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

This paper assesses Uganda’s Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and Request for Waiver of Performance Criteria. The fiscal program was broadly on track in 2003/04. Performance under the 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.

Abstract

This paper assesses Uganda’s Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) and Request for Waiver of Performance Criteria. The fiscal program was broadly on track in 2003/04. Performance under the 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.

I. Recent Economic Developments and Performance Under the Program

1. Preliminary data indicate that the economy performed well in fiscal-year 2003/04 (July–June). Real GDP growth is projected to have increased by one percentage point to 5.7 percent, inflation fell, and the external position generally improved (Table 1 and Figure 1). The construction and communications sectors led a broad economic expansion, while improved weather conditions contributed to a rebound in agriculture. Annual headline inflation declined from 10.2 percent in June 2003 to 1.4 percent in May 2004, as food crop prices fell sharply.1 Strong growth in noncoffee export volumes and improved terms of trade, helped to narrow the current account deficit, excluding grants, to 11.5 percent of GDP. Greater-than-anticipated donor support and private capital inflows more than covered this deficit, allowing international reserves to build up to about 6½ months of imports. The Ugandan shilling has been generally stable in real effective terms, despite a brief period of volatility in February 2004.

Table 1.

Uganda: Selected Economic and Financial Indicators, 2001/02–2006/2007 1/

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

Fiscal year begins in July.

The 2002/03 figure is provisional.

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 revenue projections are based on a revenue target as a share of GDP, and accordingly include unidentified revenue measures.

Ratio of three-year average of exports and based on CIRRs at June 2003.

The debt-service ratios reflects actual debt service paid, that is, after debt relief including that attributable to the HIPC Initiative, deferment of payments to non-Paris Club creditors with whom bilateral agreements have not yet been reached, and the settlement of arrears.

Figure 1.
Figure 1.

Uganda: Real Sector Indicators 1/

(Annual percentage changes)

Citation: IMF Staff Country Reports 2004, 289; 10.5089/9781451838688.002.A001

Sources: Ugandan authorities; and IMF Staff estimates.1/ Fiscal year begins on July 1.
uA01fig01

Uganda: Inflation Rates, July 2001-May 2004

(12-month percentage change)

Citation: IMF Staff Country Reports 2004, 289; 10.5089/9781451838688.002.A001

Source: Ugandan authorities.

2. The fiscal deficit was broadly consistent with the program in 2003/04, but the composition of expenditure deviated somewhat from budget intentions. The fiscal deficit, excluding grants, narrowed marginally to an estimated 11.2 percent of GDP in 2003/04, while the domestic budget deficit, which excludes grants and externally financed expenditures, declined by an estimated 0.9 percentage points to 4.3 percent of GDP (Table 2 and Figure 2).2 However, supplementary spending of about 0.9 percent of GDP in the final quarter of the year—mainly to meet security needs, cover shortfalls in salaries, and support State House—resulted in reallocations from the original budget appropriations in nonstatutory spending outside of the Poverty Action Fund (PAF), and contributed to the generation of new domestic arrears. The outturn for revenues fell a little short of the program target, owing mainly to weak value-added tax (VAT) compliance.

Table 2.

Uganda: Fiscal Operations of the Central Government, 2002/03–2006/07 1/

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

Fiscal year begins in July.

The revenue projections are based on a revenue target as a share of GDP, and accordingly include unidentified revenue measures.

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

Additional expenditures refer to the expected yield of new tax policy measures.

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

Includes cost from EAC accession.

Includes arrears on pensions, wages, court awards, utilities, non-wage recurrent expenditure, and development expenditure outlays.

Projections reflect the schedule included in the plan to clear arrears submitted by the authorities on June 30, 2004.

Figure 2.
Figure 2.

Uganda: Fiscal Indicators 1/

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

Citation: IMF Staff Country Reports 2004, 289; 10.5089/9781451838688.002.A001

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

3. Large variations during the course of the year in government liquidity injections and a shifting emphasis by the Bank of Uganda (BOU) on treasury bill sales to sterilize that liquidity contributed to substantial volatility in interest rates (Table 3 and Figure 3). In December 2003, the yield on 91-day treasury bills rose to over 20 percent, as stronger-than-projected currency demand exacerbated pressure on interest rates from a tightening in the reserve position of commercial banks. BOU subsequently loosened its monetary stance and shifted its sterilization operations toward increased sales of foreign exchange; this, together with the introduction of long-term government bonds, resulted in a sharp decrease in treasury bill yields. Base money expanded more rapidly than programmed, particularly in the first three quarters of 2003/04, but the rate of expansion has moderated significantly in recent months.3 In view of the strong demand for currency and the trend decline in the broad monetary aggregates during the past 18 months, inflation is expected to remain subdued.

Table 3.

Uganda: Monetary Survey, 2002/03–2006/07 1/

(In billions of Uganda shillings; end of period, unless otherwise indicated)

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

Fiscal year begins in July.

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

The daily average of June of each financial year is used to calculate the annual percentage change from 2003/04 onward.

Figure 3.
Figure 3.

Uganda: Monetary Aggregates and Interest Rates

(In percent, end-period)

Citation: IMF Staff Country Reports 2004, 289; 10.5089/9781451838688.002.A001

Source: Uganda authorities; and IMF staff estimates1/ Fiscal year begins on July 1.2/ Weighted averages for Uganda shilling denominated assets and liabilities.
uA01fig02

Uganda: Monetary Base, Excess Reserves to Required Reserves, and Interest Rates, June 2002-June 2004

Citation: IMF Staff Country Reports 2004, 289; 10.5089/9781451838688.002.A001

Source: Bank of Uganda.1/ Annual percent change.2/ In percent

4. The financial sector remains robust. Indicators of banks’ performance and vulnerability point to a sound expansion in balance sheets (Table 4). Supervision by the BOU has been vigilant and, under the Financial Institutions Act 2004, the regulatory framework is undergoing a substantial strengthening, for example, by reducing banks’ allowable credit concentrations. In recent months, several micro-finance institutions have applied to the BOU for licenses under the new Micro-Finance Deposit-Taking Institutions Act, an important step for extending financial services to rural areas. The insurance sector has also experienced healthy growth, facilitated by an increase in capital requirements and enhanced supervision through on-site inspections by the Uganda Insurance Commission.

Table 4.

Uganda: Selected Banking Sector Information, June 2001-March 2004

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Source: Ugandan authorities.

Starting in November 2002, the foreign exchange exposure is calculated using the short-hand method.

5. Performance under the Poverty Reduction and Growth Facility (PRGF)supported program was mixed in 2003/04. Most quantitative performance criteria for December 2003 were observed, including the ceiling on banking system credit to the public sector and the floor for the net increase in international reserves. But the performance criteria on the increase in base money, on the accumulation of domestic arrears under the Commitment Control System (CCS), and on no new lending by the Uganda Development Bank Limited (UDBL) were not observed. The deviations from the program were minor, however. Base money exceeded the program ceiling by a small margin (i.e., less than one-half of one percent of base money at the beginning of the year); the domestic arrears accumulated are a small fraction of total spending under the CCS; and the UDBL extended one small new loan to a viable commercial client, in the amount of U Sh 91 million (about US$50,000). In addition, the indicative ceiling on public administration expenditures was breached, while spending protected under the PAF fell short of its indicative floor, both by relatively small amounts.4 Preliminary indications are that much of the shortfall in PAF expenditures in the first three quarters of 2003/04 was made up in the fourth quarter.

6. Progress has been made in the implementation of the program’s structural measures; albeit with some delays (Box 1, Table 5). In particular, the benchmarks on the introduction of long-term government bonds and on verifying and reporting the stock of domestic arrears were observed. However, although most of the arrears accumulated in 2002/03 on spending covered by the CCS have been paid, they will not be fully cleared until September 2004. And the end-March 2004, structural performance criterion on the divestiture option to follow for the UDBL was not observed. As discussed below, the authorities have since decided on a divestiture option and the restructuring of the UDBL that should ensure its sustainability through sound financial management. Based on this decision and the minor nature of the slippages from the program, the Ugandan authorities are requesting waivers for the nonobservance of four performance criteria.

Structural Conditionality

Coverage of structural conditionality in the current program

The structural program proposed for the period through end-December 2004 consists of three performance criteria (PC) and eleven benchmarks (see Table 2 of the MEFP). The areas covered by this program can be categorized as (i) measures to achieve a more sustainable fiscal and external position, which include strengthening tax administration, curbing public administration expenditures; and improving external debt management; and (ii) measures in the IMF’s domain that will improve medium-term growth prospects, which include improving the effectiveness of government spending through the elimination of domestic arrears and reform of the budget process to encompass donor-supported projects in the medium-term expenditure framework, strengthening and deepening the financial sector, and enhancing transparency and governance.

Status of structural conditionality from earlier programs

The implementation of the structural conditions for the remainder of the 2003/04 program, set at the completion of the second review under the PRGF arrangement on December 17, 2003, was mixed (see Table 5). One of the two PC was observed and three out of six benchmarks were observed. The PC that was not observed, regarding the divestiture of the Uganda Development Bank Limited, however, was implemented late, while substantial progress was made on the remaining unobserved measures, which have been incorporated in the program for 2004/05.

Structural measures covered by World Bank lending and conditionality

World Bank program lending in 2004/05 is expected to be delivered under the fourth annual Poverty Reduction Support Credit (PRSC). Conditional prior actions include satisfactory execution of the budget, particularly on items protected under the Poverty Action Fund, implementation of the Leadership Code, and reform of local government procurement.

Table 5.

Uganda: Status of Implementation of Existing Structural Performance Criteria and Benchmarks Under the Program for 2003/04

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II. Policy Discussions

7. Policy discussions focused on the annual program for 2004/05 and revisions to the medium-term policy and economic outlook, taking into account the emerging recommendations of the revised Poverty Eradication Action Plan (PEAP). The authorities agreed that, in light of the recent setback to Uganda’s efforts to reduce poverty (Box 2), it was important to make some headway in the coming year on the policy agenda to be set out in the revised PEAP.

A. The Medium-Term Framework

8. The revised PEAP is expected to set out an agenda for raising economic growth rates through increased private investment, the modernization/commercialization of agriculture, and an expansion and diversification of exports. It will also call for substantial improvements in the effectiveness of government spending over a sustained period, particularly in the delivery of health and education services to the poor and infrastructure investment and maintenance. Over the medium term, real GDP is projected to grow by about 6 percent a year, while inflation would be kept below 5 percent. The strategy hinges on a gradual reduction of the fiscal deficit, excluding grants, to ease crowding out pressures on private investment and exports. The deficit reduction would be achieved by strengthening revenue mobilization in the face of losses from the East Africa Community (EAC) customs union, mainly through improved tax administration, while reducing the growth in total government expenditure, by phasing out project expenditure that is not well aligned with the PEAP priorities and increasing the overall efficiency of public spending. Commitments of donor support, excluding HIPC assistance, are projected to remain steady in U.S. dollars, but would decline relative to GDP. As a result, upward pressures on interest rates and the real value of the Uganda shilling would be expected to ease. The external current account deficit, before grants, would narrow gradually over time, financed by donor support and growing private capital inflows. The authorities would maintain a flexible exchange rate policy, selling regular daily amounts of foreign exchange (from donor inflows) for the purpose of mopping up liquidity and otherwise intervening only if necessary to maintain orderly market conditions. Official international reserves would be maintained at, or above, five months of imports of goods and services (Table 6).5

Table 6.

Uganda: Balance of Payments, 2002/03–2006/07 1/

(In millions of U.S. dollars)

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

Fiscal year begins on July 1.

Except for 2002/03 program figures, where debt relief including full HIPC assistance is included in exceptional financing, the components of debt relief are treated as separate items. HIPC grants are included in import support transfers, debt rescheduling is included in exceptional financing, and debt cancellation is included in amortization.

In months of imports of goods and services of the following year.