The Executive Board of the International Monetary Fund today completed the third 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: 13/239).
Real Gross Domestic Product (GDP) growth was lower than expected at the time of the second PSI review in fiscal year (FY) 2013/14, reflecting under-execution of externally-financed public investment and adverse impact on exports of slower growth in main trading partners. Inflation dropped to 1.8 percent in October from 5.0 percent in June 2014 owing to a sharp decline in food prices and slower economic activity, and the international reserve coverage increased to a high level of 4¾ months of imports. Growth is projected to increase in FY2014/15, supported by scaled-up public investment and a recovery in private demand as households and businesses start accessing bank credit.
Performance under the PSI-supported program remains satisfactory. In particular, the end-June targets for inflation and international reserves were met, the ceiling on government’s net domestic financing was observed, and the stock of government arrears was significantly reduced. However, the indicative target on tax revenue was missed reflecting lower growth and shortfalls in efficiency gains.
Uganda’s infrastructure investment needs remain considerable. The authorities plan to boost these investments amid stepped up efforts toward regional integration, the coming on stream of oil production, and actions to improve the business environment. The authorities have committed to base the revamped infrastructure investment program on a well-planned rollout strategy, which will include project selection on the basis of strong feasibility studies; and sequencing that takes into account the impact on debt sustainability and the absorption and implementation capacities of the economy. The plan to upgrade the capacity to appraise, analyze and implement investment projects is welcomed.
On the fiscal front, the overall deficit excluding the recapitalization of Bank of Uganda (BoU) increased from 3.4 to 4.1 percent of GDP in FY2013/14. Challenges in tax compliance resulted in lower-than-expected revenue. However, the recent elimination of many tax exemptions, if accompanied by strict enforcement by the Uganda Revenue Authority and enhanced compliance from taxpayers, would result in a welcome enhancement of tax revenues. Strict adherence to the approved budget and improvements in policy coordination would complement these efforts.
With regard to monetary policy, the BoU’s prudent stance has brought inflation to a four-year low, setting the conditions for some additional monetary easing provided that the inflation expectations are anchored and that fiscal risks are contained. Strong banking supervision and actions to remove banks’ structural rigidities and encourage financial deepening is expected to continue.
Efforts aimed at achieving successful East African Community economic integration, transparent and efficient management of the upcoming oil proceeds, appropriate implementation of the upcoming infrastructure projects, and further gains in public financial management are set to support the authorities’ medium-term objective of attaining inclusive growth and poverty reduction.