Liam Taylor

Uganda-based journalism

On borrowed time?

Ugandan president Yoweri Museveni is falling out with Western donors. He thinks he doesn’t need them any more – but is he right? 

‘I don’t like foreigners giving me orders on Uganda. Uganda is ours.’ Those were the words of Yoweri Museveni, Uganda’s president, addressing a rally last week to celebrate his re-election. The venue for his remarks was well chosen: the old airstrip in Kololo, Kampala, where in 1962 the official ceremony to grant Ugandan independence took place.

But it was an apt location for another reason too. Since February’s disputed elections one end of the airstrip has been turned into a temporary barracks, with military tents, armoured vehicles, and gun-toting men. The security deployment is part of a crackdown that has seen the repeated detention of the main opposition leader, the harassment of journalists, and plain-clothes thugs beating up ordinary citizens. Criticism of Museveni is growing – including, to Museveni’s evident annoyance, from foreign governments.

The US has been particularly outspoken. Its representative at the United Nations said last month that ‘Museveni’s actions contravene the rule of law and jeopardize Uganda’s democratic process’. Its newly-appointed ambassador in Uganda warned that ‘a country that does not respect the rights and freedoms of its own people can never be truly secure’. The Ugandan government responded by attacking America’s own democratic credentials, and accusing the US and EU of supporting regime change (donors give money to opposition parties, as part of initiatives to deepen democracy).

This is not the normal state of affairs. Museveni was for many years a darling of the West, part of what Bill Clinton called ‘a new generation of African leaders’. He won favour after he restored political stability, embraced free market reforms, and took early action on AIDS. The donor money flowed in, amounting to half the national budget. Later, Museveni positioned himself as an ally in the ‘war on terror’, against the Islamist regime in Sudan and al-Shabaab in Somalia. The Americans give Uganda $170 million a year of military assistance, and have trained more troops from Uganda in the last decade than from any other sub-Saharan African country except Burundi.

But Museveni’s alliance with the West was always strategic, not ideological. An old-fashioned nationalist, he sought Western support as the pragmatic route to rebuilding a war-ravaged economy while remaining suspicious of foreign meddling. His openness to international capital has not precluded past fallouts with donors, over corruption scandals, the Congo war, and a controversial anti-homosexuality law.

Now, though, there is a sense of a deeper shift. After three decades of growth, Museveni thinks that he no longer needs the donors. His confidence is bolstered by the discovery of oil, and a burgeoning relationship with China. Museveni thinks he has thrown off the shackles of the West. Is he right?

Grants

We’ll always have Beijing

At first glance, the answer would appear to be ‘yes’. In 2000, grants from foreign donors accounted for nearly half of all government revenues. By 2015, they accounted for less than 8% (see chart, above). Government projections have grants falling to zero in 2025.

But the reality is more nuanced. Tax revenues have been largely stagnant over the last decade (though they picked up somewhat this year). A large informal sector and myriad exemptions mean that the government receives only 13% of GDP in tax, lower than the regional average. It has meanwhile announced ambitious infrastructure plans, including major dam projects, road and rail improvements, and oil development: public investment in the next five years will be twice the level of the five years just gone.

Expenditure

The result is a widening fiscal deficit: it will average 5.5% of GDP over the medium-term, says the IMF. All that extra spending will have to financed from somewhere. One source is concessional loans – another form of aid – offered over long maturities and below market rates. These come largely from multilateral organizations, like the World Bank, which currently account for 80% of all Uganda’s outstanding debt; some also come in bilateral deals with Western governments. Though the terms are attractive, such borrowing inevitably comes with strings attached.

The government is taking two big gambles to escape from this bind. The first is to borrow from China. At present, only 9% of Ugandan debt is owed to lenders outside the Paris Club, a group of mostly Western countries. But that share is increasing. The government last year agreed chunky deals with the China Export-Import Bank, an arm of the Chinese state, to cover 85% of the cost for two new dams, at Karuma ($1.7 billion) and Isimba ($556 million).

Borrowing

Note: external borrowing only.

The second gamble is on oil. Major discoveries were made in 2006 around Lake Albert, in the west of the country. Oil revenues are expected to start swelling government coffers at the end of the decade, peaking around 2025. By then, says the IMF, oil production will account for 7% of GDP and a quarter of state revenue.

In essence, the Ugandan government is attempting a ‘big push’ strategy: forking out now on expensive projects, especially in oil and energy, and hoping to enjoy the pay-off in the next decade. In itself, that is no bad thing: countries, like companies and individuals, must sometimes borrow to invest. Debt will increase – the present value of debt-to-GDP could hit 41% by 2021 – but is projected to fall thereafter. The IMF, not known for its doveishness on debt, is sanguine about Uganda’s prospects, putting the country at a ‘low risk’ of external debt distress.

But it is not hard to see how things could go wrong. The Chinese economy is stumbling, and it not yet clear how this will affect China’s overseas commitments. The dam projects it funds are already in the spotlight for delays and shoddy engineering, after contracts were awarded to two Chinese construction companies in an opaque bidding process. Ugandan observers worry about the projects becoming costly white elephants, without delivering the boost to electricity generation (and hence to industry) that was promised.

The oil developments are even more uncertain. There are technical questions, about how much oil can be extracted. There are also political ones, from the routing of pipelines to the management of revenues. There is little to suggest that Uganda can avoid the ‘oil curse’ of corruption and conflict that has affected other resource-rich countries; indeed, Museveni’s public comments suggest that he sees the oil as his own personal bounty. And the break-even price for Ugandan oil is estimated at $60 per barrel: though oil prices will surely recover from their present state, there is no-one who would confidently predict prices in five years’ time.

The obvious back-up plan is to go to the bond markets. But this has its own shortcomings. Domestic borrowing is expensive; given Uganda’s shallow financial markets, it also tends to ‘crowd out’ private investment by bidding up interest rates. Borrowing internationally, on the other hand, would mean issuing bonds denominated in dollars, exposing Uganda to exchange-rate risk: when the Ugandan shilling falls, any dollar debt would become more expensive. Seventeen sub-Saharan African countries have issued dollar bonds in the last ten years, but Uganda has avoided the temptation – so far.

‘Save Mulago’

There is no suggestion, as yet, that Western donors will respond to the 2016 elections with cuts to aid. Strong words are one thing; action is another. Elections are only one of several factors shaping the West’s future relations with Uganda: potential complications include the regional situation, in Somalia, Burundi and South Sudan; the endless tussle between the US State Department and the Pentagon; the fallout from upcoming presidential elections in America; and Europe’s struggles with its own complex crises.

Does any of this matter to Museveni? Not that much, in pure accountancy terms. He is less reliant on donor money that at any time in his thirty year tenure. Official per capita flows to Uganda are already the lowest in east Africa; grants and concessional loans are projected to fall further, from 3.8% of GDP this year to 2.2% of GDP by 2020. Though the government has taken on sizeable financial risks, the downsides are unlikely to materialize until the next decade – by which time Museveni may already be gone, felled by old age if not by the ballot box.

But the challenge of public finance in Uganda is not just about balancing the books – it’s also about politics. With internal opposition growing, Museveni will lean more on patronage to buttress his power. At the same time, he faces growing demands for public services from ordinary Ugandans and from an increasingly vocal civil society. Ugandans were outraged this month when the government said it could not afford to repair a broken radiotherapy machine at Mulago Hospital (the only one in the country). In the same week, parliament approved a ‘supplementary budget’ of 1.4 trillion Ugandan shillings ($420 million) – extra money needed after splurges on defence and election campaigning.

That means Museveni may still find a use for cheap loans from the West: less to avert any imminent default, and more to reduce political strife. In one scenario, Uganda may find itself making renewed overtures to donors, if oil and infrastructure projects go awry and Chinese support is not forthcoming. Deep, co-ordinated cuts to aid could still give Museveni pause.

There is a more optimistic scenario, of course. Imagine this: the current investment bonanza is a success. The oil revenues start to flow, while better transport and more reliable energy boost industry. Chinese money keeps coming, and trade is helped by regional integration. Uganda then would have little need for Western support.

It is surely a good thing that Uganda is becoming less dependent on the West. But Ugandans may not count themselves so lucky if the route to economic independence means building an authoritarian petro-state in hock to China and its contractors. ‘Uganda is ours,’ Museveni has declared. The suspicion remains that what he really means is: ‘Uganda is mine.’

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This entry was posted on April 17, 2016 by in African Politics, Economics and finance and tagged , , , .
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