The Ugandan economy is weathering the impact of the global financial crisis better than anticipated. Despite a slowdown in economic activity, real GDP growth (at 7 percent) has remained strong by regional and international standards. Core inflation has been easing in spite of an increase in headline inflation due to higher food prices. The external current account performed better than expected, buoyed by strong cross-border exports. The shilling has regained strength as investor confidence has reversed the sudden portfolio outflows and the decline in FDI observed earlier in 2008/09. Gross international reserves remain strong.
Structural rigidities continue to pose challenges to macroeconomic management. Persistent weaknesses in project implementation coupled with rigidities in domestic financial markets limited the scope for fiscal and monetary stimulus in 2008/09. Progress with structural reforms has been uneven and may not have kept pace with the needs raised by the public investment drive. A renewed, more comprehensive structural reform agenda is needed to increase absorptive capacity as well as policy effectiveness.
Macroeconomic policies will continue to aim at overcoming infrastructure bottlenecks while mitigating the impact of external shocks on domestic activity. Full execution of the 2009/10 budget would provide a healthy stimulus to the economy but is contingent upon successful efforts to alleviate technical and administrative capacity constraints. The new, more flexible liquidity management framework should allow the central bank to support private demand while continuing to bring down inflation, although a tightening of the monetary stance may be required if food price pressures were to spill over to core inflation.
Preliminary plans to further step up public investment over the coming years seem justified in view of Uganda's large infrastructure deficit. However, considerable caution will be required to preserve fiscal and debt sustainability and leave space for private sector growth. The commercial exploitation of oil, although still distant in time, will raise additional challenges. The authorities are committed to manage oil revenue carefully and transparently through the budget process. A full assessment of the macroeconomic impact of oil production is planned for 2010.
The PSI-supported program remains on track and staff recommends completion of the 6th review. Staff support the authorities' request to extend the PSI to December 14, 2010 to align a possible successor PSI with the budget cycle and the new National Development Plan.