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Joint World Bank/IMF Debt Sustainability Analysis Update

Author(s):
International Monetary Fund
Published Date:
October 2011
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I. Background

1. Uganda has maintained a sustainable debt position, thanks to the sound macroeconomic policies and cautious public borrowing following debt relief. HIPC (in 1999/2000) and MDRI (in 2005/06 and 2006/07) debt relief reduced Uganda’s debt burden sharply, with all debt indicators declining to levels well below their policy-dependent thresholds.2 Prudent fiscal management and modest public sector deficits further strengthened the debt position. Debt management has remained cautious since debt relief (Box 1). New external borrowing was mainly financing productive sectors, particularly transport, energy and agriculture and was contracted on highly concessional terms, mostly from IDA and the AfDB. In line with the revised IMF/IDA’s Nonconcessional Borrowing Policy (NCBP)3, Uganda borrowed US$ 100 million on nonconcessional terms, although the ceiling under the PSI was up to US$ 500 million. Nonetheless, public and publically guaranteed external debt has remained low as a percent of GDP, and is mostly owed to multilaterals (IDA accounts for 63 percent of total debt - Figure 1). Domestic debt is low, at about 8 percent of GDP.

Figure 1.Breakdown of the stock of external debt (end FY09/10)

Box 1.Changes in Debt Indicators since the Last DSA

  • Public and publicly guaranteed external debt increased from US$ 2.0 billion (15.3 percent of GDP) to US$ 2.3 billion (16.8 percent of GDP) between 2008/09 and 2009/10.

  • The debt service to exports ratio, increased from a revised 0.6 percent to 3 percent over this period, partly on account of a statistical correction in the export data.4

  • Domestic debt declined from 8.4 percent of GDP to 8.1 in 2009/10 (mostly on account of high growth), but total public and publically guaranteed debt increased to 24.9 percent of GDP, from 23.7 percent recorded in 2008/09.

  • The debt-service-to-revenue ratio declined from 28.3 to 27.9 percent over this period on the back of stagnated revenue performance.

2. The authorities are stepping up their plans to implement large-scale critical infrastructure projects with a view to removing persistent growth bottlenecks. In line with its National Development Plan, Uganda’s main medium-term priorities are in the energy sector, in particular the realization of the Karuma hydropower plant, of which construction is expected to commence in 2012/13, as well as the further development of roads infrastructure. Financing is expected to come from a combination of domestic and external sources.

3. The authorities are committed to raise domestic revenue over the medium term, partly to make up for the expected decline in aid. While a large share of their financing needs will continue to be filled by concessional borrowing, the government also intends to use limited amounts of nonconcessional borrowing, notably for infrastructure projects. Consequently, the authorities have requested for a raise in the ceiling on non-concessional borrowing to US $ 800 million over the next 3 years of the PSI.

II. Assumptions

4. Long-term assumptions are consistent with the recent performance of the Ugandan economy and only slightly different from those in the previous DSA. In 2010/11 and 2011/12 growth is projected to be around 6-6.5 percent, slightly below historical averages partly on account of the secondary effects of the global economic slowdown as well as consecutive exogenous shocks, particularly the increased oil prices and the adverse effects of weather. Growth would rebound to 7 percent, slightly above the historical average of the past ten years thereafter, as public investments in roads and energy5 start to unlock additional growth potential. A sound monetary policy would help keep inflation around 5 percent in the medium term, as exogenous inflationary pressures relate. The public sector deficit (including grants) increases in the near term on account of the public investment drive before stabilizing at about 3 percent of GDP. Compared with the 2009 Joint IMF-World Bank DSA, the current baseline scenario assumes a less ambitious growth path over the medium term, reflecting the back-loading of infrastructure investment in light of the authorities’ wish to carefully assess and select their projects before implementing them (Box 2).

Box 2.Ex post analysis of the 2009 DSA

  • Exports have under-performed compared to the last DSA, following statistical correction that led to downward revision of informal cross-border trade (in particular) with Southern Sudan.

  • Slower growth than initially envisaged has led to lower imports. Assumptions on the behavior of exports and imports over the long term are similar to the 2009 DSA, and the trade and current account balances are therefore similar.

  • The current baseline scenario includes slightly less external borrowing compared to the 2009 DSA, in line with the smoother public expenditure path.

  • On the fiscal side, both public revenue and expenditure have not performed as well as envisaged in the 2009 DSA. They are assumed to grow smoothly over the projection period, as improved tax policy increases fiscal resources and implementation and absorption capacity constraints are addressed.

5. The external position over the long run is adequate. The medium term trade balance deficit, which reflects the high import content of infrastructure investments as well as solid domestic growth, stabilizes over the long term at about 7 percent of GDP., while the current account deficit stabilizes around 3 percent of GDP. Total transfers are assumed to decline slightly over time, from 6 to 4 percent of GDP, reflecting the gradual transition of Uganda away from aid dependency, with the current account deficit stabilizing at around 3 percent of GDP. Remittances are assumed to stabilize just below 4 percent of GDP over the long term, with a slowly declining trend. Non-oil FDI stabilizes at about 4 percent of GDP.

6. Concessional donor inflows are projected to continue to contribute to budget financing but gradually taper off. As concessional assistance decline, the use of nonconcessional resources grows to provide about half the new external financing at the end of the projection period (Figure 2)6, in spite of the fact that Uganda is not expected to graduate from IDA in the medium term. The overall grant element of new public borrowing declines over time, from over 40 percent to about 10 percent by the end of the projection period. Public domestic debt grows in line with GDP, hovering over 5-6 percent of GDP. Financing projections are somewhat below those of the previous DSA, reflecting the lower base on which projections are based.

Figure 2.New concessional and non-concessional borrowing in the baseline scenario

(in percent of GDP)

III. External Debt Sustainability Analysis

7. The authorities agreed with the results of the DSA, which were in line with the results of their own DSA. The authorities intend to rely primarily on highly concessional borrowing, and based their DSA on more conservative assumptions regarding nonconcessional borrowing. They were however well aware that the nonconcessional borrowing envisaged over the medium term was likely to continue in the longer term and agreed that such a borrowing would remain consistent with the NCB policies of the World Bank and Fund so as to ensure that debt remains debt sustainable.

8. Public and publicly guaranteed external debt is expected to remain sustainable over the next 20 years (Table 1 and Figures 1a). All five debt-burden indicators remain well below their policy-dependent thresholds throughout the period. The PV of debt-to-GDP ratio is expected to rise in the first part of the period (from 8 percent in 2009/10 to 17 percent in 2014/15) in line with the public investment drive; it then stabilizes to about 20 percent in the outer years. The PV of debt-to-exports is expected to peak at 86 percent of GDP in 2020/21 before going down gradually to 76 percent at the end of the projection period. The debt service-to-exports ratio remains very low, reflecting the continued large share of highly concessional borrowing in the debt stock.

9. External debt is expected to remain resilient to all standardized shocks (Figure 1a, Tables 1 and 3). The stress tests point to a low risk of debt distress. Under all standardized stress tests, the debt-to-GDP, debt-to-exports, and debt service-to-exports indicators of public and publicly guaranteed external debt remain below their indicative threshold values throughout the next twenty years.

10. Historical scenarios reflect to a large extent Uganda’s performance over the last ten years, notably with respect to GDP and export growth, inflation, transfers, and FDI inflows. However, there is a need to remain vigilant as reserves have fallen to 3 months of import cover and would need to be rebuild to the more comfortable historical levels of 4-5 months of import cover to provide sufficient cushion in event of foreign financing shocks.

11. Uganda is due to become significant oil producer. Due to paucity of data and uncertainties regarding the expected policy framework, this DSA update does not include the macroeconomic consequences of the anticipated oil exploration. Fund and World Bank staff are, however, assisting in collaboration with other development partners the government of Uganda to ensure that Uganda can harness the windfall from its oil. Staffs anticipate that these uncertainties will be resolved over the coming twelve months and therefore the next DSA will include the macroeconomic consequences of oil exploration on Uganda’s debt sustainability.

IV. Fiscal Debt Sustainability Analysis

12. The path of total public debt, which includes external debt and domestic public debt, is sustainable under all stress tests. (Tables 2 and 4, and Figure 1b). Under the baseline, the PV of public debt to GDP and revenue increases slightly in the medium term, and both remain at sustainable levels over the long term. Debt service is broadly stable as a share of revenue.

13. Of all bound tests, a permanent shock to growth stands out as bearing the strongest impact on debt indicators by increasing the PV of debt to GDP ratio to 35 percent. The PV of debt to GDP is relatively unaffected by other bound tests, and remains below 30 percent and close to the baseline under all scenarios. The PV of debt to revenue is relatively robust to most shocks, but is significantly affected by a shock to growth. Finally, a permanent shock to growth would raise the PV of the debt service-to-revenue ratio close to 20 percent and would constrain fiscal spending significantly. This reveals how critical public investment selection and its effective implementation is to ensure long-term debt sustainability.

V. Conclusion

14. Uganda’s public and external debt are expected to remain sustainable under the baseline scenario as well as under alternative shock scenarios, owing to a cautious strategy that combines reliance to concessional borrowing, cautious selection of nonconcessionally financed infrastructure projects and a conservative fiscal stance. Uganda’s public debt indicators are however sensitive to a protracted adverse growth shock. This highlights the importance of ensuring that a shift towards non-concessional borrowing is combined with medium-term improvements in project selection, investment planning processes and implementation capacity.

As Uganda is an IDA only country, the DSA is prepared jointly by the IMF and World Bank staff in consultation with the African Development Bank (AfDB) under the IMF-WB DSA framework for Low-Income Countries. The fiscal year of Uganda starts from July 1st.

The World Bank’s Country Policy and Institutional Assessment (CPIA) ranks Uganda as a “strong performer.” Debt burden thresholds for strong performers are NPV of debt to GDP ratio of 50 percent, NPV of debt-to-exports ratio of 200 percent, NPV of debt-to-revenue ratio of 300 percent, debt-service-to-exports ratio of 25 percent, and debt-service-to-revenue ratio of 35 percent.

The 2010 adjustments to implementation of the IDA/IMF Non-concessional Borrowing Policy enhanced flexibility by allowing debt limits to be set based on a country’s macroeconomic and public financial management capacity (now commonly referred to as “capacity”) and their debt vulnerability. Uganda is classified as a “low debt vulnerability and low capacity” country, and hence eligible for increased flexibility in setting annual non-zero non concessional debt limits.

The trade data between Southern Sudan and Uganda were revised due to better survey data becoming available in 2010. This led to a downwards revision of total export receipts.

Bujagali hydropower plant is expected to be commissioned in 2011/12.

Nonconcessional borrowing is assumed to be contracted on IBRD-like terms, with 4.9 pc rates (about 400 bp above LIBOR), 10 years of grace and 20 years of repayment.

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