- The IMF has issued Uganda $120 million as part of its Extended Credit Facility (ECF) Arrangement to aid recovery.
- Total disbursement to Uganda under the ECF Arrangement now reaches $870 million.
- IMF urges Uganda to give its Central Bank independence
Kampala is set to receive $120 million as part of its Extended Credit Facility (ECF) Arrangement with the International Monetary Fund (IMF) to aid Uganda’s economic recovery amidst various challenges, including backlash due to a harsh anti-LGBTQ law.
The IMF executive board has approved immediate disbursement of the said amount after the conclusion of its fifth review of Uganda’s ECF Arrangement. “This brings the aggregate disbursement under the ECF Arrangement to about $870 million,” the IMF note says in part.
Uganda qualified for about $1 billion under the ECF Arrangement as of June 2021, which is now distributed in part every other year.
IMF loan to aid Uganda’s economic recovery post Covid-19
According to the IMF, the lump sum is meant to help support Uganda’s economic recovery in the near-term response to the COVID-19 pandemic and boost more inclusive private sector-led long-term growth in Uganda.
“Reforms have focused on creating fiscal space for priority social spending, preserving debt sustainability, strengthening governance, and reducing corruption, and enhancing the monetary and financial sector frameworks,” the IMF explains.
According to the IMF report, Uganda’s economic recovery is increasing yearly, and it is projected to maintain this upward trajectory for the foreseeable future. According to the report, Uganda’s GDP is projected to grow at 6 per cent in FY 23/24, and then it is expected to move up to 7 per cent in FY 24/25 and so forth in the coming years.
“The inflation outlook has improved, with core inflation expected to remain subdued at 2.8 per cent in FY 23/24 and rising to the Bank of Uganda’s target of 5 per cent in the medium-term,” the report details.
It is with these good performance that the IMF has approved this fifth round of ECF funding to accelerate Uganda’s economic recovery. The IMF remains confident that despite the massive amount of loans, “…risks to the outlook remain on the downside.”
It is not giving Uganda the loans that could endanger the country’s performance, the IMF says, adding: “A further tightening of external financial conditions could constrain the availability of syndicated loans and jeopardize fiscal financing and the ongoing recovery,” reads the IMF report in its explanation as why Uganda deserves the loan once again.
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Why Uganda deserves the loan – IMF
The IMF further explains that fiscal consolidation in the country is necessary since it helps reduce risks to financing and debt sustainability and also helps maintain budgetary space for social and development expenditures.
The Bretton Woods institution cites the passing of the Anti-Homosexuality Bill, 2023 (AHA), which it says could negatively impact foreign investment, loans, and grants, as well as tourism. The lender states that there is, therefore, a pressing need to cushion the country’s economy with the loan.
Additionally, the IMF cites vulnerability in Uganda’s primarily rain-fed agriculture, which the multilateral lender says is very vulnerable to weather-related shocks.
Finally, the IMF points out that risks to inflation are also on the upside due to factors such as risks of higher international fuel prices that spring from the ongoing Israel-Gaza war, and all these could conspire to slow Uganda’s economic recovery.
There is also a concern about how Uganda will fair in the face of “exchange rate depreciation pressures from portfolio outflows,” says the IMF. So the country needs financial backing to ensure the economy does not crumble in on itself.
“A data dependent monetary policy stance will guard against risks while bringing core inflation back to the central bank’s target,” underscores the IMF report.
It also urges that with such fiscal policies backed by exchange rate flexibility, Uganda will rebuild external buffers and improve competitiveness against external shocks.
Here is how the Deputy Managing Director and Acting Chair of the IMF Executive Board Bo Li, sees the move: Uganda’s economic recovery is becoming more broad-based, “supported by falling inflation and oil industry investments.”
He adds, “The ECF arrangement continues to support fiscal consolidation to keep the public debt ratio on a downward path, ensure sustainable social and development expenditure, and implement structural reforms to improve governance and facilitate private-sector-led growth.”
According to the Acting Chair of the IMF Executive Board, Uganda’s economic outlook is optimistic but he admits that it “remains subject to downside risks including from lower external financing and tourism following passage of the Anti-Homosexuality Act.”
“The authorities’ commitment to strong policies and structural reforms will help ensure robust, sustainable, and inclusive growth going forward,” he advises.
The IMF advises Uganda to continue its commitment to fiscal consolidation as the key to reducing financing risks and safeguarding its debt sustainability.
“Implementing the Domestic Revenue Mobilization Strategy will help secure consolidation gains and lower reliance on costly domestic and external financing,” the IMF says.
Uganda is also advised to improve its structure of expenditures to help maintain social services and what the IMF describes as “…space for growth-enhancing capital expenditures.”
“ Addressing deficiencies in public financial management will improve budgeting and expenditure control,” the Acting Chair concluded in his advice to the Bank of Uganda, the recipient and custodian of the loans.
However, the IMF is also wagging a cautious finger at the Bank of Uganda, which, on the one hand, it commends for being proactive in addressing inflation, but on the other hand, it warns the Bank that risks remain.
“Monetary policy should remain data dependent, loosening only as inflation risks recede, to bring core inflation back to the central bank target,” warns the IMF.
In its advice to the Bank of Uganda, which is the country’s Central Bank, the IMF urges Uganda to pursue fiscal consolidation and maintaining a flexible exchange rate to help rebuild international reserves to safer levels.
“Limiting intervention in the foreign exchange market to situations of excess volatility will also help the economy adjust to external pressures and maintain competitiveness,” reads the report.
Uganda is advised to observe structural reforms to achieve its National Development Plan III. The country is urged to prioritize improving governance, reducing corruption, and strengthening financial stability and access. It is also encouraged to enhance the Bank of Uganda’s independence and improve spending efficiency.
