| Uganda can’t survive without aid - Report |
| By David Musoke |
| KAMPALA — A New York-based international firm has cast doubt over Uganda’s capacity to deal with significant cuts in donor aid. Fitch Ratings Limited said in its report released on March 22, “It is doubtful whether Uganda could surmount such a shock in the manner that Kenya has, for example.” The report came out the same month Britain withheld Shs17 billion of aid to Uganda because of the slow progress towards the return to multi-party politics. Ireland has also said it is considering to withdraw some of its aid to Uganda because of the government’s failure to establish a level playing field for political parties and its campaign to lift presidential term limits. President Yoweri Museveni has reacted saying Uganda can do without aid. The Donor Governance Group, which comprises envoys of Uganda’s major donors, also wrote a strong letter to Prime Minister Apolo Nsibambi last week raising concer ns over the political transition, human rights violations and corruption. In a thinly veiled warning to the government not to take donor aid for granted, Mr Stig Barlyng, the head of the group and Danish Ambassador to Uganda said in the letter that the decisions that the government takes on the political transition, human rights, corruption and other governance issues agreed on with the donors in the past “might influence our development partnership.” The Organisation for Economic Cooperation and Development (OECD) said in a report launched on Tuesday that the country’s aid was likely to be cut if President Museveni’s government mismanaged the transition to multi-partyism. President Museveni had earlier said that Uganda could do without foreign aid if the Uganda Revenue Authority (URA) could plug the leakages in tax collection. However many Members of Parliament called for caution saying the country still needs the donors. They argued that if donors turned of f the taps, the economy would be disrupted. A treasury official said recently that in case of a major problem, such as a complete aid freeze, Uganda’s foreign reserves could run the country for up to six months. Uganda relies on donors to finance half of its budget. The Fitch Ratings report said unlike Kenya, Uganda would find it more difficult to deal with major cuts in aid. Kenya fell out with donors in the late 1990s during the reign of Daniel arap Moi. The donors took a unified position of strong condemnation of the neighbouring country’s human rights and corruption record. Kenya somehow survived the storm until 2003 when Moi left. A consultant attached to the Ministry of Finance, told The Monitor recently that Kenya survived mainly because of its more developed stock exchange market. It could easily mobilise funds by selling government bonds on the stock exchange. However, Uganda’s five year-old stock exchange is still weak and is on ly starting to sell government bonds to the public. Fitch’s 15-page report says that donor inflows to Uganda have been both a blessing and a curse. “On the one hand, they have enabled Uganda to address a host of human domestic development shortcomings and on the other they have bred a culture of aid dependence and complicated macro-economic policy,” the report says. Grant aid alone, the report says, now accounts for over 30 percent of government expenditure. Without it, the twin fiscal and current account deficits would be in deficit to the tune of 10 - 12 percent of GDP. Relative to other Fitch rated Sub-Saharan African countries, these deficits are worse than Ghana, but not quite on the same scale of Mozambique or Mali. “Uganda’s domestic revenue is however seriously deficient by any measure, amounting to barely 12 percent of GDP, reflecting the subsistence nature of much of the economy and poor governance,” the report said. The Fitch Ratings r eport said that due to the high scale of aid financed expenditure, the Bank of Uganda has been forced to engage in expensive sterilisation operations (through the sale of Treasury Bills and foreign exchange) in order to absorb excess liquidity. “This in turn has slowed the depreciation of the exchange rate leading some to argue that Uganda has started to display Dutch disease characteristics and has driven up the stock of domestic debt, simultaneously crowding out the private sector,” the report said. “Such factors help to explain why Uganda has found it difficult to make the structural leap to private sector/export driven growth of 7-8 percent.” The report said Uganda’s debt sustainability has remained elusive and the debt/export ratio has climbed to over 300 percent in net present value (NPV) terms. This outcome has been primarily due to valuation changes, reflecting declining international interest rates and the sharp fall in US dollar. Net borrowing has also contributed while arrears continue to accrue to save non-Paris Club’s pending agreement to comparable terms. Fitch Ratings calculation in nominal ratio indicate that Uganda’s net external debts/ current external receipt ratio remains high at 170 percent in 2004 and shows little sign of converging to B median in the way that Ghana’s has post HIPC. “That said, though because most of the debt has been contracted on highly confessional terms, the cash flow implications are much less alarming. Fitch’s international liquidity ratio a measure of liquid international liabilities currently stands at over 400 percent, far a head of the B median substantially ameliorating concern about debts sustainability. “However, it would not be difficult to envisage a rapid erosion of this position triggered by another terms of trade shock or prolonged interruption to aid flows the report said. Fitch Ratings said that politically Uganda has yet to embrace life without Muse veni or the infrastructure characteristic of a more democratic society including a more pluralistic political system and a professional army. “In this context some uncertainty cannot be ruled out ahead of presidential and parliamentary elections in 2006 particularly as Uganda is currently contemplating constitutional change that could allow Museveni stand for a third term,” the report says. This is the first time Fitch Ratings has rated the creditworthiness of Uganda. It awarded the country a B credit. Uganda is the first country in East Africa to be rated by Fitch Ratings. Other countries awarded the B credit include Benin and Mozambique. B plus, one of the highest scores, has been awarded to Cape Verde, Ghana, Uruguay and Venezuela. Countries like Bolivia, Cameroon, Equador, Lebanon, Mali and Moldova have been awarded B minus. Fitch Ratings Agency, Standard & Poor’s and Moody’s Investor Service are the three credit rating agencies recognised worldwide. |
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