Ethiopian Review

Kampala — Uganda’s foreign debt is set to creep back to unsustainable levels as the country borrows to finance investments in key productive infrastructure over the next three years.

And as the analysts sound the warning, there is growing concern among legislators that, given the prevalent misuse of public resources by bureaucrats, the country could end up with little to show for this pile of debt.

The country’s total indebtedness, including domestic borrowing, stood at close to $5.7 billion in March on the back of a steady rise in external borrowing.

Yet less than five years ago it benefited from huge debt write-offs by key creditors, which saw foreign debt fall from a peak of $4.7 billion in 2005 to just $1.1 billion in March 2007.

In a statement that was to be presented to Parliament last week, the Finance Ministry urges caution in contracting additional debt even as it seeks legislative approval for more borrowing.

Parliament has approved just over half a billion dollars in loans in the past financial year and the ministry will be seeking approvals for additional borrowing of monies already committed by donors but not yet disbursed.

“Our debt is steadily rising and, at the current trend, it would tend to reach unsustainable levels by 2012,” the ministry says in information provided to the House on the government’s total indebtedness, grants received and guarantees of loans to individual companies and statutory bodies.

“There is, therefore, a need to borrow only for strategic productive investments that will increase production capacity. This is a shared responsibility by my ministry and Parliament, and the ministry is fully conscious of its responsibility,” says the statement the State Minister for Finance, Fred Omachi, was expected to make to Parliament.

The figures the ministry presented to legislators last week show an external debt of $4 billion, although only $1.9 billion has been disbursed.

That includes $1.6 billion as loans contracted but yet to be disbursed, and $500 million in loan guarantees but excludes $300 million in negotiated and partially concluded loans awaiting parliamentary approval.

Coupled with a domestic debt that had mounted to $1.7 billion by January and domestic arrears running into $24.5 million, Uganda’s public debt nominally stands at $5.7 billion.

The domestic debt is attributable to the loan instruments that the Bank of Uganda has been using to manage the money supply, but the statement says the rate at which it has been accumulating and its magnitude call for “conservative fiscal and monetary policies”.

The ministry however points out that, given there are no arrears on any active loan save for the $26 million owed to creditors that have not yet provided debt relief, Uganda’s current level of indebtedness is still sustainable, but this could change if caution is not exercised.

Borrowing has become a thorny issue between the legislature and the executive, with a restive House suggesting that approval of further borrowing be withheld until the full implications of Uganda’s borrowing over the past decade have been studied and understood.

For instance, after borrowing money for the Sustainable Management of Mineral Resources programme the government is asking for an additional $4.7 million to make the total $42 million, a request that has been thrown out of the House twice this month after legislators learnt that millions of dollars had been spent on two workshops in the name of sensitisation.

In fact, a team of Members of Parliament is to be constituted to study the impact of all loans made and debts acquired by the government over the past 10 years.

The bailout loans to Phenix Logistics and Apparel Tristar, the partial risk guarantee loan to the Rift Valley Railways under the East African Trade and Transport Facilitation and the loan to construct fisheries landing sites have already been identified for investigation.

In addition, all MPs have been summoned to debate the country’s debt strategy this week.

“Our biggest concern is where the money is going — what are we borrowing for? We have decided to carry out monitoring of these loans,” said MP Stephen Birahwa, chairman of the National Economy Committee.

Analysts fear that the country’s historically strong appetite for borrowing will ensure that Uganda once again piles up a mountain of unsustainable debt.

The external debt had risen to $4.464 billion in 2005/06 before falling back to $1.468 billion in 2006/07 following the Multilateral Debt Relief Initiative; more debts were written off under the Highly Indebted Poor Countries initiative.

Uganda’s external stock of Debt Outstanding and Disbursed as at the end of March 2009 stood at $1.9 billion compared to $1.65 billion in March last year, representing a 14.5 per cent increase in stock.

The bulk of the debt stock, $1,65m (87.6 per cent) is owed to the multilateral creditors as they offer highly concessional loans that are in line with the debt strategy.

Debt owed to the non-Paris Club bilateral creditors amounts to $175.2 million (9.2 per cent), while that from Paris Club is $60.1 million (3.2 per cent).

Although Mr Omachi acknowledges that the external debt is rising fast, he argues that it is still in a sustainable bracket although critics claim it is at alarming levels.

“Debt sustainability is measured relative to our export performance, GDP and domestic revenue collections. On this basis, our external public debt is currently within sustainable levels,” Mr Omachi said.

The International Monetary Fund however recently expressed fears that Uganda’s foreign exchange reserves could drop as demand for its exports and other inflows fall.

- By CHARLES KAZOOBA | The East African