Uganda
Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility-Staff Report; Staff Statement; and a Press Release on the Executive Board Discussion

This paper assesses Uganda’s Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). The program for 2002/03–2004/05, which could be supported by a new PRGF arrangement, aims to increase real GDP growth to about 6½ percent a year on average, while holding annual inflation at about 3½ percent. Monetary and exchange rate policies will focus on maintaining stability in light of sizable sterilization operations. The authorities will rely on market-based monetary instruments and will adhere to a flexible exchange rate policy.

Abstract

This paper assesses Uganda’s Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). The program for 2002/03–2004/05, which could be supported by a new PRGF arrangement, aims to increase real GDP growth to about 6½ percent a year on average, while holding annual inflation at about 3½ percent. Monetary and exchange rate policies will focus on maintaining stability in light of sizable sterilization operations. The authorities will rely on market-based monetary instruments and will adhere to a flexible exchange rate policy.

I. Introduction

1. In the attached letter (Attachment I of Appendix I), the Ugandan authorities request a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 13.5 million (7.5 percent of quota). Seven disbursements are contemplated during the three-year period, with one disbursement of SDR 1.5 million (0.8 percent of quota) following the approval of the arrangement in September 2002 and six disbursements of SDR 2.0 million (1.1 percent of quota) in May and October of succeeding years, following satisfactory conclusion of the semiannual reviews under the program. The low access level takes into account Uganda’s ample stock of international reserves and the projected availability of donor assistance on more concessional terms during the three-year program period. Fund assistance to Uganda could be augmented in the future in the event that the economic environment turns out to be worse than anticipated.

2. The authorities’ request for a new PRGF arrangement is predicated upon a number of factors. First, notwithstanding the significant progress that Uganda has made in recent years in restoring financial stability, promoting strong economic growth, and reducing poverty, its medium-term macroeconomic prospects remain fragile. Large current account and fiscal deficits (before grants) are projected, which would narrow only gradually over the medium to long term. Accordingly, the maintenance of macroeconomic stability, as well as the implementation of the authorities’ Poverty Eradication Action Plan (PEAP), will continue to depend on large disbursements of donor assistance. Present indications are that adequate donor assistance should be forthcoming to cover the projected financing needs if Uganda continues to pursue its poverty reduction program and strong policy reforms, addresses the major weaknesses in governance, and has in place a Fund-supported program. Second, Uganda has not yet built a critical mass of institutional and technical capability to implement, on a sustained basis, consistent policy reforms in the fiscal, monetary, and exchange rate areas. The building of such a capacity, as well as the sustained implementation of strong reforms, is essential to establishing credibility with foreign creditors. Third, Fund assistance in the areas of tax policy and administration will be needed to help Uganda raise its revenue effort from the current low level. Fourth, major improvements are needed in the areas of expenditure management and local government finances to minimize deviations between budget intentions and outcomes, and to improve the delivery of public services. Finally, in the period ahead, Uganda will need to foster an environment that is favorable to increased private investment, largely through sustained macroeconomic and financial sector stability, investments in infrastructure, and further improvements to the legal system and governance.

3. Accordingly, in view of the unfinished agenda of macroeconomic issues mentioned above and the important role of Fund-supported programs in the sustained implementation of structural reforms, as well as the complexity of the macroeconomic issues facing Uganda as it implements a large donor-funded poverty reduction program, the staff believes that a continued strong Fund presence will be helpful to Uganda and should be manifested in a new three-year PRGF arrangement.1

II. Performance Under the Last Fund-Supported Program and Policy Implementation—Lessons from Previous Program

A. Areas of Strong Performance

4. Strong performance was registered in the following areas during the last program period 1997-2001:

  • The incidence of poverty fell markedly, with the proportion of the population below the poverty line declining from 56 percent in 1992 to 35 percent in 2000.

  • Notwithstanding the sharp drop in the terms of trade, relatively high growth rates were maintained, with real GDP growth averaging 6.0 percent a year in the period 1998/99-2001/02 (July-June) (Figure 1 and Table 1). Most of the key economic sectors registered impressive gains.

  • Stable macroeconomic conditions were maintained; the average year-on-year headline inflation rate, including food crops, was held to 4.1 percent per annum, below the 5 percent program target. The overall balance of payments position remained strong.

  • The contribution of the donor community to Uganda’s poverty reduction and economic reform efforts increased substantially, with net donor inflows rising from 8 percent of GDP a year during 1997/98-1999/2000 to 9½ percent of GDP in 2000/01 and above 11 percent of GDP in 2001/02 (Figure 2 and Table 2).

  • The budget management system—particularly in the area of expenditure monitoring and control—was strengthened considerably with the introduction of the expenditure commitment control system (CCS).

  • Major progress was made in rationalizing the trade system and other key structural reforms, including privatization.

Figure 1.
Figure 1.

Uganda. Real GDP Growth, 1998/99-2004/05 1/

(Annual percentage change)

Citation: IMF Staff Country Reports 2002, 213; 10.5089/9781451838640.002.A001

Source: Ugandan authorities.1/ Fiscal year begins in July.
Table 1.

Uganda: Selected Economic and Financial Indicators, 1997/98-2004/2005 1/

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Sources: Ugandan authorities; and Fund staff estimates and projections.

Fiscal year begins in July.

Nominal GDP divided by average of current-year and previous-year end-period money stocks.

Weighted annual average rate on 91 -day treasury bills.

The debt-service ratio incorporates the effects of rescheduling and assistance provided under the original and enhanced HIPC Initiatives and estimated HIPC assistance from non-Paris Club bilateral creditors with whom bilateral agreements have not yet been reached.

Figure 2.
Figure 2.

Uganda: Fiscal Indicators, 1997/98-2004/05 1/

(In percent of GDP at market prices)

Citation: IMF Staff Country Reports 2002, 213; 10.5089/9781451838640.002.A001

Sources: Ugandan authorities; and staff estimates and projections.1/ Fiscal year begins in July.
Table 2.

Uganda: Balance of Payments, 1997/98-2004/05 1/

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Ugandan authorities; and Fund staff estimates and projections.

Fiscal year begins in July.

From 2000/01 onward, interest due include financing costs arising from the lease purchase of a presidential jet concluded in late March 2000.

Includes capital grants.

Includes debt relief provided through debt cancellation, grants, and rescheduling. It also includes estimated debt relief under the HIPC Initiatives from non-Paris Club bilateral creditors with whom bilateral agreements have not yet been reached.

In months of imports of goods and services.

B. Areas of Weak Performance

5. However, performance was weak in these areas:

  • While the government established a comprehensive institutional framework for promoting governance, transparency, and accountability in the public sector, enforcement of the relevant rules and regulations has been problematic, reflecting in part weak capacity and inadequate budgetary resources.

  • Private investment, and foreign direct investment in particular, has not responded as strongly as expected to the reforms and improved economic performance. Relative to GDP, private investment rose from 12.4 percent in 1997/98 to 13.2 percent of GDP in 2001/02 (Figure 3).

  • Financial intermediation in Uganda has remained low both relative to the reforms and levels of the 1970s and compared with other African economies. Nevertheless, the expansion of the ratio of broad money to GDP from 12.2 percent in 1996/97 to 17.6 percent in 2001/02 was among the largest for sub-Saharan Africa (Table 3).

  • Despite the improvements in tax policy and administration, tax revenue (relative to GDP) increased only slightly, on average, to 11.3 percent of GDP in the five years ended 2001/02 (Figure 4 and Table 4).

  • Notwithstanding the significant progress made in expenditure management, the authorities failed to eliminate domestic arrears. This was due to two factors: (a) the accumulation of new arrears in areas not covered by the CCS, and (b) identification of previously unknown obligations and validation of previously rejected arrears following improvements in the audit system.

  • The delivery of public services by local authorities has been weak.

Figure 3.
Figure 3.

Uganda: Savings and Investment, 1997/98-2004/05 1/

(In percent of GDP at market prices)

Citation: IMF Staff Country Reports 2002, 213; 10.5089/9781451838640.002.A001

Sources: Ugandan authorities; and staff estimates and projections.1/ Fiscal year begins in July.
Table 3.

Uganda: Monetary Survey, 1997/98-2002/03 1/

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Sources: Ugandan authorities; and Fund staff estimates and projections.

Fiscal year begins in July.

The public sector includes the central government, the public enterprises and the local government.

Other includes nonreserve vault cash, holdings of BOU bills and promissory- notes, and borrowing at the BOU by the Commercial Banks.

Figure 4.
Figure 4.

Uganda: Revenue, 1997/98-2004/05 1/

(In percent of GDP at market prices)

Citation: IMF Staff Country Reports 2002, 213; 10.5089/9781451838640.002.A001

Sources: Ugandan authorities; and staff estimates and projections.1/ Fiscal year begins in July.
Table 4.

Uganda: Fiscal Operations of the Central Government, 1997/98-2004/2005 1/

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Sources: Ugandan authorities; and Fund staff estimates and projections.

Fiscal year begins in July.

From 2001 /02 onward, nontax revenue includes nontax revenue collected by ministries.

From 2000/01 onward, the Poverty Action Fund (PAF) replaces Priority Program Areas as the monitored measure of poverty reduction expenditures. For 1999/2DOO, PAF expenditure are shown for comparison purposes only.

There is a break in this series in 2000/01 duo to changes in classification because Priority Program Areas are no longer monitored.

Excludes face value of recapitalization bonds issued to the Bank of Uganda and to the Uganda Commercial Bank. However, fall provision is made for the interest costs and amortization associated with these bond issues. However, the 1999/00 figure includes U 5h384.5 billion of a treasury note that was redeemed to recapitalize the Bank of Uganda.

Domestic arrear repayments are included under total expenditure rather than domestic financing.

C. Policy Implementation Lessons

6. The good performance that was achieved in the areas of macroeconomic and budget management reflected the strong commitment to prudent financial policies and ownership of the poverty reduction program by the President and the key management teams in both the Bank of Uganda (BOU) and the Ministry of Finance. These characteristics were accompanied by strong indigenous technical capabilities at key economic institutions, which played a central role in (a) ensuring the overall development of policies; (b) coordinating the work of the large (including expatriate) numbers of technical assistance personnel; and (c) mediating among the political authorities, civil society, and the donor community.

7. The following sequencing lessons can be derived from Uganda’s experience: the macroeconomic stabilization and liberalization of the foreign exchange market and export sector (primarily coffee) of the early 1990s set the stage for strong growth over the remainder of the decade. Fiscal consolidation was the main instrument of the initial stabilization process, and later market-oriented monetary policy instruments were developed to facilitate macroeconomic management. Subsequent reforms, such as the extensive privatization and liberalization of the external capital account, were initiated in 1997, as was the PEAP. While this sequencing was quite successful overall, the lack of a strong institutional setting for monitoring expenditures and enforcing good governance in the early stages of the PEAP likely resulted in some misuses of public resources.

8. The extensive technical assistance (both long and short term) that Uganda received from the donor community helped to ease Uganda’s manpower constraints in important areas and facilitated the speedy formulation and implementation of a fairly consistent set of policies over a broad range of issues. The strong coordination among donors helped to forge a common approach to issues and resulted in a predictable flow of financial assistance.

9. Improvements in the financial sector have helped to enhance the efficiency of monetary management.

10. Program implementation was hindered by the prevalence of insecurity in parts of the country and the subregion. In this connection, Uganda’s military involvement in the Democratic Republic of the Congo (DRC) weakened fiscal discipline, resulted in delays in donor disbursements, and increased uncertainties.

III. Recent Economic Developments

11. As discussed in the authorities’ memorandum of economic and financial policies (MEFP, Section A), the Ugandan economy performed relatively well in 2001/02, despite unfavorable external conditions. However, this performance still fell short of the 2001/02 budget projections and was largely accounted for by transitory factors, rather than a fundamental increase in productivity, investment, and savings. The expansion in food crop production, which still accounts for 25 percent of GDP, resulted in a sharp fall in headline inflation to negative levels (Figure 5), while underlying inflation, which excludes food crops, averaged 3.4 percent during the year. The fall in both food and cash crop prices also reduced the GDP deflator well below budget projections, as nominal GDP grew by 6.5 percent in 2001/02, compared with the 11.4 percent growth envisaged in the budget.

Figure 5.
Figure 5.

Uganda: Average Inflation, 1997/98-2001/02 1/

(Annual percentage change)

Citation: IMF Staff Country Reports 2002, 213; 10.5089/9781451838640.002.A001

Source: Ugandan authorities.1/ Fiscal year begins in July.

12. Although the government adhered to the nominal target for the overall fiscal deficit, excluding grants, the deficit, relative to a lower nominal GDP, climbed to 12.6 percent in 2001/02, exceeding the budget projection by 0.4 percent of GDP. For the first time in three years, government revenues increased relative to GDP (to 11.8 percent), even though nominal revenues fell slightly short of the budget target. The income and domestic value-added taxes performed well,2 but an unanticipated appreciation of the Uganda shilling during the first half of the year and the elimination of import duties on raw materials weakened revenues from taxes on non-oil imports (Table 5). The removal of import duties on raw materials, which was not budgeted, was done to harmonize the trade regime with the systems in the other two members of the East African Community (Kenya and Tanzania). An increase in the excise duty rates on beer and cigarettes delivered only limited revenue gains. The overall deficit was largely covered by a substantial increase in donor assistance (net of external debt service) to 11.7 percent of GDP in 2001/02, up from 11.1 percent of GDP in the previous year, mainly reflecting the disbursement of budgetary support from the World Bank’s first Poverty Reduction Support Credit (PRSC).

Table 5.

Uganda: Fiscal Revenues of the Central Government, 1997/98-2004/05 1/

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Sources: Ugandan authorities; and Fund staff estimates and projections.

Fiscal year begins in July.

Unidentified revenue measures is cumulative. It includes the revenue due to unidentified measures introduced in previous years plus the new unidentified measures introduced in the relevant year.