IMF: Implement key policies to exceed 6 percent growth 

Still emerging from the Covid-19 pandemic, countries have been hit by a sluggish global economy, worldwide inflation, high borrowing costs, and a cost-of-living crisis. But Uganda is among the countries that registered higher growth and is expected to perform better in 2024. In an interview with Prosper magazine’s Martin Luther Oketch, the International Monetary Fund resident representative Ms Karpowicz Izabela gives the rejoinder of 2023 and expectation for 2024.  

What was 2023 like for Uganda from a regional perspective?
Despite external shocks, Uganda’s growth performance in 2023 was strong amid a difficult year for sub-Saharan Africa, in which regional growth declined for a second year in a row. 

Specifically, Uganda’s economic activity was robust in industry and services and was supported by a pickup in domestic demand due to declining inflation. Real Gross Domestic Product grew by 5.2 percent in FY22/23, up from 4.6 percent in FY21/22. 

High frequency indicators also point to continued steady growth in recent months. Declining inflation in the region is good news for consumption but also poverty as recently, food inflation started slowing, including in Uganda, on account of tight monetary policy, elimination of supply chain constraints, and relative exchange rate stability. 

The external sector has witnessed a rebound in gold exports in Uganda and tourism, and Foreign Direct Investment was strong, mostly reflecting oil-related investment.

On the fiscal front, macroeconomic imbalances are declining in the region because fiscal adjustment is ongoing in many countries. The median fiscal deficit ratio is expected to have improved by 1 percentage point in 2023.

 And along with a growth pick up, this has helped stabilise public debt at around 60 percent. Uganda also continued to consolidate its finances in FY22/23 (the fiscal deficit was 5.5 percent of GDP) though the fiscal effort could have been higher. 

What do you expect in 2024?
As noted in our October 2023 regional economic outlook, there are early signs that the region is turning the corner. Growth in sub-Saharan Africa is set to rebound to 4.0 percent in 2024 and about four-fifth of countries in the region are projected to record higher growth in 2024 relative to 2023. 
High-frequency indicators of several large economies already suggest a recent pickup in economic activity. In Uganda, growth could reach 6 percent in FY23/24 and surpass it over the medium term, thanks to investment in oil-related infrastructure, the energy sector and transport. Stronger external demand could lift the prospects up, but reform implementation will be key for reaching above 6 percent growth.

What are your concerns for the near term?
Risks to the outlook are to the downside for the region and Uganda. There is uncertainty around the duration and impact of the war in Ukraine and the conflict in Gaza and Israel. Weather conditions could turn unfavourable, global growth could be lower and capital inflows less. 
Most importantly perhaps, tight global financial conditions could weigh on the recovery and debt prospects in the near term in SSA and also in Uganda.  Of particular concern for financing deficits are: the recent funding squeeze, which has aggravated a longer-term trend of declining official flows to the region, China’s reduced financing of SSA and still elevated sovereign spreads for many countries. 
Limited portfolio inflows and elevated government debt service in many countries, including Uganda, continue to put pressure on forex reserves accumulation amid the strong US dollar and high dependency on imports.

What are the reform priorities for the imminent and medium term?
Reform priorities for the region include tackling still high fiscal deficits, addressing inflation where it remains elevated, and pressing on with reforms to strengthen fundamentals for a durable and inclusive growth. The latter include for the most part economic diversification, trade integration, climate change adaptation, and job creation. Let me elaborate on a few:

The ratio of interest payments of debt to revenues is generally much higher in the SSA region than that in the rest of the world. The median ratio has more than doubled since the start of the last decade. Moreover, half of the low-income countries in the region are either in debt distress or at high risk. Therefore, fiscal consolidation remains a priority and given large development needs it should be driven by the generation of domestic revenues. There is much scope for this also in Uganda, where tax expenditures are pervasive and contribute to a substantial revenue loss.

 With a low revenue base, the tax-to-GDP ratio has stagnated a few percentage points below the region’s average despite higher statutory rates. More generally, delivering on the implementation of the domestic revenue mobilisation Strategy should be the key component of fiscal consolidation. Social spending (education and health) must be protected and increased in SSA, and in Uganda, to cater for the growing population. 
 Another reason why fiscal consolidation should be ambitious is that with still high fiscal deficits, credit to the private sector is anaemic as banks prefer to lend to the government amid high private delinquencies and few bankable projects. This stifles growth. 

In Uganda, private sector credit grew by 7.2 percent in October 2023 year-on-year, below the average of 12 percent in the two years prior to the pandemic, despite high liquidity in the banking sector.

Closely related to this is the other side of the agenda to bolster financial inclusion that could spur private sector activity and employment. There are several areas where reforms are ongoing in Uganda which include: increasing uptake of formal credit among women, MSMEs, and small-scale farmers, by computerising the land registry and extending the coverage of the immovable property registry. This should facilitate borrowing by SMEs.

Modernising the financial infrastructure and operationalising the Central data hub to which the Credit Registration Bureau will submit the credit information is also paramount. Promoting digital finance could be achieved by spurring digital transformation of government-to-person payments, for instance.

The potential of trade reforms to strengthen economic growth in the region is often overlooked. There are still substantial tariff and nontariff barriers, but in recent years, there has been a renewed push for regional integration through the African Continental Free Trade Area (AfCFTA). The AfCFTA carries out economic benefits and the possibility that supporting policies help SSA cope with global and domestic trends and shocks.

We have estimated that comprehensive reforms combined with the AfCFTA implementation could increase the median merchandise trade flow between African countries by 53 percent and with the rest of the world by 15 percent, and as a result raise the real per capita GDP of the median African country by more than 10 percent. Trade reforms could help reduce extreme poverty by an additional 30–50 million people across the continent.

The Finance  Ministry is ramping up capacity to quantify fiscal risks from climate change and is operationalising a climate-sensitive approach to public investment planning and implementation.

Climate funding remains far short of climate needs for the region. Today,  climate finance flows received by SSA are on the order of $20 billion a year, compared to adaptation costs of $50b a year.