Uganda gets nod to raise debt limit to meet increasing budgetary demands

Increased borrowing will finance the new power generation projects that Uganda is currently undertaking. Photo/FILE 

By MARTIN LUTHER OKETCH Special Correspondent

In Summary

• In response to an infrastructure-driven increase in public sector spending, this will be the third time the government has expanded its non-concessional borrowing limit under the current Policy Support Instrument (PSI) — a funding arrangement between the IMF and low-income countries.
• Increased borrowing will finance the new power generation projects that the country is currently undertaking.
• IMF’s debt sustainability analysis shows that despite the projected increase in external debt, total public debt will remain sustainable and the risk of debt distress will continue to be low as the country’s economy has been growing and past borrowing has been prudent 

The International Monetary Fund has accepted Uganda’s request to raise the debt limit on non-concessional borrowing from $1.5 billion to $2.2 billion, giving the country access to more funds to meet its rising budgetary demands.

In response to an infrastructure-driven increase in public sector spending, this will be the third time the government has expanded its non-concessional borrowing limit under the current Policy Support Instrument (PSI) — a funding arrangement between the IMF and low-income countries.

In previous PSIs, Uganda started with a borrowing limit of $500 million and then gradually raised it to $700 million; $1 billion and $1.5 billion as economic conditions improved.

IMF senior resident representative to Uganda Ana Lucia Coronel said, “Yes, the Fund has supported the request to increase the ceiling on non-concessional borrowing from $1.5 billion to $2.2 billion within its recently completed first review of the PSI.”

Uganda’s bid comes only weeks after Kenya asked the IMF for an emergency loan it plans to use in response to looming economic shocks. The loan was discussed during the recent visit to Nairobi by IMF chief Christine Lagarde on January 6-8.

In Uganda, increased borrowing will finance the new power generation projects that the country is currently undertaking.

“The electricity projects are critical to close the acute infrastructure gap that makes Uganda one of the countries with the lowest levels of electrification in Africa. A more stable electricity supply would lower production costs and lead to job creation and poverty reduction,” said Ms Coronel.

READ: New hydro projects to ease Uganda’s power

The IMF’s debt sustainability analysis shows that despite the projected increase in external debt, total public debt will remain sustainable and the risk of debt distress will continue to be low as the country’s economy has been growing and past borrowing has been prudent.

Ms Coronel said that the projects, if well managed, look consistent with the absorptive capacity of the economy, and given their high import content, the impact of the spending on inflation or the real exchange rate is not expected to be significant.

“It is important to emphasise that as with all large projects, they are subject to risks. Therefore, it is essential to ensure efficient use of the resources. This will require timely and transparent implementation of the projects, proper public financial management practices, adequate institutional arrangements, and cost recovery strategy,” said Ms Coronel.

The IMF executive board approved the new PSI for Uganda on June 28, 2013 and completed the first PSI review on December 18, 2013. Ms Coronel said that the country will have to balance new infrastructure spending with the need to avoid fuelling inflation or crowding out the private sector.

“Fiscal policy should be co-ordinated with monetary policy to contain any potential aggregate demand pressures. In this context, avoiding spending overruns or resorting to supplementary budgets that increase current spending is essential,” she said.

READ: Go slow on spending, borrowing IMF tells Uganda and Rwanda

Ms Coronel said that ongoing government efforts to reform tax policy and administration, without raising tax rates, are expected to alleviate constraints.