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
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Publication Date:
26 Mar 2003
eISBN:
9781451838657
Language:
English
Keywords:
ISCR; CR; deficit; authority; government; inflation; steadfast commitment; exchange rate; current account; local government; economic growth; vault cash
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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/

article image
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/

article image
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.

11. Reflecting the deterioration in the terms of trade, the external current account deficit, excluding grants, widened substantially in recent years, reaching 14.1 percent of GDP in 2000/01 before narrowing to 13.4 percent of GDP in 2001/02. Imports as a share of GDP rose to 17.9 percent in 2001/02.4 However, the current account deficit has been more than financed by growing donor assistance and private capital inflows. Of these capital flows, net foreign direct investment (FDI) accounted for 4 percent of GDP in 2001/02. International reserves have remained at a comfortable level (Figure 8), and, as of end-November 2002, the coverage of gross international reserves stood at about six months of imports of goods and services.

Figure 8:
Figure 8:

Uganda: External Sector Indicators, 1990/91–2001/02 1/

(Annual percentage changes, unless otherwise indicated)

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.

12. Falling export receipts have led to a deterioration in debt indicators. The ratio of the net present value (NPV) of external debt to exports rose to 190 percent at end-June 2002 from 150 percent in May 2000, when Uganda reached the completion point under the enhanced HIPC Initiative.5 But even with the decline in exports, the flow of HIPC Initiative debt relief has reduced the ratio of debt service to exports to a manageable level (about 8 percent in 2001/02).

A. Economic Outlook for 2002/03

13. Largely reflecting adverse weather conditions and poor food crop production, real GDP growth is expected to weaken to 5.7 percent in 2002/03 from 6.6 percent in the preceding year and headline inflation to rise to about 6 percent during the year. Uganda’s international reserves level should remain comfortable and its external debt position manageable.6

14. The overall fiscal deficit is expected to narrow to 11.1 percent of GDP in 2002/03 from 12.7 percent in 2001/02. Revenue collections have generally been on target through the first few months of the fiscal year, and total spending limits are expected to be respected, despite the recent announcements of higher-than-budgeted defense spending. The relatively large liquidity injections arising from deficit financing operations continue to place a burden on monetary policy, and on the effort to boost competitiveness. While the strong monetary expansion in the past couple of years may be expected to result in a pickup in inflation, the increased emphasis by the BOU on mopping up excess liquidity and firm adherence to the 2002/03 reserve money program should result in inflation remaining well contained.

15. Despite the damage to some cash crops (notably, cotton) due to adverse weather conditions, export receipts are picking up by more than expected, owing partly to a 17 percent rebound in coffee prices. As a whole, noncoffee exports are also doing well, while imports have remained in check. The external current account deficit, excluding official grants, is expected to widen, however, as inflows of private transfers are expected to fall back to historically normal levels. The current account should be more than financed by official disbursements of donor assistance, including HIPC Initiative assistance and private capital inflows, and international reserves are projected to increase to about 6½ months of imports by end-June 2003.

II. Policy Issues and Medium-Term Outlook

16. The main challenge facing Uganda is to sustain the poverty reduction effort by maintaining robust economic growth. Attainment of the PEAP target of 7 percent real GDP growth would require higher rates of private investment and the more effective use of donor support in programs that would enhance productivity. The authorities and staff concurred that several elements are central to the achievement of these objectives, including the following:

  • a gradual fiscal consolidation to reduce aid dependency and improve fiscal and external sustainability, without jeopardizing programs to reduce poverty; this will require increasing revenue collection and improving the allocation and effectiveness of spending at both the national and local levels of government;

  • further development of monetary and exchange rate policy instruments that will augment the BOU’s capacity to carry out large sterilization operations without giving rise to unnecessary interest or exchange rate volatility;

  • strengthening and deepening of the financial sector, so that it effectively intermediates private savings;

  • diversification of the economy through, among other things, an improvement in international competitiveness, as a means to reducing external vulnerability and strengthening debt sustainability; and

  • the effective enforcement, on a sustained basis, of a governance framework that boosts the productivity of public services and is conducive to attracting FDI.

17. The staff reviewed with the authorities the medium-term macroeconomic framework, with a view to establishing a baseline for the forthcoming revision to the PEAP and discussed possible risks to the medium-term economic outlook.

A. Fiscal Policy

18. The authorities strongly emphasized controlling the fiscal deficit to maintain macroeconomic stability and to contain pressure on real interest rates and the exchange rate arising from the large expenditures to support the poverty reduction program. In this regard, they are firmly committed to increasing tax revenue through strengthened tax compliance and enforcement. The Uganda Revenue Authority (URA) has recently formulated a five-year corporate plan that ambitiously aims to increase tax revenue to about 17 percent of GDP by 2006/07. Under the plan, the URA would speed up the expansion of computerized systems, improve noncomputerized control measures, and reorganize the collection department. The staff noted that, while the URA corporate plan is a welcome step toward improving tax administration, it would be important to ensure that the plan is supplemented by the prompt implementation of specific annual business agendas to achieve targets. Furthermore, with the forthcoming conclusion of the judicial investigation into improper and corrupt activities by URA staff, it will be necessary that the URA management act decisively on dismissing or disciplining staff involved in wrongdoing. Steps would also need to be taken to ensure a high degree of staff integrity in the future.

19. Customs administration presents the major challenge at the URA, and the authorities are considering outsourcing this function. The staff cautioned that this measure should be considered carefully, noting that (i) outsourcing has proved to be an expensive option where it has been tried; (ii) capacity building should be a central element of the reform effort, as otherwise the likely positive initial impact of the outsourcing may be difficult to sustain, owing to potential conflicts of interest, as increased local capacity would lead to a diminished role for the contractor, and to the difficulty of transferring from an external entity to local staff the managerial and technological know-how necessary for sustained improvement; and (iii) the support from other institutions, including the judiciary and the police, is essential to the overall reform effort.

20. The staff agreed that substantial revenue gains could be achieved from major improvements in tax administration but considered the URA corporate plan’s target as optimistic under current circumstances. It urged the authorities to consider tax policy measures as well, especially given that, in the near term, revenue gains from strengthened tax administration are likely to be limited. In the staff’s view, there would appear to be some scope for increasing revenue by revising the excise regime of domestic and imported goods, changing the value-added tax (VAT) (converting various items from the zero-rated category to the exempt category and eliminating existing exemptions on a number of final goods), and restricting the zero-rate category of import duties. The authorities stressed that the scope for increased revenue from tax policy measures is very limited, but indicated their willingness to consider a number of measures in the context of the upcoming first review of the PRGF arrangement.

21. On the spending side, for the second consecutive year, military spending will be higher than initially budgeted. The government had proposed to increase defense spending in this fiscal year by US$26 million (about 20 percent, or 0.5 percent of GDP, over budgeted levels), an increase that the government deemed necessary to address decisively the security situation in the north of the country. While the authorities intend to fully offset the increase in defense spending through cuts in other expenditures, except those protected under the PAF, the change in the composition of government outlays would result in a budget quite different from that which parliament had approved and donors had agreed to support, and thus tend to undermine the integrity of the budget process. The staff encouraged the authorities to consult with donors to determine appropriate spending and the actions needed to address the security situation in the north. The authorities have recently indicated that they intend to limit the increase in defense spending this fiscal year to US$17.5 million. The authorities also pointed to the need to increase defense spending in the next two to three years above the present levels in the medium-term expenditure framework (MTEF) in order to modernize the armed forces; however, they said they would await the conclusion of the ongoing defense review—for which preliminary results are expected in April 2003—before deciding on medium-term military expenditures.

22. There has been much progress in budget management, monitoring, and accountability systems. These systems were recently strengthened by the implementation of the new Budget Act and the extension of the expenditure commitment control system (CCS) to all nonwage expenditure. The new Budget Act has resulted in a more efficient and participatory budget process, as it sets out a precise timetable for the completion of each step of the process. Notwithstanding this progress, problems remain at both the national and local government levels. In particular, the resort to supplementary appropriations has led to government spending outcomes that deviate substantially from budget intentions. This has been reflected in a marked tendency toward greater underfinancing of unprotected social and economic programs, owing mainly to growing amounts of spending on public administration. In the current fiscal year, this tendency will be exacerbated by the large cut proposed in the discretionary recurrent and development budgets to accommodate higher defense spending. The authorities explained that the budget cuts would not affect poverty-related programs since expenditures under the PAF would be protected. The staff argued, however, that the proposed cuts would nevertheless have an impact on programs in those sectors, such as roads and agriculture, that are necessary to achieve PEAP objectives. This situation, in the staff’s view, calls for the authorities to expeditiously finalize the plan to reduce public administration expenditures, drawing on the 2002 Presidential Committee’s Report on Effective Public Administration Budgeting. There is also a pressing need to effect cost savings through the rationalization of the numerous commissions and semiautonomous agencies, in order to release resources for comprehensive civil service reform in support of the effective provision of core public goods.

23. Despite the budget allocations for repayment of domestic arrears, the stock of domestic arrears remains large, owing mainly to newly identified arrears for pension obligations and of local governments.7 This underscores a more general problem, namely, that of the government’s total contingent liabilities. These constitute a serious risk for the implementation of fiscal policy in the future because no exact measure exists of the amount of these liabilities. Recognizing this risk, the authorities have planned an assessment of the major potential liabilities, including the pension arrears and the debt of parastatal enterprises. In addition, the authorities should develop a clear strategy to reduce the existing stock of domestic arrears.

24. Notwithstanding the recent progress made in strengthening the operations of local governments, poor budget and accounting management systems, as well as the lack of a clear direction in the decentralization reform agenda, are hindering further progress. The 2002/03 budget provides for the channeling of about 33 percent of total expenditures to districts. However, the monitoring of local government activities and the systematic accounting of funds extended to local authorities have been problematic, largely because only a few local authorities have complied with the government’s requirement to submit accounts on a timely basis. In general, efforts to improve the working of local governments are being frustrated by the absence of a comprehensive decentralization reform agenda. The staff noted that, in view of the increasing importance of the decentralization process for poverty reduction, the authorities need to develop an action plan to identify and address the most pressing issues in the area of decentralization.

B. Monetary and Financial Sector Issues

25. The authorities intend to continue to follow a reserve money target in order to maintain low inflation. Although the large sterilization operations required to absorb the increase in liquidity created by government deficit financing operations have complicated the conduct of monetary and exchange rate policy, the changes in operating procedures introduced in April 2002 have eased the task. In particular, treasury bill issues and steady daily sales of foreign exchange are used for sterilization purposes, while repurchase operations and occasional foreign exchange interventions are employed for short-term liquidity management. This system has allowed market participants to distinguish more clearly sterilization operations from intervention and short-term liquidity management, and resulted in less volatile interest and exchange rates. The authorities and staff share the view, however, that further improvements in the procedures and instruments for liquidity management and sterilization operations are necessary. The monetary authorities expressed their desire to move to a benchmarking system for new issues of treasury bills at the earliest possible date, introduce longer-term government paper, and decrease the frequency of treasury bill auctions. These actions should facilitate the development of a secondary market for government paper, provide a more stable maturity structure for government debt, and further distinguish treasury bills sold for sterilization purposes from short-term liquidity management operations. The BOU also plans to further develop the use of repurchase instruments for liquidity management. The staff wholly supported these steps.

26. The overall health and soundness of the financial sector has improved considerably during the past year, reflecting the progress made in implementing the recommendations of the Financial Sector Assessment Program (FSAP) (Box 3). The enactment of three legislative proposals should further strengthen the financial sector and encourage financial intermediation. The first proposal, the new Financial Institutions Bill, which was submitted to parliament in June 2002, would strengthen the banking system by introducing prudential provisions consistent with international standards and ensure prompt bank interventions and other corrective actions deemed necessary by the regulatory and supervisory authorities. The second, the Microfinance Deposit-Taking Institutions Bill, which has also been submitted to parliament, would provide for the regulation and supervision of the microfinance industry, in order to ensure that microfinancing is conducted in a safe and sound manner conducive to the orderly growth of the financial sector. This should encourage microfinance institutions (MFIs) to play a larger role in providing financial services to small businesses and farmers. The third, an Anti-Money Laundering Bill has been drafted and prepared for submission to the cabinet. This would fill an important gap in the legal framework governing the financial sector by introducing specific legislation for the control of money laundering. In the meantime, the BOU has issued guidelines for the commercial banks to follow and continues to carefully monitor banking activity.

27. While the recent improvements in the health of the banking system, together with the increase in paid-up capital, should bolster financial intermediation, for the financial sector to play a larger role in support of economic growth, there remains a need to reduce lending risks and lower the costs of intermediation, and to increase the availability of long-term lending instruments, such as domestic private bonds. In particular, important sources of financial resources, notably pension funds and insurance companies, have been largely absent from the market. To improve this situation, the authorities are committed to restructuring the National Social Security Fund (NSSF), a major source of new savings each year, through the repeal of the NSSF Statute and replacement of the current Board of Directors and management with investment professionals. Other steps to reduce lending risks and help lower the costs of intermediation with small- and medium-sized firms include the modernization of the payments system, establishment of cash centers8 throughout the country, and creation of a shared data bank on borrowers’ creditworthiness (credit reference bureau).

28. The authorities noted that securing parliament’s approval of the Financial Institutions Bill and repeal of the NSSF Statute would be an uphill battle, especially after the difficult proceedings on the privatization and merger of the UCB. The parliamentary finance committee has already indicated its intention to alter some of the key articles of the proposed Financial Institutions Bill, while repeal of the NSSF Statute is strongly opposed by labor organizations. The mission acknowledged these political difficulties, but noted the importance of these financial sector measures for providing security to depositors’ and workers’ savings and supporting future economic growth.

C. External Sector Policies and Competitiveness

29. The authorities are pursuing a mix of policies aimed at enhancing external sustainability, minimizing vulnerability, and strengthening international competitiveness. The government’s policies aimed directly at enhancing productivity and output include the Program for the Modernization of Agriculture (PMA), the Medium-Term Competitiveness Strategy (MTCS), and improvements to infrastructure. The PMA, which was initiated in a small number of subcounties in 2001/02 and is scheduled to be rolled out to all subcounties by 2007/08, takes a comprehensive approach to increasing farmers’ productivity and rural incomes, including organization of cooperatives for commercial-based farming, demand-based extension services, agricultural research, rural financial services, marketing, and improving feeder roads. Implementation of the PMA has the potential to greatly increase competitiveness. The MTCS, which was initiated in July 2000, is a cross-cutting program that identifies and addresses constraints on doing business in Uganda.9 Improving the transportation infrastructure, such as the integration of East African railways and privatization of the Ugandan railway, is an important initiative under the MTCS. The SEP is specifically designed to expand and diversify the export base (Box 4). Particularly in the coffee sector, where new, higher-yielding plantlets are being distributed, the government’s provision of inputs can enhance productivity and competitiveness. Uganda’s export markets are expanding. Trade associations have had success in accessing new markets and, with increased export volumes, reducing transportation costs. Regional integration within the East African Community (EAC) would create an expanded market for Uganda’s surplus food crops.

30. The staff expressed its concern, however, over the authorities’ use of ad hoc investment incentives to encourage exports, which have been budgeted under the SEP. In particular, investment incentives for selected textile manufacturers have been costly and could prove to be even more of a drain on government resources in the future. The staff argued that this selective approach to incentives is inherently discriminatory, induces unproductive rent-seeking activities, and creates opportunities for corruption. The authorities argued that Uganda is operating in a competitive regional market for FDI, and to compensate, to some extent, for disadvantages such as geographic location and high transportation costs, it has to offer incentives to attract inward investment and pursue the country’s development goals. They agreed that the selective approach to incentives is undesirable and should be terminated, and that government policy is to move to a generalized system of incentives that are nondiscriminatory as between activities and enterprises. They also wish to move toward a more harmonized system of taxation and incentives for the EAC. To this end, the Ugandan authorities, in conjunction with those of the other two EAC countries, have requested the Fund’s technical assistance.

31. The authorities are committed to continuing implementation of a flexible exchange rate policy that would help to strengthen Uganda’s competitiveness. In this regard, they have limited sterilization operations through foreign exchange sales to avoid inducing an appreciation of the Uganda shilling. The objective of official foreign exchange market intervention is to maintain orderly market conditions; the BOU does not attempt to resist movements in the exchange rate stemming from changes in economic fundamentals. The authorities and staff agreed that the operating procedures for foreign exchange sales introduced in April 2002 (see para. 25) had improved the operation of the foreign exchange market and resulted in a more stable exchange rate.

32. Preparations toward the formation of a customs union in the EAC in 2004 are proceeding. The authorities explained that at the technical committee level there had been broad agreement on the common external tariff structure. There has also been broad agreement on the gradual elimination of internal tariffs for a select group of products. However, agreement has not been reached on the products to be included or on the phasing out of duties and the final level of tariffs. Negotiations are also ongoing for the establishment of a customs union in the Common Market for Eastern and Southern Africa (COMESA) in 2004. A fundamental issue yet to be addressed is the compatibility of the proposed tariff structures in the two unions.

33. Since reaching the completion point for the enhanced HIPC Initiative in May 2000, Uganda’s external debt sustainability indicators have deteriorated substantially, owing primarily to the collapse in world coffee prices and the corresponding decrease in the value of exports.10 Assuming the full delivery of HIPC assistance, the ratio of the NPV of external debt to exports is expected to peak at 195 percent at end-June 2003, compared with the HIPC Initiative target of 150 percent for end-June 1999.11 The authorities have agreed that the conclusions of the recent Updated Debt Sustainability Analysis are appropriate and that the debt-to-exports ratio should be reduced to sustainable levels over time. The authorities aim to contain new borrowing through a gradual fiscal consolidation, implement policies to increase and diversify the export base, and build up their debt management capacity. Importantly, although the ratio of debt service to exports also increased with the drop in exports, this indicator, at 8–10 percent, is expected to remain well below the indicative HIPC Initiative target range of 15–20 percent.

34. The authorities are attempting to reach final agreements with creditors on the delivery of HIPC assistance (Table 5).12 In 2001/02, Uganda was able to sign agreements with Saudi Arabia, Kuwait, the Islamic Development Bank, and the Arab Bank for Economic Development in Africa (BADEA), and to receive additional debt relief beyond HIPC Initiative assistance from most Paris Club creditors. Additional HIPC Initiative relief should be forthcoming as the governments of India, Libya, and the Republic of South Korea have recently pledged to provide relief on official debt. However, Uganda has had difficulty in securing agreements for HIPC Initiative debt relief from some non-Paris Club creditors. Indeed, some (primarily commercial) creditors have filed suits against the government in local courts and, as of December 2002, had won judgments totaling US$40 million;13 this has complicated the authorities’ efforts to reach agreement with other creditors.

Table 5.

Uganda; Status of HIPC Initiative Agreements by Creditors 1/

article image
Sources: Ugandan authorities; and Bank/Fund staff estimates.

Figures are based on end-June 1999 data, using end-June 1999 exchange rates and the six-month average Commercial Interest Reference Rate (CIRR) at at end-June 1999.

D. Governance

35. Some aspects of governance, in particular, corruption, continue to be serious problems in Uganda (Box 5). The business community has identified corruption as a major obstacle to doing business, and weaknesses in the public sector tendering process have resulted in frequent reports of poor construction of schools, health centers, and roads, which has diminished the effectiveness of government spending.

36. The authorities have taken some significant steps to expose corruption, with the ongoing judicial investigation of the URA and the recent passage of the new Leadership Code. The new Inspector General of Government (IGG) Statute has granted greater freedom to the IGG’s office to pursue wrongdoing by public officials; resources, however, are limited. Also, it is not clear how stringently the provisions of the Leadership Code will be implemented. Similarly, the URA does not yet have a clear policy for dismissal or prosecution of staff whose probity may be called into question by the judicial investigation. Other actions to improve governance in the year ahead will include a review of the judicial system and of national and local government procurement and tendering procedures.

E. Privatization

37. The privatization plan, which by law must be completed by 2005, would not only directly attract investors but, as has been the case with the privatization and restructuring of the telecommunications sector, could also contribute to the easing of constraints on investment. Major privatizations to be completed in the year ahead include the sale of the Uganda Development Bank (UDB) and the Uganda Dairy Corporation, and long-term concessions for the electricity distribution company and railway. An agreement for a 20-year concession for the electricity generation company was concluded in November 2002.

F. Medium-Term Outlook and Alternative Scenarios

38. The five-year medium-term outlook envisages broad-based economic growth, driven mainly by productivity gains in agriculture, stepped-up private sector investment, and a further expansion in public services under the PEAP. Annual real GDP growth would average 6.2 percent during 2002/03–2006/07, while monetary policy would aim at containing inflation at about 3.5 percent (Table 6). The planned rolling out of the PMA to all subcounties by 2006/07, with its comprehensive approach to building up farmers’ productivity, together with the direct supply interventions under the SEP, is expected to achieve 5 percent annual growth in agriculture. Gross investment, supported by a gradual increase in domestic saving and, beginning in 2004/05, the construction phase of the large Bujagali project, is projected to rise to 24½ percent of GDP. This project would stimulate construction and other investments in industrial capacity, while the ongoing strong expansion in public services, particularly education and health, is budgeted to continue over the next few years. Sustaining the recent success in reducing the incidence of HIV/AIDS (Box 6) would contribute to the productivity gains.

Table 6.

Uganda: Selected Financial and External Sustainability Indicators, 2001/02-2006/07 1/

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Sources: Ugandan authorities; and Fund staff calculations.

Fiscal year begins in July.

Defined as official transfers, net official disbursements, and HIPC assistance, less interest due on public sector debt.

Face value of outstanding stock of treasury bills. Does not include domestic arrears and does not net out government deposits in the banking system.

In percent of the average of three consecutive years of exports and nonfactor services, ending in the current year.

39. While Uganda would remain heavily dependent on donor support over the medium term, sustainability indicators are projected to improve, driven by the gradual fiscal consolidation and growth in exports (Box 7). The overall and primary fiscal deficits, excluding grants, are expected to decline by nearly 5 percentage points to 8 percent of GDP and 3 percentage points to 2½ percent of GDP, respectively, from 2001/02 to 2006/07, driven by increases in tax revenue from tax administration and policy measures and constrained expenditures, particularly in the area of public administration. In the process, fiscal liquidity injections would diminish (by nearly 3 percentage points of GDP), thus easing the crowding out of the private sector and the pressure on the real exchange rate. As a result of the gradual fiscal consolidation, the stock of outstanding treasury bills is projected to level off at 9-10 percent of GDP.

40. Export earnings, driven by the PMA and SEP and a recovery in commodity prices, are projected to grow by 12½ percent a year, thus lowering Uganda’s NPV of debt-to-exports ratio by 19 percentage points by 2006/07 from its projected peak of 195 percent at end-June 2003. The external current account deficit would narrow only slightly, however, to 13 percent of GDP in 2006/07, owing to a surge in imports expected from the Bujagali project, but this deficit would be more than financed by net donor support and private capital flows. As a result, gross international reserves are projected to remain above six months of imports throughout the medium term.

41. There are several risks to this outlook. First and foremost, with Uganda’s dependence on donor assistance, a reduction in this support could have serious consequences. Uganda’s ample stock of international reserves could mitigate a temporary break in donor support, but fiscal adjustment would be needed to maintain macroeconomic stability and confidence in the financial system. In this event, programs to reduce poverty would suffer. Other risks to the medium-term outlook include poor implementation of key government programs that support the economy and investment (e.g., PMA, the fight against corruption, the strengthening and broadening of the financial sector, and reduction in transportation costs); failure to meet the growing demand for electricity; and international commodity price shocks. The fiscal sector is vulnerable to poor budgetary control, a failure to raise government revenue, and substantial costs arising from contingent liabilities. While good program implementation would mitigate most of these risks, the government has yet to establish sufficient protection against contingent liabilities.

42. In addition to the discussions on risks to the economy, the staff developed some alternative scenarios, including (i) a permanent increase of US$100 million in donor assistance supporting education and health services; (ii) a high-growth scenario (real GDP growth of 7 percent a year) achieved through increased investment; and (iii) a low-growth, low-donor assistance scenario (Table 7). In the higher assistance scenario, in addition to the direct benefits to the individual recipients of the assistance, real GDP growth would experience a onetime increase of 0.1–0.2 percentage point in the initial years of the increased aid, mainly reflecting an increase in the labor force from a healthier population and reduced mortality rates arising from the additional health services, The impact on GDP of increased public sector demand would be largely offset by lost production in the tradable sector, as the additional sterilization operations required to maintain macroeconomic stability would imply about a 7½ percent appreciation of the Uganda shilling. Although there would likely be increases to production and exports from a more educated labor force, these improvements would only materialize over the long term. Relative to the baseline, in the higher grants scenario, the overall fiscal and the external current account deficits, excluding grants, would widen and, because of reduced exports resulting from the shilling appreciation, external debt sustainability indicators would worsen. Including grants, fiscal and external balances would be little changed.

Table 7.

Comparison of Sustainability Indicators Under Alternative Scenarios, 2001/02-2006/07 1/

(As a share of GDP at market prices; unless otherwise indicated)

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Sources: Ugandan authorities: and Fund staff calculations.

Fiscal year begins in July

43. The high-growth scenario assumes that, on average, investment is 2.6 percentage points of GDP a year higher than in the baseline scenario—a level that would enable real GDP to grow in line with the PEAP target. The staff is of the view that vigorous implementation of structural measures that would improve the business environment in Uganda (a strong anticorruption effort; measures to strengthen and broaden the financial sector; steps to reduce transportation costs; including infrastructure investment, privatization of the railroad, and clearing bottlenecks at ports; and timely expansion of the power grid) would lead to such an investment response, with much of the increase coming from FDI (Box 8). In this scenario, not only would real GDP growth be elevated to the PEAP target, but most sustainability indicators would improve relative to the baseline, except for the external current account deficit. However, the difference would be more than financed through higher FDI, and international reserves would rise.

44. The baseline scenario assumes sustained implementation of the program of economic and structural reforms, including in the area of governance. Weak implementation of the economic reform program, however, would undermine investor and donor confidence, leading to a decline in investment and donor assistance and lower economic growth. In this low-growth, low-donor assistance scenario, sustainability indicators deteriorate substantially over the medium term.14 Investment is ó percentage points of GDP a year lower than in the baseline scenario, on average, while annual donor assistance falls by US$100 million, resulting in an average real GDP growth rate of about 4 percent a year. Both the overall fiscal balance and external current account balance worsen, and there is a rundown of international reserves. Export growth slips relative to the baseline, as part of the lower investment is assumed to take place in the export sector. As a result, external debt sustainability indicators show a weaker improvement over time, compared with the baseline.

G. Poverty Reduction

45. An issue central to the poverty reduction program is the expected magnitude, scope, and reliability of donor support over the medium term. The authorities emphasized the desirability of channeling assistance through the budget process, which enables government to identify priorities, and exercise monitoring and control of expenditures, and promotes transparency. Moreover, the budget is the tool that ensures consistency between donor assistance and the authorities’ macroeconomic objectives, such as promoting export growth. The authorities emphasized also the need for commitments by donors to be clear and reliable in order to enhance the usefulness of the MTEF. The mission supported the authorities’ aim to increase the share of donor aid in the form of general budget support, but stressed that this would require that the integrity of the budget process be respected.

46. Based on current projections of real GDP growth over the medium term, which fall short of the 7 percent PEAP target, the staff expressed its concern that the long-term PEAP objective of reducing the incidence of poverty in Uganda to less than 10 percent by 2017 may be in jeopardy. While the staff agreed that a more enabling environment for the private sector and a higher rate of private investment could lift real GDP growth rates in line with the PEAP target, it suggested that the authorities evaluate the implication of slower growth for poverty reduction in the forthcoming PEAP/PRSP progress report. Based on a rough estimate, it appears that, even with an average growth rate of 6 percent a year, Uganda should still be able to meet the Millennium Development Goal (MDG) of cutting the incidence of poverty in half by 2015.15

H. Other Issues

47. The mission updated the fiscal transparency module of the Report on the Observance of Standards and Codes (ROSC) and, in collaboration with the World Bank, reviewed progress under the Assessment and Action Plan (AAP) for tracking poverty-reducing expenditures (Box 9). Under both reviews, Uganda has registered significant progress in fiscal transparency and budget management, particularly in the area of budget formulation.

48. Data are provided to staff on a timely basis and are sufficient for surveillance and program monitoring, but there are a number of weaknesses that need to be addressed (see Appendix III). Moreover, although there has been much improvement in the authorities’ data-generating capacity, there is still a strong desire for further technical assistance, particularly in the area of the national accounts and balance of payments statistics.16 With regard to the recently issued national accounts data, the staff pointed out to the authorities that the implied increase in private sector savings (of nearly 5 percentage points of GDP) in 2001/02 raised questions about the accuracy of these initial estimates. The authorities are taking steps to implement the recommendations of the December 2001 government finance statistics (GFS) mission, and a request for a follow-up mission will be forthcoming. Uganda is a participant in the General Data Dissemination System (GDDS) and, as such, has committed to use the GDDS as a framework for the development of national statistical systems for the production of economic, financial, and socio-demographic data.

III. Staff Appraisal

49. The Ugandan authorities are to be commended for their sustained pursuit of sound economic policies and structural reforms that have resulted in robust economic growth and macroeconomic stability, despite an often adverse external environment. Uganda has been a pathbreaking partner in the PRSP process, with the development and implementation of a comprehensive framework that has contributed to a significant reduction in the incidence of poverty. Achievement of Uganda’s ambitious poverty reduction objectives over the longer term, however, will require stepped-up private investment, improved governance structures and budget management at all levels of government, and strengthened financial intermediation.

50. The main medium-term fiscal challenge facing Uganda is how to sustain the implementation of the poverty reduction strategy in the face of a weak domestic revenue effort, a deterioration in external sustainability indicators, and a widening fiscal deficit that is rendering the budget increasingly vulnerable to a potential reduction in donor support. Addressing this challenge will require focusing on policy actions to increase revenue collection through strengthened tax administration and tax policy measures, and improving the allocation and effectiveness of spending at both the national and local levels of government. The staff endorses the authorities’ efforts to control the fiscal deficit, which is necessary to curb upward pressure on the real exchange rate and real interest rates.

51. The authorities have made great strides in developing the MTEF into a meaningful budget instrument. Still, the resort to supplementary appropriations has led to government spending outcomes deviating substantially from budget intentions, and to underfinancing of unprotected social and economic programs. In the current fiscal year, this tendency will be exacerbated by the large cut in the discretionary recurrent and development budgets that would be needed to accommodate higher defense spending. In the staff’s view, this underscores the need for the authorities to finalize and implement the plan to reduce public administration expenditures as a matter of urgency.

52. The increase in defense spending will result in a budget quite different from that which parliament had approved and donors had agreed to support. This risks undermining the use of the budget as the tool that ensures consistency between donor assistance and the authorities’ macroeconomic objectives. The strength of Uganda’s budget process has prompted donors to provide a greater share of assistance in the form of direct budget support. The staff supports the authorities’ efforts to further increase the share of donor aid in the form of general budget support, as this would enable the government to more effectively identify priorities and monitor and control expenditures. It would also promote transparency. For these efforts to be successful, however, the integrity of the budget process must be respected by all stakeholders.

53. In view of the central role of local authorities in the delivery of public services, it is essential that local government bodies be subject to effective control. There has been much progress in budget management and accountability at the local government level in recent years, but the lack of a clear decentralization reform agenda is hindering further progress. The authorities are encouraged to develop an action plan to improve the reporting, monitoring, and auditing systems of local governments; strengthen the tendering process; and rationalize the roles and responsibilities of the various central institutions involved in the decentralization process. There is also a need to review the organization of subnational levels of government, with a view to reducing the high costs of the present five-layer system of local authorities. In the meantime, no new local government units should be created.

54. Monetary policy will need to remain directed at keeping inflation low. The task should be eased by the monetary authorities’ welcome decision to mop up the excess reserves built up during 2001/02, while the new sterilization and liquidity management procedures should result in less volatile interest rates and exchange rates. The staff supports the authorities’ flexible exchange rate policy and considers the level of the real exchange rate as broadly appropriate.

55. The overall health and soundness of the financial sector have improved considerably because of a number of actions taken by the BOU during the past year. While these actions, and the BOU’s enhanced capacity to mitigate the monetary impact of large donor flows, have significantly strengthened the financial system, there are some areas that have been identified by the FSAP where further action is needed. These include (i) passage of the Financial Institutions Bill, while upholding the draft bill’s key provisions with respect to the limit on shareholding and the BOU’s ability to issue regulations and notices to implement the provisions of the bill; (ii) establishing the requisite legal framework, and the monitoring and enforcement structures and mechanisms for anti-money laundering; (iii) continuing to take appropriate supervisory corrective actions against noncompliant, undercapitalized, or nonviable financial institutions; and (iv) strictly enforcing the single borrower limit.

56. Uganda’s external position has weakened in recent years, as the economy has suffered from a prolonged deterioration in the terms of trade. To achieve a more sustainable external position and lessen the economy’s vulnerability to external shocks, the authorities have appropriately focused on gradual fiscal consolidation and measures to expand and diversify the export base. The PMA and the SEP are two central elements of this strategy. The staff believes that, while it is important to ensure that these initiatives are adequately funded, ad hoc investment incentives should be eschewed. Timely implementation of the PMA would also contribute to growth in commercial agriculture and benefit Uganda’s small but vibrant nontraditional export sector. It is important also to ensure that international competitiveness is maintained by continuing to implement a flexible exchange rate policy.

57. Uganda has put in place a comprehensive legal and regulatory structure for strengthening governance. Nevertheless, corruption continues to undermine business activities and public service delivery. At the present time, two major anticorruption efforts are under way: a judicial inquiry into the URA and implementation of the new Leadership Code. Firm follow-up action to these measures will be required if good governance is to be strengthened. Failure to act decisively would weaken the credibility of the authorities’ commitment to improve governance. The staff welcomes the authorities’ intention to investigate reports of corruption in the judicial system and encourages the planned reform of procurement and tendering procedures, at both the national and local levels of government.

58. The staff recommends that the next Article IV consultation with Uganda be held in accordance with the provisions of the decision on consultation cycles approved on July 15, 2002.

Key Structural Reforms over the Past Decade

Fiscal policies, instruments, and institutions

The following reforms were undertaken in the area of tax administration:

  • creation of the autonomous Uganda Revenue Authority (URA) in 1992;

  • introduction and expansion of a taxpayer identification numbering system in 1992;

  • creation of a large taxpayers department in the URA to collect revenue from and audit the 100 largest taxpayers in 1998; and

  • declaration of assets, liabilities, and income by URA staff, which would be subject to review by investigators into improper conduct, with false declarations grounds for dismissal.

Tax policy reforms included the following:

  • introduction of a VAT in 1996 and new Income Tax Act in 1997;

  • elimination of export taxes in 1996 and reduction in level and dispersion of import tariffs in 1997–99; and

  • elimination of discretionary tax exemptions in 2001/02.

Actions in the area of budget planning, monitoring, and control were as follows:

  • controlling of spending-induced fiscal deficits, and enforcement that all drawings on the government’s accounts be properly authorized by the Ministry of Finance, beginning in 1992;

  • introduction of the medium term expenditure framework (MTEF) in 1992/93 and explicit linking of the MTEF to the Poverty Eradication Action Plan (PEAP) in 1997;

  • creation of sector working groups in 1997, which have been expanded to include the government, parliamentarians, donors, nongovernmental organizations (NGOs) the, private sector, and technical experts, to develop sector strategies and budget priorities for the MTEF, annual public expenditure review, and budget proposal submitted to parliament, there are presently 13 sector working groups.

  • cessation of new issues of government promissory notes, except to regularize domestic arrears accumulated prior to July 1, 1997;

  • introduction of the commitment and control system (CCS) in 1999, and extension of the CCS to all nonwage expenditures in 2001/02, with accounting officers explicitly responsible for expenditure overruns; and

  • inclusion of all donor projects into the MTEF and, subject to sector budget ceilings, in the 2003/04 budget process.

Financial sector regulation, supervision, and restructuring

  • Interest rates were liberalized during 1992–94.

  • Parliament approved Financial Institutions Act (FIA) in 1993. The FIA strengthened banking regulations and the Bank of Uganda’s (BOU) supervisory role (though the Minister of Finance still had to approve bank interventions) and assigned primary responsibility to the BOU for formulating and implementing monetary policy. In accordance with the FIA, the Deposit Insurance Fund, covering small depositors in the event of a bank failure, was established in 1994.

  • A Treasury bill market was established in 1992–93.

  • BOU was restructured and recapitalized in 1993.

  • The BOU stepped up supervision and enforcement of banking regulations. In 1998 and 1999, the BOU intervened four banks, including the Uganda Commercial Bank (UCB), which was one of the largest commercial banks. These banks were liquidated or merged with other banks. (The initial sale of UCB failed, but a second attempt was completed successfully in 2002.) A small bank was intervened in September 2002 and merged with a healthy institution shortly thereafter.

  • The Nonperforming Assets Recovery Trust (NPART) was established in 1995.

  • Increased minimum capital requirements for commercial banks took effect in January 2003.

Foreign exchange and trade liberalization and investor’s rights

  • The export monopoly of the Coffee Marketing Board was abolished in 1990/91.

  • The interbank foreign exchange market was created and the exchange rate was unified in 1993.

  • The trade and foreign exchange regimes were liberalized in 1993–1994.

  • An Investment Code was introduced in 1991. Investment incentives were standardized for both domestic and foreign investors. A revised Investment Code was approved in 1997 that simplified investment incentives and eliminated tax holidays.

  • External capital account transactions were liberalized in 1997.

  • A protocol for regional integration, including a customs union and the eventual elimination of internal duties with other countries in the East African Community (Kenya and Tanzania) was signed in 2002.

Privatization and restructuring of public enterprises

  • The Public Enterprise Reform and Divestiture Statute was enacted in 1993 and later amended in 2000. All public enterprises are to be sold or liquidated by 2005. As of December 2002, of the original 146 firms held by the public sector, 38 enterprises remained to be sold or liquidated.

  • Restructuring of the telecommunications and electricity sectors began in 1997/98 and 2000/01, respectively, to allow private sector participation. Privatization of Uganda Telecom Ltd. was completed in 2000, with two additional companies also providing telecommunications services. Agreement on a 20-year concession for operation of the electricity generation company was reached in November 2002, and negotiations are under way with the winning bidder of the operating concession for the electricity distribution company.

Liberalization of domestic prices

  • Domestic prices deregulation was initiated in 1992.

  • Retail prices of petroleum products were liberalized in 1994.

Civil service reform and military demobilization

  • Civil service reform was launched in 1992, resulting in a 50 percent reduction in the number of government employees.

  • An army demobilization program was launched in 1992 and completed in 1996.

  • Civil service pay reform included monetization of previously noncash benefits in 1996/97 and an increase in the pay scale for skilled workers, beginning in 2002.

Poverty reduction

  • The process for developing and periodically revising a comprehensive strategy to reduce poverty was initiated with the publication of the first PEAP in 1997. The first revision of the PEAP was made in 2000, with further revisions to be conducted about every three years. During the interim years, beginning in 2001, annual progress reports are submitted to parliament as a background report for the budget, Summaries of the PEAPs and progress reports serve as Uganda’s PRSPs and PRSP progress reports, which are submitted to the Boards of the World Bank and the Fund for their endorsement.

  • The Poverty Action Fund (PAF) was established in 1997 to protect certain poverty reduction expenditures.

  • The role of local governments in the delivery of services and investment aimed at reducing poverty was enhanced, beginning in 1997/98, including an expanded system of intergovernmental grants.

Lessons from Past Performance Under Fund-Supported Programs

Uganda has a long track record of good policy implementation under Fund-supported programs, which have been in effect nearly continuously since 1987. While there have been occasional slippages, the overriding factor behind this good performance has been the strong commitment and ownership of the economic and poverty reduction programs by the President and the management teams at both the Bank of Uganda (BOU) and the Ministry of Finance.

Strong technical capabilities at key institutions have played a central role in ensuring the overall development of policies, coordinating the work of a large number of technical assistance personnel, and mediating among the political authorities, civil society, and the donor community. The extensive technical assistance provided by the donor community has been necessary to overcome Uganda’s manpower constraints.

The sequence of policies and the reform agenda has proved to be effective. First macroeconomic stabilization and liberalization of domestic prices, the foreign exchange market, and the export sector (primarily coffee) during 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; 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 during the latter part of the decade, as was the comprehensive Poverty Eradication Action Plan (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.

Despite good overall program implementation, private sector investment has failed to materialize to the extent needed to achieve the PEAP target of 7 percent annual real GDP growth over the past four years. Investors have cited lack of financing, high transportation costs, and corruption, especially in the Uganda Revenue Authority (URA), as leading constraints on doing business. The unreliable delivery of utility services was previously cited as the leading constraint on doing business; however, privatization and restructuring of the telecommunications and electricity sectors, as well as increased investments in these areas, have eased this constraint.

Slippages can be costly. For example, failure to aggressively fight corruption in the URA led to a serious deterioration in its performance, and the stagnation of government revenues, during the latter part of the 1990s. In other cases, insufficient resources have hindered the development of institutions needed for the promotion of good governance.

In recent years, budget outcomes have deviated from budget intentions. The tendency for public administration expenditures, notably spending by the statehouse, to exceed budgeted amounts has resulted in cutbacks for unprotected items.

The lack of security that has prevailed in some areas of the country has hindered growth and led to increased income inequality.

Main Findings of the Financial Sector Assessment Program (FSAP)1

The banking system in Uganda, which dominates the financial system, is fundamentally sound, more resilient than in the past, and poses no threat to macroeconomic stability. There are a number of reasons for this. First, the closure of four banks in the aftermath of the 1998/99 banking crisis weeded out the large, nonviable banks. Second, the authorities took swift and decisive actions in response to the FSAP recommendations, including most notably (i) the privatization of the Uganda Commercial Bank, one of the largest banks in Uganda; (ii) the improvements in the management of liquidity; and (iii) the significant strengthening of banking supervision. Third, the small size of the banking system precludes a serious threat to macroeconomic stability. Fourth, the system is now dominated by large, reputable banks (over two-thirds of the system’s assets) that are well capitalized. Finally, stress testing results show that, while the banking system is exposed to interest rate and exchange rate risks, the system is relatively robust and can weather changes of reasonable magnitude in these key parameters.

Despite the progress made in implementing the recommendations of the FSAP, much still remains to be done to further strengthen and support the development the financial system. This includes the need to:

  • fully address the problem caused by some of the small banks’ frequent violations of prudential rules and regulations and the risk they pose to market integrity;

  • move expeditiously on the stalled passage of the Financial Institutions Bill, without weakening its key provisions;

  • enact anti-money laundering (AML) and combating the financing of terrorism (CFT) legislation and put in place a credible framework for monitoring and enforcing AML/CFT issues;

  • reform the National Social Security Fund (NSSF) and improve its performance;

  • address the problems of the Uganda Development Bank;

  • phase out direct government involvement in microfinance; and

  • continue to reform the legal framework to support the healthy development of the financial system.

The macroeconomic environment in Uganda is exposed to a number of potential vulnerabilities that would also need to be managed, if the health of the financial sector is to be safeguarded. These include (i) the economy’s dependence on agriculture, which leaves Uganda vulnerable to external shocks; (ii) the country’s heavy dependence on politically sensitive foreign donor flows; and (iii) the still-unsettled security situation in parts of the country.

1 Details of the FSAP recommendations and a full discussion of the stability and developmental issues facing Uganda’s financial system are found in the accompanying staff report: “Uganda—Financial System Stability Assesment.”

Poverty and Social Impact Analysis of the Strategic Exports Program

Uganda participated in a pilot project sponsored by the United Kingdom’s Department for International Development (DFID) to build capacity for ex ante poverty and social impact analyses (PSIAs). The project focused on an evaluation of the Strategic Exports Program (SEP), which is a central component of the authorities’ economic program, particularly on initiatives in the coffee and fish sectors. The exercise, complementary to earlier reports on the SEP, suggests that further consideration should be given to the microlevel supply constraints that are likely to hinder the success of the program, particularly those arising from unequal, noncooperative gender relations within agricultural households. Furthermore, the authors propose bringing the SEP initiative under the current institutional umbrella of the Plan for the Modernization of Agriculture (PMA) and reinforcing the capacity of the PMA to allow the full realization of the SEP’s benefits.

Drawing on the SEP evaluation exercise, the report concludes that, despite the possible widespread benefits of such a PSIA exercise, there are technical capacity constraints to the effective incorporation in a timely fashion of ex ante PSIAs in the national policy system. The pilot project suggests that future PSIA exercises should be focused and employ a simple study design.

Efforts to Reduce Corruption

Corruption has long been recognized as a serious problem in Uganda.1 Upon assuming power in 1986, the National Resistance Movement’s (NRM’s) Ten-Point Program referred to corruption as a contributor to “backwardness” and stated that “… corruption must be eliminated once and for all.” In this regard, the new government set up the office of the Inspector General of Government (IGG) in its first year of existence.

Extensive economic liberalization over the past decade has reduced some opportunities for corruption. However, in other aspects, reforms have outpaced the authorities’ capacity to control improper behavior by public officials and government contractors. For example, the rapid increase in resources allocated to local governments in the decentralization of programs to reduce poverty and the expansion in the number of these local government entities have overstretched the IGG’s monitoring capacity.

Despite the difficulty involved in curbing corruption, the Ugandan authorities continue to take steps to fight corruption at its roots. In 2002, the government launched an anticorruption campaign within the Uganda Revenue Authority (URA), and parliament approved the new leadership code and new IGG Statute. With regard to the former, an ongoing judicial commission investigating improprieties and questionable behavior by URA staff is expected to issue its report in February 2003. A central element in this investigation has been the new requirement that all URA staff members submit a declaration of their income and net wealth. Under the new Leadership Code, about 10,000 public officials, including the president, the cabinet, members of parliament, senior civil servants, military officers, and local government administrators, were also required to submit similar declarations. Failure to submit these declarations or false reporting are grounds for dismissal.

The true test of these bold initiatives, however, will lie in the follow-up actions taken in the coming year. The URA management has announced a zero-tolerance policy for wrongdoing by staff. This policy would need to be strictly enforced. With regard to the declarations of wealth by public officials under the new Leadership Code, it is not clear how the government will apply appropriate sanctions. Even though the IGG’s office will be strengthened under the new statute, its resources are grossly insufficient to investigate the declarations on its own. Instead, it will rely heavily on the press and general public to verify their accuracy.

Beginning in 2003, the authorities also plan to initiate an investigation into corruption in the judiciary and to review public procurement and tendering procedures.

1 In the World Bank’s governance indicator, Uganda ranked 139th out of 165 countries surveyed in 2000/01. The index and key papers that describe the governance data and methodology used to construct the index may be found in the World Bank Institute website, http://www.worldbank.org/wbi/governance.

HIV/AIDS Epidemic in Uganda

Among developing countries, Uganda has been characterized as one of the few success stories in the fight against the HIV/AIDS epidemic. The nationwide adult prevalence rates declined from 30 percent in 1992 to 6½ percent in 2001, with the rates ranging from 4.2 percent in rural areas to 8.8 percent in urban areas. Reduction in prevalence rates among the youngest age groups at several surveillance sites—the most reliable measure of trends—provides growing evidence of concomitant declines in incidence.

During the 1990s, Uganda responded to the epidemic by developing a multisectoral national strategic framework. The initial stages of the framework were implemented through the Multi-sectoral Approach to Control of AIDS (MACA), which was concluded in 1993, followed by the National Operational Plan for HIV/AIDS/STD Prevention, Care and Support (1994–98) and an expanded National Strategic Framework (1998–2001), which placed the HIV/AIDS problem in the broader context of national development and related it to other health and poverty eradication policies. The success achieved thus far in Uganda is attributed to the behavioral change that followed the vigorous public awareness campaign, the increased access to testing and counseling, the psychological and social support for the infected and their families, and improved access to HIV treatments, which were all included in the HIV/AIDS policy framework.

Despite this success, the AIDS epidemic continues to exact a heavy toll. Nearly every household has lost a relative or a friend to the disease, and the death rate in Uganda from AIDS is still comparable to those in other sub-Saharan countries. The gravity of the epidemic is most significant when the impact on children is considered: of the 11 million children orphaned by HIV/AIDS in sub-Saharan Africa, 8 percent live in Uganda.1 Life expectancy at birth was 46 years during the 1980s but declined to 41 years in 1995, near the height of the epidemic. Moreover, regional studies in Uganda have shown significant declines in household income attributed to the HIV/AIDS epidemic; for example, in the Kabarole region, AIDS-related expenditures have reduced the AIDS-affected households’ income by almost 53 percent2. At the same time, a larger share of the shrinking incomes is allocated to caring for infected family members, thus limiting other expenditures especially on food. Studies in two districts, Apac and Kabarole, find that AIDS patients allocated over 100 percent of their household income to health expenses, suggesting a running down of assets. Similarly, studies in the Busia, Mukono, and Tororo regions indicate that AIDS-affected households report inadequate food supplies significantly more than households not affected by the epidemic2. In the agricultural sector, the epidemic has resulted in a reduction in the acreage of land under cultivation and a loss in livestock.2

Mindful of the epidemic’s continuing impact on human lives and the negative economic effects, the government’s medium-term health plan includes several HIV/AIDS-related policies. Specifically, the most recent National Strategic Framework (2000/01–2005/06) aims at further reducing the prevalence rate by promoting behavior change and reducing the risk of blood-borne HIV and mother-to-child transmission. Furthermore, the framework is designed to strengthen the national capacity to respond to the epidemic. This framework has been financially and materially supported by the government and several development partners.

1 Data from HIV/AIDS Surveillance Report, Ministry of Health Uganda (2001) and Uganda AIDS Commission Fact Sheet (2001) “Twenty Years of HIV/AIDS in the World: Evolution of the Epidemic and Response in Uganda.” 2 UNDP (2002), Human Development Report on Uganda.

Uganda’s Debt Sustainability

Stress tests illustrate the effect of alternative assumptions on the sustainability of Uganda’s public sector debt.1 Under the baseline medium-term outlook, Uganda’s external and total debt sustainability positions show improvement, as measured by the ratios of the net present value (NPV) of external debt to exports and total debt to GDP, respectively. The NPV of external debt-to-exports ratio is projected to fall by an average of 5 percentage points a year through 2006/07 from its peak of 195 percent at end-2002/03 (July–June). At the same time, total debt, equal to the NPV of external debt plus the face value of domestic debt (primarily treasury bills), is projected to remain stable at about 34 percent of GDP. These results are driven by restraint on new borrowing arising from a gradual fiscal consolidation, a steady recovery of Uganda’s export receipts (by 12½ percent a year), and strong real GDP growth (6.4 percent a year) over the medium term. Nevertheless, the external debt-to-exports ratio would remain high throughout the medium term, compared with the 150 percent threshold established under the enhanced framework of the HIPC Initiative.

Two scenarios, simulating two-year shocks to the export sector and real GDP growth rate, representing a possible downturn in the global economy and instability in the macroeconomic environment, respectively, were considered. The simulations show that these shocks would set off debt dynamics in both scenarios, which persist over the medium term, so that by 2006/07 the NPV of debt-to-export ratios are 13 and 28 percentage points higher, respectively, than in the baseline scenario. A combination of the two shocks together, however, worsens this indicator by 42 percentage points in 2006/07.

The projected path of total government debt relative to GDP to is particularly sensitive to a large depreciation of the Uganda shilling. A permanent 30 percent depreciation occurring in 2003/04 was simulated, in addition to the real GDP and export shocks mentioned above. The depreciation would result in a stock of debt-to-GDP ratio 11 percentage points higher in 2006/07 than in the baseline. The impact in the other simulations of isolated shocks are modest by comparison, as the debt ratios increase by 2½–4 percentage points in 2006/07, relative to the baseline; however, once again the effect of the combined shock worsens the debt indicator (by 7 percentage points in 2006/07).

These sensitivity tests underscore that Uganda’s efforts at achieving debt sustainability over the medium term could be derailed by strong shocks to real GDP growth or export performance or by a severe depreciation. Given the risks to GDP and export growth inherent in an economy that relics heavily on primary agricultural products, it is imperative that the government implement measures that enhance competitiveness and diversify the export base. Sound macroeconomic policies also need to be sustained, particularly adherence to fiscal consolidation and prudent debt management.

Uganda: Key results of Debt Sustainability Analysis, 2003/04 to 2006/07

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Source: IMF staff projections.

Real GDP growth, interest rate on external debt, dollar deflator, noninterest current account, and nondebt inflows are at historical average

Real GDP growth is at historical average minus three standard deviations in 2003/04 and 2004/05, equivalent to 3.5 percent

1 The stress test is based on the analytical framework developed in a recent staff paper.

Foreign Direct Investment in Uganda

Uganda has attracted increasing amounts of foreign direct investment (FDI), as levels have risen from 2 percent of GDP in 1995/96 to about 4 percent of GDP in recent years. According to the 2002 World Investment Report,1 out of 140 countries surveyed, Uganda ranked 59th in 1998–2000, compared with 130th in 1988–90. Within the east African region, Uganda now ranks as the country with the highest potential to attract FDI, as well as the best performing economy in attracting FDI within the region.

The manufacturing sector has received the largest share of foreign investment (50 percent), with a substantial part of the investment concentrated in beverages/soft drinks and breweries for the local market. Other large recipients of FDI are the transport, communications, and storage sectors, receiving about 10 percent of total investment each, followed by mining and quarrying, real estate and tourism, each receiving 6 percent of total investment.

Several factors have contributed to larger FDI flows to Uganda. Initially, macroeconomic stability achieved in the early part of the 1990s, accompanied by improved security conditions, liberalization of the foreign exchange market and unification of the exchange rate, and the 1991 Investment Code, which established the rights for foreign investors and eliminated the biases in the incentive system toward domestic firms, contributed to the growth in FDI. The return of confiscated property to its former Asian owners further helped to restore and clarify property rights. The structural reforms that continued in the second half of 1990s, including a vigorous privatization program (under which 90 of the 107 public enterprises identified by the Public Enterprise Reform and Divestiture (PERD) Secretariat in 1995 have been divested so far), capital account liberalization in 1997, and improved efficiency and capacity of the utilities have facilitated rapid inflows of FDI.

Several factors continue to hinder FDI inflows. The Investor Survey,2 as well as a survey of foreign firms Operating in Uganda reported in Obwona,3 list the main constraints on foreign investors as the following: access to financing, corruption, irregularities in tax administration, high transportation costs on account of slow processing at the ports and poor infrastructure, a lack of incentives, and discriminatory government interventions. Respondents further list the small size of the domestic market and the conflict in northern Uganda as weaknesses.

The authorities’ structural program is largely aimed at addressing these constraints on investment. Measures include the new Leadership Code and Inspector General of Government Statue, approved by the parliament in 2002 to fight corruption, and the introduction of a commercial court to expedite the resolution of business conflicts. The anticorruption effort in the Uganda Revenue Authority and other measures aimed at improving tax administration are expected to reduce irregularities. To expand the financial resources available for investment, the minimum capital requirement for commercial banks was increased (effective January 2003), and initial steps have been taken to restructure the National Social Security Fund, the country’s main source of pension funds, and privatize the Uganda Development Bank. The Financial Institutions Bill, which was submitted to the parliament in June 2002, would establish prudential norms and supervision practices in line with international standards and is expected to lead to a further expansion in bank deposits. The privatization of the Uganda Railway Corporation and improved transportation networks in the context of the East African Community (EAC) regional integration are aimed at reducing the transportation-related constraints on investment. Also, in an effort to further enhance service delivery in the electricity sector, the authorities have initiated the privatization of the electricity generation and distribution companies.

1 UN Conference on Trade and Development, World Investment Report: Transnational Corporations and Export Competitiveness (New York: UN, 2002). 2 Uganda Investment Authority, Investor Survey (Kampala: Uganda Investment Authority, 2000). 3 Marios B. Obwona, “Determinants of FDI and Their Impact on Economic Growth in Uganda,” African Development Review, Vol. 13 (June 2001), pp. 46–81.

Uganda: Implementation Status of Actions to Strengthen Tracking of Poverty-Reducing Public Spending1

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The “Report on the Tracking of Poverty-Reducing Spending in Uganda” was completed in December 2001 (REF).

S=Short-term action; M=medium-term action.

FI=fuliy implemented, II=implementation initiated, NS=not started.

Comments may explain any changes in the nature of proposed actions or changes to the timing of their implementation.

APPENDIX I Uganda: Relations with the Fund

(As of December 31, 2002)

I. Membership Status: Joined 09/27/1963; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements:

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VI. Projected Obligations to Fund:

Under the Repurchase Expectations Assumptions

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VII. Implementation of HIPC Initiative:

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VIII. Safeguards Assessments

Under the Fund’s safeguards assessment policy, the Bank of Uganda (BOU) is subject to an assessment with respect to the arrangement, which was approved on September 13, 2002 and is scheduled to expire on September 12, 2005. The review of information, including an on-site visit, is currently under way. It is expected that the safeguards assessment of the BOU will be completed prior to the first program review of the PRGF arrangement.

IX. Exchange Rate Arrangement

On November 1, 1993, the BOU stopped the auction of foreign exchange and created an interbank market for foreign exchange, through which the official exchange rate is determined. As of December 29, 2002, the official exchange rate was U Sh 1,852.6 per U.S. dollar. The exchange system is free of restrictions on the making of payments and transfers for current international transactions.

X. Article IV Consultation

The Executive Board concluded the last Article IV consultation on March 26, 2001, concurrently with the completion of the last review under the third annual PRGF-supported program. The staff recommends that the next Article IV consultation with Uganda be held on the 24-month cycle, subject to the provisions of the decision on consultation cycles approved on July 15, 2002.

In November 1998, MAE held consultations in improving the security of the BOU’s automated book-entry system. As a result, a long-term expert has been assisting the authorities on banking supervision issues since July 2001. MAE provided further consultation on the implementation of monetary policy and the coordination of liquidity management and exchange rate intervention in July 2001. Follow-up missions to give operational advice and to address the authorities’ outstanding concerns on these issues took place in January and May 2002, respectively. In February and April 2001, joint World Bank/Fund missions visited Kampala as part of the Financial Sector Assessment Program (FSAP). A final report was provided to the authorities in November 2001, and an MAE mission discussed the report with the authorities during the Article IV consultation discussion in November 2002.

XI. Technical Assistance

Uganda has received extensive technical assistance from the Fund in recent years.19

An FAD mission visited Kampala in April 1998 to advise the authorities on public service pension reform issues, and another mission visited Kampala in September 1998 to assist the authorities in improving customs administration procedures. A resident advisor in the area of local government budgeting began a six-month assignment in August 1998, which was subsequently extended to October 1999. An FAD resident advisor on budgeting and commitment control commenced a six-month assignment in November 1998, which was extended until June 2002. In October 2000, an FAD mission visited Kampala to provide technical assistance in tax policy and administration. The mission’s main objective was to examine options for improving revenue performance.

An STA multisector statistics mission visited Kampala in December 1998 to conduct a comprehensive assessment of Uganda’s macroeconomic statistics, including data compilation and dissemination, and to provide recommendations for improvements. Follow-up STA missions in national accounts and money and banking statistics visited Kampala in March–April 2000 to examine the status of implementation of the previous recommendations. An STA mission on government financial statistics (GFS) visited Uganda in December 2001 to assist authorities in improving fiscal reporting by establishing regular reporting systems that are aligned with the GFS Manual 2001, as well as ensuring consistency within monetary sector data for the government. A mission visited Uganda during February–March 2002 to review balance of payment statistics and the progress in implementing the recommendations of the multisector mission of 1998 and of the national accounts mission of 2000 with respect to the measurement of goods imports.

XII. Future Technical Assistance Priorities

The priorities for Fund technical assistance in the next few years will be in the areas of tax administration, the preparation and monitoring of district budgets, the control and monitoring of central government expenditure commitments, monetary and exchange rate management, bank supervision, national accounts statistics, reporting standards for government finance statistics, and monetary and balance of payments statistical reporting.

XIII. Resident Representative

The Fund has maintained a resident representative in Uganda since July 1982.

APPENDIX II Uganda: Relations with the World Bank Group

(As of January 8, 2003)

I. Partnership in Uganda’s Development Strategy

1. The development strategy of the government of Uganda is based on the Poverty Eradication Action Plan (PEAP), a medium-term development framework that guides government policy and provides framework for detailed sector and district plans. Because the PEAP’s objectives are fully consistent with those of the poverty reduction strategy paper (PRSP) process, a summary of the revised PEAP was used as a basis for Uganda’s PRSP, which was presented to the Boards of the Bank and Fund in May 2000. Uganda’s PEAP/PRSP is based on four pillars: (i) creating an environment for economic growth and structural transformation; (ii) ensuring good governance and security; (iii) directly increasing the ability of the poor to raise incomes; and (iv) directly increasing the quality of life of the poor.

2. The Bank and Fund support the government’s efforts to implement the strategy in a complementary fashion. The Fund provides its support through a second three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), and continues concentrating on macroeconomic and financial sector issues, focusing specifically on short-and medium-term macroeconomic stability, which fall under the first PEAP/PRSP pillar (creating an environment for economic growth and structural transformation). The structural program of the Fund addresses the areas of tax administration, budget management, monitoring of local government finances, financial sector regulations and supervision, and improvement of the national accounts and statistics.

3. The Bank is supporting the implementation of PEAP/PRSP, specifically focusing on structural and sectoral reforms to alleviate poverty. The assistance is delivered in the form of budget and project support, with also a heavy focus on analytic work.

II. Bank Group Strategy

4. The World Bank Group’s current Country Assistance Strategy (CAS) for Uganda was approved by the Board on November 16, 2000.20 The objective of the CAS is to support Uganda’s economic transformation and poverty reduction strategy. The emphasis on maintaining macroeconomic stability continues, but the focus is increasingly shifting to sector-level and cross-cutting public sector management issues.

5. Consistent with this strategy, the Bank has been increasingly shifting to programmatic lending through a series of annual Poverty Reduction Support Credits (PRSC) that support the implementation of Uganda’s PEAP/PRSP. The first annual single-tranche PRSC (PRSC1) for Uganda was approved by the Board in May 2001. A subsequent arrangement, PRSC2, was approved in July 2002, and PRSC3 is being prepared and is scheduled to be presented to the Board in September 2003. PRSCs support a medium-term reform program, with each annual arrangement linked to specific reform actions. The reform program supported by PRSCs aims to improve public service delivery and agricultural production, since basic services critical to development are still inadequate in Uganda and about 70 percent of the population derives its livelihood from agriculture. Services provided, in particular by the public sector, are of poor quality due to various governance problems and capacity constraints. Also, the enabling environment for private sector and civil society involvement is weak, thus further constraining service delivery and growth.

6. The World Bank Group’s assistance program is fully consistent with and supports the four pillars of the PEAP/PRSP through a combination of lending and analytical activities as follows:

7. PEAP/PRSP Pillar 1—Creating an Environment for Economic Growth and Structural Transformation. To promote economic growth and development of the private sector, the Bank Group supports the development of Uganda’s infrastructure, specifically, roads, power, and reform of key utilities. Infrastructure, and in particular power availability, has been identified as one of the key constraints to private sector investments. Projects such as the Fourth Power and Bujagali Hydropower aim to increase Uganda’s capacity for power generation and support the reform of the power sector. The Bank also provides support to the government’s ten-year Road Development Program through a series of road sector projects. The Privatization and Utility Sector Reform Project, in turn, supports the reform of key utilities and divestiture of the remaining public enterprises. On a regional basis, the Bank continues to provide advisory support to the Nile Basin Initiative, in which nine riparian countries of the Nile basin are cooperating to utilize the resources of the river in environmentally sustainable ways.

8. Through the PRSCs, the Bank supports the government’s efforts to strengthen public expenditure and budgetary management, enhance the results orientation of sector expenditure programs, rationalize and strengthen monitoring and evaluation systems, and proceed with gradual fiscal decentralization by streamlining of intergovernmental fiscal transfer system. To strengthen financial sector performance in terms of soundness, efficiency, and access, PRSCs also support development of the legal and regulatory framework for microfinance, pension reform, and the strengthening of the insurance sector.

9. PEAP/PRSP Pillar 2—Ensuring Good Governance and Security. Good governance is essential for effective public service delivery. The Bank plays a key role in supporting the government’s efforts to improve governance, including in the areas of combating corruption and implementing broad-based public sector reform. The Bank supports through the PRSCs a variety of cross-cutting public sector management reforms to increase accountability and transparency, and reduce corruption. These include reforms in public procurement, financial management, public sector pay, payroll and personal management, and anticorruption legislation. Ongoing work on financial accountability through the Second Economic and Financial Management Project (EFMP II) and Local Government Development Project (LGDP) complement these efforts.

10. PEAP/PRSP Pillar 3—Directly Increasing the Ability of the Poor to Raise Their Incomes. Agriculture dominates Uganda’s economy and the majority of the poor live in rural areas. The Bank supports several activities that aim to enhance environmentally sustainable rural development and reduce regional disparities. Support is provided to agricultural extension through a demand-driven National Agricultural Services Project. The Second Agricultural Research and Training Project provides support for agricultural research. Further, the series of PRSCs provides support to the Government to identify ways to promote agricultural diversification and modernization, mainstreaming of environmental concerns in government programs, land tenure reforms, and expansion of nonfarm activities in rural areas. The Second Environmental Management and Capacity Building Project continues support for Government’s efforts to strengthen environmental management capacity at national and local levels, the Second Protected Areas Management and Sustainable Use Project supports long-term conservation of bio-diversity through, among other things, establishment of the Uganda Wildlife Authority, and the second phase of the regional Lake Victoria project is designed to sustain the effort to protect Lake Victoria’s ecosystem. To reduce regional disparities, the Second Northern Uganda Social Action Fund targets the relatively poor districts of northern and eastern Uganda, which have not benefited proportionately from economic reform and liberalization.

11. PEAP/PRSP Pillar 4—Directly Increasing the Quality of Life of the Poor. The delivery of primary education, health care, and potable water has a direct impact on the quality of life of the poor, and the delivery is at the core of the government’s poverty reduction strategy. The Bank supports the government’s efforts to improve access to, and quality of, education, health care, and water and sanitation services, primarily through the series of PRSCs. The HIV/AIDs Control Project supports Uganda’s effort to fight the HIV/AIDS epidemic by supporting local initiatives that are providing prevention, treatment, and care.

III. Bank Portfolio

12. The World Bank Group is Uganda’s largest creditor. As of November 30, 2002 a total of 99 credits and 9 loans, amounting to US$3.96 billion (including US$3.84 billion from IDA and US$43 million from IBRD), had been approved for Uganda, and total disbursements amounted to about USS2.96 billion (see table below).

IV. Uganda: Financial Relations with the World Bank Group

Statement of Loans and Credits As of November 30, 2002

(In millions of U.S. dollars)

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13. Six new projects were approved in FY 02 (Roads Development II, Power IV, Bujagali Hydropower, Decentralized Service Delivery, Environment Management Capacity II, and Rural Electrification), totaling about US$320 million. Three operations (PRSC2, Northern Uganda Social Action Fund, and a Protected Area Management & Sustainable Use Project), totaling US$277 million in terms of new commitments, and a US$4.5 million supplemental credit for the Lake Victoria Environment Management Project have been approved thus far in FY 03. Six projects in FY 01 and four projects in FY 02 were closed.

V. Bank-Fund Collaboration in Specific Areas

14. The IMF and World Bank staffs maintain a close collaborative relationship in supporting the government’s structural reforms. As part of its overall assistance, the Bank supports policy reforms in the following areas in collaboration with the Fund:

15. Poverty Reduction Strategy Paper. The Bank and Fund are assisting the government in the revision and implementation of its poverty reduction strategy. The staffs of the two institutions prepare joint assessments of the PRSP or PRSP progress report on an annual basis.

16. Debt Sustainability. The staffs of the Bank and Fund continue collaborating on HIPC-related issues, and prepared jointly an updated debt sustainability analysis for Uganda in calendar-year 2002.

17. Public Expenditure Management. Strengthening public expenditure management is the critical first step in improving the efficiency of public service delivery. The Bank, Fund and other donors are working closely to provide the government the support needed for institutional and policy reforms. The Fund is leading the dialogue on fiscal policy, while the Bank is focusing on strategic expenditure allocation and efficiency of public expenditures through the work on the public expenditure review and PRSC. The staffs of the two institutions prepare on an annual basis a report on HIPC tracking of poverty-reducing spending, analyzing the quality of public expenditure management in Uganda and identifying areas needing strengthening.

18. Financial Sector Reform. A joint Bank-Fund Financial Sector Assessment was conducted in 2001. The assessment indicates that performance of the financial sector has improved in the past few years, but access to financial services remains a problem, especially in rural areas, and the range of financial products is limited. The insurance sector has been liberalized, and new companies and brokers have entered the market, but supervision of the sector is still weak. The pension sector needs urgently to be reformed, as civil service pension obligations are taking an increasing portion of budget resources. Both the Bank and Fund are supporting the government’s efforts to reform the financial sector. The Bank supports through PRSC measures to strengthen the insurance sector, reform the pension system, and develop the legal and regulatory framework for microfinance. The work is closely coordinated with a program supported by the Fund’s PRGF, which addresses selected aspects of pension reform.

19. Trade Reforms. The Bank and Fund are working closely to assist Uganda in establishing a pro-growth trade framework. Both institutions are involved in the dialogue on trade reforms in the context of the East African Community at the regional level.

20. Questions may be referred to Satu Kahkonen, Country Economist for Uganda (Tel. 473-2170).

APPENDIX III Uganda: Statistical Issues

Real sector

The March–April 2000 STA mission concluded that Uganda’s national accounts were of poor quality, owing to shortages of experienced compilation staff and equipment and a lack of reliable source data for several key economic activities. Consequently, an STA-sponsored long-term national accounts statistics advisor was assigned to the Uganda Bureau of Statistics in April 2001 to assist in the improvement of the national accounts and in the rebasing of all economic statistics. By the conclusion of this assignment, in April 2002, balanced production and expenditure estimates had been prepared, including data from the most recent household survey, and the constant price estimates had been rebased from 1991 to 1997/98 (July–June). In addition, the national accounts and balance of payments estimates of imports and exports were reconciled, and the national accounts methodology improved. In December 2002, an Africa Regional Technical Assistance Center (AFRITAC) mission to assess the need for a long-term advisor to the Uganda Bureau of Statistics on national accounts statistics took place.

The consumer price index is of sound quality and is reported promptly for publication in International Financial Statistics (IFS). Neither producer nor wholesale price indices are produced. Reliable and consistent data are not available on employment, wages, or trade volumes.

Government finance

In 2001, Uganda resumed THE reporting of government finance statistics (GFS) for publication in the Government Finance Statistics Yearbook (GFSY) and in IFS in 2002. The STA mission (December 2001) discussed several data classification issues with the Ministry of Finance, and proposed a summary framework for the reporting of GFS according to the GFS Manual 2001 framework. Additional technical assistance will be needed to refine the classification of source data into the new GFS framework. From feedback provided by the government on progress with implementation of the December 2001 mission’s recommendations, STA is of the view that a follow-up GFS mission can take place during spring 2003.

In light of the ongoing decentralization process, the nonavailability of timely data on local government operations remains the most significant deficiency in Uganda’s GFS.

Monetary accounts

An STA multisector statistics mission to Uganda (December 2–15, 1998) determined that Uganda’s monetary statistics, which had been compiled from a bank reporting system, were broadly adequate for policy purposes. However, the quality of data is compromised by various methodological problems, such as an arbitrary application of the residency criterion, an inadequate disaggregation of the resident sector data, a large discrepancy in the reported interbank positions, and misclassifications of some accounting data related to monetary aggregates. To address these issues, the mission recommended that the Bank of Uganda instruct commercial banks to classify accounts according to their clients’ properly determined residency and use a more detailed scheme for disaggregating the resident sector data. The mission also recommended a symmetrical treatment of government lending in the central hank’s and commercial banks’ data in order to narrow discrepancies in the reported interbank positions. Reclassification of the accounting data was also recommended in order to facilitate proper measurement of key monetary aggregates, in particular domestic money supply, claims on central government, claims on the private sector, and foreign liabilities. The follow-up STA mission that visited Uganda during March 29–April 12, 2000 concluded that the Bank of Uganda had implemented most of these recommendations.

Balance of payments

The December 1998 mission recommended that preshipment inspection of imports be maintained, and that the automated system for customs data (ASYCUDA) be fully implemented at the customs posts, where it had been introduced, and extended to major crossings on the eastern border. When banks are more fully computerized and commercial bank personnel have been adequately trained in reporting, the monthly bank reporting form should be revised once more to fully conform to the Balance of Payments Manual (5th ed.). Surveys should be introduced to supplement customs- and bank-reported data and to derive more accurate estimates of services and financial transactions. The 2002 mission also noted that the bank reporting system was still seriously inadequate. Given that Uganda dropped controls on financial account transactions in 1997 (for current account transactions, in 1994), major improvements are necessary to deal with weaknesses in the system.

The data presently reported to the Fund for publication are annual and relatively timely. Data for 2001 were recently submitted and will be published in the February 2003 edition of the International Financial Statistics. Reliable balance of payments data should also be compiled and reported on a quarterly basis.

Uganda: Core Statistical Indicators

(As of January 15, 2003)

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Treasury bill rates.

Codes for frequency of data, frequency of reporting, and frequency of publication are the following: D=daily; W=weekly; M=monthly; Q=quarterly; A=annual; or O=other.

Codes for source of data are the following: A=direct reporting by central bank, Ministry of Finance, or other official agency.

Codes for mode of reporting are the following: C=for unrestricted use; and D=embargoed for a specified period and thereafter for unrestricted use.

APPENDIX IV Uganda: Social Output and Outcome Indicators, 2000-04

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Source: Uganda Poverty Reduction Strategy Paper—Progress Report 2002.

Textbooks are to be replaced during this period, so these ratios can be misleading. The current ratio is based on the stock of old textbooks at the schools, whereas the target set for the future concerns the stock of new textbooks in the schools.

Estimates of net enrollment rates will be provided following the results of the 2002 population census.

APPENDIX V Uganda: Tentative Work Program

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1

In 1997, the authorities launched the Poverty Eradication Action Plan (PEAP), which has since formed the basis of the government’s development policy. The summaries of the initial and the revised PEAP have served as the corresponding poverty reduction strategy paper (PRSP). The summaries of the annual Poverty Status Reports, which are produced during the years between PEAP revisions, have served as the interim PRSP progress reports.

2

See, “Uganda—Financial System Stability Assessment”.

3

The Strategic Exports Program (SEP) consists of (i) supply-side interventions (such as the distribution of seeds and plantlets, improvements to infrastructure, and other support services) to stimulate investment in areas in which Uganda has a demonstrated comparative advantage (primarily coffee, tea, fish, flowers, fruits and vegetables, cereal, and livestock and hides); and (ii) the removal of bottlenecks that impede investment, production, and trade (including by a variety of support activities, such as acceleration of skill development, export product handling, and strengthening of service delivery).

4

The Fund’s trade restrictiveness index rating of “2” indicates that Uganda maintains an “open” trade regime. However, some restrictions remain, notably a 10 percent excise tax applied only to imports of many consumer goods that are also produced domestically, and a 2 percent import commission.

5

Based on end-June 1999 exchange rates, interest rates, and stock of debt, and assuming the full delivery of HIPC Initiative assistance.

6

The NPV of debt-to-exports ratio is projected to rise to 195 percent in 2002/03 before gradually declining to 150 percent in 2012/13.

7

In June 2002, the stock of domestic arrears (not fully verified by the Auditor General) amounted to U Sh 180.6 billion (1.75 percent of GDP). This stock remains large mainly because of newly identified old arrears, essentially pensions, and to a minor extent, because of the accumulation of new arrears. In 2001/02, newly identified past pension obligations (for pension revalidation) amounted to U Sh 103 billion, and in 2002/03 newly identified past pension obligations (for soldiers and local government pensions) are expected to amount to U Sh 134 billion. Since the introduction of the CCS, however, the accumulation of new arrears has been declining; verified new arrears under the CCS (covering the nonwage recurrent budget) declined from U Sh 45 billion in 1999/2000 to U Sh 32 billion in 2000/01.

8

The BOU intends to open branches (cash centers) outside of Kampala, which would reduce the cost of obtaining fresh supplies of currency for banks and other financial institutions, allowing them to reduce their stocks of cash-n-vault.

9

Past measures taken under the MTCS included restructuring and privatization of utilities and establishing a commercial court. Much of the current structural agenda, such as strengthening and broadening the financial system and fighting corruption are also founded upon the MTCS.

10

For a recent exposition on this issue, see the Updated Debt Sustainability Analysis for Uganda.

11

Debt relief under the enhanced framework of the HIPC Initiative was based on end-June 1999 exchange rates, interest rates, and stock of debt.

12

Uganda has not been servicing certain of its external obligations pending agreement on the delivery of HIPC Initiative assistance.

13

The government has settled claims for US$10.5 million with one commercial creditor whose judgment has cleared the appeals process. Other judgments are still subject to appeal and have not been paid.

14

The scenario also assumes that the Bujagali hydroelectricity project is postponed indefinitely.

15

The elasticity of poverty with respect to per capita growth has been estimated to be about -1.26.

16

An Africa Regional Technical Assistance Center (AFRITAC) mission to assess the need for a long-term advisor to the Uganda Bureau of Statistics took place in December 2002.

17

Net present value (NPV) terms at the completion point under the original framework, and NPV terms at the decision point under the enhanced framework.

18

Under the enhanced HIPC Initiative, the nominal amount of assistance disbursed will include an additional amount corresponding to interest on amounts committed but not disbursed during the interim period, calculated using the average return (during the interim period) on the investment of resources held by, or for, the benefit of the PRGF-H1PC Trust.

19

For a description of technical assistance provided prior to 1998, see the staff report for Uganda’s request for a three-year arrangement under the PROF.

20

The next CAS is scheduled to be presented to the Board in fiscal-year (FY) 2003/04 (July–June).

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Cover IMF Staff Country Reports
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
Volume/Issue:
Volume 2003: Issue 083
Publisher:
International Monetary Fund
ISBN:
9781451838657
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9781451838657.002
  • Figure 1.
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    Figure 1.

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

    (Annual percentage changes)

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    Figure 2.

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

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

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    Figure 3.

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

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

  • Figure 4.
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    Figure 4.

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

  • Figure 5.
    View in gallery
    Figure 5.

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

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

  • Figure 6.
    View in gallery
    Figure 6.

    Uganda: interest Rates, December 1994–June 2002

    (In percent)

  • Figure 7.
    View in gallery
    Figure 7.

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

  • Figure 8:
    View in gallery
    Figure 8:

    Uganda: External Sector Indicators, 1990/91–2001/02 1/

    (Annual percentage changes, unless otherwise indicated)

Figure 1.

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

(Annual percentage changes)
Figure 2.

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

(As a share of GDP at market prices, in percent)
Figure 3.

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

(As a share of GDP at market prices, in percent)
Figure 4.

Uganda: Monetary Aggregates, 1990/91–2001/02 1/
Figure 5.

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

(January 1992=100; foreign currency per Uganda shilling)
Figure 6.

Uganda: interest Rates, December 1994–June 2002

(In percent)
Figure 7.

Uganda: Selected Financial Market Indicators, March 1999–June 2002
Figure 8:

Uganda: External Sector Indicators, 1990/91–2001/02 1/

(Annual percentage changes, unless otherwise indicated)