I watched the show to the end, which followed a claim by Finance minister Matia Kasaija that Uganda’s (external) debt is sustainable; a view that was not supported by some Ugandans. For example, panelists Dr Fred Muhumuza, Norbert Mao (DP president), Salaamu Musumba (FDC vice president) and Nandala Mafabi (FDC secretary general) disagreed with Mr Kasaija. The four argued that Uganda should seriously worry about her debt. However, panelists David Bahati (State minister for Finance) and Ofwono Opondo (a government spokesperson) were of the opposite opinion.
Soon thereafter, Prof Augustus Nuwagaba, in an interview also published in the New Vision newspaper of February 4, agreed with Mr Kaisaija’s claim — although Prof Nuwagaba’s interview is based on generalities and is noticeably devoid of detailed, empirical or researched evidence worth quoting or mentioning.
Mwenda’s views are laced here and there with half-truths, generalities, superfluous political undertones, irrelevancies and digressions and diversions from the main issue of discussion, namely, the sustainability, or lack of it, of Uganda’s public debt. Further, as usual, Mwenda’s critique, unfortunately, occasionally degenerates into attacks on the persons of some of the panelists, instead of focussing purely on an intellectual analysis of the issues at hand.
Mwenda’s statement that “even a third-rate economist would tell you that Uganda’s average GDP growth performance … is a miracle” (a statement displaying utter lack of respect for other analysts and bordering on arrogance and sheer bankruptcy of analytical rigour or demonstration of paucity of the basics of intellectual maturity), for example, leaves a lot to be desired.
I shed intense light on a number of issues surrounding the subject of debt sustainability and the debt burden in Uganda. In so doing, I discuss some of the half-truths, myths, irrelevancies and digressions in Mwenda’s article and Nuwagaba’s interview. I begin by offering some definitions and examination of the issue of the ability by a country to repay her debt, the concept of the debt burden, and foreign aid productivity, and absorption vis-a-vis debt sustainability.
In 2017, a publisher based in Germany published two graduate-level textbooks I authored in the area of Monetary Economics. This paper benefits a lot from Chapters 2 and 5 of the second of the textbooks titled International Money, Finance, Growth and Policy in an African Setting.
A country incurs two types of debts, namely, the internal debt and the external debt. The internal debt is the debt owed by all of us to some of us; it is the sum of (unpaid) past and current government domestic borrowing.
This domestic borrowing is effected mainly through issuance of treasury bills, government bonds, treasury notes and other financial papers issued by government. Government revenue (RG) consists of net returns on government investment, direct and indirect net tax collections, revenue from fines, rates and other non-tax sources and grants or net transfers from the rest of the world. This revenue is collected continuously throughout the year, and the amount collected varies from month to month; hence, in a given month, the revenue collected may fall short of, equal to, or exceed government expenditure (EG) during that month.
Hence, even if the government balances its budget over the year (EG = RG), it has to borrow from time to time to meet various revenue shortfalls during certain parts of the year. The internal debt arises if the government does not have adequate revenue to repay its debts during a year, or if the government decides to live beyond its means. The debt is a mortgage on future generations, which will have to pay it off.
Here, I mainly focus on external debt, which is the debt owed by us to the rest of the world; it is government plus private borrowing from the rest of the world.
Thus, the external debt is a country’s sum of the stock of past and current unpaid public and private loans and advances. Whereas the internal debt has a crucial impact on a country’s efforts to attain internal balance, the external debt basically impacts on the nature of the external balance of the country concerned. The debt is a stock, not a flow. Mwenda asserts that it “is hard to nail down the actual debt since it is a moving figure”; this is not true, since any stock can be ascertained at any point in time.
The debt problem arises in situations where the debtor (borrower) finds difficulties in repaying the debt—that is, paying back the amount borrowed plus interest and other charges as agreed between the lender and borrower. In this case, there might be problems of servicing the debt and problems of repayment of the entire debt at the end of the agreed period. Since repayment is usually in periodic installments at agreed dates, the problem of debt servicing arises if the borrower is unable to comply with the agreed schedules of repayment. That is, the installments are not effected on time or at the agreed date, or the borrower is unable to raise the required amount of the installment due then. Debt servicing and debt repayments are serious problems in poor countries, including Uganda.
Must we compare Uganda with the rest of the World?
The panelists discussed whether Uganda should worry about her growing public debt. The answer to this question revolves around Uganda’s ability to generate adequate funds or foreign exchange to repay the debt—and not on East Africa’s or the rest of the world’s ability to clear her public debt.
Now, assuming away debt repudiation or unwillingness to repay the debt and exogenous shocks that impact adversely the productivity of borrowed funds, ability to repay a debt, including its servicing, depends on how the borrowed funds are/were used or invested.
To illustrate, let D = amount of borrowed funds, R = total interest to be paid on the debt, C = other charges (commitment fee, disbursement charges, bank charges, etc.) on the debt, and I = total (net) income realised by investing the D. This means that the borrower invested the D in productive ventures and earned a net income of I from the investments. The debt problem occurs if and only if I < (D+R+C). If I = (D+R+C), there is no problem. However, the ideal situation is when I > (D+R+C); the bigger the difference between I and (D+R+C) the better for the borrower. Therefore, the productivity of the borrowed funds is the crucial factor to stress if the debt problem is to be avoided. This is true regardless of whether one is focussing on a personal or a country’s total or internal or external debt.
Note that even if borrowing is at zero interest rates (i.e., R=0), as long as D consists of loans rather than grants and C is not zero, the debt may not be sustainable—that is, income (I) may still consistently fall short of (D+C). Therefore, it is not entirely true, as Mwenda would like us to believe, that if borrowing is at zero or highly concessionary interest rates, the debt will be sustainable. Low interest rates only mean that the debt burden will be lessened by reducing the R in the above formula.
In my view, Dr Muhumuza and other panelists did a good job in discussing this issue of Uganda’s debt sustainability, even if I do not necessarily agree with some of their views. Further, in answering this question, it was not necessary to compare Uganda’s borrowing magnitude, frequency or rate with those of East African or other countries, as Mwenda argues. If other countries’ debts were/are unsustainable, or as unsustainable, or as sustainable, or more sustainable than Uganda’s, would that make Uganda’s debt sustainable, or would Uganda be comfortable even if her debt were visibly unsustainable? So, comparison in answering the relevant question is optional, rather than compulsory. There is, therefore, no obligation to make superfluous comparisons, even if “Uganda is not an island”.
However, if the question under discussion had been: “Is Uganda’s performance with regard to the question of debt sustainability or borrowing better, equal or worse than that of Kenya, Tanzania, or Rwanda, or those of other countries?”, then comparisons would have been mandatory and relevant. By using comparisons, Mwenda is, therefore, answering a significantly different question formulated by none other than himself.
Is Uganda’s economy growing below potential? Is 6.92 per cent the optimum?
Muhumuza stated that Uganda’s economy has been growing below its potential, which idea Mwenda disputes with hardly any theoretical or empirical evidence. In regard to this issue, one has to examine, inter alia, the productivity, absorption, management and coordination of borrowed funds or foreign aid in general, as well as debt sustainability.
Uganda’s external public and publicly guaranteed debt is, as Kasaija claims, sustainable and at low risk of debt distress. However, at a review of the Policy Support Instrument (PSI) meeting in Kampala (in July 2017), the International Monetary Fund (IMF) Board of Directors commented as follows:
‘Directors emphasised the importance of strengthening fiscal policy implementation. They welcomed the increase in revenue collection in FY16/17, but noted the large under execution of the externally financed investment budget, which could undermine growth prospects. Directors regretted the government’s recourse to central bank financing this year, noting its inconsistency with the inflation targeting framework. They called on the authorities to settle outstanding external arrears expeditiously, while taking measures to prevent any recurrence (emphasis added).’
As a country borrows, it must take into account at least two basic factors – the expected productivity of the borrowed funds, and the country’s absorption capacity via-a-vis the implicit debt. These factors are both based on the concerned country’s management and coordination of its public debt, including the external debt. In addition, the issues of under-execution of debt-financed projects, untimely disbursement of funds, embezzlement of borrowed funds and related leakages, must be taken into account.
If not well managed and well-coordinated, foreign aid or the debt can, inter alia, lead to the emergence of the following factors:
1. Productivity rates that are less than optimal, as well as suboptimal absorption rates;
2. Aid funds being embezzled by corrupt personnel in view of the high levels of corruption in many of these poor countries, including Uganda;
3. Capital flight and unwarranted reverse flows via overpricing of imports and underpricing of exports.
According to Shah (2010), whilst countries in Africa receive $162 billion in resources such as aid, loans, and foreign investment, a whopping $203 billion is taken out, mostly by multinational corporations, debt payments, tax dodging, and the costs imposed by climate change caused by the rest of the world. In total, the rest of the world receives more than $41b a year from African countries. This is more than enough money to provide decent healthcare to all people in Africa. This stands the story about poverty on its head. Given this situation and the logic or philosophy, Africa is in the real sense the foreign aid donor, while the rest of the world is actually the recipients of Africa’s aid. This is food for thought! (Anup Shah, 2010). See details in the appendix on page 34.
4. Low or minimal local content of debt-financed projects plus high unit costs of the projects. Many skilled and unskilled workers in projects managed by Chinese and some raw materials are sourced from donor countries, and the unit cost (of, say, road construction) is very high in Uganda, compared to, say, Ethiopia. The resultant repatriations by foreigners enhance the reverse flow of dollars to the donor country.
5. Discouraging domestic production in favour of imports, thereby constraining foreign exchange generation;
6. Importation of unnecessary commodities, such as cosmetics, hair-dos, etc. using the scarce foreign exchange;
7. Overt and covert political strings and unfavourable conditionalities may be attached to the aid;
8. Borrowed funds being used to add to reserves, rather than invested in productive ventures;
9. Borrowed funds being expended mostly on consumption, rather than investment goods;
10. Aid may lead to adverse impacts on domestic cultures and values systems.
Most of the above factors, for sure, apply to Uganda. Hence, there have been questions on the productivity of borrowed funds in Uganda; there is ample evidence that productivity of aid is suboptimal, and there are serious issues of absorption. The less than optimal aid absorption and productivity rates result from, among other reasons, poor management of loans, untimely and sometimes inadequate release of counterpart funds by the government, occasional delays in the release of aid by donors, poor planning and coordination, and related political and administrative shortfalls in the face of constraints imposed by the high corruption level in the country. Of course, Mwenda will state, correctly, that many other poor countries, at least in Africa, suffer from the same problems. If so, so what? Should Uganda derive comfort in such a statement?
This means that with maximum absorption and productivity rates, timely release of counterpart funds and donor aid, sound planning and coordination, no other administrative bottlenecks, no embezzlement of funds and other overt and covert types of corruption, any first, second, third, or xth rate economist, statistician or intellectual analyst would see that Uganda’s economy would have grown at a higher rate (e.g., 7 per cent, 8 per cent, 9 per cent, or higher) than the 6.92 per cent per annum. Muhumuza is, therefore, right on this issue. Obviously, if the annual growth rate of 6.92 per cent is a miracle, definitely even Mwenda would concede that a higher rate would even be a more fascinating miracle!
Mwenda faults Muhumuza for the latter’s statement that Uganda’s growth rate is below potential.
One expected Mwenda to state what rate he considers to be the potential or optimum; is it the 6.92 per cent? Can this rate of growth of the economy be shown, argued, or ‘proved’ to be the optimum vis-à-vis the country’s debt or high propensity to borrow and the implicit rate of return on investment? Unfortunately, Mwenda just rebukes Muhumuza but does not offer any discussion of these questions. Instead, he digresses into discussing what a miracle the 6.92 per cent growth rate is, how only a few countries have, historically, ever sustained for 30 years such a miracle rate, how between now and 2025, “Uganda will be the second fastest growing economy in the world ...”, and other irrelevancies that may be interesting but are off the mark or “offside”—and you know offside goals are always disallowed.
Debt sustainability: Does a low borrowing (Debt/GDP) ratio imply sustainability?
It is important to note that the debt to GDP ratio of 50 per cent is just an average, just like a life expectancy figure of, say, 52 years for a country is an average. The life expectancy of 52 years does not mean that everybody in that country lives for only 52 years; some live for more than 70 years (like the writer) and others for less.
Similarly, the debt/GDP ratio of 50 per cent is a safety measure for some countries and not for others. For example, the US and other developed countries—and, maybe Botswana and South Africa—are comfortable with ratios of 80 per cent and above, whereas many maskini [poor] countries’ safety rates must be far below the 50 per cent ratio. Hence, Uganda’s ratio being at 41 per cent does not necessarily mean that Uganda is safe; one needs more and better (empirical) evidence! The debt/GDP ratio being below 50 per cent is, therefore, most likely a necessary, but not sufficient, condition for debt sustainability.
Further, Mwenda appears to believe that a zero or highly concessionary interest rate on borrowed funds implies debt sustainability. This is not correct; at best, it is a half-truth. As stated earlier, a zero or highly concessionary borrowing rate only implies that the debt burden will be less than if the rate had been higher (like commercial rates). As noted earlier, debt sustainability crucially depends on the productivity and absorption of the borrowed funds. In the formula given earlier, sustainability depends on whether or not I > (D+R+C); the higher the difference between the I and the (D+R+C), the better.
Rate of return: Infrastructure vs. industry or the superstructure
Mwenda asks a rhetorical question: “Is the cost of [Uganda’s] borrowing prohibitive and is the debt, therefore, unsustainable?” He answers his rhetorical question by stating that most (99 per cent) of Uganda’s loans are at highly concessionary rates and of long maturity periods. Without a discussion of the sign of the difference between the I and the (D+R+C), he myopically concludes that this borrowing at highly concessionary rates accompanied with long maturity periods “is what makes our foreign debt sustainable”. Surely, is it only the size of the R that matters?
Besides, the debt burden of a country inevitably imposes a number of constraints on that country’s growth prospects, including curtailing the degree of its participation in international trade. The burden of principal and interest payment, for instance, drains the nation’s resources and curtails the possible expenditure of resources on other productive ventures in the country. This is even more constraining considering that the incomes from which the debts are to be serviced are meagre—for the countries suffering most seriously from the burden of the debt are among the poorest of the poor. This gives rise to at least three macroeconomic problems: (1) the macroeconomics of earning foreign exchange. Export promotion? Can trade be used as an engine of growth? (2) the macroeconomics of finding extra budget resources to service the debt on a sustainable basis, and (3) the macroeconomics of adjusting to a constant reduction year in year out in spendable resources.
In order to reduce the debt burden on a sustainable basis and increase the debt servicing capacity, there is need for an increase in exports, and reduction in world interest rates, among other things. This raises basic macroeconomic issues relating to international trade and costs. To the extent that the increasing protectionism of the developed countries prevents entry of Third World countries into markets in developed countries, and in view of the rising real interest rates in these markets in the absence of concessions, the debt burden of many developing countries is not likely to abate in the foreseeable future.
Thus, part of getting out of debt is related to events in the international sector—impinging heavily on the actions of the developed countries vis-à-vis protectionism, cost of doing business (interest rates, etc.), aid/resource flows in real terms to the developing world, and a commitment to achieving the Sustainable Development Goals (SDGs) by 2030. Both the developed and developing countries need to take these issues into account in their trade and other economic activities. Are the HIPCs, public-private partnerships and Economic Partnership Agreements (EPAs) between ACP countries and the European Union likely to be the solution to the problem of debt or the indebtedness of the Third World? This is a highly moot issue.
Uganda is, needless to state, negatively affected, like other Third World countries, by the burden of the debt. Due to this pressure of the debt burden on the country, the Uganda Government has tried to follow its debt management strategy. The strategy requires any new borrowing to be on highly concessionary terms. A minimum of about 80 per cent of borrowing should be on the International Development Agency (IDA) terms or better (i.e., 40-year maturity, 10-year grace period, and 0.75 per cent interest rate). The remaining borrowing should also be on highly concessional terms (23-year maturity, 6-year grace period, and not more than 2 per cent interest rate). Efforts to obtain relief from non-Paris Club bilateral creditors on terms comparable to those of the Paris Club members are always ongoing.
The debt burden is an uncomfortable noose around Uganda’s neck—a noose that is getting tighter and tighter as time goes on. This is why the IMF Executive Board remarked as follows:
‘Directors stressed that safeguarding debt sustainability should be a priority. In this regard, they called for continued domestic revenue mobilisation and sound project implementation, especially to realise the envisaged growth dividend from infrastructure investment. They advised the authorities to target the projected debt trajectory to provide a buffer relative to the Charter of Fiscal Responsibility’s debt ceiling in case of adverse shocks (IMF Report, 2017, p. 3).’
Other Irrelevancies in Mwenda’s Article
Mwenda poses another rhetorical question: “Do our investments in transport and energy infrastructure have a good rate of return?” Compared to investments in agribusiness and other types of industry, as well as in services, the answer is definitely ‘no’. Returns on investment in the infrastructure, compared to investment in the secondary and tertiary sectors or superstructure, are spread over a long period of time. In the short and medium terms, the returns are normally low. However, available evidence shows that investments in the infrastructure provide not only a necessary but a fundamental and sufficient condition for long-term growth and development.
This means in the short and medium runs, the borrowed funds (even without corruption and the shortcomings noted earlier) are bound to generate less dollars than required—thereby straining the debt servicing and debt repayment capacities or capabilities of the borrower country. One expects that the situation may change for the better in the long run as a result of, among other things, multiplier and trickle-down effects emanating from the fundamental and sufficient condition referred to above. This is what Mwenda should have stated and discussed in fair detail.
The last part of Mwenda’s article is interesting and contains some relevant discussions on deficiencies in policy and project coordination, need to plan how the extra power will be used, and so on. But the part is full of additional irrelevancies. The electricity indeed facilitates pupils and students in rural areas to read, just like Tirinyi Road enables peasants to dry their cassava on the road edges, the infrastructure may indeed adduce votes for politicians, etc. But do these activities generate the dollars needed to service the debt and finally amortise it?
In my opinion, given evidence-based, objective, intellectual analysis, it is self-evident that Uganda definitely needs to worry a lot about her growing public debt. The talk-show panelists may not have been as analytical as was necessary, but they were not off the point considering their varied potential audiences. One of the ways to oppose their views is to come up with more believable, robust and coherent empirical evidence showing that indeed Uganda’s debt is sustainable.
Mwenda’s article is coherent, well-sequenced, spiced with political undertones, full of diversions and irrelevancies, and based on his usual arrogant stance, but lacks objective, intellectual analysis and focus with respect to the topic under discussion. Hence, its value-addition is minimal. This is the considered view of the writer, an nth-rate economist—the n ranging from one to infinity.
Magnitude of the reverse flow of resources from Africa
In this annex, the reverse flow with regard to Africa is highlighted. Anup Shaw states that “Africa is rich – but the rest of the world is benefitting from its wealth.” His report reveals that countries in Africa are rich; however, this wealth is not benefitting African citizens, but the rest of the world.
According to him, whilst countries in Africa receive $162 billion in resources such as aid, loans, and foreign investment, a whopping $203 billion is taken out, mostly by multinational corporations, debt payments, tax dodging, and the costs imposed by climate change caused by the rest of the world—as the diagram below shows.
In total, the rest of the world receives more than $41 billion a year from African countries. This is more than enough money to provide decent healthcare to all people in Africa. This stands the story about poverty on its head.
Africa is already rich. According to Shah, what is needed, therefore, are policies that mean that ordinary Africans benefit from this wealth, rather than seeing it taken out by multinational corporations and global elites. If ordinary Africans could benefit from this wealth, it would help provide education, clean water, housing, and so forth.
Action is needed to address the causes of poverty in Africa. These causes include: tax dodging, a lack of corporate regulation, debt, climate change and unfair trade policies—occasioned by the continent’s aid donors. The diagram/map below summarises this view of Africa’s exploitation.
Given this situation and the logic or philosophy, Africa is in the real sense the foreign aid donor, while the rest of the world is actually the recipients of Africa’s aid. This is food for thought!
The writer is a professor of Economics