Is Uganda’s national debt sustainable?

KAMPALA. Uganda’s bulging national debt, if not checked, is likely to worsen the cost of living in addition to burdening the consumer with more taxes, experts have warned.
Government debt is one owed by the central government and governments often borrow in order to finance its operations and other schemes of economic development since taxation alone cannot provide enough revenue for the economy.
Less creditworthy countries sometimes borrow directly from supranational organisations such as the World Bank and other international financial institutions.
Over the years, Uganda’s debt has been rising steadily at 2 per cent of its Gross Domestic Product (GDP)—an annual measure for determining the country’s economic performance.

The increase
In 2014, Uganda recorded a national debt of 33.26 per cent GDP.
This figure is set to rise to 35 per cent in 2015 as the government embarks on a series of new projects.
World Bank’s latest statistics of 2013 show that Uganda’s External Debt was at Shs13.7 trillion.
Some statistics, however, indicate that Uganda’s external and domestic debt is growing at 2 percentage points of the GDP every year.
In 2014, a report from the Parliamentary Committee on National Economy revealed that Uganda’s debt had risen to Sh14.5 trillion, sparking outrage from opposition politicians.
The projection, however, puts Uganda among the highly indebted countries with a worrying external debt raising concerns on the country’s capacity to pay back.
Projections are that Uganda’s external debt will likely grow by Shs4.5 trillion next financial year now that proposals from the Finance ministry have been factored in. This is in addition to another Shs1.5 trillion which the government intends to borrow domestically.
While Kenya and Tanzania have the biggest external debts in the region, their large economies are an indication that they have the capacity to pay back.

The pinch
At more than Shs14 trillion, Uganda’s debt might seem abstract, just another statistics in the country’s economics. However, analysts now contend that if left unchecked, that rapidly swelling figure has the potential to affect our daily lives significantly.
“Eventually, the government may find it harder to finance its debt, which may subsequently mean higher interest rates or a lower value of the Shilling,” says Peter Tugume, an economist at Makerere University.
“The potential for future growth could be less, and you could see a slower growth in the standard of living or even a decline fuelled by rising costs of goods and services,” Mr Tugume says.
In March 2015, core inflation, which measures the changes in prices of goods and services, rose to 3.7 per cent for the year ending March 2015 compared to 3.3 per cent registered.
Since the year, the Shilling has been struggling against the dollar, hitting a high of Shs3, 067 and averaging at 2,990.
Subsequently, prices for food items such as tomatoes, rice and non-food items such as, clothes, rent, education, charges, furniture and cement, an indication that the general public’s expenditure on these items is higher than they were a year ago.
Emmanuel Tumusiime-Mutebile, the governor of Bank of Uganda, at the beginning of this year, warned that a weak Shilling remained the biggest risk to medium-term inflation outlook.
In April, the Central Bank of Uganda raised its benchmark lending rate for the first time since June 2014 to 12 per cent from 11 per cent to forestall a rise in core inflation caused by a weakening local currency and faster economic growth.
“It is interesting how the increased Bank of Uganda interest rates will affect lending rates for consumer loan products, including mortgages, car loans, credit cards, and student loans. As interest rates inch up to attract Treasury bond investors, so will rates for consumers,” adds Mr Tugume.

The tax burden on Ugandans
Inadvertently, there is also the debt’s impact on taxes. Tugume argues that in the medium and long term, governments maybe forced to increase taxes so as to service the debt.
In April, Finance minister Matia Kasaija proposed new taxes on beer, cigarettes and commuter taxis to finance the Shs24 trillion Budget for the 2015/16 financial year to meet URA’s target for this financial year at more than Shs11 trillion.
“We should expect more taxes in the next financial years. Unfortunately, it is the common man who will bear the brunt of it,” Tugume warns.
Despite these writings on the wall, the government argues that the country’s growing public debt is sustainable.
In 2013, a Debt Sustainability Analysis (DSA) by the Finance ministry to assess the ability of the country to meet its current and future debt obligations, based on the current level of debt and prospective future borrowing in the context of medium-term macroeconomic scenarios, found Uganda’s public debt to be highly sustainable. Their findings denoted that it will remain sustainable in the medium-to-long term, with the debt sustainability indicators staying below their thresholds over the projection period.
“This is the case for both total public debt (external and domestic) and for public and publicly guaranteed external debt,” read the report in part.
Bank of Uganda has also come out to reinforce the notion, with the director research, Dr Adam Mugume, reassuring in an interview with local media last year that Uganda’s debt is still sustainable, meaning that the country is free of debt distress.

The looming threat
However, Martin Bakunda, a financial analyst and lecturer at Makerere University Business School, argues that rising debt creates a deficiency in funding for the sectors that need the money.
Bakunda warns that unless fiscal discipline is observed, the economy may witness a reckoning that was last seen in 2007 when Uganda’s debt rose beyond 70 per cent of its GDP.
“Looking at the 2015/2016 budget, I noticed that a huge sum is being set aside to pay debt. If most of that was allocated to sectors such as health. It would do much,” he says.

Financial discipline
“The government really has to ensure financial discipline. If it continues to borrow more and the money is not used for what it is meant, then we will struggle in the long run,” he adds in reference to the millions of money ministries turn over, unused form the previous financial year and corruption.
Over the past seven years since 2008, Ugandans have enjoyed relatively stable conditions, Tugume says, and at some point, something has to give: “Generally, the economic effects are less destructive if the government deals with the deficit by cutting back on spending especially on non-productive activities.”

Uganda’s debt burden

Shs14.5 trillion
The amount of Uganda’s External Debt according to a 2014 Parliamentary Committee on National Economy.

Shs4.5 trillion
Expected increase in Uganda’s external debt in the next financial year

Shs24 trillion
The proposed Budget for 2015/2016 Financial Year