Uganda’s big China debt

CHINA: Minister of Finance Kasaija’s secret letter to Museveni

Kampala, Uganda | THE INDEPENDENT TEAM | When, on October 18, 2018, Uganda signed an agreement with China for a US$212.6 million loan (Approx. Shs78 billion) for rural electrification, the issue of Uganda’s increasing debt and the unfair terms of some of the loans were not on the table. In fact, the Chinese Ambassador Zheng Zhuqian was cheered when he called the loan “a good example for China-Uganda Economic Cooperation”.

Ambassador Zheng was right. But possibly not in the way he meant because that loan has now become an example, in discussions between the Ministry of Finance and President Yoweri Museveni, of the bad side of Chinese debt, how it increases, and what makes its repayment a burden.

At the signing of the rural electrification loan last year, the Minister of Finance, Planning and Economic Development, Matia Kasaija said it would enable the government attain its target in the electricity distribution sector. But behind that saccade, The Independent has now seen a secret letter Kasaija has written to Musevemi complaining about the terms of the loan.

“We have noted some critical issues in the Financing agreement,” Kasaija writes and lists three main areas; on China’s insistence to supply all technology and materials for the project, its insistence that Uganda opens an escrow account in Beijing and deposits money as security in case of default, and the holding of national assets as collateral in case of loan payment failure.

“Given what is happening in our peer countries as regards to China debt, we strongly believe we should protect our assets from possible takeover,” Kasaija told Museveni.

Kasaija is mainly concerned that China could potentially takeover property related to defence and security, public health, social services, natural resources, and assets of cultural and historical significance to Ugandans.

Kasaija’s warning suggests that the government should not accept the Chinese loan – unless the terms are dramatically renegotiated. But a renegotiation is unlikely as China already appears to be on firmer ground.

China has, through its China Electric Power Equipment and Technology Company Limited (CET) indicated that it could invest up to US$3 billion (Approx. Shs11 trillion) in Uganda’s electricity distribution sector. It has also been linked to a rival bid for UMEME’s distribution concession when it expires in 2025. Museveni is, therefore, expected to proceed cautiously in dealing with the Chinese because the loan is urgently needed at the moment since the recently commissioned Isimba Dam will add 183MW on the grid in March and the 600MW Karuma Dam is expected to come on line later in the year. The government needs to raise demand for the added generation capacity through new connections; especially industries and in rural household where the electrification rate is a miserly 7%.

The loan is needed to install 3,839km of medium voltage networks, 5,921km of low voltage networks, and 3,403 distribution transfers. It would also connect 168,335 single phase consumers and 4,254 three phase consumers. That would hopefully push the national electrification rate from the current 15% and nearer to the 30% rate targeted by the government by 2020.

Finally, if any renegotiation of the Rural Electrification Loan happens, it will be a first because the general perception is the “Chinese do not negotiate”. When they give a loan to a poor country, you either take it or leave it, most experts told The Independent.

In fact, according to Kasaija, Uganda has already signed five loan agreements with almost the same terms.  They include the loan for National Backbone & E-Government Phase III, the Kampala-Entebbe Airport Expressway, the Nsimba Hydropower Project, the Aviation Authority project, and the Karuma Hydropower Dam.

The escrow account

Kasaija uses China’s insistence on Uganda opening an escrow account in Beijing to show how bad the Chinese loan is.

Under the proposed draft agreement, before China releases the loan money, Uganda must open a repayment/reserve or escrow account and deposit money to cover the highest annual amount of interest and fees under the agreement as a security in case of any defaults.

Then after the loan money is released, Uganda must deposit the annual highest amount of principal, interest, and fees payable.

Kasaija warns Museveni that “this implies government will open an account in China and hold money on that account for the period of the loan”.

“It impounds government funding that would otherwise be used for financing other development programmes,” he says.

He adds that, by implication, the account balance keeps on growing depending on the drawn and outstanding debt from beginning until loan is paid. And Kasaija warns, the rural electrification loan is not the only one to have this clause.