Uganda is exposed to increased vulnerabilities towards its external debt sustainability despite indications of low risk of debt distress, the IMF has revealed.
A report on IMF’s Seventh Review under the Policy Support Instrument indicates that Uganda will be confronted with shocks from a low grobal growth, tighter global financing conditions and negative spillovers from the South Sudan conflict which will weigh down exports.
The review undertaken jointly by IMF executives and government of Uganda officials in October 2016 also highlights the growing refugee influx and changes in weather partners which affect food prices as other significant risks.
“Near-term risks are to the downside. Uganda remains exposed to risks from adverse weather and global and regional developments. Continued problems with public investment efficiency would undermine growth prospects and debt sustainability.”
Uganda’s average growth rate declined from close to 8% between 2006 and 2011 to 4.5% in the period between 2011 and 2016. In the same period (2011 to 2016), the current account deficit widened from 6% of GDP to 7%.
IMF advises on boosting of exports over the medium term, including through effective public investment to fill infrastructure gaps. “If growth and exports prospects were to be revised down in the future, this could adversely affect Uganda’s risk rating, as could additional reliance on non-concessional borrowing that would not lead to higher growth rates.”
To mitigate these risks, IMF recommends sound project selection and implementation, reprioritization of expenditures, domestic revenue mobilization and strong governance frameworks.
On monetary policy, the IMF credits Bank of Uganda for “successfully steering inflation” and undertaking an easing cycle for 5 consecutive months since April 2016.
“Overall, the banking sector remains well capitalized, despite elevated NPLs. The BoU has appropriately taken over an under-capitalized systemically important bank. Effective and swift resolution of this bank is a key priority.”
Non-Performing Loans (NPLs) rose to 8.3% in June 2016 from 4% a year ago.
On the fiscal aspect, IMF notes that tax revenue fell short of target by 0.3 percent of GDP, reflecting lower nominal growth. There was a “higher than anticipated election-related spending led to an overrun of current expenditure of 0.1 percent of GDP.”
“Thus, the program fiscal deficit target (QAC) was missed by 0.5 percent of GDP, and the government partly relied on BoU advances for its financing needs.”
“Externally-financed development spending (including hydro power projects) was under-executed by 2.4 percent of GDP, and the overall fiscal deficit was 1.2 percent of GDP lower than anticipated, partly because the necessary domestic contribution was not budgeted for.”
On the whole, the review states that Uganda’s economy has performed “reasonably well in a complex environment” with growth slowing marginally to 4.8 percent in FY15/16.