Hundreds of millions of dollars in donor aid have been withheld from Uganda in recent months, threatening post-war rehabilitation in the northern region and key public investments across the country.
Keith Muhakanizi, deputy secretary to the Treasury, told IRIN that donors, under a Joint Budget Support Framework (JBSF) - including the World Bank, European Union, Austria, Belgium, Denmark, Germany, Ireland, Sweden and the United Kingdom - have suspended "about US$260 million", or 6 percent of the annual budget for at least six months.
The cuts followed allegations that officials in the Office of the Prime Minister (OPM) embezzled up to $13 million in donor funds intended for recovery in the northern region.
Uganda is trying to win back donor esteem by meeting their conditions - Denmark, for instance, has demanded a full refund of stolen money, the introduction of better control systems, and written confirmation of the government’s commitment to crack down on corrupt officials. Uganda has vowed to recover the stolen funds, boost the accountability to its public financial system, and prosecute guilty officials.
At least 12 implicated OPM employees have been suspended, and two senior officials are on remand facing prosecution. Hearings through a public accounts committee are ongoing, and Uganda’s Daily Monitor newspaper reported on 13 December that the cabinet had approved a measure to refund $15.5 million to donors from the government’s consolidated fund.
Muhakanizi said public services would not be impacted by the cuts until the next financial quarter, starting January 2013, when another instalment of donor funds is due to be released.
"We will take adjustment measures where necessary across the board," he said.
Uganda has already shifted its budget priorities once this financial year. In September, members of parliament refused to pass the budget without additional funding being allocated for the recruitment of health workers. Josephine Watera, lead researcher on the Parliamentary Social Services Committee behind that resolution, says more than $100 million in extra funds were eventually granted and pulled from a number of sectors.
Though she insisted that budget battle was necessary for the survival of the country's deteriorating health sector, she said government's short-term fixes will have unforeseen long-term impacts on the sectors the money is moved from.
"The Ministry of Finance says it is not impacted by the donor funds [being suspended]," Watera said. "And maybe we will mostly feel the impact two years later, but shifting money in the budget will not see it replaced to where it came from."
Government is the biggest spender in its economy - with cuts, everything suffers
With relatively low domestic revenue collection (13 percent of Uganda’s GDP, the lowest in the region) and much-awaited crude oil production still years away, analysts say the aid cuts will likely be devastating for the Ugandan economy. The country is still recovering from last year's high inflation, which hit 30.5 percent in October 2011. Tax collection and domestic borrowing make up the 75 percent of the budget not funded by donors.
"Government is the biggest spender in its economy - with cuts, everything suffers," said Angelo Izama, a political affairs analyst at the US-based Open Society Foundation.
Uganda's central bank has said the suspension of aid will cut the country's economic growth by 0.7 percent, reducing its projected 4.3 percent growth in the 2012-2013 financial year to 3.6 percent.
According to Izama, Uganda can expect to see stagnated social services, civil servant layoffs and delayed infrastructure projects due to contract breaches in the coming months.
Northern recovery at risk
With donations withheld pending the results of ongoing investigations, the fate of programmes under the troubled Peace, Recovery and Development Plan for Northern Uganda (PRDP) are in limbo. Though the government plan ended in June, an extension was due to run from July 2012 to 2015.
Ireland was the first donor to respond to the corruption allegations, suspending approximately $20 million from the budget in October. Fionnula Quinlan, a press officer with Irish Aid, said the money was due to build schools, fund basic infrastructure such as water supply, improve public financial management and prevent gender-based violence.
On 28 November, Sweden issued a statement demanding that Uganda repay some $6.7 million - the full amount Sweden contributed to roads, schools, health clinics, legal system and water supply through the PRDP - though it has not yet been able to verify that the full amount of this money was misused.
The initial result of an independent Swedish study "reinforces suspicions of embezzlement and shows that the scale is significant," the statement said.
"We are aware that our recovery might slow down some development in northern Uganda, and it is extremely regrettable," said Charlotte Petri Gornitzka, the director general of the Swedish International Development Agency (SIDA).
The Ugandan government operates a cash budget, which works on an estimate of assets, as opposed to an operating budget, which works on forecasted revenues and expenses. If Uganda’s coffers from taxes, loans or donors are empty, ministries and implementing districts will be left in the lurch.
"By cutting aid they are not punishing us [leaders] but killing children and women out in the villages who are in dire need of service delivery out there," said David Odongo, chairperson of Aleptong District in the Lango subregion.
Martin Ojara Mapinduzi, the district chairman of Gulu District, in northern Uganda's Acholi subregion, urged donors to revamp the way they distributed aid rather than cut it. "They should focus on using the district local government structures and development agencies that directly interface with the people whom the funds are meant for," he said.
"We are very, very worried," said Luke Nyeko, chairman of Kitgum District, one of the 55 northern districts that had been benefiting from PRPD programming.
According to Nyeko, Kitgum stopped receiving government-managed PRPD funds in September with no explanation, and a number of programmes, including a scholarship scheme for vulnerable youth, were stopped in their tracks.
"Our people are highly traumatized because of the war, and these students who should have been moved up through education are going to suffer," Nyeko said. "There is nothing yet we have been told about that money… Our hands are tied."
Nyeko added that roads, health centres, boreholes, and staff houses in schools have now been "completely interrupted". He called on donors to follow the example of the US government, which supports projects directly through USAID, as opposed to through Uganda's budget.
Budget versus project support
Direct budget support has been a contentious issue among donors for years, though the percentage of external support to Uganda's annual expenditure has decreased over the years. Donor funds account for about 25 percent of Uganda's budget for the 2012-2013 financial year, compared to 42 percent in 2006-2007.
Norway, a former JBSF partner whose funds were directly involved in the OPM scandal, stopped funding Uganda's budget directly in the 2010-2011 financial year, citing a lack of progress against corruption. Though it continues to provide loans to Ugandan projects aligned to national development priorities, last month Norway suspended about $10 million in aid intended primarily for roads and energy projects such as rural electrification and expanding the national power grid, according to its embassy in Kampala.
According to a March 2012 statement, JBSF partners had already planned to reduce direct budget support last year, after a joint assessment "highlighted poor budget credibility and discipline in 2011 and low releases to some key service delivery functions such as health, water and environment, and education".
Donors are increasingly tying aid to economic development and good governance - the same report that uncovered the abused PRPD funds was highlighted by donors as proof of effective aid, and the kind of investment they would continue to support.
"But there's a deep irony here, because donor-promoted institutions are maturing, and as a result donors are cutting aid," Izama said. "The reform processes that we are seeing today is actually a good precursor to the type of governance regime you need for a country that has got natural resources, and whose economy is coming of age."