Govt breaches own debt management targets 

A high debt stock puts pressure on domestic revenues. Photo / Edgar R Batte 

What you need to know:

  • The breaches saw Uganda’s overall risk of debt distress downgraded to a negative outlook from B+ Stable

Government failed to live within its set debt targets that had envisaged it would ensure sustainable debt management in the five years to 2023. 

In details contained in the Public Debt and Other Financial Liabilities Management Framework (PDMF) 2023/28, the Ministry of Finance said the breach and failure to implement certain provisions, therefore, saw Uganda’s overall risk of debt distress shift from low to moderate, with Fitch, revising the country’s credit rating from B+ Stable to a negative outlook.

“The 2018 PDMF review indicates that [government] did not fully implement provisions and thresholds outlined in the previous PDMFs. This ranged from failing to meet set borrowing thresholds and interest rate controls and failure to implement policy actions for debt management,” the Framework, which covers the period between 2018 and 2023, reads in part. 

Consequently, the Ministry of Finance noted, development partners were now closely monitoring Uganda’s borrowing capacity to ensure that debt is well managed, sustainable, and transparent.

“Government, over the past medium term, has breached some of the set borrowing benchmarks in the 2018 PDMF … and has not realised success in areas regarding fiscal consolidation,” the Framework reads in part, further noting that the new PDMF, which covers the five years to 2028, will, therefore, address breaches and shortcomings, while at the same time devise effective strategies to achieve targeted thresholds.

Under the 2018/23 Framework, government had targeted to keep the stock of domestic debt at or under 15 percent of gross domestic product, but the ratio surged to 18.7 percent, closing the 2022/23 financial year at Shs44.6 trillion, which was Shs8 trillion higher than the targeted Shs36.6 trillion.  

Other breaches included failure to keep domestic debt interest payments at 12.5 percent - which rose to 18.2 percent of gross domestic product - while total expenditure on domestic debt rose to 13.4 percent against a planned 10 percent due to increased borrowing to meet public expenditure pressure.  

However, the Ministry of Finance yesterday said certain elements such as interest rates were out of its control about debt servicing because they are market-determined.

“As a Ministry, we don’t have control on interest in debt servicing; it is demand and supply driven based on developments in the global economy and the domestic economy as well,” Dr Albert Musisi, the Ministry of Finance commissioner for the macroeconomic department, said in an interview, noting that interest rates had gone up following an increase in global inflation as developed economies raised policy rates to control inflation.

Therefore, the Ministry of Finance said that in the 2023/28 Framework, which was released on Monday the PDMF had provided essential guidance in the acquisition, utilisation, and management of public debt, contingent liabilities, and domestic arrears to promote responsible borrowing and align with the evolving economic landscape, policy changes, and global financial market conditions. 

The new Framework also emphasizes the use of a mix of concessional, non-concessional, and alternative financing options, while at the same time, stresses debt sustainability, diversification of financing sources, and transparency in debt management.

As of June 2023, public debt had risen to Shs96.1 trillion ($25.3b), and projections indicate that it will by June 2025 surpass the Shs100 trillion mark, given that government intends to borrow Shs13 trillion in the 2024/25 financial year.  

Public debt has increased rapidly, rising from 34.6 percent of gross domestic product in 2019 to above 50 percent, and is projected to increase further to about 53 percent in the current financial year.  This is above the IMF recommended threshold of 50 percent for low-income countries. 

Impact of global factors

According to Dr Musis, the effect of Covid-19 and disruption in the global supply chain saw major economies such as the US raise interest rates, which contributed to higher debt servicing costs for Uganda. 

“For instance, we used to pay an interest rate on debt payments at 3 percent before but has more than doubled; we are paying 10 percent on debt servicing, this is the reason why the interest rate on debt serving has dramatically increased,” he said, noting that internally Bank of Uganda has raised the Central Bank Rate from 6.5 percent to 10 percent, which in turn contributed to a rise in interest rate payments in domestic debt servicing. 

Dr Musis also said Covid-19 caused a rise in Uganda’s stock but remains within sustainable levels, though he noted, it has now moved to within moderate risk levels.

Government posts Shs160b revenue shortfall   

Meanwhile, government registered a revenue collection shortfall of Shs160.31b in January, signaling a slow economic environment in the first month of 2024. 

During the month, according to the Ministry of Finance Performance of the Economy report for January, government collected Shs2.22 trillion against a target of Shs2.385 trillion, posting a revenue collection performance rate of 93.3 percent.  

The shortfall, the report noted, resulted from a lower-than-expected collection from both tax and non-tax revenues. Tax revenue collections amounted to Shs2.12 trillion, posting a 95.9 percent performance against the planned Shs2.21 trillion due to shortfalls in indirect domestic taxes of Shs55.8b and taxes on international trade of Shs66b, which more than offset a Shs39.7b surplus registered for direct tax collections during the month.

During the month, indirect domestic tax collections amounted to Shs575.3b, implying a 91.2 percent performance rate against the planned target of Shs631.2b.  

This was on account of lower than planned collections from value-added tax and excise duty, occasioned by tax administration challenges such as the difficulty in effectively implementing EFRIS and the Digital Tax Stamp. 

Taxes on international trade registered a shortfall against a planned Shs877.2b target due to lower-than-projected value-added tax and excise duty-rated imports. 

Direct domestic taxes posted a surplus, rising to Shs739.5b against a planned Shs699.8b target due to surpluses in pay-as-you-earn, corporate tax, and withholding tax collections. 

The report shows that during the month, government expenditure and net lending amounted to Shs3.17 trillion, against a target of Shs4.15 trillion due to lower-than-planned spending for domestically financed expenditure on both development projects and recurrent items.