Uganda is preparing for an economy that could look markedly different from today’s. The country is buying gold to strengthen its reserves, anticipating oil revenues, exploring a central bank digital currency, and remaining committed to an East African project that ultimately envisages a single regional currency. But beneath those ambitions lie stubborn weaknesses in the economy Ugandans experience every day. Commercial loans still cost roughly 19 to 25 per cent despite the central bank rate standing at 9.75 per cent. Government borrowing is squeezing credit available to businesses, while informality, weak credit information, limited collateral and other structural problems make lending more expensive. Meanwhile, the country’s decision to accumulate gold introduces its own risks, from volatile prices and storage costs to traceability, money laundering and the possibility of weak institutional controls. Then there is oil. As Uganda prepares for petroleum revenues, the International Monetary Fund says stronger rules will be needed to protect the Bank of Uganda’s independence and ensure that oil money is governed transparently, including clear rules determining when funds can be withdrawn. In an interview with The Observer’s MARK KIDAMBA, IMF Resident Representative Sebastien Walker discusses these tensions: why borrowing remains painfully expensive, whether buying more gold makes economic sense, how Uganda should safeguard future oil wealth, and what must happen before East Africa can credibly share a currency. He also addresses the Fund’s own relationship with the institutions it advises, including questions about an IMF office physically located inside the Bank of Uganda. Taken together, the conversation raises a larger question for Uganda: can the country build the institutions needed to manage the wealth and financial ambitions it is now pursuing? The central bank rate has sat at 9.75 per cent for nearly two years, yet commercial lending remains suffocating at 19 to 25 per cent. What is the main constraint in this transmission?Beyond the relatively tight monetary policy stance, very high levels of government borrowing are crowding out credit to the private sector, hence the need for fiscal consolidation. Structural constraints also limit credit: weak infrastructure and information gaps, reflected in limited creditworthiness data, informality, and limited availability of reliable financial statements. Borrowers also lack collateral. These factors lead to higher perceived credit risk, higher loan-loss provisions, and higher operating costs. Does the IMF view this persistent gap as evidence that Uganda’s monetary transmission mechanism is impaired? What structural reforms is it recommending to the government to fix it? I would emphasize the need for fiscal consolidation to reduce this crowding out of credit to the private sector. We have also recommended addressing the structural challenges by strengthening credit information systems by expanding the coverage of credit reference bureaus; promoting financial inclusion, notably through digital finance and digital financial literacy; strengthening banks’ operational efficiency and increasing competition in the sector; and mobilising long-term savings. The Bank of Uganda has set up a three-year pilot to buy gold domestically. What specific structural safeguards has the IMF pressed for to protect these reserves from institutional leakage?The BOU has set up a three-year pilot for this domestic gold purchase programme, to support the build-up of foreign exchange reserves by supplementing them with monetary gold bought in Ugandan shillings. Risks include gold price volatility, liquidity constraints, storage security, traceability, anti-money laundering and counter-terrorism financing concerns, and potential know-your-customer failures. Safeguards and an internal control framework are needed to mitigate these risks, along with a transparent pricing framework to ensure cost recovery without creating quasi-fiscal liabilities. Gold reserves generate no interest and carry high holding costs. Given Uganda’s fiscal constraints, does the IMF consider further physical gold accumulation an efficient use of public resources? What would justify such accumulation from a reserve management perspective? The benefits of reserves must be weighed against the cost of holding them, which typically yields a lower return than an alternative use. This applies to gold too. Gold’s advantages are diversification and protection during periods of global financial stress. Its disadvantages are the lack of interest income and costs related to storage, insurance, and transactions. In Uganda, as in many other countries, gold can be a useful part of the reserves. Have you recommended any strategies – gold swaps, gold leasing – to help the gold generate income? We haven’t. We see gold as one component of the reserves. What we’ve encouraged the BOU to do is continue its foreign exchange purchases, which come at a very high cost, while the gold simply sits there. The Bank of Uganda manages the Petroleum Revenue Investment Fund. Given the different mandates of a central bank and a sovereign fund, does the IMF believe this dual role risks compromising the Bank of Uganda’s core functions? We think strong frameworks are important, both to preserve the BOU’s independence and to ensure sound management of oil revenues. The BOU’s legal framework needs to limit monetary financing of, or credit to, the government. We’ve also recommended strengthening the oil revenue framework through clear withdrawal rules and transparent governance arrangements. Central banks are built to be risk-averse, while sovereign funds are profitmaximizing by design. Do you see a contradiction there? How will this work for the Bank of Uganda? That’s not something we’ve taken a position on. With none of the eight East African member states meeting even half of the convergence criteria for the 2031 single currency, and regional trade disputes ongoing, is 2031 still a realistic date in the IMF’s assessment, or is a review of the timeline something you’d expect the EAC to take up at the regional level? Any decision about the target date for the EAC monetary union is a matter for the EAC partner states and the regional institutions responsible for implementing the monetary union protocol. We focus on the need for strong and sustained convergence—notably in inflation, fiscal deficits, public debt, foreign exchange reserves, and broader institutional readiness. What happens if they go ahead in 2031 with the same conditions unmet? Would the single currency work? That’s up to them. We continue supporting our member states regardless of what they choose, with policy advice, capacity development, and lending when requested. The Bank of Uganda has researched a possible Central Bank Digital Currency (CBDC). How does the IMF view introducing a national CBDC alongside preparations for the single currency? We’ve provided technical assistance to the Bank of Uganda on CBDCs, and we generally encourage countries to publish the reports from this technical assistance, but we cannot disclose the contents without the member’s consent. Any interaction between a Ugandan CBDC and the East African Monetary Union would depend on decisions by EAC authorities on the design of the monetary union, the regional payments architecture, and the role of digital currencies within that framework. Uganda currently leaves digital assets like cryptocurrency outside the tax system. Has the IMF advised Uganda to bring them in? Does it view this as a missed revenue opportunity under Uganda’s domestic revenue mobilisation targets? We’ve provided Uganda with technical assistance on domestic revenue mobilization, and we generally encourage countries to publish this advice, but we cannot share the exact contents of these reports without the authorities’ consent. On crypto specifically, our analysis indicates it can pose significant tax policy and tax administration challenges for countries. On the Fund’s own role in Kampala A 2009 IMF report on resident representatives quoted one experienced representative saying that substantive policy dialogue almost always entails partial capture of the resident representative by local authorities. Given that your office is physically inside the Bank of Uganda, how do you insulate yourself from institutional capture? Have you ever had to push back against undue pressure from Kampala authorities? I don’t recognize that characterisation. In some countries, our offices are hosted by the central bank; in others, by the Ministry of Finance; and in many, we have a standalone office. Over the years we have worked closely with the BOU and other government agencies, including MOFPED, supporting the Ugandan authorities and acting as a trusted advisor. Many activists have raised concerns about the optics of the IMF having an office physically inside the Bank of Uganda. The IMF is both a lender and an advisor. How do you draw the line between advising, lending, and having offices inside an independent central bank without interfering? The IMF strongly supports central bank independence and accountability, ensuring its physical presence within a host institution does not compromise local autonomy. The IMF’s role is strictly limited to providing analysis, policy advice, technical assistance, and requested financial support. It does not dictate policy, as national authorities remain solely responsible for all final decisions. In Uganda, as with all member countries, the Bank of Uganda retains full responsibility for executing its mandate. The IMF fully respects this boundary, maintaining that national central banks operate with complete independence and authority over their economic decisions. Throughout the interview, Walker spoke in detail about the Fund’s technical recommendations. However, on more sensitive institutional matters, such as the boundaries of the Fund’s advisory role and its physical presence within the Bank of Uganda, his responses were more measured. kidambamark3@gmail.comThe post Gold, oil and expensive loans: IMF on Uganda’s economic risks appeared first on The Observer Media Ltd.