Shilling slides after World Bank shocker

The World Bank’s decision this past week to halt new funding for Uganda after it green-lit anti-gay legislation in May has sent the country’s shilling tumbling.

The shilling appeared headed for its biggest drop since December of 2018 after plunging 1.76 percent to Shs3,725 per dollar on Friday morning. It also registered a fifth day of losses at the close of business on Thursday, with analysts warning that the worst is yet to come.

“The situation is going to be worse. The move might influence other development partners and we don’t have a cushion,” Mr Julius Mukunda, the executive director of the Civil Society Budget Advocacy (CSBAG), said on Thursday, adding: “We could still maintain our culture without antagonising others. I am happy the President has signalled that he is willing to have a dialogue on this matter.”

President Museveni also made clear that while his government is “continuing to talk with the World Bank … Uganda will develop with or without loans.” 

His junior Finance minister, Mr Henry Musasizi, revealed on Thursday that Uganda is planning to adjust its budget for the 2023/2024 fiscal year due to reduced funding caused by the World Bank’s decision to halt fresh loans. 

The decision by the World Bank to suspend future financing to Uganda for its passage of anti-LGBTQ legislation upended the country’s 2023/2024 budget plans.

Uganda’s sizeable outstanding debt, including arrears from multilateral creditors, is predominantly owed to the World Bank, constituting 55 percent of the total according to the March 2023 Report on Public Debt, Grants, Guarantees, and Liabilities.

Some of the facilities the government had lined up, include funding amounting to about Shs543 billion for Industrial Transformation and Employment Project. The loan was approved by the Cabinet but was yet to be cleared by Parliament.

The government also planned to source more than Shs1.8 trillion to fund the Greater Kampala Metropolitan Area Project. The loan proposal awaits Cabinet approval. Other loan proposals include Shs1.2 trillion for financing the Climate Smart Agriculture Project, and the Shs1.6 trillion loan for the refurbishment of the Kampala-Kasese metre gauge integrated transport infrastructure and services.

Before the suspension announcement by the World Bank, Parliament had greenlit two loans, including the Shs484 billion loan designated for the Uganda Digital Acceleration Project and the Shs555 billion Uganda Secondary Education Expansion Project.

Shilling tumbles
The move by the World Bank to suspend funding to Uganda is likely to be replicated by other donors and lenders, with observers fearing the worst for the country’s shilling. 

The plunge means that the exchange rate between the Uganda shilling and the US dollar has weakened. This essentially means it now takes more shillings to buy one dollar. This has several implications, including a marked increase in import costs.  

Since Uganda relies on imports for various products, such as fuel and consumer goods, a weaker shilling can lead to higher costs for businesses and consumers. Higher import costs can also contribute to inflation, as businesses might pass on the increased costs to consumers by raising the prices of their products. This can erode purchasing power and impact the cost of living.

A weaker shilling will push up debt-servicing costs on the portion of Uganda’s sovereign debt denominated in foreign currency.

Mr Stephen Kaboyo, a financial market analyst and the chief executive at Alpha Capital Partners, a local forex trading firm, who was also the director of Financial Markets at Bank of Uganda,  said a sell off in the local currency gathered pace following the World Bank announcement halting new public finance projects on account of enactment of anti-homosexuality law.

Mr Kaboyo said: “The currency flirted with the psychological key of 3,750.  Outlook for the shilling point towards further weakening as market players scramble to cover short positions in anticipation of more pressure from donors restricting budget support.”

Mr Kaboyo told Monitor that the World Bank announcement “caught the markets off guard.”  This, he adds, saw market players rush “to cover their short dollar positions.” The sum total of this was the shilling being driven to “its weakest territory seen in months.” This comes on the back of the Finance Ministry showing cautious optimism about the country’s debt stock.

“The stock of external debt including arrears has been increasing over the years. As of December 31, 2022, it stood at $12.96 billion compared to $12.90 billion as of December 31, 2021 representing an increase of 0.4 percent,” the Finance ministry noted in a report on public debt, grants, guarantees and other financial liabilities for Financial Year 2022/2023, adding: “Multilateral creditors accounted for 62 percent of external debt stock followed by the bilateral creditors at 28 percent and commercial banks at 10 percent as at December 31, 2022.”

In it all, the Finance ministry reveals in the report that was published this March that Uganda’s “external debt stock as of December 31, 2022 is denominated majorly by Special Drawing Rights (SDR), comprising 43 percent, United States Dollars with 33 percent and Euro 16 percent.”

The government is also grappling with a choking domestic debt stock that, as per the Finance ministry’s debt statistical bulletin, “increased from Shs27.7 trillion at the backend of December 2021 to Shs33 trillion at the backend of December 2022, with treasury bills, amounting to Shs4 trillion and treasury bonds amounting to Shs28 trillion.”

Slippery slope
Already, the National Social Security Fund (NSSF) has projected that a return on its investments is primed to drop on account of the government’s failure to pay billions it borrowed from the Fund. NSSF invests about 75 percent of its funds in government securities, with the vast bulk locked in treasury bonds. 

A sharp drop in returns in securities and fading fortunes in real estate projects has squarely placed NSSF on a slippery slope. This, according to Mr Fred Muhumuza—an economist, domiciled at Makerere University’s School of Economics—could potentially lower workers’ earnings after the Fund’s failure to hit its 12.98 percent gross target return on investment in 2022, much to the chagrin of its 1.2 million remitters.

“The Fund needs to rethink and strategise its investment strategies before it gets worse for them. People will no longer want to save with the entity if returns make a turn,” Mr Muhumuza told Monitor.

The economist reckons that the backlash from the passing of an anti-gay legislation, low tax revenues and investments on the Congo war is primed to have a toxic impact. Mr Muhumuza now envisages a scenario where foreign lenders will demand that Uganda restructures its debt.

“[Multinational lenders] will demand the country to reduce its uptake on bills and bonds and ultimately want those who issue bonds to reduce their interest rates,” the economist predicts, adding that in this event NSSF will be left with little choice but to reduce interest rates on government debt or forgive a portion of the government’s debt, thus lowering its annual returns.

The total amount of paper issued by the government between April and June 2023 was Shs2.42 trillion, with Shs1.94 trillion of it used to refinance debt and the rest meeting fiscal obligations. 

While this demonstrates the government’s dedication to short-term debt management, an investment analyst who sought anonymity, said it shows signs of a thirst for additional funding in the near future. The government cannot address this synonymously, the analyst reckons, with debt refinancing, including needed money to pay medical interns, the lack of funding for LC elections, the impending election, high government costs and salaries, and a sizeable budget allocated to debt repayments rather than development expenditures.

“International creditors will not be kind with us. In two or three years, they will be pushing for the government to reduce domestic borrowing, which is the largest fixed investment for NSSF,” said Mr Muhumuza.

Way forward
According to Mr Musasizi, Uganda is planning to adjust its budget for the 2023/2024 fiscal year due to reduced funding caused by the World Bank’s decision to halt fresh loans. 

Mr Mukunda from CSBAG, however, says the best thing the government can do is to lower the country’s expenditure. For example, he adds pointedly, if the country planned to build 10km of roads, that can be scaled down to 2km. 

He explained that Uganda’s domestic revenue mobilisation is still very low to cushion the country.

Mr Mukunda expressed doubt that Uganda will opt for expensive debt. He instead expects the Finance ministry to table an amended budget and make proposals to cut certain expenditures. He also expects the government to cut administrative expenses, including wiping out the foreign travel budget, directing public servants to pack their vehicles and use public transport, cutting the pay for politicians, and revise downwards the salaries of civil servants. 

Mr Karim Masaba, the lawmaker of Industrial Division-Mbale City, told Saturday Monitor that “some of the sectors we need to look at [are the ministries of] Defence and Security, which take the lion’s share of our budget.”

He added: “We have given billions of shillings to Atiak Sugar. This is money I believe we can now revise because we need to look at the priorities of the country.”

Mr Muwanga Kivumbi, the shadow Finance minister, while expressing doubt that the House will be bold enough to go after classified expenditure, offered support, saying:

“This World Bank thing for once is going to instill discipline in the way we manage our economy. It is going to be a hard and rough road but we needed this to go through so that for once we live in reality.”

Background

The response from Uganda’s Western donors and some international lenders like the World Bank has been harsher than the moves taken in 2014 after the signing of the 2014 anti-homosexuality law that was repealed.

In 2014, several Western governments announced cuts in aid to Uganda after President Museveni signed the now-repealed anti-homosexuality law.

Countries including Denmark, The Netherlands, Norway, and Sweden all cut their aid to Uganda. The World Bank postponed a $90m loan to the country.

Reporting by Stephen Kafeero, Deogratius Wamala and Arthur Arnold Wadero