1. What is a Development Policy Operation?
Development Policy Operations (DPOs) are one of the World Bank’s three financing tools. DPOs are robust, flexible and quick-disbursing financing instruments that help countries achieve development results by supporting a program of policy and institutional reforms while providing financing for their national budgets.
2. Why did Uganda need a DPO during FY20-FY21?
Uganda, like many countries has been affected by the spread of the coronavirus. Following confirmation of the first case on March 21, 2020, the Government of Uganda imposed stringent travel restrictions, banned public gatherings, and schools and businesses were shut down to contain the transmission of the virus, among other measures. These measures have had severe impact on the economy and people’s livelihoods. An estimated 3.15 million Ugandans could have fallen deeper into poverty, adding to the 8.7 million people in Uganda currently living below the poverty line. The presence of 1.4 million refugees in Uganda also continues to place a significant economic challenge and social stress on the country, and constraining delivery of essential and basic services to the districts hosting refugees
The macroeconomic impact of COVID-19 on the Ugandan economy has been significant, creating both economic disruptions and financing imbalances that needed to be addressed urgently. Moreover, the COVID-19 shock came on top of an already sizable slowdown in real output growth in early FY20 due to heavy rains and flooding, and a locust invasion during April-June of 2020. Overall economic growth declined to 2.9 percent in FY20, less than half of 6.3 percent that had been anticipated for the year or 6.8 percent realized in FY19. Government revenue dropped by 0.7 percentage points of GDP as a result of reduced trading and commerce specially in tourism, manufacturing and agriculture, key sectors that employ the largest share of the population and a main source of revenue to the Government. Spending pressures, particularly to support the management and prevention of COVID19 and other shocks, including locusts and floods, widened the fiscal deficit, translating into a financing gap of US$ 552 million in FY20 and US$ 650 million (projected) in FY21. This has endangered the country’s ability to maintain essential services, particularly health and education, and affected delivery of key basic services such as water and electricity. With fiscal space for discretionary expenditure significantly reduced by the downturn, the focus of any immediate financial support shifted to preserving essential public services.
The situation has been even more serious on the external sector side. In March 2020, capital flew out as foreign holders sold off government securities worth $75 million, leading to a 6 percent depreciation of the Uganda Shilling against the US Dollar. As the global slowdown in economic activity and inherent increase in unemployment reduced incoming foreign direct investments and remittances, the financing gap in the balance of payments widened from an estimated US$440 million in FY20 to almost US$700 million in FY 21.
3. What was the total budget support required and what were these funds used for?
The US $300 million operation provided budget support to boost the Government’s capacity to prevent, detect and treat the coronavirus; protect the poor and vulnerable population; and support economic recovery. The costs of essential utilities like electricity, water and sanitation services was subsidized to ensure continued supply to vulnerable users and providers of crucial services. Businesses in distress received tax relief from the Government to keep them running and avoid laying off workers, while farmers were supported to access high quality agricultural inputs to boost nutrition and food security and to maintain supply of raw materials to agro-based industries. Government also intended to expand social protection programs through cash for work labor intensive programs for those most affected by the crises and to the elderly unable to continue work, and to implement additional measures to protect children against violence.
4. How did the DPO create benefit for the poor and vulnerable?
One of the biggest economic impacts of COVID19 is the loss of jobs and particularly of those who are self-employed and depend on day-to-day earnings. The current social protection system is inadequate in responding to shocks. The Senior Citizens Grant and the Northern Uganda Social Action Fund – the two main social protection programs reach only 3 percent of the population, and account for 0.14 percent of GDP (FY17/18) spending. The DPO supported the government to expand and improve the targeting of social safety nets for the poor and vulnerable. These included providing cash-for-work to informal sector workers directly impacted by the pandemic in the main urban areas and the flood affected districts, increasing the number of beneficiaries under the current senior citizen grant by rolling it out to 71 districts and establishing a national single registry for beneficiaries of safety net programs in the near future. Once fully operationalized, the cash for work program will benefit an estimated 500,000 individuals. The use of the electronic voucher (e-voucher) currently being implemented through the Agricultural Cluster Development Project (ACDP) has been scaled up and rolled out in 12 additional districts outside the ACDP project area to enable better targeting of smallholder farmers, majority of them women, to access high quality inputs, seeds and fertilizers to boost agriculture productivity and incomes.
5. How did the program support private sector to create jobs sustainably?
The reforms supported by the DPO were expected to encourage domestic and foreign investments and create an environment conducive to business growth which would in turn generate an increase in job opportunities for Ugandans. Corporate and VAT tax exemptions were to enable businesses to keep running and not lay off workers. The Central Bank availed liquidity to commercial banks, microfinance institutions and credit institutions, allowing them to provide a moratorium on loan repayment for businesses and individual borrowers that had been affected by the pandemic for up to 12 months. Government will buttress this through reforms including on leasing, insolvency treatment, and business licensing, to improve the business environment to support productivity improvements, growth and job creation on a more sustainable basis. In addition, enhanced debt transparency comes along stronger attention to better management of state-owned enterprises and payment of domestic arears to suppliers.
6. What was the readiness of the country to implement reforms?
The policy actions and reforms supported by the operation were critical for the country to avoid a health, social and economic catastrophe. Left unattended, the spread of the virus would have led to businesses collapsing, high rates of unemployment, all leading to extreme poverty and death. Noting the urgency and criticality of the measures, the authorities have used already existing strong policy and institutional frameworks to deliver these measures alongside a reform program that aims to drive growth and fiscal transparency. But deeper reforms are needed to improve effectiveness in utilization of state resources, by managing public investments more efficiently, mobilizing domestic revenues more efficiently, curbing corruption, and empowering the private sector to become more competitive to generate better and higher productivity jobs for Ugandans. Better debt management is also crucial to avoid distress. The Bank has provided both technical and financial support for high quality analytical work to inform these policy reforms giving the program a solid evidence-base on which to anchor implementation.
7. How is the World Bank Group tracking the execution of supported reforms?
The critical actions underlying the reforms that are supported by this operation have already been met before the financing under the operation was approved. Nonetheless, this is a one-off operation and for those reforms that will require follow up actions to achieve results, the World Bank has supervised implementing agencies to ensure their completion. For sustainable impact, the World Bank will through its other projects maintain regular implementation support to provide policy advice and technical assistance to the institutions involved in the implementation of the reform program. This is being complemented by the ongoing World Bank engagements (including operations and Technical Assistance) in the sectors relevant to the budget support.
8. How does this DPO align to the Government’s identified priorities?
Uganda’s long-term development aspiration is to transform Uganda to a competitive upper middle-income country with a per capita income of US$9,500 by 2040. This program is aligned to the National Development Plan (II and III) which prioritize reforms to strengthen Uganda’s competitiveness for sustainable wealth creation, employment and inclusive growth. More specifically, the reforms supported are part of the several institutional and policy measures under the Government’s response plan to COVID-19. Hence, alongside the immediate goal of ensuring the provision of critical public and health services during the crisis period and protecting the most vulnerable, the operation aimed to minimize disruptions to fiscal and monetary stability, while fostering economic recovery.
9. What is the complementarity to other World Bank investments in Uganda?
The DPO was part of a comprehensive rapid response by the World Bank Group to help Uganda manage the COVID-19 pandemic. The response package included - an operation in the health sector to support critical interventions for the COVID-19 response, including procurement of testing kits, reagents, and Personal Protective Equipment and another strengthening laboratory capacity; an operation in the education sector supporting remote learning and preparations for school reopening; complementary operations supporting strengthening local government systems, tourism development and other sectors that have been most affected by COVID19 crisis. A new Multi-Donor Trust Fund administered by the World Bank is providing complementarity, strengthening public sector effectiveness, improving donor coordination and aid effectiveness, and additional support to the refugee and host community ’s response to COVID19 as well as addressing emerging environmental and climate change concerns.
10. Have the additional resources provided to GOU to manage this crisis been put to good use?
Uganda has a robust body of laws and policies for public financial management that can be used to fight corruption. Recent legal reforms to enhance public procurement, as well as the adoption of computer-based systems such as the integrated financial management system, the integrated personnel and payroll system, has enhanced control and management of public funds; improved quality of financial reporting at Ministries, Departments and Agencies and Local Governments, and revived of scrutiny and oversight of collection and utilization of public funds. Alongside this operation, government is strengthening the institutional framework for Public Investment Management and e-procurement to improve efficiency of public procurements. Nonetheless, institutional and fiduciary risks and governance challenges are substantial. For this reason, the measures supported by other development partners to ensure full accountability for the resources, publishing of large procurements, and commitment to audit all expenses related to COVID-19 will minimize these risks.
Anti-corruption safeguards were part and parcel of the DPO to ensure increased transparency, cost-savings and efficiency, greater competition in the public procurement market, and the advancement of broader policy objectives, including empowering small and medium enterprises, women, and youth. This operation requires a separate reporting mechanism for COVID-19 expenditures that allows for tracking of the support received from partners including the World Bank. Government has published large procurement contracts for works above Ush500 million (US$ 136,300) and for goods and services above Ush200 million (US$ 55000). The Government committed to undertake an independent audit of COVID-19 expenditures, an activity that will reveal whether the GoU complied to terms for the DPO, facilitate access to information and greater social accountability, and allow closer monitoring.
12. How did this DPO link to previous budget support operations?
The Bank had not provided budget support to Uganda since 2013 when the Second Poverty Reduction Support Credit (PRSC) series came to an end. In FY17, a DPO aimed at supporting fiscal decentralization and improving service delivery in health and education was sent to the Board. The DPO was, however, not discussed due to a country portfolio freeze at the time, associated with safeguard issues in the Transport Sector Development Project. The COVID Economic Crisis and Recovery DPO was based on the experience from the PRSC series, as well as emergency DPOs in other countries, and hence underscored the importance of: (i) incorporating emergency DPOs as part of a broad WBG package of inventions to maximize impact; (ii) closely coordinating with other development partners in the ‘rush to respond’; (iii) focusing on measures that will have an immediate impact on protecting lives and livelihoods; (iv) including measures that also demonstrate government’s commitment to longer-term reforms and building public institutions; and (v) ensuring strong monitoring and evaluation mechanisms.
13. What has been the level of stakeholder engagement in support of this DPO?
Lessons learned from the implementation of other World Bank operations in Uganda, as well as emergency DPOs in other countries, informed the design of the proposed operation. The preparation of this operation benefited from the on-going dialogue of the Local Development Partners Group (LDPG), which includes heads of missions of numerous multilateral and bilateral agencies. It was closely coordinated with the IMF, which prepared an emergency support to Uganda through an RCF operation around the same time. The RCF disbursement of US$500 million helped bolster foreign exchange reserves and, together with the World Bank’s funds, close the fiscal financing gap.
In preparing these operations, the Bank and IMF undertook joint dialogue with the government, fully aligned their respective macro-fiscal frameworks, and together updated Uganda’s Debt Sustainability Analysis. Furthermore, this operation is benefitting from a joint follow-up with the IMF on the transparency and accountability measures regarding expenditures related to the COVID-19 response, and a follow-on IMF program. This DPO directly complemented programs being developed by other development partners in response to the COVID-19 crisis. The African Development Bank also prepared a budget support operation. Furthermore, by sharing information through the LDPG on the likely impacts of COVID-19 on Uganda, as well as global Bank proposals and approaches to responding to the crisis, development partners were supportive of the World Bank’s support through a DPO and its objectives.
14. Did this budget support add to Uganda’s debt burden?
This operation was a loan to Uganda. It added to the country’s total debt portfolio which currently stands at $10.4 billion, and to the existing debt stock to the World Bank amounting to US$ 3.6 billion, equivalent to 35% of the country’s total publicly guaranteed external debt. However, this proportion of the debt stock is highly concessional given World Bank’s very favorable terms, compared to commercial lenders. This loan comes with a grace period of 6 years, a repayment (maturity) duration of 38 years, and no interest and only a minimal service charge of up to ¾ of 1% and commitment charge of up to ½ of 1%. This operation supported reforms aimed at strengthening debt resilience by support a faster economic recovery, as well as debt transparency on the back of ongoing support to improve the country’s debt management capacities.
15. Who is responsible for implementing the reforms?
The Ministry of Finance, Planning and Economic Development (MoFPED) is the main implementing partner in this operation. MoFPED has been coordinating with other government agencies involved in the program, including the ministry of health, Office of the Prime Minister, Ministry of Gender, Labour and Social Development, Ministry of Trade, Industry and Co-operatives, Ministry of Energy and Mineral Development, Ministry of Agriculture, Animal Industry and Fisheries, Ministry of Water and Environment, National Water and Sewage Corporation, Uganda Revenue Authority and Bank of Uganda.