IMF approves UGX 3.5 trillion loan

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The International Monetary Fund-IMF Board has approved a 3.6 Trillion Shillings loan for three years to aid Uganda in management of covid-19.

According to the IMF, the facility is a response to the financial and economic constraints the covid- 19 pandemic had exerted on the Ugandan economy.

Last month, the IMF staff concluded their report on the planned funding and during negotiations, Uganda was tasked to commit to more transparency, and intensify anti-money laundering and terrorism financing, among other conditions.

While commitment has been secured, the IMF says the country still has a lot to do.

“Advancing governance reforms remains crucial to support transparency and private sector development. The authorities have made progress in publishing information on audits and the use of COVID-19 funds, but further work is necessary to enhance the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT framework and strengthen the accountability of high-level officials.”

The arrangement under the Extended Credit Facility (ECF) for Uganda in an amount equivalent to 722 Special Drawing Rights (SDR722 million) to support the post-COVID-19 recovery and the government’s plan to increase households’ incomes and inclusive growth by fostering private sector development.

This will see an immediate disbursement of about 917 Billion Shillings to be used for budget support.

This comes just over a year after the IMF’s emergency support to Uganda under the Rapid Credit Facility (RCF) in May 2020 which amounted to US$491.5 million (close to 1.8 trillion), which was meant to respond to the initial effects of the pandemic.

“Uganda’s economy was hit hard by the COVID-19 crisis. Decade-long gains in poverty reduction were reversed, fiscal balances have deteriorated, and pressures on external buffers have intensified,” said Tao Zhang, Deputy Managing Director and Acting Chair, after the Executive Board’s discussion.

Uganda’s growth fell about 2.9% from more than 5.5% a year earlier and is expected to reach 4.3% in the financial year 2021/2022.

Much as the recovery is expected to be higher in the subsequent years, the outlook remains highly uncertain, due to risks including a resurgence of tighter covid-19 containment measures as numbers of new cases and deaths rise sharply.

“The COVID-19 pandemic—which led to a global recession and domestic containment measures— has caused economic and social strife in Uganda. It has reversed poverty gains, deteriorated fiscal balances, and put pressure on external buffers,” says the IMF.

The three-year financing package will support the short-term response to the COVID-19 crisis and help sustain a post-crisis inclusive recovery.

Reforms will focus on creating fiscal space for priority social spending, preserving debt sustainability, strengthening governance, and enhancing the monetary and financial sector framework.      

Uganda’s debt is expected to rise to 52% of the GDP at the end of this year, which takes the country’s debt level nearer to crisis levels.

The IMF supported commitment by the East African Countries, including Uganda, to cap their debt levels at 50%.

Beyond that, countries with low domestic revenue collections like Uganda, are at risk of either failing to pay back or straining the resources that would go towards improving social welfare. With Uganda’s debt now at that level, only Tanzania is yet to hit the ceiling.

The IMF says Uganda can avoid such a situation by avoiding more commercial loans that attract high-interest rates and focus on non-concessional loans, the kind that the IMF and the World Bank give.

About a third of Uganda’s loans are from China, mainly going to infrastructure projects. “Prudent debt management is important to reduce vulnerabilities, particularly given Uganda’s moderate risk of debt distress.

Every effort should continue to be made to seek concessional financing and pursue relief under the Debt Service Suspension Initiative. Contingency plans put in place would help mitigate risks,” says Mr Tao.

The IMF also called for “an accommodative monetary policy stance and for the exchange rate to continue to function as a shock absorber.”

The IMF also wants Uganda to increase and sustain central bank independence, while the banks’ capital buffers should be considered to address uncertainties surrounding the COVID-19 pandemic.

“Close attention should be paid to minimizing financial stability risks, including through strict adherence to accounting and prudential standards, and modernizing the banking resolution and emergency liquidity assistance frameworks.”

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