Public Information Notice No. 98/37

Press Information Notice: IMF Concludes Article IV Consultation with Uganda

June 11, 1998

The IMF Executive Board concluded on April 8, 1998 the 1998 Article IV consultation¹ with Uganda and the midterm review of the first annual arrangement under the Enhanced Structural Adjustment Facility (ESAF), approving the disbursement of the second tranche (SDR 20.1 million) of the first annual loan. The IMF also decided that the conditions for reaching Uganda’s completion point under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative) had been fulfilled. The amount of debt relief from its external creditors provided under the HIPC Initiative is estimated to be equivalent to US$650 million in nominal terms, or 20 percent of Uganda’s debt; in terms of net present value, assistance under the Initiative will be about US$350 million, of which the IMF will contribute about US$69 million (see Press Release No. 98/13).

Background

For over a decade, Uganda has successfully implemented macroeconomic and structural reforms that have led to higher growth and moderate inflation. According to revised national accounts figures, during 1994/95–1996/97 (July–June) real GDP grew at an annual average of 8.2 percent, while inflation was held to an average of 6.4 percent on a year-end basis. Developments thus far in 1997/98 indicate that heavy rains (caused by the El Niño weather system) have led to reductions in coffee and food production and disruptions in transport. As a result, real GDP growth is expected to be 5 percent for the year as a whole, compared with earlier expectations of 7.5 percent. Inflation on an end-period basis, which had risen to 10.5 percent in January, owing to an increase in food prices, is expected to decline significantly as weather conditions improve; by end-March 1998 annualized inflation had subsided to 4.8 percent.

The government remains committed to reducing the overall fiscal deficit (excluding grants) to 5.8 percent of GDP in 1997/98, through concerted efforts to improve revenues and maintain expenditure discipline. It has instituted measures to improve tax and customs administration, including control of smuggling and improvements in VAT administration, and to broaden the tax base, while reducing reliance on import taxes and excise duties on a small number of products. The composition of expenditure is being shifted increasingly toward social and other priority areas. The monetary program remains broadly on track. The adverse effects of inclement weather on coffee exports are being largely offset by higher-than-expected foreign direct investment. The exchange rate remains market-determined. In 1997 the nominal effective exchange rate remained relatively stable, and the real effective exchange rate appreciated modestly owing to the temporary weather-related increase in food prices.

The government is implementing a broad-based structural reform program. In the financial sector, the sale of the state-owned Uganda Commercial Bank was a milestone; moreover, commercial banks increased their rates of capitalization. Restructuring of the civil service and the Uganda Electricity Board resulted in significant reductions in staff size. The authorities implemented full capital account convertibility, and major steps were taken to liberalize the trade regime through reductions in import tariffs and elimination of three of the four import bans (the remaining import ban is expected to be lifted next fiscal year). The Uganda Telecommunications Corporation Ltd. was offered for sale. The privatization program continued to be implemented, with the divestiture of a number of additional enterprises.

The government is finalizing its strategy for implementing the Poverty Eradication Plan, which aims to increase the quality of life of the poor with measures such as the development of rural infrastructure, promotion of small firms and microenterprises, job creation, and increased expenditures on health and education. In each of the past three years, real per capita expenditures on health and education have risen substantially. In January 1997, the authorities launched the Universal Primary Education (UPE) program, as a result of which primary school enrollment has doubled.

Executive Board Assessment

Executive Directors commended the Ugandan authorities for their continued commitment to macroeconomic and structural reforms. They recognized that heavy rains had made it difficult to achieve some of the program targets for 1997/98, particularly regarding economic growth and inflation. Nonetheless, the authorities’ determination to control inflation appeared to be bearing fruit, and the prospects for the remainder of the year were encouraging.

Directors welcomed the Ugandan authorities’ commitment to achieve the programmed budget deficit in 1997/98, despite the emergence of new challenges. In this regard, they commendedthe authorities for the measures taken to strengthen tax and customs administration and to improve the functioning of the Uganda Revenue Authority. They encouraged the authorities to intensify their efforts to enhance tax administration, including through better control of smuggling and improvement of the value-added tax administration, and to avoid an erosion of the beneficial effects of the new Income Tax Act. These efforts should help contain the shortfall in revenues stemming from the adverse weather conditions and the decline in oil prices. Directors welcomed the efforts to control nonpriority expenditures, which should make it possible to meet the program target while safeguarding critical allocations for social expenditures, especially on education and health. They urged the authorities to maintain the momentum and credibility of the Universal Primary Education program. They also emphasized the need for improved expenditure control and better accountability at the district level. They welcomed the greater attention to governance issues, and called for further improvements in this area, including at the district level.

Directors welcomed the envisaged further tightening of broad money during the remainder of the fiscal year. They viewed the recent sale of the Uganda Commercial Bank (UCB) as an important milestone in the country’s financial sector reform efforts. Directors expressed the hope that under new management, the restructuring of the UCB would be speedily completed. They also welcomed the improvement in bank supervision and the health of the banking system, and urged strengthened efforts to ensure that all banks were meeting the required capital adequacy ratios. They supported efforts to strengthen the supervisory capacity of the Bank of Uganda, and to develop its monetary instruments.

Directors welcomed the progress on structural reforms, including in the areas of trade liberalization, the civil service, the financial sector, privatization, and efforts to enable diversification of the economy. They encouraged the authorities to move quickly to complete the sale of the Uganda Telecommunications Corporation. While recognizing technical and other difficulties related to the privatization program, Directors argued for best efforts to conclude the sale of as many public enterprises as possible, and to avoid losing the momentum of the privatization program. They also encouraged speeding up the restructuring of those public enterprises that would remain in the public sector. Directors stressed the importance of overcoming obstacles to growth through improvements in power and road facilities, legal and judicial frameworks, technical and administrative capacity, and the statistical base.

Directors agreed that the conditions for reaching Uganda’s completion point under the HIPC Initiative had been fulfilled, and they supported the proposed schedule for drawing down the Fund’s assistance to Uganda under the Initiative. They were pleased to welcome Uganda as the first country to reach the completion point under the HIPC Initiative, but stressed that Uganda should remain fully committed to the adjustment program. They welcomed the authorities’ announced intention to use the resources freed up under the Initiative to support the social sectors and address poverty. Directors stressed that the authorities should pursue their external debt management strategy in order to help safeguard the debt sustainability that would be achieved through the ongoing implementation of the structural reform agenda, in concert with the delivery of assistance by all of Uganda’s creditors under the Initiative. They indicated their expectation that the authorities would not relax their commitment to the reform effort after the delivery of the HIPC assistance.