Public debt crunch bites as gov’t freezes borrowing

For far too long, government’s overzealous appetite to borrow has been uncontrollably evident, often times triggering fear of driving the country into a looming debt trap, Prosper Magazine has established. 

Over the years, a number of policy experts, economic analysts and a section of civil society organisations have made their position clear, saying the government’s appetite for borrowing, will land the country into a slippery ground— a situation many analysts believe the country’s economic managers now seem to find themselves in.

Going by the revised budget call circular issued about a fortnight ago by the Ministry of Finance Secretary to the Treasury, Mr Ramathan Ggoobi, directing a freeze in acquisition of new loans beginning next financial year, barely three months away. 

Public debt hits Shs86 trillion
With the country’s public debt standing at Shs86.6 trillion as of June 2022, according to the Auditor General’s report for the financial year 2021/2022, it is no wonder that the reality check is finally setting in as evidenced by the urgency in the official government document specifying the framework and technical procedure for preparation, submission of revenue and expenditure estimates for the next financial year.

Currently, external debt servicing will require about $1 billion (Shs3.7 trillion) per year in the next two to three years, according to director research at the Bank of Uganda, Dr Adam Mugume.

This requires Bank of Uganda to purchase the same amount from the market, otherwise international reserves would be drained. Worth noting is that the sum of revenue that will be saved is worth nearly twice an amount of money the Financial Year 2023/24 budget is projected to increase with.

“Therefore, suspending external borrowing that would put additional pressure on reserves is a welcome move,” Dr Mugume told Prosper Magazine when contacted last week.

Ambitious borrowing
Described as “interesting development” by quarters familiar with workings of national budget, debt and related policies, the question, however remains: Is this an indication that government has realised its uncontrollable borrowing and the abyss it is about to plunge in at a time when the economy is not generating enough economic activities to tax from?

“I think the announcement that has just been made by the government not to borrow in the short to medium term is very interesting especially at this time when there is pressure on government resources,” says Mr Stephen Kaboyo, the managing director, Alpha Capital Partners, an indigenous firm focusing on sovereign asset management, foreign exchange trading strategies and financial markets advisory.

Speaking in an interview, the former director financial markets at Bank of Uganda, noted that the directive by the government to freeze borrowing is as a result of years of undertaking what he describes as “ambitious infrastructure development programme” to establish dams and roads among other facilities.

He said: “While the intentions were very good, government took on much more than it could afford and I think that is where the genesis of this challenge comes from.

“When you look at the evolution of our debt, you will clearly see that both domestic and external debt stock has been consistently picking up. However, this announcement fits well in the saying: better late than never.”

He continued: “The debate on sustainability of our debt has been raging for a number of years now, but clearly it looks like we are headed for troubled water as the forecasts of 50 percent+ threshold, I think we must have passed it, therefore necessitating quick intervention in terms of how we can manage our debt, going forward.”

The finance ministry projects that Uganda’s debt is expected to peak at 53.1 percent in June 2023 and decline to below 50 percent by the Financial Year 2025-2026.

According to Mr Kaboyo, the directive to freeze borrowing for new projects is aimed at minimising the costs geared at debt servicing, unlock resources for productive sectors of the economy and importantly doing all this within the available resource envelope.

Saving international reserve
When contacted, the executive director for research at the Bank of Uganda, Dr Adam Mugume, it emerged that the policy to freeze borrowing in the next short to medium term which he said means one to three years, is not only logical but the right thing to do without a shadow of doubt. 

“The move to curtail further borrowing is a laudable policy since debt servicing as a ratio of tax revenue currently exceeds 30 percent. This implies that for every shilling collected as tax, 30 cents go for debt servicing, leaving limited amount for both recurrent and development expenditures,” Dr Mugume explained in his response to Prosper Magazine last week.

He continued: “Countries that haven’t failed to consider debt servicing burden end up in severe debt distress. Recent examples of these on the African continent include Ghana and Zambia.
“In Uganda’s case, there are two policy issues on further public borrowing. External borrowing on non-concessional terms with immediate debt servicing and domestic borrowing at high domestic interest rates.”

On the domestic borrowing, yields on government securities had risen sharply to somewhere between 15 to 17 for securities of about five to 10 years.

Dr Mugume discloses: “If the government was to continue increasing borrowing from the domestic market, yields would rise further. This would have a knock on effect on private sector’s access to credit and thereby constrain investment.”

According to Mr Corti Paul Lakuma, a researcher with the Economic Policy Research Centre (EPRC), although government is looking to freeze taking on new loans in the short to long term which essentially means over one to three  years, it doesn’t mean the directive is cast in stone, saying: “It could be shorter or longer.”

He said: “The text book view is that government borrowing crowds out the private sector. I wait to see whether  private sector borrowing will go up now that the public sector is not competing.

“The response will be marginal. There are other structural constraints beyond government borrowing that makes credit expensive in Uganda.”

Bitter pill to swallow…
Although there is a general concurrence with consensus to freeze borrowing for a while, something will have to give way.

 But, Uganda’s budget is heavily dependent on external support. Importantly perhaps, according to Mr Kaboyo, “very few governments survive without borrowing”.

Those that do always have to rely on the broader revenue tax base they command.   With a rather low tax to GDP ratio that stands at no more than 13 percent, reveals how insufficient the country’s national budget is to finance service delivery. 

In comparison with regional neighbours, Uganda’s tax revenue to GDP is still below the 16 per cent Sub-Saharan average and lags behind her EAC peers such as Kenya, Tanzania and Rwanda.

Further trend analysis indicates that government has been surviving on rolling over debts— renewal of a loan. Instead of liquidating a loan on maturity, government rolls it over into a new loan because it has no cash flow to offset.

“With rollover, you simply keep building up debt stock. At some point, it will cause problems, including refinancing risk, and I think that is where we are now,” Mr Kaboyo said in an interview with Prosper Magazine.

Further, with domestic rollover, lenders will demand a higher premium, and that affects the interest rate structure in the economy, crowding out the private sector, ultimately affecting growth.

Way out
Experts interviewed concur that freezing borrowing in itself without checking the under growth makes no logical sense. They also recommend that government’s habit of running a mismatched budget in terms of expenditure and revenue must stop. This is because government expenditure, over the years, has exceeded revenue collections, resulting into borrowing to finance the deficit.

And, the Shs50 trillion budget for next financial year should be adjusted downwards.
Then, as a matter of urgency, lenders must be engaged and the negotiation should seek for relief/debt forgiveness. Uganda Debt Network has since been urging government to take this route.  

When interviewed last week, the executive director of Civil Society Budget Advocacy Group (CSBAG), Mr Julius Mukunda, a strong believer of “cut your coat according to your cloth”, noted that it is about time: “We started biting what we can chew or else we will soon fall into much deeper trouble and find ourselves in a more difficult situation as is the case now.”

Although Mr Mukunda told Prosper Magazine that he sees a lot of sense in the measures taken by the Finance Ministry to freeze acquisition of new loans in the short to medium – equating it to a span of between three to five years period, he also warned the government to brace itself for the rough, bumpy ride ahead.

“There will also be a cost in terms of something giving way,” he said.
He continued: “Even the projected growth that government is talking about might not even be achieved because growth depends on how much money you have spent on particular things to revamp the hibernated economy.”

“There are certain goals and parameters that you would have wanted to achieve like reducing poverty and creating employment, but all those things could delay because of fiscal conservation—not spending the way you would want to.”

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