Uganda needs 94 years to clear debt

Saturday April 7 2018

Huge borrowing.  The Entebbe Expressway which

Huge borrowing. The Entebbe Expressway which is under construction. Funding of the project is estimated to cost about Shs1.7 trillion which was secured from China’s Exim Bank. FILE PHOTO  

By Stephen Kafeero

Kampala.

Taking the rate at which Uganda is paying off its debt, it will take 94 years to repay the existing stock of debt. This is according to a report by the Parliament’s Committee on National Economy for the 2016/17 financial year.
The report puts the stock of external debt for both the public and private sector at 41.4 per cent of gross domestic product (GDP), up from 40.2 per cent in the preceding financial year.
It warns that the risk of Uganda rolling over external debt is increasing, just like the cost of attracting debt as the government continues to source for external debt on less concessional terms.
“If this trend continues then the country’s credit rating may deteriorate, affecting Uganda’s ability to access international financial markets,” the report notes.
Bank of Uganda has put the “provisional total public debt stock (at nominal value) as at end of December 2017 at Shs37.9 trillion, representing an increase of 9.4 per cent relative to June 2017”.
If we assume a liberal population figure of 40 million Ugandans, this means every Ugandan owes Shs992,500.
The International Development Association of the World Bank (IDA) is Uganda’s biggest creditor, but its share in Uganda’s total public debt has been on a downward trend while China’s share has been increasing.
Debt owed to IDA has declined from 61.9 per cent of the total stock in 2010/11 financial year to 45.2 per cent.
Over the same period, debt owed to China has increased from 3.3 per cent to 20.3 per cent.
The amount of total debt has exploded significantly given Uganda was a beneficiary of debt relief by the Paris Club of multilateral lenders earlier.
Under the Highly Indebted Poor Countries (HIPC) initiative, Uganda was forgiven its debt in different cycles in 1998, 2000.
By the last cycle, in 2004, Uganda’s public debt had fallen to at least $900m or Shs3.3 trillion at the current exchange rate. The Central Bank cited the growth in public external debt as the major contributing factor to the ballooning public debt.
The external debt, therefore, was Shs25.1 trillion and the domestic debt was at Shs12.8 trillion by December 2017. Both external and domestic debt grew at 12.2 per cent and 4.2 per cent, respectively, compared to June 2017, BoU notes.
BoU, therefore, puts Uganda’s debt to GDP ratio at 28.1 per cent as at end of December 2017. The BoU figure is still below the 50 per cent sub-Saharan Africa standard of sustainable debt.
When you factor in undisbursed loans, however, the ratio of total public debt to GDP is closer to the threshold and it is here that the Central Bank sounded its warning in a March 2018 State of the Economy Report. “This poses a risk of higher exposure or failure to meet external debt obligations in case of exchange rate volatility and slow growth in exports. In addition, high debt may become a drag on economic growth by discouraging public investment due to the high debt service costs,” the report reads in part.

Panic
The rising public debt has thrown authorities into panic, with the government pushing for more taxes in a bid to fill up a dwindling resource envelope.
Minus taxes, the remaining option government has is to borrow more, domestically and externally, to finance ambitious projects and other expenditures. But this, experts say, is already taking a heavy toll on public service delivery.
In what appears to be a catch-22 situation, government has opted to apply both measures that is to tax the population more but also continue borrowing.
Just last week, Parliament had on its Order Paper eight tax-related bills and three other motions on performance of the economy, Uganda’s indebtedness and utilisation of a controversial loan facility.
The events in Parliament came days after a letter by President Museveni directing relevant government bodies to impose new taxes on citizens.
The president’s suggestions would see users of social media platforms such as WhatsApp, Facebook and others pay extra taxes. Landlords across the country, the President suggested, should also pay some more money to the treasury than the Shs50b currently realised by the tax body.
Paying interest on debt has surged into one of the leading expenditures of government.
In the National Budget Framework Paper (NBFP) for the 2018/19 financial year, for instance, interest rate payments on local and external loans obligations is projected to be Shs2.7 trillion, about 9.3 per cent of the entire budget.
In the 2016/17 budget, debt servicing costs absorbed 23 per cent of government revenues. As a result, Parliament’s report cited above has warned: “Fiscal risks are starting to materialise (revenue shortfalls, critical expenditure shortfalls, and supplementary budgets)”.
On March 29, Parliament authorised government to increase domestic borrowing by Shs736b from to finance the next budget. Government also reverted to domestic borrowing because of a shortfall in expected revenue.
Ms Syda Bbumba, a former Finance minister and now chairperson of Parliament’s Committee on National Economy, advised government to sort out the tax regime in the country.
“Government should increase sources of tax revenue through a combination of measures for improvement on tax efficiency, widening the tax base and providing an environment that is conducive for growth of the private sector,” she said.

The debate
Proponents of borrowing for infrastructure, including President Museveni, argue that returns on investment outweigh the “temporary burden” that comes with over-borrowing.
In an interview with the South Africa based television CNBC last year, President Museveni said it was safe for the country to borrow for as long as the 50 per cent “danger zone” was not exceeded.
“There is no need to worry about debts, even after we have borrowed for railways and dams, the debt will be about 38 per cent of GDP, which is below the 50 per cent which is the danger zone,” Mr Museveni said.
The President would be contradicted days later by Finance Ministry Permanent Secretary Keith Muhakanizi, who warned that infrastructure development through loans was becoming expensive and unsustainable.
In an opinion published by this newspaper in 2014, Opposition leader Dr Kizza Besigye, citing a number of works supported by the Chinese government, warned that the Chinese were at risk of losing their money in future, especially that used to fund “dirty deals”.
“We cannot honour the blatant conspiracy to encumber generations of our people with odious debts. This is a legitimate struggle that Ugandans should prepare themselves to face following the inevitable collapse of the NRM regime,” he wrote.
Mr Julius Mukunda, the executive director, Civil Society Budget Advocacy Group, attributes Uganda’s rising debt to highly ambitious government plans, unfavorable terms and conditions, especially on non-concessional loans, a huge informal sector yet URA lacks capacity to broaden and deepen the tax base.
“The main factor mitigating the increase in debt has been growth in real GDP. For debt to remain sustainable, it is critical that real GDP continues to grow at a rate higher than the average real interest rate on government debt. An increase in the average real interest rate, and or a decline in real GDP growth, would pose a serious risk to debt sustainability,” he said in a statement.

Figures queried

Uganda Debt Network (UDN), a local NGO which champions the cause for debt relief, terms the figures quoted by government as conservative.
“The national debt so far is in excess of $15b away from the more conservative figures by IMF [International Monetary Fund] and government that puts it at about $12b. The variance in the UDN analysis and that of government is based on the fact that both government and IMF count the debt on basis of only disbursed and outstanding (existing) debt,” says Julius Kapwepwe Mishambi, director of programmes at UDN.
He explains that their projection is based on five parameters, including disbursed, outstanding (existing) and acquired but undisbursed loans. In this case a loan being passed onto a country or an individual is counted against the borrower whether they choose to pick and use it or not.
The second parameter is domestic arrears arising from unpaid-for-services and goods supplied to government such as private sector companies or others (such as water, telephone, hotels and water bills), salaries, pensions and gratuity to ex-servicemen and women, among others.
Then there are contingent liabilities such as court, compensations to people battered by state agencies such as police as ordered by courts or the Human Rights Commission.
The final two are the recoverable debt and land compensations. Recoverable debt can arise from, for example, those companies that have invested in the oil sector and will expect to recoup their initial investment on capital before government can make full claim over oil revenues to the consolidated fund.
The land compensations on the other hand are estimated to be in trillions of shillings.
“The concern of civil society actors such as UDN is not so much about the level of indebtedness, but rather whether the borrowed resources have registered the promised and expected performance outcomes,” Mr Kapwepwe says.
“Government’s low absorption rate of loans, yet they attract penalties and repayment costs that are unwarranted if we improved our level of project readiness as a country, we cannot continue to be a shamba (money-minting venture) for other economies that continue to exploit our laissez-faire approach to implementation that tends to suffer procurement quarrels, cutting deals through underhand methods, cost and time overruns in projects,” he adds.
Some of the borrowed money that has gone to “waste” includes billions of shillings which were borrowed for fish re-stocking years after the EU suspended Uganda fish exports over quality and that money went to waste in Mbale and Gulu fish finger development site.
Experts warn that with escalating borrowing in search of the middle class status by 2020 (two years away), with the current GDP of $25.5b for 38 million people, even if economic growth was 73 per cent to get us to a GDP of $40b, the earliest Uganda can obtain middle income of $ 1,086 (about Shs4m per capita) would be 2025 even on account of oil revenues.
Also, much of the money used for debt repayment goes to domestic markets. This has led to higher interest rates, with the average prime lending rate now standing at 24.3 per cent.
Government has also reportedly borrowed more than Shs2 trillion from various sources for development of Business Technical and Vocational Education and Training through refurbishing and building new physical structures, purchase of equipment among other things but with dismal achievements between 2012 and end of 2017.
As of Tuesday, April 3, 2018, the population of Uganda based on the latest UN estimates was 43,910,282. Only nine million Ugandans are estimated to be working with the rest still young and at home or at school.
Subjected to the UDN analysis the, every person in Uganda owes Shs1, 254,072. This excludes excluding individual household debt, debt to Saccos, banks, friends, relatives, money lenders and other sources.

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