What you need to know:
IMF forecasts that the ongoing ambitious infrastructure investments will result in an increase of the public debt, with total public debt projected to peak in FY2020/21, at about 50 per cent of GDP. Martin Luther Oketch assesses the impact of high debt levels on the economy
The International Monetary Fund projects that Uganda’s public debt will keep raising to 2021 due to ongoing ambitious infrastructure investment by government.
Uganda is facing a problem of infrastructure deficit, which is affecting the country’s long-term economic development and is the reason why government has scaled up investment infrastructure development by borrowing to close budget deficits for infrastructure development.
In an interview with Daily Monitor recently, the International Monetary Fund Resident representative in Uganda, Ms Mira Clara, said: “The current ongoing ambitious infrastructure investment scaling up will result in an increase of the public debt, with total public debt projected to peak in FY2020/21, at about 50 percent of GDP (and external public debt at about 36 percent of GDP), and decline thereafter, as the scaling up process is completed.”
Ms Clara added: “In line with the National Development Plan, the current ambitious medium term investment plan includes projects to enhance electricity production, revamp the transport network (with roads, airports and the standard gauge railway) and prepare the infrastructure necessary for oil production.”
The IMF and the World Bank occasionally carry out joint staff debt analysis of a particular country to find out whether that country is at the risk of falling under debt risk distress.
“In our view, Uganda’s public debt is currently sustainable and so is the projected accumulation path, provided that the deficits are used to finance infrastructure investment (as is currently planned) and that the investments are implemented properly,” she said.
More often than not, the government has said Uganda’s debt level is still sustainable. Ms Clara said: “Indeed, in our latest analysis of debt dynamics, in which we analyse recent developments and medium and long-term prospects, the “debt sustainability analysis”- we came to the conclusion that debt remained at low risk of distress.”
Ms Clara said Uganda is working to get the best possible financing terms and conditions for these infrastructure investment needs. While recourse only to concessional debt is not enough given the size of the projects, the government has secured non-consessional loans at better-than-market financial terms.
Ms Clara explained that the proper selection, sequencing, and implementation of the large infrastructure projects remains essential to ensure that projects produce the desired growth and productivity enhancing effect while maintaining debt sustainable.
She further stated that independent feasibility studies are required to select the best, commercially viable projects, pointing out that the sequencing of the projects is also necessary to ensure they do no overheat the economy and can be properly implemented without delays and adequate monitoring.
“As the currently planned infrastructure-related projects are implemented, the better provision of electricity, energy and transportation, together with the ongoing work to continue improving the business environment, is expected to unleash growth potential,” she said.
Looking ahead, she stressed that efforts towards enhancing domestic revenue collection would reduce the borrowing needs and provide more space to borrow sustainably and that efforts towards improving export performance would also improve the sustainability of the debt.
The government, through the ministry of Finance, has a debt management unit to ensure that the country’s debt level remains under control.
Ms Clara stated that debt management should strive to extend the maturities; currently the low revenue base combined with short maturities of domestic debt results in a high debt-service-to revenue ratio. Additional reforms aiming at improving governance, transparency, and public financial management would also help to improve debt dynamics.
“Finally, actions to ensure that the whole population, including the poor, benefits from this growth associated with the infrastructure scaling up would be welcome, including by targeted interventions to ensure inclusiveness,” she said.
In an interview with Daily Monitor, deputy governor, Bank of Uganda, Dr Louis Kasekende, said Uganda’s public debt though still sustainable, has risen in recent years, primarily on account of borrowing to finance infrastructure projects that are necessary to improve the economy’s productive capacity and competitiveness over the medium-long term.
“As read out in the 2016/17 Budget Statement by the Minister of Finance, net present value of debt is about 31 per cent of GDP while total nominal public debt is about 34 per cent of GDP. In volume terms, external debt is currently estimated at about $5 billion and domestic debt (treasury bills and bonds) at Shs11.612 trillion by end of June 2016,” he said.
Mr Kasekende said debt burden should always be assessed in terms of an economy’s present and future capacity to repay the debt. “Therefore, continued debt sustainability is dependent on the ability of the economy to grow, expand its revenue resources and diversify its resource envelope (inclusive of foreign exchange earnings), much more than would be required to meet the debt obligations,” he said.
He explained that the priority should be to increase the domestic revenue effort from the current low ratio of 13 per cent of GDP, exercise caution on increasing non-priority recurrent expenditures, proper sequencing of projects that have been deemed commercially viable and careful assessment of contingent fiscal risks in any Public-Private Partnership arrangements.
“In addition, we should ensure an appropriate mix of both concessional and non-concessional financing, and external and domestic financing, that is consistent with the capacity of the domestic financial markets and the maintenance of overall macroeconomic stability,” he said.
He added: “The most obvious impact of a very high debt burden would be higher interest rate levels coupled with inevitable constraint on investment in productive capacity of the economy as a result of large pool of resources being required to service debt. Lower debt levels also induce a favourable credit rating and are a positive signal to inward foreign direct investment.”
LIMIT TO BORROW
In the past, the IMF had a placed a limit at which Uganda should borrow from external sources. However, Ms Clara said under the current arrangement with the IMF, the Policy Support Instrument, the IMF executive board endorsed the removal of the previously existing limit on non-concessional borrowing of $3 billion, as in line with the current IMF debt limits policy, a country like Uganda, at low risk of distress, does not require explicit non-concesional borrowing limits.
The design of Uganda’s debt policy, including the decision to engage in any new borrowing, continues to be guided by considerations of project feasibility, debt sustainability, the economy’s absorption capacity, and implementation capacity.