Hitting reset button with China debt cancellations

“The President was very clear. He never declared Uganda a middle income; it is not his business,” Mr Ramathan Ggoobi, Uganda’s Secretary to the Treasury, said at the Economic Growth Forum in August.

What isn’t in dispute is that Uganda is saddled in debt. Its public debt currently stands at approximately Shs74 trillion ($19.5 billion), with Shs47 trillion ($12.3 billion) of it external. While any debt cancellation will remove a millstone round the country’s neck, past precedents indicate that it will not be a silver bullet.

When Western institutions such as the International Monetary Fund (IMF) and the World Bank introduced the Heavily Indebted Poor Country Initiative (HIPC), Uganda’s debt profile benefited from the credit lines released at the time. That was in the 1990s. The HIPC involved partaking of all external debt creditors. 

Once bitten, twice shy?

Uganda was the first country to receive a debt relief of $650 million (Shs2.5 trillion) in the 1990s and later in 2006 as per Richard Ssempala’s paper titled Uganda’s Experience with Debt and Economic Growth: An Empirical Analysis of the Effect of Public Debt on Economic Growth—1980-2016.

Under the Multilateral Debt Relief Initiative (MDRI), Uganda generously received 100 percent debt forgiveness/cancellation. This condensed the stock of the country’s debt to $1.6 billion.

The MDRI was first mooted in 2005 during the inter-governmental meetings of the leaders of the world’s leading industrialised countries known as G7 in Scotland. The leaders promised to wipe away the debt of the world’s most indebted poor countries, including Uganda.

“Consequently, Uganda’s external stock of debt was reduced by about 65 percent,” Mr Ssempala writes.

Despite the endeavours by the West to cancel Uganda’s debts, the country’s debt profile soon plunged in the red. A recent policy paper by United States Agency for International Development (USAID) and Southern and Eastern Africa Trade Information and Negotiations Institute (Seatini) indicated that Uganda has already exceeded thresholds on the present value of debt-to-revenue and is closer to the thresholds of other indicators except for debt service-to-exports ratio.

“The debt-to-GDP ratio, though increasing, is also below the EAC macro-economic convergence thresholds going by the metrics above. However, it is important to note that increasing debt leads to the deterioration of other economic variables like the stock of foreign exchange reserves, and the inability to deliver critical services due to debt service obligations,” the policy paper reads in part.

It adds: “Unsustainable debt levels can also lead to instability in key macroeconomic variables such as inflation and exchange rates by imposing pressure on foreign reserves and budget resources. The heavy debt burden also affects government ability to stimulate economic growth, including exports that led to the deterioration of the current account.”

Poisoned chalice?

One of the ways Uganda’s debt has increased is through taking part in China’s multi-billion-dollar project Belt and Road Initiative (BRI). The BRI is an audacious project launched by Chinese president Xi Jinping in 2013. It aims to develop two new trade routes connecting China with the rest of the world. Infrastructure development is its bedrock.

The vast collection of development and investment initiatives under the BRI would stretch from East Asia to Europe, significantly escalating China’s economic and political influence. Unlike the financing from the global north that is frequently escorted by strict conditionalities, the one from China is devoid of “encumbrances.”

China has consequently become a magnet for African countries like Uganda. The appetite for infrastructural projects saw the stock of Uganda’s public debt from China increase up to about Shs11.4 trillion ($3b) by 2020. It was not just Uganda that found China’s borrowing conditionalities—if any—irresistible. On November 27, 2018, two years into his presidency, John Pombe Maguful (RIP) made clear his preference for Chinese loans. Magufuli was at the University of Dar es Salaam where he was opening the institution’s main library whose construction had been bankrolled by the Chinese at $40.6m (Shs154 billion).

The World Bank had announced the freezing of €35 million (Shs133 billion) in donor aid, accusing the Magufuli administration of clamping down on human rights by expelling pregnant girls from school and forbidding them to continue their education after giving birth. By the time Mr Magufuli was waxing lyrical about his new love affair, the Chinese had taken a foothold in his country’s infrastructure—Shanghai Construction Group of China had constructed 12,000 housing units for the Tanzania People’s Defence Force (TPDF) financed by a $550m (Shs2 trillion) loan from the Exim Bank of China.

The same bank had financed the construction of a housing project for the police at $137m. In the 1970s, China had constructed the Tanzania-Zambia railway. The railway links the port of Dar es Salaam in east Tanzania with the town of Kapiri Mposhi in Zambia’s Province.

In Uganda, Mr Museveni has been showering praises on China’s approach to foreign affairs.

“Africa has been having problems for the last 600 years due to the slave trade, colonialism, neo-colonialism—and none of it was from China,” Mr Museveni said of China, adding, “They do not impose their offers if you do not want them.”

Infrastructural projects

Kampala is financing its infrastructural projects through loans received from China’s EXIM Bank. These include $350 million (Shs1.3 trillion) for Entebbe-Kampala Expressway, $200 million (Shs759 billion) to revamp the Entebbe International Airport, $100 million (Shs379.6 billion) to improve road networks, $483 million (Shs1.8 trillion) for Isimba hydropower plant and $1.4 billion for Karuma Dam, inter-alia.

Though politicians are quick to praise Chinese largess, Uganda struggled to get a loan from Exim Bank totalling $2.2 billion to finance its Standard Gauge Railway project. Talks have hit a snag following the insistence by China that Uganda must commit to repaying the loan with revenues from sales of its crude oil.

Experts say paying back loans for the Karuma (600MW) and Isimba (183MW) dams is going to be hard since the Chinese companies have been accused of doing the work poorly moreover at a snail’s pace.

Construction of the Karuma power facility by Sinohydro Corporation Ltd commenced in December 2013 and was expected to be completed by the end of 2019. This was later revised to the tail end of 2022.

Construction of the Isimba dam by China International Water and Electric Corporation started in 2013. It was expected to be completed in 2018, but the dam was commissioned by Mr Museveni in 2019. It has recently emerged that the dam is riddled with defects.

Chinese loans are normally shrouded in mystery, but many economists worry that despite debt cancellation, countries like Uganda will continue to be saddled with debt “… These loans are to be paid in a short period of time—averagely 10 years—yet they are invested in long-term projects. This implies that if Uganda doesn’t comply with the debt obligations to the latter, the country is likely to undergo debt distress in the near future, given the fall in GDP growth from 7.3 percent between 2000 and 2010, to an average of about five percent, low foreign earnings, unstable exchange rates among other macro-economic constraints,” Ssempala writes in his paper, adding, “Since there has been a drastic shift to borrow from traditional to commercial creditors, the question remains whether Uganda will get a relief from these new players in financing its development in case of default.”

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