Why Uganda’s debt situation may not be all gloom

Uganda’s national debt condition has received considerable attention in the recent past, following some red flags raised about it from responsible expert persons. Media has also put across a number of related stories to shed more light about the subject. There is no need to reemphasize the fact that most of this commentary comes from voices of experience and authority on matters of debt management and other generally related aspects of credit analysis. Their concerns therefore stand valid.

However, I note that most commentary has been focused on the now of the situation. While still alluding to the future, the above has resulted in focusing on one side of this debt story – the danger side. Just like any risk taking venture, borrowing by government or any other entity or individuals for that matter, has an opportunity side. We borrow to pursue the opportunity side, while the borrowing is itself a risk, likely to result in unpleasant outcomes if not well managed. Analyzing a debt scenario without amply contextualizing the opportunity side alongside the threats inherent in the borrowing leaves the story half told and can be depressing. When the scenario concerns loans as critical as those that constitute national debt, it is even more vital to take a bird’s eye view and tell the story from both the opportunity and threat side, and not one side in preference to the other.

When Uganda takes debt for infrastructure projects, we need to stretch our eyes to the time when this infrastructure will contribute to the national cash inflow. Unfortunately, many infrastructure projects are long-term; they take long to complete and they do not offer quick payback. Yet repayment of debt will most likely always commence in the short to medium term. What this means is that we are likely to witness an escalating liability in loan repayments that fall due, without immediate and compensating rises in national income accruing from infrastructure development. In the short-term therefore, the borrowing can constrain national cash-flow. This is a threat to be managed, but it is also half the story. To complete it, we need to stretch focus to when the projects borrowed for will start generating revenue.

If anticipated revenues out these projects, both indirect and direct, will offset the cost of debt and return a national profit in the long-term, then the borrowing is worth it. We would thus be right to embrace short-term financial discomfort in anticipation of future returns. The opportunity in this choice would be that the country is availing hardware and energy capabilities, among other bases of production, on which vital economic activity is supposed to run. This opportunity can be utilized by Ugandans to develop and grow enterprise, and is also vital for attracting foreign direct investment, since investors will be reassured that they have sufficient factors of production to run their investments when done in Uganda. Strictly speaking therefore, sounding alarms about the debt without telling this opportunity side is focusing on only the short-term price the country is paying and will possibly continue to pay for a while, without considering long term returns. It denies some stakeholders the information needed for them to make complete conclusions about the situation, and thus can arouse disproportionate public discomfort.

In taking risks, an entity considers the cost-benefit outcome of projects. If Uganda considers that the benefit to gain out of bearing with the discomforts of taking debt today and battling with repayments, while waiting in anticipation of future returns out of projects invested in, is greater than the cost and deprivations of today, then loans should indeed be taken and invested accordingly. If on the other hand, the cost of today’s deficiencies that come from borrowing far outweigh the future benefit to be derived from infrastructure for which we borrow, we should cease borrowing. Additionally, if the cost and other implications of the loans on future Ugandans outweigh the benefits that will accrue to them, we should similarly cease borrowing. We would advisably also not borrow if we envisage that the chances of failing to execute what we borrow for are threateningly high.

Since we borrow for strategic investment in infrastructure and energy, we must envisage that our borrowing trend must terminate, or significantly slow down, at some point and give way to the harvest that we expect from what we are borrowing to fund today. A comparison of what we incur in borrowing cost up to that termination point and beyond, and what we derive from the projects being funded, over their useful lives, will help to inform us of the suitability of our decisions today.

Raymond is a Chartered Risk Analyst and risk management consultant

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