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Uganda: Are debt levels rising higher than economic growth?

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Added 11th April 2018 01:02 PM

The debt burden is critical in a nation where unemployment rates are on a rise from 1.5% in 2012 to 2.3% in 2017

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The debt burden is critical in a nation where unemployment rates are on a rise from 1.5% in 2012 to 2.3% in 2017

DEBT | SUSTAINABILITY

By Samantha Byarugaba

The State of the Economy report, March 2018, released by Bank of Uganda, reveals that Uganda’s debt burden had risen. As of December 2017, the provisional total public debt stock stood at sh37.9 trillion up from sh34.5trillion in June 2017, signifying an increase of 9.4% in five months.

Although the present value of total public debt to GDP stands at 28.1%, which is well below the Public Debt Management Framework (PDMF) benchmark of 50%, the above trend could be burdensome to Uganda. This is because the economy’s growth rates, as recorded by the World Bank, have gone down from about 7.3% in the early 2000s to as low as 3.5% in the year 2016/17, and, therefore, do not match the rising debt trends. The report states that “including the committed but undisbursed loans, total public debt to GDP is closer to the threshold.” This means that at the recorded rates of increase of debt, Uganda is not far from hitting and even overriding our sustainability limits.

While borrowing facilitates development, the resources must be channelled into sustainable economic activities such as agriculture, capacity development through quality education, local and international trade in order to reap quickly and support loan repayment with the accrued interest. These productive activities will increase economic growth which in turn will boost re-investment to enable the expansion of sources of income to facilitate loan pay back hence reducing the burden. The debt burden is critical in a nation where unemployment rates are on a rise from 1.5% in 2012 to 2.3% in 2017, and poverty increased from 21% in 2013 to 27% in 2017 as reported in the Uganda National Household Surveys.

In addition to this, the Government borrows short-term loans, which must be paid back on average 10 years, yet continues to invest these in long-term projects of infrastructure which do not yield immediate returns. Continued domestic borrowing crowds out the private sector, which frustrates any efforts to instigate positive growth trends in the economy. In this case, the Government competes with the private sector for the available resources and sure enough, has easier access to credit given the low risk it offers. This reduces private sector chances of accessing financial resources since interest rates are forced to rise, which raises the cost of business, hence making the economy end up with non-performing loans. This paradox defeats Government’s objective of having a private sector-led economic growth as efforts for increased growth are also frustrated. With this state of economic affairs, how is Uganda expected to pay these debts?

The Government, therefore, needs to reduce on borrowing and also reconsider the cost levels based on the sources to avoid a situation of debt unsustainability. Debt resources should be channeled to more productive areas that yield more immediate returns, as highlighted above, so as to develop the country enough to not have to rely so heavily on debt.

The writer works with the Uganda Debt Network

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