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Interview: Uganda to keep Borrowing, But Still far from Middle Income Status – IMF

Even after borrowing one billion dollars from the International Monetary Fund (IMF), Uganda will continue borrowing. 

IMF Uganda Country Representative Izabela Karpowicz has told URN in an interview that Uganda still has a financing deficit of another one billion dollar about 3.5 trillion Uganda shilling at the current exchange rate. 

With the IMF loan which is highly concessional, she says Uganda will be borrowing less from the domestic market. Asked if Uganda can return to the IMF to borrow more money in the coming years, Izabela Karpowicz says it is hard to tell.

Though the president has been saying Uganda is about to achieve lower middle income status, Karpowicz says projections indicate it could take a decade for Uganda to achieve this status because of high population growth and lower economic growth rate. 

Below are the interview excerpts with questions ranging from the recent loan, Uganda’s growth and accountability.

Question: What is this program about and what should Ugandans know about it?

Response: The executive board approved an extended credit facility on June 28th for Uganda. This program provides financial assistance to countries that face protracted balance of payment difficulties. This means that the underlying macroeconomic imbalances are expected. So therefore, the facility supports the programs that aim at restoring macroeconomic stability, sustainable growth and reducing poverty. 

But the loan has zero interest rate. The grace period is five and a half years. That means that Uganda is going to start paying five and a half years from now and the final maturity is 10 years. These are very concessional terms. And it is going to be disbursed in phases. These disbursements are subject to reviews, which are scheduled six months apart. At the conclusion of the approval of the program, Uganda received the first disbursement which amounts to about 250 million dollars.

Question: To be specific, how does this loan benefit ordinary Ugandans?

Response: One of the most important pillars of this program is composition of budget. We have seen in past years higher spending on infrastructure that has not always been very efficient. And in recent years, we have witnessed an increased spending on security. What we have achieved in this budget that has just been passed by parliament is a rebalancing towards greater spending on social sectors health and education and ring fencing money for vaccines, and lower spending on security than in previous years. Going forward, we will see the same trend in the medium term fiscal framework where this rebalancing becomes permanent. 

Question: Many Ugandans are concerned that you’re lending the government a lot of money. They believe you shouldn’t. Why do you have confidence that the government of Uganda can repay 1.5 billion dollars you have lent it last year and this year?

Response: One thing you have to keep in mind is that Uganda is going through a very difficult time as many other countries because of the covid-19 pandemic which has inflicted a very large blow to the economy and people’s lives. We have seen growth halving compared to the pre-crisis levels of around rates of around 6 and 7%. Fiscal debt has widened considerably and pushed the debt to GDP ratio to 50%. It has also increased financing costs. Uganda has a very large financing gap, we had estimated at about 2 billion dollars. So, it was necessary to borrow, including from the IMF. And the good news is that IMF loan is highly concessional while borrowing from other sources is less. We have some confidence that this money will be used well.]

Question: So, you are saying that borrowing is still necessary for Uganda after even one billion that Uganda is going to be getting from you in the next 3 years. For instance,  before the end of this program, can Uganda come back to the IMF and say things are getting bad, give me another loan?

Response: Let me clarify a little bit on borrowing situation. First of all the credit facility will cover three years. What will happen is that the  one billion dollars that is available will be dispersed over the period 3 years.It is not completely sufficient to fill the entire financing gap. Uganda will continue to have to borrow from other sources including from domestic banks on more commercial terms. But it will have to borrow less with the IMF loan. The IMF loan improves the borrowing profile, it lowers the cost of borrowing and contributes to making debt more sustainable. 

Question: So can the IMF lend money to Uganda in the next three years?

Response: Three years from now, it is difficult to say what will happen at that point. The pandemic will hopefully be buried in the past, growth will be stronger and debt lower. Countries are subject to shocks differently. We have seen situations in which some countries have resorted to IMF support over a prolonged period. We are hoping that this will not be needed in the case of Uganda.

Question: What is Uganda’s current debt portfolio with the IMF. How much do you demand from Uganda or will you be demanding when it starts paying?

Response: Uganda has not accessed IMF loans for a while. But we have had  many non financial programs with the government which we would consult with the authorities on the policies, but without attaching any lending. 

Question: do we say Uganda debt portfolio with IMF stands at about 1.5 billion dollars or Uganda had some had some loan from you before? In the IMF staff report that informed this loan, I saw that Uganda’s IMF debt is around 770 million dollars.

Response:  the numbers you are quoting include the disbursement from last year and first disbursement for this program. That is the total amount outstanding. 

Question: On debt to GDP ratio. Uganda’s debt to GDP ratio has surpassed the 50% threshold set for low income countries. Should there be a concern?

Response: IMF has a debt sustainability framework jointly with the World Bank and this framework focuses on the present value of debt obligations for comparability reasons because the terms at which the loans are extended to low income countries vary considerably and many are concessional. In present value terms, in 2020/21, the net present value of debt to GDP for Uganda is 41% and it’s going up to 43% in the next year before it declines again. 

So, Uganda is still below the threshold. The threshold for convergence is 55%.The nominal 50% threshold that you are quoting is debt ceiling under the charter of fiscal responsibility. But that is not debt distress threshold. In the debt sustainability framework, it’s more of an outdoor discomfort label. It doesn’t mean that after that level, the country is in distress. We see Uganda’s debt is sustainable although the risk of distress has moved from low to moderate in the latest assessment. This debt threshold number should always be contextualized because regardless of the threshold one uses growth and financing costs are the most important element determining sustainability.

Question: as per the IMF country profile, Uganda achieved high economic growth from the 1990s up to around 2010. Then, growth became sluggish. Where is Uganda right now in terms of economic growth. When is Uganda likely to achieve lower middle income status?

Response: it is correct that from the decade of the 1990s to 2010, Uganda achieved high income growth and this led to drastic poverty reduction. But population continued to grow very fast. To keep per capita GDP growing, population has to be chiefly educated. We think that keeping children in school contributes to family planning, but also provides children with skills that will be helpful for them when seeking jobs. We have seen real growth rates of about 6 to 7% in the past years, then 3% last year, we are thinking that maybe it could be 4% in the coming year. 

If we assume Uganda continues to grow at 6% going forward in the medium term as before covid before and with stable inflation and exchange rate, we think that lower middle income status would be achieved sometimes by 2033 or 2034. Lower middle income status threshold is about $1,000 per capita.  For this projection, we use some realistic assumptions on population growth. Typically we use the United Nations medium variat to make projections. That (lower middle income) status is achievable in about 10 to 12 years from now. 

Question: This does seem like a very, very long time. Can’t government put in place policies or mechanisms that could help it achieve lower middle income status quicker because it’s a target that the government has been promising people for a long time?

Response: for per capita GDP to grow fast, you have two elements, you have the GDP and you have a population growth. And this is why the core elements of the IMF supported program are the higher budgetary allocation on education and health that will address the human capital element. We think it will improve education and prepare the 600,000 entrants into the labor market every year to be better skilled.

Question: there have been much concern in regard to accountability. Many, many people think that money you lend to the government is being stolen with impunity. What mechanism are you putting in place to ensure this loan is not misused.

Response: I think your question also reflects the concern over the use of financing by international financial institutions that was disbursed in the course of last year. Let me first emphasize, as part of the program, we have introduced a set of what we call prior actions and these actions are meant to ensure that the commitment that the country undertook for the disbursement of the first phase are met. 

When we provided the emergency financial assistance last year, we requested that the government spend it on Covid-19, give a report on expenditures and audit expenditure. The government has met all these requirements already. It has published summaries of procurement contracts for Covid-1919 programs. All these documents are available on the Ministry of Finance website for viewing. Government has also implemented an independent audit of Covid-19 spending for the first three quarters of this fiscal year (the year which ended last month). We have received a report but it is not published yet because it has to be discussed by the parliament.

Going forward the government has adopted a template to be used for procurement contracts for Covid-19 that will detail the beneficiaries of those contracts on public procurement and disposal of public assets portal.

When contracts are awarded, you will be able to see who are the companies and beneficiaries who have won those contracts.  But there will be other conditions developed in the course of the program because it will be reviewed after every 6 months. Additional conditions may come after every six months. Many of these conditions could come from the findings of the auditor general. 

Question: Why do you trust Uganda auditor general, can’t you do an independent audit? Isn’t there collusion between corrupt government officials and the auditor general’s office?

Response: We do trust the auditor general. We have an assessment of auditor institutions across many countries and the one in Uganda scores very, very high. If we had any doubt, we would have requested an international audit of these accounts. But this is not the case for Uganda because audit reports are very comprehensive  and very transparent.

Question: Last year, you disbursed 491 million dollars. As a person who sits in Bank of Uganda and has access to information about how money flows, could you explain where this money went and can you say in no uncertain terms that it was put to good use?

Response: It’s a little bit difficult to talk about where each shilling goes because we provide financing for the budget. Actually two thirds of money disbursed last year went to the Bank of Uganda reserves and that money is still in reserve. It’s not fair to say this dollar went to one bucket and the other went to another bucket because once you disburse money, it could be used anywhere. So, really, the concern is not what happened with the money, but in general how the government is using all the resources. The government has to be accountable, not only to the IMF, but also to its own citizens. 

Question: You talked about last year’s money going to the Bank of Uganda. There have been questions about its independence. For instance, you put money in the reserve, government takes it and refuses to pay back. Isn’t that a big problem? What do you say?

Response:  Government can legally borrow from Bank of Uganda at any point during the year about 10% of the currency  reserve to finance the budget and this money has to be paid by the end of the year. What we would like to achieve during the program is that borrowing does not surpass this limit and that there are always sufficient funds in government accounts to pay it. That is one of the conditions under the program that government cannot borrow from the Central Bank more than what is legally allowed. And that certainly reinforces the independence of the Central Bank.

Question: How do you think ordinary Ugandans can keep watch of this money?

Response: Well, I think every person is extraordinary. They should Insist on accountability at every step of the budget process, from the preparation of the budget to execution and implementation. The best way to do that is to engage with civil society organizations. Uganda has a very rich spectrum of civil society organizations. It is much easier to be heard when the group is large and organized. We have been striving to meet and cooperate with civil society organizations over the past year. I have met with a group virtually and with some of them individually and we have brainstormed on how to move this relationship forward in the future to workshops and conferences. We also have a dedicated WhatsApp group through which we keep each other informed. I would really call up to join these organizations.

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