The International Monetary Fund (IMF) has projected a 3% to 4% GDP growth for the 2016/17 financial year, pilule pointing to further slowdown in the economy largely attributed to the long drought.
IMF also notes that among other drivers of the sluggishness are the low private sector credit and slow execution of externally financed public investment which government has prioritized over the last few years.
However, with the recent changes in weather patterns and recover in credit, Axel Schimmelpfennig, the IMF Resident Representative in Uganda said growth could prop up to 5% in the 2017/18 financial year.
The projections follow IMF’s annual consultations and monitoring of Uganda’s economic development as part of the 8th review of its Policy Support Instrument.
At a press conference held along with the Mister for Planning David Bahati, Bank of Uganda and Ministry of Finance officials on Tuesday, Schimmelpfennig observed that due to the drought, inflation has edged up from 5% year on year in September 2016 to 22% in April this year. In the same month, a 6.8% and 4.9% headline and core inflation were registered respectively.
In the medium term, IMF projects that investments in infrastructure and the oil sector could yield growth of up to 6% over the next three to four years.
“However weak implementation of public investment, slowdown in global trade as well as regional developments like conflicts and elections could undermine growth,” the statement released after the review stated.
In its further findings, IMF made emphasis of the uncertainty that surrounds the timeline of oil production, effects of foreign aid cuts and the risks that the agricultural sector remains exposed to, among them; climate and pests.
Regarding public debt sustainability, IMF cautions on the possibility of Uganda’s debt to peak at 41% of GDP in the next two years due to the heavy borrowing for infrastructure investment. With the two ongoing projects of Karuma and Isimba hydropower dams, IMF says foreign financed development expectations for 2016/17 will significantly fall short.
“Safeguarding debt sustainability requires continued domestic revenue mobilization and sound project implementation to realize the envisaged growth dividend.”
IMF recommends that government adopts “strong expenditure controls” in order to avoid the reoccurrence of arrears or supplementary budgets. It also proposed more intrusive supervision and scrutiny of banks’ reporting by the Central bank to strengthen the financial sector stability.
State Minister for Planning David Bahati, in his comment on Uganda’s debt said; “Debt is not bad in itself if it is acquired for the right reasons and managed well. We (Uganda) are now at 36%, still he lowest in the region and we remain cautious.”
“The only challenge has been absorption especially on projects that require counterpart funding. But we have resolved that we shall no longer borrow unless we are sure that feasibility studies have been made and projects are ready,” Bahati added.
Regarding domestic arrears, The Secretary to the Treasury, Keith Muhakanizi admitted that much as they have highly accumulated, government has in recent years taken deliberate measures to prioritize them particularly pension, wages and utilities.
“The arrears projected to grow are mostly capital expenditure especially on infrastructure where we have land compensations. I think we became a little too ambitious on that front and that’s why we requested IMF to give us technical assistance on public investment program,” Muhakanizi added.
Government has allocated Ush 300bn in the 2017/18 financial year to reduce the current stock.