Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. We recently held discussions with Fund staff on the second review of the economic program supported by a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), which was approved by the Executive Board on September 13, 2002.

2. The attached memorandum of economic and financial policies (MEFP) reviews the implementation of the program for fiscal-year 2002/03 (July–June) and describes the objectives and policies that the government intends to pursue for fiscal-year 2003/04. The government is committed to reducing the incidence of poverty in Uganda through the continued implementation of sound economic and financial policies necessary for sustained economic growth and macroeconomic stability. The 2003/04 budget approved by parliament envisages a reduction of more than one-half of one percentage point of GDP in the fiscal deficit before grants, including higher tax revenue from tax measures and improvements in tax administration. Spending on public administration will be reduced relative to GDP, while resources will be provided to expand social and economic programs designed to meet the objectives of the Poverty Eradication Action Plan. The deficit would be covered by expected net inflows of donor support, mostly in the form of grants. The focus of the structural program is on improving public expenditure management at both the national and local levels of government, strengthening tax administration, deepening the financial sector, and improving debt management.

3. In light of the progress achieved in the implementation of the program for 2002/03 and the supporting details provided in the MEFP, the Government of Uganda request waivers for the nonobservance of the performance criteria for the accumulation of new domestic arrears; development of a plan to clear the outstanding stock of domestic arrears, including arrears on pensions and privatization of the Uganda Development Bank.

4. The Government of Uganda requests the disbursement of the third loan of SDR 2 million upon completion of the second review. The Government also requests that the disbursement of SDR 4 million over the next year of the three-year arrangement will be made as follows: the disbursement of the fourth loan (SDR 2 million) of the arrangement will be subject to the observance of the performance criteria for end-December 2003 and the completion of the third review under the arrangement no later than June 2004; and the disbursement of the fifth loan (SDR 2 million) of the arrangement will be subject to the observance of the performance criteria for end-June 2004 and the completion of the fourth review under the arrangement no later than December 2004.

5. The Government believes that the policies set forth in the attached MEFP are adequate to achieve the objectives of its program, but it will take any further measures that may become appropriate for this purpose. The Government of Uganda will consult with the Fund on the adoption of these measures and in advance of revisions to the policies contained in the MEFP, in accordance with the Fund's policies on such consultations.

6. The Government of Uganda authorizes the publication and distribution of this letter and MEFP and all reports prepared by Fund staff regarding the Poverty Reduction and Growth Facility (PRGF)-supported program.

Memorandum of Economic and Financial Policies
of the Government of Uganda for 2003–04

1. The Government of Uganda remains committed to reducing poverty through strong economic growth, macroeconomic stability, and programs targeted to increase the incomes of the poor and improve the quality of their livelihood, as laid out in the Poverty Eradication Action Plan (PEAP). The Government's economic program is supported by a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), which was approved by the Fund's Board on September 13, 2002. This memorandum of economic and financial policies (MEFP) reviews the performance under the program and sets out the Government's policies and targets for the remainder of the 2003/04 fiscal year (July–June), including actions that the Government has taken to address program slippages.

2. In July 2003, the Government of Uganda initiated the preparation of the second revision of the PEAP. This exercise, in which a wide range of stakeholders are participating, is expected to be completed by early-2004. The revised PEAP will articulate the medium-term macroeconomic policy framework that will guide the Government's strategy for achieving sustained economic growth and poverty reduction, taking into account the progress and lessons learned since the initial PEAP in 1997. Reversing the recent increase in poverty, which occurred after several years of substantial reductions, will depend not only on boosting the GDP growth rate and the effective implementation of social and economic programs, but also on resolving the security problems in the northern and northeastern regions of the country.

I. Performance under the PRGF-Supported Program in 2002/03

3. Overall, macroeconomic performance was satisfactory in 2002/03. Despite adverse weather conditions, which depressed agricultural production, real GDP grew by 5 percent, led by strong growth in private sector construction. The shortfall in agriculture contributed to a sharp rise in inflation during the year to 10.2 percent—well above the average of the past ten years—as food crop prices surged by 32 percent. Underlying inflation, which excludes food crops, remained subdued at 5.4 percent.

4. A significant advance was made in 2002/03 toward achieving a more sustainable fiscal position and one less vulnerable to disturbances. The overall fiscal deficit, excluding grants, was reduced by 1.3 percentage points of GDP to 11.5 percent of GDP, reflecting both restraint in the growth of government spending and a steady revenue performance. Uganda continued to rely heavily on support from its development partners to finance its fiscal deficit, with net donor inflows of 10.7 percent of GDP. The large fiscal deficit continued to exert upward pressure on real interest rates and complicated the conduct of monetary and exchange rate policies. Net issues of treasury bills and sales of foreign exchange by the Bank of Uganda (BOU) totaling about 6 percent of GDP were needed to mop up the excess liquidity generated by the fiscal deficit. Still, broad money, excluding foreign currency deposits, grew by 17.3 percent during the year, while bank credit to the private sector increased by 28.2 percent, albeit after three years of stagnation.

5. Regional tensions and uncertainties regarding the magnitude of donor support, together with global economic uncertainties during the run-up to the war in Iraq, increased volatility in the foreign exchange market during the second half of the fiscal year. Between December 2002 and April 2003, the Uganda shilling depreciated by 7 percent in nominal terms against the U.S. dollar, with occasionally large daily fluctuations (especially in March) of up to 2 percent. Since April, the shilling has remained fairly constant, as those difficulties have eased.

6. Uganda's external position improved in 2002/03. A recovery in export prices contributed to a 7.1 percent increase in export earnings, even though weather conditions hindered production of some key cash crops, including coffee and cotton. Various nontraditional export commodities, however, maintained solid growth, both in terms of volume and earnings. The external current account deficit, excluding grants, was narrowed by ½ of 1 percentage point of GDP to 13 percent of GDP. This deficit was more than covered by net donor support and private capital inflows, consisting mainly of foreign direct investment. As a result, the BOU continued to build up international reserves, which stood at 6.3 months of imports as of end-June 2003.

7. With regard to the execution of the PRGF-supported program, all quantitative performance criteria for June 2003 were observed, with the exception of the zero limit on new domestic arrears (Table 1). By the end of March 2004, the Government will clear all remaining nonwage recurrent and development expenditure arrears incurred under the commitment control system (CCS) during 2002/03 (amounting to U Sh 5.1 billion). In addition, we have implemented significant measures to prevent such arrears from reoccurring in the future (paragraph 13), including the Public Finance and Accountability Act (PFAA) approved by parliament in April 2003, which constrains supplementary expenditures and strengthens enforcement of the CCS. On this basis, we are requesting a waiver for the nonobservance of this performance criterion. Moreover, while the ceiling for net credit to the government by the banking system was observed, this outturn is based on data for the check float, the quality of which needs to be improved. To strengthen our check-tracking system and methods of measuring the check float, we have requested and will be receiving technical assistance from the Fund.

8. As for the structural elements of the program, the Uganda Revenue Authority (URA) prepared a business plan for implementing strengthened tax administration measures in line with the program. In October 2003, the URA management submitted to its Board a plan for computerization of the URA; Board approval of the plan is expected by end-November. The BOU published its audited financial statements for 2001/02 and 2002/03 in July and September, respectively, and the aggregated local government financial statistics for 2001/02 were produced by end-September 2003. However, the performance criteria for the submission of a bill to parliament to repeal the National Social Security Fund (NSSF) Statute by end-March 2003;¹ the privatization of the Uganda Development Bank Limited (UDBL); and the development of a time-bound plan to clear the outstanding stock of domestic arrears, including arrears on pensions, by end-June 2003 were not observed (Table 2). Although no plan for clearing the stock of domestic nonpension arrears has been formally announced, the 2003/04 budget (submitted to parliament in June 2003) and the medium-term expenditure framework (MTEF) make explicit provisions for payment of the non-CCS component of these arrears, and there are explicit regulations for clearing overcommitments incurred under the CCS. Upon concluding an updated verification of the stock of domestic nonpension arrears—net of settlements—we will submit a note to the Fund that describes our schedule for fully clearing these arrears. In addition, the Ministry of Public Service is in the process of finalizing a plan to clear pension arrears. It is expected that this plan would be adopted by cabinet during the current fiscal year and would then be submitted to parliament as part of a broader bill on public sector pension reform. The end June-2003 benchmark to establish a unit in the office of the Inspector General of Government (IGG) to identify cases of improper conduct and corruption by Uganda Revenue Authority (URA) staff was not observed because of a lack of resources and the delay in the release of the report of the Judicial Commission of Inquiry on corruption in the URA. As discussed below, we intend to correct for the slippages incurred in the 2003/04 structural program, on which basis we are requesting waivers for the unobserved performance criteria.

II. Policies for 2003/04

9. As presented in the previous MEFP, dated June 9, 2003, the program for 2003/04 aims to support a rebound in economic activity, while reducing inflation to the low rates that have prevailed over the past decade. With a return to normal weather conditions and the consequent recovery in agricultural production, real GDP growth is projected to be about 6 percent in 2003/04. Both headline and underlying inflation are projected to fall to about 3 percent during the year, as a firm monetary policy is expected to be complemented by stable food and fuel prices.

10. Fiscal adjustment continues to be a central element of our medium-term macroeconomic policy framework. In 2003/04, we project a reduction in the fiscal deficit, excluding grants, of about 0.8 percent of GDP. Tax measures announced in the June 2003 budget speech and improvements in tax administration are projected to increase government revenue by ½ of 1 percentage point of GDP. Expenditure is expected to decline by 0.3 percent of GDP, as nonwage recurrent expenditure in nonpriority areas is envisaged to fall by about 0.2 percent of GDP, while development expenditure linked to project aid is expected to fall by about 0.1 percent of GDP. The overall fiscal deficit is thus projected to narrow to 10.7 percent of GDP and would be financed almost entirely by donor support. In this regard, full disbursement of the US$150 million Poverty Reduction Support Credit (PRSC) by the World Bank in the form of a grant has led to an upward adjustment in our projections of donor support and a reduction in our net domestic financing needs.

11. The URA is continuing its efforts to increase revenue collections by strengthening administration and fighting corruption. In March 2002, the Government appointed a Judicial Commission of Inquiry to investigate corruption in the URA. Upon the issuance of its final report, we will act expeditiously on the commission's recommendations. To strengthen the supervision of staff, the URA's internal Staff-Monitoring Unit will be augmented by four additional auditors, bringing the total number of auditors in the unit to twelve. Moreover, training will be carried out to enhance the Unit's ability to investigate staff asset declarations and allegations of corrupt behavior. More generally, new URA staff will be tested to assure competency, and extensive training programs will be implemented. In line with its business plan, URA management has established a series of quantifiable targets to measure improvements in tax administration, including building a database of tax offenders; continuing the cleanup of the taxpayer registry and the tax identification number (TIN); monitoring taxpayers' compliance with payments in installments; rolling out a single customs valuation system at collection points; and stepping up audits for domestic and external taxes. Furthermore, the URA will also begin implementing its computerization plan immediately following approval by the URA Board, with the aim of establishing an integrated system across domestic tax departments, as well as strengthening implementation of the automated system for customs data (ASYCUDA++) at three specific custom points (Busia, Malaba, and Entebbe) by June 2004.

12. Improvements in public expenditure management are needed to achieve greater effectiveness of expenditures, which would be essential for achieving PEAP targets. In this respect, the government's budget process will remain highly transparent and steps have been taken to ensure that outcomes reflect budget intentions. First, as mentioned above, the new Public Finance and Accountability Act (PFAA) will help to tighten control on supplementary allocations by requiring prior parliamentary approval of all supplementaries. Second, beginning this year, all classified expenditures will be audited by the Auditor General. Third, with support from the World Bank, we are undertaking a comprehensive review of procurement procedures at both the national and local levels of government. Finally, we have embarked on a comprehensive agenda to eliminate all domestic arrears, including the paying down of outstanding stocks over the medium term.

13. Eliminating all domestic arrears involves the verification and paying down of outstanding pension arrears, the paying down of outstanding pre-CCS nonpension arrears, the clearance of arrears accumulated under the CCS, and measures to prevent new arrears. The new PFAA will make a significant contribution to preventing new arrears by constraining supplementary expenditures and enforcing compliance with the CCS by accounting officers. Inspections and internal audits have been stepped up to further encourage compliance with the CCS, which is being computerized within all central government ministries and agencies over the next two years, in conjunction with the implementation of the integrated financial management system (IFMS).We have also instituted prepayment schemes for utility services, a leading source of past arrears, and line ministries have now paid down their obligations incurred under the CCS in 2002/03, using their budgeted allocations. By December 2003, the Treasury's internal audit department will complete an updated calculation of the stock of nonpension, nonwage arrears (including the CCS), taking into account all prior settlements. Using this base, the Government will update the plan for reducing the stock of domestic nonpension arrears, which is currently budgeted in the MTEF (U Sh 45 billion a year). As noted above, a plan to clear pension arrears is expected to be finalized in the coming months and will be submitted to cabinet for adoption by end-June 2004, most likely as part of a comprehensive proposal for public sector pension reform. To contain the growth of pension obligations, the Government will review the indexation of pension benefits.

14. The Government has adopted a number of measures to reduce public administration expenditures, including: rationalizing the appointments of full-time presidential advisers; eliminating the positions of Deputy Resident District Commissioner in districts with a population of less than 500,000 and of all Assistant Resident District Commissioners; restricting the use of government vehicles; and putting a freeze on the creation of new districts. Implementation of a number of other measures to reduce the costs associated with commissions, semiautonomous agencies, and regulatory bodies will require legislative approval. Looking ahead, the government remains committed to reducing the growth in overall public administration expenditures.

15. With one-third of PAF spending executed by local governments, we need to upgrade our capacity for accounting and reporting by these governments and the monitoring of their activities. We will continue the implementation of the fiscal decentralization strategy (FDS) to achieve such an upgrade, with fifteen pilot governments in the current year. These local governments will be subject to the new budgeting and planning manuals under the FDS to ensure better reporting and greater accountability. In addition, four pilot local governments started implementing the IFMS in October 2003. To facilitate these tasks, and to assist with follow-up implementation of the CCS, we will request support from the Fund for a long-term advisor. Other policies geared toward improving public expenditure management include the implementation of the new chart of accounts, which establishes uniform budget classifications, across all local governments (for both pilot and nonpilot governments in the strategy). Finally, the FDS envisages the completion of sector policy reviews, with the aim of aligning sector policies with the decentralization strategy of the government. The draft guidelines for the sector review are in place, and negotiations on the sector guidelines are due to begin in November 2003.

16. Sound implementation of the base money program will be key to maintaining low inflation and a stable environment for financial intermediation and the foreign exchange market. Indeed, innovations in the use of monetary and exchange rate policy instruments, such as the introduction of the biweekly treasury bill auction, increased use of repurchase operations for liquidity management, and the steady daily sales of foreign exchange by the BOU for sterilization purposes, have generally allowed for greater money market and exchange rate stability. In this regard, we are seeking to encourage the further development of the secondary market for treasury bills and the interbank money market.

17. To avoid sharp movements in monetary aggregates, the BOU has revised its quarterly base money ceilings to apply to the average of the daily stocks of base money in the last month of each quarter. Consequently, the 2003/04 program has been rebased on the average stock of base money during June 2003, and, reflecting the need to contain excess liquidity, the programmed annual growth in base money has been set at 10.6 percent. Furthermore, to ease the upward pressure on treasury bill yields, the mix of treasury bill issues and foreign exchange sales in sterilization operations has been shifted toward greater foreign exchange sales. The floor for the net increase in net international reserves of the BOU has thus been reduced by US$22 million. Broad money, excluding foreign currency deposits, is projected to expand at a moderate rate of 12.5 percent in the current year, while bank credit to the private sector is expected to increase by 15.3 percent following the strong rebound in lending during the previous year.

18. To address the shortage of long-term financial instruments, the government will introduce treasury bonds with maturities of up to five years, which would serve as a benchmark instrument. Initial offerings of two-year bonds are expected to start in 2003/04. Other measures aimed at mobilizing domestic financial resources for investment include the restructuring of the NSSF, which is a potentially large source of long-term savings. For this purpose, it is necessary to establish qualified regulatory supervision for the NSSF as soon as possible. By June 2004, we will submit a bill to parliament for the repeal of the NSSF Statute, which would establish the BOU as the interim supervisor until the Capital Markets Authority is better equipped to handle such responsibilities. We expect to have a proposal for the liberalization of the pension system prepared by the Social Security Stakeholders Transitional Group (STG) available at that time. We will recommend to this working group that, in order to minimize discrimination across pension schemes and to ensure solvency, pension plans for civil servants and the private sector be subject to the same regulatory framework.

19. In addition, to address shortages of resources for term lending, we are seeking to restructure the UDBL in a manner that ensures its sustainability through sound financial management. In this respect, we will by end-March 2004 decide on the divestiture option to follow (performance criterion for the fourth disbursement). Two main options are under consideration: one, the Government will retain the majority stake in UDBL but will contract to manage the UDBL a reputable private sector financial institution willing to take a minority stake of at least 30 percent. The management contract will include explicit targets for minimizing the nonperforming loans and for ensuring that lending decisions are made on the basis of the economic viability of the prospective borrower. Two, the UDBL would be merged with the Development Finance Department (DFD) of the BOU to create a new guarantee and refinancing agency. Pending the divestiture, the UDBL will not engage in any new lending, and neither the government nor the BOU will provide or guarantee any further resources for on-lending by the UDBL (performance criterion for the fourth disbursement).

20. The main challenges in the external sector are to enhance Uganda's international competitiveness and achieve a more sustainable and less vulnerable external position. Over the past few years, government has based its competitiveness policies on the Medium-Term Competitiveness Strategy (MTCS), the Plan for the Modernization of Agriculture (PMA), and the Strategic Exports Program (SEP), which emphasize creating an enabling environment for private business and agriculture. However, these programs have often been underfunded or had their resources reallocated to other priorities. The Government will seek to address these issues by redirecting resources to resolve core problems, such as the high cost of transportation. The Government has also sought to gain access to new markets through the U.S. African Growth and Opportunity Act (AGOA), the Everything But Arms (EBA) initiative, and regional integration. The Government also wants the East African Community (EAC) to move to a more harmonized system of incentives. To this end, technical assistance is being provided by the World Bank and the Fund on the harmonization of the investment codes and the rationalization of investment incentives in the EAC.

21. There has been some progress in obtaining from creditors debt relief under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative). The OPEC Fund and the Republic of Korea have recently provided debt relief under the HIPC Initiative while the Government of India has canceled all its claims² on Uganda. Furthermore, in recent discussions, the Government of Libya agreed to enact legislation soon that will allow it to provide debt relief. For our part, we will strive to engage those creditors with whom we have yet to reach agreement on the delivery of HIPC Initiative assistance.

22. Notwithstanding the progress made in obtaining debt relief under the original and enhanced frameworks of the HIPC Initiative, Uganda still has an unsustainable external debt situation. We are taking steps to improve this situation not only by encouraging exports, but also by exercising better debt management. In particular, we will adhere to our strategy of borrowing on IDA-equivalent terms and strengthening the institutional and administrative frameworks. This will involve ensuring that both the Macroeconomic Policy Department and the Development Committee of the Ministry of Finance play a full role in evaluating all proposals for new loans and loan guarantees.

III. Medium-Term Macroeconomic Policy Agenda

23. The Government's medium-term policy aims at spurring private sector investment and economic growth, while reducing fiscal and external vulnerability. The central element of this growth strategy is the reduction of the fiscal deficit, which, along with donor support, increased sharply between 1997/98 and 2001/02. A smaller fiscal deficit would not only allow for greater mobilization of savings for private investment, but would also insulate government programs, and the broader economy, from possible shortfalls in donor support. The success of this strategy depends on strong annual increases in government revenues (by ½ of 1 percentage point of GDP a year), coupled with spending restraint. Based on these policies, real GDP is projected to grow by about 6 percent a year over the medium term, and annual inflation would be held to 5 percent or less.

24. While these policies will be updated with the forthcoming revision to the PEAP, the Government remains committed to a substantial fiscal adjustment over the medium term. In the PEAP revision, the Government will spell out its strategy for raising revenues, including steps to strengthen tax administration and tax principles that would bring greater stability and consistency to tax policy. On the spending side, the revised PEAP will incorporate cost estimates for reaching its updated goals for poverty reduction, which, in turn, would reflect the constraint foreseen on spending. Achieving savings by trimming nonpriority expenditures, such as in the streamlining of public administration, will be crucial to the success of the program. Stepped-up efforts to improve the effectiveness of government expenditures, particularly on programs aimed at reducing poverty, would be necessary to expand the delivery of public services. In addition, the Government must fulfill its obligation to resolve security problems throughout the country, if any substantial gains are to be made in reducing poverty. In this regard, we anticipate taking steps over the medium term to strengthen the Uganda People's Defense Forces, in line with the recommendations of the forthcoming defense review.

25. The Government will continue to exercise monetary and exchange rate policies that support low inflation and preserve international competitiveness. The Government would continue to implement a flexible exchange rate policy. The BOU would maintain orderly market conditions in the foreign exchange market but would not counter movements in the exchange rate stemming from changes in economic fundamentals. Effective implementation of structural policies aimed at boosting productivity in agriculture and diversifying exports, as well as supporting privatization, infrastructure development, and regional integration, would further increase Uganda's international competitiveness.

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Uganda: Technical Memorandum of Understanding

(October 30, 2003)

A. Introduction

1. This memorandum defines the quantitative benchmarks and performance criteria described in the memorandum of economic and financial policies (MEFP) for the 2003/04 financial program that would be supported by the IMF Poverty Reduction and Growth Facility (PRGF), and sets forth the reporting requirements under the arrangement.

B. Base Money

2. Base money is defined as the sum of currency issued by Bank of Uganda (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. Under this definition, the daily average of June 2003 base money was estimated at U Sh 717 billion. The base money limits for the 2003/04 program will be cumulative changes from the daily average of June 2003 to the daily average of December 2003, March 2004, and June 2004, and will be monitored by the monetary authority and provided to the IMF by the BOU.

C. Net Claims on the Central Government by the Banking System

3. Net claims on the central government (NCG) by the banking system base 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 deposits in project accounts. Credits comprise bank loans and advances to the government and holdings of government securities and promissory notes. NCG will be calculated based on data from balance sheets of the monetary authority and commercial banks as per the monetary survey. The limits on the change in net claims on the central government by the banking system will be cumulative beginning end-June 2003 for the 2003/04 program.

D. Net International Reserves of the Bank of Uganda

4. 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 maturities less than one year, contracted by the BOU and include outstanding IMF purchases and loans.

5. For program-monitoring purposes, reserve assets and short-term liabilities (excluding liabilities to the IMF) at the end of each test period will be calculated by converting reserve assets measured in Uganda shillings as reported by the BOU using the end-month Uganda shilling per U.S. dollar exchange rate. The U.S. dollar value of outstanding purchases and loans from the IMF will be calculated by converting the outstanding SDR amount reported by the Finance Department of the IMF using the U.S. dollar per SDR exchange rate at the end of each quarter.

E. Expenditures Under the Poverty Action Fund

6. The expenditures under the Poverty Action Fund (PAF) include both wage and nonwage current expenditures under the PAF, and domestic development expenditures under the PAF. The minimum cumulative expenditures under the PAF are defined in Schedule A below.

Schedule A: Minimum PAF Expenditure (In cumulative billions of Uganda shillings, beginning July 1, 2003)
Quarter	Sep. 30, 2003	Dec. 31, 2003	Mar. 31, 2004	June 20, 2004
PAF expenditure	151.8	327.3	502.1	712.8

F. New Domestic Budgetary Arrears of the Central Government

7. The nonaccumulation of new domestic payment arrears under the Commitment Controls System (CCS) is a continuous performance criterion under the program. New domestic payments arrears are defined as the sum of (i) any bill that has been received by a spending ministry from a supplier of goods and services delivered (and verified), and for which payment has not been made within 30 days under the recurrent expenditure budget or the development expenditure budget. For the purpose of program monitoring, the monthly reports for both Recurrent and Development Expenditure under the CCS will serve as audits of arrears to December 2003, and to March 2004, while the annual report by the Internal Auditor Office's of the Ministry of Finance, Planning, and Economic Development (MFPED) at end-June 2004 shall be used to determine the new arrears created during the entire 2003/04 fiscal year. The result of these audits should be available not later than seven weeks following the close of the covered period.

G. Ceiling on Public Administration Expenditures

8. The quarterly expenditure limits for the public administration sector are defined in Schedule B. For the purpose of program monitoring, the public administration sector includes the following votes: Office of the Prime Minister (004) (excluding development), Foreign Affairs (006), Missions Abroad (0A0), MFPED (008) (excluding Uganda Revenue Authority (URA), Contingency, Accountability, and Development), URA (008), State House (002), Public Service (005), Public Service Commission (027), Local Government (025) (excluding development), Mass Mobilization (034), Office of the President (001) (excluding ISO/ESO and E&I), Specified Officers' Salaries (300), Parliamentary Commission (315), Local Government Finance Commission (033), Uganda Human Rights Commission (347), and Electoral Commission (349). Any supplementary allocation of votes in the public administration sector that would exceed program ceilings will be accommodated by cuts in votes belonging to other categories within this same sector.

Schedule B: Ceiling on Public Administration Expenditures (In cumulative billions of Uganda shillings, beginning July 1, 2003)
Quarter	Sep. 30, 2003	Dec. 31, 2003	Mar. 31, 2004	June 30, 2004
Expenditure	56.5	123.0	184.5	246.0

H. Promissory Notes

9. A promissory note is a written promise by the government to pay a debt, where government is defined as the central government,³ local governments, and autonomous government agencies. It is an unconditional promise to pay on demand or at a fixed or determined future time a particular sum of money to, or to the order of, a specified person or to the bearer. The government will not use promissory notes or any form of a promise to pay for goods and services at a future date, and all domestic arrears payments will be settled in cash or by the transfer of immediately available funds.

I. Adjusters

10. The NIR target is based on assumptions regarding import support, assistance provided under the Heavily Indebted Poor Countries (HIPC) Initiative, and external debt-service payments. The NCG target, in addition to being based on the two aforementioned assumptions, is also based on assumptions regarding domestic nonbank financing of central government fiscal operations.

11. The Uganda shilling equivalent of import support (grants and loans) plus HIPC Initiative assistance in the form of grants on a cumulative basis from July 1, 2003 onward is presented under Schedule C. The ceiling on the cumulative increase in NCG 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 import support, grants and loans, plus HIPC Initiative assistance, exceeds (falls short of) the projected amounts.

Schedule C: Import Support Plus Total HIPC Initiative Assistance (In cumulative billions of Uganda shillings , beginning July 1, 2003)
Quarter	Sep. 30, 20031	Dec. 31, 2003	Mar. 31, 2004	June 30, 2004
Import support including HIPC Initiative grants	. . .	299.2	400.0	821.1
1For September 2003, program value is defined as in the Technical Memorandum of Understanding of June 9, 2003. Figures to December 2003, March 2004, and June 2004, are consistent with the revised program of October 2003.

12. The ceiling on the increases in NCG 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 due⁴ plus payments of external debt arrears less deferred payments (exceptional financing) falls short of (exceeds) the projections presented in Schedule D. 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 D: Debt Service Due, before HIPC Initiative Assistance (In cumulative billions of Uganda shillings, beginning July 1, 2003)
Quarter	Sep. 30, 20031	Dec. 31, 2003	Mar. 31, 2004	June 30, 2004
Debt service due before HIPC excluding exceptional financing	. . .	94.3	149.4	193.2
1For September 2003, program value is defined as in the Technical Memorandum of Understanding of June 9, 2003. Figures to December 2003, March 2004, and June 2004 are consistent with the revised program of October 2003.

13. The ceiling on the increase in NCG will be adjusted downward (upward) by any excess (shortfall) in nonbank financing⁵ less payment of domestic arrears accumulated prior to introduction of the CCS (up to a maximum amount of U Sh 45 billion) relative to the programmed cumulative amounts presented in Schedule E.

Schedule E: Nonbank Financing Minus Repayment of Domestic Arrears (In cumulative billions of Uganda shillings, beginning July 1, 2003)
Quarter	Sep. 30, 20031	Dec. 31, 2003	Mar. 31, 2004	June 30, 2004
(A) Nonbank financing	. . .	-87.0	-60.0	20.0
(B) Domestic arrears repayment	. . .	16.6	26.6	45.0
(C) Total = (A) - (B)	-75.3	-103.6	-86.6	-25.0
1For September 2003, program value is defined as in the Technical Memorandum of Understanding of June 9, 2003. Figures to December 2003, March 2004, and June 2004 are consistent with the revised program of October 2003.

14. Furthermore, NCG will be adjusted downward by the amount by which expenditures under the PAF fall short of the total presented under Schedule A above.

15. The Development Finance Department of the BOU provides export credit guarantee schemes (ECGS) to commercial banks. As of June 2003, the outstanding ECGS amounted to U Sh 3.89 billion, which have a maximum guarantee period of six months. These contingent liabilities fall due on the BOU balance sheet, and therefore do not affect the program targets for the NIR and the NCG.

J. Nonconcessional External Borrowing Contracted or Guaranteed by the Central Government, Statutory Bodies, or the Bank of Uganda, and Arrears

16. The program includes a ceiling on new nonconcessional borrowing with maturities greater than one year contracted or guaranteed by the government, statutory bodies, or the BOU. Nonconcessional borrowing is defined as loans with a grant element of less than 35 percent, calculated using average commercial interest rates references (CIRRs) published by the Organization for Economic Cooperation and Development (OECD). In assessing the level of concessionality, the 10-year average CIRRs should be used to discount loans with maturities of at least 15 years, while the 6-month average CIRRs should be used for loans with shorter maturities. To both the 10-year and 6-month averages, the following margins for differing payment periods should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15–19 years; 1.15 percent for 20–25 years; and 1.25 percent for 30 years or more. The ceiling on nonconcessional external borrowing is set at zero and is to be observed on a continuous basis. The coverage of borrowing includes financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms. Excluded from the limits are changes in indebtedness resulting from 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 complied with the HIPC Initiative do not constitute nonconcessional external borrowing.

17. 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. 12274-(00/85), August 24, 2000). 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 some time 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 lessor 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.

18. 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 government, the BOU, and statutory bodies⁶ from their level at end-June 2003. It comprises those external arrears reported by the Trade and External Debt Department of the BOU, the Macro Department of the Ministry of Finance that cannot be rescheduled because they were disbursed after the Paris Club cutoff date.

K. Monitoring and Reporting Requirements

19. The authorities will inform the IMF staff in writing at least ten business days (excluding legal holidays in Uganda or in the United States) prior to making any changes in economic and financial policies that could affect the outcome of the financial program. Such policies include but are not limited to customs and tax laws (including tax rates, exemptions, allowances, and thresholds), wage policy, and financial support to public and private enterprises. The authorities will similarly inform the IMF staff of any nonconcessional external debt contracted or guaranteed by the government, the BOU, or any statutory bodies, and any accumulation of new external payments arrears on the debt contracted or guaranteed by these entities.

20. The information, such as the issuance of treasury bills, the intervention in the foreign exchange market, daily average exchange rates, and the interest rate on government securities, will be transmitted to the IMF's resident representative weekly, within five working days of the end of each week.

21. The BOU will reconcile the monetary survey data with the financial statements on an annual basis and with the financial records on a quarterly basis. The Internal Audit Department (IAD) of the BOU will review the reconciliations of monetary survey data with the financial records and the audited financial statements.

22. The government will provide the IMF staff with a summary of the fiscal accounts, both on a monthly and quarterly basis, with a seven-week lag from the end of the reporting month and quarter. Revenues will be recorded on a cash basis as reported by the Uganda Revenue Authority and the MFPED. Expenditures shall be recorded when checks are issued, except for domestic and external debt-service payments, cash transfers to districts, and externally funded development expenditures. Expenditures on domestic interest will be recorded on an accrual basis and external debt service will be recorded on a commitment basis (i.e., when payment is due). Cash transfers to districts will be recorded as expenditures of the central government when the transfer is effected by the BOU. Expenditures on externally funded development programs will be recorded as the sum of estimated disbursements of project loans and grants by donors, less the change in the stock of government project accounts held at commercial banks in Uganda. Information on required and approved supplementary allocations in each month should be provided to the IMF within 15 days of the end of each month.

23. The government will provide the IMF staff with a summary of expenditure cash limits on a quarterly basis with a one-week lag from the date they are provided to ministries, and no later than two weeks after the beginning of the quarter.

24. The government will provide the IMF staff with a summary of the contingent liabilities of the central government on a quarterly basis with a seven-week lag from the end of the reporting quarter. For the purpose of the program, contingent liabilities include all borrowings by statutory bodies, loans borrowed by public enterprises or the private sector and guaranteed by the government, claims against the government in court cases that are pending, or court awards that the government has appealed.

25. Final accounts of the local government authorities for fiscal-year 2002/03 will be consolidated by end-September 2004 by the Ministry of Finance, Macro Department. The summary Status of Submission of District Monthly Accounts Returns will be provided to the IMF Resident Representative within 45 days of the end of each month. A report explaining any noncompliance with the monthly reporting requirement by districts will be provided at the same time as the summary status report to the IMF. Any noncompliance by 45 days following the end of a month will result in a reminder letter being sent from the Treasury Inspectorate Department to the District Chairperson. Any noncompliance for an additional month will result in a memorandum being sent from the Commissioner of the Treasury Inspectorate Department to the Budget Director indicating that the monitoring and accountability grants to the noncompliance districts should be discontinued until compliance is restored. A memorandum indicating this action will be sent to each noncompliant district.

26. The quarterly summaries prepared under the CCS and the overcommitments not backed by cash accumulated in the previous quarter that was cleared in the current quarter will be provided to the IMF staff within 40 days after the end of each quarter.

27. As supplementary information, the government will provide the IMF staff on a monthly basis, with a seven-week lag from the end of the reporting month, a statement of the following: (i) outstanding stock of checks issued by the Uganda Computer Services of the MFPED, disaggregated into checks issued for commitments arising during July 1, 2003 through June 30, 2004, and checks issued to settle intraministerial payment obligations; and (ii) the value of budget support (grants and loans) received by the government, and the value of projections of donor project support received so far. The government will provide the IMF forecasts of the value of budget support and project support (grants and loans) expected to be received for the rest of the current year and the medium term, by donor and sector, by the end of each reporting quarter.

28. As supplementary information, the BOU will provide the IMF staff on a monthly basis, with a seven-week lag from the end of the reporting month, a statement of the following: (i) cash balances held in project accounts at commercial banks; (ii) total value (measured at issue price) of outstanding government securities from the Central Depository System (CDS); and (iii) the stock of government securities (measured at issue price) held by commercial banks from the CDS.

29. The government will provide the IMF staff on a quarterly basis, with a seven-week lag from the end of the reporting quarter the following: (i) a statement on new loans contracted during the period as per the loan agreement, with additional information on disbursement provided within six months; and (ii) a statement on creditor participation in the HIPC Initiative, the status of creditor litigation cases, and cash payments relating to the settlement of awards.

30. The BOU will provide the IMF staff on a quarterly basis, with a seven-week lag from the end of the reporting quarter, (i) monthly commodity and direction of trade statistics; (ii) the stock of debt, disbursements, principal and interest, flows of debt rescheduling and debt cancellation, arrears, and committed undisbursed balances—by creditor category; and (iii) the monthly composition of nominal HIPC Initiative assistance, disaggregated into grants, flow rescheduling, and stock-of-debt reduction by creditor.

31. The consumer price index will be transmitted monthly to the IMF with no more than a two-week lag from the end of the reporting month. The balance sheet of the BOU, the consolidated accounts of the commercial banks, and the monetary survey will be transmitted to the IMF on a monthly basis with a lag of no more than seven weeks from the end of the reporting month.

32. Standard off-site bank supervision indicators for deposit money banks will be transmitted to the IMF quarterly and on-site reports transmitted as needed, based on the findings of the off-site reports.