We shall withdraw Shs3.5 trillion loan to cover Covid-19 deficit - BoU

The monetary policy statement for June indicated that the economies of some developed countries are actually growing or set to grow faster. What does that imply for Uganda as an economy which has slowed down a little bit because of the Covid-19 pandemic?

It is a double edged sword. First, advanced economies are growing beyond their potential and on the other side we are seeing most of the developing countries or emerging economies growing at a much slower pace.  One of the positives to draw from this is that as the big economies continue to grow so will the Foreign Direct Investment (FDI). Most of our FDIs come from rich countries and that means if they are recovering, then we can expect some of investments to trickle down here in the form of FDI.

For Uganda, you must remember that in 2020 and part of 2021 the FDI declined from about $1.2 billion to around $800 million in 2020. This year, the story so far hasn’t changed. The recovery will also see a boost in exports such as flowers, fish and coffee, let alone growth in the number of tourists. But this could be subdued by the second and third wave that is sweeping most economies, including ours.

On the other side, the recovery also has some negatives to it and we cannot ignore it because of its implication on our economy. Once advanced economies start recovering as is the case now, then it also comes with rising inflation as we are currently observing in USA, Europe and UK.

Uganda’s qualifies for the IMF Special Drawing Rights to a tune of about $1 billion (about 3.5 trillion). What is SDR and how does it work?

Every member of IMF has a quarter. So if Uganda’s economy is negligible in the global context then her quarter will equally be small.

The quarter is derived from the level of export trade you contribute in the global economy. So the quarter is assigned to you based on the size of your economy. With the allocated quarter, you have the ability to vote in the IMF decisions and allowed to borrow based on your quarter.

For example what we got, the $722 million is basically 200 per cent of our quarter. That is like if you have a SACCO that you contribute to, as a member it gives you the right to ask the members to allow you draw or borrow some of your funds that you have been saving.

So if our quarter was higher, it means we would borrow more. So it is about getting the 200 per cent of our quarter. That’s what we did, Uganda requested for that because in IMF governance structure, that was allowed under the Rapid Financing Mechanism. Basically, that’s how the $722 SDR was given to us which is equivalent of about $1 billion.

Recently, the Central Bank mentioned that we don’t have fiscal space because of the debts we have incurred. What sort of stimulus can government provide now?

For you to qualify for the 200 per cent SDR as it is the case, we (Uganda) agreed to a particular parameters. One of them was that debt to GDP should not exceed 50 per cent. This means government has a limit to how much it can borrow and spend given that we have already agreed to borrow $1 billion from IMF and we have also committed to make sure that debt to GDP should not exceed 50 per cent.

Already in this year, it will be at 50 per cent or slightly more. So ideally what that means is that going forward we should not exceed this percentage. And if we exceed, we must go back to IMF board and explain some of the emergencies that brought about that.

What does that mean for our fiscal space?

Fiscal space means that even though you have hit your 50 per cent limit to GDP and then you are confronted by emergency such as Covid-19 you have to respond.  It means the government has to go through its budget, and see what it can substitute to offer assistance.

With the lockdown, we have further constrains to the fiscal space. The 42 day lockdown will slow down some economic activities, affecting tax revenues.  This means the fiscal space has now become much smaller so in that case, many people are vulnerable. You have to have government intervention in providing food and medicine among others.

Remember Shs100,000 is being planned to be given to households that are more affected. Basically that’s what we mean by fiscal space. So given the constraint that we are seeing given that we have already reached 50 per cent of the GDP, how do you play around within the budget and switch expenditures so that you don’t violate the 50 per cent mark. So, basically that’s the fiscal space we are talking about.

So is there room for assisting households?

Most households are affected and the government wants to spend more on particular aspects like importing vaccines rather than say cancelling transmission lines from Isimba or Karuma that we were borrowing money to complete. You don’t want to tamper with that. So in that case, if the government is really constrained you can say no, let me borrow the money, irrespective of the debt to fiscal of 50 per cent threshold, given the hardship of the households and then explain to the rest of the world later.

In the last budget, we never had the household assistance line and so if you are going to spend about Shs50 billion or slightly more, it must come from somewhere. If the tax revenue is affected with the lockdown even if it is for one month, there must be some effect on tax collection and some economic activities that probably may not be able to recover very fast. So tax revenue could also be affected. To bridge the gap, you have to cut the expenditure in the budget and if you are unable, then that means you have to borrow some more money.

Alternatively, you can get more budget support from donors. You may also approach the World Bank to help you come to the rescue of your households that are really affected by this. This can be in terms of finance, but provided we show to them that actually we are credible enough in terms of our programmes, reform agenda and policy commitments.

Even with IMF, the 200 per cent is not the maximum. If we go to the board we can actually convince them to draw up to 300 per cent. So the question is whether our policy commitments and reforms are credible enough to convince the rest of the world that we can support our vulnerable groups without necessarily affecting the rest of the budget.