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Reviving growth a must - IMF

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Ms Ana Lucia CoronelMs Ana Lucia Coronel, the new International Monetary Fund (IMF) senior resident representative in Uganda, spoke to The Independent’s Julius Businge in an exclusive interview in which she tips the government and policy makers on key priorities for growth if the country’s economic fortunes are to be revived in 2013 and beyond. Excerpts.

What is your assessment of Uganda’s economy over the last few months you have been here?

I would say the economy is not bad. The authorities have succeeded in ensuring macroeconomic stability. Adequate policies have helped achieve low inflation and a significant accumulation of international reserves.

The main economic challenge now is to stimulate growth, which is essential for employment creation and poverty reduction. At only 3.5%, growth is well below the potential level and barely above the population growth rate. Another priority is to improve management of the fiscal accounts and processes to ensure that resources are efficiently utilised.

 

Major donors have been announcing aid suspensions to Uganda because of concerns about corruption particularly in the Office of the Prime Minister. What is your take on the action of the donors because some people think it’s the poor who suffer most from these aid cuts?

It is unacceptable that resources meant to address social and development needs have been diverted to other purposes in an illegal way. This has motivated a strong reaction not only from Ugandan development partners, but from the society as a whole. It affects government spending plans and it hurts all citizens in Uganda. This unfortunate situation also provides a key opportunity to the government to take definitive action to address weaknesses in public financial management and ensure proper and transparent handling of public funds.

There is continued weak demand for African goods and services in foreign markets such as Europe due to the ongoing economic constraints there. What options do poor countries like Uganda have to avoid being negatively affected by this situation?

The most recent IMF’s forecast for global growth for 2013 is 3.5%, which certainly is still sluggish. It is important to note that while this is the average, advanced economies are expected to grow by only 1.5% while emerging markets and developing economies are projected to expand by 5.5%, and in the case of Sub-Saharan African countries even a bit higher than that. This said, it is clear that there are evident spillovers of the economic difficulties in advanced economies into developing countries like Uganda.

The main channels of transmission are trade, as demand for Ugandan products comes down, financial transactions as the business options from foreigners are depressed, and remittances as Ugandans working abroad lose their jobs. These factors need to be taken into consideration when forecasting economic growth in Uganda. Countries like Uganda should try to minimize the impact of these spillovers by building buffers in good times that can be used in bad times. For example, now with lower inflation and higher international reserves, the Uganda economy is better prepared to deal with the external shocks than it was before.  The other way of shielding the economy from adverse shocks is one that will take more time and consists of diversifying products and markets to have more investment, production, and export opportunities.

Uganda’s economy has been hit by high inflationary pressures for the last one and a half years, though a decline in inflation has been reported in recent months. What is your view on how the situation has been managed at the macro level?

The decline in inflation has been quite remarkable from a high of over 30% in October 2011 to a level of under 5% now. This fall has been supported by declining food prices, but also by a restrictive fiscal stance and tight monetary policy. The disinflationary strategy was well managed at the macro level and policies succeeded in reducing inflation quite fast to the targeted level.

What is your take on the effectiveness of the Central Bank in managing the economic challenges the country is facing? Where does it need to improve?

The Central Bank has successfully used the new inflation targeting lite framework to rein in inflation. As you know, this framework uses the Central Bank Rate as the main policy device to guide market interest rates and in that way to ensure that market liquidity is consistent with the inflation target. I believe the Bank of Uganda is doing a very good technical work in this regard. The Bank uses a model that captures well the transmission of central bank rates into market rates, taking into consideration the position of economic growth in the cycle and the impact of exchange rates on inflation, among other factors.

The policy statements that the Bank of Uganda issues every month are set to provide guidance to banks and other market participants on how economic developments will evolve to support the ultimate objective of maintaining low inflation. You asked what needs to be improved.  I think reforms on the institutional side are needed to support the inflation targeting regime, which is not only a framework for the Bank of Uganda but for the country as a whole, since maintaining low inflation is in the interest of all. The actions I am thinking of refer to the need for a more autonomous central bank, with adequate and sustainable capital, and with independence of instruments to conduct monetary policy.

Briefly, what are the best options that a country like Uganda should take to stablise and grow the economy, going forward?

Following the successful decline in inflation, there is a key need to maintain macroeconomic stability by continuing to pursue adequate monetary, fiscal and exchange rate policies. Rapid monetary tightening last year raised financing costs significantly. Together with a tight fiscal stance, this resulted in low economic growth, which now has to recover. In fact, reviving growth is a clear priority in Uganda.

Short-term policies toward this end require careful calibration to maintain essential public investment, encourage a gradual resumption of bank lending, and continue to allow the shilling to reflect market conditions. Over the medium term, sound macroeconomic policies need to be underpinned by a higher contribution of private investment, which would in turn require improvements in the business environment and reinforced efforts to fight corruption.

Uganda is set to start oil production in the Albertine region in the next few years with the legal framework now being set up to manage the resource. What is your assessment of the manner in which the whole process has been managed so far?

Oil production is set to be a key driver of growth, but there are important decisions that need to be taken to allow this to happen. A key decision, from the macroeconomic point of view, is successful integration of oil revenues into a medium-term fiscal framework. What does this mean? It means that the government has to plan with sufficient anticipation how to maximize the use of the oil wealth over time, by deciding how much to save for future generations-because oil is a non-renewable product; how much to invest—given the country big infrastructure needs; and how much to spend in social and developing programs.

In the case of Uganda, these last two aspects have a priority. It is important that oil revenues are managed in a very transparent way, with all resources transferred to the petroleum fund that will be created for this purpose. It is also important that oil savings be managed in a professional way, and that spending and investment of oil revenues be carried out through the budget and not off budget. In sum, all the Ugandan population has the right to know how these sovereign resources are being used, and that is why I emphasize the importance of transparency.

Critics say the government is failing to fully support critical sectors like agriculture, tourism and infrastructure development, which is undermining the country’s economic prospects. To what extent do you share this view?

Uganda has great potential to develop sectors like agriculture and tourism, in which increased productivity will bring important returns. Domestic processing of agricultural products could be an important source of revenue, and tourism could be certainly expanded. I would like to emphasize, though, that these are all activities that should be carried out by the private sector. Support from the government to these sectors should come in three ways: First, by allowing fair competition to investors interested in working in these activities. Second, by providing a favorable business environment to investors.

This has to be done by setting clear business rules and putting governance guarantees in place. And third, by improving infrastructure to facilitate production. This will necessitate revamping the government’s capacity for appraising and implementing projects transparently and without delays.

You recently mentioned the issue of tax exemptions offered to some investors saying these were undermining revenue performance. Shouldn’t tax incentives be used to attract investors into the economy?

I think that the three factors I just mentioned are key to attract investors. Tax incentives could be occasionally and temporarily used if well targeted, but should not be widespread. In the case of Uganda, there have been important efforts to improve tax collection and I have a very positive impression of the work that the staff at the URA are doing. However, the ratio of revenue–to-GDP is still low by regional and international standards, which somehow is explained by the structure of the economy—a landlocked country with a large informal economy.

I believe there is still ample space for raising tax collections and achieve the target of increasing the tax-to-GDP ratio by 0.5 percentage points per year. Actions on this front include introducing a tax procedure code, rationalizing tax expenditures, in particular for the VAT and CIT, and educating taxpayers on the importance of paying taxes.

What is your outlook for Uganda’s economic growth prospects in 2013 and indeed in the next few years?

The economy is expected to grow by over 4% this year, affected by the suspension of aid, but helped by the expected recovery in private consumption and investment with lower interest rates and clearer inflation expectations. Over the medium term, the economy is expected to slowly pick up to reach the potential growth rates of 6-7%. This of course critically depends on reforms to fight corruption, which is a main deterrent to growth, and to improve public financial management to rebuild the trust of Uganda’s development partners, whose support is still needed to finance development.


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