Uganda continues to be assessed at a low risk of debt distress based on the low-income country debt sustainability analysis (LIC DSA) despite recent challenges to the economy from high inflation, weakening external demand, and slower growth. Both baseline public and external DSA suggest Uganda’s public sector debt is sustainable given the current size and evolution of the debt stock. Compared to the 2011 DSA assessment, overall public debt sustainability deteriorates modestly, because of a much tighter monetary policy in FY2011/12 and lower-than-expected growth. While the authorities will continue to rely primarily on highly concessional financing to fund their infrastructure investment needs, they are planning to scale up non-concessional sources for several critical infrastructure projects. The DSA hence includes an increase in the non-concessional borrowing ceiling under the PSI to US$1 billion from US$800 million. In addition, it incorporates an envisaged oil sector scenario.
The oil scenario suggests that external financing needs for oil sector development and deterioration of current account could add to medium-term debt vulnerabilities before production comes on stream in full capacity. Yet, beyond oil, downside risks on public debt cannot be ruled out, as implied by the shock scenarios of fixed primary deficits and permanently lower growth. These results highlight the need to maintain fiscal prudence and improve the efficiency of growth enhancing expenditure, particularly through improvements in investment planning, project selection, implementation capacity, and debt management.
As Uganda is an IDA-only country, this DSA update is prepared jointly by the IMF and World Bank staff under the IMF-WB DSA framework for Low-Income Countries. The fiscal year of Uganda starts from July 1st.
Uganda is ranked as a “strong performer” under the Country Policy and Institutional Assessment (CPIA) framework of the World Bank. Accordingly, debt burden thresholds for Uganda are PV of debt to GDP ratio of 50 percent, PV of debt-to-exports ratio of 200 percent, PV 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.
A contract with China was signed for US$110 million on non-concessional terms in 2010, and Parliament approved another US$350 million with China in 2011.
An alternative scenario incorporating elements of oil sector developments is presented in the external debt sustainability analysis, and Box 3 outlines the underlying assumptions of this scenario.
The Bujagali hydropower plant began operation in early 2012. It is expected to be fully operational by endyear and should help mitigate power shortages that have contributed to reduced growth through FY2011/12, and contain both power generation costs and power subsidies.
Nonconcessional borrowing is assumed to be contracted on IBRD-like terms with an interest rate ranging between 4 to 5 percent with10 years of grace period and 20 years of repayment.
The recent increase in public domestic debt in FY2010/11 was mainly due to the much tightened monetary policy which introduced a strong appetite on domestic bonds. But the trend is assumed to revert after inflation drops to meet the annual targets.