Restructuring Uganda's Debt: The Commercial Debt Buy-Back Operation

Abstract

Uganda's commercial debt buy-back operation was financed by the International Development Association's Debt Reduction Facility (IDA Facility), with cofinancing from the governments of Germany, the Netherlands, and Switzerland and the European Union. Commercial debt service is a serious burden to many low-income economies. Yet, although the IDA Facility has existed since 1989, only a handful of countries have been able to avail themselves of its resources. That is not altogether surprising: commercial debt buy-backs can be extremely complex, requiring substantial preparation for a well-articulated external debt strategy based on comprehensive data. One objective in describing Uganda's operation is to discuss the requirements of the IDA Facility and to shed light on how Uganda satisfied them and on which areas needed special attention. Uganda's offer to buy back its uninsured commercial debt at a discout of 88 percent of face value was extremely successful. Of the total eligible debt of US $188 million, Uganda bought back debt worth US $153 million, reflecting a participation rate by creditors of 80 percent. As a result, most of Uganda's commercial debt has been eliminated. The remaining commercial obligations accrue to creditors that either have work in progress or that hold some form of security or collateral for their claims. Uganda's debt problems are far from resolved. Much of the country's Paris Club debt is ineligible for rescheduling because it was contracted after the cutoff date. Arrears owed to non-OECD bilateral creditors have continued to mount, as these creditors have resisted restructuring Uganda's obligations to them. And servicing that part of multilateral debt that is nonconcessional or less concessional also is a burden. Resolving Uganda's external debt problem will require concerted action on several fronts: 1) continued economic reform; 2) vigorous pursuit of export diversification and growth; and 3) no letup in seeking creative ways to restructure the debt portfolio. Uganda must find grant funding wherever possible, or contract only the most concessional debt.