Uganda
Fifth Review Under The Policy Support Instrument And Request For Program Extension: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uganda
Author:
International Monetary Fund. African Dept.
Search for other papers by International Monetary Fund. African Dept. in
Current site
Google Scholar Close
Publication Date:
25 Jan 2013
eISBN:
9781475532517
Language:
English
Keywords:
ISCR; CR; authority; increase transparency; monetary policy; fiscal policy; management; foreign currency; exchange rate; current account; budget financing; banking system
Download PDF (1.4 MB)

Uganda has benefited from international reserve accumulation. The fiscal stance is tighter mainly owing to delays in execution of a large hydropower project. A suspension of budget support owing to theft of donor funds has curtailed spending plans and hurt growth prospects. The authorities have acknowledged the damage from corruption and responded to the concerns of development partners. Tight policies have led to the achievement of program targets. Sound macroeconomic policies need to be accompanied by reinforced efforts to fight corruption.

Abstract

Uganda has benefited from international reserve accumulation. The fiscal stance is tighter mainly owing to delays in execution of a large hydropower project. A suspension of budget support owing to theft of donor funds has curtailed spending plans and hurt growth prospects. The authorities have acknowledged the damage from corruption and responded to the concerns of development partners. Tight policies have led to the achievement of program targets. Sound macroeconomic policies need to be accompanied by reinforced efforts to fight corruption.

Background and Recent Developments

A. Recent Developments

1. Recent economic developments have been challenging. Supported by declining food prices and a restrictive fiscal stance, tight monetary policy succeeded in reducing inflation to just under 5 percent in November from 30 percent only a year before (Figure 1). Rapid monetary tightening, however, raised financing costs significantly and disrupted business plans of private companies. With a tighter-than-anticipated fiscal stance, this resulted in the lowest economic growth level in more than a decade. At just below 3½ percent (down from 6½ percent a year earlier), the FY 2011/12 growth outturn barely matched the rate of population increase.

Figure 1.
Figure 1.

Monetary Developments

Citation: IMF Staff Country Reports 2013, 025; 10.5089/9781475532517.002.A001

Figure 2.
Figure 2.

Fiscal Developments

Citation: IMF Staff Country Reports 2013, 025; 10.5089/9781475532517.002.A001

Source: Ugandan authorities and AFR database.
Figure 3.
Figure 3.

External Developments

Citation: IMF Staff Country Reports 2013, 025; 10.5089/9781475532517.002.A001

Source: Ugandan authorities and AFR database.
uA01fig02

Uganda: Monthly Inflation Rate, Dec 2011-October 2012

Citation: IMF Staff Country Reports 2013, 025; 10.5089/9781475532517.002.A001

uA01fig03

Uganda: GDP Growth, 1996-2012

Citation: IMF Staff Country Reports 2013, 025; 10.5089/9781475532517.002.A001

2. International reserve accumulation benefitted from tight monetary policy and strong private capital flows. Despite a deteriorating trade balance, the external current account over performed program expectations on the strength of private remittances and tourism. Portfolio flows, attracted by high interest rates, and sizable foreign direct investment drove international reserves up to the equivalent of 4 months of imports, almost half a month higher than anticipated.

uA01fig04

Uganda: International Reserves, Jan 2009-June 2012

Citation: IMF Staff Country Reports 2013, 025; 10.5089/9781475532517.002.A001

3. The fiscal stance was tighter than programmed mainly owing to delays in execution of a large hydropower project. Revenues and current expenditure performed broadly as anticipated, reflecting the non-recurrence of the previous year’s exceptional oil revenue and security spending, and a drop in the wage bill in real terms. However, underperformance on the large Karuma project—due to slow preparation and an investigation into procurement irregularities—led to a lower-than-expected deficit. As projected, financing of the deficit came mainly from external sources. The stock of arrears and payment delays remained broadly stable compared to end-June 2011.

4. The disinflationary strategy dampened credit growth. The Bank of Uganda (BoU) used its new central bank rate to raise market interest rates. The strengthened shilling, which had previously weakened with the onset of high inflation, helped rein in inflation. Subsequent monetary easing, through sharp cuts in the policy rate from 23 to 12 percent, has so far produced only a small decline in lending costs, revealing asymmetries in the transmission mechanism. Slow bank credit recovery is mainly explained by careful risk management to preserve asset quality and the need to meet higher capital requirements. While non-performing loans have risen and provisioning has declined, banks remain solvent, liquid and profitable.

5. A suspension of budget support due to theft of donor funds has curtailed spending plans and hurt growth prospects. Aid totaling 1¼ percent of GDP from both multilateral and bilateral partners was suspended in late October - early November. This followed the theft of about $15 million of donor funds, meant for post-war recovery in northern Uganda, from the Office of the Prime Minister in a coordinated plot by officials of several ministries and agencies, and a major fraud related to payments of salaries and pensions to ghost workers. These corruption scandals motivated strong reactions from civil society and the international community.

6. The authorities have acknowledged the damage from corruption and responded to the concerns of development partners. The authorities and the donors have held continuous discussions since November on a course of action for governance improvement and have reached preliminary understanding on the set of measures contained in Box 1. Clear progress on a credible anti-corruption strategy would allow donors to assess resumption of disbursements by the first quarter of 2013, although some would consider moving away from budget support lending.

Short-Term PFM Reform Commitments

In response to the weaknesses identified by recent corruption cases, the government has conveyed to donors its commitment to implement the following short-term actions:

  • Moving ahead with investigations and prosecutions of indicted public officials, private persons, and firms, for fraud and corruption in the Prime Minister’s office.

  • Taking administrative action against responsible officials, and recovering misappropriated funds.

  • Implementing key recommendations of previous security audits to fix weaknesses in the integrated financial management system (IFMS), and recruiting an IFMS security consultant.

  • Submitting to parliament amendments to the Public Finance Bill (PFB), including improved provisions on oil revenue management, application of sanctions, commitment controls, and creation of an independent directorate of internal audit.

  • Making the recruitment, payroll, and pension modules of the integrated payroll and pension system fully operational.

  • Constituting the Inspectorate of Government by appointing senior officials.

B. Program Performance

7. Program performance has been satisfactory. All end-June 2012 quantitative assessment criteria (QACs) were met. International reserve accumulation was significantly higher than projected due the large foreign exchange inflows. The BoU held net domestic assets (NDA) well below their program ceiling to preserve the inflation objective. The ceiling on net credit to the government (NCG) was also observed by a large margin, as stronger than expected revenue and lower capital spending decreased reliance on bank financing. Two indicative targets were missed. The one on domestic arrears by ½ percent of GDP, reflecting inefficiencies in cash management and expenditure controls, and the one on poverty reducing expenditure by a small margin.

8. Progress on structural measures under the program has been mixed. Greater transparency is now in place regarding the beneficiaries of tax expenditures, government’s net asset position with the banking system, and releases and payments for power and water obligations. In addition, high frequency economic data is now being produced and disseminated. However, reforms to improve public financial management, a key ingredient of the PSI, were insufficient. Commitments to reinforce controls over unpaid bills and publish unspent balances of all government accounts in the BoU and commercial banks have yet to materialize, and the issuance of identification cards has been delayed until end-2013, beyond the program period.

Economic Outlook and Risks

9. The outlook for this fiscal year is for slow growth recovery from a 10-year low in a context of low inflation. Under a cautious assumption that aid will not resume during the remainder of this fiscal year, growth projections for FY 2012/13 have been scaled back to 4¼ percent—around one percentage point above last year’s disappointing outturn. These projections take account of only a moderate contribution from private investment and consumption, as well as some crowding out of the private sector. Inflation is expected to remain subdued, and the external current account deficit would be broadly unchanged—with an improved trade balance and higher oil taxes offset by lower budget support grants and remittances. The drop in external financing will lead to a slowdown in international reserve accumulation, reducing its coverage from 4 to 3¾ months of imports.

Macroeconomic Impact of Aid Suspension

(In percent of GDP unless otherwise noted)

article image
Sources: Ugandan authorities; and IMF staff projections.

10. Medium-term growth prospects are more encouraging, with a return to its potential of 6-7 percent by FY 2014/15. Achieving higher growth—through a combination of increased public investment in infrastructure and efforts to improve productivity in tourism and agriculture—is essential to reduce unemployment and poverty. Oil production is set to be a key driver—but its timing and scope depends on the decision on whether the envisaged refinery is to be complemented by a pipeline to export crude oil, and on successful integration of oil revenues into a medium-term fiscal framework.

11. Risks to the outlook are concentrated on the downside. Failure to implement the preliminary understanding with bilateral and multilateral partners on actions to restore budget support would further hurt budget financing, development spending, and investor sentiment. In this event, with buffers depleted, the majority of adjustment would need to fall on expenditure, further setting back growth recovery. Success therefore critically depends on forceful action to improve the existing systems and address governance problems. Risks to macroeconomic stability arise from potential spending pressures, which could lead to disorderly domestic borrowing while a more rapid repatriation of short-term capital than currently anticipated could erode reserve cover. On the external front, regional security and political concerns in neighboring countries have potential to disrupt supply, and a deepening of the euro zone crisis could reduce aid and export receipts.

Policy Discussions

A. Ensuring High Quality Fiscal Spending in the Context of Lower External Financing

12. Fiscal plans were adapted to the cuts in external financing. The authorities had planned to boost development spending beyond the level provided for in the budget to stimulate growth. However, the aid suspension forced them to curtail spending, mainly capital outlays by about ¾ percent of GDP (half of the loss in aid) and to forgo plans to frontload expenditure in support of growth. To compensate for the other half of the delayed budget support, the authorities intend to use domestic bridge financing, mostly from the private sector. Staff supported this policy, stressing that cuts be concentrated on less essential outlays to avoid affecting poverty reducing spending, and that additional domestic financing be used to finance high quality development spending.

13. Against this background, the authorities put together a restrictive but coherent fiscal plan. Revenue buoyancy would likely be affected, but current expenditure restraint to favor projects with high local content and proven feasibility is expected to result in a small impulse to growth. Fiscal space from the recent removal of subsidies to power producers, a modest curtailment of tax exemptions, and the elimination of exceptional military expenditures, is expected to be used for this purpose. The authorities indicated that spending pressures, including for recruiting primary health workers, may lead to the approval of a small supplementary budget, but committed to keep the spending envelope within the program. In view of the weak impementation capacity, staff recommended adhering to the execution timeline of the Karuma project, and addressing the persistent arrears problem by ensuring realistic budget appropriations, avoiding irrational cash rationing, and enforcing sanctions for noncompliance.

14. Over the medium term, the authorities are encouraged to improve tax collections and further enhance PFM. There is ample room to increase the revenue/GDP ratio and to accelerate ongoing measures to improve project appraisal, implementation, and evaluation, both areas in which Uganda lags behind the SSA and EAC average. Parliamentary approval of the PFB, considered essential to medium-term improvements in PFM and revenue management, has been deferred to mid-2013. The medium-term fiscal trajectory is now somewhat different than it was in the program. It will be important to maintain close control over fiscal deficits in the medium term to avoid any undue deterioration in the overall public debt situation.

Index of Public Investment Efficiency (PIMI)1

article image

Index values range from 0 to 4, with 4 being the best.

Source: IMF and WB PIMI database.

B. Preserving Low Inflation and Safeguarding the Health of the Banking System

15. With inflation below the 5 percent target, discussions focused on how monetary and exchange rate policy could support growth without reigniting price pressures. Staff praised the fast disinflation—aided by better liquidity management and modeling capacity under the new inflation targeting light (ITL) framework—and noted the lag with which credit is expected to react to the ongoing loosening cycle. The authorities agreed that space for further monetary easing is restricted by the need to maintain positive risk-adjusted real returns on domestic assets to promote saving and avoid a disruptive exit of foreign portfolio flows. Accordingly, the BoU cut the policy rate by only 50 basis points in November and December, compared to 200 basis points in each of the previous three months. The shilling is expected to adjust to underlying fundamentals, and the BoU will intervene only to ensure a smooth transition by limiting excess volatility.

16. Staff supported the BoU’s decision to refine its ITL policy framework. The authorities see room to improve the inflation target definition, the modeling and forecasting capacity, and the policy communication strategy. Importantly, they agreed that institutional reforms to recapitalize the BoU, ensure its independence of instruments, and improve policy coordination are important priorities. An MCM mission that visited Kampala in December to assist in these areas helped design an action plan to achieve these objectives. The authorities are committed to implementing the recommendations with support of a successor PSI, and are interested in switching to inflation targeting for program purposes at that time.

17. The banking system is strong but needs to be carefully monitored. The BoU has stepped up on-site supervision to ensure early detection of underlying stress. The ongoing rise in nonperforming loans and the corresponding decline in provisioning is a concern, although this is mitigated by high capital levels and profitability—NPLs net of provisions are equivalent to less than 6 percent of annual banking sector profits. Despite the recent increase in the share of foreign currency denominated loans—35 percent of total lending in June 2012—the authorities consider that current lending restrictions to un-hedged borrowers limit indirect credit risk, and noted that personal loans and mortgages account for only 4 percent of the stock of foreign currency lending. Staff stressed the need to strictly enforce bank compliance of existing provisions.

uA01fig05

Uganda: Selected Financial Sector Indicators, December 2009-June 2012

Citation: IMF Staff Country Reports 2013, 025; 10.5089/9781475532517.002.A001

C. Taking Forceful Measures to Strengthen Governance

18. The authorities recognize the need to pursue further governance reforms to enhance growth. The vulnerabilities in systems and processes revealed by the theft of public funds call for more vigorous PFM. Looking forward, transparent administration of oil wealth and clear business rules are crucial to attract high quality investors. Discussions centered on the following key actions:

  • Approval of the PFB aligned to best international practice. The government intends to use the delay in parliamentary consideration of the law to refine its provisions in line with Fund advice, mainly to ensure transparent and sustainable revenue management, including of prospective oil proceeds, and to strengthen sanctions.

  • Introduction of a treasury single account (TSA). Staff called for a swift introduction of a TSA to help consolidate the currently fragmented scheme of government receipts and payments, improve oversight of all cash flows, and strengthen budget control. To this end, the program includes as a structural benchmark the production of a concept note reflecting the decision to introduce a TSA. This is an important first step that seeks to foster consensus within the government on the usefulness of the TSA as a tool to safeguard the integrity of public accounts. IMF technical assistance will be provided for this process.

  • Use of the IFMS to initiate and record all expenditures. Action is needed to ensure better use of the system both at the spending commitment stage and at the payment stage, caution suppliers against the use of non-authorized procedures, and enforce penalties and sanctions in a non-discretionary manner.

  • Promotion of transparency in public sector contracts. To speed up infrastructure development, the authorities favor the use of public-private partnerships (PPPs) and contractor-facilitated financing arrangements. Staff noted the governance risks of such approaches if full transparency is not guaranteed. To mitigate them, the authorities committed to recognize contingent liabilities on ongoing PPP contracts (structural benchmark). They also agreed to differentiate the gross costs of projects from their financing terms and publish the bids for public scrutiny.

  • Provision of biometric identification cards. Despite the delays encountered due to management, governance, and procurement problems, the authorities remain determined to complete this project, not only to properly identify citizens, but to improve tax administration and avoid distortions on the public payroll. Nonetheless, given the extent to which this project is off track, the issuance of four million cards by December 2012, as specified in the PSI’s structural benchmarks, is not longer feasible within the program period, and will therefore not be set as a structural benchmark going forward. Government will instead endeavour to issue two million cards by December 2013 and, as a first step, will inventory all existing equipment and develop concrete plans to continue the project.

  • Effectively implementing the Anti Money Laundering/Countering Financing of Terrorism (AML/CFT) regime. This could help detect, investigate, and recover the proceeds of corruption and other crimes.

Program Issues

19. Staff supports the authorities’ request to complete the fifth review of the PSI and to extend it from its expiration on May 11, 2013 to August 10, 2013. The attached MEFP outlines the macroeconomic policies and structural measures for the last six months of the program. To reflect the recent economic developments and outlook presented in this report, modifications are proposed to the end-December 2012 QACs on NDA, NCG, and net international reserves (NIR), and end-December 2012 and end-March 2013 indicative targets. The requested PSI extension would allow time to complete the sixth and last review (based on end-December 2012 data). At that time, staff also plans to discuss the authorities’ request for a new PSI-supported program.

Staff Appraisal

20. Efforts to tame inflation were costly but helped the authorities build important policy buffers. The BoU tightened monetary policy sharply and halted the credit boom. With scarce and expensive financing, private consumption and investment slowed, also abetted by declines in real wages. Concurrently, weak implementation of infrastructure projects resulted in a tighter-than-expected fiscal stance. As a result, economic activity was sluggish, affecting job creation and poverty reduction. Nonetheless, inflation declined sharply and international reserves increased significantly, creating useful policy space to deal with the subsequent curtailment of aid.

21. Tight policies led to the achievement of program targets. All QACs were met with wide margins, as the BoU over performed on reserves accumulation during the disinflation process while contracting net credit to the economy. Exchange rate flexibility was key in supporting the reduction in inflation. With lower development spending than projected, the government used less net domestic credit than programmed.

22. Reviving growth is a clear priority in Uganda’s low-income economy. Short-term policies require careful calibration to maintain essential public investment, encourage a gradual resumption of bank lending, and continue to allow the shilling to reflect market conditions. The suspension of aid adds challenges to this policy mix, but the authorities are committed to maintaining fiscal prudence, preserving the inflation target, and using foreign exchange interventions just to smooth exchange rate volatility.

23. Strengthening of PFM systems and governance remains a challenge. While some structural benchmarks under the program were met, commitments to reinforce control over unpaid bills, issue national identification cards, and publish unspent balances of government accounts have yet to materialize. Further, persistent arrears, insufficient transparency in procurement processes, mismanagement of the payroll system, and theft of public funds highlight the need to process all government spending through the existing accounting system and establish credible controls. The introduction of a TSA and the transparent management of procurement processes and public contracts should also deter mishandling of public funds. Moreover, introduction of national identity cards and effective implementation of the AML/CFT regime will be crucial to fighting tax evasion and money laundering.

24. Sound macroeconomic policies therefore need to be accompanied by reinforced efforts to fight corruption. The recent scandals show the fragility of the public accounts, and the government’s decision to step up actions to strengthen governance is welcome. Swift implementation of actions to prevent misappropriation of public funds would add credibility to the anti-corruption strategy. It would restore budget financing and avoid the risks of further hampering development spending and investor confidence, and setting back growth recovery.

25. Over the medium term, growth is set to converge to its potential level of 6-7 percent. This objective needs to be underpinned by a higher contribution of private investment, which would in turn require improvements in the business environment. Approval of the PFB, in a form consistent with international best practices, is critical to ensure sound management of revenues and the budget process. The authorities are interested in a successor PSI to back these efforts as well as the institutional reforms needed to strengthen inflation targeting, support efficient management of prospective oil revenues, and encourage governance enhancing reforms.

26. Staff supports completing the fifth review of the PSI. Staff also recommends modification of the end-December 2012 QACs on NDA, NCG, and NIR, modification of end-December 2012 and end-March 2013 indicative targets, and extension of the program to August 10, 2013. The program extension will allow time to evaluate the end-December 2012 quantitative assessment criteria and to prepare the successor PSI arrangement which the authorities have indicated they will request.

Table 1.

Uganda: Selected Economic and Financial Indicators, FY2009/10–2016/171

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

Fiscal year begins in July.

Differences in terms of trade projections for the 4th review versus the 5th review reflect mainly a revision in methodology.

Percent of exports of goods and nonfactor services.

Table 2a.

Uganda: Fiscal Operations of the Central Government, FY2009/10–2016/17 1

(Billions of Ugandan Shillings)

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

Fiscal year runs from July 1 to June 30. Revenue figures reported in the fourth review columns have been adjusted to include oil-related inflows, whereas they were previously treated as accruing to an extrabudgetary oil fund that was expected to be created when the Public Finance Act was approved.

Table 2b.

Uganda: Fiscal Operations of the Central Government, FY2009/10–2016/17 1

(Percent of GDP)

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

Fiscal year runs from July1 to June 30. Revenue figures reported in the fourth review columns have been adjusted to include oil-related inflows, whereas they were previously treated as accruing to an extrabudgetary oil fund that was expected to be created when the Public Finance Act was approved.

Table 2c.

Uganda: Quarterly Fiscal Operations of the Central Government, FY2011/12–2012/2013

(Billions of Ugandan Shillings)

article image
Source: Ugandan authorities; and IMF staff estimates and projections.
Table 3.

Uganda: Monetary Accounts, FY2009/10–2016/171

(Billions of Ugandan Shillings unless otherwise indicated)

article image
Sources: Uganda authorities; and IMF staff estimates and projections.

Fiscal year begins July 1st.

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

Including valuation effects and the Bank of Uganda’s claims on the private sector.

Table 4.

Uganda: Balance of Payments, FY2009/10–2016/17

(Millions of US Dollars unless otherwise indicated)

article image
Sources: Ugandan authorities; and IMF staff estimates and projections.
Table 5.

Uganda: Banking Sector Indicators, March 2010-September 2012

(In percent)

article image
Source: Bank of Uganda.
Table 6.

Uganda: Quantitative Assessment Criteria and Indicative Targets Outturn for June 30, 2012 to September 30, 20121

(Cumulative change from the beginning of the fiscal year, unless otherwise stated)

article image

Defined in the technical memorandum of understanding (TMU).

Indicative targets.

Continuous assessment criterion.

Cumulative change from May, 2010. To be used exclusively for infrastructure investment projects.

Excluding import-related credits.

Monitored annually. As numbers recorded by the authorities were not yet audited by the Auditor General as required according to the TMU, they are only preliminary indications of the arrears stock. The stock presented here does not include payments disputed in court cases and intra-governmental tax arrears.

Annual end-of-period inflation.

Table 7.

Uganda: Structural Benchmarks Under the PSI

article image
article image

Appendix I. Uganda: Letter of Intent

Kampala, Uganda

December 21, 2012

Ms. Christine Lagarde

Managing Director

International Monetary Fund

Washington, DC 20431

Dear Ms. Lagarde:

On behalf of the Government of Uganda, I would like to provide you with an update on the progress we have achieved under our economic program supported by the IMF’s Policy Support Instrument (PSI).

Since the last review, tight monetary and fiscal policies have successfully reduced inflation, allowing it to reach the Bank of Uganda’s inflation target, but economic activity has taken a toll. Our policy focus has now turned to strengthening economic growth, which is essential to alleviate poverty and address unemployment.

Unfortunately our growth-enhancing efforts have been negatively affected by the suspension of budget support by our development partners following a regrettable mishandling of public resources. We are deeply committed to restoring fiduciary assurances and rebuilding confidence, and have already started to take action against the involved officials and to strengthen our financial management systems.

The attached Memorandum of Economic and Financial Policies (MEFP) sets out the Government’s objectives and policies for the remainder of this financial year and indicates our thinking for the medium term. No quantitative assessment criteria were missed for June 2012, and the majority of indicative targets and structural benchmarks were achieved or missed by small margins. We hereby request modification of assessment criteria for end-December 2012, and completion of the fifth review under the PSI, and a program extension until August 10, 2013. At the completion of the sixth and final review, we will request a successor arrangement.

The Government believes the policies set forth in the MEFP are fully sufficient to achieve the objectives of our PSI-supported program, but as always we stand ready to take any further measures that may become appropriate for this purpose. We consent to publication of the documents for this fifth review under the PSI. We intend to work with the IMF and other development partners in the implementation of our program, and will consult with the Fund on the adoption of any such further measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund’s policies on such consultation.

Sincerely yours,

/s/

Maria Kiwanuka

Minister of Finance, Planning and Economic Development

Attachments

Memorandum of Economic and Financial Policies

Technical Memorandum of Understanding

cc: Prof. Emmanuel Tumusiime-Mutebile, Governor, Bank of Uganda

Attachment I: Memorandum of Economic and Financial Policies, December 21, 2012

Introduction

1. This Memorandum of Economic and Financial Policies presents an update on the economic performance in the second half of the fiscal year 2011/12, and lays out the policies Government is undertaking over the period ahead to stimulate growth and job creation while maintaining overall macroeconomic stability.

2. Thanks to firm measures that have been taken by the Bank of Uganda (BoU), inflation, which accelerated to unacceptable levels in mid-2011, has been reduced. Moving forward, the focus of government policies will be on stimulating a recovery of real GDP growth, which has fallen behind Uganda’s impressive performance in the past decade, while preserving macroeconomic stability.

3. Unfortunately, the suspension of budget support equivalent to 1.3 percent of GDP by several development partners following the uncovering of large scale corruption in the public administration will impede economic recovery in 2012/13, in particular because Government will not have sufficient budgetary resources to implement the fiscal stimulus in the amount it had hoped to provide to the economy. Although the easing of monetary policy, which began in the second half of 2011/2012, will provide some support to domestic demand, because of the smaller fiscal stimulus and weak external demand, real GDP growth is only projected to rise to 4.25 percent in 2012/13 from 3.4 percent in FY 2011/12.

4. Government, after consulting with development partners, has drawn up a Public Financial Management Reform Action Matrix designed to strengthen controls against corruption, recover stolen money and protect priority areas of the budget. The implementation of Public Finance Management (PFM) reforms is intended to send a strong message that Government is committed to fighting corruption and reducing its impact on ordinary Ugandans. Further, Government is committed to implementing the actions necessary to normalize relationships with development partners culminating in the lifting of the suspension of official external flows. This will be critical to allow fiscal policy to contribute to economic growth over the medium term.

A. Performance under the PSI

5. All seven Quantitative Assessment Criteria (QACs) for end-June 2012 were met. The increase in net credit to the central government by the banking system was below the ceiling by Ush 693 billion. The ceiling on the increase in net domestic assets (NDA) of the BOU was also observed, and international reserves exceeded the target by US$403 million. Government incurred no external payment arrears, and borrowing on non-concessional terms remained about US$545 million below the PSI three-year ceiling of US$1 billion. The over-performance on reserves was welcome—and although it did have the effect of driving end-September base money above its indicative program target, our inflation objective was in no way compromised as evidenced in the sharp turnaround of inflation trends. Unfortunately, the end-June stock of domestic arrears was around 0.5 percent of GDP, exceeding the zero limit set in the program as indicative target, and the indicative target on poverty reducing spending was missed by a small margin. Moving forward, we request an extension of the PSI, currently scheduled to expire in May 2013, until August 10, 2013 to provide sufficient time to complete the 6th and final review under the PSI.

6. The majority of the structural benchmarks in the program were also met. The names of beneficiaries of tax exemptions were gazetted and published, and we have developed an index of high-frequency economic indicators. Government’s net and gross position in the BoU is being reported. We have published cash releases and actual payments for power and water obligations of spending ministries, although the sanctions applied to the accounting officers who allowed arrears to accumulate are not yet public. However, the quarterly report on unpaid bills of nine Ministries based on data in the Commitment Control System (CCS) to be submitted to Cabinet for the previous quarter of the fiscal year has been delayed, but the memorandum is being prepared. Delays have also occurred regarding the benchmark to publish the balances as of June 30 and September 30 on all government accounts in the BoU and commercial banks, and to seek parliamentary approval as well as supporting work and procurement plans to spend any balances held over from the previous year beyond end June.

Economic and Policy Developments

A. Macroeconomic outturn in FY2011/12
Growth and inflation

7. Due to both internal and external factors, Uganda’s economic growth rate declined from 6.7 percent in FY 2010/11 to 3.4 percent in FY 2011/12. Factors included internal shocks such as power outages which impacted on private sector competitiveness; high inflation, which led to very high interest rates; and a reduced fiscal impulse due to capacity related delays in implementing the Government investment program—particularly in the construction and energy sectors. External shocks were related to the global financial and economic crisis, which resulted in continued low demand for exports from Uganda’s traditional trading partners and in a limited export penetration into emerging markets in Asia including China and India.

8. Annual inflation, which rose to a peak of 30.5 percent in October 2011, has dropped to 4.9 percent in November 2012 as a result of tight fiscal and monetary policies. Core inflation dropped from 30.8 percent to 3.8 percent in the same period.

Fiscal outturn

9. The tax revenue outturn amounted to 12.0 percent of GDP compared to 12.7 percent in FY 2010/11. This performance was mainly explained by low real GDP growth and high inflation, and was exacerbated by delays in clearance of goods at the Mombasa port. Total expenditure and net lending was below the budget largely due to the significant underperformance on the development budget. Significant difficulties were encountered in executing the public investment program. Recurrent expenditure exceeded the budget mainly on account of higher domestic interest rates and non-wage recurrent outlays. However, development expenditure fell substantially short of the budget target largely due to the delayed commencement of the Karuma hydropower plant. There was also a shortfall of nearly US$ 60 million on donor disbursements affecting the external component of the budget. Largely because of the capital expenditure shortfall, the overall deficit for FY 2011/12 was 3.0 percent of GDP compared to 4.3 percent in the previous fiscal year. This contributed to the weak growth outturn in FY 2011/12.

Monetary policy and inflation

10. The BoU introduced an inflation targeting lite (ITL) monetary policy framework at the start of FY 2011/12, which employs the central bank rate (CBR) as the operating target and an inflation target as the nominal anchor. Under the new framework, the BoU conducts monetary policy using secondary market instruments, mainly repurchase and reverse repurchase operations. The introduction of ITL has been a success, as shown by the reduction in inflation and the effectiveness of the CBR as a signaling device.

11. The ITL framework allowed the BoU to reduce mounting inflationary pressures from a combination of food supply shocks, exchange rate depreciation, very strong private sector credit growth, and, up to the end of FY 2010/11, a rising fiscal impulse. In response, the BoU raised the CBR from 13 percent in July 2011 to 23 percent in November 2011, thus curtailing private sector credit and aggregate demand. Coupled with improved food supplies, this led to reduced inflationary expectations. With an abatement of the food price shocks, the reversal of the fiscal impulse, a strengthening of the nominal exchange rate—partly due to strong portfolio inflows in response to higher domestic interest rates—and a sharp deceleration of credit growth, inflation began to fall by the second quarter of FY 2011/12. The easing of inflationary pressures allowed the BOU to begin cutting the CBR in February 2012 and this was followed by further reductions which brought the CBR to 12.5 percent in November.

Banking sector performance

12. Banking sector credit to the private sector fell significantly in the course of the fiscal year as a result of monetary tightening, but has begun a slow recovery. Banks recorded strong profits in FY2011/12, with the aggregate return on assets rising to 4.4 percent, mainly due to a widening of the margin between deposits and lending rates. Non-performing loans increased from 1.6 percent of total loans at end June 2011 to 3.9 percent at end June 2012. Nevertheless, because of strong profitability, core capital increased to 18.3 percent of risk-weighted assets at end June 2012 from 17.3 percent at end June 2011.

Outlook and Key Economic Objectives

A. Key goals

13. The key macroeconomic goals for FY 2012/13 are to stimulate economic growth and begin to close the negative output gap, reduce high unemployment and poverty while maintaining macroeconomic stability. However Government’s plans to stimulate economic growth through a fiscal stimulus have been weakened by the suspension of budget support by development partners. Government will accommodate the shortfall of budget support through a combination of cuts to budgeted expenditures and additional domestic financing (the details are in paragraph 17 below). The former will reduce the planned fiscal impulse in 2012/13.

14. Nevertheless, Government will continue to implement the structural reforms to the budget which are intended to increase the efficiency of public spending and enhance its contribution to economic growth in the medium term. The envisaged structural policies include reforms to improve government project implementation capacity, promote productivity, and reduce the cost of doing business for the private sector, including through an intensified fight against corruption and theft of public funds. In addition, Government has drawn up a matrix of PFM reforms (see paragraph 28 for more details) designed specifically to tackle corruption in the public administration, build public trust, and restore development partners’ confidence in the fiduciary credibility of the budget, which is imperative if the suspension of external support is to be lifted.

B. Macroeconomic outlook and risks

15. Real GDP growth is projected to increase to only 4.25 percent in FY 2012/13 from 3.4 percent in 2011/12, with inflation averaging 6.2 percent. Besides the shortfall in financing for public investment, the main constraints to a stronger recovery lie on the demand side of the economy. External demand continues to be very weak because of the problems in the global economy, with GDP growth forecasts for several of Uganda’s major trading partners and sources of remittances scaled down in the October WEO. The BOU began easing monetary policy in February 2012 but this has only recently started to be translated into an expansion of bank lending to the private sector. Consequently, aggregate demand is expected to remain subdued throughout most of 2012/13.

16. Risks to inflation emanate from possible food price and exchange rate pass through effects, but these risks may be offset by continued slack in the economy, with real output projected to remain well below its equilibrium level at least until the 2013/14 fiscal year. The trade balance is expected to widen reflecting robust import volumes to support investments in the oil sector and commencement of the Karuma hydropower plant, coupled with sluggish growth in exports. Nonetheless, Uganda will continue to be a major source of food for the region which will have a positive effect on the balance of payments.

C. Fiscal policy

17. Government will substantially revise its fiscal strategy in 2012/13 because of the suspension of budget support announced by development partners in November following the uncovering of large scale corruption in the Office of the Prime Minister (OPM) and the Ministry of Public Service (MPS). The total amount of budget support which is subject to the suspension is $282 million (equivalent to 1.3 percent of GDP). Government will accommodate the shortfall in budget resources by a combination of expenditure cuts and additional domestic financing. Expenditures will be cut by 0.8 percent of GDP, most of it in development spending while recurrent spending will only be cut moderately because it already dropped from 11.2 percent of GDP in FY 2011/12 to 10.3 percent of GDP for this fiscal year. Domestic borrowing will be increased by 0.7 percent of GDP. The latter will involve additional issuance of government securities through primary auctions. These actions will increase the fiscal burden to Government due to higher interest rates which will translate into higher cost of borrowing to the private sector. This will contribute to reduce the pace of economic recovery in the short term, but will still allow Government to prioritize spending favoring high quality outlays.

18. Given the shortfall in the budget resource envelope in 2012/13, government will ensure that the funds allocated to line ministries are spent on the intended expenditure items and projects. Each quarterly release to MDAs will be conditioned on a work plan for activities and on an account of cash released in the previous quarter including unspent balances.

19. Government hopes that development partners will restore budget support by June 2013 and thereby allow for an expansion in the budget resource envelope in the 2013/14 fiscal year and beyond. This will enable Government to address critical constraints to growth over the medium term. To achieve this objective, it will scale up investments in infrastructure, particularly in roads, railways, energy and water for irrigation. To ensure expenditure efficiency gains, Government will mobilize external resources in line with its debt strategy, and will invite private sector participation in infrastructure projects.

20. Government submitted to Parliament the Public Private Partnership Bill with the aim to ensure that PPP-related public liabilities are properly budgeted, appropriated, and accounted for and that potential risks embodied in this service delivery framework are properly mitigated and integrated in the macroeconomic framework. Government will prepare a status report of all ongoing PPP programmes. Inclusion of this status report in the Budget Framework Paper by end March 2013 will be a structural benchmark under the program.

21. Another key priority is to increase agricultural productivity to boost exports, food production and create employment. Specific actions in this area include the provision of improved seeds, farm inputs and implements to increase production and productivity; and investments in irrigation schemes in partnership with the private sector. Furthermore, Government will boost investments in rural feeder roads to increase access to markets and lower production costs.

D. Monetary and financial sector policies

22. Core inflation was brought down to the 5 percent target by the end of the first quarter of FY2012/13. The BoU will continue to set its policy interest rate at a level consistent with achieving its announced inflation target while, in the short term, supporting stronger growth in aggregate demand to bolster real GDP growth. With output below potential, there is unlikely to be a conflict between the inflation and growth targets in the short term unless there is a substantial supply side shock.

23. The BoU will ensure that the expected increase in commercial bank lending occurs in a stable prudential environment. To this end, the BoU will ensure that credit and currency risks are appropriately assessed, particularly given the recent deterioration of asset quality and the increase in the share of dollar-denominated loans. Legislation which is due to be tabled before Parliament includes a statutory instrument to introduce a capital charge for market risk.

24. Moreover, legislation already enacted will raise the minimum paid up capital for already licensed and operating banks to Shs 25 billion in March 2013 (from the current level of Shs 10 billion). Six of the existing 23 banks will need to mobilize additional capital to meet the March 2013 deadline. The government will also propose amendments to the Financial Institutions Act, which will inter alia, allow banks to engage in banc assurance and provide Islamic financial products.

E. Balance of payments and the exchange rate

25. The current account deficit is projected to remain broadly unchanged an 11¼ percent of GDP in FY 2012/13. The trade balance in goods and services is expected to benefit from lower government imports and continued strong performance of the tourism industry. The capital and financial account surplus, however, is projected to fall in 2012/13, mainly because of much lower short term net private capital inflows and the suspension of budget support loans. While the overall balance is projected to remain in surplus in 2012/13, the surplus will be lower than that in 2011/12. Because of the suspension of budget support by development partners, the BoU has scaled back its target for the accumulation of foreign reserves in 2012/13 from $221 million to $70 million. The BoU will pursue a flexible exchange rate policy which will support the adjustment of the real exchange rate to a more sustainable level, but will take appropriate action to dampen short term volatility.

F. Medium-term outlook

26. Government aims to raise output back to its potential level over the medium term while maintaining inflation of around 5 percent. Sustaining higher growth over the medium to long term will require addressing critical infrastructure gaps in the economy. Financing the needed investment will require leveraging private participation and financing to complement public funds. Furthermore, the National Development Plan will be reviewed by March 2013 to ensure that emerging priorities are reflected in expenditure planning.

G. Structural reforms
Public financial management reforms

27. Government is prioritising public financial management reforms to be implemented in both the short and medium term. The reforms include administrative measures and major changes to legislation.

28. The attached High Level PFM Reform Action Plan Matrix comprises short term measures, the implementation of which began in November 2012, designed to restore confidence among the public and development partners in the fiduciary standards of the budget. The matrix includes measures to: i) put in place a coordination strategy for PFM reform; ii) prosecute all public officials involved in corruption and recover stolen money; iii) strengthen the fidelity of PFM systems through forensic audits of the systems themselves and of major public expenditure heads in the budget, fully operationalize the Integrated Payroll and Pension System (IPPS), and rotate all officials responsible for monitoring and enforcing fiduciary standards in the public service, and iv) ensure that allocations to key priority areas of the budget, particularly those crucial to support economic growth, are protected in H2 2012/13.

29. A Public Expenditure and Financial Accountability Assessment (PEFA) was completed in September 2012 and a parallel exercise is currently ongoing for local governments. Key areas for improvement include ensuring budget credibility, improving policy based budgeting, upgrading controls in budget execution and strengthening revenue forecasting.

30. Government presented to Parliament a new Public Finance Bill, which seeks to consolidate the existing 2003 Public Finance and Accountability Act (PFAA) and the Budget Act 2001. It aims at strengthening the macroeconomic framework by introducing a Charter of Fiscal Responsibility. This bill was preceded by Government approval and publication of the oil and gas revenue management policy in February 2012. It is expected that this Bill will be enacted into law during FY 2012/13.

31. The Executive arm of Government will work with Parliament to ensure that the approved Bill reflects best international practices. In particular, Government will ensure that the final form of the draft bill contains:

  • Appropriate measures to ensure that natural resource revenues are managed transparently and sustainably, while avoiding the introduction of inflexible and unrealistic practices for the use of the petroleum investment reserve such as using future oil revenues as collateral for Government borrowing;

  • Measures to minimize extra budgetary funds. Special funds will only be established by an act of Parliament and be prohibited from running deficits;

  • Rules limiting withdrawals from the Consolidated Fund without legal appropriation to payments of tax rebates authorized by law;

  • Realistic rules on the management of the contingency fund to provide for supplementary budgets and other emergencies. Language that defines all excessive expenditure as a loss of public money will be replaced by more realistic rules;

  • Provisions to expand the coverage of public sector institutions beyond the central government;

  • Clear procedures for handling the Auditor General’s report on the government’s annual accounts;

  • Provisions to ensure that Government accounts that remain dormant or inactive for one year are automatically closed by BOU.

32. Government shall introduce a Treasury Single Account (TSA) to improve cash management, control, and transparency of government operations and to avoid unnecessary interest costs. In preparation for this, Government will request technical assistance from the IMF. To this end, the program will contain a structural benchmark on the preparation of a concept note, to be finalized by March 2013, reflecting the decision to introduce a TSA.

33. In parallel, the government will introduce measures to ensure that all non wage expenditures are initiated and recorded without delay in the Integrated Financial Management System (IFMS). These measures will cover both the commitment stage, including the issuance of local purchase orders (LPOs), and the goods received and payment stages. To ensure that the measures are respected by suppliers, the government will publicize these measures in newspapers, informing suppliers that use of non-authorized procedures will null-and-void any LPOs and result in government action to recover any payments made. Furthermore, the government will make penalties and sanctions automatic for any staff failing to follow the new procedures and to respect IFMS recording deadlines.

34. A recent audit revealed a still-high level of non-pension arrears, which weakens the credibility of the budget and decreases transparency and accountability. In response, Government intends to implement the following measures: (i) installing pre-paid meters for utilities (already started in Kampala with the power sector); (ii) requiring accounting officers to provide detailed justification for arrears to assess their authenticity; (iii) holding officers responsible for any loss of public monies; and (iv) strictly enforcing the practice of rotating accountants and procurement officers that started in 2010.

35. Government is also taking measures to eliminate the scope for diverting budgetary funds which remain unspent at end of the fiscal year, including by: (i) undertaking a review of all project accounts with the objective of maintaining only active accounts by end December 2012; (ii) freezing all domestic projects accounts by end June and publishing them on the MOFPED website; and (iii) maintaining frozen all unspent balances that have not been authorized for carry-over into the next financial year, and closing the account if no request is made by the accounting officer to activate the account within six months.

Revenue enhancement measures

36. With fiscal revenues low by regional standards, domestic revenue mobilization poses the greatest risk to fiscal sustainability. Government will continue to improve tax policy and administration to enhance revenue collection and achieve the target of increasing the tax-to-GDP ratio by 0.5 percentage points per year. Actions on this front include introducing a tax procedure code; revising tax legislation on excise duties, lotteries and gambling; rolling out e-tax services to upcountry stations; and educating taxpayers on e-registration, e-filing and e-payments. Over the medium-term, and beginning with the FY 2013/14 budget, prospects for enhancing revenue collection and ensuring Uganda’s tax system performs at a level comparable to other EAC countries will require a rationalization of tax expenditures, in particular for the VAT and CIT; and a more efficient tax administration. Government intends to seek IMF technical assistance in designing the fiscal regime for prospective mining revenues.

Pension reform

37. Government is advancing reforms in the pension sector. In September 2011, a new regulatory legislation for the pension sector became effective and in August 2012 the Retirement Benefits Regulatory Authority for the entire pension industry was put in place. The Retirement Benefits Sector Liberalization Bill, which is currently before Parliament, introduces competition in the pension industry, increases pension coverage, and improves governance of retirement benefits (pension) schemes. Government will request technical support from the IMF and World Bank to bring the proposed legislation in line with international best practices.

Reforms to strengthen the ITL framework

38. BoU and Government are strengthening the ITL monetary policy framework. In this regard, BOU is refining its use of secondary market operations to guide interbank rates towards the policy rate. To guide its evaluation of the state of the economy, BoU has developed a monthly composite indicator of economic activity, with technical support from East AFRITAC. It will prepare and publish its first quarterly inflation report in the second quarter of 2012/13. BoU is receiving TA from the Research Department of the Fund to strengthen technical capacities for forecasting and modeling. On the institutional side, Government will recapitalize BoU to ensure that it has adequate resources and instruments to fully implement its monetary policy decisions. A technical assistance mission from the Fund to strengthen selected areas of the ITL institutional and operational framework and to improve coordination between fiscal and monetary policies is expected to take place in December.

Domestic debt management

39. Government has prepared a policy document proposing reforms for domestic debt management. The purpose is to clearly differentiate issuance of securities for fiscal policy purposes from any that the BoU may need to use autonomously for monetary policy purposes. The reforms in the policy document will be included in the revised Debt Strategy 2012 to be published by the end of March 2013.

Expenditure efficiency improvements

40. Government will implement expenditure efficiency measures to ensure full budget execution of priority programs and prevent disruptive intra-year adjustments to the budget. On the enactment of the PFA, government will adopt a zero-tolerance policy on supplementary requests above the Contingency Fund and outside the productive priority sectors, and will protect funds allocated to ongoing key priority investments on roads, energy and water to avoid carrying forward outstanding unpaid certificates.

41. Government has introduced an approach called Contractor Facilitated Financing (CFF), a system that integrates supplier credits into the tendering process, which is aimed at reducing delays in the implementation of Government projects in the roads sector. Government considers that this approach has the potential to improve the efficiency of project execution, but is fully mindful of its inherent risks. Consequently, Government will ensure full transparency in the use of CFF including by publishing details of all agreements, clearly differentiating the gross cost of the projects from their financing terms and evaluating the relative costs of any projects in gross terms for the purposes of tender of procurement. To this end, Government will prepare in consultation with Fund staff, by April 2013 a policy paper on the process and procedures for managing the CFF, including provisions on the publication of tender results.

42. A review of the Public Investment Program (PIP) which was originally expected to be carried out and submitted to cabinet in September 2012 was not completed. Government will complete this exercise by end February 2013. The review is intended to ensure that the PIP only contains projects for which cost-benefit analysis and feasibility studies have been conducted and for which sources of financing have been secured. Government will ensure that capacity is developed in respective sectors to carry out cost benefit analysis and prepare feasibility studies. The project portfolio reviews will be on a quarterly basis to ensure implementation of projects by implementing agencies. This will also facilitate credible alignment of the National Development Plan priorities with the Medium Term Expenditure Framework (MTEF) and improve project quality.

National identity cards

43. Delays in the procurement process have affected the timely issuing of national identity cards. However, Government remains committed to proceed with this process as it will greatly facilitate tax administration and financial sector development. Despite this commitment, the issuance of 4 million cards by December 2012, as specified in the PSI’s structural benchmarks, is out of reach. Instead Government will endeavour to issue 2 million cards by December 2013. To bring this project back on track, Government will carry out by April 2013 an inventory of all of the equipment purchased so far under the project, and include in the 2013/14 Budget Framework Paper concrete plans and the needed financing to continue the project.

Table 1.

Uganda: Proposed Quantitative Assessment Criteria for December 31, 2012 and March 13, 20131

(Cumulative change from the beginning of the fiscal year, unless otherwise noted)

article image

Defined in the technical memorandum of understanding (TMU).

Indicative target.

Continuous assessment criterion.

Cumulative change from May, 2010. To be used exclusively for infrastructure investment projects.

Excluding normal import-related credits.

Annual end-of-period inflation.

Table 2.

Structural Benchmarks under the PSI Arrangement

article image
article image

Annex: High Level Government Financial Management Reform Action Plan Matrix

article image
article image
article image
article image
article image
article image

The number will be determined by Joint Assessment on the number of cases opened, investigated and prosecuted

This covers funds identified in the OPMPRDP case by the Auditor General and other relevant information. Government of Uganda needs to establish agreements with the individual Development Partners in line with existing bilateral agreements.

Attachment II. Technical Memorandum of Understanding

Introduction

1. This memorandum defines the quarterly assessment criteria and indicative targets described in the memorandum of economic and financial policies (MEFP) for the financial program supported by the IMF Policy Support Instrument (PSI) over the period of June 30, 2012—March 31, 2013, and sets forth the reporting requirements under the instrument.

Ceiling on the Cumulative Increase in Net Domestic Assets (NDA) of the Bank of Uganda (BoU)

2. Net foreign assets (NFA) of the BOU are defined as the monthly average (based on daily data) of foreign assets minus foreign liabilities, and include all foreign claims and liabilities of the central bank, excluding oil revenues in the petroleum fund. The monthly average values of all foreign assets and liabilities will be converted into U.S. dollars at each test date using the average cross exchange rates referred to in the table below for the various currencies and then converted into Uganda shillings using the program average U.S. dollar-Uganda shilling exchange rate for September, 2012.

article image

3. Net domestic assets (NDA) of the BoU are defined as the monthly average (based on daily data) of base money (defined below) less net foreign assets of the BoU (as defined in paragraph 2). Based on this definition, the NDA limit for December 2012 will be a ceiling on the cumulative change from the monthly average based on daily data for June 2012 to the same monthly average for December 2012. The NDA limits for December 2012, and March 2013 will be ceilings on the cumulative change from the monthly average based on daily data for June 2012 to the same monthly averages for December 2012, and March 2013, respectively. The NDA limit for December 2012 will be a quantitative assessment criterion under the PSI-supported program; and the limit for March 2013 will be an Indicative target.

Base Money

4. Base money is defined as the sum of currency issued by the 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 limit for December 2012 will be a ceiling on the cumulative change from the monthly average based on daily data for June 2012 to the same monthly average for December 2012. The base money limits for December 2012 and March 2013 will be ceilings on the cumulative change from the monthly average based on daily data for December 2012 to the same monthly averages for December 2012 and March 2013, respectively. Base money limits for December 2012 and March 2013 will be indicative targets under the PSI-supported program.

Ceiling on the Cumulative Increase in Net Claims on the Central Government by the Banking System1

5. 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 oil revenues in the petroleum fund and 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. Central government’s deposits with the banking system include the full amount of resources freed by the IMF MDRI. NCG by the banking system will be calculated based on data from balance sheets of the monetary authority and commercial banks as per the monetary survey.

Floor on Net International Reserves of the Bank of Uganda

6. 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 original maturities less than one year, contracted by the BoU and include outstanding IMF purchases and loans.

7. For program-monitoring purposes, reserve assets and short-term liabilities at the end of each test period will be calculated in U.S. dollars by converting the stock from their original currency denomination at program exchange rates (as specified in paragraph 2). The NIR limit for December 2012 will be a floor on the change of the NIR stock from June 2012 to December 2012. The NIR limits for December 2012 and March 2013 will be floors on the change of the NIR stock from June 2012 to December 2012, and March 2013, respectively. The NIR limit for December 2012 will be quantitative assessment criteria under the PSI-supported program; the floor for March 2013 will be an indicative target.

Ceiling on the Stock of Domestic Budgetary Arrears of the Central Government

8. The stock of domestic payment arrears/unpaid payment claims will be monitored on a quarterly basis. Domestic payments arrears/unpaid payment claims 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 prior to the end of the quarter in question, and for which payment has not been made, under the recurrent expenditure budget (excluding court awards and pensions) or the development expenditure budget. For the purpose of program monitoring, the reports on domestic payment arrears/unpaid payment claims prepared by the Auditor General will be used to monitor this item following the end of the fiscal year. In the interim, the reports prepared by the Accountant General on unpaid claims will be monitored to gauge expenditure pressures.

Expenditures under the Poverty Action Fund (PAF)

9. The indicative target on expenditures under the Poverty Action Fund is designed to ensure that resources freed by debt relief are used for additional PAF expenditures. Compliance with the indicative floor for PAF expenditures will be verified on the basis of releases (PAF resources made available to spending agencies).

Ceiling on Issuance of Guarantees by the Government or Bank of Uganda

10. The indicative target on issuance of guarantees by the Government or Bank of Uganda aims to prevent accumulation of contingent liabilities by the Government (including Government entities such as ministries, agencies and authorities). Included against the ceiling are any direct, contingent liabilities of Government (including entities that are part of government such as ministries, agencies and authorities) issued after June 30, 2012, and including any guarantees issued prior to July 1, 2012 but which are extended after June 30, 2012. This excludes guarantee programs which have explicit budget appropriations.

Share of Oil Revenue Placed in Petroleum Fund

11. The purpose of this assessment criterion is to avoid a situation whereby petroleum revenues bypass the Ugandan budget framework. A petroleum fund will be created upon passage of the revised Public Finance Act; in the meantime, government has established a petroleum revenue account in the Bank of Uganda. This QAC will be deemed satisfied if 100 percent of petroleum revenues are transferred to this account upon collection by URA. These resources may then be spent or saved as governed by the organic budget law in force at the time (PFAA 2003 until the new PFA is enacted).

Consumer Price Inflation

12. Inflation is measured by the headline twelve-month rate of annual end-of-period CPI inflation published by the Uganda Bureau of Statistics (UBOS). Quarterly bands denoting the target range are specified in Table 1.

Attachment II. Table 1.

Summary of Reporting Requirements

article image
article image

Adjusters

13. The NDA and NIR targets are based on program assumptions regarding budget support, assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI), external debt-service payments.

14. The NCG target for the banking system, in addition to being based on the aforementioned assumptions, is also based on assumptions regarding domestic nonbank financing of central government fiscal operations. In addition, the NDA target depends on the legal reserve requirements on deposits in commercial banks. Finally, the NDA and NIR targets are based on program assumptions regarding automatic access by commercial banks to the BOU’s rediscount and discount window facilities.

15. The Uganda shilling equivalent of projected budget support (grants and loans) plus HIPC Initiative assistance in the form of grants on a cumulative basis from July 1 of the relevant fiscal year is presented under Schedule A. The ceilings on the cumulative increase in NDA and NCG for the banking system 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 (Including HIPC and MDRI)

(Ush billions)

article image

16. The ceiling on the increases in NDA and NCG of the banking system 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 due2 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: External Debt Service

(Ush billions)

article image

17. The ceiling on increases in NCG of the banking system will be adjusted downward (upward) by any excess (shortfall) in nonbank financing, relative to the programmed cumulative amounts in Schedule C. Non-bank financing will include any domestic debt—either in domestic currency or foreign currency—of the Government of Uganda that is held by creditors—whether resident or nonresident3—that is not included in the Ugandan banking system. It will include the change in government securities held by the nonbank sector as reported in the monetary survey, as calculated by data provided by the Central Depository System (CDS), plus any other claims on government, including entities of government (ministries, agencies, authorities, etc.), held outside the banking system, including those which might be held by the National Social Security Fund (NSSF).

Schedule C: Non-bank Financing

(Ush billions)

article image

18. The floor on the cumulative increase in NIR of the BOU will be adjusted downward by the amount by which foreign exchange expenditures on the Karuma hydropower project exceeds the projected amounts as set out in Schedule D. The ceiling on NDA will be adjusted upward (downward) by the amount by which the domestic currency equivalent of Karuma spending (using the annual program exchange rate) exceeds (falls short of) the projected amounts as set out in Schedule D. The ceiling on NCG will be adjusted upward (downward) by the amount by which the domestic currency equivalent of Karuma spending (using the market exchange rate) exceeds (falls short of) the projected amounts as set out in Schedule D.

Schedule D: Expenditures for Karuma Hydropower Project

(US$ millions)

article image

19. The floor on the cumulative increase in NIR of the BOU will be adjusted downward by the amount by which inflows into the Petroleum Fund falls short of the projected amounts as set out in Schedule E. The ceiling on NDA will be adjusted upward (downward) by the amount by which the domestic currency equivalent of Karuma spending (using the annual program exchange rate) falls short of (exceeds) the projected amounts as set out in Schedule E. The ceiling on NCG will be adjusted upward (downward) by the amount by which the domestic currency equivalent of Karuma spending (using the market exchange rate) falls short of (exceeds) the projected amounts as set out in Schedule D.

Schedule E: Inflows into Petroleum Fund

(US$ millions)

article image

20. The ceiling on NDA of the BoU for every test date will be adjusted upward by the daily average amount of commercial bank automatic access to the BoU discount window and re-discounting of government securities by commercial banks.

21. The ceiling on NDA of the BoU for every test date will be adjusted downward/upward to reflect decreases/increases in the legal reserve requirements on deposits in commercial banks. The adjuster will be calculated as the percent changes in the reserve requirement multiplied by the actual amount of required reserves (Uganda shillings and foreign-currency denominated) at the end of the previous calendar month.

Ceiling on the Contracting or Guaranteeing of New Nonconcessional External Debt by the Public Sector, and Ceiling on the Stock of External Payments Arrears Incurred by the Public Sector4

22. The assessment criterion on short-term debt refers to contracting or guaranteeing external debt with original maturity of one year or less by the public sector. Excluded from this assessment criterion are normal import-related credits and non-resident holdings of government securities and government promissory notes. The definition of “debt” is set out in paragraph 24.

23. The program includes a ceiling on new nonconcessional borrowing with maturities greater than one year contracted or guaranteed by the public sector.5 For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.6 The discount rates used for this purpose are the currency specific commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation and Development (OECD). For debt with a maturity of at least 15 years, the ten-year-average CIRR will be used to calculate the PV of debt and, hence, its grant element. For debt with a maturity of less than 15 years, the six-month average CIRR will be used. To both the ten-year and six-month averages, the same margins for differing repayment periods as those used by the OECD need to be added (0.75 percent for repayment periods of less than 15 years, 1 percent for 15 to 19 years, 1.15 percent for 20 to 29 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, not only current as defined below, but also contingent, on nonconcessional terms. External debt for the purpose of this assessment criterion means borrowing giving rise to liabilities to non-residents. Excluded from the limits are changes in indebtedness resulting from non-resident holdings of government securities and government promissory notes, 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 participated in the HIPC Initiative do not constitute nonconcessional external borrowing. Excluded from these limits are also nonconcessional borrowing within the limits specified in Table 1 of the MEFP. The ceiling also excludes nonconcessional borrowing by one state-owned bank, Housing Finance Bank, which poses limited fiscal risk and is in a position to borrow without a government guarantee.

24. 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. 6230-(79/140), as amended by Decision No 14416-(09/91, effective December 1, 2009). 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 sometime 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 lesser 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.

25. 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 public sector from their level at end-June 2006. External debt payment arrears consist of external debt service obligations (reported by the Statistics Department of the BOU, the Macro Department of the Ministry of Finance) that have not been paid at the time they are due as specified in the contractual agreements but shall exclude arrears on obligations subject to rescheduling.

Monitoring and Reporting Requirements

26. The Government of Uganda will submit information to IMF staff with the frequency and submission time lag as indicated in Table 1. The quality and timeliness of the data submission will be tracked and reported by IMF staff. The information should be mailed electronically to AFRUGA@IMF.ORG.

Appendix II. Uganda: Fund Relations

I. Membership Status: Joined: September 27, 1963;

II. General Resources Account:

article image

III. SDR Department:

article image

IV. Outstanding Purchases and Loans:

article image

V. Latest Financial Arrangements:

article image

Formerly PRGF.

VI. Projected Payments to Fund 2

(SDR Million; based on existing use of resources and present holdings of SDRs):

article image

When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

VII. Implementation of HIPC Initiative:

article image
article image

Assistance committed under the original framework is expressed in net present value (NPV) terms at the completion point, and assistance committed under the enhanced framework is expressed in NPV terms at the decision point. Hence these two amounts cannot be added.

Under the enhanced framework, 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.

VIII. Implementation of Multilateral Debt Relief Initiative (MDRI):

article image

The MDRI provides 100 percent debt relief to eligible member countries that qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of end-2004 that remains outstanding at the time the member qualifies for such debt relief.

Appendix III. Uganda: Joint Bank-Fund Work Program, July 2012 – June 2013

article image
article image

Appendix IV. Uganda—Statistical Issues

As of December 3, 2012

article image
article image
1

The central government comprises the treasury and line ministries.

2

Debt service due is defined as pre-HIPC Initiative debt service due, excluding debt service subject to HIPC Initiative debt rescheduling.

3

Non-residents holding government securities are excluded from the definition of external debt in paragraph 20.

4

Public sector comprises the general government (which includes the central government, local governments, and monetary authorities), and entities that are public corporations which are subject to 'control by the government', defined as the ability to determine general corporate policy or by at least 50 percent government ownership.

5

Contracting and guaranteeing is defined as approval by a resolution of Parliament as required in Section 20(3) and 25(3) of the Public Finance and Accountability Act, 2003

6

The calculation of concessionality will take into account all aspects of the loan agreement, including maturity, grace period, payment schedule, upfront commissions, and management fees. The most recent version of the Fund’s concessionality calculator available in http://www.imf.org/external/np/pdr/conc/calculator/ will be used to calculate loan-by-loan concessionality.

Decision point - point at which the IMF and the World Bank determine whether a country qualifies for assistance under the HIPC Initiative and decide on the amount of assistance to be committed.

Interim assistance - amount disbursed to a country during the period between decision and completion points, up to 20 percent annually and 60 percent in total of the assistance committed at the decision point (or 25 percent and 75 percent, respectively, in exceptional circumstances).

Completion point - point at which a country receives the remaining balance of its assistance committed at the decision point, together with an additional disbursement of interest income as defined in footnote 2 above. The timing of the completion point is linked to the implementation of pre-agreed key structural reforms (i.e., floating completion point).

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Uganda: Fifth Review Under The Policy Support Instrument And Request For Program Extension: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uganda
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2013: Issue 025
Publisher:
International Monetary Fund
ISBN:
9781475532517
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781475532517.002
Figure 1.

Monetary Developments
Figure 2.

Fiscal Developments
Figure 3.

External Developments

Uganda: Monthly Inflation Rate, Dec 2011-October 2012

Uganda: GDP Growth, 1996-2012

Uganda: International Reserves, Jan 2009-June 2012

Uganda: Selected Financial Sector Indicators, December 2009-June 2012