Uganda’s economic growth is accelerating – IMF

The International Monetary Fund (IMF) staff appraisal has affirmed that Uganda’s economic growth is accelerating, supported by the rapid decline in inflation and the construction of a new oil pipeline which is supporting investment and demand for services. 

In their report after completing the fifth review under the extended credit facility arrangement and request for modification of performance criteria, the IMF staff in their appraisal said broad-based economic recovery continues.

The IMF staff appraisal was under the watch of the IMF Deputy Managing Director, and Acting Chair M. Bo Li, in Washington, DC, last month.

Due to the negative impact of Covid-19, the size of the Ugandan economy slowly moral from Shs139.6 trillion in FY2019/20 to Shs147.9 trillion in FY2020/21, registering a real GDP growth rate of 3.4 percent. Meanwhile ,Uganda’s real GDP growth rate rose from 4.6 percent in FY 2021/2022 to 5.2 percent in FY 2022/2023.

However, the IMF staff appraisal revealed in their report that Uganda’s economic recovery is gaining pace, with growth projected at 6 percent in FY 23/24, and rising to 7 percent in FY 24/25 and the medium-term.

“A rebound in gold exports and tourism has also supported economic activity and narrowed the current account deficit. Inflation has fallen to below the central bank’s target, thanks to prompt policy action, and is expected to converge to the target in the medium term. Private sector credit growth remains sluggish, but the banking system is sound and there are good prospects of expanding credit growth as the economic recovery consolidates,” the IMF staff said in the report about Uganda’s economy.

Interest rates

However, on the other hand, the IMF staff appraisal indicates that high international interest rates and the growing reliance on external financing are leading to a rise in debt servicing costs. Adding that the large share of agriculture in the economy makes it vulnerable to climate shocks, which are becoming more frequent.

“A continued commitment to fiscal consolidation is particularly important to reduce risks and safeguard sustainability. Enhancing revenue by redoubling efforts to implement the DRMS will provide the authorities with space to maintain critical expenditures and rely less on costly domestic and external financing. Staff welcomes the identification of contingency measures that could be implemented if necessary to reach the FY23/24 fiscal deficit target,” the staff says, adding: “In the context of consolidation, improving the composition of spending is key to maintaining social services and support for the most vulnerable and providing space for growth-enhancing capital expenditures. Enhancing revenue and controlling expenditure will also allow the authorities to reduce their reliance on central bank financing, and to abide by the legal limits set under the Public Finance Act (PFM Act).”

 The IFM staff says addressing deficiencies in public financial management will support fiscal sustainability and strengthen governance. Challenges in these areas have resulted in the repeated need to issue supplementary budgets which add to expenditure uncertainty.

Technical assistance

In this regard, the IMF staff said the authorities (in Uganda) have received technical assistance, and the staff welcomes ongoing efforts to improve budgeting, expenditure control, and cash management which are needed for the foundation of public and external accountability for prudent use of resources.

About the Bank of Uganda policy stance, the IMF staff said monetary policy should remain vigilant and data-dependent. The staff appraisal states that the authorities need to rebuild external buffers and pointed out that fiscal consolidation and exchange rate flexibility are expected to help alleviate pressures on foreign exchange reserves and facilitate the BoU’s target to reach an FX coverage of 4 months of imports, excluding oil-related imports.

Competitiveness

The IMF staff also stressed that at the same time, limiting intervention in the exchange rate market to situations where there is excess volatility will allow the exchange rate to adjust to external pressures and improve competitiveness. Uganda’s capacity to repay the Fund remains adequate.

“Financial sector policies should continue to address remaining risks and improve financial inclusion. Uganda’s financial system is well capitalized and liquid, but there remain pockets of vulnerability. Staff welcomes the BoU’s continued improvements in stress-testing methodology,” the IMF staff said.

The IMF staff added: “For AML/CFT, strengthening the BoU’s supervisory capacity, including the application of a consistent sanctioning regime, and finalizing Uganda’s exit from the FATF grey list, are priorities. Efforts should continue to extend the significant gains made in improving financial inclusion under the second National Financial Inclusion Strategy.”

In their appraisal, the staff explained that structural reforms will remain focused on reducing corruption and improving governance. They pointed out that staff welcomes implementation of the National Anti-Corruption Strategy, and efforts to improve corporate governance, enhance beneficial ownership transparency, and implement cybersecurity guidelines.

The IMF staff in their appraisal further explained that greater clarity on the definition of BoU advances to the government in the PFM Act will help reduce risks of fiscal dominance, improve governance, and enhance transparency. It will be important for the authorities to address the remaining shortcomings in the BoU Act identified in the Safeguards Assessment to enhance the independence and transparency of the Bank of Uganda.

The Permanent Secretary/Secretary to the Treasury, Mr Ramathan Goobi, said throughout the IMF Extended Credit Facility (EFC) program, there has been maintenance of macroeconomic stability.

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