Bank of Uganda Governor Emmanuel Tumusiime Mutebile has mentioned that the biggest challenge faced by his organization currently is how to accumulate foreign exchange reserves to service the external debt without hurting the domestic market.
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BOU grappling with lack of foreign reserves to service external debt – Mutebile

Bank of Uganda Governor Emmanuel Tumusiime Mutebile has mentioned that the biggest challenge faced by his organization currently is how to accumulate foreign exchange reserves to service the external debt without hurting the domestic market.

He says forex reserves have to be purchased from the domestic market, without causing sharp exchange rate depreciation pressures that would ultimately pass through to domestic inflation, thereby warranting tightening of monetary policy, and subsequently impacting on economic growth.

“For instance, in FY 2019/20, BoU has to purchase about US$1 billion to cater for servicing of external debt, debt repayment, and other government imports of goods and services, if the international reserve level has to be maintained at the current level of 4.1 months of imports of goods and services.

“The required foreign currency purchases are estimated to rise in the next 5 years before oil proceeds start flowing in. Buying these amounts without causing sharp exchange rate depreciation pressures in a shallow foreign currency market is a real challenge,” said Mutebile while making a presentation at a conference on Infrastructure and Human Capital Investment for Growth and Development in Uganda at the Serena Kampala Hotel on Friday.

Mutebile said  Uganda is confronted with extensive demand for public spending whereby it is necessary to examine the trade-offs of public expenditure choices as well as the sustainability of the outcomes.

He adds that at this point, the country can undertake the necessary pivoting away from suboptimal policy options, or indeed, to consolidate the progressive initiatives for equitable development going forward.

“The conference on “Infrastructure and Human Capital Investment for Growth and Development in Uganda” is both timely and perhaps also overdue.

“It is timely, for taking place at a time when the lessons that will be drawn from here may be used in shaping the next evolution of Uganda’s National Development Plan; but it is also overdue because it speaks to strategic choices of public investment, when the nation is already geared up for the big push in public investments.

“Uganda still faces infrastructure gaps, and there is no doubt that infrastructure bottlenecks hamper economic development.

“Public investments provide a near-term boost to economic growth and there is an enormous amount of economic evidence demonstrating that public investment is a significant long-run driver of productivity growth, and hence, growth in average living standards.

“In addition, well-executed high-yielding public investment programs can substantially raise output and

consumption and be self-financing in the long run. However, for infrastructure to result in economic transformation, this must be combined with a skilled labour force,” said Mutebile.

Mutebile says there are two crucial aspects that the country must focus on.

“First, public investment in infrastructure at the cost of human capital development will not support Uganda’s economic transformation.

“Uganda’s prosperity in the years ahead will largely depend on its skilled human capital, which is useful for innovating and has a stronger effect on economic growth.

“In particular, public investments in higher education and skills may be more growth-enhancing and strengthen the case for additional public expenditures on education,” says Mutebile.

He says expanding public investment in human capital and skills raises the question of funding sources such as taxes or changes in the composition of public spending.

“This, therefore, points to the need for the right mix of public infrastructure investment and social spending. I hope this conference will come up with the right mix.

“Second, even if public investments spur long term growth, Uganda faces challenges regarding public investment management and financing these investments.

“Concessional financing has substantially declined but access to international financial markets has eased.

“Therefore, the opportunity to borrow non- concessionally to meet infrastructure needs has become very tempting, especially in anticipation of oil revenues, which serve as collateral for borrowing from international markets,” stressed Mutebile.

Mutebile said in his view, public investments financed by public borrowing against future oil revenue is a precursor for a resource curse. Moreover, Uganda has a low public investment efficiency of about 0.3.

“If public investment is scaled up quickly, absorption capacity constraints could drive public investment costs further.

“Whereas Uganda’s total public debt remains at a low refinancing risk, public debt has risen sharply since financial year (FY) 2009/10, with nominal debt to GDP ratio increasing from 19.2 per cent in FY 2009/10 to 42.2 per cent in FY 2018/19.

“And given the current commitments on infrastructure projects, it is projected to increase further to around 45.7 per cent of GDP in FY 2019/20.

“There are risks to the rapidly rising public debt, especially the external debt, which has risen on an annual basis at an average of about 18 per cent in the four financial years to 2018/19.

“Therefore, it is important for Uganda to strike a balance between the need for public investments and managing public finances,” said Mutebile.

BY PAUL TENTENA