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Prudent debt management key for sustainable financing, development

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Added 27th May 2019 07:25 AM

There is a high potential for economic growth can be reduced as a result of a heavy debt burden is through its effect on human capital development

Prudent debt management key for sustainable financing, development

There is a high potential for economic growth can be reduced as a result of a heavy debt burden is through its effect on human capital development

By Mbabazi Peninnah

Debt repayments are reducing Government budgets when more spending is needed to meet the Sustainable Development Goals. According to the Jubilee Debt Campaign showed on average government external debt payments across the 126 developing countries has increased from 6.7% of government revenue in 2014 to 10.7% of government revenue in 2017, an increase of 60%.

This is the highest level since 2004, when such payments were 12.6% of government revenue. This rapid increase comes after a lending boom due to global interest rates being low. External loans to developing country governments almost doubled from $200 billion per year in 2008 to $390 billion in 2014.

They have since fallen back to between $300-350 billion per year from 2015-2017, but this is still well above levels seen prior to the global financial crisis.

Uganda has increasingly relied on debt which currently stands at UGX41.51 trillion as at June 30, 2018. As a result, public debt grew further to 41.3% of GDP at end FY2017/18. It is also worth noting that more than 50% of Uganda's budget for FY2019/20 will be funded using external resources. At a time when the country is struggling with raising revenue to meet the budget deficit, it beats our understanding why the burden of paying taxes should be lifted by the already burdened citizens.

High debt can have indirect negative consequences on governments in terms of public support insofar as debt is perceived to contribute to poor growth and poor policies. Despite the mixed popular perception is that high debt is having a ruinous effect on economic growth in low-income countries. To the extent that countries which have undergone economic reforms for many years, still face high debt service obligations and low per capita income growth, high debt is likely to cause political pressure on economic policy.

International Monetary Fund highlights that countries should not borrow until repayment hinders it to meet its obligations to citizens. In specific terms, the IMF has warned that Uganda's public debt is expected to grow to 50.7% in the FY2021/22 due to increased borrowing for infrastructure projects. High debt undermines policy credibility which can erode confidence in economic reforms and this diminishes the sustainability of what might be an otherwise sound economic reform strategy. Government continues its policy of scaling up infrastructure investment. Investment reached 8.9% of GDP in FY2017/18 and is envisaged to increase further this year and next.

There is a high potential for economic growth can be reduced as a result of a heavy debt burden is through its effect on human capital development. The demands of debt service financing on the government budget may not only crowd out public investment, it may also crowd out social investment spending.

The African Borrowing charter which seeks to protect the continent from risky unsustainable public debt contraction towards stemming the risks of possible deterioration in the fiscal positions of African states and living standards of African citizens. This charter amongst its objectives, which Government can adopt seeks to contribute to improvement in the contraction and management of public debt, the issuance of public guarantees, selection and implementation of debt financed projects within the context of strengthened legal frameworks and rule of law.

Uganda as well has untapped or underutilized potential tax avenues which are attributed to inefficient tax collection methods or tax compliance indiscipline as some people have chosen to evade taxes. Government continues to grapple with the challenge of broadening the tax base.

Government should address leakages and tax exemptions; such as Government waiving UGX500bn to private companies will be a loss of revenue which would also put Uganda Revenue Authority on pressure to hit its revenue target. This revenue lost is enough to contribute toward public servants salaries such as teachers, medical workers etc.

Our budget should be an investment rather than consumption, focused on pro-growth areas in key sectors like Health, Education, and skills development among others.

The writer works with Uganda Debt Network

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