25 January 2013

Uganda: Graft a Governance Problem - IMF

IMF calls for 'radical reforms' to fight graft and spur economic growth

In an unusual show of disenchantment with the level of corruption in the country, the International Monetary Fund (IMF) has joined the chorus of voices that are laying the blame on squarely on the door of the government. Following the completion of the 5th review under the Policy Support Instrument (PSI) for Uganda, the Executive Board of the donor organization suggested that high level corruption was a signal of "governance problems" and the government needed to act "forcefully" on the matter saying it had eroded the confidence of the population and the donor community.

A cross section of donors recently announced the suspension of aid worth $200m to Uganda over concerns about corruption particularly the theft of billions of shillings in the Office of the Prime Minister. In a Jan.14 press release, Naoyuki Shinohara, the IMF deputy managing director and acting chair, suggested that this called for a "radical fight" against the vice. "The recent theft of donor funds, resulting in a suspension of aid, signals governance problems and the need for a more radical fight against corruption," he said.

This verdict echoed that of Ana Lucía Coronel, the IMF senior resident representative and mission chief for Uganda who at the conclusion of an IMF staff mission to Uganda in November last year, said there was an urgent need for reforms because corruption had damaged the credibility of government policies. "Macroeconomic policies need to be accompanied by reforms to address the governance problems that have eroded the quality of spending and damaged the credibility of government policies," she said.

As a remedy, she said the government needed to reinforce efforts to improve public financial management by securing approval of a Public Finance Bill that ensures transparent and sustainable revenue management. Improving controls over budget execution and strengthening cash management by introducing a Treasury Single Account are also key priorities, she added.

In its May 2012 'Letter of Intent'- a document that describes the policies that a country intends to implement in the context of its request for financial support from the IMF - the government said it had tabled a new "Public Finance Bill," which seeks to consolidate the current PFAA 2003 and the Budget Act 2001 into one comprehensive law.

The proposed new legislation contains provisions for the "strengthening the management of public assets and liabilities. The proposed law is expected take effect in FY 2013/2014. However, the government's document remained generally silent on the measures being taken to deal with corruption specifically as a vice.

In a rare show of activism, a cross section of civil society organization have taken the fight against corruption to the streets in peaceful demonstrations. Indeed, Shinohara suggested that corruption and lack of transparency was hurting the confidence of the population and the donor community and the commitment to implement anti-corruption measues was key to rebuilding that confidence.

"The government's action plan to strengthen public financial management in order to reinforce controls and increase transparency of public sector operations is key to rebuilding confidence of the population and development partners," he said. "Forceful implementation of this plan is essential to prevent reoccurrence of misappropriation of public funds, restore budget financing and facilitate growth enhancing development spending."

Last week, Keith Muhakanizi, the deputy secretary to the treasury, told journalists that the government was keen on ensuring that the mutual relationship between the government and donors resumes. He stressed that the government was putting in place "strict measures" to address financial management and restore confidence in the financial management system.

But on a more positive note, the IMF chief said the country's macroeconomic performance under the PSI "has been satisfactory." It also gave a nod of approval to the Central bank's anti-inflationary strategy underpinned by tight monetary policy and under-execution of budget spending, saying it had managed to bring inflation under control and was thus "an important policy achievement" but quickly adding that the tightened stance had sharply slowed economic growth.

Following a year of severe economic stress, Shinohara stressed that reviving economic activity was an urgent priority for Uganda's economy. He added that the government short-term policies geared at maintaining essential public investment and encouraging a gradual resumption of bank lending, while continuing to allow the shilling to reflect market conditions, were therefore appropriate.

Going forward, the IMF boss suggested that medium-term growth could converge to its potential outlook level of 6-7%, but this objective needed to be underpinned by a higher contribution of private investment, "which in turn requires improvements in the business environment."

Also, the key goals for recovery should be centered on maintaining macroeconomic stability and accelerating economic growth so as to reduce unemployment and poverty. The policy mix to achieve these objectives should entail a continuation of the accommodating monetary policy stance, a small expansion of the fiscal deficit, some front loading of development spending, and maintenance of a flexible, market driven, exchange rate. Based on this policy mix, the IMF projected that GDP growth would increase to 5% this fiscal year, with core inflation averaging at about 6%.

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