Why is govt borrowing?

Monday May 10 2021
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President Museveni (centre) and other officials during the commissioning of a mobile transformer for the Mbale Industrial Park on November 25,2020. PPU/PHOTO

By Yasiin Mugerwa

The government will continue borrowing to bankroll what a minister says are flagship projects essential to spur the growth of Uganda’s economy, presently hamstrung by Covid-19 disruptions, potentially worsening the debt situation.
State minister for Finance in-charge of Planning David Bahati last Friday listed 13 projects that he said “must be implemented to spur the growth of our economy, support the industrialisation agenda, create wealth and jobs for Ugandans.” 

In nominal terms, the minister told Parliament that total public debt stock is expected to increase from Shs65.8 trillion (47.2 per cent) in December 2020 to Shs85.2 trillion in Financial Year 2021/22, representing 51.9 per cent of Gross Domestic Product (GDP) valued at Shs164.2 trillion. 

While a moderate debt improves welfare and enhances growth as government invests in priority sectors of the economy, economists say high debt levels can be damaging. This is why International Monetary Fund set 50 per cent debt-to-GDP ratio threshold.
Daily Monitor has provoked debate over government debt and its damaging effects to economic growth. Last week, MPs picked interest in the issue, and ordered Finance minister Matia Kasaija to present a comprehensive statement on the status of the country’s debt and plans to avert an impending crisis.

As of end December 2020, total debt stock was $17.96 billion (equivalent to Shs65.83 trillion) indicating an increase from $13.3 billion (equivalent to Shs49 trillion) at end December 2019.
Of the total public debt stock, external debt constituted a share of 64.98 per cent, equivalent to $11.67 billion (Shs42.6 trillion) whereas domestic debt constituted 35.02 per cent, equivalent to $6.29 billion (Shs22.9 trillion)

Government explains debt crisis
Mr Bahati, however, explained that the government was equally “concerned” about the rise of the debt, and that the ministry would propose some reductions in public spending plans for Financial Year 2024/25.
The lawmakers, one after the other, admonished the growing debt burden and talked of increased risk of a fiscal crisis, limited revenue for investments, and higher inflation as well as undermining investor confidence and weakening of the shilling against the US dollar.

Mr Bahati, however, remained poised all through the debate and when Speaker Rebecca Kadaga asked him to respond, he talked of “cautious borrowing” against competing demands, and singled out key prioritised infrastructure projects, especially in the transport and oil and gas sectors.
In the next few years, Mr Bahati told MPs, “public debt is projected to increase mainly on account of: the need to implement the NDP III and programmes in the NRM manifesto; the necessity to finance key infrastructure projects such as the Standard and Meter Gauge Railway, the East African Crude Oil 8 Pipeline, and the oil refinery, among others, especially in the transport and oil [and] gas sectors.”


The minister discounted members’ concerns about “debt unsustainability” and reiterated that “The Debt Sustainability Analysis, which was conducted by my ministry at the end of FY 2019/20, identified vulnerabilities in the medium term.  However, public debt is projected to remain sustainable and was 47.2% of GDP at the end of December 2020.” “Uganda’s debt remains sustainable and we are continuing to meet all our debt service obligations without deferral or defaulting as per the requirements of the Constitution,” Mr Bahati said, adding: “We are at low risk of debt distress and, therefore, can continue to cautiously access financing on both concessional and non-concessional terms.”

Mr Bahati revealed that debt is projected to decline with effect from 2013/24 (49.9 per cent), 2024/25 (48.7 per cent) and 2025/26 (47.4 per cent) of GDP, largely on account of increased domestic revenue as government implements the Domestic Revenue Mobilisation Strategy (DRMS), which targets to increase domestic revenue to GDP by 0.5 percentage points per annum. Despite the negative effects of Covid-19, the minister revealed that the economy has been resilient and is projected to grow at 4.3 per cent in FY 2021/22 and thereafter at the levels of 6 per cent or above in the medium term.

House Public Accounts Committee chairperson Nandala Mafabi told Daily Monitor at the weekend that the debt crisis in the country reflects a huge increase in government spending, citing coronavirus interventions and poor domestic revenue collections impaired by the lockdown.
“The rising debt in the country needs to be investigated. We are paying billions of shillings on unutilised loans through annual interest payments and commitment fees. This is nugatory expenditure, and the people responsible must be punished,” Mr Mafabi said.
“We have borrowed trillions of shillings for infrastructure projects with hope that people’s situation in the pockets will improve.  Unfortunately, money is in the hands of few people and most of Ugandans are struggling to make ends meet.”

In his report to Parliament, Budget Committee chairperson Amos Lugoloobi noted that the ratio of domestic interest cost to revenue (excluding grants) is projected to increase to 17 per cent in FY 202l/22 from 16.1 per cent at the end of FY 2020/21.
“This is above the public debt management threshold of 12.5 per cent; it implies that government is spending more revenue on domestic debt service at the cost of service delivery and, therefore, less discretionary budget is available for expenditure in other critical areas,” Mr Lugoloobi said.

In order to reduce the pace of debt accumulation, especially in relation to budget support, the budget committee recommends that “government should halt creation of administrative units and expedite the merger of institutions to eliminate duplications and wasteful expenditures, thereby reducing the need to borrow for budget support.”

 Debt challenges
Mr Bahati acknowledged inadequacies in debt management and historical challenge of slow disbursement of debt on funds procedures and conditions attached to specific projects. The minister also cited counter-part funding requirements and other conditions. This, Mr Bahati said, has progressively been addressed, and that absorption capacity in relation to the budget increased from 40 per cent in March 2020 to 60 per cent in March 2021.

He added: “There is also weak project implementation capacity, delays in procurement processes, challenges with rights of way and compensation issues. We are also working with accounting officers to ensure that contract management issues are addressed. We are reviewing poorly performing projects with the intent of either cancelling or restructuring.”