Statement by Mr. Saho on Uganda Executive Board Meeting, June 28, 2013

This paper focuses on Uganda’s 2013 Article IV Consultation and Sixth Review Under the Policy Support Instrument, Request for a Three-Year Policy Support Instrument and cancellation of Current Policy Support Instrument. Driven mainly by investment and trade, growth has recovered to about 5 percent, a stronger than expected rebound from the low 3½ percent expansion registered last year. Fast implementation of road construction, the start of operations of the Bujagali hydropower plant, and a good harvest boosted aggregate demand. Envisaged public finance management reforms are set to address the problems of persistent under budgeting, arrears accumulation, and failure to sanction financial irregularities.

Abstract

This paper focuses on Uganda’s 2013 Article IV Consultation and Sixth Review Under the Policy Support Instrument, Request for a Three-Year Policy Support Instrument and cancellation of Current Policy Support Instrument. Driven mainly by investment and trade, growth has recovered to about 5 percent, a stronger than expected rebound from the low 3½ percent expansion registered last year. Fast implementation of road construction, the start of operations of the Bujagali hydropower plant, and a good harvest boosted aggregate demand. Envisaged public finance management reforms are set to address the problems of persistent under budgeting, arrears accumulation, and failure to sanction financial irregularities.

My Ugandan authorities appreciate the Fund Executive Board and Management for their continued engagement and support. They are grateful for the productive policy discussions and advice offered by the IMF mission team during the 2013 Article Consultation and sixth review under the Policy Support Instrument. The authorities agree with the thrust of the report as it addresses the main challenges to the successful implementation of Uganda’s growth strategy.

Program performance

Despite the daunting challenges, my authorities continue to demonstrate a steadfast commitment to pursuing prudent macroeconomic and structural policies within the context of the IMF program. This is reflected in the strong performance in respect of the end-December 2012 program targets, as all quantitative assessment criteria were met. However, performance on the structural benchmarks was mixed. While there were some delays on avoidance of domestic arrears and transparency of fiscal operations, progress was made on publication of vital statistics. Against this backdrop, my authorities request for Executive Directors’ support for the completion of the sixth and final review of the current PSI and approval of a successor PSI.

Recent economic development

Uganda’s economic growth remains strong driven by construction, services and manufacturing. The economy is expected to expand by 5.3 percent in FY 2012/13, higher than the 3.4 percent recorded in 2011/12. Aggregate demand has been boosted, inter alia, by an increase in net exports, while aggregate supply has improved by the expansion in electricity generating capacity and better agricultural harvests. Inflation has fallen sharply as a result of the softening of supply side shocks and the tight monetary policy that has dampened the growth in domestic demand. On the fiscal front, the overall fiscal deficit in 2012/2013 is expected to be 3.9 percent of GDP, exceeding the program target by 0.5 percent of GDP. The larger deficit is largely on account of the lower than expected revenues and grants, slightly higher than programmed current expenditures and the need to recapitalize the central bank. Owing to the strong non-coffee exports and the decline in imports, the external current account deficit (including grants) is expected to narrow to 9.3 percent of GDP in FY12/13 from 13.0 percent of GDP in the preceding year. As a result, the gross international reserves of the central bank increased to US $3.0 billion from US $2.6 billion during the same period. However, in months of import cover, reserves remain unchanged at 4.2 months of imports of goods and services.

Medium-term outlook and polices

As the recovery from the recent supply side shocks is gradually consolidated, my authorities’ policy focus has shifted to returning the economy to a higher and sustainable growth trajectory in order to increase employment and reduce poverty. Continued scaling up of investment in infrastructure and improved delivery of basic social services, in line with the authorities’ National Development Plan (NDP) will be pursued in the medium term. Against this background, my authorities are in agreement with staff on the growth path of GDP to 6.0 percent during 2013/2014 and further to an average of 7.0 percent per annum over the medium term. Core inflation in the medium term, is expected to average 5.0 percent while gross international reserves will be maintained at a level of at least 4.0 months of import cover.

The new PSI will support government endeavors to expand the fiscal space for infrastructure investment while maintaining debt sustainability. In this regard, efforts will focus on revenue enhancement, reforming PFM to improve effectiveness of public spending, bolstering the new oil economy, and improving the business environment.

Fiscal policy

My authorities remain committed to a near and medium-term macroeconomic framework that aims at consolidating the recovery of the economy. To achieve this objective, the authorities intend to slightly increase budgetary spending levels for FY2013/14, in particular scaling up expenditures on infrastructure and agriculture in line with their NDP. In this regard, the authorities intend to consolidate current expenditures, while increasing spending on social services.

On the revenue side, my authorities are determined to increase revenue mobilization through the broadening of the tax base and reducing discretionary tax exemptions. Also, the authorities will continue implementing additional tax reform measures to raise domestic revenue resources over time. To this end, efforts will focus on enhancing the efficiency of VAT and strengthening tax administration.

To ensure budget credibility and make public spending more effective, the authorities reaffirmed their commitment to enhance public financial management. They are dedicated to strengthening external debt management in order to maintain debt sustainability. In this respect, my authorities will pursue concessional borrowing and grants. Non-concessional financing will be contracted for projects that have high economic returns.

The authorities will continue the implementation of PFM reforms. The Public Financial Management Bill will be amended according to international best practice. In order to avoid misappropriation of funds and payment arrears, my authorities will complete the rollout of the Integrated Personnel and Payroll System (IPPS) to cover personnel management and payroll of entities within central government. In addition, a Treasury Single Account (TSA) to improve cash management, control, and transparency of government operations will be established.

Monetary and financial sector policies

My authorities are committed to maintaining inflation below the Bank of Uganda’s mediumterm target. To this end, the current ITL regime will be strengthened through a combination of institutional reforms and technical capacity building in order to smoothly transition to fully fledged inflation targeting. As a result, efforts are being made to recapitalize the central bank and strengthen its operational independence and by enhancing the potency of monetary policy instruments for the effective implement monetary policy. Accordingly, work is at an advanced stage to submit a revised Bank of Uganda Act to cabinet by February 2014. Furthermore, my authorities are building capacity in macroeconomic modeling in both the Ministry of Finance and the Bank of Uganda. In view of this, my authorities’ appreciate the TA from the Research Department of the IMF.

In the financial sector, the medium term strategy of the authorities is to produce a significantly changed financial sector, which is stronger, more stable and vibrant and a vanguard for supporting broad-based economic growth and development. In this regard, the Bank of Uganda is implementing Basel III in segments, starting with a pilot exercise on the use of a liquidity coverage ratio by big banks. All banks will soon be required to use this ratio as well as a capital conservation buffer. Legislations to change the Financial Institutions Act and other financial sector regulations are at the parliament for ratification. Also, to deepen financial intermediation and the extension of credit, the central bank intends to improve public financial literacy and promote financial innovation while strengthening the regulation of the non-bank financial institutions.

Conclusion

The authorities remain steadfast to maintaining a stable macroeconomic environment, creating conditions for sustained broad-based economic growth and poverty reduction, and

persevering with the structural reform agenda. Efforts to create employment opportunities through significant public investment in infrastructure and reforms to the business environment remain priorities. It is in this regard that my authorities consider the Fund’s and other development partners’ policy advice and technical support critical to successfully implementing their national development plan and poverty reduction.