UGANDA

UGANDA
production. With inflation forecast to stay close to our target, as well as subdued aggregate
demand and a relatively stable exchange rate, BoU reduced its Central Bank Rate (CBR) in April,
June, and August 2016. In the October meeting, BoU decided to further reduce the CBR by
100 bps to 13 percent, with a benign inflation outlook that allows for support of the domestic
growth momentum.
13. Given strong foreign exchange inflows and BoU programmed dollar purchases, the
Quantitative Assessment Criteria (QAC) for net international reserve accumulation was met with a
comfortable margin. At the end of June 2016, net international reserves (NIR) stood at
US$ 2,962 million, equivalent to 4.5 months of imports of goods and services. By September 2016,
and following BoU purchases of US$ 249.1 million, the stock was equivalent to 4.4 months of
import cover.
14. Fiscal policy was faced with revenue shortfalls and higher-than-expected election-related
expenditures. On the revenue side, the shilling depreciation dampened import demand, resulting
in shortfalls of international trade taxes and excises relative to PSI targets of Ushs 44 billion and
Ushs 190 billion respectively. The infrastructure levy also slightly underperformed. VAT collections
remained on target, while income tax exceeded projections under the PSI by around Ushs
30 billion. Overall, we missed our end-June indicative target (IT) by a margin of Ushs 207 billion or
0.2 percent of GDP. On the expenditure side, the government had to shoulder unexpected
additional spending on election-related needs that exceeded the revised allocations agreed
during the 6 th PSI review. Furthermore, spending on externally financed investment projects
proceeded slower than hoped for because of absorptive capacity constraints resulting from
implementation challenges. However, we met the IT on poverty reducing expenditure which we
protected for its importance.
15. Against this backdrop, we were not able to achieve our fiscal deficit QAC, even though
the overall deficit was 1.2 percent of GDP lower than we had anticipated at the time of the last PSI
review. With the revenue shortfall and higher-than anticipated domestic spending, the end-
June 2016 QAC on the overall deficit was missed by 0.5 percent of GDP. That notwithstanding,
government debt at 34.5 percent of GDP at end-June 2016 is lower than expected under the
program, reflecting the under-spending on externally financed projects. The deficit IT was also not
respected in the first quarter of FY2016/17 given the frontloading of some key expenditures,
including for repayment of arrears, and softer revenue collection.
16. Given these developments, we had to rely more on domestic financing than anticipated.
By June, we issued domestic securities of 1.6 percent of GDP on a net basis in the primary market,
exceeding the forecast underlying our program. In addition, we took a temporary advance from
BoU. Given the domestic financing needs and concerns over crowding out private sector credit,
the government was unable to fully repay these advances by the end of the fiscal year, thus
missing the related IT. The advances will be repaid during this financial year.
17. We are fully aware and concerned about the impact government domestic arrears are
having on the private sector. Arrears have been identified as one of the reasons for rising NPLs in
32 INTERNATIONAL MONETARY FUND