Debt-to-GDP ratio increases by 31% in one year

By Juliet Akello

The national budget as a policy instrument helps the Government to run the state of affairs (political, social and economic) smoothly to achieve set priorities for a given financial year.

Uganda's development agenda is guided by Vision 2040 and the NDP II (2015/16 - 2019/20); therefore planning, budgeting and policy formulation processes at all have to be aligned to transform Uganda's economy to modern and prosperous country.

Of the total, national budget FY 2016/17 (sh26,361b),  sh6,524.5b equivalent to 24.8% will be sourced externally. External borrowing will total sh5,034.5b which is 19% of the budget; that is; sh2,520.8b in concessional loans and sh2,513.7b in non-concessional loans; while sh1,490b in grants and domestic debt refinancing (sh4,977.7b) equivalent to 18.8%.

However, sh2,022.9b (7.7%) is expected to settle interest payments. This is more than the 3.1% share of the budget for the agriculture sector considered the back-borne of the economy. National budget deficits increase when debt service is characterised by high interest payments because part of the available resources is diverted from public service provision translating into a cost.

Notice that public debt-to-GDP was 26% by February 2015 which rose to 32.7% by June in the same year (MoFPED Report). The Budget speech FY 2016/17 indicates that this has further risen to 34% representing an increase of 31% in just one year and three months. Can Uganda's economy growth faster than this debt growth rate to ensure debt sustainability in the future? Moreover, all this is within the context of; i) slow economic growth rate averaging less than 6% in four years, ii) stagnated revenue-to-GDP ratio at 13% for about three years now, iii) Negative Balance of Payments in recent years of less than 50% of the import bill within 12 months to March 2016 arising from a large international trade imbalance; and iv) costly infrastructural development (World Bank, 2016). These prevailing conditions are not favourable for debt sustainability.

Meanwhile, the Auditor General since FY 2009/10 to-date highlights challenges related to low absorption capacity of loans by the Government MDAs with Uganda's debt portfolio underperforming below 50% (2015 report). This is a good sign of ill preparedness for the loans acquired yet it attracts commitment charges/fees which have been steadily increasing. In FY 2012/2013 commitment fees paid on undisbursed loans increased by 40% from sh9.023b in 2011/2012 to sh12.7b in 2012/2013 yet, total commitment fees for FY 2016/17 alone are estimated at sh84b which is highly costly. Uganda's high appetite to borrow will heavily weigh on economic growth, especially where productivity is low.

Therefore, shall Uganda need a big-bang to shake the economy out of the current state for the national budget to deliver?; is it a case of mismatch between the country's development needs and available credit?; do we need to borrow every time we need to advance our development? should we lower public debt or build public infrastructure first within the context of current public expenditure Vs investment for the future generation? An analysis of whether "productivity" or "job creation" comes first is another area of interest (Budget theme).

The Government should expedite the process of establishing a fully functional and empowered appraisal, monitoring and evaluation entity to approve project designs to avoid costs and delays caused by changing project designs during implementation. This will enhance the absorption capacity to ensure full utilisation of the funds released. For an economy to gain debt sustainability over time, it should grow at a rate higher than interest rate of the debt. Otherwise, it is worth discerning the "devil out of the details" if the national budget is to deliver on the theme and the NDP II.

The writer works with Uganda Debt Network