(Bloomberg) --

Uganda’s shilling is moderately overvalued, according to the International Monetary Fund, which urged the East African nation’s authorities to only intervene in moments of “extreme” market distress.

The shilling has gained 3.5% against the dollar this year, making it Africa’s fifth-best performing currency. 

“Given uncertainties linked to the pandemic and recent appreciation of the exchange rate, the level of overvaluation is still being determined and will be updated during the forthcoming IMF mission,” Resident Representative Izabela Karpowicz said in an emailed response to questions. “Greater foreign-exchange rate flexibility would help reduce the overvaluation, with IMF staff recommending that the authorities continue intervening only in case of extreme market distress.” 

Other Highlights:

• Uganda’s planned fiscal consolidation will help to narrow the nation’s current-account deficit. The gap widened to $1.28 billion in the second quarter from a deficit of $702.3 million in the previous three months.
• The Washington-based lender’s mission to Uganda in December will evaluate the country’s “reform agenda” and will then discuss the next tranche of a three-year $1 billion loan. Uganda received $258 million when the loan was approved in June.
• The economy of Africa’s biggest coffee exporter faces a “moderate risk of debt distress” and has limited scope for absorbing shocks, Karpowicz said. The nation’s commercial loans constitute about 7% of external public debt.
• The economy may expand 4.7% this year, a lower forecast than the 6.3% that the IMF previously anticipated. Output could potentially rise by 5.1% in 2022 on oil-related, energy and transport investments, and recovery in manufacturing and construction, Karpowicz said.

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