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.

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.