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Uganda: Fourth Review Under the Policy Support Instrument and Request for Modification of Assessment Criteria

Core Content

This document outlines the Fourth Review Under the Policy Support Instrument (PSI) and the request for modification of assessment criteria for Uganda, prepared by the IMF staff team following discussions in Kampala from March 7–21, 2012. It includes the Staff Report, Staff Supplement, and Press Release, and discusses the country's economic performance, policy discussions, and risks.

Main Views and Key Information

1. Monetary Policy Performance

• The monetary tightening initiated in July 2011 has been effective in reducing inflation and stabilizing the currency.
• High interest rates helped increase foreign reserves and reduce underlying inflationary pressures.
• Inflation is expected to fall to single digits by end-2012 and approach the BoU's target of 5% for core inflation by June 2013.
• The Bank of Uganda (BoU) is planning a cautious easing of monetary policy as inflation declines.
• The exchange rate strengthened in late 2011 and early 2012 due to increased capital inflows and improved monetary conditions.
• The BoU remains committed to inflation targeting (FFIT), but the current framework is a hybrid known as "inflation targeting lite", which combines a reserve money program with inflation targeting.

2. Fiscal Policy and Performance

• Fiscal policy was very tight for most of the year but was relaxed in the fourth quarter to address revenue shortfalls.
• The domestically-financed deficit is expected to deteriorate by 0.75 percentage points of GDP due to increased spending on security and administrative costs.
• The FY2012/13 budget aims to consolidate the fiscal position and introduce measures to improve public finances.
• Revenue growth has not kept pace with inflation, and tax collections fell by about 6% in real terms in the first half of FY2011/12.
• The fiscal deficit is projected to decline by 1.25 percentage points to 3.5% of GDP next year, with a 1% increase in capital spending.
• The contingency for FY2012/13 is set at 0.75% of GDP, to manage potential spending pressures.

3. Program Performance

• The third review under the PSI was completed in January 2012, with six of seven quantitative assessment criteria (QACs) met.
• The end-December 2011 QACs were all met, including the reserve money target.
• Structural benchmarks were partially met, including the publication of utility data, but some areas like the National Identification system remain delayed.

4. Economic Outlook and Risks

• A modest recovery in growth and continued disinflation are expected for FY2012/13.
• The current account deficit is projected to remain high, due to infrastructure and oil sector investment.
• Key risks include:
  • External: A global slowdown, higher energy prices, and a deterioration in regional security.
  • Domestic: Possible budgetary expenditure arrears and asset quality issues in the banking sector.

5. Tax Policy Reforms

• The authorities introduced tax policy measures in FY2012/13, including the suspension of VAT and corporate income tax exemptions.
• These reforms are expected to create a revenue cushion and improve the medium-term revenue and budget performance.
• A comprehensive tax procedure code is being prepared and will be submitted to cabinet by April 1, 2013, and to parliament in June.

6. Debt Sustainability

• The Joint IMF/World Bank Debt Sustainability Analysis (DSA) indicates that Uganda continues to face low risk of debt distress.
• The external debt is expected to increase over the medium term but remain within policy-dependent debt vulnerability thresholds.

7. Program Modifications Requested

• The authorities requested a modification of the end-June 2012 ceiling on net banking system claims on government (NCG), raising it by 0.75% of GDP.
• The staff supports the request to complete the fourth review and the modifications to the assessment criteria.

Key Documents Included

• Staff Report
• Staff Supplement (Joint IMF/World Bank Debt Sustainability Analysis)
• Press Release (June 5, 2012)
• Letter of Intent
• Memorandum of Economic and Financial Policies (MEFP)
• Technical Memorandum of Understanding (TMU)

Conclusion

The IMF staff supports the fiscal and monetary policies of Uganda and the request for modification of assessment criteria. The country is on track to meet the quantitative assessment criteria and most structural benchmarks. However, key risks remain, particularly external and regional security concerns. The fiscal consolidation and tax reforms are seen as important steps towards improving public finances and long-term economic stability.