Uganda—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

Kampala, November 10, 2004

Mr. Rodrigo de Rato
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. de Rato:

1. On behalf of the Government of Uganda, I hereby transmit the attached memorandum of economic and financial policies (MEFP) that sets out the objectives and policies that the Government intends to implement in the remainder of the fiscal year 2004/05, as well as the underlying medium-term macroeconomic policy framework consistent with the forthcoming revision of the Ugandan Poverty Eradication Action Plan (PEAP). The attached technical memorandum of understanding (TMU) defines the terms and conditions of the program.

2. Although the Government of Uganda has made substantial progress in implementing the 2003/04 program supported by the three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), which was approved by the Fund’s Executive Board on September 13, 2002, several program slippages occurred during the current review. Four quantitative performance criteria for end-June 2004 were breached: (i) the ceiling on the increase in base money; (ii) the ceiling on the increase in net claims of the central government by the banking system; (iii) the continuous performance criterion on accumulation of new domestic arrears on expenditures covered by the commitment control system (CCS); and (iv) new lending by the Uganda Development Bank Ltd (UDBL). With respect to the ceiling on base money, the breach was relatively minor, and base money was below the program ceiling for end-September 2004. The breach of net claims on the central government by the banking system was primarily caused by one-time expenditures and there will be no carry-over effect to the 2004/05 budget; also, the Government is implementing new measures to strengthen expenditure management and limit the use of supplementary budget expenditures. With respect to the accumulation of new arrears under the CCS, the arrears will be eliminated by end-June 2005, and the Government will implement a comprehensive set of measures in the remainder of 2004/05 to strengthen the overall monitoring and control of domestic arrears. On the new lending by UDBL, although only two small loans were contracted, the breach reflected poor control by the Government of UDBL management. In addition, eight of the ten structural benchmarks were not met.

3. The Government of Uganda recognizes the significance of the program slippages and is determined to implement a range of far-reaching measures before end-December 2004, as described in the MEFP, to bring the program back on track.

4. On this basis, the authorities are requesting waivers for the nonobservance of the four missed quantitative performance criteria for June 2004.

5. In support of our objectives and policies, the Government of Uganda hereby requests the disbursement of the fourth loan under the PRGF in the amount of SDR 2 million (1.1 percent of quota) upon completion of the fourth review.

6. Looking ahead, the policies set out in the attached memorandum, together with continuing implementation of the broader policy agenda in the forthcoming revised PEAP, aim at achieving high sustainable economic growth and reducing poverty. The performance criteria and benchmarks for the fifth review will be based on end-December 2004 and end-March 2005 targets as set out in Tables 2 and 3 of the MEFP.

7. The Government of Uganda will provide the Fund with such information as the Fund may request in connection with the progress made in implementing the economic and financial policies and achieving the objectives of the program.

8. The Government of Uganda believes that the policies and measures set forth in the MEFP are adequate to achieve the objectives of its economic program for 2004/05 supported by the PRGF arrangement, but it will take further measures to that end if deemed necessary. During the implementation of the arrangement, the Government of Uganda will consult with the Managing Director on the adoption of these measures and in advance of revisions to the policies contained in the MEFP, at the initiative of the Government or whenever the Managing Director requests such a consultation.

9. The Government of Uganda authorizes the publication and distribution of this letter, the attached MEFP and TMU, and all reports prepared by Fund staff regarding the PRGF-supported program and Article IV consultation.

Sincerely yours,

/s/ Gerald M. Ssendaula Minister of Finance, Planning, and Economic Development

Memorandum of Economic and Financial Policies

1. The Government of Uganda is committed to achieving sustained economic growth and poverty reduction through the pursuit of prudent macroeconomic policies and structural reforms. The strategy to achieve these goals is set out in the forthcoming revision of the Poverty Eradication Action Plan (PEAP). The Government’s economic program is supported by the International Monetary Fund (IMF) with a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), which was approved in September 2002. This memorandum of economic and financial policies (MEFP) reviews the performance under the program (April-September 2004) and describes the policies and targets for the remainder of the fiscal year 2004/05.

I. Recent Performance Under the PRGF-Supported Program

2. Since the early 1990s, Uganda has implemented sound macroeconomic policies and an ambitious program of economic reforms, supported by substantial donor assistance. These efforts have resulted in robust economic growth, accompanied by a significant reduction in poverty through the 1990s. The incidence of poverty, however, increased to an estimated 38 percent of the population in 2002/03 from 34 percent in 1999/2000. Factors that contributed to this setback include a slowdown in real GDP growth, a deterioration in the terms of trade, especially in agriculture, and an increase in average household size and dependency ratio.

3. The economy performed well in 2003/04. Real GDP growth is estimated to have increased by one percentage point to 5.9 percent, inflation fell, and the external position generally improved. The construction and communications sectors led a broad based economic expansion, while improved weather conditions contributed to a rebound in agriculture. Annual headline inflation declined from 10.2 percent in June 2003 to 5.1 percent in September 2004, as food crop prices fell sharply. Underlying annual inflation, which excludes food crops, eased from 5.4 percent in June to 3.9 percent in September 2004, in line with the program target. Strong growth in noncoffee export volumes and improved terms of trade helped to narrow the external current account deficit, excluding grants, to 11.8 percent of GDP. Greater-than-anticipated donor support and private capital inflows more than covered this deficit, allowing international reserves to build up to about 6½ months of imports. Following the large depreciation in 2002/03, the Ugandan shilling appreciated in real effective terms by about 10 percent since December 2003. Buoyant export proceeds and private remittances, demand for domestic currency from donor-funded projects, and increased sales of foreign exchange by the BOU contributed to the exchange rate appreciation.

4. The fiscal consolidation envisaged in the program for 2003/04 was not achieved. The overall central government deficit, excluding grants, remained at 11.3 percent of GDP in 2003/04, or 0.6 percent higher than programmed. The domestic balance fell short of the program target by a similar magnitude. While revenue collections were lower than programmed, reflecting weak VAT and trade tax collections, the higher deficit is primarily explained by an excess in spending (0.4 percent of GDP), reflecting higher law and order and public administration needs, including from the State House, together with net lending to private enterprises. In addition, the composition of expenditures changed, but the core poverty-reducing outlays of the Poverty Action Fund (PAF) remained above their indicative floor at end-June 2004. The quantitative performance criterion on net credit to the government was breached by nearly 0.8 percent of GDP for end-June 2004. Moreover, the indicative ceiling on public administration spending and the performance criterion on domestic arrears accumulated under the Commitment Control System (CCS) were also breached. At end-June 2004, the estimated total stock of outstanding domestic arrears, including on wages and pensions, amounted to 3.7 percent of GDP.

5. Base money expanded more rapidly than programmed during the first three quarters of 2003/04. However, the performance criterion at end-June was breached only by a small margin, as growth moderated in the last quarter of 2003/04, and base money was in line with the program at end-September 2004. Credit growth to the private sector remained strong in 2003/04, after the large rebound led by the privatization of the Uganda Commercial Bank (UCB) to Stanbic. Money market rates have fallen sharply and become less volatile, declining from over 20 percent in December 2003 to about 7 percent in September 2004 due to the adoption of an appropriate monetary stance in line with the program, and increased sales of foreign exchange for sterilization purposes. The introduction of long-term government bonds deepened the securities market contributing to the sharp decrease in the 91-day treasury bill rate. However, the banks’ lending rates have remained relatively flat. To improve monetary management, the computation and level of reserve requirements was changed in July 2004. The cash reserve ratio was unified at 9.5 percent from 9 percent and 10 percent on demand and term deposits, respectively, and the lag between reserve base and reserve maintenance period was reduced from two weeks to one week.

6. The banking sector remains sound with a significant decline in the nonperforming loans ratio in June 2004, although there has been a modest rise in foreign exchange exposure. The implementation of the newly enacted Financial Institutions Act should help further strengthen banking operations, particularly by reducing credit exposure concentration. Moreover, a number of microfinance institutions are in the process of being licensed to take deposits under the new Micro-Finance Deposit-Taking Institutions Act, which should further encourage rural financial intermediation. The nascent housing finance sector is recording strong growth with the entrance of new players and an increase in the capital base of the Housing Finance Corporation of Uganda (HFCU).

7. The implementation of structural reforms was much slower than envisaged in the program through end-September 2004 (Table 1). All the structural performance criteria were observed, but eight out of the ten structural benchmarks were breached. A number of prior actions have been set for the completion of the fourth review under the PRGF arrangement to correct for these slippages (Table 3).

II. The Policy Agenda for the Remainder of 2004/05

8. The Government acknowledges the seriousness of the program slippages and is ready to implement corrective measures immediately to bring the program back on track. Furthermore, the Government intends to strengthen its monitoring of the program and will report on the progress in achieving the structural performance criteria, benchmarks, and other measures of the program to the IMF staff on a monthly basis.

9. Real GDP growth is expected to slow down slightly to 5½ percent in 2004/05, reflecting lower growth in agriculture related to the current drought. Underlying inflation is projected to remain low at around 4 percent, while higher food prices due to the drought are expected to push headline inflation up to about 6 percent. To achieve the inflation objective, the BOU intends to limit the rate of growth of base money to about 13 percent during the year. Consistent with the 2004/05 budget, the overall fiscal deficit, excluding grants, is projected to narrow by 1.3 percentage points to 10.0 percent of GDP. The domestic balance is projected to narrow by a similar magnitude. Despite continued export growth, the external current account deficit, excluding transfers, is projected to widen to 12.2 percent of GDP, reflecting a strong increase in imports. International reserves are expected to remain at a comfortable level of nearly 6½ months of imports. The flexible exchange rate policy, which has served Uganda well, will be maintained and, if needed, the BOU will only intervene to limit short-term exchange rate fluctuations.

10. For the remainder of 2004/05, emphasis in the fiscal area will be given to the following priorities: (i) strengthening policies to monitor and reduce domestic arrears; (ii) identifying expenditure savings to accommodate necessary additional spending in 2004/05 on arrears clearance and priority programs; and (iii) reinvigorating revenue collection through reforms of the Uganda Revenue Authority (URA) and identifying revenue measures for the 2005/06 budget.

11. To achieve the original fiscal consolidation in 2004/05, the Government has decided to cut nonpriority non-PAF and non-wage expenditures by U Sh 77 billion, or 0.5 percent of GDP. These cuts will compensate for (i) a package with a net cost of U Sh 5.8 billion in 2004/05 (and of U Sh 9 billion in 2005/06, assuming a budget ceiling of U Sh 241 billion for District Primary Education), comprising the recruitment of 6,065 new primary school teachers at a monthly wage of U Sh 140,000 (effective September 2004); the replacement of 5,115 licensed teachers with qualified teachers at a monthly wage of U Sh 130,000 (effective retroactively from July 2004); and the increase in the minimum primary school teachers’ wages from U Sh 113,000 to U Sh 130,000 a month for 107,835 teachers (to be effective, non-retroactively, from January 2005); (ii) additional spending pressures for up to U Sh 35 billion; and (iii) clearance of domestic arrears on goods and services accumulated under the CCS in 2002/03, 2003/04, and 2004/05, currently estimated at U Sh 36 billion. In addition, the Government will strive to control arrears on membership fees for international and regional institutions by reviewing the merits of participating in those institutions, and arranging for a repayment plan with them. An exhaustive list of institutions and corresponding arrears of member fees will be prepared before end-December 2004. Revenues are projected to remain in line with the budget, which assumes a revenue loss from the launch of the EAC customs union by January 1, 2005 amounting to about ½ percent of GDP.

12. To reinforce public expenditure management practices, the following measures will be implemented:

• Cease all operations of all Deferred Accounts at the BOU immediately and submit the regularization of their closure to parliament before end-March 2005.
  
  
• Submit to parliament a statement of all expenditures to provide financing to specific private firms in 2003/04 including through the government’s administered fund accounts at the BOU, by end-December 2004.
  
  
• Amend the regulations of the Public Finance and Accountability Act (PFAA) by end-December 2004 to: (i) ensure proper ex-ante and ex-post integration of donor projects into the budget; and (ii) clarify the responsibilities of all departments and agencies involved in contracting external debt, as well as in the operations of the broader debt management.
  
  
• Cease immediately lending or issuances of guarantees by the Government to private individuals or firms.
  
  
• Limit strictly supplementary requests to parliament by the security and public administration sectors to those that can be accommodated within the resources appropriated to these sectors, starting in November 2004.
  
  
• Ensure ex-ante parliamentary approval for all future expenditures in excess of the budget appropriations, starting in November 2004, and ensure that all emergency expenditures will be accommodated by the MFPED through front-loading of the quarterly cash ceilings for the same sector, in line with current regulations.

13. Clearing outstanding domestic arrears and preventing new arrears remains a priority. The Government intends to request IMF technical assistance in this area. The following steps will be taken to strengthen the procedures for reducing the existing arrears and prevent accumulation of domestic arrears:

• The Internal Auditor of the MFPED will certify and report on a quarterly basis the arrears for recurrent and development expenditures, starting end-September 2004. The report will be published within 2½ months of the end of each quarter. The cash limit for each spending unit will be adjusted to allow for the clearance of these arrears within the following quarter. The Government is committed to firmly implement, starting in November 2004, a first call on resources to pay the arrears out of the cash limits for each quarter.
  
• Reporting semi-annually on the implementation of the plan adopted by parliament to clear the overall stock of arrears certified by the Internal Audit Office at end-December 2004, with the first report to be issued by end-March 2005. The report will clearly show the clearance of the stock of arrears according to age profile and type, verifying consistency with the amounts allocated for arrears clearance in the annual budget.
  
• Starting implementation of the second phase of the Integrated Financial Management Information System (IFMIS) to the remaining line ministries and six local governments by end-June 2005.
  
• Completing an external audit and verification of the outstanding stock of pension arrears for all central government level units and the 10 districts for which partial data is currently available by end-June 2005.
  
• Prepayment arrangements for telephone services will be extended to all line ministries by end-December 2004, and similar arrangements will be implemented for consumption of electricity by end-March 2005.
  
• The MFPED will strictly implement the sanctions against noncomplying accounting officers, without exceptions, as envisaged in the PFAA.

14. To strengthen the efficiency of public expenditures and streamline the public administration, the Government is determined, in consultation with the World Bank and other development partners, to revive the public administration reform through:

• Approval by Cabinet of the Pay Policy Paper by end-December 2004 that should lead to savings in the wage bill.
  
• Reaching agreement between MFPED, the Ministry of Public Service and interested development partners on the priorities and funding modalities for the public service 2005-09 by end-December 2004.
  
• Submission of a paper to the Cabinet by the Ministry of Public Service in collaboration with MFPED on how to control the size of public administration and ensure cost efficiency by end-March 2005.

15. The Government will address the weaknesses of the URA by implementing the recommendations of the recent IMF technical assistance report, which are aimed at establishing a strong tax administration with clear accountability to eliminate duplication and fragmentation of functions. More specifically, among the measures to be implemented for the remainder of 2004/05 are:

• Appointment of the new Commissioner General of the URA by mid-November 2004.
  
• Adoption of the URA new organizational structure by the Government, consistent with the IMF technical assistance report by end-November 2004.
  
• Adoption by the MFPED of a timetable to restructure the URA in line with the recommendations of the IMF technical assistance report by early January 2005.
  
• Finalizing the staff code of conduct and disseminating it widely, requiring all staff irrespectively of past service to sign an understanding that they are familiar with their obligations and are bound by them by end-December 2004.
  
• Submit to parliament amendments to the URA Act in line with the IMF technical assistance report by June 2005.

16. In addition, the Government is committed to continue its fiscal consolidation efforts and will take appropriate tax measures in the 2005/06 budget to raise revenue equivalent to cover the expenditure pressures noted above, including any new expenditures adopted in 2004/05.

17. The Government is committed to avoiding actions that could undermine revenue collection, such as granting preferential tax treatment to specific investors or firms. In addition, to achieve greater transparency in the Government’s policy of encouraging industrial development, the MFPED will submit to Parliament a comprehensive list of companies that have benefited from tax expenditures, government subsidies, loan guarantees, and other incentives before end-December 2004. The list would identify the nature of the benefits received and their costs, and it would be hereafter be submitted on an annual basis. This measure, which originally was a benchmark for end-September 2004, will be implemented by end-December 2004. Finally, the Government will strengthen revenue collections at the local government level given their weak performance, to help compensate for the expected suspension of the graduated tax. In addition, the coverage of the property tax will be expanded by end-June 2005.

18. The Government will continue to implement the fiscal decentralization strategy (FDS) while strengthening the local government administrative capacity. The latter will be subject to the new budgeting and planning manuals under the FDS to ensure better reporting and greater accountability. Technical assistance from the IMF is being provided to facilitate some of these initiatives and strengthen the public expenditure management systems at the subnational level, including the implementation of the CCS for local governments and the development of adequate fiscal reporting and poverty-reducing expenditure tracking under the FDS. In addition, the government intends to strictly limit the number of districts.

19. On monetary policy, to maintain low inflation and a stable environment for financial intermediation and the foreign exchange market, the BOU will continue to target base money. Broad money (M2), excluding foreign currency deposits, is projected to expand by 15 percent in 2004/05, while bank credit to the private sector is expected to increase by 16 percent. The BOU will continue to implement a number of recommendations of the IMF technical assistance mission aimed at strengthening the liquidity management framework and fostering financial market development, including developing and evaluating daily liquidity forecast, reviewing the performance of primary dealers, and facilitating forward foreign exchange transactions.

20. To facilitate the conduct of monetary policy, accounts for new projects will be opened at the BOU rather than at commercial banks, and existing projects accounts at commercial banks will be transferred to the BOU in a phased manner. The effects of this measure will be assessed during the next review of the PRGF-arrangement with the IMF.

21. Mobilizing domestic financial resources for investment is an important element to enabling stronger economic growth. The Government is preparing with the participation of all stakeholders—including development partners—a proposal for the liberalization and reform of the pension system, which could generate substantial long-term savings for private sector capital formation. The proposal for reforming the public pension system will ensure that all Government obligations, including contingent liabilities, under the reform would be incorporated into the budget. As such, excessive guarantees of minimum benefits will be avoided by switching to a defined contributory system and debts arising from the transition to this pension system would be explicit. As part of the pension reform, the restructuring of the National Social Security Fund (NSSF) will be expedited to improve operations, investment performance, and governance. For this purpose, it is necessary to establish a qualified and independent regulator for the NSSF as soon as possible. Before end-December 2004, the Government will place the supervision of the NSSF under the BOU, until such time an independent pension regulatory authority is set up.

22. Other measures to facilitate term lending to productive sectors and, more broadly, financial services to rural areas and small towns will be implemented in 2004/05. To this end, the Government called for Expressions of Interest (EOI) by a strategic investor interested in a minority share and management responsibilities of UDBL, including a merger of the credit operations of the Department for Development Finance (DFD) of the BOU with those of UDBL. The government will approve the sale of a minority share and management responsibilities of UDBL to a reputed private investor short-listed by the Privatization Management Unit (PMU) by end-March 2005. The MFPED has also embarked on an outreach plan for microfinance institutions (MFIs), with the goal of increasing the capacity of staff and management of MFIs and encouraging their expansion into areas that presently lack access to financial services. In order to promote the development of the MFI sector, the government will limit its involvement in the sector to capacity building and regulation. The MFIs in the process of being granted licenses by the BOU under the new Microfinance Deposit Taking Institutions Act will be subject to BOU regulatory supervision and off-site examinations. In order to further foster financial sector development, the government is undertaking a diagnostic review of the housing finance sector including the HFCU, with the intention of increasing private equity participation in the institution. The government also intends to divest a majority share and management responsibilities of the National Insurance Corporation to a strategic investor to further fuel growth of the insurance sector. The regulations of the new Financial Institutions Act, which will help to maintain the soundness of the financial system, will be issued by end-December 2004. Finally, to further strengthen the financial sector, an anti-money laundering bill that conforms to international standards will be approved by the Cabinet by end-December 2004.

23. As part of the Government’s anti-corruption policy and to strengthen the confidence in public institutions, the Government is seeking to strengthen the Leadership Code, which aims at increasing the power and independence of the Inspectorate General of Government (IGG), either through redrafting the Code, or through a Constitutional amendment. Also, ministries and public sector agencies will introduce codes of conduct and client charters with formal complaints procedures.

24. The Government intends to complete the privatization of the remaining public enterprises in the coming 1-2 years. Most notably, interested investors have already been identified for a joint concession contract for the Uganda Railway Corporation and the Kenya Railway Corporation, with a possible completion of the transaction by June 2005. The government also intends to sell a majority position in the NIC and is preparing for privatization of the public water and sewerage enterprise. In addition, to increase the power supply, the Government intends to seek an agreement with private investors to start the hydropower project at the Bujagali Falls.

25. More generally, policies to strengthen the investment climate, increase productivity, enhance Uganda’s international competitiveness, and achieve a more sustainable and less vulnerable external position, will be supported by the government’s Medium-Term Competitiveness Strategy (MTCS) and its Strategic Exports Program (SEP). Although there have been advancements in the past, there is a need to strengthen agricultural policies, mainly by re-focusing the sectoral strategy towards improving market access, infrastructure (mainly roads), and supporting other productivity-enhancing measures. With respect to the Plan for the Modernization of Agriculture (PMA), the efficiency and staffing needs in the National Agricultural Research System (NARS) and the National Agriculture Advisory Service (NAADS) will be reviewed, with the purpose of implementing measures to increase efficiency in supporting the farmers.

26. The customs union of the EAC will be effective on January 1, 2005. The tariff rates agreed for the common external tariff (CET) are higher than Uganda’s current tariff structure. However, all discriminatory excise taxes and other charges imposed on imports that currently exist will be removed when the CET comes into effect in line with the Protocol for the EAC, thus mitigating the negative impact on competitiveness. Business opportunities are expected to grow under the customs union with its market of 90 million people.

27. The Government is considering introducing Export Processing Zones (EPZs). In preparing the draft of the Investment and Free Zones Bill, the Government will take into consideration comments from the IMF and other stakeholders. To avoid harmful tax competition for investment, Uganda will work with other EAC partner states to establish a Code of Conduct to harmonize investment incentives. The Government will ensure that the bill excludes elements that would erode the tax base and that the free zones are securely enclosed with strict implementation of customs duties and other taxes on sales to Ugandan residents.

28. Notwithstanding the progress made in the past year in obtaining debt relief under the HIPC Initiative, Uganda still faces a vulnerable external debt situation. The Government is taking steps to improve this situation not only by encouraging exports, but also by exercising better debt management. The strategy of borrowing on IDA-equivalent terms or better will be maintained, while the Government at the same time will strive at increasing the share of grants in the total donor inflows. Consistent with the amended regulations, the Government will establish clear monitoring and operational procedures for the contracting of external debt and debt management by end-June 2005.

III. Medium-Term Macroeconomic Policy Issues

29. The policy agenda for 2004/05 is consistent with the medium-term goal of sustaining poverty reduction by maintaining strong economic growth. To address the recent setback in poverty reduction, the forthcoming revised PEAP will put greater emphasis on: (i) raising growth in the incomes of the poor, using public resources transparently and efficiently to eradicate poverty; (ii) human development, including addressing the quality and drop-out rates in primary schools, improving post-primary education, and population growth issues; and (iii) restoring security for all regions of the country.

30. The medium-term economic policies will focus on spurring export-led private sector growth, while enhancing fiscal and external sustainability. Vital to the fiscal strategy will be a steady reduction in the fiscal deficit and an increase in government savings. This will limit fiscal injections of liquidity leading to lower interest rates, which in turn will promote higher private investment growth. The success of this strategy will depend on stronger annual increase in government revenues, notably through an improvement in tax administration, coupled with a better allocation and efficiency of expenditures. Social-related expenditures in the PEAP will continue to be ring fenced in order to contribute to the achievement of the Millennium Development Goals (MDGs).

Use the free Adobe Acrobat Reader to view Table 2 (5 Kb PDF file)

Technical Memorandum of Understanding

A. Introduction

This memorandum defines the quantitative benchmarks and performance criteria described in the memorandum of economic and financial policies (MEFP) for the remainder of the 2004/05 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

31. 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 2004 base money was estimated at U Sh 809 billion. The base money limits for the remainder of 2004/05 will be cumulative changes from the daily average of June 2004 to the daily average of March 2005 and June 2005, 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

32. 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 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. 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 2004 for the 2004/05 program.

D. Net International Reserves of the Bank of Uganda

33. 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.

34. 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

35. 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. PAF expenditures will be measured based on checks printed for the central government spending units and line ministries, and cash releases to local governments.

F. New Domestic Budgetary Arrears of the Central Government

36. The nonaccumulation of new domestic payment arrears under the Commitment Controls System (CCS) is an indicative target for March 2005 and a performance criterion for June 2005. New domestic payments arrears are defined as the sum of all bills that have been received by a central government spending unit or line ministry from a supplier of goods and services delivered, 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 quarterly verified reports for nonwage recurrent and development expenditure prepared by the Internal Audit Office at the Ministry of Finance, Planning and Economic Development shall be used to determine the new arrears created during each quarter of the 2004/05 fiscal year. The reports will be available within two and a half months following the close of the covered period.

G. Ceiling on Public Administration Expenditures

37. 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 all expenditure (excluding that financed by donor projects) of the following votes: Office of the Prime Minister (003) (excluding development), Foreign Affairs (006), Missions Abroad (201-223), National Planning Authority (108), URA (008), State House (002), Public Service (005), Public Service Commission (027), Local Government (011) (excluding development), Mass Mobilization (135), Office of the President (001) (excluding ISO/ESO and E&I), Specified Officers’ Salaries (100), Parliamentary Commission (104), Local Government Finance Commission (147), Uganda Human Rights Commission (106), and Electoral Commission (102). 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. Public administration expenditures will be measured by the cash releases to the line ministries and other government units listed above.

H. Promissory Notes

38. A promissory note is a written promise by the government to pay a debt, where government is defined as the central government, local governments,¹ 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

39. 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.

40. 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, 2004 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.

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 due² 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).

41. The ceiling on the increase in NCG will be adjusted downward (upward) by any excess (shortfall) in nonbank financing³ less payment of domestic arrears accumulated prior to introduction of the CCS and wage and pension arrears (up to a maximum amount of U Sh 55.4 billion) relative to the programmed cumulative amounts presented in Schedule E.

42. The base money ceiling will be adjusted upward up to a maximum of U Sh 15 billion in March 2005 and June 2005 if the amount of currency issued by the BOU exceeds those projected in Schedule F.

43. The Development Finance Department of the BOU provides export credit guarantee schemes (ECGS) to commercial banks. As of October 25, 2004, the outstanding ECGS amounted to U Sh 1.77 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

44. 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 BOU⁴. 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.

45. 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.”

46. 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 bodies⁵ from their level at end-June 2004. 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

47. 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.

48. 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.

49. 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. Any revisions to monetary survey data, in line with the recommendations of the IMF safeguards mission, will be documented and reconciled with the previous presentation to ensure accurate reporting.

50. 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.

51. 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.

52. 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.

53. Final accounts of the local government authorities for fiscal-year 2003/04 will be consolidated by end-September 2005 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.

54. For the purpose of program monitoring, the quarterly verified reports for non-wage recurrent and development expenditure prepared by the Internal Audit Office at the Ministry of Finance, Planning and Economic Development shall be used to determine the new arrears created during each quarter of the 2004/05 fiscal year. The reports will be available within two and a half months following the close of the covered period.

55. 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, 2004 through June 30, 2005, 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.

56. 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.

57. 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.

58. 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.

59. 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.

60. 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.