The government is warned against any attempts at printing new money to finance budgetary deficits, also known as monetary financing, as the economy suffers the effects of high inflation and reduced international sources of concessional finances.
Monetary financing is the direct transfer of money by the central bank to the government, as opposed to releasing it through the private sector when the government faces liquidity problems. This comes amidst persistent economic uncertainties facing the country and a World Bank pronouncement that it was halting new credit to Uganda over human rights violations.
According to Elizabeth Kasekende, the Assistant Director of economic modelling and forecasting at the Bank of Uganda, one of the suggestions being debated as the government seeks solutions to bridge the gap is monetary financing. She, however, says that the concept should be applied only in extreme circumstances.
But Kasekende expressed that this should not be an option because of the adverse effects it would pose, especially hyperinflation, potentially reversing the gains the Bank had made like controlling inflation and foreign exchange.
She was speaking at the 7th High-Level Economic Growth Forum on the theme: Strengthening Uganda’s competitiveness to foster accelerated economic growth, in Kampala.
Dr John Mutenyo, a Senior Economics Lecturer at Makerere University wondered if President Yoweri Museveni would allow the printing of cash and risk the economic backlash. Instead, he believes if the World Bank move takes effect, the president is most likely to fast-track government restructuring which would include reducing public administration costs.
Suggestions of monetary financing caused fears that the central bank would lose its independence from the executive and be vulnerable to further abuse, hence affecting its ability to manage the country’s macroeconomics.
Izabela Karpowicz, the International Monetary Fund Resident Representative in Uganda warned that such a move would draw political questions especially if it led to adverse effects. She said the Bank of Uganda would not convince the public that the move was not directed by the executive which then would question the independence of the Central Bank.
The Forum’s objective is to provide policy proposals that will inform the national budget priorities and the growth strategy for the 2024/25 financial year and the medium term.
Dr Jonathan Leape, the Executive Director of the International Growth Centre, urged the government to focus on Fiscal consolidation, ensuring that they raise enough revenue to make growth-enabling investments. He also recommended the reduction of tax incentives, boosting exports and farm productivity, value addition as well as addressing climate change issues.
He hoped that amidst the challenges, Uganda would realise its national and external growth forecasts for the medium and long term. Uganda is listed among the top five countries that will lead global growth over the next decade 2021-2030, growing at an average of 7.5 per cent, according to a Harvard University study. The other four are China, Indonesia, Vietnam and India.
Dr Albert Musisi, the Commissioner for Macroeconomic Policy at the Ministry of Finance, Planning and Economic Development said while Uganda’s economic growth has been above the Sub-Saharan Africa average, it has not led to the required development. This, he says, is because growth normally comes from the law value sectors like agriculture.
IMF’s Karpowicz agreed that economic development has been very slow despite the high growth figures. She revealed that Sub-Saharan Africa has not recorded per capita income growth over the years and yet this is one of the indicators of a progressive economy.
Most of the countries in Africa including Uganda are being suppressed by high debt service obligations and this is likely to increase as concessional debt financing sources become scarcer.
Dr Chris Adam, a development economics professor at Oxford University advised Uganda and other developing countries to take advantage of the growing sources of external financing in the form of Green Funds.
These are credit facilities that are given towards climate mitigation projects to enable the reduction of emissions or adaptation to the net-zero campaign.
