In a recent interview with Dr. Tafadzwa Ruzive, an expert from Nelson Mandela University in South Africa, Sputnik Africa examined the fallout from the World Bank's decision to suspend loans to Uganda over its Anti-Homosexuality Act. The interview shed light on the extent of Western financial institutions' involvement in African economies, and the potential economic problems arising from the ongoing backlash.
Dr. Ruzive explained that Western financial institutions engage with African economies in two primary ways: First, they provide loans to shore up foreign exchange reserves, often as budget support to remove obstacles to development. Second, grants are disbursed to address social sectors such as education, health, and infrastructure that are bottlenecks for these economies.
"Loans for budgetary support can be given directly into government coffers, while grants are disbursed through NGOs [non-governmental organizations] and NPOs [non-profit organizations] that do the work on behalf of IFIs [international financial institutions]," the financial expert said. "The economic impact of both these interventions is felt through firmer currencies, lower interest rates, and more fiscal space for these countries to spend to achieve their development agendas."
For Uganda, the World Bank's involvement is estimated at approximately $1 billion per annum, equivalent to 2.5% of GDP, Dr. Ruzive explained. These funds are disbursed through 13 government agencies to promote economic growth, enhance employability, improve the health and education sectors, and strengthen security.
Significant Repercussions
Last week, the World Bank announcedthat it is suspending all new public financing to Uganda following the enactment of the controversial Anti-Homosexuality Act, claiming that the legislation "fundamentally contradicts the World Bank Group's values." The decision came after several members of the US Congress urged the World Bank president to take immediate action against Uganda.
According to the World Bank, the suspension of new loans will affect projects that are intended to improve Uganda’s health services, education, infrastructure, and agriculture.
Commenting on the repercussions of the World Bank's decision, Uganda's minister of finance, Henry Musasizi, stated that the suspension of new loans will lead to a downward revision of the national budget.
Dr. Ruzive pointed out that such a revision means a reduction in government spending and a subsequent cooling of aggregate demand. This reduction adversely affects the country's gross national income, which in turn affects employment opportunities, jobs, and living standards.
"If this persists over time, the economy will get into a vicious cycle where falling aggregate demand continues to harm jobs, income and productivity. As the government falls short on its spending needs, downstream sectors suffer, not to mention indicators of socio-economic development," he told Sputnik Africa.
The expert added that the economy may face challenges in achieving its development agenda, as sectors downstream from government spending suffer and socio-economic indicators decline.
West's Influence in Global Financial Structures
Dr. Ruzive highlighted the issue of the US dominance within global financial structures, such as the World Bank, which effectively grants the country "veto power" over the development trajectories of other member states.
This power dynamic, according to the South African scholar, creates an "uneven playing field" where the sovereignty of African countries becomes contingent upon the interests and dictates of Washington.
He explained that the loss of sovereignty manifests when African nations take opposing positions on matters of US interest, subsequently facing economic repercussions.
"Bretton Woods Institutions function more as a political mechanism than an economic one, as their operations are managed in such a way as to achieve political alignment over issues of US interest rather than economic development of their members, especially in the Global South."
Alternative Funding Sources
Regarding alternative funding sources for African countries, Dr. Ruzive discussed two potential avenues. Firstly, on a domestic level, or "self-financing," governments can increase deficit spending in their own currencies to finance vital projects with favorable returns. However, this method requires discipline and careful management to avoid inflation and exchange rate depreciation.
In this case, he noted, investment spending by the government should align with the real resources available in the economy.
"The limits to the ability to self-finance are the real resources available in the Ugandan economy. The key then is to realize Uganda's resources have been fully utilized and how many of them can be mobilized to drive Uganda’s economic agenda," Ruzive highlighted. "This is a crucial way in which Uganda can limit the amount of loans. Self-financing is the first port of call for the Museveni government."
Another option is to seek assistance from non-Bretton Woods institutions. Dr. Ruzive suggested that Uganda could approach the New Development Bank (NDB), established by the BRICS states, for financial aid and balance sheet support.
"These institutions finance economies that are fiscally stranded, helping them achieve their development objectives," he said.
The financial expert also mentioned institutions such as Chinese state banks and the Asian Infrastructure Investment Bank (AIIB), which could offer viable alternatives to the traditional Bretton Woods Institutions.
He emphasized that all the alternative lenders mentioned provide much-needed investment with no strings attached.
"What they provide is needed investment without the conditionalities such as those that have been witnessed in the latest altercation between Uganda and the USA. International finance should be utilized to usher the world into a shared global prosperity and not for scoring political points over non-economic issues," Dr. Ruzive concluded.
It's worth noting that in his response to the World Bank's suspension of funding for national projects in Uganda, President Yoweri Museveni pointed out that the East African nation would develop with or without loans. He also emphasized that there are many alternative funding sources.
"It is unfortunate that the World Bank and other actors dare to want to coerce us into abandoning our faith, culture, principles and sovereignty, using money. They really under-estimate all Africans," Museveni said. "If there is an absolute need for borrowing, there are a number of non-Bretton Woods sources from where we can borrow."
Uganda's 2023 Anti-Homosexuality Bill was signed into law in late May. Asuman Basalirwa, who introduced the bill, claims it seeks to protect Ugandans' culture, as well as their religious and family values, "from acts that may promote sexual promiscuity in this country."
In response to the law, the US imposed travel restrictions on officials from that country in June, while President Joe Biden threatened aid cuts and other sanctions, including redirecting funds to civil society groups that support LGBTQ rights. Ugandan authorities described the threats as blackmail and interference in Uganda's sovereignty and internal affairs.