## Uganda: Staff Concluding Statement of the 2019 Article IV Mission

_IMF News, February 14, 2019_

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## Bibliographic details
- Published: February 14, 2019

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### Mission overview and macroeconomic summary
- An IMF mission visited Uganda January 29 to February 12, 2019 to hold discussions for the 2019 Article IV consultations.
- Key high-level findings:
  - Economic growth has recovered, while progress on social indicators is mixed and poverty reduction has stalled.
  - Fiscal and external vulnerabilities have increased, reflecting scaled-up infrastructure investment and weaknesses in the budget process.
  - Monetary policy has maintained low inflation and can stay the course.
  - Banking sector health has improved, and credit to the private sector has increased.

### Recent economic developments and outlook
- Growth and sectors:
  - The economy grew by 6.1 percent in FY17/18.
  - Growth is projected at 6.3 percent in FY18/19.
  - Manufacturing, construction, and services are expanding; agriculture rebounded from the previous year’s drought.
- Social and agricultural indicators:
  - Literacy and numeracy improved until 2010 but have stagnated since.
  - Primary education completion rates have declined.
  - Child and maternal mortality rates have been reduced.
  - Poverty increased to 21 percent in the four years to the 2016/17 household survey, from 19 percent in 2012/13.
  - About 70 percent of the population depends on agriculture, which grew at 2 percent on average in the five years to 2016/17.
  - Population growth is 3 percent.
  - Agriculture growth rebounded to 3.8 percent in 2017/18.
- Inflation and prices:
  - Headline inflation stood at 2.7 percent year-on-year in January.
  - Core inflation was 3.4 percent.
  - Core inflation is projected to accelerate and converge to the authorities’ 5 percent target over the next 12 to 18 months.
- Fiscal and public debt:
  - The fiscal deficit widened to 5 percent of GDP in FY17/18.
  - Revenue collection improved by 0.3 percent of GDP, short of the government’s objective of raising tax revenues by ½ percent of GDP each year.
  - Infrastructure spending increased by over 1 percent of GDP.
  - Public debt went up by 3 percentage points to 41 percent of GDP.
  - The budget now spends one in five shillings collected in revenue on interest payments (more than allocations for health or education).
- External position and reserves:
  - The current account deficit increased to 6.1 percent of GDP in FY17/18.
  - Imports of goods and services grew by 17 percent; exports grew by 9 percent.
  - Financing came from foreign direct investment, public-sector debt disbursements, and a decline in international reserves.
  - Reserves amounted to US$3.2 billion at end FY17/18.
- Financial sector soundness:
  - Financial soundness indicators for September 2018 suggest the banking sector is healthy.
  - Banks remain well capitalized, liquid, and profitable, except for some smaller banks.
  - Non-performing loans have declined.
  - Bank of Uganda’s stress tests suggest improved system resilience, though concentration risks are rising.
- Medium-term outlook and risks:
  - Over the next 5 years, growth could reach 7 percent if infrastructure and oil sector investments proceed as planned and private sector credit remains supportive.
  - The mission projects oil production to start in 2023.
  - Risks tilted to the downside include delays in oil production, weak implementation of infrastructure projects, political tensions, adverse weather, regional health concerns, and global trade tensions.
  - Upside possibilities include stronger private sector activity and improvements in regional security.

### Macroeconomic policies for inclusive growth
- Main challenge:
  - Uganda needs to ensure that economic policies translate into inclusive growth and jobs.
  - Uganda needs to create more than 600,000 jobs a year to accommodate its growing population.
- Policy priorities to promote inclusiveness:
  - Raise productivity in agriculture to increase incomes and facilitate employment shifts toward light manufacturing and services.
  - Invest in infrastructure and human capital.
  - Close the education gap and promote gender equality.
  - Reverse the trend of declining budget allocations for spending on education and health, while enhancing the effectiveness of this spending.
  - The mission was encouraged by the authorities’ intentions in this regard.

### Fiscal policy: findings and recommendations
- Lack of an effective fiscal anchor:
  - Uganda has formally adopted a debt target in its Charter for Fiscal Responsibility, but projected debt paths have been revised upward during the infrastructure scaling-up drive:
    - In 2013, debt was targeted to peak at 31 percent of GDP.
    - In 2016, at 44 percent of GDP.
    - Currently debt is projected to peak at 49½ percent in FY21/22.
  - Because of deterioration in debt metrics, the budget spends one in five shillings collected in revenue on interest payments.
  - Recommendation: set an operational debt ceiling of 50 percent of GDP in nominal terms to determine the annual budget deficit and define a binding expenditure envelope until oil production starts and an oil fiscal rule can be adopted.
  - Ongoing work: development of the 2019-2024 Public Debt Management Framework to help keep debt sustainable.
- Budget process and execution:
  - The budget process is not providing sufficient top-down guidance for resource allocation.
  - Budget execution has systematically deviated from approved budgets; capital spending is under-executed while other current spending has been higher than budgeted.
  - Recommendations:
    - Provide a high-level summary in the budget document that clearly describes quantitative targets.
    - Make targets binding during budget implementation.
    - Strengthen public investment management to address costing difficulties and lack of comprehensiveness in original estimates.
    - Contain current spending through specific identified measures adopted with the budget, while protecting social sectors.
- Market implications of spending pressures:
  - Spending pressures have led to domestic arrears contributing to non-performing loans and unanticipated large issuances of domestic securities, causing jumps in yields (for example in June 2018).
  - Recommendations:
    - Implement the authorities’ domestic arrears strategy, including settlement of validated arrears.
    - Publish a predictable issuance calendar for government securities that spells out targeted auction volumes.
- FY19/20 fiscal path and revenue mobilization:
  - In FY18/19, the overall deficit is expected to increase to 6.3 percent of GDP, mitigated by strong revenue collection.
  - Supplementary budgets before parliament would raise spending and require additional domestic borrowing.
  - Recommendation: set the FY19/20 deficit at around the same level to ensure public debt stays below 50 percent of GDP as currently projected.
  - To accommodate planned infrastructure investment in FY19/20, measures to raise an additional ½ percent of GDP in tax revenue are required.
  - Recommendation: finalize and adopt the five-year Domestic Revenue Mobilization Strategy, expected to include tax policy reforms (including rationalization of exemptions) and tax administration reforms to improve compliance.
- Debt sustainability caveats:
  - Preliminary debt sustainability analysis indicates Uganda would remain at low risk of debt distress under specific assumptions:
    - (i) infrastructure investments yield the envisaged growth dividend;
    - (ii) revenue collection improves by ½ percent of GDP per year over the next five years;
    - (iii) oil exports commence in 2023;
    - (iv) infrastructure investment is reduced once current projects are completed.
  - Significant vulnerabilities could push public debt above the Charter ceiling (50 percent of GDP in net present value terms) if these assumptions do not hold or new spending pressures and shocks materialize.

### Monetary policy and external position
- Monetary policy stance:
  - Bank of Uganda has balanced its inflation objective with supporting economic activity.
  - Monetary policy has achieved low levels of inflation, encouraging investment and protecting purchasing power.
  - The recent decision to keep monetary policy on hold was appropriate.
  - Bank of Uganda should be able to maintain its policy rate over the next few months given projections for the shilling exchange rate, food and fuel prices, and the global interest rate environment.
- Central bank finances and operations:
  - The central bank’s deficit complicates monetary policy operations due to low income from low global interest rates, costs to mop up excess liquidity, and rising operating expenditures.
  - Recommendation: prompt recapitalization of Bank of Uganda in the FY19/20 budget to ensure efficient operations.
  - Finalization of the pending Memorandum of Understanding between Bank of Uganda and Ministry of Finance, Planning, and Economic Development and a review of the bank’s cost structure would be welcome.
  - An independent, efficient central bank is essential to maintain macroeconomic stability.
- External position and reserves:
  - Uganda’s external position is weaker than implied by medium-term fundamentals and desirable policies.
  - The current account deficit is expected to widen further during the preparation phase for oil production.
  - International reserves are equivalent to 4.1 months of next year’s imports.
  - Bank of Uganda plans to continue to build reserves opportunistically to maintain this reserve coverage.
  - The flexible exchange rate regime continues to serve Uganda well.

### Financial sector and inclusion
- Financial inclusion:
  - Around 85 percent of the population now has access to financial services.
  - Agency banking introduction in 2018 contributed to increased access.
  - The authorities’ 2017–22 National Financial Inclusion Strategy to develop credit infrastructure and promote formal savings, investment, and insurance instruments is welcome.
- Supervision, regulation, and stability:
  - Regulatory structures broadly follow international best practices.
  - Bank of Uganda has ensured financial sector stability, including resolving banks that posed systemic risks.
  - Ongoing work needed: strengthen banks’ financial reporting, internal controls, and governance to prevent failures similar to the most recent bank failure.
  - Recommendation: prompt adoption of the National Payments System Act to provide legal basis for Bank of Uganda to supervise the mobile money sector.

### Governance and anti-corruption
- Legal framework and implementation:
  - Uganda has a sound legal framework to deal with governance and corruption, but implementation needs strengthening.
  - Further improvements in fiscal transparency and public investment management are necessary.
- Extractive sector transparency and AML/CFT:
  - Cabinet’s decision to start accession to the Extractive Industries Transparency Initiative is welcome.
  - Uganda achieved important progress on AML/CFT technical compliance and was removed from the FATF’s grey list in FY17/18.
  - Recommendation: continue work to align the AML/CFT regime with strengthened international standards to achieve full FATF compliance.
  - Uganda’s application to the Egmont Group is a step in this direction.

### Mission engagement
- The mission met with Minister Matia Kasaija, Governor Emmanuel Tumusiime-Mutebile, Permanent Secretary/Secretary to the Treasury Keith Muhakanizi, Deputy Governor Louis Kasekende, Commissioner General Doris Akol, Acting Director Uganda Bureau of Statistics Imelda Atai Musana, senior government officials, civil society, unions, and the private sector.
- The IMF team welcomed open and constructive discussions and expressed gratitude for hospitality and cooperation.

*Uganda: Staff Concluding Statement of the 2019 Article IV Mission, February 14, 2019 — International Monetary Fund.*

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## References

- [Uganda and the IMF](http://www.imf.org/external/country/UGA/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2019/02/14/mcs021419-uganda-staff-concluding-statement-of-the-2019-article-iv-mission_