Uganda
Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver of Performance Criteria, and Request for a Policy Support Instrument: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uganda
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Publication Date:
07 Feb 2006
eISBN:
9781451838800
Language:
English
Keywords:
ISCR; CR; government; core poverty reduction spending; monetary policy; Medium-term Competitiveness Strategy; PRGF arrangement; debt relief; fiscal year; exchange rate; private sector; Ugandan authorities
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This paper discusses Uganda’s Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), Request for Waiver of Performance Criteria, and Request for a Policy Support Instrument (PSI). Performance relative to the sixth and final PRGF review was satisfactory. The authorities request waivers for two performance criteria that were not observed by small margins. Corrective measures will be undertaken during 2006. The authorities have also requested a PSI to begin immediately after the current PRGF arrangement expires.

Abstract

This paper discusses Uganda’s Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF), Request for Waiver of Performance Criteria, and Request for a Policy Support Instrument (PSI). Performance relative to the sixth and final PRGF review was satisfactory. The authorities request waivers for two performance criteria that were not observed by small margins. Corrective measures will be undertaken during 2006. The authorities have also requested a PSI to begin immediately after the current PRGF arrangement expires.

I. A Policy Support Instrument (PSI)—The Logical Next Step after Successful Conclusion of the PRGF Program

1. Macroeconomic stability remains a cornerstone of Uganda’s reform effort. Fiscal restraint, coupled with prudent monetary management, supported Uganda’s robust growth and helped contain inflation to single digit levels over most of the past decade. In recent years, these policies contributed to a very comfortable level of international reserves. Implementation of Uganda’s Poverty Eradication Action Plan (PEAP) has improved living conditions, although per capita income gains have been modest because of Uganda’s high population growth rate.

2. As a “mature stabilizer,” Uganda is ready to move to a PSI program. In addition to its record of sustained macroeconomic stability, Uganda has completed most first-generation structural reforms and has begun to tackle the next layer of reforms, which addresses the business environment. The Ex Post Assessment of Uganda’s long-term engagement (IMF Country Report No. 06/24) concluded that the country has no prolonged need for Fund financing, but would benefit from a continued policy dialog with the Fund that goes beyond a regular surveillance relationship. A PSI would serve this purpose and also provide key donors with regular assessments of macroeconomic performance.

3. Longstanding support for prudent macro policies and the role of the private sector has been expressed at the highest political levels. President Museveni has signaled his interest in second-generation reforms aimed at establishing a more competitive business climate and has welcomed the PSI initiative as a means of maintaining a policy dialog with the Fund.

uA01fig01

Uganda Has Maintained Macroeconomic Stability

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001

4. The authorities have requested a PSI to begin immediately after the current PRGF arrangement expires. The key objective of the program—as outlined in the attached Letter of Intent and Memorandum of Economic and Financial Policies—is to continue with the implementation of policies to achieve further improvements in economic growth and poverty reduction.

5. The authorities intend to request a multi-year PSI following the presidential and parliamentary elections in February 2006. This two-step approach (i) promotes ownership by delaying discussions on substantive medium-term policies until after the elections; (ii) provides time for policy makers to assess options in light of the impact of the Multilateral Debt Relief Initiative (MDRI); and (iii) could allow the economic program period to be realigned with the budget cycle (July–June), assuming the multi-year PSI could be put in place in mid-2006.

II. The Sixth Review—Many Accomplishments, But Still More To Do

6. Performance under the PRGF program has been good. Macroeconomic developments in 2004/05 were in line with program assumptions and confirm Uganda’s stable macroeconomic situation. Economic growth remained strong and inflation in check, despite drought conditions and crop diseases. Falling interest rates, a relatively stable currency, and comfortable reserve levels supported these favorable developments (Table 1 and Figures 1-5).

Table 1.

Uganda: Selected Economic and Financial Indicators, 2003/04–2007/08 1/

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

Fiscal year begins in July.

Average exchange rate was USh 1,857 per U.S. dollar at end-October 2005; average real effective exchange rate has appreciated 8.8 percent to end-August 2005; annual average interest rate was 8.7 percent at end-October.

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 in 2006/07 and 2007/08.

In relation to the current year of exports of goods and services.

The debt-service ratios reflect 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 2006, 043; 10.5089/9781451838800.002.A001

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

Uganda: Fiscal Indicators 1/

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

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001

Sources: Ugandan authorities; and IMF staff estimates.1/ Fiscal year begins in July.
Figure 3.
Figure 3.

Uganda: Monetary Aggregates and Interest Rates

(In percent, end-period)

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001

Source: Uganda authorities; and IMF staff estimates.1/ Fiscal year begins in July.2/ Weighted averages of assets and liabilities denominated in Uganda shillings.
Figure 4.
Figure 4.

Uganda: Interbank Foreign Exchange Market Indicators, Real and Nominal Effective Exchange Rate

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001

Sources: Ugandan authorities; IMF, Information Notice System and staff estimates.
Figure 5.
Figure 5.

Uganda: External Sector Indicators, 1997/98–2004/05 1/

(Annual growth rates in percent, unless otherwise indicated)

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001

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

7. Most of the quantitative performance criteria and objectives for the sixth review have been observed:

  • Fiscal consolidation through end-June 2005 was greater than programmed, mainly because the pace of foreign-financed development spending was slower than envisaged (Table 2). Domestic financing was well below the program ceiling.

  • Core poverty alleviation spending was broadly on track, although the corresponding indicative target was missed by a small margin; the ceiling on public administration expenditures was exceeded by a small amount because of expenditure overruns (less than 0.1 percent of GDP).

  • Tax collections were in line with expectations and commitments to raise domestic revenue.

  • Base money and net international reserves (NIR) of the Bank of Uganda (BOU) were within the program limits (Table 7).

Table 2a.

Uganda: Fiscal Operations of the Central Government, 2003/04–2007/08 1/

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Sources and footnotes: See Table 2b.
Table 2b.

Uganda: Fiscal Operations of the Central Government, 2002/03–2007/08 1/

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Sources: Ugandan authorities; and Fund 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 effort.

Revenue projections for 2004/05 onwards include collections costs due to the East African Community.

Not including the Bujagali project, since its financing has not been determined yet.

These additional expenditures refer to revenue from new and yet to be identified tax policy measures relative to the authorities’ framework.

Arrears payments and contingency.

Table 3.

Uganda: Monetary Survey, 2003/04–2007/08 1/

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

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

Fiscal year begins in July.

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

The daily average of June of each financial year is used to calculate the annual percentage change.

Table 4.

Uganda: Selected Banking Sector Information, March 2003-June 2005

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Source: Ugandan authorities.

Starting in November 2002, the foreign exchange exposure is calculated using the shorthand method.

Table 5.

Uganda: Balance of Payments, 2003/04–2007/08 1/

(In millions of U.S. dollars)

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Sources: Bank of Uganda and Ministry of Finance, Planning and Development; and IMF staff estimates and projections.

Fiscal year begins on July 1.

Components of debt relief are treated as separate items. HIPC grants are included in official transfers, and debt rescheduling is included in exceptional financing.

Excluding the Bujagali project, which is incorporated as an alternative scenario in the Joint Debt Sustainability Analysis.

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

Debt cancellation is shown for fiscal purposes as a flow of debt service.

Table 6.

Uganda: External Debt and Debt Service Indicators, 2003/04–2007/08 1/

(In millions of U.S. dollars)

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Sources: Bank of Uganda and Ministry of Fnance, Planning and Development; and World Bank/Fund staff estmates and projections.

Assumes full delivery of HIPC and MDRI debt relief. The Fund and the AfDF will deliver on January 1, 2006 and IDA on July 1, 2006.

In relation to the current year of exports of goods and services.

Table 7.

Uganda: Quantitative Performance Criteria and Benchmarks for end-March and end-June 2005 1/ 2/

(Cumulative change from end-June 2004, unless otherwise stated)

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Fiscal year begins on July 1.

The performance criteria and benchmark targets under the program, and their adjusters, are defined in the technical memorandum of understanding (TMU), IMF Country Report 05/306.

Benchmarks, unless measure is a continuous performance criterion.

Performance criteria.

Cumulative changes from the average of June 2004 and June 2005 for the 2004/05 and 2005/06 program respectively, as defined in the TMU, IMF Country Report 05/306.

Continuous performance criterion.

This item is an indicative target to September 2004 and March 2005, and a performance criteria to December 2004 and June 2005, as defined in the TMU.

This continuous performance criteria was breached in August and September 2005 when the UDB made new commitments to existing clients in the amount of U Sh 1.2 billion.

8. Structural reforms are advancing. To strengthen the Uganda Revenue Authority (URA), an amendment was submitted to the URA Act (performance criterion). This and administrative improvements at the URA have contributed to improved revenue performance and rising public confidence in the revenue authority. Management concession agreements for the Uganda Railway Corporation and Kenya Railway Corporation have been signed which should accelerate the rehabilitation of Uganda’s rail link to the ocean.

9. Two performance criteria were not observed, but these slippages did not compromise the integrity of the program. Arrears under the commitment control system (CCS), equivalent to less than 0.2 percent of GDP, were accumulated in 2004/05. Part of these new arrears reflects unavoidable payment delays, such as disputed bills, and part reflects inadequate budget provisions. The amount of new arrears is modest relative to total spending and the ceiling on domestic financing of the government would still have been observed had these arrears been cleared during the financial year (Box 1). The Uganda Development Bank (UDB) made new loans of about U Sh 1.2 billion in August–September 2005, but these went to existing clients who had repaid existing loans and did not expand the bank’s loan book on a net basis. The authorities requested waivers for these missed objectives because the amounts involved did not undermine the integrity of the economic program and because corrective actions will be taken in the context of the new PSI.

Sources of Domestic Arrears and Corrective Actions

As of end-June 2005, the total stock of verified domestic arrears stood at U Sh 573 billion (3.9 percent of GDP). This represents an increase of U Sh 260 billion from end-June 2004. Most of this increase reflects newly verified arrears that were incurred in previous fiscal years, and, therefore, does not represent a deterioration in public expenditure management.

Composition. Pension arrears, most of which date to the early 1990s, are the largest component of the verified stock of arrears. Membership fees for international organizations and court awards are the next largest components and represent most of the increase in verified arrears during 2004/05.

Verified Domestic Arrears, end-June 2005

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Source: Ministry of Finance, Planning and Economic Management.

Includes arrears on payments for utilities, rents, membership fees to international organizations, and other mainly nonstatutory payments.

The CCS system. The Commitment Control System (CCS) was adopted in the late-1990s to limit spending commitments at the ministry level to within their cash allocations. However, arrears continue to accumulate under the CCS. In 2004/05, an estimated U Sh 32 billion of new CCS arrears were accumulated. The government is currently rolling out an Integrated Financial Management System (IMFS) that should allow for better tracking and control of arrears. The new system appears to be effective in pilot ministries.

Sources of CCS arrears. Arrears reflect a combination of (i) expenditure pressures outside government control (e.g., court awards); (ii) unrealistic budgeting; and (iii) inadequate budgetary discipline. CCS arrears can also occur if a bill is in dispute or if an emergency expenditure is needed at the end of the financial year. These are expected to be paid in the next budget year on a priority basis.

Measures. The following measures are in place or under consideration for the 2006/07 budget: (i) more realistic budgeting including provisions for known obligations; (ii) a more flexible contingency reserve; (iii) stronger enforcement of existing rules, for example holding accounting officers responsible for over commitments (in place); (iv) higher budgetary allocations to pay down old arrears (in place); (v) strengthening of the strategy to pay off any arrears in the following financial year out of ministry budget allocations (ongoing); and (vi) the progressive roll out of the Integrated Financial Management System (IFMS).

III. The Medium-Term Challenge—Setting The Stage For Private Sector-Led Growth

10. Uganda faces a number of medium-term challenges. Economic growth needs to increase to at least 7 percent to provide for a substantial reduction in poverty and to achieve the related MDGs. This will require continued policies aimed at macroeconomic and debt sustainability, new electric power generation capacity, and second-generation reforms to promote private sector activity. In view of Uganda’s resources, growth is likely to originate in agriculture, both production and processing.

11. Continued gradual fiscal consolidation lies at the heart of Uganda’s macroeconomic strategy over the medium term. Fiscal consolidation will help promote macroeconomic stability and sustainable private sector-led growth, and reduce donor dependency. The pace of fiscal consolidation would carefully balance these objectives with the need to channel resources to PEAP objectives and Millennium Development Goals (MDGs). The medium-term outlook, therefore, envisages continued expenditure restraint and an increase in domestic revenue by about 0.5 percent of GDP a year through either tax measures or increases in collection efficiency. Given current assumptions for donor-financed development expenditures, this revenue effort is projected to reduce the overall deficit, excluding grants, to 6.6 percent of GDP by 2007/08, from 8.8 percent in 2005/06.

12. The efficient use of international aid flows will remain high on the policy agenda. The government is bolstering budget and expenditure management procedures to ensure that resources are used as intended. The authorities are also reviewing their sterilization strategy.

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Most Medium-Term Objectives Could be Met…

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001

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… But Projected Growth is Still Too Low to Meet the MDGs

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001

13. Uganda’s medium-term structural agenda aims at fostering private sector growth and will include anti-corruption policies, infrastructure development, and trade enhancement. Second-generation reforms will include (i) increasing power generation to address a shortfall of about 30 percent of current demand; (ii) removing regional transport and trading obstacles, for example, by enhancing rail and road links to seaports; (iii) deepening financial sector services; and (iv) improving government services to businesses. Specific policies in these areas will be set out in the multi-year PSI. In the interim, the authorities will continue with existing projects.

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Uganda: Still Room for Improving “Growth Competiveness”

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001

Source: Growth Competitiveness Index Rankings (2005), World Economic Forum

IV. The PSI—Focus on Macro Stability

14. The PSI will focus on sustaining macroeconomic stability and structural reforms already under way. Fiscal policies are based on the approved 2005/06 budget and the Medium-Term Economic Framework (MTEF). Budget management will focus on addressing domestic arrears and ensuring adequate fiscal space for critical infrastructure spending, notably the Bujagali hydroelectric project, which will benefit from guarantees for commercial financing. Monetary policies will target nonfood inflation of 5 percent or less and maintain ample international reserves in the context of a flexible exchange rate regime. Further development of Uganda’s financial sector is also a priority, and this will include establishing sound management and supervision of the Uganda Development Bank. Poverty reduction policies under the proposed PSI are based on the PEAP approved in May 2005.

Macroeconomic policies

15. The macroeconomic outlook for the remainder of 2005/06 is positive. Real GDP growth is expected to reach 6 percent, led by a rebound in agriculture output and an expansion of power generation (Table 1). Despite a recent pickup in overall inflation due to rising food prices, average core (nonfood) inflation is expected to be contained to below 5 percent, although high world oil prices remain a risk. The external current account deficit, excluding transfers, is projected to deteriorate somewhat in 2005/06 and then improve in 2006/07 as a recovery in coffee prices offsets higher world oil prices. International reserves would decline slightly, but remain at comfortable levels. The macroeconomic outlook for 2006/07 is positive as well.

16. Uganda could receive significant new resources under the MDRI, but this has not been included in the projections because of the uncertainties involved. While the stock relief could reduce the NPV debt-to-exports ratio from 169 percent to 45 percent, net cash flows could be higher or lower relative to current assumptions, depending on resources available from the World Bank and other donors (Box 2). In the event of an increase in net external inflows, any increase in domestic spending will be limited in magnitude in line with the MTEF and consistent with the budgetary envelope, given concerns about absorption capacity (Box 3).

Achieving Debt Sustainability Under the MDRI

The full implementation of the MDRI would help Uganda achieve debt sustainability. The debt relief under the MDRI would decrease Uganda’s NPV of debt to exports ratio to 51 percent in 2006/07 from 179 percent in 2004/05, while the debt service to export ratio would sharply decrease to 4 percent in 2006/07 from 16 percent in 2004/05. Uganda’s external debt to GDP ratio would be reduced to 11 percent in 2006/07 from 51 percent in 2004/05. After implementing the MDRI, the LIC DSA framework is projecting an NPV of debt-to-exports ratio of 70 percent in 2009/10.

Uganda: Debt Indicators After Implementing the MDRI 1/

(In percent)

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In fiscal year, which ends in June.

Assuming delivery on January 1, 2006 for the Fund and the African Development Fund, and on July 1, 2006 for IDA.

Exports of goods and services for the year under consideration.

Uganda is well positioned to take advantage of the additional debt relief that is provided under the MDRI, but the resulting increase in spending would have to be gradual. Uganda is embarking upon a second generation of structural reforms that will help diversify the export base and strengthen export competitiveness. Maintaining debt sustainability would require implementing prudent debt management policies and efficient allocation of donor support. Overall, Uganda will be better guarded against external shocks after the MDRI debt relief is fully delivered.

17. The fiscal program for 2005/06 aims at a broadly neutral fiscal stance. The government’s absorption of domestic resources as measured by the overall deficit, excluding grants, would be broadly unchanged from the previous year. To meet this objective, the value-added tax (VAT) was increased from 17 percent to 18 percent in July 2005 and some excise tax rates were raised. Reforms at the URA are also boosting collections. On the expenditure side, the budget assumes a reduction in nonpriority, nondevelopment expenditures of 0.8 percent of GDP from 2004/05. The performance in the first quarter of 2005/06 was in line with the budget projections. Some adjustments, including increases in funding for teacher salaries and transfers to local governments will be needed in a supplementary budget.

Uganda: Macroeconomic Management of a Scaling Up of Aid Flows

Aid inflows finance nearly one-half of Uganda’s budgetary expenditures, totaling about 10–11 percent of GDP per year.

The macroeconomic management of such inflows has proved controversial. In the past, the authorities stressed the challenges associated with sterilizing domestic liquidity creation, and the potential negative impact of aid inflows on competitiveness and productivity growth. As a result, the medium-term fiscal strategy in the May 2005 PEAP projected a progressive decline in aid dependency, and a corresponding strengthening in domestic revenue mobilization.

The authorities are currently taking stock of the challenges posed by aid inflows, and are revisiting their macroeconomic strategy for managing them. Currently, most government expenditures, including donor financed project spending, are governed by the Medium-Term Expenditure Framework (MTEF), which seeks to balance the need for services against the public sector’s capacity to administer related programs and also the economy’s capacity to supply goods and services. Looking forward, the adoption of certain policies could increase Uganda’s capacity to absorb assistance. These include:

  • Orient public spending to improve growth performance and remove key business bottlenecks. This would support sustained poverty reduction while encouraging a substantive supply-side response. Current priorities should include investments in rural infrastructure and power generation capacity.

  • Strengthen the effectiveness and efficiency of public spending through a combination of improved public expenditure management, savings in public administration, and revitalized public sector reform;

  • Sustain improvements in domestic revenue mobilization to minimize donor dependency and prepare for an exit strategy;

  • Agree on a strategy for liquidity sterilization, placing an appropriate emphasis on foreign currency sales; Adopt supporting structural reforms, including those that support the domestic supply response (financial sector deepening, anti-corruption efforts) and those that ease absorption constraints (EAC tariff reduction, improved transport links).

18. The fiscal policy framework for 2006/07 is consistent with the MTEF. Total domestic revenue is envisaged to rise to 13.6 percent of GDP and the overall deficit, excluding grants, is projected to narrow by about 1 percent of GDP in line with the twin objectives of making room for the private sector and reducing donor dependence. On a preliminary basis, the fiscal policy objectives will require an additional revenue effort of 0.7 percent of GDP in 2006/07. This could come from continuing improvements in tax administration, a broadening of tax bases, and a revision of the tax regime at the local level (which will help lowering transfers to the local governments). Expenditures as a share of GDP would fall slightly compared with 2005/06. Details including specific tax measures and mechanisms to address the stock of domestic arrears would be worked out during the budget planning cycle, in consultation with IMF staff. Consequently, program targets for September and December 2006 may be revisited during the first program review.

19. The envisaged tight fiscal stance will ease the burden on monetary policy in containing inflation. In operational terms, the monetary program will continue to target base money. The BOU will respond primarily to anticipated movements in core inflation, aiming for an average core rate of 4.9 percent in 2005/06, in line with the BOU’s 5 percent ceiling. This implies relatively tight targets for base money that may need to be revised if world energy prices or adverse weather conditions push prices higher than expected.

20. The flexible exchange rate regime will be preserved to help cushion the impact of exogenous shocks and maintain international reserves at comfortable levels. The BOU will intervene in the foreign exchange market only to smooth out short-term fluctuations and will refrain from countering the macroeconomic fundamentals. This strategy has proven effective over the past several years, in particular during mid-2005, when limited dollar sales helped maintain an orderly market.

21. Because of large foreign exchange inflows, effective sterilization remains critical for macroeconomic stability. In line with earlier discussions, the BOU adjusted its sterilization strategy during 2005, from primary reliance on treasury-bill sales to foreign currency sales. The change contributed to (i) a reduction in domestic interest rates and an increase in private sector borrowing, and (ii) countered downward pressure on the exchange rate. Uganda’s international reserve coverage is programmed to dip slightly, but remain at comfortable levels.

22. Uganda’s banking sector has been expanding its loan portfolio while maintaining sound prudential ratios. Banks have been able to extend more credit to the private sector as interest rates on treasury bills fell as a result of reduced government borrowing and the shift by the BOU from open market operations to foreign exchange sales. As a result, credit to the private sector grew by 21 percent in 2004/05 and is projected to grow faster in 2005/06. At the same time, banks remain highly capitalized and nonperforming loans represent less than 3 percent of total exposure.

Structural reforms

23. The structural agenda over the next few months will address ongoing projects related to macro stability and, as a matter of urgency, the electric power shortage.

  • The Bujagali hydropower project is critical to future economic growth. The government intends to approve financing (including guarantees for commercial borrowing of up to US$400 million, or about 4 percent of GDP) and construction contracts in the near future. The project will be undertaken by a private sector consortium and the construction will take about 5 years. Until then, the government will refund duties on diesel fuel used for electricity generation to help smooth costs to business.

  • Discussions on a tax policy code of conduct with Tanzania and Kenya are ongoing. The government hopes to address inconsistencies in tax incentives across the region. The objective is to achieve transparency in tax and other investment incentives, including in export processing zones, so that governments and investors can allocate scarce resources efficiently and to avoid mutually damaging tax competition in the region.

  • The government intends to restructure the UDB as a source of longer-term credit—not currently available from Uganda’s commercial banks. The restructuring will bring in a new professional management team that will oversee a merger of UDB operations with those of the BOU’s Development Finance Department. To further safeguard government resources, a new regulator will be established and rigorous supervision and regular audits conducted. The UDB will not increase its lending on a net basis until the restructuring is complete (MEFP, paragraph 20).

24. Policies are being further strengthened to more effectively tackle the continuing problem of domestic expenditure arrears (Box 1). The authorities are committed to strengthening enforcement of existing regulations to ensure that policies undertaken are backed up by adequate budget provisions (MEFP, paragraph 11). The strategy also involves a scaled-up effort to repay the stock of old arrears by separate budget allocations, while requiring spending ministries to pay arrears incurred during 2005/06 from their own resources (MEFP, paragraphs 12).

25. Public sector pay and pension reforms have moved ahead more slowly than envisaged because of weak capacity in the lead ministry and inadequate resources in the MTEF framework. The proposals that are being considered include harmonization of pay grades across the public sector and introduction of a contributory pension scheme. In addition, the activities of the existing pension fund—the National Social Security Fund—will eventually fall under an independent regulator for all nonbank financial institutions that is currently being set up.

V. Program Monitoring

26. To monitor Uganda’s performance under the PSI, quantitative and structural assessment criteria and structural benchmarks have been set. Quarterly quantitative targets will be set, including on base money, net claims on government by the banking system, NIR of the BOU, and contracting new nonconcessional external debt. These quantitative targets will be adjusted should budget support, HIPC assistance, and external debt service payments differ from the program projections. The structural assessment criteria will cover the measures related to domestic budgetary arrears. The benchmarks will be related to the stock of arrears and lending by the UDB (MEFP, Table 2). Assessment dates will be end-June and end-December 2006 and will be followed by program reviews. The standard provisions on the exchange system and trade issues that apply to the use of the Fund’s financial resources will apply as continuous assessment criteria under the PSI.

27. The authorities have expressed interest in updating the safeguards assessment in the first half of 2006 or in the context of the multi-year PSI. There are no outstanding issues from the last safeguards assessment that was completed in April 2003.

28. Executive Board endorsement of Uganda’s request for support under the PSI would automatically place Uganda on the 24-month Article IV consultation cycle.

VI. Staff Appraisal

29. Uganda comes to the end of its PRGF arrangement with a strong record of macroeconomic performance, most first-generation reforms completed, and an enviable external position. Sustained high economic growth rates and reasonable price stability have been supported by responsible fiscal policy, prudent monetary management, and large external inflows. These conditions have contributed to improved living standards for Uganda’s fast-growing population and investments in health, education, and physical infrastructure.

30. The staff recommends completion of the sixth review under the PRGF arrangement and supports the authorities’ request for waivers for the nonobservance of performance criteria on accumulation of domestic arrears and on new lending by the UDB. Most quantitative performance criteria were observed and progress in most structural areas continued. Two program targets—avoidance of domestic arrears and no new lending by the UDB—were missed, by modest margins, and this has not jeopardized program objectives. The staff welcomes the measures being taken to address the missed targets in the requested PSI.

31. The staff supports the authorities’ request for the PSI. The requested program aims at maintaining macroeconomic stability in the pre-election period and addresses slippages in structural reforms. The PSI is based on the approved 2005/06 budget and the MTEF. The authorities have committed (i) to reducing both the stock of arrears and its future buildup and (ii) to ring-fencing the UDB’s operations until the proper safeguards are in place.

32. The PSI could be replaced by a multi-year PSI sometime during 2006. This would ensure ownership, provide time to incorporate debt relief into the medium-term framework, and allow the economic program period to be aligned with the budget cycle under the multi-year PSI. The multi-year program would include structural measures to spur the private sector activity, lower business costs, and improve Uganda’s competitiveness. Macroeconomic policies would emphasize stability and sound management of potentially scaled-up aid flows.

33. The main short-term risk to the economic program is loss of investor and donor confidence due to uncertainty in the run-up to the February 2006 elections. The donors have so far reacted with caution to the recent arrest of an opposition leader and financial markets have remained calm. High world oil prices represent another short-term risk that could cause the inflation target to be temporarily exceeded. In this case, the BOU should adjust monetary policy appropriately. Uganda’s electric power shortages could jeopardize medium-term economic prospects if current plans to build the Bujagali dam are delayed. The risk of debt distress in Uganda is moderate, as shown in the Joint Fund-World Bank Debt Sustainability Analysis (Appendix VI).

Table 8.

Uganda: Structural Performance Criteria and Benchmarks for 2004/05 and 2005/06

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Table 9.

Uganda: Millennium Development Goals

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Source: World Development Indicators database, October 2004.
Table 10.

Uganda: Status of HIPC Agreements by Creditor 1/

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Sources: Ugandan authorities; and IMF staff estimates.

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

APPENDIX I

Kampala, Uganda

December 13, 2005

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. de Rato:

1. On behalf of the Government of Uganda, I would like to inform you on the progress made under our economic program supported by the International Monetary Fund with a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), and request continued cooperation through a Policy Support Instrument (PSI).

2. Macroeconomic performance continued to be strong in 2004/05 (July–June) with high growth and stable prices. Most of the quantitative performance criteria for the sixth review were observed, notably the envisaged fiscal deficit and monetary policy targets were met. However, domestic arrears continued to accumulate for nonwage and nonpension expenditures, notwithstanding the Commitment Control System (CCS). Also, a few small loans were extended by the Uganda Development Bank (UDB), despite the performance criterion on no lending.

3. On structural policies, the reforms in the Uganda Revenue Authority (URA) are progressing well and the revenue performance suggests that these have already contributed to tax collection efficiency gains. The structural performance criterion on submitting an amendment on the URA Act was observed. In the area of public expenditure management, progress has been made in monitoring domestic arrears. The implementation of the new Financial Institutions Act is on track and the performance of the banking system remains solid.

4. In light of the progress achieved in the implementation of the program for 2004/05 and the clarifications provided below, the Government of Uganda requests waivers for nonobservance of the performance criteria for end-June 2005 on the accumulation of domestic CCS arrears, as well as the continuous performance criterion on new lending by UDB.

5. The Government will make every effort to pay off accumulated domestic arrears. The 2005/06 budget already allocates U Sh 85 billion for this purpose. We will endeavor to ensure that, if our domestic revenue collections exceed the projected amounts in 2005/06, consideration will be given to retiring additional verified arrears. In addition, we have further strengthened the reporting arrangements under the CCS, and have reinstated penalties for ministries that do not report their monthly purchase commitments.

6. The Cabinet has approved a plan to strengthen the UDB, under which a new board of directors was appointed. The board will soon put in place a new professional management team. The UDB will continue to function as a development bank, but will provide lending strictly on commercial terms. Until the new management team is in place and pending new supervision arrangements, we will ensure that the UDB does not increase net lending.

7. In support of our objectives and policies, the Government of Uganda hereby requests the release of the seventh and final disbursement under the PRGF in the amount of SDR 2 million (1.1 percent of quota) upon completion of the sixth review.

8. The PSI is described in the attached Memorandum of Economic and Financial Policies (MEFP). The policies outlined in the memorandum are based on continued fiscal consolidation and implementation of the broader policy agenda as envisaged in the Poverty Eradication Action Plan.

9. The Government of Uganda believes that the policies set forth in the attached statement are adequate to achieve the objectives of our PSI program. Given our interest in macroeconomic stability, we stand ready to take additional measures as may be necessary to achieve needed objectives. Our PSI proposes assessment criteria for review dates of end-June and end-December 2006 for the first and second reviews, expected to be completed on October 31, 2006 and May 31, 2007, respectively. We stand ready to work with the Fund and the World Bank in partnership in the implementation of our program and will consult in advance should revisions be contemplated to the policies contained in the PSI.

10. The Government of Uganda authorizes the publication and distribution of this letter, its attachments, and all reports prepared by Fund staff regarding the sixth PRGF review and the PSI.

Sincerely yours,

/ s /

Dr. Ezra Suruma

Minister of Finance, Planning, and Economic Development

APPENDIX I ATTACHMENT I Memorandum of Economic and Financial Policies of the Government of Uganda January-December 2006

1. The Government of Uganda is committed to achieving sustained economic growth and poverty reduction through the pursuit of prudent macroeconomic policies and structural reforms. The strategy to achieve these goals is set out in the Poverty Eradication Action Plan (PEAP). The Government and the International Monetary Fund (IMF) are cooperating on the economic program through a Policy Support Instrument (PSI) for the period January–December 2006. This memorandum of economic and financial policies (MEFP) reviews the performance under the program supported by the IMF’s Poverty Reduction and Growth Facility (PRGF), which expires in January 2006, and describes the policies and targets for the remainder of the calendar year 2006 and the medium term.

I. Recent Performance Under the PRGF-Supported Program

2. The Government continued to implement sound macroeconomic policies and economic reforms. These efforts resulted in robust growth, private investment, and price stability.

3. Real GDP growth was sustained at close to 6 percent in 2004/05. The construction and communications sectors maintained strong growth, while agriculture output was subdued because of difficult weather conditions and plant diseases. Underlying (core) inflation, which excludes food crops, remained below the target of 5 percent. Net donor inflows stayed high, and the central bank built up its international reserves to a healthy position equivalent to about six months of imports of goods and services.

4. Fiscal performance was better than budgeted. The overall budget deficit, excluding grants, amounted to 8.7 percent of GDP in 2004/05, below the deficit targeted under the program. Tax revenues increased because of reforms at the Uganda Revenue Authority (URA) and tax measures. Current expenditures were broadly in line with the budget, while development expenditures fell short due to delays in some donor-financed projects. Domestic arrears continued to accumulate for nonwage and nonpension expenditures under the Commitment Control System (CCS), despite renewed efforts to improve expenditure management.

5. The monetary program was on track. The target for base money growth was met, and after a buildup in inflationary expectations from higher prices on food and fuel, prices have stabilized. A combination of the tight fiscal policy and a reliance on foreign exchange sales for liquidity sterilization led to a decline in interest rates, which in turn promoted a rise in private sector credit. The banking sector remains healthy with a very low level of nonperforming loans. The ongoing implementation of the regulations under the Financial Institutions Act should provide for additional safeguards.

II. The Policy Agenda for 2006

6. The key objective in 2005/06 is to maintain policies consistent with the medium-term goals of achieving sustainable economic growth and poverty reduction. To this end, an important element of the strategy is a gradual reduction in the fiscal deficit in line with the approved budget and medium-term expenditure framework (MTEF). As envisaged in the PEAP, this will free up resources for the private sector, reduce donor dependency, and help sustain a competitive economy.

7. Real GDP growth is expected to be about 6 percent this year. Underlying inflation is projected to remain under 5 percent. The external current account deficit, excluding transfers, is projected to be largely unchanged as a recovery in coffee prices offsets higher world oil prices. International reserves are expected to remain at a comfortable level.

A. Fiscal Policy

8. The key fiscal priorities will be to: (i) implement the 2005/06 budget as envisaged and further strengthen fiscal performance in 2006/07; (ii) improve the monitoring and control of domestic arrears and reducing their stock; and (iii) continue reforms at the URA.

9. The fiscal consolidation framed by the 2005/06 budget will be maintained. The fiscal deficit, excluding grants, is projected to be maintained at around 9 percent of GDP, to be achieved by lower growth of current spending. Development expenditures are projected to recover after a temporary shortfall in 2004/05. The Government intends to submit a supplementary budget to parliament that would be financed within the current budget and any additional revenue. Among other areas, it will cover additional spending for the following:

  • Primary teachers’ salaries;

  • Transfers to local governments to compensate for the elimination of the graduated tax; and

  • Additional payments of domestic arrears accumulated in 2004/05 under the CCS.

10. The fiscal framework for 2006/07 will be consistent with the MTEF. The strategy of gradual fiscal consolidation will continue through increased revenue collection and expenditure control. As envisaged in the MTEF, tax revenues will be targeted to increase by about 0.5 percent of GDP through URA efficiency gains and broadening of tax bases. The Government is also looking at options for new local taxes to supplement the central government transfers to the local governments.

11. The Government will undertake a range of measures to improve public expenditure management. To address the arrears problem, we will emphasize compliance with the existing regulations under the CCS/IFMS and back required expenditures and planned policies with adequate budget provisions. The Government recognizes that budget discipline is central in minimizing new arrears. We will implement the following measures:

  • The Minister of Finance, Planning and Economic Development will strengthen the existing strategy paper to address new CCS arrears in the line ministries that accumulated arrears of more than U Sh 0.5 billion during 2004/05. This strategy paper will back policy objectives with realistic estimates of their costs and will be submitted to Cabinet completed by end-May 2006.

  • Starting in January 2006, the Minister of Finance, Planning and Economic Development will submit to Cabinet quarterly CCS reports prepared by the Treasury Inspectorate, including details of ministries’ arrears.

  • The 2006/07 budget will provide for payment of all CCS arrears accumulated during 2005/06 as a first call on respective ceilings.

  • Complete verification of all pre-CCS arrears by June 2006.

  • Submit to parliament for approval the statutory instrument for the Public Finance and Accountability (Contingency Fund) regulations.

12. The Government is committed to meeting quantitative program targets on accumulation and payments of domestic arrears. Our overall strategy is to pay old arrears first from the central budget, while requiring spending ministries to honor arrears incurred during the 2005/06 budget from their own current resources. For this purpose, the stock of domestic arrears is divided into two groups: (A) the stock of pre-CCS, non-CCS, and CCS arrears incurred before end-June 2004; and (B) the stock of CCS arrears incurred after end-June 2004. The following targets will be adhered to:

  • Repayment of U Sh 79 billion of group (A) arrears during 2005/06 as provided in the approved budget by end-June 2006.

  • Reduce the stock of group (B) arrears by U Sh 6 billion by June 2006. Total budget appropriations for group (B) arrears clearance will be U Sh 16 billion (of which U Sh 6 billion already are in the budget and U Sh 10 billion will be appropriated in a supplementary budget bill). This would allow for up to U Sh 10 billion in technical arrears to develop at the end of the financial year without jeopardizing the targeted repayment.

  • Reduce the stock of group (B) arrears to a level of U Sh 10 billion by December 2006.

  • If tax collection exceed the programmed amount for 2005/06, we will consider giving priority to arrears repayment.

  • The allocation for payments of group (A) verified arrears will be increased to U Sh 155 billion in the 2006/07 budget.

13. The Government is making progress with public sector pay and pension reforms. The Ministry of Public Service, in collaboration with MFPED, has produced a cabinet paper on ways to control the size of the public administration and ensure cost efficiency. These initiatives will be fit within budget constraints and the current MTEF. Therefore, full implementation of two main proposals, equalization of pay grades across the public sector and a contributory pension, may take some time. Action on the new pension system has been put on hold pending a cost review.

14. The Government recognizes the challenge of ensuring the long-run performance of the NSSF. A new Board of Directors has been appointed and a professional management team is in place. As a temporary measure, the BOU is serving as an advisor to the NSSF at the request of the Minister of Finance. We are currently setting up an independent regulator for all nonbank financial institutions that are not regulated by the BOU, and this agency will take over regulatory and supervision responsibilities of the NSSF.

15. The reform process in URA will continue, in support of the revenue mobilization objectives. The remaining challenge is to maximize the impact of the new organizational structure, including computerization of the URA.

16. The Government is considering the introduction of Export Processing Zones (EPZs). Any such proposal will be in line with international best practice and exclude elements that would seriously erode the tax base. To avoid harmful tax competition for investment, Uganda will work with other East African Community (EAC) partner states to establish a Code of Conduct to harmonize investment incentives. Moreover, the Government will continue to submit to Parliament, in line with the Budget Act, a comprehensive list of companies that have benefited from tax expenditures, Government subsidies, loan guarantees, and other incentives. More generally, the Government remains committed to maintaining a level business playing field by avoiding granting preferential tax treatment, lending or guarantees to specific investors or firms.

B. Decentralization

17. The effective implementation of the fiscal decentralization strategy (FDS) is essential for improved services. The Government is currently strengthening the public expenditure management systems at the subnational level, including pilot CCS for some local governments. Abolition of the graduated tax, which was a key revenue source for local governments, has been compensated by a broadening of the property tax and additional transfers from central government, including the forthcoming supplementary budget allocation. At the same time, the creation of several new districts has added to the urgency of identifying new local revenue sources. The Government will by April 2006 work out a plan to increase revenue collection at the local level, with the assistance from the World Bank and the IMF.

C. Monetary and Financial Sector Policies

18. The authorities are committed to keeping annual average underlying inflation below 5 percent through the reserve money targeting framework. The monetary policy stance is expected to remain largely unchanged. In this regard, the BOU will use sales of foreign exchange for sterilization of the liquidity injection related to the inflow of external donor funds, with appropriate consideration to the market conditions in the short term. The phased transfer of project accounts to the central bank has proceeded smoothly, and is expected to be completed by June 2006.

19. The Government remains committed to fostering a more efficient and deeper financial system. The Government intends to continue implementing all the remaining key recommendations of the Financial Sector Assessment Program (FSAP) update. In this respect, the regulations for the establishment of a credit reference bureau were gazetted and are now in effect. In the near term, we will focus on the following areas:

  • Establishment of a credit reference bureau;

  • Improvements to transparency of bank account charges and interest paid;

  • Assign an incentive-based management contract of UDB; and

  • Issue investment regulations to insurance companies.

20. The Government has approved a plan to strengthen the Uganda Development Bank (UDB) and appointed a new board of directors. The Government’s strategy is to target a few sectors that will boost Uganda’s value added, especially in agricultural products. The UDB will make longer-term loans that are currently not available from Uganda’s commercial banks. A new professional management team will make lending decisions on commercial terms and loans will carry market-based interest rates. Over time, the new management team can be expected to establish a track record and the Government will consider share sales to raise capital. The UDB’s lending will be increased by transferring lines of credit currently under the Department of Finance at the Bank of Uganda or through partnerships with other banks such as the European Investment Bank. Until the new management team is in place and pending establishment of new supervision arrangements, we will ensure that UDB lending is not increased on a net basis. These necessary precautions will help safeguard government resources and avoid a buildup in nonperforming loans.

D. Other Structural Reforms

21. Key elements of the Government’s broad anti-corruption strategy are to strengthen confidence in public institutions by the implementation of reforms at the URA and to increased role and independence of the Inspectorate General of Government (IGG). In particular, the 2006/07 budget resources for the IGG will be raised to expand its prosecution capacity. Regarding the possible mismanagement of resources received from the Global Fund to Fight Aids, Tuberculosis, and Malaria, the Government will take action as necessary on the basis of the forthcoming report from the Commission of Enquiry.

22. The Government is addressing the shortage in power generation with urgency. The Government is currently finalizing the bid process for the Bujagali hydropower project. Construction financing, estimated at US$400 million, will be provided on commercial terms, with a government guarantee. Until the plant becomes operational in 2010–11, our generating capacity will be increased through more expensive thermal power generation. With the end-users covering only a share of the higher costs of this short-term measure, the Government will continue subsidizing the power sector to allow for a more gradual increase in electricity tariffs. However, the current subsidy scheme will not be extended to the period after commissioning of the Bujagali plant. Furthermore, the Government will encourage the newly privatized electricity distribution company to implement measures to reduce the currently very high distribution losses and increase the billing collection rate.

23. The EAC customs union became effective on February 1, 2005. The authorities have completed discussions on a list of raw materials that would remain as zero-rated inputs in support of the Ugandan industry. The government intends to harmonize EPZ incentives and regulations under the EAC. Aiming at increasing exports, the Government will pursue broader regional integration in terms of regional roads, railway, and communications/energy infrastructure.

III. Medium-Term Policies

24. Uganda is committed to implement prudent macroeconomic policies and a second generation of reforms that will strengthen its economic performance over the medium term. The fiscal policy framework aims to reduce further the fiscal deficit, excluding grants, and increase domestic revenue. This strategy will help strengthen competitiveness and lower interest rates, and thereby provide a boost to export and private investment performance. The success of this strategy will depend on stronger annual increases in government revenues, notably through an improvement in tax administration, coupled with a better allocation and efficiency of expenditures. Poverty-reducing expenditures in the PEAP will continue to be ring-fenced in order to contribute to the achievement of the MDGs.

25. Emphasis will be placed on strengthening the investment climate, increasing productivity, and enhancing Uganda’s international competitiveness. These objectives will be supported by the Government’s Medium-Term Competitiveness Strategy, and Plan for the Modernization of Agriculture. There is a need to strengthen agricultural policies, mainly by re-focusing the sectoral strategy towards improving productivity, market access and standards, and infrastructure (mainly rural roads and power).

26. Implementation of the Multilateral Debt Relief Initiative (MDRI) will result in a sharp decrease of Uganda’s external debt. The authorities intend to use the financial resources released by the MDRI to help achieve PEAP objectives and the MDGs, in a manner consistent with our fiscal and monetary policies. The government will continue to exercise caution in contracting external debt by using grants and then concessional loans. Nonconcessional borrowing or loan guarantees will be limited to the power sector. The Government is committed to avoid the accumulation of an unsustainable debt burden over the medium term. Aiming at maintaining debt sustainability, the authorities will establish clear procedures for contracting, managing, and monitoring external debt according to best practices and international standards, and selecting high productivity projects.

Table 1.

Uganda: Quantitative Assessment Criteria and Indicative Targets for January-December 2006 1/

(Cumulative change from the beginning of the fiscal year, unless otherwise indicated) 2/

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The assessment criteria and indicative targets under the program, and their adjusters, are defined in the technical memorandum of understanding (TMU).

Fiscal year begins on July 1.

Indicative targets.

For March and June 2006, cumulative changes from the average of June 2005; for September and December 2006, cumulative changes from the average of June 2006, as defined in the TMU.

Continuous performance criterion.

Cumulative change from January 1, 2006.

Excluding normal import-related credits.

Arrears incurred after end-June 2004. The stock amounted to U Sh 27 billion at end-June 2005.

Table 2.

Uganda: Structural Assessment Criteria and Benchmarks for January–December 20061

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Assessment criteria will also apply on a continuous basis to the standard provisions on the exchange and trade issues that apply to programs supported by the Fund’s financial resources.

Group (A) arrears comprise the stock of pre-CCS, non-CCS, and CCS arrears incurred before end-June 2004.

APPENDIX I ATTACHMENT II Uganda: Technical Memorandum of Understanding

(January–December 2006)

A. Introduction

1. This memorandum defines the indicative targets described in the memorandum of economic and financial policies (MEFP) for the January–December 2006 financial program that would be supported by the IMF Policy Support Instrument (PSI), and sets forth the reporting requirements under the instrument.

B. Base Money

2. Base money is defined as the sum of currency issued by Bank of Uganda (BOU) and the commercial banks’ deposits in the BOU. The commercial bank deposits include the statutory required reserves and excess reserves held at the BOU and are net of the deposits of closed banks at the BOU and Development Finance Funds (DFF) contributed by commercial banks held at the BOU. The base money limits will be cumulative changes from the daily average of June 2005 to the daily average of March 2006 and June 2006, and cumulative changes from the daily average of June 2006 to the daily average of September 2006 and December 2006.

C. Net Claims on the Central Government by the Banking System

3. Net claims on the central government (NCG) by the banking system is defined as the difference between the outstanding amount of bank credits to the central government and the central government’s deposits with the banking system, excluding deposits in administered accounts and project accounts with the banking system, including the central bank. Credits comprise bank loans and advances to the government and holdings of government securities and promissory notes. NCG will be calculated based on data from balance sheets of the monetary authority and commercial banks as per the monetary survey. The quarterly limits on the change in NCG by the banking system will be cumulative beginning end-June in the previous fiscal year.

D. Net International Reserves of the Bank of Uganda

4. Net international reserves (NIR) of the BOU are defined for program monitoring purpose as reserve assets of the BOU net of short-term external liabilities of the BOU. Reserve assets are defined as external assets readily available to, and controlled by, the BOU and exclude pledged or otherwise encumbered external assets, including, but not limited to, assets used as collateral or guarantees for third-party liabilities. Short-term external liabilities are defined as liabilities to nonresidents, of maturities less than one year, contracted by the BOU and include outstanding IMF purchases and loans.

5. For program-monitoring purposes, reserve assets and short-term liabilities (excluding liabilities to the IMF) at the end of each test period will be calculated in U.S. dollars by converting reserve assets measured in Uganda shillings, as reported by the BOU, using the end-month Uganda shilling per U.S. dollar exchange rate. The U.S. dollar value of outstanding purchases and loans from the IMF will be calculated by converting the outstanding SDR amount reported by the Finance Department of the IMF using the U.S. dollar per SDR exchange rate at the end of each quarter.

E. Expenditures Under the Poverty Action Fund

6. The expenditures under the Poverty Action Fund (PAF) include both wage and nonwage current expenditures under the PAF, and domestic development expenditures under the PAF. The program’s minimum cumulative expenditures under the PAF will be measured based on checks printed for the central government spending units and line ministries, and cash releases to local governments.

F. Ceiling on Domestic Budgetary Arrears of the Central Government

7. The stock of domestic payment arrears under the Commitment Controls System (CCS) will be monitored on a quarterly basis. Domestic payments arrears under the CCS are defined as the sum of all bills that have been received by a central government spending unit or line ministry delivered in that quarter, and for which payment has not been made within 30 days under the recurrent expenditure budget (including rents and utilities) or the development expenditure budget. For the purpose of program monitoring, the monthly CCS reports, which will include arrears accumulated at IFMIS and non-IFMIS sites, prepared by the Treasury Inspectorate will be used to monitor arrears. A verified report on the June 2006 arrears for nonwage recurrent and development expenditure will be prepared by the Internal Audit Office at the Ministry of Finance, Planning and Economic Development. The verified report will cover both IFMIS and non-IFMIS sites, and will be available no later than end-October 2006. Arrears can be cleared in cash or through debt swaps.

8. The payments of pre-CCS, non-CCS, and CCS arrears accumulated up to end-June 2004 (“group A arrears”) are covered by specific budget allocations for 2005/06 and 2006/07. The program ceiling on the stock of CCS arrears only covers accumulation of arrears after end-June 2004 (“group B arrears”). According to the verified report prepared by the Internal Audit Office, this stock of arrears is estimated to U Sh 27 billion as of June 2005.

G. Ceiling on Public Administration Expenditures

9. For the purpose of program monitoring, the public administration sector includes all expenditure (excluding that financed by donor projects) of the following votes: Office of the Prime Minister (003) (excluding development), Foreign Affairs (006), Missions Abroad (201-222), National Planning Authority (108), State House (002), Public Service (005), Public Service Commission (146), Local Government (011) (excluding development), Mass Mobilization (135), Office of the President (001) (excluding ISO/ESO and E&I), Specified Officers’ Salaries (100), Parliamentary Commission (104), Local Government Finance Commission (147), Uganda Human Rights Commission (106), and Electoral Commission (102). Any supplementary allocation of votes in the public administration sector that would exceed program ceilings will be accommodated by cuts in votes belonging to other categories within this same sector. Public administration expenditures will be measured by the cash releases to the line ministries and other government units listed above.

H. Adjusters

10. The NIR target is based on program assumptions regarding budget support, assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), and external debt-service payments. The NCG target, in addition to being based on the aforementioned assumptions, is also based on assumptions regarding domestic nonbank financing of central government fiscal operations.

11. The Uganda shilling equivalent of budget support (grants and loans) plus HIPC Initiative assistance in the form of grants on a cumulative basis from July 1 of the fiscal year is presented under Schedule A. The ceiling on the cumulative increase in NCG will be adjusted downward (upward), and the floor on the cumulative increase in NIR of the BOU will be adjusted upward (downward) by the amount by which budget support, grants and loans, plus HIPC Initiative and MDRI assistance, exceeds (falls short of) the projected amounts.

Schedule A: Budget Support Plus Total HIPC Initiative Assistance

(In cumulative billions of Uganda shillings, beginning July 1 of the fiscal year)

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12. The ceiling on the increases in NCG will be adjusted downward (upward) and the floor on the increase in NIR will be adjusted upward (downward) by the amount by which debt service due1 plus payments of external debt arrears less deferred payments (exceptional financing) falls short of (exceeds) the projections presented in Schedule B. Deferred payments are defined to be (i) all debt service rescheduled under the HIPC Initiative; and (ii) payments falling due to all non-HIPC Initiative creditors that are not currently being serviced by the authorities (that is, gross new arrears being incurred).

Schedule B: Debt Service Due, before HIPC Initiative Assistance

(In cumulative billions of Uganda shillings, beginning July 1 of the fiscal year)

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13. The ceiling on the increase in NCG will be adjusted downward (upward) by any excess (shortfall) in nonbank financing2 less payment of domestic group A arrears (up to a maximum amount of U Sh 45.0 billion) relative to the programmed cumulative amounts presented in Schedule C.

Schedule C: Nonbank Financing Minus Repayment of Domestic Arrears

(In cumulative billions of Uganda shillings, beginning July 1 of the fiscal year)

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14. The base money ceiling will be adjusted upward up to a maximum of U Sh 15 billion in March, June, September, and December 2006 if the average amount of currency issued by the BOU exceeds those projected in Schedule D.

Schedule D: Currency Issued by the BOU

(In cumulative billions of Uganda shillings, beginning July 1 of the fiscal year)

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I. External Borrowing Contracted or Guaranteed by the Central Government, Statutory Bodies, or the Bank of Uganda, and Arrears

15. The performance criterion on short-term debt refers to contracting or guaranteeing external debt with original maturity of one year or less by the government or the Bank of Uganda. Excluded from this performance criterion are normal import-related credits. The definition of “debt” is set out in paragraph 17.

16. The program includes a ceiling on new nonconcessional borrowing with maturities greater than one year contracted or guaranteed by the government, statutory bodies, or the BOU3. Nonconcessional borrowing is defined as loans with a grant element of less than 35 percent, calculated using average commercial interest rates references (CIRRs) published by the Organization for Economic Cooperation and Development (OECD). In assessing the level of concessionality, the 10-year average CIRRs should be used to discount loans with maturities of at least 15 years, while the 6-month average CIRRs should be used for loans with shorter maturities. To both the 10-year and 6-month averages, the following margins for differing payment periods should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15–19 years; 1.15 percent for 20–25 years; and 1.25 percent for 30 years or more. The ceiling on nonconcessional external borrowing or guarantees is to be observed on a continuous basis. The coverage of borrowing includes financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms. Excluded from the limits are changes in indebtedness resulting from refinancing credits and rescheduling operations, and credits extended by the IMF. For the purposes of the program, arrangements to pay over time obligations arising from judicial awards to external creditors that have not complied with the HIPC Initiative do not constitute nonconcessional external borrowing.

17. The definition of debt, for the purposes of the limit, is set out in point 9 of the Guidelines on Performance Criteria with Respect to External Debt (Executive Board’s Decision No. 12274-(00/85), August 24, 2000). It not only applies to the debt as defined in Point 9 of the Executive Board decision, but also to commitments contracted or guaranteed for which value has not been received. The definition of debt set forth in No. 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements reads as follows:

  • (a) For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

18. The ceiling on the accumulation of new external payments arrears is zero. This limit, which is to be observed on a continuous basis, applies to the change in the stock of overdue payments on debt contracted or guaranteed by the government, the BOU, and statutory bodies4 from their level at end-June 2005. It comprises those external arrears reported by the Trade and External Debt Department of the BOU, the Macro Department of the Ministry of Finance that cannot be rescheduled because they were disbursed after the Paris Club cutoff date.

J. Monitoring and Reporting Requirements

19. The authorities will inform the IMF staff in writing at least ten business days (excluding legal holidays in Uganda or in the United States) prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Such policies include but are not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises. The authorities will similarly inform the IMF staff of any nonconcessional external debt contracted or guaranteed by the government, the BOU, or any statutory bodies, and any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities. The authorities will on a regular basis submit information to IMF staff with the frequency and submission time lag as indicated in Table 1. The information should be mailed electronically to AFRUGA746@IMF.ORG.

Table 1.

Summary of Reporting Requirements

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APPENDIX II Uganda: Relations with the Fund

(As of October 31, 2005)

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 Payments to Fund (without HIPC assistance) (based on existing use of resources and present holdings of SDRs)

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Projected Payments to the Fund (with Board-approved HIPC assistance) (based on existing use of resources and present holdings of SDRs)

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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) was subject to a safeguards assessment with respect to the PRGF arrangement, which was approved on September 13, 2002. Since that assessment, the BOU has strengthened the safeguards framework, including timely finalization and publication of the financial statements, establishing a functioning audit committee, regularly reconciling monetary data, and formalizing the follow-up of implementation of internal and external audit recommendations. The authorities are considering updating the safeguards assessment in the context of the PSI.

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 September 30, 2005, the official exchange rate was U Sh 1,862.7 per U.S. dollar. The exchange system is free of restrictions on the making of payments and transfers for current international transactions. Uganda is classified as an independently floating exchange rate regime.

X. Article IV Consultation

The Executive Board concluded the last Article IV consultation on February 14, 2005. The next Article IV consultation with Uganda will be held on the 24-month cycle, subject to the provisions of the decision on consultation cycles approved on July 15, 2002.

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 MFD mission discussed the report with the authorities during the Article IV consultation discussion in November 2002, and the Financial System Stability Assessment was prepared for Board discussion in February 2003. In November 2004, a joint World Bank/Fund missions visited Kampala for a FSAP update.

XI. Technical Assistance

Uganda has received extensive technical assistance from the Fund in recent years.3

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. A joint Bank/Fund TA mission visited Kampala in October 2003 to help harmonize tax investment incentives among the member countries of the EAC. An FAD TA mission on tax administration also visited Uganda in October 2004 to develop a comprehensive reform plan for the Uganda Revenue Authority (URA). Two FAD resident advisors (coordinated through AFRITAC-East) are currently in the field assisting the implementation of a CCS at the local government level and the Fiscal Decentralization Strategy.

A 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. A 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 follow-up mission on GFS visited Uganda in May 2003. 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. A follow-up mission on balance of payments statistics visited Uganda in August 2003. Uganda is participating in the General Data Dissemination System (GDDS) and its metadata were initially posted on the Fund’s Dissemination Standards Bulletin Board in May 2000. A STA mission was in Uganda during February 2005 to prepare a data ROSC.

Since the 2001 FSAP, MFD’s TA to Uganda has focused on liquidity management, exchange rate intervention, central bank accounting and auditing, and banking supervision. The authorities have effectively used TA advice on these topics, and they have made good use of an MFD resident advisor, who took up her initial appointment in mid-July 2001. The advisor was fully integrated into the supervision function and has been involved in all aspects of the work, including participating in on-site examinations. Her contract was extended through July 2004, and the authorities are now in the process of selecting a new MFD resident advisor to follow up on the progress made so far. MFD has fielded two TA missions (July 2001 and January 2002) to assist the authorities with liquidity management and address the problems of interest rate volatility and exchange rate interventions. The BOU has started implementing the recommendations made in the report, and now clearly separates sterilization operations and liquidity management; however, they are still having problems with interest rate and exchange rate volatility and have requested follow-up TA in this area. In March and September–October 2002, MFD provided TA to improve central bank accounting and the Bank of Uganda’s accounting manual. A TA evaluation visit was conducted in June 2003, and an MFD mission following up on monetary and exchange rate operations, public debt, and liquidity management was conducted in March 2004. An FSAP update mission was conducted in November 2004 and focused on access, outreach, and stability issues, which also updated progress made since the last FSAP. Finally, a TA mission on enhancing the effectiveness of monetary policy implementation and developing financial markets was conducted in August 2005.

XII. Future Technical Assistance Priorities

The priorities for Fund technical assistance in the next few years will be in the areas of tax administration, public expenditure management, especially control and monitoring of public arrears at both central and local government levels, monetary and exchange rate management, bank supervision, national accounts statistics, reporting standards for government finance statistics, monetary and balance of payments statistical reporting, central bank accounting, and audit and debt management.

XIII. Resident Representative

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

APPENDIX III Uganda: Relations with the World Bank Group

(As of August 31, 2005)

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 a 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 World Bank and IMF in May 2000.

2. A new PEAP has been formally launched by the government in May 2005. The revised PEAP along with a Joint-Staff Advisory Note (JSAN) were presented to the Boards of the World Bank and IMF in June 2005. The new PEAP has five pillars: (1) economic management; (2) production, competitiveness and income; (3) security, conflict-resolution, and disaster management; (4) good governance; and (5) human development.

3. 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 falls under the first PEAP/PRSP pillar. 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.

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

II. Bank Group Strategy

5. The World Bank Group’s current Country Assistance Strategy (CAS) for Uganda was approved by the Board on November 16, 2000. 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. The new PEAP forms the basis for ongoing preparations of a new CAS, the Uganda Joint Assistance Strategy (UJAS), where World Bank, together with AfDB, Germany, UK, Netherlands, Norway, and Sweden are aligning their support around comparative advantages. The UJAS is scheduled to be presented to the IDA Board in fiscal year 2005/06 (July–June).

6. 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 operation, PRSC2, was approved in July 2002, and PRSC3 and PRSC4 were approved by the Board in September 2003 and 2004, respectively. PRSC 5 is scheduled to go to the Board in November 2005. PRSCs support a medium-term program, with each annual operation linked to specific reform actions. The support provided by PRSCs aims to improve public service delivery and agricultural production, since basic services critical to development are still inadequate in Uganda with about 70 percent of the population deriving their livelihood from agriculture.

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

8. PEAP/PRSP Pillar 1—Economic Management. Growth in private investment, fiscal consolidation, and increased revenue generation is one of the main objectives of Uganda’s economic policy. The Bank’s activities under this pillar aim to help the government achieve rapid and sustainable economic growth to reduce poverty. 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 the intergovernmental fiscal transfer system. 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—Enhancing production, competitiveness, and incomes. The Bank supports several activities that aim to promote production, competitiveness, and incomes, and to enhance environmentally sustainable rural development and reduce regional disparities. Support is provided through a demand-driven National Agricultural Services Project and the Second Agricultural Research and Training Project. Furthermore, the series of PRSCs support the government 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, the Second Protected Areas Management and Sustainable Use Project, and the second phase of the regional Lake Victoria Project help address the environmental challenges. The Bank group also supports infrastructure development, especially roads, power, and reform of key utilities. The Fourth Power project aims to address some of the key constraints to private sector investments. The Bank also supports the government’s ten-year Road Development Program through a series of road sector projects. The Privatization and Utility Sector Reform Project 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.

10. PEAP/PRSP Pillar 3—Security Conflict-Resolution and Disaster Management. 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—Good Governance. 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 personnel management, and anti-corruption legislation. Ongoing work on financial accountability through the Second Economic and Financial Management Project (EFMP II) and Local Government Development Project (LGDP) complements these efforts.

12. PEAP/PRSP Pillar 5—Human Development. 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. Support under this pillar is critical to furthering Millennium Development Goals (MDGs). 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

13. As of August 31, 2005, Uganda’s portfolio of IDA operations comprised 20 active projects, with total net commitments of US$1,214 million and an undisbursed balance of US$703 million.

14. For FY06, projects in the pipeline include PRSC5 (US$150 million), Public Service Performance Enhancement Program (US$70 million), Private Power Generation Project (US$45 million), and the EAC Transport/Trade Project (US$10 million). In fiscal year FY05, PRSC 4 (US$150 million grant), Road Development Program Phase 3 (US$107.6 million of which US$40 million is grant), and Private Sector Export Competitiveness Project Phase 2 (US$70 million), totaling US$327.6 million, were approved by the IDA Board. In FY04, PRSC3, a Supplemental Credit to the Second Economic and Financial Management Project and the Sustainable Management of Mineral Resources Project were approved.

IV. Bank-Fund Collaboration in Specific Areas

15. 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:

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

17. Debt sustainability. The staffs of the Bank and Fund continue collaborating on issues related to the Initiative for Heavily Indebted Poor Countries (HIPC Initiative), and prepared jointly a debt sustainability analysis for Uganda in calendar-year 2002, which has been updated in June 2005.

18. 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 its work on the public expenditure review and PRSC. The staffs of the two institutions prepare, on an annual basis, a report that tracks HIPC Initiative poverty-reducing spending, analyzes the quality of public expenditure management in Uganda, and identifies areas needing strengthening. On FY04/05 PER, CFAA and CPAR were coordinated through an integrated fiduciary assessment approach and the outcome of that is the Country Integrated Financial Assessment (CIFA) report. The report synthesizes the finding of each of the components in an integrated way and also provides an action plan.

19. Financial sector reform. Both the Bank and Fund are supporting the government’s efforts to reform the financial sector. The Bank supports these efforts 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 arrangement, which addresses selected aspects of pension reform.

20. 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. The Bank is undertaking a diagnostic trade integrated study (DTIS) schedule to be completed by the end of FY06.

Questions may be referred to Dino Merotto, Country Economist, Tel. (202) 458-1987.

APPENDIX IV Uganda: Statistical Issues

Uganda participates in the General Data Dissemination System (GDDS); its metadata were initially posted on the Fund’s Dissemination Standards Bulletin Board in May 2000. Partial updates of external sector metadata were completed in August 2005.

An STA mission visited Uganda in February 2005 to prepare a data ROSC. It assessed data compilation and dissemination practices against international standards in national accounts, prices, government finance, and balance of payments statistics; the monetary and financial statistics were not assessed.

Real sector statistics

The 2005 data ROSC mission found that that the national accounts do not follow up-to-date international standards and have a limited scope, but do use international classifications and a generally adequate base for recording. The mission recommended undertaking an agricultural census supplemented with annual sample surveys and an economy-wide business survey at least every five years, supplemented with annual sample surveys. Compilation of the consumer price index conforms to international standards, but is of limited scope; the mission recommended expansion of coverage to rural areas, along with updating the reference and weight base to 2003–2004. No wholesale or producer price indices or labor market information are produced.

Government finance statistics

The 2001 Government Finance Statistics (GFS) technical assistance mission 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 (GFSM 2001) framework. A 2003 follow-up mission identified some weaknesses in the proposed new chart of accounts. A revised chart of accounts was implemented for use by all budgetary central government and local government units from July 1, 2004. Uganda commenced reporting GFS data compiled according to the GFSM 2001 framework for the 2004 GFS Yearbook. However, data coverage is limited to the budgetary central government and local government accounts and excludes the activities of extrabudgetary central government units and the National Social Security Fund. The 2005 data ROSC mission echoed these findings and recommended migration to the GFSM 2001.

Monetary and financial statistics

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 to use a more detailed scheme for disaggregating the resident sector data. The mission also recommended a symmetrical treatment of government lending in the central bank’s and commercial banks’ data in order to narrow discrepancies in the reported interbank positions. Reclassification of the accounting data was also recommended to facilitate proper measurement of key monetary aggregates, in particular, broad money, claims on central government, claims on the private sector, and foreign liabilities.

The authorities recently requested further technical assistance to adapt compilation to meet the recommendations of the Monetary and Financial Statistics Manual. The monetary and financial statistics mission, tentatively scheduled for January 2006, will assist with in proper sectorization of institutional units, classification of financial assets, and expansion of institutional coverage.

External sector statistics

The 2005 ROSC mission found that the balance of payments statistics broadly follow the fifth edition of the Balance of Payments Manual (BPM5), but that there are some departures from recommended definitions, scope, and classifications. Some issues noted in the report were that the data source covered foreign exchange transactions only, unidentified flows were included under services, and that timeliness was poor. The mission urged completion of the conversion to the BPM5 and the development of new source data and estimation techniques in the following areas: exports of freight and imports of passenger transportation, compensation of employees, direct investment abroad, portfolio investment and financial derivatives. International trade data could be improved by incorporation of results from the Survey of Informal Cross-Border Trade and greater use of trade partner country data sources.

APPENDIX V Uganda: Common Indicators Required for Surveillance

(As of November 30, 2005)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

Including maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); or Not Available (NA).

APPENDIX VI Uganda: Joint Fund-World Bank Debt Sustainability Analysis

1. Uganda’s risk of debt distress is moderate. Its net present value (NPV) of debt-to-exports ratio stands at 179 percent in 2004/05, or below its policy-dependent threshold of 200 percent, but this threshold is breached under various stress tests during the projection period. Debt-service payments remain manageable at about 16 percent of exports in 2004/05. The implementation of the Multilateral Debt Relief Initiative (MDRI) would provide additional debt relief that could decrease Uganda’s NPV of debt-to-exports ratio to 46 percent in 2006/07.1 The Fund-World Bank staff agreed that this joint debt sustainability analysis (DSA) will focus mainly on Uganda’s situation before the full implementation of the MDRI, as certain technical aspects of International Development Association (IDA) and African Development Fund (AfDF) debt relief are not yet defined. A reassessment of Uganda’s debt sustainability after implementation of MDRI may become necessary once the technical details with respect to the Initiative are finalized.

2. This joint DSA has been prepared using the Fund-World Bank debt sustainability framework for low-income countries. The debt data underlying this DSA was updated jointly by the Ugandan authorities and the World Bank in July 2005. New information on some creditors that became available after 2002 has been included.2 The macro economic framework is based on the Fund’s macro framework agreed with the authorities during the discussions for the Policy Support Instrument (PSI) in October 2005.3

I. Evolution of Uganda’s External Debt Since the HIPC Completion Point

3. Uganda graduated from the HIPC Initiative with an NPV of debt-to-exports of 171 percent in 2000/01.4 A DSA for Uganda for 2002, using the HIPC methodology, projected that Uganda’s NPV of debt-to-exports ratio would continue to increase from 2000/01 onwards, peaking at 209 percent in 2002/03 and declining to 198 percent in 2004/05. The current DSA, however, shows that Uganda’s NPV of debt-to-exports ratio, based on the HIPC methodology, would have amounted to 229 percent in 2004/05, exceeding projections by about 31 percentage points (Text Table 1). The depreciation of the US dollar explains the bulk of the increase in the NPV of debt-to-exports ratio, raising it by 41 percentage points.

Table 1.

Uganda: Projected Versus Actual NPV of Debt-to-Export Ratio in FY05 1/

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Source: WB Staff estimates

NPV of debt-to-exports ratio under assumption of full delivery of HIPC assistance in percent.

See “Uganda: Updated Debt Sustainability Analysis and Assessment of Public External Debt Management Capacity,” August 2002.

Exports are three-year backward looking moving average of exports of goods and services.

Changes are expressed in percentage points.

Reflects calculation error in the calculation of NPV of new debt in the DSA 2002.

Other factors capture arrears accumulation, revision of debt relief agreements and data since FY02.

4. Nominal export growth exceeded projections, largely due to strong export performance of noncoffee exports, such as fish, cotton and flowers. Exports of goods and services grew by 18 percent in this fiscal year, raising the average export growth rate between 2001/02 and 2004/05 to 14 percent. Average export growth had been projected to amount to only 10 percent during this period. Since export growth outperformed projections, the NPV of debt to three-year average of exports ratio is 27 percentage points lower than projected.

II. External Debt Sustainability Analysis1

5. Uganda’s debt burden indicators remain below their policy-dependent thresholds throughout the projection period under the baseline scenario.2 The NPV of debt-to-GDP ratio amounts to 24 percent in 2004/05, lying well below its policy-dependent threshold of 50 percent. It is projected to decline continuously thereafter, dropping below 13 percent by the end of the projection period.3 Uganda’s NPV of debt-to-exports ratio in 2004/05 amounts to 179 percent, below its policy-dependent debt burden threshold. Debt-service payments continue to be manageable, reflecting the delivery of HIPC assistance as well as the fact that most of Uganda’s debt has been contracted on concessional terms. Uganda’s debt service-to-exports ratio was 16 percent in 2004/05 and is projected to decline to 6 percent by 2010/11.

Macroeconomic Assumptions

Real GDP growth averages 6.percent between 2006 and 2025, equal to its ten-year historical average.

Exports of goods and services are projected to grow about 9 percent on average between 2005/06 and 2010/11, driven largely by an increase in the export volume of fish, maize, cotton and coffee. After 2010/11 export growth slows down to about 7 percent.

The current account deficit (including official transfers) in terms of GDP is above its historical average of 4.7 percent by about 0.4 percent of GDP between 2005/06–2010/11 and is projected to increase to 5.5 percent on average thereafter.

Fiscal policy. Tax revenues are assumed to increase gradually from 13 percent of GDP 2004/05 to 15 percent of GDP in 2010/11 and thereafter. With grants tapering off to about 4½ percent, noninterest expenditures are projected to decline gradually to a level of 18½ percent of GDP, consistent with a primary deficit of 1 percent of GDP in the outer years.

Official external loan financing is projected to amount to US$350 million on average throughout the entire projection period. The DSA assumes that only IDA grants committed before June 2005 will be disbursed.

6. Adverse macroeconomic shocks would worsen Uganda’s NPV of debt-to-exports ratio significantly. If exports were to grow less by one standard deviation in 2006/07, Uganda’s NPV of debt-to-exports ratio would jump up to 208 percent in 2006/07. An export shock would have long lasting negative effects on Uganda’s debt dynamics, keeping the NPV of debt-to-exports ratio above 200 percent until 2020/21. However, Uganda’s NPV of debt-to-exports ratio would remain below its policy-dependent threshold when key macroeconomic variables are set at their historical average.

7. Imprudent debt management would worsen Uganda’s NPV of debt-to-exports ratio significantly. If new borrowing were to be contracted on less concessional terms during the projection period, Uganda’s NPV of debt-to-exports ratio would increase substantially. Reducing the grant element by 8 percentage points4 would lead to an increase in the NPV of debt-to-exports ratio by 17 percentage points in 2011/12.

8. Uganda is projected to continue to rely heavily on donor support in order to finance its projected current account deficit. In 2004/05, net donor support amounts to 9.4 percent of GDP, with grants constituting approximately 8.4 percent of GDP.

III. Fiscal Sustainability Analysis

9. The fiscal DSA is based on the assumption of continued fiscal consolidation in the context of lower grant inflows. Specifically, it is assumed that grants will decline from about 8½ percent of GDP in 2004/05 to about 5 percent of GDP during the projection period, reflecting increased autonomy from donor support. Domestic public revenues are projected to rise to 15 percent of GDP, from currently at 13 percent, reflecting authorities’ efforts to raise domestic revenues. This should allow noninterest public expenditures to level off at about 18½ percent of GDP, while limiting the deficit of the primary balance to 1 percent of GDP.

10. Under the baseline scenario, NPV of public debt is projected to decline from 36 percent of GDP in 2004/5 to about 11 percent at the end of the projection period. In terms of public sector revenues, the NPV of Uganda’s public debt under the baseline scenario remains at about 160 percent in the first several years. After 2010, reflecting continued fiscal consolidation, the decline of the NPV of debt-to-revenue ratio accelerates, and falls to about 60 percent at the end of the projection period. Debt-service indicators also seem to remain manageable.

11. Uganda’s achievement of public debt sustainability remains valid even under alternative scenarios and most of them continue to decline over the projection period. It is noticeable that under the nonreform scenario, which assumes unchanged primary balance from 2004/05, debt indicators remain better than under the baseline scenario.

12. Standard bound tests suggest that under the standardized alternative shocks, NPV of Uganda’s public debt stays below 40 percent of GDP. The 30 percent one-time depreciation shock takes the NPV of debt to 40 percent of GDP and 200 percent of revenues, but after about ten years the two indicators returns to figures close to the baseline.

IV. The Effects of MDRI

13. Uganda is at a moderate risk of debt distress before the implementation of the MDRI. While all debt burden indicators are below their policy-dependent debt burden thresholds under the baseline, Uganda remains vulnerable to exogenous shocks. The MDRI debt relief would improve Uganda’s debt sustainability outlook substantially by leading to a drastic reduction in Uganda’s debt burden indicators (Text Table 2). The NPV debt-to-export ratio will remain volatile year-on-year, but like other indicators will stay well within presently defined policy-dependent thresholds.5

Table 2.

Uganda: MDRI and Bujagali Project: Likely Impact on DSA Baseline Scenarios

(In percent)

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Source: Staff projections and simulations.

Assuming Bujagali is built during 2008–11 and fully financed in commercial terms.

14. The authorities are planning to build the Bujagali hydropower plant to address power shortage constraints that negatively affect Uganda’s growth prospects. Building Bujagali will guarantee a steady and secure supply of energy and strengthen private sector confidence. While the terms and conditions for financing the project are not finished, the staffs have prepared a DSA scenario, in which it is assumed that Bujagali would be financed on commercial terms and commissioned by 2010/11. Under the baseline scenario, the NPV of debt-to-exports ratio increases by 6 percentage points in 2015. However, if a combination of shocks impact Uganda, the NPV of debt-to-exports ratio would increase by 11 percentage points to 247 percent in 2015. These risks show the importance of maintaining a prudent debt management policy even under the debt relief scenario.

15. The full implementation of the MDRI would substantially lower Uganda’s probability of debt distress. The debt relief under the MDRI would decrease Uganda’s NPV of debt-to-exports ratio to 46 percent in 2006/07 from 179 percent in 2004/05 while the debt service to export ratio would sharply decrease to 4 percent in 2006/07 from 16 percent in 2004/05. Uganda’s NPV debt-to-GDP ratio will be reduced to 7 percent in 2006/07 from 24 percent in 2004/05.

V. Conclusion

16. While Uganda is at a moderate risk of debt distress, it will be better protected against the risk of shocks by embarking upon a second generation of structural reforms. These reforms will help diversify the export base and strengthen export competitiveness. While these measures would reduce Uganda’s vulnerability to exogenous shocks, the implementation of prudent debt management policies and efficient allocation of donor support would be required in order to ensure that debt burden indicators remain low in the long term.

Table 1a.

Uganda: External Debt Sustainability Framework, Baseline Scenario, 2005–25 1/

(In percent of GDP, unless otherwise indicated)

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Source: Staff simulations.

In fiscal year, which ends in June.

The stock of external debt in 2005 includes a simulated stock reduction operation related to the debt relief provided by the Fund, AfDF and IDA under the enhanced HIPC Initiative.

Derived as [r -g - ρ(l+g)]/(l+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments devided by previous period debt stock.

Table 1b.

Uganda: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2006–25 1/

(In percent)

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Source: Staff projections and simulations.

In fiscal years ending in June of the calendar year.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 2a.

Uganda: Public Sector Debt Sustainability Framework, Baseline Scenario, 2003–2026

(In percent of GDP, unless otherwise indicated)

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Sources: Uganda authorities; and Fund staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past ten years, subject to data availability.

Table 2b.

Uganda: Sensitivity Analysis for Key Indicators of Public Debt 2006–2026

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Sources: Country authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

Figure 1.
Figure 1.

Uganda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2006–25

(In percent)

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001

WB Staff Simulations and Projections.
Figure 2.
Figure 2.

Uganda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios After MDRI, 2006–25

(In percent)

Citation: IMF Staff Country Reports 2006, 043; 10.5089/9781451838800.002.A001
1

Debt service due is defined as pre-HIPC Initiative debt service due, but from 2003/04 onwards, this excludes HIPC Initiative debt rescheduling.

2

Comprising the check float and the change in government securities and government promissory notes held by the nonbank public sector. The change in government securities held by the nonbank public will be calculated from the data provided by the Central Depository System (CDS).

3

Contraction is defined as approval by a resolution of Parliament as required in Section 20(3) of the Public Finance and Accountability Act, 2003

4

This definition is consistent with the coverage of public sector borrowing defined by the Fund (includes the debt of the general government, monetary authorities, and entities that are public corporations which are subject to the control by government units, defined as the ability to determine general corporate policy or by at least 50 percent government ownership).

1

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

2

Under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative), an additional disbursement is made at the completion point corresponding to interest income earned on the amount committed at the decision point but not disbursed during the interim period.

3

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 PRGF (IMF Country Report No. 02/213).

1

These figures are based on the assumption that debt relief under the MDRI is provided on debt outstanding as of end-2004 for the IMF and the AfDF and end-2003 for IDA. Implementation dates for MDRI are January 2006.for IMF and AfDF, and July 2006 for IDA. Any possible effect on disbursement projections has been ignored. Uganda received US$1.95 billion in total debt service relief under the HIPC Initiative, out of which US$1.3 billion under the Enhanced HIPC Initiative.

2

The new data refers to bilateral non-Paris Club creditors, as well as the East African Development Bank and the Islamic Development Bank.

3

See the statistical tables attached to this staff report.

4

See “Uganda: Updated Debt Sustainability Analysis and Assessment of Public External Debt Management Capacity,” August 2002 (available on the IMF website).

1

The Low-Income Countries (LIC) DSA methodology differs from the HIPC on a number of aspects, notably on (i) the current year exports are used as denominators for estimating debt-to-exports ratio rather than the backward-looking three-year moving average of exports; (ii) the use of the WEO exchange rate projections instead of exchange rates at the end of the base year; and (iii) a 5 percent discount rate instead of currency specific discount rates.

2

Uganda’s policies and institutions rank as a “strong performer” according to the latest World Bank’s Country Policy and Institutional Assessment (CPIA). Under this rank, policy-dependent, debt burden thresholds are NPV of debt to GDP ratio of 50 percent, NPV of debt-to-exports ratio of 200 percent, NPV of debt to revenue ratio of 300 percent, debt service to exports ratio of 25 percent and debt service to revenue ratio of 35 percent.

3

Similarly, the NPV of debt-to-revenue of 169 percent in 2004/05 is well below its policy-dependent threshold.

4

This would correspond to an increase in the average interest rate on new disbursements by 1 percentage point.

5

The MDRI scenario assumes that disbursement projections remain the same as under the baseline. Netting out IDA’s MDRI debt relief from disbursement projections could lower debt burden indicators significantly.

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Cover IMF Staff Country Reports
Uganda: Sixth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, Request for Waiver of Performance Criteria, and Request for a Policy Support Instrument: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uganda
Author:
International Monetary Fund
Volume/Issue:
Volume 2006: Issue 043
Publisher:
International Monetary Fund
ISBN:
9781451838800
ISSN:
1934-7685
Pages:
81
DOI:
https://doi.org/10.5089/9781451838800.002
  • View in gallery

    Uganda Has Maintained Macroeconomic Stability

  • Figure 1.
    View in gallery
    Figure 1.

    Uganda: Real Sector Indicators 1/

    (Annual percentage changes)

  • Figure 2.
    View in gallery
    Figure 2.

    Uganda: Fiscal Indicators 1/

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

  • Figure 3.
    View in gallery
    Figure 3.

    Uganda: Monetary Aggregates and Interest Rates

    (In percent, end-period)

  • Figure 4.
    View in gallery
    Figure 4.

    Uganda: Interbank Foreign Exchange Market Indicators, Real and Nominal Effective Exchange Rate

  • Figure 5.
    View in gallery
    Figure 5.

    Uganda: External Sector Indicators, 1997/98–2004/05 1/

    (Annual growth rates in percent, unless otherwise indicated)

  • View in gallery

    Most Medium-Term Objectives Could be Met…

  • View in gallery

    … But Projected Growth is Still Too Low to Meet the MDGs

  • View in gallery

    Uganda: Still Room for Improving “Growth Competiveness”

  • Figure 1.
    View in gallery
    Figure 1.

    Uganda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2006–25

    (In percent)

  • Figure 2.
    View in gallery
    Figure 2.

    Uganda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios After MDRI, 2006–25

    (In percent)

Uganda Has Maintained Macroeconomic Stability
Figure 1.

Uganda: Real Sector Indicators 1/

(Annual percentage changes)
Figure 2.

Uganda: Fiscal Indicators 1/

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

Uganda: Monetary Aggregates and Interest Rates

(In percent, end-period)
Figure 4.

Uganda: Interbank Foreign Exchange Market Indicators, Real and Nominal Effective Exchange Rate
Figure 5.

Uganda: External Sector Indicators, 1997/98–2004/05 1/

(Annual growth rates in percent, unless otherwise indicated)

Most Medium-Term Objectives Could be Met…

… But Projected Growth is Still Too Low to Meet the MDGs

Uganda: Still Room for Improving “Growth Competiveness”
Figure 1.

Uganda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2006–25

(In percent)
Figure 2.

Uganda: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios After MDRI, 2006–25

(In percent)