Uganda faces tough choices as donors cut aid
Donor funding to Uganda had dropped to 15 per cent even before the
falling out over the anti-homosexuality law, and further cuts will
adversely affect projects.
Even though opinion within government is still divided over the likely
impact of the cuts, with some officials saying that it will be
minimal, analysts predict higher lending rates.
Jim Mugunga, the Ministry of Finance spokesperson, said that earlier
aid cuts in response to corruption allegations in the office of the
prime minister had prepared the country to cope with reduced aid
flows. In 2012, donors cut about $300 million in aid to the budget and
redirected it to projects.
"What the donors are doing will not have much effect on the
implementation of the national budget," said Mr Mugunga. "The budget
is largely locally funded."
The Netherlands, Norway Denmark, Sweden and the World Bank have cut
aid to Uganda amounting to about $110 million while the US, the UK and
the European Union announced that they have begun a review of their
relationship with Kampala.
READ: Sweden freezes Uganda aid on anti-gay law
Some officials say that the donors who have had good relations with
Uganda will hesitate to take actions that could hurt the ordinary
people.
"It is difficult to point out the sectors what will be most affected
by the cuts, since they have not officially communicated to the
government," said one official.
Fred Muhumuza, economic affairs advisor at the Ministry of Finance,
said that the government will have to borrow more from the domestic
market to fund its activities.
This financial year, the government had planned to borrow Ush1
trillion ($397.6 million) but may have to increase its borrowing to
plug the gap left by withdrawal of aid.
But this means it will borrow at a much higher interest rate. That
rate, which informs commercial lending rates, will translate into more
expensive credit to the private sector and a possible reduction in
borrowing and investment.
The government will also be forced to reduce expenses and redirect its
expenditure. Cost-sharing may be introduced in social services where
the government used to picking up the bills.
That could mean a reduction in the number of HIV/Aids patients it has
been supporting for free ARVs.
In education, parents could be asked to meet the cost of their
children's tuition.
"Another alternative would be for the government to drop some of the
programmes that were budgeted for," said Mr Muhumuza.
In 2013, the total grants received by September amounted to Ush27.6
billion ($11 million) against a target of Ush82.4 billion ($33.3
million), indicating a shortfall of Ush54.8 billion ($22 million) or a
decline of 53 per cent compared with the same period in 2012.
In the first quarter of this financial year, external financing
amounted to Ush47.9 billion ($18 million) against the budgeted Ush68.2
billion ($28 million), posting a shortfall of Ush20.2 billion ($8
million).
Economists also say that commercial banks that hold project accounts
and facilitate donor transactions could see a drop in profits due to
the aid cuts.
The donor accounts are a good source of the dollars which they trade
in the market.
Uganda has traditionally been one of the largest recipients of
international aid.
According to the Overseas Development Institute, the country received
$1.6 billion in 2011, making it the world's 20th largest aid
recipient. Between 2006 and 2010 the US was the biggest donor,
providing $1.7 billion, followed by the UK with $694 million.
The UK had planned to provide $130 million worth of budget support to
Uganda over the period 2011/12 - 2014/15.
Total budget support will decline to 14 per cent by next financial
year, from current 25 per cent.
The US gives mostly project support, so by withdrawing aid from these
projects, hundreds of mothers and children will directly be affected.
The US government is Uganda's biggest bilateral financier in the fight
against HIV/Aids.
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