The International Monetary Fund (IMF) recently disbursed $ 258 million (Shs917.548 billion) as part of the $ 1 billion loan to boost economic recovery after an increase in Covid-19 cases. In an interview with Prosper Magazine Martin Luther Oketch, IMF Resident Representative Karpowicz Izabela explains the conditions attached to the $ 1 billion extended credit facility.
What conditions has the IMF placed on its $ 1 billion Extended Credit Facility for Uganda’s Economic Recovery from Covid-19?
The government has already implemented the actions required to release the first disbursement. These include the commitments resulting from the disbursement of the FCR loan last May:
The independent audit of Covid-19 expenditure for fiscal year 19/20 is published on the website of the Ministry of Finance, and an audit of Covid-19 expenditure up to the third quarter of fiscal year 20/21 has been finalized and will be discussed in Parliament.
Aggregate procurement reports were also published on the website of the Ministry of Finance.
The government has also adopted a template to be used for new Covid-19 supply contracts that will detail the beneficiaries of these contracts, which will also be published on the Public Procurement and Disposition of Public Assets portal.
How much does Uganda have in IMF Special Drawing Rights?
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 reserves needs. The proposal will be presented to the Board of Governors for consideration by mid-August 2021. If approved, the allocation could come into effect by the end of August.
By increasing the level of reserves, the allocation of SDRs reduces a member’s balance of payments requirement. However, increasing SDR holdings and international reserves from the general allocation would generally not reduce the need for macroeconomic adjustments or reforms in member countries. It improves the liquidity position of countries, but it does not affect the underlying macroeconomic and balance of payments situation of the member.
For Uganda, under the Extended Credit Facility (ECF), the proposed SDR allocation (the amount of which is not yet known) would be used primarily to increase reserve coverage towards the target of the CAE of 4.5 months of imports of goods and services earlier than expected. However, if the expected budget funding does not materialize or if the funding costs become higher, it would be possible to use the SDR allocation for budget support as long as the budget remains aligned with the overall objectives.
What strategies has the government proposed for resuming the country’s economic growth under the newly approved IMF financing?
The government has drawn up a credible structural adjustment program which is enshrined in the National Development Plan III. The program is supported by the IMF loan under the Extended Credit Facility (ECF). The ECF provides financial assistance to countries facing protracted balance of payments difficulties, which means that their underlying macroeconomic imbalances should be resolved in the medium to long term. It therefore supports economic programs aimed at restoring macroeconomic stability and reducing poverty through strong growth.
The Ugandan ECF has a zero interest rate, a grace period of 5.5 years and a final maturity of 10 years. The duration of the Ugandan ECF-supported program is three years for a loan of approximately $ 1 billion, disbursed in semi-annual installments. Disbursements are subject to reviews, 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 program is to support a recovery from the health pandemic, while generating strong and inclusive growth led by the private sector. The budget deficit and debt will be reduced over time through increased government revenue. At the same time, greater efficiency will ensure increased spending on social programs, including health, education and social assistance.
Other objectives are to promote greater transparency in public accounts, a stronger anti-corruption framework and better resilience of the financial sector.
As the second wave of Covid-19 ravages the country, how can the government bring down the infection rates that have increased over the past two months?
Containment is currently in place. Given the temporary nature of the shock, the priority would be to support lives and livelihoods by ensuring vaccines, oxygen for hospitals and helping vulnerable households and businesses, all subject to availability. funding. The FY2021 / 22 budget includes funding for Covid-19 vaccines and resources dedicated to social protection, education and health.
We have advised in the past on options and best practices. Social spending will be monitored through indicative targets on social assistance programs, which should also increase the number of beneficiaries. We are also focusing on improving the targeting mechanism, including through a national registry that will be established during the next fiscal year to ensure the identification of vulnerable households.
Uganda’s public debt has grown so rapidly over the past two years, from low distress to medium risk. What is the IMF’s point of view?
Public debt rose from 41.1% of GDP in 2019 to 49.6% in 2020 and will exceed 50% by the end of 2021. The risk of debt distress according to our latest published debt sustainability analysis has gone 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 depends not only on the outstanding debt, but also on the cost of borrowing, the savings a country can achieve and the ability to deleverage by investing in money productively.
The FEC’s budgetary strategy aims to reduce the budget deficit, the main contributor to the debt in recent years. This will be achieved by mobilizing national revenues (including from a broader tax base) and by redefining spending priorities. It is important to note that this strategy also creates space for higher social spending that will not be sacrificed. This should put debt on a downward trajectory towards the authorities’ target of 50 percent of GDP.
How long should Bank of Uganda maintain accommodative monetary policy?
The Bank of Uganda (BoU) cut the key rate at its June Monetary Policy Committee meeting by 50 basis points to 6.5%. This is the lowest historical rate. The BoU can and must maintain an accommodative policy as long as growth is below potential and inflation is low. Core inflation was 3.1% yoy in May, close to the low end of the BoU’s inflation target. There are also downside risks to inflation given the recently introduced foreclosure, so the position is appropriate for now.