EXTERNAL DEBT AND DEBT REDUCTION MEASURES IN UGANDA
by ANDREW MWABA
This paper presents a country case study of Uganda’s external debt burden, its impact on the country’s
economy and the outcomes of the recent debt relief measures implemented by the international community.
Using time series data, we show that external debt flows had positive impacts on investment and GDP
growth in Uganda, while accumulated debt demonstrated negative effects on the two variables; and that
debt relief captured by declining debt service ratios has stimulated growth in the 1990s. These findings
confirm the predictions of the debt Laffer curve models and support the results from earlier studies. It is
also established that debt relief financed activities in the social sectors have contributed to reducing
poverty in Uganda.
Key words: external debt; debt laffer curve; investment; GDP growth; debt relief; poverty reduction.
The external debt burden places severe constraints on the economic recovery of
many low-income African countries, despite years of adjustment efforts. Indeed as a
result of the debt overhang, investment continued to decline, diminishing prospects for
recovery and growth in many low-income countries. For example, for Africa as a whole
the investment rate in the 1990s averaged about 16.8 percent of GDP compared to 23.2
percent in the 1970s. The decline was even more severe in the lower-income African
countries. Unsustainable debt has also continued to undermine the efforts of the lower
income countries to achieve the international development targets set for the year 2015.
The debt burden or debt overhang affects low-income country investment and
growth prospects in a number of ways. Firstly, it forces countries already faced with
foreign exchange constraints to commit resources to repaying loans, rather than investing
in key infrastructure and productive activities. Secondly, governments face serious fiscal
constraints internally to meet the local currency requirements for debt service, and most
often resort to borrowing from the banking system and crowd out private investors.
Thirdly, the uncertainty created by external debt discourages investors from making new
commitments because of fears that taxes may have to be raised to meet debt obligations.
Finally, by restricting the fiscal space available to governments, debt payments have
limited the resources available for investment in basic services essential to the poor.
Arguments such as these have led to calls for debt relief to assist the highly indebted low-
income countries come out of the debt overhang.
This paper discusses the external debt problem of Uganda, its evolution and
impact on the economy, the recent debt reduction measures, and the outcomes for the
economy. The paper is presented in eight chapters, including the introduction. Chapter 2
presents the theoretical framework for analyzing the external debt problem of the low-
income countries. Chapter 3 reviews Uganda’s economic setting, tracking developments
in the last three decades to recent years. Chapter 4 discusses the sources of external debt
in Uganda, the magnitude of the debt burden and debt management issues. Chapter 5
outlines the debt relief programs from which the country has benefited. In chapter 6 we
analyze the impacts of external debt and debt relief measures on the economy, focusing
on investment and growth, while chapter 7 discusses issues of poverty and some of the
practical measures implemented to bring debt relief to address absolute poverty in
Uganda. The paper closes with some concluding remarks in Chapter 8.