Is Uganda slipping back into unsustainable external debt?

The former decrease in Uganda’s debt stock was partly due to multilateral debt relief from IMF, World Bank and African Development Bank; which was in form of cancellation of Uganda’s outstanding debt stock up to end of December 2003, coupled with reduced contraction of new loans due to deliberate government policy to reduce external stock gradually.

However, lately, the trend has reversed upwards. The Ministry of Finance, Planning and Economic Development recently revealed that Uganda’s external debt stock of the year ending June 2009 stood at $2.04 billion as compared to $1.79 billion at the end of June 2008, representing a 12.2 per cent increase in stock.

The new commitments, loans and grants for instance in financial year 2008/09, were $710.9 million. Computed statistics by the Ministry of Finance show that there were more loans than the grants amounting to $510.6 million, while grants amounted to $200.3 million.
During the period 2004/05 up to 2005/06, grants were dominating new commitments but in 2006/07 the trend reversed to loans dominating new commitments (arrangements under concessional borrowing)

As the external stock is on the increase; the interest rate on them is also on the increase. The finance ministry shows that stock of arrears of interest as of June 2009 amounted to $37.2 million, which government officials explains that Uganda’s stock is on the increase due to new loan disbursements and partly due to disbursements of other on-going loans.

Repayment of external debt by the government was estimated at $62.21 million in 2008/09, which the finance ministry explains that it was the same as that of the previous year 2007/08. In the fiscal year 2008/09 it was estimated that external debt servicing by the government would increase to $78.83 million because most loans were falling due for repayments.

No worries
In a recent interview with Business Power, the Minister of Finance, Planning and Economic Development, Ms Syda Bbumba, said although there has been an increase in the level of stock of external debt, it is not a worrying trend.

“Much as we have been contracting new debts, the external debt level is still within our external debt sustainability strategy,” she said.Being conscious of not falling back into unsustainable debt burden as it was in the early 2000s, the government in its debt strategy tries to seek grants first and when resources are not enough, they go for highly concessional loans from the multilateral institutions such as the World Bank, IMF, African Development Bank Fund and the European Union among others.

Ms Bbumba explained that all the new loans that government has been contracting are highly on concessional basis, which is in line with the government strategy of external debt sustainability.
As a result, the share of external debt creditors has increased from 84 per cent in 2007/08 to 96 per cent in 2008/09.

In a recent joint publication: IMF/World Bank Debt Sustainability Analysis, prepared by International Monetary Fund and the International Development Association it was reported that Uganda still falls into comfort levels regarding external debt sustainability.
Officials of the two multi world institutions argued that based on the joint Low-Income Country Debt Sustainability Framework (DSF) of the World Bank and the IMF, Uganda continues to be assessed as a low risk of debt distress.

The primary aim of the DSF is to guide borrowing decisions of low-income countries in a way that matches their need for funds with their current and prospective ability to service debt, tailored to their specific circumstances.
The forward-looking nature of the DSF allows it to serve as an “early warning system” of the potential risks of debt distress so that preventive action can be taken in time.