Uganda debt nears crisis level

Traders gather outside closed shops on Luwum Street. Many businesses were locked as a result of the coronavirus pandemic in March. PHOTO | ABUBAKER LUBOWA

What you need to know:

  • The senior research fellow at Economic Policy Research Centre (EPRC), Corti Paul Lakuma said the increase in debt level means Uganda has borrowed some money to combat the impact of Covid-19 which will have to be paid in the future.

The government yesterday said Uganda’s public debt is projected to hit 47.5 per cent of the Gross Domestic Product (GDP) which is Shs150.267 trillion in the Financial Year 2020/2021 because of increased borrowing and expenditure to counteract the Covid-19 pandemic on the economy.

Experts say the projected rise in public debt implies that the country is not collecting enough domestic taxes to meet the ever increasing government expenditure, and that it also puts a lot of pressure on the government to service the debt.

Speaking during the fourth Economic Growth Forum in Kampala, the commissioner for macroeconomic department at the Ministry of Finance, Planning and Economic Development, Dr Albert Musisi, said the Covid-19 pandemic has affected government’s fiscal position, with domestic revenues far below target while spending needs increased.

“Widening of fiscal deficit declined from 4.9 per cent in FY 2018/2019 to 7.2 per cent in FY 2019/2020 and 9.8 per cent in FY 2020/2021. Increase in the debt GDP ratio, from 35.4 per cent in FY 2018/2019 to 40.2 per cent in FY 2019/2020. (Debt threshold is 50 per cent of GDP),” he said.

Dr Musisi said revenue collections declined significantly especially in the third quarter of Financial Year 2019/2020 due to the pandemic and lockdown policies.

Despite the projected increase in public debt over the years, he expressed optimism that Uganda’s public debt level is still sustainable since it is below 50 per cent threshold.

On May 1, 2019 the International Monetary Fund (IMF) said Uganda remains at low risk of debt distress, even though debt metrics have deteriorated and one in five Ugandan shillings collected in revenue will be spent on interest in FY2019/2020.

Dr Musisi said the debt is still needed to boost the aggregate demand in the economy. Aggregate demand is the total demand for goods and services within a particular market at a given time.

He said there was a shortfall in domestic revenue in the second quarter of the FY 2019/2020 and that in the third, a shortfall of Shs589.66b was registered.

He added that in the fourth quarter, the shortfall was Shs1.777 trillion, and that the total shortfall in the FY 2019/2020 was close to Shs3.3 trillion.
Dr Musisi said the shortfall in domestic revenue means there is a need for borrowing to boost and meet increased government expenditure.

He further stated that due to Covid-19 pandemic, Uganda has a decline in Foreign Direct Investment by 40 per cent which is $278 million, in the second half of 2019/2020 compared to the same period in 2018/2019.

“Decline in tourism receipts by 62 per cent which translates to $365m in the second half of FY 2019/2020 compared to the same period in 20198/2019. However, decline in remittance is much lower than earlier projected. Remittance fell by 11 per cent ($64 million) in the second half of 2019/2020 compared to the same period in 2018/2019,” he said.

In the short term, Dr Musisi said, there is a need to increase domestic revenue collection and improve efficiency in public expenditure, reverse the trend in the debt level and the fiscal deficit should return to the EAC level of 3 per cent.

In the medium term, Dr Musisi said, Uganda’s economy is expected to recover and grow at 6 to 7per cent.
The Secretary to the Treasury, Mr Keith Muhakanizi, said there is need for debt relief for developing countries following the negative impact of the Covid-19 pandemic.

“Therefore, the objective of this year’s conference is to identify actionable policy interventions to mitigate the negative impacts of the Coivid-19 as well as recommend medium term strategies to support economic resilience and recovery,” he said.

Mr Muhakanizi said before this shock, Uganda had registered a significant economic growth rebound since 2016, pointing out that in FY 2019/2020, growth was 6.8 per cent.

He said this followed government adopting a number of policy interventions suggested in the first three Economic Growth Forums to address some of the key development challenges that threatened the country’s long-term growth trajectory.

“The interventions included raising agricultural productivity; spurring a process of structural transformation, raising public savings and investment; and addressing labour force skills deficit, among others,”Mr Muhakanizi said.

He added: “However, with the onset of Covid-19, economic growth is estimated to have fallen drastically to 3.1 per cent in FY2019/2020 and is projected to remain at the level in FY2020/2021.”

The Secretary to the Treasury said they have identified three key policy solutions: assessing the global and domestic impact of Covid-19 on enterprises and future prospects, understanding the impact of Covid-19 on enterprises and households, government’s policy response and identifying medium term strategies for key growth sectors.

The commissioner General of Uganda Revenue Authority (URA), Mr John Musinguzi Rukoki, told Daily Monitor that the projected increase in public debt to 47.5 of the GDP means Uganda is not collecting enough domestic revenue.

“If the projected level happens that means we are below the threshold of 50 per cent by just 2.5 per cent. The level at which we are borrowing is three times the level we should be borrowing,” he said.

He added: “Our mission at URA is to collect enough domestic revenue (taxes), which is better for us than the debt. It may take some time for us to collect enough domestically but we have to do it to avoid a rise in public debt.”

Mr Musinguzi said they are using domestic revenue mobilisation strategy to increase the level of domestic tax collection.

The National Planning Authority (NPA) executive director, Dr Joseph Muvawala, said the problem is not the increase in debt levels to GDP but the capacity to pay it and what the money being borrowed is used for.

“The issue is your capacity to pay back the debt not the rise in debt. The USA has debt which is more than 100 per cent of the GDP but they have the capacity. Right now there is no choice about borrowing because the government needs the money to boost the aggregate demand.”

The former Deputy Governor Bank of Uganda, Dr Louis Kasekende said the impact of Covid-19 will be severe on Uganda’s economy since many sectors of the economy have been affected.

“However, based on what the Ministry of Finance has said that there is recovery which has been registered in June and July which is good for us, we still need to boost the aggregate demand in the economy. This can only happen when the government increases spending in the productive sectors,” he said.

The senior research fellow at Economic Policy Research Centre (EPRC), Corti Paul Lakuma said the increase in debt level means Uganda has borrowed some money to combat the impact of Covid-19 which will have to be paid in the future.

“However, some of the debts that have been borrowed from the IMF and the World Bank are concessional loans which attracts no interest rates unlike the non-concessional loans,” he said.

Mr Lakuma said there is some money that has been realigned in the World Bank and the IMF for debt relief which is good for developing countries like Uganda.


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