A team from the International Monetary Fund (IMF) led by Axel Schimmelpfennig, IMF Mission Chief for Uganda, visited Kampala from October 12 to 26, 2016 to conduct the seventh review of the country’s economic program under the Policy Support Instrument (PSI) .
At the end of the mission, Mr. Schimmelpfennig issued the following statement:
“Uganda’s economy performed well in a complex environment. The February 2016 elections, muted global growth, and regional developments weighed on sentiment, and growth declined to 4.8 percent in FY15/16. More recently, high frequency indicators suggest an improvement, and growth is projected at a solid 5 percent this fiscal year and 5.5 percent in FY17/18, supported by the scaling up of infrastructure spending. With the timely tightening of monetary policy in 2015 and a stabilizing shilling, core inflation printed at 4.1 percent year-on-year in September.
“Performance under the PSI has been mixed. The Bank of Uganda (BoU) successfully steered core inflation toward its target of 5 percent and increased its international reserves buffer. The government further strengthened its public financial management framework. Poverty-alleviating expenditures were in line with program objectives. However, key fiscal targets for FY15/16 were missed.
“The mission notes the difficult environment for fiscal policy in FY15/16. While revenue collection increased as a share of GDP, it fell short of program expectations, reflecting lower than projected nominal GDP growth. At the same time, current spending was higher than anticipated. Taken together, the overall deficit target was missed by 0.4 percent of GDP, and the government did not repay outstanding BoU advances at year-end. The execution of externally financed projects lagged behind target.
“Looking ahead, the mission welcomes the authorities’ intention to adhere to their FY16/17 fiscal objectives outlined during the sixth review under the PSI. In particular, this includes raising the tax-to-GDP ratio by ½ percent of GDP and prioritization of social and development spending within a tight envelope. Strengthening project management to ensure sound project selection and improve spending efficiency are critical to ensure value-for-money. The mission urges the authorities to step up ongoing efforts to reduce and improve monitoring of government spending arrears, which undermine the budget process.
“Over the medium-term, the government needs to ensure that scaled-up infrastructure investment yields the targeted increase in GDP growth to improve the lives of all citizens and maintain Uganda’s low risk of debt distress. In parallel, efforts to enhance the effectiveness of social spending are equally important.
“The mission commends the BoU’s October 2016 decision to reduce the monetary policy rate by another 100 basis points. With incipient inflation pressures, the BoU had tightened monetary policy in 2015, successfully keeping core inflation in the target band. Since April of this year, the BoU has entered an easing cycle, with core inflation forecast to stay close to the 5 percent target. The mission agrees with the BoU’s assessment that food prices and shilling depreciation are the main risks to the inflation outlook.
“Overall, the financial sector remains well capitalized, though non-performing loans have edged up. This has prompted a tightening of lending standards and a slowdown in credit to the private sector. The third largest domestic bank had become undercapitalized, and the BoU appropriately took over its management to protect deposits and safeguard financial sector stability. As a next step, the financial position of the bank needs to be established, and BoU will look for a strategic investor.
“The mission welcomes the government’s progress on strengthening public financial management. The Ministry of Finance, Planning and Economic Development issued PFM Act regulations to strengthen the budget process. A Charter of Fiscal Responsibility was sent to Parliament in August, setting measurable fiscal objectives to guide budgeting and codifying Uganda’s strong commitment to fiscal transparency. The mission encourages the authorities to submit the amendments to the BoU Act to parliament which will strengthen the central bank’s independence.
“The mission discussed ongoing efforts to ensure Uganda’s prompt exit from the Financial Action Task-Force’s list of jurisdictions with strategic deficiencies in the legal framework for combating money laundering and the financing of terrorism (AML/CFT). The mission urges the authorities to take the necessary steps to facilitate the prompt exit, including by passing the amendments to the Anti-Money Laundering Act and the Insurance Act before December 2016.
“IMF Executive Board consideration of the seventh review of the PSI-supported program is expected by end-December 2016.”
The mission met with Hon. Mr. Matia Kasaija, Minister of Finance, Planning and Economic Development; Professor Emmanuel Tumusiime-Mutebile, Governor of the Bank of Uganda; Mr. Keith Muhakanizi, Permanent Secretary/Secretary of Treasury, and other senior government officials, as well as representatives from the private sector, civil society, and the international community. The mission thanks all counterparts for their collaboration.
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.
Source: International Monetary Fund (IMF).