International Monetary Fund (IMF) recently dished out $258 million (Shs917.548 billion) as part of the $1 billion loan to boost economic recovery following a rise in Covid-19 cases. In an interview with Prosper Magazine’s Martin Luther Oketch, IMF resident representative Ms Karpowicz Izabela spells out the conditions attached to $1 billion Extended Credit Facility.
What conditions has IMF attached to its Extended Credit Facility worth $1 billion for Uganda’s post Covid-19 economic recovery?
The government has already met the actions that were required for the release of the first disbursement. These included the commitments from the disbursement on the RCF loan last May:
The independent audit of Covid-19 spending for FY 19/20 is published on the Ministry of Finance website, and an audit of Covid-19 spending up to the third quarter FY 20/21 was finalised and will be discussed in Parliament.
Aggregate procurement reports have also been published on the Ministry of Finance web site.
The government has also adopted a template to be used for new Covid-19 procurement contracts that will detail the beneficiaries of those contracts, which will also be published on the Public Procurement and Disposal of Public Assets portal.
How much does Uganda have in Special Drawing Rights in the IMF?
The IMF Executive Board approved the proposed allocation of Special Drawing Rights (SDRs) for member countries on June 25. The total allocation is equivalent to $650 billion, based on an assessment of long-term global reserve needs. The proposal will be presented to the Board of Governors for consideration by mid-August 2021. If approved, the allocation could become effective by the end of August.
By increasing the level of reserves, the SDR allocation reduces a member’s balance of payments need. However, the increased SDR holdings and international reserves from the general allocation would not generally reduce the need for macroeconomic adjustments or reforms in member countries. It improves the countries’ liquidity position, but it does not affect the member’s underlying macroeconomic and balance of payments condition.
For Uganda, under the Extended Credit Facility (ECF), the proposed SDR allocation (the amount of which is not known yet) would be primarily used to increase reserve cover towards the EAC target of 4.5 months of imports of goods and services earlier than anticipated. Nonetheless, if the expected budget financing fails to materialise or the financing costs become more expensive, there would be flexibility to use the SDR allocation towards budget support as long as the budget remains aligned with overall objectives.
What strategies has government has put forward regarding the recovery of the country’s economic growth under the newly approved IMF financing?
The government has put together a credible structural adjustment programme that is enshrined in the National Development Plan III. The programme is supported by the IMF’s loan under the Extended Credit Facility (ECF).The ECF provides financial assistance to countries facing protracted balance of payments difficulties—meaning their underlying macroeconomic imbalances are expected to be resolved over the medium or longer term. It therefore supports economic programmes aimed at restoring macroeconomic stability and reducing poverty through strong growth.
Uganda’s ECF carries a zero-interest rate, with a grace period of 5½ years, and a final maturity of 10 years. The duration of Uganda’s ECF-supported programme is three years for a loan of about $1 billion, disbursed in semi-annual tranches. Disbursements are subject to review, which are scheduled, at most, six months apart. These periodic reviews assess the government’s progress in implementing its economic reforms.
The central objective of the authorities’ reform programme is to support a recovery from the health pandemic, while generating strong and inclusive private sector-led growth. The budget deficit and debt will be reduced over time through higher government revenue. Meanwhile, greater efficiency will ensure increased spending on social programmes—including on health, education and social assistance.
Other objectives are fostering greater transparency in public accounts, a stronger anticorruption framework, and improved resilience of the financial sector.
As the second wave of Covid-19 ravages the country, how can the government bring down the infection rates which have surged over the last two months?
The lockdown is currently in place. Given the temporary nature of the shock, the priority would be to support lives and livelihoods by securing vaccines, oxygen for hospitals, and help vulnerable households and businesses – all subject to financing availability. The FY2021/22 budget includes financing for Covid-19 vaccines and ringfences resources for social protection, education and health.
We have advised in the past on the options and best practices. Social spending will be monitored through indicative targets on social assistance programmes, which are also expected to increase the number of beneficiaries. We are also putting emphasis on improving the targeting mechanism, including through a national registry that will be established during the coming fiscal year to ensure vulnerable households are identified.
Uganda’s public debt has risen so fast in the last two years moving from a low distress level to medium risk. What is IMF’s view?
Public debt rose from 41.1 per cent of GDP in 2019 to 49.6 per cent in 2020 and will be above 50 per cent by end-2021. The debt distress risk as per our latest published Debt Sustainability Analysis has increased from low to moderate. However, Uganda’s debt remains sustainable despite the recent increase exacerbated by the Covid-19 crisis. Debt sustainability is a forward-looking concept that does not depend on the stock of debt only but also on the cost of borrowing, the savings a country can make and the capacity to grow out of debt by investing the money productively.
The fiscal strategy under the ECF aims at reducing the fiscal deficit, the main contributor to debt in the past years. This will be achieved by mobilising domestic revenues (including from a broader tax base) and reprioritising expenditures. Importantly, this strategy also builds space for higher social spending that will not be sacrificed. This should put debt on a declining path towards the 50 per cent of GDP authorities’ target.
For how long should Bank of Uganda maintain the accommodative monetary policy?
Bank of Uganda (BoU) has lowered the policy rate in its June Monetary Policy Committee meeting by 50 bps to 6.5 per cent. This is the lowest historical rate. The BoU can and should maintain an accommodative policy stance for as long as growth is below potential, and inflation is low. Core inflation was 3.1 per cent year-on year in May, close to the lower band of the BoU’s inflation target. There are also downside risks to inflation given the recently introduced lockdown, so the stance is appropriate at this time.