Source: International Monetary Fund
The IMF’s Support for Uganda’s Health Care, Most Vulnerable, Businesses, and Stability
May 22, 2020
The coronavirus pandemic has hit Uganda’s economy and population severely. The country faces a significant contraction in economic activity, including a drop in domestic demand, supply disruption, and a decline in foreign direct investment and remittances.
To help the country overcome its economic difficulties, the IMF has approved a loan under the Rapid Credit Facility (RCF)—totaling around $491.5 million.
IMF Country Focus recently talked to the IMF’s resident representative in Uganda, Clara Mira, who described the economic situation confronting Uganda, and how the country will use the RCF resources from the IMF.
What has been the impact of COVID-19 on Uganda?
The COVID-19 pandemic is severely impacting Uganda’s economy. The country is feeling the reverberations from the decline in external global demand and the difficulties faced by key trading partners. This is expected to lead to a 45-50 percent decline in foreign direct investment, remittances, and tourism inflows compared to pre-shock projections.
Growth is now projected at 3.3 percent in 2019-20 (the fiscal year covers July 1- June 30), close to half the pace expected pre-crisis as the impact of the pandemic was acutely felt in the last few months of the fiscal year. Furthermore, with lockdown measures posing a challenge for vulnerable households, about 780,000 to 2.6 million Ugandans could fall into poverty.
With the decline in economic activity and increasing pressure on spending, large fiscal and external financing gaps are emerging.
What are the key risks to Uganda’s growth?
The level of uncertainty is greater than usual. Our current growth projections assume a recovery in Uganda and the global economy in the second half of FY2020-21. If the crisis turns out to be more protracted, this would delay the recovery and make the financing gaps larger. Locust invasion, floods, and pre-election uncertainty are additional risks.
Low oil prices are also a significant risk for Uganda. While the country benefits from low oil prices as an oil importer, the current low price of oil may delay ongoing negotiations and decisions from Uganda and its joint venture partners about the start of oil production.
What emergency assistance has the IMF provided to Uganda?
To help alleviate the impact of the COVID-19 pandemic, Uganda requested emergency assistance of $491.5 million—equivalent to 100 percent of its quota—under the IMF’s RCF. This financial assistance is a zero-interest rate loan, with a grace period of five and a half years, and a 10-year maturity. This financial support—approved by the IMF Executive Board on May 6, 2020—will provide critical support to limit the decline in international reserves, contribute to heath care spending, shield the most vulnerable, and protect businesses from the shock of the COVID-19 crisis.
How are the resources from the RCF expected to be used?
The authorities plan to use about 70 percent of the RCF resources as a shock absorber to protect the country’s reserves—essential for maintaining macroeconomic stability (including low inflation). The remainder of the resources will be used for financing their response to the COVID-19 pandemic to support health care and social protection programs for the most vulnerable.
What measures will be introduced to ensure RCF money is used for its intended purpose?
The Ugandan authorities have committed to several transparency and accountability safeguards, including:
separate reporting of funds received to allow easier tracking of resources;
publication of all large procurement contracts, together with the names of awarded companies and their beneficial owners; and
an independent audit on the use of the funds in about one year and publication of its results. The audit will include an ex-post validation of delivery of the large procurement contracts.
These measures are expected to enhance the transparency and accountability of the funds received to respond to the Covid-19 response.
What will happen to Uganda’s debt situation as a result of the RCF?
In the current difficult environment, our view is that protecting lives and people’s livelihoods is the priority. In any case, even if additional borrowing is expected to temporarily worsen debt-burden indicators (including debt-to-GDP and interest payments to revenue ratios), Uganda’s debt is expected to remain sustainable and at low risk of debt distress.
Once the crisis is over, it is expected that work will continue on implementing an appropriate fiscal framework focused on:
enhancing domestic revenue mobilization—including by implementing Uganda’s recently approved Domestic Revenue Mobilization Strategy; and
improving public investment management and debt management.
Ultimately, it is expected that fiscal consolidation will ensue in the medium term once the large scaling up of infrastructure is concluded and oil starts flowing.
Is Uganda interested in participating in the G-20 Debt Service Suspension Initiative?
The Ugandan authorities have expressed interest in benefiting from the G-20 Debt Service Suspension Initiative, which would help them deal with the impact of the COVID-19 pandemic. In their letter of intent for the RCF, they expressed their commitment to:
enhancing spending the freed resources on COVID-related health, social and economic relief;
monitoring and identifying this expenditure separately in budget monitoring reports; and
- disclosing all public sector debt, and not contracting new non-concessional debt during the suspension period, other than agreements under this initiative or in compliance with limits agreed under the IMF Debt Limit Policy (DLP) or the World Bank policy on non-concessional borrowing.
Why didn’t Uganda benefit from recent IMF debt service relief?
On April 13, the IMF Executive Board approved immediate debt service relief to 25 of the institution’s member countries under the IMF’s revamped Catastrophe Containment and Relief Trust (CCRT)—a part of the Fund’s response to help address the impact of the COVID-19 pandemic. Uganda was not included in the list of beneficiary countries for this initiative because it had no outstanding debt owed to the IMF at that time.