Abstract
Uganda showed strong macroeconomic stability under the Poverty Reduction and Growth Facility (PRGF) Arrangement. Executive Directors welcomed this development as well as the fiscal adjustment. They stressed the need for strengthening their policies for boosting economic growth and reducing poverty in the context of the Poverty Eradication Action Plan. They emphasized the need to strengthen monetary, fiscal, and exchange rate policies, accelerate structural reforms, and restructure the Uganda Development Bank Limited. They agreed that Uganda has successfully completed the second review under the PRGF Arrangement, and approved waiver.
December 17, 2003
My Ugandan authorities would like to express their gratitude to the Fund management and staff for their continuous technical and financial assistance in their reform effort and they also appreciate the lasting support received from the international community. This support played a critical role in helping the authorities to crystallize the substantive progress made towards achieving macroeconomic stability, strengthening the institutional capacity and improving social indicators.
The significant improvement in economic performance, reflected in positive real GDP per capita growth since the early 1990s and low inflation was the result of the authorities’ strong resolve and consistency in the implementation of prudent policies under successive Fund-supported programs. Notwithstanding the remarkable progress that has also been made in reducing poverty levels from 56 percent in 1992 to 34 percent in late 1990s, much remains to be done to provide access to basic social services to a still large segment of the population and lifting the peoples living standards.
My Ugandan authorities are determined to remain steadfast in the path of reform by further strengthening their efforts, to achieve a stronger and sustainable growth that could positively impact on employment creation and further poverty reduction. To this effect, the policies outlined in the current PRGF arrangement are focused on preserving the stable macroeconomic environment and deepening structural reforms
Recent Economic Developments
The program for 2002/03 remained broadly on track. Economic growth at 5 percent, albeit slightly lower than projected given the adverse weather conditions, was broad-based. Consumer prices rose by 10.2 percent on account of a surge in food crop prices, the rise in fuel prices, as well as the depreciation of the Ugandan shilling. Underlying inflation, however, was contained at 5.5 percent, well below the program objective of 6.6 percent. The fiscal deficit, before grants, declined by 1.4 percentage points of GDP from previous year and the external current account position, excluding grants, strengthened more than expected. All but few performance criteria and structural benchmarks for end-June 2003 were met. My authorities are requesting waivers on the three missed performance criteria, based on the corrective actions taken meanwhile, and the completion of the second review under the PRGF arrangement.
Macroeconomic policy stance in 2003/04 and beyond
During 2003/04, real GDP is expected to grow by 6 percent, mainly due to the recovery in agricultural sector. Inflation is projected to decline substantially to about 3 percent as a result of subdued food crop prices and stricter monetary policy. Fiscal and external positions are envisaged to be further strengthened.
Fiscal Policy
Fiscal consolidation will remain the cornerstone of the program, where the objective is to reduce the fiscal deficit before grants, by an additional 0.8 percentage points of GDP. The authorities are aware of the need for further adjustments to improve the prospects of achieving fiscal sustainability over the medium-term. To support this effort, revenue is estimated to increase to 12.9 percent of GDP in 2003/04 as a result of additional tax measures announced in mid-2003 and additional improvements in the efficiency and effectiveness of tax administration.
Regarding expenditure, the authorities are committed to curb non-wage recurrent outlays in non-priority areas by 0.2 percentage points of GDP, while ensuring a better allocation of resources particularly towards poverty reduction -related programs, which will continue to be protected. To this end, the authorities have been redoubling their efforts to continue enhancing public expenditure management to ensure that budget outcomes reflect budget intentions. In this connection, an important step has been taken with the approval, last April, of the Public Finance and Accountability Act (PFAA), thus providing the authorities with an important instrument to restrain supplementary expenditures and strengthen enforcement of the commitment control system (CCS). This will greatly assist in preventing new arrears from emerging. In the meantime the authorities are in the process of verifying all accumulated domestic arrears, with a view to eliminating them in the medium-term. To help contain public administration expenditures, several cost saving measures have already been put in place, including the rationalization of certain government positions and elimination of others. In the context of the fiscal decentralization strategy, the authorities are also giving priority to strengthening the capacity of local governments, which are responsible for the execution of 33 percent of the PAF spending, to ensure better reporting and greater accountability of their activities.
Monetary Policy
The authorities will continue to pursue a restrictive monetary policy geared towards ensuring reduction in inflation and maintaining a stable environment supportive of financial intermediation and foreign exchange market. In this context, broad money growth will be limited to 12.5 percent while allowing an expansion of credit to the private sector. The authorities will continue to target liquidity management to ensure that growth in monetary aggregates is contained within the limits set under the program. Also in order to ease the upward pressure on domestic interest rates the sterilization operations are being conducted with greater recourse to foreign exchange sales.
A number of measures are being envisaged to help mobilize domestic financial resources for investments, including the introduction of a multiyear treasury bond starting in 2003/04, the restructuring of the National Social Security Fund (NSSF), which could be an important source of long-term savings. In light of the strong political opposition to the full privatization of the Uganda Development Bank Limited (UDBL), the authorities intend to take a final decision in the first quarter of 2004, regarding the best divestiture option with a view to ensuring that it becomes a financially viable institution for term lending on strictly commercial basis.
External Sector
Regarding the external sector, the authorities have in the past, set up various programs (MTCS, PMA, and SEP) to enhance the country’s international competitiveness, diversify its productive and export bases, and increase productivity, particularly in the agriculture sector, which they view as critical to help build up a stronger external position that would be less vulnerable to exogenous shocks. However, given the limitation of resources, the implementation of these programs has been slow. Although still very modest, some progress has been made to gain access to new markets for Ugandan products. In the context of regional integration, the authorities also look forward to a more harmonized system of incentives within the East African Community. They are appreciative of the technical assistance being provided by the Fund and the World Bank to this effect.
Despite having benefited from the generous debt relief provided under the HIPC Initiative, Uganda’s external debt remains unsustainable. In light of this situation, the authorities are paying close attention to debt management and adhering to their strategy of borrowing only on highly concessional terms. Some progress has been made in obtaining debt relief in terms comparable to those under the HIPC Initiative from a few non-Paris Club members. The authorities are strongly committed to continue to seek the engagement of the remaining creditors.
Beyond 2003/04
My Ugandan authorities are fully aware that the achievement of the medium-term objectives of sustained economic growth and financial viability requires continued implementation of prudent macroeconomic policies and reforms. The economic strategy, which aims to further promote the economic and social development of the country and strengthen investors’ confidence, will continue to focus on additional fiscal consolidation effort, further liberalizing the economy, and promoting the private sector development. The authorities remain fully committed to this strategy as they viewed it as fundamental to crystallize the objectives of the PEAP and place the Millennium Development Goals within reach.