IMF Program for Uganda Will Address Fiscal Challenges, Liquidity Risk
Earlier this month, Uganda with B2, stable outlook rating reached a staff-level agreement with the International Monetary Fund (IMF) on a $1 billion three year extended credit facility (ECF).
The ECF will help Uganda meet its financing needs and thus contain liquidity risk and support the government’s fiscal position by improving revenue mobilization and spending rationalization, a credit positive; Moody’s analysts concluded in a report.
It noted that pending approval of the IMF management and executive board in the coming weeks, the ECF will provide an important anchor for Uganda’s fiscal policy.
The ECF emphasizes enhanced governance by improving transparency and accountability in the use of public funds.
It will supports Uganda implement key reforms outlined in its third National Development Plan (NDP III) and medium-term fiscal framework, eventually safeguarding macroeconomic stability as well as generating more inclusive growth.
The coronavirus pandemic has exacerbated Uganda’s deteriorating fiscal trends. As revenue underperformed expectations and tax administration reforms were delayed, the fiscal deficit widened.
“We expect that the deficit will be around 9.5% of GDP in fiscal 2021 (ending 30 June 2021), widening from the 7.2% deficit in fiscal 2020 and 4.9% in fiscal 2019”, Moody’s said.
“Because of persistently large fiscal deficits, the government’s debt burden rose to about 40% of GDP in fiscal 2020 from 22% of GDP in 2013, when we first rated Uganda.
“We expect debt to approach 50% of GDP at end of fiscal 2021 (see Exhibit 1). The increase in Uganda’s debt burden is outpacing government revenue, and we project that the debt-to-revenue ratio will exceed 345% in fiscal 2021 versus 309% in fiscal 2020 and 262% in fiscal 2019”, it added.
The high ratio also reflects relatively low revenue mobilization, even compared to Sub-Saharan African peers and B-rated peer group, because of large informality, low levels of compliance and a range of tax exemptions.
Debt affordability has also deteriorated in recent years because of increasing reliance on non-concessional borrowing (mainly domestic, but recently also external), limiting Uganda’s ability to increase social spending and withstand future shocks.
“We anticipate that interest payments will absorb more than 20% of revenue in fiscal 2021, up from about 16% in fiscal 2020”.
The IMF assistance and the catalyst it provides for additional funds to be mobilized from international financial institutions on concessional terms will temper continued erosion of debt affordability by limiting Uganda’s recourse to more expensive domestic or external commercial borrowing.
Strengthening governance and budget transparency are key to improving fiscal policy effectiveness, and creating the basis for prudent management of future oil revenue.
Uganda’s public financial management, budget planning and implementation will benefit from the IMF program. The IMF program has also targeted governance improvements including specific commitments to enhance transparency and accountability in the use of public resources, such as the publication of tax expenditures and better disclosure on procurement contracts.
IMF Program for Uganda Will Address Fiscal Challenges, Liquidity Risk
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