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.
1. I
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.
2. A
The external debt burden resulted from borrowing or external assistance or
foreign aid, ideally driven by the low-income countries’ desire to develop their
economies. The accumulation of foreign debt is a common phenomenon among
developing countries at the stage of economic development where domestic savings are
low, current account deficits are high and capital imports are necessary to augment
domestic resources (Todaro, 2000). Lending to sovereign governments, even in its most
concessional form is a debt creating flow, implying that all of it, with the exception of
outright grants, will need to be reimbursed at some future date, with interest. Thus,
although the accumulation of foreign debt or borrowing by governments can be highly
beneficial, providing the resources necessary to promote economic growth and
development, it has its costs.
The main cost associated with foreign borrowing and the accumulation of a large
debt is the debt service; the liquidation of principal and accumulated interest, which
represents a contractual fixed charge on a country’s income, savings and foreign
exchange reserves. As borrowing increases or as interest rates on accumulated
borrowings rise, debt service, which must be paid in foreign exchange, also rises. This
implies that debt service can only be met with export earnings—thus should exports
decline or prices of exports fall, or interest rates rise significantly, and exceed the
country’s export capacity -- the country starts to experience debt difficulties. This was
the experience of the highly indebted poor countries as they graduated from aid to the
debt crisis.
The debt-creating feature of foreign aid or external borrowing and its transition to
indebtedness can be illustrated with the highly simplified model discussed here. Given the
theory that foreign aid finances productive investments, we can construct a simple function
relating (Y) to foreign aid or external borrowing (B) for most African countries, in the form Y
=f(B), represented by the following equation:
Y = bB
The equation states that increases in external borrowing would generate proportionate
growth in income; in other words there would be without exception, a positive and significant
correlation, whereby growth in external finance brings about positive changes in income of
the same magnitude. This would be particularly so during the first 10 ten to 15 years of aid
expansion for most low-income African countries. In other words, all that the debtor
countries needed to do was to receive that external assistance and import the capital goods
they desired to procure civil works and produce goods that translated into new incomes and
This situation could have been sustained in perpetuity, so long as the external
assistance was in the form of outright grants and the benefactors were willing to continue
making available these resources. But the bulk of these resources were debt creating flows as
defined above and had to be repaid, which introduced a new dimension— the cost in debt
service initially starting with interest payments. This brings our function to:
Y = bB — rB
where r is the rate of interest on foreign borrowing and rB the annual interest payments.
Since we have already given the condition that Y = bB, the equation can also be presented as
follows, to reflect the cost of debt service on national income:
bB = Y — rB
For this expression or identity to hold, Y must at the minimum, exceed bB by rB. In
other words, the income should grow at a rate faster than the rate of growth of debt just so as
to cover the interest payments. The implication of this requirement is that it is not enough for
income to grow in direct proportion with the rate of accumulation of the debt. Growth in
income should exceed that of debt to enable the country to meet its interest payments.
The equation subsequently transforms into the following relationship when principal
payments are introduced as the loans reach maturity:
bB = Y — rB — B/t
where B/t represents the contractual fixed annual principal repayments on borrowings
contracted over period t. For sustainability of the relationship, or for that matter for debt
sustainability, the right-hand side of equation 2.4 must be equal to the left-hand side of
the equation. That is to say, the growth in income in a given year must exceed the annual
debt service on the accumulated borrowings or debt represented by the annual interest
payments (rB) and principal payments (B/t).
Most highly indebted African countries found themselves in a position where
their exports and incomes could not grow fast enough to meet the cost of the annual debt
service represented by interest and principal payments on their accumulated borrowing.
This was the beginning of the slide into debt servicing difficulties and the debt crisis.
An alternative presentation of the foreign debt and debt payment problems is
given by the concept known as the basic transfer, defined as the net foreign exchange
inflow or outflow related to its international borrowing (Stewart, 1985)
. It is measured
as the difference between the interest payments on outstanding loans and the net capital
inflow. The basic transfer equation, BT, can be expressed as follows:
= dD
where the net capital inflow F
represents the annual increase in total external debt dD
and D is the total accumulated foreign debt. Since interest must be repaid each year on
accumulated debt, let r equal the average rate of interest so that rD represents total annual
interest payments. The basic transfer then becomes the net capital inflow minus interest
payments as expressed below:
BT = dD – rD = (d—r)D
The basic balance will be positive when d>rand the country is gaining foreign
exchange from borrowing and other sources. The basic transfer turns negative if r>d
and the country begins to lose foreign exchange. A meaningful analysis of the evolution
of the indebtedness of LDCs requires an examination of the various factors that cause d
and r to rise or fall.
At the outset of the accumulation of external borrowing when a country has a
relatively small amount of debt, D, the rate of increase d, will be high. This is also
because most early stage borrowings come from official sources such as bilateral donors
and multilateral development banks, and as such debt is incurred at a lower cost with
longer repayment periods, as opposed to the case if the borrowing was on commercial
terms. At this stage r is low and in all cases smaller than d. As long as the foreign aid or
debt accumulated is used in productive investments, whose rates of return exceed r,the
rise in borrowing does not pose a problem or threat for the recipient country. In fact it is
a worthwhile strategy for countries to borrow for productive investments in the early
stages of their development.
This discussion is based on Todaro (2000).
When does borrowing or lending become a problem. The problem arises when
firstly, accumulated debt becomes very large such that its rate of increase, d, naturally
begins to decline as repayments increase relative to new inflows or as the net inflows
decline; secondly, when the terms of borrowing become increasingly commercial
resulting in increases in r; thirdly, when the country’s balance of payments deteriorate as
a result of falling export prices; fourthly, when an external shock such as a global
recession or rising oil prices, or a rise in the value of the US$ in which most external
loans are denominated, occurs; and fifthly, when there is a loss of confidence in the LDC
resulting in the cutting off of private capital flows and investments. Finally, and perhaps
most importantly, a significant amount of capital flight occurs due to economic and
political reasons including civil unrest and conflict or fears of large currency devaluation.
The factors identified above could jointly influence the levels of d and r in the
basic transfer equation, with lower d and high levels of r causing the basic transfer to
become highly negative as capital starts to flow from the LDCs to developed countries.
At this point the external debt problem becomes a self-reinforcing phenomenon and
heavily indebted poor countries are forced into rapidly, falling, net transfers, collapsing
foreign reserves and weakening development prospects.
The foregoing discussion presented us with a review of the transition from the
accumulation of external borrowing to finance development activities, to the
accumulation of debt to crisis proportions. In the next two sections we look at
developments in Uganda, covering respectively, the evolution of the country’s economy
from the early years after independence to the 1990s, and the evolution of the country’s
external debt burden.
3. U
Uganda is a land locked country located in East Africa, and bound by Tanzania
and Rwanda to the south, Kenya to the east, Sudan to the north, and Congo (DRC) to the
west. In terms of physical size, the country covers an area of 241,139 sq. km, with a
population of about 22 million, revealing a high population density. Uganda has rich
natural resources in terms of arable land and abundant water sources, including a major
portion of Lake Victoria, which it shares with Tanzania and Kenya. Uganda is an
agricultural economy with little or no minerals of economic significance. In the 1960’s
Uganda was an emerging success story with rapid agricultural growth, an expanding
industrial sector, and growing intellectual and cultural leadership.
Uganda’s development experience during its first 30 years as an independent state
closely reflects the pattern in many Sub-Saharan African countries. After independence in
1962, Uganda witnessed rapid growth, with total GDP increasing by an average 6 percent
per year, while per capita GDP grew at about 3 percent per annum between 1963 and
1973 (IMF, 1995). The country, in addition, enjoyed a balance of payments surplus
during most of the period, and inflation was low. Per capita GDP growth peaked in 1970
and started a downward slide as a result of the stagnation in the economy that
characterized the early seventies, reaching a low of US 94 in 1980.
During the early years, Uganda had a booming and well-diversified economy
founded on its agricultural sector, but the country quickly became a mono-cultural
economy, dependent on a single commodity, coffee, as its economic mainstay especially
after the sixties. Uganda’s dependency on coffee was reflected in the fact that the crop
accounted for nearly half of the country’s GDP in 1970, and then increased to 71 percent
in 1986, before falling to 66 percent in 1989. Coffee accounted for 58 percent of export
earnings in 1970, nearly 100 percent in 1986, and 95 percent in 1989. Coffee was also
the major source of government revenue, the heavy dependence manifesting itself in
excessive taxation of the producers. This acted as a disincentive, and resulted in a
gradual decline of export earnings from a peak of USD 609 million in 1970, to USD 407
million in 1986 and down to USD 217 million in 1989.
Table 1-Uganda: Selected economic indicators 1980-2000
1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
-3.4 -3.3 6.5 5.6 3.4 8.3 6.4 11.5 9.1 4.7 5.6 7.4 5.1
Per cap.GDP $ 94.9 238.8 261.6 196.6 164.5 180.1 217.1 304.0 310.8 314.9 329.7 303.2 281.9
Per cap.GDPGr -6.4 -5.5 4.0 2.9 0.6 5.4 3.5 8.7 6.3 2.0 2.8 4.5 2.1
4.8 6.6 11.9 19.5 14.6 15.6 14.8 17.1 16.6 16.9 15.5 17.2 22.6
FiscalB/GDP (%) -4.7 -3.3 -4.1 -4.3 -6.0 -2.5 -2.7 -2.6 -1.9 -1.4 -0.4 -1.2 -7.6
... 24.0 34.2 136.5 92.9 82.5 75.9 59.2 58.7 58.6 54.0 54.5 55.5
... 5.3 14.5 33.9 24.9 18.4 22.6 14.9 12.5 12.2 7.8 2.2 ...
... 9.1 4.6 9.2 6.0 4.9 6.4 10.4 9.8 10.7 6.8 8.6 7.1
Source: IMF: World Economic Outlook
In the late 1960s the country made a major shift in policy dubbed as themoveto
the left, ushering in an era of controls and nationalized production in all sectors, including
banks and hotels. The government introduced broad legislation, which ensured its
substantial control in all areas of the economy. In the area of agriculture, a produce
marketing board was established in 1968, charged with marketing over 30 commodities,
and in 1969 gave government cooperative unions the monopoly of collecting and
processing coffee, cotton and tobacco. These measures were designed to cut out all
private sector activities in agricultural marketing. The Banking Act of 1969 also
nationalized all commercial banks operating in the country and set up other national
banks. Finally, a Central Bank was established to replace the East African Currency
Board, in a move, which was intended to give the government a free hand in monetary
and fiscal policy.
Uganda’s fortunes shifted significantly in the 1970s, with the coming to power of
the military regime led by Idi Amin, in 1971. The military government moved further
away from the outward oriented policies of the immediate post independence era,
towards increased protection of local industries and the size of the public sector expanded
considerably. A large number of companies fell into government hands. Although there
were only 10 parastatals in 1972, the number quickly increased to 23, responsible for up
to 250 different business enterprises (Katumba, 1988). This expansion of the parastatal
sector was to later prove to be disastrous for the economy.
Things were made worse in the industrial and trade sectors when, in 1972, the
Asian community, who dominated the wholesale and commercial trade and who owned a
significant proportion of a small but thriving manufacturing sector were expelled from
the country. Confiscated property and businesses were subsequently mismanaged and
virtually collapsed. Insecurity, uncertainty, and shortages of hard currency depressed
Uganda was a member of the three-country East African Community together with Kenya and Tanzania, created in
1967 (reestablished in 2000). The three countries shared a common currency and the supreme monetary authority was
the East African Currency Board. Other provisions under the community included a free trade area, a common external
tariff and the removal of quantitative restrictions on inter-territorial trade.
investment and contributed to shortages of spares and imported inputs. Industrial
production decreased and together with it the sales and exercise taxes derived from it,
further augmenting the fiscal crisis and fueling inflation. Efficiency and financial
management suffered as largely untrained people, mostly drawn from the military,
replaced skilled managers. This, coupled with shortage of foreign exchange and loss of
lines of credit as a result of the expulsion of the Asians, led to significant decline in
output in the seventies. Budgetary revenues collapsed and the government relied
increasingly on domestic bank financing, which intensified inflationary pressures.
Inspite of hyperinflation and the appreciation of the shilling, the prices of
agricultural commodities were kept fixed and so was the exchange rate. Significant
damage was done to the competitiveness of the economy and particularly the export
sector and by 1980, Uganda had become dependent on coffee as the only foreign
exchange earner. Coffee production also collapsed reaching only half the shipments
achieved in the seventies. The deterioration in security situation, which made the official
price less likely to be paid and the overvalued exchange rate contributed to the decline,
especially in crops that need intensive methods of cultivation, such as cotton. Uganda,
which in the sixties had a well-diversified agricultural sector, producing and exporting
coffee, tobacco, tea, and cotton, came to depend on coffee for 98 % of its exports by the
end of the 1970s (Bigsten and Kayizzi-Mugerwa, 1991). Total GDP stagnated from 1972
onwards until 1980, when there was a general collapse and the economy went into a free
By 1986, Uganda had become one of the poorest countries in the world. Per capita
incomes, which had averaged US$ 800 in the 1970’s, hovered just over US $ 200 in
1986, spawning widespread poverty. The education and health systems had collapsed, the
physical infrastructure had crumbled, and low wages and poor morale had destroyed the
civil service. Furthermore, the economy was highly regulated with state intervention in
nearly all sectors. Real gross domestic product (GDP) per capita was 42 percent below its
level in 1970; the public revenue base had collapsed; inflation was raging; and
government expenditure, exports and investment had all fallen to below 10 percent of
In 1987, the government embarked on an economic recovery program aimed at
reducing poverty by restoring fiscal discipline and monetary stability, and rehabilitating
infrastructure (economic, social and institutional). The recovery program also
encompassed civil service reform, revised investment and incentive structures, and made
a rapid move to a market-determined exchange rate. In the 1990s, the government
worked consistently to implement and improve an economic reform program. By 1992,
the effects of a turnaround had begun to show; foreign capital inflows increased and
coffee production recovered. The impact of the combination of government-led reform
and development assistance has been impressive.
In summary, after over two decades during which its economy totally collapsed,
Uganda has emerged as a robust economic performer in the past several years. Real GDP
growth averaged over 7 percent per year during 1994-1999 and underlying inflation was
5 percent and declining. In agriculture, Ugandan coffee growers responded to the reforms
by significantly expanding output, the tea industry has been revitalized, a small
horticulture industry is emerging, and maize exports increased. The industrial sector has
also expanded rapidly, with real output growth of nearly 12 percent per year over the past
decade. Infrastructure has been rehabilitated, with plans to create a national road grid
that will connect all parts of the country. Major strides have been taken in improving the
social conditions of the disadvantaged, notably by the implementation of a program of
universal primary education, which has led to a more than doubling in enrollment at
primary school levels.
The improvements in Uganda's investment environment are now receiving
international recognition. Uganda had the largest improvement of any country in the
Institutional Investor ratings in 1997. Economic change has been accompanied by
political reform. The government is now composed of broad-based political groupings
brought together under the country's no-party political system. These comprehensive
reforms have been instrumental in the support that Uganda continues to receive from
donors. Multilateral Banks and other donors have reacted positively to Uganda’s socio-
economic reform efforts and have expanded the level of donor support. Many bilateral
donors are active in the social sectors, public sector capacity building, civil service
reform and decentralization, as well as governance issues.
Uganda, however, continued to face a serious debt problem, which affected its
ability to reach its full potential in expanding the economy and substantially cutting
poverty levels. The external debt burden, the measures to address the problem, and the
outcomes for the economy and impact on poverty, are the focus of this paper, and are
explored in the remaining sections.
4. U
As a typical Sub-Saharan African country sharing similar characteristics with the
majority of other countries in its position, the sources of Uganda’s debt problem are in
keeping with the major sources of the debt crisis, which were presented in the theoretical
framework in chapter 2. These factors were reinforced by specific country features,
which included the impact of its difficult history manifested in successive oppressive
governments and the civil conflict, and exaggerated its external debt burden. Barungi
and Atingi (2000) outline the major factors contributing to Uganda's debt crisis as: high
and expansionary fiscal deficits incurred by successive Governments mainly to finance
civil wars; oil price shocks with direct impact on the cost of meeting oil imports and
indirectly as higher oil prices fed into the cost of the country's main imports; sharp
deterioration in the terms of trade brought about by sharp falls in coffee prices in the
1980s; and a build up of interest arrears on overdue payments.
Table 2-Uganda: external debt and composition 1980-2000
(US$ millions)
1980 1994 1995 1996 1997 1998 1999 2000
Multilateral creditors
2,156 2,488 2,655 2,763 2,827
Non-Paris Club Bilateral
398 408 457 424 357
Paris-Club creditors
332 380 351 339 324
Commercial Non-Banks
38 27 26
29 31
Commercial banks
Other loans
73 76 76.4
71 23
732.7 2,999 3,387 3,516 3,660 3,557 3,510 3.400
Source: World Bank- Global Development Finance-1999
From modest beginnings in the seventies, Uganda’s debt levels and the
corresponding debt burden increased considerably over the past twenty years. The
increase was particularly significant over the period 1985 to 1992. Total external debt
increased from US $ 732 million in 1980 to US$ 3 billion by 1994 and peaked at US$ 3.7
billion in 1997, before dropping to US$ 3.57 billion in 1998. The declining trend
continued in 1999 and 2000, falling to $ 3.5 billion and $ 3.4 billion respectively. The
declining trend reflected the increased flows of debt relief and the governments
restricting borrowing to only concessional loans in the last decade.
In terms of the major debt indicators, the debt to exports ratio increased from
about 200 percent between 1975 and 1979 to a peak of 1500 percent in 1992, before
declining to some 550 percent in 1995. The scheduled debt service ratio peaked at 128
percent in 1991, from a low of 10 percent in the early 1970s—it had dropped to 23
percent by 1994/95. This increase in the debt burden was a result of two major factors:
an increase in the debt-stock and poor export performance from Uganda’s traditional
agricultural base.
Table 3- Uganda: External Debt Indicators 1985-1995
1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Debt/exports 209.4 301.9 383.5 473.1 580.6 716.2 1050.0 1395.6 1501.3 1172.6 1012.5 535.7
55.6 35.5 36.4 30.8 29.8 42.0 61.1 85.1 105.6 96.5 85.6 62.8
Debt service 17.4 32.0 44.1 39.4 62.2 61.3 59.5 74.4 58.5 68.5 45.2 20.5
Source: World Bank- Global Development Finance
In a dynamic sense, a major contributor to Uganda's difficult external debt
situation was the increasing share of official financing especially during the period that it
was implementing its various recovery programs. The main sources of new financing
were bilateral and private creditors as well as IMF purchases, which accounted for the
bulk of the external debt expansion over the period 1975-85; more than 42 percent of
total long-term disbursements over the period. After 1985, the increase in debt levels was
mainly from large disbursements from multilateral lenders, including concessional flows
from the World Bank (IDA) and the African Development Bank.
In 1975, concessional debt accounted for 70 percent of Uganda’s debt obligations.
This fell to less than 30 percent by 1983, due to the increase in non-concessional
financing from 1974. The level of concessional debt recovered to over 80 percent by
1995, as a result of the concerted efforts to shift to more concessional financing from the
mid 1980s. The composition of debt by creditor also changed substantively over the past
20-year period, away from bilateral donors towards multilateral creditors. About 50
percent of the public and publicly guaranteed debt in 1975 was from bilateral sources,
with about 40 percent owed to multilateral agencies. This had been reversed to 73
percent for multilateral lenders and 22 percent for bilateral agencies.
The new financing by multilateral agencies mainly went to supporting structural
adjustment programs, which accounted for about US$ 2.3 billion of the amounts
committed during 1986-1995. The lending by multilateral agencies was based on
projections of strong export performance in the medium term, which signaled an
improved capacity to service the external obligations. These later proved to be optimistic
however, and debt servicing capacity was even weaker between 1985 and 1995, setting
the stage for the increased debt burden that Uganda found itself in the mid 1990s.
Lending by bilateral and private sources was much lower during this period and
that from private sources declined to insignificant levels in the1990s. In addition to the
new debt flows, Uganda’s external debt stock was positively affected by debt
rescheduling, especially from the Paris Club over the period 1986-1995, amounting to
about US$ 300 million (IMF 1998). Uganda also experienced a dramatic change in the
composition of its external financing, as its share of grant financing increased
significantly especially in the 1990s. Grants from bilateral donors amounted to about
US$ 700 million during the period 1976-1985 (IMF 1998). Since the mid-1980’s, the
largest form of financing from bilateral sources was on grant basis. This reflected the
bilateral agencies switching their support from loan to grant basis.
Table - 4: Trends in ODA commitments over the period 1962-1997
(US$ thousands)
EU Countries
100,824.0 1,942,793.0 2,043,617.0
North America
19,746.0 -
Eastern Europe
197,241.0 197,241.0
175,618.0 175,618.0
93,512.0 101,512.0
Arab countries
167,343.0 287,188.0
Other bilateral
507,594.0 997,327.0
World Bank
206,323.0 1,694,324.0 1,900,647.0
4,284.0 23,640.0
476,381.0 638,172.0
Other multilateral
700,245.0 944,199.0
24,030.0 332,528.0 1,126,552.0 7,190,429.0 8,673,539.0
Source: Aid Data Unit, Ministry of Finance, Uganda
Another underlying factor in Uganda's debt problem, as in many other countries
was the country's poor management of its external debt. A working debt management
system entails the planned acquisition, deployment and retirement of the loans, reinforced
by articulate external borrowing policies, and maintaining accurate data on external
borrowing. In the Ugandan case, these issues were not well addressed. Prior to 1982,
very little was known about the country's external debt and there were no basic
institutions to follow up debt matters. Responsibilities for debt management were shared
among several units including the Ministry of Finance, the Central Bank and the Aid
Coordination Unit in the Prime Minister’s Office. As a result of insufficient information
and coordination, the Government was not able to ensure that all new debt was contracted
on terms and conditions compatible to the country's needs and abilities. There was no
clear policy defining priority for meeting the payment obligations, although maturities
due to the IMF and the World Bank were met on time.
The Government, in 1991, introduced some measures to address these
weaknesses, including revamping of debt management activities in the central bank.
Effective July 1992, all functions relating to debt management were centralized under a
central debt unit created in the Ministry of Finance, although the Central Bank also
maintains the duty of keeping external debt records. These moves have improved the
control and coordination of policy and eliminated duplication of functions relating to debt
Uganda has since implemented an external debt management strategy, which aims
to achieve the following (Barungi and Atingi (2000): clearing the bulk of the
accumulated arrears, which had caused the government to face law suits and sanctions on
new financing; bringing to a halt the increase in the accumulation of interest arrears and
related penalties; and reducing contractual debt service to a level commensurate with
Uganda’s ability to pay.
5. E
Uganda has benefited from a number of schemes and measures to reduce the
country’s external debt burden to sustainable levels. The actions taken have included debt
rescheduling, commercial debt buy backs and restructuring, implementing special
programs with multilateral agencies such as the World Bank’s Fifth Dimension and the
debt reduction facilities. Finally, Uganda was the first African country to qualify for debt
reduction under the Highly Indebted Poor Countries Initiative (HIPC). We will discuss a
few of these below.
5.1 Paris Club Rescheduling
Uganda has benefited from a number of debt rescheduling and cancellation
schemes granted by its Paris Club creditors. This is in addition to the reductions obtained
under the 1989 rescheduling on Toronto terms and the 1992 rescheduling on enhanced
Toronto terms. The cancellations included those received from the UK and the United
States on loans originally provided on concessional terms. As at the end of June 1992,
approximately US$279 million was owed to the Paris Club, but due to cut off date rules,
which excluded about 42 percent of the amounts owed to the Paris Club creditors, only
US$ 50 million was eligible for rescheduling during the 1992 agreement
. The amount
rescheduled included US$ 36 in arrears and US$ 14 million in current maturities.
Table- Multilateral Debt agreements with official creditors 1980-1997
Date of
Length %Share Amount Repayment terms
Agreement Cut off date Start date Months Consolidate
Consolidated Maturity Grace
18-Nov-81 1-July –81 1-Jul-81
1-Dec-82 1-July –81 1-Jul-82
19-Jun-87 1-July –81 1-Jul-87
26-Jan-89 1-July –81 1-Jan-89
menu menu
17-Jun-92 1-July –81 1-Jul-92
menu menu
20-Feb-95 1-July –81 1-Feb-59 stock
menu menu
Note: menu indicates options agreed at the Toronto summit and enhanced Toronto or London terms.
Source: World Bank Global Development Finance-1997
Uganda also benefited from debt reduction under the Toronto terms plan, which
offered a menu of choices for the rescheduling of the consolidated total of US$ 86
million in January 1989. Under the plan, a third of the eligible debt was canceled, and the
maturity of the remaining debt was extended to 14.5 years, with an 8-year grace period.
These terms have however only partially addressed the problem, partly because it was not
comprehensive, and also because the rescheduling merely postpones the burden to latter
years. In June 1992, under the enhanced Toronto terms, another 50 percent of Paris Club
debts in terms of net present value were written off. Uganda was also the first country to
This discussion is based on Barungi and Atingi (2000) and Holmgren (2001)
The cut-off date of July 1 1981 was used for Uganda-i.e. only debts incurred before that date were eligible for
receive debt rescheduling on Naples terms in February 1995, corresponding to a
reduction in debt of 67 percent in net present value terms.
5.2 Non-Paris Club Bilateral Creditors
Uganda owes a significant amount of arrears and charges to non-Paris Club
creditors, amounting to US$ 185.5 million as at the end of June 1992. During 1992/93
the Government entered into agreements with some of the creditors, which amounted to a
rescheduling of some US$ 17.6 million in arrears. There was also a downward
adjustment to the stock of arrears amounting to US$ 14.7 million. These measures
reduced the stock of debt outstanding at the close of 1993. Uganda has approached other
creditors to exercise similar treatment of its obligations.
5.3 Commercial Debt Buybacks
The London Club has not featured much in the restructuring of Uganda’s external
debt, given the relatively small stock of debt owed to commercial creditors. As at the end
of 1992, Uganda owed the amount of US$ 242 million to commercial lenders, of which
US$ 226 million was to non-bank commercial creditors and suppliers. Under a debt
reduction plan undertaken in 1993, with support from the IDA Debt Reduction Facility,
Uganda was able to buy back 75 percent of the outstanding commercial debt. The total
impact of the operation was commercial debt forgiveness amounting to US$ 153 million,
providing some relief for the government to restructure its long-term debt. Uganda has
also undertaken some debt to equity conversions, amounting to approximately US$ 13.1
million, mainly covering arrears to private sector companies and joint venture partners.
Some of the operations involved swaps of Government assets for debt under the country's
privatization program.
5.4 Multilateral debt service
As is the general practice governing their operations, multilateral creditors have
traditionally not rescheduled their debt. Uganda has sought the assistance of bilateral
donor country support to meet multilateral debt and arrears and payments falling due.
Interest payments to the World Bank have been met under the IDA Fifth dimension
program. Uganda has also benefited from a similar scheme established by the African
Development Bank—the Supplementary Financing Mechanism. The government has also
negotiated other agreements with regional banks such as the East African Development
Bank, and specialized donor country agencies such as the Commonwealth Development
Corporation, Exim Bank (India), and the IFC. Some of these operations have been
undertaken under the Government’s divestiture program.
Table 5 below gives an indication of the results of the various debt reduction
schemes implemented by Uganda, the so-called traditional debt relief measures that were
implemented between 1991/92 and 1996/97.
Bilateral donor debt relief reflects a
progressive increase from US$ 12.9 million in 1991/92 to US$ 53.3 million in 1996/97.
Total debt relief at the end of 1996/97 amounted to US $ 101 million, up from US$ 12.9
million in 1991/92.
Before the onset of the HIPC initiative discussed subsequently.
(US $ million)
1991/92 1992/93 1993/94 1994/95 1995/96 1996/97
3.00 -
5.00 -
12.90 12.93 36.35
Multilateral debt fund
12.90 12.93 39.35
93.04 101.64
Source: World Bank Debt reporting system
5.5 Debt relief under the HIPC Initiative
Uganda qualified for debt relief under the HIPC initiative, the comprehensive
international program covering all categories of debt, in April 1998. Under the HIPC
Initiative, the country was to receive debt relief amounting to US$ 347 million in NPV
terms, to be delivered in various modalities by the participating multilateral and bilateral
Based on the debt sustainability analysis carried out by the World Bank (1998),
the original HIPC framework was to reduce Uganda’s debt to achieve the following: cut
the NPV of debt to exports from about 243 percent in 1997/98 to 196 percent at the
completion point of the program. The debt service ratio (without HIPC assistance) was
to decline from 27 percent in 1997/98 to below 21 percent in 1998/99, and thereafter to
about 9 percent. The debt service ratio (after HIPC assistance) was estimated to fall to
about 17 percent in 1998/91 and to about 13 percent by 2000/01, and remain below 10
percent thereafter (World Bank, 1998).
The immediate impact of Uganda’s HIPC eligibility was that in 1999, the
country’s external debt stock fell from US$ 3.62 at the end-June 1998 to US$ 3.50 billion
by June 1999. The debt service ratio also fell from 24% in 1997/1998 to 15% in
1998/1999 (Government of Uganda, 2000). Overall the HIPC Initiative was to reduce the
net present value of Uganda’s debt stock, estimated at US$ 1.80 billion at the completion
point to US$ 1.43 billion. This would permit a saving of about US$ 650 million in debt
service in nominal terms over a thirty-year period and provide about US$ 40 million in
debt relief annually.
Uganda received additional debt relief under the Enhanced HIPC Initiative agreed
by the G-7 Countries in Cologne in 1999. The Cologne initiative proposed significant
enhancements to the original framework, calling for: deeper and faster debt relief, greater
focus on debt service through interim financing and grants, and a closer linkage between
debt relief and poverty reduction. Under the enhanced HIPC program, the threshold
requisite NPV of debt to exports ratio was reduced from the original 250% to 150 %.
The other eligibility criteria included minimum thresholds of NPV debt/revenue ratio of
25 percent, export/GDP ratios of 30 percent and revenue/GDP ratio of 15 percent.
With the enhancements under the Cologne Initiative, Uganda would receive an
estimated US$ 40 million in additional debt service relief from 2000/2001, which
according to IMF estimates, would bring the NPV of the country’s debt to exports ratio
to below 150 percent in about 10 years time. The fiscal burden of debt would similarly
decline over time, with the NPV of debt to revenues dropping from 242 percent in 1998
to 109 percent in 2009/2010. The debt service ratio would also fall over the same period
from about 15 percent in 1998.99 to lower than 5 percent in 2009/10 and continue to stay
below that level thereafter.
According to the Government of Uganda’s assessment of assistance under the
HIPC Initiative, debt relief has had a significant impact on the country’s debt burden,
although Uganda’s debt ratios are still higher than targeted at the completion point. The
NPV of debt to exports ratio stood at 240 percent by the end of June 1999, compared
with a projected ratio of 207 percent. This should however be contrasted with a ratio of
285 percent that would have been the case without debt relief. The NPV of debt to
revenue ratio also dropped to 241 percent in June 1999 compared to 287 percent
estimated without HIPC assistance, while the debt service to domestic revenue dropped
to 14 percent compared to 22.5 percent owing to the same reasons.
6. E
6.1 Theory and empirical studies
The theoretical basis for the empirical discussion of the effects of external debt
and debt reduction in Uganda was laid out in chapter 2 of the paper, and is extended here
to set up the framework for the empirical analysis.
The theory predicts that current debt flows will tend to stimulate growth, as the
resource flows help to finance imports of capital and technical assistance, which are
critical inputs. Accumulated debt on the other hand, due in part to the need to meet
outstanding interest payments, works against investment and GDP growth. These two
effects interact to generate a debt Laffer curve (Fig.1), which shows that there is a limit at
which the accumulation of debt stimulates growth, in line with resource gap models
Elbadawi (1997). Normally the debt Laffer curve is used with reference to a borrower’s
prospects for repaying loans after a critical limit of debt accumulation is reached
(discussed below). Elbadawi uses the concept of the debt Laffer curve to refer to the
possible negative effects of debt on growth when there is over borrowing.
Fig.1 Debt Laffer Curve
The debt Laffer curve in figure 1 illustrates the relationship between investment
and income growth and debt accumulation. At all points to the left of D
levels of debt generate new investments and GDP growth. At D
at the point of departure
from the 45
line, both investment and GDP growth begin to increase at a declining rate,
until the peak point at D* where both begin to fall at additional levels of debt. D* is
therefore the limit at which further debt accumulation starts to impact negatively on
Debt accumulation
investment and growth. The theory therefore, predicts growth inducement effects from
external debt at low levels and thereafter growth is retarded at high levels of
The channels, through which external debt would impact investment and growth,
include through a liquidity constraint, caused by debt service payments reducing export
earnings. There is also an indirect channel that works through government expenditure
and the financing of these expenditures or the fiscal balance. How accumulated debt
might affect private investment depends on how the government is expected to raise
revenues to finance the debt service. If debt service were financed by excessive
government deficits, the concomitant expansionary policies would tend to discourage
private investments. Other issues that may compound the problem of external
indebtedness on investment and growth are crowding out effects and lack of access to
capital markets.
Debt relief has been advanced as a solution to the debt overhang effects
described above. The debt Laffer curve, with axis labels replaced by the value of
debt and face value of debt respectively, or the debt relief Laffer curve in Fig.2 as
used by some authors, offers the basis for justification for debt relief.
The debt
relief Laffer curve follows the logic of the original tax Laffer curve, which suggested
that total tax revenue would initially rise as tax rates increased but after a while,
disincentive effects of high tax rates would cause total revenue to actually decline.
The implications of this are that there is no rationale for tax rates higher than the
levels at which the total revenue begins to fall.
Fig.2 Debt Relief Laffer Curve
The debt version of the Laffer curve shows that as the level of debt increases,
its total value increases initially, but then begins to decline when point D
is reached.
The peak is reached at point D* after which the value of debt begins to fall as the
face value of debt is increased. The implication of this, as in the tax Laffer curve, is
that if the current face value of debt is more than D*, it is in the interest of the
creditors to reduce the level of debt through voluntary debt forgiveness. This is also
in the interest of the debtor. Thus, if the current face value of debt is greater than
This discussion is based on Gunning and Mash (1999) and Krugman (1988).
Face value of debt
of Debt
D*, voluntary debt relief by creditors to bring it back to D* is in their interest
because it would result in an increase in investment and growth and subsequently
increased debt service payments to the creditors.
Recent empirical studies have confirmed this relationship between external debt
variables and investment and GDP growth in low-income countries. Elbadawi (1997)
uses econometric methods to establish the linkages between external debt and investment
and growth, using cross section data for 99 developing countries. He estimated a growth
equation of the following form:
g = f(TDebt, LagTDebt
, Dsr, DefG, InvG, CrdP)
where, g is growth rate of GDP; TDebt is the ratio of total external debt to GDP;
is the square of lagged total external debt ratio (to capture accumulated or
debt overhang effects); Dsr is external debt service ratio; DefG is the ratio of public
sector deficit to GDP; InvG is public investment, measured by the ratio of public
investment to GDP; CrdP is the ratio of domestic credit to the private sector to GDP. The
investment function uses the same form, with investment, IPY, substituting growth in the
equation. IPY is private investment, measured by the ratio of private investment to GDP.
The investment equation is presented as follows:
IPY = f(TDebt, LagTDebt
, Dsr, DefG, InvG, CrdP)
The results of the regressions are contained in table 6 below. From the results of
the growth and investment equations, we see that the debt stock spurs both growth and
investment, while debt accumulation, represented by the lagged variable, deters
investment and growth. These results are consistent with Cohen (1993), who argues,
using an investment function, that there is a debt Laffer curve problem present in the
growth equation via the investment channel. He adds that since investments are supposed
to induce positive growth effects, this Laffer curve problem is further reinforced and
explains the slow growth in the highly indebted countries in 1980’s and 1990s.
Table 6; Regression results-growth and investment equations
Growth Equation
Investment Equation
Elbadawi’s results were also confirmed by other studies on the impact of the debt
crisis on African economies. A paper by the Economic Commission for Africa ECA
(UNECA 1998) characterized, using recent empirical literature, the dynamic effects of
external debt on investment rates and growth performance. The paper shows how once a
country passes the critical threshold of external debt accumulation, negative effects on
private investment develop and this has negative effect on growth. The empirical
findings show that most African countries could not reverse this trend over the period
1970-1994. The paper argues that the external debt problem in Africa led to an
investment slump and reduced growth performance substantially. The empirical evidence
from the study on the link between debt accumulation and investment rates and growth
performance shows that the debt overhang is associated with negative consequences on
the latter.
The other finding of the ECA study (UNECA 1998) is that the effects on private
investment rates, the channel through which the debt overhang affects investment and
hence future growth, starts early (at a computed threshold of 33.5% of debt accumulation
to GDP). The study further points out that “in addition to the debt accumulated, the debt
service burden which crowds out domestic expenditure needed for supporting productive
capacity further compounds the problem, making it difficult to stimulate investment and
subsequently reducing growth.”
The findings from Elbadawi’s and the UNECA studies findings confirmed the
assumption that the debt overhang contributes to retarding growth. They further
reinforce the previous preoccupation with resolving liquidity problems linked to servicing
external debt. The major theme of Elbadawi’s and the UNECA studies is that restoration
of solvency to the highly indebted poor countries rests on reducing the debt burden and
raising the levels of investment and growth. The empirical analysis that follows
determines the relationship between external debt and investment and growth in the
context of Uganda.
6.2 Description of data
The study utilizes mostly secondary data obtained from published sources as well
as from online sources from various international organizations. The major sources of
data include the World Bank’s Global Development Finance, African Development
Indicators;theIFC Annual Investment Reports;theIMF Economic Outlook,
International Financial Statistics, Government Financial Statistics and Financial
Yearbooks; government reports, budget statements and other publications.
Specifically, time series data was generated over the specified periods for the
following variables to estimate the equations. Investment and GDP growth data was
obtained from World Bank Publications such as the World Development Indicators or the
African Economic Indicators, and the IMF World Economic Outlook. Total external debt
and Debt service data is available from the World Debt Tables and Global Development
Finance, its successor publication, both annual publications of the World Bank. Public
Deficit data was obtained from the International Monetary Fund IMF World Economic
Outlook. Net Transfers data was obtained from the World Economic Outlook.Dataon
Debt Reduction was obtained from actual IMF and World Bank publications including
computations in HIPC documents, as well as electronic sources and the Internet.
6.3 Definition of variables
The investment variable used in the regression is total investment divided by
GDP. GDP growth is the annual growth rate of GDP over the previous period expressed
in percentage per annum. The total debt variable is obtained from the total external debt
in nominal terms. The lagged total external debt is the square of the total debt in year t-1.
The debt service ratio is derived from the total debt service divided by the GDP in the
current year. The fiscal balance or the government fiscal deficit is the current deficit
divided by the GDP. The net transfer is the total balance between resources flowing out
of the country as debt repayments and any inflows either as debt service or new loans,
also defined as aid disbursements less payments on interest on debt and principal. Debt
relief represents all amounts granted as debt cancellation or reduction in the debt burden
due to debt rescheduling or other conversion schemes.
6.4 The Basic Model
The empirical analysis addresses two major issues: (i) Has Uganda’s external debt
burden negatively affected investment and growth. (ii) Has debt relief to Uganda resulted
in increased investment and growth. Consistent with the theoretical framework discussed
above, we will use OLS regression to empirically analyze the impacts of external debt
and the debt burden on Uganda’s investment and income growth. The model is expressed
in the following functional form:
where the dependent variables are investment and GDP Growth respectively, and the
regressors are the Total Debt, the lagged Total Debt the Debt service ratio and the fiscal
balance. The equation states that the current external debt, the lagged external debt, the
debt service ratio and the fiscal balance influence private investment or GDP growth.
The lagged external debt ratio captures the debt overhang or uncertainty effects while the
debt service ratio captures the crowding out effects associated with the loss of investment
revenue resulting from diverting scarce resources to debt service.
Again from the theory, we would expect both investment and GDP growth to be
positively related to current external debt flows and negatively related to the lagged
external debt. Both investment and GDP growth will be negatively related to the debt
service ratio, signifying the crowding out effect of external indebtedness. Investment
(especially private investment) and GDP growth would also tend to be negatively related
to the fiscal deficit, given the crowding out and inflationary effects associated with
expansionary fiscal deficits.
The basic model could be extended to include other variables that impact
investment and growth, including uncertainty variables such as the inflation rate, public
investment, and per capita GDP growth.
6.5 Regression results
The results obtained from the basic estimation of investment and GDP growth on
total debt and lagged total debt are shown in table 7 below. The results of the regressions
are consistent with the theoretical framework discussed above. The coefficients for the
dependent variables depict the expected signs and are statistically significant. They
confirm the prediction of the response of investment to external debt variables and the
debt service ratio. Investment is positively related to the country’s accumulated external
debt, indicating the significant positive effect external borrowing or capital imports on
investment by facilitating imports of relevant capital.
Table 7: Regression Results: Investment and GDP growth
Dependent Variables:
Independent Variables
F statistic
Turning to the growth equation we get a positive relationship between GDP
growth and the country’s total external debt, and an inverse relationship between GDP
growth and the lagged total external debt. This reflects the same pattern as that depicted
by the investment equation, associating growth in income with increased capital imports
and other tradable goods that drive the economy during the period of accumulating debt.
The relationship between GDP growth and lagged external debt is also negative,
confirming the negative impact of the debt overhang on growth.
Table 8 summarizes the regression outputs when we introduce the fiscal balance
(deficit). With regard to the investment equation, the estimate still returns a positive
coefficient for the total debt variable, with a significant positive relationship. The
coefficient for the total debt variable is negative and significant, confirming the negative
impact of accumulated debt on investment. The fiscal balance variable is also consistent
with the predictions of the theory that government fiscal deficits work against investment.
Table 8: Regression Results: Investment and GDP growth
Dependent Variables:
Independent Variables
F statistic
For the GDP growth equation, the estimate returns a positive coefficient on the
total debt variable, but the relationship is not strong as evidenced by the lower t-values,
and the low R
of 20 percent. The same is observed on the other two variables; the
negative signs are consistent with the theoretical predictions, but the coefficients do not
confirm a strong negative relationship between GDP growth and the lagged total debt and
the fiscal deficit
Variables respectively.
6.6 Measuring the impact of debt reduction
The next step is to measure the outcomes of debt relief on the major economic
indicators. In our context, debt relief represents additional resource flows into the
economy as funds, which would have been committed to debt service, now become
available for new investment in the economy. Debt relief therefore indirectly constitutes
new lending or financing by the major creditors. The total impact of the debt reduction
measures, including debt cancellations, debt swaps, and debt rescheduling is to ultimately
increase net transfers into the economy. Debt reduction could, therefore, be measured
directly or could be measured by observing the behavior of net transfers. Alternatively,
debt reduction could be observed from the changes in the debt service ratio. Again, we
can argue as in the case of net transfers, that the total impact of the debt reduction
measures is to ultimately cut the resources flowing out of the economy, which reduces
the debt service ratio.
To measure the impact of debt reduction on investment and GDP growth, we
would have to estimate equation (1), with a modification to the independent variables as
indicated in equation (2),
stating that investment and GDP growth are influenced by debt relief, DEBTR,net
and the debt service ratio, DSr.
In terms of the expected outcomes, investment and GDP growth will be positively
correlated with debt relief, as the country allocates additional resources saved from debt
payments to productive investment. Both investment and GDP growth would also be
positively correlated with net transfers. We would expect growth and investment to be
higher when net transfers are positive and negative when net transfers are falling or
negative. This would be consisted with the theoretical model and empirical findings
linking new lending to increased investment and growth. Both would taper off during
periods associated with high loan repayments or negative net transfers, and to increase
again as net transfers begin to rise with delivery of debt relief. In the specific case of
Uganda, we would expect GDP growth and investment to be higher in the 1960s and
1990’s when resources were available from new debt flows and from debt reduction
especially in the latter case.
The expected outcomes with respect to the debt service ratio will closely mirror
the net transfers, in a reversed relationship. Investment and GDP growth will be
negatively correlated with the debt service ratio. We will expect growth and investment
to be higher when the debt service ratio is low, and for both to be low when the debt
service ratio is high. Both would tend to remain low during the periods associated with
high loan repayments as the debt service ratio rises, and to increase with reductions in the
debt service ratio occasioned by the delivery of debt relief. In the specific case of
Uganda, we would expect GDP growth and investment to be higher in the sixties and
early 1970’s when loan repayments were low or near zero as most loans had not reached
The results obtained from the estimation of equation (2) are summarized in table 8
below. It will be noted that the estimated equation does not include debt relief as a
variable, as reliable data could not be obtained for the period prior to 1995. The variable
was therefore dropped from the estimated equation.
Table 8: Regression Results: Investment and GDP growth
Dependent Variables:
Independent Variables
F statistic
For the investment equation, the coefficients for the net transfers and the debt
service ratios have the predicted signs, signifying a direct relationship between
investment and net resource flows and an inverse relationship between the variable and
the debt service ratio. The positive relationship between net transfers and investment and
GDP growth is to be expected in the case of Uganda. This is because of the relatively
large inflows in new external assistance as the country embarked on a series of economic
reform programs. New lending outmatched debt service payments as a result of both
debt relief and new concessional borrowing. Much of the increase in investment in
Uganda occurred after 1991, when the debt service ratio declined sharply as the various
debt reduction measures started to kick in.
The coefficients in the GDP growth equation also display signs consistent with
the prediction. Again Uganda experienced rapid GDP growth during the 1990s when the
country began to benefit from debt relief from the various creditors. In both cases
however, the t values are significantly low with equally low R
values, indicating that the
explanatory power of the independent variables is low. The two variables do not explain
a large share of the variation in investment and GDP growth; there are other explanatory
factors, which would be more significant.
7. D
International debt relief programs have in recent years come to emphasize
linkages between debt relief and poverty reduction. The G-7 countries in the Cologne
Summit Report called for a mechanism to layout specific priority steps needed to enhance
social sector investment, focusing in particular on poverty reduction. There is the
general impetus to see to that the resources freed by debt relief are invested in pro-poor
social and rural sectors. Targeting poverty reduction programs poses significant
difficulties, however, in that development assistance in form of new resources or as debt
relief is fungible. While there is no easy solution to the problem, Uganda has come up
with a possible approach, representing a good start. In this section we look at the
measures and programs instituted to effectively channel debt relief into activities with
directly impact on poverty, including primary health and primary education and rural
infrastructures and related facilities.
7.1 Incidence and extent of poverty
As discussed above, Uganda enjoyed a strong economy in the 1960’s and early
70s, which were also reflected in strong human development indicators. As a result of
the continued economic decline and a rising debt burden, Uganda had moved from being
a relatively prosperous post independence country to being one of the poorest countries in
the World. Measured in terms of per capita income, Uganda’s poverty levels were
confirmed by the drop from US $ 800 in the sixties and seventies to just about US $ 100
in 1986. Measured in terms of the poverty datum line, the percentage of the population
living on under US$ 1 per day, Uganda again scored high on poverty with the ratio rising
from below 25 percent more than 75 percent, over the same period.
While Uganda remains one of the poorest countries in the world, it has
experienced substantial reduction in the incidence of poverty in recent years, owing
primarily to strong economic growth. This is evidenced by the fall in nationwide
incidence of poverty from 56 percent in 1992/93 to 44 percent in 1997/98 (World Bank.
2000). These trends notwithstanding, the incidence of poverty in Uganda remains high
and widespread, especially in the rural areas outside the central regions. Progress is
varied, with the most notable improvements occurring in the area of primary education,
where the net enrollment ratio increased from 56 percent in 1995/96 to 94 percent in
1998/99. Improvements were also realized with regards to improved access to clean
water and literacy rates. The rates of HIV/AIDs infection also fell steadily between 1991
and 1997. In spite of all these achievements however, Uganda ranked lower than any of
its neighbors on the UN human development index.
The Government undertook the Uganda Participatory Assessment Project
(UPPAP) completed in 1998/99, to deepen and broaden its understanding of the
multidimensional nature of poverty, based on consultations with the poor. The
respondents cited as the main sources of their poverty such factors as lack of access to
clean water and sanitation facilities, poor health facilities and lack of transport networks.
Other aspects sighted were the persistent insecurity especially in the rural farming and
animal ranching communities, corruption and lack of information on agricultural prices
and markets. The study found women in agriculture and rural areas to be particularly
vulnerable to these adverse factors. There was evidence of more serious food insecurity
among women and children than other groups, and were susceptible to shock arising from
crime, insurgency and poor weather conditions.
7.2 Poverty Reduction Plan and Poverty Action Funds
To address these deficiencies and further reduce the incidence of poverty, the
Government set up a National Task Force on Poverty Eradication, which developed an
action plan in consultation with sector ministries, donors and civil society. This work
culminated in the publication, in June 1997 (and revised in 2000 with inputs from the
UPPAP), of the Poverty Eradication Action Plan (PEAP), which sets out Uganda’s
poverty reduction strategy, and whose objective is to reduce the incidence of poverty to
10 percent by the year 2017. The plan also outlines objectives of achieving universal
access to primary education, primary health care, and safe drinking water; guaranteeing
political freedom and human rights and disaster relief measures principally targeted at the
The PEAP represents the country’s comprehensive development framework,
outlining the policies that the government implements to achieve the goals indicated
above, including: i) increasing incomes of the poor by promoting high rates of broad
based growth, particularly in agriculture, improving rural roads and market
infrastructures, agriculture extension services and rural financial services; ii) improve the
quality of the poor by enhancing basic social services (primary health and education,
access to clean water and sanitation); and (iii) promoting good governance and improving
security, transparency, accountability and democratic processes. It also encompasses the
Government’s actions to foster the development of the private sector, which will
contribute directly to poverty-reduction through employment generation.
The major source of funds for the country’s direct interventions in addressing
poverty are the Poverty Actions Funds (PAFs) set up at the onset of the HIPC Initiative.
They form a key element of the budget starting from 1998/99, to ensure that resources
saved from debt relief were spent on priority programs consistent with its Poverty
Eradication Action Plan. The Poverty Action Fund is financed by contributions from
debt relief under the HIPC debt initiative, other bilateral financial contributions and the
government. The full amount of resources released from debt relief is committed to
programs focusing on poverty reduction, including: primary education, primary health
care, rural feeder roads, agricultural extension services and the provision of clean water
and sanitation in rural areas. Over the last two budget years that the PAFs have been in
operation, the following additional resources have been contributed and dedicated
towards pro-poor programs.
PAF Resources fro m HIPC savings and other donors 1998-2000
(Billion shillings)
Source of funds
1998/99 Budget
1998/99 Actual
1999/00 Budget
HIPC savings
Earmarked donor support
PAF donor support
Government own resources
Total PAF resources
Source: Ministry of Finance-Background to the budget 2000/2001
A significant proportion of PAF resources is channeled through local government
districts in the form of conditional grants to support key activities under the PEAP, in the
areas of rural roads, agricultural extension, primary healthcare, water and sanitation and
primary education. The release of PAF funds is conditional on the submission of annual
work plans; quarterly/cumulative progress reports; and quarterly budget requests. The
implementation has been largely successful with the majority of districts complying with
the requirement and accessing the release on time. The reporting system has allowed also
improved accountability by enabling central government ministries to track expenditure
on PAF funds and accordingly compile information on district implementation. Civil
society also participates in the monitoring of use of PAF funds.
Poverty levels have continued to decline, in part due to the continued
implementation of direct actions financed by the PAFs. As indicated above the number
of Ugandans living in absolute poverty or below the poverty line had dropped from 56
percent in 1992, to 44 percent in 1997/98. By the year 2000, this proportion had dropped
to 35 percent (Government of Uganda 2001). Furthermore between 1997 and 2000,
average real consumption per capita in Uganda grew by 22 percent, although the gains
were not equally shared by all groups. Consumption gains were largest for the richest 10
percent of the population, whose consumption increased by 20 per cent while that of the
poorest group increased by just 8 percent during this period. There have also been some
disparities between rural and urban households. For example, while consumption rose by
42 percent in urban areas, it rose by only 15 percent in rural areas. The reductions in rural
poverty over the decade since 1991 appear to have been broad-based and to have
benefited most groups despite the disparity between urban and rural groups.
In summary then, the commitment of debt relief savings to pro-poor programs,
Uganda has achieved some encouraging results: incomes are rising without a significant
increase in inequality and, therefore, resulting in falling poverty levels. However, in the
Government’s own assessment, not all groups participated equally in the growth in
incomes, and although poverty fell in all regions, average incomes grew faster in the
regions, which were initially better off, and especially in the urban centers. Despite these
inequalities, however, the gains in incomes and drop in absolute poverty have been fairly
8. C
Unsustainable debt has for nearly over two decades undermined investment and
growth in the low-income African countries, and presented a serious threat to the efforts
of these countries to address the ensuing problem of absolute poverty. The case of
Uganda is typical of the experience of many other countries in Sub-Saharan Africa. After
a decade of relative prosperity following the country’s independence, Uganda suffered
economic decline and rising poverty levels in the late 1970’s and the1980’s occasioned
by a number of internal and external factors including the long running civil conflicts and
cyclical collapses in its main exports.
As a result of the economic collapse, the country faced debt payment problems on
its accumulated foreign borrowing. Economic reforms instituted in the late 1980’s and
financed by renewed donor support in debt relief and new concessional loans, helped
Uganda make significant gains in economic growth throughout the 1990’s. Government
programs targeting pro-poor social sector investments financed in most part with debt
relief proceeds have led to substantive declines in the levels of absolute poverty across
the country.
The experience of Uganda makes a relatively good case for debt relief for the
highly indebted poor countries, in line with the debt Laffer curve models discussed in this
paper. The voluntary partial retirement of Uganda’s debt by creditors has significantly
raised the country’s economic prospects and its capacity to pay off the balance of the debt
and new concessional loans.
Ajai and Moshin Khan, eds. (2000). External debt and capital flight in Sub-Saharan Africa,IMF.
Barrett, C. (1998), ‘The Economic and Ethical Ambiguities of African Debt Forgiveness,’ in
Mark Chalton (1998) Crosscurrents: International Relations in the Post Cold War Era, Toronto-
Nelson Canada Press.
Barungi, B. and Michael Atingi (2000), Growth and Foreign Debt: the Ugandan Experience, in
Ajai and Khan, External Debt and capital Flight in Sub-Saharan Africa,IMF.
Boote and Thugge (1997)-Debt Relief for Low Income Countries and the HIPC Initiative,
IMF Working Paper Series No. WP/97/24.
Bigsten, Arne and S. Kayizzi-Mugerwa (1991), “Macro-economic Adjustment and Trade
Liberalization in Kenya, Uganda and Zambia”, in Hanson, G. ed, Trade, Growth and
Development-the Role of Politics and Institutions, Proceedings of the 12th Arne Ryde
Symposium, in honor of Bo Sodersten.
Bigsten, Arne and S. Kayizzi-Mugerwa, (1996) Adaptation and Distress in the African Economy:
A Study of Uganda’s Experience, unpublished mimeo, Gotenborg University, Sweden
Cohen, D. (1993), Low investment and large LDC Debt in the 1980s, American Economic
Review, Vol. 83. No. 3 pp. 437-49.
Darku, A.B. (2001), Private Investment, Uncertainty, and Irreversibility in Uganda, The African
Journal of Finance, Vol. 3 No. 1
Easterly, W. (1993), “Good Policies or Good Luck. Country Growth Performance and
Temporary Shocks” Journal of Monetary Economics, No.32
Elbadawi, I., Benno Ndulu and Ndungu, N. (1997), “Debt Overhang and Economic Growth in
Africa,” in Haque and Kunbar - External Finance and the African Countries,theWorldBank,
Washington, DC.
Edmunds, K. (1988) “Crisis Management, the Lessons for Africa from Obote’s Second Term” in
Hansen and Twadle eds Uganda Now, James Carrey, London
Government of Uganda (2000/2001), Background to the Budget, Ministry of Finance, Planning
and Economic Development.
Gunning, W. and Richard Mash (1999), Debt, Investment and Debt Relief: Literature Review, in
DFID Economist Group, Fiscal Implications of Debt Relief, Oxford
Henstridge, Mark, (1994) “Stabilization Policy and Structural Adjustment in Uganda: 1987-90”,
in Willem van der Geest, Negotiating Structural Adjustment in Africa, James Currey, London
Holmgren, T. (2001), Uganda, in Devarajan, Dollar and Holmgren eds. (2001), Aid and Reform in
Africa, Lessons from Ten Case Studies, The World Bank, Washington DC.
IMF (1998), External Debt Histories of Ten Low-Income Countries: Lessons from Experience,
IMF Working Papers
IMF (1999) Heavily Indebted Poor Country (HIPC) Debt Initiative: Review and Consultation
Internet distributed.
Krugman, P. (1988), “Financing vs. Forgiving a Debt Overhang”, Journal of Development
Economics, 29,3, pp 253-268
Krugman P. and Maurice Obstfeld (1994), International Economics: Theory and Policy,
Harper Collins, New York
Katumba, A.B. (1988) “The State of the Industrial Sector-1984” Occasional Paper no.6 Makerere
Institute of Social Research, Kampala, Uganda
Murkherjee, C., Wuyts, M. and H. White (1998), Econometrics for Developing Countries,
Routledge, London.
Mwaba, A. (1997) Fiscal Consolidation and Adjustment-Lessons from Zambia and Uganda,
African Development Bank Economic Research Paper Series No. 30
Martin, Mathew, (1993) “Negotiating External Finance for Adjustment”, in Willem van der
Geest, Negotiating Structural Adjustment in Africa, James Currey, London
Oshikoya, T. W. (1994)”Macroeconomic Determinants of Domestic Private Investment” Economic
Growth and Cultural Change, 42, 3., University of Chicago.
Ramanathan, R. (1995) Introductory Econometrics with Applications,DrydenPress,SanDiego
Selowsky, Marcelo, Van der Tak, H.G.,(1986), “The Debt Problem and Growth”, World
Development”, Vol 14 No. 9, pp 1107-1124
Sharer, Robert, et.al. (1995), Uganda, Adjustment With Growth, 1987-94, International Monetary
Fund, Occasional Paper, 121, Washington DC.
Stewart, Frances (1985), The international debt situation and North –South Relations, World
Development 13, pp. 141-204.
Tarp, Finn (1993), Stabilization and Structural Adjustment-Macroeconomic Frameworks for
Analyzing the Crisis in Sub-Saharan Africa, Routledge, London and New York
Thirwall, A. P. (1995), Growth and Development, Oxford University Press, London.
UNECA (1998), The Dynamic Impact of External Debt Accumulation on Private Investment and
Growth in Africa, UNECA Working Paper Series
Willem van der Geest, (1994) “The Bargaining Process of Policy Based Lending” in Willem van
der Geest, (ed) Negotiating Structural Adjustment in Africa, James Currey, London
World Bank (1992)-Uganda-Project Completion Report, First Economic Recovery Credit, Report
no. 10415, Washington, DC.
World Bank (1994) Adjustment in Africa Reforms, Results and the Way Ahead, Oxford University
World Bank (1994), The Debt Burden of Poor Countries: A Framework for Action, Washington.
World Bank (1998), Uganda-Initiative for Heavily Indebted Poor Countries, Completion Point
Document, Washington, DC.