RPT-Fitch: Uganda Aid Suspensions Should Have Limited Budget Impact

Fri Mar 7, 2014 6:37am EST

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March 7 (Reuters) - (The following statement was released by the rating agency)

The budgetary impact of various donors' decisions to suspend aid to Uganda in response to legislation that increases penalties for homosexuality should be limited, Fitch Ratings says. Uganda has become less dependent on aid in recent years, and the authorities have managed the budget through previous suspensions by re-prioritising spending.

Grants as a proportion of revenue fell from 40% in FY02 to 12% in FY13, and we forecast them to fall further, to 9%, in FY14, as robust economic growth has boosted other revenues. This has reduced the risk to government finances posed by volatile aid flows (there have been several previous instances of aid being suspended due to donors' concerns about corruption and mismanagement, most recently in 2012).

The government may choose to re-prioritise some spending if additional countries opt to suspend aid, although this is unlikely to affect flagship projects. The development of two long-delayed power projects, the 600MW Karuma and Isimba hydropower dams, together costing USD2.3bn, has resulted in an upward revision to the budget deficit forecast for FY14 to 7.1% of GDP, from 5.3%.

But the underlying balance, which strips out the impact of the new loans funding the projects, which will be repaid out of the project's cash flow, shows the FY14 deficit increasing only slightly, to 3.6% of GDP from to 3.4%. This is more representative of the prudent fiscal stance since debt relief in 2006, which has helped keep public debt to GDP well below the 'B' range median, at an estimated 33.9% at end 2013.

On Thursday Sweden became the fourth donor to suspend aid to Uganda following President Museveni's signing last month of a bill that tightens laws against homosexuality. The World Bank has postponed a loan to Uganda's health system worth USD90m, although this may yet go ahead. Norway and Sweden have cut USD9m, and Denmark is redirecting aid away from the government and towards NGOs. The total amount of aid suspended is worth around 0.4% of GDP, but it could grow as the US - Uganda's largest bilateral donor, providing around USD400m annually - has said it will formally review its assistance programmes.

The Uganda shilling has sold off by around 2% in response to the negative news flow but remains one of the strongest performing currencies in the region this year.

We affirmed Uganda's 'B' rating on 21 February, and will publish the accompanying Full Rating Report shortly. The Outlook on the rating is Positive.

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