TOP
  • Home
  • Opinion
  • What is the economic cost of increasing Uganda’s debt burden?

What is the economic cost of increasing Uganda’s debt burden?

By Admin

Added 23rd January 2019 02:28 PM

Since the start of implementing infrastructure projects within the National Development Plan in 2010, Uganda’s appetite for debt has increased tremendously.

Ezra1013703422 703x422

Since the start of implementing infrastructure projects within the National Development Plan in 2010, Uganda’s appetite for debt has increased tremendously.

By Ezra Munyabonera

Due to high borrowing costs—especially domestically—Uganda’s debt burden may reach unsustainable levels in the medium term, unless government slows down on accumulation of new debt. 

Since the start of implementing infrastructure projects within the National Development Plan in 2010, Uganda’s appetite for debt has increased tremendously.  During the past year, there has been a surge in debt accumulation. The recently released Auditor General’s annual report for 2018 showed that Uganda’s debt had increased by 22 percent within one year—from sh34 trillion at end of June 2017 to  sh41.5 trillion by the end of June 2018.

This places Uganda’s debt to GDP ratio at 41 percent—which is still below the risky threshold of 50 percent identified by the IMF and this level compares with other East African countries. However, the above debt level may be considered unfavorable when debt payment is compared to national revenue collected—Uganda’s rate of 54 percent is the highest in the East Africa region.

The 2018 Auditor General’s report also cautions that if government is to service the loans as projected in the next financial years  (2018/2019 and 2019/2020), it would require more than 65 percent of the total revenue collections which is over and above the historical sustainability levels of 40 percent.  This is likely to have adverse effects on Uganda’s ability to finance other development activities.  

On the other hand, Uganda’s Medium Term Debt Management Strategy (2018/19 – 2021/22) shows that some persistent challenges will continue to constrain public debt. These include:  low debt absorption, unfavorable exchange volatility which may increase debt repayment costs, slow export growth and conditional external loans. Others identified in the OAG reports include: unapproved loans by parliament, prioritizing public debt over social and development sectors like health, education, agriculture in the budget and poor public investment management. With these challenges, there is renewed concern by the Civil Society Organizations and the public that public investments are falling short of generating the desired economic return. Some of the major challenges to continued debt accumulation include:   

High cost of public debt; the cost of servicing the public debt has continued to rise—increase from 5.2 percent of the budget in FY 2010/11 to 12.3 percent of the budget by 2018/19. Even within the limits of debt sustainability (i.e. less than 50 percent of GDP), debt repayment is attained at a very cost to the country’s development—given the proportion of the budget allocated to debt repayments, as compared to other priority development sectors like education, health, and agriculture. Although the overall absorption of external debt has improved compared to previous financial year, the 2018 Auditor General Report shows that some loans are at absorption levels as low as 10 and below, thus creating a high cost to government in terms of interest rate payments. 

Over dependency of infrastructure investments on external debt; External resources are financing a bigger part of infrastructure development in Uganda. The three sectors of works and transport, energy and mineral development jointly account for about 66 percent of the total external financing (including grants) implying that government is prone to accepting tough conditions from creditors and donor partners for infrastructure development. The infrastructure appetitive could further deepen the risk of debt distress to the economy.  

Poor feasibility analysis of the projects; the Public Finance Management Act, (PFMA, 2015) emphasizes that Parliament should analyze the economic implications of budget proposals, approve acquisition of external financing, and monitor utilization. However, the previous audit reports consistently show that very few loans are technically evaluated.  Similarly, many expensive loans are secured on non-concessional terms and have no backing assessment documents of the economic and financial rate of return as required by the country’s Public Debt Management Framework. This portrays inadequate transparency in disseminating key information on loans and also impairs the picture of economic returns the country would obtain. It is noteworthy that the non-functionality of the Project Appraisal Department has contributed to poor project planning, appraisal and design.

Overall, Uganda’s public debt level has continued to grow with a surge witnessed during FY 2017/18. Public debt seems to be growing faster than the economy which necessitates the adoption of a medium term fiscal adjustment by government to ensure sustainability. The debt level poses a high risk burden to the economy if other feasible options for financing the budget are not exploited.   Government should strengthen systems for efficient and effective loan utilization amongst institutions. The medium term fiscal framework should also pursue debt restructuring to ease the high cost of the domestic debt burden.

The writer is a Senior Research Fellow Economic Policy Research Centre (EPRC)

 

More From The Author

Related articles