The International Monetary Fund (IMF) has applauded Uganda for its good track record of maintaining macroeconomic stability.
This revelation is contained in IMF’s Country Report about the recently approved US$491.5 Million (Shs1.8 trillion) disbursement to Uganda to address the COVID-19 Pandemic.
IMF Staff agree that the COVID-related fiscal measures are critical in addressing the impact of the health, economic and social crisis and should be accommodated.
“The external shock is large and temporary, and Uganda can afford to increase health spending and cushion the impact on the vulnerable, the private sector and the population as a whole,” the report reads in part.
It adds: “Uganda also has a good track record maintaining macroeconomic stability and implementing good policies.”
IMF Staff also emphasized theimportance of careful cash management to avoid domestic arrears.
“Staff also emphasized the usefulness of social protection packages to cushion the impact of the shock on the most vulnerable; Uganda could strengthen some of the existing social protection mechanisms, considering a temporary expansion to reach vulnerable people in need, as the interventions under consideration so far could be insufficient,” the report says.
It adds that there was agreement that budget allocations for health need to continue to be increased and sustained over the medium term—the pandemic has shown in the hard way how important it is to ensure that the health sector gets sufficient allocations.
“The authorities also confirmed their intention to continue to recapitalize Bank of Uganda,” the report says.
IMF Staff also cautioned the authorities about the financing risks emanating from the large fiscal financing gap for FY2020/21.
“With the banking sector already significantly exposed to government and the private sector in need of credit, additional domestic debt issuances would not be advisable, as it would contribute to crowding out the private sector,” it says, adding: “The authorities agreed that if sufficient external financing cannot be mobilized under reasonable conditions, they would reprioritize expenditure, including by postponing some lower priority development projects, and consider potential new revenue measures.”
According to IMF Staff, based on the urgent and temporary balance of payments needs caused by a sudden exogenous shock, Uganda qualifies for a disbursement under the “exogenous shocks” window.
“This emergency financing would help the authorities weather the shock while at the same time keeping reserves at precautionary levels and thus safeguard macroeconomic stability. The disbursement is expected to play a catalytic role in securing additional budget support. The authorities plan to devote 70 percent of the RCF disbursement to preserve precautionary reserves buffers of the BoU. The remainder would be made available as budget support, to finance their response to the COVID pandemic,” the report says.
It adds: “In particular, the authorities have expressed their interest in using the resources allocated to the budget to support purchases of urgent health supplies; support their efforts to protect the most vulnerable; and boost the lending capacity of the UDB to allow it to provide affordable credit to private sector companies that will reorient their production towards much needed COVID related response items. These interventions are expected to contribute to finance the response plan by providing necessary inputs and cushion the crisis’ impact on the most vulnerable. The support to private sector companies channeled through UDB is expected to alleviate pressures in the balance of payments by reducing imports and mitigate the impact of the pandemic in the private sector by generating employment.
The authorities have agreed to place UDB under the supervision and regulation of the Bank of Uganda.”
The report says Uganda’s debt is sustainable.
“Obligations to the Fund would remain below 0.8 percent of exports of goods and services, and up to 2.3 percent of net international reserves,” it says.
However, the outlook remains highly uncertain as growth is expected to decline sharply to 3.3 percent in FY2019/20, with several sectors experiencing a slowdown, including tourism, transport, trade, manufacturing, construction and agriculture.
“The effects of the shock will continue to persist in FY2020/21, though with some mild rebound expected, so the economy is projected to grow by 3.7 percent. Despite uncertainties surrounding the near-term inflation outlook—with deflationary pressures competing with inflationary ones—headline inflation is projected at 3.2 percent in FY2019/20, increasing to 4.7 in FY2020/21, with core inflation gradually converging to its 5 percent target over the medium term,” the report says.
Private sector credit growth is expected to decline to 8.9 percent in FY2019/20 and gradually pick up to support the economic recovery over the medium term, the report says.
“In this context, staff supports the authorities request for a disbursement under the RCF of SDR 361 million (100 percent of quota). The RCF is expected to play a key role in mitigating the impact of the pandemic, while preserving macroeconomic stability. The authorities are putting together reasonable policies to address the external shock and securing additional external support from development partners. They are also committed to sound safeguards to manage transparently the resources received. The authorities remain committed to sound macroeconomic policies targeted at ensuring sustained and inclusive growth,” the report says.
