UGANDA COUNTRY DEBT PROFILE UPDATED 2015 1. Political Background Table 1: Political Overview Date of Independence Constitution Type of government Le...
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1. Political Background Table 1: Political Overview Date of Independence Constitution Type of government Legal system Executive branch

Legislative branch Judiciary branch

9 October 1962 (from the UK) The country’s current constitution was adopted on 8 October 1995 and amended in 2005. Republic, multi-party system There is mixed legal system of English common law and customary law. -The President is the Chief of State as well as Head of government. The prime minister assists the president in the supervision of the cabinet which is also appointed by the president from among elected legislators. -The President is elected by popular vote for a five-year term; however there are no Presidential term limits. There is a unicameral Parliament where members of the National Legislative Assembly are democratically elected for a five year term by the people of Uganda. 1. Court of Appeal- Judges are appointed by the President and approved by the Legislature 2. High Court - Judges are appointed by the President

Capital and largest city Geography Total Area Geographic Coordinates Border countries Official languages

Kampala 241, 038 sq km 1 00 N, 32 00E Landlocked country which shares borders with DRC, Kenya, Rwanda, South Sudan and Tanzania English

Source: African Studies Centre, Central Intelligence Agency

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The Map of United Republic of Uganda

2. Economic and Social Analysis Table 2: Snapshot of Economic and Social Indicators GDP (official exchange rate)

US$26.09 billion (2014 est.) Agriculture: 21.9%

GDP composition by sector

Industry: 26.7% Services: 451.3% (2014 est.)

GDP real growth rate

5.9% (2014 est.)

Inflation rate (consumer prices)

4.3% (2014 est.) Revenues: $3.434 billion

Budget US$

Expenditures: $4.431 billion (2014 est.)


35,918,915 (July 2014 est.)

Population below poverty line

24.5% (2009 est.)

Life expectancy at birth

44.46years (2014 est.)

Literacy rate

78.4% (2015 est.)

GDP Per Capita (PPP)

US$1,800 (2014 est.)

Gini coefficient

44.3 (2009) Source: Bank of Uganda, CIA, Global Finance 2015 publications

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3. Economic and Social Analysis Uganda is of one of the poorest countries in the world, however it is also rich in natural resources, and it has significant potential for growth. The country remains an agricultural economy, thus growth tends to be dependent on weather conditions making the economic growth very volatile. Still the public and private sectors are making important investments in the oil sector which will represent a major structural change. The country also remains dependent on donations which in the past had been temporarily suspended because of corruption problems and a controversial bill. The government is doing a good job in terms of economic management and maintaining a good relationship with the IMF. Up to 61% of the current account deficit was financed through FDI, with portfolio investment flows drying up and official borrowing decreasing. During FY2013/14, Uganda received FDI amounting to a total value of US$ 1,154 million. This was 14% higher than the US$ 1,009 million received in FY 2012/13. The increase was primarily spurred by progress in the development of Uganda’s oil and gas sector. With FDI inflows equivalent to an average value of 4.2 % of GDP over the past five years, Uganda received a higher level of FDI than almost any other country in the East African Community (EAC) as shown in Fig.1 below. Fig.1 Uganda has been one of the largest receivers of Foreign Direct Investment in the EAC

Source: United Nations Statistics Database cited in World Bank (2015): The Growth Challenge: Can Ugandan Cities get to Work? Uganda economic update 5th edition Report No. 94622 Feb 2015

With the adoption of the country’s first Poverty Eradication Action Plan (PEAP) in 1997, impressive economic growth was experienced in the country over the PEAP period, with an average GDP growth rate of 7.2% between 1997/98-1998/99. However, due to the fall in Page 3 of 16

world coffee prices and rise in oil prices in 1999/00, which among others affected the expansion of productive sectors of the economy, the average real economic growth rate slowed down to 6.8% per annum from 2000/01 to 2004/05 as shown in Fig.1 below. Owing to sustained government interventions to promote growth, the country’s economic growth rate however increased and reached a peak of 10.8% in the 2005/06 fiscal year. The global economic and financial crisis that erupted in 2008/09 also had an impact on the country’s net exports, which was particularly felt in the 2009/10 fiscal year when growth slowed down to 5.9% as compared to 7.3% in 2008/09. Growth recovered somewhat in 2010/11 reaching 6.7%. However, as again shown in Fig.1 below, real growth is estimated to have slowed down in 2011/12 reaching a low of 3.2% against the 7% average projected in the country’s National Development Plan (NDP 2010/11 – 2014/15). This low performance is attributed to high interest rates/monetary tightening needed to bring down inflation, high global oil and commodity prices, drought in some parts of the country, power shortages, exchange rate volatility and weak external demand for the country’s exports. These factors had severe implications for the real sector undermining business confidence and investment in the industrial and services sectors, which grew by only 1.1% and 3.1% respectively as compared to 7.9% and 8.4% respectively, in the previous year. The economy however expanded by 4.5% in financial year 2013/14, less than the 5.7% projected, but more than the 3.3% recorded in FY2012/13. The less than expected performance is largely attributed to a weaker recovery in agricultural output and constrained external demand from a slow global economic recovery and instability in the region particularly through their impact on demand for Uganda’s exports and Foreign Direct Investment (FDI) inflows. The pace of GDP growth is nevertheless expected to pick up during FY2014/15 and FY2015/16, growing at 5.3% and 5.8%, respectively.

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Fig.2: Real GDP Growth (2005-2016)

Source: AfDB- Uganda 2015 African Economic Outlook

In spite of the country’s impressive economic performance over the last decade, the country continues to face challenges in sustaining high levels of economic growth. As indicated in the country’s NDP, there are structural features in the economy that need to be addressed to accelerate growth. These include: • Lower than desirable growth in the agricultural and industrial sectors; • Exports that are dominated by traditional agricultural products with minimal value addition, implying that the rapidly growing new sectors are not contributing significantly to exports and therefore not outwardly oriented; and • New sectors that are not absorbing the rapidly growing labour. On the social front, the 2014 UN Human Development Report indicated that Uganda’s human development index improved from 0.293 to 0.484 between 1980 and 2013, reflecting advancements across all three key development dimensions: health, education and living standards. In the report, Uganda was 164th position out of 187 countries considered for the ranking – in the "low human development" category.1 Progress was made in the UN Millennium Development Goals (MDGs) in 2013, especially against child mortality and


UNDP (2014): Uganda Human Development Report

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improving nutrition. Nevertheless, other goals remain a concern, notably the environment, maternal health and the fight against HIV/AIDS.


Overview of Public debt in Uganda

Ugandan public debt stock is crippling upwards as shown in Fig. 2 below. The decline in Uganda’s total debt stock in 2006, is attributed to the country’s debt cancellation under the Heavily Indebted Poor Countries Initiatives (HIPC I & II). 75% of the external debt was forgiven under the Multilateral Debt Relief Initiative (MDRI). However, the current debt is accumulating at an average rate of 30% per year, since 2007 and public debt as of November 2013 was estimated at Shs18 billion. External and domestic debt accounted for 18.1 percent and 12.3% of GDP, respectively. Fig.3 Public Debt Stock

Source: Uganda debt sustainability report November 2013-Ministry of Finance, Planning and Economic Development


External Debt Analysis

Uganda depends largely on external financial support, in which 48% of the national budget is donor funded. The country is one of the major beneficiaries of Aid for Trade (AfT)2, ranking second after Nigeria among the recipients in 2009. Most of the external debt is contracted on

Aid for Trade refers to development assistance that seeks to promote international trade and a number of international initiatives to promote trade-related development assistance. This comprises aid that finances traderelated technical assistance, trade-related infrastructure, and aid to develop productive capacity. 2

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highly concessional terms and is owed to largely multilateral creditors. Fig. 4 and Fig. 5 shows the total external debt and the external debt creditors of Uganda respectively. Fig.4: Total External Debt (US$ Millions)

Source: Bank of Uganda -2014

Fig.5: External Debt Creditors

Source: Uganda debt sustainability report November 2013-Ministry of Finance, Planning and Economic Development

In 2013, 87% of external debt was owed to official multilateral creditors, while the debt to official bilateral creditors accounted for 13%. International Development Association (IDA) held the largest share of Uganda’s debt obligations constituting 58.7% of the total, followed by the African Development Fund (ADF), which accounted for 19.5%.

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External Debt Sustainability Analysis

The Debt Sustainability Analysis (DSA) 2013 assessed Uganda’s Public and Publicly Guaranteed (PPG) external debt to be sustainable in both the medium-term and the long-term framework over the projection period; with both the solvency and liquidity debt-burden indicators staying well below their sustainability thresholds as shown in table.3 below. Table.3: Summary of External Debt Sustainability Assessment 2013

Source: Uganda Debt Sustainability report 2013

According to the 2013 Uganda DSA, the country’s external debt continues to be largely sensitive to borrowing on less concessional terms given the current share of concessional debt of almost 90% of the total external debt stock. Over the medium term, however, more nonconcessional borrowing is projected and likely to even dominate over the long term, changing the external debt sensitiveness to shocks to real GDP growth and changes in prices of primary products.

7. Domestic Debt Analysis The domestic debt stock still remains modest, at around 12.3% of GDP in FY2012/13. However, it accounted for 88.6% of the total interest costs because of the relatively high market interest rates on Treasury Instruments against the concessional terms of the current external debt. The ratio of medium- and long-term debt to short-term debt is currently 64:36, but is expected to reach the benchmark level on 70:30 in the medium term. Domestic debt Page 8 of 16

shall be issued exclusively for fiscal policy purposes and to further develop domestic financial markets.

Fig.6: Domestic financing of the budget has increased recently

Source: World Bank (2015): Uganda economic update 5th edition Report No. 94622 Feb 2015

Uganda’s domestic debt stock has been on an upward trend. Public domestic borrowing mainly arises for one or more of the following reasons3: 

To fund the budget deficit when domestic revenues, foreign grants and public external borrowing are inadequate to meet public sector expenditure;

For monetary policy implementation i.e. domestic debt papers are issued to influence money supply, interest rates and/or inflation for macroeconomic stability. Such debt may also be issued to sterilise local currency appreciation effect (“ Dutch disease”) of sizable aid inflows to protect export competitiveness and avoid an influx of cheap imports that substitute local products and stifle local industry;

Accumulation of public sector domestic arrears (exceptional financing), due to cash flow constraints or technical factors, e.g. slow payment process; and

Cornilius Deredza (2010): Presentation at the Regional Multi-Stakeholder Conference on Domestic Debt Management jointly organised by AFRODAD and KENDREN 3

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To promote the development of domestic primary and secondary markets, “benchmark” for corporate bonds and savings mobilization.

Of the above four factors, the issuing of domestic debt papers for monetary policy implementation purposes has been the major driver of the country’s increasing domestic debt. However, this is directly linked to the country’s external debt developments as explained hereunder. The country’s external borrowing strategy since the 1990s indicates that external debt financing will continue to constitute an important part of budget financing as long as domestic revenues fall significantly short of expenditures and donor grants alone cannot meet the shortfall (Uganda Debt Strategy, 2007:15). Accordingly, Uganda has been a recipient of external aid assistance in the form of grants and loans, with loans being largely concessional with a grant element of not less than 35%. Between 2001 and 2010 for instance, external assistance flows to the country averaged approximately US$760 million annually, registering the highest inflows of about US$1.2billion in the 2006/07 fiscal year4. On average, these flows represent 25% of total budget revenue and 6% of GDP (MoFPED, 2012:1). However, a key point to note is that the high externally financed deficits results in an annual increase in the money supply above the level of demand from the economy. To avoid potential macro-economic destabilization effects (such as high inflation pressures), there is consistently need to sterilise the increases in money supply, either by sales of foreign exchange or domestic debt through issuance of government securities. In this regard, increased budget deficits and the respective increase in external aid inflows have simultaneously resulted in increases in the country’s domestic debt stock as more issues have been done to ensure that the country achieves its set money supply and inflation targets. Accordingly, the country’s 2007 debt strategy specifies that the domestic borrowing requirement of the Government is currently limited to the issuance only for liquidity management i.e. domestic securities are only issued to “mop up” excess money supply and not to finance expenditure. The actual volumes of debt issued are set by the Bank of Uganda based on Government expenditure path, which together with foreign exchange sterilisation sales, reduce excess liquidity (Uganda Debt Strategy, 2007: 30) In addition to the issuing of government security papers to mop up excess money supply in the economy, the development of a well functioning market for Government of Uganda (GoU) securities has also been the other driver of domestic debt growth in the country. Until the 2002/03 fiscal year, treasury bills were the main sterilization instrument used by the Bank of It is reported that this was due to heightened donor confidence resulting from prudent macroeconomic management of the country 4

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Uganda. However, during the second half of 2003/04, government treasury bonds in the tenors of 2, 3, 5 and 10 years were introduced and issued. The main aim of these issues was to support monetary policy implementation by further improving liquidity management and promoting market development and deepening. It was also envisaged that these securities would help by extending not only the maturity of the instruments traded, but also the yield curve as well as provide additional saving instruments in the country. These bond issues have continued over the recent years, under the Bank of Uganda’s monetary and financial policies to support the development of financial and money markets. Proportion of Domestic Debt in the Total Public Debt Portfolio External debt was predominant in the country’s total public debt portfolio up to 2006 as shown in Fig.1 above. This reflects the Government of Uganda’s long standing policy that external debt financing will continue to constitute an important part of budget finance as long as domestic revenues fall significantly short of expenditures and donor grants alone cannot meet the shortfall. However, the Multilateral Debt Relief Initiative (MDRI) of 2006 significantly reduced the country’s external debt burden, resulting in a near split balance of external and domestic debt as of end 2006/07. By the end of 2007/08, domestic debt stock was more dominant at 52.4% of the country’s total public debt. However, as the country continued to implement its strategy of borrowing externally on concessional terms to finance infrastructure development, external debt once again gained its dominance starting from 2008/09 as shown again in Fig.1 above. Domestic Government Debt vs. Domestic Private Sector Debt A high level of borrowing on Uganda’s thin domestic capital market could result in the reduction of private investment by pushing up interest rates. As the Government increased its level of dependence on domestic loans to finance the budget, the share of domestic debt to GDP increased to more than 14.2% during FY 2013/14, up from 11% at the end of FY 2012/13. As a result, constituting 7.8% of the budget, the allocation of financial resources for interest payments is equivalent to the total value of allocations to the health sector. Moreover, the high level of domestic debt has an impact on interest rates and credit. The fact that the level of the issuance of Government securities was far higher than had been planned could be one of the reasons why commercial banks have been reluctant to significantly reduce lending rates, despite the Bank of Uganda gradually reducing the CBR over the past two years. In fact, total private sector credit, denominated in shillings, has been declining since FY 2011/12, from the equivalent of 8.2% of GDP to the equivalent of 7.6% in FY 2013/14. Page 11 of 16

Fig. 7 Domestic Government Debt vs. Domestic Private Sector Debt (in % of GDP)

Source: Ministry of Finance Planning and Economic Development 2014

8. Sustainability of Domestic Debt Unlike the case for external debt, there are currently no internationally agreed benchmarks for assessing domestic debt sustainability. However, the Debt Relief International (DRI) has suggested some provisional benchmarks that can be used as a rule of thumb in domestic debt sustainability analysis. These thresholds which are based on the DRI’s experience in the HIPC Capacity Building Programme are as shown in Table.4 below: Table.4: Preliminary Benchmarks for Domestic Debt Sustainability Domestic Debt indicator Debt/GDP Debt/Revenue Debt Service / Revenue Interest / Revenue

Threshold range (%) 20-25 92-167 28-63 4.6-6.8

Source: Debt Relief International (2001): key Issues for analysing Domestic Debt Sustainability

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Based on these thresholds, countries with debt ratios at, or near, the top of the threshold range set out in Table 4 above will have already accumulated payment arrears and will be facing an unsustainably high domestic debt burden. Those with ratios below, or near, the bottom of the range do not have arrears and hence their debt can be considered sustainable. Countries with ratios falling within the range can be considered to have potentially unsustainable domestic debt burdens. In their own efforts to ensure sustainability of domestic debt in Uganda, the 2007 Uganda Debt Strategy states that the sustainability of the domestic debt burden for the Government of Uganda and the economy is from the point of view that: 

Too high a debt burden directly undermines Government fiscal operations and the stated macroeconomic aim of fiscal consolidation, due to high interest payments; and

The issuing of debt in the domestic market could undermine growth by reducing the availability of credit to the private sector.

In regard of the above possible effects of domestic debt on the economy, benchmarks were proposed in the strategy to ensure that the level of domestic debt is consistent with the stated Government objectives of pursuing fiscal consolidation and private sector led economic growth. The suggested benchmarks are as follows: Table.5: Suggested Benchmarks for Assessing Domestic Debt Sustainability5 Domestic Debt Stock/GDP Domestic Interest Cost /Domestic Revenue (excluding grants) Domestic Debt Stock/Private Sector Credit Sovereign Credit Rating

Suggested Benchmark