How public debt will delay Uganda’s middle income aspirations

What you need to know:

Rising debt. Uganda’s total public debt has risen up to Shs73.7 trillion. If public debt is not tamed, it will have a huge impact on the economy that is trying to pick up the pieces following the disastrous effects of Covid-19. 

With the sky rocketing public debt, the aspirations of attaining the much-sought after middle income status, may once again prove elusive, according to experts.

By the year 2020 when the second phase of the National Development Plan came to close, the country should have attained the lower segment of the middle income status which didn’t happen – and it wasn’t because of the Covid-19 pandemic that struck the world. The signs were on the wall long before the pandemic proved that these aspirations were a pipe dream as a result of inadequate funding and improper coordination by government ministries, departments and agencies, according to National Planning Authority assessment.   

With the middle income status, the per capita income also known as income per person would be in the range of $1,033 (nearly Shs3 million). Currently, Uganda’s per capita income is $733 (about Shs2.5 milion). World Bank ranks middle income countries as those whose income per person averages between $1,036 (Shs3.6 million) and $12,615 (Shs44 million).

According to economists, and government technocrats, for most Ugandans to annually earn the above amount of money, majority of the population will have to be engaged in the money economy which according to President Museveni, is one of government’s outstanding challenges.

The latest National Labour Force Survey (2016/17) found that most Ugandan youth aged 18-30 years are either unemployed or employed in the informal sector. Less than 15 per cent had formal jobs.

About seven in every 10 Ugandans are engaged in agriculture, doing subsistence farming with hardly any surplus for the market.

The 31 per cent of Ugandans already in the monetised economy are facing the high cost of doing business, which limits their effort to create wealth and more jobs — for youth and nearly 70 per cent in the subsistence sector.

This explains the already narrow tax base that government is counting on to collect the much-needed revenue that will finance Uganda’s incremental national budget.    

As long as public debt is not tamed or put to good use, it will have a huge impact on the economy that is trying to pick up the pieces following the disastrous effects of Covid-19.

“Uganda’s public debt is growing amidst inequitable growth, increasing poverty and no shared prosperity,” reads part of Uganda Debt Network (UDN) analysis on the correlation between debt and middle income status.

For example In a period of 1 year, Uganda’s total public debt increased from Shs65 trillion as at December 2020 to Shs 73.7trillion (in nominal terms) at the end of October 2021, according to state of the economy report. The increase in debt was due increase in domestic debt.

Covid-19 not only increased public expenditure needs but also reduced the revenue collection potential of government. As a result, Parliament in 2021 approved Shs3.7 trillion (8 percent of total budget) for supplementary expenditure.

The source of funding the supplementary expenditure was indicated as additional borrowing; thus government acquired to the tune of $1084.8 million ($891 million as loans, $84.4 million as grants and in kind cash donations worth $109.7 million) in form of loans, grants and donations to save the economy from pressures ocassioned by the pandemic.

“How then are Uganda’s debts expected to be paid off if increased borrowing is followed by increasing poverty?” reads the UDN analysis.

On middle income status

As Uganda aspires to become an upper-middle-income country by 2040, which is classified by the World Bank as a country with Gross National Income per capita income above $4,096 (Shs14.5 million) – which is far and above Uganda’s latest figure under $1,000 (Shs3.5 million), the country must urgently find a solution to the debt problem which is already draining the national budget.

Despite government’s efforts towards economic growth, poverty reduction policies, programme and project interventions, all is not well with Uganda’s economy as inequality and poverty remain prevalent, a team of UDN researchers in their monthly publication noted. 

“The Gini coefficient – the measure of the degree of income inequality shows, a wide income gap between the poor and the rich in Uganda and has remained largely constant at 0.41 for over nine years. Using a scale of 0 to 1; zero being an equal income distribution and 1 denoting perfect income inequality,” reveals the expert analysis.

Uganda’s inequality has been aggravated by the Covid-19 pandemic, uneven land distribution and the complex land tenure system. Other factors are household sizes, disparities in access to education, inequalities in employment opportunities, urbanisation and generational poverty.

Impact on key sectors…

According to the latest National Household Survey, Uganda’s monetary poverty level (proportion of the population earning below $1.04 per day) has deteriorated in the last nine years, from 19.7 per cent in 2012/13 to 21.4 per cent in 2016/17. The number of poor reached 8.7 million people in 2019/20, from 6.6 million in 2012/13. This, despite economic growth averaging 4.7 per cent over the period.

As far as health financing, Uganda’s total health expenditure is estimated at $36.9 which is much lower than the World Health Organisation recommendation of $86 as a minimum per capita spending in low-income countries. The disturbing news, however, is that the government will no longer finance arrears.

In her presentation during the Stakeholder’s dialogue on shaping Uganda’s fiscal and monetary policies for inclusive and Sustainable Health Sector financing recently,  Ms Imelda Namagga, a Budget Advocacy Advisor disclosed: “All arrears shall be deducted from the vote’s MTEF allocations for the following year and this will take first call on the available resources.”

She continued: “Out of the verified domestic arrears of Shs4.5 trillion, the government has committed to settle Shs395.5 billion (only 9 percent) of which a few health votes are beneficiaries.”

However, in FY 2022/23, there is a shortfall of Shs3.7b for water and electricity for regional referral hospitals (that is Naguru 0.8b, Gulu 0.35b, Yumbe 0.35b, Mbarara 0.6b, Soroti 0.3b, Kawempe 0.65b, Hoima 0.35b and Lira 0.3b).

Nexus between fiscal and monetary policies and their implications on health sector

Dr Richard Ssempala, a health economist at Makerere University School of Public Health says with interest payments accounting for Shs12.7 trillion of the budget- key economic sectors will likely continue being underfunded as has been the case in the last six years.

The same will apply to Works and Transport (Shs5.9trillion), Education ( Shs3.7 trillion) and tourism.

Ms Peninnah Mbabazi, a policy analyst on debt and aid says: “Uganda got relief funds from the International Monetary Fund (IMF) to help us recover from the Covid- 19 pandemic. However, transparency in the utilisation of these funds has been a problem and a public outcry.”

Ms Jane Nalunga, executive director, SEATINI Uganda, reiterated that middle income status can only benefit Ugandans who are healthy. Therefore, government should ensure equitable and sustainable health sector financing.

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