IMF Board approves disbursement of another Shs470b loan to Uganda

The Executive Board of the International Monetary Fund (IMF) has approved the disbursement of a loan of $120m (about Shs469b) to the government of Uganda after concluding the fifth review of the country’s Extended Credit Facility (ECF) Arrangement.

This brings the aggregate disbursement under the ECF Arrangement to SDR 631.75 million (about $870 million).

The ECF Arrangement for Uganda for a total of SDR 722 million (200 percent of quota) or about $1billion was approved by the Executive Board on June 28, 2021, aiming to support the near-term response to the COVID-19 pandemic and boost more inclusive private sector-led long-term growth. This is an interest-free loan.

In a statement issued after meeting Ugandan finance officials in Kampala on Wednesday, IMF said they were satisfied that the East African country is implementing reforms 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.

“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. The inflation outlook has improved, with core inflation expected to remain subdued at 2.8 percent in FY 23/24 and rising to the Bank of Uganda’s target of 5 percent in the medium-term,” IMF said in part.

They further said a further tightening of external financial conditions could constrain the availability of syndicated loans and jeopardize fiscal financing and the ongoing recovery.

“The passing of the Anti-Homosexuality Bill, 2023 (AHA) could negatively impact foreign investment, loans, and grants, as well as tourism. Uganda’s mostly rain-fed agriculture also remains vulnerable to weather-related shocks. Risks to inflation are also on the upside, reflecting a slightly positive output gap, risks of higher international fuel prices from the ongoing Israel-Gaza war, exchange rate depreciation pressures from portfolio outflows, and weather-related shocks,” the IMF said.

Fiscal consolidation, they explained, is necessary to reduce risks to financing and debt sustainability, while maintaining fiscal space for social and development expenditure. A data dependent monetary policy stance will guard against risks while bringing core inflation back to the central bank’s target. These policies, in addition to exchange rate flexibility, will help rebuild external buffers and improve competitiveness.

M. Bo Li, IMF Deputy Managing Director, and Acting Chair, said 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.

“The economic outlook is positive but remains subject to downside risks including from lower external financing and tourism following passage of the Anti-Homosexuality Act (AHA). The authorities’ commitment to strong policies and structural reforms will help ensure robust, sustainable, and inclusive growth going forward,” he said.

He added that continued commitment to fiscal consolidation is key to reduce financing risks and safeguard debt sustainability.

“Implementing the Domestic Revenue Mobilization Strategy will help secure consolidation gains and lower reliance on costly domestic and external financing. Improving the structure of expenditures will help maintain social services and space for growth-enhancing capital expenditures. Addressing deficiencies in public financial management will improve budgeting and expenditure control,” he said.

The IMF also said Bank of Uganda has been proactive in addressing inflation, but upside risks remain. Monetary policy should remain data dependent, loosening only as inflation risks recede, to bring core inflation back to the central bank target.

“Pursuing fiscal consolidation and maintaining a flexible exchange rate will 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,” he added.

After the meeting, the Permanent Secretary in the Ministry of Finance, Mr Ramathan Ggoobi, said the successful conclusion of the fifth review of ECF backed Economic Program will go a long way in supporting activities in the budget and the economy in general.

“Beyond the ECF disbursement, the successful conclusion of the fifth review shows the confidence that IMF has in Uganda’s economic trajectory. This confidence is shared by other development partners as well as foreign investors leading to continued growth in the country’s FDI,” he said.