Uganda - Uganda's external financing requirements 1997/98-1999/00

oc-r. Iq97 UGANDA UGANDA'S EXTERNAL FINANCING REQUIREMENTS 1997/98-1999/00 Prepared for the Consultative Group Meeting of November 1997 Paris The World Bank Uganda Countr-y Department Africa Region October, 1997  External Financing Requirements 1997/98-1999/00 Prepared by the World Bank for the Consultative Group Meeting for Uganda Paris, November 12-13, 1997 Introduction Uganda continues to make progress in its stabilization program, and is seeking to move to the next stage by incorporating anti-poverty measures in its overall macroeconomic framework. During the past year, Uganda has committed itself to deepening the reform process through the Third Structural Adjustment Credit approved by the Bank's Board in June 1997. Measures include further trade liberalization, enhanced fiscal accountability and transparency within the environment of decentralization and results-oriented management, and public enterprise and financial sector reforms. In order to implement its development strategy, Uganda will still need significant levels of external financing from the donor community. Total financing requirements for 1997/98 (excluding settlement of arrears) amount to US$2,107 million, and US$2,202 million and US$2,348 million, respectively, for 1998/99 and 1999/00. This paper briefly describes recent developments in Uganda's balance of payments in 1996/97, and, based on the September 1997 Policy Framework Paper (PFP) mission, presents external financing needs for the period 1997/98 to 1999/00, focusing on the current fiscal year. BOP Developments in 1996/97 Exports of goods and nonfactor services increased from US$726 million in 1995/96 to US$823 million in 1996/97, owing entirely to a significant rise in noncoffee exports. Most noncoffee exports saw increases in 1996/97 but the main increase came from recorded gold exports. Uganda eliminated royalties on gold exports a few years ago making it more profitable to formally export gold, and there has been new investment in refinery operations. Coffee export volumes increased by over 12 percent but were offset by an almost 20 percent decline in the average unit price. Total proceeds from coffee exports in 1996/97 declined to US$366 million from US$404 million the previous year. Private transfers andforeign direct investment together fell by about 9 percent in 1996/97. There is some evidence suggesting that rehabilitation of the properties of returning Asians has peaked, resulting in lower inflows. The current account was liberalized a few years ago and since that time the private transfers entry has been a residual. Information from the Uganda Investment Authority and the Privatization Unit  has enabled the authorities to capture the investment component of private transfers, and these estimates have now been shifted from the private transfers entry in the current account to the foreign direct investment entry in the capital account. With the full liberalization of the capital account on July 1, 1997 and the introduction of new reporting requirements for commercial banks, the balance-of-payments data should improve in these two areas. Foreign reserves increased from 3.6 to about 4.6 months of imports during the past year. Assumptions for the Projections, 1997/98 - 1999/00 The projections over the next three years are presented in Table 1 and presume continued macroeconomic stability. They reflect the following assumptions: Macroeconomic Environment GDP. The projections assume a real GDP growth rate of 7.5 percent in 1997/98 and 7 percent in the following two years. Investment will be key to sustaining this growth, and is projected to increase from 19.4 percent of GDP at market prices in 1996/97 to 20.2 percent in the current year to 21.5 percent at the end of the projection period in 1999/00. Recognizing the role that private investment plays in economic growth, the Government will undertake jointly with the World Bank a study to better understand the determinants of private investment. Fiscal Balance: Fiscal balance is key to macroeconomic stability. Consequently, a decrease is assumed in the overall deficit from 5.9 percent of GDP at market prices in 1996/97 to 5.3 percent in 1997/98, and is projected to decline further to 4.4 percent by 1999/00. Central to this reduction is an improvement in revenue performance through better revenue administration and efficiency. At the same time, the programs allows for increased expenditure on education, health and roads. Requirements Imports are projected for 1997/98 at US$1,800 million or an increase of 8.9 percent in US dollar terms. This translates into a real import growth of 7.8 percent for an overall import to GDP elasticity of over 1. This can be broken down into real growth rates of 14.5 for petroleum imports and 7.3 for the rest. Increases in project-related imports to support the development budget are estimated at 13.3 percent. Debt Service increases to US$196 million or 24 percent of total exports of goods and nonfactor services. Payment schedules have been adjusted to incorporate Paris Club VI rescheduling, which shows up as a consolidated new loan within debt service. Reserves are projected to increase by US$66 million in 1997/98, or 4.6 months of imports, the same as in 1996/97.  Other Requirements, net: This category, which includes private sector transactions--coffee prefinancing, PTA Clearing House transactions, profit remittances and commercial banking and nonbanking activities--is projected to decrease somewhat from US$60 million to US$45 million. Arrears: There are negotiations with several creditors to clear arrears through a debt buyback. It is expected that they will receive 12 cents on the dollar as in the commercial debt buyback in 1992/93 but stretched over two years at 8 percent. The total clearance of arrears is included under the line "debt rescheduling towards settlement of arrears". Resources Coffee Exports: Following drought and coffee wilt disease, coffee volumes are expected to decrease slightly from 4.41 million to 4.05 million 60-kg bags. Unit coffee prices are cautiously projected at US$1.30 per kg., down from the US$1.38 average price per kg. which Uganda realized in 1996/97. Noncoffee Exports: Overall proceeds from noncoffee exports are assumed to increase from US$303 million to US$327 million. Most commodities are projected to show slight increases over 1996/97. Private Transfers and Foreign Direct Investment together are projected to increase from US$482 million in 1996/97 to US$523 million in 1997/98. HIPCs Initiative The Highly Indebted Poor Countries (HIPCs) Initiative was endorsed by both the World Bank and IMF boards in Spring 1997 with a proposed completion date of April 1998. At the time of the decision point, the debt sustainability analysis (DSA) estimated that the multilateral relief accorded to Uganda under the initiative would be US$338 million in NPV terms. The DSA will be updated in February 1998 to finalize the figures. It is currently estimated that total assistance to Uganda under the HIPCs Initiative in 1998/99 and 1999/00 will amount to US$30 million per year. IDA will also provide US$75 million in IDA grants through the Education Sector Adjustment Credit, which is currently being appraised and will support the Government's primary education program. External Financing Requirements Based on the assumptions detailed above, Uganda's total financing needs (excluding settlement of arrears) for 1997/98 will be US$2,107 million. It is expected that US$1,385 million will come from Uganda's own resources leaving a financing gap of US$722 million. Part of this gap will be met by disbursements of around US$510 million from existing commitments. This leaves afinancing gap of US$212 million to be  covered by disbursements in the same amount coming from new commitments. It is estimated that this will require about US$85 million in disbursements of new import support and US$127 million in project aid disbursements from new commitments. This translates into new commitments of US$170 million of import support and USS633 million ofproject aid. Central Government Budget and External Finance Uganda's central government budget continues to be dependent on foreign aid. Table 2 presents the Financing Requirements of the Government Budget. In 1996/97 Uganda was able to meet over half (55 percent) of total government budget requirements from domestic resources. It is expected that Uganda will continue to meet slightly over half of its total requirements from domestic resources during the three years under review. Conclusion Uganda's dependence on high levels of donor assistance to finance both its balance of payments and government budget remains an area of concern to both Government and its development partners. However, the trend of recent years is encouraging, especially in export growth, foreign investment, and tax reform. Given Uganda's record of growth, macroeconomic stability, and deepening structural reforms, and high levels of poverty, continued external support at projected levels remains fully justified. It will also be important to maintain an appropriate balance of budget/import support and project assistance. In the case of project assistance, the more rapid the movement toward sector expenditure programs, the more readily external support will promote a shared development vision articulated in Uganda's own medium-term expenditure and public investment frarnework.  Table 1: External Financing Requirements (In Millions of US Dollars) Actuals Actuals Estimates - Projections 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 Requirements 1,760 1,915 2,014 2423 2,202 2,348 Imports GNFS 1,383 1,601 1,654 1800 1910 2.063 Scheduled Debt Service 172 167 168 196 203 181 Interest 49 54 44 48 49 49 Amortization 96 72 67 87 94 81 IMF Repurchases 28 41 57 61 60 51 Reserves Build-up 169 92 148 66 66 81 Other, net 50 121 60 45 23 23 Settlement of Arrears -14 -65 -16 316 0 0 Own Resources 1,014 1,279 1,343 1385 1,493 1,636 Exports GNFS 667 726 823 818 885 972 Coffee Exports 457 404 366 316 328 352 Noncoffee Merchandise Exports 139 186 303 327 363 404 Non-Factor Services 72 135 154 175 194 216 Interest Received 16 21 38 45 49 53 Private Transfers 1/ 330 421 322 330 329 359 Foreign Direct Investment 1/ 2 110 160 193 230 251 Financing Gap 746 637 670 1037 709 712 Foreign Financing 2/ 730 619 651 510 382 275 Import Support 3/ 220 136 165 127 79 40 Project Aid 460 423 419 327 256 198 IMF Purchases 50 60 67 56 47 37 Residual Financing Gap 15 18 20 528 327 437 Debt Rescheduling 15 18 20 316 30 30 Towards Current Maturities 4/ 15 9 20 0 30 30 Towards Settleriient of Arrears 0 9 0 316 0 0 Financing Gap (see Memo Item below) 0 0 0 212 297 407 Memo Item - Estimated Commitments Needed to Fill the Financing Gap 5/ Required NEW Disbursements Commitments Import Support 3/ 85 170 Project Aid 127 633 Financing Gap 212 803 11 From 1995/96 onwards, Private Transfers have been adjusted in order to estimate Foreign Direct Investment separately. 2/ For 1996/97 onwards, estimated disbursements from existing commitments. 3/ Includes the Multilateral Debt Fund. 4/ From 1997/98 onwards, assistance under the HIPCs Initiative. 5/ Disbursements from New Commitments are assumed to disburse as follows: import support over 2 years and project aid over 5 years. Sources: BOU, IMF and staff estimates.  Table 2: Financing Requirements of the Government Budget Actuals Actuals Actuals Estimates 1994/95 1995/96 1996/97 1997/98 As Share of Total Central Government Requirements, In Percent Total Central Government Requirements 100 100 100 100 Total Expenditures 91 88 92 90 Current Expenditure 48 49 53 54- o/w External Interest I/ 4 4 3 3 Development Expenditure/Net Lending 43 39 38 36 o/w Domestic Counterpart 7 6 8 7 Principal Payments 1/ 8 6 5 5 External Arrears (+ = reduction) I 1 0 1 Domestic Arrears (+ = reduction) 1 2 2 2 Adjustments to Cash -1 3 0 1 Financing 100 100 100 100 Domestic Resources 43 53 55 54 Foreign Financing 2/ 57 47 45 46 In U Sh Billions Total Central Government Requirements 1,020 1,122 1,250 1,375 Total Expenditures 929 992 1,146 1,239 Current Expenditure 493 554 668 739 o/w External Interest 1/ 43 45 41 45 Development Expenditure/Net Lending 436 438 479 500 o/w Domestic Counterpart 72 70 105 90 Principal Payments 1/ 78 67 68 71 External Arrears (+ = reduction) 12 11 4 20 Domestic Arrears (+ = reduction) 11 23 28 32 Adjustments to Cash -9 29 3 12 Domestic Resources 440 593 683 740 Domestic Revenue 3/ 526 627 739 820 Borrowing from Banking System 3/ -96 -29 -73 -56 Domestic Non-Bank Borrowing 9 -5 17 -24 Foreign Financing 580 529 566 635 External Loans and Grants 2/ 558 498 545 606 Debt Relief 23 31 21 29 I/ Excludes Debt Service to the IMF as well as to several other creditors which does not pass through the budget. 2/ Assumes disbursements from pipeline as well as new commitmnents. 3/ Excludes excess proceeds from Coffee Stabilization Tax in 1994/95 and 1995/96 and its sterilization. Sources: Ministry of Finance, lMF and staff estimates.