Press Release No. 98/56

Press Release: IMF Approves Second Annual ESAF Loan for Uganda

November 11, 1998

The International Monetary Fund (IMF) approved today the second annual loan for Uganda under the Enhanced Structural Adjustment Facility (ESAF),¹ equivalent to SDR 33.5 million (about US$46 million), to support the government’s economic program for 1998/99 (July-June). The loan is available in two semiannual installments, the first of which, equivalent to SDR 16.7 million (about US$23 million), will be disbursed on November 25, 1998.

Background

On November 10, 1997, the IMF approved a three-year ESAF arrangement for Uganda in an amount equivalent to SDR 100.4 million (see Press Release No. 97/52). Macroeconomic performance in 1997/98 was generally in line with the program. Real GDP growth, which was adversely affected by El Nino weather conditions in the first half of the year, recovered in the second half, rising by 5.5 percent for the year. The performance was aided by a strong rebound in food production amid the return of normal weather conditions during the second half of the year. Inflation was low, and underlying inflation has been held for some time near industrial country levels. International reserves have been built to a relatively comfortable level, providing Uganda with a cushion to weather future external shocks. Notable progress was made in 1997/98 in a number of structural areas, particularly trade liberalization, civil service reform, tax administration, and financial sector reform, although privatization targets were not fully achieved. Under the first annual ESAF loan, Uganda reached the completion point under the Initiative for Heavily Indebted Poor Countries, or HIPC,² (see Press Information Notice No. 98/37).

Medium-Term Strategy and the Program for 1998/99-2000/01

The government’s medium-term economic strategy is aimed at realizing average real growth of 7 percent a year, containing inflation at 5 percent, and maintaining gross international reserves at a level equivalent to about five months of imports of goods and nonfactor services. The overall fiscal deficit (excluding grants) would increase moderately to 6.7 percent of GDP during 1998/99, and decline gradually to 6.0 percent by 2000/01. Fiscal revenue would rise to12.1 percent of GDP in 1998/99 from 11.4 percent in 1997/98, and would increase to 13 percent of GDP by 2000/01. As reform of excise and trade taxes would be revenue reducing, targeted increases in the revenue-to-GDP ratio will depend crucially on improvements in tax and customs administration, for which the government is receiving technical assistance.

Revenue enhancement remains a key element of fiscal sustainability. While tax administration has improved revenue performance, it is imperative that the government implement further revenue measures, including steps to combat smuggling and enforce penalties for tax evasion. On the expenditure side, weaknesses in expenditure control and the accumulation of domestic arrears are a concern. Other areas of concern have emerged, such as the health of some smaller banks. Further strengthening of payroll management, pension reform and a restructuring of public utilities are also warranted. However, Uganda’s favorable macroeconomic environment and external outlook allow some flexibility in fiscal policy, and provide an opportunity to accelerate urgent social and other priority spending.

Structural Reforms

The authorities’ program envisages a deepening and strengthening of structural reforms in the financial sector, with emphasis on bank supervision and enforcement of prudential regulations. An important stage of financial sector reform has been completed with the recapitalization and privatization of several banks. The next stage must deal with strengthening bank supervision and enforcing the prudential and regulatory framework. Public enterprise reform and reforms within the civil service and pension system are among additional measures seen. Also envisaged is a shift in the structure of public expenditures in favor of social programs and other priority areas.

The Challenge Ahead

Debt relief for Uganda will continue to be required in the period ahead, even with support under the HIPC Initiative. It will be important for non-Paris Club bilateral creditors, in particular, to provide relief as generous as that granted by Uganda’s Paris Club creditors. Additionally, a deterioration in regional and internal security could adversely impact donor assistance and foreign direct investment. Therefore, close monitoring of defense spending by the authorities is warranted.

Uganda joined the IMF on September 27, 1963. Its quota³ is SDR 133.9 million (about US$186 million). As of September 30, 1998, Uganda’s outstanding use of IMF resources totaled SDR 272 million (about US$377 million).