Should Uganda be worried about its current public debt burden?

OPINION

Dr Ibrahim M. Okumu

In the Financial Year (FY) 2005/06, Uganda's public external debt was 45.7% of GDP. The external public debt was mainly on concessional terms with the World Bank and African Development Bank (ADB) taking 86.7% of it. 

Much as external public debt was largely on concessional terms, it was deemed to have risen to unsustainable levels increasing the likelihood of choking Uganda's economy. 

As such, under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief (MDR) initiatives, Uganda's external public debt was forgiven/cancelled reducing it to 11.4% of GDP in FY 2006/07. 

Owing to the Government's need to abate infrastructure constraints to production in the midst of less than desirable domestic revenue mobilisation, there has been an increased appetite for public debt.  Public debt is currently hovering over 40% of GDP. 

Of this, 75% is external debt. The uniqueness of Uganda's public external debt today is that there is an increasing proportion of borrowing at commercial as opposed to concessional terms.

Indeed, today China through its state owned banks is increasingly coming on board and lending at commercial rates. This in addition to increased domestic public debt suggests limited room, if any, for debt forgiveness in the event of public debt rising to unsustainable levels.  

For example, Uganda's debt to GDP ratio has been increasing from 19.5% in FY 2009/10 to about over 40% currently.

However, post 2011, there has been dismal economic performance in view of the average 7% economic growth experienced in the decade before 2011.

This raises the question: is public debt financing actually enabling Uganda abate its binding constraints to production and export potential? For example, while we have more tarmacked roads, now excess installed electricity capacity and more university graduates this is not translating into robust economic growth and structural transformation. 

It is this less than desirable economic growth that has resulted in apprehensiveness about the risks regarding Uganda's appetite for debt. The media, for example has been awash about Uganda's debt stock with the key question being: shouldn't we be worried about our public debt level?

The debate has been contributed to by Andrew Mwenda, Daudi Mpabulungi Migereko, Dr. Fred Muhumuza, Patrick Katabazi and Ramadhan Ggoobi, among others.  

Even then, my view is that in the absence of substantial domestic revenue to unlock Uganda's binding constraints to production and export enhancement, debt is a realistic outside option. Debt financing is not a bad idea; however, what is critical is: can debt be used in ways that can enable our country enhance its production and export potential? 

Can our country's production and export potential be raised in sustainable ways that enhance household welfare, financing of critical infrastructure and paying off debt? 

The inability of public debt financing to induce robust economic growth, suggests the likelihood of incompleteness in the public sector planning, project selection and implementation framework. 

For example, what criteria guided the selection of Entebbe-Kampala Express Way or even Mbarara bypass and Mbarara-Ntugamo road? All this has been done before the construction of the Kampala-Jinja Express Way which is our export gateway to Mombasa via Busia and Malaba borders yet the existing road is heavily congested. 

The choice of public infrastructure investment is not a matter of appeasement policy to score political points, rather this should be guided by the ability of such investments connecting to core production centers. 

For example, if tourism is integral to enhanced foreign exchange earnings and that Kidepo Valley National Park is considered the most beautiful park in the whole Africa, why then should it still take 10 hours to access such a tourist destination from Entebbe? 

Also, Uganda is ranked as the best tourism destination in the world for ape watching. Why then shouldn't we have an appropriate transport infrastructure mix to access Bwindi Impenetrable National Park and Bundogo Forest Reserve for Gorilla and Chimpanzee viewing respectively or even Kidepo Valley National Park?

For example, investment in aerodromes and light aircraft could ease transport to and from these unique tourist destinations so that we do not miss out on high spending tourists, who have no time to spend on our highly congested roads.

Also, Uganda is endowed with mineral resources that are lying dormant. For example, we have iron ore in Muko and clinker in Karamoja; however, absence of appropriate infrastructure mix most importantly a railway line and failure to pursue the complementarity principle in our investment decisions has partly undermined exploiting such resources. 

Infrastructure development should be conceived in ways that allow connectivity and complimentary of economic opportunities at the respective destinations. 

For example, during the colonial times, Uganda railway was built to transport both cotton and copper. It is not surprising that the debt towards the construction of the Uganda railway was paid off comfortably because it was pegged to production centres for cotton and copper. 

Therefore, beyond opening up production centres through public infrastructure investment, my view is that perhaps mobilising households around a production enterprise has a potential of revitalising livelihood and thus leveraging public infrastructure investments.

For example, now that the Government is constructing the Tirinyi-Pallisa-Kumi road this might not be enough because efforts must simultaneously be directed towards enabling households engage in economic activities that structurally transform them and in turn improve the regional economy. 

To do so, issues of market access, financing and technology transfer must be addressed such that households are in position to produce raw materials commercially.  

The aforementioned scenario is a more complete and feasible way of using public debt to finance infrastructural investments. This is because infrastructural investment is tagged to production centers.  

Besides effort is made to ensure that the production centres are supported to takeoff. This ensures that production centres significantly contribute to Uganda's economic growth and export potential which in turn partly contributes to financing public debt used to develop the infrastructural investments.  

Also, while efforts have been made to increase the production of electricity to the extent that demand is surprisingly less than installed capacity, there are real concerns about inability to evacuate and distribute electricity at, for example, both Karuma and Isimba hydro power dams.

This begs the question, why is it that our planning processes are dotted with incompleteness? 

Investment in electricity generation, transmission and distribution ought to go hand-in-hand. In fact, there is no better requirement for the aforementioned condition, especially where the financing is debt at commercial rates. This is because electricity generation should aid production which is only possible if it is evacuated and distributed to targeted production zones. 

Otherwise, the whole process ends up stressing the economy as debt has to be financed, yet the physical infrastructure is not inducing growth in production and export potential in order to facilitate smoothening financing of debt. 

Furthermore, the existing electricity transmission and distribution infrastructure is in need of complete overhaul. Today, one way of announcing electricity load shedding is the possibility of rain irrespective of the intensity.

That implies loss of production time. Also entrepreneurs are forced to invest in costly generators to run their plants due to power intermittency. In fact, in as much as electricity tariff is perceived to be high, the intermittency of electricity supply is more distortionary to productivity than the electricity tariff.

Therefore the weak electricity transmission and distribution network has partly contributed to inability of Uganda to make economic growth gains from the recently completed electricity production projects. This in turn undermines the ability to finance public debt. 

Also, costing public investment has been associated with dead weight losses. This is through deliberate overpricing and poor quality implementation.

For example overpricing was evident during the construction of the Entebbe Express Way. The new Jinja bridge is being repaired hardly before its first birthday. Karuma Hydro Power dam developed cracks way before completion.

Such shameless actions of government officials undermine the ability of public project interventions to optimally mitigate constraints to production and exporting. In turn the actual economic performance is not in position to reflect the expected economic outcomes which constrains the ability to payoff public debt. 

The preceding debate suggests that Uganda's public investment framework has this far not induced the expected economic performance outcomes and is need of a review. Most importantly there is need for nationwide planning, proper selection and sequencing of projects.

Besides corruption which manifests through overpricing projects and misdirection of project funds ought to be mitigated. Otherwise, we run a risk of debt stock increasing without any robust gains in economic performance in the short, medium and long term. 

Finally, in as much as Uganda's recent less than optimal growth could be partly explained by weak regional economic performance, I am of the view that our inability to generate a robust positive productivity shock from the public infrastructure investment has played a more instrumental role.

This has resulted in lower than expected domestic revenue performance undermining our ability to finance debt no wonder the current tax regime is increasingly unpredictable and not evidence based.

As such there is reason to be concerned about Uganda's debt stock especially when there is evidence of some countries losing public assets to China because of inability to finance Chinese debt.