Is Uganda slipping back into unsustainable external debt?

Uganda continues to borrow funds from external sources to finance infrastructure development, which the government says, is a priority sector as it continues with its development agenda, writes Martin Luther Oketch.

Even though Uganda is being assessed as having a low risk of debt distress by the World Bank and the International Monetary Fund, its stock of external debt has lately increased by 12.2 per cent, posing concerns that the Pearl of Africa might again fall back into unsustainable debt.

Low- Income Countries (LICs), like Uganda, face significant challenges in meeting their development objectives, including the Millennium Development Goals (MDGs) while at the same time ensuring that their external debt remains sustainable.

Statistics on Uganda’s stock of external debt - as compiled by the Bank of Uganda- indicate that as of March 31, Uganda’s external debt was about $2.5 billion.
A break down of this shows that Uganda owes multilateral creditors $2 billion.

The multilateral creditors include the World Bank, African Development Bank Fund, International Fund for Agriculture (IFAD) and European Investment Bank among others.
On bilateral basis, in the context of non Paris Club, Uganda has a debt of $194 million, the non-Paris Club major donors include Eastern Europe, the former Soviet bloc (with the exception of Russia because it became a new member of the Paris Club since 1997), and the Arab states.

Whereas on the side of the bilateral debt in the Paris Club, Uganda has a debt of $61 million. The Paris Club is an informal group of financial officials from 19 countries; some of which are the world’s biggest economies that provide financial services such as debt restructuring, debt relief, and debt cancellation to indebted countries and their creditors.

Debtors are often bailed out by the International Monetary Fund after alternative solutions have failed.

Regarding arrears on external debt from private banks or other financial institutions including the East African Development Bank as of March 31, Uganda had an outstanding debt of $284,348.

The World Bank is still the largest creditor to Uganda taking up to 63 per cent share of external debt stock in the year under review. This is followed by the African Development Bank Fund with 16 per cent; IFAD coming third with a slight increase from 6 per cent in 2007/08 to 7 per cent in 2008/09.

Also, the European Investment Bank, which is the fourth, has slightly reduced her share in total external debt stock from 7 per cent in 2007/08 to 6 per cent in 2008/09. The NDF (Nordic Development Fund) took the fifth position with her share remaining the same as last years at 4 per cent. All the other remaining creditors share the balance of 4 per cent.

Way forward
The IMF Senior Residence Representative, Mr Richardson Thomas, told Business Power in a recent interview that Uganda needs to patch up its implementation process to ensure that it doesn’t fall into debt distress in the future.

“The main thing is to ensure that public infrastructure projects for which the government is borrowing to work on are well-designed and are implemented efficiently. We believe there is considerable scope for high-value public infrastructure investments in Uganda, so the key is effective implementation,” Mr Thomas said.

He explained that debt instability usually relates to the long run difference (gap) between the real GDP growth rate and the real rate of interest on the debt-assuming there is a constant level of taxation, adding that if the carrying cost (interest rate) of debt is high and is only growing at a very low rate, then a country has a risk of debt distress.

The good news for Uganda at this moment, Mr Richardson said, is that the interest rate Uganda is paying on external debt is low because almost all of the debt is highly concessional while the economy is rapidly growing. The level of debt to official creditors was 14.6 per cent of GDP by the end of 2009.

Some three years ago, the trend of Uganda’s external debt stock (disbursed and outstanding) has been declining since financial year 2004/05; from $4.7 billion in March 2005 to $1.1 billion in March 2007.