Uganda to raise borrowing after corruption cuts aid

KAMPALA - Uganda said it plans to increase domestic borrowing this fiscal year by 0.7 percent of GDP after donors withheld $282 million in budgetary support over a corruption scandal.

At least five western countries, including Uganda's biggest bilateral donor Britain, suspended their aid to the country late last year after officials in the prime minister's office were accused of embezzling $13 million meant for reconstruction.

The withdrawal of the aid, which amounts to 1.3 percent of GDP, threatens the economy's recovery from a sharp slowdown in the 2011/12 fiscal year that was caused by soaring inflation and a currency slump.

Growth fell to 3.4 percent that fiscal year from 6.7 percent in the previous period as inflation peaked at 30 percent and the shilling hit record lows against the dollar, driving up prices of basic commodities and sparking widespread protests.

The government expects the economy to expand by 4.3 percent this fiscal year, well below its medium-term potential of around seven percent.

The finance ministry told the International Monetary Fund in a letter of intent it would also cut 0.8 percent of the gross domestic product in expenditure, mainly in development spending.

"These actions (higher borrowing) will increase the fiscal burden to Government due to higher interest rates which will translate into higher cost of borrowing to the private sector," the ministry said in the letter published on Wednesday.

"This will contribute to reduce the pace of economic recovery in the short term."

The increased borrowing would be through issuance of government securities, the ministry said. The absolute level of planned borrowing was not available immediately but the nation of 33 million people has a GDP of about $17 billion.

Finance Minister Maria Kiwanuka had set the spending for the 2012/13 fiscal year, which runs from July to June, at 8.1 trillion shillings in her budget speech last June.

The finance ministry said recurrent spending would only be cut moderately because it had dropped to 10.3 percent of GDP this fiscal year from 11.2 percent in 2011/12.