IMF extends over Shs 400bln loan to Uganda

KAMPALA – The Executive Board of the International Monetary Fund [ IMF ] has concluded the fourth review of Uganda’s Extended Credit Facility [ECF], enabling the country to get an additional loan of US$ 120 million [about Shs 444 billion]. This brings the aggregate disbursement to Uganda under the ECF arrangement to about US$750 million [about Shs 2.8 trillion].

In completing the fourth review, the Executive Board also approved the Ugandan government’s request for a waiver of nonobservance of a performance criterion on the ceiling on net credit to the central government from the Bank of Uganda [BoU].

The ECF arrangement for Uganda for a total of US$1billion [Shs 3.7trn] was approved by the IMF Executive Board on June 28, 2021, aiming to support the near-term response to the Covid-19 pandemic and boost more inclusive private sector-led long-term growth. Reforms focus on creating fiscal space for priority social spending, preserving debt sustainability, strengthening governance and reducing corruption, and enhancing the monetary and financial sector frameworks.

ECF provides medium-term financial assistance to low-income countries [LICs] with protracted balance of payments problems. The ECF is one of the facilities under the Poverty Reduction and Growth Trust [PRGT]

Despite repeated external shocks and tighter financial conditions, IFM says the Ugandan economy is projected to grow by 5.5 percent in the financial year [FY] 22/23 and 6 percent in FY 23/24 which begins on July 1, 2023.

“Inflation has been declining and is expected to reach the BoU’s medium-target of 5 percent core inflation by end-2023. The improved near-term outlook (growth in FY 22/23 has been revised up slightly, and inflation projections are marked down for FY 23/24) reflects the impact of more favorable weather conditions on domestic harvests, the softening of global commodity prices and easing of global demand-supply imbalances, and the lagged effects of monetary and fiscal policy tightening.”

IMF says risks to the outlook remain elevated for Uganda, including from further tightening of external financial conditions, a renewed pickup in inflation which would increase borrowing costs via additional monetary tightening, and a stronger-than-expected drag of higher borrowing costs on private sector credit and investment. The conflict in Sudan could have a negative impact on exports.

IMF adds: “A stronger tightening of global financial conditions would constrain the availability of syndicated loans and weigh on financial sector stability given that foreign exchange credit accounts for around 30 percent of bank loans. Moreover, the recent signing into law of the ’Anti-Homosexuality Bill, 2023’ could have a larger-than-anticipated impact on the availability of grants and external loans from development partners, as well as Foreign Direct Investment [FDI] flows and tourism.”

Fiscal consolidation, tight monetary policy, and continued exchange rate flexibility remain essential to keep debt on a sustainable path, reduce the current account deficit and protect foreign exchange buffers, says IMF.

“Structural reforms will need to continue focusing on strengthening governance and anti-corruption frameworks, enhancing domestic revenue mobilisation – including through more ambitious rollback of tax expenditures, and boosting financial inclusion. Together with these initiatives, efforts to increase social spending will also improve prospects for achieving more inclusive, sustainable, private sector led long-term growth.”

Kenji Okamura, IMF Deputy Managing Director and Acting Chair among others notes: “The full implementation of the Domestic Revenue Mobilisation Strategy [DRMS], including the additional tax administrative measures identified by the authorities, is crucial to help maintain the debt-to-GDP ratio on a declining path, and allow for an increase in social spending over the medium term.”

Uganda’s public debt stood at Shs. 80.8trn as at end of December 2022. Public debt is projected at Shs. 88.9trn by June 30, 2023, according to Finance minister Matia Kasaija.

In nominal terms, Uganda’s debt-to-GDP ratio is projected to drop to 48.2 percent this FY ending June 2023 from 48.6 percent at the end of June 2022. This is slightly below the government policy target of not more than 50 percent of GDP and also below the 52.4 percent threshold provided for in the Charter for Fiscal Responsibility as of end of FY 2023/24.

Minister Kasaija has projected domestic revenue of Shs 29.7trn in FY 2023/2024, of which Shs 27.4trn n would be tax revenue and Shs. 2.3bln would be non-tax revenue, representing a revenue effort of 14.3 percent of GDP.

Okamura says increasing the pace of Public Financial Management [PFM] reforms is essential to enhance the capacity to execute social spending in a timely manner. The tax exemption rationalisation plan remains an important component of the revenue mobilisation effort.

Commenting on Uganda’s banking industry, Okamura says: “The banking system is well-capitalized, and liquidity has rebounded, but the asset quality of some banks has deteriorated. Against this backdrop, safeguarding financial stability and strengthening the supervisory framework remain paramount. The current monetary policy stance is appropriate, but the BoU should stand ready to resume its tightening if signs emerge of a slower-than-expected disinflation. Exchange rate flexibility remains crucial to preserve external buffers.”

Accelerating the momentum on structural reforms is essential to unlock Uganda’s growth potential and require more proactive efforts, he says.

“Priorities include enhancing domestic revenue mobilisation, strengthening the anti-corruption framework…, advancing the financial inclusion agenda, and climate adaptation measures. The authorities should sustain efforts to improve transparency of implementation of the asset declaration framework including sanctions enforcement for violations.”

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