Public debt is a necessary evil

Saturday April 27 2019

Isimba Hydroelectric Power Station

Isimba Hydroelectric Power Station 

By Jacob Opio

The desire among governments to attain higher levels of economic growth and development makes public borrowing an inevitable option for financing strategic investments. Public borrowing enables governments to cover tax revenue collection shortfalls as it is expected to be repaid with flexible payment plans.

According to the Auditor General’s report (December 2018), Uganda’s public debt stock stood at Shs41.51 trillion. The government has been able to use borrowed funds to set up key infrastructural projects such as the recently commissioned Isimba Hydroelectric Power Station, Karuma Dam, Entebbe Expressway, renovation of Mulago Hospital and extension of Entebbe Airport and construction of Kabale Airport.

These projects have created several employment opportunities for citizens from which tax revenue is generated, business for local firms supplying raw materials, promoted urbanisation, and infrastructure development, among others, their quality assurance issues notwithstanding. This is clear evidence that public debt is a ‘’necessary evil’’.

However, there is a growing concern over the increasing foreign debt stock whose effective repayment may be interfered with in case of any external or internal shocks against our economy. Foreign debt is acquired in foreign currency majorly the United States Dollar, which is ever fluctuating. Considering Uganda’s balance of payment deficits in the recent past: Estimates from Trading Economics (February, 2019) reveal that the value of imports exceeded the value of exports by more than $308 million. This means that Uganda is giving away more dollars than it actually brings in, yet part of it is expected to be used for debt repayment.

Consequently, the repayment cost of foreign debt becomes quite high over time, further compounding the already existing budget constraints. Hence, projects implemented are achieved at a much higher “invisible cost’’. While the stock of domestic debt appears smaller and is accessed in local currency, it’s more costly to service. The only advantage is that its repayment eliminates risks of foreign exchange fluctuations.

To increase fiscal benefits, government should: Develop domestic financial markets by establishing transparent regulatory frameworks, and ensure the execution of well-coordinated fiscal and monetary policies. The more confidence the public has in the financial markets, the easier it will be to raise more credit to finance government projects.

Ensure effective management, utilisation and implementation of debt-funded projects. Government should penalise poor project implementers with attendant accounting officers since this translates into costly ventures, especially to the citizens with regard to poor standards of quality assurance.
Jacob Opio,