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The following item is a Letter of Intent of the government of Uganda, which describes the policies that Uganda intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Uganda, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

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Kampala, July 15, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. Camdessus:

1. We recently held discussions with the Fund staff on the 1999 Article IV consultation and midterm review of Uganda's program for 1998/99 (July-June) that is supported by the second annual arrangement under the Enhanced Structural Adjustment Facility (ESAF), approved by the Executive Board of the Fund on November 11, 1998. This letter reviews progress in implementing the 1998/99 program, and sets out the broad objectives and policies to be pursued during 1999/2000.

2. A number of the 1998/99 program's quantitative and structural performance criteria and benchmarks for end-December 1998 were not met. This letter describes the remedial measures and commitments undertaken by the Government of Uganda to redress them. Taking into account the nature of the nonobservance of the performance criteria and benchmarks, and the measures described in this letter, the Government requests waivers on the end-December 1998 performance criteria that were missed. Following the completion of the midterm review of the program by the Executive Board, the government also requests the second disbursement of SDR 16.7375 million under the second annual arrangement.

I. PERFORMANCE DURING 1998/99

3. The government's basic macroeconomic objectives are being met. Real GDP growth is expected to reach 7.8 percent in 1998/99,1 reflecting primarily the recovery of food crop production early in the year. Overall inflation was 5.1 percent for the year ending June 1999 (nonfood inflation was 3.1 percent), and was -0.2 percent on an annual average basis.

4. Four quantitative performance criteria for end-December 1998 were not observed: net bank claims on government, gross issuance of promissory notes, minimum nonwage expenditures on Priority Program Areas (PPA) and the Universal Primary Education (UPE) program component of the domestic development budget, and net international reserves (Table 1). The structural performance criterion for on-site bank examinations by the Bank of Uganda (BOU) was observed, but that on verification of arrears was not (Table 2). The prior actions for the completion of the midterm review pertaining to the privatization program were not observed. The structural benchmark regarding civil service reform was met, but those pertaining to the development of a plan for clearing arrears, the cabinet decision for private sector participation in the Uganda Railway Corporation (URC), and the comprehensive audits by the LTD were not.

5. The Government believes that the above deviations from the financial program were relatively small, and that macroeconomic stability has been maintained. All quantitative benchmarks set for end-March 1999 under the program were met, with the exceptions of those pertaining to expenditures on PPAs (owing to residual implementation capacity constraints) and the gross issuance of promissory notes. Measures have been taken to ensure that all quantitative benchmarks and structural performance criteria set under the 1998/99 program will be met. Three structural benchmarks for 1998/99 will not be observed,2 but the government has taken actions (described below) to bring the structural program back on track by end-July 1999 (see Table 3 for the list of prior actions to complete the midterm review).

6. Based on the performance over the first nine months, the fiscal deficit (excluding grants) for 1998/99 is expected to be U Sh 564 billion (7.1 percent of GDP), compared with a programmed U Sh 525 billion (6.7 percent of GDP), entirely due to higher expenditures. The deficit will be financed through external resources (including grants) equivalent to 8.2 percent of GDP and domestic bank financing of 0.9 percent of GDP, allowing for a higher-than-programmed reduction in domestic nonbank claims on government of 1.9 percent of GDP (including arrears payments of 1 percent of GDP).

7. Revenues for 1998/99 are projected at the programmed level (12 percent of GDP). Better-than-programmed tax revenue are likely to be offset by lower nontax revenue. Tax revenues are expected to be U Sh 22 billion (about 0.3 percent of GDP) higher than targeted, reflecting the impact of the depreciation of the exchange rate, improvements in tax administration, the full implementation of the new income tax law, and the expiry of tax holidays. Nontax revenues are expected to be U Sh 22 billion lower than programmed as road licenses have suffered from enforcement difficulties, transfers of BOU profits have not materialized, and transfers from the Non-Performing Asset Recovery Trust (NPART) are likely to be lower than targeted. Total expenditures are projected to be U Sh 38 billion (about 0.5 percent of GDP) higher than expected, and the composition of expenditures will not be significantly different from the program, apart from higher defense expenditures related to national security needs. Defense outlays are projected to be U Sh 45.6 billion (0.6 percent of GDP) above budget and to account for 20 percent of total domestic expenditures against a programmed 15.1 percent. Nondefense, non-UPE development expenditures are expected to be U Sh 27.5 billion below program and to account for 9.6 percent of total domestic expenditures against a programmed 12.3 percent. Notwithstanding technical difficulties in implementing new programs in the early part of the fiscal year and delays in disbursements by donors, expenditures on PPAs and the domestic development component of UPE are expected to be U Sh 1.8 billion higher than programmed and to account for 19.7 percent of domestic expenditures compared with a programmed 19.3 percent. As a result of weaknesses in expenditure control at the vote level, new domestic arrears of U Sh 107 billion are expected to accumulate in 1998/99 (based on partial reporting from ministries). However, U Sh 80 billion of preexisting arrears will be cleared, bringing the outstanding stock of domestic arrears to a provisional U Sh 261 billion (3.3 percent of GDP) by end-June 1999.3

8. Under the 1998/99 program, it was envisaged that the LTD would complete 50 comprehensive audits and that the Uganda Revenue Authority (URA) would complete the on-site audit of all 545 petrol outlets. In February, the authorities advised the staff that these benchmarks could not be achieved. Consequently, it was decided that the LTD would complete 18 comprehensive audits and 40 refund audits between March 1 and June 30, 1999, and complete 100 on-site audits of petrol stations by June 1999. By May 17, the LTD had completed 10 comprehensive audits and 78 refund audits and is on track to achieve the revised objectives. These audits have resulted in higher tax recoveries; in particular, the refund audits have resulted in a 52 percent reduction in the amounts claimed. The URA conducted 261 physical inspections of petrol outlets in lieu of on-site audits. The Tax Tribunal started operations in May 1999, giving taxpayers recourse against tax assessments and abuse by tax officers. In the customs area, smuggling is being more effectively fought; URA has installed tamper-proof seals on fuel tanks or pumps in all but ten petrol outlets, chemical tracers have been introduced on imported petroleum products, and communications between customs offices and stations have been improved through the extension of the Wide Area Network. The URA has developed a comprehensive Information Technology Strategy to be implemented over the next three years. The Revenue Protection Services have recovered about U Sh 3.7 billion. The ASYCUDA customs declaration and control system is operational in Kampala, Entebbe, and Jinja.

9. The government has begun implementing a plan of action to control the accumulation of domestic budgetary arrears. A Commitment Planning and Controlling System was implemented on April 1, 1999 on a pilot basis in four ministries--State House, Defense, Education, and Prisons--and will be extended to all ministries and spending units in 1999/2000. However, some ministries have had difficulties adhering to the expenditure ceilings. A circular has been issued announcing that the practice of credit purchases is to cease and that all bills are to be paid within 30 days. New appointment letters for Accounting Officers were issued on June 10. The letters instruct Accounting Officers to ensure that expenditures do not exceed the sum of the quarterly commitment limit and unutilized cash from previous quarters and to submit a monthly report on outstanding commitments to the Ministry of Finance, Planning and Economic Development (Ministry of Finance). The letters also set out penalties for noncompliance. The Auditor General will announce the verified stock of arrears as of June 30, 1998 in June 1999, and the government will announce a plan by July 1, 1999 to clear the known outstanding arrears within three years.

10. The growth of broad money was 15.6 percent for the year ending March 1999, against a programmed 18 percent, and private sector credit increased by 26.7 percent during the same period. In light of a slight weakening of money demand, the growth in broad money for the year ending June 1999 is expected to be on the order of 15 percent. Interest rates on 91-day treasury bills fell to 4 percent in April 1999, following a fairly steady decline over the previous two years. In response to an increase in excess reserves and mounting pressures on the exchange rate, the BOU tightened monetary policy in May, and the interest rate on 91-day bills has subsequently increased to 10.3 percent at the end of May. While average commercial bank lending rates have remained relatively high at about 20 percent per year, prime lending rates fell to 14 percent in April, and have recently increased following the tightening of monetary policy.

11. A number of actions have been taken to address the financial problems of the banking sector. First, following the unraveling of the April 30, 1998 sale of a 49 percent interest in Uganda Commercial Bank (UCB), the Government has moved forward with its plan for reprivatization. The board of directors and senior staff of UCB were replaced by a BOU appointed board and managing director. Legal action has been initiated against Westmont Land (Asia) in connection with irregularities in both the purchase and sale agreement and its management contract for UCB. The operating performance of the UCB is being monitored through monthly income/expenditure statements and balance sheets fully reflecting the impact of loan-loss provisioning on capital.

12. Second, the BOU has taken a number of decisive steps to ensure that weak banks either operate in compliance with the terms of remedial memoranda of understanding, or are promptly closed to minimize the losses incurred by depositors and creditors. Following a determination by the BOU that recapitalization was unlikely, International Credit Bank was closed in September 1998. The BOU intervened in Greenland Bank in November 1998. Greenland Bank was closed on April 1, 1999 following the discovery of improper off-balance sheet assets and liabilities, the emergence of severe liquidity problems, and a continued deterioration in its capital position. A reputable liquidator with international experience has been appointed. The Cooperative Bank (Coop) was closed on May 20, 1999 due to its capital deficiency and the withdrawal of the support of USAID. Its assets have been offered for sale with the expectation that this will facilitate a rapid payment of depositors' claims through an assumption of deposits by a well-capitalized bank. In both cases, the government has announced its commitment to pay all deposit claims (net of depositors' liabilities to the banks) and has already begun paying out the insured component of these claims. The cost associated with bank restructuring and reform would be covered by the BOU in a transparent and noninflationary manner involving mainly the issuance of BOU securities. These financing operations would be developed in consultation with the Fund and World Bank staffs prior to implementation.

13. Third, the BOU has stepped up its program of on-site examinations. In the first half of 1998/99, the BOU completed nine on-site bank examinations (including follow-up examinations of three banks). Through May 1999, the BOU had completed four additional on-site bank examinations (thereby meeting the June 1999 benchmark under the program), with a fifth in progress. The BOU has also completed one examination of a credit institution (Imperial Investments Finance Ltd. completed January 1999). Where necessary, the BOU is enforcing remedial memoranda of understanding to bring banks into full compliance with prudential regulations within a period of six months.

14. Based on developments through the first ten months, Uganda's balance of payments in 1998/99 is expected to record an overall deficit of US$41 million, compared with the programmed surplus of US$47 million, owing primarily to lower inflows of private transfers and shortfall in budgetary import support. The 1998/99 external current account deficit (excluding official transfers) is anticipated to amount to 9 percent of GDP—lower than the 9.2 percent in the program, reflecting mainly a smaller trade deficit. This outcome, however, is attributable primarily to the significantly lower level of imports which appear, in part, to have been adversely affected by the sharp depreciation of the Ugandan shilling and uncertainty in the business environment. Export earnings are expected to be somewhat better than programmed because of higher noncoffee exports. Coffee exports, notwithstanding their anticipated increase in volume, will be about US$15 million less than programmed because of lower prices. With the shortfall in import support (both loans and grants) of about US$112 million, estimated official transfers and net capital account inflows are projected to be US$145 million less than programmed. Consequently, by end-June 1999, gross international reserve coverage will be 4.8 months of imports of goods and nonfactor services—slightly less than the programmed 5 months. External debt service in 1998/99 is anticipated to be essentially as programmed but Uganda will not be able to clear all its outstanding external payments arrears. Despite considerable effort, the government has had little success in securing debt relief from most of its non-Paris Club bilateral creditors on terms at least comparable to the April 1998 Paris Club restructuring agreement. All bilateral agreements with Paris Club creditors will be signed by the end of September 1999. Agreements have also been reached with almost all of Uganda's multilateral creditors regarding the modalities for delivery of assistance under the HIPC Initiative.

15. The Uganda shilling depreciated by 19 percent against the U.S. dollar during the year ending April 1999 to U Sh 1,526.5 per dollar (based on monthly average rates). The nominal and real effective exchange rates depreciated by an estimated 16.4 percent and 13.4 percent, respectively, during the same period. In the wake of the closure of Greenland Bank, the shilling came under substantial pressure and depreciated to U Sh 1,587 by mid-May. In response, the BOU intervened in the foreign currency market and tightened monetary policy. The rate has since appreciated to about U Sh 1,450 per U.S. dollar and the volatility in the market has subsided.

16. In the trade area, the last remaining import ban (on cigarettes and other tobacco products) was lifted effective April 1, 1999, and an ad valorem excise tax of 142 percent was imposed (in addition to the normal import duty of 15 percent), compared with a rate of 122 percent for domestically produced products. The differential between the excise on imported and domestic cigarettes and other tobacco products will be reduced by 50 percent by June 2000, and eliminated by June 2001. The temporary additional specific duties imposed on imports of beer, soft drinks, and automotive batteries were reduced by one-third, also effective April 1, 1999. A new Foreign Exchange Bill, which de jure liberalizes capital transactions, has been submitted to Cabinet and is expected to come into force by the end of June 2000.

17. The problems with the privatization program that emerged early in 1998/99 have been resolved. The reorganization of the Enterprise Development Project (EDP) has been completed. Staff levels were reduced from 63 to 32, the post of Executive Director was abolished, the functions of the Parastatal Monitoring Unit (PMU) were transferred to the Ministry of Finance, and a Utility Reform Unit was established to be responsible for utility reform. The amendments to the Public Enterprise Reform and Divestiture (PERD) Statute were submitted to Cabinet on March 14, and the bill is to be presented to Parliament in June. In addition, the Procedures Manual was officially launched and a summary was published. There has been progress toward completion of the sale of three high profile enterprises. Preparatory activities have been completed for the sale of Uganda Clays Limited (UCL), shares of which will be offered through the stock market in August 1999. Regarding Uganda Airlines Corporation (UAC), direct negotiations are being conducted with South African Airlines/Alliance; if the negotiations are not successful, UAC will be liquidated. Uganda Telecom Limited (UTL) has been retendered for divestiture, and the offer has been advertised. With regard to other enterprises, the divestitures of British American Tobacco (BAT), PAPCO, Soroti Meat Packers, Masindi Hotel, Uganda Spinning Mills have been completed,4 and the government's residual shares in Bank of Baroda and SAIMMCO are expected to be divested by June.

18. On public enterprise reform, significant progress has been achieved in setting the stage for the reform and ultimate privatization of the Uganda Electricity Board (UEB). A strategic plan to introduce competition and regulatory instruments has been approved by Cabinet, and legislation to establish the legal basis for restructuring the UEB into separate limited liability companies in preparation for privatization is being drafted. The Cabinet will approve a policy paper on private sector participation in the URC by June 1999 thereby observing the benchmark under the 1998/99 program with a six-month delay.

19. The restructuring of the traditional public service, encompassing 17 ministries (reduced from 22), is nearing completion, and the reductions in excess staffing levels in these ministries will be eliminated by September 1999. However, staffing levels in other "number limited" functions (commissions, secondary and tertiary schools, police, prisons, and central government staff "delegated" to the districts) have increased owing to continued weaknesses in payroll management (which has led to the accumulation of salary arrears). As a result, meeting the June 1999 benchmark for the overall reduction in the "number limited" public service will require a reduction of at least 1,625 staff during the last two months of 1998/99. At least 700 staff members will be retrenched by June 1999, mainly from ministries in accordance with the decentralization of their functions. The remaining excess staff will be retired by August 1999. The most recent survey indicates that 663 cases were pending access to the payroll as of May 1999, and this number is expected to be reduced to less than 100 by June 1999. Against this background, the government expects that the June 1999 benchmark on the size of the "number-limited" public service will be observed by August 1999. All primary school teachers will be recorded on the Ministry of Public Service (MPS) payroll by June 1999, and all outstanding back salaries will be paid at that time.

20. The recent evolution of social outcome indicators has been mixed. Education indicators improved substantially as a result of the UPE program launched at the beginning of 1997. The net primary education enrollment rate increased from 56 percent in 1995/96 to 91 percent in 1997/98, and the primary school completion rate increased from 35 percent in 1995/96 to 40 percent in 1997/98 (Table 4). However, immunization rates have deteriorated owing to some initial difficulties in the decentralization process, resulting in a temporary lack of basic resources and equipment necessary to properly store vaccines.

II. OBJECTIVES AND POLICIES FOR 1999/2000

21. The overall macroeconomic objectives for 1999/2000—2001/02 are: (i) to achieve real GDP growth rates of 7 percent per year; (ii) hold inflation to 5 percent per year; and (iii) maintain gross international reserves at a level equivalent to about five months of imports of goods and nonfactor services. Given the outlook for external resources and world commodity prices, these overall objectives are consistent with a decline in the fiscal deficit and the external current account deficit (both excluding official grants), to about 6 percent and 7 percent of GDP, respectively, by the end of the three-year period. The government's medium-term fiscal strategy remains the same as set forth in the memorandum of economic and financial policies attached to the letter to the Managing Director of the Fund dated October 28, 1998, as well as the government's policy framework paper of the same date to eradicate poverty by increasing expenditures on growth-oriented social programs and development projects, while ensuring that macroeconomic stability is maintained. As noted in the memorandum dated October 28, 1998, if donor financing proved more favorable, the government would consider engaging in higher, donor-funded expenditures on urgent social and priority areas provided that revenue performance is good, inflation remains low, sufficient credit would be available to the private sector, and the higher donor inflows are compatible with external debt sustainability. The Government believes that these conditions have been met, and the somewhat larger fiscal deficits (excluding grants) described in this memorandum, would be more than covered by increased external financing, while facilitating the repayment of currently identified domestic arrears over a three-year period and accommodating adequate growth in commercial bank credit to the private sector.

22. The overall fiscal deficit (excluding grants) is programmed to increase by 0.9 percent of GDP to 8.0 percent of GDP in 1999/00, mainly as a result of higher development and social spending. Revenues are programmed to rise by 0.6 percent of GDP to 12.6 percent of GDP. The deficit would be fully financed by external resources equivalent to 10.4 percent of GDP (including grants), permitting a buildup in government net claims on the banking system equivalent to 0.9 percent of GDP and a liquidation of domestic nonbank claims on government of 1.5 percent of GDP (including domestic arrears payments of 1.4 percent of GDP).

23. The revenue projections reflect measures to improve efficiency in tax administration, tax compliance, and relations with taxpayers. The URA strategy is to use the LTD as a model for URA reform. Measures to be implemented to enhance effectiveness and efficiency of the LTD are as follows:

  • Develop performance indicators for the Audit and Collections Divisions and audit and collection plans by June 30, 1999.

  • Complete 12 comprehensive and 200 issue oriented audits by December 31, 1999, and a cumulative 28 comprehensive, 450 issue oriented, and 90 refund audits during 1999/2000; these will constitute structural benchmarks under the program to be supported by the third annual ESAF arrangement.

  • Organize the LTD along functional lines by clearly separating the collection and audit functions.

  • Provided external funding is made available, experts from other tax administrations will train on-the-job 30 auditors.

  • With the objective of facilitating tax payments, introduce the VAT combined payment/return form by July 1, 1999; depending on its result and performance, direct banking procedures will be extended to PAYE by end-August 1999.

  • Introduce instant VAT refunds on a pilot basis for zero-rated taxpayers, claims below U Sh 5 million, and returns where input tax on imports is 75 percent or more of the refund. Instant refunds will be paid within 10 days.

  • With the objective of consulting stakeholders on issues of tax administration, including changes in payment procedures, propose to the URA Board the establishment of a Large Taxpayer Advisory Committee—which will include representatives of large enterprises, tax accountants, and LTD officials.

24. The government is receiving technical assistance to improve the duty drawback scheme by introducing automatic drawback provisions and simplifying administrative procedures to shorten the waiting period for normal refunds. The URA will present, by December 31, 1999, an updated customs modernization project. With a view to further deterring smuggling and enhance compliance with customs regulations, higher sanctions will be introduced for smuggling, misdeclaration, and false entries and documentation. In case of imports without preshipment inspection, a compulsory destination inspection will apply and its cost will be borne by the importer. The government will enhance transparency of tax policy by gazetting all existing and forthcoming Statutory Instruments (SIs) issued for specific or general exemptions and changes in tax rates. SIs will become effective only from the date they are published in the newspapers or gazetted. The government will publish in newspapers the content of the SIs and the Finance Act will include the SIs that mandate changes in tariff excises and VAT rates. As a matter of policy, the government will in future avoid granting selective tax exemptions and privileges. With regard to the income tax law, the government will resist pressures for changes which may undermine revenue sustainability and progress in tax reform.

25. Expenditures in 1999/2000 will be increased by 1.4 percent of GDP to 20.6 percent of GDP. The government's policy continues to emphasize the PPAs, which is budgeted to increase by 0.4 percent of GDP to 2.8 percent of GDP (including the UPE component of domestic development expenditures). With a view to enhancing central government monitoring of district expenditures on the Poverty Action Fund component of the PPAs, the reporting guidelines for spending ministries will be revised by December 1999 and implemented by July 1, 2000. Line ministries' reports will include indicators of outputs of government programs. Development expenditures will increase by 0.9 percent of GDP to 8.9 percent of GDP, mainly as a result of capital spending in social sectors, including primary education. The domestic development component of the latter is currently projected to increase by 63 percent in nominal terms. The government is committed to reducing defense expenditures to U Sh 177 billion (2.0 percent of GDP).

26. Expenditure control will be strengthened through several measures. The Auditor General will complete the verification domestic arrears outstanding as at June 30, 1999 by December 31, 1999. The Commitment Control System will be implemented in all ministries and spending units on July 1, 1999, and monthly reporting will commence by September 15, 1999. To monitor compliance with the new instructions to Accounting Officers, Treasury Inspectors will visit ministries and spending units and report cases of noncompliance with the new system to the Secretary of the Treasury for necessary action. On the basis of Inspectors' findings and the required reports by Accounting Officers, the Treasury will report cases of over-commitments and noncompliance with the System on a quarterly basis to the Cabinet and the President. Quarterly data on outstanding commitments and unpaid bills and the treasury quarterly reports will be provided by the Ministry of Finance to the IMF staff. Data for the first quarter of 1999/2000 will be ready by December 31, 1999. The Ministry of Finance will amend the Treasury Financial and Accounting Instruction to include the new expenditure commitment control system, the revised system of purchases, and the penalties for noncompliance on the part of accounting officers by June 2000. The revisions will include the clarification of financial misconduct, when the latter can attract penalties, and penalty procedures. The 1999/2000 Budget Estimates will include adequate provisions for utility expenses and rent—areas where arrears have accumulated owing to under-provisioning in the past. The stock of domestic arrears and pending bills will be included in the estimates in accordance with the payment plan. Starting in 1999/2000, all liabilities, including for public utilities, will be settled through checks and swap arrangements will be discontinued. Promissory notes will no longer be used for the payment of domestic arrears, but will be issued only for the purpose of facilitating the cashflow management of the Treasury; consideration will also be given to making greater use of treasury bills for this purpose.

27. The main objective of monetary policy will remain containing inflation to 5 percent. On the basis of a continued moderate decline in money velocity, broad money growth is projected at 15 percent in 1999/2000, and credit to the private sector is projected to increase by 16 percent. The BOU will continue to implement a base money program as its principal mechanism of monetary control. Consistent with the BOU's broad money program, the government will be maintaining a floor on net international reserves of the BOU, and a ceiling on the net domestic assets of the banking system.

28. The program envisages budget support of U Sh 502.5 billion. Donors are increasingly tying their budget support to specific government programs (such as the UPE program) with well-identified import components, with the expectation that the entire foreign currency value of their support would be spent on these programs. In this context, a subset of budget support comprising funds earmarked for programs or projects will be identified. The ceiling on net bank claims on government would not be adjusted for deviations in this component of budget support relative to programmed levels. The ceiling on net bank claims on government would be adjusted for deviations relative to program in untied budget support. In the event of an actual or anticipated shortfall in untied budget support, the government will consult with the Fund staff on appropriate budgetary adjustments. The ceiling on net bank claims on government would be adjusted for any deviation in nonbank financing of the budget, excluding payments of salary arrears, which would be cleared in the context of the civil service reform policies described below. The program will also include a benchmark on an appropriately defined fiscal balance consistent with the ceiling on net bank claims on government. At all times, the BOU would mop up any excess liquidity in the banking system to keep the broad money program on track.

29. In the coming months, the Government will press ahead with decisive measures to strengthen the banking sector. A new Financial Institution Statute will be introduced in Parliament in 1999/2000. The Government not only committed in the budget speech to introduce the new statute, but seized the opportunity to signal a new approach to banking supervision. The government highlighted the prompt corrective action measures designed to ensure that banks facing difficulty will be quickly rehabilitated or closed. It also drew attention to the deposit insurance limits in the new statute and committed to paying only insured depositors should future closures occur. The BOU will contract with audit firms if necessary to ensure that on-site examinations of any bank not in full compliance with capital requirements as reported in the March 1999 off-site reports are completed before the new legislation is enacted early in 1999/2000. All identified problem banks will either operate in compliance with remedial memoranda of understanding leading to prompt recapitalization, or they will be closed. The Government is developing the plan for reprivatization of the UCB with a view to having it ready for sale not later than June 30, 2001. The Government is committed to developing during the first quarter of 1999/2000 detailed plans for interim management and reprivatization of the UCB. Technical assistance will be provided through World Bank funding to assist in this regard. The mandate of NPART will be extended beyond its current September 1999 sunset date as it continues to realize on the assets transferred from the UCB.

30. The banking supervision capacity of the BOU will continue to be strengthened. The BOU will use the available World Bank funding for systematic training of bank examiners. In addition to various training courses, this will include the retention of experienced bank examiners on contract to both provide immediate technical assistance and to train BOU staff by leading examinations. The BOU is seeking technical assistance to strengthen banking supervision, and will consider other measures to ensure that decisive supervisory action will be taken in a timely manner consistent with the prompt corrective measures of the new Financial Institutions Statute.

31. The BOU policy of only providing liquidity support on a fully secured basis to solvent banks is reaffirmed. Any bank that is unable to repay its liquidity advance or requests an increase in liquidity advances will be subject to an immediate on-site examination to confirm that it is solvent. A bank in receipt of liquidity advances from the BOU that is subsequently discovered to be insolvent will be closed.

32. In disposing of the assets and arranging payment of the deposit liabilities of closed banks, the BOU will impose such prudential conditions as may be necessary to ensure that deposits are only assumed by banks with satisfactory management and financial capacity. In the extraordinary cases of Greenland and Coop where the Government has committed to pay deposits in excess of the limits of the Deposit Insurance Fund, the need to limit the monetary impact on monetary targets will be taken into account in determining the payment method.

33. Uganda's approach to financial and monetary policies already incorporates several elements of the good practices with regard to transparency. It, however, requires continued strengthening, especially in the areas of monetary operations and payment systems. A number of areas have been identified in the banking sector where enhancements are warranted, and the government has already taken some steps in this regard. The new Financial Institutions Statute will address a number of aspects where the current act is not fully consistent with the Basle Core Principles for Effective Banking Supervision. Technical assistance will be used to develop policy and capacity in nonbank supervision and oversight of capital market and insurance activities to move Uganda closer to full implementation of international standards and transparency practices.

34. External sector policies will continue to aim at achieving a sustainable long-term balance of payments position. The external current account deficit (excluding official transfers) is projected to rise to about 9.7 percent of GDP in 1999/2000. Including official transfers, the current account deficit would decline to 3.3 percent of GDP. The trade deficit is forecast to widen due to the pickup of imports by about 9 percent after their decline in 1998/99. Export receipts are projected to increase by almost 12 percent, due primarily to continued favorable performance of noncoffee exports. Coffee exports are expected to remain relatively flat despite an increase in their volume (to 3.8 million bags from 3.6 million bags in 1998/99), owing to a decline in coffee prices by almost 4 percent. Growth in private transfers is expected to be very modest. With the sharp recovery in import support grants and loans, the overall balance of payments is expected to revert to a surplus of US$ 41 million and gross international reserve coverage is projected to rise to about 5.0 months of imports of goods and nonfactor services.

35. The government will continue to allow the exchange rate to be market determined. In this context, the government will intervene in the exchange market for the purpose of smoothing seasonal fluctuations while bearing in mind the need to observe the floor on net international reserves. The competitiveness of exports and other relevant indicators, such as real effective exchange rate, relative prices, profitability, and productivity gains of export sectors, will be assessed on an ongoing basis. The government remains firmly committed to pursue prudent monetary and fiscal policies to counter-destabilizing effects in the foreign exchange market.

36. Efforts to reduce Uganda's external debt burden will continue in 1999/2000. In particular, the government will continue its efforts to secure from Uganda's non-Paris Club bilateral creditors at least comparable treatment as the April 1998 Paris Club restructuring agreement. The government will persist in pursuing a prudent external debt management strategy, including bi-monthly meetings of BOU and Ministry of Finance to ensure effective implementation of the strategy. Consistent with this strategy, the government will adhere to a ceiling on new nonconcessional public or publicly guaranteed debt.

37. The government is committed to avoiding an increase in tariffs or discriminatory excises on imports from third countries as a result of further intra-East African Community (EAC) tariff liberalization. The existing discriminatory excises of 10 percent imposed on selected imports, as well as the recently imposed additional protection on textiles and sugar, will be phased out consistent with the framework for trade liberalization to be undertaken in the context of the EAC. In addition, the temporary additional duties imposed on imports of beer, soft drinks, and automotive batteries will be reduced by one-third by March 2000 and eliminated in March 2001, and those on cigarettes and tobacco products will be reduced by 50 percent by June 2000 and eliminated by June 2001.

38. With regard to the privatization program for fiscal year 1999/2000, the government's first priority will be to make every effort to expedite the approval of the amendments to the PERD Statute by Parliament early in the year in order to implement the reforms needed to bring transparency, accountability, and efficiency to the privatization process. With regard to the high profile enterprises, the government will focus its efforts on completing the divestiture of UTL, UAC, and Uganda Clays, and preparing for Parliament all legislative amendments necessary to pave the way for the privatization of UEB. In addition, the government will strive to broaden public participation in the privatization process through offering shares in the securities exchange and through the use of employee share-ownership plans. To bring greater order and transparency in the financial operations of the public enterprises, the government will terminate the policy of accumulating arrears to public enterprises even if these enterprises are unable to remain current on payments to the government. Furthermore, to better monitor the operations of public enterprise operations, the government will announce and publish the targets for the consolidated financial statements of the ten largest public enterprises beginning with fiscal year 2000/01. Finally, the government will submit to Parliament by end-June 2000 legislation to establish a single, independent, cross-sector regulatory body to regulate all public utilities.

39. In the area of public service reform, the government recognizes the urgent need for improvement of payroll management and will institute new measures toward this end. With regard to the traditional public service, encompassing the 17 ministries, the government expects to have all vacancies filled by June 2000. Subsequently, these ministries will receive block cash grants for the payment of their wage bills. With regard to the remainder of the "number limited" public service, the government will extend the restructuring exercise to commissions, secondary and tertiary education, police, prisons, and delegated staff. Organizational structures and the number of establishments will be approved by Cabinet by December 31, 1999. In the interim, these functions will also receive a block cash grant for the payment of their wage bills. During this process of restructuring, these functions will reduce the number of staff in the payroll to keep within the block cash grants allocated for paying their wage bill, and will clear salary arrears only on the basis of the payroll determined by the restructuring process. The MPS will also remove from the payroll by September 1999 all public servants whose responsibilities have been transferred to the districts.

40. Public pension reform has encountered delays as the legal opinion of the Solicitor General was required with regard to the validity of proposed measures. The MPS will submit for cabinet approval, by December 1999, proposals to reform the pension system, including revisions in benefit formula and the extent of validating pensions of public servants who retired prior to 1996. With regard to decentralization, the timing of the district budget process, and the underlying economic assumptions, have been harmonized with the central government budget process. For the fiscal year 1999/2000 the government will establish an equalization grant to be distributed among the five poorest districts. Technical work will continue in 1999/2000 to introduce by 2000/01 a harmonized district budget classification and accounting procedures and regulations.

41. To fight corruption, in 1998 the government created the Department of Ethics and Integrity (DEI), with full ministerial portfolio, within the Office of the President. The government has approved anti-corruption plans for the short term (December 1998—June 1999), medium term (1999/2000—2000/01), and long term (beyond 2001/02), and is committed to accelerate implementation of the anti-corruption strategy. Budget allocations to the Inspector General of Government, the Auditor General, and the Department of Public Prosecutions will be increased by 35 percent in nominal terms. To improve transparency, the government will submit legislation to Parliament requiring the gazetting of all government contract awards, and submit to Parliament an amended Leadership Code, with enhanced regulations on conflict of interest. To strengthen enforcement, stricter accountability and penalties will be implemented on central government/district officials in the use of funds (whether they be for project implementation or other purposes such as teachers' salary). Efforts will be redoubled to root out corruption in tax/customs collection, and to combat smuggling. The Inspector General of Government will focus on high profile cases.

42. The government is aware of the sharp decline experienced in the health indicators caused by decentralization and is substantially increasing primary health care resources to districts in the budget for fiscal year 1999/2000. Regarding other social outcome indicators, the government's aim is to improve access to clean water in rural areas, the net primary education rate, and the primary school completion rate. It will also be stepping up its efforts to improve the monitoring of social indicators. These efforts should facilitate progress toward the poverty reduction and social development targets that have been proposed by the OECD's Development Assistance Committee.

43. The government is implementing measures to improve the coverage and quality of statistical data. In particular, the government has taken steps to improve coordination among the relevant data compiling agencies. In addition, the Ministry of Finance will increase the budgetary allocations for the Uganda Bureau of Statistics (UBS) in 1999/2000 by more than 100 percent in nominal terms, with allocations for running costs continuing at these higher levels thereafter. It will also resume reporting of Government Finance Statistics (GFS) for publication in the IMF GFS Yearbook by September 1999, and by that date will send a proposal to the IMF's Statistics Department to develop a monthly reporting system for International Financial Statistic (IFS). The BOU is correcting statistical problems in the monetary accounts and will begin reporting Uganda's balance of payments data consistent with the fifth edition of the IMF's Balance of Payments Manual by June 2000. Moreover, Uganda has been selected by the Fund as a case study in the second round of experimental case studies on transparency practices. The government stands ready to extend its cooperation to the Fund in the preparation of the section on data dissemination.

Sincerely yours,


/s/
Gerald Ssendaula
Minister of Finance, Planning and
Economic Development




1 Nominal GDP for 1998/99 has also been revised upward. All nonprogram ratios to GDP referred to below are expressed in terms of the revised GDP figure.
2 Those pertaining to the 40 comprehensive audits by the LTD, the audits of the petrol outlets, and the approval of divestiture action plans for public enterprises will not be met.
3 In addition to the accumulation of new arrears, the increase in the stock of arrears reflects the submission of claims from earlier years. All other structural benchmarks will be met, albeit with some delays.
4Divestiture is complete when the title of shares has been transferred.


Table 1. Uganda: Social Outcome Indicators, 1994/95–2004/05


1994/95 1995/96 1996/97 1997/98 1998/99
Prel.
est.
1999/2000 2000/01 2004/05
Target

Proj.

Percentage of population living in poverty

49

46

...

...

...

...

...

...

Net primary education enrollment
rate 1/

55

56

83

91

94

97

94

100

Primary school completion rate 2/

30

35

37

40

45

50

50

60

Gender ratio (primary school) 3/

45

46

47

47

48

49

50

50

Access to clean water (rural) 4/

36

38

40

42

45

50

55

75

Immunization rates

  Current series 5/

   Children

    BCG

98

96

102

88

69

...

...

...

    DPT3

79

74

72

61

46

...

...

...

    Polio3

78

78

71

62

47

...

...

...

    Measles

79

82

70

64

49

...

...

...

  Pregnant women: TT 6/

76

72

58

48

38

...

...

...


Sources: Ministry of Education; Ministry of Health; and Ministry of Natural Resources.
1/ Ratio of net enrollment to cohort (i.e., enrollment within cohort limits). Data for 1996/97 are based on February 1997 data; Ministry of Education.
2/ Ratio of number of students completing P7 to number enrolled in P1 seven years earlier. Data for 1996/97 are based on February 1997 enrollment figures; Ministry of Education.
3/ Ratio of girls to total pupils enrolled in primary school; Ministry of Education.
4/ Ratio of number of people served by protected sources of water to total population in rural areas; Ministry of Natural Resources, Directorate of Water Development.
5/ Based on district submission to Ministry of Health.
6/ Vaccinations against tetanus.


Table 2. Uganda: Quantitative Performance Criteria and Benchmarks
Under the Second Annual ESAF Arrangement, 1998/99 1/


Sep. 1998


Dec. 1998 2/


Mar. 1999


June 1999


Prog.

Adj.

Act.

Prog.

Adj.

Act.

Prog.

Adj.

Act.

Prog.

Proj.
Adj.

Proj.


(In billions of Uganda shillings; end of period)

Cumulative change from end-June 1998

Ceiling on the increase in net domestic assets of the banking system 3/ 4/

21.1

55.5

37.6

50.1

89.3

89.3

36.9

119.3

54.3

29.3

168.1

110.7

Without adjustement for off-balance sheet items 5/

106.4

71.4

127.9

Ceiling on the increase in net claims on the government by the banking system 3/ 4/ 6/ 7/ 8/

-18.5

41.0

44.4

-9.1

96.5

103.6

-41.9

79.8

78.8

-73.8

81.6

76.5

Ceiling on the gross issuance of promissory notes by the government 9/

0.0

0.0

0.6

0.0

0.0

0.8

0.0

0.0

0.8

0.0

0.0

0.8

Minimum total revenue collected by the Uganda
Revenue Authority

212.5

212.5

221.6

440.0

440.0

454.0

671.0

671.0

693.0

924.0

924.0

941.2

Minimum nonwage expenditures on Priority Program Areas (PPAs)
(including the Universal Primary Education component of development expenditures) 10/

34.9

34.9

28.5

75.6

75.6

69.9

124.6

124.6

116.9

179.1

179.1

186.8

(In millions of U.S. dollars; end of period)

Ceiling on the stock of external payments arrears 11/

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Ceiling on new nonconcessional external borrowing over one year contracted or guaranteed by the government 12/

10.0

10.0

0.0

10.0

10.0

0.0

10.0

10.0

0.0

10.0

10.0

0.0

Ceiling on outstanding short-term external debt of the Bank of Uganda 13/

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Minimum increase in net international reserves of the Bank of Uganda 3/ 4/

-6.4

-34.3

-25.8

18.9

-16.4

-21.7

50.2

-20.2

13.3

94.8

-21.3

9.7


    1/ Fiscal year begins in July.
    2/ Performance criteria.
    3/ Net domestic assets of the banking system and net claims on government by the banking system would be adjusted upward (downward) and net international reserves would be adjusted downward (upward) for any shortfall (excess) in import support (including debt relief provided under the Heavily Indebted Poor Countries (HIPC Initiative) cumulatively projected at U Sh 63.2 billion at end-September 1998; U Sh 109.3 billion at end-December 1998; U Sh 232.5 at end-March 1999; and at U Sh 366.5 billion at end-June 1999, with the following exceptions. Net domestic assets of the banking system and net claims on the government by the banking system would not be adjusted downward for the first U Sh 8.6 billion of import support in excess of the cumulative projections. Net claims on the government by the domestic banking system would not be adjusted upward for the first U Sh 8.6 billion shortfall in import support relative to the cumulative projections; net domestic assets of the banking system would be adjusted upward. Net international reserves for December 1998 were adjusted for US$3.46 million in import support passed through a commercial bank.
    4/ Net domestic assets of the banking system and net claims on the government by the banking system would be adjusted downward (upward) and net international reserves upward (downward) by the amount that external debt service paid by the central government falls short of (exceeds) the cumulative sum of U Sh 37.8 billion at end-September 1998; U Sh 72.6 billion at end-December 1998; U Sh 106.6 billion at end-March 1999; and U Sh 127.9 billion at end-June 1999.
    5/ Excludes from the June 1998 base U Sh 17.1 billion in off-balance sheet assets known to have existed prior to June 1998, but not reported to the Bank of Uganda until November 1998.
    6/ To be adjusted upward by the amount of any issue of government bonds for the completion of the recapitalization of the Bank of Uganda. To be adjusted downward (upward) by any excess (shortfall) in domestic nonbank financing of the government budget cumulatively projected at U Sh -6.4 billion at end-September 1998; U Sh -34.8 billion at end-December 1998; U Sh -74.2 billion at end-March 1999; and U Sh -110.8 billion at end-June 1999.
    7/ As part of the restructuring of the Uganda Commercial Bank (UCB), to be adjusted upward by the amount of any issue of additional government bonds required to complete the privatization of the bank. To be adjusted upward for the completion of the recapitalization of the Coop Bank.
    8/ To be adjusted upward (downward) for any shortfall (excess) in domestic nonbank financing cumulatively projected at U Sh -6.4 billion at end- September 1998; U Sh -34.8 billion at end-December 1998; U Sh -74.2 billion at end-March 1999; and U Sh -110.8 billion at end-June 1999.
    9/ Excludes promissory notes issued to regularize domestic payments arrears outstanding as at June 30, 1998. As a benchmark under the program, no promissory notes will be issued for any purpose after January 31, 1999.
    10/ Minimum expenditures on PPAs would be increased by at least 50 percent of the first U Sh 8.6 billion of import support in excess of the cumulative projections.
    11/ Comprises those external arrears reported by the External Debt Management Office of the Bank of Uganda that cannot be rescheduled. This performance criterion/benchmark is to be observed on a continuous basis.
    12/ Excludes debts contracted in the context of rescheduling agreements. Concessional borrowing is defined as having a grant element of 35 percent or more. For loans with a maturity of at least 15 years, the ten-year average commercial interest reference rates (CIRRs) published by the OECD should be used as the discount rate for assessing the level of concessionality, while the six-month average CIRRs should be used for loans with shorter maturities. To both the ten-year and six-month averages the following margins for differing repayment 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 20–29 years; and 1.25 percent for 30 years or more.
    13/ Bank of Uganda short-term external debt with a maturity period of less than one year, excluding normal import-related credit.


Table 3. Uganda: Prior Actions, Structural Performance Criteria, and Benchmarks
Under the Second Annual ESAF Arrangement, 1998/99


Action

Programmed Completion
Date

Status


Trade

   

Removal of import ban on cigarettes (prior action for midterm review)

March 31, 1999

Observed

Fiscal

   

  • Verification by Verification Subcommittee of line ministries’ report on arrears outstanding at end-June 1998 and submission of its findings to Arrears Monitoring and Reporting Unit 1/
  • December 31, 1998

    Observed

  • Finalization by Arrears Monitoring and Reporting Unit of a plan to clear verified outstanding arrears within three years
  • End-February 1999

    Observed

  • Completion by Large-Taxpayer Department of 10 comprehensive on-site audits
  • December 31, 1998

    Observed with a delay

  • Completion by Large-Taxpayer Department of additional 40 comprehensive on-site audits
  • June 30, 1999

    Not observed—target revised

  • Completion of on-site audits of all retail and nonretail petrol outlets by the Uganda Revenue Authority
  • June 30, 1999

    Not observed—target revised

    Public service reform

       

  • Reduction of the size of the number-limited civil service on the payroll (excluding primary school teachers) to:
  •    

    53,1902/
    51,6402/

    December 31, 1998
    June 30, 1999
    Observed Pending

  • Limiting of the waiting period between the date of reporting to work and that of being put on the payroll to no more than four weeks
  • Continuous beginning October 1, 1998

    Observed

    Financial sector

       

  • Completion of on-site examinations of four commercial banks that have been identified as showing less-than-full compliance with bank regulations or being in need of stronger management practices and issuance of relevant examination reports
  • September 30, 1998

    Observed

  • Completion of follow-up on-site examinations of the banks for which the BOU sent a timetable of corrective actions 1/
  • December 31, 1998

    Observed

  • Conducting of on-site examinations of at least four additional commercial banks
  • June 30, 1999

    Observed

    Privatization

       

  • Approval of divestiture plans in 1998/99 by the Divestiture and Reform Implementation Committee and commencement of investment search (defined as issuance of information memorandum, advertisement of sale, or placement of shares on stock exchange) for:
  •    

    10 enterprises (prior action for midterm review)
    Of which: 5 high-priority enterprises (prior action for midterm review)
    16 enterprises

    March 15, 1999

    March 15, 1999

    June 30, 1999

    Not observed

    Not observed

    Not observed

    Railway

       

  • Decision by Cabinet on options for increasing private sector involvement in the operation of the Uganda Railways Corporation
  • December 31, l998

    Pending


    1/ Structural performance criterion.
    2/ In assessing these benchmarks, a margin of error of up to 99 is provided for new pending cases


    Table 4. Uganda: Prior Actions for the Completion of the Midterm Review Under the Second Annual ESAF Arrangement, 1998/99

    Action Status

    A. Privatization Program

     
    • Reorganization of the Parastatal Monitoring Unit and Privatization Unit

    Observed

    • Table in Parliament ammendments to the PERD Statute by June 30, 1999

    Pending

    • Publish (a summary of) the Procedures Manual

    Observed

    • Demonstrable progress toward completion of the sale of four "showcase" enterprises

    Observed

    B. Financial Sector Reforms

     
    • Plan of action for reprivatization of the Uganda Commercial Bank

    In process 1/

    • Implementation of an exit strategy for Greenland Bank

    Observed

    • Demonstrable progress toward recapitalizing other insolvent and Undercapitalized banks

    Observed

    C. Containment of Domestic Budgetary Arrears

     
    • Implementation of a Commitment Planning and Controlling System
      (CPCS) For four ministries—State House, Defense, Education, and Prisons
      on a pilot Basis

    Observed

    • Demonstrable progress in implementing the CPCS to all spending units in 1999/2000

    Observed

    • Issuance of revised appointment letters for Accounting Officers and application of stricter penalties therein

    Observed

    • Verification of arrears (as at end-June 1998) and an announcement
      of a plan to clear them

    Observed

    D. Satisfactory Performance Regarding the Quantitative and Structural Benchmarks for June 1999

    Pending


    1/ A plan is being developed with technical assistance from the World Bank.

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