How Uganda will spend IMF’s Shs1.8 trillion loan

Friday May 8 2020

Closed shops in Kampala. Several businesse

Closed shops in Kampala. Several businesses are currently closed to contain the spread of Covid-19. PHOTO BY RACHEL MABALA 

By MARTIN LUTHER OKETCH

Kampala- The $491.5 million (Shs1.8 trillion) loan that the International Monetary Fund approved for Uganda will be used for budget support/capitalising the Uganda Development Bank (UDB) and stabilizing Uganda’s exchange rate.

The executive director of research Bank of Uganda who is currently acting as Deputy Governor, Dr Adam Mugume in an interview with Daily Monitor yesterday said Uganda has a financing gap of $500 million (Shs1.9 trillion) for this fiscal year 2019/20 and another $800 million (Shs3 trillion) for the fiscal year 2020/21, that needs to be filled and so is the IMF $491.5 million loan.

Break down
Dr Mugume said $151 million (Shs573.8b) will go towards budget support, while $340 million (Shs1.3 trillion) will enable Bank of Uganda to stabilise the exchange rate.

“The $151 million will cater for health sector needs and the capitalisation of Uganda Development Bank to provide the long term and cheap loans for each manufacture importing Covid-19 related items and to commercial banks that would wish to borrow from UDB to provide cheap loans to the private sector involved in manufacturing agricultural activities,” he said.

The $340 million (Shs1.3 trillion) for Bank of Uganda will support the stability of the exchange rate and ensure that international reserve buffers remain strong.

“We used to buy the US dollars from the market to build our reserves, but now there are no imports and exports. That is why we needed the IMF loan,” he explained.

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The IMF loan on a concessional basis does not attract interest rate. The beauty about this IMF loan is it is cheap and for a specific need which is the Covid-19, and it is going to be paid for a long period of time with zero interest rate,” he added.
On whether the new loan would not worsen Uganda’s debt levels, Dr Mugume ruled out that it is a time of crisis and the government can not stop borrowing when you have no medicines and economic activities have to continue.

“This is not the time for the government to stop borrowing. Economic activities have to continue, we need to borrow to provide financing for economic sectors like agriculture because agriculture is the backbone of Uganda’s economy,” he said.

Widening fiscal debt
In a related development, the managing director of Alpha Capital, Mr Stephen Kaboyo told Daily Monitor: “This disbursement is timely and will go a long way in addressing the urgent economic needs of the country, in particular, the widening fiscal deficit and balance of payment challenges arising out of Covid-19 crisis.”

“The amount may not be sufficient given the significant risks we face, but it will provide the well-needed cushion. It definitely assists in restoring and sustaining confidence going forward,” Mr Kaboyo said.

Mr Kaboyo said IMF’s support, creates a platform for generating additional support from other multi- laterals.
On May 6, the executive board of the IMF in Washington DC approved the $491.5 million under its Rapid Credit Facility (RCF) saying the Ugandan economy is being severely hit by the Covid-19 pandemic and, in particular, such key sectors as services (tourism), transport, construction, manufacturing and agriculture.

The IMF is providing emergency financial assistance and debt relief to member countries facing the economic impact of the Covid-19 pandemic.

The challenging external environment is curtailing remittances and foreign direct investments adding that the pandemic has also exacerbated the challenges posed by heavy rains in early 2020 and the ongoing locust invasion.

Speaking shortly after the executive board decision, Mr Tao Zhang, Deputy managing director and Acting Chair of IMF, said the global Covid-19 pandemic is expected to severely hit the Ugandan economy through several channels, with detrimental effects on economic activity and social indicators.

Cushioning economy from Covid-19
Uganda, like many other low-income countries, is facing a tight fiscal policy space to manage the impact of COVID-19 in the economy and execute other public expenditure using the domestic revenue from the treasury.

Permanent Secretary /Secretary to the Treasury, Mr Keith Muhakanizi said COVID-19 has already had a negative impact in Uganda in terms of very low economic growth because there are no economic activities going on in the country right now because of the lockdown in place.

“We have a fiscal space problem in the country, the revenue being collected right now is very low leading to revenue shortfalls. The global economy is in recession, which also has a direct impact on our economy,” Mr Muhakanizi said.

So the limited fiscal space necessitated government to request for loans from the World Bank and the IMF.

Economist’s view
A development economist who is also a lecturer at Makerere University School of economics, Dr Fred Muhumuza told Daily Monitor that the IMF loan is necessary given the kind of the situation the country is in at the moment.

“Since we expect a reduction in inflows from tourism of $1 billion, and $1 billion from remittances, we need this kind of loan because it is concessional with zero interest rate. When the economy opens up there will be financing needs and that would ease a lot of pressure on the Balance of Payments,” he said.

On whether the loan would worsen Uganda’s debt, Dr Muhumuza said: “Much as it may, the period for repaying is short because it has a five-year grace period and maturity of 10 years to be paid that would exert pressure on the government because we will need about Shs120 billion every year after the grace period has ended to complete payments within the specified date.”

How the money will be used
On May 6, the executive board of the IMF in Washington DC approved the $491.5 million under its Rapid Credit Facility (RCF) saying the Ugandan economy is being severely hit by the Covid-19 pandemic and, in particular, such key sectors as services (tourism), transport, construction, manufacturing and agriculture.

The RCF provides rapid and low-access financial assistance to member countries facing an urgent balance of payments need, without the need to have a full-fledged programme in place.

It can provide support to meet a broad range of urgent needs, including those arising from commodity price shocks, natural disasters, conflict and post-conflict situations, and emergencies resulting from fragility.

moketch@ug.nationmedia.com

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