IMF warns government against excessive borrowing

Finance Minister Mr Matia Kasaija   

Kampala- The International Monetary Fund (IMF) has cautioned government against excessive borrowing and called for clear plans to fast track the implementation of the Domestic Revenue Mobilisation Strategy (DRMS).

Presenting the regional economic outlook for sub-Saharan Africa at Sheraton Kampala Hotel on Monday, the IMF resident representative in Uganda, Ms Mira Clara, said implementing fiscal consolidation plans should stabilise or lower debt ratios in Uganda and in regional countries.

“The IMF recommended Uganda to strengthen budget management and make the budget more binding as fiscal outcomes traditionally deviate significantly from approved budgets due to relocations, supplementary budgets and delays in implementation of the infrastructure investments, among others,” Ms Clara said.

She asked government to adopt a fiscal anchor to safeguard debt sustainability, establish an easily monitorable fiscal target that would provide effective guidance for resource allocation and spending control.

“Other key recommendations include continued progress towards strengthening public investment management. A more balanced composition of expenditure, ensuring that social sectors also get sufficient allocations and as a result health and education outcomes improve, is also a critical recommendation to support inclusive growth,” Ms Clara said.

Due to increased government expenditure, Uganda has continued to borrow externally and domestically to finance the persistent fiscal deficit in the budget.

The country is still categorised under a low risk debt distress nations, however, Ms Clara said one in five shillings collected in revenue is spent on interest payments in the financial year 2019/2020.

In the financial year 2018/2019, government allocated Shs2.514 trillion, which represented 10 per cent of the total budget and in the financial year 2019/2020 government allocated Shs3.145 trillion for interest payments.
Discussing the IMF economic outlook, the Secretary to the Treasury, Mr Keith Muhakanizi, said cutting expenditure is not possible because there are so many needs.

“There is no room for cutting public spending. What has to be done is increasing domestic revenue mobilisation,” he said.
The report says domestic arrears are prevalent in sub-Saharan African countries and have increased in recent years with 70 per cent of sub-Saharan African countries reporting domestic arrears.

Mr Muhakanizi said it is not right to finance the budget, while at the same time accumulating domestic arrears.
Uganda’s nominal debt to GDP ratio has since increased from 19.2 per cent in the 2009/2010 financial year to 42.2 per cent in 2018/2019 financial year.

Ms Clara added: “It is not right to be in the category of low debt distress while 20 per cent of the revenue is spent on interest payments.”
The IMF Regional Economic outlook for sub-Saharan Africa shows that the region’s public debt as a ratio to GDP has stabilised at about 55 per cent on average across countries. Oil exporters’ debt ratios have fallen by about 10 percentage points of GDP since 2016.

The IMF said despite the stabilisation of debt dynamics, public debt vulnerabilities remain elevated in some countries.

Among low-income and developing sub-Saharan African countries, seven (accounting for 3 per cent of regional GDP) are in debt distress (Eritrea, The Gambia, Mozambique, Republic of Congo, São Tomé and Príncipe, South Sudan, Zimbabwe), and nine (accounting for 16 per cent of regional GDP) are at high risk of debt distress (Burundi, Cabo Verde, Cameroon, Central African Republic, Chad, Ethiopia, Ghana, Sierra Leone, Zambia). In the report, the IMF said there are also vulnerabilities related to the composition of public debt.

Public debt stocks are mainly from commercial sources, with more than half from domestic creditors and about 15 per cent from Eurobonds.
“Official bilateral and multilateral debt accounted for only about a quarter of total public debt in 2017, much less than in the early 2000s. The greater reliance on commercial public debt exposes sovereign balance sheets to greater rollover and exchange rate risks. Also, an increase in debt from domestic creditors could crowd out financing for private sector projects,” the IMF said.
On economic growth, Ms Clara said: “Sub-Saharan Africa growth remains bifurcated, with non-resource intensive countries outpacing resource-rich ones. Growth in sub-Saharan Africa is projected to remain at 3.2 percent in 2019 and rise to 3.6 percent in 2020. Growth is forecast to be slower than previously envisaged for about two-thirds of the countries in the region.”