Press Release No. 04/164

Press Release: IMF Completes Third Review Under Uganda's PRGF Arrangement and Reviews Noncomplying Disbursement

July 30, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the third review of Uganda's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement and approved the disbursement of an amount equivalent to SDR 2.0 million (about US$2.9 million), which would bring total disbursements under its PRGF arrangement to SDR 7.5 million (about US$10.9 million).

In completing the third review, the Executive Board granted Uganda's request for waivers of non-observance for three end-December 2003 quantitative performance criteria, and the end-March 2004 structural performance criterion regarding the decision on the divestiture of the Uganda Development Bank Ltd.

The Executive Board also reviewed matters relating to a noncomplying disbursement in an amount equivalent to SDR 2.0 million (about US$2.9 million) made on December 29, 2003, following completion of the second review under Uganda's PRGF arrangement. The Executive Board waived the non-observance of the end-June 2003 performance criterion on the contracting or guaranteeing of nonconcessional public sector external debt with a maturity of more than one year which gave rise to the noncomplying disbursement, in view of the minor deviation from the performance criterion and the subsequent corrective action taken by the authorities.

Uganda's three-year arrangement was approved on September 13, 2002 (See Press Release No. 02/41) for an amount equivalent to SDR 13.5 million (about US$19.6 million).

Following the Executive Board's discussion on the third review, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman, made the following statement:

"Uganda's continued strong commitment to sound policies has contributed to macroeconomic stability and to robust economic activity. Improved revenue performance contributed to a modest fiscal adjustment in 2003/04, despite strong pressures for additional spending. Further measures are needed to ensure a sustainable reduction in the deficit. Looking ahead, the authorities are committed to reversing a recent rise in the incidence of poverty, especially in rural areas, and are reviewing their policies for boosting economic growth and reducing poverty in the context of the forthcoming revision of the Poverty Eradication Action Plan.

"Sustained economic growth and poverty reduction will require continued pursuit of sound fiscal and monetary policies and structural reforms. To this end, the authorities aim to reduce further the fiscal deficit in 2004/05, thus strengthening fiscal and debt sustainability and alleviating pressure on real interest rates and the real exchange rate. Fiscal measures requiring timely implementation will include measures to raise revenue, improve tax administration, and contain spending on public administration and defense. The authorities remain committed to deepening reforms in public expenditure management and increasing social spending, as critical elements for fighting poverty. Improving governance remains a key objective, including tackling corruption in the Uganda Revenue Authority and strengthening confidence in public institutions more broadly.

"Supported by new instruments for liquidity management, monetary policy will aim at keeping inflation low and reducing interest rate volatility. A flexible exchange rate policy will help preserve Uganda's international competitiveness. The authorities are making progress in strengthening the framework for bank supervision and regulation of the financial system. The planned liberalization of the pension system and a broadening of the nonbank financial sector should be accompanied by an appropriate extension of this framework. Important legislative initiatives and the planned restructuring and divestiture of the Uganda Development Bank Ltd. will enhance credit to small-and medium-size enterprises.

"The authorities aim to strengthen debt management by placing an annual cap on new concessional borrowing, in addition to the embargo on nonconcessional borrowing, and relying more on grant financing. Structural reforms to modernize agriculture and improve infrastructure will promote export growth and economic diversification," Mr. Kato said.

On the noncomplying disbursement, Mr. Rodrigo de Rato, Managing Director and Chairman said:

"The Executive Board regretted the authorities' failure to provide accurate information relating to the end-June 2003 performance criterion on the contracting or guaranteeing of nonconcessional public sector external debt with a maturity of more than one year.

"The Board noted the minor nature of the slippage, and the corrective actions being taken by the authorities following the discovery of the violation of the performance criterion.

"In view of the prompt corrective actions taken by the authorities, and the steps they propose to take in the future to verify and ensure that new loans are appropriately concessional, the Executive Board decided to grant a waiver of nonobservance of the performance criterion that gave rise to the noncomplying disbursement," Mr. de Rato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5½-year grace period on principal payments.