Uganda will get a reduction of $338 mn in the present value of its external debt in April 1998. It is the first beneficiary of the Highly Indebted Poor Countries (HIPC) Initiative, the World Bank and International Monetary Fund (IMF) said in Washington on 23 April. The plan aims to reduce foreign debts of eligible countries to "sustainable" levels. Present value of Uganda's total external debt is nearly $1.9 bn.
Describing the deal as "warmly welcome," Uganda's Minister of Planning and Economic Development Richard Kaijuka said the international community had recognized the country's achievements of the last decade and also the "need to ensure that debt payments do not constrain further progress," a World Bank press release reported.
Prior to this decision, Uganda had seemed on track for debt relief this year. It then became known in March that major creditors were suggesting April 1998 at the earliest, others November 1998, and others still 1999. The Ugandan government made clear its disappointment and reiterated its need for prompt relief. In an early March letter to a London newspaper, Uganda's Finance Minister, J.S. Mayanja Nkangi said third- or fourth-quarter 1997 dates were explicitly discussed at last October's World Bank/IMF meetings. Uganda was "increasingly frustrated" at the prospect of delay, he wrote.
Launched in October 1996, the HIPC plan aims to provide relief for eligible countries with strong IMF/Bank programmes and with foreign debt burdens deemed "unsustainable" even after getting debt-stock reduction from bilateral creditors, mainly in the Paris Club.
The first package to enlist all categories of creditors, it aims to reduce and restructure bilateral, commercial and previously untouchable multilateral debt to levels that enable HIPCs to pay debt service and also invest in socio-economic development. This "exit strategy" is to free countries from repeated and costly rescheduling. Once a country exits, it cannot ask for more debt relief.
A country must normally complete six years of successful IMF/World Bank adjustment to qualify. Towards the end of the first three-year period, Bank and IMF staff do a "debt sustainability analysis" (DSA), using 20-year projections of debt, debt service and income. This forms the basis, at the end of the third year, for the "decision point" when creditors agree on how much relief to grant at the end of the sixth year "completion point."
Under various pressures, the Fund and Bank have modified this six-year schedule, enabling rare countries such as Uganda, to qualify for an early decision point, and a shorter gap between decision and completion.
While creditors have now agreed to an April 1997 decision point for Uganda, Bank officials earlier conceded there was a "tension" over the date for granting it actual debt relief. US Treasury officials privately argued that additional aid and later completion would enhance the success of Uganda's reforms. "Is it a more constructive way... to provide money more quickly, to get the deal done... or is it more effective to wait a little longer," reinforce the current programme and then reduce the debt, asked Mr. Jim Adams, a Bank country director for Uganda and Tanzania. Bank officials have avoided naming specific creditors, but some argue that early completion for Uganda could set a precedent that would raise unrealistic expectations for other HIPC candidates.
Key document on Uganda
The preliminary HIPC document recommending Uganda's eligibility was presented by Bank and IMF staff to their Boards for initial discussion on 10-12 March. It argues that Uganda is eligible for relief under most HIPC criteria: its $270 per capita gross national product in 1996 qualifies it on poverty grounds, as does its adjustment track record on policy grounds.
By mid-1996, Uganda's net present value (NPV) of debt – the sum of all future debt service obligations on current debt discounted at market interest rates to reflect concessionality – was $1.64 bn, or nearly 233 per cent of exports.
The document uses a baseline scenario with debt and debt service ratios based on projected growth of gross domestic product (GDP), exports, other income flows and outlays. Then a sensitivity analysis works out how changes in income or outlays may alter Uganda's debt ratios and payment capacity. The baseline scenario assumes that real GDP will grow by 7 per cent between June 1996 and June 1999, and by 5 per cent a year thereafter. The analysis projects that the NPV debt/exports ratio would rise to 254 per cent in fiscal 1996/97, fall to 208 per cent in 2005/06 and 153 per cent by 2015. The debt service ratio would steadily fall below 20 per cent in 1999/2000 to 13.5 per cent by 2005/06 and then stabilize near 11 per cent.
The document says that Uganda, which got 66.4 per cent of its export earnings in 1995 from coffee, is more vulnerable than all other HIPC countries bar Congo, in terms of export concentration and volatility of export revenue. For example, a 20 per cent fall in coffee prices below baseline projections could raise the NPV of debt to exports by 30-40 percentage points over the 1996/97 baseline to 282 per cent and keep it above 250 per cent until 2005/06. It would remain above 200 per cent until 2015/16.
Given this vulnerability, Uganda might have difficulty servicing its debts at the higher end of the HIPC guidelines' target range of 200-250 per cent for the NPV debt/exports ratio. The paper recommended 200-220 per cent as an appropriate "sustainability target" to reduce the risk of further debt problems. A 200 per cent target implies debt relief of $385 mn at an April 1998 completion point – $311 mn from multilateral creditors and $74.7 mn from bilaterals. A target of 220 per cent would require $189.5 mn in multilateral relief and $62 mn from bilaterals.