Foreign exchange import cover to decline, says BoU

Expected to decrease: Uganda’s foreign exchange reserves, according to Bank of Uganda are expected to decline from 4.2 months of import cover to 3.5 months. FILE PHOTO

Bank of Uganda has said foreign reserves are expected to decline from 4.2 months import cover to 3.5 months.

In his presentation during the Stanbic Bank webcast discussion on the impact of Covid-19 last week, Dr Adam Mugume, the Bank of Uganda executive director for research, said there was need to mobilise resources to support foreign reserves that are expected to take a hit due to Covid-19. The decline, he said, will also be experienced in the case international reserves that will fall to 3.6 months import cover in the 020/21 financial year.

Therefore, he said, government should support stability of the exchange rate by ensuring that international reserve buffers remain strong as well as ensuring that balance of payment is supported by about $500m in the 2019/20 financial year and $800m in the 2020/21 financial year.

This, Dr Mugume said, means that government will in the next three years need at least $1.3b to maintain or improve the current foreign exchange reserve cover.

Foreign exchange reserves are key in protecting the country against both internal and external shocks.

For, instance, foreign exchange reserves played a key role to protect a number of countries, including Uganda against shocks during the global economic crisis of the 2008/09 financial year.

Evidence from around the world shows that countries which had adequate reserves generally avoided large drops in output and consumption, and were able to handle outflows of capital without experiencing a crisis. Uganda was among those countries, whose foreign exchange reserve were deployed to deal with the crisis that emerged as a result 2008/9 global financial crisis.

Dr Mugume also noted that as a result of Covid-19, Uganda’s current account balance was likely to worsen in the 2019/20 financial and is expected to fall by $363.1m and $1.6b in the 2020/21 financial year to $4.1b.

Covid-19, he said, was also likely to worsen Uganda’s external position, through adverse effects on the flow of international trade, tourism, remittances, foreign director investment and loan disbursements.

Debt distress

According to Dr Mugume, government, as result of Covid-19-related expenditures, was faced with a preliminary additional financing gap of approximately Shs370b for the 2019/20 financial year due to revenue shortfalls and additional expenditure needs to deal with the challenges in the health sector and the desert locust invasion.

“In addition, mitigating the impact of the Covid-19 shocks requires providing support to the most vulnerable, which suggests high fiscal deficits and higher public debt levels. This could raise odds of Uganda tipping into debt distress,” he said.