Uganda’s debt burden as financial year closes
President Museveni, accompanied by First Lady Janet Museveni, commission the Source of the Nile Bridge in 2018. Many infrastructure projects in Uganda have been constructed on borrowed money. FILE PHOTO
Uganda’s fiscal position is expected to deteriorate temporarily but the debt would remain sustainable.
Both the government and development partners aggress that the impact of lower growth and tax incentives together with additional health expenditure, social protection and economic stimulus measures is expected to widen the fiscal deficit in Financial Year (FY) 2020/21.
The government continues to ensure that its overall debt service position is not overburdened by contracting long term financing as opposed to short term.
According to International Monetary Fund (IMF), although the debt stock would increase to respond to the emerging financing needs, debt dynamics would remain sustainable and Uganda would remain at low risk of debt distress, with public debt projected to rise above 54 per cent of GDP in FY 2021/22 and peak at 59.6 per cent of GDP in FY 2023/24.
Report on public debt, guarantees, other financial liabilities and grants for FY 2019/20 and the medium term debt management strategy 2020/21 – 2023/24 by the Ministry of Finance, Planning and Economic Development released on April 31 2020, indicates that the total public debt stock as at December 31, 2019 stood at $13.49b as compared to $11.52b as at December 31, 2018.
This represents a growth of 17 per cent of the total debt stock. External debt accounted for 64.8 per cent and domestic debt 35.2 per cent
The report states that the external debt stock increased by 14 per cent from $7.66b as at December 31, 2018 to $8.75b as at December 31 2019. Domestic debt stock increased by 21 per cent from $3.86b as at December 31, 2018 to $4.74b as at December 31, 2019.
The Ministry of Finance explains in its report that the increase in external debt stock is attributed to increment in disbursements from both the bilateral and multilateral creditors which is at 18 per cent and 13 per cent respectively.
External debt stock by creditor category
Multilateral creditors continue to dominate the total debt stock as compared to bilateral creditors and private banks. Multilateral creditors hold 64 per cent of the total debt stock followed by bilateral creditors with 35 per cent.
Multilateral creditors composition
The International Development Association (IDA) of the World Bank continues to dominate the multilateral debt stock with 61 per cent. This is followed by African Development Fund (AfDF) with 24 per cent.
“This is in line with the government’s efforts to borrow on concessional terms,” the report from the Ministry of Finance reads in part.
Bilateral creditors composition
China dominates the bilateral composition of debt stock as at December 31, 2019 with 76 per cent. This is followed by Japan International Cooperation Agency (JICA) with 7 per cent and France (AFD) with 5 per cent
The stock of domestic debt
The report reveals that domestic debt trends until end December 2019, government’s domestic debt at cost continues to grow at a high rate. As at the end of December 2019, the total outstanding stock of government domestic debt at cost increased by Shs3.043 trillion (21.2 per cent) from Shs14.333 trillion at the end of December 2018 to Shs17.376 trillion at the end of December 2019.
Available statistics show that of the total outstanding domestic debt at cost of Shs17.376 trillion as at end December 2019, T-Bills accounted for Shs4. 273 trillion (25 per cent) while T-Bonds accounted for 13,103 billion (75 per cent).
Despite the increase in the outstanding domestic debt stock at cost by 21 per cent in December 2019, the share of T.Bills remained at 25 per cent and the share of T. Bonds remained at 75 per cent.
The report shows that the new domestic debt issued during FY 2019/20 as at December 31, 2019, the total debt issued at cost was Shs4.389 trillion, and this was used for redemptions (62 per cent) and Net Domestic Financing (NDF) requirements (38 per cent).
Domestic Debt Service
Regarding domestic debt principal payments (Redemptions), as at December 31, 2019, Shs2.714 trillion had been cleared in redemptions. This represents 44 per cent of the projected redemption of Shs6.174 trillion for FY 2019/20.
The IMF Resident Representative, Ms Clara Mira told Daily Monitor recently that Uganda’s stock of debt stood at 37.3 per cent of GDP in June 2019, or $12.8 billion, of which nearly 70 per cent is external debt.
“From the current 37.3 per cent of GDP at the end of June 2019, debt is expected to increase and could reach 45 per cent at the end of this FY as a result of the lower projected growth and the additional planned and crisis response borrowing,” she said.
Ms Clara said the debt to GDP ratio would be expected to continue increasing over the next four years, and then start coming down, pointing out that the interest payments in percentage of revenue are also expected to increase from 15.2 per cent in 2018/19 to 20 per cent in FY2019/20, which means that one out of every five shillings collected would go to pay interest.
According to the IMF/World Bank updated Debt Sustainability Analysis report on Uganda, Uganda’s debt remains sustainable and at low risk of debt distress.
However, the report states that the economic impact of the Covid-19 pandemic is resulting into a deterioration of most of the debt indicators, including the debt to GDP ratio, and the debt to exports and debt service to revenue.
Therefore, sound fiscal management over the medium term remains critical to ensure fiscal sustainability.
Ms Clara said there are different ways of calculating debt of the country.
“At IMF, we look at several debt indicators, as this is the best way to get an accurate picture of the country’s situation. This includes not only the debt to GDP but also the debt to exports ratio, debt service to exports, and debt service to revenue. We also look separately at total public debt, and total external debt, which includes private sector external debt.”
She said Uganda is expected to remain sustainable and at low risk of debt distress, even if the debt indicators will temporarily deteriorate.
“The plans to continue efforts to enhance revenue collection strengthen public investment and eventually some fiscal consolidation as large infrastructure projects are completed and oil starts flowing are appropriate, she said.
“Also, we think that given the Covid-19 unprecedented crisis, Uganda is well advised to turn to international solidarity and mobilize financing from development partners, which is normally concessional financing,” Ms Clara added.
Ms Clara said some important considerations are put in place when deciding how much to borrow, and whether externally and domestically.
These include the need to avoid crowding the private sector, which happens when government takes too much of the available financing from the domestic market, pushing interest rates upwards, to ensure the debt remains sustainable over the medium term, and the absorption and implementation capacity of government to absorb the borrowed funds.
DEBT INITIATIVE
Freeze loan repayment
The world’s 20 largest economies widely referred to as The G20 on April 15, in Washington DC, agreed to temporally freeze bilateral loan repayment for low-income countries.
The Ugandan authorities have expressed interest in benefiting from the G20 debt service suspension initiative, which would help them deal with the impact of the Covid-19.
IMF says in their letter of intent for the Rapid Credit Facility (RCF), they expressed their commitment to enhancing spending the freed resources on Covid-related health, social and economic relief, monitoring and identifying this expenditure separately in budget monitoring reports; and disclosing all public sector debt, and not contracting new non-concessional debt during the suspension period, other than agreements under this initiative or in compliance with limits agreed under the IMF debt limit policy.
