During the last two weeks, a team from the International Monetary Fund (IMF) visited Kampala to discuss with the authorities recent developments and outlook in the context of the first review of the program supported by the Policy Support Instrument (PSI). The mission met with the Minister of Finance, Planning and Economic Development; the Governor of the Bank of Uganda (BoU); as well as with other senior government officials and representatives from the international, business, and financial communities.
At the end of the mission, Ms. Ana Lucía Coronel, IMF mission chief and senior resident representative for Uganda, issued the following statement:
“The growth recovery to 5¾ percent in 2012/13, driven by public investment and consumption and stronger private activity in telecommunications, has been supported by a fiscal stance based on strong implementation of investment projects. Monetary policy backed these efforts while dealing with the challenge of abating the impact of the recent drought-related food price shock on the medium-term 5 percent core inflation target. Aided by an improvement in the current account deficit, international reserves remained at a level equivalent to about 4 months of imports, maintaining a welcome buffer against the uncertain global environment.
“The economic outlook is favorable. With low inflation and higher growth, market confidence is set to induce some recovery in credit to the private sector. At the same time, significant investment in hydropower and road projects is expected to stimulate employment and help bring output closer to potential while addressing critical infrastructure bottlenecks. Growth is projected to reach 6¼ percent this year, inflation to stay within the program target band, and debt to remain sustainable notwithstanding increased borrowing requirements. International reserves would temporarily decline as infrastructure-earmarked government funds at the BoU are used to cover the government’s share of project financing, but would remain at a comfortable level. There are risks to the outlook related to instability in the region, spending pressures, governance weaknesses, and capacity constraints in management and implementation of large projects.
“To support this outlook the authorities have to find the right balance between encouraging growth and avoiding crowding out private sector activity by resisting rising spending pressures and strictly adhering to the budget. The mission welcomes the announcement by the BoU that it will maintain a neutral monetary policy stance and its readiness to adjust it in either direction in line with the forward-looking inflation outlook. The mission supports the BOU’s commitment to exchange rate flexibility and its intention to limit its interventions in the foreign exchange market to rebuilding international reserves while smoothing excessive exchange rate volatility.
“The quantitative assessment criteria for end-June 2013 under the current PSI were broadly met, and some progress on the structural front was achieved. In particular, the mission welcomes the reinforcement of BoU’s independence by strengthening its balance sheet and policy instruments, and the actions taken to improve financial management practices, including starting the implementation of a treasury single account, and upgrading the coverage of accounting systems to prevent misuse of funds. Swift parliamentary approval of the public financial management bill will be essential to improving budget execution and credibility and enhancing reporting and accountability of public finances.
“Tax revenue collection in Uganda remains low by regional standards and needs to improve. This will require a thorough assessment of the tax system to eliminate the numerous tax exemptions that have outlived their usefulness. The mission encourages the government to implement its action plan to enforce compliance, clean up tax registries, and issue the long awaited national identification cards, which would bring benefits in several areas. The revenue effort has to be accompanied by good management of public funds to avoid payment arrears, which have recently accumulated, and the maintenance of the budgeted level and composition of expenditures, by avoiding supplementary budgets. Efforts to this end will complement the important gains already achieved in governance and accountability.