An International Monetary Fund (IMF) mission visited Kampala during October 13-27, 2011 to conduct discussions for the third review under the Policy Support Instrument (PSI).¹ The mission met with Finance Minister Kiwanuka, Bank of Uganda Governor Tumusiime-Mutebile, and other senior officials, as well as representatives of parliament, the private sector, civil society, and development partners.

At the conclusion of the mission in Kampala, Thomas Richardson, IMF mission chief and senior resident representative in Uganda, made the following statement:

“Uganda has a strong track record of macroeconomic policy making, which has afforded the country an impressive rate of economic growth over a sustained period. The authorities clearly prioritize maintaining low inflation and a market-determined exchange rate. International reserves of the Bank of Uganda have been and remain comfortable for a country with a flexible exchange rate regime. Uganda is to be commended for adhering to a market-oriented approach to economic policy making, including by resisting the temptation to restrict exports of food products.

“Nevertheless, inflation has picked up sharply in recent months, reaching almost 30 percent (year-on-year). The acceleration in inflation owes mainly to external factors, including the regional spike in food prices and global volatility which has impacted Uganda through weaker investor appetite for emerging and frontier market assets. At the same time, there are now signs that these shocks are beginning to spill over to underlying price movements, as core inflation is almost as high as headline, and nonfood inflation is up to 18 percent. The growth rate of banking system credit to the private sector has been very rapid over the recent period, though it is expected to decline in line with the disinflation effort.

“The authorities clearly grasp the risk that inflation could become entrenched, and the Bank of Uganda has accordingly taken firm action to tighten the monetary stance. The benchmark central bank rate has been tightened for three consecutive months, most recently by 400 basis points in October. Looking forward, the Bank of Uganda – with firm Government support – has indicated a commitment to continue the tightening phase of monetary policies as long as needed to break the back of inflationary expectations. Slower rates of private sector credit growth, including lending in foreign currency, will with time feed through to aggregate demand and thereby help to tame inflation.

“The authorities also recognize that the budget will need to be supportive of the disinflation effort. With that in mind, the stance of fiscal policy is expected to remain tight over the period ahead. The mission urged that the pace of accelerated public infrastructure investment continue to be designed in a way that is consistent with the broader macroeconomic outlook. It also suggested that the authorities strive to maintain policy buffers such as healthy international reserves and a prudent budget deficit, particularly in the face of considerable global macroeconomic and financial uncertainty.

“In this regard, the mission was encouraged by the authorities' strong stance with regard to reining in tax exemptions and incentives. They informed the mission that all tax exemptions are to be reviewed, costed in terms of lost revenue, and assessed on “value-for-money” grounds. In particular, the mission welcomes the authorities’ intention to review tax exemptions in the context of the 2012/13 budget.

“Improved commitment control and greater realism at the budget preparation stage will be needed to avoid accumulation of expenditure arrears. The mission hailed the Government’s plan to review the Public Finance and Accountability Act to improve public expenditure management, and also to lay the groundwork for establishment of an appropriate oil revenue management framework.

“During the mission, agreement was reached on a number of important policy matters. Discussions will continue over the coming weeks on several outstanding issues related to the economic program for FY 2011/12. Pending successful conclusion of the discussions on these issues, the mission would recommend to the IMF Executive Board the completion of the third review under the Policy Support Instrument.”

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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. (See http://www.imf.org/external/np/exr/facts/psi.htm.) Details on Uganda’s current PSI are available at www.imf.org/uganda.