Uganda
2002 Article IV Consultation-Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Uganda
Author: International Monetary Fund
Publication Date:
26 Mar 2003
eISBN:
9781451838657
ISBN:
9781451838657
Language:
English
Keywords:
ISCR; CR; deficit; authority; government; inflation; steadfast commitment; exchange rate; current account; local government; economic growth; vault cash
Download PDF (2.5 MB)

This 2002 Article IV Consultation highlights that since the conclusion of the last Article IV consultation in March 2001, Uganda has continued to implement disciplined financial policies and sound structural reforms that have helped to sustain robust economic growth despite an adverse external environment. In 2001/02 (July–June), real GDP growth increased to 6.6 percent, boosted by highly favorable weather conditions for agriculture and a surge in construction activity from a pickup in investment. A sharp drop in food crop prices resulted in negative headline inflation of -2.5 percent during the year.

Abstract

This 2002 Article IV Consultation highlights that since the conclusion of the last Article IV consultation in March 2001, Uganda has continued to implement disciplined financial policies and sound structural reforms that have helped to sustain robust economic growth despite an adverse external environment. In 2001/02 (July–June), real GDP growth increased to 6.6 percent, boosted by highly favorable weather conditions for agriculture and a surge in construction activity from a pickup in investment. A sharp drop in food crop prices resulted in negative headline inflation of -2.5 percent during the year.

I. Background

1. Since achieving stable political and security conditions in the late 1980s, Uganda has implemented an ambitious program of economic reforms in the context of Fund-supported programs (Box 1). The early phase of the program involved the restoration of stable macroeconomic conditions, particularly the achievement of fiscal discipline, deregulation of domestic prices, building of institutions, and liberalization of the financial sector, including the unification of the exchange rate, and international trade. A subsequent phase emphasized the removal of structural distortions in the economy and involved tax reform, privatization and restructuring of key industries, strengthening of banking supervision, and liberalization of external capital account transactions. This phase of reforms coincided with the shift in focus of Uganda’s development policies to poverty reduction in the latter part of the 1990s.1 Uganda’s efforts met with considerable success, as reflected in the strong economic performance and substantial reduction in poverty during the past decade (Box 2).

2. In recent years, however, growth, while still robust, has not been as buoyant, owing in part to the impact on the economy of the collapse in coffee prices, but also reflecting a tapering off of the impetus from the economic reforms of the early 1990s, constraints on the efficient delivery of public services, and remaining impediments to private sector growth. To address this new challenge, the Ugandan government has embarked on a third phase of its economic reform program, with a focus on removing constraints at the micro sectoral level of the economy, so as to elicit a stronger supply response, while continuing to maintain sound macroeconomic policies.

3. In the past five years, real GDP growth averaged 6 percent a year, while average underlying inflation, on a period-average basis, was held to 5 percent or less (Table 1 and Figure 1). This occurred against the background of a deterioration in the terms of trade of over one-third. In 2001/02 (July–June), exceptionally favorable conditions for agricultural production and a surge in construction activity elevated real GDP growth to 6.6 percent. A sharp drop in food crop prices lowered end-year headline inflation to -2.5 percent, while underlying inflation, which excludes food crop prices, dipped to 0.1 percent. Gross fixed investment, which had stepped up to nearly 20 percent of GDP in recent years, partly reflecting improved prospects in the electricity and telecommunications sectors, rose to 22½ percent in 2001/02. Gross national saving had declined in recent years, owing to the rise in public sector dissaving, but jumped to 9 percent of GDP in 2001/02, as private saving surged (Figure 2). The resulting large current account deficits were mostly financed by foreign aid.

Table 1.

Uganda: Selected Economic and Financial Indicators, 1997/98–2006/2007 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 1.
Figure 1.

Uganda: Real GDP Growth, Inflation, and Terms of Trade, 1990/91–2001/02 1/

(Annual percentage changes)

Citation: IMF Staff Country Reports 2003, 083; 10.5089/9781451838657.002.A001

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

Uganda: Savings and Investment, 1990/91–2001/02 1/

(As a share of GDP at market prices, in percent)

Citation: IMF Staff Country Reports 2003, 083; 10.5089/9781451838657.002.A001

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

4. Notwithstanding this generally good performance, annual real GDP growth has fallen short of the PEAP target of 7 percent a year, which is viewed as necessary for achieving the PEAP’s long-term goal of reducing the incidence of poverty to less than 10 percent of the population by 2017. Still, the incidence of poverty was reduced to 35 percent of the population in 2000 from 44 percent in 1997 (and 56 percent in 1992). The decline in poverty was concentrated in the central and western regions; in the northern region, there was little improvement in incomes, owing mainly to persistent security problems.

5. Uganda has received large amounts of donor assistance in recent years to support its efforts to reduce poverty. Net donor inflows, including assistance under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative), reached 11.7 percent of GDP in 2001/02, of which 5.2 percent of GDP was in the form of direct budget support (net of debt service falling due). To facilitate greater budget support, much of the poverty-related spending was protected under the government’s Poverty Action Fund (PAF), which tripled in the past five years to 5.7 percent of GDP and in 2001/02 accounted for 23 percent of total spending. Including the PAF, budgetary expenditures on education and health increased by 1.5 percentage points and 0.8 percentage point of GDP, respectively, during this period. Similarly, there were substantial spending increases for roads, water, and agricultural support services. The share of total domestic expenditures on social and economic programs related to poverty increased from 39.1 percent in 1997/98 to 45.8 percent in 2001/02, with the ratio to GDP almost doubling. This rise has been reflected in an improvement in social output indicators (Appendix IV).

6. This assistance, however, has also contributed to a high degree of aid dependence and weakened some sustainability indicators. As donor support for the PEAP increased, total government spending rose sharply from 17 percent of GDP in 1997/98 to almost 25 percent of GDP in 2001/02; yet, during this period, government revenues stagnated at less than 12 percent of GDP on average, mainly reflecting a reduction in some excise and custom duty rates and weak tax administration. As a result, the overall fiscal deficit, excluding grants, reached 12.7 percent of GDP in 2001/02, double that of four years earlier (Table 2 and Figure 3), while the domestic deficit—a measure of the absorption of real resources by the government—climbed to 6½ percent of GDP from close to zero in 1997/98. In 2001/02 alone, total expenditures increased by 3½ percentage points of GDP. Of this increase, a little under half was accounted for by an expansion in PAF expenditures, but other spending, including defense, the wage bill, and interest payments, experienced substantial increases.

Table 2.

Uganda: Fiscal Operations of the Central Government, 1997/98–2006/2007 1/

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Source: 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 1999/2000, PAF expenditures are shown for comparsion only.

There is Break in this series in 2000/01 due tu 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, full provision is made for the interest costs and amortization associated with these bond issues. However, the 1999/2000 figure includes U Sh 384.5 billion of a treasury more that was redeemed to recapitalize the Bank of Uganda.

These additional expenditures refer to the expected but not yet formally committed budget support and to new tax policy measures.

Revenues less expenditures, excluding external interest due and externally financed developed expenditures.

Figure 3.
Figure 3.

Uganda: Fiscal Indicators, 1990/91–2001/02 1/

(As a share of GDP at market prices, in percent)

Citation: IMF Staff Country Reports 2003, 083; 10.5089/9781451838657.002.A001

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

7. To adhere to the Bank of Uganda’s (BOU) reserve money targets and maintain low underlying inflation, the growing fiscal deficit has required rising net issues of treasury bills, which climbed to 3½ percent of GDP in 2001/02, and net official interventions in the foreign exchange market reached nearly 4 percent of GDP. As a consequence, interest rates on domestic lending remained high and the growth of bank credit to the private sector was sluggish (Table 3 and Figure 4). The real exchange rate has depreciated by about 20 percent since 1998/99, reflecting the strong deterioration of the terms of trade (Figure 5). During the past two years, however, the BOU allowed a significant buildup in banks’ excess reserves and a significant deviation of base money from the targeted path. Treasury bill rates fell steeply across the maturity spectrum during much of 2001/02, but this development translated into only a modest decline in lending rates (Figure 6). In recent months, yields rose as the BOU intensified efforts to mop up the excess liquidity.

Table 3.

Uganda: Monetary Survey, 1997/98–2006/07 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.

Uganda: Monetary Aggregates, 1990/91–2001/02 1/

Citation: IMF Staff Country Reports 2003, 083; 10.5089/9781451838657.002.A001

Sources: Ugandan authorities; and IMF staff estimates.1/ Fiscal year begins in July.
Figure 5.
Figure 5.

Uganda: Nominal and Real Effective Exchange Rates, January 1992-June 2002

(January 1992=100; foreign currency per Uganda shilling)

Citation: IMF Staff Country Reports 2003, 083; 10.5089/9781451838657.002.A001

Source: IMF, Information Notice System.
Figure 6.
Figure 6.

Uganda: interest Rates, December 1994–June 2002

(In percent)

Citation: IMF Staff Country Reports 2003, 083; 10.5089/9781451838657.002.A001

Source: Ugandan authorities.

8. The banking system has undergone a substantial strengthening in recent years. Several insolvent banks were closed in 1998–99, and, in 2002, the privatization of the Uganda Commercial Bank (UCB) and its merger with a sound international bank were completed. Banking supervision has been increasingly more vigorous, with on-site inspections being stepped up substantially. As a result, one small bank was closed and taken over by a healthy institution, while a second was recapitalized and had its management team replaced. New capital requirements came into effect on January 1, 2003, raising the minimum paid-up capital to U Sh 4.0 billion.

9. As a result of these actions, the performance indicators for the banking system have continued to improve. The ratio of nonperforming to total loans declined from 9.8 percent in December 2000 to 3.6 percent in June 2002, while the risk-weighted capital-assets ratio increased from 20.5 percent to 23.7 percent over the same period (Figure 7). In May 2002, a new Financial Institutions Bill was submitted to parliament that would bring Uganda’s financial regulations and enforcement in line with international standards. Still, the financial system remains small and has not played a leading role in supporting private sector growth.2

Figure 7.
Figure 7.

Uganda: Selected Financial Market Indicators, March 1999–June 2002

Citation: IMF Staff Country Reports 2003, 083; 10.5089/9781451838657.002.A001

Source: Ugandan authorities.

10. The economy has suffered from a severe, prolonged deterioration in the terms of trade, as evidenced by the large current account deficit, but there are signs that Uganda is maintaining its external competitiveness. Between 1997/98 and 2001/02, world prices for robusta coffee, Uganda’s principal merchandise export, fell by 70 percent, contributing to a 36 percent decline in the terms of trade and a stagnation in total export receipts (Table 4). Noncoffee export volumes rose steeply, however, despite soft world prices, suggesting that Uganda has made some inroads in foreign markets and is diversifying its export base. To further shore up Uganda’s competitiveness, the government introduced in September 2001 the Strategic Exports Program (SEP), which builds upon earlier government programs to support exports, such as subsidies to replace old coffee trees with new, higher-yielding varieties.3

Table 4.

Uganda: Balance of Payments, 1997/98-2006/07 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.

In months of imports of goods and services.