Friday, August 20, 2010

Uganda needs to change focus for borrowing

Written in 2006
William Kituuka
Uganda’s current dependence on donor funds has implications for the sustainability of its external debt burden, as external loans currently account for approximately 40% of donor inflows in any given year. Uganda was the 1st country to qualify for the Highly Indebted Poor Countries (HIPC) debt relief initiative in 1998, and on its exit from the Enhanced HIPC Completion Point in April 2000, it was pledged relief amounting to $ 1 billion in Net Present value (NPV) terms from multilateral and bilateral creditors.
This debt relief was intended to ensure that Uganda’s future debt burden remained at a sustainable level, defined as the ratio of the debt stock in NPV terms not exceeding 150% of its export earnings.
Uganda has borrowed $1.5bn from multilateral donors since the HIPC Completion Point (Poverty Eradication Action Plan 2004/05 – 2007/8), and although these loans had been on highly concessional terms, their impact on the debt stock, combined with lower export growth as a result of the fall in Coffee prices and low prevailing world market interest rates, has been to raise Uganda’s NPV of debt to exports ratio to 305%, which is more than double the HIPC threshold!
It is a fact that the 1995 Constitution requires Parliament to approve funds prior to being borrowed. However, Parliament should go further to ensure that donor funds are not ‘just eaten’ hence increase debt.
Uganda should refocus the purpose for which it borrows. We should borrow where there is certainty of creation of more value. For instance, borrowing to enhance employment creation for generation of more value is the right direction. If we borrow to send youth under contract for training where the trained manpower will come back and ensure that the skills gained can be put to right use to steer the economy to prosperity, this is worthy borrowing. We should borrow to ensure Agro-processing Industrialization takes off, because it does not make economic sense any more to sell primary products. The country should also borrow to enhance competitiveness of whatever it can engage in that is marketable and can generate among other things foreign exchange. With our climate, fruit production should be boosted for export.
Parliament therefore should as a priority critically analyze proposals for borrowing, and those without prospects for generation of more value should be declined. The begging culture is simply unsustainable. We should reduce the size of Government if its size is partly responsible for donor budget support.

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