Debt savings expected to boost priority sectors
Jul 02, 2006
UGANDA'S external foreign debt will fall to below $1b from the current $ 4.4b following the debt waiver from multilateral creditors announced last week. The World Bank (WB) will cancel $3.764b the country owes its soft-loan arm, the International Development Association (IDA) under the Multilateral
By Sylvia Juuko
UGANDA'S external foreign debt will fall to below $1b from the current $ 4.4b following the debt waiver from multilateral creditors announced last week. The World Bank (WB) will cancel $3.764b the country owes its soft-loan arm, the International Development Association (IDA) under the Multilateral Debt Relief Initiative (MDRI) effective July 1.
The savings will be used to fund critical areas like energy, roads, education and health aimed at reducing poverty.
Uganda’s external debt payments allocated for the 2005/06 budget amounted to $127m with about 80% paid to the WB.
The WB debt waiver comes on the heels of an earlier announcement by International Monetary Fund (IMF) in January that it had waived $110m in debt while the African Development Bank has also in priciple approved debt relief. The announcements make good promises made by the Group of Eight (G8) rich countries to cancel developing countries’ debt during their summit in Gleneagles Scotland last July.
Uganda’s total disbursed and outstanding external debt stood at $4.316b by March 30, having increased from $0.7b in 1980 and $1.4b in 1986, according to Bank of Uganda statistics.
The country started defaulting on some of its obligation from the mid- 1980s due to the collapse of international coffee prices, which resulted in a massive drop of coffee exports from 15% of GDP in 1986/1987 to 4% of GDP in 1990/1991, depleting the country’s reserves.
Peter Allum, the outgoing IMF resident representative, outlines the country’s benefits from his institution’s debt waiver.
“The benefits are clear cut because the $110m written off will be transferred to the budget over three to four years to be utilised for different programmes.
“The minister has already allocated $15m of these funds to pay for the energy programme in his 2006/07 budget,†said Allum.
While the WB has approved the $3.764b debt waiver, the benefits will depend on how soon the G8, who are the biggest shareholders in the WB will allot money to the fund that will then be disbursed to the benefiting African countries.
“The biggest benefits of this debt waiver would come from WB because its Uganda’s biggest creditor.
“However, the mechanism is not yet clear. The amounts received will depend on some form of rankings based on a country’s governance and economic performance,†said Allum.
Analysts also pointed out that while the Government will be paying out less money in debt servicing, the WB is also expected to reduce its inflows to the national budget due to debt waiver.
Dr. Ezra Suruma, the finance minister, alluded to this in an earlier interview and noted that while debt relief was a welcome move, he cautioned that the country still needed funding.
“It is important that our lenders do not cut other funds to Uganda. We have been struggling to ensure that we still maintain additional resources as well as debt relief; otherwise, we will remain stuck,†said Suruma.
Uganda’s debt has been waived in the past, under the Heavily Indebted Poor Country’s (HIPC) Initiative and Enhanced HIPC, a factor that did not put brakes on the accumulation of debt.
The WB and IMF in May 2000 supported additional debt relief for Uganda of $1.3b after the country met the completion point under the Enhanced HIPC) Initiative. Both multilateral institutions have taken the flak for not being able to achieve debt reduction goals under the HIPC initiatives with beneficiaries like Uganda continuing to be saddled by debt.
But Allum says the past initiatives did not fail entirely but were designed differently.
“HIPC did not fail entirely but was designed differently. “Multilateral creditors would reduce debt claims so that the debts were reduced to sustainable levels. “What was calculated was how much a country would pay each year in relation to the size of economy or in relation to export earnings; in other words, debt-export ratio. Sustainability was measured based on projections. So most of the countries which had not met these projections turned out not achieving the desired debt levels,†Allum said.
He argues that the new initiative (MDRI) is a more comprehensive solution and more sensitive to export growth projections and economic development.
Allum says Uganda needs to put in place a good debt management strategy to avoid accumulating more debt because it will attract more lenders since its credit rating has improved.
“There is a risk of accumulating new expensive debt as opposed to the cheap debt that has been written off. Uganda needs a good debt management strategy,†said Allum.
Another donor source said because of the multilateral institutions debt waiver, Uganda may lose out grants.
UGANDA'S external foreign debt will fall to below $1b from the current $ 4.4b following the debt waiver from multilateral creditors announced last week. The World Bank (WB) will cancel $3.764b the country owes its soft-loan arm, the International Development Association (IDA) under the Multilateral Debt Relief Initiative (MDRI) effective July 1.
The savings will be used to fund critical areas like energy, roads, education and health aimed at reducing poverty.
Uganda’s external debt payments allocated for the 2005/06 budget amounted to $127m with about 80% paid to the WB.
The WB debt waiver comes on the heels of an earlier announcement by International Monetary Fund (IMF) in January that it had waived $110m in debt while the African Development Bank has also in priciple approved debt relief. The announcements make good promises made by the Group of Eight (G8) rich countries to cancel developing countries’ debt during their summit in Gleneagles Scotland last July.
Uganda’s total disbursed and outstanding external debt stood at $4.316b by March 30, having increased from $0.7b in 1980 and $1.4b in 1986, according to Bank of Uganda statistics.
The country started defaulting on some of its obligation from the mid- 1980s due to the collapse of international coffee prices, which resulted in a massive drop of coffee exports from 15% of GDP in 1986/1987 to 4% of GDP in 1990/1991, depleting the country’s reserves.
Peter Allum, the outgoing IMF resident representative, outlines the country’s benefits from his institution’s debt waiver.
“The benefits are clear cut because the $110m written off will be transferred to the budget over three to four years to be utilised for different programmes.
“The minister has already allocated $15m of these funds to pay for the energy programme in his 2006/07 budget,†said Allum.
While the WB has approved the $3.764b debt waiver, the benefits will depend on how soon the G8, who are the biggest shareholders in the WB will allot money to the fund that will then be disbursed to the benefiting African countries.
“The biggest benefits of this debt waiver would come from WB because its Uganda’s biggest creditor.
“However, the mechanism is not yet clear. The amounts received will depend on some form of rankings based on a country’s governance and economic performance,†said Allum.
Analysts also pointed out that while the Government will be paying out less money in debt servicing, the WB is also expected to reduce its inflows to the national budget due to debt waiver.
Dr. Ezra Suruma, the finance minister, alluded to this in an earlier interview and noted that while debt relief was a welcome move, he cautioned that the country still needed funding.
“It is important that our lenders do not cut other funds to Uganda. We have been struggling to ensure that we still maintain additional resources as well as debt relief; otherwise, we will remain stuck,†said Suruma.
Uganda’s debt has been waived in the past, under the Heavily Indebted Poor Country’s (HIPC) Initiative and Enhanced HIPC, a factor that did not put brakes on the accumulation of debt.
The WB and IMF in May 2000 supported additional debt relief for Uganda of $1.3b after the country met the completion point under the Enhanced HIPC) Initiative. Both multilateral institutions have taken the flak for not being able to achieve debt reduction goals under the HIPC initiatives with beneficiaries like Uganda continuing to be saddled by debt.
But Allum says the past initiatives did not fail entirely but were designed differently.
“HIPC did not fail entirely but was designed differently. “Multilateral creditors would reduce debt claims so that the debts were reduced to sustainable levels. “What was calculated was how much a country would pay each year in relation to the size of economy or in relation to export earnings; in other words, debt-export ratio. Sustainability was measured based on projections. So most of the countries which had not met these projections turned out not achieving the desired debt levels,†Allum said.
He argues that the new initiative (MDRI) is a more comprehensive solution and more sensitive to export growth projections and economic development.
Allum says Uganda needs to put in place a good debt management strategy to avoid accumulating more debt because it will attract more lenders since its credit rating has improved.
“There is a risk of accumulating new expensive debt as opposed to the cheap debt that has been written off. Uganda needs a good debt management strategy,†said Allum.
Another donor source said because of the multilateral institutions debt waiver, Uganda may lose out grants.