Press Release: IMF Staff Completes Review Mission to Uganda (06.04.2016)

WASHINGTON D.C., United States of America, April 6, 2016 – A team from the International Monetary Fund (IMF) led by Roger Nord, IMF Mission Chief and Deputy Director of the African Department, visited Kampala from March 21 to April 6, to conduct the sixth review of Uganda’s economic program supported by the Policy Support Instrument (PSI).[1]

At the end of the mission, Mr. Nord issued the following statement:

“In a complex global, regional, and domestic environment, affected by election-related uncertainties, Uganda’s economy continued to perform well. Economic growth is expected to reach 5 percent in the current fiscal year and accelerate to 5.5 percent in FY2016/17, supported by the scaling up of infrastructure investment. Following a sharp depreciation of the shilling, inflation increased, with core inflation reaching 7.6 percent in December 2015, though it has since then decelerated to 6.9 percent.

“Performance under the PSI has been mixed. There has been progress on increasing tax revenue, strengthening international reserves, extending the Treasury Single Account to local governments, and establishing public investment management guidelines. The decisive monetary policy response, in the context of appropriate exchange rate flexibility, contributed to the stabilization of the shilling and successfully curbed inflation expectations. However, the end-December 2015 overall deficit target was not met, poverty reducing expenditures were below target, and some structural reforms suffered delays.

“The mission commends the authorities for the steadfast implementation of fiscal policy in a complex electoral environment. Revenue over-performed through end-December 2015 and expenditure pressures were reasonably well controlled. While some fiscal tightening had been envisaged in late 2015 in the face of significant exchange rate pressures, the economy subsequently stabilized more rapidly than expected, leading the authorities to revert to the original budget targets. However, there were some renewed fiscal pressures in early 2016, including a slowdown in revenue and some additional spending. The mission welcomes that the supplementary budget currently before parliament aims at minimizing year-end slippages. The mission encourages the authorities to strengthen efforts to boost taxpayer compliance to compensate for the revenue shortfall.

“The mission welcomes the 2016/17 budget currently before parliament, which envisages a continued scaling-up of infrastructure investment while boosting domestic revenue by 0.5 percent of GDP, in line with the objective to raise Uganda’s revenue performance to levels observed in regional and other peers. The mission encourages the authorities to continue building capacity and controls to manage large public investment projects. It will also be important to avoid within-year reallocations from public investment to less productive government spending.

“The mission welcomes the decision by the Bank of Uganda (BOU) to lower the central bank rate, consistent with the forecast of core inflation returning to its medium-term target. The mission commends the BOU for its effective communication strategy, which contributed to well-anchored inflation expectations, reflected in sharply falling yields in recent weeks. The appropriate easing of monetary policy should provide a welcome boost to private sector credit growth and support economic activity.

“The mission welcomes the approval of the amendments to the Financial Institutions Act, expected to foster credit expansion and deepen the financial sector. The mission encourages the authorities to expedite the adoption of appropriate regulations to implement the new Public Finance Management Act in line with international best practice. The mission also urges the authorities to complete the reconciliation and validation of the stock of domestic payment arrears and take all necessary measures to avoid their recurrence.

“The mission is reassured by 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 May 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, and representatives from the business, and international communities. The mission thanks all counterparts for their collaboration.

“IMF Executive Board consideration of the sixth review of the PSI-supported program is expected by end-June 2016.”

[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.

Press Release No. 15/360: IMF Executive Board Concludes 2015 Article IV Consultation with Somalia (29.07.2015)

On July 27, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Somalia: 

Since 1991, Somalis have suffered greatly from civil war. The economy deteriorated as the physical infrastructure was destroyed. In addition to the loss of lives, the war worsened the population’s living conditions, now among the lowest in the world. Even though the political and security situations remain challenging, Somalia has made tremendous progress since resuming relations with the IMF on April 12, 2013. The IMF has been actively involved in providing technical assistance and policy advice in its key areas of expertise, which laid the groundwork for this Consultation. While Somalia has been welcomed back as an active member of the Fund, it remains ineligible for financial assistance pending the clearance of its longstanding arrears. Arrears clearance will be an important part of normalizing relations with the international community and establishing a roadmap to debt sustainability.

As a result of the civil war, all Somali state institutions are severely impaired. Improving governance in key state institutions is critical for progress on economic reconstruction and development. The federal government, working with the international community, has taken steps to improve governance based on the rule of law and the application of international good practices for fiscal and financial operations. IMF technical assistance is largely devoted to enhancing governance in the ministry of finance and the central bank. Rebuilding critical infrastructure and delivering basic social and economic services will be crucial for the new government to gain the trust of the Somali people, advance the process of national reconciliation, and to extend federal government authority over all parts of the country.

Economic activity is estimated to have expanded by 3.7 percent in 2014, driven by growth in agriculture, construction, and telecommunications. Consumer price inflation was 1.3 percent. For 2015, real growth is projected at 2.7 and inflation should remain subdued at about 4 percent. With modest progress on the security front and an absence of drought, medium-term annual growth should be about 5 percent. Nevertheless, growth will remain inadequate to redress poverty and gender disparities.

Budget preparation and implementation is fraught with difficulty due to deficiencies in revenue mobilization and expenditure pressures that exceed available resources. The budget consists largely of salary and security expenditures contained by strict cash rationing. Deficits have been financed mostly through arrears accumulation. Similarly, the 2015 budget was prepared on a zero cash balance basis with optimistic revenue forecasts and weak commitment control, leading the federal government to ration cash and incur arrears to the defense forces, civil servants, and suppliers. On July 19, an extraordinary session of the Cabinet, chaired by the President, approved and sent to Parliament a revised budget for 2015.

The formal financial sector consists of the central bank, six banks with provisional licenses, and nine licensed money transfer firms. The sector is small and nascent while there is reportedly a large informal sector. The central bank of Somalia (CBS) faces challenges in building financial sector supervision due to technical and human resource constraints. The economy is predominantly dollarized and cash is scarce, particularly in lower denominations. Somali banknotes are not readily available, creating problems for the poorest.

The 2014 current account deficit is estimated at US$644 million (11.3 percent of GDP). Trade consists mostly of exports of livestock to Gulf Cooperation Council countries and imports of foodstuffs from neighboring countries and the Indian subcontinent. The trade and income deficits were US$2,663 million and US$450 million, respectively, partially covered by remittances of US$1,333 million and other transfers of US$1,137 million. The deficit was financed by foreign direct investment of US$434 million, especially in telecommunications, electricity, and hotels, and donor capital transfers of US$150 million.

External debt was estimated at US$5.3 billion (93 percent of GDP) at end-2014, preponderantly arrears. Debt data covers most creditors, excludes commercial debt, and shows obligations to: (i) multilaterals (US$1.5 billion); (ii) Paris Club creditors (US$2.3 billion); and, (iii) Non-Paris Club creditors (US$1.5 billion). Based on a preliminary assessment, Somalia lacks the ability to service its debt in the medium term.

Executive Board Assessment²

Executive Directors welcomed Somalia’s reengagement with the Fund, setting the stage for its first Article IV consultation since 1989. Directors agreed with the thrust of the staff appraisal. They noted that, following the protracted civil war, the country is facing daunting challenges. The first priority is to continue building institutions and administrative capacity, while undertaking key structural reforms to spur inclusive growth and reduce poverty. Directors underscored the importance of continued assistance from the international community to support the authorities’ efforts. They welcomed the launch of the Trust Fund for Capacity Development, and highlighted the important role of Fund policy advice and technical assistance.

Directors stressed the need for decisive steps to build fiscal discipline, underpinned by realistic budgeting and effective implementation systems. They welcomed cabinet approval of a revised budget for 2015 that will avoid new arrears by raising revenues and rationalizing wages and services and other recurrent spending. Going forward, Directors stressed the importance of budgeting within a medium-term fiscal framework, based on sound fiscal principles and transparent reporting, and a public expenditure review to promote the allocation of resources towards investment in human capital and infrastructure.

Directors encouraged the adoption of sound mechanisms to ensure effective and transparent management of prospective natural resource wealth. They recommended building institutions consistent with international best practices to ensure that natural resource exploitation maximizes benefits for Somalis. They also stressed the need for clarity regarding the delineation of authority between the federal government and sub-national entities.

Directors supported ongoing efforts to strengthen the Central Bank of Somalia’s capacity and governance structure, with support from the Fund and development partners. They cautioned that currency reform should not be implemented until all prerequisites are in place, in order to safeguard policy credibility.

Directors stressed that elaboration of a financial sector roadmap will be a critical first step to build credibility in licensing and supervising money transfer firms, in order to help channel remittances through the international banking system. They also recommended bringing the AML/CFT framework in line with international standards. Other priorities include preparing and approving additional prudential regulations, and strengthening compliance.

Directors encouraged the authorities to improve statistical capacity, in order to enhance the scope, quality and timeliness of economic data compilation, with technical assistance from the Fund and development partners.

Directors noted Somalia’s longstanding arrears to the Fund and other creditors, and encouraged the authorities to continue to work towards a pathway for arrears clearance and eventual debt relief. They noted that, in due course, the establishment of a track record of cooperation with the Fund on policies and payments in the context of a well-designed staff-monitored program (SMP) would be a key step in the process of arrears clearance and normalization of relations with the international community as a whole. Directors stressed the need for sustained international support and cooperation, and welcomed the formation of the Technical Working Group on Somalia’s Debt.