Is Uganda’s debt sustainability at risk?

What you need to know:

  • Therefore, it is important to convincingly display debt aversion through cuts in current and projected deficits to stabilise market perceptions about debt sustainability. The question is, can we reconcile the alleged safety of Uganda’s public debt with a sharp rise in the debt stock?

Uganda is privileged to have a sustainable debt in the medium and long-run and a low risk of debt distress, but these privileges are likely to be eroded if overused by government.

The results of the Debt Sustainability Analysis report 2017/2018, offer a glimmer of hope about government’s ability to pay its debt obligations in the future. The report indicates that debt is sustainable in the medium and long-term at low risk of debt distress.

Based on these findings, some officials in the Ministry of Finance assert that the current and projected debt levels are not a cause of concern.
These results suggest that Uganda is privileged and hence needs to maintain this position. The possible reasons for aiming at having and maintaining these privileges include the following:

First, countries can borrow (with minimal constraints). Second, countries can boost investor confidence for investment. Lastly, market perceptions about debt sustainability are stabilised.
Some public debt historians attribute the current privileges to the actions of former policymakers such as lobbying for Uganda’s qualification and subsequent reception of debt relief.

The relief includes debt cancellation, debt rescheduling, debt buyback, debt relief funds and renegotiation of payment terms. For instance, such relief led to a reduction in total debt from Shs10 trillion in 2005/2006 to Shs4.6 trillion in 2006/2007 due to cancellation of 100 per cent of the debt owed to the International Development Association, IMF and African Development Fund. However, the debt has risen to Shs41 trillion in 2017/2018 and it is expected to rise further due to the widening fiscal deficits.

The current privileges, worth protecting, could be at risk (are likely to be eroded) if overused by Finance ministry. The current fiscal behaviour, evidenced by the increasing borrowing appetite, could be motivated by the “it is still safe” attitude.

This could be explained by the debt to GDP ratio remaining below the 50 per cent debt to GDP threshold of IMF and the 50 per cent debt to GDP threshold (in net present value terms) according to the East African Monetary Union convergence criteria. As of 2017/2018, the debt to GDP ratio was 42 per cent while the debt to GDP ratio was 31 per cent (in net present value terms). Similarly, pegging some government expenditures on “expected” oil revenues could compromise government’s fiscal prudence.

The current debt sustainability position does not necessarily guarantee future debt sustainability. The government needs to take more precautions to ensure that debt remains below the set thresholds and to guarantee debt sustainability. The failure to take precaution might render the debt unsustainable thereby breeding confidence and credibility crises. These crises usually occur when the government is expected to default on its loan obligations.

Therefore, it is important to convincingly display debt aversion through cuts in current and projected deficits to stabilise market perceptions about debt sustainability. The question is, can we reconcile the alleged safety of Uganda’s public debt with a sharp rise in the debt stock?

Enock Bulime,
[email protected]

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