Is this country experiencing a deepening debt crisis?
Posted Friday, October 4 2013 at 01:00
Recent reports confirmed by state minister for planning Matia Kasaija that Uganda will borrow $2 billion to build the 600 megawatts Karuma power project have attracted both positive and negative commentary.
Some, especially in the civil society – led by Uganda Debt Network (UDN) are saying the $2 billion loan from China will push Uganda into a deepening debt crisis. Similar crisis talk has been chorused by the Leader of Opposition in Parliament and Budadiri West MP Nandala Mafabi, with the aim of presenting the NRM government in bad light.
I would like to put this debate in context. What all of us should be focusing on is the objective of the loan that Uganda seeks to secure and sustainability of the debt. The government is not borrowing money to import luxuries and consumables. Uganda is borrowing money to construct a 600 megawatts dam at Karuma as part of its infrastructure drive articulated in Vision 2040 and a core component of intra-regional infrastructure plans that are expected to power the continent, drive technology, energise economic growth and drive Ugandans out of poverty.
The volume of Uganda’s public debt has not crossed the red line. Any nation state whose debt as a percentage of Gross Domestic Product (GDP) is below 60 per cent is considered to be in a good position. At the end of Financial Year 2012/2013, the total stock of Uganda’s public debt (domestic and external) was at Shs15,938.1 billion or 29.1 per cent of GDP. The US has a whooping national debt stock of 87.859 per cent of its GDP and it is still running firmly with its credit rating still at AAA- which means very strong capacity to meet its financial commitments.
Uganda’s credit rating is B+ according to the international rating agency Flitch. B+ means Uganda has commendable capability to meet its financial commitments. Indeed, in a 2013 statement, Flitch revised Uganda’s credit ranking from B to B+ arguing that Uganda’s economic outlook is improving because of the high economic growth and poverty reduction.
Flitch further stated that Uganda has a long track record of robust growth averaging seven per cent for more than a decade above its African peers, helping to lift two thirds of the population out of abject poverty. Perhaps the biggest point that Fitch made was to affirm that the completion of Bujagali power station helped lift growth to 5.1 per cent in 2013 by improving power supply and reducing the cost of doing business. If Bujagali’s 250 megawatts pulled the economy by 5.1 percent, what will Karuma’s 600 megawatts do? Your guess is as good as mine.
Also, the other important parameter should be debt sustainability and not debt stock. Public debt should be sustainable and Uganda is doing a good job on this. Uganda’s debt structure can be looked at from the loan negotiated terms like repayment period, grace period and interest rate.
Uganda’s biggest debt (86.6 per cent) is concessional where interest rate is less than 1 per cent payable over 40 years. It is not farfetched to state that Uganda continues to negotiate the best loan terms. And this money is deployed into projects and programmes that build the capacity of the nation to pay the debt. Karuma is one of such projects.
We should, therefore, not look at debt as a stock, but rather look at capacity of debt to redeem itself. Uganda is not looking at another round of debt forgiveness – but rather at sharp and smart investments that will decimate the debt burden, broaden the export base and inspire growth.
Mr Rwakakamba is the SpecialPresidential Assistant – Research and Information.