NEC-1-20-Proposal by Government To Borrow Up To USD 600 Million From The IMF To Finance The Budget Deficit For The FY 2020 2100010001
NEC-1-20-Proposal by Government To Borrow Up To USD 600 Million From The IMF To Finance The Budget Deficit For The FY 2020 2100010001
NEC-1-20-Proposal by Government To Borrow Up To USD 600 Million From The IMF To Finance The Budget Deficit For The FY 2020 2100010001
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1.0 TNTRODUCTTON
The Proposal was presented to this House by the Hon. Minister of Finance, Planning and
Economic Development on 21st October,2020 and accordingly referred to the Committee on
National Economy for consideration in line with Rule t75 (2) (b) of the Parliamentary Rules
of Procedure.
The Committee considered and scrutinized the proposal and now begs to report.
2.O METHODOLOGY
2.L Meetings:
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2.2 Document Review:
il The Letter from the Managing Director, International Monetary Fund (IMF)
committing to discuss a Uganda Reform Program requested by the Minister of
Finance, Planning and Economic Development;
ilt The Report of the Budget Committee on the Supplementary Expenditure Schedule
No.1, Supplementary Schedule No.2 and the Addendum to Schedule No.2 for FY
202012t;
vi The Presentation by Bank of Uganda on the Fiscal Deficit for FY 202012t and
Increase in Net Domestic Financing (27 October, 2020); and
vii. The Letter from National Planning Authority recommending approval of the loan (1Gh
November, 2020). <G
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3.0 BACKGROUND
During the staft of the FY 20t9120, the economy was projected to have an economic
growth rate of 6.50/o and then grow by 6.30/o in FY 2020121. However, given the outbreak
of the COVID-19 pandemic, that affected both the global and regional economy, the floods
and locust invasion, Uganda's economy is now reported to have grown by 2.9o/o in FY
2019120. This slower growth in the economy during FY 20t9120 was experienced in all the
sectors of the economy as; the Agriculture Sector grew by 4.Bo/o down from 5.4o/o in FY
20t9lt9, growth in the Industry sector was 2.2o/o down from 10.1olo in the FY 20t<9,
while the Seruices Sector grew by 2.9o/o down from 5.7o/o.
The impact of COVID-19 on the Ugandan economy given the global economic slowdown
and potential recession has been noted/observed through some of the following ways;
ilt Cuftailed workers' remittances in the last half of FY 2019120 as they lost jobs, which
affected household incomes;
vi Overall fiscal deficit widening to 7.2 percent of GDP and 10.7 percent of GDP in FY
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vilt Exchange rate depreciation; the Uganda shilling depreciated against the US dollar by
0.2 percent on a year to year basis from UGX 3,728.99 to UGX 3,737.94 at June
2020. In addition, worsening of external position, due to capital outflows, adverse
effects on the flow of international trade, tourism, workers' remittances, foreign
direct investment and loan disbursement continue to exacerbate exchange rate
depreciation pressures; and
ix. An increase in the number of vulnerable people as a result of the lockdown, leading
to reduced economic activities.
Similarly, Parliament approved UGX 45,493.7 billion for expenditure during FY 2020121 and
the budget was to be flnanced through domestic revenues amounting to UGX 33,071.7
billion and external resources amounting to UGX L2,422 billion. However, following the
performance of the economy in FY 20L9120, that was associated with a lower growth rate
and slower growth in revenues compared to the previous financial year, and the prolonged
effect of the COVID-19 pandemic into the second quafter of FY 202012t, the resource
projections were revised downwards.
The new resource projections reflect a growth rate of 20o/o from 27o/o in the approved
budget mostly due to a projected decline in domestic resources from a growth rate of 19olo
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Table 1: Projected Outturn of Resource Envelope and Expenditure FY 2O2Ol2l
o/w Tax Revenue 15,9t2.2 20,2t8.7 3,896.6 18,063.0 (2,L55.7) L9o/o 14o/o
Domestic Financing
(Borrowing +BOU
capitalization ) 3,878.1 3,560.3 L,672.1 3,560.3 47o/o -8o/o
Total Externa!
Resource 8.167.8 12.422.0 2.83s.7 12.422.0 23o/o 52o/o
During the first quafterof FY 202012t, the resource performed at 23o/o as domestic
revenues realized t9o/o of the approved budget revenues while external resources
performed at 23o/o on account of budget suppoft loans that performed at 53olo of the
approved b
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for e FY 2020121 as obserued in Table 7.
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The Committee noted that the performance of Quarter 1 domestic revenues had a surplus
due to a downward revision of the revenue targets for the financial year, the projected
revenue shortfalls based on the downward revision being one of the reasons for the
borrowing. However, despite the surplus, the URA Quafter 1 performance was below the
historical average peformance for the past five years, where 22o/o of the approved budget
revenues were realized during the first quarter.
2, bringing the total revised budget to UGX 48,834 billion. With the approved
Supplementary Expenditure, and the need to service domestic debt obligations, the
resource envelope is projected to leave a funding gap on the revised budget.
The Ministry of Finance, Planning and Economic Development proposes to finance the
deficit as follows: through budget cuts/efficiency gains amounting to UGX L,421billion; and
borrowing externally and from the domestic market to a tune of UGX 6,536.6 billion.
2020121; and
iii. To provide additional financing to government for additional domestic debt seruicing
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5.0 FINANCING AND UTILISATION OF RESOURCES
Table 2: Summary of Funding Pressures and Projected Budget Shortfall
FY 202012t
Revenue
1 Projected shortfall on revised budget (2,507.0)
2 Budget cuts and efficiency gains L,421.0
The IMF loan amounting to USD 600 million (UGX 2,229.3 billion) and domestic borrowing
amounting to UGX 4,307.3 billion are to provide a total UGX 6,536.6 billion as financing
meant to address the FY 202012t projected budget shortfall and additional funding
pressures identifled in Supplementary Schedule 1 and 2 and Domestic Debt Servicing to a
tune of UGX 6,611.9 billion, summarized in Table 2.
Item Terms
Loan Amount USD 600 million
Maturity Period 10 years
Grace period 5 years 6 months
Repayment period 4 years 6 months
Interest rate 0o/o
Source: Brief Letter from IMF & IMF Website
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The IMF loan is to be provided from the Extended Credit Facility (ECF), whose purpose is to
suppoft countries' economic programs aimed at moving toward a stable and sustainable
macroeconomic position consistent with strong and durable poverty reduction and growth.
The ECF may also help catalyze additional foreign aid.
The IMF letter to the Minister dated 24th September 2020, indicates that the financing under
the ECF carries an interest rate of zero percent (0olo) for a period of 10 years inclusive a
grace period of 5 years and 6 months at least through lune 2021. This implies that
Government will not incur interest payments in regard to this loan once acquired before
lune 2021.
It should be noted that under the ECF, member countries agree to implement a set of
policies that will help them make progress toward a stable and sustainable macroeconomic
position over the medium term. These commitments, including specific conditions, are
describedin the Country's Letter of Intent, which the committee was informed will be
prepared after Parliament's approval of this request. Othenruise, the IMF letter to the
Minister indicates that the IMF is willing to work out a three year program with the Country.
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From Table 4, the present discounted value of the loan request is USD 402.55 million
which is lower than the nominal value of the loan (USD 600 million). This implies that the
total future payment of the loan is cheaper than the proposed amount to be borrowed in
present terms. Othenruise, the total future payment of the loan will amount to USD 600
million after the loan period of ten (10) years.
Although the grant element of the loan at 330/o is below the benchmark of 35olo for
concessional loans, the interest rate of 0olo on the loan, which is below any market rate,
makes it highly concessional.
8.0 IMPLEMENTATTON
Once approved, the loan will be disbursed to the consolidated fund. The Ministry of Finance,
Planning and Economic Development will be responsible for ensuring that funds are
properly utilized to finance the FY 202012L budget as approved by Parliament, including the
approved Supplementary and accountability thereof provided to Parliament in line with the
provisions of the Public Finance Management Act, 2015 as amended.
With the approval of the two Supplementary Schedules for FY 2020121, the ratio of overall
deficit to GDP increased by 9o/o from 9.8% to
after adding the URA Quarter 1
10.7o/o
surplus revenues, moving fudher away from 7.2o/o realized in FY 2019120 and 7.Bo/o
envisaged in the NDPIII.
With approval of the IMF loan of USD 600 million, the projected deficit financing as a share
of GDP will 20o/o from 7 .4o/o projected to 8.9% of GDP as observed in Table 5.
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Table 5: Effect of the IMF borrowing on the Fiscal Framework - FY 2O2O|2L
Projected o/o
Change
Projected oufturn FYin
outturn 2O2Ol2l(with projected
Category with NDP III (no loans IMF loan) & outturn
Figures in Billion Poj. FY Approved & excl Qtr Quafter 1 due to
uGx 202Al2L 202012t 1 surplus) surplus loans
Revenue and
Grants L3.7olo 15.5olo L3.9o/o L4.60/o 5o/o
Domestic Revenue l3o/o L4.4o/o t2.8o/o 13.5o/o 60/o
Grants 0.74o/o L.to/o l.lo/o L.to/o 0o/o
Expenditure and
Net lending 2L.60/o 24,20/o 23.60/o 25.3o/o 7o/o
Current expenditure L2.0o/o ll.60/o 11.60/o 13.0o/o L3o/o
Development B.7o/o tL.40/o 9.Bo/o 10.8olo t9o/o
Net lending 0.9o/o 0.90/o L.0o/o t,00/o 0o/o
Other spending
(Domestic arrears) 0.3o/o t.2o/o L.4o/o L2o/o
With regard to debt service, since the IMF loan has a grace period of more than 5 years and
d 0o/o interest rate, it has no effect on the debt service in the medium term since no interest
paymen ts shall be made , and its first payment for principal is in the last 6 months of the 6th
year.
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1O.O THE LOAN AND CURRENT DEBT SITUATION OF THE COUNTRY
By end of June 2020, total Public debt stood at USD 15.4 billion of which USD 10.3 billion is
external and USD 5.1 billion is domestic. As a share of GDP, public debt stood at41.4o/o, of
which external debt was 670/o, while domestic debt was 33o/o.
With approval of the IMF loan, the external debt stock will increase by USD 600 million to
USD 10.9 billion. Over the medium term, the IMF loan will only increase the debt to GDP
ratio by 1.5 percent in FY 2020121, but the loan will have no effect on external debt service
for the next five (5) years since it will be acquired at no interest rate with a grace period of
5.5 years. However, approving UGX 4,307.3 billion borrowing from the domestic market and
the IMF loan, the public debt stock is expected to reach 4\o/o of GDP by end of FY 2020121.
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In addition, Government should prioritize an additional UGX 700 billion for
clearance of domestic arrears in FY 2020/27 within the available resource,
Uganda's external position has been characterized by a relatively large current account
deficit that has been largely funded by the surpluses in the financial account mostly driven
by Government borrowing. The current account deficit means that the county is consuming
more goods and seruices from the rest of the world than it is selling to the rest of the world.
The current account deficit is also a reflection of low national savings relative to
investments, indicating that the country is funding her i from savings from the
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The Committee recommends that, in order to improve the external position
of the country, Government should embark on increasing productivity in
the productive sectors, especially the Agriculture and Industrial Sectors in
the short to medium term; unlock the constraints surrounding the oil
production phase to boost export receipts; and attract Foreign Direct
fnvestments (FDI).
In addition, the Committee obserued that a number of projects funded through borrowing
are executed with lags in the project implementation schedules. The lags are attributed to a
number of reasons not limited to absence of counterpart funding and inadequate project
preparation before implementation.
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mobilization strategy, so as to slow down the growth in debt arising
from the need to borrow for budget support.
The Committee obserued that the purpose of the Extended Credit Facility (ECF) of the IMF,
is to support countries' economic programs aimed at moving toward a stable and
sustainable macroeconomic position consistent with strong and durable povety reduction
and economic Arowth. The ECF may also help catalyze additional foreign aid.
However, although the loan is on very good terms, at 0olo interest rate, the maturity period
of 10 years makes the loan appear non concessional going by the Grant element, measured
at 350/o or more for a concessional loan.
Extending the credit facility to a maturity period of t2 years will make the grant element at
least 350/o, reduce the fiscal burden to repay the debt through lower amounts spread over 6
and half years instead of four and a half years under the current loan terms.
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12.0 CONCLUSTON
In the short run, in the event that the economy is unable to register significant rise in
foreign inflows, Government should adjust its fiscal policy stance and opt to cut spending in
less critical areas, without undermining economic arowth objectives.
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REPORT OF THE COMMITTEE OF NATIONAL ECONOMY ON THE PROPOSAL BY
GOVERNMENT TOBORROW UP TO USD 600
MILLION FROM THE
INTERNATIONAL MONETARY FUND (IMF) TO FINANCE THE BUDGET DEFICIT
FOR THE FY 2O2Ol2t
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Hon. Katoto Hatwib
Dodoth East
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13. Hon. Rwemulikya Ibanda Ntoroko County
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Hon. Okumu Ronald Reagan
Arua Municipality
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38. Hon. Kutesa Pecos Onesmus UPDF Representative
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