Press Release No. 02/41

Corrected Press Release: IMF Approves Three-Year, US$17.8 Million PRGF Arrangement for Uganda

September 13, 2002

The Executive Board of the International Monetary Fund (IMF) today approved a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for SDR 13.5 million (about US$17.8 million) for Uganda. The Board determined that Uganda's poverty reduction strategy set out in a Poverty Reduction Strategy Paper (PRSP) progress report provides a sound basis for Fund concessional financial assistance. As a result, Uganda will be able to draw SDR 1.5 million (about US$1.9 million) under the arrangement immediately.

Following the Executive Board discussion, Mr. Sugisaki, Deputy Managing Director and Acting Chair, stated:

"The Ugandan authorities are to be commended for the continued implementation of sound macroeconomic policies and structural reforms, which have helped to sustain high economic growth rates with low inflation. This strong economic performance, combined with determined implementation of a comprehensive poverty reduction strategy, contributed to a substantial decline in the incidence of poverty in Uganda over the past decade.

"The new three-year PRGF-supported program, which is based upon the authorities' Poverty Eradication Action Plan, aims at reducing poverty further by increasing the rate of economic growth and maintaining macroeconomic stability, through prudent fiscal, monetary, and exchange rate policies as well as continued structural reforms in the areas of budget management, tax administration, fiscal decentralization, governance and the continuing fight against corruption, and financial development.

"To ensure sufficient resources for key social and economic priorities, fiscal policy aims to increase revenues—through measures in both tax policy and tax administration—and to curb nonessential expenditure. Measures to improve reporting, monitoring, and accountability at all levels of government are important to enhance the effectiveness of government spending, including notably that supported by donor assistance. The program also includes steps to further improve the operation of monetary and exchange rate management.

"The authorities' initiative to expand and diversify the export base will strengthen Uganda's external position. While the economy will still remain dependent on donor support in the foreseeable future, the program is expected to result in an improvement of Uganda's fiscal and external debt sustainability over the medium term. The strength of Uganda's continuing policy effort underscores the importance of timely and comprehensive support by creditors, particularly by non-Paris Club creditors, in providing debt relief under the HIPC Initiative process," Mr. Sugisaki stated.

ANNEX

Recent Economic Developments

The Ugandan economy performed relatively well in 2001/02, despite unfavorable external conditions. Real GDP growth in 2001/02 held steady at 5.7 percent. On account of a significant decline in food crop prices, headline inflation fell to negative levels while average underlying inflation declined to 3.7 percent.

The budget deficit increased to 12.6 percent of GDP in 2001/02, excluding grants, and was largely financed by net donor inflows, which increased to 11.7 percent of GDP and supported higher expenditures on programs designed to reduce poverty. Large sterilization operations, needed to absorb liquidity injections from donor-supported government spending, complicated monetary and exchange rate policies. On a year-end basis, the Uganda shilling appreciated by ½ percent in real effective terms, and Uganda's external position displayed signs of strengthening.

Program Summary

The program for 2002/03-2004/05, supported by a new PRGF arrangement, aims at increasing real GDP growth to about 6½ percent a year on average, while holding annual inflation at about 3½ percent.

The fiscal program aims to assure adequate funding of important programs to support economic growth and poverty reduction by increasing government revenues, through measures in both tax policy and tax administration, and curbing nonessential expenditures. Over the foreseeable future, Uganda will continue to rely heavily on donor assistance.

Monetary and exchange rate policies will focus on maintaining stability in light of sizeable sterilization operations. The authorities will rely on market based monetary instruments and will adhere to a flexible exchange rate policy.

The program seeks to further strengthen the health of the financial sector through strict enforcement of banking regulations, and development of long-term instruments and institutions for financial intermediation. The government will also seek parliamentary approval of the new Financial Institutions Statute.

Uganda's external position is projected to improve under the program, which encompasses the authorities' initiative to expand and diversify the export base.

The Poverty Reduction Process

Under the Poverty Eradication Action Plan (PEAP), published in 1997 and revised in 2000, the authorities have pursued a comprehensive strategy to reduce poverty, supported by substantial donor assistance. The incidence of poverty fell to 35 percent in 2000 from 56 percent in 1992.

Local governments play an important role in the donor-supported poverty reduction strategy. The program will emphasize reporting, monitoring, and accountability of local governments operations to ensure greater effectiveness in the delivery of public services.

Uganda joined the Fund on September 27, 1963. Its quota is SDR 180.50 million (about US$239 million), and its outstanding use of IMF resources currently totals SDR 203.45 million (about US$267 million).