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The board of the International Monetary Fund has approved the immediate release of about $120 million (Ush440.4 billion) to the country even as it warned of elevated risks including the recent fallout from the enactment of the Anti-Homosexuality Act. 

The money has been released under the Extended Credit Facility (ECF) arrangement which provides medium-term financial assistance to low-income countries, like Uganda, with protracted balance of payments problems to implement economic programmes that make significant progress toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth. 

Quoting an IMF statement announcing the release of the funds, the Finance Ministry Permanent Secretary and Secretary to the Treasury, Mr Ramathan Ggoobi, said Uganda is on a “steady path to full recovery, sustained growth and reform for socio-economic transformation”. 

The decision to release the Ush442.4 billion follows the completion of the fourth review which brings the aggregate disbursement under the ECF arrangement to about $750m (Ush2.7 trillion).

The ECF Arrangement for Uganda, which is about $1 billion was approved by the IMF executive board on June 28, 2021.

Read: IMF offers Uganda $240m three-year loan

Its aim is to support the near-term response to the Covid-19 pandemic and boost more inclusive private sector-led long-term growth.

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

While Quantitative Performance Criterion (QPC) on the ceiling on the Bank of Uganda (BoU) net credit to government (NCG) was missed by a very small margin in March 2023, the IMF says all structural benchmarks due between March and June 2023 have been met. QPCs are specific targets or benchmarks that a country must meet in order to receive financial assistance from the IMF or to maintain its eligibility for ongoing support.

Consequently, the lender granted a waiver of non-observance of a performance criterion on the ceiling on net credit to the government from the BoU.

The risks

Besides the Anti-gay law, which has received wide condemnation and threats of withholding funds from Uganda’s major donors and lenders, including the United States, the European Union  and the World Bank, the  IMF has also flagged other risks including from further tightening of external financial conditions, a renewed pickup in inflation which would increase borrowing costs via additional monetary tightening, and a stronger-than-expected drag of higher borrowing costs on private sector credit and investment.

Read: Biden slams Uganda anti-gay law, urges repeal

The IMF warns that the enactment of the Anti-Homosexuality law “could have a larger-than-anticipated impact on the availability of grants and external loans from development partners, as well as Foreign Direct Investment (FDI) flows and tourism”. 

IMF has also warned that the ongoing conflict in Sudan could have a negative impact on exports. Other risks include a stronger tightening of global financial conditions that the fund says would constrain the availability of syndicated loans and weigh on financial sector stability given that foreign exchange credit accounts for around 30 per cent of bank loans.

Despite facing multiple external shocks and experiencing tighter financial conditions, the IMF says Uganda’s economy is predicted to expand by 5.5 percent in the current financial year and 6 percent in the financial year commencing next month.

Inflation, the fund says, has also been decreasing and is anticipated to reach BoU’s medium-term target of 5 percent core inflation by the end of the year. The improved short-term outlook is attributed to favourable weather conditions impacting domestic harvests, the reduction in global commodity prices, the easing of global demand-supply imbalances, and the delayed effects of monetary and fiscal policy tightening.  

Handling debt

To maintain a sustainable level of debt, decrease the current account deficit, and safeguard foreign exchange reserves, the IMF has cautioned that it is crucial for Uganda to implement fiscal consolidation, adopt strict monetary policies, and maintain flexibility in exchange rates.  

Read: Debt servicing puts pressure on Uganda revenues

“Structural reforms will need to continue focusing on strengthening governance and anti-corruption frameworks, enhancing domestic revenue mobilisation – including through more ambitious rollback of tax expenditures, and boosting financial inclusion. Together with these initiatives, efforts to increase social spending will also improve prospects for achieving more inclusive, sustainable, private sector led long-term growth,” IMF says.