Debt-to-exports: A big challenge for Uganda

By Priscilla Naisanga

A recent article published by the New Vision, quoted the state minister of finance, David Bahati, saying Uganda's debt currently stands at 36% both domestic and foreign. This is much less than China's at 120% yet their economy is much more developed than Uganda's.

The minister missed one of the critical measure of debt — the debt-to-export ratio. China is not worried about its debt because their exports are exponentially higher than Uganda's.

In 2000, shortly after having been declared eligible for substantial support under the Enhanced HIPC initiative, Uganda experienced a sharp and unexpected rise in its Net Present Value (NPV) of debt-to-exports ratio, exceeding the HIPC threshold of 150% by some 50 percentage points (IMF, 2003).

While this did not necessitate Uganda's debt being unsustainable, due to relatively low debt service ratios, it demonstrated the fragility of the country's debt dynamics. This was at a time when the country was accessing highly concessional loans (cheaper loans).

The IMF study in 2003, indicated that although Uganda had been receiving aid and Foreign Direct Investments (FDI) of nearly 12% of GDP, its residual financing gap of about 3½% of GDP contributed some 10 percentage points annually to its NPV of debt-to-exports ratio.

In addition, when export earnings fell by more than 11% in 1999/00 (which is just one-third of the standard deviation over the past 10 years), the endogenous debt dynamics added another 20 percentage points to Uganda's NPV of debt-to-exports ratio in that year.

While these developments clearly illustrated the volatility of Uganda's NPV of debt-to-exports ratio, they did not suggest a worsening debt position, since the effective average interest rate of less than 1%, Uganda's debt ratio was trending downwards from the high levels in 1999/00, since the average export growth did not fall much below 7% (compared with a 10-year historical average of nearly 17%).

Recently past borrowing decisions, especially to finance infrastructure projects are premised on returns on growth, although this has not materialised, due to their longer term nature to register significant economic returns.

Some of the specific factors explaining the divergence between debt and growth have been: (i) vulnerability to exogenous shocks, such as adverse terms of trade or weather; (ii) waste of resources due to policy deficiencies, poor governance, and weak institutions (iii) inadequate debt management reflected in unrestrained borrowing at unfavorable terms (on less concessional terms; (iv) Refinancing policies of creditors.

In conclusion, the temporary increase in borrowing is intended to finance public investment, with an objective of enhancing economic growth. However, risks to debt sustainability have increased, as the temporary breach under an export shock scenario illustrates.

To mitigate these risks, it is important to ensure efficient project selection and implementation to achieve growth dividends, and improve domestic revenue mobilization. Significant vulnerabilities related to fiscal policy are a source of concern for the overall risk of debt distress.

Sticking to the fiscal charter targets remains fundamental in minimizing risks of debt distress.

The writer works at the Uganda Debt Network