67% of our revenue repays debt– Economist Nuwagaba

Professor Augustus Nuwagaba, what is debt?
Debt means the inability for someone to raise revenue that can cover one’s expenditure and requires you to borrow to meet the gap between what you have been able to raise and what you plan to spend. For Uganda, our revenue usually falls short of expenditure. So the country has to borrow to meet the gap between what have you have as revenue and what you need as expenditure. If our revenue was equal to expenditure, there wouldn’t be any need for borrowing. We would be operating at break-even point. But there is no country in the world which can operate at breakeven point. Many always have very high levels of expenditure with relatively low levels of revenue and need to borrow.

Why do countries contract debt?
Uganda has to contract debt because of her fiscal deficit. You find that in every financial year, what the country spends is much more than what government can raise in terms of local revenue. This is because we have many infrastructure deficit needs such as poor road networks, very low levels of electricity generation, very low levels of irrigation and storage facilities. These require sufficient resources to establish. So you have to borrow.

Uganda’s rising public debt is pegged on government’s heavy investment infrastructure. How viable are these projects to the economy?
Uganda government borrows to fill the gaps in the country’s infrastructure needs. Karuma dam, for instance, costs $1.7 billion, Isimba $600 million, the oil pipeline, and the Standard Gauge Railway. All these loans are for infrastructure projects. There is nothing you can do when you don’t have enough resources to fund these projects apart from borrowing. The assumption by the Finance Ministry is that these infrastructure projects will have a huge multiplier effect in the economy and create returns in the medium and long term. These projects – roads, railways, energy (rural electrification) storage facilities – are going to stimulate several economic activities and aggregate demand. What should be the focus is generating sufficient leverages so that we can have the capacity to pay these loans in a short time and remain solvent /safe to attract more investments in the economy.

Some people have argued that Uganda is in a debt crisis. How true is this?
This is partly not true. The reason being Uganda’s debt to GDP is still below threshold of 50 per cent at 41 per cent; so you can argue Uganda is not in debt crisis because debt ratio to the GDP is still below threshold. This is still low according to the international surveillance that has been done by the International Monetary Fund (IMF), Fitch and SP (Standard &Poor) where Uganda’s threshold is below 50 per cent and our total Gross Domestic Product (GDP) is $28.2 billion. So the debt is $10.2 billion.
The problem is you don’t need to consider just proportion of the debt ratio to the GDP. You have to consider the level of solvency; meaning that do you still have the capacity to pay back the loans you have borrowed?
In Uganda, 67 per cent of our revenue is spent on debt repayment and the major assumption by the ministry of Finance is that a lot of these loans can be paid quickly in the short term by these projects because they will generate revenue due to increased production in the economy in the medium and long term.
Most countries in the world have very high debt ratio to the GDP; for example, USA has debt ratio to the GDP of 113 per cent higher than its total GDP of $118 trillion. Germany has a debt ratio to GDP of 96 per cent, Turkey 86 per cent to the GDP. However, what matters is the level of solvency. What is the difference? Despite US’ debt to GDP of 113 per cent, it is the best economy in the world because it can pay its debt which it uses in highly productive sectors such technology. Germany is the best economy in Europe and fourth best economy in the world. It also uses debt for very high-tech production.
What matters most is whether a country has the capacity to pay the debts while remaining solvent without being downgraded as credit unworthy.

What is the social economic impact of large public debt to local citizens?
Poor management of debt can have a very negative impact on the economy. Domestic debt means the government continues borrowing heavily from the domestic market by selling government securities, that is, treasury bills and treasury bonds through the central bank to the primary dealers which are commercial banks. By doing this, government would be crowding out” the private sector.

Heavy domestic borrowing pushes up interest rates since government is competing for the same money with private sector. When interest rates go up, the cost of money will be very expensive to borrowers and this affects investment levels in the country.
Secondly, once the government continues borrowing, there will be limited money for public service delivery, which is a problem.
The bonus about debt is it fills in fiscal deficit gaps so that heavy infrastructure projects can be developed. These infrastructure projects are good for the country’s economic development because industries would be running and producing goods thanks to the availability of electricity.

Does the debt ratio to GDP matter?
Yes. It matters because it shows the ratio of solvency and the capacity to manage the repayment of the debt that you have borrowed. But this is not enough. The most important thing is the capacity to repay the loan that you have borrowed as a country. The problem comes when you cannot pay back what you have borrowed.
Recently, Italy because of its fiscal metric, failed to manage its debt (paying of pension) and the previous problem of the debt crisis in Europe in the Pigs countries that is Spain Greece, Portugal, all failed to pay back the debt and they needed a bailout. All this is happened due to their failure to manage their fiscal expenditures. So when it comes to debt management, it depends on the fiscal metric of the government.
This requires debt to be well-managed and used in areas which have the highest multiplier effects in the economy and this is how Germany and the USA have managed their debt. You don’t borrow to start some kind of infrastructure projects; you borrow to complete the projects.

Government borrowing is characterised by a mix of concessional and non-concessional loans, which one is better for Uganda?
True. Sixty eight per cent of our loans are concessional loans which is long term and it is good for us because they can be paid for a long period of time, say 30 years. Interest rates are very low usually 1.5 per cent. The six-year grace period gives you leverage to repay the loan. These loans are multilateral in nature since they are borrowed from multilateral institutions such as the World Bank, IMF, European Union Africa Development Bank.
Then the other are non-concessional loans constituting 32 per cent of Uganda’s current debt. These loans are not very good for us because they are purely commercial loans. They attract high interest rates, they are short term loans and with a short grace period. They are bilateral in nature from China Exim Bank, JICA (Japan).
The problem with this kind of loan in Uganda is the Bugagali dam the loan for Bugagali dam was non concessional and it attracted very interest rate and therefore the cost of electricity in this country is still very high.

Government borrowing is a closely related to its fiscal policy. Are all Uganda’s fiscal policies right?
What matters is the fiscal metric; what is government spending on using debt? The flagship of our budget has been infrastructure development. To me, this is positive because we have had very serious infrastructure gaps. However, the infrastructures gap have reasonably been filled. We are going to have increased electricity generation and we are going to have good road networks. I think we need to have skills development through human capital development and developing agriculture. This is where our fiscal policy should now focus most.

What have other countries done to deal with the debt that they have accumulated?
Countries have invested their debt in highly economic sectors, that is, areas that have higher multiplier effects in the economy. For example, South Korea contracted the highest debt between the years; 1954 to 1980. But debt was used for industries and in production.
The impact? All these debts have all been repaid. They contracted the highest debt and managed to repay it. They used these debts to transform their economy into one of the most industrialised nations. Today, South Korea is one of the major donors to Uganda.
Germany’s debt is not consumptive. They use debt to increase production in the economy.
So, Uganda must ensure that debt contracted is for sectors with high multiplier effects in the economy for us to develop.
Two, the debt must be repaid, because there is no free money.