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© 2004 International Monetary Fund
September 2004
IMF Country Report No. 04/289
Uganda: Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria—Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uganda
In the context of the third review under the three-year arrangement under the Poverty Reduction and Growth Facility and request for waiver of performance criteria with Uganda, the following documents have been released and are included in this package:
the staff report for the third review under the three-year arrangement under the Poverty Reduction and Growth Facility and request for waiver of performance criteria, prepared by a staff team of the IMF, following discussions that ended on May 19, 2004, with the officials of Uganda on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 16, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a Press Release summarizing the views of the Executive Board as expressed during its July 30, 2004 discussion of the staff report that completed the request and review.
a statement by the Executive Director for Uganda.
The documents listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of Uganda*
Memorandum of Economic and Financial Policies by the authorities of Uganda*
Technical Memorandum of Understanding*
*May also be included in Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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International Monetary Fund
Washington, D.C.
Front Matter Page
INTERNATIONAL MONETARY FUND
UGANDA
Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria
Prepared by the African Department
(In collaboration with other departments)
Approved by Michael Nowak and Mark Plant
July 16, 2004
A three-year PRGF arrangement, in the amount of SDR 13.5 million (7.5 percent of quota), was approved by the Board on September 13, 2002. Discussions on the third review of the program were held in Kampala during March 10–23 and May 10–19, 2004. The letter from the Minister of Finance, Planning, and Economic Development (Appendix 1) and the attached memorandum of economic and financial policies review the performance under the PRGF arrangement and sets out the program for 2004/05 (July–June).
The mission met with the Minister of Finance, Planning, and Economic Development, Mr. Gerald Ssendaula; the Governor of the Bank of Uganda, Mr. Emmanuel Tumusiime-Mutebile; and other senior government officials. The staff team consisted of Mr. Caramazza (head), Mr. Dunn, Mr. Peiris (all AFR), Ms. Gonzalez (FAD), Mr. Mitchell (PDR), and Ms. Silman (Assistant, AFR). The team was assisted by Mr. Allum, the IMF’s Senior Resident Representative in Uganda. The staff also met with President Museveni, members of parliament, and representatives of the donor and business communities. An MFD technical assistance mission on monetary policy operations overlapped with the March mission.
Uganda is undergoing a transition to a multiparty political system in the run-up to the next presidential and parliamentary elections in 2006. An amendment to the constitution that would lift the two-term limit on the presidency is also being considered. This would allow President Museveni to stand for re-election. A national referendum on these constitutional amendments is expected to be held in early-2005.
The long-running insurgency by the Lord’s Resistance Army still threatens the security situation in northern Uganda. The number of internally displaced persons arising from this conflict stands at 1.6 million.
Contents
Executive Summary
I. Recent Economic Developments and Performance Under the Program
II. Policy Discussions
A. The Medium-Term Framework
B. Macroeconomic Outlook for 2004/05
C. Fiscal Policies
D. Monetary Program and Financial Sector Policies
E. External Sector Policies and Debt Sustainability
III. Privatization
IV. Governance
V. Program Monitoring
VI. Risks to the Program
VII. Staff Appraisal
Boxes
1. Structural Conditionality
2. Poverty Dynamics—Progress and Challenges
3. The East Africa Community (EAC) Customs Union
4. HIPC Tracking Assessment and Action Plan (AAP)
5. Uganda: Aid and Real Exchange Rate Dynamics
Figures
1. Real Sector Indicators
2. Fiscal Indicators
3. Monetary Aggregates and Interest Rates
4. Interbank Foreign Exchange Market Indicators, and Real and Nominal Effective Exchange Rates
5. External Sector Indicators
Tables
1. Selected Economic and Financial Indicators, 2001/02–2006/2007
2. Fiscal Operations of the Central Government, 2002/03–2006/07
3. Monetary Survey, 2002/03–2006/07
4. Selected Banking Sector Information, June 2001–March 2004
5. Status of Implementation of Existing Structural Performance Criteria and Benchmarks Under the Program for 2003/04
6. Balance of Payments, 2002/03–2006/07
7. Debt and Debt Service Indicators, 2000/01–2006/07
8. Status of HIPC Agreements by Creditor
9. Schedule of Disbursements Under the PRGF Arrangement
10. Millennium Development Goals
Appendices
I. Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies
Attachment II. Technical Memorandum of Understanding
II. Relations with the Fund
III. Relations with the World Bank Group
IV. Core Statistical Indicators
V. Social Output and Outcome Indicators, 2000–05
VI. Uganda’s Debt Sustainability
Executive Summary
Preliminary data indicate that the economy performed well in 2003/04 (July–June). Real GDP growth increased by one percentage point to 5¾ percent, and inflation declined to low single digits. Interest rates, which remained high during the first half of the year, have fallen sharply in recent months, owing in part to an easing of monetary policy. A strong expansion in noncoffee exports contributed to a decline in the external current account deficit, before grants, while donor assistance was stronger than expected and private capital inflows held steady. Official international reserves have grown to about 6½ months of imports and the Ugandan shilling has been broadly stable in real effective terms.
The fiscal program was broadly on track in 2003/04; however, the composition of government spending deviated somewhat from budget intentions, owing to supplementary expenditures in the second half of the year. While preliminary data indicate that the fiscal deficit excluding grants was little changed from the preceding year, a substantial reduction was achieved in the domestic budget deficit, reflecting the authorities’ commitment to curb liquidity injections stemming from fiscal policy.
Performance under the Poverty Reduction and Growth Facility (PRGF)-supported program was mixed. Despite some slippages, most quantitative performance criteria were observed for December 2003 and there has been progress in the implementation of structural measures. The authorities are requesting waivers for nonobservance of four performance criteria based on corrective actions taken.
The outlook for the economy in 2004/05 is favorable. Real GDP growth is projected to strengthen and inflation should remain subdued. In line with the nearly completed revision of the Poverty Eradication Action Plan (PEAP), the program for 2004/05 emphasizes progress toward fiscal consolidation and public debt sustainability, while maintaining social spending. Poverty Action Fund (PAF) expenditures will increase slightly as a share of the budget, notwithstanding increased spending on defense and public administration. Tax policy measures will be taken to partly offset the losses in tax revenue Uganda will experience with the advent of the East African Community Customs Union. The monetary program aims at maintaining inflation low. Steadier implementation of the monetary program, based on improved liquidity forecasting, should help to dampen volatility in interest rates. The proposed structural program focuses on tax administration, expenditure management, financial sector development, and debt management. Substantive progress is expected in 2004/05 in the areas of financial sector deepening, including pension reform, privatization, and regional integration.
The incidence of poverty increased to 38 percent of the population in 2002/03 from 34 percent in 1999/2000. Factors that contributed to this setback include the slowdown in real GDP growth in recent years, deterioration in the terms of trade, especially in agriculture, and high population growth. The policy framework outlined in the draft revised PEAP, and reflected in the 2004/05 budget, seeks to address these factors. In addition, some indicators on consumption and the delivery of public services, point to advances which have mitigated the welfare loss from the increase in poverty rates.
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Press Release No. 04/164
FOR IMMEDIATE RELEASE
July 30, 2004
International Monetary Fund
Washington, D.C. 20431 USA
Telephone 202-623-7100
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July 30, 2004
