Free Access | March 2001

Uganda's external debt to HIPC Initiative

Authors/Editors: Peter Mijumbi

Abstract:

Uganda's debt burden remains extremely high, especially for a country with one of the lowest per capita incomes in the world. The country's debt stock stood at USS 3.68 billion at the end of June 2000 (Uganda, 2000b). The liquidity effects of debt are depriving the budget of badly needed resources for investment in infrastructure to support the private sector as an engine of future growth, and for human capital development to ensure higher productivity. The debt overhang, although decreasing, continues to deter major foreign investors and is a major barrier to accelerated per capita growth rates and to poverty reduction in the rural areas. Large annual debt payments limit foreign exchange reserve buildup and contribute to the balance-of-payments financing gap while placing significant pressure on the budget. The high debt-service burden reduces funding that would go to priority sectors (primary education, primary health care, water and sanitation, agricultural extension and rural roads) outlined by Uganda's Poverty Eradication Action Plan (PEAP). The September of 1996 decision of the World Bank and the IMF to grant debt relief to heavily indebted poor countries (HIPC) such as Uganda, provided a new lease on life through its aim of reducing indebtedness to a sustainable level while ensuring that the resulting debt relief is channelled into poverty-reducing priority social sectors. Uganda was the first country to qualify for HIPC debt relief under the original framework. It committed itself to channelling the debt relief funds into a common fund, the Poverty Action Fund (PAF), to be used in poverty-reducing social sectors. This paper examines Uganda's experience with external debt and debt-relief measures. Special emphasis is placed on the country's experience with the HIPC I (the original HIPC) and HIPC 11 (the Enhanced HIPC) initiatives, and their relevance to poverty reduction.