Why Uganda should tame her appetite to borrow

Wednesday November 8 2017

UNRA Kampala Expressway

Uganda National Roads Authority (UNRA) safeguard manager David Kyadondo (L) shows the UNRA probe committee Justice Bamugemereire (C) and members of the Commission a map of the Kampala Expressway during a tour in 2015. The Express-way is being constructed using borrowed funds from China. PHOTO BY DOMINIC BUKENYA 


The country’s continued appetite for borrowing is slowly but steadily getting out of control, some seasoned debt analysts on the continent have warned.
They analysts whose specialty is assessing and analysing debts incurred or contracted by the governments, believes that if the government does not begin taming her appetite to borrow now, it will not be long before the country’s soul is sold out on credit.
Just a decade after global debt movements campaigned for debt cancellation, many African countries, including Uganda, are either, in debt difficulties or quickly degenerating into debt.

Public debt
When delivering the Budget Speech for the Financial Year 2017/18 in June, Finance minister, Matia Kasaija emphasised that at only 13.8 per cent of Gross Domestic Product (GDP), the country’s tax revenue effort is very low and inadequate to finance her development needs.
He said: “Government will therefore boost domestic tax revenue in order to increase financing of the budget from domestic tax revenues.”
Currently, 30 per cent of the National Budget is servicing interest on Uganda’s rising debt, a situation which is worrying.
By the end of 2016, Uganda’s external and domestic public debt amounted to $ 8.7 billion (about Shs32 trillion).
“This is equivalent to 33.8 per cent of our GDP. However, when future debt payment obligations are discounted to today’s value, our Public Debt to GDP ratio stands at 27 per cent,” Mr Kasaija said.
He continued: “This is much lower than the threshold of 50 per cent beyond which public debt becomes unsustainable. Uganda’s public debt therefore, is sustainable over the medium to long term.”
In his latest message directed to the youthful Member of Parliament, Mr Robert Ssentamu Kyagulanyi, President Museveni said the assertion by the Kyadondo East legislator that Public Debt has made “us slaves” is false.
He, however, admitted that it is true that some of the debts are contracted carelessly by Civil Servants but much of the debt has helped “us to build roads and, “we are careful with the level of borrowing.”
“When you include the borrowing for the Standard Gauge Railway and all the other projects, the debt level will not exceed 41.7 per cent nominal debt to GDP. The danger level is 50 per cent of GDP and we are far away from that,” Mr Museveni wrote in reply to the legislator’s earlier communication which raised a range of national issues.

The Kampala - Entebbe Expressway nearing
The Kampala - Entebbe Expressway nearing completion. The road was constructed using loans from China and African Development Bank. PHOTO BY RACHEL MABALA

Cause to worry
Presenting findings of the report recently at the regional conference on debt and development under the theme: Addressing core challenges arising from the management of public debt at regional level in Entebbe, Uganda Debt Network (UDN) director for programmes, Mr Julius Kapwepwe, said public debt issues are so important to be left to politicians alone.
He said: “Our research on debt shows that Total Public Debt (Disbursed, Outstanding-Undisbursed) for Uganda by June 2017 (end of FY 2016/17) was in excess of $13 billion (about 47.5 trillion).”
He continued: “UDN is not against public borrowing, but rather for responsible borrowing (value for money, transparency and accountability, prudent management and results based), which are all Political decisions and not merely technical.”
According to the IMF (2014), Tanzania, Uganda, Rwanda and Burundi were among the first African countries that had qualified for debt relief under the Highly Indebted Poor Countries Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI) of the World Bank, International Monetary Fund, and African Development Bank
The rise in debt stock has been driven by Uganda, Rwanda, Kenya, Madagascar and South Sudan who have been borrowing heavily since 2007 from international markets and domestic markets.

Another report by the African Forum and Network on Debt and Development (AFRODAD), a civil society organisation that lobbies and advocates for debt cancellation, indicates that all is not well unless African countries, Uganda inclusive, reduce on their appetite to borrow.
Despite the high economic growth in the region, public debt still remains one of the main economic policy challenges facing most East African governments.
African countries’ debt indicators are reaching thresholds that are not sustainable, despite having a large share of their debts written down under the World Bank/International Monetary Fund debt relief programmes, Heavily Indebted Poor Countries (HIPC) Initiative of 1999 and Multilateral Debt Relief Initiative (MDRI) of 2005.
Africa’s future debt crises will be more difficult to prevent and resolve than because the debt landscape is more complex now, as it involves many more private, bilateral, and multilateral creditors and financial instruments which were not covered by institutions such as the Paris Club creditors that had traditionally dealt with African debt problems.
Most African Parliaments are tasked with approving loans, according to the report, but the August House most often rushes to “rubber stamp” the deal instead of exercising greater scrutiny on loans being contracted.

Reasons for rising debt
It emerged in the regional debt conference that the key drivers of public debt accumulation in the region, where Uganda is a key player, are declining official development assistance especially grants, increased domestic borrowing, larger budget deficits, external shocks and new borrowing opportunities.
The conference which discussed core challenges arising from the management of public debt at country and regional levels, drawing participants from finance ministries, parliamentarians, economic think tanks, UN/IMF/AfDB/World Bank country offices, and civil society zeroed on the fact that local resources are far less than the financing requirements, causing continued reliance by most post HIPCs on grants.
However, grants are not adequate but also declining. The heavy reliance on grants is unsustainable, leading countries to resort to much heavier borrowing both domestically and externally.
More so, traditional sources of credit are shrinking and new options with harder terms are emerging, such as new bilateral lenders, major ones being Brazil, China, and India.
The new bilateral lenders are attractive because they provide relatively larger amounts of financing without policy and other related conditions.
A number of EAC countries have issued large Eurobonds and these are drastically increasing external debt, which may compromise the gains on debt sustainability.
The recent slump in oil and other commodity prices revealed vulnerability of countries to adverse shocks. Countries financed fiscal deficits through borrowing, either from external or domestic sources.
“The regional total debt stock shows an incremental trend from 2006 to 2014, where the stock was at $34.854 billion in 2006 and increased to $68.338 billion in 2014. This total has huge potential to plunge the region into economic crisis,” reads part of the AFRODAD report.
According to joint debt sustainability assessments by World Bank and IMF for low-income countries in 2015, Tanzania, Rwanda, Kenya and Uganda were assessed to be at low risk.
However, Comoros, Ethiopia and South Sudan were found to be of moderate risk.
The high risk countries in the region are Burundi and Djibouti.


Way out of debt mess
In his presentation, Mr Patrick Tumwebaze, veteran debt analyst and the UDN executive director, said: “Debt has ramifications on our independence and economic status, given that we all have common characteristics, heritage and destiny as African states, particularly the Sub Saharan region.”
Mr Tumwebaze, therefore asks government to be transparent and accountable in contracting the debt and public resource management.
Initiating debt audits, for instance, would ensure transparency in lending.
Governments should mobilise their own resources for development – to prevent an over-reliance on foreign finance – regulate capital movements, illicit capital flight and tax avoidance.
Address tax havens, tax avoidance and tax evasions –increase transparency over the income and management of resources from extractives.
Domestic resource mobilisation – design progressive policies for domestic resource mobilisation - gives room for governments to define the content of their national budgets and development vision.