Bank of Uganda has yet again sounded an alarm over the large amounts of debt that Uganda has gobbled up.
In the process, the central bank is worried Uganda could default on its debt payments, which could spark off an economic spiral of high interest rates on credit and low investments.
Government’s failure to service its loans, depending on how large the debts are, could change the entire outlook of the country: government expenditure – a lifeline for the private sector – could drop drastically, taxes could go up to shore up revenues, interest rates on credit could go up, banks would be clogged up with bad loans, inflation would rise and eat into the public’s savings, and few people would want to commit any investment in such an economy without strong guarantees.
In its state-of-the-economy report for December 2016, BOU said: “There are also perceptions in the market that Uganda may not be able to service its rising debt levels.”
The central bank said external debt has grown rapidly and, on a commitment basis, is now estimated at $10.7bn as at end of October 2016. BOU said: “A lump up [in] infrastructure investment has contributed to a rise in our debt portfolio in recent years.”
Uganda’s public debt burden has risen by 12.7 per cent to 38.6 per cent of GDP in 2016/17 from 25.9 per cent of GDP in 2012/13. BOU says it is projected to continue rising towards 45 per cent of GDP by 2020.
The debt sustainability threshold for East Africa is 50 per cent of GDP. There are some signs that government is already feeling the heat from the debt burden.
The government has cut spending by Shs 848bn this financial year. The government has also frozen recruitment of public servants. Meanwhile, debt as a percentage of revenues has risen by 54 per cent since 2012 and is expected to exceed 250 per cent by 2018.
“We have been sounding the alarm in good time,” an official at the central bank told us. “Most infrastructures are non-tradable and thus there is a risk of currency mismatch in the near to medium term in using foreign debt to finance these projects.”
Government has started undertaking various projects – roads and power dams at one go - which has seen debts levels reach breaking point.
Much of these projects had been pegged on the fact that oil revenues would flow earlier than expected, but the dates have instead been postponed. Now, Uganda may not produce oil until after 2020.
Also, a drop in the price of oil since mid-2014 shows that oil can’t be relied on entirely. When Ghana discovered oil in 2007 – a year after Uganda had struck its own hydrocarbons – the West African country went on a spending spree. With oil production starting in 2010, Ghana spent heavily on its infrastructure. In 2015, Ghana agreed to a $1bn IMF bailout after its debts reached unbearable levels.
Yet even as debt levels peak, a lot of it is not disbursed. According to BOU, there was “modest decline in the undisbursed amount, from 51.6 per cent of the total committed debt as at end of June 2016 to 50.0 per cent as at end of October 2016 [but this] still highlights the existing challenges in project implementation.”
This means the country continues to borrow money without proper plans of when and where to spend it. This has come at an awful cost for the taxpayers.
According to the auditor general’s value for money report 2014/15, taxpayers paid at least $26.8m (Shs 96bn) to creditors in commitment fees and fines between 2007/8 and 2014/15 for government’s failure to spend the money they lent it.
This is thrice the money the country needs to buy the radiotherapy machine for the Mulago-based cancer institute and twice the entire budget of Mulago national referral hospital. Makerere University was closed for two months last year because government could not raise Shs 30bn to pay lecturers’ incentive arrears.
In 2013/14 alone, Uganda paid $5.1m (Shs 17bn) in commitment fees and fines. Commitment fee is charged by a lender to a borrower as a compensation for keeping the money until the latter is ready to use it.
In September, the World Bank suspended new lending to Uganda, saying it wanted “Ugandan authorities to address the outstanding performance issues in the portfolio, including delays in project effectiveness, weaknesses in safeguards monitoring and enforcement, and low disbursement.”
In an earlier assessment of Uganda’s investment strategy, the World Bank said the country had not been getting value for money on investments on most public projects over the past decade. The World Bank said Uganda’s projects were characterized by “endemic delays in implementation, cost overruns, and corruption which means that sometimes projects come twice the original cost.”
It said for every shilling invested in the development of Uganda’s infrastructure, less than a shilling (about 70 per cent of a shilling) of economic activity has been generated.
Uganda’s debt has rating firms worried too. In November, Moody’s downgraded Uganda’s long-term bond rating to B2 stable, from B1. A credit rating offers investors a clearer risk profile of the country.
“Sustained erosion of fiscal strength has occurred since the rating was assigned in 2013,” the rating firm said, adding: “The government of Uganda’s debt burden has risen nine percentage points to 33 per cent of GDP in the past four years, and is projected to continue rising towards 45 per cent of GDP by 2020.”
BOU says the country will also find a hard time paying interest. “Deteriorating debt affordability is also reflected in interest obligations expected to consume almost 16 per cent of revenues by 2018, far exceeding the Moody’s median for B-rated countries of eight per cent,” said BOU.
Moody’s said Uganda’s debt burden has “risen faster than the government’s own resources, resulting in a debt-to-revenue ratio of 236 per cent, one of the highest amongst B-rated sovereigns.”
Uganda’s revenue-to-GDP ratio is 13.4 per cent, BOU said. The central bank said the preliminary debt sustainability analysis shows that “Uganda is likely to face moderately high-risk.”
Another scary thing is that the country is taking on a lot of debt on commercial rates, meaning it has to pay more money in interest.
BOU says: “There is also a risk of a further increase in the already-high interest costs in the budget, which currently account for more than 10 per cent of government expenditure.”
On the way forward, BOU says: “A careful sequencing of these projects is necessary in order to avoid undesirable consequences of unsustainable debt.”