Despite the global and regional economic challenges and election-related uncertainties, Uganda’s economy has received a clean bill of health from the IMF.
‘Uganda’s recent economic performance has been mostly favourable. Real economic growth —led by increased public investment—reached 5 percent in FY2014/15, slightly below staff projections, but well above the FY2013/14 level (4.5 percent). Core inflation accelerated to 6.7 percent year on year in September but remains within the Bank of Uganda’s target band. International reserves remain at comfortable levels,’Ana Lucia Coronel, said on October 5 after leading a mission to review the IMF-backed economic programme.
‘Uganda is not immune to the difficult external environment affecting other countries. Together with domestic nervousness relating to the upcoming elections, external shocks and uncertainty have resulted in a sharp decline in the shilling (27 percent over the past year), creating challenges for policy makers. The exchange rate depreciation raised domestic prices given the high import content of the consumption basket, created uncertainty for consumers and investors, and generated market uneasiness,’ Coronel said.
The mission welcomed the authorities’ proactive and effective response to the challenging situation, notably the timely monetary tightening, which has helped curb further inflationary pressures.
‘Performance under the Policy Support Instrument (PSI) was satisfactory. The end-June 2015 fiscal, external, and inflation targets were mostly met. There was significant progress on increasing tax revenue, with the strong package introduced in the FY2014/15 budget yielding about 1¼ percent of GDP compared to an original target of ½ percent. However, the high stock of domestic arrears—notably the proliferation of court awards—remains a concern, despite the authorities’ efforts to reduce them,’ Coronel noted.
The mission welcomed the authorities’ determination to adapt the policy mix to the ongoing challenges, including those related to the political cycle, by closely coordinating fiscal and monetary actions. The mission is confident that supported by an adequate stock of international reserves, monetary policy will remain vigilant of price developments and help moderate inflation expectations now that the shilling has largely stabilised.
On the fiscal front, the IMF encouraged the authorities to continue to build on the strong revenue performance of last year by improving tax collections even during the election period. On the expenditure side, the government has appropriately identified a series of spending cuts that should reduce the need for domestic borrowing, creating space for private sector credit and growth recovery, the Fund said.
On the structural front, important steps have been taken. The mission welcomes the approval of the Public Financial Management Act and the actions taken to clean the payroll and improve the payments system. Regulating the new law and finalising the Charter of Fiscal Responsibility are important steps to further help improve the budget process and efficiency of expenditure. In addition to these improvements, the mission has encouraged the authorities to intensify ongoing efforts to fight corruption, which continues to affect the business climate. Improving transparency and accountability remains critical.
‘Over the medium term, core inflation is set to decline toward the 5 percent target and growth is expected to gradually return to its potential of about 6–6½ percent. While the authorities will continue their plans to scale up public investment, they intend to re-profile projects to ensure that public debt remains at low risk of distress. The completion of these projects should reduce infrastructure bottlenecks and support growth,’ Coronel said.