Kampala, August 21, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
USA

Dear Mr. Köhler:

1. We recently concluded discussions with the Fund staff on the first review of Uganda’s program for 1999/2000 (July-June) that is supported by the third annual arrangement under the Poverty Reduction and Growth Facility (PRGF), approved by the Executive Board of the Fund on December 10, 1999. The key policies for 1999/2000 outlined in my letters to the Acting Managing Director dated March 30 and April 25, 2000 were implemented, and the Government remains fully committed to the policies for 2000/01 and the medium term set forth in Uganda’s Poverty Reduction Strategy Paper (PRSP) endorsed by the Boards of the Fund and IDA in May 2000. The Government welcomes the recognition by the Executive Boards of the Fund and IDA of the progress achieved by Uganda in implementing its Poverty Eradication Action Plan (PEAP), as well as the determination by the two Boards that Uganda had satisfied the conditions for the completion point under the enhanced HIPC Initiative. The debt relief provided will assist the Government to implement the policies summarized in Uganda’s PRSP. The attached memorandum of economic and financial policies (MEFP) highlights key developments during 1999/2000 and sets forth the Government’s economic, financial, and antipoverty policies for 2000/01.

2. In my letter to the Acting Managing Director of March 30, 2000, the Government requested a relaxation of the ceiling on net bank claims on government for end-June 2000 in an amount of U Sh 57 billion (0.7 percent of GDP). In addition, the government requested a modest lowering of the floor on net international reserves of the Bank of Uganda, consistent with the maintenance of a comfortable level of reserves equivalent to five months of imports. This request was predicated upon a more difficult than programmed economic situation for the second half of the year, stemming in part from the sharp deterioration in the terms of trade and adverse climatic conditions. Accordingly, the assessment of performance under the 1999/00 program takes account of the requested modifications to the program that were contained in the letter that was circulated to Executive Directors as background information in the context of their consideration of the completion point for Uganda under the enhanced HIPC Initiative. The assessment also takes account of the changes to the quantitative performance criteria relating to the ceiling on external borrowing and the floor on net international reserves that were outlined in my letter to the Acting Managing Director of April 25, 2000, and approved by the Executive Board on May 1, 2000.

3. Given the nature of the nonobservance of the end-December 1999 quantitative and structural performance criteria pertaining to minimum expenditures on Priority Program Areas, the accumulation of domestic arrears, and the disbursement of equalization grants, the measures implemented during the second half of 1999/2000, and the policies contained in the attached MEFP, the Government requests waivers on the end-December 1999 performance criteria that were missed.

4. Furthermore, to enable the Executive Board of the Fund to assess adequately the Government’s success in implementing its economic, financial and antipoverty program under the current PRGF arrangement, the Government requests that the commitment period under the arrangement, which currently expires on November 9, 2000, be extended to end-March 2001. The Government also requests that the quantitative and structural performance criteria and structural benchmarks for end-September 2000 (Tables 3 and 4), as well as quantitative and structural benchmarks for end-December 2000, described in the attached MEFP, replace the end-June 2000 performance clauses as the basis for concluding the second review under the annual arrangement.

5. The Government of Uganda will provide the Fund with such information as the Fund may request in connection with Uganda’s progress in implementing the economic and financial policies and achieving the objectives of the program. A technical memorandum of understanding (TMU) detailing the reporting requirements under the program is attached (Attachment II).

6. Following the completion of the first review of the program by the Executive Board, the Government requests the second disbursement of SDR 8.9265 million under the third annual arrangement.

 

Attachments: Memorandum of Economic and Financial Policies for 2000/01 Technical Memorandum of Understanding

I. Developments in 1999/2000¹

1. All the quantitative performance criteria for end-December 1999 were met, except for those pertaining to expenditure over commitments of the central Government and the mini-mum expenditure on priority program areas (PPAs), both of which were missed by narrow margins (Table 1). All structural performance criteria for end-December were observed with the exception of the distribution of equalization grants to districts (which were disbursed in January), and all end-December structural benchmarks were observed, with the exception of the privatization of Uganda Spinning Mills (Table 2). All quantitative benchmarks for end-March 2000 were observed with the exceptions of minimum expenditures on priority program areas (PPAs) and over commitments of the central government. The end-March structural benchmark pertaining to district work plans for 9 of the 22 conditional grants covered by the Poverty Action Fund (PAF) was not observed owing to delays in preparing some sector-specific plans for a few districts. However, all districts have completed work plans for covering the grants for the Universal Primary Education (UPE) program, agricul-tural extension, and the schools facility grant. Nearly all districts have completed plans for the rural roads, NGO primary health care, primary health care, and rural water. The response for completing work plans for accountability has been notably lower, primarily due to some delays in finalizing and disseminating the sector-wide programs from the central Government to the districts. The Government expects to meet all quantitative and structural targets for end-June 2000 as set forth in my letter of March 30, 2000 (Tables 1 and 2).

2. Real GDP growth for 1999/2000 is estimated to have slowed down to 5.1 percent, owing to drought and a deterioration in the external terms of trade. Despite these shocks, inflation was contained to 2.2 percent for the year ending June 2000.

3. Fiscal revenues are projected to be about 11.6 percent of GDP, compared with a programmed 12.5 percent, owing primarily to a compression in imports for domestic use. As noted in my letter dated March 30, 2000, it was not possible to curtail expenditures by the full amount of the revenue shortfall without endangering key development projects and the delivery of basic government services. However, cuts in domestic expenditures amounting to 0.9 percent of GDP have been implemented.² Expenditures on PPAs (including the development component of the Universal Primary Education (UPE) program), nonetheless, were higher than programmed by about 0.2 percent of GDP. Defense outlays have been contained to U Sh 174 billion (2.0 percent of GDP), moderately lower than budgeted. The fiscal accounts now fully reflect the costs of the presidential jet and the pay out of deposits held by the three banks closed in 1998/99. The fiscal deficit (excluding grants) was 10.5 percent of GDP, against a programmed 8.1 percent.³ The deficit was covered by net external financing (including grants) amounting to 10.8 percent of GDP, and domestic bank financing of 1.5 percent of GDP. This facilitated the liquidation of domestic nonbank liabilities of 1.9 percent of GDP.

4. Most of the tax administration measures for the second half of the year outlined in my letter dated March 30 have been implemented (Annex I). The structural benchmark for end-June pertaining to the completion by the URA of comprehensive issue-oriented and refund audits was observed (Table 2). The audit and collection program of the Large Taxpayer Department (LTD) has been strengthened, and filing and payment procedures have been improved. A fast-track system for VAT refunds was introduced in the LTD, and the VAT and internal revenue departments were merged with a view to reorganizing them along the lines of the LTD. Key measures that were not completed in the second half of 1999/2000 have been included in the work program for 2000/01 (Annex II).

5. The Government has also implemented the measures outlined in the memorandum of economic and financial policies (MEFP) annexed to my letter of November 19, 1999 to strengthen the Commitment Control System (CCS). With regard to arrears, the stock of over commitments was U Sh 4.6 billion by end-March 2000; provisions were made to clear over commitments outstanding as at end-March by the end of the fiscal year. In order to strengthen compliance with the CCS, the Treasury Inspectorate undertakes inspection visits of key activities on a monthly basis to monitor compliance with the system. The Auditor General verified the stock of central government domestic arrears as of end-June 1999, thereby meeting the relevant structural performance criterion under the program. A program to clear these arrears during the next two years has been incorporated into the Medium-Term Expenditure Framework (MTEF). In accordance with the continuous performance criterion, no promissory notes were issued by the Government during the fiscal year.

6. Broad money (M2) increased by 12 percent, reflecting a shift into foreign exchange deposits in the aftermath of the bank closures. The BOU maintained a tight monetary policy throughout the year, with the discount rate on 91-day treasury bills rising to 13.2 percent by end-May 2000, up from 7.6 percent at end-June 1999. While the Uganda shilling depreciated by about 8 percent against the U.S. dollar during the year, the nominal and real effective exchange rates were relatively unchanged.

7. As noted in the Government’s MEFP attached to my letter to the Managing Director dated November 19, 1999, the Government undertook to reimburse all private sector deposits (excluding interbank deposits) held in the three commercial banks closed in 1998/99, amounting to about U Sh 91.2 billion (1.1 percent of GDP), and to reflect the fiscal costs of this operation in a comprehensive and transparent manner. The govern-ment accounts with the BOU have been correspondingly debited with these amounts, and its financial position with the central bank now fully reflects the cost of this operation.

8. Developments in the external sector were dominated by the sharp deterioration in the terms of trade, the fall in coffee volumes and the sluggishness of non-oil imports. The increased trade deficit was only partly offset by the growth of private transfers. As a result, the current account deficit (excluding official transfers) was about 10.4 percent of GDP. Net official flows (including grants, but excluding HIPC assistance and other exceptional financing) were lower than programmed, owing to delays in disbursements of import support credits, and the overall balance is estimated to have recorded a deficit of about US$34 million. Nevertheless, gross international reserves are estimated to have risen by about US$22 million, bringing total gross foreign reserves to the equivalent of five months of imports of goods and nonfactor services.

9. Uganda has completed the reconciliation of debt data with the members of the Paris Club. The Government has initiated efforts to obtain relief from non-Paris Club creditors on terms comparable to those proposed by the Paris Club, which would allow for the interruption of current payments to these creditors. In the area of trade policy, the temporary additional duties on soft drinks and automotive batteries were eliminated in March 2000, one year ahead of schedule. The additional duty on imported beer was reduced by one-third in March and will be eliminated in June 2001. The additional duty on tobacco products was reduced by one-half in March, three months ahead of schedule, and will also be eliminated in June 2001. In order to finalize the legal framework for the liberalization of international capital transactions that was implemented in July 1997, the new Foreign Exchange Act, which will supersede the Exchange Control Act, will be presented to Parliament no later than end-September 2000.

10. The Government’s structural reform agenda for 1999/2000 was largely successful. All public enterprises scheduled for divestiture in 1999/2000 were successfully privatized, with the exception of Uganda Spinning Mills, which has been retendered. Most notably, 51 percent of shares of Uganda Telecommunications Limited (UTL) were sold for US$33.5 million to a private international telecommunications consortium, which has assumed management control of the utility.

II. Program for 2000/01

11. Macroeconomic objectives and policies. Real GDP growth is expected to increase to about 6.5 percent in 2000/01, before rising to about 7 percent in the medium term. However, for programming purposes, a growth rate of 6.0 percent has been used for 2000/01. Underlying inflation will be contained to 5 percent. Gross reserves are projected to rise to 5.1 months of imports in 2000/01, before returning to 5 months in the medium term. The temporary increase reflects a bunching of donor support arising from delays in disbursements during 1999/2000, which are expected to be effected in 2000/01.

12. Fiscal policy. Fiscal revenues are projected to remain constant in relative terms at 11.6 percent of GDP. The projection does not incorporate potential gains from improved tax administration. Total expenditures are programmed to fall slightly to 22.0 percent of GDP. The fiscal deficit (excluding grants) would contract moderately to 10.4 percent of GDP, and would be more than covered by net donor inflows (including grants) of about 12.3 percent of GDP. Against this background of a temporary surge in donor inflows, the Government would build up deposits with the banking system equivalent to 0.9 percent of GDP and reduce its domestic arrears by 1.1 percent of GDP. The program would include, as a performance criterion for September 2000, a ceiling on net claims on the government by the banking system, with adjusters for deviations in import support, external debt service, domestic nonbank financing, and shortfalls in PAF expenditures, relative to the program.

13. The Government is fully aware that the sustainability of its poverty eradication program depends crucially on an increase in the ratio of revenue to GDP. Toward this end, the Government remains committed to improving tax administration. Annex II presents the measures to be implemented in 2000/01 aimed at strengthening revenue performance. Within the context of the 2000/01 budget, a decision will be made by URA on the type of integrated computer system to be adopted. The savings that will be realized from the ongoing stream-lining, automation, and integration efforts will be deployed for increased audit and collection. The Government plans to strengthen the senior manage-ment of the URA during the year. The Government will appoint a new Commissioner General of the URA when the contract of the current Commissioner expires in August 2000. In the context of strengthened management, the Government will introduce during the year an incentive-based budget for the URA with a view to improving its performance. Under this system, a percentage of revenues collected in 2000/01 above the budget target would be retained by the URA for its development program and salary bonuses. Appropriate penalties for abuse would be built into the arrangement. To improve transparency of the tax system and to help ensure a level playing field for all taxpayers, all existing tax exemptions will be eliminated and no new exemptions will be granted. The Customs Law will be amended to remove ministerial discretion in the granting of exemptions, bringing it in line with the VAT and income tax laws.

14. The Government will continue to implement its poverty-related expenditures pri-marily through the PAF and will accordingly maintain tight control over non-PAF spending. It is the intention of the Government to raise PAF expenditures not only as a percentage of GDP, but also as a percentage of total expenditure. PAF expenditures will be closely moni-tored and performance in this area will be assessed as part of the next review. The 2000/01 fiscal program contains provisions for an across the board wage increase of five percent, in line with inflation. A salary increase of 10 percent is being proposed for lower-ranking primary school teachers, prison staff, and police. In order to accommodate the annual cost of leasing the presidential jet, the 2000/01 budget for defense has been cut from the initial allocation of U Sh 193.5 billion (contained in the March 2000 MTEF) to U Sh 191.4 billion; the remainder will come from other non-PAF expenditures. A major source of spending pressure in 2000/01 will be the U Sh 25.7 billion that has been allocated for elections of the Women and Youth Councils (October 2000), the presidency (March 2001), and Parliament (June 2001). The CCS will be strengthened and extended to the domestic development budget in a phased manner. Other expenditure measures that will underpin the 2000/01 program are provided in Appendix III.

15. Monetary policy. The objective of monetary policy will remain that of containing underlying inflation to 5 percent. Money and quasi-money (M3) and broad money (M2) are projected to increase by 15 percent, based on a continued modest decline in money velocity; private sector credit is also projected to expand by 15 percent. The monetary program of the BOU includes a floor on the accumulation of net international reserves and a ceiling on net domestic assets of the banking system (with adjusters for deviation in import support and external debt service relative to the program). The arrangement would include quantitative performance criteria for September 2000 and benchmarks for December 2000.

16. The Government and the BOU will reach agreement on a memorandum of understanding by September 30, 2000 that will clarify and elaborate the relationship between the Ministry of Finance, Planning and Economic Development and the BOU. The memorandum will focus on the clarification of responsibilities in the area of banking supervision, exchange rate policy, external debt policy, and other areas where the Bank of Uganda provides services to the Government. The scope, final responsibilities, cost, and compensation for such services will be clearly delineated in the memorandum.

17. Financial sector. While the cost of compensating former depositors of the three closed banks is now reflected in the fiscal accounts, the legal basis for debiting government accounts at the BOU was secured through appropriations presented to Parliament as part of the 2000/01 budget proposal. Accordingly, the budgets for 2000/01 and subsequent years will include the interest costs of servicing the operation.

18. The BOU will continue to strengthen its banking supervision operations, including the rigorous enforcement of prudential regulations. In this regard, the two small banks that were determined to be insolvent as at end-March 1999 have been fully recapitalized and are now operating in compliance with prudential guidelines. In addition, the new Financial Institutions Bill, which greatly strengthens the bank supervision framework, will be presented to Parliament by December 2000. This would constitute a structural benchmark under the arrangement.

19. External sector and policies. World coffee prices are expected to remain depressed, but export volumes are projected to increase with the return of normal weather. Noncoffee exports are also projected to record moderate gains. However, demand for imported goods and services is projected to rebound strongly, and Uganda’s external current account deficit (excluding official transfers) will widen by about ½ percentage point of GDP, to 10.9 percent of GDP. While total foreign aid (project and import support, excluding HIPC assistance and other exceptional financing) is projected to rise markedly compared with the previous year, the overall balance is nonetheless projected to record a deficit of about US$6 million. Gross international reserves are projected to increase to about 5.1 months of imports of goods and nonfactor services, facilitated by the exceptional financing to be provided under the HIPC Initiative.

20. The Government of Uganda will continue operating liberal foreign exchange and liberal trade regimes. While the Government does not intend to resist changes in the exchange rate linked to economic fundamentals, such as permanent losses of real income linked to changes in the terms of trade, it is nevertheless committed to maintaining orderly conditions in the foreign exchange market through the implementation of appropriate fiscal, monetary, and foreign exchange market intervention policies, taking into account the net international reserve target.

21. The Government will continue its efforts to liberalize, simplify, and streamline its trade regime. The surcharge on beer will be completely eliminated by March 2001, and those on cigarettes and other tobacco products will be removed by June 2001. The Government will undertake by September 30, 2000 a study of the special protection accorded to the sugar and textile industries. The recommendations of the study on the protection accorded to these sectors will be implemented by December 31, 2000. The existing discriminatory excises on selected imports will be phased out consistent with the framework for trade liberalization to be undertaken in the context of the EAC.

22. The Government will strengthen its external debt-management policy and will strictly adhere to its commitment not to contract any new nonconcessional external liabilities above the limit set forth in the program (Table 1). In addition, the Government will update its External Debt Strategy of 1995, to take full account of the principles set out in the HIPC Initiative. It will make every effort to respect the principle of equitable burden sharing and nondiscrimination among creditors. It will endeavor to obtain relief from all its bilateral creditors on terms comparable to those provided by the Paris Club, and will speed up the resolution of outstanding debt issues with Tanzania. In keeping with the spirit of the Government’s intention to borrow only on highly concessional terms, the ceiling on nonconcessional borrowing under the program now includes financial leases and other instruments giving rise to external liabilities on nonconcessional terms.

23. The poverty-reduction program will continue to be implemented primarily at the district level. All districts are required to submit monthly accounts of expenditures financed by conditional grants. For the fiscal year 2000/01, 11 of 22 conditional grants encompassing key poverty reduction sectors (education, health, rural roads, water, agricultural extension, and monitoring and accountability) will be included in the PAF. For nine of these grants, districts are also required to prepare work plans in which programs are defined, quantified and costed, with a specific implementation time frame. PAF conditional grants will be released upon submission of a satisfactory quarterly progress report, detailing expenditures made, and the associated activities undertaken. Districts have the freedom to reallocate up to 10 percent of funds within each conditional grant among different expenditure categories. Monitoring will be carried out by local governments, the Treasury Inspectorate Department, line ministries and the Auditor General. At the end of the financial year, unutilized funds will be returned to the central government. Unreleased funds not reallocated by the end of the fiscal year will be ring-fenced and added to the PAF allocation for the following year. Budget preparation (including structure and classification) and the accounting system at the district level will be harmonized with the central government budget process. The Auditor General is in the process of verifying the stock of domestic arrears outstanding at the district level as of end-June 1999; this process is expected to be completed by December, 2000.

24. The Government remains committed to implementing the structural reforms outlined in the PRSP designed to create an environment conducive to the maintenance of strong economic growth and poverty reduction. To this end, the Government approved a Strategic Plan for Power Sector Reform in June 1999. Subsequently, in November 1999, Parliament approved new electricity legislation, which provides for the removal of the monopoly of the Uganda Electricity Board (UEB) in the production and distribution of electricity, establishment of an independent regulator for the industry, and the unbundling of UEB into separate distribution, transmission, and generation companies. Each of these companies will be privatized in the context of long-term concessions, beginning with the distribution of operations, which will be completed by end-2001. Accordingly, in 2000/01, the Government will focus its attention on asset/liability valuation, tariff modeling and rationalization and the preparation of concession contracts.

25. Proposals for the restructuring of the civil service were approved in May 1998. The undertaking, which involved the retention of policy functions by central ministries and the move of implementation operations, including personnel to districts, was completed by December 1999. A rationalization of the Foreign Ministry is under way. It will involve a cut by eight in the number of foreign embassies in 2000/01. The Government will begin implementing the recommendations of the Pay Strategy Report prepared by the Ministry of Public Service.

26. In recent years, the Government has made notable progress in building effective governance structures and in instituting measures aimed at improving the efficiency of public resources. This has involved (i) the devolution of the responsibility for the execution of programs, including the poverty reduction program, to districts; (ii) establishing and strengthening institutions, such as the Ministry of Ethics and Integrity, the Auditor General’s Department, and the Inspector General of Government; (iii) the design of new regulatory structures for government procurement of goods and services, and (iv) the implementation of a CCS, which has greatly helped strengthen budgetary control and public accountability. The system has assisted in substantially reducing the accumulation of new domestic arrears and in minimizing the channeling of scarce resources to wasteful activities.

27. Notwithstanding the above actions, public service delivery, particularly at the district level, remains weak and the machinery for accounting for expenditure is still not well developed. In this connection, the move to a district budget release system, based on the development of output plans, is an important initial step toward improving accountability. However, limited information at the district level on releases of funds to localities limits the capacity of local authorities and communities to monitor corruption. The Government has begun to disseminate information more widely and is seeking ways to strengthen the transmission mechanisms.

III. Poverty Eradication Action Plan

28. In line with the timetable outlined earlier by the Government, an updated PEAP has been completed and presented to cabinet. An initial draft of the document was prepared earlier in the year with NGOs and members of civil society and disseminated to donors. The costings of the intervention programs in the education, health, roads, and water sectors were presented to stakeholders at a workshop in June 2000. Present plans are to issue the updated PEAP in September 2000. The MTEF that forms the basis of the Budget Framework Paper (2000/01-2002/03), as well as the budget for 2000/01 has been drawn from the PEAP and incorporates the costs of programs aimed at realizing the PEAP’s output indicators. The monitoring of the PEAP indicators will be undertaken by line ministries, local authorities, the Uganda Bureau of Statistics, and the Poverty Monitoring Unit of the Ministry of Finance, Planning and Economic Development.

Annex II

Uganda: Revenue Strengthening Measures in 2000/01

Structural Performance Criteria

• A new Commissioner General of the Uganda Revenue Authority (URA) will be appointed by end-September 2000.

• The URA will produce an operational plan against monitorable revenue targets to be set by the Ministry of Finance.

Efforts to improve tax collection

• Budgetary resources will be allocated to the URA to achieve the objectives of the operational plan, as well as the revenue targets for 2000/01 by end-December 2000.

• A scheme for rewarding the URA for effective tax collection will be instituted whereby a percentage of all revenue intake beyond the official target will be retained by the URA, in part for bonuses and investment. Appropriate penalties for abuse will be built into the arrangement.

• To guard against erosion of the revenue base, the Customs Law will be amended in the context of the 2000/01 budget to remove the provision for the granting of exemptions by the Minister of Finance. All existing exemptions will lapse by end-June 2000. The exemption granted to Roadmaster will be removed on June 2001.

• All discretionary income tax exemptions will be eliminated by July 1, 2000.

Efforts to reduce smuggling

• Amendments to the Customs Law will be adopted in the 2000/01 budget to introduce tougher penalties for smuggling, misdeclaration, and false entries and documentation.

• The penalty of 3 percent for avoiding preshipment inspection will be increased to 5 percent from September 30, 2000.

• Biocoding will be introduced by September 30, 2000 to combat petroleum smuggling.

• Transit-parking yards will be established along the main transit corridor by September 2000; they will be managed by private investors, but controlled by Customs.

• The URA will initiate random audits of retail outlets and bonded warehouses from July 1, 2000.

• High-risk goods in transit will be targeted for random verification, both for quantity and value.

Annex III

Uganda: Expenditure Measures Under the 2000/01 Program

• Over commitments of nonwage recurrent expenditures by ministries and departments will not be permitted (continuous performance criterion).

• The Commitment Control System will be extended to the domestic development budget by end-December 2000.

• The Auditor General will verify domestic central government budget arrears outstanding at end-June 2000 by end-December 2000 (benchmark).

• Quarterly data on over commitments and the quarterly reports on inspection of the Commitment Control System will be provided to the Fund with a two-month lag.

• 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.

• An across-the-board pay increase in 2000/01 of 5 percent. Salary increases of 10 percent for lower-ranking primary school teachers, prison staff, and police. The government will move to an incentive wage structure from 2001/02, in the context of a fully articulated civil service reform program, as well as determined efforts to raise the domestic revenue effort.

I. Introduction

1. This memorandum defines the quantitative benchmarks and performance criteria described in the memorandum of economic and financial policies (MEFP) for the 2000/01 financial program that would be supported by the IMF under the third annual arrangement under the Poverty Reduction and Growth Facility (PRGF), and sets forth the reporting requirements under the arrangement.

A. Net Domestic Assets

2. Net domestic assets (NDA) of the banking system are defined as money and quasi-money—comprising currency in circulation, shilling, and foreign currency-denominated deposits of Ugandan residents—less the Uganda shilling value of net foreign assets of the banking system. For program monitoring purposes, net domestic assets are taken net of valuation. Under this definition, the June 30, 2000 level of the NDA was estimated at U Sh 234.4 billion. The NDA limits will be cumulative changes from end-June 2000 and will be monitored from the consolidated accounts of the banking system.

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

3. Net claims on the central government (NCG) by the banking system is defined, excluding deposits in project accounts 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. The component of credit to government in the form of securities and promissory notes will be calculated based on data on the outstanding stock valued at issue price. According to the above definition, the estimated end-June 2000 level of NCG is U Sh 4.8 billion. The limits on the change in net claims on the central government by the banking system will be cumulative from end-June 2000.

C. Net International Reserves of the Bank of Uganda

4. Net international reserves (NIR) of the Bank of Uganda 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 Bank of Uganda 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 Treasurer’s Department of the IMF at the program U.S. dollar per SDR exchange rates, which are US$1.3767 per SDR for end-September 2000; US$1.3786 per SDR for end-December 2000; US$1.3805 per SDR for end-March 2001; and US$1.3824 per SDR for end-June 2001.

D. New Domestic Budgetary Arrears of the Central Government

6. The nonaccumulation of new domestic payment arrears is a continuous performance criterion under the program. For the purpose of program monitoring, new domestic payment arrears are defined as the sum of the gross excess of expenditure commitments on the nonwage recurrent budget incurred by each central government spending unit over cash releases to those units by the Treasury of the Ministry of Finance Planning and Economic Development (MFPED), unpaid wage commitments and unpaid debt service due on government debt. The source of data regarding the excess of nonwage recurrent commitments over cash releases will be the monthly reports of the Commitment Control System (CCS). The source of data on debt service due shall be calculated by the Bank of Uganda based on the stock of outstanding government debt. Government debt is defined as the sum of outstanding government securities, promissory notes, and bank credit. Wage arrears shall be calculated as the difference between checks issued for wage payments by the Uganda Computer Service of the MFPED, less amounts due as reported by the Ministry of Public Service (MPS).

7. The NDA and NIR targets are 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. On a cumulative basis, from July 1, 2000, the Uganda shilling equivalent of import support plus HIPC assistance will amount to 121.8 billion at end-September 2000; 221.1 billion at end-December 2000; 346.5 billion at end-March 2001; and 685.5 billion at end-June 2001. Debt service paid is programmed at U Sh 48.8 billion at end-September 2000; U Sh 83.5 billion at end-December 2000; U Sh 126.4 billion at end-March 2001; and U Sh 161.3 billion at end-June 2001.

8. The ceilings on the cumulative increase in NDA and NCG will be adjusted downward (upward), and the floor on the cumulative increase in NIR of the Bank of Uganda will be adjusted upward (downward) by the amount by which import support, grants and loans, plus HIPC assistance, exceeds (falls short of) the projected amounts. The ceilings on the increases in NDA and 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 paid falls short of (exceeds) the projections.

9. The ceiling on the increase in NCG will be adjusted upward for any issuance of government securities for the completion of the recapitalization of the Bank of Uganda, the resolution of payment/transfers of the deposits liabilities of the three commercial banks closed in 1998/99, and any further recapitalization of the Uganda Commercial Bank. It will also be adjusted downward (upward) by any excess (shortfall) in nonbank financing—comprising check float and the change in government securities and government promissory notes held by the nonbank public, less payment of domestic arrears accumulated prior to July 1, 1999—relative to the programmed cumulative amounts of minus U Sh 72.2 billion at end-September, 2000; U Sh 130.9 billion at end-December, 2000; U Sh 122 billion at end-March, 2001; and minus U Sh 103.2 billion at end-June, 2001. Furthermore, NCG will be adjusted downward by the amount by which the nonwage recurrent and development expenditures under the Poverty Action Fund (PAF) fall short of the cumulative budgeted amounts of U Sh 73 billion at end-September 2000; U Sh 143.8 billion at end-December 2000; U Sh 221.1 billion at end-March 2000; and U Sh 298.6 billion at end-June 2001.

F. Nonconcessional External Borrowing Contracted or Guaranteed by the Central Government or the Bank of Uganda and Arrears

10. The program includes a ceiling on new nonconcessional borrowing over one year contracted or guaranteed by the government or the Bank of Uganda. 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 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. 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.

11. The ceiling of 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 or the Bank of Uganda from their level at end-June 2000. It comprises those external arrears reported by the Trade and External Debt Department of the Bank of Uganda that cannot be rescheduled.

G. Monitoring and Reporting Requirements

12. The authorities will inform the IMF staff in writing at least 10 (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 enterprises. The authorities will similarly inform the IMF staff of any nonconcessional external debt contracted or guaranteed by the government, the Bank of Uganda, or any public enterprise.

13. 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.

14. The government will provide the IMF staff with a summary of the fiscal accounts in the format of Table 1 (attached) on a quarterly basis with a 7-week lag from the end of the reporting 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 exter-nally funded development expenditures. Expenditures on domestic and external debt service will be recorded on a commitment basis (i.e., when payment is due). Cash transfers to dis-tricts will be recorded as expenditures of the central government when the transfer is effected by the Bank of Uganda. 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.

15. 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 (i) outstanding stock of checks issued by the Uganda Computer Services of the MFPED, disaggregated into checks issued for commitments arising during July 1, 2000 through June 30, 2001, payment of arrears accumulated prior to July 1, 2000, checks issued to the Bank of Uganda to replenish the government promissory clearing account, and checks issued to settle intra-ministerial payment obligations; (ii) cash balances held project accounts at commercial banks; (iii) total value (measured at issue price) of outstanding government securities; (iv) total value (measured at issue price) of outstanding government promissory notes; (v) the stock of government securities (measured at issue price) held by commercial banks; (vi) the stock of government promissory notes (measured at issue price) .

16. 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 Bank of Uganda, 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.

17. 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.