The International Monetary Fund is the latest institution to downgrade Uganda’s growth projection for the current financial year, following similar updates by the World Bank and the Bank of Uganda.
A statement released by IMF staff at the end of their most recent consultation mission says GDP expansion in financial year 2016/2017 is projected at between 3.5% and 4%.
The last time the fund’s staff reviewed Uganda’s economic program, this January, it said the economy would grow at 5% in the current financial year.
“The drought held back activity in the first part of the year,” the statement said, in explaining the downgrade. Private sector credit – which fell drastically in the first quarter of the financial year, and is still growing slower than usual – is “an additional drag.” Finally, “the slow execution of externally-financed public investment also contributes.”
The review said the budget for the next financial year, 2017/18, covers the necessary infrastructure investment needs but on an expenditure plan that requires a lot of discipline. “The government aims to increase tax collection by another ½ percentage point, though specific measures still need to be firmed up.
“The envelope for current spending is tight, and allocations for social spending are broadly unchanged relative to FY16/17 in Shilling-terms. Strong expenditure control is, therefore, needed to avoid a recurrence of arrears or the need for a supplementary budget.”
It also mentions the need for financial sector reforms in the wake of Crane Bank’s collapse. Bank of Uganda’s supervision should become more intrusive than it is currently, with more attention paid to the results reported by banks and their risk management frameworks.
Additionally, to reduce the risk of loan defaults, it says credit bureaus should look beyond loan repayments to other payment obligations – which are not mentioned – before giving credit scores. It adds that the central bank is considering the introduction of counter-cyclical loan provisioning – the practice of making higher provisions during good times so as not to do so during bad times – and several other indicators.
The fund expects growth to pick up to between 6 and 6.5% in the next three to four years, driven by infrastructure and oil sector investments. Still, it places strong caveats on that outlook.
“Weak implementation of public investment and regional developments (conflicts, possible disruptions during upcoming elections), could undermine growth,” the review says. So could a slowing of global trade.
Additionally, “uncertainty persists over when oil production will commence and the phasing of investment in the sector. The agricultural sector remains exposed to climate conditions and pest infestations. Tightening global financing conditions could hold back portfolio inflows. Lastly, cuts in aid flows would undermine the sustainability of spending, in particular in social sectors.”