[av_dropcap1]T[/av_dropcap1]housands rallied at Kololo Airstrip in Kampala on 31st March 2014 to mark the passing of the country’s stringent new Anti-Homosexuality Act. The mood was celebratory – and bellicose. Placards read: “Obama – We want trade! Not Homosexuality!” Speaker after speaker, including President Yoweri Museveni and the heads of the Catholic, Protestant and Moslem religions in Uganda, lashed out at countries which had cut aid to Uganda over the Act, or were threatening to do so.

For, though the Act – which criminalizes gay activities and their promotion – is hugely popular in Uganda, it’s anathema to many donor country governments. The bill’s signing, on 24th February 2014, triggered a barrage of criticism from countries including Norway, Denmark, the United Kingdom and the United States (USA). And Sweden, whose finance minister, Andres Borg, was in Uganda at the time and warned of the “reputational and economic risks” inevitably resulting.

Immediate effects

The markets seemed to agree. The Uganda Shilling depreciated by nearly 4 percent that same week, with the central bank – the Bank of Uganda (BOU) – intervening on the market with an unpredecented three injections of dollars within five days to avoid a free-fall. The amount injected was an estimated US$43m, while the Uganda Revenue Authority reckons forex losses resulting from the depreciation cost the government Shs13billion [US$5m] worth of February’s revenues.
It’s intelligible. Uganda is heavily dependent on foreign aid. Of the US$6bn National Budget for 2013/14, foreign funds – including budget support, project aid and NGO money – accounted for about 20 percent (US$1.2bn), according to official budget documents. Talk of cuts in contributions that size would indeed seem to be potentially destabilizing. “The magnitude and the timing of the possible declines in foreign aid are also a source of uncertainty for the balance of payment and the economy,” said BOU Governor Emmanuel Tumusiime-Mutebile.

Aid cuts less significant

The international agency Fitch Ratings begs to differ. Echoing officials from the Ministry of Finance, Planning and Economic Development and the BOU, Fitch said the effect of potential aid cuts on the Ugandan national budget would be minimal. Irrespective of the anti-gay law, Uganda had already been paying the price for reduced donor funds towards the budget.

“Grants as a proportion of revenue fell from 40 percent in financial year 2001/02 to 12 percent in 2012/13, and we forecast them to fall further, to 9 percent, in 2013/14, as robust economic growth has boosted other revenues,” Fitch recently reported. “This has reduced the risk to government finances posed by volatile aid flows.” Fitch cited “several previous instances of aid being suspended due to donors’ concerns about corruption and mismanagement, most recently in 2012” (a reference to around US$300m budget support cancelled due to allegations of corruption in the Public Service ministry and the prime minister’s Office).

Dr. Fred Muhumuza seems to agree. An advisor to the Minister of Finance and a Senior Research Fellow at Uganda’s Economic Policy and Research Centre (EPRC), he says that the current cuts are “too marginal” and that they are being treated as “budget shortfalls,” which had been expected.

Cuts to come?

So far, that’s probably a realistic estimation of scale. Non-US aid suspension and cuts to the Uganda government are currently estimated at US$126.7m. And the USA has so far only suspended some US$21.4m, which it was paying towards the salaries of Ugandan HIV/Aids researchers, an Interreligious Council and a tourism biodiversity project.

But the USA is still reviewing its aid program. That could be serious, since the USA is the single largest donor country, providing Kampala with close to US$450m annually (or US$700m, if you accept the US government’s own figures). Funnelled mainly through NGOs under USAID-tagged projects, this goes to support for a subsidy on anti-retroviral drugs for HIV/Aids patients, anti-malaria programs, reproductive health projects and agricultural initiatives among others. The US State Department has been quick to point out that its “commitment to support the needs of the Ugandan people remains strong,” insisting that there wouldn’t be cuts towards the provision of these services. But there is still room for potential cuts to have a substantial impact on the budget.

Uganda’s health sector is especially vulnerable. It receives roughly US$360m annually – off and on budget – in foreign aid, while the 2013/14 health budget is estimated at just US$433m. No wonder the African Centre for Global Health and Social Transformation has accused the government underfunding the sector because it relies on donor funds. Cited by the regional “East African” newspaper, Asuman Lukwago, Permanent Secretary at the country’s health ministry, has predicted aid cuts would “have a significant impact” on HIV/Aids programs and related health initiatives. One effect is already being felt: a US$90m World Bank loan earmarked for rehabilitating 13 regional hospitals is on hold.

Inflows to continue

In macroeconomic terms, things may not be so dire. Almost all countries that have indicated cuts in aid to Uganda’s government are rechanneling it to NGOs and human rights advocacy groups. BOU Governor Mutebile says this will reduce the pressure on the shilling, with dollar inflows just continuing via a different process.

Allex Thomas Ijjo, a Senior Research Fellow at EPRC’s Trade and Regional Unit of EPRC, predicts “a shift in Uganda’s aid portfolio from unconditional budget support to direct project support overseen by agencies from the same countries.”

Meanwhile, aside from reassessing the anti-gay law itself, Kampala has several options for covering any budgetary shortfalls. Aside from expenditure cuts and reducing leakages by anti-corruption measures, it can increase borrowing. With external debt stock currently a moderate UD$6.5bn – less than 30% of GDP – the IMF has green-lighted an increase of Kampala’s annual debt ceiling from US$1.5bn to US$2.2bn. Downgraded by Fitch in 2013 over a “gap between revenue and expenditure”, Uganda is still a reasonably attractive “B Stable”.
Longer term, too, it can count on oil: the country has 3.5bn barrels of reserves, and revenues from those should start hitting the budget in 2017. Meanwhile, Kampala can console itself with the thought of projects financed by the Chinese, whose funds tend to come without conditions: these include two hydroelectric projects – the 650-MW Karuma and 185-MW Isimba Dams – and the Entebbe Express Highway, an 80% Chinese-funded toll road. With these in the pipeline, perhaps Ugandan officials can afford to tell other donors not to interfere in their country’s affairs.