Uganda, mind the rapidly rising debt!

Russia has put the world on notice regarding its military might for years, displaying her fearlessness by marching into foreign territories [Ukraine], and forcefully taking up land— Crimea; also, threatening to reclaim now sovereign countries that were once colonized by it— Finland.

And that’s just a grain of her warpath. With this decorated reputation of immeasurable chutzpah, Mother Russia was brought to her knees by something as peaceable as debt. In 1998, Russia was engulfed in a financial crisis as it defaulted on domestic debt, and paused payments on foreign obligations.

This resulted in: businesses going bankrupt, the collapse of the banking system in Russia; a drop in the standard of living, political turmoil, and much more. To Russia, this was a slight on the Kremlin that had always sold itself as a toughie.

What it later understood was that public debt, both foreign and domestic, was to be monitored and managed suitably regardless of a country’s assumed status if dire consequences were to be avoided. In Uganda, Article 159(4) of the Constitution of Uganda, and Section 13 of the Budget Act 2001, require the executive to submit a report on the total indebtness of government.

This led to the filling of a dossier by the National Committee on National Economy on the State of Indebtness of Uganda submitted to the clerk of parliament on August, 30 2022. The document titled Report of the committee on National Economy on the state of Indebtness, grants and guarantees as at December 2021 raises the following concerns regarding Uganda’s public debt.

Predominantly, the report puts Uganda’s public debt at the end of June 2022 at 78.799 trillion shillings [~$20.98 billion], a 13 per cent rise from June 2021. In lay terms, with a population of 44,479,423 million people as maintained by Uganda Bureau of Statistics, for the government to clear its debt, every Ugandan owes it $471.6 [1,789,490 shillings].

Of the public debt, 48.136 trillion shillings [$12.814 billion] makes up the external debt, and the remaining 30.662 trillion shillings [$8.162 billion] forms the domestic debt. Ratifying that the external debt takes the largest share of debt at 61 per cent, while domestic debt only carries 39 per cent of the burden.

On the debt-to-GDP ratio, the report reads: “[…] while present value of Debt-to-GDP increased from 33.1% in FY 2019/20 to 37.5% in FY 2020/21. During FY 2021/22 … public debt is projected to increase by 13%, mostly on account of domestic borrowing that increased by 20 per cent”.

The total stock of debt-to-GDP of Uganda as of June 2022 is 48.6%. It has been bulging by 18.9 per cent since June 2016. Thus far, the current debt obligation is considered an ‘affordable debt’.

Although Uganda’s debt-to-GDP ratio is considered more desirable compared with some of her neighbours: Kenya public debt to GDP is 67%, Rwanda, 74.6%; the country’s overall risk rating moved to moderate in the financial year 2020/21, and its debt is growing a mile a minute.

To give an instance, in the last five years — June 2017 to June 2022, total public debt has grown by 44 trillion Uganda shillings [~$11.8 billion] from 34 trillion shillings [$8.9 billion] to 78.799 trillion shillings [$20.779 billion].

More shockingly, in one financial year 2019/20 to FY 2020/21, Uganda’s public debt grew by 22 per cent [12.5 trillion shillings — $3.3 billion] from 56.938 trillion [ $15 billion] to 69.513 trillion shillings [~ $19.54 billion], the report mentions. These monies are borrowed to bankroll public infrastructure projects, more so, in preparation for oil production. And other key sectors: agriculture, energy, water, education, environment and roads, the report discloses.

The notable lenders of this credit are: World Bank’s International Development Association [IDA], International Monetary Fund [IMF], Exim Bank of China, Stanbic Bank, Standard Chartered bank, Paris Club, African Development Bank [ADB], International Fund for Agricultural Development [IFAD], OPEC Fund for International Development [OFID], European Investment Bank [EIB], and Inter-American Development Bank [IDB].

Domestically, the government borrows from banks, pension and provident funds [NSSF], insurance companies, offshore investors and other financial institutions that largely buy Treasury bills and bonds.

Governments all over the world borrow, justifiably so, and Uganda is no exception because they have to bridge the gap caused by deficits in financing since they cannot collect all their revenue from taxes as it will weigh heavily on their citizens.

Likewise, they cannot transfer that burden to the private sector, as they too always seek subsidies from the government. So, governments look outside to borrow the money they need without having to overload their citizens.

With Uganda, besides the poor management and planning for funds, as well as corruption, the loans taken out are wasted. There are numerous incidents of monies handed to ministries to implement government projects bouncing back to the treasury without being touched. And yet, the government continues to pay interest on these monies/loans, as they lie idle in government coffers unutilized waiting to be gypped!

There’s also the reality that the government is borrowing faster than it will be able to pay, or faster than the economy is growing.

“Public debt accumulation has continued to grow faster than economic growth. Whereas in FY 2020/21, the economy grew by 3 per cent, the public debt grew by 22 per cent…” reads the report. This spells out the country’s unlikeness to pay off her debt and increased risk of default.

It’s my recommendation that even though the country’s public debt isn’t very large, it has the potential to skid out of control in the shortest time, and should, therefore, be properly minded to avert depressive consequences like: excessive borrowing that could result in inflation since huge volumes of money are pumped into the economy when loans are taken.

These borrowed monies could easily exceed the economy’s ability to produce goods and services, creating an undesirable scenario of too much money chasing few goods — inflation. Increased borrowing also means increased debt servicing; that is, payment of the principal (debt), interest, and other fees.

This will deplete the country’s foreign reserves because the debt is paid in (foreign) reserve currency; accelerating demand for the reserve currency while putting pressure on the domestic currency [shilling] to depreciate, increasing the cost of doing international business.

It (public debt) could also lead to the increasing of taxes to raise revenue to pay off the debt. Besides, the money the government has to spend to raise the standard of living of its citizens could be cut, to be diverted to debt payment.

In the past, high national debts have created unbearable conditions for natives that have galvanized political crises in Russia, and Argentina tipping-over regimes. It’s important that as government takes out these loans, it remembers that unlike countries like the USA and Japan that control the money that they borrow and pay their debt in; suggesting that they could print their currencies to pay off debt.

Uganda borrows in foreign currency and pays its debt in the same, and is more likely to have a debt crisis, and not the USA or Japan even with the astronomical debt -to-GDP ratios they possess— USA (122.84%) for the second quarter of 2022, and Japan (248%) for the fiscal year 2021, that ended in March 2022.

Therefore, as a country, we have to mind our total public debt as a percent of Gross Domestic Product, and stop consolingly comparing our debt ratio to the high ones of USA and Japan; because technically, they are in control of their debt, and we are not.

Twitter: m_kidamba

The author is an independent financial/investment analyst.