The International Monetary Fund said on Wednesday that it had approved $419.5m (Shs1.6 trillion) in “emergency financial support” to Uganda to help combat the economic fallout of the Covid-19 coronavirus pandemic.
The loan “will help finance the health, social protection and macroeconomic stabilisation measures, meet the urgent balance-of-payments and fiscal needs arising from the Covid-19 outbreak and catalyse additional support from the international community,” a statement by the IMF said.
Uganda joins neighbours Rwanda, the Democratic Republic of Congo, and Kenya in borrowing from the IMF’s rapid credit facility to address the impacts of the coronavirus. The Fund and the World Bank announced in March that they are setting aside over $70bn in emergency financing “to assist countries coping with the health and economic impacts of the global outbreak.”
Last month, the finance minister, Matia Kasaija, told parliament that the government had applied for $200 million in emergency funding from the IMF and the World Bank to plug a funding gap caused by the coronavirus. The ministry had earlier said that “revenue shortfalls and additional expenditure needs” would lead to a budget gap of $190m in the financial years of 2019/20 and 2020/21.
The $419.5m loan is, however, more than twice the initial amount mentioned by the government, indicating that either the revenue shortfall caused by the global coronavirus pandemic is higher or the additional expenditure needs have increased, or both.
In addition to a supplementary budget of Shs304.4bn ($80.6m) approved by parliament last month, the government also received authorisation from the World Bank to reallocate $15m (Shs56.9bn) from the Reproductive Maternal and Child Health Services Improvement Project to its Covid-19 response efforts. The funds will be “replenished from our fast-track facility” for Covid-19, tweeted Antony Thompson, the World Bank country manager.
Uganda’s economy has been hit hard by the pandemic, particularly the key sectors of tourism, transport, construction, manufacturing, and agriculture, according to the IMF statement. Remittances and foreign direct investments have also declined due to external disruptions caused by the coronavirus.
It added that the pandemic has also intensified the challenges caused by heavy rains early in the year and the ongoing desert locust invasion.
“The IMF’s emergency financial support under the Rapid Credit Facility, along with the additional donor financing it is expected to help catalyse, will help address Uganda’s urgent balance of payments and budget support needs,” Tao Zhang, the deputy managing director and acting board chair at the IMF said.
He added: “A temporary widening of the fiscal deficit is warranted in the short term to allow for the implementation of the response plan. Despite a temporary worsening of debt indicators and heightened vulnerabilities, public debt is expected to remain sustainable. The authorities remain committed to ensuring debt sustainability, including through their efforts to enhance revenue collection and strengthen public investment management.”
The government has pledged to manage the loan transparently, Mr Zhang said, and will “report separately on the use of the funds, undertake and publish an independent audit of crisis-mitigation spending and publish large procurement contracts.”
Policy responses to pandemic
In addition to the government’s policy response — which has prioritised an increase in health spending and stronger social protection to the most vulnerable, especially in large urban areas — the Bank of Uganda has relaxed monetary policy to encourage lending and instituted measures to anchor the financial sector.
The central bank cut its benchmark interest rate to its lowest level ever last month. This was in response to a decline in macroeconomic conditions and to ensure the normal functioning of financial markets, the Bank said.
The Bank also announced expanded measures to support the financial institutions, including a moratorium on dividends and bonus payments for at least 90 days, liquidity assistance to banks in distress, a plan to purchase government securities held by microfinance deposit-taking institutions and credit institutions to ease their liquidity distress, and expanded repurchase operations.