Uganda walks a tightrope as public debt soars 

Uganda’s economy could be placed in a chokehold as burgeoning public debt and interest to creditors continues to spiral restricting expenditure towards the most productive sectors. 
“You heard your budget of Shs52 trillion. While I support that budget because there is no other solution in the short run, it is important to know that Shs17 trillion is to pay debts,” President Museveni posted on Thursday shortly after the National Budget for Financial Year 2023/24 was read. 

READ: Shs89 trillion public debt lingers over new budget

“Many of these debts were being pushed by these neo-colonialist public servants until recently when I put my foot down and insisted on approving every loan,” the President added.

The Shs17 trillion of the total budget vote of Shs52.7 trillion for the upcoming financial year represents 32.25 percent, which eclipses the combined expenditure on the ministries of Defence, Health, Education and Sports, Works and Communication, Energy and Mineral Development, and Agriculture.

From Financial Year 2015/16 to Financial Year 2020/21, a significant amount between 25 percent and 27 percent of the entire budget vote was committed to interest payments.
 There are fears that if payment on debt and interest grows by the same margins in the next financial year, the expenditure will raise to about Shs23 trillion, which is nearly half the budget for this financial year.

This comes at the time borrowing options for Uganda, especially from the International Development Agency, a branch of the World Bank, and IMF—which provide long-term financing at low or no interest rates, are increasingly limited after the Anti-Homosexuality Act was enacted. 

“The World Bank Group is highly concerned with Uganda’s enactment of the 2023 Anti-Homosexuality Act.  If implemented, the Act would endanger people by placing an added barrier to vital medical care, disease screening, and precautions.  Further, the Act is not consistent with the values of non-discrimination and inclusion that the institution upholds.

To achieve its goals of ending extreme poverty and boosting shared prosperity, the World Bank Group places inclusive development at the forefront with a focus on all groups, especially those who are marginalised, disadvantaged or vulnerable,” reads a statement issued on May 31.

With the need to raise funds to fund the budget, experts are warning that the government will be tempted to seek non-concessional loans, which offer high and notoriously-fickle interest rates. 

Dr Fred Muhumuza, an economist, on Friday told this publication during a post-budget debate held at the Serena Conference Centre that, “Global interest rates are actually rising, so going for external borrowing you are walking into a space of rising interest rates. You are also putting your reserves in danger because if exports don’t perform, your reserves will disappear.”

The non-concessional options available to the government to borrow include bilateral lenders such as China. Presently, at least 20 percent of the debt Uganda owes to bilateral lenders is to China. Other lenders include the Paris Club, a group of 22 wealthy nations, including Japan, United States, United Kingdom and France. There is also an option to borrow from pension and provident funds as well as offshore lenders.

Early this month, government tabled a loan request worth euros 500 million (Shs2 trillion) from a Kenyan firm, Amarog Capital and Sovereign Infrastructure Group.  

 
One of the agreement clauses for this non-concessional loan, it reads: “In furtherance of the foregoing, the borrower hereby irrevocably and unconditionally agrees that should any proceedings be brought against it or its assets in any jurisdiction in connection with this agreement or any of the transactions contemplated hereby and thereby, no claim of immunity from such proceedings will be claimed on behalf of itself or any of its assets, it waives any right of immunity which it or any of its assets now has or may in the future have in any jurisdiction in connection with any such proceedings in any jurisdiction to the giving of any 14 relief or the issue of any process in connection with such proceedings including the making, enforcement or execution against or in respect of any of its assets whatsoever regardless of the use or intended use of the assets.”

The Director of Research and Policy at Bank of Uganda, Dr Adam Mugume, says: “What happened with Amarog was that it is true that it is a new company, a fund mobiliser. No hint on its fund performance. The question was how can the government use that as an agent to get external loans?”

He adds: “However if the government chooses to borrow commercially which the new budget is trying to down play, then there are many alternatives. The banks here, the commercial banks themselves, the international banks can organise a good syndicate loan but it will be at a high price.”
With such onerous borrowing terms, MPs who rejected the loan approval expressed fear that the country could stake its national assets. 

This comes at the time Chinese lenders continue to impose stringent conditions on low-income country borrowers as they seek to hedge risks. However, most of the Chinese loans to Uganda are under concessional terms from the Exim Bank. 

Some of these stringent conditions were imposed on the deal to borrow $200 million from China’s Exim Bank for the expansion and modernisation of Entebbe airport. 
The Ugandan government is required to channel all revenue into an escrow account, according to the contract obtained by AidData, a US-based research lab.

Although Chinese creditors have required sovereign borrowers to place revenue from the project in escrow as a repayment security more frequently than other development lenders, the Entebbe agreement goes further. “The sales collection account shall be used to collect the revenues of Entebbe International Airport [including but not limited to revenues generated from the project)],” it stipulates.

With the government expected to continue financing the budget deficit, which is attributed to government expenditure exceeding its revenue raised from taxes, fees and licenses— borrowing is projected to continue in the short term, necessitating the government to acquire loans in foreign currency and domestically. 
 
This comes at the time government continues to spend more on the recurrent expenditure than development priorities, as the bulk of the funds are doled out to sustain the creation of new administrative units, cities and wages for political appointees. Many of these units are not viable in terms of raising domestic revenue and yet they are financed by debt. 

The opportunity cost of public administration manifests in the form of reduced expenditure on strategic sectors such as health, education and science and innovation. 
 
On the face of it, the government recognises this folly and has declared a freeze on the creation of new administrative units, a scaling down of foreign travel and spending cuts on the procurement of motor vehicles by public servants and government officials. 

According to the Finance ministry’s debt sustainability analysis report for 2021/22, increasing commitments to debt servicing increases the risk of debt distress. The drivers of the increased debt service burden are increased domestic interest rates linked to inflation which the Central Bank combats by raising its interest rate. 

Higher interest rates are generally a policy response to rising inflation. Conversely, when inflation is falling and economic growth slowing, central banks may lower interest rates to stimulate the economy. 

Uganda’s credit rating among agencies such as Fitch is languishing in the basement as a negative outlook signals increasing risk to lenders who will likely provide loans to Uganda on stringent conditions. This rating is related to the reduced availability of cheap or concessional external loans to fund large budget deficits.

Additionally, Uganda’s foreign reserves are depleted. According to Fitch, Uganda’s international reserves declined by 18 percent to $ 3.6b at the end of 2022.  It is these reserves that will finance the external debt, which is repaid in foreign currency.

Secretary to the Treasury Ramathan Ggoobi, revealed that, “Bank of Uganda’s foreign exchange reserves have recently been strained by the high cost of servicing the large amount of external debt. Though they are still adequate and steadily accumulating.”

Dr Mugume says: “Our reserves are declining as we were unable to buy dollars from the market because offshore investors in the domestic money market are exiting. They are exiting because global interest rates are more attractive abroad. So if you are unable to buy dollars from the domestic money market, then it means your reserves become weak and yet debt servicing is on the rise.  You are talking of debt servicing every year of $1b, if you are unable to buy dollars, it automatically means reserves are declining and, therefore, that is a risk.”

A major source of foreign currency is exports, which is key to Uganda’s prospects of avoiding debt distress in the mid-term. Uganda’s main trading partners are Kenya, South Sudan and DRC. So, the non-tariff barriers to trade in the EAC region, affecting milk and maize exports to Kenya and South Sudan respectively, do not bode well. This also comes at the time the export of goods to the US market under the African Growth Opportunity Act may be placed on a freeze after the enactment of the Anti-Gay Law. 

Foreign direct investment is critical for foreign capital inflows necessary to finance Uganda’s growing external debt. Uganda’s prospects for attracting foreign direct investment are reliant on the oil and gas sector. 

Hoping on oil
“We have fully capitalised Uganda National Oil Company as the government of Uganda from taxpayers’ money. We have not borrowed a coin and they are co-investing with TOTAL and CNOOC and other companies to ensure all our activities are on schedule,” Mr Ggoobi told  Monitor at the post-budget debate.

With support from European banks towards financing the $5b East African Crude Oil Pipeline that will transport Uganda’s oil over 1,443km from Lake Albert oilfields to the Tanzania port of Tanga, stalling, Uganda is now reaching out to the far-East. 

The Permanent Secretary at the Ministry of Energy, Mr Irene Batebe, told The EastAfrican in May that most of the money required to complete the project’s debt financing will come from the “main Chinese banks.”

According to a study released by the London-based Climate Policy Initiative Energy Finance, in December 2020, Uganda’s upstream oil reserves slumped by 70 percent in value over the last five years, compromising the economic viability.
These changes in global oil market have reduced the value of Albertine basin resource from $61b to $ 18b over the last five years, the report revealed.

“Market conditions for the global oil industry have changed so dramatically over the past five years that reserves of ‘cheap oil’ may no longer be worth recovering unless the Ugandan government can strike a new deal with its foreign investors that may put the country’s public finances under extreme pressure,” the analysis states. 

Furthermore, if the global market adjusts to a low carbon transition consistent with keeping global warming to well below 2C, a further $10b could be “stranded”, meaning Uganda’s oil assets would be worth 88 percent less than they were five years ago. Under a ‘business as usual’ scenario that assumes the transition does not take place, Uganda’s upstream oil reserves would be worth $18b, with the first oil being produced in 2024 and the industry lasting between 25 and 40 years. 

In 2006, when commercially recoverable oil was confirmed in the Albertine Basin, Brent crude prices hit $78 a barrel, peaking two years later at $143. At that time, Uganda’s government had high expectations that this valuable export commodity would lift its economy, one of the poorest in the world, to middle income status within a decade. 

The 1.6 billion barrels of commercially recoverable reserves could have been worth (based on the net present value of future cashflows) $61 billion based on CPI’s long-term oil price projection from time of the original planned Final Investment Decision (FID) of 2015.

Public debt lingers over new budget
 By the end of this month, Uganda will owe lenders (local and foreign) a whopping Shs88.9 trillion, which is almost twice the Shs52.7 trillion budget announced for Financial Year 2023/2024. Of the total public debt, Shs47.9 trillion is owed to external lenders, while Shs33 trillion was contracted locally in Uganda.

 Although loan repayment is spread over several years, fears about debt sustainability (the ability to meet payment obligations) troubled economy watchers as the government showed little loss of appetite for borrowing this financial year.

 The government is, however, confident it is still within manageable limits with the country’s debt to GDP ratio standing at 48.6 percent, a figure slightly below the policy target of 50 percent of GDP, the minister said. 
Uganda’s public debt to GDP ratio is also within the 52.4 percent threshold recommended by the current Charter for Fiscal Responsibility (CFR) which will run up to financial year 2025/26.

 
Under Section 4(3) of the Public Finance Management Act, the minister for finance is required to prepare a CFR, which sets out government’s commitment to managing the country’s fiscal policy with clear and measurable objectives, and in line with specific fiscal principles, amongst which is “prudent and sustainable levels of public debt”.

Government proposes to spend Shs8.4 trillion on domestic debt financing, and another Shs6.1 trillion to clear interest payments. Separately, Shs2.6 trillion will go towards external debt payments.
The plan for maintaining debt sustainability includes ensuring effective implementation of the domestic revenue mobilisation strategy to boost the capacity to increase domestic revenue collection.

The government promised to reduce spending on areas of lower priority in order to support fiscal consolidation. It will also look at new sources of financing (climate and green financing, leverage private equity for infrastructure investments and scaling up Public Private Partnerships), among others.