External borrowing appetite needs taming

By Juliet Akello

trueWhile Uganda’s Debt Sustainability Analysis (MoFPED, Oct 2012) indicated that the country is not suffering any debt stress, Government has since signed commitments of an additional US$2.8bn (about Shs 7trillion) of external public debt, equivalent to 13.2% of GDP according to the Governor Bank of Uganda in the New vision dated Monday October 7th 2013, pg 28 .

In March 2013, external debt stood at US$5.8bn up from US$5.7bn by March 2012. This borrowing appetite increases by the day which is worrying. We need to make a forward step in reducing dependence on borrowing since it is not the only alternative for economic growth, transformation and development.
 

In 1996, Uganda Debt Network was formed to campaign for Uganda’s debt relief under the Heavily Indebted Poor Countries (HIPC) Initiatives of the World Bank and the International Monetary Fund.

As a result, debt stressed Uganda was the first country to qualify for debt relief from the multilateral organizations under the original HIPC Initiative in 1998 (estimated at US$650 million in nominal terms) and the Enhanced HIPC Initiative in 2000 (approximately US$1300 million), a total of US$ 1950 million.
 

Although the International Agency Fitch records a B+ credit rating for Uganda signifying a low cost of borrowing with decreasing risk of default, the loan amortization has registered negative performance (i.e. making insufficient loan payments on both interest and principle of loan) for several years now.

These imply a high risk of default and lose of public funds by paying for variety of penalties, late charges etc. It’s imperative to remember that this poses a question on governance and debt management standards which are costly to the Government in terms of lose revenue. These funds could be used to improve the quality of our loan amortization.

We don’t doubt that Uganda negotiates the best loans, however according to the Auditor General’s report (2012), 13 loans equivalent to Shs1.3 trillion had their agreements signed prior to Parliamentary approval; a requirement to be met as stipulated in the Constitution (1995).

In the Value for Money Audit report on Project management (March 2010), low loan absorption of external debt was cited. This resulted from;

i) Government not honoring counterpart funding hence slowing down the rate of project implementation,

ii) diversion of project funds,

iii) non-fulfillment of conditionalities, iv)delays in procurement of inputs, v)poor coordination and harmonization of monitoring and evaluation systems and vi)poor project designs which require modification.

Some project loans were already acquired and are accumulating penalties and interest payments yet the intended beneficiaries have not gained value for money.
 

These inefficiencies are costly in terms of time and financial resources because they attract fines charged on Government leading to loss of tax payers’ money.

It is disheartening to engage again in debt conversations (debt swap agreements) in future with creditors like during the Pre-HIPC era i.e. to reduce loan amounts and redesigning debt servicing payments because we are not playing our part.

Sometimes, creditors agree to forego a portion of their claims on condition that the debtor country spends an agreed amount on approved programmes of their interest – hence controlling our development agenda.

When Uganda was being forgiven of debt in 1998 and 2000, the contractors were probably not anywhere in the scene.
 

Uganda’s debt management capacity needs to be improved since we pride in positive debt sustainable levels especially now that borrowing opportunities are emerging otherwise, we could drift back into the re-accumulation of unsustainable debt.

With the volatile debt markets which obviously affect interest and exchange rates, it is imperative to develop and maintain a diverse range of financing sources to reduce the cost and risk of accessing external financing.

The reality of constant borrowing with an ever increasing debt stock should stimulate multiple efforts by the Government to raise alternative sources of development finance to support investment needs. Otherwise, Debt is Slavery!
 

The writer works with Uganda Debt Network