How Uganda depends on World Bank

Two weeks ago, the bank announced it was suspending new loans and grants to Uganda over a draconian law enacted by Parliament in May, prescribing the death sentence for individuals convicted of aggravated homosexuality crimes.

The reaction from the government was swift. President Museveni took to social media and said Uganda would “develop with or without loans” — although it is tempting to ask why the government continues to seek loans which come with conditions if it can do without them.

“The private sector in farming and manufacturing is the one developing and transforming Uganda in spite of the inconveniences by corrupt officials,” Mr Museveni said on X, which was formerly Twitter.

His statement seemed to be oblivious of the role the bank has performed, not only in Uganda’s private sector development but also in the economy as a whole. While Uganda remains poor, it has received financing from the bank totalling more than $10b (Shs37.3 trillion) since 1963, when it became a member.

That averages out at $166m (Shs618.9b) per year. Of course, the actual amount of financing a country receives from the bank each year can vary significantly from the average owing to factors such as the country’s economic needs, its creditworthiness and the bank’s lending priorities. But the average suggests the financing has been pretty decent.

What is more, the bank’s current active portfolio in Uganda stands at $3.9b (Shs14.5 trillion). From education to health to water and environment, the bank has financed a variety of sectors. In 2020, when Covid-19 pummelled health and other basic services, the bank chipped in with $300m (Shs1.119 trillion).

In December 2021, the bank approved $200m (Shs746b) to help the government tackle the effects of Covid-19 on private sector investment and employment and to support new economic opportunities, including for refugees and communities hosting them.

Private sector financing

While responding to the bank’s statement suspending financing, Mr Museveni credited the private sector for growing Uganda’s economy, but a closer look at how the sector is financed strongly suggests that the bank’s International Finance Corporation (IFC), which nurtures the private sector in developing countries, has played an instrumental role.

For example, in 2019, the IFC lent Umeme, the main electricity distribution company, $70m (Shs260b) — with up to $28m (Shs104b) coming from the corporation. It mobilised $42m (Shs156b) from Stanbic Bank, Standard Chartered Bank and the Dutch Development Bank. (It is worth mentioning that the bank also financed the construction of the Bujagali Hydropower Station way back in 2001.)

Roofings Group, the steelmaker, has also benefited from the IFC. It received a loan of $25m (Shs93b) in 2011. Dfcu bank and Nakasero Hospital — a private healthcare facility used by well-to-do Ugandans and senior government officials who shun Mulago, the national referral hospital, because it is dysfunctional — have had loans of $10m (Shs37b) and $3m (Shs11.1b) respectively.

Between them, these companies employ thousands of Ugandans, and they and their employees pay taxes, which are boosting economic growth. They would probably be struggling without affordable credit from the IFC.

Proponents of the anti-homosexuality law, including top government officials who are apparently unaware of how heavily dependent Uganda is on the bank, have been saying the country can do without external financing and may be forced to withdraw its membership.

That is easier said than done. Every country that matters is a member of the bank, and that is because being a member comes with tangible economic benefits. The bank boasts 189 members, and only a handful of countries — Andorra, Cuba, Liechtenstein, Monaco, North Korea, Republic of Kosovo and Taiwan — are non-members.

China, whose economy is 280 times bigger than Uganda’s and once dominated the headlines for its stellar performance, continues to take loans from the bank. In 2017, for example, China was the top borrower.

Uganda has even more compelling reasons to cling on to lenders — even if their terms are an affront to its sovereignty. Uganda’s economy relies heavily on agriculture, yet it is vulnerable to climate change. To tackle climate change and other global challenges, such as Covid-19, Uganda has to work collaboratively with the bank.

Another reason is abject poverty. Uganda’s GDP per capita is still below $1,000 (Shs3.7m), and progress in this regard has not been impressive. For example, real GDP per capita grew by only 1.0 percent per year between 2011 and 2022, according to the World Bank.

While this level of poverty is “good” for Uganda as it qualifies it for financing from the bank’s affiliate that supports the world’s poorest nations — the International Development Association (IDA) — it has created financial dependency for the country, which finds concessional finance irresistible.

Concessional finance, which means borrowers can secure loans provided at zero or near-zero percent interest, makes the bank particularly attractive to poor borrowers and arguably the best multilateral development institution.

Loan repayments are generously flexible and can extend over 30 to 40 years, with a 5- to 10-year grace period. Add this to the fact that the bank provides grants and you will see why Uganda would struggle to walk away.

Grants are basically free money only that the money donated must be used for a particular purpose. Any desperately poor country would find it hard to ignore free money. Some grants are substantial and even bigger than loans. For example, of the $200m (Shs743b) the bank approved in December 2021, $104m (Shs387.7b) was a grant.

Will oil help Uganda?

Government officials and technocrats say that since Uganda will soon become an oil producer, its growth will accelerate, poverty levels will go down, and the country will significantly reduce its dependence on loans. 

But Nigeria provides a prime example of how a country can be a leading oil producer and remain mired in poverty and dependent on loans. Nigeria is Africa’s largest economy and the continent’s biggest oil producer, but it tops the list of the top 10 World Bank borrowers under IDA financing. (Uganda comes in at number seven.)

More Nigerians are falling into the poverty trap than getting out, according to the Centre for African Studies at Nanyang Technological University in Singapore, which last Friday presented a 10-year roadmap to put the country back on the path of sustained growth.

In February, CNN reported an exodus of talent, citing a 2022 survey by the Africa Polling Institute, which found that a staggering 69 percent of Nigerians would emigrate with their families if given the chance. Only 39 percent were willing to emigrate in 2019, according to the same poll.

So, how can Uganda do better economically with its oil? The oil it will be producing — an estimated 216,000 barrels per day — does not even bear comparison with Nigeria’s 1.3 million barrels per day (as of April 2023, according to the Wall Street Journal). The country is already heavily indebted and is reeling from corruption, like Nigeria.

Uganda’s rapid population growth also suggests that the population will be a drain on its oil revenue. A country can benefit immensely from oil revenue if it produces huge quantities, has a relatively small population and is not corrupt.

Norway and Saudi Arabia are good examples. Norway has a population of five million and produces two million barrels per day. On Transparency International’s Corruption Perceptions Index, which ranks 180 countries and territories around the world by their perceived levels of public sector corruption, Norway has been consistently ranked high, with a score of 84. (100 means virtually no corruption; 0 means very corrupt.)

Saudi Arabia, which produces 9–12 million barrels per day and has a population of 35 million, does not score as highly as Norway, but its score of 51 is better than that of Uganda (24) and Nigeria (26). Both Norway and Saudi Arabia are high-income countries, and they have a lot to show for their oil revenue.

For Uganda, the hope is that sustained economic growth will set the stage for economic transformation and propel the country to a higher-income status. However, the bank’s economists say the country’s growth model of debt-financed public spending — which has prioritised infrastructure — has crowded out private sector investment and is not sustainable.

Even if Uganda succeeds and reaches middle-income status, there will still be plenty of work to do. Many countries, about 100, have reached this status and failed to transition to a higher status. Our neighbours, Kenya and Tanzania, are now middle-income countries but feature on the list of top borrowers under IDA financing.

How Uganda and the bank will resolve the crisis remains to be seen, but one thing cannot be disputed: The bank remains a dependable development partner, although it has not been able to eradicate poverty despite being involved in the country’s economic affairs for 60 years.

Uganda and the World Bank need each other. After all, the money the bank lends countries comes from its member countries.