Abstract
The staff report for Uganda’s combined 2008 Article IV Consultation and Fourth Review Under the Policy Support Instrument is presented. Building on a foundation of two decades of sound policies, Uganda achieved an impressive economic performance, with high growth, low inflation, and steady poverty reduction. The deteriorating economic environment could expose weaknesses in banks’ risk management practices, gaps in home-host supervisory arrangements, operational risks as financial innovation outpaces banks’ systems and controls, and increasing risk appetite owing to intensifying competition from the surge of new banks.
On January, 7, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Uganda.22
Background
Uganda’s economy has been among the fastest-growing in Sub-Saharan Africa. Building on a foundation of two decades of sound policies, Uganda achieved an impressive economic performance, with high growth, low inflation, and steady poverty reduction.
In 2008, Uganda has been buffeted by two major shocks. First, the global surge in food and fuel prices has caused domestic inflation to rise above 15 percent, well beyond traditional comfort levels. Second, the global economic downturn is likely to affect both the demand for Uganda’s exports and, more significantly, the availability of financing for critical investment projects. As a result, economic growth in 2008/09 is expected to decline from the high levels reached in recent years, but remain robust at 7–7½ percent by global and regional standards. At the same time, core inflation will benefit from the drop in international food and fuel prices, falling to an estimated 7 percent by June 2009. Monetary policy is expected to support the disinflation process, with base money growing at a substantially lower pace than in 2007/08.
The economic slowdown poses some risks for public finances, and the fiscal deficit is projected to widen somewhat in 2008/09, as development expenditures are scaled up to address infrastructure needs, but recourse to domestic financing is expected to remain limited to less than 1 percent of GDP. Moreover, buoyant private capital inflows, which allowed international reserves to accumulate at a brisk pace in 2007/08, have abated and reserves are expected to drop moderately as demand for Ugandan exports falls and other inflows, including remittances and foreign direct investment, are scaled back. Uganda’s financial system has been relatively insulated from the global financial crisis, but the economic slowdown could expose weaknesses in banks’ credit portfolios.
Executive Board Assessment
Directors commended the authorities for their sound macroeconomic management that has contributed to an impressive economic performance and steady poverty reduction. The current global economic downturn and reduced prospects for external financing pose immediate challenges to the Ugandan economy. Directors considered the economy to be well-positioned to face these challenges given its low public debt, comfortable level of international reserves, and relatively sound banking sector. Nevertheless, this difficult external environment calls for heightened vigilance.
While the medium-term outlook remains favorable, Directors agreed with the authorities that infrastructure bottlenecks and dependence on subsistence agriculture represent important impediments to growth. Thus, they welcomed the preparation of a new National Development Plan, which entails, among other things, a scaling-up of government investment in infrastructure. In this connection, they stressed the need for careful evaluation of investment projects, including their impact on debt sustainability and on international reserves.
Directors recognized the strong fiscal performance in 2007/08, and agreed that fiscal policy should maintain the modest stimulus underlying the 2008/09 budget. In the event of a revenue shortfall for 2008/09, they encouraged the authorities to avoid precipitous cuts in current expenditures, strengthen expenditure management, and prevent further accumulation of domestic arrears. For the medium term, Directors supported the authorities’ target to increase tax revenues by ½ percent of GDP annually and welcomed their consideration of introducing a fiscal rule, which would underpin fiscal consolidation and prudent use of oil revenues.
Directors stressed that monetary policy should aim at sustaining confidence in the currency, while supporting the disinflation process. They encouraged the authorities to seize the opportunity provided by falling international food and fuel prices to bring inflation back toward its medium-term objective. Directors underscored the importance of ensuring that the necessary pre-conditions are in place before introducing a formal inflation-targeting framework.
Directors considered that Uganda’s flexible exchange rate regime has served the country well, facilitating adjustment to external shocks. They took note of the staff’s assessment that the real effective exchange rate is broadly in line with fundamentals, consistent with strong export performance over the past few years. Directors also saw scope for targeted intervention in the foreign exchange market to avoid excessive volatility.
Directors noted that Uganda’s banking sector remains sound overall, with banks being well-capitalized and relatively insulated from the global financial crisis. They noted, however, the recent rapid expansion of bank lending and the significant share of foreign-exchange loans in banks’ portfolios. To address these vulnerabilities, Directors saw the need to further strengthen prudential supervision as well as close collaboration with the home supervisors of banks operating in Uganda.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
Uganda: Selected Economic and Financial Indicators, 2006/07–2012/13 1
Fiscal year begins in July.
Percent of M3 at start of the period.
Percent of exports of goods and nonfactor services.
Including Fund obligations; reflects actual debt service paid, including debt relief.
Uganda: Selected Economic and Financial Indicators, 2006/07–2012/13 1
| 2006/07 | 2007/08 | 2008/09 | 2009/10 | 2010/11 | 2011/12 | 2012/13 | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| Act. | Prog. | Est. | Proj. | Proj. | Proj. | Proj. | Proj. | |||
| GDP and prices (percent change) | ||||||||||
| Real GDP | 8.6 | 9.8 | 9.5 | 7.4 | 7.3 | 7.1 | 8.0 | 8.0 | ||
| Headline inflation (end of period) | 4.4 | 10.2 | 12.5 | 7.7 | 5.0 | 5.0 | 5.0 | 5.0 | ||
| Core inflation (end of period) | 7.3 | 11.3 | 12.1 | 7.0 | 5.0 | 5.0 | 5.0 | 5.0 | ||
| External sector (percent change) | ||||||||||
| Terms of trade (deterioration –) | 5.5 | … | -2.5 | - | -3.6 | -2.6 | … | … | ||
| Real effective exchange rate (depreciation –) | 2.7 | … | … | … | … | … | … | … | ||
| Money and credit (percent change) | ||||||||||
| Broad money (M2) | 16.7 | 20.3 | 30.3 | 18.0 | 17.6 | 16.7 | 17.6 | 19.0 | ||
| Domestic credit | -6.4 | 7.2 | 22.0 | 16.2 | 14.9 | 15.1 | 16.0 | 16.3 | ||
| Credit to the central government 2 | -17.2 | -7.6 | -4.3 | 1.4 | 2.9 | 2.9 | 3.5 | 3.5 | ||
| Private sector credit | 22.9 | 31.4 | 56.1 | 26.4 | 19.9 | 19.9 | 19.9 | 19.9 | ||
| Savings and investment (percent of GDP) | ||||||||||
| Domestic investment | 22.1 | 24.1 | 23.6 | 27.3 | 29.7 | 30.3 | 30.2 | 31.0 | ||
| Public | 4.9 | 4.9 | 5.5 | 9.2 | 11.1 | 11.2 | 10.6 | 10.9 | ||
| Private | 17.2 | 19.2 | 18.1 | 18.1 | 18.6 | 19.1 | 19.6 | 20.1 | ||
| National savings (excluding grants) | 14.8 | 15.4 | 14.5 | 17.7 | 20.2 | 21.3 | 20.9 | 22.2 | ||
| Public | -0.7 | -2.7 | 0.7 | 2.3 | 4.1 | 4.3 | 3.6 | 4.2 | ||
| Private | 15.5 | 18.1 | 13.8 | 15.4 | 15.4 | 17.0 | 17.3 | 18.0 | ||
| External sector (percent of GDP) | ||||||||||
| Current account balance (including grants) | -2.7 | -3.6 | -6.1 | -5.3 | -5.9 | -5.5 | -5.8 | -5.4 | ||
| Net donor inflows | 6.5 | 7.7 | 4.9 | 7.0 | 6.5 | 6.4 | 6.3 | 6.1 | ||
| Current account balance (excluding grants) | -7.3 | -8.8 | -9.0 | -9.6 | -9.5 | -9.0 | -9.3 | -8.8 | ||
| External debt (including Fund) | 11.0 | 14.3 | 12.3 | 13.9 | 15.6 | 17.1 | 18.3 | 19.0 | ||
| External debt-service ratio 3,4 | 1.2 | 2.6 | 1.6 | 1.8 | 1.6 | 1.2 | 1.3 | 1.1 | ||
| Government budget and debt (percent of GDP) | ||||||||||
| Revenue | 12.6 | 13.3 | 13.0 | 12.9 | 13.4 | 13.9 | 14.4 | 14.9 | ||
| Grants | 4.5 | 5.3 | 2.7 | 4.1 | 3.1 | 3.0 | 3.0 | 3.0 | ||
| Total expenditure and net lending | -18.2 | -21.0 | -17.8 | -20.6 | -20.4 | -20.8 | -21.4 | -21.6 | ||
| Overall balance (including grants) | -1.1 | -2.4 | -2.1 | -3.5 | -4.0 | -3.9 | -4.0 | -3.8 | ||
| Overall balance (excluding grants) | -5.6 | -7.7 | -4.8 | -7.7 | -7.0 | -6.9 | -7.0 | -6.8 | ||
| Stock of domestic debt | 9.3 | 11.6 | 10.7 | 7.7 | 7.2 | 5.9 | 5.2 | 4.5 | ||
| Memorandum items: | ||||||||||
| Nominal GDP (U Sh billions) | 21,168 | 24,069 | 24,648 | 30,782 | 34,950 | 38,363 | 44,687 | 51,287 | ||
| Average exchange rate (U Sh per US$) | 1,778 | … | … | … | … | … | … | … | ||
| Treasury bill yield (percent) | 9.4 | … | 8.3 | … | … | … | … | … | ||
| Overall balance of payments (US$ millions) | 704 | 569 | 572 | -92 | 91 | -78 | -3 | 61 | ||
| Gross foreign exchange reserves | ||||||||||
| (months of next year’s imports of goods and services) | 5.3 | 6.0 | 6.3 | 5.7 | 5.6 | 5.0 | 4.7 | … | ||
Fiscal year begins in July.
Percent of M3 at start of the period.
Percent of exports of goods and nonfactor services.
Including Fund obligations; reflects actual debt service paid, including debt relief.
Uganda: Selected Economic and Financial Indicators, 2006/07–2012/13 1
| 2006/07 | 2007/08 | 2008/09 | 2009/10 | 2010/11 | 2011/12 | 2012/13 | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| Act. | Prog. | Est. | Proj. | Proj. | Proj. | Proj. | Proj. | |||
| GDP and prices (percent change) | ||||||||||
| Real GDP | 8.6 | 9.8 | 9.5 | 7.4 | 7.3 | 7.1 | 8.0 | 8.0 | ||
| Headline inflation (end of period) | 4.4 | 10.2 | 12.5 | 7.7 | 5.0 | 5.0 | 5.0 | 5.0 | ||
| Core inflation (end of period) | 7.3 | 11.3 | 12.1 | 7.0 | 5.0 | 5.0 | 5.0 | 5.0 | ||
| External sector (percent change) | ||||||||||
| Terms of trade (deterioration –) | 5.5 | … | -2.5 | - | -3.6 | -2.6 | … | … | ||
| Real effective exchange rate (depreciation –) | 2.7 | … | … | … | … | … | … | … | ||
| Money and credit (percent change) | ||||||||||
| Broad money (M2) | 16.7 | 20.3 | 30.3 | 18.0 | 17.6 | 16.7 | 17.6 | 19.0 | ||
| Domestic credit | -6.4 | 7.2 | 22.0 | 16.2 | 14.9 | 15.1 | 16.0 | 16.3 | ||
| Credit to the central government 2 | -17.2 | -7.6 | -4.3 | 1.4 | 2.9 | 2.9 | 3.5 | 3.5 | ||
| Private sector credit | 22.9 | 31.4 | 56.1 | 26.4 | 19.9 | 19.9 | 19.9 | 19.9 | ||
| Savings and investment (percent of GDP) | ||||||||||
| Domestic investment | 22.1 | 24.1 | 23.6 | 27.3 | 29.7 | 30.3 | 30.2 | 31.0 | ||
| Public | 4.9 | 4.9 | 5.5 | 9.2 | 11.1 | 11.2 | 10.6 | 10.9 | ||
| Private | 17.2 | 19.2 | 18.1 | 18.1 | 18.6 | 19.1 | 19.6 | 20.1 | ||
| National savings (excluding grants) | 14.8 | 15.4 | 14.5 | 17.7 | 20.2 | 21.3 | 20.9 | 22.2 | ||
| Public | -0.7 | -2.7 | 0.7 | 2.3 | 4.1 | 4.3 | 3.6 | 4.2 | ||
| Private | 15.5 | 18.1 | 13.8 | 15.4 | 15.4 | 17.0 | 17.3 | 18.0 | ||
| External sector (percent of GDP) | ||||||||||
| Current account balance (including grants) | -2.7 | -3.6 | -6.1 | -5.3 | -5.9 | -5.5 | -5.8 | -5.4 | ||
| Net donor inflows | 6.5 | 7.7 | 4.9 | 7.0 | 6.5 | 6.4 | 6.3 | 6.1 | ||
| Current account balance (excluding grants) | -7.3 | -8.8 | -9.0 | -9.6 | -9.5 | -9.0 | -9.3 | -8.8 | ||
| External debt (including Fund) | 11.0 | 14.3 | 12.3 | 13.9 | 15.6 | 17.1 | 18.3 | 19.0 | ||
| External debt-service ratio 3,4 | 1.2 | 2.6 | 1.6 | 1.8 | 1.6 | 1.2 | 1.3 | 1.1 | ||
| Government budget and debt (percent of GDP) | ||||||||||
| Revenue | 12.6 | 13.3 | 13.0 | 12.9 | 13.4 | 13.9 | 14.4 | 14.9 | ||
| Grants | 4.5 | 5.3 | 2.7 | 4.1 | 3.1 | 3.0 | 3.0 | 3.0 | ||
| Total expenditure and net lending | -18.2 | -21.0 | -17.8 | -20.6 | -20.4 | -20.8 | -21.4 | -21.6 | ||
| Overall balance (including grants) | -1.1 | -2.4 | -2.1 | -3.5 | -4.0 | -3.9 | -4.0 | -3.8 | ||
| Overall balance (excluding grants) | -5.6 | -7.7 | -4.8 | -7.7 | -7.0 | -6.9 | -7.0 | -6.8 | ||
| Stock of domestic debt | 9.3 | 11.6 | 10.7 | 7.7 | 7.2 | 5.9 | 5.2 | 4.5 | ||
| Memorandum items: | ||||||||||
| Nominal GDP (U Sh billions) | 21,168 | 24,069 | 24,648 | 30,782 | 34,950 | 38,363 | 44,687 | 51,287 | ||
| Average exchange rate (U Sh per US$) | 1,778 | … | … | … | … | … | … | … | ||
| Treasury bill yield (percent) | 9.4 | … | 8.3 | … | … | … | … | … | ||
| Overall balance of payments (US$ millions) | 704 | 569 | 572 | -92 | 91 | -78 | -3 | 61 | ||
| Gross foreign exchange reserves | ||||||||||
| (months of next year’s imports of goods and services) | 5.3 | 6.0 | 6.3 | 5.7 | 5.6 | 5.0 | 4.7 | … | ||
Fiscal year begins in July.
Percent of M3 at start of the period.
Percent of exports of goods and nonfactor services.
Including Fund obligations; reflects actual debt service paid, including debt relief.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.