Will Uganda ever get out of debt?

Tuesday January 22 2019

Part of the turbine at Karuma Dam under

Part of the turbine at Karuma Dam under construction. The construction of the dam was initially set for completion in December 2018 but that has spilled over to this year. PHOTO BY ALEX ESAGALA 

By Ismail Musa Ladu

The government is once again on the spot over Uganda’s public debt question.
Several policy experts and public debts analysts this newspaper spoke to say the government must watch its steps because it is now treading on a slippery ground.

At this rate of borrowing, analysts believe that it will not be long before the government walks into a debt trap that could be difficult to untangle from.

Analysts and civil society organisations such as the Uganda Debt Network (UDN) and Civil Society Budget Advocacy Group (CSBAG) are not against borrowing. Theirs, according to the executive director of UDN, Mr Patrick Tumwebaze, is a call for “responsible borrowing.”

This, he said, entails transparency, accountability, sustainability and Inclusive economic development outputs plus outcomes.

The disconnect
Whereas government and some other institutions suggest a debt portfolio of $10.5 million (about Shs41.3 trillion), this is on account of disbursed and outstanding debt (DOD).

But this is not the whole story.
According to UDN, a national policy advocacy organisation that works to generate advocacy expertise that influences people-based and accountable public resource management in the country, that government narrative often does not account for all debts.

One example is the undisbursed debt and recoverable Debt (arising from private sector capital investment in oil and gas exploration and domestic arrears – that had increased from Shs1.4 trillion in FY 2014/15 to Shs3 trillion by end of FY 2016/17). This is in addition to contingent liabilities which increased from Shs6.5 trillion in FY 2015/16 to Shs7.5 trillion in FY 2016/17.


“It is little wonder, therefore, that institutions such as ministry of finance and the central bank give contradicting figures of the debt situation. In June 2018, the Ministry of Finance gave a total debt stock of Shs41.4 trillion ($10.7 billion) and Bank of Uganda in October the same year put it at Shs42.4 trillion,” Mr Tumwebaze noted in a statement issued last week.

Meanwhile, the UDN computation puts the said categories of Uganda’s debt situation at excess of $15.2 billion (about Shs52 trillion) by beginning of FY 2018/19 (that is July 2018) against Uganda’s GDP value of $26 billion, which represented a paltry 0.04 per cent of the world economy in the same period.

Borrowing threshold
But government doesn’t seem to see any reason to worry about the rising debt levels, arguing that the country is still within the safe borrowing margins.

The ratio of Public debt to GDP now stands at 41 per cent which according to the finance minister, Matia Kasaija is much lower than the 50 per cent threshold beyond which public debt becomes unsustainable.
But some analysts believe that suppressing these debt figures is drawn from some institutions’ motivation to lend to developing economies including Uganda. As a country, it should beware of the risks involved.

Interest payments
Already interest payments for FY 2017/18 stand at Shs2.34 trillion (according to Auditor General Report, Dec. 2017 report), representing 17 per cent of total revenue collections; and, therefore, already above the threshold of 15 per cent globally and as set in Public Debt Management Framework 2013.

Analysts have discarded the argument that Uganda is not alone in this situation given that other countries have much heavier public debt.

Whereas it is true that debt: GDP for economies such as Japan is at 253 per cent as at beginning of 2018 and that of the United States hovering at about 105 per cent while the United Kingdom’s is at 85 per cent and Singapore at 110 per cent all in the same period, the difference is that their own-generated revenues are able to service their respective debt portfolio within the globally accepted 15 per cent as required.

With a GDP of $26 billion (over Shs100 trillion) in the case of Uganda, the 15 per cent revenue component and threshold to debt servicing has already worried some people. CSOs are now reminding government technocrats to trade carefully away from a possible debt trap.

Servicing of public debt is increasingly taking the lion’s share of the national budget.

According to the Budget Framework Paper for FY 2019/20, Government projects to spend Shs2.9 trillion (11.4 per cent) on interest payments, up from 10 per cent in the current FY 2018/19.

It earlier took the third position in financial year 2017/18 (12.2 per cent) compared to 4th position in the previous financial year 2016/17, with an average share of 10.4 per cent of Government expenditure.

Although interest payment is ranked second in the current FY 2018/2019, after Works and Transport, and Energy and Mineral development (moreover, heavily financed with externally borrowed resources), it makes the first call on domestic revenues hence first priority on Government expenditure as projected in FY 2019/20.

Loans from China
Uganda is already indebted to China in excess of Shs6 trillion. According to UDN research, some countries accumulated debts they could not pay.

Hambantota and Gwadar ports and were both debt-financed and taken over by China. Critics fear that Uganda’s revenue from related infrastructure could literally be taken already through debt repayment obligations.

How to deal with rising debt
Civil society experts recommend that both Government and associate institutions profile the comprehensive sovereign debt portfolio for Uganda, upon which appropriate policy measures will be formulated and implemented.
Limited stakeholder participation and transparency in Debt acquisition and monitoring contributing to low performance of loans should be plugged.

Cases of debt-funded projects with absorption levels as low as 10 per cent should not be there.
The World Bank-funded project – the Uganda Support to Municipal Infrastructure Development (USMID) worth $160m (Shs600b), was for instance stuck with over Shs95 billion (95 per cent) on various accounts of 14 recipient Municipalities, coupled with various incomplete works. The five-year USMID loan-funded intervention which started in 2013 was expected to end by December 31 2018. But this has failed in Mbale, Tororo or Mbarara.

Such low absorption rates of some project loans, push up the cost of debt through time loss and cost overruns, which taxpayers will have to repay.

With the Development Committee plus Parliamentary oversight and approval, loan acquisition process should be opened up to public dialogue to improve their programming and results. Evidence of the participation of the intended recipients of debt-funded projects, for instance, should be a must in the process.

While infrastructural public sector investment is driving government borrowing, the projects should be interlinked to other sectors to generate bigger dividends for Ugandans. This will expand the economy while easing debt repayment capacity; limiting the risk of ‘white elephant’ projects and debt payment default or burden as was in the 1990s and 2000s when Uganda received debt forgiveness.

Government should progressively fizzle itself out of the domestic money/ lending market, to allow expansion of the economy and overall GDP through private sector growth anchored on lowered cost of money.

There should be policy reversals focused on Domestic Direct Investment through investment vehicles that allow majority of Ugandan citizens to be shareholders in key public sector investments such as electricity, railways and others.