Government should manage debt as interest payment is not sustainable

Monday April 17 2017

Juliet Akello

Juliet Akello  

By Juliet Akello

Of the Shs28.9trillion national budget for the 2017/2018 financial year proposed by Ministry of Finance, Shs9.9trillion, equivalent to 34 per cent will account for debt repayment.
In March 2011, Uganda’s debt was $4.29b but it is expected to increase beyond $11b in next financial year, attracting interest payments. This is because government is focused on addressing infrastructural constraints in order to increase economic efficiency and reduce the cost of doing business.
As the gap between domestic savings and investment widens, debt and interest costs accumulate as government borrows more to re-finance maturing debt obligations. For instance, interest payments accounted for Shs309.4b in the 2007/2008 financial year, but are expected to amount to Shs2,739b (73 per cent payments on domestic debt) in the 2017/2018 financial year—an increase of 785.3 per cent.

Interest payments are increasingly becoming a priority, taking fourth position in 2015/2016 and 2016/2017 financial years and becoming third in the 2017/2018 financial year (12.2 per cent) with an average share of 10.4 per cent of government expenditure. This percentage doubles, triples and even quadruples some estimated sectoral allocations in the 2017/2018 national budget framework such as health (5.7 per cent), agriculture (3.8 per cent), water and environment (3.1 per cent), legislature (two per cent) and Social Development (0.8 per cent).
Uganda’s expenditure on interest payments consumes a huge chunk of national resources, which would be redistributed among other sectors to enhance service delivery efforts.
Therefore, need we ask why, our health systems perform the way they do, farmers’ cries are not adequately met and what about the safe water coverage? (though gradually improving).

A Bank of Uganda report (December 2016), already painted a worrying picture of Uganda’s changing and increasing borrowing trend to commercial rates hence calling for higher costs on interest payments.
Also, the IMF’s report (January 2017) , notes that vulnerabilities to debt distress have increased. Currently, loans under consideration by Parliament include: $210m for upgrading Rwekunye-Apac-Lira-Acholibur road project; $9.54m supplementary loan for the interconnection of electric grids of Nile Equatorial Lakes Countries; and$14.4m to support multinational Lake Victoria Maritime Communications and transport Project. These will definitely attract more interest payments.
According to Auditor General’s report (December 2016), the ratio of interest payments to total government revenue reached 16 per cent, beyond the 15 per cent cap set in the 2013 Public Debt Management Framework.

This rate is bound to increase and will definitely not be sustainable with more borrowing. Although infrastructural development is driving debt acquisition, it is apparent that future spending is on track to rise even higher. The implication is severe and pronounced for all Ugandans, especially the poor, elderly and future generation as taxes will be raised for revenue to meet interest payment costs besides principle debt amounts.
Our policymakers should learn experiences from Greece and Mexico to avoid a future fiscal crisis and economic stagnation brought about by public debt overhang.
Government should also manage the already poor performing loans before acquiring more to avoid undesirable consequences of future unsustainable debt.

Ms Akello works at Uganda Debt Network.