Uganda’s public debt is set to increase from the current 48.4 per cent to 53.1 per cent in 2023, according to the estimated budget for the FY 2023/24 released by the ministry of Finance.
For a debt to be sustainable, particularly for developing countries of which Uganda is part, the International Monetary Fund (IMF) says it must not exceed 50 per cent of the country’s gross domestic product (GDP).
According to the Budget Framework Paper, the stock of public debt increased from USD 19.54 billion in June 2021 to USD 20.99 billion in June 2022. As a share of GDP, public debt increased from 46.90 per cent to 48.4 per cent over the same period.
This represents an increase of 7.4 per cent compared to 27.45 per cent in the previous financial year. This, the paper notes, is a result of the government's deliberate policy of fiscal consolidation aimed at ensuring that debt remains within the set threshold of 50 per cent of GDP in the medium term.
The paper notes that out of the almost Shs 50 trillion projected budget, the country will spend almost Shs 9 trillion on debt repayment and servicing. This represents 16 per cent of the whole FY 2023/2024 budget. Although the paper notes that the debt will level off to below 50 per cent in FY 2025/2026, nonetheless economists and politicians alike have already raised red flags.
In November this year, the deputy governor of the Bank of Uganda, Micheal Atingi-Ego told parliament’s finance committee that the country’s public debt had hit Shs 80 trillion as at end of September 2022, which was then approximately 50 per cent of GDP.
Atingi-Ego said that Uganda’s debt servicing in the current financial year 2022/2023 is at a ratio of tax revenue estimated at 30 per cent and this suggests that any further borrowing with associated servicing in the short to medium term would constrain government development efforts.
"But in terms of sustainability, I think we're still sustainable. The only challenge that we have is what we call the leading indicators that you observe in order to assess whether you are able to pay. So for example, if you have to look at our tax revenues the debt service to tax revenue ratio is very worrying. It is about 30 per cent - so it means that for every shilling that you collect as taxes, 30 cents goes on debt service which means that you're clouding out other important expenditures like social expenditures to service the debt," said Atingi-Ego.
"Failure to resist expenditure pressures amidst rising debt servicing costs and failure to revamp growth remains the most significant risks to debt distress. Outlook to debt sustainability is dependent on the government’s commitment to the fiscal consolidation path and the evolution of global, domestic financial conditions and the growth of the economy,” Atingi-Ego added.
He also then told MPs that other indicators that need to be looked at are the debt servicing to exports. He advised that any external loan being acquired should be interrogated to ascertain how it is going to conserve and generate foreign currency in order to help the country’s debt servicing.
"If you borrow money, particularly external loans, you need to be able to generate foreign currency revenues in order to repay this debt. If it doesn't generate those revenues and the maturity is due, where do you get foreign currency reserves to pay this debt? It means you have to come to our reserves in Bank of Uganda to service that debt. So for any external loan that we're getting, we should really ensure that we should interrogate how it is going to concern foreign currency, how it is going to generate foreign currency," said Atingi-Ego.
The deputy governor noted that the rising foreign debt servicing and government imports of goods and services have significantly pushed down the international reserves to $3.65 billion as at end of October 2022 from $4.54 billion at the end of April 2022. He said that this is amidst low inflows of foreign currency that have inhibited the purchase of dollars from the domestic market.
“In the financial year 2022/2023, the government imports plus foreign debt servicing will require about $1.8 billion which will further reduce international reserves. The rise in foreign debt servicing is largely due to the maturity of non-concessional loans. In addition, the debt service/export ratio is also projected to increase beyond the 20 per cent threshold between financial years 2021/2022 to 2025/2026,” Atingi-Ego said.
In the coming financial year 2023/2024, a total of Shs 8.343 trillion is projected as external financing. Of this, Shs 2.452 trillion will be obtained as budget financing loans and Shs 5.891 trillion from project loans. According to the Budget Framework Paper, external debt repayments are projected to amount to Shs 2.453 trillion compared to Shs 2.412 trillion in the financial year 2022/2023.
Over the medium term, external debt payments are projected to increase due to the increase in commercial loans over the last few years. Interest payments are projected to amount to Shs 6.135 trillion, equivalent to 2.9 per cent of GDP. Of this, Shs 5.227 trillion are projected for domestic interest payments while Shs 907.9 billion will be foreign interest payments and commitment fees. Most of the government borrowing is towards investment in infrastructure.
Although President Museveni and officials from the ministry of Finance have defended this continuous borrowing saying it is not a threat to the country, reports show that Uganda will need more than 90 years to pay back these loans costing each Ugandan having to pay at least Shs 1 million going by the current population estimates of 44 million people.
The United Nations Conference on Trade and Development (UNCTAD) agrees that borrowing by the governments is an important tool for financing investment critical to achieving sustainable development as well as for covering short-term imbalances between revenues and expenditures.
It also notes that government borrowing can also allow fiscal policy to play a countercyclical role over economic cycles but nonetheless, it adds that high debt burdens can impede growth and sustainable development.
In its March 2022, report, the IMF notes that although Uganda’s date is still moderately manageable, nonetheless, it has started entering danger zones especially if the oil revenues don’t start flowing as anticipated in 2025.
“Given the planned unwinding of crisis measures and implementation of fiscal consolidation, Uganda’s public debt continues to be sustainable in the medium term…Uganda has a moderate risk of external and overall public debt distress, with limited space to absorb shocks…Nevertheless, stress tests highlight breaches of external debt burden thresholds and the public debt benchmark, especially in relation to export shocks. Specifically, given that a median shock could lead to a breach of the external debt service indicators, Uganda has limited space to absorb shocks. Key risks include a slower recovery from Covid-19, environmental shocks, tighter global financial conditions, delayed reform implementation, further delays in oil exports, and a shift to non-concessional loans,” the IMF report reads in part.
The report adds that Uganda must strive to move away from a growth model based on debt-financed public spending that has emphasized infrastructure, with one where the private sector leads economic growth, supported by the state through investments in human capital and targeted regulations to promote green and inclusive growth that reduces inequality and ensures sustainability.