The Executive Board of the International Monetary Fund today completed the fifth review of Uganda’s economic performance under the program supported by the Policy Support Instrument (PSI).1 The Board’s decision was taken on a lapse of time basis.2
The PSI for Uganda was approved by the Executive Board on June 28, 2013 (see Press Release No. 13/78).
In the context of global and regional challenges, compounded by election-related uncertainties, the shilling depreciated sharply, driving an increase in inflation. Annual core inflation reached 6.3 percent in October and is expected to rise somewhat before converging to the medium-target of 5 percent due to monetary tightening. The external current account deficit widened in FY2014/15 and is expected to expand further as a result of high infrastructure-related imports, stagnant exports, and weak tourism receipts stemming from the difficulties in neighboring countries. Nonetheless, international reserves remain at comfortable levels. Supported by public investment, real GDP growth reached 5 percent in FY2014/15 and is expected to remain at that level in FY2015/16—below initial projections reflecting tight credit conditions and a smaller-than-expected fiscal stimulus.
Performance under the PSI has been positive. All end-June quantitative assessment criteria were observed, and so were most continuous assessment criteria. Average core inflation remained within the bands of the PSI consultation clause. The indicative targets on the overall fiscal deficit and withdrawals from the energy and petroleum funds were missed by a small margin. Significant progress is however needed on consistently determining the stock of domestic arrears―for which an audit is ongoing. Importantly, the structural reform agenda, including public financial management (PFM) reform, central bank independence, and financial sector enhancements, needs to be reinvigorated.
In response to rising inflation, the authorities are rightfully tightening policies. The Bank of Uganda has since April increased the central bank rate by 600 basis points, bringing it to 17 percent, and also improved the modality of foreign exchange purchases in the market. As a result, inflation expectations and pressures in the foreign exchange market are subsiding. The central bank also continues to monitor the financial system, which remains sound despite increased vulnerabilities.
On the fiscal front, the authorities have decided to reduce by 0.55 percent the budgeted fiscal expansion through spending cuts. The revised overall deficit, projected at 6.5 percent of GDP compared to 7 percent in the budget, is expected to contribute to price stability and policy credibility; and together with tax administration improvements, will lower the size and cost of domestic security issuances. To ensure that debt remains at low risk of distress, the authorities have re-profiled medium-term infrastructure projects by postponing investments. Strong fiscal-monetary policy coordination and effective communication remain essential to boost policy efficacy and credibility.
Over the medium term, achievement of inclusive growth critically depends on enhancing tax collections—still low by international standards—diversifying exports through gains in productivity and competitiveness, pursuing financial deepening to improve access to credit, improving governance, and strengthening social protection.
1 The PSI is an instrument of the IMF designed for countries that do not need balance of payments financial support. The PSI helps countries design effective economic programs that, once approved by the IMF’s Executive Board, signal to donors, multilateral development banks, and markets the Fund’s endorsement of a member’s policies (seehttp://www.imf.org/external/np/exr/facts/psi.htm). Details on Uganda’s current PSI are available at imf.org/uganda.
2 The Executive Board takes decisions under its lapse of time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.
Source: International Monetary Fund (IMF)