IMF says Uganda’s econ­omy faces chal­lenges

The Pak Banker - - Front Page -

WASH­ING­TON

The IMF team vis­ited Kam­pala from Oc­to­ber 24 to Novem­ber 6, 2012 to carry out dis­cus­sions with the Ugan­dan au­thor­i­ties for the fifth re­view of their IMF-sup­ported eco­nomic and fi­nan­cial pro­gram.

The IMF mis­sion met with Maria Ki­wanuka, Min­is­ter of Fi­nance, Plan­ning, and Eco­nomic De­vel­op­ment, and Pro­fes­sor Emanuel Tu­musi­ime- Mute­bile, Gover­nor of the Bank of Uganda, as well as other se­nior gov­ern­ment of­fi­cials, de­vel­op­ment part­ners, and rep­re­sen­ta­tives of the pri­vate sec­tor and civil so­ci­ety.

At the end of the mis­sion, Ms. Ana Lucía Coronel, IMF se­nior res­i­dent rep­re­sen­ta­tive and mis­sion chief for Uganda, is­sued the fol­low­ing state­ment: Uganda’s eco­nomic growth rate de­clined from 6.6 per­cent in FY 2010/11 to 3.4 per­cent in FY 2011/12, due to a con­flu­ence of a dif­fi­cult in­ter­na­tional en­vi­ron­ment, con­trac­tionary mone­tary poli­cies im­ple­mented in re­sponse to high in­fla­tion, and a tighter–than-bud­geted fis­cal stance.

These poli­cies, aided by de­clin­ing food prices, helped re­duce in­fla­tion sig­nif­i­cantly from its year-onyear peak of over 30 per­cent in Oc­to­ber 2011 to 4 ½ per­cent in Oc­to­ber 2012. As im­port de­mand re­mained strong de­spite sub­dued eco­nomic ac­tiv­ity, the cur­rent ac­count deficit widened slightly from about 11 per­cent of gross do­mes­tic prod­uct ( GDP) in FY 2010/ 11 to 11 ¼ per­cent in FY 2011/12. The deficit was mainly fi­nanced by for­eign di­rect in­vest­ment, and also by short-term port­fo­lio in­flows at­tracted by high in­ter­est rates. These in­flows helped sus­tain a sig­nif­i­cant ac­cu­mu­la­tion of for­eign ex­change re­serves of about US$600 mil­lion dur­ing the fis­cal year. Fis­cal pol­icy was tighter than pro­grammed be­cause of an un­der-ex­e­cu­tion of the gov­ern­ment’s pub­lic in­vest­ment pro­gram by 1 per­cent­age point of GDP. While un­fa­vor­able to growth, the re­duced fis­cal im­pulse con­trib­uted to the damp­en­ing of de­mand pur­sued by the Bank of Uganda through its in­ter­est rate pol­icy, and helped achieve the an­nounced in­fla­tion tar­get. The sharp de­cline in the cen­tral bank rate should lead to lower com- mer­cial bank lend­ing rates. How­ever, with the pri­vate sec­tor still re­cov­er­ing from the dis­in­fla­tion­ary episode, bank lend­ing to the pri­vate sec­tor has yet to re­turn to pre­vi­ous lev­els. The in­ter­est rate de­cline has re­sulted in a mod­est re­ver­sal of for­eign port­fo­lio in­flows and some ex­change rate de­pre­ci­a­tion. All quan­ti­ta­tive tar­gets in the IMF-sup­ported pro­gram for the first half of 2012 were met, most of them by a wide mar­gin, re­flect­ing faster-thanan­tic­i­pated dis­in­fla­tion. Per­for­mance on the struc­tural bench­marks was mixed. Progress was achieved on de­vel­op­ing macroe­co­nomic fore­cast­ing tech­niques and pub­lish­ing the ben­e­fi­cia­ries of tax ex­emp­tions. How­ever, the gov­ern­ment’s pro­gram com­mit­ment to re­in­force con­trol over the un­paid bills of line min­istries has yet to ma­te­ri­al­ize, and the is­suance of na­tional iden­ti­fi­ca­tion cards is fac­ing ma­jor de­lays. Go­ing for­ward, the key goals are to main­tain macroe­co­nomic sta­bil­ity and to ac­cel­er­ate eco­nomic growth to re­duce un­em­ploy­ment and poverty. The pol­icy mix to achieve these ob­jec­tives should en­tail a con­tin­u­a­tion of the ac­com­mo­dat­ing mone­tary pol­icy stance, a small ex­pan­sion of the fis­cal deficit, some front load­ing of de­vel­op­ment spend­ing, and main­te­nance of a flex­i­ble, mar­ket driven, ex­change rate. Based on this pol­icy mix, GDP growth is pro­jected to in­crease to 5 per­cent this fis­cal year, with core in­fla­tion av­er­ag­ing about 6 per­cent.

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