Page 1
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 62013-UG
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT
FOR FINANCIALSECTOR DEVELOPMENT POLICY CREDIT
IN THE AMOUNT OF SDR 30.9 MILLION
(US$50 MILLION EQUIVALENT)
TO
THE REPUBLIC OF UGANDA
May 31, 2011
Finance and Private Sector Development
Africa Region
This document has a restricted distribution and may be used by recipients only in the
performance of their official duties. Its contents may not otherwise be disclosed without World
Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Page 2
i
UGANDA – GOVERNMENT FISCAL YEAR
July 1 – June 30
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of May 27, 2011)
Currency Unit Uganda Shillings
US$1.00 = 2,387 UGS
Weights and Measures Metric System
ABBREVIATION AND ACRONYMS
ACGC Audit Committee and Governance Committee
AG Auditor General
AGO Accountant General‘s Office
BoU Bank of Uganda
CAS Country Assistance Strategy
CFAA Country Financial Accountability Assessment
CMA Capital Market Authority
CPAR Country Procurement Assessment Report
CPI Consumer Price Index
CRB Credit Reference Bureau
CSD Central Securities Depository
DFID Department for International Development (UK)
DPC Development Policy Credit
EAC East African Community
EFT Electronic Fund Transfer
FIA Financial Institutions Act
FMDP Financial Market Development Plan
FSAP Financial Sector Assessment Program
GDP Gross Domestic Product
GNI Gross National Income
GoU Government of Uganda
GIZ Gesellschaft für Internationale Zusammenarbeit
HIPC Heavily Indebted Poor Countries
IDA International Development Association
IFAD International Fund for Agricultural Development
IFRS International Financial Reporting Standards
IMF International Monetary Fund
IPSAS International Public Sector Accounting Standards
JAF Joint Assessment Framework
JBS Joint Budget Support
JSAN Joint Staff Assessment Note
KfW Kreditanstalt fur Wiederaufbau
LIS Land Information System
M&E Monitoring and Evaluation
MDIs Micro Deposit Institutions
Page 3
ii
MFI Micro Finance Institutions
MoFPED Ministry of Finance, Planning and Economic Development
MoPS Ministry of Public Service
MoTTI Ministry of Tourism, Trade and Industry
MSCL Microfinance Support Center Limited
MTEF Medium Term Expenditure Framework
NDP National Development Plan
NGO Non-Governmental Organization
NIMES National Integrated Monitoring and Evaluation Strategy
NPS National Payment System
NSSF National Social Security Fund
OAG Office of Auditor General
OPM Office of the Prime Minister
PCC Policy Coordination Committee
PEAP Poverty Eradication Action Plan
PERD Public Enterprise Reform and Divestiture
PFM Public Financial Management
PPDA Public Procurement and Disposal of Public Assets Act
PPP Public Private Partnership
PROST Pension Reform Operational Strategies and Tools
PRSC Poverty Reduction Support Credit
PRSP Poverty Reduction Strategy Paper
PSI Policy Support Instrument
PSIA Poverty and Social Impact Assessment
PSPF Public Service Pension Fund
PUSRP Privatization and Utility Sector Reform Program
RFSS Rural Financial Services Strategy
ROC Regional Operations Committee
RTGS Real Time Gross Settlement
SACCOs Savings and Credit Associations
SCP Small Claims Procedure
UBOS Uganda Bureau of Statistics
UCSCU Uganda Credit and Savings Cooperative Union
UPSPS United Public Sector Pension Scheme
URA Uganda Revenue Authority
Vice President:
Country Director:
Acting Sector Manager:
Task Team Leader:
Obiageli Katryn Ezekwesili
John Murray McIntire
Michael Fuchs
Javier Suarez
Page 5
THE REPUBLIC OF UGANDA
FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT
TABLE OF CONTENTS
CREDIT AND PROGRAM SUMMARY ...................................................................................... 1 I. INTRODUCTION ............................................................................................................... 3 II. COUNTRY CONTEXT ...................................................................................................... 3
RECENT ECONOMIC DEVELOPMENTS IN UGANDA .................................... 3 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ................... 6
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES .......... 8 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ....................................... 9
LINK TO CAS AND NEW AFRICA STRATEGY ................................................ 9 COLLABORATION WITH THE IMF AND OTHER DONORS .......................... 10 RELATIONSHIP TO OTHER BANK OPERATIONS ........................................... 10 LESSONS LEARNED ............................................................................................. 11 ANALYTICAL UNDERPINNINGS ....................................................................... 12
V. THE PROPOSED FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT ..... 12 OPERATION DESCRIPTION ................................................................................ 12 POLICY AREAS ..................................................................................................... 12
VI. OPERATION IMPLEMENTATION ............................................................................... 30 POVERTY AND SOCIAL IMPACTS .................................................................... 30 ENVIRONMENTAL ASPECTS ............................................................................. 30 IMPLEMENTATION, MONITORING AND EVALUATION ........................ 30 FIDUCIARY ASPECTS .......................................................................................... 31 DISBURSEMENT AND AUDITING ..................................................................... 33 RISKS AND RISK MITIGATION .......................................................................... 34
ANNEXES ANNEX 1: LETTER OF DEVELOPMENT POLICY ................................................................................ 36 ANNEX 2: FINANCIAL SECTOR DEVELOPMENT POLICY MATRIX ............................................. 61 ANNEX 3: FUND ASSESMENT LETTER .................................................................................................. 63 ANNEX 4: UGANDA AT A GLANCE ......................................................................................................... 66 ANNEX 5: MAP UGA33504 .......................................................................................................................... 69
TABLES
Table 1: Selected Macro Indicators 2008/09-2013/14 ........................................................................ 5
Table 2: Ugandan Pension Schemes ................................................................................................. 14
Table 3: Sequencing of actions for pension reform ........................................................................ 17
Box 1: Prior Actions for Uganda First Financial Sector Development Credit ............................ 28 Box 2: Good Practice Principles for Conditionality ....................................................................... 31
This operation was prepared by an IDA team consisting of Javier Suarez (Task Team Leader) and Moses
Kibirige (AFTFE); Manush A. Hristov ( LEGAF); Antony Randle and Simon Walley (GCMNB); Rachel
Sebbudde and Jos Verbeek (AFTP2); Rajiv Sondhi (CTRFC); Howard Centenary (AFTPC); and Paul
Kamuchwezi (AFTFM). The team benefited from extensive preparatory work done by Ravi Ruparel (AFTFE).
Peer reviewers were Dino Merotto (ECSP3) and Heinz Rudolph (GCMNB).
Page 7
1
CREDIT AND PROGRAM SUMMARY
THE REPUBLIC OF UGANDA
FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT
Borrower The Republic of Uganda
Implementing Agency Ministry of Finance, Planning and Economic Development.
Financing Data
IDA credit, standard IDA terms. 40 years maturity and 10 year
grace period. Amount: SDR 30.9 million (US$50 million
equivalent).
Operation Type Programmatic, (1st of 2), single tranche.
Main Policy Areas Financial Sector Development; Pension Reform
Key Outcome
Indicators
For Pillar 1 – Market for term finance: (i) effective, well
resourced, and efficient regulator is in place; (ii) public sector
pension scheme is sustainable; (iii) mortgage market growth
accelerates; (iv) increased capacity to manage and coordinate
Public Private Partnership (PPP) arrangements is established.
For Pillar 2 – Improving access to financial services: (i)
increased lending to private sector; (ii) increased variety of
financial products; (iii) strengthened oversight of micro finance
institutions; (iv) enhanced efficiency of money transfers; (v)
improved accessibility to payment services.
Program Development
Objective(s) and
Contribution to Country
Assistance Strategy
(CAS)
Support financial sector deepening, with special focus on:
(i) Supporting the development of the market for term
finance
(ii) Furthering access to financial services
Fully congruent to CAS commitment to support GoU‘s
financial sector and pension system reforms.
Risks and Risk
Mitigation
The main risks identified relate to:
(i) Political risk –. Over several decades, there has been
political stability and progress towards multi-party
democracy, although Uganda has not yet experienced a
change of power through elections. Recent civil
disturbances caused by political opposition and
concerns about price increases reveal fractures in the
political landscape. Mitigating this risk are
Government‘s strong commitment to its National
Development Plan, third party monitoring
arrangements, and efforts to strengthening
accountability institutions.
(ii) Economic Management - The recent deterioration of
fiscal policy stance has threatened to erode Uganda‘s
track record of sound macroeconomic management.
To mitigate this risk, the World Bank will continue, in
Page 8
2
close coordination with the International Monetary
Fund (IMF), its monitoring and policy dialogue on
economic policies.
(iii) Public Financial Management and Procurement –
While Uganda‘s budget is published, the absence of an
integrated accounting to capture projects outside the
consolidated fund, and the variance of actual
expenditure to original budget, undermines budget
transparency. This situation is compounded by
insufficient capacity in the procurement oversight
body and procuring entities and lacking compliance
with procedures in oversight and procurement audit
and effective planning and conducting procurement.
To help mitigate this risk, the World Bank is
supporting efforts to address the weaknesses in the
Public Financial Management (PFM) system. The
World Bank is also engaged in coordination with other
development partners to help strengthen procurement
regulations and procedures.
(iv) Fraud and Corruption - Petty and high-level corruption
is prevalent. The World Bank is working with the
GoU to reinvigorate institutions and accountability
systems, rethinking decentralization policies, and re-
launching stalled public service reform processes.
Operation ID P117979
Page 9
3
IDA PROGRAM DOCUMENT FOR A
PROPOSED FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT
TO THE REPUBLIC OF UGANDA
I. INTRODUCTION
1. This program document presents a proposed Financial Sector Development
Policy Credit to the Republic of Uganda for an amount of SDR 30.9 million (US$50
million equivalent) for the period FY10-FY11. This would be the first in a programmatic
series of two operations supporting Government of Uganda‘s efforts to further financial sector
development. The proposed operation is fully congruent with the National Development Plan
for 2010/2015 and the Financial Markets Development Plan for 2008-2012 which the
authorities have started to implement.
II. COUNTRY CONTEXT
RECENT ECONOMIC DEVELOPMENTS IN UGANDA
2. Over the last two decades, Uganda’s economy has achieved noteworthy growth
supported by a prudent macroeconomic framework and propelled by consistent policy
reforms. Annual growth in real GDP averaged 7.4 percent over the 10 years ending in
2009/10, compared with 6.5 percent recorded in the 1990s. This was achieved in spite of
consecutive exogenous shocks including: oil price shocks; prolonged drought conditions with
adverse effects on energy generation and agricultural production; and volatile and increasing
food prices. The translation into similar gains in per capita income, however, has been less
pronounced due to high population growth. Consequently the gross domestic product (GDP)
per capita grew merely 4.0 percent per year over the last decade.
3. The global economic slowdown has been felt in Uganda, as reflected in the
deceleration of GDP growth, but medium-term growth prospects remain solid. GDP
growth in 2009/10 was 5.2 percent, 2.0 percentage points lower than in 2008/09 (Table 1).
This relatively weaker performance was explained by lower external and domestic demand,
demonstrating itself in particular through a slowdown in the construction sector. Economic
activity has rebounded in 2010/11, supported by a strong recovery in credit to private sector
and faster growth in the services sector, resulting in a projected GDP growth of 6.4 percent.
Fueled by persistent weak current account balances and uncertainty related to Presidential
Elections, the Uganda shilling depreciated significantly in the first half of 2011. Inflation
increased and has reached double digits in March 2011, driven by high food and fuel price
inflation. As of April 2011, consumer price index (CPI) inflation stands at a non-seasonally
adjusted 14.1 percent.
4. Fiscal policy stance deteriorated in the run up to the election of February 2011.
Overall spending is estimated to increase by 3.7 percentage points of GDP this FY10/11,
compared to FY09/10. Of this increase, 1.6 percentage points was above the originally
approved budget by parliament for this FY. The main cause of this increase was unplanned
security related expenditures amounting to 2.6 percent of GDP alone in FY10/11. Even
though revenues performed better than planned, the overall deficit after grants is now
Page 10
4
expected to reach 6.3 percent of GDP for FY10/11, well above the 4.7 percent of GDP last
FY.
5. Two supplemental budgets had to be issued amounting to 4.6 percent of GDP, up
from an already large 2.8 percent of GDP in FY09/10, and below 1 percent the year
before. This was to allow for the unplanned security related expenditures and the re-
composition of expenditures to accommodate un-programmed election related outlays. As not
all of the supplemental authorization has led to increased spending, this has led to an
adjustment in the composition of expenditures. The priority sectors, health education, water,
and works and roads, have also been affected. Their releases are down by 0.5 percent of GDP
for the first three quarters of this FY. The main priority sector affected has been ‗works and
roads‘ which has received only 66 percent of its original allocation.
6. The IMF Executive Board decided in February 2011 not to complete the first
review of the Policy Support Instrument (PSI) program due to the first supplementary
budget passed in early January which put the PSI program objectives at risk. However,
since then the IMF mission, who visited Uganda in March/April this year and the authorities,
reached an understanding on macroeconomic and structural policies that are consistent with
the objectives of the PSI. The agreed stance of fiscal policies aims to bring the budget, in
particular for FY11/12, back in line with the original PSI. The program focuses on rebuilding
the cushions in fiscal balances and international reserves of which the latter had declined
significantly to allow for the security related expenditures. Foreign reserves are projected to
fall to 3.4 months of imports by end of FY10/11, down from a comfortable 4.7 in FY09/10.
On the basis of the understanding reached during the discussion with the authorities, the IMF
mission is recommending to its management to complete the second review of the PSI by the
end of June 2011.
7. Uganda’s banking sector remains sound and well-capitalized despite the
international financial crisis. In Uganda, there were two main channels through which the
global financial crisis could have impacted the financial sector: through direct contagion and
through the indirect impact of global downturn on domestic economic activity. Ugandan
financial sector was relatively immune from direct contagion given the minimal exposure of
banks to toxic assets. Banks‘ holdings in foreign assets amounted to only 12 percent of total
assets at the end of 2008, and most of these assets were deposits in correspondent banks which
remained in sound conditions. Moreover, Ugandan banks‘ reliance on short term finance from
foreign institutions to fund their asset portfolio is limited; at the end of 2008, liabilities to
foreign institutions stood at about 4 percent of total liabilities. Ugandan banks were,
therefore, largely immune from losses of liquidity when global credit crunch triggered a
reversal of financial flows to emerging markets. Nonetheless, the economic slowdown had,
and is still having, an impact in the financial sector, though. The rapid growth in assets and
profitability which characterized the banking sector in 2007 and 2008 slowed markedly in
2009. Growth in total assets fell from 35 in 2008 to 16 percent in 2009, and the share of
nonperforming loans almost doubled, reaching 4.4 percent at the end of 2009. The
profitability of the banking system, as measured by the average return on assets, fell from 3.5
percent in 2008 to 3 percent in 2009. The banking system remained profitable on aggregate
and generated sufficient profits to maintain its core capital to risk weighted asset ratio at close
to 19 percent. Preliminary figures for 2010 show an improvement of performance indicators
Page 11
5
with share of nonperforming loans back to 2.1 percent. Overall profitability remained low, at
about 2.7 percent, partly explained by new bank entries.
Table 1: Selected Macro Indicators 2008/09-2013/14
Indicators
2008/091 2009/10
1 2010/11
2 2011/12
2 2012/13
2 2013/14
2
(Annual percentage change)
Domestic prices
Headline inflation 14.2 9.4 6.4 12.5 6.4 5.2
National income accounts
Agriculture 2.9 1.8 2.7 3.0 3.0 3.8
Manufacturing 10.0 7.4 5.8 5.7 7.0 7.0
Services 8.8 6.6 7.3 7.6 7.0 7.8
Total GDP at market prices 7.2 5.2 6.4 6.6 6.8 7.0
GDP per capita 3.9 1.9 3.1 3.3 3.7 3.7
(As percentage of GDP at market prices)
Real Sector
Gross domestic investment 23.5 24.3 25.4 27.9 29.4 28.5
Public investment 5.4 6.6 7.8 10.3 11.6 10.4
Private investment 18.0 17.7 17.6 17.6 17.8 18.0
Gross domestic savings (excl. grants) 13.1 13.1 12.5 15.5 18.0 17.4
Public 0.6 -0.8 -2.9 2.6 3.2 3.5
Private 12.5 13.9 15.4 12.9 14.8 13.9
External Sector
Current account balance (incl. grants) -7.8 -8.8 -4.3 -9.9 -9.3 -9.2
Current account balance (excl. grants) -10.4 -11.3 -12.9 -12.4 -11.4 -11.0
Exports of goods & nonfactor
services
19.6 20.3 22.2 21.3 21.8 22.4
Imports of goods & nonfactor
services
34.1 33.7 38.3 36.6 36.2 36.5
External Debt to GDP ratio 19.6 20.1 23.3 25.7 26.3 26.4
Debt service to exports ratio 3.5 4.4 6.1 6.6 7.6 8.2
Public debt service to exports ratio 0.7 1.6 1.5 1.7 2.0 2.1
Foreign reserves (in months of imports) 5.1 4.7 3.4 3.1 3.3 3.5
Government Finance
Domestic Revenue 12.5 12.4 13.2 13.8 14.0 14.2
Total expenditure and net lending 17.3 19.8 23.9 21.4 22.4 21.1
Overall balance (excl. grants) -4.8 -7.4 -10.7 -7.7 -8.4 -6.9
Overall balance (incl. grants) -3.1 -4.7 -6.3 -3.5 -4.6 -3.3
Domestic borrowing 0.2 2.2 -0.5 2.1 1.8 1.4
Net Foreign financing 2.0 2.2 2.5 3.1 4.5 3.6
Notes: 1. Estimate.
2. Projection.
Sources: Ugandan Authorities; and staff estimates and projections.
8. A large portion of the Ugandan population does not have access to any kind of
financial services. Despite considerable progress in the expansion of Uganda‘s financial
services, 28 percent of Ugandans (18 years old and above) remain unserved by any kind of
financial institution, formal or informal. The proportion of the population served by formal
Page 12
6
institutions is only 28 percent.1 Uganda suffers from a low savings rate, low levels of lending,
and high intermediation costs and margins. While liquidity within the system is considerable,
banks prefer to invest in treasury securities rather than servicing a broader segment of the
enterprise sector.
9. The local market for term finance remains underdeveloped. The financial system
is able to provide bank financing for segments of the enterprise sector, however financing for
maturities longer than seven years is largely unavailable. This is a major constraint to the
financing of much-needed infrastructure investment and severely curtails the development of
finance for the housing market. The dearth of investment in infrastructure has repeatedly been
identified as a major constraint to economic development. Despite the increase in private
sector activity over the last decade, few private sector companies have accessed the capital
markets in Uganda to meet their term financing needs. The majority of businesses in Uganda
rely on internal funds to meet their term financing needs. The bond market is dominated by
the Government. There are currently 21 government bonds on the market for a total value of
UGX 984 billion, while the five corporate bonds represent about UGX 100 billion. The
average maturity for government bonds is 3.8 years, while corporate bonds have a longer
average maturity – 8.2 years.
MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
10. Uganda’s macroeconomic framework is deemed appropriate to support the
proposed operation. The authorities are committed to return to prudent fiscal management
and to ensure budget allocations are in line with National Development Plan (NDP) priorities.
The envisaged budget for FY11/12 will figure a significant adjustment, as well as expansion
of infrastructure spending. The overall balance is expected to shrink by close to 3 percent of
GDP (including grants) as exceptional security-related spending winds down. Banking system
financing of the deficit will be limited to drawing down deposits (including from exceptional
oil exploration tax earnings) to finance initiation of a large hydropower project. The proposed
medium term expenditure framework for FY11/12 to FY15/16 appears sound and coherent. It
features moderate fiscal deficits and maintains significant expenditures in infrastructure to
address key biding constrains to growth. The effectiveness and efficiency of the
implementation of government‘s policies will hinge on the quality of Public Financial
Management (PFM) and procurement systems. The authorities are committed to strengthen
accountability and efficiency of these systems and are engaged with donors, including in the
context of general budget support and its related Joint Assessment Framework which details
specific performance indicators.
11. Uganda’s medium term growth prospects remain solid. In the medium term
growth is projected to remain robust, averaging about 7 percent in the next few years. A
critical part of the government‘s economic development strategy is to focus on eliminating
infrastructure constraints and strengthening competitiveness in export markets, in particular
for processed agricultural products as a means to sustain growth. In the short to medium term
Uganda‘s growth is expected to remain robust as agricultural production in the northern
region continues to rebound with the return to peace and as regional demand for Uganda‘s
exports grows. The focus on improving productivity – supported by more effective financial
1 FINSCOPE Uganda 2009, Final Report.
Page 13
7
intermediation - will also be critical to help mitigate the adverse impact of possible real
exchange rate appreciation brought on by oil sector investment and production.
12. In the medium to long term, growth will for a large extent depend on the ability
of the authorities to harness effectively the anticipated resources from oil exploration.
Growth will hinge on prudent macroeconomic management in the presence of oil revenue
inflows, the ability to channel the fiscal resources from oil to the most productive public
investments, the management of the fiscal revenue streams from the oil sector, and the pace of
productivity growth and skills development in the labor force. Related medium term
challenges to be addressed to sustain Uganda‘s economic growth and poverty reduction
include monitoring and if possible addressing Uganda‘s demographic dynamics, addressing
inefficiency in public service delivery, and tackling emerging skills gaps as the economy
continues to transform.
13. Uganda’s oil discoveries promise significant increases in domestic revenues in the
longer-term. Even though production is anticipated to begin in 2013, peak production, which
is likely to be roughly 175,000 barrels per day, is to be reached in 2017. This rate of
exploration could be sustained for 10-20 years. Although oil price volatility makes it difficult
to predict the revenue stream from oil, public revenues are projected to increase by 10
percentage points of GDP at the height of production i.e. in six to ten years. Based on an oil
price of US$80 per barrel, export receipts will reach close to US$4 billion when production
peaks to slowly decline as domestic demand increases and to decline more drastically when
oil exploration declines towards the end of the 2020. Large supportive investments in
infrastructure will be needed between now and 2017 to produce, transport, export and refine
the oil so there remains considerable uncertainty regarding the time frame for reaching peak
oil production and revenue generation.2
14. The Government will continue to require external financing to maintain its fiscal
policy for growth. Domestic revenue mobilization remains low, at 13 percent in FY10/11
and is not expected to increase beyond 15 percent in the medium term. Therefore, further
external financing, concessional as well as non-concessional, will be required to sustain fiscal
policy. The non-concessional borrowing is to mainly address the infrastructural deficit in
roads and energy. These investments will be effective if Government also addresses
absorption capacity and implementation problems in the infrastructure development programs,
particularly in the roads sector. The fiscal deficit (including grants) is projected to decline to
3.3 percent of GDP by FY13/14 through increased tax revenues, partly due to elimination of
various tax exemptions, and containment of recurrent expenditures (see Table 1).
15. The external financing requirements are driven by the needed investments in the
oil sector and in public infrastructure. Imports are projected to increase significantly to
provide for the goods needed to prepare the oil sector for production and for the planned
public investments in energy and roads. The oil sector investments are anticipated to be
financed through direct foreign investments while the imports needed for the public
investments in infrastructure are financed through grants and concessional as well as non-
2 A detailed analysis of impact of oil sector in Uganda is included in the Annex 6 of the Country Assistance
Strategy for Uganda for FY11/15 (World Bank Report No. 54187-UG).
Page 14
8
concessional borrowing. Additional external resources are needed to rebuild Uganda‘s
foreign reserves. Foreign reserves remain relatively low compared to overall imports.
16. Uganda’s risk of debt distress is low as a result of international debt relief and
prudent macro management. The authorities intend to continue to rely on concessional
assistance to finance their public infrastructure investment in the coming years, but increase
gradually their use of non-concessional funds as they build up their debt management
capacity. The preliminary results of the 2011 Joint Debt Sustainability Analysis update
suggest that all parameters for sustainability are within the prescribed thresholds and the risk
of debt distress is low.3 Even as the non-concessional limits are increased to US$800 million,
the debt service ratios remain robust under most of the standard stress tests. The sensitivity of
Uganda‘s debt indicators to a growth shock suggests that careful selection of public
investment projects have a key role to play in the maintenance of debt sustainability over the
near and medium term, requiring continued attention from the Ugandan authorities to
improving investment planning processes and strengthening implementation capacity. As
domestic financial market develops, improved availability and allocation of savings will help
satisfy Uganda‘s investment needs.
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES
17. The authorities completed the preparation of the National Development Plan for
2010/11-2014/15 (NDP) in March 2010. The NDP succeeds to the third Poverty Eradication
Action Plan and broadens its strategic focus to structural transformation to raise growth and
living standards sustainably. During implementation of the third PEAP, the government‘s
strategy began to shift towards a greater focus on economic growth and reduction in income
poverty. Building on achievements under the Poverty Eradication Action Plan (PEAP), the
NDP aims at fostering skilled employment growth and a sectoral shift to higher value-added
activities. The NDP identifies four priority targets: (i) human resource development through
health, education and skills building; (ii) boosting up physical infrastructure, particularly in
the energy and transportation areas; (iv) supporting science, technology and innovation; and
(iv) facilitating private access to critical production inputs, particularly in agriculture.
18. The National Development Plan was developed through an extensive and broad-
based country-driven consultative process. Consultations have been held at local and
sector level, and have included representatives from the public sector, private sector and civil
society organizations. They combined a bottom-up and top-down approach through active
consultations with the grass-root stakeholder, including at the local government level. Cabinet
discussions helped build further ownership within Government. The NDP reflects, therefore, a
broad national consensus on country‘s strategy for growth, social progress, and governance.
As part of the NDP monitoring and evaluation strategy, Government is launching sub-county
level barazas - an annual forum for communities to hold public officials to account for public
service delivery. Local governments, civil society and the private sector have broadly
expressed consent and support for the NDP‘s focus on growth-enhancing investments, social
equity and improved governance, while cautioning Government to ensure that the growth
agenda does not compromise goals in the social sectors, particularly health and education.
3 Uganda: Joint IMF/World Bank Debt Sustainability Analysis, 2011.
Page 15
9
19. The NDP identifies three objectives for the financial sector. The first one is to
promote a sound, vibrant and deep financial system. Areas of interventions under this
objective include: strengthening of regulatory environment; strengthening of payment
systems; promoting competition and prudence in the sector; encouraging product innovations;
promoting expansion of banking services to rural areas; strengthening property and land rights
legislation; and strengthening anti-money laundering framework. The second objective is to
increase access to affordable long term finance. Specific areas of intervention are:
strengthening institutional arrangements for mobilizing long-term funds; and reforming the
pension sector and promoting savings mobilization. The third objective is to attain further
integration of financial services within the East African Community (EAC), focusing on the
harmonization on financial sector policies across the Community. The objectives and areas of
interventions outlined in the NDP are fully congruent with the Financial Markets
Development Plan for 2008-2012. Implementation of the Financial Market Development Plan
started in 2008, supported notably by Bank‘s second Private Sector Competitiveness Project.
20. Government’s efforts to reform financial sector have made tremendous strides in
establishing a sound, profitable, and growing financial system. Financial sector reform
has been at the core of Government‘s economic reform program since the late 1980s. The first
generation of financial sector economic reforms focused on liberalization of financial markets,
institutional reforms to the prudential regulatory framework, and divestiture of government
owned financial institutions. These reforms were supported, notably, by a Financial Sector
Adjustment Credit which focused on strengthening Bank of Uganda, and the banking system
as a whole, to increase the efficiency of financial intermediation and contribute to sustainable
growth and mobilization of domestic savings over the long term. These reforms have led to a
stronger and more efficient financial sector, which performs relatively well a number of
crucial tasks, such as banking for medium to large corporations and providing payments and
savings services to sizeable segments of the population. Since the removal of the moratorium
on the licensing of new banks in 2007, the sector is also showing signs of increased
competition, notably through marked branch expansion and the introduction of new products
such as mobile phone financial services.4
21. The authorities acknowledge that further efforts are needed to increase
intermediation and savings mobilization in support of higher and more diversified
economic growth and increased poverty reduction. Much needs to be done to improve the
depth and breadth of the financial sector while maintaining stability, and allowing the
financial sector to fully play its role of catalyst for economic growth.
IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
LINK TO CAS AND NEW AFRICA STRATEGY
22. The proposed operation is congruent with the Country Assistance Strategy
(CAS), presented to the Board of Executive Directors in May 2010, and to the new
Africa Strategy. The CAS supports GoU‘s medium-term goals of accelerating economic
growth, transforming the structure of the economy, raising employment and ensuring
prosperity. As underscored in the NDP, the development of a resilient, competitive, and
4 Since 2007, the Bank of Uganda has licensed seven new commercial banks and one credit institution, raising
the number of banks to 21 and credit institutions to 4.
Page 16
10
effective financial system constitutes a critical, though not sufficient, enabling element to
achieve Uganda‘s economic and social development objectives. Countries with higher levels
of financial development experience better resource allocation, higher GDP per capita growth,
and faster rates of poverty reduction. In congruency with the CAS, the proposed operation
would support Government‘s efforts to further financial sector development, including
through pension system reforms. The proposed operation will support pension reform by
improving the regulatory framework and strengthening both public and private pension
schemes; and it will complement current Bank‘s support to the implementation of
government‘s 2008-2012 Financial Market Development Plan (FMDP) to improve access to
financial services and the availability of term finance.5 This operation is fully aligned with the
first pillar of Africa Strategy, namely the competitiveness and employment pillar.
COLLABORATION WITH THE IMF AND OTHER DONORS
23. Collaboration between the Bank and Fund in Uganda is strong. Government‘s
macroeconomic program has been supported in recent years by successive three year IMF
Policy Support Instrument (PSI) arrangements; the current one started in July 2010. The IMF
Executive Board decided in February 2011 not to complete the first review of the PSI due to a
supplementary budget passed in early January which put program objectives at risk. During
subsequent discussions in March 2011 the authorities and the IMF mission reached
understandings ad referendum on macroeconomic and structural policies that are consistent
with the objectives of the PSI. The second review of the program is expected to be presented
for consideration by the IMF Executive Board before the end of June 2011. The Bank and
IMF collaborate on fiscal and financial support issues, including in the follow-up to the 2005
Financial Sector Assessment and the preparation of the planned Financial Sector Assessment
(August, 2011).
24. This operation was prepared in consultation with other Development Partners
active in the financial sector, notably the International Monetary Fund and the German
cooperation agency (Gesellschaft für Internationale Zusammenarbeit - GIZ), and United
Kingdom Department for International Development (DFID).
RELATIONSHIP TO OTHER BANK OPERATIONS
25. World Bank Group engagement is aligned with NDP and covers the main
strategic axes of Uganda’s development strategy. It uses harmonized instruments such as
programmatic development policy lending, investment lending, and joint analytical and
advisory services. The Second Private Sector Competitiveness Project comprised a component
to support financial sector deepening, which enabled targeted activities, including support for
the drafting of commercial and financial legislation and the establishment of the Credit
Reference Bureau. This project directly financed implementation of specific activities of
government‘s FMDP. The proposed Financial Sector Development Policy Credit (DPC)
complements these efforts. Sector-specific development policy operations are useful
instrument to support countries with strong commitment to medium-term reform in a specific
sector which require focused attention. This operation also complements Banks efforts to
5 This operation was discussed during CAS consultations and included in the lending pipeline at the Regional
Operations Committee (ROC) stage of the CAS, albeit it was dropped from the final CAS version at the request
of the authorities during the 2010 Spring Meetings. The authorities reversed their decision subsequently and
requested the Bank to resume the preparation of the operation.
Page 17
11
support the development and integration of financial sector in the EAC, notably the EAC
Financial Sector Development and Regionalization project. Finally the operation will benefit
from parallel targeted TA financed by various trust funds, notably supporting the
establishment of the pension regulator.
26. This operation also complements the PRSC series, the main vehicle for Bank’s
budget support in Uganda. PRSC series focus on Government‘s reforms to improve access
to, and greater value for money in, public services. They are being prepared and monitored
jointly with ten other Joint Budget Support (JBS) donors and Government, and place a strong
emphasis on performance-based management through tools such as output-oriented budgeting
and results oriented management. This joint approach reduces Government transaction costs,
increases the predictability of disbursements, and creates mutual accountability. Financial
sector reforms are not covered under the JBS, as authorities and partners have agreed to
circumscribe the scope of this general budget support to four sectors, namely health,
education, transport and water and sanitation for the time being. The authorities consider that
adding specific sectoral reforms to the JBS framework would introduce unnecessary
complexity and would entail the risk of jeopardizing predictability of disbursements in case
progress in the specific sector is slower than anticipated.
LESSONS LEARNED
27. Strong ownership and strengthened capacity of the institutions involved in the
reform are key factors of success. Ensuring ownership at all levels of government, from the
technical to highest level, is essential for reinforcing commitment to achieving development
objectives and facilitating implementation. Complementary technical assistance and capacity
building activities will also be critical.
28. The political economy of reform needs to be taken into account. In designing a
development policy operation, political factors and the legislative needs of the client need to
be understood and included in the dialogue with the client, particularly if the implementation
of the reform program will involve a future administration. In preparing this operation, the
World Bank understood that some of the policy reforms needed, notably with respect to
pension reform, could not be implemented within the current political cycle. The proposed
programmatic approach combines the discipline of a medium-term framework with triggers
for subsequent operations that offer the flexibility to accommodate the unpredictability and
uncertainty of complex policy reforms. This approach would also strengthen the basis for a
continued policy dialogue with the Ugandan authorities to take office in 2011.
29. Ambitious objectives require a pragmatic approach. The deepening of financial
sector and pension reform is a long-term and ambitious goal that involves difficult decisions.
In designing this operation, the World Bank understood that under current constraints, it is
more realistic to focus on institutional development (improving the legal and regulatory
framework and the capacity of the supervisory agencies), and to leave the restructuring of the
pension schemes for a second stage. This would allow building further momentum for
completion on the reform.
Page 18
12
ANALYTICAL UNDERPINNINGS
30. The design of this operation is underpinned by various diagnostic work
completed in recent years. These include World Bank report on Making Finance Work for
Uganda (2009); a consultant report on Development of PPP frameworks in Uganda (2010);
FINSCOPE survey report (2010); a policy note on Reform Options for the Public Service
Pension Fund in Uganda (2011); a review of National Social Security Fund investment
policies (2011); and the Financial Sector Assessment Program (FSAP) (2001) and its first
update (2005). A new update of the FSAP is scheduled to take place in late August 2011; its
outcomes will inform further authorities‘ financial sector reform program and help refine and
identify specific triggers for the subsequent operation under this programmatic series. This
analytical work was fed into policy dialogue and contributed to Government‘s policy
formulation.
V. THE PROPOSED FINANCIAL SECTOR DEVELOPMENT POLICY CREDIT
OPERATION DESCRIPTION
31. The proposed Development Policy Operation for the sum of US$50 million would
be the first in a series of two programmatic single-tranche operations. The proposed
operation will support the implementation and consolidation of Government‘s financial sector
reforms as outlined in the National Development Plan and the Financial Markets
Development Plan for 2008-2012. The programmatic approach defines the medium-term
framework for policy reform while accommodating the unpredictability and uncertainty of
these complex policy reforms.
32. The overarching development objective of the operation will be to help build a
more efficient, robust and deeper financial sector which can support broad-based
private sector growth. The specific reforms supported by the operation will be organized
around two main objectives: (i) supporting the development of the market for term finance;
and (ii) improving access to financial services. Under the first area, the operation would
support the pension system reform, and the strengthening of institutional arrangements for
mobilizing long-term funds, including through Public Private Partnerships and the
development of the housing finance market. Under the second area, measures supported
would seek in particular to improve the lending environment and strengthen payments and
settlement systems. Proposed prior actions for this operation and their current status are
presented in Box 1 at the end of this section; the expected specific results and proposed
triggers for second operation are contained in the policy matrix in Annex 2.
POLICY AREAS
Pillar 1: Supporting the development of market for term finance
(i) Pension System reform
Overview of the pension sector
33. The Ugandan pension system serves a relatively small portion of the population.
For private sector employees, the mandatory fund is the National Social Security Fund
(NSSF). Many private sector employers have also set up occupational schemes to accumulate
Page 19
13
additional pension benefits for their employees. For public sector employees, the scheme is
the Public Service Pension Fund (PSPF). The armed forces have a specific scheme, the benefit
payments of which are administered through PSPF. Workers in formal firms with less than
five employees, self-employed, and informal workers are not covered. The characteristics of
the major pension schemes in Uganda are described in Table 2.
34. The Public Service Pension Fund covers civil servants in both central government
and local authorities. Pensions for traditional civil servants, primary and secondary school
teachers, police officers, prison officers, doctors and public employees in the judiciary are
provided for under the Pensions Act (Cap 281). The Pensions Act also covers civil servants in
local authorities - until 1994 local authorities had their own provident funds established under
the provisions of the Municipalities and Public Authorities Provident Fund (Cap 291). After
the 1994 amendment to the Pensions Act, all local authorities were required to provide
pensions to their workers under the Pensions Act. The Armed Forces is covered under the
Armed Forces Pension Act, 1939, Cap 295 and is partly administered through PSPF.
35. The PSPF is a generous, non-contributory, defined benefit scheme funded by the
budget. The scheme provides for normal retirement age at 60 years with a benefits vesting
period of ten years. The covered population in this scheme is approximately 260,000 and
currently pensions of approximately 130 billion Ugandan shillings per annum are paid. The
scheme has a generous full pension based on gross salary with an accrual factor of 2.4 percent
multiplied by the number of years in service capped at 87 percent of final gross salary. The
scheme rules allow commutation of up to a third of the pension at commutation factors that
are double what is considered to be actuarially fair. Commuted pensions are restored after 15
years. The unique policy of indexing pensions provides a rate of indexation that is higher than
wage indexation. With regard to survivors‘ pension, the pension payable is 100 percent of the
pension entitlement of the deceased public officer. The guaranteed period for the survivors‘
pension is 15 years. The scheme also provides an array of other gratuities such as contract
gratuities, death gratuities, short term gratuities, and marriage gratuities.
36. The Armed Forces Pension Scheme is also a non-contributory defined benefit
scheme. As noted, the benefits payable by the scheme are administered through PSPF. Data
about the active contributors and pensioners is maintained by the Minister of Defense and are
not publicly available.
37. The National Social Security Fund (NSSF) is the compulsory fund for workers in
the formal sector in enterprises with five or more employees other than those persons
employed as teachers or in the Civil Service and Armed Forces. NSSF is a defined
contribution provident fund which is financed by compulsory contributions of 15 percent of
wages divided between employers and employees in the ratio of 2:1. NSSF operates on a
defined contribution basis, that is, as an investment fund where accrued balances can only be
withdrawn at retirement. As such, its assets and liabilities are by definition matched. The fund
does not guarantee a rate of return on the contributions it collects. While there are no explicit
contingent liabilities that would need to be covered by the scheme sponsors or a pension
administrator, if the fund were to face shortfalls the government would most likely have to
step in. The fund has 450,000 active contributors and its total assets stood at UGX 1.6 trillion
(end of June 2010, unaudited), equivalent to about 5 percent of GDP.
Page 20
14
38. The Board of NSSF has recently approved an investment strategy. There are no
counterparty limits or limits to its exposure to particular industries. Assets are currently
structured as following: 30 percent in fixed interest investments; 30 percent in equities; and
40 percent in real estate. The strategy recently approved by the Board is 40 percent fixed
interest, 30 percent equities (both listed and unlisted) and 30 percent real estate. A more
conventional mix would be: cash and bank deposits in the range of 10 to 15 percent; fixed
interest of 25 to 30 percent; equities of 25 to 30 percent and for real estate, a maximum of 20
percent.
Table 2: Ugandan Pension Schemes
National Social
Security Fund
(NSSF)
Occupational
Provident Schemes
Public Service
Pension Fund (PSPF)
Armed Forces
Pension Scheme
Legal
Framework
NSSF Act 1985 Not regulated Pensions Act (CAP
286)
Armed forces pensions
Act (CAP 295)
Specific
Population
Served
All private sector
employees of formal
sector companies with
more than 5 employees
Employees of private
sector firms that elect
to contribute funds in
addition to NSSF
funds
Civil servants (central
government, police and
prison officers,
judiciary, doctors,
primary and secondary
school teachers
Armed forces
Population
covered
About 450,000
members -
About 50-60 schemes,
number of members
unknown
About 228,000 active
members and 32,000
retirees
N/A
Financing of
Benefits
Mandatory
contribution (15% of
gross salary)
Voluntary (generally
employers‘)
contributions
Non-contributory
(budget-financed)
Noncontributory
(budget-financed)
Scheme design Defined contribution Defined contribution
and defined benefit
Defined benefit Defined benefit
Type of Benefit Lump sums Annuities and lump
sums
Annuities and lump
sums
Annuities and lump
sums
Funding status Funded (about UGX
1.3 billion)
Believed to be funded Unfunded Unfunded
39. There are believed to be more than 50 private sector occupational schemes
established by private sector employers. There is currently no consistent practice or
structured regulation for these schemes. Some take the form of provident funds, others are
pension arrangements based upon the final earnings of members and their length of service.
The estimated total asset value of these funds is UGX 120 billion. Most large employers, such
as the Bank of Uganda and the telecommunications companies, operate such schemes. In
addition to the single-employer schemes, there is also one multi-employer pension fund,
organized and operated by an international company.
Challenges for the pension sector reform
40. Several constraints are hampering the development of a mature and well
functioning pension sector. These can be grouped around three dimensions: (i) the overall
pension regulatory framework; (ii) the private pension schemes; and (iii) the public pension
scheme. The Government has started to take concrete steps to address these challenges.
41. There is no comprehensive regulatory framework for the pension sector,
although steps have been taken to address this. Currently, NSSF and PSPF are regulated
Page 21
15
under separate laws. NSSF is governed by a board and reports to the Minister of Finance,
while PSPF is under the direct control of the Ministry of Public Service. A small number of
occupational pension schemes operating as deposit administration funds are subject to the
Insurance Act. The passage of the URBRA Act in April 2011 has provided for the
establishment of a regulatory authority to supervise the whole pension sector. Additionally,
the Retirement Benefits Sector Liberalisation Bill (the Liberalisation Bill) has been introduced
into Parliament. Under the envisaged new regulatory framework, both NSSF and PSPF are
subject to the supervision of the regulatory authority, which is yet to be appointed.
42. The Liberalisation Bill presented to Parliament late April 2011 has significant
gaps. This submission, requested by Parliament to have a broad view of envisaged pension
reform before considering the URBRA, was made before wider consultations had concluded.
The authorities acknowledge that the submitted Liberalisation Bill has significant gaps and
have indicated that these will be addressed at the Parliamentary Committee Stage. The
authorities have requested Bank‘s inputs, as they complete consultations and ensure that gaps
in the Bill are corrected.
43. Government’s commitment to public service and armed forces pension payments
is unsustainable. The government‘s commitment to provide public sector employees pension
benefits through the non-contributory PSPF has resulted in a large contingent liability,
estimated at 63 percent of 2011 GDP at a conservative real discount rate of 5 percent.
Although the Government has embarked on an accelerated amortization of historic arrears,
according to the Ministry of Public Service, new arrears are being accumulated every year due
to under-budgeting of the government's commitments. Data were not provided for members of
the Armed Forces to enable an actuarial evaluation to be undertaken. However, it is certain
that the arrangements for members of the Armed Forces are more unsustainable due to higher
parameters applying to the benefits to these members compared with the Civil Servant and
Teacher groups. The Liberalisation Bill, when passed, will substantially address the issues in
relation to PSPF. Under the proposed Bill, PSPF will become a contributory defined
contribution fund, to which employees in the Civil Service and Teacher groups will contribute
five percent of their wages and the government will contribute 10 percent. The scheme will
be known as the Unified Public Sector Pension Scheme (UPSPS). Existing active members
with fifteen years of service or less will be provided with a redemption bond which is
redeemable at retirement. The current arrangements for active members with more than
fifteen years of service and existing retirees will be grandfathered. The future obligations of
the government will be reduced significantly.
44. Governance issues in National Social Security Fund (NSSF) need to be addressed
durably. Although not directly under government management, the composition, selection,
and rules of accountability of NSSF‘s board make it a de facto publicly managed provident
fund. This kind of structure has often failed in other countries, and NSSF‘s record to date is
certainly less than stellar, with a history of alleged fraud and poor investment decisions related
to shortcomings in its governance structure. The recent independent review of NSSF revealed
a number of issues that need to be resolved, including the valuation practices in relation to
assets for which there is no readily available market price, an inadequate investment strategy
and inequitable practices in crediting scheme earnings to the accounts of individual members.
Further, other available information suggests that there are issues with the internal procedures
of NSSF that have resulted in un-reconciled accounts, lost data and a failure to pay pension
Page 22
16
benefits in a timely fashion. The envisaged new regulatory framework will help address these
issues. The URBRA Act requires that the investment management function needs to be
outsourced to a licensed and qualified investment manager, which cannot be a party related to
the trustees or the administrator of NSSF. The regulator will have the power to set, for all
licensed schemes, regulation and prudential norms, and minimum standards covering
corporate governance, investments, valuation and operations.
45. NSSF’s monopoly over mandatory pensions is hindering the emergence of
alternative schemes. The progressive opening of this market is expected to foster financial
market development, notably with respect to mobilization and allocation of long term fund.
The passage of the Liberalisation Bill will, after a transition period, allow workers to choose
any scheme that is licensed by the regulatory authority in which to make mandatory
contributions. Currently, only a few asset managers have been licensed by the Capital
Markets Authority (CMA) to manage assets of occupational pension schemes. One of these,
African Alliance, has begun to manage and distribute retail investment funds as well. Two
banks (Barclays and Stanbic) provide custody services to these pension funds. The insurance
market, especially life insurance, is also underdeveloped. No annuity products are available
commercially, and the life insurance market consists of group term life policies. There is a
severe shortage of qualified actuaries, which is particularly problematic for the government.
Whereas private sector entities can always find and hire such experts abroad, this constraint is
particularly serious for the Uganda Insurance Commission.
Government’s reform program
46. Pension reform has been at the forefront of public debate and GoU’s agenda for
the past decade. A significant amount of public consultations and analytical work has been
undertaken over that period, ranging from comprehensive approaches embracing broad social
security considerations to more focused analysis for specific schemes. The authorities‘
emerging vision for pension reform emphasizes the capital market development objective,
rather than considerations relating to the provision of adequate, affordable and sustainable
retirement insurance for the Ugandan population.
47. The authorities have adopted a staged approach for pension reform, focusing in
the first steps on the regulatory framework and the two largest pension schemes, NSSF
and PSPF. The passage of the URBRA Act is a major achievement which needs to be
followed by the appointment of the Board and staff to the authority, and activities to make the
authority functional. Trust fund resources have been provided to assist with the set-up of the
authority. The next stage in the reform process is to pass the Liberalisation Bill, which will
ensure that PSPF is made contributory and becomes more financially sustainable and provide
for the progressive introduction of competition in the pension sector. Table 3 presents the
planned sequencing of pension reform; all actions under stage one have been completed.
Specific measures to be undertaken as part of the proposed operation
48. This first operation will support the initial stage of pension reform. The following
prior actions have been agreed with the authorities and have been completed: (i) the conduct
of an independent review of NSSF investment policies and practices; (ii) the conduct of an
Page 23
17
actuarial evaluation and simulation of reform options for the PSPF; (iii) submission of
URBRA Bill to Parliament.
Indicative measures for the preparation of the second operation
49. The second operation would support actions indentified in the second stage of
pension reform sequence. The set of possible triggers for the second operation would
include: address gaps in Liberalisation Bill introduced to Parliament before it is enacted;
appoint URBRA Board and staff; URBRA to adopt regulations, prudential norms and
guidelines; license NSSF; and Cabinet to approve policy paper on PSPF reform.
Expected results
50. The overarching objective of the actions supported in this area is the emergence
of a regulated, competitive and sustainable pension industry catering for both
mandatory and voluntary pension savings. This overall objective will require an effective,
well resourced and efficient regulator, and the transition of the public sector schemes towards
a sustainable scheme.
Table 3: Sequencing of actions for pension reform
Stage Regulatory Authority NSSF PSPF Occupational
Schemes
Other
1 Submit URBRA Bill to
Parliament
Assess NSSF
Investment policies
and Practices
Undertake actuarial
evaluation and
simulation of
reform options
2 Appoint URBRA and
assist in resourcing the
agency
Prepare regulations
prudential standards and
by laws
Adopt internal policies
and procedures
Conduct training
Commence licensing
License NSSF Take Policy
decision on options
for reforms
Appoint trustees to
PSPF
License PSPF
URBRA to review
OPS identified and
license where
warranted
Address gaps
in
Liberalisation
Bill introduced
in Parliament
Enact
Liberalization
Bill
(ii) Developing housing finance market
Overview of housing finance market
51. Uganda mortgage market is relatively small and underdeveloped. Mortgage debt
to GDP stands at some 1 percent (2007). Based on the incomes of 5.2 million households in
the country, only 0.6 percent would theoretically be able to access mortgage loans through
commercial banks, while 19.9 percent of households could access a housing microfinance
Page 24
18
loan through microfinance deposit taking institutions, 7.2 percent could access loans from
microfinance institutions and savings and credit cooperatives, 10.3 percent access loans from
a savings and credit cooperatives only, and 62.3 percent would not have a sufficient level of
income to access any form of housing finance under the current system.
52. The range of mortgage products is varied. They are typically offered for up to 20
years to maturity and at variable rates. Interest rates are still relatively high at between 16 and
18 percent. Loans are available for construction, for house purchase, for incremental
construction (10-year loan only and for shorter term, less than 10 years) and equity release
mortgages. Land loans are also available with a maturity of just four years and a rate of 20
percent. Finally, buy-to-let loans are also available, which allow prospective landlords to
invest in rental properties.
53. Housing demand is growing and a large housing gap exists. Uganda has a very low
level of urbanization of just 13 percent compared to an African average of 40 percent. The
annual housing need is around 200,000 units with 80 percent of this required in rural areas.
This does not take account of the housing backlog which has accumulated over the years. The
pattern of housing demand is expected to shift gradually as urbanization accelerates. The
formal housing construction sector could contribute significantly to closing this gap if it were
able to better service groups further down the income distribution scale. Housing supply is
increasing but still lags behind demand. The growing urbanization and rising cost of land has
resulted in a drop of owner occupancy rate. In rural areas, however, the home ownership rate
is still around 90 percent.
54. The market is responding to this growing demand. New real estate developers have
entered the market, including some developers backed by foreign capital. These developers
vary in size and are mainly focused on the high end spectrum of the market, but are expected
to enter the other segments as the market expands. The banks are also responding and getting
involved in mortgage business. Some banks, including the Housing Finance Bank have issued
corporate bonds to finance their mortgage activities. Finally, the supply response also comes
from microfinance institutions, with the introduction of new housing microfinance products
(e.g. small loans targeted at incremental construction without the need for collateral), albeit
further development is constrained by BoU regulations limiting the lending tenure to five
years.
Challenges
55. Obstacles for housing finance development are present at every stage of the
lending process, from obtaining collateral, registration process, obtaining long-term funding,
assessing credit risk, and foreclosure process.
56. There are some legal and regulatory constraints related to the implementation of
the new Mortgage Act and uncertainties regarding the Land Act Amendment Bill. The
implementation of the Mortgage Act is pending the adoption of regulations. Discussions about
the Land Act Amendment Bill are highly sensitive and it is critical that the outcome is reached
by high level of consensus and establishes transparent and fair processes to resolve claims.
Page 25
19
57. There are also important information constraints, notably slow and unreliable
property registration, and difficulties to assess credit risk.
58. Finally there are a set of constraints on the housing supply side, with high cost of
infrastructure for development, few credible developers and builders, and limited large-scale
development.
Government actions
59. Government has acknowledged these constraints and taken action to start
addressing them. The first important step was the enactment of the Mortgage Act in October
2009, which consolidates the laws relating to mortgages, revamps the mortgage industry and
harmonizes it with the Land Act. The regulations to facilitate implementation of the Mortgage
Act have being prepared and are ready for signature. To increase the flow of investment into
housing and encourage development of large scale, well planned residential areas, the
Government has decided to provide fiscal incentives and reduced the Value Added Tax rate
charged on housing from 18 percent to 5 percent. Government has also started addressing the
information constraints, notably through the implementation of the Land Information System
(LIS), and the Rehabilitation and re-opening of the Survey School in Entebbe. The LIS will
help speed up and secure property title registration. The establishment of the Credit Reference
Bureau will also contribute to improve information gaps.
60. The Government is committed to further actions in the housing sector. At the
policy level, the immediate priority areas of reform include: resolving issues associated with
the Land Amendment Act to clarify ownership issues with a view to facilitating land
development in general and housing finance in particular; and strengthening consumer
protection rules. At institutional level, the reforms will focus on: strengthening the capacity
of the Chief Government Valuer; improving knowledge and information flow about mortgage
lending including in the Judiciary; supporting the development of professional bodies in the
sector; and strengthening the technical capacity of housing lending institutions.
Specific measures supported under this operation
61. This operation will support government’s effort to implement the Mortgage Act.
The Act consolidates the laws relating to mortgages and will be instrumental in revamping the
mortgage industry. The act addresses key uncertainties which were hampering further
resources commitments in mortgage products. Most notably, it addresses clauses that could
give courts unilateral rights to change mortgage contract terms for a borrower in default. With
respect to the length of mortgage foreclosure process, until the new law is tested through the
courts, it is difficult to fully know the impact on the time and cost of foreclosing on a
property. The Act as passed will double the time between serving a notice of default and being
able to take further action (from 21 to 45 days), however, the Act provides for a strong power
of sale mechanism which should make foreclosure a straightforward process. The key priority
now, to be supported under this operation, is to prepare the necessary regulations for the act
and to begin implementation. The prior action retained for this operation is to put in force the
Mortgage Act regulations.
Page 26
20
Indicative measures for the preparation of the second operation
62. The set of possible triggers for the second operation under this area could
include: the revision of valuation policy and procedures; establish a Mortgage Market
Development Committee tasked with the setting up of a liquidity facility; and further
issuance of long term bonds. The current difficulties and delays in property registration are
largely attributed to the requirement that every transaction needs to be independently valued
by the Government Value‘s Office for the purposes of levying stamp duty. The authorities
could consider the introduction of the transactional value for tax purposes, with adequate
safeguards to prevent under declaration of value. The introduction of a liquidity facility would
allow banks to overcome some of the maturity issues and provide investors – including
pension funds – with a supply of simple bonds yielding a better return than treasury bills
without a significant increase in risk. This ―liquidity safety net‖ for banks would allow lenders
to engage in higher levels of maturity transformation. Finally, the introduction of longer term
Government bonds would help build sufficient liquidity in long–term debt to get pricing
points for a long term yield curve, hence providing the market with a price for longer term
funds.
Expected results
63. The measures under this area will contribute are expected to improve confidence
in the mortgage market and foster mortgage market growth.
(iii) Developing Public Private Partnership framework for infrastructure financing
Overview
64. Uganda has had a generally positive experience with PPPs. They have been used
to manage existing Government assets and provide infrastructure services as part of Uganda‘s
Privatization and Utility Sector Reform Program (PUSRP), a program supporting the
implementation of the Public Enterprise Reform and Divestiture (PERD) policy and Act.
These PPPs, such as the electricity distribution and railway concessions, were implemented
under a relatively well-defined institutional structure and set of rules. The Government has
also used PPPs to develop new assets, particularly in the energy sector. These have been more
ad hoc, and in some cases driven by unsolicited bids.
Challenges
65. The framework under which these projects have been developed does not apply
to the majority of the potential PPP pipeline. The poorly-defined current PPP framework is
likely to restrict further development of the PPP pipeline for providing new assets and
services. Without a coherent policy structure, line ministries and entities not already familiar
with the PPP concept—which includes much of Government—lack both the understanding of
PPP and the mandate to pursue PPP in their infrastructure development planning. In turn,
developing and transacting projects is slow and inefficient without a basic level of in-house
capacity in structuring deals, and defined responsibilities and procedures to coordinate the
process. Integrating PPP development and assessment with existing public financial
management processes will be important, to ensure the use of PPP does not create a route
around the budget process, debt or fiscal targets.
Page 27
21
Government’s reform program
66. The GoU recognizes that PPP can make an important contribution to the
development of infrastructure facilities and services in Uganda and is committed to
promoting its use. In March 2010, the GoU approved PPP framework which defines the
extent, objectives, and guiding principles of its PPP program. The key objectives of the policy
are: to establish an enabling environment that will foster investment in public infrastructure
and related services; to encourage private sector investment and participation in public
infrastructure and related services; to streamline PPP procurement process; and to articulate
accountability of outcomes. The adopted PPP policy is based on the following core principles:
(i) value for money; (ii) public interest; (iii) risk sharing; (iv) output oriented; (v)
transparency; (vi) accountability; and (vii) competitive bidding process.
67. The GoU has developed a detailed road map to implement Cabinet decision. Key
milestones ahead include: the drafting of PPP Bill and submission to Cabinet; the
establishment of PPP unit (on a non statutory basis until PPP Bill is enacted) with core staff
already familiar with PPP policy; and the preparation and adoption regulations and procedures
for developing and implementing PPPs in congruency with the PPP Bill. The draft Bill was
submitted to Cabinet, albeit it has been returned for revision and will be resubmitted. The
successful implementation of this PPP framework will also hinge on the identification and
selection of pipeline of viable projects. The authorities have started developing a pipeline of
priority projects with support from donors, including through the Public Private Infrastructure
Advisory Facility.
Specific measures supported under this operation
68. This operation will support the adoption of PPP policy, the establishment of the
non statutory PPP unit and the preparation and submission of PPP Bill to Cabinet. The
GoU opted for the establishment of a dedicated central PPP unit within the MOFPED. Given
the generally poor understanding of PPP throughout the administration and the potentially
broad pipeline, the creation of a center of expertise and experience will help addressing
capacity and coordination gaps. The draft of the Bill was submitted to Cabinet in May 2011.
Indicative measures for the preparation of the second operation
69. Under this area, a possible trigger for the second operation could be the adoption
of PPP Bill regulations and guidelines.
Expected results
70. The ultimate objective is an increased delivery of cost effective quality
infrastructure services, in particular leveraging domestic sources of longer-term
financing. This is particularly important as the services rendered by domestic utility
providers in many cases use largely locally produced materials (e.g. for roads, water and
sanitation) and provide services to local users. Intermediary outcomes will be an increase of
private sector investments in public infrastructure and related services and development of
government capacity to complete and manage effectively relevant PPP transactions.
Pillar 2: Improving access to financial services
Page 28
22
(i) Improving intermediation environment
Overview
71. Ugandan financial sector is sound and has been growing steadily in recent years,
it remains, however, relatively shallow and inefficient. Banks are well capitalized and the
nonperforming loans ratio is low. Deposit levels are growing but remain low. Despite growth
in asset levels, Uganda remains a low intermediation banking system. Banking sector
soundness indicators compare favorably within the region. Uganda‘s capital adequacy ratio
and share of nonperforming loans are respectively the highest and lowest compared to those of
its two largest EAC partners, as well as Ghana, Nigeria and South Africa. Development and
efficiency indicators, on the other hand, compare negatively, with lower levels of deposit and
private sector credit (as share of GDP), higher lending to deposit interest spreads, and higher
interest margin. Uganda‘s ratio of overheads to total assets stands at some 6 percent and is
higher than in all comparators but Ghana.
72. A large portion of the Ugandan population does not have access to any kind of
financial services. According to 2009 Finscope results, about 28 percent of Ugandans older
than 18 years remain unserved by any kind of financial institution. This represents a
significant improvement since 2006, when the proportion of financially excluded was
estimated at 43 percent. Despite the concomitant increase in number of bank branches and the
upgrading of Micro Deposit Institutions (MDIs) to commercial banks, the improvement in
financial inclusion has come mainly from informal service providers. The most recent
Finscope report indicates that the differences in figures between 2006 and 2009 are likely to
be largely explained by a better measurement of the informal services market in the latter
exercise than an actual improvement in access. The survey also revealed that one fifth of the
population uses both, formal and informal financial services providers. These results confirm
that the scope and variety of formal financial services offer need to be furthered. The
increasing importance of informal financial services also calls for a strengthening of the
supervision of informal institutions as well as further efforts to deepen financial literacy of the
population.
Challenges
73. The key constraints to the expansion of financial intermediation have been
identified. Factors hampering the expansion of financial intermediation have been identified
in a variety of studies conducted over the past years by the authorities as well as development
partners.6
74. The legal system remains inefficient and ineffective. Despite improvements in the
functioning of the legal system as a result of the establishment of separate commercial courts,
creditors still face long delays in being able to enforce debt contracts. Erratic decision making
by judges often necessitates appeals of what should be routine debt enforcement decisions to
higher courts. Even at the highest levels, judges make decisions which appear to reflect a lack
of understanding of the role of debt contracts in the economy and the need for firm precedents
to create certainty for lenders. Commercial courts are becoming clogged by a shortage of
6 Relevant studies include the 2005 FSAP update, the 2007 CEM, the 2008 Lending Survey conducted by the
Bank of Uganda, and the 2009 Making Finance Work for Africa study.
Page 29
23
judges, the lack of a small claims court system to hear low value cases, and a lack of
computerized case management systems.
75. Financial sector legal framework has not kept up to date with technological
advancements. The ability of banks to expand access to financial services using technology
(for example, telephone and Internet) is limited by the lack of a legal framework for electronic
transactions. Furthermore, the regulatory framework for advancements in branchless banking -
in particular the use of banking agents - or other innovative products is missing.
76. Banking institutions also point to regulations on minimum provisions and core
deposits and security norms for branches as additional constraints hampering
intermediation expansion. By nature, defining the optimal level of prudential and security
regulations is a normative issue and it is not surprising that the regulator and the regulated
have different viewpoints. BoU has adopted a cautious stance on prudential and security
regulations. Provisioning requirements exceed International Financial Reporting Standards
(IFRS) and banks are required to mechanically calculate provisions based on the number of
days a credit is overdue, and also to exclude the realizable value of collateral, potentially
increasing the cost of lending to higher-risk borrowers. Regulations and supervisory practices
also encourage match-funded balance sheets. Given a system-wide paucity of term deposits,
this encourages banks to only lend short-term (many banks classified any lending over 12
months as long term). This negatively impacts the availability of appropriately structured
lending products for business investment, construction, and housing.
77. Obtaining land title information is difficult. Improvements are starting to be made
in the operations of the land registry, but banks still face delays in getting title information,
particularly because of the centralization of the registry in Kampala and a requirement to value
each transaction for tax purposes. Computerization of the companies register has not yet
started, and banks described it as slow and prone to fraud and incomplete information.
78. Credit information remains insufficient. The establishment of the Credit Reference
Bureau (CRB) has helped bridge the information gap. Stakeholders underscore the need to
expand the scope of CRB, to capture nonbank credit and payments data (such as utility
payments) that could provide individual borrowers with bankable credit histories, and thus
improve their access to credit.
79. Financial literacy is limited. Micro, Smalle and Medium Enterprise (MSME) access
to credit is limited by a severe lack of basic business skills on the part of entrepreneurs. Banks
highlighted the need for extensive outreach programs to develop skills in the areas of
bookkeeping, accounting, business plan preparation, and borrower education. Banks identified
these issues as the driving force behind the high real rejection rate for loan applications
discussed above. Furthermore, the increasingly critical shortage of trained bank staff
reinforces this constraint by limiting the availability of staff to work with potential borrowers.
The need for furthering financial literacy promotion efforts is compounded by the relative
importance of the informal – hence poorly or not regulated – financial institutions.
Government’s reform program
Page 30
24
80. The government has acknowledged these challenges and started addressing them
through the implementation of the Financial Market Development Plan 2008-2012. Key
measures target the financial sector regulatory environment, the extension of the CRB
commercial dispute resolution system, the computerization of land and companies registries,
and the strengthening of financial consumer protection and financial literacy.
81. The authorities are committed to amend and complete the financial sector
regulatory environment in line with market developments and technological
innovations. The envisaged reforms include enactment of completely new laws and
significant amendments to existing ones, as well as gazetting of complementary financial
sector statutory instruments and regulations.
82. Amendments to the 2004 Financial Institutions Act (FIA) and the 2003 Micro-
Deposit taking Institutions (MDI) Act are being prepared for submission to Cabinet.
The proposed amendments seek to foster financial depth and breadth by allowing the
introduction of new products while maintaining an adequate level of prudential regulations.
Amendments include provisions for:
Islamic Banking – grounded on the requirement that all financial transactions must be
supported by real economic activity and transactions are based on profit sharing;
Bancassurance – allowing provision of insurance related to financial products;
Mobile Banking and Money Transfer – providing a regulatory framework for the
supervision and development of mobile financial services.
Credit Reference Bureau – expanding its scope of activities;
Deposit Protection Fund – established from the merging of the two separate deposit
insurance funds currently established under the 2004 FIA and 2003 MDI Acts;
Regulation of Savings and Credit Cooperatives (SACCOs) – bringing the large
SACCOs under the aegis of the 2003 MDI Act to ensure these deposits are covered by
the Deposit Protection Fund.
83. The authorities have also adopted a set of Financial Institutions Statutory
Instruments to complement and consolidate the regulatory framework. The adopted
instrument include regulations for:
Anti-Money Laundering – seeking to stem the negative social and economic effects of
money laundering and the financing of terrorism;
Foreign Exchange Business – aimed at strengthening internal controls and overall
foreign exchange risk management systems;
External Auditors – aimed at strengthening transparency and accuracy in reporting,
ensuring that external auditors of financial institutions have adequate standards of
competence and independence;
Consolidated Supervision – enabling BoU to evaluate the entire group to which a
financial institution belongs, taking into account all the risks which may affect the
institution, regardless of whether such risks arise in the financial institution, its parent
Page 31
25
undertaking, subsidiary company, affiliates, associates or other undertakings in which
it has a relationship;
Mortgage Banks and mortgage lending activity – establishing clear requirements and
performance criteria to supervise and regulate mortgage banking and ensuring that all
financial institutions operating in the sector have adequate financial strength,
management and the integrity;
Capital Adequacy Requirement – establishing and incorporating capital adequacy
requirements for market risk in addition to the capital adequacy requirements for
credit risk as defined and called for in the Capital Adequacy Regulations;
Revision of Minimum Capital Requirement – increasing its level from the current
UGX 4 billion to UGX 12 billion in a first stage, and to UGX 25 billion subsequently.
84. The authorities have established a Small Claims Procedure within the
Commercial Court Framework. This measure is embedded in the broader Commercial
Justice Reform Programme initiated in the early 2000s. Small Claims Procedure (SCP) has
been identified as one of the priority interventions to help addressing some of the constraints
to accessing justice in Uganda which include limited access to professional legal services,
delays and case backlog, complexity of procedures, and corruption. The introduction of SCP
will facilitate the development of a fast tract mechanism where small commercial claims are
resolved in a simple and less costly manner. The SCP will be set up within established
institutional framework to avoid fragmentation of the judicial system, and ensure cost
effectiveness and sustainability. The SCP will take advantage of existing institutions,
structures and human resources, and will operate as another track in the magistrates‘ courts
system. The SCP rules were signed on March 31, 2011; implementation will now start with a
pilot phase in five jurisdictions.
85. The authorities are determined to consolidate and expand the role of the Credit
Reference Bureau. The establishment of the Credit Reference Bureau and concomitant
biometric financial cards has been a major step to bridge the information gaps which have
hampered further expansion of intermediation. The CRB covers all commercial banks, credit
institutions and microfinance deposit taking institutions. The scope of the CRB has been
expanded to include institutions outside of the financial sector. Data from utility providers can
now be included in borrowers‘ records as well as records from public institutions such as the
Registrar of Companies and Courts. To engrain the use of financial cards, effective July 2010,
borrowers are required to have a financial card to be able to obtain a loan credit. As of
September 2010, more than 400,000 financial cards had been issued (free of charge) to
borrowers.
86. The authorities are preparing financial sector specific guidelines to protect
participants in the financial sector and foster the credibility of the sector. The envisaged
guidelines will introduce a set of rules and principles in line with international best practice,
which will help to appropriately structure the relationship between provider and consumer.
The guidelines will be grounded on four key principles, namely accountability, fairness,
reliability and transparency. The authorities also expect that the consumer protection
guidelines will dovetail with the substantial efforts being made to increase financial literacy
across the country. A number of projects in both the public and private sectors have been
Page 32
26
implemented to offer financial education to those Ugandans that are currently unable to
adequately manage their finances. The consumer protection guidelines are one pillar of a
financial education strategy as they clarify exactly what a consumer or potential consumer is
able to expect from their relationship with a financial services provider. The guidelines will
not be legally binding but will constitute an important step, while a comprehensive consumer
protection framework is developed and adopted through the legislative process.
Specific measures supported under this operation
87. The measures supported under this operation focus on the financial sector
regulatory environment, the commercial dispute resolution system, and consumer
protection. The following prior actions have been agreed with the authorities: (i) adoption of
complementary Financial Institutions Statutory Instruments; (ii) preparation of amendments to
2004 FIA and submission to Cabinet; (iii) put in force the Small Claims Procedure rules; and
(iv) publish Consumer Protection Guidelines.
Indicative measures for the preparation of the second operation
88. In addition to the transversal financial access issues supported under the
proposed first operation, further and specific attention is required with respect to access
to finance in rural areas. The GoU has launched a new Rural Financial Services Strategy
(RFSS) seeking to expand rural financial services through SACCOs. This initiative intends to
create new SACCOs and strengthen existing ones in every sub-county. The GoU has also
increased funding to rural areas through the Microfinance Support Center Limited (MSCL),
which provides wholesale lending to SACCOs, who then retail the funds to their members.
While furthering access to financial services in rural areas is a commendable objective, it
raises daunting challenges with respect to managing this expansion without jeopardizing the
soundness of this sub-sector and undermining the confidence of consumers in microfinance
institutions.
89. The second operation would support GoU’s efforts to improve operational
performance in the SACCO subsector and strengthen prudential regulations.
Improvements could be achieved by establishing basic, mandatory prudential standards, by
enforcing governance and transparency requirements, and by providing technical assistance to
help meet those standards within an established strategy. This strategy is being spearheaded by
the Rural Finance Services Programme (RFSP), funded by the International Fund for
Agricultural Development (IFAD). The Uganda Credit and Savings Cooperative Union
(UCSCU) is responsible for the self-regulation and supervision of SACCOs, but lacks
institutional capacity to carry out these duties. The authorities are also considering the
introduction of a legal and regulatory framework for Tier 4 institutions.7 The envisaged
approach would consist in segmenting Tier 4 by size (in terms of share capital and savings
portfolio) for regulation by: (i) Bank of Uganda; (ii) a Microfinance Regulator to be
established. The upcoming FSAP update will provide an opportunity to take stock of the
7 The MoFPED held a Consultative Workshop in July 2010 on the draft Microfinance Policy and presented the
conclusions at a meeting on October 19, 2010 of the newly reconstituted Microfinance Forum. It also presented
the Proposed Principles for a Tier 4 Microfinance Bill. A Cabinet paper is now to be prepared for enacting the
long-awaited legislation needed to institute more effective regulation and supervision of SACCOs and other Tier
4 MFIs.
Page 33
27
situation in the sector and indentify specific recommendations for authorities‘ consideration.
Indicative triggers for the second operation could be: preparation and submission of Tier 4
regulatory Bill to Parliament; and rolling out of the Small Claims Procedure in five
jurisdictions.
Expected results
90. Main expected results under this area include: increased lending to private sector
and increased availability of financial services and products.
(ii) Improving national payments system
Overview of payments system
91. Uganda’s National Payment System (NPS) has undergone significant
developments in recent years. Key milestones include the promulgation of a national
cheque standard in 1999, the implementation of electronic cheque clearing in 2002, and the
launching of the Electronic Fund Transfer (EFT) and Real Time Gross Settlement (RTGS)
system respectively in 2003 and 2005. The RTGS allows secure electronic interbank and third
party customer transfers with immediate finality across the counterpart accounts at the BoU.
The system is integrated with the Central Securities Depository (CSD) for government and
BoU securities, ensuring the settlement of government security transactions on a delivery
versus payment basis. The Government is the single largest user of the payments system. The
use of electronic payment services as grown steadily in recent years, especially after the
introduction of cheque capping in 2007. Mobile payment services have registered a
spectacular growth since inception in 2009.
Challenges
92. There is no comprehensive payments system law. In the absence of a
comprehensive law to support payments, remittances, and securities settlement arrangements,
the BoU is relying mostly on the Contract Law. This is generally inappropriate, given that
contract law does not provide the level of legal protection necessary to secure payment and
settlement arrangements. Furthermore, contract law does not address important issues such as
(i) clarity of timing of final settlement, especially when there is an insolvency; (ii) legal
recognition of (bilateral and multilateral) netting arrangements; (iii) recognition of electronic
processing of payments; (iv) absence of any zero-hour or similar rules; (v) enforceability of
security interests provided under collateral arrangements, and of any relevant repossession
agreements; (vi) protection from third-party claims on securities and other collateral pledged
in a payment system; (vii) payment system oversight powers of the central bank; and (viii)
regulation of the remittance market and RSPs. Another consequence is that the BoU does not
have formal and explicit powers to perform payment system oversight.
Page 34
28
Box 1: Prior Actions for Uganda First Financial Sector Development Credit
93. Access to the electronic funds transfer system is inequitable. Licensed deposit-
taking institutions have different levels of access to the interbank settlement systems. Only
Tier 1 institutions have direct access to these systems, with all other institutions participating
through them. Tier 2 and Tier 3 institutions, though supervised by the BoU, are not permitted
to operate accounts with the central bank. The tiered access to the core payment
infrastructures gives Tier 1 institutions an unfair advantage over Tier 2 and 3 institutions. In
addition, this system may be hindering competition, limiting consumer access to payment
services, and keeping the price of payment services high.
94. Charges for electronic payment services remain high. BoU provides the interbank
settlement infrastructure that allows final settlement for the key retail systems in central bank
money. In an effort to encourage migration from checks and to promote the use of the RTGS
system for interbank and third-party payments, BoU has reduced the charges for commercial
banks. This reduction has, however, failed to translate in lower charges for the end customer,
as commercial banks continue to charge up to 100 times the BoU charge.
Government’s reform program
Priori Actions Status of prior Actions
Pillar 1: Supporting the development of market for term finance
Prior action 1: Conduct an independent review
of NSSF investment policies and practices.
Completed – Review took place in March 2011.
Prior action 2: Conduct an actuarial evaluation
and simulation of reform options for the PSPF.
Completed – Preliminary results were presented to
authorities in March 2011; Policy Note being
finalized.
Prior action 3: Submit URBRA Bill to
Parliament.
Completed – Bill was enacted in April 2011 and is
pending President’s assent.
Prior action 4: Put in force the Mortgage Act
regulations.
On track – Regulations have been drafted; signature
scheduled by mid June 2011.
Prior action 5: Adopt policy paper on PPP,
prepare and submit the PPP Bill to Cabinet and
Establish the non statutory PPP unit.
Completed – Policy paper was adopted March 2010;
draft Bill was submitted to Cabinet on May 11, 2011;
and the non-statutory PPP unit has been established
within MoFPED.
Pillar 2: Improving access to financial services
Prior action 6: Adopt complementary Financial
Institutions Statutory Instruments and submit
amendments to 2004 FIA to Cabinet.
Completed – Proposed amendments to the 2004 FIA
have been submitted to Cabinet on November 26,
2010; Complementary Regulations were adopted on
November 12, 2010.
Prior action 7: Put in force Small Claims
Procedure rules.
Completed –Signed by Chief Justice on March 31,
2011.
Prior action 8: Issue Consumer Protection
Guidelines.
Completed – Guidelines were issued on May 27,
2011.
Page 35
29
95. The authorities acknowledge the need for further modernization of the national
payments system to keep abreast with market developments and innovations. The
primary objectives of reforming the NPS include: (i) strengthening risk management of the
NPS; (ii) enhancing efficiency in the transfer of monetary value between transacting parties;
(iii) expanding the payment instrument base by introducing new instruments; (iv) extending
modern and cost-effective payment services to rural areas and the unbanked; and (v)
improving accessibility and convenience of payment services to the general public.
96. Government is also working on the introduction of a new Central Securities
Depositary. This more robust and sophisticated CSD will replace the current one, which is
only accessible by the BoU and depends largely on manual transactions in government
security trading. The new CSD will provide online services and enable electronic bidding for
government securities. It will also be linked to the CSD system used at the Uganda Security
Exchange and to the RTGS system, allowing delivery versus payment.
Specific measures supported under this operation
97. This operation will support initial steps towards the modernization of the NPS
legal and regulatory framework, albeit no prior action has been retained. This reform has
been delayed for many years. A NPS bill was prepared in 2002/03 and submitted to Cabinet
in 2005/06 together with a NPS policy paper, but no further action was taken. The government
is now committed to revive this process and expedite the adoption of a modernized NPS
regulatory framework. The preparatory work has started; in particular a diagnostic study on
branchless banking and mobile payment systems was launched in April 2011. The
forthcoming update FSAP will further inform this reform process and support Government‘s
efforts to revamp NPS legal and regulatory framework.
Indicative measures for the preparation of the second operation
98. Under this area, possible triggers for subsequent operation are: the effective
implementation of the Central Securities Depositary system, including its linkage to USE and
RTGS system; and submission of overhauled National Payments System Bill to Parliament;
and the adoption of mobile money strategy, including regulatory framework to support use of
banking agents.
Expected results
99. Main expected results are an enhanced efficiency of money transfers and improved
accessibility to payment services.
Page 36
30
VI. OPERATION IMPLEMENTATION
POVERTY AND SOCIAL IMPACTS
100. The measures supported by this operation are expected to have a positive poverty
and social impact. The operation focuses on reforms aimed at: promoting financial
inclusion; promoting SME access to finance; fostering the development of term finance
market; strengthening financial sector regulations and supervision, including for pension
schemes; and strengthening consumer protection. As such, the series is expected to yield
direct benefits to lower income segments of the population. Supported policies under this first
operation will not have a significant distributional impact, however, the policy measures on
the reform of the Public Sector Pension Fund envisaged for the second operation will likely
have a negative distributional impact on civil servant. The authorities are still at the early
stages of assessing the different reform options, and the Bank has been providing analytical
support to help evaluate the different options, including their distributional impact. A first
policy note was prepared simulating two basic reform options, and estimating in particular the
reduction of replacement rates and the transfer rates from general budget to civil servant. As
options are refined in coming months, the Bank will continue to provide analytical support,
including performing a more detailed analysis of the redistributive effects.
101. The Government remains committed to monitor the distributional impact of its
policies. Impact assessments are conducted on a regular basis through the national monitoring
system, which relies notably on periodic surveys such as the biannual Household Survey.
ENVIRONMENTAL ASPECTS
102. This operation does not pose any significant direct environmental risk. None of
the supported policy reforms are likely to pose any significant risk for the environment and
natural resources. Complementary World Bank operations specifically address environmental
risks. The World Bank maintains a diversified investment lending portfolio of operations,
which, as deemed necessary, include sector-specific measures for enhancing environmental
management capacity. The PRSC series is also expected to have an overall positive indirect
impact through its emphasis on good governance, improved procurement, financial
management, and other aspects of civil service reform, believed to contribute positively to
authorities‘ capacity to deliver public goods and services while addressing environmental
concerns.
IMPLEMENTATION, MONITORING AND EVALUATION
103. The Ministry of Finance, Planning and Economic Development will be
responsible for implementing and monitoring progress under the program, in
collaboration with the Bank of Uganda. The financial sector reform will be monitored
through Government monitoring framework for its National Development Plan, as provided
for under Uganda‘s National Integrated Monitoring and Evaluation Strategy (NIMES). The
OPM manages a quarterly reporting mechanism at sector level that feeds into an annual
government wide performance report. The Bank of Uganda will also be directly involved in
the monitoring as part of its follow up of Financial Markets Development Plan (FMDP) 2008-
2012, including through the publication of annual progress reports on the implementation of
the FMDP.
Page 37
31
104. This operation will not fall under the Joint Assessment Framework (JAF)
developed for multi-donor general budget support. The Joint Assessment Framework has a
central objective: improving value for money and equity in public service delivery. It supports
reforms in cross-cutting areas such as public financial management and public service
management that affect the quality of service delivery, as well as targeted sector reforms in
four key service sectors: health, education, transport and water and sanitation. The authorities
consider that the reforms supported under this operation are largely orthogonal to the main
focus of the JAF and their inclusion would introduce unnecessary burden.
Box 2: Good Practice Principles for Conditionality
Principle 1 — Reinforce ownership
The design of this operation has been fully client driven and builds on Uganda‘s traditional strong ownership of
its development strategy. In 1997, Uganda‘s first Poverty Eradication Action Plan (PEAP) provided the model
for PRSPs worldwide. Building on achievements under the PEAP, the authorities prepared a National
Development Plan which aims at fostering skilled employment growth and a sectoral shift to higher value-added
activities. In the financial sector the government has developed a Financial Market Development Plan for 2008-
2012, which is being implemented and supported by various donors, including the Bank.
Principle 2 — Agree in advance with the government and other financial partners on a coordinated
accountability framework
The accountability framework delineated in the policy matrix is fully congruent with government‘s NDP
objectives and the Joint Assessment Framework (JAF) developed for general budget support operations. The
sector specific focus needed for this operation, including the level of detail of the intervention called for sector
specific policy program. This program was developed and is closely coordinated with other development partners
active in the financial sector, including the IMF and GIZ.
Principle 3 — Customize the accountability framework and modalities of Bank support to country
circumstances
The operation and associated policy measures are specifically tailored to Government‘s needs.
Principle 4 — Choose only actions critical to achieve results as conditions for disbursement
The number of policy actions is limited and focused on critical steps towards deepening of financial sector
development. Retained actions have been identified through extensive consultations with key stakeholders,
including MoFPED and BoU.
Principle 5 — Conduct transparent progress reviews conducive to predictable and performancebased
financial support
The PEAP policy matrix served as the basis for the first Annual PEAP Implementation Review, conducted in
February 2007, and guided policy analysis, budget prioritization, work planning, performance assessment, and
development partner dialogue. The development of the NDP benefitted from these assessments. GoU has
established procedures to monitor and assess its performance.
FIDUCIARY ASPECTS
105. Foreign exchange system. The Safeguards Assessment of the Bank of Uganda (BoU),
which was completed by the IMF on April 13, 2003 identified both strengths and
vulnerabilities of BoU financial systems. Under a review carried out in 2006, the IMF noted
additional vulnerabilities, particularly with regard to external and internal audits, that have
Page 38
32
since been mitigated through various measures taken by BoU. In particular, a directive to
implement a formal mechanism to monitor and report on the implementation of external audit
recommendations has been fully met. Audited financial accounts are put before the legislature
within the statutory period of three months after the end of the financial year; an Audit
Committee and Governance Committee (ACGC) of the Board has been appointed, and
procedures have been put in place to ensure that both internal and external audit
findings/recommendations, as well as follow up actions taken, are appropriately
communicated to the Governor and the Audit Committee of the Board. On a continuous
basis, Internal Audit Function monitors these recommendations and reports to the ACGC of
the Board, which then takes further action.
106. Economic and financial data are reconciled on a quarterly basis, and an audit
plan assessing the risk of BoU operations and the related control environment has been
created. Since the institution of a risk management framework in 2005, BoU conducts a risk
management review on an annual basis. However, the BoU Act (1993) has yet to be amended
to clarify whether BoU can make advances to GoU to cover capital expenditures and to
confirm the BoU role as the sole manager of official reserves of Uganda.
107. Overall, the current set of PFM and procurement systems and reforms are
deemed adequate to support the proposed operation. Under the Joint Assessment
Framework (JAF) agreed upon between the authorities and the development partners
providing joint budget support, the authorities have committed to ensure that preparation and
implementation of the budget, internal budget accountability and external budgetary control
satisfy basic conditions for good Public Financial Management (PFM), including
transparency, accountability and effectiveness of use of resources. In addition authorities are
committed to progress with their program to improve PFM and procurement systems.
Performance indicators retained under the JAF include PFM and procurement related PEFA
indicators. The latest PEFA assessment available, released in June 2009, notes improvements
in budget classification and budget document comprehensiveness and oversight of aggregate
fiscal risk from other public sector entities. It also indicates improved stock and monitoring of
expenditure payment arrears, though some commitments are not captured by the Government
IFMS system in various MDAs. Transparency of taxpayer obligations and liabilities, together
with taxpayer registration and assessment, has also improved, as has the availability of quality
data and timeliness of budget reports and annual financial reports. Progress is also noted on
the use of the International Public Sector Accounting Standards (IPSAS) framework, and
training and capacity building for staff in central and local governments in this regard has
been conducted. While special audits and payroll cleaning exercises have been undertaken,
follow up remains insufficiently transparent. Internal controls exist, but audit reports show
that they are violated or ignored. Systemic controls in the IFMS prevent any commitment that
would take cumulative expenditure above the cumulative quarterly limits, but the IFMS is
sometimes bypassed and commitments are made outside the IFMS, so some government units
continue to accumulate arrears. Remedies to some of these risks are being considered in the
current review of the multi donor funded Financial Management & Accountability Program
(FINMAP).
108. Fiduciary risks related to inadequate legislation and regulatory framework in
PFM and Public Sector Management (PSM) are being addressed through the JBSF. In
the medium term, progress on the highlighted indicators in the JAF together with other PFM
Page 39
33
reforms will continue to be guided by the Public Expenditure Management Committee
(PEMCOM) and implemented through FINMAP. Public Sector Management (PSM) reforms
regarding the payroll and pension system are being guided by the Public Service Reform
Program (PSRP).
109. Oversight institutions are being strengthened. Government passed the 2008 Audit
Act, which gives the Office of the Auditor General (OAG) full autonomy in terms of
budgeting and operations. The OAG has been sufficiently funded by government in
2009/2010 to increase his audit scope, staffing and execution of audits to include VFM audits.
In the current Parliament, the Public Accounts Committee (PAC) and the Local Government
Public Accounts Committee (LGPAC) have improved their follow up on irregularities
identified in the Auditor General‘s reports; while most backlog of audit reports (up to
2006/2007) have been cleared.
110. The national legislation on public procurement as laid out in the Public
Procurement and Disposal of Public Assets Act (PPDA) is broadly consistent with World
Bank guidelines with a few exceptions. Exceptions include the following provisions: (i)
negotiation of contracts under competitive bidding; (ii) the use of merit point evaluation for
the procurement of goods; (iii) pre-qualifying bidders and then inviting only a few on a
rotational basis and; (iv) the inadequacy of procedures for selection of consultants. These
provisions are being addressed during the ongoing exercise of revising the law as part of the
PRSC. The major country procurement risks are (i) limited compliance with the Act as
indicated in PPDA‘s Audit Reports, (ii) inadequate capacity and experience in the
procurement entities to conduct procurement, and (iii) weak procurement planning, which
causes results in delays in procurement. These risks are being addressed under the JBSF and
FINMAP program to (i) build capacity of procurement staff at Central and Local Government,
(ii) strengthen procurement planning, (iii) track as one of the JBSF indicators, the proportion
of PPDA audit recommendations implemented, and (iv) strengthen the capacity of the
Procurement Regulatory Agency.
DISBURSEMENT AND AUDITING
111. The borrower is the Republic of Uganda. A single tranche credit of SDR 30.9
million (US$50 million equivalent) would be made available upon credit effectiveness. The
closing date of the operation would be June 30, 2012.
112. The proposed credit will follow the IDA’s disbursement procedures for
development policy credits. Once the credit is approved by the Board and becomes effective,
the proceeds of the credit will be deposited at the request of the Borrower by IDA in a
designated account that is part of the country's foreign exchange reserves accounts, acceptable
to the Bank. The Borrower will ensure that upon deposit the foreign exchange amount will
immediately be converted to Uganda shillings and credited to the Uganda Government
Consolidated Fund Account, within 10 working days of receipt, to be used subsequently for
budgeted public expenditures. The Borrower will acknowledge receipt to IDA of the amount
deposited in the foreign currency account and credited in local currency to the Consolidated
Fund Account. If, after deposit in the foreign reserve account, the proceeds of the credit or any
part thereof are used for excluded expenditures as defined in the Financing Agreement, IDA
will require the Borrower to either: (i) return that amount to the foreign reserve account for
Page 40
34
use for eligible purposes; or (ii) refund the amount directly to IDA. Amounts refunded to IDA
upon such request shall be cancelled.
113. The following arrangements also support the requirements related to fiduciary
assurance:
(i) Foreign reserve account. The GoU will acknowledge receipt to IDA that the money has
been deposited in the foreign reserve account and the amount was credited in local
currency to the GoU Consolidated Fund Account. While no audit is required, it is
expected that confirmation of receipt will be signed off by both the Accountant General
and the Auditor General. IDA reserves the right to request an audit of the account as
provided for in the financing agreement.
(ii) Public (government) accounts. The Auditor General is required by law to produce
his/her annual report to Parliament on the public accounts within nine months of the
fiscal year end, and the report for the year ended June 30, 2008 was issued in March 2009
to comply with this statutory requirement. IDA has always had access to those audited
accounts.
(iii) Bank of Uganda. The annual entity financial statements of the Bank of Uganda, audited
in accordance with international auditing standards as promulgated by the International
Federation of Accountants, will be publicly available.
RISKS AND RISK MITIGATION
114. Political Risk. Over several decades, there has been political stability and progress
towards multi-party democracy, although Uganda has not yet experienced a change of power
through elections. The incumbent President won his fourth term in February 2011, and has
been in power since 1986. Recent civil disturbances caused by political opposition and
concerns about price increases reveal fractures in the political landscape. To mitigate political
risk, Government prepared Uganda's five-year National Development Plan using a broad
based consultative process. Government has reiterated its commitment to adhere to the key
priority areas and policy directions spelled out in the NDP. Third party monitoring
arrangements are being designed and political economy assessments are underway to inform
and to guide Bank interventions. The World Bank is also working to strengthen accountability
institutions.
115. Overall Macroeconomic Policy Management. For over two decades, Uganda has
maintained a consistent program of prudent macroeconomic management and structural
reform. The recent deterioration of fiscal policy stance has, however, threatened to erode
Uganda‘s track record of sound macroeconomic management. The risk of deterioration on
macroeconomic policy stance could be compounded by the future availability of oil resources
and possible frustration over the slow pace of structural transformation, which could lead
some policy makers to question pro-market policies and advocate for more state intervention
and policy reversals. Uganda is also vulnerable to exogenous shocks, including weather
conditions which have a strong influence on domestic food prices. To help mitigate economic
risks, the Bank will continue, in close coordination with IMF, its monitoring and policy
dialogue on economic policies. Authorities are also preparing a policy framework for oil
revenue management with inputs from various donors, including the World Bank.
Page 41
35
116. Public Financial Management and Procurement. Uganda‘s budget is published and
relatively transparent. However, the divergence between approved and executed budget, as
illustrated this year, undermines the confidence in the budget as a statement of government
intent. There is insufficient capacity in the procurement oversight body and procuring entities,
resulting in limited compliance and oversight of procurement processes. To help mitigate this
risk, the World Bank is supporting an FINMAP to address the weaknesses in the PFM system.
A project accounting module is being developed in IFMS to capture and report donor funding
outside the consolidated funding. The World Bank is also engaged under Joint Budget
Support Framework to (i) revise the law to close loopholes and enhance enforcement
mechanisms; (ii) strengthen monitoring and oversight functions of procurement oversight
body; (iii) strengthen enforcement and compliance of procurement entities with procurement
regulations; and (iv) strengthen the government‘s procurement skills building program
through capacity building initiatives. Procurement staff is being trained under the Local
Government Management and Service Delivery.
117. Fraud and Corruption. Petty and high-level corruption is prevalent and is most rife
in procurement, administration of revenues and public expenditures, and public service
delivery. The Government has a zero tolerance policy on corruption, however, few if any
high-level officials involved in major corruption scandals have been tried, hindering attempts
to raise the bar and address lower level corruption. To mitigate this risk, the World Bank is
working with GoU to reinvigorate institutions and accountability systems, rethinking
decentralization policies, and re-launching stalled public service reform processes. GAC is a
cross-cutting pillar in the 2011 – 2015 Country Assistance Strategy and plans are being built
into new operations and the value for money agenda is supported across the portfolio,
including in analytical work, notably Public Expenditure Reviews. The recently developed
Data Tracking Mechanism provides the Government with a self-assessment tool for
corruption and governance and identifies areas where key reforms to address governance have
failed. This will help provide pointers for better governance arrangements in investment
projects.
Page 42
36
ANNEX 1: LETTER OF DEVELOPMENT POLICY
Page 67
61
ANNEX 2: FINANCIAL SECTOR DEVELOPMENT POLICY MATRIX
Area Prior Actions for
First Operation
Triggers for Second
Operation
Expected outcomes Outcome indicators
Pillar 1: Supporting the development of market for term finance
Pension Conduct an
Independent
review of NSSF
investment policies
and practices
Undertake an
actuarial
evaluation and
simulation of
reform options for
PSPF
Submit URBRA to
Parliament
Address gaps in
Liberalisation Bill
introduced to
Parliament before it is
enacted
Appoint URBRA
board and staff
URBRA to adopt
regulations, prudential
norms and guidelines
License NSSF
Cabinet to approve
policy paper on PSPF
reform.
Development of a
regulated and
competitive pension
industry catering for
both mandatory and
voluntary pension
savings
An effective, well
resourced, and efficient
regulator is in place
A more sustainable
public sector scheme is
in place
Share of
Occupational
Schemes licensed by
URBRA (Baseline
2011: 0%; Target
2014: 33%)
URBRA Staff
appointed; internal
procedures adopted;
and investment
guidelines issued
PSPF becomes
contributory
No accumulation of
pension arrears
NB: MoFEP to
collect Data
Housing
Market
Put in force
Mortgage Act
regulations
Revision of valuation
policy and procedures
Establishment of a
Mortgage Market
Development
Committee tasked with
the setting up of a
liquidity facility
Further issuance of
longer term bonds
Mortgage market
growth
Increased tenor of
mortgages
Availability of pricing
for long term funds
Ratio of Mortgage
Debt to GDP
(Baseline 2010: 1%;
Target 2% 2014)
Yield curve for
Government
securities becomes
less inelastic for
longer maturities
(Baseline 2010:
Yield curve virtually
flat beyond 80
months; Target
2014: yield curve
becomes elastic
beyond 120 months)
NB: BoU to collect
data.
Public Private
Partnerships
for
infrastructure
financing
Adopt policy paper
on PPP, prepare
and submit the PPP
Bill to Cabinet,
and Establish the
PPP unit on a non
statutory basis
Adoption of PPP Bill
regulations and
guidelines
Increased capacity to
manage and coordinate
transparent PPPs
Increased private –
particularly domestic -
sector investments in
public infrastructure
and related services
Share of private
financing in
infrastructure
investments
(Baseline, 2009:
17% ; target, 2014:
30%.
Page 68
62
Pillar 2: Improving access to financial services
Improving
intermediation
environment
Adoption of
complementary
Financial
Institutions
Statutory
Instruments
Preparation of
amendments to
2004 FIA Act and
submission to
Cabinet.
Put in force Small
Claims Procedure
rules
Publish Consumer
Protection
Guidelines
Prepare and submit a
Tier 4 regulatory Bill
to Parliament
Roll out of the Small
Claims Procedure in
five jurisdictions
Increased access to
financial services
Increased variety of
financial products
Improved performance
and soundness of Tier 4
institutions
Share of formally
served population
(Baseline 2009:
28%; Target 2014:
47%)
Share of formally
served in rural areas
(Baseline 2009:
22%; Target 2014:
40%)
Share of Excluded
population (Baseline
2009: 30%; Target
2014: 10%)
Improving
National
payment
systems
Submit overhauled
National Payments
System Bill to
Parliament
Effective
implementation of the
Central Securities
Depositary system,
including its linkage to
USE and RTGS
system
Adoption of mobile
money strategy,
including regulatory
framework to support
use of banking agents.
Enhanced efficiency of
money transfers
Improved accessibility
to payment services
Mobile money makes
enhanced contribution
to increasing access to
financial services
Share of population
engaged in money
transfers (Baseline
2009: 35%; Target
2014: 47%)
Number of mobile
money services
subscriptions
(Baseline March
2011: 2 million;
Target 2014: 6
million
NB: Indicators
under this Pillar are
derived from
FINSCOPE Survey
conducted at a
frequency of 3-4
years
Page 69
63
ANNEX 3: FUND ASSESMENT LETTER
UGANDA: ASSESSMENT LETTER FOR THE WORLD BANK
May 31, 2011
This letter provides an assessment of macroeconomic developments in Uganda in FY2010/11,
and prospects for FY2011/12 and beyond. Relations between the IMF and the Ugandan
authorities remain strong, and the authorities have expressed their firm commitment to the
objectives of the program supported by the Policy Support Instrument (PSI).
IMF Relations
In February 2011, the IMF Executive Board conducted but could not complete the first
review under the PSI. A supplementary budget was passed in early January that had not been
discussed with staff in advance, and which was inconsistent with the agreements reached in
the context of the first review. Because of the fixed review schedule—a defining feature of the
PSI—there was no time to entertain the possibility that agreement could be reached on
remedial measures that might have allowed the review to be completed.
A mission in late March agreed ad referendum on a package of measures to enable
completion of the second PSI review. The understanding includes agreement that the draft
budget submitted to parliament on June 8 will be consistent with the program‘s
macroeconomic targets, as well as elimination of some tax exemptions. The IMF Executive
Board consideration of the second review is tentatively expected in late June. Waivers will be
requested for two assessment criteria that were missed for end-December (net domestic assets
and net international reserves) because exceptional security-related spending took place in the
first half of the fiscal year rather than the second half as had been envisaged.
Recent Economic Developments and Macroeconomic Outlook
Economic growth seems to be recovering, but inflation has accelerated. Growth will
likely be in the neighborhood of 6½ percent this year and next, rising to about 7 percent in the
following years. Headline inflation, however, reached 14 percent in April, with core inflation
also rising to 9.7 percent. The pick-up in inflation was mainly driven by sharp increases in
food prices, caused in part by dry conditions in the region as well as strong demand from
neighboring countries. Higher international fuel prices have played a role, but relatively loose
monetary policy in late 2010 and early 2011 was also a factor.
The authorities are in the process of tightening monetary policy, both to contain the
second round inflationary effects of recent food and fuel price shocks and to wind down the
countercyclical loosening of 2010. Short-term interest rates have risen significantly, and
growth rates of monetary aggregates are slowing down.
Page 70
64
Fiscal policy has been tightened relative to authorized spending levels. The government
offset the additional spending authorized in the January supplementary budget with reductions
in spending for other items—notably development spending for projects that were being
implemented slower than originally planned. Nevertheless, the shift in spending priorities,
coupled with less-than-fully effective commitment controls and weak forecasting of spending
needs for pensions and utility payments, raises the risk that expenditure arrears have
accumulated in FY2010/11 that will need to be cleared in FY2011/12.
The overall fiscal deficit in FY 2011/12 is expected to narrow significantly, as exceptional
security-related spending winds down. With these savings and other reductions in current
spending, as well as some one-off early oil revenues, infrastructure spending can be
significantly expanded. At the same time, banking system financing of the deficit will be
limited to drawing down deposits in earmarked accounts to finance initiation of work on the
Karuma hydropower project. Repayment of loans the central bank had provided to finance the
exceptional security-related spending and rebuilding of international reserves is expected over
the medium-term.
The Ugandan shilling came under some pressure earlier this year, but has since
remained broadly stable. The Bank of Uganda intervened modestly in November-January, as
some institutional investors withdrew in advance of the elections. The rapid turnaround in
capital flows expected after the elections has not materialized, owing mainly to investor
skittishness from events in North Africa, and the recent ―walk to work‖ protests in Uganda.
Recent progress in structural reforms has been encouraging. Reforms to strengthen public
financial management and enhance transparency were introduced, including the
implementation of an integrated personnel and payroll system in 10 pilot agencies,
streamlining of government accounts in commercial banks, preparations for the introduction
of direct payments (―straight-through payment‖) for utilities, and publication of a work plan
for the introduction of a National Identification System (which will help strengthen tax
administration).
Looking forward, the authorities are expected to bolster their tax effort and strengthen
public financial management. Initial steps are likely to be outlined in the FY 2011/12
budget—which the Minister will read out to Parliament on June 8. The authorities may also
signal their desire to undertake additional tax policy reforms beginning in 2012/13, possibly in
the context of an EAC-wide effort.
The authorities are setting up an appropriate oil revenue management framework. The
authorities have established a subaccount at the Bank of Uganda to save windfall capital gains
revenues from sale of an oil exploration license, earmarking them for use on infrastructure
spending. The intention is to ensure that appropriate mechanisms for transparency and
accountability are put in place before large scale oil revenues begin to flow.
Page 71
65
Overall, the outlook for the economy is broadly positive. Medium-term forecasts envisage
real GDP growth of 7 percent, inflation of 5 percent, a fiscal deficit (including grants) below
3 percent of GDP, and a gradual rebuilding of international reserves. Achieving these
objectives depends on the authorities‘ ability to tighten monetary policy, expand fiscal
space—including by reducing tax exemptions—and accelerate structural reforms, particularly
as regards public financial management and financial sector modernization.
Page 72
66
ANNEX 4: UGANDA AT A GLANCE
Page 75
BundibugyoBundibugyo
BushenyiBushenyi
IbandaIbanda
KiruhuraKiruhura
NtungamoNtungamo
HoimaHoima
IgangaIgangaBusiaBusia
SironkoSironko
BugiriBugiri
KabaleKabale
KamuliKamuliKaliroKaliro
ButalejaButaleja
BudakaBudaka
KayungaKayungaKyenjojoKyenjojo
KapchorwaKapchorwa
BukwoBukwo
KaseseKasese
KisoroKisoro
KitgumKitgum
KumiKumi
KaberamaidoKaberamaido
LiraLira
LuweroLuwero
NakasekeNakaseke
NakasongolaNakasongola
MasakaMasaka
KamwengeKamwenge
KalangalaKalangala
MasindiMasindi
MbararaMbarara
KanunguKanungu
MorotoMoroto
NakapiripiritNakapiripiritKatakwiKatakwiAmuriaAmuria
MoyoMoyo
KibaleKibale
PallisaPallisa
SorotiSoroti
FortFortPortalPortal
AruaArua
JinjaJinja
BubuloBubulo
MbaleMbale
TororoTororo
GuluGulu
NebbiNebbi
ApacApac
AmolatarAmolatar
MubendeMubende
RukungiriRukungiri
IsingiroIsingiro RakaiRakai
SembabuleSembabule
MpigiMpigi
MukonoMukonoMityanaMityanaWakisoWakiso
KibogaKiboga
KotidoKotido
KaabongKaabongAdjumaniAdjumani
YumbeYumbeKobokoKoboko
KilakKilak
MarachaMaracha
OyamOyam
DokoloDokolo
BusikiBusiki
BulisaBulisa
AbimAbim
KAMPALAKAMPALA
MO
YO
ADJU
MANI
SIRONKOSIRONKO
KA
YUN
GAA
KABA
ROLE
SEMBABULE
KISOROKISORO
KANUNGUKANUNGU
RUKUUN
GIRRI
KAPCHORWAKAPCHORWA
BUKWOBUKWO
MASINDIMASINDI
HOIMAHOIMA
KASESEKASESE
KABALEKABALE
KIBOGAKIBOGA
MITYANAMITYANA
KIBAALEKIBAALE
MUBENDEMUBENDE
MPIGIMPIGI
MBARARAMBARARA
IBANDAIBANDAKIRUHURAKIRUHURA
ISINGIROISINGIRORAKAIRAKAI
MASAKAMASAKA
NTUNGAMONTUNGAMO
BUSHENYIBUSHENYI
APACAPAC
AMOLATARAMOLATAR KABERA-KABERA-MAIDOMAIDO
KAMULIKAMULI
GULUGULU
NEBBINEBBI
LUWEROLUWERO
NAKASEKENAKASEKE
IGANGAIGANGA
KALIROKALIRO
KALANGALAKALANGALA
MUKONOMUKONO
JINJAJINJA
KUMIKUMI
KATAKWIKATAKWIAMURIAAMURIA
MOROTOMOROTO
SOROTISOROTI
PALLISAPALLISA
MBALEMBALEBUDAKABUDAKA
MANAPWAMANAPWA
LIRALIRA
K I T G U MK I T G U M
ARUAARUA
KOTIDOKOTIDO
KAABONGKAABONG
TOROROTORORO
KAMPALAKAMPALA
YUMBEYUMBEKOBOKOKOBOKO
PADERPADER
MAYU
GE
MAYU
GE
BUG
IRIBU
GIRI
WAKISOWAKISO
KAMWENGEKAMWENGE
KYENJOJOKYENJOJO
NAKAPIRIPIRITNAKAPIRIPIRIT
NAKASONGOLA
BUNDIBUGYOBUNDIBUGYO
BUSIABUSIA
MARACHAMARACHA
AMURUAMURU
OYAMOYAM
DOKOLODOKOLO
ABIMABIM
BULISABULISA
NAMU-NAMU-TUMBATUMBA
BUTALEJABUTALEJA
Ora
Alb
ert
Nile
Achwa
Victoria Nile
Oko
k
Locho
man
Siti
Nkusi
Kafu
Katonga
To To FaradjeFaradje
To To JubaJuba
To To LodwarLodwar
To To BeniBeni
To To BuniaBunia
To To BeniBeni
To To NyakanaziNyakanazi
To To KisumuKisumu
To To NakuruNakuru
To To KigaliKigali
To G
oma
To G
oma
Margherita PeakMargherita Peak(5110 m)(5110 m)
Mt. Elgon (4321 m)Mt. Elgon (4321 m)
DEM. REP. DEM. REP. OF CONGO OF CONGO
S U D A N S U D A N
K E N Y A K E N Y A
K E N Y A K E N Y A
TANZANIA TANZANIA TANZANIA TANZANIA
RWANDA RWANDA
To To Faradje Faradje
To To Juba Juba
To To Lodwar Lodwar
To To Beni Beni
To To Bunia Bunia
To To Beni Beni
To To Nyakanazi Nyakanazi
To To Kisumu Kisumu
To To Nakuru Nakuru
To To Kigali Kigali
To G
oma
To G
oma
Margherita Peak Margherita Peak (5110 m) (5110 m)
Bundibugyo
Bushenyi
Ibanda
Kiruhura
Ntungamo
Hoima
IgangaBusia
Sironko
Bugiri
Kabale
KamuliKaliro
Butaleja
Budaka
KayungaKyenjojo
Kapchorwa
Bukwo
Kasese
Kisoro
Kitgum
Kumi
Kaberamaido
Lira
Luwero
Nakaseke
Nakasongola
Masaka
Kamwenge
Kalangala
Masindi
Mbarara
Kanungu
Moroto
NakapiripiritKatakwiAmuria
Moyo
Kibale
Pallisa
Soroti
FortPortal
Arua
Jinja
Bubulo
Mbale
Tororo
Gulu
Nebbi
Apac
Amolatar
Mubende
Rukungiri
Isingiro Rakai
Sembabule
Mpigi
MukonoMityanaWakiso
Kiboga
Kotido
KaabongAdjumani
YumbeKoboko
Kilak
Maracha
Oyam
Dokolo
Busiki
Bulisa
Abim
KAMPALA
MO
YO
ADJU
MANI
SIRONKO
KA
YUN
GA
KABA
ROLE
SEMBABULE
KISORO
KANUNGU
RUKUN
GIRI
KAPCHORWA
BUKWO
MASINDI
HOIMA
KASESE
KABALE
KIBOGA
MITYANA
KIBAALE
MUBENDE
MPIGI
MBARARA
IBANDAKIRUHURA
ISINGIRORAKAI
MASAKA
NTUNGAMO
BUSHENYI
APAC
AMOLATAR KABERA-MAIDO
KAMULI
GULU
NEBBI
LUWERO
NAKASEKE
IGANGA
KALIRO
KALANGALA
MUKONO
JINJA
KUMI
KATAKWIAMURIA
MOROTO
SOROTI
PALLISA
MBALEBUDAKA
MANAPWA
LIRA
K I T G U M
ARUA
KOTIDO
KAABONG
TORORO
KAMPALA
YUMBEKOBOKO
PADER
MAYU
GE
BUG
IRI
WAKISO
KAMWENGE
KYENJOJO
NAKAPIRIPIRIT
NAKASONGOLA
BUNDIBUGYO
BUSIA
MARACHA
AMURU
OYAM
DOKOLO
ABIM
BULISA
NAMU-TUMBA
BUTALEJA
DEM. REP.OF CONGO
S U D A N
K E N Y A
K E N Y A
TANZANIATANZANIA
RWANDA
Ora
Alb
ert
Nile
Achwa
Victoria Nile
Oko
k
Locho
man
Siti
Nkusi
Kafu
Katonga
Lake Vic tor ia
LakeEdward
LakeGeorge
LakeKwania
Lake Kyoga
LakeSalisbury Lake
Opeta
Lake
Albe
rt
To Faradje
To Juba
To Lodwar
To Beni
To Bunia
To Beni
To Nyakanazi
To Kisumu
To Nakuru
To Kigali
To G
oma
Margherita Peak (5110 m)
Mt. Elgon (4321 m)
30°E
4°N
2°N
0°
4°N
2°N
0°
32°E 34°E
32°E 34°E
UGANDA
0 25 50 75
0 25 50 75 Miles
100 Kilometers
IBRD 33504R3
AUGUST 2008
UGANDA
DISTRICT CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
DISTRICT BOUNDARIES
INTERNATIONAL BOUNDARIES
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.
