IMF sees favourable prospects for Uganda, calls for more social spending

IMF annual review prods central government to pay as much attention to human capital investments as it pays to physical infrastructure for inclusive growth

An aerial photo of the Karuma hydropower project
The Karuma hydropower dam, currently under construction. The project’s cost is $1.7bn, 85% of which is a loan from the Chinese government. Credit: UEGCL on Facebook

Uganda’s economic prospects over the next five years are favourable provided that public infrastructure and oil sector investments continue as planned, the International Monetary Fund said.

Economic activity in the 2018/2019 financial year is expected to expand by 6.3%, up from 6.1% in the previous year, thanks to growth in manufacturing, services, and construction, and supported by “appropriate” fiscal and monetary policies. Growth could reach up to 7% over the next five years if infrastructure and oil sector investments move forward according to plans.

“Investor surveys suggest that business conditions and sentiment are strong, while credit to the private sector has improved, helped by an accommodative monetary policy stance,” said the fund.

This optimistic outlook is tapered by “risks… tilted to the downside”. These include weather-related shocks, an escalation of security risks among key regional trading partners and in Africa; rising protectionism and a retreat from multilateralism on the global stage; and the political and security situation in the run-up to the 2021 general elections.

More balanced expenditure for inclusive growth

The IMF, whose assessment is contained in its annual review of Uganda’s economic developments and policies, also contends that the government should pay as much attention to investments in human capital as it pays to physical infrastructure for growth that is distributed fairly across society and creates opportunities for all.

Ugandan government officials argue that infrastructure is the most pressing obstacle to growth, holding back agriculture, industry, and tourism, the report said. Resources will become available for social sectors once large infrastructure projects are completed, they say, and justify lower budget allocations for health and education by pointing at donor support to those sectors.

But the fund draws concern to Uganda’s mixed progress on social indicators especially following the slowdown in economic growth that started in 2011. Literacy and numeracy improved until 2010 but have stagnated since, while primary education completion rates have also declined.

It adds: “After two decades of formidable gains, poverty reduction has stalled in the four years to the 2016/17 household survey. About 70% of the population depends on agriculture which registered negative per-capita growth over the same period. Women, the youth, and workers with limited skills struggle to find permanent employment in the formal sector.”

If the government invested in human capital, prioritising it as it does infrastructure investment, it would lead a rise in agricultural productivity and contribute to rising incomes, facilitating an employment shift towards other growing sectors, including light manufacturing services, the fund says.

It adds that “policies to close the education gap and promote gender equality would help to better translate aggregate growth into shared prosperity” which “requires reversing the trend of declining budget allocations for education and health, while enhancing the effectiveness of this spending.”

The report is the result of an annual appraisal of a member country’s economic developments by IMF staff, with particular attention on fiscal and monetary policies and their effects on economic growth. By and large, the IMF thinks that government and central bank policy are supportive of growth in economic activity. But it also includes several caveats.

Vulnerabilities are increasing

“Vulnerabilities are increasing,” said the report. Among those vulnerabilities are a weakening in debt metrics, with government officials acknowledging that debt ceiling targets in the charter for fiscal responsibility — an outcome of 2015’s Public Finance Management Act — have not steered government spending and tax policies in recent years. Public debt increased by 4% in 2017/2018 to 41% of GDP and is projected to peak at 50.7% of GDP in 2021/2022, despite investment having fallen short of plans.

The charter for fiscal responsibility requires public debt to remain below 50% of GDP in net present value and a fiscal deficit of 3% of GDP or less by 2020/2021.

The fund’s executive directors caution that some investment projects may not generate the projected returns and that interest payments are rising, with one in five Ugandan shillings collected in revenue in 2019/2020 to be spent on interest, “a level typically only associated with countries at high risk of distress or in debt distress.”

The directors issued a call to authorities “to keep debt below 50% of GDP in nominal terms over the medium term to safeguard the hard-earned favourable debt sustainability rating.” But Ugandan officials said they don’t see a need to adopt another debt ceiling in addition to the one in the charter of fiscal responsibility.

Still, the report notes that Uganda remains at a low level of debt distress. The government is also finalising a 5-year domestic revenue mobilisation strategy aimed at keeping debt at manageable levels.

Uganda’s fiscal deficit, the funds’ economists say, is also growing faster than the target set in the charter for fiscal responsibility. It widened to 5% of GDP in 2017/2018, faster than the target of 3%, driven by public investments, and is projected to widen further to 5.4% of GDP in the current year.

Expenditure in 2017/2018 also exceeded the original budget, while revenue collection increased by 0.4% of GDP, lower than the government’s target of 0.5% of GDP.

The rise in the current account deficit to a “somewhat weaker than desirable” level of 6.1% of GDP in 2017/2018 is another vulnerability. The current account deficit is expected to further widen to 7.2% of GDP in 2018/2019 mostly due to increased imports of capital goods for public investment projects, oil projects, and FDI.

Address Bank of Uganda’s deficit

In their assessment of the Bank of Uganda’s policies and regulatory activities, the funds’ economists and directors gave an unqualified opinion. The bank’s inflation targeting policy continues to serve Uganda well and has supported economic activity, while banking supervision and regulation are sound, said the economists.

But they add that the central bank should do more to strengthen banks’ financial reporting, internal controls and governance, thereby addressing weaknesses in these areas which “were at the core of the most recent bank failure”.

The government should also address the central bank’s deficit by improving its income position through a recapitalisation in the 2019/2010 budget, and by paying for services rendered and reviewing the bank’s cost structure.

BoU’s income declined due to low global interest rates, high costs to mop up excess liquidity in support of monetary policy, rising operating expenditures, and Crane Bank resolution costs. If the central bank’s deficit is left unaddressed it could erode its ability to effectively conduct monetary policy, the economists said.

Risks tilted to the downside

A lot could happen and cause lower-than-projected growth, the fund acknowledges. Further delays in the start of oil production, security concerns and political tensions could dampen confidence, weaken public debt metrics, and reduce growth.

The outlook for government finances could be undermined by revenue shortfalls and higher spending in the run-up to the 2021 elections, the fund said. Weather conditions and climate change also remain a risk to agricultural productivity, while inadequate donor financing for refugee aid risks further straining the provision of public services to communities with refugee presence.

Externally, “recent border tensions with Rwanda and a potential spreading of Ebola from neighbouring countries are risks.” Rising trade tensions globally could also weigh on growth and put pressure on the shilling.


Investments and exports drive rebound in 2017/18 GDP growth — World Bank