Uganda’s worsening debt remains a concern

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When reading the 2015/2016 budget, Finance Minister Matia Kasaija boasted that 76.4% of the 23.972 billion shillings was to be funded by Ugandans. This, Mr. Kasaija believed at the time, would help Uganda deal with its outstanding public debt; regardless that it was expected to reach $7.6 billion by 2016, up from $7.2 billion in 2014.

“Although our public debt has grown faster compared to past trends, it is sustainable relative to the size of the economy. Measuring public debt against the size of the economy is common practice to know whether our debt is sustainable or not,” said Mr. Kasaija, who also represents Buyanja constituency, adding, “Based on this measurement, our debt to GDP ratio is estimated at 30.4%, which is well below the threshold of the 2013 Public Debt Management Framework and the 50% requirement of the convergence criteria of the East African Community Monetary Union. Public debt sustainability also means that the government can continue to service its debt without default.

Earlier that year, President Museveni used his State of the Nation Address to reveal that his government had resisted the temptation to spend on areas of consumption at the expense of development and wealth creation.

Yet in 2019 there was growing evidence that Uganda’s borrowing could become unsustainable. Mr. Kasaija, however, remained impassive. He said then: “I would like to assure this country, and everyone, that our debt is sustainable in the medium and long term.”

The Minister of Finance said that the technocrats in his ministry were vigilant.

“Every time I’m presented with a loan proposal, there are certain things I have to ask this agent, say ‘show me this, show me that!’ When the economy grows, businesses grow and you make more money; so, because I tax you more, I get more money. Now I no longer need to borrow.

Mr Kasaija had a confession to make while recently apologizing to the Parliamentary Committee on Commissions, Statutory Authorities and State Enterprises (Cosase). A supplementary budget of 10.6 billion shillings advanced to the Uganda Land Commission (ULC) to pay land claimants in Buganda and Bunyoro sub-regions in the financial year 2020/2021 had caused trouble.

“There are thousands of documents to read and sign. My assumption is that we have technical staff preparing these documents and I think they are doing their due diligence, so when they bring these documents, I sign them,” Mr Kasaija said after preliminary investigations showed that legal procedures had been flouted in the processing of the grant.

The volte-face of his technocrats at the Ministry of Finance has not been reproduced on Uganda’s public debt. Observers, however, remained concerned. When reading the 2022/2023 budget on Tuesday, Mr Kasaija estimated Uganda’s outstanding public debt – as of December 2021 – at 73.5 trillion shillings. Of this amount, he added, the external debt stood at 45.72 trillion shillings and the domestic debt at 27.8 trillion shillings.

“When you go over the threshold, you run the risk of defaulting on your debts. The borrowing rate has increased and the type of funds we allocate to debt repayment is around 20% of the budget,” Mr. Gilbert Musinguzi, head of quality assurance at the Uganda Debt Network (UDN), added that he was concerned about the imbalance between borrowing and debt servicing.

More worrying, Musinguzi noted, is the fact that the debt stock is “a combination of commercial and non-commercial borrowing rates”. Grace periods also offered little or no respite. Earlier, Mr. Musinguzi said: “[they] were longer, but now, with the increase in debt, the grace periods will be shorter with stricter rates.

He added: “Even interest rates are high, which means we are likely to default, putting the country in a dangerous position, including key assets.”

In his recent research paper Public Debt and Uganda’s Economic Growth, Mr. Richard Sempala, an economist, argues that borrowing is not particularly new in Uganda. Under the Heavily Indebted Poor Countries (HIPC) Initiative, Uganda was the first country to receive debt relief worth Shs. 244 billion ($650 million) in the 1990s and later in 2006. This was under the Multilateral Debt Relief Initiative (MDRI).

Uganda, Mr. Sempala further revealed, would later generously receive 100% debt cancellation, which would consequently reduce the country’s outstanding debt to 2.2 trillion shillings (US$1.6 billion). dollars).

Despite this, or in fact because of it, Uganda’s debt, Mr. Sempala notes, has been mainly driven by overambitious goals, as stipulated in both the second national development plan (NDP II) and in Vision 2040. Both aim to transform Uganda from peasantry to upper middle income category by 2032. A per capita income of $9,500 in 2040 is also one of the goals.

“Achieving these goals therefore pushed the government to invest in huge infrastructure projects such as dams, railways and airports, basically to unlock the productivity of physical and human capital,” Mr. Ssempala, finance and development coordinator at Oxfam. an international organization that advocates for the active participation of citizens in fiscal and budgetary allocations.

Mr. Ssempala therefore recommends that “heavy reliance on public debt…be discouraged, especially in the short term.” Uganda’s current borrowing rate, he warns, “is likely to cause economic growth figures to deteriorate, in part because it negatively affects investment”.

Since dividends need to be generated over the long term, Mr Ssempala suggests that “priority… should only be given to projects that have the potential to unlock Uganda’s productivity challenges”.

So could Uganda’s long-term infrastructure projects, like loan-financed dams, spiral out of control? Mr. Ssempala seems to think so.

“They come from Chinese commercial loans from the Exim Bank, which have high interest rates compared to IMF and World Bank loans,” he said, adding: “So the debt will continue to grow. increase because there is no immediate benefit from building dams or roads.

In fact, while politicians have been positive – even optimistic – about Uganda’s ability to deliver service and ultimately pay its debts; technocrats do not share a similar view.

“In this regard, nominal debt to GDP in December 2020 stood at 47.2%, compared to 38% in December 2019 and 42% in June 2020. Public debt is therefore expected to increase to 51.9% of GDP in the financial year 2021/2022, as the government will borrow to finance these key infrastructure projects, especially in the transport, oil and gas sectors,” explained Moses Zziwa, Acting Commissioner for Policy. and debt issuance in a budget commitment in the last year.

Alarm bells also came from Auditor General John Muwanga who used his latest report to air his scruples.

“The rate of increase in debt is higher than the rate of increase in GDP levels, creating a risk of reaching unsustainable levels sooner rather than later,” its 2021 report says. “These low levels of performance jeopardize the achievement of intended development objectives and render ineffective the commitment fees paid on undisbursed funds.”

Although many are not positive about Uganda’s future creditworthiness, some economists insist that there is inevitability around borrowing.

“Where are they going to find the money to improve the infrastructure? How will they finance the oil and gas sector without borrowing? asked Corti Paul Lakuma, a researcher at the Economic Policy Research Center (EPRC). “The problem is not getting loans; the problem is spending loans on things like salaries.

In 2015, Museveni signaled his intention to tackle this problem.

“We would have done more if we had spent less on salaries and spent more on infrastructure,” he noted, adding, “Of our total budget of 22 trillion shillings, nearly 3 trillion shillings are spent on the government wage bill. Of our own internal income of Uganda, salaries of 11 trillion shillings would be 26%. By saving even a quarter of that, you are able to build a road and a half of the Kampala type- Masaka per year where we spent 440 billion shillings.

Although Mr. Museveni had ambitions to reduce the wage bill, districts, ministers and presidential advisers have increased. Last week, Mr Kasaija announced that the government payroll stood at 6,366.9 billion shillings, meaning the government needs to do more to raise revenue.

“I am aware of attempts at frugal spending in government departments like cutting overseas travel, workshops. However, more drastic measures are needed like a ban on the purchase of assets that have alternatives like cars (and the attendant fuel expenses), foreign treatment of government officials and this calls for the improvement of local health services,” said Dr David Mugambe Mpiima, senior lecturer at the School of Women’s Studies, Makerere University, said, “Stop or cut hard on borrowing, cut big government mentality (no new administrative units), crack down hard on corruption and rethink salary increases.”

Mr. Kasaija, who did not introduce new taxes in the budget this fiscal year, would not commit to Uganda weaning itself off borrowing.

Shadow finance minister Muhammad Muwanga Kivumbi thinks Uganda “will continue to borrow because we have no fiscal discipline”.

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