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.
1. My Ugandan authorities remain determined to persevere with prudent macroeconomic policies despite the protracted global economic uncertainties coupled with heightened regional security challenges. Growth has tapered off, while the authorities’ disinflationary effort has yielded positive results with inflation down to the Bank of Uganda’s (BoU) target, and the nominal exchange rate has strengthened. Growth will, in the near term, continue to remain constrained due to the suspension of budget support by the country’s development partners following a regrettable mishandling of public resources. That notwithstanding, the authorities are determined to deepen structural reforms and strengthen the economy’s growth drivers including deepening the EAC regional integration framework. With their policy stance and the envisaged normalization of support from the international community in the near term and policy guidance from the Fund, my authorities are confident that they stand a good chance of shoring up their economy’s growth to its trajectory and further strengthening the country’s macroeconomic stability.
2. The authorities are also committed to strengthen the implementation of their program under the PSI. In that regard, they are appreciative of the Fund’s constructive engagement and support under the PSI and the technical assistance support also in view of the new oil economy. Going forward, they are determined to further strengthen their engagement with the Fund also in the context of a successor PSI engagement, and to quickly normalize their engagement with their development partners.
3. In view of the strong performance under the program, with all of the end-June 2012 quantitative assessment criteria observed with good margins, all but two quantitative indicative targets met, and continued implementation of structural reforms, they request Directors’ support for the completion of the fifth review of the PSI. They also request Directors’ support for the extension of the PSI until August 2013 to allow for the completion of the sixth and final review under the current arrangement.
Recent economic developments and respective policy environment
4. Uganda’s economic growth rate dipped considerably to 3.4 percent in FY 2011/12 from 6.7 percent a year earlier due to a confluence of internal and external factors. Internal shocks such as power outages and high inflation, coupled with disinflationary related high interest rates impacted heavily on private sector competitiveness. A reduced fiscal impulse due to capacity related delays in implementing the Government investment program, particularly in the construction and energy sectors, negatively impacted the economy’s growth prospects. Externally, the protracted global economic uncertainties resulted in continued low demand for exports from Uganda’s traditional trading partners, and market diversification continued to suffer from limited export penetration into emerging markets in Asia. Because of the smaller stimulus and weak external demand, real GDP growth is projected to slightly recover to 4.25 percent in 2012/13
5. My authorities’ fiscal policy remained on the consolidation stance in FY2011/12, but in light of the sharp decline in real GDP growth, they intend to actively use their fiscal policy to support the strengthening of the job-rich economic growth. On the revenue front, the low real GDP growth and high inflation accounted for a limited outturn on tax revenues. Total expenditure and net lending was below the budget largely due to the significant underperformance on the development budget and, especially, the delayed commencement of the Karuma hydropower plant. Recurrent expenditure, however, exceeded the budget mainly on account of higher domestic interest rates and non-wage recurrent outlays. There was also a shortfall of nearly 1.25 percent of GDP on donor disbursements affecting the external finance component of the budget. The resulting large real spending contraction contributed to the weak growth outturn in FY 2011/12.
6. The authorities’ tight monetary and fiscal policies, which were in line with staff recommendations, coupled with improved food supplies, helped to significantly contain inflation. To bring down inflation, the BoU raised its central bank rate (CBR) from 13 percent in July 2011 to 23 percent in November 2011, thus curtailing private sector credit and aggregate demand. As a result, annual inflation, which rose to a peak of 30.5 percent in October 2011, had dropped to under 5 percent in November 2012. Core inflation also dropped from 30.8 percent to 3.8 percent in the same period. The easing of inflationary pressures allowed the BoU to begin cutting the CBR as early as February 2012 to support recovery of private sector credit and aggregate demand growth.
7. External balances remained weak and were projected to remain unchanged in FY2012/13. The current account deficit (including grants) is estimated to have worsened to 11.3 percent of GDP from 10.9 percent in FY2010/11. This is on account of the limited growth in exports due to weaker demand, coupled with strong imports, both in volume and value terms. As a result, and also due to the suspension of budget support by the country’s development partners, international reserves will decline in 2012/13 from 4 to 3.75 months of imports.
Medium-term policy framework and reforms
Fiscal policy and related reforms
8. My authorities’ fiscal policy will strive to maintain an adequate support to job-rich growth though the size of the intended fiscal stimulus has been curtailed by the suspension of budget support (equivalent to 1.3 percent of GDP) by the country’s development partners. To achieve the fiscal objectives, the authorities will accordingly revise their fiscal strategy to accommodate the shortfall in budget support with the view of maintaining spending levels for the priority services.
9. The authorities are confident that their expeditious implementation of the six-tier PFM Reform Action Plan conveyed to donors will encourage the development partners to restore budget support by June 2013. Full restoration of budget support will help strengthen the authorities’ FY2013/14 budget framework and that of the outer years and, especially, facilitate the resumption of financing the scaling-up of investments in infrastructure and primary sectors to further shore-up inclusive growth.
10. To maintain prudent spending in the priority areas in an environment of tightened fiscal space, the authorities will continue to strengthen domestic and concessional resource mobilization in the medium term. On the revenue front, the authorities will persevere with enhancing fiscal reforms with the view of raising the revenue yield to levels comparable to their EAC partners. To that end, the scope of tax expenditures and exemptions will be streamlined to boost domestic revenue collections, and efficiency in tax administration will be enhanced. Cognizant of the overall capacity limitations, they intend to request additional TA from the Fund in designing the mining sector fiscal regime.
11. To improve budget execution and efficiency, the authorities intend to expeditiously implement the PFM and IFMS reforms also in line with their renewed commitment to ensure that funds allocated to spending agencies are spent on the intended expenditure items and projects. To further strengthen budget management, they have tabled before Parliament a Public Private Partnership Bill that is intended to ensure that PPP-related fiscal contingent liabilities are appropriately budgeted, appropriated and accounted for. The PPP bill will also ensure that potential risks embodied in this service delivery framework are properly mitigated.
12. The authorities have also tabled before Parliament a comprehensively reviewed Public Finance Bill (PFB) that will, inter alia, provide an appropriate mechanism for oil revenue management and consolidate the 2003 Public Finance and Accountability Act (PFAA) and Budget Act of 2001. The revised budget act will strengthen public finance management by enhancing the predictability of the budget including modalities for financing emergencies and supplementary budgets. Further and as part of the PFAA reform, the authorities have resolved to strengthen the internal commitment and control system to rein in the accumulation of expenditure arrears. To improve cash management, the authorities intend to migrate to a treasury single account system for administering government finances, and request Fund TA in this regard.
Monetary and exchange rate policies
13. My authorities’ tightened monetary policy successfully brought down core inflation to the BoU’s target of 5 percent. They will remain vigilant of the inflationary pressures going forward, and set the policy rate at a level consistent with the BoU’s inflation target rate while mindful of the continuous need to support real GDP growth. In that regard, the BoU will also ensure that credit and currency risks are appropriately assessed in view of the recent deterioration of asset quality and the increase in dollar-denominated loans. The BoU will also continue to improve its inflation-specific analytical and forecasting tools in the context of the ITL monetary policy framework that has, thus far, served the country well. The authorities intend to recapitalize the BoU to ensure it has adequate resources and instruments to fully implement its monetary policy.
14. On the exchange rate, the BoU remains committed to a flexible exchange rate regime. In that regard, the BoU will remain vigilant and only intervene occasionally to smooth out excessive volatility. The authorities will also, over the medium term, seek to rebuild the country’s international reserves.
Financial sector
15. The BoU will continue to enhance its supervisory and regulatory services to the financial institutions to enhance the stability of the country’s financial system by mitigating NPLs and enforcing bank compliance with existing provisions. The pension sector is now effectively regulated following the operationalization of the Retirement Benefits Regulatory Authority in August 2012. The authorities have also tabled before Parliament the Retirement Benefits Sector Liberalization bill which is intended to improve governance of the pension schemes, introduce competition in the pension sector, and increase pension coverage. The authorities are also committed to implement further financial sector reforms, strengthen the regulatory framework for financial institutions to be fully consistent with the 2005 Basel Core Principles, and to update the Financial Institutions Act to allow banks to offer additional products.
Conclusion
16. The authorities regret the recent mishandling of public funds and the resultant suspension of budget support by the country’s development partners. They reaffirm their commitment to expeditiously implement their six-tier PFM Reform Action Plan, in addition to strengthened implementation of their economic program supported by the PSI, to redress the governance deficit and facilitate normalization of relations with their development partners. The authorities are mindful that, in the meantime, the economy’s growth prospects will remain constrained also as a result of the protracted global economic uncertainties. They are, in this regard, prepared to take additional measures to protect the country’s macroeconomic stability. They, therefore, request continued support from the Fund, other international financial institutions, and development partners in their efforts to strengthen macroeconomic stability, restore high growth rates with low inflation for poverty reduction and attainment of the MDGs.