancing the effectiveness of public outlays, the development of entrepreneurship, and the promotion of strong economic growth. It will take action, including the provision of increased resources, in a targeted manner, to enforce rigorously tax compliance and to curb the incidence of smuggling and fraud. The government will also vigorously enforce the new leadership code with a view to weeding out corruption in the public sector.
17. On the basis of the strategy and policies outlined above, the government expects to achieve a 6.6 percent per annum average real economic growth over the next three years. Growth would be boosted by the stimulative effects of the construction phase of the Bujagali hydro-electric project and government programs aimed at increasing productivity in the agriculture and export sectors. Sustained high economic growth over the longer term would require an increase in the ratio of gross investment to GDP from an average of about 20 percent over the last three years to about 22.3 percent of GDP, supported by an expansion of gross domestic savings of 3 percent of GDP. The increase in the investment rate is expected to come primarily from the private sector. Private investment would depend on the success of measures identified above to spur private sector activity. Monetary policy would aim at containing annual underlying inflation to 3.5 percent, on a period average basis.
18. Although Uganda would still depend heavily on donor support for the PEAP, progress is expected to be made toward achieving greater fiscal sustainability by moderately reducing the overall fiscal deficit, excluding grants, over the medium term. Government revenue is projected to increase steadily through 2004/05, while spending would be reduced somewhat, depending on available donor support. The external current account deficit is projected to narrow to 14.7 percent of GDP, as exports expand, supported by the government's strategic export promotion initiative and full implementation of the Program for the Modernization of Agriculture (PMA), a key element for enhancing rural productivity. Donor-aided programs to develop trade associations and open new markets for Ugandan products should also help to boost exports. Furthermore, integration into the East African Community (EAC) is expected to create new export markets for Uganda's food crops, while the U.S.'s Africa Growth and Opportunity Act (AGOA) and the EU's "Everything but Arms" programs offer access to additional export markets. The gradual reduction in the fiscal deficit would ease appreciation pressures on the Uganda shilling, and improvement in export production would help to narrow the trade gap. Foreign direct investment is expected to continue to be an important source of external financing and technology.
III. The Program for 2002/03
19. The macroeconomic framework for 2002/03 envisages a growth of real GDP of 6.5 percent, as the construction phase of the Bujagali project begins. Manufacturing is expected to pick up, as electricity constraints are eased with the completion of an additional turbine at the Kiira hydro-electric plant. The communications sector is poised to grow strongly, as are education services with the planned hiring of 10,000 new teachers. Monetary policy will aim at holding average underlying inflation at 3.5 percent, but a likely rebound in food crop prices could temporarily push headline inflation higher, to about 6.0 percent during the year.
A. Fiscal Policy
20. In addition to its central role in maintaining macroeconomic stability, fiscal policy will focus on increasing the effectiveness of government spending to assure strong economic growth and poverty reduction over the medium term. The government will therefore take steps to ensure that the PMA, the strategic exports promotion initiative, and the PEAP are adequately funded to meet medium-term poverty reduction objectives. To support the medium-term fiscal stance, the government will introduce revenue-enhancing and expenditure-restructuring measures aimed at consolidating general administration expenditure. The main elements of the strategy involve a contraction in the scope of public administration operations to core areas and determined efforts to boost revenue collection.
21. The government's program for 2002/03 will aim at increasing revenue to 12.3 percent of GDP while limiting total expenditures and net lending to 22.8 percent of GDP, including payments of outstanding domestic arrears. The resulting overall fiscal deficit, excluding grants, of 10.4 percent of GDP would be covered by net donor inflows of 10.4 percent of GDP of which 7.1 percent of GDP would be in the form of grants. As a result of this financial stance, the domestic deficit, including payments of domestic arrears, would be lowered to 4.9 percent of GDP in 2002/03, compared with 6.6 percent of GDP in 2001/02 and net government deposits with the BOU would rise by 1.2 percent of GDP.
22. The planned increase in revenue collection by 0.5 percent of GDP will be sought primarily through actions designed to enhance tax administration, including a strengthening of tax enforcement and compliance. In this respect, the government will undertake quarterly reviews of revenue performance by tax category. At the same time, several new tax measures will be implemented in early 2002/03, including an increase in excise on motor vehicles, gasoline, and fees and charges on the Traffic Act.
23. With regard to public expenditure, the government views the reduction of public administration expenditures as a major part of its strategy to refocus spending toward poverty-related and economic priority areas. To achieve this objective, the government is developing an action plan for streamlining general administrative services to be implemented starting 2002/03. Moreover, the phasing out of the discount on residential electricity consumption in January 2003 will enable the restructured Uganda Electricity Board and its subsidiary companies to meet all scheduled payments to the government in full.
24. The above revenue and expenditure measures would allow the government to provide adequate resources for funding the strategic export promotion initiative and to raise pro-poor spending under the PAF to 5.9 percent of GDP in 2002/03. The government has also taken other steps to ensure that budgetary allocations for essential poverty-related outlays are protected, including through the placement of a limit on the level of public administration expenditure, which will be monitored on a quarterly basis. The 2002/03 budget also provides funds for the implementation of the second phase of the civil service pay reform, which will involve an increase in the pay scales for professional workers. The salaries of lower grade workers will be raised by about 3 percent on average, broadly in line with the average increase in underlying inflation in 2001/02. The government will determine by December 2002 the full cost and phasing of implementing the entire pay reform strategy. In addition, it will develop a reform strategy for the pension system and complete an assessment of outstanding pension liabilities by June 2003.
25. The budget management system has been strengthened considerably in recent years, in part through the enactment of the 2001 Budget Act and the extension of the CCS to the development budget. Nevertheless, the buildup of arrears, especially those relating to court awards, pensions, and utilities under the recurrent budget and the frequent use of supplementary allocations remain problematic. To enhance the operation of the CCS and to reduce the buildup of arrears, the Ministry of Finance will ascertain the domestic budget arrears outstanding as at end-December 2002. The Ministry will also ensure that all provisions of the CCS are strictly adhered to, including the clearing of all expenditure over-commitments sustained in each quarter by the end of the subsequent quarter, the imposition of penalties for incorrect or misleading monthly returns, and that regular audits of the CCS will be carried out by the Internal Auditor/Auditor General's Office at each line ministry/department. To tighten control over the use of supplementary allocations, the Public Finance Accountability Bill (which revises the 1964 Public Finance Act), includes a provision requiring prior parliamentary approval of all supplementary allocations. Finally, to facilitate the gradual move toward full programmatic budgeting, the government intends to integrate externally funded development projects into the sectoral ceilings of the medium-term economic framework (MTEF) starting in fiscal year 2003/04. In this connection, the government is committed to adhering strictly to the overall MTEF ceilings.
B. Local Government
26. The government is taking steps to ensure that the decentralization of social services delivery proceeds in an orderly and sustainable manner. To this end, programs are under way to establish the necessary accounting, fiscal reporting, legal, and administrative framework for successful decentralization. The problems relating to the tracking of local government activities, as well as the systematic accounting of funds extended to local authorities, would be addressed through timely submission of monthly and final accounts to the Ministries of Finance and Local Government. The Ministry of Finance has initiated a process of collecting local government financial statistics and will produce aggregate data for the period 1999/2000-2000/01 by September 2002. It will also prepare quarterly summaries of the monthly accounts within two months of the end of each quarter. An initial assessment of the tendering systems of local governments will be undertaken with World Bank assistance. In addition, the United Nations Capital Development Fund will work with the Local Government Finance Commission to build up local government revenue generating capability.
C. Monetary Policy and Financial Sector Issues
27. Monetary policy will aim at holding annual average underlying inflation at 3.5 percent. Efficient management of monetary policy will require a mopping up of the existing stocks of excess reserves presently held by commercial banks and the sterilization of the liquidity injected by government expenditure on local goods and services financed mainly with donor budgetary support. The monetary program for 2002/03 is therefore predicated on limiting excess reserve deposits of commercial banks in the BOU to no more than 15 percent of required reserves from end-September 2002. Thereafter, the BOU will take appropriate measures to maintain base money on the desired path. The BOU will closely monitor a broad spectrum of monetary indicators and will take appropriate measures in response to any signs of incipient inflationary pressures. Broad money (M2) is projected to grow by 11 percent during 2002/03. On account of projected shifts to foreign currency-denominated deposits, money and quasi-money (M3) is projected to grow by 11.4 percent. Commercial bank credit to the private sector is projected to pick up to 10 percent during the year, partly reflecting large lines of credit established by some corporate clients with local banks, and the ongoing deepening of financial intermediation.
28. In light of the large injections of liquidity, mainly generated by donor-supported government spending, the BOU has adopted new operating procedures that will help to achieve the inflation objective, reduce interest rate volatility, and minimize risks of a real appreciation of the Uganda shilling. The basic principle of this strategy is to conduct regular and measured sterilization operations with treasury bills and foreign exchange sales, so as to distinguish them from short-term liquidity management. Foreign exchange interventions will be limited under the program to those required to counteract disorderly market behavior subject to the program overall ceiling. For 2002/03 as a whole, total foreign exchange sales by the BOU are targeted at US$200 million.
29. Financial sector policies aim at consolidating the recent gains in banking supervision, regulation, and the general health of the banking system, ensuring that public confidence and access to financial services continue to improve, and further strengthening the regulatory and supervisory framework. The new Financial Institutions Statute (FIS), presently awaiting enactment by parliament, would address identified problems in the current code. Meanwhile, the BOU has begun to put in place the regulatory framework necessary for the implementation of the new statute, when enacted.
30. The BOU has decided to address decisively and promptly the long-standing problem of two weak banks. To this end, the BOU recently completed full-scope examinations of the two banks. Based on the findings of these examinations, the BOU will take appropriate supervisory action and communicate it to the Fund by August 31, 2002. Furthermore, in view of its importance for long-term financing, the Uganda Development Bank (UDB) will be privatized by June 30, 2003, so as to strengthen and rationalize its operations. Pending the privatization, neither the government nor the BOU will provide or guarantee any further resources for on-lending by the UDB.
31. The phased increase over the past two years of the minimum paid up capital has helped strengthen the capital base of the banking system. However, there are considerable doubts regarding the ability of six of the smaller banks to meet the deadline of January 1, 2003, for the increase in their unimpaired minimum paid-up capital to the required U Sh 4 billion. The BOU will, therefore, (i) require all banks to submit by September 30, 2002, a Capital Compliance Plan detailing their proposal to comply with the requirement; (ii) develop a contingency plan for an orderly exit of weak banks failing to meet the requirement; (iii) encourage weak banks, where appropriate, to vigorously pursue mergers and consolidations as a way to meet the requirement; and (iv) continue to monitor closely all the six small banks to ensure sound policies and safeguard the depositors' interests in the intervening period.
32. The government is aware that money laundering could undermine the integrity of Uganda's financial system and adversely affect macroeconomic developments. Therefore, all possible steps will be taken to prevent money laundering. In this regard, the authorities will build on the recent efforts of the Uganda Anti-Money Laundering (AML) Committee, enact urgently an AML legislation, and establish the appropriate infrastructure for its enforcement. Meanwhile, the BOU will issue regulations reinforcing the "know your customer" rule and requiring banks to report suspicious transactions.
33. The BOU is taking steps to ensure that the prudential guidelines for calculating the limits on foreign exchange net open position are aligned with internationally accepted methodology (the Shorthand Method) so as to measure and monitor appropriately foreign exchange rate risks. In addition, the BOU has initiated a revision of the BOU's Statute of 1993 to bring it in line with the Constitution with respect to the independence of the BOU and the provisions of other laws.
34. The government is embarking on a reform of the National Social Security Fund (NSSF) with a view to ensure good governance and investment management control. As a first step toward that end, the government will submit to parliament a bill to repeal the NSSF statute by March 31, 2003 to pave the way for the regulation of the NSSF by the BOU. Future steps would include prompt and proper disclosure of NSSF accounts and institution of measures to ensure that best practices in investment of the funds are adhered to. Over the longer term, the government aims to establish the Capital Markets Authority as the comprehensive regulator of Uganda's pension industry. These are important steps toward the development of long-term financial instruments in Uganda.
D. Industrial Policy and Investment Promotion
35. The government is taking steps aimed at expanding private sector investment activity including in agro-processing with a view to increasing value added from Uganda's considerable resource base. In promoting these endeavors, the government intends to play a facilitative role. Government policy is to move to a generalized system of incentives that are nondiscriminatory as between activities and enterprises and that are in compliance with Uganda's commitments to the World Trade Organization. In line with this approach, the government intends to grant no new ad hoc privileges/incentives during the program period, and will consult with the Fund before introducing any new industrial policy measures that could affect the outcome of the financial program. The government also wants to move toward a more harmonized system of incentives for the EAC. To this end, the government is consulting with other members of the EAC with a view to securing the Fund's early technical assistance for reviewing the structure of incentives in the three member countries.
E. Governance and Corruption
36. Two important components of the government's efforts to improve governance are the major efforts to curtail corruption in the Uganda Revenue Authority (URA) and the new Leadership Code Bill, which was passed by parliament in April 2002. In January 2002, the URA applied in full to all of its staff the stringent income and wealth-reporting requirement, which is also part of the new Leadership Code Bill. The assets, liabilities, and income declared by URA staff, including their spouses and children, will be verified by end-September 2002. In addition, the head of the URA has announced a policy of zero tolerance of corruption and asked URA staff and the general public to provide specific information regarding employees engaging in corrupt practices. A Judicial Enquiry Commission has been set up to investigate all allegations of corrupt behavior by URA staff and to recommend appropriate remedial action including employment termination/criminal prosecution. The inquiry is scheduled to be concluded by end-September 2002 and all staff found to be corrupt will be terminated by December 2002. Following the retrenchment of corrupt staff identified by the Commission of Enquiry, the remuneration of the URA staff would be augmented.
37. The definition of leaders under the new Leadership Code Bill has been extended to include about 7000 holders of public office: senior civil servants, members of parliament, local government officials, heads of secondary schools, and senior officials in public bodies and the central bank. Under the new bill, not just leaders, but spouses, children, and dependants are also required to declare their income, assets, and liabilities. Failure to file or report accurately is punishable by fine or dismissal. False information can also lead to confiscation of assets and/or imprisonment for up to three years. All information provided is considered public and anyone can question the accuracy of a leader's statement, and the Inspector General of Government (IGG) is required to investigate the allegations, unless they are deemed to be insignificant, and make the results of the investigation public. The new budget provides a significant increase in resources to the IGG to enable the office to carry out its expanded activities. The IGG will verify at least 10 percent of declarations per year.
F. External Sector, Competitiveness, and Trade Policies
38. Although export earnings grew in 2001/02, the sharp decline in receipts over the past few years, following the precipitous decline in coffee prices, highlights Uganda's vulnerability to external shocks. To counter this situation, the government has developed a strategic export promotion initiative, which not only seeks to bolster a recovery in coffee exports, but also builds upon the success of several noncoffee export products in recent years. The strategy proposes a range of government supply-side interventions to promote exports in seven agricultural subsectors, plus that of information and communication technology services. Successful implementation of the strategy will contribute to an expansion and diversification of the export base, increase the rate of economic growth, and assist in furthering Uganda's poverty alleviation objective. The government consulted its development partners and other stakeholders on the design and implementation of the strategy, in the context of a conference on competitiveness held in February 2002. Engagement of donors has already attracted additional financing for the strategy, which is reflected in the 2002/03 budget. Moreover, donor-supported private sector initiatives are fulfilling a much-needed role in developing new markets for, and increasing the value added of, Ugandan exports.
39. These programs offer strong promise for a substantial recovery in the export sector. Based on planting programs in recent years and forecasts of improving coffee prices, coffee export receipts are projected to stage a rebound. Noncoffee export receipts are projected to grow by 12 percent a year over the medium term driven mainly by increased export volumes. For this reason, the external current account deficit, excluding grants, is projected to narrow to about 11.5 percent of GDP in five years. Direct foreign investment is projected to remain strong over this period, and gross international reserves of the BOU would remain ample at about six months of import cover.
40. The government reaffirms its commitment to a market-determined exchange rate policy. Apart from sales of foreign exchange to sterilize liquidity injection through the budget, the BOU will intervene in the foreign exchange market only to smooth out erratic fluctuations in the exchange rate.
41. The government remains committed to further trade liberalization in the context of the frameworks of the Common Market for Eastern and Southern Africa (COMESA) and the EAC. Negotiations leading to an EAC Customs Union are under way and a trade protocol is expected to be concluded by end-2002. Pending agreement on the protocol, imports from two prospective EAC members are already receiving an 80-percent tariff discount. It is expected that, when agreed, the EAC common external tariff (CET) structure would also be a three-rate structure similar to that in Uganda. However, currently Uganda has the lowest maximum tariff rate among the prospective members of the EAC; hence, the CET agreed to under the EAC framework could possibly lead to an increase in the maximum tariff rate for Uganda.
G. External Debt Sustainability
42. Export diversification is an important element of the government plan that should improve its debt sustainability position. The government also intends to continue following sound debt management principles, both by restricting new borrowing to concessional credits, while simultaneously exploring with development partners the possibility of increasing the grant element in external assistance, and by trimming its external borrowing needs over the medium term from what was envisaged only one year ago. Based on an updated debt sustainability analysis (DSA), conducted by the government with World Bank/Fund staff, the approach outlined in this Memorandum should generate steady improvements in Uganda's debt sustainability situation. In particular, while the ratio of the NPV of Uganda's external debt to exports has risen well above the HIPC target, other debt and debt-service indicators remain within HIPC threshold.
43. Uganda's efforts to reach agreement with non-Paris Club bilateral and commercial creditors for providing debt relief under the HIPC Initiative have met with only partial success. Many creditor developing countries, including some HIPCs, have expressed their inability to provide debt relief on their claims. Some creditors have also resorted to suing the government in local courts of law to gain full repayment of outstanding obligations. Several recent judgments by local courts to pay outstanding arrears and penalty to creditors have greatly complicated debt and budget management. Payment by the government would be in violation of the "proportionate burden-sharing principle" among all creditors under the enhanced HIPC Initiative, while nonpayment would result in contempt of the courts. The government has reiterated its request to the World Bank and the Fund for assistance in reaching speedy agreement with its creditors.
G. Program Monitoring
44. The program will be monitored on the basis of quantitative and structural performance criteria and benchmarks. The structural performance criteria and benchmarks are listed in Table 1; the quantitative targets are set out in Table 2. The targets for December 2002 and June 2003 constitute performance criteria under the program. Two reviews are envisaged under the program to be concluded by May and September 2003, respectively.
1. This memorandum defines the quantitative benchmarks and performance criteria described in the memorandum of economic and financial policies (MEFP) for the 2002/03 financial program that would be supported by the IMF Poverty Reduction and Growth Facility (PRGF), and sets forth the reporting requirements under the arrangement.
A. Base Money
2. Base money is defined as the sum of currency issued by Bank of Uganda (BOU) and the commercial banks' deposits in the BOU. The commercial bank deposits include the statutory required reserves and excess reserves held at the BOU but exclude the deposits of closed banks at BOU and Development Finance Funds (DFF) contributed by commercial banks held at BOU. Under this definition, the end-June 2002 base money was estimated at U Sh 626 billion, based on data available through May 2002. The base money limits will be cumulative changes from end-June 2002 and will be monitored from the monetary authority balance sheet, provided to the IMF by the BOU.
B. Net Claims on the Central Government by the Banking System
3. Net claims on the central government (NCG) 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 the banking system, excluding deposits in project accounts. Credits comprise bank loans and advances to the government and holdings of government securities and promissory notes. The component of credit to government in the form of securities and promissory notes will be calculated based on data from balance sheets of the monetary authority and commercial banks.1 The limits on the change in net claims on the central government by the banking system will be cumulative from end-June 2002.
C. Net International Reserves of the Bank of Uganda
4. Net international reserves (NIR) of the BOU are defined for program monitoring purpose as reserve assets of the BOU net of short-term external liabilities of the BOU. Reserve assets are defined as 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 defined as liabilities to nonresidents, of maturities less than one year, contracted by the BOU and include outstanding IMF purchases and loans.
5. For program monitoring purposes, reserve assets and short-term liabilities (excluding liabilities to the IMF) at the end of each test period will be calculated by converting reserve assets measured in Uganda shillings as reported by the BOU using the end-month Uganda shilling per U.S. dollar exchange rate. The U.S. dollar value of outstanding purchases and loans from the IMF will be calculated by converting the outstanding SDR amount reported by the Treasurer's Department of the IMF using the U.S. dollar per SDR exchange rate at the end-of each quarter.
D. Expenditures Under the Poverty Action Fund
6. The expenditures under the Poverty Action Fund (PAF) include both wage and nonwage current expenditures under the PAF, and domestic development expenditures under the PAF. The minimum expenditures under the PAF are defined as 95 percent of the budgeted expenditures under the PAF, which cumulatively are: U Sh 141.9 billion for end-September 2002, U Sh 299.5 billion for end-December 2002, U Sh 464.1 billion for end-March 2003, and U Sh 647.3 billion for end-June 2003.
E. New Domestic Budgetary Arrears of the Central Government
7. The nonaccumulation of new domestic payment arrears is a continuous performance criterion under the program. New domestic payments arrears are defined as the sum of: (i) any bill that has been received by a spending ministry from a supplier of goods and services delivered (and verified) and for which payment has not been made within 30 days; (ii) unpaid and due personal claims, including wages and salaries; and (iii) unpaid debt-service due on government debt. For the purpose of the program monitoring, the Auditor General's/Internal Auditor Office's of the Ministry of Finance, Planning, and Economic Development (MFPED) audits of the stock of arrears at end-December 2002 and at end-June 2003 shall be used to determine the new arrears created in the first six months and during the entire 2002/03 fiscal year, respectively. The result of these audits should be available not later than 45 days following the close of the covered period. Results of the Auditor General's final audit of government accounts for end-June 2002 should be available by March 2003, and will be the basis for verification of domestic budget arrears outstanding as of end-June 2002. These audits should include all arrears regardless of whether or not the area of expenditure is covered by the Commitment Control System (CCS).
F. Ceiling on Public Administration Expenditures
8. The quarterly expenditure limits for the public administration sector are: U Sh 57.7 billion for the first quarter to end-September 2002, U Sh 125.4 billion for the second quarter to end-December, 2002, U Sh 188.1 billion for the third quarter to end-March 2003, and U Sh 250.8 billion for the fourth quarter end-June 2003. For the purpose of program monitoring, the public administration sector consists of the following votes: Office of the Prime Minister (004) (excluding development), Foreign Affairs (006), Missions Abroad (0A0), MFPED (008) (excluding URA, Contingency, Accountability), URA (008), State House (002), Public Service (005), Public Service Commission (027), Local Government (025) (excluding development), Mass Mobilization (034), Office of the President (001) (excluding ISO/ESO and E&I), Specified Officers-Salaries (300), Parliamentary Commission (315), Local Government Finance Commission (033), Uganda Human Rights Commission (347), Electoral Commission (349). Any supplementary allocation to votes in the public administration sector that would exceed the program ceilings will be accommodated by cuts to votes belonging to other categories within this same sector.
G. Promissory Notes
9. A promissory note is a written promise by the government to pay a debt, where government is defined as the central government2, local governments, and autonomous government agencies. It is an unconditional promise to pay on demand or at a fixed or determined future time a particular sum of money to or to the order of a specified person or to the bearer. The government will not use promissory notes or any form of a promise to pay for goods and services at a future date, and all domestic arrears payments will be settled in cash or by the transfer of immediately available funds.
10. The NIR target is based on assumptions regarding import support, assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative, and external debt-service payments. The NCG target, in addition to being based on the two aforementioned assumptions, is also based on assumptions regarding domestic nonbank financing of central government fiscal operations. On a cumulative basis, from July 1, 2002, the Uganda shilling equivalent of import support plus HIPC assistance will amount to U Sh 73.9 billion at end-September 2002; U Sh 526.4 billion at end-December 2002; U Sh 629.0 billion at end-March 2003; and U Sh 816.0 billion at end-June 2003. Debt service due before assistance under the Highly Indebted Poor Countries (HIPC) Initiative, excluding debt service owed to creditors that have not yet reached agreement on the delivery of HIPC assistance is programmed at U Sh 54.4 billion at end-September 2002; U Sh 92.3 billion at end-December 2002; U Sh 157.6 billion at end-March 2003; and U Sh 205.3 billion at end-June 2003.
11. The ceiling on the cumulative increase in NCG 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 import support, grants and loans, plus HIPC assistance, exceeds (falls short of) the projected amounts. The ceiling on the increases in NCG will be adjusted downward (upward), and the floor on the increase in NIR will be adjusted upward (downward) by the amount by which debt service payments inclusive of debt service financed with HIPC assistance falls short of (exceeds) the projections of debt service due before assistance under the Highly Indebted Poor Countries (HIPC) Initiative, excluding debt service owed to creditors that have not yet reached agreement on the delivery of HIPC assistance.
12. The ceiling on the increase in NCG will be adjusted downward (upward) by any excess (shortfall) in nonbank financing3 less payment of domestic arrears accumulated prior to introduction of the CCS (up to a maximum amount of U Sh 50.2 billion) relative to the programmed cumulative amounts of negative U Sh 85.5 billion at end-September, 2002; negative U Sh 122.0 billion at end-December, 2002; negative U Sh 130.5 billion at end-March, 2003; and negative U Sh 40.0 billion at end-June, 2003. Furthermore, NCG will be adjusted downward by the amount by which expenditures under the Poverty Action Fund (PAF) fall short of 95 percent of the cumulative budgeted amounts of U Sh 149.3 billion at end-September 2002; U Sh 315.3 billion at end-December 2002; U Sh 488.6 billion at end-March 2003; and U Sh 681.5 billion at end-June 2003.
13. If excess reserves of the commercial banks increase on account of a shortfall in the cumulative quarterly flows of private sector credit relative to programmed amounts of U Sh 3.4 billion by end-September, 2002; U Sh 23.5 billion end-December, 2002; U Sh 26.7 billion end-March, 2003; and U Sh 66.5 billion end-June 2003, and 12-month underlying inflation is below 4.5 percent, the base money ceiling will be adjusted upward up to U Sh 9 billion. The base money ceiling will not be adjusted upward if the underlying 12-month inflation exceeds 4.5 percent.
I. Nonconcessional External Borrowing Contracted or Guaranteed by the Central Government or the Bank of Uganda and Arrears
14. The program includes a ceiling on new nonconcessional borrowing with maturities greater than one year contracted or guaranteed by the government or the BOU. Nonconcessional borrowing is defined as loans with a grant element of less than 35 percent, calculated using average commercial interest rates references (CIRRs) published by the OECD. In assessing the level of concessionality, the 10-year average CIRRs should be used to discount loans with maturities of at least 15 years, while the 6-month average CIRRs should be used for loans with shorter maturities. To both the 10-year and 6-month averages, the following margins for differing payment periods should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15-19 years; 1.15 percent for 20-25 years; and 1.25 percent for 30 years or more. The ceiling on nonconcessional external borrowing is set at zero. The coverage of borrowing includes financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms. Excluded from the limits are changes in indebtedness resulting from refinancing credits and rescheduling operations, and credits extended by the IMF. For the purposes of the program, arrangements to pay over time obligations arising from judicial awards to external creditors that have not complied with the HIPC Initiative do not constitute nonconcessional external borrowing.
15. The definition of debt, for the purposes of the limit, is set out in point 9, of the Guidelines on Performance Criteria with Respect to External Debt (Executive Board's Decision No. 12274-(00/85), August 24, 2000). It not only applies to the debt as defined in Point 9 of the Executive Board decision, but also to commitments contracted or guaranteed for which value has not been received. The definition of debt set forth in No. 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements reads as follows: (a) For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
16. The ceiling of the accumulation of new external payments arrears is zero. This limit, which is to be observed on a continuous basis, applies to the change in the stock of overdue payments on debt contracted or guaranteed by the government or the BOU from their level at end-June 2002. It comprises those external arrears reported by the Trade and External Debt Department of the BOU that cannot be rescheduled.
J. Monitoring and Reporting Requirements
17. The authorities will inform the IMF staff in writing at least 10 (ten) business days (excluding legal holidays in Uganda or in the United States) prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Such policies include but are not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises. The authorities will similarly inform the IMF staff of any nonconcessional external debt contracted or guaranteed by the government or the BOU.
18. Information such as on the issuance of treasury bills, the intervention in the foreign exchange market, daily average exchange rates, and the interest rate on government securities will be transmitted to the IMF's resident representative weekly, within five working days of the end of each week.
19. The government will provide the IMF staff with a summary of the fiscal accounts on a quarterly basis with a seven-week lag from the end of the reporting quarter. Revenues will be recorded on a cash basis as reported by the URA and the MFPED. Expenditures shall be recorded when checks are issued except for domestic and external debt-service payments, cash transfers to districts, and externally funded development expenditures. Expenditures on domestic interest will be recorded on an accrual basis and external debt service will be recorded on a commitment basis (i.e., when payment is due). Cash transfers to districts will be recorded as expenditures of the central government when the transfer is effected by the BOU. Expenditures on externally funded development programs will be recorded as the sum of estimated disbursements of project loans and grants by donors, less the change in the stock of government project accounts held at commercial banks in Uganda. Information on required and approved supplementary allocations in each quarter should be provided to the IMF within 15 days the end of each quarter.
20. Final accounts of the local government authorities for fiscal years 1999/00 and 2000/01 will be consolidated by end-September 2002. The summary Status of Submission of District Monthly Accounts Returns will be provided to the IMF Resident Representative by the 10th day of each month. A report explaining any noncompliance with the monthly reporting requirement by districts will be provided by the 10th day of the month following the end of each quarter to the IMF. Any noncompliance by one month and 15 days following the end of a month will result in a reminder letter being sent from the Treasury Inspectorate Department to the District Chairperson. Any noncompliance for an additional month will result in a memorandum being sent from the Commissioner of the Treasury Inspectorate Department to the Budget Director indicating that the Monitoring and Accountability Grants to the noncompliant districts should be discontinued until compliance is restored. A memorandum indicating this action will be sent to each noncompliant district.
21. The quarterly summary reports prepared under the CCS will be provided to the IMF staff within 40 days after the end of each quarter.
22. As supplementary information, the government will provide the IMF staff on a monthly basis, with a seven-week lag from the end of the reporting month, a statement of: (i) outstanding stock of checks issued by the Uganda Computer Services of the MFPED, disaggregated into checks issued for commitments arising during July 1, 2002 through June 30, 2003, payment of arrears accumulated prior to July 1, 1999, and checks issued to settle intra-ministerial payment obligations; (ii) cash balances held in project accounts at commercial banks; (iii) total value (measured at issue price) of outstanding government securities; (iv) total value (measured at issue price) of outstanding government promissory notes; (v) the stock of government securities (measured at issue price) held by commercial banks; (vi) the stock of government promissory notes (measured at issue price) .
23. The consumer price index will be transmitted monthly to the IMF with no more than a two-week lag from the end of the reporting month. The balance sheet of the BOU, the consolidated accounts of the commercial banks, and the monetary survey will be transmitted to the IMF on a monthly basis with a lag of no more than seven weeks from the end of the reporting month.
24. Standard off-site bank supervision indicators for deposit money banks will be transmitted to the IMF quarterly and on-site reports transmitted as needed based on the findings of the off-site reports.
1 The monetary authority values the securities and promissory notes at issue price, while commercial banks value the securities and promissory notes at face value.
2 Central government consists of the state house, cabinet ministers, all ministries, parliament, the judiciary, and committees.
3 Comprising check float and the change in the stock of government securities and government promissory notes held by the nonbank public.