Did IMF’s $1B Loan Foster Uganda’s Macroeconomic Stability?

by Business Times writer
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Government of Uganda is implementing a three-year economic program supported by the Extended Credit Facility (ECF) of the International Monetary Fund (IMF). The program was approved by the IMF Executive Board on June 28, 2021 and will run until June 2024.

The program aims to consolidate the recovery from COVID-19 and other recent shocks, support economic recovery, ensure public debt remains sustainable, support Uganda’s external position (Balance of Payment), increase domestic revenue mobilization, and ncrease efficiency in public expenditure.

The 36-month ECF arrangement for Uganda amounts to a total of USD 1 billion.

At the time of the loan’s approval in 2021, the IMF assessed and highlighted severe impact of COVID-19 on Uganda’s economy.

It said that decade-long gains in poverty reduction were reversed, fiscal balances had deteriorated, and pressures on external buffers had intensified.

Last week, the International Monetary Fund disbursed a USD 120 million loan to Uganda under the Fund’s Extended Credit Facility program.

“The Executive Board of the International Monetary Fund (IMF) concluded the fifth review of Uganda’s Extended Credit Facility (ECF) Arrangement. The completion of the fifth review enables the immediate disbursement of SDR 90.25 million (about US$120 million). This brings the aggregate disbursement under the ECF Arrangement to SDR 631.75 million (about US$870 million),” the IMF announced.

The Extended Credit Facility is a medium-term financial assistance offered by the International Monetary Fund specifically designed to help low-income countries, like Uganda, with protracted balance of payments problems to implement economic programmes that make significant progress toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth.

Did the IMF’s ECF Program Enable Uganda’s Economy Recover

According to IMF, Uganda’s economic recovery is gaining pace, with growth projected at 6 percent in financial year 2023/24, and rising to 7 percent in financial year 2024/25 and the medium-term.

“The inflation outlook has improved, with core inflation expected to remain subdued at 2.8 percent in FY 23/24 and rising to the Bank of Uganda’s target of 5 percent in the medium-term.”

The IMF’s Deputy Managing Director, and Acting Chair, Bo Li said, “Uganda’s recovery is becoming more broad-based, supported by falling inflation and oil industry investments. The ECF arrangement continues to support fiscal consolidation to keep the public debt ratio on a downward path, ensure sustainable social and development expenditure, and implement structural reforms to improve governance and facilitate private-sector-led growth.”

He added: “The economic outlook is positive but remains subject to downside risks including from lower external financing and tourism following passage of the Anti-Homosexuality Act. The authorities’ commitment to strong policies and structural reforms will help ensure robust, sustainable, and inclusive growth going forward.”

According to Finance Ministry Permanent Secretary and Secretary to Treasury (PSST) Ramathan Ggoobi, the rate of Uganda’s economic growth has been improving, from 3.0% in FY2019/20, to 3.5% and 4.6% in the two subsequent financial years.

“In FY2022/23, the economy expanded by 5.2% partly supported by continued implementation of growth supportive government programs and an increase in private sector activity, as well as the reforms undertaken under the ECF backed economic program. We are on course to achieving economic growth of 6.0% for FY2023/24 propelled by increased output in the services, industry, and agriculture sectors,” he said.

Fiscal Consolidation

According to Ggoobi, “the fiscal deficit has been reduced from 9.0% of GDP in FY2020/21 to 5.5% in FY2022/23. It is projected to reduce further to 3.8% in FY2023/24.”

The PSST attributed this to Government’s commitment to its approach of a two-pronged fiscal consolidation involving increased domestic revenue mobilization coupled with expenditure rationalization.

“The financing under the ECF backed economic program has been crucial in the maintenance of fiscal sustainability,” he said.

Continued commitment to fiscal consolidation is key to reduce financing risks and safeguard debt sustainability. Implementing the Domestic Revenue Mobilization Strategy will help secure consolidation gains and lower reliance on costly domestic and external financing.

IMF said, improving the structure of expenditures will help maintain social services and space for growth-enhancing capital expenditures, adding that addressing deficiencies in public financial management will improve budgeting and expenditure control.

Although Bank of Uganda has been proactive in addressing inflation, IMF says upside risks remain.

“Monetary policy should remain data dependent, loosening only as inflation risks recede, to bring core inflation back to the central bank target.”

“Pursuing fiscal consolidation and maintaining a flexible exchange rate will help rebuild international reserves to safer levels. Limiting intervention in the foreign exchange market to situations of excess volatility will also help the economy adjust to external pressures and maintain competitiveness,” Bo Li said.

Public Debt

Despite warnings from the Auditor General and the significant increase in its public debt, Uganda still secured this loan.

As per the Auditor General’s findings in the report for the fiscal year 2022/23, the cumulative public debt by June 30, 2023, reached a substantial figure of 96.168 trillion shillings. This sum is composed of a Domestic Debt Stock of 43.696 trillion shillings, representing 45.4%, and an External Debt Stock of 52.472 trillion shillings, accounting for 54.6%.

Economic experts have repeatedly voiced concerns regarding the troubling pattern of Uganda’s escalating debt.

“As our debt stock is increasing, our domestic revenue is not meeting the targets, but in order for us to meet the obligations of paying debts, it is increasingly eating away on the money which would have been available for ordinary services like health, education, roads and others. That is a concern that we need to take note of,” the Programme and Policy Advisor for Civil Society Budget Advocacy Group (CSBAG), Jeff Wadulo said recently.

However, Ggoobi says Uganda’s public debt remains sustainable.

Within the span of one year (2023), Uganda’s debt surged by 9.329 trillion shillings, marking a 10.74% increase from the previous year’s debt of 86.839 trillion as of June 30, 2022. This rise is attributed to a notable expansion in government expenditure that has outpaced the collection of domestic revenue.

This indicates that Uganda’s public debt is increasing at a pace significantly exceeding the growth rate of its GDP, which expanded from 132.09 trillion shillings in the fiscal year 2018/19 to 184.895 trillion shillings in the fiscal year 2022/23.

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