Press Release No. 15/305

Press Release: IMF Executive Board Completes Fourth PSI Review for Uganda and Concludes 2015 Article IV Consultation

June 29, 2015

The Executive Board of the International Monetary Fund today completed the fourth review of Uganda’s economic performance under the program supported by the Policy Support Instrument (PSI)¹ and also concluded the 2015 Article IV consultation² with Uganda.

The PSI for Uganda was approved by the Executive Board on June 28, 2013 (see Press Release No: 13/239).

Following the Board discussion, Min Zhu, Deputy Managing Director and Acting Chair, made the following statement:

“Economic performance has been positive, underpinned by sound policies and strong implementation of the program supported by the Policy Support Instrument. In particular, tax revenue has been higher than expected; inflation has remained low despite global and regional shocks; and exchange rate flexibility has been preserved. GDP growth is picking up, the financial sector remains sound, and international reserves and public debt remain at comfortable levels.

“The economic policy mix is expected to remain focused on attaining growth and inflation objectives. The authorities are urged to maintain fiscal discipline in the pre-electoral period, by adhering to a budget that contains large infrastructure investment and higher tax collections, while keeping domestic financing at a moderate level. The Bank of Uganda is encouraged to remain firmly focused on the maintenance of price stability. Preserving the banking system’s soundness and promoting financial deepening and access would contribute to economic growth.

“Further increasing tax revenue collection; ensuring that the infrastructure investment program is well sequenced, with project selection based on commercial viability; enhancing regional integration; and strengthening social protection are important steps to attain medium-term inclusive growth and poverty reduction.

“The authorities are to be commended for the progress achieved on the structural front. The Public Financial Management (PFM) Act was adopted, the accounting and payments systems upgraded, the stock of domestic arrears reduced, and the inflation targeting framework improved. Enacting regulations to implement the new PFM Act and a charter of fiscal responsibility, and improving cash management are critical remaining reforms. Amending the Bank of Uganda Act and enacting financial institutions legislation are key steps to further enhance central bank independence and strengthen financial resilience. Reforms are also needed to strengthen the business climate and public institutions in order to promote diversified, inclusive growth through enhanced competitiveness, foreign investment, and regional integration.”

The Executive Board also completed the 2015 Article IV Consultation with Uganda.

Uganda’s recent economic performance has been favorable. Real GDP growth is projected at 5¼ percent for FY2014/15 supported by a fiscal stimulus and a recovery in private consumption. Annual core inflation increased to 4¾ percent in May, from very depressed levels, mainly fueled by the shilling depreciation pass-through. The current account deficit is set to widen to about 9 percent of GDP reflecting increasing capital goods imports, but international reserves remain adequate. A sound banking system resumed lending to finance trade and construction activities.

Economic policies in FY2014/15 have supported growth and stability objectives. The fiscal deficit is estimated at 4½ percent of GDP, below previous projections, on account of a sharp tax revenue increase (the package in force is expected to yield 1 percent of GDP compared to a target of ½ percent), savings from improvements in the payment and payroll systems, and delays in the implementation of infrastructure projects. Following the recent large depreciation—driven by the dollar strengthening, subdued exports, and profit repatriations—the Bank of Uganda tightened the monetary policy stance to keep inflation low. Risk-based supervision has kept bank vulnerabilities low.

The outlook is promising. Growth is estimated at 5¾ percent in FY2015/16 and an average 6¼ percent over the medium-term, driven by scaled-up public investment and a rebound in private demand. Core inflation is projected to remain within the 5 percent medium-term target range. Despite the planned ambitious infrastructure investment package, total debt is expected to remain at low risk of distress and reserves to remain at comfortable levels. Risks to the outlook emanate from regional geo-political uncertainties and potential unbudgeted election-related spending.

Executive Board Assessment³

Directors commended Uganda’s positive economic performance supported by sound policies amid a challenging external environment. Growth has rebounded, inflation has remained moderate, policy buffers are adequate, and the banking system remains sound. Directors stressed the importance of continued strong policies to foster resilience and competitiveness, maintain macroeconomic stability, and promote diversified, inclusive growth.

Directors endorsed the authorities’ fiscal policy stance focused on enhanced revenue mobilization and public spending efficiency, to create room for priority social and infrastructure investment. They welcomed the tax reform package, and endorsed plans to extend the tax net to the informal sector, strengthen tax compliance and enforcement, and eliminate discretionary tax exemptions. Directors stressed the need for continued fiscal discipline in the pre-electoral environment, and recommended strengthened communication with the markets.

Directors supported the authorities’ plans to scale up infrastructure spending, underpinned by new public investment management guidelines. They stressed the importance of ensuring the consistency of infrastructure investment with absorptive and implementation capacity; transparent selection of projects that are commercially viable; and contracting debt on favorable terms. Well-designed public-private partnerships should help to curtail contingent liabilities. Fund technical assistance would be helpful in supporting the authorities’ efforts in these areas.

Directors welcomed the adoption of the Public Financial Management Act, and advised prompt enactment of its regulations. They looked forward to the adoption of the Charter of Fiscal Responsibility, and recommended sustained efforts to reduce domestic arrears.

Directors considered the tight monetary stance appropriate, in view of recent price and exchange rate developments and rising domestic spending. They welcomed the strengthened inflation targeting framework, and called for further efforts to improve monetary policy transmission and coordination. Interventions in the foreign exchange market should continue to be limited to smoothing excessive volatility. Directors encouraged measures to enhance the central banks’ independence, including timely passage of amendments to the Bank of Uganda Act and the central bank’s continued recapitalization.

Directors noted that the financial sector is well capitalized and profitable. To further enhance financial stability, they advised enactment of the financial institutions legislation, and strengthening the risk assessment of foreign currency lending and credit concentration. Directors supported efforts to promote financial inclusion and deepening, including the strengthening of financial literacy. They welcomed the recent passage of the Anti-Terrorism Amendment Bill, and encouraged the authorities to address remaining deficiencies in the AML/CFT framework.

Directors commended the significant progress on structural reforms, and recommended sustained efforts to strengthen the business climate and public institutions in order to enhance competitiveness and promote diversified, inclusive growth. Efforts are needed to attract foreign investment and enhance regional integration, while a stronger social protection system should contribute to reducing poverty and inequality.