Uganda needs to keep an eye on how much it’s paying for its debt

Monday May 20 2019

Ms Mira is the Resident Representative Uganda,

Ms Mira is the Resident Representative Uganda, IMF. The article is co-authored by Ms Aidar Abdychev, a Senior Economist, IMF, and Aminata Toure, a Senior Economist, IMF. 

By Clara Mira

The International Monetary Fund’s (IMF) latest country report on Uganda looks at public debt and the way the government develops and implements its annual Budget. The IMF finds that Uganda’s debt remains at manageable levels (41 per cent of GDP), though interest payments are taking up an increasing share of government revenues. The report also argues that the annual Budget provides too little guidance for government spending and borrowing. Development spending typically falls short of budget plans, while current spending usually exceeds initial targets, requiring so-called “supplementary” budgets to authorise the additional spending. As a result, borrowing from banks is often higher than expected, pushing up interest rates.
One part of the IMF’s annual report is a deep dive into Uganda’s public and external debt, a so-called debt sustainability analysis. We find Uganda’s public debt remains manageable, receiving a “low risk of debt distress” rating. However, the report emphasises that public debt has increased by 12 per cent of GDP over the past decade to 41 per cent of GDP in FY17/18. Public debt is projected to peak at over 50 percent of GDP over the next three years.
The finding that debt remains manageable is conditional on the government being able to achieve four policy objectives which they discussed with the IMF. First, the government continues to strengthen its public investment management to ensure that infrastructure investments generates the targeted growth dividend. Second, once the currently planned projects are completed, infrastructure investment is scaled back, and the rate of borrowing slows. Third, the government will take measures to increase revenue collection annually by ½ per cent of GDP over the next five years. And fourth, oil production and exports will start by 2023.
While the level of debt remains manageable, interest payments are starting to bite. For the next fiscal year FY19/20, the IMF projects that interest payments will take up 20 per cent of government’s revenue. In other words, one in five shillings collected in revenue will go to pay for interest. This is a shilling that cannot be spent on teachers, nurses, or other policy priorities.
Given Uganda’s low revenue collection, the Budget process is crucial to choosing between competing policy priorities and then implementing these choices. The IMF report notes that in recent years, Uganda’s annual budgets have provided only limited guidance to how government spends its money. Development spending has consistently fallen short of Budget expectations. At the same time, current spending has often exceeded Budget expectations—current spending includes government wages, interest payments, and other items necessary to run a government. Moreover, the National Planning Authority finds that Budget outcomes are not well aligned with the priorities set out in Uganda’s National Development Plan. As a result, projections of government debt have been revised up regularly from one Budget to the next. For example, in 2013, public debt was projected to peak at 31 per cent. In 2016, public debt was projected to peak at 44 per cent. And today, before the FY19/20 Budget has been finalised, public debt was projected to peak at 50.7 per cent in 2021/22.
Uganda can strengthen its Budget process to make the annual Budget more binding and keep debt on the envisaged path. One option for this is to re-introduce a contingency reserve. By setting aside some resources for unforeseen developments, the government would not have to cut spending in other areas or turn to additional borrowing when an ad-hoc spending needs arises. Having a truly binding Budget ultimately depends on strong political commitment to operate within the parameters set by the Budget. In addition, some countries find it useful to adopt a fiscal rule that charts a clear course for fiscal policy. The IMF report suggests that Uganda adopts a debt ceiling of 50 per cent of GDP as a firm anchor for fiscal policy.
Such a fiscal rule will become even more important once Uganda starts oil production. Revenue from natural resources such as oil tend to be very difficult to predict. A fiscal rule can help the government to see through such volatility and keep spending and debt on a steady path.
The Pula Fund in Botswana is a good example of such a fiscal rule. The government has started to develop such a rule which would help ensure that Uganda realises the maximum benefit from its oil wealth.
The success of the government’s development strategy also depends on two reform areas. First, the government has developed a Domestic Revenue Mobilisation Strategy to raise revenue collection over the next five years and create space for additional spending. The draft strategy includes tax policy reforms, including a rationalisation of exemptions, and tax administration reforms to improve compliance. Second, the government is strengthening its public investment management practices in the areas of estimating the cost and benefits of a project, project selection, and project implementation.
Uganda must create more than 600,000 jobs per year to keep up with its growing population. Fiscal policy plays a key role for preparing the ground for this, including through investments in infrastructure and people. In this, fiscal policy needs to balance many conflicting needs and priorities. A strong Budget process and supporting reforms will help the government deliver on these objectives while keeping public debt at a manageable level.

Ms Mira is the Resident Representative Uganda, IMF. The article is co-authored by Ms Aidar
Abdychev, a Senior Economist, IMF, and Aminata Toure, a Senior Economist, IMF.