Uganda: Request For Disbursement Under The Rapid Credit Facility—Press Release; Staff Report; And Statement By The Executive Director For Uganda
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International Monetary Fund. African Dept.
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Publication Date:
14 May 2020
eISBN:
9781513544274
Language:
English
Keywords:
ISCR; CR; IMF lending tracker; financing; emergency expenditure; emergency financing request; health preparedness plan; IMF's emergency financial support; Credit; Imports; Budget planning and preparation; Global; budget support; financing gap; net financing; exchange rate; fiscal year
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Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Uganda

Abstract

Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Uganda

Context

1. The coronavirus outbreak is affecting Uganda and resulting in a severe contraction of economic activity. The first case was reported on March 21 and followed by 78 more. So far there has been limited evidence of local transmission of the disease and no covid-related deaths have been reported. The measures initially adopted included the closure of schools and universities, the restriction of public gatherings, and the banning of public transport. They were later expanded with the closure of all borders and the airport, the suspension of refugee reception services, and the introduction of a 14-day full country lockdown—later extended by 21 days—with a night curfew. During this period, private transport was also banned, and the movement of people severely limited. The impact of the lockdown and containment measures is reducing domestic demand and disrupting supply. The economy is also severely affected by a decline in FDI and remittances.

2. The pandemic is also inflicting large social costs. The confinement measures are posing a challenge for vulnerable households, which depend on their daily work as a source of livelihood. Unemployment and poverty are expected to increase. The Ministry of Finance estimates that between 780,000 and 2.6 million Ugandans could move into poverty as incomes decline, threating to erode the impressive progress in poverty reduction achieved over the last decade. The informal sector workers are particularly at risk—a group in which women make up the majority. In addition, the large refugee population—around 1.4 million, the largest refugee presence in Africa—represents an additional challenge, as settlements are at heightened risk of pandemics. Finally, the outbreak comes at an uncertain time, when the country is also dealing with a locust invasion and had earlier suffered torrential rains and floods.

3. As a first immediate emergency response, the authorities are prioritizing health spending to fight the pandemic. Uganda’s health system does not have adequate resources to face this health emergency. There are less than 7 health professionals per 10,000 citizens, and there is a shortage of essential equipment and materials, including oxygen supply. The Ministry of Health, working jointly with key development partners, has prepared a plan to respond to covid, with an initial cost of about US$125 million over the next six months. The plan includes measures such as the urgent recruitment of additional health personnel, the upgrading of equipment, and the mobilization of medical supplies and key health commodities such as test kits, personal protective equipment, oxygen, ventilators and ICU beds. To finance the plan, the authorities have already used US$1.3 million from their Contingency Fund in the FY2019/20 budget and passed a supplementary budget. Furthermore, since funds are being reallocated from other health programs to the covid response, essential health services are also under strain and require financing.

4. Before the outbreak, the economy was performing well, with growth projected at 6 percent for FY2019/20. The rebasing of the national accounts in October 2019 depicted an increase in the size of the economy by 11.6 percent, and some structural transformation, with a significant increase in the share of industry in GDP.1 Both annual headline and core inflation were hovering around 3 percent. The current account deficit had widened to 8.6 percent of GDP in FY2018/19, largely due to one-off private sector-related imports financed by FDI. As at end February 2020, the Ugandan shilling remained stable on account of FDI and capital inflows; reserves remained adequate at US$3.2 billion, equivalent to 4.4 months of imports, and private sector credit was growing at 12 percent.

5. At the same time, the implementation of the FY2019/20 budget was already proving challenging due to revenue and financing shortfalls and large spending pressures. Revenue collections had been short of the FY2019/20 budget target by about Ush 600 billion (0.4 percent of annualized GDP) in the first half of the fiscal year, due partly to the non-implementation of some of the planned revenue-generating measures and delays in expected oil-sector related revenues. Together with large spending pressures arising mostly from wages, the preparation for elections, and security needs, the authorities had issued a supplementary budget and negotiated a commercial loan from the banking sector to cover some of the gap.

Impact of the Pandemic

6. The pandemic and its global repercussions are weighing heavily on economic activity. Global supply chain disruptions, particularly from China—Uganda’s largest source of imports—have affected local manufacturers, construction companies, exporters, logistics firms, tourism companies and other service providers. The national lockdown accentuated the challenges in the private sector. Short-term indicators based on private sector surveys in March show a pronounced deterioration in economic activity (Text Figure 1). Growth is now projected at 3.3 percent in FY2019/20 (2.7 percentage points below the previous forecast) and begin to recover in FY2020/21, with a 3.7 percent projection. The most affected sectors include services (particularly tourism, transport, and trade), manufacturing and construction. The agricultural sector is also affected by the fall in external demand.

Text Figure 1.
Text Figure 1.

Real Sector Developments

Citation: IMF Staff Country Reports 2020, 165; 10.5089/9781513544274.002.A001

7. The pandemic is also resulting in a significant deterioration in the balance of payments compared to the pre-shock projections:

  • Imports are expected to decline by 12 percent in FY2019/20 and 17 percent in FY2020/21. Supply chain disruptions from Asian and European suppliers—some of Uganda’s key trading partners—global lockdowns and the expected deceleration in FDI is likely to significantly reduce import volumes. Furthermore, the lower oil prices have contributed to reducing the import bill.

  • Exports will also moderate by 13 percent in FY2019/20, and 19 percent in FY2020/21, with lower domestic production, weak global demand, scarcity of some intermediary and capital imports, and lower export commodity prices.

  • Tourism receipts are expected to decline by 54 percent in FY2019/20 and 52 percent in FY2020/21.

  • Remittances would decline by 43 percent in FY2019/20 and 51 percent in FY2020/21.

  • FDI is expected to drop by 48 percent in FY2019/20 and 52 percent in FY2020/21, in a context of uncertainty. FDI in Uganda has been largely related to the start of oil production, and that start date is now more uncertain.

  • Some capital outflows from offshore investors in government securities have already materialized, resulting in exchange rate depreciating against the dollar by about 5.7 percent in the month of March. Such pressures could be compounded by a likely slowdown in project loans disbursements. Public sector disbursements would decline by 33 percent in FY2019/20 and 18 percent in FY2020/21.

8. The resulting urgent balance of payments needs will require external support. The pandemic is opening a financing gap of about US$1.3 billion in 2020, of which US$0.5 billion (1.4 percent of GPD) would happen in FY2019/20 and US$0.8 (2.2 percent of GDP) in FY2020/21 (Text Table 1 and Text Table 2). Absent external support, the expected deterioration in the current, capital and financial accounts would result in a sharp decline of the Bank of Uganda’s (BoU) reserve buffer from 4.4 months of imports in FY2018/19 to below 2 months of future imports at the end of FY2020/21. This would be below the adequate level of reserves for Uganda2, and would leave the country in a vulnerable position. The resources provided by the IMF under the proposed RCF disbursement would contribute to filling the financing gap, with financing from other development partners also necessary (Text Table 2). Therefore, Uganda would respond to the balance of payments shock through a combination of reserve drawdown (with reserves declining from 4.4 to 3.5 months of imports in FY2019/20 and FY2020/21) and external financing.

Text Table 1.

Projected External Financing Requirements, FY2018/19–FY2020/21

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Sources: Ugandan authorities and IMF staff estimates and projections.
Text Table 2.

Financing Gaps, 2020

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Sources: Ugandan authorities and IMF staff estimates

Percent of post-shock GDP

Outlook and Risks

9. The outlook remains highly uncertain. Growth is expected to decline sharply to 3.3 percent in FY2019/20, with several sectors experiencing a slowdown, including tourism, transport, trade, manufacturing, construction and agriculture. The effects of the shock will continue to persist in FY2020/21, though with some mild rebound expected, so the economy is projected to grow by 3.7 percent. Despite uncertainties surrounding the near-term inflation outlook—with deflationary pressures competing with inflationary ones—headline inflation is projected at 3.2 percent in FY2019/20, increasing to 4.7 in FY2020/21, with core inflation gradually converging to its 5 percent target over the medium term. The current account deficit is projected at 10.1 percent of GDP in FY2019/20, due to the sharp decline in exports, income from tourism and remittances, and despite the mitigating impact of declining imports, with some improvement to 8.7 percent of GDP in FY2020/21 (Text Table 3). Private sector credit growth is expected to decline to 8.9 percent in FY2019/20 and gradually pick up to support the economic recovery over the medium term.

Text Table 3.

Medium-Term Macroeconomic Outlook, FY2018/19–FY2024/25

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Sources: Ugandan authorities and IMF staff estimates and projections.

10. Over the medium term, the outlook is positive, provided the covid-crisis toll is contained and the infrastructure and oil sector investments can proceed as planned. The economy is expected to stabilize and continue growing as some of the large investment projects are completed and start yielding a growth dividend. Growth could reach 9.2 percent with the start of oil production in FY2024/25— though uncertainty given current low oil prices is high. The oil-related investments necessary to start production are expected to raise the budget deficit, public debt, and the current account deficit, but these developments would be temporary.

11. The fiscal position is expected to deteriorate temporarily but the debt would remain sustainable. The impact of lower growth and tax incentives together with additional health expenditure, social protection and economic stimulus measures is expected to widen the fiscal deficit in FY2020/21. In FY2019/20, the significantly lower-than-expected externally-financed development spending would more than compensate for the covid-related deterioration in the deficit. Nonetheless, the deficit excluding externally-financed projects and project grants would increase by 1.1 percent of GDP. Although the debt stock would increase to respond to the emerging financing needs, debt dynamics would remain sustainable and Uganda would remain at low risk of debt distress, with public debt projected to rise above 54 percent of GDP in FY2021/22 and peak at 59.6 percent of GDP in FY2023/24 (Annex I).

12. The authorities largely agree with staff’s projections, though they are more optimistic about the growth outlook, particularly concerning the rebound for next fiscal year. The Ministry of Finance expects that the economy could recover somewhat faster than projected by staff, with growth at 4.5 percent in FY2020/21, supported by the measures in their response package, though acknowledging great downside risks in the current circumstances. Over the medium term, the authorities expect the recovery to happen at a similar pace to that of partners in the region, given the high dependence on exports to neighboring countries. They are however concerned that the low oil price environment could affect demand for Ugandan exports by some key trading partners.

13. Overall, risks remain tilted to the downside. The assumptions behind staff’s projections consider the pandemic a temporary shock, from which the global economy and the Ugandan economy would start recovering in the second half of FY2020/21. If the outbreak proves to be more severe, the fiscal costs could be significantly higher, and the recovery could be delayed. A less favorable external environment could also delay the recovery, causing a slower pick-up in external demand and affecting tourism, remittances, exports and FDI. Civil unrest could also increase as the population deals with the difficult consequences of the containment measures. Besides the covid-related risks, the evolution of the oil price is a key risk factor for Uganda as it may contribute to further delay the start of oil production. Indeed, the already delayed and protracted discussions between Uganda and its oil sector partners to reach Final Investment Decision is not favored by the pandemic and the current low oil price environment3. Furthermore, Uganda is suffering from a locust invasion that could potentially become very damaging. The proximity of the early 2021 general elections also brings considerable uncertainty, which could affect sentiment and economic activity and lead to high spending pressures.

Policy Issues and Discussions

A. Fiscal Policy

14. The authorities are taking measures to mitigate the impact of the pandemic on the economy and to support the most vulnerable groups (Text Table 4). Key measures include (i) shielding the most vulnerable affected by the lockdown and containment measures via a food distribution campaign; and (ii) introducing an economic stimulus package to support the severely affected private sector. The details of the package are still under discussion, but there is already agreement that key measures will include expedited repayment of domestic government arrears to private sector suppliers; boosting the lending capacity of the state-owned Uganda Development Bank (UDB) to provide affordable credit to support private sector companies to reorient their production towards covid response related items; the deferment of tax payment obligations for the most affected sectors; the introduction of tax exemptions for items used for medical use; the support with water and electricity utilities; and the expansion of labor-intensive public works programs.

Text Table 4.

Authorities’ response to Covid

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Sources: Ugandan authorities and IMF staff estimates

In percent of post-shock GDP

Compared to January projections

15. The pandemic and related measures will result in a widening of the fiscal deficits in FY2019/20 (excluding externally financed projects) and FY2020/21 (Text Table 5). The lower projected economic activity coupled with the tax exemptions are projected to result in a domestic revenue shortfall of 1 percent of GDP in FY2019/20 and 1.7 percent of GDP in FY2020/21 compared to the latest projections from January. Covid-related expenditure is expected to be 1.7 percent of GDP for the calendar year 2020, of which 0.6 percent of GDP in FY2019/20 and 1.1 percent in FY2020/21. Parliament has already approved a supplementary budget providing Ush 304 bn shillings to respond to the pandemic, with the bulk of it devoted to the health sector, followed by security, disaster management and protection of the vulnerable population. The pandemic is also expected to lead to a worsening in the already weak absorption of externally-financed investment projects, affected by disruptions in the supply chains and in project financing. Furthermore, government has prioritized covid-related sectors and postponed plans for additional supplementary spending, while reducing capital expenditure in the last quarter of the year. All in all, the FY2019/20 deficit excluding externally-financed projects and project grants is projected to increase by 1.1 percent of GDP, with the overall deficit projected at 7.7 percent, from 5 percent in FY2018/19. The FY2020/21 budget has just been endorsed by Parliament. However, it does not include the impact of the pandemic. Since the Covid-crisis started when the Ministry of Finance was in the last stages of the budget preparation process, and given the high degree of uncertainty, the authorities decided to proceed with a budget without the impact of Covid, and plan to revise it in the coming weeks. Staff currently projects a deficit at 8.9 percent of GDP and anticipates that government would have to reorient some of their spending from lower priority areas to respond to the pandemic.

Text Table 5.

Uganda: Central Government Fiscal Operations FY2018/19–FY2020/2021

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Sources: Ugandan authorities and IMF staff estimates

Percent of post-shock GDP

16. The government is working with development partners to mobilize financing. With limited room for additional issuances—and the intention to limit them to avoid contributing to crowding out a struggling private sector—the proposed RCF on-lending (worth 0.4 percent of GDP) would be instrumental in closing the fiscal financing gap in FY2019/20. Work is also ongoing with the World Bank to put together a budget support operation and other financing through existing and new projects to address key covid response needs (particularly for health), boost growth and preserve jobs, and support the most vulnerable; with the African Development Bank; the United Nations (UN) organizations, that are just launching a Flash Appeal to support and complement government’s efforts in the response to Covid, and other bilateral development partners. Furthermore, the Ugandan authorities are interested in seeking debt service relief under the G-20 Covid-19 debt relief initiative and are working on contacting bilateral creditors. According to the information shared with staff, US$94 million worth of debt service falling due could benefit from the moratorium and contribute to reducing the financing gap resulting from the Covid-related crisis. The authorities have noted their intention to adhere to the needed commitments. The Covid crisis is also generating a large wave of solidarity from the private sector, institutions and individuals, who are responding to the authorities’ call to make donations, both in cash and in kind, to the crisis response team. The residual fiscal gap—after adjusting for the expected pledges—is estimated at 0.3 percent of GDP in FY2019/20 and at about 3.1 percent of GDP in FY2020/21.

17. Over the medium term, Uganda plans to continue work to introduce a fiscal anchor, as recommended at the time of the 2019 Article IV. Preparations are advanced to design a fiscal rule to manage future oil revenues. In the meantime, the authorities are committed to respecting an interim debt ceiling of 50 percent in NPV terms, as established in their Charter for Fiscal Responsibility and in line with the EAC convergence criteria. They also monitor closely debt developments looking not only at the debt stock, but also at a broader range of indicators, including the interest to revenue ratio, that points to increasing vulnerabilities. The authorities also remain committed to continue their work to enhance revenue mobilization by implementing their recently concluded Domestic Revenue Mobilization Strategy and to continue strengthening their public investment management framework.

18. Staff agrees that the covid-related fiscal measures are critical in addressing the impact of the health, economic and social crisis and should be accommodated. The external shock is large and temporary, and Uganda can afford to increase health spending and cushion the impact on the vulnerable, the private sector and the population as a whole. Uganda also has a good track record maintaining macroeconomic stability and implementing good policies. Staff emphasized the importance of careful cash management to avoid domestic arrears. Staff also emphasized the usefulness of social protection packages to cushion the impact of the shock on the most vulnerable; Uganda could strengthen some of the existing social protection mechanisms, considering a temporary expansion to reach vulnerable people in need, as the interventions under consideration so far could be insufficient.4 The authorities explained that work is ongoing with the Ministry of Gender, Labor and Social Protection and development partners in that direction. Staff also highlighted the importance of ensuring transparency and accountability in the management of the emergency response, and was reassured by the authorities’ commitment to introduce targeted measures including the publication of the large procurement contracts and of an independent audit of the Covid-19 emergency expenditure. Going forward, staff also emphasized the need to ensure the covid-related tax exemptions are temporary. There was agreement that budget allocations for health need to continue to be increased and sustained over the medium term—the pandemic has shown in the hard way how important it is to ensure that the health sector gets sufficient allocations. The authorities also confirmed their intention to continue to recapitalize Bank of Uganda.

19. Staff cautioned the authorities about the financing risks emanating from the large fiscal financing gap for FY2020/21. With the banking sector already significantly exposed to government and the private sector in need of credit, additional domestic debt issuances would not be advisable, as it would contribute to crowding out the private sector. The authorities agreed that if sufficient external financing cannot be mobilized under reasonable conditions, they would reprioritize expenditure, including by postponing some lower priority development projects, and consider potential new revenue measures. Staff also recommended preparing a contingency plan to deal with a potential deepening of the shock. Although Uganda is focusing its efforts on prevention of a large outbreak, if the situation deteriorated, additional required health and social protection expenditure would need to be accommodated by budget adjustments—reducing nonpriority spending or introducing new revenue measures.

B. Monetary, Exchange Rate and Financial Sector Policies

20. The BoU reduced the Central Bank Rate by 100 basis points to respond to the crisis on April 6. March figures showed subdued inflation, with headline and core at 3 and 2.5 percent respectively, due to lower fuel prices and despite rising food prices. In this context, staff agrees that the monetary policy stance should be accommodative to minimize the negative impact of the shock on the economy and speed up a recovery. Looking forward, there are significant uncertainties surrounding inflation projections; lower domestic demand and lower oil prices could keep inflation low, but other factors such as rising food prices, a delayed and pronounced impact of the supply chain disruptions, and a further depreciation of the shilling could flare up prices quickly. The BoU should continue to monitor developments closely and stand ready to adjust its policy stance accordingly.

21. The authorities remain committed to maintaining exchange rate flexibility as a shock absorber and preserving an adequate international reserve cover. The BoU has announced that it stands ready to intervene in the foreign exchange market to smooth out excess volatility of the exchange rate. They agree that the interventions should be limited to such circumstances and be fully sterilized. In the month of March, Bank of Uganda’s intervention in the context of capital outflows and some speculative purchases succeeded in calming down the markets, though it resulted in a loss of nearly US$200 million. In such a volatile context, staff agrees with the BoU’s intention to ensure that the reserve buffer covers at least 3.5 months of imports for precautionary motives.

22. The BoU is committed to protecting the soundness of the financial system. Among the package of measures announced, the BoU has directed supervised financial institutions (SFIs) to defer the payments of all discretionary distributions such as dividends and bonus payments for at least 90 days to protect their capital buffers. In supporting private sector businesses, the BoU has introduced measures aimed at minimizing insolvency due to lack of credit, waiving limitations on restructuring of credit facilities at financial institutions that may be at risk of going into distress, and granting exceptional permission to SFIs to restructure corporates and individuals loans, including a moratorium on loan repayment for borrowers that have been affected by the pandemic.

23. While the financial sector remains healthy, risks have increased resulting from the pandemic. The December 2019 financial soundness indicators show banks with a stable capital position, improved profitability and comfortable liquidity, though a deteriorated asset quality. However, the pandemic could alter financial sector health and tighten financial conditions. Rising NPLs from the private sector in severely affected sectors such as trade, tourism and agriculture, could deteriorate asset quality, increase borrowing costs and ultimately affect banks’ liquidity and ability to extend new loans and rollover existing credit.

24. The package of measures announced by the BoU to protect the financial sector goes in the right direction and needs to be carefully implemented. The measures are geared at ensuring that banks maintain an adequate capital position, protecting their asset quality, and supporting liquidity. BoU should encourage prudent loan restructuring by banks and loan classification and provisioning rules should not be relaxed. Staff emphasized the need for close monitoring of NPLs and regular reassessment of the level of provisioning as the current crisis evolves. The BoU has also worked with mobile money providers and commercial banks to ensure they reduce charges on mobile money transactions and other digital payment charges—a welcome move which would help foster financial inclusion.

Access and Capacity to Repay

A. Access Level and Modalities

25. The authorities are requesting a disbursement under the RCF equivalent to 100 percent of quota (SDR 361 million, or about US$490 million). Based on the urgent and temporary balance of payments needs caused by a sudden exogenous shock, Uganda qualifies for a disbursement under the “exogenous shocks” window. This emergency financing would help the authorities weather the shock while at the same time keeping reserves at precautionary levels and thus safeguard macroeconomic stability. The disbursement is expected to play a catalytic role in securing additional budget support. The authorities plan to devote 70 percent of the RCF disbursement to preserve precautionary reserves buffers of the BoU. The remainder would be made available as budget support, to finance their response to the covid pandemic. In particular, the authorities have expressed their interest in using the resources allocated to the budget to support purchases of urgent health supplies; support their efforts to protect the most vulnerable; and boost the lending capacity of the UDB to allow it to provide affordable credit to private sector companies that will reorient their production towards much needed covid related response items. These interventions are expected to contribute to finance the response plan by providing necessary inputs and cushion the crisis’ impact on the most vulnerable. The support to private sector companies channeled through UDB is expected to alleviate pressures in the balance of payments by reducing imports and mitigate the impact of the pandemic in the private sector by generating employment. The authorities have agreed to place UDB under the supervision and regulation of the Bank of Uganda. A memorandum of understanding will be signed between the Ministry of Finance and Bank of Uganda to (i) commit to maintaining funds received from the IMF in a government account at the central bank, pending their use, (ii) require the government to hold foreign exchange balances only with the BoU, and (iii) clarify the responsibilities for repaying Fund resources.

B. Capacity to Repay and Safeguards Assessment

26. Uganda’s capacity to repay its obligations to the Fund is adequate (Table 7). Uganda’s debt is sustainable. Obligations to the Fund would remain below 0.8 percent of exports of goods and services, and up to 2.3 percent of net international reserves.

Table 1.

Uganda: Selected Economic and Financial Indicators, FY2017/18–2024/251,2

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Sources: Ugandan authorities and IMF staff estimates and

Fiscal year runs from July 1 to June 30.

All figures are based on the 2016/17 rebased GDP.

Latest available data. Exchange rate: Jun-2019; REER: Jun-2019; NPLs: Dec-2019; BoU policy rate: reduced from 10 to 9 percent in Oct-2019, and to 8 in Apr 2020. Period Average.

Capital expenditures include net lending and investment on hydropower projects, and exclude BoU recapitalization.

Based on revised figures after the 2014 census by the Uganda Bureau of Statistics.

Table 2a.

Uganda: Fiscal Operations of the Central Government, FY2017/18–2024/251

(Billions of Ugandan Shillings)

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Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

Include mainly HIPC-related grants from FY 2013/14 onwards.

Expenditure categories in FY2013/14 include clearance of arrears totaling Shs. 544 billion, mainly in Government of Uganda investment and other current spending.

Reflects actual and projected issuances for the recapitalization of Bank of Uganda.

Net financing from the Bank of Uganda includes resources freed by MDRI relief.

Table 2b.

Uganda: Fiscal Operations of the Central Government, FY2017/18–2024/251

(Percent of GDP)

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Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

Include mainly HIPC-related grants from FY 2013/14 onwards.

Expenditure categories in FY2013/14 include clearance of arrears totaling 0.8 percent of GDP, mainly in Government of Uganda investment and other current spending.

Net financing from the Bank of Uganda includes resources freed by MDRI relief.

Table 3.

Uganda: Monetary Accounts, FY2017/18–FY2024/251

(Billions of Ugandan Shillings unless otherwise indicated)

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Sources: Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30.

Starting on June 2013, the Bank of Uganda expanded the reporting coverage from Monetary Survey to Depository Corporations Survey.

Interest payments (in percent of revenue)

Including valuation effects, the Bank of Uganda’s claims on the private sector and Claims on Other Financial Corporations.

Reflects actual and projected issuances for the recapitalization of Bank of Uganda.

Inclusive of foreign currency clearing balances.

Table 4.

Uganda: Balance of Payments, FY2017/18–2024/251

(Millions of US dollars unless otherwise indicated)

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Sources : Ugandan authorities and IMF staff estimates and projections.

Fiscal year runs from July 1 to June 30. Based on BPM6, including sign conventions.

Excess prospective financing in 2019/20 is assumed to be deposited in reserves FY20/21, reducing the financing gap in FY20/21.

Table 5.

Uganda: Banking Sector Indicators, March 2015–December 2019

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Source: Bank of Uganda.

Under new rules, effective in December 2016, designed to ensure compliance with Basel III financial standards, tier one capital requirements were raised to 10. 5 percent from 8 percent, while the total regulatory capital ratio was raised to 14.5 percent from 12 percent. However, Systemically Important Banks (SIBs) will be required to maintain tier one capital of 11.5 per cent and a total regulatory capital ratio of 15.5 percent respectively. The cash reserve requirement for banks is 5.25 percent, and the liquidity coverage ratio is at 20 percent.

Historical numbers are revised by the Bank of Uganda, data as of February 2018.

Table 6.

Uganda: External Financing Requirements, FY2017/18–2020/21

(In millions of US dollars)

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Sources: Authorities and IMF staff estimates and projections.
Table 7.

Uganda: Indicators of Capacity to Repay the IMF, 2020–301

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Source: Ugandan authorities, and IMF staff estimates and projections.

Assumes access of 100 percent of the quota in April 2020 as one-time disbursement.

27. The authorities are committed to undertake an update of the safeguard’s assessment. An update assessment of the BoU was completed on April 10, 2007 and concluded that the BoU had strengthened its safeguards framework since the previous assessment. The BoU commits to undergo an update of the safeguards assessment, which would need to be completed before Executive Board approval of any subsequent arrangement and authorize the central bank’s external auditors to hold discussions with staff.

Staff Appraisal

28. The impact of the covid pandemic is severely hitting the Ugandan economy. Growth is expected to reduce to half, with a severe contraction in manufacturing, tourism and transportation; poverty is expected to increase; the fiscal accounts would deteriorate with additional spending and shortfall in revenue collections, and large external financing needs would arise.

29. Staff welcomes the Ugandan authorities’ prompt reaction and adoption of measures to contain the dissemination of the disease, while cushioning the impact on the most vulnerable and the private sector. The World Health Organization singled out Uganda as an example of countries that quickly responded to the pandemic. The response measures to increase health spending and support the impact of the shock on the households and private sector are welcome.

30. The temporary deterioration in the fiscal position is appropriate, and debt is expected to remain sustainable. The worsening of the debt indicators is projected to be temporary, as after the shock the authorities remain committed to ensuring debt sustainability. They plan to continue their efforts to enhance revenue collection and strengthen public investment management. The authorities will also need to consider reprioritizing non-essential expenditure if sufficient financing to fill in the fiscal gap is not mobilized and consider potential new revenue measures. Staff encourage the authorities to continue to step up social protection programs, which can cushion the impact on the vulnerable population both during the current emergency and the recovery phase, and to continue protecting health allocations over the medium term. Ensuring transparency and accountability in the delivery of the emergency response is also essential.

31. In this context, staff supports the authorities request for a disbursement under the RCF of SDR 361 million (100 percent of quota). The RCF is expected to play a key role in mitigating the impact of the pandemic, while preserving macroeconomic stability. The authorities are putting together reasonable policies to address the external shock and securing additional external support from development partners. They are also committed to sound safeguards to manage transparently the resources received. The authorities remain committed to sound macroeconomic policies targeted at ensuring sustained and inclusive growth.

Appendix I. Letter of Intent

30th April, 2020

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C. 20431

Dear Ms. Georgieva,

1. The economic and financial impact of the Coronavirus pandemic continues to be felt globally, as the disease spreads rapidly across many countries. The outbreak has severely curtailed output, created uncertainty and threatens near-term economic prospects. While, to-date, the number of coronavirus cases in Uganda is relatively small, the impact on our economy is already severe. To curb further spread of the virus within the country, government instituted stringent measures including closure of all borders and a partial domestic lockdown which has resulted in supply disruptions and a slow-down in economic activities. Moreover, the virus outbreak comes at a time the economy is faced with a locust invasion that further threatens agricultural production. The consequences of both are severe, with significant additional public resources required for health spending to contain the spread of the pandemic and to mitigate the economic impact.

2. The short-term economic impact of the Covid pandemic is expected to be significant. Our preliminary estimates indicate the economy will slow-down to 3.9 percent in FY2019/20 and 4.5 percent during FY2020/21, down from pre-pandemic projections of 6.0 percent for both financial years—as global and domestic supply chain disruptions together with travel restrictions have affected the manufacturing, construction, trade and tourism activities.

3. Our fiscal situation will be affected by a shortfall in tax revenue due to the impact of a fall in domestic demand and imports (international trade taxes account for about 40 percent of tax revenues). We need significant budget resources to address critical spending, including health spending and increased social assistance to the most vulnerable, to help contain, manage, and handle the pandemic while mitigating its negative financial consequences. As a result, we have immediate fiscal needs for the remainder of FY2019/20 estimated at US$565.5 million or 1.5 percent of GDP, and at close to US$1.5 billion for FY2020/21.

4. The covid outbreak is expected to worsen our external accounts. The current account deficit is projected to widen to 8.7 percent and 10.3 percent of GDP during FY2019/20 and FY2020/21 respectively, due to a sharp decline in inflows from tourism, remittances and exports. In addition, Foreign Direct Investment (FDI) flows are now projected to decline by one-third and two-thirds during FY2019/20 and FY2020/21, respectively as compared to the pre-pandemic projection levels. The deterioration in the external accounts is expected to result to pressures in the domestic foreign exchange market. Additional government foreign expenditure requirements and the foreign exchange market stabilization measures taken by Bank of Uganda will require significant draw-down in foreign reserves.

5. The government is committed to continue its efforts to address the economic and health damage caused by the COVID outbreak. In addition to making available—through a supplementary budget—additional public resources for health spending, we have prioritized providing support to the vulnerable population and taken remedial measures in support of the private sector.

6. We are determined to do everything in our powers to offset inevitable economic hardship, especially for poor and vulnerable communities. Vulnerable households will be hit hard and without decisive action it could take entire generations to re-emerge from economic adversity. To support such vulnerable population, government has embarked on providing basic food items and has guaranteed continued supply and access to key utilities – water and electricity for all until the situation normalizes. We are also planning to extend our public work programs. Furthermore, we are working closely with the Ministry of Gender, Labor and Social Development and our development partners to strengthen existing social protection mechanisms and, provide one-off targeted cash transfers and cash for work aimed at shortening the window of economic vulnerability swung wide open by the pandemic. Work is on-going to define the key parameters and operational modalities to roll out this mitigation mechanism across the most vulnerable groups.

7. To support the private sector, measures include temporarily deferring PAYE tax payments by the most affected sectors, like manufacturing and tourism. This is expected to help the businesses to sustain a level of cash-flow in order to remain operational and not to lay off staff. Payment of corporation tax for qualifying companies and Small, Medium Enterprises (SMEs) in the most affected sectors with a turnover of less than Shs 500 million per annum has been delayed by six months without attracting interest. Government will waive interest on tax arrears to lessen businesses’ tax liability obligations to government. This is intended to benefit taxpayers who voluntarily comply with their tax obligations. Payment of outstanding VAT refunds due to businesses will be expedited and this will be accompanied by measures to limit fraud risks. For a limited period, medical items required in the fight against Covid will be exempted from tax. These include; medical face masks, boots, impermeable aprons/overall suits, protective goggles, indirect side ventilation, infra-red thermometers, motorized fumigation pumps, oxygen cylinders, biohazard bags, body bags, disinfectants including sanitizers, plastics/rubber gloves, gas masks with mechanical parts and paper bed sheets.

8. On a strategic front, government is to make available investment finance through an additional liquidity injection into Uganda Development Bank (UDB) to support local manufacturing. To further strengthen UDB, we shall amend the necessary legislation to place it under the regulation and supervision of Bank of Uganda. Government will increase funding to industrial research in order to strengthen the domestic technological base of the economy to support the growing manufacturing sector. In addition, we will be expanding Business Development Services, including establishment of industrial business shelters to help integrate both SMEs in both the informal and formal economy into the country’s industrialization process to meet domestic demand and take advantage of the regional market.

9. The Bank of Uganda (BoU) will continue to implement monetary policy in a prudent manner. Owing to the weakening of the exchange rate and the lagged-effects of the supply disruptions on prices, it will accommodate a temporary increase in inflation and closely monitor second-round effects of the exchange rate depreciation. It will adjust the monetary policy stance if there is substantial risk of sustained price increases above the target range. BoU will continue implementing a flexible foreign exchange regime and limit foreign exchange interventions to smoothen volatilities in the market. The BoU will implement measures to reverse the deterioration of international reserves position once confidence is restored over the medium term.

10. The BoU has put in place measures to ensure that the financial sector remains resilient in the face of vulnerabilities from the economic disruption caused by COVID. It will stand ready to provide liquidity to the financial system for a period of up to one year if needed. BoU will continue to ensure that all financial institutions under its supervision have adequate capital buffers to operate effectively. It has accordingly instructed these institutions to defer payments of all discretionary distributions such as dividends and bonus payments for at least 90 days effective March 24, 2020. The BoU has waived limitations on restructuring of credit facilities. Supervised Financial Institutions (SFIs) have been granted relief to restructure loans and provide loan repayment holidays to companies and individuals affected by COVID. Furthermore, the BoU will continue to engage with Mobile Network Operators and commercial banks to facilitate and promote the use of digital payments in order to limit the use of cash and bank branch visits.

11. In order to face the immediate financing needs, the Government of Uganda requests emergency financing from the IMF under the Rapid Credit Facility (RCF) in the amount of 361 million SDRs—equivalent to about US$490 million (100 percent of quota)—to support our efforts to respond to the negative impact of the pandemic. Of this, US$340 million will help Bank of Uganda in bridging the gap in the balance of payments position and US$150 million will be used as budget support to finance Government’s response plan to the pandemic, including by acquiring necessary health supplies (diagnostic kits, masks, personal protective equipment); supporting the vulnerable population, and supporting the private sector that has been affected by the adverse effects of Covid by boosting the lending capacity of Uganda Development Bank. As we intend to use part of the RCF disbursement to help fill the projected fiscal financing gap, this amount will be on-lent by the BoU to the Treasury. The Bank of Uganda and the Ministry of Finance, Planning and Economic Development will sign a Memorandum of Understanding (MoU) to specify the conditions of this operation, and to clarify the respective responsibilities for repaying Fund resources.

12. Alongside the IMF, we are also working with other development partners, including the World Bank and African Development Bank, to fill the projected fiscal and external gaps. Government plans to seek US$300 million from the World Bank to fund part of the health interventions in response to the COVID this financial year, US$50 million towards dealing with the locust invasion. Government has also requested US$350 million from the African Development Bank towards supporting the budget for next financial year, though the amounts to be received are still unclear.

13. Uganda is also interested in participating in the G-20 led debt service suspension. We are grateful for such initiative that is expected to open up some fiscal space to respond to the crisis. In that regard, we are in the process of reaching out to our bilateral creditors. In line with the terms of the initiative, we commit to spending the freed resources on Covid-related health, social or economic relief. We also agree to monitor this expenditure and identify it in budget monitoring reports. We commit to disclose all public sector financial commitments (debt), respecting commercially sensitive information, within 3 months, and not later than September 1, and are willing to request technical assistance from the IFIs to achieve this. We also commit to contract no 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 WBG policy on non-concessional borrowing.

14. Uganda has been able to maintain macroeconomic stability for over 20 years with assistance of the IMF through programs like the Policy Support Instrument (PSI). While our fiscal deficit will widen in response to the challenges of dealing with the impacts of the COVID pandemic, we are mindful of the need to avoid fiscal imbalances that could jeopardize the hard-earned gains in macroeconomic stability. Our policy intentions for the medium-term remain guided by the need to maintain this stability, underpinned by fiscal sustainability and inclusive economic growth. In particular, we are working to adjust our FY2020/21 budget by September 2020, since the version just endorsed by Parliament does not include the impact of the covid-related crisis. We are however mindful that projections show a large residual financing gap in the expected revised budget for FY2020/21. If we fail in mobilizing sufficient external financing, we commit to readjust expenditures and consider additional revenue measures. We are also committed to ensure that the health sector continues to receive adequate financing going forward. We will also continue to recapitalize Bank of Uganda.

15. In line with IMF safeguards policy, we commit to undergoing a new safeguards assessment conducted by the Fund. We will authorize BoU’s external auditors to hold discussions with IMF staff, and provide access to the BoU’s most recently completed audit reports. To foster transparency of accounting and management of resources, we will provide a separate reporting mechanism for COVID-19 expenditures in the context of our Program Based Budgeting that will allow for clear tracking of the support received by partners. UDB will also report on the use of the funds received. We are also committed to continuing to adhere to the best fiscal management practices and to ensuring that the best possible use is made of the funds provided by the IMF, and we commit to anti-corruption safeguards. To that effect, we commit to (i) publishing, once they are signed, documentation on the government’s website of large procurement contracts—defined as contracts above Ush500 million for works contracts, and above Ush200 million for goods and services—of COVID-19 expenditures, together with the names of awarded companies and their beneficial owners and (ii) undertaking an independent audit of COVID-19 expenditures in about a year’s time, which will include an ex-post validation of delivery of the large procurement contracts, and publishing the results. Uganda’s capital account remains open and we do not intend to introduce any exchange measures, multiple currency practices, trade restrictions or policies that would compound the BoP difficulties.

16. Finally, we authorize the IMF to publish this Letter and the staff report for the request for disbursement under the RCF.

Sincerely yours,

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1

The base year changed from FY2009/10 to FY2016/17, and activities that were previously missing were included. The industry’s share increased from 20.6 percent to 27 percent, mostly as a result of the doubling in the manufacturing sector. The share of the services sector declined.

2

Although the IMF’s metric to assess reserve adequacy in credit-constrained economies indicates that a reserve coverage of 2 months of imports would be adequate for Uganda, staff still considers, in line with the latest Article IV assessment, that this level is too low considering external vulnerability. Thus, from an external vulnerability perspective, reserves should be maintained at least above the rules of thumb of 3 months of imports, and ideally above 4 months of imports with the EAC convergence criterion of 4½ months of imports as the anchor (Article IV 2019, IMF Country Report No. 19/125, Annex III). Furthermore, as a small open economy, Uganda is vulnerable to capital outflows. Historically, Bank of Uganda has kept reserves higher than 4 months of import cover, and therefore a significant decline (below 3.5 months of imports) would increase Uganda’s risk premium.

3

Nonetheless, the authorities and the oil companies have just reported progress in their discussions towards agreeing on a fiscal regime, and Total and Tullow have announced that they have reached a deal for Total to acquire Tullow’s share in the oil project. These developments could pave the way for progress leading to a Final Investment Decision.

4

Uganda has a Senior Citizens Grant and developed a National Social Protection Policy. Nonetheless, less than 4.5 per cent of Ugandans has access to any form of social protection.

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Cover IMF Staff Country Reports
Uganda: Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Uganda
Author:
International Monetary Fund. African Dept.
Volume/Issue:
Volume 2020: Issue 165
Publisher:
International Monetary Fund
ISBN:
9781513544274
ISSN:
1934-7685
Pages:
40
DOI:
https://doi.org/10.5089/9781513544274.002
Text Figure 1.

Real Sector Developments