Is Uganda’s debt situation a nuisance or a necessity for us to grow?

I wanted to write a post about Uganda’s public debt situation, but there are so many articles already out there that I almost did not even come up with this effort.

Take for example Makerere University Economics Lecturer, Dr. Ibrahim Okumu’s effort which asks if we as Ugandans should be worried about our current growing debt burden. He mentions that Uganda’s current public debt is currently hovering over 40% of GDP.  Up by over 100% as it was 19% in the 2009/10 fiscal year. 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. The lower than expected domestic revenue performance has undermined our ability to finance the growing debt and hence the current tax regime is increasingly unpredictable and not evidence based. As such there is reason to be concerned about Uganda’s debt stock 

Bernard Busuulwa of the regional paper the East African had a good effort too sharing his opinion too on Uganda’s precarious national debt. He says that from 2006, the sharp growth in public debt is attributed to heavy borrowing to fund large infrastructure projects in the transport and energy sectors, occasional surges in military spending and humanitarian needs, observers say. Are the returns on this borrowing cum spending, experts ask, enough to justify the surging national debt?

Apparently not, because the debt levels have consistently risen.

Bernard further mentions that Uganda’s  domestic borrowing target for 2019/20 stands at UGX 2.8 trillion (US$ 746.9 million). In 2016/17, the government borrowed more than UGX 1 trillion (US$266.8 million) from the local market, exceeding its target by more than UGX 200 billion (US$53 million). This has raised interest rates earned on Treasury bills and bonds by around three per cent, according to financial market data.

Another article written by Daily Monitor’s Frederic Musisi mentions key red flags in our national debt situation revolving around China ranking as Uganda’s TOP bilateral lender with about 75 per cent, followed by France, the UK, which is financing construction of the Kabaale International Airport in Hoima, and Japan, which financed the new Jinja cable bridge and when combined account for 25 per cent. The increment in Uganda’s debt stock is attributed to disbursements from China’s EXIM Bank on account of financing Karuma and Isimba dams, and World Bank loans, as well as foreign exchange rate variations.

Now for anyone with a dash of curiosity, you will be noticing the increased mention of Uganda’s debt over the past 24 or so months with some subtle yet strong concerns about its steady growth over the past recent decade. But to put it into context, here is a graph showing evolution of Uganda’s debt for the past 20 or so years.

But to put it into context, here is a graph showing evolution of Uganda’s debt for the past 20 or so years. Source: Bank of Uganda website

The accompanying graph below gives the picture of Uganda’s growing GDP over the same period. Source: Bank of Uganda website

For good measure, the word budget deficit is the gap between flows of government revenues and outlays in a given year. The fiscal debt on the other hand is the outstanding stock of government borrowings that were issued to finance past budget deficits.

As a person who runs a boutique consulting firm with manageable monthly overheads, I may not be the best placed person to speak about borrowing to build an office block. But just imagining if my company had a debt to earnings ratio doubling in a decade as shown the table below, how much of my higher I would want my earnings to be. Source again is Bank of Uganda website.

Year 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Debt (USD in Bn) 3.76 4.61 5.26 3.90 3.51 4.52 6.02 8.20 9.17 11.6
Debt (% GDP) 62.9 70.9 63.5 36.1 20.3 22.4 24.5 30.7 37.0 41.3
GDP growth rate 3.9 7.1 5.8 7.0 10.4 7.7 2.2 4.6 2.3 6.1

In December 2019, an article was written and published in a leading newspaper that mentions my country Uganda borrowing 2.4 Trillion Shillings (approx. 600 Million Euros) to fund certain budget deficits for the Financial Year (FY) 2019/2020. As I publish this article, the Parliament of Uganda passed a motion to approve borrowing of €300M from Stanbic Bank Uganda and €300M from Trade Development Bank to finance the budget deficit for the fiscal year 2019/20.

While many economists would concur that textbook presentations of the effect of government borrowing on growth stress the importance of deficits, not debt, a number of economic observers have made the claim that rising debt levels can affect economic performance in three ways.

ONE

An increase in the fiscal budget deficit means that the government increases its demand for “loanable” funds from the private sector, looking to borrow money from its own citizens as well as from international investors. In a healthy economy (hehehe) , this means that the government begins competing with private borrowers for a fixed supply of savings, and thus drives up interest rates at which the lender operates. This increase in interest rates may reduce (“crowd out”) private-sector investments across its space. This decline in investment means that the overall economy has a smaller capital stock with which to work, and this smaller capital stock decreases future growth rates

TWO

A country with rising debt levels could make investors wary that a nation will not be able to make debt-service payments to its creditors. The resulting flight of investors from the nation’s debt could cause interest rates to spike as higher returns had to be guaranteed to creditors to persuade them to keep financing a nation’s deficits.

THREE

Slow economic growth, and especially growth that is slower than policy makers’ expectations, will lead to higher levels of debt as revenues fall and as automatic-stabilizer spending increases. High annual deficits that lead to higher debt loads may in theory lead to higher interest rates and thus lower levels of private investment and growth in the future.  Persistent slow growth will yield high debt levels, and will thus mechanically yield to contemporaneous combinations of high debt and slow growth.

Two important points (amongst many others) that guide Uganda’s Public Debt Management Framework are:

  • Government of Uganda shall work towards raising its tax-to-GDP ratio to the Sub-Sahara Africa’s (SSA) average of 15.1%, compared to the current level of 14.38%; as part of Uganda’s Financing Strategy to limit on borrowing.

This is still managed at 14.4% in 2019 up from 13.7% and 13.2% in 2018 and 2017 respectively

  • To ensure the sustainability of Uganda’s debt, Government shall ensure that the present value of government debt as a proportion of GDP does not exceed 50% of GDP (combined at 20% being Domestic debt and 30% being External debt) , in line with the Macroeconomic Convergence Criteria on debt under the EAC Monitory Union Protocol.

This is currently at 41.37% in 2019 up from 37.07 in 2018 and 30.7% in 2017

My key takeaways from all this information

  • Uganda will continue to borrow to pay for fiscal deficits as our top line revenues from tax revenues remain skewed to current methods of growth. The debt to GDP ratio limit though of 50% is fast approaching. The NDP III plans to improve domestic revenue mobilisation through wider (and deeper tax base) is done and being executed as you read this.
  • Uganda needs oil-money (or any legal money) desperately. The debt to GDP threshold of 50% is fast approaching (in some circles, already eclipsed). Any increased access to earnings directly to the Government will ease a tonne of cash pressure being felt by the big boys at the Ministry of Finance, Planning & Economic Development (MoFPED). Kudos to the team as the situation is truly a big task.
  • Speaking of MoFPED, I think they will approach things with that “no more Mr. Nice Guy attitude” very soon. If it has not already happened. More information on effective-debt-usage and improved project appraisal will come forward as will as increased periodic progress reports about debt and non-performing loans.
  • The domestic debt choice is a risky, but relatively practical way to keep the Government’s head above water. The local private sector companies and banks already suffered crowding out effects a few years ago (post elections of 2011) and many still have recurrent memories of having to write off debts and others sell assets just to survive.
  • The Ugandan debt is unsustainable across next 5 years (i know, i am being very generous, it should be capped at the next 24 months) if for some reason, our potential oil money further delays, a strange case of reduced government spending could take shape if the new revenue mobilisation strategies do not hit intended targets. Tough scenarios like debt-write off negotiations and potential bail-outs from the International Monetary Fund (IMF) would not be a joke anymore.
  • External debt has financed a bigger share of some of Uganda’s investment sectoral budgets: Public infrastructure sectors particularly works and transport, energy, and mineral development are increasingly funded from external sources, respectively by 38% and 87% in FY 2016/17 as a share of respective sector Budgets.  They jointly account for 66.4% of the total external financing (including grants) implying that the government is prone to accepting the tough loan conditions set by creditors and donor partners
  • Our political ties with China, Europe and the USA will continuously stay amicable because any write-offs of budget support from multi-lateral agencies (e.g. World Bank, IMF) or governments  will lead to more borrowing and as already mentioned, the threshold is almost being met. Beyond that, the vultures stop circling and with no fear land near the soon to be carcasses.
  • Hopefully, this huge infrastructure spending has its returns someday. I for one am pro-infrastructure spend because they are part of the conducive environment charter for any growth to happen.
  • I hopefully see a rise in Public Private Partnerships on few initial projects and eventually more and more projects (even with some political interference). This mainly to increase actual efficiency of borrowed resources and timeliness of project execution as Government of Uganda has been alleged to sometimes be wasteful and slow.
  • I also see interest rates rise again over the next 18 to 24 months and government paper will stay steady to manage domestic debt levels.
  • On the flip side, Debt is a much needed tool to help companies and governments cover any recurrent expenditure while getting the ship in order. If repeatedly done however, certain future earnings may be tied to repayment schedules and having hands-tied become a reality.
  • So kudos to you if you already saw where I was going because I think debt is a nuisance, a necessary nuisance. >>Disclaimer, if used well enough, it is a partial nuisance<<.

By Edmund Kamugisha

Edmund is the Principal Consultant and Co-Founder at BLEGSCOPE®, and has 13+ years of management consultancy experience notably in MSMEs, FMCG companies and in the service industry. You can follow him on twitter at @edmokmg

2 Comments

  1. Mark M

    Good analysis on current debt trends. Two comments. 1) Yes it is indeed a necessary nuisance. The solution does not lie in reducing borrowings but increasing earnings to make the debt servicable. Unfortunately to do that, majority of the solutions require investment including infrastructure, mechanisation, agribusiness value addition, industrialisation, skills development. This investment unfortunately in the short run will need to come from somewhere. Where you ask?, you guessed it, more debt!
    2) There is a common fallacy and misconception about debt from china. Many assume there is a puppet master at the government level sending chinese ” investors” out to sell loans to African countries. This is far from the truth. What actually happens is private chinese enterprises come seeking projects and contracts, lobby officials here, win the projects and go back to source the financing from the EXIM bank for these very projects. Actually, majority of them do not get funded, although they are typically recorded and reported as ” a loan from China”. It is mostly private sector driven. This truth challenges some of the statistics indicated above. The real issue is the debt levels from sell of government paper. As long as we continue to offer these astronomical high interest rates, that trend will not turn. Institutional invests will continue to buy BOU paper which increases the debt level. Default risk is priced in for the investor either way and still makes sense. Also, so we default in 5 years, what is the “true” impact on omuntu wa wansi? Nothing. He will continue to struggle with bad roads, umeme outages, poor healthcare, and few employment opportunities. Nothing changes. This is because he was left out of the economic equation in the first place. …

    1. Edmund Kamugisha

      Thank you Mark for reading and commenting.
      To respond to you, the debt is currently being used to set up necessary services for the revenue mobilisation grow i.e. infrastructure, electricity and security. The challenge for any one (businesses and governments) to raise their top line revenues will always be tough.
      But as i mentioned about the effective use of the borrowed funds, and MoFPED no-longer being Mr. Nice Guy… Maybe this will somehow help the economy have a better impact of that debt!

      And the facts you mentioned in your last few sentences about the common-man facing regular bad-roads, shady power supply, poor healthcare et al are truly hurtful, but which facts are not!

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