Uganda - Financial Markets Assistance Project

Report No. PID6157 Project Uganda - Financial Markets Assistance Project (FIMAP) Region Africa Sector Financial Sector Project ID UGPA44213 Borrower Government of Uganda (GOU) Implementing Agency Bank of Uganda (BOU) Date this PID prepared April 2, 1998 Projected Appraisal date June 1998 Projected Board date August 1998 1. Country and Sector Background. With a per capita GNP of about US$ 240 in 1995, Uganda ranks among the poorest countries in the world. Poverty in Uganda is largely a consequence of civil war, political instability and economic mismanagement during the period 1972-85. The country has strong growth potential, however, blessed with fertile soils and a good climate. Agriculture is the mainstay of the economy, accounting for more than 50 percent of GDP, about 75 percent of export earnings and around 80 percent of employment, and it provides inputs for a number of manufacturing and processing industries. The country is predominantly rural, with only 11 percent of the population living in towns and cities. Industry has grown rapidly since 1987, but its contribution to GDP is only around 12 percent. The Government has made substantial progress in reforming the economy. The rate of inflation has declined from 30-40 percent in early 1990s to single digits since 1994. Low inflation has been accompanied by a fairly stable exchange rate, although after the introduction of inter-bank market for foreign exchange in 1993, the Ugandan shilling has experienced some appreciation. 2. Uganda's growth targets require a sound and more efficient financial system which would facilitate fast and secure payments and transfers, provide savings facilities for urban and rural population and loans to credible businesses. In the last five years, the Government has taken significant steps to rectify weaknesses in the financial sector. Some of these steps include: (i) enacting updated Central Bank, banking, insurance and capital markets legislation; (ii) establishing a loan recovery agency (NPART) and expediting the workout of loans from the Uganda Commercial Bank (UCB); (iii) undertaking the privatization of UCB; (iv) enforcing minimum capital requirements for banks; (v) declaring a moratorium on the licensing of new banks, and (vi) strengthening the capacity of the BOU Banking Supervision Department. Major improvements have been made in the BOU's management, organization and operations. The BOU's structure has been streamlined with the establishment of functional departments and its authority has been enhanced through legal reforms, restructuring and recapitalization. The BOU's extensive involvement in credit allocation has been curtailed and the quality, accuracy and timeliness of commercial bank reports to the BOU has been upgraded. With the liberalization of interest rates, the BOU has also been taking a more active role in the formulation and implementation of monetary  policy. Real rates, which were strongly negative in the 1980s, are positive, particularly money market and bank lending rates. 3. In spite of considerable policy reforms, further measures are needed to develop the institutions capable of implementing the legislation enacted. Although institutional reforms were supported under the previous Financial Sector Adjustment Credit, further assistance is needed to carry out a second stage of financial sector reform. 4. Project Objectives. The objective is to improve the soundness, performance and competitiveness of the financial system. This is then aimed at supporting broad-based private sector growth. This will be accomplished by: (i) strengthening the regulation, supervision and operations of deposit- taking institutions; (ii) improving monetary management and payment systems; and (iii) developing contractual savings institutions, as well as their oversight. 5. Project Description. Project components would likely include: a. Strengthening the Regulation and Supervision of Deposit-taking Institutions: - Assistance to BOU Commercial Banking and Non-bank Supervision Departments; - Assistance to the Non-Performing Assets Trust (NPART); and - Assistance to the Uganda Institute of Bankers. b. Improving Monetary Management and Payment Systems; - Strengthening BOU Monetary Management; - Strengthening the Payment Systems; and - Strengthening the Macro Programming Unit in the Ministry of Finance. c. Contractual Savings Reform and Regulation - Assistance to the Insurance Commission; - Developing and strengthening pension regulation; and - Assistance to capital markets development. 6. Project Financing. The estimated project cost would be US$ 5.0 million equivalent, of which IDA would finance approximately US$ 4.5 million equivalent. Co-financing would be sought by other donors. The project is being developed in close coordination with these other donors, including USAID which is developing complementary support for a credit information bureau. 7. Project Implementation. Overall responsibility for the implementation and coordination of the Project will be entrusted to the Bank of Uganda (BOU), who will be supported by administration and coordination staff. The BOU will be responsible for ensuring policy consistency across Government agencies involved in the project, coordinating implementation and ensuring adequate financial management (procurement, disbursement, accounting and audit) and general administration (monitoring the implementation plan and reporting). Each project component will be implemented by a specifically designated agency who will be primarily responsible for the execution of project activities and timely delivery of outputs as defined and agreed under the Project Implementation Plan (to be finalized at Appraisal). These agencies will be supported by the BOU for procurement of goods and services, disbursement and other financial services. It is the responsibility of the BOU to ensure satisfactory and timely service. Quarterly progress reports, prepared on the - 2 -  basis of the project implementation plan and the logical framework would be provided by each beneficiary agency to IDA, through the BOU. The Bank will carry out regular supervision missions and a mid-term review at mutually agreed dates. Finally, Government will transmit a completion report to IDA within six months of the Project closing date. 8. Project Sustainability. The project seeks to assist in the development of strong, sustainable institutions as follows: (i) regulatory institutions that are able to demonstrate capacity and have the management systems to maintain that capacity; and (ii) financial institutions that sustain themselves in terms of solvency and profitability. Recognizing that strong institutions require years to develop, the project aims to initiate a process that will maintain itself well beyond the period of the credit. Indicators of sustainability will be reviewed under the Project Implementation Plan. 9. Lessons Learned from Previous Bank/IDA Involvement. The project aims to draw on the results of financial sector and institutional development projects in Uganda and elsewhere. Institution and capacity building operations are widely used and remain relevant to the Bank's commitment to develop expertise and strengthen local institutions. The key lessons that will guide the preparation of the proposed operations are simplicity of project design and quick response. Project design is also based on well-targeted objectives; well-defined actions with timetables for implementation; and clear evaluation criteria with monitorable indicators. Compatibility with both the political and institutional absorptive capacity of Government is also taken into consideration and will be incorporated into the Project Implementation Plan. Project benefits and risks will be verified and confirmed during pre- appraisal. 10. Issues that need continued focus and strengthening include: development of the borrower's capacity to implement and manage the technical assistance, including close supervision efforts by Government; consultants' abilities to transfer skills to counterparts; encouragement of local consultants and professionals; counterpart staffing and greater attention to monitoring indicators to track progress. The proposed project aims to have greater success than the FSAC where capacity building is concerned by only providing assistance to agencies that have carefully considered business plans and where the assistance is an integral part of such plans. 11. Environmental Aspects. The project is not expected to present any environmental risks and thus an environmental rating of "C" is proposed. Neither an indigenous peoples plan nor resettlement plan will be developed. 12. Program Objective Categories. The project would primarily contribute to the private sector development, financial intermediation and institutional development categories. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or -3 -  components may not be included in the final project. Processed by the InfoShop week ending April 3, 1998. - 4 -