How sustainable is Uganda’s public debt?

A view of the Jinja rail station in 2010. Uganda envisions upgrading its outdated rail network into a Standard Gauge Railway network that will connect with Nairobi, Mombasa, Kigali and Juba (USG Photo)

Uganda’s debt repayments and interest payments have reached to 30% of the total FY 2017/18 budget approved at the end of last month. While the finance minister says that public debt is ‘sustainable over the medium to long term,’ some MPs and analysts are raising concerns.

Debt repayments, refinacing and interest total to UGX 8,600 billion (USD 2.4bn) in the new budget of UGX 29,000 billion, including 5,000bn for domestic debt refinancing for maturing domestic debt, UGX 949bn for external repayments and UGX 2,675bn for interest payments.

Why is Uganda running up a large debt? Most of it goes to financing ambitious infrastructure projects such as the Karuma and Isimba dams and the Kampala-Entebbe expressway.

According to Finance Minister Matia Kasaija, Uganda’s public debt amounted to USD 8.7 billion as of December 31st, 2016. He told parliament in a presentation this month that this is less than a third of gross domestic product (a measure of the size of a nation’s economy). “This is much lower than the threshold of 50% beyond which public debt becomes unsustainable. Uganda’s public debt therefore, is sustainable over the medium to long term.”

KPMG, an audit firm that studied the new budget, concurs with this assessment. “Although the public debt has increased at a higher rate compared to past trends, it is sustainable in relation to the size of the economy,” reads the firm’s Uganda Budget Brief 2017.

Parliament’s Budget Committee offered a different assessment in a report in May, however, saying, “the Committee has a strong view that the current public debt situation for the country is unsustainable. This is evidenced by the fact that, out of the total resource envelope of UGX 29,992 billion for FY 2017/18, only UGX 12,989 billion (44.8% of the total) will be available for discretionary spending. The balance of UGX 16,003 billion is earmarked for debt serving and project support. This makes the country highly vulnerable, to the extent that the budget can no longer adequatly provide for quality Education and Health services, re-capitalization of vital enterprises… financing the productive sectors and the local governments.”

The parliamentary committee also expressed concern at the high cost of interest payments, particularly from domestic borrowing, and the effect this was having on the private sector: “The higher domestic borrowing by Government has crowding-out effects to private sector growth through higher interet rates, which constrain private sector borrowing, lowers aggregate demand and hence slower growth.”

Similarly, Moody’s Investors Service, a credit ratings firm, cited Uganda’s domestic interest costs as a factor when they downgraded Uganda’s sovereign debt rating in November last year. “Debt affordability has been a persistent vulnerability for Uganda, and the higher debt burden combined with the shift in financing sources will lead to further deterioration.”

Uganda Debt Trend

Bank of Uganda acknowledged creditors’ concerns in a report at the end of last year saying, “There are… perceptions in the market that Uganda may not be able to service its rising debt levels.” The central bank admitted that it was witnessing “deteriorating debt affordability” with interest obligations expected to consume almost 16 percent of revenues by 2018.

Preliminary analysis on the debt level indicated “moderately high risk,” the bank disclosed. Economist Fred Muhumuza, a former government advisor, commented that some lenders already seem to be more cautious about Uganda’s ability to repay. “You can see that getting funds from China’s Exim Bank to finance the SGR (standard gauge railway) is taking too long. These people are just dragging their feet because they are not sure if Uganda will be able to pay,” he said, as quoted in a recent report by The Monitor newspaper.

“Banks are taking flight to safety after the increasing cases of non-performing loans. Many financiers doubt Uganda’s ability to pay back loans,” added Muhumuza.

On the other hand, Washington-based International Monetary Fund was more sanguine about the situation in an official statement published mid-May, expressing general satisfaction with the Ugandan government’s financial and monetary policies. “The overall deficit of 3.7 percent of GDP… keeps public debt well on a sustainable path,” reads the IMF policy statement.

In the eyes of some, the discovery of oil in Uganda boosts its prospects for long-term economic sustainability, including its ability to repay debts, while others worry that this could shift the mindset in Kampala spark an unsustainable spending spree. A recent article in the UK’s Guardian online newspaper cautioned, “The experience of Ghana, which discovered oil in 2007 and went on a spending spree, suggests the need for restraint. In 2015, Ghana agreed to a $1bn IMF bailout so it could service its debts.”

According to KPMG, the audit firm, Uganda’s debt to GPD ratio rose already to 39% this year compared to 33.8% in the previous financial year. It is projected to hit 43.5% of GDP by the year 2020 if the current trend is not reversed. The question isn’t so much whether the debt burden is rising significantly — it’s whether Uganda can sustain enough economic growth and implement sound budgetary and central banking practices to keep repayments manageable.

Questions of values and prioritization also come into play: Is it worth taking out big loans in order to achieve key infrastructure goals that will benefit the country in the long haul? Or does this detract from pressing social services needs and mortgage the future of Uganda’s children?

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An aerial view of the Entebbe Expressway under construction between Kampala and Entebbe. The 51.4km road is expected to be completed in May 2018 (Facebook / Yoweri Museveni)

The IMF isn’t too concerned: it says that Uganda’s inflation is ‘on target’, domestic revenue collection is seeing ‘welcome progress,’ and the Ugandan shilling has depreciated minimally against foreign currencies. However, the Washington-based lender is urging Uganda to improve reporting on its own debt position and liabilities. IMF published an evaluation of fiscal transparency in Uganda last month saying that “there is no reporting of a balance sheet that provides a complete picture of the government’s financial position.”

The main current gaps include a failure to account for pension liabilities in the government’s balance sheet. This means that the formal debt estimates as cited above may not fully represent the growing constraints on Uganda’s budget. Policy-makers will need to get a better grasp of Kampala’s long-term liabilities if they are to devise an effective strategy for managing debt.


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