Uganda is showing economic growth potential at 5.5% for the 2017 to 2018 financial year with a ‘solid’ growth performance of 5% projected for the rest of 2016.
These projections were released by an International Monetary Fund (IMF) team led by Axel Schimmelpfennig, IMF Mission Chief for Uganda, who visited the Ugandan capital Kampala during the early parts of October.
Schimmelpfennig says the East African country’s economy performed well in a complex environment. “The February 2016 elections, muted global growth, and regional developments weighed on sentiment, and growth declined to 4.8% percent in the financial year 2015 to 2016.”
Yet, says Schimmelpfennig, more recently, high frequency indicators suggest an improvement, and growth is projected at a solid 5% this fiscal year and 5.5% in the next financial year, supported by the scaling up of infrastructure spending.
Core inflation target
‘With the timely tightening of monetary policy in 2015 and a stabilising shilling, core inflation printed at 4.1% year-on-year in September.”
The Bank of Uganda (BoU) successfully steered core inflation toward its target of 5% and increased its international reserves buffer. The government further strengthened its public financial management framework. Poverty-alleviating expenditures were adequate.
However, key fiscal targets for the financial year 2015 to 2016 were missed. “The mission notes the difficult environment for fiscal policy. While revenue collection increased as a share of GDP, it fell short of program expectations, reflecting lower than projected nominal GDP growth. At the same time, current spending was higher than anticipated. Taken together, the overall deficit target was missed by 0.4% of GDP, and the government did not repay outstanding BoU advances at year-end. The execution of externally financed projects lagged behind target.”
The IMF mission welcomed the Ugandan government’s intention to adhere to their fiscal objectives for the next financial year. “In particular, this includes raising the tax-to-GDP ratio by a half percent of GDP and prioritising social and development spending within a tight envelope. Strengthening project management to ensure sound project selection and improve spending efficiency are critical to ensure value-for-money.”
The mission urgeD the authorities to step up ongoing efforts to reduce and improve monitoring of government spending arrears, which undermine the budget process.
Medium term outlook
“Over the medium-term, the government needs to ensure that scaled-up infrastructure investment yields the targeted increase in GDP growth to improve the lives of all citizens and maintain Uganda’s low risk of debt distress. In parallel, efforts to enhance the effectiveness of social spending are equally important.
“The mission commends the BoU’s October 2016 decision to reduce the monetary policy rate by another 100 basis points. With incipient inflation pressures, the BoU had tightened monetary policy in 2015, successfully keeping core inflation in the target band. Since April of this year, the BoU has entered an easing cycle, with core inflation forecast to stay close to the 5% target. The mission agrees with the BoU’s assessment that food prices and shilling depreciation are the main risks to the inflation outlook.
Measurable fiscal objectives
The mission welcomed the government’s progress on strengthening public financial management. The Ministry of Finance, Planning and Economic Development issued PFM Act regulations to strengthen the budget process. A Charter of Fiscal Responsibility was sent to Parliament in August, setting measurable fiscal objectives to guide budgeting and codifying Uganda’s strong commitment to fiscal transparency. The mission encouraged the authorities to submit the amendments to the BoU Act to parliament which will strengthen the central bank’s independence.