Monday, January 08, 2007

FE 201 (The International Monetary Fund & Economic Policy),Assignment Two, Uganda Case Study

Ronald Rutherford
Assignment Two
FE 201


Write an essay discussing how the IMF engages with its low-income country members. Use country case studies to illustrate your answer

In this assignment I will discuss these issues raised in the above questions with-in the prism of Uganda’s development process. And one of the most important things to consider is the “Human Face” of the issues that has been brought up in this course. The video from the IMF: Uganda: A Different Drummer (http://www.imf.org/external/mmedia/view1.asp?eventId=54&file=1 (11)) does a good job in explaining the programs and how Uganda has benefited from the IMF involvement while allowing the country itself to develop its own programs and goals not the least being the use of grassroots political organizations.

It is also important to consider the context of the nation in question. Uganda has been plagued by political and social strife since independence from Great Britain in 1962 (12) starting with a coup from Prime Minister Milton Obote in 1966 (13) in which he declared himself president but not before suspending the constitution. While Obote was not as bad a tyrant as Idi Amin’s who reigned from 1971-1979 (14) he did not reform the government or commit to structural reforms needed to develop the country after his reinstatement as President during 1980-1985.

Which eventually led to the current President Yoweri Museveni (15) taking over in 1986. But it has not been easy for him to follow his own words: "The people of Africa, the people of Uganda, are entitled to a democratic government. It is not a favour from any regime. The sovereign people must be the public, not the government." While the 2006 elections were marked by multi-party polls, there continues to be severe restrictions and acts of intimidations that prevent political parties from advertising, although the press is given fairly free latitude in free speech. This was under the guise of factional divisions of the Nation prevented open forum candidacy since 1986(16). Last year also marked the signing of a ceasefire between the Lords Resistance Army and the Ugandan Government, with ongoing negotiations with the Southern Sudan Government and the other parties (17).

From the US Department of State: “Uganda's economy has great potential. Endowed with significant natural resources, including ample fertile land, regular rainfall, and mineral deposits [copper, gold and cobalt (22)], it appeared poised for rapid economic growth and development at independence. However, chronic political instability and erratic economic management produced a record of persistent economic decline that left Uganda among the world's poorest and least-developed countries.” (20) But hopefully with the help of the IMF these conditions are expected to change and according to the last estimates for 2006 and 2007 from the IMF are Real GDP Growth of 5.5% and 6% respectively and Consumer Price increases of 6.7% and 7% respectively (21).

Uganda is under the Executive Director Ismalia Usman from Nigeria with a quota of 180.5 millions of SDRs which represents .08% of total number of SDRs and thus has a vote total of 2,055 which brings their total vote percent to .09% of the total with the addition of their 250 basic votes (2 Page 12) (18). The additional vote for each country beyond the 250 basic votes per country is 1 vote for every 100,000 of SDRs of quota (1, Unit 8, Page 6). It is easy to see from their small percentage of the total votes that Uganda lacks any real power in the outcomes of vote counts. One suggestion to alleviate this situation is to increase the amount of basic votes for each country and have the proportion of total basic votes be some agreed upon percentage of the total voting rights and then evenly divided between all nations at the time. Basic votes were 11.3% in 1944 of total voting rights and the original member’s basic vote now counts for only .5% of the total. This was the result of quadrupling of total membership as well as a nearly 37 times increase in quotas while basic votes have not changed (3, Page 15).

While Low Income Countries (LIC) have little political power or chance to increase the basic votes (based on their vote totals themselves), the 85% requirement also makes it nearly impossible for members who fail to cooperate with the IMF to have their membership revoked (1, Unit 8, Page 7). And even to suspend a member from voting rights require a 70% approval. Thus even countries in protracted arrears are still members as in Liberia, Somalia and Zimbabwe (2, Page 12). While there is ongoing talks and payments that are being received from Zimbabwe and Liberia, Somalia does not even have a mention in the most current IMF Current Members Quotas and Current Voting Power notes (18) and shows no interest in making any payments (19).

In September of 2006 at the International Monetary and Financial Committee, Executive Director Usman (representing Africa Group 1) included this in his statement: “The [more fundamental reforms], we understand would include: (a) a new quota formula; (b) a commitment that quotas will be adjusted on a more timely basis in future in line with changing economic weight in the world economy; and (c) an increase in basic votes to protect the voice of small economies, and measures to alleviate disproportionate workload of large chairs, including African chairs.” (23, Paragraph 8) He later gets more specific by asking for a tripling of basic votes which he concedes may not be enough to bring it to back to the 11.3% of original level but enough to retain to give a larger voice to the Sub Saharan African Countries. (23, Paragraph 9) Ariel Buira also suggests that “…no Executive Director should represent more than, say, 10 countries.” (3, Page 25) But if Africa becomes even more Balkanized than it already has been then there must be a point where the number of Executive Directors becomes diminishing marginal productivity to the goals of the IMF.

But now let me focus back on the beginning of the Poverty Reduction and Growth Facility (PRGF) transition and how Uganda went through it. Uganda has been a consistent and long term user of the facilities of the IMF starting with its membership in September 27, 1963. A recap of the Transactions with the Fund from May 01, 1984 to November 30, 2006 can be found on the IMF website (24). The PRGF was established in September of 1999 after an external review of the then Extended Structural Adjustment Facility (which the ESAF followed the Structural Adjustment Facility (SAF)). The external review conducted in 1998 showed that in some instances poverty actually increased and failed to reduce poverty in most cases and thus failed to achieve their objectives (1, Unit 7, Page 5).

One of the main reasons for the change from the ESAF to the PRGF was the lack of ownership on the part of the borrowing countries. The funds were needed for stability but lacked a strong commitment to implementation and follow through on the structural reforms that needed to be completed. One of the biggest changes has been in the introduction of the Poverty Reduction Strategy Paper (PRSP) that must be completed first by the governments asking for the loans and prior to applying for the PRGF. While it is considered that this paper takes a significant amount of institutional resources, the IMF would consider ‘Interim PRSP’ as the first step (1, Unit 7, Page 9). And it would not be a stretch to see the IMF to use its Technical Assistance to help LDCs that may lack such resources.

Uganda’s Poverty Reduction Strategy was ahead of the curve in this regard by already implementing the “Poverty Eradication Action Plan (PEAP) (first formulated in 1997). The third version of the PEAP was finalized in December 2004.” (26, 11) Or as Jim Levinsohn said, “Uganda though, put together its ‘Poverty Eradication Action Plan’ in 1997 so it was ready to go when the PRSP approach was announced in 1999 (3, Chapter 5, Page 128) It is interesting to note that the IMF does not differentiate ESAF and PRGF on its web site by marking even programs started in 1994 as PRGF (25, V. Latest Financial Arrangements).

“Has the Poverty Reduction Strategy Paper (PRSP) process yielded benefits that exceed its considerable administrative costs?” was the opening question posed by Jim Levinsohn. As such I was expecting his paper to be a quantitative study of costs and benefits of the PRSP process. Instead it contained a lot of issues and questions without addressing the underlying question he asks. While the papers average 100 pages and take up to two years to complete, he provides no evidence of what this would cost a country to produce. It seems that someone with a Masters degree could possibly complete this with help from the Technical Assistance that the IMF, World Bank and other IFIs could provide. And the benefits could include substantial externalities that he does not acknowledge. NGOs may continue to gripe but providing information on a timely and continuous basis can not hurt in targeting and directing funds to the areas most needed. In trying to manage problems that are complex such as this, the first task should be to identify how to measure the progress and then to measure it. (3, Chapter 5)

Levinsohn analyzes the intent of the PRGF changes. 1. That the plans of action come from the recipient country. This was mentioned earlier in implementing the PRSP with the expectation that the recipient country would seek out and get advice from many of the countries ministries, other internal stakeholder groups, external aid providers and NGOs, and even the poor (which may need a variety of outreach programs). 2. Measuring and monitoring the results and thus to emphasize a ‘results oriented’ process. 3. Understanding the many dimensions of poverty and not relying strictly on income based measures of poverty. 4. Emphasize medium to long-term progress.

Since the funds are highly concessional or subsidized, there has been much demand for these facilities, with 77 countries becoming eligible by September 2003 and by 2004 over 30 countries completed fully the Poverty Reduction Strategy Paper (PRSP) (1, Unit 7, Pages 6, 10). The subsidization has come mostly from the industrialized countries as well as the general funds of the IMF. The PRGF-HIPC (Heavily Indebted Poor Country) trust fund borrows at general market rates and lends through to the PRGF-eligible countries at a rate of 0.5% (1, Unit 7, Page 6).

Uganda was in a very good position for implementing the HIPC process and was the first country to benefit from this process (26). During the first stage Uganda was already demonstrating the prudent use of resources. While corruption is still a concern, much has been done to address these problems. And during the second stage (Full-Fledged Poverty Reduction Strategy), Uganda was well under way on implementing and carrying out its PEAP programs. The Enhanced HIPC was not meant to forgive all indebtedness but to reduce the amount to a sustainable level. This sustainable level is measured as either 150% of its exports or 250% of its government revenue and this was the result of reduced percentages in the transition from the original HIPC initiative to the Enhanced HIPC of 200-250% of exports and 280% of government revenue under the original initiative.

In terms of actual amounts Uganda has benefited tremendously, with total debt forgiveness being around 2 billion US Dollars (22). But in 2002, Uganda stated in their PRSP that “Uganda’s external debt sustainability has deteriorated since its enhanced HIPC Initiative completion point.” And Iraq and some commercial creditors were filing suit against the Uganda government (5, Page 19). When the creditor and debtor countries have been industrialized vs. developing countries respectively, then the industrialized countries usually forgive unsustainable debt on the developing countries as part of their commitment to providing assistance to developing countries or out of public sentiment. But if both are HIPC countries then it is considered unfair to have them have to litigate each other for debts and this issue has not been solved as of yet.

As of November 2003, “Uganda still has an unsustainable external debt situation.” But there was some progress with India canceling its claims, the OPEC fund and Korea providing debt relief and Libya agreeing to enact legislature to allow debt relief to Uganda (6). As of July 2004, Uganda said it still faced unsustainable external debt (7).

Uganda is still working hard with creditors as shown in the Uganda: Sixth Review under the Three-Year Arrangement under the Poverty Reduction and Growth Facility 2006(4, Page 29). This paper also states that “Uganda’s risk of debt distress is moderate.” But notes that “The full implementation of the MDRI would substantially lower Uganda’s probability of debt distress” (4, Pages 60-67). So the good news is that the World Bank has approved the Multilateral Debt Relief Initiative (MDRI) on March of 2006 and cancelled Uganda’s IDA debts on July 2006 (26). Now that things are looking better for Uganda and it no longer appears a need for PRGF services, Uganda has and continues to receive assistance under the Policy Support Instrument (PSI) (4, Pages 8-11).

“PSIs are designed to address the needs of low-income members that may not need Fund financial assistance, but seek Fund endorsement and assessment of their economic policies. A PSI will be available only upon request of a member and will add to the toolkit of instruments from which low-income countries can choose their desired form of engagement with the Fund.” (8) This form of technical assistance, which Uganda has completed its first review of its 16 month PSI and was approved for a 3 year PSI as of December 2006 (9). And this will be looked on favorably if new shocks should affect Uganda and as a result Uganda may need rapid access to the PRGF funds in the future, according to the directors (8). Hopefully Uganda will continue to get timely and important TA from all departments and the four broad areas: designing and implementing fiscal and monetary policy; institution building; collecting and refining statistical data; and drafting and reviewing financial legislation (1, Unit 7, Page 18) “Uganda has received extensive technical assistance from the Fund in recent years,” including from the MAE and FAD as early as 1992, INS conducted a financial programming seminar in 1994, LEG provided technical assistance on income tax legislation, and the Fund has maintained a resident representative in Uganda since 1982 (5, Appendix II).

From what I read, Uganda has not defaulted or fallen into arrears with their private sector creditors. Most of Uganda’s unsustainable debt has come from the BWIs and other governments. They have also shown a willingness to work with a variety of creditors including other governments in a timely and early dialogue process and a willingness to share non-confidential information, although some creditors still took the litigation approach. Thus the issue the IMF being reluctant to lend to members that were in default did not appear a problem in any negotiations with Uganda.

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