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Uganda: Seventh Review Under the Policy Support Instrument

Author(s):
International Monetary Fund. African Dept.
Published Date:
January 2017
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Background and Recent Developments

1. The political cycle has complicated policy making. The February 2016 presidential and parliamentary elections and the subsequent events weighed on sentiment. The elections also contributed to fiscal slippages. President Museveni was declared winner with 61 percent of the votes, and is now in his fifth term. Parliament and cabinet took office in June. The new government has reiterated the objective of reaching middle-income status by 2020 through infrastructure investment, agricultural growth, and supporting private sector job creation.

2. The economy has performed reasonably well in a complex environment. Growth slowed marginally to 4.8 percent in FY2015/16 from 5 percent in the previous year (Figure 1), as the elections and adverse global and regional developments, particularly in neighboring South Sudan, contributed to a slowdown in investments and exports. After a sharp depreciation in 2015, the shilling appreciated and stabilized as market sentiment improved. High frequency indicators suggest a strengthening of economic activity, with growth projected to nudge up to 5 percent in FY2016/17, supported by rising private and public investments. Nevertheless, growth lags behind the rates achieved in Uganda’s recent past and those of regional peers.

Figure 1.Uganda: Real Sector Developments

Sources: Bank of Uganda, Uganda Bureau of Statistics, and IMF staff calculations.

Per capita real GDP growth*

(percent)

* Refer to FY data or calculated equivalents.

3. Despite significant progress over the last decade, poverty remains elevated. The poverty rate has come down from 62.2 percent in 2003 to about 34.6 percent in 2013, under the international poverty line.1 Vulnerability to poverty also remains high, with about 43 percent of Ugandans classified as insecure non-poor. During 2005–09, two out of three non-poor fell back into poverty. Reducing poverty further also calls for higher and more inclusive growth. This challenge notwithstanding, Uganda is hosting refugees from South Sudan through a commendable integration model (Box I).

4. The current account deficit narrowed by 1 percentage point to 5.9 percent of GDP in FY2015/16, but is expected to widen again. Imports dropped sharply, mainly due to lower oil price and delayed investments. This more than offset a decline in exports on account of weak global and regional demand, including from South Sudan (Figure 2). In all, the overall balance recorded a small surplus. For FY2016/17, the current account deficit is projected to widen again, reflecting higher investments in infrastructure projects.

Figure 2.Uganda: External Sector Developments

Sources: Bank of Uganda and IMF staff calculations.

5. The underlying private sector sentiment appears more muted than the headline numbers suggest. Export weakness, a virtual standstill in private sector credit expansion and problems in the banking sector, domestic government arrears, and arrears from South Sudan to Ugandan businesses who had been active there, are all creating an air of uneasiness and uncertainty. Morever, concerns of a possible drought also affect expectations.

Box 1.Uganda’s Humanitarian Response

Uganda has become one of the top refugee-hosting countries in Africa. The latest influx comes from conflict-torn South Sudan and about ten other countries. The total number of refugees in Uganda is estimated at over 922,000 (about 2¼ percent of the population), of which about 553,000 come from South Sudan. This has made Uganda one of the top countries hosting refugees in Africa.1 Since September 2016, a record number of refugees have been arriving—about 2,000 to 3,000 per day—the majority of which are women and children.

Uganda’s refugee policy provides for integration with the local communities, widely acclaimed as an international best practice.2 The UNHCR has praised Uganda’s “non-camp” approach in the 2006 Refugee Act as “progressive and forward-thinking.” Under the Refugee and Host Population Empowerment program, refugees are given similar rights as nationals—including the right to work and establish businesses, free schooling and healthcare, freedom of movement, and allocation of agricultural land. By allowing refugees to work, the approach benefits host communities and facilitates deeper and faster refugee transitions.3 Ugandan authorities work closely with the UNHCR and UN partner agencies, in collaboration with the World Bank, and local and international NGOs. Refugee settlement has been included in Uganda’s National Development Plan II, thereby bringing together the humanitarian and the development aspects, and the government is promoting social service delivery in refugee-hosting areas.

Top African Countries in Hosting Refugees1

(percent)

Sources: Amnesty International, UNHCR, IMF World Economic Outlook, and staff calculations.

1 Data are as of end-October 2016 for Uganda and end-2015for other countries.

The cost of hosting refugees has been largely absorbed within existing programs, but challenges have emerged with the recent surge of refugees. The government’s refugee outlays are partly covered by the allocations for disaster preparedness, which were approved before the recent conflict in South Sudan erupted. The government’s contributions also include the allocation of communal land to newly arrived refugees and the enrollment of child refugees in schools. Other donor-financed programs include: access to training and general support for rural livelihoods, cash-based food assistance, healthcare services, and provision of water, sanitation and hygiene facilities, and other essential non-food items. With an increasing number of refugees, local government service delivery systems are being strained, not least because of shortfalls in donor funding. The continued high influx of refugees is also likely to constrain the size of available agricultural plots for refugees, which potentially threatens their food security and increases the burden placed on humanitarian assistance.

1 See the UNHCR’s Revised South Sudan Regional Refugee Response Plan, January-December 2016.2 See http://www.worldbank.org/en/topic/fragilityconflictviolence/brief/ugandas-progressive-approach-refugee-management.3 See https://www.wfp.org/news/news-release/new-research-finds-humanitarian-assistance-refugees-boosts-ugandas-economy.

Performance Under the PSI

6. Performance under the PSI through end-June 2016 was mixed (Memorandum of Economic and Financial Policies (MEFP), para. 11-18). The BoU kept core inflation inside its inflation target band. Softer growth and election effects led to the non-observances of fiscal targets, though it is important to note that these were more muted than during the previous presidential elections. Structural reforms progressed, albeit with many delays.

7. The BoU kept inflation within the target band and exceeded its reserve accumulation target at end-June (MEFP Table 1.1). Tight monetary policy through April 2016 helped contain core inflation within the BoU’s target range. Core inflation decelerated to 5.1 percent year-on-year in October from its peak of 7.5 percent in December 2015, remaining well within the inner band of the inflation consultation clause at end-June. In the same period, headline inflation decelerated to 4.1 percent year-on-year from its peak of 8.4 percent. The BoU seized the favorable balance of payments developments and accumulated about US$170 million gross international reserves to US$2.96 billion (about 4½ months of next year’s imports), exceeding the end-June target.

8. Most fiscal targets were missed due to a confluence of temporary factors (MEFP Table 1.1). The authorities met the targets on the zero ceiling of external payment arrears and on the deposit of oil revenues in the Petroleum Fund. They also protected poverty-alleviating spending, meeting their FY15/16 program objective. However, tax revenue fell short of target by 0.3 percent of GDP, reflecting lower nominal growth. In addition, higher than anticipated election-related spending led to an overrun of current expenditure of 0.1 percent of GDP. Thus, the program fiscal deficit target (QAC) was missed by 0.5 percent of GDP, and the government partly relied on BoU advances for its financing needs.2 Staff supports a waiver on the basis that the non-observance was temporary. Externally-financed development spending (including hydro power projects) was under-executed by 2.4 percent of GDP, and the overall fiscal deficit was 1.2 percent of GDP lower than anticipated, partly because the necessary domestic contribution was not budgeted for. While the authorities have cleared domestic arrears of about 0.1 percent of GDP in FY16/17 so far, they are still reconciling estimates of the stock, which has complicated assessment of the associated indicative target. The preliminary estimates put the stock of domestic arrears as of June 2016 at 3.2 percent of GDP.

9. Structural reforms have progressed, with two out of five completed on time (MEFP Table 1.2). The government has issued regulations for implementing the PFM Act, though some key elements (e.g., the management of oil revenues) have not been incorporated and are partly expected to be covered in the corresponding instructions under preparation. The government also sent the charter of fiscal responsibility to Parliament. The charter includes measurable fiscal objectives to guide Uganda’s fiscal framework and strong commitments to transparency, though it could have usefully included a requirement to explain how deviations from the measurable objectives will be corrected. There have been delays in the publication of quarterly reports on unpaid bills and domestic arrears. The publication of reconciled reports on the stock of domestic arrears for June 2015 and June 2016 has been rescheduled to December 2016 to allow sufficient time for the authorities to validate the data. The authorities will no longer be able to publish a reconciled report on the stock of unpaid bills for December 2015 as this interim data is superseded by the end-fiscal year report. Similarly, a delay occurred in the passage of the amended Anti-Money Laundering (AML) Bill and the Insurance Regulatory Bill, intended to help ensure Uganda’s prompt exit of the Financial Action Task Force (FATF) “gray list.” There was also a delay in the approval of the Amendments to the BoU Act, designed to enhance the legislative framework for strengthening BoU’s capital and operational independence.

Policy Discussions

10. With the elections over, the authorities aim to refocus macroeconomic policies on their medium-term objectives. Fiscal policy will emphasize improving the quality of spending and continued increases in domestic revenues to create space for the scaled up infrastructure drive and preserve debt sustainability. Monetary policy has scope for further easing, if the favorable inflation forecast remains in place. The authorities will also push ahead with their structural reform agenda, though some measures may take more time than initially hoped for. The medium-term growth outlook remains favorable. The authorities expect growth to reach 6½ percent over the medium-term, as infrastructure bottlenecks are eased and more investments for oil production commence. After some delays, oil production licenses have now been awarded, and the pipeline route through Tanzania has been agreed on.

11. While the baseline outlook is favorable, risks are tilted to the downside. As other countries, Uganda remains exposed to risks from lower global growth and trade as well as tighter global financing conditions. Negative spillovers from the conflict in South Sudan could further weigh on exports and growth, while the growing refugee influx could entail budget pressures. Rainfalls have been late this year, and an unfolding drought could adversely affect food security and add to fiscal pressures. There also appears to be a negative sentiment in the private sector that is not yet captured in the headline numbers, but may forewarn of a potential deterioration in economic conditions.

A. Fiscal Policy

12. The authorities aim for a slightly tighter fiscal stance in FY16/17 compared with the sixth review and their budget to ensure Uganda remains at low risk of debt distress—the cornerstone of the program—and minimize crowding out of the private sector. They target the overall deficit to widen by ¾ percentage points to 6 percent of GDP (¼ percentage point lower than envisaged in the sixth review). The authorities have taken tax policy and administration measures to increase revenue collection by ½ percent of GDP.3 However, the budget is under pressure from three directions: (i) revenue collection could be lower in shilling terms, reflecting the downward revision of nominal growth; (ii) the authorities had underestimated debt service by about 0.2 percent of GDP, which they intend to accommodate within the existing envelope; (iii) and the authorities do not want to significantly increase their reliance on bank financing, with private sector credit growth already near zero. Staff acknowledges the authorities’ ambition, but cautions that this will require strict expenditure control which may be difficult to achieve, given that about 55 percent of the budget has been released in Q1 and Q2. There is, thus, a risk that the government could miss its deficit target. In this case, they may have to consider additional domestic financing to avoid relying on BoU advances again.

13. The authorities’ financing strategy is guided by the objective to limit reliance on domestic bank financing. The government will utilize a US$200 million non-concessional loan to replace World Bank budget support and repay the outstanding BoU advances from FY15/16.4 The Bank’s budget support has been affected by the decision to withhold new lending to Uganda to address performance issues in the portfolio, and the authorities are engaging closely with the Bank to address these concerns, including by improving social safeguards and project supervision (MEFP, para. 34). The authorities remain committed to using BoU advances only for cash-flow management. Taken together, the authorities expect to reduce their reliance on bank financing compared with last year and thus facilitate a recovery in private sector credit.

14. The authorities are stepping up efforts to reduce domestic arrears. They have reported preliminary data on the stock of domestic arrears as of June 2016 and committed to provide fully reconciled data by December 2016 after completing an ongoing internal reconciliation exercise. In addition, they have made a specific front-loaded allocation for domestic arrears clearance in FY16/17 and additional allocations in their medium-term budget framework, and issued guidance to provide arrears repayment the first call on budgetary resources. Furthermore, they have requested technical assistance from AFRITAC East to improve expenditure commitment controls and prevent future domestic arrears.

B. Monetary Policy and Financial Stability

15. With a favorable inflation outlook, the BoU has entered an easing cycle since April. The Monetary Policy Committee reduced the central bank rate (CBR) by 100 basis points to 13 percent in its last meeting in October, resulting in a cumulative reduction of 400 basis points since April (Figure 4). While treasury bill rates have continued to decline across all tenors since the elections, the reduction in the CBR has been slow to transmit to lending rates, possibly reflecting a tightening of lending standards and the asymmetry in transmission of monetary policy.

Figure 3.Uganda: Fiscal Sector Developments

Sources: Ministry of Finance and IMF staff calculations.

Figure 4.Uganda: Monetary Sector Developments

Sources: Bank of Uganda and IMF staff calculations.

Figure 5.Uganda: Financial Sector Developments

Sources: Bank of Uganda and IMF staff calculations.

Figure 6.Uganda: Other Financial Sector Developments

Sources: Bank of Uganda and IMF staff calculations.

16. The scope for further monetary policy easing is guided by the BoU’s inflation forecast. The BoU considers that food prices are subject to considerable risks from unfavorable weather, while Shilling depreciation could also pose inflation risks. The scope for further easing of monetary policy also depends on fiscal policy implementation. The BoU’s inflation model—which has been developed with Fund support—projects core inflation to converge to its target. Staff agrees that the BoU may have further space to ease monetary policy, if the inflation outlook remains benign, and concurs with their risk assessment.

17. The BoU appropriately took over management of the third largest domestic bank. The Crane Bank had become undercapitalized when it had to recognize underreported NPLs earlier this year. Facing a steady deposit outflow, the bank was close to being illiquid, and there were signs of asset stripping. Deposit outflows have reportedly stopped, and the authorities aim to find a strategic investor. Staff welcomes these steps, but cautions that the authorities should also consider contingency plans.

18. The remaining banking system is, in general, well-capitalized, but rising NPLs have constrained private sector credit. Most banks already meet the increased Basel III capital requirements, and the BoU’s top-down stress tests point to the sector’s resilience.5 However, NPLs rose to 8.3 percent in June 2016 from 4 percent a year ago, ascribed to the slowdown of economic activities and government domestic arrears. NPLs declined to 7.7 percent in September based on preliminary figures. Some smaller banks struggle with profitability and have been subject to social media rumors. Heightened credit risk and elevated provisioning costs have prompted a tightening of lending standards. The government’s recent efforts in clearing domestic arrears is expected to reduce NPLs and improve private sector credit conditions (MEFP, para. 7).

19. The BoU continues to strengthen prudential oversight. To address potential vulnerabilities in real estate lending, the BoU implemented a new cap on the loan-to-value ratio in May 2016. In addition, to mitigate risks around mobile money, the BoU has commissioned an international firm to study the industry and provide recommendations for strengthening supervision. Furthermore, the BoU collaborated with other central banks to conduct regional stress tests and assessed the cross-border operations of banks with a regional presence. Finally, to enhance the supervision of nonbanks, Parliament approved the Tier IV Microfinance Institutions Act in July 2016, which supports the establishment of a Microfinance Regulatory Authority to complement the BoU in supervising the sector.

20. The authorities are addressing deficiencies in Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) to secure Uganda’s swift exit from the FATF “gray list.” Building on an earlier action plan to improve Uganda’s AML/CFT regime, the authorities have included additional measures to address the deficiencies identified in a 2016 Mutual Evaluation Report by the Eastern and Southern Africa AML Group. These measures include, among others: (a) adequately criminalizing the financing of terrorism; (b) expanding the scope of record-keeping requirements to all financial institutions; and (c) designating supervisory bodies with necessary powers to enforce compliance, including proportionate and dissuasive sanctions. The authorities expect to take the key legal steps by December 2016 (structural benchmark (SB)).

21. The authorities acknowledged the delays with the proposed Amendments to the BoU Act. Discussions between the Ministry of Finance and the BoU are advanced, and should be concluded soon. With that, the authorities expect to submit the amendments to the Act to parliament by end-March 2017. Staff regrets the delays and encourages the authorities to follow international best practices in the outstanding areas.

C. Financial Sector Development and Inclusion

22. The authorities have continued reforms to deepen financial markets. The authoriies are reviewing which banks should be allowed to act as primary dealers, since not all current primary dealers are delivering on their responsbiliities which affects the functioning of the secondary market. In parallel, the BoU is developing a master repo agreement to facilitate a deepening of the interbank market.

23. The authorities are pursuing financial inclusion through several fronts. Passage of the Amended Financial Institutions Act in 2016 allows for Agency Banking, bancassurance, and Islamic banking, which enhances financial inclusion by greatly expanding the network of service providers. The regulations for Agency Banking are expected to be approved by the Ministry of Finance later this year; the draft regulations for bancassurance have been shared with the industry for review; and the draft regulations for Islamic Banking are under review with support from the Islamic Development Bank. The mobile banking industry continues its expansion, with over 21 million registered users. Building on the 2013 Mobile Money Guidelines, a comprehensive regulatory framework is under preparation to safeguard this important part of the financial market (proposed new SB).

24. The BoU is also strengthening consumer protection. BoU has continued to enforce through annual onsite inspections the financial protection guidelines to protect consumers while also promoting financial literacy programs. Banks are required to issue key financial facts to consumers for all loan products at their inception and whenever there are changes in the contractual terms.

D. Debt Sustainability

25. The authorities are committed to ensuring that their debt remains at low risk of debt distress. The Debt Sustainability Analysis (DSA, Annex 2) continues to show a low risk of debt distress, but also indicates that vulnerabilities have increased. The authorities acknowledged the vulnerability to export shocks and the importance of realizing the envisaged growth dividend. They expected the level and resilience of exports to improve over time, supported by infrastructure investment and regional integration.

26. Further progress on domestic revenue mobilization is key to maintaining Uganda’s favorable risk rating. The authorities recognize that Uganda’s tax revenue significantly underperforms compared to regional peers and are committed to increasing tax revenue by at least ½ percentage point of GDP per year. They remain focused on revenue administration reforms to boost tax collection.6 In addition, the authorities have requested FAD technical assistance on tax policy to assess priority areas for further reforms. Staff welcomes these efforts and suggests that the authorities also monitor tax expenditures and their effectiveness.

Tax revenues*

(percent of GDP)

* Refer to FY data or calculated equivalents.

27. Likewise, enhancing the efficiency of public investment is key to realizing the growth dividend which underpins debt sustainability. The authorities are concerned about persistent investment under-execution and will continue with reforms to strengthen public investment management, in particular, requiring more rigorous feasibility studies and ensuring that the required budget allocations for counterparty funding are made before loans are contracted. They aim to finalize an Appraisal User Manual by December and make it mandatory for all new projects (structural benchmark). They have requested FAD technical assistance to help set reform priorities in public investment management going forward.

28. Safeguarding debt sustainability also requires better debt monitoring and management, including fiscal risks from extra-budgetary units and Public-Private Partnerships (PPPs). The authorities recognize that the increasing use of PPPs requires improved monitoring and management. While a PPP unit has been created at the Ministry of Finance, sufficient resources are yet to be provided. The authorities are also establishing a system for monitoring borrowing by government agencies and state-owned enterprises. Staff welcomes these efforts and encourages the authorities to make use of technical assistance from the Fund or development partners in this area.

E. Program Design

29. The authorities propose changes to their program, given developments in FY15/16 and the more muted economic outlook. The overall program objectives, in particular raising the revenue yield by ½ percent of GDP remain in place. However, reflecting base effects from FY15/16 and lower nominal growth as well as concerns over balance of payments inflows, the authorities propose to adjust two QACs (the ceiling on the overall deficit and the minimum accumulation of international reserves) and a few indicative targets for the remainder of the program period (MEFP Table 1.1). They also propose to reschedule those SBs for which they will require more time (MEFP Table 1.2).

30. In addition, the authorities propose four new SBs, including those on AML/CFT and public financial management (MEFP Table 1.2):

  • Ministry of Finance to further strengthen the AML/CFT framework in line with the international standard by liaising with Parliament to amend the Anti-Terrorism Act to adequately criminalize the financing of terrorism (SB, end-December 2016).
  • Ministry of Finance to establish a framework for following up and reporting on the implementation of the recommendations of value-for-money audits conducted by the Auditor General’s office (SB, end-March 2017).
  • Ministry of Finance to produce a manual setting out national parameters, shadow prices, and conversion factors to be used in all economic project appraisals prior to admission into the Public Investment Plan (SB, end-March 2017).
  • Ministry of Finance and BoU to prepare and submit to Cabinet a policy to regulate mobile money banking (SB, end-April 2017).

Staff Appraisal

31. The Ugandan authorities have managed well in a difficult election year. Fiscal slippages were contained compared with the 2011 election, and inflation was kept close to target. However, growth at 5 percent—2 percent in per-capita terms—falls short of past performance and aspirations and seems insufficient to shake an undercurrent of negative sentiment. The scaling up of infrastructure investment is intended to address growth bottlenecks, and will be most effective if combined with investments in human capital and improvements in the business environment. Staff commends Uganda for hosting refugees from neighboring countries and allowing them the opportunity to be economically active. The international community is called upon to provide financial assistance to mitigate the humanitarian crisis and support this integration model.

32. Staff notes the mixed performance under the authorities’ program through June 2016. Stable inflation and the build-up of international reserves are welcome, as is the protection of poverty-alleviating expenditures. The fiscal slippages were contained, and partly reflect lower nominal growth. However, expenditure composition has deteriorated, as externally financed development spending fell short of expectations and current, less productive expenditure increased. This points to weaknesses in the budget and public investment management processes that undermine the intended scaling up of infrastructure investment. The authorities met SBs aimed at improving public financial management and fiscal transparency, but other important initiatives were delayed. Staff supports the modification of QACs to update the authorities’ current program, the rescheduling of the dates for a few existing SBs, and the addition of the proposed new SBs in program monitoring.

33. Staff welcomes the authorities’ FY16/17 policy objectives. The inflation outlook has allowed monetary easing and remains benign, with the exchange rate and drought-related food price spikes being the main risks. Fiscal policy stays the course on increasing the revenue take by ½ percent of GDP, while seeking to contain expenditures within a tight ceiling. Achieving this expenditure restraint will be difficult, not least because line ministries have not always properly budgeted for the domestic component of development spending. Staff encourages the authorities to finalize reporting of domestic government arrears and follow through on plans to hold accounting officers responsible for arrears avoidance. Staff cautions that new policy proposals, however well-intended, need to be accommodated in a way that would not undermine revenue mobilization and debt sustainability.

34. The BoU appropriately intervened in a systemically important domestic bank. The search for a strategic investor has begun, and the BoU should in parallel consider contingency plans. A review of the episode could be useful to assess what potential lessons could be drawn for bank supervision. The implementation of Basel III capital standards and tightening of macro-prudential standards should enhance the resilience of the sector.

35. The authorities are cooperating closely with FATF to ensure a swift exit from the “gray list.” The necessary legal changes to the Anti-Terrorism Act, the AML Law, and the Insurance Act are under way, but completing them on the timeline agreed with FATF will require deep engagement with parliament. Staff also calls on the authorities to submit the amendments to the BoU Act to parliament which will strengthen the central bank’s ability to deliver on its mandate.

36. The DSA update underscores the importance of further raising the revenue-to-GDP ratio and ensuring that public investment yields the intended growth dividend. Uganda remains at low risk of debt distress, and public debt would stabilize at about 42 percent of GDP after the current investment scaling-up is completed. However, the DSA shock scenarios indicate increased vulnerabilities compared with the previous update. The government could consider a more ambitious path of domestic revenue mobilization to mitigate these vulnerabilities. In parallel, strengthening public investment management will be instrumental to ensuring that projects are properly prepared, vetted, consistent with policy priorities, and executed efficiently to yield maximum value for money. Staff encourages the authorities to speed up reforms in this area.

37. Staff recommends completion of the seventh review of the PSI-supported program. The attached MEFP outlines the macroeconomic objectives and policies for the remainder of the program period. Staff supports a waiver of the nonobservance of the ceiling on the overall deficit of the central government on the grounds that the non-observance was temporary.

Table 1.Uganda: Selected Economic and Financial Indicators, FY2012/13–2020/211,2
2012/132013/142014/152015/162016/172017/182018/192019/202020/21
6th RevEst.6th RevProj.Proj.
(Annual percentage change, unless otherwise indicated)
Output, prices, and exchange rate
Real GDP2.75.25.15.04.85.55.05.56.06.36.5
GDP deflator6.13.45.17.64.04.45.14.74.84.83.8
CPI (period average)5.05.23.07.36.65.55.44.84.95.05.0
Core inflation (period average)6.64.63.36.86.75.14.84.64.85.05.0
Terms of trade (“−” = deterioration)−8.24.718.82.55.0−2.8−0.3−1.3−1.0−1.1−0.9
Exchange Rate (Ugandan Shilling/US$)1.3−2.011.421.8
Real effective exchange rate (“−” = depreciation)3.37.8−3.7−7.2
Money and credit
Broad money (M3)6.617.415.915.57.112.95.817.413.018.915.8
Credit to non-government sector6.413.920.416.24.016.28.315.015.516.016.5
Bank of Uganda policy rate 311.011.013.015.0
M3/GDP (percent)18.620.121.122.520.723.019.821.121.522.924.0
NPLs (percent of total loans)4.05.84.08.3
(Percent of GDP, unless otherwise indicated)
Central government budget
Revenue and grants12.712.614.215.714.916.215.915.916.116.216.5
Of which: grants1.41.01.21.71.41.81.81.41.20.70.6
Expenditure16.216.618.522.119.722.521.920.820.119.119.3
Current9.09.59.910.710.810.410.410.310.310.310.1
Capital 46.57.08.011.08.511.311.010.39.78.79.1
Primary balance−2.1−2.6−2.7−4.4−2.8−4.1−3.6−2.3−1.2−0.2−0.2
Overall balance−3.2−3.5−4.4−6.4−5.2−6.2−6.0−4.9−4.0−2.9−2.7
Excluding grants−4.7−4.5−5.6−8.1−6.5−8.1−7.8−6.2−5.2−3.6−3.3
Of which: Net domestic borrowing1.02.23.21.62.20.90.71.00.30.00.6
Public debt
Public gross debt25.928.331.836.934.540.538.641.541.440.941.1
External15.015.818.523.220.927.125.028.129.129.930.5
Domestic10.912.513.313.813.713.513.713.412.311.110.6
Investment and savings
Investment27.826.724.327.524.728.827.829.130.730.731.5
Public6.57.08.08.98.59.211.010.39.78.79.1
Private21.319.716.318.616.219.616.818.821.022.122.4
Savings21.218.816.817.318.417.920.420.621.121.622.3
Public1.72.32.91.72.82.13.64.55.05.56.0
Private19.616.514.015.715.715.716.716.116.116.116.3
External sector
Current account balance (including grants)−6.3−7.6−7.2−9.7−5.9−10.7−7.1−8.2−8.8−8.9−8.8
Current account balance (excluding grants)−6.6−7.9−7.5−10.1−6.3−11.0−7.4−8.5−9.6−9.1−9.2
Exports (goods and services)20.218.218.120.418.219.419.019.520.521.221.9
Imports (goods and services)30.327.928.832.028.631.529.530.031.231.232.0
Gross international reserves
In billions of US$2.93.42.92.73.02.93.03.13.53.94.4
In months of next year’s imports of goods and services4.55.14.93.94.64.04.24.04.14.24.5
Memorandum items:
GDP at current market prices
Ush. Billion64,75870,45877,84584,30684,90792,87893,639103,400114,880127,947141,375
US$ million24,99327,76127,53124,661
GDP per capita (Nominal US$)665717690592600632626648672718742
Population (million)37.638.739.941.1
Share of population below poverty line (percent)19.7
Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

The CBR was introduced following the start of Inflation Targeting in July 2011. Data refer to end-year CBRs.

Capital expenditures include net lending and investment on hydropower projects, and excludes BoU recapitalization and other spending.

Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

The CBR was introduced following the start of Inflation Targeting in July 2011. Data refer to end-year CBRs.

Capital expenditures include net lending and investment on hydropower projects, and excludes BoU recapitalization and other spending.

Table 2a.Uganda: Fiscal Operations of the Central Government, FY2012/13–2017/181,2(Billions of Ugandan Shillings)
2012/132013/142014/152015/162016/172017/18
6th RevEst.Budget6th RevStaffProj.
Total revenue and grants8,2458,86811,04513,20812,64714,69915,07114,86816,451
Revenue7,3098,16510,11411,74711,50012,91413,38613,15015,052
Tax7,0057,8319,54211,04010,83312,58512,42414,304
International trade taxes5997478381,1201,0761,3191,2671,608
Income taxes2,5882,7563,4023,8403,8724,3164,3704,912
Excises1,4661,7572,1282,4902,3002,9632,7673,258
Value-added tax2,3532,5703,1173,5183,5223,9023,9504,428
Infrastructure levy577263856998
Nontax304334452582545674597748
Oil revenue001201251211321271280
Grants9367029311,4601,1471,7851,6851,7181,399
Budget support3199191258334340292282287
Project grants7385116731,1278081,3931,4361,112
Expenditures and net lending410,52311,68414,37918,59016,72720,79320,87520,46421,483
Current expenditures5,8136,7067,6898,9969,1699,6009,6569,71010,623
Wages and salaries2,1602,3852,7592,9892,9663,3073,3593,549
Interest payments8909701,2131,6921,6822,0022,1882,703
Other current2,7633,3513,7174,3144,5204,3474,1634,371
Development expenditures4,2374,9375,2307,0175,9079,2269,0879,0549,285
Externally-financed projects2,1631,8711,9333,4892,3844,7054,8044,568
Of which: Non-concessional borrowing1,0472029258701,928
Government of Uganda investment2,0743,0663,2963,5283,5234,3824,2504,716
Net lending and investment409211,2352,4971,5321,6051,7821,5391,415
Hydro-power projects0219852,2971,3321,4321,2391,315
Of which: Non-concessional borrowing0001,9941,0741,4321,2231,315
Recapitalization4100250200−37350300100
Of which: Bank of Uganda54100250200−37350100100
Other spending632022580119362350161160
Clearance of domestic arrears632022580119110161160
Contingency0000024000
Float−193−3526803130000
Overall balance−2,084−2,463−3,402−5,382−4,393−6,094−5,804−5,596−5,031
Underlying balance (excl. one-off spending)6−1,675−2,443−2,287−1,963−2,780−4,621−3,224−3,315−1,688
Financing2,0842,4633,4025,3824,3936,0945,8045,5965,031
External financing (net)1,4188879194,0172,4945,4974,9694,9204,000
Disbursement1,6281,1281,1774,3562,8145,3525,2974,771
Budget support324000026100
Concessional project loans1,3031,1281,1771,3151,5372,3872,4971,528
Non-concessional borrowing0003,0411,2762,3572,0933,243
Revolving Credit3477070
Amortization (−)−200−212−254−339−320−388−373−776
Exceptional financing−10−30−4005−46
Domestic financing (net)6661,5762,4831,3651,8995968356761,031
Bank financing5086471,288765923503220513
Bank of Uganda7−77−1981,064265309223−236100
Commercial banks585845224500614305280456413
Nonbank financing1589301,195600976306332456518
Memorandum Items:
Petroleum Fund (end-period stock)81,6061,608120245241372369369
Energy fund (end-period stock)77574819000000
Expenditures for poverty-alleviating sectors2,4482,8413,0323,0323,2413,5473,5474,151
Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

Include mainly HIPC-related grants from FY 2013/14 onwards.

Expenditure categories in FY2013/14 include clearance of arrears totaling Shs. 544 billion, mainly in Government of Uganda investment and other current spending.

Reflects actual and projected issuances for the recapitalization of Bank of Uganda.

The overall deficit excluding large infrastructure projects financed by nonconcessional external borrowing (e.g. HPPs), BOU recapitalization, and oil revenue.

Net financing from the Bank of Uganda includes resources freed by MDRI relief.

The balances of the Oil Fund were transferred to the UCF and in line with the PFM Act, a new Petroleum Fund was opened with balances from recent oil revenue deposits.

Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

Include mainly HIPC-related grants from FY 2013/14 onwards.

Expenditure categories in FY2013/14 include clearance of arrears totaling Shs. 544 billion, mainly in Government of Uganda investment and other current spending.

Reflects actual and projected issuances for the recapitalization of Bank of Uganda.

The overall deficit excluding large infrastructure projects financed by nonconcessional external borrowing (e.g. HPPs), BOU recapitalization, and oil revenue.

Net financing from the Bank of Uganda includes resources freed by MDRI relief.

The balances of the Oil Fund were transferred to the UCF and in line with the PFM Act, a new Petroleum Fund was opened with balances from recent oil revenue deposits.

Table 2b.Uganda: Fiscal Operations of the Central Government, FY2012/13–2017/181, 2(Percent of GDP)
2012/132013/142014/152015/162016/172017/18
6th RevEst.Budget6th RevStaffProj.
Total revenue and grants12.712.614.215.714.915.716.215.915.9
Revenue11.311.613.013.913.513.814.414.014.6
Tax10.811.112.313.112.813.613.313.8
International trade taxes0.91.11.11.31.31.41.41.6
Income taxes4.03.94.44.64.64.64.74.8
Excises2.32.52.73.02.73.23.03.2
Value-added tax3.63.64.04.24.14.24.24.3
Infrastructure levy0.10.10.10.10.10.1
Nontax0.50.50.60.70.60.70.60.7
Oil revenue0.00.00.20.10.10.10.10.10.0
Grants1.41.01.21.71.41.91.81.81.4
Budget support30.30.30.30.40.40.30.30.3
Project grants1.10.70.91.31.01.51.51.1
Expenditures and net lending416.216.618.522.119.722.222.521.920.8
Current expenditures9.09.59.910.710.810.310.410.410.3
Wages and salaries3.33.43.53.53.53.63.63.4
Interest payments1.41.41.62.02.02.22.32.6
Other current4.34.84.85.15.34.74.44.2
Development expenditures6.57.06.78.37.09.99.89.79.0
Externally-financed projects3.32.72.54.12.85.15.14.4
Government of Uganda investment3.24.44.24.24.14.74.54.6
Net lending and investment0.60.01.63.01.81.71.91.61.4
Hydro-power projects0.00.01.32.71.61.51.31.3
Recapitalization0.60.00.30.20.00.40.30.1
Other spending0.10.00.30.10.10.40.40.20.2
Clearance of domestic arrears0.10.00.30.10.10.10.20.2
Contingency0.00.00.00.00.00.30.00.0
Float−0.3−0.50.10.00.40.00.00.00.0
Overall balance−3.2−3.5−4.4−6.4−5.2−6.5−6.2−6.0−4.9
Underlying balance (excl. one-off spending)5−2.6−3.5−2.9−2.3−3.3−4.9−3.5−3.5−1.6
Financing3.23.54.46.45.26.56.26.04.9
External financing (net)2.21.31.24.82.95.95.45.33.9
Disbursement2.51.61.55.23.35.85.74.6
Budget support0.50.00.00.00.00.30.00.0
Concessional project loans2.01.61.51.61.82.62.71.5
Non-concessional borrowing0.00.00.03.61.52.52.23.1
Revolving Credit0.40.80.0
Amortization (-)−0.3−0.3−0.3−0.4−0.4−0.4−0.4−0.8
Exceptional financing0.00.00.00.00.00.00.00.0
Domestic financing (net)1.02.23.21.62.20.60.90.71.0
Bank financing0.80.91.70.91.10.50.20.5
Bank of Uganda6−0.1−0.31.40.30.40.2−0.30.1
Commercial banks0.91.20.30.60.70.30.30.50.4
Nonbank financing0.21.31.50.71.10.30.40.50.5
Memorandum Items:
Petroleum Fund (end-period stock)72.52.30.20.30.30.40.40.4
Energy fund (end-period stock)1.21.10.20.00.00.00.00.0
Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP released in November 2014.

Include mainly HIPC-related grants from FY 2013/14 onwards.

Expenditure categories in FY2013/14 include clearance of arrears totaling 0.8 percent of GDP, mainly in Government of Uganda investment and other

The overall deficit excluding large infrastructure projects financed by nonconcessional external borrowing (e.g. HPPs), BOU recapitalization,

Net financing from the Bank of Uganda includes resources freed by MDRI relief.

The balances of the Oil Fund were transferred to the UCF and in line with the PFM Act, a new Petroleum Fund was opened with balances from recent oil revenue deposits.

Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP released in November 2014.

Include mainly HIPC-related grants from FY 2013/14 onwards.

Expenditure categories in FY2013/14 include clearance of arrears totaling 0.8 percent of GDP, mainly in Government of Uganda investment and other

The overall deficit excluding large infrastructure projects financed by nonconcessional external borrowing (e.g. HPPs), BOU recapitalization,

Net financing from the Bank of Uganda includes resources freed by MDRI relief.

The balances of the Oil Fund were transferred to the UCF and in line with the PFM Act, a new Petroleum Fund was opened with balances from recent oil revenue deposits.

Table 2c:Uganda: Quarterly Fiscal Operations of the Central Government, 2015/16–2016/171, 2(Billions of Ugandan Shillings)
2015/162016/17
Q1Q2Q3Q4AnnualQ1Q2Q3Q4Annual
Est.Est.Est.Proj.Proj.Proj.Proj.
Total revenue and grants2,9863,3912,8083,46212,6472,9734,0703,5344,29014,868
Revenue2,5043,0822,6673,24811,5002,8323,3223,2253,77013,150
Tax2,3652,9462,5402,98210,8332,6953,1723, 0693,48812,424
International trade taxes2542892502841,0762823243113501,267
Income taxes7291,1288271,1883,8728441,2129731,3414,370
Excises5025985846162,3006276537387502,767
Value-added tax8659138658783,5229269661, 0291,0293,950
Infrastructure levy15171416631717171769
Nontax139136126144545137150157154597
Oil revenue000121121000128128
Grants4833091422141,1471427483095201,718
Budget support315961507034058639863282
Project grants32324892144808836852114571,436
Expenditures and net lending3,8854,9303, 7064,20616,7274,1446,2734,5755,47220,464
Current expenditures2,1662,2752,3152,4129,1692,5022,3692,2852,5539,710
Wages and salaries6987607587512,9668378438408403,359
Interest payments3893544824561,6826145185015552,188
Other current1,0791,1611,0761,2044,5201,0511,0089441,1594,163
Development expenditures1,0891,8151,2371,7665,9071,5583,1121,7912,5939,054
Externally-financed projects4438294364742,3843891,9906878684,804
Of which: Non-concessional borrowing0202002028338221303870
Government of Uganda investment6467848011,2923,5231,1627848831,4214,250
Net lending and investment61081610601,532167824902511,539
Other spending202447281196710975161
Float−79127−18545031326400−2640
Overall balance4−820−1,667−712−1,194−4,393−1, 434−2,203−1, 041−918−5,596
Underlying balance (excl. one-off spending)5−289−521−791−865−2,466−1, 147−1,084−329−755−3,315
Financing8201,6677121,1944,3931,4342,2031,0419185,596
External financing (net)7031,1732523652,4941922,7321,0929034,920
Disbursement8031,2423294402,8143062,8241,1889805,297
Concessional project loans4464282234401,5372981,3054764182,497
Non-concessional borrowing35781310601,27688127125612,093
Revolving Credit070700707
Amortization (—)−100−68−77−74−320−104−94−96−79−373
Exceptional financing00000−9202−4
Domestic financing (net)1174934608281,8991,242−529−5115676
Bank financing3430430428923724−554−131181220
Bank of Uganda30241−10167309193−579−210360−236
Commercial banks−268−115313626145312579−179456
Nonbank financing83463304009765182580−166456
Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

Include mainly HIPC-related grants from FY 2014/15 onwards.

The projections for the overall balance in FY17 are consistent with the adjusted ceiling on the overall balance, as defined in the TMU of the Staff Report for the Sixth Review of the PSI.

The overall deficit excluding large infrastructure projects financed by nonconcessional external borrowing (e.g. HPPs), BOU recapitalization, and oil revenue.

Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

Include mainly HIPC-related grants from FY 2014/15 onwards.

The projections for the overall balance in FY17 are consistent with the adjusted ceiling on the overall balance, as defined in the TMU of the Staff Report for the Sixth Review of the PSI.

The overall deficit excluding large infrastructure projects financed by nonconcessional external borrowing (e.g. HPPs), BOU recapitalization, and oil revenue.

Table 3.Uganda: Monetary Accounts, FY2012/13–FY2017/181, 2(Billions of Ugandan Shillings unless otherwise indicated)
2012/132013/142014/152015/162016/172017/18
6th RevEst.6th RevProj.Proj.
Depository Corporations Survey3
Net foreign assets8,4278,8449,65610,74010,32911,55911,04912,267
Bank of Uganda8,3059,45510,09210,30910,64211,13711,41112,629
Commercial banks122−611−436432−313422−362−362
Net domestic assets3,6215,2916,7338,1967,2289,8177,5279,547
Claims on public sector (net)4−176231,9112,6582,8413,1613,0613,574
Claims on central government (net)−1055391,8272,5762,7503,0792,9703,483
Claims on the private sector8,0119,12410,98612,76211,42214,83112,37214,230
Other items (net)5, 6−4,373−4,456−6,163−7,224−7,035−8,176−7,907−8,257
Money and quasi-money (M3)12,04714,14216,38918,93717,55721,37618,57521,814
Broad money (M2)8,93210,19511,09513,06012,08514,84912,78615,015
Foreign exchange deposits3,1153,9475,2945,8775,4726,5275,7896,798
Bank of Uganda
Net foreign assets8,3059,45510,09210,30910,64211,13711,41112,629
Net domestic assets−4,760−5,363−5,039−4,416−4,991−4,567−5,699−6,502
Claims on public sector (net)4−2,858−3,059−1,995−1,731−1,686−1,508−1,922−1,822
Claims on central government (net)−2,858−3,059−1,995−1,731−1,686−1,508−1,922−1,822
Claims on commercial banks−518−889−161628−4611,206−423−400
Other items (net)5,6−1,383−1,415−2,883−3,312−2,844−4,264−3,354−4,280
Base money3,5454,0925,0535,8935,6516,5705,7116,127
Currency in circulation2,4532,7463,2323,6503,3924,1503,5734,196
Commercial bank deposits71,0921,3461,8222,2432,2592,4212,1381,931
Other Depository Corporations
Net foreign assets122−611−436432−313422−362−362
Net domestic assets9,80512,43914,11315,37514,98517,39515,87218,577
Of which Claims on central government (net)2,7533,5983,8304,3074,4364,5874,8925,305
Of which Claims on private sector7,9649,06910,92212,69311,38614,76212,33114,189
Deposit liabilities to the non-bank public9,92711,82813,67715,80614,62117,81615,51018,215
Shilling deposits6,8127,8818,3839,9299,15011,2899,72111,416
Foreign exchange accounts3,1153,9475,2945,8775,4726,5275,7896,798
Memorandum items:
(Annual percentage change)
Base money17.715.423.516.611.811.51.17.3
M36.617.415.915.57.112.95.817.4
Credit to the private sector6.413.920.416.24.016.28.315.0
Base money-to-GDP ratio (percent)5.55.86.57.06.77.16.15.9
M3-to-GDP ratio (percent)18.620.121.122.520.723.019.821.1
Base money multiplier (M2/base money)2.52.52.22.22.12.32.22.5
Credit to the private sector (percent of GDP)12.412.914.115.113.516.013.213.8
Gross reserves of BoU (US$ millions)2,9123,3942,8952,7452,9622,9102,9803,101
Velocity (M3)5.45.04.74.54.84.35.04.7
Exchange rate (Ush/US$, eop)2,5932,6003,3023,778
Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

Starting on June 2013, the Bank of Uganda expanded the reporting coverage from Monetary Survey to Depository Corporations Survey.

The public sector includes the central government, public enterprises, other financial corporations and local governments.

Including valuation effects, the Bank of Uganda’s claims on the private sector and Claims on Other Financial Corporations.

Reflects actual and projected issuances for the recapitalization of Bank of Uganda.

Inclusive of foreign currency clearing balances.

Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

Starting on June 2013, the Bank of Uganda expanded the reporting coverage from Monetary Survey to Depository Corporations Survey.

The public sector includes the central government, public enterprises, other financial corporations and local governments.

Including valuation effects, the Bank of Uganda’s claims on the private sector and Claims on Other Financial Corporations.

Reflects actual and projected issuances for the recapitalization of Bank of Uganda.

Inclusive of foreign currency clearing balances.

Table 4.Uganda: Balance of Payments, FY2012/13–2017/181, 2(Millions of US dollars unless otherwise indicated)
2012/132013/142014/152015/162016/172017/18
6th RevEst.6th RevProj.Proj.
Current account−1,582−2,105−1,971−2,357−1,452−2,850−1,884−2,316
Trade balance−2,123−2,367−2,250−2,169−1,870−2,505−2,183−2,416
Exports, f.o.b.2,9122,7062,7382,6872,7052,6912,8653,149
Of which: coffee423404400342352308388457
Imports, f.o.b.−5,035−5,074−4,988−4,856−4,575−5,196−5,048−5,565
Of which: oil−1,028−1,090−933−671−647−641−743−811
Of which: government−438−361−224−644−494−489−585−597
Services (net)−405−331−685−632−696−718−591−557
Income (net)−528−612−444−759−430−884−462−623
Of which: interest on public debt−39−45−42−71−62−123−110−188
Transfers1,4731,2041,4071,2021,5431,2571,3511,280
Private transfers1,1309991,1731,0011,3051,0289871,027
Of which: workers’ remittances (inflows)817696792769820790721779
Official transfers343205234201238230365252
Of which: budget support (including HIPC)7183999699848078
capital gains tax77446368350
Capital and financial account1,5191,7931,1702,2181,0253,0181,9062,438
Capital account339199226120264129137
Of which: project grants339199226120264129137
Financial account1,4861,7021,0711,9929052,7541,7772,301
Foreign direct investment9401,0968701,0555121,1325671,268
Portfolio investment−475−162−10−175972399
Other investment5926093669485681,5261,188934
Of which:
Public sector (net)5343134221,1967081,5561,3871,083
SDR allocation00000000
Build-up (-)/drawdown (+) of petroleum func−7−71270−6127−7−7
Loan disbursements6174033851,2948071,5401,4991,303
Project support (loans)497322385379436687707417
Budget support (loans)12000007500
Non-concessional borrowing0810915371778792885
Amortization due−76−83−90−98−93−112−106−212
Commercial banks (net)380282−103−255−40510−6
Other private (net)−322144613−99100−209−143
Errors and omissions4026914490522000
Overall balance338378−353−1399516922123
Financing−338−378353139−95−169−22−123
Of which:
Central bank net reserves (increase = -)−334−374353150−93−165−18−121
Of which: SDR allocation00000000
Use of Fund credit−2−2−20−1000
Memorandum items:
Gross offical reserves2,9123,3942,8952,7452,9622,9102,9803,101
Months of imports of goods and services4.55.14.93.94.64.04.24.0
Donor support
Of which:
Budget support (loans and grants)191839996991598078
Project support (loans and grants)530413484605556951836554
Current account balance (percent of GDP)−6.3−7.6−7.2−9.7−5.9−10.7−7.1−8.2
Current account balance (excluding grants)−6.6−7.9−7.5−10.1−6.3−11.0−7.4−8.5
Trade balance (percent of GDP)−8.5−8.5−8.2−8.9−7.6−9.4−8.2−8.6
Exports of goods (percent of GDP)11.79.79.911.111.010.110.811.2
Imports of goods (percent of GDP)20.118.318.120.018.519.419.019.7
Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

All figures are based on the 2009/10 rebased GDP provided by the authorities in October 2016.

Table 5.Uganda: Banking Sector Indicators, March 2013–June 2016(In percent)
2013201420152016
Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15Mar-16Jun-16
Capital adequacy
Regulatory capital to risk-weighted assets24.524.323.122.123.622.822.522.223.221.219.721.021.821.7
Regulatory tier 1 capital to risk-weighted assets121.421.220.319.120.920.319.919.720.818.817.318.619.119.0
Asset quality
NPLs to total gross loans4.74.04.46.06.25.85.34.14.24.03.95.36.98.3
NPLs to total deposits3.52.93.24.34.24.13.72.93.12.92.93.94.95.8
Specific provisions to NPLs55.153.147.364.853.962.155.448.953.751.945.441.647.254.3
Earning assets to total assets69.670.070.769.669.368.971.571.570.469.569.669.270.168.0
Large exposures to gross loans34.836.035.437.933.632.337.238.335.240.043.540.942.241.5
Large exposures to total capital95.4103.4102.2113.697.796.4109.7113.2104.5126.4140.8123.5123.9121.5
Earnings and profitability
Return on assets3.63.33.22.02.42.12.22.62.52.82.72.62.82.2
Return on equity21.020.418.912.414.212.813.116.015.617.717.216.016.813.8
Net interest margin12.512.211.811.611.411.511.311.011.010.911.011.311.611.9
Cost of deposits4.34.13.93.73.63.73.73.53.43.33.33.33.43.4
Cost to income72.072.473.280.176.675.874.868.768.768.668.569.268.467.9
Overhead to income41.943.245.346.745.441.941.140.040.142.942.741.941.137.4
Liquidity
Liquid assets to total deposits42.741.140.642.545.446.541.844.044.246.446.046.442.543.4
Market sensitivity
Foreign currency exposure to regulatory tier 1 capital−5.1−6.7−8.2−3.2−2.6−6.7−1.4−6.9−5.4−5.7−3.4−5.9−7.6−6.2
Foreign currency loans to foreign currency deposits72.372.863.057.673.765.064.364.558.861.360.859.260.560.4
Foreign currency assets to foreign currency liabilities104.8104.9100.697.3100.895.495.297.1102.9101.4102.0101.897.496.7
Source: Bank of Uganda.

Under new rules, effective in December 2016, designed to ensure compliance with Basel III financial standards, tier one capital requirements were raised to 10. 5 percent from 8 percent, while the total regulatory capital ratio was raised to 14.5 percent from 12 percent. However, Systemically Important Banks (SIBs) will be required to maintain tier one capital of 11.5 per cent and a total regulatory capital ratio of 15.5 percent respectively. The cash reserve requirement for banks is 5.25 percent, and the liquidity coverage ratio is at 20 percent.

Source: Bank of Uganda.

Under new rules, effective in December 2016, designed to ensure compliance with Basel III financial standards, tier one capital requirements were raised to 10. 5 percent from 8 percent, while the total regulatory capital ratio was raised to 14.5 percent from 12 percent. However, Systemically Important Banks (SIBs) will be required to maintain tier one capital of 11.5 per cent and a total regulatory capital ratio of 15.5 percent respectively. The cash reserve requirement for banks is 5.25 percent, and the liquidity coverage ratio is at 20 percent.

Appendix I. Letter of Intent

Kampala, Uganda

November 22, 2016

Ms. Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, DC 20431,

USA

Dear Madame Lagarde:

On behalf of the Government of Uganda, we would like to provide you with an update on the progress we have achieved under our economic program supported by the IMF’s Policy Support Instrument (PSI). Economic growth declined slightly in the context of a difficult global and regional situation, and uncertainties around the February 2016 general elections. Our decisive monetary policy actions under the inflation targeting regime successfully kept inflation under control. International reserves remain at adequate levels. However, the softer-than-anticipated growth together with election-related pressures affected our fiscal accounts.

We observed all June 2016 quantitative assessment criteria, except one. Bank of Uganda successfully kept inflation within the bands of the inflation consultation clause, and increased its international reserve buffers. At the same time, the fiscal deficit was affected by revenue shortfalls—reflecting softer growth—and slightly more expansionary expenditure linked to elections. The indicative target on poverty reducing expenditure was respected. However, with the slightly higher fiscal deficit and concerns over government leaning too much on domestic financing from the banking sector, we were not able to repay the advance from Bank of Uganda by the end of the fiscal year. Instead, the outstanding advances will be repaid this fiscal year. Looking ahead, we remain committed to our objectives described in the context of the 6th PSI review. In particular, we are implementing measures to increase the tax-to-GDP ratio by ½ percent, and will ensure that the quality and composition of expenditure is protected in the context of a tight envelope. Bank of Uganda continues to target core inflation of 5 percent. Given a slightly tighter balance of payments, the scope for accumulating international reserves has narrowed, but the reserve coverage remains at adequate levels.

We made good progress on structural reforms. Government adopted the PFM Act regulations and is preparing implementation instructions, thereby enhancing the efficiency of the budget process. We have also submitted the charter of fiscal responsibility to Parliament. The charter will set clear fiscal objectives and enhance fiscal transparency. The exercise to reconcile domestic arrears data has been practically completed, and we are resuming semi-annual arrears reporting and monitoring. The amendments to the Bank of Uganda Act are under preparation and will strengthen central bank independence.

Furthermore, we are working closely with the Financial Action Task Force to ensure Uganda’s prompt exit from their “gray” list of jurisdictions with strategic deficiencies in Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT). We expect to approve the remaining pieces of amendments to legislation by end-December 2016, thus allowing an on-site visit early in 2017 which should culminate with Uganda’s leaving the list in June 2017.

As you know, Uganda’s financial sector is in good health and well capitalized. Most banks are already meeting Basel III capital requirements which will come into effect in December 2016. At the same time, Bank of Uganda recently had to take control of the third largest domestic systemically important bank which had become undercapitalized due to high non-performing loans. We continue to monitor the stability of the system closely, and are confident that our actions will protect deposits and safeguard financial sector stability.

These and other details of our economic program are set out in the attached Memorandum of Economic and Financial Policies (MEFP) and the Technical Memorandum of Understanding (TMU).

In light of the satisfactory performance and our continued commitment to and ownership of the program, we request completion of the seventh review under our Policy Support Instrument (PSI).

We intend to work with the IMF and other development partners on the implementation of our program, and will consult with the Fund on the adoption of any further measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund’s policies on such consultation. We will provide the IMF with such information as the Fund requests in connection with our progress implementing the policies and reaching the objectives of the program. In the context of the eight review of the PSI, we plan to request a successor PSI program. We also consent to publication of the staff report, the letter of intent, the MEFP and the TMU for the seventh review under the PSI.

Sincerely yours,

/s//s/
Hon. Matia KasaijaProf. E. Tumusiime Mutebile
Minister of Finance, Planning, andGovernor Bank of Uganda
Economic Development

Attachments:

  • 1. Memorandum of Economic and Financial Policies.
  • 2. Technical Memorandum of Understanding.

Attachment I. Memorandum of Economic and Financial Policies

Introduction

1. This Memorandum of Economic and Financial Policies complements the agreed policies under the 2013, 2014, 2015 and May 2016 Memoranda of Economic and Financial Policies under Uganda’s Policy Support Instrument (PSI). It presents an update on the economic performance in FY2015/16 and preliminary outturns for the first quarter of FY2016/17. Looking ahead, the memorandum describes the macroeconomic policies and structural reforms the Government of Uganda will pursue over the remainder of FY2016/17. The memorandum proposes extension of quantitative targets, structural benchmarks, and other reform commitments through to end-June 2017.

Recent Developments

2. Following the February 18, 2016 Presidential and Parliamentary elections, President Museveni was sworn in, and the new Parliament and Cabinet took office in June.

The government’s overarching objective is to achieve middle income status by 2020. To this end, over the medium term, we will continue to focus on the following priorities:

  • i) Increasing production and productivity in the primary growth sectors of the economy, including agriculture, tourism, oil, gas and minerals;
  • ii) Supporting private sector development for sustainable employment and economic growth;
  • iii) Enhancing infrastructure development to provide affordable power and lower transportation costs for value addition and enhanced market access;
  • iv) Enhancing economic management and domestic resource mobilization;
  • v) Improving public service delivery; and
  • vi) Improving efficiency in government operations.

3. Growth was 4.8 percent in FY2015/16, slightly below the 5 percent achieved in the previous fiscal year. The growth recorded was held back by the difficult global environment (including the slowdown in China and Brexit) and complex geo-political conditions (impact of the situation in South Sudan); lower commodity prices; a deceleration in the execution of public infrastructure investments; a decline in private sector credit; and election and post-election related uncertainty. The key sectors that contributed to growth include services (especially the information and communication services), agriculture, and construction, while manufacturing experienced a notable slowdown.

4. Construction of the key infrastructure projects, including the Karuma and Isimba hydro-power projects and the Kampala-Entebbe Express Highway, is already underway. However, there were some supervision challenges with the Karuma construction during the year which resulted in cessation of operations for several months. To prevent this kind of problem, we have established a committee to supervise the works in reference to the implementation schedule and report progress to Cabinet on a quarterly basis. In terms of financing, by the end of June 2016, the China-Exim bank loans had been disbursed to 16.3 percent (or US$313 million) of the projects cost.

5. Recent events in South Sudan continue to affect Uganda in a number of ways as Uganda continues to host a significant number of refugees with support from the international community, helping manage the humanitarian crisis. The slowdown in Ugandan exports to South Sudan and the decline in worker’s remittances may continue to adversely affect Uganda’s economic performance. In addition, many Ugandan traders are burdened with unpaid bills from the South Sudanese government, which threatens their commercial viability.

6. Private sector credit growth decelerated to 3.1 percent year-on-year in September 2016, driven largely by provisioning for bad loans—which has heightened risk aversion of banks—as well as subdued economic activity. All sectors experienced a squeeze in loan disbursements with the exception of lending to electricity and water and personal and household loans. Lending to the manufacturing, trade, building and construction and the business services sectors was minimal, resulting in net recoveries in the most recent period to September 2016. Foreign currency lending which previously supported private sector credit has deteriorated significantly to a year on year growth rate of minus 1.9 percent in September 2016 relative to a 3.1 percent growth in June 2015 (both adjusted for valuation changes). Local currency lending has on the other hand started recovering after having bottomed out in March 2016.

7. Overall, the banking sector remains healthy, though Non-Performing Loans (NPLs) have increased and Bank of Uganda (BoU) had to intervene in one bank. The sector remains well-capitalized, liquid and profitable. However, NPLs as a ratio of gross loans increased from 4.0 per cent in June 2015 to a peak of 8.3 percent at end-June 2016, declining afterwards to 7.7 percent at end-September 2016. The main reasons for this increase according to a survey conducted in the industry are government domestic arrears, diversion of borrowed funds, the effect of political instability in South Sudan, insufficient cash flows resulting from the slowdown in economic activity, fraudulent practices, increased cost of borrowing following monetary policy tightening, and foreign exchange volatility that negatively affected repayment capacity of borrowers with loans denominated in foreign currencies. Stress tests show that the system remains resilient to shocks, including the impact of an increase in the industry average NPL ratio to 12.6 percent on bank capital, default of the single largest borrower in each bank, a sudden withdrawal of short-term deposits, a sudden withdrawal of the single largest depositor and the 3 largest depositors in each bank.

8. To ensure the stability of the financial system, BoU took over management of Crane Bank on October 20th 2016. Crane Bank, the fourth largest overall—and the third largest domestic systemically important bank (D-SIB)—was undercapitalized following a significant increase in NPLs. BoU appointed a statutory manager and suspended the Board of Directors. The next key steps include ensuring that the bank’s capital base is restored and on this front, the new management is seeking a strategic investor. This intervention was successful in stopping deposit outflows. However, with an estimated share of credit to the private sector of 10 percent, Crane Bank’s predicaments will likely constrain further private sector lending in FY2016/17.

9. The current account deficit including grants improved to 5.9 percent of GDP in FY2015/16, owing mostly to a decline in the private sector import bill, which is largely attributed to low international crude oil prices and a slowdown in economic activities during the year. The current account deficit was financed by project aid and FDI inflows. The overall balance of payments recorded a surplus of US$ 95 million leading to a net build up in reserves. In the first quarter of FY2016/17, BoU continued with the daily purchases of foreign exchange for reserve build up supported by the stability of the exchange rate. Following an annual average depreciation by nearly 25 percent in 2015, the exchange rate has remained relatively stable, with the shilling appreciating by 7.8 percent against the U.S. dollar on a year-on-year basis in September 2016. The relative stability of the exchange rate has been supported by subdued corporate sector activity and continued inflows from NGOs, the coffee export sector, and offshore portfolio investors. More recently, the market has experienced some sharp depreciation pressures following a rebound in corporate sector demand.

10. We have made further progress toward the commencement of oil production in 2020. We recently issued eight production licenses in the oil sector, and companies should make their final investment decision within 18 months after receiving the licenses. We decided that the pipeline will go through Tanzania to the port of Tanga. Negotiations are progressing well regarding the necessary inter-governmental and host-government agreements. The pipeline project is estimated to cost US$ 3.5 billion and will be financed by the private sector. However, negotiations with the strategic investor for the planned oil refinery were unexpectedly called off, and we are exploring alternative options. We have established the national oil company, with a mandate to handle government’s commercial interests in the oil and gas sector, and the Petroleum Authority tasked with monitoring and regulating exploration, development and production of petroleum activities in Uganda.

Performance Under the PSI Through October 2016

11. In this complex environment, we maintained macroeconomic stability, guided by the objectives we had identified under our program. Specifically, we achieved all end-June monetary and external sector targets, while some fiscal targets proved challenging. We also made progress on the structural reform agenda, though some areas moved slower than had been hoped for.

12. Importantly, core inflation is converging to our target and remained within the bands of the inflation consultation clause. In 2015, in response to emerging inflation pressures mostly linked to the exchange rate depreciation, we tightened monetary policy by 600 basis points from 11 percent in March 2015 to 17 percent in October 2015. As a result, annual average headline inflation declined to 4.1 percent in October 2016 from a peak of 8.5 percent last December, and core inflation declined to 5.1 percent from 7.5 percent over the same period. The decline also reflects the strengthening of the shilling and lower food prices following increased agricultural production. With inflation forecast to stay close to our target, as well as subdued aggregate demand and a relatively stable exchange rate, BoU reduced its Central Bank Rate (CBR) in April, June, and August 2016. In the October meeting, BoU decided to further reduce the CBR by 100 bps to 13 percent, with a benign inflation outlook that allows for support of the domestic growth momentum.

13. Given strong foreign exchange inflows and BoU programmed dollar purchases, the Quantitative Assessment Criteria (QAC) for net international reserve accumulation was met with a comfortable margin. At the end of June 2016, net international reserves (NIR) stood at US$ 2,962 million, equivalent to 4.5 months of imports of goods and services. By September 2016, and following BoU purchases of US$ 249.1 million, the stock was equivalent to 4.4 months of import cover.

14. Fiscal policy was faced with revenue shortfalls and higher-than-expected election-related expenditures. On the revenue side, the shilling depreciation dampened import demand, resulting in shortfalls of international trade taxes and excises relative to PSI targets of Ushs 44 billion and Ushs 190 billion respectively. The infrastructure levy also slightly underperformed. VAT collections remained on target, while income tax exceeded projections under the PSI by around Ushs 30 billion. Overall, we missed our end-June indicative target (IT) by a margin of Ushs 207 billion or 0.2 percent of GDP. On the expenditure side, the government had to shoulder unexpected additional spending on election-related needs that exceeded the revised allocations agreed during the 6th PSI review. Furthermore, spending on externally financed investment projects proceeded slower than hoped for because of absorptive capacity constraints resulting from implementation challenges. However, we met the IT on poverty reducing expenditure which we protected for its importance.

15. Against this backdrop, we were not able to achieve our fiscal deficit QAC, even though the overall deficit was 1.2 percent of GDP lower than we had anticipated at the time of the last PSI review. With the revenue shortfall and higher-than anticipated domestic spending, the end-June 2016 QAC on the overall deficit was missed by 0.5 percent of GDP. That notwithstanding, government debt at 34.5 percent of GDP at end-June 2016 is lower than expected under the program, reflecting the under-spending on externally financed projects. The deficit IT was also not respected in the first quarter of FY2016/17 given the frontloading of some key expenditures, including for repayment of arrears, and softer revenue collection.

16. Given these developments, we had to rely more on domestic financing than anticipated. By June, we issued domestic securities of 1.6 percent of GDP on a net basis in the primary market, exceeding the forecast underlying our program. In addition, we took a temporary advance from BoU. Given the domestic financing needs and concerns over crowding out private sector credit, the government was unable to fully repay these advances by the end of the fiscal year, thus missing the related IT. The advances will be repaid during this financial year.

17. We are fully aware and concerned about the impact government domestic arrears are having on the private sector. Arrears have been identified as one of the reasons for rising NPLs in the banking sector, putting companies in a difficult situation, and more generally weighing on business sentiment. We have undertaken an exercise to reconcile the stock of arrears from internal audit and final accounts, by reviewing submissions from all government entities to come up with a harmonized position. The data show that the stock of arrears was Ushs 1.4 trillion in June 2014 and Ushsin June 2015, and, preliminarily, Ushs 2.7 trillion in June 2016. The increase registered in 2016 is the result of some methodological issues—including the fact that some new reporting entities were unable to provide figures for years prior to June 2016, including universities and examination boards—and some other factors including (i) the formalization of a commitment to pay pensions and gratuity for veterans, that could only be measured this fiscal year, which accounts for nearly half of the increase in arrears; (ii) the increase in court awards and compensation; (iii) outstanding commitments of National Medical Stores; and (iv) VAT arrears amounting to Ushs 71 billion under the Ministry of Finance Planning, and Economic Development.

18. We have made progress on our structural reform agenda, though some items are taking longer than we had hoped for. The Public Financial Management (PFM) Act regulations were gazetted in June 2016. Although not the full level of detail could be included, treasury instructions currently under preparation are expected to cover detailed aspects of financial management and accountability processes. The Charter of Fiscal Responsibility has been presented to Parliament for approval and contains clauses on the levels of the fiscal deficit and public debt consistent with maintaining macroeconomic stability. We have finalized the Appraisal User Manual, which is expected to be published and disseminated to all Ministries, Departments and Agencies by end-December 2016, to help guide project preparation and appraisal (structural benchmark). In addition, the Development Committee Guidelines have been updated, and will be published by end-December, in order to help ensure compliance with the Appraisal User Manual (structural benchmark). A cabinet memorandum on the principles for amending the BoU Act has been prepared and will be presented to cabinet and thereafter to Parliament by March 2017 (structural benchmark). The AML Amendment Bill 2016 which was submitted to the previous Parliament has been re-published and recommitted to the new Parliament in October 2016 for discussion and approval by end-December 2016. The Amended AML Act also contains provisions to address deficiencies highlighted in the 2016 Mutual Evaluation Report, namely: adequately expanding the scope of record-keeping requirements to apply to all financial institutions; and designating supervisory bodies with necessary powers to enforce financial institutions’ compliance with AML/CFT obligations, including proportionate and dissuasive sanctions. The Insurance Regulatory Authority (amendment) Bill was recently resubmitted to the First Parliamentary Council before being sent to the relevant Parliamentary Committee, and is also expected to be considered and approved by Parliament by end-December 2016. The Anti-Terrorism Act has been amended to properly criminalise the financing of terrorism and submitted to Parliament for its approval. We will engage closely with Parliament to ensure a speedy passage by end-December 2016 (structural benchmark).

Macroeconomic Outlook and Risks

19. Real GDP growth is projected at about 5 percent, on account of the continuation of the infrastructure investments and a muted recovery in private sector demand. Inflation is projected to remain close to its medium term target on account of a relatively stable exchange rate and lower commodity prices especially oil. We anticipate that the current account deficit will widen resulting from subdued exports partly because of the strife in South Sudan–a key export market, as well as the low international prices of our export commodities. On the other hand, the level of imports remains high–in particular intermediate input and government infrastructure related imports. The level of international reserves will remain adequate at around 4 months of import cover. Private sector credit is expected to recover to about 8 percent, following monetary policy easing, while the exchange rate is projected to remain relatively stable.

20. Over the medium-term, the expected start of oil production in FY2020/21, together with the growth dividend from completion of our infrastructure investment projects, are projected to improve Uganda’s growth prospects and fiscal and current account dynamics.

21. The risks to the outlook arise from the current global and regional situation. On the global front, a slow recovery in global growth coupled with low commodity prices could impact export growth, while the continued unease in the financial markets could impact direct investment and financing flows. Implementation challenges for public investment projects remain a key factor that could hinder reaping of the growth dividend, while sustained foreign exchange demand for infrastructure projects, widening current account position, civil strife in South Sudan and volatile global financial markets remain key risks to the exchange rate.

Policies for the Remainder of FY2016/17 and Beyond

22. Macroeconomic policies remain aligned with our objective of ensuring macroeconomic stability and enhancing sustainable growth. Our medium term strategy continues to be based on scaling up infrastructure investment to remove key constraints to growth; protecting essential poverty-alleviating expenditure; increasing production and productivity; and enhancing domestic revenue mobilization. These policies will go hand in hand with structural reforms to further improve the business environment to support private sector growth. Fiscal sustainability and maintaining government debt at a low risk of distress constitute the anchor of our growth strategy.

23. In the remainder of FY2016/17, government policies will continue to focus on supporting economic growth, while adhering to our fiscal framework and keeping inflation within the target band. Fiscal policy will continue the process of scaling up infrastructure investment and prioritize the quality of spending. In addition, the government targets a revenue increase by ½ percent of GDP. Settling government domestic arrears and containing the need for domestic financing should facilitate private sector activity. Monetary policy will remain focused on ensuring price and financial stability in an environment of a benign inflation outlook.

Fiscal Policy

Strengthening our efforts to enhance revenue mobilization

24. In the first quarter of FY2016/17 revenue collection underperformed, due to weaker import demand. In the first two months of the quarter, revenue collections on corporation tax, withholding tax, VAT on services, and excise duties on sugar, soft-drinks and imports, were all below their respective targets. However, the trend got better with overall collections for September recording a surplus relative to projections.

25. We are implementing tax policy measures to yield the agreed revenue increase of at least Ushs 500 billion at the time of the 6th review. On the tax policy side, this includes the adjustments in excise duty on fuel, motor vehicle lubricants, cement, sugar, various other fees and levies. However, two of these measures (increases in excise duty on cement and the environmental levy on used clothing) were rejected by Parliament and could not be implemented. To compensate for that, we have strengthened revenue administration, including boosting the public sector office operations, strengthening valuation controls, debt collection and undertaking joint compliance activities with local government. Other measures include; further expansions to single customs territory activities and close monitoring of current declarations. We continue implementing reforms to ease the cost of doing business. Through the implementation of business licensing reforms, the time taken to register a business has been reduced from 33 days in 2013 to 24 hours. Uganda’s ranking in the World Bank Doing Business report has improved seven positions in 2016 reflecting these improvements and enhancements in the tax system. With collaboration under Tax Registration Enhancement Programme, 4 institutions (namely Uganda Revenue Authority (URA), Uganda Registration Services Bureau (URSB), Kampala Capital City Authority (KCCA), and the National Social Security Fund (NSSF)) are working together to ensure that upon registration of business, an enterprise immediately gets a Tax Identification Number (TIN), trading license and NSSF registration.

26. Government is committed to further reforms of the tax policy and tax administration consistent with the policy target on increasing revenue by 0.5 percent of GDP per year. We remain fully committed to reducing the scope of tax exemptions and tax holidays in order to support domestic revenue mobilization. However, we will be mindful of the need to balance revenue enhancement with private sector development and welfare. We welcome additional IMF technical assistance (TA) in this area, in particular to review capacity and structures of URA with regards to implementing the tax laws.

27. We have just joined the Addis Tax initiative and thus further signaled our commitment to continue stepping up domestic revenue mobilization and pursue policy coherence for development.

Expenditure - focusing on efficiency, quality, and reprioritization

28. In the first half of the year, we decided to frontload a significant amount of expenditure. The front loading was necessitated by the need to clear domestic arrears, meet counter-part financing obligations under roads and energy and meet other requirements under social services. Overall budget implementation reached 52 percent, particularly in development and Poverty Action Fund (PAF) related expenditures.

29. For the remaining second half of the fiscal year, we plan to target an annual budget execution rate of 96 percent, implementing cuts to some categories of recurrent expenditure. These savings will be made in the non-essential aspects of the nonwage recurrent expenditure of central government, such as travel inland, travel abroad, workshops and seminars, and advertising. The cuts are not deemed to generate arrears because they will fall on non-contractual obligations arising out of targeted areas. Poverty reducing expenditure and counterpart funding obligations under domestic development will be protected. Furthermore, we shall be able to accommodate additional demands of about Ushs 100 billion arising out of the unfolding food emergency situation in 80 districts in the country.

30. Expenditure priorities have not changed. We will continue to focus on the scaling up of infrastructure and on improving human and social capital. On infrastructure, the key projects to be implemented this year include, among others: Karuma and Isimba dams, roads, and the rehabilitation of Entebbe airport. Since implementation of the projects has historically lagged behind and we are being affected by poor execution of projects, we have agreed to continue to strengthen public investment management through putting in place guidelines to sectors on appraisal, sequencing and implementation of projects.

31. On the social and poverty-alleviating expenditure we plan to devote 21.5 percent of our budget to health and education, in particular areas targeting primary health care, funding for malaria and HIV/AIDs, and the school capitation grant in the education sector. Furthermore, a new Integrated Early Childhood Development policy has just been launched targeting children from conception to 8 years. The policy includes enhancing prenatal and postnatal care, early infant simulation and education, parent education, health and nutrition education and care, sanitation, and protection against abuse, exploitation and violence. Priority is on the most vulnerable children who are to benefit from quality services for holistic development.

32. On social protection, the Poverty Assessment Report (2016) alludes to the fact that 46 percent of Uganda’s population is insecure non-poor which implies that they are prone to falling back into poverty when hit by a shock. In order to mitigate such shocks, government is investing in social protection mechanisms which include (i) identification, verification, and payments of pensions, including pension arrears, (ii) the Social Assistance Grant for Empowerment (SAGE), which provides direct cash transfers to the elderly in the pilot districts and has been allocated additional resources for its operations; (iii) continued funding for the Youth Livelihood Programme through allocations of Ushs 85.2 billion; and (iv) the Uganda Women Entrepreneurship Programme (UWEP) (Ushs 43 billion), which has been rolled out in 19 districts and Kampala City as a pilot to benefit vulnerable women.

33. Government is implementing a skills development program for employment and enhanced productivity and growth. The objective is to create employable skills and competencies relevant in the labor market and to enhance participation of the private sector in policy development planning, implementation, monitoring and evaluation including financing and training.

34. We are committed to improving service delivery and value for money and recognize that improving implementation performance must be a key area. Service delivery will be enhanced by drawing on lessons from the first national social service delivery atlas, produced by the Ministry of Finance, UNICEF and EPRC, which identifies service points by local government and the impact of public investments on social outcomes. This will further focus the spot-light on the processes, contexts, and determinants of the delivery of public services and goods. In light of project implementation delays, contract management and social safeguards management concerns, the World Bank recently decided to freeze lending for new projects, while disbursements for ongoing projects continue. This freeze particularly affected the Development Policy Support Loan (budget support) that we had included in the budget in the current fiscal year. We are working closely with the World Bank to resolve the issues raised, and are taking a number of social safeguard measures, including; completing the outstanding Resettlement Action Plans (RAPs) for the affected projects, and adopting a policy on Gender-Based Violence (GBV) and Child Abuse. We are also developing an emergency protection response to provide holistic services to all vulnerable groups affect by GBV and abuse. Government has enhanced the process of portfolio review with respective development partners and is strengthening the capacity of implementing agencies in project supervision, contract management and monitoring.

35. The refugee influx to Uganda has increased significantly, making Uganda one of the top refugee recipients in Africa and the world. With a refugee population of around 922,000 and about 2000 to 3000 arrivals a day, most of them children and women, pressures on service delivery by local governments are mounting (and ultimately possibly in budget). Uganda has a very progressive refugee management system that provides refuges with the same rights as nationals, including access to health, education, provision of land and right of establishment. We strongly believe this is the fairer and more equitable system that provides refuges with opportunities. However, to be able to continue implementing our model, there is an urgent need for the international community to step up its contributions, as the refugee response plan is only about 20 percent funded.

Financing - Minimizing private sector crowding out and impact on inflation

36. Since the advances received from BoU throughout the FY 2015/16 year were not fully repaid by end-June 2016, we plan to reimburse the central bank in a phased manner during quarter two and three. Looking ahead, temporary advances from the BoU will only be used for cash management purposes and not go beyond 10 percent of projected revenue, as stated in the PFM Act, and be repaid before the end of the current fiscal year. Furthermore, such advances will bear an interest cost aligned with market rates, as stated in the BoU Act 2000.

37. We plan to finance the budget using domestic, concessional and non-concessional loans. Non concessional financing will include the PTA loan, which amounts to US$ 200 million and is planned to be disbursed this fiscal year. As with all other budget support, the PTA loan resources will be disbursed to an account held at the BoU. We will also have to increase domestic debt issuances by Ushs 300 billion, which we believe the market can absorb given current liquidity conditions.

38. Government’s core principle continues to be ensuring that debt remains at low risk of distress through long-term prudent debt management, as outlined in the Medium Term Debt Management Framework, which aims at minimizing costs and risks associated with public investment project financing. The updated Debt Sustainability Analysis (DSA) results show that debt remains at low risk of distress. However, to sustain this position, the resource bases (GDP, revenue, export) need to be improved to minimize risks, in particular from weak exports. We are also cognizant of risks from contingent liabilities, including those from public-private partnerships. We will closely monitor developments, and stand ready to adjust policies as needed to safeguard debt sustainability. We will continue to engage with IDA/IMF staff on debt management issues and to address the short maturity of domestic debt by building policy credibility and deepening the markets.

Monetary and Financial Sector Policies

39. BoU will continue to be guided by its inflation forecast in determining whether the current easing cycle can continue. Risks to the inflation forecasts emanate from the future path of the exchange rate, food price dynamics, the extent of fiscal prudence, as well as uncertainty in the global financial markets resulting from the vote by the United Kingdom to leave the EU and the evolution of commodity prices, especially oil.

40. BoU is committed to avoiding excessive volatility in the exchange rate without impeding the real exchange rate from reflecting market conditions. As such, interventions in the foreign exchange market will remain limited to preventing excessive volatility. Interventions will continue to be sterilized. BoU shall continue to look out for opportunities in the market to purchase foreign exchange from the market for reserve build up to ensure stability.

41. BoU will be recapitalized by Ushs 100 billion in Q2 of FY2016/17 to facilitate monetary policy management. Following the amendments to the Bank of Uganda Act (expected shortly), a dynamic capital rule will be introduced which ensures that capital will be maintained as a share of monetary liabilities. In the meantime, there is excess structural liquidity build up in the system that requires sterilization by BoU. In this context, we are planning to reactivate deposit auctions as an instrument for liquidity management alongside repos.

42. We are monitoring closely developments in the financial sector and will continue to do so to ensure the soundness of the system. The sector has been affected by a continued deterioration in asset quality, which is expected to remain a concern for the short term. Furthermore, the recent developments regarding Crane Bank’s take over by BoU have impacted market sentiment. Nonetheless, banks remain well capitalized and able to absorb losses. In December 2016, we will be implementing new capital requirement provisions aligned with Basel III: all banks will be required to have a Capital Conservation Buffer (CCB) of 2.5 percent of Risk-Weighted Assets (RWA) above the minimum capital requirements; all D-SIBs will be required to have additional capital of between 1–3.5 percent of RWA above the minimum capital requirements and CCB. The sector is on track to meet these requirements, as most banks – particularly the big ones, have already complied with the requirements. To reassure the markets and provide for quality assurance, we would like to request support to conduct an updated FSAP analysis. The FSAP would help us to draw lessons to strengthen our financial sector.

43. BoU is undertaking reforms in the primary dealership system in the government securities market to alleviate the challenges affecting their ability to fulfil their obligations. A set of reforms to address distribution constraints and provide the opportunity for banks to demonstrate the ability to meet the obligations of a primary dealer, especially market making and secondary market trading have been approved. In the reforms, all banks will be required to post two-way quotes for on-the-run securities and these quotes will be good for Ushs 250 million; be able to open CSD accounts for their clients directly through an online platform called the Primary Dealer Shared Gateway (PDSG); submit bids for their clients and settle bids of their clients, in addition to settling their own proprietary bids. BoU also engaged a consultant to review the draft Master Repo Agreement. The consultant noted that there were too many gaps and shortcomings, including not providing adequate cover for banks if a counter-party faced insolvency. Uganda will adopt a globally recognized Global Master Repurchase Agreement (GMRA), but with a Uganda annex and a buy/sell back annex be appended to it.

44. In addition, the Financial Institutions Act (FIA) was amended in 2016 to allow for agent banking, bancassurance and Islamic banking. The Tier IV Microfinance Institutions Act was passed by Parliament, which will provide oversight for Savings and Credit Cooperatives (SACCOs), Money Lenders and Micro Finance Institutions. Consumer protection has been enhanced by requiring Supervised Financial Institutions (SFIs) to provide a key facts document to consumers for the products they offer. In addition, a complaints desk has been set up at the BoU to address consumer complaints as well as a review of consumer complaints during on-site examination.

45. The mobile money market continues to evolve, with over 21 million registered customers. In April 2016, one additional player joined the mobile money market. The new mobile money service is not tied to a particular mobile phone network or bank rather it is an internet-based application. Furthermore, at the start of FY 2016/17, a mobile money service provider launched a micro savings and loan product that allows registered users to borrow and save money using their mobile phones. The 2013 Mobile Money Guidelines, issued by BoU, have been a useful tool to provide clarity and stipulate the roles and responsibilities of the parties, while enhancing competition, financial inclusion and consumer protection. However, to ensure the smooth operation of the mobile money services and to protect the integrity and stability of the financial system, Ministry of Finance and BoU are working together to develop a more comprehensive legal, regulatory and supervisory framework for mobile money activities (structural benchmark).

46. Government is committed to ensuring the prompt exit of Uganda from the Financial Action Task Force (FATF) Grey list. We have accomplished significant progress, including passing further amendments to the Anti-Terrorism (Amendment) Act by Parliament; and the gazetting of the Anti-Terrorist Regulations and of the AML Regulations. Looking forward, we will accelerate the adoption of the remaining measures to ensure prompt exit from the FATF Grey list, including the approval by Parliament of the amendments to the AML and Anti-Terrorism Acts (structural benchmark by December 2016). We will also aim to have the mutual evaluation report widely publicized; complete the national risk assessment and have its report adopted by cabinet and subsequently published on the Financial Intelligence Authorities’ website; prepare a five-year Strategic Plan and communications strategy for the Financial Intelligence Authority and initiate the update and preparation of the national AML/CFT policy.

Structural Reforms

47. To prevent reoccurrence of arrears, we plan to include the non-accumulation of arrears as a key criterion for reappointing accounting officers. In addition, accounting officers have been asked to migrate all electricity and telephone utilities from the post-paid to the prepaid systems by 30th June 2017. Thereafter, no funds will be released to non-compliant Ministries and Agencies, while accounting officers who create arrears will face disciplinary action, including termination of their appointments. We would like to request IMF TA to further strengthen our processes and prevent the reoccurrence of arrears. In terms of our reporting requirements, we will continue to publish semi-annual reports on unpaid bills (end-December) and arrears (end-June) for the agreed ministries and government departments (structural benchmarks), and we have provided reports signed by the PS/ST on the stock of outstanding arrears at end-June 2014, end-June 2015, and end-June 2016 (preliminary), reconciled between the Accountant General and the Internal Audit Department of the Ministry of Finance, Planning, and Economic Development.

48. We will continue our efforts to further strengthen the implementation of infrastructure projects. We have finalized the Appraisal User Manual and Development Committee Guidelines to ensure that no project is included in the Public Investment Plan (PIP) unless a feasibility study has been done and counterpart funding is provided for in the medium term budget framework. The manual details a step-by-step guide to the MDAs in the preparation and appraisal of projects. We are setting up an Integrated Bank of projects that will act as a central depository for all public projects in Uganda and enable tracking of the development process of projects on a real time basis and will also establish a project Development Facilitation Fund to allow a number of priority projects to undergo feasibility and/or pre-appraisal studies while awaiting inclusion in the PIP and annual budget by March 2017. On the basis of diagnostic study on strengthening public investment management, we are finalizing a project preparation manual, which will set out national parameters, shadow prices and conversion factors to be used in all economic project appraisals prior to admission into the PIP. This will be used to guide decision making on new projects (structural benchmark, March 2017).

49. We continue upgrading our PFM and cash management systems for instance the Treasury Single Account (TSA) framework was extended to 56 Local Governments (LGs), (14 LGs on IFMS Tier 1 in July 2015 and an additional 42 LGs on IFMS Tier 2 in January 2016). Further extension of more LGs on TSA will depend on their enrolment onto IFMS. We are also minimizing use of cash through Electronic Funds Transfer.

50. We are also in the process of establishing a framework for following up and reporting on the implementation on the recommendations of value-for-money audits conducted by the Auditor General’s office (structural benchmark, March 2017). In addition, a Public Expenditure and Financial Accountability (PEFA) exercise has commenced and is jointly undertaken with the World Bank. A Fiscal Transparency Evaluation (FTE) was just completed for Uganda, showing that there are good and advanced practices being applied, but more work needs to be done in some areas, especially relating to coverage, quality and reliability of budget information. The government is undertaking a number of measures to improve budget credibility, including the alignment of work plans, procurement plans, recruitment and cash-flows to the budget using the Output Based Tool and the development of an integrated macro-economic model to improve fiscal forecasting.

51. The strategic plan for the Public Procurement and Disposal of Public Assets Authority (PPDA) identifies strengthening accountability and transparency in public procurement as one of its top priorities. We plan to roll out e-procurement to 50 percent of all Procuring and Disposing Entities by FY 2018/19 to increase efficiency, transparency, and public confidence. Government has initiated a process of amending the PPDA Act, which will among others streamline the processes associated with administrative reviews of public procurements. This remains the source of the extensive delays which affect project start dates.

Program Modalities

52. Progress in the implementation of the policies under this program will be monitored through QAC, ITs, and structural benchmarks (SBs) detailed in the attached Tables 1 and 2 and through semi-annual reviews. The eighth review is expected to be completed by end-June 2017. The attached Technical Memorandum of Understanding—which is an integral part of this memorandum—contains the needed definitions.

53. We will continue to consult with the IMF on major policy initiatives before decisions are made.

Table 1.1.Uganda: Quantitative Assessment Criteria and Indicative Targets for December 2015–March 20171(Cumulative change from the beginning of the fiscal year, unless otherwise stated)
Dec. 31, 2015 2Mar. 31, 2016 2Jun. 30, 2016 2Sep. 30, 2016 3Dec. 31, 2016 3Mar. 31, 2017 3
ProgramAdjusted TargetOutturnResultProgramAdjusted TargetOutturnResultProgramAdjusted TargetPrel.ResultProgramAdjusted TargetPrel.ResultProgramProposed revised programProgramProposed revised program
Quantitative Assessment Criteria(Billions of Ugandan shillings)
Ceiling on the overall deficit of the Central Government2,3462,1132,325Not met3,8142,8283,066Not Met5,3823,7984,260Not Met1,5905231,447Not Met3,9833,6464,9884,688
(Millions of US dollars)
Ceiling on the stock of external payment arrears incurred by the public sector400Met00Met00Met00Met0000
Minimum increase in net international reserves of the Bank of Uganda5−225−26231Met−281−32957Met−150−145174Met414131Not Met831812418
(Percent)
Share of oil revenue placed in the Petroleum Fund100100Met100100Met100100Met100100Met100100100100
Indicative targets(Billions of Ugandan shillings)
Ceiling on cumulative changes in temporary advances from Bank of
Uganda to the central government6268182Met118−60Met0479Not Metn.a.n.a.n.a.n.a.−516n.a.−726
Floor on tax revenue5,2825,310Met7,9977,851Not Met11,04010,833Not Met2,7562,695Not Met6,0085,8679,0848,936
Expenditures on poverty alleviating sectors1,5701,488Not met2,3672,393Met3,0323,241Met8931,126Met1,8241,8242,7822,782
Ceiling on the issuance of guarantees by the Government/Bank of Uganda00Met00Met00Met00Met0000
Net change in the stock of domestic arrears7−39n.a.Not met−80n.a.n.a.−80n.a.n.a.n.a.n.a.n.a.−62−77n.a.n.a.
Ceiling on withdrawals from energy and petroleum funds173140140Met253253144Metn.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
(Annual percentage change)
Inflation consultation clause
Outer band (upper limit)8.08.08.08.08.08.0
Inner band (upper limit)7.07.07.07.07.07.0
Core inflation target85.05.2Met5.06.3Met5.06.7Met5.06.4Met5.05.0
Inner band (lower limit)3.03.03.03.03.03.0
Outer band (lower limit)2.02.02.02.02.02.0

Defined in the Technical Memorandum of Understanding (TMU). Values for December 31, 2015, June 30, 2016, and December 31, 2016 are quantitative assessment criteria except as marked. Values for other dates are indicative targets.

Proposed targets are measured as the change from June 2015, except as marked.

Proposed targets are measured as the change from June 2016, except as marked.

Assessed on a continuous basis.

The NIR outturn is assessed using program exchange rates.

As the issues regarding this target have been addressed by the Amendments to the PFM Act (2015), the target was set up until June 2016 but is now proposed to be continued at the seventh review.

The outturns are not available because a reconcilatjon process has not been completed yet This target will be measured semiannually for quarters ending June 30 and December 31 since the seventh review.

Annual percentage change, twelve-month period average core inflation.

Defined in the Technical Memorandum of Understanding (TMU). Values for December 31, 2015, June 30, 2016, and December 31, 2016 are quantitative assessment criteria except as marked. Values for other dates are indicative targets.

Proposed targets are measured as the change from June 2015, except as marked.

Proposed targets are measured as the change from June 2016, except as marked.

Assessed on a continuous basis.

The NIR outturn is assessed using program exchange rates.

As the issues regarding this target have been addressed by the Amendments to the PFM Act (2015), the target was set up until June 2016 but is now proposed to be continued at the seventh review.

The outturns are not available because a reconcilatjon process has not been completed yet This target will be measured semiannually for quarters ending June 30 and December 31 since the seventh review.

Annual percentage change, twelve-month period average core inflation.

Table 1.2.Uganda: Structural Benchmarks
Policy MeasureMacroeconomic RationaleDate1StatusProposed Revised date
Ministry of Finance to submit to Parliament amendments to the Bank of Uganda Act containing provisions to support implementation of inflation targeting in line with international best practices, including establishing the capital of the BoU as an adequate percent of monetary liabilities, and limiting the size of intra-year advances to the government to 10 percent of tax revenues of the previous year.To strengthen monetary policy independence and credibility of the central bank.September 2016Not met.

Draft Cabinet Memo on the Principles for Amending the BoU Act to be presented to Cabinet, thereafter, Bill to Parliament.

Approval of Cabinet Memo pending.
March 2017
Ministry of Finance to publish reconciled reports signed by the PS/ST on the stock of unpaid bills of all government entities contained in the central government votes at end-December of each fiscal year.To facilitate control and reduction of unpaid bills.February 15, 2016 for December 2015 report

March 2017 for December 2016 report
Not met. Dropped because the authorities will no longer be able to publish a reconciled report on the stock of paid bills for December 2015 as the interim data are superseded by the end-year report.
Ministry of Finance to publish reconciled reports signed by the PS/ST on the stock of domestic arrears of all government entities contained in the central government votes at end-June of each fiscal year.To facilitate control and reduction of unpaid bills and arrears.June 2016 for the June 2015 report

December 2016 for the June 2016 report
Not met.

Expected to be met
December 2016
Regulations for implementation of the PFM Act in line with international best practice to become effective.Ensure efficient PFM implementation and oil revenue management by providing guidelines, clarifying and making specific those aspects that are general in the law.June 2016Met.

Instructions are being prepared to complement the Regulations—to be reviewed by the Fund.
Ministry of Finance to send to Parliament the charter of fiscal responsibility.To improve fiscal and macroeconomic management.September 2016Met. Sent to Parliament on August 18th.
The Ministry of Finance to strengthen the AML/CFT framework in line with the international standard, and to liaise with Parliament to ensure the following: (i) amending the AML Act to give the FIA the sole authority to appoint its own staff, and enable the FIA and supervisory bodies to provide international cooperation to their foreign counterparts; (ii) amending the Capital Markets Authority Act and Insurance Regulatory Act to give regulators adequate supervisory powers to monitor compliance with AML/CFT obligations; and (iii) providing the legal basis and procedural mechanisms for the freezing of terrorist assets under UNSCR 1267 and 1373.To strengthen the financial system safeguardsJune 2016Not met.

Additional deficiencies (highlighted in the 2016 Mutual Evaluation Report) are addressed by the Anti-Money Laundering (amendment) which has been tabled in Parliament. The Insurance Regulatory Authority (amendment) Bill was recently resubmitted to the First Parliamentary Council before being sent to the relevant Parliamentary Committee.
December 2016
Ministry of Finance should finalize, publish and disseminate the Appraisal User Manual to all Ministries, Departments and Agencies.To provide guidelines and procedures for undertaking a project through each stage of the project cycle.December 2016Expected to be met.

Status: Second draft of the manual is undergoing consultative review. Once comments from this process are incorporated, the manual will be published and disseminated.
Ministry of Finance should update and publish Development Committee guidelines to ensure compliance with the Appraisal User Manual.To promote compliance with the Appraisal User Manual.December 2016Expected to be met.

The guidelines are being aligned to the manual.
Proposed new structural benchmarks
Ministry of Finance to further strengthen the AML/CFT framework in line with the international standard by liaising with Parliament to amend the Anti-Terrorism Act to adequately criminalize the financing of terrorism.To facilitate the speedy tracing, identification and freezing of terrorist assets, helping to secure Uganda’s timely exit from the FATF Gray list.December 20 16The Amended Anti-Terrorism Act has been sent to Parliament for its approval.
Ministry of Finance to establish a framework for following up and reporting on the implementation of the recommendations of value-for-money audits conducted by the Auditor General’s office.To improve public investment efficiency.March 2017
Ministry of Finance and BoU to prepare and submit to Cabinet a policy to regulate mobile money banking.To strengthen financial sector oversight and consumer protectionApril 2017
Ministry of Finance to produce a manual setting out national parameters, shadow prices and conversion factors to be used in all economic project appraisals prior to admission into the Public Investment Plan.To improve public investment efficiency.March 2017

All dates refer to the end of the month, unless otherwise specified.

All dates refer to the end of the month, unless otherwise specified.

Attachment II. Technical Memorandum of Understanding

Introduction

1. This memorandum defines the quarterly quantitative assessment criteria (QAC) and indicative targets (ITs) described in the Memorandum of Economic and Financial Policies (MEFP) for the economic program supported by the IMF Policy Support Instrument (PSI) over the period of December 31, 2016—March 31, 2017, and sets forth the reporting requirements under the instrument. The stock of all foreign assets and liabilities will be converted into U.S. dollars at each test date using the cross exchange rates referred to in text table 1 below for the various currencies, and then converted into Uganda shillings using the program U.S. dollar-Uganda shilling exchange rate for end-September 2016, unless otherwise indicated in the text.

Text Table 1.Program Exchange Rates (end-September 2016)1
US Dollar (US$)1
Chinese Yuan/US$6.6704
British Pound/US$0.77155
Japanese Yen/US$101.08
SDR/US$0.71643
Kenyan Shilling/US$101.25
Tanzania Shillings/US$2,182.0
Euro/US$0.89598
Canadian dollar/US$1.3117
Australian dollar/US$1.3106
Ugandan Shillings/US$3,381.41

For the currencies not listed in this table, the cross exchange rates to the U.S. dollar at end-September 2016 will be applied.

For the currencies not listed in this table, the cross exchange rates to the U.S. dollar at end-September 2016 will be applied.

Consultation Mechanism on Inflation (QAC)

2. The quarterly consultation bands for the twelve-month average rate of consumer price inflation (as measured by the core consumer price index (CCPI) published by the Uganda Bureau of Statistics (UBOS)) are specified in Text Table 2. The consultation bands specify the range of admissible CCPI inflation. Observed CCPI inflation for end-December 2016 will be subject to the consultation mechanism, while the CCPI inflation for end-March 2017 will be an indicative target.

Text Table 2.Inflation Targets
Dec. 2016Mar. 2017
Outer band (upper limit)8.08.0
Inner band (upper limit)7.07.0
Core inflation target5.05.0
Inner band (lower limit)3.03.0
Outer band (lower limit)2.02.0

3. Should the observed average CCPI inflation for the test date linked to a PSI program review (i.e., end-December 2016 for the eighth review) fall outside the outer band as specified in the above table, the authorities will complete a consultation with the Executive Board of the Fund on their proposed policy response before requesting completion of the review under the program. The authorities will not be able to request completing a review under the PSI-supported program if the average CCPI inflation has moved outside of the outer band as of the test date linked to such review, until the consultation with the Executive Board has taken place. In line with the accountability principles, the BoU will report to the public the reasons for any breach of the outer bands, and its policy response. In addition, the BoU will conduct discussions with Fund staff when the observed average CCPI inflation falls outside the inner band, as specified for December 2016 in Text Table 2.

Ceiling on Overall Deficit of the Central Government1 (QAC)

4. The QAC on the ceiling on the overall deficit of the central government is defined as the cumulative sum, from the beginning of the relevant fiscal year, of:

  • net domestic financing (NDF) as defined below;
  • net external financing (NEF), defined as the sum of the difference between disbursements and amortization of any loans (including budget support loans and project loans, both concessional and non-concessional), internationally-issued bonds, and any other forms of liabilities by the Central Government to nonresidents, excluding nonresidents’ holdings of domestically-issued government securities (which are covered under NDF), plus external exceptional financing; and
  • net proceeds from sales of non-financial assets including privatization receipts.

5. The NDF of the central government is defined from below the line on a cash basis as the sum of:

  • the change in net claims on the central government by the banking system: Net claims on the central government by the banking system is defined as the difference between the outstanding amount of bank credits to the central government and the central government’s deposits, excluding deposits in the Energy and Petroleum Funds and project accounts with the banking system and the central bank. Credits comprise bank loans and advances to the government and holdings of government securities and promissory notes.
  • the change in net claims on the central government of domestic nonbank institutions and households: net claims on the central government of domestic nonbank institutions and households are defined as treasury bills, bonds or other government securities held by nonbank institutions and households (including nonresident individuals and nonresident financial institutions), plus any other liabilities of the central government to domestic nonbank institutions or households.

All changes will be calculated as the difference between end-of-period stocks, net of any valuation changes resulting from currency movements. NDF will be calculated based on data from balance sheets of the monetary authority and deposit corporations and government liabilities to nonbank institutions and households as per the deposit corporations’ survey (DCS).

6. Changes in NEF will be measured using external financing (net) provided in the monthly government financial statistics. These data, in turn, will be based on the reconciled donor disbursement figures obtained by the central bank and by Ministry of Finance, Planning, and Economic Development (MoFPED) through the Debt Management and Financial Analysis System (DMFAS) and Aid Management System (AMS).

Floor on the Net International Reserves of the Bank of Uganda (QAC)

7. Net international reserves (NIR) of the Bank of Uganda are defined for program-monitoring purposes 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 original maturities less than one year, contracted by the BoU and include outstanding IMF purchases and loans.

8. For program-monitoring purposes, reserve assets and short-term liabilities at the end of each test period will be calculated in U.S. dollars by converting the stock from their original currency denomination at program exchange rates (as specified in text table 1). The NIR limits are the cumulative changes of the NIR stock from the beginning of the respective fiscal year to the specified dates.

Share of Oil Revenue Placed in Petroleum Fund (QAC)

9. The purpose of this QAC is to avoid a situation whereby petroleum revenues bypass the Ugandan budget framework. The 2015 PFM Act has established a petroleum fund, and government has established a petroleum revenue account in the BoU. This QAC will be deemed satisfied if 100 percent of any kind of petroleum-related revenues (even before the start of oil production) is transferred to this account upon collection by URA. These resources may then be spent or saved as governed by the 2015 PFM Act.

Ceiling on Cumulative Changes in Temporary Advances from the Bank of Uganda to the Central Government (IT)

Purpose, definition, and measurement of this indicative target

10. The purpose of the indicative target on the ceiling on cumulative changes in temporary advances from the BoU to the central government is to help define and monitor the balance of outstanding temporary advances and ensure their prompt repayment. This should help reduce the likelihood of a situation where the temporary advances are used in order to bypass issuances of treasury securities in the domestic financial market, resulting in monetization of fiscal deficits and potential inflationary pressures. The cumulative change in temporary advances from the BoU to the central government is defined as the cumulative change, from the beginning of the respective fiscal year, in adjusted net claims on the central government by the BoU. The adjusted net claims on the central government by the BoU is defined as the difference between the outstanding amount of BoU credit to the central government and the central government’s deposits, excluding deposits in administered accounts (including the energy and petroleum funds), project accounts with the central bank, and net recapitalization securities (recapitalization securities provided to the central bank less those used for monetary policy purposes). Credits comprise BoU loans and advances to the government and holdings of government securities and promissory notes.

11. The cumulative change in temporary advances from the BoU to the central government will be calculated based on data from balance sheets of the monetary authority as per the DCS.

Floor on Expenditures on Poverty Alleviating Sectors (IT)

12. The indicative target on the floor on poverty alleviating expenditures includes domestic expenditures inclusive of wages and salaries in the Health, Education, Water and Environment and Agriculture sectors, as defined by the Government of Uganda functional budget classification, excluding those which are externally financed. Compliance with the indicative floor for poverty alleviating expenditures will be verified on the basis of releases.

Ceiling on Issuance of Guarantees by the government or Bank of Uganda (IT)

13. The indicative target on issuance of guarantees by the GoU or the BoU aims to prevent accumulation of contingent liabilities by the GoU (including entities such as ministries, agencies and authorities). Included against the ceiling are any direct, contingent liabilities of the GoU (including entities that are part of the GoU such as ministries, agencies and authorities). This excludes guarantee programs which have explicit budget appropriations.

Tax Revenue (IT)

14. A floor applies on tax revenue of the central government measured cumulatively from the beginning of the fiscal year. For program-monitoring purposes, tax revenue is defined as the sum of direct domestic taxes (PAYE, corporate tax, presumptive tax, other direct taxes, withholding tax, rental income tax, tax on bank interest, casino tax and unallocated receipts); excise duty and value-added taxes net of refunds; infrastructure levy; and taxes on international trade minus temporary road licenses and fees to hides and skins, as defined by the GoU’s revenue classification.

Net Accumulation of Domestic Arrears of the Government (IT)

15. A ceiling applies to net accumulation of domestic arrears of the central government as an indicative target. A negative target thus represents a floor on net repayment. The ceiling for each test date is measured cumulatively from the beginning of the respective fiscal year.

16. An unpaid bill is defined as any verified outstanding payment owed by any entity that forms part of the central government votes for the following: utilities, rent, employee costs, other recurrent, court awards, compensation, contributions to international organizations, development, taxes, and other deductions. Domestic arrears are the total stock of unpaid bills as of June 30 of the fiscal year as reported in the consolidated financial statements of the GoU.

17. This indicative target will be observed on a semi-annual basis. For the quarter ending December 31, the net change in the stock of unpaid bills as reported in the semi-annual report on domestic arrears will be used as the indicative target.

Adjustors

18. The NIR and the overall deficit targets are based on program assumptions regarding: (A) budget support excluding assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative and the MDRI; (B) net inflows into the Petroleum Fund; (C) recapitalization of the BoU; (D) external financing tied to projects. and (E) Other recapitalization.

Adjustor related to budget support

The Uganda shilling equivalent of projected budget support (grants and loans) excluding HIPC Initiative and MDRI assistance in the form of grants on a cumulative basis from the beginning of the relevant fiscal year is presented under Schedule A. The floor on the cumulative increase in NIR of the BoU will be adjusted upward (downward) by the amount by which budget support, grants and loans, excluding HIPC Initiative and MDRI assistance, exceeds (falls short of) the projected amounts. The ceilings on the cumulative increase in overall deficit will be adjusted downward (upward) by the amount by which budget support grants, excluding HIPC Initiative and MDRI assistance, exceeds (falls short of) the projected amounts.

Schedule A: Budget Support1(Ush billions; cumulative from the beginning of the respective fiscal year)
Jun-16Sep-16Dec-16Mar-17
Budget support grants11041947
Budget support loans0000

Budget support loans and grants excluding HIPC initiative and MDRI assistance.

Budget support loans and grants excluding HIPC initiative and MDRI assistance.

Adjustor on Inflows into the Petroleum Fund

19. The ceilings on the cumulative increase in overall deficit will be adjusted upward (downward) by the amount by which inflows into the Petroleum Fund (excluding valuation changes) falls short of (exceeds) the projected amounts as set out in Schedule B.

Schedule B: Inflows into Petroleum Fund(Ush billions; cumulative from the beginning of the respective fiscal year)
Jun-16Sep-16Dec-16Mar-17
125000

Adjustor related to BoU Recapitalization

20. The ceilings on overall deficit will be adjusted upward (downward) by the amount by which the recapitalization of the BoU exceeds (falls short of) the projected amounts as set out in Schedule C.

Schedule C: Recapitalization of the Bank of Uganda(Ush billions; cumulative from the beginning of the respective fiscal year)
Jun-16Sep-16Dec-16Mar-17
200350100100

Adjustor related to externally financed projects

21. The ceiling on overall deficit will be adjusted downward (upward) by the amount by which (both concessional and non-concessional) external financing tied to projects falls short of (exceeds) the projected amounts as set out in Schedule D. Any upward adjustment will be capped by 10 percent of the amounts set out in Schedule D.

Schedule D: External Financing Tied to Projects(Ush billions; cumulative from the beginning of the respective fiscal year)
Jun-16Sep-16Dec-16Mar-17
4,3561,01831304318

Adjustor related to other recapitalization

22. The ceilings on overall deficit will be adjusted upward (downward) by the amount by which spending on recapitalization (excluding recapitalization of the BoU) exceeds (falls short of) the projected amounts as set out in Schedule E.

Schedule E: Other Recapitalization (excluding Bank of Uganda)(Ush billions; cumulative from the beginning of the respective fiscal year)
Jun-16Sep-16Dec-16Mar-17
00200200

Ceiling on the Accumulation of new External Payments Arrears Incurred by the Public Sector2

23. The definition of debt, for the purposes of the ceiling, is set out in point 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No 6230–(79/140), as amended by Decision No. 15688–(14/107), effective June 30, 2015). It not only applies to the debt as defined in point 8 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 point 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements reads as follows:

  • 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 sometime 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 lesser 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.
  • Under the definition of debt set out in point 8(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes 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.

24. The ceiling on 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 public sector from their level at end-June 2016. For the purpose on monitoring compliance with the PC on the non-accumulation of external arrears, external arrears are obligations (reported by the Statistics Department of the BoU, the Macro Department of the Ministry of Finance) that have not been paid on the due date (taking into account the contractual grace periods, if any) but shall exclude arrears on obligations subject to rescheduling. External payments arrears on external debt service obligations in respect of public private partnership projects (which are defined as infrastructure projects which involve the (i) granting of a government guarantee and the (ii) participation of a public corporation subject to control by the government) are not included in the coverage of this external arrears AC, unless these external payment arrears are overdue (under the terms of the contracts including any grace periods) by more than 30 days.

Monitoring and Reporting Requirements

25. The GoU will submit information to IMF staff with the frequency and submission time lag as indicated in Table 1. The quality and timeliness of the data submission will be tracked and reported by IMF staff. The information should be mailed electronically to afruga@imf.org.

Attachment Table II 1. Summary of Reporting Requirements
Reporting institutionReport/TableSubmission FrequencySubmission Lag
I. Bank of UgandaIssuance of government securities, repurchase operations and reverse repurchase operations.Weekly5 working days
Operations in the foreign exchange market and the level of the BoU’s international reserves.Weekly5 working days
Interest rates (7 day interbank, commercial bank prime lending rate, government securities).Weekly5 working days
Private sector credit growth by shilling and forex, and excess reserves of commercial banks.Monthly5 working days
Disaggregated consumer price index.Monthly2 weeks
Balance sheet of the BoU, consolidated accounts of the commercial banks, and depository corporations’ survey.Monthly4 weeks
Monthly balances of net foreign assets, net domestic assets, and base money of the BoU.Monthly4 weeks
Details on the government position at the central bank including deposits broken down by i) net public debt, ii) government project accounts, iii) Petroleum Fund (specifying the currency), iv) Energy Fund, v) government ministries accounts, and the remainder in vi) other deposits. In addition, liabilities broken down by i) appropriation account (UCF), ii) other drawdown accounts, iii) government securities accounts and the remainder in iv) other liabilities. Detailed information about the recording of the recapitalization of the BoU.Monthly4 weeks
Monthly foreign exchange cash flow table of BoU.Quarterly4 weeks
Statement of (i) cash balances held in project accounts at commercial banks; (ii) total value (measured at issue price) of outstanding government securities from the Central Depository System (CDS); and (iii) the stock of government securities (measured at issue price) held by commercial banks from the CDS.Quarterly6 weeks
Summary of (i) monthly commodity and direction of trade statistics; (ii) disbursements, principal and interest, flows of debt rescheduling and debt cancellation, arrears, and committed undisbursed balances—by creditor category; and (iii) composition of nominal HIPC Initiative assistance.Quarterly6 weeks
Summary of stock of external debt, external arrears, and committed undisbursed loan balances by creditor.Quarterly6 weeks
Standard off-site bank supervision indicators for deposit money banks.Quarterly4 weeks
Summary table of preliminary program performance comparing actual outcome with adjusted program targets for (i) net claims on central government by the banking system; (ii) new non-concessional external borrowing; and (iii) net international reserves.Quarterly6 weeks
Currency composition of the BoU’s international reserves in unit of each currency at each end of quarter.Quarterly6 weeks
II. Ministry of FinanceSummary of central government accounts. Revenues shall be recorded on a cash basis, with a breakdown including infrastructure levy. Expenditures shall be recorded when checks are issued, except for domestic and external debt-service payments1, 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).Monthly4 weeks
Summary of the stock of arrears (or unpaid bills) by government entities contained in the central government votes as reported by the Accountant General and signed by the PS/ST.Semi-annually3 months
Summary of contingent liabilities of the central government and the BoU. For the purpose of the program, contingent liabilities include all borrowings by statutory bodies, government guarantees, claims against the government in court cases that are pending, or court awards that the government has appealed.Quarterly6 weeks
Detailed monthly central government account of disbursed budget support and project grants and loans (less change in the stock of project accounts held at the BoU and commercial banks), HIPC support, and external debt service due and paid.Quarterly4 weeks
Detailed central government account of disbursed donor project support grants and loans.Monthly6 weeks
Statement on new external loans contracted or guaranteed by the central government and the BoU during the period according to loan agreements. Parliament resolutions on any new loans.Quarterly6 weeks
Updated national accounts statistics (real and nominal) according to UBOS and medium-term projections.Quarterly12 weeks
Releases of domestic expenditures on wages and salaries in the Health, Education, Water and Environment and Agriculture sectors, as defined by the Government of Uganda’s functional budget classification, with a breakdown based on financing (domestically financed or externally financed).Quarterly6 weeks

The budget records domestic interest payments on cash-basis while for program purposes this entry will be reported on an accrual basis.

The budget records domestic interest payments on cash-basis while for program purposes this entry will be reported on an accrual basis.

1Based on the World Bank’s 2016 Uganda Poverty Assessment Report. The poverty rate refers to poverty headcount ratios measured by the international poverty line of 2011 international PPP$1.9 per day. Using Uganda’s national poverty line set over 20 years ago, the poverty rate declined from 38.8 percent in 2003 to 19.7 percent in 2013.
2BoU advances are intended only for within-year cash flow management.
3These include raising excises on fuel, motor vehicle lubricants, and other products, and improving compliance through intensifying audit and research on medium and large taxpayers. In percent of GDP, revenue is lower than expected in the sixth review, mainly reflecting the below-target collection in the previous fiscal year.
4The loan is provided by the Eastern and Southern African Trade and Development Bank, referred to as the PTA Bank.
5All banks will be required to have a capital conservation buffer (CCB) of 2.5 percent of risk-weighted assets (RWA) above the minimum capital requirements; all Domestic Systemically Important Banks will be required to have additional capital of between 1-3.5 percent of RWA above the minimum capital requirements and CCB.
6A 2014 FAD report on Value-Added Tax finds that improving compliance and achieving the regional average tax efficiency can help Uganda collect about 2–2½ percent of GDP at that time.
1The central government comprises the treasury and line ministries.
2Public sector comprises the general government (which includes the central government, local governments, and monetary authorities), and entities that are public corporations which are subject to ‘control by the government’, defined as the ability to determine general corporate policy or by at least 50 percent government ownership.

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